KNOWLEDGE ACQUISITION AND INNOVATION IN SMALL ICT BUSINESSES by Bram van der Leij

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KNOWLEDGE ACQUISITION AND INNOVATION IN SMALL ICT

BUSINESSES

by

Bram van der Leij

University of Groningen

Faculty of Economics and Business

Msc. Small Business and Entrepreneurship

August 2013

Rabenhauptstraat 1-2a 9725 CA Groningen +31616748399 bramvanderleij@gmail.com Student number: 1424238

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Knowledge acquisition and innovation in small ICT businesses

Abstract

Small ICT businesses need to innovate to keep up with technology. To be able to do so they need to obtain knowledge from knowledge sources. In their knowledge acquisition strategy small ICT businesses can choose to use different knowledge sources and use these sources more or less intensively. This strategy could depend on the knowledge intensity within the region. Small ICT businesses in regions high on knowledge intensity seem to use their knowledge sources less intensively to obtain the necessary knowledge to innovate. This could be because they obtain this knowledge more easily compared to businesses in regions low on knowledge intensity. Evidence was also found that there could be an optimum in the total effort a business spends on knowledge acquisition. Spending effort above this optimum could be

counterproductive.

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Introduction

The First World’s economy today is moving from a managed economy with large firms being dominant towards an entrepreneurial economy in which small firms become more

important. Globalization triggers routinized economic activity being transferred outside the First World to lower-cost regions. In the First World, the routinized economic activity therefore has to be replaced by knowledge-based economic activity. Within a knowledge-based economy,

uncertainty is high and individuals assess this uncertainty differently, devising different ideas to make a profit. This results in an increased role for small firms, because more individuals work at small firms or start their own firm to be able to exploit their own ideas (Audretsch & Thurik, 2001).

One of the knowledge-based industries is the ICT industry. The large extent and the importance of the internet made the ICT industry one of the most important industries in the First World. The ICT industry is an important driver of the changing economy because it fosters globalization by enabling communication and the exchange of information worldwide (Pohjola, 2002). Within The Netherlands there are nearly 27,000 ICT businesses present1. Over 90% of these businesses are small businesses.

The enormous growth of the internet and the accelerating evolution of computer hardware makes the ICT industry a fast moving industry, with new products and services appearing rapidly (Jorgenson, 2001; Pohjola, 2002). ICT businesses have to continuously renew their products and services to keep up with modern technological improvements and thereby be viable. So being innovative is very important for ICT businesses.

To be innovative, ICT businesses need to possess and manage knowledge. When these businesses do not possess enough or the right knowledge, they need to acquire this knowledge externally. The process of acquiring and using knowledge, knowledge management, is a key factor for businesses to be innovative (Carter & Jones-Evans, 2006; Kianto, 2011; Rothwell et al., 1974; Rothwell, 1974). Acquiring knowledge can be done through R&D efforts or

collaborations with other businesses. According to multiple authors, these are the two most important sources of knowledge to a business (Freeman, 1991; Griliches, 1979; Roberts, 2001;

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3 Smith-Doerr, Owen-Smith, Koput, & Powell, 1999). Next to collaborations, businesses can think of acquisition or cooperation with universities to obtain knowledge (Fogg, 2012; Lowik, van Rossum, Kraaijenbrink, & Groen, 2012; Zhang, Shu, Jiang, & Malter, 2010). In some small businesses, the knowledge of the owner and other employees seems to be very important to innovate (Yu-Lin Wang, Yau-De Wang, & Ruey-Yun Horng, 2010). De Jong and Marsili (2006) also found significant sources of knowledge for small businesses, namely suppliers, customers and knowledge/education institutes (de Jong & Marsili, 2006). Further elaboration on the knowledge sources will be stated in the literature part.

Because of the growing importance of small businesses and the ICT industry, it would be interesting to research the relationship between knowledge acquisition and innovation within small ICT businesses. First, attention will be paid to the different sources of knowledge which enable ICT businesses to innovate as described in the literature. Based on that research, analysis can be done on the use of the knowledge sources, the intensity of use and the effect on

innovation. This analysis will lead to insights in businesses’ knowledge acquisition strategy and their success. To observe possible differences in knowledge acquisition strategy, a comparison will be made between two regions differing in knowledge intensity. Following this analysis a distinction can be made between knowledge acquisition strategies within these two regions.

This results in the following research questions:

What is the knowledge acquisition strategy used by small ICT businesses?

How does this knowledge acquisition strategy differ in high and low knowledge intensive regions?

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4 A qualitative study will be performed considering ten small ICT businesses, five from a region low on knowledge intensity and five from a region high on knowledge intensity. An interview with the owner or a board member will be conducted to gather information about the knowledge acquisition strategy of the business. By use of this information the research questions will be answered.

This thesis is structured as follows. First, a review of the relevant findings on innovation,

knowledge management and knowledge acquisition will be performed. Based on this review, the propositions and the conceptual framework for this study will be explained. Next, the method for the study is elaborated upon after which the results are presented. Based on the findings, the propositions will be tested. Lastly, the results will be discussed and a conclusion will be drawn.

Literature review

The literature review introduces the concepts innovation, knowledge management, knowledge acquisition and sources of knowledge. Furthermore, the connection between sources of knowledge and innovation will be clarified. Then, the knowledge acquisition strategy will be explicated, followed by three propositions which will be tested to answer the research question. Innovation

There are a lot of different definitions of innovation. For example Kanter (1983) argues that innovation is the process of bringing any new problem-solving idea into use (Kanter, 1983). According to Schilling (2010), innovation is the practical implication of an idea into a new device or process (Schilling, 2010). Baregheh et al. (2009) tried to come up with a

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5 2006). The latter is in line with the definition of Baregheh et al. (2009) and very well applicable to the small ICT businesses as described in this research.

There are some aspects to innovation which are important, like the difference between

incremental innovations (refining and improving existing products or processes) and radical innovations (introducing totally new concepts) (Dussauge, Hart, & Ramanantsoa, 1996). In this

thesis innovation will be seen as the introduction of new (to the industry and/or to the firm) products/services. This includes incremental and radical innovations. To be able to measure this, firms need to be followed over time, which is not possible within this research. Therefore, the number of new to the firm and new to the industry introductions/improvements and the effort of the firm spend on innovation will be asked to the owner. In the methods section this will be expatiated in more detail.

