The Innovator Blog

Over the past twenty years the academic field of entrepreneurship has exploded. The number of journals publishing research in the area has increased significantly along with the overall volume of academic papers. Around the world there are now thousands of academics engaged in research relating to entrepreneurship and related activities. Against this background of scholarly expansion there lies the question as to what does all this research activity actually deliver that might help a practising entrepreneur?

In this first of a series of articles I will overview some of the leading journals in the field to see what practical value an entrepreneur might gain from this research. We start with the Journal of Business Venturing (JBV). First published in 1986 the journal has become one of the leading academic journals in the field of entrepreneurship, and boasts an impact factor of 3.062 and a 5-year impact factor of 3.849.

We start this review by looking at the Top-5 most highly cited papers from JBV. This is based on the number of citations since these papers were published and is a reflection of the impact that these papers have had on the academic community who are citing them in their own work. The data is drawn from Anne Wil Harzing’s “Publish or Perish” analysis.

The role of social and human capital among nascent entrepreneurs

The most citied paper is Per Davidsson and Benson Honig’s (2003) paper on “The role of social and human capital among nascent entrepreneurs”. At time of writing this paper had been cited 1,271 times or an average of 127 times a year since publication. This paper draws on a sample of 380 Swedish people who were engaged in the process of establishing a new business venture and tracks their activities over an 18 month period. Their behaviour is also compared to that of a control group of 608 people.

The paper’s findings suggest that “nascent” entrepreneurs seeking to establish a new business venture will get benefit from having parents, friends or other close associates who are already in business. Support and encouragement from family and friends is also likely to assist their start up process. It also suggests that some benefit can come from undertaking formal classes in business, but such education alone is insufficient to guarantee success. There was also no evidence that having support from third-party small business assistance agencies significantly enhanced success.

Another interesting finding is that past managerial experience outside the small business environment did not seem to predict whether a person would launch a new venture. This may suggest that managerial experience is not a foundation for entrepreneurial behaviour, even if it might assist in the management of the business post-launch.

The key finding from the paper from an applied perspective is the notion that social capital is an important element for nascent entrepreneurs. What this means is that people seeking to launch a new venture should invest in strengthening their social networks within the business community. This is likely to yield better returns than taking business courses or seeking help from business support agencies.

The role of networks in the entrepreneurial process

The second most highly cited paper is that of Sue Birley (1985) on the role of networks in the entrepreneurial process.  Since its publication it has been cited 1,184 times or around 42 times a year.

This study took place in St Joseph County, Indiana in the United States where it drew on a sample of 160 respondents. The questionnaire looked at the decision making process and experiences these people had had in the process of starting up a new business venture.

The paper's findings highlight the importance of formal contacts such as accountants or business support agencies in assembling the key elements of the business. However, family and friends were the most useful source of contacts in addressing local issues associated with the creation of these new ventures.  

From an applied perspective the paper suggests that nascent entrepreneurs seeking to launch a new business venture need to develop both their formal and informal networks. What is important is the ability to have access to an “efficient network”, one in which the entrepreneur can easily find assistance and support. At whatever point they might enter this network they can quickly have their needs diagnosed and be passed from contact to contact until they get the necessary information or advice they need.

Initial human and financial capital as predictors of new venture performance

The third most highly cited paper is by Arnold Cooper, Javier Gimeno-Gascon and Carolyn Woo (1994) into initial human and financial capital as predictors of new venture performance. Since its publication the paper has been cited 1,171 times or an average of 61.63 times a year.

Another study from the United States, the research drew a sample of 2,994 people who had launched a new business venture in the previous 17 months. Follow up surveys were undertaken over a three year period to investigate their progress. The final results were drawn from 1,053 people, 668 who had survived and 385 who had abandoned their venture.

The key findings from this study were that business survival and growth appeared to be related to the level of education the person had, with higher levels of education seemingly related to greater problem solving skills. Also important to education seemed to be the individual’s commitment, motivation and discipline.

