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PREFACE This project represents our Integrated Project in connection with the second semester of our Master’s Programme in Management of Technology, Copenhagen Business School. The project builds on the teachings in two courses Management Control and Finance in Technology-Intensive Organizations and Technology Strategy and Market Development, both administrated by the Department of Industrial Economics and Strategy. The pages presented here are a result of our efforts, but would not have been possible without the aid of Novozymes. We owe much to Jørgen Thomsen, Marketing Director, Peter Rosholm, Strategic Account Director, Mette Flansmose, Project Director, Flemming Funch, Vice President of Quality Management, Niels Henrik Sørensen, Creativity Manager and Martin Barfoed, Project Director. You all uncovered imperative empirical data for this project, and have contributed greatly to the final results. We also acknowledge our supervisor Dr. Markus Reitzig, Associate Professor, for the time spent on directing, sparring and inspiring us. Adam Buchhorn Jon Schäffer Rune Sylow Pedersen Jens Christian Roelsen Store Kongensgade, Copenhagen May 28, 2003


TABLE OF CONTENTS SECTION A 1 INTRODUCTION...........................................................................................................................................................3 2 RESEARCH QUESTION...............................................................................................................................................5 3 METHODOLOGY..........................................................................................................................................................6 4 DELIMITATION..........................................................................................................................................................11 5 SETTING THE STAGE...............................................................................................................................................12 6 STRATEGY UNDER UNCERTAINTY.....................................................................................................................15 7 DYNAMIC CAPABILITIES AND INNOVATION STRATEGY............................................................................24 8 CREATING A BUSINESS RELATIONSHIP............................................................................................................37 9 CONCLUSION SECTION B.......................................................................................................................................40 10 PUTTING CUSTOMERS ON A PEDESTAL?........................................................................................................43 11 IMPLEMENTING STRATEGY UNDER UNCERTAINTY..................................................................................48 12 CONCLUSION............................................................................................................................................................63 13 REFERENCES............................................................................................................................................................66 14 APPENDICES..............................................................................................................................................................71

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1 INTRODUCTION Firms innovate under conditions of considerable market and technical uncertainty (Tushman & Anderson, 1986; Kreiner, 1995; Courtney 1997; Christensen, 1992 among others). Customer needs are often tacit and beyond reach, market potential virtually impossible to estimate, the competitive situation is worsening, and most importantly to the creative destruction and raison d´être of firms: the technological revolution is constantly reaching unprecedented new levels, to some firms at a suicidal rate. Indeed, the world is dynamic and forcing firms and their environments to acknowledge their mutual dependence if the realization of profits is to continue. Firms’ ability to be aware of, impact, and eventually comply with each other could be a question of survival. Firms know that the road to success is a predicament, from which there is no clear or easy way out. To our opinion uncertainty in general has become the Goliath of the modern times of the 21 st century, and firms must have the culture and attitude to change managerial and organizational routines in accordance with the environment. The remedy is to implement a strategy armed with powerful weapons to battle the uncertainty, and consequently reduce its potential impact on its business activities. Firms are increasingly resorting to innovative means of reducing the uncertainty, primarily by integrating each others business activities in strategic partnerships, thereby obligating all parties to take part in the battle against uncertainty. However, the situation is grimmer than that. Despite ones ability to reduce the uncertainty by sharing it among partners, they are still faced with one immense task: ensuring that visions and strategic objectives employ the correct means to reduce uncertainty, while being implemented throughout the organisation into the very backbone of the organisation. Or, in the other more crude terms chosen by Clint Eastwood in “Heartbreak Ridge”: “Adapt, improvise and overcome.” To analyse and understand how this challenge can be overcome, we have used the global leader in the enzyme industry, Novozymes as our case for this project. It is our proposition that, not only are firms faced with the challenge of reducing uncertainty. This has to be accomplished, while implementing and realizing their strategic objectives, that being an innovative strategy in the case of Novozymes. Rhetorically speaking, we question what would be the point in reducing uncertainty, if firms ultimately still fail to achieve their goals? With Novozymes we wish to gain a holistic

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understanding of how visions, strategic objectives are conceptualized in the realm of uncertainty, and how these are implemented to the very fingertips of the organisation. Although, we are not attempting to contribute to the theoretical world, our objective is to offer the reader with a clear understanding of how one firm, Novozymes, is reducing uncertainty; a situation where elimination of uncertainty is not necessarily the best outcome, but rather in combination with exploiting uncertainty.

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2 RESEARCH QUESTION Based on our theoretical background and our empirical understanding of Novozymes, we will study strategising and realisation through management control and the relationships between these elements. This project’s overall research question is: How Novozymes prevail from strategising and adapting under conditions of uncertainty, and how their strategic objectives are realised through management control? This project takes several different theoretical frameworks into consideration, hence, we wish to concretise and elaborate on our research question by taking the following three sub-questions into consideration: 1) To justify the importance of the consideration behind innovation under uncertainty in the case of Novozymes, we wish to identify from a dynamic perspective: What are the main internal and external drivers of uncertainty and to what extent do the external drivers influence Novozymes? 2) The changing environment has forced Novozymes to continuously reconsider the strategic posture to affect and comply with internal and external changes, hence we wish to analyse: How Novozymes identifies changes in the environment and accordingly develop and align internal capabilities to remain competitive? 3) Firms cannot realise strategic objectives by only strategising. This must be complemented with more practical means of implementation, which is why we will analyse: How Novozymes’ own vision and strategic objectives are continuously implemented, measured and controlled to ensure their realisation in accordance with the changing demands of the environment?

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3 METHODOLOGY The study of strategy and management control systems undoubtedly falls within the area of social sciences. Social sciences in general and business studies in particular are real sciences concerned with understanding and influencing the real world. Strategy is inherently situational (Teece et al., 1997) and not all knowledge can be transferred in tangible form without loss of detail (Kreiner, 1999). This chapter will introduce the project’s overall structure of analysis and a preliminary description of the different chapters of the analysis. In addition, this chapter will also include an introduction of our empirical data collection, and our use of theories. Furthermore, the chapter will introduce our thoughts on the operationalisation of our findings, and to what extend they can be said to be useful outside the context of Novozymes.

3.1 Novozymes Project Map To increase the readability of the report itself, we have designed and attached the socalled Novozymes Project Map. We suggest the reader uses the map to get the best possible understanding of the projects structure. The map, see figure 1, can be found as the last page in Appendix 7, and can be folded open on the right side of the report.

Figure 1: Novozymes Project Map

This way, the busy reader can quickly browse through selected parts of particular importance. The map also features an ability to navigate through the four sections of the project, or just for simple orientation using the arrows indicated in the left side of the map, or the references on each page’s footer in accordance with the map. Finally, as the project uses citation to a great extent, we will only include the person’s name. Their respective titles and department can be found on the map.

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3.2 Structure of Analysis In this section, we will provide the reader with a brief overview of the individual section and the main themes presented in relation to the formulated research question and sub-questions. Our point of departure will be in Section B, after the descriptive and formal nature of this Section A. Section B Chapter 6 - Strategy under uncertainty In this chapter we will answer sub-question one as presented in the Research Question. We will go deeper into the notion of strategy under uncertainty and identify the internal and external drivers of uncertainty, how these drivers change over time and how these changes influence Novozymes. We will assess the change of importance of the external drivers as a result of the change in the environment as presented in the case description. Chapter 7 – Dynamic Capabilities and Innovation Strategy In this and the following chapters in Section B we will answer sub-question two as presented in the Research Question. Based on the concepts of Resource Based View (Grant, 1991) and Dynamic Capabilities (Teece et al., 1997) we will deduce a framework emphasising the ability to search and integrate as being imperative for firms to remain competitive when operating in environments of uncertainty. Next, we will apply the framework of Search and Integration to the case of Novozymes and analyse how Novozymes has been able to identify changes in customer demands towards lower costs, by searching the environment through business relationships and reconfigure organisational routines to meet these changing needs. Chapter 8 – Creating A Business Relationship In continuation of the search and integration framework, we will user Tomkins (2001) and Håkansson (forthcoming) to analyse what are the underlying drivers of the search and integration process, thereby giving an understanding of how the business relationship has been created. Chapter 9 – Conclusion Section B We will summaries our main findings, and describe the connection to Section C. Section C In this section we will answer sub-questions 3 as presented in the Research Question

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Chapter 10 – Putting Customers on A Pedestal? The purpose of this chapter is to analyse Novozymes’ extensive use of business relationships from a different perspective. We question the potential pitfalls of placing too much emphasis on the customer, potentially leaving Novozymes as the misled ‘dependent’ organisation at the mercy of the customer. Is the customer always right? Chapter 11 – Implementing Strategy Under Uncertainty The first part of this chapter has the purpose of examining by what means strategy is exactly implemented. Primarily, we will illustrate how Novozymes brings different managerial technologies and business technologies together to implement their strategy under uncertainty, while balancing demands of the environment. In the second part, we continue the same line of thought based on the managerial and business technologies. However, here we take it to a very practical level, where we analyse how strategic objectives can be inscribed in numbers and thus measured. Chapter 12 – Conclusion Finally, chapter will conclude and generalize on the basis of our findings.

3.3 Empirical Data Collection In addition to theoretical literature we have made use of public available material from Novozymes such as their Annual Report 2002, and other relevant reports and articles from their website. Further, we have gained access to internal project papers related to the development and evaluation of enzymes. However, the most important empirical source has been the interviews conducted with employees spanning various departments in the organisation. In order to collect a vast amount of qualitative data for this project, we conducted interviews 1 with present employees from Novozymes. Each interview had duration of 1½ to 2 hours, and were all semi-structured. Interview guides had been prepared and e-mailed to the interviewees prior to the interviews. We generally encouraged the interviewee to give his or her own account of the subject of discussion, rather than some canonical truth present in the firm. This was sometimes contrasted to his or her general perception of the company by asking what he or she thought would be the 1

See Appendix 1 for list of interviewees

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answer of other members of the organisation. Where obvious contradictions in and between interviews were apparent we delved further into the topic in question. Our general impression is that the interviewees were exceptionally honest in their accounts. We do not feel that important information was withheld, but rather that intricate information about the organisation was revealed that cannot normally be expected to be revealed to outside observers.

3.4 Theoretical use Throughout this project, we have aimed at employing theory in a dynamic relationship with the empirical data collected through our interviews and written material. It has not been our goal to come up with new theory through a deductive approach to the problem at hand. Neither have we taken an inductive approach by letting the theory describe our empirical findings. We have strived to employ an interactive relation between the theory and the empirical base. From this interaction the relevant analytical topics have emerged, topics that have influenced our findings both in relation to theory and empirical data. Hence, we have in this project approached both the empirical base and the theories in what could be called an abductive approach. We have on few occasions found it illustrative to include literature external to the curriculum from the two courses on which this project rests. In this project we have also employed a multi-perspective approach. The idea is to use different theoretical positions to approach the organisation in question from different sides. Each theory will have its strengths and blind spots in relation to the specific subjects of analysis we have undertaken in Novozymes. It is our ambition with the use of this approach to get a more adequate picture of the organisation. It should be noted here, that the ambition is not to provide a complete picture of Novozymes and all the processes concerning strategy under uncertainty in the firm. Other perspectives could have provided foundation for interesting analysis, yet we believe the chosen subjects of analysis to be imperative to the understanding of how Novozymes has retained the dominant position on the enzyme market in times of considerable uncertainty.

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3.5 Validity The question of validity becomes relevant as it can tell us something about the nature of our findings and to what extend they can be applied to the reality outside Novozymes. The discussion is divided into two parts, the internal and external validity (Andersen, 1999). Internal Validity Internal validity relates to the processes surrounding the project, the empirical data collection, and the subsequent analysis etc. These all relate to the internal aspect of the project. This group has written a project for Novozymes during the 1 st semester, also in connection with the MOT programme at CBS. The empirical base in this project is therefore an extension of the last. This adds to our validity, since it is now unnecessary to create our basic empirical base concerning Novozymes as an organisation, and instead focus our data collection on the primary focus of this project, strategy under uncertainty. Due to the managerial nature of this focus, we were granted considerable resources from the Novozymes management, in the sense that all of our interviews were carried out at this organizational level. Naturally, the empirical data has been through several interpretations, as a result of our progressing learning curve, before being presented in this project . First, we as observers have had a theoretical starting point, which has affected the questions posed. Second, the respondents have given us their picture of strategy under uncertainty. Finally, the empirical material presented in this project has been selected based on its correlation with the projects’ research questions. Since the interviews were not recorded, the majority of citations presented in this project, were reconstructed from each of the individual group members’ notes. In a few instances of doubt, the interviewee in question was contacted for clarification. Due to Novozymes’ high interest in the project and delight in helping students with projects, they also offered to review the project, mostly to avoid misunderstandings and use of sensitive information. Although, this project is deemed confidential, Novozymes was naturally reluctant to release information of particular strategic nature. We respected their wishes, and by ensuring the validity of this information, selected elements of particular sensitive nature was sent to Novozymes for review and “acceptance”, before including into the project.

External Validity While internal validity looked at the project from within, external validity relates the findings of the project to the outside world.

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The external validity is of particular importance to us as students, as it is interesting to see whether management and employees at Novozymes can relate their view of the issues presented to our interpretations. The approach taken in this project is of an abductive nature. Among the purposes of the abductive approach, one was coming up with a more descriptive picture of the reality at Novozymes, while leaving the reader with a tentative picture of the future of Novozymes. Thus, it can be argued that the abductive approach used in this project adds to the external validity in relation to Novozymes.

4 DELIMITATION Appreciating Novozymes’ sheer size, it was only natural for us to choose a section of Novozymes with well defined boundaries. After an invitation to discuss their largest market segment, the Detergent Industry, we were convinced about its potential in connection with this project. Although our empirical study was carried out at the company headquarters in Denmark, it was an easy task to extent the analysis to include an international perspective, since 97% of Novozymes’ turnover comes from foreign markets. Although, our theoretical theme related to the environment, implementing related strategic objectives will inevitably require an internal focus. To the furthest extent possible, we will therefore strike a balance between the internal and external focus.

