How Firm Visibility Affects Secrecy Management
Jan Jouke Melchers
s2219395
Thijs L.J. Broekhuizen
Pedro M. M. de Faria
Rijksuniversiteit GroningenAbstract.
The positive benefits of utilizing secrecy are increasingly acknowledged, while also the applications are becoming more diverse. Secrecy, often used as a means to protect value, as part of the technology strategy literature is one of the primary knowledge protection mechanisms. Although a broad understanding exists of the different opportunities arising from the use of each of these mechanisms, little research has investigated the different opportunities of the mechanisms in-depth. This research examines existing literature to develop a comprehensive understanding of the opportunities arising from secrecy management related to the firm’s visibility. The visibility of a firm is often described as the degree to what the firm is monitored by its environment, and determines to what extent the firm is able to seize the benefits of its secrecy management. Based upon a qualitative case-study of two firms within the same industry, one highly visible and the other less visible, the linkages between firm visibility and the secrecy management concepts are explored. It is found that the firm’s visibility ensures firms to benefit from their strategic secrecy opportunities. However, this benefit comes with the increased costs and effort firms need to invest in protecting their innovations. On the other hand, if a firm maintains a low visibility position, the strategic opportunities of secrecy are less, but the firm also needs to invest less effort and costs in protecting the firm’s innovations. The research concludes with providing future directions and managerial implications to help managers utilize their secrecy management based upon their visibility.Word count: 11.593 words
Key words
Secrecy Visibility Appropriability Strategic Tool Protective Tool Innovation Technology Strategy Secrecy Management 1
1 Introduction
Firms have several reasons to protect their innovations from competitors. One of those reasons is to capture value from innovation (Teece, 1986) by delaying imitation. Imitation occurs on all markets, or as Levitt (1967) states it: “Imitation is endemic. Innovation is scarce”. When a firm is highly monitored by its environment or its direct competitors, that is its visibility is high, it is expected that the firm tends to protect its innovations differently than when visibility is low. Similarily, Rayton, Brammer & Cheng (2012) state that firms are more constrained when highly visible than compared to when less visible.
Secrecy management is influenced by multiple factors which need to be considered before a firm can appropriate the value of its innovation efforts (Teece, 1986). As such, a firm’s ability to protect its innovation efforts from imitation through knowledge protection mechanisms can determine how successful a firm will be with its innovations. Apart from the protection of valuable knowledge, secrecy can be used as a strategic tool for firms to obtain firm success (Cohen, Nelson & Walsh, 2009). Secrecy is recognized to be increasingly important as a strategic tool (Cohen et al. 2000) and can be therefore a source of the firm’s competitive advantage. The management of the secrets and the use of those to obtain certain strategic goals can become a significant part of a firms competitive advantage (Hannah, 2007). When a firm becomes successful by its innovations, and its use of knowledge protection mechanisms to protect the innovations, the firm may attract potential imitators, build a reputation, which can eventually lead the firm to have an increase in visibility. This increase in the firm’s visibility can have a significant influence on the firm’s decisions concerning its usage and management of firm’s secrets. The difference in firm visibility could result in prior installed knowledge protection mechanisms becoming redundant. Firms utilizing this visibility can attain strategic benefits such as exchange benefits and marketing or signalling advantages. The other way around, because of the firm’s visibility it might be more difficult to protect the valuable knowledge using secrecy, and hence it may impact the firms secrecy management. As firm visibility impacts secrecy management, it simultaneously impacts the possibilities that firms have to use their increased visibility to their advantage.
2 who mention the Apple case, where Steve Jobs, former CEO of Apple, released parts of information regarding the launch of the new Iphone. By doing so, Jobs created ‘buzz” around the release, which caused major public attention. This use of secrecy as a signalling tool is a creative solution to obtain certain strategic goals. However, it also can be questioned whether or not this method of creating ‘buzz’ would have been as successful if Apple would not be under such strict observation from its environment. Kekst and Freitag (1991) argue the firm’s visibility influences its dependence on relations, like competitors, customers, and suppliers, when the firm faces a change, in face of a radical innovation.
Firm visibility can explain the behaviours and success of firms. As such, increased firm visibility is a motive for a firm to be listed on the New York Stock Exchange (Baker, Powell & Weaver, 1999), as a communication tool to fill in the asymmetric information relationships between corporate management and the other stakeholders in an organization (Brammer and Millington, 2006), or as constrain on a firm’s behaviour to avoid incompliance with the common norm (Rayton et al., 2012).
This study relates firm visibility to secrecy management by qualitatively identifying possible relationships. Contributions to the existing knowledge protection literature and the less developed literature field concerning the visibility of firms are provided. This study links visibility to the implementation and use of secrecy. In doing so, the impact of visibility on the importance and effort of protection is investigated, and also the impact on the relative importance of protective versus strategic benefits. Furthermore, the paper provides concrete managerial implications which assist managers in protecting and guiding the firm’s innovations, influenced by its visibility.
2 Literature Background
2.1 Firm visibility
Firm visibility is the quality or state of being visible1. The visibility of the firm is described by Sutton and Galunic (1996) as a collection of four elements, that identify firm visibility: (1)
1
3 persistent attention to the leader or organization, (2) close and persistent performance monitoring and evaluation, (3) frequent interruptions, and (4) relentless questions about events that have occurred, are occurring, and will occur, along with requests that the reasons for such actions be explained.
Visibility as perceived by external parties is partially referred to as the public attention, which corresponds with the degree to which the organization is monitored by its environment including other firms. The extent to which a firm is visible can vary over time, firm’s innovativeness, market success, or visibility enhancing efforts influence firm visibility. As such, firm visibility can be divided in observable and non-observable behaviours. The observable behaviours are those visibility characteristics that are observable to the firms environment. The non-observable characteristics are those aspects of a firm that are hidden. This non-observability can be caused by for example a knowledge protection mechanism, or by the nature of the visibility-object. For example, regarding process related aspects of a firm, it is recognized that such information is more “hidden” within firm boundaries (Gonzalez-Alvarez & Nieto-Antoli, 2007). Therefore, observable behaviours of a firm influence the attention to the firm which influences the detection of such behaviours by the firm’s environment.
