The Innovator Blog

This is a blog covering various in-depth topics relating to innovation and enterprise from a different perspective. It aims to draw upon research findings undertaken by CEMI that are not readily available through other channels.

 

Enterprise Society

This is a regular blog by Professor Tim Mazzarol published in "The Conversation" online newspaper that deals with issues relating to the role of entrepreneurship, innovation and small business in our society. 

 

The Innovator Blog

This is a blog covering various in-depth topics relating to innovation and enterprise from a different perspective. It aims to draw upon research findings undertaken by CEMI that are not readily available through other channels.

Developing the Innovative Organisation
Post date: Thursday, January 13, 2011 - 21:35

One of the more recent ‘buzz-words’ in management is the concept of the knowledge-based organisation. Governments have even begun to talk about promoting “knowledge-based economies”. A knowledge driven economy is one in which the generation and exploitation of knowledge plays the predominant part in the creation of wealth. Of critical importance to the successful development of a knowledge-based economy is the ability of firms to foster creativity and innovation. Knowledge is more than just information. It is the ideas and intellectual property that can be the wellspring of new business ventures and new product development.
 
Fostering creativity and innovation within an organisation is the principal challenge of managers in the 21stcentury. Innovation is a process of seeking market opportunities through identifying the value potential in existing operations and adapting them to generate new business or enhance existing business. Successful innovation is frequently simple and understandable. Innovation is not intrinsically difficult and does not have to involve high risk. A successful innovation is usually a response to a market need identified by the entrepreneurial organisation or individual. Incremental rather than revolutionary change is usually more important.
 
Most organisations with good track records in innovation make this a part of their culture. Innovation among organisations is frequently characterised by their willingness to tackle even the most demanding customers. Innovative companies also have the ability to identify access and use the external environment for expertise and knowledge, as well as valuing the skills and expertise of their employees. Within such firms interaction between skilled workers with technical skills enhances creative opportunities and the generation of new ideas. Innovation, therefore, seems to involve not only new ideas and their development, but also change and risk. It is a positive force for any enterprise seeking to develop competitive advantage.
 
Managers seeking to encourage innovation must realise that it is closely linked to human creativity. Fostering creativity within an organisation requires some or all of the following: 
  1. A tolerance of risk taking and failure;
  2. The ability to process information and generate new, original and meaningful ideas;
  3. A willingness to grant substantial autonomy to employees over decision making;
  4. The capacity for employees to set their own goals; and
  5. The creation of opportunities for employees to exchange ideas, skills and behaviours through a process of interactive learning.
Senior managers should consider how important knowledge or intellectual capital is to their competitiveness. If the answer finds it of greater importance than physical plant and equipment they should examine their corporate culture to see if it encourages or discourages innovation and knowledge creation. Ideally the company will possess a strong set of core values that emphasize innovation, diversity and flexibility. Forcing everyone to fit the “corporate mould” may prove counterproductive.
 
Push down the leadership in the company by giving greater responsibility to front line managers and employees. Encourage employees to exchange ideas, share knowledge and work together to solve problems in a collaborative way. Reward enterprise and discourage negativity, particularly the kind that suppresses new ideas.

 

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Loyal Customers make Business Easy
Post date: Friday, November 19, 2010 - 15:40

If you are a small business owner consider the following important questions:

  • What percentage of your customers are repeat customers?
  • What is your customer's buying cycle?
  • How much is a loyal customer worth to your business?
  • How much time do you spend winning new customers versus nurturing existing ones?
Most small business owners understand the concept of “good will”. This is the intangible asset that frequently adds value to the balance sheet. Loyal customers represent a cushion of potential sales that if retained are almost like having a healthy bank balance to draw upon. They are in essence the firm’s ‘good will’.
 
Loyal customers are valuable. For example, the Domino’s Pizza chain estimates that a loyal customer is worth around $5,000 over the ten year life of a franchise. The Ford Motor Company estimates that a loyal customer is worth $142,000 over their life.
 
Many business people spend much of their time trying to win new customers. While this is a necessary activity it is usually three to five times more expensive getting a new customer to purchase, as it is to get a repeat purchase from an existing one. For this reason the loyal customer is valuable and deserves more attention than the prospective customer.
 
