- Using knowledge management to improve innovative capability -

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Paving the way for continuous innovation

- Using knowledge management to improve innovative capability -

Groningen, April 27^th 2005

Author: Klasina Groeneveld First Advisor: Dr. N Borgers Second Advisor: Dr. D.J. Kiewiet Faculty of Management & Organization Rijksuniversiteit Groningen

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“What do people want, when they want knowledge? Nothing more than this: something strange must be converted into something known (…) Is our need to know not just this need for the known, the need to find something that doesn’t disturb us, between all the weird, the unusual, the dubious? Couldn’t it be the instinct of fear that leads us to know? Couldn’t the cheering of him who knows, just be the cheering over the feeling of a regained feeling of safety? (…) The known is that which we are used to;

and that which we are used to, is the hardest to know, that is to say, to see as a problem, that is to say, to see as strange, as far away, and outside us? “

– Friedrich Nietzsche (1882), Die fröhliche Wissenschaft -

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Paving the way for

continuous innovation

- using knowledge management to improve innovative capability -

27^th of April 2005, Groningen Author: Klasina Groeneveld Student number: 1140027

Faculty of Management & Organization Department of Business Development Rijksuniversiteit Groningen

Advisor: Dr. N. Borgers Advisor: Dr. D.J. Kiewiet

Company coach: Ir. M.T.P. van Kesteren

The author is responsible for the contents of the master thesis; the authorship of the master thesis rests with the author.

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Management summary

This thesis gives insight in how X can reach a situation in which the brand can come to market continuously with innovative products. In order to be able to innovate innovative capability is needed.

The problem however is that the present capability to innovate results in a good innovation every now and then. In the business X is in it is necessary to continuously come to market with innovative products.

The first part of the research, the preliminary research, was given direction with the following objective:

Diagnosing which factor(s) influencing innovative capability is/ are to be improved at X

The factors influencing innovative capability derived from literature were: knowledge management, innovation strategy, culture, organization structure, availability of means and network activities.

In order to see how the situation concerning these factors enabling innovative capability is at X research was conducted by means of a questionnaire and an interview.

This preliminary research resulted in choosing one factor to investigate further. This decision was made after exploring the relationships between the factors. It appeared that two factors in specific were fundamental. Both the factor ‘knowledge management’ and the factor ‘innovation strategy’ are connected to the five other factors influencing innovative capability. The choice between these two factors was made by considering which factor seemed to be causing the need for improvement of the other factor. This resulted in the choice to focus on the factor ‘knowledge management’.

The second part of the research, the diagnosis, had the following objective:

To give recommendations in what way knowledge management directed at the NPD-process should be used effectively at X

This objective was translated in the following research questions:

Which factor(s) influence the effectiveness of knowledge management directed at the NPD-process?

Which factor(s) are to be improved to use knowledge management directed at the NPD-process effectively?

The first research question was answered by means of literature study. This literature study revealed that in order to enable effective knowledge management process having an effective knowledge creation process is a prerequisite. An effective knowledge creation process is being influenced by the following factors: intention, autonomy, environmental fluctuation, redundancy, and requisite variety.

The second research question was investigated by means of empirical research. This empirical research consisted out of a questionnaire. This questionnaire was spread under the employees involved in the innovation process of X.

The results of the questionnaire showed that all five enabling factors were to be improved on several points. First, there is a need for clear, measurable targets. These targets ought to be realistic and reachable and derived from the innovation strategy. To employ the factor ‘autonomy’ an experimental attitude helps to motivate employees. This means amongst others being allowed to make mistakes provided that it’s a learning experience. Another aspect of the factor ‘autonomy’ that needs to be

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improved is the need for authority for the NPD-team to take decisions concerning new products and concepts ad the product development policy. This gives the NPD-team a feeling of responsibility as if it is their own business which helps motivate them. The amount of information available, the

‘environmental fluctuation’, helps employees to question their own business. To enable this there should be more interaction between brands and more information available about products and/ or processes at other departments/ brands. Besides the amount of information there should also be redundancy; an intentional overlapping of information. This enables employees to see reality from more perspectives and judge their own role in the organization. To enable this needed information should be present and there should be access to the needed information for all employees involved in the NPD-process. For requisite variety, the organization’s internal diversity must match the variety and complexity of the environment in order to deal with challenges posed by the environment. To maximize this internal diversity there should be sufficient time to share knowledge, easy access to information, information should be easy to find and this information should be stored in a structured manner.

In order to use knowledge management directed at the NPD-process effectively the main recommendations to reach this goal are mentioned below.

• Clear innovation strategy

• Give employees ‘slack’ time and resources

• Give employees decision-making power

• Enable interaction inside and outside the organization

• Make information available throughout the organization

• Make using the knowledge base easy

• Make an employee responsible for updating information in the knowledge base

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List of figures and tables

Figures

Figure 1.1 Operational structure company Y Figure 2.1 Research path

Figure 2.2 Network activities (source: Trott, 2002) Figure 2.3 The knowledge process

Figure 2.4 Relationship between factors

Figure 3.1 Conceptual model preliminary diagnosis

Figure 3.2 Classification of NPD-activities (source: Trott, 2002) Figure 3.3 Scope of the preliminary diagnosis

Figure 3.4 Managing and managed party

Figure 4.1 Knowledge management as subject for further research Figure 5.1 Four modes of knowledge conversion

Figure 5.2 SECI-model

Figure 6.1 Conceptual model diagnosis

Figure 6.2 Knowledge creating process (source: Nonaka and Takeuchi, 1995)

Tables

Table 2.1 Examples of scanning routines (source: Tidd, 2001)

Table 2.2 Classification in organization structure (source: Burns and Stalker. 1995) Table 5.1 Objects of knowledge streams

Table 7.1 Knowledge instruments used for the knowledge streams

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List of appendices

Appendix 1: NPD-process Appendix 2: Interview scheme Appendix 3: Questionnaire

Appendix 4: Operationalization of the knowledge enabling factors Appendix 5: Questionnaire

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Preface

“Der Weg ist nicht zu Ende wenn das Ziel explodiert”

- Heiner Mueler

This thesis has been written in light of finishing my study of Business Administration at the faculty of Business Administration of Rijksuniversiteit Groningen. About six months ago I chose a subject after I finished my internship at the marketing department of brand X which is part of company Y.

