How core competences are developed by start-up companies

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How core competences

are developed by start-up companies

A case study of a Danish golf cart design company

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Master Thesis

How core competences

are developed by start-up companies

A case study of a Danish golf cart design company

by Zulan Song

Dual Award Master in Advanced International Business and Management Newcastle University

Business School

5 Barrack Road, Newcastle upon Tyne, NE1 4SE, England &

University of Groningen Faculty of Economics and Business

P.O. Box 800, 9700 AV Groningen, The Netherlands

Zulan Song Student number: 2090074(Groningen)or

099041139(Newcastle) E-mail: sophiesongchi@gmail.com Supervisors: Prof. Chris Carter

Dr. Kees van Veen Submission: 5th_{Dec 2011}

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Abstract

The aim of this report is to understand how core competences are developed in start-up companies. This topic was chosen as existing literature primarily focuses on large companies, and moreover, see core competences as pre-existent, and in a sense suggest a static causal link between competences, core product, and competitive advantages. In order to explore the issue of core competences in relation to small or start-ups companies, a Danish start-up refer as D-firm was chosen. D-firm is a design company, founded with the purpose of making the “World‟s most exclusive” golf cart. Lacking both tangible and intangible resources, D-firm chose to outsource the development of core product to China. In China, D-firm, however, experiences both failures and frustrations and ultimately decided to move development and production to Finland. D-firm finally produced a successful product in Finland, and is currently selling their golf cart worldwide and doing research and development in-house. This report uses a narrative approach, exam D-firm‟s experiences in two countries. It was found that D-firm gained knowledge by going through these processes. Based on D-firm‟s experience, a model which reflects the development process of core competences is constructed. The model suggests that core competences are developed through a dynamic learning cycle between capabilities and core product, and during this learning cycle, core product and core competences co-evolve. During the learning cycle, knowledge and competences were gained through external partnering, learning by doing, and the transfer of tacit knowledge into the product. Moreover, competences were developed through both failure and success. The findings challenge the current research on large companies, it was shown that outsourcing can be a way for start-up companies to gain and develop their core competences. Moreover, the finding sheds light on how core competences are development through time.

The findings of this report are relevant to both managers and researchers, as they provide a supplemental view, in which core competences can be identified through a process approach. By understanding the developmental process, managers and the like, may pay attention to critical skills they have developed through the learning process, and thus better support and sustain core competences.

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List of Tables

Tabel 1: Strengths, Weaknesses, Opportunities and Threats - seen from D-firm and Marshell (Engineer, D-firm;

engineering assistant, Marshell) ... 27

List of Models and figures

Model 1: Core competences (adapted from Prahalad and Hamel, 1990; Barton-Leonard, 1992 and Barney,1991 ) ... 16 Model 2: The development process of core competences... 55 Figure 1: Project team organisaiton - across three companies ... 37

List of pictures

Picture 1 Club cart 2 seats golf cart ... 25 Picture 2 The initial design of the D-firm G2 golf cart ... 25 Picture 3 The Alfa cart (Inital prototype) ... 29 Picture 4 The three Gamma prototypes produced in Shenzhen: From left: project manager COC, unior sales manager Marshell (the author of this report), designer D-firm, technical director COC and quality engineer COC ... 36 Picture 5 : Final product made in F-firm ... 46

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Acknowledgements

It is a pleasure to thank those who made this thesis possible.

I am grateful to the people provided me the possibilities to carry out interviews. Especially, I would like to thank Anders Lynge, the designer of D-firm. Anders has provided support for my project and has been open to my inquiries. He has, moreover, spent many times in multiple interviews, and supported me with his insightful thoughts and valuable information, and views that enriched my thesis. I would also like to thank Rasmus Sass, Jakob Holstein from D-firm, who also provided many valuable views, and have been very helpful and open during the interviews.

I appreciate the opportunities of interviewing some key persons from China Outsourcing Company and Marshell. They have all provided me with useful information in a very open and honest way. I would like to reveal their names: Carsten I. Egelund, Hans F.B. Rasmussen, Li Cheng, Yong Bai.

I am grateful for the opportunity involving into the D-firm development project in person, this have motivated my interests and allowed me to relate my experiences to the theory learned during my Master study. This made the work of this report very interesting.

This thesis was made possible through the support and help of my supervisors, Professor Chris Carter and Dr. Kees Van Veen. I am grateful for their valuable advice and insightful comments.

I would like to also thank my classmates, for their encouragement, help and suggestions on my topic. Special thanks to Eleni Panteli, for her help during my time in Groningen; and Benjamin Ihbe, for his suggestions on my topic.

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Chapter 1 Introduction

Globalisation has led to higher competition for companies, which has shaped various business strategies in the last decades. In the early nineties, It was important for companies to be largely vertically integrated - to carry out all operations in-house - so that they could “own, manage, and directly control” their own assets(Handfield,2006). While development of technology provided greater opportunities for global businesses, organizations strived to compete globally; organisations were increasingly globalized in the 1970s and 1980s. It was under the context of globalization, that outsourcing became a major feature of organisational restructuring, perhaps one of the most important topics of the business world in the 1990s (Child, 2004). Quinn calls outsourcing “one of

the greatest organisational and industry structure shifts of the century” (Corbert,2002).

Given the importance of outsourcing, what can or should be outsourced is the subject of an ongoing debate. In a broad sense, there are two main categories, which are: Outsourcing of value-chain operations and outsourcing of support activities (Child, 2005). According to Michael Porter‟s (1985) Value Chain model, the value chain of a business includes primary activities such as logistics, operations/manufacture, marketing/sales, and services; the support activities include firm infrastructure, human resource management and research and development(R&D). In the process of choosing what to outsource, researchers stress the importance of identifying core competences, so that organisations do not outsource the 'wrong' activities leading to loss of competitive advantage (Quinn, 1999; Child, 2005; Prahalad and Hamel, 1990). Outsourcing less important activities, thereby enabling the parent company to concentrate on “core competences”, is considered as important benefits of outsourcing by some researchers (such as Quinn, 1999; or Child, 2004).

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view, suggesting that intangible resource such as employees know-how and skills are critical, because they are inimitable, they sustain the competitive advantages for a company.

