Standardized Strategic Assessment Framework for the Small and Medium Enterprises in High-Tech Manufacturing Mustafa Demir Committee

Dr. Gary Waissi Dr. Jane Humble Dr. Gerry Polesky

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Agenda --- 09/27/2012

• • • • • • • •

Overview Goal and Objective Assumptions and Limitations Theoretical Background of the Standardized Strategic Assessment Framework(SSAF) Research Design Survey Application Future Data Analysis Discussion and Summary

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Introduction

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Goal:

The primary purpose of this study is to lay the groundwork for the SSAF. The secondary purpose of this study is to develop theoretical models for the SSAF and to provide a framework for linking these models to the theory and each other. The SSAF is a tool, consisting of a set of six theoretical models, which will aid with evaluation and assessment of a SMEs’ current and future strategic positioning.

The six models are R&D activities model, technology adoption model, export performance model, operational excellence model, product innovation model, and process innovation model. •

Project Phases

Phase I: Phase II: Literature review and development of preliminary modeling approaches (Continuing) Company visits; model improvement, model testing, survey questions improvement (Fall 2012) Phase III: Software development

(Future project)

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SSAF Theoretical Models

Six theoretical models were developed for the purpose of analyzing these factors and developing the SSAF: – – – – – – (1) Research Development (R&D) activities model will attempt to explain the relationship between inputs (tangible resources, intangible resources and human resources) and outputs (product and process innovation, and process improvement) (2) Product Innovation model will attempt to explain the relationship between inputs (e.g. R&D activities, qualified workforce, etc.) and outputs (e.g. export performance). (3) Process Innovation model will attempt to explain the relationship between inputs (e.g. R&D activities, qualified workforce, etc.) and outputs (e.g. export performance); (4) Technology Adoption Model in this study will attempt to explain the relationship between inputs (environmental influences, tangible, intangible and human resources) and outputs (company performance); (5) Operational Excellence Model(process improvement) will attempt to explain the relationship between inputs (e.g qualified workforce, technical information, etc.) and outputs (critical success factors); (6) Global Engagement Model will attempt to explain the relationship between inputs (e.g. product and process innovation, process improvement, etc.) and outputs (company performance).

• Supporter Models: – Qualified workforce: Development and management of the workforce is vital, because sustainable competitive advantage relies on the company’s qualified workforce (Dahms, 2001). – Machines and equipment are classified as physical capital resources (other physical capital resources are a company’s plant, geologic location, and access to raw materials) which are used by companies in their operations (Barney, 1991).

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Research Method

The following methodological research techniques were used in this study: – Review of fundamental competitive advantage models, including the MOT, the RBM, and complementary perspective that comprises the MOT and the RBM.

– Identify theoretical models relating to the proposed SSAF driven by fundamental competitive advantage models.

– Develop the SSAF in a systematic way to demonstrate the relationship between theoretical models from the literature relating to competitive advantage.

– Identify each theoretical model’s inputs and outputs, based on literature reviews.

– Develop hypotheses regarding each input and output of these theoretical models.

– Conduct a pilot survey to SMEs in A&D industry in Arizona area.

– Analyze the data with appropriate statistical analysis tools.

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Assumptions

The following assumptions are considered in this study: • There are two supporter models in the SSAF, including qualified workforce, and machine and equipment. • In literature review, positive and negative relationships are found for the models within the SSAF and their variables. However, the effects of the relationships on the competitive advantage can be different for each industry. • There are positive and negative externalities which affect company’s sustainable competitive advantage. • In order to determine the validity of the SSAF for any specific company, the hypotheses should be tested.

• There are information gaps between the company and the customer. In due course, customers’ demand changes, because of new products, and it is difficult for companies to understand customers’ demand. Therefore, this creates information gaps between customer and company. As a way to reduce these gaps, a company should communicate (e.g. surveys) with customers in order to meet their demand.

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Limitations

The study had certain limitations described as follows: • This study is limited to development of only six theoretical models: R&D activities, product innovation, process innovation, technology adoption, operational excellence and global engagement. Only three of them, R&D activities model, technology adoption model, and global engagement model are explicated in detail.

• This study is limited to only two supporter models, including qualified workforce, and machine and equipment. Qualified workforce, and machine and equipment are explained within each theoretical model. • • • This study is limited to only the Advanced Manufacturing Technology (AMT) adoption for the technology adoption theoretical model. There are different types of technology adoption, such as information technology adoption, AMT adoption, etc.. This study is limited to only export performance for global engagement theoretical model. This study is limited to only for pilot-test, because of time constraints.

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What is Competitive Strategy and Competitive Advantage?