Racial background (as an American study whether the person was black or white) seemed to also be important. People from racial minorities were less likely to succeed than those from mainstream ethnic backgrounds.  This was attributed to such people lacking adequate business contacts upon whom they could call for support, finance or customers.

Gender also seemed to be important, with males generally achieving higher rates of growth than females. Once again the authors suggest that this might be a function of the men having superior networks than the women.

These novice entrepreneurs were also found to have greater probability of survival if they had parents who owned or had owned a business. However, it did not seem to enhance their level of business growth. Yet the firms that were founded by multiple owners were the most likely ones to achieve higher rates of growth. Management expertise alone was not viewed as having a strong influence on business performance.

The key conclusions the authors draw from their research for practical applications is that resources are important for the survival and growth of a new business venture. People who seek to found a new business should proceed with caution if they lack resources, and women and minority groups may be disadvantaged due to their lack of resources, networks and past experience.

Differences between entrepreneurs and managers in large organisations

The fourth most highly cited paper is by Lowell Busenitz and Jay Barney (1997) entitled “Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decision-making”. This paper has been cited at least 1,065 times since publication or an average of 72.25 times a year.

This study aimed to explore the differences between entrepreneurs and managers in large firms and drew on a sample of 124 entrepreneurs and 95 managers from large firms. The entrepreneurs were selected on the basis that they had launched their own business and had been in operation with it for an average of 1.7 years. The managers were selected on the basis that they had been given responsibility for at least two functional areas within their organisations.

The paper sought to explore how these managers approach decision making. Particular attention was given to situations of uncertainty and complexity, and their use of biases, heuristics and overconfidence in making decisions.

The findings suggested that entrepreneurs are likely to be more overconfident than managers from larger firms when making decisions. Further, it was suggested that entrepreneurs will use “representativeness” in their decision making, or what has been called in other papers “the law of small numbers”. This means that these entrepreneurs extrapolate from a small base of data to a much more general conclusion as to how the majority of situations will occur.

From an applied perspective the paper’s authors suggest that the tendency is for entrepreneurial people to use biases and heuristics in decision making and that this is necessary for them to take the calculated risks that they must take. Windows of market opportunity are often short and fleeting. It is not usually possible for entrepreneurs to obtain all the information they need to make a fully objective decision. Yet entrepreneurs may also risk making bad decisions due to their tendency to employ cognitive biases.

This intuitive decision making may be beneficial in the early years of a new business, but may not be appropriate over the longer term. For larger firms, the study suggests that managers who wish to encourage entrepreneurial behaviour need to understand the need for this type of decision making. While it may not be appropriate within a more considered, methodical organisational culture, it should not be dismissed or suppressed. However, in some cases it may be best to let such entrepreneurial people leave the firm and set up their own businesses.

What do venture capitalists do?

Our final paper is by Michael Gorman and William Sahlman (1989) titled “What do venture capitalists do?” This paper has been cited 1,065 times or around 44.38 times per year since its publication. The paper draws a sample of 49 venture financiers from the United States who undertook a survey sent to them by the researchers in 1984.

The paper describes that these individuals, who were working for formal venture capital firms, spent about half their time monitoring an average portfolio of nine investments. They also sat on the boards of at least five of these firms and spent around 80 hours a year on site at each of these businesses and a further 30 hours on the telephone with these firms’ management teams.

Their most important role was the raising of finance for the firms in their portfolios and also giving strategic level advice and assisting in the recruitment of management personnel. These venture financiers had the power to replace the senior managers from the firms over which they had financial ownership. They had replaced an average of three CEOs during their careers.

The authors conclude their paper with the observation that venture capital financiers play an important role in finding new investment opportunities and add them at a rate of two businesses each year. As noted above, they devote around half their time looking after their portfolio of investments and sit on the boards in many cases. They are generally very active in working with these firms although only for short periods and without executive responsibility. Their role is more of a strategic advisor and source of new resources. Most of their failures were attributed to poor management within their investment firms.

