[su_pullquote align=”right”]By Lambert Jerman and Evelyne Misiaszek[/su_pullquote]
Successful companies like Sigfox, BricoPrivé or Hellocasa all belong to the world of scale-ups. Whether these companies are young or old, their hypergrowth phase is a highly critical period.
These days, the idea of « scale-up » includes businesses with an annual turnover greater than €5m, with growth of at least 10 to 20% over three years. After graduating from being a start-up and having validated its business model, the scale-up must transform rapidly on several levels : internationalization, recruitment, new business, technical or financial partnerships. Its internal piloting system must keep evolving so that the company can face new challenges, while at the same time the director has to ensure that any new management tools put in place are adapted for hypergrowth. It’s a situation that requires a delicate balance between short-term decisions and the company’s long-term strategy.
A loss of proximity and a delicate balance to be achieved
Recruitment needs being, by definition, substantial in companies in hypergrowth, employee numbers are inclined to increase so quickly that before long the director finds him or herself unable to directly supervise the workforce or get to know them personally. This loss of hierarchical proximity is often exacerbated by an ever greater geographical distancing. Information flow can be threatened within that structure, and jeopardise the business’s culture and cohesion. The director’s charisma, values and personal commitment are no longer enough.
To get to grips with this new reality, the director of a scale-up has to adapt and reinforce the way the company is governed and strengthen its piloting system, without curbing the creativity and innovation so vital so its development.
Achieving this delicate balance in a way that maintains responsiveness and the informal coordination inherited from the start-up alongside more formal and rationally-defined procedures necessary to a larger group, is anything but easy. Four drivers of action can nonetheless be identified to make transforming the company less complex, and to maintain as far as possible the proximity necessary for it to remain cohesive.
- The redefinition and effective delegation of responsibilities, by upskilling staff, particularly those with high potential. This requires the director to listen to and support his or her staff, and to trust them and include them in decision-making.
- Possible actions :
- Create centres of responsibility with real decision-making powers.
- Follow the new prorogatives in their entirety, despite the temptation to take « shortcuts » in urgent situations.
- Information transmission should be agile and reliable. To be able to delegate, the director must implement a reliable information system which can be flexibly adapted to the needs of the company’s decision-makers.
- Possible actions :
- Communicate on a regular basis summary reports and key indicators describing the firm’s strategic levers, with the intention to ‘objectivize’ the activity, and in time, to better anticipate and facilitate decision-making.
- A combination of formal and informal controls.. Alongside the establishment of indicators, the director could create opportunities for regular exchange of ideas with his or her teams to encourage better upward and downward circulation of information.
- Possible actions :
- Setting up recurring meetings where technical ideas can be exchanged, as well as more informal and occasional encounters to encourage team involvement.
- Maintaining the entrepreneurial spirit. The setting up of a more structured piloting system should not put a brake on innovation and creativity within the company. It’s the director’s responsibility to maintain the spirit and values of his or her company by spending time with the teams on a regular basis to share his or her vision, without threatening their much-needed autonomy.
- Actions :
- Communicate on a regular basis the goals and values of the company, the director’s strategic vision, day-to-day issues and more strategic ones aimed at successful hypergrowth.
- Actions :
- Possible actions :
- Possible actions :
- Possible actions :
To tackle the two major risks associated with piloting hypergrowth – a more complex business environment and the loss of proximity to its teams – the director of a scale-up needs to let the company find a balance between the very informal piloting system of a start-up and the more formal control of the big groups.
[su_pullquote align=”right”]By Amadou LÔ [/su_pullquote]
Order or disorder? Stability or flexibility? Control or ‘laissez faire’? Issues linked to the management of long-term collective action have long been presented in a binary logic where choice fell within the scope of exclusivity. Today more than ever, the development of competitive strategies involves a logic suited to economic dynamics whose trends appear contradictory at first glance. At the same time, the evolution of collaborative practices and spaces are playing an important role in the transformation of our ways of working. The company Fab Lab is a manifestation of this which is interesting to analyse.
What is a company Fab Lab?
Recently, a new collaborative workspace dedicated to exploration was born: the Fab Lab. The Fabrication Laboratory  – commonly abbreviated to Fab Lab – is a workshop given over to innovation and rapid prototyping. It’s a space where people are free to come and go, swap ideas in a non-formal setting. The Fab Lab was developed at the Massachusetts Institute of Technology (MIT) by professor Neil Gershenfeld in the 2000s. It’s a place that’s open to all, complete with equipment ranging from simple – like a soldering iron – to very sophisticated – like a 3D printer or a laser cutter. Creative and prototyping activities emerge through the interactions of an active community made up of individuals with a range of skills. This all takes place without hierarchies or orders being given.
Originally, Fab Labs were open areas, free and independent facilities located in community settings, whether educational or open to the general public. Up until now, this type of facility existed only in this form. Today, though, big businesses are getting interested in the concept and wish to put it to use in their own organisations in order to stimulate innovation. By opening its exploratory activities to members of production teams, the company Fab Lab poses an interesting challenge: how to reconcile employee production activities and exploratory activities. We worked within the innovation directorate of the French car manufacturer Renault, which has been a pioneer of this process since 2011.