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5 SETTING THE STAGE Being a world leader, within the competitive enzyme industry, has required a sustained effort to innovate and market truly new products through a strong focus on applying knowledge and in developing and utilising new technologies in its products and production processes. Novozymes has been highly successful so far, as indicated by the data below, however, maintaining this position is, as we shall see, a constantly challenging and changing task, of both strategic and managerial character. In the following we will briefly describe some facts about Novozymes. Novozymes A/S was established in November 2000 de-merging from Novo Nordisk A/S. Subsequently, Novozymes was quoted on the Copenhagen Stock Exchange in the year 2000. Novozymes manufacture approximately 75 types of enzymes and with almost 600 different products they have the largest enzyme product portfolio in the world. Customers are not typical

Detergent 36% Technical 24% Food 26% Feed 10% Micro 4%

end-users rather large corporations such as Proctor & Gamble, Unilever and Henkel, who produce and market detergents, in which enzymes are embedded. Out of Novozymes’ total sales of DKK 5.64 billion in 2002, detergent enzymes account for approximately 36%. Figure 2: Sales pr. Segment in 2002

There are approximately 3700 employees represented in 25 countries of which 2000 are based in Denmark. In 2002 Novozymes had a global market share of approximately 44% within enzymes in general and export accounted for 97% of the total turnover. However, they have experienced an increased competition on the global market for biotech-based enzymes in recent years, their main competitors being the American-based Genencore and several Japanese companies. Despite this, Novozymes has obtained a market share of 54% in 2002, within their core competence, being the detergent industry, compared to Genencore’s share of 36%. With a very few exceptions Novozymes has been behind every major discovery in the field of enzymes over the last 40 years.

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In 2002 Novozymes used approximately 13% of net turnover on R&D and have introduced 41 new products to the market during the period 1996-2001. In 2002, sales of new products and concepts accounted for around one third of total turnover and a dedicated effort in R&D is expected to ensure that this pattern can be sustained and further improved. This reflects the significance of the R&D department and their ability to continuously develop new products to the enzyme market.

5.1 The Innovation Funnel In highly innovative industrial environments, organised innovation processes are necessary for corporations to control and manage product development. Most such procedures build up over time in a natural most-efficient manner to encompass the different and necessary chains in the innovation process. Previously, innovation procedures were hidden inside the minds of employees, but slowly as the procedures become more evident and embedded in routines they also become more explicit. Since 1995 the innovation processes within Novozymes have become common knowledge of practice, and as an attempt to communicate this tacit knowledge of existing practice it is now codified and visualised as the innovation funnel model (also see Appendix 3).

5.2 Novozymes in retrospect Viewed in a national historical perspective it is worth considering why the enzyme industry emerges in Denmark and why Novozymes evolve within a company like Novo Nordisk. In Denmark, previously being a highly sophisticated agricultural nation, a broad understanding and expertise was developed within the field of pig production. The natural occurrence of insulin in pig stomach, and the former research in protein structure and basic scientific knowledge in the use of insulin as a medical cure of diabetes, resulted in Novo Nordisk2 being one of the first and leading companies within the insulin industry. As argued by Porter, the evolution of the enzyme industry may be due to national path dependencies and the co-evolution of supporting industries within the dairy and beer industry, from where insulin and enzyme producers sourced skilled workers (Porter, 1990). Novo Nordisk adopted deep scientific knowledge about the structure of proteins and insulin and consequently contained the basic knowledge to expand into the innovation of enzymes. With such strong heritage, Novozymes soon established themselves as the market leader within the detergent enzyme industry. For many years, the products developed heavily exploited the capabilities present in the firm and learning was primarily generated internally in the laboratories on 2

Novozymes was at that time an integrated business unit within the Novo Nordisk Corporation.

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technical grounds and in terms of basic research. Thus, researchers were encouraged to indulge into skunkworks that could lead to radically new developments based on technical breakthroughs. “I would say that in the old days up to 90 % of the ideas feeding in to the ‘New lead’ phase of the innovation funnel came from our own scientists.” Niels Henrik Sørensen. As a result Novozymes developed strong technical capabilities that enabled them to develop, in many respects, superior products compared to those of competitors concerning technical sophistication, although they often relied on claimed effects, not always realised. Many of these products were indeed successful when introduced on the market since end-users were easily persuaded by the claimed properties of the enzymes rather than by realised benefits. In retrospect, it seems as if the competitive advantage of Novozymes, at this immature stage of the enzyme industry, was the ability to introduce radically new products, based on internally generated capabilities, which provided Novozymes’ customers with a claim value towards end-users. However, this approach was solely a reflection of the technology push strategy pursued and not developed in congruence with the market. The main reason why Novozymes obtained the dominant position on the enzyme market was that they, to a large extent, created and developed the market for detergent enzymes and thus, from the beginning, imposed a certain trajectory of enzyme development on the customers, who held very little knowledge of enzymes themselves.

5.3 Winds of Change To Novozymes, the pursued strategy for product development seemed aligned with the needs of the customers, not realising that the customers did not posses explicit needs. This was probably the reason why Novozymes kept pushing new products on the market with little attention to the environment. In the words of Martin Barfoed: “In the past, Novozymes exhibited a rather arrogant attitude towards customers and competitors. We did not think that we could learn much from external parties.”

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Over the years, Novozymes has become more attentive to the environment 3, acknowledging that no company can compete and innovate successfully in a highly competitive environment by isolating themselves (Edquist, 1997). However, it is doubtful that Novozymes would have prevailed, had they pursued any other innovation strategy initially, than one characterised by a technology push, due to the high uncertainty at both industry level and product level. Having paid too much attention to the environment might have proved unsuccessful, since the environment was green and unaware of the potential of enzymes. The mentioned shift in innovation strategy for Novozymes is not the only one, which has affected how business is conducted in the firm. The detergent enzymes industry has been faced with changing needs from the end-users of the detergents, which have had substantial implications for all players in the industry and related industries. No longer was it sufficient to purchase washing powder with questionable claimed properties, e.g. “Now removes fat stains at only 40 degrees C”, rather they commanded lower prices and realised benefits. Honing these requirements put considerable strains on Novozymes as well as other players on the market. Summing up, Novozymes had developed strong capabilities through a technology driven innovation strategy, where product development only involved established routines and procedures. However, the changing demands now confronting the firm, called for an external focus on an environment that now imposed considerable degrees of uncertainty on Novozymes’ innovation strategy.

6 STRATEGY UNDER UNCERTAINTY Our project analysis will depart in the theoretical setting of strategy under uncertainty. In this section, the purpose is to give the reader a better understanding of our conception of uncertainty and in what aspects uncertainty affects organisations, such as Novozymes. We will analyse and conceptualise uncertainty in relation to Novozymes, i.e. clarify the main drivers of, and reason for uncertainty, whether they come from internal or external sources, and most importantly to what extent these various kinds of uncertainty affect Novozymes over time. This will elaborate the reader’s understanding of Novozymes, as a supplement to the case description, thereby giving the reader better ground to appreciate our subsequent theoretical discussions and the basis for the remainder of this project. This includes universities, suppliers, customers, competitors, research institutes, governmental bodies and NGO’s among others. 3

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6.1 Fundamental Levels of Uncertainty To start out we will discuss the theoretical framework and the complementary theories that we will implement in our empirical discussion. Courtney (1997) discusses scenarios of uncertainty in relation to innovation strategy and divides them into four different levels. While time is presumably an important dimension, the levels of uncertainty play a role when considering the innovation strategy. Depending on the number of industry trajectories or possible product outcomes the future scenario is either: 1) clear, 2) there are alternative future outcomes, 3) a whole range of possibilities, 4) or true ambiguity (Courtney, 1997, p.70). The perspective is interesting as an overall framework when considering the future of an industry or a product, but over time uncertainty at industry as well as product level naturally changes, moving towards less ambiguous levels. However, we see a distinct difference between industry and product level that Courtney does not take into account. We will illustrate this from the historical perspective of Novozymes heritage. Novo Nordisk was one of the first companies to launch enzyme products for the detergent industry. Back then, shaping the future of the enzyme industry and related products was very ambiguous, and nobody could foresee the magnitude of enzyme application as today within food, feed, dying, wood and forest, not to mention the expansion of enzyme application in the detergent industry. Even though enzymes only possess 1-8% of the final detergent product, there are many ingredients to substitute in a near future (Jørgen Thomsen). Albeit, the picture of the enzyme industry is much clearer today, and the uncertainty about enzymes’ potential application is vastly reduced, there still exists high uncertainty about the innovation of the individual products. For instance, what future applications can be predicted for enzymes? Hence, there is a difference between the reduction of uncertainty in the industry in general and the uncertainty at the individual product level that Courtney (1997) does not set apart. In short, Courtney (1997) gives us a general perception of uncertainty, and what role it plays in strategic decision making. Unfortunately, the Courtney-framework tells us nothing detailed about the reasons for uncertainty, to what degree these characteristics play a role, and most importantly: if the world is complex and under constant change, would that not call for an equally complex and multifaceted constitution of uncertainty? In order to compensate the general conceptualisation by Courtney (1997), we turn to the work by Christensen (1992).

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6.2 Reasons and Degrees of Uncertainty Uncertainty is prevalent in two organisational aspects, namely in relation to market uncertainty and technical uncertainty. The former relating to whether the project will be a commercial success and the latter to whether the project can be technically accomplished (Freeman, 1982, p.149 4; Christensen, 1992, p.87). We will discuss both aspects in relation to Novozymes in the section to come. According to Christensen (1992), the reasons for market uncertainty stem from three main sources, connected to the product’s market value, number of entities sold, and the development of competing and/or substituting products. On the technical side uncertainty arises due to three main reasons linked to the number of technical problems, changes in product design, and the time span from idea to product launch. In effect the cost and time perspective of an innovation project is difficult to predict and is most often underestimated. Consequently, a combination of thorough technical and market knowledge is a precondition for successful innovation (Christensen, 1992). The most important factor, when discussing the degree of uncertainty is the time dimension (Christensen, 1992, p.89). While technical uncertainty reduces rapidly in the beginning of the innovation process, as major problems are solved, the market uncertainty is reduced only slightly over time in the development phase. In addition to time and stage of the development, an increasing degree of radicality of the innovation affects the degree of uncertainty in innovations (Freeman, 1982, p.150). But the relation between radicality and uncertainty is not obvious and to our belief not necessarily negative, as left unnoticed by most authors.

6.3 Turning uncertainty into a competitive advantage Literal discussions on uncertainty are often concerned with how to avoid or reduce uncertainty in product innovation. From a theoretical perspective this might appear most rational, but in practise uncertainty has hidden benefits. We can consider both market uncertainty and technical uncertainty as increasing functions of the radicality of the innovation (Christensen, 1997). Since a highly radical innovation is less accessible Freeman includes a third category by discussing general business uncertainty, which is the general state of business on which firms create their perception of what is profitable investment. We will not include this category. 4

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by the general company, especially due to the associated technical uncertainty, that innovation project has a higher potential in terms of profitability, for the firm undertaking such innovation project. In other words, we believe, uncertainty should not necessarily be considered an impediment, but rather an opportunity for potential profits, since radical innovation projects characterised by high uncertainty are less approachable by the average company, than are small predictable projects, thus also less competitive. Consequently, we will argue that the potential of an innovation project is a function of the market

Potential

and technical uncertainty of the innovation project, at least to a certain limit5, see figure 3.

Uncertainty

Hence, the challenge of innovation under uncertainty is to cope with the different aspects of uncertainty most efficiently and to turn this capability into a competitive advantage. Empirical studies show that large companies are better at innovating under uncertainty compared to small companies (Christensen & Bower, 1996).

Figure 3: Potential vs. Uncertainty

Afuah and Braham (1995) would question such relation between radicality and profitability. The hypercube model sets different standards for the advantage of radicality, arguing that an incremental innovation to the innovator may very well be deemed radical to the consumer. If such innovation is too radical the product may not become a commercial success despite superior functionalities. In According to Afuah & Bahram (1993) radical innovations have different consequences depending on the parties involved and affected. 5

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our case discussing the B2B detergent industry, the affect on the end-users is most often incremental as functionalities are inherent in the commodity available to end-users. With respect to Novozymes’ customers, the products are developed in cooperation with the market. Usually, uncertainty is defined by contrasting the term risk. Thus, while risk is tangible, potentially subjective, and can be measured in numbers, uncertainty is intangible, the degree of uncertainty can be estimated only afterwards, and then only in a general way. In the words of Tidd et. al. (1997, p.198): “Risk can be estimated, and is defined in terms of probability distribution, whereas uncertainty refers to an unknown outcome.” We have chosen to complement this simple definition with each of the different dimensions of the others authors analysed above, thereby constructing a holistic but accurate definition of uncertainty in accordance with the complex reality of Novozymes and its environment.

6.4 Uncertainty In The Case of Novozymes Novozymes’ operations take place under conditions of considerable market and technical uncertainty. With our theoretical framework in mind, we will now identify the drivers of uncertainty in Novozymes, why they exist and how market and technical uncertainty play a role over time, therefore requiring different attention.