Five critical tests of relevancy

 According to Thomas and Tymon (1982) there are five critical tests of relevancy in managerial research studies. These are:

1. Descriptive relevance – do the research findings capture the phenomena encountered by the business practitioner within their organisational setting?
2. Goal relevance – does the research align with the objectives and goals the end-user practitioners are seeking to achieve?
3. Operational validity – can the end user practising manager actually implement the findings by manipulating the same independent variables to achieve the same outcome on the dependent variable?
4. Non-obviousness – are the findings able to offer information that is more informative than what the common sense theory of the practitioner already suggests?
5. Timeliness – are the findings published in a manner that allows the practitioner to use it to deal with real world problems when they need it?

This provides a useful framework in which to assess the practical value of much of the research that has been published around the world in the academic journals. When we look at these five most highly cited papers in one of the entrepreneurship field’s leading journals what conclusions can we draw as to their managerial relevance?

It is clear that the first three papers are related closely to the issue of new venture creation and the factors likely to enhance the survival of such start-ups. This has been a key area of interest for academics within the entrepreneurship field for much of the past thirty years.

The overall pattern of findings from these three studies is that nascent and novice entrepreneurs are likely to benefit from building up their social network. This social capital is likely to be of more value to them than going to business education courses or even seeking help from formal support agencies.  However, they may still get benefit from having a network that can include formal sources of support as these can be useful at different times. Having good resources and networks to call upon are also important to survival and growth.

In terms of the five critical tests it may be concluded that these three studies have some descriptive and goal relevance for people seeking to start up a small business. However, they are less relevant in terms of their operational validity and “non-obviousness”. The ability for nascent and novice entrepreneurs to expand their social capital and resources is easier to recommend than to achieve. The papers also did not really offer any substantial recommendations as to how nascent or novice entrepreneurs might achieve these outcomes.

It might also be argued that these findings are, or should be, fairly obvious to people who are seeking to launch a new venture. Perhaps the finding that formal education, formal support agencies or even past managerial experience may not be as significant as may first be thought is a non-obvious finding. However, the papers do not really give much guidance as to why this is the case or how this problem might be addressed by policy makers.

The fourth paper in terms of the first three tests may be relevant as any practising entrepreneur will acknowledge that they probably do follow a fairly intuitive approach to decision making. However, this would seem fairly obvious to such individuals. The paper is more likely to be of benefit to managers from the larger organisations. Here they could take away the understanding that they should be careful how they encourage and seek to manage entrepreneurial people. Risk averse managers will find entrepreneurs difficult, perhaps even threatening.

The fifth paper is largely descriptive in nature but reflects the role and behaviour of formal venture financiers. It offers relatively little to the entrepreneur other than the observation that to take on formal venture capital is likely to subject your business to a more rigorous outside scrutiny. Further, you are likely to find yourself under pressure to step down from control over your company if things do not go as planned and shareholders become restive.

In future articles I will examine some of the more recent research published in the JBV and also the top 5 papers from some of the other leading journals. It should be recognised that these observations are not meant as a review or critical assessment of the methodology used by these studies. Nor is it a criticism of their contribution to the academic theory relating to entrepreneurship. My purpose is more to find out what practical relevance these leading papers have for those who seek to establish and run their own business ventures, and for those who would hope to support them in this quest.

References

Birley, S. (1985). "The role of networks in the entrepreneurial process" Journal of Business Venturing 1(1): 107-117.

Busenitz, L., and Barney, J.B. (1997). "Differences between Entrepreneurs and Managers in Large Organisations: Biases and Heuristics in Strategic Decision-Making." Journal of Business Venturing 12(1): 9-30.

Cooper, A. C., Gimeno-Gascon, FJ., and Woo, C.Y. (1994). "Initial human and financial capital as predictors of new venture performance." Journal of Business Venturing 9(5): 371-395.

Davidsson, P., and Honig, B. (2003). "The role of social and human capital among nascent entrepreneurs." Journal of Business Venturing 18(3): 301-331.

Gorman, M., and Sahlman, W.A. (1989). "What do venture capitalists do?" Journal of Business Venturing 4(4): 231-248.