The company Fab Lab, a chance for employees to explore
The Renault Group operates an internal Fab Lab which is a carrier for the upstream phase of the innovation process which is transversal to Renault’s matrix organisation. This process is defined as a regulatory process for all the “vehicle projects,” using precise signposting and a formal distinction in the distribution of functions. However, the people belonging to units of this process dedicated to production activities have complained about poor access to exploration activities.
The Fab Lab was therefore developed within Renault with the aim of bringing new opportunities for employees to get involved in exploratory activities alongside their usual activities. Through its location, its charter, its activities and its digitally-operated machines and tools, the company Fab Lab aspires to be a codified space which is also inclusive and permissive. It was conceived to be directly accessible by employees, so that they can individually carry out exploration activities alongside their production activities, ie, develop their individual ambidexterity.
Practices promoting employee ambidexterity within the company Fab Lab
We have been able to put forward four main practices (table) which characterise the Fab Lab and which explain the emergence of this dynamic: improvisation, innovative design, DIY and rapid prototyping.
Table – practices promoting employee ambidexterity within the company Fab Lab
|Practices within the Fab Lab||Promoting employee ambidexterity||Employee comments|
|Adopting a heuristic process and offering employees the chance to adapt their projects at any time||“Ah, but we didn’t have a model.. I tell you, I went in convinced it had to be done, but we took our first steps with enthusiasm”.|
|Innovative design||Offering employees methodological support in their creative and innovative activities||“We need people who have time to help us get into this deeply, and that’s where I can see that it’s very complementary. We’re more on the operational side, so there are things that we might miss, with the Fab Lab methods, we can get a wider and deeper perspective, and because of that we come up with different ideas than we would usually.”|
By manipulating and reorganising what is available, individuals learn to cope with a lack of resources and surmount conceptual obstacles “by doing”
|“People who try to explain things with slides when they’ve never even touched the products they’re talking about are fooling themselves! You need to touch things, see them, put them to use. And the Fab Lab helps us with that, with making little models very quickly, with creating little processes very quickly, and to turn our ideas into reality.”|
Through activities that bring ideas to life and accelerate the development of innovative projects
|“And what also happened here is that we have a concept that’s a bit complicated and which we can’t get to ripen, and that’s when Eric went to see someone at the Fab Lab, and they created a scenario and a model with the 3D printer which showed exactly what we wanted to do.”|
Our results show that the company Fab Lab constitutes a space conducive to exploration which supports employees wishing to carry out innovative projects alongside their usual production tasks.
It’s a space conducive to social interaction, open to all and all occupations, giving employees the opportunity to organise their time as they wish, between their usual occupation and their exploratory projects. Through this structure, employees get support for their exploratory activities, in the form of the practices we have highlighted – DIY, improvisation, prototyping and innovative design. The Fab Lab acts as an additional support alongside ordinary work, thus rectifying the lack of exploratory activities for employees. It therefore constitutes a facility for the development of employee ambidexterity.
As a physical space lending itself to social interaction, it is open to all and to all types of occupations, offering employees the chance to freely organise their time between their usual production activities and their exploratory projects. This facility allows employees to avail of assistance for their exploratory activities in the form of the practices already highlighted – DIY, improvisation, prototyping and innovative design. So the Fab Lab offers support that complements the workers’ ordinary activity by fulfilling employees’ need for exploratory activities. It therefore constitutes a facility which allows employees to develop ambidexterity.
The in-house Fab Lab offers an opportunity for businesses to use the digital revolution to deal with and adapt to the ever-changing environment of the markets and innovative practice. By offering employees in production units the chance to carry out exploratory activities, we’ve seen that the in-house Fab Lab plays the role of a valuable tool and a support for emerging employee ambidexterity. It takes the form of a safe space for exploratory activities and offers every employee the chance to manage their own work, between production and exploration, and hence to become ambidextrous.
We saw that when offering employees in production roles the opportunity to carry out exploratory activities, the internal Fab Lab is a useful tool and a support to the emergence of employee ambidexterity.
[su_spoiler title=”Methodology”]Table 1 summarises our collection methodology and the analysis of our research.