Fundamental picture of uncertainty Novozymes has developed a significant and deep knowledge about the innovation process. Whereas ten to twenty years ago product development was very much a trial-error process, today, Novozymes has scientific maps of cause and effect, i.e. they have mapped the results from research in protein stability of how to make changes in the protein structure to get the expected outcome. Novozymes, shaping the future as the global leader in this industry, feels confident about the competitive situation, and they are certain about the potential of enzymes. Hence, while the enzyme industry as such seems like a safe path, the decisions on, and innovation of, new enzymes remain subjected to a vast share of unknown factors which Novozymes must battle. Using Courtney’s (1997) terminology this development clearly indicates how the level of product uncertainty has

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gone down from four to three, possibly two with some enzymes, i.e. from a truly ambiguous world of uncertainty to a situation where the future can be identified in terms of a range of possibilities. Technical and Market Uncertainties However, when looking at the enzyme products and related potentials, Novozymes has its own conceptualisation of which parameters constitute uncertainty. When evaluating a potential product moving down the innovation funnel, several main conditions play a determining role in approving the shift to the next stages. First, they estimate the probability of market success and technical success, which multiplied gives a so-called GenSight6 score. Second, the latter value is multiplied with Net Present Value of the project in question with a cost focus on future appropriation. As a result, Novozymes’ Executive Management has one overall tentative bearing on the potential outcome of the project. The innovation project undergoes several stages from New Lead to Launch 7. Moving down the innovation funnel technical uncertainty naturally reduces, more often in path-braking steps than on a continuous basis, and predominantly in the first two stages. Major problems may hamper or even call for cancellation of the project for a considerable time or even entirely, until this “shoulder on the trial� is passed. Therefore, certain milestones are crucial. New Lead I 8 and New Lead II are both stages of high technical uncertainty. The potential functionality of the enzyme is identified and suggestions whether a possible protein9 structures can be found are proposed. During New Lead I and II the market uncertainties are only slowly decreasing as Novozymes confirm product potentials with customers. The first major step forward reducing technical and market uncertainties is moving from New Lead II to Discovery. NPV and GenSight represent all the central determinants during stage gate I and II10. Technical uncertainty arises for several reasons. Firstly, at the initial stages, it is impossible to predict the technical solution needed to create a new product or whether it is at all feasible. Can the enzyme be stabilised to work purposefully with the detergent? Does Novozymes have the equipment to produce and upscale the enzyme, and if not, does such equipment exist on the current market? Secondly, for the enzymes to be sellable it must converge with the detergent configurations, hence the product design may have to change during the innovation process to be See Appendix 4: Gensight Scoring template. See Appendix 3: The Innovation Funnel 8 Can a technical and/or commercial opportunity be found in a given market or with a given technology? 9 Proteins are the basic building blocks of enzymes 10 See Appendix 3, for which decision parameters must be fulfilled for commencement of the next phase 6 7

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complementary at the time of launch. For instance, in the effort of commercialising Lipex 11, Novozymes had to test the enzyme with hundreds of different detergents to assure complementarities. Thirdly, the time from Idea generation to Launch is an issue, since the technical knowledge may have been replaced by competing solutions, thus leave the product obsolete. Furthermore, time may inflate cost of R&D to unworkable levels. Enzyme production is a timeconsuming process from Idea generation to Launch. The product Lipex was a radical innovation developed over 15 years with several intermediate launch stages. But the final Lipex product was not marketed until April 2002. During the innovation process there is a possibility that the product design has to change to match the configuration of the final consumer detergent. Small biological or chemical changes in the detergent may render the enzyme unstable or obsolete. Market uncertainties occur for other reasons. Firstly, the market value of the final enzyme is difficult to estimate in terms of NPV, especially in lengthy projects and within highly competitive product categories. Thus secondly, if the enzyme does not become a commercial success, quantities sold will not cover R&D expenses. The commercial potential of an enzyme is difficult for Novozymes to estimate unless they have up-to-date information from the consumer market. Thirdly, the possibility of a substituting product replacing the enzymes under innovation plays a threatening role to Novozymes. Nevertheless, as a market leader, the threat is significantly reduced due to three reasons. i) Novozymes has a great network of information to foresee such threats. ii) The customers are dependent on Novozymes in shaping the future and they do not risk being thrown off the rolling wagon. iii) The knowledge base in Novozymes is matched by no competitor, and hence the majority of players have the capacity to only follow in Novozymes’ footstep. As a new development project is approved for discovery, the question is whether a technical producible enzyme can be found, and especially whether this can be formulated with the detergents, in which the enzyme is embedded. At this stage Novozymes is highly dependent on the feedback from customers in testing of detergents. Uncertainty in retrospect In a historical revision, uncertainty appears to have affected Novozymes from different directions. During the mid 1980s until early 1990s the enzyme industry was immature. Novozymes’ technology driven strategy was based on internal resources. Innovation processes were left with Lipex is the latest product in a line of radical product innovations, ranging from the general enzyme Lipase, a double wash fat stain remover labeled Lipolase, to Lipolase Ultra and Lipoprime being incremental innovations, until finally Lipex being a first wash fat stain remover. See Lipex Time Line, appendix 5) 11

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unsolved technical problems12, until a possible solution was later discovered. Hence, the uncertainty had a great impact on the technical side. Nevertheless, uncertainty on the technical aspects is nowadays reduced due to a much broader and deeper knowledge base, and the shift in consumer behaviour has likewise shifted uncertainty from internal to external. As put forward during our interview with Mette Flansmose: “Eventually the technical problems will be solved. It is only a matter of time and effort. The uncertainty on the market remains much higher even at the end of the innovation process. For this reason we now have corporate consultancy on the marketing department.� - Mette Flansmose. From the above analysis of market and technical uncertainties, is seems reasonable to conclude that the external market uncertainties play the main role. However, as discussed from a theoretical perspective, Afuah and Braham (1995) suggest that introducing new enzymes affects your entire environment, but the nature of the enzyme itself will not affect the environment evenly; some are affected more than others, and some are left unaffected. The stepwise introduction of Lipex through its many predecessors is an example of this. From the first edition, Lipolase, to the final edition, Lipex, the technical uncertainty played the largest role, since Novozymes experienced no noticeable problems with sale. The claim value was still of great importance in the late 1980s; enzyme quality was not. The large degree of technical uncertainty affected the complementary innovators, such as the subcontractors and engineering consultancy firms, who help Novozymes develop its production facilities. In contrast, the very same innovation would have no impact on the suppliers of raw materiel, e.g. soy beans and yeast, which are the basic production ingredients of enzymes. Regardless of the technical uncertainty, these suppliers deliver the ingredients to Novozymes, unlike the former who are dependent on Novozymes’ ability to solve their technical problems. Indeed, this supports the notion of Afuah and Braham (1995), that uncertainty is ambiguous and unevenly distributed in the environment. We were also introduced to a practical example of how the potential of product categories is reflected by the radicality and the increasing uncertainty. When deciding on the resource allocation of product innovation, a certain distribution key is used. 12

Lipex was left several times until R&D could solve the problem for further progress. See the Lipex time line Appendix 5

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“A more radical innovation is associated with higher potential but of course these innovations are also more uncertain to undertake…we have chosen to balance the uncertainty, by allocating resources to projects of varying nature.” - Jørgen Thomsen. The distribution key to this allocation process is

Business Maintenance

confidential, so we cannot analyse/reveal to what

- Incremental

Short-term consumer claims

extent Novozymes’ innovation strategy is biased

Substitution

towards focus on innovations of incremental or

Breakthrough innovations

radical nature. We will return to this later.

- Radical

Table 1: Product Catagories

6.5 Conclusion Uncertainty in Novozymes is generally perceived as market and technically related. We have identified the main drivers in connection with estimating the commercial potential and future appropriation of the product. Clearly Novozymes is confident about coping with the technical uncertainty, rather their focus is on external factors. Conclusively from our analysis, market uncertainty is the most prevalent and dominant factor influencing decision making in the innovation process today. Such confidence however, should not completely shift the focus of Novozymes. Uncertainty is changing over time between market and technical aspects. Hence, the challenge is to balance market with technical uncertainty. Therefore, a combination of thorough technical and market knowledge is a precondition for successful innovation. We identified that Novozymes’ uncertainty is characterised by ambiguity, since the uncertainty is unevenly distributed across their suppliers, complementary innovations, and especially their customer. Finally, as for the majority of authors, if such uncertainty is wrongly anticipated as an impediment, probably Novozymes is not directly reducing uncertainty in a general sense; rather, their hidden weapon, is the capability of better working in competitive environments under high uncertainty.

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7 DYNAMIC CAPABILITIES AND INNOVATION STRATEGY In an environment of high uncertainty originating from various areas, it becomes imperative for organisations to employ certain strategic initiatives in order to cope with this uncertainty. The lack of ability to do so may hamper the organisations’ competitive advantage. We wish to assess the “sources and methods of wealth creation and capture” (Teece et al., 1997, p. 509) employed by Novozymes i.e. the innovation strategy pursued in order to successfully compete and prevail despite the uncertainty facing them. In particular, we will focus on how Novozymes develop their internal capabilities to adapt and even capitalise on rapidly changing environments. Thus far, several bodies of thought exist in the literature on innovation strategy formulation and the impact on organisations13. Our theoretical focal point will be the Dynamic Capabilities approach as presented by Teece et al. (1997) 14, since it provides a solid framework for analysing how firms act and react under uncertainty. We will come to a more tangible understanding of what constitute dynamic capabilities in a theoretical sense and subsequently apply these findings to the case of Novozymes, analysing how they aid Novozymes in order to “exploit existing internal and external firm-specific competences to address changing environments” (Teece et al., 1997, p.510).

7.1 Dynamic Capabilities In this section we wish to shed light on what are dynamic capabilities, why these capabilities are imperative to firms in order to stay competitive in an environment of high uncertainty and consequently what constitutes dynamic capabilities. The dynamic capabilities approach has its origin in the Resource Based View on strategy as presented by Grant (1991) among others. The central notion deducted from this line of thought is that of internal resources and capabilities as constituting the basis for a firm’s competitive Of the theoretically important ones should be mentioned: Competitive Forces approach (Porter, 1980), The Resource based View (Grant, 1991), Dynamic Capabilities (Teece et al., 1997) and The Relational View (Dyer & Singh, 1998). 14 We acknowledge that the mentioned theoretical bodies of thought are far from mutually exclusive, but rather distinct elements in an evolutionary theoretical development of an understanding of strategy formulation complementing each other. In the words of Teece et al.: ‘The trick is to work out which frameworks are appropriate for the problem at hand’ (1997, p. 526). 13

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advantage, strategy as well as the primary source of profit of the firm (Grant, 1991, p.116). Thus, the exploitation of internal resources and capabilities plays an imperative role for firms to effectively position itself and operate in the marketplace15. In essence, the firms’ “competitive advantage lies ‘upstream’ of product markets and rests on the firm’s idiosyncratic and difficult-to \imitate resources” (Teece, 1997, p.513). The dynamic capabilities approach provides the theoretical framework for a more thorough understanding of how the firm can constantly draw on the existing internal resources and capabilities, whilst developing and adapting these to the changing environment. Resources can be seen as the basic building blocks of capabilities in the firm (Grant, 1991). Those capabilities supporting the activities that differentiate one firm strategically from competitors are core to the firm16. Thus, it makes intuitive sense to deduce that a firm’s competitive advantage is constituted of its core capabilities. However, resources and capabilities are not free to choose and change for the firm (Dierickx & Cool, 1989), they are only developed over time and hinge on the path the firm has followed previously and its present asset position (Teece et al., 1997). Most firms strive to obtain sustainable competitive advantages, on which they can excel compared to competitors in the long run. However, they are constantly faced with two types of threats, which can potentially overturn their competitive advantage, i.e. imitation and substitution. In order for firms to avoid imitation by competitors of core capabilities, these have to be unique and difficult to imitate, i.e. they have to build on non-tradable, non-imitable and non-substitutable strategic assets 17 (Dierickx & Cool, 1989), or in the words of Teece et al. “In competitive markets, it is the ease of imitation that determines the sustainability of competitive advantage” (1997, p.526) Yet, the threat of imitators is not the only one faced by firms. Often core capabilities may be more vulnerable to substitution by firms holding substituting capabilities than to imitation. If unable to cope with the changing requirements from the market, core capabilities of the firm will most likely be rendered obsolete, potentially leading to a decrease in competitive advantage in the sense that the This way of positioning the firm in the marketplace is fundamentally different from the Competitive Forces approach to strategy pioneered by Porter (1980), which accentuates the industry attractiveness as being the main decision parameter for management in positioning the firm. 16 Various authors have suggested different taxonomies for such core capabilities: Core competences (Prahalad and Hamel, 1990) and firm-specific competences (Pavitt, 1991) to mention a few. 17 Dierickx & Cool (1989) use the term strategic assets to describe assets required for implementation of a firm’s product market strategy (e.g. brand loyalty, technological skills). The taxonomy of assets covers those of resources, capabilities and competencies as used by Grant (1991) and Teece et al. (1997). 15

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existing capabilities of the firm supports other activities than those valued by the market (Grant, 1991). Summing up, the dynamic capabilities approach to innovation strategy opens up avenues for firms to achieve new and innovative forms of competitive advantages given path dependencies and market position, by constantly replenishing, augmenting and upgrading existing capabilities, based on input from the external environment, in order to avoid imitation and substitution by competitors. In essence, focusing on dynamic capabilities are what allow firms, not only to survive, but also to grow and capitalise on markets characterised by high degrees of market and technical uncertainty.

7.2 Moving towards a more descriptive framework In the previous section we identified resources as being the basic building blocks of capabilities. This relationship is by no means a simple predetermined one, but rather a result of extensive and “…complex patterns of coordination between people and between people and other resources. Perfecting such coordination requires learning through repetition” (Grant, 1991, p.122). Such regular and predictable patterns of coordination among resources in the organisation are also what constitute organisational routines (Nelson and Winter, 1982). Thus, the ability of firms to combine resources and capabilities into competitive advantages, eventually hinges on the organisational routines embedded in the firm18. In the words of Grant “A capability is, in essence, a routine, or a number of interacting routines.” (1991, p.122). We established above that a key parameter to remain competitive in a dynamic market is the ability to renew capabilities, i.e. organisational routines, to stay congruent with the changing business environment. A first step in this process is to possess the ability to identify changes before the inevitable consequence of negative impact on business occurs. Zollo and Winter (2001) terms this ability search routines, which in essence is the ability of firms to constantly assess the environment for potential amendments to the existing core capabilities of the firm. The second step in the process is to change existing routines according to the observed changes. Since organisational routines are not build or changed overnight, but rather constitute stocks of capabilities, which are acquired over time (Dierickx & Cool, 1989), certain processes have to be established to allow for organisations to question their existing routines based on newly acquired knowledge and adjust accordingly (Argyris & Schön, 1996), which Teece et al. phrase this way: 18

The notion of organisational routines is close to that of Business Processes (Teece et al, 1997)

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“Such routines or skills to reconfigure and transform is itself a learned organisational skill� (1997, p.521). We will use these two phases of manoeuvring in dynamic environments to clarify the relationship between dynamic capabilities and organisational routines in a subsequent section. In practise, the window for renewal of organisational routines appear when an organisation exploits existing capabilities in performing activities, which are related to, and evaluated by external actors. A typical example of this is the case where firms initiate new product development programs, where parts of the core capabilities base are mobilised, others not. Those core capabilities not mobilised in the process will often be experienced as core rigidities by involved parties (Leonard-Barton, 1992). It is at these instances that the organisation has to realise the opportunity to renew its routines. Summing up, we have shown that in order for firms to hold sustainable competitive advantages, which are not easily substituted by competitors they need the ability to search the environment for indications that existing routines are becoming obsolete and to identify which capabilities are required to remain competitive. Subsequently, firms should possess the routine to change existing organisational routines. The range of capabilities open to firms is shaped and limited by the path and market position of the firm.

