Organizing innovation in small KIBS companies: A structured approach.

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Organizing innovation in small KIBS companies:

A structured approach.

Faculty of Economics and Business MSc BA Business Development October, 2013 E. Renes Assendorperplein 4a 8012TW Zwolle The Netherlands T: +31(0)611465886 E: e.renes@student.rug.nl Student number: 1918362

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2 Theme

Organizing the development process of KIBS

Company

Xcellent ICT Groep Maanlander 39 3824MN Amersfoort

Supervisor

University of Groningen: Ir. C. Shah Dr. C. Reezigt

Xcellent ICT Groep: Ing. J.H. Schoonderbeek MBA

Keywords

Organizing innovation, service innovation, incremental innovation, knowledge-intensive business service, planned approach, structuring, Stage-Gate, small companies, ICT companies

Abstract

Business services are an important part of today´s economy. This also applies to the knowledge-intensive business service (KIBS). Companies who deliver KIBS are highly innovative, and often small. Despite their innovativeness, service companies in general do often use a haphazard approach when it comes to developing and marketing new services. While several studies find out, that companies which did apply a planned approach improved the performance of their new services. In this study the development process of small KIBS companies is highlighted. More specific, this study shows a model how to structure the development process of incremental innovations in small KIBS companies.

Acknowledgments

I would like to thank Xcellent ICT-Groep for the opportunity and time dedicated to this research, in particular, J.H. Schoonderbeek for his support, useful input and feedback. I would also like to thank C. Shah for his input and feedback. Furthermore, I would like to thank my family and friends who have always supported me during my study. Special thanks go to Rebekka Lassche for encouraging me during my internship, and for being my sounding board whenever I needed.

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Introduction 3

1 Introduction

Business services are an important part of today´s economy. They constitute a major part of total economic activity and employment in most economies (OECD, 2007; EMCC, 2005). Studies have mentioned that the importance of service will continue to increase in the future. This also applies to the knowledge-intensive business service (KIBS) (OECD, 2007; Gotsch and Hipp, 2012). KIBS companies are highly innovative, and often small (EMCC, 2005; OECD, 2007; Gotsch and Hipp, 2012). Valadez (2011) mentions that small companies, in general, serve as an economic incentive, and are the fundamental building block of business creation. Small companies are responsible for a large part of all innovations. They are often free to be creative, innovative, explore and try new ideas, and take risks, whereas, big companies may be limited by its own political culture and obsession to be efficient (Valadez, 2011). Innovations have been recognized as a potential source of competitive advantage for many companies (Cooper, 1990; Brown and Eisenhardt, 1995). Small companies that do not embrace innovation within their core business strategy run the risk of becoming uncompetitive. (Madrid-Guijarro, Garcia and van Auken, 2009). Constant innovation is therefore necessary. Despite this innovative advantage, service companies in general do often use a haphazard approach when it comes to developing and marketing new services (de Brentani and Ragot, 1996; de Jong and Vermeulen, 2003; Dolfsma, 2004; Shekar, 2007). While several studies find out, that companies which did apply a planned approach improved the performance of their new services (de Brentani, 2001; Barczak, Griffin, and Kahn, 2009). Especially the development process of incremental service innovations should be well-planned to gain important benefits (de Brentani, 2001). However, the innovation development process for service companies, is little studied compared to the development process of manufacturing companies (Vermeulen and Dankbaar, 2002; de Jong and Vermeulen, 2003; Dolfsma, 2004). Most studies about the innovation development process are focused on big manufacturing companies (Sundbo, 1997; de Brentani, 2001), or on production-intensive services, like financial services, transport, telecommunications, and wholesale (de Jong and Vermeulen, 2003). These services should be distinguished from services were innovations has a continuous incremental nature due to high knowledge intensity, such as IT services (KIBS) (de Jong and Vermeulen, 2003). Therefore, the focus of this study is on small KIBS companies, and how they have structured the development process of their incremental innovations.

2 Innovation

The literature has many definitions of innovation. All these definitions include the development and implementation of something new. For example: Tushman and Nadler (1986) define innovation as “the creation of any product, service or process which is new to a

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Company size and innovation

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new to the adopting organization”; Rogers (2004) defines innovation as “the ability of the firm to generate new ideas, where new means new to the firm.” The definition of Sawhney,

Wolcott and Arroniz (2006) is, compared to most definitions, different; they conclude that

“innovation in not about new things, but about new value. Innovation is only relevant when it creates value for customers and thereby for the company.” Furthermore, most literature

appoints that innovation consist of two sub-components: product/service and process (Tushman and Nadler, 1986; Cohen And Klepper, 1996; Vaona and Pianta, 2008). Product innovations are usually associated with a growth-oriented strategy, and process innovations mainly emerge from a strategy dominated by a search for efficiency (Cohen and Klepper, 1996; Vaona and Pianta, 2008). Based on these findings and definitions, innovation in this study means: “the generation and adaption of an idea and the conversion of that idea into

a service or process that is new to the company and adds value to the customer and company”.

2.1 Nature of innovation

Innovations can be thought of as falling on a continuum from revolutionary to evolutionary (de Brentani, 2001; Tao, Probert and Phaal, 2010). Terms such as ‘radical’, ‘breakthrough’, ‘revolutionary’, ‘exploratory’, ‘really new’, ‘game changing’, and ‘discontinuous’ have all been used to refer to innovations that involve the development or application of significant new unique technologies or ideas. So, little knowledge from previous experience can be reused in the new innovation context (Tushman and Nadler, 1986). These innovations are designed to meet the needs of emerging customers or markets (Benner and Tushman, 2003). They entail a much higher degree of risk, require greater company effort and resource commitment, and gain usually really outstanding profits or achieve a major competitive advantage. Terms as ‘evolutionary’, ‘exploitative’, ‘incremental’, and ‘continuous’ refer to innovations that are designed based on existing knowledge, and extend existing products and services for existing customers (Benner and Tushman, 2003). It also reinforces existing skills, processes, and structures (Jansen, van den Bosch and Volberda, 2006). This kind of innovation gain less profit, but involve also lower levels of uncertainty, risk, and development effort, and are therefore often successful (de Brentani, 2001.) This study will be focused on innovations which extend existing products, are based on existing knowledge, and have lower levels of uncertainty and risks. To describe this kind of innovations the term `incremental innovations´ will be used.

