Control of market institutions

Not all financial markets operate within formally constituted exchanges, but those that do can be divided into two categories.

1. Mutually owned cooperatives. In this case the exchange is organized as a club, or cooperative, controlled and managed by its members. The cooperative controls the market’s facilities (e.g. computer networks or dedicated telephone links), writes the market’s rule book and administers the rules. The membership typically comprises ‘member firms’ (dealers) but, in principle, could include brokers and public investors.
2. Shareholder-owned companies. In this case a company, legally distinct from the market participants, owns and operates the exchange. The company’s shares could be privately owned (perhaps by another company); they might be owned partly or wholly by the state. If constituted as a public company, its shares would be openly traded. The exchange’s member firms may wholly or partly own its shares.

Regulation of financial markets

Practically all financial markets are regulated in some way or another. The regulation is typically highly complex – too complex to warrant discussion here. Very often exchanges themselves form part of the regulatory mechanism, together with the involvement of external organizations. Thus, for example, the Securities and Exchange Commission (SEC) oversees financial markets in the United States, while the Financial Services Authority (FSA) has broadly similar responsibilities in the United Kingdom. The declared purpose of regulation is normally to protect investors from practices and conduct deemed to be unfair or improper. Most directly, the protection is intended to guard against fraud. More indirectly, regulation ostensibly seeks to foster competition, with resulting benefits for the consumers of financial services. Investors themselves would possibly favour protection against all losses sustained on their investments, including losses incurred when asset prices fall. Such comprehensive protection stretches beyond the bounds of regulation that has been, or is likely to be, adopted. However, when losses occur as a consequence of what is perceived to be bad advice, investors may feel justified in seeking compensation – either from those who gave the advice or from the regulators responsible for overseeing the advisers. In these circumstances, resorting to litigation will test how far the law requires investors to bear the consequences of their own decisions. Much of the regulation in financial markets is self-regulation. Whatever the merits of such regulation (such as the expertise of the regulators in their own lines of business), the justification of its proponents should not necessarily be taken at face value. For regulation can have its drawbacks. These include:

• Regulatory capture, in which regulation is designed to protect the regulated institutions rather than their customers
• Tax regulation, such that the activities of institutions may not be properly supervised.

Competition within and among financial markets

As already mentioned, many financial markets approximate the competitive ideal in that market participants typically take prices as given, beyond their individual control. However, although the underlying ‘commodities’ (the assets) are homogeneous, the services offered by brokers and dealers may well be differentiated, offering the scope for non-price competition. Moreover, the organization of exchanges and their regulation can have the effect of restricting competition among market participants. Competition among members of the market can be restricted in several ways.

1. It is commonly necessary for members of exchanges to be able to provide capital as a guarantee against default or fraud. The capital requirement can be interpreted as a cost of doing business, but may be used as a device to limit competition by restricting the number of members.
2. The exchange may designate individual market specialists as monopolists in specified securities, in the sense that only the specialists can trade on their own account; all other members can act only on behalf of public investors. This monopoly power is usually regarded as compensation for the obligation imposed on specialists to quote firm prices guaranteed for trade with other market participants.
3. Members of an exchange may be restricted in their trading activities outside the exchange. For example, rule 390 on the NYSE requires its members to trade listed securities on the exchange rather than the over-the-counter market. The rationale for this type of rule is, presumably, that it restricts the extent to which investors can free-ride on the price discovery function of the exchange.

Trading and asset prices in a call market

Among the market mechanisms described a call market is one of the simplest and provides a starting point for modelling flows of trading in asset markets. In the model outlined here, market participants are divided into three groups:

• Informed investors;
• Uninformed investors (or noise traders); and
• Market makers.

The informed and uninformed investors are interpreted as public investors, while market makers exist to ensure that a price that balances the purchases and sales of public investors is realized. Members of all three groups are assumed to be risk-neutral. Exchanges of assets among investors could take place for a multitude of reasons, here divided into two:

• An information motive
• A liquidity motive

The information motive applies to those investors who trade because they seek to make gains (or avoid losses) on the basis of their beliefs about future payoffs from assets. The liquidity motive is a catch-all, encompassing the other reasons why investors trade. It includes circumstances in which investors sell assets to raise funds for consumption or to meet some unforeseen contingency, or when savings flows are invested in traded assets. The caprice and whims that motivate noise traders are also absorbed into the liquidity motive.

Bid–ask spreads: inventory-based models

Explanations of the bid–ask spread fall into two groups: inventory-based theories, and information-based theories. In each case market participants are classified into market makers and public investors. Market makers are assumed to be dealers who quote bid and ask prices at which they guarantee to buy and sell the asset (if the size of each order falls within a pre-announced range). Public investors are subdivided into informed and uninformed investors as in the previous section, though this distinction is relevant only for the information-based models. The framework studied here abstracts from reality in a number of ways. Dealers who are not market makers are ignored. Brokerage services are not treated separately from the services of market makers. Hence, the bid–ask spread should be interpreted as including all transaction costs (such as commission fees and taxes). Also, phenomena such as deals made within quoted spreads and special arrangements for large block orders are neglected.

In both inventory-based and information-based theories, public investors are assumed to arrive at the market in a random flow and to issue orders to buy or sell one unit of the asset. The market makers execute buy orders at the ask price and sell orders at the bid price. Price quotations are then changed according to some rule, studied below, according to the market makers’ observations of orders to buy or sell the asset. Inventory-based models view the price quotations as determined by the need for market makers to hold inventories of the asset to satisfy the flow of demands and supplies from public investors. The main influences on the bid–ask spread are assumed to be these.

1. Costs of holding inventories. There is an opportunity cost of holding inventories, in the sense that the funds could be invested elsewhere. For physical assets (e.g. soya beans or precious metals) the cost of storage may be important, though storage costs are probably negligible for most financial assets.
2. Market power. To the extent that competition among market makers is restricted, the exploitation of their market power implies that bid prices are lower, and ask prices higher, than otherwise. Also, the costs associated with the privileges of being a market maker (e.g. the obligation to quote firm prices or the need to fulfil minimum capital requirements) would be covered by the bid–ask spread.
3. Risk aversion. Market makers, because of their obligations to the market authorities, or concern for their reputations, or for other reasons, may seek to avoid the prospect of zero inventory.

Bid–ask spreads: information-based models

The information-based models studied in this section take it for granted that inventories are always adequate and that the costs of holding them can be ignored. Instead, the analysis highlights

• The asymmetry of information between informed and uninformed investors, and
• The assumption that market makers cannot observe whether the orders they receive come from informed or uninformed investors.

At its simplest level, a business enterprise represents a series of contractual relationships that specify the rights and responsibilities of various parties. People directly involved include customers, stockholders, management, employees, and suppliers. Society is also involved because businesses use scarce resources, pay taxes, provide employment opportunities, and produce much of society’s material and services output. Firms are a useful device for producing and distributing goods and services. They are economic entities and are best analyzed in the context of an economic model.

Expected Value Maximization

The model of business is called the theory of the firm. In its simplest version, the firm is thought to have profit maximization as its primary goal. The firm’s owner-manager is assumed to be working to maximize the firm’s short-run profits. Today, the emphasis on profits has been broadened to encompass uncertainty and the time value of money. In this more complete model, the primary goal of the firm is long-term expected value maximization. The value of the firm is the present value of the firm’s expected future net cash flows. If cash flows are equated to profits for simplicity, the value of the firm today, or its present value,

The Corporation Is a Legal Device

The firm can be viewed as a confluence of contractual relationships that connect suppliers, investors, workers, and management in a joint effort to serve customers.

• employee
• society
• investor
• management
• customer
• supplier

Constraints and the Theory of the Firm

Managerial decisions are often made in light of constraints imposed by technology, resource scarcity, contractual obligations, laws, and regulations. To make decisions that maximize value, managers must consider how external constraints affect their ability to achieve organization objectives. Organizations frequently face limited availability of essential inputs, such as skilled labor, raw materials, energy, specialized machinery, and warehouse space. Managers often face limitations on the amount of investment funds available for a particular project or activity. Decisions can also be constrained by contractual requirements. For example, labor contracts limit flexibility in worker scheduling and job assignments. Contracts sometimes require that a minimum level of output be produced to meet delivery requirements. In most instances, output must also meet quality requirements. Some common examples of output quality constraints are nutritional requirements for feed mixtures, audience exposure requirements for marketing promotions, reliability requirements for electronic products, and customer service requirements for minimum satisfaction levels.

Limitations of the Theory of the Firm

Some critics question why the value maximization criterion is used as a foundation for studying firm behavior. Do managers try to optimize (seek the best result) or merely satisfice (seek satisfactory rather than optimal results)? Do managers seek the sharpest needle in a haystack (optimize), or do they stop after finding one sharp enough for sewing (satisfice)? How can one tell whether company support of the United Way, for example, leads to long-run value maximization? Are generous salaries and stock options necessary to attract and retain managers who can keep the firm ahead of the competition? When a risky venture is turned down, is this inefficient risk avoidance? Or does it reflect an appropriate decision from the standpoint of value maximization?

Business Versus Economic Profit

The general public and the business community typically define profit as the residual of sales revenue minus the explicit costs of doing business. It is the amount available to fund equity capital after payment for all other resources used by the firm. This definition of profit is accounting profit, or business profit.

The economist also defines profit as the excess of revenues over costs. However, inputs provided by owners, including entrepreneurial effort and capital, are resources that must be compensated. The economist includes a normal rate of return on equity capital plus an opportunity cost for the effort of the owner-entrepreneur as costs of doing business, just as the interest paid on debt and the wages are costs in calculating business profit. The risk-adjusted normal rate of return on capital is the minimum return necessary to attract and retain investment. Similarly, the opportunity cost of owner effort is determined by the value that could be received in alternative employment. In economic terms, profit is business profit minus the implicit (noncash) costs of capital and other owner-provided inputs used by the firm. This profit concept is frequently referred to as economic profit.

WHY DO PROFITS VARY AMONG FIRMS?

