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The analysis of dynamic capabilities in a competence-oriented organization
Pergamon PII: S0166-4972(97)00093-X
Technovation, 18(3) (1998) 179–189 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0166-4972/98 $19.00 + 0.00
The analysis of dynamic capabilities in a competence-oriented organization Alberto Petroni ` Dipartimento di Ingegneria Industriale, Universita degli Studi di Parma, Parma, Italy
Abstract The crucial determinants of innovation reside in the interaction between technological and organizational processes. The former influence the creation, shape and renewal of a firm’s skills and capabilities, thus representing the basic foundation for the latter, which, in turn, can be a powerful driver for reshaping a firm’s competence base. In this paper, first a general framework of competence analysis is presented and applied to a case study from the healthcare industry. In order to better understand and explore the nature of mutual interactions between component and architectural dynamic competences, the focus is then shifted to the new product development domain. A description of the organizational dimensions of integration (both internal and external) is provided, which represents the basic foundation for the renewal of the organization’s dynamic capabilities. Finally, the implications of adopting a competence-oriented organizational scheme for R&D management are briefly discussed. 1998 Elsevier Science Ltd. All rights reserved
1. INTRODUCTION The innovative performance of an organization can be considered as the outcome of a complex isomorphism and reciprocal influences between its internal evolutionary capabilities and external contingencies related to environmental uncertainty and turbulence (Dosi et al., 1991; Nelson and Winter, 1982; Teece et al., 1990; Teece, 1982). Competence can be broadly defined as “the ability to identify, expand and exploit business opportunity”. It ... “constitutes the means through which technological possibilities are converted into economic activity” (Carlsson and Eliasson, 1994).
The ‘evolutionary school’ considers the accumulation and development of competences as a pathdependent process of continuous learning: a firm ‘evolves’ from elementary levels of knowledge to some forms of ‘technological mastery’ targeted to product or process innovation resulting in performance differentials (Winter, 1987; Barney, 1986; Nelson, 1991). Knowledge is then the basic foundation of capabilities, and problem solving represents the driver of their building, nurturing and renewing process (Winter, 1987; Saviotti, 1994). In order to be functional to this purpose, any kind of knowledge must be embodied in specific action producing forms; that is, using Leonard-Barton
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(1992) categories, skills, technical resources (equipment, machinery, tools), managerial resources (routines, procedures, incentives) and values and norms. The organizational routines adopted by firms in problem-solving activities are the essence of dynamic capabilities, for they are an organization’s basic increment of knowledge creation (Heiner, 1988). Firms’ capabilities are dynamic because such is the nature of the linkages between market, technological environment and the competence base of a firm (Iansiti and Clark, 1994). This paper aims at a deeper understanding of capability building and renewal processes in a large, multidivisional science-based organization. To this purpose, two steps are carried out. First, core competences are identified and analysed at firm level, by using a framework enabling one to distinguish between component and architectural capabilities (Henderson and Clark, 1990). Later, in order to exploit the link between dynamic routines and innovative performance, the focus of analysis is shifted to new product development (NPD) activities, where concept creation, development and product engineering are the domain of the capabilities development process. The empirical evidence shows and confirms the importance of those organizational mechanisms that enable different functions and processes to integrate, internally and externally, and hence to proficiently develop action-producing capabilities (Iansiti and Clark, 1994). Customer integration capability is, in fact, associated with dynamic performance in environments characterized by significant market uncertainty, and technology integration capability is associated with dynamic performance in environments characterized by significant technical uncertainty. Internal integration capability is also associated with dynamic performance; in particular, it drives project implementation as far as development speed and productivity are concerned. The case study hereinafter presented illustrates an example of competence-oriented organizational design, since most of the solutions there adopted and implemented are explicitly targeted to carry out an effective integration between technological, manufacturing and commercial competences.
2. THE SMITH & NEPHEW GROUP Smith & Nephew is a major worldwide group in the healthcare industry, specifically operating in sec-
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tors such as casting, support and rehabilitation, wound management, trauma, orthopaedic implants and endoscopy (Fig. 1). The strategy for product differentiation is based on concentrating effort on specific product areas where integrated competences (scientific, commercial and technical) can be enhanced and exploited and coordination, on a worldwide scale, amongst different activities increased.1 Business reorganization has been further accomplished through a set of mergers, acquisitions and joint ventures essentially aimed at strengthening the firm’s presence in arthroscopy instrumentation, rehabilitation products, bracing, orthopaedic accessories, wound management and phlebology markets. Dismissals have particularly concerned business areas that, albeit being historical brands,2 no longer fitted with the overall group’s strategy, lacking in complementarity to the main core business.
3. THE ANALYSIS OF SMITH & NEPHEW’S CORE COMPETENCES Data for the case study were primarily of company proprietary information collected through in-depth interviews (both structured and unstructured) with scientists, managers and technicians at different hierarchical levels. Methodology varied significantly, depending upon the focus of interviews: structured frameworks were used to collect information on the basic organizational mechanisms, structures and processes, whereas completely unstructured discussions were run when attempting to track the evolution of a single development project or of sequential projects. A first effort consisted in ‘mapping’ the system of Smith & Nephew’s core competences. This is somewhat complex since identifying and defining core competences may encounter a number of pitfalls such
1 In 1996, for instance, skin care products operations in Florida have been combined into the Smith & Nephew Wound Care Centre of Excellence in Hull (UK), allowing the group to improve its geographical coverage and gain faster sales growth, since the markets for skin care and wound care products overlap and opportunities are created for involvement of nurses and clinician educators in promoting the whole range. 2 An example is Perry, a surgeon’s and speciality gloves business (increasingly a commodity market) sold to Pacific Dunlop in Australia: the brand will fare better with a company that is focused on latex rubber technology. Another example is Ditropan, a licensed incontinence drug, completing Smith & Nephew’s withdrawal from ethical pharmaceuticals.
The analysis of dynamic capabilities in a competence-oriented organization
consumer healthcare 17%
Wound Management 18%
Other medical products 10%
Casting, support and rehabilitation 19% orthopaedic implants 13%
endoscopy 12%
trauma 11%
Fig. 1. 1995 Sales from continuing operations by product groups.