Knowledge management

According to Chaffey and Wood (2005), knowledge management is the combination of strategies, techniques and tools used to capture and share knowledge within an organization. This makes knowledge management a structured approach to utilizing knowledge (Chaffey & Wood, 2005).

Knowledge management systems need to: find or create knowledge (input stage), store knowledge (organizing stage) and use knowledge (output stage) (Fibuch & Van Way, III, Charles W., 2011). The input stage covers the acquisition of knowledge which is of interest in this study, to see where businesses find the necessary knowledge. First the possible sources of knowledge will be identified from the literature. Within the empirical part of this research the knowledge sources used by small ICT businesses will be determined.

Knowledge acquisition through sources of knowledge

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6 mostly commercial objectives. Development refers to activities that apply knowledge to produce useful devices, materials or processes.

Firms acquire knowledge by utilizing multiple sources of knowledge, including:

– Linkages to customers or other potential users of products or services of the business; – Linkages to an external network of firms that may include competitors, complementors and

suppliers;

– Linkages to other external sources of scientific and technical information, such as universities

and government laboratories (Freeman, 1991; Rothwell et al., 1974; Rothwell, 1974).

These findings are confirmed by Roberts (2001), who found that the most frequent collaborations are between firms and their customers, suppliers and local universities (Roberts, 2001). Older research also showed that customers are the most valuable source of new product ideas (Cooper & Kleinschmidt, 1986; Yoon & Lilien, 1988).

So the most important sources of knowledge that businesses use to acquire knowledge are R&D, linkages to competitors, complementors and suppliers, linkages to customers, linkages to universities and government laboratories and recruitment of experts. With these sources of knowledge being identified as important the relationship with innovation is of interest. Relationship sources of knowledge and innovation

To be innovative, the most important sources of knowledge for businesses are R&D and

collaborations with other businesses like competitors, complementors and suppliers (Freeman,

1991; Griliches, 1979; Roberts, 2001; Smith-Doerr et al., 1999). It was also shown that linkages

to customers and knowledge/education institutes are important sources of knowledge for SMEs,

to innovate (de Jong & Marsili, 2006). Also the knowledge of the owner and other employees are shown to be an important source of knowledge to small and medium enterprises (SMEs) to innovate (Yu-Lin Wang et al., 2010). By conducting a thorough literature review, these sources and their relationship to innovation will be further highlighted.

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7 Lampert, 2001; Freeman, 1991; Hargadon & Sutton, 1997). Collaborative R&D is even more important in high-technology sectors, like the ICT industry, because it is almost impossible to possess all the necessary resources and capabilities to be able to innovate (Hagedoorn, 2002).

Second, vertical cooperation with suppliers and other businesses are important for businesses to innovate (Zeng, Xie, & Tam, 2010). Lasagni (2012) added that when SMEs are proactively strengthening these relationships, they will be better innovators (Lasagni, 2012). Gronum et al. (2012) showed that strong, heterogeneous ties within a network improve innovation in SMEs (Gronum, Verreynne, & Kastelle, 2012).

Third, cooperation with customers plays an important role in the innovation process in SMEs (Zeng et al., 2010). Integrating the ideas of customers in the process of innovating products or services enables businesses to be successful innovators.

Fourth, research from universities, government laboratories and incubators report to be important sources of innovation to private companies (Beise & Stahl, 1999; Lasagni, 2012). Businesses that have an extensive relationship with universities and other research institutions benefit from the knowledge these institutions possess report to be better innovators.

Fifth, the knowledge of the owner and other employees is very important to small businesses, if not the most important to innovate (Yu-Lin Wang et al., 2010). According to Olander et al. (2011), having creative employees is the most valuable resource in small firms, when it comes to generating innovation (Olander, Hurmelinna-Laukkanen, & Heilmann, 2011).

Lastly, when the owner and/or the employees of a small firm do not possess the necessary knowledge another option to obtain this is acquiring new employees.

Knowledge acquisition strategy

With these sources of knowledge being identified as important for small businesses to innovate, it is interesting to know in what way small ICT businesses use the different knowledge sources.

Laursen and Salter (2006) introduced the concepts external search breadth and external search

depth to describe the character of a firm’s strategy for accessing knowledge from sources outside

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8 knowledge sources) and deeply (the intensiveness of using a certain knowledge source) can provide resources that help firms to innovate. Sofka and Grimpe (2010) confirm this and state that the ability of a business to innovate depends on the internal R&D processes and the potential of the environment to provide the firm with external knowledge (Sofka & Grimpe, 2010). So R&D is a similar source of knowledge to innovate as the external sources of knowledge. Patel and Van der Have (2010) further expatiate on search breadth and search depth. They describe search breadth as the engagement into accessing different sources of knowledge and search depth as the degree to use the knowledge within a single source (Patel & Van der Have, 2010). They conclude that a combination of seeking breadth and depth simultaneously has a positive influence on innovation.

The above leads to the following propositions:

Proposition 1: Small ICT businesses which engage into accessing more different sources of knowledge (search breadth) innovate more.

Proposition 2: Small ICT businesses which use the knowledge of the separate sources in a higher degree (search depth) innovate more.

Research of Patel and Van der Have (2010) does not mention if search strategies under different environmental circumstances could have different effects, so this is subject to this research (Patel & Van der Have, 2010). Sofka and Grimpe (2010) state that a business’ search strategy should reflect the environment (Sofka & Grimpe, 2010). The success of a business’ specialized search strategy depends on the characteristics of the local knowledge environment (Grimpe & Sofka, 2009). They found that businesses in low-technology sectors need a different search strategy compared to businesses in high-technology sectors, mostly because businesses in low-technology sectors have limited options when it comes to their search strategy. This suggests that businesses in a region high on knowledge intensity are able to use more different knowledge sources and thereby need to use these sources less intensively to obtain the necessary knowledge to innovate. Businesses in a region low on knowledge intensity are able to use fewer knowledge sources and thereby have to use these knowledge sources more intensively to obtain the

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9 This leads to the third proposition:

Proposition 3: Small ICT businesses operating in a high knowledge intensity region will use more different sources of knowledge and use a single source of knowledge in a lower degree.