3 Company size and innovation

Company size refers to the scale and scope of operations and is often associated with organizing innovation (Cohen & Klepper, 1996; Rogers, 2004; Vaona & Pianta, 2008). The established academic literature is mainly focused on new development processes within

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large manufacturing companies, therefore, the focus of this survey is on small companies. It is expected that large companies are more likely to benefit from innovations in terms of market and financial position. Specifically, large companies are better able to finance R&D from internal sources (Vossen, 1998) and they can deploy more resources to sustain their innovations in the market-place, increasing the adoption rate of these innovations (Rubera & Kirca, 2012). However, innovativeness should have a stronger impact on small companies, because innovativeness is more critical for their survival and growth (Freel, 2000; Rubera & Kirca, 2012). The relative strength of small companies lies in their behavioral characteristics, like efficient communication, greater motivation, and flexibility (Vossen, 1998). This part of the research highlights if small and large companies should organize their innovation process in different ways.

3.1 Innovation barriers

To be innovative, small and large companies have to deal with all kinds of barriers, which make the innovation process much more difficult. Barriers faced by large companies, are mostly disadvantages of their bureaucratic structure, which decreases creativity and innovation (Vossen, 1998). Related to this is the cumbersomeness of internal communication, information has to pass a lot of hierarchal layers, which increases information inertia (Rothwell, 1984). Many people are involved in decision making and there is a longer chain of command, which might lead to inefficiency and loss of flexibility (Vossen, 1998). Another barrier is compartmentalized thinking. Large and established companies break tasks down into separate steps. This influences market learning, because departments are focusing on their own goals with the result that information does not cross department boundaries (Adams, Day and Dougherty 1998).

Barriers which have most impact on the innovativeness of small companies are fundamentally related to financial and human resources (Freel, 2000; Larsen & Lewis, 2007). Typically, small companies are constrained by a shortage of time, finances and qualified personnel to manage the innovation process (Tidd and Bessant, 2009). Aspects of the finance barrier are cost of innovation and risks related to these costs. The human resource barrier has to do with the availability of skilled labor and management commitment to innovation (McAdam and McConvery, 2004; Madrid-Guijarro et al., 2009). Weak management commitment can be a signal that the organizational culture does not support innovation. Arising from this is a lack of innovation strategy. Another barrier to innovation is the lack of formal new development structures in small companies (Cooper and Kleinschmidt, 2000; Oke, 2004). In particular, the latter is of interest for this study.

Hence, small and large companies do face different innovation barriers and to overcome these barriers they have to react differently. According to Adams (1982), human resources, for example, are essential for successful innovation, especially during the early product

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Service

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development stages. Small companies do often lack these resources and should overcome these problems in some way. In response to these barriers, Vossen (1998) mentions that small and large companies are likely to play complementary roles, in the sense that they are better at different types of innovation. De Brentani (2001) mentions that different types of innovation require different types of development approach to achieve success. This is stressed by the study of Amara, Landry, and Doloreux, (2009) who argue that size does matter when developing innovations. Based on these findings it can be argued that organizing innovation will differ between small and large companies.

3.2 Small companies

In favor of this research, we will define small companies. According to the traditional way, small companies are defined as a business having <500 employees (Valadez, 2011). However, for the purpose of this paper, another more precise definition is necessary. Even though this study concerns Dutch companies, we do not use the Dutch definition of a small and medium-sized company (<100 employees) (EIM, 2011), because this definition makes no distinction between small, and medium sized companies. Therefore, we will use the European definition of small companies. The European definition makes a distinction between micro, small, and medium sized companies and fits therefore best to this research. Micro companies have <10 employees, small companies have 10-<50 employees and medium sized companies have 50-<250 employees (EIM, 2011). Hence, a small company is defined in this study as a company with 10-<50 employees.

4 Service

This study is focused on structuring the development process of a new service, more precise, a KIBS. Therefore, a more comprehensive description of a service will be given, including the differences regarding products, followed by a more specific description of a KIBS.

4.1 Service definition

In this study service is described according to the definition of Vargo and Lusch (2004). They mention that the common denominators of most service definitions are ‘activities’ and/or ‘processes’, which implies applying something and doing something for the benefit of an entity. They argue that individual and organizational resources, especially specialized skills and knowledge, are being applied. Therefore, service is defined as “the application of

specialized competences, through deeds, processes and performances for the benefit of another entity or the entity itself (self-service).” Noticed that this service is sometimes provided

directly and sometimes it is provided indirectly, trough the provision of tangible goods. This definition may suggest that everything is a service and in a very real sense it is, because economic exchange is fundamentally about service provision (Vargo and Lusch, 2004).

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Therefore, to make clear what the distinction is between services and products, a description will be given how they differ characteristically.

4.2 Characteristics of services

The differences between service and physical products have been well covered in the existing literature. Zeithaml, Parasuraman, and Berry (1985) did a systematic review of the service literature and listed four characteristics that are commonly most used. These characteristics are intangibility, heterogeneity, inseparability, and perishability. A short description will be given of every characteristic (Johne and Storey, 1998).

- Intangibility: Services are predominantly processes rather than ‘things’ and therefore intangible. Although, services are often associated with physical elements;

- Heterogeneity: Services are often variable in quality, because services are commonly produced and consumed simultaneously. Since they are often created and consumed at the staff-customer-interface, the service experience is likely to vary each and every time. Both staff and customers play a role in the delivery of services. The degree of variation is likely to depend on the degree of standardization of the service and the amount of technology applied at the customer interface;

- Inseparability: Services are typically produced and consumed simultaneously, therefore production and consumption are inseparable;

- Perishability: Most services cannot be produced in advance and held in stock, and are therefore perishable.