The non-observable and observable aspects of firm visibility are to some extent manageable by the firm and to some extent determined by the nature of the firm’s activities and by its environment. Therefore, visibility of a firm is determined by the collection of observable and non-observable behaviours. Furthermore, firm visibility is dependent on perspective. While this paper examines firm visibility as visibility between firms, firm visibility is in literature often described from the public environment perspective.
2.1.1 Antecedents of Firm Visibility
4 the attention to the firm. Baker et al. (1999) found that a motivation for firms to become more visible is to increase the accessibility of information of the firm.
However, from literature certain contradictions exist. Whilst Bushee and Miller (2012) found that to increase a firm’s visibility the firm needs to increase its size, Chen and Hambrick (1995) found that actions of smaller firms tend to be more visible as opposed to larger firms. Therefore, firm’s size is dependent on multiple factors, like previous success of the firm, innovativeness and firm specific characteristics. As derived from the work of Bushee and Miller (2012), and Chen and Hambrick (2012), firm size does not always positively correlates to firm visibility.
2.1.2 Consequences of Firm Visibility
The primary consequence of firm visibility is the attention a firm gets from its environment. In literature multiple perspectives of firm visibility exist, however the most commonly used is public scrutiny. Sutton and Galunic (1996) clarified public attention (or scrutiny) as a collection of two elements, content (positive or negative) and attention (intense or obtrusive). The more visible a firm becomes, the more attention the firm receives from actors in the environment.
Firm visibility increases the pressures on firms to act and respond to social media and political pressures, this because actors in the firm’s environment take greater interest in firms that directly affect them, as compared to firms that are less visible (Brammer and Millington, 2006).
By becoming under closer attention of other industry actors, the firm gets greater opportunities to signal the firm’s power, which leads to an increase of gains from the firm’s secrecy management.
5 another firm. As such, some firms try to avoid visibility, to minimize the chance of being sued by other firms or so called “patent sharks” (Henkel and Reitzig, 2008).
Further research on the influences of firm visibility identifies five major consequences to firm’s leaders as a result of increases in firm visibility: (1) frequent delays in ongoing tasks, (2) the increased attention and effort devoted toward symbolic activities, away from other kinds of activities, (3) greater adherence to norms from the firm’s environment, (4) attention and effort focused on well-rehearsed acts, away from acts that require learning or creativity, and (5) greater perseverance at on-going and planned activities (Sutton and Galunic, 1996).
2.2 Secrecy Management
Secrecy is defined as the intentional withholding of information by one or more individual(s) from others (Scheppele, 1998). The essence of secrecy lies in making the search process for imitators as costly and unpredictable as possible (Arundel and Kable, 1998). Secrets can offer protection of its contents in perpetuity (Hannah, 2005), and is used by firms to intentionally conceal knowledge, information and/or behaviour from the view of others (Bok, 1984). While patents offer a formally guaranteed protection, after disclosing the information and getting the patent over a predefined period, secrets continuously run the risk of leakage (Arundel & Kabla, 1998). In case a secret leaks, excluding trade secrets, the law provides no legal protection (Delerue and Lejeune, 2010). A secret can entail many forms of knowledge, it can encompass a chemical formula, customer files, machinery designs, and many other types of information. Secrecy is valuable as it helps firms to protect their innovations by deterring imitations of competitors (Hannah, 2005).
2.2.1 Conditions that Drive the Effectiveness of Secrecy
6 Several studies compared different categories of knowledge resulting in a thorough understanding when secrecy is most effective. A summary of the findings of when secrecy is more effective is provided in Table 1.
Table 1: Overview of literature regarding the differences between patents and secrets Different
innovation categories
Author (s) Relation between knowledge type and secrecy
Explanation of relation
Incremental vs. Radical
Arundel & Kabla, 1998
Secrecy is more effective for incremental
innovations than for radical innovations
Secrecy is favoured when the investment cost of a patent are larger than potential risk of imitation
Process vs. Product
Levin, Klevorick, Nelson, & Winter, 1987 ; Gonzalez-Alvarez & Nieto-Antolin, 2007
Secrecy works better for process related innovation rather than product related innovation
Process innovations are more ‘hidden’ inside the firm, and are therefore easier to protect with secrets
Product vs. Service
Amara, Landry & Traoré, 2008
Secrecy is more effective to protect service related innovations
Due to the nature of knowledge (heterogeneous, tacitness, and knowledge specific content) of services, services are hard to protect with formal mechanisms like patents
Small vs. Large firms
Arundel, 2001 Secrecy is less effective for larger firms that focus on product innovations (no relation found for process innovations)
Small firms do not possess the resources required obtain, sustain, and defend patents
External cooperation vs. no cooperative relations
Arundel, 2001 Firms that relay on external cooperative relations favour patents above secrecy
Due to the knowledge and information sharing of the cooperating firms, performance of each individual firm is measurable by the number of patents. Pre-developed market vs. developed market
Arundel, 2001 Secrecy is favoured above patents in pre-developed, or less developed, markets
By early market development, patenting an innovation causes other new entrants to ‘invent around’ the patent with the result of losing firm’s competitive advantage
Product development stage
Friedman, Landes, & Posner, 1991 ; Searle and Reid,
Secrecy is more effective in early stages of new product development
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2012 process, whilst in later stages more formal IP mechanisms are preferred
such, a firm is less willing to invest heavily in protecting the invention formally
The effectiveness of secrecy as a protection mechanism differs between incremental and radical innovations (Arundel & Kabla, 1998), process and product innovations (Levin et al., 1987), product and service innovations (Amara, Landry & Traoré, 2008), and small and larger firms (Arundel, 2001). In knowledge-intensive business services (KIBS), innovations are more often derived from new combinations of knowledge, rather than from new combinations of physical objects (Amara et al., 2008). Therefore, the knowledge content of services is considered heterogeneous, very diverse, and not easily protected with formal intellectual property protection methods like patents (Amara et al., 2008). Especially small firms lack the required resource capital to protect their innovations with patents, and therefore choose to rely on secrecy in order to avoid heavy investments of patent protection of their innovations (Arundel, 2001).
