CH6_Outline_Strategic-Partner-Identification-And-Marketing –Strategic-Plan [Draft2]

Mohsen Z. SalehiWednesday, February 1, 2012Chapter Draft Due February 28, 2012

CHAPTER 6: STRATEGIC PARTNER IDENTIFICATION AND MARKETING/STRATEGIC PLAN

Sponsored Research Prepared for:

Saint Mary’s College of CaliforniaSchool of Economics and Business Administration

Trans-Global Executive Masters of Business Administration (TGEMBA)

Wednesday, February 15, 2012

Prepared byMohsen Z. Salehi

TGEMBA Graduate Student

Principal InvestigatorsMohsen Z. Salehi, TGEMBA, B.Sc., ODC

Todd Sanchez, TGEMBA, F.A.Taiye Doherty, TGEMBA, F.A.

Amit Chandarana, TGEMBA, DM

Research AssistantAdriana Sandoval

Virunga Artisans Sustainable Enterprise Development Plan

TABLE OF CONTENTS

6.0 EXECUTIVE SUMMARY...........................................................................36.1 STRATEGY.............................................................................................36.2 PARTNER TYPES....................................................................................36.2.1 OVERVIEW...........................................................................................36.2.2 APPLICATION SERVICE PROVIDER...........................................................46.2.3 COMPLIMENTARY PRODUCTS..................................................................56.2.4 OUTSOURCE PROVIDER........................................................................566.2.5 SERVICE BUREAU PROVIDER..................................................................56.2.6 SYSTEM INTEGRATOR............................................................................56.2.7 VALUE-ADDED RESELLER.......................................................................66.2.8 TECHNOLOGY.......................................................................................66.3 PARTNERSHIP SCENARIOS....................................................................66.4 PARTNER RULES OF ENGAGEMENT........................................................76.4.1 OVERVIEW...........................................................................................76.4.2 PURPOSE.............................................................................................76.4.3 SCOPE.................................................................................................76.4.4 KEY OBJECTIVES & RESPONSIBILITIES....................................................76.4.5 DECISION-MAKING................................................................................86.4.6 RESOURCE COMMITMENTS.....................................................................86.4.7 FINANCIAL...........................................................................................96.4.8 STRUCTURE..........................................................................................96.4.9 EXIT STRATEGY....................................................................................96.4.10 OTHER...............................................................................................96.4.11 CONTRACTUAL REQUIREMENTS .............................................................96.5 PARTNER CANDIDATES.......................................................................106.5.1 BUSINESS PARTNER SELECTION CRITERIA.............................................106.5.2 BUSINESS PARTNER CANDIDATES.........................................................106.5.3 TECHNOLOGY PARTNER SELECTION CRITERIA.........................................116.5.4 TECHNOLOGY PARTNER CANDIDATES....................................................116.6 INTERNAL COMMUNICATION PLAN.....................................................126.7 MILESTONES.......................................................................................126.8 OBSTACLES TO SUCCESS.....................................................................126.9 APPENDIX A – GLOSSARY...................................................................126.10 APPENDIX B – PROCESS GUIDE.........................................................136.10.1 CREATING A PARTNER PLAN................................................................13

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6.10.2 CHOOSING THE RIGHT PARTNER.........................................................146.10.3 KEYS TO PARTNERING SUCCESS..........................................................146.11 APPENDIX C - APPROACHING PARTNER CANDIDATES................................146.12 ACKNOWLEDGEMENTS..........................................................................16

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6.0 EXECUTIVE SUMMARYThe purpose of this report is to provide a framework to Virunga Artisans in Uganda, Africa for structuring social enterprises and innovative marketing strategies for groups of women who produce hand-made crafts, clothing or fabrics. This report is based on secondary and primary data including four interviews with organizations that produce hand-made products, provide women in need development of life skills and employment education classes taught in a Christian context where women mentor women, time-definite delivery of packages and documents worldwide, and sleeping accommodations and hospitality. In addition, one fair trade organization that sells products in both a wholesale and retail fashion was interviewed in order to gain some ideas on organizational structures and marketing strategies. (See the Appendix for more details on the four case studies and the one fair trade interviews.)

All four organizations work with women. One is ethnically homogeneous (Ten Thousand Villages) while Christian Women's Job Corps is more culturally diverse. Two of the interviews were with organizations that are in the same general market as Virunga Artisans – hand-made baskets, soap or crafts produced in a rural location as a social enterprise, including Ten Thousand Villages, and Clouds Mountain Gorilla Lodge. They were interviewed in order to learn marketing innovations from the fair trade community. Ten Thousand Villages is a for-profit business but also has an associated non-profit organization that assists suppliers with organizational development and develops policy initiatives related to fair trade and sustainable international development. A fourth organization, United Parcel Service of America, Inc., was interviewed because it has successfully distributed artifacts to independent retailers around the world.

The innovations of the wholesaler or group with which is familiar, includes:

• Successful web-based marketing,• Creating a national/global network of independent retailers,• Selling through a four-color catalog, and• Selling products in an innovative fashion through mainstream retail chains.

6.1 STRATEGYManagement teams of small to medium size enterprises are often approached by competitors, third party associates as well as members of their staff, real estate investment trusts, equipment vendors and others seeking to form partnerships. While the pressure to rapidly close a deal is significant, there are two considerable risks:

1. Partnerships that are inherently inappropriate are formed, fail, and must be unwound.

2. Fearing failure or a loss of control, leaders delay potentially dynamic partnerships and thus do not capitalize on an important opportunity.

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These and others shortfalls can be minimized by applying the following 10-step approach to evaluating and selecting a strategic partner.

Step 1: Identify imperatives for partnering.Before considering a partnership, Virunga Artisans’ long-and-short-term objectives need to be clarified. A partnership should not only be a “win-win” for the involved parties, it should help your organization and achieve significant strategic advantages, such as:

Gaining access to a potential pool of customers, management resources or capital that would not otherwise have been readily attainable

Strengthening competitive position or even co-opting a potential competitor Providing a mechanism to more rapidly achieve a necessary end point than

would otherwise be possible

If a potential partnership does not provide a strategic and compelling benefit, do not consume resources in its pursuit.

Step 2: Set criteria for evaluating potential partners.Prior to identifying or beginning a dialogue with potential partners, take time to set out the criteria for evaluating the opportunity. While the criteria should be tailored to the specific opportunity, it is generally helpful to consider the following issues:

The opportunity to enhance expertise in areas international operations, service line leadership, utilization management/quality assurance and customer service

The opportunity to enhance expertise in diagnostic and technical skills, evidence-based protocols and organizational specialist services

The capability to fill staff gaps, add mechanical and technical equipment, offer desirable manufacturing facilities or other resources

The potential impact on the recruitment and retention of the artisans and staff The ability to enhance competitive differentiation, market share and financial

performance The extent of gain in leverage with payors, employers and purchasing companies The transaction’s effect on access to capital The degree of cultural fir between the organizations The ability to “close the deal” in a timely manner

The last point is often a hot button issue for small to medium sized enterprise executives. It is valuable to recognize that no typical time frame exists for completing a partnership. Factors that influence the time to close include:

The extent to which the parties agree on the partnership’s objectives and agree on the issues of structure, governance and funds flow

The complexity of the partnership model and the related “deal points” The degree to which the interested parties’ legal counsels share a common

interpretation of regulatory guidelines specific to partnerships The time needed to complete due diligence reviews, including valuation studies

Step 3: Identify potential partners.

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Utilize the experience of your board members, management team and outside advisers to identify potential strategic partners. This is an opportunity to think creatively. On occasion, the strongest strategic partnership involves bringing multiple entities to the table.

For example, a multi-platform business system providing wholesale, retail and rehabilitation services on a disaggregated basis to residents in a broad geographic area. A strategy was set to integrate and co-locate those services, then position the resulting entity as a regional institute–which required a new legal entity, a series of joint ventures, and new operational procedures to ensure efficient patient flow and clinical information. To accomplish this, members of the medical staff (including specialists), the management teams of each of the hospitals, and a local community-based athletic club worked together to help design the partnership. The institute is now operational, and its management team attributes a portion of its success to the broad base of constituents who assisted with planning and implementation.

Step 4: Conduct a preliminary screen and qualify the potential partners.A preliminary screen should be conducted to filter out potential partners that do not offer a sufficient benefit to your organization. At this level, scrutiny should be given to four issues:

1. To what extent does the potential partnership contribute to meeting your organization’s strategic imperatives?

2. What does the potential partner bring to the table, and what are its weaknesses? In addressing this question look for indicators of potential benefits related to:

Management and/or craftsmanship and manufacturing expertise, resources (i.e., facility, equipment, information technology and personnel)

Access to capital, and Relevant supporting relationships (i.e., contracts, partnerships and

affiliations/ alliances).

At the same time, look for signals concerning significant weaknesses associated with:

Management (competencies/capabilities and stability) Revenue (track record on achieving growth, extent to which revenue

streams have an uncertain future--i.e., potential decline in insurance coverage)

Reliance on one or a limited number of revenue sources (i.e. a single artisan or enterprise)

Expense (pending capital investment requirements, degree of control over labor and supply cost escalation), and

Reputation and image.

3. What is the probability of successfully implementing a partnership with this entity? An organization with a track record of successful partnerships and evolving to address changing internal and market characteristics has a greater

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likelihood of success. Similarly, when the two entities share common vision, values, cultures and performance metrics, the working relationship is more likely to succeed.

4. What are the opportunity costs of not pursuing a partnership with this entity?

These questions should be addressed based on publicly-available information and not depend on a request for proposal or entry into a confidentiality agreement. Effective detective work should include investigating the prospective partner’s internal and external publications (newsletters, press releases, advertisements, annual reports and articles posted on its website) and reviewing local media coverage specific to the organization. Internet searches may also be used to gather information about the organization’s characteristics, major initiatives and profiles on members of the management team. Historical performance (production and service activity, financial and business outcomes) may be reported or benchmarked by state and/or federal agencies, insurance companies and public “report card” agencies. Finally, site “drive-bys,” “walk-ins” and discussions with other entities who have interacted with the prospective partner in the past may provide insight, as well.

The process should be completed within a few days and result in identification of no more than three or four organizations to be studied in greater depth.

Step 5: Complete a detailed assessment and prioritize the potential partners.To support a detailed analysis, issue a formal request for proposal and enter into a confidentiality agreement. After review of the submitted proposals, it is generally helpful to interview representatives of the potential partner and to conduct a site visit to observe their resources and operations. Typically, a well planned one to two day site visit will help your organization develop a thorough understanding of the prospective partner. Through- out this process, your organization should be assessing the following:

To what extent does the candidate meet the criteria (Step 2) previously established?

What factors would influence revenue and cost trends relevant to the partnership? Are they favorable? Controllable?

What are the key competencies required for the success of the partnership? Do the parties have those competencies?

What are the major investment requirements and timing necessary to make the partnership successful? Can we afford them?

Which key constituents must support this partnership for it to be successful? What is their degree of support?

This step should result in a prioritized list of potential partners.

Step 6: Evaluate the deal’s structural options. At this stage, the dialogue will generally be between your organization and the highest priority partner. The interchange will focus on options for structuring the partnership.

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While the tendency is to consider cash deals (acquisitions and joint ventures), there are multiple other potential formats such as leases and contractual agreements. Additionally, combinations of these approaches could be used. The advice of legal, financial and other business advisors is generally helpful at this stage.

Step 7: Identify operational implications of the deal.In this step, attention would be devoted to jointly defining roles and responsibilities. Control, “rights of first refusal” and funds flow processes would each be set forth.

Step 8: Prepare financial analyses. Once the preliminary structure and funds flow have been clarified, it is appropriate to define the resource requirements (personnel, equipment, facilities, IT). If the partnership includes an acquisition, merger or joint venture, a formal asset valuation analysis by a certified party is usually necessary.

Step 9: Conduct negotiations. Ultimately, the formation of a strategic partnership hinges on the final negotiations between the parties and the ability to reach compromises. Here, too, an objective third party (business strategy consultant, attorney) can help facilitate the process and find common ground that satisfies the objectives of all parties.

Step 10: Close the deal and implement the communication plan.In the euphoria of completing a strategic partnership, the parties often charge ahead to their next opportunity or challenge and neglect to give attention to communicating the deal. The communication stage provides the initial opportunity to gain the attention and enhanced loyalty of targeted customers, retailers, wholesalers, distributors, payors and other constituents.

6.2 PARTNER TYPES

6.2.1 OVERVIEW

The following are the broad categories of the types of partners necessary for broad distribution and success. Note that some partners would act in several capacities, such as service bureau and system integrator, depending on their capabilities.

Category Type ProvidesBusiness 1. Millennium Promise

Application Service ProviderComplimentary ProductsOutsource ProviderService Bureau Provider

System IntegratorVAR or other channel partner

Application hosting + support (customer "owns" license)Products needing our CISIT infrastructure hostingApplication hosting + support (host owns license)Implementation servicesSales to specific markets that we

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Category Type Providescan’t reach easily or quickly; localization or bundled solution + support

Technology 1. Lights For Life International

Call Center SystemsComplex BillingCredit & ScoringCRM SystemsDocument Management/ImagingBusiness Intelligence/Data WarehousingE-Commerce StorefrontElectronic Bill Payment/PresentmentERPFacilities Management

Telephony, CSR, VRU, IVR systemsBilling for large accountsCustomer credit informationSales/marketing systems, in-houseDocument managementEngineering and marketing analytics

Web site front endBusiness to business messagingBill payment/presentmentEnterprise systemsInfrastructure managementApplication to application integrationHardware for app. EnvironmentSoftware/OS for app. EnvironmentSales management systemCommodity supply managementInformation and work order mgmt.Field crew dispatch/ticket mgmt.

Skills Training 1. Aid to Artisans2. Gifted Hands Innovation

Center3. Rwanda Knits

Provides practical assistance to artisan groups worldwide, working in partnerships to foster artistic traditions, cultural vitality, improved livelihoods and community well-being. Aid to Artisans works with artisans in every region of the world through its product and market development programs, business skills training and Small Grants Program.

Resource DeveloperConstruction Services

1. Save the Rain

Finance/Grants/Microcredit/

1. GreaterGood.org2. Mercy Corps3. Vital Edge

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Category Type ProvidesMicro-aidDistribution 1. Ten Thousand Villages

2. Global Girlfriend3. Gifted Hands Innovation

Center4. Anthropologie

Employee Benefits:HealthCare,Clothing,

HealthCare1. A Child's Right (ACR)2. Gardens for Health3. Partners in Health4. Intelligent Mobility

International (IMI)5. Prosthetics Outreach

FoundationClothing

1. Soles4Souls

to bring the benefits of modern medical science to those most in need of them, and to serve as an antidote to despair.

Education 1. Africaid's WhizzKids United program

2. The Campaign for Female Education (Camfed)

3. First Book

Teaching children and women essential life skills as well as providing reading materials.

Students Abroad Workshop Coop

1. Giving undergraduate and graduate students the opportunity to contribute to the fight against poverty by working, training and educating the artisans.

Human Resource

1.

6.2.2 SERVICE PROVIDER

Here are the glimpse of the support that we render to our partner artisans:

Financial Support:

1. Monetary support: SETU provides valuable financial support to artisans and their community whenever the need arises. We look after artisans’ needs regarding advance payments for procurement of raw materials and accomplishment of target production.

2. Fair Wages: SETU ensures stringent monitoring measures to prevent unethical monopolized practices of middlemen and ensures fair wages to artisans for their

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arduous work. SETU protects artisans from falling prey to pressure tactics of unethical buyers and disapproves their practices of cuts and exploitative bargains.

Technical Support:

3. Resource Development and Technical assistance: SETU is well aware & has assessed the serious problem of lack of availability of correct raw materials and resource accessories, which causes the artisans to suffer and ultimately their entire standing risks obliteration. SETU tries to solve such problems by coordinating with other artisan groups, different information sources & other relevant resource providers to ensure accessibility of the required resources for the needy artisan groups and enable them to perform effectively.

We also provide technical support & updates to the artisans regarding design & construction details, fine manufacturing tips, stitching, dyeing & color schemes, latest trends, scheme selection, alteration, recycling, functionality improvement etc. so as to help them produce exceptional products.

4. Process Improvement: SETU relentlessly remains involved with artisans for their process improvement & development. We provide innovative tips and guidance for the development of the current processes involved in making a product.

5. Quality Improvement: SETU takes several steps for improvement & assurance of their artisans’ product quality. We assure intermittent quality checks through active and phase wise interactions with artisans during the entire production process so as to help them produce quality products. We also aim to help the artisans save valuable resources and in controlling their inventory and waste.

6. Product Design and Functionality Improvement: SETU aims to support artisans in learning more about product design and development. They are exposed to contemporary designs and global trends and encouraged to use their inner creativity to develop new & trendy products. We also provide them with latest designs & construction details for producing modern & functional products, at the same time keeping their ethnic beauty intact. Product designs are reviewed from time to time to improve their functional aspects with changing customer needs.

Marketing Support:

7. Market Opportunity: Art and Artisans are lost in oblivion due to lack of access to the market and isolation due to geographic and other reasons

Most of the artisan groups experience, to varying degrees, isolation and a lack of market linkages. A few of the producers have noticed a slight revival in the local market for traditional products but this is still not enough to make ends meet. Some tourists and other people are interested in purchasing the handicrafts but even there, the artisans find difficulty in connecting with them directly. For selling their products in local markets

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as well as in global markets, they have to face exploitation by several chains of middlemen.

SETU offers a sustainable and assured market to the Artisans for their products, a market that not only value their art and talent but also gives them a new identity at the global platform. We strive to strengthen the artisans’ community by assisting them in gaining access to international markets, which are larger and higher in volume than local markets and offer more potential & revenue to provide sales and income to large numbers of artisans and micro enterprise producers of handicrafts.

8. Market Feed Back: Many artisans lack the capacity to respond to changing market demand with new products. Many do not use product development techniques and have little access to market feedback. SETU updates the artisans with regular information about latest market demands, trends and practices and provides access to these. We act as a bridge between the producer artisan groups and potential buyers with ethical marketing practices.

We strive to equip our artisan partners with all the latest information & feedback that they need about the changing market scenario so that they are always well geared up to produce as per market demands only.

9. Cost Optimization: SETU provides all possible guidance to artisans for cost-effective solutions to hold market sustainability. We assist them to remain competitive and at the same time enabling them reap maximum possible revenue from their products

10. Capacity Building and Enhancement: SETU is formidably committed towards enhancing the production capacity of artisans so as to meet the challenging variations of the market demand. We build & strengthen the artisans’ capacity to meet quality and quantity standards in time framed environment to keep pace with the needs of the buyers.

11. Enterprise Building: SETU helps in bringing ardent changes in the unstructured outfits of artisans by influencing positive changes in their attitude and methodology to make their efforts more organized and synchronized to help them grow from isolated artisans to micro and macro enterprises. The aim is to make them eminent and influencing entities in the competitive trade market locally as well as globally. To meet this objective, we also provide guidance to our artisans regarding general business management (including finance, H.R. & marketing).

Sustainable Developmental Support:

12. Conservation of traditional and extinct art forms and artisans: SETU plays an important role in conserving the traditional art forms and their creator artisans. Many of the traditional art forms are on the verge of becoming extinct. We make various promotional efforts to bring the richness of such art forms to the forefront at global level.

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We organize several training and workshop sessions for artisans also to substantiate the above cause. The craftsmen are encouraged to develop products for the local and tourism target markets also.

13. Common Platform: We aim to provide a common professional platform to the entire artisan community (known & unknown both). A common platform is the need of the hour to promote & popularize art forms globally, besides developing artisans in a competitive environment.

We also endeavor to provide a unique opportunity to the ambassadors of various art forms by facilitating interactions amongst them to develop various innovative fusion arts, mutual exchange of techniques and improvement in their manufacturing processes.

14. Employment Opportunities: By providing larger Marketing & business opportunities, we also help in generating employment opportunities for more & more artisans. The main aim is to ensure transition of legacy of art and craftsmanship from old generation to the new generation, in order to protect the ethnic and traditional art forms from extinction. When the art skills get linked to employment opportunities and income generation, they become even more fulfilling & appealing to the new generation. We, therefore, make consorted efforts to generate new employment opportunities for the younger generation of the artisans and to keep their traditional livelihood alive.

15. Fair Working Conditions: SETU ensures fair working conditions for the artisans in following ways:

SETU assures that the working environment surrounding their work place is safe & healthy, decent and free of exploitation and stress. We also try to extend personal and community based help to improve subjective working conditions of artisans. Time-to-time visits are conducted to assess and reinforce our objective.

At the same time, SETU absorbs high work pressure generated due to the challenging demands of buyers and does not allow it to percolate down to the artisans. They are rather facilitated to function in a stress free and flexible working environment which helps them to generate and preserve the real beauty of the art form.

16. Enhancing Self-Confidence and Self-sustainability: SETU exerts to provide generous feedbacks to artisans, backed with repeat orders, which in fact generate immense self-confidence amongst the artisans. They develop a sense of adaptability towards the feedbacks regarding improvements & new developments, which ultimately strengthen them to produce better and to attain sustainability.

17. Sustainable Relationship: We nurture a respectful relationship with all our partner artisans. They are considered as equivalent partners in our growth. Mutual trust and transparency are maintained for a long-term relationship. We look forward to networking and providing better opportunities to our partner artisans.

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18. Environmental well-being: SETU provides guidance to artisans regarding well-being of the environment. SETU believes that good working conditions and protection of the environment are pre-requisites for good Fair Trade. We strive to combine our strategy along with our commitment to environment and social responsibility. Our manufacturing partners and our employees are trained to work safely, to value time, energy and raw materials and to follow environmental waste, chemical and emission management procedures.

19. Socio-economic Development and Community Welfare: Besides providing fair wages and fair working conditions, SETU is also involved in several social and economic welfare projects and programs for the betterment and development of our artisan communities. SETU Consortium (consisting of SETU Fair Trade organization and SETU non-profit Society) realizes its corporate social responsibility and hence, is dedicated to serve the cause of underprivileged, marginalized & weaker sections of artisan community and sections of other such communities and masses in general by running social projects to address their vital issues of

Miserable life conditions & vulnerability, Health Hygiene and sanitation Educational Environmental Scarcity of basic resources Gender discrimination Earning of livelihood, poverty etc

‘SETU-The Bridge To Artisans’, through its act of promoting and marketing various art forms, generates resources to serve the above mentioned causes. We provide health insurance cover to our artisans, provide relief aid against floods and other natural calamities, organize health check-up camps with free distribution of medicines, HIV/AIDS prevention campaigns, health and family planning awareness camps, spread education, general awareness and motivational sessions, conduct trainings and workshop sessions etc. SETU is currently aimed to undertake solar lighting project to bring artisans to illuminated state of living from the present state of darkness, in the desert areas of Barmer.

To know more about the details/upcoming projects, please click here

2o. Infrastructure Development: SETU believes in the philosophy of “grow and let others grow”. To make this happen in real terms, comprehensive infrastructural development in surrounding areas of artisans and artisan community is the need of the hour.

SETU is striving hard to promote this cause before the government and resourceful private agencies, too. We are of the opinion that independent artisan entities, in

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comprehensive developmental terms, will automatically take care of the vast and rich art and craft heritage of India.

Benefits for the Society as a whole:

SETU Consortium is striving hard for value based fair trading to serve following causes of substance, which ultimately uplifts the living standard of the underprivileged & marginalized artisan community and builds a great image for Indian Society around the world.

Conservation of rich art and cultural heritage of India. Conservation of extinct art forms and art producing communities of India. Representing these guardians of our art and culture in every nick and corner of

the world and thus enabling them to know true India. Helping to bridge the people of greatest democracies in the world

India-US/Europe, by fair trading of the ethnic and traditional art forms. Above all, our humble services to the hard-working masses of artisan community,

who help the country earn revenue and represent true glory of India.

SETU Consortium also endeavors Environment protection by prevention of animal cruelty, by not purchasing products made of bone, by using only cruelty free leather derived from naturally dead animals, adopting procedures of manufacturing which tend to protect environment, by minimizing environment waste, chemical and emission hazards and working relentlessly to protect flora and fauna on the planet Earth.

6.2.3 COMPLIMENTARY PRODUCTS

Virunga Artisans contracted with the Saint Mary’s College of California – School of Economics and Business Management (SMC) to conduct a research of primary and secondary research that concerns how small and medium-sized enterprises (SMEs) in Base-of-the-Pyramid (BoP) regions develop new products and services. 5elements Consulting team extensively reviewed the research for concepts and research on new product and service development. We also identified several cases of successful implementation of innovative new product and service development practices. Based on what we learned, we developed recommendations to enhance Virunga Artisans’ competitiveness and the ability to assist Virunga Artisan in this endeavor.