Problem formulation

Through reviewing the literature, major academic discussions of core competences and competitive advantage tend to focus on what core competences are, why they are important, and how they provide a competitive edge(e.g. Prahalad and Hamel, 1991, Quinn, 1999; Hall, 1993). Questions such as how core competences of a company are developed through time, are merely touched upon. This is a relevant and an interesting question, as competences do not just appear out of the blue, but rather are cultivated and learned through time (Prahalad and Hamel,1991). Moreover, the literature about core competences tends to focus on big companies, and research in general lacks insight into small or start-up companies. This could be influenced by outsourcing studies, which also often focus on large multinational companies (Gregorio et al, 2008; Hsuan&Mahnke,2010). Consequently, researchers seek to provide strategic guidelines for large companies, while ignoring small start-ups. For example, as mentioned, the literature emphasises the importance of identifying and thinking carefully about the „core competences‟ before constructing outsourcing strategies. This however, may well not be applicable to small companies which may be unaware of their core competencies, or development of such core competences. Moreover, referring back to the topic of outsourcing, the choices of outsourcing by many small companies are often not rational, i.e. strategically aiming at concentrating on core competences. Rather, outsourcing decisions for small companies are often passive and reactive (Al-Qirim, 2003), because under a number of materialistic limitations, small companies may not have another choice.

This report aims to address these theoretical limitations, and explore how core competences are developed in relation to small start-up companies. Small companies are an important research topic, as they represent 99% of all enterprises in the EU, and are seen as socially and economically important(European Commission,2011). Since little is known about development of core competences in small start-up companies, this research will be exploratory in nature.

How core competences are developed: A real life case

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golf cart design company, who had the idea of making “the World‟s most exclusive” golf cart. The core idea of this cart was that it is designed to have a driving set-up similar to a modern sports car, and that it will represent the high-end of the market. However D-firm lacked the competences and the financial resources needed to develop the product, and so outsourced the new product development (NPD) to low-cost China. The development of the cart was both problematic and tortuous and lasted approximately four years. A successful product was not finalized before the end of 2009, after D-firm had started up a new cooperation with a Finnish supplier. When launched to the market, December 2009, the birth was reported in different newspapers such as the Metro in the United Kingdom, and the business paper Boersen in Denmark(Appendix 2). The D-firm golf cart was described by both papers as a revolution in the golf cart industry. Currently, D-firm have established R&D in-house, and developed further models.

The D-firm case shows the path of a small start-up firm, who had neither core product nor enough competences from inception and through outsourcing NPD - the only feasible way to develop the cart – succeeded in making their core product, on which their core competences are currently based. The existing literature seems unable to explain this unusual path of developing core competences. However, this path of developing core competences may be unavoidable for small and start-up firms, thus this case is a valuable topic for investigation, and serves the explorative aim – of how core competences are developed in relation to small start-up companies.

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Research questions

The story of D-firm shows that the company‟s core competences have been developed in the NPD process. As the NPD was outsourced, the development of core competences would arguably have been developed through the experiences and knowledge acquired during this process. The evident theoretical limitations on core competences in small companies have triggered the interest to investigate this case study further in terms of the development of core competences. The following question is formulated:

Main research question:

How core competences are developed in relation to start-up companies?

As the core competencies have been developed during the NPD process, it is therefore important to investigate this process. Moreover, as competences are defined as a unique set of skills, and skills are based on knowledge; it is important to determine exactly what knowledge was acquired in the process and what connection the learned knowledge had to the current core competences. Therefore, to assist answering the main research question, the following sub-research questions have been formulated:

Sub-research question:

1. What were the experiences during the NPD process for D-firm?

2. What knowledge was acquired in the process that would set the basis of future core competences?

3. What are D-firm‟s current core competences that the core product is based upon?

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Chapter 2 Literature Review

Core competences

Core competences are those capabilities that differentiate a company strategically from their competitors (Leonard-Barton, 1992). It is also those activities that the company does „best in the World‟ (Quinn, 1999). The concept of core competences is not new. Some researchers refer to it as distinctive competences (Snow and hrebiniak 1980); firm-specific competence (Pavitt,1991) or invisible assets (Itami, 1987). The importance of companies‟ critical skills and competences, was highlighted by earlier literature to be influential on a firm‟s strategy formulation (Andrews, 1971, Ansoff,1965). Later researchers go further and establish the link between strategy, distinctive competence, and organisational performance (e.g. Snow & Hrebiniak, 1980; Hitt and Ireland, 1985). The underlying assumption of these studies seems to be that core competences are pre-existing and static, where companies can just choose and utilise them to determine an appropriate strategy. Such assumptions cannot be applied to small start-up companies which may have few pre-existing skills. More often individual or organisational knowledge and skills are accumulated through learning and experiences through time (Inkpen, 1998).

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World”, and states that core competences are “sets of skills and systems that a company does at best

in world levels and through which a company creates uniquely high value for customers” (12,6).

Prahalad and Hamel (1990) stipulate that development of core competences does not mean overspending R&D, instead strategic alliances can be used to learn and supplement the core competences. The authors, however, remained pessimistic towards outsourcing, and believed that outsourcing remains a way of losing companies‟ core competences, and “typically contributes little

to building the people-embodied skills” (p84). This is because the employees in the organization

would not learn from the strategic business units (SBU) once they have been outsourced. Thus, competitiveness will not be sustained, as a company might risk losing critical skills and valuable chances to develop people-embodied knowledge. By contrast with Prahalad and Hamel, Quinn(1999) suggests that companies should buy in some intellectual competencies or skills, e.g. product design, from the “best-in-World” sources, if the company cannot do best in World design by itself. However, Quinn (1999) states that once acquired ”best in World activities” they should never be outsourced. While these arguments highlight that core competences are learned and needed to be developed, they still tend to focus on large companies; and do not explain how core competences are initially developed by start-ups. For example, Prahalad and Hamel(1990) distinguish between a portfolio of businesses/products and a portfolio of core competences, suggesting that strategic decisions at the business level hinder development of core competences, thus the way to develop core competence should be managed at corporate level. This notion again shows that core competence are assumed to pre-exist, and top managers need to identify and make decision on which core competences they should develop. Lei et al., (1996) advanced this notion of development of core competences through learning and suggested a learning model, however, they implicitly state that the primary aim is to focus on core competence development at corporate level, thus a large company focus. The underlying issues for start-ups is that there is no corporate level, instead often a flat structure, where decision making might just as well be of emergent instances, and not deliberate actions from the entrepreneur(Mintzberg et al., 1998). Moreover, start-ups neither have a portfolio of existing core competences nor a portfolio of products for them to choose, as discussed by Prahalad and Hamel. Rather, start-ups are often short of both human and physical capital, and skills and capacities need to be explored and built(Rothwell and Dodgson, 2007)