Conceptual framework

The propositions will be combined into one conceptual model, which will be tested within ten small ICT businesses in the two different regions. The conceptual model is shown below.

Fig. 1: Conceptual Model

As shown above, small ICT businesses have two options in using knowledge sources. They can use a wide range of sources to be able to innovate or they use fewer sources, but use them more deeply to be innovative. When a firm operates in a low knowledge intensity region, the deep use of separate knowledge sources will be favored and the wide use of different

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Methodology

This research is exploratory in nature to give a clearer picture of the sources of

knowledge used by small ICT businesses to innovate. A qualitative approach with a multi-case study is adopted which aims at identifying the knowledge acquisition strategy of small ICT businesses. A qualitative approach with a multi-case study is favorable in this matter because it is useful when generating (novel) insights. Strength is that the insights are likely to be testable because it includes measurable constructs and propositions that can be proven true or false. Lastly, the resulting insights are likely to be empirically valid, because they are directly related to the findings from the research. A weakness of a qualitative approach with a multi-case study is the resulting insights being overly complex, caused by the intensive use of empirical evidence. Another weakness is that the use of a multi-case study can result in narrow and idiosyncratic theory (Eisenhardt, 1989). In this case, the resulting insights will presumable not be overly complex because a pre-conceived conceptual framework is being used. When interpreting the results, narrow and idiosyncratic thinking will be prevented by being cautious when making generalizations.

Sample

For the multi-case study, ten small ICT businesses within two different regions are examined. The two regions are Groningen and Amsterdam. Amsterdam is a region with a high density of businesses like competitors, complementors and/or suppliers, a high density of potential customers, a high density of universities and government laboratories and a high density of available potential employees. In other words, Amsterdam is a region high on knowledge intensity. Groningen on the other hand is a region low on knowledge intensity, especially when compared to Amsterdam. By making use of the two different geographical regions in this research, it is possible to make a comparison between a region which is high on knowledge intensity and a region which is low on knowledge intensity. By this means it is possible to see if there is a difference in approach of the small ICT businesses when it comes to the use of knowledge sources in relation to the innovativeness of the business.

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11 has to be between 1 and 49. This size range belongs to small businesses in general, not only for the ICT industry (European Commission, 2005). Five of these businesses are selected within Groningen (Gro) and five of them within Amsterdam (Adam). An overview of the selected businesses can be seen in the table below. The size of the businesses ranges from 1 to 45 people working within the business. Two of the three businesses who have only 1 or 2 employees work continuously with freelancers, so in practice they are not only working by themselves. The age of the businesses ranges from 4 to 19 years old.

Business A B C D E F G H I J

Location Gro Gro Gro Gro Gro Adam Adam Adam Adam Adam

Age 5 15 4 10 19 5 15 4 11 14

Size 3 28 5 11 45 7 1 1 24 2

Table 1: Overview of selected businesses Method

For the qualitative approach, semi-structured interviews with the owner or manager of the businesses were conducted. For these interviews the methodology of Emans (2004) is used (Emans, 2004). He described an interview as the collection of information from statements of the interviewee by using an in advance drafted questionnaire. The questionnaire is drafted by first clarifying the different concepts (from multiple articles) and identifying how these concepts should be operationalized. When this is done, the set of possible values is defined and the actual interview can be drafted.

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12 Measurements

To enhance the reliability and validity of the research, questions from previously published articles are used in the questionnaire. In the table below, the interview questions are related to the different sources they come from. The interview itself can be found in appendix A. The first question is to make sure the interviewer is talking to the owner or an upper level

manager. The questions regarding size, age, exact industry, output, collaboration with other businesses and being innovative come from Gronum et al. (Gronum et al., 2012). The questions regarding R&D come from Grimpe and Sofka (Grimpe & Sofka, 2009). The questions regarding cooperation with universities, research institutes and government agencies come from Zeng et al. (Zeng et al., 2010). The questions regarding using information from customers come from Yoon and Lilien (Yoon & Lilien, 1988). The questions regarding the capabilities of owner and

employees come from Sofka and Grimpe (Sofka & Grimpe, 2010). And finally, the questions regarding hiring new employees come from Lowik et al. (Lowik et al., 2012).

Innovation is measured in percentage of new to the firm and new to the industry introductions in the firms’ output, compared to their total output. To see in what degree the businesses are innovative in relation to the effort they spend on trying to be innovative, the owner is asked to give the percentage of effort the firm spends on innovation (new to

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Interview question Source

Q2: How many employees are working at your company?

Q3: How many years does your company exist?

Q4: What does your company exactly offer to their customers?

Q5: Does your company offer something new to your customers?

Q6: Does your company renew internal processes?

Q10: Could you give a percentage of effort your company spends on offering something new to customers in relation to the total effort spend by the company?

Q11: How much percent of your output can be regarded as new introductions (new to firm and new to industry)?

(Gronum et al., 2012)

Q7: Which sources of knowledge does your company use?

Q8: I will now name some possible sources of knowledge, could you tell me if your company uses them or not?

Q9: You told me your company uses ***, *** and *** as sources of knowledge. Could you tell me in what extent your company uses these sources? You can choose between very much, much, mediocre, little and very little.

(Grimpe & Sofka, 2009) (Zeng et al., 2010) (Yoon & Lilien, 1988) (Gronum et al., 2012) (Sofka & Grimpe, 2010) (Lowik et al., 2012) Table 2: Sources of interview questions used

The complete interview guide is displayed in appendix A.

With the information received by the interviews, the propositions will be tested in the results section. This will be done for each proposition, making use of the qualitative approach; by describing the businesses which were interviewed, quoting from these interviews and by making use of simple statistics.

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Results

In this section the findings from the interviews will be presented by discussing the three propositions stated in the literature section. An overview of the complete interviews can be found in appendix B. Only the most relevant statements of the interviewees related to the three

propositions can be found below. Search breadth

P1: Small ICT businesses which engage into accessing more different sources of knowledge (search breadth) innovate more.

