Organizational capabilities in market segment selection

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PUBLIC VERSION

Parts of this report have been erased due to confidentiality. Confidential parts are shown in BOLD.

Harm Jan Dekker

University of Groningen Faculty of Economics and Business

Master of Science Technology & Operations Management University supervisor: ir. Henk de Vries

Organizational capabilities

in market segment selection

Towards a framework which includes organizational

capabilities for selecting market segments for new

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Organizational capabilities

in market segment selection

Towards a framework which includes organizational capabilities for

selecting market segments for new products in new markets

HARM JAN DEKKER

University of Groningen

Faculty of Economics and Business

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Preface

This thesis is written for my master Technology and Operations Management at the University of Groningen. In 2010 I started the pre-master program Technology Management at the University of Groningen after finalizing my Bachelor Industrial Engineering and Management at Windesheim (University of Applied Sciences). In 2011 I started with my Master in Science. This thesis is the final part of my study.

For this thesis I would like to thank several people that helped me during my research. First of all I would like to thank the people within XXX.

My special thanks go to Henk de Vries for his feedback and insights during this process. I enjoyed the meetings with him and I would like to thank him for the time he has taken to fulfil the role of supervisor. Also I would like to thank Jos Bokhorst for his feedback and comments.

Furthermore I would like to thank Charles de Monchy (BearingPoint), Marcel Weijers (Bevyz), Roy Gerding (Datawatt), Tjalling de Boer (Molgo), Henk van Heerde (Syntens), Frank Streefland and Wim Biemans (both University of Groningen). I am very grateful for their help in the validation process in my research. Also I would like to thank Koen Klokgieters (Capgemini), Sander van den Born (CGI/Logica), Charles Koning (Novay), Leo Haffmans (TenU advies) and Sybrand de Boer (Twynstra Gudde) for their input during this research.

Finally I would like to thank my family and friends for their support during my research. I would not have succeeded this research without their support.

Tuk, 28th June 2013,

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List of Abbreviations

DMU Decision Making Unit

NPD New Product Development

QFD Quality Function Deployment

List of Figures

Figure 1: Theoretical framework of organizational capabilities ... 23

Figure 2: Classification of capabilities based on Day (1994) ... 24

Figure 3: Five stage research process model (Stuart et al., 2002: p.420). ... 25

Figure 4: Confidential ... 27

Figure 5: General overview of the framework ... 28

Figure 6: Step-approach to apply framework of organizational capabilities ... 34

Figure 7: Flowchart of the approach to select suitable market segments ... 35

Figure 8: Matrix for selecting market segments ... 38

Figure 9: Market segmentation model of Weinstein (2006) ... 39

Figure 13: Matrix for market segments of company XXX ... 51

Figure 14: D05 remote terminal unit ... 53

Figure 15: QFD matrix organizational capabilities for energy segment D05 (Datawatt) ... 55

Figure 16: Innovation Growth Model developed by Syntens ... 71

Figure 17: Generic product development process by Ulrich and Eppinger (2008) ... 75

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List of Tables

Table 1: Important categories of capabilities per value discipline ... 9

Table 2: Overview of research questions ... 11

Table 3: Definitions of key-concepts ... 12

Table 4: Definitions of organizational capabilities ... 15

Table 5: Organizational capabilities adapted from Ulrich & Smallwood (2004) ... 17

Table 6: Definition of leadership and strategic unity (Ulrich & Smallwood, 2004) ... 22

Table 7: Description of organizational capabilities ... 31

Table 8: Overview of organizational capabilities... 32

Table 9: Overview academicians and experts ... 33

Table 10: Overview experts ranking categories of capabilities ... 36

Table 11: Value disciplines combined with organizational capabilities ... 36

Table 12: Overview of market segments for new product ... 40

Table 13: Confidential ... 51

Table 14: Organizational capabilities per value discipline ... 60

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Abstract

This research aims to develop a framework to take organizational capabilities into account for selecting market segments for new products in new markets. “If an organization is to enjoy any level of marketing success, this is through an ability to match its own capabilities to the requirements of the marketplace” (Jenkins & McDonald, 1997). To develop the framework, the overview of organization capabilities of Ulrich and Smallwood (2004) and the value disciplines of Treacy and Wiersema (1993) are used. The resulting framework is validated by conducting six interviews with academicians and external experts, and by the application of the framework in the case of company XXX and for a historical case of Datawatt. The result is an overview of the attractiveness of a market segment based on organizational capabilities and product or service properties. This research has contributed to scientific literature by providing a framework and approach to include organizational capabilities in the process of market segment selection and suggest the approach as a useful guide for managers to select suitable market segments for their new product or service.

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Management summary

This research provides an initial approach towards taking organizational capabilities into account in the market selection process. Based on a literature study the background of the market segment selection process and organizational capabilities is discussed. Market segmentation consists of viewing a heterogeneous market as a number of smaller homogeneous markets in which different product preferences exists. However, there is a paucity of criteria detailing how to choose market segments suitable for organizations with new products in new markets (Quinn, 2009). Weinstein (2006) mentioned that choosing market segments is important because serving customers that do not fit within your organization tend to consume more of the organization’s resources “In many businesses only the most simple and intuitive segmentation attempts are made” Dibb and Simkin (2001, p: 612).

Jenkins and McDonald (1997) recommend taking organizational capabilities into account in the industrial market segment selection process, because the capabilities and the nature of an organization are closely linked with the industrial market segment selection process. “If an organization is to enjoy any level of marketing success, this is through an ability to match its own capabilities to the requirements of the marketplace” (Jenkins & McDonald, 1997).

Therefore this research focuses on organizational capabilities in market segment selection. Based on the categories of capabilities described by Ulrich and Smallwood (2004) and the value disciplines of Treacy and Wiersema (1993) a framework and approach is developed which is validated by interviews with academics from the University of Groningen and external experts. In total six interviews have been conducted to discuss and validate the organizational capabilities itself and the approach towards taking organizational capabilities into account in the process of market segment selection. To determine important capabilities per value discipline the input of 9 experts is used. Furthermore, the framework is applied in the case of company XXX and a historical setting of Datawatt.