2.2.2 Different Functional Roles of Secrecy
The effectiveness of secrecy is determined by its benefits, and the costs of achieving those benefits. This results in a collection of uses for secrecy separated by protective and strategic means. Apart from the protection of knowledge by intentionally withholding it from others, secrecy can also be used to attain certain strategic goals. The attainment of these protective and strategic benefits are dependent on how secrecy is managed. The protective and strategic roles of secrecy are summarized by Table 2. The table shows that the protective role entails only the withholding of information from others, the strategic options are more diverse, like the difference of benefits towards customers and firms, and the influences on firms learning capabilities and incentive benefits.
Table 2: Overview of Strategic and Protective goals of Secrecy
Protective goals Author(s)
Intentional withholding of information from others to avoid or delay imitation
Scheppele, 1998
Strategic benefits & costs
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circumstances complete disclosure of firm’s secrets
Strategic benefits towards consumers
Reputational or signalling benefits Ndofor & Levitas, 2004
Strategic benefits between or within firms
Incentive advantages for firm’s employees Dufresne & Offstein, 2008 Leverage with (cooperative-) partners Schrader, 1991
Signalling to encourage others to develop complementary products.
James, Leiblein, & Lu, 2013
Control behaviour of individuals Holiday, 2000 To intimidate competitors and deter response Ghemawat, 1991
Strategic costs
Lower learning capabilities leading to higher costs James, Leiblein, & Lu, 2013
Incentive/motivation losses leading to higher costst James, Leiblein, & Lu, 2013
2.2.2.1 Secrecy as protective tool
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2.2.2.2 Secrecy as strategic tool
In literature, strategic purposes of IP mechanisms are often devoted to the use of patents (Hall et al., 2012; James et al., 2013). However, secrecy in many of these purposes can achieve similar results by strategically using the secrets to attain certain strategic goals. The strategic usage of secrecy is best described as the “paradox of disclosure”, which states that firms must disclose the technical details of their innovation efforts to signal the value of their innovative efforts (James et al., 2013). Although the signalling of firms qualities seems to be a necessity, the firm does not have any legal protection after disclosing information (Delerue & Lejeune, 2010). Therefore, the strategic appliance of secrecy by partially revealing or leveraging secrecy is often a risky decision in which the management of the firm needs to be aware that its efforts to keep certain R&D activities secret often leaks out within 12 to 18 months (Mansfield, 1985). Hence, the decision between the benefits of disclosing information or to maintain secrecy determines to what degree the firm is able to appropriate value from its innovation efforts.
The strategic usage of secrets is used to influence the behaviour of firm’s consumers or the firm’s competitors. The strategic decisions related to consumers are primarily reputational or brand based. By signalling false information, for example false “secretive” information, the firm influences its consumers’ purchasing behaviour, the firm can fool its competitors and still maintain a healthy customer relation (Steele, 1989). The other method to build reputation or to strengthen the firms marketing position is to signal small parts of the secret to firm’s consumers (Ndofor & Levitas, 2004). In doing so, the firm can profit from the curiosity of its consumers by providing just enough information to steer or control their behaviour (Holiday, 2000).
10 strategic applications of secrecy can be a method for a firm to utilize its secrets, since the relative short (12 to 18 months) lifecycle of secrets (Mansfield, 1985).
2.3 Firm Visibility Influencing Secrecy Management
Visibility impacts secrecy management through impacting the protective and strategic costs and benefits of firms using secrecy. The relation between a firm’s visibility and its secrecy management emerges from the multiple applications of secrecy. The visibility of a firm determines to what extent the firm is monitored by its environment (Rayton, Brammer & Cheng, 2012). Hence, the consideration to what extent a firm uses secrecy is an expected derivate from its visibility. Therefore, the use and effectiveness of secrecy, with respect to its protective and strategic benefits, is related to what extent the firm recognizes the attention of possible imitators or possible interests of the firm’s actions.
As the firm maintains low visibility, the accessibility of information about the firm is low (Baker et al., 1999), the firm will perceive relative lower protection costs of secrecy. But low visibility will also result in limited strategic opportunities. When accessibility of the firm’s information due to its high visibility is high, the firm will experience higher protection costs as the chances of leakage increase, given that the environment more closely observes the firm of interest. However, the firm can also achieve more strategic benefits.
Firms can actively manipulate their visibility, and therefore can actively influence the benefits and costs that arise from firm’s secrecy management. The increase in visibility of a firm can be a result of the firm’s reputation building efforts (Fombrun & Shanley, 1990). The reputation of a firm in that sense relates to signalling to consumers and competition about product quality, attract high quality applicants, enhance access to capital markets, and attract new investors (Fombrun & Shanley, 1990). By signalling the firm’s innovative efforts, the firm also enhances its reputation. By increasing the firm’s reputation, the firm reduces the uncertainty of its environment and ensures a higher degree of firm visibility (Basuroy, Desai & Talukdar, 2006; Pollock & Gulati, 2006).
11 visibility. By recognizing the balance between the protective and strategic benefits, the focus may shift from firms focussing on the protective benefits, towards the strategic benefits of secrecy.
3 Methodology
To relate firm visibility with secrecy management, a holistic-qualitative multiple-case study (Yin, 2009) is conducted. By examining two separate firms, one highly visible and one less visible firm, detailed understanding of the influences on a firm’s secrecy management are developed. The relation this research tries to identify is the influence of a firm’s visibility on the firm’s secrecy management.
3.1 Industry Context
An industry was chosen in which the management of secrets is relevant, and the presence of an institutional environment in which secrecy is a present mechanism to appropriate the value of their innovations, led to the Dutch fast mover consumer goods industry. This specific part of the FMCG-industry in the Netherlands has changed rapidly during the past 10 years. Rapid new product launches and a broad range of different types of products and complements characterize the industry. Although several innovative visible players, the present industry is also characterized by a broad range of less visible, private label producers. Often, the products of the private label producers are an exact copy of the innovator, often the A-brand producer. From recent examples it is recognized that formal protection within the industry falls short and also from media publications it is recognized that some firms actively signal new future product launches.
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3.2 Data Gathering Process
As the industry is selected for providing the right industry context, firms are selected based upon their visibility and on similarities between each firm. By examining two firms operating in the same industry, producing similar products, for similar markets, and of similar size, comparable results are derived from the data gathering process. To minimize distorting effects, such as industry differences and firm specific differences, the firms were both in comparable situations within the industry.