The subject chosen was based on my experience with the course of things at brand X and based on conversations with my advisor of the university, Natacha Borgers, and with Martijn van Kesteren, my coach at company Y. At brand X I noticed that several people experienced problems with the innovations with which brand X had come to market lately. Critic came amongst others from the sales department and the marketing department; the sales people were of opinion that the new products were not innovative enough to keep shelf space at retailers and from the marketing department the remark came that brand X was cutting back on market share due to the upcoming of baby care products from private labels and global players. Earlier research by the Boston Consulting Group by order of brand X pointed out that it is important in its market to come to market with continuous innovations. A literature study pointed out that in order to effectuate innovations possessing innovative capability is a necessity.

Another reason why I chose to focus on the innovative capability of brand X was that I noticed a special interest for the subject of product development during my internship. But as this subject is very comprehensive the first part of the research was a literature study concerned with discovering which factors influence innovative capability. This literature study resulted in six factors influencing innovative capability. To find out what the state of these factors was in the situation at brand X I held interviews and I handed out a questionnaire. These interviews and questionnaire were given to all employees involved in the innovation process of brand X. The results made clear that in order to start improving the innovative capability knowledge management was to be subject of further investigation. First, I explored this subject with the help of literature after which I defined five factors which influence the knowledge creation process. These five enabling factors influence the effectiveness of knowledge management. To see whether/ in what degree these enabling factors were present at brand X I set up a questionnaire. The findings of this research were the basis for the recommendations in what way knowledge management directed at the NPD-process should be used effectively in order to improve the innovative capability at brand X.

With this thesis there comes an end to my years of study during which I was paving my way for the future. I would like to thank everybody who ”contributed a pebble” in this learning process!

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Chapter 1 Company profile

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Chapter 2 Preliminary diagnosis

In this chapter the preliminary diagnosis is being set up. First the Background is given (§ 2.1), followed by the Theoretical Framework (§ 2.2). In § 2.3 the relationship between factors is given.

§ 2.1 Background of the research

At this moment brand X is losing market share to private labels and global players. One of the causes might be that brand X struggles with coming to market continuously with innovative products. In recent years most new products that were marketed were “me-too”- products; products copied from competitors.

The industry of Z however is still very attractive to company Y. Even though the Z segment is small in sales (Net Sales Value), it has the highest contribution margin in the division (from: Z Research by Boston Consulting Group, Sept. 2003). The same research concluded that the Z industry is characterized by a high level of innovation. The Z market requires continuous innovations (incremental and next generation innovation, see § 3.3) in order to grow; these innovations are mainly small, but relatively frequently marketed.

Besides this research conducted specially for company Y, there is widespread evidence of the importance of innovation for growth and profitability (Porter, 1980, p.4; Drucker, 1988, p.67; Olson et al., 1995, p. 48; Tushman, 2004, xi). Banbury and Mitchell (1995, p.161) found that the introduction of incremental product innovations, strongly influenced the market share and business survival of an industry participant. Other evidence comes from Soni et al. (1993, p. 365) who also found a positive relationship between innovation and sales growth. Management research confirms that innovative firms, which are able to use innovation to improve their processes or to differentiate their products and services, outperform their competitors, measured in terms of market share, profitability, growth or market capitalization (Tidd et al., 2001, xi). As Tidd et al. (2001, p.19) summarizes the relationship between innovation and the financial performance of an organization: “Whether the organization is concerned with bricks, bread, banking or baby care, the underlying challenge is still the same. How to obtain a competitive edge through innovation- and through this survive and grow?”. Tidd et al. sees innovation as the opportunity for a company to differentiate itself from other companies. Clark and Wheelwright (1993, p.4) also see being innovative as the solution in a world full of intense international competition, fragmented, demanding markets and rapidly changing technology.

According to above findings being innovative is important in order to survive and grow. In the case of brand X this means frequently coming to market with continuous innovations (from: research by Boston Consulting Group, Sept. 2003). In order to come up with innovations possessing innovative capability is a condition (Trott, 2002, p.11). The capability to innovate is influenced by different factors.

In order to see whether innovative capability is present these factors will be examined. The factors examined in this research are derived from literature (see § 2.2).

In this part of the research, the preliminary diagnosis, the research objective is:

Diagnosing which factor(s) influencing the innovative capability is/are to be improved at brand X

This research will follow the research path as outlined below:

Figure 2.1 Research path Ch. 5 Diagnosis

Ch.2 Preliminary diagnosis Ch. 8 Design

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§ 2.2 Theoretical framework

The focus in this paragraph is the question “Which factors influence the innovative capability?”. Below six factors influencing innovative capability according to literature are given.

Network activities

Kay (1993) suggests that the external linkages that a company has developed over time and the investment in this network of relationships (generated from its past activities) form a distinctive competitive capability. Moreover, this can be transformed into competitive advantage when added to additional distinctive internal capabilities such as technological ability and marketing knowledge. This can be seen as a process of associating external knowledge with the internal knowledge base of the company (Trott, 2002, p. 104). Trott (2002, p.104-105) sees this ‘scanning’ activity as necessary for both the technological and the commercial department. The successful combination of all of these activities can lead to the generation of genuine business opportunities which combines a commercial opportunity with a technical opportunity.