Even after risk adjustment and modification to account for the effects of accounting error and bias, ROE numbers reflect significant variation in economic profits. Many firms earn significant economic profits or experience meaningful economic losses at any given point. To better understand real-world differences in profit rates, it is necessary to examine theories used to explain profit variations.

Compensatory Theory of Economic Profits

Compensatory profit theory describes above-normal rates of return that reward firms for extraordinary success in meeting customer needs, maintaining efficient operations, and so forth. If firms that operate at the industry’s average level of efficiency receive normal rates of return, it is reasonable to expect firms operating at above-average levels of efficiency to earn above-normal rates of return. Inefficient firms can be expected to earn unsatisfactory, below normal rates of return.

This article focuses on technology transfer for the development of the Tanzania national. In other words, this transfer of technology it focus on the following activities covering basic research, applied research, development, and even technical support for operational activities though development of the industry, this is our first mission activities when we focusing on the industry era. Non-mission-oriented research  have their objectives defined primarily in scientific terms—for example, the study of high-energy physics, nuclear energy, toxic substances, atmospheric physics, and bioacoustics. Academic research is generally non-mission-oriented and is usually small-scale research carried out in academic departments of universities. Much of the technology transfer from non-mission-oriented research to application in real-life situations is likely to occur via a buffer industry similar to a mission-oriented R&D , and hence the focus on such national.

A new technology has to have considerable relative advantage and has to provide significant value to the customer before it is embraced by the wider user community. The new technology can be more expensive than the older technology, but the value in terms of quality, flexibility, and responsiveness it provides motivates the user to take the necessary steps in adopting this technology. In utilizing new technology, there are numerous management challenges. Continuous improvement is the basis of future competitive advantage for a firm.

Suggested five main steps leading to the adoption of technology:

• Knowledge
• Persuasion
• Decision
• Implementation
• Confirmation

Knowledge occurs when a potential user learns about the new technology and gains some understanding of its capabilities and usefulness. At this stage the user wants to know what the innovation is, what its capabilities are, and how it works.

 Persuasion occurs when the user forms a favorable or an unfavorable attitude toward the innovation. Here the user is looking at comparative advantages and disadvantages of the innovation.

Decision occurs when the user engages in activities that lead to adoption or rejection of the innovation.

 Implementation occurs when the user incorporates the innovation into the way of doing things.

Confirmation occurs when the user seeks to confirm the implementation decision and continues to use the innovation. This step is not always well understood, which is why many innovations first implemented are later discontinued. Certain activities to reinforce user acceptance of the innovation need to continue after implementation.

Adoption of innovation involves considerable uncertainty and thus some risk since it is not always clear what benefits will follow. Operational problems can often occur during the implementation stage, thus increasing costs and reducing benefits. Some of this uncertainty can be reduced by demonstration projects and by implementing the innovation on a partial basis. Organizations that do not reward prudent risk-taking are less likely to adopt innovations.

Adoption of innovation typically follows a bell curve, or an S-curve if considered cumulatively. Describes five categories of adopters. In general, early adopters are prudent risk-takers, are better informed and educated, and act as opinion leaders for the organization. The role of early adopters is to decrease the uncertainty about an innovation by adopting it and by adjusting it to fit the organization’s needs. Early adopters then communicate this information to other potential users within the organization and to peers outside the organization. The late majority and laggards adopt innovation last.

Successful adoption normally requires resources (people, funds, and time), some training in using the innovation, and, at times, some changes in the way organizations operate. This involves commitment to and acceptance of the innovation at both the individual and organizational levels. Organizational structure and its routine functioning provide stability and continuity to an organization. The adoption of innovation may seem to threaten this stability and continuity, and thus it is understandable that there often is some resistance to innovation. Some innovations may require manufacturing before they can be utilized by the ultimate user. For example, if the innovation involves a longer-lasting light bulb or a complex instrument to monitor toxic wastes, the device must first be manufactured.

Some innovations, such as computer systems, improved analysis procedures, or improved design criteria, can be transferred to the user without major intermediate steps. In both cases, before the innovation is implemented, the manufacturing department or the user has to become aware of the innovation and be persuaded to go on to the next steps: decision and implementation. During the early steps—knowledge and presentation—marketing people can play an important role. Marketing people may, for example, develop information brochures or demonstrations that capture the imagination of the users, motivating them to seek further information. As users move to the decision stage and beyond, the R&D group and other individuals intimately familiar with the innovation need to play the pivotal role.

APPROACHES AND FACTORS AFFECTING TECHNOLOGY TRANSFER

 Three general approaches used by industrial research organizations to facilitate research utilization: These are the personnel approach, the organizational link-pins approach, and the procedural approach.

The Personnel Approach

The personnel approach involves movement of people, joint teams, and intensive person-to-person contact between the generator and the user of the research. Suppose an R&D group develops an intelligent and stand-alone air-pollution monitoring device that has a built-in microprocessor capable of real-time analysis. The innovation is complex, requiring some modifications or debugging during manufacturing. Some key members of the R&D group may be transferred to manufacturing to facilitate the process. The enthusiasm and keen insight of the R&D group can thus be transferred to manufacturing, increasing the probability of effective technology transfer.

The Organizational Link-Pins Approach

This encompasses specialized transfer groups that contain engineering, marketing, and financial skills; use of integrators who act as third-party transfer coordinators; and new venture groups. Some organizations may find that the movement of people creates other unacceptable personnel problems or is not economical. A special “technology transfer group” is formed to specialize in moving innovations from R&D to demonstration, to manufacturing, and to the ultimate user. It is important to recognize that a technology transfer group cannot consist of just a sales or public affairs office (PAO).

In one case we studied, the PAO was driving the train and results, predictably, were disappointing. After the initial knowledge and presentation stages, further activities quickly faded away. The PAO group did not have the technical understanding to successfully carry out other tech transfer activities. Even at the knowledge and persuasion stages, misleading and at times erroneous information was provided to the user groups. This further reduced the probability of success for the follow-up stages. For a technology-based innovation, it is essential that knowledgeable engineers and scientists play a leading role in the technology transfer group at all stages. As the technology moves to the decision stage and beyond, the PAO group’s role is minimal.

The Procedural Approach

This includes joint planning, joint funding, and joint appraisal of research projects using research and user groups from manufacturing and marketing. This procedural approach, which involves joint planning and participation in the innovation process by the user community, can be utilized quite effectively. User groups that include personnel from manufacturing, marketing, field users, corporate funding sponsors, and the research community can be organized for major R&D products. It is important to note that participants in these user groups still continue their normal duties. Their participation in the user group is an added responsibility. Researchers often comment on how many new ideas are generated as a result of their interaction with this user group. Such approaches require considerable organizational support, but the effort is worth the cost. In many cases, movement of people or formation of specialized technology transfer groups is simply not feasible due to organizational or cost considerations. Procedural approaches such as formation of user groups can serve as a tool for effective technology transfer without requiring movement of people or extra resources for establishing technology transfer groups. Procedural approaches can also be used to complement the other two approaches. The number of factors affecting technology transfer:

• Corporate policies
• National policies, laws, and regulations (e.g., taxes and tax credits, tariffs, and health and safety regulations)
• Market demand
• Scientific base of the nation and industry
• Level of R&D effort
• Education level
• Availability of capital

ROLE OF PEOPLE

The role of people in technology transfer has been well recognized. The existence of a technology gatekeeper, a person who links the organization to the outside world of scientific and technical knowledge, the   two other gatekeepers—market gatekeeper and manufacturing gatekeeper—who have relevance to technology transfer.

The market gatekeeper is a communicator who understands what competitors are doing, what regulators might be up to, and what is happening with regard to the marketplace. This type of a gatekeeper brings vital information to the R&D organization and keeps the R&D research focus on target and toward the kinds of activities that are likely to be accepted and implemented successfully.

The manufacturing or operations gatekeeper understands enough of the practical and constrained environment of manufacturing and of the operations of the user community to keep the R&D personnel well informed about the manufacturing and operations requirements. This individual makes sure that the concepts developed by R&D can either be manufactured profitably or be made a part of the operation procedures of the user community.

• Can the benefit involved in the opportunity be articulated convincingly to a defined targeted market?
• Can the target be located and reached with cost effective media and channels?
• Does the company posses or have access to the critical capability and resources needed to deliver the customer benefits?
• Can the company deliver the benefit better than any actual or potential competitors?
• Will the financial rates of return meets or exceed the company required threshold for investment?

CONFLICT WITHIN INDIVIDUALS

Many kinds of conflict occur within individuals. The first one we will discuss is role conflict. Roles are ideas about correct behavior for a person holding a position in a social system. For example, the position of chief engineer specifies particular activities that are appropriate for the position. When analyzing roles, it is important to talk about prescribed, subjective, and enacted roles. A prescribed role is a role that is prescribed by other people. In other words, the chief engineer usually receives definitions of what he or she is supposed to do from the boss, from subordinates, and from peers, and each has specific ideas about the engineer’s role, which are integrated into a concept of what he or she is supposed to be doing. In other words, when the chief engineer says, “I am doing this because I am the chief engineer,” that is an element of the subjective role; the role thought appropriate by the individual. Finally, we have the enacted role, which is the actual role behavior of the chief engineer. It is useful to look at the enacted role and see if it corresponds to the subjective role or to the prescribed role. According to research, the three kinds of roles—the prescribed, the subjective, and the enacted—frequently do not match very well.

A second kind of role conflict is related to workload—in other words, how much is one supposed to do. Given a particular role, there are different definitions of how much one should do. A third conflict has to do with creativity. Who is supposed to initiate what or who is supposed to do new things does vary according to role senders. Finally, there are conflicts that have to do with company boundaries and who has responsibility for what activity—for example, who must decide whether a laboratory member is to go to a conference. The research by Kahn shows that the greater the role conflict:

• The greater the dissatisfaction of the individual,
• The more frequent the physical symptoms of the individual,
• The greater the number of hospital visits the individual undertakes,
• The less confidence the individual has in the company.

