Skills, personal competencies and enterprise capabilities throughout the organization lifecycle
Various factors have been put up as reasons that can explain performance
1. Introduction
Over the last few decades of entrepreneurial research, various factors have been put up as reasons that can explain performance. However the results of these studies have shown insignificant correlations with performance (Begley & Boyd 1985, Perry et al. 1988) or been inconsistent (Chandler & Hanks 1994, Cooper 1993). The entrepreneur's skills and competencies and their effect on firm capabilities and performance seem to take on more importance (Man et al. 2002). Skills and competencies can be seen as being more behavioral than personality traits, intentions, or motivations (Bird 1995). A person's skills and competencies will reflect more upon behavior and the firm's capabilities and effectiveness than other factors, laying the bedrock of strategy development. Success depends upon a firm maintaining not just a focus upon the external environment, but also focusing on the internal organization to ensure it has the resources and develops the capabilities to exploit, and to continue to exploit, the perceived opportunities in the environment (Lipparini and Sobrero 1994). Without skills and personal competencies a firm will have few capabilities. It is these capabilities that create firm effectiveness and underline the strategies that create competitive advantage form the firm.
This article will examine the difference between basic abilities, skills, talents, and expertise, then look at the basic skills required to undertake the various tasks required in a firm, look at the development of personal competencies and how they relate to enterprise capabilities that form the anchors of strategy.
2. Abilities, Skills, Talents, and Expertise
People are born with particular abilities or natural talents. A natural ability is an innate aptitude towards some kind of physical or mental tasks. Ability is natural skill or talent, a qualitative personal attribute that enables some exercise of personal capability. A natural ability is a person's existing or raw capacity to perform various tasks with no or very little education, training, or experience. (1) These may include physical activities like running, swimming, gymnastics, or ball game coordination, i.e., selected bodily-kinaesthetic activities. They may also include mental tasks like mental arithmetic and picking up language vocabulary, i. e., selected cognitive activities. We may also inherit psychic abilities like empathy, intuition, spirituality, etc. (Eysenck 1995). However, although people may possess natural attributes, only hard work, learning, training and experience can develop these into an expertise (Renzulli 1978) (see Figure 1).
Therefore people with inherent abilities can only take them so far without developing proficiency through knowledge and practice. Abilities are only innate traits and dispositions that need to be developed before they can become skills. As skills are acquired behaviors, they need a willingness, desire or conditioning (2) to learn. Skills are therefore a learned capacity to translate knowledge into action that results in desired outcomes or results, with a minimum amount of predetermined thinking. Skills turn knowledge as theory into practice. For example, an MBA graduate may understand the theories of marketing, the product concept, market positioning, segmentation, strategy, advertising and promotion, and consumer behavior, etc. All this is knowledge and it is translated into practice through skill, just as learning to drive a car or fly an aircraft. And to a certain degree, learning requires a time of trial and error to become proficient, which is experience. Therefore skills rely on both education and experience.
Skills rely on a great amount of intuition when being translated into action. Car mechanics, computer technicians, automobile and train drivers, pilots, and athletes rely greatly on intuition to get their jobs done. Good intuition based on skills and knowledge builds skills into expertise. Expertise requires a large amount of domain-specific knowledge. Simon and Gilmartin (1973) estimated that about 50,000 chunks are needed to become an expert in a particular fields and this accumulation of knowledge would take many years. (3) Sternberg (1998) argues that expertise is a combination of genetic endowment (abilities) and experience, and among its important characteristics are:
* Rich schemas containing large amounts of declarative knowledge that is domain specific,
* Spending time looking at problems and potential routes for solutions,
* Being able to develop rich representations to compare structural similarities of problems,
* Having schemas that contain procedural knowledge about solving problems (intuition),
* Being able to automate sequences of steps in problem solving procedures, and
* Being able to monitor problem solving strategies for effectiveness.
Skills can be developed into skill-sets that contribute to a person's competence. Personal competencies refer to underlying individual characteristics like knowledge, experience, and skills required in performing specific tasks (Baum 2001). For example, a person with a skill for football may have a complementary set of kinaesthetic skills for ball handling, athletic skills, coordination skills, etc., and cognitive skills that are spatial and strategic, etc. Any skill alone will not make a talented footballer, but combined these skills compose a person's expertise.
Skills fall along a continuum from very specific domain skills that can only be utilized in a specific job, to generalist skills that can be utilized in almost any job or situation. Various occupations can be placed along this continuum according to the types of skills required to undertake their jobs. For example, a design engineer working on designing very specific parts or products with well defined functions, materials, and other specifications. The knowledge and skills required to undertake this is very domain specific and skills, i.e., software skills, knowledge of material specifications, etc. Specialist surgeons, industrial chemists and pilots also carry a range of very specific occupational skills. However they also rely on some generalist skills to make decisions upon. Although their jobs are very specific, outside factors like the general condition of the patient, chemical properties, and weather conditions will influence specialist surgeons', industrial chemists', and pilots' decisions respectively. Further along the continuum, a general practitioner can look at a patient's symptoms, which may be common to many forms of disease. But it is usually the situational aspects of the patient, i.e., lifestyle, stress levels, etc., that leads the general practitioner to early conclusions. Likewise an architect must take account of the topography, weather, and surrounding environment when designing a new dwelling or building. Next along the continuum are business people who utilize specific skills, but rely on their knowledge, experience, and general skills to make decisions. The political leader almost entirely relies upon generalist skills to integrate all the elements he or she must deal with when making decisions.
At the left hand side of the continuum (see Figure 2), specific domain knowledge, skills, and expertise contribute to domain specific insights. For example a car mechanic will usually know from the sound of an engine what might be wrong with a car. To achieve these insights only select knowledge and expertise is required. On the other side of the continuum, insights are much broader and rely on multiple sources of information, wide areas of knowledge, experience, and a number of cognitive and interpersonal skills. For example, a skilled business negotiator (salesperson) or political leader will be able to pick up the emotions from his or her listeners and modify his or her approach to the audience.
Boyatzis (1982) found that there may be a relationship between personal competencies and organizational competencies (capabilities). Traits alone don't make entrepreneurs (Naffziger 1995), passion and enthusiasm are also required (Herron & Robinson 1993), and competitive strategies reflect the choices of people, whether they are an entrepreneur or manager (Child 1972). The choices will be based on what they are supposed to do, what they are motivated to do, and what they think they can do (Bandura 1986, Hollenbeck & Whitener 1988). People commit to strategies they think are achievable (Bandura 1986, Covin & Slevin 1997, Herron & Robinson 1993), but will only perform according to the limits of their own skills, abilities, talents and expertise (Bird 1989, Lock & Latham 1990). It should be also noted that different opportunities will require different sets of skills and competencies to exploit them.
3. Basic Business Skills
Basic business skills are necessary to underpin the vision of a firm, expressed in strategies and operations. Skills are needed to discover or construct ideas, evaluate ideas as opportunities, commence a start-up firm, develop products and services, market and sell products, and manage the firm through the early growth and maturity stages. During the infancy of a firm, a person's range of basic skills contributes to creating individual competencies which contribute to the firm's range of capabilities.
Different types of basic skills are required during the various stages of firm development. This is one of the challenges for an entrepreneur, as different problems require different skills to solve them (Churchill & Lewis 1983). Different skills can be synergized to form competencies to get things done, as individual basic skills by themselves are of limited use. Combining the knowledge behind different skills creates a much greater depth of understanding of tasks that can provide the intuition and eventually the wisdom required to make the important decisions, necessary in start-up firms. Figure 3 shows the basic skills and higher competencies required throughout the stages of firm development.
According to Robert Katz (1974) different types of skills have different relevance across different aspects of management. Technical skills deal with functional and specific specialized tasks, which are usually developed through education, training and experience. These skills enable a person to use select methods and procedures to accomplish tasks, i.e., software and computer skills. Technical skills are the most on the job and vocational of the three types of skills.
The second set of skills are human skills which enable a person to work with other people. They involve trust, enthusiasm, empathy, sensitivity, and the ability to communicate, which are central to many entrepreneurial activities and managing. These types of skills can be seen in the way a person works and behaves with others. These skills are used continuously when working with others. When a person is highly skilled in this area, he or she will be aware of their own attitudes, assumptions, beliefs and feelings. These skills are harder to learn formally as they tend to be integrated within a person's personality. However through some forms of training and self awareness human skills can be developed to some extent.
Thirdly, conceptual skills involve the capacity to see things as a whole, to understand interrelationships, and see new concepts, analyze and solve complex problems, coordinate, and identify new opportunities. The quality of decision making depends upon the quality of conceptual skills. Conceptual skills can also be looked at as a creative ability (Barnard 1948). More effort on the part of business educators has been put into teaching conceptual skills through experiential learning and simulations, etc. (4) Although these skills are much more abstract in nature, developing these types of skills have become the focus of leadership training, as it involves more about "ways of thinking".
Each type of skills can overlap with the other. For example, marketing skills which are functional technical skills require creative decision making which are based upon conceptual tools. This synergy brings out expertise, intuition and wisdom.
Any venture, event, journey, or project is the result of some form of idea that has been conceptually visualized and had the supporting motivation for a person to take action upon it. As we have seen, the creation of an idea partly comes from our prior knowledge fuelled by our life experiences which include employment experience (Basu & Goswami 1999), observation of the environment (Mitton 1989), social background (Basu & Goswami 1999, Murray 1996), hobbies and interests, networks, and personal histories (Murray 1996). These elements influence our emotions and what we think. We have also seen that opportunities created a number of ways through discovery or construction. We also know that the ability to generate ideas is not a uniform talent within the population and not all ideas are turned into actionable opportunities. Therefore generating ideas that are potential opportunities is a skill, and a cognitive one at that. As we all have the same cognitive hardware, it is the cognitive tools (ways we think) that are important skills in conceptualizing ideas. (5)
In the ideas evaluation phase of firm development, ideas need to be evaluated to determine their potential as an opportunity. The danger of failing to evaluate an idea fully may result in a person setting up a firm to follow a "dream strategy" in pursuit of a "fantasy" rather than a real opportunity. Many firms are formed on this premise and quickly fail because of seriously underestimating the effort and resources required and failing to target specific customers, etc. To avoid this type of failure, research and evaluation of ideas are necessary.
However, due to the wide differences in the types of opportunities, different types of customers, different types of products and industries involved, there is no standard method of opportunity evaluation that can be utilized. As each type of opportunity is unique in some way, different methods of evaluation are required. In established markets the more traditional methods of evaluating opportunities can be used, i.e., calculating total market size and competitors market shares, identifying and analyzing segments, etc. Through such straight forward analysis, one through focus groups and other forms of consumer research evaluate a product idea against the existing competitive products in the market. Risks can be assessed and appreciated, strategies created, resources assessed, and skills and capabilities assessed, etc.
A new to the world product, breakthrough technology, invention based new knowledge, a unique business model, or product/service bundle is another matter. Only the potential of the new concept in solving an existing consumer problem can be evaluated, and only in a very subjective manner. Products, services, and concepts that are based on a constructed opportunity are even more difficult to evaluate and are very unlikely to gain any serious airing from potential financiers. These concepts can only rely on an intuitive evaluation that may only satisfy the entrepreneur him or herself. Until these concepts are proved in the field, they are "fuzzy concepts" which after their success will appear perfectly logical in hindsight. (6) The risk of trying to evaluate some products, services, or concepts by traditional means will just raise too many "red flags" and reasons why the idea should not be preceded with, killing the idea completely. Sometimes entrepreneurs need the courage to act upon their own intuitions, rather than be influenced by others who will put negatives in the way about why it won't work. The skills and acumen needed to evaluate and make a decision upon any idea must be very flexible and mostly based upon intuition (7) to answer the following types of questions: Do I have customers? Will they support me? Do I have the skills and expertise required? How long will it take until I'm in a profitable situation? Is this viable? Am I committed? (Am I motivated enough?) What are the opportunity costs? What are the risks? Can I handle them?
Finally in the idea evaluation stage networking skills are needed to communicate ideas and seek feedback from peers and people involved within the field the idea have relevance. There is a large range in networking skills ranging from those people who have strong interpersonal skills and relevant contacts within the field, to those who find it difficult to communicate with others and/or have poor contacts within the relevant field. These skills are also important in the gathering of resources, open potential channels of distribution, create new customers, and communicate with other potential stakeholders, etc.
The start-up phase of an enterprise requires mainly functional or technical skills in three main areas; 1.) Skills related to the setting up of the legal, resource, and logistical aspects of the firm, 2.) Skills related to developing a new product or service and developing the means to produce them on a commercial scale, and 3.) Skills required in the promotion and sales of the products/services produced by the firm.
Skills related to the setting up of the legal, resource, and logistical side of the business involve the set up of the formal aspects of the legal vehicle for the firm. The complexity of this varies from country to country where a formal business entity is required to be formed, registration made for tax purposes, and several licenses and/or permits may be required as well. This is where the first requirement for basic administrative skills is required. Resource gathering skills are required at this stage to facilitate the development and future growth of the firm. The way this would be undertaken very much depends upon the type of enterprise starting up. If it is a small entrepreneurial start-up firm, it may rely on its own internal funds, small personal loans, and finding small credit facilities where it can, i.e., family, friends, credit cards, superannuation, etc. Physical resources may be borrowed or purchased cheaply, i.e., second-hand equipment, etc. More resource endowed firms may set the enterprise up according to budgets they developed utilizing their own funds or from an arranged bank overdraft, if this has been successfully negotiated with a bank. However these activities will require the ability to develop a business plan and oral presentation skills. The setting up of early logistical aspects of the firm may only require the identification of transport carriers, potential suppliers, support services and other necessities for future operational activities.
There are numerous skills required to develop a new product or service and developing the means to produce them on a commercial scale are primarily technical and functional. New product development is a very complex task and requires numerous technical and conceptual skills to satisfactorily undertake this task. The specific skills required in each type of product will depend upon the actual physical characteristics and what the production processes involve. If the product is highly technical, then it would be very likely the founders involved in the enterprise would have most of the product knowledge required to produce the product, and be able to obtain what knowledge they require fairly easily. Likewise the founders involved in FMCG products would also be expected to have a sound working knowledge of how products are constructed and their respective production processes. The founders of a firm providing a service still need to develop it like a product as it has attributes and a supply chain just like any product. Presumably they will know how to develop the infrastructure and support networks that the service requires to satisfy customer needs. New product development is a firm capability which will be discussed later in this chapter.
In most industries, the majority of time during the start-up phase will be devoted to sales and promotion. In the start up phase of an enterprise, sales and promotion will be the only reason for the firm's existence, and the only reason that the firm will continue to exist in the future. The success of the firm depends almost entirely on sales and promotion. Early sales that the enterprise achieves will dictate the momentum of firm growth. Too little growth will create a situation where revenues don't cover costs, which may inhibit the sustainability of the firm. Too fast a growth on the other hand will extend financial resources to the point that a firm may face cash flow deficiencies which will inhibit firm functioning. Skill is required to maintain sales growth within specific parameters that the firm can sustain without undergoing too much stress. To some degree the early sales path will influence the emotional disposition of the firm's founders and early employees greatly, especially in low resource based firms where founders are fully committed to their venture.