Despite the huge amount of research that use and accept these distinctive characteristics, there is also a stream of research that argues that the four characteristics fail to distinguish services from goods adequately (Vargo and Lusch, 2004).

- Intangibility: On a goods-services continuum, goods are perceived to be relatively more tangible than services. However, in essence, all goods have a service component, whereas essentially all services have some form of tangible representation. Tangibility of goods is of second importance; goods have little value in and of themselves, they are important only to the extent that they serve as the equipment and supplies for the extraction of service production processes. (Vargo and Lusch, 2004).

- Heterogeneity: The idea is, because humans are involved in the provision of services, that services cannot be standardized like goods. But if human input is the constraining factor, tangible goods cannot be inherently more homogeneous than services. So, human activity is the common, not the distinguishing, factor in the provision of services and tangible outputs. Standardized output is an outgrowth of mass production; not an inherent characteristic of tangible output. It is a manufacturing goal and nowadays,

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Knowledge-intensive business services (KIBS)

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standardization is making place for customization. Heterogeneous offerings are the normative goal regardless of whether the core offering is relatively tangible or intangible (Vargo and Lusch, 2004).

- Inseparability: Tangible goods have only been produced without customers since the Industrial Revolution, but this production, separate from the consumer does not mean that the value is created without the customer. Produced goods only get value when they are used by customers, goods are merely the distribution vehicle for service provision; they are appliances. Both managers from goods and services should strive to increase inseparability, in order to get the customer involved, allowing them to find, chose, design, and use what they want. (Vargo and Lusch, 2004).

- Perishability: Just as goods are stored in depositories, services are stored in systems, buildings, machines, knowledge and people. Both have a limited lifetime, but all that matters are the benefits they can provide. Benefit (value) is only created in concert with the customer (an unsold good has no value) and may be relatively enduring, whether the associated service is provided directly or through an appliance. (Vargo and Lusch, 2004).

These differences in the literature are caused by the used perspective. The believe that services differ from products, due to the four characteristics, is viewed from a manufacturer´s perspective. While the believe that services and product do not differ due to the four characteristics, is viewed from a marketing/ customer perspective. So, depending on the used view, products and services can differ from each other mainly on four characteristics.

5 Knowledge-intensive business services (KIBS)

KIBS are a particularly dynamic and rapidly growing area of the service sector (OECD, 2007). The KIBS sector consists of companies who have emerged, to help other organizations deal with problems for which external sources of knowledge are required (Miles, 2005). In the past, these activities were largely conducted in-house given their strategic importance and their company-specific nature. Increasingly, however, companies have been buying KIBS from external sources (OECD, 2007). KIBS have a key role, since they support (innovative) activities across a wide range of other business fields.

5.1 KIBS definition

There exist several partly identical, partly different definitions of KIBS. This study refers to Miles (2005), Amara et al. (2009), and Gotsch and Hipp (2012), who claim that KIBS are “services

that provide knowledge-intensive inputs to the business processes of other organizations, including private and public sector clients.“

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KIBS companies are a subset of business services and can be grouped into two main categories (Miles, 2005), namely:

- Traditional professional KIBS (p-KIBS): legal and financial services, accountancy, advertising, marketing, business and management consultancy, and architectural services;

- New technology based KIBS (t-KIBS): Software design, engineering services, research and development, technical services, and computer related activities.

Table 1 provides an overview of the sectors usually included within the definition of KIBS. In this study the focus will be on computing and related activities.

Table 1: Summary of KIBS activities (EMCC, 2005; Freel, 2006; Huggins, 2011)

Computing and related activities R&D Other business activity - Hardware consultancy (t-KIBS)

- Software consultancy and supply

(t-KIBS)

- Data Processing (t-KIBS) - Database activities (t-KIBS)) - Other computer related activities

(t-KIBS)

- Research and experimental development on natural sciences (t-KIBS)

- Research and experimental development on social sciences and humanities

(t-KIBS)

-Legal activities (p-KIBS) -Accounting (p-KIBS) -Market research (p-KIBS) -Business and management consultancy (p-KIBS)

-Architectural and engineering activities (t-KIBS)

-Technical testing and analysis (t-KIBS) -Advertising (p-KIBS)

-Labor Recruitment (p-KIBS)

To distinguish p-KIBS and t-KIBS Miles, Kastrinos, Flanagan, Bilderbeek, den Hertog, Huntink, and Bouman (1995) mention that a typical purpose of p-KIBS is helping customers navigate/negotiate complex systems. These complex systems are traditionally not so much technical systems. Their relation to new technology is typically that of users rather than as agents in development and diffusion. T-KIBS are mostly related to the development of various new services connected with technology, and with the production and transfer of knowledge about new technology (Miles et al., 1995). Companies providing t-KIBS combine highly specialized knowledge from different sources and distribute this knowledge to develop problem-specific solutions (Miles, 2005; Amara et al., 2009). They are highly innovative and act as a driver of innovation in other companies, as well as facilitating innovations in other economic sectors (OECD, 2000; Gotsch and Hipp, 2012).

However, this distinction between p-KIBS and t-KIBS is very limiting, because very often research on KIBS is in fact research on t-KIBS. In line with most research, t-KIBS will be referred as KIBS in this study.

5.2 KIBS innovation

Companies are increasingly outsourcing KIBS (Huggins, 2011), and because of the huge amount of KIBS suppliers, KIBS companies have to distinguish themselves by being innovative.

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Innovation in services can be related to changes in various dimensions, this counts also for KIBS. These dimensions are: service concept, client interface, delivery system, and technological options (figure 1) (de Jong and Vermeulen, 2003; den Hertog, Broersma and van Ark, 2003; Gotsch and Hipp, 2012).

- Innovation in the service concept includes changes in the characteristics of the service itself.

- Service innovation can be related to a new client interface as well.

- Innovation in the delivery system refers to the internal organizational arrangements that have to be managed to allow service workers to perform their job better, and to develop and offer innovative services.