Synthesis of the methodological framework of our research
|Our research was qualitative. The case study being the preferred methodological approach for exploring and understanding a complex phenomenon, we carried out a single, illustrative case study as part of this exploratory and descriptive research. Faced with the inherent complexity of our research subject and therefore the difficulty of drawing firm conclusions, we opted for an abductive reasoning process.|
|Data collection and processing method|
|We worked with Renault from September 2013 and we stopped gathering in June 2014 – a period of 10 months. However, our collaboration is ongoing. Everyone was aware of our research activities, so we opted for the observer-participator model because the aim was to understand Renault’s innovation processes on three levels: the official version, the employee version, and our own observations. Thus, our empirical work is based on semi-directed interviews carried out with different players in the company (managers, Fab Lab members, innovation specialists and non-specialists). Over 43 days at the site, we carried out 42 semi-directed interviews of an average duration of 1 hour and 26 minutes, all recorded and transcribed in their entirety. We also kept a working journal where we were able to note the context of our observations during the creativity sessions and meetings we attended. Finally, we had access to a number of internal documents which allowed us to get to grips with the way the business is organised. Our data collection therefore adheres to the principal of data triangulation, and is therefore valid as a research framework.|
To establish an innovative business model, disruptive start-ups use a strategy resting on two complementary processes: building a discourse which will engage clients and partners in the new ecosystem, also known as framing, and continuous adaptation of their business model in response to the needs of clients. This will be illustrated by the case of Salesforce versus Siebel in the business software industry at the start of the 2000s.
Cases of successful disruptive innovation, where a start-up manages to radically transform the functioning of an industry, remain exceptional. Among the best-known are Amazon with the distribution and sale of books or Netflix which revolutionised the film distribution industry in the United States. They have resulted in the creation of a new business model which shifts the industrial ecosystem’s centre of gravity away from the historic leader and towards the start-up, and ends up creating a new ecosystem around the start-up. Business
model innovation is characterised by new sources of value creation, the arrival of new clients and partners and the implementation of a new kind of organisation, which rivals the business model of the historic leader and gradually replaces it.
Revealing one’s intentions from the outset
Up until now, studies of disruptive innovation have been more interested in the reaction of existing businesses, and much less in the manner in which the start-up succeeded in establishing its business model. Hence, the importance of understanding the processes set
in motion by the disruptor, which starts off with slender means with which to attract clients, partners, the media and analysts, and ends up taking the lead over an established and much more powerful competitor, and in some cases, making it disappear.
This is the process that we call the disruptor strategy, whose aim is to reduce uncertainty in order to engage consumers and partners as players in the creation of the new ecosystem: from the outset, in order to get their attention and support, the start-up reveals its
intentions and ambitions through framing, ie, the construction of an effective discourse and presentation. At the same time, it must adapt its business model and its product to achieve the best possible offer for its clients and partners. The combination of these two actions
creates a virtuous circle and puts the historic leader on the horns of a dilemma: retaliate at the risk of legitimising the new business model, or do nothing and risk being overtaken.
Salesforce and the emergence of the cloud
The study of the emergence of Salesforce between 1999 and 2006 against Siebel in the management and client relation (CRM) software sector illustrates the concept of disruptor strategy. Originally, software publishers (Siebel, SAP) sold their clients CRM software and
costly products associated with maintenance and consulting services. Salesforce’s innovation consisted of coming up with a much less expensive business model, based on cloud computing, with SaaS services available by subscription. In the first instance, this product was aimed at consumers who were not part of the Siebel ecosystem.
Before Salesforce had even launched, it was already addressing the ecosystem with a discourse emphasising its unique affinity with the “no software” revolution, and then its leadership, via press releases, interviews and dramatic stunts. This framing found an echo with start-ups and small-to-medium-sized businesses lacking the means to invest in a heavy system; with partners interested in the new ecosystem; and with the media and analysts who relayed and amplified Salesforce’s discourse and took up a more critical position in relation to Siebel. At the same time as new consumers were starting to get interested in the product, Salesforce was continually improving it to reach the standards expected by the majority of existing consumers. By combining these two framing processes and adapting the business model, the start-up had started to seduce Siebel’s clients and partners within two or three years.
In the face of Salesforce’s offensive, Siebel didn’t react at first. The firm stayed with its old model without taking account of the new needs created by a competitor which it didn’t yet perceive as such. It only launched into the cloud in 2003, three years late. A vicious circle, symmetrical with Salesforce’s virtuous circle, falls into place: poor responses, mounting criticism in the media and from analysts, mass exodus of clients and partners to the new ecosystem. Finally, in 2006, Salesforce became the leading supplier of CRM services, while Siebel was bought by Oracle.
A situation that was hard to predict
The Salesforce-Siebel case is a prime example of the establishment of a new business model. It highlights the importance of these two complementary processes of framing and adaptation in the disruptor’s strategy. This is, of course, an individual case, but it shares elements with other cases of successful disruption like Amazon and Netflix. For businesses, there are a number of lessons to be learned from these results. For the disruptors, it’s about the importance of pulling on both levers at the same time, given that the temporal window is limited. That means they have to find a way to reveal themselves clearly, but without being too precise, so as not to limit their scope for adaptation. In its framing, Salesforce presented itself as the leader by stating that it was offering a better value product and that its service was cheaper, but without going into the key points of the new business model.