Figure 2.2: Network activities (Trott, 2002, p.104)

In Tidd et al.’s framework this activity of identifying, processing and selecting information from the environment is called “the scanning phase” which he sees as fundamental to successful innovation management (2001, p. 52).Therefore it is important to see whether the organization has established effective external linkages in a systematic way, both on the technological side and the commercial side. For this to occur, it is necessary to have well-developed mechanisms for identifying, processing and selecting information from the environment (Tidd et al., 2001, p. 52, 243). Tidd et al. (2001, p.244) gives some key enabling routines for innovative capability which are associated with picking up and processing signals about possible inputs to the innovation process, divided in market-related and technology-related signals.

market related signals technology-related signals defining the boundaries of technological forecasting

the marketplace

understanding market dynamics developing extensive links

market forecasting benchmarking

working with users

continuing interaction communicating user perspectives in the rest of the organization voice of the customer'techniques

Table 2.1: Examples of scanning routines (Tidd et al., 2001. p. 244)

External scanning and networking External scanning and networking

associatio n

Commercial knowledge base and capabilities of the organization. This includes skills, knowledge and experience Technological knowledge base and capabilities of the organization. This includes skills, knowledge and experience

Current projects and activities

flow of knowledge and skills flow of

knowledge and skills

Current projects and activities

Internal scanning, involving the searching and receiving of ideas

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Organization structure

The organization structure influences innovative capability since successful innovation requires an optimal overall structure (Burgelman and Maidique, 1996, p.24). The more permeable and organic the structure, the greater the potential for innovative ideas to spring (Lawson and Samson, p. 393, 2001).

Organization structure means according to Mintzberg (1979, p.2) the sum total of the ways in which it divides its labour into distinct tasks and then achieves co-ordination among them. The structure is usually labelled at the level of the organization. But can an organization structure be analysed at departmental level? Trott (2002, p.73) sees this presupposition as inherent to the contingency theory.

As Trott (2002, p. 63) states: “These (contingency theories) posit the view that there is not a single best organizational structure, but rather that the structure should be adapted to the activities being performed”. Organizational activities or tasks are the things that individuals do as part of groups in order for the organization to achieve its goals. The activities derived from these goals ask for their own structure according to the contingency theory. And thus, it is possible to analyze the activities performed and the structure at the level of a department.

The well-known classification by Burns and Stalker (1995, p.119) consists of a continuum with on the one end a mechanistic system and on the other end an organic system. This classification helps to get a view of the organization structure and can be linked to innovation management in a way that a mechanistic system is more appropriate to stable conditions where competition mainly exists of competition on price and an organic system is more appropriate to changing conditions where emphasis is put on being able to be flexible and creative.

This classification has some limitations. In general, the continuum of the mechanistic versus the organic organization is not a very rigorous classification but merely gives some insight in the organization structures.

Organization structure has in itself a dualistic character. First, there is a difference between the formal and informal organization structure. This difference becomes apparent since the mechanistic structure lays more emphasis on formal procedures and a narrow definition of tasks and responsibilities.

aspect of the organization mechanistic Organic

task specialization strong weak

knowledge required technical general

nature of the task non-flexible, flexible,

routine varied

specification of tasks and narrow, wide,

responsibilities narrow defined generally defined

link between individual contribution not clearly recognizable clear

and organization targets indirect direct

degree of hierarchical control strong low (emphasizing self control)

communication vertical horizontal (between colleagues)

decision making authorative democratical, participative emphasize obedience and loyalty strong weak

Table 2.2: Classification in organization structure (Burns and Stalker, 1995, p. 119-122)

Second, structure is a perceived reality; the people who build the structure bring in their own perception. For example; in the mechanistic organization form top management defines the boundaries more, narrowing the possible interpretations and giving employees the perception that they can’t determine their own playing-field (Van Gils, 1994, p 128).

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Innovation strategy

An innovation strategy does not necessarily have to be a special process in an enterprise. Tidd et al.

(2001, p. 20) states that innovation can be linked to a generic process which all enterprises have to find their way through. This is being pursued by routines: learned patterns of behaviour which become embodied in structures and procedures over time. Innovation management is therefore the search for effective routines- in other words it is about managing the learning process towards more effective routines to deal with the challenges of the innovation process. Since they are shaped within one firm’s structures and procedures they are hard to copy and highly firm-specific.

A strategy gives direction to a company and determines where the means and efforts are directed to.

The strategy is a more concrete elaboration of the mission or vision. In the strategy formulation attention has to be paid to innovation. Targets on the field of innovation are important in order to prevent that employees see innovation as an ad-hoc process which would result in a situation that only when competitors come to market with new products, or when the market asks for it, or when new possibilities coincidentally come up, employees would react.

In order to see whether an effective innovation strategy is available in a company one can look whether innovation is mentioned in the mission statement of the company. But saying that you are innovative is not enough, also whether the mission is lived up to through communication, target setting and the commitment felt towards the mission are important indicators of how innovative a company really is. Tidd et al. (2001, p. 48) would call bringing these indicators into the organization “embedding routines into the business”. He states that successful innovation management is primarily about building and improving effective routines. In order to build and improve effective routines it is necessary to have a clear direction of where to go to and with what measures the success or failure can be monitored.

Availability means

Besides saying that you are innovative a company should act innovative in order to eventually be innovative. But acting innovatively costs time and money. Time and money that cannot be allocated to something concrete immediately but which should be seen as investing in the future. The following factors are beneficial to the innovative capability directed at the availability of means (De Jong and Kerste, 2001, p. 65): the freedom for employees to experiment, the availability of financial means, and training and education.