In short the approach developed in this research is as follows:

Step 1: Develop an overview of market segments which can be served with the new product or service.

Step 2: Analysis of market segments with the Five Forces analysis of Porter (2008) to define required value discipline of Treacy and Wiersema (1993) per market segment. The type of value discipline will require certain categories of organizational capabilities, see table 1.

Table 1: Important categories of capabilities per value discipline

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Step 3: Usage of Quality Function Deployment to assess the required organizational capabilities of a value discipline per market segment and to assess the required characteristics per market segment.

Step 4: Selecting suitable market segments. The attractiveness of market segments is based on the level of suitability with organizational capabilities and product characteristics.

The framework is applied in the case of company XXX, the initial motive to perform this research. XXX developed a sustainable and environmentally friendly product. In total three different market segments are analysed and data is collected from 74 organizations. Based on the attractiveness, fit between market and product and fit between market and organization, market segment ‘warehouses’ is the most attractive market segment. Furthermore, the analysis resulted in providing organizational capabilities and product characteristics which are the most important to develop in the future to meet the requirements in this segment.

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1 Introduction

Traditional strategic management approaches have focused on the analysis of products and markets as the key to competiveness and good performance of an organization. The emphasis has been on how organizations position their product offering in relation to markets and competitors.

In the 1990s this traditional way of viewing strategy for new products in new markets was becoming inadequate. It did not explain how certain organizations could enter successfully in new markets and some organizations not. A growing body of scientific literature demonstrates the link between capabilities of an organization, such as innovation and knowledge sharing, and the level of performance of the organization. Many scholars emphasize the importance of organizational capabilities, as they are seen as key to sustained competitive advantage (Prahalad & Hamel, 1990). Despite the importance of organizational capabilities, there is relatively little research that looks specifically at taking organizational capabilities into account in the industrial market segment selection process. This research explores the role of organizational capabilities in a critical strategic activity within an organization: the selection of new market segments for new products.

1.1 Research objective and questions

As mentioned in the introduction, there is a lack of studies about organizational capabilities in market segment selection. The scientific objective of this research is to develop a valid framework that can be used for organizations with new products or services to select market segments based on the product-market fit (fit between the product of an organization with the market) and the organization-market fit (fit between the organization and the market). The main scientific research objective is formulated as follows: development of a selection framework including organizational capabilities to select market segments for organizations with new products in new markets. Table 2 provides an overview of the main scientific research question and sub questions.

Table 2: Overview of research questions

Main research question What kind of framework can be developed that includes organizational capabilities to select market segments for organizations with new products in new markets?

Sub-questions Market segment selection

 What stages are involved in the process of selecting market segments?

 What stages should be involved in the process of selecting market segments?

Organizational capabilities

 What are known categories of organizational capabilities and how do they differ from each other?

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In this research a case study is performed at company XXX. In this case study an answer is provided to the following questions: what are potential market segments for the new product, and what are suitable markets for the new product of company XXX?

1.2 Definitions

Table 3 provides an overview of the definition of key-concepts used in this research paper. In this research the terms ‘capability’ and ‘competence’ can be used interchangeably.1

The definitions provide a brief and clear overview of fundamental used concepts in this report and make it easier to understand the research paper.

Table 3: Definitions of key-concepts

Term Definition

Market segmentation

Market segmentation is the process of subdividing a heterogeneous market into distinct subsets of customers that behave in the same way or have similar needs (Foedermayr & Diamantopoulos, 2008).

Organizational capabilities

An organizational capability refers to an organizational ability to perform a coordinated task, utilizing organizational resources, for the purpose of achieving a particular end result (Helfat & Peteraf, 2003).

1.3 Outline

Chapter 1 provides an introduction to the research subject and describes the research questions of the research. Chapter 2 will discuss the theoretical background of the research question. This theoretical background is needed in the first stages of the research methodology, described in chapter 3, to develop a framework. The design of the framework is explained in chapter 4, consisting of the conceptual design, detailed design, validation, and the usage of the framework. In chapter 5 the developed framework will be used in the context of company XXX and Datawatt. Finally chapter 6 describes the conclusion of this research and discusses the scientific and managerial contribution. Furthermore, suggestions for further research are described in this chapter.

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2 Theoretical background

In this chapter the theoretical background of the subjects: market segmentation (see paragraph 2.1) and organizational capabilities (see paragraph 2.2) is described. In the first paragraph the definition and the need for market segmentation is highlighted, followed by an overview of the different stages in the market segmentation process. These process stages describe how market segmentation process should be conducted, and therefore the remaining of this paragraph discusses how market segmentation is conducted in practice.

In the second paragraph the background of organizational capabilities is described. This is followed by describing the need to incorporate organizational capabilities in the process of selecting market segments for new products in new markets and bridging the gap (see paragraph 2.3).

2.1 Background of market segmentation

In 1956 Wendell Smith (1956) introduced the concept of market segmentation in the marketing literature arguing that, instead of mass markets, products would reach their maximum potential in markets as the result of recognizing the differences in requirements of market segments. Market segmentation can be defined as: “the process of subdividing a heterogeneous market into distinct subsets of customers that behave in the same way or have similar needs” (Foedermayr & Diamantopoulos, 2008). As a result of market segmentation, a better understanding of customer needs can be achieved, which subsequently assists in better matching the firm’s offering with the requirements of the customer.

2.1.1 Stages of market segmentation process

Dibb and Simkin (2001) state that the process of market segmentation is well established, and usually described as: [1] segmenting in which customers are grouped by applying one or more variables (e.g. grouping customers with similar needs and buying behaviour), [2] targeting (making decisions where to prioritize resources) and [3] positioning, focusing on the design of programs that will match with the requirements in target segments. According to Harrision and Kjellberg (2009) a further distinction of approaches for identifying and diagnosing industrial markets can be made. They describe that in general, two approaches can be used. The first approach is a ‘customer needs’ approach where customers with shared needs are grouped into segments. The second approach, described below, works through a disaggregation process to locate the most appropriate market segments (e.g. Wind & Cardozo, 1974; Weinstein, 2006).