- Service innovation can also have a relationship with technology, and is mostly related to investments in ICT. ICT facilitates the non-technological dimensions of innovation.

Figure 1: Four dimensions of service innovation (den Hertog, Broersma and van Ark, 2003)

It is stressed that in practice it is difficult to provide pure examples of the above mentioned dimensions. Most new services will involve a combination of changes in various dimensions (de Jong and Vermeulen, 2003; Gotsch and Hipp, 2012). However, KIBS innovations in ICT companies mainly occur in the technological dimension, and are therefore different than most service innovations.

KIBS innovations are a result from the creation of new combinations of knowledge. The core competence of KIBS resides in their capability to combine codified scientific and technical knowledge, with tacit knowledge based on extensive experience. This combination of knowledge is transferred in a new unique body of knowledge, so they can assist other companies in dealing with problems where external sources of knowledge are required (Amara et al., 2009; Gotsch and Hipp, 2012). Therefore, KIBS innovations require structurally new technological, organizational, or human capabilities of the service organization

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(Sundbo, 1997; Gotsch and Hipp, 2012). KIBS innovations are more multidimensional than innovations in the manufacturing industries. KIBS are not often generated in special departments, but during daily work in cooperation with customers or in time-restricted project groups (Gotsch and Hipp, 2012). In this context, human capital is an important factor for the success of service innovation (Gotsch and Hipp, 2012).

5.3 Nature of KIBS innovation

KIBS innovations mainly appear to take place in small incremental steps. KIBS where innovation has a continuous incremental nature, due to high knowledge-intensity, are scientific, engineering and IT services (de Jong and Vermeulen, 2003). While innovation is often associated with major product, service or process advances, the vast majority of successful innovations are based on the cumulative effect of incremental changes in products, services, and processes (Tushman And Nadler, 1986; Kuusisto and Meyer, 2002). It is through these incremental innovations that companies can respond to specialized and/or changing customer needs, as well as continue to differentiate themselves and their products from competitors (de Brentani, 2001). In general, KIBS innovations start from customer needs, using existing ideas/products and adapt/improve them based on their internal research (Teirlinck and Spithoven, 2013). Typically a new service feature is first adopted with one customer and it can subsequently be used on a needs basis with other customers (de Brentani, 2001; Kuusisto and Meyer, 2002). For incremental innovations a resource and strategic fit are important. A good resource fit can lead to more efficient , error-free, and also often more highly leveraged innovation; a good strategic fit is important for planning and introducing derivatives or off-shoots of earlier, more pioneering, ventures by which the company can sustain its competitive advantage (de Brentani, 2001). A good resource fit is especially an important and challenging factor for small KIBS companies. It is important, because highly qualified human capital is essential for innovative activity in KIBS, due to the importance of tacit knowledge, adsorptive capacity and the high level of customization (Carmona-Lavado, Cuevas-Rodriquez, and Cabello-Medina, 2013). At the same time it is a challenge, because human capital is often scarce, and an innovation barrier, in small companies. Carmona-Lavado et al. (2013) mention further that organizational capital enhances human capital. Organizational capital constitutes institutionalized knowledge and codified experience within organization processes and databases, documents and manuals, that organizations use to store and retain knowledge. When people, involved in innovation activities, face information needs, they can use the knowledge stored in systems, structures and procedures, and apply it to their new projects. Therefore, structuring the innovation process in small KIBS companies, should lead to a better resource fit and better innovation performance. It should be noted, that the first condition for the success of innovation may not consist in the proper implementation of any universal model, but rather in the choice of an

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Service and innovation structure

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appropriate model for particular environmental or project contingencies (Cunha and Gomes, 2003).

6 Service and innovation structure

According to Oke (2004) difficulty in employing an effective development process for service innovations are perceived to be major barriers to innovation management in service companies. Consequently, not much effort is done to develop a specific service development model in comparing with the development of a specific product development model, probably due the intangibility and complexity nature of services (Edvardsson, Haglund and Mattsson, 1995; Oke, 2004). For many service companies, innovation is an on-going, relative informal process where new services tend to evolve over time in response to changes in client needs (de Brentani, 1991). This ‘ease’ of development has a negative impact on the development of services. Companies tend to use an, too casual, approach for the development process and this can lead to failures. In reality, even the simplest service is a highly complex process, involving many operations, experiences, outcomes, and customer perceptions (de Brentani, 1991). However, service companies do often use a haphazard approach when it comes to developing and marketing new services, while several studies find out that companies who did apply a planned approach improved the performance of their new services (de Brentani and Ragot, 1996; Griffin, 1997; de Brentani, 2001). To reduce the risk and failure, a systematic framework for managing innovation should be adopted to develop new goods and services to achieve success in the marketplace (Booz, Allen, and Hamilton, 1982). Furthermore, de Brentani (2001) mentions in her research that a formal system should be used including pre-development activities, these activities specifically should lead to better innovation performance. Activities included in the pre/development are scoping, idea screening and building a business case. The findings are stressed by Cooper (2008). The service development process is usually presented in line with the traditional manufacturing-based literature, as a number of formal phases or activities that are conducted more or less sequentially (Vermeulen and Dankbaar, 2002; Oke, 2004). As mentioned before services can differ from products on four characteristics. However, most of these characteristics do not influence the innovation process in his essence. Customer Interaction in general is seen as the distinguishing feature of service offerings which influences the innovation process (Easingwood, 1986; Bygstad and Lanestedt, 2009). However, a growing body of literature suggests that companies perform better if they interact with and involve customers in the new product development process (Brown and Eisenhardt, 1995; Shamsuzzoha, Kyllönen and Helo, 2009; Lin, Chen Chiu, 2010). Furthermore, Vermeulen and Dankbaar (2002) mention that from an organizational perspective, similar issues arise when developing a product or service. As in manufacturing several people are needed to develop the new service. These are individuals from functional departments and have to work

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together for some time in a project team. It may be difficult to perceive a general understanding of the final product, because there is no physical object on which all can direct their thoughts. However, in the KIBS sector very few projects are concerned with radically new offerings, which decrease this problem. Simultaneity of production and consumption has an important impact on the organization of new service development activities. The heterogeneity of services does not appear to give rise to important differences with physical products in the realm of product development. The fact that services cannot be stored obviously does not mean that they cannot be developed in advance at the conceptual and infrastructural level.