Creating loyal customers requires understanding of the customer buying cycle. This is the sequence of stages through which your customers move prior to and after they actually make a purchase. You need to find out the following things about your customers:
 
  1. What motivates them to buy your product or service?
  2. What search process they go through to find a supplier?
  3. How they learn about your business,
  4. Why they chose to buy from you?
  5. What their satisfaction was during and after purchase? And
  6. What has made them buy again if they are repeat purchase customers?
Knowing these things can help you turn suspects into prospects, prospects into customers and customers into advocates who sell your business for you. All of which can help to make running your business a little easier.
 
©Tim Mazzarol (2010)
 
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Handling Customer Complaints
Post date: Friday, November 19, 2010 - 15:41

A satisfied customer is the objective of most small businesses. Keeping customers satisfied ensures that they not only return to buy again, but that they tell their friends and family to do so too. Unfortunately not all customers can be satisfied all the time. Unhappy customers frequently voice their dissatisfaction but they don't do it to you.

Research shows that only 4% of unhappy customers complain. The other 96% go elsewhere and 91% will never return. They usually tell 8 to 10 other people about their problem. On average it costs 5 times as much to win a new customer as it does to keep an existing one. However the average business will lose between 10% and 30% of customers each year. Two thirds of customers who leave do so because they were treated with indifference.

THE 5 MYTHS OF CUSTOMER SATISFACTION

Much has been written about the way to achieve high quality customer service leading to satisfied customers. There are 5 common myths about customer satisfaction:
 
  1. Complaint data accurately reflects the level of customer complaints - it is a myth because most customers do not complain directly to your business.
  1. Complaint data accurately reflects the level of customer satisfaction - it is a myth because satisfied customers will rarely tell you and most dissatisfied customers tell other people not your business.
  1. Repeat customers are satisfied customers - just because someone keeps coming back to your business may not be due to their satisfaction. They may simply have few other options. As soon as an alternative offer is made to them they may shift their business.
  1. How a service is provided is as important as the service itself - service can be delivered with a smile and all the best intentions but if it essentially fails to meet the customer's expectations it will fail to satisfy.
  1. Customer service policy and complaint handling are the responsibility of Top management - all employees of the business should see that it is their responsibility to ensure customers are satisfied and complaints effectively handled. Passing this responsibility on to management will not solve the problem.

FACTORS INFLUENCING CUSTOMER SATISFACTION

Within retailing customer satisfaction is based on three primary factors:
 
  1. Service level performance;
  2. Service level standards and
  3. Customer expectations
 
The first of these relates to the way a service is performed or delivered to the customer. This is the responsibility of the individual sales staff member who deals with the customer. Poor performance in this area is corrected by training.
 
The second factor is more a management responsibility and requires the careful documentation of customer service performance standards. These standards can and should be used in any training to educate staff how to deal effectively with customers. Finally the expectations customers have about how a service is to be delivered is critical to their satisfaction. If they are made to expect high standards as a result of your advertising or promotions you had better ensure that such expectations can be met. It is also important to monitor these expectations. You need to know what the minimum levels of performance expected by customers are. Failure to meet these will result in unhappy customers.

RESEARCH INTO CUSTOMER COMPLAINT BEHAVIOUR

A study of clothing retailing found that one in four customers had purchased products that failed to provide satisfaction in key performance criteria but only 43% sought redress from the retailer and none from manufacturers. Customer willingness to repurchase from the retailer was associated with the redress obtained from the store. Even though the manufacturer of the product was the cause of the problem it was the retailer who had to solve the problem.
 
A further study by SAKS Fifth Ave Department Store found that where complaints involving purchases of under $100 were handled to the customer’s satisfaction 70% of customers remained loyal. For purchases over 100% the figure was 54%. Regular monitoring of customer complaints and the soliciting of dissatisfaction has increased General Electric’s customer satisfaction levels to 93% and reduced warranty costs substantially.
 
In a university study undertaken in the United States 286 business majors who had experienced dissatisfaction wrote complaint letters to 166 different companies regarding 248 different branded products. Those who received follow up responses offering free replacements or refunds demonstrated significantly higher levels of satisfaction and a more positive image of the company. This occurred regardless of how long it took for them to get a response. However, those customers who did not get a response were significantly more likely to view the company poorly, while those who received only a letter showed no change in their attitudes.

