Innovation and Synergy – Kraft Foods and Cadbury

Multi corporations can improve performance and achieve competitive advantage not just by focusing on the outside environment but also by combining and exploiting internal resources and knowledge between different business units within a company (Ansari et al, 2006, p353).

A way to achieve this is through the concept of synergy, within the corporate strategy and the growth and development of organisations (Mullins, 2010, p544). The concept of synergy was developed by Ansoff (1969). Synergy is the theory that a whole is better than the sum of its component parts. This can be expressed in terms of the 2+2=5 effect (Mullins, 2010, p544). It has also been stated that synergy often occurs in situations of expansion or as a result of the mergence of two separate organisations (Mullins, 2010, p544).

Potential benefits of synergy include; scale economies sharing core competences, cross selling, and leveraging a strong brand image across a variety of product groups (Bowman, 1998, p4) and also gain of market power and internal governance, arguing that multi-business firms can outperform their single business counterparts by creating a more efficient transacting environment than exists in the market (Martin and Eisenhardt, 2001, p3). Other reasons to pursue synergy would be the likes of wanting to restructure the market, achieve a more balanced portfolio of businesses or achieving corporate growth targets at times when development through organic growth proves difficult (Bowman, 1998, p180).

However, despite these advantages, there may also be some costs of synergy. Ansari et al, state that the challenge of coordinating and integrating multiple businesses can increase the costs of coordination and reduce the benefits of synergy (2006, p355). This suggests that, in order to achieve competitive advantage, the value of the potential synergy should not be outweighed by the costs of implementing it.

Reasons that organisations may consider the concepts of synergy are; acquisitions, market entry, business reconfiguration, divestiture, and diversification (Martin and Eisenhardt, 2001, p3).

An excellent example of synergy is the Kraft Foods – Cadbury acquisition. In early 2010 Cadbury was taken over by the US food company Kraft.

Cadbury at the time has a value of about £11.5bn (news.bbc.co.uk). This merger was a tremendous success as it earned Kraft Foods Net profits of $937m, compared with $827m in the same period of the previous year. Their revenues rose 25.3 per cent to $12.3bn – with about 90 per cent of that gain reflecting Cadbury’s contributions (http://www.ft.com/).

Despite these obvious benefits of the acquisition there was some controversy surrounding the event. Despite Kraft Foods stating that the deal would create a ‘global confectionery leader’ (news.bbc.co.uk) some were concerned about the levels of debt that Kraft had and the fact that they will have to pay down that debt and when cost savings of that magnitude have to be made, you have to ask where those cost savings will come from (news.bbc.co.uk). Those fears were shared by David Bailey, professor at Coventry University Business School, he stated that ‘Serious questions need to be asked about Kraft's intentions as Kraft already has a track record of cutting production and moving production abroad. There's no guarantee that they'll keep production in the UK in the long run’ (news.bbc.co.uk). Therefore suggesting that synergy, although beneficial in many ways is not always done for wholesome reasons.

References

Ansari, S. Schouten, M. Verwaal, E. (2006) Unlocking synergies between business units: internal value creation at Royal Vopak. Strategic Change. Vol. 15, issue 7/8, pp353-360.

Ansoff, H I. (1969) Business Strategy. London: Penguin inc.

BBC (2010) BBC NEWS [online]. Accessed from: http://news.bbc.co.uk/1/hi/8467007.stm Accessed: 12 December 2011].

Bowman, C. (1998). Strategy in Practice. Hertfordshire: Pretence Hall.

Financial Times (2010) ft.com [online]. Accessed from: http://www.ft.com/cms/s/0/adc2b170-a0d2-11df-badd 00144feabdc0,dwp_uuid=da5b2be8- 9c6b-11de-ab58- 00144feabdc0.html#axzz1gM5w4yD6 [Accessed: 12 December 2011].

Martin, J A. Eisenhardt, K M. (2001) Exploring cross-business synergies. Academy of Management Proceedings and Membership Directory. Pp1-6.

Mullins, L J. (2010) Management and Organisational Behaviour. Ninth Edition. Harlow: Pretence Hall.