as mistaking technologies, resources or individual skills for core competences. Also, this process seems to be partially ‘political’ in that each person interviewed tends to attribute special relevancy to the activities in his/her own domain. Finally, core competences are often restricted to technological capabilities alone, thus disregarding their organizational dimension. To get a real distinction between what is and what is not genuinely core is the outcome of a patient attempt to couple each relevant activity with the related degree of ‘customer perceived value’. By using this criterion, successive incremental focusing allowed us to identify some distinctive properties together with the key factors governing the performance of each competence and explaining its internal functioning. Smith & Nephew presents a rich variety of core capabilities: component competences (Henderson and Cockburn, 1994) are particularly related to research, manufacturing and sales (Fig. 2). This illustration is based on a theoretical scheme according to which each core competence is depicted as a set of systemic properties pertaining to individual, formal and social subsystems. The advantage of this approach is that it represents the constituent elements of a competence, enabling it to function. As far as research capabilities are concerned, one of the major strengths of the company is the effective and continuous application of science: S&N’s product range is testament to a progressive development of a comprehensive tissue repair system. Over the past five years the group has devoted over US$131 million to the development of existing and new products, with many of the most recent innovations yet to enter or complete the clinical testing phase. Industrial research at Smith & Nephew leads to the
development, protection and regulatory approval of innovative products in areas such as: 쐌 healing and management of severe chronic wounds; 쐌 repair and replacement of damaged joints; 쐌 treatment of trauma injuries; 쐌 minimally invasive surgery; 쐌 enhanced-performance speciality surgeons’ gloves. R&D strategy is an integral part of the overall group strategy. Research and development is overseen by the Research Steering Group, which involves the group’s senior business and technical leaders and is chaired by the Chief Executive. The scientific quality of R&D is monitored and guided by a Scientific Advisory Panel comprising scientists in a wide range of disciplines. Almost one-quarter of the primary research is managed by the Group Research Center in York, opened in 1993, which concentrates on radical new technology and background research into new materials (polymeric and composites) and the biology of tissue repair. The move to York Science Park was a watershed in the way research is organized: it reinforced the Center’s focal role between the market-driven demands of the company’s manufacturing centres and the pioneering ‘blue sky’ research being pursued in academic centres as well as other research institutes including Imperial College and Queen Mary and Westfield College (both University of London), York University, Manchester University and Cardiff University, all in the UK, and John Hopkins University, the University of Massachusetts and Advanced Tissue Sciences (a joint venture for new tissue-engineered cartilage products) in the USA. Research capabilities basically draw on: (a) the research-oriented values shared throughout the company;
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EXTERNAL ENVIRONMENT
Internal Organization
Skills "local" knowledge multidisciplinarity RESEARCH CAPABILITY
Healthcare professionals
Managerial system communication coordination mechanisms incentives
Normative values space for creativity informal network Skills Highly integrated (commercial/scientific)
Buying associations
Govermental bodies
Customer perceived value: "Completeness" of product range "Cost - effectiveness"
MARKETING/ DISTRIBUTION CAPABILITY Managerial system "Remote" management "Specialists Involvement" Quality Function Deployment
Normative values self-development
Skills "local" tacit
MANUFACTURTING CAPABILITY
International scientific councils
Mangerial system "Global" plant management Process plant start up Quality Function Deployment
Fig. 2.
A ‘systemic’ approach to competence analysis at Smith & Nephew.
(b) the operating mechanisms (either formalized or not) and the managerial skills which improve the effectiveness of communication and leadership. There are two dimensions around which the organization has developed its unique capability: 쐌 the individual skills originating from a highly specialized ‘local’ knowledge base that ensure firm-specific expertise in particular disciplinary areas such as analytical chemistry, biochemistry, cell biology, histopathology, physical chemistry, textile technology and so on. 쐌 the extensive flows of information across the boundaries between scientific disciplines (the multidisciplinary approach). The marketing innovation capability depends on individuals who have conceived a ‘branded service
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Normative values continuous improvement self-development
concept’ and have begun to embed ‘industry focused values’ in the organization. Also, global marketing and distribution skills have become of strategic importance in the industry: albeit the group operates in more than 50 markets worldwide, a ‘one company’ philosophy has been extensively adopted throughout the organization. Acting as a single entity rather than a sum of discrete parts has increased coordination in logistic processes and synergy in marketing and sales. This has resulted in higher negotiating power with distribution and a generalized cost reduction which represent a critical factor in a highly turbulent environment characterized by strong governmental pressures which make price adjustments completely unfeasible.3
3 In the UK, for instance, all the distribution activities for non-consumer goods have been referred to a single organization, Smith + Nephew Healthcare.
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Improvement in manufacturing capability seems rather to be pursued over time through a sound balance of internal skills consolidation and technology purchase from external sources (mainly acquisition of leading manufacturers). Whilst some manufacturing processes are simple, others are not and require advanced technology. A key requirement is to comply with stringent regulations affecting the 31 productive sites worldwide as well as to continuously rationalize processes. This may require a factory redevelopment (in Hull, UK), a waste reduction programme (France) or an improvement to engineering technology (Memphis, USA). The set of manufacturing capabilities can be ideally divided into two subsets: 쐌 those drawing on professional knowledge, having specific technical content but also requiring organizational skills: quality function deployment and process plant startup are recently adopted techniques specifically aiming at their refinement; 쐌 organizational capabilities of communication and leadership, both coupled with self-development values and a culture of continuous improvement. The overall competence is driven by pressure from low-cost competitors and legal requirements from governmental bodies,4 and is strengthened by establishing close relationships with healthcare professionals. Continued success in the healthcare market results from perceived customer value which, in turn, is also a function of a balanced product range: whilst the group has gained scientific leadership in tissue engineering and technological excellence in related instrumentation, its traditional productions (plaster of Paris and bandages) still amount to a considerable portion of the total sales.
4. NEW PRODUCT DEVELOPMENT IN WOUND MANAGEMENT The focus of analysis is now shifted to NPD in order to explore the organizational routines and integration mechanisms adopted for effective innovation. The motivation for this choice is that the complex linkages between concept creation, concept develop4 Ensuring that all products comply with the regulations in force wherever they are marketed is not an easy task: one proposed European directive contains over 350 standards for medical devices alone. In this respect product safety is a major topic: it requires time-consuming activities both in NPD and in all clinical trials, where a specific ethics committee is appointed.
ment and implementation are one of the major drivers in shaping and renewing those capabilities which emerge as critical in technology-based industries (Fig. 3). The principal challenges in wound care include protection against infection, absorbing wound fluids, preventing the dressing from sticking to the wound and optimizing the rate and quality of healing. Damage to skin takes many forms — from chronic wounds such as pressure sores and leg ulcers to acute wounds such as cuts, burns and surgical incisions. Recent product innovations in wound management include: 쐌 an adhesive form of Allevyn for treating chronic wounds, including leg ulcers, diabetic ulcers and pressure sores, which make up the fastest growing wound care segment. These wounds are difficult to treat and can take weeks to heal, causing significant distress, discomfort and pain to the patient. Allevyn dressings provide superior performance in managing and accelerating the healing process; 쐌 the new Applipak version of Intrasite, a ‘debriding’ dressing gel that gently removes dead tissue from chronic wounds. The unique pack is a step forward in presentation, allowing users to direct gel into the wound with one hand; 쐌 Profore, a cost-effective four-layer compression bandage which significantly improves healing rates for leg ulcers; 쐌 acute and intravenous fixation products: Cica-Care, a market-leading gel that helps reduce unsightly scarring, achieved further rapid sales growth particularly in China, where the population’s propensity to heavy scarring makes it especially valuable; OpSite Post-Op, launched in 1994, is now recognized worldwide as the best post-operative dressing; 쐌 IV3000, a leading-edge IV catheter fixation dressing with advanced moisture transmission. The development process of Allevyn has been investigated. The overall project started in 1990 and aimed to discover completely new options that could spearhead fundamental changes in this sector. Pursuing these so-called ‘step changes’ in technology has tended to come from the York R&D Center’s pioneering work, albeit final product development, along with product improvement and manufacturing process development, has primarily been the concern of the combined action of York R&D Center and the Hull Centre of Excellence.