Technicians versus Researchers

Other kinds of intrapersonal conflict occur when certain technical employees have problems with the way they are perceived by members of the company. A good example is provided by Fineman (1980), who discusses the problem of technicians in large R&D Company. They are often in a supportive role; in other words, they are supposed to be helping the researcher do the work. This frequently makes them feel like second-class citizens who are being “used” by the researchers as servants rather than as co-workers. Furthermore, their job appears to lack creativity, since it is the researcher who does all the original work and they are only providing the technical support. Naturally, such people often feel that their technical skills and qualifications are underutilized and that their superiors do not take their personal needs into account. In R&D company, quite often, support personnel experience helplessness and lack of power and influence. Managers must find ways to integrate support staff by providing common goals for them and for the researchers.

Supervisor–Subordinate Expectations

A frequent problem in most company is that the expectations of one’s supervisor and of one’s subordinates may be quite different. This problem becomes especially difficult to solve when the training backgrounds of the supervisor and the subordinates are very different. For example, in some commercial company the top management has MBA training or degrees in law or finance. Managers of the R&D functions may report to an MBA while their subordinates might be physicists or engineers. The expectations of people with such varied kinds of training can be very different. As a result, the managers find that their supervisor expects a particular set of behaviors while their subordinates expect a different set with minimal overlap between them. Such “role conflicts” have been found to result in health problems (e.g., ulcers), job dissatisfaction, and even depression.

Engineers’ Status and Company Conflicts

An analysis of the kinds of stresses that professional engineers face is provided by Keenan (1980). Keenan also identifies, as a problem, the fact that professional engineers have a relatively low status in society (mostly the case in the United States, not so in Japan and Germany) despite their academic level of qualifications and their level of contributions to society. A number of scholars have pointed out that scientists and engineers who work in industrial company are likely to experience strains due to the conflict between their professional values and the goals of the company for which they work. Conflicts between the technologist and the company over issues such as which project to focus on and how and in what way to do them can drain the engineer’s energies.

Role Overload and Underload

In some cases, there is role overload; that is, the work that needs to be done is too difficult and exceeds the individual’s abilities, skills, or experience. In a study summarized in Keenan’s (1980) paper, French and Caplan (1973) found that engineers and scientists more frequently experienced situations in which the job was too difficult than did administrators. Another problem is role underload; the demands made by the job are insufficient to make full use of the skills and abilities of the scientist. The Keenan paper suggests that this is a frequent problem among engineers. Engineers receive sophisticated training (e.g., in mathematics) that results in skills often not required by their job. In one study, more than half of the engineers complained that many aspects of their jobs could be handled by someone with less training.

Boundary Role

Another source of stress or interpersonal conflict comes from occupying a boundary role, one that connects the company with the external environment. There is some evidence that engineers who are in such roles experience more stress and strain than other engineers. Individuals in boundary roles frequently complain that they experience greater deadline pressure, fewer opportunities to do the work they prefer, and less opportunity for advancement. They also claim that they are not attaining the maximum utilization of their professional skills.

Coping with Conflict and Stress

The ways engineers cope with work-related stress is discussed by Newton and Keenan (1985), who point out that there are different ways in which one can cope. For example, one can talk with others, take direct action, withdraw from the situation, or simply resent it. Exactly what is done depends on (1) individual differences (for example, people who are characterized as having a Type A personality are most likely to be resentful), and (2) situational variables (for example, withdrawal or doing as little as possible occurs more frequently among those who work in company that lack a supportive climate). Withdrawal appears to be more common in some fields of engineering than in others. Also, the way the person looks at the stressful situation determines whether the person will talk to others or take action, such as quitting. One cannot generalize and say that there is an effective coping technique that should be taught to everyone, because coping differs from person to person and from company to company. It also depends on the way the person perceives the conflict situation. Nevertheless, in training engineers and scientists, we can sensitize them to intrapersonal conflict and teach them stress-reduction techniques (such as biofeedback). Often being able to understand that role conflict and role ambiguity are “normal” in company makes dealing with such conflict more manageable. Facing the conflict squarely by “negotiating” one’s role is most helpful.

CONFLICT BETWEEN INDIVIDUALS

Chan (1981) has studied conflict between R&D managers and non managers in four company, and he found that they perceived conflict as generally having negative consequences. Most conflict occurs in the areas of reward structure (most important), control of goals, authority, and insufficient assistance. Most respondents saw a negative link between conflict and performance and job satisfaction, but a few respondents saw conflict as having positive consequences such as increased performance. Reactions to conflict were perceived as quite different. Competition and avoidance reactions were seen as most detrimental to the effectiveness of the work group; cooperation was seen as the most desirable reaction to conflict. In general the ideal way to deal with conflict is to be creative and try to reach win–win solutions. For example, if authorship of a paper is a disputed issue, arranging for one of the persons to do extra work on it, in order to justify joint authorship, can result in a win–win situation.

CONFLICT BETWEEN GROUPS

Conflict between groups is very common in company. In what follows, we will summarize some of the major findings in social psychology concerning the study of intergroup relationships (Worchel and Austin, 1985).

In-Groups, Out-Groups

The first point is that it is very easy to create confrontations between in-groups and out-groups. An in-group is one with which the individual is ready to cooperate and whose members consist of individuals who trust each other. An out-group consists of people one distrusts. It is very easy to create in-group/out-group distinctions. For example, in a laboratory experiment, one can say to teenagers, “You belong to the yellow group,” and the others constitute “the red group.” With no other visible distinction, one says, “All right, you yellows, here is a pile of money. Divide the money between your group and the other group.” This simple manipulation is sufficient to make the individuals who are doing the dividing favor their in-group. For instance, they may give 60 percent of the money to the in-group and 40 percent to the out-group. It is as if there were a natural way of thinking that “since I belong to this group and the other group is my ‘enemy,’ it is natural for me to give more to my group and to be a little distrustful of the other group.” The research also shows that out-groups are perceived as more homogeneous than in groups. In other words, the “other” people are “all the same.” By contrast, in-groups are perceived as relatively heterogeneous. The members of one’s in-group are perceived as “all different” from one another. These tendencies imply that we stereotype members of out-groups and may perceive them more inaccurately than we perceive the in-group. It is useful to distinguish relationships that are intergroup from those that are interpersonal .

In an interpersonal relationship, the individual is very much aware of who the other is. In the intergroup relationship, the individual is not aware of the other’s personal characteristics. For example, when soldiers shoot at the enemy they do not care who that particular individual is. It is just a global reaction or judgment about the other person as a representative of a group. Intergroup relationships are more likely to develop than interpersonal relationships under the following five conditions:

• When there is intense conflict,
• When there is a history of conflicts,
• When there is a strong attachment to the in-group,
• When there is anonymity of membership in the out-group,
• When there is no possibility of moving from the in-group to the out-group.

Conflicts in Company

Recent reviews of experimental work on conflict in company (DeDreu and Gelfand, 2008) suggest that there are many circumstances when moderate amounts of conflict may stimulate innovation and creativity. When a research team includes a member who looks at the research problem very differently from the way the other members do, even when that member is wrong, the difference of opinion can increase information search, and may uncover a solution that was not considered by any member of the research team. Therefore if, when the work begins, the best solution is not evident to any of the members of the research team, the team’s work can benefit from dissent. Of course, dissent is not without costs. In dissent situations the decision will probably take longer, the research members may feel antipathy toward the member who has different views, and may emotionally block the implementation of the best solution. On the other hand, if the research team has the norm described in “Ethos of a Scientific Community”, even if individuals are critical of the solutions proposed by others, the negative effects of dissent can be minimized. The complexities of the way dissent may be used to stimulate creativity are discussed in Schultz-Hardt, Mojzisch, and Vogelgesang (2008).

Coping with Conflict between Groups

What we said in the case of interpersonal conflict also applies to intergroup conflict: If superordinate goals (goals of both groups that neither group can reach without the help of the other) can be found, the relationship can be improved. There are two orientations that one can adopt in an intergroup situation: One is called a win–lose orientation and the other is called a win–win orientation. In the win–lose orientation, one tries to win for one’s in-group something that the out-group loses, while in the win–win orientation, one tries to win something for both groups. Another way to look at conflict is to examine the Conflict Resolution Grid of Blake and Mouton (l986, p. 76). The win–win orientation corresponds to position 9.9. The win–lose orientations are 1.9 and 9.1. Two other orientations—compromise and all lose, both less satisfactory than the win–win.

INTERCULTURAL CONFLICT

Intercultural conflict is a special case of intergroup conflict. “Culture” here is defined as unstated assumptions, beliefs, norms, roles, and values found in a group that speaks a particular language and lives in a specific time period and place. Potentially, there can be cultural conflict whenever people speak a different language including dialects, live in a different (e.g., Australia versus Canada), or have been socialized in different time periods (e.g., old versus young). Other contrasts, such as differences in religion, social class, and race, can also create intercultural conflict. Socialization in a particular culture results in a specific “world view.” Unstated assumptions (e.g., one must not start a new venture without consulting an astrologer), customs, and ways of thinking (e.g., starting with facts and abstracting a generalization versus starting with a generalization or an ideological position and finding facts that fit it) can create more trouble in interpersonal or intergroup relationships than even having something valuable to divide. This is because unstated assumptions appear so natural to the thinker. Intercultural disagreement can be more damaging to interpersonal relationships than disagreement within culture situations because rational arguments are not particularly helpful. There are basically four approaches to intercultural training: the cognitive approach, the affective approach, the behavioral approach, and self-insight.

The Cognitive Approach. The cognitive approach teaches people the worldview of the other culture. As Norman’s (1998) article argues, issues contributing to conflict are unlikely to go away and therefore must be managed rather than resolved. Management involves open communication to increase understanding. This is done with a series of “critical incidents” in which interpersonal behaviors between members of cultures A and B are described. After each incident, there are four explanations of the behavior of the people in the incident. If one is training a person from culture A to understand the point of view of persons from culture B, three of the four explanations are commonly given by people in culture A and one by people from culture B.

 The Affective Approach. The affective approach involves exposing trainees to situations in which their emotions are aroused when in interaction with members of the other culture. This can be done by having them interact with members of the other culture in specific situations. When negative emotions develop, they are exposed to a positive experience that competes with the negative emotions. In some cases, simply breathing deeply or doing some exercise that reduces stress in the presence of the negative emotion is helpful. In other cases, arranging for pleasant experiences, such as the sharing of tasty food, listening to enjoyable music, or being exposed to agreeable perfumes, can create the right mood.