7.3 Search and Integration The above analysis has provided us with the proper foundation to put forward a more tangible framework of the qualities necessary to posses in order for firms to successfully adapt organisational routines to an uncertain and dynamic environment. Below, we will introduce the concepts of Search and Integration to pinpoint the tasks at hand for firms operating in such environments (Zollo and Winter, 2001; Teece et al., 1997). Search By Search we refer to all activities firms undertake with an external focus to the firm, which allows the firm to question exiting capabilities based on newly obtained knowledge from the environment (Leonard-Barton 1992). In practise, the instances of such moments of double loop learning (Argyris & SchĂśn, 1996) takes place when individuals from the firm are in contact with the environment, be it customers, universities, competitors or suppliers. Such contact may range from arms-length collaboration to

27


close partnerships, which affect the extent to which the firm is able to extract tacit and more valuable knowledge from the other party or simply easy-accessible explicit information. In order to perform search operations, individuals in the organisation have to be empowered by the management to do so, acknowledging that it might result in changed organisational routines. Organisations prone to such search are often characterised by the ability to strike a proper balance between exploiting the existing knowledge base and organisational routines and at the same time exploring new avenues for changing the very same routines, if these are not aligned with the environment (Weick & Westley, 1996; Schumpeter, 1942). However, firms do not have unlimited search possibilities, but are limited in their search by the asset position and capabilities present in the firm. These constitute the absorptive capacity (Cohen and Levinthal, 1990), i.e. the ability to comprehend new knowledge. If the absorptive capacity is not sufficiently developed, the firm will simply miss out the signals from the environment resulting from a search. Searching the environment is imperative to foresee changes that potentially could render a firm’s competitive advantage obsolete. However, without the ability to adapt accordingly and implement the acquired knowledge, the firm stands little chance to successfully cope with the dynamic environment.

Integration We identified above that individuals, not organisations, undertake the search process. However, this process is not sufficient to allow for changing existing organisational routines, since the newly acquired knowledge still resides with the individual, who performed the search on behalf of the organisation (Argyris & Schön, 1996), rather it has to be diffused in the organisation in order to impact the existing organisational routines. Changing these routines is by no means a simple task, since firms are limited by chosen trajectories and populated by individuals who might be reluctant to change. Overall, a prerequisite for change of existing organisational routines is the presence of a core routine of changing organisational routines or in the words of Teece et al. “The capacity to reconfigure and transform is itself a learned organisational skill” (1997, p.521). This ability has to

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be supported by a culture and mindset in the organisation, headed by the management, which embraces and encourages the adoption of new organisational routines. Our proposed framework is made up of two distinct abilities, i.e. search and integration, instilling a sense of isolation in time and content, the former being prerequisite to the latter. However, we acknowledge that in real life such a division is hardly imaginable. Rather, search and integration will in practise be an ongoing iterative process often spanning long periods of time and with a high degree of interdependency. Summing up, given the existing asset position, path and capabilities a firm holds, the ability to integrate new organisational routines in order to comply with changes in the environment, and the ability to search the environment, seems to be the main source of sustainable competitive advantage to firms, or in the words of Teece et al. (1997, p.521): “The ability to calibrate the requirements for change and to effectuate the necessary adjustments would appear to depend on the ability to scan the environment, to evaluate markets and competitors and to quickly accomplish reconfiguration and transformation ahead of competitors.� We believe the presented framework provides a more descriptive foundation to analyse what happens in firms when activating dynamic capabilities and how it affects organisational routines. Thus, we will use the notions of search and integration in the following sections to analyse how Novozymes undertakes the task of coping with an uncertain environment.

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7.4 Adapting to changing environments “Collaborations, alliances and dialogue with our stakeholders all help the business to grow – not only when it comes to developing new products, sales and marketing but also in our relations with society in general.” - Novozymes Annual Report, 2002.

In continuation of our case description and our theoretical framework above, we now wish to analyse how the change in customer behaviour shifts Novozymes’ resource based view towards a more dynamic innovation strategy. By bringing the concepts search and integration into practical use we will illustrate how Novozymes align with external opportunities and demands. Nevertheless, it is important to emphasize, that even though we will divide the concepts search and integration into two sections, the process actually takes place as an iterative progression. The task of the first section is to analyse implications and possibilities of how Novozymes search the environment. The main task of the second section is to analyse which means Novozymes possesses for changing existing organisational routines through integration of newly acquired knowledge obtained through the search processes. More specifically we will assess how this has helped Novozymes in integrating new routines supporting the establishment of external relationships, while discarding obsolete organisational routines and how Novozymes subsequently update organisational routines, in a more incremental and iterative fashion based on inputs from the established external relationships.

7.5 Searching changing environments In continuation of the case description, Novozymes was in the mid 1990s faced with new challenges about combining internal capabilities with external requirements. Novozymes was well aware of its technological capabilities and related product possibilities and limitations; however they did not possess sufficient knowledge about the detergent market or end-user demands. Introducing new expensive enzymes with only incremental improvements marketed with new detergent claim values (Ultra, Plus, Ultra-prime etc.) was no longer on the end-users’ shopping list. Both end-users and customers now focused on cost reduction and higher enzyme quality rather than expensive incremental innovations with unrealised claim values.

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Looking inwards, Novozymes did not possess the resources and capabilities to market such cost efficient products, since focus so far had been on sophisticated technical solutions, thus cost reduction had to be accomplished elsewhere. Turning to the value chain (Porter, 1985a) Novozymes had no indication of where to cut cost, and the situation forced Novozymes to search the environment for possible solutions. “Developing a sense of external orientation – towards key customers or major technological development – and ensuring that this pervades organizational thinking at all levels is of considerable importance in building and maintaining an innovative organization.” (Tidd, Beassant, Pavitt, 1997, p.327)

At that stage Novozymes operated in a business environment characterised by arms-length relationships with external parties. Consequently, knowledge about customers and especially endusers was scarce, and it was difficult for Novozymes to redirect the previous technology driven strategy (Ulrich & Eppinger, 1995). It was therefore necessary to build a closer relationship with customers to extract the knowledge from the market, as indicated by Peter Rosholm: “We neither had the resources nor the capabilities to retrieve knowledge from the end-user and thus it was important for us to get closer to our customers.”

By engaging in direct contact with the end-users to acquire the knowledge needed, Novozymes would be signalling an unintended move towards the retail business activity; the domain of Novozymes’ own customers, e.g. Unilever. This signal would be most unfortunate, since the customer would only distrust Novozymes, and trust was at this stage a scarce resource. Jørgen Thomsen explains: “We needed this knowledge! ...But why should Novozymes spend millions on acquiring this knowledge, alienating our customers making them distrust us, thereby worsening our situation, when all of this knowledge was already available? Our

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customers were already in possession of it, required for their own business. They had been accumulating it for years, so there was just no need for us to re-invent the wheel, so to speak.“ As a way to overcome this dilemma Novozymes engaged in co-location with customers, i.e. relation managers in Novozymes were exchanged with similar positions in e.g. Unilever and Procter & Gamble, to extend the rather formal relationship beyond the initial stage. This was a first step in the process to gain more intimate knowledge of the customers and end-users as termed by Håkansson (forthcoming); opening the “Black Box”19 of relationship coordination. Additionally, the colocation of strategic account managers produced other benefits. Not only did Novozymes achieve a better understanding of end-user behaviour, they also transferred a whole lot of tacit knowledge about customers’ requirements in product development projects, thereby producing the knowledge to close the gab between external needs and internal capabilities. Central to this new external approach was for Novozymes to empower employees to search the environment for new opportunities and subsequently enable such inputs to be integrated in the organisations’ existing routines. On the other hand, it was important not to rely too heavily on exploring new knowledge but rather coordinate such inputs with the existing knowledge base, by adapting the existing routines with new capabilities. This is what Weick and Westley (1996) refers to as balancing exploitation with exploration. One disadvantage of searching is, while learning takes place during the interaction with the environment, the knowledge is only accessible to the degree such knowledge can be absorbed in Novozymes, and since the organisation relied heavily on its path, position and processes (Teece, 1997), it was difficult initially to adapt to such external changes. “The larger the incongruity between project requirements and core knowledge, the more the latter becomes a rigidity”, (Leonard-Barton, 1992, p.118). Therefore, not only must Novozymes search the environment but in order to learn and adapt, the organization must integrate such new coordination capabilities. End-users easily become intangible variables to Novozymes because they have no direct contact or indication in terms of demand and consumption patterns. This distance highly increases the market uncertainty about the adequate future product development. 19

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7.6 Integrating Organizational Routines Having identified how Novozymes manages to search the environment for significant changes that might affect the way it conducts business, we now wish to analyse how such changes subsequently are integrated in the firm. The point of departure will be to assess the prerequisites for even considering changing routines, i.e. the ability to question own routines based on newly acquired knowledge (Argyris and SchĂśn, 1996). The prerequisite “We must foresee change and use it to our advantage. Innovation is key to our business and therefore we will encourage a learning culture for the continuous development and improved employability of our people.â€? - Our Values, The Novozymes Touch booklet.

As indicated in the above statement, Novozymes is highly prone to adapting existing organisational routines to new requirements from the market. The mentioned learning culture refers to routines that support the change of organisational routines, indicating the focus Novozymes has on renewal and creative destruction (Schumpeter, 1942) of organisational routines. Based on our empirical data and the visits we have paid to the organisation, we believe this learning culture is not only canonical phrases formulated by the management but are actually adopted by the employees. We believe the culture is on one hand shaped and instilled by the daily enzyme R&D, i.e. the actual development of enzymes provides numerous opportunities to question existing routines, since it has an inherent nature of learning-by-failing. On the other hand, the culture can be traced further back in time to the founding fathers of Novo Nordisk. When the company was still in its infancy, these people inspired a mindset in the organisation supporting freedom of the individual to question existing routines and initiate changes if these proved inadequately fitted to support the overall goals of the organisation. Whatever the label, i.e. culture, mindset, organisational DNA etc., it is our conviction, that every employee at Novozymes is constantly aware of his and her responsibility to be open to changes in the routines, as the fundamental prerequisite to be successful in the enzymes industry.

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7.7 The Integration of New Routines We will in this section focus on the routines needed to establish a relationship with the customers and on the advantages of establishing such relationship. More precisely we will analyse how Novozymes combines and changes existing organisational routines through interaction with customers to better engage in cooperation. First, we will assess how this has helped Novozymes in integrating new routines supporting the establishment of external relationships, while discarding obsolete organisational routines. Secondly, how Novozymes subsequently updates them, in a more incremental and iterative fashion based on inputs from the established external relationships. To build the relationship with the customers, the existing capabilities in Novozymes were not aligned with the new external requirements. For this reason Novozymes needed to change existing routines that would otherwise turn into core rigidities, and consequently hinder Novozymes in cooperating closely with external parties. Close collaboration with customers in the product development process influences the different phases in the innovation funnel. Instead of only evaluating technical and market probability from an internal perspective Novozymes approached the customer, bringing their opinions into consideration. Novozymes now consults customers, e.g. Unilever, before approving products entering the New Lead I phase. First, ideas are shared about technical and commercial issues. Second, enzymes are tested with detergents and information about the end-user’ response to new product initiatives is received by Novozymes. Third, a joint analysis of product potential in many aspects is conducted, and fourth, whether a particular innovation adds value to the customer detergent without increasing price, and whether it produces mutual advantages, is appraised. By integrating the customer in the innovation process, Novozymes achieves a much more reliable picture of the success of the final product, contrary to earlier when they relied on internal estimations. This way both market and technical uncertainty is vastly reduced. Products are evaluated from several perspectives, i.e. by the innovator, by the customers and the end-user, feeding back into Novozymes’ evaluation procedure. The GenSight score is an example of how the potential enzyme is balanced by market/technical uncertainty and NPV, in collaboration with the customers, thereby bringing the external environment into consideration as oppose to the previous technology driven approach, where mainly the technical probability was evaluated.

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The interaction with and integration of customers, has vastly impacted the fundamental flows of new development projects through the innovation funnel. Hence, it has changed routines in the innovation process with regards to how products are evaluated and accepted at the stage gates between the various phases. The co-location of relation managers, as mentioned in the previous section, further improved this relationship between Novozymes and its customers. The physical presence of an employee from e.g. Unilever, now affects the way coordination of product development is carried out. In many situations it decreased the need to contact Unilever as information was right at hand in physical terms, and the fact that Unilever was now a direct part of the innovation process, gave them a sense of ownership and commitment. As a result, technical and market uncertainty was further disarmed, because of the mutual involvement. This realisation of advantages of balancing internal and external knowledge has further affected the culture and mindset in Novozymes, acknowledging and emphasising the importance of the customers. We will now go into further detail of how these changes of organisational routines were integrated into the existing routines of executive management. The first step in the relationship was to employ one Strategic Account Director for every strategic customer 20, whose sole responsibility was that particular customer. Peter Rosholm explains: “My job as a Strategic Account Director is basically simple. I am responsible for everything that is related to the customer, in my case Unilever. They have eight technology centres and 56 factories around the world, so I have my work cut out with ensuring that deliveries are made. In addition, I am also in charge of price negotiations, contracts and what not.� When first integrating with Unilever, both parties quickly realised what Mouritsen et al. (1999, p.222) describes as the following:

20

There are five strategic customers, Unilever and P&G among others, and 12 regular customers

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“It was not only a matter of crafting a more focused strategy…They also found that their own modes of ordering changed, so that their ‘core competencies’…were partly redefined, and so that the internal – and not only external – distribution of centres and peripheries changed.” With this in mind inter-organisational workgroups (Berry, 1994) were established to coordinate activities and search for opportunities, and mutually implement these into both organisations. One result of this change of organisational structure and procedure is reflected in one of the primary benefits of the customer relationship. Through the organisational workgroups and new line of communication, Novozymes and Unilever found a solution to an imminent supply chain problem by matching their activities and resources to each other through integrating their logistics systems. Novozymes could thereafter forecast the production and shipment of enzymes required at specific times, in turn removing the administrative strains and routines of processing orders for both parties, consequently resulting in a cost reduction. We will conduct an in-depth analysis of the supply chain advantage later in the project, and for now just acknowledge how their core capabilities were affected, in the sense that the routines concerning production and on-time-delivery had been enhanced as a result of the relationship with Unilever. The change of such routines resulted in direct improvements of cooperation, as well as a reduction of the market uncertainty, in that Novozymes could rely and plan on future demands from key customers. Summing up, we have identified that Novozymes, has found an avenue for decreasing both market and technical uncertainty through an increased collaboration with key customers. The ability to establish such relationships hinged on the successful application of search and integrations routines in relation to customers. Though described as an isolated period of time, the search and integration routines are mobilised in iterative processes, constantly developing the organisational routines of Novozymes, enabling the firm to always stay in tune with the market.