Open Innovation

Up until recently many organisations developed new technologies for their products internally i.e. they undertook relatively closed innovation strategies (Lichtenthaler, 2011, p75). However the disadvantages to this were that organisations had little interaction with the outside environment, thus their innovations were limited to their own knowledge. There were only a few exceptions to this, mainly within the chemical industry where active technology transactions were encouraged. Despite this in recent years these strategies have begun to change as firms across industries have increasingly acquired external technologies to complement their internal knowledge bases (Lichtenthaler, 2011, p75). This was done by means of strategic alliances or in-licensing, which involves acquiring the right to use external knowledge (Lichtenthaler, 2011, p75).

In 2003 Henry Chesbrough coined the term ‘open innovation’ to describe the innovation process of firms interacting with their environment, resulting in external knowledge exploration and exploitation (Lichtenthaler, 2011, p76). The official definition of open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively (Chesbrough et al, 2006, p1).

A good case study for exploration of open innovation is Fiat. Who discovered that n the midst of a worse than expected economic downturn, had reached the status of worldwide excellence (Minin et al, 2010, p132). This was because of open innovation. In 2009 Chrysler were in threat of going bust due to the current economic climate. However Fiat agreed to create a partnership with Chrysler in order to revive it. Fiat demonstrates that it can build the clean, fuel-efficient cars that are the future of the industry and as part of this partnership with Chrysler, Fiat then agreed to transfer billions of dollars in cutting-edge technologies to Chrysler to help them do the same (Minin et al, 2010, p132). This is an example of open innovation as Chrysler is using the knowledge of others, i.e. Fiat in order to innovate their products.

Open innovation seems to be extremely beneficial to some companies. However are there any disadvantages to this new innovation process? The results of a recent Bain & Company survey of more than 200 global senior executives suggest there is a desire to pursue open innovation (Rigby and Zook, 2002, p82). It was stated that one of many reasons for this was the fact that nearly two-thirds of company executives admitted their businesses were not close to realizing their full potential, and reaching this potential was critical to creating future competitive advantage and earning profits (Rigby and Zook, 2002, p82). Therefore there was a huge need for the like of open innovation. This case study also showed that some of the fastest growing and most profitable industries found open-market innovation to be a critical new source of competitive advantage (Rigby and Zook, 2002, p82). Some of the advantages therefore of open innovation are that the importation of new ideas is a good way to increase the success of a company’s innovations. This is because when outside sources are used for innovation ideas, internal innovators have more ideas to choose from and different kinds of expertise available to them, therefore the cost, quality and speed of innovations improve (Rigby and Zook, 2002, p82). As a result of this companies that use open innovation within their R&D departments gain a higher percentage of total sales from new products than those who don’t (global think tank the STEP Group: CITED: Rigby and Zook, 2002).

Another Advantage of open innovation is exportation of ideas. This is a good way to raise cash and keep talent. This also gives companies a way to measure an innovation's real value and to determine whether further investment is warranted helping companies clarify what they do best. This is done by managers looking at their innovation initiatives through ‘market hardened eyes’ that regularly reveal where the business is going and where it has advantages over its rivals (Rigby and Zook, 2002, p84).

However despite the advantages of open innovation, there are also some disadvantages. An example of this is the ‘not invented here syndrome’ (Rigby and Zook, 2002, p82) where companies are reluctant to use an innovation due to the idea coming from an external source, this may be to do with internal pride. Another risk to consider when contemplating open innovation is that of competition. Sceptics of the open innovation approach like to cite valid examples of companies that miss out because they shared their innovations with current or potential competitors, who create or produce the innovation faster or better than they could (Rigby and Zook, 2002, p84). The dangers of sharing innovations are real, but they are manageable. Generally, the greatest danger lies not in the transfer of the innovation but in the structure of the deal. Furthermore, selling or renting innovations poses fewer competitive risks than simply giving them away.

I think that open innovation is a good idea as it allows companies to come up with new and better innovations together, as opposed to creating ok innovation alone.   