Virunga Artisans is face unrelenting pressure from powerful customers and competitors to increase production, deliver products on a timely manner, produce higher quality products and competitors to lower prices and accept shrinking margins on sales. They have responded to this pressure by partnering with SMC and 5elements Consulting to reengineer their current business model and infrastructure through research and identification of new best practices and innovations in operational excellence, e.g., lean manufacturing and six-sigma. As these best practices and innovations approach their limits, Virunga Artisans is also seeking revenue growth from new products and services. They must offer their customers something different than their competitors offer in order to avoid the same low-margin trap that they now face. This report suggests that a powerful way for Virunga Artisans to do this is to offer customers new products and services that allow more efficient and effective use of the products that they currently sell. These new products may complement existing products, and require new manufacturing and design skills, but offering new services is uncharted territory for Virunga Artisans. Their service experience is often limited to offering

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customers free or below-cost installation, training, and maintenance. They must learn to offer services that can make their products yield greater total return over their useful life than can a competitor’s products. These services include customization of products to specific customer uses, training for optimal performance, product disposal, and even taking over customer operations that pertain to the use of the product, e.g., lodge retail shops.

The above mentioned services requires Virunga Artisans to form deep and trusting relationships with their customers so that they can co-discover ways to make the best use of their products, and learn new ways to develop and implement ideas for new services. Our research led us to propose an “Adaptive Enterprise Development Model” that synthesizes existing new product and new service development models and reflects the dynamic relationship between Virunga Artisans and their stakeholders as well as the complex problem-solving required in such endeavors. We also identified five mini-cases of SMEs that developed compelling new business models that were accompanied by the creative use of information technology and proprietary databases to help customers use their products more effectively. Changes in organization structure and culture are almost always required to do this effectively.

We offer guidance to SMEs that want to transition from a product-centered to a product-and-service-centered business. The transition must occur in phases that involve mastery of new skills and capabilities at each phase before graduating to the next one. Finally, we offer recommendations to help Virunga Artisans become more capable of offering their customers the products and services they need to make the transition to a product-and-service-centered business. This can be facilitated by development of a dynamic knowledge management portal that partners and colleagues can access to share ideas across a shared network on the most effective methods to bring about change.

6.2.3.1 INNOVATION STRATEGIES FOR SMALL AND MEDIUM-SIZED ENTERPRISES

The purpose of this report is to explore how small and medium-sized enterprises (SMEs) can enhance their competitiveness with innovation strategies that leverage their strengths and minimize their weaknesses relative to larger enterprises. These strategies can involve partnering with large enterprises, competitors, nongovernment organizations, not-for-profit organizations as well as for-profit organizations rather than competing against them. To achieve our purpose, we must first recognize that a single set of recommendations is not appropriate for all SMEs because their attributes and environments vary considerably. Second, there is a wide range of innovation options that can serve different purposes at different times. No one option is right for all SMEs, but innovation in products, processes, or services of varying type and degree can be appropriate for different SMEs in different industry sectors or product life cycle stages. Thirdly, we can’t discuss innovation for SMEs without recognizing that they differ significantly from large enterprises, and most of the existing research on innovation was developed from studying the latter. Lastly, given all of the above qualifiers, we explore SME innovation strategies that exploit a firm’s current capabilities and help them develop potentially valuable new ones. One innovation strategy that we will explore in depth is the development of industrial or product-related services that complement the sale of a firm’s current products.

6.2.3.2 Generalizations about SMEs and Innovation are Difficult to Make

SMEs vary in their interest and approach to innovation because of differences in their sources of capital. Senior managers of privately held firms (i.e., most SMEs) have much greater discretion in strategic pursuits than do those in publicly held firms (Nooteboom, 1994). Public stockholders focus mainly on return on invested capital, which narrows senior management’s range of acceptable strategies (including innovation). Private capital providers (personal, family, friends, and local banks) do not have a similarly limited focus,

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which allows more individual variation in behavior, i.e., preference for independence, informality, life-style (Gray, 2002).

Personality and emotions are allowed to play a larger role in decisions made in privately held SMEs. Research suggests that the age and tenure of an SME CEO are negatively related to his or her interest in innovation (Khan and Mattapichetwattana, 1989). Research also suggests that only 20% of SMEs are interested in growth through acquisitions, geographical expansion or innovation (Nooteboom, 1994). However, with SMEs accounting for 90% of all firms in Uganda with 80 percent being located in urban areas, this represents a large number of entities (Hatega, 2007).

Our focus in this report is mainly on established small owner-managed businesses, mostly, but not exclusively, in mature industries. These businesses consume the majority of their owner-managers’ time. They are the primary source of income for owner-managers and an extension of their personality and family; their personal lives overlap with their business interests (Carland et al., 1984; Gray, 2002; Blumentritt and Danis, 2006). Although they value growth and profitability, it is not their major or sole preoccupation. Such firms are to be distinguished from entrepreneurial start-ups, especially those that are heavily science-based and knowledge intensive. These firms are headed by entrepreneurs who are primarily motivated by opportunities for growth and profitability through innovation in new products, processes, and markets. These entrepreneurs are already seeking opportunities wherever they can find them. They don’t need help to stimulate their interest in innovation, although they might benefit from the guidance that enterprise development consultants can provide to owner-managers of established businesses.

SME innovation behavior varies by industry sector. Food, textiles, and furniture industries tend to be conservative, thereby leading firms to be cautious about their innovation initiatives (March-Chorda et al., 2002). Although innovation tends to be incremental in textiles and food, it is more radical in optics, ceramics, and chemicals. Similarly, textile, lumber, wood and paper mills, printing and publishing, and construction firms rely heavily on equipment suppliers for process innovation (Pavitt, 1984).

The type of innovation that SMEs pursue also depends on whether their industry is emerging (where radical innovation is more likely) or is mature (where incremental innovation is more likely) (Nooteboom, 1994). Apparel is highly seasonal and fashion oriented, which prompts shorter and inexpensive innovation efforts. In contrast, computers and electronics have high product obsolescence rates; which means higher and more continuous investment in incremental innovation (March-Chorda et al., 2002).

Wright et al. (2005) suggest that the hostility of the environment influences innovativeness. Firms operating in highly competitive (hostile) markets are likely to be more successful innovators by increasing the number of new product introductions through incremental innovation in order to meet customer needs. The study suggests that the resources of firms embedded in highly competitive markets would be better spent on incremental innovations rather than radical ones because of the cut-throat nature of the environment. In contrast, Khan and Mattapichetwattana (1989) found that environmental hostility lessened SME innovativeness.

Few of the available SME studies focus on U.S. firms, and it is likely that countries differ significantly in institutional factors (e.g., government subsidies and support to SMEs) that will affect their approach and interest in innovation (Siu et al., 2006). Government plays a much more prominent role in the economies of most European and Asian countries. The type of customers that SMEs serve also influences the type of innovation they undertake.

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SMEs that sell consumer products generally serve a larger number of customers directly or through distributors than do SMEs that sell products or services directly to other businesses.They also must devote more time and attention to market research and advertising and generally have more difficulty getting timely and accurate feedback from their customers. SMEs that sell products to other firms, such as equipment, components, or instrumentation, generally have fewer customers than those that sell consumer products. Pavitt (1984) referred to such firms as specialized artifact suppliers. This type of firm is the main focus of this report. Their customers range from small to medium firms in industries such as hospitality, textile manufacturing, museum, grocery, clothing, furniture, and lodging. Poor operating performance, especially downtime, is very costly for them. Thus, they may be receptive to outsourcing their in-house manufacturing of specific products or services, if convinced that a supplier can do a better job, and thereby allow them to concentrate on their core competencies (Quinn et al., 1990). In contrast, their SME suppliers are not scale-intensive, but rely on firm-specific technical skills in design and manufacturing that they deploy quickly to meet their customers’ needs. Large customers are candidates for services too. Ashton et al. (2003) advise SMEs to consider segmenting their markets to identify large customers that lack the resources needed to effectively produce raw and exotic materials, create artifacts, distribute, or maintain operations that are essential to their business. Also, high-end specialty customers may value the SMEs services more than low-end customers.

6.2.3.3 Types of Innovation that SMEs Undertake

SMEs can introduce process innovation to enhance the capability of their production processes or their supply chain operations (e.g., increase reliability or reduce cost). These innovations are developed for their own use; in-house engineering is used to customize them to suit specific applications. SMEs also can introduce product innovations into existing or new markets. Product innovation can include the introduction of new functions, enhanced performance, or added features to existing products. Innovation of this type is generally incremental. The underlying technology can be new to the firm, but is unlikely to be “new to the world”. Radical innovations are relatively rare events, of course, and enhance product performance significantly or even create new product categories or industries.

Innovative products and services can be “pushed” by staff or “pulled” by customers. In the former case, products may differ significantly from the firm’s or its competitors’ existing products (Salavou, 2005). There is the risk that technical staff will push too far ahead of customers and lead to a product failure. Products with “pushed” technology may require customers to change behavior or perception significantly before they are accepted and used. In the case of technology “pull”, “lead-users” can be a significant source of innovative ideas (von Hippel, 1988). Lead-users are firms or individuals that are on the very edge of the target market. They are generally very highly-specialized and sophisticated, requiring different innovations than the average customer. In fact, lead-users are so advanced that they often modify existing or develop new products to meet their own needs. Thus, they can work collaboratively with the firm’s technical staff to fix shortcomings of existing products and to design new products to meet their needs (von Hippel et al., 1999). However, caution should be taken when using input from customers as they can only suggest innovative ideas from what they’ve experienced. It is more important for firms to ask customers what outcomes they value instead of just looking for solutions (Ulwick, 2002). In addition, taking ideas from lead-users can be dangerous as lead-users are often a step above common users and may suggest ideas that are only considered valuable to those in lead-markets, thus making them harder to sell to common users.

Marketing innovation includes the use of new channels of distribution and new advertising approaches for selling current or new products. SMEs can expand their revenues by selling their current products in new regional or international markets or by expanding their existing product lines into new segments of existing markets (Branzei and Vertinsky, 2006).

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This kind of innovation, “application innovation” involves applying existing technology for new uses in new markets (Moore, 2004).

Business model innovation involves creation of a value proposition that offers to satisfy the same or different customer needs in new ways by performing a function, solving a problem, or creating an experience through the sale or lease of a product and/or service. The value proposition may be targeted to a select set of customers whose needs are best met by the product or service. Innovation of this kind may or may not require product innovation. If it does, it is more likely to be a re-configuration of existing technology that results in a product or service that is better suited to the needs of a set of customers that a larger company overlooks. Christensen and Bower (1996) indicate that large companies often dismiss innovations of this type (which they call “disruptive”) because their existing customers don’t value them or the emerging market is too small to interest them. Chesbrough and Rosenbloom (2002) indicate that business model innovation, besides a new value proposition and targeted customers, also requires articulation of a value chain to produce the new product or service, and a plan to establish and maintain a competitive advantage over potential competitors. We return to the topic of business model innovation in section 3 where it relates directly to adding new services that complement existing products.

Moore (2004) suggests that different types of innovation are important at different points in a product’s life cycle. For example, Moore suggests that niche strategies are useful for firms that offer leading–edge technology to early adopters. He also suggests that business model innovation is useful after mainstream products have commoditized. SMEs can offer customers customized products perhaps supplemented with services. The same SME is unlikely to be nimble enough to modify its strategy to match the evolution of life cycle stages, especially at its opposite ends. SMEs at the front-end of the life cycle are likely to be science-based firms (Pavitt, 1984), and if successful, they might grow with their industry and become large companies (e.g., electronics and software). SMEs that focus on the middle or end of the life cycle may be specialized equipment suppliers.

6.2.3.4 SME Strengths and Weaknesses and Required Capabilities for Innovation

Yap et al. (2005) suggest that SMEs have smaller top management teams, which means less functional diversity in experience. Moreover, owner-managed SMEs often favor placing family members in senior management positions over hiring outside professional managers, which can lead to poor management decisions and generational transition problems (Crosetto, 2004). They also have less developed HRM practices (i.e., they are at a disadvantage for reaching the labor pool, which leads to poor recruiting, etc.) and less access to materials and financial resources. The main reason why SMEs may be weak in technical or marketing capability is the number and quality of their professional personnel. Assuming an SME can attract appropriate personnel, there is the question of senior management’s motivation to invest resources in their continued development through training, provision of research journals, travel to conferences, and giving them challenging assignments.

SMEs often have limited financial resources to invest in innovations that are expensive to develop, require long development cycles, and long payback periods. They also cannot spread R&D expenses over large sales volumes nor spread the risk of failure across multiple projects.

This tends to make them more cautious about innovation than larger enterprises. There is a strong correlation between R&D expenditure and innovation success in SMEs. Such expenditures are often underestimated in SMEs because investments are less in “R” and more in “D”, such as in design and engineering tools (CAD), prototypes, customization, etc.

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Further, SMEs often have an inadequate knowledge of their competitors and their products. They need to scan their environment regularly to learn what their competitors are doing (Woodcock et al., 2000; Camp, 1989; Frost, 2003). They also need to compensate for their lack of resources by partnering or networking with customers, suppliers or even competitors (Freel, forthcoming; Vossen, 1998). A firm with strong marketing skills and weak technical skills can partner with a firm with a reverse set of strengths and weaknesses (Huang et al., 2002). There is some evidence that SMEs draw upon a greater variety of sources for information and ideas than do larger firms (Bommer and Jalajas, 2004). Firms vary in their ability and interest in partnering. Rothwell and Dodgson (1991) suggest that SMEs may prefer to partner with other SMEs rather than with larger firms because the latter’s culture is often bureaucratic, has a longer payback horizon, and increases the risk of intellectual property loss.

Although only a small proportion of SMEs engage in innovation activities, those that do so appear to have a higher yield for their effort, especially in number of new patents issued (Nooteboom, 1994). This underestimates the yield, however, because many SMEs don’t have the legal resources to file for patents, would rather rely on trade secrets, have minimal codification, or stay enough ahead of competitors to allow for an imitation lag.

SMEs often carry out the new product development (NPD) process less completely or thoroughly than do larger companies (Woodcock et al., 2000). Most SMEs do not use all of the thirteen new product development “stage-gates” recommended by Cooper (1999). March- Chorda et al. (2002) found that 54% of Spanish firms use nine or less of Cooper’s recommended thirteen stage-gates. Huang et al. (2002) found that Australian SMEs undertook market-related activities less frequently than technical activities, and this distinguished successful from unsuccessful new products. Lindman (2002) suggests that SMEs that have close relationships with a limited number of customers may be able to forgo marketing steps because there is less need for market research. SMEs in the Finnish metal working industry (most with less than ten customers) do market research and learn about their customer’s needs by working closely with them. SMEs with a formal written product development strategy are likely to complete more NPD stages with higher quality (Huang et al., 2002).

SMEs have fewer employees, each with multiple roles (Yap et al., 2005), but they may be able to form cross-functional teams more easily than large enterprises because their professional specialization is less complete. Employees of SMEs interact more often with their counterparts and may have shared or swapped tasks with them. This gives team members a clearer idea of their respective contributions to the NPD process. The downside of less specialization is difficulty in keeping up with the latest knowledge in a given specialty. Assuming that senior management has a clear idea of what it wants its cross-functional teams to do, there is less risk of a disconnect between levels due to bureaucracy, delays, and miscommunication.

SMEs also vary in how much they focus on learning (Salavou, 2005). Most SMEs don’t focus on learning, but even if they do, they vary in how much they codify their learning so that it can be used for developing similar products (Mosey, 2005). Many SMEs don’t recognize the value of data, have minimal archives and don’t learn from experience (Woodcock et al., 2000). Uncodified or tacit knowledge has benefits and shortcomings for SMEs. On the one hand, it is harder to identify what a firm is doing wrong if it has not codified its NPD process. Similarly, tacit knowledge plays a role in how SMEs learn from other firms. They are more influenced by being in direct contact with people (suppliers, customers) whom they know well and trust (Lindman, 2002). On the other hand, tacit knowledge is difficult to imitate so other firms cannot easily appropriate an SME’s intellectual property (Kogut and Zander, 1992).

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Dynamic capabilities are the specific knowledge and skills that firms learn in order to carry out specific activities, including formation of effective cross-functional teams and conducting an effective NPD process (Eisenhardt and Martin, 2000). They differ from “core competencies” (Prahalad and Hamel, 1990) in that they need not be rare or inimitable. For example, best practices in NPD can be learned and easily transferred between firms. Core competencies rely on leverage across NPD projects within a single firm for competitive advantage, but conditionsmay change too rapidly for this to happen. Instead, dynamic capabilities allow existing sets of knowledge and skills to be recombined and emergent requisite skills to be developed to meet new opportunities. The dynamic capabilities of particular concern are those that accelerate internal learning (e.g., degree of codification and learning routines) and networking capability (e.g., highly trained personnel who know what to look for and where). The choice of NPD projects feeds on itself to strengthen current dynamic capabilities or develop new ones (Branzei and Vertinsky, 2006). As part of a strategy to develop dynamic capabilities for NPD (e.g., technical, market, collaborative skills), SMEs need to carefully consider the types of NPD projects they undertake and the customers they serve (Mosey, 2005).

6.2.3.5 What Innovation Strategies Should SMEs Pursue?

Based on the review and analysis above, we can recommend specific focus areas for innovation in which SMEs can apply their inherent advantages and mitigate the influence of their shortcomings. We postulate that SMEs need to pursue innovation strategies that do not rely on scale in production or marketing (Nooteboom, 1994). Product customization and customer intimacy are ways to do this, especially in delivery of industrial services. Scale should be sought by geographical expansion to similar (“narrow but deep”) product markets, not by product-line diversification (Simon, 1996). Large firms have more resources, but SMEs have behavioral flexibility. SMEs need to play to their strengths.

SMEs should cultivate relationships with a small number of captive customers (Lindman, 2002). Intimacy helps make up for lack of resources for market research. This relationship can be characterized as “relational” rather than “transactional” (Siu et al., 2006). It is even suggested that firms can “outsource” innovation to customers by giving them tools to articulate their needs, which can then be given back to the firm for actual development and production (Thomke and von Hippel, 2002). There is a paradox in customer closeness and a risk, however, in that firms that work closely with only a few customers begin to depend mainly on their own internal resources for ideas rather than seek new information from the outside. Nevertheless, this level of customer intimacy is especially appropriate for SMEs that pursue industrial services to complement the sale of their products.

Nooteboom (1994) suggests that SMEs pursue product innovation strategies in emerging markets and marketing innovation strategies in mature niche markets. Moore (2004) also suggests that business model innovation is a very effective strategy in mature markets with products in late life cycle stages. As we indicated earlier, we will focus little attention on SMEs in emerging markets, other than to indicate that these SMEs are better at quickly forming unique technology/market/product combinations that exploit new technology than they are at conducting fundamental research (which large firms do better). SMEs in mature niche markets should pursue price inelastic customers who still want products that larger companies have dropped or ignore.

Pavitt (1984) indicated that the specialized equipment suppliers he studied tended not to diversify technologically either vertically or otherwise. His explanation was that their current market was stable enough not to require them to moderate sales volatility through diversification. Ledwith (2000) found similar results in a sample of Irish electronics firms. Cooper (1999) and Meyer and Roberts (1986) advised such firms not to diversify into new markets because they don’t have the resources for it. If SMEs don’t diversify in this way,

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then what paths of growth remain for them? They can add new customers in their current market by offering them variations of existing products, take market share from competitors, or seek new revenue opportunities from existing customers by offering them a more complete solution to their needs (Simon, 1996). Any of these options are possible, but we are going to focus mainly on the last one.

The possibilities for the last option include taking over activities in the value chain that either the customer or another supplier currently performs. For example, Flinchbaugh Engineering, a small employee-owned company in Pennsylvania, now operates transfer lines for customers such as Caterpillar, SKF and Siemens that previously owned these lines (Anonymous, 2006). It has mastered lean manufacturing practices so well that it can operate these lines more efficiently than its customers. Fine (1998) discusses how Johnson Controls and Lear continued to acquire suppliers that first made up car seats and eventually the entire car interior including door panels and dashboards. These companies now have much more leverage over their customers, the automobile companies. Few SMEs have the resources to pursue such an acquisition strategy, but it illustrates the point.

Another option for SMEs is to perform industrial services that their customers currently perform or propose new services that will help them operate more efficiently. The most well known industrial services are maintenance and provision of spare parts. We will provide a much longer list of such services in the next section of the report. If SMEs are allowed to work closely with their customers, they might be able to propose new services to perform by observing “points of pain” (Gustafsson and Johnson, 2003) that perplex and frustrate their customers when they use their product or other firm’s products. Lastly, new service revenue opportunities can be generated by thinking beyond the sale of the product and about its installation, operation and disposal. Gustafsson and Johnson (2003) suggest viewing “products as services waiting to happen”. The next section develops these themes further by exploring in depth one potentially attractive innovation path for SMEs, namely the addition of services to product offerings.

6.2.3.6 SERVICE INNOVATION IN MANUFACTURING COMPANIES

The period from approximately 1985 to 2000 saw U.S. manufacturers responding to the competitive challenges arising primarily from Japanese firms. Focus was on improving productivity and quality using such techniques as TQM, six sigma and lean manufacturing practices. However most of the firms that have sustained their operations in this period have implemented such programs successfully and, in line with the manufacturing sector in general, are again looking for organic growth to enhance both revenues and profits. This requires innovation skills and new innovative business models as outlined in our previous report (Warren and Susman, 2004). One way that SMEs can achieve such growth is by adding services to or around their products and this section reports on such new opportunities. Also in this section, we include five “mini-cases” that illustrate how these opportunities can be realized. In section 5, we discuss details of the challenges posed by the transition to service-centered manufacturing, which demand different skills and indeed a different organizational structure and culture both within the management of SMEs and the consultants that can help them.

6.2.3.7 Why Add Services?

There are many reasons why the addition of services can provide significant growth opportunities, greater stability, and higher profit margins to SMEs (Reinartz and Ulaga, 2006). Among these reasons are:

• Improving predictability of sales and cash flow. Many industries suffer from cyclical variations, e.g., seasonal for the building sector, economic for the automotive sector, etc. In addition, many product categories are becoming more saturated with tough competitors competing for market share. This results in “commoditization” of

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products and hence lower profitability. Global supply chains, with their increased purchasing power, are also forcing lower prices, and meeting these demands by improving productivity has nearly run its course. Adding or substituting service revenue can mitigate against some or all of these factors.

• These same pressures on SME customers, on the other hand, are forcing them to focus on their core competencies and turn to outsourcing to provide many of the functions that were once performed in-house.

• Adding services can help consolidate and protect the core product businesses of an SME.

• Services can differentiate a company from competitors and establish closer relationships with customers. It is relatively easy for a competitor to provide a better and/or lower cost product, but much more difficult to replace an “intimate and trusting” relationship between suppliers and customers.

• Innovation in services typically results in increased customer satisfaction and loyalty. Both are concerned with the direct attributes of the service offering, but also with the image of the supplier, and with the unique relationship that the customer and the supplier may have. Typically, service is about transferring additional values and functions to those gained by just owning or leasing a product to better satisfy customer needs. This will eventually have an impact on the financial results because of repeat purchases by the customer, and because of recommendations to other potential customers.

6.2.3.8 Definition of Services

There are several different definitions of service found in the research literature. Among the most useful are:

• To place a bundle of capabilities and competences (human, technological, organizational) at the disposal of a client and to organize a solution which may be co-produced with the client and given to varying degrees of precision, codification, and customization (Gadrey and Gallouj, 1994).

• Service products are something a customer pays for receiving even though it may be intangible. The service may be attached to a tangible product however, although a great many service products are intangible even though they may have a physical manifestation. Often, where customers and employees are in relatively constant contact, inter-personal experiences are critical to the delivery of service products (Tidd and Hull, 2002).

• A service is an activity or series of activities of a more or less tangible nature that normally, but not necessarily, takes place in interaction between a customer and service employees and/or physical resources or goods and/or systems of the service provider, which are provided as solutions to customer problems. Advances in information technology increasingly may remove the person-to-person interaction as a service is provided. Examples of this are the ubiquitous deployment of ATMs and more recently, check-in terminals at airports and hotels (Gustafsson and Johnson, 2003).

6.2.3.9 Types of Product-Related Services

Servicing the Installed Base. In describing the service elements provided by manufacturing firms, several labels are used in the literature: industrial services, service strategy in manufacturing, product-related services, product-services, or after-sales services. SMEs are motivated to develop these services in order to complement their existing product base as well as to enhance revenues. This is done by showing customers the importance of services during the life of a product. In the past, many services have been offered as add-ons in order to make a sale, but the product was the main source of revenue. Servicing the installed base requires firms to make services a higher priority. A firm’s

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installed base (IB) refers to its products that are currently in use. For example, one of Hewlett-Packard’s installed bases is printers. Although Hewlett-Packard’s servicing is in terms of a product (i.e., the ink cartridge), the model still stands. The company sells a product that is its main source of revenue (i.e., the printer), and then sells a service to keep the product running (i.e., the ink cartridge, albeit a product). This example highlights the main idea of servicing the IB. Selling a product that has needs (not deficiencies, but needs), such as installation, operation, upgrades, maintenance, spare parts, decommission, etc., requires some sort of service (Oliva and Kallenberg, 2003). IB services include all services that are needed to keep the product functioning properly throughout its life-cycle. The firm that originally sold the product is usually in better shape to do the servicing than a competitor because the firm knows its product well, but it is conceivable that firms can service a competitor’s IB. In this way, the firm can use the product’s life-cycle in order to generate service revenues and a competitive advantage. Focusing on servicing an IB is one way that a firm can develop new services for its existing market, and it is also less risky than other innovations, since the firm already has a customer and knows its product.