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8 CREATING A BUSINESS RELATIONSHIP The dynamic capability view provides us with a comprehensive insight in to the processes present in Novozymes for searching new trends in the environment by empowering the individual employee to question existing ‘ways of doing things’ through close collaboration with customers and subsequently integrate the new insights into organisational routines. Further, it allowed us to identify changing demands stemming from the end-users which we have identified as the main source of uncertainty faced by Novozymes today. Though informative, we believe this framework misses an important aspect of these customer relations, by neglecting the existence and importance of what drives the iterative process of search and integration. Without an understanding of what drives Novozymes ability to change we cannot relate our findings to our general research question, and understand exactly why Novozymes enjoys its current leadership role. Thus, we will in the following section provide a parallel analysis to the one above, which provides insights into the drivers of customer relationships. From the analysis above we can conclude that the main problem of Novozymes in coping with the changing environment was a lack of knowledge of the end-users, in turn the result from lack of trust and commitment between Novozymes and the customers, e.g. Unilever. From this, executive management chose to increase the level of collaboration with the customer.

8.1 Theoretical discussion According to HĂĽkansson (forthcoming) the prevalent goal with collaborating with any other party, is to achieve efficiency. To ensure this efficiency, the activities that different parties engage in have to be coordinated, depending on the nature of these activities. There are three kinds: hierarchy, market, and business relationship, where the latter requires the most coordination due to the complexity of the relationship. One main conclusion, which will be used extensively in our analysis, is the proposition that the hierarchical and market coordination are not alternatives applicable to the same situation, but are instead complementary, i.e. the market presupposes the existence of the hierarchical, while both are preconditions for the business relationship, and its own respective clan coordination type.

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Tomkins (2001) uses relationship, alliance, business network as similar concepts to conceptualise the same coordination forms as Håkansson. However, in addition to Håkansson, Tomkins elaborates on what drives the development of relationships. According to Tomkins (2001) there is a relationship between trust and information 21 available. To make matters more complex, there are various kinds of information; the exchange of information type 1 is essential throughout the stages of building a relationship, especially in the beginning but also to maintain the relationship. The upper layer to this is the information type 2, which is only possible to exchange in relationships when type 1 exists and flows. Information type 2 adds value to the relationship, beyond the early immature phases of the relationship. Furthermore, Tomkins (2001) would argue that in order to acquire both types of information, trust has to be instilled, both to progress through the phases of the relationship and as a result of trust, ensure sufficient flows of information.

8.2 Enticing Unilever In the early phases of Novozymes’ relationship to Unilever, their activities were only in need of hierarchical coordination, due to the complementarity and similarity of their activities: Novozymes developed enzymes for the detergent developed by Unilever. They acknowledged the mutual scale benefits by coordinating their R&D activities towards creating the final detergent, building on information Unilever had supplied about end-users’ demands. However, since Unilever is not Novozymes’ only customer, and the product potential for the detergent market is abundant, the standardisation of the activities and the product portfolio began to rapidly expand. This called for new types of coordination since the demands of several customers (for instance Unilever) had to be matched with the supply of several producers of similar enzyme products (e.g. Novozymes and Genencore). Håkansson states (forthcoming, p. 6), that in such a situation the market will let each activity be undertaken in accordance with its optimal scale, i.e. the output is controlled by the classic demand-supply balance. During the same period, Tomkins would propose that trust was in its early phase of being instilled into the relationship. Using the terminology of Ford et al. (1998) during this period, Novozymes and their customers were still in the early pre-relationship and exploratory phases of constructing the relationship. Here information type 1 is most important, in order to establish the relationship, but is however complemented by information type 2, for which

21

The term information is predominantly used by Tomkins. We will also use the term knowledge (Cook & Brown, 1999) because we feel it accurate in describing what is exchanged between Novozymes and key customers.

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exchange was required in order for Novozymes to co-develop enzymes to match the detergent formulation of Unilever. However, during Novozymes’ and Unilever’s relationship in these stages of exploratory and developing nature, they discovered that they wanted to use the relationship to a considerable extent, where resources and activities are connected across organisational boundaries to mobilise the development of higher quality enzymes, technical development, and ultimately a reduction in the associated cost. In all, efficiency is increased, however while blurring the boundaries and limitation of each firm (Håkansson, forthcoming). The business relationship is the third form of coordination which is required, because the firm, i.e. hierarchy, and the market cannot coordinate the activities of information sharing and technical product development. These activities are dissimilar, therefore requiring integration and matching of planning. As referred to here, the organisational structure of both parties had to undergo changes. During the early phases with hierarchical and market coordination of the relationships, communication was typically conducted using only one channel of communication, e.g. a sales representative or key account manager from both sides of the business relationship. Novozymes changed their organisational communication routines and structure, by aligning their organization with that of customers. As mentioned earlier, for every strategic customer one Strategic Account Director was hired, whose sole responsibility was the customer. As the success of these changes became evident for both parties, trust increased in the business relationship and according to Ford et. al. (1998) the relationship was beyond the exploratory phases and well into the developing phase. Soon, Novozymes solved the largest technical problems from which the detergent enzymes was suffering, mainly instability and quality issues, through the exchange of information type 2, and as sales thereafter began to surge again Novozymes and their strategic customers began to enter a stable phase. Still, our empirical study did not support the proposition of Tomkins (2001) regarding the last phase of trust and its required information. According to him, there are virtually no maximum level for trust, but the required information, on which the quality of the relationship is dependent (Håkansson, forthcoming), decreases. We interpret, that Tomkins (2001) is trying to convey that after a critical mass of trust has been instilled into the relationship, the amount of information, required to maintain and expand trust, decreases. Surely, the trust between Novozymes and the customers creates leverage for both parties, meaning

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the need to know certain kinds of information to maintain the relationship decreases to approximate a constant level. However, this level of information is insufficient to increase both parties’ competitive advantages, meaning information that is nice to know is a must-have. How else are firms supposed to change and progress? Without a steady stream of updated knowledge concerning market and end-user circumstances, Novozymes looses its contact with the tacit demands thereby the foundation on which measures of cost reduction are created, eventually affecting their competitive advantages. Indeed, such type of information is nice to know. The exchange of such codified and confidential knowledge is not the only and prime benefit. Through business relationships and often in conjunction with product development projects, Novozymes get the opportunity to tap into tacit and unarticulated needs of the customers. “In experimenting together and communicating directly, both parties explore tacit knowledge elements and implicit expectations, and in the process may come to share understandings of the situation.” - Kreiner, 1995, p.343

9 CONCLUSION SECTION B The shift in end-user behaviour created an incentive for Novozymes to change. Our analysis of search and integration was aimed at understanding how Novozymes is able to change. We analysed how Novozymes combine and change existing organisational routines, and how this has helped them to move away from obsolete ways of conducting business to combine the considerations of the customer. We can conclude that such routines are not built or changed overnight, but rather constitute stocks of capabilities, which require time to change (Dierickx & Cool, 1989). The case used here has evolved over the past decade, and only recently have Novozymes and Unilever begun to exchange, otherwise confidential knowledge, such as strategic plans and new technological developments, thereby letting Unilever and Novozymes plan future detergent product launches, which only confirms that things do not change over night. However, our analysis here has more far-reaching implications. First, we can confirm the already stated, that in order to change existing organisational routines, in this case Novozymes’, one must

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possess a mindset of change, i.e. the culture and its ‘DNA’ must be geared for change. Second, we can conclude that from a general viewpoint, business relationships with strategic customers can help reduce uncertainty, as was the case with the R&D collaboration between Unilever and Novozymes, where both market and technical uncertainty was reduced. Most importantly, in order to drive the iterative process of search and integration, we identified trust as an imperative parameter in creating the business relationship. With piecemeal increased levels of trust over time, the flow of knowledge is increased, which in turn discloses areas of particular uncertainty for Novozymes. In this case, we analysed the largest area, the black box represented by the end-users, where Novozymes now has the competitive advantage of knowing about their demands, in turn helping Novozymes to understand what enzymes to produce. In the words of Tomkins (2001, p.186): “The role of information…()…in uncertainty reduction is obvious and widely discussed and analysed…Irrespective of the current state of technology, alliances will be pursued and trust given where that approach to reducing uncertainty supports mutual survival.” Figure 4 summarises our findings, and clearly shows the development of the relationship in both Håkonssons’ and Tomkins’ terms related to one another. Finally, the evidence from our analysis of Novozymes suggests, that information of a need to know nature may suffice to maintain the business relationship, but is far from sufficient if the business relationship is to achieve its overall mutual strategic objective: create new competitive advantages. Therefore, both parties are relying on information of the type nice to know.

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Figure 4: Trust-building and Relationship Development

Thus far, we have noticed how Novozymes is embracing the customer based on a familiar management philosophy, that collaboration with the customer will unlock the secrets to eternal competitive advantages. According to Garud & Rappa (1994) collaborating with other actors does not always entail creating artefacts, such as enzymes, that meet with their prior expectations. They suggest a linear progression from the conception of an idea to its commercial application is contradictory to their more complex propositions. Instead, researchers must on one hand create and believe in their own realities in order to make progress in their chosen paths and convince others, while on the other hand, be ready to disbelieve their realities and be willing to embrace the emerging shared reality even if it does not match theirs. The problem arises during the interactions between those who develop the technology, the physical artefacts they create, and the institutional environment they foster. In this line of thought, we question how much firms can rely on their customers in situations of collaboration. Surely, there are upper and lower limits for the advantages acquired through collaboration, and this enforces a certain level of constraints on each party.

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10 PUTTING CUSTOMERS ON A PEDESTAL? “To be able to deliver a steady stream of new ideas and products, we have to know our customers’ needs. Together with many of our largest customers, and ideally in strategic alliances, we constantly analyse how our technology can lead to new products and processes.” – Novozymes, Annual Report 2002 The majority of mentioned strategic elements have a strong external focus, i.e. Novozymes rely greatly on information sharing with their customers through close business relationships. Before continuing our in-depth analysis of these, we wish to further analyse them from a more sceptical perspective. According to some authors (Christensen & Bower, 1996; Lynn et. al. 1998) pitfalls do exist, i.e. too close interaction with customers could lead to inabilities to remain the industry leader, since new entrants emerge outside the stable relationships with entirely new products. We propose that firms must balance customer orientation, despite the competitive advantages of uncertainty reduction, which a business relationship brings about. However, we feel that certainty is not necessarily the ultimate goal.

10.1 Remaining innovative Turning to Christensen & Bower (1996), it remains difficult to analyse whether the nature of the innovation, sustaining or disruptive, is a problem for Novozymes. Christensen and Bowers main concern is that Novozymes risks being held captive by the customer, since the customer is interested in sustaining innovations, where the uncertainty is minimal as opposed to disruptive technologies. Unfortunately, sustaining technologies offer Novozymes no chance of expanding market share and revenue, let alone global leadership. “In the old days we were mainly driven by ideas for new products and markets arising from our own employees. This strategy worked in the 1980s where the claim value of new products was the main parameter for our customers, regardless of the price. But, during the 1990s customers started focusing on what cost reduction we could offer them, thereby prompting a shift in our strategic thinking, mainly to maintaining a focus on improving our

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existing products, integrating with the customers, and as a result increase our market share in existing markets.“ – Flemming Funch In line with Christensen and Bower, new entrants could exploit this situation, where Novozymes is embedded with the customer, building their business on existing products and markets, to introduce entirely new products into the market, and if successful overrun Novozymes. However: “The backbone of Novozymes’ innovation strategy has always been our radical innovations. This is our culture; this is the reason for our global leadership. We do not succumb to our customers, since we are not the only players in the detergent enzyme market, and there are other customers out there. In order to attract these customers, and continuously stay ahead of the field in the future, we have to be innovative. We do this by balancing the allocation of resources into product categories that reflect the different nature of innovations – from maintaining existing products to entirely new products.” - Jørgen Thomsen The main fear raised by Christensen and Bower (1996) is that a firm’s resource allocation process is market-driven, i.e. determined by customer demands. When either of these is unknown or the firm itself plans the introduction of entirely new products, then resources are unlikely to be allocated, unless the surrounding uncertainty is diminished beforehand (Christensen & Bower, 1996). This is true at Novozymes, but they employ other means of reducing uncertainty, besides integrating with the customer. They mainly rely on the expertise of their own employees, when evaluating the potential of new products from a market and technical perspective. Armed with this expertise, Novozymes is not required to solely rely on the information supplied by customers, even though it minimises the market uncertainty. To a great extent, this enables Novozymes to avoid entrapment with the customer and remain radically innovative at the same time. One practical mechanism of maintaining this balance of resource allocation to both incremental and radical innovations (Henderson & Clark, 1990) is by using a set of resource distribution keys for each of the four product categories mentioned in chapter 6. The distribution keys are confidential, so we cannot analyse/reveal to what extent Novozymes’ innovation strategy is biased towards focus on incremental or radical.