CASE STUDY – ALAMO’S RENT-A-CAR

In 1989 Alamo’s Rent-a-Car was ranked 5th among car rental firms in the US. To enhance their position the company established a customer service program called “Best Friends”. The program urged all employees to always treat customers and fellow employees as if they were their best friends. Within one year the business had increased its turn over by 30% and the level of repeat customers rose to 70%. Sales complaints fell 15%, service complaints dropped from 11 to 9 per 10,000 customers.

VIEW CUSTOMER COMPLAINTS AS AN OPPORTUNITY

So what do you do when faced with a complaint from a customer? According to studies undertaken into the most effective means of dealing with customer complaints you should put in place the following key policies:
  
  • Record all complaints formally - this will help you to track them and ensure that they are not ignored.
  • Make it easy for customers to complain - this reduces their frustration and opens the lines of communication.
  • Empower employees to handle complaints - staff should be trained in how to deal with unhappy customers and resolve disputes. Where possible they should be able to make refund decisions on the spot.
  • See complaints as strategic opportunities - customer dissatisfaction with a particular product or service, when formally tracked, will indicate how your business needs to change.
  • Develop a customer service policy - this should clearly outline the service standards and procedures to be followed by employees and should be linked to customer service training.
  • Make all staff aware that complaints are their responsibility - employees should be aware that their role is to keep customers satisfied. You might even link rewards to customer service policies.
  • Reward complaining customers - give them thank-you notes and follow up telephone calls, small gifts or even cash rewards.
  • Don't call them 'complainers' - use the term critics, allies or consultants; it helps to change their role from nuisance to quality improvement advisers.  
Management of the customer service process can assist in reducing complaints. An important aspect of this is to ensure that customer expectations are monitored and prepared by your business in advance. For example, provide customers with cost estimates in advance to avoid surprises. Let them know when service appointments cannot be kept and use formal written statements of how work is to be performed. These should be supported by service guarantees.
 
Customer service is more than knowing how to handle complaints. Clear policy should be drafted to assist all staff in dealing with complaints, but customer satisfaction needs to be the most important focus.

A 10-STEP APPROACH TO HANDLING COMPLAINTS

While there is no easy solution to dealing with irate and upset customers the following ten-step approach to handling customer complaints may assist:
 
  1. Stay calm
  2. Avoid admitting any liability at this stage
  3. Let the customer get the story off their chest
  4. Get the facts
  5. Find out what the customer wants
  6. Identify the appropriate action to take
  7. Take the action to solve the problem
  8. Tell the customer what will be done and when
  9. Record the action to be taken
  10. Follow up.
 
It is most important that your business have some form of recording and tracking system in place to monitor customer complaints. Customer information files should seek to regularly collect feedback on product or service performance with a view to continuous improvement. Formal and informal customer feedback – both positive and negative – needs to be gathered and analysed. Any complaints should be responded to promptly and compliments also acknowledged. Finally, a blueprint of customer contact points should be developed. This can be used to enhance the quality of customer interactions. Who deals with your customers, how and when they do so and what expectations and experiences the customers have should all be examined. The primary objective should be to establish an internal organisation that understands and supports the notion of after sales service and customer follow up.
 
©Tim Mazzarol (2010)
 
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Beating the Time Bandits
Post date: Friday, November 19, 2010 - 15:44

In business, time is a resource that needs to be considered in the same manner as finance, people or equipment. Unfortunately time is unique in that we can never increase the quantity of time we have. Each day we get only 24 hours to work with and at least 8 of those should be spent resting!

For most small business people time is a scarce commodity. Australian small business owner-managers work an average of 55 hours per week with at least one in ten working over 60 hours. Better time management can be a major enhancement of business productivity.

Research shows that small business people spend their time in five key areas:
  1. Time spent with external parties - this includes the customers and prospective customers as well as suppliers and various network support groups.
  1. Time spent with staff and other internal parties - this involves the management, problem solving and team building work that is so critical.
  1. Time spent doing administrative paperwork - this includes the 'compliance' paperwork such as invoicing, taxation and other necessary nasties.
  1. Time spent planning - this is where you clear your desk and your mind and think about the future and how to cope with it.
  1. Time spent with family, friends and you - this is critical time that is often robbed from us by the pressures of work.
 