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2.1.2 Market segmentation in practice

Market segmentation consists of viewing a heterogeneous market as a number of smaller homogeneous markets in which different product preferences exists. Successful market segmentation attempts require firms to stabilise the relation between the image they have generated of the market and the actual market (Harrision & Kjellberg, 2009). However, there is a paucity of criteria detailing how to choose market segments suitable for organizations with new products in new markets (Quinn, 2009). “In many businesses only the most simple and intuitive segmentation attempts are made” Dibb and Simkin (2001, p: 612). One major conclusion of the research of Harrision and Kjellberg (2009) is that the established conceptualization of industrial market segmentation needs to be revised. This is illustrated in their case study of Biacore, a Swedish company attempting to select market segments for their new product. They conclude that the descriptive dimension of selecting market segments (e.g. Wind & Cardozo, 1974; Weinstein, 2006) will fail in developing the user’s needs and product characteristics and may suffice in making generalizations about segments. Therefore, organizations with new products in new markets should use other approaches of market segmentation. A key facet is to include organizational capabilities (Harrision & Kjellberg, 2009). Therefore, a need for further research is needed for criteria which help organizations in choosing suitable market segments for their new product (e.g. capabilities of the organization (Jenkins & MacDonald, 1997; Wu & Wu, 2000). In this research a framework is developed which includes organizational capabilities for selecting market segments.

2.2 Background of organizational competences and capabilities

“Dell Computer assembles and markets computing equipment and supplies. Unlike its competitors, however, Dell had a long, highly profitable stretch of success, including an 87,000% gain in its stock value since 1990. […] Wal-Mart, Southwest Airlines, and Nucor Steel have similar records of persistent top performance. What can explain an organization’s sustained superior performance?” (Clardy, 2007: p.339).

Within any competitive industry, organizations compete in offering their product or services. Some firms will have a ‘normal’ level of profit, some firms will perish, and other firms achieve above-average profitability. The case of Dell Computer is an example of an organization’s ability to perform over time. This suggests the presence of a core competence that provides competitive advantage (Prahalad & Hamel, 1990). Research in the field of strategic management and organization theory has shown that a focus on the concept of capabilities or competences provide effective perspectives which are not included in traditional theories of strategic management or organizations (Clardy, 2007).

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However, most researchers share the following points (Prahalad & Hamel, 1990; Kusunoki, Nonaka & Nagata, 1998):

 Organizational capabilities are not easy to obtain and are difficult to copy by others.

 Organizational capabilities make a contribution to the benefits of the customer.

 Organizational capabilities have the potential to become a source of sustainable competitive advantage on a long-term basis.

In this research the definition of Helfat and Peteraf (2003) is selected for use in this research paper.

Table 4: Definitions of organizational capabilities

Author(s) Definition

Helfat and Peteraf (2003)

An organizational capability refers to the ability of an organization to perform a coordinated set of tasks, utilizing organizational resources, for the purpose of achieving a particular end result.

Ray, Barney and Muhanna (2004) Capabilities refer to tangible and intangible assets firms use to develop and implement their strategies.

Ulrich and Smallwood (2004) The collective skills, abilities, and expertise of an organization.

Organizational capabilities are not easy to measure, so managers within organizations often pay far less attention to them, than to tangible assets such as production plants and equipment. However, organizational capabilities are seen as an important contribution to sustained competitive advantage of organizations, and contribute more to a firm’s core competence than tangible assets (Prahalad & Hamel, 1990; Leonard-Barton, 1995; Helfat & Peteraf, 2003; O’Regan & Ghobadian, 2004). A main reason for managers to focus on tangible assets is that they are easier to measure than (the benefits of) organizational capabilities (Tracey, 2004).

While literature suggests that one of the most effective means of achieving competitive advantages is by using the firm’s capabilities, their main focus is on ‘unique’ and 'distinctive’ capabilities (core competence), rather than having a generic perspective. Capabilities are termed ‘core’ when they result in a competitive advantage over other firms (O’Regan &Ghobadian, 2004). In addition, O’Regan and Ghobadian (2004: p.295) state that: “the source of competitive advantage within a firm is often multifactorial in that it usually cannot be attributed to only one type of resource.” They suggest that it is the interaction between different types of resources that will lead to a firm’s competitive advantage. Furthermore, a mix of generic capabilities will lead to achieving a competitive advantage (Teece, Pisano & Shuen, 1997; Schoenecker & Cooper, 1998; O’Regan & Ghobadian, 2004).

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Many scholars emphasize the importance of organizational capabilities. They are seen as key intangible assets of an organization. However, little research is conducted to take these capabilities into account in the process of selecting suitable market segments. This research will analyse generic organizational capabilities within this process and how these capabilities can be taken into account in selecting market segments for new products in new markets. Focusing on generic capabilities increase the applicability and these capabilities are not unique to an organization (O’Regan & Ghobadian, 2004). Therefore, this research will focus on the development of a framework which includes generic organizational capabilities. In the next paragraph the ‘gap’ in literature is described together with a theoretical framework to bridge the gap.

2.3 Bridging the gap

Traditional market segment selection processes consist of viewing a heterogeneous market as a number of smaller homogeneous markets in which market segments have different preferences. In general these methods, frameworks and models (e.g. Wind & Cardozo, 1974; Weinstein, 2006) focus on the customer preferences related to the product or service characteristics (e.g. tangible resources of an organization) and fail in providing an analysis of the needed organizational capabilities in a market segment (e.g. intangible assets). For example, Weinstein (2006) mentioned that choosing market segments is important because serving customers that do not fit within your organization tend to consume more of the organization’s resources. However in his research the aspect of intangible resources is not described.