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10.2 Combining learning with customer focus The main conclusion from Lynn et. al. (1998) with the customer driven strategy was the problems surrounding the customers inability to explicate its tacit knowledge, or the supplier’s ability (Novozymes) to mobilise this knowledge. Innovative firms should therefore adopt a learning strategy, since it allows for improvements of the product based on previous learning, e.g. which features are important to the customer, and finding the right market segment for the product. The Marketing Manager for Detergent enzymes explains how this is accomplished at Novozymes: “Novozymes is B2B (business-to-business). We therefore have to rely on the information that our customers, such as Unilever convey, regarding end-users’ needs. In the majority of cases, the information we receive from our customers is very reliable. The uncertainty surrounding the end-user is most often very low, due to the very concise nature of the information. We know basically everything about the market, its size, the customers and the customers’ needs.” – Jørgen Thomsen Indirectly, he is indicating a high success ratio, thereby supporting that strategic customers, such as Unilever constitutes a relative high proportion of total revenues in comparison with other customers. The proposition put forward by Lynn et. al. (1998) therefore seems to lack support using Novozymes as a case. However, when directing the attention of a Project Director to the same subject of explicating customers’ tacit knowledge concerning their demand for needs, we found a different picture. “The high success rate enjoyed by Detergent section is far from representative for Novozymes in general. As Project Director, I supervise a variety of projects in other sections, such as enzymes for our animals section and food&feed section. Here the success rate is different, although differing from year to year, depending on the nature of the innovation. I can think of many examples, where the information from the customer was reliable at first sight, but proved very imprecise during market launch, where the product failed to attracts customers. This case is not the exception.“- Mette Flansmose The situation in the detergent market seems to be an isolated case. Information related to the market is very precise, therefore contradicting the conclusions of Lynn et al. Although, Mrs. Flansmose

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could not explain in detail the reasons for the lower success ratio incurred at other enzymes sections, she was apposed to the view, that market uncertainty played a diminished role, due to reliable information supplied by the customer, in comparison to the technical knowledge. To her knowledge, the majority of failed innovations were due to market uncertainty that had been insufficiently minimised through explication of customer needs. “Eventually, we always overcome the technical difficulties. Else, the innovation process will never be commenced. The main reasons for failed market launch have to do with the lack of information concerning the market, especially relating to the identification of customer needs.” – ibid. This supports the propositions that a customer-driven strategy alone is dangerous to adopt, but our data is insufficient to investigate whether the adoption of a sole learning-driven strategy is a correct strategic move, as proposed by Lynn et al. as a remedy. However, the statement is sufficient evidence and support for Lynn’s proposition of adopting the learning driven strategy, since one distinguishing feature of this strategy is the iterative stages, where customer needs are continuously extracted.

10.3 The Balancing Act at Novozymes This analysis so far clearly indicates various problems for customer-sensitive firms in general, as well as Novozymes. One important conclusion from Christensen and Bower (1996) was that despite being innovative and customer-sensitive, the leading established firm could be misled by the customer. Although, deemed unlikely by Novozymes themselves, new entrants could potentially exploit Novozymes’ entrenchment with the customers, by focusing on disruptive technologies that Novozymes has ignored since these innovations are unlikely to be demanded by customers, due to their inherent uncertainty. From this, the problem seems to be an imbalance between relying on information provided by the customer, who is biased towards sustaining technologies, and for the firm to allocate resources to innovations with unknown markets and customers, in turn creating new markets and profitability. Lynn et al. (1998) supplements Christensen & Bower, by presenting that a customer-driven innovation strategy should as a minimum be completed by a strategy focusing on learning. Novozymes rely to a great extent on customers’ information concerning market, demands,

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and end-user segments. This process of information gathering should, according to Lynn et al., be a continuous process even at the point of market launch. In general terms, the objective seems to be how to strike the balance between a customer-driven, i.e. demand pull, and a technology driven, i.e. technology push innovation strategy, thereby striking a balance with minimising uncertainty. Perfect knowledge removes uncertainty, but since this is virtually impossible when producing new products for new markets, Novozymes must always take advantage of their expertise, where competitors so far have failed to challenge them. Indeed, Novozymes’ secret weapon is uncertainty. We question, how Novozymes maintains this balance in practice. Their innovation strategy is dependent on strategic partnerships with key customers, but also on remaining very innovative, creating new markets thereby maintaining or expanding their current global leadership role, not solely relying on their customers for new ideas. This balance calls for means of controlling the implemented innovation strategy, ensuring that Novozymes stays in balance by being true to their customers as well as themselves.

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11 IMPLEMENTING STRATEGY UNDER UNCERTAINTY This section of the project was prompted by the previous analysis of the inherent problems of a strong external focus on the customer, as suggested by Christensen & Bower (1996) and Lynn et al. (1998). The main problem facing Novozymes is to ensure the implementation of a strategy with a strong customer focus, while avoiding the problems just identified with such a focus. As described in the case description, the customers are demanding cost reduction, which is a primary underlying incentive of the current strategic objectives in their pursuit of being the preferred partner in the eyes of the customers, but is also forcing Novozymes to concentrate on reducing cost throughout its organisation and in all business activities. As indicated by this statement: “The drop in sales of detergent enzymes was unexpected and due primarily to large customers cutting back on raw materials costs. Large customers’ focus on cutting costs rather than launching new products is expected to impact on sales in 2003 too.” – Novozymes Annual Report, 2002 The overall objective of this section is to analyse how the strategic objectives, with an underlying focus on cost reduction, are implemented. We will analyse which initiatives Novozymes is taking throughout the organisation to reduce cost, and consequently securing and expanding their role as global leader and preferred partner with key customers. In other words, what is management control in Novozymes22, and how are managerial and business technologies brought together and mobilised to reduce cost in production and delivery to the customer, and constantly couple daily activities to strategy? From a perspective of management control, this is especially interesting, since we will gain understanding of how exactly Novozymes manages to successfully implement a strategy of serving the customer with cost reduction at the operational level. Finally, we will conclude how this implementation, also aids Novozymes in reducing uncertainty. In the overall context of managerial and business technologies in an uncertain environment we will in the first part examine how time, abstract as may be, has become a strategic weapon in the battle for reducing cost in combination with other associated managerial technologies. In the second part, we will analyse how the Balanced Scorecard (BSC), also as a managerial technology works to monitor the success of the strategic goals, such as cost reduction by means of performance Due to limitations on confidential information provided by Novozymes, we can only focus on production, including some aspects of suppliers’ role, and the supply system with the customer. 22

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measures. Consequently, this provides the reader with a holistic understanding of how managerial and business technologies are brought together, from which Novozymes can assess whether cost has actually been reduced. Did they realise their expectations, and if not, then how can Novozymes change in light of this? It is our main belief that Novozymes’ true competitiveness is constituted by the gap between the expected and the realised outcome caused by uncertainty, thereby providing Novozymes with an opportunity to change and prosper.

11.1 Managerial and Business Technologies Mouritsen & Bekke (1998) argue that time is a very useful managerial technology, if it is sealed off and freed from external uncertainties and disruptions. They argue that although time is important for management, it is also an executional cost driver which presupposes the existence of certain structural drivers, thereby indicating that time is a managerial technology via cost accounting (Mouritsen & Bekke, 1998, p.160). Cost accounting in this manner assumes the new role of creating the space, within which time can reign. But why should time supersede cost as a medium, instead of complementing cost? “When looking at time, cost savings may result; when looking at cost, there is no obvious indication of time savings, and therefore, ‘senior managers mush shift focus from cost to time…’” – ibid. When managing customers or suppliers, cost accounting should therefore assume a new role through open book arrangements, and instead play a part in the control of the firms’ environment, by setting the external parameters, this sealing time off from the environment. Mouritsen et al. (1999) focuses on cost accounting in the form of open book accounting and target cost management as inter-organisational control mechanisms, and as new means of enabling insight and control in situations of external focus. Open book is also a precondition for Time Based Management (TBM), i.e. without an integration of both parties’ information systems, TBM will be inefficient. Also, the integration can create more harmonious and efficient relations promoting more closeness and trust among partners. However, Mouritsen et al. (1998) mention nothing of the information per se ultimately required to be fed into these information systems. At the lowest physical levels of managerial and business technologies, Yoshikawa et al. (1993) in the context of strategic management accounting, recites the related gathering of various relevant information sources to

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support strategic decisions in a firm’s environment. This group of authors introduces us to a world of relevant cost information, which can be used to support the imperative strategic decision processes.

11.2 Time is Money “Time can be spent, sold, shared, saved or fretted away. It can be allocated, priced, lost and made. Time in a sense has economic value: Time is money” – Davies (1991, p.1) Initially, our analysis of Novozymes involved focusing on cost management, but as the study progressed we soon realised, that a cost focus would mislead us to the wrong conclusions, in terms of how cost reduction is achieved. As an alternative, time emerged as an important topic throughout Novozymes’ business activities, both internal and external, i.e. not only in production but also in the innovation process and logistic aspect, in which the customer is an important factor, hence the external aspect. As one group of authors point out: “Time Based Management may be seen to generalize time’s importance to management, not only in terms of operations, but also in terms of product development, customer-relations, and decision making processes. The continuous attention

to

time

may

increase

speed

(productivity)

and

punctuality

(sequentialization), which, if generalized to all aspects of the firm’s activities, may improve competitiveness.” – (Mouritsen & Bekke, 1999, p.160) In combination with our empirical data our theoretical standpoint suggests that time is of particular interest in the case of Novozymes, where cost reduction represents an important source of competitive advantages (Stalk, 1988). Under the heading of Time Based Management, we will in the following examine to what extent time, as a managerial technology, is a strategic weapon for Novozymes, and whether time can be said to be a competitive advantage. How has Novozymes ensured that the required space is created, within which time can reign, and to what extent has Novozymes fulfilled them? To mobilise the

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correct arguments for this, we need to further support our findings with an analysis of what other managerial technologies and information sources Novozymes employs in order to support the strategic decision making process in business relationships. Introducing TBM is one thing, but the ability to change requires correct information from the correct sources.

Time as A Strategic Weapon for Novozymes In light of the situation of the 1990s the main question for the industry has been which activities in the value chain should implement changes into their cost management systems? The industry and customers have to a great extent relied on Novozymes to reduce their cost related to their activity in the value chain, since they are the global leader; a request Novozymes seems to have accepted, but mostly due the end-users’ demand for cost reduction, rather than due to pressure from the industry. Novozymes has relied on Time Based Management to compress the use of time in all of its business activities. “There is always room for improvement, especially with respect to reducing cost wherever the opportunity may be, thereby strengthening our strategic partnerships, who in turn can offer detergents for Mrs. Hansen at a lower price, since she has lost interest in to what degree the detergent maintains the colour of her clothes.” – Flemming Funch In order for Novozymes to maintain their market leadership, something had to be done. TBM was introduced as a new management philosophy, with the sole purpose of questioning how cost could be reduced in all aspects of their business activities, while still producing increasingly higher quality enzymes. We question, what business activities have been affected by TBM, and thereby how TBM has reduced cost, while creating a leaner firm with strong attention to the customers. Centralised Supply Chain & Production Management Systems Novozymes has production facilities in Denmark, China, USA, Switzerland and Brazil. Novozymes has centralised its production management system dramatically over the years, in order to reduce cost related to production and the supply chain processes. Each regional production manager has to comply with a variety standards pertaining to continuous optimisation of the production. Primarily, production managers have relied on internal knowledge and ingenuity, when analysing how to

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reduce throughput time, inventories and accelerate production cycles, some of the main advantages of TBM. However, during the 1990s the increased integration of the customer into Novozymes’ own organisation, entailed new sources of external information, which gave Novozymes more inspiration to further reduce these aspects of production. Primarily, this information was made available through open book accounting and stipulated contracts (Mouritsen & Bekke, 1999; Mouritsen et al, 2001), which were introduced to understand the customers’ demand for quantity, time and delivery: “We have integrated our information systems with Unilever to the extent, where we (Novozymes) can predict the correct amount of enzymes needed, where, when and by what means of transportation. This gives both us and Unilever huge competitive advantage. We can minimize both our inventories, produce very precise quarterly production plans, as opposed to monthly plans which our competitors have to rely on, and most importantly we can tie Unilever even closer to us, making it harder for our competitors to make money. It is just so sweet!” – Peter Rosholm (emphasis added) Both open books and contracts were introduced with raw material suppliers from the agricultural industry (Jönsson & Grönlund, 1988), in addition to the customers. The contracts state the conditions for when, where and how much, while Novozymes receives information to understand the cost endured by the supplier through the open books. The advantages are the same as with the customers, i.e. minimised inventories, more accurate production and supply plans etc. What has previously distorted the production system has been the delay and uncertainty surrounding customers’ decisions to submit orders for detergent enzymes. Before integrating the customer, Novozymes had an inaccurate view of the market potential. Again, time is what distorts the system (Stalk, 1988). Besides centralising production planning, factory layout, and transforming relations between central and local management (Jönsson & Grönlund, 1993), factories themselves are time-based, i.e. they are organised by the product they produce. Handling is minimised by physically placing the various production components as close as possible. Also, local suppliers to the factories are placed within close proximity, reducing response time considerably. The physical production facilities are constructed with standard interfaces and flexible modules (Sanchez & Mahoney, 1996) themselves and can therefore be quickly adapted to produce a different kind of

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enzyme, without the need for new unique components. The time delay incurred during switching between production schemes has been minimised. Some studies show that flexible time-based factories enjoy as much as 200% increase in productivity compared to traditional factories (Stalk, 1988). From a management control perspective, the integrated supply chain system Novozymes and Unilever share has, in addition to the points made above, decreased the relative cost of shipping, and minimised the need for storage capacity. Still, Novozymes only has this supply chain advantage with five of the 17 detergent customers, but by reducing the consumption of time in every aspect of the business, Novozymes has created a visible and measurable competitive advantage and sales point vis-à-vis existing and potential customers. Creating A Space for Time From a static perspective, the analysis above clearly indicates what areas have been affected by TBM, hence to what extent cost reduction has been achieved. As previously identified, time is an executional cost driver, which has no limit in terms of reduction (Mouritsen & Bekke, 1999). The supply chain advantage from the statement above supports this notion, i.e. despite certain pitfalls of integrating the customer, the situation is from a TBM perspective a never ending win-win situation for both parties, since there are no limits to the compression of time. As pointed out by Mouritsen and Bekke (1999) in an analysis of a similar situation: “Time was treated as an unambiguous good: It was always better to do things more quickly (speed), and to let a factory’s activities be aligned more systematically with other sequentially interdependent factories’ activities (punctuality). As an executional cost driver, time should always be reduced or compressed.” – (ibid, p.160) The purpose of this part is to analyse how the space, in which time reigns, can be expanded thereby pushing the boundaries, and empower Novozymes to constantly reduce time. The distinction between executional and structural cost drivers originates from Shank and Govindarajan (1993). They believe certain structural drivers, such as scale, scope, experience, technology and organisational structure, must be in place prior to executional cost drivers, such as

