Presentation for ITK B54 – Research Seminar on Software Business By Peter Törnroos 20.5.2003

1. Presentation of my Bachelor’s thesis on ”Key success factors of small software firms” and an overview of article:”Implementing enterprise resource planning and knowledge management systems in tandem: fostering efficiency and innovation complementarity” Presentation for ITK B54 – Research Seminar on Software Business By Peter Törnroos 20.5.2003

2. Key success factors of small software firms - Outline • Introduction • Identifying key success factors • Importance of small businesses • Key success factors of small software businesses • Flexibility • The importance of leadership and software talent • Networking • Customer relations • Operational efficiency • Challenges of small software businesses • Uncertainty • Internationalization • Corporate venturing • Literature and research of small businesses • Conclusions, Criticism and Discussion

3. Key success factors of small software firms - Introduction • This part of the presentation is based on my bachelors thesis of the same topic • In this presentation I will also bring up issues that I had to left out from my bachelors thesis and give an overview of small businesses

4. Identifying key success factors • In my thesis key success factors are defined as factors that are critical for best performance, rather than performing good enough to keep alive (critical success factors) • There are many buzz words that have in some extend the same meaning • sticky factors vs. key success factors (same meaning according Ketelhöhn) • essential competencies, plain competencies, core competencies, spillover competencies, protective competencies, parasitic competencies • are all these buzz words really needed? • There are KSFs for everything • product launch • brand management • anything that challenges an organization • In my thesis the context is small software businesses

5. Importance of small businesses • Many governments see small software firms as important employers and builders of international competitiveness of future and therefore support their efforts (Ireland as a good example for supporting high-tech start-ups) • Small software businesses: • Bring healthy competition • Introduce markets new ideas and solutions • Software embedded in the products and services of other industries • Can occupy positions that larger firms can’t economically enter or dare not go, expect by corporate venturing • The importance of small software companies is indicated by an Austrian study which states that micro enterprises account for 55,7 per cent and small-to-medium enterprises 32,2 per cent of the Austrian software organizations

6. Nature of software business • Fierce competition • Technologies change fast, industry evolves rapidly and in unexpected ways • High uncertainty over markets and technology

7. Key success factors of small software firms

8. 1. Flexibility • One main reason for the success of small companies • Possibility to adapt rapidly to new circumstances and tap opportunities • Identifying new opportunities and market niches • When focusing on market one has to be able to change the direction of the company when things go wrong

9. 2 The importance of leadership and software talent • small firms core employees consists of managers that usually own the company • Low hierarchies between employees • Important characteristics of business leaders • previous experience on technology • knowledge of the industry • experience on entrepreneurship • Successful leaders identify opportunities that others can consider as too high risks or do not believe in them • developing new innovative ideas one must take risks • Downside of taking risks are mistakes • mistakes can be corrected and they need to be corrected fast to steer the company in more successful direction

10. 3 Networking • The most important challenge for SMEs’ is their lack of resources • Resources can be gained through networking and partnering • Previous working relationships, families, friends and acquaintances are important sources of advice and information • There is great number of mechanisms of how to relate to external organizations

11. Other key success factors • Importance of customer relations • The research of “tiger” SMEs in Singapore identified good client and customer relationships as the sixth important KSF • Frequently satisfying customer needs (identifying and meeting) • Alliances and concentrating on few customers for better communication • Operational efficiency • “Any system, like any argument, is as strong as its weakest link” (Ketelhöhn in “What Is a Key Success Factor?” ) • The resources that small software businesses have offer the opportunity to grow and perform well, but they have to be exploited thoroughly in order to achieve good results

12. Challenges of small software firms

13. Uncertainty • The uncertainty of markets presents challenges for high-tech SME’s and larger enterprises respectively • Uncertainty can be derived into two categories • The buyers can be uncertain, because they don’t have experiences on the product and • Certain market circumstances such as heterogeneity and chancing technologies set requirements for customer’s ability to handle information

14. What needs are fulfilled by the technology? How big is the potential market? How will the needs change in the future? Market uncertainty How fast will the innovation spread? Will there be market standards? Sources for market uncertainty

15. Does the product work as promised? Does the know-how become obsolete? Technological uncertainty Does the time of delivery hold? Does the supply have any side effects? Is the service of high quality? Sources for technological uncertainty

16. Internationalization • Internationalization is brings both opportunities and a threats for small software businesses • Opportunities • Larger market share • More sources for revenue:”thicker skin” against market ups and downs (European companies face problems derived from small markets and cultural issues) • Low barriers • Threats • Brings competition to local markets from foreign companies

17. Corporate venturing • Can be seen as way for larger companies to compete against smaller players • Ventures have the same structure as a small company would have • Can compete in the same markets, which are usually niche markets • Develop software for small market, can be highly specified user group, such as professional software • Brings a high threat to smaller companies, because ventures have the financial and other resources to back their business by the big corporate