The freedom for employees to experiment influences the innovative capability. Freedom to experiment means that the employee has some slack in order to think through “the way things go around here”

(De Jong and Kerste, 2001, p.65). In order to be able to do this it is needed that the workload is manageable, that there is free space in the agenda for unexpected events, that employees are given challenging tasks and that the company targets and strategy are communicated since each employee should know what his contribution is to reach the targets. The result can be an employee who thinks through how his work can be done and invent effective and efficient routines.

In order to execute ideas time ánd money is needed. A lack of budget can work discouraging for employees (De Jong and Kerste, 2001, p. 68). Some events that work encouraging are: allocating budget when employees have a clear direction what they want and give them the opportunity to show what they found. In short, give employees the opportunity to innovate as if it is their own business.

Training and education can help improve the innovative capability since new knowledge means new input for more ideas and besides this it can help as a motivator (De Jong and Kerste, 2001, p.71). Tidd

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et al. (2001, p. 328) states that the extent to which a company is committed to training and development is a core characteristic which is being associated with high-performance organizations.

Studies at national, sectoral and individual company level also repeatedly stress the relationship between investment in training and education and innovation capability. The argument here is that the ability of an organization to make best use of new equipment or to produce products and services with novelty in design, quality or performance depends to a large extent on the knowledge and skills of those involved in producing such innovations.

Culture

According to Von Stamm (2003, p. 385) “Creating the right culture is key to innovation”. By culture in this sense organizational culture is meant. The relationship between culture and innovation is explained by Flynn and Chatman (In: Tushman, 2004, p 247) as following; as a system of social control, organizational culture can influence members’ focus of attention, behaviour, and commitment.

Through member’s clarity about organizational objectives and their willingness to work toward these objectives, culture influences the attainment of valued organizational goals by enhancing an organization’s ability to execute its strategy. From literature the following characteristics can be extracted which influence the organization’s ability to execute its strategy (De Jong and Kerste, 2001, p.33; Flynn and Chatman, in: Tushman, 2004, p. 247-248): a focus on people, soft control, openness, result driveness, future driveness of employees, and knowledge sharing.

Knowledge base

A knowledge base plays an important role in the innovation process since innovators, opposed to imitators, create new products and services by extending their existing knowledge base (Tushman, 2004, p. 361). This given is caused by the fact that since innovators do not follow the beaten road, they must learn as they go, and the more effectively they learn, the greater the opportunity they have to develop distinctive competencies that are difficult to copy for imitators (Tushman, 2004, p. 361).

Enterprises have the opportunity to learn from progressing through the innovation process (in the figure below seen as the knowledge creation process) so that they can build their knowledge base and can improve the ways in which the process is managed (Tidd et al., 2001, p.39).

Figure 2.3: the knowledge process

The saying ‘the whole can be more than its parts’ is applicable to the concept of the knowledge base.

The knowledge base is not just the sum of the individual knowledge bases. According to Willman (1991) ‘the organisation itself, rather than the individuals who pass through it, retains and generates innovative capacity, even though individuals may be identified who propagate learning’. With this, he emphasizes that the knowledge of the organization consists out of the accumulation of the knowledge bases of all individuals and the social knowledge embedded in relationships between those individuals (Trott, 2002, p.97). Trott (2002, p.100) sees these internal processes as the focus point of

knowledge management knowledge

creation process

knowledge base

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management attention that lead to this ability of knowledge accumulation and application. These internal processes can be named “knowledge management”; managing knowledge leads to the accumulation of knowledge and enables the application of knowledge.

Managing knowledge effectively and efficiently can have advantages like a faster rate of innovation, increased efficiency in manufacturing and supply chain, and acceleration of rolling out best practices (Von Krogh, 2001, p.421) and embedding time-saving routines (Tidd et al., 2001, p.48). Research by Soo et al. (2002, p.134) found a positive relation between the level of new knowledge creation and the amount of innovation. Van Krogh emphasizes the need for managing the knowledge creation in his article with the significant title “Making the Most of Your Company’s Knowledge“ as following “...in the light of the increasing pressure to innovate and with high employee mobility, managing the effectiveness of knowledge creation is becoming crucial for business success” (2001, p.424).

§ 2.3 Relationship between factors

The factors influencing the innovative capability overlap. This paragraph gives an overview of the relationships between the factors.

Figure 2.4: relationship between factors

1. culture – knowledge management

The definition of culture as “a system of shared values (that define what is important) and norms that define appropriate attitudes and behaviours for organizational members (how to feel and behave)”

already implies that for adding knowledge to a knowledge base to occur is has to become a routine for organization members. Culture influences members’ focus of attention, behaviour, and commitment.

2. organization structure – culture

The link between these two factors is a very strong one. The way in which an organization is structured often tells something about the culture present. In this research the cultural factors that influence innovative capability are: focus on people, soft control, openness, result drivenness, future drivenness of employees, and knowledge sharing. These factors are related to the organization structure. For example, the degree of knowledge sharing depends on the way knowledge is organized through a company; without communication channels knowledge sharing becomes difficult.

Organization structure has in itself a dualistic character; you can’t speak of thé organization structure, there is both a formal and an informal organization structure and structure is dependent on the perception of the people who build it. How the division between the formal or the informal structure depends partly on the culture. The perception of employees is also coloured by the culture.

3. innovation strategy – culture

knowledge management

culture

organization structure

network activities

innovation strategy

availability of means 1

3

4

5

2

7 8

6

9

10

11

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An innovation strategy doesn’t have to be a special process in an enterprise; innovation strategy can be linked to a generic process by means of routines. These routines make up the culture.

4. knowledge management– organization structure

The organization structure is the sum total of ways in which it divides its labour into distinct tasks and then achieves coordination among them. A knowledge base is a supporting tool for achieving coordination. The structure has to be such that accumulating the knowledge base is made possible.

