The effectiveness of open innovation practices: an application to efficient replenishment

Available online at www.sciencedirect.com

Procedia Technology 5 (2012) 133 – 140

CENTERIS 2012 - Conference on ENTERprise Information Systems / HCIST 2012 - International Conference on Health and Social Care Information Systems and Technologies

The effectiveness of open innovation practices: an application to efficient replenishment Carmen de Pablos-Herederoa,*, Jose Luis Montes Botellab, Ignacio Soret LosSantosc a

Universidad Rey Juan Carlos, Paseo de los Artilleros s/n, Madrid 28032, Madrid, Spain b Universidad Rey Juan Carlos, Paseo de los Artilleros s/n, 28032, Madrid, Spain c ESIC Marketing and Business School, Avda. Valdenigrales s/n, 28.056,Madrid, Spain

Abstract Collaborative efforts with customers to innovate are essential. For this it is necessary to adapt the business innovation system to the characteristics of the market demands taking into account the technological and social change. The aim of this paper is to propose a model that allows the measurement of knowledge and the generation of organizational improvement in the initiatives of customers’ co-creation in innovative processes. The model has been applied to efficient replenishment practices in the Spanish market. © 2012 Published Elsevier Ltd. SelectionLtd. and/or peer review under responsibility of CENTERIS/SCIKA © 2012by Published by Elsevier Selection and/or peer-review under responsibility ofOpen access under CC BY-NC-ND license. Association for Promotion and Dissemination of Scientific Knowledge CENTERIS/HCIST.

Keywords: collaborative strategies; relational capital; organizational efficiencies; co-creation, efficient replenishment

1. Introduction In the information society, collaborative efforts with customers to innovate are essential [1, 2]. Business innovation must be based on distributed models and above all collaborative ones [3].

* Corresponding author. Tel.: 34-669761657; fax: 91-4887780. E-mail address: [email protected]

2212-0173 © 2012 Published by Elsevier Ltd. Selection and/or peer review under responsibility of CENTERIS/SCIKA - Association for Promotion and Dissemination of Scientific Knowledge Open access under CC BY-NC-ND license. doi:10.1016/j.protcy.2012.09.015

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Users are not just passive agents. They must have a much more active role [4]. In an open innovation process, the goal is to find ideas that can be successful wherever they are. From this perspective, customers are the focus of innovation processes where different agents interact [5]. They decide what the uses of new products and services will be [6]. One of the great challenges of this concept of innovation is identifying access and to incorporate the needed knowledge to develop a successful product or service. It is not a trivial task and requires, apart from being well informed, know how to use knowledge management tools. The main objective of this paper is to propose a model that allows the measurement of knowledge and the generation of value co-creation [7] with customers [3]. 2. Relational capital [8] and [9] identifies the relational capital as the ability of people to work in teams, according to a set of shared rules and values. In this sense, relational capital articulates the knowledge and skills acquired in communication processes and working experiences with agents relating to the company [9]. Thus, social activities play an important role, since they offer the capability to create and share the knowledge needed to generate sustainable competitive advantages [10]. [11] Support the hypothesis that specific relational capital can create competitive advantages. Since it is costly to imitate, these particular advantages can be sustained. In this regard, [12] describes how the relational dimension can explain how economic actions are influenced by the quality of relationships. 2.1. Relational capital indicators and business efficiencies The measurement model we propose contains two main parts: one modelling knowledge or relational capital and the other the improvements. To develop the two parts we review existing models of relational capital and some methodologies for measuring business performance. Upon review of the literature and to obtain secondary information, both internal and external, and primary data, about 12 interviews were conducted with experts from various companies working in innovation processes. Of all these, we formed a panel of 8 experts. With this panel, working on group dynamics and subsequent interviews, a consensus was reached regarding the most appropriate model structure. First, we worked with various models of relational capital measurement. Among them, the Global Scorecard model which is actually more than a "balanced scorecard", inspired by the "Balance Scorecard" of [13], than a model of knowledge. On the other hand, the Euroforum Intelect models and expanding from these, the model the 5 capitals model, M5C, which are, in our view, true knowledge models. We have chosen to apply the Intelect model in the field of innovation by collaborative practices with customers, for the following reasons: it is easy to understand and, moreover, is the most widespread and operated in Spain [14]. Second, when measuring the impact of relational capital on business improvements we have selected the strategic planning methodology ITSGA, the Strategic Information Technology Generic Actions [15], which aims to identify strategic generic actions produced by the application of information technologies, whose application can deliver improvements. Companies as Sears, Federal Express and TRW have identified several ITSGA categories for applications such as "transactions with customer data," "product development" or "various partnerships establishment ". In addition, authors such as [16] and certain advisory groups [17] have emphasized in their work the importance to identify standard actions. Furthermore, this methodology can be integrated with other methodologies such as the SWOT analysis [18].