A reason for this ‘gap’ in literature may be that organizational capabilities are not easy to measure, and often managers within organizations pay far less attention to them than to tangible assets. However, many scholars emphasize the importance of organizational capabilities, as they are seen as key to sustained competitive advantage (Prahalad & Hamel, 1990; Leonard-Barton, 1995; Thompson & Heron, 2005a), and discuss the importance of organizational capabilities in the process of choosing market segments (Di Benedetto, DeSarbo & Song, 2008). “Innovation may require a firm to draw on existing capabilities or to invest in new ones” (Di Benedetto et al., 2008: p.422).

Also O’Regan and Ghobadian (2004) state that there is the need to achieve a fit between the organization’s internal environment and its external-operating environment, and their findings indicate that generic capabilities enable organizations to manage for the future by focusing on customer’s needs and requirements, while at the same time managing crises and problems arising in their operating environment.

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In this research a framework is developed which includes organizational capabilities for selecting market segments for new products in new markets. Ulrich and Smallwood (2004) developed an overview of 11 areas or categories of key capabilities for organizations to use within their company to monitor and assess intangible assets. This overview of capabilities, shown in table 5, is used as a base for the organizational capabilities within the framework. Maier, Moultrie and Clarkson (2012) describe that managing and improving organizational capabilities is a significant and complex issue, and to support this performance assessment the base developed by Ulrich and Smallwood (2004) can be used to enable the assessment of organizational capabilities.

Table 5: Organizational capabilities adapted from Ulrich & Smallwood (2004)

 Accountability  Collaboration  Customer connectivity  Efficiency  Innovation  Leadership  Learning  Shared mind-set  Speed  Strategic unity  Talent

2.3.1 Operationalization of organizational capabilities

Ulrich and Smallwood (2004) provide an overview of categories of capabilities. However, in the process of market segment selection this overview is not immediately applicable. Furthermore, some areas of capabilities might be reorganized and some might be left out if they are not applicable in the context of market segment selection. In this paragraph the categories are described in more detail, an operationalization of each of the categories, together with their relevance or non-relevance within the process of selecting market segments. A graphical overview of the theoretical framework is shown at the end of this paragraph.

Accountability

“Performance accountability becomes an organizational capability when employees realize that failure to meet their goals would be unacceptable” (Ulrich & Smallwood, 2004: p.120). Accountability of an organization is to be disciplined in delivering what is promised to the customer. The performance of a product or service should meet or be above the expectations of customers. Customers do not tolerate poor performance or quality of the product, or a late delivery. Tracey (2004) states that a complete order, which encompasses the quality of the product requested by the customer, and an accurate project delivery date, in turn delivers a supply chain which is more reliable in making and supporting promises to customers. In short, customers expect to have a quality product which is delivered on time.

Collaboration

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suppliers, advising companies, or partners) might be needed to gain and maintain customers. A high-level of collaboration might be required by customers before they would buy the product or service offered to them (e.g. high degree of shared functional programs, resources and facilities). “The relationships that firms can create internally (among employees) and externally with customers, suppliers and other stakeholders is increasingly seen as a critical source of competitive advantage” (Thompson & Heron, 2005b: p.383).

Tracey (2004) concludes that greater collaboration from parties leads to better organizational performance over the long term. However, the form of collaboration can be different for specific market segments. Organizations can create collaboration with other parties; these are (Tracey, 2004):

 Synchronizing internal processes within an organization (e.g. manufacturing, purchasing, and logistics departments)

 Collaborate with supply chain partners (e.g. supplier representatives on product design, manufacturing agility, delivery service, and overall performance)

 Involvement of customers, which is advantageous to manufacturing agility and overall performance. This aspect is described in the ‘customer connectivity’ capability.

 Collaboration with complementors in product offering to the customer (Byers, Dorf & Nelson, 2011).

As stated before, the collaboration with other parties may be to gain efficiencies of operations. However, collaboration might also be required for marketing activities. For example, supply chain partners which endorse your product to acquire new customers.

Customer connectivity

The customer connectivity capability is an organizations’ capability related to building enduring relationships with customers. Companies in the current business markets attempt to connect with customers to enhance the quality of the product, the speed of processes or to provide information. Fang (2008) states that organizations connect with customers in two distinctive dimensions, namely:

 Customer participation as an information resource (CPI)

 Customer participation as a co-developer (CPC)

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Network closure is also an important aspect in customer connectivity (Ahuja, 2000). For example, the set-up of a downstream network closure with distributors and retailers to gather information about their end-customers to speed up the NPD process. Network closure is higher if everyone in the network knows and communicates with one another. For some markets highly connected networks are important to build trust between (certain) network participants or to promote the product or service.

Efficiency

Efficiency is about being capable as an organization at managing costs (Ulrich & Smallwood, 2004). Organizations who fail to manage costs will not likely to have the opportunity to grow to the top-line. Processes optimized for high quality, short processing times, and reliable delivery services lead to a higher level of cost-efficiency within an organization. “Do we reduce costs by closely managing processes, people, and projects?” (Ulrich & Smallwood, 2004: p.122). In general, efficiency may be the easiest capability to measure, quantitatively determined by the ratio of input and output. A high-level of cost-efficiency may be needed when markets compete on prices of products and services (O’Regan & Ghobadian, 2004).

Innovation

Innovation, whether in products, processes, business strategies, channel strategies, or customer service, focuses on the future rather than on past successes. This organizational capability is about “being good at doing something new in both context and process” (Ulrich & Smallwood, 2004: p.122). Innovation can be an important organizational capability in segments where innovations are time-based instead of event-based, especially in markets that will not stand still (Eisenhardt & Brown, 1998). To cope in high-velocity, intensely competitive industry markets, innovation is critical to an organization’s success (Eisenhardt & Brown, 1998).