By considering the IB in this context, we realize that it leads to a more competitive market with greater size and scope. The fundamental principle is integrating the value chain from the initial stages of product development with providing service to the end user.

The original equipment manufacturer (OEM) has a distinct advantage when servicing its IB. The OEM collects data at the sale and has reduced costs associated with acquiring new customers. The OEM has inherent product knowledge and requires less cost to acquire any additional knowledge about the requirements of service over the product’s life. The OEM will also realize lower costs in fabricating spare parts or upgrading existing technologies.

We later discuss the phase of organizational change where the firm consolidates its service offerings and creates a separate organization to handle the service offering. Once this step is complete the firms can optimistically enter the IB service market.

Once the profit opportunity within the service arena is identified, the firm must set up the structures and processes to exploit it. We discuss later in this report the major cultural changes that must occur to shift the firm’s understanding of the tremendous potential of the service opportunity. The firm must collectively learn to value services and how to manage the service process. In order for a successful expansion of the IB service offering to take place, the firm must have already made its cultural and structural transformations to the service focused strategy.

The first critical step then becomes changing its customer interactions from transactional to relational-based selling. The optimal agreement for the service provider is a fixed-price contract, covering all services over an agreed period. This transfers the risk of equipment failure to the service provider and focuses on relationship-based services centered around the product and operational availability and response time in case of failure. This allows the service provider to better predict demand and utilize its human resources more effectively.

It is now pertinent to list the different classes of services that can be added around a product sale. They are listed in order of increasing differences in management and organizational factors required. The earlier categories are often included in a product offering and are transactional one-time services. They may in fact be of considerable value to customers yet are bundled in “free-of-charge” because of perceived or actual competitive pressures. Clearly, this does not add to revenue and profits. More complex service additions that involve a closer relationship with the customer and leverage the OEM’s advantages have greater potential to contribute significantly to financial performance.

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Following Oliva and Kallenberg (2003), we arranged these services into four clusters (see Table 3.1). These authors suggest that firms must master product-based services first before graduating to comprehensive and relationship-based services. Firms that don't do this usually fail at transitioning to services. Two of these clusters involve migrating from a transactional to relationship-based approach with customers (vertical path) and the other two involve migrating from selling services focused on single products to selling comprehensive services in which the firm’s products and ancillary products and services are embedded (horizontal path).

Table 6.1 Service Opportunities for Manufacturers

Adapted from Oliva and Kallenberg, 2003 and Monitor Group, 2004.

As firms seek to increase their service offerings and gain access deeper into their customer’s value chain to offer more complete solutions, it is critical for them to understand both their individual customer needs as well as the overall market potential for their service offerings. Figure 6.1 provides perspective as to where the largest portions of customers’ spending and providers’ sales are taking place in the industrial service sector.

Figure 6.2 shows the evolution of service offerings from less involved, transaction-based to comprehensive, relationship-based, and higher margin solutions. There are major barriers to reaching the higher phases of service offering, as the service firm’s risk increases and higher levels of solution expertise must be available.

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Figure 6.1 Share of Service Sales/Spending Volume by Type

Figure 6.2 Market Penetration of Services

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6.2.3.10 Mini-Cases

The first “mini-case” illustrates how a supplier of a commodity product changed its business model to provide a complete service thereby satisfying previously unmet, indeed unvoiced, needs of its existing customers. Additionally the data accumulated from having a greater knowledge of customers’ behavior enables the company to continually add value and build barriers against competitors. (The importance of acquiring and building databases as tools for adding value and defending against competitors is returned to later).

Mini-Case Example #1: Greif Packaging, a supplier of metal drums for shipping bulk chemicals, many of which are toxic, realized that they had no real competitive position and profit margins were thin. An internal entrepreneur decided to listen carefully to customers. He saw there were unmet needs and new sources of value to be accessed. Customers did not want to buy and own steel drums, they wanted to move toxic chemicals efficiently and safely; they did not want to deal with all of the details such as finding a licensed trucker, filling in the government forms, washing, cleaning and refurbishing the drums, etc. To meet its customers’ actual needs, Greif converted its business model to being a “trip leasing” company for specialty chemicals – the FedEx® of problem chemicals.Now Greif solves the total trip problem for its customers – drum supply, cleaning, refurbishing, regulatory compliance, transportation, and tracking. It built a new web application and became an “(Internet-enabled company”. Although Greif sub-contracts out most support functions, it captures the value in the supply chain and builds long-lasting client relationships. Moreover, it buys support services in volume, and its database of trip costing enables the company to accurately quote on “trips”

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and to provide customized and traceable service. This shift has significantly improved Greif’s profit margins and cash flow, which it can direct to further innovations. The business model also builds barriers against competitors. Source: Warren and Susman, 2004.

Additionally, services can help to establish “customer lock-in”. Customers, by foregoing certain tasks, increase their dependence on their suppliers. Switching costs therefore are increased. The second mini-case illustrates how special skills can be used to capture and retain customers for later delivery of products and services.

Mini-Case Example #2: General Fasteners, a supplier of components to the major automotive companies, had been squeezed more and more on price as the global competition in this sector became increasingly tough. Even if a supplier has some proprietary technology, the power of the large buyers such as GM and Ford are such that they insist that their suppliers share their unique know-how so that they can play-off multiple competing suppliers against each other. Life is particularly tough when the component is simple to make, the product is nonproprietary and there is an over-supply. Faced with these daunting pressures on profits, General Fasteners (GF), a manufacturer of bolts and other metal fasteners for the automotive industry looked for an innovative business model to change its competitive status. It started by participating in the engineering design of new car “platforms”, taking responsibility for how major sub-assemblies, such as frame, interiors, engine, and transmission of the car will be reliably fastened together. This requires special, hard-to-come-by engineering skills which GF can attract as the engineers have a number of challenging projects to work on, which might notbe the case within an automotive OEM. GF then contracts to supply the car company with just-in-time components directly to the production lines, with 100% quality inspection and guarantees. GF uses fasteners either made in its own plants or by purchasing from other suppliers. It manages an integrated supply chain from design to final assembly. This requires GF’s computer systems to seamlessly integrate with car plants exchanging data in real-time. GF is “lockedin” to its customers both in design and operations making it difficult for competitors to displace them. It provides both products and services. In addition, by taking over the front-end skilled design work, GF’s customers have no need to retain these expensive skills in-house for occasional use, and therefore become more dependent on their supplier when it comes time to design a new family of cars. (For a more complete discussion of supplier/OEM relationships see Clark and Fujimoto (1991) where distinctions between “supplier propriety parts”, “detail-controlled parts” and “black box” components as alternative approaches to supplier-OEM design relationships are explored). Source: Warren and Susman, 2004.

Providing a service component to existing customers builds on past relationships and increases revenue and profits from the installed customer base. This reduces cost of sales, while adding revenues and profits. In many cases, the addition of complementary services such as scheduled maintenance, remote monitoring of performance, benchmarking, etc. can also increase sales of physical product and take market share away from competitors.

Services demand closer relationships with customers, sometimes requiring regular on-site engagement. These interactions can uncover unmet needs, or possible future demands for products and services that would not normally be encountered with a more “arms-length” product-sale relationship.

The company may also innovate entirely new services. The latest information technology standards and infrastructure can be used to provide services that were not even conceived by customers until their providers innovate. For example, using advanced data collection and data mining tools, coupled with real-time data collection over the Internet may provide

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a whole new level of product and service reliability. The third “mini-case” provides an example.

Mini-Case Example #3: Taprogge GmbH, (www.taprogge.com) a family owned business headquartered in Germany, has over 90% of the world-wide market for cleaning condensers and heat-exchangers in power plants. The company has a strong patent position covering its unique invention of using “scrubbing sponge balls” which are randomly circulated through the condenser tubes to remove scale build-up. Initially, Taprogge supplied the equipment together with sponge balls tailored for particular water quality. The balls wear out, so the company has an ongoing revenue stream once the equipment has been installed. Recently the company has moved towards a “total service” business model starting with the installation of the plant and taking responsibility for its operation. The latest equipment has a number of embedded sensors that monitor the performance and relay the data over the Internet back to a central office. Analysis of these data enable the company to predict possible performance deterioration and ship parts followed, if needed, by a qualified service engineer. Shutdown of a central power plant may have an enormous economic impact.

Taprogge’s service model is therefore highly valued by customers who are willing to pay for the reliability and security that the company provides. The responsibility for down-time now shifts from user to supplier, which implies that Taprogge must be able to support its claims and be willing to enter into contracts that may contain significant penalty clauses for failure to perform.

The company’s most valuable asset is a complex database covering all operating parameters of every installation. This is now enhanced by its on-line monitoring systems that give it real-time access to customers’ systems. These data enable Taprogge to a) predict the behavior of a system in most if not all locations and environments (“water is not just water”), b) design new products, systems and services more effectively, c) provide fast turn-around service or even on-line help that reduces service time and costs. This strategy is particularly important when the product is customized. Again we see the power of using information technology innovatively to create added-value for customers while building barriers to competitors.

The service business model improves customer relationships. As mentioned above, the company prides itself on reputation and reliability. It now embodies customer contact on a regular basis by using remote monitoring that gives a basis for pre-emptive actions and regular interaction with all customers either from the local office or from the German HQ. The importance of this cannot be overemphasized. Two major advantages thereby accrue – better service at lower cost and the ability to detect problems early. Customers initiated most of the new products by coming to the company with an unrelated water problem, and knowing that it will do its utmost to solve the problem. In this way the company has built the reputation as the “problem-solvers” in the sector and this capability is promoted. Source: Warren and Susman, 2004.

With all of these potential financial and strategic benefits available, we might expect that SMEs would be readily adding services to their product portfolios. However relatively few manufacturing companies have introduced services to their product offerings. There are some noticeable exceptions, such as IBM and GE of course. But even these large companies have struggled with making the transition. The reasons for this are complex. The next section of this report examines the differences between products and services and how innovation practices differ substantially between the two. As we shall see, the situation

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becomes even more complicated when a company attempts a hybrid model of products plus services, where the organizational, cultural, and management tasks are challenging and require significant change management.

6.2.3.11 Differences between Products and Services

As SMEs are used to thinking in terms of physical products, it is useful to compare them with services. Services are in fact inherently different from products in a number of key attributes (de Jong and Vermeulen, 2003; de Jong et al., 2003):

• Intangibility: this characteristic best differentiates products from services. Services are intangible and often, but not necessarily manifest themselves together with the customer. On the other hand, products are a) more often shipped to the customer, b) are developed with limited customer input, and even then, at the formative stage of development, c) the supplier may have limited knowledge of how the customer actually uses the product and d) most importantly not fully understand the commercial benefit or value accrued during its use.

• Ownership: a pure service also does not transfer the ownership of a tangible item to the customer.

• Heterogeneity: services tend to be heterogeneous; that is they are customized to the specific needs of the recipient. On the other hand, products are usually created in an identical series and can be sold from a catalog, either printed or on-line. Because products have a physical identify, it is a challenge for a manufacturer, other than those classified as a job-shop, to manufacture many products each different and made for a specific customer. Customization implies an inherently different relationship between supplier and customer.

• Perishability: Services are perishable and are usually created as they are used, whereas products can be made ahead of time and held in inventory or within a distribution supply chain.

• Imitatability and opportunities for “bundling”: Services can be more readily combined into customized packages compared with product features. This differentiates products from services and makes them more difficult to imitate by competitors, thus increasing competitive advantage. When we categorize different classes of services, it is clearly seen that, in many instances, they may be flexibly combined to meet the specific needs of a customer.

• Integration of an external factor: this means that during the preparation of a service, an external factor, an object or a subject will be involved in the process, e.g., such as a car in a car rental contract.

• Need for synchronous contact between customer and service supplier: Often there is a simultaneous production and consumption of a service. Customers may participate in production because the service preparation and the service delivery are identical (e.g., at the hair dresser) (Kupper, 2001).

The distinction between products and services is often unclear. For example, software service providers may offer homogeneous products that are not produced or consumed simultaneously, and manufacturers increasingly offer products that are accompanied by services, such as repair and maintenance (de Jong et al., 2003). Products and services can be viewed as a continuum because many products have services embedded in them and vice versa (Johne and Storey, 1998). At one end of the continuum are physical products that are exchanged for payment. The relationship between buyer and seller starts and ends with the sale. At the other end of the continuum are services that consist of dialogues between service providers and clients, e.g., consultation or therapy. The client participates in the delivery of the product, which is intangible and perishable. Services such as banking and insurance are further along the continuum because the client receives a product, e.g., mortgage, policy. Services such as transportation, telecommunications and courier mail

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require systems that are designed, developed, and optimized for performance or delivery of the service.

6.2.3.12 Innovation in Product-Based Services

We have seen that services have a number of attributes that are inherently different from products. Based on these findings, we now examine the similarities and differences in the innovation processes needed for each type.

Innovation in service and manufacturing (products) industries differs because of the contrasting general characteristics of the two offerings. Due to the labor intensive nature of services, typically service innovations require much less capital investment. Service innovations usually require less R&D, require less in fixed assets, and need less investment on patents and licenses for the development of new services (Brouwer and Kleinknecht, 1997). Technology is also less important for the development in new service as many times the face-to-face relationship building component becomes more important.

Because less of a financial and technological commitment is needed for service than manufacturing innovation, service innovation can be easier to imitate. As competing firms realize these features of service innovation, they may be tempted to copy the offering. However, it is not as easy as it may appear to imitate a competitor’s service innovation. Though capital investment may be low, organizational aspects play a larger role in the success of service innovation. One common barrier to innovation in service firms is the lack of a robust human resource strategy. A fatal flaw for a service company can be the lack of well-educated coworkers capable and committed to the firm’s mission, which can have a larger influence on the success of new services than on new manufactured products.

We start by reporting on the research literature covering both product and service innovation. Figure 3.3 shows the focus of academic work in the field of innovation models over the last thirteen years. The database analyzed was the ISI “Web of Knowledge” (ISI, 2006) using the social science sub-set of indexed publications. Specifically, we searched for the terms shown in the figure within the title, abstract and key words only. All categories show a gradual upward trend. However, despite the fact that there has been a major shift in the GDP of developed nations from product-based to service-based economies, research agendas have not kept pace.

Indeed, the research literature on innovation divides strongly into two separate areas of endeavor – product innovation and service innovation. Service innovation research is heavily targeted at specific market sectors such as financial, telecommunications and transportation. Our review of this literature indicates that, although there are some results that are relevant to SMEs, much of the work is so sector specific, the value is limited. Indeed, apart from some relevant research in Finland and Holland (de Jong et al., 2003; Paloheimo et al., 2004), there is an extreme paucity of work that has focused on innovation around a combination of both product and service. Further, examining innovation processes that encompass both product and service, the topic of this section, we see that the research intensity is actually falling behind the other two categories.

Figure 6.3 Comparison of NPD, NSD and TSD Processes

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Source: Garud and Tuertscher, 2006.

Other general observations arising from our literature analysis show that:

• Research on service innovation models has grown much faster in Europe in locations such as Finland, Holland and Switzerland rather than in the U.S.

• Research on “hybrid” innovation models combining services with products is extremely limited, again led primarily by European teams. This research is mostly anecdotal and not underpinned, as yet, with a solid theoretical background.

We find, therefore, that there is a significant shortfall in fundamental research on service innovation, particularly when embedded within a manufacturing enterprise. We will return to this issue in the recommendation section.

Some definitions of service innovation taken from the research literature include:

The development of service products which are new to the supplier (Johne and Storey, 1998)

An offering not previously available to a firm’s customers, resulting from additions to or changes in the service concept (Menor et al., 2002)

Encompassing ideas, practices or objects which are new to the organization and to the relevant environment, that is to say to the reference groups of that innovator (Van der Aa and Elfring, 2002)

6.2.3.13 Role of Information Technology (IT) in Product-Related Service Innovation

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We saw in the three mini-cases, Greif Packaging, Taprogge, and, to a lesser extent, General Fasteners, that IT was an integrated part of their service business model, and not used just as a set of tools to help them manage the operations of their business. Increasingly, IT can become a powerful weapon for SMEs to create greater value for their customers.

The fall in the price of computers and data storage devices, coupled with the rise of the Internet, have made the use of digital information as a competitive weapon no longer just the domain of larger companies. Start-up companies can now harvest information technology to provide their customers with greater value and to create subtle barriers to competition. Indeed, this new low-cost digital freedom may even provide smaller companies advantages over larger firms which are encumbered by “legacy” data systems and cultures freezing them in outdated business models. It was, after all, Amazon and eBay that created on-line bookstores and auctions rather than Barnes & Noble and Sotheby’s.

Here are some categories for use of IT in business model innovations. They are illustrative and not intended to be a complete list.

Data Acquisition and Mining: Capturing data on customer requirements and using it to create unique services or products can be a powerful way of adding value and keeping out competitors. Netflix has changed the way that consumers rent movies. The power of the Netflix business model comes not only from the convenience but the ability to “mine the data” obtained by combining information from ALL customers nationwide. This enables the company to make suggestions on what someone might like to rent based on not only past rentals but by matching behavior with others who have a similar taste. This ability is termed “collaborative filtering”. In addition, by getting instant feedback from their database (customers provide long lists of future wants and rate past rents), Netflix is able to balance its inventory centrally to meet both current and anticipated customer requirements, something not possible to do on a local basis. Using this novel database structure, Netflix is able to provide its customers with a convenient personalized service, as it continually optimizes its supply chain.

The following “mini-case” shows how, in a business-to-business market, acquisition of data, and its subsequent analysis or mining can provide a powerful service model for a manufacturer.

Mini-Case Example #4: De-Angelo Brothers: Using a truck bought for them by their father, and some standard mowing equipment, the two brothers provide services in “vegetation management” to businesses rather than home-owners. DBI Services (www.dbi.com) learned by listening carefully to customers that businesses have greater and more complex needs than home-owners. For example, “Class I” railroads are regulated by the federal government on the amount of vegetation that may grow on their rights of way. This is, for example, to mitigate against fire hazards and to ensure that there is a clear line of sight at crossings for safety. DBI realized that the value proposition for these customers was not focused on low cost but on the reliability and speed with which a service provider could treat the vegetation growing along the tracks. If any equipment breaks down on the railroad, the loss of income from trains not being able to run would greatly surpass any small cost savings for the service. Understanding the customers’ true needs has enabled DBI to build a dominant position in this sector by designing and building its own vegetation treatment road/rail vehicles. These rapidly mount the track and detect the location and type of vegetation along the line, mix optimized herbicides in real-time, and spot-spray using robot arms on the truck. This minimizes the amount of chemical carried and used, limiting any environmental damage and coincidentally reducing the time needed to refill the containers with herbicides. By mapping the exact location of every plant using on-board GPS technology, the company ensures that its next

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service run can be accomplished in minimum time with highly efficient utilization of chemicals and equipment. The proprietary data that the company collects on its clients’ unique situations are a major competitive advantage, making it exceedingly difficult for a competitor to bid accurately on a contract and to compete in service. DBI’s business model is based on the principle of providing customers with reliable and customized services supported with proprietary information systems. Source: Warren and Susman, 2004.

Customer Lock-in: Information can be shared between customers and suppliers so that each is closely locked into the other as business partners. A business model based on information sharing can provide high barriers against competitors as the costs involved in integrating compatible data and computer systems can be prohibitive. On the other hand, the SME must be aware of becoming too dependent on one supplier or customer when the “lock-in” can become disadvantageous. A sound business model using data lock-in will have multiple partners so that the dependence on one partner is reduced. The General Fasteners case above is a good example of so-called “customer lock-in”.

IT enabled innovative business models: Entirely new forms of business can be created by employing data acquisition and mining to lock-in customers, suppliers and partners. The fifth “mini-case” provides an interesting and illustrative example of a company supplying commodity chemicals yet providing greater value to customers, and partners.

Mini-Case Example #5: ChemStation was founded by George Homan (www.chemstation.com) in 1983 after he had spent some years as a distributor of industrial cleaning chemicals. His close contact to customers led him to recognize that businesses do not want to handle bulky containers of cleaning chemicals and George saw an opportunity to provide a better service by offering custom formulated, environmentally friendly industrial cleaning and process chemicals delivered to proprietary refillable containers that are placed free of charge at customer facilities. ChemStation has used a franchise business model to expand rapidly nationally without the need for the founding entrepreneur to raise any external capital. ChemStation has used its franchisee network very effectively to get tremendous reach within the U.S. market. The first franchise was given in 1985 and since then 50 franchises have been awarded. Today there are 55 units operating in the U.S. of which only five are company owned. ChemStation’s elegant business model is depicted in Figure 3.4.

Figure 6.4 ChemStation’s Business Model

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The franchisor’s headquarters, which is based in Ohio, serves some local customers and uses its buying power to purchase cleaning chemicals at a lower price than can small competitors. The HQ also holds the secure and coded database of proprietary cleaning formulas for specific customer needs, whether to clean eggpacking equipment or the floors of a car assembly plant. A franchisee is granted a region to service, funds the local marketing, sales and delivery services after paying an entry fee of about $1 million to ChemStation. In exchange, the franchisee gets access to the database on demand when a customer need is defined. This provides the formula for the optimum cleaner components and the usage instructions. In this way the franchisee can provide customers with an immediate proven solution to their cleaning problems. In addition, if a major national company, for example a rental car firm, would like every car to be cleaned the same way and have a distinctive brand-building aroma, ChemStation can provide the formula to every franchisee for delivery to local offices, something that a small local firm is unable to guarantee. In the event that there is no solution in the database for a customer’s new problem, and the franchisee develops the answer, then the franchise agreement commits them to submit it to the central database, where it becomes available to all franchises and adds to the intellectual assets of ChemStation. In this way, the franchise model is enhanced by the continual building of a proprietary database of customer solutions adding greater value to both the franchisor and franchisees. Whatever problems are solved at a franchisee’s location are fed into the software package which has been devised by ChemStation and the new solution now becomes an integral part of the ChemStation database. The sharing of such information by the franchisees with the HQ is mandated by a written agreement between ChemStation and its franchisees. The database is a key asset for ChemStation and it has the necessary software and

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framework in place to interpret the results and distribute the data. The database also builds barriers against competition. For example, ChemStation solved a cleaning problem at a Harley Davidson plant within its shock absorbers manufacturing division which resulted in using one cleaning solution on one line and another solution for the adjacent sister line. This subtle know-how becomes a part of ChemStation’s data bank. Such captured knowledge helps to lock-in customers, and prevents competitors gaining the account. Since its founding, ChemStation captured, in less than ten years, around 25% of the $300 million U.S. industrial cleaner market by providing customized cleaning solutions in an innovative business model that includes elements of franchising, data-mining of customer information, and customer lock-in. Source: Warren and Susman, 2004.

In addition to using information technology (IT) to enable creative business models, SMEs can, of course, derive benefits from the use of IT in their operations. Froehle et al. (2000) found that IT decisions play a significant role in improving both the speed of the NSD process and the effectiveness of the firm’s NSD efforts. Also, the use of teams for NSD directly contributes to the overall effectiveness of developing new services. Teams appear to enhance the firm’s NSD efforts through creativity and diversity, given that management provides the proper motivation. Formalization of the NSD process directly contributes to the execution speed of the company’s service design sub process. In contrast, there appears to be no connection between the use of cross-functional development teams and process execution speed. Finally, training, employee attitudes, and perception of management support also moderate the effectiveness of adoption of new IT tools (Agarwal and Prasad, 1997; Leonard-Barton and Deschamps, 1988; Roth et al., 1997). Thus, investments in process-enabling IT can yield multiple benefits, increasing the generation of new ideas, accelerating the development of new services based on those ideas, and generally supporting the firm’s goal of rapidly bringing new service offerings to market.

6.2.3.14 Do Manufacturing and Service Firms Innovate Differently?

Tether (2005) studied the presumed differences between the way that manufacturing and service firms innovate. He found that there are both similarities and differences. Innovation in service and manufacturing firms is similar in that innovation is often treated the same in both sectors. As we shall see in section 4, service innovation requires different steps than product innovation, and it also requires a different type of company culture and organization. This shouldn’t be surprising based on the specific attributes of services that were mentioned earlier (see section 6.6), such as intangibility and imitatability.

Service innovations are generally more incremental, whereas product innovations can be more radical (Tether, 2005). This is because it is natural for service firms to incrementally improve their services based on customer feedback, etc. Product innovations are also made in gradual and incremental forms, but they are also likely to be radical, i.e., something brand new to the firm or its market. Service can be thought of as much more conventional than new product development, because it is based on internal assets, such as people, instead of external ones.

Although people are important in the new product development process, they are arguably more important in new service development. This is because people are the ones who generate new service ideas. New product ideas can stem from external sources, such as new technology. New service ideas come from a close interaction between customers and employees. Thus, although product and service innovation are often thought of as “the same”, they are actually quite different and require different procedures.