For the leader, it’s hard to know how to react. Siebel had logical reasons for not responding to Salesforce in a market sector in which – at first at least – it had no interest. It’s very tricky to predict whether a start-up will be successfully disruptive or not. The problem is that Salesforce gained a competitive advantage by learning faster than Siebel. Siebel didn’t ask itself the right questions for several years, and the needs of Salesforce’s start-up clients were ahead of the needs of its own clients. When the firm did finally take action, its cloud didn’t function as well as Salesforce’s one, despite an R&D budget and far greater human resources.
To avoid this, existing businesses must therefore develop a strategic vision, an understanding of what is happening in their environment, in order to try to learn more quickly than the start-ups and be attentive to the market of tomorrow. But it’s very difficult for a firm to say that in 10 years’ time its clients will want products that are completely different from those it has on offer today.
This article is a synthesis of the publication “An Ecosystem-Level Process Model of Business Model Disruption: The Disruptor’s Gambit”, published in the Journal of Management Studies. It presents the results of a longitudinal study carried out by Yuliya Snihur (Toulouse Business School), Llewellyn D.W. Thomas (Imperial College London, Universitat Ramon Llull) and Robert A. Burgelman (Stanford School of Graduate Business), from the case study of Salesforce and Siebel, combining a theoretical approach and the analysis of a documentary base of historic data.
Any company faced with a radical innovation in its sector of activity will hesitate between indifference and reaction, because of the impossibility of foreseeing whether the innovation is a radical breakthrough or a product that is doomed to fail. To resolve this dilemma, the solution might be to identify potentially disruptive innovations and assess their risk for established stakeholders, as illustrated by the case of the satellite industry.
The miniaturisation of satellites has affected space industry markets over the last 20 years. On the offer side, new manufacturers have emerged, marketing small satellites at a lower cost; on the demand side, there are new clients that see this innovation as an opportunity. Quite logically, the well-established manufacturers, positioned in the segment of traditional large-size satellites, are wondering whether they should consider these radically new technological choices as a threat?
Disruptive innovation is difficult to observe until it’s happened
Our research, conducted in the framework of the Sirius chair (http://chaire-sirius.eu), aims to answer this question, which first involves clarifying the concept of ‘disruptive innovation’. This is necessary because the expression, which is widely used and sometimes mistakenly, makes established players in the sector anxious, while fascinating and intriguing them, without it being entirely clear what exactly we are talking about.
A disruptive innovation is a particular case of radical innovation which modifies the structure of an industrial sector and whose effects may lead to existing companies being replaced by new competitors. The difficulty is that it is only possible to be certain that it is a disruptive innovation in the long run, a posteriori, once it has staked out its place or even driven out the oldest technologies and the companies that marketed them. In the short term it appears rather to be a less efficient product or service, aimed at a marginal clientele, an immature technology proposed by small companies with limited resources, less know-how and less knowledge of the market.
Because of these characteristics, it is very difficult to distinguish between a real disruptive innovation which has just been introduced and so requires that existing companies react, and an innovation destined to fail, that they can comfortably ignore. This creates uncertainty about what they should do, which is known as the innovator’s dilemma, since existing companies should promptly assess the danger and possibly invest in the new market while the disruptive innovation is not yet a threat, if they are to limit the consequences. If they wait too long, it might be too late.
A classification for anticipating the threat
What matters to company executives is to be able to anticipate trends and thus, if possible, to be able to use forecasting tools. Since it is not possible to affirm at an early stage that an innovation is disruptive, the solution is to try and determine in the short term whether it has the typical characteristics, in other words whether it is a potentially disruptive innovation and if so what type of threat it is likely to pose to well established stakeholders.
Not all disruptive innovations have the same consequences: some lead to complete substitution of the old technology by the new one and thus pose an extreme threat, the typical case being that of silver-based, emulsion film photography wiped out by digital photography; other innovations do not entirely replace the initial products. This is the case in air transport, for which low-cost companies have captured only some of the clientele of traditional companies, and in telephony, where landline technology continues to coexist with mobile technology. These examples are characteristic of three types of disruptive innovation for which only the first is associated with a high risk of the pre-existing market disappearing. In the two other cases, the threat appears to be lower for established companies.
Small satellites, a limited threat
What then is the situation for the space industry? Given this conceptual framework, how should well established stakeholders react to the development of small satellites? According to the parameters chosen for our theoretical model, small satellites have most of the characteristics of potentially disruptive innovation: lower technological performance with respect to the requirements of the traditional main customers; they are less complex; they either cost less or on the contrary cost much more, for instance in the case of constellations of small satellites; they offer the perspective of introducing new performance criteria such as the possibility of designing, building and launching a new satellite in a very short time or again the improvements offered by constellations in low Earth orbit.
However, an analysis of the demand for these new satellites shows that they are intended mainly for new customers, which means that we can exclude the hypothesis of a disruptive innovation affecting an existing market, which is really the main risk case for manufacturers. Those who buy them can be divided into institutional customers from emerging countries, which do not have sufficient resources to launch conventional satellites, and private top-of-the-market customers with new needs for low orbit constellations, which conventional satellites do not meet.