The Behavioral Approach. The behavioral approach involves shaping the behavior of the trainee to make sure that behaviors that are objectionable in the other culture do not occur. For example, crossing your legs and showing the bottoms of your shoes is absolutely insulting in some cultures, but many Americans do this and are not even aware of it. Simply telling them that they must not do it (the cognitive approach) is not effective. They have to experience rewards and punishments that will change their habits. The best way to accomplish this is to reward a competing behavior, such as keeping one’s shoes on the ground.

Self-Insight. Self-insight is an approach designed to make the trainee understand how much culture influences behavior. The aim in this case is to give the trainee a chance to analyze his or her own culture. Understanding how much of one’s own behavior is under the influence of norms, customs, and values unique to one’s culture can be very instructive. The technique used in this kind of training is to have the trainee interact with a person who is a trained actor and who acts in the opposite way from the way people in the trainee’s culture usually act. The experience of interaction with such a person and discussion of the experience with the trainer makes very clear that one’s behavior and feelings are shaped by culture. When people know how culture influences their behavior, they are able to be more sensitive to culture as a variable affecting social behavior and  interaction.

UNIQUE ISSUES OF CONFLICT IN R&D CAMPANYS

For a research company, there are some ethical issues that either create special cases of conflict or provide a rather different framework for resolving conflicts. The following discussion of conflict within individuals, interpersonal conflict, and intergroup conflict focuses specifically on R&D Company.

• Conflict within Individuals. The need to find an intellectually challenging research environment, the need for research facilities, and, indeed, the simple need for employment forces many scientists to work in an organized environment. In addition, the needs of the company and of society as they relate to a research project can be at variance with the moral beliefs or convictions of individual scientists. Some recent cases have involved scientists who are opposed to R&D related to the defense industry. However, when one looks at investment by defense company in R&D worldwide, it should come as no surprise that the majority of scientists are involved in activities related to the defense industry. When some prominent scientists at major research universities in the United States questioned programs such as the Strategic Defense Initiative, the so-called “Star Wars,” they were perhaps responding to a conflict between their desire to make a contribution to science and their disapproval of the expenditure of resources for research programs that, from their perspective, served no meaningful human needs. In an open democratic society such differences should be expected.

• Interpersonal Conflict. One scientist may be competing with another scientist within a research group for promotion, status (for example, principal investigator versus associate investigator), or other rewards (attending conferences, office space, etc.). Since many of these things are perceived by the individual as a zerosum game, the ethos of a scientific community, which emphasizes cooperation, universalism, and sharing of ideas as its underpinning, is often lacking. This, in turn, creates conflicts within the company and also adversely affects the productivity of the company.

• Intergroup Conflicts. It is not unusual for one group in a research company to compete with another for projects or resources. This inevitably creates conflicts. Again, the total resources and other amenities (such as laboratory space) that are available are finite. If one group gets a certain portion of these resources, then the other group may feel that they did not get their fair share. This inevitably leads to some conflicts and also may lead to a lack of cooperation between the groups. Some company have competing divisions undertake the same research project. This type of competition can, for some situations, speed up the innovation process by making participants work very hard and perhaps work very cooperatively within the division. Competition among different research groups in an R&D company is inevitable and so is some of the resultant conflict. Some of this competition and conflict may in fact be beneficial. It may provide motivation to excel and thus positively affect performance. Benefits may exceed any adverse effect that may result from conflict and a lower level of cooperation among different groups.

Money, which represents the prose of life, and which is hardly spoken of in parlors without an apology, is, in its effects and laws, as beautiful as roses cash flow is nothing more than the movement of money in and out of your business. But in reality it is the lifeblood of your company. You need money to pay your vendors, landlord, and employees in order to stay in business.

As the term implies, cash flow is a moving target; money is constantly going in and out of the business so it can be difficult to pinpoint what your cash status is at any given time. The point of tracking cash flow isn’t to get a fix on your money. Rather, it is simply to make sure that there’s enough money on tap when you need it. Cash flow is not the same as profit. Your business may be profitable, yet face a serious cash flow problem. So it isn’t helpful to focus only on your bottom line and ignore your money supply. In this chapter you will gain a better understanding of what cash flow is all about and how you can analyze your company’s cash flow cycle so you can predict your future money needs. You’ll find out how to plan so that you don’t run out of money, and you’ll learn about a number of ways in which you can improve your cash flow by increasing the money that comes into your business and decreasing the money that goes out.

 Understand the Cash Flow Cycle

How does your cash flow run? As strong and as constant as the Mississippi River or as small and erratic as the little stream that sometimes dries up in the summertime? It is important to know about your company’s cash flow so that you can pay your bills to stay in business.

• Cash Flow

Cash flow is the cycle of money going in and out of your company. Usually, it is tracked from the start of the sales process. As a general rule, money flows out during the first phase of the cycle when you incur expenses to furnish your goods or services and flows in during the final phase when you collect the payment for sales. The first phase of the cycle erodes your cash stash; the final phase replenishes it. In other words, the cycle is the time it takes to convert a sale into cash.

• Cash Flow Analysis

Do you know how long it takes for money to come in during your business cycle? Without this knowledge you may be caught short of the cash needed to meet your obligations. Take the case of a wedding planner in Seattle. She was great at creating a bride’s dream event, but couldn’t get her mind around cash flow. As a planner she could schedule every component of the event, from the caterer and photographer, to the invitation printer and band. But she failed to take a sufficient down payment from the bride’s father to cover the deposits she owed to each player involved in the affair, leaving her dreadfully short of money to pay her own bills.

Cash flow analysis, which is also called cash flow projection or forecasting, involves an examination of the income coming in and the expenses for which money goes out. It lets you know how much money you’ll need at some future point to meet your expenses. Cash flow analysis also involves the time span in which these items occur. In an ideal situation, you hope your cash outflow will be less than your cash inflow, or will match as closely as possible. If outflow is more than inflow, the wider the gap between these events, the more problematic things can become. Experts differ on how long you need cash flow projections for. Some suggest that six months out is long enough, while others say that two years are mandatory. Obviously, you must find what will work best for you.

• Keep a Close Eye on Cash Flow

As the owner of your business, it’s your responsibility to keep tabs on cash flow. Whether you work with an accountant or have a board of directors or advisers, it is ultimately up to you to watch your money and initiate appropriate steps if there are cash flow problems.

In the old (precomputer) days, monitoring cash flow required a time-consuming projection on paper of your money needs, month by month. Doing this work the old-fashioned way—as an exercise— may help you better understand what cash flow is all about. The worksheet in Table 5.1 shows how to perform this analysis for the month of January; you would do the same analysis for each of the other 11 months of the year.

Today, monitoring cash flow can be automated with the use of software designed for this purpose. This cuts down considerably on the time it takes to track your money. If you work closely with an accountant, it is the job of this professional to closely watch your cash flow and to advise you if there is a problem. If you keep your own books, then use software to help you track your cash flow. For example, if you use QuickBooks to keep your books, you can find there two useful cash flow reports: Statement of Cash Flows and Cash Flow Forecast. You do nothing to complete these reports; they are filled in automatically based on the income and expenses you input to your books. All you have to do is be sure that you check these reports regularly to detect problems on the horizon. Other small-business accounting software, such as M.Y.O.B. Accounting and Peachtree First Accounting, have similar cash flow reports and tracking.

• Plan for Adequate Cash Flow

Lack of capital is one of the main reasons that businesses fail. They run out of the money needed to pay their bills, and creditors can force them into bankruptcy, requiring them to liquidate the business and distribute whatever money there is to those creditors. It doesn’t matter that there is a hot sales prospect in the wings or that the long-range forecast for the business is great. You need to have adequate sources of money to pay your bills when they come due.

Warning Signs of a Cash Flow Problem

You may not perform an in-depth cash flow analysis each and every month, but you can stay on top of things and avoid a potential problem by doing an easy check at the end of each month. Compare your sales with your expenses. If your expenses, including overhead and purchases to make your sales, are outpacing your sales, you have a potential problem. Danger signs that you may have or are about to have a cash problem include:

• Bank account balances drop below normal averages.

 Check the balances on your business checking and savings accounts each month to see that they approximate what you have been seeing in prior months. A decline does not necessarily mean you’re in trouble; you may simply have purchased new equipment or made an unusual purchase. But if there is a decline for an unexplained reason, it may indicate cash flow problems (e.g., that your expenses have gone up without the same increase in sales).

• Sales outlook is dim.

Depending on your type of business, you may continually have sales in the pipeline. For example, if you are an architect, you prepare proposals in order to keep new sales forthcoming. But if you notice that you are doing fewer proposals, you will probably have less sales in the future, something that can jeopardize your cash flow stability.

• Inventory is building up.

If you find items are sitting on your shelf for longer and longer periods, again you face an issue of reduced sales, which will bring in less revenue.

• Bills are being paid late.

Many bills you receive are due on receipt or within 10 days. Some bills may give you a 30-day period in which to remit payment. If you find that you are paying these bills in 60 days, 90 days, or longer, you know there’s already a serious cash flow problem.

• Major purchases are being postponed.

 Your company needs a piece of equipment, but you can’t afford to buy it now because money is tight.

• Banks are asking for financial statements.

You already have outstanding commercial loans and your lenders are getting nervous, as evidenced by their requests for your balance sheets, income statements, and other financial information.

• Improve Cash Flow

Just because you see a cash flow problem looming does not mean you are doomed to experience difficulties. Knowing that there’s a potential problem lets you take steps to avoid a crisis. There are two main ways to improve your cash flow: Increase the amount of cash that’s coming in and reduce the amount of cash that’s flowing out. Both ways help to ensure that you won’t run out of cash. It is usually advisable to tackle both ways simultaneously in order to avoid a cash crunch.

• Cash Reserves

If possible (and for many small businesses this is virtually impossible to do), create a cash reserve to help you ride out the lows you may experience. A cash reserve will help you avoid the need to take drastic measures when you experience a cash flow problem.