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core competences should fulfil three criteria: provide access to a wide variety of markets; contribute significantly to the end-product benefits, and be difficult for competitors to imitate. This goes in-line with resource-based view, in which Barney (1991) points out that an organisation‟s competitive advantage derives from its valuable, rare, imperfectly imitable and substitutable resources. Moreover, according to this view, intangible resource such as employee know-how, technological skills, and organisational processes are critical for sustaining a competitive advantage. This could be because employee know-how and skills are characterised to have a „tacitness‟, i.e. cannot be codified and transmitted easily, thus it is “a source of ambiguity that raises barriers to imitation” (Simonin,1999:469). According to these views, it could be argued that core competences should have their roots in tacit knowledge in order to be difficult to imitate. However, for this knowledge to become core competences, it needs to be developed and learned within the organisation.

We know core competences consist of different skills and capabilities, which lead to production of core products, thus the question for a firm is, what kind of capabilities are needed in order to produce a core product?

Leonard-Barton (1992) adopts a knowledge-based view and points out that core capabilities include the following four dimensions:

1. Employee knowledge and skills: Refers to knowledge and skills embodied in employees of the organisation, and this type of knowledge is the one most often associated with core capabilities (Teece et al., 1992). These are also the most relevant capabilities to NPD (Leonard-Barton, 1992).

2. Knowledge embedded in technical systems: This type of skill results from years of accumulating, codifying and structuring the tacit knowledge. Some examples of technical systems are production systems and information systems.

3. Managerial system: Refers to formal and informal ways of creating knowledge, and controlling, decision making and power.

4. Values and norms: Refers to the various types of knowledge both embodied and embedded in the organization. Different values and norms lead to different rationalities.

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product development (Ulrich and Eppinger, 2004). The logic is that without finance there will be no employee salary, and as the competences lie within the employees, there will be no (core) products. Conversely, without people‟s skill, no profits will be made, thus less financial support in developing capabilities and products are present. Therefore, capabilities and skills may be seen to interlink with materialistic resources, leading to core competences and competitive advantage. This is consistent with the resource based view, in which valuable resources include both tangible and intangible resources (Barney, 1991; Collis and Montgomery, 2008). The above literature review sets the basis for the below model.

Employee knowledge and skills Managerial systems Technical systems Values and norms Core competences Core product Physical Competitive advantage Financial

Capabilities and skills Materialistic Resources

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Developing core competences

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Chapter 3 Methodology

Research design

This paper seeks to study how core competences are developed by a start-up firm through outsourcing. It will use a single case study with a narrative basis. A qualitative case study is seen as a suitable research strategy as little or nothing is known about the phenomenon (Thomas, 2004). This could be because a case study enables the researcher holistically to investigate a case company, and to consider the majority of the aspects within the case study. This then allows intensive analysis and deep understanding, and the research might be more critical and better able to explain why certain phenomena occur. Furthermore, the „thick description‟ of the case study may form the basis of the explanatory theories (Thomas, 2004). In this report, little is known a priori about core competences in relation to small start-ups. The details and the richness of a single case then allow a deep understanding and explanation of the phenomenon of: development of core competences in start-up companies. Some researchers might argue that the limitation of a case study strategy is that external validity and generalization are difficult to secure. These limitations may be relevant for this report but may not be critical since the aim of this report is theory-building. Specifically, the aim is to add to theory by exploring and adding to our understanding of development of core competences by start-ups. Since the research purpose is to develop theory, not to test it, the choice of a single case, i.e. theoretical sampling, is appropriate (Eisenhardt and Graebner, 2007).

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actions in a sequence i.e. NPD that leads to the outcome to be explained. A narrative approach is thus appropriate, as it can provide a way to explain the case by locating events within a meaningful story (Thomas, 2004).

Case study

As already mentioned in the introduction, the empirical setting of this research is based on a story of a start-up firm D-firm develops their golf cart. Researchers point out that cases are often selected because they are unusual or extreme, and suitable for illuminating and extending relationships and logic among constructs (Thomas, 2004). This is also why the D-firm‟s case has been chosen for this report. The development of D-firm shows the process a start-up company developed its core competences from inception, in a way which cannot be explained by the existing literature. In this way the aim of exploring this unknown area is served. Moreover, this case is unusual because it does not follow the path discussed by existing literature. For example, international expansion (see Ohmae, 1982; Farrell, 2004) suggests that R&D and manufactory is the last step of locating activities in a foreign country, whereas D-firm started by locating R&D aboard. Another reason for choosing this case study is also from personal interests. The author of this report has participated in this project as a communication agent between the partners for one and half year, it will be interesting to connect theoretical consideration with my personal experience in the D-firm case.

Data

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interviews were face-to-face, which increased the accuracy of the research, because live communication enables questions and responses to be understood properly (Sekaran and Bougie,2010). The interview questions were semi-structured, and based on literatures about outsourcing, core competences, but also taking NPD literature into account(sample questions Appendix 7). This served as a guideline, ensure interviewers provide the most relevant information possible, but also allowing the interviewees to unfold their experiences and tell „the story‟ from their perspective (Bryman& Bell, 2007). This flexible approach supported the explorative research aim of this report. Some limitations in the way that data were collected are: it has been two years since D-firm outsourced to China Marshell, therefore, some issues, experiences and feelings might have been forgotten. However, this could also be an advantage. Since the project with China already terminated, the interviewers could be more open as there are no sensitive or confidential issues for example, between D-firm and Marshell. Furthermore, since it is already two years ago, any extreme emotions either negative or positive are diminished. Therefore, interviewees were likely to be more objective when commenting on their understanding and feelings of the experiences.