3.2.1 Firm Selection
Two firms are selected after conducting a pre-selection process. This process entailed a semi-structured phone interview with a firm representative, and a detailed investigation of the firm’s website providing the firm’s activities and history to guarantee the firms and respondents fit the exact classification required for the data gathering process. As such, multiple firms were examined, resulting in a clear distinction between the visible firm and the less visible firm. Some of the selected firms that fit the criteria were not willing to cooperate, resulting in a refusal of 2 of the four larger Dutch firms. However, both major players, the Dutch A-brand player, and the Dutch (and European) largest player in private label products, were willing to participate with the research. Due to innovations within this industry, the product portfolio of both firms changed from regular fast mover consumer goods towards goods that are aimed to deliver an experience. The visible firm is listed on the Dutch stock exchange market, while the less visible firm is not. Both firms have a long history, and exist over 200 years in their current business within the Dutch industry. Table 3 summarizes the selected firms based upon their visibility.
Table 3: Selected firms – high versus low visibility
Firm Visibility Firm description
A. High visibility
The firm is highly visible. The firm is on industry-level recognized as an innovator and on market-industry-level the firm is highly visible due to its marketing efforts. The firm had significant previous successes with game-changing innovations.
private-13
label brands that market their product. As perceived by industry actors, the firm is moderately visible, the firm is recognized as a large size player. Further the firm isn’t recognized as very innovative with respect to the development of new products
To check the visibility of both firms using more objective data, this study assessed both firms on their frequency of appearing in the media. This resulted in a clear separation of visibility of both firms, in which the visible firm is most often mentioned in the media (993 hits on firm’s name2), compared to the less visible firm (1hit on firm’s name3). This data triangulation resulted in convincing results to continue with both firms by identifying possible respondents within each firm.
3.2.2 Respondent Selection
This study aimed to interview those employees that were knowledgeable about both the protective and strategic parts of secrecy management within each firm. Both participating firms were asked upfront to explain their activities by phone, and from the researcher side the firm was informed about the essence of the data gathering process. Due to the qualitative nature of the research, both firm representatives were asked to name four persons within each firm to address the scope of secrecy management and to cover the strategic and operational aspects. Four potential respondents were selected, two senior-managers, to address both the strategic and operational secrecy management decisions, and two middle-managers concerned with primarily the protective and operational decisions. Each of these persons were personally contacted and informed with a research outline, explaining their role as participant and suggested dates to conduct the interview. This research outline is attached in Appendix 1. To provide clarity and consistency in the use of terms, the research outline included instructions about the research subjects and were provided before the interview with the respondent.
2
LexisNexis Academic, accessed on the 6th of June, 2013
3
14 Within both firms, both executives were willing to participate and of middle management at both firms only one respondent participated. This resulted in three qualitative interviews for each firm. The respondents were explained that all provided information needed to be confirmed before this information would be used for research. Also, the transcript of the interviews were sent within 2 workdays after the interview, and were all approved within 1 week after they were sent. The transcripts can be found in Appendix 2.
3.2.3 Data Collection
The six semi-structured interviews, three for each firm, took about 40 minutes each. To ensure the transcripts entailed all discussed topics, including the details, the interviews were recorded. The structure of the interviews was prepared by the interviewer by following a question scheme, one for the senior manager and one for the middle manager. This resulted in gathering all the required data, while keeping the flexibility to gather further in-depth information about firm and person specific interpretations and perspectives. Table 4 highlights the different subjects asked to both senior and middle management. The different questions asked were divided over operational-, and strategic-level.
Table 4: Different subjects asked to both managers
Subjects asked Middle managers Executive managers
C. Secrecy Management
The operational aspects of secrecy. The (preventive) measures to prevent leakage
The strategic and protective arguments for using secrecy, its objectives, and the opportunities created (or identified) by using secrecy
D. Firms visibility
Influences of firm visibility on the preventive and protective mechanisms installed within the firm
Influences of firm visibility on the strategic mechanisms and usage of secrecy E. Usage of secrecy management (strategic vs. protective)
Protective usage of secrecy versus the strategic usage
15 All respondents demanded certain additional confidentiality measures, resulting in the limitation of not listing any firm or personal names in the ultimate version of the research.
3.3 Data Analysis
The data gathered are analysed based upon the guidelines provided by Eisenhard (1989). This entails a four step approach, (1) entering the field, (2) analysing data, (3) enfolding literature, and finally (4) reaching closure. By structurally analysing the transcripts of the interview, and systematically relating the data to literature, this study tries to reach closure upon the influence of firm visibility on secrecy management.
3.4 Case Studies
3.4.1 Firm A: the highly visible firm
The visible firm is an A-player in the Dutch FMCG-industry over 260 years. It operates internationally but its roots and main market are in the Netherlands. The firm is globally recognized for its innovativeness and some innovations from the past are considered game-changing for the industry. The brand name is recognized as one of the best known A-brands in the Dutch FMCG-industry and it has a reputation as an innovator, which has repeatedly led to leave competitors following the firm by imitating the firm’s products. The firm operates in the Netherlands on three main locations, two production plants and the head-office. Outside the Netherlands, the firm owns several production plants spread over Europe, primarily to serve local markets or to produce under other brand names.
The game-changing innovations of the firm ensured the firm’s industry-leading position as a major player in specific products and complementary products, like game-changing products produced and developed by cooperative partners. The firm recently separated from its US-based parent, with the introduction on the Dutch stock-exchange market. Latest developments of the ownership of the firm caused the firm to be owned by another major international firm. The data for this research is gathered before this ownership-transition. The firm’s products, brand name, and long history in the industry makes the firm a highly visible firm.
3.4.2 Firm B: the less visible firm
16 growth, the major production plant was bought which made it possible to produce against low cost, primarily for the Dutch retail market. Due to this growth, and the acquisition of the firm by a large international firm, the firm now also produces for major US-based fast-food concerns and other internationally operating firms. The firm serves in total over 1,600 different products, to be sold under several known and less known private label brands.