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quality and flexibility. In the case with Novozymes, these drivers could be identified as the open books and contracts with both suppliers and customers, in addition to the psychological contracts that also obligated both parties. Without these, there would be no executional cost drivers, from which TBM could operate. All in all, the structural cost drivers also act as the preconditions for successful implementation of TBM, and we can hereby determine, that the very existence of these structural cost drivers is not only the foundation for TBM, but also the managerial technologies that help create space for TBM. Time cannot stand alone (Mouritsen & Bekke, 1999, p.176). Cost accounting have changed role into expanding the environmental boundaries of the space, and thereby the amount of space itself, within which TBM can sway. The basic principle is, the more information available to Novozymes, e.g. through open books, the more space can be created for TBM. Besides improving the executional cost drivers, cost accounting expanded the boundaries. Peter Rosholm explains: “Everything is ready for reducing cost: our information systems are integrated, contracts constitute all parties’ obligations, and production planning is centralised. Remaining is the constant awareness of how to enlarge the area, within which we can improve. Exporting the uncertainty was one way. Now we could use our existing budgets reports, different kinds of costs budgets, capacity etc. to help us manage our relationships.“ In our belief, cost accounting, such as productivity, overhead budgets, product life cycle cost, etc. (Yoshikawa, 1993) play an imperative role as sources of information and inspiration for Novozymes to reduce cost. One example illustrates this. Recently, a cost report of a customer in China indicated a high frequency of unscheduled deliveries being made to the customer from Novozymes’ factory and associated inventories. Sometimes the customer returned the goods, or required a speedy delivery due to sudden unexpected order of enzymes elsewhere. The situation was dissatisfying to Novozymes due to an increased amount of time wasted, as a result of the customer’s lack of information. By communicating the results of the cost report to the customer, Novozymes convinced the customer to set up their own local inventories to which Novozymes would make constant deliveries to. With this example, inventory, hence cost accounting, had become the customer’s problem, since cost associated with inventories had been exported to the

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customer, leaving Novozymes with less time spent and smaller inventories. This example also supports the theoretical notion by Mouritsen and Bekke (1998) of how traditional cost accounting helps Novozymes to expand the space for time, by setting new boundaries, through definitions of economic relationships between different parties. Finally, Novozymes has created more space for TBM, since the exporting of inventories to the customer also facilitated the exporting of uncertainty, otherwise left for Novozymes to deal with. Peter Rosholm, highlights the greater ramification of the example in China: “The industry wanted us to reduce cost for Mrs. Hansen, so we did, but not without tying and obligating key stakeholders, primarily our suppliers and customers to us, and thereby indirectly exporting the uncertainty to their shoulders as well.” Today, Novozymes either share or export inventories to other parties, especially the customers and suppliers, and Novozymes have therefore been empowered to make greater demands on suppliers. All things considered, the analysis given above proves that all parties gradually introduced TMB as a managerial technology to reduce cost and uncertainty in important aspects of the value chain, while supplying the cost reduction the end-users are demanding. Abiding by the spirit of capitalism, Weber (in Mouritsen & Bekke, 1998, p.177) stated: “Waste of time is the first and in principle the deadliest of sins”

11.3 The Balanced Scorecard & Performance Measures Above we gained an understanding of how TBM works as a managerial technology for Novozymes to reduce cost, resulting in strong competitive advantages. However, managerial technologies only enable firms to act at a distance. In order for strategies to be successfully implemented such technologies must be complemented by other managerial and business technologies which enable even closer action at a distance and finally action by contact, i.e. translating and organising competitiveness by contact (Hansen & Mouritsen, 1999). This section will introduce and analyse how the use of Balanced Scorecard and financial and non-financial performance measures are continuously mobilised to create conditions to produce better relationships to the environment in a more hands-on fashion.

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First, the primary analysis is how the strategy is visualised by the Balanced Scorecard, as a managerial technology thereby enabling control of Novozymes’ performance in business relationships at a distance (Hansen, 1999), but at closer distance than TBM. Second, we will analyse what, and how, the underlying performance measures carry the strategy, as a business technology in order to measure, hence control the realised outcome of their strategy. In total, this will make us understand why Novozymes has become the global leader in the enzyme industry, hereby finalising this project’s journey from vision and strategy fostered by the executive management to implementation among the employees that are the resources in daily work. Monitoring Progress and Performance

“Novozymes’ Executive Management uses the Balanced Scorecard – also called the Novozymes Strategy Map – to monitor how the company is performing financially and commercially.” – Novozymes, Annual Report 2002 The process of measurement allows a company to transform abstract strategic perspectives to operational expressions (Hansen, 1999). The preferred model for conceptualising strategy in relations to performance measures is the perspective of the Balanced Scorecard by Kaplan and Norton (1993), where strategy is subject for break-up into measurable, hence controllable dimensions. First, we will turn to the BSC followed by the analysis of performance measures.

The Novozymes Strategy Map During 1999 Novozymes’ executive management decided to implement BSC for the same reasons, as other large firms. They needed to translate visions and strategies into a measurement system that was aligned with the entire system of management, thereby creating consistency in all divisions on a global scale. Management developed a vision that went beyond the corporate framework to also include environmental and social responsibility. The underlying four strategic objectives of their strategy relate to the four perspectives of BSC, respectively. Here, our focus is strictly external to Novozymes thereby excluding the internal People & Organization and Process perspectives.

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Recently, in 2002 Novozymes implemented novel extensive changes to the BSC, as a result of the learning gained since the initial introduction in 1999. Presently, management feels very confident that the investment BSC has required has been worth the effort. It was created building on their vision and strategic objectives23, only they called it the Novozymes Strategy Map. Flemming Funch explains: “We chose to expand the theoretical thinking of the BSC, motivated by a need to understand and communicate, both internal and external, the relationship between the performance measures. We therefore drew roads between the measures, and dubbed it the Novozymes Strategy Map. This enables them to understand exactly their role, and how their activities shape the future of Novozymes, as well as how employees’ work affects one another. They must feel that they are part of the greater whole called Novozymes,” (emphasis added) Figure 5 illustrates the external view of the BSC. Implementing BSC was not motivated by traditional problems, i.e. firms’ inability to balance short-term goals with long-term strategy. Instead, Novozymes implemented BSC as a proactive step to prevent this inability and to ensure their strategic efforts were effective throughout the 3700 Figure 5: Novozymes Strategy Map (external perspective) employee organisation. Timing is crucial for BSC, as was it for Novozymes, since studies suggests that BSC is most successful when it is used to drive the process of change (Norton & Kaplan, 1993, p.142). Change is exactly what characterised 1999, above all. It had been a very successful financial year characterised by overseas expansion, and the introduction of many new successful products, but most notably was the introduction on the Copenhagen Stock Exchange.

23

See Appendix 6: Model of Novozymes’ Strategic Objectives

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The IPO had called for an organisational change and an alignment of Novozymes corporate image and communication to fit the public realm of its new shareholders. The BSC signals to everyone what the organisation is trying to achieve for shareholders and customers alike (Kaplan & Norton, 1993, p.80). Again, TBM was one of these underlying objectives. When vision, strategy and drivers of TBM had been established, all employees started concentrating on these, including on how to reengineer critical business processes, e.g. production, supply chain, and administrative processes, in order to optimise and reduce time wasted in the organisation. However: “In terms of employees, it is Novozymes’ experience that communicating the essence and importance of Novozymes’ Strategy Map, including Time Based Management, is the hardest part of implementing it. We use workshops. Here, employees perform a variety of tasks as part of their daily job, making the results instantly visible in the other perspectives.” – (ibid.) Thus, the traditional approach of communicating BSC has been complemented by more practical workshops, where employees are not only exposed to the all empowering essence of BSC, but also are instantly reflected in all other perspectives of the roadmap.

Performance measures In order for BSC to work and support strategic decision making, performance measures were established for periodical reviews by managements. As stated by Hansen (1999, p.23): “By establishing performance measurements, the company’s visions and strategy are concretized, and it becomes clear what has to be done in order to realise the strategy. The strategy becomes operationalised, so to speak…” Although both financial and non-financial performance measures play an obvious role in this theatre, our primary interest is the latter. Hansen (1999, p.1) continues: “Through non-financial performance measures, strategy becomes operationalised and people in the organisation become responsible for strategy…Numbers help to promote understanding of what must be done in order to be strategic. This relation between the

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strategic and the operational serves as the basis for the belief that new performance measures can contribute to strategic control.” Without a doubt, financial performance measures play a role in Novozymes, but the non-financial performance measures remain uncharted land both in the academic world (Hansen, 1999) and practical world of Novozymes 24. We know performance measures in general play an imperative role to Novozymes, internally as well as externally. The focus of this section is to analyse performance measures as mechanisms for control. Even though BSC is relatively new at Novozymes, the use of performance measures is not. Peter Rosholm explains: “During the past two decades performance measures have changed faces from focusing on brand value and claim value to continuously focusing on the maximisation of the customer’s perceived value of Novozymes as a supplier, who ultimately strives for achieving the status of the customer’s exclusive enzyme supplier.” In order to achieve this stage in the business relationship Novozymes employs a variety of performance measures used both as means of control of operations internally, but also as brand and claim value external to the customers. Executive management has transformed the vision and related strategic objectives to a set of performance measures, which they believe are crucial for Novozymes’ competitiveness. Financial Performance Measures The financial performance measures are more traditional techniques, but still of great importance to the BSC. This perspective includes three overall measures, which are of particular importance to the shareholders. High profitability and Double digit growth reflect strong preferences for short term results. Although, marginal profits vary among the hundreds of enzyme products Novozymes currently has on the market, then from an economic perspective, the enzyme industry is very profitable. In addition, Novozymes has globally coordinated production capacity to produce vast To provide the reader with a tangible and concrete analysis of performance, we will to the furthest possible extent use practical examples from Novozymes. However, due to confidentiality such examples were scarce. 24

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amounts in short periods, at different locales. As a result of high profitability and double digit growth rates, Novozymes is left with Strong free cash flows, which never renders Novozymes without the necessary resources to carry out its R&D or production. Since the IPO in November 2000, Novozymes has used its extensive financial assets to buy back shares. In February 2003, the Board of Directors authorised executive management to undertake further share buy-backs of up to DKK 400 million, making it the fourth time Novozymes buy back its own shares since it was listed in November 2000. From The Novozymes Strategy Map, we can see the intuitive relationship between the double digit growth and high profitability, which in turn creates a strong free cash flow. Also illustrated, is how the financial performance measures are affected by the non-financial performance. Non-financial Performance Measures The identified non-financial performance measures include Preferred value proposition, White biotech positioning, and making Novozymes one company with a strong brand based on the Novozymes Touch. Together, with these three measures Novozymes aims at becoming the preferred partner of their stakeholders. The next part will describe and analyse how these are being used. 1. Preferred value proposition: Ultimately, Novozymes wants to be their customers’ exclusive enzyme supplier. While striving for this, Novozymes integrates the customer into the innovation process, where the customer feeds Novozymes with knowledge of end-user demands for the eventual product based on a variety of markets analysis etc. In our opinion, the supply chain advantage stated in the official BSC is one way of underlining that the importance of TBM and cost accounting is implemented in employees’ daily activities. Still, one example of exactly how the strategic objective of TBM is implemented in the daily activity is reflected in the Delivery Liability Index (DLI). With this performance measure, Novozymes can measure time, place and quantity to be delivered to customers. Basically, it measures whether they delivered on time, and if not, what went wrong. Standardised DLI exists, from which all local sales offices around the globe can be benchmarked. The supply chain advantage, also gives the financial benefit of planning production on a quarterly basis, since uncertainty surrounding the customers’ current and expected demands are dramatically reduced, as a result of the system integration. In general terms, the preferred value proposition reflects Novozymes strategic objectives of closing the gap with the customer, and

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thereby integrating the customer in a business relationship, in turn creating what Novozymes terms customer intimacy, besides the previously identified advantages of TBM. By implementing this performance measure into the BSC, Novozymes has communicated to the employees the enormous importance of building relationships with customers, from whom Novozymes can minimise the uncertainty surrounding end-user needs. The intimacy also represents goodwill and claim value for Novozymes, compared to “just” being a supplier of enzymes, thus an important competitive advantage, in addition to being a mechanism for reducing uncertainty. 2. White biotech positioning: Novozymes bases its business on the use of environmentally friendly enzymes, originating from the still emerging white25 biotech zone, where nature’s own resources are used in industries, thus maintaining “a cleaner world”, as Novozymes states (Novozymes Annual Report, 2002, p.4). Besides being politically and environmentally correct, Novozymes can exploit white biotech positioning from a financial perspective, since present high levels of product awareness among end-users, makes them opt for these products, rather than traditional products based on chemicals, in turn making Novozymes achieve their double digit growth rates. 3. One company with a strong brand based on The Novozymes Touch: In 2002 Novozymes’ Communication Department came up with the concept The Novozymes Touch, which is a marketing booklet containing Novozymes’ basic facts, vision, strategic objectives etc; information that is relevant for stakeholders, especially the employees. In order to symbolise the employees’ importance to the organisation as a whole, the Touch-concept was invented. The cover of the booklet is made of a sensitive material, which changes colours if exposed to a sustaining pressure, e.g. by a finger, hence the touch. In our opinion, the Novozymes Touch booklet is an attempt to communicate the raison d’être of the employee to the employees themselves, but we doubt how this means of communication has the added value of being subject to measurement by management. Nevertheless, it represents how BSC helps to implement, and how strategic objectives are made subject for measurement.