In D-firm‟s later development with its Finish partner, the author was not personally involved; the data were therefore mainly collected through interviews with D-firm‟s designer, the engineer and the chief engineer. Interviews were also semi-structured, questions raised were based on the literature mentioned above. Moreover, questions were also related to the China experience. It should be mentioned that these three interviewees from D-firm were closely involved in the NPD process. The designer was in the company from its inception, and was closely involved in both the Chinese and Finish cooperation. He is also currently one of the top managers and owns shares of the company, and takes responsibility for managerial decisions(see Appendix 1). One of the engineers that were interviewed also started in D-firm from the very beginning, and was the main engineer at the time D-firm outsourced to Marshell in China, and was also fully involved in D-firm‟s later cooperation with the Finish company. The other engineer is D-firm‟s current chief engineer, who was not involved in the Chinese experience, however, he was team leader responsible for the project while D-firm moved outsourcing to Finland.

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Chapter 4 Analysis

The aim of this chapter is to analyse the development process, taking a narrative approach and following Wheelwright and Clark‟s(1992) three major steps in product development: idea and concept generation, detailed development and preparation for manufacture. This approach has been taken because D-firm most likely developed their core competences through their experiences in the NPD process. Specifically, this section seeks to answer:

- What were the experiences during NPD process for D-firm?

- What knowledge was acquired in the process that would set the basis of future core

competences?

4.1 The beginning of the D-firm cart – idea and concept generation phase

The idea of D-firm business comes from its founder who worked as a car sales man. The origin of the golf car comes from his dream. For market research, the founder and the designer of the company visited golf courses in Denmark; they found that there were not many golf cars sold in Denmark, and none had their origin in Denmark. This was assessed to be due to the high prices of golf cars (D-firm designer, 2011). Therefore, the company initially wanted to make an inexpensive cart, but with optional features, such as logos, for the body of the cart (D-firm designer, 2011). The first design of the D-firm golf cart was made by the D-firm designer in 2005 (pictures see Appendix 4). D-firm, however, decided to find another company to do the development and manufacturing for them. This decision was made because D-firm, at that time, only had two employees in the company, and neither of them had experience in making golf carts (D-firm designer, 2011). Moreover, at that time, D-firm did not have enough financial backing from investors to support this project. Therefore, it would have been too expensive and unrealistic to establish development and manufacturing in-house. Additionally, according to D-firm‟s current technical engineer (2011), engineers were in short supply on the Danish labour market at that time. In order to keep the cost low, D-firm therefore decided to go abroad (D-firm designer, 2011).

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development which focuses primarily on, planning the target market, the project and business goals (Eppinger and Ulrich, 2004). However, in order to develop this market idea and concept into an actual physical product, D-firm needed to have a set of capabilities. The capabilities of developing a product were discussed earlier in the Literature Review chapter, and four dimensions were found.

Among these, employee skills and knowledge are the most relevant capabilities in terms of NPD (Barton-Leonard,1992). Moreover, according to Eppinger and Ulrich(2004) important capabilities and employees for developing electromechanical product include: industrial designers, mechanical designers, electronics designers, manufacturing engineers, purchasing specialists, marketing professionals, and project team leaders. D-firm‟s situation at this time clearly shows a lack of several of the above capabilities, with only the designer and the founder at work, thus major capabilities needed to be acquired through external parties. This is not new for SMEs, as SMEs are characterised by resource poverty at different levels, thus competitiveness is often gained through external networks(Al-Qirim,2003;Narula,2004;Rangone,1999). The reasons for outsourcing, as described by D-firm‟s engineer and designer, shows that D-firm‟s choices for outsourcing the development of a golf cart were passive, as the company basically had no choice due to the lack of finances and capabilities. This result concords with studies such as Al-Qirim(2003) who found that small companies outsource mainly on an ad hoc basis, i.e. reactively, or when required.

China was chosen by D-firm, as the country to outsource development. The main reason was an imminent low-cost advantage. Additionally, the founder had experience of China and already had contacts there. The founder‟s experience came from previous business relationship with a furniture company who manufactured in China, and he understood the low cost advantage of out sourcing to China (D-firm designer,2011). Therefore, D-firm recognising this advantage, saw China as the best choice for the golf cart development. This were nevertheless later seen by D-firm‟s designer as a major mistake because“…We kind of leaned on that, we knew a guy there, this guy can show us

around…let‟s go to China, do a cheap car, and do it fast…and it was really driven by this stupid thought of „how difficult can it be‟, that was the biggest mistake we have never articulated” (D-firm

designer,2011).

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existing in the head of the leaders (Mintzberg et al.,1998). The strategy of outsourcing was based more on intuition, than actual positive facts speaking in favour of China. Additionally, the cart cannot be placed in the same business sector as furniture and thus using the same strategy as for the furniture company was not carefully considered.

With the idea of making an inexpensive car, D-firm found a Chinese supplier in Northern China, and the first sample was finished in 2005 (D-firm designer,2011). However, when presented to potential investors, this cart was rejected, because a professional golf player believed that the functionality of the cart was insufficient. He suggested travelling to America, the biggest golf cart market in the World, and visiting some famous golf courses and clubs in Florida. The observations were that“people living in these high class golf courses/communities have very nice and expensive

houses, cars, and clothing, but they share a 3000 dollar golf car which looks just like the one you would find everywhere else.” “This did not make sense, because everything else i.e. the houses, the cars, the watches on these people were very unique expressions of who they wanted to be.” (D-firm

designer,2011). D-firm thus saw an opportunity for high class unique golf carts, and that at present, the market lacked these high class designer products (Golf cart market: Appendix 5). Consequently, the initial idea of making an inexpensive golf cart was rejected. Instead, D-firm decided to change their business focus to building the World‟s most exclusive golf cart (the first of its kind) that would combine superior design, comfort and driving experience. The core idea was to make a golf cart similar in quality and function to a high class road car.

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stems from the company goal being mostly informal (Daft, 2004 p329; Mintzberg, 2003 – chapter 13).