Highly skilled and experienced practitioners in some industries may be able to launch a product within a field incurring minimum promotional and selling costs. They will know how to spend promotional monies wisely and gain product prominence without spending large amounts of money that other firms in the field will find necessary to spend if they don't have the same experience. This advantage comes in part from a long exposure within the field with good relationships. Very experienced founders in some fields may be able to save up to 40% on the initial enterprise expenditure required, which gives a small start-up firm some advantages in the early period.
Most of the skills discussed above are still required in the early growth stages of the enterprise. The firm within the early years will most probably still be looking for new ideas that present viable opportunities. These ideas will be evaluated and decisions made on which way the enterprise will proceed in the future. This means the need to develop more new products/services and a further focus on sales and promotion. The founders will start to also focus on developing the formal organization, requiring organizational and management skills as revenues, cost and staff numbers increase.
As a firm's growth slows down, it begins to make a transition from the growth to the maturity stage; the momentum of the organization begins to change. The firm's growth was based upon the unique position it defined for itself based upon a source of opportunity. After a period of time new firms enter the competitive field, competing on the same or similar premise. The paradigm of competition changes towards competition and on finding some form of incremental differentiation and/or market segmentation to create competitive advantage, rather than a unique advantage.
The firm slips into the form of a formal organization in need of managerial direction rather than entrepreneurial leadership. The firm must maintain a number of complex operations, i.e., sourcing, procurement, manufacturing, marketing, sales, finance, accounting, and administration, etc. Seeking growth through relatively risky ideas becomes secondary to managing what already exists. General management skills, accounting skills, finance skills, cash flow management skills, marketing skills, sales skills, human resource management skills, and manufacturing management skills become very important in the control and performance of the firm.
Michael Gerber (2001) argues that many small businesses were formed out of the love and desire to practice a technical skill that the founder enjoys, rather than the wish to become an entrepreneur. Through the stresses of running a business, the technician orientated founder is forced to become a manager and overcome the complexities of running a business. Some people are good technically, while others are good at starting new things, while others may be good at managing. Not many people are good at all three. People tend to be skilled in particular areas and take time an experience to develop skills in other areas. This should occur in a firm if the founder has the willingness and motivation to do so. Not all founders do.
Specific areas and problems require specific skills, and therefore different businesses will also require different skill sets. Conceptual and technical skills are important early on, while management and functional skills become more important later on during the enterprise's evolution. What is important that the skills a person has and develops go together to synergize into competencies which bring strategic intuition and wisdom.
Before moving onto discussing personal competencies, it is important to mention that each of the basic skills discussed above are made up of sub-skills and parts of knowledge. For example accounting skills require book keeping skills, arithmetic skills, knowledge of the basic accounting rules and procedures. These sub-skills and parts of knowledge are important for mastering each basic skill. Some skills may also be skills in their own right but also a sub-skill of another skill, making up a web of skills and knowledge required to master any specific skill. For example finance skills, would require the sub-skills of accounting, cash flow management, budgeting, costing and estimating, etc. Many business issues are interdisciplinary where for example procurement systems are embedded within business accounting and financial systems and also related to product costing and manufacturing planning. Table 1 shows some basic business skills and the subskills that make them up.
Studies have shown that a perception of lack of knowledge and experience relevant to business can put people off the idea of going into business because of their self-perception of self efficacy (Gibb & Ritchie 1985, Robertson et al. 2003).
4. Personal Competencies
Personal competencies can be considered higher level characteristics encompassing personal traits, behavior, knowledge, and groups of skills. For example, swimming is a skill and synchronized swimming can be considered a competency. Competencies are much wider than skills, expertise, motivation, personal traits, self concept, knowledge, and acumen, as they combine to form a platform for future behavior. Personal competencies are also situational and socially defined. For example, the ability to find where schools of fish exist is a maybe a very important competency for an Eskimo in Alaska, but useless to a stockbroker in Wall St. New York. Personal competencies are the total ability of a person to perform a job or a task successfully (Man et al. 2002). They are a set of attributes that are relevant to the exercise of successful activities, in the case of entrepreneurship, the creation, growth and survival of a firm. Personal competencies have important implications for firm performance.
In early enterprise start-ups, personal competencies almost directly influence organizational performance. The basic role played by the owner/manager is one of the major determinants of SME competitiveness because the concentration of decision making power is in the hands of the owner/manager. Thus competencies become firm capabilities in the SME environment, which consequently influences the firm's overall strategy.
Personal competencies have been vaguely defined and often confused with skills, attributes, traits and capabilities (Hayton & McEvoy 2006). Terms like competencies, skills, knowledge, and expertise are often used interchangeably with insufficient consensus on the meanings. The boundaries of personal competencies are ill-defined and overlap, as many skills, knowledge, and other traits are not exclusive to any single competency.
One of the difficulties of defining personal competencies is that we have difficulties explaining what characteristics make a person successful, although we can see that they are successful. One can consider the CEOs of Goldman Sachs Lloyd Blankfein, Oracle--Larry Ellison, Xerox--Ursula Burns, John Paul DeJoria --John Paul Mitchell, OWN--Oprah Winfrey, Las Vegas Sands group--Sheldon Adelson, Starbucks--Howard Schultz, Cirque Du Soleil--Guy Laliberte, Chelsea FC and Oil Tycoon--Roman Abramovich, and Hutchison Whampoa Ltd.--Li Ka Shing. All commenced their lives in different forms of adversity and started their careers from the bottom. (8) Yet their individual successes are based on totally different factors, behavior, and mixes of competencies that enabled them to found (in some cases) and lead these successful corporations.
The characteristics of people are not the same, entrepreneurs and managers develop and transform their organizations and add value in their own unique ways of organizing resources and opportunities (Bird 1995).
Competencies are not uniform within the population. They probably exist within a "bell curve" distribution, so only a small percentage of the population possess the competencies necessary to spot opportunities, strategically evaluate them, engage in a start-up, and manage an organization (Lado & Wilson 1994). Competencies aren't easily transferred from one person to another. If competencies contain both functional and tacit knowledge, the functional aspects like marketing knowledge can be taught, but the tacit aspects are not teachable in the same way. Tacit competency knowledge involves creative, inductive, deductive and generative thinking processes which are more easily picked up by individuals who are naturally talented. Any teaching curriculum cannot develop competencies needed by an entrepreneur, but only serve to demonstrate the processes involved in being successful (Henry et al. 2005). Educators cannot create entrepreneurs anymore than they can provide foolproof, step by step methods that ensure success (Miller 1987). Self confidence, persistence, and high energy levels cannot be taught in the classroom (Miller 1987). We hope to develop competencies through education, but it is more likely we advertently pick up groups of skills that have not yet formed into competencies. These aspects of competencies can only be learnt through practice, experience and trial and error.
Personal competencies don't directly contribute to firm competitive advantage. Being competitive and operationally effective requires different disciplines (Waheeduzzaman & Ryans 1996). Competitiveness is related to strategy which deals with external factors, while competencies enhance internal organizational capabilities, which form the anchors of strategies. Therefore competencies facilitate capabilities. The level of operational effectiveness that individuals assist in creating will depend upon the freedom within the organization for individuals to be allowed to excel and work together for the organization's benefit. (9)
Different frameworks and competencies have been suggested by various authors. Boyatzis (1982) suggested that all competencies should have three major elements; 1. They should contain motives and traits, 2. There is a social role and aspect of self concept, and 3. Competencies enable role transactions. Competencies thus have a functional and tacit aspect which enables behavior. For example a management competency is made up of various pieces of management knowledge but rely on personal skills to act upon the knowledge. Some of the major types of personal competencies that have been described in the literature are summarized below.
Opportunity Competencies are related to recognizing and developing market opportunities by various means and methods (Bartlett & Ghoshal 1997, Chandler & Jansen 1992, McClelland 1987, Mitton 1989, Snell & Lau 1994). Opportunity competencies are about alertness, i.e., the ability to see unexploited opportunities (Kirzner 1973, 1979) and having the ability to see the environment through different perceptions (Casson 1982). An entrepreneur must have the ability to interpret environmental conditions and distinguish between the subjective and objective environments (Westerberg et al. 1997). (10) Opportunity competencies are closely related to relationship and conceptual competencies in developing the competitive scope of SMEs (Man et al. 2002).
Relationship Competencies are related to interpersonal interactions and relationships. They are concerned with building trust, empathy, cooperation, building teamwork, communications, networking, persuasive abilities, and other interpersonal skills (Bartlett & Goshal 1997, Bird 1995, Chandler & Jansen 1992, Durkan et al. 1993, Lau et al. 1999, McClelland 1987, Mitton 1989). It is through relationship competencies that entrepreneurs and managers utilize their other competencies. Relationship competencies are closely related to organizational competencies as it is through relationships that things get done.
Conceptual Competencies are related to a person's conceptual abilities. Conceptual competencies are reflected in understanding problems, problem solving, decision making, seeing things holistically, and conceptualizing things ideas and concepts (Bartlett & Ghoshal 1997, Bird 1995, Chandler & Jansen 1992, Durkan et al. 1993, Lau et al. 1999, McClelland 1989, Mitton 1989, Snell and Lau 1994). Conceptual competencies are important in innovating new ideas, new processes, new products and new services (Man et al. 2002). Conceptual competencies are closely related to opportunity, entrepreneurial, managerial, leadership, and organizational competencies.
Creativity Competencies are related to constructing opportunities, crafting strategy, and solving problems. Creativity involves the traits discussed in chapter four of volume one which include a motivational trigger, creative sensitivity, focus and attention, attenuation, imagination, curiosity, prior knowledge, emotion affect, and ego to create the right conditions. Creativity also requires knowledge and mastery of a number of creativity tools (or ways of thinking) to exercise creativity and gain new insights into the environment, opportunities, or in solving problems. The distribution of creativity is not uniform throughout the population (Simonton 2003). Creativity competencies are closely related to emotional intelligence, opportunity, entrepreneurial, strategic, management, and conceptual competencies.
Entrepreneurial competencies are related to the exercise of successful entrepreneurship. Some believe that entrepreneurial competencies are invaluable for start-up and enterprise development activities (Man et al. 2002). Entrepreneurial competencies involve resource gathering, self confidence, persistence, sense of achievement, decisiveness, optimism, networking, opportunity evaluation, strategy crafting, intuitive decision making, development of products and services, idea generation, negotiation skills, environmental scanning, and opportunity exploitation abilities. Entrepreneurial competencies are the total ability of the entrepreneur to perform a job role successfully and are extremely important in the start-up and early growth phases of the enterprise.
Management Competencies can be used interchangeably with the term Organizational Competencies which are related to the organizing of internal and external physical, financial, human, and technological resources of an organization. They involve teambuilding, leading, mentoring, training, allocating, and controlling employees (Bartlett & Ghoshal 1997, Bird 1995, Chandler & Jansen 1992, Durkan et al. 1993, Lau et al. 1999, McClelland 1989, Mitton 1989, Snell and Lau 1994). Other management attributes that are important to managerial competencies include, the ability to develop management systems necessary for long term functioning of the enterprise, resource acquisition skills, operational skills, managerial experience, coordination skills, communication skills, familiarity with the market, financial and budgetary skills, management style, and technical skills, etc. Management or organizational competencies involve transforming resources into higher value products and services (Grant 1991), i.e., using inputs effectively and efficiently, and the delivery of value to organizational stakeholders. Management or organizational competencies assist the entrepreneur enact a beneficial firm-environment relationship (Hambrick & Mason 1984, Tushman & Romanelli 1985). Management or organizational competencies are closely related to relationship, conceptual, managerial, and entrepreneurial competencies, and contribute to organizational efficiency and effectiveness.
Strategic Competencies are related to setting, evaluating, and implementing strategies of the enterprise (Bartlett & Ghoshal 1997, Bird 1995, Chandler & Jansen 1992, Durkan et al. 1993, Lau et al. 1999, McClelland 1989, Mitton 1989, Snell and Lau 1994). Strategic competencies provide a cognitive map (Weick 1979) that supplies the underlying logic for combining, deploying, and mobilizing resources within the firm and among the various organizational business units (if a large organization) (Prahalad & Bettis 1986). Strategic competencies are important in ensuring the long term performance and survival of the firm, verses the short term. Therefore people that possess strategic competencies will tend to consider the medium and long term implications of the decisions they make. Strategic competencies add a vision dimension rather than allow the making of decisions through impulse. There appears to be a positive relationship between planning and performance (Davig 1986, Ibrahim 1991, Kargar 1996), even if planning is informally undertaken is most entrepreneurial and SME firms. Informal planning has the function of forcing the entrepreneur to think towards focused objectives. Not only is goal setting and motivation required in the early stages of a firm, but this should continue into the growth and mature periods of the enterprise's lifecycle (Kuratko et al. 1997), which strategic competencies tend to support.
Leadership competencies are related to the ability of the entrepreneur or manager to articulate a strategic vision, communicate the vision throughout the organization, and empower employees about the vision (Westley & Mintzberg 1989). Some leadership traits include the ability to motivate and lead staff, building trust, conflict resolution, creating shared visions, developing teamwork, and mentoring. The leadership competency is closely related to the management, entrepreneurial, and strategic competencies and is important to firm performance.
Commitment Competencies drive the entrepreneur to commence and remain committed to the business (Bartlett & Ghoshall 1997, Bird 1995, Chandler & Jansen 1992, Durkan et al. 1993, Lau et al. 1999, McClelland 1989, Mitton 1989). The entrepreneur needs to maintain internal focus on organizational activities, whilst also maintaining a critical external focus on the larger business environment (Adam & Chell 1993). Commitment competencies also incorporate ambition, aspirations, desire, and long term motivational factors that drive the entrepreneur to meet his or her objectives. While commitment competencies can have a very positive effect, they also can have a negative effect. Commitment competencies can distort objectivity concerning firm performance and thus prevent a person coming to a decision that it is no longer viable to support a firm that is continuing to perform poorly over a long period of time where exit may be the best option. Commitment competencies are strongly related to strategic competencies as a factor contributing to long term performance.
Ethical Competencies can be considered the possession of appropriate personal and professional values and the ability to make social judgments based upon a work related situation (Cheetham & Chivers 2005). Ethical competencies bring an ethical frame into the decision making process domain of an individual. Ethics usually come from history, the law, a society's cultural values, personal moral codes, religion, various institutions, other social codes, and sensitivity to the needs of others. Ethics are not synonymous with knowledge as ethics require interpretation in order to apply rules and codes to real life situations. Individuals are usually left with discretion in developing and applying concepts. Ethical competencies tend to be integrated with opportunity, conceptual, entrepreneurial, managerial, and leadership competencies.