Most small business people would like to have more time to spend in each of these areas. Few spend sufficient time on number four and most feel that they spend too much time on number three. Getting control of time requires “beating the time bandits”. There is a five step process that can be followed to assist you in this:
 
  1. Keep a daily time log - this is a record of how you spend your day in each of the five key areas. This can be monitored using 15 to 30 minute time blocks. After tracking your time for say two weeks you can get a clear picture of how you spend it.
  1. Consider how you should spend your time - are you keeping things in balance? Prepare your monthly, weekly and daily goals. Setting goals is a process of visualising what you wish to achieve and then working backwards. It is fairly true to say that what you can visualise you can most likely achieve. However, achieving anything worthwhile will take effort. Remember that you “eat the Elephant one slice at a time”. This means setting weekly or daily objectives that lead towards your long-term goals. Identify what your three daily fixed activities should be to eventually reach your goals. Write them down on paper and ask yourself at the end of the day - "did I complete them?" If the answer is no you should look at disciplining yourself.
  1. How effectively do you use time? - wasting time is as critical as the wasting of money or any other resource. Key time bandits are the telephone, visitors, paperwork and procrastination. Some tips for beating these time bandits are:
  • Telephone - set aside telephone time. Try to complete calls within 3 minutes and note down key points as you go. Sales calls are frequently best done in a closed room with no distractions and a clear block of time - usually in the morning - set aside to do them.
  • Visitors - the best way to stop interruptions is to close the door to your office. When closed you are 'no available' but when open you are 'open for communication'. Set clear time limits on visitors and stick to them. Use body language to signal your time is being wasted. This can involve simply standing up to meet the visitor and remaining standing while the visitor talks to you. If you invite them to sit down they will be remaining there for some time.
  • Paperwork - try to deal with paperwork via a 'one touch' system. Set aside time to read your mail or make an appointment with yourself to get paperwork completed. Have three in-trays: 1) Action, 2) Information and 3) Reading. Remember that the best 'in-tray' you have is your wastepaper basket.
  1. Procrastination - the enemy here is you. Set yourself the clear objectives mentioned above. Daily fixed activities will help avoid procrastination. If you find it hard getting motivated to do these things apply the 5-minute rule. Start the work and allow five minutes to do it. Set the watch going and do nothing else for five minutes but that necessary task. You will find that you do it for much longer and it helps you get started.
  1. Increase your control of time - this is the hard part but can be achieved by use of planners, time saving systems and the careful protection of your precious time in areas that you feel are most important.
 
A useful tool to help you think about time use is to look at your hand. The middle finger represents your planning time it is both the largest and holds the centre of the hand suggesting that planning is of central importance and should be where you spend a lot of your time. Learn to work “on” not “in” your business. The index finger represents the time spent with external contacts - it points the way to new business. The ring finger represents the time spent with internal people - it is the relationship finger. It is the same size as the index finger suggesting its equal importance to this. The little finger represents the compliance paperwork time. It is necessary but is the smallest of the fingers. Finally, the thumb represents the time spent with family, friends and on you. It is not a finger, so it sits outside the business. However, the thumb provides the hand with its strength and if you don't have a thumb your 'business hand' is useless.
 
So next time you are worried about how you spend your time look at your hand. Consider if you are keeping faith with all your fingers and whether your 'business time fingers' are in proportion. A well-balanced hand can be a well-balanced business.
 
©Tim Mazzarol (2010)
 
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Why your Business is like a Bicycle
Post date: Friday, November 19, 2010 - 15:46

Most small business owners start out as a specialist expert in whatever they are good at that forms the basis of their business. For example, a plumber gets his or her trade qualification and following their apprenticeship launches their own business. What enables them to 'do business' with customers is their specialist skills as a plumber. This situation is the same for professional as well as technical trade people.

The various 'Technical' skills - engineering, accountancy, computers, trades etc. - that enable small business owners to get started are what can be described as Rear Wheel skills. They are functional and drive the business along. It is necessary to be good at these and keep the processes - the chains, cogs and gears - well oiled.

Unfortunately the possession of rear wheel skill is only half of what is needed. In order to expand and develop the business the owner manager also requires effective Front Wheel skills. These are the more personal human skills - communication, interpersonal and analytical. For a business to grow it needs the owner manager or managers to effectively communicate its rear wheel skills to customers. Sales and marketing is more about front wheel than rear wheel skills. The business will need to establish networks of customers, suppliers and various other supporters who can assist it with everything from referrals to finance. Holding this network together requires good interpersonal skills. Finally the successful growing business will need the owners to commit to long term planning and the development of a team of motivated employees. Once again front wheel skills are critical here.
 