Thomas, K. W., and Tymon, W.G. (1982). "Necessary Properties of Relevant Research: Lessons from Recent Criticisms of the Organizational Sciences." Academy of Management Review 7(3): 345-352.

In an intriguing article in the Journal of Asset Management published in the March-April 2012 edition, Mark Summerfield overviews the battle between Apple and its many competitors. According to Summerfield, when the late Steve Jobs heard about Google’s decision to launch the Android operating system for mobile smart phones and tablets in 2010 he threatened to declare a “thermonuclear war”.

The primary strategy that Apple has followed throughout its history has been that of a closed operating system. When you choose to go Apple you enter an Apple controlled world and accept that everything is supplied by Apple.

During the 1980s the approach taken by Apple in computing was to keep their operating systems closed and only available on their machines. By contrast Microsoft embraced the IBM clones and built their business on software that could run across a wide range of hardware platforms.

For Apple users the benefits are a seamless and less “glitch” prone environment in which the Macbook, iPod, iPhone and iPad all work in harmony. The downside is that they can only use Apple software or Apple approved products.

Microsoft grew successful on the rise of the IBM PC clones in the 1980s and has held a dominant position in software with its Windows operating systems. Despite some initial hostility Apple and Microsoft reached an agreement in 1997 to allow Microsoft’s Office suite to run on Apple along with the Internet Explorer.

Enter Samsung

As the process of convergence brought mobile telephony and computing together into products such as the iPhone (launched 2007) and iPad (launched 2010) Apple innovated and secured dominant market position. Yet as with any open market there is competition and the launch of the Linux-based Android operating system in 2008 offered an opportunity for competitors to get into the market.

Korea’s Samsung launched its Galaxy S smartphone with Android operating system in 2010 and the Galaxy SII the following year. During the same period it also launched the Galaxy Tab, as a competitor to the Apple iPad. By 2012 it had sold over 30 million Galaxy phones globally and was reporting sales of over 2 million Galaxy Tabs.

Faced with this competition Apple sought to take legal action against Samsung claiming infringement of its intellectual property (IP) rights. It took similar action against other competitors including Motorola and HTC. Despite some initial success in Europe and Australia, the Apple claims for IP rights infringements were overturned.

Samsung is now free to sell its products and has modified the Galaxy Tab sufficiently to satisfy the courts that they are not identical to the Apple devices. Yet where is the future of mobile computer telephony heading?

Battle of the patent thickets

A key point made by Summerfield in his article is the power various companies hold in relation to their ownership of patents. A study of patents relevant to the mobile communications and computing industry suggests that Samsung is a major player in the sector. As shown in the following graph Samsung holds around 31,524 patent families compared to only 1,941 held by Apple or 8,887 held by Microsoft.

What is meant by “patent families” is the ownership of patents across a range of hardware and software application, with these typically registered in the three main patents offices in the United States, Japan and the European Union. These patent portfolios create a concentration of patents within specific areas of technology known as “patent thickets”. The diagram below illustrates cluster map of the various patent portfolios relating to mobile communications and computing in which companies such as Apple, Microsoft, Motorola and Samsung compete.

At the bottom left hand side of this “patent thicket” are patents relating to mobile and wireless networks access and transmissions. At the top right hand side are software applications relating to the internet. Lower right are cellular mobile network management and operations, while the top left hand side has handset designs, antennas and touch screen displays. In essence the cluster map shows the range of hardware and software patents that can be found in almost all the smartphones and tablets we use today.

Microsoft and Samsung’s patent portfolios

As illustrated in the diagram below are the range of patents owned by Samsung (shown in Red) and Microsoft (shown in Yellow). It can be seen that Samsung controls the largest range of patents and its technology is found inside many products, ironically a good proportion of Apple’s iPhone and iPad devices. Microsoft also has a strong presence, with strength in software.

Apple’s patent portfolio

For fiercely competitive Apple the amount of patents they own in the mobile communications and computing field is significantly less than their two major competitors. As shown in the following diagram, the main concentration of Apple’s patents is in the areas of audio process management and output (Hello Siri) and image processing and display (touch screen technology).