The firm is known within its industry as a private label leader. Hence, the firm does not consider themselves as an innovator, but more as a quick follower. One of their latest major successes entailed their response of the game-changing innovation of the visible firm included in this research. At point of market launch of the A-player’s product, the firm rapidly decided, apart from the rest of the industry, to imitate the A-player’s product. This patent-protected product, imitated by the private label producer, has caused major disturbance within the Dutch industry, as the private label producer won the patent fight. Due to this risky decision of the less visible firm, the firm was able to grow rapidly and expand their installed base. Its current, leading, market share is due to this decision to adopt the A-players product innovation. By challenging the products of firm A, the firm gained some visibility, however, more as imitator than as innovator.
The policy of the firm regarding its public presentation towards the media is very low. Besides some sponsoring to some public events in the close environment, the firm actively tries to avoid all possible visibility raising activities.
The firm closely observes new product launches of the A-player, but also realizes they are observed by firm A as well. However, firm B monitors firm A to imitate their products and processes, while firm A observes firm B to monitor its imitative, and possible patent infringing activities. At the moment of interview with one executive of firm B, the manager showed one of the A-players products, containing a packaging fault. The executive explained that this illustrated to what level the firms observe each other’s actions and products.
17 their leading position, by having the opportunity to operate under minimal surveillance of other industry actors.
4 Results
4.1 Firm A
4.1.1 Firm Visibility
The interviewees of the firm confirm the firm to be highly visible. This visibility is an outcome of the innovative and successful history of the firm. However, in the last 15 years, some game-changing innovations were introduced which occasionally led to a significant increase of public and competitor’s attention. This attention is demonstrated by the example provided by one of the firm’s executives explaining the presence of patent detections facilities to monitor competitors but also from various studies investigating the awareness of the firm’s market.
The firm is aware of its high visibility and acts upon it by applying strategic manoeuvres to attain certain strategic goals. One of this manoeuvres was explained by the firm’s introduction on the Dutch stock market in which the firm managed minimum leakage of strategic information. The investors presentation prior to this move was prepared in such way to demonstrate some innovations but not to elaborate it too strongly which could lead to providing competitors with valuable information.
Visibility of the firm is also found as a result of the firm’s marketing efforts. With respect to marketing the firm emphasizes on becoming visible to the firm’s desired level. Resulting in several strategies to create “buzz” around certain issues. This strategy is illustrated by the firm’s CEO stating several pronouncements in media-interviews where the quality and superiority of the firm’s most known innovation is questioned and even negatively described. As one of the firm’s executive interviewee’s responded on this event:
“I need to say that within the firm not everybody was that enthusiast about his statements in that interview. …. it was a strategic statement”. (Transcript 1.2 – Firm A – Executive
18 This statement indicated the awareness of the firm’s executives of their visibility. The CEO is aware that all publications to the media have direct and indirect effects, as such he strategically releases messages to attain certain strategic goals. The actions of the CEO illustrate the high visibility position by the definition of Sutton and Galunic (1996), who state that both persistent attention to the leader of his or her organization, and relentless questions about events that have occurred including the explanation of those events, are characteristics for a highly visible firm.
4.1.2 Secrecy Management – operational protection
From the interviews, a clear image was derived of how the firm manages its secrets. Confirming, that since the firm grown into multiple market segments and dominates those, the firm’s secrecy management policies became more formal and were more often a priority on the top-management agenda. As such, secrecy management became, especially in the last turbulent years, a serious point of attention. This increased awareness was managed throughout the firm by workshops, including all managers throughout the whole firm, who were educated how to respond with certain “incidents”. Those incidents for example were described as the loss of a highly knowledgeable key employee, but also included media training in how to respond to the external environment. Beside the corporate workshops, it was explained that especially within the top 150 managers of the firm, emphasis was on educating certain spokes people. By selecting a number of people that are allowed to communicate with externals or with the press, and deter all remaining 150 from speaking with the environment, the firm tries to manage secrecy by minimizing chances of leakage. In this way it is managed to centralize information flows which intentionally lead to less leakage of the firm’s valuable information.
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4.2 Firm B
4.2.1 Firm Visibility
The visibility of firm B is considered by all its interviewees as low, however, all the interviewees also indicated that this low visibility is relative. Because the firm delivers over 1600 products primarily to private label retailers, the visibility of the firm with its consumers is extremely low. However, due to its size the interviewees indicated that compared to its direct competitors the firm become slightly more visible. The firm does not experience direct competition within the Netherlands, but primarily from larger competitors from Belgium and Germany.
As the director of production stated about the firms desired visibility level:
“We try to be as less visible as possible. Our name does not need to ring a bell for our consumer”. (Transcript 2.1. - pg. 5 – answer 22)
Due to the desire to avoid public attention, the firm’s brand name is not known by its consumers. Furthermore, the firm indicates that only 3 to 4 people in the Netherlands need to know their name, which are the major purchasing people in the larger retail stores.
As the firm rarely launches new products that are “new to the market”, the firm has less “observable” events and therefore possesses information that might be valuable to firm’s competitors. It primarily focuses on keeping its secrets “non-observable” for other industry actors, which are their internal processes and in-house new product development. The firm’s strategy is to follow the major A-players in the market because these firms determine primarily the customer preferences. By imitating those successful products the firm ensures a solid customer base in which their products are preferred by consumers over the A-brand due to its lower price. As such, the firm does not focus on marketing efforts to enlarge their brand-power or to increase the visibility of the firm to the customer.
4.2.2 Secrecy Management – operational protection
20 employment contracts, the firm also shields their computer network by personalized passwords and for some confidential projects the firm makes use of compartmentalization. The firm’s production plant and its head office are separated and located on two different locations. Hence the new product development efforts are separated physically from the firm’s production processes. One of the firm’s executives indicated that they experience this compartmentalization as the periodically signals of projects that are going on, and in some cases they are not informed about the details due to the higher ranked importance of certain projects.
All interviewees within the firm indicated that the secrecy topic has been more often on the firm’s agenda in the past 2 years. Reasons for this varied; from increased competitiveness, past success, and also the fact that the firm never suffered any significant leakage. The latter was one of the major reasons why management decided to protect this success by actively increasing the firm’s secrecy management. An example of this formalization of secrecy management is the shielding and closure of all entrances, except the front main-entrance. The firm also installed a reception where visitors are expected to sign the firm’s confidentiality policies and provide the arrival and expected departure time.