References

Chesbrough, H., Vanhaverbeke, W. West, J. (2006) Open innovation: Researching a new paradigm. Oxford, UK: Oxford University Press.

Di Minin, A. Frattini, F. Piccaluga, A. (2010) Fiat: Open Innovation in a Downturn (1993-2003). California Management Review. Vol. 52 Issue 3, p132-159.

Lichtenthaler, U. (2011) Open Innovation: Past Research, Current Debates, and Future Directions. Academy of Management Perspectives. Vol. 25 Issue 1, p75-93.

Rigby, D. Zook, C. (2002) Open-Market Innovation. Harvard Business Review. Vol. 80 Issue 10, p80-89.

Organisational Change

Organisational change is a multidimensional phenomenon (Pundziene, 2004, p163). So what is organisational change? Pundziene states that it is the transition of the individuals or groups from one state to another in a complex, constantly changing, and open social system (2004, p165). Burke states that there are two definitive types of organisational change. These are evolutionary and revolutionary (2008, p21). These types of change differ significantly, as evolutionary is ‘a gradual continuous process of change’ in contrast to revolutionary which is ‘a sudden event’ (Burke, 2008, p21). Revolutionary change requires ‘initial activity that calls attention to the clear need modifications, due to changes that have occurred’ (Burke, 2008, p21). Evolutionary change in contrast requires improvement measures in ‘how a product is designed, delivered, or how its quality is measured/upgraded’ (Burke, 2008, p21). Whilst Mullins agrees with these definitions he also take account of the fact that an issue of high performance companies is evolutionary VS revolutionary change (2005, p912). Stating that although it is essential to ‘recognise that radical change is sometimes necessary to push through measure with urgency’, companies are often vigilant, but deliberate innovators, and ‘balance the need for continuous change against the needs to conserve core values’ (Mullins, 2005, p912).

Huber and Glick display this diagram showing where evolutionary and revolutionary changes lie in models of change within organisations and industries. (1993, p72).

Change originates sometimes as part of a ‘natural process of aging’ within an organisation, such as; change of the organisations goals, culture or philosophy, change in equipment, techniques or sequencing of activities, change of administrative or communications procedures, or changes in specific personnel or staffing levels (Huber and Glick, 1993, p223). However much of this change can be managed through careful planning (Mullins, 2005, p909). However other changes can be due to external forces (Mullins, 2005, p909) or a shift in external environments (Burke, 2008, p22). Examples of this may be the likes of; uncertain economic conditions, globalisation, government intervention, political interests competition, or development of technology or information, diversification or potential threats or opportunities (Mullins, 2005, p909) and (Hughes, 2010, p60). All, one, or a selection of these factors may induce change within an organisation.

However when change does occur there may be some resistance or problems in implementation of the said change. This may also come in two forms. Firstly individual resistance may be received in the face due to ‘reluctance to change habit, selective perception, inconvenience or loss of freedom, economic implications, personal security, or simply fear of the unknown’ (Mullins, 2005, p913). The second form is, organisational resistance; this may be the result of; reluctance to change organisational culture, maintaining stability, investment in resources, past contracts or agreements, or threats to power or influence’ (Mullins,2005, p914).

Despite these potential resistances, there are some ways that organisations can minimise the problems of change. It is important to crate trust and shared commitment when change is occurring, involving staff in discussions and actions that may affect them. This should occur as soon as possible, as this will give a better chance of a cooperative spirit among staff as they will feel involved, resulting in a greater willingness to accept the chance. There should also be the production of a ‘personnel management action programme’ that will highlight all of the change and it implementations. During changes to organisations the balance of the socio-technical systems must be kept in balance. Lastly close attention should be given to job design, methods of work and relationships between the nature and content of jobs and their task functions (Mullins, 2005, p920). Providing that all of these points are taken into consideration, change within an organisation may well be very successful.

A good example of internal organisational change can be found in the John Lewis Christmas adverts. In 2010 the advert it showed generic people that were relatively unrelated wrapping gifts. However in the 2011 advert it showed a young boy who seems to be excited about Christmas for his personal benefits, however it concludes that he is most excited about the gift that he has got for his parents. This is an internal change in the views of John Lewis, shifting from targeting the general public, to mainly targeting families.