Thus, small satellites are indeed a potentially disruptive innovation but they only pose a slight threat to well established stakeholders. Despite the structural changes they might lead to for this industry, there is not much risk that they will entirely replace conventional satellites. This in no way determines either their ultimate success or failure.
[su_spoiler title=”Methodology”]This study was conducted by Victor dos Santos Paulino (TBS) and Gaël Le Hir (TBS) in the framework of the Sirius chair, on a topic proposed by the chair’s industrial partners. For the theoretical part, the authors reviewed the existing literature on the theory of disruptive innovation, which enabled them to draw up a table classifying the characteristics of potentially disruptive innovations. They then applied this model to the satellite industry while referring to several sources of information (information published by manufacturers, sectoral information, interviews with experts, databases). The study was published in the Journal of Innovation Economics & Management in February 2016 under the title “Industry structure and disruptive innovations: the satellite industry”.[/su_spoiler]
The case of innovation in the space industry
Innovation is one of the major themes in management. The capacity to innovate is considered to be critical for businesses to succeed. However, if we look at the space industry, we can see that innovation should be bridled with caution if a strategy is to succeed.
Conventional wisdom claims that the rapid adoption of new technologies improves the performance and survival of companies. Already at the beginning of the 20th century, Joseph Schumpeter had demonstrated the link between innovation and industrial success. In the 1990s, other scholars, such as Joel Mokyr, followed suit while explaining the inertia (the slow adoption of new technology) as being due to the phobic and irrational attitudes of managers. Against this backdrop, the space industry provides an interesting, and even paradoxical, example: this highly technological sector is a symbol of innovation, yet it considers it necessary to adopt a cautious approach. This is a requirement for telecommunications satellite operators, for whom reliability is more important than novelty, a factor that entails risk.
Uncertainty in the space industry
Innovation is a complex phenomenon that does not automatically guarantee success, progress and profits. For example, it has been demonstrated that over 60% of innovations led to failures. In addition, many companies legitimately postpone the adoption of innovations in several cases: for example, when an innovation would cannibalize an existing product or make it obsolete, or when the costs turn out to be too high compared with the expected profits. Do these factors explain the inertia-based strategy observed in the space industry?
By its very nature, the use of new technology by the space industry entails a risk: ground testing of a component, even under conditions that simulate space, may not accurately predict its behaviour in flight. It may perform perfectly, or prove faulty and no-one can be sure ahead of time! The result is that satellite manufacturers tend to favour an inertia-based strategy with which technological changes are adopted in an extremely cautious manner. Only tried and tested innovations are implemented. The cost of failure makes both manufacturers and their customers behave cautiously.
Reliability is a source of competitive advantage in space telecoms
Caution features strongly in the space telecommunications sector, because the reliability of satellites is a major competitive advantage. To ensure the greatest reliability, manufacturers have set up perfectly tuned organisations and processes. This is why the cycle of design, development and manufacture of satellites is broken down – and must continue to be so, into successive phases: Phase 0 > Mission analysis; Phase A > Feasibility study; Phase B > Preliminary design; Phase C > Detailed design; Phase D > Manufacturing and testing; Phase E > Exploitation; Phase F > Decommissioning. While this approach helps ensure high levels of reliability, it also brings with it considerable structural inertia.
This need for reliability and stability leads space manufacturers to adopt information and communications technologies that have the least impact on the organization. However, it also leads them to not question technological choices for space telecommunications, choices that increase reliability, but do not allow any savings in production costs. Serge Potteck, a specialist in space project management, emphasises, for example, that to transmit a signal, engineers prefer to design antennas with a diameter of 60 cm in order to guard against possible malfunctions, whereas a less costly 55 cm antenna would suffice.
Differences between segments in the space sector
This analysis, however, needs to be refined for each of the different segments that make up the space sector. They can be classified into three groups. The first consists of telecommunications satellites and rockets (launchers). In this segment, the cost of failure would be very high. It would penalize the manufacturer, who would have produced a non-functioning satellite as well as the company that operates the launchers and markets launch services, but, also, all the players involved in the business plan. A failure can cause a delay of several years in the marketing of new telecommunications services to be delivered by satellite.
The second group consists of spacecraft built for scientific or demonstration purposes, and as always, the rockets used to launch them. The governments or space agencies that commission them are not subject to the usual profitability requirements. Here, disruptive technology and its associated risks are part and parcel of a project.
The last group overlaps the space industry and other industries. It encompasses, for example, the tools to operate the geolocation capabilities of the Galileo constellation or the distribution of digital content. In this segment, stability is seen as detrimental to the development of new markets.
An inertia-based strategy… but only at first sight
While the particular environment in which the space sector operates tends to dampen its ability to experiment, it does not entirely prevent innovation. Inertia-based strategies are, in fact, largely an appearance. What we refer to as “inertia” is, in fact, a genuine innovation-dynamic: any new technology will be studied carefully before being tested, or not, on a new spacecraft, and before its possible subsequent integration. Could such a strategy, therefore, ensure the survival of a market in certain cases? To consider it as a failure to be countered would be a mistake!