When looking into the ten interviews, it strikes that all ten businesses use four or five different knowledge sources to innovate. Also, it is notable that none of the businesses

cooperates with universities, research institutes or government agencies. One business said about working together with universities: “We would really like to work together with a university when it comes to R&D, but the responsiveness and way of working and communicating is to slow to link it to our business processes”. Two businesses make use of freelancers to innovate. They select a freelancer based on the knowledge and expertise they need at a certain moment. When looking at the different knowledge sources, it is striking that R&D sometimes is very formally arranged and sometimes very informal, but nine of the ten businesses make use of R&D in some way. One business said about their R&D activities: “Every employee is expected to spend 10% of their time at R&D.” Other formal R&D activities like a full-time employee working on R&D of one R&D project each month are also used. The more informally organized R&D activities are mostly employees and owners who look up new information online.

When it comes to using the ideas of customers to innovate, the interviewed businesses all use the ideas of customers, most of them when working on an idea which came from the customer, but sometimes also when asking customers for feedback on the collaboration. One business said about using the ideas of customers: “We use monthly feedback meetings with customers to obtain new ideas from them.” Most businesses use the ideas of customers when communicating about the project.

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15 competitors/colleagues and also by collaborating with complementors. Some businesses ask suppliers of certain software to give a lecture about it at the business itself, like one business who said: “We ask suppliers of software to come to our office and teach our employees to work with it in the best way possible.” Some businesses also work together with complementors like hosting businesses or pressers.

The capabilities of the owner and the employees are used by all ten businesses to innovate. Most of them begin the innovation process with these capabilities and mention the knowledge they possess as the most important. All of the interviewees said that their internal knowledge and capabilities are continuously renewed. Thereby, this source of knowledge also is time consuming, expensive and laborious, just as the other sources mentioned.

Six of the ten businesses hire new employees to innovate. Most of them do this only sometimes. Two businesses hire new employees often. One business made clear that they rather acquire knowledge by sharing information with competitors than by hiring new employees. Another business said: “We hire new employees to acquire new knowledge, for instance about

marketing.” It became clear that most businesses will not hire new employees unless they have no other option. One reason for this is the current crisis, but also the time it takes to direct employees is mentioned as a reason for this cautious approach.

As could be expected, the older and larger businesses have more formal arrangements when it comes to R&D and using ideas of customers to innovate. For instance, business E (the oldest and largest business within this research) uses a monthly customer satisfaction survey to acquire feedback but also ideas which enable them to innovate. The younger businesses seem to have less need to formally arrange R&D for instance. Being smaller also makes formal arrangements less important to function well as a business. When more employees are attracted, formal arrangements get more important.

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16 Graph 1: Number of knowledge sources used

When looking at the relationship between the number of used knowledge sources and the innovativeness of the businesses, it can be seen that using five instead of four different

knowledge sources does not enable businesses to be more innovative. This is shown in table 3 below, where the percentage of output new to firm and new to industry is shown for businesses which use four and businesses which use five different knowledge sources. Also figures are given for percentages of output new to firm and new to industry when corrected for percentage of effort spend on innovation in relation to the total effort spend within the business. This is done by dividing the percentages of output new to firm and new to industry by the percentage of effort spend on innovation within the business. The percentages of effort spend on innovation can be found in appendix B. 0 1 2 3 4 5 6 A B C D E F G H I J N u m b e r o f kn o wl e d ge so u rc e s Businesses

Number of knowledge sources used

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17 4 knowledge sources used 5 knowledge sources used t-test Percentage of output new to firm 48.75% 48.75% tdf=8 = 0.00 p = 1.00 Percentage of output new to industry 21.13% 11.25% tdf=8 = 0.91 p = 0.39 Percentage of output

new to firm corrected for effort spend on innovation

1.63 1.65 tdf=8 = -0.05

p = 0.96

Percentage of output new to industry corrected for effort spend on innovation

0.48 0.43 tdf=8 = 0.17

p = 0.87

Table 3: Relationship number of knowledge sources used – innovativeness

As can be seen in table 3, P1 is not supported. Businesses using more (five) knowledge sources do not score a higher percentage on being innovative than businesses using less (four) knowledge sources. For output new to firm both groups score 48.75%. For output new to industry, the businesses using four knowledge sources score 21.13% and the businesses using five knowledge sources score 11.25%. So the businesses using more knowledge sources score even lower on percentage of output new to industry compared to businesses using four

knowledge sources.

When corrected for percentage of effort spend on innovation, the percentage of output new to firm of businesses using more different knowledge sources is almost the same as for businesses using less different knowledge sources. The percentage of output new to industry, when

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18 To conclude, businesses which engage into accessing five different sources of knowledge are not better able to innovate than businesses which engage into accessing four different

knowledge sources. Almost every business under study used R&D, ideas of customers, collaboration with other businesses and capabilities of the owner and the employees as a knowledge source. None cooperates with universities, research institutes or government agencies. Hiring new employees and contracting freelancers is only done by some businesses. Search depth

P2: Small ICT businesses which use the knowledge of the separate sources in a higher degree (search depth) innovate more.

The search depth of the knowledge sources is measured by asking the interviewees in which extend they use a certain knowledge source. The interviewees could choose between ´very little´, ´little´, ´moderate´, ´much´ or ´very much´.

When looking into the ten interviews, it strikes that no knowledge source is used ‘very little’. So if a knowledge source is used by a business to innovate, it is at least used ‘little’. When looking at the average use for every different knowledge source when used, R&D is used

‘moderate’. Ideas from customers are also used ‘moderate’. Collaboration with other businesses is used ‘much’. The capabilities of the owner and the employees are used the most, namely between ‘much’ and ‘very much’. Hiring new employees is used between ‘little’ and ‘moderate’, while freelancers are used ‘moderate’.

When looking at how businesses use the different knowledge sources when they use them intensively, for R&D there is a clear relationship between using R&D ‘much’ and a formal approach for using R&D to innovate (business B, E, H & I). For instance, business B has one employee working full-time on R&D and business E has a rule which lets every employee spend 10% of their time on R&D projects.

When looking at the businesses which use the ideas of customers ‘much’ or ‘very much’, it can be seen that they have extensive contact with their customers about new ideas which need to be implemented (business A, C, D & F, see appendix B). Business F even organizes monthly feedback meetings at their office with a panel of their customers.