6.2.3.15 The Customers’ Role in Product and Service Development

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In order to develop services that customers find valuable, it is important to have customer input. Although this will be discussed in greater detail in section 4, firms should observe customers and their “points of pain” (Gustafsson and Johnson, 2003), frustrations or unmet needs with existing products and/or services. Once these unmet needs are uncovered, the firm and its customers should work together in order to generate ideas to solve the problem. Often this can be a daunting task, as customers are prone to changing their minds about their desires (Takeuchi and Quelch, 1983). Thus, firms must be able to handle a vast amount of customer input, and use it to build new products and/or services that are valuable to the customer. It is critical that the firm realizes that regardless of how valuable the firm thinks the innovation might be, it is the customer’s opinion that matters. Customers will not buy products or services that they don’t find valuable for their firm. New products and/or services must be developed to add value to the customer. (Gordon et al., 1993)

Figure 6.5 below is adopted from Gustafsson and Johnson (2003) and links the evolving relationship between the firm and its customers (y-axis) to shifts in the firm’s strategic focus as reflected in the value proposition it offers to its customers (x-axis). The space between curves represents regions where firms are located strategically. Firms in the lower left region of the figure offer stand-alone products to customers and sell products in “arms-length” single transactions. The new product development (NPD) process for this region involves very little interaction between the firm and its customers, other than input from focus groups and needs surveys. The NPD process is structured and focuses heavily on managing risk, and keeping the process on budget and schedule.

Firms in the middle region of the figure offer discrete services usually on a fee-per-event basis (e.g., maintenance). Interaction between the firm and its customers during new service development (NSD) may be greater than for NPD, but the customers’ role is still

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essentially passive, i.e., respond when asked questions or observed unobtrusively. Firms may discover new solutions to customer problems by observing the customer using the firm’s products. “Moments of truth” occur when customers experience frustration with using the firm’s products and the firm offers solutions that reduce the frustration. Also in the middle region, but more to the right are firms that offer comprehensive solutions that focus on using the firm’s product over its useful life. Ideas for services may be offered to customers on a fixed-term contract basis. Customers are active participants in the NSD process and in service delivery.

The upper right region of the figure is uncharted territory for most firms, especially manufacturing-based SMEs. Comprehensive solutions for service delivery put the firm in the role of system architect in designing and delivering system-based solutions to current and future problems that relate to use of the firm’s product. The value added is more in the system architecture than in its components, which makes the firm comfortable in forming alliances or networks with other firms to supply some of the system components. We characterize this process as total service development (TSD).

Section 4 will elaborate on differences between NPD, NSD and TSD models. Suffice it to say here that the customer’s role in each development process differs dramatically. The relationship between product/service providers and customers shifts from one-way static information exchanges in NPD to two-way overlapped information exchanges in NSD to dynamic and interactive information flows in TSD.

Table 6.2 compares the attributes of the three models, NPD, NSD and TSD. The factors shown are:

• Closeness to customer, ranging from distant to intimate• Kinetics, i.e., how the interaction occurs, ranging from static to dynamic• Relationship type, i.e., transitioning from “remote, one-way”, “arm’s length” product

transactions, to “one-on-one close” where a stronger relationship exists between supplier and customer, and “networked, close”, whereby several stakeholders participate in parallel in an ongoing dynamic relationship to provide a total valuable solution to all parties

• Information flow ranging from one-way on an irregular basis to two-way on a continuous basis

• Operational issues, i.e., difficulty in managing the innovation process. We will see that TSD demands significant shifts in culture, management methods, behaviors, etc.

Section 5 of this report will deal with the challenges of transitioning from a product-centered firm or customer-support firm with traditional NPD and/or NSD processes to a firm that engages collaboratively in TSD with its customers, and most likely with alliance or network partners.

Table 3.2 Comparison of NPD, NSD and TSD Processes

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6.2.3.16 INNOVATION MODEL AND TOOLS FOR TOTAL SOLUTION DEVELOPMENT

In this section, we first review the innovation models proposed in the literature, starting from the models for new product development (NPD), and the current models for new service development (NSD). We then propose a revised model for a holistic innovation concept (Total Solution Development), which is particularly relevant to manufacturing firms. Finally, we discuss various tools available to implement each step in the proposed new model.

6.2.3.17 Models for New Product Development and New Service DevelopmentAn extensive and well understood corpus of work exists on product innovation. The most recognized work is associated with Robert Cooper and co-workers, and is known generally as the “stage-gate process” (Cooper, 1994). The stage-gate process, represented in Figure 4.1, normally starts after ideas have already been generated. The objective is to continually narrow down the options as a new product development project proceeds and provide for rigorous review stages where concepts are eliminated. In Figure 4.1, for example, five different gates are instituted, each after one key development stage. The process de-emphasizes continuous innovation and flexibility and there is a concern that rejected ideas are lost or not explored sufficiently, as the focus is more on “getting the next product out of the door”. In this process,

Figure 4.1 The Linear Stage-Gate Process

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Adapted from Cooper and Edgett, 1999 and Cooper, 1994.

NPD is treated as a defined programmatic effort, with clearly defined goals and resource constraints. It has worked well for larger organizations where resource management and controls are key issues. It is not clear whether it works well for service innovation, which, as we shall see, requires greater flexibility and often “co-creation” of new ideas during close interaction with customers. In addition, new services may not have as clearly defined yardsticks, as new products do, against which a fixed gate could be associated.

A defining feature of an innovation paradigm is how it posits the relationship between the firm (internal) and external parties. The stage-gate process implies relatively static relationships between a firm (SME in this case) and its customers (see insert in Figure 4.1). Customer inputs are incorporated in this type of paradigm, but most activities in this innovation process are done within the firm.

In contrast to new product development, most new services are developed in an ad hoc fashion (de Jong et al., 2003; Gallouj and Weinstein, 1997; Martin and Horne, 1993; Kelly and Storey, 2000; Sundbo, 1997). de Jong et al. (2003) discussed many reasons why this might be the case; for example, (1) new services can be imitated by competitors, and thus require a quick response and less formal process, (2) no natural milestones for review, unlike for new products. A new product concept, for example, must be shown that it can be engineered and, if it can, then must later be scaled up under certain cost constraints. A new service concept, on the other hand, normally does not have such relatively objective obstacles. Kelly and Storey (2000) conducted an empirical study in the U.K. and found that many firms do not have formal NSD strategies and that idea generation is done in an ad hoc manner. In cases where firms have NSD strategies, idea screening does not explicitly take into consideration these strategies.

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In NPD, formalized models have proven to be critical in leading to better new products (e.g., Griffin, 1997, Cooper, 1984). It is thus desirable to develop a formalized process for NSD. Several different models have been proposed in the literature. Based on the Booz, Allen and Hamilton (1982) model for new product development, Bowers (1987, 1989) proposed an eightstage model. Scheuing and Johnson (1989) proposed a fifteen-stage model mainly based on the financial industry. More recently, a ten-stage model (Alam and Perry, 2002) has been suggested that incorporates the concepts of cross-functional teams and parallel processing of the developments stages.

Gustafsson and Johnson (2003) have developed one of the most influential new service development models. They adapted the stage-gate process to new service development, which reduced the total number of stage-gates, but added two new parallel gates for cultural and organizational change fit. We summarize their framework in Figure 4.2 (this is an expanded version of the figure on page 121 of their book). Unlike the stage-gate process (Figure 4.1), there is much less emphasis on multiple layers of gates, instead, a key gate is included between idea generation and design/prototype solution. This gate, in essence, is a gate of idea screening and selection. Within this gate, Gustafsson and Johnson suggested that cultural fit and organizational change fit, in addition to strategy fit, should be the key criteria that determine whether an idea will move to the next phase of new service development. These two additional dimensions are necessary as new service, unlike new products, will likely require change in culture and organization. Unlike the stage-gate process, Gustafsson and Johnson also explicitly incorporate a needs identification stage in their framework. They call this stage “Immerse Yourself in Customers”.

Figure 6.2.4 A Revised Stage-Gate Process for New Service Development

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Adapted from Gustafsson and Johnson, 2003.

In addition, the model shows a closer relationship between the service provider and customers. It posits that service is driven by unmet customer needs, customers are “listened to” and information flows primarily from the customer to the SME (see insert in Figure 4.2). Despite these modifications to Cooper’s original concepts, there is little mention of a continuous discourse and interaction between the supplier and customer, and members of the supply chain are not included in the model.

6.2.3.18 A Model for Total Solution Development

We propose that these methods can be taken further by adopting a “Total Solution Development” or TSD model. The difference between TSD and the previously discussed new product and new service development models is that the TSD model generally starts with an established base of products and customers (such as a SME), but it does not limit its future innovation to either products or services; instead it posits that a firm should let customer needs dictate the type of innovation the firm should develop, either service, or product, or a product/service combination.

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Such an approach will require the firm to engage more completely with external parties (e.g., supply chain members, potential partners, and competitors), and have a dynamic rather than static interaction with customers. Some companies go as far as having a full-time relationship person on-site to ensure this continual interaction with the customer. We present the TSD model in Figure 4.3.

The TSD model incorporates the key elements of both the stage-gate process and the new service model (e.g., Gustafsson and Johnson). Similar to Gustafsson and Johnson, and unlike stage-gate, it maintains the importance of identifying customer needs as the very first step in innovation. TSD goes even further as it recommends that a firm should segment customer needs prior to selection if possible. It incorporates the key roles of strategic, organizational change and culture fit. However, TSD makes explicit differentiation among new service, new product, and service/product combination, and recognizes the criteria used to select these three different types of ideas differ. Capability and competition are added as part of this gate, but mostly for new product or new product/service combination ideas.

Similar to the stage-gate process, and unlike Gustafsson and Johnson, TSD incorporates multiple gates in the innovation process. It should be noted, however, that different criteria might be used at the same gate; it depends on the nature of the innovation (service, product, or combination), as shown explicitly for the idea screening gate. Market test and launch have been divided into two distinct stages, with one gate between them.

Unlike either of the previous models, TSD explicitly differentiates among new service, new product, and a product/service combination. The combination does not have to be completely new, it could be a new service bundled with an existing product, or a new product added to a service already provided to existing customers. Many SMEs likely already have established products, and they could certainly explore how to add new services to these products to address customer needs that products alone cannot address. TSD espouses a strong and dynamic relationship between the firm and customers (see insert in Figure 6.2.5). Unlike the static relationship in stage-gate and quasi-static relationship in Gustafsson and Johnson, TSD suggests intimate collaboration with customers with continuous exchange of bi-directional information. External parties, other than customers, are explicitly incorporated into the entire process of innovation. They include potential partners, supply chain members, and competitors. Furthermore, TSD suggests the specific interactions between the firm and various external parties during different stages of innovation development. For the design and prototype solution

Figure 6.2.5 A Total Solution Development (TSD) Model

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stage, for example, TSD recommends that the firm work closely with potential customers, potential partners, and supply chain members -- customers will help assure the new solution

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does indeed address their needs, partners will help address challenges in developing such solutions (e.g., IT), and supply chain members will help ensure the new solution is in a form that could be delivered to customers in an efficient manner.

TSD dictates innovation should be an iterative and adaptive process; two specific arrows exemplify this process. One arrow goes from the post development review gate back to the design/prototype solutions stage, and the other arrow goes from the pre-commercial business analysis gate back to the design/prototype solution. A stage is not meant to be visited only once during the TSD process. Even idea generation may be revisited if previous new ideas do not appear to be attractive during the following gates. It should also be highly adaptive, conditional on the type of innovation (product, service, and product/service combination).

There are several additional unique features of the TSD model that are not included in Figure 4.3. One is parallel processing. The cycle time must be short to react quickly to changing market conditions and prevent easy copying by competitors. To reduce cycle time, it is essential to engage in some TSD stages in parallel. For example, Alam and Perry (2002) recommend idea screening and business analysis be conducted in parallel as well as personnel training and service testing and pilot run. It should be noted that sometimes parallel processing (and faster development time) leads to higher development cost.

Cross functional teams are a critical component in TSD. They increase the probability of success in new solution development and may avoid costly mistakes. The composition of such teams should reflect the type of innovation (product, service, or combination), and represent all functional departments that will be involved in actually developing, producing, and delivering the innovation. An innovation, if adopted by a firm, will have a different impact on individuals within the firm – some people’s careers will be enhanced and compensation increased, while others will have the opposite fate. As a result, it is important for a firm to put the right incentives in place for the people involved, and make sure that it is in the best interest of everybody (at least those involved in the development) to come up with new solutions that serve the firm best. Another aspect of incentives is to encourage risk taking. An individual (or team) should not be punished if the innovation fails, if all due diligence was exercised. A culture of risk-taking is essential for a successful innovation process. Unlike products, many services are delivered by individual employees and the quality of service can vary greatly depending on the training and experience of employees. As a result, it is critical that personnel training is conducted properly regardless of whether the solution is a product, service or product/service combination.

6.2.3.19 Tools to Implement Total Solution DevelopmentWe review and suggest some common tools that can be used for each of the stages proposed in the TSD model (Figure 4.3).

Immerse Yourself in Customers (needs identification, segmentation, and selection).Regardless of the source of new solution ideas (inside or outside of the firm), it is essential that a new solution addresses some relevant needs of clients. This could happen ex ante, in the sense that a firm actively investigates clients’ needs and makes decisions on which needs to target, and what new solutions (service, product, or combination) to develop to achieve such goals. It could also happen ex post, in the sense that a firm will investigate, after a new solution concept becomes concrete (either from suppliers or competitors), whether this new concept addresses any substantial needs of its clients and is profitable. Regardless of the sequence, it is essential that a firm understands the needs of its customers and ensures that the new solution addresses their needs.

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There are several tools that can be useful, including one-on-one interviews, focus groups, observation, lead users, and even becoming a user. The most commonly used are interviews and focus groups, and it is important to understand the relative strengths and weaknesses of these two approaches. Interviews allow a respondent to open up, but it lacks the stimulation usually present in a focus group. On the other hand, some people are likely to go along with the majority during a focus group. Griffin and Hauser (1993) have indicated that both methods are equivalent in their ability to uncover customer needs, if enough interviews and focus groups are done. Passive observation has gained ground recently as an effective way to uncover customer needs. Passive observation requires a representative from the firm (or a third party) to tag along with the current users of current products (or potential customers), and observe how they initiate and complete various relevant tasks, and try to identify their unmet needs (frustrations).

The objective during customer needs identification is to gather as many needs as possible, without prejudgment. The objective in needs selection/segmentation is to identify the most promising needs to work on, among all those uncovered in the previous stage.

The first step is to organize needs. The same need can usually be expressed in many different ways, and it is essential that managers establish the key dimensions of needs. This is normally achieved by affinity diagrams (a sorting process conducted by the firm’s employees), or customer sort (ask customers to sort the needs). The objective here is to reduce hundreds of needs statements to 10-20 major dimensions of needs (see Ulrich and Eppinger, 2004 for a very accessible discussion).

The second step is to understand how important these needs are to the firm’s (current or potential) customers. This understanding will help the cross-functional team to select the needs that it will target. If the customer base is small, interviews and focus groups will be best. Otherwise, a quantitative approach (e.g., survey) is more appropriate. There are several variations of surveys that can be used for this purpose. First is the compositional approach, which asks direct questions and asks respondents to compare explicitly among different needs. Second is the decompositional approach, including conjoint analysis, which asks respondents to evaluate a combination of needs; their specific valuation for each need is then inferred from their responses.

The third step is to select segments to target. More than likely, the customers’ preferences of various needs are heterogeneous. Segmentation allows a firm to do at least two things: (1) identify the most profitable segment; and (2) avoid direct competition. Segmentation can be done qualitatively or quantitatively. Qualitative segmentation usually requires managers to brainstorm, based on the information collected from the previous step, combined with their own judgment. It is important that a cross-functional team should be charged with this task, to bring all perspectives to the table. The quantitative segmentation is best if there are quantitative preference data (e.g., from surveys). Tools such as cluster analysis have been used successfully for this purpose.

Generate and Assemble Ideas. Once the target segment and its core needs are identified, the next task is to generate ideas to address these needs. Sometimes a product is the answer, sometimes a service is the answer, and sometimes a product/service combination is the answer. It is important that managers keep an open mind.

There are several different tools that can be used to facilitate idea generation. Overall, ideas can be obtained from individuals (e.g., employees, lead users), groups (e.g., brainstorming), external search (e.g., patent search, new use of existing products/services, competitors, upstream and/or downstream channel members) or collaboration (e.g., license, alliance, acquisition). A key dimension we included in the TSD model is to draw ideas from three sources – potential partners, supply chain members, and competitors.

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One very useful approach to new idea generation is to break down a specific task (associated with the targeted needs) into several components, and then try to come up with new ideas for each component (sometimes borrowing from existing products/services that target a component, but in a different context), and finally explore the combination of ideas (see Ulrich and Eppinger, 2004 for some examples). A firm that is interested in developing a new cell phone, for example, can break down the cell phone into the following components -- receiving signals from tower, transform signals to voice, transform voice to signals, human input/output interface (screen, keypad, etc), and send signals to towers. The firm can decide to generate new ideas for a human input device by searching for all possible human input devices used in other (non-cell phone) products and see which ones can be used for a cell phone (e.g., use the dial mechanism on iPod instead of keypad for inputting numbers).

Once the raw ideas are generated, it is important to categorize and assemble them based on their similarities. This step is essential before moving to the screening stage. It could be done either internally (by the cross-functional team charged with the innovation development), or externally (by focus groups of potential customers or lead users).

Screening Ideas. In most cases, managers will end up with more ideas than they can implement. As a result, it is critical to screen the ideas and identify the best ones. We suggest a combination of non-compensatory and compensatory screening tools. In the non-compensatory approach, an idea will be eliminated if it does not pass the threshold of one criterion. In the compensatory approach (e.g., weighted average), an idea will only be eliminated if the overall score is below the cutoff level (Urban and Hauser, 1993).

We suggest a two-step process for idea screening. In the first step, we recommend mostly non-compensatory rules, and the objective is to quickly eliminate those ideas that clearly will not be able to satisfy the firm’s objective. In the second step, we recommend a combination of non-compensatory and compensatory tools, and business analysis should only be done for those ideas that pass the first step of screening.

It is important to recognize market potential, cost, and risk associated with each idea. In most situations, the business analysis should include at least three scenarios: most likely scenario, best case, and worst case. If possible, some types of probabilistic outcomes should be assessed. There are two cautionary notes: (1) business analysis is only as good as the input, and it is critical to vet the input data carefully; (2) the business analysis should only serve as guidelines, and should not be taken literally. In most cases, business analysis should serve to attest whether certain thresholds will be reached for a given idea.

It should be noted that there are three key “soft” dimensions that are equally important in this screening process, compared to the “hard” data (e.g., projected market share, net present value). They are (1) strategy fit; (2) culture fit; and (3) organizational change fit. We suggest non-compensatory rules might be more appropriate for these criteria. For example, if a new solution does not fit the culture, it should not be moved forward, regardless how attractive the solution is otherwise.

Design and Prototype Solution. Unlike product design, service design usually involves intensive customer participation; it also must address perishability, intangibility, and other characteristics of services. A solution involving product and service combinations should also take this into consideration.

Several tools have been suggested and used, including service blueprinting (Shostack, 1984), functional analysis (Berkley, 1996), and structured analysis and design (Congram and Epelman, 1995). More recently (Zhang et al., 2005) have suggested that TRIZ (Theory of

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Inventive Problem Solving, originally proposed by Altschuller and colleagues in 1946) can be a useful tool for service design.

The proposed solution should be tested at this stage, and the objective is to quickly eliminate losers without spending additional money on further development. In most cases, a firm should have multiple solutions at this stage for testing, with the objective of selecting a final solution to go into the next phase of development. Several methods are commonly used in this stage. Qualitative methods include focus group and lead users. Quantitative methods include surveys.

Market Test and Validation. In many cases, a new solution identified through the TSD process should be tested in the market before full launch. The purposes of test marketing are two fold: (1) identify a loser (if it is indeed a loser) without spending major cost associated with scaling up; (2) obtain feedback to fine-tune the new product/service (e.g., positioning, channel). There are many different tools that can be used for test marketing.

Pseudo-sale involves providing the new product/service to a selected few customers, observing whether they are willing to spend money purchasing the new product/service, and whether they will make repeat purchases after experience with the new product/service.

Controlled sale is more systematic; a specific group is targeted, but the products/services are delivered through (some) regular channels/contacts. This could include direct marketing, minimarket, and informal selling in the business markets.

The full scale test marketing involves delivering a new product/service to a representative segment/location of potential customers, and utilizing all marketing arrangements that are planned for use in scaling up.

If possible, a market test should be designed in a way that certain conclusions can be drawn easily, if possible. For example, if a SME wants to test which of two different segments of customers it should target, it should include a large enough sample (customers) from both segments, and ideally, at geographically separate locations.

When considering various test marketing, managers should keep in mind the cost of such testing, as well as information leaking to potential competitors. This is particularly true in new services, as they are much easier to imitate and subject to less legal protection.

Reviews (pre-commercial business analysis gate) should be conducted after test-marketing. There are several purposes for this: (1) to identify problems that can be corrected, and then go back and revise the solution (product and service) to remedy them; (2) to formulate better marketing strategies; and (3) to learn lessons for future innovation development.

Ramp-up and Launch. Due to the nature of services, managers should be prepared to scale up quickly to preempt potential competitors and realize maximum profit. Standard operation management skills can be used, and various external parties should be involved (e.g., supply chain members, partners).

Post Launch Review. This is the place where lessons are drawn.

6.2.3.20 TRANSITION STRATEGY

Manufacturing companies find it difficult to enter service-centered businesses, and thus fail to exploit the financial potential that such businesses offer. Nearly all product manufacturing companies that invest heavily in extending their service businesses increase their service offerings and incur higher costs, but do not always get expected corresponding higher returns. This is referred to as the “service paradox” (Gebauer et al., 2005). Effective

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transition into a service-centered business requires a transition strategy as well as management of employee motivation and supporting organizational structure and culture.

This section suggests potential paths that SMEs may take to increase revenue from selling services. We will start by assuming that SMEs have little initial experience with selling services, so that we can discuss the entire journey that these firms may have to take. SMEs with moderate experience in selling services can start the journey at their current level of capability and take potential paths from that point forward. In all cases, top management motivation and leadership are essential to decide on the path to take, communicate the decision broadly and consistently to all employees, and provide the resources to assure that the path is taken. In addition, each part of the path has its own organizational change challenges that must be overcome (Table 6.2.5).

Table 6.2.5 Path from Product-Centered to Service-Centered Business

Phase IServices embedded in

product sale

Phase IIServices provided to the installed base

Phase IIIServices based on customer relationship

Path from Product-Centered to Service-Centered Business →

Transition

Issues

• Add product-centered services• Consolidate services into a single unit• Staff and train service sales force• Develop incentives, measures, rewards for selling services• Build a serviced centered culture

• Base business model on quick response and customization• Shift downtime risk from customer to service supplier• Transition fromtransactional to relational selling

• Base business model on low cost and convenience over product life• Extend customer relationship deep into value chain• Develop TSD skills

6.2.3.21 Phase I: Services Embedded in Product Sale

The journey from product-centered to service-centered offerings usually starts by adding product-centered services to the sale of existing products, e.g., maintenance, spare parts, installation and training. The latter two may be part of the sale price (at or below cost) because the product may not function properly without providing them. Maintenance and spare parts could be part of the initial sale or offered through a one-year warranty.

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L

evel

of

Dif

ficu

lty →

Experience in offering such services allows the firm to develop response capability, reputation and image with customers. It also gives the firm experience in working with customers between sales, which can be a prelude to a shift from transactional to relational selling. At the end of a year warranty, single or multi-year service contracts can be proposed to the customer.

In order to assure that services receive the attention they deserve, firms should consolidate all services into a single department, and give its manager profit and loss responsibility (Gebauer et al., 2005; Oliva and Kallenberg, 2003). Consolidation allows the firm to concentrate on developing a service-centered culture that emphasizes the firm’s new values and goals such as responsiveness, speed, customization and customer satisfaction. Consolidation also helps to establish a separate reward structure that rewards employees for culture-supportive behavior. Employees in this unit will need to be motivated to relate to customers differently than those in manufacturing units. Dialogue is essential for success. These employees may need to be trained to relate to customers or selected according to certain criteria. Similarly, it is probable that there will be conflicts between product and service departments, as the firm’s priorities shift. It is important that employees understand their function within the company and how it relates to the whole company. Managing any firm is inherently difficult; however, in a hybrid company the management problem is exacerbated as two different modes of operating are actually pulling against each other - the more rigid and disciplined stage-gate approach to new product development and the more flexible, inclusive and relational context in which service innovation flourishes. This is perhaps even more difficult in SMEs as they tend to have more conservative management styles and are motivated to maintain stability and life-style rather than to innovate.