The space industry would probably not innovate much if its only clients were commercial satellite operators. However, space agencies are willing to finance experimental spacecraft, thus accepting the financial risk associated with possible failure. It is thanks to them that the manufacturers of commercial satellites are able to validate the technological choices available to them, since they have proven their reliability.
[su_note note_color=”#f8f8f8″]From my publications, ” Innovation: quand la prudence est la bonne stratégie [Innovation: when caution is the right strategy]”, published in TBSearch magazine, No. 6, July 2014, and ” Le paradoxe du retard de l’industrie spatiale dans ses formes organisationnelles et dans l’usage des TIC [The paradox of the delay of the space industry in its organizational forms and in the use of ICT],” published in Gérer et comprendre [Managing and understanding], December 2006, No. 86[/su_note]
[su_spoiler title=”Methodology”]The analysis of the organizational and technological paradox that characterizes the space industry is based on several types of information: the theoretical literature available (Hannan and Freeman, 1984; Jeantet, Tiger, Vinck and Tichkiewitch, 1996); the work done by engineers in the sector (Potteck, 1999); and field observations made between 2003 and 2007 at one of the leading European prime contractors manufacturing satellites and space probes.[/su_spoiler]
[su_pullquote align=”right”]By Lourdes Perez[/su_pullquote]
Contrary to conventional wisdom, small businesses are not condemned to be always at a disadvantage in their relations with large ones. They may have much to gain, provided they find a suitable mode of operation that avoids them finding themselves in competition when it comes to sharing the value created.
Under what conditions can both companies in a commercial partnership benefit fully and fairly? Until now, there has been something of a consensus on this issue: above all, the two companies in the partnership needed to be of equivalent size. As the profits from the partnership (development of new products, winning new markets, creation of additional income) are seen as a cake to be shared, they should be distributed according to the respective size and contributions of each partner. Seen from this point of view, an asymmetric partnership between a large company and an SME would most likely be less beneficial for the latter. Moreover, the literature on the subject generally stresses the risks for SMEs, which lack the weapons to defend themselves in this ‘coopetition’ relationship (cooperation-competition).
Complementarity rather than similarity
In opposition to this commonly-held idea, our study shows that on the contrary asymmetrical relationships offer opportunities for small businesses to innovate. This kind of relationship is virtually inevitable in the context of the globalized, ultra-competitive economy, where the most dangerous posture for a small company is to remain isolated. There are many examples of asymmetric partnerships, particularly in predominantly technological sectors, which have been found to be just as fruitful for “small” as for “large” companies. In many such cases, partners have been able to create relationships based on complementarity, which, in the end, is just as important as similarity.
This does not mean denying the risk of failure. The risk remains, but is far from insurmountable, as long as a strategy is devised to meet the challenges of this type of partnership: first, the difficulties of communication related to the differences in scale between the two structures (it’s rare for the head of an SME to have direct access to the Managing Director of a large company); and secondly, the differences in organizational structure and ways of working.
If the small business systematically approaches such a relationship with due respect for a number of basic rules, it increases the chance of a profitable outcome. To reach this conclusion, we analyzed a successful partnership between a small Spanish seafood company that wanted to extend the time it could conserve its shellfish and a large Italian company in the energy sector. From this case study, we developed a model that summarizes in three key steps the approach that a small business should follow to avoid the pitfalls generally associated with asymmetric partnerships.
Three basic steps
The first step requires the selection of only a small number of partners. An SME does not have the means to commit itself seriously to multiple partnerships with large companies because it lacks time, logistical organisation and resources. It therefore has every interest in building a lasting alliance with a partner whose strategic objectives are complementary to its own. In our case, the two companies had very different motivations for forming a relationship: whereas the SME sought a technological solution, the large company saw an opportunity to enter the Spanish market, in a sector where it was not previously present. There was therefore no question of sharing the profits of the partnership, as they were not the same for each partner.
The second step is the construction of a strong and committed relationship that offsets the imbalance between the two structures. This requires a serious commitment on the part of the SME, which must nominate a “champion” within the company, i.e. a privileged contact person, with sufficient clout in the organization, someone who is respected throughout the company and who is capable of defending the project and driving it forward in spite of any resistance and obstacles that may arise.
The third step is to develop proposals of mutual value. At the beginning of the partnership, the SME and the large company each pursue specific objectives. But once the project gets under way, some appear unattainable and others incompatible, while new ones appear. The important thing here is to find the appropriate balance between obstinacy and flexibility: to be able to hold firm to one’s positions while taking the partner and unforeseen events into account, and being prepared to rethink the initial objectives. This requires an ability to listen, an open mind, and knowing the partner, its objectives and its motivations.
