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Global Perspectives on Achieving Success in High and Low Cost Operating Environments

Göran Roos Swinburne University, Australia

Narelle Kennedy The Kennedy Company Pty Ltd., Australia

A volume in the Advances in Business Strategy and Competitive Advantage (ABSCA) Book Series

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Published in the United States of America by Business Science Reference (an imprint of IGI Global) 701 E. Chocolate Avenue Hershey PA 17033 Tel: 717-533-8845 Fax: 717-533-8661 E-mail: [email protected] Web site: http://www.igi-global.com

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Global perspectives on achieving success in high and low cost operating environments / Goran Roos and Narelle Kennedy, editors. pages cm Includes bibliographical references and index. Summary: “This book features a collection of research and case studies addressing contemporary issues surrounding opera- tional success in various regions”-- Provided by publisher. ISBN 978-1-4666-5828-8 (hardcover : alk. paper) -- ISBN 978-1-4666-5829-5 (ebook) -- ISBN 978-1-4666-5831-8 (print & perpetual access) 1. Industrial policy. 2. Costs, Industrial. 3. Manufacturing industries. 4. Regional economic dispari- ties. 5. Economic development. I. Roos, Goran. II. Kennedy, Narelle, 1953- HD3611.G56 2014 658.4’01--dc23 2014006707 This book is published in the IGI Global book series Advances in Business Strategy and Competitive Advantage (ABSCA) (ISSN: 2327-3429; eISSN: 2327-3437)

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Advances in Business Strategy and Competitive

Advantage (ABSCA) Book Series

• Adaptive Enterprise • Balanced Scorecard • Business Models • Entrepreneurship & Innovation • Ethics and Business Strategy • Globalization • Outsourcing • Small & Medium Enterprises • Strategic Alliances • Strategic Management • Value Creation

Patricia Ordóñez de Pablos Universidad de Oviedo, Spain

ISSN: 2327-3429 EISSN: 2327-3437

Mission Business entities are constantly seeking new ways through which to gain advantage over their competitors and strengthen their position within the business environment. With competition at an all-time high due to technological advancements allowing for competition on a global scale, firms continue to seek new ways through which to improve and strengthen their business processes, procedures, and profitability.

The Advances in Business Strategy and Competitive Advantage (ABSCA) Book Series is a timely series responding to the high demand for state-of-the-art research on how business strategies are created, implemented and re-designed to meet the demands of globalized competitive markets. With a focus on local and global challenges, business opportunities and the needs of society, the ABSCA en- courages scientific discourse on doing business and managing information technologies for the creation of sustainable competitive advantage.

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The Advances in Business Strategy and Competitive Advantage (ABSCA) Book Series (ISSN 2327-3429) is published by IGI Global, 701 E. Chocolate Avenue, Hershey, PA 17033-1240, USA, www.igi-global.com. This series is composed of titles available for purchase in- dividually; each title is edited to be contextually exclusive from any other title within the series. For pricing and ordering information please visit http://www.igi-global.com/book-series/advances-business-strategy-competitive-advantage/73672. Postmaster: Send all address changes to above address. Copyright © 2014 IGI Global. All rights, including translation in other languages reserved by the publisher. No part of this series may be reproduced or used in any form or by any means – graphics, electronic, or mechanical, including photocopying, recording, taping, or information and retrieval systems – without written permission from the publisher, except for non commercial, educational use, including classroom teaching purposes. The views expressed in this series are those of the authors, but not necessarily of IGI Global.

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Titles in this Series For a list of additional titles in this series, please visit: www.igi-global.com

Global Perspectives on Achieving Success in High and Low Cost Operating Environments Göran Roos (Swinburne University, Australia) and Narelle Kennedy (The Kennedy Company Pty Ltd., Australia) Business Science Reference • copyright 2014 • 300pp • H/C (ISBN: 9781466658288) • US $195.00 (our price)

Revolutionizing Enterprise Interoperability through Scientific Foundations Yannis Charalabidis (University of the Aegean, Greece) Fenareti Lampathaki (National Technical University of Athens, Greece) and Ricardo Jardim-Goncalves (Centre of Technology and Systems (CTS) – UNINOVA, Portugal) Business Science Reference • copyright 2014 • 351pp • H/C (ISBN: 9781466651425) • US $215.00 (our price)

Developing Business Strategies and Identifying Risk Factors in Modern Organizations Madjid Tavana (La Salle University, USA) Business Science Reference • copyright 2014 • 309pp • H/C (ISBN: 9781466648609) • US $185.00 (our price)

Information Quality and Governance for Business Intelligence William Yeoh (Deakin University, Australia) John R. Talburt (University of Arkansas at Little Rock, USA) and Yinle Zhou (IBM Corporation, USA) Business Science Reference • copyright 2014 • 478pp • H/C (ISBN: 9781466648920) • US $235.00 (our price)

International Business Strategy and Entrepreneurship An Information Technology Perspective Patricia Ordóñez de Pablos (Universidad de Oviedo, Spain) Business Science Reference • copyright 2014 • 306pp • H/C (ISBN: 9781466647534) • US $185.00 (our price)

Implementing IT Business Strategy in the Construction Industry Goh Bee Hua (National University of Singapore, Singapore) Business Science Reference • copyright 2013 • 354pp • H/C (ISBN: 9781466641853) • US $185.00 (our price)

Chaos and Complexity Theory for Management Nonlinear Dynamics Santo Banerjee (Politecnico di Torino, Italy) Business Science Reference • copyright 2013 • 449pp • H/C (ISBN: 9781466625099) • US $185.00 (our price)

Integrated Operations in the Oil and Gas Industry Sustainability and Capability Development Tom Rosendahl (BI Norwegian Business School, Norway) and Vidar Hepsø (Norwegian University of Science and Technology, Norway) Business Science Reference • copyright 2013 • 457pp • H/C (ISBN: 9781466620025) • US $185.00 (our price)

Cultural Variations and Business Performance Contemporary Globalism Bryan Christiansen (PryMarke, LLC, USA) Business Science Reference • copyright 2012 • 418pp • H/C (ISBN: 9781466603066) • US $185.00 (our price)

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Table of Contents

Foreword10.4018/978-1-4666-5828-8.chfwd.............................................................................................................................................. xiv

Preface10.4018/978-1-4666-5828-8.chpre................................................................................................................................................. xvi

Section 110.4018/978-1-4666-5828-8.chs01 Responses for National Economies10.4018/978-1-4666-5828-8.chs01

Chapter 110.4018/978-1-4666-5828-8.ch001 Manufacturing.in.a.High.Cost.Environment:.Basis.for.Future.Success.on.the.National.Level...............110.4018/978-1-4666-5828-8.ch001

Göran Roos, Swinburne University, Australia10.4018/978-1-4666-5828-8.ch001::1

Chapter 210.4018/978-1-4666-5828-8.ch002 Competing.from.a.High.Cost.Economy:.What.is.the.Challenge.to.Australian.Public.Policy?.............5210.4018/978-1-4666-5828-8.ch002

Ian Marsh, University of Tasmania, Australia10.4018/978-1-4666-5828-8.ch002::1

Chapter 310.4018/978-1-4666-5828-8.ch003 Foundations.for.Industrial.Rejuvenation:.Lessons.from.International.and.National.Experience..........7210.4018/978-1-4666-5828-8.ch003

John Spoehr, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch003::1

Section 210.4018/978-1-4666-5828-8.chs02 Responses for Sectors, Clusters, and Regions10.4018/978-1-4666-5828-8.chs02

Chapter 410.4018/978-1-4666-5828-8.ch004 The.Role.of.Local.and.Regional.Institutions.......................................................................................11210.4018/978-1-4666-5828-8.ch004

John Tomaney, University College London, UK10.4018/978-1-4666-5828-8.ch004::1

Chapter 510.4018/978-1-4666-5828-8.ch005 Putting.Clusters.to.Work......................................................................................................................12210.4018/978-1-4666-5828-8.ch005

Rodin Genoff, Rodin Genoff & Associates, Australia10.4018/978-1-4666-5828-8.ch005::1 Graeme Sheather, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch005::2

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Chapter 610.4018/978-1-4666-5828-8.ch006 Confronting.the.Productivity.Challenge.in.the.High.Cost.Economy:.Evidence.from.the.. Australian.Oil.and.Gas.Industry..........................................................................................................15310.4018/978-1-4666-5828-8.ch006

Jerad A. Ford, University of Queensland, Australia10.4018/978-1-4666-5828-8.ch006::1 John Steen, University of Queensland, Australia10.4018/978-1-4666-5828-8.ch006::2 Martie-Louise Verreynne, University of Queensland, Australia10.4018/978-1-4666-5828-8.ch006::3 Bradley Farrell, Ernst & Young, Australia10.4018/978-1-4666-5828-8.ch006::4 Gerald Marion, Ernst & Young, Australia10.4018/978-1-4666-5828-8.ch006::5 Seelan Naicker, 4Sight Group Pty Ltd, Australia10.4018/978-1-4666-5828-8.ch006::6

Chapter 710.4018/978-1-4666-5828-8.ch007 Strategic.Roadmapping.as.a.Policy.Tool.for.Meso-Level.Industrial.Transformation:.The.Case.of. Cellulosic.Fibre.Value.Chain.in.the.Green.Triangle,.South.Australia.................................................17210.4018/978-1-4666-5828-8.ch007

Toni Ahlqvist, VTT Technical Research Centre, Finland10.4018/978-1-4666-5828-8.ch007::1 John Kettle, VTT Technical Research Centre, Finland10.4018/978-1-4666-5828-8.ch007::2 Ville Valovirta, VTT Technical Research Centre, Finland10.4018/978-1-4666-5828-8.ch007::3 Nafty Vanderhoek, VTT Technical Research Centre, Finland10.4018/978-1-4666-5828-8.ch007::4

Section 310.4018/978-1-4666-5828-8.chs03 Responses for Enterprises and Workplaces10.4018/978-1-4666-5828-8.chs03

Chapter 810.4018/978-1-4666-5828-8.ch008 Business.Innovation:.Beyond.Technology...........................................................................................20910.4018/978-1-4666-5828-8.ch008

Don Scott-Kemmis, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch008::1

Chapter 910.4018/978-1-4666-5828-8.ch009 Design-Led.Innovation:.Overcoming.Challenges.to.Designing.Competitiveness.to.Succeed.in.. High.Cost.Environments......................................................................................................................24110.4018/978-1-4666-5828-8.ch009

Sam Bucolo, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch009::1 Cara Wrigley, Queensland University of Technology, Australia10.4018/978-1-4666-5828-8.ch009::2

Chapter 1010.4018/978-1-4666-5828-8.ch010 The.Effects.of.Six.Sigma.Quality.(SSQ).on.Innovation.and.Organisational.Ambidexterity.in.a.. High.Operating.Cost.Environment......................................................................................................25210.4018/978-1-4666-5828-8.ch010

Milé Terziovski, Curtin Graduate School of Business, Australia10.4018/978-1-4666-5828-8.ch010::1

Chapter 1110.4018/978-1-4666-5828-8.ch011 Managerial.Practices.in.a.High.Cost.Manufacturing.Environment:.A.Comparison.with.Australia.. and.New.Zealand.................................................................................................................................26810.4018/978-1-4666-5828-8.ch011

Renu Agarwal, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch011::1 Christopher Bajada, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch011::2 Paul J. Brown, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch011::3 Roy Green, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch011::4

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Chapter 1210.4018/978-1-4666-5828-8.ch012 Supporting.Entrepreneurship.in.High.Cost.Economies:.What.Can.Governments.Do?.......................29010.4018/978-1-4666-5828-8.ch012

Allan O’Connor, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch012::1 Graciela Corral de Zubielqui, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch012::2 Mushui Huanmei Li, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch012::3 Manjula Dissanayake, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch012::4

Chapter 1310.4018/978-1-4666-5828-8.ch013 Manufacturing.in.a.High.Cost.Environment:.Basis.for.Success.on.the.Firm.Level............................39310.4018/978-1-4666-5828-8.ch013

Göran Roos, Swinburne University, Australia10.4018/978-1-4666-5828-8.ch013::1

Conclusion10.4018/978-1-4666-5828-8.chcon.......................................................................................................................................... 481

Compilation of References10.4018/978-1-4666-5828-8.chcrf................................................................................................................ 483

About the Contributors10.4018/978-1-4666-5828-8.chatc..................................................................................................................... 555

Index10.4018/978-1-4666-5828-8.chidx................................................................................................................................................... 563

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Detailed Table of Contents

Foreword10.4018/978-1-4666-5828-8.chfwd.............................................................................................................................................. xiv

Preface10.4018/978-1-4666-5828-8.chpre................................................................................................................................................. xvi

Section 110.4018/978-1-4666-5828-8.chs01 Responses for National Economies10.4018/978-1-4666-5828-8.chs01

Chapter 110.4018/978-1-4666-5828-8.ch001 Manufacturing.in.a.High.Cost.Environment:.Basis.for.Future.Success.on.the.National.Level...............110.4018/978-1-4666-5828-8.ch001

Göran Roos, Swinburne University, Australia10.4018/978-1-4666-5828-8.ch001::1

This.chapter.explores.the.current.state.of.flux.in.manufacturing..It.examines.the.forces.that.drive.frag- mentation.and.dispersion.of.value.chains.on.the.one.hand.and.those.that.drive.concentration.and.in- tegration.of.value.chains.on.the.other..These.forces.are.underpinned.by.changes.in.technology,.wage. costs,. business. environment,. importance. of. economies. of. scale. for. production,. need. for. interaction. with.customers.and.input.providers,.needs.for.skills.in.the.manufacturing.workforce,.and.the.workings. of.industrial.commons.and.economic.complexity..Analysing.these.changes.at.the.level.of.the.firm,.this. chapter.puts.the.competitive.focus.on.the.creation.of.value.more.than.on.cutting.costs.(although.both. are.important)..The.policy.environment.must.provide.both.carrot.and.stick.to.ensure.that.firms.align. with.these.developments..In.this.dynamic.world,.an.effective.policy.response.requires.a.shift.from.any. single.dominating.economic.lens.(e.g..neo-classical,.neo-Keynesian,.neo-Schumpeterian,.evolutionary). to.a.situation-specific.approach.10.4018/978-1-4666-5828-8.ch001

Chapter 210.4018/978-1-4666-5828-8.ch002 Competing.from.a.High.Cost.Economy:.What.is.the.Challenge.to.Australian.Public.Policy?.............5210.4018/978-1-4666-5828-8.ch002

Ian Marsh, University of Tasmania, Australia10.4018/978-1-4666-5828-8.ch002::1

The.starting.point.for.this.chapter.is.that.Australia.is.a.high-cost.economy.with.a.fading.resources.boom. and.a.diminished.domestic.manufacturing.sector..The.chapter.explores.the.fresh.challenge.that.these. structural.developments.present.to.public.policy..It.argues.that.this.requires.a.shift.from.the.dominant. neo-classical.policy.paradigm,.which.has.to.date.provided.the.intellectual.muscle.for.a.transformation. of.Australia’s.political.economy..The.chapter.makes.the.case.for.policies.framed.to.foster.innovation. and.knowledge.as.the.approach.needed.for.Australia.to.succeed.in.an.environment.characterised.by.the. new.international.distribution.of.manufacturing,.the.impact.of.new.technologies,.and.the.prevalence.of. global.supply.chains..To.realise.innovation-based.economic.renewal.requires.capacities.for.much.more. targeted.interventions.that.engage.business.at.cluster,.sectoral,.and/or.regional.levels..The.chapter.con- cludes.by.considering.the.obstacles.to,.and.the.possibilities.for,.policy.change.10.4018/978-1-4666-5828-8.ch002

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Chapter 310.4018/978-1-4666-5828-8.ch003 Foundations.for.Industrial.Rejuvenation:.Lessons.from.International.and.National.Experience..........7210.4018/978-1-4666-5828-8.ch003

John Spoehr, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch003::1

Drawing.on.a.body.of.research.examining.the.economic.and.social.effects.of.downturns.and.major.man- ufacturing.plant.closures.in.Australia.and.South.Australia.in.particular,.this.chapter.investigates.how. industrial.rejuvenation.strategies.can.help.to.minimise.the.negative.impacts.on.the.workforce.and.sup- ply.chains.affected..The.chapter.identifies.key.lessons.from.the.national.and.international.literature.on. industrial.rejuvenation.and.the.management.of.major.closures..Industrial.rejuvenation.is.a.multi-faceted. strategy.that.seeks.to.manage.pressures.and.complex.change.in.response.to.local,.national,.and.global. conditions..The.chapter.focuses.on.the.evidence.about.the.strategic.options.for.industrial.rejuvenation. available. to. government. in. partnership. with. industry,. trade. union,. and. community. stakeholders.. The. chapter.concludes.by.drawing.out.some.broad.strategic.implications.for.the.design.of.more.integrated. rejuvenation.and.regeneration.policies.10.4018/978-1-4666-5828-8.ch003

Section 210.4018/978-1-4666-5828-8.chs02 Responses for Sectors, Clusters, and Regions10.4018/978-1-4666-5828-8.chs02

John Tomaney, University College London, UK10.4018/978-1-4666-5828-8.ch004::1

This.chapter.explores.the.ways.in.which.regions.that.are.remote.from.the.main.concentrations.of.eco- nomic.wealth.and.power.can.achieve.development.in.a.high.cost.environment..The.role.of.effective.in- stitutions.in.creating.the.conditions.for.economic.development.has.become.a.major.field.of.scholarship.. Recently,.these.insights.have.been.applied.to.the.urban.and.regional.scale..This.chapter.pays.particular. attention. to. the. role. that. regional. and. local. institutions. play. in. shaping. patterns. of. economic. perfor- mance,.especially.in.high.cost.environments..The.chapter.examines.ways.in.which.this.new.thinking. is.informing.regional.policy..It.provides.some.case.studies.of.regions.that.have.succeeded.in.the.high. cost.environment.of.Europe..It.concludes.by.stressing.the.importance.of.effective.and.adept.local.and. regional.institutions.in.ensuring.the.prosperity.of.cities.and.regions.10.4018/978-1-4666-5828-8.ch004

Rodin Genoff, Rodin Genoff & Associates, Australia10.4018/978-1-4666-5828-8.ch005::1 Graeme Sheather, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch005::2

This. chapter. illustrates. the. effect. of. clusters. on. company. performance. through. rigorous. mapping. of. the. patterns. and. strength. of. relationships. between. companies. applied. in. the. Aalborg. region. of. Hub. North,.Denmark..This.case.study.has.been.selected.from.similar.industry.cluster.projects.undertaken. between. 1999. and. 2013. in. Midjutland,. Denmark,. Dalarna,. Sweden,. mining. regions. in. Queensland,. and.the.Playford.industrial.region.in.South.Australia..A.conceptual.methodology.and.suite.of.tools.that. have.translated.cluster.theory.into.bottom.up.business.outcomes.for.companies.participating.in.these. cluster.projects.demonstrates.how.a.deeper.understanding.of.clusters.can.contribute.to.the.economic. development.of.industrial.regions..The.methodology.and.findings.described.in.this.chapter.pioneer.new. insights.and.ways.to.analyse.emerging.cluster.developments.10.4018/978-1-4666-5828-8.ch005

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This.chapter.reports.research.findings.into.the.productivity.challenge.facing.the.Australian.oil.and.gas. industry..This.industry.has.been.experiencing.cost.overruns.indicating.a.productivity.decline.that.puts. future.projects.and.investment.at.risk..Using.world-class.survey.methodologies.developed.by.the.Centre. for.Business.Research.at.Cambridge.University.and.adapted.for.the.oil.and.gas.industry,.an.evidence- based.view.on.business.decisions.and.conditions.is.provided.and.linked.to.performance..While.many.of. the.productivity.challenges.facing.the.Australian.oil.and.gas.industry.are.beyond.immediate.manage- rial.control,.this.research.shows.that.key.productivity.drivers.are.in.the.realm.of.the.firm.to.influence.. The.research.reported.in.this.chapter.shows.that.improvements.in.innovation,.collaboration,.and.deeper. competitive.capabilities.are.the.best.levers.to.lift.business.productivity.and.to.build.a.growth.pathway. for.the.future.for.this.industry.10.4018/978-1-4666-5828-8.ch006

This.chapter.illustrates.the.use.of.strategic.roadmapping.as.a.policy.tool.for.regions.or.industry.sectors. to.formulate.a.strategy.to.renew.and.transform.their.industrial.base.when.faced.with.structural.decline,. diminishing.opportunities,.and.intensifying.competitive.pressures..This.approach.is.illustrated.by.the. case.study.of.the.forest.and.wood.products.industry.in.the.Green.Triangle.region.in.the.southeast.of. South. Australia,.both. the. road. maps. produced.and. the. staged.policy. recommendations.made.for. im- mediate,.short,.and.long-term.action..The.chapter.concludes.by.summarising.the.key.arguments.for.the. use.of.strategic.roadmapping.as.policy.tool.for.industrial.transformation,.and.identifying.some.future. avenues.for.strategic.roadmapping.in.the.forest.and.wood.products.industry.and.in.manufacturing.in- dustry.in.general.10.4018/978-1-4666-5828-8.ch007

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Section 310.4018/978-1-4666-5828-8.chs03 Responses for Enterprises and Workplaces10.4018/978-1-4666-5828-8.chs03

Don Scott-Kemmis, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch008::1

This.chapter.presents.the.case.for.a.wider.understanding.of.innovation.beyond.technology.and.beyond. novel.products.and.processes..It.examines.the.dynamics.of.Business.Model.Innovation,.which.refers. to. fundamental. changes. to. the. total. formula. for. business. success.. New. approaches. to. value. creation. and.appropriation.through.business.model.innovation.are.particularly.vital.in.times.of.turbulence.and. realignment.faced.by.firms.in.high.cost.operating.environments..Business.model.innovation.can.create. new. and. sustainable. sources. of. competitive. advantage. for. firms,. securing. their. survival. and. growth.. The.chapter.discusses.the.evidence.for.the.role.of.business.model.innovation.in.the.growth.of.leading. firms.and.in.the.restructuring.of.markets..It.provides.an.overview.of.the.frameworks.for.characterising. and.analysing.business.models..The.options.for.different.types.of.business.models.likely.to.be.success- ful.in.high.cost.environments.are.described.10.4018/978-1-4666-5828-8.ch008

Sam Bucolo, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch009::1 Cara Wrigley, Queensland University of Technology, Australia10.4018/978-1-4666-5828-8.ch009::2

This.chapter.focuses.on.demonstrating.the.role.of.Design-Led.Innovation.(DLI).as.an.enabler.for.the. success. of. Small. to. Medium. Enterprises. (SMEs). within. high. growth. environments.. This. chapter. is. targeted.toward.businesses.that.may.have.been.exposed.to.the.concept.of.design.previously.at.a.product. level.and.now.seek.to.better.understand.its.value.through.implementation.at.a.strategic.level.offering.. The.decision.to.engage.in.the.DLI.process.is.made.by.firms.who.want.to.remain.competitive.as.they. struggle.to.compete.in.high.cost.environments,.such.as.the.state.of.the.Australian.economy.at.present.. The.results.presented.in.this.chapter.outline.the.challenges.in.the.adoption.of.the.DLI.process.and.the. implications.it.can.have..An.understanding.of.the.value.of.DLI.in.practice—as.an.enabler.of.business. transformation.in.Australia—is.of.benefit.to.government.and.the.broader.design.community.10.4018/978-1-4666-5828-8.ch009

Milé Terziovski, Curtin Graduate School of Business, Australia10.4018/978-1-4666-5828-8.ch010::1

This.chapter.explores.the.effect.of.Six.Sigma.Quality.(SSQ).on.innovation.and.organizational.ambi- dexterity.in.a.high.operating.cost.environment..Multiple-cross.case.analysis.revealed.that.SSQ.seems. to.align.very.well.with.process.innovation,.where.the.organisation.has.a.well-defined.process.output. to.control..However,.some.tension.exists.between.SSQ.and.product.innovation,.particularly.in.terms.of. the.time.expectation.for.SSQ.to.deliver.results..Furthermore,.the.study.shows.that.SSQ.could.have.a. positive.impact.on.organizational.ambidexterity.in.a.high.operating.cost.environment,.as.long.as.man- agement. recognizes. that. innovation. approaches. require. their. own. formula. for. success.. Management. needs.to.establish.a.team.that.could.manage.the.tension.between.“getting.it.right.the.first.time”.as.part. of.managed.innovation.and.“learning.from.failure”.as.part.of.entrepreneurial.innovation.10.4018/978-1-4666-5828-8.ch010

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This.chapter.explores.the.management.strategies.adopted.by.manufacturing.firms.operating.in.high.ver- sus.low.cost.economies.and.investigates.the.reasons.for.differences.in.the.management.practice.choices.. The.study.reported.in.this.chapter.identifies.a.subset.of.countries.that.have.either.high.or.low.labour. costs,.with.USA,.Sweden,.and.Japan.being.high,.and.India,.China,.and.Brazil.being.low.labour.cost. economies..The.high.labour.cost.manufacturing.firms.are.found.to.have.better.management.practices.. In. this. chapter,. the. authors. find. that. Australia. and. New. Zealand. manufacturing. firms. face. relatively. high.labour.cost.but.lag.behind.world.best.practice.in.management.performance..The.chapter.concludes. by.highlighting.the.need.for.improvement.in.management.capability.for.Australian.and.New.Zealand. manufacturing. firms. if. they. are. to. experience. a. reinvigoration. of. productivity,. competitiveness,. and. long-term.growth.10.4018/978-1-4666-5828-8.ch011

Chapter 1210.4018/978-1-4666-5828-8.ch012 Supporting.Entrepreneurship.in.High.Cost.Economies:.What.Can.Governments.Do?.......................29010.4018/978-1-4666-5828-8.ch012

This.chapter.sets.out.the.findings.of.a.comprehensive.literature.review.that.addressed.three.objectives:. to. review. internationally. recognised. and. accepted. methodologies. of. entrepreneurial. human. and. firm. characteristics.data.collection.and.analysis;.to.formulate.the.contemporary.view.and.latest.research.on. entrepreneurial.characteristics.and.how.these.characteristics.contribute.to.a.model.of.entrepreneurial. firm.behaviour;.to.examine.developments.in.the.literature.that.explain.to.what.extent.human.character- istics.influence.and.predict.the.performance.of.firms..The.implications.of.this.work.are.that.firms.with. high.potential.in.either.innovation.or.market-based.growth.opportunities.need.to.have.the.right.environ- mental.settings.in.terms.of.social,.political,.regulatory,.economics,.and.technology.for.firms.with.a.high. success.potential.to.realise.this.potential..The.concept.of.stage.progression.and.the.relationship.between. the.characteristics.of.the.individual,.the.firm,.and.the.opportunity.provide.the.elements.of.a.framework. through.which.to.consider.government.support.programs.and.interventions.10.4018/978-1-4666-5828-8.ch012

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Chapter 1310.4018/978-1-4666-5828-8.ch013 Manufacturing.in.a.High.Cost.Environment:.Basis.for.Success.on.the.Firm.Level............................39310.4018/978-1-4666-5828-8.ch013

Göran Roos, Swinburne University, Australia10.4018/978-1-4666-5828-8.ch013::1

This.chapter.draws.on.an.overview.of.contemporary.literature.to.distil.the.best.ways.for.manufacturing. firms.to.adapt.to.and.succeed.in.high.cost.environments..Parts.of.global.value.chains.will.move.back.to. sophisticated,.economically.complex,.high.operating.cost.environments.like.the.US.and.the.European. Manufacturing.Belt..However,.the.firms.that.participate.in.these.value.chains.will.look.different..The. forces.that.impact.the.structure.and.location.of.manufacturing.activities.will.also.impact.the.individual. firm,. and. this. chapter. discusses. how. this. will. result. in. successful. firms. becoming. so. called. “Hid- den.Champions.”.A.successful.transformation.into.tomorrow’s.Hidden.Champion.will.result.in.fewer. employees.with.higher.capability,.producing.a.higher.level.of.output.of.which.a.very.high.share.will. be.produced.and.delivered.digitally..These.firms.will.participate.in.smaller,.more.concentrated.value. chains.serving.a.global.market.but.operating.both.competitively.and.collaboratively.in.agglomerations. like.clusters..These.agglomerations.will.be.located.in.jurisdictions.with.high.economic.complexity.and. with.a.deep.and.broad.industrial.commons.and.with.a.supportive.policy.regime.10.4018/978-1-4666-5828-8.ch013

Conclusion10.4018/978-1-4666-5828-8.chcon.......................................................................................................................................... 481

Compilation of References10.4018/978-1-4666-5828-8.chcrf................................................................................................................ 483

About the Contributors10.4018/978-1-4666-5828-8.chatc..................................................................................................................... 555

Index10.4018/978-1-4666-5828-8.chidx................................................................................................................................................... 563

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xiv

Foreword

It’s not about the big companies eating the small; it’s about the agile ones eating the slow. This is the reality of the present and future global business world and it will only intensify.

Agile companies are value-driven, knowledge-oriented, collaborate, act in clusters, and consider innovation, fast rejuvenation, and flexible change as the norm.

Slow companies are cost-driven, volume-oriented, act reactively in isolation, and avoid change as much as possible.

Global Perspectives on Achieving Success in High and Low Cost Operating Environments is the first book that draws together in one place the leading thinking on how to be agile, both from a theoretical and practical point of view. The authors are eminent academics, experienced practitioners and consultants with the insights to reveal the critical issues relating to one of the key challenges brought on by globalisation.

Succeeding in a high operating cost environment is a challenge for most OECD countries as well as for countries with a rapidly increasing cost level, like China. This challenge is greater the more rapidly the cost level has increased. The examples in this book are grounded in Australia, one of the countries with the fastest increase in cost levels over the last six years. The results of being slow to adapt to this new cost environment at the firm level can be seen by the challenges faced in the automotive industry, the pharmaceutical industry, and forest-related industries. The eventual successful adaptation by some of the firms in the industries mentioned would have happened faster if there had been a greater understanding of what it takes to succeed in a high cost-operating environment – these insights are provided by this book.

Hence, this book is very important, describing both the theory behind the dynamics and requirements, based on practical cases, as well as practical advice on how to manage this challenge.

The book not only describes the firm level but also discusses similar issues at industry and cluster level, which have implications also for regional economic development. The book also discusses the macro or national level and illustrates the dynamics and challenges faced by nations aiming to maintain and increase their citizens’ present standard of living. Maintaining this standard of living will not be pos- sible unless a clear economic and industrial policy is implemented and pursued over long periods of time.

These three levels (micro, meso, and macro) are covered in 13 chapters, each providing an important contribution to what it takes to succeed.

I recommend anyone active in the industrial world today or active at regional, cluster, or national levels to read this book in order to better understand the complexity of the different business systems, and to increase their knowledge of how to think and act in different situations.

In addition, this should be recommended reading for university students as well as all people active in the media industry who are responsible for reporting economic and industrial issues in a complex global world.

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Peter Holmstedt RISE Research Institutes of Sweden AB, Sweden

Peter Holmstedt, PhD, is Professor of Industrial Production at KTH, Stockholm, Sweden (Royal Institute of Technology), Senior Advisor at RISE Research Institutes of Sweden, and acting business angel in the Swedish Innovation System. He was previously the President and CEO of RISE Research Institutes of Sweden AB, President and CEO of Innovationsbron AB (early stage venture capital), and President and CEO of the Electrum foundation at Kista Science City. Dr. Peter Holmstedt is a member of the Boards of STINT (internationalization of universities), AMFA Bank AB, Gullers Group AB, and KTH Hold- ing AB. He received his PhD at KTH in Flexible Industrial Production 1998, and in 2004–2005, he was the Vice President of External Relations at KTH. He has served 15 years in the Swedish export industry, for example at Scania (heavy trucks) and Atlas Copco (mining and industrial technology).

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Preface

INTRODUCTION

This book shows that the gravitational forces driving economic activities towards ever-lower costs and narrower specialisations, resulting in a significant hollowing out of manufacturing industry, can be combated by advanced high-cost economies. This trajectory does not need to be accepted as a natural and inevitable course of events.

Competing in a high-cost environment is a completely different proposition to competing in a low-cost environment. This is particularly true for manufacturing industry, which is confronting both intense and growing global competition and fundamental shifts in the very nature of manufacturing itself.

The operating environment in many countries has moved, or is moving, from a relatively low or medium cost-operating environment towards a high cost-operating environment, with the continuous emergence of new competing locations. This development changes the basis for competition for many firms, industries, states, and nations from one focused on imitation and efficiency to one of innova- tion and effectiveness. This requires an associated move from an economic policy lens based on the mechanistic models of neo-classical theory to the more organic models of evolutionary economics and innovation theory.

To date, this journey has not been well described in the literature, and there is very little guidance for action by firms, industries, regions, or economic policymakers forced to make this journey. This collection of expert papers seeks to address this.

COMPETING ON VALUE, NOT PRICE

The contributions in this book present evidence that open, often small, high-cost economies can succeed and prosper provided they compete on value, not price. In these circumstances, strong competitive capa- bilities and productivity performance are equally as possible for low and medium technology industries as they are for high technology industries.

This book draws on evidence from studies and research projects in traditional high-cost environments (like Switzerland, Germany, Sweden, Finland, and Norway) that are also high-performing countries, and contrasts this with the experience in low-cost jurisdictions. It pays special attention to the experience of Australia, as a country that has made the journey from a low- to high-cost environment very rapidly.

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The book presents a collection of chapters addressing contemporary issues on what it takes for busi- ness enterprises to succeed in a high-cost environment and the policy actions that facilitate this success. It explores the basis for success in high-cost environments at three levels: the macro level of national policy; the meso level approaches taken by industries, regions, clusters, or sectors; and the micro-level actions by enterprises and workplaces.

An enduring theme across the book is that a high-cost environment creates a new context for the competitiveness of firms, industries, and nations. Competitiveness from cost advantages and economy- wide efficiencies alone will not work for high-cost environments. Rather, competitiveness is generated by responding to demand in superior ways compared to competitors—in business offerings, quality, and responsiveness to specialised customer needs and tastes. Creating value in the eyes of the customer is a critical ingredient for competitiveness.

The authors in this book also make the case for the importance of understanding and capitalising on knowledge as a factor of production decisive to business success, especially in high-cost environments.

THE POWER OF KNOWLEDGE

The importance of the knowledge economy is based on the richness and mastery of both stocks and flows of productive knowledge accumulated, accessed, and put to use effectively by both countries and companies. It is not restricted just to economic activities in high tech sectors or to workers with high levels of technical, conceptual, and analytic skills. Knowledge underpins competitiveness when rich and diverse sources of economically useful knowledge are acquired, held, refreshed, absorbed, combined, and applied to productive ends.

Knowledge is a vital intangible asset that provides increasing returns, and which grows rather than diminishes with use. Collaboration for greater access and use of productive knowledge is the flipside of the push towards increasing specialisation and divisions of labour. Capitalising on knowledge as an asset is central to the ability of high-cost economies to thrive against low-operating-cost environment competitors.

COLLABORATION DRIVES INNOVATION AND COMPETITIVENESS

In fact, evidence of strong connections and collaborations are consistently cited by authors as an essential ingredient for successful performance in high-cost environments. Collaboration is an important driver of competitiveness, innovation, and productivity whether in knowledge sharing and problem solving initiatives between businesses and universities and researchers; relationships and engagement between firms in supply chains and clusters; public-private partnerships for policy development or service deliv- ery; co-design and co-production with customers; effective cross-disciplinary and multi-sector problem solving teams using open innovation and living laboratory methods; collaborative firms reporting bet- ter productivity gains; or harmonisation of national and regional policy-making by robust engagement between national and local institutions.

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A FOCUS ON CLUSTERS, REGIONS, AND SECTORS

Evidence is presented in this book that a single focus on economy-wide framework conditions is likely to be a flawed strategy for high-cost environments. Attention to approaches taken in specific industries, clusters, and geographic regions illuminates and extends the pathways available for success in high-cost economies.

In particular, the authors emphasise the critical importance of place-based policies. Prosperity invari- ably follows from the concentration of economic activity, making such locations magnets for growth. The benefits of economic agglomeration are particularly important in high-cost economies as they are one way of offsetting the adverse effects of a high-cost base, but this can put locations that are remote, small, or declining at a double disadvantage.

This book argues, however, that if regional and local institutions are potent, informed, and active, the rules of economic concentration can be stretched. This allows for every region, city, or district, no matter how peripheral or remote, to build their own untapped internal capabilities and resources into a viable economic base, and thereby make a significant contribution to national economic prosperity and social cohesion.

In particular, a region’s innovation capabilities and its human capital of know-how, skills, and rela- tionships are especially crucial because they provide a distinctive and sustainable advantage that serves to embed otherwise mobile investments in the region.

In high cost economies, it is imperative that the focus shifts from external transfers to reduce re- gional disparities to the improvement and leveraging of “home-grown” capabilities that drive regional competitiveness.

These arguments are extended by an examination of levers for growth and productivity in particular industry sectors and illustrated by a close analysis of their dynamics, including the effects of unlocking the connections between firms in clusters to secure new sales and lucrative joint ventures; the demon- strated productivity improvements from a mutually-reinforcing combination of collaboration, accumulated innovations, and deep competitive capabilities; and opportunities opened up by strategic foresight and technology roadmapping initiatives.

THE IMPERATIVE OF INDUSTRIAL REJUVENATION

Industrial rejuvenation policies have a central role in the fate of high-cost economies. By definition, industrial rejuvenation deals with the problems and casualties of high-cost economies. Finding the best policy response is likely to be contested, controversial, and difficult for governments to meet often con- flicting community expectations. This book explores the experience in Australia and internationally of industrial rejuvenation approaches and their impact, and charts a course from the lessons learnt.

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INNOVATION BY ENTERPRISES AND WORKPLACES

The contributors to this book draw out a variety of significant insights into how business enterprises and workplaces can themselves stare down intense and growing low-operating-cost global competition and secure their future success. They highlight cases of firms understanding the wider dimensions of creating value for existing and prospective customers, embarking on innovation through: transformative changes in business models, by action on design, by attention to world-class quality, and by mapping and securing their place in new technology and industry frontiers; the creation of distinctive capabilities to serve emerging industries with good growth prospects; understanding the dynamics of entrepreneurship and entrepreneurial individuals and firms; and boosting management and workforce skills to be resilient and agile for the future.

STRUCTURE OF THE BOOK

The chapters are grouped into three sections and cover the following topics:

Section 1: Responses for National Economies

Manufacturing in a High Cost Environment: Basis for Future Success on the National Level by Göran Roos

This chapter explores the current state of flux of manufacturing. It examines the forces that drive fragmentation and dispersion of value chains on the one hand and those that drive concentration and integration of value chains on the other. These forces are underpinned by changes in technology, wage costs, business environment, importance of economies of scale for production, need for interaction with customers and input providers, needs for skills in the manufacturing workforce, and the workings of industrial commons and economic complexity.

The current momentum is in favour of the forces that disperse value chains. The swing back towards concentration of value chains sees high cost economies entering the next structural shift. This is result- ing in increasing back-shoring or re-shoring of activities to those high cost operating environments that have maintained a high economic complexity emerging out of a deep and broad industrial commons.

Analysing these changes at the level of the firm, this chapter puts the competitive focus on the creation of value more than on cutting costs (although both are important). The policy environment must provide both carrot and stick to ensure that firms align with these developments. In this dynamic world, an ef- fective policy response requires a shift from any single dominating economic lens (e.g. neo-classical, neo-Keynesian, neo-Schumpeterian, evolutionary) to a situation-specific approach. The chapter concludes with identifying the domains in which policy actions must be taken to secure the industrial future of a high cost jurisdiction.

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Competing from a High Cost Economy: What is the Challenge to Australian Public Policy? by Ian Marsh

The chapter makes the case for policies framed to foster innovation and knowledge as the approach needed for Australia to succeed in an environment characterised by the new international distribution of manufacturing, the impact of new technologies, and the prevalence of global supply chains. Consequently, it argues for a new conception of the economic role of the state and new capacities for Federal-State collaboration.

To realise innovation-based economic renewal requires capacities for much more targeted interven- tions that engage business at cluster, sectoral, and/or regional levels. This is an alternative approach to the arm’s length philosophy that currently prevails.

In exploring these issues, this chapter sketches public policy measures that have been adopted in a variety of jurisdictions to catalyse innovation. It continues to illustrate dilemmas in their adoption in Australia’s present public policy system. The chapter concludes by considering the obstacles to, and the possibilities for, policy change.

Foundations for Industrial Rejuvenation: Lessons from International and National Experience by John Spoehr

The chapter identifies key lessons from the national and international literature on industrial reju- venation and the management of major closures. Industrial rejuvenation is a multi-faceted strategy that seeks to manage pressures and complex change in response to local, national, and global conditions. The chapter focuses on the evidence about the strategic options for industrial rejuvenation available to government in partnership with industry, trade union, and community stakeholders.

There are significant implications for policy development in the close linkage between industrial rejuvenation and concepts of urban and regional regeneration. The emergence of the regional innovation systems agenda and its relevance as a strategic response to industrial decline and dislocation is reviewed. So too is the literature on smart specialisation in the European Union, together with a discussion on the relevance to rejuvenation strategies of integrated and inclusive innovation and problem solving processes.

The chapter discusses notable international case studies of rejuvenation and regeneration such as Bilbao and Manchester. It pays particular attention to the impacts of major industrial dislocations and closures in Australia and the UK. The chapter concludes by drawing out some broad strategic implica- tions for the design of more integrated rejuvenation and regeneration policies.

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Section 2: Responses for Sectors, Clusters, and Regions

The Role of Local and Regional Institutions by John Tomaney

This chapter explores the ways in which regions that are remote from the main concentrations of eco- nomic wealth and power can achieve development in a high cost environment.

The role of effective institutions in creating the conditions for economic development has become a major field of scholarship. Recently, these insights have been applied to the urban and regional scale. This chapter pays particular attention to the role that regional and local institutions play in shaping pat- terns of economic performance, especially in high cost environments.

The chapter outlines new thinking evident worldwide on place-based city and regional development. The essence is a move away from traditional approaches that emphasise provision of large-scale infra- structure, attraction of footloose investors, and the disbursement of transfer payments designed mainly to compensate for the effects of industrial restructuring and low growth. The new approaches emphasise the identification and mobilisation of a region’s internal skills and innovation capacities that have been unrecognised and under-utilised. Such approaches stress the importance of integrating policies for land use, innovation and business support, skills, and infrastructure.

The chapter examines ways in which this new thinking is informing regional policy. It provides some case studies of regions that have succeeded in the high cost environment of Europe. It concludes by stressing the importance of effective and adept local and regional institutions in ensuring the prosperity of cities and regions.

Putting Clusters to Work by Rodin Genoff and Graeme Sheather

A conceptual methodology and suite of tools that have translated cluster theory into bottom up business outcomes for companies participating in these cluster projects demonstrates how a deeper understanding of clusters can contribute to the economic development of industrial regions.

The methodology and findings described in this chapter pioneer new insights and ways to analyse emerging cluster developments.

Confronting the Productivity Challenge in the High Cost Economy: Evidence from the Australian Oil and Gas Industry by Jerad A. Ford, John Steen, Martie- Louise Verreynne, Bradley Farrell, Gerald Marion, and Seelan Naicker

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Using world-class survey methodologies developed by the Centre for Business Research at Cambridge University and adapted for the oil and gas industry, an evidence-based view on business decisions and conditions is provided and linked to performance. While many of the productivity challenges facing the Australian oil and gas industry are beyond immediate managerial control, this research shows that key productivity drivers are in the realm of the firm to influence.

The research reported in this chapter shows that improvements in innovation, collaboration, and deeper competitive capabilities are the best levers to lift business productivity and to build a growth pathway for the future for this industry. This is illustrated by case examples of organisations that are successfully implementing such productivity-enhancing strategies.

Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation: The Case of Cellulosic Fibre Value Chain in the Green Triangle, South Australia by Toni Ahlqvist, John Kettle, Ville Valovirta, and Nafty Vanderhoek

Strategic roadmapping is an approach that uses foresight analysis combined with collaboration pro- cesses to engage stakeholders in identifying future higher value-added pathways and helping them to initiate transformation through innovation and the adoption of new technologies.

This approach is illustrated by the case study of the forest and wood products industry in the Green Triangle region in the southeast of South Australia, both the road maps produced and the staged policy recommendations made for immediate, short, and long-term action.

The chapter concludes by summarising the key arguments for the use of strategic roadmapping as policy tool for industrial transformation, and identifying some future avenues for strategic roadmapping in the forest and wood products industry and in manufacturing industry in general.

Section 3: Responses for Enterprises and Workplaces

Business Innovation: Beyond Technology by Don Scott-Kemmis

New approaches to value creation and appropriation through business model innovation are particu- larly vital in times of turbulence and realignment faced by firms in high cost operating environments. Business model innovation can create new and sustainable sources of competitive advantage for firms, securing their survival and growth.

The chapter discusses the evidence for the role of business model innovation in the growth of leading firms and in the restructuring of markets. It provides an overview of the frameworks for characterising and analysing business models. The options for different types of business models likely to be successful in high cost environments are described.

The chapter concludes with guidance for firms seeking to design and implement business model innovation as a competitive strategy.

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Design-Led Innovation: Overcoming Challenges to Designing Competitiveness to Succeed in High Cost Environments by Sam Bucolo & Cara Wrigley

This chapter focuses on demonstrating the role of Design-Led Innovation (DLI) as an enabler for the success of Small to Medium Enterprises (SMEs) within high growth environments.

This chapter is targeted toward businesses that may have been exposed to the concept of design previously at a product level and now seek to better understand its value through implementation at a strategic level offering. The decision to engage in the DLI process is made by firms who want to remain competitive as they struggle to compete in high cost environments, such as the state of the Australian economy at present.

The results presented in this chapter outline the challenges in the adoption of the DLI process and the implications it can have. An understanding of the value of DLI in practice—as an enabler of business transformation in Australia—is of benefit to government and the broader design community.

The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational Ambidexterity in a High Operating Cost Environment by Milé Terziovski

Australian organisations are struggling to develop strategies to compete with products and services produced in low-operating-cost environments.

Despite the huge success of the Six Sigma Quality (SSQ) methodology implemented by Motorola, General Electric, and many others, the emphasis on efficiency and effectiveness through SSQ has left some leading innovative organizations such as 3M in a state of confusion. A controversial 2007 Business Week article claims that creativity can be affected as a result of SSQ being ingrained in a company’s culture. Therefore, this chapter explores the effect of SSQ on innovation and organizational ambidexter- ity in a high-operating-cost environment.

A case study protocol was developed from the literature to gather qualitative data from four large Australian organisations, in a high-operating-cost environment: Securency, Qantas, Rio Tinto, and Cat- erpillar Underground Mining. Multiple-cross case analysis revealed that SSQ seems to align very well with process innovation, where the organisation has a well-defined process output to control. However, some tension exists between SSQ and product innovation, particularly in terms of the time expectation for SSQ to deliver results.

Furthermore, the study shows that SSQ could have a positive impact on organizational ambidexterity in a high-operating-cost environment, as long as management recognizes that innovation approaches require their own formula for success. Management needs to establish a team that could manage the ten- sion between “getting it right the first time” as part of managed innovation and “learning from failure” as part of entrepreneurial innovation. Based on the findings, the report concludes that managers need to exercise caution when implementing SSQ in a high operating cost environment.

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xxiv

Managerial Practices in a High Cost Manufacturing Environment: A Comparison with Australia and New Zealand by Renu Agarwal, Christopher Bajada, Paul Brown, and Roy Green

This chapter explores the management strategies adopted by manufacturing firms operating in high versus low cost economies and investigates the reasons for differences in the management practice choices. Labour costs and other institutional differences are expected to inform management practice choices and how they are implemented by firms; however, there are few detailed studies that explore these issues in any depth.

In this study, the emerging World Management Survey (WMS) dataset is used to consider these is- sues. The WMS dataset allows this study to extend the work of Bloom and Van Reenen, who developed a novel method for evaluating better versus worse managed firms on 18 dimensions of management practice. The study reported in this chapter identifies a subset of countries that have either high or low labour costs, with USA, Sweden, and Japan being high, and India, China, and Brazil being low labour cost economies. The high labour cost manufacturing firms are found to have better management practices. In this chapter, the authors find that Australia and New Zealand manufacturing firms face relatively high labour cost but lag behind world best practice in management performance.

The chapter concludes by highlighting the need for improvement in management capability for Aus- tralian and New Zealand manufacturing firms if they are to experience a reinvigoration of productivity, competitiveness, and long-term growth.

Supporting Entrepreneurship in High Cost Economies: What Can Governments Do? by Allan O’Connor, Graciela Corral de Zubielqui, Mushui Huanmei Li, and Manjula Dissanyake

Entrepreneurship in high-cost economies plays an important role in re-focusing an economy as it transitions from scale-based production-centred firms to smaller, flexible, and globally connected knowledge-based businesses. Equipping a population with the skills for this transition is a critical role of government. This chapter sets out the findings of a comprehensive literature review that addressed three objectives: to review internationally recognised and accepted methodologies of entrepreneurial human and firm characteristics data collection and analysis; to formulate the contemporary view and latest research on entrepreneurial characteristics and how these characteristics contribute to a model of entrepreneurial firm behaviour; to examine developments in the literature that explain to what extent human characteristics influence and predict the performance of firms.

The implications of this work are that firms with high potential in either innovation or market-based growth opportunities need to have the right environmental settings in terms of social, political, regulatory, economics, and technology for firms with a high success potential to realise this potential. The major challenge for government is to find ways and means of helping the firms that want and need assistance whilst leaving alone the firms that do not. The concept of stage progression and the relationship between the characteristics of the individual, the firm, and the opportunity provide the elements of a framework through which to consider government support programs and interventions.

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xxv

Manufacturing in a High Cost Environment: Basis for Success on the Firm Level by Göran Roos

This chapter draws on an overview of contemporary literature to distil the best ways for manufacturing firms to adapt to and succeed in high cost environments.

It is likely that global value chains will move back to sophisticated, economically complex, high- operating-cost environments like the US and the European Manufacturing Belt, but the firms that participate in these value chains will look different. The forces that impact the structure and location of manufacturing activities will also impact the individual firm. These firms will need to have continu- ously high productivity growth driven by effective and efficient managerial competence, capability and managerial practices, high-performance work systems, increasingly higher-quality general labour and capital inputs, deployment of key enabling technologies, increasing R&D capital formation, continuous innovation to both create and appropriate value, continuous improvement through learning by doing, using, and interacting, effective firm structure given the industry structure and ecosystem in which the firm operates, optimal absolute and relative firm size, effective absorption of productivity spillovers allowing for acquisition, assimilation, transformation, and exploitation of knowledge, approaches that embrace both competition and cooperation, access to flexible input markets, operating in an environment of simultaneous deregulation and smarter regulation, and high and dynamic demand.

This chapter discusses how this will be done and concludes with an explanation of how this results in firms becoming so-called “Hidden Champions.”

Success in the above challenges will result in fewer employees with higher capability in tomorrow’s manufacturing firms, producing a higher level of output of which a very high share is being produced and delivered digitally. These firms will be in smaller, more concentrated value chains serving a global market but operating both competitively and collaboratively in agglomerations like clusters. These ag- glomerations will be located in jurisdictions with high economic complexity and with a deep and broad industrial commons and with a supportive policy regime.

Göran Roos Swinburne University, Australia

Narelle Kennedy The Kennedy Company Pty Ltd., Australia

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Section 1

Responses for National Economies

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Chapter 1

DOI: 10.4018/978-1-4666-5828-8.ch001

Manufacturing in a High Cost Environment:

Basis for Future Success on the National Level

ABSTRACT

This chapter explores the current state of flux in manufacturing. It examines the forces that drive fragmentation and dispersion of value chains on the one hand and those that drive concentration and integration of value chains on the other. These forces are underpinned by changes in technology, wage costs, business environment, importance of economies of scale for production, need for interaction with customers and input providers, needs for skills in the manufacturing workforce, and the workings of industrial commons and economic complexity. Analysing these changes at the level of the firm, this chapter puts the competitive focus on the creation of value more than on cutting costs (although both are important). The policy environment must provide both carrot and stick to ensure that firms align with these developments. In this dynamic world, an effective policy response requires a shift from any single dominating economic lens (e.g. neo-classical, neo-Keynesian, neo-Schumpeterian, evolutionary) to a situation-specific approach.

THE STRUCTURAL CHANGE OF MANUFACTURING: PAST-TO-PRESENT

Like all industrial activities, manufacturing is in a constant state of flux. Historically, change was driven by the mutual interaction of technology development and change in consumer demand. But with the reduction in trade barriers, consum-

ers were able to access a wider choice of products and receive value in different ways, beyond the performance of products when used.

Three different dimensions of value in the eyes of customers can be identified: Instrumental Value is the value of a product doing what it is supposed to do when put to use; Intrinsic Value is the appreciation of a product for what it is in itself, regardless of if its use e.g. the value of a

Göran Roos Swinburne University, Australia

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Manufacturing in a High Cost Environment

coin to a coin collector is neither its face value nor its resale value but rather its value as a coveted object; Extrinsic Value is the value to the owner of others appreciating the owned object e.g. the value of a policy to a politician may lie in the fact that it is appreciated by the electorate, rather than in the outcome it delivers or that it is good as an action in its own right.

The above mentioned trade barrier reduction resulted in more choice and thereby the provision of many customers and consumers with higher total value-for-money by adding up contributions from all three value dimensions (instrumental, intrinsic and extrinsic)1. E.g. same functionality different brand, same functionality higher collectability, higher functionality with higher desirability, etc.

From the producers’ perspective, this provides benefits in terms of increased economies of scale due to increased volumes from larger markets, as well as potential for increased earnings due to maximising differing price levels and price elas- ticity in different markets. In addition, producers benefit from learning more from the rapidly in- creasing volumes of products in different markets.

This provides for more rapid growth of firms that serve export markets than for those that only serve the domestic market. Hence, a structural change has occurred that favours larger firms over smaller ones. Such firms have greater bargain- ing power and scale, demonstrated in particular by their ability to extract more value from their suppliers.

In summary, reduced trade barriers led to greater consumer choice and new understandings of value, resulting in economies of scale from serving larger markets which in turn drove exports and larger businesses with more bargaining power.

The next structural shift happened when firms started to realise that labour costs differed across countries and locations. This provided opportuni- ties for reducing costs and led to the relocation of activities, most commonly production activities or service activities, to lowest cost jurisdiction or location, and hence offshoring was born.

The next structural shift was enabled by the rapid development of information and commu- nication technologies (ICT) which provided the tools for coordination of activities on a scale and complexity previously not possible. Through de- ploying ICT, transaction cost could be reduced to a level where the firm was now able to sub-divide its operations into many discrete unit operations that could be dispersed, not only geographically, but also organisationally, leading to the birth of outsourcing. This development has resulted in the fragmentation, or dispersion of value chains which is a key characteristic of manufacturing at present.

The forces that drive fragmentation and disper- sion of value chains that are normally discussed under the heading of globalisation are not the only forces at play. There are also forces that drive value chains towards concentration and integration and these will be discussed below. It is the balance between these two sets of forces that determines the structure of value chains at any given time and this balance is continuously changing. We are now probably at the peak of imbalance between these two sets of forces. It is interesting to note that in spite of the present imbalance being in favour of the fragmenting and dispersing forces, more than two-thirds of global manufacturing activity takes place in industries that tend to locate close to demand (George et al., 2014), be this demand in growing economies like China or resurging economies like the US.

The practicalities of the present situation can be illustrated by some insights from the Swedish economy where (SCB, 2013):

• In the period 2009-2011 6,200 jobs (equal to 1.3% of the workforce), where lost due to operations being offshored. This equates to about 1 in 250 jobs. Out of these the ma- jority (60%) were in services and construc- tion and not in manufacturing.

• Measured on the company level 308 com- panies or 13% had offshored some part of their operations in the period.

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Manufacturing in a High Cost Environment

• For all three sectors, offshoring has pri- marily related to support activities rather than core activities. Within the service sector 80% of the firms that offshored, offshored support activities compared to 70% in manufacturing. This is a trend shift compared to the period 2001-2006 when most of the activities that were offshored were core activities. Looking closer at the support activities that are being offshored it becomes clear that a high proportion is management and administrative functions.

• 30% of the firms that offshored services, offshored R&D and 40% of those that off- shored support functions, offshored ICT services.

• It is worth noting that 86% of the firms that offshored have offshored within the group i.e. the location has changed but the owner- ship and control is unchanged.

• The Swedish economy is starting to see an increase in firms bringing activities back to Sweden. 69 firms or 3% brought previ- ously offshored activities back to Sweden during the period and the two most com- mon reasons for this decision are strategic and problems with local suppliers in the offshored jurisdiction.

• The conclusion is that the Swedish econ- omy has passed through the first wave of offshoring when core activities were being offshored and has passed into the second wave where support activities are being offshored. Observing the types of activi- ties being offshored it is clear that the Swedish economy is in the end of the sec- ond phase of offshoring and also observ- ing the increase in bringing activities back, the Swedish economy is in the early part of the third phase – the backshoring phase. Figure 1 shows the firms’ reasons for off- shoring and backshoring.

This pattern is repeated in other OECD coun- tries. Kinkel & Maloca (2009) note that every fourth to sixth offshoring activity is followed by a backshoring activity within the following four years, mainly due to lack of flexibility and quality problems at the foreign location and this makes the authors conclude that backshoring may be a short-term correction of prior location misjudgements, rather than a long-term reaction to slowly emerging local development trends. It is clear that there is a trend towards backshoring and that some of this trend falls under the heading of correcting prior decisions that turned out to be erroneous whereas others fall under the heading of responding to changing relative competitiveness of the home and offshored location. In a recent article by Bryson & Mulhall (2014) it was noted that 15% of companies in the UK were returning production to the UK and that the underlying reasons are:

• Firms are shifting production onshore, as offshore cost savings were not as great as anticipated. Labour increasingly accounts for a small proportion of a product’s manu- facturing costs. This means that for many products wage inflation combined with es- calating shipping costs will reduce the sav- ings gained from outsourcing to locations such as China.

• The production of products outside the home market can lead to long product- delivery cycles; speed and closeness to market are becoming significant drivers of success.

• There have been concerns with the quality of products supplied by producers located in low-cost locations.

• There have been problems related to the loss of intellectual property.

• Firms are reluctant to tie up valuable capi- tal in large overseas shipments. Managers

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Manufacturing in a High Cost Environment

Figure 1. Reasons for offshoring and backshoring in the Swedish Economy 2009-2011 (SCB, 2013, p. 27 & p. 30)

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Manufacturing in a High Cost Environment

have begun to seek alternative local suppli- ers willing to supply small batches.

• Companies are beginning to appreciate the benefits of co-locating design and de- velopment with production managers and assembly workers. This enables a close dialogue between design, development and manufacturing.

• During the 20th century, labour played an important role in where goods were manu- factured. This century, energy will play a much more important role and may dis- place labour costs as the most important factor. Energy costs are involved in the shipment of products from low-cost loca- tions to the UK and also in fabrication.

Similar findings can be found in Holz (2011); Leibl et al. (2011); Corbet (2012); Dholakia et al. (2012); Kinkel (2012); Liao (2012); Oppigård (2012); Chu et al. (2013); Ellram (2013); Ellram et al. (2013); Fratocchi et al. (2013); Gray et al. (2013).

The structural changes have been and are continue to be impacted by government policy in different jurisdictions. Policy enacted by different jurisdictions is very much a consequence of the economic lens through which the world is viewed, and in the high cost operating jurisdictions there are basically three economic lenses at work, as well as the constitutional systems which impact the relative power balance between citizens, politicians and the crafting and implementing side of the bureaucracy. The economic lenses are illustrated in Table 1.

The challenge in the prevailing policy land- scape is expressed by McCraw (2007) as the contradiction between on the one hand the very high interest in innovation, entrepreneurship, and creative destruction and on the other hand that the public policy debate remains guided and framed by the neoclassical and neo-Keynesian economic doctrines.

In the evolutionary economic perspective, government has a critical role as relates to market

failure due to technological development. The key elements of a policy that responds to technology related market failures have been outlined by Tassey (2013) and are shown in Figure 2:

In addition it is critical that any industrial policy relating to manufacturing recognises the complex ways in which service and manufacturing tasks are combined in production systems (Bryson et al. 2013). This complexity combined with the impor- tance to a jurisdiction of mastering and controlling manufacturing is central to policy-making but is, as already pointed out by Cohen & Zysman (1988), obscured by the popular myth that economic development is a process of sectoral succession e.g. agricultural is followed by manufacturing which in turn is followed by services and so on. This is a myth because it is factually incorrect and a function of, among other things, a static definition of value creating activities supported by public statistics using these static definitions. As an example today’s agricultural production in countries like the US, Australia, Denmark, Holland, Sweden etc is more efficient than ever due to replacing labour by capital and continu- ous upgrading of technology and knowledge. As will be discussed elsewhere in this chapter high value service jobs are overwhelmingly comple- ments to manufacturing and not substitutes for manufacturing, so if manufacturing is lost these service activities will be also be lost. It is critical that policy-making is underpinned by an in-depth understanding of how these evolving sectors with their complex linkages look today and how they are likely to look tomorrow.

THE STRUCTURAL CHANGE OF MANUFACTURING INTO THE FUTURE

Future structural development will be driven by continued technological development, continued shift in patterns of consumer and customer demand, rebalancing of economic forces that act towards further geographic and organisational dispersion

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Manufacturing in a High Cost Environment

Ta bl

e 1.

S um

m ar

y of

k ey

c ha

ra ct

er is

tic s

of th

e m

os t c

om m

on e

co no

m ic

le ns

es u

nd er

pi nn

in g

in du

st ry

r el

at ed

p ol

ic y

(M et

ca lfe

, 1 99

4; D

op fe

r et

a l.,

2 00

4; H

au pt

m an

n, 2

00 4;

A tk

in so

n &

A ud

re ts

ch , 2

00 8;

A ud

re ts

ch &

L in

k, 2

01 2)

N eo

cl as

si ca

l N

eo -K

ey ne

si an

N eo

-S ch

um pe

te ri

an E

vo lu

ti on

ar y

(I s

so m

et im

es c

lu st

er ed

w it

h th

e N

eo cl

as si

ca l a

nd s

om et

im es

w it

h th

e N

eo -S

ch um

pe te

ri an

v ie

w )

O ri

gi n

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m S

m ith

: A n

In qu

ir y

in to

th e

N at

ur e

an d

C au

se o

f t he

W ea

lth o

f N

at io

ns (1

77 6)

Jo hn

M ay

na rd

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ne s:

T he

G en

er al

he or

y of

E m

pl oy

m en

t, In

te re

st , a

M on

ey (1

93 6)

Jo se

ph A

lo is

S ch

um pe

te r:

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ita lis

m ,

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al is

m , a

nd D

em oc

ra cy

(1 94

2) T

ho rs

te in

V eb

le n:

W hy

is e

co no

m ic

s no

t an

e vo

lu tio

na ry

s ci

en ce

? (1

89 8)

G ui

di ng

P ri

nc ip

le s

• T

he a

cc um

ul at

io n

of c

ap ita

l dr

iv es

e co

no m

ic g

ro w

th .

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co no

m ic

g ro

w th

is a

ch ie

ve d

m ax

im is

in g

al lo

ca tiv

e ef

fi ci

en cy

.2 •

T he

e co

no m

y is

a m

ar ke

t de

te rm

in ed

b y

pr ic

e si

gn al

s an

d al

l m

ar ke

ts a

re th

e sa

m e.

•

T he

e co

no m

y te

nd s

eq ui

lib ri

um .

• In

di vi

du al

s an

d fi

rm s

ar e

ra tio

na l m

ax im

is er

s an

d re

sp on

d to

ce nt

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• D

em an

d dr

iv es

e co

no m

ic g

ro w

th .

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qu ita

bl e

di st

ri bu

tio n

of w

ea lth

cr iti

ca l.

• M

an ag

in g

th e

sh or

t- te

rm b

us in

es s

cy cl

e is

th e

pr im

ar y

ob je

ct iv

• In

no va

tio n

dr iv

es e

co no

m ic

g ro

w th

. •

T he

m aj

or d

ri ve

rs o

f e co

no m

ic g

ro w

ar e

pr od

uc tiv

e ef

fi ci

en cy

a nd

a da

pt iv

e ef

fi ci

en cy

. •

Sp ur

ri ng

e vo

lv in

g an

d le

ar ni

in st

itu tio

ns is

th e

ke y

to g

ro w

th .

• T

he e

co no

m y

te nd

s to

w ar

d ch

an ge

th er

th an

to w

ar d

eq ui

lib ri

um .

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di vi

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s an

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no t r

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m ax

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•

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t p ub

lic -p

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te p

ar tn

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ip s

ar e

th e

be st

w ay

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pl em

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• U

se s

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m et

ho do

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st ud

y th

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a nd

in te

ra ct

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d tr

an sf

or m

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n pr

oc es

se s

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ir m

s, in

st itu

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, i nd

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ie s,

pl oy

m en

t, pr

od uc

tio n,

tr ad

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d gr

ow th

. •

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ie s

in no

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n w

hi ch

is d

ef in

as th

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ith

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al ue

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n or

th e

in di

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id e

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cu se

s on

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sf or

m at

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ro ce

ss es

o pe

ra tin

g fr

w ith

in th

e gr

ou p

of o

rg an

is at

io ns

, th

e or

ga ni

sa tio

n or

th e

in di

vi du

al a

in st

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ed b

y ag

en ts

w ith

b ou

nd ed

tio na

lit y.

T he

se a

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s m

ay le

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fr om

in te

ra ct

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a nd

e xp

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an d

th is

le ar

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a nd

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as so

ci at

tr an

sf or

m at

io n

pr oc

es se

s ar

e a

fu nc

tio n

of th

e di

ff er

en ce

b et

w ee

n ag

en ts

a s

w el

l as

th e

ag en

t’s a

bs or

pt iv

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pa ci

ty .

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ra w

s on

th e

pr in

ci pl

es o

f c um

ul at

iv e

an d

ci rc

ul ar

c au

sa tio

n as

w el

l a s

ev ol

ut io

na ry

p sy

ch ol

og y

an d

co m

pl ex

st em

• A

s in

N eo

-S ch

um pe

te ri

an th

in ki

ng ,

ad ap

tiv e

ef fi

ci en

cy is

s ee

n as

a k

co nt

ri bu

to r t

o ec

on om

ic e

ff ic

ie nc

co nt

in ue

d on

fo llo

w in

g pa

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Manufacturing in a High Cost Environment

N eo

cl as

si ca

l N

eo -K

ey ne

si an

N eo

-S ch

um pe

te ri

an E

vo lu

ti on

ar y

(I s

so m

et im

es c

lu st

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w it

h th

e N

eo cl

as si

ca l a

nd s

om et

im es

w it

h th

e N

eo -S

ch um

pe te

ri an

v ie

w )

K ey

P ol

ic ie

s •

E nc

ou ra

ge s

av in

gs .

• A

vo id

p ol

ic ie

s th

at d

is to

al lo

ca tiv

e ef

fi ci

en cy

. •

R ed

uc e

ar tif

ic ia

l b ar

ri er

s an

d im

pe di

m en

ts to

m ar

ke t

eq ui

lib ri

um , p

ar tic

ul ar

ly b

y en

su ri

ng th

at p

ri ce

s ar

e al

ig ne

d w

ith c

os ts

. •

C ut

ta x

ra te

s on

in di

vi du

al s,

pe ci

al ly

h ig

h ea

rn er

s to

in cr

ea se

od uc

tiv ity

. •

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uc e

pu bl

ic s

pe nd

in g.

• In

cr ea

se g

ov er

nm en

t s pe

nd in

g to

k ee

p th

e ec

on om

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ow in

• Im

pl em

en t c

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cl ic

al f

is ca

l po

lic ie

• Im

pl em

en t p

ro gr

es si

ve ta

xe s.

•

St ro

ng re

gu la

tio ns

• Ta

x, e

xp en

di tu

re , a

nd re

gu la

to ry

lic ie

s to

b oo

st in

no va

tio n,

s ki

lls ,

in ve

st m

en t i

n ne

w e

qu ip

m en

t, co

m pe

tit io

n, a

nd e

nt re

pr en

eu rs

hi p.

• Su

pp ly

s id

e po

lic ie

s th

at d

ri ve

fa ct

or s

lik e

kn ow

le dg

e, s

ki lls

a nd

in ve

st m

en t.

• D

em an

d si

de p

ol ic

ie s

th at

d ri

ve fa

ct or

s lik

e gr

ow th

a nd

in no

va tio

n –

na m

el y,

w k

no w

le dg

e, n

ew s

ki lls

a nd

n ew

pi ta

l e qu

ip m

en t.

• D

em an

d si

de p

ol ic

ie s

lik e

pr oc

ur em

en t

an d

cl us

te r p

ol ic

ie s

th at

d ri

ve in

no va

tio n.

•

Po lic

ie s

th at

e nd

ow th

e m

ar ke

t w ith

te r-

or ga

ni sa

tio na

l a rr

an ge

m en

ts in

de r t

o ac

hi ev

e co

or di

na tiv

e ef

fi ci

en cy

c as

es w

he re

th er

e is

n ot

c om

pl et

e kn

ow le

dg e

ab ou

t t he

c ha

ra ct

er is

tic s

ne w

p ro

du ct

s an

d pr

oc es

se s.

• Po

lic ie

s to

s tim

ul at

e va

ri et

y th

ro ug

h in

no va

tio n.

•

Po lic

ie s

th at

s tim

ul at

e in

no va

tio n

to ge

th er

w ith

v ar

ie ty

in th

is in

no va

tio n

by d

if fe

re nt

a ct

or s.

•

Po lic

ie s

th at

p re

ve nt

s el

ec tio

n pr

oc es

se s

fr om

re du

ci ng

th e

va ri

et y

an d

he nc

e en

su re

s ec

on om

ic e

vo lu

tio n.

•

Po lic

es th

at fo

cu s

on o

rg an

is at

io ns

a nd

st em

s of

o rg

an is

at io

ns th

at d

ev el

th ei

r o w

n un

de rp

in ni

ng k

no w

le dg

e do

m ai

• Po

lic ie

s th

at in

cr ea

se th

e ec

on om

co m

pl ex

ity a

nd b

ro ad

en a

nd d

ee pe

n th

e in

du st

ri al

c om

m on

• Po

lic ie

s th

at e

nc ou

ra ge

th e

fo rm

at io

n of

c lu

st er

s an

d pr

ec in

ct s.

•

C lu

st er

s th

at in

cr ea

se th

e ef

fe ct

iv en

es s

of th

e na

tio na

l o r r

eg io

na l i

nn ov

at io

n sy

st em

K ey

p ol

ic ie

s no

t t o

en ac

t •

Po lic

ie s

to s

pu r f

ir m

s’

pr od

uc tiv

ity o

r i nn

ov at

io n

ar e

in ap

pr op

ri at

e be

ca us

e th

“d is

to rt

” th

e m

ar ke

• C

ar ef

ul a

ro un

d un

re gu

la te

d fr

ee tr

ad e.

• Po

lic ie

s th

at b

ui ld

b ar

ri er

s to

no va

tio n

lik e

e. g.

p ro

cu ri

ng o

ff -t

he -

sh el

f p ro

ve n

so lu

tio ns

. •

Po lic

ie s

th at

p ic

k in

di vi

du al

f ir

m s

w in

ne rs

• A

vo id

p ol

ic ie

s th

at tr

y to

o pt

im is

e ou

tc om

e w

ith re

sp ec

t t o

so m

e ob

je ct

iv e

fu nc

tio n.

T he

s ea

rc h

fo r r

at io

na lit

y w

ith re

sp ec

t t o

ill d

ef in

ed p

ro bl

em s

ca n

re su

lt in

in fe

ri or

c ho

ic es

, d ue

to th

e lim

ita tio

ns in

th e

co m

pe te

nc e

to im

pr ov

e co

m pe

te nc

• Po

lic ie

s th

at e

nc ou

ra ge

o ff

-t he

s he

pr oc

ur em

en t o

f p ro

ve n

so lu

tio ns

In S

um m

ar y

• L

ib er

al N

eo cl

as si

ca l e

co no

m ic

ct ri

ne m

in im

is es

th e

ro le

in no

va tio

n in

g ro

w th

a nd

ve rn

m en

t’s c

ap ab

ili ty

to s

pu r

in no

va tio

n an

d la

rg el

y co

un se

po lic

ym ak

er s

to m

an ag

e th

e bu

si ne

ss c

yc le

, r ed

uc e

al lo

ca tio

n in

ef fi

ci en

ci es

, a nd

s up

po rt

g re

at er

ir ne

ss .

• T

he fo

cu s

of K

ey ne

si an

e co

no m

ic s

on re

st or

in g

ec on

om ic

o ut

pu t t

o le

ve ls

m pa

tib le

w ith

fu ll

em pl

oy m

en t.

T he

ai n

po lic

y ta

rg et

is th

e (a

gg re

ga te

) de

m an

d si

de o

f t he

e co

no m

y. T

m ai

n po

lic y

in st

ru m

en ts

a re

f is

ca l a

m on

et ar

y po

lic y.

T he

p ol

ic y

fo cu

s on

gr eg

at e

de m

an d

as su

m es

th at

s up

pl y

w ill

re sp

on d

to d

em an

d. T

hu s,

th er

e is

lit

tle a

tte nt

io n

pa id

to th

e ro

le o

r i m

pa ct

in no

va tio

n. 4

• N

eo -S

ch um

pe te

ri an

e co

no m

ic s

is a

bo ut

fa ci

lit at

in g

in ve

st m

en t i

n kn

ow le

dg e-

cr ea

tin g

ac tiv

iti es

, s uc

h as

se ar

ch a

nd e

du ca

tio n,

a nd

to e

nc ou

ra ge

en ts

o f c

ha ng

e, o

r e nt

re pr

en eu

rs , t

o in

no va

te . T

hi s

le ad

s to

a w

id e

ra ng

e of

lic y

ta rg

et s

an d

in st

ru m

en ts

w ith

ba la

nc e

be tw

ee n

su pp

ly a

nd d

em an

d si

de .

• E

vo lu

tio na

ry e

co no

m ic

s on

e m

ic ro

ec on

om ic

le ve

l i s

ab ou

t un

de rs

ta nd

in g

th e

pr oc

es s

th at

d es

cr ib

ho w

a n

ag en

t ( us

in g

hi s

co gn

iti ve

a nd

ag in

at iv

e ca

pa bi

lit ie

s as

w el

l a s

hi s

in te

ra ct

io ns

w ith

o th

er a

ge nt

s bu

t w

ith in

a s

et tin

g of

b ou

nd ed

ra tio

na lit

or ig

in at

es , a

do pt

s, a

da pt

s an

d re

ta in

s a

no ve

l g en

er ic

r ul

• E

vo lu

tio na

ry e

co no

m ic

s on

th e

m es

o- ec

on om

ic le

ve l i

s ab

ou t d

yn am

re pl

ic at

io n

Ta bl

e 1.

C on

tin ue

co nt

in ue

d on

fo llo

w in

g pa

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Manufacturing in a High Cost Environment

N eo

cl as

si ca

l N

eo -K

ey ne

si an

N eo

-S ch

um pe

te ri

an E

vo lu

ti on

ar y

(I s

so m

et im

es c

lu st

er ed

w it

h th

e N

eo cl

as si

ca l a

nd s

om et

im es

w it

h th

e N

eo -S

ch um

pe te

ri an

v ie

w )

an d

di ff

us io

n of

g en

er ic

r ul

es . T

hi s

cr ea

te s

a ba

ck dr

op o

f c on

tin uo

us c

ha ng

e w

hi ch

le ad

s to

a c

on tin

uo us

n on

- eq

ui lib

ri um

s ta

te o

n th

e m

es o

le ve

l. •

E vo

lu tio

na ry

e co

no m

ic s

on th

e m

ac ro

ec on

om ic

le ve

l i s

ab ou

t t he

al ys

is o

f c om

pl ex

s tr

uc tu

re s

an d

th e

as so

ci at

ed p

ro ce

ss es

. T he

m ac

le ve

l s tr

uc tu

re is

d et

er m

in ed

b y

se lf

- or

ga ni

sa tio

n an

d se

lf -o

rd er

in g

si nc

e ra

tio na

lit y,

c ho

ic e

an d

be ha

vi ou

r i s

go ve

rn ed

b y

bo un

de d

ra tio

na lit

y an

d he

nc e

no n-

ex is

te nt

in th

e ra

tio na

l s en

se .

T hi

s co

m pl

ex s

tr uc

tu re

h as

a n

al m

os t

no n-

de te

rm in

ab le

b eh

av io

ur s

in ce

it is

ad e

up o

f t he

s ur

fa ce

-s tr

uc tu

re a

th e

de ep

-s tr

uc tu

re th

at d

if fe

r f ro

m e

ac h

ot he

E m

pi ri

ca l s

up po

fo r

• M

ar ke

ts a

re im

po rt

an t,

es pe

ci al

at th

e m

ic ro

ec on

om ic

le ve

l. •

H el

pi ng

to e

ns ur

e th

at p

ri ce

s us

ua lly

m at

ch c

os ts

c an

b e

im po

rt an

t t o

pr om

ot in

g al

lo ca

tiv e

ef fi

ci en

cy , e

sp ec

ia lly

w he

n th

er e

ar e

lit tle

o r n

o co

m pe

ns at

in g

be ne

fi ts

to p

ro du

ct iv

ity o

r in

no va

tio n.

•

Ta x

ra te

s at

to o

hi gh

a le

ve l c

lim it

in ce

nt iv

es .

• B

ud ge

t d ef

ic its

a t t

oo h

ig h

a le

ve l

• Fa

ir ne

ss a

nd e

qu ity

a re

c or

ne rs

to ne

s of

th e

su st

ai na

bi lit

y of

w es

te rn

m oc

ra ci

es , a

nd s

oc ie

tie s

in w

hi ch

co m

e in

eq ua

lit y

is to

o hi

gh e

xp er

ie nc

e lo

w er

e co

no m

ic g

ro w

th th

an m

or e

eq ui

ta bl

e so

ci et

ie s.

• M

ac ro

ec on

om ic

fa ct

or s

ar e

m or

e im

po rt

an t t

ha n

m ic

ro ec

on om

ic o

ne s

de te

rm in

in g

em pl

oy m

en t l

ev el

• Fu

ll em

pl oy

m en

t h as

b en

ef ic

ia l e

ff ec

on p

ro du

ct iv

ity a

nd in

no va

tio n.

• M

os t o

f t he

th eo

ry .

• T

he c

o- ev

ol ut

io n

of a

n in

du st

ry o

n th

e on

e ha

nd , a

nd o

f p ro

gr es

si on

in th

e un

de rly

in g

kn ow

le dg

e do

m ai

n on

th e

ot he

r h as

b ee

n pr

ov en

. •

B ou

nd ed

ra tio

na lit

y in

d ec

is io

n m

ak in

g ha

s be

en w

el l e

st ab

lis he

• Pr

of it

sa tis

fi ci

ng ra

th er

th an

p ro

fi t

m ax

im is

in g

as a

b eh

av io

ur h

as b

ee n

sh ow

n to

b e

pr ev

al en

t. •

O th

er w

is e

lik e

th e

N eo

-S ch

um pe

te ri

le ns

, m os

t o f t

he th

eo ry

h as

fo un

d em

pi ri

ca l s

up po

rt .

Ta bl

e 1.

C on

tin ue

co nt

in ue

d on

fo llo

w in

g pa

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Manufacturing in a High Cost Environment

N eo

cl as

si ca

l N

eo -K

ey ne

si an

N eo

-S ch

um pe

te ri

an E

vo lu

ti on

ar y

(I s

so m

et im

es c

lu st

er ed

w it

h th

e N

eo cl

as si

ca l a

nd s

om et

im es

w it

h th

e N

eo -S

ch um

pe te

ri an

v ie

w )

ca n

lim it

ca pi

ta l a

va ila

bi lit

• In

di vi

du al

s an

d or

ga ni

sa tio

ns a

ra tio

na l a

nd re

sp on

d ap

pr op

ri at

el y

to in

ce nt

iv es

(b ut

n ot

n ec

es sa

ri ly

l t he

ti m

e) .

• C

er ta

in m

ar ke

ts , e

sp ec

ia lly

th os

e ch

ar ac

te ri

se d

by s

ta bi

lit y

an d

sl ow

te s

of c

ha ng

e, d

o te

nd to

w ar

d eq

ui lib

ri um

(b ut

m an

y ot

he r

m ar

ke ts

d o

no t)

E m

pi ri

ca l f

in di

ng s

th at

a re

o pp

os ed

w ha

t t he

th eo

st at

• In

no va

tio n

is a

m uc

h la

rg er

iv er

o f g

ro w

th th

an c

ap ita

l. •

Pr od

uc tiv

e ef

fi ci

en cy

6 a nd

ap tiv

e ef

fi ci

en cy

7 a re

m uc

h m

or e

im po

rt an

t t o

ec on

om ic

g ro

w th

th an

ax im

is in

g al

lo ca

tiv e

ef fi

ci en

cy .

• T

he e

co no

m y

in cr

ea si

ng ly

es n’

t t en

d to

o ne

e qu

ili br

iu m

.8 •

In di

vi du

al s

an d

fi rm

s ar

e no

t ne

ce ss

ar ily

ra tio

na l a

ct or

• E

co no

m ic

h is

to ry

, c ul

tu re

, no

rm s,

in st

itu tio

ns , a

nd p

at h

de pe

nd en

cy m

at te

rs .

• C

ap ita

l d ee

pe ni

ng is

re sp

on si

bl e

fo r o

nl y

a sm

al l p

ar t o

f a dv

an ce

s in

bo ur

p ro

du ct

iv ity

.9 •

In te

r- fi

rm c

ol la

bo ra

tio n

is a

ci lit

at or

n ot

a n

in hi

bi to

r o f

co m

pe tit

iv e

su cc

es s.

• T

he re

is n

o co

ns is

te nt

re la

tio ns

hi p

be tw

ee n

co ns

um er

s pe

nd in

g an

d pr

od uc

tiv ity

g ro

w th

. •

C ha

ng es

in w

ag es

h av

e be

en ti

to c

ha ng

es in

p ro

du ct

iv ity

o ve

r t he

od er

at e

an d

lo ng

te rm

• N

o ge

ne ra

l f in

di ng

s. •

N o

ge ne

ra l f

in di

ng s.

Ta bl

e 1.

C on

tin ue

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Manufacturing in a High Cost Environment

of the value chain and forces that act towards a geographic and organisational concentration of the value chain, as well as the policy settings in the different jurisdictions. Some jurisdictions e.g. Germany are primarily evolutionary in their outlook, some like e.g. Australia are primarily neoclassical in their outlook, whereas e.g. US, UK and Japan are balanced between the neoclassical and the Keynesian outlook.

Technology

The structure of manufacturing will be impacted by developments in a set of key technologies and systems of technologies like production systems. Some of these developments have potentially transformative structural implications .These key technologies with examples of their structural implications on future manufacturing are outlined, very briefly, in Table 2.

The patenting activity by sector 2000-2009 is shown in Table 3 and illustrates the KET knowl- edge intensity by sector:

All the above technology developments will impact on existing value chains and form new value chains. They are a prime reason for greater concentration and clustering of value chains, as opposed to the trends to outsourcing and offshor- ing which act to disperse value chains.

This can be exemplified with additive manu- facturing that is likely to create markets and value chains for (Sissons & Thompson, 2012):

• Design: Additive manufacturing will likely create a global market for digital designs, both for generic blueprints and bespoke de- sign services;

• Bespoke Manufacturing Services: Additive manufacturing may well place in- creased emphasis on the service aspect of

Figure 2. Policy roles in response to market failures over the entire technology life cycle (Tassey, 2013, p. 14)

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Manufacturing in a High Cost Environment

Ta bl

e 2.

S om

e is

su es

a ro

un d

th e

im pa

ct o

f t he

K E

T (K

in se

y (2

00 1)

; S ou

th ga

te e

t a l.

(2 00

7) ; K

in se

y et

a l.

(2 00

9) ; A

tz or

i e t a

l. (2

01 0)

; B ol

an d

(2 01

0) ; B

ut te

r e t a

l. (2

01 1)

; J en

ki ns

e t a

l. (2

01 1)

; S po

rl ed

er &

B ol

an d

(2 01

1) ; A

E N

E A

S &

C A

TR E

N E

(2 01

2) ; B

re ch

er , e

t B re

ch er

, e t a

l. (2

01 2)

; C

he n

(2 01

2) ; C

SC (2

01 2)

; G op

al ak

ri sh

na n

& B

ro w

n (2

01 2)

; S is

so ns

& T

ho m

ps on

, ( 20

12 );

v an

d e

Ve ld

e et

a l.

(2 01

2) ; A

hl qv

is t e

t a l.

(2 01

3) ;

D ic

ke ns

e t a

l. (2

01 3)

; M

an yi

ka e

t a l.

(2 01

3) ;

O ko

li et

a l.

(2 01

3) ; R

oo s

(2 01

3) ; W

oo dl

ey e

t a l.

(2 01

3) ; K

ilk en

ny (2

01 4)

; R oo

s et

a l.

(2 01

4) )

Te ch

no lo

gi es

/S ys

te m

s of

ch no

lo gi

es K

ey I

ss ue

s to

b e

So lv

be fo

re th

e Te

ch no

lo gy

w ill

ve M

aj or

D is

ru pt

iv e

Im pa

ct o

n C

on ce

nt ra

ti ng

F or

ce s

Im pa

ct o

n D

is pe

rs in

g Fo

rc es

Im pa

ct o

n Sh

ift in

g C

on su

m er

D em

an d

an d/

or I

nd us

tr y

Se ct

or s

In fo

rm at

io n

an d

C om

m un

ic at

io n

Te ch

no lo

gi es

cl ud

in g

B ig

D at

a &

B ig

D at

a A

na ly

tic s.

T he

re a

re m

an y

im pr

ov em

en t

re qu

ir em

en ts

e .g

.: B

et te

r d yn

am ic

m od

el s.

ig he

r p ro

ce ss

in g

sp ee

ds .

B et

te r t

ra ns

m is

si on

s pe

ed s.

et te

r c om

pr es

si on

a lg

or ith

m s.

et te

r d at

a st

or ag

W ill

e na

bl e

th e

di gi

ta lis

at io

n of

an uf

ac tu

ri ng

th at

re du

ce s

th e

ne ed

r p ro

du ct

io n

ac tiv

iti es

in m

ul tip

lo ca

tio ns

st im

at ed

im pa

ct b

y 20

25 is

: •

M ob

ile In

te rn

et :

o 4

–5 %

in cr

ea se

in e

ff ic

ie nc

y th

ro ug

h so

ci al

te ch

no lo

gy v

m ob

ile fo

r i nt

er ac

tio n

la bo

ur .

o 1

0– 30

% p

ro du

ct iv

ity g

ai n

fr om

tim

e sa

ve d

ac ce

ss in

g in

fo rm

at io

n fo

r tr

an sa

ct io

n la

bo ur

. •

A ut

om at

io n

of k

no w

le dg

e w

or k:

$ 35

,0 00

v al

ue p

er F

T E

o f

ad di

tio na

l p ro

du ct

iv ity

fo r c

le ri

ca l

an d

cu st

om er

s er

vi ce

/s al

es la

bo ur

. o

$ 60

,0 00

v al

ue p

er F

T E

o f

ad di

tio na

l p ro

du ct

iv ity

fo r I

Sc ie

nc e/

E ng

in ee

ri ng

a nd

M an

ag er

ia l

la bo

ur .

o $

65 ,0

00 v

al ue

p er

F T

E o

f ad

di tio

na l p

ro du

ct iv

ity fo

r f in

an ce

d le

ga l l

ab ou

r. •

C lo

ud te

ch no

lo gy

: o

2 0–

30 %

p ro

du ct

iv ity

g ai

th ro

ug h

re du

ce d

in fr

as tr

uc tu

re a

fa ci

lit ie

s fo

ot pr

in t t

og et

he r w

ith

hi gh

er ta

sk s

ta nd

ar di

sa tio

n an

d au

to m

at io

o 1

0– 15

% p

ro du

ct iv

ity g

ai ns

ro ug

h st

an da

rd is

at io

n of

a pp

lic at

io n

en vi

ro nm

en t a

nd p

ac ka

ge s

to ge

th er

ith fa

st er

e xp

er im

en ta

tio n

an d

te st

in g.

W ill

c on

tin ue

to e

na bl

e be

tte r

co or

di na

tio n

ac ro

ss c

om pl

sy st

em s

of m

ul tip

le a

ct iv

iti es

d pa

rt ic

ip an

ts in

in cr

ea si

ng ly

sp er

se d

lo ca

tio ns

. H en

re du

ce s

th e

si ze

re qu

ir em

en ts

r f ir

m s

to d

is pe

rs e

th ei

r v al

ch ai

ns g

lo ba

lly .

W ill

c on

tr ib

ut e

to a

fu rt

he r

m ov

in g

aw ay

fr om

a fo

cu s

on in

te rn

al is

in g

ac tiv

iti es

ex te

rn al

is in

g th

em e

.g . o

pe n

in no

va tio

W ill

e na

bl e

th e

co ns

um er

to b

ec om

e aw

ar e

of p

ro du

ct o

ff er

in gs

fa st

er a

nd to

s ou

rc e

pr od

uc ts

in te

rn at

io na

lly c

on tr

ib ut

in g

a gl

ob al

is at

io n

an d

in cr

ea si

ng s

im ila

ri ty

d em

an d

pr ef

er en

ce s

as w

el l a

s an

ce le

ra tio

n of

d em

an d

gr ow

th a

nd d

ec lin

e re

su lti

ng in

s ho

rt er

li fe

-c yc

le s

bu t w

ith

hi gh

er v

ol um

es . co

nt in

ue d

on fo

llo w

in g

pa ge

EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

Manufacturing in a High Cost Environment

Te ch

no lo

gi es

/S ys

te m

s of

ch no

lo gi

es K

ey I

ss ue

s to

b e

So lv

be fo

re th

e Te

ch no

lo gy

w ill

ve M

aj or

D is

ru pt

iv e

Im pa

ct o

n C

on ce

nt ra

ti ng

F or

ce s

Im pa

ct o

n D

is pe

rs in

g Fo

rc es

Im pa

ct o

n Sh

ift in

g C

on su

m er

D em

an d

an d/

or I

nd us

tr y

Se ct

or s

A dd

iti ve

M an

uf ac

tu ri

w ith

s pe

ci fi

c fo

cu s

on m

et al

od uc

in g

sy st

em s.

• Sp

ee d

– N

ee ds

to b

e im

pr ov

ed b

y a

fa ct

or o

f 1 0

10 0.

•

R ep

ea ta

bi lit

y –

im pr

ov e

pr oc

es s

pr ed

ic tio

n an

d cl

os ed

op fe

ed ba

ck to

p ro

vi de

th e

ba si

s fo

r p ro

ce ss

re lia

bi lit

• Im

pr ov

e m

at er

ia l p

ro pe

rt ie

s in

fo rm

at io

• Fo

rm ul

at e

un ifo

rm te

st in

g st

an da

rd s

(t he

ta sk

o f A

ST M

te rn

at io

na l –

F 42

). •

In cr

ea se

th e

av ai

la bi

lit y

tr ai

ne d

de si

gn er

s, e

ng in

ee rs

, te

ch ni

ci an

s, s

of tw

ar e

pr og

ra m

m er

s, e

tc . t

ha t h

av e

th e

ca pa

bi lit

y of

e xp

lo iti

th e

ca pa

bi lit

ie s

of a

dd iti

m an

uf ac

tu ri

ng . (

e. g.

p ro

du ci

co m

pl ex

g eo

m et

ri es

, p ro

ce ss

tim is

at io

n, p

ro ce

m an

ag em

en t)

. •

Su pp

or t s

ys te

m s

m us

t b e

de ve

lo pe

d. In

m an

y sy

st em

s ov

er ha

ng in

g fe

at ur

es n

ee d

a m

at er

ia l t

o ac

t a s

a su

pp or

t. Su

pp or

ts m

ay b

e th

e sa

m e

m at

er ia

l a s

th e

pa rt

o r

co m

pl et

el y

di ff

er en

t. A

s pa

rt s

be co

m e

m or

e co

m pl

ex th

e su

pp or

t r em

ov al

b ec

om es

m or

e di

ff ic

ul t o

r i m

po ss

ib le

. •

D es

ig n

So ft

w ar

e m

us t b

e de

ve lo

pe d

si nc

e ex

is tin

• W

ill e

na bl

e th

e ce

nt ra

lis at

io n

of m

an uf

ac tu

ri ng

e .g

. t he

to ol

od uc

tio n

fo r t

he p

la nt

b y

th e

pl an

t at

th e

pl an

t – re

du ci

ng th

e ne

ed fo

r to

ol m

ak er

s an

d si

m pl

if yi

ng a

co nc

en tr

at in

g th

e va

lu e

ch ai

n; th

e pr

od uc

tio n

of s

pa re

p ar

ts b

y th

e sp

ar e

pa rt

u se

r o n

th e

sp ar

e pa

us er

’s lo

ca tio

n an

d w

he n

th e

sp ar

e pa

rt u

se r n

ee ds

it h

en ce

s im

pl if

yi ng

d co

nc en

tr at

in g

th e

va lu

e ch

ai n;

c. B

en ef

it: L

itt le

to n

o pr

od uc

tio n

w as

te , s

ho rt

c ha

ng eo

ve r t

im es

, a nd

to ol

in g

ch an

ge s

or d

ir ec

t l ab

ou r

re qu

ir ed

. W ill

in iti

al ly

im pa

ct B

m an

uf ac

tu re

rs w

ith lo

w p

ro du

ct io

n ra

te o

r m ak

e- to

-o rd

er a

ss em

bl y

lin es

d m

an uf

ac tu

re rs

w ith

p ro

du ct

s th

ha ve

in tr

ic at

e in

te rn

al s

tr uc

tu re

• E

st im

at ed

im pa

ct b

y 20

25 fr

ad di

tiv e

m an

uf ac

tu ri

ng is

: o

6 0–

80 %

v al

ue in

cr ea

se p

3D -p

ri nt

ed p

ro du

ct a

nd 3

5– 60

co st

s av

in gs

to c

on su

m er

s pl

us 1

ad de

d va

lu e

fr om

c us

to m

is at

io n

fr om

ns um

er u

se .

o 4

0– 55

% c

os t s

av in

gs to

b uy

er s

of 3

D -p

ri nt

ed p

ro du

ct s

fr om

d ir

ec t

pr od

uc t m

an uf

ac tu

ri ng

. o

3 0%

p ro

du ct

io n

co st

re du

ct io

n us

in g

su pe

ri or

3 D

-p ri

nt ed

m ou

ld s

fr om

to ol

s an

d m

ou ld

m an

uf ac

tu ri

ng .

E na

bl es

th e

co ns

um er

to c

re at

e pe

rs on

al is

go od

s; c

op y

ex is

tin g

pr od

uc ts

(c om

pa re

e co

py in

g of

m us

ic im

pa ct

o n

th e

m us

in du

st ry

); o

r p ro

du ce

o n

de m

an d.

te nt

ia l f

or d

is ru

pt io

n fr

om a

dd iti

m an

uf ac

tu ri

ng o

n se

ct or

al le

ve l c

an b

e su

m m

ar is

ed a

• Fo

od , D

ri nk

a nd

T ob

ac co

: U nl

ik el

y to

ov e

w ho

lly to

a dd

iti ve

m an

uf ac

tu ri

ng ,

al th

ou gh

s om

e co

m po

ne nt

s (i

nc lu

di ng

ck ag

in g)

m ay

b e

ad di

tiv e

m an

uf ac

tu ri

w ith

in s

up pl

y ch

ai ns

. •

Te xt

ile s,

C lo

th in

g an

d L

ea th

er :

L ik

el y

to b

e he

av ily

d is

ru pt

ed b

y ad

di tiv

e m

an uf

ac tu

ri ng

, w ith

d es

ig n,

lo gi

st ic

s an

d re

ta il

pr oc

es se

s po

te nt

ia lly

tr an

sf or

m ed

. •

W oo

d an

d Pa

pe r:

a dd

iti ve

m an

uf ac

tu ri

pe ne

tr at

io n

w ill

d ep

en d

on a

bi lit

y to

p ro

ce ss

ff er

en t m

at er

ia ls

. •

P ri

nt in

g an

d R

ec or

di ng

: P ri

nt in

g an

d re

co rd

in g

ha ve

a lr

ea dy

b ee

n hu

ge ly

sr up

te d

by s

hi ft

to d

ig ita

l c on

te nt

; t hi

s is

li ke

ly to

b e

fa r m

or e

si gn

if ic

an t t

ha n

ad di

tiv e

m an

uf ac

tu ri

ng , a

s di

gi ta

l m ed

do m

in at

e ph

ys ic

al m

ed ia

. •

R ef

in ed

fu el

s: U

nl ik

el y

to b

e si

gn if

ic an

tly

af fe

ct ed

b y

ad di

tiv e

m an

uf ac

tu ri

ng .

• C

he m

ic al

s: S

om e

pa rt

s of

th e

in du

st ry

ay b

e af

fe ct

ed b

y sh

if t t

o ad

di tiv

e m

an uf

ac tu

ri ng

, b ut

c om

pl ex

ity o

f c he

m ic

te ch

no lo

gi es

li ke

ly to

m ak

e ad

di tiv

e m

an uf

ac tu

ri ng

s lo

w to

d is

ru pt

. •

P ha

rm ac

eu ti

ca ls

: S ig

ni fi

ca nt

p ot

en tia

Ta bl

e 2.

C on

tin ue

co nt

in ue

d on

fo llo

w in

g pa

EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

Manufacturing in a High Cost Environment

Te ch

no lo

gi es

/S ys

te m

s of

ch no

lo gi

es K

ey I

ss ue

s to

b e

So lv

be fo

re th

e Te

ch no

lo gy

w ill

ve M

aj or

D is

ru pt

iv e

Im pa

ct o

n C

on ce

nt ra

ti ng

F or

ce s

Im pa

ct o

n D

is pe

rs in

g Fo

rc es

Im pa

ct o

n Sh

ift in

g C

on su

m er

D em

an d

an d/

or I

nd us

tr y

Se ct

or s

do es

n ot

w or

k w

el l f

or th

e co

m pl

ex g

eo m

et ri

es (e

.g .

in te

rn al

la tti

ce s

an d

su rf

ac e

te xt

ur es

) t ha

t c an

b e

m ad

e by

p ro

du ce

d w

ith a

dd iti

m an

uf ac

tu ri

ng . P

ro bl

em s

ex is

t w

ith g

eo m

et ry

p tim

is at

io n

an d

re pr

es en

ta tio

n of

m ix

ed o

r gr

ad ed

m at

er ia

ls e

tc .

• N

ew b

us in

es s

M od

el s

ar e

ne ed

ed to

b en

ef it

fr om

lo t s

iz es

o ne

, c us

to m

is ed

p ro

du ct

s an

d re

m ot

e m

an uf

ac tu

ri ng

. •

D ev

el op

m en

ts to

e na

bl e

E le

ct ro

-M ec

ha ni

ca l S

ys te

m s

In te

gr at

io n

– i.e

. d es

ig n

an d

pr od

uc tio

n of

c om

po ne

nt s

th at

te gr

at e

se ns

in g,

a ct

ua tio

an d

co m

pu tin

fo r o

n- de

m an

d m

an uf

ac tu

re o

f d ru

gs in

sp ita

ls , a

lth ou

gh m

uc h

w ill

d ep

en d

te ch

no lo

gy .

• R

ub be

r an

d pl

as ti

cs : H

ig h

lik el

ih oo

d of

sr up

tio n,

e sp

ec ia

lly fo

r b es

po ke

s ha

pe d

pl as

tic s.

P la

st ic

s ar

e al

so li

ke ly

to b

e th

e ke

y m

at er

ia l f

or a

dd iti

ve m

an uf

ac tu

ri ng

, w hi

m ay

p ro

m pt

in no

va tio

n in

d ev

el op

m en

t o f

pl as

tic s.

•

M et

al s

an d

B ui

ld in

g M

at er

ia ls

: Po

te nt

ia l f

or s

ig ni

fi ca

nt d

is ru

pt io

n fr

ad di

tiv e

m an

uf ac

tu ri

ng . H

ow ev

er , a

dd iti

m an

uf ac

tu ri

ng m

ay n

ot p

ro vi

de th

e sc

al e

pr od

uc tio

n re

qu ir

ed fo

r s om

e in

du st

ri al

a nd

ns tr

uc tio

n pr

oc es

se s.

•

C om

pu te

rs , E

le ct

ro ni

cs a

nd E

le ct

ri ca

l E

qu ip

m en

t: S

om e

po te

nt ia

l f or

d is

ru pt

io n

fr om

a dd

iti ve

m an

uf ac

tu ri

ng , a

lth ou

is su

es o

f a ss

em bl

y an

d pr

ec is

io n

m ay

li m

it up

ta ke

. •

M ac

hi ne

ry : 3

D p

ri nt

in g

is li

ke ly

to p

la y

a m

aj or

ro le

in p

ro vi

di ng

b es

po ke

a nd

o n-

de m

an d

m ac

hi ne

ry .

• C

ar s

an d

ot he

r V

eh ic

le s:

a dd

iti ve

an uf

ac tu

ri ng

is u

nl ik

el y

to re

m ov

e as

se m

bl y

lin es

o r e

nd m

as s

pr od

uc tio

bu t m

ay p

la y

a ro

le in

m an

uf ac

tu re

o f

co m

po ne

nt s.

•

Sh ip

s an

d A

er os

pa ce

: L ar

ge s

ca le

ild in

g pr

oj ec

ts m

ak e

ad di

tiv e

m an

uf ac

tu ri

ng u

nl ik

el y,

a lth

ou gh

m ay

b e

in vo

lv ed

in th

e su

pp ly

c ha

in .

• Fu

rn it

ur e:

a dd

iti ve

m an

uf ac

tu ri

ng s

ho ul

d pl

ay a

m aj

or ro

le in

re -s

ha pi

ng fu

rn itu

m ar

ke ts

, w ith

d es

ig ns

a nd

lo gi

st ic

s he

av ily

sr up

te d.

•

O th

er M

an uf

ac tu

ri ng

: O th

m an

uf ac

tu ri

ng in

cl ud

es a

ra ng

e of

lo w

-t ec

be sp

ok e

m an

uf ac

tu re

rs s

uc h

as to

ys ; t

he se

e lik

el y

to b

e on

e of

th e

ea rl

ie st

m ar

ke ts

r a dd

iti ve

m an

uf ac

tu ri

ng . (

Se e

fi gu

re a

t en

d of

ta bl

Ta bl

e 2.

C on

tin ue

co nt

in ue

d on

fo llo

w in

g pa

EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

Manufacturing in a High Cost Environment

Te ch

no lo

gi es

/S ys

te m

s of

ch no

lo gi

es K

ey I

ss ue

s to

b e

So lv

be fo

re th

e Te

ch no

lo gy

w ill

ve M

aj or

D is

ru pt

iv e

Im pa

ct o

n C

on ce

nt ra

ti ng

F or

ce s

Im pa

ct o

n D

is pe

rs in

g Fo

rc es

Im pa

ct o

n Sh

ift in

g C

on su

m er

D em

an d

an d/

or I

nd us

tr y

Se ct

or s

In du

st ri

al B

io te

ch no

lo gy

w ith

ec if

ic fo

cu s

on m

ic ro

bi al

ns or

tia e

ng in

ee ri

ng in

cl ud

in g

sy nt

he tic

b io

lo gy

• M

in im

is in

g th

e m

ic ro

bi al

lls .

• A

ss em

bl in

g pa

th w

ay s

th at

c an

m et

ab ol

is e

m ix

su bs

tr at

es .

• R

em ov

in g

un ne

ce ss

ar y

pa th

w ay

s co

ns um

in g

su bs

tr at

es .

• U

til is

at io

n of

s ea

w at

er fo

r ce

ll gr

ow th

. •

M in

im is

in g

ox yg

en d

em an

d fo

r a er

ob ic

c el

ls &

re du

ci ng

uo ru

m s

en si

ng e

ff ec

ts .

• D

ev el

op in

g co

nt in

uo us

oc es

se s.

•

C on

ta m

in at

io n

re si

st in

g st

ra in

s gr

ow n

in o

pe n

sy st

em s.

•

D ev

el op

in g

an ae

ro bi

c bi

op ro

ce ss

es .

• A

rt if

ic ia

l c el

ls th

at c

on ta

on ly

n ec

es sa

ry m

et ab

ol ic

th w

ay s.

W ill

c ha

ng e

th e

st ru

ct ur

e of

m e

va lu

e ch

ai ns

li ke

c he

m ic

pr od

uc tio

n; re

cy cl

in g;

m in

in g

et c.

he im

pa ct

w ill

b e

bo th

c on

ce nt

ra tin

g an

d di

sp er

si ng

d ep

en di

ng o

n th

e sp

ec if

ic v

al ue

c ha

in b

ut it

w ill

h av

e dr

am at

ic im

pa ct

b y

ch an

gi ng

th e

pa rt

ic ip

an ts

in a

g iv

en v

al ue

c ha

an d

fr eq

ue nt

ly re

du ce

th e

nu m

be r

of p

ar tic

ip an

ts in

th e

va lu

e ch

ai n.

nt he

tic b

io lo

gy a

pp ro

ac he

s ca

n be

ed to

re -c

on st

ru ct

p la

nt a

nd w

as te

ed st

oc ks

in to

b es

po ke

fe ed

st oc

de si

gn ed

fo r o

pt im

al p

ro ce

ss in

g fo

r s pe

ci fi

c no

n- fo

od b

io re

fi ni

ap pl

ic at

io ns

• A

s re

la te

s to

fo od

: C on

su m

pt io

n or

ig in

at ed

in th

e ne

ed to

g et

c al

or ie

s an

d nu

tr ie

nt s

th en

m ov

ed o

n to

s at

is fy

ta st

e pr

ef er

en ce

s an

d to

da y

ha ve

a dd

ed th

e ne

to p

ro vi

de fo

r c on

ve ni

en ce

a nd

p er

so na

l he

al th

le ad

in g

to e

xp ec

ta tio

ns a

ro un

d fo

sa fe

ty a

nd h

ea lth

p er

fo rm

an ce

in th

e fo

of e

.g . f

un ct

io na

l f oo

ds a

nd n

ut ra

ce ut

ic al

In du

st ri

al b

io te

ch no

lo gy

w ill

e na

bl e

th e

de ve

lo pm

en t o

f p ro

du ct

s an

d pr

od uc

tio n

pr oc

es se

s th

at w

ill b

e ab

le to

s at

is fy

th es

e ne

ed s

w hi

ls t b

lu rr

in g

th e

lin e

be tw

ee n

fo od

d m

ed ic

in e.

•

In b

io fu

el s,

b io

ba se

d ch

em ic

al s

an d

bi op

la st

ic s

th er

e is

a h

ig h

pr ob

ab ili

ty fo

r fu

ll- sc

al e

re pl

ac em

en t o

f a s

ig ni

fi ca

po rt

io n

of c

ru de

o il

as a

fe ed

st oc

k w

ith th

e as

so ci

at ed

v al

ue c

ha in

im pa

ct in

th e

ea rl

ie r

pa rt

s of

th e

va lu

e ch

ai n.

Ta bl

e 2.

C on

tin ue

co nt

in ue

d on

fo llo

w in

g pa

EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

Manufacturing in a High Cost Environment

Te ch

no lo

gi es

/S ys

te m

s of

ch no

lo gi

es K

ey I

ss ue

s to

b e

So lv

be fo

re th

e Te

ch no

lo gy

w ill

ve M

aj or

D is

ru pt

iv e

Im pa

ct o

n C

on ce

nt ra

ti ng

F or

ce s

Im pa

ct o

n D

is pe

rs in

g Fo

rc es

Im pa

ct o

n Sh

ift in

g C

on su

m er

D em

an d

an d/

or I

nd us

tr y

Se ct

or s

• D

ev el

op m

en t o

f a p

la tfo

or ga

ni sm

fo r m

an y

pr od

uc ts

. •

W as

te o

r a ct

iv at

ed s

lu dg

e as

bs tr

at es

. •

T he

u se

o f c

ar bo

n st

ee l

fa ci

lit ie

• A

ch ie

vi ng

s ca

le in

p ro

du ct

io n

as w

el l a

s th

e de

ve lo

pm en

t o f

re lia

bl e,

c on

si st

en t a

nd s

ca la

bl e

m an

uf ac

tu ri

ng p

ro ce

ss es

. •

St re

am lin

in g

of re

gu la

tio ns

d ap

pr ov

al s.

•

In cr

ea se

d sp

ee d

an d

re du

ce d

co st

in d

ev el

op in

g ne

w b

io lo

gi ca

l p ro

du ct

io n

pr oc

es se

• So

lv e

th e

pr ob

le m

s ar

ou nd

su ff

ic ie

nt c

el l s

ou rc

es , s

lo w

ll pr

ol ife

ra tio

n ra

te a

nd la

of c

on st

ru ct

s th

at m

im ic

th e

de pl

oy m

en t e

nv ir

on m

en t.

• E

st ab

lis h

m at

er ia

l s ta

nd ar

an d

pr oc

es s

st an

da rd

is at

io n

pr ot

oc ol

• Im

pr ov

e ca

pa bi

lit y

to m

an ag

e st

or ag

e an

d tr

an sp

or ta

tio n

lo gi

st ic

s fo

r l iv

in g

pr od

uc ts

en d

us e

si te

E st

im at

ed m

ar ke

t s iz

e in

2 01

5 is

25 bn

•

E st

im at

ed im

pa ct

fr om

n ex

t- ge

ne ra

tio n

ge no

m ic

s in

2 02

5 is

: o

1 5–

20 %

c os

t s av

in g

in e

th an

pr od

uc tio

n an

d 15

0– 20

0% p

ri ce

em iu

m fo

r d ie

se l t

og et

he r w

ith

30 –7

0% C

O 2

re du

ct io

n fr

om fu

el s

ov er

li fe

c yc

le fr

om s

ub st

an ce

od uc

tio n.

Ta bl

e 2.

C on

tin ue

co nt

in ue

d on

fo llo

w in

g pa

EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

Manufacturing in a High Cost Environment

Te ch

no lo

gi es

/S ys

te m

s of

ch no

lo gi

es K

ey I

ss ue

s to

b e

So lv

be fo

re th

e Te

ch no

lo gy

w ill

ve M

aj or

D is

ru pt

iv e

Im pa

ct o

n C

on ce

nt ra

ti ng

F or

ce s

Im pa

ct o

n D

is pe

rs in

g Fo

rc es

Im pa

ct o

n Sh

ift in

g C

on su

m er

D em

an d

an d/

or I

nd us

tr y

Se ct

or s

In te

rn et

-o f-

th in

gs In

te gr

at io

n of

s ev

er al

ch no

lo gi

es a

co m

m un

ic at

io ns

s ol

ut io

ns .

Id en

tif ic

at io

n an

d tr

ac ki

te ch

no lo

gi es

, w ir

ed a

w ir

el es

s se

ns or

a nd

a ct

ua to

r ne

tw or

ks , e

nh an

ce d

co m

m un

ic at

io n

pr ot

oc ol

s an

d di

st ri

bu te

d in

te lli

ge nc

e fo

r sm

ar t o

bj ec

ts .

• Se

ns or

s to

tr ac

k m

ac hi

ne ry

d pr

ov id

e re

al -t

im e

up da

te s

eq ui

pm en

t s ta

tu s

w hi

ch d

ec re

as es

w nt

im e.

•

Se ns

or s

to tr

ac k

tr uc

ks a

nd p

al le

to im

pr ov

e su

pp ly

c ha

in tr

ac ki

ng a

m an

ag em

en t a

s w

el l a

s m

on ito

ri ng

e fl

ow o

f i nv

en to

ry a

ro un

d fa

ct or

y fl

oo rs

o r b

et w

ee n

di ff

er en

t w

or ks

ta tio

ns , r

ed uc

in g

w or

k- in

- pr

og re

ss in

ve nt

or y

le ve

ls , d

ec re

as in

g w

ai t t

im es

, a nd

c re

at in

g tr

an sp

ar en

to b

et te

r o pt

im is

e fl

ow s.

•

Se ns

or s

an d

ac tu

at or

s ca

n be

u se

d to

c ha

ng e

th e

po si

tio n

of o

bj ec

as th

ey m

ov e

do w

n as

se m

bl y

lin es

, en

su ri

ng th

at th

ey a

rr iv

e at

m ac

hi ne

ol s

in a

n op

tim um

p os

iti on

, av

oi di

ng th

e sm

al l d

ev ia

tio ns

in th

e po

si tio

n of

w or

k in

p ro

ce ss

th at

c an

m o

r e ve

n da

m ag

e m

ac hi

ne to

ol s.

st im

at ed

e co

no m

ic im

pa ct

o n

m an

uf ac

tu ri

ng is

$ 90

0- 23

00 bn

20 25

b as

ed o

n 2.

5– 5.

0% s

av in

g in

o pe

ra tin

g co

st s,

in cl

ud in

g m

ai nt

en an

ce a

nd in

pu t e

ff ic

ie nc

ie s.

W ill

h av

e ve

ry b

ro ad

im pa

ct o

f w hi

ch th

e la

rg es

t m ig

ht in

iti al

ly b

e in

th e:

•

Tr an

sp or

ta tio

n an

d lo

gi st

ic s

do m

ai n,

ea lth

ca re

d om

ai n,

S m

ar t e

nv ir

on m

en t

(h om

e, o

ff ic

e, p

la nt

) d om

ai n,

P er

so na

l a nd

ci al

d om

ai n.

Ta bl

e 2.

C on

tin ue

co nt

in ue

d on

fo llo

w in

g pa

EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

Manufacturing in a High Cost Environment

Te ch

no lo

gi es

/S ys

te m

s of

ch no

lo gi

es K

ey I

ss ue

s to

b e

So lv

be fo

re th

e Te

ch no

lo gy

w ill

ve M

aj or

D is

ru pt

iv e

Im pa

ct o

n C

on ce

nt ra

ti ng

F or

ce s

Im pa

ct o

n D

is pe

rs in

g Fo

rc es

Im pa

ct o

n Sh

ift in

g C

on su

m er

D em

an d

an d/

or I

nd us

tr y

Se ct

or s

Ph ot

on ic

s •

Fu rt

he r m

in ia

tu ri

sa tio

n of

p ro

du ct

s an

d pr

oc es

se s

w ill

e na

bl e

th e

us e

ph ot

on ic

te ch

no lo

gi es

in n

m in

ia tu

ri se

d sy

st em

s, c

re at

in g

ne w

m ar

ke ts

. •

In cr

ea si

ng in

te lli

ge nc

e of

s ys

te m

s, d

ue to

s of

tw ar

e de

ve lo

pm en

t, bu

t a ls

o sm

ar te

r m

at er

ia ls

e na

bl e

m or

e tr

ad iti

on al

p ho

to ni

c se

ns or

y sy

st em

s to

b e

us ed

a s

pa rt

th e

m ac

hi ne

/e nv

ir on

m en

t in

te rf

ac e.

•

U bi

qu ito

us n

et w

or ks

b oo

th e

de ve

lo pm

en t o

f s m

ar t

ph on

es (a

nd u

se o

f s cr

ee ns

). •

In te

rn et

o f t

hi ng

w he

re p

ho to

ni cs

s en

so rs

e in

st ru

m en

ta l f

im pl

em en

ta tio

• R

ob ot

d ev

el op

m en

t w ill

cl ud

e m

an y

ph ot

on ic

m po

ne nt

s, e

sp ec

ia lly

ag in

g an

d se

ns in

g de

vi ce

• N

ew c

on su

m er

-o ri

en te

d m

ed ic

al p

ro du

ct s

(e .g

. e ar

di ag

no st

ic d

ev ic

es , r

ob ot

is ed

rg er

y) u

si ng

p ho

to ni

cs .

• D

ev el

op m

en t o

f s w

ar m

in g

su rv

ei lla

nc e

sy st

em s,

w he

ph ot

on ic

s en

so rs

a re

u se

d to

g. p

re di

ct r

io ts

a nd

c ri

m in

ac tiv

ity .

• B

et te

r p re

di ct

io n

ep id

em ic

s an

d pa

nd em

ic s

w ill

le ad

to a

n ew

d em

an d

fo r

ph ot

on ic

s- en

ab le

d de

vi ce

• V

ir tu

al m

od el

lin g

an d

te st

in g

ac co

m pa

ni ed

b y

ph ot

on ic

s- en

ab le

d m

an -m

ac hi

in te

rf ac

es .

E st

im at

ed m

ar ke

t s iz

e in

2 01

5 is

80 bn

. Is

a k

ey e

na bl

er fo

r t he

fo llo

w in

g in

du st

ri al

ct or

• M

an uf

ac tu

re o

f E le

ct ro

ni cs

a nd

O pt

ic al

qu ip

m en

t; M

an uf

ac tu

re o

f V eh

ic le

s an

d L

ar ge

M ac

hi ne

ry ; M

an uf

ac tu

ri ng

o f

Fi ne

C he

m ic

al s

an d

Ph ar

m ac

eu tic

al s;

an uf

ac tu

ri ng

o f T

ex til

es a

nd C

lo th

in g;

ed ia

P ro

du ct

io n

an d

B ro

ad ca

st in

Fo od

a nd

B ev

er ag

e Pr

od uc

tio n;

P ri

nt in

g &

P ub

lis hi

ng A

ct iv

iti es

; O il

an d

G as

xp lo

ra tio

A nd

is c

on tr

ib ut

in g

si gn

if ic

an tly

to th

e fo

llo w

in g

fi na

l m ar

ke t s

ec to

rs :

• M

ed ic

in e

& H

ea lth

ca re

A ct

iv iti

es ;

D ef

en ce

a nd

S ec

ur ity

A ct

iv iti

es ; A

vi at

io n

an d

Sp ac

e In

fr as

tr uc

tu re

; R oa

d &

R ai

l Tr

an sp

or t a

nd L

og is

tic s

In fr

as tr

uc tu

re ;

Te le

co m

m un

ic at

io ns

In fr

as tr

uc tu

re ; S

ci en

ce ,

R es

ea rc

h &

D ev

el op

m en

t; E

le ct

ri ci

G en

er at

io n

& S

up pl

y; C

on st

ru ct

io n

an d

B ui

lt E

nv ir

on m

en t;

E nv

ir on

m en

ta l

M on

ito ri

ng a

nd P

ro te

ct io

n; R

ec re

at io

C ul

tu re

a nd

E du

ca tio

n; R

et ai

l & S

er vi

ce s.

Ta bl

e 2.

C on

tin ue

co nt

in ue

d on

fo llo

w in

g pa

EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

Manufacturing in a High Cost Environment

Te ch

no lo

gi es

/S ys

te m

s of

ch no

lo gi

es K

ey I

ss ue

s to

b e

So lv

be fo

re th

e Te

ch no

lo gy

w ill

ve M

aj or

D is

ru pt

iv e

Im pa

ct o

n C

on ce

nt ra

ti ng

F or

ce s

Im pa

ct o

n D

is pe

rs in

g Fo

rc es

Im pa

ct o

n Sh

ift in

g C

on su

m er

D em

an d

an d/

or I

nd us

tr y

Se ct

or s

A dv

an ce

d M

at er

ia ls

in cl

ud in

• L

ig ht

w ei

gh t &

u ltr

a- st

ro ng

at er

ia ls

. •

M at

er ia

ls c

ap ab

le to

re si

ag gr

es si

ve e

nv ir

on m

en ts

. •

Su rf

ac e

m at

er ia

ls a

co at

in gs

. •

E le

ct ro

ni c

an d

ph ot

on ic

at er

ia ls

. •

Sm ar

t, m

ul tif

un ct

io na

l de

vi ce

s an

d st

ru ct

ur es

. •

B io

m at

er ia

ls .

• In

du st

ri al

a nd

o th

m at

er ia

ls .

Sp ee

di ng

u p

th e

de si

gn -t

o- m

ar ke

t t im

e. E

st im

at ed

m ar

ke t s

iz e

in 2

01 5

$1 50

bn .

W ill

im pa

ct a

ll m

an uf

ac tu

ri ng

a ct

iv iti

es .

N an

ot ec

hn ol

og y

To d

ev el

op e

ff ic

ie nt

a nd

on om

ic al

ly v

ia bl

e m

an uf

ac tu

ri ng

/ fa

br ic

at io

n pr

oc es

se s

th at

su re

n an

om at

er ia

ls a

av ai

la bl

e in

s uf

fi ci

en t q

ua nt

ity

an d

at a

ff or

da bl

e co

st .

E st

im at

ed m

ar ke

t s iz

e in

2 01

5 is

7b n.

W ill

im pa

ct a

lm os

t e ve

ry d

om ai

n bu

t i s

st ill

rly in

it s

vi si

bl e

im pa

ct .

A dv

an ce

d M

an uf

ac tu

ri ng

qu ip

m en

t w ith

s pe

ci al

fo cu

s on

in du

st ri

al ro

bo tic

N um

er ou

s im

pr ov

em en

ts s

til l

ne ed

ed in

th is

d om

ai n.

• Si

m ul

ta ne

ou s

in cr

ea se

pe rf

or m

an ce

a nd

re du

ct io

n in

c os

t i n

pa ra

lle l w

ith s

im pl

er s

et -u

p an

d lo

w er

t- up

c os

ts a

re lo

w er

in g

th e

ba rr

ie rs

e nt

ry e

na bl

in g

SM E

s to

b en

ef it

fr om

th e

te ch

no lo

gy .

• Sm

ar te

r d ri

ve r-

le ss

v eh

ic le

s w

ill

dr am

at ic

al ly

re du

ce d

ir ec

t l ab

ou r

co st

s an

d im

pr ov

e sc

he du

lin g

th ro

ug h

se lf

-o pt

im is

at io

n. W

ill p

ri m

ar ily

pa ct

p ro

ce ss

in du

st ri

es li

ke M

in in

g &

F or

es tr

y as

w el

l a s

m ov

em en

t in

te ns

iv e

ac tiv

iti es

li ke

lo gi

st ic

s as

el l a

W ill

im pa

ct a

ll m

an uf

ac tu

ri ng

b us

in es

se s.

Ta bl

e 2.

C on

tin ue

co nt

in ue

d on

fo llo

w in

g pa

EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

Manufacturing in a High Cost Environment

Te ch

no lo

gi es

/S ys

te m

s of

ch no

lo gi

es K

ey I

ss ue

s to

b e

So lv

be fo

re th

e Te

ch no

lo gy

w ill

ve M

aj or

D is

ru pt

iv e

Im pa

ct o

n C

on ce

nt ra

ti ng

F or

ce s

Im pa

ct o

n D

is pe

rs in

g Fo

rc es

Im pa

ct o

n Sh

ift in

g C

on su

m er

D em

an d

an d/

or I

nd us

tr y

Se ct

or s

m ov

em en

t i nt

en si

ve p

ro du

ct io

n lik

e sh

ip bu

ild in

g an

d co

ns tr

uc tio

• M

os t m

an uf

ac tu

ri ng

a ct

iv iti

es w

ill

be im

pa ct

ed b

y se

lf -c

on fi

gu ri

ng a

ad ap

tin g

ro bo

ts th

at w

ill b

e ab

to p

er fo

rm w

ith th

e fl

ex ib

ili ty

o f a

ill ed

h um

an a

nd th

e pr

ec is

io n

an d

sp ee

d of

a ro

bo t.

• E

st im

at ed

im pa

ct fr

om a

dv an

ce d

ro bo

tic s

in 2

02 5

is :

o $

24 0,

00 0–

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00 0

pe r p

er so

n fo

r ex

te nd

ed / i

m pr

ov ed

q ua

lit y

of li

fr om

ro bo

tic h

um an

a ug

m en

ta tio

o 7

5% p

ot en

tia l i

m pr

ov em

en t

in p

ro du

ct iv

ity p

er u

ni t o

f w or

k au

to m

at ed

fr om

in du

st ri

al ro

bo ts

. o

3 5–

55 %

p ot

en tia

l i m

pr ov

em en

t in

p ro

du ct

iv ity

p er

u ni

t o f w

or k

au to

m at

ed fo

r c om

m er

ci al

s er

vi ce

bo ts

. •

E st

im at

ed im

pa ct

fr om

a ut

on om

ou s

an d

ne ar

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on om

ou s

ve hi

cl es

20 25

is :

o $

2– 8

pe r h

ou r i

n va

lu e

of ti

m e

sa ve

d as

w el

l a s

70 –9

0% fe

w er

ci de

nt s

to ge

th er

w ith

1 5–

20 %

g ai

n in

fu el

e ff

ic ie

nc y

fr om

a ut

on om

ou s

ca rs

. o

7 0–

90 %

fe w

er a

cc id

en ts

a nd

1 0–

40 %

g re

at er

fu el

e ff

ic ie

nc y

pl us

1 –2

iv er

s pe

r 1 0

tr uc

ks (f

or m

on ito

ri ng

) fr

om a

ut on

om ou

s tr

uc ks

Ta bl

e 2.