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Technical options
Uncertainly (contingencies)
Capability gap in concept creation, development and implementation
Problem-solving activity
Demand
Fig. 3. The underlying relations between uncertainty and problem-solving activities.
The first phase (materials study and selection) was overseen by the Research Steering Group and involved the materials science staff based at York, who were divided into two sub-teams. The first team conducted a wide range of basic research in skin repair, using a variety of techniques to study interactions between medical devices, bacteria and human tissue which resulted in notable advances in medical applications of tissue cultures. The second research team worked on developing an understanding of the physical properties of new polymeric materials. The scientific challenges were, in this exploratory phase, to obtain easy-to-remove adhesive dressings promoting a moist wound healing environment. It was found that best fitting material was a special kind of hydrophilic polymer. One of the greatest strengths in this phase lay in combining biology with physical and engineering sciences to create wholly new products that could answer needs identified through working closely with clinicians. Once basic material requirements were clear, the Center’s main responsibility was research into new product concepts, techniques and technologies to be developed into marketable products. Its primary goal was to generate new products clearly differentiating from the competitors’ ones, delivering significant benefits to the patient with cost advantages to healthcare providers.
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Effective development of Allevyn took place through problem-solving routines (problem-solving circles) where knowledge accumulation has been essential in driving and framing capabilities (Fig. 4). The process has been cyclical and iterative: concept creators and developers twice undertook the creation/development sequence before getting to the final prototypes. At first (concept creation) all efforts were concentrated on developing a water-based adhesive which could stick to the patient’s skin but not to the wound site in order to cause minimal trauma upon removal. In this early stage the critical objective was the development of technical options that could fulfil customer expectations, and at the same time the adoption of mechanisms for correctly construing market information and constructing possible scenarios (external integration with healthcare providers, material suppliers and regulatory institutions). To this purpose, the combined knowledge of the linkages between physical and informative resources were the agents for technical options to be effectively explored and pursued in the project. Panels of scientists and clinicians were formed which met repeatedly to discuss possible options, enjoying a close and informal relationship. They initiated discussion with material suppliers also, and several partial prototypes were proposed for investigation at bench scale. All of them were tested but
The analysis of dynamic capabilities in a competence-oriented organization
Fig. 4.
The development process of Allevyn.
results were not satisfactory, especially with regard to leakage prevention. The issues researchers were concerned with related mainly to increasing the dressing’s initial level of perforation, finding and exploring solutions compatible with the physical properties of materials and the manufacturing technologies in use. The most critical issues thus turned out to be the analysis of the impact of new technical choices on the existing base of design and manufacturing capability. Since no easy-to-implement solution was found, the whole product architecture had to be redesigned; product concept went then back to York. An informal ‘integration group’ was then created which gathered scientists, people from the process research group and manufacturing engineers from the Centre of Excellence at Hull. The process research group is part of York Center and its major aim is to undertake detailed investigation to help devise practical and reliable manufacturing processes for material developed at the Center. This group is a key link with the technical and production departments in the operating centres of excellence. Its laboratories are endowed with all the facilities needed for a full prototyping. The centres of excellence are manufacturing centres specializing in particular types of product, championing the evolution of new products for their own markets through strong ‘organic’ links with commercial people from
all the different geographical markets. This ensures that new product development is a principal driver of business growth, taking place close to the relevant sales and marketing teams and guided by sound understanding of market needs. The role of integrators was mainly played by the process group researchers: their ability to discuss with scientists and engineers endowed the integration group with such a breadth of experience and technical knowledge, ranging from basic forms (technical possibilities) to manufacturing capabilities, that a radical new solution was found. It consisted in a foam’s open cell structure which revealed higher performance in absorbing excess liquid and preventing leakage. Novel heat and pressure technologies were used to perforate 42 holes into every square centimetre of stretchable, double-sided adhesive film. A final prototype was achieved that, through the combined utilization of the hydrophilic polymer and the open cell structure, allowed excess exudate to pass through the foam core. Clinical trials for the product were organized on a worldwide basis: the testing programs were designed to establish and refine its effectiveness, its safety, to provide guidelines for best clinical practice and to give evidence that the product met national regulations. Summing up, the integrating capability linked,
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Fig. 5.
Prosess of building NPD capabilities.
through the execution of problem-solving processes, the company’s knowledge base to its capacity for innovation (Fig. 5). It is related to what Iansiti and Clark (1994) have defined as dynamic capability, which synthesizes performance improvement over the next product generations within a single line.
were employed to demonstrate and promote the new product’s functionality. Market response was excellent since sales in chronic wound dressing grew almost threefold.
The essential nature of integration was, in the second phase, technological, and specifically consisted of a superior ability to link the evolving base of technical knowledge (both inside and outside the company) to the existing base of capability within the firm. It mainly depended on the capacity to use the basic set of knowledge to select different technical possibilities and to adapt the current resources to product and process engineering. Communication routines between organizational sub-units and coordination leadership emerge as major organizational factors (Table 1). The final phase (manufacturing engineering) has certainly required less effort since all the relevant manufacturability questions were considered and solved in advance. Finally, qualified nurses and clinical educators
5. A COMPETENCE-ORIENTED APPROACH TO ORGANIZATION The analysis has confirmed that the capacity of an organization to access new forms of ‘external’ knowledge (external integration) and the capacity to flexibly coordinate the knowledge base of each disciplinary area (internal integration) represents an integrating (architectural) capability which increases the performances of each component capability. The organizational elements and processes through which it is uniquely and originally carried out are the essence of the firm-specific properties that crucially drive innovative performance. The constituting dimensions of such a metacompetence (so defined because of a higher hierarchical level) are essentially organizational: the enhancement of competences and
TABLE 1. Integration
Critical factors
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External
Internal
Ability to generate options by sampling external information sources Ability to evaluate and frame those options through in-depth analysis
Ability to carry out changes in skills and systems Capacity for coordination leadership and organizational routines for sufficient communication between organizational sub-units
The analysis of dynamic capabilities in a competence-oriented organization
their evaluation as ‘horizontal’ properties are the basic criteria for organizational design. In Smith & Nephew, some organizational solutions have been implemented in order to allow all the potential users to share any relevant scientific, technical or commercial competences. More specifically, the group has been structured in competence centres through the identification of ‘centres of excellence’, where the bulk of the R&D — primarily development — is carried out. Such an organization has a high degree of flexibility, residing in the fact that those competences which are not product/market specific are located in business units parallel to the centres of excellence. Thus a superior integration between scientific, technological and commercial competences is achieved and effectiveness of product development activities is devised. Second, in NPD processes informal ‘integration groups’ are put into life in order to devise possible solutions and suggest concrete actions for those problems (design, manufacturability, production yields and so on) arising in different phases of the development process. By ensuring, within these integration groups, the concurrent presence of scientists, development researchers from York and manufacturing engineers from the centres of excellence, competence accumulation and diffusion are guided and decisions centralized. External integration is particularly relevant in concept creation, thus playing a key role in the renewal of the competence base, while internal integration is an effective driver for product engineering (Table 2). The specific integrative features of the system are eventually emphasized by the adoption of interfunctional units (Educational Committees) which act, within each centre of excellence, as ‘observatories’ of the ripened individual skills and their evolution over time. A ‘competence-oriented’ organization is, thus,
primarily aimed at having the fundamental knowledge base of the company, the set of shared values and desired behaviors, clearly emerging and pointed out. Such is, then, the only criterion driving professional training philosophy and self-development culture. According to this, the overall job evaluation system has to be founded on long-term performance measurement, including the assessment of individual skills and their evolution over time. This implies that a centralized model (i.e. Human Resource corporate or divisional functional units) for highly specialized competences is not — nor could be — advisable: the capabilities development process is, in fact, indirectly managed through the adoption of specific organizational solutions and strategic choices, allowing line managers with project responsibility to exert all those ‘integrating’ actions that, as seen, are crucial for its effectiveness (Fig. 6). Such a ‘competence-oriented’ reorganization has allowed Smith & Nephew to effectively balance the trade-off between R&D centralization and decentralization5. The decision to create integrated technical/commercial committees within each centre of excellence, acting as a key link with corporate R& D staff, together with the adoption of contractor–customer approaches for relationships between corporate and divisional laboratories have avoided situations by which: (a) the reinforcement of a company’s technological base, together with the accumulation of specialized local knowledge at business unit level, tends to lower the flexibility of the overall technological strategic design; (b) inconsistency between divisional research infrastructures and managerial requirements is 5 Recently, a generalized trend has been observed consisting of an increased short-term focusing of technological strategies at divisional or business unit level. Corporate laboratories have often decreased the range of their tasks in favour of more trouble-shooting supporting activities, while the bulk of development is carried out in the divisional facilities (see EIRMA, 1996).