Especially at executive level, the interviewees indicated that due to their rapid growth, and the market success of the past 10 years, the firm intends to increase their secrecy level. They notice an increase of attention to the firm by its direct competitors and other larger industry actors.
4.3 Influences of visibility on strategic vs. protective usage of secrecy
21 firms, to in-depth product investigations to compare product and production quality. This monitoring illustrates both firm’s visibility as defined by Sutton and Galunic (1996).
The competitiveness between the firms is evidently present in the sense that without asking, in both firm’s executive managers named business examples of each other’s competitive activities. This indicates an industry-effect, resulting in firms to invest more in appropriation mechanisms to reap the benefits of their innovation efforts (Teece, 1986). However, beside the industry-trend, still significant differences in the firm’s secrecy management approaches are observed which can be devoted to the influence of the firm’s differences in visibility. Furthermore, it is found that firms become more visible for their public due to the fact that they are increasingly governed by the media (Webster and Ksiazek, 2012). Webster and Ksiazek (2012) define the ‘attention economy’ as the process in which the audience is a prerequisite for achieving economic, social, or political objectives. Given the ‘attention economy’, firm A indicated that the monitoring of other industry actors increased sincerely since the emergence of the digital exchange market. This awareness of certain changes in the environment is illustrated by the following statement of one of firm A’s executives:
“We became more visible, but that is not the only change. Maybe even more contributing is that the IT changed so radically in the last 10 years. In the past after we filed a patent the patent was summarized and published in a monthly magazine. Nowadays when patents get published it is spread as soon as possible and the next day everybody knows. Whether we are visible or not, the knowledge gets so easy transferred that protection with secrecy is inevitable. It is the same as “Google alert”; all automatically we get a signal as soon as one of our direct competitors files a patent. And also the other way around as soon as we file something, I am absolutely certain that our competitor is alerted within a week about it”.
(Transcript 1.2. – pg. 7&8 – answer 32)
22 The less visible firm also encountered major firm-level transitions in the past ten years. As a result of these changes, the firm indicated that their visibility increased, though they still consider themselves as a low visible firm. The firm indicated that based upon the industry changes and the change in the firm’s visibility, the firm actively formalizes its secrecy management.
The secrecy management activities compared between both firms show that the visible firm significantly invests more in protective measures. The firm actively trains its employees to handle certain situations in which the firm is vulnerable for information loss, for example by appointing spokespeople, and by forbidding others to speak publicly. The firm compartmentalizes valuable knowledge about new product development efforts by managing secrecy from top-down in the firm. However, this compartmentalization of information can have a negative influence on the firm’s learning efforts (Jamet et al., 2013). The possession of knowledge by individuals is recognized, and key-players are personally asked by the CEO to handle certain information with extra caution. The less visible firm does not invest significantly in managing secrecy. The production director answered on the question concerning the importance of secrecy management the following:
“It is not really important here at the firm. Of course you cannot just walk around at the production environment. And of course we ask our employees when we employ them to sign for confidentiality. Further we make use of the basic secrecy methods like passwords. But nothing special with respect to protection from imitation. About our employees, of course there are some employees with specific technological knowledge. But that is not of major importance for the success of our firm. We do not actively protect such things.” (Transcript
2.1. – pg. 3 – answer 10)
23 relation with its major retailers was managed by strategically using secrecy, to attain certain privileges, like the benefit of last-moment introduction of new products. This awareness was illustrated by one of the executive managers of firm A who stated that:
“We have two moments in the year to launch new products. This heavily depends on the willingness of our retailers to market our products. As such if we want to strategically place a new product we need to do that very conscious in order to constrain our competitors from imitation” (Transcript 1.2. - pg. 5 – answer 20)
Also the example earlier mentioned where the CEO of firm A states that one of the firm’s most appreciated products does not fit its quality standards, the interviewee indicated that this was primarily a signal to the environment to increase the confidence of the shareholders that the firm is working on certain innovative projects.
In firm B, all interviewees agreed upon the influence of firm visibility on the firm’s secrecy management. The increase of public, competitor, or media attention would be a reason for the firm to respond by adjusting its secrecy management. In firm A, both an executive and middle manager agreed upon the relation between firm visibility and secrecy management hence, one executive manager stated that:
“Our experiences causes that even if we talk about our secrets on conferences or on media, they are still protected since they are fully embedded in our culture and in the path we have taken. Because of that, and because of the success we got through it we do not feel the explicit need to actively protect our secrets apart from their strategic purposes. We not just make the product, every element of it is completely thought through and carefully and nicely packaged together. Then it won’t be under attack, people will understand the concept but it will be very difficult for them to adopt it.
Similarly, the middle manager also agreed upon the relation between firm visibility and secrecy management with:
24
management but we know that our DNA is not so easy to copy”.; “I would not only protect the secrets by putting a bigger lock on the gates, the way I would protect our IP is serving our consumers in such a holistic and a complete fashion that most competing firms would find it impossible to come up to that standard”. (Transcript 1.1. – pg.6 & 7 – Answers – 26 & 28)
This perspective can be partially explained by literature. Gemser and Wijnberg (2001) argue that, besides exercising secrecy, firms can decide to (1) protect the innovation by designing it is such way that it requires high capital requirements, and (2) protect the innovation by ensuring an exclusive portfolio of suppliers which are only accessible through the firm self. The statement of the manager of firm A, relates both perceptions and could clarify why the firm would not increase its secrecy level under influence of increased firm visibility. Another explanation of this perspective is the concept of path dependency (Barney, 1986; Barney, 1991). The protection of path dependence occurs through firms relying on their previous learning experiences which are not easily imitated by competition.
The middle manager of firm B indicates that firm visibility influences their protective secrecy management in two ways. First, protecting the firms secrets serves the need to protect the firm’s valuable knowledge from leaking to the firm’s competitors. Secondly, by becoming more visible, the firm acknowledges a possible threat for the firm’s product quality standards. By questioning the middle manager about the influences of the firm’s visibility position on its secrecy management, the middle manager answered:
“Although it is not from within my function, I do get signals that especially on our R&D activities, sales and marketing, it becomes increasingly important [to manage secrets]. That means they provide us with fewer details and we also hear some rumors of projects whilst we did not hear such initiatives in the past”.; “I do not know the reasons in detail, but it has certainly to do with the major costs involved in developing such efforts and those costs would or could be lost when leaked out. And of course it has two sides. It is not only about protecting our knowledge, but also about “food defense” [workshop to train employees how
to handle certain secrecy related scenarios]. We have a few high profile, US, clients. Those
25 This statement explains that besides the potential loss of a the firm’s competitive position, the firm also experiences the potential loss of reputational repercussions (Gemser & Wijnberg, 2001) or the potential loss of a major customer, which makes it more difficult for the firm to strategically use firm’s secrets, due to the risk of damaging firm’s key-customers.