C on

tin ue

co nt

in ue

d on

fo llo

w in

g pa

EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

Manufacturing in a High Cost Environment

Te ch

no lo

gi es

/S ys

te m

s of

ch no

lo gi

es K

ey I

ss ue

s to

b e

So lv

be fo

re th

e Te

ch no

lo gy

w ill

ve M

aj or

D is

ru pt

iv e

Im pa

ct o

n C

on ce

nt ra

ti ng

F or

ce s

Im pa

ct o

n D

is pe

rs in

g Fo

rc es

Im pa

ct o

n Sh

ift in

g C

on su

m er

D em

an d

an d/

or I

nd us

tr y

Se ct

or s

Pr od

uc tio

n Sy

st em

s ta

rg et

at h

ig h

co st

o pe

ra tin

g en

vi ro

nm en

ts v

iz :

• In

di vi

du al

is ed

P ro

du ct

io n,

fi ne

d as

a c

on ce

pt fo

r th

e de

si gn

a nd

la yo

ut o

f a ll

el em

en ts

o f a

p ro

du ct

io n

sy st

em in

s uc

h a

w ay

th at

pe rm

its a

h ig

h de

gr ee

o f

va ri

ab ili

ty in

th e

pr od

uc tio

n pr

og ra

m m

e w

hi ls

t m ai

nt ai

ni ng

od uc

tio n

co st

s on

a le

ve l

co m

pa ra

bl e

to th

at o

f m as

s pr

od uc

tio n.

•

V ir

tu al

P ro

du ct

io n

Sy st

em s

ar e

de pl

oy ed

in th

e de

ve lo

pm en

t o f n

ew p

ro du

ct s

w ith

th e

ob je

ct iv

e of

re du

ci ng

tim

e an

d re

so ur

ce s

us ed

fo r

no n-

pr od

uc tiv

e pl

an ni

ac tiv

iti es

p ri

or to

th e

ac tu

va lu

e cr

ea tio

• H

yb ri

d Pr

od uc

tio n

Sy st

em s

bu ild

o n

a co

m bi

na tio

n of

od uc

tio n

te ch

no lo

gi es

b as

on d

if fe

ri ng

p hy

si ca

l p ri

nc ip

le s

or th

e in

te gr

at io

n of

s ep

ar at

e pr

od uc

tio n

pr oc

es se

s in

to a

ng le

, n ew

p ro

du ct

io n

pr oc

es s.

•

Se lf

-O pt

im is

in g

Pr od

uc tio

n Sy

st em

s po

ss es

s an

in he

re nt

te lli

ge nc

e an

d ha

ve th

e ca

pa bi

lit y

to a

da pt

th em

se lv

au to

no m

ou sl

y to

c ha

ng in

g am

bi en

t c on

di tio

ns in

o rd

to a

ch ie

ve g

re at

er p

ro ce

fl ex

ib ili

ty .

N um

er ou

s sp

ec if

te ch

no lo

gi es

, d ep

en di

on w

hi ch

o f t

he p

ro du

ct io

n sy

st em

s ar

e ob

se rv

ed , n

ee d

to m

ig ra

te fr

om th

e re

se ar

ph as

e to

th e

op er

at io

na l p

ha se

A re

d es

ig ne

d to

e na

bl e

hi gh

m an

uf ac

tu ri

ng b

as ed

v al

ue c

re at

io n

in a

h ig

h co

st o

pe ra

tin g

en vi

ro nm

en t

th an

in a

lo w

o pe

ra tin

g co

en vi

ro nm

en t.

Ta bl

e 2.

C on

tin ue

co nt

in ue

d on

fo llo

w in

g pa

EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

Manufacturing in a High Cost Environment

Te ch

no lo

gi es

/S ys

te m

s of

ch no

lo gi

es K

ey I

ss ue

s to

b e

So lv

be fo

re th

e Te

ch no

lo gy

w ill

ve M

aj or

D is

ru pt

iv e

Im pa

ct o

n C

on ce

nt ra

ti ng

F or

ce s

Im pa

ct o

n D

is pe

rs in

g Fo

rc es

Im pa

ct o

n Sh

ift in

g C

on su

m er

D em

an d

an d/

or I

nd us

tr y

Se ct

or s

M ic

ro a

nd N

an oe

le ct

ro ni

cs .

In th

e na

no el

ec tr

on ic

s er

a, th

e di

ff er

en ce

s in

th e

m at

er ia

an d

m an

uf ac

tu ri

ng p

ro ce

ss es

qu ir

ed to

p ro

du ce

d ig

ita l

da ta

p ro

ce ss

in g,

s to

ra ge

a nd

di tio

na l f

un ct

io na

lit ie

s th

at a

re p

hy si

ca lly

re al

is ed

nt in

ua lly

in cr

ea se

B ec

au se

o f t

he m

as si

ve re

so ur

ce s

re qu

ir ed

to b

ri ng

a bo

ut th

in no

va tio

n an

d re

ne w

al , e

xt en

de d

co lla

bo ra

tio n

is re

qu ir

ed th

ro ug

ho ut

e na

no el

ec tr

on ic

s ec

os ys

te m

, ad

dr es

si ng

th e

en tir

e va

lu e

an d

in no

va tio

n ch

ai n.

S uc

h co

lla bo

ra tio

n m

us t b

ri ng

to ge

th er

le ad

in g

re se

ar ch

st itu

te s

an d

ac ad

em ia

, s up

pl ie

of s

em ic

on du

ct or

m an

uf ac

tu ri

eq ui

pm en

t a nd

m at

er ia

ls , d

es ig

ne rs

d m

an uf

ac tu

re rs

o f s

em ic

on du

ct or

ic ro

ch ip

s, a

nd s

ys te

m in

te gr

at or

s of

ic ro

ch ip

s fo

r e nd

u se

r a pp

lic at

io ns

. E

st im

at ed

m ar

ke t s

iz e

in 2

01 5

$3 00

bn .

In no

va tio

n th

ro ug

h na

no el

ec tr

on ic

s is

e ss

en tia

l e na

bl er

o f g

ro w

th in

th e

au to

m ot

iv e,

a er

os pa

ce , m

ed ic

al , i

nd us

tr ia

l, an

d te

le co

m m

un ic

at io

ns s

eg m

en ts

Ta bl

e 2.

C on

tin ue

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Manufacturing in a High Cost Environment

Ta bl

e 3.

K ey

E na

bl in

g Te

ch no

lo gi

es P

at en

tin g

In te

ns ity

b y

In du

st ry

S ec

to r

(v an

d e

Ve ld

e et

a l.,

2 01

2, p

.3 4-

35 )

N A

C E

ev . 2

Sh ar

e of

te nt

s th

at a

K E

Pa te

nt s

in th

e Se

ct or

Sh ar

e of

K E

Pa te

nt s

th at

F al

l w

it hi

n In

du st

ri al

io te

ch no

lo gy

Sh ar

e of

K E

Pa te

nt s

th at

F al

l w

it hi

n M

ic ro

a nd

an oe

le ct

ro ni

Sh ar

e of

E T

P at

en ts

at F

al l

w it

hi n

A dv

an ce

d M

at er

ia ls

Sh ar

e of

K E

Pa te

nt s

th at

ll w

it hi

n P

ho to

ni cs

Sh ar

e of

K E

Pa te

nt s

th at

ll w

it hi

n N

an ot

ec hn

ol og

Sh ar

e of

K E

Pa te

nt s

th at

F al

l w

it hi

n A

dv an

ce d

M an

uf ac

tu ri

Te ch

no lo

10 8

M an

uf ac

tu re

o f o

th er

fo od

od uc

ts 14

% 66

% ze

ro 12

% ze

ro 1%

20 %

11 0

M an

uf ac

tu re

o f b

ev er

ag es

31 %

28 %

19 %

ze ro

3% 31

12 0

M an

uf ac

tu re

o f t

ob ac

co p

ro du

ct s

5% 23

% ze

ro 32

% 2%

13 %

30 %

13 1

Pr ep

ar at

io n

an d

sp in

ni ng

o f

te xt

ile 28

% 5%

3% 71

% 9%

1% 12

17 1

M an

uf ac

tu re

o f p

ap er

a nd

p ap

pr od

uc ts

13 %

1% 8%

56 %

15 %

2% 18

17 2

M an

uf ac

tu re

o f a

rt ic

le s

of p

ap er

d pa

pe rb

oa rd

13 %

8% 2%

67 %

1% 2%

20 %

19 2

M an

uf ac

tu re

o f r

ef in

pe tr

ol eu

m p

ro du

ct s

28 %

6% 13

% 40

% 13

% 2%

27 %

20 1

M an

uf ac

tu re

o f b

as ic

c he

m ic

al s,

rt ili

se rs

a nd

n itr

og en

m po

un ds

, p la

st ic

s an

d sy

nt he

tic r

ub be

r i n

pr im

ar y

fo rm

42 %

8% 13

% 46

% 9%

3% 19

20 2

M an

uf ac

tu re

o f p

es tic

id es

/ ag

ro ch

em ic

al p

ro du

ct s

5% 71

% 1%

6% 1%

2% 20

20 3

M an

uf ac

tu re

o f p

ai nt

s, v

ar ni

sh es

, co

at in

gs , p

ri nt

in g

in k

39 %

1% 2%

77 %

3% 6%

11 %

20 4

M an

uf ac

tu re

o f s

oa p

an d

de te

rg en

ts , c

le an

in g

an d

po lis

hi ng

p re

pa ra

tio ns

, p er

fu m

an d

to ile

t p re

pa ra

tio ns

10 %

6% 4%

59 %

4% 10

% 17

20 5

M an

uf ac

tu re

o f o

th er

c he

m ic

pr od

uc ts

32 %

2% 22

% 28

% 30

% 4%

15 %

20 6

M an

uf ac

tu re

o f m

an -m

ad e

fi br

es 33

% ze

ro 21

% 22

% 40

% 5%

12 %

co nt

in ue

d on

fo llo

w in

g pa

EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

Manufacturing in a High Cost Environment

N A

C E

ev . 2

Sh ar

e of

te nt

s th

at a

K E

Pa te

nt s

in th

e Se

ct or

Sh ar

e of

K E

Pa te

nt s

th at

F al

l w

it hi

n In

du st

ri al

io te

ch no

lo gy

Sh ar

e of

K E

Pa te

nt s

th at

F al

l w

it hi

n M

ic ro

a nd

an oe

le ct

ro ni

Sh ar

e of

E T

P at

en ts

at F

al l

w it

hi n

A dv

an ce

d M

at er

ia ls

Sh ar

e of

K E

Pa te

nt s

th at

ll w

it hi

n P

ho to

ni cs

Sh ar

e of

K E

Pa te

nt s

th at

ll w

it hi

n N

an ot

ec hn

ol og

Sh ar

e of

K E

Pa te

nt s

th at

F al

l w

it hi

n A

dv an

ce d

M an

uf ac

tu ri

Te ch

no lo

21 1

M an

uf ac

tu re

o f b

as ic

ar m

ac eu

tic al

p ro

du ct

s 28

% 60

% ze

ro 3%

4% 3%

31 %

21 2

M an

uf ac

tu re

o f p

ha rm

ac eu

tic al

ep ar

at io

ns 9%

54 %

2% 11

% 3%

7% 23

22 1

M an

uf ac

tu re

o f r

ub be

r p ro

du ct

s 28

% 1%

7% 65

% 14

% 2%

13 %

22 2

M an

uf ac

tu re

o f p

la st

ic s

pr od

uc ts

48 %

2% 11

% 66

% 7%

2% 12

23 1

M an

uf ac

tu re

o f g

la ss

a nd

g la

pr od

uc ts

61 %

1% 13

% 48

% 22

% 2%

14 %

23 4

M an

uf ac

tu re

o f o

th er

p or

ce la

an d

ce ra

m ic

p ro

du ct

s 40

% ze

ro 21

% 43

% 3%

5% 27

23 9

M an

uf ac

tu re

o f a

br as

iv e/

no n-

m et

al lic

m in

er al

p ro

du ct

s 43

% ze

ro 28

% 14

% 30

% 4%

24 %

24 1

M an

uf ac

tu re

o f b

as ic

ir on

a nd

ee l a

nd o

f f er

ro -a

llo ys

54 %

ze ro

8% 50

% 3%

ze ro

38 %

24 4

M an

uf ac

tu re

o f b

as ic

p re

ci ou

s/ no

n- fe

rr ou

s m

et al

s 46

% ze

ro 11

% 49

% 3%

2% 36

25 6

Tr ea

tm en

t a nd

c oa

tin g

of m

et al

m ac

hi ni

ng 4%

ze ro

12 %

48 %

8% 12

% 20

26 1

M an

uf ac

tu re

o f e

le ct

ro ni

c co

m po

ne nt

s an

d bo

ar ds

31 %

1% 42

% 8%

17 %

4% 28

26 2

M an

uf ac

tu re

o f c

om pu

te rs

a nd

ri ph

er al

e qu

ip m

en t

19 %

1% 39

% 6%

20 %

7% 27

26 3

M an

uf ac

tu re

o f c

om m

un ic

at io

n eq

ui pm

en t

6% ze

ro 37

% 4%

32 %

6% 21

26 4

M an

uf ac

tu re

o f c

on su

m er

ec tr

on ic

s 25

% 1%

32 %

4% 42

% 3%

18 %

Ta bl

e 3.

C on

tin ue

co nt

in ue

d on

fo llo

w in

g pa

EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

Manufacturing in a High Cost Environment

N A

C E

ev . 2

Sh ar

e of

te nt

s th

at a

K E

Pa te

nt s

in th

e Se

ct or

Sh ar

e of

K E

Pa te

nt s

th at

F al

l w

it hi

n In

du st

ri al

io te

ch no

lo gy

Sh ar

e of

K E

Pa te

nt s

th at

F al

l w

it hi

n M

ic ro

a nd

an oe

le ct

ro ni

Sh ar

e of

E T

P at

en ts

at F

al l

w it

hi n

A dv

an ce

d M

at er

ia ls

Sh ar

e of

K E

Pa te

nt s

th at

ll w

it hi

n P

ho to

ni cs

Sh ar

e of

K E

Pa te

nt s

th at

ll w

it hi

n N

an ot

ec hn

ol og

Sh ar

e of

K E

Pa te

nt s

th at

F al

l w

it hi

n A

dv an

ce d

M an

uf ac

tu ri

Te ch

no lo

26 5

M an

uf ac

tu re

o f i

ns tr

um en

ts a

ap pl

ia nc

es fo

r m ea

su ri

ng , t

es tin

g an

d na

vi ga

tio n;

w at

ch es

a nd

oc ks

23 %

7% 25

% 9%

22 %

6% 30

26 6

M an

uf ac

tu re

o f i

rr ad

ia tio

el ec

tr om

ed ic

al e

qu ip

m en

t 5%

18 %

13 %

21 %

13 %

8% 27

26 7

M an

uf ac

tu re

o f o

pt ic

in st

ru m

en ts

/p ho

to gr

ap hi

c eq

ui pm

en t

44 %

1% 27

% 9%

43 %

4% 15

27 1

M an

uf ac

tu re

o f e

le ct

ri c

m ot

or s,

ne ra

to rs

, t ra

ns fo

rm er

s an

d el

ec tr

ic ity

d is

tr ib

ut io

n an

d co

nt ro

l a pp

ar at

21 %

2% 31

% 18

% 20

% 4%

25 %

27 2

M an

uf ac

tu re

o f b

at te

ri es

a nd

cu m

ul at

or s

13 %

ze ro

8% 24

% 56

% 5%

27 3

M an

uf ac

tu re

o f w

ir in

g an

d w

ir in

g de

vi ce

s 17

% ze

ro 22

% 18

% 45

% 1%

13 %

27 4

M an

uf ac

tu re

o f e

le ct

ri c

lig ht

in g

eq ui

pm en

t 50

% ze

ro 22

% 3%

69 %

2% 5%

27 5

M an

uf ac

tu re

o f d

om es

tic

ap pl

ia nc

es 2%

ze ro

14 %

33 %

45 %

3% 5%

27 9

M an

uf ac

tu re

o f o

th er

e le

ct ri

ca l

eq ui

pm en

t 36

% 1%

29 %

12 %

42 %

8% 8%

28 1

M an

uf ac

tu re

o f g

en er

al -p

ur po

m ac

hi ne

ry 15

% 2%

21 %

47 %

1% 4%

25 %

28 2

M an

uf ac

tu re

o f o

th er

g en

er al

- pu

rp os

e m

ac hi

ne ry

13 %

2% 25

% 13

% 7%

5% 48

28 4

M an

uf ac

tu re

o f m

et al

fo rm

in g

m ac

hi ne

ry /m

ac hi

ne to

ol s

11 %

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Manufacturing in a High Cost Environment

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Manufacturing in a High Cost Environment

manufacturing, with retail and production being fused into a bespoke service;

• Home Additive Manufacturing: Some Additive manufacturing is likely to take place within the home, while some will take place within shops or factories; these domestic and commercial markets will look very different;

• Manufacture of Additive Manufacturing Units: Producing and servicing Additive manufacturing units themselves should be a big money industry; and

• Materials: Creating and sourcing materi- als for use in Additive manufacturing units will also be a significant market.

The complexity surrounding these domains as well as the large impact they will have can be illustrated by medical applications of nanotechnol- ogy as illustrated in Figure 3:

As can be seen, one of the key challenges is to develop suitable policies that are conducive to the development, adoption, innovation, wealth creation, wealth retention and public good as it relates to these key technologies.

Policy action will be required on:

• Intellectual property. • Competence development aimed at indi-

viduals and firms. • Adoption support aimed at firms.

Figure 3. Socioeconomic dynamics of innovation and uptake: medical application of nanotechnology (Baucher et al., 2013, p. 41)

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Manufacturing in a High Cost Environment

• Health and Safety implications. • Participation in standard setting bodies. • Demand and supply side support for the

development of core firms within the new value chains created by these technologies e.g. large scale inorganic-nano-power pro- duction as an input to additive manufactur- ing and as a core firm in the additive manu- facturing materials value chain.

Over the last 140 years, manufacturing pro- ductivity growth among the OCED nations has converged. Further, there is empirical evidence that continued productivity growth is strongly linked to research intensity (as a proxy for inno- vation intensity). Given this, it is fundamentally important that research intensity in high cost operating environment countries is maintained on a higher level than in low operating cost environ- ment countries, especially since non-OECD low operating cost environment countries can speed up their convergence to the frontier countries if they have a well developed financial system (Madsen & Timol, 2011).

Other drivers that are shifting the balance in favour of value chain concentration include increasing wage-levels in emerging economies, lower quality of the business environment in emerging economies (LDCs), lower importance of economies of scale for production, and need for closer interaction with customers (Kianian et al., 2013) These forces are discussed further below.

Wage Cost Drivers

In a recent survey (Statistic Denmark, 2008) half of Danish, Swedish and Dutch firms stated that labour cost savings was the primary reason for offshoring outsourced activities. This also means that the firms that were first movers in terms of offshoring were those that had a high share of labour costs in their production and that have a low need to be co-located with their customers or suppliers. Given that the wage levels in many

BRIC and N11 countries are increasing faster than productivity improvements, the labour cost advantage is a transitory advantage. (It is argued that average labour costs in China are increasing by 20% per year and that due to insufficient produc- tivity improvements, the net cost to manufacture in China and the USA will converge around 2015 (Sirkin et al., 2011).

Firms that pursue this benefit will have to constantly change location in order to chase the lowest cost labour location that also has an ad- equate skill level available in sufficient numbers. Not only will this deprive the previous location of the manufacturing activities now being moved out after having first been moved in, but it sets in motion a vicious cycle of damage to the eco- nomic development of nations and their human and social capital.

During the presence of these manufacturing activities in the country from which they are now moving, there was initiated a growth in related industries to the industry that relocated to the country. This growth increased the demand for skilled labour to the level where a bidding war for scarce talent erupts with rapidly escalating wage costs as a result, hence contributing to shorten- ing the presence of the firms that located in the country due to the resulting profitability pressure within these firms.

In addition, increasing living standards and government policy have encouraged the return of high skilled nationals to their country of origin with the associated higher levels of wage cost, further increasing wage cost pressures due to setting new wage “benchmarks” (Saxenian, 2006). Both of these effects can be observed e.g. in China.

These developments provide for the potential of relocating the manufacturing activities back to their country of origin. But unfortunately the retrieval of manufacturing is a problem, as once reduced below a threshold, it may not be possible to reverse.

The logic of this, from a neo-classical point of view, is outlined by Venables (1999, pp.178-

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Manufacturing in a High Cost Environment

179): “As firms exit or relocate, remaining firms benefit from a relaxation of competitive pressure (they get a larger share of local demand). How- ever, they suffer from now having lower demand for any intermediate products they produce and from having to pay a higher price for intermedi- ates, more of which are now imported (with a transport cost) rather than being locally supplied. Withdrawal of the benefits arising from these demand (backwards) and cost (forwards) linkages can cause collapse of the entire sector. There may be multiple equilibria and consequent hysteresis.” It follows from this that policy measures must be evaluated to avoid such an outcome.

Venables (1999) also points out that it is ex- tremely difficult for (neo-classical) economists to predict the effect of policy change due to the existence of demand and cost linkages. Moreover, this situation is complicated further due to technol- ogy development, associated creative destruction and subsequent innovative and entrepreneurial renewal, as well as the irrationality of human behaviour, easiest visible in goods with primarily intrinsic and extrinsic value (including Veblen good12) as discussed in behavioural economics.

Some of the key policies are to create a link between productivity improvement and wage cost increases to ensure that the relative wage cost is not increasing and resulting in pressure to outsource or offshore the production.

Business Environment

The operating environment as controlled by gov- ernment is a potential driver of cost advantage or cost disadvantage of firms and will impact their decision to concentrate their activities in fewer locations or distribute, and potentially disperse, their value chains into more locations.

If a firm locates its activities across very many locations and jurisdictions, it may incur an increase in the number of internal transactions and governance costs which may, if high enough, eventually outweigh the benefits of offshoring

and outsourcing (Tallman & Li, 1996). A well functioning institutional setting (i.e. easy interface, clarity of rules and predictability of any changes in the regulatory and institutional environment) of the destination market contributes to lowering the transaction cost of entering this new market (Meyer, 2001).

Developing a well functioning institutional setting (i.e. having high transparency, clarity and predictability) forms a competitive market condition that encourages firms to build market- based firm-specific advantages e.g. technological capabilities (Globerman & Chen, 2010). Accord- ing to transaction cost theory, this will result in full ownership of the local firm to protect these asset-specific capabilities and created advantages from opportunism13 and involuntary spillovers (e.g., Williamson, 1985; Beamish & Banks, 1987; Hennart 1988, 1991; Hennart & Larimo, 1998). The ownership choices of foreign firms reflect both efficiency and legitimacy concerns. In particular, the business behaviour of foreign firms is condi- tioned by the political behaviour of government (Zhang, 2007). This leads to two conclusions: firstly, if the institutional setting is unpredictable or difficult to understand (i.e. differs wildly from the one the firm is used to (Coeurderoy & Murray, 2008)), the transaction cost of entering the market will be high. This provides a substantial barrier to entry and if entry is still pursued, the entry will be joint with a local firm or entity which in turn limits the firm’s desire to create market-based, firm-specific advantages due to the difficulty in protecting these from opportunistic appropriation by third parties or through involuntary spillovers. Secondly, if the institutional setting is developing in a direction that increases the transaction cost for the firm or on a trajectory that is not reducing the transaction cost at the pace expected by the firm, this will contribute towards a decision by the firm to exit the market. Some clear guidelines for factor and framework condition policy setting can be drawn from this analysis (Moavenzadeh et al., 2013):

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• Provide a consistent and stable policy en- vironment, freed from election cycles, pro- viding longer-term certainty for business investment decisions. As capital invest- ment and workforce hiring decisions have long-term consequences – often 10- to 20-year time horizons or more – establish- ing policy stability over longer time peri- ods facilitates the setting of business and investment strategies with greater confi- dence and enhances the ability to commit to stakeholders.

• Establish policies that are globally compet- itive with other nations and which do not create competitive disadvantages for busi- nesses (“do no harm”). Further, policies should strive to help level the playing field and be rigorously enforced for all global competitors. Policy-makers have a critical role to play regarding the establishment of fair and competitive global markets. Strong enforcement is essential particular- ly in the areas of intellectual property pro- tection, currency manipulation and trade violations.

• Ensure that policies are developed in mean- ingful dialogue and collaboration between business leaders and policy-makers, lead- ing to more informed and thoughtful pol- icy development and limiting unintended negative consequences.

• Ensure policies that create institutional le- gitimacy – in the court systems, the finan- cial systems and markets, for intellectual property protection, for asset protection, for enforcement, and for fair and consistent consequences of infractions and violations. This is essential for markets to thrive and grow and to attract investment of capital and talent. Corruption should find no home in free markets.

• Policy-makers should strive to reduce the fragmentation and complexity of today’s policy environment through the synchroni-

sation and harmonisation of national, state, and/or local policies and across agencies and branches of government.

• Individual polices and the overall policy bundle must be financially affordable and reasonable for business and society. The costs associated with policies – even those that may be well intentioned and arguably necessary – should not outweigh the ben- efits. Here it is important that the benefits expressed in all value dimensions (instru- mental, extrinsic and intrinsic) and across all legitimate stakeholders are converted to a monetary equivalent number14 to get a proper value for money estimate in order not to erroneously limit it to instrumental value only for a narrow stakeholder group.

Changing Importance of Economies of Scale for Production

At what saving is it profitable to separate product development from manufacturing? This topic was first discussed by Arditti (1968) who showed that the cost saving in a number of defence contracts would have had to be in the region of 25-31%. A further study by Teece (1977) found a range of 0.3%-37% with an average of 5% in the process industry and a range of 1%-179% with an average of 25% in the machinery industry (findings from these two studies is consistent with the study from the same time period by Mlinar (1978)). There are three new developments since these studies:

Firstly, the complexity of products has in- creased (this is true even if the products have architectural and modular design structures – it is just a question of on what scale the complexity has increased: system, sub-system, part, component, etc) which increases the difference in the cost as starting points for the learning curves as well as increasing the difference in slope for the learn- ing curve both to the advantage of the developer if development and production is co-located15. The cost differential is made up of the cost to

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shift organisational resources (e.g. drawings, formulae, documented processes, specific soft- ware, information, etc.), competence (primarily tacit knowledge like e.g. know-how, knowledge gained from experience, etc.) as well as absorptive capacity costs (e.g. expenditure on R&D by the supplier, cost of training workers to adapt to new technology, or acquiring new technology from the technology market) (Grover). The effects of this for outsourcing is outlined by Grover (and aligns with the findings of Antràs, 2003; Grossman & Rossi-Hansberg, 2008) and is simplified and sum- marised in Figure 4.

As can be seen from the Figure 4, when the relative wage differential declines (i.e. when the horizontal line moves downwards in the figure), the domain where international outsourcing is an appropriate response decreases both from the low-tech domain (i.e. from the left in the figure) and from the high-tech domain (i.e. from the right in the figure) but it decreases faster from the high-tech domain. This fits well with what we see happening in China at the moment. In order to compensate for this trend a country like China must build better contracting institutions to influ- ence the level of production sharing by impact-

Figure 4. Trade-off between Domestic Outsourcing and International Outsourcing (source: Simplified after Grover, 2008)

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Manufacturing in a High Cost Environment

ing relative productivity of the final good sector (Acemoglu et al., 2007) and increase the level of absorptive capacity and proficiency in technology to sustain a more technologically sophisticated good by lowering the cost of technology transfer (Grover, 2008). Both of these actions would widen the range of offshoring in the figure above.

Secondly, the average life cycle for a given product has shortened with the associated decline in volume produced of a given product, leading to pressure to decrease time-to-market and lowering tolerances for any delays in the time-to-market (a six month delay in releasing a new car model or a one month delay in releasing a new mobile phone model will wipe out the profit of that model).

Thirdly, the relative labour cost differential for a given skill level of labour has, for some time, increased between the OECD located developer and the potential BRIC16 or N1117 based producer (be that a fully owned subsidiary or outsourcing and offshoring to a contract producer), albeit for some of these countries like China this differ- ence has decreased rapidly over recent years (see above). Given these developments, it is likely that the cost differential needed to justify offshoring or outsourcing (and hence separating development from production) has declined, with the emergence of the globalisation period, from the initial 1960s estimate by Arditti of a high 20 percent level, down to 7-9 percent at the lowest point of these three forces (around the year 2000), to then rise back to around 15 percent in 2013 and be on an upwards trajectory18.

Technological developments will also reduce the labour cost component of manufacturing as well as enabling smaller series, down to the level of one, produced cost efficiently. These developments include additive manufacturing, robotics, collaborative manufacturing services and the four types of production systems (see Table 3), with the associate technologies embodied in both equipment and processes, targeted at high cost operating environments as discussed in the table above. This technology-enabled reduction

in the labour cost component will start in high cost operating environments, firstly, since an increase in the intensity of technology use leads to a substitute of labour by capital equipment as well as an increase in output; and secondly, since a given level of intensity in technology use will have the same level of labour reduction, the cost effect is higher in a high cost operating environ- ment than in a low operating cost environment and as a consequence the optimal level of technology intensity is lower in a low cost operating environ- ment than in a high cost operating environment (Brecher et al., 2012).

Two of the key cost savings with these new technologies are in waste (additive manufactur- ing operates on a waste level of around 7% of the input material whilst subtractive manufacturing operates on a waste level of up to 90%) and in energy use (where the reduction in transportation enabled by these new technologies plus higher energy efficiency in the production process itself due to these technologies will enable substantial cost savings).

These technology related developments are likely to open the way for returning production from low cost operating environments to the origi- nating high cost operating environment (Grossman & Helpman, 2005; Tuck & Hague, 2006; Holstein, 2010; Nash-Hoff, 2012a; Nash-Hoff, 2012b; Chu et al., 2013; Kianian et al., 2013; Tavassoli, 2013), given that the relevant industrial commons have not been impoverished beyond the point of no return and given that a sufficient level of economic complexity exists in the home jurisdiction . This opportunity must influence the policy settings to facilitate the realisation of returning production with the associated economic benefits.

Changing Need for Interaction with Customers and Input Providers

Given a shortening of the product life cycle, the need to continuously innovate is increasing. This innovation needs to be faster, better aligned with

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Manufacturing in a High Cost Environment

customer and consumer needs and with lower failure rates. The innovation needs to take place not only in the end product-service-system domain but also in the production process domain and the deployment of new production equipment and new production system domains. In spite of the fact that transactions and exchanges can be made almost instantly and independent of location and distance, there are transactions and exchanges that for one reason or another do not follow this pattern but are instead highly sensitive to distance. These activities need to be built on trust and a common institutional framework that can only be developed by face-to-face contact and hence require geographical proximity (Karlsson, 2012). This creates a pressure to be co-located with key input providers in all relevant domains, which will of course provide contradictory pressures on location of activities as outlined in Table 4:

The key benefits of these proximities are best articulated by Döring & Schnellenbach (2006): “Networks of regionally clustered businesses and institutions, therefore, offer two broad opportu-

nities: formal exchanges of knowledge through market relationships, where proximity allows the establishment of closer ties; and the informal exchange of knowledge in social networks of individuals”.

Those beneficial aspects of close proximity which firms cannot control or achieve in any other way than through close geographical and specialisation proximity have been named un- traded interdependencies by Storper (1995; 1997).

The economic terminology for this is agglom- eration economics and a policy driven opera- tionalisation of this is known as cluster policy or smart specialisation. The research in this domain shows that firms that are members of agglomera- tions have higher productivity as well as higher productivity improvements than firms that are not members of any agglomeration (Jaenicke et al., 2009; Garanti & Zvirbule-Berzina, 2013). Typi- cal benefits are fourteen percentage points higher value added growth, seven percentage points higher profitability growth and two percentage points higher wages per employee (a proxy for productivity) to the advantage of firms in clusters vs. those not in clusters (Extracted from Table 2, page 30 in Sölvell & Williams, 2013). A cluster/ smart specialisation policy needs to be part of an overarching manufacturing policy.

In order to realise the opportunity present in this development, countries and locations must have a strong industrial commons (i.e. a high economic complexity – see discussion below); the presence of the key components in a regional innovation system19 (example in Figure 5) and a suitable system innovation perspective (sum- marised in Figure 6).

Changing Needs for Skills in the Manufacturing Workforce

Given the rapidly increasing technological so- phistication of products, production processes, production equipment and production systems, tomorrow’s manufacturing workforce will be re-

Table 4. Location pressure by input provider

Input Provider

Location Pressure

Lead customer

Location in proximity of lead customer’s location.

University or PRO/ RTO

Location of R&D in proximity of external research provider and given the discussion above this also means pressure to locate manufacturing in the same proximity (e.g. Arnold et al., 2010; Connell & Probert, 2010; Kliknaite, 2011; Roos & Pike, 2011).

Equipment Supplier

In order to be a lead customer to an equipment supplier you either have to be located in the proximity of the equipment supplier or be located at the equipment supplier’s most important market.

Key market

If transportation cost is a large component of total cost the location of the producer has to be in close proximity of the key market (Warrian, 2010). If there is a large requirement for market adaptation/customisation the producer has to be in close proximity of the key market.

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Manufacturing in a High Cost Environment

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Manufacturing in a High Cost Environment

quired to have substantially higher skills including new knowledge domains like e.g. ICT (hardware, sensor and software skills); sufficient technology competence to understand the key production process/equipment e.g. nanotechnology, biotech- nology, advanced manufacturing technologies, material science etc. and key skills required for participating in and contributing to a high per- formance workplace environment e.g. problem solving, interpersonal collaboration, etc. This will require a substantially higher level of formal edu- cation on entering the workforce complemented by continuous education to stay productive in this future manufacturing environment.

Modern manufacturing requires teamwork, plan- ning skills, communication skills, improvisation, agility of the mind, and a large foundation of knowledge. (Mitchell, 2012).

The lowest level of education is likely to be the highest level of VET (or technical colleges)

including joint programs with industry, whereas the norm is likely to be Bachelor level university degrees. There is already a clear link in high cost operating environments between the educational attainment of both management and the workforce and productivity improvements20. In addition, the effects of productivity growth and liberalised trade tend to be felt disproportionately by low-skilled workers (Berman et al., 1994) resulting in fewer employment opportunities for them (Deitz & Orr, 2006). The need for STEM graduates will accelerate as a consequence of these shifts and the availability of these graduates is a prerequisite for manufacturing moving back to high cost operat- ing environments. A more detailed discussion around the emerging skill production system for manufacturing can be found in Weaver & Oster- man (2014) and of the emerging skill need in Davis et al. (2012).

Given the servitization of manufacturing and the increasing tradability of services and service activities, it will be challenging for those high

Figure 6. Summary of system innovation perspective (based on Geels)

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Manufacturing in a High Cost Environment

cost operating environments that do not manage to retain or recoup manufacturing activities, that do not mange to have enough entrepreneurial activity to regenerate high value adding activities, and that do not manage to add value to domestic raw material. This challenge will be around the level of employment available and the general salary level of this employment. This is because these jobs will be in service professions where productivity improvements are either impossible or undesirable, where any wage increase will re- sult in a cost increase since it cannot be offset by a productivity increase (Baumol’s disease21) and hence the relative cost for these services will tend to increase faster than the consumer price index. This is acceptable for luxury services, but not for non-luxury services were this will instead force constant wage reduction to keep the cost constant in relative terms .This presents a major political challenge because it will affect a large and grow- ing number of people in such an economy (well exemplified by the present trajectory of Australia).

In order to realise the opportunity present in this development, countries and locations must have a strong industrial commons (i.e. a high economic complexity – see discussion below); the presence of the key components in a regional innovation system22 (example in Figure 5) and a suitable system innovation perspective (sum- marised in the table below).

INDUSTRIAL COMMONS AND ECONOMIC COMPLEXITY

The industrial commons is normally defined as the embedded knowledge, technology capabilities, specialised equipment and specific co-specialised assets that enhance the efficiency, effectiveness and productivity of the proprietary capital and labour that use it. This industrial commons does not reside in one organisation but is spread out over a large group of organisations and individuals but normally within a limited geographic domain

(Pisano & Shih, 2009). A broad base of indus- trial commons with different domain expertise and located in different geographies across the country provides a basis for a high level of eco- nomic complexity. Hence, the complexity of an economy is related to the multiplicity of useful knowledge embedded in it. In a broad context, the term ‘complexity’ could be substituted by such terms as ‘density’, ‘thickness’, ‘interweaving’ or ‘network richness’. This emphasises the fact that modern societies are able not only to amass but also to utilise effectively large amounts of produc- tive knowledge, because of it being distributed in modules amongst members of society.

This is an extension of Adam Smith’s idea that economic progress is the result of an ever- deepening division of labour (Smith, 1863; Young, 1928). This division of labour gives us all access to knowledge we would not be capable of holding individually. Economic complexity is therefore expressed in the composition of a country’s productive output and reflects the structures that emerge to hold and combine knowledge. To be fully utilised, different knowledge need to come together in diverse combinations in teams, organisations and markets. It is these various teams, organisa- tions and markets that allow the diffusion and use of this knowledge across society and globally, and that provide on the one hand the networks that allow increasing degrees of specialisation, whilst on the other hand ensuring that the outputs of this specialisation can be absorbed and used. Increased economic complexity is necessary for a society to be able to hold and use a larger amount of productive knowledge vested in many individu- als and networks). That means that to be utilised fully, knowledge needs to be organised through a social process into organisations, markets and institutions as modules. This complexity then consists of:

• Increasing levels of specialisation and technical sophistication and organisation of knowledge into modules, and

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• Their complex combining and coming to- gether in institutions, enterprises, markets and organisations.

This productive knowledge is not only formal but also tacit, and hence hard to acquire. It is not tradable, nor can it be priced in the normal sense. It is clustered around and embedded within organisations, markets, institutions and their net- works and referred to as the “industrial commons” when limiting it to manufacturing only. For those countries and regions that do acquire and hold it, it becomes a basis for competitive advantage distinct from standard price-based competition. It is therefore evident in those high cost manufactur- ing economies that succeed regardless of low cost competition, and is of vital importance to all coun- tries and specifically to countries like Australia, that have become high cost economies and are in clear danger of losing significant manufacturing capabilities, unless they undertake accelerated transition to advanced manufacturing activities. The higher the economic complexity, the easier to transition into advanced manufacturing since this requires the interaction and combination of the knowledge of specialists (e.g. designers, mar- keters, finance specialists, engineers, technology experts from various disciplines, human resource managers, legal experts, environmental scientists, specialists from the social sciences, etc.). Where these inputs are missing, it is not possible to make products of the same complexity. Making advanced products involves interdependencies requiring co- operation amongst and between individual actors. The more these interdependences can be located within a nation or region, the more that nation or region’s economy has the potential to capture the benefits of the activity or sector in locally based complex value chains. Building these networks embodying key capabilities, including leverag- ing demand along high growth value chains is a central task for policy.

Hausmann et al. (2011) have developed an Economic Complexity Index for 128 countries. The Economic Complexity Index attempts to capture the total amount of productive knowl- edge embedded in society, relating to two terms: ‘diversity’ and ‘ubiquity’: A country exhibiting diversity in its products has a large amount of embedded knowledge and a sophisticated array of capabilities: it can do many things. Less diversity indicates the reverse. Ubiquity is about the number of countries that make the same or similar product, given that sophisticated products are made in rela- tively few places. The more ubiquitous a product the less sophisticated it is likely to be. In short, the knowledge-intensity of a nation is expressed in the (higher) diversity of the products it makes and the (lesser) ubiquity of its products.

The higher the economic complexity (and the faster it grows) the stronger the economic value creation prospects of an economy. The countries with the highest Economic Complexity Index are in order Japan (2.3), Germany (2.0), Switzerland (1.9), Sweden (1.9), Austria (1.8), Finland (1.7), Singapore (1.6), Czech Republic (1.6), United Kingdom (1.6), Slovenia (1.5) and Korea (1.5). These are then followed by e.g. the US (1.4) in the next group, whereas Australia is ranked as number 79 with an Economic Complexity Index of -0.3. These findings are aligned with the find- ings of Abeles & Rivas (2011), who when they analysed the relationship between the level of overall economic development as illustrated by per capita GDP (and the degree of industrialisa- tion as represented by per capita manufacturing sector GDP), identified two features that stood out:

• Countries with the highest per capita GDP levels are also those which reveal the high- est per capita manufacturing GDP levels i.e. the US, Japan, Germany, Switzerland and northern European countries (e.g. Sweden, Finland). This group is then fol-

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lowed by most of the remaining European countries, as well as Canada, Australia and some Asian countries (e.g. South Korea).

• The data analysed had a good logarithmic fit suggesting that the impact of an increase in the weight of the manufacturing sector in the economy depends very much on ini- tial conditions.

In order to achieve a high Economic Complex- ity Index an economy has to have a high presence of product groups (or communities) requiring or generating high complexity. Some product com- munities and their Economic Complexity Index are shown in Table 5:

From the above table we can see that manufac- turing is critical for a country’s ability to achieve high levels of economically-useful embedded knowledge and hence for its ability to capture value from economic activities and to grow both employment and GDP over time. An economy with a high economic complexity has a higher prob- ability of benefiting from a random entrepreneurial event than one with low economic complexity. In the latter economy, the entrepreneurial event will engage lead customers and access specialist sup- pliers in places with high economic complexity

and this will over time lead to the entrepreneurial start-up firm migrating to the economy with the higher economic complexity and larger economic scale. From the earlier discussion, we can also conclude that many of the product communities that involve the technologies discussed above will have a high economic complexity index.

IMPLICATIONS OF THE ABOVE CHANGES IN MANUFACTURING

The present benefits of manufacturing to an economy and the future changes to each of these are summarised in Table 6.

CONCLUSION

Structural Changes to Manufacturing

High cost operating countries have so far moved through two waves of offshoring and outsourcing (the first relating to production activities and the second to service and support activities linked to the pre- and post production phase together with general administrative activities) and are on the

Table 5. Economic Complexity Index for selected product communities (Hausmann et al., 2011)

Product Community ECI Product Community ECI Product Community ECI

Machinery 2.54 Construction Materials & Equipment 0.77 Garments -0.4

Chemicals & health 2.52 Metal Products 0.76 Fruit -0.6

Electronics 2.25 Meat & Eggs 0.64 Mining -0.6

Pulp & Paper 1.77 Agrochemicals 0.4 Misc Agriculture -0.8

Other Chemicals 1.67 Coal 0.21 Leather -0.9

Boilers 1.56 Textile & Fabrics 0.18 Animal Fibres -0.9

Aircraft 1.48 Beer, Spirits & Cigarettes 0.07 Fish & Seafood -1.2

Petrochemicals 1.22 Precious Stones 0.02 Tobacco -1.5

Home & Office 1.16 Food Processing -0.1 Tropical Agriculture -2

Milk & Cheese 1.14 Inorganic Salts & Acids -0.2 Oil -2.1

Ships 0.83 Cereals & Vegetable Oils -0.3 Cotton, Rice, Soy & Others -2.3

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way into the third wave which is backshoring of activities to the country of origin. These waves are driven by the changing balance between the forces that are pushing for a coordinated but fragmented and dispersed value chain and the forces that are pushing for a coordinated and concentrated value chain. The drivers that are pushing this balance in the favour of the concentrating forces are: technol- ogy development; reduced importance of labour costs in production combined with reduced wage cost differential with BRICS and N11 countries; increasing skill requirements for the workforce; changes in the industrial structure with an increas- ing need for high economic complexity in the form of broad and deep industrial commons as well as

an increasing need to be close to customers and key input providers; and a requirement on well functioning institutional settings.

Basis for Future Success by High Cost Nations

On the firm level comparative advantages are becoming less important than competitive advan- tages at the same time as competitive advantages tend to have a shorter duration i.e. becoming temporary. The ongoing structural changes in manufacturing are putting the competitive focus on the creation of value more than on cutting costs (although both are important) and this requires

Table 6. Consequences of the future development of the manufacturing industry

Present Benefit of Manufacturing to a Country or a Jurisdiction

Impact from the Changing Structure of Manufacturing Consequence

Driver of total factor productivity including the development of productivity improvement tools

and techniques with spillover effects into the rest of the economy.

This role will become even more pronounced as manufacturing

digitalises.

Economies without a presence of advanced manufacturing will slip behind in terms

of productivity improvement with an associated decline in wealth generation

capability and living standards.

Driver of jobs and economic activity in the rest of the economy through very high multiplier

effects.

This role will reduce as manufacturing servitizes.

The requirement to increase entrepreneurial start-up activities will become stronger to compensate through employment growth for the decline in manufacturing related

employment. This will be easier the higher the existing economic complexity.

Manufacturing jobs pays better than non- manufacturing jobs.

This role will become even more pronounced as the skill requirement

increases in manufacturing.

This will put pressure on economies that want to bring back, retain, grow or develop

manufacturing to ensure the presence of a sufficiently well educated workforce in

sufficient numbers.

Manufacturing provides a disproportionately large share of tax revenues in terms of tax on value added throughout the supply chain, tax on firm profit, tax on salaries paid, tax on the consumption enabled by the salaries paid plus

different fees and duties.

This role will likely become smaller due to the reduction in multiplier

effect in spite of likely higher salaries and higher profits.

This will put pressure on economies to either find other sources of revenue that do not reduce their comparative

competitiveness or to cut expenditure.

Manufacturing provides a disproportionately large share of R&D.

This role will become even more pronounced due to the accelerating

technology development with adoption and the increasing servitization

following from the digitalisation of manufacturing.

This will put pressure on research providers to become high performing suppliers

to industry and on the creation of high performing clusters and regional innovation

systems.

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closeness to customers and key input providers, a wider understanding of value, both deep and wide mastery of the core knowledge that underpins the firm, as well as very high absorptive capacity all of which aims at maximising the productive and adaptive efficiency and hence resulting in endur- ing competitiveness. The policy environment must provide both carrot and stick to ensure that firms align with these developments.

The higher the economic complexity of a nation the easier to transition into advanced manufacturing since this requires the interaction and combination of the knowledge held by many different individuals and organisations. Where this knowledge is missing, it is not possible to make products of the same complexity. Making advanced products involves interdependencies requiring cooperation amongst and between individual ac- tors. The more that these interdependences can be localised within a nation or region, the more that nation or region’s economy has the potential to capture the benefits of the activity or sector in locally based complex value chains. Building these networks (i.e. building deeper and broader industrial commons or increasing the economic complexity) embodying key capabilities, includ- ing leveraging demand along high growth value chains is a central task for policy.

Failure to do the above will result in reducing employment levels as well as reducing wage levels for those in employment .This is because the ma- jority of jobs will be in service professions where productivity improvements are either impossible or undesirable, where any wage increase will result in a cost increase since it cannot be offset by a productivity increase and hence the relative cost for these services will tend to increase faster than the consumer price index. This is acceptable for luxury services, but for non-luxury services, this will instead force a constant wage reduction to keep the cost stable in relative terms .This presents a major political challenge because it will affect a large and growing number of people in such an economy (well exemplified by the present

trajectory of Australia). It also put the focus on the inadequacies of the neoclassical economic lens as a policy lens in high cost operating economies as opposed to the more suitable Neo-Schumpeterian (evolutionary/innovation) economic lens.

Policy Actions

High cost operating countries need to take policy actions in the following fields:

• Technology: ◦ The creation of an intellectual prop-

erty regime conducive to the deploy- ment of emerging technologies.

◦ Competence development aimed at individuals and firms.

◦ Technology adoption support aimed at firms.

◦ Health and Safety implications of emerging technologies.

◦ Participation in standard setting bod- ies to lay the groundwork for success- ful domestic firms.

◦ Demand and supply side support for the development of core firms within the new value chains created by these technologies e.g. large scale inorgan- ic-nano-power production as an input to additive manufacturing and as a core firm in the additive manufactur- ing materials value chain.

• Wage Cost: ◦ Linking wage cost changes to produc-

tivity changes. ◦ Outsourcing and offshoring will only

happen when the technological com- plexity is medium, when the wage differential is high, when the increase in technological complexity is slow and when productivity improvement is lower in the outsourcing country. Policy should strive to ensure that these conditions are not present.

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• Workforce: ◦ Ensure substantially higher level of

formal education on entering the workforce complemented by substan- tial amounts of continuous education to stay productive. This is a question of both quality and quantity and is valid for shop floor and management alike.

• Industrial Structure: ◦ Ensure that sectoral collapse is avoid-

ed as a consequence of firm exits leading to lower demand for inter- mediates, forcing remaining firms to import more at higher costs whilst operating under reduced competitive pressure and hence rapidly becoming uncompetitive and going under.

◦ Facilitate co-location between firms drawing on common knowledge do- mains and firms and their input pro- viders (e.g. facilitate precinct and clusters) generating formal exchanges of knowledge through market rela- tionships where proximity allows es- tablishment of closer ties, and infor- mal exchange of knowledge in social networks of individuals resulting in superior performance of participating firms.

◦ Facilitate access to lead customers – government is a very important lead customer and more sophisticated procurement policies are needed that look at whole-of-life costs as well as demanding solutions not yet in exis- tence rather than purchasing off-the- shelf proven solutions.

◦ Implement policies that drive an in- crease in economic complexity as well as broadening and deepening the industrial commons.

• Business Environment: ◦ Ensure a well functioning institu-

tional setting, i.e. having high trans- parency, clarity and predictability, as a competitive market condition that encourages firms to build market- based firm-specific advantages. This can be achieved using the following guidelines: ▪ Provide a consistent and stable

policy environment, freed from election cycles, providing lon- ger-term certainty for business investment decisions. As capital investment and workforce hiring decisions have long-term conse- quences – often 10- to 20-year time horizons or more – estab- lishing policy stability over lon- ger time periods facilitates the setting of business and invest- ment strategies with greater con- fidence and enhances the ability to commit to stakeholders.

▪ Establish policies that are global- ly competitive with other nations and which do not create competi- tive disadvantages for businesses (“do no harm”). Further, policies should strive to help level the playing field and be rigorously enforced for all global competi- tors. Policy-makers have a critical role to play regarding the estab- lishment of fair and competitive global markets. Strong enforce- ment is essential particularly in the areas of intellectual property protection, currency manipula- tion and trade violations.

▪ Ensure that policies are devel- oped in meaningful dialogue

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and collaboration between busi- ness leaders and policy-makers contributing to more informed and thoughtful policy develop- ment and limiting unintended negative consequences.

▪ Ensure policies that create in- stitutional legitimacy – in the court systems, the financial systems and markets, for intel- lectual property protection, for asset protection, for enforce- ment, and for fair and consistent consequences of infractions and violations. This is essential for markets to thrive and grow and to attract investment of capital and talent.

▪ Reduce the fragmentation and complexity of today’s policy environment through the syn- chronisation and harmonisation of national, state, and/or local policies and across agencies and branches of government.

▪ Individual policies and the over- all policy bundle must be finan- cially affordable and reasonable for business and society. The costs associated with policies – even those that may be well intentioned and arguably neces- sary – should not outweigh the benefits. Here it is important that the benefits expressed in all value dimensions (instrumen- tal, extrinsic and intrinsic) and across all legitimate stakehold- ers are converted to a monetary equivalent number to get a prop-

er value for money estimate in order not to erroneously limit it to instrumental value only for a narrow stakeholder group.

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ENDNOTES

1 For more on the discussion on value cat- egories see e.g. Beardsley, (1965); Rescher, (1969); Anderson, (1995); Saracevic & Kan- tor, (1997); Bradley, B. (1998); Rabinowicz & Rønnow-Rasmussen, (2000); M’Pherson & Pike, (2001); Kelly & Male, (2004); Pike & Roos, (2004); Sigala, M. (2006); Goel, (2008); Zimmerman, (2008); Town, (2011); Ng & Smith, (2012); Puustinen, (2012).

2 Allocative efficiency is the market condition whereby resources are allocated in a way that maximizes the net benefit attained through their use; and the quantity of goods produced is that which is most beneficial to society. An allocative efficient market is one in which scarce goods and services are consumed on the basis of the prices consumers are willing to pay for them and scarce goods and services are produced on the basis of marginal costs equalling the prices charged for them.

3 This is because innovation and productivity depend not just on the workings of individual firms acting alone, but on a wide array of supports, such as a strong research base, skilled workers, networks, standards, and

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a host of other factors that public-private partnerships can play a key role in helping to provide (Atkinson & Audretsch 2008)

4 Audretsch & Link (2012) 5 Breener et al., (1991); Alesina & Rodrik

(1994); Leibfritz et al. (1997) and for a more recent and detailed discussion see e.g. Voitchovsky (2003)

6 Productive efficiency is the ability of or- ganizations to produce in ways that lead to the most amount of output with the fewest inputs, including labour inputs

7 Adaptive efficiency is the ability of econo- mies and institutions to change over time to respond to successive new situations, in part by developing and adopting technological innovations

8 Equilibrium systems by definition are in a state of rest, while growth implies change and dynamism (Beinhocker, 2007)

9 Nelson (1981) ; Bradford De Long (1991); Klenow & Rodriguez-Clare (1997); Hall & Jones (1999); Easterly & Levine (2001)

10 Marsh & Shaw (2000) 11 Big Data Analytics is underpinned by data

fusion/analysis (including mining, visualiza- tion and management of data and informa- tion using e.g. probability, statistics, quality, reliability, fuzzy logic, multivariable testing, pattern analysis, etc.), decision modelling (including discrete simulation, finite ele- ment analysis, stochastic methods, neural networks, genetic algorithms, optimization, etc. and needs further tool development since most steady state models become irrelevant in a real-time environment), and systems engineering which focuses on integrating products, processes and operations from a holistic perspective (Tien, 2012)

12 Named after Thorstein who first identified the concepts of conspicuous consumption and status-seeking in his 1899 publication (Veblen & Almy, 1899)

13 Described by (Williamson, 1981) as dishon- est behaviour by competing firms

14 Using a valid methodology like e.g. Conjoint Value Hierarchy

15 The technology transmission cost incurred by a sourcing firm in an internal production transfer is substantial and forms a part of its relationship specific investment, while the subsidiary manager has little incentive to invest in technology assimilation – in other words, the absorptive capacity development cost is born by the sourcing firm. If the off- shore production is contracted to an outside supplier i.e. outsourced, then the supplier has to incur a significant proportion of the technology transfer costs while the sourcing firm has little motivation to bear the costs of technology transmission and this is facili- tated by competition among suppliers that ensures that the sourcing firm’s technology costs are minimised (Grover).

16 Brazil, Russia, India and China sometimes also including South Africa and then known as BRICS

17 Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea, and Vietnam

18 These are the author’s estimates and are based on a labour share of total cost of around 15% and an architecturally and technologically complex system (product) in the B2B space where absorptive capacity issues will arise in the firms sourced from.

19 Innovation system theory states that inno- vation and technology development result from a complex set of relationships among actors in the system, which include enter- prises, universities and research institutes. The original concept was articulated (using different terminology) by List (1841) and the present concept was introduced by Lundvall (1985).

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20 See e.g. de La Fuente (2011). For a discus- sion of the literature here

21 So named after being first described in Baumol & Bowen (1966).

22 Innovation system theory states that innova- tion and technology development result from

a complex set of relationships among actors in the system, which includes enterprises, universities and research institutes. Original concept was articulated (using different terminology) by List (1841) and the present concept was introduced by Lundvall (1985).

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Chapter 2

Competing from a High Cost Economy:

What is the Challenge to Australian Public Policy?

ABSTRACT

The starting point for this chapter is that Australia is a high-cost economy with a fading resources boom and a diminished domestic manufacturing sector. The chapter explores the fresh challenge that these structural developments present to public policy. It argues that this requires a shift from the dominant neo-classical policy paradigm, which has to date provided the intellectual muscle for a transformation of Australia’s political economy. The chapter makes the case for policies framed to foster innovation and knowledge as the approach needed for Australia to succeed in an environment characterised by the new international distribution of manufacturing, the impact of new technologies, and the prevalence of global supply chains. To realise innovation-based economic renewal requires capacities for much more targeted interventions that engage business at cluster, sectoral, and/or regional levels. The chapter concludes by considering the obstacles to, and the possibilities for, policy change.

INTRODUCTION

Australia is a high cost economy with a fad- ing resources boom and a diminished domestic manufacturing sector (Roos, 2012, 2013). This chapter explores the fresh challenge that these structural developments present to public policy. This, so it argues, involves a shift in the focus of policy towards innovation, with particular attention to manufacturing and start-ups. This

approach already receives rhetorical - and limited substantive - support from federal and state gov- ernments.1 As the chapters in this book suggest, this is insufficient. The challenge is fundamental and wide ranging. It involves assimilating a new policy paradigm (Hall, 1983), which cuts across the current conventional wisdom, based in neo- classical understandings of economic dynamics. Since 1983, this stream of conceptual and policy ideas has provided the intellectual muscle for a

Ian Marsh University of Tasmania, Australia

DOI: 10.4018/978-1-4666-5828-8.ch002

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transformation of Australia’s political economy. But, as has recently been convincingly argued, the new international distribution of manufacturing, the impact of new technologies and the prevalence of global supply chains combine to create a new international economic context (e.g. McKinsey Global Institute, 2012; Gereffi and Lee, 2012; Herrigal and Zeitlin, 2010). This coincides with the end of the resources boom in Australia and the emergence of substantial new domestic eco- nomic challenges including employment, skills and growth (e.g. Garnaut, 2012; Parkinson, 2012).

This is encapsulated in the broad idea of a ‘knowledge economy’. This phrase points to the transcendence of commoditised activity, which remains the basis of much economic and indus- trial practice. In this world, knowledge is often secondary to other considerations like scale or ef- ficiency – but in the context of a given technology. In the past decade, commoditised manufacturing has moved to low cost and low wage settings. Op- portunity now lies in products and services that are much more responsive to individual tastes or business needs – indeed in the best case they shape these tastes and needs – and to a dynamic based on technologies that cut costs and enhance quality. A myriad of contemporary innovations sustain these opportunities. Indeed fully realised the idea of a knowledge economy extends beyond any narrow technical conception. A knowledge economy is embedded in a society that nourishes creativity, imagination and risk taking, one that welcomes these disruptions to conventional ways. In the best case, this is the vision of an open society, one whose citizens are alert to emerging economic and other challenges and who do not baulk at the adjustments that adaptation requires. Utopian? Perhaps. But, to sustain their ways of life, economically advanced societies would seem to have few alternatives.

So knowledge-driven innovation and entrepre- neurship may hold the key to economic renewal (Roos, op cit). But realisation requires a new conception of the economic role of the state and

new capacities for federal-state collaboration. It requires capacities for much more targeted inter- ventions that engage business at cluster, sectoral and/or regional levels: in other words, relation- ships that are different from the arms-length and hands-off philosophy that currently prevails. A theoretical framework for this approach is avail- able in the concept of a knowledge economy and its associated focus on the development of specific economic capabilities (e.g. Lipsey et al, 2008; West 2013; Pedersen, 2010). This concept represents both a next step beyond the neoclassi- cal focus on economy-wide deregulated markets and a response to the competitive challenge in a high cost economy.

This is now well recognised in economies whose economic maturity and basic cost structures more or less resemble those of Australia, notably the United States. There, as well as in Britain and Canada, a variety of programmes that involve new catalytic and leadership roles for the state are either being implemented or discussed. These include collaborative engagement and strategy develop- ment at regional and sectoral levels. They involve a focus on economic capabilities that are based in shared infrastructures, most importantly concern- ing knowledge development, but also involving training, communications, logistics, finance etc. They ask if relevant upstream, downstream and spill-over capabilities are appropriate to the needs of particular contexts. In this exercise, business, universities and other research and industry bod- ies are partners. In other words, in a knowledge economy, relevant actors collaborate in thinking systemically about common sources of economic leverage. In a federation like Australia, this espe- cially involves working across levels of govern- ment. Moreover start-ups present a special case. Where innovation is concerned, their consolidation can become a particular priority for public policy (Mazzucatto, p. 37-39).

Such roles for the state are a world away from the conventional wisdom that currently informs policy in relation to industry. They include a posi-

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Competing from a High Cost Economy

tive, opportunity-oriented focus and acting as a catalyst in system-level analysis and engagement; also the development of appropriate institutional arrangements. Incentive structures and motives need to be congruent with the policy environ- ment. As we will see, one particular challenge concerns the ability of the state to act at sectoral and regional levels. In Australia’s case, evidence of the distance between this need and present capacities is available in a source that may at first appear to have little to do with industry – that is, indigenous affairs. In this area, where the approach to decentralised activity is most elaborated, we also see most starkly the scale of the challenge to prevailing centralised governmental practices.

In exploring these issues, this chapter first surveys some key conceptual and other differences between innovation and neo-classical approaches. It then sketches public policy measures that have been adopted in a variety of jurisdictions to ca- talyse innovation. It continues to illustrate dilem- mas in their adoption in the present Australian public policy system. The chapter concludes by considering the obstacles to, and possibilities for, policy change.

THE FRAMEWORK FOR PUBLIC POLICY

A high cost economy creates a new context. Competitiveness is not based on cost advantages and not only or primarily on economy-wide ef- ficiencies. In a high cost economy, it derives from superior products, superior quality and superior responsiveness to specialised customer needs or tastes. Innovation theory offers a framework for a policy response to these imperatives. It offers an alternative framing of the role of the state in the economy. It offers a different, and essentially bottom-up, reading of firm-level dynamics and of the logic of economic coordination. This is avail- able in a technical version (e.g. Lipsey et al. 2005; Fagerberg et al. 2005; West 2013) or generalised

in a more expansive ‘learning by doing’ account (e.g. Sabel, 2004, 1992 and elsewhere; Sabel and Zeitlin, 2011; Sabel and Simon, 2011). A number of conceptual and governance perspectives join to create the framework for public policy.2 Here these elements can only be sketched – but hopefully this will be sufficient to indicate the fundamental character of the challenge that they present.

What Knowledge is Relevant? How is it Disseminated?

A high-cost economy competes, at one level, through the development of transformative tech- nologies and, at another, on quality and continuous improvement: put more generally, it competes on the basis of superior knowledge. But there are fundamental differences between conceptions of the economic role of knowledge in neo-classical and innovation paradigms. The former treats knowledge as a homogenous category that arises exogenously and diffuses seamlessly. In essence it assumes a world in which basic technologies already exist and are widely available. In this world, costs and prices adequately assimilate all relevant information and are thus sufficient to drive optimising choices. The mechanical, neo- classical equilibrium model is an elegant synthesis of these assumptions and, in a world in which general purpose technologies are the basic drivers of economic activity, it has wide and appropriate practical application. This basic model has also been modified to accommodate technological change. But even in this modified (evolutionary) form, neo-classical theory does not sufficiently recognise the dynamic nature of knowledge and the organisational, institutional capabilities and settings that mediate its development and appli- cation (Lipsey et al. p. 29; Mazzacuto, p. 31-35; Smith and Estibals, p. 7-10).

By contrast, in innovation approaches, knowl- edge is the primary driver of economic activity. Knowledge systems are no less important than market structures.

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The knowledge that is involved is differenti- ated, lumpy and contingent and its diffusion is problematic. Knowledge interactions are multi- directional and context specific. A linear model – from scientists to entrepreneurs to products – is wholly discounted. Knowledge can be specific to particular clusters of economic activity (Porter, 1990 and 1998). A later Brookings research pro- gramme explored the requirements for developing such strategies in metro settings (Muro, 2008) - work that has since been extended to the design of federal-state collaboration (Katz, 2012).

The knowledge that is involved can also be trans-sectoral. Recent US research suggests ‘co- located interdependencies among complemen- tary activities, not narrowly specialised clusters, produce higher rates of growth and job creation. Moreover, they do so across a broad range of industries, not just in high-tech or advanced manufacturing (Berger et al. 2013 citing Delgardo et al. 2012). Whatever the span of engagement, the essentially heterogeneous, local and contex- tualised character of knowledge is clear; equally clear is the problematic nature of its development and dissemination (e.g. March, 2005).

Knowledge comes in a variety of forms. Blue skies research typically involves basic frameworks and paradigms (black matter, black holes) and general purpose technologies (e.g. IT, nano- technology, robotics). The public good character of this research is well established. Other broad forms are generic knowledge and applied and focused knowledge. Generic knowledge is concerned with technologies or processes that have application in a number of specific economic settings (e.g. surface engineering; advanced sensing, measurement and process control; advanced forming and joining technologies: President’s Council of Science and Technology, Report to the President, 2012,p. 18: this nominates eleven such technologies). This research is hybrid in nature. There can be both public and private interest in the development of this knowledge – the latter because particular firms recognise the importance of the technology

in question for their immediate activities; the former because of wider spill-over possibilities. As is illustrated in the next section, public-private and state-federal collaboration focused on generic knowledge has been the primary concern of re- cent US policy development. In addition, process and organisational innovations may be no less significant than technologies (e.g. Roos, 2011; Sabel and Simon, 2011, p. 62).

Knowledge creation is thus a multi-facetted and complex process. Generic knowledge is the form which presents especial challenges to policy. It can arise within a disciplinary field or by synthesis across disciplinary fields. It can concern technolo- gies strictly understood or systems and processes. The settings in which these research activities can be pursued are also varied: for example, universi- ties, dedicated national and/or regional and/or local research institutes, science parks, entrepreneurial accelerators etc. Where there are joint public- private interests in the activity it invariably involves interactions between producers and researchers. Indeed, the more knowledge becomes the prime source of product and systems development, the greater the need for intermediary and brokerage organisations.

In mapping particular knowledge systems, three questions are pertinent. How in this par- ticular economic ecology are shared problems identified? How are they solved? How are the results disseminated to, and taken up by, those who need to know? Clearly, different economic and research contexts will involve diverse institutional architectures. Thus the Australian wine industry represents one configuration (Smith and Marsh, 2007); the Taiwanese biotechnology industry an- other (Dodgson et al. 2008; also Matthews, 2000 on electronics). The wide literature on national innovation systems is also relevant (e.g. Nelson, 1993; West 2013, p. 13-15)

This brief sketch of the role of knowledge in innovation theory points to important policy implications. First, where knowledge develop- ment becomes the primary driver of productivity

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the state has a direct stake in the propagation of this activity. Second, the spillover implications of generic technologies reinforce this interest. Third, these knowledge developments are essen- tially contextual or ‘local’ in character. We have moved from a world in which the focus of policy is economy wide to one in which this shifts to particular regions or contexts or ecologies of in- stitutions and firms. Fourth, the general skill level of the population is an essential consideration.

Risk, Uncertainty and their Policy Implications

A second critical conceptual difference concerns risk and uncertainty. Neo-classical theory does not distinguish these terms. People with the same information are assumed to have similar prefer- ences. Hence in neo-classical models, two people faced with similar choices will make the same decisions. Genuine uncertainty, which is expressed in different and equally plausible judgements of future possibilities, is thus assumed away and modelling becomes tractable.

In the real world uncertainty is pervasive. Two people with the same information may reach totally different judgments. One important reason concerns the mystery that is the future. They may assign different weightings to technological risk. They may assess production risk differently. They may anticipate different market opportunities. They may evaluate financing risks differently. Uncertainties can also arise where there is inter- dependence between developments. Risk is thus not only of different types, it also varies across contexts and sector.

From a policy perspective, at least two implica- tions follow. One concerns financing. The returns on innovation are typically highly uncertain and the assets involved often take intangible forms (e.g. West, 2006, 2009). An absence of any ac- counting history and limited market power are other problems especially for start-ups and SMEs. Uncertainty may be a particular impediment to the

provision of finance and investment and deliber- ate action may need to be taken to counteract its impacts. A survey of EU practices concluded: ‘There is no single optimum method for financing innovation-active firms – there is a mix of relevant financial instruments and firm behaviours, and policy needs to take account of the heterogeneity in the population of firms and in their need for funding during the life cycle of the innovation processes’ (cited Smith and Estabels, p. 73).

A second implication concerns strategies for value-capture at the national level. The encour- agement of risky investments involves tilting the playing field towards higher than average returns. By comparison with businesses operating with established technologies, the gains from success accrue disproportionately to stock owners. West (2013, p. 20) cites the shares of income accruing to wages and net operating surplus to underline this policy finding: ‘For many nations it is not sufficient to rely upon serving as an attractive base for the operations of foreign-owned corporations. In the past a strategy of this type could assume that much value would be captured locally through wages. But that is less and less true.’ Recent debates in Britain and Germany about the use of tax havens to minimise liabilities from domestic sales introduce yet another consideration.

The Concept of Efficiency

Efficiency now figures prominently in public policy analysis. The Productivity Commission has recently released a discussion paper which defines its various forms (2013). In neo-classical thinking the relevant form is allocative – that is exchange should occur in markets that are as close as possible to the theoretical ideal of perfect competition. In such a setting prices are set at optimal levels and resources are thus allocated to their most productive uses.

In innovation theory, the relevant form of efficiency is different: it is not primarily of this allocative type, important though that is as a

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base-line indicator of structural effectiveness. Rather the relevant type involves what Libenstein (1966) termed X efficiency. Efficient price-based exchanges remain as a base-line condition, but once established other linkages and spillovers come into focus. For example, X-efficiency focuses on the quality of relationships at the level of the firm and in the relations between a firm and its customers and suppliers. It involves attention to the appropriateness and presence of supporting infrastructures like knowledge or skills or finance or logistics or communications. It derives from a variety of local, on-the-job, technological and quality factors and from the broader infrastructures that sustain such possibilities. This reinforces a shift of the focus of policy to sectors or regions, and to the systems of activity that develop at these levels. Markets are one important element in such systems, but other institutions – or systems of activity – are equally, if not more, critical. The context is the definitive consideration.

Coordination and Accountability

In a world of decentralised action, where continu- ous improvement is sought via collaboration at sectoral and/or regional levels, the issue arises: how can the centre preserve accountability? How can the circle be squared between local initiative, innovation and/or continuous improvement and centralised accountability? This is an important issue in any governance system, but particularly acute in a federation. In integrating the activity of sovereign governments around common goals, the EU has adapted an approach described as pragmatic or experimentalist governance (e.g. Borras and Radaelli. 2011).

Its primary proponent, Charles Sabel has de- scribed its core elements (the following quotes are from Sabel and Simon p. 79-83): ‘First, framework goals (such as “adequate education” or “good water status”) and provisional measures for establishing their achievement are established… through consultation between the centre and the

local units and relevant outside stakeholders. Second, local units are explicitly given broad discretion to pursue these ends as they see fit…. But third, as a condition of this autonomy, local units must report regularly on their performance and participate in a peer review in which their results are compared with those of other units employing other means to the same general ends. These reviews require the local units to describe and explain their efforts to peers and superiors; to show that they have considered alternatives; and to demonstrate that they are making progress by some jointly acknowledged measure of success, or re making plausible adjustments if not.’ The centre provides services and inducements that facilitate this disciplined comparison of local performances and mutual learning.

An experimentalist regime differs from com- mand and control in that ‘a large fraction of their norms are indicative or presumptive rather than mandatory…..rules will be continuously revised in the course of application. It treats rule departures diagnostically as symptoms of systemic problems and opportunities for systemic improvement.’

Incentive designs should reinforce these out- comes. Their distinctive goal is ‘to induce actors to engage in investigation, information sharing and deliberation about problems with multiple dimensions that are only dimly understood’. A variety of grant programs in the US indicate how these designs can be operationalised. These ‘award large grants …through a competitive process in which …applications are judged on the extent to which they demonstrate capacities to plan and self-assess, to share and make use of information about their own and peer performances, and to co-ordinate with critical stakeholders in both the public and private spheres.’

Accountability also differs between systems based on narrow by contrast with extended notions of efficiency. ‘(Agents) often have discretion to depart from rules when they believe it would be counterproductive to follow them. This discre- tion, however, is limited by the requirement that

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the worker do so transparently in a manner that triggers review, and, if her judgment is sustained prompt rewriting of the rule to reflect the new understanding.’

Policy Advice

What of policy advice? Neo-classical theory takes its cue from mechanics and images systems of economic activity as tending to equilibrium. This has many consequences not least the possibility of formal modelling. This lends a degree of precision to policy advice – which is appropriate in certain contexts, but not where innovation is the focus. Innovation theory does not draw on equilibrium models and envisages no terminal or end point to system development. Rather, competition involves a continuous and never resolved pursuit of advan- tages. Schumpeter’s (1975, p. 83) answer to this is his paradox of competition: ‘A system that at every point of time fully utilises its possibilities to the best advantage may yet in the long run be inferior to a system that does so at no given point in time, because the latter’s failure to do so many be a condition for the level or speed of long run performance’.

Analysis thus ends in a technically-informed prudential judgement and in this respect resembles determinations of monetary policy. In Lipsey et al. summary: ‘…policy ….must be based on a mix of theory, measurement and selective judgment. The need for judgment does not arise simply because we have imperfect measures of the variables that our theory shows to be important, but because of the very nature of the uncertain world in which we live. Although a radical idea with respect to microeconomic policy, the point that policy re- quires an unavoidable component of subjective judgment is commonly accepted with respect to monetary policy.’ After discussing Friedman’s failed effort to make central banking rule based, they conclude that the approach now adopted by central bankers can be generalised to innovation policy making: ‘Central banking… is guided by

theoretical concepts; it is enlightened by many types of empirical evidence; and in the end all of these are inputs into the judgments that central bankers cannot avoid making’ (2005, p. 505-506)

Collaboration

As we will see in the next section, where innova- tion is concerned, collaboration between business, government and other actors is essential. But this runs counter to much current thinking about the risks of engagement between public and private actors. This derives from a powerful body of analysis, public choice theory, which involves the application of the neo-classical model of choice (‘instrumental rationality’) to political relation- ships. In a public choice perspective, collabora- tion encourages not productive activity but rent seeking. This arises as powerful interests seek to acquire and preserve special or sectional benefits at the expense of wider taxpayer and public interests (e.g. Olson, 1965, 1982).

The empirical evidence on this subject is mixed. There can be little doubt that favoured interests fight to preserve special privileges. On the other hand recent evidence suggests the state is not as ineffective as the public choice analysis implied (e.g. Australian tariff roll-backs: Edwards, 2006, p. 21 notes that by 2001 the average rate decreased from 38% in the 1970s to 5%). The psychological model of choice on which public choice analysis is based is critical. It assumes that optimising preferences arise independently of the current context. If the expected benefits outweigh the costs of lobbying, a rational optimiser, who perceives opportunities for especial gain – such as tariffs or subsidies - will pursue these rents. By contrast, the generality of taxpayers have no incentives to monitor this advocacy or to resist this outcome. On its own logic, this model is compelling.

But is this logic of choice the only or right frame? An alternative conception of agency, ‘ap- propriate behaviour’, offers a much more positive and expansive foundation for choice (March and

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Olsen, 1995, 2006). Whether researcher, public official or entrepreneur, appropriate behaviour develops from a basic question: ‘How should a person like me behave in a situation like this?’ The answer to this question will depend on under- standings of context, which continuously develop and unfolds. This model of choice and behaviour thus builds on the uncertainty that is inherent in innovation. It offers a much more sanguine read- ing of possibilities of collaboration. It suggests that, through an understanding of shared contexts, self-interested rational actors can not only vary their reading of self-interest (to attain ‘self-interest well understood’ in Tocqueville’s famous phrase) but also their understanding of the ways in which their immediate interests are implicated in the actions of others.

These can concern not just uncertainties about technologies, but also inter-subjective understand- ings associated with institutionally-based collabo- ration. Culpepper (2008, 2003) describes some of these: ‘Uncertainty springs from the inability to gauge the performance of new institutions, the actions of other players, or the consequences of what we will gain if we do change our behaviour’ (2008, p. 7). And elsewhere: ‘Actors in this new setting are not simply unclear about the sort of people with whom they are interacting; they may also be unclear about what game they are playing and consequently how they should understand their own stakes in the game.’ (p. 16). And in a third framing: ‘Actors not only need a way to estimate how well new political institutions and new practices will work, but they also need a mechanism to help coordinate their expectations about what other actors will do’. But uncertainty and inter-subjectivity also intersect to create op- portunities for negotiated accommodation. Where private incentives are absent, governments can play a catalytic role in convening co-ordination, risk-pooling and risk reduction and bridging. The steps that are being taken in particular jurisdic- tions to advance such outcomes are explored in the next section.

IMPLEMENTING INNOVATION POLICY: ALTERNATIVE DESIGNS

It will be clear from the foregoing that not only is there not one best policy design but also that the scope of policies can vary widely. Each high cost economy needs a policy design appropriate to its broader political, economic and indeed cultural setting. That said, the examples that follow illus- trate the steps that are being taken by a diverse variety of developed states, perhaps notably the United States, to cope with high cost contexts.

As these examples show, innovation strate- gies can be of two broad forms: they can be the keystone for public policy designs across their full range; or they can be more circumscribed, focusing particularly on economic capabilities (Pedersen, 2010). For example, Denmark illus- trates the former category. Pedersen (2006) has described Denmark as a ‘negotiated economy’ – one in which the development of capabilities is the primary focus of policy and in which a va- riety of central, regional and joint public-private institutions seek to mediate continuous learning. The Economist recently suggested that a variant of this design is common throughout Scandinavia where it is associated with very high levels of both economic prosperity and social satisfaction and trust (The Nordic Countries: The Next Super Model, 2nd February 2013).

The tiger economies of East and Southeast Asia are another area where different models of eco- nomic development have emerged (Weiss, 2010; Marsh 2006). These started as strong state-led developmental models but more recently they have moved towards innovation-based designs. Thus Dodgson et al. (2008) described the collaboration between the Taiwanese government and private interests in the development of biotechnology capacities in that state. They assess a work-in- progress with qualified optimism. Looking to the economy overall, Strand et al (2011) offer an analogous assessment. Recent developments in Singapore are explored in Ng (2012) and

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Hornbridge (2010) and in South Korea in Noland (2012) and Lim (2012). In each case the shift of overall policy designs to a focus on innovation and economic capabilities is evident.

Most relevant to Australia, thinking is also advancing in new directions in the United King- dom and the United States. In the former case, the triggers include the election of the coalition government in 2010 and the financial crisis, al- though aspects (such as technology forecasting) had long been established (Public Administration Select Committee, Governing the Future, HC 126, 2007, Ev. p. 77). Think tanks have also been actively promoting a new approach (e.g. Institute for Public Policy Research - Creative Destruction, 2010, The Third Wave of Globalisation, 2012; Demos - The Entrepreneurial State, 2011). The relevant government department, Business, In- novation and Skills, has also commissioned an extensive review of the practical implications of academic literatures (Innovation and Research Strategy for Growth, 2011). In a leaked letter to the Prime Minister and Chancellor, the Minister, Vince Cable, subsequently proposed a much more sectorally oriented strategy and various forms of special financial support. Some of these proposals were subsequently adopted (Cable, The Telegraph (London), 6 March 2012) but the most far-reaching semi-official report was by Michael (now Lord) Heseltine, a former Conservative Minister, who was commissioned in early 2012 by David Cameron to review economic strategy (No Stone Unturned, October 2012). Its central recom- mendation involves the replacement of current highly centralised approaches with a decentralised design in which Local Enterprise Partnerships would be charged to formulate development plans for their areas. These would start with economic opportunities which would also guide research, education and social strategies. Overall priorities and co-ordination would be accomplished through a formal national growth strategy. This would be the responsibility of a National Growth Council made up of senior ministers and chaired by the Prime Minister. These proposals reflect ‘knowl-

edge economy’ assumptions about the role of the state and the practice of economic policy. They remain far from current practice. But these and the think tank reports noted above reflect a developing alternative conversation.

Turning to the United States, the nominal home of free market capitalism, Marina Mazzacutto (Professor of Science and Technology Policy at the University of Sussex) has described in detail the entrepreneurial role adopted by the American state. Through four examples, she illustrates how the US federal government has progressively developed an entrepreneurial role. The first in- volves the Defence Advanced Projects Agency (DARPA) which was founded in 1958. To explore the potential in emerging technologies, the agency played a catalytic role mobilising big and small firms and university and government laboratories. Its work contributed critically to what became the computer industry and later to the emergence of biotechnology (pp. 79-81). Building on this expe- rience, the Reagan administration established the Small Business Innovation Research Programme which was designed to provide support to high- tech firms. Later the federal government played a lead role in drug development (through the Orphan Drugs Act of 1958 which was designed to fast track research on drugs that affected less than 200 000 people) and most recently in the National Nanotechnology Initiative.

More recent developments exemplify the ex- tent to which knowledge economy thinking has come to inform US practice. As in the UK this has been driven by various factors including the offshoring of manufacturing jobs, unemployment following the financial crisis, the emergence of new thinking about the requirements for innovation and of new technologies that holds in prospect a manufacturing revival. The arrival of the Obama administration in 2008 was one turning point and the fact that 26 governorships changed hands in the 2011 election another.

The transmission of knowledge economy concepts into public policy in the United States is reflected first in the development of interdependent

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national and state economic strategies. Although it is too early for impact to have been evaluated, the number of programmes and their complementar- ity suggests the emergence of a new public policy design: one that moves away from arms-length regulatory change or a sole focus on competition policy towards new patterns of public-private collaboration driven by new central capacities for linking emerging technological capabilities to emerging global economic opportunities.

Consistent with innovation theory, this ap- proach started with the identification of specific generic technologies that offer the prospects of driving future productivity growth and manufac- turing recovery. This occurred in a report to the President released in July 2012.3 For example, five of the nominated technologies are: advanced sens- ing, measurement and process control, sustainable manufacturing, nano-manufacturing, industrial ro- botics. The report also suggested that ‘Universities, national labs, intermediate technology institutes, independent research institutions and community colleges will need to work together with industry to support research, development and deployment and to develop the talent pipeline for industry’.

Thereafter the focus shifted to implementation at regional or sectoral levels. This marked a shift of the competitive focus to local and regional ‘ecologies’ of institutions. These policy changes are documented in several recent publications. For example, in early 2013 the National Governors Association Policy Academy (NGA) released a report entitled “Making” our Future: What States are doing to encourage Growth in Manufactur- ing through Innovation, Entrepreneurship and Investment. 4 This surveys the recent develop- ment of policy in eight states: Massachusetts, Connecticut, California, Colorado, Illinois, New York, Pennsylvania, and Kansas. Another example of an elaborated state wide strategy is available in the approach adopted by Washington State.5 Despite diversity in basic strategies, four common elements are noted:

• Strategy Development: All of the US States pursued an integrated approach to develop an advanced manufacturing strat- egy connecting large and small manufac- turers, as well as state, federal and regional partners.

• Industry Led: In each case, the policy de- sign involved co-production – the policy priorities and partnerships that were iden- tified were developed by and with the rel- evant industries, not imposed from outside by arms-length official action.

• Collaboration: In each case the effort to boost innovation potential included a par- ticular focus on small and mid-sized firms. In addition, the strategies all involved creating linkages between firms, universi- ties, research institutes and other appro- priate coordinating and skill development agencies.

• Skills: Finally, the need to create a spe- cial focus on the development of ap- propriate skills was acknowledged. This was designed not only to fill immediately specialised needs but also to deliver life- long, industry relevant training to workers. STEM programmes (Science, Technology, Engineering, Mathematics) were a general feature.

Since context was critical, the approach to these broad objectives was varied. In practice, strategy development was based on mechanisms such as: state-wide councils, a regional and bottom-up process or a development of existing structures by strengthening their role and standing. For example, in 2011 Pennsylvania appointed the Governor’s Manufacturing Advisory Council as a public-private partnership. Leadership was shared between a senior elected official and a business leader with acknowledged standing both in the business community and in the broader community. The council consisted of 24 people. Following an eighteen month period of research

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and consultations, it provided a blueprint for state development which was endorsed and implemented. By contrast, New York created ten regional economic Councils one in each of the State’s regions. These brought together lo- cal business, university, labour and community leaders. Each region designed its own plan. The state budget was aligned to these priorities and a consolidated application process for funding was introduced. Applications were invited for projects and in 2012, 2800 were submitted. The regional councils then ranked the projects.

The NGA report also illustrates the variety of arrangements which have developed in different regions to pool research capacities, encourage col- laboration amongst firms and link business to the research community. For example, Virginia has established a Commonwealth Center for Advanced Manufacturing which includes three universities (University of Virginia, Virginia Tech and Vir- ginia State University) and industry members at Tier 1 and Tier 2 levels of support. The former have access to both generic and directed research whereas the latter only have access to generic findings. Contributions are scaled accordingly. The partnership was led by the state as part of an effort to bring a Rolls Royce production facility to Virginia. There are now eight Tier 1 participants including Newport News Shipping, Rolls Royce and Siemens. Surface engineering exemplifies a generic technology which has wide application amongst participating industries. The Centre also prepares a skilled workforce for manufacturing jobs through a variety of internships and through partnerships with community colleges to help design curricula.

Other elements of these programmes include innovation vouchers and sectoral collaboration to build workforce capabilities. Innovation vouchers have been introduced to strengthen ties between small and medium manufacturers and universi- ties and research organisations. Already well established in the Netherlands, Germany, Austria,

Switzerland and Canada, the EU has conducted an extensive evaluation and that experience was used to inform policy design in US states (e.g. Connecticut).6 Workforce development is also orchestrated through a variety of sectoral partner- ships. The NGA report records over a thousand have been established around the states.

Another report (Trends in Technology Based Economic Development, Local State and Federal Action in 20127) records parallel efforts in ten states: Connecticut, Colorado, Hawaii, Idaho, Massachusetts, Michigan, New Jersey, New York, Virginia and Washington. It reports initiatives in relation to commercialising research, investing in workforce skills, organisation and branding of state economic development agencies, the devel- opment of strategic and competitiveness plans, the development of tax incentives and city-based initiatives.

Together, these varied descriptive accounts affirm the shift towards innovation based ap- proaches.

DILEMMAS IN SHIFTING PUBLIC POLICY

The diverse initiatives described in this chapter all involve decentralised policy designs. The ca- pacity to shift substantial initiative in the design and implementation of public policy to regional and sectoral levels is critical. The requirements are also clearly set forth in a number of OECD reports.8 How equipped is the Australian policy system to manage such a transition?

The most developed example of such an effort is available in a policy area which, at first sight, may seem remote from innovation but in fact the public policy challenge is directly analogous.9 In March 2000, in an endeavour to impart a more posi- tive orientation to indigenous policy, the Howard government espoused what it labelled ‘practical reconciliation’. This explicitly acknowledged the

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leadership role of the national government.10 It aimed to improve conditions on the ground in relation to health, housing and education.

In 2002, a regionally based and joined-up government strategy was launched with tri- als at eight indigenous sites. In May 2004, the government established a Ministerial Taskforce on Indigenous Issues. The idea was to create a Cabinet level committee to drive the ‘practical reconciliation’ process.11 This was supported by a Secretaries Group which was designed to coor- dinate implementation. At an administrative level, an Office of Indigenous Policy Coordination was also established.

In an analogue of joint strategy agreements around innovation, and to facilitate change at the regional level, Shared Responsibility Agreements (SRAs) were to be signed covering particular measures. In addition, to build coordinated action these were to be backed by Regional Partnership Agreements (RPAs). By 2007, 180 SRAs and 3 RPAs had been signed (Australian National Audit Office (ANAO) evaluation, 2009). To implement these arrangements, thirty multi-agency Indig- enous Coordinating Centres (ICCs) were also established in urban, rural and remote Australia. By 2006, some 562 staff members were assigned to ICCs (approx 19 staff per centre). They as- sumed three main roles: program administration; solution brokering to provide a bridge between community needs and departmental programs; and developing SRAs with local communities. ICC managers were the key.

Ten evaluations have since been conducted. Their findings are uniform. Governance is con- founded at the critical regional and ICC levels. The obstacles are structural and systemic not con- tingent or personal. Consider the two most recent reports, one official (2008, conducted by KPMG) and the other independent (2010, conducted by academics from the ANU and the University of Canberra). The KPMG study involved a review of internal documents plus interviews with 158 Australian and state government agency staff

and 35 community organisations. The following selected observations define the magnitude of the structural barriers that continue to frustrate this arrangement despite six years experience and at least eight preceding reviews. Here is a catalogue of the obstacles:

Siloed departments were fundamental obstacles to more joined-up activity at local levels and to the exercise of discretion by ‘local’ staff.

There is a definite trend of line agency staff presenting to communities/organisations as representative of their agency…..Communities/ organisations reported this as confusing as they do not know who to talk to or if they have to talk to all the different agencies instead of accessing services through the ICC….ICC staff and line agency staff rarely visit communities together.

ICC managers reported frustration in undertaking (their intended leadership) role. As coordina- tors, Managers indicated that they do not have authority to gather agency staff support….Line agencies confirmed that their staff are directly responsible to their line agency and that the ICC manager has no authority to compel or direct staff to undertake ICC work.

Line agency staff located in ICCs commented that they experienced a tension between their program management responsibilities (i.e. the expectations of their line agency) and their responsibility to engage in what they referred to as ICC work…. Conversely ICC managers reported feeling pow- erless in some situations as they do not have the authority to direct change. (p. 9)

The implementation of whole-of-government col- laboration in ICCs is an area requiring significant improvements. Many of the issues that impede whole-of-government are structure and have little to do with ICC staff and management’s willingness to collaborate. (p. 10)

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Resource allocation and spending authority remained highly centralised:

One ICC took over 12 months to negotiate and approve an SRA which was worth under $50 000 in funding…To overcome the barrier of obtaining multiple line agency approvals…many ICCs have adopted the approach of developing smaller SRAs in terms of dollar value, number of signatures and issues to be addressed.

A perceived barrier to reducing red tape is line agencies different program and funding guide- lines….For example one agency may apply more rigorous risk assessment for applications over $100 000, while another agency’s more rigor- ous assessment only applies to applications over $150 000.

Accountability arrangements were another obstacle.

Many line agency staff were unable to provide governance and financial management assistance to organisations due to probity issues relating to assessment of funding applications… Com- munities advised that it was difficult for them to keep abreast of the changing policy and service delivery environment.

In Summary

‘Overwhelmingly the consultation repeated the message that the current funding and reporting arrangements are a significant barrier to whole- of-government collaboration…Line agencies have different program guidelines, funding rounds and delegation which do not align… Complaints were raised about the different risk assessments each line agency applies..in some cases this can result in applications undergoing up to 8 different risk assessments’

The findings of the University-based study (O’Flynn et al. 2011) echo these conclusions albeit in more graphic terms. This study was based on 48 field interviews covering staff at ICCs, State and regional offices and in Canberra. Their conclu- sion is unequivocal: ‘Due to entrenched barriers, which permeate the broader public service, ICCs have been a failed experiment.’

Like KPMG, O’Flynn et al. identify structural failings in the basic organisational design:

• No or limited assignment of author- ity to the Indigenous Coordination Centre Managers,

• An ad hoc approach to the representation of departments (which meant staff were withdrawn as cost pressures emerged);

• An underinvestment in skills; • Inconsistent operating systems.

Accordingly they conclude: ‘The pervasiveness of a program focus and the silos that it creates were seen as impossible to combat even in a setting where there was physical co-location and strong endorsement from Ministers and Secretaries.’

Most recently, under the 2009 National Part- nership Agreements between the Commonwealth and the States, the same broad arrangements have been extended to coordinate the delivery of programs across jurisdictions. The parties com- mit to ‘developing a co-ordinated approach’ and ‘enabling initiatives to be delivered in a manner appropriate to needs in particular locations’. To oversee the arrangements, a Coordinator-General based in Canberra was appointed in 2009. This officer would ‘have the authority to work across agencies to cut through bureaucratic blockages and red tape…the Coordinator–General will have direct relationship with Commonwealth Secretar- ies …and will work collaboratively with State and Territory officials and Ministers to achieve a unified approach’ . The reports so far produced

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suggest centralised accountability arrangements and siloed programmes remain as a fundamental obstacle to co-ordinated action.

Despite the well-intended rhetoric, the pro- gramme has failed totally in practice to realise its decentralised ambitions. The structural obstacles that have hobbled this exercise will likely confound any parallel moves in industry and innovation strategies.

CONCLUSION

High cost economies present new policy challeng- es (the specific challenge to Australia is explored in Roos. esp. sections 4.1-4.6).They require a shift in policy focus towards economic capabilities. The magnitude of this shift is suggested in the concepts and approaches that were discussed in earlier sections. Above all, this requires a move from centralised one-size-fits-all designs towards collaborative, decentralised architectures that fo- cus on capabilities and continuous improvement. Earlier sections also surveyed descriptively the array of approaches that have been adopted in a variety of jurisdictions that are close in culture and practice to Australia. Last, the chapter reviewed the obstacles that have thwarted the development of more decentralised policy designs in one particular space, indigenous affairs. Although apparently far removed from innovation, the effort in indigenous affairs illustrates the many obstacles that will thwart more decentralised policy designs wher- ever they might be sought. Why is the Australian policy system so resistant to change?

The major obstacle is clear. The overriding structure and ethos of programmes remains embed- ded in neo-classical thinking. This is reinforced in the habits and approaches of policy makers. Neo-classical approaches to governance have embedded centralised control and accountability. Indeed, this is noted as one of the prime virtues of present arrangements (e.g. Keating, 2004; Bell and Hindmoor, 2009). This policy design was

implemented in the decade after 1983. It was de- signed to overcome protectionist habits, practices and patterns of policy that had developed over the preceding 80 years. This was accomplished in a remarkably short period (surveyed in Marsh and Miller 2012, pp. 163-176).

If public policy in Australia is to move in the same direction as in the United States (and as seems to be happening more tentatively in Brit- ain), the extent to which it confounds structures, habits and practices developed and nurtured over the past 30 years must be confronted. The basic thrust of these changes was to buttress the power of the central state to accomplish an economy wide transformation. This project has been ex- traordinarily successful. But decentralised designs introduce a new direction. To be implemented upon any elaborated scale they require the reworking of governance arrangements at the centre no less than at local or regional levels.

These obstacles are compounded by the deep suspicion, nourished not without cause, by neo- classical policy analysis. Many studies in the public choice tradition discount the capacity of the state to act positively in economic affairs. The way this formerly encouraged rent seeking by interest groups is well documented (e.g. Kasper, 2000; but see McLean 2012 for a more sanguine view). These concerns are surely not groundless. On the other hand the policy designs reviewed in the last section involve clear performance metrics. Moreover the pragmatic or experimentalist frame explored earlier suggested how accountability can be developed in a way that avoids interest group capture.

In sum, despite current concerns about the decline of productivity and despite the examples of practice in other jurisdictions, it seems clear that much more pressure, both at conceptual and political levels, will need to be mobilised to effect any substantial change in current approaches. Until this occurs, it is hard to see how an innovation- focused policy design can proceed much beyond rhetoric.

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KEY TERMS AND DEFINITIONS

Allocative Efficiency: A norm of efficiency that derives from the neo-classical ideal of perfect competition: a frictionless world in which prices ensure that resources are allocated to their most productive uses. The ideal becomes a powerful practical benchmark for public policy.

Decentralised Policy Designs: The essential framework for a policy that fosters innovation. In this setting, many required capabilities are context specific: they respond to critical local/regional/ national/systemic business needs.

Economic Capabilities: ‘Accumulations of strategic resources and proprietary knowledge, which, to be realised, require organisational routines, employee commitment, and superior problem-solving. Deep capabilities are those aspects of the economy that are difficult for oth- ers to copy and that support ongoing gains in competitiveness’.

High Cost Economy: A circumstance that cre- ates a new competitive context – where economy- wide cost advantages and efficiencies are not the only or primary form of economic capability. In a high cost setting, competitive advantages derive from superior products, superior quality and superior responsiveness to specialised customer needs or tastes.

Innovation Theory: Offers an alternative, bottom-up, reading of firm-level and whole- economy dynamics and of the logic of economic

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coordination. Assumes the pursuit of advantages by firms is never ending – the idea of an end-point is a misleading fiction. Includes an enabling and facilitating conception of the economic role of the state.

Knowledge Economy: A conception in which economic capabilities underpin products and services that respond to differentiated individual tastes and specialised business needs – indeed in the best case they shape these tastes and needs. Product, process, and other forms of knowledge are critical in achieving these outcomes.

Neo-Classical Economics: The most authori- tative contemporary theory of economic activity. Starting with assumptions about individuals, their rationality and their logic of choice, builds up to an economy-wide, equilibrium model of exchange and allocation. A static construction that involves a number of critical simplifying as- sumptions, covering the role of knowledge, the idea of uncertainty, behaviour etc.

ENDNOTES

1 See A Plan for Australian Jobs, The Austra- lian Government’s Industry and Innovation Statement, February 2013 for some embry- onic proactive initiatives.

2 James Q Wilson describes the contribution of theorists to public policy in the follow- ing terms: ‘(They contribute) the concep- tual language, the ruling paradigms, the empirical examples (note I say examples, not evidence) that become the accepted assumptions of those in charge of making policy. Intellectuals frame, and to a large degree conduct, the debates about whether this language and these paradigms are cor- rect. The most influential intellectuals are those who manage to link a concept or a theory to the practical needs and ideologi- cal predispositions of political activists and government officials. The most important

source of intellectual influence on public policy arises out of the definitions of what constitutes a problem….What intellectuals mostly bring to public policy debates is not knowledge but theory…..Some theories, if adopted, will make us better off. The problem is to know which ones.’ Public Interest, 64, 1981, pp. 31-47.

3 AMP Steering Committee, President’s Coun- cil of Advisors on Science and Technology, Report to the President on Capturing Do- mestic Competitive Advantage in Advanced Manufacturing, (Washington, DC. AMP Steering Committee, Presidents Council of Advisers on Science and Technology, July 2012)

4 (http://www.nga.org/cms/home/nga-center- for-best-practices/center-publications/ page-ehsw-publications/col2-content/main- content-list/making-our-future.html).

5 Driving Washington’s Prosperity A Strat- egy for Job Creation and Competitiveness Washington Economic Development Com- mission http://wedc.wa.gov/Download%20 files/2013StrategicPlan.pdf

6 Barbara Good and Brigitte Tiefenthaler, Innovation Vouchers - Small is Beautiful, Platform FTeval, December 2011.

7 Trends in Technology-Based Economic De- velopment: Local, State and Federal Action in 2012 State Science & Technology Institute http://www.ssti.org/trends.pdf

8 Strengthening Global-Local Connectiv- ity in Regional Innovation Strategies: Implications For Regional Innovation Policy OECD http://www.oecd-ilibrary. org/governance/strengthening-global- local-connectivity-in-regional-innovation- strategies_5kgc6d80nns4-en

Regional innovation strategies OECD http://www.oecd.org/innovation/policyplat- form/48137737.pdf

Governance of Public Policies in De- centralised Contexts OECD http://www.

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oecd-ilibrary.org/governance/governance- of-public-policies-in-decentralised- contexts_5kg883pkxkhc-en

9 More limited examples of these same ap- proaches in relation to community and economic development are available in Australia at the state level. The following describes approaches that have been applied in Tasmania and Victoria: Spatial Innova- tion in Tasmania Constructing Advantage

through Regional Development Platform Methods (RDPM) AIRC http://www.utas. edu.au/__data/assets/pdf_file/0020/111188/ Spatial-Innovation-in-Tasmania.pdf

10 Grattan, M. ‘Howard practices a sorry argu- ment’, Sydney Morning Herald, 30 March 2000, p. 8.

11 Ministerial Taskforce on Indigenous Affairs available at http://www.atns.net.au/agree- ment.asp?entityID=2330

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Chapter 3

Foundations for Industrial Rejuvenation:

Lessons from International and National Experience

ABSTRACT

Drawing on a body of research examining the economic and social effects of downturns and major manufacturing plant closures in Australia and South Australia in particular, this chapter investigates how industrial rejuvenation strategies can help to minimise the negative impacts on the workforce and supply chains affected. The chapter identifies key lessons from the national and international literature on industrial rejuvenation and the management of major closures. Industrial rejuvenation is a multi-faceted strategy that seeks to manage pressures and complex change in response to local, national, and global conditions. The chapter focuses on the evidence about the strategic options for industrial rejuvenation available to government in partnership with industry, trade union, and community stakeholders. The chapter concludes by drawing out some broad strategic implications for the design of more integrated rejuvenation and regeneration policies.

INTRODUCTION

While Australia has been spared the devastat- ing economic and social dislocation that many other OECD countries have experienced since the Global Financial Crisis, it has not been immune to its impacts. Slower economic and employment growth at a national and local level are reminders of this. So too are sectoral pressures playing out

in vulnerable sectors like manufacturing where the combination of a high Australian dollar and the rise of low cost mass manufacturing in Asia has undermined the competitiveness of significant manufacturing operations in South Australia and elsewhere. This now includes General Motors Holden which announced in December 2013 that will close its automotive manufacturing operations in Australia in 2016 and Toyota which announced

John Spoehr University of Adelaide, Australia

DOI: 10.4018/978-1-4666-5828-8.ch003

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in February 2014 that it will close its automotive manufacturing operations in Australia in 2017 effectively announcing the end of car manufactur- ing in Australia.

There is now an urgent need to develop a sophisticated response to the closures to help minimise the negative impacts of the closure on the workforce and the supply chains affected. The starting point for this is to identify key lessons from national and international literature on indus- trial rejuvenation and the management of major closures. Industrial rejuvenation can be viewed as a multi-faceted strategy that seeks to manage pressures and complex change in response to local, national and global conditions. The difficulties associated with managing change, dislocation and restructuring are magnified during periods of economic crisis when underlying vulnerabilities become more evident and the increased scale and intensity of impacts cause widespread socio- economic hardship.

The last 30 years have seen three distinct peri- ods of crisis resulting in large-scale firm closures with associated layoffs. The recessions of the early 1980s and 1990s were marked by very high levels of retrenchment, fuelling high unemployment and long-term unemployment (Spoehr and Shanahan, 1994). Unemployment in South Australia peaked at around 12.3 per cent, largely as a consequence of firm closures and mass layoffs. The last period is occurring presently in what is a clear wave of, primarily, foreign owned subsidiary closures with ripple effects into the local supply chains.

Huge structural changes were unleashed during the 1980s with the deregulation of the banking and financial system and phasing down of industry tariff protection. Since this time Aus- tralian industry has faced significant adjustment pressures requiring restructuring and the adop- tion of innovation and productivity enhancing measures. To influence and manage change, a range of restructuring plans were adopted in- cluding the Passenger Motor Vehicle Industry Plan, the Metal Plan and the Clothing, Textile

and Footwear Plan. Each of these plans sought to improve the competitiveness of firms though tri-partite planning and processes. Allied labour adjustment packages sought to provide alterna- tive employment pathways for workers displaced through restructuring. During recessions this proved particularly difficult to achieve, resulting in high rates of unemployment for those that were retrenched. During periods of economic growth the costs of adjustment to workers, families and communities is often considerably less.

This chapter has been prepared during a period in which considerable global economic instability prevails. The GFC has exposed exist- ing vulnerabilities, particularly in relation to mass manufacturing which has been subjected to intense competitive pressures from a high Australian dollar and subdued global and domestic demand. The rise of low cost mass manufacturing in Asia adds to this pressure, forcing a fundamental reas- sessment of manufacturing strategy in Australia. In South Australia this challenge has been taken up by the State Government through the adop- tion of the Manufacturing Works strategy which seeks to support the development of knowledge intensive high value manufacturing, a strategy endorsed in much of the literature as Trippl and Otto (2009) attest:

A cost-reduction response to a severe crisis is not a viable way forward, whereas a search for market niches and an orientation on innovation promises better results. If the firms succeed in enhancing their competences to operate innovatively within their existing markets, and to move to the upstream end of their industries, their accumulated knowl- edge and skills will be redeployed in a creative way. (Trippl and Otto, 2009, p 1220)

The impacts of downsizing and closures during economic downturns are quantitatively and quali- tatively different to those that take place during periods of growth and relatively low unemploy- ment. For example, we know that the prevalence

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Foundations for Industrial Rejuvenation

of long-term unemployment amongst manufac- turing workers is very high as a consequence of firm closures or downsizing during economic downturns. The scale and focus of interventions to manage and minimize the negative impacts of significant change and shocks must be acutely tuned to the prevailing economic and labour market conditions. The following chart provides an illustration of this, indicating the significant differences in economic conditions prevailing at the time of the closure of Mitsubishi in the middle to latter part of last decade, compared to the last few years. Of particular note is the sharp decline in manufacturing employment since the GFC and the steady rise in labor force underutilisation. A more subdued economic outlook for South Aus- tralia is expected in 2014-15, creating challenging business and labour market conditions in the year ahead (Budget Paper No. 1, 2013-14).

In considering the economic impact of GMH in South Australia it is instructive to review a

recent assessment of the automotive industry in South Australia prepared by The Allen Consulting Group. It is important to note that the assessment was undertaken using a General Computable Equilibrium Model (CGE) which assumes that shocks like closures will lead to adjustment in wages which in turn will affect demand in other sectors, generating a decline in demand in some and an increase in others. In addition it assumes that capital is flexible and readily deployed to other sectors. These assumptions are problem- atic as the capital associated with the closure of GMH will not be reinvested in Australia. While significant depletion of capital deployed in one part of the automotive sector might result in a benefit for another producer in Australia, there is a high risk of capital flight from the sector as a whole due to the loss of economies of scale and other factors. Local economic and labour market circumstances will also mediate any outcome, with parts of Northern Adelaide, where GMH is based,

Table 1. Selected Labour Market Trends 2004-2013 (ABS Labour Force Australia: 6291.0.55.003 Labour Force, Australia, Detailed, Quarterly Table 05. Employed persons by State and Industry; 6291.0.55.001 Labour Force, Australia, Detailed - Electronic Delivery Table 02. Labour force status by State, Capital city / Balance of state and Sex; 6202.0 Labour Force, Australia Table 23. Labour underutilisation by State and Sex - Trend, Seasonally adjusted and Original)

Unemployment (Monthly/April)

Employment (Quarterly/ May)

Employment Growth (Quarterly/May)

Underemployment (Quarterly/Nov)

Year Unemployment Rate (%)

Total (‘000)

Manufacturing (‘000)

Total (%)

Manufacturing (%)

Labour Force Underutilisation

Rate (%)

Underemployment Rate (%)

2004 5.9 719.1 101.4 0.4 9.5 12.9 8.1

2005 5.4 742.0 93.7 3.2 -7.6 12.1 7.7

2006 5.1 754.1 98.4 1.6 5.0 12.5 7.6

2007 5.3 766.6 87.7 1.7 -10.8 11.8 7.3

2008 5 783.4 93.7 2.2 6.8 12.7 7.7

2009 5.7 799.6 80.0 2.1 -14.6 13.4 8.2

2010 5.9 805.3 82.4 0.7 2.9 12.6 7.3

2011 5.6 815.1 81.8 1.2 -0.7 13.4 8.4

2012 5.5 818.4 74.7 0.4 -8.6 13.2 8.1

2013 6 831.4 73.3 1.6 -1.9 na na

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Foundations for Industrial Rejuvenation

experiencing amongst the highest unemployment rates in the nation. In summary it is reasonable to expect that the closure of GMH in South Australia and Toyota in Victoria will generate substantial, widespread negative impacts, significantly in excess of those estimated using a CGE model.

With these caveats in mind The Allen Consult- ing Group estimated that the impact of an automo- tive industry closure in South Australia would be very substantial (2013, p 50-51). They calculated that a shut-down of the automotive sector in South Australia would result in a 1.1 per cent reduction in Gross Regional Product with employment ex- pected to decline by around 1.3 per cent. The loss to 2031 of a shutdown of the entire industry in Australia is calculated to be around $23 billion in net present value terms. Should economic condi- tions remain difficult or deteriorate the impacts would be considerably worse.

Using an input-output modelling approach Burgan and Spoehr (2013, p 3) estimate the direct and indirect employment losses associated with the closure of GMH to be around 12,000. The closure is estimated to result in a $1.1 billion loss to South Australian GSP and $65 million in lost taxes.

Recognising this, it is vital to examine the potential role that economic and industrial reju- venation strategies might play in both mitigating and minimising the impacts of the closure and creating the conditions for sustainable develop- ment in the years ahead. There are no quick fixes available in circumstances like these, though early intelligent intervention can greatly assist. This might include investments in transitionary measures like accelerating the roll out of major infrastructure projects, which can greatly assist with rapid generation of alternative employment in circumstances where short-term demand for skills is subdued. Similarly fast tracking new investments in defence projects would provide certainty to the defence sector and associated supply chain partici- pants. Medium term growth prospects also exist in horticultural industry development, particularly through value adding in response to growing de-

mand for clean and green food. Sustained growth in education services remains a high priority. In addition the considerable growth currently tak- ing place in the wellbeing, health, aged care and community services sectors is set to continue with allied investments though Disability Care and Consumer Directed Care programs creating additional demand for a wide range of assistive technologies and services. Finally, investments in civic, transportation, communications, health and educational infrastructure can play a key role in boosting short term demand and jobs while adding to medium term productivity growth.

The intention of the chapter is not to provide an exhaustive review of the extensive literature that exists on rejuvenation but rather a more select examination of that part of the literature which focuses on strategic options available to government in partnership with industry, union and community stakeholders.

The chapter comprises five sections including this introduction.

• Section 2 discusses the dimensions of in- dustrial rejuvenation and the related con- cept of regeneration. The emergence of the regional innovation systems agenda and its relevance as a strategic response to indus- trial decline and dislocation is reviewed. The emergence of smart specialisation in the European Union is discussed prior to a brief discussion on the relevance to rejuve- nation strategies of integrated and inclusive innovation and problem solving processes.

• Section 3 reviews notable international case studies of rejuvenation and regeneration.

• Section 4 focuses on the impacts of major industrial change, paying particular atten- tion to major industrial dislocations and closures in Australia and Britain. It iden- tifies key lessons arising from scholarly research on strategic responses to closure.

• Finally Section 5 draws out some of the broad strategic implications from the lit-

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erature for the design of more integrated rejuvenation and regeneration policy and strategy.

REJUVENATION AND REGENERATION

While it is not always made explicit in scholarly work and government reports, the literature on industrial rejuvenation has close linkages with that on urban and regional regeneration. There is a shared concern with better understanding and managing crisis and change, reversing economic and industrial decline, fostering innovation and improving competitiveness, generating employ- ment, reducing unemployment and disadvantage and improving urban amenity and community well-being. This suggests the existence of a mu- tually reinforcing relationship between industrial rejuvenation and urban and regional regeneration, a premise that has significant implications for policy and strategy development.

Industrial rejuvenation involves the trans- formation of existing industries as well as the development of new and more resilient ones. In broad terms it recognises the need to respond stra- tegically and sometimes in transformational ways to structural and cyclical change that can threaten the viability and sustainability of sectors, harming the well-being of businesses, employees and com- munities. Innovation is often seen to be at the core of rejuvenation, necessitating the development of close and robust formal and informal linkages between government, industry, unions and the research community. Agile industry networks and clusters situated in a sophisticated regional innovation system are central to this challenge. This section provides some insights from the literature into this, drawing out the important role that policy and institutions, along with innovation and creativity, play in successful rejuvenation.

Urban and regional regeneration on the other hand entails the modernisation and revitalisation

of ageing housing stock and physical and social infrastructure, creating healthy, stimulating and vibrant spaces to live, work and invest in. This is commonly regarded as a foundation for improving well-being and productivity, essential to building and sustaining successful industries and econo- mies. During periods of crisis, urban regeneration can play a vital role in boosting domestic demand, creating alternative employment opportunities for those who lose their jobs through downsizing and closure. It also plays a vital role in boosting regional pride and morale. Linking urban and regional regeneration to industrial rejuvenation represents a significant conceptual, policy and practical challenge, which this section will shed some light on.

Concern that narrowly conceived policy responses to economic and financial crisis are largely ignoring innovation objectives has led some scholars to argue for “an innovation solution to the contemporary economic crisis” (Ranga, M. and Etzkowitz 2012, pp. 1429-1437).

Regional Innovation Systems and Change

Over the last 30 years Australian manufacturing has been exposed to increasingly intense global competition, particularly as a consequence of trade liberalisation in Australia and the industri- alisation of China, India and Thailand who have emerged as major centres for low-cost, high volume manufacturing. Regions with a high dependence on mass-manufacturing in Australia have been profoundly affected by these changes, calling into question the viability of some sectors and demand- ing major transformation of others, circumstances that have caused some to reflect on the value of Schumpeterian economic analysis.

…the current economic crisis has triggered dual effects: on the one hand, it affected innovation systems both directly, as a result of the economic slump and financial shortages, and indirectly,

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by aggravating existing systemic weaknesses, in a process of “creative destruction” (Schumpeter 1942). On the other hand, it provides an im- mense opportunity for correcting such systemic weaknesses, salvaging old industries in parallel with creating new ones and boosting innovation systems, in a concomitant process of “creative reconstruction”. (Ranga, M. and Etzkowitz 2012, p 1433)

A challenge arising from this is to identify the competitive foundations for industrial renewal of old industrial areas (OIAs) and the appropriate roles that government, industry, unions and the wider community might play in establishing and sustaining these in building robust and respon- sive regional innovation systems and successful industry clusters.

In this context Todtling and Trippl (2004) discuss the renewal of clusters in old industrial regions, focusing on the region of Styria in Austria as an example of an old industrialised area in which a dominant industrial cluster came under threat. They address the question of how clusters might be renewed in regions facing decline and how they adjust to changes in their environment. The authors compare the renewal of the automotive and the metal clusters in the region, concluding that a well-developed regional innovation system, the establishment of new innovation networks and new and more indirect forms of policy are critical to the development of successful new clusters. Moreover they find that:

• Clusters in such regions often face the problems of mature industries such as stag- nating demand, high competition and “lock in” to old technology paths.

• The renewal of clusters can be supported by a well-developed Regional Innovation System (RIS).

• Clusters in old industrial regions are often characterised by either fragmentation (few links within the region) or by networks ori- ented towards the old trajectory.

• The attraction of leading transnational companies may have a positive effect on cluster renewal, if they bring in comple- mentary knowledge to the cluster and if they can be integrated into regional sup- plier and innovation networks.

• Active policy is needed to overcome the situation of ‘lock in’; market forces alone will not be sufficient to improve the situ- ation. Measures such as the stimulation of networks, the enhancement of ‘systemness’ within clusters, and an upgrading of the re- gional innovation system are important.

Trippl and Otto (2009, p 1219) apply a regional innovation systems approach to an analysis of the challenges that OIAs face in designing and effectively implementing successful industrial rejuvenation strategies. Focusing on the areas of Styria in Austria and Saarland in Germany, they discuss three types of cluster-based renewal: an innovation-oriented adjustment of mature clusters (incremental change); the emergence of new agglomerations1 2 in established industries (diversification); and the rise of knowledge- intensive and high-technology activities (radical change). The study shows that Styria rebuilt its regional innovation system more successfully, enabling the innovation-oriented adjustment of a mature cluster, the rise of a new cluster in an established industry, and the emergence of knowledge-intensive activities. The key factors underpinning this success according to Trippl and Otto (ibid, p 1232) were:

• The presence of local firms with strong in- novation capabilities;

• The attraction of FDI which established in- novation networks with local actors;

• Related diversification processes of steel companies;

• The existence and further strengthening of an excellent knowledge infrastructure;

• A proactive policy approach facilitating in- novation linkages and cluster development.

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By contrast, in the Saarland, the regional innovation system has been more specialised, resulting in poorer performance with respect to incremental change and diversification and high performance regarding radical change. Trippl and Otto (ibid) argue:

In the Saarland, branch plants attracted by low wages, the region’s weak endowment with knowl- edge providers and supporting institutions and a late and less proactive policy response provided rather unfavourable conditions for the dynamic evolution of the automotive cluster. (Trippl and Otto, 2009, p 1232)

A key conclusion from the study was the need to identify, support and sustain the development of “new clusters to broaden the economic base and to promote related diversification in order to avoid the risk of economic overspecialization” (Trippl and Otto 2009, p 1232). Central to this is a sophisticated and well functioning regional innovation system that enables firms and clusters to overcome problems associated with ‘lock in’ to old technologies, managerial practices and working arrangements. Regions with sectors that display these characteristics might find part of the solution in building new industries upon the old, argues Treado (2010, p 112).

Regions, like Pittsburgh, that have a strong reputation for expertise in a particular industry or set of industries may find reputation building to be easier than regions that are attempting to build reputation from scratch in a new industry …or have built strong, competing reputations in other industries.

When Pittsburgh’s industrial legacy is viewed narrowly as pertaining to steel production alone, the region seems to serve as an excellent

illustration of how path dependence can lead to industrial ‘lock-in’ and the resulting pitfalls of a destabilising shock. In these models, the ability of the Pittsburgh region to transition from steel production to steel technology represents an es- cape from path dependence.

…when Pittsburgh’s industrial legacy is viewed broadly as pertaining to metallurgical and mate- rials engineering, the presence of the steel tech- nology cluster is more consistent with its legacy.

Reflecting on the experience of the Steel Technology Cluster in Pittsburgh, Treado (2010, p 114) concludes that the “ultimate source of regional resilience” was the expertise of the re- gional workforce.

More than any other factor, the technical knowl- edge of local labour seemed to be the key to at- tracting and retaining the members of the steel technology cluster.

Transforming old industrial areas by moving up the value chain and fully utilising the exper- tise available locally might be accompanied by a strategy designed to attract FDI. One common expression of this has been the establishment of technology and science parks, which have sought to embed relationships between universities, in- dustry and government in new common spaces. In a study of evolution and change in industrial clusters, Parker (2009, p 256) notes, “The out- standing success of high-technology clusters has sparked initiatives from governments and other social actors, including universities, to promote the development of regional industrial models that replicate the entrepreneurial and innovation dynamics of successful clusters”. One manifesta- tion of this has been the establishment of technol- ogy and science parks like Sophia Antipolis and

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Hsinchu in Taiwan, which are the subject of a major comparative study by Parker (ibid, p 257). They conclude that:

• Institutional change involving the transfor- mation of a city/region does not necessar- ily depend on exogenously induced crisis. It may involve access to new ideas and visions from political entrepreneurs and policy elites.

• The provision of resources and physical infrastructure to support regional transfor- mation is an important element in estab- lishing the viability of the new vision for the region.

• Institutional systems are not necessarily static in between moments of exogenous- ly induced crisis. They may evolve and change through a reflective process of stra- tegic learning in which social actors iden- tify problems with the existing institutional base of the city/region and reconfigure in- stitutions to new ends.

• The processes of adaptive institutional change involve the strategic learning of social actors and firms who reconfigure institutions to suit their own needs and per- spectives regarding the future development of the industrial base.

EU Smart Specialisation

The importance of context responsive regional innovation systems is now an overriding con- sideration for both scholars and policymakers (Martin and Trippl, 2013, p 9). This is strongly reflected in the European Union’s Europe 2020 Strategy. The emergence of the smart specialisa- tion agenda in Europe represents a new chapter in regional innovation systems policy develop- ment and practice. In adopting the Europe 2020

(sustainable, inclusive and smart growth) Strategy the European Union (EU) has placed innovation at the centre of efforts to tackle the economic crisis facing much of Europe. The strategy involves three interlinked priorities:

• Smart growth, based on knowledge and innovation;

• Sustainable growth, promoting a more re- source efficient, greener and competitive economy;

• Inclusive growth, fostering a high employ- ment economy delivering economic, social and territorial cohesion.

The EU (2012a, p 7) asserts “Investing more in research, innovation and entrepreneurship is at the heart of Europe 2020 and a crucial part of Europe’s response to the economic crisis”. A cornerstone of the EU approach is the “design of national/regional research and innovation strate- gies for smart specialisation as a means to harness the potential for smart growth and the knowledge economy...” (ibid).

The rationale for smart specialisation3 is to focus nations and regions on a “limited number” of economic and industry development priorities that are capable of being competitive in the global economy (ibid, p 11). The EU argues that smart specialization “allows regions to take advantage of scale, scope and spillovers in knowledge pro- duction and use, which are important drivers of productivity” (ibid).

The adoption of smart specialisation is de- signed to respond to weaknesses evident in past regional innovation strategies including (ibid):

• Lack of an international and trans-regional perspective with the regional innovation and economic systems being considered in isolation from each other;

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• Lack of responsiveness to local economic and industrial conditions and insufficient business drivers of R&D;

• Lack of a sound analysis of a region’s assets;

• Tendency to pick winners; • Tendency to copy best performing regions

without due consideration of local context.

The pursuit of smart specialization will require different forms of change (ibid, p 12-14). This includes:

• Transition: From an existing sector to a new one based on cooperative institutions and processes (i.e. from fine mechani- cal and optical engineering to medical technologies);

• Modernisation: Technological upgrading of existing industry involving the adoption of Key Enabling Technology (i.e. nano- technology, biotechnology, photonics);

• Diversification: Developing synergies be- tween existing industrial activities and new ones that are more sustainable;

• Radical Foundation of a New Domain: New technologies making previously low growth activities attractive.

In developing a regional innovation system based on smart specialization the EU has devel- oped a model to guide strategy development in Europe called RIS3. It comprises four key strategic elements (ibid, p 17):

• (Tough) Choices and Critical Mass: Limited number of priorities on the basis of own strengths and international specialisa- tion – avoid duplication and fragmentation;

• Competitive Advantage: Mobilise talent by matching research, training, develop- ment and innovation capacities and busi- nesses needs through an entrepreneurial process;

• Connectivity and Clusters: Develop world class clusters and provide arenas for related variety/cross-sector links internally in the region and externally, which drive specialized technological diversification – match what you have with what the rest of the world has;

• Collaborative Leadership: Efficient in- novation systems as a collective endeavour based on public-private partnership (qua- druple helix) – experimental platform to give voice to un-usual suspects.

The EU has set out the following 6-step process for development of RIS3 strategies (ibid, p 18-25).

• Analysis of the regional context for innova- tion (regional assets, internal and external linkages and dynamics of entrepreneurial environment).

• Set up of a sound and inclusive governance structure (industry, government, research and education and civil society).

• Production of a shared vision about the fu- ture of the region.

• Selection of a limited number of priorities for regional development.

• Establishment of suitable policy mixes. • Integration of monitoring and evaluation

mechanisms.

In the context of the Smart Specialisation agenda, Ortega-Argiles (2012) provide an over- view of what a range of EU regions are focusing

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on. While there are some significant variations in focus there are also striking similarities as Table 2 suggests.

While smart specialisation suggests variation in the sectoral focus of regional innovation and rejuvenation strategies most regions converge around advanced medical technologies, photonics and sensing, cleantech and robotics.

Integrated and Inclusive Problem Solving

Accompanying the smart specialisation debate and central to the processes involved in industrial rejuvenation has been a related debate about in-

tegrated and multi-dimensional innovation and problem solving processes. This is significant because it draws attention to important behavioural and organisational factors underlying innovation, along with long held observations made in the extensive literature on regional economic and industry development emphasising the importance of collective learning, tacit knowledge and insti- tutional thickness (Martin, 2003). An important manifestation of the debate has been the Triple Helix Model of innovation and subsequent Qua- druple and Quintuple variants – all of which seek to convey the value of integrated and collaborative innovation processes using the intertwined threads characteristic of a helix as a metaphor. The original

Table 2. Smart specialisation focus in some EU regions (Ortega Argiles (2012, pp 11-))

Region Country Focus

Flanders Belgium • Strategy built around creation of 6 clusters (transport-logistics; ICT and services in healthcare; new materials, manufacturing and nanotechnology; ICT-enabling services platforms for socio- economic innovation (e-health, e-gov, e-learning); energy and environmentally friendly smart grids). Each area has spearhead initiatives. • New Industrial Policy based on 4 pillars (new sources of productivity in resources, smart infrastructure, clusters and specialization; Factory of the Future; Robust management structures; robust stakeholder based discovery processes.

Navarra Spain • Moderna Plan defines four types of clusters: basic (auto, electric vehicles and sustainable construction; healthcare services), strategic (renewable energies, agro-food industries), future commitments (biomedicine, medical appliances, services to persons; sustainable tourism, environment and waste; mechatronics, design and creativity, safety) and complementary (business services, education and generation of knowledge).

Lower Austria Austria • Technopol Program comprises four different technopols (Medical biotechnology; Agro and environmental biotechnology; Modern industrial technologies; Bioenergy, agriculture and food technology). • Clusters include Green building cluster; Food cluster; Logistic cluster; Plastics cluster).

Berlin Brandenberg

Germany • Cluster strategy InnoBB aims to develop future fields of excellence into clusters (Life science; Energy technologies; Transport, mobility and logistics; ICT/New media; Optical technologies).

Lahti Finland • Environmental technology (Cleantech); design (particularly industrial) and practice based innovation (tools to support innovation) are defined as key strengths.

Silesia Poland • Medical technologies; Environmental technologies; ICT (modeling and simulation or processes and optoelectronics; Production and processing (metal alloys, polymer and ceramic materials), Transport and transport infrastructure (intelligent systems); Machinery, auto, aerospace and mining (automation, sensors, robots, design); Nanotechnologies.