As the business goal of the golf cart project changed into making a high quality product, i.e. the Worlds most exclusive golf cart, the designer began to re-design, and the final looks for the new D-firm car – the “G2” was finished in early 2006 (picture 2 below). From the figure below it can be seen the G2 differentiated itself from comparable golf carts, both in regards to its curvy design but also technically, introducing features like „sporty-like‟ driving through use of double-wishbone suspension, and use of light-weight aluminium components for example for frame and roof. „Normal‟ golf cars on the market, like the American brand Club Cart(Picture 1), often appear to have a square design, and consist mainly of steel materials.

Through introducing the idea of the World‟s most exclusive golf cart, D-firm did get some investors involved in the project(detailed investor structure Appendix 1). However, the investors did not, at that time, want to put in large amounts of capital, maybe because the concept was too far away from being an actual physical product. Consequently, the D-firm still had to keep the cost low (D-firm designer,2011). Therefore, D-firm decided to continue to run this project in China. Nevertheless, since D-firm did not only focus on low cost but also high quality, they were more thorough this time, i.e. in their choice of supplier. D-firm therefore hired a Danish consultancy company, China Outsourcing Company (COC) (Company introduction Appendix 3) to assist them in choosing a proper supplier in China, but also to establish better quality and control management during the development process. D-firm believed that COC‟s experiences in China, and its dedicated project management staff, could supplement D-firm‟s shortage in experience and human resources (D-firm

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designer, 2011; D-firm engineer, 2011). D-firm and COC started to visit different factories in China at the end of year 2006.

As mentioned, D-firm‟s change in business strategy can be seen as rather radical. According to Porter‟s (1985) generic competitive strategy, companies can gain competitive advantage through two broad strategic objectives, low-cost and differentiation. The first idea of an in-expensive golf cart underlies a low-cost strategy(Porter,1985). Ways to realise such a strategy are for example to locate organisational activities in a low-cost country. Thus, choosing China for its low-cost focus was consistent with accomplishing D-firm‟s initial goal. However, the change in business idea to an exclusive car underlies Porter‟s differentiation strategy. A higher level of differentiation strategy is to optimize quality and design by offering something that is truly different (Mintzberg et al., 1998). However, while D-firm changed its strategic focus, the decision to outsource to China did not change. Developing the World most exclusive golf cart while still focusing on low-cost, seems thus to be a paradox, as trade-offs are necessary between strategic focuses, in order to become market leader. A unique product requires unique skills and creativity to make, whereas low cost requires operational efficiency (Mintzberg et al., 1998)

In December 2006, D-firm and COC contacted the Chinese golf cart manufacturer Marshell Green Power Co. Ltd. (Company introduction Appendix 3). At the initial meeting, several persons were present from Marshell management such as the President, the General manager of the sales department, the engineering director etc. Marshell made a good impression on D-firm/COC, in fact the designer stated that: “We ended up with Marshell because that is where we had the best

impression” and according to the technical director of COC “…The reasons we chose Marshell were because the managerial team were very committed and efficient, and the unit price they offered was attractive”. Further observations were that:

“We thought Marshell had good engineering capabilities…the manufacturing facility was good, the size was also big especially since they had a new factory open soon in Shanghai”

(COC technical director, 2011)

“…the Marshell product had much better quality than the other Chinese golf cart manufacturers we looked at.” (D-firm

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“The plan was also to find something that was not „too Chinese‟. Because it is much easier to communicate with people that are western minded, for example a more internationalised company with more foreign activities, like Marshell”

(D-firm technical engineer, 2011)

On the other hand, it can be observed that Marshell was also considerably interested in this project. Marshell‟s motivation to corporate with D-firm, came from the carts innovativeness, but also from the future approx 2000 carts manufactured annually. The production volume would provide a good and stable work load to the new and empty factory in Shanghai. Marshell‟s strategy was to offer a low unit price to attract the project, and to gain profit by lowering the unit cost when the annual quantity increased later in mass production (Marshell president). Another benefit Marshell could gain from this was to improve the company‟s R&D capabilities, and the G2 project could thus serve as a good reference for new customers.

The following table summarises the two companies‟ motives and risks of the cooperation, at the time of contract signature:

D-firm Marshell

Strength Strong idea and innovative

design

Human resources and facilities, technical knowledge of golf carts, low cost

Weaknesses Lack of resources and

engineering knowledge

Language

Opportunities Utilize large market potential

through low cost

Increase market share through new cart model, learning new tech. and design, stable order flow

Threat Unable to meet market

demand, exceed cost and time, unsatisfactory quality level

Unrealised product, waste resources

Tabel 1: Strengths, Weaknesses, Opportunities and Threats - seen from D-firm and Marshell (Engineer, D-firm; engineering assistant, Marshell)

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flow through utilizing D-firm‟s strength of having an innovative design idea; D-firm by utilizing Marshell‟s strengths of low cost and large resources, in order to meet the potential demand for exclusive golf carts. It was thus evident to both parties that mutual benefits were present through the relationship. According to Håkansson et al. (2002), having a mutual benefit is a prerequisite for a successful relationship, low on conflicts. It thus seems that the configuration from a strategic point of view, provided good ground for future cooperation. Threats and weaknesses were also evident to both parties, however, both considered the potential gains outweighed the threats, as shown above.

After these initial meetings held in January, 2007, Marshell were chosen as a project partner, and the project team was established. The project team consisted of members from all three companies: D-firm, COC and Marshell. The responsibilities were: D-firm would be in charge of the outer design. COC should represent D-firm in China, and provide supervision, assist in communication, and perform quality control. Marshell should follow D-firm/COC‟s requirements and ensure the technical development and the functionality of the golf cart, and also manage mass production.

Learning Summaries

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4.2 Chinese experience

Developing the G2 cart - Detailed development phase

Once the team was established, the developing schedule was agreed. Some milestones were: to design mechanical system, to make three sets of prototypes, to make tooling for mass production, to make 18 pilot carts, prepare for production in Shanghai (Detailed schedule see appendix 9)

During the detailed development phase five prototypes were made, the Alfa cart, the Beta carts and the Gamma carts:

The Alfa prototype

All parties believed that the project went smoothly for the first six months. The first G2 prototype was finished in June 2007(see picture below). Although there were many outstanding issues about functionality and the quality1_{, D-firm and COC were satisfied at this stage, and in fact pleasantly}

surprised by the speed (D-firm designer, 2011; D-firm engineer, 2011; COC technical director). Seen from Marshell‟s side the engineers and workers were also generally satisfied and pleasant about the achievement.