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Have also been included in the model a set of factors considered successful for the implementation of innovative practices, associated with the models of co-creation with users (lead-user of [3, 4]): leadership commitment, motivational leadership, polyvalent team, critical mass, involvement of participants, information and communication technologies, individual and collective ability to learn, organizational capacity process towards orientation, training programs, reporting results from the improvement actions, climate work and personal initiative. For the empirical analysis a structural equation model has been used. As mathematical model, it is appropriate to address this problem given its ability to integrate observable and measurable, real and latent variables representing concepts that cannot be observed directly [18]. Besides, measurement errors for each variable could be included explicitly in the estimation process. Measurable or observable variables would be the corresponding indicators for each latent variable in the model. The latent variables in the structural equation model are: "relational capital" and "improvements". Therefore, it has guided the formation of the structure of the model: to seek a correspondence with a structural equation model that allows its subsequent validation, adequacy of the proposed indicators and corroboration of a theory indicating that high levels of relational capital in an organization generate improvements in the field of innovative actions. The model established that there is a direct relationship between relational capital with achieving business improvements.

e1

RELATIONAL CAPITAL

IMPROVEMENTS

e2

Fig.1 Structural equation model

Thus, we propose a model for measuring relational capital (CR) and improvements grounded on "strategic generic actions based on practices of user-centered innovation". In regard to improvements, we consider 5 categories of standard actions [19]: "product", "clients", "channels", "suppliers" and "general". For the development of the indicators we have followed the comments and proposals of the experts panel along with other references. Particularly, the process of intellectual capital indicators according to [13] and [20]. 2.2. The area of study: efficient replenishment Efficient replenishment, efficient consumer response (ECR) practices, is a joint strategy of suppliers and distributors, aimed at providing consumers the best value, best service and widest range of products, through collaboration on improving supply chain and demand generation [21]. Initiated in Europe in 1994 to eliminate supply chain unnecessary costs and, for the sector as a whole, to react in the best suited manner to the consumers demands [22-26]. 3. Model Table 2 shows each of the 6 proposed constructs (1 on relational capital improvements and 5 on improvements). These constructs have been divided into elements which together account for 36, each element can be still subdivided in other sub-elements. Thus a total of 158 indicators or variables that can be

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measured by "perceptions of improvement" (with a Likert scale), constituting our proposed measurement model of innovation centred on user practices and business improvements.

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Fig. 2. CR measurement model and improvements in the ECR domain

Indicators of innovation practice -relational capital with improvement indicators- strategic actions based on the adoption of innovative practices, are shown in the following Tables 3 and 4. The indicators are collected from a larger previous study [25]. Table 3 Relational capital indicators

RELATIONA L CAPITAL

1. • • • • 2. 3. 4. 5. 6. 7.

Customer DB New customer Fidelization Up-selling Cross-selling Customer satisfaction improvement Customer loyalty Collaboration agreements increase MP: AFM, OER, CRP, . Partners satisfaction indicators EIP (Information portals)

Source: [25]

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Table 4.Improvement indicators IMPROVEMENT INDICATORS Product IMPROVEMENTS Improve and / or increasing product information Product Personalization (in itself, through packaging and / or packaging, labeling, ...) Consumer IMPROVEMENTS Price improvement Improved range of supply Improved promotions Information portals creation Distribution channels IMPROVEMENT Efficiency agreements Communication agreements with ICT Supplier IMPROVEMENTS Continuous replenishment, CRP Collaborative supply planning and forecasting, CPFR Alignment of Master Files, AFM Giving and receiving orders, OER General IMPROVEMENTS General best practices Promote an electronic market

Source: [25]