The lack of effective front wheel skills is a major cause of problems in many small businesses. Owners who spend time learning how to develop such skills - frequently through management training - grow their businesses and have more confidence of their future directions. So ask yourself, 'is your business a well maintained bicycle?' Are both wheels functioning and of equal strength, or are you seeking to head down the business highway with a flat or wobbly front wheel?
 
©Tim Mazzarol (2010)
 
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The Seven Predictors of Innovation in Small Firms
Post date: Friday, November 19, 2010 - 15:39

Innovation among small to medium enterprises (SMEs) has attracted substantial interest from governments throughout the world as policy makers seek answers to globalisation and the loss of jobs from structural reforms in established industries. In the US small firms have been found to produce substantially greater levels of innovation per employee than their larger counterparts. A study by the OECD across 40 countries found that while small firms were on average less innovative than their larger counterparts, they were still a significant contributor to their economies comprising 99% of all businesses and 50-75% of value added.

In the 1990s the Australian Manufacturing Council found most innovative manufacturers tended to compete in markets where they experienced both high levels of competition and demanding customers. Not surprisingly there was a strong link between innovation and exporting. These firms also used networks to enhance their competitiveness as well as tapping expertise and knowledge not available in-house. Employees of innovative firms were highly valued, and there was strong interaction between skilled workers to create opportunities and generate new ideas.

Research undertaken within CEMI surveyed 137 small, growth oriented WA firms to explore the factors likely to predict innovation behaviour. For the purposes of the study innovation is defined in terms of the quantity of new ideas generated by staff that adds real value to the firm’s products or services. Findings from this research suggest that innovation is associated with seven key predictors:
 
  1. Having the right products and services – an ability to offer products or services that satisfy customers’ needs, are of high quality, and which offer distinctive qualities not found elsewhere. Achieving this appears to be dependent on the firm knowing why its customers buy from them, and is willing to make improvements when required.
  1. Monitoring Key Indicators – possessing systems to monitor and report on key indicators that monitor trends both internal (e.g. cash flows, break-even), and external (e.g. customer satisfaction). Such key indicators are regularly reported throughout the firm and are used to keep on-track and moving forward. Success is celebrated and prompt action is taken when things appear to be going off-track.
  1. Owner’s values don’t dominate – innovative firms were more likely to have owner-managers that did not allow their personal values dominate the way the business operates. Although an owner should have a clear set of personal values through which they operate their business they need to encourage innovation among employees by ensuring such values don’t stifle alternative views.
  1. Positive Role Modelling – rather than allow personal values to dominate the owner-manager of the small innovative firm is likely to demonstrate by action rather than word. Such owners are usually confident that their employees understand their values and they display the type of behaviours that they would like to see in their staff. As such they are usually good time managers and use symbols to reinforce key business objectives.
  1. Leadership – innovative small firms were also more likely to have owners that had a clear vision for where their business was heading. They communicated this vision to all their employees and used it as an incentive for positive action and ideas.
  1. Quality Assurance – top management is strongly committed to achieving formal third-party accreditation for quality standards. Quality is understood both by management and employees who have defined it and documented procedures for key areas of the business. Such firms see ASA/ISO 9000 formal quality assurance as relevant to them.
  1. Staff Partnering – finally, the owners of small innovative firms were found to possess strong partnership relations with their employees. They viewed their employees as the key to achieving competitive advantage and sought to recruit and retain the ‘right’ people. Such owner’s were able to claim that their people gave “110 per cent” and frequently produced results beyond their expectations.
 
©Tim Mazzarol (2010)
 
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Are your Finances "Static" or "Dynamic"?
Post date: Friday, November 19, 2010 - 15:38

There are few business people who consider they have total control or command over the financial management and performance of their business. Financial management within small to medium enterprises frequent requires the attentions of specialists such as bankers, accountants and other business advisers. While such specialised assistance is necessary and valuable more can and should be performed by the owner managers themselves. One method of achieving this is for the business manager to understand the difference between “Static” and “Dynamic” Accounting.