Limburg Netherlands • Mapping project identifies 3 key areas of strength: Chemicals and Advanced Materials; Health (life) Sciences; High-tech Systems. • Initiatives include: cross campus strategic co-operation linking universities and businesses; attracting and retaining knowledge workers from all over the world through an International Knowledge Works program.

Emilia Romagna Italy • Program of activity centered around multiple technopoles and a Regional High Technology Network composed of 34 structures for industrial research and 11 Centres for technology transfer.

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Triple Helix Model (Etzkowitz and Leydesdorff, 2000) aimed to shed light on the potential value to innovation processes of collaboration between government, industry and universities while the Quadruple Helix (Carrayannis and Campbell, 2012) added civil society as a fourth stakeholder. The Quintuple Helix (Carayannis, Barth and Campbell, 2012) adds the environment into the innovation equation, embedding innovation in principles of sustainability.

Flowing from this debate, particularly that associated with the Quadruple Helix, has been a range of so-called user-oriented innovation con- cepts including ‘living labs’, ‘open innovation’, and ‘social computing’ (Arnkil, Jarvensivu, Koski and Piirainen, 2010). These seek to engage, to various degrees of intensity, with existing or po- tential service or product users, with the objective of optimising outcomes for the parties involved. The extent to which benefit accrues for different stakeholders is the subject of considerable debate, reflected in the shift in preference from the Triple Helix to the 4 and 5 strand models which engage variously with the wider community either as end users, stakeholders or active participants.

Recent interest in ‘co-design’, ‘design thinking’ and ‘integrated design’ concepts intersect with this debate, sharing a view that multi-disciplinary/ multi-stakeholder approaches are necessary to develop innovative solutions to complex problems and challenges (Curley and Salmelin, 2013). One of the outstanding examples of this internation- ally is the Stanford d-school that has created an environment designed to generate productive knowledge rich collaborations.

At any one moment, there are hundreds of projects underway at the d.school4 involving partners, stakeholders, users and experts. Some are quick introductions that last just an hour or two, oth- ers are 10-week class projects and some span

years as student teams stick with a project after their class is over. http://dschool.stanford.edu/ our-point-of-view/

The emergence of a network of living labo- ratories5 based on ‘co-design’ or ‘co-creation’ principles is also of significance. Typically liv- ing labs involve a combination of the following activities (Pallot, 2009):

• Co-Creation: Bring together technol- ogy push and application pull (i.e. crowd- sourcing, crowdcasting) into a diversity of views, constraints and knowledge sharing that sustains the ideation of new scenarios, concepts and related artefacts.

• Exploration: Engage all stakeholders, es- pecially user communities, at the earlier stage of the co-creation process for discov- ering emerging scenarios, usages and be- haviours through live scenarios in real or virtual environments.

• Experimentation: Implement the proper level of technological artefacts to experi- ence live scenarios with a large number of users while collecting data which will be analysed, taking into account the context, during the evaluation activity.

• Evaluation: Assess new ideas and innova- tive concepts as well as related technologi- cal artefacts in real life situations through various dimensions such as socio-ergo- nomic, socio-cognitive and socio-econom- ic aspects; make observations on the poten- tiality of a viral adoption of new concepts and related technological artefacts through a confrontation with users’ value models.

From 19 foundation members in 2006, lab membership of the European Network of Liv- ing Laboratories (ENoLL) is over 300. ENoLL

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Foundations for Industrial Rejuvenation

members can be found in all continents including Australia as the following maps illustrate.

A recent living lab to be established in Aus- tralia is the Future Logistics Living Lab located at Australian Technology Park in Sydney (see http://www.futurelogisticslivinglab.com.au). One review of the success of living labs by Planitz, Hanlen and Souminen (2010) has concluded that “less than 30 percent were clear successes”.

The European Union has also sought to foster researcher, industry government and community collaborations through the establishment of larger scale Knowledge and Innovation Communities (KICs). These are described by the EU as, “highly integrated, creative and excellence driven partner-

ships which bring together the fields of education, technology, research, business and entrepreneur- ship, in order to produce new innovations and new innovative models that inspire others to emulate it” http://eit.europa.eu/kics/. The KICs program has funded major initiatives designed to foster col- laboration in the areas of ICT, climate and energy.

Over the past five years various purpose built spaces, inspired by initiatives like these have emerged in Australia, including Hub Melbourne, Hub Sydney, The University of Adelaide Hub, Hub Adelaide and various ‘smart work centres’. The Tonsley innovation precinct in Southern Adelaide and the Stretton Centre in Northern Adelaide are larger scale examples of these developments. The

Figure 1. Location and number of members in the European Network of Living Laboratories (ENoLL) (http://www.openlivinglabs.eu)

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latter is a partnership between The University of Adelaide Australian Workplace Innovation and Social Research Centre, the City of Playford, Renewal SA and the Australian Government’s Suburban Jobs Program.

REJUVENATION AND REGENERATION IN CITIES AND REGIONS

In the world of urban policy-making, there is a fascination for cities that have managed to turn around their economic fortunes or emerge like a phoenix after crisis. Occasionally, some cities acquire a ‘paradigmatic’ or ‘celebrity’ status as they seem to “sum up an era, the place where it all comes together…If Paris was the capital of modernity and Los Angeles of post-modernity, Bilbao and Barcelona in Spain have become meccas for urban regeneration, from industrial cities of a post-authoritarian regime to culturally vibrant magnets of visitors, and all in only a few decades. (Gonzalez, 2011, p 1397)

When we think of regeneration and rejuvenation of cities and regions our minds often turn to the icons of transformative change – Bilbao, Barcelona and Manchester, places often visited by policymakers seeking inspiration. Indeed such is the attraction of these places that some have argued that they have become sites for regeneration tourism - around 5000 professionals visit Bilbao and Barcelona each year to study regeneration (Gonzalez, 2011, pp. 1397-1413). This suggests caution needs to be exercised in reviewing the literature emerging from these places, laden as it can be, with often- immodest messages of success. Thoughtful and critical reflection is urged upon the reader. In the absence of robust evaluation of regeneration and rejuvenation programs, value judgments remain a valuable but imperfect guide to decision making.

Older Industrial Regions

The problems faced by industrial regions expe- riencing long-term decline are complex multi- dimensional ones, rooted in space and time. In reviewing cases of regeneration and rejuvenation we face a long list of cities and regions that have experienced one or a combination of recession, de-industrialisation and major company closures. In a multi-country study Koutský et al (2011) examine issues related to older industrial regions including:

• Manchester (UK) • Ruhr Area or Saarland (Germany) • Basque Bilbao and its hinterland (Southern

Europe) • Detroit and environs (USA) • Manchuria (China) • Examples of ‘new industrial spaces’; • The environs of M4 highway in Great

Britain, • Bavaria (Europe)

These regions are regarded as among the principal ‘losers’ in the deepening process of globalisation, a consequence of the emergence of ‘new’ industrial regions in a rapidly changing global political economy. While this change has the potential to overwhelm some cities and regions, the authors, using Manchester as a case study, argue that new development trajectories are possible. Koutský et al (2011) reject fatalistic predictions in their assessment of Manchester, arguing that adaptability and the formation of “new combina- tions” based on the interconnection of local and global trends can generate specific advantages, which will enable regions facing decline, to once again become competitive.

Manchester faced extremely difficult economic circumstances over the decade to the mid 1980s, resulting in the loss of over 200,000 industrial

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jobs and an unemployment rate exceeding 20 per cent (ibid, p 170). Responding to these difficult circumstances Manchester became a touchstone for policymakers and researchers interested in regeneration and rejuvenation, particularly the cultural dimensions. It is one of the first cities in the world to industrialise and one of the earliest to experience the effects of de-industrialisation. A revitalised cultural sector is regarded as one of the success stories of the regeneration effort in Man- chester, a strategy that would later be emulated by other regions including Bilbao and Barcelona in Spain. Like Bilbao, Barcelona’s emergence from industrial decline involved major investments in cultural infrastructure as well as the attraction of major events like the 1992 Olympics which provided a focal point for regeneration as well as attracting international attention on the city and region. The regeneration efforts of Barcelona were lauded internationally with the award of the Royal Gold Medal for Architecture, a major first for a city design project.

Koutský et al (2011) caution against interpret- ing the success of one particular region as unam- biguously positive (as such processes can lead to internal and external tensions); or as perfectly replicable elsewhere (as this is only replicable in regions with a similar institutional and structural context). Hence this should be interpreted as a useful guide in facilitating the development of new industrial combinations during the process of rejuvenation.

Cities like Glasgow and Manchester in the United Kingdom have been the focus of consid- erable attention by policymakers and scholars searching for solutions to industrial decline. Glasgow experienced a sharp decline in manu- facturing employment during the 1980s. At the beginning of the 1970s manufacturing employ- ment numbered around 306,000, declining to

121,000 by 1991 (Gomez 1998, p 108). While services sector employment grew over the period it was insufficient to fill the employment gap that remained, around 160,000 fewer jobs available in 1991 relative to 1971.

The extent to which regeneration and rejuvena- tion strategies have been successful in tackling de- industrialisation and chronically high unemploy- ment has been of central concern. Gomez (1998) has argued that despite the image of Glasgow as a city transformed by regeneration, the strategies adopted up until the late 1990s failed to reverse industrial decline and generate sufficient employ- ment in the services sector to compensate for heavy losses in manufacturing. While the enormity of this challenge is recognized, it is a preoccupation with image reconstruction and the lack of integration of urban regeneration and industrial rejuvenation that appears to be at the heart of the problem as Gomez argues:

The emphasis on fostering service sector growth via image reconstruction, primarily through the promotion of the city centre, has had very limited success in Glasgow. There is no doubt that this strategy has had dividends in respect of the number of visitors to the city. …it is also undeniable that the image of Glasgow, both within and outside the city, has been radically reconstructed. There is also agreement on the success of these poli- cies in terms of Glasgow’s central area physical renaissance. But this seems to refer only to a very constrained and poor idea of urban regeneration. In fact it’s clear that the formula used to revitalize the urban area has not been very fortunate as far as employment is concerned.

Furthermore, a wider exercise of revitalization, focusing on potential industrial employment, has been hampered…by the growth of centralized

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power…and subsequent exclusion of the city as a location for manufacturing inward investment. (Gomez, 1998, p 118)

Bilbao

Situated in the Basque Country of northern Spain, Bilbao’s population reached around 1 million in 2013. The industrial structure of the city was once dominated by heavy industries, particu- larly steel, shipyards and machine engineering. A deep economic crisis during the first half the 1980s led to unemployment rising to around 25 per cent and widespread demoralisation (Ploger, 2007; Gomez, 1998). Over the 20 years to 1995 manufacturing employment declined by half or around 60,000 jobs in Bilbao. By 2005 manufac- turing employment had declined from 46 per cent of total employment to just 22 per cent. Service sector employment on the other hand, rose steadily from around 40 per cent to nearly 70 per cent of total employment (Ploger, 2007, p 27). By 2009 manufacturing employment comprised just 18 per cent of total employment (Plaza and Harrich, 2013, p 8). While much of the employment growth in the post crisis period was in lower paid and less secure service jobs, Plaza and Harrich (ibid) note a sharp rise in advanced business services from around 10 per cent in 1995 to more than 18 per cent in 2009 (ibid).

Population outflow from the area was dramatic with the City of Bilbao alone losing around 16 per cent of inhabitants over the fifteen years to 1995. Over the following decade more than 11 billion Euro (Aus $15.6b) in public sector investment was directed towards urban regeneration and industrial rejuvenation projects. On the integration between regeneration and rejuvenation, Arancegui, Quere- jeta and Montero (2011, p 12) note that:

The diversification strategy of the Basque Gov- ernment went beyond industry and addresses the regeneration of cities, especially in Bilbao. A

prominent sign of this policy was the Guggenheim project, which sought to place the city in a global network of cultural and recreational centres.

Key elements of a regeneration strategy emerged in the late 1980s with the early focus being on major projects before the development of an overarching strategy. A strategic plan was drafted towards the end of the 1980s, “establishing a regulatory framework for regeneration of Bil- bao” (Ploger, 2007, p 16). In 1991 the ‘Strategic Plan for Revitalisation of Metropolitan Bilbao’ was finalised and a “dedicated agency,” ‘Bilbao Metropoli-30’ (BM30) established to drive the process of regeneration in accordance with the strategy.

BM30 has been described as “a think-tank, lobby organisation and catalyst for investment,” industry led but based on a “partnership model with the public and private sector” (ibid). Four areas of action were identified as priorities for BM30.

• Formation of a knowledge-based high-tech sector.

• Inner-city renewal; especially revitalisation. • Environmental intervention; river clean-

ing, industrial land recycling. • Strengthening of cultural identity through

culture-led regeneration.

An early initiative was to develop a regenera- tion Master Plan drawing on the experiences of Barcelona and other areas of Spain with project- led regeneration (i.e. Olympic Games). Addi- tional inspiration came from lessons learnt in Glasgow and Baltimore, cities badly affected by de-industrialisation.

An ambitious vision for regeneration was adopted, seeking to transform Bilbao into “a key node on the European axis,” to “not only guarantee (sic) the ‘survival’ of the city but also establish (sic) the city as a competitive node in an emerg- ing post-industrial urban network” (ibid, p 17).

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This was embodied in a ‘Territorial Plan’, which sought to focus regional and global attention on Bilbao, recruiting leading architects like Frank Gehry to transform the urban landscape.

Other institutions were established to facilitate development including Bilbao Ria 2000, respon- sible for regeneration of abandoned industrial land and infrastructure. Bilbao Ria 2000 has been described as pivotal to the regeneration project (ibid). It is a not-for-profit agency involving all tiers of government in the redevelopment of vacant land. While establishment funds for the venture came from central, regional and EU sources, Bil- bao Ria 2000 became self-financing through land value enhancement strategies, underpinning major redevelopments throughout the area (ibid, p 18).

Regeneration and rejuvenation was under- pinned by detailed work involving leading planners and architects with the initial plan generated by Cesar Pelli who had undertaken similar work in New York City on the Battery Point regeneration project. Public sector investment played a key role in the regeneration in Bilbao with the private sector reluctant to contribute to major civic and trans- portation projects. Centrepiece projects included the Guggenheim Museum (144 million Euro) and the Euskaduana Conference Centre (72 million Euro) (ibid, p 20). More than 6 billion Euro was invested in transportation infrastructure projects including an extensive metro system and new metro stations designed buy renowned architect, Normal Foster (ibid, p 21). The scale of transport modernisation was astounding, leaving little if any infrastructure untouched by the regeneration and rejuvenation program.

Another major pillar of the Bilbao regenera- tion program was environmental remediation of contaminated industrial land and waterways. A foundational investment was the development of a new sanitation system costing one billion Euro (ibid, p 22).

Combined the civic and transportation in- frastructure projects stimulated significant eco- nomic and employment development in the region, growth that was reinforced by wider industrial rejuvenation initiatives underpinned by EU funds over the ten years to 2006 (ibid, p 26). Around 4.5 billion Euro was invested in economic and industry restructuring projects, particularly in the steel and shipbuilding sectors.

REFLECTIONS ON BILBAO

The success of the Bilbao regeneration and reju- venation strategy is attributed in part to the level of autonomy available to decision makers at the local level in the Basque region, a consequence of democratic reforms (ibid, p 15) that enabled Bilbao to “design tailored policies at the right time”. The Basque region is, notably, the most autonomous region in Spain. The availability or resources to support regeneration and the establishment of specific institutions to drive regeneration were a function of domestic taxation policies and a high level of autonomy, conferring considerable institutional agility.

Cultural tourism has increased markedly since the crisis of the 1980s with the Guggenheim Museum alone attracting 1 million visitors each year (ibid, p 30). Business visitation increased tenfold over the ten years to 2005, attributable to the establishment of the conference centre and airport upgrades.

The Bilbao strategy has been criticised for not being sufficiently inclusive of community stakeholders and being too “top down” (ibid, p 35). Others have argued that while civil construc- tion projects were effective in providing much needed employment, longer-term industrial and employment development initiatives have not been particularly successful (Gomez, p 112).

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The adoption of strategic planning, while important, has lacked the statutory foundations to overcome inter-institutional complexity and duplication. Bilbao Ria has been viewed by some as privatisation of functions once undertaken by local government, circumventing democratic processes and accountability (Gomez, ibid).

Gomez (ibid, p 113) points to a tendency in regeneration to place style ahead of substance, focusing more on the development of iconic build- ings than on sustainable industries and jobs. Plaza and Harrich (2013, pp 8-12) argue however that the Guggenheim Museum in Bilbao has played an important role as part of a wider strategy of attracting investment and boosting “connectivity for the city of Bilbao, providing favourable condi- tions for improving the region’s competitiveness and attractiveness”. In isolation, a new building can do only so much. As part of a wider strategy of rejuvenation and regeneration it can be inspi- rational as Guggenheim Bilbao continues to be.

To this day Bilbao and the wider Basque region remains a source of great interest to policymakers and scholars seeking to better understand factors influencing industrial rejuvenation and urban regeneration. In a review of smart specialisation in the region Arancegui, Querejeta and Montero (2011, p 13-18) note a commitment in the 2010 Science, Technology and Innovation Plan (PCTI 2010) to a science and technology push involv- ing the development of new sectors and enabling technologies, focusing on commitments in a num- ber of areas including biosciences, nanosciences, alternative energies and electronics for intelligent transport. This overarching plan built on earlier strategic initiatives including BioBasque (2003 and updated in 2010) and nanoBasque (2008), extending this work into the energy sector. These strategies selectively extended the engagement of the region into areas where it was judged the region might develop a competitive advantage. Arancegui, Querejeta and Montero (ibid, p 14) note that “the strategy fostered the lines that matched the most with the Basque system: human health,

but with less of a focus on the bio-pharmaceutical chain because [of] the lack of companies in that sector and more of a focus on diagnostic systems and bioengineering”.

To activate the BioBasque strategy the Bio- Basque agency was established to help drive innovation in the sector, to “influence not only the central part of the bioscience value chain (i.e. the bio-science business group) but also the entire value chain, including suppliers (driving the diversification of the significant machine tool industry towards the production of instruments and equipment for the bio-business sector and research in the field of health) and users (driv- ing diversification in sectors such as agro-food, environment and chemicals) where, although the Basque country does not have high levels of specialisation, there is significant employment and economic activity” (ibid, p 15).

The nanoBasque strategy was accompanied by the establishment of the nanoBasque Agency, both of which were designed to “advance the diversification of all sectors of the Basque economy through the introduction of micro and nanotechnology applications” (ibid), which are regarded as general-purpose technologies or GPTs. Building on a foundation of companies already specialising in nanotechnology, the nanoBasque Agency embarked on a process of mapping existing interest and capabilities in the sector. In reviewing smart specialisation in the Basque region, Arancegui, Querejeta and Montero (ibid) conclude that, “different modes of diversification based on R&D can coexist in a single territory. In each mode, the roles of government and other agents differ according to the entrepreneurial and scientific skills available in the region. When such capabilities exist in the private sector or university environment, the government can take a primary role as facilitator…In other cases where such skills are non-existent or only potential, the role of government is much more active” (ibid, p 17). Key reasons for the success of the Basque approach to smart specialisation is the “high degree

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of competence of the regional government” and “a large and sustained investment capacity that has been made possible by its unique system of economic agreements…” Arancegui, Querejeta and Montero (ibid) argue that responsiveness of the University sector was a “notable weakness” that requires transformation of universities.

Arancegui, Querejeta and Montero (ibid, p 19) suggest that caution needs to be exercised in arriving at a view about the optimal role for government in smart specialisation, arguing that advocacy of a minimal role for government is likely to prove counterproductive in circumstances where there is underdeveloped or nascent entre- preneurial leadership.

Generally, the role of government is greater when the production base and knowledge in the stra- tegic area of diversification are lower. Even in a relatively advanced region, such as the Basque Country, the pure “entrepreneurial discovery processes” seem to be more an exception than the rule and the regional government’s role can go beyond that of a mere facilitator or catalyst. As noted by Etzkowitz (2003), entrepreneurship need not be restricted to the private sector; it can also be undertaken by the government.

IMPACTS OF INDUSTRIAL CHANGE AND SHOCKS

Industrial rejuvenation must be undertaken in an integrated way in order to deal with both the economic and social consequences of industrial dislocation and shocks like the closure of GMH. This section briefly reviews literature on the im- pacts of major business closures and downscaling in this context. Lessons learnt from a number of national and international case studies of closure are identified.

It is vital when reviewing the impacts of closures and retrenchment to take account of the circumstances in which they take place, as these

help to both understand the causes of particular events and the likely magnitude of impacts. Cook et al (2013, p 4) argue:

The immediate causes of closures are due to business decision-making, but the wider context of causes needs to be understood in the light of sectoral, market and technological trends. These trends can include the changing nature and size of demand in markets, over-capacity in supply/ provision, cheaper competition from international producers and altering business models including with respect to the processes of innovation. The macroeconomic environment can have a particu- lar bearing on some of these causes. For example, economic downturns can have a noticeable effect on demand, as can exchange rate shifts, which can affect the competitiveness of goods and services. Some of the causes can be tracked and understood over time, which can contribute to foresight of shocks (or potential shocks).

Regions with a high dependency on mass manu- facturing have proven to be particularly vulnerable to large-scale downsizing and firm closures over the last 20 years (Spoehr and Shanahan 1994). The timing of downsizing and closures profoundly shapes the experiences of those who are retrenched. During periods of economic decline those ex- periencing retrenchment are much more likely to become long-term unemployed (unemployed for 12 months or more). During the recessions of the early 1980s and 1990s, retrenchments in South Australia increased sharply from 23,000 in 1988 to 48,000 in 1992 (ibid, p 6). Around one in three of these job losses were concentrated in manufacturing. Retrenchment as a proportion of unemployment in South Australia doubled during the height of the 1990s recession (ibid).

Major business closures and restructuring can have a wide range of direct and indirect impacts (Cook et al 2013), which are mediated in their severity by economic, financial and organisa- tional and personal circumstances. In relation

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to the workforce, factors such as age, gender, educational qualifications, cultural background and financial circumstances play a key role in shaping outcomes. Six broad categories are used here to review impacts that commonly accompany closures and major downsizing events. These are:

• Economic and employment • Supplier • Health and psycho-social • Population • Taxation • Housing

Economic and Employment Impacts

Business closures and large-scale downsizing often have significant economic impacts with large-scale closures having the potential to signifi- cantly reduce economic output and value added in an economy. The extent to which closures result in net negative economic impacts depends on the existence of compensating factors such as the time available to adjust prior to closure, the quantity and quality of new business or government investment designed to offset impacts and the effectiveness of policy and strategy designed to mitigate negative impacts and generate alternative economic and employment opportunities.

While impacts vary in their severity from case to case, a recent review of the impact of large firm closures undertaken by the Nous Group for the Department of Industry, Innovation, Science, Research and Tertiary Education (Nous, 2013, p 10) concludes that:

Workers displaced as part of major firm closures or retrenchments often experience poor labour market outcomes for extended periods of time. These negative effects are not felt uniformly; although some level of hardship is the typical ex- perience, particular groups tend to struggle more than others. The effect of a mass-layoff extends

beyond the individuals who lose their jobs and is felt keenly in communities that are reliant on one or two industries.

Studies of the estimates of the economic impact of closures in South Australia by Spoehr and Morrison (2002) and Spoehr, Wilson and Morrison (2003) illustrate the potential impacts of large-scale business closures on economic output and value added. The closure of the Mitsubishi Lonsdale plant and downsizing of Tonsley Park plant operations was estimated to reduce economic output by around $370 million at the business itself and have flow on effects in the wider economy of a further $230 million. In addition the changes were expected to result in the loss of around $79 million in value added directly from the business and a further $98 million in value added as a result of flow on effects throughout the wider economy. The negative impacts that ultimately flowed from the closure of Mitsubishi, while significant (see case study in section 4.1), were contained to a large extent by the relatively buoyant economic and labour market conditions that prevailed at the time of closure.

The closure of the Port Stanvac Oil Refinery was estimated to result in the loss of around $23 million in direct value added from the state economy and a reduction in flow on value added in other sectors of the state economy of around $50-80 million. Spoehr, Wilson and Morrison (2003) indicate that a significant number of businesses linked contractually to the Mobil Oil Refinery expected negative sales and production impacts. They identify other potential economic impacts including increased demand for Federal and State income support arising from an increase in unemployment.

A wide range of employment impacts can be expected to flow from business closures. The magnitude of these impacts will be mediated by prevailing economic, industry and labour market conditions, the location of the plant and policy

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responses. Business closures during periods of economic downturn or significant turmoil within an industry sector often generate significant un- employment and long-term unemployment. One consequence of this can be the out-migration of individuals and families from one region to another in the search for work. Closures during periods of strong economic and employment growth will often have fewer negative employment impacts, though this is dependent upon the quality and the suitability of the employment that is avail- able. Harris (1984) has found that the industries and geographic regions in which businesses are generating new jobs can differ markedly from those losing jobs through plant closings and major layoffs. This mismatch in the location of growth and decline can be a source of considerable social and economic distress.

Plant closures can have a wide range of em- ployment related impacts in addition to job loss including difficulty in transferring existing skills to new jobs, a reduction in pay and benefits and increased insecurity of employment (Armstrong et al 2008; Beer et al 2006; Collins and Quark 2006; Tomaney et al 1999, p 408). While it is common for plant closures to lead to higher unemployment and under-employment, a consequence of plant closures can also be the entry of a new business or new investment, which generates employment (Yoder and Staudohar, 1985).

Spoehr and Morrison (2004) estimated the potential employment impacts of the closure of the Mitsubishi Motors Limited Lonsdale plant and downsizing of the Tonsley Park Plant in South Australia. They found that the reduction in opera- tions would result in the loss of approximately 1,170 full-time equivalent jobs at Mitsubishi directly and around 1,000 jobs in other sectors of the state economy. Flow-on employment effects were estimated to be greatest in the property and business services, other manufacturing, trade, and other motor vehicles and parts manufacturing sec- tors. The study notes that the results do not take account of potential offsetting positive impacts

flowing from reductions in the scale of Mitsubi- shi’s operations. These include employees gaining alternative employment, income transfers from State and Federal Governments associated with re-training, unemployment and general adjustment assistance that may flow to South Australia if there were a significant reduction in the scale of the automotive industry in the State.

Spoehr, Wilson and Morrison (2003) estimate the likely economic impact on the South Australian economy of the closure of the Mobil Port Stanvac oil refinery. Employment loss was estimated to be approximately 350 full-time equivalent jobs directly and between 450 and 740 jobs lost in other sectors of the state economy. Flow-on effects were estimated to be greatest in the utilities, other manufacturing, business services and transport sector. Large firms with significant contracts with Mobil indicated that they would reduce employee working hours or cut staff. Businesses that were dependent on Mobil for a majority of their turnover indicated that a third of their staff would have to be laid off as a result of the closure. Furthermore, one owner/manager indicated that the closure of Mobil would force him into semi-retirement.

In a study of the impact of the closure of the Geelong based Sterling Clothing Company plant in 1985, Kriegler and Sloan (1986) focus on the significant employment losses flowing from the closure. The majority of employees made redun- dant were able to secure alternative employment almost immediately. This is likely to have been due to the relatively favorable economic climate prevailing at that time. Most of the employees were able to find work with other clothing firms, reflecting strong demand for machinists in Geelong at the time. The study found that re-employment was related to the timing of undertaking job search. Those who started to look for work either before the announcement of the plant’s closure or between the announcement and the actual closure were much more likely to have jobs than those who had not started their job search until after the plant had closed. One-fifth had left the labour force at the

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time and a further one-fifth were unemployed. Those who had withdrawn from the labour force tended to be older than those who had found new jobs. They were also more likely to be foreign-born, married, and long-standing employees.

Health and Psycho-Social Impacts

Business closures and major restructuring can have a wide range of health and psycho-social impacts. A major review undertaken by an expert European group in 2011 found that negative impacts on the health of workers were evident for workers where retrenchment has been experienced indirectly, that is colleagues were made redundant in their workplace (Koper et al 2013, p 21). Among the key impacts found were:

• Impairment in self-rated health state. • Increase in certified sickness absence. • Impaired sleep. • Impaired ‘recuperativeness’. • Increased self-reported stress. • Cardiovascular impairment and increased

rates of related mortality. • Increased drug addiction. • Increased number of medical prescrip-

tions/use of psychotropic drugs. • Increase in smoking and alcohol

consumption.

In a study of the closure of General Motors and Ford plants in California in the mid-1980s, Yoder and Staudohar (1985) found that employees and their families experienced high levels of anxiety and stress as a result of the closures. They indicate that poor management of the closure and the lack of job placement support services available to employees generated high levels of anxiety among workers. They report that employees experienced physical and psychological problems that led to a number of suicides. Spoehr and Morrision (2002) indicate that closures resulting in job loss

may result in an increase in family stress levels, increase in domestic violence and child abuse and increased drug and alcohol abuse.

Using Mitsubishi Motor Limited in South Australia as a case study, Verity and Jolley (2008) draw attention to potential impacts of closures on sense of community and belonging. They conclude that closure can lead to the loss of close work based friendships and supportive relationships, a problem exacerbated by long-held work based ties in many manufacturing workplaces. Nearly half of Mitsubishi employees responding to a survey indicated that they had worked at the plant for over 21 years and many others much longer (ibid, p 334). According to Verity and Jolley (ibid, p 337) the “Loss of repetition of contacts within the organizational setting seems to have impeded the maintenance of relationships that had existed over many years within and outside paid work. In other words the loss of regular contact with co-workers led to the loss of deep work-based social attach- ments and intensive and extensive networks that developed over time” (ibid, p 340). They conclude that there is a need for policymakers to pay greater attention to these potential impacts by engaging human service professionals in post-retrenchment support and community development processes.

Community Impacts

Business closures can result in the loss of cash and in-kind donations and support to community organisations and programs. Spoehr and Wilson (2003) indicate that the closure of the Mobil Oil Refinery would have a significant impact on local schools and community organizations, which were beneficiaries of $600,000 in donations from Mobil over a six year period. The loss of corporate fi- nancial support from the oil refinery was expected to intensify the pressure on organisations to seek support from alternative sources. Similarly the McDowell Group (2004) found that the closure of the Agrium Kenai Nitrogen plant in Kenya would

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Foundations for Industrial Rejuvenation

result in substantial losses to the community. The plant contributed around $195,000 to 43 non-profit organisations or programs while a further seven organisations received in-kind support. Agrium was active in a wide range of industry and busi- ness support organisations.

Large-scale business closures can also result in significant population impacts including the out-migration from a region of people seeking employment elsewhere. The McDowell Group (2004) argue that the loss of an important busi- ness might result in both immediate population loss and gradual, long-term population decline.

Significant reductions in economic output, income and demand flowing from business clo- sures are likely to result in a decline in revenue to government with the impact of losses mediated by prevailing economic conditions in the wider economy. This is likely to be most profound where significant out-migration to other regions arises from closures. Any reduction in revenue is likely to increase the tax burdens on residents and busi- nesses that remain and/or result in a reduction in services provided. The McDowell Group (2004, p 2) found that the closure of the Agrium Kenai Nitrogen Plant in Alaska would result in the loss of around $2 million in industrial property tax and $0.2 million in residential property tax from Agrium’s employees’ houses.

Revenue impacts flowing from business closures in the Australian context might include reductions in revenue streams from property tax, payroll tax, local government rates, Goods and Ser- vices Tax, business tax and employee income tax.

There are potential housing impacts flowing from large-scale business closures. The McDowell Group (2004) suggests that business closures and layoffs might result in a weakening of the hous- ing market where a closure results in significant unemployment and population outflow. Spoehr, Morrison and Wilson (2003) suggest that closures

could result in an increased demand for low cost housing and housing assistance from employees who become unemployed or underemployed.

In summary the literature confirms that the im- pact of retrenchment and closure is multi-faceted, with social, economic, health and psychological dimensions that can each require attention. This necessitates an integrated, multi-agency response. The challenge as we shall see in the following case studies, is to put this into practice.

RESPONDING TO INDUSTRIAL CHANGE AND SHOCKS

Large-scale jobs losses and closures necessitate early intervention to support retrenched workers and their families. In the absence of appropriate support and alternative employment, retrenched workers can face long periods of unemployment and associated social-psychological and health impacts. Mitigating and minimizing the risk of this presents a great challenge to policymakers, particularly when closures are sudden and occur during periods of economic difficulty.

While retrenched workers can become unem- ployed, they commonly have skills, qualifications and a record of continuous employment prior to retrenchment. They normally also have access to a separation package that can act as a buffer against short-term hardship and enable a reduction in home mortgage or other forms of debt. A problem emerges when the benefits of this are eroded by the inability to find suitable alternative employ- ment or when the security and remuneration of employment is significantly inferior.

The common response to major closures in Australia has been the development of Labour Adjustment Packages (LAPs) funded from finan- cial contributions from government and industry. Australia has a long history of implementing such

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packages, particularly during recessions when closures are common. LAPs typically include the following elements:

• Counselling • Career advice • Resumé writing • Financial assistance for career transition • Re-training

Importantly most LAPs are accompanied by industry development initiatives designed to support industrial diversification and generate employment in the affected area. Making judg- ments about the success or otherwise of LAPs can be difficult given the lack of robust longitudinal evaluations of them. Fortunately a number of surveys have been undertaken on the impact of closure on employees over time. There is much that we can learn from these and from reflections on the experience of industrial shocks and closures in Australia and elsewhere. This section reviews a number of relevant case studies detailing the policy response to the event, evidence of outcomes and lessons learnt. The case studies are:

• Mitsubishi (Southern Adelaide) • MG Rover (Birmingham) • BlueScope Steel (Illawarra) • Bridgestone (Northern Adelaide)

Mitsubishi

The closure of Mitsubishi in Southern Adelaide in South Australia occurred during a period of economic growth, prior to the sharp decline in manufacturing employment triggered by the Global Financial Crisis. Employment prospects were regarded to be high at the time, particularly given increased investment in mining exploration and the proposed expansion of Olympic Dam, which subsequently did not proceed. In 2004 Mitsubishi announced that it would close the Lonsdale based engine plant and downsize its

Tonsley Park assembly plant, affecting around 1200 workers. In 2008 the closure of the Tons- ley Park plant followed resulting in around 1700 Mitsubishi workers losing their jobs.

The Response

In response to the Lonsdale closure and downsizing at Tonsley Park in 2004 a $10m Labour Adjust- ment Program and $45m Structural Adjustment Fund SA (SAFSA) were established. The Fed- eral Government provided $45m with balance provided by the South Australian Government. In addition to the services provided though the LAP, the South Australian Government provided access to financial counselling, résumé prepara- tion and career counselling valued at around $380,000 (Armstrong et al, p 345). The response to the Mitsubishi closure has been described by some analysts as “rushed…ad hoc and not very effective” (Armstrong et al, p 353), a conclusion that warrants more detailed examination than is possible in the absence of robust evaluation of clo- sure responses and outcomes, which incidentally should be integrated into the implementation of closure response strategies.

Outcomes

In a survey of Mitsubishi workers (n 372), Beer et al (2006, p ii) found that a large proportion of those affected by the closure were optimistic about the future, reporting that, “Most respondents… believed they had good prospects for finding employment within the next six months”. A sig- nificant deterioration in the quality and security of the employment secured after layoff resulted with Beer et al finding that, while “a significant number had secured employment by the time of Stage 1 interview, …many of those jobs were ca- sual or short-term contract employment,” the study reports (ibid). The vast majority of Mitsubishi workers experienced a significant deterioration in their income and security post redundancy:

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• 225 of 316 respondents (72%) reported earning less than they did after redundancy;

• Just 11% reported earning around the same post-redundancy while 15 per cent report- ed earning more;

• Around one third of those in employment had held three or more jobs in the last 12 months.

The vast majority (36 per cent) of respondents found work in manufacturing while around 11 per cent worked in retail, 7 per cent in construction, 6 per cent in health services and just 2 per cent in mining and 2 per cent in defence.

More of those who were retrenched might have found employment if they had been encouraged to undertake retraining. According to Armstrong et al (ibid, p 346) no funds were made available for retraining of Mitsubishi workers despite the existence of skill shortages in a range of areas in South Australia.

Importantly the Mitsubishi impact study re- vealed that “many…respondents reported that the JobNetwork providers were unable to assist workers in their situation,” a consequence of ap- plying a model designed to support long-term unemployed people, to recently displaced workers (ibid, p v). The key implication of this is the need to develop a tailored program of assistance that is responsive to the client group (ibid, p vi). Some respondents reported that they were not fully in- formed about the employment service entitlements available to them through JobNetwork providers. This appeared to be a function of inconsistency of knowledge among service providers.

Other effects of the Mitsubishi closure on surveyed employees indicate, as earlier studies have also demonstrated, the need for attention to be paid to a holistic response to downsizing and closures involving a coordinated response from a range of agencies beyond industry, employment and training, including health, community services and housing. The evidence includes:

• Half of respondents believed that the loss of employment at Mitsubishi affected their social life;

• Higher levels of mental health problems were reported relative to the population as a whole;

• Housing costs were a source of worry for around 60 of the respondents who sought assistance with their housing. (Beer et al, 2006, p iv).

The $45m Structural Adjustment Fund SA (SAFSA) offered grants for new business want- ing to start up in South Australia and assistance for the expansion of existing operations, with the intention that much of the employment that was generated, be to the benefit of those who were retrenched from Mitsubishi. The extent to which this was the case is difficult to discern. Armstrong et al (1998, p 345) indicate that “While there have been numerous businesses established on the Lonsdale site through SAFSA funding, the govern- ment has been forced to admit that the majority of firms who received grants have not achieved their employment targets”. They add that, “…over half of the SAFSA funding went to businesses on the northern side of the city, when virtually all of the displaced workers lived in the southern region”. It should be noted that the closure of Mitsubishi is likely to have had an impact on suppliers located across the greater Adelaide area.

Lessons

• Attention needs to be paid to dimensions of quality, security and appropriateness in the provision of career advice and placement support.

• Retraining should be offered as a pathway to alternative employment, particularly to avoid people retiring prematurely.

• Mainstream services provided to unem- ployed people are not likely to translate well

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for application to closures. Employment and support services should be tailored to meet the needs of the sector and the work- ers involved.

• A large proportion of manufacturing work- ers that were retrenched from Mitsubishi went on to work in other areas of manu- facturing, indicating that this is a highly preferred outcome. As a consequence in- dustry development funds need to be better targeted to start-ups and expansions in sec- tors that are likely to generate employment for those directly effected by closure.

• The short and longer term social, health, housing and psychological impacts of retrenchment need to be central to any response to closure. A multi-agency, multi-disciplinary case-work approach is warranted.

MG Rover

MG Rover closed its Birmingham plant in July 2005, making 5500 workers redundant and af- fecting the operations of a range of suppliers. The turnover of the company was equivalent to around 1 per cent of GDP and it generated a flow of revenue to government of around £200 million per annum (Bailey and MacNeill, 2008, p 112).

Like the Mitsubishi closure, the MG Rover closure took place during a period of relative economic buoyancy, prior to the GFC. The scale of the response was significantly larger but so was the size of the MG Rover workforce.

MG Rover was a very significant contributor to the regional economy, boosting gross regional production by around 0.5 to 1 per cent and income to government in excess of £200 million annually (Armstrong et al 2008, p 348). Five years prior to the collapse of MG Rover a Task Force was established to provide support to the automo- tive sector. The report of the Rover Task Force detailed over £58 million of initiatives in three interlinked areas, modernization, diversification

and regeneration (Bailey and MacNeill, 2008, p 112). Related to this was a program of supply chain improvement.

Bailey and MacNeil (ibid, p 113) note:

While the modernization included a number of linked initiatives to improve competitivene, through increased productivity, the new diver- sification programme sought to help suppliers diversify away from Rover, and from automotive in general, by encouraging the application of engineering skills to other industries such as medical and nano technologies.

The Response

In response to the closure, Rover Task Force – mark 2 was established to manage the response, which was resourced from a £177 million assistance package. The Task Force involved a wide range of organisations drawn from industry, govern- ment, unions and the NGO sector. The focus of the Task Force was to “…facilitate diversification in the supply chain, support ex MGR workers to find new jobs and provide assistance to the wider community” (Armstrong et al 2008, p 349)6.

The financial assistance package included the following elements:

• £50 million for re-training. • £40 million in redundancy payments. • £24 million loan fund for business growth. • £41.6 million to assist suppliers plus

a further £7.6 million for supplier diversification.

The Task Force put in place a telephone hotline for the workforce, a website, helpline and a central Jobcentre. Travel subsidies were made available for workers having to commute longer distances to work. Of particular note was a 3.4 million pound wage replacement scheme assisting around 170 firms, which Bailey and MacNeill (2008, p 114) note, “kept around 3000 workers in place for

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the critical weeks following the collapse, with 1,329 ‘confirmed’ jobs being saved in this way”. Armstrong et al (ibid) argue “that in contrast to ex-Mitsubishi workers, there has been significant assistance to ex-MGR workers”.

Specialist assistance was offered to MG Rover suppliers for diversification initiatives. In the following section we examine some survey and outcomes data collected to track post-closure experience and outcomes.

Outcomes

Armstrong et al (ibid, p 349-50) report the follow- ing outcomes from a longitudinal survey (3 waves) undertaken by de Ruyter, Bailey and Bentley (2012) on the impact of the closure.

Six months after the closure:

• More than half of the respondents (n232) were in full-time employment.

• Around one third of respondents were still unemployed.

Twelve months after the closure:

• Around 4000 of those retrenched were in work with around 90 per cent of those in full-time work (compared to around two- thirds of those in the Mitsubishi study earlier).

• 667 were undertaking or waiting for training. • 398 had received training but were not in

work. • 530 were not working.

The main employing sectors for those re- trenched in order of priority were:

• Manufacturing • Motor industry • Transport • Engineering

• Construction • Local government • Health • Government • Transport • Retail • Security • Financial services

In the final wave of the survey in 2008, de Ruyter, Bailey and Bentley (2012, p 10) found that around “86 per cent of ex MG Rover workers who had become re-employed had ‘permanent’ contracts, while the remainder (14%) employed on a casual basis, or on fixed term contracts, or via agency work”. Significant instability of em- ployment was evident for those whose contracts were for less than 12 months (the statutory pe- riod required in order to claim unfair dismissal) (ibid). Around one third of respondents who were employed reported a higher occupational role compared to their role at MG Rover, while one third reported a decline in their occupational status (ibid, p 11).

Around two thirds of respondents reported their annual incomes being significantly lower than their income at MG Rover (ibid, p 11).

Lessons

A range of policy lessons have been identified by researchers examining the Rover MG experience (de Ruyter, Bailey and Bentley, 2012, p 10; Bailey and MacNeill, 2008, pp. 115-122). These relate to the areas of employee transitions/support and industrial rejuvenation and diversification.

• Employee transitions and support ◦ Effective policy intervention requires

supporting people to enable them to have different options to move within the same sector (and thereby assisting skill reproduction).

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◦ Avoiding sudden closures and slow- ing down the process of plant closure also enable workers released to pick up jobs arising through ‘replacement demand’ where firms require workers to cover those who have left, retired and so on.

◦ Government and regional/local agen- cies need to do more to ensure that employees have the necessary skills to cope as industries change, through high quality, flexible education, training, information and mobility programmes.

◦ A policy response is needed to tack- le growing income inequality. This needs to go beyond a reliance on the National Minimum Wage and con- sist of genuine measures to provide a “living wage” for individuals.

• Industrial rejuvenation and diversification ◦ Local economic diversification

should be supported…supporting modern manufacturing…given both the growth potential of this sector and the need to diversify the economy so as to avoid over-reliance on retail and financial services as drivers of growth.

◦ Regional development policy needs to foster knowledge intensive compe- tencies through regional ‘collective learning’ which is central to the de- velopment of a successful milieu or set of territorial arrangements linked to cluster development.

An evaluation of the impact of a suite of programs implemented in response to the crisis facing Rover and then MG Rover provides useful insights into the value of different interventions (ECOTEC 2008)7. Prepared for Advantage West Midlands by ECOTEC the evaluation represents one of the most detailed of its kind available. It

reveals that the response to managing the crisis played a critical role in helping to maximize the number of workers re-employed after closure, retain workers in related businesses and create new employment opportunities. Key program strengths and areas for potential improvement identified from the evaluation included (ibid, p 10-11):

• Strong partnership working across the re- gion and recognition of its importance.

• Strong central co-ordination of the process of interventionism.

• A well prepared and efficient intervention- ist approach.

• Absence of isolationist stances i.e. every- one playing their part.

• Speed of response by all players. • Pro-active and direct approach and confi-

dence building between agencies and the private business sector.

• Flexibility in delivery and program con- struction to meet short term specific needs.

• Diversification being recognised as a con- tinuous process.

• Realisation that short term responses can form the basis of long term improvements.

• Awareness of future strategic positioning as a result of the developments associated with the Rover and MG Rover experience.

• Safeguarding of jobs.

Areas identified for potential improvement included:

• A fuller realisation of the actual dependen- cy of businesses beyond claimants.

• Avoidance of inconsistency between differ- ing agents in terms of managing programs.

• Greater emphasis on ensuring diversifica- tion was being applied into the long-term and across the West Midlands in spite of emergency situations.

• Better identification of outcomes associat- ed with program elements and monitoring.

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• Wider UK impacts needed to have been considered and the construction of relation- ships with other Regional Development Agencies was not so apparent.

• Greater emphasis on the potential leverag- ing of alternative funds as a result of pub- lic sector support to encourage employer engagement.

• Need for examination of multiplier effects as a result of jobs created or safeguarded.

• Need for strong identification of linkage between business outputs and skills devel- opment and up-skilling.

• Realisation that more could have been done to wean firms off Rover, or other large firm dependency and greater monitoring through better screening of how reliant the supplier firms actually were.

BlueScope Steel

BlueScope Steel announced the restructuring of their Australian operations in August 2011, resulting in 1,000 retrenchments (800 from the Port Kembla site). In addition to those directly effected there were around 650 indirect job losses in the Illawarra region (Nous 2013, p 6). Total direct and indirect estimates of jobs losses were estimated to range between 1450 and 2500.

Retrenchment took place two months after the announcement. In the intervening period a ‘redun- dancy swap’ arrangement was made available by the company. This enabled some workers whose positions had been made redundant to swap with someone who wished to leave but their position had not been made redundant. One consequence of this is that the redundancy program encouraged older workers to leave - around half of those who were retrenched, retired.

Unemployment in the Illawarra region was significantly higher than the State average, lim- iting local employment opportunities for those searching for work.

The Response

• A taskforce (Illawarra Stakeholder Taskforce) was established to manage the response.

• BlueScope established a Job Centre to provide support to workers – an office pro- viding information and job search advice and support. It also provided a jobs board for local employers. Access to the service was made available prior to redundancy as JSA services were not available till after redundancy arrangements were confirmed. These were confirmed around 12 months after the announcement.

• Establishment of the Illawarra Region Innovation and Investment Fund with contri- butions from BlueScope, State Government and the Australian Government – a $30m fund (Australian Government - $20m; NSW Government - $5m; BlueScope Steel - $5m over three years to June 2014) providing grants for employment generation linked to indus- trial diversification and sustainable jobs.

• Establishment of the BlueScope Labour Adjustment Program delivered by DEEWR – a $10m allocation for career support and transition services.

• A website/information sessions detailing entitlements was made available to workers.

• A Jobs Market was held to link local em- ployers with BlueScope employees.

Outcomes

• Estimated that 50 per cent of retrenched workers retired immediately.

• Of those eligible for Job Services Australia support services, 338 were placed in jobs by the end of October 2012.

• No data available on the quality of jobs or turnover in jobs after retrenchment.

• Quality of the vacancy data available to in- form job search was questioned by some.

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• Innovation and Investment Fund claims outcomes of around 900 FTE. Concerns were reported about slow pace of allocat- ing grants; no requirement for the program to directly benefit BlueScope workers; lack of support for SMEs relative to larger enterprises.

Lessons

• Delivery of programs regarded as effective but largely as a consequence of informal linkages rather than effective formal insti- tutional arrangements.

• The contribution of Local Employment Co- ordinator regarded as central to successes.

• Job Centre provided a central point for con- tact prior to formalisation of redundancy.

• Jobs Market viewed as broadening range of employment options available.

• Lack of support to map skills and identify training needs.

• Need to combine training with on the job experiences to increase employability.

• Need for more guidance about what jobs are in demand beyond vacancy lists.

• Focus on supply does not of itself solve the problem of lack of available and appropri- ate employment.

• Support to BlueScope suppliers regarded as inadequate, particularly given the large presence of these in the area. Need to pro- vide assistance for diversification.

Bridgestone

Bridgestone Australia was a major tyre manu- facturing factory based in Northern Adelaide in South Australia. In October 2009 it announced that it would close its Salisbury plant leading to the retrenchment of 600 workers. This followed earlier automotive industry plant closures, notably Mitsubishi in 2004 and 2008.

The Response

A ‘Beyond Bridgestone’ steering committee was established to manage the response to the closure. The committee was supported by five working groups. Nous (2013, p 28) notes that “the involve- ment of so many players from different layers of government confused the process for workers who would have benefited from a single information source or co-ordinator”. A Local Employment Co-ordinator worked with a separate working group, which was linked to the steering committee.

A range of institutions provided services funded by the Automotive Industry Structural Adjustment Program while additional support was provided through the Productivity Places Program for training. Retrenched workers were provided access to Stream 3 Job Services Australia intensive support services.

Outcomes

• While 438 Bridgestone workers were re- ported to have found jobs, the relative quality and security of these jobs are not known.

• Job search assistance provided by JSAs was reported as valuable by some.

• Concerns were expressed that the reward structure in place for JSAs led them to streaming people into short-term jobs rath- er more secure longer term arrangements.

• The take up of PPP places was low. • Access to Recognition of Prior Learning

assessment was accessed by 404 workers with 267 gaining qualifications through this process.

Lessons

• The governance arrangements were re- garded as inappropriate and cumbersome by some. Lack of communication be-

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tween the working groups and the Steering Committee was a limitation, though early inertia was overcome to a large extent through the constructive role played by the Local Employment Co-ordinator.

• Recognition of Prior Learning played a key role in successful transitions for a large proportion or workers.

• JSAs may be too focused on short-term outcomes driven by the incentive struc- tures in place. This may generate job place- ments that are unsuitable or unsustainable.

• Lack of data about the experiences of workers interactions with services makes it difficult to evaluate the effectiveness of specific services.

Responding to Shocks

A recent report on lessons from past economic shocks commissioned by the British Government, Cook et al (2013, p 51-60) provides a useful summary of potential interventions/responses to help inform future action. These are summarised below by domain (Business, Supply Chain, People and Place).

The British Framework for Managing Economic Shocks

A key outcome of the research commissioned by the British Department for Business, Innovation and Skills on Economic Shocks has been the development of a framework for how to under- stand and respond appropriately to them (Cook et al, 2013, p 61-92). The broad contents of the framework are summarised below. It comprises four domains and accompanying guidance to assist with responding to and managing shocks.

Diagnosis of the Shock

Key elements in this domain are:

• Determine whether or not there is (or there might be) a case for intervention in any or all of the domains.

• Identify the critical issues and potential needs for each of the four domains.

• Identify the market and other failure argu- ments that might provide a case for public sector intervention.

Key outputs for this stage should be assessment and diagnosis of the shock.

Reviewing Functions and Forms

Key elements in this domain are:

• What mainstream services already exist that businesses or individuals could be signposted to, and/or that place/communi- ties could benefit from.

• What existing initiatives and services can be leveraged and/or deployed in response to the shock.

• What additional bespoke actions might be required to cover any needs that remain unmet by mainstream or existing services, and how self-standing might these be into the future.

Developing Appropriate Packages

Key elements in this domain are:

• Testing strategic fit, so as to ensure that the response action works.

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Table 3. Potential interventions/responses to help inform future action (Cook et al (2013, p 51-60))

Domain Intervention/Response Commentary on what Worked/Learning

Business Support package to influence decision making

In the case of General Motors’ decision to stay at Ellesmere Port, government was able to draw on a package of interventions around the business and its supply chains (e.g. Grant for Business Investment, Advanced Manufacturing Supply Chain Initiative) and its workforce (e.g. National Apprenticeship Service). This was also facilitated by workforce concessions to help improve plant efficiency.

Business Selective Financial Assistance Harris and Trainor (2007) found that receipt of Selective Financial Assistance (SFA) by manufacturing firms in Northern Ireland reduced the probability of plant closure by 15%-24%. The results showed that the overall net effect on employment change was an increase of around 19,600 jobs in plants that had received SFA compared with a loss of 33,200 jobs in eligible but non-assisted plants.

Business & supply chains

Business support Albeit based mainly on self-reported benefits, RDA evaluation evidence found that the largest benefits (relative to costs) were in the area of business support (PricewaterhouseCoopers, 2009).

Supply chains

Support to modernise and diversify Mitigating actions were successful in helping suppliers to Rover to diversify between the Rover Task Force in 2000 and the MG Rover Task Force in 2005, and then thereafter (ECOTEC, 2008). This was a tailored support package.

People Combining employer-led redundancy support with Jobcentre Plus and Rapid Response Service

The quick and coordinated response following the closure of RTA in Northumberland meant that 78% of redundant workers were in new employment, engaged in start-up/self-employed enterprise, in training, or retired within several months of closure. The sustainability of outcomes was unknown at the time of the work.

People Coordination and ‘flexicurity’ The coordination between employers, employees and public authorities has been identified as key in Finland in providing financial security to redundant workers in between jobs (European Commission, 2008). This incentivises partners to help secure positive destinations for workers quickly. In Austria, outplacement services are jointly-funded by employers, surviving workers and redundant workers (European Commission, 2010) – this requires a strong public employment service and a cooperative ethos and culture.

People Employer pools and coordination In various countries in Europe, employer pools are used to identify opportunities in other employers locally – e.g. in Sweden and Germany (European Commission, 2010)

People Retraining A key part of the response to MG Rover’s closure was having: • discretionary support so that workers could take part in retraining for alternative careers • flexibility that could be used to bend rules (e.g. retaining benefits even though workers were in short-term full-time training). 90% of ex-MG Rover workers were in employment three years after the closure and 60% had undertaken some form of retraining/education (Bailey et al., 2012).

Long-term restructuring Pringle et al. (2011) identify a number of issues in supporting place-based growth, including having long-term stability in institutions, developing new areas of growth in related activities, and the importance of strong research centres and human capital that reinforces development. This emphasizes holistic place-based responses over a long period of time that take advantage of local strengths. E.g. in Germany (in the Ruhr and Munich for example), there have been targeted investments in strategic transport, and assets such as science parks and educational establishments alongside other support.

Place Long-term restructuring In Gothenburg, long-term response to closure of the shipyards has taken 25+ years. It has combined investment in educational establishments, with development of related clusters around information technologies where synergies have been found to other sectors, e.g. automotive. The process benefited from long-term stability in institutions, and a private sector ethos of borrowing at commercial rates to fund regeneration (Cadell, 2008).

continued on following page

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• Options assessment to consider the pros, cons, possible costs and benefits and risk associated with different actions; key to this is to review critically past evaluation learning.

• Discussion with key agencies delivering relevant services about capacity and ca- pability to deliver at higher scale and/or around eligibility criteria.

• Identification of possible funding sources to deliver actions, including within part- ners, private sector, national and other sources – and discussion about scope to

relax any eligibility criteria or other con- straints on funding.

• Planning to set out all relevant actions, lead parties taking responsibility for actions and reporting arrangements.

Implementation

Key elements in this domain are:

• Review and refinement of actions. • Monitoring and evaluation of the event and

interventions.

Figure 2. British Department for Business, Innovation and Skills’ Framework for Managing Economic Shocks (Cook et al, 2013, p 61-92).

Domain Intervention/Response Commentary on what Worked/Learning

Place Investing in technology assets In the West Midlands, longer-term transformation of the economy was implemented through regional strategy and regional programs around clusters and High Technology Corridors. The High Technology Corridors program was seen as effective in developing technology assets and was combined with specialist support to businesses, e.g. through proof of concept funding and innovation networks (SQW, 2008).

Place Developing sites The future development of sites and premises requires some coordination between public authorities and private developers/owners. In some cases, developers may ‘sit on’ sites, hoping values will increase. A desirable outcome is for sites/premises to be used appropriately in the context of local economic strengths, which may require taking a long-term view and may mean seeking higher value uses. For example, the current approach at Discovery Park (formerly Pfizer) seems to combine technology uses with other employment creation that may be appropriate to the local labour market.

Table 3. Continued

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FOUNDATIONS FOR REJUVENATION AND REGENERATION

This final section of the chapter distils some broad strategic implications flowing from the various strands of literature reviewed here. Taken together they might be regarded as some of the foundations for successful rejuvenation and regeneration.

Strategic Implications

As we have discovered, rejuvenation and regen- eration can be regarded as mutually reinforcing concepts. When intelligently integrated they have the potential to significantly improve the social and economic prospects and wellbeing of areas experiencing industrial decline, closures and a legacy of underinvestment in social and physical infrastructure.

Integrated Planning and Execution

• Integration of economic, industry, work- force, social and urban policy and program agendas.

• Ensuring responsiveness to place, econom- ic, political, historical and cultural needs and circumstances.

• Agile and responsive collaboration and governance processes and structures.

Facilitative and Catalytic Leadership and Institutions

• Developing high quality leaders and diffus- ing leadership.

• Authentic engagement, trust building and collaboration.

• Effective communication of vision, strate- gic responses and progress.

• New trans-disciplinary institutional spaces for design thinking, problem solving and action.

Early Impact Assessment and Response Management

• Early assessment of the full range of poten- tial impacts of disinvestments and closures to provide an evidence base prior to them occurring.

• Economic, workforce and social modelling of potential and actual impacts.

• Scenario planning of alternative responses to large scale retrenchments with particu- lar attention to short and medium term de- mand side solutions.

• Ensuring that the social and economic costs of industry adjustment are mitigated or minimised for workers, families and communities through early intensive as- sistance appropriate support or pathways to appropriate employment made available to all those affected by restructuring, re- trenchment or closure.

Transformative Knowledge Intensive, High Value Economic and Industry Development Pathways that Build on Existing Strengths and Add New Ones

• Building and sustaining a robust regional innovation system.

• Developing viable pathways for transition- ing from mass production to knowledge intensive, high value goods and services.

• Transforming existing industries and en- terprises to make them more resilient in the face of domestic and global pressures.

• Fostering and supporting the growth of new and more resilient firms/sectors to re- spond to the decline of others.

• Investing in high performance workplace systems.

• Facilitating and sustaining robust and outward looking industry clusters and networks.

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• Fostering and investing in a culture of cre- ativity and innovation sustained by design thinking processes and institutions.

Modernising Physical and Social Infrastructure and Improving Well-Being

• Identifying early infrastructure develop- ment priorities that help to boost employ- ment in the short term and productivity over the medium term.

• Improving the quality of civic amenity as a foundation for improving morale, well- being, population/workforce attraction and retention.

• Modernising housing and transport infra- structure to improve well-being and reduce travel to work times.

Learning from Experience

• Ongoing monitoring, evaluation and adjust- ment as appropriate of response strategies.

ACKNOWLEDGMENT

This chapter has been prepared with grant support from the Government of South Australia through the Department of Manufacturing, Innovation, Trade, Resources and Energy and the Stretton Centre supported by the Australian Government.

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KEY TERMS AND DEFINITIONS

Creative Destruction: The process by which innovation arises from the decline of previous regional economic orders, i.e. old industrialised areas undergoing renewal through regional in- novation system approaches and diversification.

Industrial Diversification: Processes by which industries build on the capabilities of exist- ing manufacturers to develop new products and unlock new markets.

Industrial Rejuvenation: A multi-faceted strategy that seeks to manage pressures and complex change in response to local, national and global conditions. It involves the transformation of existing industries as well as the development of new and more resilient ones.

Industry Clusters: Concentration of net- worked businesses, suppliers and institutions in a region that leads to increased productivity and competitive advantage the diffusion and sharing of knowledge.

Integrated and Inclusive Problem-Solving: An approach to innovation processes based on multidisciplinary collaboration to optimise out- comes for the various parties involved (sometimes called ‘design thinking’, ‘co-design’, ‘integrated design’, ‘open innovation’ etc.).

Regional Innovation Systems: A strategic response to industrial decline and dislocation that identifies the competitive foundations for industrial renewal. It considers the roles that gov- ernment, industry, unions and wider community might play in establishing the rapid diffusion of knowledge, skills and best practice to sustain renewal and build robust and successful industry clusters.

Smart Specialisation: Involves smart growth based on knowledge and innovation; sustainable growth promoting a more resource efficient, greener and competitive economy; and inclusive

growth, fostering a high employment economy de- livering economic, social and territorial cohesion.

Urban and Regional Regeneration: Entails the modernisation and revitalisation of ageing housing stock and physical and social infrastruc- ture, creating healthy, stimulating and vibrant spaces to live, work and invest in.

ENDNOTES

1 Economics of Agglomeration: Many economists argue that the economic suc- cess of cities and regions is closely related to the degree of concentration of economic activity, the sectoral composition of this activity and important contributory factors such as urban amenity, knowledge and skills intensity, social and creative capital and the quality of physical and social infrastructure. Following the path breaking work of Alfred Marshall in the late 19th century, economic geographers and economists have been eager to better understand the drivers of economic concentration – an area of research known as agglomeration economics. Locations thick with similar economic activity expose firms to pools of skilled labour specialized suppliers and potential inter-firm knowledge spillovers that can provide firms with oppor- tunities for competitive advantage. (Alcacer and Chung 2010, p 26)

2 Benefits of Agglomeration: Dense concen- trations of economic activity are generally seen as giving rise to increasing returns that may be shared by business units that cluster in space. The analysis shows that virtually all plants reap productivity benefits from being located in places where occupational distri- bution of workers matches the demand for labour by occupation. ..older firms, whose

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production processes have been standard- ized, are better able to exploit advantages of local supplier/buyer networks. (Brown and Rigby 2013)

3 Smart Specialisation is about generating unique assets and capabilities based on the region’s distinctive industry structures and knowledge bases. (EU 2012a, p 11)

4 The D.School Process: This process – which has been called design thinking – draws on methods from engineering and design and combines them with ideas from the arts, tools from the social sciences and insights from the business world. Students begin in the field, where they develop empathy for the people they design for, uncovering real human needs they want to address. They then iterate to develop an unexpected range of pos- sible solutions, and create rough prototypes to take back out into the field and test with real people. (http://dschool.stanford.edu)

5 Collaborative Research in the Real World: Living laboratories provide a way to structure research and innovation so that those involved work together more co- operatively and the end result constitutes a better response to the preferences and circumstances of innovation end-users and others affected and to environmental impera- tives. Researchers, industry, government and often end-users collaborate on the research and development, testing it out in real world settings. (Salter and White 2013)

6 Rover MG Program – Employment and Economic Impact of Programs: A suite of programs was put in place by government to help minimize negative impacts from the restructuring and ultimate closure of MG Rover. Fortunately some evidence on the

impact of these programs is available. An evaluation of key Rover Task Force 2000 and MG Rover Task Force 2005 programs was undertaken by ECOTEC in 2008. The evalu- ation estimates that around 620 jobs were created and nearly 12,000 jobs safeguarded over the 2002/3-2007/8 period as a result of the suite of programs (ECOTEC, p 31). The bulk of these were attributable to extension support, innovation, diversification and wage subsidy programs. ECOTEC estimate the Gross Value Added benefit of the jobs created and safeguarded to be around £174 million.

7 Rover MG Program – Conclusions: “The evidence suggests that on the whole the Rover Task Force and MG Rover Task Force pro- grams were highly successful in mitigating the overall economic impact of the declining fortunes of the automotive sector and its supply chain. The interventions however, must be taken in the context of a prevailing relatively healthy labour market, but one where a declining automotive sector was far from conducive to the re-employment of a large number of workers back into the sector itself and where the overall trends in this sec- tor did not provide support for employment, investment and growth. The contribution of the Task Force activities in generating and safeguarding jobs and assisting businesses is considered substantial especially in terms of generating and replacing to a degree what would have been lost income and Gross Value Added. The amount of skills training was substantial and contributed in no small part to the retention of experienced workers”. (ECOTEC 2008, p 11)

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Section 2

Responses for Sectors, Clusters, and Regions

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The Role of Local and Regional Institutions

ABSTRACT

This chapter explores the ways in which regions that are remote from the main concentrations of economic wealth and power can achieve development in a high cost environment. The role of effective institutions in creating the conditions for economic development has become a major field of scholarship. Recently, these insights have been applied to the urban and regional scale. This chapter pays particular atten- tion to the role that regional and local institutions play in shaping patterns of economic performance, especially in high cost environments. The chapter examines ways in which this new thinking is informing regional policy. It provides some case studies of regions that have succeeded in the high cost environment of Europe. It concludes by stressing the importance of effective and adept local and regional institutions in ensuring the prosperity of cities and regions.

REGIONAL DEVELOPMENT IN A HIGH COST ECONOMY

How can regions prosper in a high cost economy? Peripheral cities and regions are typically seen as especially vulnerable in a high cost environment. The concentration of economic activity in mega- cities with large and diverse markets and agglomera- tions of industries is seen as providing productivity returns that offset the disadvantages of a high cost base (Glaeser, 2011). This chapter explores the ways in which regions that are remote from the main concentrations of economic wealth and power can achieve development in a high cost environment.

The role of effective institutions in creating the conditions for economic development has become

a major field of scholarship. For Douglass North (2005) the long-run evolution of the political- economic structure of a society is key to how choices are made and how they are able to shape economic policies and contribute to “adaptive efficiency,” that is, the ability of some societies to adjust to shocks in a world characterised by ubiquitous uncertainty and constant change and under conditions of bounded rationality (cf. Simon, 1986). Institutions are the “scaffolding that shapes human interaction” (North 2005: 48) or, “the rules of the game in a society; (and) more formally, the humanly devised constraints that shape human interaction” (North 1990: 477).

Recently, scholars and policymakers have sought to apply these insights to the urban and

John Tomaney University College London, UK

DOI: 10.4018/978-1-4666-5828-8.ch004

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regional scale (see Tomaney 2013 for an over- view). Thus this chapter pays particular attention to the role that local and regional institutions play in shaping patterns of economic performance, especially in high cost operating environments. The chapter begins by looking at new thinking on “place-based” forms of development. It then exam- ines ways in which this new thinking is informing regional policy. The chapter then looks at some case studies of regions that have succeeded in the high cost environment of Europe. It concludes by stressing the importance of effective and adept local and regional institutions in ensuring the prosperity of cities and regions.

NEW THINKING ON PLACE- BASED CITY AND REGIONAL DEVELOPMENT

Over recent years there has been a growth in new thinking about the process of local economic de- velopment. Across the world local and national governments have moved away from traditional approaches that emphasised the provision of large-scale infrastructure, the attraction of foot- loose investors and the disbursement of transfer payments designed mainly to compensate for the effects of industrial restructuring and low growth. Under these conditions, peripheral regions in high cost economies often find themselves com- peting for investment through lowering wages. Such approaches have generally proved to be temporary measures that fail to contribute to the factors that will underpin more sustainable forms of development. The new approaches tend to emphasise the identification and mobilization of endogenous potential; that is, the ability of cities and regions to grow drawing on own resources. The new approach though is applied not just in areas with obvious economic strengths such as major cities – but in all areas. The new “place- based” approaches involve attempts to tap into

economic potential that remains unused and not identifiable to outside agencies, so that all cities and regions – potentially at least – can contribute to national development.

This kind of thinking is evident in recent reports by the OECD (2009, 2010 and 2012), by Fabrizio Barca (2009) for the EU and from the Obama administration (White House, 2010), which have pioneered “place-based” approaches. These reports posit a model of regional and local development intervention which is being increas- ingly adopted, in adapted fashion, in developed and developing countries, in cities and regions, and which at its heart focuses on the identification and mobilisation of endogenous assets, i.e. the region’s internal skills and innovation capabilities. The OECD calls it a “new paradigm” of regional development (see Box 1). Skills and innovative ca- pacity are very important to regional development because they can be used to embed investment in cities and regions in an era of more mobile capital in ways that the provision of low cost labour and infrastructure alone cannot.

Table 1. Old and new paradigms of regional policy (Source: adapted from OECD (2009: 51) Regions Matter: Economic Recovery, Innovation and Sustainable Growth, OECD: Paris)

Old Paradigm New Paradigm

Objectives

Compensating temporarily for location disadvantages of lagging regions.

Tapping underutilised potential in all regions for enhancing regional competitiveness.

Unit of intervention

Administrative units.

Functional economic areas.

Strategies Sectoral approach. Integrated development programmes.

Tools Subsidies and state aids.

Mix of soft and hard capital (capital stock, labour market, business environment, social capital and networks).

Actors Central government. Multiple levels of government.

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‘Place-based’ development policies are par- tially a response to perceived failures of earlier regional policies and focus instead on tackling un- derutilised economic potential and reducing social exclusion, through supply of integrated goods and services tailored to local contexts and triggering innovation, which is critical to economic growth.

NEW APPROACHES TO LOCAL AND REGIONAL DEVELOPMENT: GLOBAL DEVELOPMENTS

Table 1 summarises the broad shift in approaches to regional policy that can be observed globally, albeit there is considerable unevenness in the ap- plication of the new principles and in practice the lines between them prove to be fuzzy.

The new paradigm emphasises bottom-up, locally designed and owned strategies aimed at promoting growth potential in all local econo- mies. It stresses the importance of integrating policies for land-use, infrastructure and business support. It places a particular emphasis on “soft”

factors of development such as high-level skills and innovative capacities of firms and public sector organisations and especially the role of inter-firm networks in contributing to growth. New approaches tend to emphasise the need for multi-annual comprehensive strategies which ad- dress the broader local environment that affects the performance of firms, including the quality of human capital, innovation and the provision of patient investment funds. They also tend to stress the promotion of endogenous assets rather than the role of exogenous investments and transfers. Increasingly cities and regions conceive of their economies as regional innovations systems. Within these new approaches there is a preference for iden- tifying and exploiting opportunities for growth, rather than ameliorating the consequences of de- cline. A further feature of the new paradigm is the prominence of negotiated multi-level governance with a stronger role for local and regional actors, including business and other social partners, in the formulation of policy. The proliferation of the Regional Development Agency model, especially in Europe, is a concrete expression of some of these developments (OECD, 2009, 2010, 2012).

To some extent the new paradigm represents an addition to existing concerns and approaches. Thus, good quality infrastructure is regarded as a necessary but insufficient condition for devel- opment. Infrastructure investments only have a positive impact on growth and development if they are accompanied by improvements in human capital and innovative capacity. For example, re- taining graduates and attracting skilled migrants are typically policy priorities in the new regional policy paradigm, although these are especially difficult to achieve in lagging regions. The focus on human capital and the centrality of innovation, though, are the hallmarks of the new paradigm. In a knowledge economy, know-how and product, process and organisation innovation are the key to competitive advantage. Despite the growing integration of the international economy and concomitant increase in the mobility of capital,

Box 1. A “new paradigm” of city and regional development? (OECD, 2009: 5)

“In response to poor outcomes, regional policy has evolved, and continues to evolve, from a top-down, subsidy-based group of interventions designed to reduce regional disparities, into a much broader family of policies designed to improve regional competitiveness. These policies are characterised by: a strategic concept or development strategy that covers a wide range of direct and indirect factors that affect the performance of local firms; a focus on endogenous assets, rather than exogenous investments and transfers; an emphasis on opportunity rather than on disadvantage; and a collective/ negotiated governance approach, involving national, regional and local government plus other stakeholders, with the central government playing a less dominant role. The new regional approach is based on the principle that opportunities for growth exist in the entire territory, across all types of regions. The aim is to maximise national output by encouraging each individual region to reach its growth potential from within. Before, policy makers regarded regional polices as a zero sum game. Recent reforms of regional policy in a number of OECD countries provide evidence that this thinking has undergone a paradigm shift”

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cities and regions which offer specialist skills and innovative capacities that are at a premium in the economy are able to attract and retain enterprises because of the quality of their local human and knowledge capital, albeit these need continual upgrading. The issue here is how cities and regions insert themselves and draw benefit from national and global flows of investment.

The shift from redistributive approaches to growth-oriented spatial policy has different impli- cations for different types of region. In general the focus on opportunities and the advantages afforded by agglomeration economies would appear both to favour larger metropolitan areas and heighten territorial competition at the expense of weaker cities and regions. In Europe, cities and regions are insulated from the full effects of heightened interregional competition because, even under the terms of the new paradigm, centralized fiscal systems, which allocate resources according to population, act as automatic financial stabilisers of local economies. As a rule, the kinds of fiscal crises of local and state governments which are visible in the United States are less frequent in Europe. In Europe, territorial competition has tended to be regarded as a zero sum activity, which exacerbates territorial inequalities, although it may improve the efficiency and timeliness with which infrastructure, services and skills are provided.

Cities can derive economic advantages by virtue of their size, diversity, the extent of their economic specialisation, and the role these play in contributing to lower costs of labour and in- puts and generating knowledge spillovers and an increase in the value of urban assets. On the other hand, the advantages of concentration are offset by “diseconomies of agglomeration” including rising land and property prices, which can have negative labour market impacts and by costs of congestion. Concentration may drive growth, but the accrued private benefits are associated with societal costs. The balance between forces of centralisation and decentralisation is partially contingent on time and place and the extent to which public policy

is effective in its management and the extent to which growth occurs in “unexpected places” (OECD, 2006, 2009; Turok, 2004).

The new paradigm operates differently in different places. In more remote rural areas char- acterised by a declining share of employment in agriculture, it finds expression in the shift from sectoral policies to the promotion of local com- petitiveness based on sustainable development and resource management, diversification around natural resource endowments, the introduction of new skills and technologies into traditional sec- tors, and reform of local governments in order to achieve scale economies in service provision. In many parts of Europe, policy focuses increas- ingly on interactions between urban and rural areas, often in the context of pressures to man- age urban growth, with land considered less for its agricultural value and more for housing and leisure amenity.

At the urban scale, the new paradigm finds expression in the shift away from a focus on managing the consequences of urban decline to strategies based on making cities attractive to mobile knowledge workers. Urban problems, however, have not disappeared and in some re- spects have intensified, contributing to a growth in intra-urban inequality, sometimes exacerbated by rural migration. In practice, there is consid- erable variation in approaches to urban policy reflecting the degree of decentralisation within national political systems and the wide diver- sity of urban problems and opportunities. But, in principle, large agglomerations are able to contain a greater range of specialisms in growth sectors which avoid the problems of narrowly specialised economies and make larger urban economies more resilient, notwithstanding the fact that the importance of manufacturing as the “flywheel of growth” makes it critical to policy concerns (Kaldor, 1972). Policy strongly focuses on the promotion of knowledge assets, including industry-university links and the en- couragement of key clusters, which require a

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detailed knowledge of the economic structure and its properties (OECD 2006). While almost all large metropolitan regions are seeking to be hi-tech leaders, Turok cautions that,

…most branches of most urban economies do not need to compete in international markets. Many cities could prosper by serving predominantly regional and national markets, especially as ser- vices become a larger share of their economies (2004: 1072).

In general, major cities, especially cities at the top of urban hierarchies confront the dilemma of economic dynamism versus liveability. Live- ability may increasingly be a factor in attracting dynamic firms and individuals, but it is constantly under threat in successful cities. Designing taxa- tion regimes, and planning effective governance systems which address the negative factors that threaten liveability (including social inequality) is highly challenging, but there are cities around the world which seem to manage this challenge better than others.

PLACE-BASED APPROACHES IN EUROPE

The EU is characterised by deep and enduring re- gional inequalities, partly the product of successive enlargements, in which lower income countries acceded to membership, but the result also of enduring structural problems in some regions in Western Europe. At the same time, the EU is a high cost environment for firms. The European Commission’s Fifth Report on Cohesion (2010) identified mixed progress on addressing regional development with some evidence of narrowing disparities between countries, but the widening of regional disparities within countries often reflect- ing the accelerating growth of capital cities and declining relative performance of lagging regions. Even in the current context of severe austerity

there are marked differences in the resilience and performance of regions within Europe.

Within Europe, the distinction between ur- ban and rural regions is increasingly irrelevant, partly because of the growth of suburbanisation and, partly, because the new paradigm suggests growth is possible in both types of region. In Europe, policy increasingly is concerned with the interaction between rural and urban economies, reflected in the growing interest in, and concern with, the development of city regions. This concept stresses the relationship between cities and their hinterlands. In some cases, such regions are mono- centric, with a very strong urban centre – such as London, which dominates the whole of south-east England – or polycentric, with inter-connected multiple development nodes or centres often pro- viding complement functions in the urban-rural system – such as the Randstad in the Netherlands or the Rhein-Ruhr region in Germany.

Within this context the European experience provides good examples of cities and regions which have prospered and in which public policy and effective city and regional development strate- gies have played a critical role (Pike et al, 2006). These include cities which are simultaneously economically dynamic, relatively highly taxed and “liveable,” notably in the Nordic and Alpine countries. Europe also provides examples of economies which have maintained competitive- ness despite a dependence on traditional industries through the pursuit of strategies based on innova- tion and the promotion of SME networks, such as Emilia Romagna and Toscana (Tuscany) in Italy or Baden Württemberg and Bayern (Bavaria) in Germany or Steiermark (Styria) in Austria or which have remade themselves as high tech regions based around universities, such as Västra Götaland (Sweden) or Oulu (Finland). Industry clusters based on the developing manufacturing and knowledge activities have developed in west- ern Norway in relation to oil and gas and wood in Styria. Finally within Europe are regions which have successfully industrialised on the basis of

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the attraction of FDI including Navarre (Spain) and Wielkopolska (Poland). All of these regions are being tested in the current severe recessionary conditions in Europe, but some regions are likely to prove more resilient than others.

Boxes 1-4 report the experiences of four Euro- pean regions that have performed comparatively well over recent years, albeit they face intensified competition and restrained public finances in the current context. A number of general lessons arise from these examples. The production of integrated city and regional development strategies is gener- ally accompanied by the development of strong institutions of regional governance – a process sometimes referred to as the “new regional- ism”. Decentralisation and devolution have been strong tendencies across Europe, albeit in many countries central governments retain control of public finances. Across Europe the Regional Development Agency model has been widely adopted — the European Association of Develop- ment Agencies (EURADA) has a membership of about 150 regional development agencies from all member states. Typically, they operate at a range of urban and regional scales and tend to be semi-autonomous bodies, with strong business representation and a focus on key local clusters and the promotion of innovation (Bellini, et al, 2012). However, there is a wide diversity of forms of decentralisation between and even within countries and assessing the impacts of these is difficult. One crucial denominator is the form of accountability to which development bodies are subject. In some cases, Regional Development Agencies are instruments of central government such as in England or Romania. In other cases, they are accountable to sub-national governments such as ERVET (Emilia-Romagna Valorizzazione Economica Territorio) in Emilia Romagna; or SFG, the Styrian Economic Development Agency (Steierische Wirtschaftsförderung) in Austria. Elsewhere, the emphasis has been on coordinat- ing existing multi-level governance institutions to

focus on shared priorities, such as in the Swedish Regional Growth Agreement (tillväxtavtal).

The OECD (2009: 112-113) concludes that lo- cally accountable agencies are a superior form of institution because, by drawing on information and analysis possessed by local actors, they allow for a better focus on the identification and exploitation of local opportunities and the integration of this into effective strategies. However, local institu- tions can also contribute to functional, cognitive and political “lock-in” where local development strategies remain focused on outmoded sectors or activities (Pike et al, 2006). The examples of ERVET and SFG above are noteworthy because both have been critical to the dynamic adaptation of their respective industrial structures to chang- ing competitive environments. These approaches to development policy rely heavily on the input of local actors such as business organisations, requiring these same organisations to devolve their structures and develop local analytical capacity.

In short, recent interest in place-based ap- proaches to local development has begun to at- tract much policy attention and debate in Europe. Europe is characterised by a diversity of local economic experience, but well performing regions typically exhibit strong commonalities notably the presence of clear local economic strategies, effective and accountable local institutions and emphasis on innovation as the centrepiece of the approach.

LESSONS FOR CITIES AND REGIONS

Although the challenges facing peripheral cities and regions are formidable, there is evidence that they can succeed in high cost environments. A recent study by the Organisation for Economic Cooperation and Development (OECD, 2012) suggested that while the power of economic concentration is incontestable, there is also reason

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Box 2. Small firm networks and international competitiveness in Emilia Romagna

The experience of Emilia Romagna has attracted worldwide attention for the lessons it provides in relation to local and regional development. Emilia Romagna has a population of 3.9 million people, with Bologna its capital and part of the Third Italy group of regions located between the poor south (or Mezzogiorno) and northern industrial heartlands around Turn and Milan. It experienced rapid and sustained economic growth during the 1970s with a distinctive economic structure based on 90,000 small manufacturing firms, 90 per cent of which employed less than 50 people. The region was characterised by many “industrial districts” producing high value mature products based on networks of cooperating artisan enterprises, such as high end garments, footwear, fashion and furniture; ceramic tiles, farm machinery and engineering products and motorbikes. Also distinctive was the region’s political culture, which was dominated by the Italian Communist Party (PCI) for most of the post-war period. The PCI-controlled regional government established a sophisticated set of institutions to support the development of the small firms, including the regional development agency, ERVET, and a group of “real service centres,” which provided direct support to small firms in particular sectors (http://www.ervet.it/ervet2010/Default.asp — in Italian). During the 1980s economic growth slowed in the region in face of intensifying international competition and the region underwent a period of economic and institutional restructuring. The process of industrial restructuring saw the decline of some industrial districts, the increased use of informal migrant labour and the consolidation of some micro-enterprises into larger firms. But this occurred alongside the renewal of some existing activities and the emergence of new ones and the arrival of inward investors for the first time. This process involved the intensification of innovation and upgrading of skills within existing sectors, but also the growth of new activities such as business services and consultancy linked to traditional industries. Changes in policy and governance accompanied these developments. The PCI reduced its influence in the region and presided over a shift to a public-private partnership model of support for regional development, with the private sector more closely involved in the design and management of the regional development policies and agencies. Although the regional government of Emilia Romagna gained new powers from the central government, it undertook a major reform of regional development institutions, closing many real service centres, focusing more strongly on support for innovation, entrepreneurship, the provision of patient capital and support for internationalisation of small firm activities. At the same time support moved away from individual firms to support for firm networks and the development of a “one stop shop” approach to support for enterprises. These developments were associated with a relative resurgence of the economic performance of the region. It would be wrong to eulogise this experience, but some important lessons can be drawn from it. These lie less in the particular forms of small firms that underpin the model of growth that are impossible to transfer, but rather the degree to which competitiveness was based on the adaptation of existing industries and the way in which locally owned policy and institutions have evolved to support this over a long period. Sources: Brusco (1982); Bellini and Pasquini (1998); Rinaldi (2005), ERVET documentation.

Box 3. Renewal and growth in mature industries in Styria (Steiermark), Austria

Styria (Steiermark) is a region which attracts attention because of its relatively successful recovery from a structural crisis of its economy in the 1980s. Styria is a state (Land) in the Austrian federal system with Graz its capital city and a population of 1.2 million people, traditionally governed by the Austrian People’s Party (ÖVP) until 2005. The economy was historically based on iron and steel production and mechanical engineering, with a high degree of public ownership. These sectors contracted in the recession of the 1980s and the region experienced a peak unemployment rate of 18 per cent and the state became a byword for economic decline in Austria. However, this situation changed during the 1990s and 2000s and — until the global financial crisis — output and employment in the state grew faster than the Austrian average. The basis for this improved performance was a massive increase in R&D and innovative activity. By 2007, Styria had had the highest spend per state on R&D as a proportion of Gross Regional Product at 4.3 per cent (compared to the Austrian average of 2.46 per cent) with over 70 per cent of this expenditure in the private sector and employed over 10,000 workers in this activity. The transformation of Styria’s performance coincided with some important institutional changes. At a national level responsibility for innovation policy — hitherto a national policy —was devolved to the states. Meanwhile, at the state level, economic development policy was radically restructured. At the centre of this restructuring was the creation in 1991 of a new regional development agency, the Steirische Wirtschaftsförderung (SfG), an independent semi-public body funded by the state government (http://www.sfg.at/ — in German). SfG developed a strategy focused on improving the innovation performance of existing firms and attracting new firms with a strong innovation performance. This strategy was pursued with a strong emphasis on support for the development of key clusters which it had identified as being important for the regional economy and in which the state exhibited real strengths. The state’s seven higher education institutes were also identified as a key strength and the aim of the strategy was to develop and intensify university-industry links within (and beyond) the region. While some of these activities were hi-tech, such as life sciences and informatics located around Graz, others included mature sectors such the automotive, wood and paper and mechanical engineering industries. The aim of the strategy is to raise the innovation performance of each of these sectors. The strategic focus on the innovative potential of mature sectors is a distinctive feature of the Styrian case. These issues are exemplified by the wood and paper cluster (http://www.holzcluster-steiermark.at/en/desktopdefault.aspx). Over 60 per cent of Styria is covered in forest and forestry and associated industries employ 55,000 people in 5,000 businesses. Enterprises are involved in a long value chain from timber harvesting and processing to innovation-intensive, high-end products such as flooring, fuel, housing and paper. This cluster has attracted global attention in part because of the large R&D programme supporting its development, focusing on innovations in the sustainable use of wood as a building material especially in housing. Sources: Geldner (1998); Trippl and Tödtling (2008); Steiner and Schenlast (2012) Sturn (2000); SfG documentation

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to question the extent to which economic growth is solely associated with densely developed mega-cities. Statistical analysis demonstrates that sources of economic growth among OECD regions are heterogeneous, while the potential for growth exists in a diversity of locations with human capital and innovation as key factors. The study explores why these patterns emerge, including why some regions become trapped in low growth equilibriums. A key explanatory factor for poor economic performance turns out to be “institutional bottlenecks” including poor mobilisation of stakeholders, lack of continuity and coherence in the implementation of policies

by institutions, institutional instability, lack of a common and strategic vision, and lack of capacity and gaps in multi-level governance frameworks. For the OECD:

Formal and informal institutions that facilitate negotiation and dialogue among key actors in order to mobilise and integrate them into the development process are vital, as are those that enhance policy continuity … the challenge is to create institutions that strengthen the region’s “voice” in dealing with other regions and coun- tries and those that foster linkages among the private, public and education sectors (2012: 25).

Box 4. Regional agreements and economic restructuring in Västra Götaland, Sweden

Västra Götaland in western Sweden is the second largest Swedish region by area and contains a population of 1.5 million. Its capital is the city of Gothenburg (Göteborg). In the post-war period its economy was strongly specialised in shipbuilding as well as automotives, petrochemicals, pharmaceuticals and food. During the 1980s and 1990s these industries experienced decline. Since the 1990s, however, the region has made a relatively successful transition from a predominantly industrial region to one based more on knowledge-intensive activities. This change has been accompanied by the creation of new regional institutions, strategies and policies in a country hitherto characterised by strong central government, a large number of small independent local councils and a weak regional structure. Region Västra Götaland was created in 1999 through merger of existing county councils as an experimental devolved region with an elected assembly and a higher level of autonomy than other local councils in Sweden. Sweden in general suffered from slow growth in the 1990s and widening regional inequalities as regions such as Västra Götaland struggled to deal with industrial restructuring. At the same time the Swedish economy was characterised by a high rate of R&D in both industries and universities. The Swedish government responded by promoting a new “national regional growth policy” aimed at promoting growth in all regions rather than compensating slow growing regions with transfer payments. The main instrument for achieving this objective was Regional Growth Agreements (tillväxtavtal) later replaced by Regional Growth Programmes (tillväxtprogram) aimed at coordinating the resources of central and regional authorities around agreed objectives rather than the provision of new resources. Central government remains an important actor in the process especially through the national innovation agency VINNOVA. These new approaches have emphasised coordinated sectoral policies, localised learning, innovation and clusters. Drawing on regional assets of corporate R&D departments, relatively high R&D expenditure and internationally renowned research- intensive universities, the core of Västra Götaland’s strategy focuses on the development of a “regional innovation system” and the diffusion of technology-based activities in new and existing businesses in hi-tech sectors exemplified by GöteborgBIO an initiative in the medical sector including among others AstraZeneca, Business Region Göteborg, Chalmers University of Technology, University of Gothenburg, Nobel Biocare and Region Västra Götaland. A key objective has been to connect areas of economic decline (towns such as Uddevalla and Trollhättan) to knowledge hubs in Gothenburg in order to relieve inflationary pressures there in labour and housing markets. This knowledge-based strategy was based upon high R&D intensity, new technology-based firms and intermediate organisations to facilitate university-industry knowledge transfer in “Science parks”. The aim was to better connect the regional knowledge base with existing economic activities and more effective commercialisation and exploitation of new innovations and technologies. Cross-cutting and interconnecting the more generic research-oriented hubs and platforms were cluster-oriented initiatives focused upon automotive, forestry, metallurgy, IT and telecommunications, medical technology pharmaceuticals/biotechnology and aviation and aeronautics sectors. For instance, the Trollhättan Science Park specialises in production technology and is closely linked into the local automotive sector, particularly the research programmes of Volvo and SAAB. Determining the exact impact of these initiatives is difficult, but they coincided with a marked improvement in the region’s economic performance with the region experiencing a long period of growth (until the GFC) with GDP and employment rates reaching 99% and 73% of the national average respectively (119% of EU average) in the mid-2000s. Moreover, Västra Götaland can claim an exceptional performance in levels of R&D investment and the growth of new technology-based firms in recent years, especially in the leading science parks in Gothenburg. Productivity and investment levels have improved alongside new firm formation rates. Sources: Larsson (2004) Niklasson, L. (2006) Region Västra Götaland (2007) Pike, A (2008)

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The OECD study simultaneously calls into question the overriding importance of economic concentration as the source of economic growth and draws attention to the importance of local and regional institutions in the process of economic development as a central element of the “new paradigm” of regional policy.

For firms in peripheral cities and regions there are particular challenges to achieving success in a high cost operating environment, but this chapter has outlined ways in which regions can tackle these challenges and looked at some cases where at least a degree of success can be identified. It has highlighted the importance of local and regional institutions because these “frame the struggle between the proponents of change and their op- ponents and thereby affect the ability to innovate and to implement new technologies” (Helpman, 2004: 112). The larger lesson of this discussion is that we should broaden our focus beyond the firm to examine the wider systems of regulation and governance in order to understand the nature of success in a high cost operating environment.

REFERENCES

Barca, F. (2009). An agenda for a reformed cohe- sion policy: A place-based approach to meeting European Union challenges and expectations. Brussels: DG Regio, European Commission.

Bellini, N., & Pasquini, F. (1998). The case of ERVET in Emilia-Romagna: Towards a second- generation regional development agency. In Re- gional development agencies in Europe (Vol. 21). London: Jessica Kingsley Publishers.

Brusco, S. (1982). The Emilian model: Productive decentralisation and social integration. Cambridge Journal of Economics, 6(2), 167–184.

European Commission. (2010). Investing in Eu- rope’s future: Fifth report on economic, social and territorial cohesion. Brussels: Publications Office of the European Union.

Galeser, E (2011). The triumph of the city. Lon- don: Pan.

Geldner, N. (1998). Successful structural change in Styria. Austrian Economic Quarterly, 3(2), 95–100.

Helpman, E. (2004). The mystery of economic growth. Cambridge, MA: Balknap for Harvard University Press.

Kaldor, N. (1972). The irrelevance of equilibrium economics. The Economic Journal, 82(328), 1237–1255. doi:10.2307/2231304

Larsson, S. (2004). Creating learning regions: Experiences from a policy initiative in Sweden. In Spatial development trends: Nordic countries in a European context. Stockholm: Nordregio.

Niklasson, L. (2006). Joining-up for regional development. Stockholm: Statskontoret.

North, D. (1990). Institutions, institutional change, and economic performance. Cambridge, UK: Cambridge University Press. doi:10.1017/ CBO9780511808678

North, D. (2005). Understanding the process of economic change. Princeton, NJ: Princeton University Press.

OECD. (2009a). How regions grow: Trends and analysis. Paris: OECD.

OECD. (2009b). Regions matter: Economic recovery, innovation and sustainable growth. Paris: OECD.

OECD. (2010). Organising local development: The role of local development agencies and com- panies. Paris: OECD.

OECD. (2012). Promoting growth in all regions. Paris: OECD.

Pike, A. (2008). Västra Götaland regional growth agreement (Sweden): A review of local economic and employment development policy approaches in OECD countries, 149. Paris: OECD.

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Pike, A., Rodríguez-Pose, A., & Tomaney, J. (2006). Local and regional development. London: Routledge.

Region Västra Götaland. (2007). Sustainable development in Västra Götaland–Report on the region in 2006. Göteborg: Region Västra Götaland.

(2012). Regional development agencies: The next generation? In Bellini, N., Danson, M., & Halkier, H. (Eds.), Networking, knowledge and regional policies (Vol. 59). London: Routledge.

Rinaldi, A. (2005). The Emilian model revisited: Twenty years after. Business History, 47(2), 244–266. doi:10.1080/0007679042000313675

Simon, H. (1986). Rationality in psychology and economics. Journal of Business, 59 (4): S209-S224

Steiner, M., & Schelnast, M. (2012). Regional development agencies in Austria–Institutional settings and evolutionary development: a small country perspective. In (N. Bellini, M. Danson, H. Halkier Eds.) Regional development agencies: The next generation? Networking, knowledge and regional policies (Vol. 59). London: Routledge.

Sturn, D. (2000). Decentralized industrial poli- cies in practice: The case of Austria and Styria. European Planning Studies, 8(2), 169–182. doi:10.1080/096543100110811

Tomaney, J. (2013). Region and place I: In- stitutions. Progress in Human Geography. February 2014; vol. 38, 1: pp. 131-140 doi: doi:10.1177/0309132513493385

Trippl, M., & Tödtling. (2008). Cluster renewal in old industrial regions: Continuity or radical change?. In C. Karlsson (Ed.), Handbook of re- search on cluster theory. Aldershot, UK: Edward Elgar.

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KEY TERMS AND DEFINITIONS

Agglomeration: Agglomeration economies are the benefits that arise when firms and people locate near one another together notably in large cities.

Growth Oriented Regional Policy: Policies aimed at supporting fast growing regions in the belief that these will make the greatest contribu- tion national development.

Local and Regional Institutions: The public, private and non-governmental bodies that seek to identify and mobilise local and regional economic potential.

Place-Based Development: A long-term development strategy aiming at reducing unde- rutilization of resources and social exclusion of specific places, through through the development of local knowledge and assets.

Redistributive Regional Policy: Resource transfers to regions in order to compensate them for weak economic performance.

Regional Development: The social and economic transformation of sub-national com- munities traditionally measured as improvements in economic output but increasingly understood as encompassing wider measures of wellbeing.

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Chapter 5

Putting Clusters to Work

ABSTRACT

This chapter illustrates the effect of clusters on company performance through rigorous mapping of the patterns and strength of relationships between companies applied in the Aalborg region of Hub North, Denmark. This case study has been selected from similar industry cluster projects undertaken between 1999 and 2013 in Midjutland, Denmark, Dalarna, Sweden, mining regions in Queensland, and the Playford industrial region in South Australia. A conceptual methodology and suite of tools that have translated cluster theory into bottom up business outcomes for companies participating in these cluster projects demonstrates how a deeper understanding of clusters can contribute to the economic develop- ment of industrial regions. The methodology and findings described in this chapter pioneer new insights and ways to analyse emerging cluster developments.

INTRODUCTION

This chapter illustrates the effect of clusters on company performance through rigorous map- ping of the patterns and strength of relationships between companies in a methodology developed by Rodin Genoff & Associates and applied in the Aalborg region of Hub North, Denmark. This case study has been selected from similar industry cluster projects undertaken between 1999 and 2013 in Midjutland, Denmark, Dalarna, Sweden, mining regions in Queensland and the Playford industrial region in South Australia. A conceptual methodology and suite of tools that

have translated cluster theory into bottom up business outcomes for companies participating in these cluster projects demonstrates how a deeper understanding of clusters can contribute to the economic development of industrial regions. The methodology pioneers new insights and ways to analyse emerging cluster developments.

Part One outlines the Business Opportunity and Strategic Potential Framework (BOSP) model that forms the conceptual basis and methodology to explore a region’s competitive capabilities and its level of interconnectedness, both locally and globally. Responses to a Performance Audit and Cluster Survey questionnaire are used to identify

Rodin Genoff Rodin Genoff & Associates, Australia

Graeme Sheather University of Technology, Sydney, Australia

DOI: 10.4018/978-1-4666-5828-8.ch005

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the strengths and weakness of the local business networks. The framework compares the effec- tiveness of a company’s ability to ‘Win Orders’, and relates this to its central position in regional ‘Supply Chain’ and ‘Product Chain’ networks operating between the company and its first tier suppliers and customers. Sets of Network Maps based on supply and product chain Transaction Scores are used to identify the array of Connector Companies, that is, the most interconnected clus- ters within the region. Finally, Cluster Companies and their characteristics are used as input to the Business Collaboration Process (BCP) to lever- age their ‘Competitive Capability’ and ‘Business Outcomes’ through joint ventures.

Part Two summarises the Business Collabora- tion Process (BCP). The BCP has been deployed through putting to work ‘connector’ companies identified through the industry and cluster map- ping processes described in Part One, or working from the bottom up individually with selected companies to optimise business collaboration opportunities. This results in the formation of new joint ventures between companies that bring together complementary business services right through to companies working across disparate yet connected industry clusters such as electronics, creative industries and engineering, to spinning off completely new companies as a result of the formation of strategic alliances.

Such collaborations in high cost economies and especially between small to medium size enter- prises (SMEs), develop over time deep reservoirs of trust that are a prerequisite for companies to work more closely together. These collaborations result in reduced transaction costs – planning and decision making is faster and more integrated. A direct spinoff of this trust is the creation of a milieu that fosters innovation and the ability of these business partnerships and collaborations to compete in niche markets, particularly in markets that require tailored products and services.

Hence one of the key outcomes of SMEs col- laborating together in high cost economies is the

ability to provide turnkey solutions to their cus- tomers. This has several benefits from increasing their ability to work as an integrated team to win new contracts to cooperating more effectively with their customers to improve say engineering speci- fications and design as they go into production. For their customers, this means faster turn around and superior end product. It is this interaction that increases the competitiveness of these SMEs in high wage economies, while delivering a regional productivity dividend back to the industries and regions of which they are a part..

Part Three provides several practical examples and outcomes of this process at work and discusses how it has helped to transform the companies that have participated in these cluster projects and in the process,created new jobs, while building the capacities and capabilities of SMEs at a regional level.

The conclusion outlines the lessons learnt from developing clusters across a range of industries from mining, engineering, electronics and related software companies to cleantech and the creative industries.

Methodology in Relation to Existing Cluster Literature

The cluster methodology described in this chapter is an example of applied research. Its findings can be positioned to add to and provide new understandings of existing literature on cluster development and formation. The findings show the capacity of businesses to generate opportunities for regional growth and joint venture development through identifying ‘latent nodes’ for collaboration and networking. This also demonstrates where the cluster methodology differs from current approaches.

The following provides an outline of where the cluster methodology and its findings draws from and contributes to existing cluster literature.

The cluster methodology demonstrates how to integrate theory and practice. It is an action

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research methodology that delivers tangible business results for clusters and the companies operating within their networks. Theoretically the approach owes much to the work of Alfred Marshal and theories of agglomeration that have informed the pioneering work of Michael Porter. Stuart Rosenfeld’s Industrial Strength Strategies (1995) has guided the thinking from traditional economic analysis to more innovative and ‘hands on’ methods and approaches to gathering practical business data on a region, its clusters and business performance of its firms.

The difference between this cluster method- ology and a number of traditional approaches to cluster theory, its application and then implemen- tation, can be seen by comparing the macro-scale industrial economic concepts of clusters with the micro-scale level of application guidelines. This model bridges the two scales. At the macro level, Michael Porter’s theories of industrial dynamics (Porter, 1990), strategy formulation (1996) and clusters as the new economics of competition (Porter, 1998) are supported by Michael Enright’s “Five Levels of Competiveness Framework” (Enright and Petty, 2013: 54). His model for drivers of competitive influence starts with firm level drivers, moving to industry level drivers, onto cluster level drivers, to regional/national level drivers, closing with global level drivers. At the operational improvement level of the firm John Gattorna’sDynamic Supply Chains (2009) specifications are relevant, whilst at the micro industry level Ffowcs-William’s The Go-to Hand- book (2012) provides guidelines for cooperative partnering.

This methodology provides a bridge by build- ing upon Porter’s integrated value chain concepts (Porter, 1998) and his concept of ‘mapping activity systems’ (Porter, 1996) to identify the connections between both upstream and downstream business operations. These act as sets of interconnected cross-sector linkages between firms that form po- tential clusters for creating business opportunities,

access to business relevant information, capital equipment and finances, joint venture projects, market information, and collaboration in R&D innovation, with both product and geographic advantages. Implementation strategies based on identified business alliances and collaborative networks illustrate the ‘how to’ at the micro scale of this model.

The business networking dimension of the methodology has been informed by the practical ‘bottom up’ strategies deployed by regions such as Emilia Romagna (Best, 1990; Brusco and Righi, 1989; and Worrall,1993), and the numerous practical applications reported in The Formation of Inter-Organizational Networks (Ebers, 1997). Frameworks developed in Australia by the Bureau of Industrial Economics in its seminal work Be- yond the Firm (1995) that informed Australia’s national networking program during the 1990s, have also informed our approach. The application of social network analysis to mapping supplier and buyer inter-firm linkages is developed from Burt’s (1991) seminal work on general purpose network analysis. Kleindorfer and Wind’s (2009) compilation of research papers on The Network Challenge as it affects corporate strategies and firm profitability also provided useful insights into how to document and implement supply webs and networks of global suppliers.

The extensive research undertaken by the OECD on cluster formation and the role of the private and public sectors has provided the basis for bridging theory and practice. The OECD’s (2001) publication Innovative Clusters: Drivers of National Innovation Systems was in many respects a landmark study especially Bergman, Charles and Hertog’s (2001) exposition of value chain cluster development and concepts of complementarity. Both these works have guided the integration of the Business Opportunity and Strategic Potential (BOSP) component and the Business Collabora- tion Process (BCP) component of the methodol- ogy. Historically, the principal omission in cluster

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practice is ‘top down’ policy driven frameworks that have failed to address the day to day concerns of business.

The cluster approach adopted in this methodol- ogy is ‘bottom up’, firmly grounded in gathering practical and real time industry intelligence. It focuses on unlocking the connection between companies, not only in their own cluster, but in other clusters to which they are connected. For example, the automotive sector is connected to mining, food processing, electronics, or aerospace through their supplier and/or customer networks. As Sabel (2002) notes, it is important to focus not only on specialisation but also on diversity. This compliments Green et al. (2001) observation that we live in a world of “boundary less clusters”.

This ‘bottom up’ methodology and way of working directly with companies and stakeholders has enabled the survey auditing and interviewing to tap into small to medium sized enterprises and work with them in a manner that has led to the creation of significant new investment and em- ployment opportunities in practice. As a result, the business networks created span cross-sector clusters and cross- country boundaries. There is empirical evidence from previous cluster projects that the approach and methodology has helped address the ‘top down’ failures of cluster policy identified in the OECD’s report Competi- tive Regional Clusters (2007) and the European Union’s A Toolbox for Inspired Regional Cluster Development (2008).

Lundvall et al. (2002) work is important in providing an understanding of the relationship between high, medium high, medium low and low technology industries to which we apply this model. Their report addresses the rapid diffusion of the concept of a ‘national system of innova- tion’ as well as related concepts. In Section 3 we describe how “the Aalborg version of the concept evolved by a combination of ideas that moved from production structure towards including all elements and relationships contributing to inno- vation and competence building”. (Source:http://

infojustice.org/download/gcongress/dii/lund- vall%20article%202.pdf) This is relevant since this illustration is also drawn from the Hub North Aalborg region and reinforces the findings of our cluster methodology. At a macro level it is also grounded in the European triple helix cluster policy architecture of bringing together universi- ties, government and business. The case studies in Part 4 of this chapter show that the combination of government, cluster, innovation and knowledge play a vital role in supporting the formation of new business collaborations and joint ventures.

The OECD report (2000) presented at The OECD Bologna Ministerial Conference focused on “Local partnerships, clusters and SME glo- balisation” and “Enhancing the Competitiveness of SMEs in the Global Economy: Strategies and Policies”. This work, along with that of Ifor Ffowcs -William’s on effective governance, stresses the need to pull local government and business associ- ations together to ensure a’ bottom up’ and business driven approach. Our approach demonstrates how to do this by addressing the phenomena of clusters of firms and inter-firm networks, the competitive advantages that can derive from membership of business alliances and the definition of public policy directed towards both. These organisational forms and related policies are considered in the context of the increasing international integration of markets for goods, services, capital and labour. Different perspectives are presented reflecting economic analysis of what policy should entail as well as the insights of practitioners concerned with the daily implementation of policy.

Ffowcs-Williams, I., (2012), Cluster Devel- opment: The Go-To Handbook; Building Com- petitiveness Through Smart Specialisation, targets cluster managers, public agencies, private sector organisations and academics that “(1) Want a comprehensive guide to establishing a successful clustering initiative; (2) Want to revitalise a weak initiative; and (3) Want to lift a cluster to the next level of competitiveness”. (Source: http://www. clusternavigators.com/content/view/104/97/) It

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begins with ‘Setting the Stage’, explores ‘The What?’ and ‘The Why?’ of cluster development, and follows up with ‘Cluster Development in Prac- tice’, identifying ‘The How?’ of cluster develop- ment, dividing the journey into a series of Twelve Steps. These steps include cluster identification, cluster analysis, the cluster’s governance board and measurement and evaluation. The process can be used for kick-starting a new clustering initiative and for revitalising existing businesses, as has been accomplished in the Aalborg region.

Bell G. G. (2005) extends current knowledge of industry clusters by disentangling the effects of networks from cluster (i.e., distinctly geographic) mechanisms on firm performance as well as by studying the influence of these different mecha- nisms on firms located inside and outside the industry cluster. He also highlights the importance of simultaneously modelling multiple networks which may differentially influence important firm outcomes.

Clusters have increasingly dominated local and regional development policies in recent decades. The Handbook of Research on Cluster Theory (Bergman, 2008) provides a “comprehensive refer- ence source for scientists, students, policymakers and cluster managers keen to have an up-to-date overview of agglomeration and cluster theory, cluster research methods, clustering in different spatial contexts and clustering in service indus- tries. Consequently, leading experts in the field provide the basis for improving and evolving future research on clusters”.

The most recent longitudinal and cross sec- tional (by industry) study by Örjan Sölvell (Sölvell and Williams, 2013) Building the Cluster Com- mons is a comparative survey of twelve Swedish cluster organisations. It traces the value add impact of cluster formation on individual company finan- cial performance as a guide to organised cluster policymakers. This Cluster Audit methodology employs a similar set of business performance metrics, but goes further and deeper by tracking the transactions between a company’s suppliers

and buyers. The resulting networks between these SMEs provide the basis for identifying ‘connec- tor companies’ as potential collaborators in joint ventures using our ‘bottom up’ Business Col- laboration Process (BCP) approach.

PART ONE: DEFINING BUSINESS OPPORTUNITIES AND STRATEGIC POTENTIAL FOR A REGION

Overview

The objective of the Hub North Industry Cluster project is to explore the region’s competitive capabilities and its level of interconnectedness, both locally and globally. Company responses to a Cluster Survey questionnaire are used to identify the strengths and weaknesses of the lo- cal business networks. The framework compares the effectiveness of a company’s ability to ‘Win orders’, relates this to its central position in ‘Sup- ply and Buy Chain’ networks, and the type of ‘Collaborative Arrangement’ operating between the company and its first tier suppliers and final customers, within the Aalborg region. The BOSP performance measurement framework is shown in Figure 1.

The model has two principal streams one headed BUSINESS CAPABILITIES, relating to the company’s competitive capability to win orders in markets along with its corresponding organisa- tional performance. The second stream is headed NETWORK CONFIGURATION, depicting the spatial configuration and operational capacity of each company. The first stream combines Competitive Capability and Organisational Per- formance metrics for each company. The second stream produces the sets of Network Maps based on Transaction Scores, along with elements that form the Connections Triad, that taken together identify the array of Connector Companies.

These clusters are filtered according to selected company characteristics and their competitive and

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business capabilities to target those companies from which to shape Action Plans that have the greatest potential for development opportunities. Companies with complex procurement and distri- bution logistics can be expected to generate high concentrations of activity and comprise ‘hubs’ of the network. These hubs may be SMEs, large companies and multinationals, but they may also be first tier suppliers depending upon the com-

plexity of the product range – as in the case of Elaborately Transformed Manufacturers (ETMs).

The project used a sample of 20 companies drawn from the Hub North membership engaged in a mix of manufacturing and service operations related to the off shore wind industry and energy related industries. Data collection involved se- lected site visits to obtain responses to the Audit Survey from original equipment manufacturers

Figure 1. Business opportunity and strategic potential framework (Source: Rodin Genoff & Associates, 2013)

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(OEMs) and SME companies, capturing data on these companies, their first tier suppliers, end-users and their customers across the Aalborg region. Data analysis employs sophisticated database software, network mapping routines and data visualisation techniques.

Business Performance: Competitive Capability

A company’s competitive capability compares the strategic intent of the company relative to its advantage or position in the industry summed across the seven capabilities of price, flexibility, quality, delivery, service, speed and innovation, as shown in Figure 2. These competitive capabilities are crucial to a company’s ability to ‘win orders’ in their respective market places. Usually a company

employs a mix of two or three of these capabilities depending on product type, customer demand and stage in the product or service development life cycle, and competitors’ market strategies.

Performance on all these measures has a cumu- lative impact on a company’s reliable operation, fast throughput, error-free processes, ability to change product/service range, ability to innovate, ability to control cost structures and, therefore, its productivity and profitability.

To illustrate how effective a company’s com- petitive strategies are in ‘winning orders’ against the ‘performance of its major competitors’ the relationship can be expressed as ‘Zones of Com- petitive Capability’. These zones are shown in Figure 3 and indicate the effectiveness in strategic intent of a company’s competitive capabilities in terms of:

Figure 2. Performance objectives and seven competitive priorities (Source: Rodin Genoff & Associates adapted from Operations Management (2nd Edition) Slack et al., 1998)

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• Excessive Effort: Meaning an over invest- ment in terms of what is required to satisfy the customer and therefore an inefficient application of those resources/capabilities.

• Appropriate Response: Or application of effort in order to qualify and/or win the orders.

• Needs Improvement: Suggesting an in- crease in the level of application of the key competitive attributes valued by the customer.

• Requires Urgent Action: On selected ca- pabilities to remain in the market or prod- uct space.

Results of Competitive Capability

The diagonal line A B represents the ‘Lower Bound of Acceptability’ with the scatter of 20 companies distributed across the four levels of strategic preparedness recorded in Zones A to E. The ‘Excess’ region above the boundary line EF defines where an unwarranted level of resources is devoted given the low importance of winning orders for these products/services. The boundary line CD distinguishes between ‘Urgent Priority’ actions required (Zone D) and the less urgent ‘Improvements Needed’ in Zone C. Overall, 14 of the manufacturing and service delivery companies

Figure 3. Zones of acceptability – total companies (Source: Rodin Genoff & Associates adapted from Slack et al., 1998)

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in the Aalborg region convert strategic intent into competitive capability to satisfy customer require- ments to win orders. A number of companies proclaim the importance of using a marketing strategy employing a mix of the seven attributes but are unable to convert their strategic intent into industry leadership. Clearly, six companies must leverage the importance of their strategic capabilities if they are to become successful with their marketing efforts.

A number of specific recommendations can be made based on this analysis relating to those companies falling below the A-B line: speed and reliability of delivery; target pricing; market strategies to meet product support and after sales

service; investment in technologies and new prod- uct innovation to avoid falling behind industry best practice.

Business Performance Outcomes

The data records the current level of performance for key business indicators and management func- tions scored on the range from ‘Weak, Moderate, On Par, Strong, to Very Strong’. Figure 4 displays these metrics for all 20 companies categorised by Financial Measures, shown on the Y axis, and Planning Measures, shown on the X axis. Four quadrants are depicted in the graph, that compare how financially strong the companies are (score

Figure 4. Business performance (Source: Rodin Genoff & Associates, 2013)

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1-5) against how effective their corporate plan- ning systems (score 1-5) are used to support their financial performance.

Results of Business Performance

Five groupings of companies emerge from this analysis shown as Zone A (2 companies), Zone B (8 companies), Zone C (4 companies), Zone D (3 companies) and Zone E (3 companies). Zone A companies are leading companies reporting Strong to Very Strong levels of performance on both Financial and Planning metrics. Zone B companies are middle performing companies reporting Strong Planning performance but only On Par Financial performance. Zone C companies report Strong Planning performance but Below Par Financial performance. Zone D companies report On Par performance for both Financial and plan- ning metrics. Finally, Zone E companies report only Moderate to Below Par performance for both Financial and Planning metrics. Three companies fall well below par on both their financial and/or their business planning performance.

Those companies that are ‘On Par’ with respect to financial and planning system performance need to examine their strategic targets related to productivity, profitability, and cash flows; and efficiency of ERP systems regarding business/ market planning, demand planning and operational controls. Companies with ‘Strong’ performance need to examine why and how they achieve these results, and put in place Key Performance Indicator (KPI) targets to ensure sustainable business outcomes, and constantly survey and monitor performance. ‘Weak’ companies need to develop strategic business objectives culminating in corporate plans focussing on how to improve market penetration, new product development and operational processes, all targeted towards growing their businesses.

Operational Capacity Scorecard

This section focuses on mapping the collabora- tion between major companies operating in the Aalborg region. First, Network Configurations for supplier and buyer transactions between compa- nies are analysed. Second, the Types of Supply Chains operated, types of Manufacturing Process employed, and the types of Collaborative Arrange- ments entered into by the companies are recorded.

Supply Chain Types

The types of supply chains employed by each company to support the production of key products or services are categorised as Lean, Fully Flexible, Agile, Continuous Replenishment, and Digital Services and Engineering Design Services. De- pending on the mix of physical products produced or digital services offered there can be different types of supply chains operating concurrently in a particular company.

Figure 5 demonstrates the five types of generic supply chains differentiated according to ‘Predict- ability of Demand’ from High to Low against ‘Relationship with the Customer’ from Tight to Loose. The four quadrants display Lean (Type 1); Fully flexible (Type 2); Agile (Type 3); Continu- ous replenishment (Type 4); and involved in all four types, Digital and design services (Type 5).

Analysis of Types of Supply Chains

The mix of types of supply chains operating per company can be used to explain the nature of supply/buy networks operation across the Aalborg region. Survey data records the preference is for Agile types of supply arrangements required to service unpredictable, unplanned or unforeseen situations of PULL customer demand. Such demand requires Agile responses at high cost-

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to-service, with capacity to meet speed in time- to-service. Second are the other three systems of Fully Flexible, Continuous Replenishment and Digital Services which are evenly split, indicat- ing a broad range of types of customer demand requiring (1) ability to respond opportunistically and manage the outputs, (2) meet the requirements of dedicated pull environments and (3) ability to engage and link all stakeholders from customer demand to final product delivery.

Based on the self-reported categorisation of supply chain types, a number of strategic rec- ommendations were drawn from this analysis, relating to: increasing the efficiency of supply chains: creating agile manufacturing; responding to PULL environments; undertaking research and development (R&D); applying ERP systems to link all operations and suppliers; and improving innovation in digital technologies.

Manufacturing Processes

The Types of Manufacturing/Operational Process- es employed by the companies in the production of their key products and/or services use a mix of manufacturing processes across various product or service lines ranging from Project, Jobbing, Batch, Line, to Continuous Processing as shown in Figure 6 and described below.

Results of Manufacturing/ Operational Processes Analysis

As may be expected within the heavy engineer- ing industries that support off-shore energy and wind turbine contracts the majority of companies surveyed utilised Project, Jobbing, and Batch manufacturing processes. This requires a mix of design and turn-key operational skills for the Proj-

Figure 5. Five generic supply chain types (Source: Rodin Genoff & Associates adapted from Dynamic Supply Chain Alignment, Gattorna, 2009)

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ect type. In turn Jobbing and Batch types require dedicated equipment and tooling, fixed machine layouts, Kanban procurement, JIT operations, and quality control systems to produce sub-assemblies and finished components, plus fully integrated supply and distribution logistical systems. Essen- tial to the operation to the three key processes of projects, jobbing and batch, is the role of digital technology services providing industrial design, software and IT services, manufacturing protocols, and logistical and management control.

A number of strategic recommendations were drawn from this analysis concerning: partnering between companies for joint ventures, where their individual manufacturing processes are

complimentary; building competitive capability for ‘contract-relationship’ tendering, and entering into joint R&D for process improvements.

Relationship between Supply Chain and Manufacturing Processes

Manufacturing processes adopted by each OEM or SME dictate the type of supply chain ar- rangements needed to service the production/ operational/service lines. As described above the majority of processes focus on turn-key projects (8 companies), jobbing (5 companies), and batch (7 companies) type manufacturing. The supply chain arrangements required to service each of these

Figure 6. Position of hybrid processes and the five classic choices of process configuration (Source: Rodin Genoff & Associates adapted from Manufacturing Strategy (2nd Edition), Hill, 1993)

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processes assigned to one or more product lines are predominantly: Fully Flexible (9 companies); Agile (20 companies); Digital Technologies (10 companies). The relationship between processes (Y axis) and supply chains (X axis) is shown in Figure 7, where manufacturing processes for Projects, Jobbing, and Batch are serviced by Fully Flexible, Agile, and Continuous Replenishment supply chains. The number of OEMs shown at the intersection of the two approaches may be repeated due to their multiple uses of supply chains and/or manufacturing processes.

Types of Collaborative Networks

The literature on the Principles of Network Analy- sis (Burt, R.S. 1991) suggests that the pattern of relationships between prominent actors operat- ing in social networks can take five principal forms, namely brokerage, range, prominence, equivalence, and cohesion. To expand these in- dividual actor concepts to reflect collaborative arrangements existing at multi-level supply and buyer network levels appropriate to cluster audit analysis, we have created a new nomenclature

Figure 7. Relationship between supply chain types and manufacturing processes (Source: Rodin Genoff & Associates, 2013)

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for the typologies. This nomenclature better re- flects the essence of major inter-organisational relationships, namely: Negotiator, Resourcer, Leader, Enabler and Integrator. Two of these principal forms depict the phenomena of struc- turing based on common boundaries and social bonding (namely integrator and enabler), with the phenomena of network behaviour between agencies described by the principal forms of negotiator, resourcer and leader. A taxonomy is applied where the five structural types lie on a spectrum ranging from ‘disorganised’ through to a ‘fully integrated ‘level of network organisation along the X axis. The level of Transaction Scores for the Supply Chains of companies constitutes the Y axis of the Network diagram. Data is drawn from key responses to the audit survey

that indicates the different levels and types of collaboration engaged in by the companies and their nominated suppliers and buyers.

The hierarchical configuration of each type along this spectrum is illustrated in Figure 8 rang- ing from a minimum degree of collaboration to a maximum level of interaction, and describes a range of increasingly interconnected networks. The types are:

Type 1: Negotiator (based on ability of individual agents to broker connections)

Type 2: Resourcer (based on ability of agents to assemble a range of resources)

Type 3: Leader (based on the predominance of agents to dominate their networks; and are often found in hierarchical supply chains)

Figure 8. Hierarchy of supply chain network types (1-5) (Source: Rodin Genoff & Associates adapted from Structure, Version 4.2, Burt, 1991)

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Type 4: Enabler (based on agents who engage/ contract/share common patterns of relation- ships and boundaries)

Type 5: Integrator (where similar agents are tied together by trust, a high level of business collaboration and through the strength of joint projects and potential clusters)

Results of Collaborative Network Analysis

There is a spread of types of collaborative rela- tionships across the 20 surveyed companies (also known as OEMs) ranging from Type 1 to Type 5 describing the relationship between the companies and their first tier suppliers and first tier custom- ers. The predominant type is Type 3 – Leader (12 companies), then Type 4 – Enabler (10 companies), followed by Type 5 – Integrator (7 companies), and Type 2 - Resourcer (6 companies). There are no companies that fit Type 1 – Negotiator typol- ogy that involves Business Networks, brokers or cluster arrangements. There are more companies than the 20 surveyed OEMs recorded in the clas- sification (i.e., 35) as companies stretch across a mix of hybrid typologies depending upon the range of markets, customers, products and services they provide.

As is common in industrial regions, the pre- dominant arrangement is Leader – Type 3, involv- ing multiple first-tier supply chain companies servicing intermediate and finished product OEM manufacturers and service providers. Companies lying in the Integrator Type 5 category provide excellent opportunities for cluster development due to shared/common suppliers and/or custom- ers, shared professional services, and partners in business networks.

Supplier and Buyer Transactions

Supplier Networks

This section provides the basis for finding common linkages between OEMs and SMEs and their sets of first tier suppliers – that is, which suppliers are

most central across all companies throughout the Hub North region. The survey asks companies to list major suppliers, location, and number of deliveries made per annum, the average spend per annum, by type of product category and/or digital service technologies. The results provide a transaction score illustrating the ‘intensity of exchange’ as a basis for plotting the density of the supply chains. Figure 9 displays the pattern of linkages between eighteen respondent companies and their 88 first tier suppliers.

Analysis of this network map shows that fifteen of the companies (also known as OEMs) have unique sets of preferred or endorsed suppliers, ranging from single up to 10 different supplier companies. At the core of the map there are three OEMs that share suppliers and produce similar product and services such as control systems, automation processes and security systems to the wind industry. This set of service-industry OEMs and their common suppliers provide the basis for Connector Companies highlighted as Cluster A in the shaded circle.

This set of cluster companies constitutes the focus for the development of future joint venture action plans. They can examine partnerships to facilitate joint procurement discounts, quality controls for common and standard components, and joint marketing and tendering arrangements. This facility provided a powerful mechanism for workshopping potential sets of Connector Com- panies within the Hub North region, particularly those trading in overseas markets.

Buyer Networks

This section provides the basis for finding common linkages between OEMs and SMEs and their sets of first tier buyers – that is, those customers that are most preferred, and their major buyers both domestically and internationally. The survey asks companies to list major customers, their location, the number of sales deliveries per annum, the aver- age spend per annum, by type of product category and/or digital service technologies. The results again provide a transaction score illustrating the

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‘intensity of exchange’ as a basis for plotting the density of the buyer distribution/logistics chains. Figure 10 displays the pattern of linkages between seventeen respondent companies (also known as OEMs) and their 70 first tier customers who con- stituted wholesale, regional distribution centres or final end-users.

Analysis of this network map shows that eight of the OEMs have unique sets of customers, rang- ing from three up to nine different client compa- nies and stand alone in the network map. Besides these stand-alone OEMs there are three clusters of OEMs that share common sets of customers.

Cluster A comprises OEM 8 and OEM 16 that share a single common customer 184, and 10 other separate customers. Together, these companies represent heavy machinery for marine and wind turbine applications, along with automation sys- tems for export. In Cluster B there is a unique situation where all seven OEMs are interlinked via four buyer companies as customers. These seven OEMs provide the basis for potential Connector Companies in association with the four shared customers. Together, these companies constitute a mix of heavy machinery and engineering ser- vices, transport equipment and services, project

Figure 9. Hub North supplier cluster map (Source: Rodin Genoff & Associates, 2013)

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management, control technology applications, and training services – essentially the construction and management core of the wind industry. In Cluster C there is a similar configuration as for Cluster A where only two OEMs are linked by a single common customer number. This cluster repre- sents consumables packaging products, plastics moulding, electrical installation and maintenance services to both regional and export markets.

Data visualisation software provides a drop down menu with the ability to filter details of these individual OEMs, plus details for major customers by location, Danish Krona (DKK) spent per annum, product category, accreditation, transaction intensity, and size of OEM by number

of employees. This facility provides a powerful mechanism for workshopping potential sets of customer Connector Companies within the Hub North region as explained below.

Pathways for Strengthening Connections between Suppliers and Buyers

This section outlines four key pathways used to build the business capabilities of Hub North companies and their suppliers and buyers:

Pathway 1: Explores how to build on strategic alliances between companies. Specific path-

Figure 10. Hub North buyer cluster map (Source: Rodin Genoff & Associates, 2013)

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ways are outlined in Figure 11 that are based on different types of relationships between companies. This is important to understand because a one size fits all approach to building clusters misses the dynamics and essential differences in their relationships.

Pathway 2: Explores similar characteristics of companies with common capabilities that form the basis for developing connections between companies that can create new busi- ness and investment opportunities.