5. knowledge management – innovation strategy

Knowledge management as factor enhancing innovative capability is the basis for the innovation strategy; without knowing what you know and which knowledge is unknown there cannot be defined a direction.

6. innovation strategy- organization structure

The innovation strategy is shaped within one firms’ (organization) structure and procedures. The organization structure – the way in which labour is divided into distinct tasks and the coordination between them – however should be adapted to the (innovative) activities performed.

7. network activities - knowledge management

Trott (2002, p.14) sees the importance of network activities how these activities result in knowledge which is added to knowledge base. Network activities add knowledge to the knowledge base in such a way that when the external knowledge collected through network activities are connected to internal capabilities knowledge arises.

8. innovation strategy - network activities

The innovation strategy relates to network activities. For employees to act proactively the scanning phase of the innovation process has to be done in a systematic way. In order to know what a systematic way of acting is, a strategy has to be formulated.

9. knowledge management- availability of means

In order to build a knowledge base time, money and people have to be available. For adding knowledge to the knowledge base systematically, to be structurally updated and to be user-friendly, people have to manage knowledge which costs time and money.

10. innovation strategy - availability of means

The innovation strategy has to be coupled to available means since without means the strategy can’t be executed. A strategy is needed in order to know which means are to be made available. An innovation strategy is also a guide to know which means have to be made available in order to execute the strategy.

11. network activities - availability of means

For network activities to occur, time and money to network is needed. These means also include the freedom to experiment and training and education.

The factors influencing innovative capability derived from literature are highly dependent on each other. Changing one factor will impact other factors as well. It becomes apparent in this paragraph that the factors “culture” and “structure” are interweaved with all the factors and with each other. The factors “network activities” and “availability of means” can be seen as input for the process of adding knowledge to the knowledge base. The factors knowledge management and innovation strategy are closely linked; without knowledge what you know (and can) and don’t know it is difficult to set out a clear direction. Knowledge management is seen as basis for the innovation strategy in this research.

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Chapter 3 Research Design

In this chapter the outline of the preliminary diagnosis is given. In paragraph 3.1 the Conceptual Model is given, the Research Problem is defined in § 3.2 followed by the Research Area and Scope (§ 3.3) and the Research Method (§ 3.4).

§ 3.1 Conceptual Model

In this paragraph a conceptual model is given which makes clear which factors influence the innovative capability according to literature. These factors are derived from literature study (see § 2.2) This conceptual model shows the relation between the factors influencing innovative capability.

However in this research focus will lie on the relationship of the individual factor with innovative capability and not on the relationships between the factors.

A note has to be made concerning the comparison between theory and the real life situation. It is not the purpose to see whether brand X works according theory but to see how she functions and to be able to attach criteria to the factors.

Figure 3.1: Conceptual model preliminary diagnosis

§ 3.2 Research Problem

The previous chapter started with the assumption derived from literature that innovative capability is needed in order to come up with innovations. Literature study revealed six factors which influence innovative capability. Resulting from this finding the research problem can be defined. The research problem consists out of two parts: the research objective (see § 2.1) and the research question.

The research objective of the preliminary diagnosis is:

Diagnosing which factor(s) influencing the innovative capability is/are to be improved at brand X

The research question for the preliminary diagnosis is:

Which factors influence the innovative capability at brand X?

Which factor(s) is/ are to be improved at brand X?

knowledge management

culture

organization structure

network activities

innovation strategy

availability of means

Factors influencing innovative capability

aspects of innovative capability that are to be

improved Current state of the

factors influencing innovative capability

at brand X

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§ 3.3 Research Area and Scope

In this paragraph the research area and scope of the preliminary diagnosis are defined. First, the types of innovation which are likely to appear in the situation at brand X given the current context are typified. Second, insight is given into the scope of the research, the innovation process.

A well-known distinction in types of innovation is one by Wheelwright and Clark (1992). They distinguish breakthrough, next generation and incremental innovations. These three types of innovation can be classified into continuous (next generation and incremental) and discontinuous innovations (breakthrough).

In this research breakthrough innovations remain out of the scope because of three reasons. First, research by BCG (Sept, 2003) concluded that continuous innovation (= incremental and next generation innovation) is needed in the Z market. Second, in discontinuous innovation projects the requirements for success and the role of learning differ (Ayas, 1996, p.6). Third, the current structure at brand X in which R&D is not able to work on New Technology projects is such that breakthrough innovations are not likely to occur.

At brand X almost all ideas come from the marketing department as this department is in the lead for filling the pre-project phase of the development funnel. As can be seen in the figure below this is normal for the FMCG industry brand X is in.

This means that brand X is more occupied with promotion and packaging whereas for example the pharmaceutical industry is more concerned with the functional aspects of the product. This is reflected in the R&D capacity; R&D has time to work on projects started by marketing but doesn’t have the capacity to work on New Technology projects which might result in technology-driven innovations.

Purchasing and Technology does come with new packaging options passed on by suppliers but is also not occupied with developing technology themselves. Hence the conclusion that innovative ideas are mainly market-driven in the case of brand X.

This research treats innovative capability as enabling innovation. The process that transforms the innovative capability into an innovation is seen as the scope of this research. This process is called the New Product Development-process (NPD-process) at brand X (see appendix 1). For structuring this NPD-process a well-known way of structuring is being used at brand X; the Stage-Gate process by Cooper et al. (2001). Cooper developed this conceptual and operational model to put emphasis on reviewing the development of an innovation and to frequently make a go/ no-go decision to avoid

Balance of activities

Industrial products Pharmaceutical industry Electronics industry

White goods and domestic appliance industries FMCG

Foods and drinks industries Technological

activities

Marketing activities

Figure 3.2: Classification of NPD-activities (from: Trott, 2002, p.272)

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throwing away money. This model breaks the innovation process into stages in which clearly defined steps are taken to progress the product development project.