Transitioning from a product- to a service-centered firm requires organizational-based culture adjustments. Culture is defined as a firm’s values, norms and beliefs. A service-centered firm values flexibility, variety, responsiveness, speed, customization and customer satisfaction. Its norms, or standards that are accepted as status quo, should reflect a high priority on customer relationships. In contrast, a product-centered firm’s norms should show a high priority on new product development and time-to-market. Similarly, a service-centered firm believes in adding value to its customers. Values, norms and beliefs shape the firm and drive employee behavior. Some companies will have a tougher time with the transition to a service-centered culture; however firms wishing to shift from product-centered to a service-centered business should adopt a culture that places a high emphasis on customer satisfaction.

In our earlier study (Warren and Susman, 2004), we examined the cultural factors that separate excellent innovative SMEs from others over a long period of time. Interestingly, many of these had moved from a pure product-centered business model to one where service components played an increasing role. It is worthwhile therefore to recall the attributes that we associated with such companies as they provide a guideline for SME managers that wish to add services to their business model. These cultural attributes are explained in Table 5.2.

In addition to culture, the goals of a service-centered firm will also be different than those of a product-centered firm. Thus, the firm’s management team must set realistic goals with participation from affected personnel in order to achieve its new objectives. These goals should be customer-oriented. For example, goals that a service firm might set include a goal for selling a realistic, but challenging number of services per month as a revenue goal, or socializing with x number of customers x times per month as a customer relationship building goal. Whatever goals the firm decides to implement, it is important that the affected people are included in the goal setting decision process. It is critical that goals are not applied too aggressively as research shows that unrealistic and unattainable goals result in unmotivated and cynical employees (Gebauer et al., 2005). Further, research suggests

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that goals should be broken down to the individual level as “sub goals” that contribute to the overall “corporate goal”, and that those goals should be connected to the reward structure (Gebauer et al., 2005). When employees can see that their task contributes to the overall strategy and goals of the firm, they are more motivated to achieve their objectives (Boswell and Boudreau, 2001).

Management tends to get what it rewards, thus it is essential to link the reward structure to the firm’s strategy . This means, that a service-centered firm’s reward structure should focus on services and customer relationships. Rewards can be tangible in the form of monetary bonuses, or they can be less tangible in the form of recognition, promotions or empowerment. Regardless of what type of reward is given for a certain behavior, the objective is to make sure that rewards are associated with behaviors that management would like to see increase (Susman et al., 2006).

In addition to goal setting and reward structure, it is imperative that service-centered firms have service-centered performance measures. These performance measures include customer satisfaction, employee satisfaction and business success (Gebauer et al., 2005). In a product-centered firm, customer satisfaction is based on the product, but in a service-centered firm it is based on service delivery, employee friendliness, value-added, flexibility, customization, etc. Thus, customer satisfaction may be more difficult to achieve in service firms. It is imperative that the firm focuses heavily on customer satisfaction because the reputation of a service-centered firm for customer satisfaction is very important. In fact, some firms find their customer satisfaction reputation so important to their firm that they would never consider outsourcing their service responsibilities to others (Simon, 1992). Of course, outsourcing would defeat the purpose of being a service-centered firm, but it exemplifies how important reputation is to such firms.

Once goals are set and a reward structure is in place, management must motivate the employees to reach their goals and be rewarded. Employee motivation can be described in terms of employee-push and -pull (Gebauer et al., 2005). Employee-push refers to management’s desire to motivate employees to engage in the service business. On the other hand, employee-pull refers to employees’ enthusiasm and self-motivation to commit to the new service initiative, resulting from understanding the benefits and results of pursuing services. Although employee-push might be sufficient initially, the goal in service firms is to stimulate employee-pull in order

Table 5.2 Cultural Attributes of Successful Innovative Enterprises

Alignment The degree to which the interestsand actions of each employeesupport the clearly stated andcommunicated key goals of theorganization

“We have clear aims and objectives whicheveryone understands; we build consensusaround key objectives; we recognize andreward loyalty”

Communication

The degree to which there is plannedand random interaction betweenfunctions and divisions at all levelsof the organization

“I am kept in the picture on how we areperforming; we have excellent formalchannels of communications; we use bestpractice knowledge transfer

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betweendepartments; we actively manage ourintellectual assets”

Empowerment The degree to which each employeefeels empowered by managers andthe organization

“As a manager, I am expected to delegate; wehave a ‘no-blame’ culture; we allow staff tomake decisions”

Engagement The degree to which all levels of theorganization are engaged with thecustomer and the operations of theorganization

“Management understands the operations ofthe company; I can share problems with mymanagers; I know why my job is important”

Freedom The degree to which self-initiated and unofficial activities are tolerated and approved throughout the organization, not instead of teamwork, but in addition to it.

“I am allowed to do my own thing in additionto working with my team; we encouragepeople to take initiatives; we recognize theindividual”

Honesty The degree to which each employeehas total confidence in the integrity,ability and good character of otheremployees and the organization,regardless of their role

“I trust the people I work with; I find it easyto be open and honest with people from otherdepartments”

Risk The degree to which the organization, employees and managers take risk

“I am encouraged to experiment; we takecalculated risks; we encourage trial and error”

Stimuli The degree to which it is understoodthat unrelated knowledge can impactproduct, service and operationsimprovements

“I am encouraged to search externally forinformation; I obtain data from many differentsources; we listen to suggestions fromsuppliers; we use consultants in focused roles”

Support The degree to which new ideas areencouraged from all sources andresponded to promptly andappropriately

“We encourage fresh ideas and new approaches; we reward innovative individuals; we reward innovative teams”

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Teams The degree to which teamperformance is emphasized overindividual performance

“We promote teamwork and make it the center of everything that we do; there are usually people from other departments in my team; we have both problem-solvers and ‘out-of-the-box’ thinkers in our teams”

Adapted from Warren and Susman, 2004.

to get employees involved. Internal marketing is one way that firms “sell” the service concept to their employees in order to get them to “buy-in” to the new initiative.

Management should provide excess human resources while service-centered learning is underway so that employees are free to engage in service exploration. Once the change process takes off and employee-pull is set in motion, employees will become the driver of new ideas. During shifts from product-focus to service-focus there are often conflicts between departments because of perceived status, either increased or decreased. For instance, production personnel may feel downgraded because of the new interest in service sales. In addition, service personnel may have inflated egos because of the new interest in their department. Management’s assurance of status parity can help to bridge the gap between departments, and unite them for a common purpose (Susman and Dean, 1992).

Once employees are motivated and united to achieve service-centered goals, they will need to be equipped with training that will help them meet their objectives. High expertise refers to the availability of knowledge about the firm’s basic technologies, customers and delivery processes. High expertise determines the success of innovative service concepts. Education and training on the job are relevant to improve the firm’s expertise, to enlarge the body of knowledge and to increase the creative and problem-solving capacities of employees. In product-centered firms, sales people view products as the main source of revenue and services as add-ons that are obligatory in order to make a sale. However, in a service-centered environment, sales people must view services as the main source of revenue; services can no longer be performed for free, but must be priced according to the value they add to the customer (Oliva and Kallenberg, 2003).Thus, sales people need to be trained to eagerly sell services, not just products (Johne and Storey, 1998).

Firms also may need to hire new personnel to staff the new service department. If the firm chooses to hire new employees it is critical that the new hires fit with the new service-centered culture in order to maintain it, and take the company in the right direction (Kotter and Cohen, 2002). According to Blumentritt (2004), there are three main characteristics to look for when hiring a new person into an increasingly innovative culture: curiosity, talent and motivation. Curiosity is important because people who are curious generally ask a lot of questions and usually have a very creative mentality that helps to stimulate idea generation. Likewise, talent is needed in order to understand how things work and finally motivation is necessary so that new service ideas are not only conceptualized, but also carried out to completion. In addition, the firm should also look for new hires that have diverse work experiences, education, demographics, knowledge, skills and abilities so as to bring new perspectives to the table. Newly hired personnel can also bring excitement, which can help build support and energy for the shift to a service-focus (Susman et al., 2006).

It is imperative that employees believe the internal marketing before they can get involved in external or interactive marketing. External and interactive marketing are strategies that can help employees to sell services. External marketing is about portraying the firm’s image to customers, but before employees can make that portrayal they must be sure of its

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existence, a belief that relates back to the firm’s internal marketing. Once the employees are assured that the internal marketing is credible (i.e., the firm will be able to keep the promises it makes), they are able to perform external marketing, which includes making promises to customers (Gebauer et al., 2005). Interactive marketing is the how the firm sells its value proposition to customers and begins the transition from transactional to relational selling. The first stage in the transition from transactional to relational selling includes marketing activities, which commonly don’t include any personal interaction between the firm and its customers. If the firm is just beginning the transition, it is likely that its customer/employee interaction includes advertising, sales promotions and publicity. It is important to use the relationships that are originally created in this phase to help develop more strong and long-lasting relationships in the future.

One of the most prevalent reasons for failure among firms focusing on developing new services is an inadequate assessment of customer needs and problems (de Brentani, 1995). An inadequate assessment of customer needs can stem from a lack of attention paid to understanding customers and creating value for them. New services cannot be developed effectively in isolation of customers. Front-line employees, the ones who commonly work the most closely with customers, need to be in-tune with customer needs, wants and frustrations, and should be encouraged to have frequent contact with them in order to build relationships (de Jong and Vermeulen, 2003). These employees also need to be committed and able to come up with possible ideas and solutions for customer problems. Sometimes this includes active listening, which entails engaging the customer in serious dialogue where the employee listens intently and asks questions to make sure he or she understands what the customer is trying to articulate. Exceptionally creative employees can listen to customer problems, generate their own ideas and solutions, and share them with others to stimulate maximum problem-solving ability. In any event, there are certain characteristics of company culture that can help to foster idea generation that is relevant to customer needs and wants.

Idea generation is facilitated by company culture. As aforementioned, company culture is a very important piece of the transition from product-centered to service-centered offerings. Cultural attributes that foster a supportive culture for idea generation include openness, management support, autonomy, information sharing, tolerance of mistakes and communication. Senior managers play a key role in stimulating an open culture. It is important that they share their ideas with employees, stimulate communication within the organization, and provide leadership to motivate employees (Johne and Storey, 1998). All too often service firms view their people simply in terms of an approach to deliver the product, i.e., a delivery system. However, because of the inseparable nature of services, front-line employees shape the quality of a customer relationship. de Brentani (2001) concludes that having a highly trained workforce that has an intimate knowledge of the customer plays an important role in the success of new services. Often, new service initiatives do not sufficiently involve input from front-line employees. In this case, the employees who should play a critical role in the process are uninformed and underutilized and will build resentment to the new initiative. As a result, co-workers can be the biggest resistance to innovation efforts, which is another reason to involve them in the process. Accordingly, management must consistently support the innovation process, encouraging employee involvement, and ensuring communication among the different functional areas (e.g., production, process design, IT, service delivery and marketing) to drive service innovation (de Brentani, 1995).

In addition, autonomy is another characteristic of an open culture. Autonomy is the extent to which followers are given latitude to carry out their tasks without excessive supervision (Basu and Green, 1997). When workers experience autonomy, they feel less constrained to explore opportunities and to generate ideas. Innovative new services can result from this. Similarly, information sharing among employees should be encouraged so as to generate more ideas to satisfy unmet customer needs (de Jong and Vermeulen, 2003). Additionally,

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task-rotation (i.e., having employees cross-trained and able to perform other company tasks) also helps to broaden employees’ points of view and problem-solving ability, enabling them to generate more ideas (de Jong and Vermeulen, 2003).

An open culture supports idea generation and fairly evaluates each idea that is generated, no matter how outlandish it seems on the surface Further, this type of culture also tolerates errors and even celebrates failures as long as lessons are learned. Thus, if an employee took the initiative to generate ideas for solving a customer problem and failed, the person would still be rewarded for his or her efforts according to the rewards policy, as long as the employee (and the firm) learns from the mistakes. An open culture should value experimentation and should understand that sometimes the firm will need to “fail early and often to succeed sooner” (Kelley, 2001). Employees should understand that learning from failures is often a key to success (Susman et al., 2006).

As always, management needs to ensure that there are open channels for communication, both vertically and horizontally (Susman et al., 2006). Reducing the number of levels in a company will result in a flattened structure. Flat structures allow employees to see “the big picture” and minimize distortion by reducing the levels through which communications must pass. Flat structures also encourage an “open door policy” where employees have easy access to top management. This helps employees to be able to contact people in other functions directly without going through and/or clogging other channels. It should be noted that the individuals with the most formal authority aren’t necessarily the most knowledgeable on a certain subject. Employees should be permitted to seek advice from those who have authority based on knowledge as well as position. Information should also be shared with employees at all levels (e.g., service, production, financial, marketing) by publishing newsletters or using other communication channels. Managers should make sure that everyone is on the same page and minimize symbols or signals of status differences so that some employees don’t feel less valued than others. In order to encourage teamwork and idea sharing, it is important that employees feel equal with their peers.

6.2.3.22 Phase II: Services Provided to the Installed Base

The next step is to extend services from the sale of existing products to providing services to the firm’s installed base or even to its competitors’ products. The latter is especially opportune if competitors do not offer such services or offer inferior service. Potential service revenue from one’s own and competitors’ installed bases depends on how many generations of product are in it (the older the product, the larger the installed base). Enough experience may have accumulated to know what parts wear out most frequently (and how much they cost to replace) and what alternative sources of parts may be available (e.g., after-market). As sophistication of the average product in the installed base is likely to be less than that of currently sold products, service may now include upgrades and refurbishing. One major challenge is to assure that the installed base is not more widely dispersed geographically than the firm can reach easily. Responsiveness is a key to reputation and the firm cannot afford major holdups because technicians cannot be deployed where needed. Contracting such work to outsiders has reputation risks and inhibits feedback and learning opportunities from the field. It is better to overstaff inhouse personnel than risk ineffective response (Gebauer et al., 2005). The firm also can start to offer services where its installed base is most dense, but supplement these services elsewhere with a 24/7 help desk and self-diagnostic software where applicable.

Up to this point, the firm’s business model need not shift dramatically, but further steps will require a more dramatic shift. The value proposition underlying the Phase II business model is to offer the customer equipment availability, operational uptime, and do it better and/or cheaper than the customer can. The skills of the firm’s employees now must extend beyond accurate diagnosis and speedy repairs, but include surveillance, monitoring, information gathering, interpretation, and the firm’s willingness to invest in data capture and storage.

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The move to Phase III should not be made until the firm has thoroughly mastered selling services with current sales or to its installed base. Firms can move from transactional to relational selling by offering their customers a fixed-term contract for services. Customer interaction in this phase should include employees creating a friendly and helpful atmosphere for the customer. In addition, regular contact with customers via opportunities such as newsletters, users’ clubs, chat rooms, etc. will help make the transition easier. The move to fixed-term service contracts is prompted and accelerated by the firm’s desire to increase capacity utilization of the higher fixed costs of its newly centralized and specialized service unit. The value proposition to customers is equipment availability or up-time. The firm’s responsiveness and problem-solving capability underlie its ability to deliver on this proposition. However, responsiveness may not be enough. The firm now has a strong incentive to innovate with methods for preventive or condition-based maintenance. The firm might also consider offering consultation services to help its customers develop their own diagnostic and response capabilities.

6.2.3.23 Phase III: Services Based on Customer Relationship

The next step is to shift from sale of individual products to sale of services embedded in products, comprehensive services or integrated solutions (Wise and Baumgartner, 1999). The first option is primarily an engineering solution in which services that the customer previously performed are now embedded in the product or at the interface between simpler and previously isolated product components. The value proposition is that technology can substitute for the customer’s current service personnel. The second and third options require understanding the product’s context of use and need for ancillary services, and require a more radical transformation in the business model. The firm now offers the customer total solutions to problems that relate to consumption or use of its products. Some of these problems may be known initially and included within the scope of a fixed-term contract, but other problems await discovery as the firm and its customers deal with problems that emerge over the course of their relationship.

Smaller customers may lack the knowledge or resources that larger customers possess to solve their operational problems or pay for infrastructure and ancillary services that relate to the effective use of their products. This presents an opportunity for market segmentation and focus on customers with the greatest need for the firm’s services. Firms can recognize the need for new services by studying how the customer uses or consumes the firm’s current product and suggesting that they can perform these activities better than the customer can. It can do this by focusing on mastering these skills. The firm now needs an effective product or service development process with which to generate ideas and transform them into new services (replaces or creates activities up and down the value chain). Firms that already have an effective NPD process in place can make the transition to NSD more easily, especially if they have previously used cross-functional teams. However, there clearly are differences (de Jong and Vermeulen, 2003). For example, customer interaction is higher with NSD and less attention is given to prototype test and launch.

We propose going a step beyond NPD or NSD because of the nature of the type of services that firms and their customers will co-develop and the intensive interaction required to develop them.

We described this advanced step as “Total Solution Development” in section 3, and offered more specific details about it in section 4. Cross-functional (and cross-firm) team composition, timing (after need recognition) and location (firm’s or customer’s premises) are less predictable than with NPD and NSD. The “fit” issues are also more comprehensive, including the need for strategic, organizational and culture fit of solutions to the customer’s operations and the seller’s delivery capabilities. Firms should encourage employees who are in regular contact with customers to share ideas with other employees concerning optimal use of the product, and observe points of pain and frustration that customers experience in

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using the product. These ideas and observations, if captured, may help create a proprietary database that can give the firm a competitive advantage over its rivals.

In this phase, employees should be immersed in their customer’s business. Employees should be able to see the points of pain (Gustafsson and Johnson, 2003), or frustrations that customers have with existing offerings, and generate ideas for new solutions. Since the employees are very close to the customer, the solutions generated from this type of encounter are often very valuable to the customer.

What can we learn about the development of new services from the five mini-cases discussed in section 3? What are they offering of value to customers beyond the sale of a basic product (e.g., bolts, containers, detergent)? Greif Packaging and General Fasteners observed how customers used or consumed their product and believed that they could do this better by specializing in activities that customers currently perform but don’t have the skill, time or interest in mastering to the same degree. Taprogge specializes in providing maintenance activities and spare parts.

These are traditional services, but a natural offering for a company that sells such sophisticated equipment. ChemStation, DeAngelo Brothers, and Taprogge used IT to capture data about their products’ performance in different contexts and developed proprietary databases that allowed them to customize use of their product to meet specific customer needs. All five cases required their work force to be extensively trained in activities that their customers could not do as well as they could. In all cases, once a firm establishes a foothold inside the customers’ operations, they are in a privileged position to offer new ideas to progressively take over more of their customers’ current activities or suggest new ones to perform.

6.2.3.24 RECOMMENDATIONS FOR THE MEP NETWORK

This report has reviewed the literature on innovation for creating SME growth. In particular, we have researched one specific major growth opportunity for such companies, namely the addition of complementary services around manufactured products. This strategy can provide higher operating margins, greater revenue stability and, most importantly, heightened barriers against competitors, including non-domestic suppliers.

However, the transition to new service-centered business models does not come easy. The admittedly limited research on so-called “hybrid business models” indicates that the value systems, customer interfaces, incentives and innovation processes must be substantially different from purely product-centered firms. Thus the move to these more complex yet more robust business models requires confronting the need for change management. As we have seen, SMEs may have in-built cultures and governance methods that make such changes difficult to execute. They need support in initial analysis of their current and potential business models, development of a transition strategy for changes in operations and structures needed to succeed, and handholding throughout the process.

These tasks are an ideal role for the MEP outreach network if the relevant consultant skill set can be tapped. Before suggesting how this might arise, it is necessary to understand the current focus of this network.

6.2.3.24 Current Skills within the MEP Network

In order to determine the present strengths of the MEP network, we analyzed the MEP database of past success stories coupled with selective interviews.

We reviewed a total of 689 “success stories” from 2002 to 2005 that were posted on the NIST MEP website. All these stories were divided into four broad categories based on the

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type of consulting services provided by MEP – Operational, Marketing, Funding, and Business Planning. Each story was put into one of the categories based on the following criteria:

1. Operational – six-sigma, lean, ISO, IT implementation, plant/equipment design2. Marketing – product design, market entry3. Business Planning – organizational restructuring, change in business models4. Funding – anything related to finance

Figure 6.1 shows the breakdown of the stories by category. About 83% of the consulting assignments were related to operational issues faced by the SMEs and most of them were related to “lean” implementations. Only 7% of the assignments were related to business planning. Within this 7% (or 45 assignments) MEP had helped the SMEs change their business model only in about 20 assignments, less than 3% of the total support activities.

Following this analysis, we conducted random phone interviews with four of the MEP center directors. The interviewees varied greatly in their opinion about the role of MEP in the economy. Many of these directors clearly felt that lean implementation was the most important service offered by MEPs, but some clearly understood the need to move towards “top line consulting” and have been pushing for change. The centers under their supervision have been making strong progress in marketing and business planning related consultancies.

We also found that MEP centers do not interact with one another on a regular basis. Hence there is very little knowledge sharing among the centers. Consultants rarely refer to the success stories posted on the website for information and insight. Most of the collaboration among centers is based on personal relationships among the directors and quarterly

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national conventions. As a result, national customers usually have to work with many centers and fail to get the desired quality and breadth of service.

6.2.3.25 Statement of the Key Problems

Our research has shown that historically there has been very few outreach projects undertaken by the MEP affiliated offices that address the issues of innovation, new business models, change management and revenue enhancement through service additions.

We have also seen that the addition of services around manufacturing products can have major benefits in terms of increased revenues, profits and creating barriers to competitors. Yet, although adding services may seem, at first, a rather easy expansion of current business, many companies have experienced great difficulties in managing these changes. Questions of innovation processes, compensation structures, customer interfaces, management of intellectual property, sales force management etc. all require major changes first in understanding the cultural issues and then adapting the organization shifts that are demanded.

Our assessment of the current resources and experiences of the MEP outreach consultants indicate that, before these changes can be transferred to the SMEs seeking to expand, there needs to be a major shift in the skills and techniques deployed by these consultants. Indeed, they themselves may not be able in most cases to absorb and evangelize these new ways of doing business. Further, in comparison with the current skill sets employed by MEP programs, such as TQM, lean manufacturing, etc. there is a limited supply of consultants who have the appropriate knowledge, skills, and application to affect the sorts of change management and business model innovation that we are addressing here.

It is therefore unlikely that, at least on a local or regional basis, current consultants within the MEP network are sufficiently knowledgeable to engage and excite SME owners and managers of the potential of changing their business model to include services and all that it entails; and even less likely that there are local skills that can effectively help these companies through consulting projects.

A further shortcoming is the static nature of the case histories that reside within the MEP database. We found this database rather difficult to use. However, the more important issues are concerned with both content and format. The content is largely written for the benefit of the current project, i.e., how the work was recorded, rather than specifically as an aid to subsequent remote, future projects. The title of “success stories” in itself can lead to further shortcomings as cases are skewed to show that projects are “successful” where the honest reporting of problems and failures may indeed be more valuable. Many of the reports are sterile in content and it is difficult to relate to them as a model for a new challenge. They are also almost entirely involved with cases that are not relevant to the changes that we are exploring.

6.2.3.26 Recommendations

In order to break out of these very major resource and knowledge shortfalls, we need to instigate a scalable initiative that meets a number of new demands including:

• Maximizing the use of the scarce consulting resources available to help SMEs• Adding new skills via focused training of those local consultants who have the

propensity to provide outreach services in the field of change management and service addition

• Providing tools to this community• Leveraging experience across assignments.

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The current MEP database may not fulfill the purpose for which it was created, either in content or in user value. Therefore, we make the following recommendations:

Recommendation 1 - Leverage the existing skills between MEP centers

We recommend augmenting the current database with a dynamic knowledge network. (See recommendation 5 for a more detailed discussion of this topic.) NIST would support a secure portal that enables local MEP centers to interact in real time to tap into specific and relevant know-how tailored to each case. This portal would be used to post “client challenges” which would stimulate consultants nationwide to offer advice, cases, and possibly direct involvement.

Recommendation 2 – Develop new skills

Our analysis shows that there is a major shortage of appropriate skills in the MEP consultant network. In order to increase the availability of growth strategy and change management skills, it is necessary to expand the population of consultants versed in such skills.

We recommend the development and provision of a training program for existing MEP linked consultants to provide them with the skills to excite MEP targeted SMEs in the opportunities for growth, to analyze the existing firm positioning and possible new opportunities, and to guide the client through the change process. The courses would be residential, one week in length and be based on actual cases and examples. The consultants would learn how to use tools specifically designed for tackling the challenges faced by SMEs. This program would be positioned as a retraining program for MEP consultants. The target should be one consultant from each location identified and qualified by the MEP team at that location.

Recommendation 3 - Analyze use of the current MEP database

We recommend a web-survey of existing MEP centers to determine:

• The current use and value of the database• Research to determine features and expectations of the knowledge portal• “Market research” for the proposed training courses and content

Recommendation 4 - Develop a research agenda

As reported in section 3, there is a paucity of research on service innovation and in particular the additional challenges of innovation in hybrid companies. This is despite the fact that current U.S. economic activity in the private sector based on service revenues exceeds 82% (Rae, 2005). Moreover the research is largely European in content. We recommend that NIST develop an agenda for research in hybrid companies. This would directly benefit SMEs in the U.S.