Pathway 3: Profiles connector OEMs in the clus- ters they are situated in and offers insights into how their underlying capacities and capabilities can be marshalled to generate new collaborations and future business op- portunities.

Pathway 4: Outlines a process to support Hub North strengthening connections between suppliers and buyers and provides a basis for developing future action agendas.

Operationalising Pathway 1: Building Alliances between Suppliers and Buyers

Within these four pathways the relationship between supplier companies to OEMs and the customers to whom these OEMs sell (their buyers) can be expressed as a set of potentially strategic alliances or partnerships. The degree of strategic alliance occurs at four levels, where Level 1 covers Buyer-High relative to Supplier-High dependence; Level 2 covers Buyer- Low to Supplier- High de- pendence; Level 3 covers Buyer-High to Supplier- Low dependence; and Level 4 covers Buyer-Low to Supplier- Low dependence. The matrix of these relationships is shown in Figure 11.

Operationalising Pathway 2: Leveraging Common Capabilities for Investment and Employment Growth

The purpose of this pathway is to identify those companies with maximum potential for forming collaborative clusters in the Hub North region.

Multi-dimensional scaling plots the alignment between companies based on the types of op- erational processes they adopt for Supply Chain Management, Manufacturing Processes, and Collaborative Networking. Groups of OEMs emerge that are aligned due to a mix of common and unique characteristics across these three pro- cesses. The array of inter-connections between these companies are recorded as zones A, B, C, D in the ‘Connections Triad’ graph in Figure 12.

This three dimensional graph brings together companies (shown as spheres) that have similar scores on supply chain types, manufacturing process types, and collaborative network types. These common, yet distinct characteristics can be leveraged to create new employment, business and investment opportunities. For example in Zone A are companies that have fully flexible supply chains, project manufac- turing processes and leader types of collabora- tion. Zone B uses digital supply chains, batch manufacturing processes and enabler forms of collaboration. Zone C contains companies that have lean supply chains, batch manufacturing processes and enabler types of collaboration. Zone D companies employ agile supply chains, project manufacturing processes and integrator types of collaboration. Companies recorded in these respective zones have many common product/service linkages. For example, Zone A companies comprise heavy engineering, wind turbines, control systems and moulding pack- age products. Zone B companies manufacture component assemblies, transport equipment and control technologies. Zone C companies pro- duce construction and transport facilities, and engineering steel machinery. Zone D companies produce off shore foundations, construction and transport equipment.

The Hub North Demonstration Project has focused on these sets of companies as potential clusters to leverage the region’s manufacturing capacity, provide access to new and emerging markets, and generate innovation in new products

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and services. All of this has enhanced the economic capability of the Aalborg region to undertake joint ventures and new development opportunities, and ultimately lead to new job creation.

Pathway 3: Profiles Summary of Connector Companies

The profiles of OEM connector companies in Sup- plier Cluster A (Figure 9) and Buyer Cluster A and Cluster B (Figure 10) cover: employee strength,

competitive capability, supply chain type, manu- facturing process type, financial performance, planning performance, market concentration, ISO accreditation, and transaction scores related to the respective supplier and buyer networks. This is a vital pathway as it provides essential operational, business performance, market focus and network scores to inform workshops with client companies exploring future Agendas for Change as described below in the final Pathway 4.

Figure 11. Interdependent alliance between supplier and buyer (Source: Rodin Genoff & Associates adapted from Managing the Supply Chain, Gattorna J. and Walters D (1996))

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Pathway 4: Developing Future Action Agendas

This pathway outlines Potential future action agendas and includes:

• Using on-line data visualisation software to draw-down menus allowing interrogation of particular companies, their Suppliers and Buyer companies.

• Workshopping with client companies, their supplier and buyer companies to facilitate ‘what if’ scenario testing of alternative de- velopment options for the Aalborg region.

• It recommends sets of Connection Companies to be read in conjunction with the sub-sets of Supplier and Buyer Connector Companies.

• It aligns common capabilities and resource requirements to support cluster development.

Figure 12. Connections triad (Source: Rodin Genoff & Associates, 2013)

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• It provides background information on companies through a filter feature on the supplier and buyer network maps.

PART TWO: BUSINESS COLLABORATION PROCESS

Using Clusters and Business Networks to Create New Investment and Business Opportunities

This section demonstrates how the ‘pathways for future action agendas’ outlined above, guides the practical application of Connector Company Cluster development by marshalling the energy, financial resources and vision of potential joint ventures and business collabo- rations. The application of this methodology to the Hub North companies has created some 20 joint ventures illustrating how diversifica- tion can create new opportunities for business. Specifically, the case of Conlan (a traditional electronics company operating in Aalborg) illustrates how collaboration between Herman Rokkita (a German industrial designer) and Bigwheel (a local software developer) led to the commercialisation of high security systems for residential, commercial and industrial ap- plications. This joint venture was undertaken by the Hub North wind industry cluster program, and is elaborated upon in Part Three Putting Connectors to Work.

The author’s experience reveals that each joint venture or business collaboration has its own dynamic and own collective DNA! Unlocking this energy and achieving a consensus between companies to move forward requires a commitment of time, people and financial resources, together with patience, insight and leadership. And most importantly it requires an understanding of the

benefits that business joint ventures can deliver to the individual companies involved in what are often transformative collaborative partnerships.

Strategic Collaborations

On a day-to-day basis all companies engage with each other, from purchasing inputs to selling goods and services. Some of this business is purely transactional—they buy what they need as cheaply as possible and sell to maximise profits. For many companies it is more a matter of the 80/20 rule: 80 per cent of one’s business often comes from only 20 per cent of customers. The same can be said of the company’s suppliers. It is often also the case that companies usually develop long and deep relationships and histories of doing business with their “key accounts” or “20 presenters”.

It is with these “key accounts” that collabora- tion of various kinds is most likely to be particu- larly high. For example, working closely together to jointly bid for contracts or even co-locating. These strategic collaborations are often critical for the efficient and integrated supply of inputs to delivering contracts.

Joint Venture or Business Networks to Underpin Strategic Collaborations

Generally a group of two or more companies come together to collaborate by building scale or scope of services and products; knowledge sharing and group learning; sharing resources, risk and rewards in development of joint projects; and through activities such as these win contracts that each company bidding alone would find unattainable. Specifically these include for example:

• Input Collaborations: From joint pur- chasing to R&D.

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• Operational Collaborations: From joint processing to co-location.

• Output Collaborations: From commer- cialisations to export development.

(For detailed account of the benefits and the reasons why companies work together see Genoff and Sheather, 2010, Ledrum, Des Masters in Ge- noff and Sheather, 2005; Green and Genoff, 1998).

Competition is between Business Networks as much as it is between Companies

There is increasing evidence that value chains or networks of companies (including those “20

percenters” working shoulder to shoulder) com- pete more effectively than individual companies battling each other for market share. Hence the now familiar term “collaborating to compete”.

In key industries from mining and provision of large infrastructure and energy projects to the automotive and food processing industries, turnkey solutions are increasingly demanded by customers. The ability to collaborate and integrate a company’s capacities and capabilities is critical for its strategic position in such major projects. Companies that can collaborate most effectively, that can reduce time to market and deliver projects more efficiently than their competitors are those that will win contracts and continue winning projects into the future.

Figure 13. Critical success factors (Source: Rodin Genoff & Associates 2013)

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Making Collaborations Work

Figure 13 summarises the critical success fac- tors for making collaborations work and outlines some of the reasons why business partnerships fail. Foremost reasons for success are trust, cour- age and a willingness to invest in a collaborative future, while the reasons for failure are putting self-interest above that of the network and the lure of a quick buck at the expense of putting in place the planning and systems needed to integrate capacities and capabilities between the partnering companies. For a detailed account of these factors see Genoff and Sheather, 2010.

Ten Phases to Create New Joint Ventures

Table 1 outlines the ten phases used over the past decade to develop and create new joint ventures or business networks on the ground. It also outlines the major tasks to be undertaken by a company in order to complete this process, which often require specific operational plans in their own right.

Benefits of Developing Strategic Collaborations or Joint Ventures

Developing strategic collaborations with one’s suppliers and customers spins off many benefits and sometimes these can be easily measured, such as shorter lead times or higher profits. Equally, what cannot be easily measured may be just as, or even more, important such as the competitive market advantages achieved through greater flexibility or faster and improved deci- sion making processes that result in winning new contracts. At a time when delivering turnkey solutions is so important to winning contracts, effective partnerships between suppliers and customers are paramount to meeting demands of final end users.

It is crucial to remember that while companies often think and plan in terms of single suppliers and customers, significant competitive advantage and benefits can be found in joint supplier and customer arrangements. In fact a company may be part of the glue that provides strategic competencies that bind and integrate those arrangements together.

Joint Ventures and Business Collaborations are Dynamic and Evolving

The previous section stepped through the process of creating joint ventures and business collaborations. This section addresses the issue that the form and nature of the collaboration can take many guises. The important thing to remember is that it is a dy- namic and evolving process. For instance, a more informal collaboration that wins new contracts can easily step up a notch or two leading the compa- nies involved to formalise their collaboration and partnership arrangements. In doing so, this may act as a catalyst to begin the process of working differ- ently together; from integrating their capacities and capabilities to co-locating to maximise economies of scale or scope or logistics.

Some successful collaborations and joint ven- tures may even result in mergers, acquisitions or lead to the creation of new companies. These new start-ups may be a vehicle to support sales and marketing of joint products or services, or they may be a strategic move from the need to market or brand products right through to commercial- ising new intellectual property or the fruits of a research project. The reality is that joint ventures and business collaborations evolve. Sometimes they blossom while at other times they dissipate. They may simply be a “marriage of convenience” to win projects, with companies going their separate ways until some new project brings them together again. Figure 14 plots the progress of an evolving joint venture or business collaboration.

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PART THREE: PUTTING CONNECTORS TO WORK

This section presents some practical examples that have led to company transformations, forma- tions of new companies and joint ventures, and companies doubling their turnover, as a result of effective application of the BOSP methodology and the Business Collaboration Process (BCP) models to sets of Connector Companies within the Hub North region.

Transforming Connector Companies into New Business Networks that Create New Investment and Business Opportunities: Selected Case Studies

Tooling Company Finds Niche in Industrial Design

Herning Tooling in Central Denmark’s industrial region responded to the global financial crisis (GFC) by transforming its capacities and capa- bilities and diversifying into new markets from

Figure 14. Creating new joint ventures: Transformative collaborations (Source: Rodin Genoff & As- sociates 2013)

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furniture making and niche production, prototyp- ing and industrial design. It merged with Meteor, an exclusive home heating company, and a former steel company, All Round, with whom it had previ- ously collaborated closely, while making formal collaborations with three of Denmark’s leading industrial designers.

Through smart collaborations it built on exist- ing competencies, in this case tooling, and shifted into high value added and more profitable niche markets and revenue streams. The company had in effect moved out of a market where as a tool- ing company they were price takers to one where they could not only set the price but have a greater degree of autonomy over the quality and nature of the work they undertook.

Heavy Engineering Company Spins Off Medical Division

Bilcon is a traditional heavy engineering company located in Aalborg and specialising in manufac- turing fuel tanker and transport equipment for the defence industry. It participated in a cluster project that brought together Aalborg’s life sci- ences cluster, ICT cluster, regional authorities, and an industrial design company to develop mobile breast screening units and mobile blood banks, to meet growing demand for strengthen- ing community health delivery services. This is a powerful example of working across clusters to develop turnkey solutions, not only to diversify their market base but create highly profitable new niche markets. Consequently, this heavy engineer- ing company now has its own medical division competing in the global market place with sales to the Middle East, Sweden and Switzerland.

It is also an excellent example of the European triple helix cluster approach at work where the City of Aalborg forged the institutional connec- tions to the health authorities, life sciences and ICT cluster. This institutional linkage provided the basis for fast tracking an innovative investment and business opportunity for Bilcon.

Putting Software and Industrial Design to Work

Conlan, a traditional electronics company lo- cated in Aalborg Denmark, collaborated with Herman Rokkita, an internationally recognised and award winning German industrial designer, and Bigwheel, a local software developer, to commercialise a new high security system for homes, offices and industrial uses. The new MyKey product was launched at an international ITC expo held in Essen in October 2012. This collaboration built on Conlan’s existing product range. The major outcome for the company was a new high end and premium product range made possible through a deep collaboration with Rokkita and a new generation of technology developed through sophisticated software programming that interfaces with IT platforms of smart buildings of the future. This example shows how SMEs like Conlan with only around 20 staff can successfully develop products normally reserved for much larger or global companies.

The collaboration was undertaken through the Hub North wind industry cluster program and is a good example of companies spinning off new opportunities in clusters other than their own. The outcome for the company was greater profitability in niche markets that strengthened Conlan’s long term economic viability. For the cluster, the en- hancement of the company’s technical and design competencies added to the overall competitiveness of the wind industry cluster.

Helped “To Double Our Turnover” Børsen (Denmark’s Daily Financial Newspaper)

Doubling Borsen’s turnover was a result of stra- tegic and at times opportunistic collaborations with sub-suppliers to, and customers for, the engineering company, Stalindustri, located in central Denmark. Its business networks make a strong return on investment. This is a company

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that ‘strikes while the iron is hot’ and is a great example of what happens when a company’s broad supplier and customer base is put to work in a structured and collaborative manner.

Anchoring Stalindustri’s success are close long term collaborations with a dozen engineering sub suppliers that complement its activities, while developing strategic collaborations with globally recognised industrial design houses like the award winning CPH Design located in Copenhagen. CPH Design is both the company’s customer on some projects, and collaborator on others. Stalindustri has learned to strategically push upward and re- define its commercial relationships with its larger customers in a collaborative and profitable manner.

CONCLUSION: LESSONS LEARNT FROM PUTTING CLUSTERS TO WORK

Strategic Industry Intelligence

The major failure of traditional economic and cluster analysis is that it doesn’t gather the strategic industry intelligence required to put individual networks of companies and their supply chains to work, that is, to activate new business, market, research or investment opportunities. Hence:

• Any attempt to map the relationship between major production and service delivery com- panies requires a systematic framework for capturing these relationships and mapping the patterns and relative strength of these net- works. Unless such a systematic framework is used to capture real time performance data and the existing exchange arrangements be- tween OEMs and their multiple supplier and buyer networks, it is difficult, if not impos- sible, to activate new business opportunities and jobs on the ground.

• A key lesson demonstrated by applying the BOSP framework, and then implementing action/business networking programs with

companies identified as central players in regional industrial networks, is how to do both stages.

• A major outcome from the BOSP and BCP approaches is the development of a suite of tools that can translate cluster theory into bottom-up business outcomes. As a result of the application of the models new busi- ness and development opportunities at the individual SME and company level are generated.

Need for Responsive and Agile Policy Framework

Cluster experiences vary from country to country. A high cost economy like Sweden funds its clusters for up to 10 years because they understand that the process is just as much about behavioural and cultural change as it is about strengthening and creating new opportunities for companies inside the cluster. For others, like the Offshore Centre Denmark cluster, it has galvanised a strong mar- keting and promotional architecture to help its companies win new contracts in emerging energy markets such as Brazil. Conversely, Hub North, a wind industry cluster in Denmark, employs a bottom up approach to network SMEs so that they can work together to bid for larger and more technically complex contracts.

Countries such as these believe that clusters are powerful agents of investment and regional development while others point to Silicon Valley and believe that markets are best left to themselves. Nonetheless, governments from countless coun- tries around the world invest in cluster programs both large and small.

Having undertaken cluster analysis to create business opportunities and develop clusters from the bottom up, as practitioners, our experience indicates that:

• Current experience with both conceptu- alising the process of analysis and then implementing programs based upon the

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recommendations emerging from that real- time data is scarce and fragmented.

• Except in some exceptional examples with- in the European arena, most prescriptions for defining or creating industry clusters focus on broader industry issues ranging from innovation, labour market and infra- structure issues and export market devel- opment and B2B networking activities. This is particularly true of Australia.

The case studies presented in Part Two of this chapter demonstrate how the two components of a comprehensive cluster analysis, namely, an ap- plication of a systematic framework for capturing the existing situation, and how to build on these recommendations, in order to achieve sustainable sets of likeminded companies that can form alli- ances (clusters), produce benefits from collabora- tion with R&D exchanges, product development, innovation, market penetration, supplier and customer management.

Those clusters outlined above have directly incorporated the activities of creative industries or new media alliances to support industrial design, commercialisation, product diversification and re-branding through marketing and communica- tions companies. One salient lesson is that it is just as important to work between clusters, as within the cluster itself. In fact, it is often forgot- ten that a company’s suppliers and customers are often themselves in other clusters. Putting this dynamic to work has been at the heart of creating new business and investment opportunities for the companies participating in our projects.

Test of Relevance for Companies

In conclusion, the major challenge for cluster policy makers is to ensure that their programs are relevant for all companies in the cluster. Large companies become members because they need to. Cluster organisations offer them opportunities to interface with government, industry associations

and the like and participate in the formulation of industry wide programs such as labour market or innovation initiatives that can support the industry as a whole.

The CEOs of SMEs have limited time to participate and are all too often disengaged. It is essential to offer real business outcomes ‘on the ground’ that lead to new business and invest- ment opportunities. Such SMEs can then become powerful agents of change as they themselves are transformed through the clustering process and enter new markets and in turn become role models for others to emulate. This is why in the major cluster projects undertaken we ensure new joint ventures are formed, contracts signed and that these results feature in the financial press and, in so doing, co-brand the companies’ new directions and the success of “Putting Clusters to Work”.

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KEY TERMS AND DEFINITIONS

Action Plans: From the audit analysis, key strategies are developed to improve a region or industry’s competitive advantage, providing op- portunities to attract investment and a skilled work- force. Action plans focus on: exploring current resources; creating new business and investment opportunities; profiling connector companies in the cluster; outlining processes to support a region or industry; strengthening connections between suppliers and buyers. This provides a basis for developing future action agendas.

Business Alliances: Are agreements between businesses, usually motivated by cost reduction, technology innovation, and improved service for the customer.

Business Collaboration Processes: Are utilised to create business partnerships and joint ventures between companies.

Business Networks/Strategic Collabora- tions: Generally involves a group of two or more companies that collaborate to build scale or scope of services or products. It involves knowledge sharing and group learning, plus sharing resources and the risks and rewards in development of joint projects. Such joint activities help win contracts unattainable as single firms.

Cleantech Industries: The Copenhagen Cleantech Cluster (CCC) project, defines clean- tech industries as those activities (including con- sultancy and research) which develop products or implement new or improved processes in the fields of (1) Energy, including green energy, energy infrastructure, energy efficiency, energy storage, and (2) the Environment, including sustainable materials, water and wastewater, air and environ- ment, waste and recycling.(Source: http://www. cphcleantech.com/about/q--a-about-cleantech).

Cluster Audits: Involve surveying a popula- tion of OEMs and their first tier suppliers/buyers to

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Putting Clusters to Work

record their competitive performance (on selected business KPIs) and their inter-firm transactions, to identify networks of connector companies to create potential industry clusters.

Clusters: Are geographically close groups of interconnected companies and associated institutions in a particular field, linked by com- mon technologies, skill sets, and complimentary products and markets.

Collaborative Networks: Describe the pattern of relationships between companies operating in multi-level supply/buy networks and can take five principal forms, namely: Negotiator, Resourcer, Leader, Enabler, and Integrator. Details can be found in the main text.

Connector Companies: Are identified through spatial mapping and plotted from inter- firm transactions between OEMs and their first tier suppliers and buyers. Connector companies are the leading companies (usually the top 10%) with a high degree of interconnectedness between their suppliers and/or buyers.

ETM: An acronym for Elaborately Trans- formed Manufactured products applying advanced manufacturing technologies.

Kanban: A method of Just-in-Time production that uses standard containers or lot sizes with a single card attached to each. It is a pull system in which work centres signal with a card that they wish to withdraw parts from feeding operations or suppliers. The term is often used synonymously for the specific scheduling system developed and used by the Toyota Corporation in Japan.

Manufacturing Process Types: There are five generic types of manufacturing processes differentiated according to process configuration or choice, the level of flexibility and depend- ability. Companies use a mix of manufacturing

processes across various product or service lines. They include Project, Jobbing, Batch, Line, and Continuous Processing. Details can be found in the main text.

Networks: Are identified through spatial mapping and are patterns of relationships be- tween combinations of OEMs, supplier and/or buyer firms, operating to the mutual benefit of all participants.

SCM: An acronym for Supply Chain Manage- ment systems. Digital Supply Chain Management systems send messages electronically up and down the supply chain through fully integrated links between customers, producers, and suppli- ers. Essential to demand management processes.

Social Network Analysis: Is a statistical methodology applying graph theory concepts of nodes, ties and degrees, to record and score inter- relationships between sets, individuals, groups or organisations to reveal underlying patterns of association between participants.

Supply Chain Types: There are five generic types of supply chains differentiated according to ‘predictability of demand’, from high to low, against the ‘relationship with the customer’, from tight to loose. They include Lean, Fully Flexible, Agile, Continuous Improvement, and Digital Services. Detailed explanations can be found in the main text.

Zones of Competitive Capability: Measure a company’s competitive position across seven key capabilities (price/cost, flexibility, quality, deliv- ery dependability, service, speed and innovation.) against industry best practice in these capabilities. The scores illustrate how effective a company’s competitive strategies are in ‘winning orders’ against the ‘performance of its major competitors’.

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Chapter 6

DOI: 10.4018/978-1-4666-5828-8.ch006

Confronting the Productivity Challenge in the High

Cost Economy: Evidence from the Australian

Oil and Gas Industry

ABSTRACT

This chapter reports research findings into the productivity challenge facing the Australian oil and gas industry. This industry has been experiencing cost overruns indicating a productivity decline that puts future projects and investment at risk. Using world-class survey methodologies developed by the Centre for Business Research at Cambridge University and adapted for the oil and gas industry, an evidence- based view on business decisions and conditions is provided and linked to performance. While many of the productivity challenges facing the Australian oil and gas industry are beyond immediate managerial control, this research shows that key productivity drivers are in the realm of the firm to influence. The research reported in this chapter shows that improvements in innovation, collaboration, and deeper competitive capabilities are the best levers to lift business productivity and to build a growth pathway for the future for this industry.

Jerad A. Ford University of Queensland, Australia

John Steen University of Queensland, Australia

Martie-Louise Verreynne University of Queensland, Australia

Bradley Farrell Ernst & Young, Australia

Gerald Marion Ernst & Young, Australia

Seelan Naicker 4Sight Group Pty Ltd, Australia

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Confronting the Productivity Challenge in the High Cost Economy

INTRODUCTION

Recent years have seen soaring investment in natural gas resources in Australia. A mix of conventional and unconventional natural gas projects are at the heart of this expenditure with a majority of projects focused on exporting Liq- uefied Natural Gas (LNG) to Asia. Conventional gas projects include offshore gas field develop- ments like Chevron’s Gorgon project in Western Australia. Unconventional gas projects include Queensland’s Coal Seam Gas (CSG) projects, which will bring together distributed gas wells from across a vast geographic distance to par- allel LNG processing plants on Curtis Island, Gladstone, Australia. Taken together, Australia has more than $US190b in LNG export projects under construction (Reuters, 2013), placing Aus- tralia on track to becoming the world’s largest exporter of LNG by 2025 (OECD, 2012). A list of the major projects, expected to be completed by 2020, is provided in Table 1.

Cost overruns in these projects have become commonplace in the Australian oil and gas in- dustry. In 2012 Chevron announced a $9 bn cost overrun on its Gorgon gas project with the final cost now estimated to be $52 bn (MENA, 2012). This represents a 40 per cent increase on the original 2009 project budget in US $ terms. In 2012, cost

overruns from Chevron, Woodside, BG, Santos and Exxon Mobil totalled $25 bn (Ker, 2012). This pattern has continued into 2013 with the Conoco/ Origin joint venture APLNG announcing a more modest seven per cent overrun of $US1.3 bn (Re- uters, 2013). The BG group’s QCLNG project has witnessed a $US5 bn overrun (Chambers, 2013).

Explanations for cost overruns usually focus on external factors, which all relate in various ways to productivity. Logistical challenges of remote locations, access to overseas labour (Bloomberg, 2009), wage costs, regulatory complexity and technical challenges are all commonly cited as rea- sons for these overruns. Together these represent various facets of the productivity challenge facing the industry. The received wisdom is that these challenges contribute to the overall inefficiencies of the LNG megaprojects and to declining pro- ductivity. The threat of the productivity decline is that future projects might not be invested in, or worse, delivered at unnecessarily high cost (BCA, 2012). Faced with this prospect, investors will seek better capital returns on projects outside Australia, signs of which are already becoming evident. For instance, recent reports show that comparable investments in gas projects might be up to 30 per cent less expensive in east Africa (Ellis, Heyning, & Legrand, 2013). Executives from several major energy companies warn that steps need to be made

Table 1. Australian LNG projects expected to start through 2020 (Reuters, 2013)

Projects Under Construction Developer(s) Capacity (mtpa)

Cost ($US bn)

Development Type

Gorgon 1,2,3 Chevron 15.6 52 Conventional, off-shore

Queensland Curtis Island (QCLNG) 1, 2

BG Group (QGC) 8.5 20.4 Coal Seam Gas

Gladstone LNG (GLNG) 1 2 Santos/ PETRONAS/ Total / KOGAS 7.8 18.5 Coal Seam Gas

Australia Pacific LNG (APLNG) 1, 2 Conoco Phillips / Origin 9 25.4 Coal Seam gas

Icthys 1, 2 Inpex / Total 8.4 34 Conventional, Offshore

Prelude FLNG* Shell / KOGAS 3.6 12.6 Conventional, floating offshore

Wheatstone 1, 2 Chevron 8.9 29 Conventional, Offshore

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Confronting the Productivity Challenge in the High Cost Economy

to reduce labour costs, cut regulation and deliver a stable political environment, or the next wave of investment in Australian LNG will be in serious jeopardy (Daley and MacDonald-Smith, 2013).

Therefore, the Australian Oil and Gas industry is at a crucial turning point. Another $150 bn in LNG investment hangs in the balance and depends on the capacity of the industry to generate competi- tive investment returns (Daley and MacDonald- Smith, 2013). Already Woodside has shelved the Browse LNG project and is considering cheaper alternatives including floating LNG technology, and Shell has raised doubts about the viability of its Arrow LNG project citing cost pressures (Kelly, 2013). Future projects that are at risk are shown in Table 2.

ADDRESSING THE PRODUCTIVITY CHALLENGE AT THE FIRM-LEVEL

Economic studies of labour or multi-factor pro- ductivity can point to the problem but are too high-level to present solutions for oil and gas executives to act upon quickly. Some of these productivity challenges come from factors beyond

immediate managerial control. Exchange rates, industrial relations, remote locations and skills shortages are systemic problems in this regard. For instance, the most significant cost reduction target regarding LNG competitiveness in Australia was shown to be tax related (Ellis et al., 2013).

Ultimately however, productivity is determined by what happens in businesses and there are po- tential routes to improving productivity regardless of broader macroeconomic constraints. While Australia confronts wider national productivity challenges, such as the regulatory burden, taking remedial action at the firm-level is an important step forward.

Leading firms are not ‘lame ducks’ in this constrained environment. Rather, our research shows how productivity improvements relate to innovation, collaboration and deeper competitive capabilities that are in the realm of the firm to influence. It is these three levers of performance that provide the best opportunities for managers to lift business productivity, and build a growth future for the industry over the next decades. These findings are relevant to all oil and gas firms in our sample; applying equally to operators and the rest of the supply chain, and to those with

Table 2. Future LNG projects that may be at risk (Reuters, 2013)

Projects May Be Finalised in 2013+ Developer(s) Capacity (mtpa) Est. Start

Browse 1, 2, 3 Woodside 12 2018

Arrow 1,2 LNG Shell / PetroChina 8 2017

Sunrise FLNG Woodside 3.5 2018

Bonaparte FLNG GDF Suez / Santos 9 2018

Expansions

Gorgon 4, 5 Chevron 10 2018+

Pluto 2, 3, 4, 5 Woodside 4.3 each 2015+

Wheatstone Chevron 16.1 ?

Darwin 2 ConocoPhillips 3.5 ?

Arrow LNG 3,4 Shell PetroChina 10 ?

Queensland Curtis Island LNG 3 BG (QGC) 3.5 ?

Australia Pacific LNG 3,4 Origin / ConocoPhillips 9 ?

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Confronting the Productivity Challenge in the High Cost Economy

business interests in conventional and unconven- tional oil and gas1. Our survey delineates between operators and the rest of the supply chain, and is diverse in terms of focus: over half of surveyed firms report being in the conventional business, a third unconventional, and nearly a quarter both2. The representativeness and diversity of the sample suggest these findings are pervasive and applicable to many firm types.

Focussing attention on improved collaboration, effective innovation and improving competitive capabilities will provide the best outcomes for firms in this industry. These findings are in line with broader productivity findings conducted across all sectors of the Australian Economy (Australian Innovation System Report, 2012).

Using world-class survey methodologies de- veloped by the Centre for Business Research at Cambridge University and adapted for the oil and gas industry, an evidence-based view on business decisions and conditions is provided and linked to performance. To bring these productivity drivers to life we provide real cases of organisations that have successfully implemented capability devel- opment, innovation and collaboration strategies.

THE DAWN OF A GOLDEN AGE OF GAS OR A MISSED OPPORTUNITY IN THE MAKING?

Energy is the lifeblood of economic growth and will be a critical resource in the ‘Asian Century’. An estimated US$37 trillion will be spent glob- ally on energy supply infrastructure in the next decade (OECD, 2012). Australian megaprojects will contribute directly to satiating this global demand, tripling natural gas production3 by 2035 (OECD, 2012).

While the production of LNG from conven- tional gas has been ongoing in Australia since 1989, the emerging demand from Asia has seen a raft of projects that link Australian gas fields to international markets. With domestic prices

falling as low as $2.5/mmbtu a few years ago, export markets represent a much better margin for conventional gas from Western Australia where long-term supply contracts to Asia can fetch around $15/mmbtu (Global LNG: Will new demand and new supply mean new pricing?, 2013).

In tandem with the rise in LNG export prices, there has been a revolution in extraction of gas from unconventional sources with the development of hydraulic fracturing technology and horizontal drilling. Coal, shale and tight sands are all possible sources of gas. This has meant that the eastern Australian coal seams have the potential to support large LNG export terminals. Consequently three LNG plants are being constructed on Curtis Island near Gladstone, again bolstered by the relatively high price for LNG exports.

Three threats are emerging that may curtail the Australian gas boom. First, the same technologies that have created new sources of gas are also available to other nations, particularly Russia and China which have vast reserves of coal and shale. While these countries will take time to develop their resources using such technologies, ultimately it will have downward pressure on the costs of gas in the international market.

Second, while the Australian export gas price is still linked to the oil price, the disparity between US gas prices and the export price will eventu- ally put pressure on the oil-gas price link with the outcome of lower prices for Australian gas, potentially making new LNG projects economi- cally unviable. The estimated breakeven cost of Australian LNG projects is around US$12/mmbtu (Ellis et al., 2013).

Third, eating away at this already slim mar- gin, the cost of doing business in Australia has been rising steadily. A new LNG project is now 20 to 30 per cent higher than North America or East Africa (Ellis et al., 2013). Wages, materials, remote locations, poor infrastructure, the strong Australian dollar, regulatory burden, and tax policy have all been cited as factors contributing to re- duced international competitiveness of Australian

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Confronting the Productivity Challenge in the High Cost Economy

industry. As mentioned previously, these factors are also blamed for the spate of cost overruns in major gas projects.

A recent survey of the industry by Ernst & Young and the University of Queensland Business School shows several of the common factors at the centre of the cost competitiveness debate being highly cited by managers in oil and gas industry (Ernst & Young, 2013). Figure 1 shows the per- centage of firms citing several industry-specific factors as critical or crucial barriers to meeting business objectives in the past three years.

Figure 1 reveals that several firms commonly cite governmental factors as severe challenges to meeting business objectives, such as approval processes and regulations, which are outside the typical sphere of influence of managers. In con- trast, several labour related factors and high cost of doing business bring the productivity discussion at the firm level centre stage.

Where the Australian oil and gas industry goes from here depends on its ability to attract interna- tional investment capital. If better risk-adjusted

returns can be found elsewhere, then the Australian industry could cease to expand after the current round of projects are completed, despite extensive unconventional reserves that rival those in the US. Clearly a concerted effort involving government and industry is necessary to raise productivity. Our purpose here is to delve into how these various factors relate to the productivity challenge and what can be done at the firm level to overcome these challenges.

REFRAMING THE PRODUCTIVITY AGENDA: WHAT CAN FIRMS DO IN THIS ENVIRONMENT?

One of the challenges confronting oil and gas productivity is the general lack of sophistication in the productivity debate in Australia. Produc- tivity is a reasonably simple concept in that it measures the ratio of inputs to outputs, but this becomes complicated with different ways to cal- culate productivity. Economists typically measure

Figure 1. Australian oil and gas industry firms citing barriers to business objectives

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labour productivity, capital productivity and total or multi factor productivity. Labour productivity is usually calculated as hours worked per unit of output. Less straightforward is capital productivity where the input measured is the productive value of capital stock, which can include plant, equipment, software and capitalised exploration expenditure. It is argued that capital productivity matters more for industry performance in the resources sectors, such as oil and gas, where labour costs are a relatively small proportion of expenditure (McKinsey 2011). Multifactor productivity (MFP) attempts to measure the combined productivity of labour, capital and the residual inputs such as economies of scale and technological change but the ambiguous nature of these inputs makes MFP hard to interpret (Eslake & Walsh, 2011).

Despite the multi-faceted and complex nature of measuring productivity (Eslake & Walsh, 2011), the default position in the popular business media is to equate productivity with labour productiv- ity. One outcome of the dominant logic around labour productivity being the culprit for poor performance is a narrow focus on industrial rela- tions, and therefore the leap to consider lowering wage bills as a remedy. Besides the tenuous nature of the relationship between industrial relations and productivity (Hancock, Bai, Flavel, & Lane, 2007), the trouble with this approach is that it not only ignores capital productivity, but it also neglects the other side of the global resources industry. Capital can move to other nations to get better returns, but so can labour. Attempts to lower wages may therefore accelerate the flight of talent beyond Australia.

Recent commentary on the productivity chal- lenge also warns against the view that productivity improvements result from labour intensification or simply working longer hours. To quote an influential report from the Grattan Institute, “labour produc- tivity growth is attained by working smarter, not by working harder or longer” (Eslake & Walsh, 2011, p. 8). Thus Australia’s productivity challenge is due at least in part to the apparent slowdown in

Australia’s adoption of productivity-enhancing technologies, and this calls for a heightened in- novation effort (Eslake & Walsh, 2011).

Fundamentally, innovation is the impetus behind long-term productivity growth. GDP growth in the US is directly attributable to the impact of innovation produced during major in- dustrial changes surrounding steam, electronics and Internet (Gordon, 2012). Since the Industrial Revolution innovative activity has also played a central and sustaining role in per capita economic growth in Britain. Research and development intensity, when sustained at levels proportional to the population growth, explains the steady productivity rate increases observed during this time (Madsen, Ang, & Banerjee, 2010). Research like this demonstrates that productivity has more to with innovation than wage bills, workplace flexibility or motivating employees.

The link between innovation and productivity can be seen in the oil and gas industry and the way that innovation has continuously reshaped the industry. In one interview for this study, a director of oil and gas for a world-leading management, engineering and development consultancy (Firm M) commented that without innovation in the in- dustry, the global economy would have ground to a halt decades ago due to stiflingly high oil prices. According to this director, the tension between growing global demand and the challenges the industry faces “… is that you can’t continue as is, because if you continue as is, then your revenues stop, money runs out, resources will disappear and accidents will start happening… The only way you can square the circle, or reconcile these opposing forces is to create new solutions and paradigms and that’s where the innovation comes in.”

Our aim in this chapter is to show the relation- ships between business activities (like innovation) and productivity, using primary data collected from the Australian oil and gas industry. The chapter is organised as follows, first we describe our research methods including the data analysis. We then describe the main results from the models

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and the most significant drivers of productivity. Finally, these results are discussed with the aid of case study examples to demonstrate how these drivers can be managed in real businesses.

METHODS

Survey Instrument

A well-tested survey instrument for measuring firm performance, innovation and collaboration originally developed by the Cambridge Business Research group (Cosh, Fu, & Hughes, 2012) and based on the Oslo Manual guidelines (OECD, 2005) was augmented to capture important infor- mation specific to the industry. In particular, new questions were developed to elicit information about labour productivity, capital intensity, indus- try position and sources of revenue, contracting methods, regulatory environment, community relations, particular types of collaborations, and open innovation measures. These adaptations to the instrument were vetted externally by four ad- visory partners from Ernst & Young, two senior executives from major Australian energy firms and the Chief Operating Officer of the Australian Petroleum Production and Exploration Associa- tion (APPEA) eastern region. Before release, the survey instrument was soft tested with a subset of the industry network to resolve any remaining issues with the survey instrument before the full launch.

The survey was administered by phone to the senior executives of APPEA’s membership over a period of several weeks in August and September 2012. In total, 290 member firms were solicited and 80 responses were received, resulting in a 27.6 per cent response rate - close to the average response rates when targeting top management (Baruch, 1999). Age, size and industry position characteristics show that a very representative sample was obtained as summarised in Table 3 and Table 4.

Data Analysis

In addition to exploratory analyses using de- scriptive statistics, exploratory factor analysis was conducted, followed by regression analysis. Logistic regression techniques using IBM SPSS 19 were used to determine how influential various predictors are towards firms achieving productiv- ity improvements. We also conducted a number of interviews with senior managers from the industry about productivity and innovation, using a standard set of questions so we could compare responses.

Logistic Regression

Logistic regression models were created to ex- plore the relationship between several factors and productivity in our sample of firms from the Australian oil and gas industry. Selected variables were entered into SPSS version 19 and a predictive

Table 3. Representativeness of sample vs. sample frame

Type Sample Sample Frame

No. Per Cent

Operators 25 31 94 32

Service 55 69 203 68

80 100 297 100

Table 4. Firm ages and size

Firm Age (Years) Per Cent Firm Size

(Staff)

Per Cent

0-5 13.8 0-4 6.3

5-9 23.8 5-19 26.3

10-19 21.3 20-199 38.8

20-29 18.8 200+ 16.3

30-59 12.5 1000+ 12.5

60-175 10.0

100 100

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Confronting the Productivity Challenge in the High Cost Economy

model was developed using maximum likelihood estimation techniques. The predictive model resulted in relative importance (odds) placed on each independent or explanatory variable. The odds are the contribution of each factor toward achieving the dichotomous outcome (e.g. achiev- ing a productivity increase).

Odds ratios have an intuitive interpretation in that each additional incremental increase in the independent variable, the odds of achieving the outcome category increase or decrease by the odds ratio. Broadly, a factor with odds larger than one means increases in that factor improves the chances of achieving the outcome (alternatively the probability is greater than 50 per cent). Odds of one are neutral toward achieving that outcome (probability is 50 per cent exactly). Factors with odds less than one mean increases in that factor decrease the chances of achieving the outcome (probability is less than 50 per cent) (See Table 5).

Odds and probabilities have a simple relation- ship (see Equation 1 and Table 5).

Exploratory Factor Analysis

Of primary concern to managers and industry observers regarding productivity are the myriad ‘barriers to meeting business objectives’. Our survey asked about 19 distinct barriers on a Likert scale ranging from 1 ‘insignificant limitation’ to 5 ‘crucial limitation’. These 19 factors were submit- ted to exploratory factor analysis using Varimax rotation. This resulted in three latent factors that we termed External Constraints (α=.920, eight

items), Labour Constraints (α= .750, three items), and Competitive Constraints (α=.693, four items) (see Figure 2).

In addition, we asked firms about 11 key differentiators in their business. We asked re- spondents to rank the 11 items on a Likert scale ranging from 1 ‘not a competitive advantage’ to 5 ‘key differentiator’. This resulted in one factor with an α=.811; containing four items, which we term Competitive Skills (see Figure 2).

Model Development

The logistic regression models utilised a dichoto- mous outcome variable (dependent variable), indicating whether productivity increased (1) or did not (0) in the past year.

Table 5. The relationship between probability and odds

Probability Odds

0.10 0.1

0.20 0.3

0.30 0.4

0.40 0.7

0.50 1.0

0.60 1.5

0.70 2.3

0.80 4

0.90 9

0.95 19

0.98 49

Equation 1. Relationship between odds and probabilities

odds o p

p probability p

o � �and�( )=

−( ) ( )=

+( )1 1 (1)

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Confronting the Productivity Challenge in the High Cost Economy

Independent variables included innovation and collaboration, which have been shown to positively influence productivity (Australian In- novation System Report, 2012; Eslake & Walsh, 2011; Gordon, 2012). The innovation variable was operationalised as a binary variable, taking the value of one if the firm reported any innovations in the past three years. Innovation included any of the types shown in Table 6. Collaboration was operationalised as a binary variable measuring whether the firm maintained any formal engage- ments in the past year. Collaborative engagement in our survey was defined as engagements that are beyond the normal day-to-day operations of the firm, and are intended to improve some aspect of the business.

Figure 2. Regression model and construct definitions

Table 6. Innovation types measured in survey, introduced in prior three years

Innovation Type

Description

Product Technologically new or significantly improved physical product / technology.

Process Technologically new or significantly improved methods of producing a physical product / technology.

Distribution Technological improvements in supply, storage or distribution systems for physical product / technology.

Service New or significantly improved ‘service product’.

Service Delivery

New method to produce and deliver your ‘service product’.

Managerial New organisational/managerial processes or marketing methods.

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Independent variables, including the constraint constructs, are shown in Figure 2. These blocks of constraints reflect the factors frequently debated in research and the media as directly responsible for reduced productivity in the industry. Based on the popular press we would anticipate these factors to negatively influence productivity increases at the firm level.

Finally, we included the competitive skills construct as an independent variable in order to reveal whether firm-level capabilities are respon- sible for productivity increases. We anticipated a positive relationship between these capabilities and productivity increases.

Controls in the models included a binary vari- able indicating whether (1) or not (0) the firm conducts research and development (R&D), the natural log of firm size, and an industry control we termed ‘service’, which is binary and delin- eates between oil and gas operators (0), and all other firms in the sample (1). The base model is shown in Figure 2 with the theorised direction of relationships (indicated by + / -).

RESULTS AND DISCUSSION

General Findings

The descriptive statistics revealed surprising find- ings, such as the fact that most firms do not track their own productivity (Figure 3). Fewer than half of the businesses in our sample reported any

type of productivity measures (outputs per unit input). However, firms that did measure labour productivity had growth intentions twice those of firms that did not measure productivity. We interpret this finding as firms with a productivity focus lay the foundations for profitable growth.

The descriptive statistics revealed that 21 per cent of the sample reported productivity increases. Firms in the oil and gas industry were highly in- novative with 80 per cent having introduced some type of innovation in the past three years. Firms in the sample were also very collaborative with 73 per cent engaging in formal developmental ef- forts. These figures were much higher than typical samples of Australian industry (Verreynne, 2012).

Looking at how the variables used in the mod- els correlated with each other, it can be seen that productivity increases were strongly and positively correlated with competitive skills. Interestingly external constraints, including a range of industry business constraints, were negatively correlated with competitive skills. One could interpret this result to mean that firms with higher competitive skills are more adept at handling external con- straints. However, it was also clear that there were some industry segmentation differences, such that non-operators were most aligned with competi- tive skills and competitive constraints, but were negatively related to external constraints. Thus non-operators may not be as affected by industry or governmental regulations, but are affected by the nature of contractual relationships and com- petition. Also, very large firms appeared to be

Figure 3. Measuring productivity (Ernst & Young, 2013)

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more collaborative, had higher competitive skills and were also dealing more with labour related constraints, but this appeared to be regardless of industry position (see Table 7).

Model Results: The ‘Big Three’ Productivity Relationships

The first model very clearly revealed the impor- tance of innovation, collaboration and deepening competitive capabilities with regard to productiv- ity increases (Figure 4). These can be summarised as follows:

• Innovation included managerial and ser- vice related innovations and product and process innovations. Innovations were also classified as incremental (new to the firm)

and novel (new to the industry) items. The odds revealed that if the firm innovated in the last year, the odds were 7.3 greater that productivity increases would exist (~88 per cent probability).

• Collaboration was important regardless of industry position. Collaborations around supply chain (infrastructure, joint material inputs, new equipment and overall stream- lining of supply chain) and outsourcing were important for productivity, as were collaborations with peer-firms. The odds were 8.2 that a collaborating firm might achieve productivity increases (~89 per cent probability).

• Deepening competitive capabilities meant that both breadth and depth of specialised offerings, supply chain integration and ex-

Table 7. Correlations of variables, Spearman’s Rho

N M S.D. 1 2 3 4 5 6 7 8 9

1 Productivity Increased

80 .21 .41

2 Innovation 80 .80 .40 .183

.052

3 Collaboration 80 .73 .45 .183 .112

.052 .161

4 Competitive Skills

80 .00 1.00 .328** .158 .001

.002 .080 .496

5 External constraints

80 .00 1.00 -.153 .066 -.027 -.350**

.088 .279 .407 .001

6 Labour constraints

80 .00 1.00 .028 -.074 .224* .014 -.032

.401 .256 .023 .451 .390

7 Competitive constraints

80 .00 1.00 -.095 .171 .093 .143 -.023 .018

.202 .065 .205 .103 .419 .437

8 R&D 80 .55 .50 .101 .239* .174 .076 -.018 -.023 .021

.186 .016 .061 .251 .435 .420 .428

9 Service firm 80 .69 .47 .152 .135 .008 .421** -.414** .048 .392** .041

.089 .117 .474 .000 .000 .335 .000 .360

10 Log Size 80 4.29 2.25 .054 .072 .286** .319** -.100 .326** .142 .243* .124

.318 .264 .005 .002 .188 .002 .105 .015 .136

**. Correlation is significant at the 0.01 level (1-tailed). *. Correlation is significant at the 0.05 level (1-tailed).

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ecuting projects well in a large-scale proj- ect environment were strongly related to productivity increases. For each increment of increase in these competitive skills, the odds increased by 4.5 that productivity in- creases would occur (~81 per cent chance).

• Interestingly we found no statistically sig- nificant relationship between two of the three industry constraint factors in terms of stifling productivity. We did find that Competitive Constraints were negatively related to productivity increases. Odds were .5 (~33 per cent probability) that each incremental increase of competitive constraints would relate to a productivity increase.

A second model (Figure 5) was devised, which expanded the labour constraints construct to observe the ‘labour productivity’ item. This model revealed that those firms facing challenges finding managerial talent were more likely to have productivity increases. However, it did not reveal any relationship between perceived labour productivity challenges and the ability to actually achieve productivity increases.

The second model, better fitting than the first, increased the odds for the existing relationships. That is, the importance of innovation moved to odds of 29 (from 7.3), collaboration nearly doubled to odds of 16 (from 8.2), as did competitive skills to 7.5 (from 4.5). A slightly stronger negative re- lationship between Competitive Constraints was

Figure 4. Logistic regression results for model 1

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also revealed. Finally, one of the control variables revealed that very large firms are slightly less likely to achieve to productivity increases.

DISCUSSION

Interpretation of Quantitative Findings

Our models show that many factors in the domain of the firm are strongly related to productivity increases. This finding clashes with the conven- tional wisdom and media reports that consistently point to external factors relating to government

bureaucracy as detracting from productivity. In the external constraints construct, which is a col- lection of firm-level business constraints that are overwhelmingly governmental in nature, we found no negative relationship to productivity. It should however be noted that models that included the individual constraint factors in a previous study, do show a negative influence of red-tape specifically (Ernst&Young, 2013). Similarly the construct of labour constraints had to be unpacked in order to find a significant relationship to productivity, and the one we found in this study was positive.

Our findings further challenge received wisdom by revealing that intramural activity of firms in the industry detract from productivity,

Figure 5. Logistic regression results for Model 2

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refocussing the productivity discussion to col- laboration issues. Our ‘competitive constraints’ construct, which included items around contrac- tual factors in the competitive landscape, was the most likely reason for productivity declines in the models. Firm size, perhaps indicating inertia which diminishes firms’ ability to adapt to constraints, was also shown to detract from productivity increases.

Taken together, these models suggest that im- proving productivity is a challenge for managers, not governments. Although there is no denying that externalities, like regulations around migrant worker visas, or red tape (Ernst & Young, 2013), might adversely impact firms’ ability to achieve productivity increases, our models show that together external factors cannot explain the pro- ductivity challenge in the face of strong internal promoters like innovation, collaboration and in- creasing competitive skills. Further, the fact that intramural concerns like inequitable risk sharing in contracts (part of the competitive constraints construct) is an indictment on firms themselves and the contractual norms they maintain. Risk sharing practices between firms are clearly in the domain of managers and not governments and we show these practices are partly responsible for declining productivity.

Narrative Exemplars

From our research we found that only 45 per cent of firms actually measured productivity, and only a further 21 per cent witnessed productiv- ity increases. But what does an explicit focus on productivity look like in practice?

Taking the results of the models as a starting point, we next explore the interview data collected from interviews with Australian oil and gas firm executives. We organise this discussion around those themes identified earlier.

Innovation and Productivity

Our models clearly demonstrated the central role that innovation plays in the productivity discus- sion at the firm level. If the models are taken as accurate reflections of the industry, the produc- tivity step-change needed from the industry can only come through innovation. Almost all of 20th century global economic growth can be attributed to innovation and it is important that the oil and gas productivity challenge is also framed as an innovation challenge (Gordon, 2012).

By innovation we mean the full spectrum of the ‘successful application of new ideas’ such as innovation in products (e.g. improved geophysics software), services (e.g. rapid land rehabilitation), processes (e.g. continuous pipeline construction) and management (e.g. better methods of safety monitoring and training).

Looking expressly at this single relationship, from our data we see firms that reported any in- novations were five times more likely to report productivity improvements. The models that incorporated other factors illustrated that the im- portance of innovation is even greater in context. The central role of innovation in the ability of firms to improve productivity is a well regarded fact in line with other country-wide studies (Australian Innovation System Report, 2012). In our models innovation was inevitably a strong contributor to the variance in productivity increases at the firm-level.

Despite the indications of the role of innova- tion in the industry, a director of oil and gas of a world-leading management, engineering and development consultancy (Firm M), cites the forces of corporate and cultural inertia that exist and that cause companies to continue doing what they have always done. If you add on top the risk aversion and the investment portfolio planning and business planning practices, the director stated

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“preference will always be to carry on doing stuff they’ve always done, and not to come up with big innovations.” Innovation must be a conscious choice that is embedded in the company strategy.

The biggest spur for innovation is the chal- lenging operating conditions that many businesses are facing. In other models not shown here, we find firms with a broad portfolio of innovations were likely to cite uncertainty around future in- frastructure availability, ability to access overseas markets, inequitable risk sharing on contracts and the high cost of doing business in Australia as performance obstacles.

Successful firms were tackling problems and finding new ways to do business and leveraging their competitive skills in the process. These firms were also more likely to reach out to R&D-based institutions such as universities and organisations like CSIRO (models not shown here). We found that the largest firms in the sample were not in- novating broadly, and they were also much less likely to see productivity increases. Lifting the innovation performance of larger firms is key to improving the competitiveness of the industry as a whole.

However, firms with a clear view of key performance drivers were able to focus their in- novation efforts. One vice president (VP) for a Queensland CSG operator (FIRM A) highlighted fresh thinking behind business innovations on their CSG to LNG implementation project. The drilling intensity and significant upfront capital flows in the CSG arena had prompted new think- ing about organisational structures and production processes divergent from traditional gas plays: “We tend to focus on innovation and technology but there’s also a huge amount of innovation to make these projects work and particularly when they are dispersed geographically.”

FIRM A’s CSG to LNG implementation challenge involved overcoming the propensity to approach risk as in traditional gas plays. The VP said that, “drilling is the biggest single activity this company does,” which quite naturally resulted in a focus on subsurface risks and up-front costs

within the project team, and triggered the natural mitigation practices associated with keeping these risks in check. However, the economics of the project were dwarfed by the economics of filling the LNG plant and selling, saying it “far outweighs actually the CAPEX in terms of sensitivity analy- sis”. So a shift of focus to a balanced approach to risk was necessary.

FIRM A’s VP said, “It’s just so critical…to throw out the old way of thinking, look at the problem, and then write your management process around the problem, not the other way around...It’s about thinking differently and placing your project in its current environment as opposed to it.” Giv- ing a specific example, the VP emphasised that in this context, “drilling becomes a value driver. Just simply by changing your company manage- ment structure to reflect that, actually changes the way you operate as a company.” This has led to a significantly more modular and repeatable drill- ing processes, including a process the VP called the “well-factory,” and water recycle innovations supporting pit-less drilling.

“So, it’s really going back to real fundamentals and… thinking almost from first principles and not being scared to do that. That’s what we’re trying to drive in FIRM A, is to really think about fundamentally as a company, what is it that we’re trying to do…This company is not about building assets. It is right now, but it won’t be and what you have to do is build the company for the future so it is sustainable and that’s where this well factory actually is the single biggest thing we do.” Another critical area for the business in the high labour environment was, “really understanding…how do you lean processes out, how do you for instance take the labour out of those processes whether it’s the processes in the company or actually the processes of doing the job in the field.”

Innovation and Collaboration

Collaboration was directly related to innovation performance and productivity in our modelling. This was a strong relationship with collaborating

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firms being between eight and 16 times more likely to report improved productivity than firms without collaborations. This presents a strategic opportunity for both operators and service com- panies. Firms engaging in different types of col- laboration were almost certain to be innovative, particularly in product innovation or logistics innovation. The larger operators therefore have an opportunity to shape the business ecosystem through collaboration and rewarding the supply chain for innovation.

One case in point is the collaboration between a drilling company (FIRM B) and CSG operators. FIRM B had reduced the duration of CSG drilling operations from 14 days down to three. According to FIRM B’s Chief Operating Officer (COO) the innovations contributing to this feat were based on hands-on engineering as opposed to traditional R&D, “It’s not the sort of typical R&D you have where it’s a lab. You don’t see much of that.” “In reality, every day is an R&D day”.

The demand and high frequency of well drill- ing in the CSG to LNG business means FIRM B’s clients were seeking to reduce the time spent drilling, “It’s a factory approach. When you work offshore you drill a $100M well. It’s a one asset thing. In these projects we’ve got thousands of wells. It’s a volume game… so you’re looking at cycle times, you’re looking at getting incremental costs down.”

Behind the reduction of cycle times the COO talked about “micro-innovations” that when added up, resulted in big savings. For instance, FIRM B had incorporated hydraulically operated walkways and handrails into their rigs, reducing set-up times to 30 minutes down from three hours. Every min- ute counts in the CSG drilling business. A small time saving might mean, “nothing for one single well, but across a thousand wells it makes a big difference”. “You add those up…and you chop days off your programs.”

The importance of trust between the clients and suppliers underpinned FIRM B’s ability to deliver drilling productivity innovations. “What

works really well is when you’ve got a client that you work hand in glove with… and when you’ve got that level of trust, ... and the good communication, ideas come from both sides.” In addition, he said that, “long-term relationships make a big difference” in this respect. “People are driven to get a better outcome and you get a much better outcome when you can collaborate with your clients and with your suppliers.” The ability to have open and honest communication is key to FIRM B’s continued success. Working through any issues with clients and suppliers in real time had underpinned FIRM B’s contributions to productivity in the industry.

On the construction side, collaboration was also a driver of innovation and productivity. A project manager (PM) from an engineering and services provider (FIRM C) said that close and early collaboration with the client and design firms was important to maximizing productivity across the industry. “If we can get that relationship working, then we think that that’s where we bring our greatest innovation.” The PM said, “innova- tion to us doesn’t come by this magnificent idea and it solves all our problems… it comes through the little things, which added together that really drives productivity”.

FIRM C is developing standard designs where possible, resulting in manufacturing cost economies of scale, and subsequently in sharper pricing for its clients. This type of repeatability creates efficiencies on the job site as well. The process of forming foundational concrete now includes adjustable steel forms, eliminating time spent building timber forms. As the PM said, this is an accumulation of innovations rather than the big breakthrough, “Now, you know, that doesn’t sound brilliant in the way of innovation, but it has a dramatic effect on your base cost elements that go into your pricing.”

Collaboration between larger established play- ers and innovative small companies also has the potential to pull new technology into the industry. One notable case of this is a geophysics company

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(FIRM D). They have built their business around reducing drilling risk for their clients. The owner was now taking the technology into the unconven- tional gas realm with its patent pending software.

The basics of the technology were summarised by the CEO as, “taking qualified broad brush structural geology and turning it into quantified accurate numbers.” The software was a work flow assist tool that took existing 3D seismic interpreta- tions and converted them into quantified data to produce highly accurate pressure-depth graphs. The approach offered a way to reduce drilling risk, which is particularly relevant to firms involved with Australia’s current gas boom, and could be critical to improving productivity in the industry.

The original inception of the technology was to help explain reverse fault seals in the North Sea, and the CEO supported international big oil and gas players in their reinterpretation of seismic data after some drilling failures in the 90’s. In 2000s several smaller firms were critical to proving out the technology.

Deepening Competitive Capabilities

In the survey we asked executives about sources of competitive advantage ranging from breadth and depth of offerings, reputation, and the abil- ity to execute projects in a timely manner. Firms that rated themselves highly in these competitive capabilities were more likely to have productivity improvement. These firms were also more likely to innovate, suggesting a close link between com- petitive advantage, innovation and productivity.

As an example in improving capabilities in the project delivery dimension, one executive from a Queensland CSG joint venture (JV) (FIRM E) de- scribed the productivity and innovation challenge as a gap they are steadily closing through improved management approaches that encourage creative problem solving and team work between contrac- tors. Leadership had been critical to transcending traditional risk mitigation practices and “finger

pointing” triggered by unforeseen challenges in the project implementation, opting instead to com- mission focused problem-solving teams.

FIRM E’s LNG construction contractor uncov- ered a critical path issue that would have delayed completion of a vital piece of LNG infrastructure. Leadership from the JV stepped in and brought together a core group of engineers to address the challenge. In just four days the team developed an alternative solution to the problem. The project was now slated to be delivered 30 days ahead of schedule.

FIRM E’s leadership is driving the onus of decision making toward smaller autonomous groups to facilitate adaptive and creative problem- solving. The importance of leadership in this process of change was critical, with one execu- tive saying, “the primary role of leadership is to push the organisation to get a better answer… to not just accept the answers.” In this way, FIRM E is focusing attention on the next generation of young leaders to ensure they have the experience to deliver large complex projects, the courage to challenge prevailing wisdom and the supporting organisational culture in which to do it.

The Productivity Flywheel

Our analysis revealed three productivity drivers but it also shows that they reinforce each other. Innovation related strongly to productivity when competitive capabilities and collaboration are considered in tandem. This flywheel effect can underpin profitable growth in the Australian oil and gas industry in all parts of the supply chain.

The implication of this relationship is that fac- tors that impede these drivers have a flow-on effect to other drivers. For instance, competition is good in that it focuses the industry on building competi- tive capabilities. Likewise, policy initiatives that create incentives to collaborate, particularly in the areas of infrastructure and R&D will also have a positive impact on the productivity flywheel.

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The Potential of Australia: The New Norway of the Unconventional Gas Industry?

It is clear that the future of the Australian oil and gas industry depends on how the productivity challenge is addressed. The unconventional gas resource in Australia is vast and the potential of Australia to be a long-term exporter of LNG depends on being cost-competitive. However, the other prize for creating national wealth will be creating a new technical services industry with specialist high-value expertise in manag- ing unconventional gas project development and production. As the director of oil and gas business for a world-leading management, engineering and development consultancy (Firm M) noted, we need to remember that producing LNG from unconven- tional sources is a new industry that will require different skills and capabilities. The director said, “These end to end LNG projects…are extremely interesting to us. What they are showing us is the kind of innovation Australia will need. But more importantly it’s demonstrating a model that can be applied elsewhere. I think some of these technolo- gies and developments will be sellable abroad, and over the next five years or so Australia is probably going to become the Norway of the gas industry. They’ll be developing new techniques… having a lot more expertise and capability that will be of extreme interest abroad. Australia really is at the frontier in a number of fields and people are watching very closely, particularly being able to monetize CSG and Shale gas as LNG, which has enormous potential in other parts of the world.”

After the gas reserves are depleted, there is still the possibility that the expertise and indus- trial network that will be left behind will continue to generate value-added income and high-wage employment for decades to come.

ACKNOWLEDGMENT

This research was funded by a Collaborative In- dustry Engagement Fund (CIEF) grant from the University of Queensland with additional support from EY and the UQ Centre for Coal Seam Gas.

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Ellis, M., Heyning, C., & Legrand, O. (2013). Extending the LNG boom: Improving Australian LNG productity and competitiveness. New York: McKinsey & Company.

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ENDNOTES

1 Industry control variables for supply chain position and supplemental cross-tabulations between firms participating in conventional and unconventional oil and gas, show no significant relationship to productivity im- provements.

2 Nineteen firms were unclassified in this re- gard but these data were missing completely at random according to Little’s MCAR’s test (all model variables included) and cross- tabulations between firm age groups, firm size groups and non-response revealed no statistically significant relationship.

3 To 160 billion cubic meters (5.65tcf).

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Chapter 7

Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation:

The Case of Cellulosic Fibre Value Chain in the Green Triangle, South Australia

ABSTRACT

This chapter illustrates the use of strategic roadmapping as a policy tool for regions or industry sectors to formulate a strategy to renew and transform their industrial base when faced with structural decline, diminishing opportunities, and intensifying competitive pressures. This approach is illustrated by the case study of the forest and wood products industry in the Green Triangle region in the southeast of South Australia, both the road maps produced and the staged policy recommendations made for immediate, short, and long-term action. The chapter concludes by summarising the key arguments for the use of strategic roadmapping as policy tool for industrial transformation, and identifying some future avenues for strategic roadmapping in the forest and wood products industry and in manufacturing industry in general.

INTRODUCTION

When exposed to fierce global competition manu- facturing industries working in high cost operating environments face the risk of becoming locked in low value add products, outdated production technology and eroding competitiveness. With insufficient capacity to innovate and adopt new

technologies companies, industries and entire regions can fall into a self-enforcing spiral of industrial decay having negative repercussions on firm profitability, supplier industries, employment and local communities.

Policy makers need to select their strategy among three basic options. They can allow the force of creative destruction to take its toll by

Toni Ahlqvist VTT Technical Research Centre, Finland

John Kettle VTT Technical Research Centre, Finland

Ville Valovirta VTT Technical Research Centre, Finland

Nafty Vanderhoek VTT Technical Research Centre, Finland

DOI: 10.4018/978-1-4666-5828-8.ch007

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letting uncompetitive industry dwindle and hope more cost effective operations will grow to replace it. This laissez-faire approach has a high economic and social cost in the short run. It provides no guarantee that more competitive businesses will emerge to replace the vanishing ones. Large stocks of local natural and human resources may also be- come redundant. Alternatively, policy makers can start providing financial and fiscal support to the troubled industry in order to improve viability of the industry and maintain it in its current operation. While this option might be politically attractive in order to save jobs it also has a high economic cost and holds no guarantee in the longer run. If anything, it puts back the necessary transforma- tion thus making it even harder to deal with the inevitable changes at a later stage.

The third option for governments is to take an active role in catalysing transformation towards a new technological trajectory with a view to developing higher value add products for future markets. This is a challenging task for public policy makers to undertake. Governments are notoriously ill equipped to identify opportunities with long term prospects. They are also not in a favourable position to direct industry towards new pathways. Nonetheless, when encountering severe economic challenges this option holds the best odds.

In this chapter, we present a strategic roadmap- ping approach to assist governments and industries to identify future pathways towards higher value add and assist them in initiating transformation through innovation and adoption of new technolo- gies. We demonstrate the use of our approach with a case roadmapping process carried out in South Australia’s forest industry. The forest and wood products industry and associated value chain, along with many other Australian manufacturing industries, has experienced a very difficult decade, peaking in recent times from the exceptional circumstances created by the global financial crisis and increased globalisation. Coupled with internal factors such as a lack of re-investment, aging equipment and poor management decisions

have resulted in a significant reduction in industry profitability and a loss of employment opportuni- ties that have combined to create an atmosphere of doom and gloom in the crisis situation that exists today.

The Regional Development Australia Lime- stone Coast has met this challenging situation by pursuing an agenda of economic diversification to broaden the economic base of the South East through the initiative of The Limestone Coast Economic Diversification Forum. In turn, the South Australian government have felt compelled to act and sought the assistance of VTT Techni- cal Research Centre of Finland, as experts in the forest product value chain, to develop grounded pathways for the renewal of the industry, both in the short (3–5 years), medium (5–10 years) and long-term (greater than 10 years), through a roadmap exercise.

This chapter is based on South Australian Cellulosic Fibre Value Chain Technology Road- map project conducted in 2012 and 2013 in the Limestone Coast region, South Australia, which forms part of a wider region known as the Green Triangle. The objective of the project was to provide the region with a future strategy to renew its industrial basis. The project was funded by Department of Manufacturing, Innovation, Trade, Resources and Energy (DMITRE) and led by VTT Technical Research Centre of Finland (Ahlqvist et al., 2013a, 2013b).

The paper is structured as follows. In the next section we briefly discuss how industrial trans- formation and related policies can be catalysed through foresight and strategic roadmapping. In the third section we outline the contexts of our case study, forest and wood products industry in the Green Triangle, South Australia. In the fourth section we present the strategic roadmaps, constructed to open future-oriented perspectives in forest and wood products industry. In the fifth section we depict the recommendations crafted on the basis of the roadmaps – this stage was an important one, because especially the roadmaps

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beyond the five year horizon require some tan- gible directions on where to head in the short to medium term. The sixth and final section wraps up the key arguments and delineates some future avenues for strategic roadmapping in the forest and wood products industry, and in manufacturing industry in general.

STRATEGIC ROADMAPPING, POLICIES AND INDUSTRIAL TRANSFORMATION

Catalysing Policy Changes through Foresight

In the last two decades or so, foresight has increas- ingly become identified as a strategic practice and a process for catalysing industrial transformation and related policies. It is commonly discussed that foresight can be realised in different “modes,” and in the context of different spatial scales and industrial sectors. For example, foresight could focus on the strategic options of a single organisa- tion or a single technology. This mode could be called micro-level foresight rationale. Foresight could also consider multiple organisations and technological trajectories in the meso-level of an industry. This mode could be called meso-level systemic foresight rationale. In this rationale especially two perspectives are of importance. The first is the stimulation of systemic capaci- ties. Foresight stimulates two types of systemic capacities (see Ahlqvist et al., 2012a). Firstly, foresight provides actors with information and signals outside the immediate environment and helps to identify potential threats and opportuni- ties. It helps the actors in the system to overhaul market lock-ins. Secondly, foresight stimulates new social structures and linkages that could be useful in fostering the circulation of information in the system. The increased circulation of infor- mation helps actors to anticipate potential system failures. System failures can be approached as

outcomes of “rigidities and mistakes of innovation agents” and “a lack of linkages and fragmenta- tion between innovation actors” (Georghiou and Keenan, 2006, p. 763).

The adoption of a more future-oriented ap- proach in policy processes initiates changes in the policy practice accordingly. Indeed, Weber et al. (2009, p. 955) argue that policy processes have gone through a conceptual shift in which a linear model of policy-making has been replaced with a more learning based cyclical model. In this set- ting, foresight is a process that aligns expectations and builds a “self-fulfilling prophecy”. Foresight can thus be viewed as “an integral element of networked and distributed policy making”. This is realized through three functions of foresight: informing, strategic counselling and facilitating (Weber et al., 2009, p. 956).

In the context of policy-making, foresight can also have different rationales. Georghiou and Keenan (2006, p. 766) distinguish three policy rationales of foresight. The first is the provision of policy advice by accentuating the long-term perspective. The second is the building of advo- cacy coalitions. Foresight builds up an “interac- tion space” by stimulating new networks and communities through the formation of a common vision. The third foresight rationale is providing social forums. The foresight process provides a “hybrid forum” between public and private actors for strategic reflection that broadens the range of participation on policy issues.

In the systemic settings, policy processes become increasingly matters of policy design. In our usage, policy design refers to an adaptive and experimental approach in which a selected variety of policy instruments are applied either simultane- ously or successively. What these instruments are and how their sequential flow is organised depends on the characteristics of the system under policy intervention. These system characteristics are, for example: actor assemblages, enabling technologies and related infrastructures, a temporal scope of the system (e.g. what is short-term, what is long-term)

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and spatial scales of the system (e.g. local, regional and national). In policy design, multiple policy instruments are adapted and tested in parallel. Thus policy design aims to increase the resilience of the policy practices in the systemic contexts by allowing space for policy experimentation.

When policy design is augmented with a foresight process or set of processes, the outcome could be called forward-looking policy design (Ahlqvist et al., 2012b). Foresight has six func- tions in the practice of forward-looking policy design, adapting Da Costa et al. (2008, p. 369). Accordingly, the functions of foresight are to 1) inform policy, that is, to generate research-based views on futures; 2) facilitate policy implementa- tion, that is, to widen the change capacities in a certain policy community; 3) make policy-making more participatory; 4) support policy definition by transposing results of foresight processes towards policy practice; 5) re-orient the policy system towards long-term perspectives; 6) create a shared and collaboratively interpreted ground for policies.

STRATEGIC ROADMAPPING AS A MESO-LEVEL POLICY TOOL

In this section we outline a framework of strategic roadmapping to be utilised as a policy tool in meso- level industrial transformation. The framework derives from the view that roadmapping can be considered both as a line of strategic thinking and as a collaborative process methodology. Our argument draws on three somewhat distinct theoretical tenets. The first of these is the classic theory of dynamic capabilities, as defined by Teece et al. (1997). In their seminal paper they defined a “dynamic capability” as: “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly chang- ing environments” (Teece et al., 1997, p. 516). It is important to notice that dynamic capabilities are linked to the managerial processes, strategic position and organisational path. Thus, the notion

of dynamic capability provides a theoretical basis for organisational transformation that connects the transition to contextual historical understanding. The second tenet is the literature on strategic foresight. It has been suggested that in the context of strategic management, foresight contributes to different value creation forms (Rohrbeck, 2012, p. 441). For example in the context of innovation management foresight can have different roles, such as the roles of “the initiator,” “the strate- gist” and “the opponent” (Rohrbeck, 2012, p. 442). Strategic foresight can also be deployed to develop new business fields for companies (e.g. Heger & Rohrbeck, 2012). The third tenet is the organisational strategy crafting (e.g. Whittington & Cailluet 2008, Heracleous & Jacobs, 2008), which makes the argument that strategies should not be viewed as locked-in paths to some pre- determined goals, but rather as organic schemes that are always partially open and available for alternative options, multiple instruments and “side-schemes”. This definition opens a possibil- ity for a forward-looking experimental approach.

On this basis, roadmapping can be utilised as a nexus for building a continuous and dynamic foresight practice for organisations. Roadmap- ping combines different modes of knowledge with specific activity layers (Kostoff & Schaller, 2001, Phaal et al., 2004). Roadmaps are tools for the combination of organisational knowledge that may be “unlinkable” with other strategic methods (see e.g. Petrick & Echols, 2004, Phaal et al., 2006). It is possible to make a distinction between two roadmapping cultures. First is the culture of technology roadmapping in which the roadmap- ping is approached as a normative instrument to identify relevant emerging technologies and to align them with explicit product plans and related action steps (see e.g. Phaal et al., 2001). Second is the emerging culture of strategy roadmapping which is perceived as a more dynamic and iterative process that produces weighed crystallisations, usually in a visual form, of an organisation’s long- term vision, and short- to medium-term strategies

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to realise this vision. It is based on the idea that roadmaps are like visual narratives describing the most critical paths of future developments (Phaal & Muller, 2009). This visual emphasis enables the use of roadmaps as crystallised strategy charts that open simultaneous perspectives both on macro- level currents and micro-level developments (see Blackwell et al., 2008).

Roadmapping, especially in its strategic form, is an adaptive process-based methodology well suited for systemic contexts (see Ahlqvist et al., 2012b): its visual format enables the transparent formulation of visions with explicit linkages across the temporal spectrum (present, medium term, and long term) and roadmap layers (such as drivers, markets and enabling technologies) (see Figure 6). In the systemic context, roadmapping refers to a continuous and transparent process, not a single exercise, which produces a hermetic chart of the future with a sealed vision. Therefore, the vision should be understood as a temporarily locked target that is systematically verified and re-formulated, either based on an organisation’s strategy clock or when a critical need emerges such as a change in the environment. For industrial firms, a vision which is shared between geographically bounded economic and political actors may provide a risk reducing mechanism by aligning development activities of interdependent organisations.

Strategic roadmapping, as we define it here, has two basic elements: cognitive and collabora- tive. The cognitive element provides a method for producing and analysing strategic intelligence about the current economic state of affairs, fore- sight on markets and technologies, and policy options. The strategic roadmapping is an approach to structure knowledge in a temporally sequenced representation with systemic linkages between the elements. The collaborative element of strategic roadmapping provides a process for mobilis- ing relevant stakeholders to set transformation processes in motion. Knowledge alone is a weak tool to initiate change, but when brought into collaborative processes between industrial value

chains, government, and knowledge providers such as local universities or research organisations, the knowledge becomes a powerful instrument to as- sist actors to arrive at shared understandings of potential future pathways.

Strategic roadmapping can be applied to forward-looking policy design in multiple ways (see Ahlqvist et al., 2012a). The first way is through the building of a common vision. The building of a collaborative vision stimulates the commitment and embeddedness of the long-term goals. In innovation policies a common vision is required, because, for example, commercialization of innovations is usually dependent on investments and development activities realized by multiple actors. A joint vision can direct these interlinked activities towards joint goals and align their timing.

The second way to apply a strategic roadmap- ping approach in policy design is to facilitate sys- temic change by identifying those societal needs which create a potential demand for new products and services. With regard to a set of pressing “grand challenges” such as climate change, an aging population, depletion of mineral resources or shortages of food and water, roadmapping can identify latent societal demand, for example, in the context of environmental sustainability (Könnölä et al. 2011). Particularly when large sunk costs have been incurred in existing technologies and infrastructures, an industry can become locked into technological solutions which are socially and environmentally suboptimal. Industrial systems may stop responding to demand signals from the marketplace. Under these conditions a transfor- mation process can be set in motion by carefully guided public policy. Roadmapping can articulate these needs more explicitly and link them with emerging technological and industrial develop- ment, and with different policies, e.g. regulation and taxes, and public procurement based instru- ments (Wieczorek & Hekkert, 2012).

The third way is to anticipate how and when the demand could be articulated towards the emer- gence of a new market. There are several reasons

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why the existence of a market for new products cannot be taken for granted. In some cases, adopt- ing new technologies is very slow due to high switching costs (David, 1985; Arthur, 1989). In other cases, the market does not develop because a pricing mechanism for the benefits is missing. This is common, for example, in environmental problems when product prices do not adequately reflect negative externalities on the environment (Faber & Frenken, 2009). Social and economic costs created by emissions and pollution are not always easy to allocate to those who generate them. A pricing regime for these externalities has to be established before a market can emerge. When executed well, a roadmap synthesizes and depicts purchasers’ and suppliers’ common understanding of future societal and market needs (Georghiou & Cassingena Harper, 2011).

The fourth way to use roadmaps is with vi- sionary strategizing. This refers to a “cross-over” knowledge that builds on understanding the in- terfaces between the layers of the roadmap, for example societal drivers, markets, solutions and technologies in a certain timeframe. A roadmap can create an analytic structure for understanding how and when the “push” created by new tech- nologies and the “pull” driven by market demand are likely to match, and under which conditions. There are several policies and policy instruments to support visionary strategizing, like facilitating the commercialization of public research and technology development, providing validation and feasibility assessment, creating demonstration and piloting environments or setting product certifi- cation and labelling schemes and requirements.

The fifth way is to identify specific innovation targets, either singular technologies or logical tem- poral sequences, in the roadmap structure. When the business environment follows the systemic logic of a value network rather than the more linear logic of a value chain, it is important to identify all the elements and linkages in a network (Adner and Kapoor, 2010). Single or sequential targets

could be very important for identifying preferred partners in a value chain or when formulating a sourcing strategy.

In the next section we will focus on the case study, realised in the Green Triangle, South Aus- tralia, that demonstrates how strategic roadmap- ping can be utilised as a meso-level instrument for supporting industrial transformation and related policies.

CASE STUDY: THE PRESENT STATE OF CELLULOSIC FIBRE VALUE CHAIN IN THE GREEN TRIANGLE, SOUTH AUSTRALIA

Acknowledgements

The authors would like to acknowledge the con- tribution of the following representatives and organisations for their constructive feedback and one-on-one discussions enabling the roadmapping project underpinning this case study to reach a successful outcome: Prof Göran Roos, Advanced Manufacturing Council & Chair of the Project Steering Committee; Len Piro, Department for Manufacturing, Innovation, Trade, Resources and Energy (DMITRE); Stuart West, Department of Primary Industries and Regions South Australia (PIRSA); Mike Ryan, Regional Development Australia (RDA); Prof. Gil Garnier, Monash University; Trevor Smith, South Australian Forest Industry Advisory Board; Laurie Hein, Green Tri- angle Forest Products; Brad Coates, Construction, Forestry, Mining and Energy Union (CFMEU); Allan O’Conner, University of Adelaide; Dermot Cussen, Department for Manufacturing, Innova- tion, Trade, Resources and Energy (DMITRE); Noel Richards, Department of Primary Industries and Regions South Australia (PIRSA); Peta Crew, Department of Primary Industries and Regions South Australia (PIRSA); Steve Chapple, Regional Development Australia (RDA); Jennifer Kelly,

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AusIndustry; Andrew Trainer, Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education (DIICCSRTE); Mark McShane, South East Local Government Association (SELGA); Forest and Wood Products Australia; Parsonson & Parsonson; NF McDon- nell & Sons ; Timberlink; Whitehead Timber Sales; Green Triangle Forest Products; Geddes Management; Whiteheads; Round Wood Solu- tions; Hancock Victorian Plantations Pty Ltd; LV Dohnt; International Timber Solutions Pty Ltd; Green Triangle Bark & Mulch; South East Pine; Tabeel Trading; KC & MR Boult; SERIC; Badenoch Integrated Logging; Biogro; Blackbird Industries; Kimberley-Clark Australia; Southern Tree Breeding Association; Banner; Forestry SA.

Setting the Scene

Forests cover approximately 19 per cent of Aus- tralia’s land area. The Green Triangle estate is the largest plantation based wood fibre producing region in Australia. The Green Triangle straddles the state borders of South Australia in the South East and Victoria in the South West. The Green Triangle hosts approximately 355,000 ha of planta- tions, half softwood (SWD) Pinus radiata, and the balance hardwood (HWD) Eucalyptus globulus. The South Australia portion of this estate (known as the Limestone Coast) is 188,100 ha of plantation resources, of which 128,400 ha is of softwood and 59,700 ha of hardwood (12.5% and 6.1% of Aus- tralia’s total respectively) (Cunningham, 2011).

South Australia’s forest and wood products industry is being significantly challenged as production levels fall due to declining export com- petitiveness and accordingly means for improving the industry’s competitiveness are being sought. It cannot be overstated that the forest and wood products industry in the Green Triangle region is currently highly challenged and even, according to some, in a state of crisis. Several company clo- sures and the transforming situation in the forest resource have left the region in an uncertain state.

The forest sector thus needs actions to boost and renew the industry to a new level.

Achieving world class productivity in existing businesses combined with the development of higher value-add products are keys to creating a sustainable future for the forestry industry. The South Australian Cellulosic Value Chain Technol- ogy Roadmap project, on which this case study is based, aims at developing the full potential of the forestry resources in the Limestone Coast region of South Australia (see Ahlqvist et al., 2013a, 2013b). The project was funded by Department of Manufacturing, Innovation, Trade, Resources and Energy (DMITRE) and led by VTT Techni- cal Research Centre of Finland.1 The study was a prime initiative of the State Government’s Manufacturing Works strategy, and is also one of the key actions identified in the Limestone Coast Economic Diversification report (MW, 2012).

The project had two objectives. The first objec- tive was to provide the South Australian govern- ment with a roadmap describing how current pro- cesses can be made more efficient using existing or commercial ready technological advancements (efficiency gains) and to potentially diversify into other new and high value products (effectiveness gains) using the raw materials available in the region, while taking into account relevant local issues. The second objective of the roadmapping exercise was to identify suitable companies that would consider locating in the region with VTT as their local and global research provider and supporter in accessing global value chains. The overall goal was to identify new business opportu- nities for the region as well as raising technology levels to meet the requirements of a competitive modern fibre-based industry.

Why the Study was Conducted

The Green Triangle, incorporating South Austra- lia’s Limestone Coast region and adjacent parts of Western Victoria is Australia’s premier wood production region. The SWD plantations yield

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3.2 million m3 of logs annually, approximately two-thirds sawlogs and one-third pulplogs. In Green Triangle, there is a well-established forest and wood products industry cluster developed to grow, harvest and transport, and process these logs. However manufacturing capacity has been declin- ing with notable facility closures in the last several years. Chronic underinvestment for most facilities has left the majority of the remaining industry relatively uncompetitive versus state-of-the-art domestic or international competitors. This sector has experienced poor markets for key products, especially low-grade sawnwood, residual chips and surplus roundwood. Consequently, the whole value chain has struggled to generate adequate returns. Increasing SWD log exports are an outcome, as growers seek to re-balance log demands with the log mix produced from their forests.

The HWD plantations produce mainly pulp- wood logs. The plantations were developed by ad-hoc planting during the last decade by

Managed Investment Scheme (MIS) promoters, many of which have gone into receivership. The estimated volume of logs to be yielded from these plantations will exceed 4 million green metric tonnes (GMT)/year by the middle of this decade. Significant volumes of HWD pulpwood supplies will be available for the following 10 years. Aside from chipping, there is no domestic processing of these logs. Chips are currently exported from Portland destined for Asian pulp mills (Figure 3). Export of HWD roundwood logs is a recent and growing phenomenon. At present, the Port of Portland’s dock facility capacity represents a (po- tential) constraint on chip exports. Infrastructure will limit HWD chip exports to approximately 3.4 million GMT/a.

Asian markets are currently oversupplied with HWD chip and pricing is well below the level required to deliver adequate returns to growers. Consequently, industry observers expect around half of Australia’s current HWD plantation estate

Figure 1. A softwood plantation (Pinus radiata) in Green Triangle (Authors)

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Figure 2. A hardwood plantation (Eucalyptus globulus) in Green Triangle (Authors)

Figure 3. Logs waiting to be exported in the Portland dock (Authors)

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will not be re-planted. This will include planta- tions in the Green Triangle. The area replanted will affect the HWD pulpwood volumes available beyond 2025.

In addition to the supply of SWD and HWD logs, the region can also generate an estimated 500,000 m3/a of woody biomass. This material comprises the tops and branches of trees left after harvesting.

The situations outlined above for the cellulosic value chain require urgent actions. At the Stage 1 report (Ahlqvist et al., 2013a) of our case study we found that few of the current players had initia- tives in place to address either the fundamental problems in the existing sector, or to capture the region’s unique opportunities. For example, there is currently no pulpmill in the region. Govern- ment grants have underpinned investments that are planned. However, as far as we can determine not all of the grants have been deployed in ways that have enhanced the region’s competitiveness.

The current SWD industry can benefit from investments to improve its competitiveness, and to develop value added uses for currently under- utilized components of the log and residuals sup- plies available. On the positive side, the quality of the region’s logs, proximity to key markets and the potential to achieve world competitive scale facilities means this is a unique opportunity in Australia.

The HWD pulpwood supplies yielded from the region represent a globally significant volume of high quality, certified fibre. The current owners of these plantations are actively looking to diversify uses away from the current low paying export chip markets. In addition, Australia is the only region with a long term surplus of cellulose.

In the Green Triangle, a more strategic per- spective to the cellulosic value chain is needed. This perspective would be particularly crucial for forest owners and sawmillers. Rethinking the industry would in the best case scenario result in more capital to invest in the region’s process- ing assets. Renewing the technologies employed

and diversifying into new sectors have long term positive effects across the cellulosic value chain.

The traditional sawn timber production indus- try must continuously improve and develop to ensure world-class productivity, but in an emerging global bioeconomy this is not enough. The new opportunities presented by bioenergy, biochemi- cals and biomaterials must be captured, in addi- tion to further developing opportunities in more traditional but evolving areas like construction elements, wood residue laminates, wood plastic composite products, and value added packaging materials etc. This could mean, for example, that in addition to the focus on developing the existing industry through productivity improvements and product extensions, next-generation biorefineries could be established in the region, utilising side streams or under-utilised raw material streams from the forest and wood products industry as input for the production of bioenergy, biochemicals and biomaterials. The eventual goal must therefore be to identify new business opportunities suitable for local companies as well as raising the techno- logical level of the region’s industry to meet the requirements of a competitive modern fibre-based industry. The vision is to make the Limestone Coast a significant player on the global integrated biorefinery stage and to raise the employment and skills level in the region.

The roadmap study also covered the produc- tion of biofuels, bioenergy, biochemicals and biomaterials from a biorefinery. Biofuels and bioenergy are seen as lowest value per volume of the co-products from a biorefinery but are important, as supplementary sources to existing fuels assuming sufficient levels and mandates are available. However, it is clear from recent reports by Parrat & Associates and CSIRO in 2011 that the petroleum and petrochemical industry refineries need higher value co-products to make them eco- nomically viable (e.g. 80–90% of the profit from crude oil processing comes from the 10–20% of materials produced as chemicals and downstream products). This study includes an analysis of the

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bioenergy opportunities, together with the pro- duction of chemicals and plastics from biomass, even though the authors are concerned that there are no obvious related industries in the area. The biofuel opportunity could well be impacted by a recent study (Cook et al., 2013) indicating that Australia’s shale gas deposits are far more abun- dant than previously expected, though their remote location could make extraction a costly prospect except where infrastructure already exists like in the Cooper Basin. How this plays out in the longer term could well be critical.

The Green Triangle case study also investigated the “low hanging fruits” or more immediate oppor- tunities for the forest and wood products industry. In the Limestone Coast Region this sector has declined in recent years. Member companies, and the sector as a whole, urgently need to improve their efficiency and effectiveness leading to new business opportunities. To help address these

issues, the study proposed the development of a woody biomass-based value chain facilitated by the clustering and cooperation of the existing industry and supported by applied (primarily process and equipment) research, development and engineering in the region to explore selected product opportunities relevant to these existing businesses.

Another focus of this study was to evaluate the commercial and technical feasibility of sug- gested biorefinery options under the proposed carbon price. The rapid pace of development in the bioeconomy sector worldwide coupled with the significant changes in the global agricultural and manufacturing environments must also be kept in mind, particularly what is happening in Asia, North and South America and the European Union (EU).

The Green Triangle region currently exports wood chips and logs to Asian markets. This

Figure 4. Parts of the deconstructed Tantanoola pulp milll. The pulp mill was shut down in December 2010 (Authors).

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source material could be used just as profitably in the region with the right investment, mandates and legislation in place. Indications are that in the Limestone Coast region, the lignocellulosic material (woody biomass from radiata pine and/ or Eucalyptus) is available in sufficient quantity and reliability of supply to warrant future invest- ment in integrated biorefineries. However, it is clearly understood that the establishment of a biorefinery based on forestry biomass would need to compete directly for access to the resource at a competitively stable price, volume and supply at least equivalent to alternative uses such as mulch or particleboard.

The Current Situation in the Green Triangle Softwood Processing Sector

The Green Triangle Region enjoyed significant investments during the period between the 1970s and the mid-1990s. The major assets, including the two largest sawmills and the particleboard plants, were state-of-the-art when built. However, the lack of investments, particularly since 2000 means the region’s sawmills have lost competitiveness relative to domestic and international competitors. The existing sawmills’ internal layouts reflect the operating requirements of the day. However, these layouts now constrain efforts to update these mills to take advantage of new technologies such as in-line scanners to improve recoveries and lower the costs. The region’s sawmills produce a range of products, primarily structural timber sold into the domestic construction sector. The region also produces a large array of non-structural products including boards, pallet and landscape timbers and millwork.

The region’s sawmilling industry has been challenged by the combination of the slow do- mestic housing markets and competition from imported structural timber. This has kept timber prices relatively low, while costs, especially la- bour and electricity, have increased. The region’s sawmills’ lack of investment has meant the mills

have relatively higher labour and power costs versus state-of-the-art competitors. The sawmills’ dated technology also produces higher levels of non-structural sawn products that typically attract relatively lower prices. In addition, the current market for sawmill chips is limited and prices are low. This combined has impacted adversely on the financial performance of the region’s sawmills.

The typical outputs for Green Triangle’s large and small sawmills are contrasted with a hypotheti- cal Australian best practice mill sawing the same logs (as available to the large sawmills) (Table 1). The hypothetical mill employs curve or shape sawing technologies and state-of-the-art scanning technologies that allow such sawmills to generate higher yields of product and a higher proportion of structural product than either of the typical mill types in Green Triangle. The best practice mills typically have lower labour and energy costs per unit quantity of timber produced. The present average labour use in large sawmills is 800 m3/a per person.

Consequently, the key challenges facing the Green Triangle region’s sawmills include improv- ing the recovery of higher value products. The large Green Triangle sawmills could potentially lift recovery of structural grade product by up to 5% by investing in curve sawing and advanced scanning technologies. Additional opportunities exist to improve prices achieved for fall down products, and to reduce key input costs. The South Australian Government’s A$ 27 million South East Forestry Partnerships Program is providing direct grants to the existing sawmill operators. At the time of making the case study, the program has earmarked A$ 17 million in grants, with A$ 10 million remaining which may be partially used to support new initiatives.

Timberlink’s Tarpeena sawmill is one of the large Green Triangle sawmills and was last upgraded in any major way about 30 years ago. Timberlink and the South Australian Government have announced planned investments at the mill. The State Government has committed a A$ 7.8

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million grant to be matched dollar for dollar by the company. The new investment is expected to increase sawlog processing volume from 460,000 to 575,000 m3 annually (two shift basis). It is un- derstood that Timberlink are considering installing a Quad Reducer Bandsaw as the primary machine centre, while at the same time undertaking a major upgrade of the sawmill waste handling system. The benefits anticipated include improved productiv- ity, and lower manufacturing costs. Investments will also be made in the drying kilns, and drymill.

As is typical for sawmills built during the 1980s, there is very limited space between the machine centres in the mill. This limits the ability of the owners to implement the latest in-line scanning and related technologies. In the specific case of the Tarpeena sawmill, the low initial investment made by the current owners (New Forests) coupled with the generally good quality of the logs processed by the mill means that the benefits accruing from a major reconstruction and reinvestment are unlikely to justify the significant additional investment costs needed to bring the sawmill up to the best practice standards.

Timberlink has identified another potential initiative for the Tarpeena site. The company is in the early stages of assessing the potential to develop a combined heat and power (CHP) facility at the Tarpeena location. Such a facility would take the residues from the sawmill, plus additional biomass and wood waste from other sources, as fuel.

CHH operates the Green Triangle’s second large sawmill (Jubilee Highway) and has a partially mothballed sawmill at Lakeside. The company also operates two particleboard mills in the re- gion at Lakeside and White Avenue. The Jubilee Highway sawmill facility benefits from its supply of arguably Australia’s best quality sawlogs as measured by average diameter, sweep and knot size. The sawmill equipment was upgraded in 1994/95 and is among the largest (by throughput) sawmills in Australia. As previously noted above, the prevailing sawmills configured in the 1990s and earlier have constrained the current owners in terms of their ability to incorporate the lat- est in-line technologies. As with the Tarpeena sawmill, this disadvantage is partly offset by the

Table 1. The typical large and small Green Triangle sawmills benchmarked against hypothetical Aus- tralian best practice

Output Component A Typical Large Green Triangle Sawmill

(>500,000 m3 log Input/a) Av 42.0% Dry Dressed

Recovery

Hypothetical Australian Best Practice Large Softwood

Sawmill (>500,000 m3 log Input/a)

Av 47.0% Dry Dressed Recovery

A Typical Small Green Triangle Sawmill

(<100,000 m3 log Input/a) Av 48.0% Green Sawn Recovery = <40% Dry

Dressed Recovery

Structural grades (MGP 10 or better)

29% 35% 5%

Non-structural boards 7% 6% 26%

Non-structural core wood 6% 6% 17%

Woodchips 28% 25% 28%

Shavings/dockings 18% 17% 10%

Sawdust 11% 11% 15%

TOTAL 100% 100% 100%

Bark 7% 7% 7%

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consistent high quality of the sawlogs processed by the Jubilee Highway sawmill. Consequently, while the product recovery and costs achieved by this mill are not up to best practice standards, the likely investments needed to achieve these benchmarks may not be justified on the basis of the improved returns generated.

The small Green Triangle sawmills are typi- cally family-owned and operated. These enter- prises are capital constrained, and have developed sawing systems that are robust, flexible and with relatively lower (capital) cost. The businesses have adapted their processing equipment to al- low them to process the log mix available, and to meet often niche markets not serviced by the larger operators.

The Current Value Network in the Green Triangle

Figure 5 presents a generic outlook on the present forest industry value network in the Green Triangle forest and wood products industry. The bases were laid out in the stage 1 of the case study (Ahlqvist et al., 2013b). To reiterate, the key functions of the present value network can be divided into the activities of forest owners and supporting actors, notably actors in breeding and genetics, machine suppliers, and data analysis providers. All these actors provide inputs for utilisation and renewal of the resource base in the region, mainly formed of pine and eucalyptus plantations. This set of activities forms the first loop of the value network.

Figure 5. Representation of the forest and wood products industry value network in the Green Triangle region. The shaded green colour depicts the key functions in the value network, the shaded purple depicts key output directions, and shaded blue colour designates key external inputs.

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The first loop acts as an input to the second loop, that is from hauling and harvesting to the downstream sawmills. The key present products of Green Triangle sawmills are sawlogs, pulp logs, roundwoods, woodchips, sawmill and wood residues and barks. Important external inputs for this second loop are skilled labour and cost-related factors such as electricity and fuel.

In the third loop, the sawmills act as provid- ers to different customer industries, the first of which is direct exports of woody materials such as logs and woodchips, mainly to Asia. Some of this material is later imported back to Australia as value-added products. The second is the traditional pulp and paper industry that has been in decline in the Green Triangle region. The pulp and paper industry uses mainly pulp logs and wood chips as material for the production of cellulosic pulp and, subsequently, paper products. The third customer industry is the construction and building industry that produces sawn timber, panels, engineered wood products, posts and treated timber. In addi- tion, the industry produces furniture, fencing and

other products. There are also residual products, like mulch and potting mix, but these do not con- tribute significantly to the present value network. On the basis of our analysis, the side streams are currently under-utilised and provide a clear op- portunity for the region.

In the current value network, the functions of the four actor groups in the study (forest owners, hauliers, sawmills, specialised suppliers) can be summarised as follows. The core business of for- est owners is to take care of the renewal of basic resources, production of timber (softwood and hardwood), and the core functions related to this. The hauliers and harvesters persevere with their core business of hauling, harvesting and transport. The sawmills produce processed timber, gener- ally at low levels of added value. The specialised suppliers provide services and products both for business-to-business and business-to-customer. There are currently services, for example, in breed- ing and genetics, machine supply, data analysis and geoinformatics, but their potential in the present Green Triangle forest and wood products

Figure 6. The generic roadmap structure

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industry is not fully realised because there is a lack of advanced demand and demanding customers.

STRATEGIC ROADMAPS TO CATALYSE INDUSTRIAL TRANSFORMATION IN THE GREEN TRIANGLE

The Roadmap Structure and Lenses

This section presents the strategic roadmaps constructed to catalyse the industrial transfor- mation in the Green Triangle. The roadmaps were constructed at stage 2 of the project by the VTT experts in three workshops during 2013 (see Ahlqvist et al., 2013b). The process applied generic roadmap structure utilised at VTT Tech- nical Research Centre of Finland (Figure 6). In the roadmap structure, the level of drivers refers to wider socio-economic issues that could have

particular impacts on the roadmap topic. These could include megatrends, like climate change or ageing, but also more specific things related to roadmap topic, like standards or specific policies. The level of markets is based on the information of emerging market trajectories and dynamics rel- evant in the roadmap topic. The level of products and solutions maps the key emerging products, applications and services in the roadmap topic. The level of technologies focuses especially on technologies that enable the emerging products and solutions.

In order to contextualise the roadmapping to the specific context of forest and wood products industry, we adopted a so-called “lens-based” approach. In this case it means that we analysed the futures of forest and wood products industry through four lenses2 (Figure 7). The idea of lenses was to get a grip of the global cutting edge in forest industry development, and build strategic roadmaps on the assessed state-of-the-art. To

Figure 7. Roadmap lenses and their connection to the regional knowledge base

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structure the roadmapping process, four strategic developments paths were formed based on the “lenses” described in Figure 7, and detailed mate- rials provided to the VTT experts participating in the workshops. These included information on the general drivers affecting the fibre-based industry from a 10 year perspective, collection of most important solutions and enabling technologies as identified from a literature review, and presentation of key aspects from the stage 1 report.

The first perspective in roadmapping was a mass lens: it emphasised a more efficient tradi- tional forest and wood products industry. Basically, the question was about making the existing type of forest and wood products industry more efficient by formulating strategies for how to modernise old technology and how to make production processes more efficient. This is the lens that underpins the present traditional logging, wood chip and timber sector in Australia. The mass lens represents a lowest level of value adding and is somewhat vulnerable in a high operating-cost environment.

The second was an energy lens. This lens fo- cused on the potentials of industry renewal through energy biorefinery. It focused on how the forest production side streams, like branches, bark or excess chips, can be turned into energy. This lens also underpins the existing and emerging industries that focus on heat and energy generation, as well as ethanol and biodiesel production (normally via a first generation bio-refinery). In the lens, there are pockets of high value opportunities such as biodiesel, bioethanol and aviation fuel.

The third was a molecular lens, emphasis- ing radical industry renewal through diversified second and third generation biorefineries. This is the lens that shows emerging opportunities based around second and third-generation bio-refineries that have the potential to replace existing chemi- cal production based industries. The lens could include specialty chemicals that are recyclable such as bioplastics for soft drinks bottles.

The fourth was an atomic lens, with a focus on radical industry renewal through new biomass and

fibre-based production. This lens is high value- added and requires exceptional technological understanding and R&D. The lens enables the production of a wide range of new or modified materials such as biodegradable lightweight cel- lulose nanocrystals (CNCs) with a tensile strength exceeding that of steel or cellulose foams as insula- tors for the construction industry, and transparent paper replacing petroleum-based materials, like plastics.

Mass Lens: More Efficient Traditional Forest and Wood Products Industry

• Vision Statement for the Mass Lens: A modern and globally competitive mechani- cal forest and wood products industry that provides high value added products for dif- ferent industries and customers such as the furniture and construction industries.

The key present drivers for the increased use of wood are resource scarcity, sustainability and emission policies (Figure 8). In the medium term new policy incentives could emerge at the federal and state level to favour wood as a raw material in different industrial settings. Also, the need for an affordable, safe and comfortable societal environ- ment is rising. In the long term a new driver will be energy efficient buildings.

Presently, large scale markets exist for wood- based construction and high-rise housing in the US and Europe, coupled with an increasing need to attain low cost timber of premium quality. In the medium term, the uses of the wood in the construction industry will develop and vary. For example, wood could be used in building bridges. There is also a rising need for construction mate- rials that enable industrial production of prefab- ricated components. In the long term, advanced zero energy and easy-to-modify buildings with specific parameters will emerge. There will be specific needs to control acoustics in wooden constructions.

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It would be important to start a state-wide PR (public relations) process for marketing wood as widely applicable and sustainable resource. For Green Triangle, the critical issue is to formulate a joint regional strategy among the key players in the region. The key players from the regional perspective are the saw mill owners as well as technology providers. In the medium term, it is important to continue the state-wide PR process. Also, the Green Triangle joint strategy develop- ment should be continued and intensified. In the long term, it can be envisioned that Green Triangle will have a new industry cluster specialising in value added fibre-based production.

To realise the new value-added fibre-based production, the key present objective is to develop value added products from raw materials and side streams. The following processes, applied in Scandinavian sawmills, could be transferred to Green Triangle: specialisation also in small logs, applying modern equipment to e.g. produce oriented strand board or veneer based engineered wood products, X-ray scanning and geometric scanning, using improved sorting, using thinner blades, practising outsourcing, and developing new grades. In the medium term, the creation of value added products from raw materials and side streams is emphasised. Innovative construction technologies and solutions for public premises and housing are rising in importance. There is also an increasing emphasis for the diversifica- tion of wood production. In the long term, new products such as materials to control microclimate in buildings and wood-based easy-to-use technolo- gies for modifying structures on site will emerge. In the construction sector, new foam-fibres will be used as insulation, and these will be related to the development of wood components. Also, 3D-manufacturing of building components will gain prominence together with new fibre board technologies.

The present state-of-the-art enabling technolo- gies apply modular thinking that could be key per- spectives, along with enhanced process efficiency,

when forming a joint regional strategy in Green Triangle. A key state-of-the-art enabling technol- ogy is the vision recognition of timber, which should be integrated with new planning systems and integrated information system models. Other state-of-the-art enablers in this category are X-ray scanning combined with artificial intelligence. In the medium term, new enabling technologies that aim for the production of cross-laminated wood and massive glued beams will grow, while the utilisation of ICTs (information and communica- tion technologies) will intensify. In the long term, the new enablers will be novel wood composite materials and emerging bio-based protective treat- ments for wood products.

Energy Lens: Industry Renewal through Energy Biorefinery

• Vision Statement for the Energy Lens: Energy lens focuses on a modern biore- finery facility that produces energy and other value adding products. The biorefin- ery utilizes Green Triangle’s biomass, and complements the globally competitive me- chanical forest and wood products industry that provides high value added products for different industries and customers, e.g. fur- niture industry and construction industry.

The key present driver is a resource scarcity that widely affects societies and industries (Figure 9). It will push the industrial system towards the efficient use of raw materials; to use raw materials sustain- ably throughout the entirety of the lifecycle. The active CO2 market is the secondary driver. Climate agreements and the related policy incentives to lessen the dependence on fossil fuels act as critical drivers in the energy lens. In the medium term, the drivers such as resource scarcity, CO2 market, climate agreements together with related policy incentives, and development of fuel standards will collectively increase in impact. In addition, new drivers such as competition for biofuels will

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play a more important role. In the long term, the competitiveness of biofuel will become a key driver, as biofuel production reaches maturity.

Markets and consumer needs are currently regulated by the need for electricity. Today, it is important to fulfil biofuel requirements in a safe way i.e. biofuels should be compatible to or complementary with existing fuels. In the medium term, new affordable biobased fuels in some form will be available in the market. Second generation biofuels are emerging rapidly. As these enter the market, there will be increasing competition be- tween land for food and land for fuel production. In the long term, the question of biofuel pricing and pricing mechanism will rise in importance, coinciding with enhanced competition among the players.

International agreements currently set the standards in the field. The key players in the present and medium term are grid owners and utility companies. The forest and wood products industry, with logistics of biomass, will become an increasingly important player and sawmills will also play a key role. Already, the mining industry is a key user of biofuels in their fleets. In the medium term, the question of fuel blends, and community acceptance of biofuels as a local solution will be crucial. In the long term, and provided the question of blending is resolved, the mining industry will be the major beneficiary of local biofuel capacities. New players will enter the field, such as energy and biofuel companies.

The state-of-the-art present solutions include solid biofuels, made from sawmill side-streams towards simple products, like fuel for CHP (com- bined heat and power), pellets, and charcoal. However, production is still at an early stage and the scale is small. In the medium term, the liquid biofuels, mainly pyrolysis oil to boilers, emerge as state-of-the-art solution. In the medium term, gaseous biofuels can also be produced, for ex- ample, by gasifying fuel gas to CHP. The field of gaseous biofuels will develop and solutions to convert syngas to SNG (synthetic natural gas) will

emerge. In the long term, solid biofuels will move from torrefied wood to the use of lignin for energy purposes. In order to achieve this, the lignin will be separated from the bioethanol process. The liquid biofuels consist mainly of hydro-treated pyrolysis oil, low cost biomass to ethanol, DME (dimethyl ether), and FT-liquids. More advanced liquid biofuel technologies are emerging, such as biomass fractionation to yield ethanol and other products from the hemicelluloses and lignin components. In the case of gaseous biofuels, the main process will be converting syngas to SNG (synthetic natural gas). In the long term, the biofuel production will be integrated with petrochemical production.

Current enabling technologies include methods for harvesting the biomass on site, with drying technologies for pyrolysis and gasification being particularly important. The enabling technologies focus on first generation bioethanol and biodiesel, and on the second generation biodiesel through thermochemical or biochemical routes. In the medium term, new enabling technologies will emerge. Initially, enzymatic processes will de- velop further, and progressively novel separation/ fractionation technologies will emerge, together with technologies that enable methanol to be con- verted to gasoline. In the long term, the advanced enzymatic processes will emerge. Other interesting technological opportunities include the possibility of making ethanol by total hydrolysis and combin- ing it with the fermentations from sawmill waste. Several new catalytic and biotechnical processes may also be industrially implementable.

Molecular Lens: Radical Industry Renewal through New Biorefineries

• Vision Statement for the Molecular Lens: A diversified second and third gen- eration biorefinery facility that utilizes state-of-the-art technological solutions. The facility provides a diverse set of green chemicals, and different side-streams.

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The key present drivers are biomass/biofuels regulations and directives (Figure 10). The second driver is the benefit of using renewable resources that minimize the dependency on fossil fuels. The third driver is the emergence of new business op- portunities that are based on nature’s chemistry. In the medium term there will be regional and national bioeconomy strategies. New business models via partnering and joint ventures will increasingly act as drivers. Replacement of oil based plastic materials with renewable ones will be a crucial driver, as will be the developing performance chemicals. In the long term, the bioeconomy will be increasingly regulated and standardised. The availability of cheaper energy has the potential to be a significant driver.

The markets and consumer needs currently emphasise the business models of partnering and joint ventures. The biodegradable plastic market is focusing on packaging. In the medium term there will be more products that are based on current biochemicals, bioplastics and high performance products. There will also be service businesses related to these. In the long term, the demographic changes in South-East Asia will increase demand of materials.

Presently, large enterprises and SMEs are particularly active in the field. Brand owners currently use “green” for differentiation purposes. There are also new players in the field, like food and agricultural companies, seeking added value for their side streams. There is the requirement in the longer term for better coordination between government, academia and industry at the R&D, pre-commercial (pilot-scale providers) and com- mercial level. In the medium term, there will be increasing joint ventures between the forest and wood products, biofuels and chemical industries. SMEs will have an important role to play in specialty technologies and niche products. Large chemical companies will enter the market with biopolymer and material solutions. In the long term, the impact of technical development will be significant and will require the involvement of

both industry and academia. Coordinating these alliances will become increasingly important to achieve positive outcomes.

The key state-of-the-art solutions are bio-based platform chemicals and polymers. Another solu- tion is bioethanol from wood hydrolysis that could potentially be used in lignin fractionation. New products and derivatives, such as those from or- ganosolv pulping and fractionation processes, are entering markets. In the medium term, new isola- tion and conversion technologies will be applied. Simultaneously, bio-based drop-in replacements, like green-PE and bio-PET will offer new market opportunities. All fractions should be utilised, for example thermo-mouldable lignin, cellulose fibres, and fibres suitable for food productions. In the long term, the range of biobased products will increase. New fully bio-based chemicals, materi- als and other products will emerge. Combinations of fibre materials and new biopolymers will find emerging markets, particularly in packaging ap- plications. Organosolv pulping and fractionation processes will be commercialised and various by-products isolated, for example sulphur-free lignin for polymers. In the long term, the advanced processes, like catalytic pyrolysis, will emerge.

The present enabling technologies emphasise chemical and enzymatic technologies with strong process control. These technology platforms are currently advancing at a significant pace, as are existing biorefineries with improved fraction- ation and separation technologies. In addition, raw material handling, sorting and compacting has improved significantly and is being realised through fully optimised logistics. In the medium term, the enabling technologies will focus on complementary biofuel production through side streams. New and emerging enzyme technologies to transfer cellulose to starch will emerge. A new generation of thermal processes will be developed on a major scale. There will also be novel cascade concepts and zero-waste biorefining technolo- gies. In the long term, new enzyme technologies for transforming cellulose to starch will emerge.

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A new generation of thermal processes will be developed on a major scale. In the long term, a more radical vision could be to remove biomass and utilise CO2 from the air. Combinations of syn- thetic biotechnology with chemical engineering and polymer science will have a market impact.

Atomic Lens: Radical Industry Renewal through New Biomass- Based Production

• Vision Statement for Atomic Lens: A novel form of biomass and fibre-based in- dustry producing high value added nano- materials, packaging solutions, bioplastics, and chemicals. The industry uses a mix of first, second and third generation biorefin- ery technologies.

The key drivers of the atomic lens can be linked to generic drivers affecting the global economy, like climate change and energy policy, the rising demand for renewables and the transition towards a bio-economy (Figure 11). In the medium term, there will be new potential drivers, such as the emergence of regional and national bioeconomy strategies, and the potential for bio-premiums. New business models, partnering and joint ventures will increasingly act as drivers. In the long term, the development towards performance chemicals could be a significant driver for the industry in the medium term, as well as the need to replace starch-based products with cellulose equivalents.

There is a strong potential for cellulose and fibre-based products and highly increasing inter- est in developing numerous novel cellulose-based technical and life-science related products. There are established and increasing markets for wood plastic composites (ca. 3 Mt 2012), and novel applications are constantly being explored. In the medium and long term, it is expected that global demand for textile fibres will increase by 80% by 2030, while stagnation in cotton production may increase the potential for cellulosic textiles by 15 Mt.

The key present actors include the forest and wood products industry and chemical industry. Also, various actors in other industrial sectors, such as textiles, cosmetics, food, electronics, and construction are part of the value chain. However, there is still intensive research and development needed before the new value chains are in full operation. For this purpose, research co-operation is paramount. In the medium term, there will be evolving new value chains, with various op- portunities for new companies, including SMEs. These novel value chains will cover the complete spectrum from raw material (biomass) production to end-use development, testing and marketing, and require active collaboration between research providers and industries. In the long term, a key development could be the emergence of global virtual research centres with expertise in cellulose- based products.

Currently, nanocellulose production has com- menced, but is still in its infancy. Another solution is in wood plastic composites (WPC) that can be used in multiple ways, including as extrusion for building industry, for injection moulding in the car industry, and in furniture and auxiliaries. Currently, there are different packaging solutions based on wood and cellulose fibres, and for coating and barrier materials. Different wood treatments, such as chemical and thermal treatments are cur- rently available. In the medium term, there will be an increased demand for cellulose particularly in the textile industry, but also for other applica- tions. This demand will generate new cellulose processes that will result in new cellulose-based products for use in agriculture, soil conditioning, water purification, tissue engineering, and insula- tion applications. In the medium term, numerous solutions for nanocellulose will emerge. Wood plastic composites (WPC) will continue to grow in importance. Different packaging solutions based on wood and cellulose fibres for coating and barrier materials will be high on the agenda. Functional packaging will advance and result in multiple product categories. In the long term, new products will emerge at the convergence

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of nanocellulose with printed intelligence, and nanocellulose with photovoltaics. There is a pos- sibility of developing optical photovoltaics, and combining nanocellulose and pharmaceuticals. Additionally, different water related solutions will become more common.

Presently, the key enabling technologies focus on advanced, but existing, pulping and other processes that are suitable for different raw materials. Further enabling technologies include applications of material sciences, chemistry and biotechnology. In the medium to long term, the key enabling technologies will be novel pulping and fractionation processes, for example hot water systems and use of ionic liquids. These will en- able optimal separation and uses of all biomass constituents. A further enabling technology is for new polymer and fibre blends, and for composites.

FUTURE PATHWAYS FOR THE GREEN TRIANGLE IN SHORT AND MEDIUM TERM

Key Pathways in 3 to 5 Year Time Horizon

This section presents the short and medium term next steps as outlined in the roadmapping process. We created three pathways with a 3 to 5 year time horizon that collectively capture the opportunities for expanding the local forest and wood products industry. The opportunities were selected from among the very wide array of possible products and processes by applying the following selec- tion criteria:

• Be practically implementable within a 3 to 5 year timeframe.

• Add value to wood resources available within the region where such resources are not currently being used by domestic manufacturers.

• Be of sufficient scale to make a difference at a regional level.

• Raise the competence levels of regional forest and wood products industry.

• Create opportunities for long term invest- ments and new jobs in the region.

• Renew the industry and raise its competitiveness.

Figure 12 presents central pathways and recommended next steps. It must be mentioned that the next steps are not in any particular order of preference, but are presented as options to be compared and explored further.

The following three pathways with a 3 to 5 year horizon were identified:

Pathway 1: New wood products from under- utilised Green Triangle log supplies.

Pathway 2: Value-adding opportunities for con- struction industry using existing outputs.

Pathway 3: Biorefinery – value adding opportuni- ties for underutilised wood fibre and residues.

The study also defined four pathways that have a temporal horizon beyond 5 years:

Pathway 4: Absorbents and membranes for local opportunities.

Pathway 5: Cellulose fibres in textiles. Pathway 6: Bio-based chemicals and polymers. Pathway 7: Opportunities in nanocellulose.

A workshop for embedding the recommenda- tion in the Green Triangle regional setting was organised in December 2013. The workshop in- cluded ca. 40 participants representing the major local companies and regional policy makers in the region. As a preliminary task for the workshop, the participants prioritised the key next steps that would have, in their perspective, specific role for the Green Triangle region. The prioritised next steps were the following: 1) X-ray scanning, 2) Cross-laminated timber, and 3) Power and heat by gasification. We use these steps as examples.

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Pathway 1: New wood products from under- utilised Green Triangle log supplies, Im- proved sorting and better yields by X-ray scanning.

X-ray scanning of logs to be processed is not a new technology and has been used for at least 10 years in several sawmills in Scandinavia. The simple advantage is that by being able to “see” inside a pine log, better and more efficient saw- ing is possible, e.g. splitting the round wood to sawn timber pieces of highest possible quantity and quality. The logs with inner defects can be sorted to different sawing patterns before sawing and thus the end products are of the best possible quality and volume. Investment of X-ray scanners is quite modest, A$ 2–4 million, but may also require investment in additional ICT and some- times extra log sorting and mill layout. Payback time is very short, usually within 1–2 years. The best result can be reached through stem terminal, but this needs higher investment costs and can be utilized beneficially only in large sawmills. The next step would be to contact X-ray technology suppliers and establish what yield improvement is achievable through real time measurement on

local radiata pine logs at one of the larger mill sites with good log sorting facilities. Labour safety regulations concerning the installation and use of scanners should also be checked. The value yield increase can be best verified through use of equip- ment in local mills. Ultimately the stem terminal solution can be adjusted and verified during this process, but this needs more research work for logistics etc. Only then can the value of the yield increase be estimated, not only for the sawmill, but for the total forest biomass.

Pathway 2: Opportunities in construction indus- try using existing outputs, Cross-laminated timber (CLT) and high storey houses.

Cross-laminated timber (CLT) is an innovative- engineered wood product that is not currently produced in the Green Triangle. Imports of CLT are growing and the national and international market is predicted to grow. CLT is presently rapidly growing in Europe, but has still only a very low share of the construction material mar- ket. It can be expected that the same trend will be replicated in Australia and hence a good business case can be made for increasing the production

Figure 12. Three main pathways in a nutshell: The time span is 3–5 years (shaded boxes depict the steps described in this chapter).

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of CLT. There is enough material for a new CLT plant that should be co-located with one of the existing sawmills. The investment for a 60,000 m3 capacity plant is approximately A$ 30 million with a payback of 3 to 5 years. The next step would be to consider in detail the recent experiences in Europe and initiate contact with CLT equipment and adhesive suppliers. It would be necessary to work with FWPA (Forest and Wood Products As- sociation Australia), South Australia Government and other groups to modify relevant building codes to permit use of CLT in a range of applications including in the construction of high-rise CLT buildings. Training programs to build compe- tence in wooden building skills and encourage use of CLT in public construction projects would need to be initiated. The value chain of building code authorities, sawmill, CLT site, construction companies and eco-marketing companies needs to be developed. As a consequence tall wood buildings will be part of the next generation of high-performance sustainable buildings. This is a trend that South Australia should not miss, but could if locally produced CLT is not available. Beyond the potential profitability of construction with CLT, South Australia will produce a safe, carbon-neutral and sustainable alternative to the conventional structural materials of the increas- ingly urban world.

Pathway 3: Biorefinery - opportunities for un- derutilised wood fibre and residues, Power, heat and biofuels by gasification.

Gasification is a key future energy biorefinery technology that has many different application areas. Gasification of forest residues has been demonstrated at an industrial scale. Large amounts of unused wood and forest biomass in the Green Triangle is a potential raw material base for elec- tricity and, in the future, for conversion of syngas into transportation fuels or chemicals. Revenues of over A$ 100 million are possible for a facil- ity processing 1,000,000 m3/a biomass when FT

(Fischer-Tropsch) diesel is produced. The next steps to consider would be to identify the most suitable incentive or capital investment subsidy programmes for supporting first implementations of liquid transportation fuels production and for motivating bio-based electricity production, to de- velop contacts and co-operation with fuel produc- ers and distributors, to establish a well-operating low cost biomass supply chain for supporting the large biomass demand of gasification based bio- fuels production, and to identify by-product heat integration possibilities. A successful progression could see the first gasification based heat and power plants being realised in 3–5 years and a major part of unused forest biomass valorised.

Policy Actions in Short and Medium Term

In order to catalyse the industrial transition to- wards a higher value production in cellulosic fibre value chain, we suggested three long term policy trajectories. The advanced biomass based industry is unlikely to achieve a successful outcome or be severely hindered without the right policies and incentives in place, as has been the case in North America, Europe and elsewhere. Therefore, the technologies and processes identified and priori- tised in our study should be supported with sets of well-planned policies. This could be challenging in the Australian context where for the biomass industries there exists currently regulatory and legislative uncertainty and even fragmentation between different jurisdictions and government departments. Clearly, where duplication or confu- sion exists, every effort should be made to allevi- ate or eliminate the complexity.

Policy Action 1: Promoting and increasing the use of wood in society.

Wood and wood fibre should be encouraged as a generic option for industries. There are many ar- guments to endorse the use of wood. For example,

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wood is a logistically credible solution as it can be sourced locally and weighs less than steel. Wood is a green, renewable and a sustainable material. Wooden constructions are good containers of carbon dioxide and the construction can also be unequalled in energy efficiency.

Promoting wood across society should be encouraged through different pathways, with the prime consideration to affect building legisla- tion and building codes that will enable the use of wood in construction options such as house construction, public buildings, bridges, high-raise apartment buildings and the like. This can be enhanced through networking and collaboration within and between industries (forest, wine and mining), policy makers, research units (CSIRO, universities and appropriate international organi- sations) and non-government bodies.

Any program should aim to build on the mo- mentum created by the Wood: Naturally Better™ campaign initiated by Forest & Wood Products Australia (FWPA; http://www.fwpa.com.au/). Launched in 2008, this industry initiative, together with associated programs, has actively promoted, with considerable success, the many benefits of wood to working professionals as well as the general community.

The collaboration can take place in workshops aimed at training and raising awareness, cross- industry workshops, creative projects between like-minded industries that are biomass based (such as the forest and wine industries) that share best practice philosophies and by developing sup- plier development measures. Another approach would be to create networks between producers, consumers and other potential partners, including forest owners, harvesters and hauliers, integrated sawmill operators, biorefinery owners, ship own- ers and the mining industry. There are good examples of such collaboration in Finland, with the SHOK system; national strategic centres of excellence and especially the Bioeconomy SHOK being the prime example. Additionally, different public-private partnership structures, such as

European initiatives SPIRE (Sustainable Process Industry through Resource and Energy Efficiency; http://www.spire2030.eu/) or BRIDGE (Biobased and Renewable Industries for Development and Growth in Europe; http://bridge2020.eu/), can be used as potential benchmarks.

The longer term target for Green Triangle should be the creation of cross-industrial col- laboration groups as, for example, between the forest, wine, agricultural and mining industries, and possibly other value-chain sectors centred on cellulose-based products and utilising virtual concepts. The Finnish Centre of Nanocellulosic Technologies is based on such a system and is a good example to evaluate.

Policy Action 2: Building education strategies for cellulose based industries.

The key for the entire Limestone Coast is to build capabilities and skills commensurate with the needs of both the existing and proposed new industries. The education system should pay at- tention to the training of architects and construc- tion engineers able to plan and build facilities from wood. It should also be capable of training engineers with a specific focus on biomass-based industries via new education programmes in the universities, exchange schemes for workers in forest and products industry, and transformation programmes for engineers currently employed in related fields and wishing to be re-trained. Realising these demanding targets will require communication and interaction between universi- ties, industry across the full value-chain, indus- try associations and policy-makers. Successful relationships can be found in Europe, notably in Finland, Sweden and Austria.

The starting point from the perspective of Green Triangle is that whatever the focus of the education and training programmes, they should be modular and allow distance education. To organise the training, one should consider set- ting up a national training network in cellulosic

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industries - composed of companies, universities and government actors - that would aim towards modular programmes through systematic identi- fication of educational gaps.

Buy-in from the union movement, and particu- larly those intimately associated with the forest- product and allied value chains, is a necessary pre- requisite for success. Unions in Australia (South Australia included) are strong advocates of skill improvement for its members and any programs they have should be modified to reflect the new opportunities identified in this report.

State government has a role to play as an initia- tor of training programmes in co-operation with universities, research organisations and compa- nies. The programmes could be distributed through industry organisations to ensure a more business focus. In order to realise the education target, there should be strong links with like-minded interna- tional research bodies and appropriate visiting programs for industrial practitioners and academ- ics at all levels. The European Union provides a good example of where different programmes, such as COST actions, stimulate the exchange of ideas and co-operation across Europe. Many research projects funded by the European Union require collaboration across the jurisdictions as a necessary pre-requisite. Another good example is the Finnish Distinguished Professor Program (FiDiPro) that enables distinguished researchers, both overseas and local, to team up with the best and so make a difference.

At the very least, the education strategy needs to reverse the disastrous trend of the last few years that has seen a significant reduction in the forestry and forest product scientific research capacity in Australia across all the major players; private companies, universities, CSIRO and state govern- ments. The impact of this change has been well documented in a position paper recently prepared by the Australian Forest Products Association (AFPA; http://www.ausfpa.com.au/site/). Their proposal for government to commit $50 million over 4 years to create a National Institute for

Forest Products Innovation (NIFPI) and to better organise/enhance current capacity is worthy of serious consideration and debate, as would other suggestions that have been advocated from time to time i.e. the recommendation from the Pulp & Paper Industry Strategy Group to fund a Biorefin- ery Research Institute or the advocacy by others for a Biorefinery CRC.

Policy Action 3: Creating targeted government policies and policy instruments.

When considering targeted public policy measures to influence industrial development, all policy measures should be carefully selected to fit with the maturity of technology, product life cycle, identified entry barriers for new products in the marketplace, and capacity of local firms to take advantage of new opportunities. Optimally, the policy measures should aim at influencing both supply for and demand of new products based on novel technologies. In the following, policy measures are outlined for each roadmap lenses (mass, energy, molecular, atomic).

The policy actions discussed here are based on the presumption that sawmill process improve- ments and technology upgrading, presented in the previous sections, are already being implemented in some form. Available policy should aim to build industrial capacity by subsidizing training pro- grammes, initiating awareness raising campaigns together with relevant industrial associations, and promoting international benchmarking of best available technologies. Financial policy instru- ments can be used to facilitate large investments associated with any technology upgrade. The gov- ernment can also support research and education institutions to build technical competencies and develop relevant technical services to industrial firms (see Roos, 2012a, 2012b).

Creating incentives for the local industry to diversify to value-added products for the construc- tion sector along the second lens (energy) can be supported by various policy measures lowering

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entry barriers of new products to the marketplace thus promoting their demand. The main objective of the policy should be to reduce risks associated with adopting new wood material components in construction industry where buildings have a very long life cycle. Building codes and other regula- tions impacting use of new wood-based products can be revised by implementing performance- based norms in construction. Performance-based norms regulate functional properties of building materials (e.g. durability, fire resistance) but are neutral with regard to technical properties of ma- terials used. This will create room for alternative materials such as wood-based building compo- nents meeting these functional requirements. Government may also facilitate new product entry by ensuring availability of technical testing and verification services and promotion of product standards. Collaboration with bodies granting certificates for green building ratings systems should promote recognition of environmental credentials of wood-based products. Direct de- mand for wood-based construction materials can be stimulated by public procurement when investing in municipal buildings (schools, health care facilities) and infrastructure (bridges). Aware- ness raising campaigns can be used to influence perceptions among professionals and the public at large about benefits and safety of wooden-based constructions. Finally, as large markets for some of the added-value construction products are found overseas (e.g. Japan), export promotion measures should be also considered when the industry is ready to introduce new products.