In his classic book The Genghis Khan Guide to Business British author Brian Warnes described the difference between these two approaches using the analogy of a motor car. Measuring the car’s “Static” features – height, length, width colour, style and shape – could be readily undertaken while the vehicle is stationary. However, once in motion the “Dynamic” features of the car – acceleration, road holding and breaking – were harder to evaluate. Like a car most businesses need the finances to be examined not just while they are stationary or “Static” but also in terms of their “Dynamics”, while in motion. Mr. Warnes developed the principles of “Financial Dynamics” to address the need to provide managers with a set of tools to measure the financial performance of their business on a regular basis.

“Financial Dynamics” commences with the understanding that most conventional means of presenting financial information to the managers of small to medium businesses are inadequate. Numbers in isolation have little meaning and unless the manager is formally trained in Accountancy they are usually intimidated by financial data. Few managers will admit their lack of financial understanding but unless they can interpret the data in a meaningful way it is of no practical use. What is required is clearly presented financial data that helps the owner manager understand what is happening financially within their business so that they may control and plan.
 
To achieve this goal the business must first identify for itself a list of key financial indicators ideally no more than a dozen. For example, from the Profit and Loss account the sales revenue; variable and fixed costs can be identified. These indicators enable the calculation of the firm’s gross margin percentage and breakeven point. The breakeven point is where sales revenues are sufficient to cover all business costs. It is calculated by dividing fixed costs – along with any interest payable – by the gross margin percentage. Breakeven is critical to understanding the financial health of any business and is a means of measuring the firm’s financial ‘pulse’.
 
If the breakeven of a business increases at the same rate as sales revenue the owner manager risks being trapped by the “busy fool” syndrome. This is where they work harder and harder to make the same level of profits that were made at lower levels of sales turnover. Many “busy fools” find themselves no further ahead than when they started despite rapidly increased business activity. If not checked such businesses will fail. A well managed business will get its breakeven down and keep it down allowing the full benefit of extra sales to show in terms of profitability.
 
Of equal importance to breakeven is the gross margin percentage. The gross margin of a business is the difference between sales revenue and variable costs. There is no substitute for a high gross margin and all businesses should aim to increase theirs if they can. To illustrate the power of gross margin let us take the example of a business that has a gross margin of 25%. Our hypothetical business is experiencing increased competition and seeks to meet this challenge by offering a discount of 10% to all its customers. With a 25% gross profit margin this business will need to achieve a total increase in sales of 67% or it will actually lose money. By contrast if the firm’s gross profit margin was 40% this discount could be absorbed by a sales increase of only 33% without harm to the bottom line.
 
Knowing your breakeven and gross margin percentage enables a business to avoid the “busy fool” syndrome and potential cash flow problems. It makes owner managers aware that even modest price increases or small reductions in variable costs can have major positive effects on the overall profitability of their business. For example, if our hypothetical business with the 25% gross margin were to increase it prices by a mere 5% it could afford to lose 17% of sales with no impact on its bottom line profitability.
 
Even if price changes are not feasible many businesses can reduce variable costs through enhanced operational processes that can serve to improve profitability. Manufacturers are frequently the first to recognize this, but even service industries and retailers can find ways to trim variable costs through more efficient use of labour or stock control. Each dollar shaved off variable costs contributes to pre tax profit.
 
An important message in the process of “Financial Dynamics” is to reduce breakeven and keep it down in both good times and bad. Modest increases in price if combined with value engineering to both enhance the product or service and reduce variable costs will greatly assist the improvement of gross margin. Further, by not competing only on price the business will be able to concentrate on developing a true competitive advantage and enjoying a more secure financial future.
 
©Tim Mazzarol (2010)
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How Strong is your Strategic Network?
Post date: Friday, November 19, 2010 - 15:36

The value of networking to businesses has been much touted in recent years, but why should a small business owner develop a strategic network, and what is a strategic network anyway?

Over the past 150 years two dominant organisational designs have existed in business. The first is the vertically integrated firm such as the Ford Motor Company of the 1920s, which controlled almost all parts of its supply chain, from rubber plantations to the final assembly plants. The second is the outsourced organisation that emerged in the 1970s in response to a need to reduce costs. Unfortunately this drive for outsourcing led to a hollowing out of the corporation and saw much of the value lost to sub-contractors. By the 1990s the need to maintain competitiveness, speed up the pace of innovation and retain control over valuable intellectual property led to the strategically networked organisation as a third way.