TABLE 2. Integration External Phase of problem-solving
Concept creation
Concept development
Internal
The firm frames capability building activities that are needed to respond to external contingencies Activities involving the integration of specialized skills, knowledge base and managerial systems (procedures, routines, incentives)
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Healthcare professionals
Buying associations
RESEARCH CAPABILITY
INTEGRATING METACOMPETENCE Centers of excellence Integration Groups Educational Committees
Customer perceived value:
MARKETING DISTRIBUTION CAPABILITY
Govermental bodies
MANUFACTURING CAPABILITY
International scientific councils
EXTERNAL ENVIRONMENTAL
Fig. 6.
Architectural capabilities ‘systemic’ approach to competence analysis at Smith & Nephew.
progressively generated, arising from the utilization of competence-destroying technologies (i.e. following the adoption of novel manufacturing technologies which cause the current productive system to become obsolete); (c) excessive R&D decentralization may cause multidirectional behavior, spinning out of control; (d) a lack of transferal mechanisms of expertise amongst sub-units (cross-fertilization) in large diversified firms tends to provoke notable biases in the interdivisional sponsorship of horizontal technologies, thus damaging the long-term competences and the knowledge accumulation process.
6. CONCLUSIONS The key elements of NPD capabilities at Smith & Nephew are basically related to: (a) the ‘action-producing’ procedures adopted
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within the managerial systems (i.e., project management techniques); (b) the ‘cultural’ domain, highly informed by research-oriented and result-oriented values. These two elements are, nonetheless, in constant tension, since rigidities in the project management system may limit and prevent profitable customer relationships in new product development, and feedback in the innovation process may gradually reduce as the ‘project culture’ becomes dominant. This is most dangerous in a situation, such as the case study presented in this paper, where the deployment of local and specialized knowledge and of available technologies is often suggested by problem-solving processes put into practice in order to accomplish customer expectations. In order to bypass these possible pitfalls, a number of organizational solutions have been adopted by Smith & Nephew, aiming to coordinate and integrate those activities ranging from concept development to
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technical post-sale assistance and, through this method, favouring the renewal process of capabilities. Lastly, it is perhaps remarkable to note that the case study has confirmed that a competence-oriented approach to reorganization, as adopted in Smith & Nephew, has been coupled to gradual centralization in R&D planning. In particular, aggregating different sub-units on the basis of commonly shared competences seems a powerful tool for recomposing and unifying fragmented activities, hence limiting their degree of autonomy. This, in turn, helps in reaching conditions of resource sizing and allocation which guarantee sufficient uniformity throughout the company in the use of research methodologies. As a result of this, personal relationships and exchange of information flows across sub-units involved in the innovative process are encouraged.
REFERENCES Barney, J.B. (1986) Organisational culture: can it be a source of sustained competitive advantage? Academy of Management Review 11(3). Carlsson, B. and Eliasson, G. (1994) The nature and importance of economic competence. Industrial and Corporate Change 3, 687. Dosi, G., Teece, D.J. and Winter S.G. (1991) Toward a theory of corporate coherence. In Technology and Enterprise in a Historical Perspective, ed. G. Dosi, R. Giannetti and P.A. Toninelli. Oxford University Press, Oxford. EIRMA (European Industrial Research Management Association) (1996) Working group report No. 48. Heiner, R.A. (1988) Imperfect decisions and routinized production: implications for evolutionary modelling and inertial technical change. In Technical Change and Economic Theory, ed. G. Dosi, C. Freeman, R. Nelson, G. Silverberg and L. Soete. Pinter Publishers, New York. Henderson, R. and Clark, K. B. (1990) Architectural innovation: the reconfiguration of existing product
technologies and the failure of established firms. Administrative Science Quarterly 35, 9–30. Henderson, R. and Cockburn, I. (1994) Measuring competence? Exploring firm effects in pharmaceutical research. Strategic Management Journal 15, 63–85. Iansiti, M. and Clark, K. B. (1994) Integration and dynamic capability: evidence from product development in automobiles and mainframe computers. Industrial and Corporate Change 3, 557–605. Leonard-Barton, D. (1992) Core capabilities and core rigidities: a paradox in managing new product development. Strategic Management Journal 13, 111–125. Nelson, R. R. (1991) Why do firms differ and how does it matter?. Strategic Management Journal 12, 61–74. Nelson, R.R. and Winter, S.G. (Eds.) (1982) An Evolutionary Theory of Economic Change. Harvard University Press, Cambridge, MA. Saviotti, P.P. (1994) Knowledge, information and organizational structures. 11th International Economic History Congress, Milan, pp. 12–16. Teece, D. J. (1982) Towards an economic theory of the multi-product firm. Journal of Economic Behavior and Organization 3, 39–63. Teece, D.J., Pisano, G. and Shuen, A. (1990) Firm capabilities, resources, and the concept of strategy. University of Berkeley Consortium on Competitiveness and Cooperation, Working Paper No. 90–8. Winter, S.G. (1987) Knowledge and competence as strategic assets. In The competitive challenge, ed. D.J. Teece, pp. 159–184. Ballinger, Cambridge. Alberto Petroni is a post-doctorate researcher at the University of Parma (Italy) where he is also a teaching assistant in Business Economics and Organisation. His qualifications include an MSc in Management from the Bocconi University of Milan and a PhD in Science of Industrial Innovation from the University of Padua with a thesis on the analysis of corporate core competences. His research interests and publications mainly relate to two areas: the management of innovation (with a particular focus on technology strategic planning, organisation of product development, competence and knowledge-oriented managerial systems in R&D) and the management of industrial risks in SMEs.