Warning: Pay Taxes First

In managing cash flow, always avoid problems with the IRS and state sales tax departments. Pay your tax obligations before other creditors, even if the other creditors are knocking at the door. If certain taxes are in arrears (check with your accountant as to which taxes you must pay immediately), these government agencies can freeze your bank account and/or seize your assets. By then it may be too late to address your cash flow difficulties. Once your accounts are frozen, you are no longer in a control of your money.

Strategies for Increasing Cash Inflow

Short of winning the lottery, receiving an inheritance, or depleting your nest egg and putting the funds into your business, there’s no fast and easy way to boost your company’s money supply. Generally, you must look to increase your sales and the collection of payments on these sales. There are, however, other ways to increase your money supply besides boosting sales or putting more of your own money into the business. You can also increase the return on your investments (e.g., interest on money market accounts) and look to find financing from loans, factoring (similar to loans), or grants.

• Increase Sales

Obviously, if you sell more, you’ll take in more cash through these sales. Thus, the first and main way to increase your money supply is to take steps to boost your sales, such as changing and rearranging marketing efforts. However, recognizing the old adage “It takes money to make money,” stepping up your sales efforts may initially cost you more than you take in. You’ll have to pay at the start of the sales cycle for these additional costs even though you may not see a return until later on. Thus, it’s a good idea to launch this approach well before you face serious cash flow problems.

• Raise Prices

Review your current pricing schedule to see if there is room to make upward adjustments. When was the last time you raised prices? If it was more than a year ago, it may well be time to revise your pricing schedule. What are your competitors charging? You may have fallen behind in pricing by not raising your fees sooner. How is the economy doing? A booming economy can better support your price increases than one in a recession.

• Improve Collection of Receivables

You may want to review your collection policies and become more aggressive about delinquent accounts. There are also incentives you can use to obtain payments more rapidly and to avoid slow paying and nonpaying customers.

• Tighten or Loosen Up on Extending Credit to Customers

Always try to get cash up front to avoid extending credit to customers. But this is not always possible. For example, if you are a Web designer who contracts to create a Web presence for a company, you may receive payment upon completion of the job. However, you can usually arrange to receive partial payment at stages of the job, including 25 percent to 50 percent of the total fee up front. If you are fortunate enough to be sitting on cash reserves, don’t let them sit idle. Invest (carefully). Make your money work for you, but choose investments that keep your money liquid so you can use the funds as needed at any time. For example, depending on the size of your reserve, you may invest in money market mutual funds or short-term commercial paper.

• Find Grant Money

While there may not be an abundance of grants for small businesses, this financing mechanism should certainly be explored. Grants are free money because they do not have to be repaid. To find grants for small business, go to the Small Business opportunities.

• Borrow Money

You don’t have to take out a loan and keep the money sitting in the bank to be in a good position to avoid a cash flow disaster. All you need is to put financing options in place so that you can call upon them when necessary. It is always better to make these arrangements when you are in a good financial position than to wait until you really need the money. Consider the following financing options.

• Line of credit

Set up a pot of money you can draw upon as needed. A line of credit is a loan you obtain from your bank up to a fixed limit. Usually, this type of loan is a revolving line. As you pay back principal you have more to draw on later on. The line runs for a set term, but can be extended as needed if the bank is agreeable.

• Factoring

If your business has accounts receivable that you must wait to collect upon, consider using a company, called a factor that will buy your receivables (outstanding invoices) from you. Factoring originally was used exclusively in the clothing industry, but today it is being used by many different businesses. The amount you receive has nothing to do with your creditworthiness, but rather the creditworthiness of businesses that owe you money. With factoring, you’ll receive 50 percent to 80 percent of the receivables’ face value up front. The factor then collects on the receivables and remits to you the amount collected, less the factor’s fee. This fee is usually 1 percent to 5 percent of the face value of the receivables. So, in effect, you may receive up to 99 percent of what you are owed, with the bonus of getting half or more of those funds immediately for working capital. Using a factor can be a short-term arrangement to help you over a rough spot. But some small businesses, especially those with continual cash flow swings resulting from seasonal payroll or peak sales periods, may work with a factor as a long term arrangement. Try to obtain “nonrecourse” on the financing so that the up-front money is yours, even if the factor fails to collect on one or more of the receivables. It is usually a good idea to work with a broker specializing in factoring (and who is compensated by a finder’s fee that may be pricey). The broker can shop around for the best factoring company for you and help negotiate the best deal. To locate a broker, do an Internet search in your favorite search engine for “factoring brokers” (make sure you are dealing with a broker and not a factoring company). To check on a factor, contact the Commercial Finance Association (CFA), a trade association for the asset-based financial services industry .

FINANCING FROM SUPPLIERS

Your vendors may be able to offer you extended payment terms, minimizing your current need for cash. For example, ask for 180- day payment terms. Of course, this will cost you more overall if there are financing costs, but it can help you get over the hump.

Strategies for Decreasing Cash Outflow

You can improve your cash flow by minimizing the drain on your money supply. Usually this means tightening your belt. But there are also a number of creative ways to reduce or delay the outflow of cash from your business.

• Cut Expenses

Obviously, the less money you spend, the less you need to take in and the better your cash flow will be. But reducing expenses can be challenging, especially if it requires laying off a valued employee or waiting another year to buy a needed piece of equipment. Examine carefully everything you spend money on; there’s surely room for savings. Try to renegotiate the cost of products or services you regularly purchase since these sellers may be willing to work with you to keep you as a satisfied customer. Buy smarter. The less you pay for something, the better off you will be. Today, you can check the prices of everything from supplies to heavy machinery at online sites and may, in fact, save money by making your purchases online through auction sites or remainder sellers. If you are experiencing severe cash flow problems, you may have to make drastic and painful cuts. You may, for example, need to scale back wages (at least temporarily) in order to avoid firings.

Caution: Do not overlook your obligation to pay so-called trust fund taxes—this is not the place to cut. Trust fund taxes are payroll taxes you withhold on behalf of your employees (income taxes and the employee share of Social Security and Medicare taxes). No matter how your business is legally organized, you are personally liable for 100 percent of these funds. You do not want to pay another creditor over the U.S. Treasury in this case.

• Trim Inventory

If you sell goods, you have an inventory on hand for sale. Ideally, you can switch to a just-in-time inventory management system where you do not stock anything until it is needed. You might, for example, be able to arrange shipment directly from a manufacturer rather than warehousing items yourself. But most businesses can’t do this, so you might want to aim for minimizing the amount  of inventory you carry. Again, this is simply a matter of cutting back—ordering less and stocking a smaller variety of items. Of course, you must maintain sufficient inventory to offer your customers a good selection of items and be able to deliver promptly, so scaling back requires some finesse. Also work with suppliers to increase delivery time for your receipt of inventory items so you can cut back on your stockpiles.

• Delay Paying Your Bills

You don’t want to fall delinquent on your obligations—doing so can cost you interest charges, damage your credit rating, and cause you to lose standing with existing vendors or suppliers. But you don’t have to pay immediately. Take advantage of the payment terms. For example, if you have a 30-day window, remit payment on the 27th day. Pick and choose carefully which creditors to pay if funds are tight, paying careful attention to interest rates that may apply. Use online payment options to finely time your payments. Since transfers are instantaneous, you can send payments at the very last minute. If you must be late, talk with your suppliers to gain their understanding. Try to arrange for extended payment options, even if it costs you some interest charges, if you are experiencing a temporary cash crunch.

The study of innovation in industry draws on insights from several social science disciplines: economics, sociology, economic geography, political science and management. The economics of innovation developed as a subdiscipline based on the work of pioneers such as Schumpeter (1942/1975), who coined the term “creative destruction” to describe the transformation that accompanies radical innovation under capitalism. He was followed by the economists Arrow (1962), Nelson and Winter (1982), Freeman (1982), Lundvall (1992) and Metcalfe (1998).

“Innovation” in the productive sector, whether in manufacturing or services, is usually defined as the creation of novelty of economic value. This translates into viewing innovation as the creation of new products and services, as change in the processes of producing these products and services and as organisational change, including new work practices. Innovation in industry may also mean using new methods to produce services and the creation of “product-service packages”, either as “generics” for a market or to solve particular client needs (Marceau, Cook and Dalton 2002). An example of a new “product-service” package is the set of services provided as part of the “deal” or “bundle” when purchasing a mobile phone.

Both creativity and invention can be found in innovation. Here I define “creativity” as the creation of new ideas or a recombination of existing knowledge that has no immediate or particular market drivers. Invention is a new product (usually) or service whose economic value has not been tested in the market or whose value has been tested but has been found deficient and the new product remains unused. In this sense, creativity is similar to invention. Creative people are viewed as drawing on their thinking and research to find solutions to “problems”, with an emphasis on thinking “outside the box”, “playing” with existing products or services (cf. Dodgson, this volume) to find new ideas for product or services and new understandings of how “things work”. Creative people are also those who can recognize new knowledge and apply it to address both scientific and product-related problems. Creativity is difficult to define in relation to innovation. It is clear that successful innovation depends on creative people as new products and processes require people to think outside the box. This is especially true for radical innovation where new products, processes or services combine new and older knowledge in particularly novel ways. The creative spark is also involved in designing the organisational forms to improve production and sales. The creative leap involved in thinking of and about new knowledge combinations is seldom examined by innovation theorists. Accordingly, even in the management literature, creativity and innovation tend to occupy different conceptual spaces, as argued by Mark Dodgson in this volume.

Innovations may be “radical” or incremental. Some innovations change fundamentally the kinds of products produced, for example, computers and automobiles, while some are small improvements on existing products or manufacturing processes. Incremental innovations are far more common than radical innovations as most fi rms prefer to stay on familiar ground and make only small changes to minimise risk. Radical innovations, such as those in the information and communications technology, which begin life as products, may lead to major process changes; examples are computer- aided design and computers in manufacturing. Some new technologies begin as scientific breakthroughs—examples are biotechnology and nanotechnology—and take considerable time to become the platform for new products.