Yet the relatively small number of patents that Apple actually owns requires them to rely upon patents from the likes of Samsung and Microsoft for which they pay royalties. As noted by Summerfield, Samsung has been actively involved in the development of industry standards for mobile communications systems. Its work over many years since the emergence of the first GSM systems has made a significant contribution to the development of the currently mobile telephony and computing market.

Although Samsung has sought to negotiate with Apple in good faith over the use of its patents, Apple has tended to ignore these approaches and make use of technology using third party technologies by the likes of Qualcomm and Infineon that adhere to the standards set by Samsung and others who support industry standards.

Google’s wildcard

The patent wars that have been fought out between Apple and Samsung within the tablet market have tended to overlook the emerging threat from Google. Since its founding in 1998 Google has grown steadily to become one of the largest technology companies in the world. In 2011 Google acquired Motorola’s mobile communications business for $12.5 billion. This purchase gave Google ownership over a substantial patent portfolio. It is a wildcard for the internet giant.

As shown in the figure below, the Motorola/Google patent portfolio is quite substantial and strengthens its position in the ongoing patent wars. By controlling this substantial portfolio Google is able to better protect its Android market in mobile telecommunications and computing. With some 9,582 patent families across a wide spectrum of the patent landscape Google is well placed to match the technology position of Samsung and Microsoft, not to mention Apple.

Where to from here?

Of interest will be the future use to which Google may put its patent portfolio acquired at such high cost from Motorola. Technological convergence has thrown open the doors to significant shifts in the market landscape. I recall running a series of strategic management training workshops for Nokia Corporation in 2006. During a discussion of future competitive threats one particularly prescient manager made the comment that; “one day someone will put an aerial in an iPod and it will be game over”! Indeed the following year saw Apple enter the mobile telephony market with the iPhone.

Samsung was not viewed as a significant competitor to Apple in the mobile telecommunications market until its launch of the Galaxy range of products. The launch of the Galaxy Nexus Android smartphone in 2011 as a joint venture between Google and Samsung appears to signal a move by Google into the world of mobile telephony products.

Seeking to predict the future in the rapidly moving world of mobile communications and computing is fraught with risk. However, if the foundation of market competition is the control over patent portfolios we can expect Google to play a key role into the future.

The term 'business model' has been used a lot during recent years and it is not uncommon for entrepreneurs to talk about this concept. However, it may surprise you to know that the concept of the business model is not well supported by academic research and is often poorly understood. In an article published in Long Range Planning in 2010, David Teece noted: "The concept of a business model has no established theoretical grounding in economics or in business studies".

The concept of the business model emerged as far back as the 1950s but really came into prominence in the 1990s as a tool to assist the formulation of competitive business strategies for new, often high-tech, business ventures. 

Research undertaken by Alexander Osterwalder, Yves Pigneur and Christopher Tucci suggests that a business model is "a conceptual tool containing a set of objects, concepts and their relationships with the objective to express the business logic of a specific firm." It is an attempt by the firm's management to describe the value that the business can offer to one or more customers or market segments. It is also a description of the way in which that firm will need to be designed - in essence its architecture - in order to configure its resources to deliver this value and also make a profit for the owners.

So what then is a business model and how might it be employed?

In essence a business model is a conceptual tool designed to help managers think through the underlying logic of their business venture. It must define the value that the business can generate for customers, shareholders and employees. A basic business model comprises four primary elements: i) the customer value proposition; ii) the profit formula; iii) the key resources; and iv) the key processes.

Customer Value Proposition

The first of these elements relates to what is described as the customer value proposition (CVP). This is the means by which the business has managed to configure its resources to offer value to customers in a systematic and sustainable manner. It typically involves the ability to offer products or services that are either different due to innovation or value adding, or delivered at a much lower cost than competitors.

There are at least three important questions that should be asked when seeking to develop a CVP for a business model:

1. What are your target market segments? 
2. What do your target customers want? 
3. What is your overall customer value proposition? 