Two other colour-coded industry paradigms exist: 1) The Red, approached by the pharmaceutical industry. 2) The Green, approached by firms solely using Gene-Modified-Organisms (GMOs) 25

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11.4 Concluding remarks From a general viewpoint, it is our belief that the shift in end-user consumption behaviour represents one of the main underlying incentives for the emergence of the strategic objectives Generating Value and being The Stakeholders Preferred Partner in the BSC, and related performance measures analysed above. As reflected in the Novozymes Strategy Map, both the financial and market perspective has a strong inherent focus on cost reduction, and therefore TBM as in the case with Novozymes. We have analysed how managerial technologies as TBM, open book arrangements, cost accounting and BSC are brought together with performance measures in the role of business technologies to ensure the realisation of their strategy, under the considerate uncertainty initially identified. In addition to reducing the uncertainty, the remaining uncertainty has been distributed along the value chain to suppliers and customers. Consequently, as the global leader, Novozymes is on the leading edge of enzyme technology, often leaving both the customer and supplier at the mercy of Novozymes (Hansen et al. 1999).

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12 CONCLUSION The project was initiated through our theoretical interest in how firms are able to strategise and adapt under conditions of uncertainty, and how this ability is managed. We conducted an empirical study of Novozymes, for which the following research question was formulated: How Novozymes prevail from strategising and adapting under conditions of uncertainty, and how their strategic objectives are realised through management control? From our analysis we found, that the reason for Novozymes’ ability to prevail in the enzyme industry was due to an ability to optimise uncertainty. Underlying this concept is an oxymoron, which consists of two antithetical processes, exploring and exploiting the environment. To explore is to forget existing capabilities and seek renewal in uncertainty. To exploit is to focus on existing capabilities and exploit its potential under less uncertainty. The theoretical framework has presented uncertainty as a negative element, where the elimination of uncertainty is the ultimate goal. We propose the optimisation of uncertainty as a positive theoretical alternative, i.e. firms must balance in a world of uncertainty, where the reduction of uncertainty is only beneficial to certain extend. Any further reduction beyond this point will create a more certain world, but also erode the potential. In other words, potential is an inherent part of uncertainty.

What constitutes potential is a different matter, since potential can be found both internal in the organisation as well as external in the environment. Our analysis revealed Novozymes’ strong external focus on the customer, e.g. Unilever and the potential of their common business relationship, but in combination with our proposition, we wish to generalise our findings, and propose that potential can be represented in an infinite number of forms and shapes, replacing the vertical axis with another parameter. As a Figure 6: Optimise Uncertainty result, an infinite number of similar relationships between uncertainty and potential exist, depending on how the firm in question defines its own potential. Other examples of potential could be suppliers and complementary innovators, whereas learning and creativity are internal areas of

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potential. In other words, the act of continuously balancing between exploring and exploiting the potential of opportunities is what we mean by optimising uncertainty. However, the main objective has been to understand how this is even a possibility for Novozymes. As stated by James G. March (1999, p.5): “’Balance’ is a nice word, but a cruel concept.” The remaining part of the conclusion will tend to conclude on, how exactly Novozymes has balanced between the exploration and exploitation of uncertainty surrounding the customer, thereby optimizing uncertainty and reaping the full potential of the business relationship. Balance is a nice word… A first step in the quest of realising the full potential in an uncertain world, as described above, is to identify the main sources of uncertainty. Since companies can attend to each source at various degrees of intensity, a main task of the firm is to identify which sources of uncertainty would be most efficient to attend to, in order to prevail, given the environment it faces. Since Novozymes has focused on the development of the internal knowledge base of enzyme development for a long period of time, this aspect of business was not perceived as posing significant uncertainty to the company. Rather, the external uncertainty stemming from the market had increased as a result of the changing consumer behaviour. Armed with this insight, Novozymes was brought closer to an understanding of the sources of the uncertainty it faces, in turn a step towards the possibility of optimising the level of this uncertainty. Due to the increased focus on external drivers of uncertainty, we questioned whether Novozymes did realise the potential danger of neglecting uncertainty stemming from internal aspects, which was why the company balanced attention given to external and internal uncertainty, e.g. by the use of product categories. The aspects of the environment, which posed the highest degree of uncertainty was further concretised when Novozymes acknowledged the existence of a ‘black box’ containing the end-user of the final detergent product. Thus, being able to open this black box, i.e. obtaining a more accurate knowledge of the main driver of uncertainty, would provide valuable information on how to cope with and optimise this uncertainty, as described in the framework above. The key to open the box turned out to be the existing customers of Novozymes, since they possessed the in-depth knowledge of the end-users’ needs. Having identified the primary driver of uncertainty as being the end-users, whilst the source from which insights into the changing needs of these users could be obtained, were business relationships with key customers, Novozymes had to mobilise the ability to

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align internal capabilities and organisational routines with the identified changing demands, in order to stay competitive. We identified this as the ability to search and integrate. Through this process, Novozymes was capable of moving towards the optimal level of uncertainty (see figure 6) by paying attention to changes in the environment, i.e. exploring new opportunities characterised by uncertainty, yet at the same time ensuring the proper integration into and exploitation of the existing organisational capabilities. Had such a balance not been obtained, Novozymes would probably unintentionally have further reduced uncertainty, consequently eroding the potential of the business relationship. For such changes in organisational routines to take place, a certain prerequisite had to be present. We identified the presence of a mindset and culture in Novozymes that guide all employees to be open to changes, probably originating from the very early days of the company. However, in order to drive such changes, both parties must expand the business relationships beyond a state of maintenance. In addition, we argue that in order to realise competitive advantages, high levels of information sharing, i.e. the level of ‘nice to know’, is required. This is only made possible by infusing a high degree of trust in the relationship at the same time. …but a cruel concept To finalise our holistic view of Novozymes’ ability to prevail, we brought our research question to the operational level, motivated by two conclusions. First, we identified potential pitfalls in working too closely with the customer. Second, the ability to search and integrate in an uncertain and competitive environment is imperative for Novozymes, in order to translate new insights and existing capabilities into successful products in the detergent market. However, balancing uncertainty in the environment with the potential of business relationships has no purpose, unless Novozymes’ strategic objectives are implemented and consequently realised, and ultimately help to optimise the degree of uncertainty in the detergent market. From our analysis, we can conclude that managerial technologies such as Time Based Management, open-book accounting and the Balanced Scorecard were brought together with the business technology of performance measurements to implement, measure, thus enabling control of the implementation of strategic objectives. This continuously provided Novozymes with knowledge of new initiatives that may optimise the overall uncertainty. Pitfalls were avoided by distributing the uncertainty to the customers, by integrating their production planning and supply chain information systems. As a consequence, uncertainty was optimised by mobilising mutual efforts. Most importantly, we can conclude that management control also gives Novozymes the ability to balance the exploration and exploitation, which enables

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the optimisation of uncertainty in the detergent industry. Ultimately, this will improve Novozymes’ competitive advantage, thus letting Novozymes prevail the industry.

13 REFERENCES 13.1 Articles Afuah, A.N. og Bahram: “The hypercube of innovation”. Research Policy vol 24, 1995 s. 51-76. Andersen, Ib (1998): “Den skinbarlige virkelighed – om valg af samfundsvidenskabelige metoder”, Frederiksberg, Samfundslitteratur Argyris, C. & Schön, D. (1996). What Is An Organization That It May Learn?. In Organizational Learning II: Theory, Method, and Practice. Reading, MA: Addison-Wesley. p. 3-29. Bassett, Ross (1998), “New technology, new people, new organizations: the rise of the MOS transistor 1945-1975”. Business and Economic History, Vol. 27, No. 1. (pp. 1-7) Berry, A. J. (1994). Spanning Traditional Boundaries: Organization and Control of Embedded Operations. Leadership & Organization Development Journal, 15, 4-10 Christensen, C.M. and J.L. Bower (1996): Customer power, strategic investment, and the failure of leading firms, Strategic Management Journal, Vol. 17 (21 p.) Cohen, W. M., & Levinthal, D. A. (1990). “Absorptive Capacity: A new perspective on learning and innovation.” Administrative Science Quarterly, 35. Cook, Scott D.N. & Brown, J. Seely (1999), “Bridging epistemologies: the generative dance between organizational knowledge and organizational knowing”. Organization Science, Vol. 10, No. 4. (pp. 381-400)

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Henderson, R. M. and K. B. Clark (1990). ‘Architectural innovation; the reconfiguration of existing systems and the failure of established firms.’, Administrative Science Quarterly, 35. Håkansson, H & Lind, J. Accounting and network coordination, Accounting, Organisation and Society (forthcoming) Jönsson, S. & Grönlund, A. (1988): Life With a Sub-Contractor: New Technology and Management Accounting, Accounting, Organizations and Society, pp.512-532. Kaplan, R.S. & Norton, D.P. (1993): Putting The Balanced Scorecard to Work, Harvard Business Review, September-October Kaplan, R.S. & Norton, D.P. (1996): Using The Balanced Scorecard as a Strategic Management System, Harvard Business Review, January-February Kreiner, Kristian (1999), “Knowledge and Mind”. In: Porac, J.F. and R. Garud (eds.), Advances in Managerial Cognition and Organizational Information Processing, Vol. 6. (pp. 1-29) Leonard-Barton, D. (1992): Core Capabilities and Core Rigidities: A Paradox in Managing New Product Development, Strategic Management Journal, Vol. 13 (12 p.) Leonard-Barton, D. (1995): Learning from the Market, Chapter 7 in Leonard-Barton, D.: Wellsprings of Knowledge, Boston, MA: Harvard Business School Press (36 p.) Lynn, G.S., Mazzuca, M., Morone, J.G. and Paulson, A.S. (1998), “Learning Is the Critical Success Factor in Developing Truly New Products”. Research Technology Management, Vol. 41, No. 3, May-June. (pp. 45-51) March, James G. (1999), “Introduction” to The Pursuit of Organizational Intelligence. Malden, Massachusetts: Blackwell (pp. 1-10)

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Mouritsen, J. & Bekke, A. (1998): A Space for Time: Accounting and Time Based Management in a High Technology Company, Management Accounting Review (forthcoming) Mouritsen, J., Larsen, H.T. & Bukh, P.N., Reading Intellectual Capital Statements: Describing and Prescribing Knowledge Management Strategies, Journal of Intellectual Capital (2001, vol.2, no. 4, pp. 359-383) Nelson, R. and S. Winter (1982). ‘An Evolutionary Theory of Economic Change’. Harvard University Press, Cambridge, MA Nonaka, I., Takeuchi, H. and Umemoto, K. (1996), “A Theory of Organizational Knowledge Creation”. International Journal of Technology Management, Vol. 11, No. 7/8. (pp. 833-45) Porter, M. E., (1985), Competitive Advantage: Creating and Sustaining Superior Performance, New York, The Free Press. Porter, M.E. (1990). The Competitive Advantage of Nations. Free Press, New York Powell, Walter W. (1998), “Learning from Collaboration: Knowledge and Networks in the Biotechnology and Pharmaceutical Industries”. California Management Review, Vol. 40, No. 3. (pp. 228-40) Prahalad, C. K. and Hamel, G. (1990). ‘The core competence of the cooperation’, Harvard Business Review, 68(3). Rosenberg, N. (1995): Why technology forecasts often fail, The Futurist, July-August, pp. 17-21. Sanchez R. and J.T. Mahoney (1996): Modularity, Flexibility, and Knowledge Management in Product and Organization Design, Strategic Management Journal, 17: 63-76 (13 p.) Schumpeter, Joseph A. (1942): ‘Capitalism, Socialism and Democracy.’ New York, Harper and Row

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Shank, J.K. & Govindarajan, V. (1993): Strategic Cost Management: Three Key Themes (Chapter 2), The Value Chain Concept: The First Key to Effective Cost Management (Chapter 4), Cost Analysis Considerations and Managerial Applications of Value Chains: An extended Field Study (Chapter 5), in Strategic Cost Management. The New Tool for Competitive Advantage, the Free Press. Stalk, G. (1988): Time - The Next Source of Competitive Advantage, Harvard Business Review, No. 4, pp. 41-54. Swan, J. et al. (1999), “Knowledge management and innovation: networks and networking”. Journal of Knowledge Management, Vol. 3, No. 4. (pp. 262-75) Teece, D.J., G. Pisano and A. Shuen (1997): Dynamic Capabilities and Strategic Management, Strategic Management Journal, Vol. 18:7: 509-533 (22 p.) Tidd, J., J.Bessant, and Keith Pavitt (2001): “Managing Innovation. Integrating Technological, Market, and Organizational Change” in: Chichester: John Wiley & Sons. Chapter 6: “Processes: Integration for Strategic Learning” Tomkins, C (2001):Interdependencies, trust and information in relationships, alliances and networks, Accounting, Organisation and Society, vol. 26 pp 161-191 Tushman, M. L. And P. Anderson (1986). ’Technological discontinuities, and organizational environments’, Administrative Science Quarterly, 31. Ulrich, Karl T. and Eppinger, Steven D., 1995, Product Design and Development. New York, McGraw- Hill. Ch. 1+2+3 pp 1-51. Zollo, M and Winter Sidney G (2001): “Deliberate learning and the evolution of dynamic capabilities”, in press Organization science, special issue on “Knowledge, Knowing and Organization”

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Yoshikawa, T., Innes, J., Mitchell, F. & Tanaka, M. (1993): Contemporary Cost Management, Chapman & Hall. Weick, Karl E. & Westley, Frances (1996), “Organization Learning: Affirming an Oxymoron”. In: S.R. Clegg, C. Hardy and W.R. Nord (eds.), Handbook of Organization Studies. London: Sage. (pp. 440-58).

13.2 Reports 1. The Novozymes Annual Report 2002 2. Annual accounts of the parent company Novozymes A/S.

13.3 Internet sources 1. www.Novozymes.com – used in the period between 1st of April until the 28th of May 2003.

14 APPENDICES 14.1 Appendix 1: Interviews For this project, we have conducted six interviews, one with each of the following persons. They are all to be found on the Novozymes Project Map, for quick and easy reference. •

Flemming Funch, Vice President of Quality Management

Jørgen Thomsen, Marketing Director, Detergent Section

Martin Barfoed, Project Director

Mette Flansmose, Project Director

Niels Henrik Sørensen, Creativity Manager

Peter Rosholm, Strategic Account Director

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14.2 Appendix 2: Novozymes Organizational Chart

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14.3 Appendix 3: The Innovation Funnel

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14.4 Appendix 4: Gensight Scoring Template

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14.5 Appendix 5: Lipex Time Line

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14.6 Appendix 6: Novozymes’ Strategic Objectives

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14.7 Appendix 7: Novozymes Project Map

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PREFACE