Modern economies tend to comprise a mix of firms making radical and incremental innovations. Firms may move between radical and incremental innovation as the platform technologies mature and the business environment changes. Radical innovation is more likely to stem from R&D, while incremental innovation, including process innovation, is more likely to stem from customer suggestions and feedback or by experience with the product. The different kinds of innovation all necessitate “creativity” as they involve doing things differently. The new business models essential for commercial breakthroughs also require creative thinking (an example is the Just-in-time operations management system), but often take time to emerge in the marketplace.

The so-called “high-tech” industries are considered significantly more innovation-intensive than their “low-tech” counterparts, but recent studies have shown that the so-called low-tech sectors often use leading-edge technology for product and process innovation (von Tunzelman and Acha 2005). “Old” industries, such as mining and agriculture, are in fact highly knowledge- and R&D-intensive, and have become constant innovators through the application of new science and new business models, including the outsourcing of key activities. The leading mining fi rms, for example, often outsource mine tunneling operations to engineering and construction firms with “cutting- edge” expertise in tunneling. This is an example of how links between different industries can transform operations in another. There are many models of the innovation process.

The linear model (knowledge–push) suggests that new knowledge moves directly from its creators in public-sector research organisations into commercial hands. Over time the linear model has been modifi ed to include factors such as market pull, feedback loops, organisation of the fi rm, knowledge management and links with outside organisations. The new generation models point to distributed or “open” forms of innovation and establishment of networks to share knowledge and capabilities of several organizations (global and local), permanent and transient (Chesborough, Vanhaverbeke and West 2006; Bessant and Venables 2008). In the new generation innovation model, new IT-based “innovation technologies” enable new product and process simulation, rapid prototyping, team design and rapid steps to manufacturing through a process Dodgson, Gann and Salter (2005) refer to as “think, play, do” (see Dodgson, this volume).Creativity plays its clearest role in the new generation models. The opportunity for highly creative ideas based on multiple sources of knowledge and perspectives to become an innovation grows as innovation becomes a more open, distributed and networked activity. As the new models of innovation take hold, creativity may attract greater attention among writers on innovation. With changes in the organisation of innovation we may see a deeper examination of creativity in firms and organisations.

COMPONENTS OF INNOVATION SYSTEMS

Innovation in an industry is dependent on the context (e.g. nation, region and city) in which industrial firms and related institutions function. Here I describe the components frequently identified as critical for innovative capability and performance and how they can be understood as elements of an integrated system.

• human capital
• science system
• research and development
• business system
• trade
• venture capital
• technology change
• innovation

INNOVATION IN INDUSTRY: LARGE FIRMS, SMALL FIRMS, HIGH TECH AND LOW TECH

What determines the level of innovation across different industries? International surveys (OECD 2002, 2003) have measured the levels of innovation activity undertaken by companies and suggest that expenditure on R&D is a critical differentiator for success. The surveys show significant differences in levels of innovation-related expenditure between nations, industry sectors (high versus low tech) and between firms of different sizes. High-technology firms, such as biotechnology, are innovation-intensive and spend up to 10 per cent or more of turnover per annum on R&D; science-based start-up firms may spend considerably more.

Many firms obtain their innovation ideas externally. Studies have shown that customers are the single most important source of innovation knowledge, followed by suppliers and competitors (see e.g. von Hippel 1988; Marceau 1999). Maintaining close links with customers as end-users reduces innovation risk and smoothes the innovation process, especially in regard to product design. Some observers suggest that the most successful firms rely on multiple sources of innovation ideas and seldom a single source (Hyland, Marceau and Sloan 2006), especially, of course, if their markets are differentiated and consist of more than a few large clients. The size of a firm, however, does not alone determine the degree and direction of innovation activity. The type of technology central to the firm, the stage of development of that technology and the type of market in which

a company operates also shape decisions about innovation and investment in new products (Whitley 2000). Some recent studies attempt to identify the different sources and “packages” of influence (Hollenstein 2003). There is likely to be considerable industry variation as, for example, biotechnology firms may behave very differently from, say, metals manufacturers, at least in the early stages of development. The information exchange relationships between four key players (customers/users, producers, regulators, etc.) in a product system. This is a “perfect” map of information and knowledge exchange. All four players are linked equally in information and knowledge exchange across all combinations. We would predict much innovation, unless of course the four players spend all their time informing and not implementing! Few real-life situations approximate equality of information flows and influence. However, under some conditions, such as rapid technological change or a dramatic shift in the regulatory environment (e.g. removal of tariff protection), the industry may rely on powerful dominant players to shift the organisational and operational arrangements and push suppliers into compliance in order to survive. Under other conditions, the major players may be the only ones able to negotiate and coordinate the necessary but complex changes in relationships between all the players in the industry (e.g. with the regulators and the training institutions). Tensions may arise between the “creative” elements of the industry (who value their autonomy and independence) and their “innovative” counterparts who place a premium on business results and industry survival. In practice at any time some players dominate the activities of the industry. The case examples have been selected to focus on industries with significant creative elements—architecture and engineering in the building industry and fashion design in the clothing industry.

Our mapping of an industry product system has implications for policy. For example, the map might reveal perceptions and evidence of too little input from customers or from R&D organisations (information dimension) or too heavy-handed a policy and regulatory compliance framework from government (power relations). In each case this pinpoints the location of an obstacle to innovation. In interviews we look at information

flow and degree of influence from the player’s point of view. Thus, one player (producers) might claim there is little input from research technology organisations, and another reports there is too much interference by powerful regulators. The “maps” thus generated are slices of subjective reality designed to highlight issues and dynamics which industry and policymakers may wish to address for improving innovation.

• uses
• producer
• research and development
• training institution
• regulator

While globalization has opened up markets everywhere, it has also thrown the inherent tension between government economic activism and entrepreneurial freedom into sharp relief. We now take up crucial questions about the proper role of government on the one hand, and the place, indeed the very future, of entrepreneurship on the other. In our global economy entrepreneurs are frequently competing with companies supported and directed, and often controlled, by the governments of the countries where they do business. It is hardly an even match: such policies inevitably engender hidden or overt preferences for buying local products.

Clearly, state-controlled economies pose a serious challenge to the basic concept of entrepreneurship and the ability of foreign corporations to operate freely within those economies. By raising barriers to international sales opportunities, they clearly increase the inherent risks of launching new entrepreneurial businesses. Under such conditions, it is fair to ask whether the individualistic and “random” entrepreneurial process, gated by so many unpredictable circumstances, can be counted upon in the future as a significant economic driver. Must governments everywhere become much more involved in supporting ambitious entrepreneurs focused on creating new markets? This is a pressing issue for countries like the US, which have a tradition of free markets and limited government support of their industries. We opened this book on the entrepreneur in the global economy by outlining how governments involve themselves in building local economies.

The succeeding chapters tracked the fortunes of twelve entrepreneurs, from David Sarnoff of RCA in the first half of the twentieth century to Lynn Liu of Aicent at the opening of the twenty-first, as they strove to build competitive companies in an increasingly globalized economy. In this chapter we will ask whether and how governments and entrepreneurs can coexist and cooperate, and explore the ramifications of that question. This covers such topics as, to what extent will governments take on the roles of venture capitalist and entrepreneur, choosing the technologies and building the industries of the future? In what areas is government participation most likely to be healthy and productive? How can entrepreneurs and corporations responding to market conditions make better decisions? The hazards of targeting industries To set the stage, we will review two diametrically opposed views of economic development, as described initially in our opening chapters. They represent the most extreme positions in the argument over industrial policy in the developed world: pure free markets versus heavy state involvement. There is plenty of public support for an untrammeled entrepreneurial approach. Free-market advocates insist that the US government (and by extension governments in other free-market countries) should stay out of the markets and let entrepreneurs chart their own course. According to these proponents, “The country needs to unleash entrepreneurs, who will only be held back by tax-funded make-work projects.”

Others question the efficacy of this approach. They believe that the idea that “entrepreneurs are the foundation of the [US] economy” is a myth,3 and that the US and other free-market countries might be better off with a targeted industrial policy to ensure the growth (and protection) of domestic industries, particularly new ones based on domestic innovations. A better way to frame the argument is to ask the following question. Is it realistic to believe that government planning, supported by taxpayer money, can force-feed industrial innovations into the commercial marketplace? Can it totally replace the more chaotic but much more flexible and dynamic entrepreneurial process? As an approach to answering this question, it is worth keeping in mind the observations of Nassim Taleb in his book The Black Swan,4 in which he summarizes the views of Nobel Laureate economist Friedrich August Hayek, a famous proponent of the free market For Hayek, a true forecast is done organically by a system, not by fiat. One single institution, say, the central planner, cannot aggregate knowledge; many important pieces of information will be missing. But society as a whole will be able to integrate into its functioning these multiple pieces of information. Society as a whole thinks outside the box. Hayek attacked socialism and managed economies.

Owing to the growth of scientific knowledge, we overestimate our ability to understand subtle changes that constitute the world, and what weight needs to be imparted to each such change. On a theoretical level, then, there are limits to what can be done with “top-down” economic planning. Hayek suggests that any attempt to dictate a national approach to a dynamic market will be unsuccessful in the long run. Instead, the most productive strategy  for fostering economic growth is likely to be the creation of national policies that focus government on what it does best, leaving private capital and entrepreneurs to areas where they function more efficiently. We will clarify the dividing line between these two spheres by looking at some examples of government actions and their outcomes.

Government as entrepreneur

On the face of it, it seems like a good idea to have the national government fund the creation of industries around promising technologies in the hope of expanding the economy and building exportable products. Proponents of this approach envision using subsidies and other incentives to accelerate the growth of the chosen industries.

This would be done in partnership with private industry if possible€– and without it if private funding is not available. This may sound familiar because it is an old idea. We encountered it in our discussion of Colbert, who targeted growth industries for seventeenth-century France. China runs a modern version of the strategy. Although this approach can achieve quick success, it usually runs into trouble later on. The availability of “easy” state money spawns enterprises with uncompetitive cost structures. They become too far removed from the discipline of the competitive marketplace to achieve profitability. Bereft of entrepreneurial management, companies built on this model risk becoming permanent wards of the state. This actually happened in Colbert’s France. There is a bigger problem with this approach: it too often fails, especially when newer technology is introduced. We can understand why when we contrast industrial development with infrastructure and defense, two functions crucial to economic growth and stability that governments can carry out quite effectively.