Figure 3.3 Scope of the preliminary diagnosis

In the preliminary diagnosis the question of “how to improve the innovative capability” is looked at integrally. In order to look as broad as possible to the primary process directed at innovating, the NPD- process in the whole is chosen as the scope for the research. Therefore all disciplines involved in the NPD-process are treated in the preliminary diagnosis to obtain a wide view on existing opinions on how the NPD-process is perceived.

The NPD-process is object of managing. This managing occurs inside the NPD-teams in which marketing is in the lead. The innovation process is managed by the team and the team is managing itself with marketing in the lead as part of the team.

Figure 3.4: managing and managed party

At organizational level the NPD-team is managed by a higher management layer, for the larger part consisting out of the managers of the employees involved in the NPD-process.

innovation process multi-

disciplinary NPD-team

consisting of people from Marketing, Sales, R&D, Medical

Profession, Purchasing &

Techhnology marketing

management

scope of the preliminary research

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§ 3.4 Research Method

In the preliminary diagnosis six factors influencing innovative capability derived from literature are subject of the preliminary research. In this paragraph the method used is being explained.

Paragraph 2.1 gave reasons why brand X should possess innovative capability. In this research the underlying problem is that brand X has not come to market continuously with innovations that were able to strengthen market leadership in recent years. In order to come up with innovations, innovative capability is necessary (see § 2.1).

A literature study was being performed to answer the methodical question “which factors influence innovative capability?”. The purpose of this literature study was to develop a good understanding of the concept and to gain insight into previous research directed at factors influencing the innovative capability.

After defining which factors to look at, an empirical research was conducted in the form of interviews and a questionnaire. The aim of this empirical research was to discover how the current situation was concerning the factors influencing innovative capability.

The first reason to use both a questionnaire and an interview was that in case of the factor

“organization structure” the well-known continuum by Burns and Stalker was used. The aim of the questionnaire was to collect opinions of employees involved in the innovation process on the continuum. A questionnaire is a suitable instrument with which respondents can give their opinion concerning a factor on a continuum. Asking people to rate factors on a continuum in an interview could have been understood as steering. This sort of question is considered to be easier to answer on paper since the answer wanted is only a ‘yes’ or a ‘no’ or a number ranging from 1 till 5. Another reason why this approach was used was a consideration of time; now the interviews lasted for about an hour and a half and the questionnaire took about ten minutes.

The questionnaire was used to help typify the organisation structure at brand X (see appendix 3). This questionnaire was based on the classification by Burns and Stalker (1995, p. 119). This classification aims at getting a view of the structure of the organization. The subjects of the questions were derived from this classification (Burns and Stalker, 1995, p.119-122).

The interview was held to gain insight into the factors: innovation strategy, network activities, availability of means, knowledge base, culture and organization structure (see appendix 2). For every factor questions were set up.

The questionnaire and interview were held with employees involved in the innovation process since innovative capability is built up during this process. Employees involved in this process are the ones who can make the difference in the capability to innovate.

The outcome of the empirical research was compared to the theoretical ideal situation; the practical situation was reviewed in light of theory. This comparison gave answer to the question which factors influencing innovative capability were to be improved.

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Chapter 4 Results of the preliminary diagnosis

This chapter offers the results of the empirical research. The questions “Which factors influence the innovative capability of brand X?” and “Which factors are to be improved at brand X?“ stand central in this chapter.

§ 4.1 Results

Network activities

Network activities during which the external knowledge is associated with the internal knowledge base can lead to successful innovation management (Tidd et al., 2001, p.52). To be able to say something about the network activities at brand X questions were asked about whether the organization has established effective external linkages in a systematic way and well-developed mechanisms for identifying, processing and selecting information from the environment (Tidd et al., 2001, p.52, 243).

At brand X the scanning phase is being executed every year before the Long Range Plan (LRP) is being composed by a.o. the marketing department, the R&D department and the Purchasing and Technology department. This is done on an ad-hoc basis, and not in systematic fashion. The routines mentioned by Tidd et al. are used in the phases before the idea generation phase at brand X but it is only then when the different disciplines start brainstorming for ideas when all information and knowledge is put together. It can be said that the identifying, processing and selection of information is done but not structurally and the knowledge derived from it is not easy accessible.

Scanning activities on the technological side include: presentations from companies in the packing industry, perfume houses, suppliers raw material suppliers, reading professional literature and on the commercial side: information from databases (AC Nielsen, global new product database), consumer contact, visiting congresses, and reading professional literature.

These external linkages are being maintained by individuals and therefore are subject to the individual effort given to exploit the linkages. At this moment the responsible managers do use their networks in order to get the latest information. This information is being used as input for the innovation process.

But before the LRP has to be composed the information stays at the separate departments; there is no

‘system’ in order to share this knowledge.

Concluding can be said that brand X uses its external linkages – technological and commercial - in its innovation process but it is highly dependent on the individual. This scanning can be done in a more systematic fashion. The knowledge obtained from the scanning activity has to become easy accessible for departments involved in the NPD-process to share the findings.

Organization structure

The structure at brand X is being analysed using the well-known classification by Burns and Stalker (1995, p.119). This classification is linked to innovation management in a way that a mechanistic system is more appropriate to stable conditions where competition mainly exists of competition on price and an organic system is more appropriate to changing conditions where emphasis is put on being flexible and creative. The organic system is said to be more appropriate for innovative firms.