5 Discussion & Conclusion
5.1 Discussion of Results
The research shows several interesting differences with recent literature. Research of James et al. (2013), Levin et al. (1987), and Gemser and Wijnberg (2001) all state that firms rather use secrecy for process innovations instead of product innovations. However, especially from the visible firm of this research, it has been repeatedly mentioned that in the FMCG-industry patenting products is less successful than market lead time, which is often ensured with the use of secrecy. Therefore, the superiority of formal protection over the use of secrecy for product and process innovations would need a context variable, explaining to what extent IP-mechanisms are increasing the appropriability opportunities of the innovator.
The findings of this research indicate a possible relation between firm visibility and secrecy management. When a firm is highly visible, the firm’s valuable information and knowledge is more accessible (Baker et al., 1999), and also becoming visible increases the interest the environment has in the firm (Brammer and Millington, 2006). Especially the reduction of information asymmetries between firms can be enhanced by firm’s visibility (Baker et al., 1999). If a firm emphasizes on maintaining or enhancing the information asymmetries between firms, firms should try to minimize firm visibility or protect the information with IP mechanisms.
26 The consequences of visibility on a firm’s secrecy management showed that, as the firm becomes more visible, it experiences more difficulties to remain undetected and protect secrets effectively, resulting in the firm experiences more quickly reprisals of competitors (Rayton et al., 2012). Therefore, firm visibility influences secrecy management on first, the protective level, and second, on the strategic level. The former is influenced by raising costs and effort of secrecy management as the visibility becomes higher. The latter is influenced by higher firm visibility in the form of better signalling strength of firms and also greater benefit s from strategic opportunities.
5.2 Visibility Influences on the “Protective” Secrecy Management
Both firms showed influences of firm visibility on secrecy management. From the protective perspective of secrecy, as the firm becomes more visible, compartmentalization (James et al., 2013) of valuable knowledge, by informing the “trusted” or involved people, of innovation efforts was showed in both firms. Both firms found their visibility increased in the past few years, and indicated that the increase in firm visibility led to formalization of secrecy management. The degree of visibility determined to what extent the firms formalized their secrecy management. The influences on the actual secrecy management is relative. If a firm perceives its visibility position as low, the firm will not likely recognize the risk of improving the firm’s secrecy level. Hence, with the perceived rate of visibility change, firms tend to formalize their secrecy efforts at the same rate. Furthermore, it is also partially influenced by the change in focus within the industry on secrecy. The influence of firm visibility on secrecy is partially confirmed by both firms, since both firms also indicate that the formalization of secrecy is a result of industry changes.
5.3 Visibility Influences on the “Strategic” Secrecy Management
27 complementary products or technologies. However, the results show that especially the highly visible firm recognizes those strategic opportunities to influence the behaviour of actors in the environment. Given a firm’s decision about its visibility, firms consider the opportunities and threats of certain influences of firm visibility on their activities, including secrecy management.
It is known that the success of a firm’s marketing efforts are related to the firm’s brand-strength and reputation (Simon and Sullivan, 1993). If the firm decides to remain less visible, the firm agrees on operating “under-the-radar”, which entails the firm not being able to successfully signal its efforts to attain its strategic goals.
6 The role of visibility and secrecy management: towards specific
propositions
By analysing the case studies in detail, four proposition can be formulated that describe the possible relations of firm visibility influencing secrecy management.
The highly visible firm indicated that due to their increased visibility, secrecy management became increasingly formalized within the firm. The less visible firm formalized due to their increased visibility of the last few years with respect to other industry actors. Both firm’s executives mention that this formalization was a result of, on the one hand changes in the market, and on the other hand as a result of their increased visibility. This formalization is illustrated by the following answers:
[Highly visible firm] “We absolutely see that our secrecy policies become more formal and
also more detailed. We take it much more serious, beside the influences of our visibility position also due to the developments in the patent effectiveness” (Transcript 1.2. – answer 30
– pg. 7)
[Less visible firm] “And we try to keep the visibility on the other hand as low as possible
because we then don’t need to protect our knowledge more formally”.[formally as in formal
28 Both answers indicate the relation between firm visibility and the formalization of secrecy management, leading to the following proposition:
P1: As firm visibility increases, firms tend to formalize their secrecy management.
Likewise the degree of formalization, indications are found that with higher firm visibility comes higher protective costs. The less visible firm stated:
[Less visible firm] “I do not know the reasons in detail, but it has certainly to do with the
major costs involved in developing such efforts and those cost would or could be lost if it leaked out” (Transcript 2.3. – answer 18 –pg. 4)
This indicates a possible relation between firm visibility and increasing protective costs. As the firm becomes more visible, information becomes more accessible (Baker et al., 1999) and the firm comes under closer surveillance of other industry actors. In order to protect valuable knowledge from leaking to those actors, the firm finds itself increasing investments to improve the firm’s secrecy management, leading to the following proposition:
P2: As firm visibility increases, the costs of protection by secrecy management increase.
As the protective measures become more expensive related to firm visibility, so is found for firm visibility and the strategic and protective opportunities of using secrecy. Although this relation was expected, it is found that there seems to be a turning point in which a firm can consider strategically applying the firm’s secrets. This turning-point can be interpreted as a certain point in which the firm is sufficiently monitored by other industry actors, and has certain valuable information in possession which other industry actors don’t possess. The strategic usage of secrecy provides the opportunity for firms to recoup their higher protective costs that came with their above moderate visibility level.
P3: As firm visibility increases, the higher the potential strategic benefits by applying firm’s
secrets.