Infrastructure (roads, airports, and water and power utilities) is convenient for the citizenry€– and absolutely necessary for industrial development. Likewise, defense programs uphold national security€ – and also spur the growth of industry by underwriting R&D programs. Even the most radical proponents of limiting the power of

government would agree that both of these activities are the rightful province of the state. Governments are the only entities with the resources to plan and finance such sweeping programs. They are also dealing with known quantities: it is relatively easy to project infrastructure requirements and forecast future defense needs.

Deciding which new innovative industries to subsidize, on the other hand, is a far less certain undertaking than determining when and where people will need roads and sewers. It is nearly impossible to predict future market trends and competitive threats with any great degree of accuracy. As a result governments are notoriously poor at picking winning new commercial industries for long-range development. Such attempts have often generated disappointing results.

 Long-term planning, longer odds

There is another reason why governments have such a poor track record in planning technology industries: the nature of their A decision-making process. They are not the only entities affected by this shortcoming. It is common in large corporations as well.

As can well be imagined, thousands of planning meetings take place every day in large organizations around the world, with committees deciding economic and technological matters large and small. Whether these meetings occur in the government bureaucracies of planned economies or in the boardrooms of large corporations, one thing is certain. Lone visionaries, even if present, have little chance to influence the ultimate decision. In addition, most of the people in the room will be far removed from the actual technologies under discussion.

 Targeting growth industries: Government teams with the private sector

When state initiatives to develop new industries fail, it is the taxpayer who foots the bill. Where the government has recruited private capital and entrepreneurs to join such initiatives, however, the economic effects are amplified. Entrepreneurs and their investors are left stranded along with the taxpayers, potentially affecting the availability of funding for other, more promising innovations. Three US government “clean energy” programs illustrate how this can happen. Clean energy is currently one of the most popular areas for investment, so it was easy to persuade private investors and companies to participate. All the programs were targeted at reducing fossil fuel consumption and controlling greenhouse gas emissions, though in very different ways. Two programs addressed the electrical utility industry, while the third subsidized sales of hybrid electric automobiles. Of the two programs targeting electric utilities, the first

sought to replace non-renewable fossil fuels (oil and coal) in power plants with biomass (wood and other organic materials). Biomass was touted as a “clean” and renewable energy source. The other program aimed to build a so-called “smart grid” to improve the efficiency of the electrical power distribution network. With a more efficient grid, the electric industry could meet the demand for power with less fuel. Both programs had the worthwhile goal of reducing the amount of CO2 spewed into the atmosphere by generating plants.

Industrial planning vs. technology funding

Up to now we have looked at the difficulties of industrial planning. We have also reviewed the dismal record of planners and prognosticators in accurately predicting which technologies would prove successful in the marketplace. Fortunately, there are positive aspects to the planning process. These include government policies that recognize how important entrepreneurship is to economic development. As observed before, entrepreneurs do not generate new businesses in a vacuum. They need access to intellectual property developed by others on which to base product offerings. They have to identify and exploit promising new markets, develop funding sources, and attract talented employees. And contrary to myth, they rely heavily on the infrastructure, resources, and business environment established by government. Even in free-market countries like the US, the government has more involvement in the development of new industries than most people realize.

We saw how David Sarnoff took advantage of cooperation between the US government and private companies in the 1920s to create the broadcast industry as we know it. Without the original government initiative to establish RCA, he would not have had the opportunity. Of the entrepreneurial innovators we cover in this book, Sarnoff is the earliest by some sixty years. But he took full advantage of government policies and funding, and US entrepreneurs have followed his path right up to the present. To prove the point, consider a prominent example from our own era: the digital industries pioneered in the US after World War€II. Everyone talks about the famous entrepreneurs who created iconic companies such as Apple and Microsoft, but few mention that these and many other enterprises had their genesis in technologies developed under government-sponsored R&D funding. Many of the companies we discuss in this book replicate the pattern.

The technology that underlies RMI, RDA, and SanDisk can be traced to government-funded initiatives if you go far enough into the past. In the case of Ness Technologies, the roots of some of the technologies it commercialized can be traced to work sponsored by the governments of Israel and other countries. This research was conducted under government funding in

universities, national laboratories, and private industry, and originally may have been targeted at applications in the defense and space programs. But somehow the resulting technologies, developed in unrelated settings for different purposes, found their way to the world market. The results were spectacular: the creation of new electronics, computer, and telecommunications industries that have literally transformed the way people live, work, and communicate.

In this article we will examine

• What researchers and managers in R&D company do, and
• The way we can tell how well they do it.

We will also discuss the need for focusing less on “appraisal” (evaluation, judgment) and more on employee contribution to the company. Accepted wisdom would suggest that for a business company to function efficiently and effectively, the employees must work well toward meeting company goals and objectives. From a manager’s point of view, it would seem prudent to reward those employees whose performance contributes to company success.

Logically, performance appraisal systems need to be designed to motivate employees to improve performance and thus contribute to company productivity, effectiveness, and excellence. In practice, there are many problems. Few management activities have challenged and intrigued executives as much as performance appraisal has. To some, appraisal suggests supervisors sitting in judgment as “Roman emperors.” To others, performance appraisal is thought of as a method of manipulating employees and intruding into their lives.

SOME NEGATIVE CONNOTATIONS OF PERFORMANCE APPRAISAL

The problem may lie in the negative connotations of the words “performance appraisal.” Appraisal implies evaluation and making judgments as to the quality and quantity of an individual’s productivity. To make such an evaluation or a judgment, a certain yardstick has to be available to ascertain whether the individual has measured up to the performance level envisioned by the evaluator. How is one to compare the performance of one individual who has clearly exceeded the low standards he set for himself versus another individual who failed to meet the rather difficult standards she set for herself? Dimensions associated with the yardstick are variable, and procedures available to evaluate many of these dimensions are subjective and often not well understood by the employee or the supervisor.

 DIFFICULTIES WITH EMPLOYEE APPRAISAL

When a supervisor appraises a subordinate, the process of appraisal can be analyzed as follows. First, the supervisor must have observed some performances. However, such observations in the case of R&D personnel are unlikely to be sufficiently coherent to be valid. If the supervisor were to observe a simple operation, he might be able to judge it. But R&D work is complex, and doing any one thing well is unlikely to provide a clue to the total performance. Thus, rather than observe an individual’s specific performance, the supervisor is much more likely to observe large chunks of performance, such as the presentation of a research plan or the completion of a project. Usually these are products of groups rather than individuals. It then becomes difficult to know how much the particular scientist has contributed to the group product.

Second, the observations must be integrated into some sort of “schema.” Unfortunately, there are several biases in the formation of such schemata. For example, research has shown that first impressions are extremely important. If the scientist has a good reputation, many acts that are ambiguous will be evaluated positively. Also, recent events tend to be given more weight in the formation of such schemata than events that occurred during the middle of the period of observation.

The fact that negative events are given more weight in such judgments than positive events creates a further bias. If the supervisor has observed ten events, and eight are positive and two are negative, the negative ones will be given more weight because they “stand out” as “figures” against the “background” of the eight positive events. This is because in our own lives we generally encounter few negative events, but when we do they are major negatives (e.g., loss of loved ones). On the other hand, although we encounter mostly positive events, they are seldom major positive events (e.g., getting married, winning a million dollars), and so we become especially vigilant about the negatives.

 PERFORMANCE APPRAISAL AND THE MANAGEMENT SYSTEM

Performance appraisal needs to be linked to the managerial activities and the management system. It  has categorized the management system into two distinct areas: The process of management includes activities such as planning, organizing, controlling, budgeting, and staffing, and the key orientation of these processes focuses on integrating (work activities), making decisions, recording information, motivating, and negotiating. The function of management includes procurement, production, adaptation, and so on. The orientations of these functions are adaptability, productivity, efficiency, and bargaining.

The managerial processes are concerned with the administration of inputs, while the managerial function deals with the way inputs produce outputs (production) that are important and relevant to the organization. Managerial processes respond to day-to-day problems, and primarily involve problem solving. The managerial functions, on the other hand, are concerned with prescribing specific operations, procedures, and standards for achieving a certain level of production or output.

PERFORMANCE APPRAISAL AND ORGANIZATIONAL STAGES

Some of the purposes of performance appraisal relate to management control and to achieving the congruence of organizational and individual goals and objectives. Management control and strategies for goal congruence also depend on

• The stage of development of the organization, and
• Several other factors such as the technology of the organization.

It has defined four stages of corporate development in terms of “the structure of operating units” (dependent variable) and “product-market relationships” (independent variable).

 In a general sense,

At Stage 1, the organization has a single operating unit, producing a single line of products on a small scale.

 At Stage 2, operating units increase and production becomes large scale, but the focus is still on a single line of product.

 At Stage 3, operating units may be at different locations and decentralized, each producing different or related products using multiple channels of distribution.

 At Stage 4, the number of autonomous units producing different products increases. Basically, as organizations move from Stage 1 to Stage 4, the number of autonomous operating units increases,

These units become geographically decentralized, and the operating units produce technologically different product lines or research outputs for diverse markets using multiple channels of distribution. As this development progresses the number of variables related to organizational products, operational centers, and market relationships increases. This would also point to the organization increasing in size (number of employees and volume of sales or the size of the research budget); it may, in some cases, lead to an increase in assets and profits. Management control at each of these four development stages is different. At the earlier stages, the organization is small, and one owner or director can oversee most of the activities. At later stages the organization grows in size and in number of products and may also be geographically dispersed.

 As authority becomes decentralized, performance elements need to be designed differently, depending on the development stage of the organization. For example, performance elements could be less formal during the early stages of development and more structured and quantitative later. This approach was successfully used by Salter for four high-tech electronic firms. It should be used also by managers whenever they are setting up an appraisal system. Start by analyzing your situation. In what stage is your laboratory? Then design a system that fits your stage.