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19 much’ state that they have contact with complementors and competitors on a daily basis

(business C, F & E). The investors of Business E even created a knowledge center for the businesses within their investment portfolio to be able to exchange knowledge.

The capabilities of the owner and the employees are the most important source of knowledge to innovate for the interviewed businesses. There are seven businesses which use this knowledge source ‘very much’ (business B, C, E, F, G, I & J). They state that every process begins with and needs the knowledge of the people who work within the business. They also made clear that it is important to continuously renew your own knowledge as an owner. With the ICT industry being very innovative and fast moving this finding was expected.

The businesses which hire new employees to innovate ‘moderate’ or ‘much’ do this to increase the knowledge within the company (business C & E). Business E hires new employees to even broaden their range of expertise.

The two businesses which use freelancers to innovate do this ‘little’ and ‘much’ respectively (business H & J). Business J, who uses freelancers ‘much’, contracts these freelancers especially to acquire the knowledge to be able to produce an innovative product.

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20 Graph 2: The average degree of use of the knowledge sources

When looking at the relationship between the degree of using the different knowledge sources apart and the ability to innovate, no relationship between one or more of the knowledge sources and the ability to innovate is found.

To be able to look at the relationship between the average degree of using knowledge sources and the ability to innovate, the five businesses using the knowledge sources on average the most are grouped and the five businesses which use the knowledge sources on average the least are also grouped. The group with the five businesses using the knowledge sources the least on average use them between ‘moderate’ and ‘much’ or lower (3.5 or lower). The group with the five businesses using the knowledge sources the most on average are using them between

‘moderate’ and ‘much’ or more (3.6 and higher).

It can be seen that the businesses using the knowledge sources on average between ‘moderate’ and ‘much’ or lower score higher on percentage of output new to firm and percentage of output new to industry when compared to the businesses using the knowledge sources on average between ‘moderate’ and ‘much’ or higher.

When the percentage of output new to firm and new to industry are corrected for the effort spend on innovation, the same relation can be observed. So the businesses which use the knowledge sources less extensive score higher on innovation.

See table 4 below for the exact figures.

0 1 2 3 4 5 A B C D E F G H I J D e rg e e o f u se o f kn o wl e d ge so u rc e s Businesses

Average degree of use of

the knowledge sources

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21 Average degree of use of knowledge sources of 3.5 and lower (N=5) Average degree of use of knowledge sources of 3.6 and higher (N=5) t-test Percentage of output new to firm 61% 36.5% tdf=8 = -1.11 p = 0.30 Percentage of output new to industry 17.9% 12.5% tdf=8 = -0.49 p = 0.64 Percentage of output

new to firm corrected for effort spend on innovation

2.12 1.16 tdf=8 = -2.61

p = 0.03

0.54 0.36 tdf=8 = -0.80

p = 0.45

Table 4: Relationship degree of use of knowledge sources - innovativeness

Based on the above, P2 is not supported. There is no evidence that using knowledge sources in a higher degree enables businesses to be more innovative. Instead, based on these results, it seems that using knowledge sources in a higher degree makes businesses produce less innovative output. That is, when using them more than between ‘moderate’ and ‘much’. This difference in innovativeness is only significant when looking at the percentage of output new to firm when corrected for effort spend on innovation.

To conclude, businesses which use the separate knowledge sources on average in a lower degree than between ‘moderate’ and ‘much’ seem to be better able to innovate when compared to businesses which use the separate knowledge sources on average in a higher degree than between ‘moderate’ and ‘much’. The capabilities of the owner and the employees and

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22 Regions with different knowledge intensity

P3: Small ICT businesses operating in a high knowledge intensity region will use more different sources of knowledge and use a single source of knowledge in a lower degree.

First, statements from all ten businesses will be showed within a table to see in which way they use the different knowledge sources. For a complete overview of the interviews see appendix B. Table 6 below shows an overview of the most interesting statements of the ten businesses about the different knowledge sources they use and about the extent of using these knowledge sources. For the five most common knowledge sources used (R&D, ideas of customers, collaboration with other businesses, capabilities of the owner/employees and hiring new employees) statements are showed from all ten businesses, classified into the two different regions.

Region low on knowledge intensity Region high on knowledge intensity

About R&D

“We have a dedicated employee working on R&D and R&D only.”

(Business B)

“Every month I select one project which needs a lot of R&D, also to keep my knowledge on a certain

level.” (Business H)

About the ideas of customers

“Many of our improvements on products and services come from ideas of our customers.” (Business

D)

“We try to learn from our customers, how do they work, how do they

resolve issues.” (Business J)

About collaboration

with other businesses

“We work together with a busier to offer our customers a complete

solution, online and offline.”

(Business A)

“We exchange a lot of information with competitors. Also, our investors

create knowledge centers, where we meet other businesses and receive a

lot of knowledge.” (Business F)

About capabilities of the owner and

employees

“We try to continuously renew our internal processes and therefor have to renew our own capabilities also.”

(Business C)

“The knowledge I possess myself is the most important source of knowledge to be able to produce

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23 About hiring

new employees

“At this moment we are hiring new employees to be innovative in the

marketing advice we give to customers.” (Business E)

“We hire a few new employees each year to acquire new knowledge within

the business.” (Business I)

Table 6: Overview of interesting statement from the ten interviews

When looking at the amount of different knowledge sources used, the five businesses located in the region high on knowledge intensity used on average 4.6 different knowledge sources to innovate. The five businesses from the region low on knowledge intensity also used on average 4.6 different knowledge sources. So no difference is found when it comes to the number of knowledge sources used to innovate between both regions.

The businesses in the region high on knowledge intensity did use the sources of

knowledge in a lower degree when compared to the businesses in the region low on knowledge intensity. On a scale from 1 to 5, with 5 being the highest possible use of the knowledge source, the businesses in the region high on knowledge intensity scored 3.38 while the businesses in the region low on knowledge intensity scored 3.7 when it comes to the degree in which they used the knowledge sources to innovate. So businesses in the region high on knowledge intensity scored closer to using the different knowledge sources on average ‘moderate’ and the businesses in the region low on knowledge intensity scored closer to using the different knowledge sources on average ‘much’ to innovate.