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Technovation, 18(3) (1998) 179–189 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0166-4972/98 $19.00 + 0.00
The analysis of dynamic capabilities in a competence-oriented organization Alberto Petroni ` Dipartimento di Ingegneria Industriale, Universita degli Studi di Parma, Parma, Italy
Abstract The crucial determinants of innovation reside in the interaction between technological and organizational processes. The former influence the creation, shape and renewal of a firm’s skills and capabilities, thus representing the basic foundation for the latter, which, in turn, can be a powerful driver for reshaping a firm’s competence base. In this paper, first a general framework of competence analysis is presented and applied to a case study from the healthcare industry. In order to better understand and explore the nature of mutual interactions between component and architectural dynamic competences, the focus is then shifted to the new product development domain. A description of the organizational dimensions of integration (both internal and external) is provided, which represents the basic foundation for the renewal of the organization’s dynamic capabilities. Finally, the implications of adopting a competence-oriented organizational scheme for R&D management are briefly discussed. 1998 Elsevier Science Ltd. All rights reserved
1. INTRODUCTION The innovative performance of an organization can be considered as the outcome of a complex isomorphism and reciprocal influences between its internal evolutionary capabilities and external contingencies related to environmental uncertainty and turbulence (Dosi et al., 1991; Nelson and Winter, 1982; Teece et al., 1990; Teece, 1982). Competence can be broadly defined as “the ability to identify, expand and exploit business opportunity”. It ... “constitutes the means through which technological possibilities are converted into economic activity” (Carlsson and Eliasson, 1994).
The ‘evolutionary school’ considers the accumulation and development of competences as a pathdependent process of continuous learning: a firm ‘evolves’ from elementary levels of knowledge to some forms of ‘technological mastery’ targeted to product or process innovation resulting in performance differentials (Winter, 1987; Barney, 1986; Nelson, 1991). Knowledge is then the basic foundation of capabilities, and problem solving represents the driver of their building, nurturing and renewing process (Winter, 1987; Saviotti, 1994). In order to be functional to this purpose, any kind of knowledge must be embodied in specific action producing forms; that is, using Leonard-Barton
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(1992) categories, skills, technical resources (equipment, machinery, tools), managerial resources (routines, procedures, incentives) and values and norms. The organizational routines adopted by firms in problem-solving activities are the essence of dynamic capabilities, for they are an organization’s basic increment of knowledge creation (Heiner, 1988). Firms’ capabilities are dynamic because such is the nature of the linkages between market, technological environment and the competence base of a firm (Iansiti and Clark, 1994). This paper aims at a deeper understanding of capability building and renewal processes in a large, multidivisional science-based organization. To this purpose, two steps are carried out. First, core competences are identified and analysed at firm level, by using a framework enabling one to distinguish between component and architectural capabilities (Henderson and Clark, 1990). Later, in order to exploit the link between dynamic routines and innovative performance, the focus of analysis is shifted to new product development (NPD) activities, where concept creation, development and product engineering are the domain of the capabilities development process. The empirical evidence shows and confirms the importance of those organizational mechanisms that enable different functions and processes to integrate, internally and externally, and hence to proficiently develop action-producing capabilities (Iansiti and Clark, 1994). Customer integration capability is, in fact, associated with dynamic performance in environments characterized by significant market uncertainty, and technology integration capability is associated with dynamic performance in environments characterized by significant technical uncertainty. Internal integration capability is also associated with dynamic performance; in particular, it drives project implementation as far as development speed and productivity are concerned. The case study hereinafter presented illustrates an example of competence-oriented organizational design, since most of the solutions there adopted and implemented are explicitly targeted to carry out an effective integration between technological, manufacturing and commercial competences.
2. THE SMITH & NEPHEW GROUP Smith & Nephew is a major worldwide group in the healthcare industry, specifically operating in sec-
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tors such as casting, support and rehabilitation, wound management, trauma, orthopaedic implants and endoscopy (Fig. 1). The strategy for product differentiation is based on concentrating effort on specific product areas where integrated competences (scientific, commercial and technical) can be enhanced and exploited and coordination, on a worldwide scale, amongst different activities increased.1 Business reorganization has been further accomplished through a set of mergers, acquisitions and joint ventures essentially aimed at strengthening the firm’s presence in arthroscopy instrumentation, rehabilitation products, bracing, orthopaedic accessories, wound management and phlebology markets. Dismissals have particularly concerned business areas that, albeit being historical brands,2 no longer fitted with the overall group’s strategy, lacking in complementarity to the main core business.
3. THE ANALYSIS OF SMITH & NEPHEW’S CORE COMPETENCES Data for the case study were primarily of company proprietary information collected through in-depth interviews (both structured and unstructured) with scientists, managers and technicians at different hierarchical levels. Methodology varied significantly, depending upon the focus of interviews: structured frameworks were used to collect information on the basic organizational mechanisms, structures and processes, whereas completely unstructured discussions were run when attempting to track the evolution of a single development project or of sequential projects. A first effort consisted in ‘mapping’ the system of Smith & Nephew’s core competences. This is somewhat complex since identifying and defining core competences may encounter a number of pitfalls such
1 In 1996, for instance, skin care products operations in Florida have been combined into the Smith & Nephew Wound Care Centre of Excellence in Hull (UK), allowing the group to improve its geographical coverage and gain faster sales growth, since the markets for skin care and wound care products overlap and opportunities are created for involvement of nurses and clinician educators in promoting the whole range. 2 An example is Perry, a surgeon’s and speciality gloves business (increasingly a commodity market) sold to Pacific Dunlop in Australia: the brand will fare better with a company that is focused on latex rubber technology. Another example is Ditropan, a licensed incontinence drug, completing Smith & Nephew’s withdrawal from ethical pharmaceuticals.
The analysis of dynamic capabilities in a competence-oriented organization
consumer healthcare 17%
Wound Management 18%
Other medical products 10%
Casting, support and rehabilitation 19% orthopaedic implants 13%
endoscopy 12%
trauma 11%
Fig. 1. 1995 Sales from continuing operations by product groups.