Ultimately, it comes, through a confirmatory analysis testing, if the generation or increase of relational capital generates improvements, within the ECR domain. Thus, from the constructs defined, we have established the following assumptions: • Hypothesis 1: Knowledge generated by the adoption of ECR practices generates product-related improvements. • Hypothesis 2: Knowledge generated by the adoption of ECR practices generates customer-related improvements. • Hypothesis 3: Knowledge generated by the adoption of ECR generates improvements related to the distribution channels. • Hypothesis 4: Knowledge generated by the adoption of ECR generates improvements related to suppliers. • Hypothesis 5: Knowledge generated by the adoption of ECR generates improvements related to general aspects. 4. Results To obtain the sampling frame a professional meeting was organized in ESIC Business & Marketing School in collaboration with Logica, a logistics operators business organization. We obtained a total of 106 valid questionnaires. The data have been processed with SPSS and AMOS software, performing descriptive

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analysis and principal component factor analysis, with the object of reducing the items for a subsequent confirmatory analysis using the structural equation model with latent variables and measurement errors. We have identified three distinct groups, or segments, that we denote as follows: • C-PD consultants and teaching staff. Provide an academic standpoint. However, has the advantage of knowing a large number of case studies in the field of consumer products. • FD: manufacturers and distributors, that are jointly involved in certain practices or pilot projects. • OL: logistics operators. We consider interesting that the majority of these companies agreed to participate in this research, and this is so because they are knowledgeable and support many important activities in the area of logistics activities. Activities that they offer as a catalog of services to their customers, manufacturers and distributors. Table 5 presents the data sheet. Table 5. Technical Specifications UNIVERSE FIELD QUESTIONNAIRE DESIGN SAMPLE SIZE ERROR CONFIDENCE LEVEL SAMPLE DESIGN FIELD WORK DATE SEGMENTATION

Spanish organizations users of ECR practices Whole country Researchers based on group dynamics and in-depth interviews 106 surveys, multi-channel strategy: business daily call in, telephone, personal interview § ± 3.25% (p = q = 50) 95.5% (2 sigma) Contributions; several business surveys Researchers March 2010 C-PS: 10 (12'93%) FD: 27 (32'54%), OL: 55 (54'53%)

The study variables were grouped into 16 factors: 10 for the CR and 6 for improvements. Each dimension comprises several elements of the obtained factor structure, its name being representative of all these elements. These dimensions or factors will be used as measurable or manifest variables in the linear structural equation model. For more precise parameter estimation, we conducted a Bayesian multiple imputation, generating a new sample using Markov chain Monte Carlo method, using a diffuse distribution as prior distribution. Thus, we arranged on a sample of 900 data sufficient for the estimation. Results for each latent variable with its factors, emphasizing standardized regression weights by the corresponding p-value are presented in Table 6. Table 6. Results (standardized weights and p value)

Relational Capital Index Customer standards Customer satisfaction, GXC Loyalty Programs CRP, CPFR ASN Improvement Indices Improved information to consumers and CD Improved communication to CD Product customization to suppliers

(Estimate; p-value) (0,946; 0,000) (0,352; 0,001) (0,200; 0,000) (-0,472; 0,000) (-0,354; 0,000) (0,853; 0,000) (0,154; 0,000) (0,178; 0,000)

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New Product Information Innovation and customer price

(-0,116; 0,000) (-0,234; 0,000)

With respect to the group of hypotheses linking relational capital increased to achieving improvements, we have verified that: Increased relational capital is favoured by the creation and/or improvement of customer standards, their satisfaction with loyalty programs and category management. There is a direct relationship between the following variables: improving information to distribution channel and consumer, improving communication to the distribution channel and product customization from suppliers. For the purpose of our study, we verified that relational capital generates improvements for business in the area of Efficient Consumer Response, ECR. Therefore, the relational capital explains better business results. 5. Conclusion In this paper we have proposed a model to measure the impact of business innovation practices that focus on the customer and on business improvements generation. The indicators of relational capital generation and business improvements are difficult to quantify. For this reason, we selected the use of qualitative measures, from intangibles measurement models. The results show that relational capital positively influences the generation of improvements in the organizations in efficient replenishment practices. The proposed model is a global model, which for the purposes of this analysis has been applied to efficient replenishment practices of large areas. However it can be particularized to different segments of interest and different companies. In the proposed model are integrated in a novel way, relational capital and a set of indicators of organizational improvements.

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