You might start by dividing up your customers into logical segments based on such things as their purchasing habits, level of expenditure per purchase, industry sector or whatever makes sense within your particular market. Segmentation is an important first step in developing a competitive strategy. Not all customers are the same and knowing what makes them interested in purchasing from you is critical.

Once you have identified your key customer segments you should seek to learn as much as you can about each one and determine whether you can satisfy all segments, or whether you need to focus on only a few. You should try to get a full appreciation of what target customers want from your business considering things like quality, service, price and features. There may be some need to trade off some of these and different customer segments are likely to have different priorities.

For example, an affluent customer may be willing to pay a premium price for more features or better service, while a less affluent one will be concerned more with price. Identifying what makes your customers tick can allow you to develop an attractive offer and to strategically position your business to gain a competitive edge.

Knowing what your customers want - or think they want - can allow you to configure your resources to deliver a CVP that will see your firm chosen in favour of competitors. However, you will need to make this CVP a unique offer that cannot be easily copied by competitors. This is where innovation can play a role, but also finding out what the customer may not yet realise they want (unspoken needs) and finding ways to deliver this.

Profit Formula

The second element within the business model is the profit formula. This refers to the process employed by the business that identifies how it will generate value for its shareholders while also offering value to customers.

An important component within the profit formula is the revenue model. This determines what price you should charge at a given volume of sales in order to cover your overhead or fixed costs so as to reach break-even and achieve any desired profit margins.

When considering your profit formula ask the following questions:

1. What is the revenue that can be generated for each product or market area?
2. What fixed and variable costs will be incurred in order to produce these sales?
3. What are the profit margins that each market segment can generate?
4. What are the main financial measures that can help you to fully assess the business model?

Each customer or market segment will have different capacity for sales volume and may offer long term growth or only a small limited opportunity. The cost of delivering your products or services to each market segment will also vary in different ways that impact on the amount of profit that can be generated at a given sales volume.

For each customer or target market segment you should examine such things as how price sensitive they are, the frequency of their purchasing and quantity of purchase. The time that each customer or segment may take to pay your business is also important as this can impact on your firm's cash flow cycle.

Key Resources

The third element of the business model relates to the key resources that are required by your business to deliver the CVP. These typically comprise the equipment, financing, people, skills and facilities needed to manufacture products or deliver services.  

There are at least four questions that you should ask when considering your key resources:

1. What are the core competencies (e.g. skills and abilities) required in order to deliver the CVP?
2. What alliances and partnerships should you form?
3. How best should you structure your team?
4. What physical facilities will you need to deliver the CVP?

To address the first of these questions you should list all the skills, abilities and resources that you will need to consistently offer your CVP to the customer or market segments. Look for areas where you may have gaps that need to be closed, or systems that need to be improved and record these for future attention.

The second question requires you to consider what new or existing alliances with customers, suppliers or complementary partners may be required to allow your business to deliver the CVP. Draw up a list of any current or potential alliance partners your business has that can help you to access resources you may lack, win new business or defend existing market share.

The third question relating to your team structure requires you to consider whether you have the right balance of people to enable you to consistently and competitively deliver the CVP. You should also recognise that how you organise your people may be just as important as who your people are.

The fourth question asks you to look at your firm's physical facilities and determine whether they are going to be suitable for where you feel that the business is going to be heading over the coming years. Buildings, technology, plant and equipment should all be reviewed.

Key Processes

The fourth and final element within the business model relates to the key processes that your business must follow in order to deliver the CVP. Such processes are embedded in the firm's operational and administrative systems.

Three questions are of importance here:

1. What key customer relationships must exist?
2. How can you ensure that the business can deliver its CVP?
3. What is the best way to configure the operational and administrative systems within the business?

In addressing the first of these questions you should draw up a list of the types of customer relationships that your business will need to develop within each target market segment so as to forge a competitive advantage. For example, some customers may want you to deliver products and services via direct and personal sales and service systems. However, others may prefer online or more remote contact.