A strategic network is where a firm can contract out its activities to one or more key suppliers, while keeping control over those activities or resources that enable it to maintain its competitive advantage. Interest in strategic networks has grown significantly in recent years as firms seek ways to outsource much of their production as a means of lowering costs, while simultaneously retaining strategic control over this outsourced work. However, for small firms the value of a strategic network is often less well understood.
 
The strategic network of a small firm typically encompasses three interrelated networks. The first is the production network that comprises the customers and suppliers. The second is the resource network that includes third party complementary partners such as accountants, banks or business support agencies. The third is the social network that comprises personal and professional contacts with who the owner-manager of the business interacts.
 
Strategic networks enable a small firm to build a competitive advantage by creating new business opportunities, building up their existing resources, or defending their market position. They do this by leveraging their networks to gain entry into new markets, identify new ways to satisfy customers, access new technologies, financial resources, knowledge and skills. Most small firms engage within these strategic networks in a largely informal way, and how active and successful they are is often determined by the characteristics of their owners. While some owner-managers are highly networked and actively seek to forge business relationships, others are less inclined to do so.
 
For many small business owners, the decision to actively engage in a strategic network is viewed as a risk. There can be a fear that their ideas or even their staff will be poached. They can also prefer to be independent and not want to operate in alliance with other firms whether on a formal or informal level. These attitudes seem to be fairly common among many Australian small business owners, who feel that such networking is a risk. Despite these views there are many benefits from strategic networking, although it can be a complex process that requires a well considered engagement strategy.
 
Our research highlights the importance of strategic networking to small firm performance, particularly in the field of innovation and commercialisation. Further, it is not the size of the network that is important, but its intensity and richness. In other words, it is better to forge close, trusting relationships with a few key partners than to have a wide range of more superficial contacts. Establishing and maintaining a network of strategic business partners is time consuming so it should be based on quality not quantity.
 
As you look at your own business ask the following questions:
    
  • Who are your leading customers and how well do you partner with them to generate ideas for new products or services?
  • Who are your key suppliers and are you partnering with them to find ways to enhance the cost effectiveness of your supply chain?
  • How good is your network of complementary resource providers who you can call upon when you have specific problems that need expertise or assets your own business lacks?
  • How active are you in systematically developing a strong social network of personal and professional contacts to who you can turn for advice, ideas and support when required?    
 
This article was first published in WA Business News.
 
©Tim Mazzarol (2010)

 

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What is the Value of Planning to a Small Firm?
Post date: Friday, November 19, 2010 - 15:35

Small business owners are often told that they should prepare a business plan and that failing to plan is tantamount to planning to fail, but what is the evidence that having a business plan is likely to result in more success than not having one?

The majority of small business owners do not have a formal, written business plan and yet the perceived wisdom is that the possession of a business plan is a critical element in a small firm’s success or failure. As a business academic and consultant I am an advocate of business planning, but one might legitimately ask me what evidence can I show that such planning makes any real difference to business success? To address this question we undertook a detailed examination of the academic literature relating to small business planning in order to seek this evidence. What we found was rather surprising.

What emerges from a review of hundreds of research papers published over the past forty years is that there is a lack of any clear and consistent evidence that demonstrates a link between possession of a formal, written business plan and success in the small firm. It is also not clear precisely what factors contribute to the success or failure of such businesses. The reasons for this are complex, but much of the problem is caused by a lack of appropriate definitions of what planning within a small firm is, how planning works, and what is success or failure in a small firm. Even getting a universally accepted definition of what a small business is remains difficult due to the way such firms are defined around the world.
 
However, a few things do emerge from the body of past research. First, the key problems facing most small business owners are that they have limited resources, time and means to do any planning, and often limited knowledge and skills in how to plan. Most focus on only one product or market and there is a tendency for planning to overload or overwhelm many owner-managers. Second, the small business owner is fortunate in that they are often very close to their customers and have the opportunity to get first hand feedback on how they are performing. As the firm’s main, and often the only, source of strategic direction, the owner manager is the key to any planning and the subsequent coordination and motivation of any employees. Unlike larger firms, the small business can adapt and change very quickly if required.
 