Vermeulen and Dankbaar (2002) conclude in their study that many concepts found in the literature on industrial product development can be applied to service development. This conclusion is in line with findings by Cooper and de Brentani (1991), and Griffin (1997), they found in their research that factors associated with success and failure are mostly similar for service and manufacturing. Many of the key factors for new service development are identical to those identified for manufacturing companies and there are almost no organizational differences between service and product producing companies (Griffin, 1997). Therefore, it is likely that many similar issues will arise and that manufacturing concepts will also be useful in KIBS. According to Amara et al. (2009), KIBS innovations, with respect to the technological dimension, are comparable to technological innovations in manufacturing companies. Based on these arguments, the innovation process of services does not differ that much from the innovation process of products and the research in this study is therefore based on a new product development model (NPD).

7 Structure

According to Kamoche and Cunha (2001) there are three kinds of established models that can be found in the NPD literature: the sequential model, the compression model and the flexible model.

The sequential model uses a step-by-step approach and is presented as a blueprint for safe

and efficient new development projects (figure 2).

Figure 2: Sequential model (Kamoche and Cunha, 2001)

For every step there is a functionality specialized department of the organization that would contribute its specific knowledge into the new product. The sequential model lead to major advantages of specialization, but it also means that the product is “thrown over the wall” from one department to another. Negative consequences of the sequential method are long

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development lead times, communication problems and increased costs. These models are expected to reduce the uncertainty inherent to innovation. Sequential models rely heavily on planning, anticipation and control, and are therefore not learning or creativity-oriented tools, but means of control though standardization. Their rationality however, does not seem to fit the way most organizations actually work. The model is mainly appropriate for small incremental innovations, than for breakthrough innovations; (Cunha and Gomes, 2003).

Figure 3: Compression model (Kamoche and Cunha, 2001)

The compression model can be thought of as a version of the step-by-step approach. As in

the previous model, a sequence of steps forms the basis for developing innovations. However in this model, steps can be accelerated or compressed, due to market pressure, development time or competitive importance (figure 3). There are several ways of achieving compression: improving planning, simplifying the process, eliminating unnecessary steps, shortening the completion time of each step and overlapping steps. The crucial phase of a compression approach is predevelopment planning: if predevelopment planning is accurate, the entire process may be rationalized, delays eliminated and mistakes detected earlier. The compression model implements suggestions for parallel processing of the activities involved in the development process, which will lead to uncertainty reduction, while recognizing the need to save time. The model is tailored to high-speed environments; (Cunha and Gomes, 2003).

Figure 4: Flexible model (Kamoche and Cunha, 2001)

The flexible model introduces an organic approach to the new development process. The

flexible model abandoned the idea, that sequencing (with or without overlapping) is the most appropriate way of handling new product development, and a more dynamic perspective is adopted, based on learning-while doing. It is based on keeping the concept development stage open as long as possible, in order to increase development agility

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through diversity and fast integration (figure 4). Frequent iteration and testing can work in turbulent environments because these practices favor the creation of more opportunities and probabilities for variety to occur and offer frequent feedback. Which has two advantages: errors are uncovered earlier and team members can have a perception of progress and improvement, which will be a source of learning and motivation. This model has been necessitated by disturbed reactive and turbulent environments where high levels of uncertainty are the norm. (Cunha and Gomes, 2003).

According to the description above, the sequential model should be most useful for incremental innovations. However, the compression model is most useful for incremental KIBS innovations in small companies, because the compression model is based on a step-by-step approach, but has as advantage that the innovation process can be shortened and accelerated. So in this way the often limited resources of small KIBS companies can be saved. One frequent used compression model in the literature is the Stage-Gate model of Cooper. This model is in its essence a sequence model, but has evolved over the years into an compression model.

7.1 Stage-Gate Model

Stage-Gate is a conceptual and operational model, designed for moving new products from idea to launch and beyond, a blueprint for managing the new product development process to improve effectiveness and efficiency (Cooper, 1990). The way to improve the output of a process is to focus on the process itself by removing variance in the process (Cooper, 1990).

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Structure

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Stage-Gate breaks the development process into a set of discrete and identifiable stages, with each stage consisting of a set of prescribed activities. These stages are separated by gates, which serve as the control and go/no go check points. Stage-Gate consists generic of five stages (Figure 5): scoping, build business case, development, testing & validation and launch. At front of the model there is a discovery phase (idea generation) and the model is closed with a post-launch review phase (evaluation of the whole process) (Cooper, 2008). Although stages are laid out in sequential steps, Stage-Gate is not as rigid as it seems. The model should be seen as a guide that suggests best practices, recommended activities, and likely deliverables. The project team has much discretion over which activities it executes and which it chooses not to do. Ever project is unique and merits its own action plan. Another facet of flexible is simultaneous execution. Key activities and even stages overlap, not waiting for perfect information before moving forward. Simultaneous execution usually adds risks to a project, but increases the speed to market. Thus, the decision to overlap activities and stages is a calculated risk, but the risk must be calculated. That is, the cost of delay must be weighed against the cost and probability of being wrong (Cooper, 2008).

A model very much related to the Stage-Gate model is the model of Booz, Allen, and Hamilton. The main differences with Stage-Gate are that this model includes more testing and it includes a new product or service strategy. Especially the latter one can be important for the development of KIBS, because several studies found out that service companies tend to lack a strategic focus on new service developments (Oke, 2004), and, as mentioned before, for incremental innovations a strategic fit is important.

The stages

According to Cooper (2008), the innovation process can be visualized as a series of stages, with each stage composed of a set of required or recommended best-practice activities needed to progress the project to the next gate or decision point (Figure 6).