It could be argued that Emotional Intelligence (Competencies) is a personal competence required in entrepreneurship and developing an enterprise due to the need of emotional maturity, objectivity, and stability required. Some important aspects of emotional intelligence are the ability to recognize and manage one's own and others emotions, to motivate oneself, to be able to restrain impulses, and to handle interpersonal relationships effectively. According to Daniel Goleman (1998), emotional intelligence is a learned capability that results in outstanding performance in working situations and determines our potential to learn, based on our self awareness, motivation, empathy, self-regulation and adeptness to relation ships. Some of the important traits related to emotional intelligence include emotional awareness, self assessment, self worth, self control, adaptability, commitment, initiative, optimism, ability to manage conflicts, leadership, ability to influence others, and team capabilities.
Personal competencies are the building blocks upon which organizational capabilities, and in turn, organizational strategies are built upon. How effective this is depends upon how freely employees are able to exercise their personal competencies and how well respective employees' competencies are synergized within the organization. This is not so important in an entrepreneurial start-up where the competencies of the founder will usually dominate, but very important in a firm with many employees. While the entrepreneur's experience, education, and training are important to the possession of personal competencies, there is little conclusive evidence that strong competencies are reflected in age (Cooper & Gascon 1992).
An individual is as effective or limited in functioning effectively at specified tasks according to the limits that their personal competencies allow. There are numerous personal competencies and great overlap between them. Personal competencies tend to form an overlapping lattice where competencies are balanced and mutually support each other. When this occurs, a person will be able to work very effectively and perform at their best. There mere procession of competencies does not make a person necessarily competent. It is a person's view and perception of the environment that triggers the use of personal competencies, so competency activation is reliant upon external stimuli and motivation.
To develop our personal competencies, one must develop what Peter Senge (2006) calls "personal mastery." Personal mastery is concerned with personal growth and development so that real learning can take place. Personal mastery involves using our skills and competencies at the highest possible level where we achieve creative fulfillment and spiritual growth (Senge 2006, P. 131). Personal mastery enables a person to see things more objectively without biases and other cognitive blocks. A person with personal mastery has vision and the desire to be creative. He or she remains curious and inquisitive about why things occur the way they occur. People with personal mastery are aware of their strengths and weaknesses and their ability to achieve. They are on a continual quest to learn and improve. Personal mastery also brings true courage and commitment to pursue the personal objectives a person may have.
To develop personal mastery, one must work on a series of "principals and practices" according to Senge (2006, 136). These principles and practices are:
* One must develop a sense of vision, 'a big picture' of what they want out of life. This goes much further than goals and objectives that don't carry the same deep meanings about life that a vision contains. Visions are intrinsic that gives one a sense of purpose, motivating action and persistence.
* One must create tension inside to generate energy to pursue the vision from where they are today (This was discussed under the section Motivational Trigger in chapter three of volume one).
* We must overcome our own deep feelings of powerlessness and recognize our own coping and defence mechanisms (See Emotional Attachment, Defence Mechanisms and Neurotic States in chapter three of volume one),
* We must see our true selves and our respective dysfunctional behaviours, and
* To master a large repertoire of skills so that they can be carried out almost subconsciously, i.e., the task is integrated with the self.
People with personal mastery are able to integrate intuition and reason which is where personal competencies can be utilized very effectively. Competencies are thus multidimensional constructs (Smith & Morse 2005). They are deeply rooted in a person's background, being acquired through education, training, and experience (Man & Lau 2005).
Competencies play differing roles and importance during the various stages of the firm lifecycle. It is the understanding of the importance of these different roles that can be crucial to successful business growth (Churchill & Lewis 1983). The type of competencies that are needed in the start-up i.e., entrepreneurial competencies will differ from the types of competencies that are needed during growth period, i.e., managerial competencies. As each enterprise varies in the type of opportunity it is attempting to exploit, the entrepreneur has to acquire unique resources and skill combinations to enable the venture to progress successfully (Mitchelmore & Rowley 2010). Likewise, the range of skills and competencies required to run a small business are qualitatively and quantitatively different from those needed to run a large business. New venture founders often find it very difficult to move from the start-up phase, relying mainly upon entrepreneurial competencies to the maturity stage, requiring mainly management competencies (Galbraith 1982). An adequate level of management skills and training is essential to the transformation of a firm from an entrepreneurial organization to a profoundly management organization (Hofer & Charan 1984).
Figure 4 shows two pie charts indicating the relative amounts of personal competencies required to undertake an entrepreneurial start-up and manage a mature company. This is metaphorical as personal competencies truly blend together and overlap through their common skills. Also, the proportion of each personal competency will vary according to individual, as each person will have different strengths and weaknesses. Other influences on the proportion of personal competencies within each enterprise situation include the particular challenges facing a person, the type of business, personal business orientations and styles, and the different sets of skills individuals have.
When a firm moves from an entrepreneurial to a managed business, or a professionally managed business, this is where it is possible to recognize a change from reliance on individual level competencies to firm level capabilities. Competencies are to an individual, as capabilities are to an enterprise.
5. Enterprise Capabilities
Over the last few decades enterprise capabilities have been referred to as distinctive competencies (Selznick 1957, Snow & Hrebiniak 1980, Hitt & Ireland 1985, Reed & DeFillippi 1990, Fiol 1991), resource deployments (Hofer & Schendel 1978), invisible tenets (Itami & Roehl 1987), organizational capital (Prescott & Visscher 1980, Ranson 1987, Tomer 1987), core competencies (Hayes et al. 1988, Prahalad & Hamel 1990), organizational capabilities (Ulrich & Lake 1990, Stalk et al. 1992), and firm specific competencies (Pavitt 1991). These various names reflect differing perspectives concerning enterprise capabilities. Most of these perspectives share the view that the foundation and shape of long-term strategy rests upon a firm's internal resources and capabilities (Grant 1991, Lado & Wilson 1994).
Enterprise capabilities can be seen as sets of skills, competencies, organized routines, and knowledge that utilize complementary assets to perform and coordinate a set of tasks that are consistent with the firm's strategy at the time. This implies that enterprise capabilities coordinate both at the individual and organizational level to achieve higher level routines that assist in management decision making, operating and coordinating work flows with the view of achieving specific objectives (Winter 2000). These routines are learned and include manufacturing, marketing, procurement, new product development, and general management, etc. (Nelson & Winter 1982).
Enterprise capabilities provide the internal firm dynamics needed to pursue company growth and competitiveness (Chandler 1990). They are strategic assets which enable a firm to adapt, compete, and survive within dynamic environments (Teece & Pisano 1994). Enterprise capabilities are heterogeneous and unevenly distributed and deployed across companies within a given competitive field. It is the differences in enterprise capabilities which partly accounts for the different competitive positions of firms and their individual performances (Conner 1991, Rumelt 1984). For example Wal-Mart's logistical capacity could be seen as being superior to its domestic US competitors and Toyota's performance on a number of levels has been superior to that of General Motors and Ford. One will find within single industries that some companies are much more profitable than others, signaling the importance of firm specific factors like enterprise capabilities may play some important role (Rumelt 1991, Jacobsen 1988, Hansen & Wernerfelt 1989). Each enterprise capability a firm possesses is drawn from its internal skills, knowledge, systems, routines, efforts, and historical experiences, and therefore to some extent, unique to that firm. Enterprise capabilities in the right areas, truly distinctive ones, i.e., for example logistics for Wal-Mart and quality for Toyota, can provide a real key to a company's success and future development (Learned et al. 1969).
The major objective of enterprise capabilities is to anchor strategy and create firm effectiveness in terms of cost, customer service, logistical mastery, sales, technical service, manufacturing, organization, and new product development, etc. This enables a company to compete and pursue its objectives. Therefore in terms of opportunity, the important question is: "Does the organization have the capabilities to exploit a particular opportunity?" Broken down into specific functional areas the question is: "Does the organization have the capabilities to execute specific jobs that are needed to be completed in order to exploit an opportunity?"
Enterprise capabilities are the means through which things get done. These capabilities reside inertly within the methods and processes by which people in the organization transform inputs of labor, energy, raw materials, information, and technology into higher value outputs and within the organization beliefs and values managers and employees utilize when making decisions (Leonard-Barton 1992). Consequently it is very difficult for competing firms to directly emulate many enterprise capabilities of other firms directly, as any capability contains many intangible attributes. Enterprise capabilities cannot be measured and itemized on balance sheets or organizational charts, yet they positively exist (Teece et al. 1997).
The firm's success in the environment is a result of the effectiveness of crafted strategies within the environment. However any strategy is only as good as what it is premised upon and what anchors it. Thus the success of any enterprise depends upon many factors, not neglecting the ability of managers to maintain a viable balance of (strategy) supporting capabilities (Thompson 1967, Schendel & Hatten 1972). This is the basis of resource based theory where Penrose (1959) argued that a firm creates a strong base by specializing in physical resources, including tangible assets like raw materials, plant and equipment, etc., and human resources including intangible assets like financial, managerial, technical knowledge or skills. A firm explores and experiments with all the resources it has at hand to create new value added products or services in the exploitation of markets that add growth to the enterprise, rather than collecting unrelated resources. These resulting capabilities are the result of years of accumulated decisions and actions taken in uncertainty (Henderson 1994).
Enterprise capabilities are thus effectively developed through years of work and experience (Cohen & Levinthal 1990), historical condition (Barney 1991), and through socially complex interactions (Amit & Schoemaker 1993, Reed & DeFillippi 1990). Consequently enterprise capabilities can become rigid. For example, organizational culture (Barney 1986), Organizational routines (Nelson & Winter 1982), and the firm's reputation and image (Weigelt & Camerer 1988) cannot be transferred very easily to other organizations. Enterprise capabilities become unique to the firm. However although these capabilities may be diverse, they are set in, rigid, but intangible. As a result a firm may not be able to diversify its capabilities due to this rigidity and miss out on future opportunities (Leonard-Barton 1992), or may be able to grow incrementally along the path set by the cluster of capabilities through slow expansion and diversification (Davies & Brady 2000).
Each firm will have a number of enterprise capabilities which will differ in number, types, and quality from enterprise to enterprise. Each enterprise capability contains embedded knowledge, skills, values and norms. These characteristics with their embedded tacit knowledge affect the firm's ability to undertake strategic and functional tasks, to create more knowledge resulting in new products and services, make both strategic and managerial decisions. Enterprise capabilities also define value and influence of particular knowledge structures within an organization. They decide individual verses collective decision making, centralized verses decentralized decision making, who controls information flows, and the degree of autonomy verses control. Enterprise capabilities also carry political values, where the weight of marketing over production, finance over procurement, and divisional management over line management is decided within the nature of enterprise capabilities. Enterprise capabilities are institutionalized (Zucker 1977) and become a firm's taken for granted realities, within the fabric of the firm's corporate culture (Schein 1986). Enterprise capabilities also dictate the degree of creativity the members of a firm can express depending on the types, combinations and rigidity of these institutionalized routines. Some of the major enterprise capabilities are summarized below.
6. Management Capabilities
Management knowledge is a pivotal firm resource and plays an important role in firm performance (Fayol 1948, Mintzberg 1973, 1994), although this relationship with performance has not been explored thoroughly in management literature (Bartlett & Ghoshal 1993). Management plays a key role in delivering business performance and logically better management capabilities should engender higher management performance. Management capabilities comprise of are accumulated explicit and tacit knowledge that is utilized to fulfill a large number of tasks and requirements needed in driving and operating an organization through the different levels of management. (11) Basic traits, routines, and outcomes required of management capabilities are listed in Table 2 below. There are great differences in the types and composition of management capabilities between organizations (Clark & Fujimoto 1991).
To understand the performance of firms, great attention should be paid to the knowledge the enterprise has access to, and to the knowledge creation process itself. As knowledge supports the basis of managerial capabilities, this creates barriers to competitors who try to imitate the firm, which infers knowledge is a strategically significant resource of the enterprise (Grant 1996). Continual knowledge creation is imperative in a dynamic environment as the firm needs to adapt to changing environmental conditions and evolving competition (Nonaka & Takeuchi 1995). This includes both explicit and tacit knowledge creation, which occurs at the organizational level through analysis, problem solving, and decision making, utilizing various levels of creativity, as enterprise capabilities are essentially organizational (Kogut & Zander 1992, Teece et al. 1997). However enterprise capabilities also rely upon individual knowledge absorption, as knowledge occurs both at the individual and organizational level (Spender 1996).
Integrated knowledge at the organizational level is primarily related to how assets, resources, and capabilities are deployed to pursue strategy for the firm (Grant 1996). Within this integrated knowledge is a combination of higher order knowledge in regards to how to undertake the functions of organization. The various knowledge domains produce mental models both on an individual level and on an organizational level. These domains encapsulate experience, knowledge, intelligence, skills and competencies related to each respective area.
The functional (operational) knowledge domain includes all knowledge about general management, human resources, logistics, marketing, manufacturing, and finance capabilities, etc. (12) Functional knowledge can be broken down into specific technical knowledge domains. An example of a firm with outstanding functional qualities is McDonalds which produces exceptionally consistent products, human resources training and management, market research and localized product development, financial control and operations management that enable it to operate thousands of restaurants with remarkable consistency throughout the world.
Katz (1955) defines technical knowledge as an understanding and proficiency in specific kinds of activities involving methods, processes, procedures, and techniques. This includes both general knowledge and specific company skill knowledge (Castanias & Helfat 1991). Black and Decker's designing of tools utilizing small electric motors or Canon's ability to integrate optical, microelectronic, and precision mechanical technologies together in their cameras are examples of outstanding use of technical capabilities. These functional and technical capabilities will generally be held by the junior and middle managers within the firm.
Company specific knowledge would include specific conceptual skills that assist in the ability to see the enterprise as a whole and conduct what is specifically necessary for the firm to function. Company specific knowledge grasps and integrates technical, human, processing, and conceptual knowledge together. Company specific knowledge also entails what the firm stands for (Simon 1985). Air Asia's ability to provide an efficient service that is on time, convenient, and safe, with a young enthusiastic team is an example of company specific capabilities.
Environmental knowledge relates to industry specific knowledge that enables the firm to operate within the environment. Banks know how to operate in the financial environment, as do airlines understand how to operate within the aviation environment. Competition knowledge specifically relates to operating within the competitive field the firm is directly engaged within. Sara Lee, Kraft, Cadbury, and Pfizer all understand how to compete exceptionally within their respective competitive fields.
Some managers will specialize in particular areas, but the combined knowledge is integrated to form management knowledge. These aspects of knowledge share a tacitly shared accumulated experience (Tsoukas 1996), which socializes, externalizes and internalizes, sets governing principals, which is codified for specific firm operation, integrates the organization (Boisot 1995) and forms routines (Nelson & Winter 1982). Again, they exist both explicitly and implicitly (Tsoukas 1996).