 PERFORMANCE APPRAISAL AND COMPANY PRODUCTIVITY

Company productivity can be defined as the ratio of outputs to inputs. Inputs can be determined by the level of resources invested. Outputs can be conceived as income minus costs. For a profit-making organization, profitability can provide a good measure of the organization’s productivity. We must keep in mind that behavior is shaped by its consequences. If we want specific behaviors to occur, we need to use an appraisal system that rewards them when they occur. Output measures for a research organization can be subjective or objective, quantitative or non quantitative, and discrete or scalar and can include some measure of quality. While the measurement of quality requires extra effort and, at times, human judgment, this dimension of output should not be ignored. Since R&D organizations have multiple objectives and their outputs are often incommensurate, the output measures are usually non quantitative and subjective. Quantitative measures for the output elements are usually in different units, thus defying precise comparison between different quantitative outputs. It suggests that it might be feasible to combine a multidimensional array of indicators into aggregate units, which could then provide trends, indicators, and patterns of the individual (and organizational) output measures. One suggested categorization of output measures includes the following:

• Process measures (related to activities carried out in an organization; useful for the measurement of the current, short-run performance)
• Result measures (stated in measurable terms; end-oriented)
• Social indicators (stated in broad terms, related to overall objectives of the organization rather than specific activities; useful for strategic planning)

PERFORMANCE APPRAISAL AND MONETARY REWARDS

Giving monetary rewards to those who perform well seems logical enough. In an acquisitive and consumption-oriented modern society, higher pay satisfies basic human needs and more. For an individual, receiving monetary remuneration above what is required for basic human needs can also provide security, autonomy, recognition, and esteem. The motivation model, generally referred to as the expectancy model, suggests that high performance is likely to occur if the individual feels capable of achieving it, if pay is closely tied to performance level, and if the individual finds pay to be important (this would of course vary across individuals). In a research and development organization, indeed in most complex professional organizations, a number of reasons make tying pay inexorably to performance appraisal an imprudent approach:

• Significant accomplishments in an R&D company often require input by many individuals. Singling out one person for a monetary reward creates the problem of inequity for others.
• The purpose of performance appraisal shifts, on the part of the supervisor, to justifying the pay decision already made, and, on the part of the employee, to comparing himself or herself to others and shaping his or her performance data to outdo others.
• Cooperation among peers is reduced because of competition for pay for performance, where total monetary rewards are viewed as a zero-sum game.
• During performance appraisal the employee is likely to exaggerate (some might suggest falsify) his or her performance to gain higher monetary rewards. This would not create the proper environment for counseling and feedback—two of the important purposes of performance appraisal.

IMPLEMENTATION STRATEGY WITH EMPHASIS ON EMPLOYEE CONTRIBUTION

The preceding discussion identified some of the underlying issues associated with the performance appraisal system. Commenting on performance appraisal,  states that “few things have been more baffling to managers than the results of their attempts to develop workable performance measures and controls, thus channeling the energies of their employees towards the firm’s objectives.” Recognizing that many complex issues are involved in implementing a meaningful performance appraisal system, it is nevertheless useful to focus on three items:

• What an individual’s performance depends on
• Why performance appraisal is needed
• A suggested strategy

Which styles of leadership bring out the best performance in a company, department, team, or project? Finding the perfect way to manage knowledge workers remains elusive. The study of leadership, however, has proposed a variety of approaches. Some researchers have spent a good deal of time observing the behavior of groups and the emergence of leaders. As a result, they have seen that the activities of leaders fall into two general categories. The first involves maintaining (M) the group by paying attention to the needs of the members and making sure that conflicts do not become serious.

The second involves the actual task that the group must perform (P), the definition of the task, how and when it is to be done, and so on. We can label these two types of activities consideration and structure. “Consideration” involves paying attention to people, being considerate of their needs and goals, being employee-oriented, and paying attention to the human factor. “Structure” refers to what is to be done and to where the group is going. What is to be accomplished? How is it to be accomplished? How can the activities of the members be controlled?

For each job setting, the identified behaviors that are P or M for that particular job. What fits one laboratory does not necessarily fit another. The talks to people in the job setting and asks each subordinate to describe the behavior of the leader and rate him or her on their M or P behaviors. The uses the symbols M and P for those who use many behaviors, and he uses m and p to indicate that the leader does few maintenance or production behaviors. This way, in each setting, The identified four kinds of leaders:

mp = little maintenance, little production

mP = little maintenance, a lot of production

Mp = a lot of maintenance, little production

MP = a combination of high maintenance and high production

An interesting finding is that a leader who is high in production behaviors and also does many maintenance behaviors is seen as providing “planning” or “expertise;” but the leader who does a lot of production behaviors and few maintenance behaviors is perceived as “pressuring for production.” Pressure for production is resisted. In short, the same behavior (production) is perceived differently depending on the context within which it appears.

In different cultures the behaviors that express M can be quite different. Research has shown, for instance, that “to criticize a subordinate directly, privately in your office” is seen as high M in the West and low M in Japan. In Japan one is supposed to criticize indirectly—for instance, by asking a colleague of the subordinate to convey the manager’s criticism to him or her—so that the subordinate will not lose face. People who observe groups note that leaders may specialize in one of these activities or may sometimes engage in both; or in the case of “great leaders,” they will perform both activities with great frequency. First providing general theory and then focusing on a company , this article covers:

• Theories of leadership and leadership styles
• Leadership in R&D organizations
• R&D leadership—a process of mutual influence
• A leadership style case (where the problem of abdication style of leadership is presented)
• Leadership in a creative research environment.

IDENTIFYING YOUR LEADERSHIP STYLE

In characterizing the behavior of their supervisors, subordinates used similar ideas—for example, bossy or structured versus people-oriented or considerate. Similarly, when leaders are questioned, some claim that they pay attention to people and others say they focus on the task. As it turns out, however, the distinctions are not so clearly drawn. Extensive research by Fiedler (1967, 1986a) found that some people are task-motivated

when they are relaxed but person-motivated when they are under stress, while others show the opposite pattern—that is, they are person-motivated when relaxed and task-motivated when under stress. It might be useful to find out for yourself what kind of leader you are. To do that, look at Fiedler’s instructions in “Identifying Your Leadership Style” (Fiedler et al., 1977).

THEORIES OF LEADERSHIP AND LEADERSHIP STYLES

No leader can afford to ignore M and P behaviors. Ideally, leaders should do a lot of both. Supervisory behavior style impacts employee performance.

However, there are other leadership theories that suggest that in some situations the leader should emphasize one or another even more than is usual. Another way of looking at leadership is to say that the leader is supposed to supply what is necessary for the followers to reach their goals. This is called the path–goal theory of leadership. Basically, this theory argues that the way a leader acts should be determined by what the followers need. For example, if the followers do not know how to do the job, then it is necessary for the leader to be very structuring. If the followers have several needs that are not being met, then it is important for the leader to be especially considerate.

Consider the following different kinds of leadership styles:

1. The directive style, in which the leader simply makes the decision and tells the subordinates what to do.
2. The negotiator style, in which the subordinates give the information that the leader needs in order to make the decision, but then the leader makes the decision.
3. The consultation style, in which the leader asks for information and suggestions on what to do and makes the decision on the basis of these suggestions.
4. The participative style, in which the subordinates provide information and suggest solutions, the leader negotiates with them, and together they reach a mutually satisfying agreement and the best decision.
5. The delegation style, in which the leader provides information to the subordinates about the problem and suggests possible solutions. The responsibility for the decision is ultimately given to the subordinates. In this case, the leader does not even ask the subordinates to report what solutions were adopted.

LEADERSHIP IN R&D ORGANIZATIONS

While P behaviors of the leader are needed, most leaders do P, but many do not do enough M. M behaviors are especially important in R&D labs. However, subordinates still require a certain amount of guidance from the manager; otherwise their activities will become unrelated to the needs of the company have shown that when there is either excessive or insufficient autonomy, the contributions of the professional to the research organization are minimal. An intermediate amount of autonomy provides optimal conditions for the professional. Only then can the contributions of the scientist to the company be maximized.

Leadership in an business company is essentially a process of mutual influence between the supervisor and the employees. Knowledgeable workers don’t work toward a goal because someone else has set it. They work toward it because they believe that it is right. To bring a knowledge worker on board requires using multiple leadership styles. Based on mutual influence, Farris suggests four styles of leadership or supervision:

• Collaboration: Both the supervisor and the employees have a great deal of influence in making decisions.
• Delegation: The employees are given considerable responsibility for the decisions, and the supervisor has little influence.
• Domination: The supervisor has a great deal of influence, and the employees have very little input.
• Abdication: The supervisor neglects to assign a particular task to the employees and neglects to work on it himself. In this case, neither the supervisor nor the employees have much influence on a particular decision.

 Leadership Style

The leadership style is a combination of abdication and delegation. All technical responsibility is delegated to the department heads, integration at the division level is minimal, and responsibility for decisions normally made at the division level is abdicated and passed on to a higher level—the laboratory director, Dr. Cole. His views are sought and essentially all decisions normally made by the division director are in fact made by the laboratory director. The behavior pattern of the division director is characterized by his readily admitting lack of technical competence, building strong alliances with selected research divisions, degrading division directors who may have distinguished scientific records, doing what the laboratory director, Dr. Cole, wants him to do, getting marching orders on all division operations from Dr. Cole, and taking zero risk.

 Organization Performance

The company performance is fair. Increasingly, emphasis is on technical assistance instead of research. Innovative research programs never reach fruition; they are downgraded to technical assistance activities.

Leadership Problems

Clues to the existence of the problem manifest themselves via the leadership style and the behavior pattern in the division director and via lack of substantial innovation by the division over the years.

Organization Response

A company can cope with such problems in a number of ways. Before discussing that, it might be useful to see how such a situation arose.

 LEADERSHIP IN A CREATIVE RESEARCH ENVIRONMENT

In a business company, a person holding an important leadership position would normally have a significant business program. In many U.S. government departments and in industry, some individuals have oversight responsibility for the business Company, although they are not involved in business program execution. It is therefore useful to focus on those leadership and managerial aspects that are directly involved in managing and executing an important business program involving a significant number (say 50 or more).