Recommendation 5 - Develop a dynamic knowledge management portal

Background. One of the shortcomings that we must address is the efficient use of experience and knowledge. Every MEP client project cannot be seen as being entirely unique; we must build on the expertise that is accumulated. We look as this issue in the context of knowledge management. Considerable attention has been given over the last twenty or so years to this field. In Figure 6.2, the shifting market value of enterprises largely from tangible to intangible assets (Hand and Lev, 2003) leads us to believe that knowledge, which is an intangible asset, is becoming more and more important. Attempts have been made to codify and apply the knowledge created by a company for future use and application; knowledge is a firm’s primary intangible asset. This should be no different within the MEP network.

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A number of researchers recognized that it is useful to consider two categories of knowledge – explicit and tacit (Nonaka and Takeuchi, 1995; Hinds and Pfeffer, 2001). Broadly speaking, explicit knowledge can be structured and recorded for the benefit of future users without any interpretation from the creators of the knowledge. Examples might include maps, recipes, operating manuals, etc. Within this category are the case histories that reside in the MEP database. They are rather sterile reports that are built around standard terms, categories and data, and do not really convey any of the actual “touchy-feely” attributes which are much more important in this case.

Tacit knowledge, on the other hand, is more complex and has personal interpretations embedded within it such that the value for future users requires access to the implied knowledge and experience of the creator. For example, Kraft manufactures a range of processed cheeses that are noted for their quality, and consistency. Yet the raw materials are highly variable coming from a range of farms in which the product quality, flavor, texture etc. may depend on a large number of variables, such as weather, herd management, timing etc. Selection of the mix of raw materials into the manufacturing process is aided by tasters who choose the blend from the warehouse of individual raw materials in order to achieve a consistent output. The selection depends highly on experience, taste, health of the tasters, etc. This knowledge is impossible to codify and has a high tacit content.

These two classes require different methods for transmission between individuals and teams wishing to avail themselves of the intellectual content. For example:

• Explicit-to-explicit is the simplest transfer challenge exemplified best by web-publishing such as the MEP database. There is a wealth of information that is not

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tailored to the user. If it is structured and codified, then it can be of considerable value.

• www.webmd.com for example has a wealth of health-related information. Often however, it requires the experience and tacit knowledge of a trained physician to interpret and diagnose complex disease states. Current web-sites and brochures targeting economic development are rich in explicit knowledge.

• Explicit-to-tacit is typified with a learning environment particularly where students are required to experiment with published information and develop tacit knowledge for themselves.

• Tacit-to-explicit has been the Holy Grail for many years spawning the field of expert systems. The aim has been to somehow capture the subtleties of tacit knowledge and use computer systems to codify and interpret them for particular future instances – replacing the cheese taster above with a computer program. Apart from very limited domains, this approach has been largely unfruitful.

• Tacit-to-tacit is still the most powerful method of knowledge transfer using such techniques as story-telling. Fortunately, now that the Internet has developed, we can deploy systems that allow tacit knowledge application without the necessity for direct one-on-one contact. This is included in the solutions we are proposing.

Dynamic knowledge management. Many large enterprises have invested millions in creating knowledge management systems based on attempts to catalog knowledge to be searched and applied later. It is now generally accepted that these investments have been largely unsuccessful. There are several reasons for this. The first set of barriers is considered to be a result of the way that humans assimilate cognition:

• Expert knowledge creators, when asked to codify their knowledge, embed significant tacit information using more abstract concepts than novices can comprehend.

• Experts do not remember how they learned and hence set expectations too high – novices may then just give up.

• Experts tend to emphasize their most recent experiences to the detriment of the earlier supporting knowledge and experience.

• Tacit knowledge is inherently difficult to verbalize. (How do you learn to swim or ride a bike?)

• Tacit knowledge is difficult to generalize to other situations. (Is cheese making similar to chocolate blending?)

• There is little incentive for someone to take the time to codify his or her knowledge for others’ later benefit. Even if an appropriate incentive system is there, it is difficult to codify knowledge for yet to be defined problems.

The second group of barriers is related to motivational limitations:

• Competition can be a disincentive, with participants believing that their personal promotion, status, raises, etc. may be lost if they teach others. They believe they must “look better” than their peers.

• Team cohesion forces may prevent open exchange of valuable knowledge.• The belief that “knowledge is power”. (If I am the only one who can blend cheese,

then my job is secure forever.)• There can be hierarchical and status barriers to open knowledge exchange.• Reward and incentive systems can counter openness.• Organizational trust can be a barrier, (Do I trust others not to use this knowledge

against me?).

It is this second group that we must be cognizant of as we develop a cooperative innovation network.

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Over the last few years there have been some developments based on the evolution of the Internet that are successful at overcoming the inherent shortcomings of static knowledge management. These are generically referred to as “dynamic KM systems”. They work as follows:

Knowledge is not preemptively codified, but is only requested when there is a need.“Challengers” create a web-request which is then responded to, based on the knowledge and experience of the network. Experts do not work in isolation and, responding to a specific need, they are more likely to offer tacit information as well as tapping into their own extended expert networks. The challenge therefore becomes alive as each contributor builds on the knowledge of the others. The environment is collaborative, active, dynamic, and innovative.

Portal Features and Operation. Based on the above concepts, we propose a secure knowledge management portal for the MEP network. Access to this portal will be only for local MEP offices and approved and relevant consultants who are able to address the new issues confronting SMEs. We refer to the MEP offices as “gateways”.

The portal will also have resources and tools for the local offices to help them determine when it would be appropriate for them to “post” a request on the portal for help. These resources and tools could include such topics as:

• Analysis tools to determine whether the company in question is ready and accepting for considering changes in its business model.

• Techniques for judging the cultural attributes (see section 5) that can help determine how open the company may be to change.

• Access to “stories” that illustrate clear cases that show how moving into services has been accomplished – not only the successful parts but also the difficulties encountered. We suggest rich media materials for these to add “mapping” of the example to the new case.

• Bios and contact information for the consultants.

The aim of these tools and support data is to prime the outreach function at the MEP offices on which types of companies to approach with materials to provide discussion topics.

When an office identifies and engages with a company seeking to change its business model, for example, the “challenge” will be compiled in a standard format on the portal. The posting office can remain anonymous together with the target company. The posting person can select which consultants and experts may be able to help.

The “case” is then posted and all the selected possible experts are e-mailed with a password to access that case and invited to comment, suggest help, guide to materials, etc. This dialog is open to the selected community as well as the company executives so that they can also participate in the knowledge exchange and thereby become engaged and encouraged to continue.

The most appropriate contributors can then be approached by the local MEP office together with the company and an appropriate project designed with the most relevant resources.

Upon the completion of the project, a case will be constructed again in standard format with links to the participants and thereby become part of an ongoing and active database for future projects as the links can be used to tie in the experts for future cases.

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OUTSOURCE PROVIDERAn outsource provider partner provides the data center or IT infrastructure to host the customer's application(s). The applications would be licensed to the customer and the outsource provider would have a contract in place directly with the customer for these services. An example of an outsource provider is EDS.Contractually, YOUR COMPANY would have system environment technical support and 2nd level product technical support agreements in place with the partner. YOUR COMPANY would have a system license and 1st level product technical support agreements in place with the customer.Setting up outsource provider partners is a primary priority.

SERVICE BUREAU PROVIDERA service provider partner provides a standard configuration application to a customer. Service bureaus typically target the small to mid-size customer base. An example of a service bureau is GE Information Systems.Service bureaus are responsible for providing all implementation and ongoing support to the end customer. A system integrator may be involved during the implementation. The primary difference between an ASP and a service bureau is that the ASP licenses from YOUR COMPANY on a per customer basis. The service bureau licenses from YOUR COMPANY for use with multiple clients.YOUR COMPANY would provide second level support to the customer via the service bureau and system integrator, if involved. Contractually, YOUR COMPANY would typically offer a service use license. YOUR COMPANY would have system environment technical support and 2nd level product technical support agreements in place with the partner The service bureau would typically set up a transaction based payment arrangement between themselves and the customer to recover the license fee from YOUR COMPANY. Setting up service bureau partners is a primary priority.

SYSTEM INTEGRATORA system integrator partner provides implementation and configuration services to a buyer of Your product. An example of a system integrator is PriceWaterhouseCoopers.The system integrator is responsible for the project management, integration of Your product to 3rd party applications and configuration of Your product based on the business rules of the customer.YOUR COMPANY would provide second level implementation support to the customer via the system integrator. Contractually, YOUR COMPANY would typically have a 2nd level implementation support agreement with the system integrator.Setting up system integrator partners is a primary priority.

VARA value-added reseller (VAR) partner provides additional enhancements, products or services combined with Your product. An example of a VAR would be a partner who localizes Your product for international distribution.The VAR provides all 1st level support to the customer and licenses Your product directly with the customer. Contractually, YOUR COMPANY would have a reseller license, 2nd level implementation support, system environment support and 2nd level product technical support agreements in place with the partner.Setting up VAR partners is a secondary priority and will be formed on an as need basis.

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TECHNOLOGYTechnology partners offer products or services that enable Your product to have broader market acceptance or allow for a better return for the customer's investment. An example is IBM, who provides the system platform technology. Contractually, YOUR COMPANY would typically have co-marketing and developer agreements with the partner. An OEM agreement may be needed if the technology is bundled with Your product.Setting up technology partners is a primary priority.

PARTNERSHIP SCENARIOSThe following scenarios show which partners are necessary for various implementation and ongoing operational cases. Note that a single partner may fulfill more than one partner category.

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Customer buys licenseSystem run on customer premises

- - - - R O O/R

Customer buys licenseSystem run on outsource provider premises

- R - - R O O/R

Customer buys licenseSystem requires language other than US EnglishSystem runs on customer premises

- - R - R O O/R

Customer wants volume based pricingCustomer does not want to purchase licenseSystem outsourced

- - - R R O O/R

Where:R = RequiredO = OptionalO/R = some element may be required and others optional

PARTNER RULES OF ENGAGEMENT<This section defines specific deliverables and responsibilities in the partnership. When customized to fit your organization’s needs, it can also be used as a checklist for contract requirements.>

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OVERVIEW

PURPOSE

SCOPE

KEY OBJECTIVES & RESPONSIBILITIES

The following details the specific responsibilities and deliverables from both sides, by YOUR COMPANY and by the partner. Where C indicates provided by YOUR COMPANY and P indicates provided by partner.

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License to customer - C P - - - -Transaction/Usage charge to customer P - - P - - -License to partner C - C C - - -Product technical support, 1st level - - - - - - -Product technical support, 2nd level P - P P - - -Product technical support, 3nd level C C C C - - -Developer Support C C C C C - PImplementation support, 1st level - - - - P - -Implementation support, 2nd level - - - - C - -Product training, technical; to partner C C C C C - -Product training, technical; to customer P C P P - - -Product training, operational; to partner C C C C C - -Product training, operational; to customer P C P P C - -Product training, sales and marketing C C C C C - -Product hosting P P - P - - -Adjunct systems (i.e. bill print/stuff, …) - - P P - - -Reference in marketing/sales collateral material C/P C/P C/P C/P C/P C/P C/PActive reference by sales force C/P C/P C/P C/P C/P C/P C/PSales and Marketing P - P P - - -Requirement for partner's technology by customer where needed

- - - - - P C/P

Bundling of partner's technology into our product offering

- - - - - - C

Discount development environment - - - - - - PUse of system labs - - - - - - PWhere:C = Provided by YOUR COMPANYP = Provided by PartnerC/P = Provided by both YOUR COMPANY and PartnerRules of Engagement, Continued:<For each type of partner defined in the plan, determine the following:>

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DECISION-MAKING

<who will take the lead on certain types of decisions required within the partnership?>

RESOURCE COMMITMENTS

<what resources are needed; which party should take the lead on providing those resources?>

FINANCIAL

<What financial outlays are required to execute the partnerships, over what period of time? What’s the business model: how with the partnership make money for both parties? Include financial and ROI analysis>

STRUCTURE

<is the partnership a joint venture, are you joining an existing partner program, is the partner joining one of your existing programs?>

EXIT STRATEGY

<under what conditions do you see the partnership ending? How long is it likely to be productive for each party?>

OTHER

CONTRACTUAL REQUIREMENTS

The following are the types of necessary contractual arrangements, responsible party for creating the contracts and brief description of scope. Where C indicates provided by YOUR COMPANY and P indicates provided by partner.

Requirement Resp. for Contract

Scope

Developer PCo-Marketing CReseller COEM PLicense, Customer CLicense, Resell CLicense, Service CProduct technical support, 1st level

C

Product technical support, 2nd level

C

System environment technical support

C

Implementation support, 1st level

C

Implementation support, 2nd level

C

The following contract requirements are expected for the partner types:

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ASP

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Roles and responsibilities, primary contactsTechnical support: definition, levels, responsibilities, SLARevenue quotasReporting requirementsMarketing programs: list, responsibility, resources and fundingExit criteria: who owns what at the end (source code, derivatives, customer, prospect, lead data, etc)Custom development needsProduct release requirements, expectations, schedule (including demo versions)Milestones and commit dates for deliverables, paymentsService level agreement and remedies for non-performance

PARTNER CANDIDATES

BUSINESS PARTNER SELECTION CRITERIA

Type Must Have: Nice to Have: Must Not:Application Service ProviderComplimentary Products

Strong Direct Sales force

etc.

VAR Channel Sell directly competing products

Outsource Provideretc.

BUSINESS PARTNER CANDIDATES

Type Priority Primary Candidate(s) Secondary Candidate(s)

Application Service Provider

3 GEISCSCIBM Global Services

EDSConvergys

Complimentary Products

2 GE CapitalCellNet

Outsource Provider 1 GEISCSC

EDSIBM Global Services

Service Bureau Provider

1 GEISCSC

ConvergysIBM Global Services

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Type Priority Primary Candidate(s) Secondary Candidate(s)

System Integrator 1 PWCIBM Global Services

AndersenErnst & Young

VAR 2 PWCIBM Global Services

AndersenDMR

TECHNOLOGY PARTNER SELECTION CRITERIA

Type Must Have: Nice to Have: Must Not:E-Commerce Storefront

Ability to process 1000 transactions/hr with 3 second response time average

EDI/XML EBPPetc.

TECHNOLOGY PARTNER CANDIDATES

Type Priority Primary Candidate(s) Secondary Candidate(s)

Call Center Systems 2 SiemensComplex Billing 3 SAIC

LodeStarUTS

Credit & Scoring 3Document Management/Imaging

2 FileNET DocucorpEastman

DSS/Data Warehousing

3 CognosIBM

SASOracle

E-Commerce Storefront

1

EDI/XML 1 GEIS Sterling CommerceHarbinger

EBPP 1 TranspointCheckfree

CassCybercash

ERP 2 OracleBaan

J.D. EdwardsSAP

Facilities Management/GIS

3 ESRISmallWorld

AutoDeskIntergraph

Middleware 1 Crossworlds GEIS

BEA IBM

OMS 2 SmallworldTellus

ABB

Platform, hardware 1 IBM SunHP

Platform, OS/software 1 IBMMicrosoft

SCOSun

Sales Force Management/CRM

2 Siebel OnyxVantive

Supply Management 2 TransEnergy/Altra

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Type Priority Primary Candidate(s) Secondary Candidate(s)

Work Order Mgmt. 2 Logica James MartinFiled Crew/Ticket Mgmt.

2 MDSI Data CriticalUtility Partners

INTERNAL COMMUNICATION PLANInsert what needs to be communicated to other groups within your organization; how and when it will be communicated.

MILESTONESInsert timeframe and milestones of implementation of partner programs.

OBSTACLES TO SUCCESS

Sustainable development: a business definitionThe concept of sustainable development has received growing recognition, but it is a new idea for many business executives. For most, the concept remains abstract and theoretical. Protecting an organization’s capital base is a well-accepted business principle. Yet organizations do not generally recognize the possibility of extending this notion to the world’s natural and human resources.

If sustainable development is to achieve its potential, it must be integrated into the planning and measurement systems of business enterprises. And for that to happen, the concept must be articulated in terms that are familiar to business leaders.

The following definition is suggested:

For the business enterprise, sustainable development means adopting business strategies and activities that meet the needs of the enterprise and its stakeholders today while protecting, sustaining and enhancing the human and natural resources that will be needed in the future.

This definition captures the spirit of the concept as originally proposed by the World Commission on Environment and Development, and recognizes that economic development must meet the needs of a business enterprise and its stakeholders. The latter include shareholders, lenders, customers, employees, suppliers and communities who are affected by the organization’s activities. It also highlights business’s dependence on human and natural resources, in addition to physical and financial capital. It emphasizes that economic activity must not irreparably degrade or destroy these natural and human resources.

This definition is intended to help business directors apply the concept of sustainable development to their own organizations. However, it is important to emphasize that sustainable development cannot be achieved by a single enterprise (or, for that matter, by the entire business community) in isolation. Sustainable development is a pervasive philosophy to which every participant in the global economy (including consumers and government) must subscribe, if we are to meet

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today’s needs without compromising the ability of future generations to meet their own.

Implications for businessIt has become a cliché that environmental problems are substantial, and that economicgrowth contributes to them. A common response is stricter environmental regulation,which often inhibits growth. The result can be a trade-off between a healthy environmenton the one hand and healthy growth on the other. As a consequence, opportunities forbusiness may be constrained.

However, there are some forms of development that are both environmentally andsocially sustainable. They lead not to a trade-off but to an improved environment,together with development that does not draw down our environmental capital. This iswhat sustainable development is all about - a revolutionary change in the way weapproach these issues.

Businesses and societies can find approaches that will move towards all three goals -environmental protection, social wellbeing and economic development - at the same time.Sustainable development is good business in itself. It creates opportunities for suppliersof ‘green consumers’, developers of environmentally safer materials and processes, firmsthat invest in eco-efficiency, and those that engage themselves in social well-being. Theseenterprises will generally have a competitive advantage. They will earn their localcommunity’s goodwill and see their efforts reflected in the bottom line.

Practical considerationsWhile business traditionally seeks precision and practicality as the basis for its planningefforts, sustainable development is a concept that is not amenable to simple and universaldefinition. It is fluid, and changes over time in response to increased information andsociety’s evolving priorities.

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The role of business in contributing to sustainable development remains indefinite. Whileall business enterprises can make a contribution towards its attainment, the ability tomake a difference varies by sector and organization size.

Some executives consider the principal objective of business to be making money. Othersrecognize a broader social role. There is no consensus among business leaders as to thebest balance between narrow self-interest and actions taken for the good of society.Companies continually face the need to trade off what they would ‘like’ to do and whatthey ‘must’ do in pursuit of financial survival.

Businesses also face trade-offs when dealing with the transition to sustainable practices.For example, a chemical company whose plant has excessive effluent discharges mightdecide to replace it with a more effective treatment facility. But should the companyclose the existing plant during the two or three-year construction period and risk losingmarket share? Or should it continue to operate the polluting plant despite the cost of finesand adverse public relations? Which is the better course of action in terms of economy,social wellbeing and the environment?

Moreover, many areas of sustainable development remain technically ambiguous, makingit difficult to plan an effective course of action. For example, the forestry industry hashad difficulty defining what constitutes sustainable forest management. Some criticsbelieve that simply replacing trees is not enough, because harvesting destroys thebiodiversity of the forest. Clearly, more research will be needed to resolve such technicalissues.

From a broader perspective, however, it is clearly in the interest of business to operate

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within a healthy environment and economy. It is equally plain that, on a global basis,growing and sustainable economies in the developing countries will provide the bestopportunities for expanding markets.

To some, sustainable development and environmental stewardship are synonymous. Inthe short term, sound environmental performance is probably a reasonable objective formost businesses, with sustainable development as a longer term goal. However, this canlead to confusion. In the developed world, the focus is on environmental management,while in developing countries, rapid and sustainable development is paramount.The global economy is coming under growing pressure to pay for the restoration ofdamaged environments. But this economic engine is being asked to help solve otherpressing problems at the same time. The challenge is to solve all of these problems in asustainable manner, so as to generate continuing development.

Despite ambiguities about definitions, there is now widespread support for sustainabledevelopment principles within the business community. However, for that support togrow, it will be important to recognize and reward initiatives that are being taken to turnthe concept into reality.

Positive signs of changeWilliam Mulligan, environmental affairs manager at Chevron Corporation, reflects theview of many in the business community who believe that the environment is now amajor issue - one which presents both challenges and opportunities.

‘Over the last decade, we have seen many polls confirming the importance of theenvironment to Americans,’ he says. ‘Only an irresponsible company would dismiss thistrend as a passing fad or fail to recognize the need to integrate environmental

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considerations into every aspect of its business. Environmental excellence has to becomepart of strategic thinking. It is in our best economic interests to do so. In fact, wheneverwe are forced to change, we often find opportunities.’

This positive change in attitudes and practices is echoed by the Organization forEconomic Cooperation and Development, which says: ‘There is now a realistic prospectof harmonizing environmental and economic considerations, and thus of graduallyincorporating these objectives in policy.’

Many executives have demonstrated that pursuing sustainable development strategiesmakes good business sense. For example, a 3M manufacturing plant scaled down awastewater treatment operation by half, simply by running cooling water through itsfactories repeatedly instead of discharging it after a single use. Meanwhile Dow’s ‘WasteReduction Always Pays’ programme, which began in 1986, has fostered more than 700projects, and saved millions of dollars a year. And in a Westinghouse metal finishingfactory in Puerto Rico, the company reduced ‘dragout’ - the contamination accidentallycarried from one tank to another - by 75% simply by shaking the tank to remove solidsbefore releasing the chemical to the next tank.

Pacific Gas and Electric decided that energy conservation was a more profitableinvestment than nuclear power, and McDonald’s made its well-publicized move fromplastics to paper the cornerstone of a much broader, but less visible, waste reductionstrategy.

The managers of these businesses clearly believe that environmentalism has something tooffer business.

In an interview with Tomorrow magazine, John Elkington of environmental consultancy

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SustainAbility says: ‘We are seeing the birth of corporate environmentalism. In fact themain impetus for sustainable development in the future will probably come frombusiness.’

There are other significant developments too, Elkington points out. Many consumers arenow prepared to pay more for environmentally responsible products. And the emergenceof ethical investment funds has thrown the spotlight onto corporate environmentalperformance.

Also significant, says Elkington, is that companies are changing from within, rather thansimply responding to external pressure from consumers and environmentalists.

Enhancing management systemsThe concept of sustainable development needs to be incorporated into the policies andprocesses of a business if it is to follow sustainable development principles. This does notmean that new management methods need to be invented. Rather, it requires a newcultural orientation and extensive refinements to systems, practices and procedures.

The two main areas of the management system that must be changed are those concernedwith:A greater accountability to non-traditional stakeholders;Continuous improvement of reporting practices.

Developing an effective management framework for sustainable development requiresaddressing both decision-making and governance. The concept of sustainabledevelopment must be integrated both into business planning and into managementinformation and control systems. Senior management must provide reports that measureperformance against these strategies.

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Governance is increasingly important because of the growing accountability of thecorporation and its senior management. Information and reporting systems must supportthis need. Decision-making at all levels must become more responsive to the issuesarising from sustainable development.

Seven steps are required for managing an enterprise according to sustainabledevelopment principles. These are set out below.

1. Perform a stakeholder analysisA stakeholder analysis is required in order to identify all the parties that are directly orindirectly affected by the enterprise’s operations. It sets out the issues, concerns andinformation needs of the stakeholders with respect to the organization’s sustainabledevelopment activities.

A company’s existence is directly linked to the global environment as well as to thecommunity in which it is based. In carrying out its activities, a company must maintainrespect for human dignity, and strive towards a society where the global environment isprotected.

At the beginning of this century, company strategies were directed primarily towardsearning the maximum return for shareholders and investors. Businesses were notexpected to achieve any other social or environmental objectives. Exploitation of naturaland human resources was the norm in many industries, as was a lack of regard for thewellbeing of the communities in which the enterprise operated. In short, corporationswere accountable only to their owners.

Today, business enterprises in developed countries operate in a more complicated, andmore regulated, environment. Numerous laws and regulations govern their activities, and

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make their directors accountable to a broader range of stakeholders. Sustainabledevelopment extends the stakeholder group even further, by including future generationsand natural resources.

Identifying the parties that have a vested interest in a business enterprise is a centralcomponent of the sustainable development concept, and leads to greater corporateaccountability. Developing a meaningful approach to stakeholder analysis is a vital aspectof this management system, and one of the key differences between sustainable andconventional management practices.

The stakeholder analysis begins by identifying the various groups affected by thebusiness’s activities. These include shareholders, creditors, regulators, employees,customers, suppliers, and the community in which the enterprise operates. It must alsoinclude people who are affected, or who consider themselves affected, by the enterprise’seffect on the biosphere and on social capital.

This is not a case of altruism on the company’s part, but rather good business. Companiesthat understand what their stakeholders want will be able to capitalize on theopportunities presented. They will benefit from a better informed and more activeworkforce, and better information in the capital markets.

In identifying stakeholder groups, management should consider every business activityand operating location. Some stakeholders, such as shareholders, may be common to allactivities or locations. Others, such as local communities, will vary according to businesslocation and activity. Finally, the stakeholder analysis needs to consider the effect of thebusiness’s activities on the environment, the public at large, and the needs of futuregenerations.