At brand X the organization structure on the continuum “mechanistic versus organic” is classified as organic. Only the aspects, style of decision making and the degree of hierarchical control, point out that the structure at brand X can be called mechanistic; questions asked towards these factors pointed out that the decision making process regarding the NPD-process is perceived as slow (three out of five) and authorative (three out of five). Questions asked concerning the degree of hierarchical control

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or the procedures concerning the NPD-process that have to be followed also pointed towards a mechanistic approach; employees perceive this as slow (four out of five), extensive (four out of five), and directed towards following the rules opposed to getting business done (four out of five).

An organic system is more appropriate to changing conditions where emphasis is put on being able to be flexible and creative and a mechanistic system is more appropriate to stable conditions where competition mainly exists of competition on price. At brand X most factors pointed out that the organization structure can be described as organic. Some examples: the communication is perceived as informal (four out of five), directed towards information and advice (four out five), and there is a free flow of information (four out of five).

In general the organization structure of brand X can be called ‘organic’ and is adapted to the activities which are being performed, as contingency theory prescribes. Though, the slow and authoritative decision making process and the slow and comprehensive procedures to be followed (pointing at a mechanistic structure) during the innovation process counteract the necessary ease of decision making and low hierarchic control needed in order to come to market quickly with innovative products.

Innovation strategy

An innovation strategy doesn’t need to be a special process in an enterprise; building and improving effective routines is the primary cause of successful innovation management (Tidd et al., 2001, p.48).

In order to see whether innovation strategy is available in a company one can look whether innovation is mentioned in the mission statement of the company.

Employees at brand X said to know the mission statement – “xxx” - from the headers on PowerPoint sheets, from note-blocks and other stationery but they didn’t feel committed to this mission (even though spontaneously the need to focus was mentioned by four people during interviews). When asked if they could find the mission back in target setting it was mentioned that company Y does make a subdivision in ‘growth’, ‘maintain’ and ‘hold’ brands but that this strategy can change to reach targets or to exploit new chances and so the focus aimed for was lost in favour of short-term profits.

The necessary routines that have to be embedded in the organization in order to be able to have a clear direction for innovation are not clear to employees. In the interviews was mentioned that at this moment it was not clear whether there was an innovation strategy (four out of six), some thought there was no innovation strategy (four out of six), that they felt there was not a fit with business strategy (five out of six), that sometimes decisions were altered by top management (five out of six), that budgets available were adjusted in order to get short-term success (five out of five), and that brand X acted reactive (five out of five). Only one person mentioned the LRP-process (Long Range Plan) for now till over three years as a product of the innovation strategy. This person himself also added the restriction that in reality it wasn’t a real long-term plan since this LRP is being made every year.

The routines mentioned above don’t give a clear direction and there is not clear with what measures success or failure can be monitored. When was asked which direction the generic strategy of brand X was heading for very different answers were given which points out that the long-term vision for brand X is not clear which makes it hard to measure whether the brand is doing well or bad. Concluding can be said that if there does exist an innovation strategy this strategy, made up of routines, is not embedded effectively in the strategy of the organization since employees do not have a clear sense of direction for the brand X, amongst others because innovation targets are not known or subject to change on the short-term, and it is not clear with what measures the success or failure can be monitored.

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Availability means

Factors that enhance the innovative capability regarding the availability of means are the freedom for employees to experiment, the availability of financial means and training and education.

At brand X own initiative is valued highly, also starting up new projects is encouraged. Therefore it can be said that employees do get the freedom to experiment. Since almost all innovative ideas are market-driven at brand X experimenting especially finds place at the marketing department. At the R&D department there is no time to work on New Technology projects which might have resulted in technology-driven innovations (see § 3.3). At the marketing department time is also lacking to structurally free time to experiment, even though this occasionally happens. Not too long ago a project on Consumer Insights was initialized. In the example of the Consumer Insights-project time and money was made available in order to execute the project but only then when the project was made concrete.

There does not exist a budget which is structurally available for experiments. It is highly dependent on the individual whether experimenting takes place. Normal projects can be adjusted during the year which causes employees to be cautious since their plans can be changed even when budgets are already allocated. This short-termism interferes with the long-term view needed to innovate successfully (Cooper, [1998], p.10). Cooper stresses that it is difficult to embrace a long-term commitment to product development in a world where a short-term, financial focus seems to dominate.

The situation at brand X concerning training and education appears to highly dependent on budgets as well. In the interviews it was stated that there was the opportunity to follow training and/or do education. Every year a personal development plan is set up individually. In this development plan personal targets for the coming year are described. Together with the job evaluation conversation this leads to a plan which sorts of training and/ or education could be effective for the individual’s development. However, in the interviews it was mentioned four times that during the year budgets for

training and education are being cut resulting in less training and education than planned.

Concluding can be said that there is no time to experiment on a structural basis. It is highly dependent on the individual whether experiments are initialized and executed. As for the availability of time and money it can be said that it is highly dependent on the effort of an individual person whether experiments are started and executed. There is no structural budget or ‘slack’ time to experiment.

Training and education is arranged but when budgets need to be cut, the budget for training and education is one of the first which will be put a stop to.

Culture

From literature the following characteristics can be extracted which influence the organization’s ability to execute its strategy (De Jong and Kerste, 2001, p.33; Flynn and Chatman, in: Tushman, 2004, p.

247-248): a focus on people, soft control, openness, result driveness, future driveness of employees, and knowledge sharing.

At brand X the employees say to experience a focus on people. By this is meant that employees can influence their own job and that they perceive the degree in which the organization cares for their well- being as high. Employees state that own initiative is valued and that they feel free in the way they can do their job. This causes a feeling of involvement which makes people come up with ideas more easily opposed to a culture where the focus lies on doing the job.