- Each stage is designed to gather information to reduce key project uncertainties and risks;

- Each stage costs more than the preceding one;

- The activities within stages are undertaken in parallel and by a team of people from different functional areas. Multi-disciplinary teams are a means to encounter the lack of communication between functional departments. Although, Love and Roper (2009) conclude in their research that implementing multi-functional teams only pays off when they are implemented in the appropriate elements of the development process, otherwise it can have a negative effect on innovation outcome. In particular, the market strategy should remain a focused, single discipline activity. These teams should be led by a part-time leader who has other duties (Barczak et al., - 2009).

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- Each stage is cross-functional. There is no research and development (R&D) stage or marketing stage, every stage is marketing, R&D, production or engineering (Griffin, 1997; Cooper, 2008; Barczak et al., 2009).

Figure 6: Overview of a stage and a gate (Cooper, 2008)

The gates

According to Cooper (2008) gates serve as quality-control check points, go/kill, and prioritization decisions points. Gates also points out the path forward for the next play or stage the project is agreed to (figure 6). Gates consist of two types of control: process control and output control (Sethi and Iqbal, 2008). The structure of each gate is similar and consists of the following:

- Inputs are the deliverables that the project leader must bring to the decision point; - Criteria are the items upon the which the project will be judged;

- Output is the decision at the gate, typically a Go/Kill/Hold/Recycle decision, along with an approved action plan for the next stage.

Gates are designed in the form of meetings that take place between senior management and project leaders. These senior managers act as ´gatekeepers`. This gatekeepers group is typically multifunctional and multidisciplinary, and its members have the authority to approve resources needed by the project. The project leader drives the project from stage to stage, gate to gate. He or she is aware of what inputs are required to ´pass´ the gates and organizes the team to meet the input requirements for the upcoming gate. A project team approach is fundamental to stage-gate approaches, projects can no longer be handed from department to department (Cooper, 1990).

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Structure

21 7.2 Next-Generation Stage-Gate

The Stage-Gate model is still changing and adjusting to changing demands. The greatest change is probably that is has become a scalable process, scaled to suit different types of innovation and risks (figure 7). In the beginning the model was mainly designed for the development of new products, but through adjustments it is now also better useful for extensions or modifications of current products/services. Practice showed that some innovations were too small to push through the full five-stage model. So the Stage-Gate model was circumvented into a scalable approach, because all innovative projects have risks, consumes resources and must therefore be managed. The process has thus changed into multiple versions to fit business needs and to accelerate projects (Cooper, 2008). Recent studies also mentioned that, achieving successful outcomes for projects that differ radically in terms of innovativeness, requires, that companies adjust their development practices in line with the type of innovation they are developing (de Brentani, 2001; Tao, Probert and Phaal, 2010).

Figure 7: Next Generation Stage-Gate: A scalable approach (Cooper, 2008)

Figure 7 shows an example of a Stage-Gate model for innovations of moderate risk (improvements, modifications, and extensions) and for very small projects (simple customer requests) (Cooper, 2008). All innovation projects start at the idea stage and enter Gate 1. At Gate 1 the idea screening decision is made, as is the routing decision. The routing decision determines what kind of project is it, and what version of Stage-Gate should be used.

7.3 Misunderstandings about Stage-Gate

The concept of Stage-Gate sounds simple, but there are some misunderstandings about the model. Some of the main misunderstandings people face using the Stage-Gate model (Cooper, 2008):

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- Not a rigid, lock step process. Stage-Gate is a map to get from idea to successful new product. As in any map, detours can be taken and many companies tailor the model to their own circumstances and build lots of flexibility into their process. Not all projects pass through every stage or every gate of the model. Stage-gate is an adaptable innovation process;

- Not a linear system. Although the stages are laid out in sequential steps, activities and tasks within the each stage are anything but linear. Inside stages there is much looping, iterations, and back-and-forth play as the project proceeds; some activities are undertaken sequentially, in parallel, or in overlap. Even stages can overlap each other;

- Not just a back-end or product delivery process. The fuzzy front end (ideation, scoping the project, defining the project, and building the business case) is perhaps the most critical part of Stage-gate. So, the front end of Stage-Gate is vital and is the part of the model that contributes the most to a much higher success rate.

- Gates should have teeth. In practice gates have often no teeth: once a project is approved, it never gets killed. The point that is missed here, is that the idea-to-launch process is a funnel and not a tunnel where everything that enters comes out the other end. Gates after Gate 1 are also go/kill points.

8 Direction of research

Based on the literature study several conclusions can be made, serving as the basis for the research. According to the literature small and big companies should organize their innovations in different ways. Despite the fact that services and products have different characteristics, the innovation development process for KIBS does not differ that much from the development process for products. Of the NPD models the compression model is most useful for incremental KIBS innovations. Therefore, the Stage-Gate model, in his essence developed for products, is also suitable for the development process of KIBS. These findings are based on a literature study. In the next part of this study, it will be researched in what way small KIBS companies do structure their development process. This research consists of a case study, followed by a qualitative research, among small KIBS companies in the Netherlands. The literature study and the field research give answer to the question:

How should a small ICT Company, that delivers a knowledge intensive business service (KIBS) and develops incremental innovations, structure these innovations, so their employees are

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Case study

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9 Case study

In this case study a look is taken how Xcellent ICT Groep organizes their Innovation process.

9.1 Xcellent ICT Groep

Xcellent ICT Groep is an ICT company, located in the Netherlands, and has about 40 employees. Their core business is to deliver and maintain ICT networks for business to business. Their focus is on: ICT management & outsourcing, pro-active managed services, datacenter services, projects, strategies and advising. Through collaboration with companies, they are able to deliver ICT services that are outside their core business. Xcellent ICT Groep tries to know their customers very well. With their knowledge of specific branches and environments, they are able to think on strategic level. The main objective of Xcellent ICT Groep is to relieve companies of their ICT proceedings, through a long-term strategic cooperation. Xcellent ICT Groep distinguishes itself by using innovation. Xcellent ICT-Groep expects from their employees to be innovative and to come up with innovative ideas. However, in reality employees do not often come up with ideas and if they do, they do not know how to execute these ideas.