as mistaking technologies, resources or individual skills for core competences. Also, this process seems to be partially ‘political’ in that each person interviewed tends to attribute special relevancy to the activities in his/her own domain. Finally, core competences are often restricted to technological capabilities alone, thus disregarding their organizational dimension. To get a real distinction between what is and what is not genuinely core is the outcome of a patient attempt to couple each relevant activity with the related degree of ‘customer perceived value’. By using this criterion, successive incremental focusing allowed us to identify some distinctive properties together with the key factors governing the performance of each competence and explaining its internal functioning. Smith & Nephew presents a rich variety of core capabilities: component competences (Henderson and Cockburn, 1994) are particularly related to research, manufacturing and sales (Fig. 2). This illustration is based on a theoretical scheme according to which each core competence is depicted as a set of systemic properties pertaining to individual, formal and social subsystems. The advantage of this approach is that it represents the constituent elements of a competence, enabling it to function. As far as research capabilities are concerned, one of the major strengths of the company is the effective and continuous application of science: S&N’s product range is testament to a progressive development of a comprehensive tissue repair system. Over the past five years the group has devoted over US$131 million to the development of existing and new products, with many of the most recent innovations yet to enter or complete the clinical testing phase. Industrial research at Smith & Nephew leads to the
development, protection and regulatory approval of innovative products in areas such as: 쐌 healing and management of severe chronic wounds; 쐌 repair and replacement of damaged joints; 쐌 treatment of trauma injuries; 쐌 minimally invasive surgery; 쐌 enhanced-performance speciality surgeons’ gloves. R&D strategy is an integral part of the overall group strategy. Research and development is overseen by the Research Steering Group, which involves the group’s senior business and technical leaders and is chaired by the Chief Executive. The scientific quality of R&D is monitored and guided by a Scientific Advisory Panel comprising scientists in a wide range of disciplines. Almost one-quarter of the primary research is managed by the Group Research Center in York, opened in 1993, which concentrates on radical new technology and background research into new materials (polymeric and composites) and the biology of tissue repair. The move to York Science Park was a watershed in the way research is organized: it reinforced the Center’s focal role between the market-driven demands of the company’s manufacturing centres and the pioneering ‘blue sky’ research being pursued in academic centres as well as other research institutes including Imperial College and Queen Mary and Westfield College (both University of London), York University, Manchester University and Cardiff University, all in the UK, and John Hopkins University, the University of Massachusetts and Advanced Tissue Sciences (a joint venture for new tissue-engineered cartilage products) in the USA. Research capabilities basically draw on: (a) the research-oriented values shared throughout the company;
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EXTERNAL ENVIRONMENT
Internal Organization
Skills "local" knowledge multidisciplinarity RESEARCH CAPABILITY
Healthcare professionals
Managerial system communication coordination mechanisms incentives
Normative values space for creativity informal network Skills Highly integrated (commercial/scientific)
Buying associations
Govermental bodies
Customer perceived value: "Completeness" of product range "Cost - effectiveness"
MARKETING/ DISTRIBUTION CAPABILITY Managerial system "Remote" management "Specialists Involvement" Quality Function Deployment
Normative values self-development
Skills "local" tacit
MANUFACTURTING CAPABILITY
International scientific councils
Mangerial system "Global" plant management Process plant start up Quality Function Deployment
Fig. 2.
A ‘systemic’ approach to competence analysis at Smith & Nephew.
(b) the operating mechanisms (either formalized or not) and the managerial skills which improve the effectiveness of communication and leadership. There are two dimensions around which the organization has developed its unique capability: 쐌 the individual skills originating from a highly specialized ‘local’ knowledge base that ensure firm-specific expertise in particular disciplinary areas such as analytical chemistry, biochemistry, cell biology, histopathology, physical chemistry, textile technology and so on. 쐌 the extensive flows of information across the boundaries between scientific disciplines (the multidisciplinary approach). The marketing innovation capability depends on individuals who have conceived a ‘branded service
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Normative values continuous improvement self-development
concept’ and have begun to embed ‘industry focused values’ in the organization. Also, global marketing and distribution skills have become of strategic importance in the industry: albeit the group operates in more than 50 markets worldwide, a ‘one company’ philosophy has been extensively adopted throughout the organization. Acting as a single entity rather than a sum of discrete parts has increased coordination in logistic processes and synergy in marketing and sales. This has resulted in higher negotiating power with distribution and a generalized cost reduction which represent a critical factor in a highly turbulent environment characterized by strong governmental pressures which make price adjustments completely unfeasible.3
3 In the UK, for instance, all the distribution activities for non-consumer goods have been referred to a single organization, Smith + Nephew Healthcare.
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Improvement in manufacturing capability seems rather to be pursued over time through a sound balance of internal skills consolidation and technology purchase from external sources (mainly acquisition of leading manufacturers). Whilst some manufacturing processes are simple, others are not and require advanced technology. A key requirement is to comply with stringent regulations affecting the 31 productive sites worldwide as well as to continuously rationalize processes. This may require a factory redevelopment (in Hull, UK), a waste reduction programme (France) or an improvement to engineering technology (Memphis, USA). The set of manufacturing capabilities can be ideally divided into two subsets: 쐌 those drawing on professional knowledge, having specific technical content but also requiring organizational skills: quality function deployment and process plant startup are recently adopted techniques specifically aiming at their refinement; 쐌 organizational capabilities of communication and leadership, both coupled with self-development values and a culture of continuous improvement. The overall competence is driven by pressure from low-cost competitors and legal requirements from governmental bodies,4 and is strengthened by establishing close relationships with healthcare professionals. Continued success in the healthcare market results from perceived customer value which, in turn, is also a function of a balanced product range: whilst the group has gained scientific leadership in tissue engineering and technological excellence in related instrumentation, its traditional productions (plaster of Paris and bandages) still amount to a considerable portion of the total sales.
4. NEW PRODUCT DEVELOPMENT IN WOUND MANAGEMENT The focus of analysis is now shifted to NPD in order to explore the organizational routines and integration mechanisms adopted for effective innovation. The motivation for this choice is that the complex linkages between concept creation, concept develop4 Ensuring that all products comply with the regulations in force wherever they are marketed is not an easy task: one proposed European directive contains over 350 standards for medical devices alone. In this respect product safety is a major topic: it requires time-consuming activities both in NPD and in all clinical trials, where a specific ethics committee is appointed.
ment and implementation are one of the major drivers in shaping and renewing those capabilities which emerge as critical in technology-based industries (Fig. 3). The principal challenges in wound care include protection against infection, absorbing wound fluids, preventing the dressing from sticking to the wound and optimizing the rate and quality of healing. Damage to skin takes many forms — from chronic wounds such as pressure sores and leg ulcers to acute wounds such as cuts, burns and surgical incisions. Recent product innovations in wound management include: 쐌 an adhesive form of Allevyn for treating chronic wounds, including leg ulcers, diabetic ulcers and pressure sores, which make up the fastest growing wound care segment. These wounds are difficult to treat and can take weeks to heal, causing significant distress, discomfort and pain to the patient. Allevyn dressings provide superior performance in managing and accelerating the healing process; 쐌 the new Applipak version of Intrasite, a ‘debriding’ dressing gel that gently removes dead tissue from chronic wounds. The unique pack is a step forward in presentation, allowing users to direct gel into the wound with one hand; 쐌 Profore, a cost-effective four-layer compression bandage which significantly improves healing rates for leg ulcers; 쐌 acute and intravenous fixation products: Cica-Care, a market-leading gel that helps reduce unsightly scarring, achieved further rapid sales growth particularly in China, where the population’s propensity to heavy scarring makes it especially valuable; OpSite Post-Op, launched in 1994, is now recognized worldwide as the best post-operative dressing; 쐌 IV3000, a leading-edge IV catheter fixation dressing with advanced moisture transmission. The development process of Allevyn has been investigated. The overall project started in 1990 and aimed to discover completely new options that could spearhead fundamental changes in this sector. Pursuing these so-called ‘step changes’ in technology has tended to come from the York R&D Center’s pioneering work, albeit final product development, along with product improvement and manufacturing process development, has primarily been the concern of the combined action of York R&D Center and the Hull Centre of Excellence.