See table 7 for an overview of these figures.

Region low on knowledge intensity

Region high on

knowledge intensity t-test Average number of

knowledge sources used 4.6 4.6

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24 Businesses in a region high on knowledge intensity use the same amount of knowledge sources but use them in a lower degree when compared to businesses in a region low on knowledge intensity. However, this difference in degree of using the knowledge sources is not significant, so P3 cannot be accepted. But there is some evidence suggesting that businesses in a region high on knowledge intensity use their knowledge sources in a lower degree compared to businesses in a region low on knowledge intensity. Possible explanations for this will be discussed within the following discussion and conclusion section.

Discussion and conclusion

In this concluding section the results will be interpreted and discussed and the scientific and practical contribution will be presented. Also the limitations of the research and the direction for future research will be stated. At last, the thesis will be concluded as a whole by answering the main questions.

Discussion

P1: Small ICT businesses which engage into accessing more different sources of knowledge

(search breadth) innovate more.

There was no evidence found that using more different knowledge sources enables businesses to be better able to innovate. This could be due to the fact that there were only businesses found that use four or five different knowledge sources. It seems that using five instead of four different knowledge sources has no different effect on the ability to innovate for a small ICT business. Presumably, using less knowledge sources, like one or two, makes

businesses less able to innovate when compared to using four knowledge sources for instance, but no such businesses were found so this can only be assumed.

P2: Small ICT businesses which use the knowledge of the separate sources in a higher degree

(search depth) innovate more.

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25 sources much even seem to be less able to innovate when compared to businesses which use their knowledge sources moderately. Presumably, small ICT businesses which use their knowledge sources moderately will be better able to innovate when compared to businesses which use their knowledge sources for instance little or very little, but since no such businesses were interviewed this can only be assumed.

To try to identify the cause for these results, the total effort spend on obtaining knowledge could give some useful insights.

Total effort spend

When combining search breadth and search depth, for each business the number of different knowledge sources used is multiplied by the businesses’ average use of these knowledge sources.

When this is done, five businesses score 15 or less and five businesses score 16 or more. The exact numbers are shown below in graph 3. The mean is also plotted and has a value of 16.3.

Graph 2: The total effort spend on obtaining knowledge from knowledge sources When looking at the relationship between total effort spend on obtaining knowledge from knowledge sources and the ability to innovate, it is striking that the five businesses which used the knowledge sources the most are also the businesses which score the highest on total effort

0 5 10 15 20 25 A B C D E F G H I J To tal e ff o rt sp e n d o b taining k n o wl e d ge Businesses

Total effort spend on obtaining

knowledge from knowledge sources

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26 spend on obtaining knowledge from knowledge sources. Table 5 below is thus exactly the same as table 4.

Total effort spend obtaining knowledge

of 15 or lower (N=5)

Total effort spend obtaining knowledge of 16 or higher (N=5) t-test Percentage of output new to firm 61% 36.5% tdf=8 = -1.11 p = 0.30 Percentage of output new to industry 17.9% 12.5% tdf=8 = -0.49 p = 0.64 Percentage of output new to firm corrected for effort spend on innovation

2.12 1.16 tdf=8 = -2.61

p = 0.03

0.54 0.36 tdf=8 = -0.80

p = 0.45

Table 5: Relationship total effort spend on obtaining knowledge from knowledge sources - innovativeness Based on these results, it seems that a total effort of 16 or higher on obtaining knowledge from knowledge sources makes businesses produce less innovative output. This difference in innovativeness is only significant when looking at the percentage of output new to firm when corrected for effort spend on innovation.

So, businesses which total effort spend on obtaining knowledge from knowledge sources is 15 or lower seem to be better able innovate when compared to businesses which total effort spend on obtaining knowledge from knowledge sources is 16 or higher.

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27 different knowledge sources and using them in a higher degree does allow businesses to be better able to innovate. Businesses which use their knowledge sources in a higher degree even seem to be less able to innovate at some point. Assuming that businesses do need knowledge (from knowledge sources) to innovate, it could be the case that using more knowledge sources and using them in a higher degree only helps businesses to be better innovators when the total effort spend on obtaining knowledge does not exceed a certain optimum level. When small ICT

businesses spend too much effort on obtaining knowledge from their knowledge sources, it could become counterproductive when trying to produce innovative output. This is in line with the findings of Laursen and Salter (2006), who found that at a certain point searching more widely and deeply for knowledge is counterproductive when it comes to being innovative (Laursen & Salter, 2006).

P3: Small ICT businesses operating in a high knowledge intensity region will use more different

sources of knowledge and use a single source of knowledge in a lower degree.

The result not supporting P3 show that there is no difference between a region high on knowledge intensity and a region low on knowledge intensity when it comes to number of knowledge sources used. This could mean that the difference in knowledge intensity between both regions is too small, or the use of a certain amount of different knowledge sources is not influence by the knowledge intensity of the region. The first explanation seems the most likely. Businesses in the region high on knowledge intensity do, on average, use the different

knowledge sources in a lower degree, although this result is not significant. However, this result could mean that the knowledge sources these businesses do use can provide them more easily with knowledge so they do not have to use the knowledge sources that extensive. In the region low on knowledge intensity, it could be that businesses have to use the different knowledge sources more extensive to receive a sufficient amount of knowledge to innovate. This could be an explanation why small ICT businesses in a region low on knowledge intensity use their knowledge sources in a higher degree.

Contribution

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28 knowledge sources when a small ICT business tries to innovate. At least it seems that spending too much effort on obtaining knowledge is not favorable when a small ICT business tries to innovate.

The practical contribution of this study lies in the suggestion that using more different knowledge sources does not automatically enables a small ICT business to be a better innovator and also using them in a higher degree does not automatically induce this effect. It could be the case that small ICT businesses have to be aware not to spend too much effort at obtaining knowledge from knowledge sources when trying to innovate, because at a certain point this effort could become counterproductive.