For the second question you should look at the dynamics of each type of relationship that emerges from your assessment of these customer segments and ask whether you currently deliver value to these customers. Be honest and focus on the reality of your firm's performance not just what you may hope to be doing. A survey of your key customers that seeks honest feedback on your performance can help you to get this reality check. Where you find gaps or problems you must take steps to improve.

Once you have this information you should review your firm from a number of perspectives. Critically review your human resources management policies and practices to ensure that you are getting the best people and then helping to train and support them in their roles. Pay close attention to the underlying culture within your business. This can be difficult to monitor but it is very important. Often your best guide to this are your employees and customers who can let you know how they view your business and what makes it different from competitors.

At a more technical level you should review your rules, policies and operational management systems to ensure that they are running at best practice. Develop a set of key performance indicators (KPI) that can help you to monitor the way your business is running. Some of these KPI may be of a financial nature, but many will be related to customer or employee attitudes and satisfaction.

Delivering Value

The business model should build a bridge between your firm's strategic vision, mission and values so as to determine where you are heading over the longer term (e.g. 3 to 5 years), and your short term operational business planning (e.g. what you must do over the next 12 months).

Remember that your overall aim is to identify what your target customers want or need and then configure your firm's resources and process to deliver this CVP in a consistent and sustainable manner. If you have this in place and such activity will generate the level of profit formula you desire, you will have a strong and viable business model.  

©Tim Mazzarol 2011

There is a need for a more systematic approach to the management of innovation within the public sector that embraces information and communications technologies (ICT) seeks to push beyond simple process improvements, and builds linkages between agencies, the private sector and the wider community. This was a key message communicated by Mr Ron McFarlane and Professor Tim Mazzarol from CEMI at a presentation to 82 public sector managers at a symposium organised by the Institute of Public Administration Australia (IPAA) in Perth on 1 March 2011.

The presentation built on research undertaken by CEMI of international best practice in public sector innovation plus the feedback from 15 innovation strategy workshops run by Ron McFarlane and Tim Mazzarol for the WA Public Service during the preceding four years. It highlighted the increasing complexity of public sector management and the need for greater integration of agencies in a process of ‘joined-up-government’. According to McFarlane this is now more easily achieved through the application of modern ICT.

While many senior managers within the Public Service aspire to enhancing the level of innovation within their agencies, it is not always achieved due to poor design of the project or problems of implementation. In an IBM global study of 700 business leaders, innovation was identified as a key element in their firm’s ability to sustain growth, however only 35 per cent took direct responsibility for it.  Furthermore, while 65 per cent identified that they faced substantial changes in the coming 3 to 5 years only 15 per cent felt that they were successful at managing it.

The Australian manager was described by McFarlane as being averse to risk and viewing failure as something to hide rather than something to learn from. This was at odds with the Australian culture of being willing to ‘have a go’ and being among the first to adopt new ideas. He suggested that many managers within the public sector were more interested in mitigating risk and managing tax payer funds in a diligent manner.

Best practice in public sector innovation requires greater integration of agencies and services, with ICT as a facilitating mechanism. There should also be more inter-agency partnering and partnerships between public and private sector organisations in service delivery. The Twenty-first Century citizen demands a more active role in government and can now actively participate via social media and online forums. Information exchange between government agencies and the wider community is a key ingredient.

Successful innovation requires support from the most senior levels of management and the existence of an organisational culture that can embrace new ideas and take risks. There must be rewards and incentives for individuals as well as ongoing and sustainable resources. According to McFarlane the majority of public sector managers are motivated by a desire to make a difference and deliver good outcomes to the community. However, innovation involves risk and managers need to be encouraged to take on challenges and view even unsuccessful projects as honourable learning experiences.

Networking across the public sector and with the wider community to exchange ideas and knowledge were identified as important ingredients for successful innovation. However, there was a need for projects to be guided by the lessons of others and in this it was desirable that best practice case studies be shared. Managers seeking to lead innovation project teams also needed to be equipped with adequate education and tool kits to help them think through the process, design the architecture and implement successfully.