• Strategic management is the process of identifying, choosing and implementing activities that will enhance the long-term performance of an organization by setting direction and by creating ongoing compatibility between the internal skills and resources of the organization, and the changing external environment within which it operates as (Smith, Jackson, & Wyatt, 1998, p. 6). • A company has a sustainable competitive advantage when “it is implementing value creating strategy not simultaneously being implemented by any current or potential competitors and when these other companies are unable to duplicate the benefits of the strategy” (Barney, 1991, p. 103).

• Competitive strategy “aims to establish a profitable and sustainable position against the forces that determine industry competition” (Porter, 1985, p.1).

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Competitive Strategy Models Figure 1. The Evaluation and Integration of the Concepts Source: (Bogner, Mahoney, & Thomas, 1998)

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Theories based on Industry

Industrial Organization Economics (SCP Approach): The origin of IOE is industry -structure, -conduct, -performance (SCP) which originated in the Harvard School of Industrial Economics. Wirth & Bloch (1995) define ‘structure’ as market structure, ‘conduct’ as the behavior of the companies in a market, and ‘performance’ as market performance (p. 17).

Figure 2. More Complex Relationship between Structure, Conduct and Performance Source: (Ferguson & Ferguson, 1994).

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Theories based on Industry

Market Oriented Theory: • • Porter’s MOT takes into consideration two factors (Porter, 1985): The attractiveness of industries to enter.

Improvement of the relative competitive position.

In order to explain these two factors, Porter (1985) developed the well-known five competitive forces model, which includes the entry of new competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the rivalry among the existing competitors.

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Theories based on Company Resources

Resource-Based Model (RBM): • • • • The RBM elucidates that competitive advantage occurs where the company is applying a value creating strategy which is not being applied at the same time by current or potential competitors, and the competitors are unable to duplicate the benefits of this strategy (O'Shannassy, 2008, Barney, 1991). Companies are fundamentally heterogeneous in terms of their resources and internal capabilities (Barney, 1991). According to Barney (1991), company resources must have four attributes, which are also shown in Figure 5, a company resource (Barney, 1991): must be valuable which means that it exploits opportunities in a company’s environment; must be rare among a firm’s current and potential competition; must be imperfectly imitable and must not be strategically equivalent substitutes for this resource. 12

Theories based on Company Resources

Company Resources: • • • There are three types of company resources in company environment Tangible resources are the resources which can be easiest to identified and valued in the company’s financial statements.

Intangible resources can be defined as “a company’s image or its scientific and technological knowledge” (Del Canto & Gonzales, 1999). Human resources can be classified as resources which “offer to the company their skills, knowledge, and reasoning and decision-making abilities” (Grant, 1995, p.125).

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Table 3. Classifying and Assessing the Company's Resources

Resource Tangible Resources Financial Resources Physical Resources

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Main Characteristics

The company’s borrowing capacity and its internal funds generation determine its investment capacity and its cyclical resilience.

The size, location, technical sophistication, and flexibility of plant and equipment; Location and alternative uses for land and buildings; Reserves of raw materials constrain the company’s set of production possibilities and determine the potential for cost and quality advantage.

      

Key Indicators

Debt/ equity ratio.

Ratio of net cash to capital expenditure.

Credit rating.

Resale values of fixed assets. Vintage of capital equipment. Scale of plants.

Alternative uses of fixed assets.

Intangible Resources Technological Resources Reputation

Stock of technology including proprietary technology (patents, copyrights, trade, secrets) and expertise in its application of know-how.

Resources for innovation: research facilities, technical and scientific employees.

   Reputation with customers through the ownership of brands, Established relationships with customers, the association of the company’s products with quality, reliability, etc.

The reputation of the company with the suppliers of components, finance, labor services, and other inputs.

     Number and significance of patents.

Revenue from patent licenses.

R&D staff as a percentage total employment.

Brand recognition.

Price-premium over competing brands.

Percentage of repeat buying. Objective measures of product performance.

Level and consistency of company performance.

Human Resources

The training and expertise of employees determine the skills available to the  company. The adaptability of employees determines the strategic flexibility of the  company. The commitment and loyalty of employees determines the company’s ability to maintain competitive advantage.

Educational, technical, professional qualifications of employees.

Pays rates relative to industry average. 14

Complementary Perspective

Although their premises are different, the similarities between the market-driven perspective and the RBM perspective has been recognized The fundamental compatibility of these two perspectives are (Spanos & Spyros, 2001, p.912): • • • They are complementary in terms of explanation of company performance, “in the sense that by drawing insights from both, one can gain a more balanced view on the sources of competitive advantage (internal and external determinants)” (p.912).