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Learning

Organizations generate new ideas through benchmarking, experimentation, competence acquisition, and continuous improvement. It is an organizational capability of letting go of old practices and paradigms, and adopting new ones. The higher degree of learning capacity increases the efficiency, flexibility, and adaptability towards customers. Organizations can learn from successes and failures and from various sources. Pavitt (1991) describes the learning process within innovation firms. “Sources of learning are very diverse, and their relative importance will vary according to the nature of the core competences of the firm” (Pavitt, 1991: p.46). The sources of learning are:

 Learning by experience

o Learning by doing: learning by producing and coping with complex and interdependent process technologies.

o Learning by using: learning of the limitations and further potentialities of products in use.

o Learning by failing: learn from previous failures (e.g. failed product innovations).

o Learning by studying: learn and explore potential opportunities (e.g. experimenting and assessing in R&D laboratories)

 Learning from competitors (e.g. reverse engineering for learning from competitors’ product technologies)

Learning is a characteristic of an adaptive organization. For an organization to be capable to learn, it should sense signals from its internal environment (e.g. manufacturing) and external environment (e.g. competitors) and adapt accordingly to these signals (Pavitt, 1991).

Learning within an organization is a collective activity and since the accumulated knowledge is partly tacit, difficulties arise to transform and transfer this knowledge and effective means of communication and learning are needed in an organization (Pavitt, 1991). Zander and Kogut (1995) show that an organization capability to transform and transfer knowledge, or to imitate improvements of competitors, depends on their capabilities to make the information more easy to communicate and understand to others ‘teachability’ and the degree to which knowledge is being transformed into information ‘codification’.

Shared mind-set

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The complexity of the environment can be differentiated in (Camisón & Villar-López, 2012):

 Diversity of customers. The ability of an organization to handle the diversity of customers (e.g. customization, purchasing habits).

 Diversity of competitors. The ability of an organization to cope with the diversity of competitors in the industry (e.g. substitutes of competitors).

 Diversity of technologies. Extend to which differentiated technologies are present in the industry.

 Diversity of suppliers in the industry.

An organization should understand the complexity in each of the above mentioned aspects and be able to handle this complexity. In this way an organization is more capable to create a shared mind-set within the organization and develop an alignment between the organization and the external environment.

Speed

Speed refers to the ability of an organization to recognize opportunities, threats, and technology changes and act quickly, whether to exploit new markets, create new products, or establish new employee contracts (Ulrich & Smallwood, 2004). Aspects which can indicate the speed capability within an organization are for example: how long it takes to go from product concept to commercialization, or form the collection of customer data to changes in the customer relations, and the increases in inventory turn of physical assets. “The speed capability seeks to measure the extent to which the organization can respond to customer needs in a rapid manner” (Spillan & Parnell, 2006: p.238). Understanding the customer and keeping the rest of the organization informed about customer changes is assumed to be a precondition for success and profitability for most companies (Kohli & Jaworski, 1990).

Spillan and Parnell (2006) describe four variables of activities which reflect the extent to which an organization cannot respond to customer needs in a rapid manner. These four variables are:

 Organization is slow to detect changes in customers’ product/service preferences.

 Organization is slow to detect fundamental shifts and trends in an industry, trends such as competition, technology, regulation et cetera.

 For the organization it takes a long time to decide how to respond to our competitors’ price changes.

 If the organization came up with a great marketing plan, the organization probably would not be able to implement it in a timely fashion.

Talent

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organization does not possess the expertise to fulfil the interest of the buyer, the organization is not likely to be trusted.

Non-relevant capabilities

Not all categories of organizational capabilities are relevant in the context of market segment selection. The organizational capabilities ‘leadership’ and ‘strategic unity’ are left out in the theoretical framework. These categories of capabilities are internally focused and (potential) customers in market segments are not likely to have certain requirements in these fields. Strategic unity is covered by the shared mind-set capability. Shared mind-set is in short about the internal alignment of the organization with the external mind-set of customers.

Table 6: Definition of leadership and strategic unity (Ulrich & Smallwood, 2004) Capability Definition

Leadership

Organizations which is good at embedding leaders throughout the organization, which consistently produce effective leaders, and have a clear understanding of what leaders know, be, and do.

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2.3.2 Theoretical framework

In figure 1 an overview of the theoretical framework is shown. The framework is based on the categories of organizational capabilities described in the research of Ulrich and Smallwood (2004) and further scientific literature described in the previous paragraph.

Efficiency

Customer connectivity

Ahuja (2000) Ability to connect with other

network participants

Shared mind-set

Camisón and Villar-López (2012)

 Diversity of customers

 Diversity of competitors

 Diversity of technologies

 Diversity of suppliers

Innovation

Camisón and Villar-López (2010) Ability to develop product,

process or organizational innovation Fang (2008)

 Information customer

 Co-developer customer

Eisenhardt and Brown (1998) Time-based innovation Accountability Talent Collaboration Learning Speed

Tracey (2004) and Byers, Dorf and Nelson (2011)

 Synchronizing internal process

 Supply chain partners

 Involve customers

 Complementors Pavitt (1991) Zandar and Kogut (1995) Ulrich and Smallwood (2004)

Reduce costs by managing processes, people, and projects.

O’Regan and Ghobadian (2004) Cost-efficiency is required when

markets compete on price.

Spillan and Parnell (2006)

 Detect changes preferences

 Detect changes environment

 Respond to price changes

 No timely market plan

 Sense signals environment

 Adapt accordingly

 Teachability

 Codification Tracey (2004)

The organization is able to deliver on time, as defined by the customer, and to deliver completeness and quality of the order.

Ulrich and Smallwood (2004) and Byers, Dorf and Nelson (2011) Employees within the organization have the needed skills, knowledge

and know-how (expertise) requested by the customer.

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The general capabilities described by Ulrich and Smallwood (2004) can be classified in the model of Day (1994). His classification model can be used to classify organizational capabilities in internal, or external capabilities, or capabilities which ‘span’ between the internal and external environment. The three different categories should be seen as elements of a spectrum. At one end of the spectrum are those capabilities listed that are deployed from the inside out. For example the efficiency of internal production processes. At the other end of the spectrum are those capabilities whose focal point is outside the organization. Finally, “spanning capabilities are needed to integrate the inside-out and outside-in capabilities” (Day, 1994: p.41). For example: speed is a spanning processes because speed refers to the ability of an organization to detect changes of the environment (outside-in) and flexibility to adapt to these changes in the environment (inside-out).