2010:

2011:



References

Burke, W W. (2008) Organisation Chance; Theory and Practise. Second Edition. London: Sage Publications Ltd.

Huber, G P. Glick, W H. (1993) Organisational Change and Redesign; Ideas and Insights for Improving Performance. Oxford: Oxford University Press. 

Hughes, M. (2010) Managing Change; A Critical Perspective. Second Edition. London: CIPD.

Mullins, L J. (2005) Management and Organisational Behaviour. Seventh Edition. Harlow: Pretence Hall.

Pudziene, A. (2004) Managing Organisational Change: Insight into your Employees. Management of OrganisationsL Systematic Research. Issue 29, pp 163-172.

Youtube (2011) John Lewis Advert 2011. [online]. Accessed from:  http://www.youtube.com/watch?v=pSLOnR1s74o [Accessed: 11 December 2011].

Youtube (2010) John Lewis Advert 2010. [online]. Accessed from:  http://www.youtube.com/watch?v=mpV-xagkTDU [Accessed: 11 December 2011].

Global Innovation – Globalisation

Generically speaking, globalisation is ‘the worldwide movement toward economic, financial, trade, and communications integration’ (thebusinessdictionary.com, 2011).

It has been said that globalization implies the opening of local and nationalistic perspectives to a broader outlook of an interconnected and interdependent world with free transfer of capital, goods, and services across national frontiers. However, it may hurt smaller or fragile economies if applied indiscriminately (thebusinessdictionary.com, 2011).

As businesses become increasingly global, corporate innovation strategies are also becoming more global as companies attempt to globalise research and development (R&D) departments and gain international market access and insight (Changsu and Jong-Hun, 2010, p43). Tidd et al, state that following the ‘globalisation’ of product markets in large firms R&D activities should also be globalised in order to create interfaces with specialized skills and innovative opportunities at a world level (1998, p138). However despite this need for firms to be global, many are in fact already running on a global basis, however, does this necessarily mean that they are globalised? It has been stated that in and around 1990;

• The world’s largest firms performed about 11% of their innovative activities outside of their home countries.
• Firms based in the leading R&D countries (i.e. USA, Japan, Germany) perform more than 80% of their innovative activities at home.
• Most of the foreign innovative activities are performed in the USA and Germany, they are not globalised. 
• Large firms’ foreign innovative activities reflect their own and their home country’s strengths and not that of their host countries.
• Within each industrial sector, business firms’ innovation intensity was negatively correlated with the share that was located in a foreign country.

(Patel, 1995).

Here it seems that Patel is suggesting that despite many firms running on a global basis, many of these firms are not actually globalised. How then is it that a company becomes globalised?

The iPod is a perfect example of a globally innovated product, combining technologies from the USA, Japan and a number of Asian countries (Linden et al, 2007, p2). Before the iPod many electronic devices were developed and manufactured in the home country of the company in question. However supply chains in the global electronics industry have steadily disaggregated across corporate and national boundaries (Sturgeon, 2002; Dedrick and Kraemer, 1998. CITED: Linden et al, 2007).

Linden et al, also suggest that in order for a company such as Apple to be successful in global innovation they need to recognize how their products create potential value and then negotiate over its division with their partners. As well as this he suggests that a successful firm understands that the creation of value and profits are needed all along the supply chain to sustain innovation by all participants (2007, p2).

Despite the products of Apple being globalised the management of Apple as a company is relatively un-globalised. Dr. Rolf-Christian Wentz suggests that based on its superior product design and superior product usability globally, until now Apple seems to be rather a hesitant supporter of a growing globalisation of innovation management. Apple is still very centrally organized with a strong US focus (The Innovation Machine, 2008).

This proves that just because one aspect of a company may be globalised, it does not mean that the company is globalised as a who, and that it is in fact extremely difficult to achieve complete globalization of a company as a whole.

I have also found this short video highlighting some of the Pros and Cons of Globalisation.