29 protective part of secrecy and the potential gains firms can attain by using firm’s secrets strategically. It is argued that since firms can manipulate firm visibility, firms can decide to lower the relative costs of protecting firm’s secrets by utilizing the firm’s visibility strategically, which results in the fourth proposition:
P4: As firm visibility increases, the potential strategic benefits outweigh the increasing
protective costs.
Figure 1: Relative costs of protection vs. the potential gains of strategically applying secrecy
Figure 1 illustrates the potential gains firms can realize by strategically applying firm’s secrets. However, to realize such gains firms need to be more visible in order to benefit from this potential strategic benefits. Beside the relative gain in overall secrecy costs, applying secrecy strategically creates additional benefits such as reputational benefits (Ndofor & Levitas, 2004), and potential intimidation of competition benefits (Ghemawat, 1991). As the firm is low visibile, the firm does not need to invest heavily in protective costs, but also can’t Relative costs of secrecy
P4: Relative potential gain by strategically applying secrecy
Low Firm visibility High
Potential relative costs P2: Relative protection
30 benefit from the strategic opportunities that come with secrecy. If firm visibility increases, the firm can still benefit from its relative low visibility, but can increasingly benefit from the reputational benefits (Ndofor & Levitas, 2004). As such, when visibility increases the firm approaches the point where the relative costs of secrecy transcend the benefits of the firm’s increased visibility. Hence, the firm needs to seek strategic appliances of the firm’s secrets to eventually outweigh the high protective costs that come with the firm’s higher visibility. Firms that are more visible will be more effective in reducing the overall relative secrecy costs through realizing strategic benefits.
7
Conclusion
The findings of this research identify the possible influences of firm visibility on the protective, and the strategic parts of secrecy. It is found that the highly visible firm recognizes more strategic opportunities due to its higher visibility, but also is conflicted with higher protective costs and effort, due to the greater accessibility of information of the firm (Baker et al., 1999).
On the other hand, the low visible firm emphasizes less on protecting its innovation efforts, which is a result of the firm’s low visibility position since the firm is less closely monitored by its competitors, and thus the firm’s information accessibility is also lower. Furthermore, the less visible firm does not recognize opportunities to signal their innovation efforts to attain strategic goals. Reason for this lies in the firm’s strategic decision to remain less visible, because the firm wants to “operate-under-the-radar”. Strategic management of the firm’s knowledge would endanger the firm’s low visibility position which would lead to a greater investment and effort need for the protective part of secrecy.
31 To visualize the relations between the findings and the propositions Figure 2 is included. The figure shows the relations between firm visibility and secrecy management, including the corresponding propositions.
Figure 2: Relations and propositions
The framework shows that firm visibility positively influences the formalization of secrecy management within the examined firms, also a positive relation is visualized between firm visibility and the protective costs derived from using secrecy management. Proposition 3 shows a positive relation between firm visibility and the strategic opportunities firms can derive from using secrecy management. The relation between the relative benefits versus the relative costs of secrecy management is illustrated as proposition 4, in which it is expected that firms find significant benefits from strategically applying firm’s secrets, after the firm’s visibility passes a certain point in which a firm is highly visible for other industry actors.
7.1 Managerial Implications
To protect valuable information from others intentionally by withholding it from others, firms need to identify to whom they withhold the secret, and how and to what extent the firm is monitored. By identifying that information the firm identifies the effort and costs involved with protecting firm’s secrets by using secrecy. If the costs exceed the value protected, the firm can decide to utilize their secrets through applying it strategically.
Hence, applying secrets strategically requires the firm to be visible to a certain extent. The turning point in which the firm is able to reap the strategic benefits of secrecy beside the
P3 + P1 +
P2 + Firm Visibility
Formalization of Secrecy Management
Strategic Opportunities of Secrecy Protective Costs of Secrecy
Relative Strategic Benefits vs. Relative Protective Costs of Secrecy
32 protective benefits, is a consideration managers need to make carefully. To optimize secrecy management, firms need to balance firm visibility and balance the protective and strategic opportunities of secrecy management.
Furthermore, it is acknowledged that firm visibility is not static, likewise secrecy firms need to assess their visibility from time to time to identify the degree to what firm’s valuable knowledge is accessible by others and to what degree the firm is under surveillance of other industry actors.
7.2 Limitations & Future Research
This qualitative study combines the relative “new” concept of firm visibility, by combining literature about the antecedents and consequences, with secrecy management, divided in a strategic and protective part. Although much literature describes the protective roles of secrecy, not much literature exists about the strategic roles of secrecy. Also the effectiveness between different IP mechanisms, formal and informal, is often measured from the protective perspective. The data gathered in this study shows that beside this protective decision about IP mechanisms, firms more often decide to use secrecy for strategic reasons, and do not protect the appropriability opportunities of their innovations formally. This results in firms emphasizing on market lead time to remain ahead of the competition. To realize such market lead time the firm prefers secrecy over formal protection mechanisms, which is confirmed by findings of Levin et al. (1987) and Gemser and Wijnberg (2001). Therefore, future directions on this field of literature comprises the elaboration of “firm visibility”, further develop a better understanding of the relative effectiveness drivers of IP mechanisms, and elaborate the strategic aspects of secrecy management, since it matches the strategic opportunities of patents.
33 The major limitation is the qualitative and industry specific nature of the data on which the study is based. In order to identify the influence of industry specific aspects, research should quantitatively address the differences in technology and innovativeness of firms. It is expected that the more high-technology within a firm is used, the firm possesses more codifiable knowledge which is more easily exchanged between industry actors. Therefore, the firm would tend to use secrecy management differently and would also experience the monitoring of competitors due to its visibility.
Further, the concept of firm visibility is hard to measure and less quantitative evidence and literature is available, visibility is a less developed concept which needs to be quantitatively tested. Also from the case studies, it appeared that firm visibility is context-dependent. The perception of firm visibility varies from consumer level, industry level, marketing level, shareholder level, and between competitors. As such, before quantitatively researching the visibility of firms, research would first need to elaborate the details to what extent firm visibility is relevant and if the definitions vary between those perceptions.
The strategic opportunities of secrecy in recent literature, are primarily derived from the opportunities derived from patent protection. However, due to the different nature of protection and the different applications and goals, quantitative research should complement the existing literature by providing a detailed understanding of the opportunities arising from strategically applying secrets.