The combination of all this knowledge at the integrated organizational level is something like "management cognition," guided by management processes forming a strategic logic (Sanchez & Heene 1996). This integrated knowledge is different to the individual knowledge of respective individuals (Sanchez 1997), who will have their own mental model (Mahoney 1995) as well as shared enterprise mental models. How static or dynamic is knowledge accumulation depends upon how flexible management is in regards to contingencies posed by the changing environment and how creative management is in analyzing data, making decisions, and solving problems through reintegrating and reconfiguring their knowledge to create new combinations of knowledge.
Wisdom in any domain is concerned with understanding it as a system. Management must know what, how, when, where, why and who in order to apply knowledge through solving problems and making decisions, thereby creating more knowledge. Know-how, know-why, and know-what are related to firm processes, purpose, and current state of existence (Sanchez 1997). Know-how is concerned about how the different elements within a domain and the organization are interrelated. Know-why is concerned about why different parts of the system are interrelated. Know-what is concerned about what causes of action are available to the firm. Know-where is concerned about where the important and critical issues are located within the firm. Know-when is related to the time dimension of management and strategy (Van den Bosch & de Man 1997). Know-who is related to working through other people (Koontz 1964) and who controls or possesses certain parts of the system and has the power to make decisions. Wisdom is related to the ability of the knowledge system to become a "self organizing system" where solutions and new insights through manipulating knowledge patterns occur through management analysis, problem solving, and decision making. This creates new knowledge which enables the creation of new products and services, routines, perceptions, system rectifications, and new strategies. The hierarchy of organizational knowledge is shown in Figure 5.
However one of the risks with ingrained management capabilities is complacency, with a high regard for a firm's own management capabilities where organizations fall victim in a belief of their own infallibility due to past successes in the marketplace. Strategies can reflect hopes for the future and wishful thinking rather than wise contemplation. Many companies did not see the threats posed by new competitors entering the market as the US automobile makers ignored Toyota and Honda's entry into the US market and Harley-Davidson and BSA-Triumph did not believe Honda could seriously challenge their market leadership in the market for "up-market" motorcycles.
As mentioned in the introduction to this section, there is a relationship between management capabilities and enterprise performance, although we are not sure to what extent. The effectiveness of managerial capabilities is contributed to by a number of possible factors, which we also cannot quantify their influence. Firstly, managerial capability effectiveness is dependent upon the integration and cohesion of the members of the firm. Strong group cohesion should lead to shared perceptions, knowledge, values, and sense of importance in a collective setting, where managers are able to complement each other (Penrose 1959, pp. 46, 52). Poor group cohesion for whatever reason may lead to dysfunctional management capabilities.
Then come a set of background factors which may have varying influence upon management capabilities (which have all been discussed before), including social background, education, experience, prior knowledge, and motivation. These interactions are so complex that it may be too difficult to individually determine the influence of any individual factor upon management capabilities. Expectations are very important as they set a benchmark upon what performance is measured and what is expected. Management discretion or autonomy provides managers with the freedom and opportunities to use and develop their own judgment. The influence of organizational culture and learning will be discussed in their own sections. The broken arrows between managerial capabilities and enterprise performance indicate that the correlation of this relationship is unknown. This is schematically shown in Figure 6 below.
7. Entrepreneurial Capabilities
Firms mostly start with an idea and in their infancy are small, flexible, and adaptive to the nature of the chosen opportunity. The fact that a small start-up firm can make decisions fast, do things quickly and on the cheap, enter small market segments without direct competition, and modify products and strategy easily where needed, are the very traits that make a small entrepreneurial firm successful. Ideas can be gestated into products reasonably quickly, giving the small entrepreneurial firm many advantages over larger and mature incumbents.
Large firms can become cumbersome, lethargic, and complacent, making them slower to react because of high fixed cost to serve smaller market segments and find difficulty in modifying strategies due to their sunken investments. They lose the entrepreneurial drive that first made them successful and become very formal and management orientated. Many mature firms act as though they exist within a stable environment, only undertake revisions of strategy on a periodic basis and rely on natural growth of the market for their development, rather than making any innovations.
The capability to maintain a state of adaptation to the environment requires more than just management capabilities. Entrepreneurial capabilities are concerned with maintaining alertness to opportunities, evaluating them, and making decisions to exploit them. Entrepreneurial capabilities encompass more than gaining access to the necessary resources to make things happen, steering growth and surviving. Entrepreneurial capabilities are about actively searching for an applying new technology (13) to fulfill continuing visions of what the management of the firm envisages for the future. Entrepreneurial capabilities are about finding growth through rearranging resources, building new capabilities, employing new technologies in the pursuit of new visions. (14) Entrepreneurial capabilities are about maintaining alignment with the changing environment through making conscious strategic choices (Child 1972). Change does not just occur in the environment while a firm passively looks on. A firm's strategic interventions also change the environment (Wernerfelt 1984).
During early firm infancy, the founder may rely on his or her skills and personal competencies to get through. These evolve through the growth of the firm into first entrepreneurial capabilities and then into other enterprise capabilities. Entrepreneurial capabilities are built up upon early entrepreneurial initiatives (Garret & Covin 2007). Entrepreneurial initiatives build up new knowledge that develops other enterprise capabilities (Zahra et al. 1999). The development of other enterprise capabilities is an evolutionary process, usually entailing trial and error and experimentation (Zahra & Filatotchev 2004, Zahra & George 2002). A continued entrepreneurial capability throughout the life of the firm can facilitate the identification and pursuit of new entrepreneurial initiatives, thus maintaining alignment of resources, capabilities and opportunities. Entrepreneurial capabilities provide flexibility where mature firms can quickly deviate from set strategic paths. Entrepreneurial capabilities assist in providing flexibility (Birch 1987), innovation (Backman 1983), and growth (Drucker 1985).
Entrepreneurial capabilities facilitate two types of entrepreneurial initiatives, those that are intended and those that are emergent on an ad hoc basis. Intended entrepreneurial initiatives are activities that are the result of planned and purposeful action based on a strategy. This may include opening of a new outlet, a branch, the development of a new product or service, etc. They are intended to return a purposeful revenue and profit based upon the perceived opportunity and crafted strategy intended to exploit it (Lovas & Ghoshal 2000). Emergent entrepreneurial activities just happen without any formal recognition of any specific opportunity. They are an extension, or flexible move following a perceived opportunity path that is emerging of perceived within the environment. These initiatives occur serendipitously but usually linked to the current competitive field and technologies of the firm. These initiatives often occur where the founder or management cannot properly assess the scope of the opportunity and are very common occurrence at SME level.
The existence of entrepreneurial capabilities within a firm is dependent upon the attitude of individuals within the firm (Stevensen & Jarillo 1990). It is not just the founder/manager's attitude but also the rest of the employees as well. In addition opportunities cannot be pursued and exploited if they are not spotted and identified in the first place. Alertness to the environment is an important aspect of entrepreneurial capabilities and depends upon individual abilities, product, market, and technical knowledge. Entrepreneurial capabilities assist a firm develop strategic growth rather than rely upon natural market grow for its internal growth. This is a fairly rare capability (Leibenstein 1987) and is somehow connected to the values of the enterprise founders (Schein 1983).
Entrepreneurial capabilities are a driver of a firm's ability to renew itself (Stopford & Baden-Fuller 1990, Sambrook & Roberts 2005). Entrepreneurial capabilities are the sustaining characteristic of a firm that enables it to react to a changing environment. Without this characteristic a firm will be stifled, unable and unwilling to transform its products, processes, and strategies. Entrepreneurial capabilities enable a firm to keep stretching itself into new areas of opportunity and growth during its lifetime.
8. Organizational Culture
Organizational culture became very popular in management literature during the 1980s. However, most literature took a positivist approach which treated the various aspects of culture as objects that can be manipulated to achieve better organizational performance. The instrumentalist concepts of a power culture (Deal & Kennedy 1982), a role culture, task culture, person culture (Handy 1985), caring culture, integrative culture, apathetic culture and an exacting culture (Sethia & Von Glinow 1986) all tended to ignore that culture is made up of human irrationality and emotion. Culture is in effect a multiplicity of complex conceptual structures, many superimposed or knotted into one another, which appear strange, irregular and inexplicit (Geertz 1973).
Edgar Schein (2005) defines organizational culture as "a pattern of shared basic assumptions that the group has learned as it solved its problems of external adaption and internal integration that has worked well enough to be considered valid, therefore, to be taught to members as the correct way to perceive, think, and feel in relation to those problems." Organizational culture can be seen, felt, and observed through narrative, rules, offices, office layouts, furniture, written documents like mission statements, slogans, the way people dress, the way people react with each other and with those outside the organization, the way people work, peoples ideals, status and status symbols, the organization's heroes, traditions, peoples' emotions, and behaviors. Under this can be seen what is valued within the organization and the underlying set of beliefs members share. These are primarily at the conscious level.
Underneath peoples values and beliefs lay the underlying tacit assumptions of the organization, which are primarily unconsciously embedded within the members. These can be picked up through seeing what subjects and issues are taboo within the organization and finding out the "unspoken" rules that people follow. Looking at the difference in what is espoused through narrative and what is actually done by the by the organizations members also exposes deep assumptions (Argyris and Schon 1974). Culture produces paradoxes and inconsistencies that show up particular values like rewarding people, but at the assumption level take on different meanings like favoritism and/or control, which can have profound influence on the effectiveness of enterprise capabilities. Culture is also a field of power, which can either empower members or alienate them (Bourdieu 1988). An organizational culture is greatly influenced by the organization's leadership through their narrative, actions, style, and symbols. Different configurations of the above produce sub-cultures which can run consistently or counter to the prevailing dominant organization culture.
Certain types of culture delineate reflection, thought, spontaneity, impulsivity, an action orientation, no action orientation, risk taking, risk aversion, aggressiveness and being pro-active verses being laid back and passive, etc. Some cultures suppress conflict in the interests of harmony, while other cultures produce conflict which lead to new meanings, new directions, thus influencing the whole inertia of the firm (Bourdieu 1993). Cultures continually change with dynamic interplay between the organizations members, society, the environment, its leaders, and the results the organization achieves or fails to achieve. Culture provides a collective interpretation and assignment of meaning to the environment (Daft & Weick 1984, Morgan 1986, Smircich & Stubbart 1985, Weick 1979). An organizational culture has immense effects upon enterprise capabilities but at the same time is one of the most difficult aspects of an organization to understand and change.
The effects of culture can be seen by casual observation of an organization. For example, if one experienced the staff at an old Eastern European hotel in one of the old communist bloc countries during the cold war era, one would have found that the staff often appeared complacent and disinterested in guest problems as the state provided job security. Compare this to the enthusiastic staff on Asia's leading low cost airline Air Asia. Culture plays a role like an "invisible hand" in ensuring an organization's members adhere to rules and conventions and behave according to the norms of the organization.
Organizational culture can play a positive role in an organization. The prevailing culture ensures members follow formal and informal rules of conduct and social norms supported with powerful conforming forces, so efficiency, predictability and stability is assured (Morgan 1986, p. 131). Norms are created through enactment where they are tested, and the positive ones that reinforce success are retained and the negative ones that are unsuccessful or unimportant weeded out and rejected (Miller 1993). Eventually these accepted norms mould into shared meanings as beliefs and values. This process over time creates a generation of firm specific symbolic knowledge that success in the past and present has been obtained through. Thus culture links the past with the present and with a certain orientation that can be taken in the future.
Developing enterprise capabilities requires more than just assembling skills, personal competencies, assets and other resources together. Capabilities require complex patterns of coordination between people and the resources they have. Capabilities must become routines which are supported by the organizational culture to be effective. The effectiveness of capabilities requires cooperation and coordination within the membership of the organization and the values, norms, traditions, and leadership are all important in gaining member commitment (Grant 1991). Finally through the socialization aspects of culture, tacit knowledge gets passed on from member to member through specific use of models, symbols, analogies, metaphors and other means that "objectifies" implicitly (Schultz & Luckman 1985). Implicit knowledge is necessary for any capability to operate effectively.
An organizational culture can also cause an organization to behave dysfunctionally and affect the firm's perceptions, performance, efficiency, effectiveness, and the ability to implement meaningful strategy. At the extreme, firms that rely on formal bureaucracy and rules for control tend to produce employees who fear superiors and spend their time trying to avoid censure. Fairness is achieved through impersonal rule creation that is orientated around reporting and measurement, i.e., time clocks and punch cards, etc. (Bies & Tyler 1993). Authority is top down, usually in the hands of "powerful people" who use intimidation to make employees feel they are beyond questioning. Bureaucracy and rules are also used to mask leaders' biases (Moore & Haas 1993), or to justify self serving actions. Consequently employees feel that they have little power and discretion and develop a sense of mistrust of the organization (Sitkin & Roth 1993). The poor congruence between competent people and the values and requirements of the bureaucracy may create feelings of alienation, despair, frustration, and apathy (Argyris 1957). As a result individuals may only perform to their minimum to satisfy organization requirements, refusing to do anything more for the organization than is necessary (Bateman & Organ 1983). This may result in employees creating dysfunctional work routines (15) to cope with their feelings of alienation which may emerge as covert sabotage of the workflow, or resignation from the organization, leading to the inability to exercise their enterprise capabilities effectively, affecting overall performance and efficiency of the organization (Martinko & Gardner 1982). When employees engage in behaviors that are negative to the organization, management may respond by tightening their controls on employees, creating a spiral of actions and reactions that can destroy enterprise capabilities (Lado & Wilson 1994).
Leaders that utilize hierarchical authority to control and coordinate their organization may lead it to being a very rigid one. This is advantageous when existing values, norms, and routines may be orientated around existing enterprise capabilities which have worked in the past. However excessive rules and procedures hinder any potential innovation as members of the organization have become risk adverse and are unwilling to experiment and make any extra efforts on behalf of the organization. Therefore any organizational culture that supports existing enterprise capabilities can also constrain their evolution and development (LeonardBarton 1992). This weakens the firm when existing enterprise capabilities do not align to the changing needs of the environment. This can become very difficult to rectify as the firm finds that current enterprise capabilities are supported by deeply ingrained knowledge, values, management, and technical systems.
Firms often become trapped by their own cultures which distort perceptions and create barriers to taking action. Firms can exhibit "defensive routines" just as individuals exercise personal defense mechanisms. Organizational "defensive routines" may be utilized at a group level to cope with ambiguity, contradictions, or surprises emerging from the environment (Argyris 1986). This may lead to management denial or ignoring of ambiguous and contradictory situations within the environment. Management may blame "external factors" for poor performance, rather than try to improve their own performance (Cangolesi & Dill 1965, Starbuck 1983). The phenomena of groupthink discussed back in chapter three of volume one can come into play where management backgrounds tend to be very similar. Finally firms may not be apt to take action because they over analyze the situation looking at quantifying irrelevant things, thus preventing decisions. Any potential remedy to a threat is discounted due to over scrutiny which produces negativity and pessimism.