100% benefit for each side
The success of this strategy clearly shows that there is no reason why an asymmetrical partnership should inevitably be less beneficial to the smaller partner. In our case study, each partner obtained 100% of what it was seeking, because they had expectations that were in no way mutually exclusive and because they were able to build their compatibility together. This new perception of asymmetry in a cooperative spirit, rather than as an unequal balance of power, opens new perspectives for the understanding and the management of relations between unequal partners.
[su_note note_color=”#f8f8f8″]References: Based on an interview with Lourdes Pérez and the article “Uneven Partners: managing the power balance”, Lourdes Pérez and Jesùs J. Cambra-Fierro, Journal of Business Strategy, 2015.[/su_note]
[su_spoiler title=”Methodology”]Lourdes Pérez and Jesús J. Cambra-Fierro undertook a qualitative case study of two companies, a Spanish SME and a large Italian company, engaged in an asymmetric partnership. The information collected was from a documentary survey (public information, sectoral information, databases) and a review of the scientific literature. Interviews with several qualified people in each company, based on open-ended questionnaires, helped the researchers determine the major themes of the study and build a matrix. The conclusions of the study are a synthesis of these different sources.[/su_spoiler]
[su_pullquote align=”right”]By Stéphanie Lavigne[/su_pullquote]
Quite unexpectedly, those European companies which invest the most in Research & Development (R&D) are also those whose majority shareholders are institutional investors (and particularly pension funds located in English-speaking countries) whereas we expected to find so-called ‘strategic’ investors (the State or families) that are generally believed to support a company’s growth policy and therefore also its innovation policy.
The advent of institutional investors in the 1990s led to a radical change in equity breakdown in European companies. Today, 50 to 60% of the capital of European groups listed on the stock exchange is held by pension funds and mutual funds (which manage other peoples’ money). Now, as leading shareholders, they have imposed their own governance principles and value creation strategies, demanding about 15% return on investment for the households whose savings they manage.
To achieve this level of return, companies are implementing financially-driven strategies with shorter investment periods, so that they can deliver ever-increasing dividends to their shareholders on a yearly or even a six-monthly basis. But is this short period of time compatible with a given company’s growth and with its R&D policy in particular?
Relationship between share ownership and R&D policies
In this study, we have tried to establish a relationship between the equity breakdown and innovation policies of major European companies.
A review of empirical studies undertaken so far reveals that they relate almost entirely to the North American market and yield contradictory results. Two opposing theories have emerged regarding the influence of institutional investors: one of the theories asserts that these investors believe in short-term profitability only and do not encourage high-risk innovation policies; the second theory, on the other hand, acknowledges the control exercised by these investors and their positive influence on innovation policy, which ensures the company’s long-term profitability.
Our study shows that in Europe, the more companies’ shares are held by institutional investors the more they spend on R&D whereas we were expecting to find strategic investors such as governments or families that are known to support companies with patient growth policies. It seems that the crucial factor is the investment period of these institutional investors: the longer the period, the greater the likelihood of the company committing to an innovation policy. This may seem insignificant, but the findings have never before been demonstrated in a multinational context (a sample of 324 European companies) over such an extended period of time (tests between 2002 and 2009).
“Patient” investors versus “impatient” investors
One of the major conclusions of our study highlights the detrimental effect of short-term investor attitudes on the innovation strategies of companies, which actually need the support of long-term investors in order to carry out their R&D policies.
When analyzing how the investment period influences the innovation strategies of European companies, we compared companies having short-term or “impatient” investors (with an investment period of less than 18 months) as majority shareholders with companies where long-term or “patient” investors are the majority shareholders. Our findings show that R&D spending is higher when the majority shareholders are patient investors and lower when most of the company’s capital lies in the hands of impatient investors.
[su_note note_color=”#f8f8f8″]This article was written by Stephanie Lavigne and the article “Ownership structures and R&D in Europe: the good institutional investors, the bad, ugly and impatient shareholder”, co-authored by Olivier Brossard and Mustafa Erdem Sakinc, published in Industrial and Corporate Change (Volume 22, Number 4) – Oxford University Press, 5 July 2013.[/su_note]
[su_box title=”Practical applications” style=”soft” box_color=”#f8f8f8″ title_color=”#111111″]Our study of equity breakdown and the innovation strategies of European companies shows that we should not be disparaging about institutional investors but focus on the crucial issue of how long they leave their investments in companies.
With this in mind, companies must learn to identify the investment period of any new institutional investors promptly in order to build a privileged relationship with them and attempt to offset any short-term investors.
[su_spoiler title=”Methodology”]In our research, we conducted an empirical study of the relationship between the equity breakdown and innovation policies of leading European companies. We analysed a sample consisting of the 324 most innovative European companies (as listed on the EU Industrial R&D Investment Scoreboard between 2002 and 2009) and compared their R&D expenditure against financial and shareholding data obtained from the Thomson Financial data base.[/su_spoiler]
[su_pullquote align=”right”]By Akram Al Ariss[/su_pullquote]
In order to win points in the global search for talents, companies had better create a human resources policy that is attractive to self-initiated expatriates. Akram Al Ariss, research professor at Toulouse Business School, has carried out a review of scientific research on this important subject.