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After the stakeholders have been identified, management should prepare a description ofthe needs and expectations that these groups have. This should set out both current andfuture needs, in order to capture sustainable development concept. The key is to analyzehow the organization’s activities affect each set of stakeholders, either positively ornegatively.

Developing these statements of needs and expectations requires dialogue with eachstakeholder group. To this end, some companies have established community advisorypanels. Similar groups made up of employees, shareholders and suppliers have been usedto help management better understand their needs and expectations.

Because the needs of stakeholder groups are constantly evolving, monitoring them is anongoing process.

The stakeholder analysis may reveal conflicting expectations. For example, customersmay demand new, environmentally safe products, while employees might be concernedthat such a policy could threaten their jobs. Shareholders, meanwhile, may be wary aboutthe return on their investment. A stakeholder analysis can be a useful way to identifyareas of potential conflict among stakeholder groups before they materialize.

2. Set sustainable development policies and objectivesThe next objective is to articulate the basic values that the enterprise expects itsemployees to follow with respect to sustainable development, and to set targets foroperating performance.

Senior management is responsible for formulating a sustainable development policy forits organization, and for establishing specific objectives. Sustainable development meansmore than just ‘the environment’. It has social elements as well, such as the alleviation ofpoverty and distributional equity.

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It also takes into account economic considerations that may be absent from a strictly‘environmental’ viewpoint. In particular, it emphasizes maintaining or enhancing theworld’s capital endowment, and highlights limits to society’s ability to substitute manmadecapital for natural capital.

Nevertheless, a policy on environmental responsibility is a good first step towards thebroader concerns of sustainable development.Management should incorporate stakeholder expectations into a broad policy statementthat sets out the organization’s mission with respect to sustainable development. Thispolicy statement would guide the planning process and put forward values towards whichmanagement, employees and other groups such as suppliers are expected to strive.Drafting a policy statement that is both inspirational and capable of influencing behaviouris a challenging task. However, the benefits justify the effort.

The following policy statement was developed by the Dow Chemical Company:

The operating units of the Dow Chemical Company are committed to continuedexcellence, leadership and stewardship in protecting and conserving the environment forfuture generations. This is a primary management responsibility as well as theresponsibility of every employee worldwide. We are sensitive to the concerns of thepublic and accountable to them for our decisions and actions. We believe in theresponsible integration of environmental and economic considerations in all decisionsaffecting our operations. We are continuously reducing our emissions to protect humanhealth and the environment. Our goal is the elimination of wastes and emissions.

Policy statements like this one should be developed and implemented in a way thatvisibly involves directors and senior management.

A survey by DRT International of European companies found that half of the respondentshave board members who are responsible for environmental issues. The report adds:The amount of time spent on environmental issues at board level varies greatly betweencountries and sectors. The greatest involvement is found in the chemical andpharmaceutical industries and in utilities. These sectors devote significant resources toplanning green strategies and establishing sophisticated environmental management

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systems. The lowest involvement is in tourism and financial services, where none of thecompanies surveyed had board-level appointments.

There are many benefits in actively involving the board of directors in the developmentof a sustainable development policy. It is the board of directors that determines overallpriorities and sets the tone for management and employees. By itself, the board’scommitment will not guarantee that a sustainable development policy will be effectivelyimplemented. However, the absence of that commitment will certainly make it difficult toimplement the policy.

While statements of broad policy on sustainable development are important, seniormanagement and directors should supplement their policy statement with a series ofspecific objectives. For example, the following statement of policy and objectives,developed by Northern Telecom, illustrates the desirable scope and level of specificity:

Recognizing the critical link between a healthy environment and sustained economicgrowth, we are committed to leading the telecommunications industry in protecting andenhancing the environment. Such stewardship is indispensable to our continued businesssuccess. Therefore, wherever we do business, we will take the initiative in developinginnovative solutions to those environmental issues that affect our business.We will:Integrate environmental considerations into our business planning and decisionmakingprocesses, including product research and development, newmanufacturing methods and acquisitions/divestitures;Identify, assess and manage environmental risks associated with our operationsand products throughout their life cycle, to reduce or eliminate the likelihood ofadverse consequences;Comply with all applicable legal and regulatory requirements and, to the extentwe determine it appropriate, adopt more stringent standards for the protection ofour employees and the communities in which we operate;Establish a formal Environmental Protection Program, and set specific,measurable goals;Establish assurance programs, including regular audits, to assess the success ofthe Environmental Protection Program in meeting regulatory requirements,program goals and good practices;To the extent that proven technology will allow, eliminate or reduce harmfuldischarges, hazardous materials and waste;Make reduction, reuse and recycling the guiding principles and means by whichwe achieve our goals;Prepare and make public an annual report summarizing our environmentalactivities;Work as advocates with our suppliers, customers and business partners to jointly

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achieve the highest possible environmental standards;Build relationships with other environmental stakeholders - includinggovernments, the scientific community, educational institutions, public interestgroups and the general public - to promote the development and communicationof innovative solutions to industry environmental problems;Provide regular communications to, and training for, employees to heightenawareness of, and pride in, environmental issues.

It is important that sustainable development objectives be clear, concise and, whereverpossible, expressed in measurable terms. Establishing measurable objectives is essentialif management and others are to be able to assess whether their business activities havemet the established objectives.

In setting these objectives, management will need to determine the appropriate level ofaggregation. For example, one objective might be to set measurable performance targetsfor waste reduction at all operating locations. This goal would then be supported by moredetailed objectives for each operating location.

After the sustainable development objectives have been established, management shouldcompare its competitive and financial strategies against these targets. In some areas,business strategies will be consistent with the sustainable development objectives. Inothers, existing strategies may be incomplete or in conflict with them. Consequently,strategies may have to be modified.

It is important to ensure that the sustainable development objectives that are establishedcomplement the enterprise’s existing competitive strategies. In other words, sustainabledevelopment should provide an additional dimension to business strategy. It providessenior management with an additional benchmark against which business strategies andperformance should be assessed.

An effective external monitoring system is necessary for directors and seniormanagement, in order to ensure that sustainable development policies, objectives and

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management systems are appropriate for the complex and rapidly changing world inwhich their business operates. Information should be gathered on key subjects, including:

New and proposed legislation;Industry practices and standards;Competitors’ strategies;Community and special interest group policies and activities;Trade union concerns;Technical developments, such as new process technologies.

For many enterprises, monitoring and influencing external developments meansbecoming more actively involved in the public policy process. A commitment tosustainable development involves helping to formulate policies that shape externaldevelopments, so that industry-wide sustainable development objectives are achieved.To this end, responsible business enterprises are taking leadership roles in industryassociations, working with government and special interest groups to achieve positiveresults for both the enterprise and the stakeholders.

The monitoring of external developments is particularly complex for companies selling toexport markets, and even more so for those with production facilities in several countries.Many multinational corporations subscribe to the International Chamber of Commerceprinciples on environmental management. These include adherence to internationalenvironmental performance standards. However, monitoring all the relevant internationaldevelopments can be a daunting task.

This external monitoring can be integrated into a firm’s strategic management process, orelse carried out as a separate exercise. Some corporations have social policy committeeswhose scope covers sustainable development issues. Others have environmentalcommittees with a narrower focus.

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3. Design and execute an implementation planIt is important to draw up a plan for the management system changes that are needed inorder to achieve sustainable development objectives.Translating sustainable development policies into operational terms is a majorundertaking that will affect the entire organization. It involves changing the corporateculture and employee attitudes, defining responsibilities and accountability, andestablishing organizational structures, information reporting systems and operationalpractices.

These changes are normally so substantial that a three-to-five-year plan with one yearmilestones will be needed.

Managing this type of organizational change requires leadership from seniormanagement. The board of directors, the chief executive officer and other seniorexecutives must be actively involved in the process. They need to lead by example, andto set the tone for the rest of the organization.

As a starting point, after the board and senior management have established theirsustainable development objectives, these should be communicated to the variousstakeholder groups. Some organizations have ongoing consultation arrangements withstakeholders which facilitates this process. There is little point in embarking on aprogramme to meet stakeholders’ needs without first consulting stakeholders to ascertainwhat those needs are.

It is also important to determine any modifications that should be made to theorganization’s systems and processes in order to ensure that day-to-day activities areperformed in a manner that is consistent with these objectives.The enterprise’s organizational structure should then be reviewed to determine whoshould take specific responsibility for the sustainable development objectives. In some

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cases, environmental management committees have been established; in others, a specificdepartment has been established under the leadership of a senior environmentalexecutive.

Some organizations incorporate statements of environmental responsibility into the jobdescriptions of managers and staff. Clearly defining accountability is essential tosuccessful implementation.

Cultural change and retraining should complement the new goals. Reward systems andincentives reflecting the new corporate values should also be considered.Business planning processes should be modified to reflect the sustainable developmentpriorities, the expanded stakeholder consultation process, and external monitoring needs.Management information systems should be enhanced, in order to ensure thatmanagement and employees receive the information they need to assess theirperformance against the objectives.

Marketing activities should consider customers’ needs regarding sustainability. This willrequire changes to the organization’s market research efforts. This feedback can affectthe way products are designed, produced, packaged, marketed and promoted. In somecases, new markets may be added or existing markets redefined.

Meanwhile production processes and operating procedures must be assessed againstregulations, industry practices or internal standards, in order to determine areas forimprovement. This represents an opportunity for the company to develop innovativeproduction processes.

Regulatory requirements are easily identifiable, although they continually evolve.Sustainable development criteria are less precise, and are generally not yet clearly

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manifested in regulations. The use of industry practices as performance norms isexpanding rapidly, and in some cases these standards exceed regulatory requirements.The chemical industry’s ‘Responsible Care’ programme is one example of industrystandards that companies can use to foster improvements in their processes and practices.Another popular tool is benchmarking.

At the same time, managers responsible for procurement must reassess their choice ofsuppliers, in terms of their products and the way in which they are produced, to ensurethat the company’s sustainable development objectives are fostered through itspurchasing activities.

Financial planning should consider the capital requirements for process changes, as wellas possible tax incentives and the financial effect of new mechanisms such as credits forwaste recovery.

A successful implementation plan depends on ‘rethinking the corporation’ if it is torespond to the paradigm shift associated with sustainable development. It is important toaddress not only the positive forces for change but also barriers and sources of resistance.While the basic management framework may remain intact, substantial changes willprobably be needed in the culture, the organization and its systems. The plan must havefull ‘buy-in’ if it is to be effective. This in turn requires broad consultation and culturalchange.

4. Develop a supportive corporate cultureIn order to ensure that the organization and its people give their backing to thesustainable development policies, an appropriate corporate culture is essential.In the process of implementing sustainable development or environmental management

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policies, many companies have experienced a kind of organizational renewal. The increased participation of employees not only generates practical ideas, but also increases enthusiasm for the programme itself. Most customers and employees enjoy being part of an organization that is committed to operating in a socially responsible manner.

Implementing sustainable development objectives will probably require managers to change their attitudes. This may be accomplished only after retraining. For example, some executives may feel that their sole responsibility is to maximize the wealth of the enterprise’s owners. As a result, they may have difficulty understanding the sustainable development concept and in accepting it as a legitimate business objective.Meanwhile some managers may not be accustomed to identifying the need for ecoefficient practices such as energy efficiency and recycling. Some may never have explicitly considered the effect of their actions on any stakeholder group other than shareholders. Others may resist changing the way in which their performance is measured.

Managers of multinational corporations may not think it appropriate to redesign their programmes in order to ensure that contribute to sustainable development in poorer countries.

Effective communication is essential. Internally, all levels of management, and all employees, must understand the policies and objectives that have been established.

For business enterprises, this means broadening the outlook of many people, including some senior executives. Dr Frank Frantisak of Noranda Inc. emphasizes the importance of communication:

The fundamental need in Canadian corporations is the promotion of environmentalconsciousness throughout the whole organization, from senior management down to theplant floor. Environmental concerns need to be part of everyday communications anddecision-making at all levels. Executives need to be regularly asking division managers:Is your operation in compliance? What progress is being made with your action plan?Division managers need to be putting these questions, in turn, to the plant and facilitystaff.

Employees can have a strong influence on corporate culture and on a company's environmental performance. The DRT International survey of European companies reports that:

Just over half of the companies surveyed invite direct suggestions from employees onenvironmental issues. About 80% of the companies that invite suggestions have changedtheir products or processes as a result, while only 54% of all respondents have made suchchanges. This happens not only in environmentally advanced countries such asSwitzerland and Norway, but also in Hungary, where employees are keen to tackle thecountry’s considerable environmental problems.

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The concept of sustainable development requires organizations to develop a culture thatemphasizes employee participation, continuous learning and improvement. TheInternational Chamber of Commerce explains the process of continual improvement thus:…To continue to improve corporate policies, programmes and environmentalperformance, taking into account technical developments, scientific understanding,consumer needs and community expectations, with legal regulations as a starting pointand to apply the same environmental criteria internationally.

Internal reporting systems can have a significant effect on corporate culture. They mustbe designed to reinforce positive behaviour with respect to sustainable development.They also need to be linked to the enterprise’s recognition and promotion systems,The active and visible involvement of senior executives and directors can be a powerfulforce in forming attitudes, and in creating a supportive culture in which sustainablebusiness practices can flourish. Executives are the people who set the policies and thenorms by which business is done.

Equally, it is important that the board provide an oversight in the allocation ofresponsibilities for sustainable development objectives. This umbrella role should includeensuring that responsibilities are assigned in a manner that holds key executivesaccountable. It also means ensuring that reward and promotion systems recognize thosepeople who achieve, or help to achieve, sustainable development objectives.

5. Develop measures and standards of performanceThe implementation of sustainable development objectives, and the preparation ofmeaningful reports on performance, require appropriate means of measuringperformance.

Management control, as well as external reporting, depends in part on the availability oftimely information about company operations. This is needed in order to allow

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management to assess performance against external and internal performance standards,using appropriate performance measures. Information systems will therefore need to bereviewed, to enable the necessary reports to be provided to management.

The measures used to assess and report on performance will be influenced by thecompany’s sustainable development objectives, and by standards that have beenestablished by government and other public agencies. For example, performance targetsmay be set in terms of emission levels and energy usage per tonne of output, or perhapsworking hours lost due to accident or illness. The information generated must be in theright units if actual performance is to be compared with the set targets. This might requirenew measuring procedures to be introduced.

In many cases, companies are ahead of governments in establishing sustainabledevelopment performance criteria. However, as society becomes more aware ofenvironmental issues and exerts more pressure for action, government can be expected totake on a more influential role.

There is a significant opportunity for the business sector to work with governments inestablishing performance measures and standards, and to help develop reporting andmonitoring systems that are cost-effective and which meet the needs of both the publicand business.

While external standards, measures and reporting systems are needed, they take time todevelop and implement, especially if consultation is required. Businesses should not waitfor such standards to be developed before setting sustainable development objectives andmeasuring the sustainability of their activities.

6. Prepare reports

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The next step in the process is to develop meaningful reports for internal managementand stakeholders, outlining the enterprise’s sustainable development objectives andcomparing performance against them.

Directors and senior executives use internal reports to measure performance, makedecisions and monitor the implementation of their policies and strategies. Shareholders,creditors, employees and customers, as well as the public at large, use external corporatereports to evaluate the performance of a corporation, and to hold the directors and seniorexecutives accountable for achieving financial, social and environmental objectives.Regulators and government officials add to the task by requiring an ever-expandingdegree of disclosure, in order to ensure compliance with their regulations.

While financial reports continue to be a fundamental component of corporate reporting,they are now only one of many types of report issued annually by a corporation.It is important to narrow the gap between the way economic activity is measured and theway in which the use of natural resources is evaluated. For example, financial statementsdo not illustrate the degree to which an enterprise invests in pollution control andconserves resources. As a result, companies that do not invest in environmentalprotection may present financial statements with lower costs and higher earnings thanthose which do.

The system needs incentives, and reliable information, in order to ensure that there arerewards for positive actions. It is ironic that business activity which destroys habitats andpollutes air, land and water produces ‘income’ and contributes to gross national product.Decision-makers within businesses and governments need a more relevant reportingsystem.

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A system that provides a meaningful picture of a company’s sustainability achievementsis essential for strengthening accountability. This is necessary if an effective relationshipis to be maintained with stakeholder groups.

Internally, several companies now ask their line managers to include in their regularreporting procedures a statement on whether they have achieved the environmental andsustainable development targets. Similarly, the board of directors should receive periodicreports from senior management on whether these objectives have been achieved.External reporting on sustainable development issues can take a number of differentformats. Some organizations are experimenting with special reports for particularstakeholder groups, such as employees. Others provide a general-purpose report onenvironmental activities. Still others include the subject of environmental and socialissues in a separate section of their annual reports.

Every business enterprise should publish, at least once a year, an external ‘sustainabledevelopment report’. Ultimately, a universal format for such reports will be desirable. Inthe meantime, managers and boards of directors should decide on the organization andcontent of reports.

7. Enhance internal monitoring processesOn an ongoing basis it will be important to develop mechanisms to help directors andsenior managers ensure that the sustainable development policies are being implemented.Performance monitoring is well established as an important element of the managementprocess. In many areas, it is directly linked to reporting. The key to any system’seffectiveness is whether the management monitors operations and outputs on an ongoingbasis.

Monitoring can take many forms, such as:

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Reviewing reports submitted by middle managers;Touring operating sites and observing employees performing their duties;Holding regular meetings with subordinates to review reports and to seek input onhow the procedures and reporting systems might be improved;Implementing an environmental auditing programme.

Organizing internal environmental audits is a practical way to monitor theimplementation of management policies. For example, many organizations now performinternal audits to monitor compliance with environmental policies and legislation. Thesenormally require multidisciplinary teams of experts (for example engineers, auditors andscientists) who possess the necessary knowledge and experience, both in auditing and inthe areas being audited.

The following definition of environmental auditing was developed in 1989 by theInternational Chamber of Commerce’s working party on environmental auditing:A management tool comprising a systematic, documented, periodic and objectiveevaluation of how well environmental organization, management and equipment areperforming, with the aim of helping to safeguard the environment by:(i) Facilitating management control of environmental practices;(ii) Assessing compliance with company policies, which would include meetingregulatory requirements.In Europe, the Commission of the European Community has adopted guidelines onenvironmental auditing of industrial activities. Such audits are voluntary but must followEU guidelines, including the publication of a statement on the audit results by thecompany, verified by an accredited auditor. The objective is to give companies morecontrol over their environmental performance, and to increase public awareness.

Management leadershipEstablishing sustainable development objectives, systems and monitoring mechanismsrequires leadership on the part of senior management, and a commitment to continuousimprovement.

The role of the board

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Without the active involvement of the board of directors, it will be difficult for anorganization to implement sustainable business practices. Corporations are encouraged toestablish a ‘social responsibility committee’, responsible for setting corporate policies onsustainable development and for dealing with issues such as health and safety, personnelpolicies, environmental protection, and codes of business conduct.This list is not all-encompassing. The committee’s exact responsibilities should bedictated by individual business circumstances. Nevertheless, there may be a need toestablish a ‘minimum’ set of responsibilities.

It is important that corporate sustainable development policies be implementedconsistently throughout an organization. Too many business enterprises observe variablelevels of corporate ethics and integrity, depending on the country in which they areoperating. This double standard is inconsistent with the concept of sustainabledevelopment, and ensuring that it does not prevail is an important role of the directors.The board also has a role in monitoring the implementation of its policies. It shouldreceive regular reports on how the policies are implemented, and should be accountableto its stakeholders on the company’s performance against these policies.

Self-assessmentThe first step for businesses in adopting sustainable development principles is to assesstheir current position. Management should know the degree to which the company’sactivities line up with sustainable development principles. This requires evaluating thecompany’s overall strategy, the performance of specific operations, and the effect ofparticular activities.

This process should compare the company’s current performance with the expectations ofthe stakeholders. Management philosophies and systems should be reviewed; the scope of

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public disclosures on sustainability topics should be analyzed; and the ability of currentinformation systems to produce the required data should be evaluated.

Various self-assessment devices are available to help this process, such as the GEMI andCERES questionnaires, as well as material tailored to specific industries – for example,the North American chemical industry’s ‘Responsible Care’ programme.

Deciding on a strategyOnce managers have gained an understanding of how its own operations shape up, theyshould gauge the performance of other, comparable organizations. Comparisons againstthe standards set by other industries and environmental groups can be instructive.This task should be relatively easy if there is reasonable public disclosure, organizedindustry associations and co-operative sustainable development programmes. However, ifthese structures do not exist, management could approach other businesses to discusssharing information and possibly establishing an industry group.Management should then consider ways to narrow the gap between the current state ofthe corporation’s performance and its objectives for the future. A strategy will need to bedeveloped, outlining where the company hopes to position itself relative to itscompetitors and its stakeholders’ expectations.

A general plan is needed to describe how and when management expects to achieve thatgoal, together with the various milestones it will reach along the way.Senior management should review and approve the strategy and the plan beforesubmitting them to the board of directors for final approval. Because of the pervasivenessof sustainable development, it is essential that members of the senior management team(representing all facets of the company's activities) ‘buy in’ to the project. Anything lessthan full commitment may doom the plan to failure.

Strategy implementation

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Once the strategy and the general plan have been approved, detailed plans should beprepared indicating how the new strategy will affect operations, management systems,information systems and reporting. These should set out measurable goals to be achievedin each area, and explain how progress will be monitored. They should also specifyspending and training requirements.

These plans should be developed through consultation with employees throughout theorganization, possibly with the assistance of outside specialists. It will be a timeconsumingand dynamic process, which will entail frequent modifications as input isobtained from several sources.

Once finalized, the plans should be approved by senior management and, ideally, by theboard of directors as well.

Small business and private company considerationsApplying the proposed framework will be a challenge for all enterprises, but smallerbusinesses may encounter additional challenges. Besides sustainability reporting, smallerbusinesses will have to adapt to the new corporate climate with less in-house expertise,fewer resources and less formal management structures than larger corporations. It willbe difficult for them to keep abreast of ever-changing regulatory requirements.

Fortunately, small businesses can find much of the expertise they require throughindustry associations, chambers of commerce, corporate environmental groups (such asGEMI in the USA), national and international business-government groups (such as theEuropean Green Table), management consultants and universities.

There is also a growing body of literature, some of which deals with the experiences ofcompanies that have integrated sustainable development into their operations.

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The limited resources of small businesses can be offset by co-operative ventures withother companies. These may, for example, take the form of committees which monitordevelopments and serve as a forum for exchanging ideas. To the extent that differentcompanies have similar stakeholders, they can compare notes on their stakeholders’needs and expectations and how they plan to address them.

These cooperative ventures could be more complex, and include formal industryprogrammes dealing with matters such as performance standards, monitoring andtechnological research.

Once the expertise and resource issues have been addressed, the generally less formalmanagement structures found in small businesses can be a positive advantage. There willbe fewer people to educate within the enterprise, and there will usually be less resistanceto change. In addition, there are usually no formal committees to whom the newstrategies must be ‘sold’, and no lengthy review and approval procedures to slow theprocess down. The ‘hands on’ management style common to smaller businesses can alsoaid the monitoring function: management will be well positioned to spot problems and tomake the necessary adjustments.

The road to implementing a sustainable development philosophy will be different forsmaller businesses, but with ingenuity, perseverance and cooperation, they can achievethe desired result.

APPENDIX A - GLOSSARYActive reference by sales force - Explicit reference and referral by other party's sales forces.Adjunct systems (i.e. bill print/stuff, …) - Other systems necessary to complete the processes Your product is part of.Bundling of partner's technology into our product offering - Bundle other party's technology in Your product and include in customer or partner license.

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Discount development environment - Provide free or substantial discount on environment to use other party's technology for Your product or environment.

Implementation support, 1st level - Basic support for configuration of product using documented user manuals and help tools. Designated point(s) of contact.Implementation support, 2nd level - Problem determination and troubleshooting of unknown configuration issues. Typically detailed questions or resolving issues not documented. Designated point(s) of contact.License to customer - license to install and operate Your product for customer's own use.License to partner - license to other party for installation and use of Your product by a customer. Could also include option to install and use in ASP or service bureau model.

Product hosting - Running the system on behalf of a customer.

Product technical support, 1st level - Basic troubleshooting of known issues, using documented user manuals and help tools. Typically the internal help desk of the customer.Product technical support, 2nd level - Problem determination and troubleshooting of unknown issues. Designated point(s) of contact.Product technical support, 3nd level - Determination of anomalies, typically involving detailed knowledge about the system. Designated point(s) of contact.Developer support - Assistance and support of tools for use in implementation, configuration or modification of system. Designated point(s) of contact.

Product training, operational - Provide training about operational subjects, such as user interface and business events.

Product training, sales and marketing - Provide training about how to position and sell Your product.

Product training, technical - Provide training about technical subjects, such as environment and APIs.

Reference in marketing/sales collateral material - Explicit reference to other party's products/services in collateral marketing/sales materials.