The style of control at brand X is said to be soft but sometimes hierarchic (two out of five). Soft control can promote innovative behaviour since it triggers employees to come up with own initiatives and

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ideas. This system of control is being used laterally. An indicator of a process with strong hierarchic control is the amount of forms that have to be filled in when coming up with an idea. This system of tight control is used in the vertical line of organization at brand X. Though, informally, there is a flexible attitude towards them; as one employee said “Sometimes phases in the innovation process are being skipped or phases take place at the same time; this flexibility is necessary. It has to be prevented that it becomes a hunt for signatures”.

In the interviews with employees of brand X five out of six of them mentioned that top-down decisions are being made even when according to their job description these employees themselves are responsible for making these decisions. A consequence of this can be that employees will only follow the rules in future practice and feel less committed since they have the experience that people higher in the organization posses the actual decision-making power.

The culture at brand X can be defined as an open culture; most employees say the style of communication in the organization can be typified as informal (five out of five), with a free flow of information (three out of four), based on information and advice (two out of five agree; others neither agree nor disagree), and the work attitude as collaborating (five out of five). Openness can improve innovativeness as innovation profits from informal contacts and information sharing which can result in having employees feeling at ease and feeling comfortable coming up with ideas (De Jong and Kerste, 2001, p 38).

The next characteristic that influences innovative capability is whether the culture is result driven.

When employees are managed on the results they have more freedom to fill in their own job. This freedom can enhance creativity and motivation to make it their business. At X employees feel their job is managed on results. They are being appreciated based on matters like expertise, vision, commitment and people factors such as personality and empathy. These factors also emphasize a result driven culture since emphasis is laid on whether they can do it in stead of how to do the job.

Being directed towards the future is a characteristic of employees which is directed to the question whether employees think about the future of their brand. In order to achieve this it is necessary to be open to influences from outside the company (De Jong and Kerste, 2001, p 41). At X looking at the future is part of the procedure to fill the Long Range Plan. This is done by filling in a SWOT-analysis.

Input from outside can be seen in the form of a “Consumer Trends”-booklet handed out by an external company which helped brand X in the development of product ideas, and also in the form of knowledge from the packing industry, the perfume industry, AC Nielsen database and the global new product database. In daily practice at brand X it is stimulated to be familiar with current trends. A factor hich undermines the degree of being directed towards the future at brand X is the high mobility of employees at amongst others the marketing department. This results in a danger of focussing on the projects you are able to finish as long as you work at brand X in stead of starting up new projects.

The final characteristic of culture is the degree of knowledge sharing. Knowledge sharing can result in the spread of ideas inside a company and contributes to a culture in which ideas are valued. Besides this, knowledge sharing can result in prohibiting making the same mistakes twice. At brand X knowledge sharing is encouraged by circulating magazines, professional journals, Employee Information Meetings, results from the consumer service department, Intranet which is a site for employees of Company Y and on the X-drive, a special area of the hard disk, which is accessible to all employees. Even though employees state that a lot is being done on information sharing, it is also said that often the same mistakes are being made again and again which could have been prohibited

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when an easily accessible evaluation would be available. At this moment employees say there is no easy way of finding information by all departments involved in the innovation process (six out of six).

Concluding can be said that a focus on people is experienced by employees at brand X which can result in employees feeling committed. Concerning the style of control the shoe pinches especially in the vertical organization; decisions are being made top-down which discourages employees to take initiative. The openness experienced by employees at brand X is a precondition for employees to come up with ideas. The result drivenness of the targets for employees can result in the feeling of being free to fill in their own task, of becoming the ‘owner’ of their part of the whole, which can increase the innovative capability. The future drivenness is formally arranged by means of information from a SWOT-analysis, external companies and databases but the high mobility of the employees and the lack of documenting prohibits that this becomes a major strength. The degree of knowledge sharing is moderate: ideas are hardly shared with other brands or other departments in the company and there is not one easily accessible database for learnings.

Knowledge management

The role of a knowledge base in the innovation process is important since it is necessary to learn when innovating and restoring this knowledge for later use in a knowledge base. In order to make effective use of knowledge it is necessary that the knowledge is stored in such a way that employees are able to access it easily and quickly.

At brand X managing knowledge is not a separate function; it depends very much on the individual employee whether it is included in his/ her personal working method. At brand X different instruments are available to manage knowledge; on corporate level there is Intranet, a website which contains amongst others firm-specific information and news about competitors and International Z meetings during which harmony is strived after in order to allocate R&D resources. On organizational level, the level of Company Y, there is a special place on the hard disk, the x-drive, which contains information accessible to all departments. At the individual brand level there are discussions with the manager and the Consumer Insights program. This program strives to trace the manner in which consumers use products in order to know what the consumer needs and is willing to buy.

For all these knowledge instruments individually it was remarked during the interviews that they were not systematic, not updated on a structural basis, not easily accessible and not user-friendly. In the interviews several people said that they thought that knowledge, especially tacit knowledge, was lost due to the high mobility of people, especially on the marketing department, and due to the lack of building organizational memory.

Concluding can be said that information and knowledge is made available. However the way in which it is made available is not perceived as easy accessible, user-friendly, not systematic and not structurally updated. The effectiveness of knowledge sharing and knowledge creation should be managed in order to wage war against competitors and prohibit a knowledge leak.

- Using knowledge management to improve innovative capability -

Paving the way for continuous innovation

- Using knowledge management to improve innovative capability -

Paving the way for

continuous innovation

- using knowledge management to improve innovative capability -

Management summary

CONTENTS

List of figures and tables

List of appendices

Preface

Chapter 1 Company profile

Chapter 2 Preliminary diagnosis

§ 2.1 Background of the research

§ 2.2 Theoretical framework

§ 2.3 Relationship between factors

Chapter 3 Research Design

§ 3.1 Conceptual Model

§ 3.2 Research Problem

§ 3.3 Research Area and Scope

§ 3.4 Research Method

Chapter 4 Results of the preliminary diagnosis

§ 4.1 Results