1

For example: the angle of suspension system was not correct; the aluminium roof system was not consistent with the design and thus difficult to fit into the fibreglass body; the quality of the leather seat was also not good enough.

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The beta sample(Two items)and the Gamma samples(three items)

After the first prototype, the plan was to make two beta prototypes to implement engineering and design changes that were needed in order to improve from the first sample. Thorough functional testing, like endurance tests of the chassis, would be carried out. When making the three Gamma prototypes, all the knowledge accumulated through the Alfa and Beta prototypes would then make the Gama carts of higher quality, and these would be used as master samples for mass production. Despite the good intensions, the project ran into some problems, rooted in:

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Frequent changes

Frequent changes, originating from both Chinese and Danish teams, occurred during the Beta and Gamma prototype development. However, when changes on the carts or tools were needed, cost would occur, and one question was always raised, namely: who was responsible for that change? From D-firm and COC‟s point of view, Marshell would in most cases be responsible, because Marshell was responsible for engineering and functionality. However, Marshell argued that the design, provided by D-firm, was not detailed enough and the design solutions were too far from reality. As Marshell chief engineer (2011) states “it was very difficult to engineering, because

D-firm did not specify the requirements for the product…and their design is just a picture…”.

Furthermore, Marshell also felt that D-firm was not open to suggestions, and insisted too much on their own designs and ideas. “…the design is very nice but difficult to realise, we always tried to

make 2D engineering specifications and samples according to their 3D design drawings, but it never reaches their expectations” states Marshell engineer. In order to make D-firm change their

design, Marshell‟s engineers would have to try to develop the requested solutions despite having informed D-firm of the impossibility of making a component functional or within the manufacturing budget. D-firm might realise that an alternative solution was needed but they regarded Marshell‟s engineers as inexperienced and unskilled. The alternative solutions provided by Marshell engineers were often not good enough2

(COC technical director, 2011). D-firm‟s technical engineer states that the Chinese engineers “lacked the ability to think creatively. They could make

something which already exists, but if they had to make something completely novel, it was difficult for them.””... in China, people are used to listen to what the big Chairman says, and people don't think before they do things”.

Creative engineering capability was important for developing D-firm golf cart, because the cart has a different mechanical structure compared to all other carts on the market. The above quote shows that D-firm understood at this point. The inability of Marshells‟ employees to develop D-firm car might be rooted in their lack of skills but also in their national culture. Hofstede (website) characterizes China to have a higher degree of „uncertainty avoidance‟ compared to Denmark.

2

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Uncertainty avoidance means to feel uncomfortable in unstructured situations (Hofstede, website). The high uncertainty avoidance in the Chinese culture meant Chinese employees dislike uncertainty, and have a greater need for structured work than the Danes. This could be a barrier to creativity, because innovation and creativity means to think or to do something differently, thus involves risks and uncertainty. Therefore the Chinese may be less open to innovation compared Danes.

Quality disagreements

With the development process moving forwards attention was paid to details and refining/finishing of the golf cart. The definition of the finished product was discussed already in January 2007. High quality requirements were prioritized by the Danes, and an agreement was reached that the Danes should approve the quality of the diverse parts, at all times. Despite this, quality was the biggest issue in the development process of the G2. The Danes were disappointed with the quality Marshell provided, and it rarely met their requirement and expectation. The fluctuation in quality meant that D-firm/COC often „failed‟ the manufactured components, and insisted that Marshell had to remake them. The Danes were frustrated that the Chinese seemed unable to understand the concept of „high quality‟. On the other hand, the Chinese were confused as to what quality level was actually required. It was very difficult to follow when there were no samples (Marshell chef engineer, 2011). Marshell believed D-firm had „unreasonable‟ high quality requirements, and that this resulted in wasting well-functioning products. For example, D-firm/COC required fiber glass bodies to be scrapped because they did not reach their quality standards. At the time of the development process, the Chinese project manager complained that these parts were better than the quality of Marshell‟s own golf carts thus to scrap these parts was a waste of money and effort. The combination of the quality requirements and the engineering changes mentioned above resulted in components being reworked over and over again. Often, Marshell believed that this inefficiency was due to too much focus on small cosmetic issues.

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no quality definitions, no samples to use as quality benchmarks, the standard for quality assessment was basically based on a personal visual standard and that person‟s understanding of high quality. In this case, the quality standards of the Marshell workers and the Danes were different. D-firm and COC believed that the cultural gap between two countries had a major impact on the quality issues and the cooperation:

“A big issue of the entire cooperation was the massive gap between China and Denmark. For example, how many things you have experienced, how many things you have seen, how do you perceive different things and what are your values in life… I think they have difficulties in understand high quality, and if it actually existed… if they have never looked at a Bentley or Ferrari, the benchmark we have used for our golf cart product, then how could they know? You have to have some references. None of us have a Bentley or Ferrari, or a 5000 dollar hand bag, but we have seen them, and we know what they look like, and that‟s what makes the difference.”

(D-firm designer, 2011)

“…If you are living in a dormitory with 10 other people, I think you have hard time to understand what quality really is.” (D-firm engineer, 2011)

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“For such a guy[the Chinese factory workers], living together with 6 other guys in his room, missing his family, not feeling he is going anywhere on a personal level, he is very locked in his position…to ask him to make a 15,000 dollars golf cart, and justify that it has to be the same quality as a luxury car…it does not make sense to him…because it is totally unnecessary to him, as he was worrying too much about basic survival”

(D-firm designer, 2011)

“It is more or less the same for the engineers. For them, the cart was running the steering wheel was turning and we kept complaining that the suspension quality is not good enough… I could understand that would not matter to him, because maybe he was worrying how can I get off earlier and spend some time with my family?... for them the quality is merely understood as „functionality‟, and we understand quality as „finishing‟…”

(D-firm Engineer, 2011)

“I felt the Chinese engineers (also workers) did not have any real interests in cars… I think many Chinese people have a hard time just to get daily work, and to earn money to support their family. So they do not have many interests besides just making money.”