Limitations

The most important limitation of this study is the relative small difference in knowledge intensity between the two regions used. Because of this, the number of different knowledge sources used is almost the same in both regions. When comparing two regions with a greater difference in knowledge intensity, there should be more businesses using a lower number of different knowledge sources, which could result in a lower percentage of innovative output. Also, this could provide more information about a possible optimum in the total effort spend on obtaining knowledge from knowledge sources.

Another limitation are the three small businesses in Amsterdam with one or two employees, this seems to differ a bit from the businesses in Groningen. Two of these businesses work

continuously with freelancers, so in practice they are working with more than one or two people within the business and need to acquire knowledge just as the other businesses to innovate. This makes them relatively equal to the other businesses and appropriate for this research.

Future research

It would be interesting to see if the results would be different when the difference in knowledge intensity between the two regions used is greater. So comparing businesses located in the first world with businesses located in the second world for instance.

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29 from knowledge sources and in what way the number of knowledge sources used and the degree of using them effects this possible optimum.

To conclude, at a certain point, using more different knowledge sources and/or using these knowledge sources more intensively does not enable a small ICT business to be more innovative. Most small ICT businesses use four or five different knowledge sources and use the most of them quite intensive.

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Appendix A: Interview Guide

Master’s Thesis – Bram van der Leij 2012/2013

Interview guide small ICT businesses Interview page 1 Interviewee: ………. Name interviewer: Company: ……… Date of the interview: Year Month Day

Instructions for interviewer:

1. Stick to the order of the questions as below.

2. The questions to ask are in italics, the remaining text is information for the interviewer. 3. Before you begin, make sure the recording equipment works.

4. Enter the above data (name interviewee, company name, your own name and date of the interview). 5. Specify the recording file directly to the name of the company and the date of the interview and make

a backup.

6. Record the exact time when you start.

7. Make sure you know the interview from the beginning till the end before you begin the interview itself.

8. Clarify who you are and make sure the aim of the interview is understood, using the following points.  This research is performed in order to write my Master’s Thesis for the Business Administration

master Small Business & Entrepreneurship.

 To be able to write my thesis I need to interview around ten small ICT businesses.  The aim of these interviews is to discover how small ICT businesses innovate.

 The results of these interviews will be processed in my thesis, which can be send to you afterwards if you would like this.

 My thesis will be finalized in the beginning of 2013, so this is when I have drawn conclusions which will be available to you.

 The questions will regard your company and how your company deals with knowledge and innovation.

 After my research, this recording will be deleted, it is only used to be able to process your answers after the interview.

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Interview guide small ICT businesses Interview page 2 - The interview will take approximately 15-20 minutes.

- Do you have any questions before we begin the interview?

If not, start the interview. Note current time: . . : . .

Start audio recording now.

We will start with a few general questions about your company.

Question 1 [owner or upper level manager]

What is your function within the company?

Question 2 [size]

How many employees are working at your company?

Question 3 [age]

How many years does your company exist?

Question 4 [exact industry]

What does your company exactly offer to their customers?

Question 5 [innovative output]

Does your company offer something new to your customers?

(If yes, ask how often, new to firm or to sector and incremental or radical.)

Question 6 [internal innovation]

Does your company renew internal processes?

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Interview guide small ICT businesses Interview page 3

The following questions will regard the sources of knowledge your company uses.

Question 7 [sources of knowledge]

Which sources of knowledge does your company use? (Check answer(s) below, do not mention them.) □ R&D

□ Cooperation □ Customers □ Collaboration

□ Capabilities owner/employees □ Hire new employees

□ Other, namely…

(Note below when other sources of knowledge are mentioned.)

Question 8 [sources of knowledge]

I will now name some possible sources of knowledge, could you tell me if your company uses them or not?

(Skip already mentioned sources of knowledge) □ 1 R&D (in-house research and development)

□ 2 Cooperation (with universities, research institutes and government agencies) □ 3 Customers (using customers and potential customers their needs and ideas)

□ 4 Collaboration (with other businesses like competitors, complementors and/or suppliers) □ 5 Capabilities owner/employees (the knowledge the people within the company possess) □ 6 Hire new employees (acquiring knowledge by hiring new employees)

Question 9 [extent of sources used]

You told me your company uses ***, *** and *** as sources of knowledge. Could you tell me in what extent your company uses these sources? You can choose between very much, much, mediocre, little and very little.

Source 1 *** Source 2 *** Source 3 *** Source 4 ***

□ Very much □ Very much □ Very much □ Very much

□ Much □ Much □ Much □ Much

□ Mediocre □ Mediocre □ Mediocre □ Mediocre

□ Little □ Little □ Little □ Little

□ Very little □ Very little □ Very little □ Very little

1: 4:

2: 5:

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33

Interview guide small ICT businesses Interview page 4

Source 5 *** Source 6 *** Source 7 *** Source 8 ***

□ Very much □ Very much □ Very much □ Very much

□ Much □ Much □ Much □ Much

□ Mediocre □ Mediocre □ Mediocre □ Mediocre

□ Little □ Little □ Little □ Little

□ Very little □ Very little □ Very little □ Very little

To conclude this interview I have two questions regarding to innovation within your company.

Question 10

Could you give a percentage of effort your company spends on offering something new to customers in

relation to the total effort spend by the company?

Question 11

How much percent of your output can be regarded as new introductions (new to firm and new to industry)?

These were the questions, thank you very much for your cooperation.

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34

Appendix B: Interview answers

Answers from the five businesses from the region low on knowledge intensity:

Question Answer

Q1: What is your function within the company?

Business A: Owner.

Business B: Sales manager & MT member. Business C: Marketing & communication manager.

Business D: Co-owner.

Business E: Operational Director.

Q2: How many employees are working at your company? A: 3 B: 28 C: 5 D: 11 E: 45

Q3: How many years does your company exist? A: 5 B: 15 C: 4 D: 10 E: 19

A: Customized applications online and a number of standardized applications.

B: Internet solutions: websites (open source), customized products, support and advice. C: Internet solutions, systems based on safety; sites and apps.

D: Web projects, websites, web shops, i-marketing and number of proprietary products and advice.

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35

A: Yes, regularly, especially new to business and especially incremental but also radical. B: Yes, many, often incremental and sometimes radically. Sometimes new to industry, often new to business.