As for the third lens (molecular), the primary target of policy measures encouraging industry to move towards value-added products for bioenergy should be twofold. First, policy should support industry to build technical skills and production capacity in biorefinery technologies. As imple- mentation of biorefinery concepts at industrial scale requires sizable investments the government can share some of the risk in building the technical

capability by co-financing demonstration sites and industrial pilots. These pilots can also be used as training facilities for professional capacity build- ing purposes with local educational institutions. Second, policy should facilitate emergence of a market for bioenergy products. The most intensive policy measures include environmental obliga- tions and fiscal measures such as tax incentives. Communication campaigns can also be considered to assure the public that risks associated with adop- tion of new technologies with potential hazards (e.g. explosion risks) are minimized. Finally, as some of the potential biorefinery technologies, most notably pyrolysis, has potential applications also in metal industry, government can provide support to building cross-industry capabilities through knowledge transfer programmes.

Policy recommendations concerning the fourth lens (atomic) towards advanced biorefinery are built on the assumption that a second generation biorefinery industry has taken off in the region. The principal target of policy is to support building technical capacity in the industry and supporting institutions to shift into next generation biorefinery concepts along the maturation of technologies. Knowledge base can be strengthened with sup- port to research and development, education, and testing and piloting facilities. Institutional environment can be strengthened by promoting standardisation of biorefinery products based on wood fibre such as biocomposites. The regulatory environment should also be revised not to maintain any unnecessary barriers to advanced sustainable biorefinery products such as biocomposites in comparison with conventional products based on fossil resources.

DISCUSSION AND CONCLUSION

In the first part of this chapter we outlined a per- spective on how strategic roadmapping could be applied as a policy tool in the meso-level industrial

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transformation. We depicted the different roles that strategic roadmapping could play in catalysing industrial and policy changes, and elaborated on how to craft explorative policy strategies on the basis of the roadmapping results. In the second part of the chapter we presented an analysis of cellulosic fibre value chain in the Green Triangle, South Australia, as a case study. Through the case study, we wanted to highlight three points. Firstly, the roadmapping process aimed at meso-level industrial transformation should begin with a stage that contextualises and embeds the analysis in a particular regional and industrial setting. It is of high importance that local specific realities, like key historical lineages and actors, are taken into account in analysis. Secondly, the stage of strategic roadmapping should be explorative and focus on the global state of the art and long term R&D potentials in the industrial horizon. Only when focusing on these long term future potentials can the local opportunities for local industry can be unravelled. In our case study, we realised this explorative stage by preparing strategic roadmaps in four lenses (mass, energy, molecular, atomic) with different emphases and different future vi- sions. Thirdly, the stage of strategic roadmapping should be augmented with a stage that integrates and re-embeds the key results of the strategic roadmaps to the particular regional setting. This is an important stage, because without this stage the results could easily be too “far out” for the regional actors. In our case study, we realised this re-embedding by making two kinds of future pathways: pathways with a 3 to 5 year time horizon and pathways with over 5 year time horizon. The 3 to 5 year pathways were further divided into four short to medium term recommendations, which were created specifically from the perspective of the regional industry in the Green Triangle.

In order to assess our methodology we would stress that it is of critical importance that all of the

study stages (contextualisation, exploration, inte- gration) should be realised systematically, and with the best possible knowledge and process expertise. In our case study, for example, we devoted a major part of the project to really grasp the specificities of the local industrial setting. For the first stage report (Ahlqvist et al., 2013a) we interviewed 23 local companies through a specific functional framework. We also developed a multi-criteria assessment procedure to rank the relative competi- tive positions of these companies (see also Dufva et al. 2013). When we moved to the explorative stage, and towards preparing the roadmaps, we first realised an extensive background study (see Ahlqvist et al., 2013c) and then organised three expert workshops at VTT Technical Research Centre of Finland to construct the roadmaps. In the integrative stage, we further deepened our knowledge about the raw materials in the Green Triangle region, constructed calculation models to compare different bioenergy routes and to as- sess flows of raw material in the local system, and then crafted the future pathways in 3 to 5 year term and beyond 5 year term. We set particular emphasis on this integrative stage, because the previous stages of the study (contextualisation, exploration) had revealed that the gap between the local realities and the global state of the art was wide, and because it was necessary to point out the critical next steps in order to push the regional industry away from the downward spiral it had faced for the last decade or so. In the stage 1 and stage 2 reports (Ahlqvist et al., 2013a, 2013b), there was discussion on how the regional actors could stimulate their collaboration, and move from the present value network structures towards industrial cluster structures (see also Ahlqvist et al., 2013d). The stage 2 report, in which the future- oriented information of the strategic roadmaps was translated into embedded local knowledge, was actually the most critical and laborious stage

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of the process. However, it is not too common in foresight process to focus on how the results of the analyses could be implemented and embedded in a particular study setting.

It is also important to notice that there is a large variety of public policy instruments available to influence industry transformation. But each mix of policy tools needs to be carefully selected for each transformation pathway envisioned. Local capabilities, market characteristics, and maturity of targeted products along the life cycle all matter to the composition of effective policy tools. There are no one-size-fits-all policy recipes, and a tendency to rely on conventionally used instruments should be resisted. Expectations should be realistically set by matching policy time-to-impacts with product time-to-market experienced by the industry. In understanding the realistic temporal time scales roadmapping has proved a useful method.

We conclude by making three more generic comments on the possibilities of the strategic roadmapping as a meso-level policy tool. Firstly, strategic roadmapping is a flexible method that fits well with the emerging policy orientations that increasingly emphasise use of evidence and future-oriented knowledge. Secondly, strategic roadmapping is highly dependent on two organisa- tional and personal assets: the available expertise and the capacity to run the process in a way that enables a perfect fit between the short term and long term aspects. Strategic roadmapping is an expert-oriented tool that requires the right kinds of experts to join the process in order to produce meaningful, and creative, results. Thus, every organisation does not possess alike capacities for entering into a strategic roadmapping process in all topic areas. Thirdly, the strategic roadmap- ping process, especially when complemented with purposeful contextualisation and integration stages, provides highly useful new knowledge to be utilised in policy-making. By using the right

process mixture, it creates a possibility to move from a reactive industrial policy towards forward- looking and resilient policy design.

ACKNOWLEDGMENT

The authors would like to acknowledge the De- partment for Manufacturing, Innovation, Trade, Resources and Energy (DMITRE) for support in putting the case study together and Prof Göran Roos, Chair of the Advanced Manufacturing Coun- cil for constructive comments and contributions.

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ENDNOTES

1 VTT is a leading multi-technological re- search organisation in Northern Europe, with world-class R&D competencies in forest-based industries, including biorefin- ery, bioenergy, biochemicals, nanocellulose, sawmilling, and wood-based construction as well as conventional pulp, paper and packag- ing.

2 These lenses were suggested by Prof. Roos, Chair of the Project Steering Committee.

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Section 3

Responses for Enterprises and Workplaces

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Chapter 8

DOI: 10.4018/978-1-4666-5828-8.ch008

Business Innovation: Beyond Technology

ABSTRACT

This chapter presents the case for a wider understanding of innovation beyond technology and beyond novel products and processes. It examines the dynamics of Business Model Innovation, which refers to fundamental changes to the total formula for business success. New approaches to value creation and appropriation through business model innovation are particularly vital in times of turbulence and realignment faced by firms in high cost operating environments. Business model innovation can create new and sustainable sources of competitive advantage for firms, securing their survival and growth. The chapter discusses the evidence for the role of business model innovation in the growth of leading firms and in the restructuring of markets. It provides an overview of the frameworks for characterising and analysing business models. The options for different types of business models likely to be successful in high cost environments are described.

INTRODUCTION

There are periods in history when necessity and opportunity drive a rapid exploration of new approaches to value creation and appropriation. Firms in high-cost environments are particularly vulnerable to these rapid realignments. But when they do pursue the new opportunities and design new approaches they find that they often have strong competitive advantages.

The transformation of markets and industry that is underway overturns the assumptions that

have underpinned many well established business models. Many analysts have sought to describe and raise awareness about these shifts. Marsh, for example, considers the fifth and current stage of industrial development is one characterised by ‘mass personalisation’ – the ability to produce near unique products to precise personal criteria in mass1.

At the same time there is a wealth of oppor- tunity: the growth of the middle class in China, India and Indonesia opens major new markets; there are more channels to these and other markets;

Don Scott-Kemmis University of Technology, Sydney, Australia

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there is a rich array of new technologies with the potential for diverse applications; and there is an increasing range of capable firms with comple- mentary capabilities.

In this context, driving greater cost reduction and product or service innovation in the current business model is unlikely to be a strategy for growth or survival. Experience shows that a com- mitment to an old business model is the cause for declining returns to investment and R&D in firms and the failure of others.

In Section 2 of this chapter we discuss the evi- dence for the role of business model innovation in the growth of leading firms and the re-structuring of markets. Many firms that have used innovative business models to enter mature markets have been extraordinarily successful. In the US, for example, both discount retailers and low cost airlines have captured the majority of the market, while Delta, Northwest, United, Continental, ATA, and USAir, among others, declared bankruptcy. This section also discusses the drivers of change that diminish the power of old business models, noting that these drivers are not transient but becoming stronger.

Section 3 provides a brief overview of frame- works for characterising and analysing business models. Many forms of innovation are vital for sustaining competitiveness in high cost environ- ments: technological innovation in products and processes; service innovations based on IT applications; and organisational and managerial innovations based on lean production, continuous improvement and high performance workplaces. But these are most effective when integrated as components of a more systemic re-framing at the level of the business model. Section 4 is the core of this chapter and outlines three archetypal families of business models for firms in high cost environments: the ‘bookend’/ outsourcing model; the product-service solutions model and the high value niche strategy.

Section 5 draws on firms’ experience of busi- ness model innovation to provide a roadmap for designing, testing, implementing and upgrading

a new business model. It emphasises gaining in- sight into market dynamics and often unexpressed customer preferences. The need for experiment and rapid learning while evolving a new business model has vital implications2 for management capability and organisational culture. Analysing, planning, experimenting and learning must find a level of inevitably uncomfortable synergy. While the chapter recognises the challenges of business model innovation for established firms, this section also emphasises the advantages that most firms in high-cost environments have in accessing high quality human resources and research organisa- tions, and in collaborating with leading edge users and capable suppliers. Of course public policy has a vital role in ensuring that high-cost is also high-opportunity – and also in assisting firms to identify and pursue those opportunities.

THE CHANGING CONTEXT: DRIVING THE NEED FOR NEW BUSINESS MODELS3

The rapid growth of mass production in the mid- 1900s centred on the growth of large factories, reaping economies of scale and clustered with their suppliers in a few regions and supplying domestic and export markets. The follower East Asian countries such as Japan and Korea sought to replicate this model, using protected home markets to build the full assembly of suppliers, eventually reaching the global frontier of efficiency, quality and innovation. However, the diffusion of ICT, more open markets and lower transport costs has led to unbundling these sectors, lowering the barri- ers to entry into these now mature industries. The evolution of global supply chains is summarised in Figure 1. To participate in the global supply chain, a firm does not need to master an entire production process, but to excel in a specific phase.

In this context a primary driver of business model innovation is the pervasive diffusion of information and communication technologies

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(ICT), and the impacts of this diffusion on prod- uct and process technologies, the organisation of production and the dynamics of markets. Not surprisingly, a 2005 Economist Intelligence Unit (EIU) survey concluded:

To succeed, characteristics of flexibility, open- ness, collaboration and speed will be increasingly critical. Many of these attributes will depend on information technology (IT), which is regarded by more than 80% of respondents as critical to their ability to change their business models over the next five years. It is also coming to be seen as more of a competitive tool than simply a driver of cost efficiency.4

As shown in Figure 2 the impact of these un- derlying drivers cascades through three proximate drivers: changing patterns of demand; changes in the organisation of production; and innovation.

The overall context drives the search for spe- cialisation. But sustained competitiveness depends

increasingly both on the resources a company controls and on the insight and capability in finding and mobilizing the resources of others in order to add more value for customers. Hence, the drive to specialisation is at the level of products or services and also in positioning in complex value chains and business ecosystems, Figure 3.

An outstanding example of these patterns of specialisation is the garment industry: retail chains focus on the customer interface; firms such as the Chinese firm, Li and Fung focus on supply chain coordination and they orchestrate produc- tion networks based on 7,500 business partners (suppliers of fabrics and materials for apparel, designs and garment cutting and assembly) in 37 countries. Li and Fung knows the capacities and capabilities of each supplier and can rapidly and flexibly configure a network to meet complex demands from major retailers in the US and else- where. Each supplier can specialise in a specific product or service and receive feedback from the network coordinator (Li and Fung) about the

Figure 1. Evolution of gobal supply chains (Source: Fung Global Institute)

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Figure 2. Drivers of business model Innovation

Figure 3. Specialisation in value chains and business ecosystems

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patterns of demand and hence focus on capability building. Capable, innovative and at least semi- independent partners contribute to the network’s ongoing strength.

Rising Awareness

Several surveys have now charted the rising importance of business model innovation: EIU surveys in 2005, 2006 and 2010; the 2006 IBM Global CEO Survey; and a 2008 Business Week/ Boston Consulting Group (BCG) Innovation Survey. This latter study found that business model innovators achieved a substantially higher shareholder return compared to product or service innovators. It found that business model innova- tors achieved total shareholder return averaging 8.5% over three years, compared with 1.7% for product/service innovators. The study also found that this superior relative performance had been sustained over 10 years.

The growing importance of changes in the busi- ness model was evident in the first three editions of the Deloitte governance surveys of ASX 200 companies (Board Effectiveness: The Directors Cut). In the fourth (2013)5 edition business model issues moved much higher up the agenda of the key issues raised by Directors and CEOs. The emphasis on business model innovation arose from the need for new strategies for growth and productivity, and the impacts of digitisation. However, Deloitte concluded that the firms’ approach to business model change was reactive. They found little evidence of firms actively seeking opportunities for disruptive business model innovation.

Firms are often reluctant to reassess, rethink and change their business model. This arises in part from a reliance on established ‘industry reci- pes’ such that the business model was essentially copied as ‘the way things are done’ rather than consciously and purposively designed. It is a reluctance that has proven costly for many firms.6

The trends we have noted above have stimulated a growing literature on the role of business models

in competitive and innovation strategy (Johnson et al, 2008, Casadesus-Masanell & Ricart, 2010, Teece, 2010, Zott & Amit, 2010, and Roos, 2013).

BUSINESS MODEL OPTIONS

While there is broad agreement on the business model concept there are many complementary frameworks7. The essence of a firm’s business model is how and for whom it creates, delivers and captures what value, with the aim of achieving sustainable competitiveness. Hence, a business model is a conceptual tool which integrates a:

...set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams. (Osterwalder, Pigneur and Tucci, 2005)

Hence, a firm’s business model defines the who, what and how of the business architecture:

• Who are our targeted customers - whose problems do we aim to solve?

• What is the value proposition we offer to these target customers?

• How and with whom do we generate and provide the offering, and how do we (and our stakeholders) capture value from the business?

Table 1 shows two familiar business models; contrasting them in terms of these dimensions. Table 2 goes further, elaborating key components of each of these dimensions. Figure 4 illustrates the functional inter-dependence among these components and suggests the importance of a closer synergy for competitiveness. An integrated

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and aligned business model, with high level of distinctiveness in the product or service, and in the capabilities, processes and relationships that support the offering, is also more difficult to copy8.

The Australian wine firms Casella Wines and Jacob’s Creek provide examples of effective busi- ness models. The former was carefully crafted for the mainstream US market (the who). A similar combination of product attributes (the what) had previously proven effective for wines such as Jacob’s Creek in the European market. In these cases decades of investment, research and training in Australia, and relationships with distributors, retailers and marketers, provide the foundation of the ‘how’ enabling both to produce consistently good quality, low cost bulk wines of wide appeal. Yellow Tail became the number one imported wine in the US market in 2003, and Casella Wines expanded capacity ten-fold9.

Few business models are likely to retain their virulence for long. Experience shows that firms will need to retain a capacity to improve a business model through ongoing innovation, to extend a business model, often through leveraging some of the key assets into complementary business models, and to design new business models10. Close relationships with suppliers and customers, and the active engagement of staff, will often be vital for generating the insights and the capabili- ties that enable such innovation.

BUSINESS MODELS FOR HIGH COST ECONOMIES

Firms in high cost economies can seek to remain competitive by either or both finding ways to lower costs or to raise the value of their offering as perceived by the customer11 – Figure 5.

There are often diminishing returns to pursu- ing either of these paths in an old business model – which is why surveys consistently find that, in the new global context, the profitability of firms prioritising business model innovation exceeds that of firms focusing on product/service inno- vation only12. We characterise three archetypal

Table 1. Henry Ford’s Model T – an example of a disruptive business model

Business Model

Traditional Auto Firms

Henry Ford and the Model T

Who Wealthy clients Middle Class (a growing market)

What Expensive luxury cars

Simple, robust cheap cars

How Handmade with hand tools, by craftsmen

in low volume

Standardised design and parts, assembly line with

division of labour

Table 2. Generic components of a business model (based on Osterwalder and Pigneur (2010))

Dimensions Components

Who Target Customer: The distinctive segment of customers to which the value proposition is targeted.

What Value Proposition: The overall bundle of products and services that generate value for the customer.

How Customer Interface: • Distribution Channel: The mechanism for delivering value to the customer. • Relationship: The kind of link or interface established with the customer.

Capabilities & Networks: • Capabilities: The in-house capabilities necessary to create value for the customer – ie to design, produce and deliver the product or service. • Partner Network: Linkages with other firms or organisations that access external capabilities. • Value Chain Positioning: The configuration of value chain activities that provide value creation or support those activities.

Financial Dimensions: • Cost Structure: The sources of cost involved in generating value. • Revenue Model: The way money is made through a variety of revenue flows and how profit is gained.

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business models for high cost economies, each providing a different approach to the challenges (see also Figure 6):

• Bookend: This model focuses on the prod- uct/service design and the marketing and customer support activities. One of the best known examples is that of Apple and

its family of products based on its success- ful computers, iPod, iPad and iPhone.

• Integrated Solutions: Firms that have of- ten been producers and suppliers of full systems such as equipment or computing migrate downstream to take on a range of service activities based on the use of equipment, for example IBM’s transforma-

Figure 4. Business model components

Figure 5. Potential elements of competitive strategy

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tion as a solutions provider. The growth of this business model reflects the extensive outsourcing by customers as they special- ize, focusing on their core competencies.

• Niche: Niche business models are based on supplying to specific user segments, but often maintaining extensive participa- tion in some of the specialized elements of the supply chain. Globalisation has pro- vided the opportunity for growth through focusing on global niches, as many of the German Mittelstand have done. A hybrid of the niche and bookend business mod- els is the low-cost strategy, for example the Aldi supermarket strategy is highly focused, and achieves low costs through detailed control of the supply chain and a high level of standardisation of the product and the retail service system. This is an ex- ample of a market where several business models co-exist.

These alternatives are quite similar to those identified in the recent review of development strategies for the Australian Textiles, Clothing and Footwear Industry - see Box 1.

CONTROLLING THE VALUE CHAIN THROUGH THE BOOKEND MODEL

The ‘bookend model’ focuses on the high value adding design/product development stages and the final marketing and product support stages. In the case of Apple, they design: the product (although with substantial collaboration with design specialists such as Ideo); the production system (who will supply what components and who will manufacture and handle logistics); the value system (the added value to product platforms through iTunes, Apps and connectivity); and they closely coordinate (many would say control) all activities. Apple also leverages (ie re-uses) their

Figure 6. Archetypal business models (*The level of emphasis on value chain activities is indicated by shading)

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key assets (design, branding and marketing) through a range of linked products. In terms of the positions in Figure 4, Apple’s strength is product design, where ‘product’ includes all dimensions of the value proposition, which extends well be- yond the physical product. This is one key point of differentiation from Nokia, for whom product excellence was more hardware-based.

When Apple introduced the iPod/iTunes in 2003 there were other digital music players already in the market – the product itself was not an in- novation. But the Apple iTunes/iPod product and service brought an entirely new value proposition and overall business model. While this was far from the lowest cost digital music platform, it was deeply disruptive for the established firms. Apple differentiated its offering by providing easy access to music and video for downloading. Most of the technical and aesthetic design of the iPod was done for Apple by others and almost all of the components came from suppliers and all of the manufacturing was done off-shore.

Within a short time Apple had 80% of the US digital music player market. By 2007 the iPod/ iTunes combination delivered income of US$10 billion and accounted for almost 50% of Apple’s turnover, leading to a transformation of Apple’s market capitalisation from US$1billion to US$150 billion.

The essence of the new value proposition of the iPod was a distinctive and aesthetically ap- pealing platform that provided expanding value creation through iTunes. Apple designed a prod- uct, a global supply and marketing chain and a customer-focused value creating system – from which Apple captured an ongoing stream of profit. This business model innovation transformed Apple and the industry, enabling value creation and the orchestration of a value network linking producers of recorded music to PC owners. The iPod/iTunes value proposition has several key value dimen- sions: content, mobility, convenience, choice, Web technology, communication technology, artists.

An analysis of the value chain and value ap- propriation for Apple products (iPhone in Figure 7 and iPad in Figure 8) is particularly instructive. In both cases components are sourced from sup- pliers in many countries, including the US, but assembly is in China. Two aspects are striking: although Chinese firms ‘make’ these products Chinese workers capture a tiny share of the value created; although they ‘make’ nothing Apple captures the overwhelming share of the profits. In addition, by 2012 Apple iPhones had captured less than 10% of the smart phone market, yet their premium product captured over 70% of the profit of all smart phone producers13.

As a result of this business model the majority of high paying professional jobs (and payments to workers in Apple and suppliers) are in the US – Table 3.

Apple’s growth also opens opportunities for innovative US firms with a competitive position based on product excellence. For example, Corn- ing produces the glass for the iPhone, reviving a factory in Kentucky14. Companies around the

Box 1. Business Model Changes in the Textiles Clothing and Footwear Industry (Sources: Green, R. (2008) Building Innovative Capability: Review of the Australian Textile Clothing and Footwear Industries, DIISR; OECD (2007); Webber & Weller (2001))

Repositioning in the value Chain - Specialisation and Outsourcing. Residual, difficult to automate activities are outsourced while the firm focuses on creating value through design, marketing and orchestration of the value chain. Remaining production activities are automated to ensure flexibility, quality and lower labour intensity. By redesigning the production system firms can increase their capacity to respond to demand, be profitable with short runs and customize their products. Shifting down the value Chain. Secure market access by developing retail and/or direct factory outlets, perhaps moving to outsource all production and become an importer. Shifting to another value chain. Move out of commodity production and focusing on the high-value fast moving fashion segment of the market, or moving into specialized products where technical product characteristics are the basis for competitiveness. Process and product innovation, and close relationships with users and market channels, are essential to sustain competitiveness.

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Figure 7. Distribution of value for iPhone, 2010 (Kraemer et al, 2011)

Figure 8. Distribution of value for iPad (Kraemer et al, 2011)

Table 3. Worldwide iPod-related jobs, 2006 (Source: Kraemer et al (2011))

Production Retail/Non-Professional Engineering/Professional Total

U.S. 30 7,789 6,101 13,920

Non-U.S. 19,160 4,825 3,265 27,250

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world copying the iPhone have also increased demand for Corning, leading to sales of over US$700m in 2011 and over 1000 jobs. Corning has also increased production of strengthened glass in its plants in Japan and Taiwan, close to their customers.

A similar distribution of value occurs in the case of a men’s sports jacket manufactured in China. The material and labour costs account for only 9% of the value-added, whereas design, transportation, logistics, marketing and retail ac- count for the overwhelming majority of the final price and capture the majority of the profit. As in the case of Apple, controlling design, branding, supply chain management and retailing is a far more profitable position than manufacturing. This is because the manufacturing tasks are relatively simple, there are many suppliers competing for apparel manufacture services and there is little to differentiate them.

An Australian example, Beacon Lighting (Box 2), moved from production and retailing to a de- sign and distribution model. Over time, and with continuous improvement, an integrated business model developed, and Beacon has leveraged its key assets (in this case its logistics system and product

and market knowledge) through a family of linked business models. In addition to the chain of retail outlets, Beacon provides services based on design and installation of home and commercial lighting. It has also begun international sales.

INTEGRATED SOLUTIONS: PRODUCT – SERVICE COMBINATIONS

In the systems integration or ‘solutions’ model, the firm supplies and supports whole and often com- plex technical systems and in some cases provides the services based on those systems. Due to the increasing commodification of the industry, IBM transformed its business into supplying services – maintenance, problem solving, consulting (and particularly strategic advice and support to help firms re-think their business models in the light of the opportunities arising from IT). A segment that had been a minor part of the business became, within a decade, the source of more than half of IBM’s revenue.

The US firm Best Buy looked beyond its prod- ucts to focus on customer needs. They realized

Figure 9. Shifting value added (Source: Li & Fung, Fung Global Institute)

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that in purchasing computer-related goods most customer wanted ongoing support for mainte- nance, upgrading and problem solving, not simply a one-off sales. However, the highly competitive market had led most retailers to lower costs through a focus on the transaction – ie pushing product. Best Buy developed a service which provides an on-going relationship.

Other examples include Rolls Royce (selling aeroengines but also offering full through life support – ie ‘power by the hour’) and Althsom

(selling trains but also, like Rolls Royce, providing full through life support and hence the availability of serviceable rolling stock).15

There are several examples of ‘integrated solutions’ business models in the Australian min- ing industry. In the 1980s and 1990s most of the major mining companies changed their business models to focus on mine development and mineral marketing. As a result they became increasingly reliant on service providers for exploration, the design of mines, the management of construction

Box 2. Beacon Lighting – A ‘Bookend Business Model’ with Continuous Innovation (http://www.bea- conlighting.com.au/pdf/Beacon_CorporateProfile.pdf)

Beacon lighting was founded in 1974 and opened its first franchised store in Victoria in 1989. In 1998 the company expanded into Queensland and NSW, and later to all States. The traditional industry recipe in the lighting industry involved the local production of long standing designs and of designs based on copying those of international firms, along with some importing of light fittings from international suppliers. This limited and slow- changing product range was marketed through specialist lighting shops and through department stores. Demand for lighting products has grown and changed over the past 20 years as houses expanded, outdoor living increased, lighting became an important aspect of housing design, energy efficiency grew in importance and tastes widened. Customers building new homes or undertaking renovations are more likely to take an active role in choosing their light fittings. At the same time manufacturing in Australia became very expensive due to labour costs and the trend toward shorter production runs. The essence of the business model of Beacon Lighting is a greater focus on design, logistics, customer service and capturing feedback from the market for ongoing product and service development. This model enabled, and required, a sustained increase in volume and the rate of change – but it also responded to the changes in demand and to the availability of low-cost offshore suppliers. The elements of the model include: • Manufacturing is outsourced to several firms in China – some branded products are also imported; • A strong product design team has been developed in Melbourne drawing on design trends internationally – “When we discover a new trend, we’ll develop and design the product to meet Australian standards, then have it manufactured and in stores within months” ; • Quality Control is based on Beacon engineers, in Melbourne and Hong Kong; • The product range widened and changed more frequently; • There is a focus on energy-efficient lighting; • Staff are trained to be able to provide professional advice to customers; • The centralised, automated stock management systems with internal e-commerce supports efficient and speedy logistics; • Stock ordering systems based on sales history, seasonal and trend factors and business intelligence tools enable rapid re-stocking while limiting inventory; • The products are marketed through 65 stores owned by Beacon Lighting and through franchise arrangements. Continuing Business Model Developments: • The Wholesale Division developed a large IT-based warehouse for incoming logistics and distribution, including fulfilling international orders. • Beacon Lighting Commercial is developing a dedicated trade product range and new commercial offices in Melbourne, Sydney, Brisbane and Townsville. Beacon Lighting Commercial creates specialist lighting solutions for large developers, architects, contractors and specifiers for use in hotels, conference centres, retail outlets, offices, schools, warehouses and private residences. • Beacon Solar, launched in 2008, offers grid connected photovoltaic solar power systems, ranging from 1kw and upwards including expert installation. • Beacon Lighting Installations, launched in 2005, provides full service solutions from lighting design advice to product selection and installation. • International Sales - from 2008 Beacon, which has become the leading retailer in Australia, has begun to distribute globally. Products are designed to meet the standards of specific markets. Beacon Lighting won The Age|D&B Victorian Business Award for the Retail Category in 2007 and 2009 and were also the Overall Award Winner in 2007.

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and for the operations of mining. As a result, the Australian mining equipment, technology and services (METS) industry has grown rapidly and is increasingly active offshore. The sector in 2012 includes over 270 firms, employs over 250,000, generates over A$70bn in sales and its exports exceed A$12 bn16.

One outstanding example is Orica Mining Services (Box 3), which has evolved from a supplier of explosives, a commodity product, to a supplier of ‘designed explosions for ma- terials transformation’ contracting to convert a rock structure to fragments of a specified size range. This business model evolved over time as the firm built the capabilities to provide the services and as the customers were prepared to outsource a wider range of activities to Orica. It has also leveraged off these assets (an intimate relationship with the customer, growing mining knowledge and reputation) to provide a wider range of mining-related services.

GLOBAL (AND LOCAL) NICHE BUSINESS MODELS

The global niche model aims for control of the value chain, while often outsourcing standardised, value-add elements. Perhaps the most outstanding examples are the many specialised German Mit- telstand firms supplying industrial machinery.18 Many of these firms have prospered in the glo- balising markets, building and retaining leading positions in specific market segments, with close links to and support for customers. The opening of global markets drives users of capital goods to seek those suppliers who can best support their product/service quality and productivity. In this model the control of manufacturing by the equip- ment producer is often essential to ensure quality and to implement continuous product and process innovation. High levels of automation, investment in workforce skills and flexible work systems en- able high productivity in a high cost economy19.

Box 3. ORICA Mining Services (Sources: Sequeira and Ryans (2008) Orica Mining Services. IMD Case Study. IMD-5-0725; Dick and Merrett (2007); Kumar (2006); Jobson’s Yearbook of Public Companies. 2005 Dun & Bradstreet.)

The core of Orica’s business is its Mining Service Group, although it remains involved in a range of chemicals sectors. Orica was formed in 1998 after purchasing the majority shareholding in ICI Aust. and NZ from ICI Plc. At that time the explosives industry had become commoditized. Orica has progressively moved out of fertilizers and consumer products sectors and is now the world’s leading supplier of commercial explosives and explosives services. A large proportion of the explosives were used in mining and quarrying industries. Orica developed electronic blasting systems and software that could enable customers to better manage their blasting. Orica began to supply explosives as an emulsion in bulk form which was mixed to the required specification on-site. But users were generally not willing to pay for these additional products. Orica then began to use laser technology to survey and model rock faces to identify the optimum location of drill holes for blasting. “The exacting combination of laser technology, detonation software and emulsion explosives resulted in both significant cost savings and improved yields. The broken rock was of a more uniform and optimal size from the operator’s perspective.”17 The combination of capabilities led to Orica offering ‘tailor made’ solutions to customers, eventually moving from ‘selling kilograms of explosives to billing customers according to quantities of broken rock’ that meet customer’s specifications – ie to selling solutions. Managing blasting on the site of customer’s operations gave Orica detailed data and increased the intimacy of the business relationship. Similarly, operating mining services in many different contexts around the world substantially strengthened Orica’s knowledge and capability base – which is partly embodied in their IT tools. In 2006 Orica acquired the global explosives operations of Dyno Nobel, consolidating its position as the dominant global supplier of blasting solutions. Operating globally, Mining Services is Orica’s largest business, offering a range of blasting products, services and technology to the global mining, quarrying and construction industries. Orica focuses on leveraging technical superiority, innovation and scale to achieve growth. Orica’s services enabled customers to reduce downtime for drilling and blasting and due to better rock fracturing reduced their processing costs. Orica has invested in R&D to develop explosives, detonators, site measuring equipment and software to improve the productivity of blasting.

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The majority of Germany’s 3.7 million firms are SMEs (and could be considered Mittelstand) family-owned (95%), and managed by their owner. Such firms account for over half of Germany’s total economic output. Many Mittelstand firms have strong positions in narrow niches and hence are effectively oligopolists - 90% of them operate in the business-to-business market. These niches are diverse: high quality microphones (Sennheiser) printing presses (Koenig & Bauer), licence plates (Utsch), snuff (Pöschl), shaving brushes (Mühle), flycatchers (Aeroxon), industrial chains (RUD) and high-pressure cleaners (Kärcher), castors for hospital beds (Tente), ovens for professional kitchens (Rational), cleaning equipment (Hako). There have been several analyses of the continuing success of the global niche strategies of Germany’s Mittelstand20. The key factors underpinning their sustained competitiveness have been identified as:

• Focus: Specialisation, at the level of who and what, is an essential element of suc- cess. The who is increasingly global, en- abling these firms to remain specialised while continuing to grow. For many firms the core competencies are also an oppor- tunity for closely related diversification. For example, the main product of the Brandstätter Group is its Playmobil toy figures, but their capabilities in moulding plastic have been applied to new prod- uct categories such as self-watering plant containers. For the white goods producer Miele that ‘second leg’ is a professional line for commercial applications. 21

• Cluster Support: Many Mittelstand evolved over many decades based initially on local cluster dynamics – close links to customers and strong support from local banks, technical training and research or- ganisations. Even today almost a half of Germany’s high school students undertake dual training in one of the more than 300 specialised trades that provide a high qual- ity supply of skilled workers.

• Production Excellence: The how of these business models is based on continuous in- vestment in plant and training supporting high standards of quality and productivity. Collaborative industrial relations within plants and well organised supply chains enable lean manufacturing. Outsourcing to lower cost suppliers is frequently for stan- dard materials and components.

• Innovation: The Mittelstand pursuing ef- fective global niche business models em- phasise innovation and constant improve- ment to stay ahead of potential rivals and they are protective of the core competencies that underpin effective innovation. Close links with customers, including providing ongoing services contributes to shaping in- novation. As with all aspects of strategy, the family ownership and deep specializa- tion leads to a long term perspective.

• Customer Relationships: Many of the Mittelstand are also consolidating their positions with customers by providing maintenance and other services. Even in this highly specialised capital goods area there is a trend toward ‘hybrid value-add- ed’ where the ‘product’ is the outcome sought by the customer not the equipment that enables that outcome. The capacity to provide such a hybrid product/service re- quires a much deeper knowledge base than that required to replicate machinery. In fact many Mittelstand make the majority of their revenue from services, as in the ‘solu- tions’ business model.

Many Nordic companies have also thrived in well-defined global niches, most not ‘high tech’, but nevertheless innovative: mining and related equipment (Sandvik and Atlas Copco), retail (IKEA and H&M.), lifts and escalators (Kone), toys (Lego), high-quality lorries (Volvo Trucks)22. Sweden has many world-class firms, Denmark is the world’s 8th-biggest food exporter and Norway is a world leader in oil services and fish farming.

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Like Germany’s Mittelstand the high levels of family ownership lead to firms taking a long-term perspective rather than pursue short-term profits. Again like the German firms, the successful Nordic firms emphasis innovation and training, a focus on customer needs, and a consensus-based approach to management that supports continuous improve- ment and high levels of automation.

The success of the many specialised German and Nordic SMEs shows that traditional strengths in “old-fashioned” industries can be the basis for building what may appear to be small niches into large global markets.

The women’s fashion clothing chain, Zara, (Box 4) is also an excellent example of a business model where the ‘how’ dimension has been care- fully developed to support the value proposition for the target market. The firm closely monitors what customers are buying in its shops as well as assessing fashion trends. It has built a supply chain that is extraordinarily flexible and it has an inter- nal culture that supports experiment and change.

Local Specialisation

J. Robins (Box 5) is an example of a niche busi- ness model, but one which is (at least at this stage) local rather than global. It competes in the women’s fashion shoes industry through offering current styles of designer shoes. The minimum supply time for the high volume offshore suppli- ers which dominate the Australian retail market is three months, but J. Robins can take a new design from concept to sale in one week. The how of that model involves extensive investment in equipment and training and the development of a new organisation and culture of production.

Kimberly Kampers (Box 6) is a second example of a niche business model that is also at this stage. The design of this business model was consciously based on the international niche business models.

Low Cost Models

The low cost business models are a hybrid of the niche and the bookend models because they include a higher level of standardisation at the level of product/services or processes. Low cost strategies generally begin by focusing on a market segment and on the product/service attributes valued by those customers. As in the example of Yellow Tail wine, that may mean reducing the emphasis on other dimensions valued relatively less by the targeted customers – Johnson suggests initially focusing on the four main barriers to consumption – wealth, skills, access, and time – and assessing which one of these is a significant barrier to purchase for the targeted customers.23 Such low-cost models must be supported by ef- ficient business processes. A good example is the supermarket chain, Aldi, which stocks less than 1000 lines, largely reliable quality private label, compared with more than 20,000 in a major su- permarket, and with substantially lower mark ups than those of the main supermarkets24.

Table 4. Ingredients of a business model that disrupts incumbents

There is scope for a new business model to rapidly gain market share if: • There is a significant user group whose needs are underserved or not met; • This user group is growing or indicates the direction of overall market trends; • The value proposition for this user group is compelling and substantially different from the standard offering in the industry; • The business model is scaleable so as to enable rapid growth after a period of de-bugging and tighter alignment; • The value proposition leverages unique and deeply rooted capabilities or is based on resources which are not accessible to followers; • There is a strong alignment between the offering, the business processes, the capabilities and the accessible resources; • There is a high level of ‘freedom to operate’ in the new business model unencumbered by the values, structures and processes of the old business model; and • There are strong barriers to entry and growth for others seeking to copy this business model.

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CHARACTERISTICS OF SUCCESSFUL BUSINESS MODEL INNOVATORS

There is much variation within each of these four main business model types. While each of the sev- eral cases of business model innovation discussed above is unique, the approaches to dealing with survival and growth in a high-cost environment have some common characteristics:

• All have focused on providing a superior value proposition to specific market seg- ments, and in doing so most have developed a strong relationship with their customers. These relationships help to generate in- sight about customer preferences that in-

Table 5. Identifying opportunities for new busi- ness models

• Identify significant user groups whose problems are not being addressed by current market offerings. • Identify the key dimensions of the business model space drawing on insight about the likely evolution of the industry, the changing patterns of potential user needs/wants (and the most useful way of segmenting user groups), the evolution of potentially relevant technologies and the likely directions of regulatory change. • Reassess how each element aligns with trends in customer preferences and competitor positioning, in emerging market segments. [Are any alternative business models emerging and gaining customers in some market niches or in similar markets?] • Reassess how emerging technologies might enable a different approach to each element of the business model. • Identify and discuss buyer behaviour in the broad target market – explore trends and events and seek to understand whether they might signal new imbalances, new trends. • Review successful business models in other industries, particularly those of new entrants who are gaining market share.

Box 4. Zara – A Well integrated Business Model (Source: Van der Heyden, L., ‘M&S vs Zara: Case Analysis’ 2007; Harlé, N., Pich, M., and Van der Heyden, L., ‘Marks & Spencer and Zara: Process Competition in the Textile Apparel Industry’, INSEAD, France, 2002; Santos, J., Spector, B. and Van der Heyden, L., ‘Toward a Theory of Business Model Innovation within Incumbent Firms’ 2009/16/ EFE/ST/TOM, 2007.)

Zara’s business model shows why it has grown rapidly taking market share from the high fashion stores (too expensive) and the department stores (too out-of-fashion). • Target Users • Young fashion conscious consumers – Zara avoids being out of the price range or out of fashion for its target market. • Defining the What: • Customization with low cost. • Combination of low cost, reasonable quality - fast changing to reflect current fashion. • Business Model Design Dimensions Addressed: • Accessing current designs – scan, select, copy & simplify current fashion. • In-house designers modify and develop based on customer purchasing. • Avoiding excess demand to which a slow supply chain cannot respond. • Developing a supply chain/demand chain that it highly responsive. • Enabling rapid feedback from customers purchasing to product designs. • Create an in-store experience. • Limited but fast changing range of clothes. • Cost saving through avoiding the excess supply that must be discounted, little advertising, copying design from ‘the market’, reduced range of types, sizes and colours enables low overhead with fast turnover reduces working capital. • Developing the How – Critical Capabilities: • Lean enterprise. • Developing sharp competencies in picking fashion trends. • Managing a very fast and responsive supply chain. • IT – library of designs on CAD/CAM. • Small and flexible sewing shops in Spain, with outsourcing some activities • Key Lessons of the case: • The importance of market focus. • Quality is in the eye of the customer. • The power of lean and flexible supply chains for mass customization.

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form both improvements to the product/ service but also ideas for related products and services.

• Business model innovation has been used defensively to extend the competitiveness of an established business. It has particular benefit when it is used to open a new path for business development - enabling a shift to higher value-added activities, products

or services to escape commodification or to engage with an emerging growth market.

• In most cases those market segments/ user groups have become more international over time.

• To enable the competitive production and delivery of the product or service the firms have had to often transform their internal processes to achieve greater efficiency and

Box 5. J.Robins – Manufacturing Shoes in Australia. (Sources: Roberts, P (2009). ‘Shoemaker puts best foot forward’. Australian Financial Review. 26 May.; James, D. (2006). ‘Process of Creativity’ Australian Business News. Oct.; Warnock A. (2006) ‘Fashion Manufacturing’ ABNews. Oct/Nov.)

The only volume producer of women’s shoes remaining in Australia. The firm developed a new strategy following the tariff reductions of the 1980s and the inevitable rise in competition from offshore low-cost producers. Spurred by the realization that major change was essential, the firm benchmarked world’s best practice. It drew in particular on lessons from the Japanese auto industry to develop a stronger alignment between business processes and the creation of customer value. ‘Just in time’ and ‘lean manufacturing’ using production cells (teams) and modular manufacturing were the foundations of a new approach. J. Robins survives by focusing on mass customization. It cannot compete with the low-cost offshore producers on price, but it can provide high quality shoes to customer specifications in a fraction of the time that it takes offshore producers to supply, through: • Small batches; • Designed range of shoes set out in a catalogue and on a website; • Radical reduction in ‘work in progress’ and in lead times; • Advanced equipment with CAD/CAE/CAM to support quality and the most efficient cutting of leather; • Outsourcing of the most labour-intensive work overseas; • Increased vertical integration to give control over leather supply; • Multi-skilled workers in self organising teams (production cells) with staff moving around work stations to produce the product; • Devolving to teams decisions about training and internal organisation; • Rapid turnaround from order to dispatch; • Enabling retailers to carry less stock and hence have lower risk of unsold inventory; • Focus on customer specifications; • Selling through a range of retailers including fashion brands. This performance is supported by investment in training and by organisational innovation. It is also enabled by investment in high quality German and Italian machinery. Achieving high performance in a team organisation required a focus on the social relations in the workplace. The team-based approach and concern about social relations has led to a very low turnover of staff. As other Australian shoe manufacturers ceased production in Australia the survival of the local suppliers of components and services was threatened.

Table 6. Engaging customers in the search for Business Model Innovations

Pursuing the dominant industry recipe means being a rule follower and almost certainly means focusing on the articulated ‘needs’ of the mainstream customers. It usually leads to minor variations on the established business models. To identify new opportunities, ensure that design, product development and production personnel as well as marketing, are involved in user interactions and explorations. • Getting out to engage with users: o Ethnography – see how people actually behave; o Bringing people together – active and open focus groups. o Bringing users into the creation process: o Design workshops with customers. • Identify leading edge users: o Find users who are pushing the product/service beyond its design space, but adapting it themselves to generate new value. o Test your product/service design.

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flexibility often through higher levels of delegation along with training and invest- ing in comprehensive capability and pro- cess upgrading. In most cases the trans- formation to a successful new business

model has required substantial increases in knowledge-intensity. While technological innovation is an important aspect of some new business models, it is neither neces- sary nor sufficient.

Box 6. Kimberley Kampers – Customer focused, design-led supply chain(Sources: Jenny Dillon, J. (2009), ‘Changes make for happy Kampers -, Daily Telegraph, 22 July; Loxton, Bruce, pers comm; http://www. kimberleygroup.com.au)

Kimberley Kampers designs, makes and distributes camper trailers, off-road caravans, modified long-wheelbase vehicles and roof-top tents at its factory in Ballina, NSW. Kimberley has been manufacturing off-road accommodation since 1994, with over 5000 trailers and caravans shipped. The Managing Director and owner since 2003, Bruce Loxton, is an engineer with extensive international experience of management in the engineering sector, including Managing Director of Asea Brown Boveri in Australia. He has led a process of business model innovation that has resulted in a profitable and growing firm exporting to five countries. The framework of the business model is a customer-focused, design-led supply chain strategy. The innovations it has introduced range from design of the equipment through to the supply chain and distribution network, all modelled on the successful European H&M clothing chain and the approach of Harley Davidson in the US. • Who: Travellers – particularly older ‘grey nomads’ who want the option of travelling and camping in remote off-road locations. • What: A range of 8 models of high quality and innovative trailers and off-road caravans. • How: The integrated components of the ‘how’ are set in the following diagram and include: o The design-led supply chain strategy focuses on a product of high value to customers, based on fit for purpose, ease of use, robustness, light weight, environmental features (eg low energy use and renewable energy options). The quality of the design and manufacture of the product contributes to a high re-sale value. o The extensive use of IT enables the integration of design and manufacturing software, enabling automation and accuracy in procurement, clear communications and efficiency in all operations. o The location in the small town of Ballina contributes to the capacity to retain staff, but this is supported by investments in training, a flat structure and team-based working. o The overall factory and organisational design for lean manufacturing, with work teams and ‘Kanbans’ supports efficiency and a greater level of customer option choice within a limited product range.

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• The approach to developing the value proposition, the value chain, the internal processes and the overall business model can be seen as business design, in the now wider use of that term. There are many alternative designs but some are more co- herent, robust and flexible. In many cases the business model (and the design of the subsidiary components) has evolved over time. Outsourcing has been selective and firms have maintained control over key segments of the value chain.

• The firms have continued to evolve their value proposition, often deepening the value potential and widening the market scope, and in many cases developed com- plementary business models based on le- veraging key competitive and differentiat- ing assets.

DESIGNING AND MANAGING BUSINESS MODEL INNOVATION FOR HIGH-COST ECONOMIES

The message of many recent surveys is that the capability to design and implement innovation at the level of the business model is now often es- sential for growth and, in high-cost environments, decisive for survival. This section focuses on the processes of developing new business models and the capabilities required to do so.

Established firms often find it challenging to assess and manage the risks and uncertainties of business model innovation. The existing business model, often based on the mainstream industry ‘recipe’, will be deeply embedded in routines and norms, and largely taken for granted. Understand- ably, firms tend to take a cautious approach, em- phasising the forms of product/service innovation they have pursued in the past, and filtering out disruptive ideas. New product or service concepts or technologies that require new business models

are often not pursued. It is tough for a new busi- ness model to be born and nurtured within an old business model – and attempts to do so are likely to be precipitated by crises of survival.

Introducing a new business model involves insight, experiment and adaptation. Complexity and uncertainty means that planning cannot re- move risk or the requirement for incubating the new model and an element of learning-by-doing.

An overall strategy for business model inno- vation, whether modifying an existing model or developing a new model, involves a series of stages from exploration and assessment, to identifying and evaluating the options for the elements of the business model and their overall alignment, selecting the best fit and specifying the linkages, processes and capabilities required, through to the tasks of implementation. A framework for such a strategy is summarized in Figure 10. In practice, as with any innovation process, these stages are not necessarily linear – a good deal of iteration, forward and backward, may be involved as issues become clearer and some lines of development are closed. In the following we discuss each of these stages in more detail.

SCAN AND SCOPE

Envisioning and creating new business models in an established firm calls for a clear vision and strong leadership. Some firms locate new business models in new companies, sharing only some corporate assets – for example, full service airlines launching low-cost carriers, such as Qantas and Jetstar. This is also the reason why new firms, without corporate ‘baggage’ (legacy systems and culture), are often the champion of new business models.

Experience shows that the design of potential new business models for high cost environments can be developed through four complementary approaches:

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• Systematic Analysis: An analysis of in- dustry, market and technology trends may identify new customers, offerings or ways of creating and capturing value. Analysis of the value curve along with a review of the options for each component of feasible business models will help to identify op- tions for new models.

• Building on Exemplars: Having identi- fied the need for a new direction, many firms have developed a new business mod- el from an exemplar, often from a different industry.

• Evolutionary Responses: A third ap- proach is essentially evolutionary, re- sponding to emerging customer needs and technological opportunities, within an overall strategy that shapes the direction of change.

• Focusing on an Unmet Need: This is less about predicting the future and more about identifying significant perhaps emerg- ing market segments whose needs are not well met by current offerings. The efficacy of this approach was a conclusion of the 2001 Deloitte study of business models.

Figure 10. Overall strategy for developing business model innovation (Developed from Deloitte Re- search, 2002)

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Another major study found that most suc- cessful business model innovators devel- oped their approach by targeting customers who were under-served or even ignored by established firms – underserved because the dominant assumptions were that it was not possible, too risky or unprofitable to address their needs or preferences:25

…creating blockbuster new business models doesn’t require you to predict the future. Rather, it calls for an ability to redefine the present…

To be truly innovative, businesses have to go far beyond identifying the next big product in- novation. They have to start by identifying an un-served or under-served market segment (i.e. changing just the ‘who’). Each of the companies also carefully designed and built the ‘what’ (the product or service offering), and the ‘how’ (op- erations and supplier relationships) of its model to produce extraordinary customer value. The innovators also captured sustainable competitive advantages and preyed upon competitors’ inherent disadvantages.26

Surprisingly, there are many cases of business model innovators rapidly building market share in mature industries with high levels of competition but little diversity in business models. In such mature industries, the dominant firms are often vulnerable to, but often underestimate, new en- trants who change the focus of competition. The business model innovators in these cases were often not leaders in technological innovation, but had a clearer grasp of how available technologies could create value and how new business models could capture a higher share of that value.27

The emergence of new customer segments is often related to regulatory, technological or socio-demographic trends, and a clear focus on an under-served customer group (rather than the trend) can be the foundation for a niche or ‘solutions’ business model which wins market

share and changes the nature of competition in an established industry – see Table 4.

A customer-centric perspective is usually essential for effectiveness in all of these four approaches: investing in customer research, and exploring new ways to deepen understanding of customers. Whichever approach is taken it is clear that a strategy for business model innovation must address developing:

• A clear strategic vision; • An internal culture that can support change,

accept uncertainty and learn rapidly; and • A capacity to handle disruption and the

risks of destabilization.28

Competitive new business model innovation can lead to new answers to the ‘what business are we in?’ question. This can be difficult to answer as the Kodak struggle to find a place in the camera/ film/image/chemical industry shows.

Approaches to identifying opportunities for new business approaches are summarised in Table 5.

RETHINK AND REDESIGN

Identifying opportunities for new business models is helped by making explicit the components, and related assumptions, of the current business model. As noted previously, some of the founda- tions of the established model are likely to be taken for granted and hence have largely implicit assumptions, beliefs and values. Bringing these out facilitates both re-assessment and creative thinking about alternatives.

The re-assessment (and visioning) process involves:

• Unpackaging the dominant business mod- els in the industry in terms of who, what and how and identifying the assumptions in each of these dimensions;

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• Recognising the strengths and limitations of the current business model – why does it work? What are the weaknesses of the current business model - why do these re- main weaknesses? Are the reasons why the business model was designed that way still valid?;

• Assessing the longevity of the current business model;

• Reassessing how each element aligns with current customer preferences, competitor positioning, technology trends (What com- promises does the current business model force customers to make? Do any competi- tors offer a superior value proposition?);

• Identifying underserved or dissatisfied cus- tomer groups (Why are those who don’t or who stop using our offering dissatisfied?);

• Identifying assets (eg customer loyalty, or process strength) that could be leveraged into new business models;

• Encouraging a preparedness to identify and question the assumptions of the cur- rent model and to creatively consider alternatives.

A strong and intimate market focus is often a place to begin, and this can be explored and developed by:

• Identifying Customer Needs and Assessing the Value Curve that Might Best Address their Priorities: Many firms have effectively brought employees into the search for improvement and new ideas, rewarding them for their initiative and commitment. In larger firms with many business units, the ‘collective intel- ligence’ of the different businesses may be able to identify new business model op- portunities and tap into distributed assets in the group.29

• Exploring the Scope of the Apparent Opportunity: Does this gap indicate a broader opportunity? Is this customer group growing? Does this group signal shifts that will shape the general market?

• Assessing Possible Business Models: What models could underpin an effective integrated high value solution for the op- portunity area?

SPECIFY AND ASSESS

Specifying, building, leveraging and aligning internal and external assets, including customer relationships, are the core of activities at this stage:

• Identifying How to Develop Deep Customer Relations and Value Chain Links: Are there opportunities to devel- op high customer value and strong links to other organisations in the value chain/ value network that provide a second level of integrated competencies?

• Experimenting with the Elements and Alignment of the Who, What and How: It is often essential to experiment, to assess the outcomes of these experiments and pursue further experiments in promising areas and perhaps for specific segments. It is often possible to test elements of the new business model through small scale experiments. This may be much easier to manage in a new organisation with select- ed staff and will often require a separate line of funding. Many firms have success- fully brought customers into the process of exploring new market segments and new value propositions – see Table 6.

• Scaling Up New Models: Scaling-up after testing the assumptions of a business mod- el design will be important whether the

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new business model replaces the old model or targets a different market segment and is developed as a separate business line. New venture entrepreneurs also need to test the assumptions of their business model prior to any detailed business planning. The new venture business plan is likely to evolve in some or many dimensions as the entre- preneur engages with potential customers, suppliers, investors and tests the assump- tions of the model.

PLANNING AND IMPLEMENTING: ACTIVITIES AND CAPABILITIES

A strategic approach to business model innova- tion was summarised in Figure 10. Management and leadership competencies will often be vital for dealing with such major risks as:

• A strategic vision that rapidly becomes unviable due to unpredicted change in the business environment. According to the EIU an increasing number of companies, recognizing the turbulence in their envi- ronment, formally review their business model regularly;30

• A slow re-orientation as the culture, values and routines of the old business model con- tinue to shape approaches and expectations;

• Employee resistance to restructuring – particularly (and understandably) where change involves outsourcing;

• Underestimating the time and resources re- quired to follow through with the develop- ment of the new offering and the support- ing business processes.

These risks point to three difficult challenges for leadership and management. First, clarity of vision and focus is essential – but that is par- ticularly demanding in a context of uncertainty.

Second, understanding what will be involved in redesigning the business model, implementing change and predicting barriers requires a high level of managerial insight, before and during change. Third, selling a new approach to employees (and other stakeholders, including alliance partners) and developing an open discussion of changes and impacts demands a high level of management skill.

Focusing on the capabilities required for busi- ness model innovation we can draw on the previous discussion to identify five areas of capability that have been essential for the effectiveness of many business model innovations:

• Customer Insight: Insight into value from a customer’s perspective will provide the key focus, the sense, of the business mod- el. By encouraging a wide range of staff to understand the customer’s use of the firm’s products, a deeper foundation of insight can be built.

• Exploration and Experimentation: Ima- gining future scenarios, conducting low cost low-risk experiments of the potential business model elements, encouraging an exploratory approach by staff and (where appropriate) delegate decision-making that does not need to be centralized, and brain- storming new ideas for developing busi- ness model innovation teams. Some firms have drawn customers and suppliers into the process of exploring and experiment- ing with new business models.

• Business Design: The competencies and processes for effectively identifying, devel- oping, aligning and managing the compo- nents of a business model are critical. While the specific capabilities will depend on the context and the change, these may include, for example: market analysis and marketing, building collaborative links with customers, forms of strategic alliance management, outsourcing, and supply-chain manage-

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ment, acquisitions and spin-outs. This also involves the capabilities that underpin the wider changes needed to support the core business model, eg in R&D, operations, cul- ture, leadership skills, training, incentives, metrics, information systems.

• Acquiring New Competencies: In several of the examples of business model inno- vation discussed, the firm has had to build new capabilities, usually through hiring and training. In the case of Orica its develop- ment of mining services involved a substan- tial investment in research and staff recruit- ment to build strengths in IT.

• Managing Change: The rising significance of business model innovation is increas- ing the importance of high quality strategic leadership and of multifunctional structures and teams. The typical directions of change in business models increase the importance of managing emergent strategy develop- ment and implementation, and hence more internal entrepreneurship. Managing culture change, supporting rapid learning and en- suring clarity and communications are vital as in any change process.

CAPABILITY FOR ONGOING BUSINESS MODEL INNOVATION

For both technological and business innovation a key issue is how firms upgrade their capabilities more quickly and more effectively than com- petitors, and in directions more relevant to future competition31. Four key mechanisms contribute to ongoing capability upgrading (Figure 11):

• Knowledge acquisition from firms and or- ganisations such as research organisations – this is one of the advantages of locating in a dynamic cluster;

• Interaction with dynamic suppliers – some industries such as process industries and mining are particularly dependent on their suppliers, and indeed even more so as they have tended to outsource technology provi- sion to suppliers;

• Learning by ‘doing’ (actually by changing, experimenting, monitoring, innovating – rather than any type of passive accumula- tion by doing the same thing day after day);

• Close relationships with ‘leading edge’ customers.

Figure 11. Key mechanisms for capability development

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For firms in the traded goods and services sec- tors of high cost economies, survival will require building stronger positions in global value chains or creating new value chains. There are advantages to being earlier movers as there are increasing returns due to positive feedbacks – firms which develop close links with customers or win strong positions in value chains are likely to learn more rapidly, and also more quickly discover sustainable niches or value chain segments32. In either case the development of dynamic capabilities – the capabilities that guide and support upgrading a firm’s resources – will be vital. However, it must also be recognised that strategies for upgrading capabilities and building linkages in value chains face an increasingly more complex organisational and knowledge context. The required transfor- mations are challenging for management, at the strategic and operational level:

• Firms may fail to develop the appropriate strategies, or become locked-in to relation- ships and value chain partners that do not lead to sustainable positions and effective learning; or

• Firm may not be successful in forming and managing commercial and strategic rela- tionships (with suppliers and customers) or may not manage the processes of inter- nal re-organisation and capability building necessary for those external relationships to be effective.

CONCLUSION

The ability to innovate, at an accelerated pace, will be the most important capability differenti- ating the success of countries and companies….

Talented human capital will be the most critical resource differentiating the prosperity of countries and companies.

The Future of Manufacturing: Opportunities to Drive Economic Growth, A World Economic Forum and Deloitte Touche Tohmatsu, April 2012, p.4

The term business model has emerged as a strategic analytical framework. As new concepts like this evolve, aiming to capture the essence of complex changes, there are several antecedent or complementary concepts and insights: value networks, value curves, business or innovation ecosystems. All of these concepts aim to provide a way to re-imagine and re-assess strategy beyond the level of the enterprise and above simplistic models of value creation and appropriation. In an increasingly customer-centric, networked and collaborative world a strategic framework must cover both the firm and its network relationships. And these relationships are likely to play vital roles in value creation and value appropriation. The infusion of IT into almost all business activi- ties has often dramatically lowered transaction costs creating more options for those activities – whether they are done, who does them, where they are done, how they are done, on what basis they are remunerated etc.

Business model innovation usually involves a range of specific innovations, some small and low risk and others more dramatic, for example in products, services and/or processes and business activities, that together are intended to develop or transform the business. The impact of each specific change is amplified through synergy with the other changes, which is why business model innovation can be transformative in terms of performance and returns. New technological

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innovations often languish in the market until a new business model captures the potential for value creation and appropriation.

Several overall conclusions emerge from this discussion of the experience of business model innovation by firms in high cost economies:

• Business model innovation has played a vi- tal role in re-building or creating the com- petitiveness of many firms from high-cost economies.

• Deep changes in the competitive land- scape, due to the globalisation of markets and industry, and the transformative role of IT in general, of the Internet in particular, have rapidly eroded the competitive foun- dations of many long established business models. For this reason re-assessing the current business model, making explicit the assumptions on which it is based, can ignite innovation. But changes in the busi- ness context have also opened many new markets and business model possibilities – and it is firms that have explored these pos- sibilities that have often been remarkably successful. Those pioneers remind us that innovation in any aspect of the value chain - organisation, management, processes, internal services, etc – can contribute to the resilience of a business model. And in high-cost contexts, such diverse forms of innovation are often vital elements of busi- ness model changes and frequently criti- cal for the effective commercialisation of new technologies, and for appropriating a high share of the value created by new technologies.

• Business models must now often be more complex, particularly as they are likely to involve greater specialisation (in terms of market and value chain segments and

products/services), closer integration of components, a stronger focus on the ser- vices and customisation dimension of the offering, deeper change in firm culture and processes, greater mobilisation of the engagement and creativity of staff, and higher levels of interdependence with ex- ternal collaborators. Higher levels of inter- nal staff diversity and external networking are likely to contribute to innovation. A business model is hard to copy, and hence more likely to be sustainable, if it is also based on unique elements, deeply embed- ded in the firm and its business ecosystem, along with particularly strong synergies among the components. Business models of firms in high-cost economies are much more likely to be competitive and resilient when they make effective use of the strong assets of their context – human resources, knowledge centres, networks etc.

• As firms from emerging economies narrow the capability gap with leaders from high- cost economies, the costs of maintaining leadership rise while the lead-time gained from technological innovation declines. This is why competitive performance rooted in a number of unique and interde- pendent assets (like firm culture, links to research organisations and suppliers, staff competence, reputation, feedbacks from customers that drive innovation) within a complex business model can sustain competitiveness.

• A firm in a high-cost context facing declin- ing competitiveness might be able to ex- tend the viability of the existing business model through re-alignment and the modi- fication of some components – eg adding on-line distribution and marketing, out- sourcing some standardised activities. But

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such defensive change can usually only buy time for the development of a new business model platform and a deeper transforma- tion of the firm.

• The capabilities to assess, design and im- plement business model innovation are an increasingly important but demanding competence, and will often be essential for survival and growth in high-cost countries. The starting point for business model in- novation is often recognising an unmet or under-met need, along with an insight into a feasible value proposition. Innovating at the level of the business model involves learning – from analysis, imagination, ex- periment, and successful models elsewhere – and hence planning to learn.

• Finally, many of the assets that contribute to the productivity and innovation of firms in high-cost economies are outside these firms – world class education and train- ing organisations, research organisations, networks among firms, quality of life that attracts talented people, infrastructure that supports competitive services. They are largely dependent on enlightened public policy.

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KEY TERMS AND DEFINITIONS

Bookend Business Model: A business model in which the firm outsources much of the routine low value-adding activities, which are typically those involved in the direct production of goods or services, while retaining control of the overall value chain and particularly the design of the value proposition and the direct interaction with customers.

Business Model Innovation: As a business model is not only a set of elements, but an in- tegrated system in which both unique elements and unique overall architecture contribute to both differentiation and sustainability. Business model innovation involves change in the overall design or architecture of the business model and also often change in significant elements.

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Business Model: A business model is a con- ceptual tool which specifies the essential design or architecture of a business based on what value it creates for whom and how it creates, delivers and captures that value, with the aim of achieving sustainable competitiveness.

Cluster Dynamics: The key cluster dynamics are those that contribute to the continuous strength- ening of a cluster – investment in innovation and capability upgrading, increased specialisation, entry of new firms, growth of new organisations for coordination and for knowledge acquisition, creation and diffusion, interaction and collabora- tion among firms and organisations.

Customer-Centric: A customer-centric ap- proach aims to ensure that the firm understands the perceived value of products or services from the customer’s perspective, and hence creates and provides products or services that customers will want and value.

Integrated Solutions Business Model: A business model in which the firm specialises in providing customers with a fully functional system for the production of goods or services, and in some cases managing and/or maintaining that system. The components integrated into the overall solution may come from many suppliers, including the solution provider itself.

Leading Edge Customers: Customers, typi- cally with strong technological capabilities, who use a product in demanding applications, often modifying the product to improve performance, and whose needs signal future directions of evolu- tion in the wider market.

Lean Manufacturing: A management philos- ophy drawn from the Toyota plant manufacturing process, which involves the reduction of waste, minimising inventory, and empowering workers in the process of producing more output.

Niche Business Model: A niche business model is highly specialised in a specific and demanding market segment where reputation and deep competence, based on technological mastery and strong customer relations, underpin competitiveness.

Value Chain: A model of the sequence of activities of a firm, from receiving inputs, using these in processes and finally providing goods or services to customers, that are intended to create value for the firm and its customers.

Value Proposition: The good or service offered to potential customers, where value is perceived from the perspective of the customer.

ENDNOTES

1 Marsh (2012) a, similar analysis is in Hagel et al, (2010)

2 Leszinski and Marn (1997) 3 This chapter draws in part on a study of

business model innovation in Australian industry, this study also provides a more comprehensive discussion of business model innovation, see; Scott-Kemmis, 2012.

4 EIU (2005) 5 Deloitte Australia (2013) 6 Reeves (2007), Teece (2010), KPMG (2006) 7 See for example: Scott-Kemmis (2012); Roos

(2013) 8 Some approaches to competitive strategy

are relevant to business model analysis, for example the Value Innovation approach of Kim and Mauborgne (1997). This approach tends to lead to radical market segmentation, eg low cost/service airlines. Amit and Zott (2012) emphasise the role of complementari- ties, such as having PayPal with eBay, and efficiency through the logistics supporting a low cost strategy

9 Kim and Mauborgne (2005 10 Scott-Kemmis (2012), Teece (2010) Mitchell

and Coles (2004) 11 Porter (1998), Mintzberg, (2003) 12 They key point here is that technological,

economic, social and regulatory change stimulates often deep change in markets (segments, preferences) and in the strategies of competitors (eg specialisation), such that all elements of a business model need to be

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open to review and change, and to much tighter re-alignment: Chesbrough (2006), (2007), KPMG (2006), Teece (2010)

13 Apple reached 75% of profit share, nearly 40% of revenue share and 9% of units share; Samsung, Apple, Nokia and the smartphone dogfight.

14 Economist (2012c) 15 Davies (2001), (2004) 16 Scott-Kemmis, (2013). 17 Sequeira and Ryans (2008) p.2 18 Economist (2012b) 19 Simon (1996), Venohr & Meyer (2009),

Meyer (2010, Rothgang (2008 20 Simon, (1996, 2009); Rommel (1995);

Venohr & Meyer (2009) 21 Bryant (2012 22 Economist (2013) 23 Johnson, M. (2010); Kim & Mauborgne

(2005) 24 Kumar (2006) 25 Deloitte Research, 2002 26 Deloitte, 2001. 27 Deloitte Research, 2002. 28 KPMG, 2006.

29 Santos, et al, 2009. 30 The 2006 EIU survey found that almost 50%

of the companies they surveyed reviewed their business model annually.

31 EIU, 2006. 32 There is an important public policy issue

here concerning the level of spillover from early movers. To what extent and in what ways might learning by early movers create positive externalities. There appear to be three levels of spillover: first, early movers that have leading roles in value chains where many segments are located in the domestic economy can drive innovation, upgrading and specialisation in the value chain; second, early movers can signal to other firms and to upstream suppliers the key directions of knowledge accumulation and the overall strategic imperative, eg their business model innovations might influences others to also undertake business model innovation; third, the managerial, organisational and relational innovations developed by early movers may also provide roadmaps for followers.

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Chapter 9

DOI: 10.4018/978-1-4666-5828-8.ch009

Design-Led Innovation: Overcoming Challenges to Designing

Competitiveness to Succeed in High Cost Environments

ABSTRACT

This chapter focuses on demonstrating the role of Design-Led Innovation (DLI) as an enabler for the success of Small to Medium Enterprises (SMEs) within high growth environments. This chapter is targeted toward businesses that may have been exposed to the concept of design previously at a product level and now seek to better understand its value through implementation at a strategic level offering. The deci- sion to engage in the DLI process is made by firms who want to remain competitive as they struggle to compete in high cost environments, such as the state of the Australian economy at present. The results presented in this chapter outline the challenges in the adoption of the DLI process and the implications it can have. An understanding of the value of DLI in practice—as an enabler of business transformation in Australia—is of benefit to government and the broader design community.

OVERVIEW

The importance of design to a firm’s innovation has been the subject of much research particularly in the design and development of new products. More recently it has become widely understood that design can add significant value to a firm’s strategic capabilities beyond the development of

a product or service. Design continues to repo- sition itself from a downstream manufacturing related activity to one which adds strategic value to business. This union of design and strategy is referred to as Design-Led Innovation (DLI). DLI is a process for business transformation, provid- ing a mechanism where businesses are able to manufacture or create an alternative competitive

Sam Bucolo University of Technology, Sydney, Australia

Cara Wrigley Queensland University of Technology, Australia

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advantage to that of operating in low cost environ- ments – especially low labour cost environments.

In Australia, the small to medium enterprise (SME) sector is currently at a crossroads. Techno- logical advancements have in many cases lowered start-up costs for many new businesses and by vir- tue of their size, SMEs are able to react relatively quickly to changes in the business environment (Condon, 2004). However, the high Australian dollar combined with low total factor productiv- ity and high labour unit costs increases operating costs, making it very difficult for SMEs to grow to meet increasing demand (Moufarrige, 2012).

SMEs are more prevalent in Australia repre- senting (98.3%) of total business in comparison to other key OECD nations such as the US (87.4%) and the UK (94.6%). The Australian Government has emphasised the importance of increasing productivity, using creativity and design-based thinking to solve complex problems (DIISR, 2009; Australian Government, 2012). In its broadest view, DLI provides businesses with an opportunity to increase productivity through business transformation, to overcome comparative costs disadvantage, and contribute to overall cost reduction (Samson, 2010 p.40).

In a low cost economy, a common route to success in manufacturing business is imitation, whereas in a high cost environment it is innova- tion. In a low cost environment, most factors of production are available at lower or similar cost compared with other locations. With the develop- ment of technology and increased globalisation, the share of factors of production available at simi- lar cost increases, making the remaining factors of production available at lower cost increasingly valuable as a basis for the firm’s competitive ad- vantage. These remaining factors tend to be linked to national or regional comparative advantages, such as minerals, agricultural land or produce, low population-density land, biodiversity, and university educated people.

In a high cost environment, this development when combined with the increasingly shorter lead- time for codification of tacit knowledge, tends to continuously undermine firm competitiveness. To stay competitive, firms in high cost environ- ments must either shield some valuable pieces of knowledge from becoming globally accessible, or be able to create, acquire, accumulate and utilise codified knowledge faster than firms in more favourable cost locations. This ability is strongly supported by close interaction with suppliers, customers, and rivals. Furthermore, processes of knowledge creation are strongly influenced by specific localised capabilities such as resources, institutions, social and cultural structures.

Traditionally, the answer to the question of what drives productivity in advanced econo- mies has been the technological change and innovation embodied in capital equipment, but more recent evidence suggests that non- technological innovation is just as, if not more, important. These include: design and branding; new business models and production methods; systems integration and the firm’s absorptive capacity; and the development of high per- formance work organisation and management capabilities. While ingenuity may be found in many Australian workplaces, Australia lags behind other advanced economies in these areas including investment in intangibles (defined as R&D, ICT, Organisational Structures, Busi- ness Models, Design, Brand Equity, Education and Training).

This chapter outlines the value of Design-Led Innovation in supporting SMEs to compete in a high cost environment. Based on an analysis of Australian SMEs who have begun their adoption of DLI to remain competitive, challenges are revealed. This highlights the key activities which must be undertaken to enable this approach to competiveness in a high cost environment to be scaled across the SME community.

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WHAT IS DESIGN-LED INNOVATION AND HOW DOES IT FACILITATE BUSINESS TRANSFORMATION?

The term ‘design-led’ is defined by Bucolo and Matthews (2011) as the tools and approaches which enable design thinking to be embedded as a cultural transformation within a business. Being design-led requires a company to have a vision for top line growth within their business, which is based on deep customer insights and expanded through customer and stakeholder engagements, with the outcomes being mapped to all aspects of the business to enable the vision to be achieved.

One of the first studies to outline the broader benefits of design was by Mozota (2003) who found that:

• Design accelerates time to market. • Design improves cooperation among

agents. • Design changes relationships with suppliers. • Design improves coordination between

marketing and production. • Design creates a new market. • Design develops care for the customer in

innovation. • Design generates technology transfers. • Design allows the company to sell at a

higher price. • Design contributes to benefits perceived by

consumers.

Recent research indicates that companies who use design in their business perform better eco- nomically in the marketplace (Cox, 2005; Borja de Mozota, 2002; Dell’Era, Marchesi and Verganti, 2010; Moultrie and Livesey, 2009). There is significant international evidence to indicate the positive contribution of design to both firms and the broader economy. The UK Design Demand (2012) program review indicated that:

• Every £100 a design alert business spends on design increases turnover by £225.

• On average, design alert businesses in- crease their market share by 6.3% through using design.

• Shares in design-led businesses outper- form key stock market indices by 200%.

• Businesses that see design as integral don’t need to compete on price as much as oth- ers. Where design is integral, less than half of businesses compete mainly on price, compared to two thirds of those who don’t use design.

• 51 per cent of Queen’s Award for Export Achievement winners in 2002 directly at- tributed overseas sales success to their in- vestment in design.

• Over 90 per cent found that design was val- ued by their international customers and 86 per cent indicated that design helps them to compete internationally.

This evidence is supported by programs un- dertaken in several nations. Much of this work focuses on European and Asian nations (Fleet- wood, 2005; Marsili and Salter, 2006; Moultrie and Livesey, 2009; Nussman, 2006; Raulik, Cawood and Larsen, 2008; Ward and Runcie, 2009). Specific reported programs and examples are highlighted below:

• Between 2002 and 2005, the Finnish gov- ernment invested 30 million Euros in de- sign research and development in Finland.

• Other countries such as Spain and the Netherlands are expanding their design pol- icy focus to gain competitive advantages.

• Similarly, design capability is being nur- tured and developed to create competitive advantages across industries in the Asia- Pacific regions, where countries that his- torically based their economies on mass

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production now recognise that design is key to product and service differentiation, Japan, Taiwan, South Korea, and China in particular.

• New Zealand has achieved proven eco- nomic benefit from programs in “Better by Design”.

• The Design Singapore Council is focused on Singapore becoming a hub for design, and Singapore introduced a 250% Productivity and Innovation Credit (PIC) for Investments in Design in their 2010 budget.

Business transformation activities are not solely dependent on Design-Led Innovation. Sev- eral management programs and tools exist which can assist firms in getting access to its markets and developing a strategic mindset. However, there are three key differentiators between these well documented approaches and the design-led approach discussed in this chapter: firstly the process in which tools are applied; secondly it is the mindset, where the meaning of design is described as a verb, rather than as a noun (or outcome); and thirdly it is the ability to fold in business model innovation objectives to these mindsets and processes.

The underpinnings of the Design-Led In- novation process is commonly described as design thinking. The value that design thinking brings to an organisation is a different cultural philosophy, of framing situations and possi- bilities, doing things and tackling problems: essentially a cultural transformation of the way it undertakes its business. The work of Martin (2009) has clearly highlighted the generalised differences between design thinking and busi- ness thinking, highlighting many instances of where these differences have been overcome, but also noting the many obstacles of trying to unify both approaches within an organisation. Liedtka (2010) encourages firms to try and persist in overcoming these barriers as she has noted that “business strategy desperately needs

design ... because design is all about action and business strategy too often turns out to be only about talk ... fewer than 10 percent of new strate- gies are ever fully executed”. While some tools and concepts on which Design-Led Innovation is based may appear similar to those of other management tools, it is the combination, ap- plication and uptake of the tools, processes and mindsets by the firm which achieve sustainable innovative value.

Although the value of a DLI approach has been explored by various countries over the past decade, Australia is lagging behind in its adop- tion of such an approach. Therefore the necessary data to inform the broad based uptake of this ap- proach to Australian SME manufacturing firms is currently unavailable. A recent study by the UK Design Council noted that new research should be built on the evidence of design impact on business performance, particularly in the broader context of innovation (UK Design Council 2008).

As noted earlier, Design-Led Innovation is defined as the tools and approaches which enable design thinking to be embedded as an element of cultural transformation within a business (Bucolo and Wrigley, 2011; Bucolo et al. 2012). Applying the DLI process within a business leads to the outcome of being Design Integrated. In practice this may lead to:

• New business model creation; • New methodologies for stakeholder

engagement; • Re-alignment of the organisation’s value

proposition; • Facilitating organisational structural change.

The above four changes require the business to identify a need to increase top-line growth. In this regard, DLI varies from other business im- provement processes, which focus on a reduction in the bottom-line, or seek to improve an existing process to reduce variance or defects yet produce the same outcome. Top -line Growth is one of the

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four criterion identified in Figure 51. Together with Strategic Mapping, Provoking, and Deep Customer Insights consideration of these criteria constitute the DLI process.

As shown in Figure 1, these four criteria are inter-related. All four are necessary components of the DLI process. Within the DLI process the remaining three components are:

• Deep Customer Insights: Identifying and understanding the market’s latent needs and values beyond those understood to be “known”.

• Provoking: Deliberately confronting stakeholders for the purpose of gauging their true emotional response to a radical new business model proposition.

• Strategic Mapping: Evaluating how changes to a company’s product or service offerings affect the overall organisation.

The DLI approach developed by the authors consists of three integrated stages and ten sub- stages (Figure 2). These are:

• Dissect (understand, reveal and ask); • Learn (propose, prototype, provoke and

re-frame); • and Integrate (design, share and transform).

This approach provides an overarching frame- work by which each business transforms and differentiates its culture by design, individually

Figure 1. Design-led innovation (DLI)

Figure 2. Design-led innovation (DLI) framework

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aligned with innovation economic theory. This framework is a non-linear process, acting merely as a guide. The extent to which this framework is applied is dependent upon the specifics of the organisation, including size, industry, market position and corporate culture.

RESEARCH APPROACH

The motivation for this research originated from the authors’ experiences as design practitioners and educators. Over the past five years, they have witnessed a significant transformation in the role of design in business. This timeframe also coincides with a period of significant input cost increases in the Australian economy, during which the authors have been engaged with 50+ SMEs spanning various industries and sectors including medical devices, consumer electronics, agriculture, manufacturing and service delivery. The common theme that linked these companies was a realisation that their market share was being eroded as they no longer had a significant point of difference in the market, that is, their offerings had been commoditised.

Though DLI is not the only possible response to this challenge, it reduces the reliance on process improvement methodologies e.g. Lean or Six Sigma and allows firms to increase the speed of new to the world offering releases above the speed of commoditisation.

The goal of this chapter is to reveal the chal- lenges companies face, or are perceived to face in embedding of DLI and provide general recom- mendations to address these.

Using the DLI framework (Figure 2) as a foun- dation, the challenges (both perceived and actual) of adopting a DLI approach were investigated. Using Schön’s Reflection in Action Paradigm, observations (captured through discussions with firms during the authors’ business immersion through the practice of raising DLI awareness) are categorised and analysed. As Schön (1983)

notes “practitioners do reflect on their knowing- in-practice. They may do this in a mood of idle speculation, or in a deliberate effort to prepare themselves for future cases. But they may also reflect on practice while they are in the midst of it. Here they reflect-in-action … (however) the pace and duration of episodes of reflection-in-action vary with the pace and duration of the situations of practice”. These reflections are collectively analysed using a thematic approach (Braun & Clarke, 2006) to uncover consistent themes for discussion. These themes are presented in the following sections of the chapter.

WHAT ARE THE PRACTICAL CHALLENGES OF ADOPTING A DESIGN-LED INNOVATION APPROACH?

Findings indicate a myriad of challenges that in- hibit the ability of firms to undergo a design-led approach. These include:

• Cultural challenges (resistance to change either of habits or thinking);

• Communication challenges (describ- ing business and articulating the need for change);

• Educational challenges (barriers to imple- mentation and education of both staff and customers);

• Integration challenges (confusion and po- larisation surrounding tools, methods and the time required to implement) and re- source challenges.

It is important to note that the Design-Led Innovation process cannot be seen and/or treated as a discrete event, or a series of steps or stages, nor can it be delegated. Rather the whole busi- ness model needs to be in focus to achieve ho- listic, sustainable innovation while encouraging a different way of thinking (Pozzey et al. 2012).

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The challenges identified through this study are outlined below and are supported through quali- tative insights, which reinforce the key thematic challenge. These challenges are not exhaustive and aim to highlight the series of activities that must be considered by firms seeking to use DLI as a source of competitiveness in a high cost en- vironment. Further, these key themes point to the programs, which must be developed in order to support firms along this journey to DLI adoption.

Cultural Challenges

Changing the culture of any organisation is a slow process especially for firms that have a strong fam- ily history and an engrained way of doing things. Isolation of departments is a large barrier that limits knowledge dissemination and collective action on strategy. Firms identified departmental isolation and weakness in communication, yet attributed it to daily routine and personality differences. Working in isolation on new projects stems from a need to expedite projects and compliments a sense of control over the activities involved. Pursuing greater collaboration was suggested as:

…a massive culture shift for a lot of us…people will sometimes take power from holding information and you know, obviously dealing with different personalities in the company…I think that would be a challenge for a lot of people.

Creating dialogue between colleagues to avoid assumptions and create consistency was considered difficult partly due to the low level of policy and procedural enforcement. For many long-term employees, the firm has a unique and strong culture of community, which has led to a ‘local language’ between departments and indi- viduals in the company. This presents a difficulty with the dissemination of knowledge and raising all employees to an even knowledge platform. When embarking on a design-led initiative it was

made clear, “we need to talk the same talk and speak the same language otherwise it’s going to be impossible.”

Communication Challenges

The largest adoption challenge identified was the empowerment and optimisation of communica- tion skills necessary for growth within a firm. Decentralising decision-making within a growing firm can enable greater efficiency of projects and encourage ownership of roles throughout the company. It was found that even when firms placed empowerment as a priority, there was limited translation of that throughout the firm. ‘Upper management might be trying to empower people…but people don’t feel empowered and they feel they need to get the collective ok.’ Maximis- ing allegiance within the design and engineering department specifically was seen to be a key factor in enabling innovation to occur. One par- ticipant noted, ‘Ideally if you want to keep those people (design and engineering) here and keep them entertained…it’s the perfect opportunity to capitalise on those skills they have.’ Cultivating those skill-sets should lead to a level of increased responsibility and authority.’

Also taking the opportunity to involve a wider group of people from the organisation in discus- sions was seen as a key area to leverage. An aver- sion to involving employees outside the immediate scope of a project or problem because they may not be of direct contributory value to the discussion, risks discouraging and undervaluing the people of the organisation. The opportunity to gain valu- able insight and knowledge was noted by using methods other than meetings. One business said:

…one of the ways to go forward would be to in- ternally have a lot more conferences …I mean the other word for it is training…but when you say that it seems to have such a bad feeling… I’ve got bucket loads of information and you’ve got bucket

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loads of information… if we could all use all of that stuff I think we’d be in a much better space and that’s training. It’s sharing for the purpose of training.

Educational Challenges

An important finding was a consensus that the firms had the correct people with the appropriate skill sets available to lead a design-led approach, but had difficulty in finding avenues to utilise these skills more effectively. A designer stated,

The people and the resources are here, the drive and tools are here, but are stuck in current thinking and models.” Another participant with potential to influence change explained his inability to fully engage in additional projects, ‘Trying to get new innovations while project managing people as well as a project pile that big which we’re constantly trying to tick off…it’s like treading water.

When discussing a strategy to create some organisational buy-in and begin integrating a Design Led approach, the preferred strategy focused on individual work spheres and the least time intensive approach. A willingness to share the learning, tools and processes within their own work spaces was evident as described here by a product manager:

I can adopt the ideas of Design-Led Innovation and use it in training and presentation with new and old employees to bring about change.

Ultimately, this barrier presents a very difficult but not uncommon challenge facing firms tackling any sort of change initiative. This reinforces the fundamental need for commitment and visible engagement by higher management to empower employees to allocate sufficient time and energy into implementing change strategies. As indicated, these barriers are not borne out of ignorance, and recognition of the need to act is not lost on management. As a participant expressed:

…well definitely it’s more important than any- thing else we do right now, it perpetuates through everything… we need to actually pause to think critically.

Integration Challenges

Another result that emerged is the polarising position workers felt between the need to pursue a design-led approach but also maintain existing responsibilities to the core business. Limited time and pressure to deliver meant that sufficient trac- tion in any change initiative either was disbanded through other demands or simply could not get a sufficient number of people to focus on building growth. Especially within family owned busi- nesses, the decision to trade off existing core activities with those that build strategies for the future, needs leadership to drive (and permit) engagement. Still, even those leaders who wholly recognised the need for innovation in a globalis- ing economy, ‘…we no longer have this buffer of the ocean that’s protecting us from -- you know, protecting us from us proving ourselves’, found it difficult to step away from the present to discuss the future. This further emphasizes the major challenges in developing an implementation framework that can get traction for real change yet maintain the current business model sufficiently in the interim. The challenge to overcome this is described by one participant as, “Short term cash out trumps the vision.”

Resource Challenges

Defining the customer and their true problems is a key challenge facing firms. This is vital in adjusting the structure and workflows to enable better allocation of resources to meet customer needs. As a fundamental and central competency of the Design-Led Innovation approach, workers noted the need to prototype more consistently and frequently throughout the design process for the sake of delivering a product that exceeds customer expectations. The repercussion of not

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giving priority to this prototyping is that the value proposition is tested predominantly through the fully materialised product in the market. This incurs added cost, time and risk to the firm’s brand. A standout characteristic used to describe the firm in light of the aforementioned behaviour was “fault tolerant”. One participant noted that the case firm was receptive to “killing a project at the 11th hour” through being realistic about the availability of profitable market space. There was consensus that decisions like this are made because of a gap in the case firm’s ability to effectively ‘predict returns on innovative concepts’ in the early stages of project conception.

IMPLICATIONS FOR FIRMS TO BECOME DESIGN INTEGRATED AND NEXT STEPS

Many business cultures have political, social and operational complexities that require thorough navigation and consideration of factors that have traditionally remained outside the scope of design. Therefore understanding the internal barriers and challenges to adoption when becoming design-led are imperative. The need to effectively articulate the advantages of pursuing a design-led approach, in a way that is meaningful to business discourse is one such challenge. This is critical in ensuring firms are able to internalise and subsequently steer the wheel of innovation autonomously.

Design-Led Innovation is a proven approach to compete in a high cost environment. There is sufficient international evidence to validate the DLI approach to enhancing a firm’s competive- ness. However, there is a significant lack of data to support its uptake in the Australian context. This initial study has revealed some of the challenges in adopting DLI as part of the innovation culture of firms. Strategies to overcome these challenges are required if a broad based adoption of DLI is to

be achieved. Currently, a systematic approach to addressing these issues is not evident within the national innovation eco-system. Therefore, this study is only the beginning and further research is required which focuses on building programs and activities which aim to enable a broad based adoption of DLI to help firms compete in a high cost environment.

Given the rapid rate of structural economic change within the Australian economy, a sense of urgency now exists to collect the necessary evidence, develop support programs and build capability and leadership within organisations. As developing DLI is only one aspect of the in- novation agenda, this activity must develop in parallel with all other innovation activities (such as enhancing technological capabilities) and not be seen as separate or competing. This will be a difficult challenge, as the role of design has not typically been seen as key to enhancing competi- tiveness at a strategic level in a firm.

Based on the evidence from the firms who have been early adopters of this approach in Australia, businesses are willing to explore this approach; however, it is clear that they will require the support across the innovation eco-system to ensure they are able to realise the value of DLI in the future.

REFERENCES

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Bucolo, S., & Wrigley, C. (2011). Design led in- novation as a means to sustain social innovation enterprises. Paper presented to Design Business Conference 2011. Barcelona, Spain.

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Bucolo, S., Wrigley, C., & Matthews, J. (2012). Gaps in organisational leadership: Linking strate- gic and operational activities through design-led propositions. Design Management Journal, 7(1), 18–28. doi:10.1111/j.1948-7177.2012.00030.x

Chaffey, P., & Bolton, L. (2010). Building shared perspectives. SEMIP Knowledge Clubs Pilot Project.

Condon, L. (2004). Sustainability and small to medium sized enterprises - How to engage them. Paper presented to Effective Sustainability Educa- tion: What Works? Why? Where Next? Linking Research and Practice. Sydney, Australia.

Cox Review. (2005). The Cox review of creativ- ity in business: Building on the UK’s strategy. London: Author.

Dell’Era, C., Marchesi, A., & Verganti, R. (2010, March). Mastering technologies in design-driven innovation. Research Technology Management.

DIISR. (2009). Innovation and raising Australia’s productivity growth. Canberra, Australia: Austra- lian Government.

Fleetwood, R. (2005). Design audit by research: Building a knowledge base for competitiveness by design. In Joining forces. Helsinki: University of Art and Design.

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Marsili, O., & Salter, A. (2006). The dark matter of innovation: Design and innovative performance in Dutch manufacturing. Technology Analysis and Strategic Management, 18(5), 515–534. doi:10.1080/09537320601019628

Martin, R. (2009). The design of business. Boston: Harvard Business Press.

Moufarrige, M. (2012). What Aussie small busi- ness really need to be competitive. Dynamic Business. Retrieved from http://www.dynamic- business.com.au/blogs/what-aussie-small-busi- nesses-really-need-to-be-competitive-16042012. html

Moultrie, J., & Livesey, F. (2009). International design scoreboard: Initial indicators of inter- national design capabilities. Cambridge, UK: University of Cambridge.

Mozota, B. (2002). Design and competitive edge: A model for design management excellence in European SMEs. Academic Review, 2(1), 88–103.

Mozota, B. (2003). Design management: Using design to build brand value and corporate innova- tion. Allworth Press.

Nussbaum, B. (2004, May 17). The power of design. Business Week.

Pozzey, E., Wrigley, C., & Bucolo, S. (2012). Unpacking the opportunities for change within a family owned manufacturing SME: A design led innovation case study. Paper presented to Leading Innovation through Design. Boston, MA.

Raulik, G., Cawood, G., & Larsen, P. (2008). National design strategies and country competi- tive economic advantage. The Design Journal, 11(2), 119–136. doi:10.2752/175630608X329217

Samson, D. (2010). Innovation for business suc- cess: Achieving a systemic innovation capability. Melbourne, Australia: University of Melbourne.

Schön, D. A. (1983). The reflective practitioner. New York: Basic Book.

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UK Design Council. (2008). The impact of de- sign on business. Retrieved from http://www. designcouncil.org.uk/Documents/Documents/ Publications/Research/Briefings/DesignCouncil- Briefing01_TheImpactOfDesignOnBusiness.pdf

UK Design Council. (2012). Design demand. Retrieved from http://www.designcouncil.org. uk/Documents/Documents/OurWork/Design- ing%20Demand/Designing%20Demand_Execu- tive_Sumary_Final.pdf

Ward, A., Runice, E., & Morris, L. (2009). Em- bedding innovation: Design thinking for small enterprises. The Journal of Business Strategy, 30(2/3), 78–84. doi:10.1108/02756660910942490

KEY TERMS AND DEFINITIONS

Deep Customer Insight: A profound under- standing gained about a customer or group of customers through comprehending their problems and latent needs.

Design-Led Innovation: Leveraging deep customer insights, in order to capitalise on new market opportunities that result in the transforma- tion of new business models.

Design Thinking: The process and methods that designers use to ideate, prototype and prob- lem solve in order cultivate a more creative and human-centred company culture.

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Chapter 10

The Effects of Six Sigma Quality (SSQ) on Innovation

and Organisational Ambidexterity in a High

Operating Cost Environment

ABSTRACT

This chapter explores the effect of Six Sigma Quality (SSQ) on innovation and organizational ambi- dexterity in a high operating cost environment. Multiple-cross case analysis revealed that SSQ seems to align very well with process innovation, where the organisation has a well-defined process output to control. However, some tension exists between SSQ and product innovation, particularly in terms of the time expectation for SSQ to deliver results. Furthermore, the study shows that SSQ could have a positive impact on organizational ambidexterity in a high operating cost environment, as long as management recognizes that innovation approaches require their own formula for success. Management needs to establish a team that could manage the tension between “getting it right the first time” as part of man- aged innovation and “learning from failure” as part of entrepreneurial innovation.

INTRODUCTION

In this section we introduce the Six Sigma Quality (SSQ) program, by providing a brief background, outlining its objectives and developing a research question. The objective of Six Sigma Quality (SSQ) is to manage process ‘Variation’ in order to reduce defects to 3.4 per million opportunities

(DPMO) (Blakeslee, 1999; Linderman, et al., 2003). SSQ requires that companies build their business around an in-depth understanding of their customers’ requirements (Blakeslee, 1999). It could be argued that SSQ is grounded in the fundamental principles of Total Quality Manage- ment (TQM) (Evans & Lindsay, 2008). However, SSQ goes beyond TQM, particularly with its

Milé Terziovski Curtin Graduate School of Business, Australia

DOI: 10.4018/978-1-4666-5828-8.ch010

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disciplined approach to training and achieving ‘stretch goals.’ (Antony & Banuelas, 2002).

The concept of implementing SSQ was pio- neered at Motorola in the 1980s as part of their successful application for the Malcolm Baldrige National Quality Award (MBNQA) (Evans & Lindsay, 2008). Despite Motorola’s success with SSQ, it was not until the late 1990s that large US companies such as General Electric recognized the corporate benefits of SSQ. For example, CEO Jack Walsh described his vision for SSQ in GE’s 1997 annual report as the “centre-piece of GE’s dreams and aspirations.” GE’s payoff reached more than $750 million in the first year that SSQ was implemented.

Despite the resounding success achieved by large companies with the SSQ methodology, many companies today operate at 3-sigma. This trans- lates to 67,000 Defects Per Million Opportunities (DPMO), or cost of poor quality of 20-30 per cent of sales. Manufacturers frequently achieve 4-sigma while service firms are often at 2-sigma (Antony & Banuelas, 2002; Byrne, 2003; Zu, Fredendall, & Douglas, 2008; Hoerl, & Gardner, 2010).

Notwithstanding its profit potential, SSQ has led to problems for innovative organisations such as 3M. In a Business Week article, Hindo (2007:10) stated that “..efficiency programs such as Six Sigma are designed to identify problems in work processes-and then use rigorous measurement to reduce variation and eliminate defects. When these types of initiatives get ingrained in a company’s culture, as they did at 3M, creativity can easily get squelched.” Hindo (2007: 14) further asserts, “There has been little formal research on whether the tension between Six Sigma and innovation is inevitable.” Benner and Tushman in Zhang, Hill and Gilbreath (2011:48) support this view by stating that “diffusion of process management technologies favours exploitative innovation at the expense of exploratory innovation.”

A recent article by Zhang et al. (2011) de- velops an agenda for Six Sigma research. The authors challenge the academic and practitioner

communities to work collaboratively to find practical research-based answers to each of their eight research questions that they propose in their published article. The aim of this chapter is to shed new light on the relationship between SSQ and innovation, adding to the SSQ research agenda developed by Zhang et al. (2011). The general question we address in this chapter is: can SSQ coexist as part of an ambidextrous organisation in a high operating cost environment?

LITERATURE REVIEW AND THEORY

In this section, the literature on SSQ, innovation and ambidexterity is reviewed in order to define various terms and to identify research proposi- tions, which would provide a clear purpose for the empirical and theoretical discussion throughout the chapter.

Six Sigma Literature

Linderman, Schroeder & Zaheer (2003) contend that Six Sigma is a phenomenon that is gaining wide acceptance in industry, but lacks a theoretical underpinning (Braunscheidel, Hamister, Suresh, & Star, 2011). Linderman et al., (2003) argue that rigorous academic research of Six Sigma re- quires the formulation and identification of useful theories related to the phenomenon. For example, Linderman et al., (2003) argue in their theoretical paper that most managers use explicit goal setting to motivate performance with SSQ projects, which creates the illusion of it being a technical issue. However, the authors believe that goal setting also requires behavioral considerations. Thus, an important literature finding is that SSQ success requires technical and behavioral understanding (Linderman et al. 2003).

Zhang et al. (2011) conducted extensive research of the academic and practitioner SSQ literature, coupled with numerous focus group meetings with expert practitioners, and senior

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managers, in order to develop a research agenda for Six Sigma research (Zhang et al. 2011). The au- thors identified five different views of Six Sigma:

• Metric View: Focuses on the sigma met- ric, other process capability metrics and “balanced –scorecard” metrics.

• The Tool View: Emphasizes statistical tools, causal mapping, process mapping etc.

• Project View: Emphasizes project man- agement tools, for example, project sched- uling and project control, and the DMAIC stage-gate method for managing improve- ment projects (define, measure, analyze, improve, and control).

• Program View: This view emphasizes generating, selecting, resourcing, control- ling, and closing a portfolio of projects.

• Philosophy View: Focuses on the under- lying philosophies and how they affect the values and culture.

The authors conclude that all five views are critical in understanding SSQ and propose a research agenda that focuses on the program view “..given that Six Sigma is an organisational improvement program, researchers can approach Six Sigma as an organisational intervention. This program view is broader than the metric, tool, and project views and more concrete than the phi- losophy view.” The authors make an observation that SSQ practices can be divided into core and discretionary principles. The core principles are necessary for a process improvement program to be considered as an SSQ program. A theoretical paper by Blakeslee (1999) articulates several core principles for successful implementation of SSQ.

Principle 1: Committed leaders drive a successful SSQ implementation.

Principle 2: The integration of SSQ with existing initiatives and business strategy.

Principle 3: A framework of process thinking needs to support SSQ efforts.

Principle 4: The gathering of customer and market intelligence is crucial.

Principle 5: SSQ project must produce real sav- ings or revenues.

Principle 6: A thoroughly trained core of team leaders directs the SSQ effort.

Principle 7: The continuous reinforcement and rewarding of leaders who support initia- tives and improvement teams that carry the initiatives out is required to sustain SSQ implementation.

We can ascertain from the SSQ principles above that several traditional theories play a role in SSQ implementation such as leadership, busi- ness strategy, process improvement, teams, finan- cial rewards and recognition (Evans & Lindsay, 2008; Zu, Robbins, & Fredendall, 2010). These principles are supported by Wiklund & Wiklund (2002) who outline many of the already under- stood concepts and elements of SSQ; such as the use of Master Black Belts, Black Belts and Green Belts, the DMAIC (Define-Measure-Analyse- Implement-Control) approach. The authors also articulate some of the benefits that can be obtained by implementing SSQ in a high operating cost environment including cost savings, improved customer satisfaction and increased productivity.

The importance of quality education, train- ing and participation are presented as being key to the success of SSQ implementation, coupled with cultural changes that reinforce the learning cycle. These SSQ principles outlined by Blakeslee (1999), together with the discussion by Wiklund & Wiklund (2002), are used as a basis for the development of the case study protocol, and are subsequently used in the discussion of the quali- tative results.

Definition of Innovation

It is important to define the different types of innovation that are likely to be affected by SSQ in an organisation (Yusr, Othman & Mokhtar, 2011). However, innovation is not an easy concept

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to define. Camison-Zomoza et al., (2004, p.334) assert that a global definition of innovation does not exist. Different definitions of innovation are appropriate under different circumstances. “One common element in all definitions of innovation is that it is a new idea that is put into practice while paying special attention to its usefulness.” Extending this broad definition, innovation in- volves the application of knowledge to offer new products or services to customers through lower costs or improved attributes (Damanpour, 1992). These improvements can be achieved through new product innovation or process innovation.

A more encompassing definition of innovation is provided by Damanpour (1991), who defines innovation as “the adoption of an idea or behaviour, whether a system, policy, program, device, pro- cess, product or service, that is new to the adopting organisation.” This could be explained further if we consider Schumpeter’s (cited in Narayanan, 2001: 85) two-phase innovation theory of entre- preneurial innovation and managed innovation.

The entrepreneurial innovation phase relates to new product development, for which organic characteristics are necessary. On the other hand, the managed innovation phase relates to cost efficiencies through process innovation (Terzi- ovski, 2010). Based on the literature findings it is reasonable to speculate that Six Sigma would facilitate managed innovation in a high operating cost environment and would be less conducive to entrepreneurial innovation (Narayanan, 2001). Eng (2011) provides a link between theoretical concepts of organisational innovativeness and market orientation to SSQ.

SSQ practices provide a balance between short and long-term goals, which can enhance organi- sational innovativeness, which are imperative in a high cost operating environment.

SSQ provides a tool for the successful imple- mentation and measurement of market orientation.

SSQ ‘champions’ have an important role in creating opportunities for performance enhance- ment through collaboration across organisational boundaries.

Positive brand outcomes resulting from SSQ practices can be utilised in marketing in order to strengthen customer perceptions and enhance customer value.

High-tech firms demonstrate a significant correlation between SSQ e-business practices and SCA in contrast to the insignificant correlations for low-tech firms. This suggests highly varied perceptions of the impacts of SSQ on e-business processes between low and high-tech firms.

New Product Innovation and Process Innovation

Pisano (1996) argues that there is a strong link between New Product Development (NPD) and process innovation. The author identifies “process driven” sectors, which predominantly consist of large firms such as commodity chemicals, steel and paper where there is little product innovation. In these sectors process innovation is required to reduce cost, cycle time, and to improve quality of products. This is where SSQ is expected to play a key role. Changes in process innovation would lead to human resources practices, logistics and marketing functions (Narayanan, 2001).

On the other hand, Pisano (1996) identifies “product driven” sectors such as software, com- puters, assembled products, where new product innovation would help firms to compete for new customers. This is where Design for Six Sigma (DFSS) is more likely to be implemented. Evans & Lindsay (2008:590) in Zhang et al. (2011) define DFSS as: “a set of tools and methodologies used in the product development process for ensuring that goods and services will meet customer needs and achieve performance objectives, and that the processes used to make and deliver them achieve Six Sigma capability.” According to Zhang et al. (2011) some organisations implement DFSS as part of an integrated SSQ program, while others implement DFSS as an independent methodology (Sony & Naik, 2012).

Parast, (2011) uses theories from process management and innovation to establish whether

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SSQ projects can improve firm innovation, and if so, how? The author suggests that SSQ acts as an effective tool for translating the needs of the customer into improvement projects that ul- timately enhance technological innovation. The well-known fact that SSQ aims to reduce defects through customer feedback is used to support the proposition that if a firm is oriented heavily towards its existing customers then SSQ is likely to lead to highly incremental innovation and a low level of innovation for new customers. The authors suggest that a stable customer base and environment allow SSQ to have a greater impact on performance.

Consequent to the above discussion, I have adopted Zhang et al. (2011) proposition and recommendation to further explore the relation- ship between SSQ and innovation, both product and process. Proposition 1: The implementation of Six Sigma improves both product and process innovation for organisations.

Ambidexterity

Given our earlier discussion that success with SSQ requires technical and behavioral understanding; the ambidextrous model is a useful tool to interpret technical and behavioral considerations. Benner & Tushman (2003: 247) define the ambidextrous organisation as: “…composed of multiple tightly coupled subunits that are themselves loosely coupled with each other. Within subunits the tasks, culture, individuals, and organisational arrange- ments are consistent, but across subunits tasks and cultures are inconsistent and loosely coupled.”

For example, O’Reilly III & Tushman (2004) in Hindo (2007), based on a research study of 35 organisations, found that ambidextrous struc- tures were successful 90 per cent of the time and were able to separate new exploratory activities from traditional exploitative activities (Benner & Tushman, 2003). The successful companies established an executive team to manage the two sub-cultures by separating exploratory and exploitative activities.

Consequent to the above discussion, a paradox has emerged between the need for efficiency and the management of process variation, which is fostered by SSQ, and on the other hand, the need for risk-taking and learning from failure. Hindo (2007: 16) reinforces the paradox by stating, “Six Sigma fosters a very low tolerance for risk because risk increases variation. Innovation, on the other hand, seeks to brave undiscovered, uncertain territory. Such fledgling efforts are inherently inefficient. Innovation requires a tolerance for risk-taking and failure.”

Another way to interpret the paradox is that SSQ leads to more incremental innovation at the expense of more breakthrough innovation (Burgel- man, et al., 2004). Benner and Tushman (2003) ar- gue that competitiveness in organisations depends on the ability of an organisation to be ambidex- trous by balancing exploitation and exploration so that it is better suited to deal with a dynamic environment. Zhang et al. (2011) proposes that SSQ may provide an interesting context for the study of organisational ambidexterity because of its balancing mechanism between structural control and structural exploration. Zhang et al. (2011) express concern that “The mechanism for maintaining this balance is unclear.” Zhang et al. (2011) have summarized their previous discussion by the following proposition: Proposition 2: The implementation of Six Sigma leads to a higher level of organisational ambidexterity.

The qualitative data is expected to shed new light on the research question and the two proposi- tions articulated by Zhang et al. (2011) (O’Reilly III & Tushman, 2004; Benner & Tushman, 2003; Schumpeter’s (cited in Narayanan, 2001)).

RESEARCH METHODOLOGY

Case Study Protocol

Given the explorative nature of this study, the fol- lowing questions are articulated from the literature, and form the basis for the Case Study Protocol

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(CSP). A multiple cross-case analysis is conducted with respect to each of the CSP questions.

• Which factors stimulated your organisation to adopt SSQ?

• What is the nature of the change process adopted – new product innovation or pro- cess innovation based on SSQ?

• What are the barriers to implementing SSQ and how were these barriers addressed?

• What is the impact of SSQ on the organisa- tion’s innovation culture?

• What are the perceived and actual out- comes of SSQ?

The Unit of Analysis

The unit of analysis in this study is defined as the Strategic Business Unit (SBU). An organisation can have any number of SBUs that implement their own versions of Six Sigma. The case stud- ies provide a longitudinal analysis of the process of SSQ implementation in a high cost operating environment and the culture of innovation, the dif- ficulties encountered by each organisation over a three-year time frame. In particular, primary data was sought from the case study organisations.

Respondents

The case study protocol was used to interview senior managers from each of the companies. The respondents are typically the General Manager or person responsible for the implementation of Six Sigma within the case study organisation (Yin, 1989). A letter of invitation was sent to each of the interviewees seeking participation in the project. The letter explained the purpose of the research and explained the methodology and addressed the ethical undertakings by the researchers to each organisation. The interviews were taped using a

digital recorder after permission was sought from the interviewees. Interviews typically ran for two hours, and in some cases longer. The researchers collected relevant documentation from the inter- viewees and respective Internet sites.

MULTIPLE-CROSS CASE ANALYSIS (MCCA)

Lindeman et al., (2003) argue that rigorous academic research of Six Sigma requires the formulation and identification of useful theories related to the phenomenon. Multiple cross-case analyses have been conducted based on the case study protocol questions developed from the literature. The seven SSQ principles (Blakeslee, 1999), and the Five Core elements of SSQ articu- lated by Zhang et al. (2011) are used to support the qualitative analysis. The two propositions are explored through the common themes identified through the MCCA (Eisenhardt 1989; Evans & Lindsay, 2007).

The Factors Which Stimulated the Organisation to Adopt SSQ

The factors, which stimulated the four case study companies to adopt SSQ all varied in nature. However, the underpinning factor was to increase the bottom line, given the high operating cost en- vironment in which the four SBUs were operating. This is consistent with principle 5: SSQ Projects must produce real savings or revenues (Blakeslee, 1999). This is also consistent with the Metric Focus articulated by Zhang et al. (2011:43) “Six Sigma emphasises metrics in either customer or financial terms. It also emphasises rigorous tracking of the metrics to ensure that benefits are obtained from improvement projects.” For example, the operations department initially introduced SSQ

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at Securency. After strong results in the opera- tions area, SSQ was expanded to accomplish the strategic goals of the organisation.

The main factor which motivated senior man- agement to implement Lean Six Sigma at Qantas Engineering was the positive word of mouth from their key suppliers, General Electric and Boeing, who had very successful SSQ programs. Lean Six Sigma is an integral part of the Engineering Group’s business strategy and spread gradually to other parts of the organisation.

The main champion for Six Sigma at Rio Tinto came from a senior executive at Comalco Aluminium Ltd, a strategic business unit within the Rio group, who quickly won CEO buy-in. He was the initial ground-breaker and explorer who went out and studied the methodology and formulated the value proposition.

The Copper Group followed a similar learn- ing model, which received support from the CEO which was essential for beefing up the structures, engaging managers, conducting training and implementing projects. However, the same de- gree of commitment was not present across all Product Groups at Rio Tinto. This is consistent with Principle 1: committed leaders drive a suc- cessful SSQ implementation (Blkeslee, 1999). Furthermore this finding aligns well with Zhang’s core element of Leadership Engagement, which argues that the success of a process improvement program requires strong top management support, where senior executives act as champions and are directly involved in projects. This ensures that the right projects are selected (Blakeslee, 1999; Zhang et al., 2011).

The motivation for implementing SSQ at Rio Tinto varied according to how advanced the Product Group was with its process improvement practices. For example, in the more organised parts of the business such as Comalco, SSQ was accepted as part of the leadership development program. At Comalco and the Copper Group managers were convinced that Six Sigma played a key role in their competitive strategies. The initiation of

full-time positions at the two product groups was to link the Six Sigma program with the business planning. This finding is consistent with Principle 2: The integration of SSQ with existing initiatives and business strategy (Blakeslee, 1999).

At Caterpillar Underground Mining (CUM), SSQ was driven by the parent company Caterpil- lar from the USA, which was heavily focused on quality with a philosophy of getting things right the first time and resolving field issues. The manag- ers at the Burnie, Tasmania plant had a good core group performing the functions and knew what was going on with Quality and Business Process Improvement. SSQ had received prominence as part of the significant amount of changes that were taking place at the Fabrications and Assembly site over a period of six months.

Caterpillar implemented SSQ by motivating their employees through incentives. Caterpillar promised their Black Belts that after 2 years as a Black Belt they would be promoted. This is consistent with Principle 7: The continuous reinforcement and rewarding of leaders who support initiatives and improvement teams that carry the initiatives out is required to sustain SSQ (Blakeslee, 1999).

The strategy worked quite well for the first 18 months; however, the promise of promotion yielded limited results at the Burnie plant, hence the motivation shifted to using Six Sigma as a development opportunity for employees rather than a process improvement methodology. This is an interesting shift from Principle 7 to Principle 6: A thoroughly trained core of team leaders directs the SSQ effort. This supports Zhang’s third core element of a dedicated improvement organisa- tion. Zhang concluded that it is convention in Six Sigma to select some of the organisation’s best employees to fill the Black Belt positions (Eckes, 2000; Harry & Schroeder, 2000; Pande, Neuman & Cavanagh, 2000).

It is important to note that one of the factors that contributed to the acceptance of Six Sigma at the CUM plant was the existing quality strategy and

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innovation culture of risk taking and experimen- tation. This is a critical finding in the context of the ambidextrous organisation; supporting Benner & Tushman’s (2003) theory that competitiveness depended on the ability of an organisation to be explorative and exploitative at the same time. The other important message that emerged from the CUM case study is that SSQ does not need to be implemented throughout all functions in order to be of value, as long as the SSQ project produces value to the organisation as stated in Principle 5: SSQ project must produce real savings or revenues (Blakeslee, 1999).

SSQ and the Change Process Adopted New Product Innovation and/or Process Innovation

The nature of SSQ and the change process adopted also varied across the four case study companies. For example at Securency, the repetitive processes had to be standardised in order to get some gains and stability in the process. Principle 3 supports this: a framework of process thinking needs to support SSQ efforts (Blakeslee, 1999). Zhang (2011) argues as part of his structured method that adhering to a standard method helps to create a common language across the entire organisa- tion, which facilitates knowledge creation and dissemination.

At Qantas Engineering, certain changes were required with the existing management systems in order to achieve alignment with Six Sigma. Qantas has many different departments with good internal processes within a department structure. Management discovered that by comparing the processes end to end across all the departments, many opportunities for incremental innovation emerged. This is a critical finding from a process innovation perspective and reinforces the impor- tance of SSQ in a specific departmental structure. This finding aligns very well with Principle 3, a framework of process thinking needs to support SSQ efforts (Blakeslee, 1999). This finding is

also supported by Zhang et al. (2011), through his structured method stating that “..the method supports structured exploration of root causes and structured control of the process to produce the desired output.”

Following the experience with several SSQ projects, Qantas Engineering decided to imple- ment Lean Six Sigma, a term used to describe continuous improvement (Evans & Lindsay, 2008). Lean seeks to create “more value with less work”. Lean is a generic process manage- ment philosophy derived mostly from the Toyota Production System (TPS). According to Liker & Hoseus (2008:461) “The term ‘lean production’ was coined in the book titled The Machine that Changed the World to refer to the next generation manufacturing company..Toyota did more with less and continuously improved. The focus was on adding value to customers at every step in the process from raw materials to finished goods, to give customers and society more with less.”

An internal team, reporting directly to the Executive Manager, was established to implement Lean Six Sigma at Qantas Engineering. Responsi- bility for Lean Six Sigma was gradually transferred to the business units. Senior managers stepped back and transferred ownership to the business units while at the same time they maintained full support for the new program. This finding aligns well with Zhangs’ core element of Leadership Engagement. Zhang et al (2011) stated, “The success of process improvement program requires strong top management support. Six Sigma puts a systematic mechanism in place to ensure that the leadership team is engaged and Six Sigma stays on the organisation’s dashboard..”

Qantas Engineering combined Toyota’s lean philosophy with its own modus of operations. One of the benefits of going with the lean approach was that it called for Total Integration. Qantas found the best way to implement Lean Six Sigma was to focus on a smaller area of the organisation like Engineering, then make it a real shining example of what could be done throughout the rest of the

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organisation. The Six Sigma deployment strategy revolved around implementation strategy in order to achieve successful Six Sigma outcomes.

The above is consistent with earlier find- ings that SSQ does not have to be implemented throughout all functions of an organisation in order to be of value. Zhang et al. (2011) supports this finding by stating that “..Six Sigma projects must have clearly defined goals, expressed in metrics such as critical-to-quality. Each project is carefully audited on its intended and realised benefits, usually in financial terms and certi- fied by the organisation’s finance department.” (Schroeder et al. 2008). At Rio, Lean Six Sigma was also implemented with a significant emphasis on eliminating waste and being more efficient. This is consistent with Pisano (1996) who as- serted that process innovation is required to reduce cost, cycle time, and to improve quality of products. The focus on waste elimination re- sulted in a tidier work place; however, this was not related well to productivity improvement.

An important question emerged from the Rio case study, which was consistent with the key question, addressed in this paper: does SSQ help or hinder innovation and ambidexterity? (Zhang et al., 2011). There was strong support for SSQ at Rio from a process innovation perspective, be- cause it enabled employees to work in a standard way using a standard methodology and tool set. However, the main concern was that the standard approach might have a negative effect on creativity and innovation. This concern was not confirmed with strong evidence.

On the contrary, in some Product Groups, SSQ was a core component of delivering the business plan from a product and process innovation per- spective. This is supported by Zhang et al. (2011: 43) core elements of ‘structured method’ and ‘metric focus.’ “Six Sigma is highly prescriptive in demanding that each project must strictly fol- low the DMAIC structured method. The method supports structured exploration of root causes and structured control of the process to produce the desired output.”

The Barriers to Implementing SSQ and How These Barriers Were Addressed

This question produced some interesting qualita- tive results, which have shed new light on the role of SSQ in organisational ambidexterity as defined earlier by Benner & Tushman (2003). The barri- ers to implementing SSQ at the four case study companies were mainly cultural in nature. For example, at Securency, some of the major barri- ers and how they were overcome included freeing up key people to implement projects, overcom- ing resistance to change exhibited by qualified workers such as Printers who had been taught to operate in certain ways and problems associated with rapid growth of business from central banks around the world. This is consistent with Zhang et al (2011:42) conclusion that Six Sigma philosophy can be summarised as “assigning some of our best people to our most important problems and requiring data-based decision making.”

This result shows that management was aware of the tension between the two cultures of man- aged innovation (process) and entrepreneurial innovation (product innovation) (Narayanan, 2001). Securency is another good example where SSQ had a positive effect on organisational am- bidexterity. For example, SSQ was a catalyst to promote exploitation through process innovation and exploration through new product development. Securency have demonstrated that through SSQ implementation they were able to standardise their current processes, and at the same time, they cre- ated new customers in different parts of the world, with their unique product for note printing, which they developed through DFSS.

Lean Six Sigma implementation at Qantas Engineering was mixed. While there was a very supportive leadership team in the Engineering Group, in other areas, there was uncertainty as to whether SSQ was worthwhile or not. There were employees at all levels of Qantas Engineering that had healthy scepticism. Some of the greatest risks perceived in implementing Lean Six Sigma were

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that in the early stages of implementation often the cost savings would not be obvious.

This finding is supported by Zhang et al. (2011: 44) who articulate the true challenge that organisations are faced with when implementing SSQ “The aggregated results of many successful Six Sigma projects are an improved bottom line for an organisation, as manifested by the savings reported by many companies. This suggests that Six Sigma can also lead to improved financial performance.” However, the authors go on to articulate the challenge for SSQ implementation stating that “The true challenge, however, is em- pirically validating Six Sigma’s effectiveness.”

These findings are further reinforced by the Rio case study. The greatest risk perceived at Rio Tinto in the early days of implementing Six Sigma was the concern that the organisation may not be in a position to deliver on the bold financial prom- ises. One of the major barriers to implementation of Six Sigma was the attitude that even without Six Sigma the same performance improvements could have been achieved. The Black Belts tried to overcome that attitude by articulating how extra value was created using cross-functional teams. Interest in Six Sigma at Rio was found to drop off significantly the moment trainees could not see relevance to their projects. In some Product Groups at Rio Tinto, Six Sigma did not get cred- ibility up front because it took up to two years to show the bottom line results. Therefore, the challenge for Six Sigma champions was to make it clear upfront to staff at all levels that it may take up to two years for a project to show results.

Another barrier to SSQ implementation at Rio Tinto was creating awareness at senior manage- ment level what commitment meant for a signifi- cant change program such as SSQ. Although it was relatively easy to agree on a solution it was a lot harder to implement the solution. One of the major barriers to implementation was the need for Six Sigma to demonstrate its benefit delivery capabilities. This finding aligns with Zhang et al.

(20011:45) comment, that “The true challenge, however, is empirically validating Six Sigma’s effectiveness.”

The Impact of SSQ on the Organisation’s Innovation Culture

Zhang et al. (2011: 45) asks the question “How should Six Sigma be implemented in different organisations?” The multiple cross-case analyses revealed that SSQ had a different impact on the culture of each case study company. For example at Securency the impact was positive. The growth of new international customers required new processes that Securency did not have, which required a lot of technical input. The rigour as- sociated with Six Sigma helped the organisation in the context of large technologically complex projects through Failure Mode Defects Analysis, What If Scenarios? and Risk Management.

The major challenge for the Qantas Engineer- ing Group was the fact that the airline was going through a lot of change at the time that the Lean Six Sigma was being implemented. The critical question was whether Lean Six Sigma could be prioritised alongside other change programs. Unlike GE and Boeing, Qantas Engineering has not found it necessary to modify its reward structures in order to implement Lean Six Sigma. Compared to GE and their rigid promotion policy, which makes attainment of Black Belt status a precondition for promotion, Qantas’s approach was more a ‘preferred’ policy, which states that it would be good if managers have a Black Belt (Pande et al. 2000).

Qantas Engineering examined the style used by former GE CEO Jack Walsh, which was based on compulsory implementation of Six Sigma, and decided that their approach needed to be suited to their organisational culture. Culture was identi- fied as one of the major reasons why it took so long to implement change at Qantas Engineer- ing. Consequently, Qantas adopted a policy of

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promoting Lean Six Sigma as a desirable skill set for employees and encouraged employees to express interest in learning. Jack Walsh used the ‘push’ approach from the ‘top’ to implement SSQ, whereas Qantas used the ‘pull’ approach based on need and the Qantas culture.

Continuous innovation was part of the Qantas Engineering mission statement, but the word ‘quality’ had always been part of Qantas’ strate- gic principles. Lean Six Sigma had made Qantas Engineering more flexible and competitive by enabling it to become more customer oriented. Zhang et al. (2011:43) has articulated customer orientation as one of the five core elements of Six Sigma, stating “At the organisational level, customer orientation is used as a principle to select and prioritise projects by the project selec- tion committee.”

At the time of the case study interview, Six Sigma was still evolving at Rio Tinto with at least two years needed for SSQ to be imbedded into the culture. Structural changes were required with the existing management systems at Rio for Six Sigma to work properly such as the creation of full-time positions to support the deployment of the program. Schroeder et al. (2008) in Zhang et al. (2011) outline a “parallel-meso” structure as the most effective organisational structure for a SSQ program. This refers to a parallel organisa- tional structure, which enables SSQ projects to be formulated and implemented, without affect- ing the organisation’s normal operating structure (Zhang et al., 2011).

The ability of an organisational culture to accept new job design changes is critical in the successful implementation of SSQ. Six Sigma had a positive impact on corporate culture at Rio by allowing more people to become involved in improving the organisation. For example, SSQ empowered the operations people and helped them to gain more respect from senior management. Once the lines of communication were opened up at Rio, team members were able to understand the ‘internal customer concept’ that some of the

outputs from one process were inputs in another process. This tended to create a cause and effect relationship (Evans & Lindsay, 2008).

The Outcomes of SSQ

Blakeslee (1999) identified Principle 5: SSQ projects must produce real savings or revenues as critical for successful SSQ implementation and survival. Zhang et al. (2011:43) have identified Metric Focus as one of their core elements of Six Sigma, emphasising either customer or financial metrics. Zhang et al. (2011) reinforce that the metric view not only focuses on the sigma met- ric, but also on other process capability metrics, and high-level “balanced-scorecard” metrics, as outlined by Kaplan & Norton (1996).

One of the most positive impacts that Lean Six Sigma has had on the Qantas Engineering Group has been the reinforcement of a culture of ongoing improvement and innovation. Lean Six Sigma has allowed Qantas Engineering to vali- date its strategic model by fine-tuning its metrics. Leading indicators that were introduced as part of Lean Six Sigma supported Qantas’s strategic plan and mission. This helped to increase profitability and assisted in the marketing and communication efforts. Overall, Lean Six Sigma allowed Qantas Engineering to improve customer service and to lower their costs.

Although the financial benefits for every single project were not immediately evident at Rio Tinto people learned something new from each project and from each other. Sometimes the benefits of Six Sigma have been difficult to quantify in a short period of say three to six months. Net Present Value was the key measure used to assess invest- ment in projects. There is a growing realisation within Product Groups that there are going to be some benefits that are non-tangible.

At the time of the case study interview, achiev- ing Six Sigma, 3.4 defects per million opportuni- ties, was not something that was expected at Rio Tinto. What was known and measured was that

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Six Sigma had produced significant cost savings over time. For example, for every dollar invested the organisation gets four dollars back as a return on investment. Nine to 12 months was perceived as a reasonable time frame for a six-sigma project to start delivering quantifiable results.

Six Sigma helped CUM to think more strategi- cally and make decisions based on data and facts. According to Byrne, Lubowe, & Blitz (2007); the parent company Caterpillar introduced Lean Six Sigma (LSS) as a way of improving processes, and facilitating continuous, customer-driven innovation. Changes were introduced as part of LSS, which ranged from the development of a vi- sion, based on customer, market and capabilities data, to minor operational improvements, to the development of new products. R&D processes were redesigned to align more closely with cus- tomer expectations and provide more targeted products. Supply chain processes were also im- proved through the deployment of innovative new practices. The SSQ methodology has made the organisation more flexible and competitive. Leadership commitment was the single most important factor for successful implementation of LSS at Caterpillar.

Some of the major lessons learned from engaging with Six Sigma at Rio Tinto revolve around engaging and educating the leadership team, finding sponsors and champions and train- ing employees for Six Sigma roles. Six Sigma had a positive impact on workplace culture, with a greater recognition of the importance of evidence-based management. The rigour of Six Sigma helped the organisation to think more stra- tegically. Furthermore, it has given managers the confidence to close the gap between where they are and where they need to be in terms of busi- ness process improvement, waste elimination and reduction of variation. Some of the major lessons learned from engaging with Six Sigma at CUM were the critical importance of senior manage-

ment, followed by providing early Black Belt training for managers. Significant improvements have been achieved at the Burnie plant and this has contributed to creating a culture of fact-based decision-making.

DISCUSSION AND ANALYSIS OF PROPOSITIONS

The two propositions are discussed below based on the literature synthesis and the qualitative research findings. Hindo (2007: 10) states “..the very factors that make Six Sigma effective in one context can make it ineffective in another.” We did not find sufficient qualitative evidence to support Hindo’s theoretical claim. In fact, several underpinning themes were identified in the mul- tiple cross-case analysis that are common to both process and product innovation. Therefore, there is a need to balance exploitation and exploration. The dilemma that has emerged is that SSQ tends to be more exploitative innovation. A possible solution to this dilemma is the concept of or- ganisational ambidexterity (Benner & Tushman, 2003; Andriopoulos & Lewis, 2009) argued that the tension between exploitation and exploration should be viewed as a series of ‘nested paradoxes’ that should be treated as interconnected elements across all levels of a firm.