(D-firm engineer, 2011)

More concerns were about the influence of the education and skills of the Chinese workers. For example, D-firm engineer(2011) states that “… Marshell was taking in people from the street to do labouring work. If you are not skill at your job, have no education or the wrong education, you are probably not able to do a piece of good craftsmanship.

“When they moved to the Finnish car manufacturer, they got professional people…they knew everything about car design, and the quality requirement. You can see the golf car that Marshell made was a much simpler structure than D-firm really wanted, and I sometimes feel that the engineers did not really understand why D-D-firm would like to have it like this, because the old traditional design was good enough for them.” (COC technical director, 2011)

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the global market; it is unlikely that they can pay high salaries to have workers who had a high education and high living standard comparable to their Western counterparts.

Price disagreements

Despite all the problems seen with the two Beta versions, the third versions (Gamma carts) were made and shipped to Denmark for testing (Picture 2 – the 3 Gamma carts). One of these carts was later brought to the USA as a sample cart and shown in the biggest golf cart show. The other two Gamma carts were tested for functionality in Denmark. In January 2008, the G2 project, including tools, prototypes and major project staff3 were all moved to Marshell‟s new factory in Shanghai. G2 were further developed in Shanghai for mass production. 18 pilot G2 golf carts were made at the Shanghai factory. The quality problems still persisted, and caused frustration for both companies. For Marshell, it was tiring and costly to make changes and follow the „unreasonable‟ high quality demands. As a result, Marshell‟s top managers lost interest in companies‟ original strategy, which was to benefit through mass production. Instead, in order reach break-even, Marshell universally raised the prices. For example, the original quote per cart was 2800RMB, instead the price increased to 6500RMB per unit. The engineering and tooling price were also increased. The arguments were that the work Marshell undertook was more complicated, and the quality requirements were higher than initially described by D-firm. Furthermore, small orders and special high quality requirements increases the purchasing price for raw material and components. On the other hand, D-firm claimed they have emphasized their quality requirement clearly at the initial kick-off meeting, and that the requirements never changed. Although Marshell‟s price kept rising, D-firm saw no essential improvements in quality level. As a result, D-firm and COC were both unsatisfied both technically and commercially. Thus, D-firm had to take action and as a consequence, the introduction on the American market, was postponed.

3

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Picture 4 The three Gamma prototypes produced in Shenzhen: From left: project manager COC, unior sales manager Marshell (the author of this report), designer D-firm, technical director COC and quality engineer COC

Project team conflicts

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Firstly, it was observed that Marshell had too few people working on the project. At the kick-off meeting in January 2007 Marshell presented 17 people to be involved in the project. These included members from all functional departments. However, as shown in above figure, only four people were actually fully allocated, on a day-to-day basis, to the project. These were: the junior sales manager, the sales assistant, the G2 project engineer, and the engineering assistant. This may be seen as problematic technically as it meant that the whole mechanical system was designed by one engineer and his assistant. The remaining members presented at kick-off were mostly for show. In many cases they were not qualified to take the responsibility. For example, the Chinese project manager was initially introduced as responsible for overseeing and to coordinate the project development. This person was also the production manager in the factory in Shenzhen. The project manager had neither the engineering background nor the English communication skills, needed for the coordinating role of a project manager. Even though the Chinese project manager was officially at the centre of the project team, and in charge of coordination; during the product development the project management role seemed to be allocated to the junior sales manager. The division of project

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management would be assessed to be approximately 70 % in favour of sales, leaving sales at the centre of the project.

The relatively small project allocation, from Marshells side, resulted in project inefficiency, which was not recognized by Marshell‟s top managers. Moreover, while D-firm/COC were dissatisfied with the speed and the quality, top managers at Marshell, who were often involved in the meetings, would at the time promise improvement. However, after the meetings, the top managers would pass on the promises to the original project team members, often without adding extra resources. Ultimately, it seemed on the Chinese side, there was no concept of project management. According to Brown and Eisenhardt(1995) project team composition and team leader are essential to the success of a new product development project. Specifically, it requires project leader to have power, management skill and strong vision. Moreover, as mentioned, Eppinger and Ulrich (2004) states some important capabilities are needed for developing electromechanical product4. These people in the case of G2 project were not present or not fully involved.

Communication

Communication have long been discussed as one of the issues most critical to successful project development(Brown and Eisenhardt, 1995; Pinto, 1990). It includes internal communication within the project team, and external communication to critical stakeholders such as suppliers. Effective communication can achieve a common understanding of project goals, and develop solutions for problems, and ultimately improve team performance (Brown and Eisenhardt, 1995). However, the communication quality between D-firm/COC and Marshell were assessed to be generally poor. According to one communication model(Gupta&Govindarajan,2000), the richness of transmission channels between communicators has critical influence on communication quality. As showed in the figure above, the communication channels between the three companies were limited. The project group on both sides had to communicate through Marshell‟s sales department. The reason was practical, as sales had the only English speaking employees. The most basic requirement of communication is to have a shared language( Carlile, 2004). The Marshell President however was of the opinion that hiring English speaking engineers was a bad idea, as employees from operational

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departments may possess company secrets, and in order to protect business, it is better to use the sales department as a single communication channel. The barriers of language lead to major inconveniences in the development process, because both the Danes and Chinese engineers and operational staff communicated through sales personnel5, who had no technical background. Frustrations were observed numerous times among the Danes. For example, the project manager of COC( 2011) states“ If for some reason the junior sales manager was unavailable; the Danes would

need to communication through COC‟s Quality Engineer or the Sales Assistant, spending a lot of time trying to make these two Chinese understand any inquiries”. However, while the Danes were

frustrated in this situation, from the Chinese side the ill communication seems to have been used as an excuse for not taking responsibility for unfortunate actions. Having only the junior sales manager in the central role of communication, basically meant she was over-loaded with information, work, and responsibilities. This also negatively affected the balance of project team arrangements, because the Chinese workers would not offer full input to the project, if they did not feel responsible.