There are numerous ways of viewing and mapping organizational culture with each method providing different perspectives of the meaning for an organization's members and/or for the organization as a whole. As mentioned at the beginning of this section, much of the management literature takes a positivist or instrumentalist approach to the subject, simplifying the concept of culture down to a few variables that can be manipulated to create a certain type of culture.
From the point of view of being able to develop and evolve enterprise capabilities and utilize them effectively within the strategic environment a cultural environment should both have a propensity towards stability, coordination and control on one side, and nurture creativity and learning on the other. Burns and Stalker (1961) through their studies found that organizations that are characterized as hierarchical, highly structured with well defined formal roles and rules, with top down communication, are mechanistic organizations and more suited to repetitive and routine tasks like manufacturing and distribution, etc. On the other hand firms that were more fluid in structure and where teams were formed around expertise rather than formal authority were organic organizations that were better suited to facing environmental ambiguity and unpredictability, approaching new problems and opportunities, and had better internal environments for creativity and learning. Firms need to find a balance between the two types of organizations to maximize their enterprise capability effectiveness and also be able to develop and evolve them.
The work of Theresa Amabile et al. (1996) discussed back in chapter four of volume one can add more depth to the concept of mechanistic and organic organizations. Amabile points to six continuums that affect the level of creativity within an organization; 1) the level of organization encouragement, 2) supervisors encouragement, 3) work group support, 4) personal freedom, 5) available resources, and 6) the personal challenge involved. Amabile (1998) also mentions that domain expertise i.e., competence is very important for creativity and innovation. Rosabeth Moss Kanter (1988) stated that innovation is most likely to occur in organizations that 1) have integrative structures, 2) emphasize diversity, 3) have multiple structural linkages inside and outside of the organization, 4) have intersecting territories, 5) have collective pride and faith in people's talents, and 6) emphasize collaboration and teamwork. Robinson & Stern (1997) also highlight the positive aspects of open communication on firm innovation.
Creativity and learning is also influenced by the time orientation of a firm. According to Drucker (1974) firms that become trapped in analysis of the past succumb to what he calls the "paralysis-by-analysis" syndrome. An analytically orientated firm will tend to rely on extrapolated financial models which will give different results depending upon the method used. One of the effects of this reliance on data is that the firm may lose faith in their own judgments, as forecasts become replacements for plans. Firms also become complacent with their past achievements and become over confident about the future (Schumacher 1974). Firms that are orientated toward goals in the future will tend to be more open to creativity and learning (Tesluk et al. 1997). Figure 7 summarizes the above with a culture map showing a relationship and time focus axis with four quadrants; control, competence, cultivation, and collaborative quadrants. The organization position on the map will have specific consequences for capacity effectiveness and creativity and learning.
9. Learning Capability
The ability of the firm to learn is one of the building blocks of strategy which links the past, present, and future together (Starkey et al. 2004). The primary objective of an organization is concerned about dealing with the future. This is usually based on analyzing the past and seeing how this information influences the present and then selecting one of the numerous potential strategy scenarios that can be identified for a firm to take (Hamel 1997). Prahalad (1997) suggests that a firm cannot compete in the future with old strategies. It will be the firms that learn faster than their rivals, see and exploit new opportunities that will make them the most successful in the future. Strategy is about preparing for an unknown future and therefore a learning process.
The learning organization metaphor evolved as a concept in the early 1990s and is described as an organization that facilitates learning which consciously transforms that organization and its context (Pedler et al. 1997). Daniel Kim (2004) stated that advanced organizational learning is about developing capabilities that are consistent with firm objectives. Every firm comes into contact with and deals with customers, suppliers, competitors, and confronting its own internal problems, but some companies are better than others at extracting knowledge from their experiences. The ability to maximize learning from experience is vital to a firm in developing new strategies so the same mistakes are not made over and over again. The ability to learn at an organizational level is a necessity to developing strategy and as a consequence can be classified as an enterprise capability.
Environments for learning differ greatly between organizations. Organizational learning requires imagination, the development of generative relationships, and the ability to continually reorganize ourselves (Dixon 1994, p. 81). The emphasis of the learning organization is to develop collective reasoning and the intelligence at organizational level and make learning occur rather than dysfunctional habits and intimidation that management uses as a control tool (Starkey et al. 2004, 5). This aspiration aims to create an organization that functions as an adaptively rational system that continually learns through experience (Cyert & March 1963). The organization becomes an interpretable system of the environment where transitions can occur (Daft & Weick 1984).
The core aspect of organizational learning is the ability to act more creatively in viewing, discovering and constructing opportunities and crafting their corresponding strategies that exploit the appropriate sources of opportunity in enterprise innovation. Conceptual learning is concerned with thinking about why things are done and how things are done the way they are in the first place. This often challenges the very nature of our routines, procedures, perceptions, and conceptions that presently exist. The challenge enables us to critically question our existing mental models which can open up new opportunities, new directions in strategies, incremental improvements, the realization of market incongruities, and new approaches to a problem reframing it in such a way that bring breakthroughs in approaches. Creativity is learning, where if the result is positive, the new framework is reaffirmed into acceptance, and if the result is negative, further investigation is required to find another way that will bring a positive result.
Organizational learning is based upon individual learning but is much more complex. In the early stages, organizational learning is synonymous with individual learning. Learning at the individual level is about developing knowledge and skills which through repetition and experience become operational skills and conceptual competencies. Organizational learning depends upon knowledge being built up into a mental model and shared amongst members of the organization. This knowledge is mostly tacit and embedded in organizational routines and procedures that become institutionalized. This organizational mental model is held in the assumptions of its members which are deeply ingrained images about how the world works, which has profound influence upon what we see and what we do. Learning at the organizational level is about reframing these mental models. However, our mental models often prevent learning, protecting the rigidity of the status quo that precludes any challenge.
As organizational learning is a metaphor of our understanding of individual learning, theories of individual learning are thus important to understand in order to understand organizational learning. Definitions of learning from a number of academics and practitioners in this area stress the importance of experience in the learning process (Piaget 1970, Argyris & Schon 1978, Kolb 1984). Therefore learning occurs when a person continually cycles through a process of having concrete experiences, making observations and reflections upon the experience, develop abstract concepts based on these reflections, and test them in the new life situation which leads to another concrete experience.
People learn know-how and apply what they have learnt, demonstrating know-why. For example, a builder knows how to build a house foundation, set up the support frames of the walls, lay bricks, build a roof, and lay tiles, etc. But without knowing what these skills can be used for, i.e., building a house and other conceptual structures, he or she lacks know-why. Likewise, an architect knows about conceptually developing all sorts of structures, know-why, but lacks the personal know-how to lay foundations, build wall frames, build roofs, and lay tiles, etc.
This way of learning through experience, reflection, conceptual generation and trying these new concepts in a new situation which leads to a new concrete experience is the basic cycle used in Total Quality Management (TQM), Deming cycle of plan-do-study-act, Schein's (1987) observation-emotional reactions-judgment-intervention cycle, Argyris and Schon's (1978) discovery-invention production-generalization cycle of learning, and Kolb's (1984) experiential learning model (see author's version Figure 3.8. in volume one).
However this learning cycle at an organizational level, i.e., scan the environment, set goals and objectives, and monitor performance, adjusting for any deviations of performance, amounts to what Arygris and Schon (1978) call single loop learning. This is fine for monitoring spending budgets, production and sales targets, etc. Just like a heater thermostat set to 20°C. If the temperature in the room rises above 20°C, the heater will turn off, and when the temperature falls below 20°C the heater will turn on again. This cycle continues unbroken without any changes to assumptions.
However, sometimes to correct a situation, the underlying assumptions need to be reviewed. For example when a firm faces inventory shortfalls it may schedule more production by expanding operational hours, utilizing overtime. But there may be serious capacity problems that the production clerk is not considering, requiring a long term solution outside the short term solution of expanding production hours. Finding wider solutions that relying on feedback won't occur, as questioning the basic assumptions behind the process is required. This is double loop learning. Going back to the heater thermostat example, single loop learning (temperature feedback to the thermostat) does not provide any questioning of other factors that contribute to the temperature level in the room, e.g., insulation, open windows or doors, etc; it just reacts to the temperature feedback. Double loop learning enables us to question our assumptions and mental models by allowing us to look at new possibilities and solutions to problems, leading to new actions.
However double loop learning is not easy to achieve as it challenges the organizational status quo, the way things are done, and the current mental modals one possesses. This is particularly the case in bureaucratic organizations that are rigid and don't promote experimentation and risk taking. Within bureaucracies individuals may learn in fragmented sections, but this knowledge is never collated and synthesized at an organizational level. Conflict and political considerations may hinder the organization taking up information from certain sources as it is seen to challenge the authority or power of certain people. It is really questionable whether executives are truly logical, rational, and wise in their deliberations as is generally believed (Kets de Vries 1995). Much of what takes place in organizations takes place within an intrapsychic environment that exhibits conflict, anxiety, defensive behavior, and tension, etc. These factors lead to defensive routines which block learning and stifle creativity within the organization to protect embedded mental models, ease anxiety, relieve fear, and deflect criticism. They are often hard to see as they may form part of the organization's values such as "we win, do not lose," "we suppress our feelings so not to offend others and maintain harmony," and "we must analyze things before we act," etc. These types of values are considered the correct way to think and behave, which can lead to dysfunctional actions (Argyris et al. 1985).
In an effective organization, learning is greater than the sum of individual learning. New knowledge comes from a number of different sources which include:
1. Individual Employees individually know their own specific tasks and duties better than others within the organization. They bring various types of expertise and knowledge with them to the organization and also accumulate further knowledge through work repetition. The accumulated knowledge that results over the years from experience and training will if utilized greatly assist in enterprise problem solving (Simon 1984). Diversity of knowledge is very important for the organization to be able to draw upon it in the developing new innovations, but the effectiveness of this knowledge depends upon how decentralized this knowledge is in the bureaucracy and how free employees are to explore new knowledge and techniques within the organization (Marengo 1992). Human resource selection procedures are very important in selecting the right mix of employees to bring diverse knowledge to the organization. The effect of human resource selection upon performance can be seen in football club recruiting which has an important bearing on how a team will perform within each season.
2. Public Domain Knowledge is generally any knowledge that is not covered by intellectual property rights, or that individual property rights have expired. (16) Public domain knowledge generally includes formal arts and science knowledge, mathematical and scientific formulae, general knowledge, most forms of traditional knowledge, expired patents and copyright rights, and any other intangible knowledge that cannot be individually owned. Firms may utilize fundamental knowledge which may include scientific theories and principals that can be used to produce proprietary knowledge. Public domain knowledge allows a firm to pursue competitive imitation strategies, use as building blocks to create other knowledge, or make adaptations or derivatives to create new products. (17)
3. Migratory knowledge includes specific explicit knowledge like technical books, plans, specifications, designs, and implicit knowledge through the acquisition of employees, consulting, and training etc. Migratory knowledge enhances the building of a firm's prior knowledge, enabling it to catch up with technically superior competitors (Badaracco 1991). This is very evident in both the automobile and computer industries where knowledge, technology, production processes, and expertise has been packaged and can be assembled in a way that firms can take advantage of these pieces of knowledge developed externally to their own organizations. (18) The intellectual property patent system has allowed pieces of technology to be packaged together so they can be transferred through license from firm to firm. Other ways migratory knowledge can be acquired is through purchasing "turnkey" equipment, and through materials and products that can be reverse engineered. Knowledge migration is quicker when organizations have the capabilities to understand, assess, manipulate, manage, deploy, and apply the knowledge they acquire.
Knowledge comes into an enterprise as both explicit and tacit information (Polanyi 1966). Explicit knowledge is knowledge that is codified and can be transmitted in formal, systematic language which can be acquired in the form of written information. This information is stored in individuals as skills and vocational knowledge and within the organization as written documents, products, machinery, and other organizational assets. Tacit knowledge is deeply rooted in the human mind and is difficult to codify and communicate formally. It is expressed through action, commitment, involvement, attention, and focus to specific things within the organization. Much tacit information is embedded in the formal and informal rules, procedures, and routines of the firm (Cyert & March 1963). This is what is sometimes called the organizational memory of the firm (Lawson & Lorenz 1999). Therefore much behavior in firms may not be formed by explicit intentions. Tacit knowledge may have a very important influence which itself may be based upon firm history, traditions, and cultural origins. Tacit knowledge can only be acquired through experience, observation, socialization, imitation, and practice within the organizational context.
It is tacit knowledge that enables an individual to interpret the rest of the firm's knowledge base. There are assumptions behind explicit knowledge which provides it with contextual meaning. For example, a person may know how to ride a bicycle. The same person may also know how to endure long bicycle rides through various weather conditions. The fact that the person is a member of a road bicycle club gives meaning to the person's skills and competencies.
Explicit and tacit knowledge forms the firm's prior knowledge base. This may include proprietary explicit knowledge as patents, trade secrets, custom procedures, specifically designed software, etc. However it is tacit knowledge which enables explicit knowledge to work for the benefit of the organization (Howells 1996, Nelson & Winter 1982).
Organizational learning is dependent upon absorptive capacity. Absorptive capacity is the basic ability of an enterprise to acquire new knowledge and combine it with the prior knowledge base (Cohen & Levinthal 1990). Absorptive capacity depends upon a firm's ability to recognize the value of new knowledge. However absorptive capacity can be hindered by what Levitt & March (1988) call the "competency trap" where an organization that is very good at doing something is blind to new ideas and technologies. This resistance to new knowledge is based in some of the assumptions a firm develops behind its tacit knowledge. Absorptive capacity can also be limited when a firm has little or no technical knowledge in the domain that new knowledge exists within. Consequently no one within the organization is able to put any value upon the knowledge and it is not absorbed into the firm, and thus the firm is unable to benefit upon it (Tushman & Anderson 1986). So to a great extent absorptive capacity also depends upon individuals' background knowledge and ability to communicate with other members in the organization.
We have discussed in some detail how organizational factors influence the firm's ability to utilize new information for problem solving, decision making, innovation, and strategy. As we saw in the last section, different cultural aversions create different sets of conditions for creativity and learning within an organization. This also influences our general perception of the environment. We don't see objectively, what we see is value laden and given meaning through the scope of our prior knowledge. As we saw back in chapter three of volume one, perception is greatly influenced by our defense mechanisms, cognitive biases, heuristics, motivations, abstract inferences, fallacies, and neurotic states, etc. We only perceive what we want to perceive.