Outside-In Processes Inside-Out Processes Spanning Processes  Collaboration  Customer connectivity  Innovation  Shared mind-set  Speed  Accountability  Efficiency  Learning  Talent

EXTERNAL EMPHASIS INTERNAL EMPHASIS

Figure 2: Classification of capabilities based on Day (1994)

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3 Methodology

In this chapter the research methodology is described which is used to provide an answer to the main research question. The first paragraph will outline the scientific approach of this research. The second section introduces company XXX as a real-life setting to conduct a case study.

3.1 Research approach

For this research the research model of Stuart, McCutcheon, Handfield, McLachlin and Samson (2002) is used. The model consists of five stages (see figure 3). The used methodology contributes to both scientific and managerial objectives.

Stage 1 Define the research question Stage 2 Instrument development Stage 3 Data gathering Stage 4 Analyse data Stage 5 Disseminate

Figure 3: Five stage research process model (Stuart et al., 2002: p.420).

However, research does not require the completion of one stage, before being able to start the next stage of the research model. Stages can be performed simultaneously or in a different sequence (Stuart et al., 2002).

Stage 1: Define the research question

In this stage a preliminary research is conducted to gain knowledge and understanding about the research topic. Based on this knowledge and the discovery of previously unrecognized phenomena the main research question is defined. The research question is described in chapter 1: introduction.

Stage 2: Instrument development

The second stage involves the set-up of a preliminary framework based on a theoretical background. By defining the problem and the research question (stage 1), scientific literature is searched to develop a theoretical background. This theoretical background, or literature review, helps the researcher to create a knowledge base and to set-up a preliminary framework. The graphical overview in paragraph 2.3 bridging the gap is the developed theoretical framework.

Stage 3: Data gathering

Data can be gathered by using different sources. Yin (2009) describes six types of sources which can be used to gather data. The following types of sources are used in this research:

 Documentation (e.g. scientific literature)

 Interviews

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The source ‘interviews’ is described in more detail. In the research process interviews are conducted with:

 Internal interviews and personal communication with employees within company XXX (e.g. managing director, manager, manager research and development) (these interviews are conducted in stage 5).

 Interviews with academicians of the University of Groningen (RuG) and external experts to gather information and to validate outcomes of this research.

 External interviews with potential customers and other organizations to gain insight in the needs of customers within market segments. Surveys can also be conducted to gather data from customers. However, Griffin and Hauser (1993) state that surveys are generally ineffective in revealing unanticipated needs. They state that conducting interviews is the most-effective way of gathering quality information.

In this research triangulation is applied to validate the data. This means that different sources of evidence (e.g. scientific literature, interviews, data et cetera) are compared with each other to ensure the reliability and the validity of the data (Maruster, 2011). It is important to keep in mind that the researcher judges if the particular (general) findings would be valid in other circumstances and that other factors, which are out of the scope of this research, might be an alternative explanation (Stuart et al., 2002).

Stage 4: Analyse data

In the previous stage data is gathered from different sources of information. This data is used to develop a framework design based on the developed framework. For example, interviews with academicians can lead to new insights. By analysing the data a framework is designed which is disseminated in the following stage.

Stage 5: Disseminate

In stage 5 the research methodology, developed framework, and outcomes of the research are criticized. In this research a case study is conducted. Case studies are often subjected to criticism (Stuart et al., 2002) and can never claim “overall truth” (Eisenhardt, 1989). Therefore, the common criticism of case-based approaches will be addressed, and the analysis, interpretation, choices and outcomes within this research should be supported by further research. However, this further research is outside the scope of this research paper. These shortcomings and limitations of this research are described in chapter 6: discussion and conclusion.

3.2 Case study

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understanding the dynamics present within single settings (Eisenhardt, 1989). Case studies can involve single or multiple case studies (e.g. multiple organizations).

Company XXX

This part of the report has been erased due to confidentiality.

Figure 4: Confidential

For company XXX, research should be conducted to explore the market of the new product. The new product is developed without a particular market in mind at forehand. The case study in this research will also provide an overview of the potential markets for the new product and provide an answer to the question which are suitable markets for the new product of company XXX.

Company XXX is the main case study of this research. The context of the organization was the initial motive to perform this research. However, the developed framework in this research is also applied in a case at Datawatt. The case at Datawatt is about an outstation for telemetry control system which has been developed about five years ago. More detail about this case is described in paragraph 5.5: case study: Datawatt.

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4 Framework design

In this chapter the framework will be described which includes organizational capabilities to select market segments for organizations with new products in new markets. The first paragraph will outline the conceptual design of the framework, and describes the framework in general. The detailed framework is described in the second paragraph. In this paragraph the organizational capabilities and the customer requirements will be discussed. In the next paragraph the validation of the framework is described. In the validation process data is gathered from experts from the University of Groningen (RuG) and external experts. For a framework to be applicable and usable, the usage of the framework in the context of market segment selection is described in the last paragraph.

4.1 Conceptual design of the framework

In general the framework consists of five boxes, namely: customer requirements, organizational capabilities, a relationship matrix, and two score boxes (see figure 5). These boxes are the ‘base’ of the framework. The general structure of the framework is comparable with the basic construction of Quality Function Deployment (QFD) matrices.

Customer requirements Organizational capabilities Relationship matrix Score 2 Score 1

Figure 5: General overview of the framework

The framework should be applied in the context of an organization with a new product or service to help to focus on the organizational capabilities needed from the viewpoint of customers in new market segments. Furthermore, the framework should be easy-to-use in practice. Developing a framework which includes a list of all organizational capabilities is not desired. As Ulrich and Smallwood (2004: p.120) state: “There is no magic list of capabilities appropriate to every organization”. However, this framework will provide an overview of the organizational capabilities which tend to be important in the given context, and which can be used to assess the differences in viewpoint of market segments. In short, the framework is a construct for understanding customer requirements and establishing priorities of organizational capabilities to satisfy them.

Customer requirements

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Organizational capabilities

In this box the organizational capabilities are listed which meet customer requirements of a homogeneous group of customers.