The termination of G2 project in China

In May 2008, 18 pilot carts were made in Marshell‟s Shanghai factory and shipped to Denmark for testing and exhibition. However, many problems were exposed in all the carts while being tested. The electrical system was one of the biggest problems. For example, many electrical components did not work after some time; the wires were not in order; exposed parts were not waterproof, etc. In order to keep the carts running and to retain the commitment of already established customers, D-firm had to spend a large amount of money for continuous repair. After experiencing all the problems in China, D-firm lost confident that the Chinese supplier could reach required quality. In July 2008, D-firm decided to terminate the cooperation with Marshell and COC.

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Although D-firm had many headaches with Marshell, the experiences contributed to further development of the cart. D-firm realise the design of the car needed to be reviewed. They changed the design for the dashboard, armrest, roof system, and the structure of the chassis and implemented these changes on two of Marshell‟s sample carts. The development process with Marshell was later seen by D-firm as an important step for D-firm, both in terms of learning, sustaining investment and the further development in Finland. They state that: “…I was using these two carts with

modifications to show our later partner what it should look like, what we should achieve…the sample was a good way to show them, and hopefully they would agree they could make it one step… without the cart from Marshell, convincing F-firm would have been much more difficult. Because you can‟t just convince people with nothing, they will not buy in.” (D-firm designer, 2011)

“…we had learned from China, but the most important thing was that we had the car… …So we could show F-firm, drive the car and show them what was good , and what was not good, in that way we learned.” (D-firm designer, 2011)

These above two quotes show that D-firm learned from these cars and understood that having the physical sample for the product is an efficient way to learn. By having the car physically, it is also easier to communicate with external supplier. While D-firm learned from the car, they also learned from the process of making the car. The following quote from D-firm engineer shows during the process of making the physical product, the employee‟s skills and knowledge have also been improved through learning by doing. Specifically, this refers by making the carts, it improve D-firm‟s capabilities in mechanical design, and technical specification. Lack of these capabilities was a fundamental reason behind problems such as quality disagreement and communication. “I think

China was a good experience for us, we did really learn from the prototypes we made there, both how we wanted the car to be, and how to design/develop…I had no experience in golf carts when I started in D-firm…we also became better to specify during the time in China. At the beginning we were too brief, did not think in depth about the design…” (Engineer)

Moreover, D-firm also stated that the importance of having the physical cart, is to re-enforce the confidence of the investor, thereby accumulate enough finance for the product development. For example, theD-firm engineer (2011) states that “…we made those prototypes in China, and we did

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more money into the project. Because they could see that this was a really cool product, it was a good idea, they had only seen it on paper, now they could see it and drive it, but it just need to be better, this made them want to invest more money to build it properly.” This could be because

investors often decide to support projects according to risk. In the early stages of investment, there is product risk i.e. the product may not be feasible (Lucintel, 201). D-firm do also now admit that they were partly responsible for poor NPD in China. This was mainly because they were unsure about their product at that time “… it succeeded at a certain level, if we have been better at

specifying, we would have had better success. But the problem was we did not really know where to go.” (D-firm engineer, 2011)

Learning Summaries

In this section of the analysis, it was found that D-firm experienced multiple problems in the cooperation with Marshell. The overall problems were:

- Frequent changes - Quality disagreements - Price disagreements - Project team conflicts - Communication difficulties

Despite this list of problems, analysis showed that D-firm learned the following:

- In order to ensure a satisfactorily quality level, it is necessary to define, in advance of cooperation, the specification of their cart. Having specifications in place, could also help to prevent problems in frequent changes and communication.

- When product specification is missing, different cultural background, may lead to different perception of quality.

- Multiple communication channels are necessary, in order to achieve direct communication with departmental functions. At Marshell the risk of creating confusing or simply information not reaching the intended person, were high, due to the limited communication channel.

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- Understood that to produce their product needed creativity, and learned that the engineering capabilities in Marshell were low, and that Chinese engineers do not possess the creativity needed for D-firm‟s unique product.

- Gained engineering capabilities in mechanical/detailed design through learning by doing, consequently they became better in specifying product requirement.

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4.3 The Finish experience – further detailed development and preparation for manufacturing

The following section presents D-firm‟s experiences with the further development of G2. The section seeks to explain the product development process at the Finnish automotive company (For confidential consideration, refer as F-firm) (company introduction Appendix 3). This section also highlights whether, as a result of lessons learnt with Marshell, the process was handled differently at F-firm.

After the failed development attempt in China, D-firm contacted F-firm in July 2008, and presented the business idea and the refurbished Marshell golf carts. The D-firm designer states that “the

reason to choose F-firm was because they were a reputable car manufacturer, and were known for making top quality road cars, e.g. Porsche Boxster”. From this it can be seen that D-firm‟s criteria

for choosing supplier was changed compared to in China, and now clearly focused on top quality. For F-firm, D-firm‟s golf cart was a good opportunity for its new business strategy of making environmental friendly cars (designer, D-firm, 2011)

Cooperation was established, and the project team was made. Responsibilities were also defined, and were different compared with Marshell. D-firm and F-firm split the detailed engineering jobs: D-firm was responsible for the lower part - chassis and the electric system of the cart; F-firm was responsible for the body, the roof system and the finishing of the cart (D-firm designer, 2011). This division shows that D-firm had gained competences in mechanical engineering and electrical engineering, as they did not take on that responsibility in China. However, the D-firm engineer (2011) stress that he did not learn detailed engineering from Marshell, as Marshell‟s suspension system steering systems were inadequate, and D-firm in the end, had to design these themselves. Therefore, it could be argued that because of the errors and problems experienced in China, D-firm effectively enlarged its knowledge and skill base through learning by doing (Leonard-Barton, 1992), and learning from the mistakes made by Marshell. This was confirmed by D-firm‟s designer as “all the errors we made in China, were corrected in F-firm, and if we had to start from scratch in

F-firm, we would still have had these earlier errors”.

How core competences are developed by start-up companies

How core competences

are developed by start-up companies

A case study of a Danish golf cart design company

How core competences

are developed by start-up companies

Abstract

List of Tables

List of Models and figures

Contents

Acknowledgements

Chapter 1 Introduction

Chapter 2 Literature Review

Chapter 3 Methodology

Chapter 4 Analysis