The key variable in the small business planning process is therefore the owner-manager and the value of any planning is likely to depend on how they think and act. There is a relationship between the visionary leadership and managerial competence of the owner-manager, and their ability to configure their firm’s limited resources to exploit opportunities and meet threats. A key to the success of the small firm is less the presence of a formal, written business plan; than the owner-manager’s ability to create a clear vision for their firm and to use innovation to exploit future opportunities with limited resources. Having a business plan is useful and writing a plan provides structure and discipline. However, the value it offers depends on the ability of the owner-manager to think and act strategically; and use their proximity to the customer to shape innovative responses that build loyalty and repeat business. If required, the owner-manager should also be prepared to completely reinvent their business from time to time, as this is much easier for a small firm than a large one.
 
As you look at your own business ask the following questions:
 
  • Where do you want your business to be in say three to five years time?
  • What are the key opportunities and threats that you might face over this time period?
  • What will you need to change in your business to achieve this vision?
  • What do customers think of your business and how it satisfies their expectations?
  • What operations must change to ensure that you meet and exceed these expectations?
 
This article was first published in WA Business News.
 
©Tim Mazzarol (2010)
 
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How Should you Think about Innovation?
Post date: Friday, November 19, 2010 - 15:31

Innovation is viewed by most businesses as the key to their competitiveness and something they should aspire to achieve. However, innovation is also poorly understood and should be viewed as a process to be systematically managed.

The term “innovation” has become something of a buzzword in business circles, but it is also one of the most misunderstood and abused words in the English language. Innovation is about the creation or invention of something new or different, but it is not just about technology. Research into the process of managing innovation within a business suggests that at least seven things need to be considered. The first are the inputs of people, ideas, equipment, time and money that are needed get any meaningful innovation program up and running. Without a willingness to invest in innovation a business cannot expect it to happen in any meaningful way.

The second thing that must be considered in the management of innovation is the management of knowledge. Creativity is the foundation of innovation, but without discipline creative thinking is of limited commercial value. Businesses must systematically manage the process of ideas generation and the capture of good ideas and their dissemination throughout the firm into appropriate areas where they can be turned into useful actions.
 
The third consideration is the development of an innovation strategy, or at least the alignment of innovation activity to the firm’s broader business strategy. Great ideas will be more readily generated if there is strong and effective strategic leadership within the business that articulates the importance of innovation defines it and energies the workforce to embrace it. Without this strategic leadership calls for more innovation within the organisation will be little more than hot air and wishful thinking.
 
The fourth element is the ability to foster within the business a culture of innovation and a structure that is supportive. Innovation is best fostered in an environment where there is tolerance of calculated risk taking and failure, and a recognition that without risk there can be no innovation. The culture also needs to encourage creative thinking, but within a commercially disciplined context. It is also best to drive such discipline via a structure of project teams that have clear goals, appropriate levels of support and resources, as well as sense of ownership over the outcomes.
 
The fifth element is the need for the business to manage its innovation projects as a portfolio of strategic investments that have well defined key performance measures that balance the risk and return to the time and money invested. In this way managers can be held to appropriate deadlines and performance benchmarks, and the organisation can monitor its innovation portfolio in a strategic manner.
 
The sixth consideration is the need for the business to develop skills in the effective management of innovation projects. Managers and team leaders need to be training and equipped with the necessary tools and knowledge to manage what are often risky and uncertain projects in which continuous problem solving and invention are key to success. These skills are not commonly developed within managers and employees who are generally taught to follow strict processes and avoid making mistakes.
 
Finally, the seventh element is the challenge of commercialisation of the innovation. In the case of a new product or service this will require the business to systematically address such things as the need for market research, market testing and evaluation, the development of a business case and then the planning and implementation of marketing and sales activities designed to get the innovation into the marketplace. For process innovations and those associated with administrative or marketing innovations there is still the need for a well considered implementation plan that will sell the idea into the organisation and ensure that it is adopted.
 
As you look at your own business ask the following questions:
     
  • Do you value innovation and if so can you define it and use that definition to engage others?
  • Has your business systematically addressed these seven areas of innovation management?
  • What is the opportunity cost to your business of not treating innovation as a process to be managed?     
 
This article was first published in WA Business News.
 
©Tim Mazzarol (2010)

 

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