9.2 Innovation process Xcellent

Most innovation effort of Xcellent ICT Groep concerns incremental innovations, with a development time about 40 hours per innovation. Their sources of innovation are technological developments, ideas from employees, but most of all, requests from clients. 80 percent of all innovations are based on demand of clients and 20 percent is based on ideas from employees/ technological developments. Xcellent ICT-Groep tries to make the solution to the demand of one customer also applicable for other customers. Their innovations are performed by using existing and new knowledge. Innovations at Xcellent ICT Groep are executed by the R&D department. The R&D department consists of one operational employee, who spends 50 percent of his working time on innovation. Figure 8 gives a general overview of Xcellent ICT Groep´s innovation process. This figure is based on an interview with the employee of the R&D department.

Xcellent ICT Groep does not make use of a formal documented approach, but uses some clear defined steps in their innovation process. These steps are:

- Discovery: ideas and demand from clients are screened by the operations manager; - Business case: an a4 is prepared by the R&D department. The content of this a4

consists of: description of customer demand, deliverables, planning and time use; - Go/no-go moment: the go/no-go decision is made by the manager operations or by

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- Developing and testing: this step is executed by the R&D department. Innovations are tested in-house, or pilot-tested at the client. During the development process there is no interaction with the client, because the client´s demand is often clear. In parallel with this step a check moment is carried out by the operations manager and the R&D employee. During this moment open and new cases are discussed, and innovations can be killed off;

- Marketing: a service description is made and deliverables are delivered. In parallel with this step the process planning is evaluated by the R&D employee and the operation manager;

- Launch: delivery to client.

Figure 8: Innovation process Xcellent ICT-Groep

Despite their kind of formal approach, Xcellent ICT Groep would have a formal documented approach, so all their employees are able to execute innovative projects in an efficient way.

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Methodology

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10 Methodology

The objective of this study is to find out what kind of approach is most commonly used by small ICT companies to structure their incremental innovations. Therefore, 1370 small ICT companies in the Netherlands were contacted by email, to fill-in an online survey about how they arranged their incremental innovation development process. Further, new media, like LinkedIn, was used to increase the number of respondents.

10.1 Data collection

The 1370 companies were selected from two sources: The Handelsregister from the Kamer van koophandel (kvk) and DATA-collectief (table 2).

Table 2: Composition of company sample

Handelsregister (kvk) DATA-collectief Total

Number 1316 341 1657

Overlap 183 0 183

No email 98 6 104

Total 1035 335 1370

The Handelsregister is the basic registration in which all businesses and legal entities, in the Netherlands, are registered. All other organizations involved in trade are also in this register. DATA-collectief is an up-to-date database, with address files of businesses in the Netherlands. The used selection criteria are: - 10-50 employees;

- Located in the Netherlands; - An ICT-related company; - Economic active.

Table 3 shows which economic activities are involved in the term ICT-related, and are involved in this research. These economic activities are based on the classification of the Centraal Bureau voor de Statistiek (CBS), so called SBI (Standaard Bedrijfs Indeling) 2008 (CBS, 2013). These economics activities are chosen, because they match the activities delivered by Xcellent ICT Groep.

Table 3: ICT related economic activities

Description SBI

Service activities in the field of information technology (IT) 62

Developing, producing and publishing of software 6201

IT consultancy 6202

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Al these companies were contacted by email, using a student email account of the Rijksuniversiteit Groningen, with a request to full-in an online survey at www.thesistools.com (appendix 1). The survey consists of up to 41 questions, depending on the given answers, and took about 7 minutes to complete. In the first part some general questions were asked about the company, the second and largest part consists of questions about how they have structured their innovation process for incremental innovations. 37 questions are multiple-choice questions and 4 open questions. At the end of the online-survey respondents were asked whether they would participate in an in-depth interview, about the topic, to collect some more depth information. 3 respondents were chosen, based on their survey, for an in-depth interview. These interviews serve as background information to understand the results better and to place the results in a better perspective.

10.2 Reliability

To ensure the reliability of the research some checks were done. In the first place, the questionnaire was checked by 3 persons who had no knowledge of innovation development. This was done to ensure that asked questions were grammatically correct, clear and understandable (also for people who have no knowledge of innovation). In the second place, the questionnaire was also checked by 1 person who could be in the sample of the research. This was done to make sure that the asked questions were substantively well, and to check of given answers were able to process in a good way. After these checks some adaptions were made, resulted in a final survey. However, the response per question varies, because not all questions are filled in equally. Therefore the number of respondents will be mentioned by all the results from the questionnaire.

11 Results

11.1 Sample

This study involves an initial sample of 1370 KIBS companies, 200 eventually took part (14,6% response rate) and were all business to business companies. Of these 200 companies, 96,0 percent sees themselves as innovative, of which 68,8 percent is permanently innovating. However, the response rate per question varies. Therefore, the sum is taken of all the response per question and divided by the number of questions, giving an average of 101 companies. (7,4% response rate). All companies are located in the Netherlands and have between 10 and 50 employees. The respondents were involved in the innovation process, and are in most cases managers or CEO´s. Furthermore, three semi-structured interviews were taken. The interviews were taken at three companies: one company with a clear structured and well documented innovation process, one company with an innovation process consisting of some well-defined steps, but the process is not formal documented, and one company with no structured innovation process.

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Results

27 11.2 Innovation in general

This part of the study describes the results of the online questionnaire supported by in-depth interviews. First some brief remarks about the innovation process in general will be mentioned, second a comprehensive description of the innovation process of incremental innovations will be given.

Figure 9: Overview of ICT-services (n=128)

The responding companies covered all kind of ICT-services, however, most of the companies are active in the software business (figure 9). 80,5 percent is software consultant, and 25,0 percent of the companies that filled in `other´ have also their businesses mainly in the software business (software development and SaaS (software as a service). Table 4 shows that 57,4 percent of the companies deliver services and 36,0 percent deliver services and products. Most innovations done by these companies are service/product and process innovations (table 5).