Requirement for partner's technology by customer where needed - Require purchase of other party's technology for implementation and operation of Your product

Sales and Marketing - Provide complete sales and marketing efforts without the direct involvement of the other party.

Transaction/Usage charge to customer - Alternative to license, where payment is made on a transaction or monthly seat charge.

Use of system labs - Use of test environments for other party's technology for free or nominal charge.

APPENDIX B – PROCESS GUIDE

CREATING A PARTNER PLAN

• Identify key stakeholders and gather objectives• Research models for potential programs• Define partner categories, profiles, and programs (including business case)• Obtain resources for program execution• Create program materials and target partner lists• Recruit and sign partners• Manage partners to realize value

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CHOOSING THE RIGHT PARTNER

• Identify key stakeholders and gather objectives – and objections• Create requirements and evaluation criteria and get consensus• Create financial analysis outline

o Make vs. buyo Business case for both parties

• Research the market for candidates• Pick 3 or 4 candidates and collect data• Test channel and market (customer!) acceptance of proposed solution• Determine internal impacts, deliverables and timeframes• Check references• Assign internal resources to execute• Perform risk analysis• Finalize contract• Manage partner relationship to maximize value

KEYS TO PARTNERING SUCCESS

• Assign post-contract resource to managing partner relationships• Assess, communicate, and mitigate impact on internal operations – tech support

requirements, sales compensation and incentives, product release dependencies, etc.

• Make organization culture assessment a part of partner evaluation• Use a strategic selling approach when presenting to key partner candidates (see

Appendix C)

APPENDIX C - APPROACHING PARTNER CANDIDATES

Firm: Ideal partner name

Estimated Overall Value Proposition: (e.g.; grow market, steal share, increase margin)

Goal: e.g.: commit (at all levels) to initial steps of working together – e.g; test market

Target Position

Personal Motivator

Value proposition

1st contact (propose)

1st Meeting (plan)

2nd meeting (do)

VP (decision maker)

High profile new business effort

Sexy, high tech, visibility, measurable revenues and profits attached

Sr. Mngr presents, or coaches you on presenting idea. Present value proposition and early activities. Limit risk and investment;

Finalize LOI

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early success on small steps before fully engaging.

Sr. Mngr. (“coach”)

Create image as up-and-comer

Novel business, new revenues (growth). Mitigate risk with exit strategies.

First contact is with this person: often via phone to set meeting, review agenda. Confirm motivators for each individual; confirm value proposition; propose goal. Get direction/ permission to move forward.

Lay out the steps (e.g. test market setup, LOI, test market, full program)Outline draft LOI

Review detailed execution plans.

Manager (do-er)

Job security – new products

Lack of growth challenges job stability – more stuff (products/ revenues) helps secure position…

Proposed map of actions – and how much they really don’t have to do at this stage.

Begin execution.

Propose:• What’s in it for them, what’s in it for you• Ways that the two companies could engage; determine strongest interest areas• Who you are: customers, channels, products, organization

Plan:• Based on interest shown in first contact/meeting – how might the partnership

look? Market perception, financial, product mix, overall value proposition, early activities.

• Talking points for draft LoI

Do:• Present LoI and timetable for going forward. • Then finalize the LOI and execute!

ACKNOWLEDGEMENTS

Steve Seavecki and Chris Bradley for input to the Process GuideJeffrey Smoll for the initial draft of the Partner PlanPatrick Hogan for the Partner Approach grid

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Studies and discusses innovation for mature SMEs.Blumentritt, T. and W. M. Danis (2006). "Business strategy types and innovative practices."Journal of Managerial Issues 18(2): 274-292.

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Bommer, M. and D. S. Jalajas (2004). "Innovation sources of large and small technology-based firms." IEEE Transactions on Engineering Management 51(1): 13-18.

Compares US large enterprises (LEs) vs. US and Canadian SMEs on 14 sources of innovation. LEs rated only suppliers as more importance sources than did SMEs. SMEs rated customers, co-workers, marketing and professional journals as more important.

Booz, Allen, and Hamilton (1982). New Product Management for the 1980's. New York:Booz, Allen, and Hamilton, Inc.

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Bowers, M. R. (1987). "Developing new services for hospitals: A suggested model." Journal ofHealth Care Marketing 7(2): 35-44.

Discusses the development of a new service development model for hospitals that includes input from service recipients.

Bowers, M. R. (1989). "Developing New Services: Improving the Process Makes It Better." TheJournal of Services Marketing 3(1): 15.

Discusses the new service development process in banks, hospitals and insurance companies.

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Brouwer, E. and A. Kleinknecht (1997). "Measuring the unmeasurable: A country's non-R&D expenditure on product and service innovation." Research Policy 25(8): 1235-1243.

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Camp, R. C. (1989). Benchmarking: The Search for Industry Best Practices that Lead to SuperiorPerformance. Milwaukee: ASCQ Quality Press.

Describes how firms can benchmark and scan their environment to find best practices.Carland, J. W., F. Hoy, W.R. Boulton, J.C. Carland (1984). "Differentiating entrepreneurs from small business owners: A conceptualization." The Academy of Management Review 9(2): 354-359.

Explores the differences between entrepreneurial and small business firms.Chesbrough, H. and R. S. Rosenbloom (2002). "The role of the business model in capturingvalue from innovation: Evidence from Xerox Corporation's technology spin-off companies."Industrial and Corporate Change 11(3): 529-555.

Discusses using a business model to successfully determine the value of technology.Christensen, C. M. and J. L. Bower (1996). "Customer power, strategic investment, and the failure of leading firms." Strategic Management Journal 17(3): 197-218.

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Discusses how customer demands shape the allocation of resources in innovation. Also discusses innovation differences in innovating to meet existing customer needs vs. innovation in new markets.

Clark, K. B. and T. Fujimoto (1991). Product Development Performance: Strategy, Organization, and Management in the World Auto Industry. Boston: Harvard Business School Press.

Discusses alternative approaches to supplier-OEM design relationships.Congram, C. and M. Epelman (1995). "How to describe your service: An invitation to the structured analysis and design technique." International Journal of Service Industry Management6(2): 6-24.

Discusses the use of structured analysis and design to better describe service processes.Cooper, R. G. (1984). "How new product strategies impact on performance." The Journal ofProduct Innovation Management 1(1): 5-19.

Discusses the connection between new product development and firm performance.Cooper, R. G. (1994). "Perspective: Third-generation new product processes." The Journal ofProduct Innovation Management 11(1): 3-15.

Discusses the use of "stage-gates" in the new product development process.Cooper, R. G. (1999). "From experience: The invisible success factors in product innovation."Journal of Product Innovation Management 16(2): 115-133.

Discusses how and why NPD projects continue to fail and suggests approaches for NPD success.

Cooper, R. G. and S. J. Edgett (1999). Product Development for the Service Sector: Lessons from Market Leaders. New York: Perseus Books.

Discusses the application of new product development techniques to the service industry.Crosetto, P. (2004). Competition and cooperation: Italian SMEs go international, CIRPETUniversity of Turin.

Discusses internationalization, and specifically the weaknesses of SMEs.de Brentani, U. (2001). "Innovative versus incremental new business services: Different keys for achieving success." The Journal of Product Innovation Management 18(3): 169-187.

Discusses the differences and similarities in NPD and NSD and outlines success factorsfor new service ventures.

de Brentani, U. (1995). "New Industrial Service Development: Scenarios for Success Failure :Ulrike de Brentani, Journal of Business Research (February 1995), pp. 93-103.

Describes the types of new service development situations that typically lead to success and those that lead to failure.

de Jong, J. P. J., A. Bruins, W. Dolfsma, J. Meijaard (2003). Innovation in service firms explored: What, how and why? EIM Business and Policy Research, EIM Business &Policy Research, SMEs and Entrepreneurship, Netherlands Ministry of EconomicAffairs: 1-73.Discusses service innovation.

de Jong, J. P. J. and P. A. M. Vermeulen (2003). "Organizing successful new servicedevelopment: A literature review." Management Decision 41(9): 844-858.

Describes NSD on the basis on managing key activities in the NSD process and creating a climate for continuous innovation.

Eisenhardt, K. M. and J. A. Martin (2000). "Dynamic capabilities: What are they?" StrategicManagement Journal 21(10/11): 1105-1121.

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Discusses the concept of dynamic capabilities and its conflict with the resource-based view (RBV).

Fine, C. H. (1998). Clockspeed: Winning Industry Control in the Age of Temporary Advantage.New York: Perseus Books

Shows how supply-chain design choices can drive company evolution. Analyzes product, process and innovation cycles in fast moving industries.

Freel, M. (forthcoming). Exploring the Reach of Innovation-Related Cooperation in Small Firms.Small and Medium-Sized Enterprises and the Global Economy. G. I. Susman. Northampton:Edward Elgar.

Describes small firm collaboration and networking.Froehle, C. M., A. V. Roth, R.B. Chase, C.A. Voss (2000). "Antecedents of new service development effectiveness: An exploratory examination." Journal of Service Research 3(1): 3-17.

Found that organizational structure influences the effectiveness of NSD, formal processes increase NSD speed and IT affects the speed and effectiveness of NSD. No support for cross-functional teams and NSD speed.

Frost (2003). "The use of strategic tools by small and medium-sized enterprises: An Australasian study." Strategic Change 12(1): 49-62.

Discusses the tools and techniques that can be used by companies in order to aid strategic planning. Studies 36 small and medium-sized manufacturing firms. The article heavily highlights the importance of environmental scanning.

Gadrey, J. and F. Gallouj (1994). L'innovation dans l'assurance: le cas de l'UAP (Innovation in insurance: The case of UAP), for UAP and the French Ministery of Research-University of Lille.

Discusses service innovation in the insurance industry.Gallouj, F. and O. Weinstein (1997). "Innovation in services." Research Policy 26(4/5): 537-557.

Describes innovation in the service sector.Garud, R. and P. Tuertscher (2006). Mapping the field of innovation, The Pennsylvania StateUniversity- Smeal College of Business.

Discusses the evolution of innovation research.Gebauer, H., E. Fleisch, T. Friedli (2005). "Overcoming the service paradox in manufacturing companies." European Management Journal 23(1): 14-26.

Discusses the implementation of change and obstacles for manufacturing firms to overcome when offering services.

Gordon, G. L., P. F. Kaminski, R.J. Catalone C.A. di Benedetto. (1993). "Linking customer knowledge with successful service innovation." Journal of Applied Business Research 9(2): 129-140.

Discusses the activities and knowledge needed to develop and market services that create customer value.

Gray, C. (2002). "Entrepreneurship, resistance to change and growth in small firms." Journal ofSmall Business and Enterprise Development 9(1): 61-72.

Discusses small firms and their attitudes towards change.Griffin, A. (1997). "PDMA research on new product development practices: Updating trends and benchmarking best practices." The Journal of Product Innovation Management 14(6): 429-458.

Highlights NPD best practices as well as industry differences. "Best practice" firms use cross functional teams and measure NPD outcomes.

Griffin, A. and J. R. Hauser (1993). "The voice of the customer." Marketing Science 12(1): 1-27.

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Discusses using customer input in business processes.Gustafsson, A. and M. D. Johnson (2003). Competing in a Service Economy: How to Create aCompetitive Advantage Through Service Development and Innovation. San Francisco: Jossey-Bass.

Describes how to gain a competitive advantage by strategically pursuing service innovation.

Hand, J. and B. Lev (2003). Intangible Assets (Oxford Management Readers). Oxford: Oxford University Press.

Discusses the emerging importance of intangible assets in today's business.Hatega, G. (2007). SME development in Uganda.

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Hinds, P. and J. Pfeffer (2001). Why organizations don't 'know what they know': Cognitive and motivational factors affecting the transfer of expertise, Stanford University Graduate School of Business.

Describes the complexities of tacit and explicit knowledge.Huang, X., G. N. Soutar, A. Brown (2002). "New product development processes in small and medium-sized enterprises: Some Australian evidence." Journal of Small Business Management40(1): 27-42.

Discusses marketing-related and technical activities and their frequency, execution and success in the NPD process.

ISI (2006). Web of Knowledge, http://portal.isiknowledge.com/portal.cgi.Johne, A. and C. Storey (1998). "New service development: A review of the literature and annotated bibliography." European Journal of Marketing 32(3/4): 184-251.

Discusses NSD activities and processes.Kelley, T. (2001). The Art of Innovation. New York: Doubleday.

Discusses innovation and ways to make it happen.Kelly, D. and C. Storey (2000). "New service development: Initiation strategies." InternationalJournal of Service Industry Management 11(1): 45-62.

Discusses the initiation of new service development projects, including strategy, idea generation and screening.

Khan, A. M. and V. Manopichetwattana (1989). "Innovative and noninnovative small firms:Types and characteristics." Management Science 35(5): 597-606.

Found a positive relationship between scanning and innovation. Discusses environmental dynamism and heterogeneity. Found that an abundance of resources encouragedproactiveness.

Kogut, B. and U. Zander (1992). "Knowledge of the firm, combinative capabilities and the replication of technology." Organization Science 3(3): 383-397.Builds a dynamic perspective on how firms create knowledge. Discusses path dependency. Cumulative firm knowledge provides options in uncertain markets.

Kotter, J. P. and D. S. Cohen (2002). The Heart of Change. Boston: Harvard Business SchoolPress.

Discusses eight steps for successful organizational change.Kupper, C. (2001). Service innovation- A review of the state of the art, The University ofMunich, Institute for Innovation Research and Technology Management: 1-46.

Discusses the history and current state of service innovation in industry and literature.

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Ledwith, A. (2000). "Management of new product development in small electronics firms."Journal of European Industrial Training 24(2/3/4): 137-148.

Studies small Irish electronics firms and compares them to larger ones. SMEs had high percent of R&D and R&D employees per sale. They also had fewer patents than large firms and interacted less with outside firms.

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Discusses the effect of managerial influence on employees' willingness to adopt innovation.

Lindman, M. T. (2002). "Open or closed strategy in developing new products? A case study of industrial NPD in SMEs." European Journal of Innovation Management 5(4): 224-236.

Reports on the quality of NPD in 5 SMEs in the Finnish metal industry. Describes SMEs' lack of proactive innovation and the danger in only reacting.

March-Chorda, I., A. Gunasekaran, B. Lloria-Aramburo (2002). "Product development processin Spanish SMEs: an empirical research." Technovation 22(5): 301-312.

Looks at 65 SMEs in Spain and discusses critical success factors and productdevelopment processes. Major determinants that confront NDP are cost of NPD projects and uncertainty about market acceptance. Contrary to common theory average NPD time is approximately six months.

Martin, C. R. J. and D. A. Horne (1993). "Services innovation: Successful versus unsuccessful firms." International Journal of Service Industry Management 4(1): 49-65.

Compares firms that are successful against those that are unsuccessful in new service development.

Menor, L. J., M. V. Tatikonda, S.S. Sampson (2002). "New service development: Areas for exploitation and exploration." Journal of Operations Management 20(2): 135-157.

Identifies areas of the NSD literature that need further exploration.Meyer, M. H. and E. B. Roberts (1986). "New product strategy in small technology-based firms:A pilot study." Management Science 32(7): 706-821.

Creates a "newness index" to describe a firm's new products.Monitor Group (2004). Industrial services strategies: The quest for faster growth and higher margins.

Provides an in-depth discussion of industrial services.Moore, G. (2004). "Darwin and the demon: Innovating within established enterprises." HarvardBusiness Review 82(7/8): 86-91.

Discusses choosing between radical and incremental innovation on the basis of market life-span.

Mosey, S. (2005). "Understanding new-to-market product development in SMEs." InternationalJournal of Operations and Production Management 25(2): 114-130.

Discusses applying NPD to new customers using existing technologies. There is a need to empower cross-functional teams and involve larger number of partners. Also discusses systematizing learning across projects.

Nonaka, I. and H. Takeuchi (1995). The Knowledge-Creating Company: How JapaneseCompanies Create the Dynamics of Innovation. New York: Oxford University Press.

Describes how Japanese firms do business, and particularly how they handle knowledge.Nooteboom, B. (1994). "Innovation and diffusion in small firms: Theory and evidence." SmallBusiness Economics 6(5): 327-347.

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Describes small businesses compared to large ones on the basis of strengths and weaknesses. Those strengths and weaknesses influence innovation. The study examinesinnovation diffusion.

Oliva, R. and R. Kallenberg (2003). "Managing the transition from products to services."International Journal of Service Industry Management 14(2): 160-172.

Describes the extent of integration that is desirable for products and services. Also discusses implementation issues in transitioning from a product-only to a product/service firm.

Paloheimo, K.-S., I. Miettinen, S. Brax (2004). Customer oriented industrial services, HelsinkiUniversity of Technology, BIT Research Centre.

Discusses the creation of industrial service innovations that add value to the customer.Pavitt, K. (1984). "Sectoral patterns of technical change: Towards a taxonomy and a theory."Research Policy 13(6): 343-373.

Discusses how variations in sectoral patterns of change can be classified into a three-part taxonomy, including supplier dominated, production intensive and science-based firms.

Prahalad, C. K. and G. Hamel (1990). "The core competence of the corporation." HarvardBusiness Review 68(3): 79-91.

Describes core competencies and management's need to develop them for competitive advantage.

Quinn, J. B., T. L. Doorley, P.C. Paquette (1990). "Beyond products: Services-based strategy."Harvard Business Review 68(2): 58-64.

Discusses the need for services as well as strategy. There needs to be a change in mindset from just manufacturing to manufacturing and services.

Quinn, J. B. and T. L. Doorley (1988). "Key policy issues posed by services." TechnologicalForecasting and Social Change 34: 405-423.

Describes the issues relating to services and policy formation.Rae, J. M. (2005). Analysis of data from the U.S. Bureau of Economic Analysis. A. Warren,Personal Correspondence.

Ratio of 82.5 is taken at Q1 in 2005. The 50% tipping point was 1987.Reinartz, W. and W. Ulaga (2006). "Growth beyond the core." Financial Times (31 March2006): 10.

Explains how manufacturers can stabilize cash flows and develop new revenue streams by developing service offerings to complement their products.

Roth, A. V., R. B. Chase, C.A. Voss (1997). Service in the US: Progress Towards Global ServiceLeadership. London Business School, University of North Carolina and University of SouthernCalifornia Research Monograph.

Discusses progress towards global service leadership in the US service industry.Rothwell, R. and M. Dodgson (1991). "External linkages and innovation in small and mediumsized enterprises." R & D Management 21(2): 125-137.

SMEs have some advantages (flexibility) and disadvantages (unable to spread risk across projects, can't afford to fund log-term R&D). One area that would help is how to link internal and external technical knowledge.

Salavou, H. (2005). "Do customer and technology orientations influence product innovativeness in SMEs? Some new evidence from Greece." Journal of Marketing Management 21(3): 307-338.

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Studied 150 Greek SMEs. Found that innovation is based on product newness to customers and product uniqueness. Found that technology-focused firms are likely to introduce products that are new and unique to their customers.

Scheuing, E. E. and E. M. Johnson (1989). "New product development and management in financial institutions." The International Journal of Bank Marketing 7(2): 17-21.

Discusses the management of new product development in service businesses other than financial institutions.

Shostack, G. L. (1984). "Designing services that deliver." Harvard Business Review 62(1): 133-139.

Discusses characteristics of services. The reason that services fail is that there is a lack of systematic method for design and control.

Simon, H. (1992). "Lessons from Germany's midsize giants." Harvard Business Review 70(2): 115-123.

Discusses the factors that have led to the success of the Mittelstand, i.e. Germany's SMEs.

Simon, H. (1996). Hidden Champions: Lessons from 500 of the World’s Best UnknownCompanies. Boston: Harvard Business School Press

Discusses the attributes and strategies of hidden champions (worldwide market leading SMEs).

Siu, W., T. Lin, W. Fang and Z-C. Liu (2006). "An institutional analysis of the new product development process of small and medium enterprises (SMEs) in China, Hong Kong andTaiwan." Industrial Marketing Management 35(3): 323-335.

Examines the impact of governmental intervention on NPD processes in China, Hong Kong and Taiwan. Includes a study of 97 SMEs.

69Sundbo, J. (1997). "Management of innovation in services." The Service Industries Journal17(3): 432-455.

Discusses organizational learning and the organization of innovation from the perspective of Danish service firms.

Susman, G. I. and J. W. Dean Jr (1992). “Development of a model for predicting design for manufacturability effectiveness”. In G. I. Susman (Ed.) Integrating Design and Manufacturing for Competitive Advantage. New York: Oxford University Press.

Discusses factors that lead to effective communication between design andmanufacturing personnel.

Susman, G. I., K. Jansen, and J. Michael (2006). Innovation and Change Management in Small and Medium-Sized Manufacturing Companies, The Pennsylvania State University- SmealCollege of Business.

Sponsored Research for The National Institute of Standards and TechnologyManufacturing Extension Partnership. Discusses the processes of innovation and change in manufacturing SMEs.

Takeuchi, H. and J. A. Quelch (1983). "Quality is more than making a good product." HarvardBusiness Review 61(4): 139-146.

Discusses the importance of service quality in addition to product quality.Tether, B.S. (2005) “Do services innovate (differently)? Insights from the EuropeanInnobarometer Survey”, Industry and Innovation, 12, (2), 153-184.

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Discusses that "innovation in services brings to the fore 'softer' aspects of innovation based in skills and inter-organizational co-operation practices."

Thomke, S. and E. von Hippel (2002). "Customers as innovators: A new way to create value."Harvard Business Review 80(4): 74-81.

Discusses the use of "customer tool kits" to transfer some of the innovation process (i.e. design) into the customer's hands.

Tidd, J. and F. Hull (2002). The organization of new service development in the USA and UK,SPRU Science and Technology Policy Research - University of Sussex: 1-31.

Introduces and tests a framework for new service development in the US and UK.Ulrich, K. T. and S. D. Eppinger (2004). Product Design and Development. Boston: McGraw-Hill.

Discusses integrated methods for managing new product development.Ulwick, A. W. (2002). "Turn customer input into innovation." Harvard Business Review 80(1):5-11.

Ask customers for desired outcomes, not solutions; use ideas for innovation. There are dangers in listening to customers. Presents 5 steps and a mathematical formula for deciding what innovations are most promising.

Urban, G. L. and J. R. Hauser (1993). Design and Marketing of New Products. EnglewoodCliffs: Prentice Hall.

Discusses the new product development process.U.S. Census Bureau (2003). Statistics of U.S. Businesses, U.S. Census Bureau:http://www.census.gov/csd/susb/usst03.xls andhttp://www.census.gov/epcd/susb/introusb.htm#size.

Shows that SMEs accounted for 99.7% of all firms in the US in 2003.van der Aa, W. and T. Elfring (2002). "Realizing innovation in services." Scandinavian Journalof Management 18(2): 155-171.

Describes innovation in the service industry.von Hippel, E. (1988). The Sources of Innovation. New York: Oxford University Press.

Discusses "unconventional" sources of innovation, such as end-users.von Hippel, E., S. Thomke, M. Sonnack (1999). "Creating breakthroughs at 3M." HarvardBusiness Review 77(5): 47-57.

Discusses the "lead-user process", e.g. innovation with the help of lead-users.Vossen, R. W. (1998). Combining small and large firm advantages in innovation: Theory and examples. University of Groningen Research Institute SOM.

Discusses possible innovation advantages of small and large firms. Suggests networking for leverage. Found that relationships seem to determine innovative success for smaller firms.

Warren, A. and G. I. Susman (2004). Review of Innovation Practices in Small ManufacturingCompanies, The Pennsylvania State University-Smeal College of Business-for NIST.

Reviews the innovation activities of SMEs.http://www.smeal.psu.edu/fcfe/more/white/innovation.pdf

Wise, R. and P. Baumgartner (1999). "Go downstream: The new profit imperative in manufacturing." Harvard Business Review 77(5): 133-141.

Discusses innovation via going deeper into your customer's value chain and going downstream to make more sustainable profits via servicing a high installed base.

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Woodcock, D. J., S. P. Mosey, T.B.W. Wood (2000). "New product development in British SMEs." European Journal of Innovation Management 3(4): 212-222.

The research finds that SMEs companies often neglect NPD in the face of other shortterm pressures. Also discusses other short-comings of SMEs having to do with the NPD process.

Wright, R. E., J. C. Palmer, D. Perkins (2005). "Types of product innovations and small business performance in hostile and benign environments." Journal of Small Business Strategy 15(2): 33- 44.

Based on small firm surveys, found that the strategy of innovation through development of more new product lines may be preferable to developing dramatic innovations for small businesses in a hostile external environment.

Yap, C.-M., K-H. Chai, P. Lemaire (2005). "An empirical study on functional diversity and innovation in SMEs." Creativity and Innovation Management 14(2): 176-190.

Advantages of SMEs: Intrapersonal function diversity (measures the range of function experience within each individual in the management team) has a positive impact on innovation moreso for SMEs than larger companies.

Zhang, J., K-H. Chai, K-C Tan (2005). "Applying TRIZ to service conceptual design: An exploratory study." Creativity and Innovation Management 14(1): 34-42.

Discusses TRIZ (the theory of inventive problem solving) and its use in developing new services.

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