Both of them try to find a way to explain the same phenomenon of interest such as sustained competitive advantage.

Their unit of analysis is identical, as they both use the company as subject of examination. 15

Methodology

Methodology part of this study describes design, and procedures used in answering the following initial key research questions for the SSAF development: • • R&D Activities Model key research questions: Question 1: How do company R&D inputs (resources) affect R&D activities (capabilities)?

Questions 2: How do company capabilities (basic research, applied research and development) affect R&D outputs (e.g. technological innovations, etc.)?

• • Technology Adoption Model key research questions: Question 1: How do technology adoption inputs (resources) affect technology adoption?

Questions 2: How does company technology adoption affect outputs (company performance)?

• Export Performance Model key research question: Question 1: How do export performance inputs (resources) affect technology adoption?

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Research Design

This study used the quantitative research instead of qualitative research (because this study does not investigate why something occurs) in order to identify whether there is a relationship between variables and the strength of their relationship. In quantitative research, experimental or non-experimental designs such as surveys are considered (Creswell, 2009). • • • • In this study the basic research strategy is followed (Scandura & Williams, 2000): Formal theory (literature review): In order to conceptualize models for empirical testing, researchers summarize literature in area of research. Literature reviews often applies a deductive process that generally provides researchers with hypotheses for empirical testing.

Sample surveys: maximizes the representative sampling of the population units studied. Although surveys maximize population generalizability, they are low on realism of context and precision of measurement.

Measurement: concerns “how well the measures employed fit the theories for which a test designed” (Scandura & Williams, 2000, p. 1252). As a way to obtain valid results, measures must be valid representations of constructs. Conclusion: statistical conclusion refers to the ability draw conclusions on the basis of statistical evidence.

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Pilot Survey

The measurement scales will be validated using a pilot test (preliminary test) with a view to ensure validity and reliability. For the pilot test, academicians and five local key executives from Small and Medium Enterprises (SMEs) in the Aerospace and Defense (A&D) industry will be interviewed. By conducting a pilot test, the survey will be evaluated in terms of phrasing, clarity, adequacy of construction; and in addition, instructions about the instrument will be given.

Sample: The focus area of this study is how a company can achieve sustainable competitive advantage based on company resources, capabilities and competitive strategy. The population for this study will be represented by a total collection of local SMEs in the A&D industry. A sample of the population will be used to draw conclusions about the entire population, because surveying a large number of companies would be costly and lengthy. The sample will be chosen from Arizona A&D supply chain interactive database, which was developed in 2012 by the department of Technological Entrepreneurship and Innovation Management in Arizona State University (TEIM, 2012). 18

Summary

• This study involves literature review conducted to understand the sustainable competitive advantage at the company level, how it occurs, what are the internal and external sources of sustainable competitive advantage and how they affect each other. • This study used the quantitative research in order to identify whether there is a relationship between variables and the strength of their relationship. • As a way to collect the data, companies will be interviewed. 19

Systems Engineering

• • • • The SSAF was designed by systems engineering approach. A system can be defined as “an integrated composite of people, products, and processes that provide a capability to satisfy a stated need or objective” (DOD, 2001, p. 3).

Systems engineering is “ an interdiciplinary engineering management process that evolves and verifies and integrated, life-cycle balanced set of system solutions that satisfy customer needs (DOD, 2001, p. 3).

Two major fundamental concepts are used, including : – Integration Definition for Function Modeling (IDEF0) and transformational (or functional system). IDEF0 which is a functional modeling tool of systems engineering, was used. IDEF0 is a common modeling technique for the analysis, development, re-engineering, and integration of business processes.

– Transformational (functional) system, which is depicted in Figure 13, is a system which “receives inputs from its environments, and transforms them to outputs, and releases the outputs to the environment, whilst seeking to maximize the productivity of the transformation” (Katsundo, 1996, p. 27).

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Standardized Strategic Assessment Framework

General Environmental Influences

Government Economy Industry Culture Company Strategy Global Operational Excellence Technology Adoption Process Innovation Product Innovation R&D Activities Qualified Workforce

LABOR

Machine and Equipment

CAPITAL

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R&D Activities Model

Phase 1

H1: + Equity Debt H2: Size H3: + Capital Intensity H4: + Business & Strategic Plan  Mission & Vision  Goals and Objectives R&D Workforce R&D Collaboration Process Improvement Marketing Orientation H5: + H6: + H7: + H8: + Commercial H9: +   

R&D Activities

Basic Research Applied Research Experimental Research

Phase 2

Technological Innovation H11: + Product Innovation H12: + Process Innovation H13: + Process Improvement Learning Orientation H10: + 22