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Technical options
Uncertainly (contingencies)
Capability gap in concept creation, development and implementation
Problem-solving activity
Demand
Fig. 3. The underlying relations between uncertainty and problem-solving activities.
The first phase (materials study and selection) was overseen by the Research Steering Group and involved the materials science staff based at York, who were divided into two sub-teams. The first team conducted a wide range of basic research in skin repair, using a variety of techniques to study interactions between medical devices, bacteria and human tissue which resulted in notable advances in medical applications of tissue cultures. The second research team worked on developing an understanding of the physical properties of new polymeric materials. The scientific challenges were, in this exploratory phase, to obtain easy-to-remove adhesive dressings promoting a moist wound healing environment. It was found that best fitting material was a special kind of hydrophilic polymer. One of the greatest strengths in this phase lay in combining biology with physical and engineering sciences to create wholly new products that could answer needs identified through working closely with clinicians. Once basic material requirements were clear, the Center’s main responsibility was research into new product concepts, techniques and technologies to be developed into marketable products. Its primary goal was to generate new products clearly differentiating from the competitors’ ones, delivering significant benefits to the patient with cost advantages to healthcare providers.
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Effective development of Allevyn took place through problem-solving routines (problem-solving circles) where knowledge accumulation has been essential in driving and framing capabilities (Fig. 4). The process has been cyclical and iterative: concept creators and developers twice undertook the creation/development sequence before getting to the final prototypes. At first (concept creation) all efforts were concentrated on developing a water-based adhesive which could stick to the patient’s skin but not to the wound site in order to cause minimal trauma upon removal. In this early stage the critical objective was the development of technical options that could fulfil customer expectations, and at the same time the adoption of mechanisms for correctly construing market information and constructing possible scenarios (external integration with healthcare providers, material suppliers and regulatory institutions). To this purpose, the combined knowledge of the linkages between physical and informative resources were the agents for technical options to be effectively explored and pursued in the project. Panels of scientists and clinicians were formed which met repeatedly to discuss possible options, enjoying a close and informal relationship. They initiated discussion with material suppliers also, and several partial prototypes were proposed for investigation at bench scale. All of them were tested but
The analysis of dynamic capabilities in a competence-oriented organization
Fig. 4.
The development process of Allevyn.
results were not satisfactory, especially with regard to leakage prevention. The issues researchers were concerned with related mainly to increasing the dressing’s initial level of perforation, finding and exploring solutions compatible with the physical properties of materials and the manufacturing technologies in use. The most critical issues thus turned out to be the analysis of the impact of new technical choices on the existing base of design and manufacturing capability. Since no easy-to-implement solution was found, the whole product architecture had to be redesigned; product concept went then back to York. An informal ‘integration group’ was then created which gathered scientists, people from the process research group and manufacturing engineers from the Centre of Excellence at Hull. The process research group is part of York Center and its major aim is to undertake detailed investigation to help devise practical and reliable manufacturing processes for material developed at the Center. This group is a key link with the technical and production departments in the operating centres of excellence. Its laboratories are endowed with all the facilities needed for a full prototyping. The centres of excellence are manufacturing centres specializing in particular types of product, championing the evolution of new products for their own markets through strong ‘organic’ links with commercial people from
all the different geographical markets. This ensures that new product development is a principal driver of business growth, taking place close to the relevant sales and marketing teams and guided by sound understanding of market needs. The role of integrators was mainly played by the process group researchers: their ability to discuss with scientists and engineers endowed the integration group with such a breadth of experience and technical knowledge, ranging from basic forms (technical possibilities) to manufacturing capabilities, that a radical new solution was found. It consisted in a foam’s open cell structure which revealed higher performance in absorbing excess liquid and preventing leakage. Novel heat and pressure technologies were used to perforate 42 holes into every square centimetre of stretchable, double-sided adhesive film. A final prototype was achieved that, through the combined utilization of the hydrophilic polymer and the open cell structure, allowed excess exudate to pass through the foam core. Clinical trials for the product were organized on a worldwide basis: the testing programs were designed to establish and refine its effectiveness, its safety, to provide guidelines for best clinical practice and to give evidence that the product met national regulations. Summing up, the integrating capability linked,
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Fig. 5.
Prosess of building NPD capabilities.
through the execution of problem-solving processes, the company’s knowledge base to its capacity for innovation (Fig. 5). It is related to what Iansiti and Clark (1994) have defined as dynamic capability, which synthesizes performance improvement over the next product generations within a single line.
were employed to demonstrate and promote the new product’s functionality. Market response was excellent since sales in chronic wound dressing grew almost threefold.
The essential nature of integration was, in the second phase, technological, and specifically consisted of a superior ability to link the evolving base of technical knowledge (both inside and outside the company) to the existing base of capability within the firm. It mainly depended on the capacity to use the basic set of knowledge to select different technical possibilities and to adapt the current resources to product and process engineering. Communication routines between organizational sub-units and coordination leadership emerge as major organizational factors (Table 1). The final phase (manufacturing engineering) has certainly required less effort since all the relevant manufacturability questions were considered and solved in advance. Finally, qualified nurses and clinical educators
5. A COMPETENCE-ORIENTED APPROACH TO ORGANIZATION The analysis has confirmed that the capacity of an organization to access new forms of ‘external’ knowledge (external integration) and the capacity to flexibly coordinate the knowledge base of each disciplinary area (internal integration) represents an integrating (architectural) capability which increases the performances of each component capability. The organizational elements and processes through which it is uniquely and originally carried out are the essence of the firm-specific properties that crucially drive innovative performance. The constituting dimensions of such a metacompetence (so defined because of a higher hierarchical level) are essentially organizational: the enhancement of competences and
TABLE 1. Integration
Critical factors
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External
Internal
Ability to generate options by sampling external information sources Ability to evaluate and frame those options through in-depth analysis
Ability to carry out changes in skills and systems Capacity for coordination leadership and organizational routines for sufficient communication between organizational sub-units
The analysis of dynamic capabilities in a competence-oriented organization
their evaluation as ‘horizontal’ properties are the basic criteria for organizational design. In Smith & Nephew, some organizational solutions have been implemented in order to allow all the potential users to share any relevant scientific, technical or commercial competences. More specifically, the group has been structured in competence centres through the identification of ‘centres of excellence’, where the bulk of the R&D — primarily development — is carried out. Such an organization has a high degree of flexibility, residing in the fact that those competences which are not product/market specific are located in business units parallel to the centres of excellence. Thus a superior integration between scientific, technological and commercial competences is achieved and effectiveness of product development activities is devised. Second, in NPD processes informal ‘integration groups’ are put into life in order to devise possible solutions and suggest concrete actions for those problems (design, manufacturability, production yields and so on) arising in different phases of the development process. By ensuring, within these integration groups, the concurrent presence of scientists, development researchers from York and manufacturing engineers from the centres of excellence, competence accumulation and diffusion are guided and decisions centralized. External integration is particularly relevant in concept creation, thus playing a key role in the renewal of the competence base, while internal integration is an effective driver for product engineering (Table 2). The specific integrative features of the system are eventually emphasized by the adoption of interfunctional units (Educational Committees) which act, within each centre of excellence, as ‘observatories’ of the ripened individual skills and their evolution over time. A ‘competence-oriented’ organization is, thus,
primarily aimed at having the fundamental knowledge base of the company, the set of shared values and desired behaviors, clearly emerging and pointed out. Such is, then, the only criterion driving professional training philosophy and self-development culture. According to this, the overall job evaluation system has to be founded on long-term performance measurement, including the assessment of individual skills and their evolution over time. This implies that a centralized model (i.e. Human Resource corporate or divisional functional units) for highly specialized competences is not — nor could be — advisable: the capabilities development process is, in fact, indirectly managed through the adoption of specific organizational solutions and strategic choices, allowing line managers with project responsibility to exert all those ‘integrating’ actions that, as seen, are crucial for its effectiveness (Fig. 6). Such a ‘competence-oriented’ reorganization has allowed Smith & Nephew to effectively balance the trade-off between R&D centralization and decentralization5. The decision to create integrated technical/commercial committees within each centre of excellence, acting as a key link with corporate R& D staff, together with the adoption of contractor–customer approaches for relationships between corporate and divisional laboratories have avoided situations by which: (a) the reinforcement of a company’s technological base, together with the accumulation of specialized local knowledge at business unit level, tends to lower the flexibility of the overall technological strategic design; (b) inconsistency between divisional research infrastructures and managerial requirements is 5 Recently, a generalized trend has been observed consisting of an increased short-term focusing of technological strategies at divisional or business unit level. Corporate laboratories have often decreased the range of their tasks in favour of more trouble-shooting supporting activities, while the bulk of development is carried out in the divisional facilities (see EIRMA, 1996).