McFarlane and Mazzarol outlined a process model for innovation in the public sector comprising nine stages:

1. The need for an innovation vision and key performance indicators (KPI)
2. Access to ongoing resources
3. Development of information sharing networks
4. The identification of innovation champions to lead change
5. Innovation KPI linked to budget outcomes
6. The management of organisational boundaries
7. The creation of demonstration projects in innovation
8. The development of innovation knowledge and application tools
9. Human resource development strategies in innovation education to mitigate risks and failures.

Tim Mazzarol explained the importance of recognising that innovation was more than just creative ideas or continuous improvement of the status quo. It required both innovative ideas and clear improvements of existing practices. He also noted that many public sector agencies struggle to adopt innovations due to failures in the implementation process.

According to Mazzarol this lack of success can be explained by examining the dynamic capabilities framework used in strategic management theory. This focuses on the role played by three elements; the organisation’s processes, positions and paths. The first of these relates to how the organisation coordinates, configures and transforms resources and assets via its internal processes. Positions relates to the organisation’s control over resources and assets, in particular where its organisational boundaries and institutional authority lies. Finally, the history of how the organisation has behaved in the past is often a determinant of the path dependencies it will follow in the future.

Case Study of Successful and Unsuccessful Innovation Adoption

Mazzarol gave the example of a case study undertaken by Erk Piening and published in Public Management Review in February 2011 of the introduction of Chest Pain Units (CPU) in German hospitals in 2007. The German hospital group that formed the basis of this case study had 9 hospitals with 13 centres holding 3,300 beds and servicing over 300,000 patients a year. At the time of the introduction of the CPU the German hospital system was under enormous pressure to reduce costs and improve efficiencies or face closure.

The CPU is a specialised medical unit designed to allow patients with acute chest pain to go into hospital for observation using standardised observations and diagnosis prior to determining if they require more urgent attention. The CPU keeps such patients out of Intensive Care Units (ICU) and mainstream wards thereby lowing costs and enhancing patient services. It represents a technological process innovation. The Executive Board of the hospital group saw the CPU as a means of achieving cost efficiencies while achieving better market image.

Despite the support given to the CPU by the senior management each hospital was allowed to implement the innovation without central oversight. An examination of 5 of the hospitals highlighted the critical role played by path dependency within the unsuccessful cases. Here the hospitals who did not succeed viewed the CPU as of limited strategic importance, and just something that would increase their existing workloads. They lacked genuine commitment to the innovation.

In one hospital the CPU was placed within the ICU as a result of poor planning and time pressures. As a result it was a failure and highlighted tensions between the doctors and nurses. In another hospital the desire to avoid adding to the nursing staff’s existing workloads saw the CPU frequently closed down thereby leading to its ultimate failure.

By contrast the hospitals that succeeded in introducing the CPU viewed the innovation as of strategic importance and did not see the issue of additional workloads or lack of staffing a key obstacle. These hospitals had track records of successfully adopting new ideas and had developed superior routines and processes for the introduction of innovations. According to Mazzarol the case study highlighted the failure of innovations due to mindsets and culture that sees such initiatives blocked by the processes and path dependencies that keep on entrenching established bad practices.

He noted that the OECD had recently reported on the need for government agencies to become innovative actors in delivery of services and to make use of ICT to embrace e-government. Just as social media in the form of Web 2.0 technologies had seen a shift towards customer engagement and participation in many products and services, so too could government agencies encourage co-creation and co-design of services. This community participation can occur via use of wikis, blogs and social bookmarking techniques.

A final message for public sector managers summarised by McFarlane and Mazzarol was the need for a top-down support for innovation by senior managers, reward structures aligned to innovation and adequate resources in the form of innovation funds to seed projects. Government agencies also needed to tolerate failure, diversity and divergent thinking. There also needed to be an active process of seeking out lessons via networking of best practice to provide benchmarks to guide innovation teams. Public sector managers must be willing to experiment, seek input from all levels of their agencies and engage in self-analysis.