The organizational mind only exists metaphorically. It is distributed between individuals, groups, enterprise routines and procedures, its products and manufacturing processes, problem solving and decision making processes, letters, spreadsheets, what is on the minds of organizational members, how the membership of the organizations acts, what they pay attention to, and other sources of explicit and tacit knowledge "stored" around the organization in various forms, making up the prior knowledge base.
Organizational learning is bound to the extent of technical, functional, and conceptual knowledge the firm possesses. This "stock" of knowledge bounds the firm to a particular competitive field, thus new knowledge in the environment must bear some close proximity to the existing prior knowledge base to be understood. For example firms are better able to recognize and exploit new information relevant to their specific product/markets (Abernathy 1978, Rosenberg 1982). Production experience provides a firm with the background necessary to recognize the value of technical information and exploit it.
Therefore new ideas, concepts, new products, strategies, and ways of self organizing can only be created to the extent of the prior knowledge base. Thus the breath of categories in which prior knowledge exists and the linkage across each category determines how individuals make sense of new knowledge (Bower & Hilgard 1981). Learning is more difficult in novel domains, limited by the existing expertise. So diversity of knowledge plays an important role. This implies that the act of creating new knowledge is an act of creativity, as creativity is the act of rearranging and making new links in knowledge. An organization is therefore a self organizing system of knowledge. The essence of learning is acquiring new knowledge and combining diverse pieces of information together until they make some new meaning. Decision making and problem solving creates new knowledge. Most new knowledge results from knowledge a firm already has and borrowed ideas from other places, rather than inventions (March & Simon 1958). One of the important ingredients that assist in achieving the assimilation of new knowledge into the enterprise is the existence of a shared language and knowledge, which facilitates intra-firm communication (Cohen & Levinthal 1990).
Knowledge is transferred by either tacit to tacit conversion where members of the organization transfer their knowledge through training and others observing, or explicit to tacit conversion when explicit knowledge is shared throughout the firm and other members use this information to reframe, broaden, or reflect upon their existing tacit knowledge (Nonaka 1994, Nonaka & Takeuchi 1995).
Exposure of the organization's members to knowledge is not enough to learn unless an effort is made. The intensity of effort is the amount of energy expended by organizational members in solving problems, and thus must be somehow related to personal and group motivational factors. Without intensity of effort, there will be no enterprise absorptive capacity, creativity, or learning. Generally organizations with large and diverse prior knowledge bases and high intensity of effort will have a high absorptive capacity for new knowledge. Organizations with a high prior knowledge base and low intensity of effort will lose their capability to absorb new knowledge and may find it difficult to remain competitive as their prior knowledge base becomes obsolete. An organization with a low prior knowledge base and high intensity of effort will be able to broaden and enlarge their knowledge through absorption.
Learning occurs through solving problems and testing new solutions through trial and error (Harlow 1959). Time must be invested in solving organizational problems to develop the cumulative knowledge and learning skills necessary to assimilate information and make novel linkages and associations (Kim 1995).
Cumulative learning usually occurs along a steady pace within an organization. Because of the nature of prior knowledge, learning follows a particular trajectory from an historical base. However when a crisis occurs within an organization, periods of discontinuous learning can occur where the whole learning process speeds up. A crisis can occur because of an external event or a deliberately created event that will be effective if it unites members of the organization together. Organizations can potentially come to their best when faced with a crisis (Miller & Friesen 1984, Tushman et al. 1985). A crisis usually brings with it an opportunity and it is up to the leadership to guide the membership into productive activities towards specific goals, rather than allow them to drift into unproductive or self destructive defensive routines (Kim 1997).
A constructed crisis is a solution to organization inertia as it may generate intense pressure to get things done enabling the organization to set new goals (Meyers 1990). This strategy will not be suitable for pioneering firms in ambiguous environments where they can only chart broad directions because of the uncertainty (Nonaka 1988), but very suitable for firms that are attempting to catch up technically with the rest of an industry (Kim 1997).
Once a firm has a deep and diverse prior knowledge base and diverse range of membership expertise, new knowledge can be created by research. This is particularly the case when the firm is a pioneer of a technology.
Organizational learning is dependent upon people changing their mental models. Learning is effective if what is learnt is relevant to strategy and innovation. Firm innovation is the result of learning. Innovation could be new ideas, the solving of problems associated with products, processes, or procedures, the launch of new products and/or services, the creation of new channels or business models, technology enhancement, new technologies, and/or new strategies. The rate at which innovations resulting from learning are adopted by an organization depends upon; a) the relative advantage the innovation provides the firm, b) The type of organizational decision made i.e., authoritarian, consultative, c) the communication channels used to explain the innovation, d) the extent that change agents support the innovation, and e) the nature of the social system. Figure 8 shows a metaphoric model of the organizational learning process just discussed.
The next section will look at the innovative capacity of the enterprise.
10. Innovative Capability
Innovation is the result of a number of interrelated actions rather than a single action or task. It is not just a conception of a new idea, nor the invention of a new device, nor the development of a new market. It is the process of all these things within an integrated fashion. Therefore innovation is a process, and as a process it must be managed and integrated accordingly through the various processes and manifestations that result from the organizational learning process. Innovation is concerned with implementing conceptualized ideas and developing practical applications of inventions. As there are numerous types of different innovations (these were discussed in chapter one of this volume as sources of opportunity), they must be managed differently. The actual development of innovation is the process of transforming opportunities into tangible products, services, and strategies (Trott 2002, p. 200).
Innovative capabilities build enterprise ingenuity. This may involve making new manufacturing plant and equipment, or creating service and supply models that couldn't or haven't been done before, through creating a broader knowledge base to solve specific applied problems related to product/service design and/or production/delivery processes, etc. (Bowen et al. 1994). Creating new product concepts is one thing, but producing them on a mass scale is another. The development of new knowledge through creativity is needed to achieve this. Therefore being an innovative enterprise requires a) basic knowledge in the relevant domains, b) the use of that knowledge to identify opportunity, c) the ability to apply that knowledge in new product development, and d) the ability to apply that knowledge in forming and developing the organization. Thus function and hierarchical organization and leadership can never achieve these requirements without the addition of creativity and imagination through the analytical, problem solving, and decision making processes of the enterprise.
The type of people employed and their knowledge can have a bearing on the firm's future development (Beckman 2006). An enterprise's innovative capabilities are dependent upon the degree and variance in the technical knowledge of employees, their different education, training and backgrounds, and types and ranges of abilities they have. Different geographical locations will tend to contain people with different knowledge bases. For example people originating from Silicon Valley will have a different knowledge base and conceptual vision than others from the wheat belt of the United States, or from the financial centers of London, New York, or Singapore (Saxenian 1994). Also, the enterprise's environment and culture also affects innovation. Innovation is dependent upon the authority and autonomy they are given in solving problems and making decisions. There must be a system within the organization that enables the application of what is learnt. There should be a widely held belief by the members of a firm that the firm will progress through learning (Bowen et al. 1994). Failure should be seen as part of the learning process, rather than something that creates stigmatization for those that don't succeed with their ideas (Landier 2006). There should also be a guiding vision within from the leaders of the firm that innovation is a necessity for the future.
Individuals within an enterprise must understand the commercial consequences of technical knowledge to be able to apply it to any innovation. This is a necessary precondition so that a continuous process of innovation can occur and be relevant within an enterprise. New product development is the most effective way of making continuous change within an enterprise (Eisenhardt & Tabrizi 1996). It is through new product development that knowledge is converged to create new knowledge (Iansiti & Clark 1994, Helfat & Raubitschak 2000). This is especially so in changing environments where innovation and imitative behavior erodes competitive advantage quickly (Schumpeter 1934). Depending upon a firm's capabilities, some products are harder than others to develop (Verona & Ravasi 2003), and technical capabilities must be supported by marketing capabilities when applying new knowledge to product development. This is where innovative capabilities become dynamic and push the firm's capabilities forward.
The new product development process itself requires good management and problem solving skills to ensure all relevant issues concerning the technical and marketing aspects of the products are covered and that the prototype can be mass produced. Enterprises that can conduct this process in an efficient and flexible manner may have an advantage over firms that take a longer time. For example, quick and flexible new product development would be of great advantage to firms in the stationary industry in responding to retailer requirements, but almost an impossibility in the pharmaceutical industry which has many statutory protocols to meet.
New product development is a way for an enterprise to maintain its competitive position in the marketplace. Even companies with products based on new "breakthrough" technologies cannot maintain their competitive advantage forever and must continue to develop and acquire new products in order to keep in front of their competitors who will eventually catch up with them. Products have a limited life and new products must be created to replace those near the end of their lifecycle. Even in markets that are considered stable there is continual change due to the influence of changing consumer tastes, preferences and new technologies. This is leading to shorter product lifecycles. Brands may continue, but the products under the brand umbrella will normally change regularly in an almost seasonal fashion (see Figure 9). Thus companies that don't continue to develop new products run the risk of becoming irrelevant to the marketplace, threatening their survival. Markets have changed so rapidly that 40% of the Fortune 500 companies that existed in 1975 do not exist today (Griffin 1997). New product development is a very important aspect of the competitive environment and facilitates competitive advantage to a firm. New products are a strategy that companies utilize to introduce enhancements to their offerings in the market, so they can claim benefits over their competitors. If encumbering companies don't launch new products, their competitors will launch products that may give them potential advantage in the marketplace. This can potentially erode other company market positions, revenues, profitability and even threaten survival of firms that do not take any retaliatory action. The significance of this strategy can be seen in the fact that today, on average, 33% of a company's revenue will come from products launched within the last five years (Foster 2000).
Products have much shorter lifecycles than a few decades ago. For example, pharmaceutical products once had a market life of over 25 years now survive less than 7 years on average. Likewise the lifecycles of processed food products has decreased from 20 years to less than 5 years. A cosmetic product will survive in the market around 3 years before being phased out of the market, where once these products would last more than a decade in the market (Von Braun 1997). Although individual products have much shorter lifecycles, the brand is much more enduring, being continually revived through new product launches under the same umbrella. Companies tend to invest in the brand over the product as a strategy to cope with shorter product lifecycles. This is seen with the major cosmetics and household products brands in the marketplace today.
The purpose of new product development is to find an opportunity and make a strategic decision to develop a product and competitive strategy to meet the basic enterprise objectives of sales, profitability, growth, sustainability and survival. This is manifested through new products being launched in the market place. New product development steers the direction of the company and will have great influence upon the firm's value propositions to consumers and ultimately, it's relative competitive advantage. While new product development is one of the most important aspects of competitive strategy, it is also one of the riskiest. New product failure rates have risen from 45.6% in 1961 to over 80% today (Reinertsen & Smith 1991).
The new product development process begins with the discovery of ideas, screening them for potential opportunity and making a decision to exploit the opportunity. This is very similar to the entrepreneurial process. The new product development process will shape the direction of the company as it will create future sources of revenue for the enterprise. If the new product fails to reflect a need in the marketplace, it is most likely to fail, bringing heavy consequences to the enterprise. If a new product is not differentiated from competitors' products, this will lead to tough competition and price cutting. This will erode potential enterprise revenues and make it very difficult for the new enterprise to survive in an industry of larger and stronger firms. Conversely, if the product is highly differentiated from competitors' products in the marketplace, the new venture will have to make enormous promotional efforts to establish it in the marketplace, requiring a lot of time and resources to do so. The place of new product development within the interrelated web of company strategies and operations is shown in Figure 10 below.
Fundamentally companies regardless of their size adopt similar new product development processes. There is very little difference in the information needed to develop ideas and create opportunities and the procedural steps that need to be taken between companies of varying size. However the new product development process is much more haphazard in a small and new business than within a large company. Yet many small businesses create very successful products just as well, if not better than many large corporations. Although many academics and practitioners advocate a formal new product development process, there is little evidence to suggest that any formal process is more effective than the haphazard way a new venture undertakes new product development. In fact many corporate organizations are looking for ways to make their organizations more entrepreneurial, particularly in the area of new product development.
No standard set of procedures or processes exist in new product development. There are department stage, activity stage, cross functional, decision stage (stage-gate) and process models espoused in the literature. Different industries take different orientations towards new product development, where for example pharmaceutical companies will be dominated by scientific, technological and regulatory issues, while food companies are dominated by consumer research that leads to minor product changes. Yet some industries still take a craft approach, like fragrance creation. A general procedural diagram of the new product development process is shown in Figure 11 below.
There is a strong inter-connection between all facets of the new product development process. Opportunity identification and selection is the heart of the process. Opportunities can be identified from ideas through asking pertinent questions, relying both on hard data and intuition for answers. Once an idea is considered viable, product specifications can be developed. Product specifications at this early stage represent a "wish list" of product attributes that managers feel are desirable and necessary for the product success in the market place. The objective is to identify attributes that will give the product an edge over existing competition in the market place.
After desirable product specifications have been developed, the processes of concept and prototype generation, market and product planning and package design takes place. Where additional knowledge is gained during these stages, the original idea should be re-examined and re-screened to ensure the opportunity is really viable from the market and technical point of view. The product registration process is often commenced early during the new product development process because of the time lag between application and approval, particularly in jurisdictions which require product pre-registration before launch.
The new product development process will then focus on manufacturing development, where methods must be designed to efficiently manufacture the product. This may require further product reformulation and packaging modifications to facilitate product manufacture. There will usually be a final market review before launch. Sometimes a test or limited market release is undertaken within a single group of stores or a single country market before a wider launch is made. However this option is much more limited than before because of increasing customer concentration and the difficulty of achieving selective distribution. Finally after the product launch, some refinements to the product are usually required. This is usually because of unforeseen technical and market issues.
In reality, new product development is influenced by assumptions, short cutting the logic process through the use of heuristics. Heuristics are little rules of thumb firms implicitly develop through executives' collective experience in the industry and have grown to take these beliefs as givens (Crawford & Di Benedetto 2003). For example "30% of people who hear about a new brand will try it." Hunches, gut feeling and intuition are heavily relied upon to develop products. This is contrary to what most of the literature about new product development advocates.
Companies competing in the same industries with similar products have basically the same strategy choices and generic themes to pursue with similar groups of customers. Companies launching products in new markets usually face the same competitors or different competitors with similar products. Points of product differentiation occur from the way management groups in different companies hold assumptions set into heuristic rules that put different weights on particular product aspects and issues. This will result in the development of products that differ between companies because of the different sets of heuristic rules relied upon. Thus the influence of heuristics is the primary way a firm differentiates itself from its competitors.
Successful new product development is influenced by experience. Individuals must have the discipline and maturity to know when they are biased in their thinking. Industry knowledge is very important, but it must be used objectively without emotional bias, i.e., "we have a long history in that market and it is ours," or "we have always been successful with new products in this market," etc. These are cognitive biases that can lead to failure, that some would call market arrogance.
The difficulty of developing new ideas that are real company opportunities can be seen in the realities of new product development below:
* Less than 5% of new products launched on the market are successful,
* Out of 100 new ideas, less than 2 become a commercial reality,
* Most companies are followers in the market and not innovators,
* Very few really novel innovations are ever launched commercially, and
* Most new products are actually only incremental steps in enhancement of products, rather than something completely new.