C: Yes, very much, completely newly developed product (radical) and updates (incremental). New to business and also new to sector.

D: Yes, about 30%, mostly new to business, sometimes something new to sector (5-10%). Often radical.

E: Yes, sometimes customization, more standard. Sometimes new to business, total solutions sometimes somewhat new to sector.

A: Yes, regularly, especially new to business and especially incremental but also radical. B: Yes, very much, continuously. Much new to business. Radical and incremental.

C: Yes, continuous improvement. Mainly new to business.

D: Yes, incremental; optimization. New to business, not to industry.

E: Yes, constantly, we always evaluate and we do customer satisfaction surveys. Incremental and radical, for example introduction of CRM. New to business.

Q7: Which sources of knowledge does your company use?

A: R&D: Yes, but not much. Knowledge acquiring online, but mostly for solving current projects.

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36 together we look at the situation and

depending on this situation we offer a solution. Collaboration: Yes, with complementary businesses such as a presser, to be able to offer customers a complete solution.

Capabilities owner/employees: Yes, this is very important to be innovative.

Hire new employees: Yes, but only if we have a project for a new employee.

B: R&D: Yes, one person fulltime on R&D. Customers: Yes, working on ideas together to be innovative.

Capabilities owner/employees: Yes, to come up with solutions/find solutions.

Hire new employees: Yes, regularly, we are a growing business.

C: R&D: Yes, occasionally

Customers: Yes, in interaction with the customer.

Collaboration: Yes, exchange information. Capabilities owner/employees: Yes, increase and use own knowledge.

Hire new employees: Yes, sometimes. D: R&D: Yes, a lot.

Customers: Yes, many improvements have come from customers.

Collaboration: Yes, with a designer and a hosting company, innovate together.

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37 Customers: Yes, through customer satisfaction surveys and based on customer requirements. Collaboration: Yes, exchanging information with suppliers.

Capabilities owner/employees: Yes, own knowledge is used.

Hire new employees: Yes, to expand our services: marketing.

A: R&D little, customers much, collaboration much, capabilities owner/employees mediocre, hire new employees little.

B: R&D much, customers mediocre,

capabilities owner/employees very much, hire new employees little.

C: R&D mediocre, customers much, collaboration very much, capabilities owner/employees very much, hire new employees much.

D: R&D mediocre, customers very much, collaboration much, capabilities

owner/employees much.

E: R&D much, customers mediocre, collaboration much, capabilities owner/employees very much, hire new employees mediocre.

A: 15% B: 60% C: 60% D: 20% E: 5%

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38

regarded as new introductions (new to firm and new to industry)?

B: 100% & 30% C: 70% & 40% D: 25% & 7,5% E: 12,5 & 5

Answers from the five businesses from the region high on knowledge intensity:

Question Answer

Q1: What is your function within the company?

Business F: Chief Technical Officer. Business G: Owner.

Business H: Owner. Business I: Owner.

Business J: Owner & developer.

Q2: How many employees are working at your company? F: 7 G: 1 H: 1 I: 24 J: 2

Q3: How many years does your company exist? F: 5 G: 15 H: 4 I: 11 J: 14

F: Online system for product offerings; web shop. Online shopping.

G: Technical applications: back office, CRM, management systems.

H: Full service: websites, hosting, everything. I: Websites and applications, mobile

applications.

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39 products and advice.

F: Yes, especially new to business, to industry (mainly) new. Radical failed (real time

shopping with friends), now incremental, offering lookbooks through social media. G: Yes, a lot, mainly incremental, sometimes radical. Especially to business, sometimes to industry.

H: Yes, innovative, customized projects. Base is the same but solution is new (to business). So mostly incremental but also radical. I: Yes, (really) occasionally new to business (incremental), never new to industry.

J: Yes, often new service, also new to industry, especially new to business, incremental and radical.

F: Yes, in the past eighteen months, two major changes in terms of communication/marketing. New to business, but also quite new to

industry. We try to keep the team as small as possible so we use much technical

developments. Meanwhile, also incremental development.

G: Not really, everything is figured out now and it works.

H: Yes, quite radically, no permanent

employees, no fixed location, adapt to market when needed.

I: Yes, we try to improve (incremental). J: Yes, regular, incremental.

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40

company use?

than at an earlier stage. Now mainly exploiting already made products.

Customers: Yes, once a month we organize a user panel at the office to receive feedback. Collaboration: Yes, we share lots of

information with competitors. Our investors also created knowledge centers, where we can meet other businesses and exchange

knowledge.

Capabilities owner/employees: Yes, continuously renew our own knowledge. Hire new employees: Yes, rather not, but when it is necessary we recruit new people to

acquire new knowledge, to fill in weak spots. But we rather acquire the necessary knowledge from competitors if possible.

G: R&D: Yes, to create apps.

Customers: Yes, from the project/the problem. Collaboration: Yes, exchange information with colleagues.

Capabilities owner/employees: Yes, I use my own knowledge a lot.

H: R&D: Yes, every month one R&D project. Customers: Yes, they sometimes come up with innovative ideas.

Collaboration: Yes, with 5 to 6 companies with certain specialties.

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41 I: R&D: Yes, searching for new knowledge online.

Customers: Yes, they come up with new concepts.

Collaboration: Yes, daily working together with other companies.

Capabilities owner/employees: Yes, almost every project starts with this knowledge. Hire new employees: Yes, several times a year to keep up with technology

J: Customers: Yes, how they solve things, how they work.

Collaboration: Yes, with (potential) partners. Capabilities owner/employees: Yes, own knowledge and understanding of things. Freelancers: Yes, attract knowledge through freelancers, sometimes on a project basis.

F: R&D little, customers much, collaboration very much, capabilities owner/employees very much, hire new employees little.

G: R&D little, customers little, collaboration mediocre, capabilities owner/employees very much.

H: R&D much, customers little, collaboration much, capabilities owner/employees mediocre, freelancers little.

I: R&D much, customers mediocre, collaboration very much, capabilities owner/employees very much, hire new employees little.

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42 capabilities owner/employees very much, freelancers much.

F: 40% G: 30% H: 35% I: 5% J: 45%

Q11: How much percent of your output can be regarded as new introductions (new to firm and new to industry)?

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43

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