Relationship matrix

The relationship matrix shows the interrelationship between organizational capabilities and customer requirements of each market segment. The score of the correlation is based on the general construction of Quality Function Deployment. These interrelationships can be scored as follow: 9 – Strong correlation 3 – Medium correlation 1 – Weak correlation 0 – No correlation Score box 1

Extensive studies have indicated the significance of assessment of market and customer requirements for the success of product development (Kärkkäinen & Elfvengren, 2002). To make this assessment the concept of QFD is used. To make this assessment the following step-approach should be used:

1. Score the importance (weight) of a requirement for a customer between 1 (very low priority) and 5 (very high priority).

2. Score the current performance of the organization between 1 (very poor) and 5 (best-in-class) for the market requirements.

3. Make a target score for the performance of the ‘new’ organization between 1 and 5. 4. Calculate the improvement rate (quotient by dividing the target performance of the

organization with the current performance).

5. Calculate the weight factor to indicate the importance and priority to improve on the different requirements. This calculation is based on multiplying the improvement rate (step 4) with the customer priority (step 1).

6. Determine the interrelations in the relationship matrix.

7. Calculate the absolute importance to improve in score box 2 (see paragraph below).

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Score box 2

In score box 2 the absolute importance to improve is calculated. The absolute importance to improve rating is calculated by multiplying the weight factor (score in step 5 of score box 1) with the correlation scores determined in step 6 of score box 1. A higher absolute importance to improve factor indicates a higher development need for the organization to meet the requirements of the market segment. In other words, these factors matters the most for customers.

After completing the steps in score box 1 and score box 2, an organization has an overview of important capabilities for a specific market segment. A second QFD is applied to score the characteristics of the product and/or service requested by the market segment. The same procedure described in score box 1 and 2 is followed with the exception that the organizational capabilities box is replaced by the product characteristics. In this QFD procedure the market requirements and customer needs are transformed into product characteristics. After completing both of the QFD procedures for one or more market segments, an assessment of the attractiveness and the suitability of the market segment for an organization can be made.

4.2 Detailed design of framework

In the following paragraph the boxes customer requirements and organizational capabilities of the framework will be described in more detail. The remaining of this chapter will describe the validation process of the framework, the modified version of the developed framework, and the procedure to use this framework.

4.2.1 Customer requirements

Customer requirements are characteristics and specifications determined by a customer of a product, service or organization. There is a wide diversity of sources available to gather customer requirements. For example: surveys, customer complaints, desk-research, or interviews with customers. For each market segment the customer requirements should be gathered since the requirements may differ per market segment.

4.2.2 Organizational capabilities

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Table 7: Description of organizational capabilities

Organizational capabilities Description (based on figure 1: theoretical framework)

Accountability The organizations takes responsibility to deliver what is promised to the customer, of a consistent quality on time. Collaboration The ability of an organization to link with other parties to

ensure the suitability of the product offering.

Customer connectivity The organization forms needed relationships with customers to collect data regarding customer needs.

Cost-efficiency The organization has the ability to compete on the price of the product or service offered.

Innovation

The organization is capable in adapting changes of preferences/environment in the development of new products.

Learning

The organization continuously learns from successes and failures of their product (both internal and external) and adapt accordingly.

Shared mind-set The ability of an organization to understand and handle the complexity of the environment.

Speed The organization has the flexibility to adapt to changes in the environment.

Talent The organization has the expertise (know-how) to provide answers and solve problems in the situation of the customer.

Based on table 7 and the insights described below, a list of organizational capabilities is developed which should be applied in the framework (see table 8).

 A list of all possible organizational capabilities is not desired because the completeness of this list can be questioned (Ulrich & Smallwood, 2004; Di Benedetto et al., 2008). Furthermore, the list should be comprehensive to be easy in use in practice.

 For this framework the focus is on developing an overview of generic organizational capabilities rather than on capabilities that are ‘core’ or ‘unique’, on the basis that generic capabilities have wider applicability and are not unique to an organization (Leonard-Barton, 1992).

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Table 8: Overview of organizational capabilities

Organizational capabilities Operationalization of organizational capabilities Cost-efficiency  Ability to produce cost-efficient

Speed

 Adapt to unanticipated changes in preferences of the customer and in the environment

 Respond to swings in product volume Accountability

 Organization delivers what is promised

 Deliver products on time

 Offers consistent quality

Shared mind-set

 Ability to handle the diversity of customers

 Ability to cope with the diversity of competitors (e.g. substitutes)

 Ability to create and manage a portfolio of interrelated technologies

 Ability to involve different suppliers

Talent  Expertise of the organization (e.g. to solve problems) Customer connectivity

 Involvement of customers as information resource

 Involvement of customers as co-developers

 Ability of network closure to connect with other network participants (e.g. for trust, promotion)

Collaboration

 Synchronizing internal processes

 Involvement of supply chain partners

 Involvement of complementors Innovation  Ability to make rapid design changes

 Deliver a broad range of products Learning

 Sense signals from internal and external environment

 Adapt accordingly to these signals

 Ability to learn and teach others

 Ability to transform knowledge (e.g. codification)

The usage of this framework is described in paragraph 4.4 because the interviews with academicians of the university of Groningen and external experts (see paragraph 4.3) provided new insights which resulted in a modified version of the usage of the framework. However, before the validation process the general procedure is as follows:

1. Develop an overview of market segments.

2. Analyse the market requirements in each market segment.

3. Use Quality Function Deployment to assess the market segments based on product requirements and organizational capabilities.

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4.3 Validation of framework

This paragraph describes the validation process of the framework (shown in figure 5 and figure 8). In the validation process data is gathered from experts from the University of Groningen (RuG) and external experts. Target of this process is to validate the framework. The experience and broad knowledge of the academicians and experts can result in useful remarks, identification of missing aspects or critics to the developed framework. Furthermore, it might also be that, based on these validations, the developed framework will be rejected. In table 9 an overview is shown of academicians and experts who are interviewed during this research. A transcription of these interviews can be found in appendix II: validation process.