The following section examines how SSQ influences or manifests itself in organisational ambidexterity. With respect to the second proposi- tion, it is worth revisiting Benner & Tushman’s (2003) basic definition of ambidexterity. “..an ambidextrous organisational form would provide the context for inconsistent activities to coex- ist, such as new product innovation and process innovation.” In other words, understanding the mediating effects of the external environment is also important in considering the impact of SSQ. A stable environment and customer base

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are more likely to produce greater impacts from SSQ implementation, especially on sustainable competitive advantage (Parast, 2011).

On the other hand, SSQ can encourage the development of an organisational culture that facilitates exploration as well as controlling exploitation. For example, SSQ enabled the four organisations to validate their strategic models by fine-tuning their performance metrics with leading project indicators within their business plans. Secondly, SSQ reinforced an ongoing learning culture, and enabled the four case study organisations to leverage value from knowledge generated through SSQ’s disciplined methodol- ogy. For example, the rigour associated with Six Sigma helped Securency to cope with the com- plexities of a large technological project, which helped them to create a new international market for their product.

Inconsistent activities existed in all four or- ganisations. On the one hand, where the process output that was controlled was well known, SSQ led to better quality, lower costs, and generally more efficient processes (Zairi & Alsughayir, 2011). On the other hand, where the nature of the problem was not well defined, we found Six Sigma to have conflicting objectives with new product innovation. This further highlights the need for balance and integration with existing strategies in implementing SSQ in order to mitigate any possible negative effects during the explorative innovation (Raisch, et al., 2009).

Based on the above discussion, it is reasonable to support the second proposition, which states that the implementation of Six Sigma leads to a higher level of organisational ambidexterity. However, the argument that SSQ and some type of innovation could have conflicting objectives is also true, and needs to be addressed. SSQ does not have to be implemented throughout all func- tions in order to be of value, as long as managers are aware of the paradoxical cultures that exist, particularly in terms of performance expecta-

tions. Understanding and effectively managing these issues is important in fostering positive, whole-organisation impacts from SSQ, such as organisational learning, and integrating SSQ with organisational ambidexterity.

CONCLUSION

With respect to the research question, the study concludes that SSQ can coexist as part of an am- bidextrous organisation in a high operating cost environment. On the one hand, SSQ can be an effective quality control tool for high operating cost environments. SSQ improves process inno- vation where the organisation has a well-defined output that it would like to control to a high level of quality. This is consistent with Deming in Evans & Lindsay (2008), who argues that improvements in quality lead to lower costs due to less rework, fewer mistakes, fewer delays, and better use of time and materials, which leads to productivity improvements (Conding, 2013).

In a business context, Pande et al. (2000) defines Six Sigma as a high-performance, data- driven approach to analysing the root causes of business problems and solving them. It ties the outputs of business directly to marketplace re- quirements. In the context of a high-cost operating environment, SSQ companies would spend less than 5 per cent of their revenue on fixing process- related problems compared to 15-20 per cent of their revenue fixing process-related problems of 4 sigma companies.

On the other hand, explorative innovation re- quires a different mindset. Typically this type of innovation is less efficient and requires a culture of risk taking and learning from mistakes, as shown by Sony & Naik (2012), while Wiklund & Wiklund (2002) highlight the importance of fostering organisational learning during the implementation of SSQ. Based on a ‘best prac- tice’ case study, Wiklund & Wiklund (2002) use

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the term ‘Soft Sigma’ as a way of introducing organisational learning into the SSQ program. For example, Solectron provided its Black Belts with training in leadership, change management and learning, and implemented SSQ at the highest level by employing a full time behavioral scientist as a Master Black Belt. This allowed the Master Black Belts to better understand and perform their roles in finance and statistics as consultants and facilitators with the aim of generating a culture of organisational learning from the top-down.

The two approaches could coexist, as part of an Ambidextrous Model, as long as management establishes a team that could manage the tension between the two cultures, one based on control and the other one based on learning (Hindo, 2007; Benner & Tushman, 2003; Andriopoulos & Lewis, 2009). In other words, while SSQ may be better suited to enhancing exploitative inno- vation practices, other positive benefits such as enhanced organisational learning may be leveraged to produce positive impact on the organisational exploitation/exploration balance and organisa- tional ambidexterity.

Implications for Managers

Wiklund & Wiklund (2002) demonstrate the need to approach SSQ implementation as a company- wide initiative that incorporates organisational learning as a key element and outcome. Based on the qualitative analysis, several implications for managers have emerged:

• Senior Management Commitment: Leadership commitment at the highest lev- el and selling SSQ as a business improve- ment strategy were found to be critical suc- cess factors for SSQ implementation.

• Innovation Culture: SSQ has an impact on corporate culture by encouraging em- ployees to engage in continuous improve- ment, constant learning and innovation as a way of life.

• Goal Setting: Technical and behavioural goal setting motivates performance in SSQ Projects, where SSQ enables performance metrics to be validated.

• Learning Culture: The SSQ methodol- ogy reinforced an ongoing learning culture and leveraging value from knowledge gen- erated through SSQ projects.

• Training and Learning: SSQ changed people’s perceptions and understanding of the practice and generated interest in train- ing and learning.

• Ambidexterity: SSQ supports ambidex- terity subject to managers recognizing that process innovation and new product de- velopment require their own formulae for success.

Following from the above discussion, the main implication for practitioners is that SSQ can be used effectively for firms to compete in high operating costs environments by effectively managing variation at the 6-sigma level of quality, as part of an ambidextrous organisational culture. This is consistent with the literature, for example, GE initially focused on exploitation, using SSQ to squeeze out significant inefficiencies before they attempted exploration under the banner of “Ecomagination.” (Hindo, 2007). The important message for managers is that SSQ can encourage the development of an organisational culture that facilitates exploitation as well as exploration.

FUTURE RESEARCH AGENDA

The following propositions could be tested in future cross-sectional research studies:

• Launching SSQ and entrepreneurial in- novation at the same time would be very difficult. What are the main impediments? How should they be overcome?

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• Which leadership styles are most condu- cive to successful implementation of SSQ and entrepreneurial innovation?

• Would Design for Six Sigma bridge the gap between managed innovation and en- trepreneurial innovation phases?

• Would larger companies find it easier to implement SSQ due to their formal culture, structure and abundant resources?

• Is SSQ less effective in a low cost operat- ing environment?

• Do ‘soft sigma’ practices contribute to in- novation performance more than the ‘hard sigma’ practices?

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Chapter 11

Managerial Practices in a High Cost Manufacturing

Environment: A Comparison with Australia

and New Zealand

ABSTRACT

This chapter explores the management strategies adopted by manufacturing firms operating in high versus low cost economies and investigates the reasons for differences in the management practice choices. The study reported in this chapter identifies a subset of countries that have either high or low labour costs, with USA, Sweden, and Japan being high, and India, China, and Brazil being low labour cost economies. The high labour cost manufacturing firms are found to have better management practices. In this chapter, the authors find that Australia and New Zealand manufacturing firms face relatively high labour cost but lag behind world best practice in management performance. The chapter concludes by highlighting the need for improvement in management capability for Australian and New Zealand manufacturing firms if they are to experience a reinvigoration of productivity, competitiveness, and long-term growth.

INTRODUCTION

Operating in a high labour cost environment presents practical challenges for manufacturing firms attempting to achieve a competitive ad- vantage (Roos, 2012). The manufacturing sector

is particularly susceptible to changing competi- tive pressures which over time can significantly influence the nature of the economic landscape in which it operates and thus its performance and viability. The manufacturing sector’s productivity and competitive advantage is also influenced by

Renu Agarwal University of Technology, Sydney, Australia

Christopher Bajada University of Technology, Sydney, Australia

Paul J. Brown University of Technology, Sydney, Australia

Roy Green University of Technology, Sydney, Australia

DOI: 10.4018/978-1-4666-5828-8.ch011

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the labour-capital intensity of production, which in turn is shaped by the local (national) economic conditions. These conditions vary across countries and are underpinned by structural differences in the economy and society. They are the result of a myriad of factors including legislative and institutional which influence the cost of labour, private and public investments in education and research, capacity for technology and labour transfer across national borders, industries and firms, access to market information and efficient mechanisms for managing risk and uncertainty. Much has been written about the causes and con- sequences of these structural factors, including the investigation of actions taken by firms to maintain competitive advantage when faced with structural disadvantage (Deraniyagala & Fine, 1999). Green et al (2012) suggested three integrated measures to improve productivity, namely enhanced inno- vation capability, participatory work organisation methods and skills utilisation, and the adoption of better management practices, as significant alternatives to deliver productivity gains at an organisational level.

With this backdrop, the objective of this chapter is to provide descriptive evidence on the differ- ences in management practices of manufacturing firms, paying particular attention to Australia and New Zealand and how these compare to manufac- turing firms that operate in high and low labour cost environments.

Understanding how management practices are influenced and become adaptive to the environ- ment in which they occur provides valuable lessons for future productivity gains, commercial success and contributions to economic growth and well- being of a nation. Developing an understanding of (and evaluation of) the causes and consequences of management practices in different jurisdictions has been expensive and difficult to do given the absence of empirical datasets necessary for making such comparisons.1 Given this problem, studies which make available empirical data on similarities and difference on management practices across

different institutional settings will take us closer to developing evidence-based frameworks to better understand these practices. In this context, the management practices of Australian and New Zealand manufacturing firms are of practical and theoretical interest, as firms operating in these economies face a number of contextualised chal- lenges including the combination of factors such as high labour costs, spatial distance affecting trans- port costs and other legislative and institutional considerations (including government policy interventions on investment and infrastructure).

The potential benefits from investing in management capability for innovation and or- ganisational performance was emphasised in the Australian context in a comprehensive report on leadership and management skills by Karpin (1995), Enterprising Nation. Subsequently, a se- ries of Australian workplace employment relations surveys (for example, Alexander & Green 1992; Callus et al, 1990) demonstrated that superior management behaviour and techniques have a correlation with productivity gains. Similar argu- ments have been raised in the New Zealand context (New Zealand House of Representative, 2013; Green et al. 2010; Agarwal et al. 2012). Given the competitive pressures faced by Australian and New Zealand firms, lessons may be learnt from studying the organisations that have been able to exist in this context. Therefore an understanding of the management practice choices by firms operating in countries such as Australia and New Zealand provides valuable insights, especially when benchmarked against countries operating in high and low cost economic environments.

Since the work of Bloom & van Reenen (2007), which introduced a new instrument to measure and compare management practices within and between economies, there has been a plethora of benchmarking studies using the instrument under the auspices of the World Management Survey (WMS). Bloom & van Reenen (2007) developed a unique approach which allows for firms to be categorised as better or worse on 18 dimensions

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of management performance. The Management Practices Score (MPS) is the average of all 18 dimensions, with ‘better’ managed firms scor- ing higher. Most of the studies in the emerging literature have focused on either benchmarking countries with the aim of evaluating their rela- tive management performance, or evaluating the causes and consequences of better management practices (see Bloom & Van Reenen, 2007; Bloom et al., 2007; Bloom & Van Reenen, 2010; Agar- wal et. al., 2013; Green et al. 2009; Green et al. 2010). Our study exploits the findings from these studies and the emergence of the WMS dataset by allowing us to compare individual management practices between countries where firms have different operating cost structures.

The focus in this chapter is to compare Australia and New Zealand’s manufacturing management practices with those of manufacturing firms in high and low labour cost economies. Our high and low cost countries classification was deter- mined through the use of average manufacturing labour cost data (sourced from the US Bureau of Labor Statistics). Our sample comprises of 2833 manufacturing firms from the WMS dataset for the following eight countries: Australia, China, India, Japan, New Zealand, Brazil, Sweden and the United States. We find that the high cost coun- tries have typically a higher average management practices score (i.e. high-cost/high-performing) while the low labour cost countries tend to have a lower management practices score (low-cost/ low-performing). We find that both Australia and New Zealand sit on the continuum between these two groupings of countries.

Our analysis of individual management practic- es provides a number of notable observations. We find that the management practices of manufactur- ing firms differ significantly between high and low cost countries and this is primarily driven by differ- ences in operations and performance management strategies. The scores are less disparate on people management practices, although different between high and low cost countries. When we compare

Australia and New Zealand manufacturing firms with the two country groupings, we find that they share similarities with each. In particular, Aus- tralia and New Zealand share similar approaches on the adoption of lean manufacturing with the high-cost/high performing countries while on the other hand initiatives to instil a talent mindset and retain high performers appear on par with the low- cost/low-performing nations such as India, China and Brazil. Our findings are consistent with the argument that management practice choices are influenced by institutional settings (e.g. the high versus low cost environments). This suggests that to be globally competitive, Australian and New Zealand manufacturing firms may benefit from lifting their game in the areas of performance and people management. Failing to effectively instil a talent mindset, to address poor performance and to make efforts to retain high performers may see the manufacturing sector become progressively more uncompetitive and contribute to its gradual decline as has been evident in recent years.

MANAGEMENT PRACTICES IN MANUFACTURING

There has been considerable debate in the extant literature on which management practices can enhance value for organisations. Central to this debate is the concept of best practice, where certain management practices are proposed to increase performance for firms who adopt them.2 Recog- nising the problems associated with measuring and evaluating management practices, Bloom & Van Reenen (2007) pioneered a novel double blind, double scored method which they used to evaluate a range of firms on 18 dimensions of management practice. Essentially, the double blind/double scored method involved telephone interviews with managers, which were conducted in a conversational mode. The interviewer followed a scoring grid which allowed them to classify the management practises of the organisation,

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without alerting the interviewee that they were being scored, although the interviewees clearly knew the topic of and overall purpose of the in- terview.3 Also, a second interviewer listened in on the majority of interviews and independently scored the organisation, with high correlations between the two scores noted. Table 1 presents the 18 dimensions.4

Bloom et al. (2007) aggregate the 18 individual management practice scores into the MPS, with a proviso that some of the practices included may not necessarily be ‘best practice’ for ‘all’ firms given the context-dependent nature of management. The MPS aggregated score is calculated by averaging across the 18 dimensions and a management score was also calculated across the three dimensions of operations, performance and people manage- ment comprising of seven, five and six manage- ment dimensions respectively (see Bloom & Van Reenen, 2007). These 18 practices are argued to be on average better for manufacturing firms, as opposed to being highly situational. Bloom et al. (2007) classify these management practices as ‘better’ or ‘worse’, as well as assume that the effects of individual management practices are additive, consistent with the approach of earlier studies (e.g., MacDuffie, 1995).

It is beyond the scope of this chapter to review all the literature that contributed to the selection of each of the 18 MPS dimensions; however we do present some key findings. In the field of ‘opera- tions management’, best practices include reduc- tion in waste, increasing efficiency and helping improving substantially the quality of production (Holweg, 2007; Krafcik, 1988). According to the strategy literature, performance management prac- tices include measuring goals and setting targets such as the balanced scorecard (Kaplan & Norton, 1996), the performance prism method (Neely et al., 2003) and the key performance indicators method (Parmenter, 2007). These best practice dimensions not only include setting goals and targets, but also formulating and implementing strategy to effec- tively integrate strategic objectives and operational

practices (Morita et al., 2011; Pinheiro de Lima et al., 2009) and seeking continuous improvement and change management in organisations (Pinheiro de Lima et al., 2013). The human resource litera- ture focuses on the acquisition and development of human capital, workplace practices such as benchmarking, recruitment strategies, the extent of employee participation in decision making, and the role of employee performance in mediating the relationship between quality management practices and firm performance (Sadikoglu & Ze- hir, 2010; Huselid, 1995; Ichniowski et al., 1997; Black & Lynch 2001). For this study best practice in ‘people management’ focuses on identifying, attracting, and rewarding high performers, while addressing the shortcomings of poor performers. For a more comprehensive discussion of the root literature on management practices see Bloom & Van Reneen (2007) and Bloom, Genakos, Sadun & Van Reenen (2012).

There is considerable debate in the extant lit- erature as to the reasons and effects of the adoption of best management practices, and therefore the validity of the WMS dataset has been subject to evaluation. Numerous studies have revealed that there is an association between the MPS and firm level measures of performance and productivity (see for example: Bloom & Van Reenen, 2007; Bloom & Van Reenen, 2010; Agarwal et. al., 2013; Green et al. 2009), which provides a level of validity. In addition, prior research has found that the MPS is associated with a range of firm specific factors, such as the level of education of managers and employees, firm size and owner- ship structures (e.g. Bloom & Van Reenen, 2007; Agarwal et. al., 2013). Further, the research has shown that there is variation between sample firms in different economies, with more developed economies generally having better management practices. In summary, the WMS stream of re- search demonstrates that firms that have higher MPS generally have higher levels of productivity and/or performance and there is significant varia- tion between countries.

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Table 1. Management practices scoring dimensions (Source: Green, R., Agarwal, R., Van Reenen, J., Bloom, N., Randhawa, K., Brown, P. J. & Hao, T. 2010, Management Matters – How does manufactur- ing measure up?” Report for the Ministry of Economic Development, New Zealand)

Operations Management

Adoption of Lean Manufacturing Best practice: All major aspects of Lean have been implemented Worst practice: Other than just-in-time, no other aspects of Lean have been introduced

Rationale for the adoption Best practice: Lean was introduced to meet business objectives Worst practice: Lean was introduced to catch up to competitors

Process problem documentation Best practice: Exposing problems is integral to individuals’ responsibilities rather than ad hoc solutions Worst practice: No process improvements are made when problems occur

Operations Performance tracking Best practice: Performance is continuously tracked and communicated to all staff using a range of visual tools Worst practice: Tracking is ad hoc, and measures being tracked do not indicate directly if overall business objectives are being met

Operations Performance review Best practice: Performance is continuously reviewed, based on indicators tracked; follow-up ensures continuous improvement Worst practice: Performance is reviewed infrequently and only success or failure is noted

Operations Performance dialogue Best practice: Regular performance conversations focus on addressing root causes. Purpose, agenda, and follow-up steps are clear to all Worst practice: Relevant data are often not present at meetings or discussion is based on data that is not meaningful. Agenda and purpose are not clear

Consequence management Best practice: Failure to achieve agreed targets drives retraining or moving individuals around. Worst practice: Failure to achieve agreed targets does not carry any consequences

Performance Management

Types of goals Best practice: Goals are a balance of financial and non-financial goals Worst practice: Goals are exclusively financial or operational

Interconnection of goals Best practice: Corporate goals increase in specificity as they cascade through the business units Worst practice: Individual workers are not aware of how their contribution is linked to corporate goals

Time horizon Best practice: Short-term goals are set so that they become a staircase to reach the long-term goals Worst practice: Top management’s main focus is on short term goals

Setting stretch goals Best practice: Goals are demanding for all divisions, and are grounded in solid economic rationale Worst practice: Goals are either too easy or impossible to achieve

Clarity of goals Best practice: Performance measures are well defined and well communicated; worker performance is made public to induce competition Worst practice: Performance measures are complex and not clearly understood; worker performance is not made public

People Management

Instilling a talent mindset Best practice: Senior managers are evaluated and held accountable on the strength of the talent pool they actively build Worst practice: Senior management do not communicate that attracting, retaining, and developing talent is a top priority

Rewarding top performance Best practice: The firm provides ambitious stretch targets with clear performance related accountability and rewards Worst practice: People within the firm are rewarded equally irrespective of performance level

continued on following page

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AGGREGATE MANAGEMENT PRACTICES AND HIGH VERSUS LOW LABOUR COSTS ECONOMIES

Given that firms which score higher on MPS tend to have higher labour productivity, it would seem logical that firms with higher labour costs would have an incentive to introduce better management practices when faced with competition from low labour cost economies. To allow for differences in management practice choices to be identified, we have chosen eight economies which differ in cost structure and MPS. The countries comprising the ‘high cost’ economies in our sample include Japan, Sweden and the United States, as well as Australia and New Zealand, while the ‘low cost’ countries include China, India and Brazil.

Figure 1 presents a plot of the MPS on average manufacturing wages for our sample of countries. Australia is clearly in the higher cost group of na- tions, whilst New Zealand is also a relatively high cost country. The New Zealand overall manage- ment performance score falls somewhere between the high and low management performance scores for the eight countries under consideration. Al- though it is beyond the scope of this chapter to rigorously test for the association, our figure sug-

gests that management practices could be jointly determined with respect to relative labour rates, despite the small sample size.

To elaborate on the importance of labour rates with respect to investment into better management, consider the following thought experiment. Suppose two firms, both of which supply a similar product, where one pays an average wage of $3 per hour, and the other pays $30 per hour. If they have similar production technology, the employees being paid $3 per hour could take 10 times as long to complete the same work as the firm paying $30 per hour; with no loss in relative competitiveness. It would appear that the $30 per hour firm would benefit more from the implementation of management practices to boost productivity, relative to the other firm, in part because their survival is at stake. In addition, the high labour cost firm has an incentive to invest in technology to boost labour productivity, exit the market, or move production to a low labour cost jurisdiction. This thought experiment illustrates the idea that in international markets, differences in labour cost are likely to influence management practice choices. What is not clear from the lit- erature is what specific management practices are chosen by firms operating in economies faced by different labour cost.

Table 1. Continued

People Management

Addressing poor performance Best practice: Poor performers are moved to less critical roles or out of the company as soon as weaknesses are identified Worst practice: Poor performers are rarely removed from their positions

Promoting high performers Best practice: Top performers are actively identified, developed, and promoted Worst practice: People are promoted primarily upon the basis of tenure

Attracting high performers Best practice: The firm provides a unique value proposition to encourage talented people to join the company instead of the competitors Worst practice: Competitors offer stronger reasons for talented people to join their companies

Retaining high performers Best practice: Managers do whatever it takes to retain top talent Worst practice: Managers do little to try and keep the top talent

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STRUCTURAL, INSTITUTIONAL AND ECONOMIC FACTORS INFLUENCING MANAGEMENT PRACTICES

The countries illustrated in Figure 1 imply that structural, institutional and economic factors impact on the nature of management practices. The groupings of countries into high-cost/high- performing and low-cost/low-performing also sug- gest that there is a degree of similarity in individual management practices within each of the groups. Australia and New Zealand are shown (see Figure 1) to sit between these two clusters of countries, indicating they may share similar management practices. In this section we will review various structural, institutional and economic factors that probably contribute to the divergent management practices illustrated in Figure 1. Table 2 provides a ranking of countries according to a number of broad areas designated as pillars, namely higher

education and training, labour market efficiency, technological readiness, business sophistication and innovation.

From Table 2, the United States and Sweden rank highly across each of the pillars with all but one ranking in the top 10. That said, incongruously Sweden and Japan ranked relatively low in pillar 7 [Labour Market Efficiency] when compared to the United States. Japan performed relatively well on pillars 7, 11 and 12 [Labour Market Efficiency, Business Sophistication and Innovation] but rela- tively lower in pillars 5 and 9 [Higher Education and Training and Technological Readiness].

The low MPS group countries in Table 2 per- form much worse across each of the five pillars listed in Table 2. Interestingly there is a range of variations in the rankings across these three countries. India performs poorly on pillars 5, 7 and 9 [Higher Education and Training, Labour Market Efficiency and Technological Readiness]

Figure 1. Plot of average hourly wage for manufacturing workers on management practices score. (Source: Labour rate data is the average hourly rate for manufacturing workers in 2009, from the US Bureau of Labor Statistics [http://www.bls.gov/fls/ichccindustry.htm]; Source: MPS scores are sourced World Management Survey dataset [http://worldmanagementsurvey.org/?page_id=183])

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when compared to China and Brazil. On the other hand, India is significantly ahead of China and Brazil on pillar 11 [Business sophistication] and better than Brazil on pillar 12 [Innovation], but slightly behind China. When we consider China we find that it performs better than India in four of the five pillars, the exception being the pillar

on innovation. China’s performance however is only marginally better than Brazil on pillars 5 and 11 [Higher Education and Training and Business Sophistication].

In Table 3 we report the performance of each country on a sub-set of dimensions constituting the pillars listed in Table 2. This more disaggregated

WEF Pillars: Country (2009-10)

Pillar 5: Higher Education

and Training

Pillar 7: Labour Market

Efficiency

Pillar 9: Technological

Readiness

Pillar 11: Business

Sophistication

Pillar 12: Innovation

Australia 14 9 20 26 20

New Zealand 11 11 23 34 23

High MPS

United States 7 3 13 5 1

Sweden 3 19 1 4 5

Japan 23 12 25 1 4

Low MPS

India 66 83 83 27 30

China 61 32 79 38 26

Brazil 58 80 46 32 43

WEF: Sub-

Categories By Country

5.02 Tertiary Enrollment

5.08 Extent of Staff

Training

7.04 Hiring and Firing Practices

9.02 Firm-Level Technology Absorption

11.07 Production Process

Sophistication

11.09 Willingness to Delegate Authority

12.01 Capacity for Innovation

Australia 13 18 62 16 23 13 26

NZ 8 20 90 18 25 9 24

High MPS

US 6 8 8 5 8 5 6

Sweden 12 1 102 6 4 1 4

Japan 32 5 116 2 1 16 1

Low MPS

India 100 34 103 30 43 36 35

China 80 50 77 47 50 65 22

Brazil 73 52 118 36 31 40 28

Note: ranking from a total of 133 countries

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information provides some interesting compari- sons across each of these countries. A glance at the rankings across each of these dimensions for the high MPS countries with those of the low MPS countries would suggest why the MPS between the two groups is so different.

The United States has an excellent university system that collaborates with business in R&D (Global Competiveness Report 2013-14), unlike the experiences in some sectors in China, India and Brazil. When we consider tertiary enrolments for the United States and compare this to the low MPS group of countries we find the gap to be substantial. While the United States ranks in the top 10 on student enrolments, China, India and Brazil rank 80, 100 and 73 respectively. When we consider the extent of staff training, we find that the high MPS countries fall within the top 10 group of countries in developing capabilities of their workers, which is still significantly different to the performance of the low MPS countries. It is interesting to note that the low tertiary enrolments in the low MPS countries may be compensating for low tertiary enrolments (and hence graduates) by more extensive in-house staff training.

For “hiring and firing practices” it is interest- ing to note that the high ranking countries such as Sweden and Japan rank very low in this area – in the same vicinity as India and Brazil. It is also interesting to note that China ranks higher than New Zealand, Sweden and Japan on this metric. Another unique point is that Japan and India have relatively low participation rates of females in the workforce (Global Competiveness Report 2013- 14). This could point to a correlation, albeit weak, that female labour is not culturally embedded in the labour force of these countries.

AUSTRALIA AND NEW ZEALAND MANUFACTURING FIRMS

The manufacturing sectors in Australia and New Zealand operate in a relatively high cost environment. Both countries are considered

relatively high-taxing and regulated countries with high labour cost, which the business com- munity often cites as being problematic for doing business (Economist Intelligence Unit, 2013). In Figure 2 we plot the manufacturing sector wage rate (index) from 2001 to 2012. Over this period the wage rate in Australia’s manufacturing sector increased by approximately 50%, which was higher in dollar terms than for most other Australian industries. The manufacturing wage rate in New Zealand also grew over this period but at a much slower pace - just over 30% for the period 2001 to 2012.

A productivity slowdown in Australia has been obscured by windfall gains from a commodity boom. Over the last 10 years, Australia has lost over 100,000 manufacturing jobs with the excep- tion of the period 1991-1996 which was evidenced by growth in employment (Green & Roos, 2012). New Zealand’s manufacturing industry is facing a crisis with the trend in manufacturing volumes declining since the latter half of 2007: it shed 40,000 jobs between 2008-09 and June 2012 (NZ House of Representatives, 2013). A recent inquiry by the NZ House of representatives, titled “Manufacturing: The New Consensus - A Blue- print for Better Jobs and Higher Wages” (June 2013) sets out a path for policy change to correct imbalances and barriers affecting manufacturers in New Zealand. Cost reductions alone however will not create the competitive advantage the in- dustry is in need of. Reductions in costs through efficiencies and innovative practice will produce the long term benefits for the sector, and govern- ment participation to help foster such practices is heavily warranted.

When we compare Australia and New Zea- land’s performance across each of the pillars in Table 2 we find some interesting similarities and differences with the high and low MPS group of countries. We find that Australia and New Zealand perform comparatively well with the high MPS countries on pillars 5 and 7 [Higher Education and Training and Labour Market Ef- ficiency] however on pillars 11 and 12 [Business

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Sophistication and Innovation], Australia and New Zealand’s performance is comparable to that of the low MPS countries and significantly below the performances of the high MPS countries. This suggests that Australia and New Zealand lack the business sophistication and innovative practices which are prudent for firms competing in high labour cost contexts.

Table 3 provides some further granular data for Australia and New Zealand’s performance in Table 2. We observe that Australia and New Zealand’s performance in tertiary enrolments is comparable to the high MPS countries and significantly better than the low MPS countries, while on the other hand their performance on the extent of staff training is not so good. Although the extent of staff training is better than in the low MPS countries, Australia and New Zealand’s performance is certainly lagging behind the high MPS countries. What is interesting however is the

fact that both Australia and New Zealand perform on average better on hiring and firing practices (with the exception of the United States) than both the low and high MPS countries. On the other dimensions [firm level technology absorption, production process sophistication and willing- ness to delegate authority] both Australia and New Zealand perform between the low and high MPS countries.

The use of this data illustrates that no individual country has exemplary performance across all areas and the results are derived from a complex set of cultural, economic and other conditions that show up in the various measures of manage- ment practices across these countries. Critically for Australia and New Zealand, capacity for in- novation is considered on par to the low labour cost countries. This does not bode well for these manufacturing sectors, which may find themselves unable to compete effectively in the future.

Figure 2. Wage rate index: Manufacturing sector. (Source: DX Database (Australia: Total hourly rate: excluding bonuses: Private: C: Manufacturing: index; New Zealand: Salary & Ordinary Time Wage Rates: Private: C Manufacturing: index)

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MANAGEMENT PERFORMANCE IN THE MANUFACTURING SECTOR

High vs. Low Costs Economies

To evaluate Australia and New Zealand’s manage- ment performance in the manufacturing sector we benchmark against two groups of countries that we have identified as either high cost or low cost. More recently, Roos (2012) when examining the Australian economy defined high and low cost economies as follows:

“In a low-cost operating environment the primary basis for competitive success is low cost and the key basis for competitive advantage is ef- ficiency and access to inputs for which there exist a comparative advantage. In a high-cost environ- ment the primary basis for competitive success is value for money arrived at through competitive advantages grounded in constant innovation ap- proached in an integrated way” (p.9).

Further Roos (2012) suggests that “a high cost operating environment requires high man- agement capability whereas a low cost operating environment is not equally demanding” (p. 6), implying that management practices are very important. The analysis in Section 3 is consistent with Roos (2012) that high labour cost countries have higher performance in education, innovation capability, management practices, and business sophistication.

The 18 Dimensions of Management Practices Scores: Comparing MPS of High Cost Nations with Low Cost Nations

In Figure 3 we plot the 18 dimensions of manage- ment practice scores for the three high cost and three low cost countries in our sample. Each of the 18 management practice scores for the high cost countries are found to be significantly different (at the 1% level) to each of the 18 corresponding

management practice scores for the low cost coun- tries. For our sample the US, Sweden and Japan are used as high cost countries, and India, China and Brazil as low cost nations. Table 4 provides the MPS score averaged across the three high and three low cost nations as well as the average management performance score for the three broad areas of management: operations, performance and people management. The largest performance measurement gap between the high and low cost economies is in operations management while the smallest gap is in people management.

The country specific factors include the stage of economic development; the relative labour- capital intensity in manufacturing production: and the various structural and policy profiles in each country. Together they appear to play a notable part in explaining the difference in management performance as evident in Figure 3. The average management practices score across each of the 18 dimensions for the three high cost and three low cost countries is represented in Figure 3. What is notable in Figure 3 is the similarity of scores across the various dimensions of people management compared to the various dimensions defining operations management and performance management across the two clusters of countries.

From Figure 3, it is evident that the average management practice score for the high cost countries (shown in blue) is consistently above the management practices score for the low cost countries (shown in red), although the difference in scores on people management is relatively small compared to operations and performance manage- ment. Also, the average management practices score for the high cost countries is found to be statistically different (indicated by ***) to the average management practices score for the low cost countries across each of the 18 dimensions.

The largest of differences in the management performance scores between the high cost and low cost countries include the following dimensions. In each of these cases the manufacturing firms in

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the high cost economies have scored 3 or more in each of the dimensions while the manufactur- ing firms in the low cost economies have scored less than 3.

• Adoption and Rationale for Adoption of Lean: Manufacturing firms in high cost economies have implemented various as- pects of Lean whereas manufacturing firms in the low cost economies have under in- vested in lean approaches. This is consis- tent with higher labour cost causing firms to counteract these costs with investment in technolgy and better management.

• Time Horizon: Senior management of manufacturing firms in low cost econo- mies appear to have a short term perspec- tive in their planning horizon whereas se- nior management of manufacturing firms in high cost economies have a more longer term perspective when planning their short run strategies. This may be in part due to high labour cost firms having to invest in costly technology, human resources, and management practices, and hence bearing relatively more risk than low cost firms. Such high labour cost firms would have an incentive to plan and consider longer term objectives.

• Types of Goals: Manufacturing firms in low cost economies appear to focus heav- ily on financial performance whereas man- ufacturing firms in the high cost economies tend to demonstrate a balance of effort on both financial and non-financial goals. Non-financial indicators of performance can give a more accurate assessment of fu- ture performance (focus on lead indicators of performance), as compared to financial information (often lag indicators of per- formance) (Kaplan & Norton, 1996). The focus on financial and non-financial per- formance by high labour cost economies is consistent with these firms adopting a longer term focus, suggesting complemen- tary management practices. In addition it is common to adopt non-financial goals to boost labour productivity as they can be more inspiring and challenging than finan- cials alone.

• Process Problem Documentation: The results suggest that employees and man- agement in manufacturing firms in high cost economies tends to demonstrate a degree of responsibility for exposing and addressing problems while individuals em- ployed in manufacturing firms in the rela- tively low cost economies tend not to fol- low process to the same extent.

The management performance scores of the high cost and low cost countries where the dif- ference is relatively small include the following dimensions:

• Addressing Poor Performance: in both cases, for the average firm poor performers often stay in their current position for sev- eral years, and are not typically removed from their positions in a best practice manner.

• Clarity of Goals: Although many firms have well defined communicated perfor-

Table 4. Management practice score: Comparing high and low cost countries.

Ave (SW+JP+US)

Ave(CH+IN+BR)

Management Practices Overall Score

3.23 2.66

Operations Management

3.47 2.82

Performance Management

3.24 2.64

People Management 2.95 2.61

Notes: SW – Sweden; JP – Japan; US – United States; CH – China; IN – India; BR – Brazil

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mance measures, for most firms they are rather complex and not clearly understood. In only a minority of firms are individual performance measures transparent.

• Rewarding Top Performance: Individuals within many manufacturing firms are typi- cally rewarded equally irrespective of in- dividual performance levels. Relatively few firms provide stretch targets and clear performance-related accountability and rewards.

• Retaining High Performers: Managers typically do little to try and keep the top talent although manufacturing firms in low cost economies tend to under-perform on this metric compared to the manufacturing firms in the high cost economies.

Comparing MPS Scores of High Cost and Low Cost Nations with Australia and New Zealand

Table 5 provides the MPS score averaged across Australia and New Zealand as well as the average management performance score for the three broad areas of management – operations, performance and people management. As evident, the perfor- mance measurement gap between Australia and New Zealand is not so large, and the maximum gap is in people management while the smallest gap is in performance management.

The average MPS across each of the 18 dimen- sions for Australia compared with the three high cost and three low cost countries is represented in Figure 4 (Note: values in parenthesis are p-values. The first p-value evaluates how significantly dif- ferent each of Australia’s 18 dimensions are to the group of high cost countries while the second p- value evaluates how significant the dimensions are to the group of low cost countries), and in Figure 5 a similar comparison in made for New Zealand.

As evident from Figure 4, the average MPS for Australia (shown in green) is consistently below the management practices score for the high-cost/high-performing countries and found to be statistically significant. The two dimensions which Australia scores higher (clarity of goals and rewarding top performance), are found not to be statistically different in any case. Australia performs equally well on the dimensions of man- agement practice relating to lean manufacturing (adoption of lean manufacturing and rational for adoption) when compared with the high-cost/ high-performing countries. Despite being a high labour cost country, there are three dimensions (instilling a talent mindset, addressing poor per- formance and retaining high performance) where Australia’s performance in is not different to the low-cost/low-performing countries.

Figure 5 (Note: values in parenthesis are p-val- ues. The first p-value evaluates how significantly different each of New Zealand’s 18 dimensions are to the group of high cost countries while the second p-value evaluates how significant the di- mensions are to the group of low cost countries) shows the average MPS for New Zealand (shown in green) is consistently below the management practices score for the high-cost/high-performing countries and is also found to be statistically dif- ferent. There is one dimension of MPS where New Zealand scores higher (clarity of goals), which is found not to be statistically different in any case. Importantly, New Zealand scores below the low-

Table 5. Management practice score: Comparing Australia and New Zealand.

Australia New Zealand

Management Practices Overall Score

3.02 2.93

Operations Management 3.26 3.17

Performance Management 3 2.96

People Management 2.75 2.62

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cost/low-performing countries in two dimensions (addressing poor performance and retaining high performance); where in each case the score is found to be significantly lower for New Zealand. For ‘rewarding top performance’, New Zealand scores on par with the low-cost/low performing countries. New Zealand performs equally well on the dimensions of management practice relating to lean manufacturing (adoption of lean manufactur- ing and rational for adoption) when compared with the high-cost/high-performing countries. This is the same result found for Australia.

Comparing MPS of Australia with New Zealand

Australia and New Zealand are both remotely located nations when compared with the geo- graphical positioning and access to markets of other nations under consideration. Management practice performance of New Zealand manufac- turing firms is ranked lower than Australia in all management areas (Green et al, 2010). However, based on this analysis, the scores of New Zealand and Australia are on statistical parity with each other in the areas of overall management, opera- tions management and performance management. New Zealand performs statistically worse than Australia in people management, an area where there is significant scope for improvement. Figure 6 compares the MPS results for both Australia and New Zealand and against each of the 18 di- mensions listed we report the p-value evaluating whether the performance management scores are significantly different from each other. Seven of the eighteen dimensions are found to be statisti- cally significantly different between Australia and New Zealand and for each except one (instilling a talent mindset) Australian manufacturing firms perform better than New Zealand manufacturing

firms. Both Australian and New Zealand firms are relatively more operations-oriented than people-oriented, confirming that there is scope for improvement in the area of people management.

CONCLUSION

This chapter highlights the similarities and dif- ferences in management practices adopted by manufacturing firms in low versus high labour cost economies. Our approach allows us to focus on identifying weaknesses and strengths of varied management skills and capabilities across econo- mies. Specifically, this chapter compares Australia and New Zealand’s manufacturing management practices with those of manufacturing firms in high and low labour cost economies, namely two groups: US, Japan and Sweden, and India, China and Brazil. Our findings suggest that the high cost countries have typically a higher average management practices score (i.e. high-cost/high- performing) while the low labour cost countries tend to have a lower management practices score (low-cost/low-performing), and that both Australia and New Zealand sit on the continuum between these two country groupings. Based on this analy- sis, the findings reveal that the management prac- tices of manufacturing firms differ significantly between high and low cost countries and this is primarily driven by differences in the operations and performance management strategies, and less disparate across people management practices. On comparing Australia and New Zealand manufac- turing firms with the two country groupings we find that there are similarities, which suggests that to be globally competitive, Australian and New Zealand manufacturing firms may benefit from lifting their game in the areas of performance and people management. Our findings are consistent

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with the argument that structural, institutional and economic factors do have an influence on the management strategies of manufacturing firms.

Our chapter contributes to the management practices literature by providing evidence of the different management strategies adopted by firms in high versus low labour cost economies, and by exploring a number of feasible reasons for the observed differences. In particular, firms operat- ing in low labour cost economies can consider adopting the strategies of firms in high labour cost to leverage labour, and hence potentially gain an advantage over domestic competitors.

There are also a number of policy implications for Australia and New Zealand. The presence of strict regulation around labour laws allows re- gional competitors such as India and China more competitive advantage in terms of labour costs, forcing Australian and New Zealand firms to adopt management and innovative practices to boost their productivity to remain competitive. They also face other disadvantages. Firstly, both these economies are small relative to other nations under consideration, making economies of scale much more difficult to achieve when catering for local demand. Second, due to geographic isolation there is more costly access to large markets. With this backdrop, this chapter makes a significant policy contribution and suggests that trying to compete on labour cost alone is a dubious strategy. In this context our findings endorse the internally focused policy measures as affirmed by Roos (2012) and Green et al (2012) and that the key strength of both Australia and New Zealand lies in significant enhancement of their firm’s innovative practices and management capability, which are deemed a necessary condition for reinvigorating productiv- ity, competitiveness and long-term growth.

ACKNOWLEDGMENT

We would like to thank Dr Alexandria Pitsis for her research assistance in developing this book chapter.

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ENDNOTES

1 Further, there is a large literature which ar- gues that cultural settings have an influence on what management practices are chosen and/or acceptable in different cultural set- tings (see for example Hofstede (1991) and Chiang & Birtch, (2005,2006)). Hence, the

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interpretation of the possible influence of various management practices on produc- tivity may be different between economies. It is beyond the scope of this chapter to adequately do justice to this literature, and hence we note that our sample firms are from economies with varied cultural settings.

2 In most instances, we use the term ‘better’, rather than ‘best’. For a review of the best manufacturing practices research, see Lau- gen et al. (2006). For impacts of national cultures on manufacturing practices, see Wiengarten et al. (2011). For research of ‘best practices’ in related areas such as human

resource management, see Delery & Doty (1996) and Geringer, Frayne & Milliman (2002).

3 The research method used in the World Management Survey has been approved by the various research ethics committees from the institutions where the research was conducted.

4 For information on the scoring grid, see Bloom and Van Reenen (2007) or http:// worldmanagementsurvey.org/ (URL: http:// worldmanagementsurvey.org/wp-content/ images/2010/09/Manufacturing-Survey- Instrument.pdf).

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Chapter 12

Supporting Entrepreneurship in High Cost Economies:

What Can Governments Do?

ABSTRACT

This chapter sets out the findings of a comprehensive literature review that addressed three objectives: to review internationally recognised and accepted methodologies of entrepreneurial human and firm characteristics data collection and analysis; to formulate the contemporary view and latest research on entrepreneurial characteristics and how these characteristics contribute to a model of entrepreneurial firm behaviour; to examine developments in the literature that explain to what extent human characteristics influence and predict the performance of firms. The implications of this work are that firms with high potential in either innovation or market-based growth opportunities need to have the right environmental settings in terms of social, political, regulatory, economics, and technology for firms with a high suc- cess potential to realise this potential. The concept of stage progression and the relationship between the characteristics of the individual, the firm, and the opportunity provide the elements of a framework through which to consider government support programs and interventions.

INTRODUCTION

In the context of economic development for regions, entrepreneurship displays a ‘U’ shaped relationship with the increase of wealth within nations (Kelley, Bosma & Amorós, 2010). Poorer nations experience higher entrepreneurship activ- ity as measured by the rate of early-stage new

venture start-up activity. This occurs as people who have no better means of earning an income start businesses to feed themselves and their families. These are commonly referred to as necessity en- trepreneurs. As a nation advances and scale-based firms become more prevalent, much of the pressure on unemployment is reduced and more people find jobs as the industrial sectors of an economy

Allan O’Connor University of Adelaide, Australia

Graciela Corral de Zubielqui University of Adelaide, Australia

Mushui Huanmei Li University of Adelaide, Australia

Manjula Dissanayake University of Adelaide, Australia

DOI: 10.4018/978-1-4666-5828-8.ch012

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become more pervasive and established. During this period the rate of entrepreneurship generally declines. As wealth continues to accumulate in a country, inevitably capital seeks lower cost wage economies for the scale-based firms that once had an advantage. In this phase of development entrepreneurship again increases as the basis of the economy transitions toward a knowledge- based economy that features firms with smaller workforces are more automated and more active within global supply chains.

Under these circumstances entrepreneurship in high-cost economies plays an important role in re-focusing an economy as it transitions from scale-based production centred firms to smaller, flexible and globally connected knowledge- based businesses. Equipping a population with the skills for this transition is a critical role of government. This chapter sets out the findings of a comprehensive literature review that addressed three objectives:

• To review internationally recognised and accepted methodologies for data collection and analysis of entrepreneurial human and firm characteristics.

• To formulate the contemporary view and latest research on entrepreneurial charac- teristics and how these characteristics con- tribute to a model of entrepreneurial firm behaviour.

• To examine developments in the literature that explain to what extent human charac- teristics influence and predict the perfor- mance of firms.

The authors argue that there are various economic perspectives and understandings of entrepreneurship and that its relationship to eco- nomic outcomes varies dependent upon which perspective is adopted. Regardless, particularly in more economically advanced economies, entrepre- neurship is increasingly becoming accepted and

adopted by governments as a means to stimulate fundamental development and growth within an economy.

This chapter also acknowledges the differences between entrepreneurship research agendas and foci. Therefore this chapter not only considers frameworks created for developed countries but also frameworks created for developing countries. It explores the individual characteristics of entre- preneurs and the characteristics of their ventures at various stages of development and growth. Entrepreneurship is not completely separate from its environment and policymakers also need to assess the environment to create conditions that stimulate and support entrepreneurs. Although national entrepreneurial frameworks have been created for different purposes, they represent a broad picture of instruments used internationally for assessing entrepreneurial activities. Analysing the entrepreneur’s external environment is very useful in recognizing the opportunities and threats for developing and sustaining an entrepreneurial ecosystem.

The review of the macro level analysis of frameworks suggests that there are four main concerns highlighted by international measures of entrepreneurship. These are the leading indicators that highlight the prevalence of human attitude and aspirations for entrepreneurship; the operational indicators that consider the framework conditions (social, political, regulatory, technology and eco- nomic), levels of activity, the barriers and ease of entrepreneurship within an economic region; the lagging measures that isolate performance and impact; and lastly the government pro-activeness indicators that reveal the extent to which a govern- ment supports entrepreneurship through policy, programs and infrastructure. These are summa- rized in Table 1.

The review of the individual and firm level literature reveals both consistent and inconsis- tent findings with respect to the contribution of individuals toward firm level outcomes. Entrepre-

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neurship research is still in relatively early stages with respect to uncovering the causal relationships between individuals, firms and the socioeconomic performances of any specific economic boundary.

Although there are varied conceptualizations about the stages of development of a firm, the researchers adopted an approach that considered three phases that were representative and relevant to the research objectives. In particular, firms will only be started if there are individuals actively engaged in exploring ideas and opportunities that form the foundations of new firms. This stage of activity is undertaken by nascent entrepreneurs, those who are involved in activities of becoming an entrepreneur. Assuming nascent entrepreneurs identify with an opportunity and judge sufficient benefit in pursing it through to business formation, the priority of the subsequent stage is survival of the new business. Those individuals who man- age to sustain the business through this stage may either choose to plateau or leverage the firm into further growth following product, service or market development opportunities. Alternatively, some entrepreneurs may choose either volun- tarily or, through unfavourable circumstances, to withdraw from the business. Hence, in order for entrepreneurship to deliver significant benefits to an economy, government assistance should consider strategies that identify firms with growth ambitions and provide support and the removal of barriers for entrepreneurs as they progress through

the stages of nascence, survival and growth, as is necessary for promising new business ventures.

Entrepreneurship is not solely concerned with individuals. Equally, significant research focus is placed on entrepreneurial firms. The survival and growth of a firm is unquestionably linked to the capabilities and attributes of the entrepreneur and their start-up team. Further, the way the firm evolves through entrepreneurial management capabilities and maintains an entrepreneurial orientation toward the market and opportunities will dictate the ongoing march toward success. Adopting a firm level unit of analysis, by defini- tion, implies a limit to this research to the factors that contribute to progressions through the stages of survival and growth as nascent firms tend to be indistinguishable from the characteristics of the nascent entrepreneur. However, any firm is commenced on the perception of some sort of opportunity regardless of the motivations of the nascent entrepreneur. Therefore, in this chapter, the proxy for the firm at the nascent stage is the particular opportunity that the entrepreneur is actively pursuing.

For the success of a firm, there are many factors that are outside of the control of the entrepreneur that need to be considered. Some of these factors relate specifically to the nature of the opportunity being followed and the demand, acceptance and uptake of the product/service by a sufficiently large group of customers with a requisite level of innovation, uniqueness and differentiation. Extending this further, the particular location and context of the venture may equally be responsible for the venture’s success or otherwise. The extent to which the context is supportive or hostile in terms of the market, industry and general social, political, economic, regulatory or technological environment can play a major role in determin- ing whether a firm progresses through stages and emerges as a successful venture or not. Related to this is the access to the particular tangible and intangible resources that are important for the

Table 1. Macro indicators of entrepreneurship

Leading Operational Lagging Government Pro-

Activeness

Entrepreneurial Population: Behaviours, attitudes & aspirations etc.

Framework conditions: Social, political, regulatory, technology and economic.

Firm performance and impact measures.

Supporting policy, programs and infrastructure.

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venture, whether that be human resources, in terms of labour, knowledge and skills; financial capital; technology or a particular infrastructure. Ultimately success is attained through manage- ment of the opportunity and the ability of the team to identify or create feasible opportunities that can be transformed into feasible and sustainable business models.

The implications to be drawn from this work for government is that firms with high potential in either innovation or market based growth op- portunities need to have the right environmental settings in terms of social, political, regulatory, economics and technology for the firms that are pre-disposed for success to flourish. Firms located in different sectors and for that matter industries will have different performance drivers. Some firms will need particular attention in terms of support and interventions that assist them to over- come obstacles and constraints to achieve growth outcomes. However, many small and medium firms have low or no growth ambitions and need little intervention from this perspective except the maintenance of stability in the economic and political environment. The major challenge is to find the ways and means of helping the firms that want and need assistance while leaving the firms that don’t alone. The concept of stage progression and the relationship between the characteristics of the individual, the firm and the opportunity provides the elements of a framework through which to consider government support programs and interventions.

This chapter is assembled and presented as follows. First, an introduction that explains the economic contexts, theories and background to entrepreneurship is contained in Section 2. It is apparent from this discussion that no one concep- tion of economic theory has the power to explain entrepreneurship in its entirety and therefore a composite model of entrepreneurship becomes

necessary and a matrix approach is detailed that connects the macroeconomic theories of entrepre- neurship with the individual behavioural levels.

Section 3 explains common terminology and concepts within entrepreneurship theory providing the reader with a useful reference and explanation of the recurring key terms and themes that will be encountered throughout the chapter.

Section 4 explores the three current widely accepted methodologies for measuring and monitoring entrepreneurship at a national and/or regional level. Each methodology has strengths but also weaknesses. These are discussed in the contexts of the presentation of reviews of the literature in the following two sections, Section 5 on individual level characteristics and Section 6 on firm level characteristics.

The conclusion discusses the current status of methodologies and the use of established instru- ments that provide potential for use in government monitoring of and filtering for support initiatives.

ECONOMICS AND ENTREPRENEURSHIP

Entrepreneurship is a complex phenomenon which is evidenced by the number of disciplines that have contributed and at times converged in attempts to explain it. Hart (2003), while noting the absence of the political sciences in entrepreneurship research, suggests that economics, geography, manage- ment, psychology and sociology are the primary areas producing research in the field. Similarly, Audretsch (2004) claimed that ‘entrepreneurship does not correspond nicely with any established academic discipline…’ (p. 167) while Davids- son (2003) referred to the diversity of interest in entrepreneurship as a ‘societal phenomenon’. Barreto (1989) conducted a thorough review of the concepts of the entrepreneur and economic

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theory and concluded that ‘entrepreneurship is above ‘formalization’’, also noting that ‘it cannot be neatly packaged within a mechanistic, deter- ministic model’ (p. 141).

Entrepreneurship which is carried on in the pursuit of business opportunities has been ac- tively sought after as one of the major engines for economic development, innovation, job creation, new start-ups and existing business growth by many governments and has been examined by many researchers. The research perspectives of entrepreneurship vary from individual, organisa- tion to environment and these perspectives are accompanied by various definitions of entrepre- neurship that include new material combinations (Schumpeter, 1934), new entries (Lumpkin, GT & Dess, 1996), creation of organisations (Gartner, 1988) and the process of pursuing opportunities (Shane, S & Venkataraman, 2000; Stevenson & Jarillo, 1990).

Entrepreneurship as a process involves the identification, evaluation, and exploitation of opportunities (Shane & Venkataraman, 2000; Teece, 2007) and this process has sub- processes (Shane, 2012). Opportunities, being different from business ideas, are widely considered as objective phenomena (Eckhardt & Shane, 2003; Shane, S, 2012), however the ideas, behaviours and strategies to identify, evaluate and exploit these opportunities are subjective phenomena. An entrepreneurial opportunity does not have to be new in every sense of the word; however a commonly accepted view is that the pursuit of entrepreneurial opportunity requires a recombina- tion of resources (Shane & Venkataraman, 2000), therefore entrepreneurship is also said to be the process of resource recombination (Lumpkin & Dess, 1996).

The outcomes of entrepreneurial processes do not have to take the form of new firm creation, new products/services, new technology etc (Shane & Venkataraman, 2001), although these are still the main foci of entrepreneurship research. At the heart of the entrepreneurial process are the opportunities

identified, the activities and the methods and the decision-making styles embodied in the resource recombination processes (Lumpkin & Dess, 1996; Ucbasaran, Westhead & Wright, 2001; Wiklund & Shepherd, 2003). Thus, the entrepreneurial process can take the form of market or hierarchy, new firms or within existing firms and encompasses acts of organisational creation, renewal or innovation that occur within or outside an existing organisation (Sharma & Chrisman, 1999).

Sectoral Perspectives

Many policymakers recognise the importance of entrepreneurial activities in generating economic development (Hannon, 2006; Jennings et al., 2005; Martinez et al., 2010; Perren & Jennings, 2005; Pittaway, 2005; Minniti & Lévesque, 2008; Yu- suf, 2010). The recognition of opportunities and the development of them lead to value creation in economies. That value creation can lead to a better standard of living for the whole population. However, as noted earlier, entrepreneurship is a complex phenomenon and this has led to some researchers observing that ‘the concept of the ‘entrepreneur’ and the function of entrepreneur- ship in society have ranged extensively within theories’ (Pittaway 2005, p. 201). Significantly though, Minitti & Lévesque (2008) have argued that it is important that entrepreneurship be un- derstood from the viewpoint of its origins as a field of study in economics and how it generally fits within that context.

O’Connor (2013) has elaborated different economic conceptions of entrepreneurship with respect to the various levels of analysis crossing from micro to macro. A distinctive feature of this argument is that entrepreneurship is considered to operate from different vantage points and, in line with this, with different means to influence an economy. O’Connor (2013) draws on a number of economists to articulate the points but the essential argument is that entrepreneurs can either be en- dogenous and act within existing market dynamics

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or be exogenous actors outside of the established market system. Endogenous entrepreneurs explore and occupy established and operating markets to discover, create and exploit unfilled gaps in a market economy plying the principles of arbitrage (either in costs or quality/differentiation) to seek advantage in a market. Therefore, they improve the productivity of the economic system by decreasing costs and expanding product/service distribution to meet unfulfilled demand with the same or adapted versions of existing products. Exogenous entrepreneurs on the other hand are acting outside of established markets and are working with new ideas, technologies and unproven concepts to discover and create new products/services never before seen in a market (significant innovations) to introduce them into market dynamics. These exogenous entrepreneurs introduce shocks via innovation into the established market systems displacing older goods and creating new layers of economic activity.

Regardless of the endogenous or exogenous origin of entrepreneurship, the economic interest lies with the growth outcomes that are derived from the activities of the entrepreneur. O’Connor (2013) terms this as a third form of entrepreneurship which is grounded in the expansionary and growth effects that stem from the endogenous and/or exogenous activities of entrepreneurs as it is the growth in production of goods and services, employment and wealth that are the tell-tale signs of an active entrepreneurial economy. Further, it is important to appreciate that entrepreneurs do not simply disengage from market activity once the market opportunity is identified and acted upon. Rather the entrepreneur remains responsible for at least the early stages of firm growth and just as likely the longer term growth of the newly created firm as he or she seeks to survive and prosper. There- fore, the activity of the entrepreneur transitions into strategic growth and business management to expand and exploit the firm’s success.

O’Connor (2013) argues there are three key sites for entrepreneurship development; firstly in

the corporate sector that includes all corporatised small, medium and large firms where entrepre- neurship will serve renewal and/or expansion strategies for existing businesses to improve the productivity of the market economy; secondly in the knowledge sector where entrepreneurship will assist individuals with new knowledge and technol- ogy to enter new ventures into market economies therefore contributing new businesses toward development of the economy and thirdly in the social sector where the aim is to use entrepreneur- ship to develop market principles as an economic utility lever to address social problems. O’Connor suggests that the support for entrepreneurship for economic development should be differenti- ated from either economic productivity or utility functions. He also argues that entrepreneurship arising from all three sectors contributes to the higher order goal of economic growth. Figure 1 expresses the relationship between these three views on entrepreneurship and the relationship to economic growth as the spinal cord of the economy and also exhibits the areas of impurity between these origins of entrepreneurship at the intersections where the sectors overlap.

The Unit of Analysis Perspective: Micro to Macro

Given that entrepreneurship examines the emer- gence and growth of firms that impacts the macro- economic status, the study of entrepreneurship development also needs to cross levels of analysis from the individual behavioural level to the firm level to the social or economic level. As the unit of analysis shifts in entrepreneurship theory so too does the type of economic analysis. This shift can be detected in the disputes over the appropriateness of various economic theories for entrepreneurship that result in such demarcations as expressed by Endres & Woods (2006) between the neoclassi- cal, Austrian and behavioural economists. The Austrian economists distinguished themselves by proclaiming that entrepreneurship is centred

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on human action influenced by the conditions of a market economy (Gunning, 1997). The empha- sis by this group on the human element laid the path for alternative explanations of the economic model including evolutionary and behavioural economics.

Evolutionary economics attempts to link macro and micro economic explanations. However, evo- lutionary economics is also positioned to explain endogenous entrepreneurship within pre-existing market structures, assuming economic behaviour is governed by existing market forces. Behavioural economics on the other hand attempts to account for the psychophysical elements of human decision making and judgement (Camerer & Malmendier, 2007) although it is generally also applied within the confines of operating markets endowed with maximising agents and equilibrium concepts (Minitti & Lévesque, 2008). Notably, Schum- peter’s theory of economic development stands in stark contrast to both evolutionary and behav- ioural economics by avoiding enclosure within the boundaries of the neoclassical economic market model. His entrepreneur is not endogenous or contained within the market process but operates

outside of the market as an exogenous influence ultimately introducing new dynamics that disrupt the established market system.

In synthesizing these perspectives a matrix is useful to understand the influence of entre- preneurship given the different effects observed at different levels of the economy and units of analysis and to account for the different macro- economic objectives aligned with the three differ- ent market contexts endogenous, exogenous and expansionary. O’Connor (2013) provides such a matrix (see Table 2) and also introduces effectua- tion arguments (Sarasvathy, 2008; 2005) as the means of explaining the fundamental behaviour of different entrepreneurs who are active in the different market interventions.

The upper three rows of the matrix describe the market economic distinctions discussed above. The three lower rows build from and extend ideas of two different theorists. With respect to organi- sational form this concept is drawn from Schum- peter (1961 [1934]) who argues for a distinction between enterprise—the source of innovation and disruption to markets and business—the means of production within existing markets carried out

Figure 1. Entrepreneurship and sectoral relationships (Adapted from O’Connor, 2013)

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by the firm. O’Connor (2013) extends the argu- ment to cover the transitional state between when enterprise either transforms into a functional busi- ness or transitions into the routines of an already operating business during which stage growth becomes the primary economic objective.

The bottom two rows are attributed to Saras- vathy (2008; 2005) who has more recently expounded the theory of effectuation and dis- tinguished human activities through different reasoning and logic regimes. Sarasvathy (2008) portrays the effectual reasoning of an entrepreneur as that which drives behaviour in conditions of uncertainty and exploration as the entrepreneur is driven by the desire to create the future rather than predict it. Sarasvathy places causal reasoning at the other extreme where the entrepreneur’s role can be framed as exploitation, coordination and management of largely known and predictable daily routines (see section 5 for further discussion and development of this theoretical viewpoint). Sarasvathy (2005) also offers a third perspective, the creative causal reasoning, that describes en- trepreneurs who have come to terms with some uncertainty (that is the product or service is de- fined) but struggle to survive under the pressures of market uncertainty as they endeavour to gain a foothold in a competitive landscape.

Many entrepreneurs or small business own- ers operate with a causal logic running me-too businesses and dealing with the daily grind of delivering their marginally differentiated regular products within a known market place as they seek to maximize profits. The effectual logic entrepreneur is comfortable with uncertainty, will seek out innovation and will seek to challenge the status quo of the existing market dynamics. The entrepreneur with creative causal reasoning adopts a strategic mind and experiments with the business design to come up with a business model that can deliver sustainable value creation.

Through this matrix a rationale is offered that defines the direction of this review of research. It is the aim of this chapter to explore the links between micro-level behaviours of individuals and firms and the macroeconomic outcomes sought by policy-makers. This matrix hints at the complex- ity within the task and explains why the research team has adopted a dynamic lens to take to the literature. In essence the skills and knowledge needed by entrepreneurs will vary with the context within which entrepreneurs are likely to work and the research team has taken the approach that depending upon the objective of policy, different forms of support will be necessary to accommo- date the development of an entrepreneur whether

Table 2. Behavioural distinctions across units of analysis (O’Connor, 2013)

Unit of Analysis Behavioural Distinctions

Economic objective Development Growth Productivity

Market context Exogenous Expansionary Endogenous

Firm level objective Innovation seeking Survival seeking Arbitrage seeking

Organisational form Enterprise Transitional (enterprise to business establishment)

Business

Team or group task Exploration and uncertainty bearing

Experimentation and value creation Exploitation and coordination

Individual form of reasoning Effectual Creative causal Causal

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at the nascent stage (becoming an entrepreneur), the survival stage (wrestling with the task of es- tablishing a new business venture) or the growth stage (embedding the recently established firm into the established market dynamics).

In this chapter we adopt the view of entre- preneurship that equates with an entrepreneurial service originally proposed by Penrose (1959). The entrepreneurial service is the set of behav- iours that value-add to innovation. Innovation is something new that creates value in the eyes of the consumer (Sundbo, 1998). Innovation comes in many different forms and can include, but is not limited to, that which is associated with prod- ucts, services, operations, organisational issues, financial engineering, and/or marketing strategies (OECD, 2005). The entrepreneurial service is provided by one or a team of entrepreneurs who recognise those innovations with potential and then proceed to introduce the innovation into market dynamics. From this perspective entrepre- neurship involves the transformation of an idea or invention into some form of novel application or innovation and the entrepreneurial service is responsible for recognising the potential value creation of the novelty/innovation and introduc-

ing it into a market. Thus, entrepreneurship and innovation are understood to be key elements for competitive (national) economies (OECD, 2008, p. 5). Furthermore, entrepreneurship is viewed as an important element for achieving economic and social growth (Yusuf, 2010). However, entrepre- neurship research has been dominated by micro level analysis predominantly using the firm or the individual as the level of analysis (Brown, Davidsson & Wiklund, 2001).

At the level of economic argument there has been diversity of opinion about entrepreneur- ship and how it contributes to macroeconomic development and growth. Kirchhoff, Linton & Walsh (2013) draw attention to this intense de- bate in their article that examines the equilibrium neo-Marshellian view with the disequilibrium Schumpeterian view of economic contribution. The article draws these opposing views together through a prior article by Kirchhoff (Kirchhoff, 1994 cited in Kirchhoff, Linton & Walsh, 2013) that proposes a figure that juxtaposes innovation with the firm growth concepts anchored in the two opposing lines of thinking. The figure, represent- ing the dynamic capitalism typology, is provided below (See Figure 2) and is instructive for this

Figure 2. The Kirchoff juxtaposition of innovation and firm growth concepts (Kirchhoff 1994 cited in Kirchhoff, Linton & Walsh 2013)

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work as it highlights the five types of firms that constitute the entire pool of small and medium firms functionally operating in a market and places them into context with respect to entrepreneurship and innovation.

The largest pool of small and medium enter- prises occupies Quadrant I. These firms provide the economic core of relatively stable employment (subject to stability in broader economic factors) but have generally low innovation and limited growth. From an entrepreneurship perspective these firms fall into the small business category and hold limited interest to entrepreneurship scholars except as they may transition to quadrants II, III or IV.

At the opposite end of the growth dimension are the firms with low innovation but with high growth. Those firms in Quadrant IV manage to identify market based gaps and opportunities, exploiting growth through exceptional product or price performance in response to untapped or under-served market demand. Innovation may be relatively minimal but growth can be spectacular driven by the ambition and drive of the entrepre- neur or the entrepreneurial team. The Australian business Wotif characterizes this type of firm.

Quadrant III holds firms that are highly in- novative and through this innovation are able to gain high growth opportunities. These firms are the glamour set of the entrepreneurship world and Cochlear in Australia is a firm that may fall into this category. Interestingly, although the firms that occupy Quadrants III and IV receive most of the attention with respect to the contributions they make to an economy, they are the firms that are least likely to need specific attention and are the least in number. These firms are characterized by both the strength of the fundamental oppor- tunity and the entrepreneurial drive, spirit and determination to succeed. From a government and entrepreneur scholar perspective these firms are

instructive but are the very firms that are likely to succeed with the least assistance or guidance given that the basic social, economic, political, regulatory and technological settings are favour- able to the venture.

In some respects the quadrant that represents firms facing the highest challenge and the strongest need for intervention and support are the firms in Quadrant II. These firms have high potential but are unable to unlock that potential due to either internal or external constraints. It would be folly to believe that all firms in Quadrant II could be leveraged into a high growth position but certainly some firms would be well served and would benefit from supportive frameworks that assist them to overcome either the external or internal constraints.

Drawing upon the works of O’Connor (2013) and Kirchoff, Linton & Walsh (2013) discussed above, it is important to acknowledge that entre- preneurs may require different kinds of support not only for their individual development as an entrepreneur but also with regard to the sectors of the economy from which they emerge and the internal and external constraints that they endure during the time of commencing and surviving the early days of a newly created venture. Further, support during the growth of their business as it matures may differ again. There are different stages of an entrepreneur’s development and the new venture lifecycle encompassing nascent, survival and growth (please refer to the defini- tions section below) means that an entrepreneur will need the right characteristics and skills to navigate through each stage. The different devel- opment stages of an entrepreneurial firm will call for different strategies and policies both for the venture and the governmental environment within which it is operating in order to influence not only entrepreneurial attitudes and capabilities but also entrepreneurial opportunities. Recognising those

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stages can help to understand what type of support can facilitate the entrepreneurial activities that lead to socio-economic development.

However, in drawing distinctions between different stages, there is an inevitable difficulty for theorists and for policy-makers in clearly iden- tifying them in individual firms. As Schumpeter (1961 [1934], p. 77) argued ‘the entrepreneur’s essential function must always appear mixed up with other kinds of activity, which as a rule must be much more conspicuous than the es- sential one’. Viewing entrepreneurship through the lens of stages is valuable for increasing our understanding of a phenomenon that is broadly recognized as having significance for advancing and modernising economies. For a policy-maker it requires acceptance of a broad generalization that assists in targeting policies and programs for the time when entrepreneurs identify with the stage. In practice entrepreneurs and entrepreneurship is not as clearly and as neatly delineated as the theory would suggest.

THE KEY CHARACTERISTICS OF ENTREPRENEURSHIP: DEFINITIONS AND TERMS

This section presents the characteristics and defi- nitions of key terms that are used in this chapter for the purposes of exploring the link or relation- ship between entrepreneurship and economic development.

Entrepreneurship is centred on activities that convert ideas into economic opportunities al- lowing business growth. Entrepreneurship can be defined as the identification, evaluation, and exploitation of opportunities (Shane & Venkata- raman, 2000). Entrepreneurs spur innovation and accelerate the growth of the economy by disrupting market equilibrium; a phenomenon referred to as creative destruction (Harvard University, 1949). This stimulus for competition through entrepre- neurship is likely to increase the productivity and

employment levels and at large the national and regional competitiveness (Fritsch & Schroeter, 2011). However, it is also argued by scholars that just having many entrepreneurs, particularly when broadly characterized as small business owners, in an economy will not necessarily guarantee a higher level of productivity or employment growth. A typical small business start-up is not innova- tive, creates fewer jobs and generates less wealth (Shane, 2009, Stam & Wennberg, 2009) than an entrepreneurial business that may be characterized by high growth and a unique place in a market. As a result, policy makers and academics around the world focus on how entrepreneurship, with the attributes of innovation and rapid growth, can be nurtured amongst all firms to facilitate regional and national competitiveness.

There have been many studies analysing the link between entrepreneurship and performance of regions (Audretsch & Fritsch, 2002; Reynolds, P, Storey & Westhead, 1994; Reynolds, PD, Miller & Maki, 1995). Furthermore, other authors state that there is a link between entrepreneurship and economic development (OECD, 1998; Verheul et al. 2002). Some international institutions claim that “entrepreneurship is one of the most important drivers of job creation and economic growth, and is crucial for the development of a vibrant formal small and medium-sized (SME) business sector” (United Nations Conference on Trade and Development, 2012, p. 9). However, the results of empirical analyses do not always give clear causality. For example, Reynolds et al. (1994) found a positive relationship between entrepreneurship and regional economic growth in the US. On the other hand, Audretsch & Fritsh (2002) found a different story in Germany, where the results show a negative relationship in the 80s but a positive one in the 90s. Other studies show empirical evidence of the connection between entrepreneurial activities and national growth (Audretsch & Fritsch, 2002).

Despite the limitations and inconsistency of evidence, overall scholars have argued that having

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an enabling ecosystem, primarily in developed countries, plays an integral role in economic growth. The importance of creating a policy framework that includes but is not limited to in- vestment in research and development, improving the incentives for self-employment, stimulating entrepreneurship education and promoting the commercial exploitation of scientific findings is paramount. Further educating the masses on the importance of an entrepreneurship policy framework should be a priority.

The Entrepreneur

An entrepreneur is the central figure of entrepre- neurship. Acting on an identified opportunity that is worth pursing is the primary role of the entre- preneur (McMullen & Shepherd, 2006). While the majority of entrepreneurs pursue opportunities in well-defined markets, entrepreneurs can also take on the role of defining new markets and market segments, a process referred to as effectuation (Sarasvathy, 2003). Entrepreneurs are involved in an entrepreneurial process. Many scholars have given attention to the entrepreneurial process and have defined it as a process that includes opportunity creation, opportunity discovery and opportunity recognition. At times the same con- cepts have been used in different processes and at other times same processes have been charac- terized by different concepts, all of which leads to confusion (Baron, 2008). Alvarez and Barney (2007) defined a simplified process resulting from two main entrepreneurial sub processes; the discovery process and the creation process. The discovery process involves the entrepreneur identifying existing opportunities or gaps in the market whereas the creation process involves the entrepreneur actively creating new opportunities. In other words, unlike in the discovery process, in the creation process, the opportunity does not exist without the activity of an entrepreneur. Alvarez and Barney argued that in order to carry out the entrepreneurial process, the entrepreneur will un-

dertake such tasks as leadership, decision making, managing human resource practices, developing strategy, preparing the finances and marketing all with a view to sustaining a competitive advantage. During the execution of these tasks, entrepreneurs interpret available information and give meaning to it in different ways (Barreto, 2012), which gives rise to variations in outcomes.

Entrepreneurial Characteristics

Different terminology has been used by prior researchers when discussing characteristics that positively influence entrepreneurial success. Competency, skills, expertise and acumen are all interchangeably used in the literature. Competent behaviour results from a combination of fac- tors including an individual’s personality traits, knowledge or skill and therefore it is not surprising that the boundaries of these terms are ill-defined. According to Moore, Cheng & Dianty (2002), the Management Charter Initiate UK and American schools prefer the term competence. Competency theory is based on examinations of the behaviours, attitudes and skills of successful leaders. Boyatizis (1982) defined competency as the underlying characteristic of a person that leads to or causes effective or superior performance. Considering the above, this paper will refer to competency and characteristics as interchangeable words.

Composite Entrepreneurial Characteristics

Entrepreneurial success can be determined by analyzing entrepreneurial characteristics at an individual level. Entrepreneurial characteristics and firm performance have positive links. Need for achievement, internal locus of control, cogni- tion and human capital have been found as the key characteristics of an entrepreneur at a composite level (Di Zhang & Bruning, 2011). There exists an interplay among human capital, cognition and learning that are possible to generalise to activities

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and actions central to the entrepreneurial process (Haynie, Shepherd & Patzelt, 2012). During the entrepreneurial process the entrepreneur learns various entrepreneurial competencies. Both the ability of the entrepreneur to learn and being able to access learning opportunities of support- ing competencies are important concepts with respect to entrepreneurial development (Aouni & Surlemont, 2009).

Discrete Entrepreneurial Characteristics

Based on the literature, opportunity, risk pro- pensity and human capital are the most widely researched characteristics of an entrepreneur. With respect to opportunity, opportunity alertness, opportunity discovery, opportunity creation and opportunity exploitation have been identified as key characteristics that define an entrepreneur (Baron & Ensley, 2006; De Carolis & Saparito, 2006; MacKo & Tyszka, 2009; Shepherd, Haynie & McMullen, 2012; Tang, Kacmar & Busenitz, 2012; Welpe et al. 2012; Wiklund & Shepherd, 2011). Risk propensity and perception are also shown to play an integral role in entrepreneurial success (Barbosa & Fayolle 2010; Caliendo, Fossen & Kritikos, 2009; Palich & Ray Bagby, 1995). Research shows that risk management dif- ferentiates entrepreneurs from non-entrepreneurs (Caliendo et. al., 2006). The concept of human capital is perceived as taking multiple elements into account including entrepreneurial experience, education and social network (Baron & Markman, 2003; De Carolis, Litzky & Eddleston, 2009; De Carolis & Saparito, 2006; Fischer & Reuber, 2011; Knockaert et al. 2011; Thornton, Ribeiro- Soriano & Urbano, 2011; Wennberg, Wiklund & Wright, 2011; Zheng, 2012). The human capital dimensions play an integral role in opportunity identification as well as opportunity exploitation efforts.

Based on the different firm stages defined be- low, the impact of entrepreneurial characteristics on firm performance is discussed in subsequent sections.

Entrepreneurial Capability

Entrepreneurial Capability is the capability to identify an entrepreneurial/business opportunity and to develop the resource base needed to pursue the opportunity. In this chapter, we distinguish between the individual and the firm level entrepre- neurial capabilities and discuss each independently in two different sections of the chapter.

The concept of the entrepreneurial capabilities has become increasingly important in the field of entrepreneurship theory, strategic management theory, the resource-based view, organisational learning and network theory. Consistent with the existing entrepreneurial opportunity based entre- preneurship research, we define entrepreneurial capability as the capability to identify, evaluate, exploit and/or explore entrepreneurial/business opportunities. The concept of entrepreneurial capabilities can be applied to individual entrepre- neurial teams as well as established firms. Teece (2007) has identified the capabilities required in the entrepreneurial process to exploit opportuni- ties at the organisational level as Figure 3 shows.

The review of the literature also reveals that the concepts of entrepreneurial capability and dynamic capability are overlapped or substitutable in the strategic management literature. Arthurs & Busenitz (2006) argue that while entrepreneurial capabilities are referring to the capabilities to identify a new opportunity and develop or acquire the resources needed to pursue the opportunity, dynamic capabilities on the other hand can be viewed as the adjustment and reconfiguration of the resource base in conjunction with an extant opportunity. Figure 4 shows the differences be-

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tween entrepreneurial capabilities and dynamic capabilities. According to the statement of Arthurs & Busenitz (2006) entrepreneurial capability is opportunity oriented while dynamic capability is change oriented.

Entrepreneurial Competence

Where entrepreneurial competency is concerned, it is viewed as a specific group of competencies relevant to exercise successful entrepreneurship

that is mainly associated with development of small and new businesses (Colombo & Grilli, 2005; Nuthall, 2002). Some scholars view entrepreneur- ial competencies as necessary to start a business, and managerial competencies as necessary to grow a business. However, Man (2002) argues that entrepreneurial competencies require skills in both areas. Man & Lau (2005) reasoned entrepre- neurial competencies comprise components that are deeply rooted in a person’s background (traits, personality, attitudes, social role and self-image)

Figure 3. Firm level elements for seizing market and technological opportunities (Adopted from Teece (2007))

Figure 4. Entrepreneurial capabilities (linear) vs. dynamic capabilities (recursive demonstrated by the dotted line) (Adopted from Arthurs & Busenitz 2006)

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as well as those that can be acquired at work or through training and education (skills, knowledge and experience). They classify the competencies into six areas as opportunity competencies, rela- tionship competencies, conceptual competencies, organising competencies, strategic competencies and commitment competencies. Amhad (2007) extended this model further by including ethical competencies, competencies to do with social responsibility and technical competencies. As noted above, this paper will refer to competency and characteristics as interchangeable words.

Entrepreneurial Behaviours

Entrepreneurial behaviours are those behaviours that lead to a venture start-up which is the outcome of an entrepreneurial process. The entrepreneurial process is the process that includes identifying, evaluating, exploring and exploiting entrepreneur- ial opportunities. A new firm, in the earlier stage of the start-up, is called an entrepreneurial firm or entrepreneurial start-up which has a potential of attaining significant size and profitability.

Entrepreneurial Opportunity

Entrepreneurial Opportunity refers to situations in which new goods, services, raw materials, markets and organising methods can be introduced through the formation of new means, ends or means-ends relationships.

The concept of opportunities has its roots in Austrian economics and the role of entrepreneurs in economic growth has been divided between arbitrageurs (Hayek, 1945; Kirzner, 1973) and innovators (Schumpeter, 1934). One of the fun- damental questions of entrepreneurship research, raised by Shane & Venkataraman (2000) is: why, when and how opportunities for the creation of goods and services come into existence and this draws much research attention on the attributes, forms, origins and life cycles of the entrepreneur- ial opportunity. As such, research is increasingly

focused on the capabilities at individual, team and organisational levels to identify, evaluate and exploit/explore entrepreneurial opportunities.

The definition of entrepreneurial opportunity is quite fragmented (Hansen, Shrader & Monllor, 2011) and lacks consistency in the entrepreneur- ship literature. Hansen, Shrader & Monllor (2011) review 19 years of entrepreneurial opportunity related research and list six worthy composite conceptual definitions as shown below. Accord- ing to Table 3, an entrepreneurial opportunity is viewed as a subjective perception or an objective existence. This remains a controversial issue in the entrepreneurship literature. In this chapter, we adopt the argument of Shane (2003) and McMul- len, Plummer & Acs (2007) that opportunities are objective phenomena. Following the definition of entrepreneurial opportunities given by Cas- son (1982) and Shane (2000), entrepreneurial opportunities are defined as situations in which new goods, services, raw materials, markets and organising methods can be introduced through the formation of new means, ends or means-ends relationship.

As stated above, opportunities take the form described by Schumpeter (1934): new products/ services, new geographical markets, new raw materials, new methods of production and new ways of organising. Opportunities themselves are heterogeneous in form or size, life cycle, profit-

Table 3. Composite conceptual definitions of opportunity (Adopted from Hansen, Shrader & Monllor 2011, p. 292)

1. The possibility of introducing a new product to the market at a profit

2. A situation in which entrepreneurs envision or create new means ends frameworks

3. An idea that has developed into a business form

4. An entrepreneur’s perception of a feasible means to obtain/ achieve benefits

5. An entrepreneur’s ability to create a solution to a problem

6. The possibility to serve customers differently and better

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ability, and risks. Take “the opportunity for a hot dog stand on a particular corner in Adelaide” as an example. The opportunity is contained in the form of “a new geographical market--- a particular corner in Adelaide; however the opportunity itself is to sell hotdogs in that particular corner of an Adelaide street. The opportunity is contained by a small geographical market, and the opportunity for an entrepreneur is defined as selling hotdogs in a small market, for little profitability, in a highly labour intensive business.

Holcombe (2003) proposes that entrepreneurial opportunities arise from factors that disequili- brate the market, factors that enhance production possibilities and prior entrepreneurial activity. Similarly, Shane & Eckhardt (2003) suggest that the origins of entrepreneurial opportunities are information asymmetry and exogenous (new knowledge), supply and demand changes, and productivity enhancing and rent seeking op- portunities. These origins of entrepreneurial op- portunity affect largely whether the opportunity is objectively new or underexploited (McMullen, Plummer & Acs, 2007). Taking “the opportunity of selling hot dog” as an example again, if the entrepreneurial opportunity comes from unmet needs or demands due to a lack of food vendors in the area, then the opportunity is an underexploited market which requires little by way of entrepre- neurial capabilities to acquire and combine the resources. However, if the opportunity is coupled with productivity improvement, such as a new processing or packaging method that exploits faster production and customer turnover in a high traffic area serviced by traditional vendors with long order queues the opportunity may have a big potential for the entrepreneur to enjoy greater profits by exploiting reduced costs or greater turnover over the competition. Furthermore, this entrepreneurial activity could generate other entrepreneurial opportunities to open in other geographical markets or opportunities in this or other related product areas.

In conclusion, the size, life cycle, profit- ability and growth potential of entrepreneurial opportunities can largely determine whether they are worth pursuing with any chance of success. These characteristics of entrepreneurial oppor- tunities are not stable; instead they interact with the external environment and the entrepreneurs pursuing them, which makes opportunity-based research more complex.

The Entrepreneurial Firm

Research on entrepreneurship in established companies has extended over the course of more than three decades. Accordingly, the focus of the research on entrepreneurship has gradually shifted from identifying and describing individual characteristics to the process of opportunity iden- tification, evaluation and exploration/exploitation undertaken by individuals and firms. A review of the literature in the field of entrepreneurship evi- dences substantial, implacable research outcomes that justify the shift. However, due to research definition, methodology and instrument limita- tions, the current research shows divergent firm- level entrepreneurship research outcomes. Many entrepreneurship research theories intersect with strategic management although entrepreneurship research differs from strategic management as it can take place at lower levels than the firm level of analysis. Consequently a large proportion of entrepreneurship literature focuses on the charac- teristics of individuals in explaining entrepreneur- ship and this chapter while acknowledging the link to strategy and business management in the existing firm context does not set out to explore these vast areas of research contributions but instead stays focused on entrepreneurship when considering the established firm.

The process of pursuing entrepreneurial op- portunity could take the form of a new venture, a new product/service, a new firm and so on. When the process involves starting a new firm which

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has the potential of attaining significant size and profitability whether from a spin-off, a merger or independent entrepreneurial behaviours, in the earlier stage of the new venturing it is called an entrepreneurial firm or start-up (Bantel, 1998; Bhide, 2000). Those new firms that are established based on pursuing entrepreneurial opportunities through the formation of new means, ends or means-ends relationships may be considered en- trepreneurial start-ups that contribute to economic development objectives while other firms that are based on market and demand gaps for existing products/services are contributing to economic productivity functions. Both sets of firms ulti- mately contribute to economic growth as long as they realise a potential for achieving significant size and profitability.

When individual entrepreneurs start a new firm to pursue entrepreneurial opportunities, the survival of the new firm largely depends on the entrepreneurial opportunity pursued since opportunities occur within a limited time period and this in turn determine profits and resources needed in a dynamic fashion due to the interaction between the entrepreneurial firm and its environ- ment. Accordingly, entrepreneurs are required to obtain certain capabilities to combine resources to pursue these complicated/changing/not explicit opportunities successfully. In this scenario, gov- ernments can play significant roles in creating a munificent business environment, educating for entrepreneurial capabilities and nurturing nascent entrepreneurs.

Start-up businesses are “new,” “active,” and “independent” (Luger & Koo, 2005). Both in research and in practice it is shown that entrepre- neurial firms, that is new start-ups and SMEs that consistently pursue opportunities for growth and development, are the engine of regional/national economic development.

Stages of Firm Growth

This chapter classifies firms broadly into the following three stages of development; nascent, survival and growth. The subsequent sections discuss the entrepreneurial characteristics that are positively influencing the transition through these stages of firm development.

Nascent

Creation of a successful venture is a process. A nascent entrepreneur is someone who commits time and resources to start a new firm. When this gestation process is completed, either a venture could start as an operating business or if the na- scent entrepreneur abandons the effort, a stillborn occurs. A nascent entrepreneur is defined as a person who is now trying to start a new business as the owner or part owner of the new firm, who has been active in trying to start the new firm in the past 12 months carrying out some gestation activity (Lepoutre et al., 2011). Scholars also refer to this phase as the inception stage or pre-start stage (Chrisman & McMullan, 2004; Capelleras at el, 2008).

Survival

A multitude of terminologies have been used to de- fine this stage by various scholars including start- up phase and live or die stage (Steinmetz, 1969, Chrisman & McMullan, 2004, Reynolds & Miller, 1992). These firms have in most cases started the operation ideally with a business registration and have started operating with a cash flow either by means of income and/or expenses. The survival of these firms often depends upon securing enough cash to maintain working capital and fund capital purchases, both of which are necessary to support the business’ ongoing sustainability.

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Growth

Growth is a multi-faceted phenomenon. Growth can be different from vertical integration. How- ever it is commonly measured by the scaling-up of sales by a firm that has been in operation for at least 3-5 years.

Entrepreneurial Environment

Contingency theory suggests that the study of entrepreneurship cannot be isolated from the external environment for entrepreneurship (Gilad & Levine, 1986). The external environment is crucial to entrepreneurial activities since it poses threats and offers opportunities in varying degrees to entrepreneurs and entrepreneurial firms. The external environment of entrepreneurship includes the economic environment (e.g. labour and mar- ket conditions, materials availability, access to financial assistance), social environment (culture, honesty, justification, religion, social marginality) and political environment (stability).

The interaction between entrepreneurship and the environment is dynamic and complicated, thus it is difficult to generate a universal environment to promote entrepreneurship. Littunen et al (1998) have found that the local environment can influ- ence entrepreneurial firm success and survival by impacting the entrepreneurs and firms within it. Based on data from 10,000 persons in ten Ger- man planning regions, the empirical research of Wagner & Sternberg (2004) supports the theory that regions with a more dense population, faster growth and lower land prices enjoy higher entre- preneurship (measured by new start-ups). Their theoretical framework of the interplay between environment and external environment is shown in Figure 5. The environment for entrepreneur- ship can also be expanded to the concept of the ecosystem that takes into account local, regional and global influences.

Entrepreneurial Ecosystem

Many researchers have used the institutional ap- proach in the field of entrepreneurship where the institution (conceptualized as the firm or venture) is the primary unit where the entrepreneur oper- ates. However, the institutional ecosystem is also an integral mediator for entrepreneurial success (Alvarez et al. 2011). An ecosystem is the environ- ment that will have an impact on entrepreneurship. This can broadly be classified into three levels as local, regional and global. An entrepreneurial ecosystem comprises hundreds of elements that build the environment in which entrepreneurship takes place. Based on the literature review carried out by Alvarez and his team (2011), financial sup- port, government policies and programs, research and development (R&D) transfer, access to infra- structure, cultural and social norms and education and training have been identified as environmental factors explored by scholars that have an influ- ence on entrepreneurial activity. The following diagram is an example of the elements within an entrepreneurial ecosystem which, for simplicity and convenience, has classified the ecosystem into six main categories: a conducive culture; enabling policies and leadership; availability of appropriate finance; quality human capital; venture friendly markets for products and services; and a range of institutional and infrastructure support. These principles and processes at large drive the entre- preneurial ecosystem which in turn accelerates entrepreneurial success (Isenberg, 2010).

An ecosystem has a mediating effect on the entrepreneurial success and the ecosystem changes from place to place and time to time. While a supportive ecosystem enables more opportunity discovery for entrepreneurial success by creat- ing a positive perception among entrepreneurs, a dynamic ecosystem enables successful entrepre- neurial activity where entrepreneurial opportunity

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creation is concerned (Webb et al. 2012). As a result, characteristics of the entrepreneur and impact of the ecosystem to entrepreneurial activity have a tightly knit interrelationship.

REGIONAL LEVEL CHARACTERISTICS

The main objective of this section is to review the principal best practices from around the world con- nected to the data collection specifically focused on the regional entrepreneurial characteristics for economic development. The concept of economic development refers to those actions that the govern- ment or the community can undertake in order to

improve not only the standard of living but also the health of a region (Acs, Z 2006; Acs, ZJ et al. 2012; Carree & Thurik, 2003). The actions can include the development of any indicators associ- ated with the standard of living such as health, social inclusion, literacy, etc.

It is recognised within many entrepreneurial research frameworks that the social and economic development of countries can lead to differences in entrepreneurship activities. The ecosystem within which companies operate can become a competitive advantage or a barrier for a firm’s development. As such, there are some differ- ences between the treatment of entrepreneurs in developing and developed countries which is connected to the analysis of the socioeconomic

Figure 5. The impact of external environment (Adopted from Wagner & Sternberg 2004)

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Supporting Entrepreneurship in High Cost Economies

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environment surrounding entrepreneurs, or more specifically, the regulatory framework, culture, access to finance, market conditions and so on.

Entrepreneurship can assist in meeting eco- nomic growth objectives (Nadim & Anders, 2008; Wennekers & Thurik, 1999) such as productivity, innovation and employment which are becoming key factors of economic dynamism (OECD, 2008). This section outlines the primary models used by national or regional economists to monitor and assess the level of entrepreneurial activity within a given geographic boundary and provides an analysis of the most common measurements used in the field. Many of these measurements present different issues and the relevance of them depends on the governments’ agendas and objec- tives (Yusuf, 2010).

There are any number of lesser known entre- preneurial activity frameworks such as Gallup’s framework for entrepreneurship and job creation (Badal, 2010). However, for the purpose of this chapter we first present the better known surveys and indices. We then target three high profile and internationally recognized frameworks for detailed discussion: the Global Entrepreneurship Monitor (GEM), the Entrepreneurial Indicator Programme (EIP) from the OECD, and the Entrepreneurship Policy Framework and Implementation Guidance (UNCTAD). Each of these has been created to serve different purposes.

GEM started in the late 1990s as a project to measure entrepreneurial activities across nations. At the beginning it was only used to measure 10 countries. It was created with the idea of filling a gap in the data available for measuring entrepre- neurial activities. It has become one of the most important entrepreneurship studies in the world with respect to monitoring the rate of entrepre- neurship within countries and providing cross country comparisons. GEM allows comparison of entrepreneurial activities between those countries which participate in the study and the results help

us understand the drivers or characteristics of entrepreneurship in order to develop appropriate policies for each country.

The second framework that is presented for detailed discussion is the EIP (OECD) which was launched in 2006 with the purpose of building comparable statistics about entrepreneurship and its determinants. In 2005, the OECD found that there was a gap in the entrepreneurship measures as many of their members were not measuring entrepreneurship activities.

Finally, this chapter will outline the UNCTAD which aims to help policymakers of developing countries and economies in transition to promote entrepreneurship (United Nations Conference on Trade and Development, 2012).

Regional Level Data on Entrepreneurship

Surveys

In order to gather information about entrepreneur- ship, different instruments have been created. Surveys were developed to collect data about entrepreneurial individuals and/or firms by in- ternational institutions.

Table 4 presents a summary of the main instruments created and entrepreneurship data availability by international institutions in order to measure regional entrepreneurial activities.

GEM developed two main instruments for measuring entrepreneurial activities, as can be seen from the previous table: The Adult Popula- tion Survey (APS) and the National Expert Survey (NES). The purpose of those surveys is different. APS measures attitudes, activity and aspirations of individuals and is administrated to 2000 adults in each country measured. Further information about the main variables measured in the APS can be found in the 2010 Global Report (Kelley, D, Bosma & Amorós, 2010). Also, the full instru-

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ment can be downloaded from the GEM website http://www.gemconsortium.org/docs/409/gem- 2010-aps-questionnaire.

The second instrument is the NES survey of socio-economic factors which can influence the entrepreneurial activities of the countries. This instrument is administered to at least 36 experts in each country in order to gather qualified opin- ions. It measures finance, government policies and programs, entrepreneurial education and training, R&D transfer, commercial and profes- sional infrastructure, internal market openness, physical infrastructure and services, and cultural and social norms (http://www.gemconsortium. org/Data-Collection).

Eurobarometer Survey on Entrepreneurship measures entrepreneurial mindset. This includes the motivation, choices, experiences and obstacles linked to self-employment. This survey was de-

veloped with the idea of understanding the situ- ation in Europe in order to develop policies. This instrument targets over 26,000 randomly selected respondents aged 15 years and over from 36 countries, including 29 European Union member and candidate countries, 3 European Free Trade Agreement countries, the USA and three Asian countries; China, Japan and South Korea. The com- plete instrument can be obtained at http://www. eubusiness.com/topics/sme/entrepreneurship.09.

EIP used data from different sources in order to analyse the entrepreneurial activities. The database contains information about business demography, enterprise birth, death and survival, and other information such as high-growth enterprises.

The World Bank Group Entrepreneurship Snapshots (WBGES) works on entrepreneur- ship. This group works in collaboration with the International Finance Corporation (IFC), and

Table 4. Entrepreneurship regional surveys

Surveys

Institution Name Description

GEM

APS (Adult Population Survey) It is a questionnaire that is administered by GEM to collect information about attitudes, aspirations and entrepreneurial activities (GEM). This survey is used to collect data which are comparable across countries and allows longitudinal studies (GEM 2010).

The National Experts’ Survey (NES)

It is a survey instrument administered by GEM for measuring key entrepreneurial framework conditions such as: finance, government policies and programs, entrepreneurship education and training, R&D, infrastructure, culture and social norms, market openness and so on (GEM 2012).

European Commission

Eurobarometer Survey on Entrepreneurship

It measures entrepreneurial mindset. It focuses on motivation, choices, experiences and obstacles linked to self employment. The results from this survey help policymakers to understand entrepreneurship in their countries. This survey started in 2001 and has expanded into Asian countries (European Commission 2009).

OECD Eurostat Entrepreneurship Indicators Programme (EIP)

In 2006, EIP work began with the development of standard definitions and concepts as a basis for the collection of empirical data.

World Bank World Bank Group Entrepreneurship Snapshots

The objective was to create a database to make comparisons on entrepreneurship and its determinants across the OECD countries. It started in 2004 and covers 112 countries (World Bank 2008).

Kauffman Firm Foundation

Kauffman firm survey It collects data on young businesses in the United States to understand factors influencing entrepreneurship. It began operations in 2004. The questions are about the founders’ background, access to finance, firms’ performance, and so on.

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the Kauffman Foundation on data collection on business creation. They analysed the regulatory, political and macroeconomic institutional environ- ment on entrepreneurship and the entrepreneurs’ drivers. They do not include the informal sector in their measures. They collect data through phone interviews and email/fax with businesses registered from over 150 countries http://econ. worldbank.org/.

Finally, the Kauffman Firm Survey (KFS) studies around 5,000 businesses in the US and was created in 2004. The purpose is tracking business development during the early years. The data collected is connected with business forma- tion, strategies, employment patterns, founders’ characteristics and financial arrangements (http:// www.kauffman.org/kfs/).

Entrepreneurship Index

Another means of monitoring entrepreneurial activity is via the use of entrepreneurial indexes. Table 5 details two such entrepreneurial indexes.

The Kauffman Index of Entrepreneurial Activ- ity is based upon the population survey from the US. It examines business creation. This index only includes individuals who own their business and work more than 15 hours per week and who are adults between 20 and 64 years. Further informa-

tion about the Index of Entrepreneurial activity can be found in www.kauffman.org/research- and-policy/kauffman-index-of-entrepreneurial- activity.aspx.

The Danish Entrepreneurship Index involves diverse factors such as capital availability; quan- tifying the focused expenditure in building up en- trepreneurial skills though educational programs, trust in bankruptcy laws, administrative burden and research environment. All these factors create a framework that can hinder or promote entrepre- neurial activities. The analysis is based on the six factors presented by OECD (Nadim & Anders, 2008): regulation, market conditions, access to financing, creation and diffusion of knowledge, skills and culture. These factors influence policy areas. Much of the information collected from different countries is not directly comparable (percentages, ratios, etc). They use normalised data setting values of 100 for the best country and 0 for the poorest (Hoffmann et al. 2010). Quality assessment of the indicators has been presented at www.foranet.dk.

Entrepreneurship Websites

More information about entrepreneurs and en- trepreneurship programs are available on the following websites:

Table 5. Entrepreneurship indexes

Indexes

Institution Name Description

Kauffman Foundation Index of Entrepreneurial Activity

Uses leading indicators of new business creation in U.S. Data from the Current Population Survey (CPS). The index compares percentages of adults not business owners who start business. Additional information about business creation by demographic groups is presented in this index. www.kauffman.org

Danish Enterprise and Construction Authority

Danish Entrepreneurship Index (2009/2010)

First publication in 2009 (Astrup et al. 2009) to follow up on the Danish Government’s goals. The entrepreneurship index shows that a total of six factors affect a country’s entrepreneurial performance such as regulation, market conditions, access to financing, creation and diffusion of knowledge, entrepreneurial skills, and entrepreneurial culture.

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• www.fasttrac.org (Kauffman Foundation) • www.barbadosentrepreneurshipfounda-

tion.org (the Barbados Entrepreneurship foundation)

• www.endeavor.co.za (Entrepreneurial dialogues)

• www.entrepreneurindicator.com/ (Global Entrepreneurship Indicator)

• www.efinlab.com (Harvard Entrepreneurial finance lab)

• www.wbaa.biz (World Business Angels Association)

• www.unleashingideas.org (Global Entrepreneurship Week – Kauffman Foundation)

• w w w. s u s t a i n - e n t r e p r e n e u r s h i p . o r g (Sustainable Business and Entrepreneurship Platform)

• www.ace.sg/Site/index.aspx (ACE – Action Community for Entrepreneurship)

• www.eonetwork.org (Entrepreneur’s Organization Network)

• www.entrepreneurship.org (Kauffman Foundation)

• www.entrepreneur.com (Magazine and website)

There are many other instruments which are not presented in this chapter which focus on al- lied concepts to support entrepreneurship such as business incubators, science parks, and so on.

Internationally Recognised Frameworks

It is recognised that it is necessary to measure entrepreneurial activities. However, there is no consensus about how to measure these activities (Rachida & De Castro, 2008) as entrepreneur- ship is a concept that includes many dimensions (Bruyat & Julien, 2000; Rachida & De Castro, 2008; Verheul et al. 2002). Furthermore, the

entrepreneurial activities are also affected by the environment in which they operate (Rachida & De Castro, 2008).

Global Entrepreneurship Monitor Project (GEM)

GEM started in 1997, at a time when there was a lack of possible comparisons across the world of entrepreneurship. Recognition of the impor- tance of entrepreneurship around the world was growing and governments started to realise that it was an important factor influencing economic development.

Among other things, the GEM sought to pro- vide understanding of the role of entrepreneurs in our economies and how external factors can affect the development of new businesses. It was assumed that a high relationship between the eco- nomic development and entrepreneurial dynamic sectors existed.

The GEM was established to achieve the fol- lowing objectives:

• “To measure differences in entrepreneurial attitudes, activity and aspirations of indi- viduals among many economies across the globe,

• To uncover factors determining the nature and levels of entrepreneurial activity, and

• To identify policy implications for en- hancing entrepreneurship in an economy.” (Bosma et al. 2012, p. 8).

The GEM treats entrepreneurship as a complex process which is influenced by many factors, tak- ing a comprehensive socio-economic approach with a focus on the individual (Bosma et al. 2012).

The first model of the GEM was explained in detail by Levie & Autio (2008) who present how entrepreneurship’s three main components (attitudes, activity and aspirations) are influenced

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by national conditions. Levie & Autio (2008, p 235) state “To date, the relationships between the variables in the model have lacked explicit theo- retical grounding. Because of this, the potential value of the GEM model for academic research remains unfulfilled, and it has been difficult to assess the value of empirical contributions based on GEM data”.

Further reviews were undertaken by GEM and the revised model is presented in Figure 7. The GEM model shows that entrepreneurship is not independent of its environment and is affected by national conditions. This model reflects how the three components (attitudes, activity and aspira- tions) interact with each other. Furthermore, it takes into consideration how entrepreneurship can influence economic development as an output.

Figure 7 shows that entrepreneurship is not a standalone process and it has been recognised by other authors to involve many dimensions (Murphy, Trailer & Hill, 1996). It is not enough to have an entrepreneurship profile – there are other factors that influence entrepreneurs which are also important. These factors are subdivided into three basic requirements; efficiency enhanc- ers, innovation and entrepreneurship.

In order to measure the variables presented in the previous model, GEM developed two measure- ment instruments in order to gather information for analysing the model. The first instrument is the Adult Population Survey (APS) and the second one is Expert Survey (ES). The first randomly surveys a minimum of 2000 adults between 18 and 64 and the second surveys 36 experts in every economy.

Figure 7. The revised GEM model (Kelley et al. 2012; Bosma et al. 2012)

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The aspiration is to have world coverage with 87 countries thus far participating in the surveys over the years since the project’s inception.

GEM 2011 Report: Australia

In 2011, GEM measured 54 economies. GEM esti- mated that 388 million entrepreneurs were starting or running new businesses in 2011. Based on this report Australia is recognised as an Innovation- Driven Economy (IDE). This classification takes into consideration GDP per capita and the share of exports including primary goods. This type of economy is characterised by a higher proportion of business services compared to the other levels (factor-driven and efficiency-driven) (Kelley, DJ, Singer & Herrington, 2011).

Based on the GEM 2011 report, Australia displays a medium range number with respect to perceived opportunities, capabilities and fear of failure, however it also shows that 12.3% of individuals with entrepreneurial intentions were expecting to start a business within the next three years. This number was below Czech Republic, France, Korea and Taiwan (countries which are also innovation-driven economies) (Kelley, DJ, Singer & Herrington, 2011).

There are also some measures which show so- cietal attitudes to entrepreneurship. These attitudes may positively or negatively influence entrepre- neurial activities. Australia ranked high in the ‘awarding high status to successful entrepreneurs and focusing media attention on entrepreneurship’ factor (Kelley, DJ, Singer & Herrington, 2011).

Australia has a nascent entrepreneurship rate of 6% compared to the US with 8.3% (Kelley, DJ, Singer & Herrington, 2011). Furthermore, Aus- tralia and the US have high levels of early-stage entrepreneurial activity, and these two countries also show the higher involvement of women in entrepreneurial activities in the innovation-driven group.

EIP / OECD-Eurostat (Entrepreneurship Indicators Programme)

The EIP (OECD) started in late 2006 (OECD, 2008). The OECD stated that until then, there was no country from the OECD group which collected data on entrepreneurship. The EIP programme was developed to cover this gap and propose a framework to measure entrepre- neurship. The framework developed includes a set of indicators and methodologies to produce international comparable data which is used by OECD countries.

This framework also treats entrepreneurship as a complex concept which cannot be considered with a single measure (Hindle, 2006; Murphy, Trailer & Hill, 1996; Verheul et al. 2002). This programme’s main objective is to help policy- makers understand the situation and propose new policies, based on the idea that policymakers can improve the entrepreneurial activities by improv- ing the entrepreneurial environment (Nadim & Anders, 2008).

Furthermore, the OECD uses external data and databases for analysing the entrepreneurial environment. The proposition involves a collab- orative process between OECD and other national statistical organisations in order to develop an international entrepreneurship measure which provides policymakers with indicators needed to tackle whichever entrepreneurship related objective they determine (Schmiemann, 2009). The OECD not only focuses on SMEs or start-up companies, they mention that large companies can also be entrepreneurial and they should be taken into consideration (Nadim & Anders, 2008).

The framework identifies three separate but interconnected flows, all of which are important in the formulation, assessment and appraisal of policy measures. The three components of the framework are: determinants, entrepreneurial performance and impact.

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The first component is determinants which reflect the key factors that affect entrepreneurial performance. The second component is entre- preneurial performance which reflects the target indicators that policymakers believe have an im- pact (third component) on some or many ultimate objectives (Nadim & Anders, 2008).

Determinates of Entrepreneurship

Determinants involve many environmental and sociological factors which, in conjunction with the entrepreneur’s personal attributes, affect the outcomes of the entrepreneurial process (Nadim & Anders, 2008). Although the OECD report does not present the literature underlying each of these determinants, many of them may be ex- plained within the following individual and firms entrepreneurial characteristics sections.

Nadim & Anders (2008) mentioned three fac- tors which influence entrepreneurship, such as opportunities (market conditions), skilled people (capabilities and infrastructure) and resources (access to capital, R&D and technology). Addi- tionally, they stated the importance of the envi- ronment which includes, for example, regulatory frameworks and culture. Together, they isolated

six subgroups of determinants for the conditions that support entrepreneurial performance as shown in Figure 9.

These six determinants can be affected or influenced by government policy (see Table 6), for example, policies affecting access to capital and connected with Business Angels, access to capital and stock markets. Policies influencing access to R&D and technology are connected with R&D investment, university/ industry col- laboration, collaboration between firms, diffusion of new technology, patent system and broadband access. Furthermore, government can also influ- ence market conditions using anti-trust laws or competition laws, and other regulations influenc- ing access to external markets and procurement. The regulatory framework can include policies such as administrative burden, bankruptcy, legal environment, taxes, and so on. Culture can be influenced by entrepreneurial education policies and motivation to change certain societal attitudes (Nadim & Anders, 2008).

Furthermore, policies influencing entrepre- neurial capabilities, which are the subject of this chapter, are: training and experience of entrepre- neurs, business and entrepreneurship education, entrepreneurship infrastructure and immigration

Figure 8. Three-stage entrepreneurship model (Nadim & Anders 2008, p. 10)

Figure 9. Determinants of entrepreneurship (Nadim & Anders 2008, p. 19)

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(Nadim & Anders, 2008). Other authors previously studied the influence of experience and education (Cooper, AC, Gimeno-Gascon & Woo, 1994). Please refer to later sections of this chapter for detailed information about the entrepreneurial capabilities literature.

Table 6 shows how each of these determinants can also be subdivided further into specific policy areas. However, for the purpose of this chapter, entrepreneurial capabilities are the main focus.

The International Consortium for Entrepre- neurship (ICE) collects and evaluates 57 indicators connected with determinants (Hoffmann, Larsen & Oxholm, 2006). Many factors which influence entrepreneurship have been previously studied by many authors. Some of them have been presented in the individual characteristics such as gender, age, marital status, family background, wealth, income, current working status, education, work experience, risk attitude, over-optimism, prefer- ence for independence, etc. External influences include per capita income, financial system and availability of credit, and business cycles.

Indicators for Entrepreneurial Performance

Entrepreneurial performance depends on ac- tions from the entrepreneurs that will impact the economy (Nadim & Anders, 2008). The indica- tors that OECD has chosen in this case are based on a pragmatic approach, where it is recognised that more indicators can be added as statistical capacity of the institutions improves (Nadim & Anders, 2008).

Figure 10 shows the main subgroups of entre- preneurial performance.

Each of these subgroups also contains many components as shown in Table 7.

Each of the indicators can be further broken down to varying degrees into sub-sectors such as industrial sector, gender, business size, etc. Many of these can be produced using currently existing data sources, particularly sectoral and size breakdowns (Nadim & Anders, 2008). Yusuf (2010) mentioned that growth, profitability and survival are the most popular measurements of

Table 6. Determinants for entrepreneurship (Source: OECD 2009b)

Regulatory Framework

R & D and Technology

Entrepreneurial Capabilities

Culture Access to Finance

Market Conditions

D et

er m

in an

• Adm. burdens for entrepreneurs and for growth. • Bankruptcy regulations. • Safety, health and environmental regulations. • Product regulation. • Labour market regulation. • Court and legal framework. • Social and health security. • Income taxes, wealth/bequest taxes. • Business and capital taxes.

• R&D investment. • University and Industry interface. • Technological cooperation between firms. • Technology diffusion. • Broadband access. • Patent System. • Patent system, standards.

• Training and experience of entrepreneurs. • Business and entrepreneurship education (skills). • Entrepreneurship infrastructure. • Immigration.

• Risk attitude in society. • Attitudes towards entrepreneurs. • Desire for business ownership. • Entrepreneurship education (mindset).

• Access to debt financing. • Business angels. • Access to Venture Capital. • Access to other types of Equity. • Stock markets.

• Antitrust laws. • Competition. • Access to domestic market. • Access to foreign markets. • Degree of public involvement. • Public procurement.

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outcomes. Brush & Vanderwerf (1992) analysed outcome measurements and they selected the most popular ones as: survival, sales and employee changes, profitability, return on investment and net profit. Schutjens & Wever (2000) recognised the most frequently used three measurements to be: profits, return on profit and income generation. Others mentioned measurements such as revenue, profit, number of ventures, and employee growth (Luke, Verreynne & Kearins, 2007).

Impact

According to Nadim & Anders (2008) impacts reflect the “value” created by entrepreneurs and entrepreneurship on the economy. However, some measures of social and economic impact are pre- sented in the framework. Nadim & Anders (2008) recognised this part of the model can be seen as additional as they focused on determinants and performance and not on impact measurements.

They introduce the impact measures with the purpose of showing that policies created to influ- ence determinants influence the performance of those firms and in turn they will have social and economic impact on the region.

Figure 11 shows the EIP subcategories of the entrepreneurial impact: job creation, economic growth, poverty reduction and formalising the informal sector. In this instance there are no subdivisions for entrepreneurial impact. As was previously mentioned, the OECD framework report does not mention the reasons behind the selection of these measurements: they only pro- pose them as obvious measures. However, there are many authors who highlight the relationship between entrepreneurship and economic growth (Van Stel, Carree & Thurik, 2005; Wong, Ho & Autio, 2005). There are no indicators currently identified within these subcategories, however there are clearly obvious candidates, for example GDP growth, employment indicators, average

Figure 10. Indicators of entrepreneurial performance (Nadim & Anders 2008, p. 14)

Table 7. Entrepreneurial performance (OECD 2009b)

Firm-Based Indicators Employment-Based Indicators Wealth-Based Indicators

E nt

re pr

en eu

ri al

rf or

m an

• Employer enterprise birth rates. • Employer enterprise death rates. • Business churn. • Net business population growth. • Survival rates at 3 and 5 years. • Proportion of 3 and 5 years.

• High growth firm rates by employment. • Gazelle rates by employment (the number of high-growth firms and the number of young, high-growth firms). • Business ownership rates. • Employment in 3 and 5 year old firms. • Average firm size after 3 and 5 years.

• High growth firm rates by turnover. • Gazelle rates by turnover. • Value-added by young or small firms. • Productivity contribution, young or small firms. • Innovation performance, young or small firms. • Export performance, young or small firms.

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wages and salaries, and relative poverty. Yusuf (2010) explained that entrepreneurship can be seen as a path out of welfare and poverty for the underprivileged.

OECD Data Availability: Australia

The OECD presents a report with a list of tables with all the indicators showing comparisons between the members (OECD, 2012). There are data available for structural indicators on the enterprise population; enterprise birth, death and survival; employment creation and destruction; enterprise growth; women entrepreneurship and

selected determinants of entrepreneurship (OECD, 2012). In the case of Australia not all the previous indicators are available.

UNCTAD Entrepreneurship Policy Framework and Implementation Guidance

The policy framework developed by UNCTAD is intended to support developing-countries’ policy- makers to promote entrepreneurship. It is claimed that policies connected with entrepreneurship cannot be treated completely separately from the economic development policies (United Nations

Figure 12. Key components of the UNCTAD entrepreneurship framework (UNCTAD (United Nations Conference on Trade and Development 2012, p. 7))

Figure 11. Categories of entrepreneurial impact (Nadim & Anders 2008, p. 14)

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Conference on Trade and Development, 2012). It is stated that “the Entrepreneurship policy framework is narrower in scope and focuses specifically on policies aimed at promoting the emergence of new entrepreneurs and facilitating new business start-ups in developing countries and transition economies” (United Nations Con- ference on Trade and Development, 2012, p. 5). UNCTAD (2012) reviewed best entrepreneurship practices in developing countries and created the best entrepreneurship practices inventory.

The UNCTAD (2012) report states that this framework has been developed based on experi- ence and international expertise in research and policy analysis (p.1); however they do not present reasons for choosing the policy areas selected.

This framework recognises that one policy cannot be designed for all cases; however they propose an approach which identifies the key priority areas to take into consideration, in order to formulate a national entrepreneurship strategy, such as (also see Figure 12):

• Optimising the regulatory environment. • Enhancing entrepreneurship education. • Facilitating technology exchange and

innovation. • Improving access to finance. • Promoting awareness and networking.

Furthermore, they provide guidance on specific issues for thoroughly assessing each area. They formulated a toolkit that can help governments prepare entrepreneurship policy and assess the effectiveness after the implementation. The UNC- TAD proposes a step by step process.

The Formulation of the National Entrepreneurship Policy

The UNCTAD proposes identifying the policy objectives and recommending actions for each of the key components of the entrepreneurship framework. UNCTAD recommends that govern-

ments undertake a proactive systematic approach in supporting entrepreneurship (Radosevic, 2010).

Table 8 shows policy objectives and recom- mended actions for the formulation of the national entrepreneurship policy as follows:

The UNCTAD report explains that there is no right mix of policy and actions. They deliver a set of explanations for each of the points involved in the formulation of the entrepreneurship national policy. However, the report does not present any explanations about the selection of these steps.

The first step is connected with the identifica- tion of a country’s conditions. It recognises the importance of entrepreneurship strategies being tailored to each country-specific condition. The report mentioned a great list of conditions which can be assessed by governments. Before starting to develop entrepreneurial policies governments should access the particular conditions of their countries. Some of them are presented below. Governments should assess the rate of start-ups relative to the size of the workforce and levels of innovation, other authors have mentioned the rate of start-ups as a measure of entrepreneurial outcome (Armington & Acs, 2002; Chrisman, J. J., Gatewood & Donlevy, 2002). Furthermore, it is important to analyse and take into account whether entrepreneurs are being pushed into this area as a consequence of necessity as developing countries tend to have a high level of own-account workers. Also, the analysis of the importance of the informal sector and the segmentation of the private sector could help policymakers to under- stand their country situation. Entrepreneurs and informal sectors tend to be lower in developed countries.

The second step is connected with setting up goals and priorities. Barriers and opportunities faced by entrepreneurs may be connected with gaps in the education system, specific skills, and so on. Furthermore, access to finance is not always equal for all sectors in developing countries. The productivity spectrum may also be affected by the product quality and managerial skills for growth.

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Other specific country conditions can help policymakers such as characteristics of the private sector. For example, capital intensive and/or export oriented firms require different characteristic linkages so specifically developed programs can create new opportunities for new firms. Other factors include if the country faces discrimination issues (this type of information can help government decide who requires extra support, for example women in some countries); and depending also on the workforce, whether the characteristics of young entrepreneurship programs can also be an option.

The third step mentioned in the formulation of national policies is the coherence of entrepre- neurship strategy and other national policies. It is important that the entrepreneurship strategy is aligned with the development strategies and with other competitiveness policies in the country. Furthermore, it is important to mention that the entrepreneurial strategy should also have internal

coherence. This is also based on the multifaceted characteristics of entrepreneurship (Yusuf, 2010).

The fourth step is described as strengthening the institutional framework which is focused on the importance of the right choice of instru- ments. Designating a leading institution could help to coordinate the implementation of the entrepreneurial policies and facilitate the links between the stakeholders (non-governmental ac- tors, new enterprises and private sectors should have a voice). Entrepreneurship development should be addressed by more than one institu- tion in order to face the multidimensionality of the process.

And finally, measure the results and ensure policy learning. It is important that policies re- main relevant and that impact and achievement of objectives can be successfully measured.

UNCTAD (2012) proposes analysing the spe- cific country situation so that countries will be able to tailor their policies to their environment.

Table 8. The formulation of the national entrepreneurship policy (UNCTAD (United Nations Conference on Trade and Development 2012, p. 9)

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As a starting point UNCTAD (2012) suggests the following checklist (without, however, offering explanations for the selection of these particular questions) (United Nations Conference on Trade and Development, 2012, p. 19):

• “Are there surveys for assessing the nation- al entrepreneurial environment?

• Do mechanisms, such as multi-stakeholder forums, exist to promote policy dialogue on entrepreneurship?

• Does the country have a dedicated policy framework to promote entrepreneurship? Is there a national entrepreneurship strategy?

• Is there clarity about the priorities and type of entrepreneurship that the country wants to encourage?

• Are there specific policies in place to fa- vour start-ups and SMEs?

• Are there specific policies in place to en- courage the transition to the formal busi- ness sector?

• Is the entrepreneurship policy closely co- ordinated with other national policies? Is entrepreneurship embedded into other na- tional policies?

• Is there a ministry, agency or institution championing entrepreneurship? Is there a ministerial level entity in charge of coordi- nation of the strategy?

• Is there a deliberate policy to promote for- mal entrepreneurial activity among specif- ic groups of the population?

• Are there specific targets or measurable objectives to increase entrepreneurial activity?

• Does the government assess the impact of policy measures?

• Does the government support regular inde- pendent policy evaluations?

• Does the government incorporate feedback from lessons learnt?

• Is there an annual (periodic) report on the state of entrepreneurship?”

Furthermore, the UNCTAD (2012) proposed a series of indicators which can help to understand how to measure the results after the implementa- tion:

• Number of formal business start-ups cre- ated annually (Armington & Acs, 2002; Davidsson & Henrekson, 2002)

• Survival rates (Chrisman, J.J. & McMullan, 2000)

• Share of total start-ups in target areas • Share of total start-ups in target groups • Job growth (Birley, 1987; Cooper, A et al.

1990; Puhakka, 2007; Yusuf, 2010) • Taxes paid by start-ups and revenue gener-

ated (United Nations Conference on Trade and Development, 2012, p. 66).

UNCTAD (2012) does not explain how they selected the indicators. Previous authors have also presented similar indicators and these have been added next to the indicators for the purposes of this report.

Optimising the Regulatory Environment

The UNCTAD (2012) point out that it is not only about entrepreneurs’ capability, but it is also about the environment that enables enhancement of those activities. UNCTAD (2012) proposed policies and objectives, which are recognised as crucial for enterprise development, based on policies addressed by international reports. Those reports include:

• Index of Economic Freedom, refer www. heritage.org/index

• Doing Business, refer www.doingbusiness. org

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• Transformation Index, refer www.bertels- mann-transformation-index.de/en/bti

• Global Entrepreneurship Monitor, refer www.gemconsortium.org

• The Donor Committee for Enterprise Development, refer www.enterprise-devel- opment.org

Table 9 shows policy objectives and recom- mended actions for the formulation of the regula- tory environment as follows:

The ranking presented by Doing Business shows that the most entrepreneurial economies and competitive economies (such as Singapore, New

Zealand and Canada) recognised the importance of the environment as, in general, they imposed less administrative requirements on start-ups. Administrative entry barriers have a greater influ- ence on poor people (cost of business registrations, licensing, etc). Furthermore, the lack of transpar- ency or corruption can affect the development of entrepreneurial activities.

The first step is analysing the regulatory requirements for start-ups. At this point, it is important to analyse the reasons connected with the regulatory environment that affect the development of entrepreneurial activities. Although some international reports (doing

Table 9. Regulatory environment (UNCTAD (United Nations Conference on Trade and Development 2012, p. 20)

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business) mention that less regulations help entrepreneurs, the UNCTAD (2012) point out the importance of arriving at the right balance in regulation. It mentioned that entrepreneurs require regulations to create a more predictable business environment, fair competition and security. The report stated the importance of benchmarking.

The second point is connected with minimis- ing regulatory hurdles for start-ups. This involves working in the reduction of bureaucratic process, facilitating accurate information, and reducing time-consuming procedures. Reducing this can facilitate the formal entrepreneurship sector.

The next step is connected to building entrepre- neurs’ confidence in the regulatory environment. UNCTAD (2012) stated that the confidence in the regulatory environment is related to the regulator’s power to enforce rules, entrepreneurs’ awareness, government operations (how timely and efficient), contractual enforcement in the countries, legal dispute mechanisms, property rights, and access to credit after bankruptcy.

The third step is the guidance and help available to assist entrepreneurs through the administrative process for start-ups. Help to new entrepreneurs in the administrative procedures can be offered via assistance with websites or help desks.

In order to help countries to work on the regu- latory environment in 2007 UNCTAD developed an e-regulations tool (please refer to www.e- regulations.org). This tool helps governments to work on business facilitation.

Again, as a starting point, a checklist is offered by the UNCTAD (United Nations Conference on Trade and Development, 2012, p. 29):

• “Has the government carried out an as- sessment of the process of starting a busi- ness? Does it benchmark the time and cost of starting a business? Does it have a good overview of sector- and region-specific regulations?

• Is a public-private dialogue on regulatory costs and benefits in place?

• Has the government considered initiat- ing a process of weeding out unnecessary regulations?

• Are there special provisions for social entrepreneurship?

• Does the country have fast-track mecha- nisms and one-stop-shops to bundle pro- cedures? Does it make use of ICT-based administrative procedures?

• Does the government offer mechanisms to make contract enforcement easier and faster?

• Has it considered the introduction of alter- native dispute resolution mechanisms?

• Do bankruptcy laws allow for business re-starts?

• Does the government offer services to assist start-ups in meeting regulatory requirements?

• Is information about business establish- ment procedures transparent? Are business regulations available online? Are there tutorials available for start-ups? Is infor- mation on business regulations also made available to disadvantaged groups?”

Possible indicators for measuring the effi- ciency of the regulatory environment which can allow international comparison are (refer United Nations Conference on Trade and Development, 2012, p. 66):

• Number of procedures to open a business • Number of days and cost to start or close

a business • Timeliness of dispute resolution mechanism.

Enhancing Entrepreneurship Education and Skills Development

UNCTAD recognises two types of skills: soft and hard. Soft skills are connected with attitudes and hard skills with knowledge. The framework highlights the importance of both formal educa- tion and informal processes which can alter the

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culture. The formal education is associated with formal entrepreneurship programs. However, government should ensure that the entrepreneurial education is implanted across the whole formal and informal education system.

Table 10 shows policy objectives and recom- mended actions for enhancing entrepreneurship education and skills development as follows:

This part requires the involvement of many different government departments – not just the education departments but also the economic development departments. It is not enough to introduce an effective entrepreneurial curriculum only at the university level.

The first step is embedding entrepreneurship in formal and informal education systems. Entre- preneurial education can start from a young age with the introduction of soft skills such as risk taking, etc. Later, more formal entrepreneurship education can be introduced through university or Vocational Education and Training (VET) programs.

The UNCTAD (2012) report does not mention the reason for choosing skills. However, many authors have previously studied the soft skills connected with entrepreneurship (Arenius & Minniti, 2005; Van Gelderen, Thurik & Bosma, 2005) and hard skills (Delmar & Davidson, 2000).

Table 10. Enhancing entrepreneurship education and skills development (UNCTAD (United Nations Conference on Trade and Development 2012, p. 30)

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A higher level of education has been shown to be positively related to entrepreneurial activities (Delmar & Davidson, 2000).

The second step is developing effective en- trepreneurship curricula which includes a more holistic approach (basic financial skills, opportu- nity recognition, business planning, commercial law and so on). There are three main points that entrepreneurship education should address: per- sonal competencies, core operative skills, and business and management skills.

UNCTAD developed with this purpose the “Empretec Entrepreneurship Training Pro- gramme” (refer for further information to www. empretec.net).

The third step is training teachers who can be- come key elements of the entrepreneurial process.

Finally, partnering with the private sector is a key factor of entrepreneurial education. Entre- preneurs can become an important part of the teaching and mentoring process. Some examples of firms involved in this process can be found in UNCTAD’s Business Linkages Programme.

UNCTAD also developed a checklist as a starting point for analysing educational policies and actions (United Nations Conference on Trade and Development, 2012, p. 38):

• “Do national curricula recognize entre- preneurship as a subject? Is it integrated across other disciplines?

• Do policies promote key entrepreneurial skills training in schools including both at- titudes and enabling skills?

• Do policies recognize the specific needs of youth, women and other target groups?

• Are entrepreneurship training programmes offered outside the formal education sys- tem? Do these programmes address low- literacy groups and those in rural areas?

• Are there policies for introducing more interactive and experience-based teaching approaches in the educational system?

• Are schools engaged with business practi- tioners and local entrepreneurs?

• Has entrepreneurship been explicitly rec- ognized as an objective of the national cur- ricula for vocational, technical and com- mercial school at secondary level?

• Have provisions of specific training and in- centives for teachers been introduced?

• Do curriculum designers develop local case studies and entrepreneurship course materials to be used in the classroom?

• Are academic institutions encouraged and supported in providing training, counsel- ling, diagnostic and advisory services to early-stage entrepreneurs?