TABLE 2. Integration External Phase of problem-solving
Concept creation
Concept development
Internal
The firm frames capability building activities that are needed to respond to external contingencies Activities involving the integration of specialized skills, knowledge base and managerial systems (procedures, routines, incentives)
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Healthcare professionals
Buying associations
RESEARCH CAPABILITY
INTEGRATING METACOMPETENCE Centers of excellence Integration Groups Educational Committees
Customer perceived value:
MARKETING DISTRIBUTION CAPABILITY
Govermental bodies
MANUFACTURING CAPABILITY
International scientific councils
EXTERNAL ENVIRONMENTAL
Fig. 6.
Architectural capabilities ‘systemic’ approach to competence analysis at Smith & Nephew.
progressively generated, arising from the utilization of competence-destroying technologies (i.e. following the adoption of novel manufacturing technologies which cause the current productive system to become obsolete); (c) excessive R&D decentralization may cause multidirectional behavior, spinning out of control; (d) a lack of transferal mechanisms of expertise amongst sub-units (cross-fertilization) in large diversified firms tends to provoke notable biases in the interdivisional sponsorship of horizontal technologies, thus damaging the long-term competences and the knowledge accumulation process.
6. CONCLUSIONS The key elements of NPD capabilities at Smith & Nephew are basically related to: (a) the ‘action-producing’ procedures adopted
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within the managerial systems (i.e., project management techniques); (b) the ‘cultural’ domain, highly informed by research-oriented and result-oriented values. These two elements are, nonetheless, in constant tension, since rigidities in the project management system may limit and prevent profitable customer relationships in new product development, and feedback in the innovation process may gradually reduce as the ‘project culture’ becomes dominant. This is most dangerous in a situation, such as the case study presented in this paper, where the deployment of local and specialized knowledge and of available technologies is often suggested by problem-solving processes put into practice in order to accomplish customer expectations. In order to bypass these possible pitfalls, a number of organizational solutions have been adopted by Smith & Nephew, aiming to coordinate and integrate those activities ranging from concept development to
The analysis of dynamic capabilities in a competence-oriented organization
technical post-sale assistance and, through this method, favouring the renewal process of capabilities. Lastly, it is perhaps remarkable to note that the case study has confirmed that a competence-oriented approach to reorganization, as adopted in Smith & Nephew, has been coupled to gradual centralization in R&D planning. In particular, aggregating different sub-units on the basis of commonly shared competences seems a powerful tool for recomposing and unifying fragmented activities, hence limiting their degree of autonomy. This, in turn, helps in reaching conditions of resource sizing and allocation which guarantee sufficient uniformity throughout the company in the use of research methodologies. As a result of this, personal relationships and exchange of information flows across sub-units involved in the innovative process are encouraged.
REFERENCES Barney, J.B. (1986) Organisational culture: can it be a source of sustained competitive advantage? Academy of Management Review 11(3). Carlsson, B. and Eliasson, G. (1994) The nature and importance of economic competence. Industrial and Corporate Change 3, 687. Dosi, G., Teece, D.J. and Winter S.G. (1991) Toward a theory of corporate coherence. In Technology and Enterprise in a Historical Perspective, ed. G. Dosi, R. Giannetti and P.A. Toninelli. Oxford University Press, Oxford. EIRMA (European Industrial Research Management Association) (1996) Working group report No. 48. Heiner, R.A. (1988) Imperfect decisions and routinized production: implications for evolutionary modelling and inertial technical change. In Technical Change and Economic Theory, ed. G. Dosi, C. Freeman, R. Nelson, G. Silverberg and L. Soete. Pinter Publishers, New York. Henderson, R. and Clark, K. B. (1990) Architectural innovation: the reconfiguration of existing product
technologies and the failure of established firms. Administrative Science Quarterly 35, 9–30. Henderson, R. and Cockburn, I. (1994) Measuring competence? Exploring firm effects in pharmaceutical research. Strategic Management Journal 15, 63–85. Iansiti, M. and Clark, K. B. (1994) Integration and dynamic capability: evidence from product development in automobiles and mainframe computers. Industrial and Corporate Change 3, 557–605. Leonard-Barton, D. (1992) Core capabilities and core rigidities: a paradox in managing new product development. Strategic Management Journal 13, 111–125. Nelson, R. R. (1991) Why do firms differ and how does it matter?. Strategic Management Journal 12, 61–74. Nelson, R.R. and Winter, S.G. (Eds.) (1982) An Evolutionary Theory of Economic Change. Harvard University Press, Cambridge, MA. Saviotti, P.P. (1994) Knowledge, information and organizational structures. 11th International Economic History Congress, Milan, pp. 12–16. Teece, D. J. (1982) Towards an economic theory of the multi-product firm. Journal of Economic Behavior and Organization 3, 39–63. Teece, D.J., Pisano, G. and Shuen, A. (1990) Firm capabilities, resources, and the concept of strategy. University of Berkeley Consortium on Competitiveness and Cooperation, Working Paper No. 90–8. Winter, S.G. (1987) Knowledge and competence as strategic assets. In The competitive challenge, ed. D.J. Teece, pp. 159–184. Ballinger, Cambridge. Alberto Petroni is a post-doctorate researcher at the University of Parma (Italy) where he is also a teaching assistant in Business Economics and Organisation. His qualifications include an MSc in Management from the Bocconi University of Milan and a PhD in Science of Industrial Innovation from the University of Padua with a thesis on the analysis of corporate core competences. His research interests and publications mainly relate to two areas: the management of innovation (with a particular focus on technology strategic planning, organisation of product development, competence and knowledge-oriented managerial systems in R&D) and the management of industrial risks in SMEs.
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