Table 9: Overview academicians and experts

Name Function Organization

Dr. W.G. Biemans Associate Professor University of Groningen Drs. T. de Boer Freelance market researcher Marktonderzoekbureau Molgo Ir. H. van Heerde Innovation consultant Syntens

Drs. C. de Monchy Partner and head of Benelux BearingPoint

Drs. F.D. Streefland Lecturer University of Groningen

Drs. ir. M. Weijers Vice-president R&D Bevyz

In the validation process the academics and experts were asked to discuss the conceptual design of the framework described in paragraph 4.1 and 4.2. Based on their input (see list below) the framework is supplemented. After the initial six interviews, the framework is provided to all of the interviewees for any final remarks or recommendations.

The important outcomes, recommendations and critics of the interviews can be summarized as follows:

 Include the value disciplines described by Treacy and Wiersema (1993). The choice for a value discipline: operational excellence, customer intimacy, or product leadership, will provide a specific strategic approach of an organization. To focus on a strategic approach, an organization should excel in certain categories of capabilities mentioned in the framework. Each of the value discipline requires that an organization has certain capabilities. For example, for operational excellence, an organization should focus more on capabilities such as cost-efficiency, speed, and collaboration.

 Discussion if assessment required organizational capabilities should be before the discussion of required product characteristics of a market segment. Since organizational capabilities are on a higher aggregation level.

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 The category ‘efficiency’ is an overarching capability of the other categories in the framework. Therefore the category ‘efficiency’ could be renamed to ‘financial’ or, which is more appropriate, ‘cost-efficiency’.

4.4 Modified version of the framework

The outcomes of the validation process resulted in a modified process in which the framework is applied and a modified detailed version of the framework. Both aspects are described in this paragraph. Figure 6 describes the step-approach to apply the framework of organizational capabilities.

Figure 6: Step-approach to apply framework of organizational capabilities

In the remaining of this paragraph each step in the figure above is described in more detail. In figure 7 is the flowchart shown for selecting suitable market segments. The attractiveness of a market segment is based on the outcomes of the analysis of the required organizational capabilities and the required product properties.

Step 1

• Overview of market segments

• Develop an overview of market segments which can be served with the new product or service.

Step 2

• Analysis of market segments

• Usage of the five forces analysis of Porter (2008) to gain insights in the type of customer in the market segment. After this analysis the required value discipline per market segment can be defined. The type of value discipline will require certain categories of organizational capabilities.

Step 3

• Application of Quality Function Deployment

• Usage of QFD to assess the required organizational capabilities of a value discipline per market segment.

• Usage of QFD to assess the required product characteristics.

Step 4

• Selecting suitable market segment(s)

• The attractiveness of market segments is based on the level of

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Overview of market segments Analysis of market requirements (Porter, data collection) Market requirements related to product Market requirements related to process Current organization Organizational

capabilities Product properties

Attractiveness of segment no Market segment is not suitable yes Market segment is suitable QFD Analysis QFD Analysis

Figure 7: Flowchart of the approach to select suitable market segments

4.4.1 Step 1: Overview of market segments

The first step is to develop an overview of possible market segments for the new product or service. There are numerous ways of information sources and methods which can be used to develop an overview of these segments. For example; using the framework of Weinstein (2006) to define different markets, desk research (e.g. websites of competitors), and interviews. The outcome of this step should be an overview of market segments in which a heterogeneous market for a new product or service is differentiated in homogenous market segments of customers, in other words a market in which customers have similar needs and requirements.

4.4.2 Step 2: Analysis of market segments

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which is based on data collection, interviews et cetera – one of the value disciplines of Treacy and Wiersema (1993) can be selected which fits most to the type of customer for succeeding as an organization in serving these customers. The five forces analysis will provide guidelines for the ‘required’ organization and product or service offering in a specific market segment. The five forces analysis of Porter is described in more detail in appendix IV.

Per value discipline the three most important categories of organizational capabilities are described. “Companies typically excel in as many as three of these areas while maintaining industry parity in the others” (Ulrich & Smallwood, 2004: p.120). Furthermore experts in the validation process discussed that an organization should focus on certain categories of organizational capabilities per value discipline. Therefore experts, shown in table 10, were asked to rank the categories per value discipline (see appendix III). For each category the scores are combined. Based on the results of this survey three important categories of capabilities (highest total scores) per value discipline have been selected.

Table 10: Overview experts ranking categories of capabilities

Name Function Organization

Drs. S. de Boer Consultant Twynstra Gudde

Drs. T. de Boer Freelance market researcher Marktonderzoekbureau Molgo Drs. S. van den Born Vice-president Marketing,

Communications & Innovation CGI (Logica) Ir. L. Haffmans Innovation consultant TenU Advies Ir. H. van Heerde Innovation consultant Syntens Drs. K. Klokgieters Vice-president Strategy &

Innovation Capgemini Consulting

Drs. C. Koning Business Development Manager Novay

Drs. F.D. Streefland Lecturer University of Groningen

Drs. ir. M. Weijers Vice-president R&D Bevyz

This results in the following overview of value disciplines and key capabilities:

Table 11: Value disciplines combined with organizational capabilities

Operational excellence Customer intimacy Product leadership Description

(Treacy & Wiersema, 1993)

Providing customers with reliable products

or services at competitive prices and delivered with minimal

difficulty or inconvenience.

Segmenting and targeting markets precisely and then tailoring offerings to

match exactly the demands of those

niches.

Offering customers leading-edge products

and services that consistently enhance the customer’s use or application of the

Organizational capabilities in market segment selection

Organizational capabilities

in market segment selection

Towards a framework which includes organizational

capabilities for selecting market segments for new

Organizational capabilities

in market segment selection

Towards a framework which includes organizational capabilities for

selecting market segments for new products in new markets

HARM JAN DEKKER

University of Groningen

Faculty of Economics and Business

Preface

Table of contents

List of Abbreviations

List of Figures

List of Tables

Abstract

Management summary

1 Introduction

2 Theoretical background

3 Methodology

4 Framework design

Step 1

Step 2

Step 3

Step 4