Table 4: Type of product (n=136)

Type Companies Percentage

Services 78 57,4%

Both 49 36,0%

Products 9 6,6%

Total 136 100,0%

Table 5: Type of innovation (n=133)

Innovation Companies Percentage

Service/ product 124 93,2%

Process 72 54,1%

Strategic 47 35,3%

Marketing 36 27,1%

Management 24 18,0%

80,9 percent of the companies mention customers as source of innovation, also the R&D department plays an important role (56,3%), followed by trend analyses (45,8%) (table 6). 57,4 percent of the companies make use of a strategy that gives directions to their innovations (table 7). The interpretation of an innovation strategy differs, in some cases a clear future-oriented goal is drawn up, and innovations has to fall within the range of the strategy to be executed and implemented. In other cases it is some form of bucket-list, where innovative ideas are placed on, till the moment they are useful for the company, because of some

103 32 28 25 18 14 11 8 0 20 40 60 80 100 120 Software consultancy Other Computer centers & data entry Network management Hardware consultancy Computer security Exploitation of search engines and databases Maintenance and repair of computers

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customer demand. A reason to not use a strategy is that small companies often use a short term view. Their services have to provide directly money.

Table 6: Source of innovation (n=131)

Source Companies Percentage

Customers 106 80,9% R&D department 74 56,3% Trend analysis 60 45,8% Competitor analysis 31 23,7% Employees 23 17,6% Suppliers 21 16,0% Other 10 7,6%

Table 7: Use of innovation strategy (n=129) Strategy Companies Percentage

Yes 74 57,4%

No 55 42,6%

Total 129 100,0%

Most innovations are developments of new products/ processes, which are new to the company (69%), adjustments and improvements to existing products occur significantly less (31%) (table 8). Both types of innovation mainly use new and existing knowledge (69%). Remarkable is the only use of existing knowledge in the development of new products/ processes. To execute these innovations, 35,7 percent of the companies do not use a structured innovation process (table 9). Mentioned reasons for this are that innovations need creativity and flexibility, and can therefore not be structured. 64,3 percent of the companies use a structured approach. Of these 64,3 percent, 31,7 percent only uses a structured approach depending on the innovation. When it depends on the innovation, most answers reveal in a certain way that radical innovations are more often structured than incremental innovations.

Table 8: Kind of innovation (n=129)

Innovation Used knowledge Companies Percentage

Adjustments and improvements to existing

products Existing 4 3,1

products New 5 3,9

products New and Existing 31 24,0

Development of new products/ processes,

which are new to the company Existing 20 15,5

which are new to the company New 11 8,5

which are new to the company New and Existing 58 45,0

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Results

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Table 9 : Structured innovation approach (n=129) Table 10: Use of innovation tool (n=125)

So, it can be argued that the companies which responded to the questionnaire show characteristics corresponding to the academic literature. The KIBS companies are innovative, on a permanent basis, they often have no structured innovation process, and their innovations are mostly based on the demand of their customers and R&D department. Differences related to the academic literature are the more radicalness of the innovations and the use of an innovation strategy. According to the academic literature service companies often lack a strategic focus, however in this survey more than half of the companies use a strategy for their developments. Furthermore, the academic literature appoints that small KIBS companies deliver in general incremental innovations, however the small KIBS companies in this survey appoints that most of their innovations are new products/ processes that are new to the company. This probably has to do with the huge amount of small software companies that respond to the questionnaire. However, in the online questionnaire it is explicitly mentioned what the definition of incremental innovations is, and based on this definition the answers to the questions about incremental innovation were given. Therefore, the more radical innovation nature of most companies does not influence the results of this questionnaire.

11.3 Incremental innovations and structure

Table 10 shows that most companies do not use an innovation tool to structure their innovation process. 8,9 percent of the companies uses a tool, cited tools are: the Deming Cycle (Plan, Do, Check, Act), Business Model Generation, Product Canvas, Quality Management Systems (QMS) and HBiB Manage (Holistic balance in Business). 33,0 percent of the companies do not use a standard and/or structured approach for their incremental innovations. 33,0 percent use a formal documented approach and 33,9 percent have some well-defined steps, but not a formal documented approach (table 11). So, the majority of small KIBS companies in this study do not use a formal documented approach, but they do use some kind of structured approach. Table 12 gives an overview of stages that are involved in the innovation process for incremental innovations. Strategy, scoping and evaluation are stages which are less used by small KIBS companies in their innovation process.

Tool Companies Percentage

Yes 11 8,9%

No 113 91,1%

Total 124 100,0%

Structure Companies Percentage

Yes 42 32,6%

No 46 35,7%

Depends on

innovation 41 31,7%

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Table 11: Formal innovation process incremental innovations (n=115)

Table 12: Frequency of new service development activities (n=108)

The most frequently used stages are discovery, idea screening, build business case, development, testing & validation and launch. These steps are also the steps that uses most time within the development process (Figure 10). Especially the development step uses a huge amount of the total time (29,2%) and is therefore important, followed by testing & validation (12,8%), and discovery (12,8%). Some companies mentioned that stages were missing in the development process. Most cited missing stages were documentation and involvement of customers during the development process (pilot testing, try-outs etc.). Table

Innovation process Companies Percentage

No standard approach 38 33,0%

No formal documented approach, but

some well-defined steps 39 33,9%

A formal documented approach 38 33,0%

Total 115 100,0%

Stage Companies Percentage

Strategy 81 75,0%

Discovery 102 94,4%

Idea screening 90 83,3%

Scoping 82 75,9%

Build business case 87 80,6%

Development 99 91,7%

Testing & validation 100 92,6%

Launch 96 88,9% Evaluation 70 64,8% 8,2% 12,8% 7,7% 6,8% 7,7% 29,2% 12,8% 9,9% 4,9% 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% 35,0% Strategy Discovery Idea Screen Scoping Build Business Case Development Testing & Validation Launch Evaluation

Organizing innovation in small KIBS companies: A structured approach.