References

Changsu, K. Jong-Hun, P. (2010). The Global Research-and-Development Network and Its Effect on Innovation. Journal of International Marketing. Vol. 18, issue 4 pp43-57.

Linden, G. Kenneth, L. Kraemer, Jason, D. (2007). Who Captures Value in a Global Innovation System? The case of Apple's iPod. Personal Computing Industry Center (PCIC) Accessed from: http://www.signallake.com/innovation/AppleiPod.pdf [Accessed: 9 December 2011].

Patel, P. (1995). The localised production of global technology. Cambridge Journal of Economics. Vol. 10, pp141-153.

The Business Dictionary (2011). [online]. Accessed from: http://www.businessdictionary.com/definition/globalization.html [Accessed: 9 December 2011].

The Innovation Machine (2008) [online]. Accessed from: http://www.the-innovation-machine.com/?p=86 [Accessed: 9 December 2011].

Tidd, J. Bessant, J. Pavitt, K. (1998). Managing Innovation’ Integrating Technological, Market and Organisational Change. Sussex: John Wiley and Sons Ltd.

Youtube. (2010) Globalisation Pros and Cons. [online]. Accessed from: http://www.youtube.com/watch?v=SyJ23a7_fvQ [Accessed: 9 December 2011].  

Supply Chain Management – The Dell Company

Michael Dell didn't take long after returning as chief executive of his namesake company to locate the source of the firm's recent financial and operational problems: its supply chains (Hoffman, 2007, p58). Before I look more into this I am going to discuss the concept of Supply Chain Management.

Supply chain management (SCM) is a ‘total systems approach to managing the flow of information, materials and services from raw material suppliers to the end customer (Jacobs et al, 2009, p17). Each product or service will have its own SC (Greasley, 2009, p391). There are three main objectives to SCM, these are; focus on satisfying end customers, formulation and implementation of strategies based on capturing and retaining customer business and managing the SC effectively and efficiently (Johnston et al,1997, p211). The relationship between a firm, a supplier and a customer is known as a supply network. These relationships are shown in the diagram below (Greasly, 2009, p392), this diagram demonstrates the structure of a supply chain. 

Supply chains are highly complex and span many different organisations (Gattorna, 2009, p271). All supply chains are different; as a result organisations need to define the supply chain practices that best support their business strategy (Gattorna, 2009, p273). Therefore the supply chain design is crucial in order to optimise performance. Greasley states that one of the most important design features of a supply chain is the cooperation of organisations with each other, in order to provide customer satisfaction (Greasly, 2009, p394).

This is, according to Michael Dell, where his company went wrong. Dells share price has declined from more than $40 two years ago to less than $25 today on missed financial targets and market share losses to Hewlett-Packard and other competitors. The company has also seen its reputation for customer service tarnished (Hoffman, 2007, p58), all because of the lack of a high-quality supply chain. Dell highlighted some of the things he was going to change in order to get his company back no track;

‘As we continue to grow worldwide, it is important that we increase our ability, via the Direct Model, to manufacture close to our customer and fully integrate our supply chain into one global organization.’ Dell said. ‘This will allow us to drive for even greater excellence in quality, cycle time and delivered cost. We will innovate and adapt our supply-chain model to help drive differentiated product design, manufacturing and distribution models’ (Hoffman, 2007, p58).

After these innovations to the supply chain had taken place it was later said by Jacobs et al, that the Dell supply chain is ‘unique and interesting’ (Jacobs et al, 2009, p361). They also state that through the likes of innovative product design and assembly systems, internet order taking processes and co operation from their suppliers their supply chain has become extremely efficient (Jacobs et al, 2009, p361), therefore proving that a high-quality supply chain may be key to a company’s success.   

References

Greasley, A. (2009). Operations Management. Second Edition. Sussex: John Wiley and Sons Ltd.

Hoffman, W. (2007). Dell Targets Supply Chain. Gulf Shipper. Vol. 18, issue 10, p58.

Jacobs. Chase. Aquilano. (2009). Operations and Supply Management. Twelfth Edition. London: McGraw Hill.