Although new product development is one of the most important strategies for enterprise sustainability, too many companies turn away from innovation in reaction to declining performance by cutting costs and expenses. They fail to look into the root causes, which may be product life-cycle or competitive based, requiring a new product development solution. This is usually a panic response further stifling innovation within the company. The new product development option is often seen by management as a more difficult alternative than purchasing a product or company outright. The following problems arise when the firm is under strategic pressure:
* Finding the right opportunities and appropriate innovation necessary to develop them,
* Reducing development times without reducing quality and innovation,
* Building and maintaining brand equity through a strong product,
* Integrating market, design engineering and production processes to produce, and products that are considered useful and desirable by consumers.
The above issues are traps for companies which do not view new product development as a continuous strategic process. New product development should be an implicit and continuous background process within the company and the minds of those who manage it. A matrix can be developed of potential new product development strategies available to an enterprise when contemplating new product decisions. This matrix looks at different degrees of technology change on one side and different degrees of market orientation on the other side (see Figure 12.). Each section of the matrix requires a different level of knowledge and capabilities to execute.
Most technical change within any industry primarily relies on incremental improvements (Rosenberg & Steinmueller 1988). Firm improvements upon their range of products are usually the result of R&D activity which generates new applied knowledge through its absorptive capacity. Therefore the pace at which a firm can advance in a domain by launching products into the competitive field will depend upon the extent of the firm's absorptive capacity. Thus it is important for employees of a firm to continually seek new knowledge concerning technical advances and developments. The firm's ability to exploit identified opportunities depends upon the ability to develop new products (Trott 2002, p. 200). This can be seen through the new products launched by Apple, Microsoft, Nokia, Ericsson, Sanyo, Boeing, and Airbus as the primary means of firm growth. New product development is the major enterprise capability that drives continuous change and brings about enterprise renewal in the face of a changing environment (Dougherty 1992, Nonaka 1994, Daneels 2002).
In technologically dynamic industries, a firm's strategic intent and strategic action can often drift apart. This is what is called strategic dissonance (Burgelman & Grove 1996). Strategic dissonance can lead to a gap between firm capabilities and the basis of competition within an industry, leading to a firm losing its competitive position within it to other competitors which pick up the new competitive dynamics, and most often race away to market leadership. The point at which this occurs is called the strategic inflection point where one set of industry dynamics gives way to another, a winning strategy gives way to another winning strategy, or one technology trajectory gives way to another technology trajectory. Figure 13 shows this situation where one firm's innovative capabilities curve drifts away from the terms of competition, losing competitive advantage to another firm whose innovative capabilities get closer to matching the terms of competition, which are also changing along a trajectory line. (19)
This is often difficult to see coming and to avoid strategic dissonance, management must develop the capacity to see the changing nature of competition, the emergence of new capabilities in competitors, the nature of changing technology, that are relevant to competitive advantage. Strategic dissonance occurs because of either the changing basis of competition and the firm's innovative capabilities, or a widening divergence between a firm's corporate strategy and strategic action. This can happen in a firm where employees representing established firm capabilities are dominant in the organizational decision making process or the firms beliefs and values are rigid and not changing to reflect the changing terms of competition (Leonard-Barton 1992). Alternatively the firm may act opposite to inertia and embark upon strategies that are beyond the firm's capabilities or what the market will accept. To keep out of this situation, top management must ensure that the firm's internal environment continues to reflect the needs of real competitive pressures out in the competitive field. Managers must listen to divergent views, rather than insist upon the conformity of ideas. Managers on the basis of diversity of opinions must create new strategic intentions that will lead the firm to new technology, capability and corresponding strategy trajectories to reflect the changing terms of competition within the competitive environment.
Finally in this section on innovative capabilities, it is important to mention that there is a shift away from the emphasis on maintaining sustainable competitive advantage to the capacity to manage innovation and change in the management literature (Brown & Eisenhardt 1997, Tushman & O'Really 1997, Christensen 1997). Thus new product development is the firm's strategic mechanism that converges knowledge and creates new applied knowledge that allows the firm to continually innovate and adapt to change.
11. Dynamic Capabilities
Firms differ greatly in their abilities to adapt to changing environmental situations. Firms also differ in their abilities to create value from their knowledge, assets, capabilities, and resources. These firm differences are usually the result of differing adaptive capacities to create new capabilities and develop new resources according to future requirements, which is critical to achieving sustainable alignment between itself and the environment (Hitt et al. 1998).
Dynamic capabilities are complex, structured, and multi-dimensional. Some enterprise capabilities are static and do not change while others are dynamic and support growth and change within the enterprise. Dynamic capabilities are the firm's ability to integrate, build and reconfigure capabilities to address rapidly changing environments (Teece et al. 1997). These capabilities support the opening up of new outlets and generation of new products and services, etc. Dynamic capabilities reflect the firm's ability to be innovative. They are the firm's capacity to renew capabilities in congruence with the changing environment. Dynamic capabilities enable the enterprise to fulfill the key role of strategic management to adapt to new opportunities (Dierickx & Cool 1989). This is critical to the role of innovation and technological change.
Dynamic capabilities reside in the firm's organizational processes that are shaped by its position within the competitive field, its assets, and historical development path. What a firm can or cannot do is constrained by this evolutionary path. Experience defines the locus of a firm's technological search scope (Rosenkopf & Nerkar 2001). Firms search for information in the areas that they are familiar and had past success (Christensen et al. 1998, Cyert & March 1963), which greatly influences the firm's knowledge acquisition ability. Consequently firms often have problems coping with changes they are not prepared for. For example, a firm may have accumulated a large technology base which will be almost totally useless if a new "breakthrough" technology unconnected to the present technology base enters the industry (Zander & Kogut 1995).
Dynamic capabilities enable management to follow a number of flexible routines that widen management's ability to follow a number of strategy options (Winter 2000). Dynamic capabilities assist in creating new systems, processes, products, knowledge, capabilities, or new strategic forms of organization (Spender 1996). Dynamic capabilities define the future path of the enterprise, as they lay the foundations of strategy.
One important factor in enterprise success is the ability of a firm to change to change its capabilities, applications of its capabilities, or develop new capabilities when needed (Thornhill & Amit 2000). The ability to redeploy capabilities is paramount to opportunity exploitation. For example, many whalers in the mid 1800s responded to greater opportunities in gold prospecting by jumping ship and heading for the California gold rush, as they had the ability to redeploy their labor (Helfat & Peteraf 2003). Wal-Mart, Tesco, and Carrefour must develop new logistical capabilities to support their stores when expanding their retail outlets in new geographical areas. Exposure to knowledge, the environment, and possession of specific capabilities enables a firm to develop new opportunities.
The possession of certain capabilities enables firms to exploit particular opportunities better than other firms which don't possess the same capabilities. Firms begin their own capability development from different starting points which initially provide some form of uniqueness, however overtime these capabilities converge to "mirror" industry standards (McGrath et al. 1995).
Dynamic capabilities provide a firm with strong ingenuity to understand complex technical problems with the ability to transform knowledge they have into new innovations. The end of a lifecycle for a firm's product does not necessarily mean an end of the capabilities that supported the product. Firm facilities, abilities, processes, and understandings, can be redeployed into renewed capabilities to support new products. For example, this is common in the microchip industry where the same basic facilities can be utilized to produce much more powerful microchips.
A firm's ability to adapt capabilities to other areas rests with the ability to identify and acquire new knowledge that is critical to capability redeployment. The firm must also be able to recognize the links and connections between different pieces of information and combine them to make new meaningful information that enables the exploitation of emerging opportunities. Often the value of new knowledge will depend upon the relevance of complementary assets (Teece 1981), as it plays a role in defining the search zones for new knowledge (Cyert & March 1963). According to McGrath and MacMillan (2000), the ability to make new meaning from different strings of information is central to the entrepreneurial mindset or entrepreneurial capabilities of the firm, which is a driver of firm evolution.
The types of opportunities a firm recognizes helps to define how it sees itself and the competitive field. Self perception motivates a firm to develop new capabilities so it can perform in a reframed view of the competitive field with new competitive strategies (Christensen et al. 1998). However firms run the risk of missing a "window of opportunity" in industry upheavals (Tyre & Orlikowski 1994, Winter 2000). Firms can be blinded by radical shifts in innovation leading to their failure (Christensen 1997, Zajac & Bazerman 1991). Firms can fall into a "familiarity trap" which results from an over emphasis or refining and improving existing knowledge, which often prevents a firm exploiting alternative knowledge sources, thus limiting the firms cognitive schemata (Ahuja & Lampert 2001). "Maturity traps" may result from the need of an organization to work with reliable and predictable information, which can limit the exploration for new knowledge (Ahuja & Lampert 2001). Finally firms may be blinded by "nearness traps" where a firm seeks only the information closest to its own expertise, thus ignoring other information (Ahuja & Lampert 2001).
Dynamic capabilities provide an organization the scope by which it can survive within the continually moving and changing environment. Dynamic capabilities maintain a state of adaptation to allow strategic flexibility.
12. The Basis of Strategy
A firm must create a good fit between its capabilities and strategies in order to be successful. On many occasions large incumbent firms quickly lose their dominant position in the market to much smaller rival new entrants with far fewer resources. Therefore abundant resources are not enough to keep a dominant firm on top; it depends greatly upon the fit between their capabilities and strategies. Air Asia, Canon, CNN, Glaxo, Honda, NEC, Sony, and Toyota had high ambitions and focused on building their capabilities and were creative in matching strategies to those capabilities within their respective industries, even though they were initially much smaller than the industry incumbents.
A firm's strategic posture is determined partly by its learning, internal capabilities and external environment. The formal and informal structure of the firm and its external linkages have and important bearing on the rate and direction of innovation and how capabilities develop (Argyres 1995, Teece 1996). Firms are constrained by their product/market positions, and the historical legacies of whether they have been leaders, followers, or imitators. Also the environment that a firm works within cannot just be thought of as only a market. Firms are constrained by what they can do by regulation, public policy, consumer expectations, intellectual property regimes, anti-trust laws, culture, consumer trends, the economic situation, and technology.
Innovation alone does not necessarily create success (Teece 1996). The firm's reputation, strength of sales force, customer service levels, manufacturing capabilities, quality and prior commercialization experience (Teece 1986), all have bearing on a firm's effectiveness. Strategy should therefore be developed with regard to the main fundamental aspects that provide a firm its performance base, rooted in employees' personal competencies, enterprise capabilities, shaped by the firm's historical path and current market position. Strategy depends upon the perception of the firm's boundaries, its business and mission, influenced heavily by the firm's founder and/or management (Burgelman 1983). This influences the scope of opportunities sort and breath of firm operations along the value chain. Strategy also requires focus and convergence to bring all efforts to a single focal point to maximize the potential for success. Many firms fail to do this, wasting resources on strategically irrelevant activities.
Where a firm can go is a reflection upon the current position of the firm and the potential paths ahead based upon its abilities to rollout new capabilities. The concepts of strategy is based upon a firm's retrospective sense making of its past successes (Burgelman 1991), its perception of its ability to create and rollout new capabilities, its ability to manage this process, and finally the vision that will best facilitate the long-term performance of the firm (Lovas & Ghoshal 2000). The key to gaining advantage on other firms is the ability to identify and respond to environmental cues well in advance of others, which may require developing new capabilities that a firm doesn't presently have. This was one of the keys of Toyota's and Honda's success in the United States market during the 1970s where both companies rolled out dealer and service networks to support their automobile sales (Kotler et al. 1985). The development of sales and sales support capabilities were prerequisites to Toyota's and Honda's success in the US market. Therefore how fast a firm can implement strategy depends upon how fast it can develop and rollout new capabilities. Opportunity exploitation is restricted by our present and future capabilities.
Strategic theories often assume enterprise capabilities of different firms are similar when they are actually not. Firms may possess similar capabilities, but performance differences arise from the different development paths firms take (Cockburn et al. 2000). As we have seen throughout this chapter, technical skills are not enough to build enterprise capabilities. There is an extremely complex relationship and hierarchy between sub-skills, skills, personal competencies, enterprise capabilities, and dynamic capabilities which act as strategy anchors, as shown in Figure 14.
Enterprise and dynamic capabilities provide the firm with capacity. Just as an individual needs the capacity to undertake a specific job to complete it in a satisfactory manner, so should an organization. These capacities are similar to Porter's (1985) value chain, which provides the firm a base for the implementation of strategy.
A firm's capacity has three dimensions, perception, stress tolerance, and communication (Low 1976). Perception is related to seeing the right problem to solve. Many mistakes in perception have been made with devastating consequences due to seeing the wrong problem. The colonial British authorities in Singapore prior to World War II did not see any potential attack by the Japanese through the hinterland of Malaya. They saw any potential attack coming from the sea, so fortified the west, south, and east of Singapore, with devastating consequences when the Japanese invaded through Malaya. The Coca Cola Company in the early 1980s found their market share dropping behind Pepsi-Cola. As a consequence Coca-Cola changed the flavor of Coke in 1985, only having to restore the original flavor three months later due to a large public backlash. Problem finding is more important than problem solving (Churchman 1968). Perception is an intuitive rather than intellectual process, as emotional and illogical things often create the problems facing firms. Within an organization there must be stress, an emotional trigger, that creates enough energy for action to be taken (Selye 1956) on the perceived problem. Without this stress, nothing will be done. Finally there must be a decision to take action upon something with the relevant resources and budgets available.
Capacity, according to Chamberlain (1968), also involves interdependence between the firm and certain aspects of the environment. Capabilities as we have seen involve beliefs, values, and assumptions about the environment and functional relationships between the firm and suppliers, customers, and competitors, etc, which influence perceptions, stress tolerance, and communications. The willingness of suppliers and customers to deal with the firm is also as much a part of a firm's capability for action as its internal capabilities. Interactions with customers are influenced by psychological factors concerning their perceptions of the firm's products, services, brand image, and reputation, etc., and these may weigh in on the courses of strategic action that may be selected. Relationships with suppliers, local government, environmental bodies, unions, consumer agencies, and special interest groups are also very important to the firm's capabilities and strategy selection (Pfeffer & Salanicik 1978, Hegarty et al. 1978). Other factors that may influence the firm's ability to acquire capabilities are the size of the firm and the degree of market fragmentation. For example a small firm within a fragmented market may have difficulty in attracting labor, and other resources necessary to support strategy. However at the other side, the possession of economies of scale may also be of little benefit in a fragmented market.