• Is extracurricular entrepreneurial activity promoted (e.g. student activities, business plan competitions, business development programs, etc.)?

• Have national entrepreneurship educators’ networks been established to facilitate the application of programs?

• Is private sector funding leveraged for en- trepreneurship education?

• Are there mentoring and coaching avail- able to develop entrepreneur’ skills?”

Possible indicators for measuring performanc- es in this area are (United Nations Conference on Trade and Development, 2012, p. 19):

• Share of secondary or technical/vocational schools offering entrepreneurship pro- grams/extra-curricular activities.

• Number of annual spin-offs from universi- ties/research programs.

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The Framework Continues with Facilitation of Technology Exchange and Innovation

The UNCTAD (2012) approach recognises the supported environment between entrepreneurship, technology and innovation and proposes a series of policy objectives and options, as indicated in Table 11.

The first point UNCTAD (2012) emphasizes is supporting greater diffusion of Information and Communication Technologies (ICT) and le- veraging the advantages of these modern systems

to the private sector; however low technology firms are not included in the report. The report is focused on developing countries and mentions mobile phone uses and technologies to facilitate enterprise growth.

The second point is promoting inter-firm networks spreading technology and innovation. Proximity can help to create opportunities. Knowl- edge becomes one of the main characteristics of a dynamic environment which fosters innovation (Audretsch, Hülsbeck & Lehmann, 2012; Santoro & Chakrabarti, 2002; Sorenson & Audia, 2000; Varga, 2000). Clusters of firms appear and use the

Table 11. Facilitation of technology exchange and innovation (UNCTAD (United Nations Conference on Trade and Development 2012, p. 39)

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synergy of working together in order to be more competitive. Maskell & Malmberg (1999) main- tained that Regional Innovation Systems (RIS) can guide competitive advantages through the localisation of certain capabilities. These capabili- ties could be specific resources, specialised skills, and all the social dimensions that are implicit in cultures. A definition of RIS is “a set of interact- ing private and public interests, formal institutions and other organisations that function according to organisational and institutional arrangements and relationships conducive to the generation, use and dissemination of knowledge” (Doloreux & Parto, 2005, p. 3).

Fostering innovation and technology transfer, creating relationships between the actors, and de- veloping National Innovation Systems (NIS) also help to promote technology based entrepreneurial activities. NIS and RIS have been supported by many authors (Cooke, 1998; Edquist, 1997, 2005; Lundvall, Bengt-Åke, 1992; Lundvall, Bengt-Åke, 2007; Nelson, 1993; Patel & Pavitt, 1999). The global economy raises the necessity of having more competitive advantages in certain areas of the world in order to face increasing competition (Doloreux & Parto, 2005). As a result, the clusters of firms appear and use the synergy of working together in order to be more competitive and transfer knowledge that increases entrepreneurial activities.

The third point is to build bridges between public bodies, research institutions, universities and the private sector. Previouys studies show that the innovation process relies on the interaction of academia, government and private sectors. Etz- kowitz (2003) wrote about the Triple Helix Model (THM). He explained that innovation is the base of the THM, where knowledge plays a relevant role. The THM frames studies of the interaction between university, industry and government but focuses mainly on the university in their support of technology based firms. Etzkowitz (2003) explained that universities should be involved in

training and sharing knowledge processes and the government should go further than the traditional role of setting up the rules of the game and be a public entrepreneur and venture capitalist.

UNCTAD (2012) mentions the importance of universities becoming more actively involved in the innovation and entrepreneurship process. Furthermore, the private sector may become more interested in sharing knowledge with universi- ties. The government should also have an active entrepreneurial role in facilitating different sector interactions.

The fourth and final policy point is for sup- port of high-tech start-ups and notably there is no mention in the report (United Nations Conference on Trade and Development, 2012) about low-tech start-ups. Some of the possible policy actions recommended are establishing: technology hubs, incubators, small science parks, innovation awards, preferential access to finance or intellectual prop- erty, and so on.

Audretsch et al (2012) found that research in- tensive universities influence young and high tech firms. In this way, universities become important competitive advantages of the regions. They also argue that government can facilitate the process providing infrastructure and incentives for entre- preneurs and researchers (p.599). They also point out that public funded research should spill over into entrepreneurial firms.

A checklist of questions is presented as a starting point for developing policies and actions that facilitate technology exchange and innova- tion (United Nations Conference on Trade and Development, 2012, p. 45):

• “Are there awareness and capacity-build- ing campaigns on ICT use?

• Is there a policy to promote diffusion of technologies to SMEs?

• Does the Government facilitate or provide training and support for technology up- grading in small firms?

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• Are there initiatives to facilitate and en- courage exports, business linkages and in- dustrial clusters?

• Are there supplier development programs to engage SMEs in the value chain of larger companies?

• Does the Government provide assistance for standardization and quality certification for local enterprises to meet required stan- dards, including social and environmental standards?

• Does the government encourage and support linkages for university industry partnerships?

• Does it provide support for applied re- search and commercialization of science and technology?

• Does the government provide support infrastructure or engage in public-pri- vate partnerships to establish business incubators, clusters, networks and sci- ence parks for science and technology commercialization?”

Lists of possible indicators for measuring performances in this area are (United Nations Con- ference on Trade and Development, 2012, p. 19):

• Share of graduates with science/engineer- ing degrees.

• Share of technology-intensive start-ups in total start-ups.

• Share of technology-intensive start-ups with venture capital funding.

• Number of science parks, technology hubs and incubators.

Improving Access to Finance

Inadequate access to finance has been recognised as the main impediment for entrepreneurs in de- veloping countries (McKinsey, 2010).

UNCTAD addresses the finance issues pre- sented below based on a series of international reports (International Finance Corporation, 2010; OECD 2009a).

Table 12 shows policy objectives and rec- ommended actions for improving the access to finance.

The first point prescribed by UNCTAD is improving access to relevant financial services on appropriate terms. In developing countries entrepreneurs do not have access to finance, sometimes interest rates are very high, and/or requirements for finance are very complicated. Furthermore, sometimes the access to finance also differs between groups. One solution could be the implementation of public credits guaran- tees for entrepreneurs. Moreover, by improving Foreign Direct Investment (FDI) it is also possible to improve credit for local entrepreneurs and so on (United Nations Conference on Trade and Development, 2012).

The second point is to promote funding for innovation which includes encouragement of business angels, assistance funds, loans, grants, tax incentives, etc. (United Nations Conference on Trade and Development, 2012).

Third, policymakers should build the capacity of the financial sector to serve start-ups. There are four basic categories where governments can work to build that capacity: commercial banks, micro-finance institutions, community banks/ credit cooperatives, and private equity and ven- ture capital funds (United Nations Conference on Trade and Development, 2012). Furthermore, policymakers could play an important role in the promotion of new banking technologies.

Finally, it is important to provide literacy train- ing to entrepreneurs and encourage responsible borrowing and lending. Easy availability to credit information is required.

There is also a checklist presented as a starting point for analysing accessibility to finance, how-

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ever as previously explained there is no explana- tion about the reasons for selecting the following questions (United Nations Conference on Trade and Development, 2012, p. 55):

• “Are there measures to encourage financial institutions to lend to start-ups and SMEs?

• Does the government require banks and other financial institutions to report their lending by size of firm?

• Are there public-private funds for entrepreneurs?

• Is FDI promoted to broaden access to fi- nance to local entrepreneurs?

• Are factoring and leasing schemes encouraged?

• Are there incentives for venture capital and the development of networks of business mentors or supporters, including business angel networks?

• Are development-oriented funds encour- aged to invest in seed capital and small firms?

• Has the government taken steps to improve access to finance for target groups (minori- ties, youth, women, immigrants, expatri- ates, those in rural areas, etc.)?

• Is the adoption of financial service provi- sion through post offices and other “prox-

Table 12. Improving access to finance (UNCTAD (United Nations Conference on Trade and Develop- ment 2012, p. 46)

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imity lenders”; and new banking tech- nologies (e.g., mobile phone banking) encouraged?

• Are effective intellectual property rights (IPR) accepted as collateral?

• Is there a financial charter? • Does the government provide appropriate

supervision and regulation to prevent un- sustainable lending?

• Are there formal courses on financial lit- eracy designed and available for SMEs and micro-enterprises?

• Is training available to lenders to design ways to expand lending activities to SMEs and entrepreneurs?

• Are there credit bureaux?”.

Possible indicators for measuring performanc- es in this area are (United Nations Conference on Trade and Development, 2012, p. 19):

• Share of microfinance/SME loans in total business loans.

• Average value of collateral required for SME loans (per cent of loan).

• Total venture capital invested in SMEs. • Credit bureau coverage (per cent of adult

population).

Promoting Awareness and Networking

Fostering an entrepreneurial culture could be a key determinant for successful entrepreneurship policies (United Nations Conference on Trade and Development, 2012).

Table 13 shows policy objectives and recom- mended actions for promoting awareness and networking in order to support entrepreneurship. There were no explanations about the reason un- derlying the selection of these areas as presented in the UNCTAD (2012) report.

Networking can foster entrepreneurial culture in a positive way through showcasing models, champions and references to successful entrepre- neurs. In developing countries, entrepreneurial networking is important in facilitating operations through trust, support, counselling, communica- tion, etc. (United Nations Conference on Trade and Development, 2012, p. 56).

The first step is highlighting the value of en- trepreneurship to society and challenging negative cultural biases. Some countries have negative perceptions towards entrepreneurship which can be connected to societal values such as tolerance to risk, fear of failure, rewards to success, and so on. The governments can address this issue by showing entrepreneurship importance in solving problems like unemployment, social inequality and poverty (Audretsch, Grilo & Thurik, 2007; Gilbert, Audretsch & McDougall, 2004; Yusuf, 2010). Furthermore, the UNCTAD (2012) mentioned the importance of eliminating cultural bias based on age, race, disability, etc. Many organisations can play an important role in this process such as chambers of commerce, professional associations, trade unions and so on.

The second step mentioned in this report is raising awareness about entrepreneurial opportu- nities which can be achieved though government participation in reducing information asymme- tries. Forums and fairs can be ways of showing entrepreneurial opportunities.

Finally, stimulating private sector led-initia- tives and strengthening networks among entrepre- neurs can be done by diverse measures such as: free office space, finance, mentoring support, etc. By improving horizontal links (between different small businesses) and vertical links (with potential suppliers to create a value chain) governments can improve the distribution of information (United Nations Conference on Trade and Development, 2012).

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A checklist as starting point was also developed by UNCTAD for this area. Like the other checklists no explanations were presented in regard to the selection of the questions (United Nations Con- ference on Trade and Development, 2012, p. 63):

• “Does the government carry out campaigns to promote entrepreneurship?

• Do policymakers communicate their sup- port for entrepreneurship in speeches, and communicate the link between entrepre- neurship and economic development?

• Are measures taken within the public sec- tor to raise awareness of entrepreneurship issues with officials?

• Does the government take part in global entrepreneurship awareness initiatives such as Global Entrepreneurship Week?

• Does the government engage in public-pri- vate partnerships to organise entrepreneur- ship awareness activities such as entrepre- neurship fairs or entrepreneurship forums?

• Does the government support competi- tions, awards or similar events to publicly recognize entrepreneurs?

• Are there initiatives to encourage and rec- ognize corporate social responsibility?

• Do information platforms on entrepreneur- ship and trade opportunities exist?

• Does the government support networks of entrepreneurs and business leaders?

• Are there measures in place to engage in- ternational Diaspora networks?”

Lists of possible indicators for measuring performances in this area are (United Nations Con- ference on Trade and Development, 2012, p. 19):

Table 13. Promoting awareness and networking (UNCTAD (United Nations Conference on Trade and Development 2012, p. 56))

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• Results of opinion/attitudinal surveys and evaluations following awareness campaigns.

• Number of business associations ‘ for [...] entrepreneurs’.

Summary and Recommendations

This section of the report summarises the variables included in the most recognised global interna- tional entrepreneurship frameworks (see Table 14); the GEM, OECD and UNCTAD. Furthermore, it presents instruments to measure entrepreneurial activities developed around the world. The GEM is used for a global perspective where 87 countries are measured. The Entrepreneurship Program is used in the OECD member countries. Furthermore, the World Bank measures entrepreneurial activities in 112 countries. And finally the Eurobarometer en- trepreneurship measures entrepreneurial activities in European countries, EFTA countries, Croatia, Turkey, the US, Japan, South Korea and China. Many of these surveys for collecting data started in the last decade with the intention of providing information about entrepreneurial activities and supporting policymakers in developing the right strategies that can promote the economic develop- ment of the regions.

Information about entrepreneurship around the world can be found in regional reports. Aus- tralia’s entrepreneurial situation can be compared to the rest of the world by analysing information presented by GEM and OECD reports.

Entrepreneurial activities can drive economic development. The efforts of regional govern- ment should be to improve the entrepreneurial environment. The entrepreneurial environment is multidimensional and as such requires the co- ordination of many government departments in order to improve it. Table 15 highlights the focus of macro-level monitoring of entrepreneurship

that considers leading, operational, lagging and government pro-activeness measures.

The challenge for regional governments lies in assessing the region’s entrepreneurial situation, benchmarking with similar jurisdictions around the world, and identifying the main factors to work on in coordination with different entities to achieve the final objectives. A key obstacle to meeting this challenge is accessing relevant and pertinent data and intelligence on not only on a region-wide basis but also on a sub-region level.

INDIVIDUAL LEVEL CHARACTERISTICS

The purpose of this section of the study was to determine the various entrepreneurial character- istics that are associated with different stages of firm development. Governments are challenged by the need to create programs to support the growth and development of firms, provide a framework of conditions that will encourage firms toward success and monitor the overall state of a region with respect to its readiness to start, nurture and grow firms to prosperity. Lichtenstein (2008) argued that the stage of development of a firm is independent of the characteristics of entrepreneurs although transitioning through stages depends upon entrepreneurs with more suited individual characteristics. Therefore, understanding the as- sociation between a firm’s stage of development and the entrepreneurial characteristics needed to transition the firm to the next stage will aid government policy-makers to provide direct train- ing and education programs that better match the dominant need within a region.

What are the characteristics of nascent entre- preneurs, those who have not started the business, are determinants for successful venture formation? What entrepreneurial characteristics of entrepre-

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Table 14. GEM OECD and UNCTAD summary of variables

GEM OECD UNCTAD

Attitudes - Perceived opportunities and capabilities x

Attitudes - Fear of failure x

Attitudes - Status of entrepreneurship x

Activity - opportunity/necessity driven x

Activity - Early stage x

Activity - Inclusiveness x

Activity - Industry x

Activity - Exits x

Aspirations - growth x

Aspirations - innovation x

Aspirations - International orientation x

Aspirations - social value creation x

Regulatory Framework / Commercial, legal infrastructure for entrepreneurship x x x

Market conditions / internal market openness x x

Access to finance / Entrepreneurial finance x x x

R&D transfer and Technology x x x

Entrepreneurial capabilities / education / skills x x x

Culture / and social norms x x

FIRMS entrepreneurial performance x

Employment entrepreneurial performance x

Wealth entrepreneurial performance x

Job creation - impact x

Economic growth - impact x

Poverty reduction - impact x

Formalising the informal sector - impact x

Government Policy x

Government Entrepreneurship programs x

Physical infrastructure for entrepreneurship x

Promoting awareness and networking x

Table 15. Macro indicators of entrepreneurship

Leading Operational Lagging Government Pro-Activeness

Entrepreneurial Population Attitudes & Aspirations

Framework conditions: Social, political, regulatory, technology and economic

Firm Performance and Impact Policy, Programs and Infrastructure

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neurs will ensure firm survival during the start-up phase? What entrepreneurial characteristics of entrepreneurs will accelerate firm growth?

The Driver of Entrepreneurial Process: Causation or Effectuation?

In recent years the concepts of causation and effectuation have emerged as two alternative ap- proaches used by entrepreneurs in the new venture development process (Sarasvathy, 2001). Together with other influencing factors, entrepreneurial opportunities, entrepreneurial personality and experience are the drivers of the entrepreneurial process that result in either “develop a full-blown business or marketing plan” (causation) or “just get started” (effectuation) (Chandler, G. N. et al. 2011). According to Sarasvathy (2001 p. 245), “Causation processes take a particular effect as given and focus on selecting between means to create that effect. Effectuation processes take a set of means as given and focus on selecting between possible effects that can be created with that set of means”. Chandler et al. (2011 p377) differen- tiates entrepreneurial causation and effectuation processes through the following four aspects:

• A focus on short-term experiments to iden- tify business opportunities in an unpredict- able future (effectuation) versus prediction of an uncertain future by defining the final objective up front (causation).

• A focus on projects where the loss in a worst-case scenario is affordable (effectua- tion) versus maximization of expected re- turns (causation).

• An emphasis on pre-commitments and strategic alliances to control an unpredict- able future (effectuation) versus business planning and competitive analyses to pre- dict an uncertain future (causation).

• Exploitation of environmental contingen- cies by remaining flexible (effectuation) versus exploitation of pre-existing capa- bilities and resources (causation).

During new venture creation, research has shown that experienced entrepreneurs tend to apply effectuation rather than causation (Harms & Schiele, 2012). Family owned firms are some- what more likely to follow effectuation processes and significantly less likely to follow causation processes than non-family owned firms (Hayton, Chandler & DeTienne, 2011). In the process of new venture creation, causation oriented entre- preneurs systematically search information to find opportunities to accomplish their clearly defined objectives. Thus, the venture is envisioned from the beginning by entrepreneurs following a causation process and all the following efforts are directed at achieving the pre-envisioned state (Chandler, G. N. et al. 2011). In contrast, in the process of new venture creation, effectuation oriented entrepreneurs do not have a clear defined future of new venture creation, they might begin their venture process through general aspiration (Chandler, G. N. et al. 2011) and they have flex- ible approaches and change their venture course based on new information.

The new venture creation process is influenced by multi-dimensional factors that in turn affect entrepreneurial outcomes. Thus, it is important to know the nature of an entrepreneurial process. Chandler et al. (2011) suggest that the causa- tion process is a reflective construct while the effectuation process is a formative constructive. To measure whether an entrepreneurial process is a causation or effectuation process, they ran a two-stage study and statistical analysis of these two studies.

The Approach to the Study of Individual Entrepreneurial Characteristics

Systematic review, meta-analysis and narrative re- view methods were taken into account as method- ologies for this stage of the research. A systematic review comprehensively identifies, appraises and synthesizes all relevant studies on a given topic whereas a meta analysis uses a specific statisti-

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cal technique for synthesising results of several studies into a single quantitative estimate such as the summary effect size (Patticrew, 2009). As this is the first attempt to understand the state of the literature, this research followed a narrative study in order to explore the heterogeneity descriptively.

Based on the methodology followed by Meglio & Risberg (2011), as a first step, three main data- bases were identified. Business Source Complete, Academic OneFile and Scopus were the main three databases where the searches were carried out on a set of keywords. These databases do not cover the same journals. The main keywords were: entrepreneur*, competenc*, attribute*, trait*, characteristic*, capability*, nascent, survival, start-up, growth, established, firm*, organiza*, company*. The asterisk stands for finding all combination of a word or word fragment.

After filtering the initial pool or more than 350 articles, 184 were extracted based on the publication date which was from the year 2000 to current date of the study. The citations of the older articles were also analysed in order to determine any articles that were significant yet not included in the pool of shortlisted articles. Google scholar was mainly used to search these articles using the title (which was obtained from the citation list of the articles that were older than publication year 2000) as the search criteria and included in the pool. Subsequently their area of study was closely analysed to determine whether the study was focus- ing on individual level attributes and not firm level or environmental attributes. This resulted in 98 papers. A final filtering criterion was the type of the study. Conceptual articles, theoretical articles and studies on the literature reviews including but not limited to meta analysis reviews, systematic reviews and narrative reviews were excluded. This resulted in the 42 articles that present the main themes of study. Table 16 shows the breakdown of the article filtration process while Table 17 shows the main journal sources of articles.

In addition to the above, during the filtering process a backward and forward referencing mechanism were also put into practice whilst analysing each article, in order to increase the pool of the articles. The objective was to gain insights into themes as well as contradictive views on entrepreneurial capabilities and their influence towards various firm stages.

Measuring Entrepreneurial Competency

Entrepreneurial competency can be measured through multiple aspects. There are two broad units of classifications in measuring entrepreneurial competencies: at a composite level combining the competencies of the entrepreneur, or at an atomic level measuring specific entrepreneurial

Table 16. Filtering summary

Filter Criteria Articles

Total papers reviewed 357

Filter one - publication date 184

Filter two - focus of study (excluded firm specific articles, environmental specific articles)

Filter three - type of study (excluded meta analysis studies, theoretical studies)

Table 17. Main source of selected articles

Name of the Journal Number %

Journal of Business Venturing (JBV) 9 21%

Entrepreneurship Theory and Practice (ETP)

6 14%

Entrepreneurship and Regional Development (ERD)

4 9%

Journal of Small Business Economics (SBE)

5 11%

Journal of Applied Psychology (JAP) 3 7%

Economics Letters (EL) 3 7%

Other 12 27%

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competencies. For instance risk propensity, self- efficacy and opportunity alertness are examples of specific competencies that can be measured at an atomic level. Scholars have developed compos- ite level instruments to measure entrepreneurial competencies as illustrated in Table 18.

Empirical evidence of these is discussed below. Most of the research is confined to measuring entrepreneurial competencies based on self as- sessment. Self assessment is primarily defining competencies based on literature and allowing entrepreneurs to self assess their own competen- cies or level of agreement with competence related statements (Markman et al., 2002).

Another subjective measurement device has been performance based assessment that identifies key tasks (Lerner & Almor, 2002; Reuber & Fische, 1994). For example Escan is a self-assessment test that poses 114 questions and statements to measure entrepreneurial competencies (Driessen & Zwart, 1999). This has been developed based on determinants of successful entrepreneurship from psychological and business studies. Escan looks at need for achievement, need for autonomy, need for power, social orientation, self-efficacy, endurance and risk taking propensity from a traits standpoint. In addition it measures three skills: market awareness, creativity and flexibility.

Table 18. Composite level instruments to measure entrepreneurial competencies (Mitchelmore & Rowley 2010)

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Delmar & Shane (2004) have suggested a method to determine the entrepreneurial ability based on reaching milestones which are beyond the traditional measures such as achieving first sale or getting into positive cash flow. These are milestones of entrepreneurial ability and are such things as product completion and product pilot. Davidsson & Honig (2003) proposed the mea- surement of accumulation of gestation activities between two points in time as a performance indi- cator where nascent entrepreneurship is concerned. Entrepreneurial competencies measurement needs further research which has been called for by many researchers (Davidsson, 2007; Hisrich et al., 2007; Sarasvathy, 2004).

Even though scholars have argued that there is a void where entrepreneurial competency measure- ment is concerned, tested models are available to measure some entrepreneurial competencies. For instance, general education as a competency can be measured by the number of years of school- ing (Van der Sluis et al., 2006; Van der Sluis & Van Praag, 2007). Entrepreneurial self-efficacy (ESE) can be used to determine an individual’s choice, level of effort and perseverance (Chen et al., 1998) and researchers have devised methods to measure ESE as a multi-dimensional construct (Wilson, Kickul, & Marlino, 2007; Zhao et al., 2005, McGee et al., 2009). McGee et al. (2009) developed an instrument based on 50 questions and it was tested in the field successfully. They found that the multi-dimensional and sequential nature of entrepreneurship should be taken into account when developing entrepreneurship-related education programs and the effectiveness of these programs can be measured through pre- and post- ESE measurement. An alternative argu- ment to using ESE measure is to use a General Self-Efficacy (GSE) measure. Some researchers advocate using GSE as they believe entrepreneurs require a diverse range of skills (Markman, Balkin, & Baron, 2005).

MacKo & Tyszka (2009) used the Kogan- Wallach instrument to measure risk propensity of individuals where they concluded entrepreneurs in naturalistic risky situations opted for risky choices. Interestingly they found under laboratory condi- tions entrepreneurs and non entrepreneurs were similar in their choices unlike the circumstances found in natural situations.

Entrepreneurial activity is primarily in and around opportunity identification and exploita- tion. As a result, opportunity alertness is another facet of measuring entrepreneurial competency. Tang et al. (2012) proposed a process to measure alertness for opportunity comprising of three stages: (1) systematically or non-systematically scan the environment and search information; (2) associate or piece together previously uncon- nected information; and (3) make evaluations and judgments about the possibility to commercialise the idea. This model was tested with three studies and reported to be reliable.

Measuring entrepreneurial characteristics sup- ports the predictability of entrepreneurial success. Using a combination of the findings of recent empirical studies, policy makers will be able to determine the competencies at an individual level.

Entrepreneurial Characteristics and Stages of a Firm

We have analysed capabilities associated with entrepreneurs that positively contribute towards various stages of the firm to argue that different capabilities are crucial for different stages. Given the different sample sizes and diversity of studies, we recognize the need for caution in interpreting the results. However, we believe our study brings further insight to the individual level capabilities that are positively contributing towards a firm transitioning across stages of growth.

In order to carry out the analysis, the entrepre- neurial capabilities discussed above were mapped

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against the studies that fulfilled the criteria of firm stages as outlined in the definitions section. Table 19 is the summary of the classification of studies and the significant observations of the study are discussed in detail in the subsequent sub sections below.

Entrepreneurial Capabilities during the Nascent Stage

Creation of a successful venture is a process. A nascent entrepreneur is someone who commits time and resources to start a new firm and the

Table 19. Summary of individual level studies

Firm Stage Entrepreneurial Capability

Author Journal Sample

Nascent Risk propensity, Opportunity propensity, Self-efficacy

Westhead, Ucbasaran & Wright (2005)

SBE Based on a GEM, 80,117 across 28 countries

Risk propensity van Gelderen & Jansen (2006) SBE Based on SOEP, 22,000 in Germany

Van Gelderen, Thurik & Bosma (2006)

SBE 517 in the USA

Education, Experience, Role models, Age, Marital status

Delmar & Davidsson (2000) ERD 30,427 in Sweden

Role models Lichtenstein, B. B., Dooley & Lumpkin (2006)

JBV 297 in Netherlands

Seeking assistance Brixy, Sternberg & Stüber (2013)

EL Based on GEPANGE, shortlisted 209 in Germany

Education, Experience Cassar (2006) JBV 490 in the USA

Business planning Chwolka & Raith (2012) JBV

Human capital Dimov (2010) JMS Based on PSED, 64,222 in the USA

Business planning Honig & Samuelsson (2012) SBM 623 in Sweden

Complexity dynamics Lichtenstein, B.B. et al. (2007) JBV Based on PSED 15,118 in the USA

Support network Zhao, Hills & Seibert (2005) SBM Based on PSED I, shortlisted 830 in the USA

Balanced skills Stuetzer, Goethner & Cantner (2012)

EL Based on Thuringian Founder Study 98 in Germany

Self-efficacy, Entrepreneurial intension

Wilson, Kickul & Marlino (2007)

ETP 4,292 in the USA

Self-efficacy Zhao, Hills & Seibert (2005) JAP 265 in the USA

De Clercq et al. (2009) SBE Based on PSED, 81 in the US

Entrepreneurial passion Zhu, Li & Chen (2011) ERD

Experience Chrisman & McMullan (2004) ERD Filtered 197 from a 9,533 sample In Norway

Opportunity propensity Edelman & Yli‐Renko (2010) ETP Based on PSED, 114 in the US

Nascent, Survival

Entrepreneurial aspirations Brush, Edelman & Manolova (2008)

SBM Based on PSED 280 from the US

Nascent, Survival, Growth

Entrepreneurial intension, Opportunity propensity

Delmar & Davidsson (2000) ERD Based on GEM, 25,384 in 38 countries

continued on following page

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required capabilities for nascent entrepreneurs is discussed below. When this gestation process is completed, either a venture will start as an operating business or if the nascent entrepreneur abandons the effort, a stillborn venture occurs, i.e. the venture remains a conceptual idea that has not found traction with either or all of the entrepreneur, the market it seeks to serve or the backers and supporters needed to operationalise the venture.

Identifying market opportunities is more of an art than a science. In broad terms, an op- portunity may be the chance to meet a market need (Schumpeter, 1934). Being alert for new opportunities, recognizing them, developing the same and evaluating the possibility of fulfilling the demands through existing and/or available resources are elements of opportunity perception. Nascent entrepreneurs who demonstrate these traits are more successful in their endeavour than

Firm Stage Entrepreneurial Capability

Author Journal Sample

Survival Entrepreneurial passion Newbert (2005) QRE&F Based on BHPS, shortlisted 1436 in the UK

Rotefoss & Kolvereid (2005) JM Filtered 204 out of 1,866 initial sample

Entrepreneurial passion, Entrepreneurial intension

Reynolds et al. (2004) FER 201 in the US

Human capital, Social capital, Entrepreneurial passion

Van Gelderen, Thurik & Bosma (2005)

SME 517 in Netherlands

Experience Stel, Carree & Thurik (2005) II 2,497 in Denmark

Cardon et al. (2005) JBV 630 in the UK

Human capital Delmar & Davidsson (2000) E&SB 97 in the UK

Shrader & Siegel (2007) ETP 198 in the US

Shared experience Zheng (2012) JBV 98 in China

Self-efficacy Tumasjan & Braun (2012) JBV 254 in Germany

Opportunity alertness Tang, Kacmar & Busenitz (2012)

JBV 291 in the USA

Cognition and ideation Gemmell, Boland & Kolb (2012)

ETP 32 in the USA

Survival, Growth

Human capital, Social capital

Carter et al. (2003) AMJ 275 in the US

Assisted planning Frese et al. (2007) JBV 159 in the USA

Related experience French, Kelly & Harrison (2004)

ETP 349 in China

Growth Business planning Frese et al. (2007) JAP 117 in South Africa

French, Kelly & Harrison (2004)

JMD 126 in Australia

Sarason & Tegarden (2003) JBM 314 in the USA

Related experience Shepherd (2011) JAP 59 in Finland

Barringer, Jones & Neubaum (2005)

JBV 100 in the USA

Table 19. Continued

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others (Arenius & Minniti, 2005). Dimov (2010) found that opportunity confidence is a strong me- diator of nascent entrepreneurial success which is defined as venture formation and both prior experience and planning are positive influencers to determine opportunity confidence.

Attitude towards risk is an important determi- nant for nascent entrepreneurial success. Scholars have defined various models to determine the at- titude towards risks although it is also argued that risk management capabilities are strongly affect- ing nascent entrepreneurial success over merely looking at the attitude towards risks (Caliendo at el 2009; Gelderen at el 2006).

Growth intentions of the entrepreneur are also an important determinant for nascent entrepreneur- ial success (Cassar, 2007; Chwolka & Raith, 2012; Honig & Samuelsson, 2012; Manolova, T.S. et al. 2012). While career independence was identified as the key motivation for an entrepreneurial career by Cassar (2007), he also identified it as a barrier for employment growth.

Based on the studies carried out by schol- ars including Delmar & Davidsson (2000) and Muller (2006), education can build knowledge with respect to opportunities, resources and their efficient application, specifically with respect to the general administration of a business. In addi- tion to knowledge, it is expected that such general education would also support the development of general skills such as communication, teamwork, critical analysis, and problem solving. Finally, it has been suggested that the extent to which an entrepreneur obtains formal educational qualifica- tions is also an indicator of his or her determination and drive, energy, motivation and commitment to the business enterprise.

In addition to knowledge and skills obtained from education, it was empirically argued that it is important to consider the influence of prior experience. Prior experience in similar contexts represents a form of specific human capital. This provides nascent entrepreneurs with knowledge of the industry, understanding of markets, customers

and the specific technologies. Experience supports opportunity identification and exploitation, as well as resource acquisitions (Kim et al. 2006). Thus, it is recommended to consider education and experience as highly positive determinants to identify nascent entrepreneurs with a higher de- gree of potential for successful venture formation. With a different viewpoint on industry experience, Brixy, Sternberg & Stüber (2013) suggested poli- cies should target highly educated inexperienced entrepreneurs for assistance schemes based on their study findings as opposed to experienced entrepreneurs. This suggests that government policy makers and education providers need to decide on the nature of support and the outcome sought depending upon the objective requirements.

Self-efficacy is a useful concept for explaining human behaviour as research reveals that it plays an influential role in determining an individual’s choice, level of effort, and perseverance (Chen et al., 1998). Simply stated, individuals with high self-efficacy for a certain task are more likely to pursue and then persist in that task than those individuals who possess low self-efficacy. Entrepreneurial self-efficacy when coupled with entrepreneurial risk propensity, education and experience is a highly positive determinant for nascent entrepreneurial success (Zhao & Siebert, 2005). Gender differences have an impact on en- trepreneurial self-efficacy where entrepreneurship is found to be a “male” field. However, entrepre- neurial education acting as an equalizer reduces this effect of low self-efficacy among female entrepreneurs and ultimately increases the chances for successful gestation activity by women.

A social network facilitates establishing linkages with the market in order to understand market demand. In addition, it also provides bet- ter access to those who can assist in fulfilling resource requirements to cater for the demands of the markets. It is also evident that the impact of role models with required knowledge are of high significance to nascent entrepreneurial success (Newbert & Tornikoski, 2012; Bosma et al 2012).

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The gestation process is complex by nature as it involves understanding many facets but yet being focused enough to successfully accomplish the gestation activities. As a result, examining the capabilities of potential successful entrepreneurs should place a critical emphasis on ensuring na- scent entrepreneurs have the ability to compound various skills in an appropriate manner while tak- ing the complexity of the business landscape into account. This will be a key criterion for effectively filtering nascent entrepreneurs with a high prob- ability of entrepreneurial success (Davidsson & Gordon, 2012; Stuetzer et al 2012; Lichtenstein et al 2006).

Entrepreneurial Capabilities during the Survival Stage

Survival rates of firms are strikingly low after firm formation. Accordingly Bartlesman et al (2005), found that around 20-40% of firms fail within the first two years of life. The founder’s role is paramount to manage this stage success- fully and this section consolidates the literature that discusse the capabilities of the entrepreneur that are critical to this survival stage.

Entrepreneurial passion is a positive intense feeling experienced by engagement and is enduring as opposed to being momentary. Entrepreneurial passion positively influences entrepreneurial actions that accelerate firm growth and survival during survival phase (Murnieks et al, 2012). The passion of the entrepreneur is significant during the survival stage although, in subsequent growth phases of the firm, it has less of an impact. During the survival stage of the firm, firms cannot escape facing unforeseen challenges. In order to be pas- sionate on the mission of the firm, it is paramount the entrepreneur demonstrates coping skills which will in turn lead towards positive well-being (Uy et al, 2010). This becomes a positive influencer towards the firm survival and growth during the survival phase. Georgellis et al (2011) suggested that being satisfied about one’s work as an entre-

preneur has a positive influence on the survival of the firm as opposed to being negative about the work. However, even when entrepreneurs lack self-efficacy, Tumasjan & Braun (2012) found that the capability to remain focused on promotion of the venture can substitute for a lack of self- efficacy, and an entrepreneur will successfully face the challenges by identifying opportunities to overcome the obstacles during the survival stage.

Educated entrepreneurs with relevant experi- ence had better access to relevant information and are expected to exhibit better firm survival rates and firm performance (Dhal & Reichstein 2007; Baptista et. al. 2011; Rotefoss et al 2005; Ebbers 2011). Furthermore, Ucbasaran et al (2010) found that experienced entrepreneurs identified and exploited more opportunities than inexperienced entrepreneurs. It is also empirically proven that business failure will temper the likelihood of comparative optimism and grief resulting from business failure, which negatively influences the ability to learn from said failure (Ucbasaran et al 2010; Shepherd 2003). Shrader & Siegel (2007) through their study found prior experience with corporate environments influenced entrepreneurs to be more conservative or risk averse while start- up experience tends to influence the entrepreneur to contribute in a positive manner during the survival stage of the firm. The founding team is also a mediator during the survival phase primarily due to relief of the limited human and financial capital of an individual and the benefit of shared experiences among the founders that induce an effective and efficient environment (Zheng, 2012).

An entrepreneur’s network also has a positive influence during the survival stage in identifying demand to penetrate the market as well as sourcing the right skill sets for the firm, to supplying the required input to fulfil the demands of the market (Florin et al, 2003). Depending on the size of the firm, the impact of the network varies. For instance, for a small firm the founder’s network will play a crucial role, more than for a firm with a sizable resource pool (Gurău et al, 2010). Macpherson &

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Holt (2007) through their study revealed that social capital obtained through the founder’s network, should be evaluated in a context specific manner. Gemmell, Boland & Kolb (2012) through their study on technology entrepreneurs identified that ideation which is a cyclic complex process is a social process where ideas are being refined through a form of shared cognition.

A founder’s desire to improvise has a very positive influence on firm survival during the survival stage and firms founded to seize an op- portunity are more likely to survive with such founders as opposed to firms that were founded out of necessity (Hmieleski & Corbett 2006). Further Tang, Kacmar & Busenitz (2012) found a positive mediating effect between prior experi- ence and opportunity alertness and they argued that opportunity alertness strongly influences the innovative performance of the firm.

In summary, the specific capabilities that will facilitate venture survival include entrepreneurial passion, prior work experience, an entrepreneur’s education and social network. These aspects are indicated as those that will help to predict the po- tential for firms to survive and persevere through the critical early stages of venture establishment.

Entrepreneurial Capabilities during the Growth Stage

Based on the literature, a different set of entre- preneurial capabilities are significant during the growth phase of a firm and are different compared to the entrepreneurial capabilities of nascent or survival stage firms.

In the growth stage the literature suggests that founders with higher education, with a more compelling entrepreneurial story or entrepreneur- ial intentions and higher incidence of industry experience will grow their firms faster than others. However, in addition to the contributions by the

founder, firm attributes, business practices and human resource management practices also have a substantial impact on firm growth (Barringer, Jones & Neubaum, 2005). These aspects will be discussed in the subsequent firm section of this chapter. While entrepreneurial experience has a significant impact during previously discussed nascent and survival phases of the firm mainly to identify opportunities, management experience becomes significant during the growth phase of the firm (Gruber, MacMillan & Thompson, 2012). Sadler-Smith et al. (2003) argue that management competencies and entrepreneurial competencies are dynamic rather than static in their interaction with contextual and temporal factors. This is best discussed under firm level analysis.

Firm growth cannot be measured by studying a single point in time and is generally measured by the differential outcome between two points in time (Shepherd & Wiklund, 2003; Delmar et al., 2003; Penrose, 1995). In research based on a survey carried out among close to 500 US South West firms, it was found by Watson et al. (2003) that the founding partner with higher education and more work experience had better firm growth. Delmar & Wiklund (2008) carried out a study and found that the willingness to grow or the entrepre- neurial intentions have a positive co-relationship to firm growth. On the other hand, McKelvie & Davidsson (2009) through a 3-year time-lagged study found that initial measures based on the founders for growth have less explanatory power than first thought as the management team tends to change over time.

Unlike nascent and survival stages of the firm, the most critical capability during the growth stage of the firm is planning skills (Chrisman & McMullan, 2004; French, Kelly & Harrison, 2004). Many scholars from different regions have found this association. Related experience (Bar- ringer, Jones & Neubaum, 2005; French, Kelly &

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Harrison, 2004; Shepherd, 2011) supports better planning and planning during growth phase ac- celerate the success of the firm.

Summary and Discussion of Individual Characteristics

The authors identified the findings from hetro- geneous studies on entrepreneurial capabilities across firm stages. The authors beleive these findings will contribute to the development of entrepreneurial capabilities that are empirically grounded and significant during different firm stages. Table 20 summarises the main findings for this section of the chapter.

Some entrepreneurial capabilities, such as higher education, are found to be positively in- fluencing the firm in a stage independant manner. Specific capabilities were more significant to certain firm stages according to the literature. However, the authors emphasise that the above associations of capabilities do imply skill that is associated with firm stages that positively influ- ence firm growth and success.

An entrepreneur’s competence play an integral role on the performance and progression of the firm. Depending on the stage of the firm, the significance of the competencies varies. This

paper classified firm stages into three: nascent stage, survival stage and growth stage. However, it may be that these factors can be linked to a more sophisticated heuristic beyond entrepreneurial competence. In this regard, a contextually sensitive understanding that influences firm growth may be useful. This could provide policy makers and practitioners with a higher level of predictability for facilitating entrepreneurial growth.

This study makes several contributions: Firstly it combines recent individual level entrepreneurial studies in order to depict the heterogeneity of entrepreneurial capabilities and their effect on firm stages in an explorative way. On the surface it appears that the capabilities of the entrepreneur are not a significant mediator depending on the stage of the firm. However, based on the literature, this study highlights more significant and impact- ful capabilities of the entrepreneur for different firm stages.

Education and experience primarily falls under the human capital influences across all three stages in a positive manner. Based on the literature, related experience supports the success of the growth stage more than the nascent and survival stages. Furthermore, is a strong influencer during the growth stage but planning did not play a crucial mediator role during nascent and survival stages. Risk propensity and opportunity propensity are apparent capabilities during the nascent stage to influence successful firm formation. Self-efficacy and entrepreneurial passion are more evident and noteworthy capabilities for the survival stage based on the articles reviewed for this study.

The study findings will support policy makers and practitioners alike in taking the prominent ca- pabilities into account during different firm stages to accelerate firm success and growth. Higher education, industry and/or market experience, social capital and balanced skills and an ability to analyse complex dynamics will each influence more specifically the nature of the opportunity that the entrepreneur seeks to follow. Furthermore, the individual characteristics that will become

Table 20. Firm stages and significant entrepre- neurial capabilities

Firm Stages Significant Entrepreneurial Capabilities

Nascent

Risk propensity, Opportunity propensity, Entrepreneurial intentions, Higher education, Industry and/or market experience, Social capital, Balanced skills and an ability to analyse complex dynamics.

Survival

Self-efficacy and coping skills, Promotion capabilities, Entrepreneurial passion and intentions, Higher education, Related start-up experience, Social capital.

Growth Business planning, Growth intentions, Higher education, Related business management experience.

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telling as the venture progresses through survival and growth will be the capabilities of the entre- preneur to cope with the stresses and strains of early-venture establishment, business and strategic planning skills and the intention to pursue growth beyond catering for a life-style venture.

A further observation from this work is that the broader policy dimensions that are non-specific to new venture start-up but that influence nascent entrepreneurs, have a role to play in preparing would-be entrepreneurs. In particular, identifica- tion and development of nascent stage entrepre- neurial intentions and self-efficacy, an exposure to risk and opportunity dynamics that identifies these predispositions and the development of balanced skills that facilitate analysis and com- prehension of complex dynamics should be more broadly embedded in the primary and secondary school education. These attributes of an educa- tion system would help to foster and stimulate the entrepreneurial ecosystem.

FIRM LEVEL CHARACTERISTICS

This section focuses on exploring the characteris- tics of entrepreneurial firms and firm performance as it is relevant to economic development. First, we analyse the linkage between entrepreneurial opportunity and the entrepreneurial firm concept, particularly as these concepts overlap at the nascent stage of a business venture. Next, we review the entrepreneurship literature to establish the range of measures of success for firm level entrepreneur- ship. We then discuss the relationship between the entrepreneurial firm and firm performance based on the empirical studies in this field. Further, some factors that could affect the entrepreneurship and performance relationship are discussed along with the implications for researchers and practitioners. In the final section, we draw conclusions and implications.

Linking Entrepreneurial Opportunity to the Entrepreneurial Firm (Nascent Stage)

The recognition and development of opportunities is at the heart of the new entrepreneurial firm. Prior experience, gaining insights to new information, changes in the ecosystem and being frustrated are the main triggers for an entrepreneurial opportu- nity to emerge with an entrepreneur (McMullen & Shepherd, 2006; Shane, 2000; Tripsas, 2008). The emergence of the entrepreneurial opportunity is a cognitive process in the mind of the entrepreneur (Baron, 2006). Self-efficacy and self regulation play an integral role during the entrepreneurial opportunity emergence process (Baron, Hmieleski & Henry, 2012; Tumasjan & Braun, 2012). Self- efficacy is the measure of one’s own perception of competency to complete tasks and achieve a goal. Self regulation is the psychological processes by which individuals exercise control over their cognitive, emotional, and behavioural processes.

Based on a study carried out on 1000 ventures in the United States, Hmeileski et. al. (2007) found that self regulatory behaviours by the entrepreneur have a greater impact in dynamic ecosystems than in stable ecosystems with respect to exploiting opportunities. Self-efficacy is a positive determinant for opportunity exploitation independent of the ecosystem. In accordance with effect-as-is information theory, fear decreases entrepreneurial opportunity exploitation, whereas joy and anger increases the exploitation tendencies of the entrepreneurial opportunity (Welpe et al. 2012). Entrepreneurial opportunity is a creative process, and a multidimensional representation of the phenomenon explains the process best than any one-dimensional representation. Based on a study that was carried out on 1500 organisations with revenues between US$5-100 millions, it was found a five factor process for opportunity recognition is better than a two factor process or

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a single factor process. The five factors of the process were preparation, incubation, insight, evaluation and elaboration (Hansen, Lumpkin & Hills, 2011). Based on a meta analysis carried out (De Carolis & Saparito, 2006), it was found that social capital is a mediator for cognition biases where opportunity exploitation is concerned.

A default position in entrepreneurship research is that entrepreneurial opportunities are not evi- dent, but need entrepreneurial alertness (Gaglio & Katz, 2001; Kirzner, 1973) or entrepreneurial vision (Sadler–Smith et al. 2003) to identify en- trepreneurial opportunities. To exploit entrepre- neurial opportunities, entrepreneurs need to have or have access to necessary resources. Entrepre- neurial opportunities can only be pursued through the formation of new means, ends or means-ends relationships (Shane, S & Eckhardt, 2003). As such, the entrepreneurial ability to recombine resources is necessary which characterises the entrepreneur as innovative and creative. Entre- preneurial opportunities are often embedded in uncertain environments and link with uncertain outcomes, thus, entrepreneurs bear risk and have long-term vision. Shane & Venkataraman (2001, p. 16) state:

…..opportunity cost, financial cost, social ties, career experience, willingness to bear risk, op- timism, self-efficacy, internal locus of control, tolerance of ambiguity, and need for achievement- ----influence the decision to exploit opportunity.

Shane & Venkataraman’s (2001) statement has been supported by empirical research. Westhead & Wright (2001) examined 161 independent firms over the period 1990/91 to 1997 and found that firms that have principal founders with denser information and contact networks, and consider- able management know-how are more inclined to enter international markets. Specialised know-

how such as prior work experience has been found significantly and positively to influence small firm profitability but not growth (Coleman, 2007). Cooper, Gimeno-Gascon & Woo (1994) also found that human capital of the principal founder such as education and prior work expe- rience has a significant and positive influence on the survival of new start-ups. Prior research has also evidenced that an entrepreneurs’ gender and educational level have an impact on whether they opt for start-up assistance (Brixy, Sternberg & Stüber, 2013)

Schutjens & Wever (2000) operationalised 20 factors: a mix of entrepreneur, firm and external characteristics. Their empirical examination highlights that work experience, business partner and thorough preparation are mostly important to the conversion of an opportunity to success as a new start-up. Their research outcomes can be informative to government policy-makers.

From these perspectives outlined above it be- comes clear that distinguishing the nascent new venture from the nascent entrepreneur at the very early stages is a difficult task. The opportunity is primarily a conceptual design in the mind of the entrepreneur: sales have not necessarily com- menced, resources may not yet have been acquired, a support team may not have been assembled and a business is not yet registered. The proxy for the firm though is the articulation of a feasible business model that is designed to capitalise on a perceived market, based on identified unmet demand or potentially created demand. The next order of success of this conceptualisation depends upon the environmental conditions and access to tangible and intangible resources including ac- cess to capital. Providing these conditions can be observed at the nascent stage, the entrepreneur is likely to move to commence business operations and create a start-up business.

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Success Criteria of Start-Ups: Not a ‘One Size Fits All’ Proposition

The meaning of success differs considerably between firms and entrepreneurs (Schutjens & Wever, 2000). New venture success is often defined from the starter’s perspective as the achievement of something desired, planned or attempted (MacMillan, Siegel & Narasimha, 1986). However, this definition has subjective bias and the measurement of new venture/start-up success should not be decoupled from the market economy, especially if the measurement of success is intended to promote and contribute to growth of the regional/national economy. As Reid & Smith (2000) argue, performance evaluation can never be divorced from the market nexus and should be objective, parsimonious, and plausible.

Because of the various definitions of start-up success, measurements of success can be very different, which is one of the major challenges of entrepreneurship research (Murphy, Trailer & Hill, 1996). “Frequently used operationalisations of new firm success are profit, return on invest- ment or a substantial income generation for the entrepreneurs and their families” (Schutjens & Wever, 2000). Much of the existing research also employs survival or continued functioning (Lit- tunen, Storhammar & Nenonen, 1998) to measure success, which can also be subject to bias since closed businesses can also be successful busi- nesses (Headd, 2003) in terms of creating wealth for owners or successfully merging with other firms. Performance aspects of new start-ups are also differentiated in terms of life cycle stage; for instance whether they are in emergence or early stage (Pirolo & Presutti, 2010).

As an indicator of the diversity of metrics associated with success and performance, Ka- kati (2003), using Factor Analysis and following MacMillan et al.(1986), identified nine factors out

of 38 items that influence high-tech new venture performance. Multiple-regression analysis was used and nine items were found that had signifi- cant betas for the performance measures in the research, as shown in Table 21.

A general problem of all objective measures for start-up success is that they depend on the founders’ intentions and aspirations (Witt, 2004) while subjective measurement are also problem- atic since “different people may not be equally satisfied with the same level of performance” (Chandler, G.N. & Hanks, 1993). Chandler & Hanks (1993) list three widely adopted ap- proaches to obtain self reported data, requesting performance in broad categories; using satisfac- tion with performance index and using a com- petition relative to competitors’ index. Kakati (2003) used a five-point scale (1, significantly worse than expectation; 2, marginally worse than expectation; 3, achieved expectation; 4, marginally better than expectation; 5, much better than expectation) to assess seven performance variables of new ventures.

An overview of the literature on articles that report research on new start-up success criteria is shown in Table 22. These articles are generated initially from the Scopus database by the keywords “performance,” “success,” new venture,” “start –up (s) and “survive (survival)”. Only primary English language studies from the A* or A ranked journals calculated by Thomson ISI are considered. We then chose articles in highly regarded journals relating to entrepreneurship and economics such as Small Business Economics, Entrepreneurship and Regional Development, Journal of Business Venturing, Journal of Small Business Manage- ment, Management Science and the Journal of Urban Economics. To maintain reliability and representativeness only articles in the last 3 years were extracted as, among the few research articles in this area, many are similar.

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The Resources and Capabilities of the New Entrepreneurial Firm for Survival

Pre-entry firm level resources and capabilities will largely determine the entry type, timing and entry success. Firm associated resources such as human capital and financial capital are critical components for new start-up success and survival. These resources include tangible and intangible firm assets and capabilities (Wu et al. 2008). The strategic valuable resources of a firm should be tacit, complex (Schoemaker, 1990), valuable, rare, and inimitable (Barney, 1991). Helfat & Lieber- man (2002, p. 725) state:

The greater the similarity between pre-entry firm resources and the required resources in an industry, the greater the likelihood that a firm will

enter that particular industry, and the greater the likelihood that the firm will survive and prosper.

In short, following Teece (1980, 1982, 1986), Helfat & Lieberman (2002) develop taxonomies (see Table 23) distinguishing pre-entry firm level core versus complementary and specialised versus generalised resources and capabilities.

Furthermore a new firm’s business model, defined as the content, structure, and gover- nance of transactions designed so as to create value through the exploitation of business op- portunities (Amit & Zott, 2001), has been found crucial to the survival of new start-ups (Zott & Amit, 2007). Zott & Amit (2007) argue that be- ing novel in business model design can enhance new entrepreneurial firm performance. Through a test of 195 new, technology based firms in the UK, Yli-Renko, Sapienza & Hay (2001) propose

Table 21. Items that have a significant beta in multiple regression model (Adopted from Kakati 2003)

Items with Significant Beta

Performance Variables

Sales Market Share

Market Cost

Production Cost

General Administration

Cost

Return on Investment

(ROI)

Profit

Size of venture team -0.21

Capability of sustained intense effort

-0.302

Ability to evaluate and react to risk well

0.34

Attention to detail 0.487

Technical capability 0.516

Input sourcing capability

0.759

Customization strategy 0.525 0.57 0.37 0.15 0.53

Protection of the product

0.32

Product was in early stage of development

0.35

Venture stimulated existing market

0.45 0.44 0.381

R2 0.54 0.52 0.326 0.801 0.53 0.87 0.606

Significant F 0.00 0.0035 0.0029 0.000 0.002 0.000 0.0001

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that greater contractual governance flexibility is associated with higher new entrepreneurial firm performance in new product development and sales cost advantages in a situation of a high level of exchange dependence. This viewpoint is consistent with the research finding of Wynarczyk

& Watson (2005) who examined the performance of a sample of 211 UK subcontractors and found that inter-firm partnerships contribute to firm growth in sales and employment.

Taken together, the preceding literature sug- gests that firm level pre-entry resources and capa-

Table 22. Success criteria in start-ups

Author (Year) Sample Measurement of Start- Up Success

Subjective Objective Notes

Tocher et al.(2012)

163 entrepreneurs within 8 years of inception throughout the USA

Entrepreneurial performance; Sales growth rate; Accounting return

✓ Entrepreneurial performance measured as average of the entrepreneur’s answers to the 7 item entrepreneurial performance scale

Rotger, Gørtz & Storey (2012)

Participants of the North Jutland Entrepreneurial Network (NiN) programme between 2002 and 2006 (a yearly intake of about 1200 participants).

Survival Employment Sales Growth firm”

✓ A growth firm is a venture that experiences a growth of at least 20% in turnover or in employment a.

Pirolo & Presutti (2010)

105 firms younger than 10 years old in high-tech cluster in Rome

Sales Level Change in Sales Earnings Profitability Interest and Taxes Return on Sales Return on Assets Return on Equity

✓ Innovation performance measure is based on the number of new products, services, or technologies that has been developed

Hvide & Møen (2010)

A large panel of start-ups from Norway

Profitability ✓ Operating return on assets (OROA)

Arora & Nandkumar (2011)

286 information security market (ISM) start-ups, followed from the time of entry until 2004 or their exit.

Favourable acquisitions IPOs (initial public offering)

✓ Total start-ups are divided into success, failure and surviving.

Kuckertz, Kohtamäki & Körber (2010)

201 German technology-oriented new start-ups that had successfully obtained venture capital funding

Return on sales Sales growth Market share Net profit Cash flow Return on investment Shareholders’ return on assets

✓ Innovation performance is measured separately and is found positively influence venture performance

Chen, H et al. (2010)

Sample consists of 28,434 venture capital investments in 14,006 portfolio companies for 2,039 venture capital firms between 1975 and 2005.

Whether each venture- backed company went public through an IPO or has registered for an IPO.

✓ The finding supports that geographical proximity has significant positive relationship with new start-up success

asame standard as OECD’s

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bilities, business model of new firm and business flexibility etc. can be significant factors leading to a new firm’s success and survival.

New Start-Up Summary

Entrepreneurial start-ups have been considered as the major engine for employment and most important for innovation. Policymakers and re- searchers have paid much attention to promote entrepreneurial start-ups regionally and nationally. However, the success of entrepreneurial start-ups is determined by various factors which interact. As stated in the above sections, the success of entrepreneurial start-ups is determined mainly by the entrepreneurial opportunity, the capabil- ity of the entrepreneur to identify and pursue the opportunity, the entrepreneurial process to start a new firm and finally the external environ- ment. In this chapter, we follow the definition of entrepreneurial opportunities given by Casson

(1982) and Shane (2000) that entrepreneurial opportunities are situations in which new goods, services, raw materials, markets and organising methods can be introduced through the formation of new means, ends or means-ends relationship. The entrepreneurial capabilities are defined as capabilities to identify entrepreneurial/business opportunities and to develop the resource base needed to pursue the opportunity. Firm associated factors such as human capital and financial capital are critical components for new start-up success and survival. These resources include tangible and intangible firm assets and capabilities (Wu et al. 2008). The resources of a firm can be tacit and complex (Schoemaker, 1990). Strategically valuable resources for firm competitive advantage are valuable, rare and inimitable (Barney, 1991).

Entrepreneurial opportunities and entrepre- neurial personality and experience together with other influencing factors influence which entrepre- neurial process is more appropriate for particular

Table 23. Pre-entry resources and capabilities (Adopted from Helfat & Lieberman 2002)

Core Versus Complementary Resources and Capabilities

Core resources and Capabilities Complementary Resources and Capabilities

Knowledge required to create a product or service Examples: Technological knowledge Knowledge of customer needs

Resources and capabilities needed to profit from core resources and capabilities Examples: Finance Marketing and sales Distribution and logistics Customer service

Specialised vs. Generalised Resources and Capabilities

Specialised resources and capabilities: Resources and capabilities that are more specialised to particular settings

Generalised resources and capabilities: Resources and capabilities that can be applied in a broad range of settings

Functional area resources Examples: Marketing Research and development Distribution

Functional area resources Examples: Financial capital

Intangible resources Examples: Relationship with buyers, suppliers Brand name Patents and trademarks

General organisational capabilities Examples: Transfer of knowledge Management of multiple businesses (single location or geographically dispersed)

Market-specific knowledge Examples: Industry conditions Country or regional conditions

Mode of entry capability Examples: Acquisition Joint venture

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would-be entrepreneurs to take. Causation and effectuation are two alternative approaches used by entrepreneurs in the new venture development process (Sarasvathy, 2001). According to Saras- vathy (2001 p245), “Causation processes take a particular effect as given and focus on selecting between means to create that effect. Effectuation processes take a set of means as given and focus on selecting between possible effects that can be created with that set of means”. External envi- ronment is crucial to entrepreneurial activities as well since it poses threats and offers oppor- tunities in varying degrees to entrepreneurs and entrepreneurial firms. The external environment for entrepreneurship includes economic environ- ment (e.g. labour and market conditions, materials, financial assistance), social environment (culture, honesty, justification, religion, social marginality) and political environment.

These factors can influence the success and survival of entrepreneurial start-ups indepen- dently. However, more often than not, the success of entrepreneurial start-ups is determined by the dynamic interactions between factors as shown in Figure 13. This figure shows that to promote entrepreneurial activities policymakers should consider interactions across the whole landscape that influence entrepreneurial firm success.

Growth in Established Entrepreneurial Firms

The roots of the concept of the entrepreneurial firm can be traced back to earlier works about strategic decision making in strategic manage- ment literature. Mintzberg (1973) describes the entrepreneurial decision making model as domi- nated by the active search for new opportunities

Figure 13. The dynamic interactions influencing firm survival

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as well as dramatic leaps forward in the face of uncertainty. In some similar pioneering work exploring entrepreneurially managed firm styles, entrepreneurial firms are often characterised as risky, proactive, aggressive decision-makers and innovative (Khandwalla, 1976; Miller, 1983a). This description is consistent with the follow up re- search on entrepreneurship at the firm level. Morris & Paul (1987, p. 249) conceive an entrepreneurial firm as a firm with decision-making norms that emphasizes proactive, innovative strategies that contain an element of risk. These decision-making norms are reflected in the management styles of firms, as Covin & Slevin (1988, p. 218) state that entrepreneurial firms are those in which the top managers have entrepreneurial management styles, as evidenced by the firm’s strategic decisions and operating management philosophies.

Entrepreneurial firms exist in order to generate and appropriate the economic rents associated with market opportunities (Alvarez & Barney, 2004, p. 631). Entrepreneurial firms represent a radical departure from predominant and historic strategic or structural patterns (Sharma & Chrisman, 1999, p. 17). On the opposite side, traditional general management is to utilise the resources controlled

by the firm. Managers will consider their resources before exploiting any opportunities, only opportu- nities requiring relevant resources under the firms control are exploited by the firm. These firms are mostly highly centralised and formal with clearly defined hierarchy, authority, responsibility and systems to ensure efficiency. Covin & Slevin (2002) compare traditional general management and entrepreneurial strategic leadership in beliefs and philosophy as shown in Table 24.

Some useful work has been done to conceptu- alise and operationalise the entrepreneurial firm. Based on Miller’s (1983b) original work on firm level entrepreneurship, Covin & Slevin (1989) developed a nine-item scale to measure entrepre- neurial posture of firms highlighting innovation, proactiveness and risk-taking. Drawing from strategic management literature, Lumpkin & Dess (1996) proposed a five dimensional framework of entrepreneurial orientation (EO) for investigating firm level entrepreneurship: autonomy, innovative- ness, risk taking, proactiveness and competitive aggressiveness. Lumpkin & Dess’s research on EO is analogous to Stevenson & Jarillo’s (1990b) concept of entrepreneurial management (EM) since both reflect in the entrepreneurial process,

Table 24. Traditional general management vs. entrepreneurial strategic leadership a comparison of beliefs and philosophies

Attitude Toward Traditional General Management Entrepreneurial Strategic Leadership

Organisational resources and capabilities.

Resources and capabilities should be protected.

Resources and capabilities should be valued but challenged.

The firm’s “business” and “purpose”.

Definitions of “business” and “purpose” are relatively enduring.

Definitions of “business” and “purpose” should be periodically re-examined.

Business strategy. Play the game better than competitors. Play the game better than competitors or play your own game.

Organisational architectural. Designed to optimize implementation of the strategy.

Designed to allow for strategic flexibility.

Meeting customer needs. Stay “close to the customer”. Stay “close to the customer,” but also invest in promising innovations that don’t currently meet expresses needs.

Entrepreneurial activity within the organisation.

Entrepreneurial activity should follow from strategy.

Entrepreneurial activity should lead to as well as follow from strategy.

Organisational learning. Institutionalise knowledge to avoid having to relearn business lessons.

Institutionalise a questioning attitude such that learning and unlearning can coexist.

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the entrepreneurial capabilities to identify op- portunities and recombine requisited resources to seize opportunities.

Sharma & Chrisman (1999, p. 18) define cor- porate entrepreneurship as the process whereby an individual or a group of individuals, in associa- tion with an existing organisation, create a new organisation or instigate renewal or innovation within that organisation. They classify corporate entrepreneurship into corporate venturing, innova- tion and strategic renewal. Their conceptualisation of corporate entrepreneurship is domain-focused, i.e. it specifies where to look for entrepreneurship at the firm level. Comparatively speaking, the most currently adopted definition of EO is more phenomenon-focused. Lumpkin & Dess (1996) identified the five dimensions of an entrepreneurial orientation as discussed above. In the past 30 years or more, research on EO has become a central focus of the entrepreneurship literature (Covin & Wales, 2011). Stevenson (1983) conceives entrepreneur- ship as an approach to management, the pursuit of opportunity without regard to resources currently controlled. Stevenson’s entrepreneurial manage- ment perspective to investigate entrepreneurship at firm level has received wide recognition in the literature of entrepreneurship (Brown, Davidsson & Wiklund, 2001).

Drawing on the above discussion and the existing research of the entrepreneurial firm, the entrepreneurial firm should be innovatively oriented, opportunity oriented, risk-taking, and non-administrative. Theories of strategic manage- ment and entrepreneurship, and resource based theory have placed much effort into understand- ing entrepreneurial behaviours in established firms. In the following two sections, we will discuss entrepreneurial orientation (EO) and entrepreneurial management (EM) which are the two most developed instruments to understand entrepreneurial firms.

Entrepreneurial Orientation (EO)

Entrepreneurial orientation is regarded in the field of entrepreneurship research as the most established instrument for measuring firm level entrepreneurship. Lumpkin & Dess (1996) de- fine entrepreneurial orientation as the methods, practices, and decision-making styles managers use to act entrepreneurially. Lumpkin & Dess (1996) proposed a five dimensional framework referred to as entrepreneurial orientation (EO) for investigating firm level entrepreneurship that includes autonomy, innovativeness, risk taking, proactiveness and competitive aggressiveness. The following table (see Table 25) demonstrates the definitions and implications of entrepreneurial orientation.

Entrepreneurial Management (EM)

The opportunity-based entrepreneurial manage- ment (EM), which reflects the pursuit of oppor- tunity without regard to the resources currently controlled, is differentiated by Stevenson & Jarillo (1990b; 1986) from traditional management. The entrepreneurial management practices are reflected by the strategic orientation, resource orientation, management structure, reward phi- losophy, growth orientation and entrepreneurial culture of a firm (Brown, Davidsson & Wiklund, 2001; Stevenson & Gumpert, 1985; Stevenson & Jarillo, 1990b, 1990a; Stevenson & Jarrillo-Mossi, 1986). The conceptualisation of opportunity-based entrepreneurial management (EM) is consistent with the contemporary opportunity-based entre- preneurship definition (Eckhardt & Shane, 2003; Shane, S & Venkataraman, 2000; Venkataraman, 1997) and reflects classical entrepreneurship domains such as Kirzner’s (1973) “opportunity alertness”. After three decades of theoretical and empirical inquiry, EM is widely recognised as

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an efficient tool to evaluate or measure entrepre- neurship in existing organisations and further our understanding of the entrepreneurial behaviours pursued by existing organisations.

There are six factors in entrepreneurial manage- ment: strategic orientation, resource orientation, management structure, reward philosophy, growth orientation and entrepreneurial culture. The en- trepreneurial strategic orientation is driven by perceived opportunities in the environment not by resources required to pursue these opportunities. An entrepreneurial firm’s resource orientation is toward maximising value creation generated by exploiting opportunities while minimizing the firm’s resources commitment. The dimensions of ‘commitment of resources’ and ‘control of resources’ in resource orientation has been firstly described by Stevenson, and then developed by Brown et al (2001). To maintain this type of en-

trepreneurial commitment of resourcing may be difficult because of the organisational pressures such as the increasing needs for capital allocation systems, formal planning systems and certain incentive systems, created by the accumulation of resources within the firm (Brown, Davidsson & Wiklund, 2001). In short, a firm’s growth to- gether with the accumulation of resources leads to increasing difficulty in maintaining an entre- preneurial management practice.

Management structure and the idea of organic versus mechanistic organisational structures is introduced by Burns & Stalker (1961). To achieve growth from the addition of new products/services or new markets, firms must be flexible and open to change (Stevenson & Gumpert, 1985), the organic organisational structure allows employees to cre- atively seek opportunities and resources external to their firms to adapt to the environment. The re-

Table 25. Dimensions of entrepreneurial orientation

Dimensions Definition and Implication

Risk-taking Risk-taking is typically characterized by resources commitment in uncertain or risky environments, which may cause costly failure. Besides resource commitment, strategic risk is also indentified by scholars, that of “venture into unknown”. A risk-taking firm emphasizes exploring and exploiting opportunities in products, services, and process even under the situation that these opportunities are unclear. Risk-taking favours speed decision-making and enable firms to react to change quickly. The dimension of risk-taking is very critical in the economic situation nowadays since the opportunity needed could disappear after a systematic investigation. Risk-taking firms can often harvest the first-mover advantage; however, the risk-taking characteristic should match with insight strategic judgment.

Innovativeness New, change, creativity, differentiation, advance and improvement etc. Innovativeness represents a bias toward embracing and supporting creativity, experimentation, R&D in product-market or technology. As such, innovativeness is a chief means to create differentiation and develop solutions that undermine those of competitors (Hughes & Morgan 2007). Profit opportunities usually require recombination of resources, during which process either Kirznaian or Schumpeterian innovation is included. Accordingly, innovativeness is the precondition for firms to get competitive advantage. A firm, in contrast, is lulled into inertia, inaction, and adherence to tradition has the higher possibility to fail in fierce competition and changing environment.

Proactiveness A firm with the characteristic of proactiveness has a forward-looking perspective, seeks opportunities actively, and instigates forecasting changes in current strategies and tactics. Proactiveness increases the firm’s receptiveness to market signals and awareness of customers’ needs (Kollmann & Stockmann 2010). Former experiences and learning ability assure it can better understand market signals and anticipate market trends than its competitors.

Autonomy Autonomy refers to the independent action of an individual or a team in bringing forth an idea or a vision and carrying it through to completion (Dess & Lumpkin 2005; Lumpkin, GT & Dess 1996, p. 140). As suggested by the previous research, the degree of autonomy varies according to the firm size, structure and industry type etc.

Competitive Aggressiveness

Competitive aggressiveness refers to an intensity efforts of a firm to outperform and undermine its industry rivals (Lumpkin, G & Dess 2001). It is characterised by a combative posture and aggressive response (Dess & Lumpkin 2005). It can take the form of deliberate action as well as reactive action (Hughes & Morgan 2007). A competitive aggressiveness firm establishes advantage through continuous offensive tactics (Davidson, 1987) and leverages entrepreneurial capabilities to get more market share from competitors.

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ward philosophy of an entrepreneurially managed firm reflects interest in creating and harvesting wealth (value) and thus is toward compensations based on how individuals contribute to value creation in pursuing opportunities. Managers in entrepreneurial firms prefer rapid growth as op- posed to steady growth which is often the choice of managers in a more traditional administrative firm. Entrepreneurial culture describes a firm’s culture that encourages a broad range of ideas, experimentation and creativity. Table 26 compares the practices of entrepreneurial management and administrative management.

A Review of Firm Entrepreneurial Capabilities: The Link to Growth

We have talked about the factors that impact the success of start-ups and performance of well established firms. However, these factors may not directly bring competitive advantage to entre- preneurs/firms in fierce competition. One reason is that most of these factors are static, common and imitable; the other reason is that many of these factors are the outcomes of other elements, among them is the entrepreneurial capability at the firm level.

To further our understanding of entrepreneurial capability, we conducted a broad literature review in highly regarded journals relating to entrepre- neurship. These journals are generated initially by keywords search of the Scopus database to identify the most cited articles and journals. We searched for the words “capability or capacity” in the article title, abstract and keywords, and searched for the words “entrepreneurial,” “en- trepreneurship” or “entrepreneur” in the whole article. The search revealed 154 articles at this first stage from only primary English language studies from the A* or A journals calculated by Thomson ISI drawn from 12 years prior to our study. We then conducted a manual review of all

the articles to check that the article focused on firm level entrepreneurial capability. As such, 86 articles were excluded and 68 articles were left in the final review group. Table 27 shows the distribution of entrepreneurial capability research in various Journals, from which we can see the distribution is quite fragmented. This indicates that the entrepreneurial capability research is at its very earliy stage and needs more future research attention. All these 68 articles are reviewed and categorised based on their focus on entrepreneurial capability and presented in Table 28.

Linking Firm Entrepreneurial Capability to Performance and Growth

Entrepreneurial capability is defined as the capa- bility to identify, evaluate, exploit and/or explore entrepreneurial/business opportunities and has been viewed as a crucial factor in influencing firm performance. Chaston & Mangles (1997) conclude that firm key capability factors may influence a small firm’s strategic positioning; new product development; financial management; business planning; innovative workforce; productivity; human resource management; quality and infor- mation management. Chaston & Sadler-Smith (2012) propose that under intense market condi- tions firms that have well-developed capabilities are more likely to succeed than firms that do not have such capabilities. They argue that entrepre- neurial orientation (EO) and firm capability are two important positive factors in enhancing firm performance and growth, as shown in Figure 14.

Fully-fledged explanations that identify the factors that affect different organisational arrange- ments under which opportunities are identified, evaluated, and exploited have not been developed (Alvarez & Parker, 2009; Davidsson, 2005; Shane, S 2012). Gürbüz & Aykol (2009) argue that a firm’s entrepreneurial orientation needs the support of entrepreneurial management to

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Table 26. Comparison between entrepreneurial management and administrative management

Entrepreneurial Management Administrative Management

Strategic Orientation The strategy creation is driven by perceived opportunities in the environment not by resources required to purse these opportunities in entrepreneurial management practises. As opportunities driven strategy, opportunities are the first consideration of managers, once opportunities are indentified as real, then, required resources will be marshalled to exploit these opportunities. All most any opportunity is relevant to the firm (Brown, Davidsson & Wiklund 2001) because managers are inclined to create a new business (organisation), instigate renewal or innovation (Sharma & Chrisman 1999).

The administrative management’s strategy is to utilise the recourses controlled by the firm and to make these resources use efficiently. Managers will consider their resources before exploiting any opportunities, only opportunities required relevant resources under the firms control are exploited by the firm.

Resource Orientation

Under the situation of resource orientation, the commitment of resources is in a multi-step manner (McGrath 1999), which allows the entrepreneurial firm to adopt new or improved strategies according to opportunities status. An entrepreneurial firm reduces the resources it uses or owns as much as possible and favours resources (e.g. financial capital, intellectual capital, skills, and competencies) that are borrowed or rented from others. Such an entrepreneurial resources orientation provides flexibility, which allows SMEs to manage uncertainty by pursuing multi opportunities (Bradley, Wiklund & Shepherd 2011).

The firms that considered less entrepreneurial if its commitment of resources is characterised by favouring ownership control of resources, thorough analysis in advance before mostly irreversible investments.

Management structure

Organic firms are decentralised, informal, emphasising on lateral interactions and an equal distribution of knowledge and information throughout the organisation (Lumpkin, GT & Dess 1996). The organic organisational structure enable an entrepreneurial firm to manage its rented or borrowed resources flexibly when pursuing opportunities under environment contingency.

Mechanistic firms are highly centralised, formal with a clearly defined hierarchy, authority, responsibility and systems to ensure efficiency. A traditional administrative firm, in contrast, tends to adopt the mechanistic organisational structure to allocate owned resources efficiently.

Reward Philosophy The reward philosophy of an entrepreneurially managed firm reflects interest in creating and harvesting wealth (value) and thus, is toward compensations based on how individuals contribute to value creation in pursuing opportunities. The entrepreneurial management structure makes is possible to reward or evaluate employees based on their own individual performance and accountability. Under a entrepreneurial reward philosophy, employees are encouraged to explore potential opportunities, which develops higher levels of commitment and trust within the firm (Bradley, Wiklund & Shepherd 2011).

Under a less entrepreneurial reward philosophy, rewards are based on the amount of resources under the individual’s control, hierarchy, and on seniority. Such a reward philosophy will undermine the pursuit of opportunities since the individuals who control resources tend to limit the usage of these resources to pursuit any opportunities under uncertainty.

Growth Orientation Managers in entrepreneurial firms prefer rapid growth to steady growth that is often the premier choice of managers in a traditional administrative firm. A entrepreneurial firm is characterised as proactive and competitive aggressive (Covin & Slevin 1991), utilise all kinds of opportunities and resources to achieve high growth. High growth often indicate high value creation, thus in entrepreneurially managed firms, managers are inclined to seek high growth rate.

A traditional administrative firm, in contrast, focusing on resources under its control, tend to avoid rapid growth that required more and new resources. The reward philosophy in less entrepreneurial firms decides that it seeks a growth rate which does not jeopardise accumulated resources or create fluctuations in the management track record (Stevenson & Gumpert 1985).

continued on following page

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enhance firm performance. The organisational characteristics are often viewed as important mediating factors in the relationship between entrepreneurial orientation and firm performance. Wolcott & Lippitz (2007) classify four models of the entrepreneurship models in established firms: the enabler, the producer, the opportunist and the advocate according to the resource authority and organisational ownership. In Figure 15, we show how entrepreneurial opportunities interact with other important factors of firms to impact jointly on firm performance.

Summary and Discussion of Firm Level Characteristics

Entrepreneurship is not solely concerned with individuals. Equally, significant research focus is placed on entrepreneurial firms. Adopting a firm

level unit of analysis by definition suggests a limi- tation of this discussion to research that examines the factors that contribute to the progression from the stage of survival to growth; in the nascent stage a firm by definition is not established. However, any firm is commenced on the perception of some sort of opportunity regardless of the motivations of the nascent entrepreneur. Therefore, in this sense, the proxy for the firm at the nascent stage is the particular opportunity that the entrepreneur is actively pursuing and the business model that is designed to respond to that opportunity.

The survival and growth of the firm is unques- tionably linked to the capabilities and attributes of the entrepreneur and the start-up team. Further the ongoing firm evolution is subject to entrepreneur- ial management capabilities and maintaining an entrepreneurial orientation within the firm toward the market and opportunities. However, there are

Entrepreneurial Management Administrative Management

Entrepreneurial Culture

An entrepreneurially managed firm regards opportunity is the starting point to conduct business; on the other hand, a traditional administrative firm takes resources under its control as the starting point. Therefore, it is full of ideas, experimentation, and creativity within an entrepreneurial firm. Entrepreneurial culture is beneficial to firm growth since growth can be generated from a broad range of opportunities.

It is lack of ideas or ideas just match the owned resources within traditional a more administratively focused firm. firms that are lack of entrepreneurial culture typically generate sales from a more proven and narrow set of opportunities that is associated with slower growth rates than entrepreneurial firms (Covin, Green & Slevin 2006).

Table 26. Continued

Table 27. The distribution entrepreneurial capability research

Journal No. of Journals

No. of Articles (Each)

Academy of Management Journal, Academy of Management Review, International Journal of Research in Marketing, International Small Business Journal, Journal of business research, Journal of International Business Studies.

6 1

Journal of Engineering and Technology Management, Management Science, Technovation. 3 2

Organisation Science, Organisation Studies, Small Business Economics. 3 3

Research Policy, Entrepreneurship and Regional Development, Entrepreneurship: Theory and Practice. 3 4

Journal of Management Studies, Industrial and Corporate Change, Journal of Business Venturing. 3 5

Journal of Small Business Management, Journal of World Business. 2 6

Strategic Management Journal. 1 8

Total 21 68

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Table 28. A review of entrepreneurial capability research in last 12 years

Author (Year) Focal Entrepreneurial Capability Casually Adjacent Outcomes of Entrepreneurial Capability

Sapienza, Autio et al.(2006); Moreno & Casillas (2007)

Generating new routines, new project or initiatives.

Firm survival and growth.

Lechner & Dowling (2003); Eraydin & Armatli- Köroǧlu (2005); George, Wood D.R et al. (2001); Jong (2006); Chen, Zou & Wang (2009); Walter, Auer & Ritter (2006); (Zhou, Barnes & Lu 2010); Lowik et al.(2012); Chung (2006)

Networking capability. Competitiveness & Firm performance; Innovation; Firm survival; New venture performance.

Agarwal, Echambadi et al. (2004); Zahra, Van de Velde & Larrañeta (2007)

Integrating, acquire or converting knowledge.

Firm survival; Firm Productivity.

Autio, George et al.(2011) Organisational organising process and cognitive map.

New venture performance.

Ireland, Covin et al. (2009); Patel & Fiet (2011); Jacobides (2006); (Corner & Wu 2012); Arthurs & Busenitz (2006); Hsieh, Nickerson & Zenger (2007); Kor, Mahoney & Michael (2007); Liao, Kickul & Ma (2009); Withers, Drnevich & Marino (2011); Newbert, Gopalakrishnan & Kirchhoff (2008); Ucbasaran, Westhead & Wright (2008)a; Clarysse, Tartari & Salter (2011) a

Capacity to recognise and exploit opportunity.

Corporate entrepreneurship strategy; Competitive advantage; Creation of new capability and/or business model; New venture performance; Innovation.

Mathews (2003); Wu (2007); (Vohora, Wright & Lockett 2004); Arora & Nandkumar (2012); Yiu & Lau (2008); Pitelis & Teece (2010)

The capability to accumulate, combine and coordinate intern and external resources.

Start-up performance; Venture performance; Firm performance; Value creation.

Zahra, Filatotchev & Wright (2009);(Zahra & Hayton 2008); (Deeds 2001)

Absorptive capacity. Entrepreneurial activates; Firm Performance; Wealth creation.

Zheng, Liu & George (2010); (Robeson & O’Connor (2007)

Innovative capability. Firm valuation.

Balasubramanian (2011) Learning capability. Venture performance.

Laamanen & Wallin (2009); (Zahra, Sapienza & Davidsson 2006);Liao, Kickul & Ma (2009); Newbert (2005)a; (Weerawardena et al. 2007); Augier & Teece (2009); Augier & Teece (2008); Mathews (2010); Hoang & Rothaermel (2010); Rothaermel, Hitt & Jobe (2006); Bingham & Eisenhardt (2011); Teece (2007)

Dynamic capability. Innovation ; New firm formation; Internalisation; Firm performance ; Strategy evolution ; Competitive capability; R&D project performance.

Lerner & Almor (2002); Lau & Bruton (2011); Bock et al. (2012)

Strategy building. Venture performance; Business model innovation.

Wang & Ang (2004); Liang, Lu & Wang (2012); Loane, Bell & McNaughton (2007); Ripollés & Blesa (2012); Klepper & Sleeper (2005); Argyres (2011); (Lockett & Wright 2005); (Narayanan, Yang & Zahra 2009); Hewitt-Dundas (2006); Gruber et al.(2010); Verwaal et al. (2010); Zahra & Nielsen (2002); Kakati (2003)Lee, C., Lee, K. & Pennings, J. M. (2001)b

Resources based capability. Venture performance; Internationalisation risk-taking tendency; Spin-off; Innovation; Firm performance; Technology commercialization.

Filatotchev et al.(2003); Boeker & Wiltbank (2005);

Managerial capability. Organisation restructure; Firm growth.

bincluding entrepreneurial orientation; financial resources and technological capability

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Figure 14. Interaction effect of firm capability, market conditions (i.e. intensity of competition) and entrepreneurial orientation on firm growth (Adopted from Chaston & Sadler-Smith 2012)

Figure 15. The entrepreneurial capability of established firms

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also many factors that are outside the control of the entrepreneur that need to be considered. Some of these factors relate specifically to the nature of the opportunity being followed and the demand, acceptance and uptake of the product/service by a sufficiently large group of customers and the level of innovation and uniqueness and differentiation.

Extending this point further, the particular location and context of the venture may equally be responsible for the venture’s success or other- wise. The extent to which the context is supportive or hostile in terms of the market, industry and general social, political, economic, regulatory or technological environment can play a major role in determining whether a firm progresses through stages and emerges as a successful venture or not. Related to this is the access to the particular tan- gible and intangible resources that are important for the venture, whether that be human resources in terms of labour, knowledge and skills or financial capital, technology or particular infrastructure. Ultimately success is attained through manage- ment of the opportunity and the ability of the team to identify or create feasible ongoing opportuni- ties that can be transformed or incorporated into feasible and sustainable business models.

Tables 29 and 30 summarise the findings of the chapter with respect to the development and application of characteristics and capabili- ties at the firm level through the three stages of development targeted by the authors taking into account the proxy of the opportunity at the nascent entrepreneur stage.

ENTREPRENEURSHIP POLICY

Entrepreneurship policy and small business policy are two different definitions. That is to say, public policy encouraging entrepreneurship is not always policy encouraging small business (Dennis Jr, 2011). Public policy is currently tend- ing to shift emphasis away from SME policy and towards entrepreneurship policy in many countries

(Henrekson & Stenkula, 2010) with the objective to stimulate a dynamic entrepreneurial economy.

Entrepreneurship can be encouraged by public policy ranging from specific supports such as tax breaks, government-directed credit (Kawai & Urata, 2002), technology assistance and entre- preneurial training to generalised supports such

Table 29. Firm level capabilities summary

Firm Stages Significant Entrepreneurial Firm Level Capabilities

Nascent (Opportunity

Stage)

Capability to develop a feasible business model designed to capitalise on a perceived market, based on identified unmet demand or potentially created demand. Abilities to access or acquire the tangible and intangible resources including access to capital and abilities to secure and draw upon a supportive network of associates.

Survival Capabilities are intrinsically linked to human capital and financial capital for new start-up success and survival. These capabilities can be either tangible or intangible but specific to the firm and the opportunity. Strategic capabilities to build a firm competitive advantage establishes the foundation for growth.

Growth Entrepreneurial orientation and entrepreneurial management team factors that leverage capabilities and opportunities.

Table 30. Firm level indicators of success and stage relationships

Opportunity (Nascent)

Stage

Start-Up (Survival) Stage

Established (Growth) Stage

Fi rm

Founder(s) characteristics (see Individual level above)

Supportive economic, social and political environment

Access to tangible (physical resources) and intangible (human/ social capital) resources

Extent of innovation

Access to financial capital Entrepreneurial orientation

Customer demand

Entrepreneurial management

Opportunity (market) feasibility

Business model feasibility and competitive advantage

Market dynamics

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as tax incentives, knowledge transformation and entrepreneurial culture creation to maintain a stable economic environment.

According to Baumol, Litan & Schramm (2007), an entrepreneurial economy has four main characteristics: ease of starting and growing a business; generous rewards for productive entre- preneurial activity; disincentives for unproductive activity and incentives to keep the winners on their toes. Entrepreneurship can also be encouraged by public policy from supply side (entrepreneurial capabilities from the labour market perspective) and demand side (business/entrepreneurial op- portunities from the product market perspective). Besides these two areas, Henrekson & Stenkula (2010) propose that public policy can influence entrepreneurship in three other areas: the availabil- ity of resources, skills and knowledge; preferences for entrepreneurship; and, the decision-making process of potential entrepreneurs.

The policy milieu favouring entrepreneurship is created by the composition of entrepreneurship promoting policy portfolios including government honesty and efficiency, public service quality and attentiveness, positive social attitudes toward en- trepreneurship and general sympathy to entrepre- neurial firms in taxes, funds and regulations. Any single tax policiy has not been found to have sig- nificant influence on entrepreneurship (Bruce & Deskins, 2010). In supporting high-tech start-ups, research has shown that R&D subsidies through selective/competitive basis leads to a positive effect while R&D subsidies through automatic procedures lead to inefficiencies (Colombo, Grilli & Murtinu, 2011).

Government guided preparation for new ven- tures has been found to contribute to the survival of new ventures (Rotger, Gørtz & Storey, 2012). Although importantly, portfolio entrepreneurs are more likely to show dimensions of entrepreneurial behaviours than novice and serial entrepreneurs (Westhead, Ucbasaran & Wright, 2005). The pro- vision of appropriate information about resources to enable portfolio entrepreneurs to exploit op-

portunities is critical; support should be provided for serial entrepreneurs to aid the identification of opportunities. Relevant training schemes should be launched to address the obstacles met by nov- ice entrepreneurs and learning adaptation skills contributes to dependent business unit survival (Andries & Debackere, 2007).

Policies that encourage entrepreneurial educa- tion are another key government area of influence. Entrepreneurial education has been defined as “a process of providing individuals with the ability to recognize commercial opportunities and the insight, self-esteem, knowledge and skills to act on them” (Jones & English, 2004). Entrepreneurial education combines different disciplines such as management, marketing, finance, economics and engineering. It enhances students’ willingness to become entrepreneurs (von Graevenitz, Harhoff & Weber, 2010) and studies of college experi- ences have been found to influence significantly students’ attitudes toward entrepreneurship and en- trepreneurial self-efficacy (Kamau-Maina, 2009).

In essence government policies can have a range of effects on the entrepreneurial ecosystem. The broader social policy settings, particularly in the education sector, can identify, support and de- velop the key attributes of entrepreneurial minded young individuals. A range of programs and sup- port mechanisms such as incubators, science parks and co-creation spaces can provide crucial low cost start-up support services and accommoda- tion. Awareness of industry and sectoral activity and needs is important for governments to be able to target development of key infrastructures that facilitate the emergence of new enterprise and particularly so if these facilities are important for the collective industry base or cost is prohibitive without government assistance. In this regard industry cluster policies and programs can assist to stimulate innovation, university collaboration and technology transfer to accelerate expansion and growth of particular industry sectors. Creat- ing the right conditions for financial capital to flow to early-stage start-ups and firms positioned

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for growth is a key role of policy. Lastly, policy can nurture the emergence of new opportunities through procurement platforms and incentives and rewards for risk-taking by ventures exhibiting high promise, strong capabilities and growth ambition.

The objective for this research was to conduct a comprehensive literature review that addressed three areas:

• To review internationally recognised and accepted methodologies of entrepreneurial human and firm characteristics data collec- tion and analysis to recommend strategies viable for DMITRE.

• To formulate the contemporary view and latest research on entrepreneurial charac- teristics and how these characteristics con- tribute to a model of entrepreneurial firm behaviour.

• To examine developments in the literature that explain to what extent human charac- teristics influence and predict the perfor- mance of firms.

The rationale for this work was to inform government policy on:

• Particular criteria to assist with grantee se- lection of early-stage ventures.

• Designing the parameters for a gap analy- sis on entrepreneurship programs.

• Providing Key Performance Indicators (KPIs) for Policy and Program Monitoring.

Each of these will now be discussed before the conclusion of the chapter.

Criteria for Grantee and Program Participant Selection

While much effort has been placed into under- standing the characteristics of entrepreneurial individuals and firms, another line of research has focused on the investment decision making

of venture capital firms and informal (angel) in- vestors. The roots of this research stem from the 1970s and the screening of ventures emphasises two lines of thinking with respect to what con- stitutes a successful venture. The first involves a focus on the entrepreneur and the management team. The underlying logic to this view is that a good management team will persevere and make a success of new venture concepts by adapting and evolving the business model in response to the drivers of the market place and customer. The second line of evaluation emphasises the market and industry dynamics and identifies with the customer need, the market potential and the competitive landscape. This view acknowledges that the basis of a good venture starts with a viable product/service that can penetrate or establish a market beachhead with a competitive advantage that will serve to fuel growth. Using these two dimensions serves as a means to comprehend the venture’s likelihood of success and probability of an acceptable positive return on the investment.

As research has developed the dynamism of new venture development has also been taken into account. Ventures progress through stages and attract different types of investment at different times throughout a venture’s life cycle develop- ment. Research suggests that venture screening at the earlier stages of a new venture’s life is biased toward identifying good market/industry potential. For more mature ventures the emphasis shifts to a focus on the abilities of the management team and/or entrepreneur to exploit the market oppor- tunity with management capabilities grounded in industry and prior new venture experience. Hence, there is no dichotomy in the decision-making processes of Venture Capital firms. Rather, as- sessment of both market and team takes place but the relevance and significance of the market and team criteria shift depending upon the stage of development of the venture and the investor’s strategy of investment.

Research also highlights a third dimension that drives investment decision-making being the

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investment parameters of the particular investment firm (including expected investment returns). This aspect will be ignored for our purposes although it is relevant in consideration of the development of a screening tool whereby the objective of the tool should be clearly stated and appropriate criteria included. A key point to consider is that individual investment firms may have a pre-disposition to particular investment strategies, types of invest- ment preferences or preferred firm investment stages. Therefore, in adapting a screening tool for government screening purposes, any bias toward types of investment strategies will need to be addressed and the tool should be appropriately aligned to the stage of support.

There are a range of screening tools that may be of assistance in screening new ventures. These include but are not limited to:

• The New Venture Opportunity Screening Guide (Timmons 1994)

• The Bell-Mason Diagnostic (Bell & Mason 1991)

• ProGrid Venture (Bowman 1997) • The New Venture Template (Mitchell

1995)

• Klofsten Business Platform (Klofsten 1998) • The Idea Venture Assessment Tool (Hindle

2010)

The underlying principle in choosing a screen- ing tool is to identify those that use known and tested viable venture attributes supported by ac- tuarial modelling. These offer the most potential of assisting in identifying new ventures that are mostly likely to succeed. Table 31 is a summary of relevant indicative factors that are critical in- dicators of venture success.

To explore the application and use of screening methodologies has been beyond the scope of this chapter. However, there are three options available with respect to incorporating these approaches into an assessment methodology with some predictive power of the likely success of nascent entrepre- neurs and their ventures. These are:

• Develop a methodology in-house leverag- ing this Entrepreneurial Characteristics chapter as the basis for the work and in- clude a broad ranging review of market/ industry factors to identify specific and rel- evant inclusions.

Table 31. New venture screening tools abridged critical indicators of firm success

Principle Areas of Screening Typical Critical Indicators

New Venture Screening Tool Market/Industry Opportunity Target market is experiencing growth. Evidence of market acceptance for the product/service. Large potential market. Industry sector is attractive and not hostile to value retention. Product is proprietary or can be protected (has competitive advantage). Competitive rivalry is restricted, limited or manageable. Product has a working prototype.

Entrepreneur / Management Team Capability

Industry/market experience. Previous new venture experience. Demonstrated leadership ability. Capable of sustained effort. Able to evaluate and react to risk well. Articulate and comfortable in communication. Trustful in relationships.

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• Leverage the knowledge and experi- ence of the University sector to incorpo- rate the findings of the Entrepreneurial Characteristics to develop a robust and purpose built methodology.

• Examine the potential of adopting one of the aforementioned methodologies for ad- aptation to the specific needs required by the a regional government.

Parameters for a Gap Analysis on Entrepreneurship Programs

Entrepreneurship research is still in relatively early stages with respect to uncovering the causal rela- tionships between individuals, firms and the socio- economic performances of any specific economic boundary. However, in the context of this work, there is a specific purpose for entrepreneurship which is aligned with an economic development agenda rather than either a productivity or socio- economic (social) focus. From this perspective and if the conceptualization of entrepreneurship economic purposes are accepted, policy should be concerned with proactive stimulation, facilitation and growth of ventures that are grounded on new and advancing technologies and the harnessing of new knowledge. This differentiates entrepreneur- ship policy from either small business or industry policy, that are both anchored in the productivity agenda, except where new knowledge and/or new technology serves to revitalise and re-focus busi- ness and industry toward new activity to provide a platform basis and a new source of wealth for the economy.

of doing entrepreneurship within an economic region; the lagging measures that isolate perfor- mance and impact; and lastly the government pro-activeness indicators that reveal the extent to which a government supports entrepreneurship through policy, programs and infrastructure.

By drawing together the literature discussed in this chapter it is now feasible to present specific measures that are relevant to different questions that policy-makers may wish to explore to gain a more complete appreciation of entrepreneur- ship within an economy. Table 32 lists the items from the three most internationally accepted methodologies to provide a focus on the leading, operational, lagging and pro-activeness indicators. Furthermore drawing upon the conceptualisation of the development, productivity and social sectors of the economy also directs the sites for informa- tion gathering and eliminates some questions that would be irrelevant to a specific socioeconomic policy agenda. For instance Table 32 lists the questions that are most relevant to economic de- velopment and omits questions relating to social value created and poverty reduction which may more appropriately be directed toward the social sector and the issues of utility of entrepreneurship.

In order to pursue a gap analysis of entrepre- neurial capability there are four considerations that must first be explicitly decided:

1. What is the basis of entrepreneurship that is of most concern; one or more of the eco- nomic development, productivity or social issues? This determines where to look and who to ask regarding specific policies and programs to meet specific agendas.

2. Is one or more indicators, be it leading, operational, lagging or pro-activeness, of most importance for analysis? This may be based on perceptions of need and stage of development of policies or urgency of implementation needed and would dif- ferentiate between the needs to know the latency of entrepreneurship in an economy,

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the transformative power of the operational platforms for entrepreneurship, the stock or impact that policies and programs have had or the relative performance of the govern- ment on issues of entrepreneurship.

3. What are the acknowledged best practices and policy and program philosophies in areas of specific concern? This provides a

benchmark from which the gap in policies and programs can be assessed and further invites the question for later analysis whether the best practices can actually be bettered.

4. Does the specific region differ in any substan- tive way or have unique characteristics that are not encountered by best practices in other jurisdictions? This consideration focuses on

Table 33. Individual indicators of success and stage relationships

Nascent Stage Survival Stage Growth Stage

In di

vi du

al s

Higher education

Related industry experience

Entrepreneurial intentions and self-efficacy. Business planning/management skills.

Social network Growth intentions

Risk/opportunity propensity Coping skills

Complexity dynamic/balanced skills

Fi rm

Supportive economic, social and political environment.

Founder(s) characteristics (see Individual level above).

Access to tangible (physical resources) and intangible (human/social capital) resources.

Extent of innovation

Access to financial capital Entrepreneurial Orientation

Customer demand Market dynamics

Opportunity feasibility Business model feasibility

Entrepreneurial management

Table 32. Macro indicators of entrepreneurship for economic development

Leading Operational Lagging Government Pro-Activeness

Entrepreneurial Population Attitudes & Aspirations

Framework conditions: Social, political, regulatory, technology

and economic

Firm Performance and Impact Policy, Programs and Infrastructure.

• Perceived opportunities and capabilities. • Fear of failure. • Status of entrepreneurship. • Aspirations for growth. • Aspirations – innovation. • Aspirations - International orientation.

• Regulatory Framework / Commercial, legal infrastructure for entrepreneurship. • Market conditions / internal market openness. • Access to finance / Entrepreneurial finance. • Entrepreneurial capabilities / education / skills. • Culture / and social norms. • Opportunity/necessity driven. • Industry. • Early stage entries. • Business exits.

• R&D transfer and Technology. • FIRMS entrepreneurial performance. • Employment entrepreneurial performance. • Wealth entrepreneurial performance. • Job creation. • Economic growth.

• Promoting awareness and networking. • Formalising the informal sector. • Government entrepreneurship policy. • Government entrepreneurship programs.

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adaptation, extension or irrelevance of policy and programs observed across dissimilar geographies or socio-political contexts.

Key Performance Indicators for Program Monitoring

Although there are varied conceptualizations about the stages of development of a firm, the researchers for this chapter adopted an approach

that considered three phases that were represen- tative and relevant to the research objectives. In particular firms will only be started if there are individuals actively engaged in exploring ideas and opportunities that form the foundations of new firms. This stage of activity is undertaken by nascent entrepreneurs, those who are involved in activities of becoming an entrepreneur. Mea- suring activity in this area suggests indicators of entrepreneurship latency.

Table 34. Entrepreneurship KPI synthesis

Key Indicators for Economic Performance

Leading Entrepreneurial

Population Attitudes & Aspirations

Operational Framework Conditions: Social,

Political, Regulatory, Technology and

Economic

Lagging Firm Performance and

Impact

Government Pro-Activeness

Policy, Programs and Infrastructure

Latency • Higher education of nascent entrepreneurs. • Related industry experience of nascent entrepreneurs. • Entrepreneurial intentions and self- efficacy. • Cultural fear of failure. • Status and perceptions of entrepreneurship. • Perceived opportunities and capabilities.

• Entrepreneurial capabilities / education / skills. • IP Regulatory Framework / Commercial, legal infrastructure for entrepreneurship. • Culture / and social norms. • Business entry / exits.

• Firms entrepreneurial performance. • Employment entrepreneurial performance. • Entrepreneurial wealth created.

• Promoting awareness and networking.

Economic Development

• Aspirations – innovation. • IP filing of the knowledge sector. • Economic status (i.e. decline). • Presence of clusters.

• Access to entrepreneurial finance, informal and formal investment. • Innovation opportunity motivated entrepreneurs.

• R&D and technology transfer to new starts and spin-outs. • R&D sector employment. • Growth of existing clusters.

• Formalising the informal finance sector. • Government entrepreneurship policy and programs.

Productivity • IP filing of the industry sector. • Relative productivity performance per sector.

• Market conditions / internal market openness. • Access to entrepreneurial finance, mezzanine and expansion capital. • Market opportunity motivated entrepreneurs.

• R&D transfer and Technology to spin-ins and established firms. • Firm R&D spend.

• Government innovation policies and programs.

Social Utility • Necessity motivated entrepreneurs.

• Government social entrepreneurship policies and programs.

Economic Growth • Aspirations for growth. • International aspirations. • Entrepreneurial orientation and management.

• Exports. • Business expansion.

• Job creation. • GDP (GSP) growth. • (State)Trade surplus.

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Assuming nascent entrepreneurs identify with an opportunity and judge sufficient benefit in pursing it through to business formation the priority of the subsequent stage is survival of the business. Those individuals who manage to sustain the business through this stage may either choose to plateau or leverage the firm into fur- ther growth following product, service or market development opportunities. Alternatively, some entrepreneurs may choose either voluntarily or, through unfavourable circumstances, to withdraw from the business. Hence, performance indicators measured at this stage of activity would indicate levels of entrepreneurship dynamism revolving around economic development, productivity and/ or utility. However, the ultimate contribution toward economic growth will only transpire as firms move to the third stage and achieve sig- nificant growth.

The third stage in the new venture life cycle, growth, sees the new venture established as a busi- ness entity. At this point, the economic contribution of the firm shifts from development, productivity

or utility to the more specific measures of eco- nomic growth as new jobs and wealth are created. Measures of established firm growth become key lead indicators of economic growth.

Table 33 summarises the findings of the lit- erature review with respect to the changing char- acteristics observed across the transition through the three stages of entrepreneurial activity. The contribution of the work for this chapter is to identify the specific entrepreneurial characteristic measures that may be taken to suggest indicators of corresponding economic performance at the levels of entrepreneurship latency, economic de- velopment, productivity and utility and ultimately economic growth.

Synthesizing the characteristics identified in this work with the four categories of macro indicators of entrepreneurship and the economic purposes produces Table 34 which clusters key performance indicators under leading, operational, lagging, and policy performance with the specific indicators of entrepreneurship in the categories of latency, economic development, social util-

Figure 16. The conceptual relationships between the entrepreneurial effort and government and private sector support

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ity, productivity and economic growth. In other cases indicators may contribute to more than one category and therefore this suggests that further refinement of this table is still required.

From the synthesis provided in Tables 33 and 34, Key Performance Indicators can be selected and formulated for any particular policy direc- tion and for various stages of entrepreneurship development. In some cases the measures may be specific but in others the precise metric might need further refinement by drawing upon this chapter and other research. Each cell of the table can also be added to by reference to the earlier sections of this chapter. For instance economic growth will have many more indicators than suggested here although the metrics suggested area guide.

CONCLUSION

A review of research literature strongly suggests that there is a role for government in stimulating entrepreneurial and new venture activity. The nature, type and number of policies all have an effect on entrepreneurial activity. The key chal- lenge for government is to walk a fine line between managing the evolution of new industries while looking after the interests of current industries and dependent communities. As a consequence, governments can play a significant role in the development of the entrepreneur and their early stage new ventures but then must allow the private sector to pick-up the most promising and emerging new players. Figure 16 conceptually illustrates the intertwined dynamics between the private and public sectors highlighting the area of the individual’s domain of entrepreneurial endeavour that is applied to extend the support provided by government and the private sector to bring new ventures to life.

Research also highlights that government programs of entrepreneurial support must take

into consideration the business and private sec- tor conditions and make allowance for business objectives to be met. Supporting new ideas or technologies without factoring in these critical areas that facilitate transition from concepts to operating and flourishing businesses reduces the public sector investment efficiency and effective- ness. Aside from the direct support and focus on the emergence and development of entrepreneurial ideas, governments also must seek to provide the conditions that stimulate and encourage private sector engagement.

ACKNOWLEDGMENT

This research was made possible by funding from the Department for Manufacturing, Innovation, Trade, Resources and Energy, Government of South Australia.

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KEY TERMS AND DEFINITIONS

Entrepreneurial Behaviours: Those behav- iours that lead to a venture start-up which is the outcome of an entrepreneurial process. The en- trepreneurial process is the process that includes identifying, evaluating, exploring, and exploiting entrepreneurial opportunities.

Entrepreneurial Capability: The capability to identify an entrepreneurial/business oppor- tunity and to develop the resource base needed to pursue the opportunity. In this article, we distinguish between the individual and the firm level entrepreneurial capabilities and discuss each independently.

Entrepreneurial Characteristics: Include competency, skills, knowledge, expertise, acu- men, behaviours, attitudes and personality traits of successful entrepreneurs. This paper will refer to competency and characteristics as interchange- able words.

Entrepreneurial Competence: A specific group of competencies relevant to exercise suc- cessful entrepreneurship that is mainly associated with development of small and new businesses. This paper will refer to competency and charac- teristics as interchangeable words.

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Entrepreneurial Ecosystem: Comprises of hundreds of elements that build the environment in which entrepreneurship takes place among them are financial support, government policies and programs, research and development (R&D) transfer, access to infrastructure, cultural and social norms and education and training.

Entrepreneurial Environment: Includes the economic environment (e.g. labour and market conditions, materials availability, access to fi- nancial assistance), social environment (culture, honesty, justification, religion, social marginality) and political environment (stability).

Entrepreneurial Firm: A firm in the earlier stage of new venturing or start-up which has the potential of attaining significant size and prof- itability whether from a spin-off, a merger or independent entrepreneurial activity.

Entrepreneurial Opportunity: Situations in which new goods, services, raw materials, markets and organising methods can be introduced through the formation of new means, ends, or means-ends relationships.

Growth Firm: Commonly measured by the scaling-up of sales by a firm that has been in operation for at least 3-5 years.

Nascent Entrepreneur: A person who is now trying to start a new business as the owner or part owner of the new firm, who has been active in trying to start the new firm in the past 12 months carrying out some gestation activity.

Nascent Firm: The conceptual stage of a firm in the process of becoming an established business led (most likely) by a nascent entrepreneur who commits time and resources to start a new firm.

Stages of Firm Growth: Describes the devel- opment of firms following three stages; nascent, survival and growth.

Survival Firm: Firms that have in most cases started operations ideally with a business registra- tion and have started operating with a cash flow either by means of income and/or expenses. A survival firm often depends upon securing enough cash to maintain working capital and fund capital purchases, both necessary to support the ongoing sustainability of the business venture.

The Entrepreneur: The central figure in en- trepreneurship, acting on opportunities either in well-defined markets or by defining new markets and market segments.

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Chapter 13

DOI: 10.4018/978-1-4666-5828-8.ch013

Manufacturing in a High Cost Environment:

Basis for Success on the Firm Level

ABSTRACT

This chapter draws on an overview of contemporary literature to distil the best ways for manufacturing firms to adapt to and succeed in high cost environments. Parts of global value chains will move back to sophisticated, economically complex, high operating cost environments like the US and the European Manufacturing Belt. However, the firms that participate in these value chains will look different. The forces that impact the structure and location of manufacturing activities will also impact the individual firm, and this chapter discusses how this will result in successful firms becoming so called “Hidden Champions.” A successful transformation into tomorrow’s Hidden Champion will result in fewer employees with higher capability, producing a higher level of output of which a very high share will be produced and delivered digitally. These firms will participate in smaller, more concentrated value chains serving a global market but operating both competitively and collaboratively in agglomerations like clusters. These agglomerations will be located in jurisdictions with high economic complexity and with a deep and broad industrial commons and with a supportive policy regime.

LOW COST OPERATING ENVIRONMENT

In a low cost operating environment, the basis for success is normally to successfully compete on price i.e. to have the lowest total cost. This leads to a focus on efficiency (which is interpreted as doing what you do as well as possible) and consequently on imitation (normally called benchmarking, best

practice, etc.) which reduces the risk, and thereby cost, associated with introducing new things into the firm. It also leads to a focus on productivity improvements which are interpreted as cost reduc- tion and work efficiency.

Low cost operating environments are charac- terised by most production factors being available at lower or similar cost to other locations. With globalisation, an increasing number of produc-

Göran Roos Swinburne University, Australia

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tion factors become available at similar cost in different locations, which makes the remaining production factors that are still available at lower cost increasingly valuable as a basis for the firm’s competitiveness.

HIGH COST OPERATING ENVIRONMENT

In a high cost operating environment, the basis for success is normally to compete on superior value for money. This means an emphasis on effective- ness balanced with an emphasis on efficiency. Effectiveness (which is interpreted as doing the right thing) is about delivering what the customer values; efficiency (which is interpreted as doing what you do as well as possible) is about delivering this value at the lowest possible cost.

This emphasis on effectiveness leads to a focus on innovation and on productivity defined as do- ing smarter things in smarter ways, whereas the secondary emphasis on efficiency means ensuring as short a lead-time as possible from idea to prod- uct and as rapid a cost reduction as possible for the new innovation once it is put into production.

Given the continuously increasing speed of knowledge dissemination (including the codi- fication of tacit information) in an increasingly globalised world, firms in a high cost operating environment must do one or both of (Roos, 2013a):

• Creating and accumulating knowledge faster than firms in low cost operating en- vironments, at the same time as converting this new knowledge to a temporary com- petitive advantage1 faster than firms in low cost operating environments.

• Shielding some critical part of their knowl- edge base (usually partly tacit) from be- coming globally accessible in order to extend the duration of their temporary competitive advantage.

The ability to achieve one or both of these outcomes is frequently based on close interaction and cooperation with customers. Building up and maintaining strong interactive relationships with external partners, and primarily with lead custom- ers, is critical to firm success (Kleinaltenkamp & Jacob, 2002; Jacob, 2006; Arnold et al. 2010). The benefits include dramatic reduction in rework cost (Bürgel & Zeller, 1997) and enhanced idea generation (Arnold et al. 2010). Maintaining close relationships and engagement with suppliers is similarly critical as they frequently are drivers of process innovation and technology transfer (Chronéer, 2005; Aylen, 2010; Lee et al. 2010; Sjödin & Eriksson, 2010), especially in process industries (Rönnberg Sjödin et al., 2011; Sjö- din, 2012; Rönnberg-Sjödin, 2013). Likewise, relationships with competitors (the concept of coopetition2) is critical here (Johansson, 2011; Peng et al. 2012; Ritala & Hurmelinna‐Lauk- kanen, 2013; Yami & Nemeh, 2013) and can lead to positive outcomes (Bengtsson & Kock, 2000) like shorter time to market and increased technological diversity (Lou, 2007; Faems et al., 2010) and stimulus for new product innova- tion (Belderbos et al., 2004; Quintana-Garciá & Benavides-Velasco, 2004; Ritala, 2012). These benefits also result from engaged working rela- tionships with research providers (Roos & Pike, 2011; Estep & Daim, 2013). Crespi et al. (2008) found that vertical linkages and cooperation within the business group account for 50 percent of total factor productivity growth and Harris et al. (2012) found that cooperation with universities account for 16.3 percent of total factor productiv- ity growth, hence it can be stated that firms that have a higher level of cooperation are more likely to innovate successfully with positive impact on total factor productivity growth.

Knowledge creation is normally strongly in- fluenced by particular location-specific factors in the regional innovation system, combined with social and cultural institutions and behaviours

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(Porter, 1998; Cantwell & Piscitello, 2002; Mal- ecki, 2004; Thierstein et al. 2011; Theyel, 2012; Lüthi et al., 2013).

EXOGENOUS DRIVERS OF INNOVATION DYNAMICS

In periods of economic expansion, an innovation based strategy is pursued primarily by well estab- lished firms that can exploit strong appropriability conditions and that have formal internal and con- tracted R&D activities executed in collaboration with both customers and suppliers (Archibugi et al., 2013).This fits with the concept of creative accumulation taking place in an environment characterised by a technological regime with high cumulativeness and low technological opportuni- ties, with the resulting stability enabling the bulk of innovation to be incremental in nature and to be carried out by large and established firms, resulting in a market with high entry barriers and oligopolistic competition (Schumpeter, 1942).

A large share of the explanation for this rests with the concept of path dependency (i.e. that the present state is a function of the preceding state and so on backwards in time). Path dependency is driven by (Hannan & Freeman, 1984; David, 1985; David, 1988; Cohen & Levinthal, 1990; Hodgson, 1993; Arthur, 1994; David, 1994; Car- roll & Hannan, 1995; Crow & Bozeman, 1998; Essletzbichler & Winther, 1999: Ronde, 2001; Araujo & Harrison, 2002; Niosi, 2002; Booth, 2003; Fuchs & Shapira, 2005; Gertler, 2005; Hassink, 2005; Meyer & Schubert, 2007; Martin & Sunley, 2010; Golomzina, 2013):

• Barriers to changing the existing compe- tence base due to behavioural inertia, ex- isting language, etc.

• Contract based barriers to change due to high cost, as well as performance uncer-

tainties of the “new offering” combined with risk avoidance behaviour from the buyer.

• Increasing returns to scale due to the first entrant imposing their technology and hence forcing later entrants to suffer from the negative effect of economies of scale and economies of learning.

• Network externalities due to the first en- trant imposing their standard resulting in exclusion of “better offerings” that are non compliant with this standard.

• Success lock-in, meaning that what is a successful strategy, business model and resource system at one point in time may well not be successful at a different point in time, but past success has generated both behavioural inertia as well as an inability to see the reducing performance of the ex- isting strategy, business model, resource system combination.

• Sunk cost resulting from past investments in equipment that generates technological lock-in.

In periods of economic contraction, an in- novation based strategy is pursued primarily by smaller firms in cooperation with other firms using methods aimed at exploring and exploiting new technologies to capture new markets and op- portunities (Archibugi et al., 2013). This fits with the concept of creative destruction taking place in an environment characterised by fierce competi- tion, low cumulativeness and high technological opportunities, leading to a situation with greater dynamism in terms of technological ease of entry and exit, providing a major role for entrepreneurs (Schumpeter, 1911).

These same arguments for periods of economic expansion and contraction can be made for periods of technological stability with linear technologi- cal development versus periods characterised by

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discontinuous non-linear technological develop- ment (Wersching, 2010; Karvonen, 2011; Bonnyai, 2013; Golomzina, 2013).

PRODUCTIVITY DRIVERS IN HIGH COST OPERATING ENVIRONMENTS

Total Factor Productivity (TFP) or Multifactor Productivity (MFP) measures the changes in output per unit of combined inputs. A change in TFP (MFP) reflects the change in output that can- not be accounted for by the change in combined inputs and as a result, multifactor productivity measures reflect the joint effects of numerous factors e.g. new technologies, economies of scale, managerial skill, changes in the organisation of production, changes in capital services, changes in labour services, changes in energy use, changes in materials, changes in purchased services, etc. TFP (MFP) is often seen as the real driver of growth within an economy:

• The biggest factor in increasing economic growth and raising living standards over time is the economy’s ability to produce more out of less, also known as productiv- ity (Fox, 2002).

• Productivity isn’t everything, but in the long run it is almost everything. A coun- try’s ability to improve its standard of liv- ing over time depends almost entirely on its ability to raise its output per worker (Krugman, 1990)

So what drives productivity on the firm level? In an excellent article Syverson (2011) has identi- fied the following drivers:

• Managerial competence and capability to- gether with managerial practices (Walker, 1887; Mundlak, 1961; Shashua et al. 1976; Mefford, 1986; Bertrand & Schoar, 2003; Alvarez et al. 2004; Cosh et al., 2005;

Yukl, 2008; Bushnell & Wolfram, 2009; Baranchuk et al., 2011; Lazear et al., 2012; Balsmeier & Czarnitzki, 2013; Lin et al., 2013; Yonker, 2013). The seminal stud- ies by Bloom et al. (Bloom & van Reenen, 2007; Bloom et al., 2010; Bloom & van Reenen, 2010; Bloom & van Reenen, 2011; Bloom et al., 2012a; Bloom et al., 2012c; Bloom et al., 2012b; Bloom et al., 2013a; Bloom et al., 2013b) find a statis- tically strong correlation between a firm’s management practice score (see Figure 1) and the firm’s TFP (MFP) with an eco- nomic impact that expressed in numbers means if you move between quartiles of management practice score, the produc- tivity impact varies between 3.3 percent and 7.5 percent which equals to between a third and a quarter of the corresponding TFP (MFP). Bloom et al. (2013b) estimate that management could account for on av- erage 29 percent of a country’s TFP (MFP) deficit.

The research by Bloom et al. also shows that there are two primary factors that are strongly correlated with management practice: The first is competitive intensity where higher intensity is positively correlated with high management practice score; the second is when family firms (which in themselves as an ownership structure are positively correlated with management practice) have installed the first son as a manager – which is negatively correlated with management practice.

• An interesting subset of the managerial practices discussion relates to high-per- formance work systems. These systems are not clearly defined (some critique around one-sided reporting favouring posi- tive outcomes (Godard, 2004) as well as validity of claimed causalities has been voiced (Gerhart, 2012; Tregaskis et al., 2013)) but different studies have identified

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the key components of such systems and they have been summarised by Gibbons & Henderson (2012) and shown in Table 1.

The findings from the studies seem to indicate that it is the complete bundle of practices that increases performance rather than the individual practices (Gritti & Leoni, 2012). It also should be noted that while some high-performance work systems in some contexts do contribute to enhanced performance; not all high-performance work systems in all contexts contribute to the de- sired outcomes (Boxall, 2012; Jiang, et al., 2012). The identified productivity difference between using the complete bundle and using none of the identified practices seems to be in the range of 6 -7 percent. Another interesting finding is that the productivity benefits and the improvement of these benefits only accrue slowly – less than 10 percent improvement annually. Gibbons & Henderson

(2012) point out that significant management practices require both managers and employees to act in ways that cannot be fully specified ex ante or verified ex post, so organisations must rely on relational contracts to implement these practices, which can explain the slow diffusion speed since three barriers may be encountered: firstly, the relational contracts operated by high performing firms may be unfeasible or prohibitively costly for underperformers to implement (Gibbons & Henderson, 2012, p. 61); secondly, the sequence of events during a relationship can produce measured performance differences among ex ante identical enterprises: achieving perfunctory cooperation can make it harder to achieve consummate coopera- tion; cooperation, once built, can be fragile; and cooperation may be difficult to build in the first place (Gibbons & Henderson, 2012, p. 61-62); thirdly, difficulty in communicating the extensive task and relational information that underlies

Figure 1. Management practice scores by country (Averages taken across all firms within each country) (Bloom et al., 2013b, p. 73.)

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many relational contracts may also play a role in making it difficult to build unfamiliar relational contracts (Gibbons & Henderson, 2012, p. 62). This explanation is probably more important than other explanations put forward in the literature (Gibbons & Henderson, 2012):

• Incumbent managers may not know that they are operating with a sub-standard performance (Henderson & Clark, 1990; Christensen, 1997; Tripsas & Gavetti, 2000; Ambrosini & Bowman, 2010; Kaplan, 2011).

• Incumbent managers may know that they operate at a sub-standard performance but do not know what to do about it (Nelson, 1982; Winter, 1988; Winter, 1998; Almeida & Kogut, 1999; Anand & Khanna, 2000; Gant et al., 2002; Zollo & Winter, 2002; Lacetera et al., 2004; Winter, 2006; Breschi & Lissoni, 2009).

• Incumbent managers may know that they operate at a sub-standard performance and do know what to do about it but have no (or negative) incentive to take action and adopt new practices (Reinganum, 1989; Bloom & van Reenen, 2007; Bresnahan et al., 2011).

• Incumbent managers may know that they operate at a sub-standard performance but do not know what to do about it and they are striving to take actions to improve performance but cannot get the surround- ing organisation to implement the neces- sary and identified actions to achieve the higher performance (Milgrom & Roberts, 1990; Milgrom & Roberts, 1995; Pil & MacDuffie, 1996; Rivkin, 2000; Bresnahan et al., 2002; Rivkin & Siggelkow, 2003; Siggelkow & Rivkin, 2005)

• Higher-Quality General Labour and Capital Inputs. On the labour side, qual- ity of labour is impacted by e.g. educa- tion, training, overall experience, ten- ure, etc. (Amabile et al, 1996; Maliranta,

2003; Ilmakunnas et al., 2004; Shalley et al., 2004; Schneider et al., 2007; Jones et al., 2010; Chen et al., 2011; Naoki, 2011; Spiegelaere et al., 2013; Parrotta et al., 2014). On the capital input side, Sakellaris & Wilson (2004) estimate that the annual capital efficiency growth due to capital-em- bodied technological progress is between 8 percent and 17 percent whilst Cummins & Violante (2002) arrive at 5 percent. This exemplifies how important continued in- vestment in the latest capital equipment is for increasing productivity.

• The importance of Key Enabling Technolo- gies3 for productivity has been identified since the beginning of this century, starting with the productivity impact of ICT (Brynjolfsson et al., 2008; Bartelsman et al., 2010; Faggio et al., 2010). See chapter 1 table 2 for a more de- tailed discussion of the KETs.

• R&D capital formation, primarily driven by the pace not the intensity of R&D in- vestment, is an important contributor to productivity growth in manufacturing firms (see table 2) by facilitating techno- logical progress as well as catch up with industry leaders (Lee & Kim, 2006).

This impact on productivity is further strength- ened by the spill-over effects in the form of inter- firm and inter-industry innovations (Mansfield et al., 1977; Hall & Mairesse, 1995; Verspagen, 1995; Yanbing, 2006; Griliches, 2007; Sveikaus- kas, 2007; Heshmati & Kim, 2011; Higón et al., 2011; Ortega-Argilés et al., 2011; Doraszelski & Jaumandreu, 2013).

Innovation is a core driver of both firm (Cuc- culelli, 2013) and industry productivity and this is well recognised also among managers (Crossan & Apaydin, 2010). On the industry scale, aggregate productivity comes from the market reallocating inputs to successfully innovating firms from non- innovating or unsuccessfully innovating firms that hence fall behind the performance frontier, or from

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failing firms. Lentz & Mortensen (2008) found that this reallocation made up 75percent of the aggregate productivity growth in Denmark. Ber- nard et al. (2006) found that productivity growth accompanies expansion of the variety of products a firm offers. Cucculelli & Ermini (2012) found that the release of a new product enhances growth opportunity among multiproduct firms (which fits with the empirical finding from Kawakami & Miyagawa, 2013), that multiple-product firms perform better than single-product firms and that their labour productivity growth rates are higher. It also fits with the findings of Lelarge & Nefussi (2008) who found that increasing competition from low cost operating countries drives innovation in forms aimed at broadening or renewing the prod- uct portfolio and that more productive firms are more successful in doing this and hence achieve higher survival rates. Further, they found that product development promotes the growth of firms belonging to sectors with stronger commitment to research and development, by allowing them to better exploit the benefits from their “learning by innovating,” and also that new product devel- opment enhances firm growth substantially in those sectors which absorb externally-originated patents4. Buckley & Chatterjee (2012) found in their study of 1600 businesses that strong busi- ness practices and effective management were as important as the more traditional drivers of product innovation in Australian SME’s, whereas financial performance was found to have no posi- tive influence on innovation.

Learning by Doing, Using and Interacting. Improvements can be achieved by learning what works without needing to know why it works. These improvements can be made due to the skill and knowledge acquired by employees on the job as they face and solve unforeseen problems. Depending on the type of problem faced and solved, the acquired skill and knowledge may be specific or generic, and if generic it may be pos- sible to codify it and turn it into an organisational

resource that is available organisation wide. If the problem is complex, it may involve teams rather than individuals and may also involve inter-personal interactions between individuals both within and between teams. This is a mode of learning that requires hands-on acquisition of know-what frequently combined with know-who. Organisations can purposefully foster this type of learning through building conducive practices, structures, processes and relationships (both inside and outside the organisation) like e.g. apprentice- ship structures, project teams, problem-solving groups, job and task rotation, etc. (Lundvall & Nielsen, 1999; Laursen & Foss, 2003; Lorenz et al., 2004; Lorenz & Valeyre, 2005; Jensen et al., 2007 ; Schienstock et al., 2009; Pankhurst, 2010; Rasmussen & Nielsen, 2011; Høyrup, 2012; Spiegelaere et al., 2012; Egelman et al., 2013). There are two processes going on simultaneously, the first is the accumulation of learning in the or- ganisation, where Thornton & Thompson (2001) identified that past experience with the specific product design was the largest source of learn- ing, followed by in declining order (in percent of the learning from the specific product design): past experience with other product designs at 60 percent and lastly cross-firm spillover learning at 5-10 percent. The second is loss of learning in the organisation (driven by e.g. lack of use of accumulated knowledge, employee turnover, change in the production process, the production system, the production equipment, change in the product produced, change in organisational structures, etc.), and Benkard (1999) estimated the annual loss of the cumulated learning to 40 percent in the aircraft industry (see also de Holan & Phillips, 2004; Rao & Argote, 2006; Fernandez & Sune, 2009; Besanko et al., 2010; Brachet & David, 2011; Kleiner et al., 2012; Argote, 2013; López & Sune, 2013). The net effect of these two processes is normally observed and named Experience Curve, Learning Curve or Progress Function (Adler & Clark, 1991) which states

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in simplified form that the unit cost declines proportionate to the logarithm of the cumulative volume as long as there is no change in any of the variables mentioned above.

Firm Structure in combination with the indus- try structure and ecosystem in which it operates as well as the firm’s absolute and relative size will impact the firm’s productivity. Hortaçsu & Syverson (2009) and Atalay et al. (2012) in their study of establishments in the US found that verti- cally integrated plants have higher productivity levels, but that most of this difference is due to high-productivity plants being part of vertical structures rather than being a function of causal impact of integration on productivity. Further, the empirical evidence suggests that rather than mod- erating goods transfers along production chains, integration instead allows more efficient transfers of intangible inputs (e.g., managerial oversight) within the firm and this latter point fits with the findings of Ramondo et al. (2011) that the com- parative advantage of multinational corporations is their ability to transfer intangible—rather than physical—inputs along vertically linked produc- tion units. One of the explanations of firm diver- sification can be found in the results of a study by Zhou (2011) which found that a firm is more likely to diversify into a new business when its existing business lines can potentially share more inputs with the new business; however, the firm is less likely to diversify into any new business when its existing business lines are complex. The study also found that the likelihood of diversifying into a new business decreases more with the complexity in the firm’s existing business lines if they share more inputs with the new business, which suggests that increasing coordination costs counterbalance the potential synergistic benefits associated with related diversification. Schoar (2002) shows that conglomerates have, if anything, higher produc- tivity and claims that the financial diversification discount arises out of the temporary adjustment costs resulting from the very act of diversifying into new businesses; and that the acquired busi-

ness will initially experience productivity growth whereas existing plants experience productivity loss; generating an initial net productivity loss for the conglomerate as a whole This would explain results like those which showed that the degree of vertical integration consistently has a negative and statistically significant impact on firm productiv- ity. Ševčík (2010) found in his study of Canadian firms that small plants in conglomerates are less productive than plants in single-segment firms of similar size, but large plants in conglomerates are more productive than those of similar size in single-segment firms. Zaninotto & Pieri,(2011) in their study of the Italian machine tool industry found that more efficient firms exploit their ef- ficiency advantage to control a greater part of the production chain, possibly benefiting from greater coordination among different phases and tailored intermediate inputs, whereas poor performers outsource instead and this fits with the theoretical findings of Fossati (2011).