Johnston, R. Chambers, S. Harland, C. Harrison, A. Slack, N.  (1997). Cases in Operations Management. Second Edition. UK: Pitman Publishing.

Innovation in New Product Development (NPD).

Andrews states that New Product Development (NPD) is the ‘best means of utilising a company’s strengths and achieving long-term growth’ (1975, p46). The major stake holders in successful NPD are the customers (Bruce and Cooper, 2000, p48); therefore suggesting that it is the market’s expectations and needs that are crucial to a successful product. However as market needs are ‘difficult to constantly ascertain’, and ‘customers are unable to articulate their requirements’ (Bruce and Cooper, 2000, p48), it consequently becomes essential that ‘companies commit themselves to continuous development of products (Barczak, 1995). Tidd suggests that ‘innovation demands a deep knowledge of user needs and therefore a close relationship with customers would be beneficial (1993).

The Evolution of innovation process systems can be seen in the timeline below (Gordon-Hall, 2011).  

The innovation process has traditionally been viewed as a sequence of separable stages oractivities (Trott, 2002, p17). The first variation of this process is known as the ‘Technology Push‘ process (Trott, 2002, p17). Within this process it is assumed that ‘scientists make discoveries, technologists apply them to develop new product ideas, and then engineers and designers turn them into prototypes’ and then lastly ’marketers will promote the product to potential customers’ (Trott, 2002, p17). It is apparent that in this process of innovation the customers have very little say in the product. This process nowadays is most notably used in the pharmaceutical industry (Trott, 2002, p17). The diagram below displays the Technology Push process (adapted from Trott, 2002, p17 description).

Hippel states that it was not until around ‘the 1970s that new studies of actual innovations suggested that the role of the marketplace was influential in the innovation process’ (1978). As a result the second variation of the innovation process was developed, the ‘Market Pull’ process. This emphasises ‘the role of marketing as an initiator of new ideas, resulting from close interactions with customer’ (Trott, 2002, p18). Therefore implying that the research and design of new products is based on what the customers want as apposed to the reverse idea. This is shown in the diagram below (adapted from Trott, 2002, p18 description).

The third generation ‘Push-Pull’ process is also known as the ‘Coupling’ process. It has been stated that the previous processes are linear and are ‘only able to offer explanations of where the initial stimulus for innovation is born’ (Trott, 2002, p18). Therefore the coupling model suggests that it is the blend of manufacturing, R&D, and marketing that will promote innovation (Trott, 2002, p18), instead of one or the other.

E-commerce has enhanced innovation greatly. For example ’electronic data interchange (EDI) facilitated the application of the just-in-time (JIT) approach in management operations’ (Trott, 2002, p158). It has been said that the innovative procedures that the advancement in technology has aided is an integral part of the drive to generate business value (Trott, 2002, p158). Many companies have recognised the potential for innovation when it comes to ‘integrating customers and content in previously impossible ways’ (Trott, 2002, p159). An example of this would be the Encyclopaedia Britannica, this was originally only available in book form, however through e-commerce it has gone from, book to CD to becoming available online in less than a decade. Many business’ now solely run via the internet such as iTunes, Wikipedia, eBay and Amazon etc.

References

Andrews, B. (1975). Creative Product Development; A marketing approach to new product innovation and revitalisation. London: Longman Group Ltd.

Barczak, G. (1995). New Product Strategy, Structure, Process and Performance in the Telecommunications Industry. Journal of Product Innovation Management, vol. 12, pp 3-15.

Bruce, J. Cooper, R. (2000). Creative Product Design; A practical guide to requirements capture management. Sussex: John Wiley and Sons Ltd.

Tidd, J. (1993). Technological Innovation, Organisational Linkages and Strategic Degrees of Freedom. Technology Analysis and Strategic Management. Vol. 5, (3), pp 273-284.

Trott, P. (2002). Innovation management and New Product Development. Second Edition. Harlow: Pearson Education Ltd.

Von Hippel, E. (1978). Users as Innovators. Technology Review. Vol. 80. (3), pp 30-34.