The scale of international migrations has been steadily increasing for many years: from 214 million in 2010, the number of people living outside their country of origin has risen to 232 million and may well increase again by 96 million people between now and 2050 according to United Nations estimates. Until now, the potential use of highly skilled talents from this population by organizations has not been paid much attention by researchers. The human resource management literature on this topic refers to these talents as ‘self-initiated expatriates’. Therefore, we use this term in the rest of this article.
A talent pool of self-initiated expatriates
Highly skilled talents who undertake an international mobility are a pool of human resources that could give host countries and companies a competitive edge in the global war for talents. This is especially the case with regard to self-initiated expatriates (SIEs) made up of individuals who have chosen to move of their own free will, and who are often highly qualified and experienced, with a rich linguistic and cultural background. But dipping into this pool first requires identifying, recruiting, developing, and retaining them as staff while satisfying their ambitions. In order to do so, companies need to devise and implement a specially-tailored Human Resources strategy.
This is particularly important for companies which are expanding internationally. For cost reasons, the classic pattern of expatriation of their employees with concomitant salary bonuses and various other benefits, has been replaced in the past few years by a more economical, “local plus” model, in which the employee resigns in order to be rehired under a local contract, with much less favorable conditions. But this system, which generates frustration and understandably dents staff motivation, often leads to a swift resignation, and is counterproductive. In reality, rather than the employee, it is the company that ends up losing in the long term: the saving is only illusory, since the “local plus” strategy creates a detrimental turnover of employees, leading to a brain drain in the company and damages its image in the eyes of potential expatriate candidates. The recruitment of self-initiated expatriates is undoubtedly an interesting way out of this impasse. Since they are already expatriates for non-professional reasons, they will more readily accept to work at local market conditions.
Removing obstacles to their professional integration
The question actually applies to every business: how to target and reach those with high added value individuals? One answer could be by simply taking into account their specific needs. The situation varies according to their experience as well as their countries of origin and host countries. Nevertheless, studies have shown that SIEs face a number of barriers and obstacles that limit their opportunities for integration in their host organizations and societies. Among the most commonly cited, we find the immigration policies of states, particularly regarding visas and work permits, recognition or not of qualifications and professional experience, barriers related to language proficiency and communication codes and, more insidiously, discrimination and stereotypes of all kinds. These difficulties are also exacerbated when it comes to women, who nowadays make up one out of two self-initiated expatriates. A company’s first responsibility is to recognize these obstacles and then help self-initiated expatriates to find a way round or overcome them in order to facilitate recruitment and enable them to find jobs matching their skills.
A differentiated HR strategy
Human resource (HR) managers’ strategy plays an essential role in two specific ways: through adapting their organizational recruitment and selection procedures, on the one hand, and through providing cultural training and development opportunities to these self-initiated expatriates, on the other. In terms of recruitment, HR practices must adapt to this expatriate population, not only to avoid excluding it (for example by neglecting its preferred communication channels or requiring local professional experience that, by definition, it cannot have), but also to attract it (for example by not restricting the job offer to a technical description of the proposed job but giving in addition general information on life opportunities linked to the job). For the company, the main benefit of this proactive and differentiated approach is not to miss out on this highly skilled labor.
The second priority is to encourage them to stay with the company by facilitating their integration and cultural adaptation. Research cannot provide a comprehensive and definitive answer as to why an SIE remains in a job, especially as these reasons may vary from country to country. However, HR management should strive to understand the motivating factors in order to implement appropriate development and retention solutions.
These are only a few indicators from research results. The development of a relevant HR strategy tailored for self-initiated expatriates is essential in any case. Of course, whatever happens, it’s a win-win policy for expatriates themselves, for whom the choice of mobility is then crowned with success, but equally for companies who manage to attract the best candidates, thus giving them a decisive advantage in global competition. Indeed, the international workforce is a source of diversity, creativity and innovation. The winning companies will be those that are capable of looking beyond the various stereotypes, discrimination and obstacles, in order to tap into this worldwide flow of human resources.
This article written by Akram Al Ariss and articles on “self-initiated expatriation and migration in management literature,” co-authored with Marian Crowley-Henry (Department of Management, National University of Ireland Maynooth), published in Career Development International (2013); “Human resource management of international migrants: current theories and future research”, co-authored with Chun Guo (Department of Management, Sacred Heart University, Fairfiels, CT, USA), published in The International Journal of Human Resource Management, 2015.
Further Reading (books):
- Self-Initiated Expatriation : Individual, Organizational and National Perspectives, Akram Al Ariss, Routledge, 2013.
- Global Talent Management : Challenges, Strategies, and Opportunities, Akram Al Ariss, Springer, 2014.
[su_spoiler title=”Methodology”]In writing the two articles referenced above, Akram Al Ariss and his two co-authors conducted a systematic review of the scientific research conducted on the subject of self-initiated expatriation.[/su_spoiler]