The creation of products and services that are valued by consumers requires specific knowledge, experience, and capabilities (Drucker 1964). Crafting strategies requires a methodical consideration of what barriers will be likely encountered and what critical tasks must be undertaken proficiently for any strategy to be effective. Successful strategy requires the right knowledge, accompanying resources, and coordination to overcome identified barriers (Thompson 1967). For example, large mass marketed products will require large capital, effective distribution channels, and manufacturing facilities, while a specialist enterprise like a restaurant, spa, or consultancy must require effective networks, specific skills, and customer orientations, etc. However it must not be underestimated what effect the nonfunctional enterprise capabilities like entrepreneurial, management, technological, strategic, and organizational culture play in the effectiveness of strategy.
A firm must identify what capabilities are required to drive the potential strategies it may wish to undertake and implement. Can those that don't exist be generated? How effectively? And, how long will it take to roll them out? The absence of specific capabilities could pose a major barrier to strategy implementation. Likewise there may be external impediments to strategy execution. These may include the scale and effectiveness of competitors, their expected retaliation, regulatory bodies like the environment protection agency, and access and control of distribution and marketing channels, etc. The required capabilities can be plotted on a matrix that shows the firms preparedness for any selected strategy. The matrix shows each enterprise capability (functional ones on the left, the operational ones in the middle, and the abstract ones on the right hand side). The resulting matrix shows how well prepared and aligned the firm's capabilities are with the proposed strategy. Figure 15 shows a capability-strategy matrix for an FMCG product manufacturer.
The matrix above shows the firm lacks a research and development capability. This may occur because basic material research is left to outside suppliers and the firm focuses on new product development, relying on external information about materials and their functions. The lack of logistics and distribution and sales capabilities may resemble a firm that is about to enter a new geographical market. In order to support the firm's future strategies, it must either develop logistics and distribution and sales capabilities or seek them out externally through logistics and distribution companies and sales organizations like wholesalers and brokers, etc.
13. Conclusion
We have seen that as well as a person having personal attributes, behaviors, and values associated with being enterprising, entrepreneurs also need a range of skills, and personal competencies to identify opportunities, start-up, develop, manage, and grow a business or enterprise. In the early stages of the firm's development, skills and experience will develop into personal competencies, and through firm growth with the founder as leader may develop into enterprise capabilities, which support strategy.
Understanding the role of skills, personal competencies, and enterprise capabilities can help explain why innovation occurs within a specific firm. Capabilities can also explain why some firms perform better than others in the same industry and why some become very rigid and have difficulty adapting to new technologies, as they don't have the processes in place that facilitate the generation of knowledge and its application into products, services, and processes (Teece et al. 1997).
It is only when capabilities within a firm are broad that it can function effectively and take advantage of the specialized knowledge it has. Capabilities must complement each other to maximize firm effectiveness (Teece 1986a). Being entrepreneurial is about being able to apply the relevant skills and competencies to the enterprise to create and build something. The ability to be able to "invent" their way out of difficulties is an important aspect of skills, competencies, and capabilities which is not easily replicated by other firms. This depends upon experience, although all experience is not the same. For example, some studies did not find any significant relationship between industry experience and performance within the same industry (Keeley & Roure 1990, Van de Ven et al. 1984), but prior entrepreneurial experience often enhances the ability to find opportunities (Brush et al. 2001, Wright et al. 1998).
This suggests that entrepreneurs must have some knowledge about the industry and its relevant technology, the skills required and enough experience to know that they are doing the right thing, and the requisite abilities and intelligence (Schoonhoven et al. 1990). Peoples' knowledge, skills, and intelligence are not the same and this may explain why people enter industries they are familiar with because of prior knowledge, skills, and experience, where they believe they can develop a better firm than others.
Enterprise capabilities provide a firm with the ability to coordinate and integrate its assets, resources, and other capabilities together in a way that provides synergy with whatever strategy the firm employs within the environment. This is achieved through organizational routines, which are sequences of coordinated actions within the enterprise. In this view the organization can be seen like a huge network of integrated routines (Grant 1991). These sequences of routines govern the flows of raw materials through the production process, logistical systems, and contact with the environment through marketing, promotion, and sales, and feedback loops monitoring performance. Enterprise capabilities enable resources to be useful. Without associated routines, any resources will not be able to make any contribution to the generation of value for the firm. Enterprise capabilities provide governance and order to the firm, encapsulating values, beliefs, and assumptions within them. In this way strategy can be seen as complex interactions of routines that co-opt resources in the pursuit of nominated objectives.
Enterprise capabilities differentiate firms in their individual capacities to perform tasks. For example, in the early 1970s Butler Lampson and Chuck Thacker of Xerox Parc. invented the "Alto," the first personal computer. However their design and components cost over USD 10,000 to construct. It was only when Steve Jobs and Steve Wozniak designed the Apple computer which cost less than USD $3,000 to construct did the value of the opportunity increase as there were many more people willing to spend USD $3,000 on a PC than USD 10,000 (Grant 1991). Individual's skills and competencies and enterprise capabilities cannot necessarily be separated from the opportunity itself, and are in some way, part of it. To some extent perceived skills, competencies and capabilities are important in both the perception and realization of opportunities. Opportunities are conceptualized with skills, competencies, and capabilities in mind. As well as self perception, the actual skills, competencies of an individual and capabilities of an enterprise also partly define the scope of the opportunity. For example, the same retailing opportunities were there for all retailers to exploit, but Sam Walton through his vision, skill, competencies and developed firm capabilities was able to realize the opportunity better than any other discount retailers at the time, e.g., Sears, K-Mart, Target, Costco. Individuals and firms differ on their perceived and actual skills, competencies, and capabilities.
The existence of enterprise capabilities enables firms to find new opportunities based upon its capabilities and suitable new environments. For example, multinational firms can replicate their products, brands, and operations in other markets due to their capabilities and suitableness of selected new markets. The key in exploiting these types of opportunities is to be able to screen capabilities for suitability in other markets. If a firm looks internally and then into the surrounding environment, it will sooner or later find new opportunities.
Enterprise capabilities can only bring relative sustainable value to a firm if its capabilities and corresponding routines cannot be easily imitated or improved upon by its competitors. If a capability is no longer relevant to the marketplace, it will cease to provide any value to the firm. For example bureau facsimile services lost their value when office facsimile machines became available in the marketplace. Most capabilities and their corresponding routines are tacit in nature and difficult to replicate. Many sources of competitive advantage may be so complex and based upon capabilities that the firm itself, let alone the competition are unable to understand it (Lippman & Rumelt 1992).
However over time a firm's competitive advantage becomes eroded as rival firms are able to emulate the firm's resources and capabilities. The speed of this depends upon the characteristics and complexity of the firm's resources and capabilities. (20) For example Rolls Royce cars are craft based manufactured and when packaged together with its branding, image, and aspirations it conjures within buyers, is extremely difficult to emulate by any firm. In contrast drinking water manufacturers have extreme difficulty in creating any capabilities that are difficult to emulate by competitors, leaving the product with a commodity image. Therefore the firm's most important capabilities are those that are not easily identified and understood. Capabilities that require a complex pattern of coordination are much harder to comprehend than a capability which requires a single routine. That is why Harley-Davidson bikes are the product of complex capabilities that their Japanese rivals find it very difficult to directly emulate. Many firms possess capabilities that are firm specific, the result of complex social relationships, and embedded in a firm's history and culture (Barney 1992).
However capabilities can inhibit the development of new capabilities due to strongly embedded organization routines. What may have been success factors in the past may hold back the company in the present (Ohmae 1982). Enterprise capabilities should be continually replenished, upgraded, and overhauled to maintain their relevance to the competitive field (Porter 1985, Ranson 1987, Stalk et al. 1992). New capabilities are most often required to exploit new opportunities. It is the firm's values and directions given by leaders that mould the capability path that the firm will follow, which in turn influences the types of opportunities the firm will consider exploiting in the future. The future direction will be shaped by the capabilities the firm has amassed, organizational learning and cognitive processes, and conditions within the external environment (Nord 1969, Skinner 1971).
Psychosociological Issues in Human Resource Management (2013), 1 (1), 37-107
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NOTES
(1.) This minimal education, training, or experience may be the activity that exposes a person to something they have an innate ability for, rather than provide knowledge on how to excel at the particular task.
(2.) Early in the 20th century Ivan Pavlov commenced experiments on the conditional response of dogs. Pavlov presented a piece of meat to the dogs, ringing a bell each time. After a period of time, he rang the bell without presenting any meat and the dogs and found the dogs still salivated in anticipation of the meat. This experiment showed that conditioned response (salivation) could be achieved from a conditioned stimulus (the bell), hence the name conditional learning. By continually repeating the conditioned Stimulus, the conditioned response weakened, and then eventually to disappeared, which Pavlov termed extinction. Surprisingly though, a after a day or two, when the conditioned Stimulus (sound) was recommenced, the dog produced the Conditioned Response (salivation) again, which is called spontaneous recovery. This showed that conditioned behaviors can become very deeply embedded and well established. Pavlov's work began the behaviorist school of psychology thinking, where many felt it was more advantageous to deal with observable behaviors rather than the elusive mind (Watson 1930). Pavlov's classical conditioning experiment for this reason was probably the single most famous study ever conducted in the behavioral sciences (Luthans 1977, p. 283).
(3.) A chunk is a cluster of information that is stored in the long term memory.
(4.) Most business schools have missed the point that skills and competencies also require the directly relevant technical skills as well as business skills to fully round a person for entrepreneurial pursuits.
(5.) As we have seen back in chapter four, creativity is needed to develop ideas and there are a number of ways in which this can be assisted. Although certain innate traits like sensitivity, focus, attention, and attenuation, as well as prior knowledge and experience are required in the creativity process, specific cognitive tools (or ways of thinking) like imagination, whole brain thinking, brainstorming, metaphor or analogy generation, competitive imagination, visualization of the future, and reengineering, etc., are extremely important. These are some of the cognitive skills which can be developed and assist in the idea discovery process. Without them, there can be no vision for any future firm or enterprise to be modeled upon.
(6.) Some start-ups are created with incomplete ideas that are only fully formed during early business operations. It takes trial and error to refine many concepts and business models which can only be achieved through actual commercial activities.
(7.) As we have seen in chapter three most intuitions are based on our own biases and heuristics. Heuristics can simplify uncertainty, while biases can put irrelevancies into those judgments. For a summary outside of this book see Gilovich & Griffin (2002).
(8.) Lloyd Blankfein was the son of a postal sorter and brought up in Brooklyn. He started his career as a teenager as a concession vendor at the Yankee Stadium. Larry Ellison was an adopted son and worked his way up with no family connections or inheritance. He twice dropped out of university taking on odd jobs, until he got a job at Ampex Corporation. He went on to co-found Oracle Software and now considered the 6th wealthiest person in the world. Ursula Burns grew up on New York's lower east side where her mother ran a home day-care centre and ironing shirts for neighbors. John Paul DeJoria started his first job at the age of nine, waking up at 4am to fold newspapers for morning deliveries. He was homeless twice as a single father. He got a job as a sales representative at Redken before borrowing USD $700 to create John Paul Mitchell Systems with his friend Paul Mitchell. Oprah Winfrey was born to unmarried teenage parents. She was abused in her early years and became pregnant at the age of 14, with her baby dying one week after birth. She took her first job as a grocery store worker. She eventually got a scholarship to study at Tennessee State University and upon graduation became Nashville's first African-American female news anchor. Sheldon Anderson grew up in working class Dorchester, Massachusetts. His father was a cab driver and Adelson started selling newspapers on street corners at the age of 12. Adelson also dropped out of university. Howard Schultz was brought up in Brooklyn, living in a cramped two room apartment. Schultz's father lost his job as a nappy service delivery driver after breaking his ankle when Schultz was the age of 7. Guy Laliberte dropped out of college at the age of 19 and performed on the streets of Europe and Canada as a street performer. He eventually got a troop together and performed in the Los Angeles Arts festival in 1987. Four years later Laliberte's troop called Cirque du Soleil started working in Las Vegas. Roman Abramovich was orphaned at a young age. He later dropped out of college and served in the army. He started his business career selling stolen gasoline to other officers in his unit. After his marriage, Abramovich started selling plastic ducks from his Moscow apartment and black market goods as a street trader. He later started a plastics factory and eventually entered the oil business. Li Ka Shing quit school at 15 after his father died of tuberculosis and found work in a plastic factory, where he worked 16 hours a day. He eventually accumulated knowledge about plastics and started his own business.
(9.) There are many reasons members of an organization are prevented from contributing their personal competencies to the organization. These blocks may occur because of stifling bureaucracy, autocratic leadership, centralized decision making, group norms preventing people from excelling, and political considerations, etc.
(10.) It should be mentioned that there are no real objective views of the environment and potential opportunities in the environment are subject to perception. Opportunities are likely to be perceived with relation to the competitive scope or ability of the entrepreneur, the perceived competitiveness of the industry, demand for new products and services, the influence of suppliers, barriers to entry, technology, social and economic conditions, and the general regulatory environment, available and potential resources required, verses what can be acquired by the entrepreneur, and their personal competencies.
(11.) These levels of management are senior management which considers the strategic aspects of a firm, middle management that translates strategic goals into specific objectives and activities, and junior management which is involved in dealing with non-managerial employees, implementing specified plans developed by middle managers. In flat organizations, the middle level may be absent where the responsibilities of the second level of management are shared.
(12.) Enterprise capabilities is a very flexible concept in that there are potentially an infinite number of potential capabilities. What types of capabilities a firm has depends upon the nature of the firm and cumulative individual skills and competencies.
(13.) Technology in this case may also mean new business processes.
(14.) These visions need not be visions for an overhauled firm, they may be for a new product, a new market segment, a new line extension that will attract new customers, etc.
(15.) These can be mild actions such as being late and going home early from the office, taking longer than necessary for tea and coffee breaks and lunch, to more dramatic actions that are designed to disrupt the workflow such as purposely interfering with product quality, leaving work uncompleted, or in extreme circumstances going on a rampage.
(16.) Expired intellectual property rights (patents) have a major impact on competition within the pharmaceutical industry. When proprietary pharmaceutical patents expire, other firms are free to launch "generic" versions of the formally patented medicine that are much cheaper.
(17.) For example, the plots of Shakespeare's plays have been widely adapted in contemporary entertainment and Disney has adapted and derived "Snow White and the Seven Dwarfs," "Cinderella," "The Little Mermaid," and "Aladdin," from folklore and fairytales.
(18.) For example, automobiles are manufactured with components based on technologies and raw materials from all around the world. Likewise computer assembly relies on different components and licensing from a number of manufacturers.
(19.) The terms of competition may consist of technology exhibited in product, form, features, and functions, cost, branding, distribution channels, consumer expectations, and any other factor that influences the nature of competition in the competitive field.
(20.) There are some industries where competitive advantage is difficult to achieve. For example products and services in the securities, commodities, real estate, foreign exchange, general trading, small and petty retailing, and consulting are hard to develop competitive advantage within. Competition may be better explained through the firm's capacity to innovate rather than competitive advantage.