Productivity Spillovers exist in both the technological domain and the business practice domain and are impacted by location, product, process, technology and position in eco system relatedness, meaning the closer in terms of both distance and technological relatedness, the larger the spillover effect. These spillover effects oper- ate through various mechanisms, all of which experience some level of friction to diffusion and replication. The benefits of being parts of clus- ters, as one operationalisation of agglomeration economics, has been estimated by Roos (2013b) based on data from Sölvell & Williams (2013) to be 14 percentage points higher value added growth, seven percentage points higher profit- ability growth and two percentage points higher wages per employee (a proxy for productivity). The success of clusters depend on many different factors including but not limited to industry, tech- nology level, openness to exchange between par- ticipants, international linkages, labour exchange, etc. Successful clusters enable local firms that are part of the cluster to be embedded simultaneously

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in knowledge exchanges at different geographic scales. It is interesting to note that manufacturing firms represent the largest users of knowledge from most sources and that advanced manufacturers are around twice as likely to cooperate internation- ally with all types of partners relative to average manufactures (Bascavusoglu-Moreau & Li, 2013).

Competition drives productivity through Dar- winian selection among producers with heteroge- neous productivity levels by rewarding the more efficient producers and penalising the less efficient producers, sometimes to the point of forcing their exit. A secondary outcome of this also raises the productivity bar for potential entrants. Competi- tion also drives productivity through encouraging firms to take costly productivity-increasing actions that otherwise may not have been taken, unless the market size is limited when the effect may be the opposite (Vives, 2008).

Deregulation or Smarter Regulation can drive productivity improvements. Deregulation through the mechanisms identified above. Smarter regulations by imposing productivity reducing regulations on the firm that force it to innovate in order to re-establish its previous productivity level, a level required to remain competitive with jurisdictions that do not have these productiv- ity reducing regulations. This, when the firm is successful, establishes a basis for a superior competitive position that can be realised once the productivity reducing regulations are imposed in jurisdictions from which competitors operate. This fits with the findings of Blind et al. (2004) that e.g. environmental regulations have a short term negative but a long term positive impact on innovation. Regulation can be a powerful tool to drive innovation within specific sectors (e.g. con- struction) and technologies (e.g. green technolo- gies) (Roos, 2011a) as can be seen in studies like Averch & Johnson (1962); Zajac (1970); Cotton & Clairman (1995); Blind et al. (2004); Walz et al. (2008); González (2009); Walz et al. (2011); Blind (2012). Blind (2012) finds a positive impact of product and service legislation deterring business

activities in general, and environmental laws and compliance hindering competitiveness in particu- lar, which again fits with the statement above but requires a clear distinction between short-term and long-term impact of regulation that deters business activities like e.g. environmental regulation. The above discussion is closely interlinked with the discussion around lead markets i.e. the jurisdiction in which a globally successful innovation takes off (Beise, 2004).This is because lead markets provide the opportunity for first mover advantage, which if successful, provides these countries and their firms with a good opportunity to dominate international competition due to their early pres- ence in this field (Porter & Van der Linde, 2005). A country’s potential to become a lead market is determined by (Walz et al., 2011):

• The characteristics of the technology for which a lead market is sought. This tech- nology should have the following charac- teristics in order to form a barrier to inter- national relocation: ◦ Provide opportunities for niche mar-

kets where value for money is more important than cost.

◦ High innovation dynamics. ◦ High potential learning effects of the

technology. • The demand conditions in the country

should have the following characteristics: ◦ Presence of lead users, which are in-

terested in novel approaches and will- ing to accept higher prices.

◦ Openness to new innovations and new technologies.

◦ Supportive of user-producer interactions.

◦ High levels of competition, along with the presence of competitors of- fering alternative solutions grounded in different technologies.

◦ Strong domestic players in the field of the technology and strong domestic

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suppliers or in summary a strong do- mestic industrial commons and high economic complexity.

◦ A high technological reputation. ◦ Preferences similar to that of the world

market but with a time advantage. ◦ Open to the world.

• Innovation-friendly regulation in the country should have the following characteristics: ◦ National regulation should set the

standard for the regulatory regime, which other countries are likely to adopt.

◦ Regulation should lead to a correc- tion of market failures which origi- nate in environmental externalities and monopolistic bottlenecks.

◦ National regulation should not lead to an idiosyncratic innovation.

◦ Regulation should be open to di- verse technical solutions, which in- crease the chance that the solution fits into the preferences of importing countries.

• The technological capability of the country should have the following characteristics: ◦ The ability of a country to utilise a

lead market for a first-mover advan- tage also depends on its comparative technological capability. Path depen- dency means that if a country has a comparatively high knowledge base, it also has an additional advantage in developing and marketing future technologies.

◦ High R&D spending as share of GDP and a high share of this being R&D spending by business.

◦ High patenting rate per capita. • The competitiveness of related industry

clusters in the country should have the fol- lowing characteristics:

◦ Innovation and economic success depend on how a specific technol- ogy is embedded into other relevant industry clusters. Learning effects, expectations of the users of the tech- nology and knowledge spillovers are more easily realised if the flow of (tacit) knowledge is facilitated by proximity and a common knowledge of language and institutions. The in- ternational competitiveness of sectors and technologies is greatly influenced by the competitiveness of interlinked sectors. This boils down to a require- ment for a broad and deep industrial commons or in other words a very high economic complexity.

Flexible Input Markets are facilitated if insti- tutions improve match efficiency, solve asym- metric information problems, or otherwise serve efficiency-enhancing roles. If they on the other hand facilitate rent-seeking behaviour, they reduce flexibility. Petrin & Sivadasan (2013) found that regulatory change that increased the cost of em- ployee termination was associated with reduced allocative efficiency.

Demand plays a role for productivity since it can generate e.g. innovations in situations where a customer demands solutions and performance that does not presently exist in the market. This has been illustrated by e.g. Eliasson (2010) in a study where he illustrated that if the spillover value is divided by the development investment, a spillover multiplier of at least 2.6 was arrived at in the Swedish Griffin Fighter project where the government created a market by demanding something that could not be delivered using the knowledge then available, but required substantial research and development efforts. This identi- fied spillover effects related to core technolo- gies, related technologies, general engineering technologies, general industrial technologies

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contributing to the industrial commons and the economic complexity, and development of localised industrial competence blocs with ag- glomeration economic benefits. Eliasson (2010) concludes that public procurement of sophisti- cated public goods and services is an effective form of innovation policy.

Thomas et al. (2012) has identified nine de- velopmental areas for UK manufacturing which could be improved by identifying and continuously implementing the latest best practice approaches as summarised in Table 3.

To summarise the findings from this discussion as it relates to actions that firms and government can take, see the Table 4 (all such tables are per definition incomplete):

FIRM RESPONSE IN HIGH COST OPERATING ENVIRONMENTS

The above findings fit well with the insights from both the general findings by Ridgway et al. (2013) (summarised in Figure 2) and from successful medium sized firms in Northern and Germanic Europe (i.e. Germany, Switzerland, Austria, Netherlands, Sweden, Denmark, Finland and Norway) which are outlined in Table 5 and some of the key aspects in this table will be discussed in more detail below.

Absorptive Capacity

As outlined in the table below, these firms must have high absorptive capacity to pursue this

Figure 2. Characteristics of the factory of the future (Ridgway et al. 2013, Figure 10, p. 33)

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strategy/business model combination. A firm’s absorptive capacity is made up of a set of rou- tines and processes, by which the firm acquires, assimilates, transforms and exploits knowledge to produce a dynamic capability that underpins a competitive advantage (Mowery et al., 1996; Dyer & Singh, 1998; Koza & Lewin, 1998; Zahra & George, 2002; Lane et al., 2006; Flatten et al., 2011; Kamal, 2013). These routines and processes are of course complemented with capable and competent individuals (Massini, 2010) and a wide spectrum of high quality relationships i.e. an effective resource system well deployed (Roos et al., 2012).The definitions of the components are (Zahra & George, 2002):

• Acquisition: Is about identifying and ac- quiring externally generated knowledge that is critical to the firm’s operation. This means the ability to identify what is rel- evant in all the information that surrounds the firm and then finding ways to bring this information into the firm. The suc- cess in this domain is achieved by the di- versity and relevance of the firm’s existing knowledge base (Rocha, 1999) enabling it to know where to look for external infor- mation as well as enabling it to understand and evaluate the information and in that process, assimilate it (Cohen & Levinthal, 1990; March, 1991; Levinthal & March, 1993; Szulanski, 1996; Kamien & Zang; 2000; Lane et al., 2006; Leahy & Near, 2007; Camisón & Forés, 2010).

• Assimilation: Is about the processes that enable the analysing of information, in- terpretation of information, adaptation of information, as well as adding to or sub- tracting from the acquired information (Szulanski, 1996; Kim, 1997; Lane et al., 2006; Todorova & Durisin, 2007; Ben-

Menahem et al., 2012; Perez-Arostegui et al., 2013). These processes are influenced by a firm’s tacit, firm-specific knowledge regarding its established systems for pro- cessing information (Cohen & Levinthal, 1990; Van Den Bosch, 1999; Lane et al., 2006; Sedoglavich, 2008) and are facilitat- ed by close similarity between the informa- tion provider and the information receiver in terms of knowledge base, culture, lan- guage and cognitive structures, skills and on the organisational level similar strategy and business model (Cyert & March, 1963; Bierly & Chakrabarti, 1996; Barkema & Vermeulen, 1998; Lane & Lubatkin, 1998; Simonin, 1999; Ahuja & Katila, 2001; Rosenkopf & Nerkar, 2001 Bhagat et al., 2002; Lane et al., 2006; Yeoh, 2009; Jensen, 2010; Baumann & Rundahl, 2013). These processes are made more difficult the higher the tacitness and complexity of the information (Reed & DeFillippi, 1990; Kogut & Zander, 1992; Garud & Nayyar, 1994; Nonaka, 1994; Szulanski, 1996; Lam, 1997; Saviotti, 1998; Simonin, 1999).

• Transformation: Is the ability to take what has been assimilated and make it usable (i.e. possible to assimilate) to the relevant parts of the organisation (Zahra & George, 2002; van Wijk et al., 2008). Transformation and assimilation are not distinct concepts and depending on defi- nition, one can replace other (see e.g. de Man, 2008)

• Exploitation: Is about the conversation from information via knowledge to a com- petitive advantage for the firm (Koestler, 1964; Cohen & Levinthal, 1990; Ireland et al., 2003; Daghfous, 2004; Bogner & Bansal, 2007; Lumpkin & Katz, 2007; Alegre & Chiva, 2008; Straßburger, 2008;

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Pollard & Svarcova, 2009; Liu et al., 2011; Arts, 2012; Gong et al., 2013; Marcone, 2013).

Firms in high cost operating environments must have a high absorptive capacity underpinning their innovation activities and hence building and maintaining this capacity is a critical managerial responsibility. Li (2010) found that absorptive capacity accrues not passively but rather auto- matically from day-to-day interaction, and must be continuously and purposefully developed. Li (2010) also found that if leakage risks increased, so did the focus on enhancing the absorptive ca- pacity and further, that if there is close operational integration with a partner (customer, cooperating firm, etc.), the exploitation component becomes more effective and also that in a partner relation- ship, both parties need to learn at the same pace

to ensure development of the absorptive capacity. These findings are outlined in Figure 3:

Bascavusoglu-Moreau & Li (2013) found that manufacturing firms appear to have the highest absorptive capacity for general external knowledge (the principal type of absorptive capacity) and also a noticeable advantage in its absorptive capacity for national and international cooperation, and busi- ness strategy and practice. The second sector that stood out in the study was Knowledge-Intensive Services (KIS) which dominates in its absorptive capacity for business strategy and practice, na- tional and international cooperation and is second only to manufacturing in its principal capacity for general external knowledge.

Firms normally ensure assistance from Public Research Organisations (sometimes known as Research and Technology Organisations) and universities in developing and enhancing their

Figure 3. Summary of drivers of absorptive capacity and effective exploitation (i.e. solution innovative- ness) (Average value of responses from customer and focal firms) (Li, 2010, p. 98)

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absorptive capacity. Spithoven et al. (2011) identi- fied the following roles as provided by the PROs/ RTOs (in descending order of frequency of use):

• R&D laboratory for use of company. • Technology advisory services. • Technology innovation stimulation. • Information on Public R&D programmes. • Access to technical library. • Provision of qualified personnel. • Sales of equipment. • Right to use inventions (licences). • Provision of advice to external parties ac-

tive within the sector. • Provision of advice to external parties,

firms active outside the sector. • Provision of advice to external parties, oth-

er organisations (universities, PROs).

This is part of having a large number of high quality sets of relationships which, together with a high internal R&D capability, is one of the pre- requisites for building a high absorptive capacity. Lim (2009) identified the following three types of absorptive capacity with key enablers (Table 6).

Experienced, Educated, and Entrepreneurial Leadership with Ambitious Goals

Management capacity matters as shown in the different studies by Bloom et al. (2007) and Green et al. (2009). The studies show that a 17 percent improvement in management practice score is associated with the same increase in output as a 25 percent increase in the labour force or a 65 percent increase in working capital. The literature, as reported in Jarzabkowski et al. (2013) finds that management education has a general impact on the development of managers’ skills and competencies (Ishida, 1997; Kretovics, 1999; Baruch & Peiperl, 2000; Cheng, 2000; Priem & Rosenstein, 2000;

Sturges et al., 2003; Simpson et al., 2005; Wren et al., 2007; Hay & Hodgkinson, 2008; Hall et al, 2013b). Jarzabkowski et al. (2013) finds that formal management education does provide a basis for improving the use of management tools and techniques but that the effect depends on individual characteristics, so that formal business education, exposure to and frequency of manage- ment training, higher specificity of the training, seniority of corporate position, the relevance of the tools and techniques to the area of responsi- bility has a positive correlation, whereas age has a negative correlation. Lin et al. (2013) find that firms whose owners received higher education had 5.2–5.8 percentage points higher return on equity, 115–126 percentage points higher profits, and 102–111 percentage points higher sales revenue, respectively, than firms that did not have higher educated entrepreneurs.

Croce et al. (2013) find that highly educated employers have a greater propensity to invest in workplace training and also that close proximity between competing firms can lead to either a lower propensity to train workers due to the risk of poaching or a greater propensity to engage in training due to a positive knowledge spillover effect. Which of these two effects will dominate is a function of cultural traits where the second dominate in northern and Germanic Europe and the first in latin Europe. Sung & Choi (2013) found that internal staff training is a precursor for improved innovative performance which aligns with the findings of Kim & Ployhart (2013) that staff training drives firm productivity and growth and the findings of Aragon & Valle (2013) that shows that firms that train their managers with high frequency achieve better efficiency and performance than those that train their managers with lower frequency or not at all.

The above findings validate the importance of life-long training of both managerial staff and the workforce in general. This need is going to

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increase as technology developments continue to accelerate and as product life cycles continue to shorten into the future.

Knowledgeable, Loyal Low- Turnover Employees

In addition to the discussion above, Kwon & Rupp (2013) find that the negative impact of high-performer turnover on firm performance will be strongest for reputable firms and for firms who invest less in human capital (e.g. selection, training, and incentive-based pay) which aligns with the more general findings of Osterman (1987), Alexander et al. (1994), Huselid (1995), Batt(2002) and Yanadori (2007) that there exists a negative relationship between turnover and firm performance; and the findings of Dess & Show (2001), Cross & Cummings (2004), Shaw et al. (2005) and Burt (2009) that high-performer turnover negatively influences firm performance because it results in more social capital loss compared with overall turnover since high per- forming employees hold more ties and have more network centrality. This complements the view of performance and that high performers’ turnover is dysfunctional for firm performance but low performers’ turnover in fact can be functional for firm performance (Dalton et al., 1982) since it allows firms to upgrade their human capital pool by replacing lower performers with more qualified people from the outside.

The conclusion is that firms should develop high performers and then maintain them in the firm with continuous capability development, whilst speedily letting go low performers whose skills cannot be developed. This is going to be- come even more important given the increasing requirements posed by accelerating knowledge development in the domains underpinning the firm’s activities, combined with shorter and shorter product life cycles.

High Performing Product-Service- System Offerings Anchored in Customer and Consumer Insight

These firms have an offering portfolio made up of interconnected products and services that pro- vide the highest possible value for money. This means that they have a superior insight into the customers and the customers’ customers’ value perspective.

This requires an understanding of the three components of value (Pike & Roos, 2004):

• Instrumental: The value derived from the deployment and use of the offering. This is the value component that is most com- monly focussed on to the exclusion of the other two. In its simplest form this compo- nent can be expressed easily in direct mon- etary terms.

• Intrinsic: The value derived from the pos- session of the offering. This is the value that a coin collector assigns to his coins or the value we assign to things for what they are in themselves, like aesthetics or knowl- edge. This is the reason why you might be willing to pay for features in a product that you will never use – it feels good to have them.

• Extrinsic: The value derived from the ap- preciation of the offering by others. This is most easily visible in goods that are sold as “show-off” goods (see e.g. Veblen, 1899) e.g. the brand suit with the brand label still kept visible on the sleeve when worn.

In order to maximise the value for money from the customers’ perspective, all these value dimensions need to be taken into account (for some case examples see e.g. Fletcher et al., 2003; Pike & Roos, 2006; Rødseth et al., 2007; Garnett et al., 2008; Millar et al., 2010; Roos et al., 2012).

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These products then need to incorporate the outcomes of four domains: The Science and Technology Domain; The Design Domain; The Art Domain; The Domain of Understanding Emotional States. When innovation is done using all of these with the intent to contribute both to value creation and value appropriation we call it integrated innovation and it will be discussed further below.

There are two primary forces that drive manu- facturing firms to include services in their offer- ings. The first is discussed above and relates to increasing the value for money from the customer’s perspective when a product-service combination is offered instead of a stand-alone product offering. The second relates to the migration of the manu- facturing value adding potential from production activities to pre- and post-production activities as shown in Figure 4:

As can be seen from the above curve and the fact that the trend identified in the curve will continue to strengthen, firms must extend their activities into the pre- and post-production phase of manufacturing as well as increasing these ac- tivities in order to stabilise or increase the total value creating potential.

This above development is further strength- ened by the increasing move to digital space of activities presently executed in physical space as outlined in Figure 5, and increases the pres- sure on manufacturing firms to servitize5 (some examples of this move to digital space are given in e.g. Ludwig & Spiegel, 2014)

From this follows that in addition to servitiz- ing to compensate for the reduction in the value adding potential of production activities, firms will have to create service monopolies generated by product attributes that lock competing service

Figure 4. The shift in value-adding over time across the key value chain steps (Veugelers, 2013, p.27 after original concept by Shih, 1992)

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providers out as well as by continuously innovating also in the domain of services which will enable temporary competitive advantages resulting in higher economic rent. This means that the firm will compete on value for money in a market where it ideally is the only service provider able to provide services associated with a given product that it manufactures, hence becoming the highest value for money provider of the complete product- service-system offering in competition with other providers of competing product-service-system offerings or several cooperating or independent providers of products and services (Roos, 2014b).

Roos (2014b) summarises the work by Lewis, 1942; Levitt, 1983; Coyne, 1989; Reichheld & Sasser, 1990; Knecht et al., 1993; Anderson& Narus, 1995; Kalwani & Narayandas, 1995; Reich- held, 1996; Frambach et al., 1997; Desmet etal., 1998; van Looy, et al., 1998; Goffin, 1999; Wise & Baumgartner, 1999; Reichheld, 2001; Goffin & New, 2001; Mathieu, 2001; Nambisan, 2001;

Munos, 2002; Davies, 2003; Homburg et al., 2003; Krishnamurthy et al., 2003; Oliva & Kallenberg, 2003; Henkel et al., 2004; Kalliokoski et al., 2004; Mont, 2004; Sawhney et al., 2004; Vargo & Lusch, 2004; Windahl et al., 2004; Brax, 2005; Gebauer et al., 2005; Gebauer & Friedli, 2005; Slack, 2005a; Slack, 2005b; Ward & Graves, 2005; Malleret, 2006; Breunig et al., 2007; Gebauer & Fleisch, 2007; Kim et al., 2007; Matthyssens & Vandenbempt, 2008; Neely, 2008; Reinartz & Ulaga, 2008; Baines et al., 2009a; Bains et al., 2009b; Brax & Jonsson, 2009; Brege et al., 2009; Schmenner, 2009; Kindström & Kowalkowski, 2009; Aurich et al., 2010; Slepniov et al., 2010a; Slepniov et al., 2010b; Isaksson et al., 2011, and Neely, 2013, into the most common tactical reasons and desired outcomes as relates to servitization as shown in Table 7.

A push towards servitization cannot be of lim- ited scope since Fang et al. (2008) have found that servitization strategies typically require building

Figure 5. The increased digitalisation in the manufacturing activities (Roos, 2014a)

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a critical mass in sales, estimated to be 20 – 30 percent, before they can expect positive effects on firm value and that smaller outcomes than that may in fact have a negative impact both on firm value and firm performance. Fang et al. (2008) also concludes that managers should focus their service initiatives on closely related businesses as much as possible to enhance synergistic spillover benefits and this fits with the above statement around achieving a monopolistic position as a provider of services linked to products manufac- tured by the firm.

Implementing servitization is challenging and in order to succeed servitization must be seen as a business model innovation not an offering innovation, and as such it requires interlinked changes in many dimensions. The dimensions, and the resulting business model, will be a com- bination of the dimensions outlined by Salkari et al. (2007) in their business-to-business service business model and the dimensions outlined by Roos (2013a) for a manufacturing business model as seen in Table 8. This need to combine the service and manufacturing business model is aligned with the findings of Visnjic & Van Looy (2013) in their study of a large durable industrial equipment manufacturer that has been actively pursuing a servitization strategy over the last decade. They found that these manufacturers enact complementarities between products and services by relying on an “integrated service busi- ness model‟, characterised by offering a variety of services related to the product activities of the firm. This ensures the effective deployment of a service business, but service activities also act as a driver of the product business. This reciprocal relationship between service and product activities is achieved in spite of the inherent substitution- type relationship that characterises products and related service offerings since successful service provisioning frequently leads to an extension of the in-use product life cycle (of existing products) and limits the potential sales of replacement products. Here, paradoxically, service-product

relatedness leads to product cannibalisation if it was not for the managerial practices that ensure service-to-product complementarity (Visnjic & Van Looy, 2013).

The variety of service offerings that are possible across the complete set of activities, pre-production/production/post-production, are il- lustrated by Ren (2009) in his synthesis (Figure 6).

The driving force to extend the manufacturing firm’s offering to include services can be expressed as a move from an incomplete offering in a product- focused transaction-based customer relationship to a complete offering (i.e. the bundling of products and services to better meet defined customer needs) in a relational-based customer relationship (Tellis & Stremersch, 2002; Penttinen & Palmer, 2007, Kowalkowski et al., 2009).

The conclusion from this section is that the firm must develop an offering that combines products and services, where the total bundle provides the highest value for money from the customer’s perspective and where the services that are part of the bundle can only be supplied by the firm due to their unique coupling with the product and where the products can only be produced by the firm due to unique features built into the product or unique attributes of the production process.

A Focused Niche Strategy & Deep In-House Knowledge in the Underpinning Knowledge Domains

The relationship between characteristics of strat- egy and firm performance has been studied for a long time. When looking at high cost countries the studies tend to agree that a focus on innova- tion grounded in market insight and with a market focus tend to outperform other strategies (Douglas & Rhee, 1989; Wong & Saunders, 1993; Collis & Montgomery, 1995; Avlonitis & Gounaris, 1997; Spedale, 2003; Iansiti & Levien, 2004; Narver et al., 2004; Atuahene‐Gimaet al., 2005; Bierly & Daly, 2007; Paladino, 2007; Wong & Ellis, 2007; Grinstein, 2008; Paladino, 2008; Schindehutte et

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al., 2008; Paladin, 2009; Terziovski, 2010; Hakala, 2011; Blarr, 2012; Andersén, 2012; Reulink, 2012; Blackmore & Nesbitt, 2013; Cheng & Chen, 2013; Flor & Oltra, 2013; González‐Benito et al., 2013; Hollen etal., 2013; Hamidizadeh & Taheri, 2013; Hussain et al., 2013 ; Jarrar & Smith, 2013; Jespersen & Bysted, 2013; Liao et al., 2013; Lo- nial & Carter, 2013; Marín-Idárraga & Cuartas- Marín, 2013; Martín-Rojas et al., 2013; Obel & Gurkov, 2013; Rashidirad et al., 2013; Slater et al., 2013; Tournois, 2013; Vermeulen & De Kok, 2013; Walter et al., 2013; Ynzunza Cortés & Izar Landeta, 2013).

A given strategic orientation is organisation specific and depends on the cultural context and can generate complex capabilities that can form the basis for competitive advantage (Zhou et al., 2005) and as a consequence different strategic orientations have different pros and cons. Pala- dino (2009) compares firms across two composite dimensions: the first is made up of the degree of resource sharing within the company to fully exploit the benefits combined with the degree of integration and deployment of resources to induce organisational learning combined with the degree of difficulty for rivals to imitate the resource base – this composite dimension is called Resource Orientation (RO). The second dimension is the degree to which the organisation’s culture effectively and efficiently creates the necessary behaviours for the creation of superior value for buyers and is called Market Orientation (MO). Paladino (2009) finds that four types of organisa- tions emerge with differing performance and that the highest performance is achieved when resource and market orientation are balanced (Table 9).

In fact, organisations with a high RO in the matrix (masters of innovation and financial champions) achieved a higher impact on innova- tion relative to the quadrants reflecting a lower MO. Results also demonstrate that pursuing a low degree of resource and market orientations leads to inferior financial performance. Therefore, a balance of resource and market orientations is

important (Atuahene-Gima, 2005; Menguc & Auh, 2006; Raisch & Birkinshaw, 2008) albeit in times of increasing technological turbulence, such as in the coming decade, the emphasis should be rebalanced towards a higher resource orientation (Paladino, 2008). Likewise when market turbulence is increasing, as in the coming decade, the emphasis should also be rebalanced towards higher resource orientation (Calantone etal., 2003; Jansen et al., 2006; Droge et al. 2008). As competitive intensity increases the emphasis on market orientation should increase so that customer needs can be well understood to guide the innovations towards highly valuable offerings from the customer’s perspective (Porter, 2008). In a resource rich environment the focus should be on effectiveness whereas in a resource poor environment it should be on efficiency.

These findings are borne out by the empiri- cal results from Reulink (2012) in his study of Dutch SME’s showing that SME’s that aim for high performance in terms of radical innovation capability as a basis for competitive advantage have to both develop and deploy unique and costly-to-imitate, highly valuable immobile and heterogeneous resources both for offensive pur- poses (the exploitation of opportunities) and for defensive purposes (the neutralisation of threats.) Such a resource base provides a high potential for synergy through a high degree of intra-firm resource sharing to maximally exploit the potential benefits. It also provides a basis for a high degree of resource deployment and integration to gener- ate organisational learning. Finally, it is obviously very difficult for competitors to imitate or replicate this resource base. Adding to this an inside-out focus (i.e. a high resource orientation) enables radical innovations that can create new markets by successfully satisfying latent customer needs, whereas an outside-in focus (i.e. a high market orientation only) would only enable incremental innovations in response to articulated customer needs. Once the new offerings grounded in a radical innovation approach are realised, the market orien-

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tation needs to be ramped up to ensure successful capitalisation of these. Reulink (2012) finding also indicates the need for high and continuous learning which fits the previously discussed need for education of both management and workforce and the establishment of a high performance work place organisation.

The above findings align with those of An- dersén (2012) who developed a resource based taxonomy of manufacturing Micro, Small, and Medium-Sized Enterprises (MSMEs) through a cluster analysis of 186 Swedish manufacturing MSMEs. He identified six clusters:

• Technocrats (27 Percent): These com- panies have technological production ca- pabilities and utilise them to a great ex- tent. This also enables them to produce both complex and innovative products. However, the companies are inward-look- ing and do not market their products to a great extent. This distinguishes technocrats from, for example, prospector firms.

• Conservatives (22 Percent): These com- panies can be regarded as non-entrepre- neurial, and in entrepreneurship research they are generally referred to as conser- vatives. Members of this group produce simple products and are below average in marketing as well as in innovation. This is generally the result of an unwillingness to adapt to a changing environment.

• Marketeers (19 Percent): This group of companies is extremely market-oriented and compete by producing complex prod- ucts that require advanced technological facilities. However, their average level of innovation distinguishes them from tradi- tional entrepreneurs. Thus, they are highly outward-looking in their efforts to maxi- mise returns from their existing products.

• Craftsmen (16 Percent): A group of com- panies that are below average regarding several resources and capabilities. Their

extremely low level of technological re- sources is the most apparent weakness. Their marketing capabilities are also well below average. They do, however, produce complex products. Thus, they are highly skilled but not in areas that require com- plex technological facilities; they produce more craftsman-like products.

• Ikeas (10 Percent): These companies compete by producing low-cost products and are highly innovative in their product development. They are also skilled in mar- keting and have strong relations with their customers. Companies such as IKEA and Wal-Mart are typical examples of larger companies in this group. The products are not very complex to produce. The low-cost production ability does not have to imply that they adopt a low-cost strategy in the product market. However, this is likely to be the case for the majority of these companies.

• Nomads (6 Percent): These firms are below average on all fronts regarding re- sources and capabilities. Their lack of re- lational resources stands out most. These firms wander the markets from customer to customer (lack of relational resources) without much direction (lack of market- ing capabilities). They do not have any ap- parent competitive advantages and can be classified as primitive and non-innovative.

The three categories of firms that were found to have high survivability potential and that, with further improvements, could reach very high levels of success were Technocrats, Marketeers and Ikeas (totalling 56 percent of the study’s firms), whereas the rest are under threat of downsizing and clo- sure. As can be seen there is a close resemblance between these categories and the characteristics of success in Reulink (2012) study.

The conclusion is that firms in a high cost operating environment must have a focused

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global niche strategy underpinned by continuous innovation grounded in deep domain knowledge and deep customer knowledge. The develop- ment of new knowledge within the firm must be faster than in competitor firms and the firm must be faster in converting this new knowledge to product-service-system offerings than any of the competing firms. This will mean cannibalis- ing existing own offerings in order to bring new higher value-for-money offering to the market and these offerings will frequently be aimed at latent customer needs grounded in the firm’s superior customer knowledge and customer relationships.

Global Outlook and Global Business but Local Operations

The key characteristics of successful firms in high cost operating environments is that they fulfil the characteristics of what is called Hidden Champions by Simon (1990), i.e. they achieve dominating regional or top three global market position in their selected niche, they are highly focused, highly proactive and have a turnover of less than $4bn. They are generally unknown outside their core market and purposefully keep a low profile. The work by Simon (1990) allowed for the identification of the success factors of these hidden champions viz:

• As firms they are tight on strategy and loose on control so characterised by en- lightened despotism on strategic issues, but a bottom-up participative leadership style on operational issues. The identity of the leader is embedded into the firm and the leaders identify themselves with the firm. The leaders are product focused and normally have a deep technical expertise in both the products and the knowledge domains that underpin the products. The leadership tenure is substantially longer than in listed companies. In these firms ex- ceptional management means doing small

things better than the competitors every time all the time. A core guiding principle is to have more work than you have re- sources to execute it and another is to rely on your own strengths (an example of this latter is the willingness of becoming your own supplier if you are unhappy with ex- ternal suppliers).

• The corporate culture of hidden champi- ons is distinctive and they value hard work, strict merit based selection and are intoler- ant of underperformance which results in low absenteeism and high employee loy- alty. There is a strong bond between com- pany and employees – due to the strong mutual interdependency between them. A large and increasing share of their employ- ees has university education or the equiva- lent through the apprenticeship process. The knowledge level and creativity of em- ployees is a key success factor for Hidden Champions.

• They also view themselves as an integral part of the community (mostly smaller towns) where they are located and their perceived obligations to this community go well beyond what would be taught at an average American business school and is more in line with what is articulated also by Strand & Freeman (2013).

• They accept the risk inherent in being a single product manufacturer but this also leads, for better or worse, to a high level of mutual dependency between the Hidden Champion and their customers.

• They are early exporters driven by econo- mies of scale to export early in their firm life cycle and have a very high export share.

• They are mostly family owned and keep a very low public profile especially around their success.

• They have long term strategic objectives that are pursued with diligence and do not maximise short term profits.

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• They are characterised by above average growth, both in revenue and employees.

• They avoid gaining sales through discount- ing or aggressive pricing

• They normally have a decentralised organi- sational structure with organisational units that encompass the entire value chain. This delegation of responsibility at the customer interface fosters closer and more in-depth customer contact which underpins their focus of being very close to their custom- ers and and understanding their customer’s needs very well which forms an important input into their innovation activities as well as building their excellent reputation among their customers which in turn con- tributes to their success. This decentralised organisational structure is combined with strong cross-functional cooperation within the company which minimises waste of time and resources.

• They operate in oligopolies with intense competition.

• They are very robust and have high survival rates even under very adverse conditions.

• They produce highly specialised and unique products, that are not normally clearly distinguishable within the final product and are hence invisible to the user, and which they are frequently the original inventor of, and they are ranked top in the world for instrumental value of these prod- ucts within the global target (niche) market but the products are unknown outside this market. They aim for market leadership in these terms not in terms of market share, which is perceived to come if the first is achieved and both employees and manag-

ers have a passion to become and remain number one in these terms. They offer high value for money through high instrumental performance and low total cost of owner- ship over the life of the product not through low product cost. As a consequence they play an active role in defining the rules of the game for their market.

• They have sustained outstanding innova- tion performance regarding technologi- cal, service, process, design, marketing, or business model innovations (what we call integrated innovation and will discuss further below). Technological leadership often goes hand in hand with non-techno- logical innovations and they tend to pursue joint innovation together with customers, suppliers and external partners whilst re- taining the barriers to imitation discussed. They are good in pursuing a coopetitive strategy with competitors in close geo- graphical proximity benefiting all parties.

• They have a very high Real Net Output Ratio

This High Real Net Output Ratio is maintained by design and is grounded in proprietary product elements and production processes as well as tacit knowledge combined with codified but complex knowledge underpinning also their service of- ferings. Their ability to provide customers with excellent service (including system integration and system solutions) linked to their products, makes it hard to imitate their offering and the barriers to imitation are also kept high by not outsourcing any of these core processes whilst non-core administrative processes are frequently outsourced e.g. finance, regulatory, logistics etc.

Equation 1. Real net output ratio definition

Real Net Output Ratio = Internal Production TotalProductio nnValue

= Internal Production

Internal Production + Externaally Produced Goods + Externally Produced Services

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This also leads to a solitary way of doing business i.e. to control the total chain from production to final installation in-house rather than working with other firms. This means that international operations are managed from the parent company using employees of the parent company, which of course contributes to protecting the unique knowledge of the firm as well as facilitating the attraction of a highly qualified workforce, which for smaller firms otherwise can be a problem.

The foregoing list of characteristics accords strongly with the success factors identified in the literature previously discussed. As a curios- ity it is worth mentioning that the overwhelming majority of these types of Hidden Champions are found in the Germanic part of Europe6 (i.e. Austria (13.8/million inhabitants), Denmark (3.4/million inhabitants), Finland (2.7/million inhabitants), Germany (16/million inhabitants), Netherlands (1.7/million inhabitants), Norway (2.8/million inhabitants), Slovenia (3.5/million inhabitants), Sweden (5.4/million inhabitants, Switzerland (13.9/million inhabitants) – to be compared with e.g. Australia (0.5/million inhabitants), Canada (0.5/million inhabitants) and the US (1.2/million inhabitants)) and given the relative size of these economies they are mostly found in Germany (examples of German hidden champions are: Getrag - transmissions; Gildemeister – machine tools; Karl Mayer Textilmaschinenfabrik - knitting technology; Schmitz Cargobull - Truck Trailers; Kärcher - High Pressure Cleaners; Wild - Ingredi- ents for beverages; KHS - Bottling systems; Sta- bilus - Gas-pressurised springs; Suspa - vibration control; RUD - Industrial chains; Wanzl - Shop- ping carts; Zahoransky - Brush-making machines; Fischerwerke - Fastening products; Tracto-Technik - Ground-rockets; Herion - Pneumatic proportional valves; RUD-Kettenfabrik - Tire and snow chains; Sachtler - Camera tripods; Heidenhain - Linear measuring systems; Kiekert - Locking systems

for cars; Prominent - Metering pumps; Krones - Labeling machines; Böllhof - Screws and nuts; EJOT - Screws for plastic; Loos - Steam systems; Probat Werke - Coffee roasters.

There has been considerable research based on these criteria aimed at further refining the under- standing of high performing firms (see e.g. Kum- metsteiner, 1992; Simon, 1992a; Simon, 1992b; Simon, 1996a; Simon, 1996b; Voudouris et al., 2000; Blackburn et al., 2001; Haussmann, 2003; Ewing, 2004; Henle, 2004; Rickes & von Hassell, 2007; Simon & Zatta, 2008; Volk, 2008; Lee, 2009; Simon, 2009; Yu & Chen, 2009; Lechner, 2010; Roth, 2010; Pittrof, 2011; Zastempowski, 2011; Boga, 2012; Çetindamar & Kozanoglu, 2012; Malshe, 2012; Shi, 2012; Classen et al., 2013; Coltorti et al, 2013; Din et al., 2013; Dolles et al., 2013; Haric et al., 2013; Hilz, 2013; Ivarsson & Alvstam, 2013; Kammerlander, 2013; Klarner et al., 2013; McKiernan & Purg, 2013; Witt & Carr, 2013; Zink, 2013)

The conclusion from this section is that firms in high cost operating environments should try to adhere to the principles of hidden champions which means no outsourcing of core activities, most of the value chain in-house, manufacture in the high cost operating country, co-locate innova- tion and manufacturing, be good at coopetition, cover the world from your location and aim to be best at what you do.

Masters at Incremental Integrated Innovation

One of the key issues that has come through in most of the discussions above is the need for an integrated approach to innovation. An integrated approach to innovation has the following compo- nents (Roos, 2011b; Roos, 2011c; Roos, 2011d; Roos, 2012; Roos et al., 2013; Roos, 2013a; Roos, 2014c):

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• All innovation enablers present in suffi- cient quantity with sufficient quality, and deployed in a way that maximises the ef- fectiveness and efficiency of innovation production.

• A clearly articulated innovation strategy that sets the direction and scope of the in- novation activities

• A well functioning innovation manage- ment system that provides the processes and interfaces for repeatable innovation activities in a closed, semi-open or open innovation environment

• Simultaneous, integrated and continuous pursuit of value generating innovations

• Simultaneous, integrated and continuous pursuit of value appropriating innovations

Each of these will be discussed below.

Innovation Enablers

Identify the resources deployed by the firm to create value and the effectiveness of their deployment structure. Resources fall in the fol- lowing five categories and can be both tangible and intangible as outlined in Table 10.

The resource transformation system7 is the firm specific transformation of resources into each other with the use of other resources in a journey from lower to higher value in the eyes of the paying customer. Examples of such transformation are illustrated in Table 11.

Sufficient volume of resources with suffi- cient quality, deployed in an effective resource transformation system is the foundation for well functioning innovation activity.

Innovation Strategy

An innovation strategy in its simplest form is an articulation of the problems, that if solved, would dramatically improve the firm’s performance. In practice it can become as large as you want it to

be. Anderberg & Roos (2004) and Anderberg & Roos (2005) have outlined the typical structure and content of a comprehensive innovation strategy as shown in Box 1.

Innovation Management System

The innovation management system is the embodi- ment of the processes, systems and structures that the organisation deploys to ensure that innovation becomes a business process and is managed as such rather than a random happening. The prin- ciple characteristics of an innovation management system are outlined below (Anderberg & Roos, 2004; Anderberg & Roos, 2005; Roos, 2007):

Organisationally they have:

• A managerial top down element that de- cides and approves the innovation strategy for the next product-service-system life cycle, as drafted by the innovation man- agement group. The top down element also decides and approves the document out- lining the different innovation projects as provided by the innovation prioritisation meeting and documented by the innovation management group. The top down element is responsible for decisions on strategic in- vestments and is in the end accountable for all investments made. The top down ele- ment is also responsible for initiating and responding to stakeholder relationships that follow as a consequence of the innova- tion strategy in alignment with corporate strategy, e.g. Initiating cooperation agree- ments, negotiating joint efforts with stake- holders that require peer-to-peer interac- tion and articulating corporate interests in involving key stakeholders in projects. The top down element will further initiate key projects to ensure that the decided innova- tion strategy is delivered upon.

• An Innovation Management Group that is the permanent staff function that oversees

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and runs the innovation management sys- tem. This group is responsible for organis- ing and leading the work preparing the in- novation strategy and the plans as well as preparing and documenting the innovation prioritisation meeting. It will comprise se- nior people with relevant background. The innovation management group is also the keeper of the key documents pertaining to the innovation management system. It is important to note that the responsibility of the innovation management group is to oversee and coordinate; it does not have authority to make any project or strategy relating decisions.

• A Bottom Up Element which is responsible for generating and facilitating the genera- tion of ideas, evaluating ideas against the strategy and for overseeing the execution of the innovation projects and evaluating the results. The bottom up element includes

representatives from entities (normally in- side the firm but can also be from outside) that can convert the ideas into reality and from entities inside the organisation that can convert the realised idea into business benefit (e.g. revenue, market share, cost re- duction, etc), and is frequently linked into semi-open (can also be open or, in today’s world, more seldom closed) innovation networks.

Process wise there are:

• Innovation Prioritisation Meetings: Together with the innovation strategy, these meetings are the key component of the innovation management system ensur- ing transparency and adherence to the in- novation strategy. The innovation prioriti- sation meeting is an event, the frequency of which depends on the industry the firm op-

Table 1. Management practices underlying high-performance work systems (Gibbons & Henderson, 2012, p. 18)

Non Mutually Exclusive Practices

Huselid, (1995)

Macduffie, (1995)

Ichniowski, Shaw & Prennushi,

(1997)

Pfeffer, (1998)

Appelbaum, (2000)

Black & Lynch, 2001

Bloom & van

Reenen, (2007)

Incentive pay X X X X X X X

Skills training X X X X X X X

Selective recruiting X X X X X X X

Teamwork X X X X X X X

Employment security X X X X X

Information sharing X X X

Merit-based promotions

X X X

Flexible job assignment

X X X

Reduced status distinctions

X X X

TQM/Process Control X X X

Communication X X X

Performance review X X

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Box 1. Example of structure and content of a comprehensive innovation strategy (Anderberg & Roos, 2004; Anderberg & Roos, 2005)

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erates in and the strategy that the firm pur- sues. One of these meetings is dedicated to developing next year’s budget and plans and the others address re-prioritisation as a consequence of emerging issues. At this meeting the bottom up and top down ele- ments are both represented together with the innovation management group. The in- novation prioritisation meeting members discuss priorities against the background of the innovation strategy. Based on this dis- cussion the chairman of the innovation pri- oritisation meeting decides which projects and programs should be launched within the existing budget. The innovation priori- tisation meeting delivers its output to the creating management group for conversion into plans. The innovation management group then forwards this to the top down element for formal decision and sign-off.

• Operation of the Innovation Management System: The principle flow of the system is that a suggestion for an innovation enters the innovation management system from inside or outside the firm. This idea enters the bottom-up element, which is usually made up of more than one entity with simi- lar structure but different areas of expertise and responsibility structured by e.g. tech- nology domains, customer type, problem domain mentioned in the innovation strat- egy etc. Inside the Bottom Up Element the idea has to pass three sequential hurdles: Is it aligned with the articulated strategy? Can it be realised by the firm? Can the firm benefit from the realised idea? Only when all three hurdles are passed will the idea be turned into a project plan outlining the nec- essary resources (including time) for both the realisation of the idea through value generating innovation and the realisation of the benefit inherent in the idea through val- ue appropriating innovation. This project plan is then put forward to the Innovation

Management Group. With some frequen- cy Innovation Prioritisation Meetings will be called and during these meetings the project plans put forward through the Innovation Management Group by the dif- ferent Bottom Up Elements will be priori- tised. The result is three categories: the first are those projects that will be commenced and that fit within the existing budget; the second are those projects that are desir- able to commence but for which there is no budget – these are put back for review in the next Innovation Prioritisation Meeting; the third are those projects that are rejected and that will not be commenced. The op- erations so far are outlined in Figure 7.

The Bottom Up Element is also responsible for overseeing ongoing innovation projects and this is done with regular reviews. The moment the innovation project starts to deviate from the project plan a specific evaluation is done to see if the innovation project can be brought back on plan or not. If the judgement is that it can, the innovation project is allowed to continue under intense supervision until it is clear that it is either back on plan or cannot get back on plan. If the innovation project is judged not possible to get back on plan it is immediately terminated and a new project plan for the innovation project is worked out and treated as a completely new project in that it enters into the process as such and may or may not be given a go in the next Innovation Prioritisation Meeting.

The Bottom Up Element is also responsible for: evaluating the performance of the project estimates done by the Bottom Up Element (this is done in such a way that one Bottom Up Element is evaluating another Bottom Up Element); the performance of the innovation project managers; suggestions for changes in the Innovation Strategy due to insights from Innovation Suggestions; the benefits accrued to the firm from the realised innovations; and the benefits accrued to others

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outside the firm from realised innovations. This then forms the basis for the annual evaluation of the innovation management system, including suggestions for improvements.

The purpose of the Innovation Management System is to ensure that all major strategic in- novation thrusts are executed using an integrated approach i.e. have both a value creating and a value appropriation element, when appropriate. Smaller innovations and improvements rest within the normal day-to-day responsibility of manage- ment on all levels.

Value Generating Innovations

The purpose of Value Generating Innovations is to maximise the value for money that the customer perceives from the innovation whilst ensuring a maximum benefit to the firm. This means that there are five principal domains that are pursued in an integrated way:

The first is efficiency improvements i.e. doing what you do even better. These are done using all the normal productivity improving tools8 and tech- niques9 available. Due to continuously increasing pressures on productivity combined with an ever

increasing speed of technological development in the domain of production processes and production equipment rather than in the domain of products offered, productivity improvements are achieved at a very high speed in manufacturing. The auto- motive industry can serve as an example here, as shown in Figure 8. It is one of the industries under the highest pressure to continuously increase its productivity with some remarkable results, and is also the industry that has originated most of the tools and techniques used throughout industry (in- cluding in service and public sector organisations) to achieve productivity improvements. According to Suzaki (1985), 70 percent of the productivity improvements in the Japanese automotive industry can be attributed to improvements in operations and management systems.

As a consequence, companies linked to the global automotive industry have adopted produc- tivity improving tools and techniques to a higher extent than general manufacturing10, 11 (Deloitte Touche Tohmatsu, 2004). Trimble et al. (2013) studied the use of productivity improvement tools and techniques among 162 automotive suppli- ers and found the results shown in Table 12 and Table 13.

Figure 7. The first area of operations for the innovation management system (Roos, 2007; Roos, 2013)

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As a consequence of this, the annual produc- tivity improvement for the automotive industry is in the range of 2.5 - 8 percent depending on the study, the specific definition of productivity, and the time period studied (see e.g. Kim, 2010; Chen, 2011; García-Castro et al., 2013). In a high cost operating environment, firms should strive for an annual productivity improvement of 5 percent. Achieving this objective can be facilitated through applying two lenses: The first is the principle of “lean” which can be expressed as “do more of what you get paid for and less of what you do not get paid for”. The latter is normally called waste which is generated in many ways, and is to be avoided (as outlined in Figure 9).

The second is the ability to do smarter things in smarter ways – the way productivity improve-

ments are defined in most firms working in high cost operating environments, which leads us back to innovation.

Beyond mere efficiency, we enter into the pure value creating innovation domains, of which the first is the use of science and technology as a basis for innovation. This is a domain where most firms are active and it has been and continues to be thoroughly studied in the literature. The conclusion so far is that mastery of this domain is becoming even more critical and that the speed by which new technological knowledge can be absorbed and exploited is critical. This is especially true when it comes to Key Enabling Technologies12 since most advance products in a product-service-system offering include combinations of several key enabling technologies as illustrated in Figure 10.

Figure 8. Sources of productivity improvements in the US Automotive industry in the period 1987-2002 (Baily et al., 2005, p. 11)

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Given the familiarity of the science and tech- nology domain for value creating innovations, it is important to concentrate on some less familiar domains instead.

The next such domain is the use of design as a basis for innovation. In summary, design based innovation is the ability to create an artefact that when being used makes the user change behaviour.

Figure 9. The principles of Lean (Moura & Botter 2012, complemented by the author with “intellectual Waste”)

Figure 10. Examples of advanced products encompassing several key enabling technologies (HLGKETs, 2011, p. 10-11)

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This behavioural change leads to the user feel- ing better off and as a consequence of this new behaviour, the creator of the object is better off: in other words, a win-win situation. A familiar example would be the Apple iPhone.

Acklin (2010), outlines the main roles of design throughout the innovation process (Figure 11).

This above description is to be contrasted with the two daily uses of the word design in manufacturing that have different meanings. The first is an engineering take on design as in e.g. design-for-manufacturability see e.g. Petroski (1996) and the other is the art take on design as e.g. designing for attractiveness see e.g. Sunley et al. (2010). These two domains have received a lot of research interest whereas design in the meaning that we have adopted above has been substantially less studied. A somewhat broader view has been taken by e.g. Roy et al., 1986; Waksh, 1988; Walsh, 1996; and finally an excellent review by D’Ippolito, 2012 in which she conceptualises the principal characteristics of the term design as used in literature and shown in Table 14.

Design, in all of the above uses of the word, impacts most dimensions of a product like cost, performance, usability, durability etc., and hence is a basis for market differentiation and impacts both revenue and cost as well as being critical in all aspects of innovation.

This is illustrated by the findings from Design Council (2012) that:

• For every $1 invested in design, businesses can expect over $20 in increased revenues.

• For every $1 invested in design businesses can expect a return of over $4 increase in net operating profit.

• For every $1 invested in design, businesses can expect a return of over $5 in increased exports.

The use of design for behavioural change has been proposed by e.g. Rodriguez & Boks (2005), Lilley (2007), Bhamra et al. (2008), Consolvo et al. (2009),Clune (2010), Lockton et al. (2010), Selve- fors et al. (2011), Shirey (2011), Hermanssdottir

Figure 11. Design and design management capabilities and outcomes in the innovation process (Acklin, 2010; Acklin, 2013, p. 86)

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et al. (2012), Laitala (2012); Lockton (2012a), Lockton (2012b), Lockton (2012c), Montazeri et al. (2012), Richter (2012), Lockton et al. (2013), Wendel (2013).

An example can be used to illustrate how design for behavioural change can work:

A large department store has a situation where the haute couture department on the second floor experiences very few sales. When the security camera footage is reviewed, it is found that the typical customer group is made up of a couple where she wants to stop and look (and potentially try on and buy some of the offerings) and he on average allows her 8 minutes before he manages to drag her on to the next department in the store. The problem is obviously that the couple is made up of one potential customer and one saboteur from the department store’s point of view. The desired outcome of any intervention is to have a changed behaviour that leads to a sale and both members of the couple being happy. In the end the resulting solution, (using the design methodology of observation, interpretation, innovation and implementation in a trial and error way) turns out to be: Firstly, the installation of a sports and beer bar in the back of the haute couture department with 8 screens showing different sports channels and 160 different brands of beer for sale. This enables and encourages the couple to self sepa- rate (the divide in divide and conquer achieved from the department store’s point of view) to their mutual satisfaction providing sufficient time for the potential buyer to evaluate and pick potential purchases. Secondly, the introduction of a process that states that if you procure something from the haute couture department exceeding a total value of $800 the beer consumed at the bar is free (the conquer in divide and conquer achieved from the department store’s point of view) and this means that when the previous saboteur is presented with a potential purchase by the potential buyer he has two choices: 1. To reject and then to have the partner see that he has to pay on average $100 for the beer consumed during the waiting time i.e.

he has got something beneficial and enjoyable to him for a price and she has got nothing with the associated negative consequences for their relationship the rest of that day. 2. To accept and then have no expense for the consumed beer i.e. she has got something beneficial and enjoyable to her for a price and he has got nothing(since the free beer value will not be easily observed post consumption) with the associated positive consequences for their relationship the rest of that day. The result for the department store is increased sale and profit and the result for the couple that purchase something is beneficial to both the partners. Hence a behavioural change has been achieved where the parties that have changed their behaviour are better off and as a consequence of their behaviour they make the instigator of the change better off (in this case the department store) and all this due to design (in this case a redesign of the department with the design and location of the sports and beer bar plus the design of the discount process).

The same way as science and technology based innovation needs to be managed so does design based innovation. Acklin, (2009) has synthesised and visualised a model for design management taking into account the coordination, alignment, communication, education and even mediation between conflicting forces in the company that is necessary if design is to fully unfold its power as a value creator (Figure 12).

The third is the use of art as a basis for in- novation. Art has numerous opportunities to add value to business. In consumer goods art can add to the perceived authenticity of the good and thereby increase its value in the eye of the con- sumer (Gilmore & Pine, 2007). This is critical in the luxury goods end of the spectrum.

Gilmore & Pine (2009) provide an example:

The Aria Hotel in Prague, organises itself around music, so much a part of the heritage of the capi- tal of the Czech Republic. Each floor represents a different type of music: classical, opera, jazz,

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Figure 12. Design management model (Acklin, 2009; Acklin, 2013, p. 49)

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and contemporary. Suites on each floor highlight a particular musical artist representing that type of music, including the Dvořák, Mozart, Gershwin and even Elvis Presley suites. The Aria came up with a number of innovations to extend the basic design, including room keys that come with iPods pre-loaded with music to play on a speaker system in every room (which also has the Art Channel on every TV). And in the public area, right next to the Coda restaurant and Music Salon, lies the Music CD/DVD Library with its own Music Concierge. The art of music infuses the entire place.

On the theatre side there have been some stud- ies around leadership and choreographical studies of work processes (Denhardt & Denhardt, 2006). Roos & Roos (2006) state that for many people the word drama is connected with theatre, but there is a difference. Drama is a personal experience (the word comes from the Greek drao: ‘I do’ or ‘struggle’) and theatre is communicating the expe- rience to others (the word comes from the Greek theatron: ‘a place for seeing/showing’). Drama therapy and psychodrama both employ drama as therapeutic methods but in slightly different ways: for example spontaneity and imagination are even more emphasized in psychodrama. They are not, as in theatre, specialised skills that people can or cannot do. Anyone can role-play. Techniques such as sociodrama and psychodrama can have a profound impact on innovation and value creation.

The performing art of ballet has formed the basis for what is now called Movement Pattern Analysis based on the pioneering work by Rudolf Laban who developed a subtle and refined method of notating and describing movement around ballet (Kaylo, 2006; Kaylo 2009; Rothe, 2012; McColl, 2013). Movement Pattern Analysis has been put to use in labour intensive manufacturing environments to improve overall performance and minimise injuries.

Retailers have long understood the importance of store environment in enhancing the shopping or service experience, and past research has examined

the main effects of many pleasant ambient stimuli such as music and scent (Bartholmé & Melewar, 2009; Rajagopal, 2009; Bartholmé & Melewar, 2011; Ford, 2013; Mari & Poggesi, 2013). When ambient scent and music are congruent with each other in terms of their arousing qualities, consum- ers rate the environment significantly more posi- tive, exhibit higher levels of approach and impulse buying behaviours and experience enhanced sat- isfaction (Mattila & Wirtz, 2001; Spangenberg et al., 2006; Wirtz et al., 2007; Kearney, 2012). The impact of scent on social interaction (Zemke & Shoemaker, 2008; Hulshof, 2013) and hence as a facilitator for innovation has also been identified.

The evidence from both research and practice (Garlin & Owen, 2006; Turner, 2012) clearly suggests that customers’ affective and cognitive responses to experiences in-store influence the likelihood of behaviours which directly impact an organisation’s financial returns (Hinskton, 2000; Oakes & North, 2008; Price, 2010; Ke- arney. 2012; Srivastava, 2012). The literature reports on studies which highlight managers’ implicit beliefs in the ability of background music to facilitate top- and bottom-line returns to business. Other researchers have secured sig- nificant results using more objective measures. Taken collectively, past research demonstrates the capacity for appropriate background music to illicit positive effects on affective, attitudinal/ perceptual, temporal and behavioural variables. A considerable body of work presents evidence for these effects to provide returns to business in the form of sales value and volume, repeat purchase, rate of spend, quantity purchased and gross margin. Many indirect returns to business are apparent, such as positive perceptions of quality and venue/store brand image. In addition, clear impact of music on creativity has been seen (Callaghan & Growney, 2013).

Scent is generally regarded as the most affec- tively laden atmospheric cue because the direct link between the sense of smell and the limbic system enables scent to elicit strong emotional reactions

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and mood changes (Glatzel, 2010). The nature of these reactions depends on the individual associa- tive network that will be triggered by a particular scent. Nevertheless, due to mixed research find- ings, there are still divergent opinions about the validity of this assertion. With regard to cognitive effects, scent can act as a central and peripheral cue in order to shape attitudes and decision-making. Pleasant odours can for instance enhance atten- tion, memory, information search and processing as well as elicit more favourable brand or product evaluations. Emotional and cognitive responses to ambient scent are often inextricably linked. However, it is still contended in which order they occur. There are two approaches, the C-E approach and the E-C approach. Both approaches converge in the belief that cognition and affect are often inextricably linked and are both somehow affected by scent. Finally, pleasant scent positively influences approach behaviour. Previous research, for instance, found positive effects on consumer spending and store lingering time.

There has been much attention paid to the emo- tional effects which impress and impact customers during e.g. the marketing process. It has been shown (Yagi et al., 2009) that the customer who feels emotionally satisfied is positively committed to the marketing process, contributes to knowledge accumulation, and is involved in associated social

networks. As a consequence, insightful firms use the arts in creating and marketing products for emotional effect.

In spite of the fact that aspects of what might be deemed art have been well studied, the rela- tionship between art and business is still under- researched, although some results are starting to appear in the literature (Eriksson, 2007; Antal, 2009; Antal, 2014). The benefits seem to be un- der four headings: providing new perspectives; combining emotional intelligence and rational thinking; recovering imagination, and using all senses. Hence artistic interventions can change perceptions through a heightened aesthetic sen- sibility (Buswick et al., 2004)

An example of how art as an approach can contribute to innovation is given by Barry and Meisiek (2005), Roos et al. (2004) and Roos & Statler (2004) and replicated in Box 2.

An increasing share of businesses employ aesthetic strategies based on the premise that the boundaries between art and everyday life are dis- appearing. New opportunities have been opened up for marketers in terms of not only adding more value to their products but also how they add this value beyond the functionality of the object (Dou & Ekiz, 2011). Research shows that consumers judge these applications non-cognitively and mostly based on their senses. This approach has

Box 2. Examples of contributions from art towards innovation (Meisiek, 2005; Roos et al., 2004; Roos & Statler, 2004)

The painter Karsten Auerbach worked with Quilts (a company which makes duvets). He began by placing his easel in the centre of the factory floor and painting the people and their operations. Every now and then an employee would walk past and ask questions about what he was painting. Around the same time, he went to a number of department stores to look at how the company’s quilts were displayed. Coming back to the factory he confronted the managers: ‘You’re extremely white,’ he said. ‘There’s no colour in your product, your displays, or your work.’ Managers later stated that they had never thought about their company in terms of colour until that day. His next move was a workshop where employees mixed paints to form numerous colour swatches. He asked ‘Which one of these is Quilts?’, a question which triggered intense and prolonged debate around just who and what the company was. This was followed by a photo collage workshop, where the employees used magazine cut-outs to represent the world of quilts. Their montage ranged from bluish photos which depicted technical advances, to warm coloured photos which connected quilts to comfort, happiness, and sex. As the implications of these experiments sank in, the company executives decided to change the business focus from technical superiority to more lifestyle considerations. With the help of Lego blocks and sponsorship by the Lego Company, the Imagination Lab in Lausanne conducted ‘serious play’ sessions with numerous organizations. Top managers would sit together and model their strategic landscape and organization using Lego bricks, coming up with representations that would promote more inventive strategic thinking.

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Table 2. Overview of studies estimating the rate of return of in-house R&D activities in UK firms (ex- tracted from Bascavusoglu-Moreau & Li, 2013, Table A1 p. 90)

R&D Rate of Return Sample Period Study

38% and 20% respectively, using different approaches 239 firms 1988-1996 Bond et al. 2003

11%* and 14%* respectively, using different approaches 188 mfg firms 1990-2000 Griffith et al. 2006

40% - 58% (mfg) 53% - 108% (non-mfg)** 719 firms 1989-2000 Rogers 2009

*Computed assuming means of medians of the variables. **Capital and labour corrected for double counting

Table 3. Potential best practice application areas for UK manufacturers (Thomas et al. 2012)

Manufacturing Development Area Objective Potential Best Practice Domain

Rapid and consistent delivery of new products to the marketplace.

• Fast response to produce timely and affordable niche products to meet specific customer requirements.

• Innovation management • Agility in supply chains • Change management • Leadership practices

Develop people competencies to create a move away from “manufacturing” only.

• Develop capabilities to manufacture “high value” products and services to a global market.

• Improving productivity in product- service systems

Responsive and precise knowledge management systems.

• Faster and more accurate decision making within companies.

• Management education • Knowledge management • Security of information • Advanced analytics

Minimise environmental damage and achieve energy neutral operation.

• Development of energy efficient local supply systems.

• Technology adoption • Energy management systems • Sustainable manufacturing

Rapid enterprise configuration. • Ability to reconfigure supply chain and manufacturing capability.

• Agility in supply chains • Change management • Leadership practices

Develop innovative products, processes and services.

• Drive down product lifecycle times and develop more effective NPD and introduction systems.

• Innovation management • Change management • Leadership practices

Closer collaboration between industry, universities and colleges.

• Collaborative design, research and manufacturing environments.

• University/college/industry collaboration • Change management • Leadership practices

Develop new manufacturing paradigms. • Create a flexible, responsive and competitive manufacturing organisations that can continuously evolve and adapt to change.

• Change management • Leadership practices • Supply clustering • Engagement with universities • Application of new technologies

Develop digital networks to enhance the digital economy.

• Digitally connected supply chains. • Novel manufacturing management methods. • Enhanced learning systems.

• Application of new technologies • Change management • Leadership practices • Engagement with universities • Security of IT systems

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Table 4. Summary of productivity drivers and firm and government action

Productivity Driver Concluding Actions for Firms Concluding Actions for Government

Managerial competence and capability together with managerial practices.

• Increase the managerial capability in firms through education and job rotation. Hire managers from outside the firm with experience from leading firms in the industry. • Implement high performance management practices.

• Introduce policies conducive to life-long learning, international experience building and international recruitment. • Facilitate access to information on high performance managerial practices.

High-performance work systems.

• Introduce all aspects of high performance work systems: o Incentive pay o Skills training o Selective recruiting o Teamwork o Employment security o Information sharing o Merit-based promotions o Flexible job assignment o Reduced status distinctions o TQM/process control and all other productivity enhancing tools and techniques of relevance o Communication o Performance review • Facilitate for employees and managers to do the “right thing” to drive productivity and to do it in cooperation. • Ensure that managers know what “good looks like” when it comes to performance and how to get from the present state to the desired future state and that they are encouraged to take these actions with appropriate implementation support.

• Introduce policies conducive to the introduction of the components of a high performance work systems.

Higher-Quality General Labour and Capital Inputs.

• Ensure that the firm builds high quality labour through education and experience building. • Ensure continuous investment in modern manufacturing processes, systems, and equipment.

• Introduce policies conducive to life-long learning as well as to a better quality labour input to the workforce. • Introduce policies conducive to continued investment in the latest processes, systems and equipment.

Key enabling technologies. • Build capabilities in all the relevant key enabling technologies and implement them in the product- service-system offerings or in the production processes, systems and equipment. • Aim to participate in the most relevant key enabling technology value chain.

• Introduce policies that ensure capability building in the key enabling technologies and the participation in the associated emerging value chains. • Introduce policies that encourage firms to build capabilities in the key enabling technologies so that the country’s industrial commons is enlarged with capabilities in these technologies.

R&D capital formation • Ensure a substantial R&D effort both internal as well as in cooperation with external agents.

• Introduce policies that are conducive to R&D activities and also conducive to the activities being done in cooperation.

Innovation • Develop leading edge capability in innovation. • Introduce policies that are conducive to innovation, like openness to procure unproven solutions and procurement that requires development of offerings with performance not presently possible to achieve. • Introduce policies that focus on taking R&D outcomes all the way through to commercialisation.

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Productivity Driver Concluding Actions for Firms Concluding Actions for Government

Learning by Doing, Using and Interacting

• Introduce doing, using interacting type innovations as a complement to science and technology based innovations. • Introduce processes and systems conducive to efficient doing, using, interacting learning.

• Introduce policies that recognise that other forms of innovation besides science and technology have equal value in innovation space.

Firm Structure in combination with the industry structure and ecosystem in which it operate, as well as the firm’s absolute and relative size

• Understand the opportunities presented by global value chains and eco-systems.

• Introduce policies conducive to productivity enhancement of local firms in global value chains or eco-systems.

Productivity spillovers • Participate in clusters and other cooperation activities that are outcome oriented.

• Introduce policies conducive to cluster and other operationalisations of agglomeration economic benefits.

Competition • Aim to provide the highest value for money against global benchmarks even if the business is local.

• Introduce all policies that increase the competitive pressure on individual firms whilst not risking the total capability in the industrial commons or a decline in the economic complexity.

Deregulating or Smarter Regulation

• Accept all challenges that tougher regulations provide and aim to innovate to a level of performance that is better after the new regulation than it was before. • Aim to be a first/early mover in lead markets.

• Deregulate as much as possible, as long as the outcome is primarily measurable in monetary terms and as long as a decline in the industrial commons or the economic complexity is not the result. • Use regulation to drive innovation in new technology areas or in social regulation domains e.g. environmental or healthcare or private entrepreneurship around public goods etc. • Aim to identify opportunities for lead market roles.

Flexible input markets • Strive to benefit from increased flexibility in input markets and strive to contribute to this flexibility by e.g. linking salary increases to productivity increases on the firm level.

• Introduce policies that are conducive to increased input market flexibility.

Demand • Accept the challenge of delivering outcomes not previously achieved.

• Put in place smart procurement that drives towards a willingness to buy untested solutions with performance not presently available and also set outcome targets that require research and development to be achieved and always ensure domestic system integrator. • Introduce SBIR type programs to encourage demand for new solutions or the creation of new markets.

Table 4. Continued

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Table 5. Summary of characteristics, strategy aspects and business model aspects of successful manu- facturing firms operating in high cost operating environments

Key Characteristics Key Strategy Elements Key Business Model Elements

• Experienced, Educated & Entrepreneurial Leadership with Ambitious Goals.

• Only hire the right people and treat them as part of the family.

• Leadership i.e. the MD must have deep understanding of the knowledge domains that underpin the business as well as a passion for the business so that they can lead by example.

• Knowledgeable, Loyal Low Turn- Over Employees.

• Continuous life-long learning for all employees both formal and informal.

• Highly flexible work arrangements based on a mutual understanding that there exists a mutual obligation expressed as: “My responsibility as an employer is to make you the employee more employable during your tenure with me” and “My responsibility as an employee is to make you the employer more successful during my tenure with you”.

• Decentralised management approach.

• Structure follows strategy and focus is on process and the ability for everyone to be trusted to do “the right thing” at any one time due to high competence and mutual trust between management and employees embodying elements of a high performance work place system.

• High degree of mutual trust and loyalty leading to an implicit life-long contract contributing to a high performance work place culture. • Bottom-up management style and a high degree of cross departmental cooperation.

• Deep expertise in the knowledge domains that underpin their business.

• To know more than anybody else about the offering and its underpinning knowledge domains.

• Also focused on having a low resource footprint e.g. products are built to use low levels of input and have high levels of recyclability or reusability with reusability journeys outlined.

• Focussed Niche Strategy. • Extreme focus as opposed to all things for all men which means saying NO when it is outside identified focus area.

• Experts at operations and a tight focus on cost using all available productivity enhancing tools and techniques. • Low levels of debt if any and high levels of profitability.

• High Performance, High Quality, Product-Service- System Offering.

• Best in class product-service-system offering that is sold on value for money not cost.

• Do not enter price driven volume markets and when an existing market moves towards this behaviour they exit and migrate to other segments i.e. rigorously pursue a niche strategy. • The focus is superior value in absolute terms and high value for money in relative terms but at a high price. • Highly servitized with well defined product-service-system offerings where all sub-components are charged for.

• Global outlook and global business but local operations.

• The market is global and global customers are served continuously and well but the operations and the people are based in one place and there is very little if any outsourcing.

• Have very strong long-term relationships with partners and suppliers based on a win- win approach but always control the channel to market and to the customer. • Partnerships are local and so are most suppliers and very little outsourcing and no outsourcing of anything that is core to the business or the offering. • Always co-locate research, development and innovation with production and operations.

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Key Characteristics Key Strategy Elements Key Business Model Elements

• Know more than the customer about how the customer can maximise the value they get out of the procured product-service- system offering.

• Deep customer and customer’s customer knowledge.

• Global footprint combined with a high level of specialisation results in market leadership. Almost all existing and potential customers are known and the characteristics that a potential customer must fulfil to be allowed to become a customer are well known and adhered to. • Profit is an inevitable consequence of serving customers better than anyone else.

• Masters at incremental integrated innovation.

• Continuous innovation is a core strategy. Must only produce items that nobody else can produce [at that performance level] and must cannibalise own offering with new offering before anyone else.

• Obsessed with new knowledge and with innovation in all forms i.e. integrated innovation and innovates both to create and to appropriate value. • Have a very effective resource deployment structure that is continuously reviewed given innovation driven changes. • Manages to combine economies of scale with economies of scope in different parts of the organisation.

• Risk reducing and innovation driving partnerships with research and expertise centres.

• Given the deep expertise in the underpinning knowledge domain any business threatening developments will originate in knowledge domains outside the firm’s competence area so need partners to identify these threats early in order to include emerging knowledge domains into the firms existing knowledge domains to maintain leadership in serving the customer. This requires high absorptive capacity (see below).

• These partnerships are pursued and managed with respect based on earned trust in a win-win way.

Table 6. Three types of Absorptive Capacity (Lim, 2009, p. 1252)

Disciplinary Absorptive Capacity

Domain Specific Absorptive Capacity

Encoded Absorptive Capacity

Type of knowledge acquired

• General scientific knowledge. • Solutions to specific technical problems.

• Knowledge embedded in tools and processes.

Stage of technology

• Very early. • Early to intermediate. • Late.

Internal R&D • Exploratory (with a focus on autonomy).

• Focused R&D. • Integration.

Linking internal to external R&D

• Hire discipline-trained scientists, develop ties with the academic community, encourage scientific publications.

• Hire people with domain-specific skills, fund external R&D in specific areas, influence the trajectory of external R&D.

• Collaborate with suppliers possessing the relevant embedded knowledge.

Table 5. Continued

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Table 7. Tactical reasons and objectives driving servitization in manufacturing firms (Roos, 2014b, p.)

Tactical Observation Desired Outcome

Increased volatility in product sales (e.g. reduction of customer capital equipment spend in the mining industry).

Lower volatility in cash flows due to a balance of product sales revenues and after sales service revenues.

Missing out on the revenue potential in the large installed base. Increase the revenue stream from the installed base and contribute to a reduction in cash flow volatility for the manufacturing firm.

Loyal customers are easier to serve and hence cost less to serve and consequently are more profitable to serve.

Increase profitability by leveraging economies of loyalty.

Loyal customers have lower price sensitivity. Increase profitability by leveraging economies of loyalty.

Loyal customers use more complex services that frequently are more profitable.

Increase profitability by leveraging economies of loyalty.

Loyal customers provide positive referrals and references to potential new customers.

Reduce selling costs by leveraging economies of loyalty.

Services are more difficult for competitors to imitate. Increased profitability due to the creation of competitive advantage, the duration of which can be extended through barriers to entry inherent in the difficulty to imitate.

Services provision requires a closer relationship between producer and customer and may result in customer lock-in.

This increases customer loyalty as well as providing a basis for competitive advantage and hence increase profitability.

The product as a vehicle for service delivery, offers a potential for monopoly in some co-created services.

Increased profitability through monopoly rent, economies of loyalty and in-depth learning which reduces the cost and risk around the development of both new products and new services.

Continuous customer interaction speeds up the acquisition, volume and relevance of customer knowledge.

Volume of innovation ideas increases and their market acceptance risk is reduced. Probability of co-developing new offerings with a lead customer is increasing thereby reducing market acceptance risk.

Decreased interest in the product matched by increased interest in the outcome of the use of the product.

The ability to partake in business operations that do not involve product sales but instead product use e.g. car sales replaced by car rental or car sharing.

Service delivery with high customer satisfaction drives replacement product sales.

Increased profitability due to repeat purchase.

Some outcomes demanded by customers requires service delivery. Retain market relevance, frequently combined with increased customisation of the complete offering.

Some products require continuous service deliver over extended periods of time.

Retain customer relationship.

Offshoring or outsourcing of production. Substitute lost cash flow and earnings.

Increasing regulatory requirements in the through-life and end-of life product responsibility domain.

Services ensure regulatory compliance.

Services can contribute to reduced environmental and resource footprint.

Respond to market trends and reduce operating costs.

Service provision adds another business. Increased turnover and (frequently) operating margin sometimes through increased opportunities for cross-selling.

Services can differentiate the product offering. Increased competitive advantage resulting in increased profitability.

Services can extend product life. On the one hand this increases the net present value of the earnings from a given product sale but on the other hand it reduces the net present value of new product sales so this needs to be managed very carefully.

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Table 8. The service business model (Salkari et al., 2007, p. 15) and derived business model dimensions for manufacturing firms (Roos, 2013a)

A Generic Service Business Model for Product Centric Businesses A Generic Business Model for Manufacturing Businesses

Elements classification

Element Description Positioning of THIS business within the company’s strategy.

Strategic business choices

Position in company strategy

Companies are value partners supporting their customers’ (segments’) value creation in order to provide solutions to meet customer needs, including subconscious needs.

Description of the Product-Service-System/Solutions offering.

Offerings Consist of bundled services and products meeting customer needs and supporting customers’ value creation. Services are understood as processes to support customer value creation processes.

Identification of target customer segments, target consumer segments and other definitive stakeholders.

Target Customer Segments

We select customers (customer segments), where business may be supported by way of our services in order to be able to utilise our core competencies to deliver services.

Value Proposition for each of the target customer segments, target consumer segments and other definitive stakeholders.

Customer Relationships

Long-term relationships/ partnerships, close relations with joint processes and dense and continuous exchange of information. Joint processes: service providers move closer to end customers in the value chain

Description of how the target customer segments, target consumer segments and other definitive stakeholders capture value from the offering.

Core Competencies, Capacity and

Tools

Competencies related to understanding customer business, processes and operations (at least to some extent), and information management within service networks. Competent personnel are required to deliver the services. The capacity may be limited in some geographical areas.

What competitive advantage does the offering enable or contribute to within the target customer segments, target consumer segments and other definitive stakeholders.

Partner Network

May be strategic service partners and partners delivering services at some sites/locations. Partner networks often operate under the brand of the company acting as an integrator.

Value attribute, attribute preference and attribute performance for each of the target customer segments, target consumer segments and other definitive stakeholders.

Value Proposition

Value comes from solutions supporting customer value creation. Such solutions consist of services and products.

What requirements must be fulfilled by the target customer segments, target consumer segments and other definitive stakeholders in order to be able to benefit from the offering.

continued on following page

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A Generic Service Business Model for Product Centric Businesses A Generic Business Model for Manufacturing Businesses

Customer Concerns:

Understanding and

supporting customer

value creation

Customer Value Creation

Customer value creation and related processes need to be understood.

Description of how the Product-Service-System or Solutions offering should be implemented at the target customer segments, target consumer segments and other definitive stakeholders to ensure the targeted benefits (value).

Value Capture Customer value comes from solutions best supporting their value creation – the services supplied may even add to the value of whatever the customer outcome is.

Place, role and strategy of THIS business in the business ecosystem of which it is part.

Customer Advantages

Customers get solutions without spending their resources beyond their core competencies.

Technology base of the Product-Service-System/Solutions offering.

General Customer

Prerequisites

Customer key competencies and businesses are well understood by customers. Customers accept the services and commit to developing their own business at different levels (strategic, process, operations) in order to fully benefit from the services. Purchasing know-what and know- how.

Design base of the Product-Service-System/Solutions offering.

Implementation model

Joint service configuration and implementation. Implementation involves different levels provided by service providers and customers. Setting right Key performance Indicators (KPI’s) is elementary.

Art base of the Product-Service-System/Solutions offering.

Profitable Service

Business

Earning Logic Earnings are accrued over time and are based on value created. Jointly defined KPI’s pinpoint over- and under-performance for both parties (provider – customer). There are agreed principles in place for dealing with performance related risks.

Counselling (Hermeneutic) base of the Product-Service- System/Solutions offering.

Pricing Value-based pricing: our service should deliver certain value exceeding service-related costs. Therefore, a righteously dividable “value” surplus will be generated.

Outgoing Logistics and Distribution Channel choice for each of the target customer segments, target consumer segments and other definitive stakeholders.

Delivery Delivery Channel

Own delivery set-up or use of service delivery networks, which can be organised in various ways to enable local offerings yet still profitable business. Service delivery networks may not own customers.

Incoming Logistics and Supply Chain Choice.

Table 8. Continued

continued on following page

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A Generic Service Business Model for Product Centric Businesses A Generic Business Model for Manufacturing Businesses

Relationship width, depth and frequency for each of the target customer segments and other definitive stakeholders.

Value Configuration (Value Chain, Value Shop, Value Network) and associated transaction and coordination cost issues.

Resources, Competitive Advantage and Resource Deployment Structure (IC Navigator).

Cost structure due to strategic choices and identification and management objectives for associated economic value added drivers as well as bankruptcy predicting indicators.

Revenue Models with focus on accessing multiple profit pools and maximising the number of revenue streams/pricing logic combinations aimed at achieving an economic value added for the business exceeding the revenue stream from its primary offering.

Table 9. Impact of resource orientation and market orientation on innovation and financial performance of the firm (Paladino, 2009)

Low Resource Orientation High Resource Orientation

High Market Orientation

Market-Driven Innovator Second Highest Financial Performance

Lowest Innovation Performance

Financial Champion Highest Financial Performance

Third Highest Innovation Performance

Low Market Orientation

Unfocused Imitator or Follower Lowest Financial Performance

Second Highest Innovation Performance

Masters of Innovation Third Highest Financial Performance

Highest Innovation Performance

Table 10. Resource categories (Roos et al., 2012)

Resource Category

Monetary Physical Relational Organisational Competence

Definition Money or monetary equivalent resources.

All physical manifestations including plant, equipment, energy and electricity.

All relationships held by individuals as representatives of organisations.

All results of human endeavours that remain in, and are owned by, the organisation when the employees have gone home and that you cannot find on the balance sheet e.g. Brands, Processes, Software, Information, etc.

Competence residing in individuals.

Tangible Example

Cash Building, Energy Contractual Relationships

Documented information Exam results

Intangible Example

Unutilised borrowing Capacity

Location, Exergy

Trust Preferred status

Corporate culture Tacit knowledge

Table 8. Continued

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been used by brands that have become iconic such as Apple turning computers into aesthetic designs, Swatch turning watches into fashion and Cirque du Soleil turning circus into art (Moon, 2010).

The fourth is the use of emotional state as a basis for innovation. This is about the ability to generate a predictable emotional state in an individual (e.g. making you hungry by exposing your olfactory sense to the smell of newly baked bread). Some of this has been touched upon above but here we take it one step further by applying a reverse hermeneutic approach to innovation. The

methodology of hermeneutics was developed by Frederich Schleiermacher (1768-1834). The term is derived from the Greek word ‘hermeneutikos’, which means ‘to interpret’, and this is exactly what hermeneutics aims to do in order to reach understanding (Palmer, 1969). In methodologi- cal hermeneutics, the aim of interpretation is to understand the creator of a text (or other object) and his/her emotions, intentions and thoughts behind it by means of the hermeneutic circle that, according to Schleiermacher, enables us to put ourselves in the place of the creator (Sheratt,

Table 11. Examples of resource transformations (Roos et al., 2012)

Monetary Physical Relational Organisational Competence

From Monetary Putting money in the bank to gain

interest.

Procurement of raw material or

equipment.

Investing in relationship

building.

Investing in software,

brand building, information, etc.

Investing in competence

development or in people with higher or more appropriate

competence.

Physical Selling products. Mixing chemical A with chemical

B to get chemical C.

Strengthening relationships

through superior aesthetic design or through chemical dependency e.g.

tobacco.

Developing new products requiring

new production processes.

Taking into use new equipment requiring new competence to

operate.

Relational Monetising relationships like in e.g. shopping TV where the

good seller pays the TV channel to get access to

the viewers.

The power exerted by big customers to

get free sample products

developed by tier one suppliers.

Word of mouth. The quality system that is implemented for free by the large customer into the

valuable small supplier to assist

them reduce quality variability.

Co-learning in e.g. joint research

projects.

Organisational The additional price you can

charge because of brand or IP.

Process drive production in

e.g. the process industry (the recipe that if followed

generates the product).

A customer relationship management system that increases

customer loyalty when put to use.

Automated software development.

Automated training.

Competence Monetising competence (frequently

through manhours as a

proxy).

The creation of a prototype or a

work of art.

The conversion of a non-relationship into a relationship

by e.g. a salesperson.

Documenting a process so that it

can be repeated by others.

Apprenticeship or personal training.

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Table 12. The use of productivity improvement tools among 162 automotive suppliers [tool rating relat- ing to the usefulness/ease of use of the tool using Likert Scale of 1 to 5, where 5 = very useful to 1 = of no use.] (Trimble et al., 2013 p. 25)

Table 13. The use of productivity improvement techniques among 162 automotive suppliers (Trimble et al., 2013 p. 26)

Product Group TQM Six Sigma

Benchmarking Change Management

Business Process Re- Engineering

Policy Deployment

Chassis suppliers 35% 20% 50% 16% 16% 23%

Electrical Suppliers 68% 32% 58% 45% 10% 48%

Trim suppliers 37% 33% 49% 20% 16% 35%

Total Percentage 42% 26% 50% 23% 14% 30%

51% Compared their performance against other factories in their own company group. 47% Compared their performance against competitors in their own field. 9% Compared their performance to other organisations outside of their own product group or manufacturing areas in addition to comparing against other factories in their own company group and/or against competitors in their own field.

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2005). According to Sheratt (2005) you, the in- terpreter, imagine yourself to be the creator and in doing so, will reach an understanding of the author’s intentions and thoughts. Ricouer (1981) recognises along with Habermas (1987) that the hermeneutical process described can become a vi- cious circle, in which the prejudices of the reader dictate certain dogmatic readings, over and over again. The explanation employed is pre-selected to pre-determine the appropriation. Ricouer’s (1981) solution is to interject the possibility of a wilful distancing from one’s prejudices, a kind of temporary suspension of judgment. He renames the three stages as prejudgment, configuration,

and refiguration. The hermeneutic circle then becomes a spiral as outlined in Figure 13.

Norman (2004) states that emotional responses are the outcome of visceral, behavioural and reflec- tive level processing in the brain. This is aligned with Desmet’s (2002) statement that emotions are not elicited by the tangible product but by a per- sonal meaning derived from the tangible product. Brunswicker et al. (2012) states that integration of emotion is seen as a way to innovate beyond products, services and processes.

Innovating in this space then becomes a reverse hermeneutic process using insights from design, behavioural and cognitive science together with

Figure 13. The hermeneutic spiral (Ricour, 1981)

Table 14. Characteristics of design in different domains (D’Ippolito, 2012, p. 20)

Engineering Meaning Management Meaning Aesthetics Meaning

Purpose Engineering Mean to shape a firm’s innovativeness, structure and strategy

Artistic

Importance of the Consumer

Medium Medium High

Skill Emphasis Team Team/Individual Individual

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psychology, with the aim as the creator of an ob- ject, of generating in the mind of the interpreter (consumer/customer) a specific set of predictable emotions, intentions and thoughts.

Value Appropriating Innovations

These innovations come in two types: Effective- ness Improving Innovations and Business Model Innovations.

Effectiveness Improving Innovations fall into one of three types (Roos, 2011d):

• Innovations that ensure a better fit between the organisation’s offering and an explicit or tacit demand from key stakeholders, e.g. reducing the resource footprint of the offering.

• Innovations that increase the effectiveness of the resource-deployment structure, e.g. switching from a physical resource to a re- lational resource through outsourcing, In this category fall also innovations that lock in key stakeholders through platform strat- egies – common in product-service sys- tems where the only potential provider of the service is the provider of the product, or uses of e.g. switching costs or market barriers.

• Innovations aimed at reducing coordina- tion cost. Coordination cost includes cost due to imperfect information and the op- portunistic behaviour of organisational ac- tors contributing to uncertainty in the firm. The impact of coordination cost-based decisions on business models is either an increase in the precision or a broadening of the coverage in the business model, or a termination of the existing business model.

Business Model Innovations can act both as an improvement in the appropriation of any value created (their primary application), as well as an additional increase in the value created (their

secondary application). Arend (2013) defines a business model on a high level of abstraction as how an organisation creates value by trans- forming and transferring information, physical resources, private, public or other categories of goods through deploying resources, capabili- ties, relationships, structures and other factors, driven by an identifiable monetary or opera- tional aid sourced from customers, partners, volunteers, governments or other stakeholders. This clarifies why the specific dimensions of a business model will vary by sector, firm and activity-system and hence there is no specific set of dimensions that will be relevant across all firms (see the right hand side of Table 8 above for the most common dimensions of a manufacturing business model). Business model innovation involves an innovation in at least one of the constituent dimensions of the specific business model.

The business model concept is useful in the way it breaks down high level strategies into spe- cific managerial tasks for businesses grounded in new technologies or new approaches, especially if the business has challenges as relates to making money (Demil & Lecocq, 2010), and in addition the business model concept enable effective com- munications around how technology is translated into value and then into profit (Chesbrough & Rosenbloom, 2002). This conclusion is supported by the conceptual ease with which successful new business approaches like those brought to market by e.g. Apple, Cirque du Soleil, Ryan Air, Google, Twitter, Facebook, etc., can be explained using the business model concept.

An integrative framework for business model innovation is outlined in Figure 14 and can be complemented with practical guidelines from Bisgaard et al. (2012), Henriksen et al. (2012) and Beltramello et al. (2013) that are useful al- though they are mostly focussed on green business models, as well as the insights from Roos & Pike (2009), Burton et al. (2013), Roos (2013a) for manufacturing firms.

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The importance of business model innova- tion has been pointed out e.g. by Chaharbaghi et al. (2003), Mitchell & Coles (2003), Mitchell & Coles (2004), Santos et al. (2009), Taran et al. (2009), Wang et al. (2009), Elbers et al. (2010), Korsaa & Røge Jensen (2010), Leavy (2010), Moingeon & Lehmann-Ortega (2010), Zhang (2010), Breiby & Wanberg (2011), Ho (2011), Habtay & Holmén (2012), Immonen (2012). Jonkers et al. (2012), Kaplan (2012), Na (2012), Shao et al. (2012), Sinfield et al. (2012), Storbacka et al. (2012), Bocken etal. (2013), Burton et al. (2013), Chesbrough et al. (2013), Geterud & Tegern (2013), Konter (2013), Schneider et al. (2013), Yannopoulos (2013), Gassmann et al. (2014). Kindström & Kowalkowski (2014).

One of the key strategies that a firm can use to achieve a high level of value appropriation is to widen the coverage of its business model and

participate in value chains where the firm was not previously active and hence reach profit pools previously inaccessible. Spring (2013) identify the following themes for future manufacturing business models:

• The decoupling of ownership from product use and the increasing presence of circular economy13 thinking will require the devel- opment of products, institutions and sys- tems appropriate to recycling, re-manufac- ture, re-use and to more fluid attachments of products to owners and users.

• Increasing importance of intrinsic and ex- trinsic value attributes, including sustain- ability, personalisation, guarantees of prov- enance, and the information about these facets that become ‘attached’ to products.

• ICT will increasingly enable radical de- constructing and re-constructing of the

Figure 14. Phases of the business model innovation process and their key challenges (Frankenberger et al., 2013)

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activities involved in product manufacture (broadly defined), and in product use.

• There will be an increasing number of ways in which value can be captured in addition to a combination of strategic control of as- sets, and mechanisms for making transac- tions. This will include new ways to track, measure and remunerate.

• Value will increasingly be created through interactions between many small organisa- tions, rather than through actions within fewer, larger organisations.

CONCLUSION AND RECOMMENDATIONS

In order to succeed in a high cost operating environ- ment firms should ensure that they have access to:

• High managerial competence. • Managers with experience from interna-

tional high performing firms. • Modern managerial practices. • A high performance work system operat-

ing in their business. • A well educated and well trained workforce. • Up to date capital equipment embodying

the latest proven productivity improving technology.

• Competence in relevant key enabling tech- nology domains.

• Well functioning and continuous R&D. • Well functioning integrated innova-

tion management system with all its components.

• A strategy that requires 5 percent produc- tivity improvement annually.

• Skills in coopetition. • A high performing cluster that it can be

part of. • A high absorptive capacity.

• A combined and integrated product-ser- vice-systems offering portfolio.

• A focused niche strategy with a balanced resource and market orientation.

• Local lead customers. • A strategy that requires global leadership

in the selected niche.

and that they in all other aspects adhere to the principles of “Hidden Champions”.

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ENDNOTES

1 In a highly dynamic market it is not pos- sible to have a long lasting competitive advantage i.e. there is no such thing as a sustainable competitive advantage but rather a sequence of temporary competitive advan- tages (Thomas, 1996; Eisenhardt & Martin, 2000; Useem & Brown, 2000; Fiol, 2001; Roberts & Eisenhardt, 2003; Teece, 2007; O’Shannassy, 2008; Chen, 2009; Thomas & D’Aveni, 2009; Ahokangas et al., 2010; D’Aveni et al. 2010; Sirmon et al., 2010; Schimmer, 2012; Sigalas & Economou, 2013; El Shafeey, 2014)

2 The strategy by which companies cooperate and compete simultaneously

3 Key Enabling Technologies are technology domains that are knowledge intensive and associated with high R&D intensity, rapid innovation cycles, high capital expenditure, highly-skilled employment, and that not only underpin most industrial activities across sectors but that also form industrial sectors in their own right. They include in the author’s definition: Information and Communication Technologies, Nanotechnology, Micro- and Nano-electronics, Industrial biotechnology, Photonics, Advanced materials, Advanced manufacturing Technologies, and Produc- tion Systems for High Cost Operating En- vironments.

4 It should be noted that Hall et al. (2013a) found that firms with patents grow on av- erage 10 percent faster than firms without patents and that firms with design rights or trademarks perform 16 -17 percent better than firms without (Greenhalgh & Rogers, 2007; Bascavusoglu-Moreau & Tether, 2011).

5 The first use of the term servitization in a context of manufacturing operations was by Vandemerwe & Rada (1988, p. 314). They defined servitization as “the increased offer- ing of fuller market packages or “bundles” of customer focussed combinations of goods, services, support, self-service and knowl- edge in order to add value to core product offerings”. Baines et al. (2009a) later defined servitization as “the innovation of an organi- sation’s capabilities and processes to shift from selling products to selling integrated products and services that deliver value in use”.

6 The numerical values are sourced from Simon-Kucher & Partners’ 2013 study of hidden champions in the 21st century.

7 The concept of resource transformations was first introduced by Roos & Roos (1997)

8 Productivity improvement tools can be defined as tools that are ‘stand-alone’ and

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which can be used to resolve particular problems or make improvements in certain focused areas. In addition, they have a clear role and are narrow in focus. Productivity improvement tools examples include Failure Mode Effect Analysis (FMEA), 5S and Value Stream Mapping. Individual productivity improvement tools do not need any other tools or methodologies to be able to function and come in many forms ranging from very simplistic to complex. As they tend to be only used in certain areas of the company, they do not normally require significant resources or investment other than initial training and implementation (Trimble et al., 2013).

9 A tool is a simple standalone application, whereas a technique tends to be a more comprehensively integrated approach to problem solving that might rely on a num- ber of supporting tools (Dale & McQuater, 1998). Examples of techniques are Total Quality Management (TQM), Business Pro- cess Reengineering (BPR), Six Sigma (6σ) and Objective Policy Deployment (OPD) (Trimble et al., 2013).

10 In general categories of erroneous applica- tion of tools and techniques can be observed: the use of wrong tool to solve problems; the use of a single tool to solve all problems and the use of the same set of tools on all problems (Pavnaskar et al., 2003), lack of understanding of the tool (Herron & Braiden, 2004) and in addition the error of using no tools or techniques at all.

11 Productivity improvement is not easy and use of tools and techniques does not guar- antee success. A survey of 138 organisations showed that nothing had changed in 26 percent of companies following productivity improvement efforts, 49 percent of compa- nies reported disillusionment over the lack of improvement, 72 percent of improvement initiatives had suffered due to time and re- source limitations, 68 percent stated the cost of the improvement was more than expected, and 67 percent believed they needed more guidance about exactly how to implement successful improvement programs (Golden- son & Herbsleb, 1995).

12 Generally considered to include: Nanotech- nology; Micro and nanoelectronics; Indus- trial biotechnology; Photonics; Advanced Materials and Advanced Manufacturing systems. The author also includes Pro- duction Systems for High Cost operating Environments with their different enabling technologies.

13 The concept was first introduced by Bould- ing (1966) and is used as a generic term for an industrial economy that is, by design or intention, restorative and in which material flows are of two types, biological nutrients, designed to re-enter the biosphere safely, and technical nutrients, which are designed to circulate at high quality without entering the biosphere.

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Conclusion

SUCCEEDING IN A HIGH COST ENVIRONMENT

Akeytestofsuccessforhighcosteconomiesistheirappetiteandabilitytomanagechange,particularly transformativeordisruptivechange.

Inordertocompetesuccessfullyfromahighercostbaseagainstlowercostbutsophisticatedcom- petitors,theneedforchangeisinevitable.Itisaquestionofwhetherhighcostfirmsandnationsactto anticipatetheforcesofchangeandcreateviableoptionsfortheirownfuture,oroperateontheassump- tionthattheseforcesarebeyondtheircontrolandsobecomethecasualtiesofchange.

Muchofthetopicalcommentaryonoperatinginhighcosteconomies,likeAustralia,issimplistic. Forexample,thereisapopularbeliefthatproductivitydeclinecanbeattributedtolowlabourproduc- tivityandhighwagelevels,andthesimpleremedyistocutwages.Butthisprescriptionisatoddswith authoritativeevidencepresentedinthisbookabouttheactualdriversofproductivityindifferentindus- tries,andaboutthedecreasingimportanceofthecostsoflabourinproduction,locationandinvestment decisionsformoderndaymanufacturing.

Similarly, policy setting in Australia’s high cost economy are invariably cautious, minimalist and basedonalogicdesignedarguablyforanindustrialeraofthe19thand20thCenturies,nottheglobalised knowledge-basedeconomyofthe21stCentury.

Governmentstendtofavouratriedandtruecourseandarewaryofrent-seekingandmarket-distorting behaviourthatisdetrimentaltothewelfareofthecommunityeconomy-wide.Butcontributorstothisbook argueontheinternationalevidencethatthisessentiallylaissez-faireapproachisaperformancefailure bygovernment,onethatcreatesmorelosersthanwinners.Itisineffectiveinaddressingthechallenges ofcompetingsuccessfullyasahighcosteconomy,andofturninganation’scomparativeadvantageinto anenduringcompetitiveadvantage.

The task of succeeding in a high cost-operating environment is not one for policy makers alone: actionbyenterprisesandworkplacesisalsokey.Itisvital,however,thatdecisionsaremadewitheyes wide open to the realities of how to compete by creating and capturing value, not simply by cutting costs.Contributionsinthisbookpointtothefollowingattributesofenterprisesthatcompetethrough innovationandaddingvalue:

• Open,outward-lookingorganisationsembeddedinawidespectrumofqualityrelationshipsand networks,andwithanexceptionalabilitytolearn,includinglearningbydoing;learningbytheuse of next generation technologies and equipment which provide new productive capabilities; and learningbyinteractingwithothers.

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• Closenesstocustomersthatprovidesathoroughunderstandingofneedsanddemand,asanav- enueforprovidingsuperiorvalueformoneyintheeyesofthecustomer,includingwithbusiness offeringsthatmeetlatent,unexpressedneedsandpreferences,orengagingcustomersdirectlyin theproductionofthegoodsandservicestheybuy.

• Deep,uptodatesubjectmatterknowledgeintheirindustryandadjacentindustries,marketintel- ligenceandknowledgeabouttrends,potentialdisruptionsandforcesforchange,understandingof technologydevelopmentsandforesightingofnewtechnologiesandconvergence.

• Collaboration for problem-solving and for knowledge sharing and application, especially with universities and research organisations, in clusters and regions, or in virtual cross-sectoral or multi-disciplinarycommunitiesofpractice.

• Strong and deliberate building of new competitive capabilities within the business enterprise, which increases its ‘absorptive capacity’. This refers to the set of processes, routines and skills bywhichenterprisesacquire,assimilate,transformandexploitknowledgetoproducedistinctive anddynamiccapabilitiesthatgivethemacompetitiveadvantagethatothersfindhardtoimitate orsubstitute.

• Agileandcapablemanagersandskilledandempoweredemployeesengagedintheconstantsearch fornewandemergingmarketopportunitiesandneeds,andhowthesecanbematchedwiththe enterprise’sowndesign,operations,financial,engineeringandorganisationalcapabilities.

Thecollectionofexpertpapersinthisbookoffersakaleidoscopeofwell-referencedinsightsand internationalcaseexamplesforfirms,regionsandpolicymakerstoassess,experimentwith,andadapt tosuittheirownpriorities,businessmodelsandlocalcircumstances.

Thisbookmarshalstheevidenceforactiontocombatthepushforeverlowercostsandworse,ever loweraspirationsbycompanies,communitiesandcountries.Anantidote,ratherthanablueprint,thisis abookforthetoughtimesbeingconfrontedbyhighcosteconomies.

Göran Roos Swinburne University, Australia

Narelle Kennedy The Kennedy Company Pty Ltd., Australia

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About the Contributors

Göran Roos is Professor in Strategic Design in the Faculty of Design, Swinburne University of Technology, Melbourne; Adjunct Professor at Mawson Institute, University of South Australia, Adelaide; Adjunct Professor at the Entrepreneurship, Commercialisation and Innovation Centre, University of Adelaide, South Australia; Adjunct Professor at University of Technology Sydney Business School, Sydney; Adjunct Associate Professor in the College of Business, Nanyang Business School, Nanyang Technological University, Singapore. He is a Stretton Fellow appointed by the City of Playford at Uni- versity of Adelaide and chairing the Advanced Manufacturing Council in Adelaide; is a member of the Economic Development Board; a member of the Council for Flinders University, Adelaide; a member of CSIRO’s Manufacturing Sector Advisory Council; Senior Advisor to Aalto Executive Education Academy in Helsinki; and holds the title of Professor at VTT Technical Research Centre of Finland. He is a member of the editorial boards for Journal of Intellectual Capital, International Journal of Learn- ing and Intellectual Capital, International Journal of Strategic Change Management, and Journal of Human Resource Costing and Accounting.

Narelle Kennedy, AM, is Managing Director of the Kennedy Company Pty Ltd. providing business leaders and public policy makers with research, advisory and consulting services to enable them to com- pete in fast-moving, volatile global business environments. She is Adjunct Professor with the School of Business at the University of Technology Sydney. She founded and led the pioneering, business-backed collaborative research think tank, the Australian Business Foundation, and is responsible for its catalogue of published research studies with leading academics and practitioners on innovation, future scenarios, globalisation, productivity, sustainability, and industry case studies. She was awarded a Member of the Order of Australia (AM) in 2014 for significant service to business in Australia.

* * *

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About the Contributors

Renu Agarwal is Senior Lecturer in Innovation and Service Operations Management at UTS Busi- ness. In her current faculty position, she provides leadership and conducts research in the disciplinary fields of service science, service value networks, supply chain management, dynamic capability building, management practices, management education, and innovation and productivity. As a Research Director, Renu has been instrumental in managing several federal government projects on management practices in manufacturing firms for both Australia and New Zealand and at state government level in Australian hospitals, participating in a global study of management practice and productivity, working in collabora- tion with London School of Economics, McKinsey, and Stanford University. She has published in top tier international journals including Decision Sciences, International Journal of Operations Management, and International Journal of Production Economics. She is currently editing The Handbook of Service Innovation to be published by Springer-Verlag London in 2014.

Toni Ahlqvist is Principal Scientist in the foresight team at VTT Technical Research Centre of Finland. He has some 17 years of research experience in the fields of foresight, economic geography, and innovation studies. He has been a project manager and a foresight expert in several foresight and technology roadmapping projects at VTT. His present research focuses on socio-spatial transformations induced by science, technology and innovation policies, and on political economy of national and regional innovation systems. He has published widely on the field of foresight, on topics such as roadmapping, emerging technologies and infrastructures, and socio-technical change. He is an Adjunct Professor of economic geography and technological transformations at the University of Turku, Finland.

Christopher Bajada is Associate Professor of Economics and Associate Dean (Teaching and Learning) at University of Technology Sydney. He started his teaching career at the University of New South Wales, from where he holds a PhD. He has taught economics on a variety of undergraduate and postgraduate courses, with his most recent teaching experience being in applied microeconomics. In recognition of his teaching, Chris was awarded the University of Technology Teaching Excellence Award and Team Teaching Award as well as the Carrick Institute (now the Office of Learning and Teaching) Teaching Award for Outstanding Contributions to Student Learning in Higher Education. His research is primarily in applied macroeconomics, with a special interest in tax compliance. He has worked with the Australian Taxation Office as a member of the Cash Economy Task Force, as a member of the Eco- nomics Society of Australia and more recently on the expert advisory panel on the development of the Economics Learning Standards for Australian Higher Education.

Paul J. Brown is a Lecturer at UTS Business School in the Accounting Discipline Group. His PhD was in the area of corporate governance and contracting theory, and since completing it in 2009, he has embarked on a cross-disciplinary research program. As part of cross-disciplinary teams, he has been funded for two large projects: Leadership and Change for Energy Efficiency in Accounting and Man- agement, funded by the NSW Office of Environment and Heritage; and Accounting for Value Chain Sustainability and Competitive Advantage, funded by the Australian Government Cotton Research and Development Corporation. He has also worked on a number of Australian and New Zealand federal gov- ernment funded projects focussing on evaluating the links between management practice and productiv- ity. He is a core member of the UTS Centre for Corporate Governance and the Centre for Management and Organisation Studies.

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About the Contributors

Sam Bucolo is Professor of Design and Innovation at University of Technology Sydney and a leading academic and practitioner in the emerging field of design led innovation. He has led several projects that has contributed to transforming businesses facing structural change through embedding design capability within the organisation. He has published widely on the topic of the value of design to industry and has undertaken several significant projects with a wide variety of firms. He is recognised as a leader in this field. He leads a team investigating the value of Design Led Innovation to the Australian Economy. He is also the convenor of the recently established Australian Design Integration network and is an executive board member of the Cumulus global network.

Graciela Corral de Zubielqui is the Associate Head (Research) and lecturer in the postgraduate Project Management area in the Entrepreneurship, Commercialisation, and Innovation Centre at the University of Adelaide. She completed her PhD in the area of innovation and globalization. She also holds a Bachelor of Economics (Honours) and a Master in Economics and Business Administration. She has held appointments as a Research Associate in the School of Management, University of South Australia, the Entrepreneurship, Commercialisation and Innovation Centre, and the Adelaide Business School at the University of Adelaide. She worked in projects which linked government departments, industry and university. She is interested in innovation and collaboration activities between government, industry and university, and performance and economic regional development.

Manjula Dissanayake is a PhD candidate at the Entrepreneurship Commercialisation and Innovation Centre (ECIC) at the University of Adelaide, studying entrepreneurial team learning and strategy develop- ment. Prior to starting his PhD candidature, he was a founding member of highly successful technology start up companies, one of which was acquired by Symbol Technologies (now a Motorola Company) in 2002. He has worked on innovative projects for leadings clients in retail, banking and government sectors including for Fortune 500 companies. He has co-authored granted US patents in the technology space mainly for the retail industry. He has served on numerous boards of universities and industry chambers including the American Chamber of Commerce. He has presented and chaired sessions at international conferences on Entrepreneurship. He obtained his Bachelors in Information Systems from Manchester Metropolitan University, UK with a First Class Honours and Masters in Advanced Computing from School of Computing – University of Colombo, Sri Lanka. He has also obtained his executive manage- ment training from Stanford University, USA.

Bradley Farrell is a Partner at Earnst & Young and the firm’s Oil and Gas Advisory Leader for Oceania. For more than 10 years, Bradley has delivered commercially pragmatic advisory solutions to a wide range of local and international clients. He specialises in providing Advisory services to Exploration and Production companies, especially those with interest in LNG (liquefied natural gas). His oil and gas advisory experience includes assignments related to business transformations, enterprise performance management, business management systems, process analysis and improvement, organisation design and development, and change management. He coordinates the firm’s market strategy and thought leader- ship. He also monitors current and emerging issues, represents Ernst & Young at industry forums and participates in national and global consultations on energy specific issues.

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About the Contributors

Jerad A. Ford has over 10 years of experience with the world’s largest independent research and development firm, Battelle, as a Senior Research Scientist responsible for project management and busi- ness development. He has worked extensively with major US government agencies on innovation, and has recently set strategy for renewable energy, and oil and gas exploration and production, for a major national oil and gas firm in SE Asia. He is currently undertaking a PhD at The University of Queensland Business School in Strategy with a focus on innovation in Australia’s oil and gas industry.

Rodin Genoff is founder and Managing Director of Rodin Genoff & Associates, Pty Ltd. Sydney Australia, established in 1998. Rodin is an internationally recognised cluster development expert. His work with the City of Playford in South Australia won the DOTARS award for the most innovative economic development program in Australia. He has designed and led cluster projects in Europe, Asia and Australia focussing on integrating cross cluster dynamics between sectors such as food processing, steel, engineering, electronics, IT, cleantech, industrial design, and the creative industries to create col- laborations between companies. These have led to new business and investment opportunities and the formation of born global companies. His work has been widely reported in the Australian and Danish financial press. He has worked at executive level of government, local and regional development and between 1994 and 1999 lectured at undergraduate and postgraduate level in Economics and Public Policy at the University of South Australia and undertook ARC research at the Centre of Labour Studies at Adelaide University. He has written several books on manufacturing, innovation and industry cluster development, was the Australian representative to the OECD LEED program between 2001 and 2006, and has served on Ministerial Advisory Boards. He is also co-founder and Global Head of Strategy for Integrative Design, a Singapore based sustainability and engineering design company. In 2013, Rodin was named by ABC Carbon (Singapore) as one of the top 100 sustainability leaders in the world for his innovative work in the cleantech and environment industries.

Roy Green is Dean of UTS Business School at the University of Technology Sydney. He gained his doctorate from the University of Cambridge and has worked on innovation policy with governments and business around the world, including projects for the OECD’s National Innovation Systems programme and the European Union’s Seventh Framework Programme for Research and Technological Develop- ment (FP7). Most recently, he led Australian participation in a global study of management practice and productivity, conducted a major industry review for the Department of Innovation, Industry, Science and Research and was invited to join the Prime Minister’s Manufacturing Taskforce. He has also chaired the Australian Government’s Innovative Regions Centre, CSIRO Manufacturing Sector Advisory Council and NSW Manufacturing Council, and was a member of the Enterprise Connect Advisory Council and Australian Research Council (ARC) Centre of Excellence for Creative Industries and Innovation.

John Kettle earned his PhD at the University of Plymouth and is presently Manager of International Operations at VTT Technical Research Centre of Finland. He has over 30 years of industrial research and development experience in the Minerals R&D (Imerys) and Pulp and Paper R&D (SCA, KCL, and VTT). His present focus is on the development of VTT’s business internationally and with particular focus on Australia. He has published in the fields of porous materials, coating and printing technologies.

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About the Contributors

Mushui Huanmei Li graduated with a Bachelor of International Economics and Trade from Tianjin Agriculture University, China in 2007. From 2007 to 2010, she completed a Master of Regional Eco- nomics at North West Agriculture and Forestry University, China. She commenced her doctoral studies at the University of Adelaide in November 2010. Her research interests are entrepreneurship, industrial clusters, and wine industry policy in Australia.

Gerald Marion has over 17 years of professional experience as a Private Equity Investor and Manage- ment Consultant. He is a Director within EY’s Advisory and the Strategic Direction & Customer Lead in Queensland. His focus areas include delivering growth and business transformation projects across Government, Financial Services and the Energy Sector. He has worked on a variety of strategy and opera- tional projects including Growth and Innovation, Organisational Productivity, Customer Transformation, Target Operating Models Redesign, and Lean/Six Sigma programs. He is a UQ Business School Industry Fellow and has closely collaborated with UQ on a number of key initiatives, namely: The Productivity and Innovation Study of the Australian Oil and Gas Industry; The Digital Transformation Audit of 500 businesses and 25 digital champions; The Brisbane Innovation Scorecard and The University of the Future. He presented on behalf of EY-UQ the preliminary findings of “The Productivity and Innovation Study of the Australian Oil and Gas Industry” at the APPEA conference in October 2012 in Brisbane.

Ian Marsh is Visiting Professor at the Crawford School, Australian National University and at the Australian Innovation Research Centre, University of Tasmania. His most recent study Democratic De- cline and Democratic Renewal: Political Change in Britain, Australia and New Zealand (with Raymond Miller) was published in 2012 by Cambridge University Press. He has a strong background as a teacher, researcher, author, and policy adviser, specialising in innovation and governance. He received a BA from the University of Newcastle and is a graduate of the Kennedy School of Government and the Graduate School of Arts and Sciences at Harvard University (AM. PhD).

Seelan Naicker (BSc Geology [Hon], MBA) is Managing Director of the 4Sight Group Pty Ltd that is focused on assisting asset intensive organisations design and execute distinctive game plans to domi- nate in today’s turbulent world. He specializes in the areas of innovation led productivity enhancement, capital project innovation, value driven transformation and eco innovation. Prior to founding 4Sight Group, he held senior leadership positions at Deloitte and Ernst & Young in Australia, South East Asia and South Africa, where he was responsible for leading the Energy and Resources Practices, with a focus on strategy, innovation, and supply chain transformation consulting. He is recognised as a thought leader, and has published and presented papers on innovation, productivity and business excellence at signature global conferences such as Asia Mining, Coaltrans, Deep Water Asia Pacific and APPEA in Australia. He is a member of the Society of Petroleum Engineers, Energy Institute and Council for Supply Chain Management Professionals.

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About the Contributors

Allan O’Connor is the Academic Director for Innovation and Entrepreneurship Post-Graduate programs at the Entrepreneurship Commercialisation and Innovation Centre (ECIC), The University of Adelaide, Australia. Commencing his professional career in 1979 in mechanical engineering, He has worked primarily in the small and medium enterprise sector developing and introducing new products, entering new markets, and expanding sales and business opportunities in both established and new business environments. His qualifications in entrepreneurship include a Master in Enterprise Innovation and a PhD in the field of public policy for entrepreneurship education and economic development. His research involves enquiry at the intersections between entrepreneurship, innovation and socioeconomic development.

Don Scott-Kemmis is a consultant specialising in innovation management and policy. He is Adjunct Professor at UTS and teaches innovation management and entrepreneurship to postgraduates. Previously, he was an Associate Professor at the ANU, and held research appointments at the University of Sussex and University of Wollongong. He has been a consultant to many national and international organiza- tions, and is currently advising on a major EU project in Indonesia. He has also been a manager and adviser in research and innovation policy in the public sector in Australia. He holds degrees from the University of Sydney and University of Sussex.

Graeme Sheather is Visiting Professor at the University of Technology Sydney Business School. He has a Bachelor Degree in Architecture, a Master of Science in Urban and Regional Planning, and a Master of Ekistics, and spent 30 years teaching, researching and consulting in urban and regional plan- ning in Australia, Israel, Greece, and the USA. At UTS, he was the Director of the highly acclaimed Bachelor of Manufacturing Management Coop degree. He has been a visiting lecturer in manufacturing at Rhodes University, South Africa, and lecturer in manufacturing logistics at the Institute of Transport and Logistics at University of Sydney Business School. He has some 50 publications across academic and professional journals, papers in referred conference proceedings, and technical inquiries and reports. He is joint author of three books and has chapters in a number of others, and has been a regular keynote speaker and workshop leader at professional conferences. He was a joint recipient of ARC Large Re- search grants incorporating work on integrated supply chain management, and awarded an international grant as part of the EU’s ESPRIT 2000-TBP ENAPS Program for 1997 and 1998. He has completed consulting contracts for industry and government agencies in regional industry analysis, transport and economic planning and supply chain management. Currently he is a Principal in the consulting firm Rodin Genoff & Associates, responsible for developing the cluster audit methodology used by the firm, in creating economic development and job creation projects undertaken for regional Governments in South Australia, Denmark and Sweden.

John Spoehr is the Executive Director of the Australian Workplace Innovation and Social Research Centre at The University of Adelaide where he is an Associate Professor. He has published widely in the areas of socio-economic impact of change including as Editor of State of South Australia now in its third edition and The Engaging State, both published by Wakefield Press. He is currently playing a leading role in the establishment of the Stretton Centre, which is seeking to foster and support more integrated approaches to industry, workforce, and urban development in Australia.

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About the Contributors

John Steen is Associate Professor in Strategy at The University of Queensland Business School in Brisbane. He holds PhDs in Strategy (The University of Queensland) and Biochemistry (University of Tasmania). He is currently leading major international projects on the subject of innovation and produc- tivity, with colleagues at UQ, Imperial College London and University College London. This includes the transition to new digital business models and performance in megacapital ($1billion +) projects, particularly in the oil and gas sector. Current partners in these projects include Imperial College London, Cambridge University, Brisbane City Council, Queensland Government, Norwegian School of Manage- ment, UQ Sustainable Minerals Institute, APPEA, and Ernst & Young. He is a nationally recognised teacher in the field of business strategy, receiving an award from the Australian Teaching and Learning Council in 2008. He has been on both the advisory and technical committees for the Brisbane Innovation Scorecard, since its inception in 2010. He is highly sought after as a guest speaker and commentator and has given talks on strategy and innovation to business and governments in Australia, Asia and Europe. His research has been published in a range of leading peer-reviewed publications and he has been the recipient of several competitive grants. In 2011, he was appointed as a visiting research fellow at the Centre for Business Research, Cambridge University.

Milé Terziovski is in his second term as Head of School, International Graduate School of Busi- ness, and Professor in Strategy and Innovation, at the University of South Australia. He is the Dean (designate), and Professor in Innovation at the Curtin Graduate School of Business, effective end of March 2014. Professor Terziovski has strong links with industry and the professions, and an outstanding academic record of scholarship ranging across innovation, entrepreneurship and quality management. He has published in prestigious journals such as the Strategic Management Journal, Journal of Operations Management, and Rand European Journal of Operations Research, and received two best paper awards from the US Academy of Management. He was previously employed with the University of Melbourne for 10 years, Monash University for four years and Rio Tinto Ltd for 16 years as an Engineering Manager and Project Leader.

John Tomaney is Professor of Urban and Regional Planning in the Bartlett School of Planning at University College London. He holds visiting professorial appointments at the University of New South Wales, Monash University, and Newcastle University (UK). He is an Academician of the (UK) Academy of Social Science and a Fellow of the Regional Australia Institute.

Ville Valovirta is Senior Scientist at VTT Technical Research Centre of Finland. His research fo- cuses on innovation systems, technology foresight, innovation policy, and public-private collaboration for innovation. He is pursuing research on diffusion of urban innovation in cities and public procure- ment of innovation. He has carried out foresight projects in Finland, Australia, South Korea, and Chile. He has conducted programme evaluations and impact assessment related to innovation policy, R&D programmes and commercialization support schemes. He has worked in a private consultancy where he held responsibility for management of research and evaluation services. He holds M.S. (Pol.) from University of Helsinki.

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About the Contributors

Nafty Vanderhoek is a graduate of the University of Adelaide where he obtained his BSc (Hons) in 1970 and PhD in 1974. He has been supporting the pulp and paper and related industries for almost 40 years in a variety of technical and management roles; 28 years with APM/Amcor, nine years with CSIRO and for the past three years with VTT for whom he acts as a Senior Advisor. Today, he maintains a strong interest in R&D aspects of biomass utilisation from transitioning existing pulp and paper operations to new stand-alone biorefinery opportunities.

Martie-Louise Verreynne is Associate Professor in Innovation at the University of Queensland Busi- ness School in Brisbane, Australia. She holds a PhD in Strategic Management from Massey University in New Zealand and has worked at universities in Australia, New Zealand, and South Africa. She has published in all three major small business journals, and is currently an assistant editor for one of those journals. Her current work is in the areas of small firm growth, strategy, and innovation.

Cara Wrigley is Senior Lecturer in the field of Design-Led Innovation (DLI). She currently directs the Queensland University of Technology’s DLI Research Lab, placing postgraduate researchers within Australian businesses. She has developed a unique understanding of “visceral hedonic rhetoric” and its contribution to the field of product design research. Combined with her scholarly expertise in emotional design, she is actively researching the value that design holds in business – specifically through the creation of strategies to design business models which lead to emotive customer engagement.

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Index

A Action Plans 127, 136, 151 Agglomeration 32, 115, 121, 124, 126, 400, 403 Allocative Efficiency 69, 402 ambidextrous organisation 253, 256, 259, 264

B Bookend Business Model 238 Business Alliances 124-125, 151 Business Collaboration Processes 151 Business Model 209-210, 212-215, 217, 219, 221,

223-224, 227-229, 231-234, 238-239, 244, 246, 248, 297, 346, 348, 350, 357, 362, 404, 410, 440-442

Business Model Innovation 209-210, 212-214, 217, 224, 227-229, 231-234, 238, 244, 410, 441-442

Business Networks 123, 125-126, 136, 142-144, 146-147, 151

C Cellulosic Fibre 172-173, 178, 199, 203 Cleantech Industries 151 Cluster Audits 151 Cluster Dynamics 239 Clusters 32, 55, 76-78, 109, 115-117, 122-126, 137,

139, 142, 147-149, 152, 274, 278, 327-328, 367, 393, 400, 413

Collaborative Networks 124, 134, 152 competitive advantage 36, 88, 109, 114, 144, 151,

160, 169, 209, 241-242, 264, 268-269, 276, 278, 286, 301, 308, 350, 355, 362, 404, 412

Connector Companies 123, 126, 136-138, 140, 146, 151-152

cost economy 52-54, 59, 69, 112, 148, 153, 221, 242

Creative Destruction 5, 28, 60, 77, 109, 172, 300, 395

cultural transformation 243-244 Customer-Centric 229, 233, 239

D Decentralised Policy Designs 62, 65, 69 deep customer 243, 245, 251, 414 Deep Customer Insight 251 Design-Led Innovation 241-246, 248-249, 251 Design Thinking 82, 109, 243-244, 251 development strategies 116-117, 216, 321

E Economic Capabilities 53, 59-60, 65, 69-70 Economic Complexity 1, 31-32, 35-39, 393, 403 Entrepreneurial Behaviours 304, 306, 353-354, 361,

391 Entrepreneurial Capability 302-303, 355, 359, 364,

391 Entrepreneurial Characteristics 290, 301-302, 306,

308, 316, 333, 335, 338, 392 Entrepreneurial Competence 303, 344, 392 Entrepreneurial Ecosystem 291, 307, 345, 361, 392 Entrepreneurial Environment 307, 315, 333, 392 Entrepreneurial Firm 290, 299, 304-307, 345, 348-

349, 351-354, 392 Entrepreneurial Opportunity 294, 302, 304-307,

345, 350, 392

G Gas industry 153-159, 162, 169-170 Gorgon project 154 Growth Firm 392 Growth Oriented Regional Policy 121

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Index

H High Cost Economy 52-54, 59, 69, 112, 148, 153,

221 human capital 114, 119, 233, 271, 301-302, 307,

341, 344, 346, 348, 350, 407

I Industrial Diversification 94, 109 Industrial Rejuvenation 72-73, 75-77, 81, 85-89, 97,

109 Industry Clusters 77, 109, 116, 123, 126, 152 Innovation Theory 54-56, 58, 61, 69, 255 Integrated and Inclusive Problem-Solving 109 Integrated Solutions Business Model 239

K Kanban 133, 152 Knowledge Economy 53, 60, 70, 79, 114

L labour costs 2, 27, 38, 155, 158, 219, 268-269, 273,

286 Leading Edge Customers 239 Lean Manufacturing 239, 270, 281, 284 Limestone Coast 173, 178-179, 182-183, 200 Local and Regional Institutions 112-113, 120-121

M management practices 268-271, 273-274, 277-278,

281, 284-286, 343, 353, 397 manufacturing firms 244, 268-271, 276, 278, 280,

284, 286, 393, 401, 405, 408, 441 Manufacturing Process Types 139, 152 market share 143, 229, 246 multi-level governance 114, 117, 119

N Nascent Entrepreneur 292, 306, 339-340, 346, 357,

360, 392 Nascent Firm 392 Neo-Classical Economics 70 Niche Business Model 223, 239

O operating cost 27, 31, 252-255, 257, 264, 270, 393 operating economies 39

P Peripheral cities 112, 117, 120 Place-Based Development 121 policy design 59, 61-62, 65, 174-175, 177, 204 production activities 2, 37, 408 productivity challenge 153-155, 157-158, 166, 170 public policy 5, 52-54, 56, 59-62, 65, 69, 115-116,

125, 173, 177, 201, 203, 210, 360-361

R Redistributive Regional Policy 121 Regional Development 112-114, 116-117, 121, 126,

148, 173, 178, 347 Regional Innovation Systems 76-77, 79, 109, 328

S Six Sigma 246, 252-261, 263-264 Smart Specialisation 32, 79-81, 88-89, 109, 125 Social Network Analysis 124, 152 Stages of Firm Growth 295, 306, 392 strategic roadmapping 172-178, 202-204 structural change 1-2, 5 Supply Chain Types 131-132, 134, 139, 152 Survival Firm 392

T Technical Research 173, 179, 187, 203 The Entrepreneur 291-293, 295, 297, 299-302, 305,

307-308, 316, 336, 340-342, 344-346, 350, 357, 360, 362, 368, 392

U Urban and Regional Regeneration 76, 109

V Value Chain 10, 27, 38, 78, 88, 124, 172-173,

177-181, 183, 195, 199, 203, 216-217, 221, 233, 238-239, 331, 408, 416

Value Proposition 217, 223, 238-239, 249, 258

W wood products 172-174, 178, 180, 182-183,

185-188, 190, 192-193, 195, 197, 199-200

Z Zones of Competitive Capability 128, 152

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Title Page
Copyright Page
Advances in Business Strategy and Competitive Advantage (ABSCA) Book Series
Table of Contents
Detailed Table of Contents
Foreword
Preface
Section 1: Responses for National Economies

Chapter 1: Manufacturing in a High Cost Environment
Chapter 2: Competing from a High Cost Economy
Chapter 3: Foundations for Industrial Rejuvenation

Section 2: Responses for Sectors, Clusters, and Regions

Chapter 4: The Role of Local and Regional Institutions
Chapter 5: Putting Clusters to Work
Chapter 6: Confronting the Productivity Challenge in the High Cost Economy
Chapter 7: Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation

Section 3: Responses for Enterprises and Workplaces

Chapter 8: Business Innovation
Chapter 9: Design-Led Innovation
Chapter 10: The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational Ambidexterity in a High Operating Cost Environment
Chapter 11: Managerial Practices in a High Cost Manufacturing Environment
Chapter 12: Supporting Entrepreneurship in High Cost Economies
Chapter 13: Manufacturing in a High Cost Environment

Conclusion
Compilation of References
About the Contributors
Index