18. Literature and research of small businesses • There isn’t much research done from the small businesses point of view even though there is no arguing that small firms are important for the development of software business and economy • The issue of lack of previous literature is stated in many research articles that I have studied • Perhaps my master’s thesis will give a contribution to the field of small businesses • Preliminary topic: “Networking of high-technology firms: A technology and resource based view”

19. Conclusions • There are KSFs for everything: industry, strategies and company itself • KSFs have a substantial impact on the success of a company • The most important KSF of small software firms is their ability to adapt to no new circumstances rapidly • Small software firms encounter challenges derived from their limited resources • Can be tackled by networking (gaining resources) • Mastering only KSF isn’t enough for a company to be successful; they just prepare the company for the fierce competition

20. Criticism on the thesis • KSFs that are identified are universal in nature and don’t reflect software SMEs in depth • KSFs are drawn from a wide variety of literature and they have a major impact on the way issues are discussed • literature of KSFs from other industries • nature of software business differs greatly from traditional industries • I have only theoretical base to understand software business and I cannot in depth compare how these KSFs would be adopted to practical level of doing business

21. Criticism on the thesis (cont.) • I identified an important KSF that is flexibility and adapting rapidly to new circumstances • literature I reviewed didn’t address this factor directly and this is why that issue wasn’t discussed in depth in the thesis • As the emphasis was on identifying KSFs the number of these factors made it impossible to discuss each factor in depth • Internalization is left out in order to keep the information manageable for this sized thesis • Keeping the talent in house can be a major challenge for a small software firm, but the current situation in Finland seems to be that there are a lot professionals out there in the field of IT

22. Discussion • Even though it is widely identified that SMEs are flexible there are also researchers that don’t agree • Naumanen, M., 2002. Nuorten teknologiayritysten menestystekijät • Current situation of economy and the shape of IT field • more small businesses • more possibility to tap

23. Implementing enterprise resource planning and knowledge management systems in tandem: fostering efficiency and innovation complementarity • Authors • S. Newell, J.C. Huang, R.D. Galliers and S.L. Pan • The paper examines the simultaneous implementation within a single organization of two contemporary managerial information systems: • Enterprise Resource Planning (ERP) and • Knowledge Management (KM) • The study is done through interpretative single case method

24. Introduction • In this part of the presentation I will discuss the conceptual framework and findings, leaving out the case description • I will emphasize the findings on organizational efficiency and flexibility of the study • Implementation of multiple systems is likely to produce effects that differ from implementing a single system • The focus of the paper is to investigate the simultaneous implementation of IS/IT concepts • ERP and KM • As both ERP and KM systems are currently being widely implemented across organizations in all probability they are implemented simultaneously or at least their implementations are overlapping

25. Characteristics of ERP • Enterprise-wide packages that tightly integrate business functions into a single system with a shared database • Comprehensive software solutions that integrate organizational processes through shared information and data flows • ERP systems can play an important role in increasing organizational competitiveness through improving the way in which strategically valuable information is produced, shared and managed across functions and locations • ERP systems are promoted as systems that will improve organizational efficiency through both enhanced information capture and organizational redesign around defined best practices

26. Characteristics of KM • KM systems emphasize how firms can enhance competitive advantage through more effective utilization of their knowledge assets • Achieved by free flow of knowledge across organizations • Different approaches to KM • Personalization and codification strategy • Firm cannot be strong in both (80-20 rule) • Personalization: face-to-face communication • Codification: transferring documents through IT • Cognitive and community approach • Cognitive: transfer of explicit knowledge where users have common understanding • Community approach: sharing of tacit knowledge in case of multi-disciplinary teams

27. Characteristics of KM (cont.) • Distinction between personalization/community approach promote either efficiency or flexibility • First generation KM • Emphasize on dissemination, imitation, and exploitation • Second generation KM • Emphasize on education, innovation, and exploration • Focus shifts from the supply of knowledge to creation and maintaining knowledge • The case company was very much within the frame of the second company

28. Background on efficiency and/or flexibility • The trade-off between efficiency and flexibility is perhaps the most enduring in organization theory • Mechanistic structures are characterized by high degrees of standardization, specialization and hierarchy; organic structures structures are characterized by low degrees of each of these aspects of structure • These opposing structures have formed the idea that organization either had to focus on efficiency or flexibility • There are now a few writers who haw suggested that it is possible to be both efficient and flexible at the same time • Term used: ambidextrous (using both hands)

29. Mechanisms for ambidextrous organizations • Metaroutines • Routines to standardize internal processes that focus on flexibility or innovation • Non-routines to more specified processes • Job enrichment • Motivation potential is increased • Through increased autonomy and responsibility • Giving flexibility to routine tasks • Switching • Person is given time to spend on non-routine tasks and then switched back to routine tasks • Partitioning • Divisions of tasks that are defined to certain group of the organization • E.g. R&D focuses on innovation while production department focuses on efficiency

30. Objectives of the company

31. Research findings • Both systems were judged by organizational members to be successful • Within Company A the ERP and KM initiatives were complementary rather than contradictory • Each system was designed and implemented for clear managerial purpose • Managing organizational information to improve efficiency or knowledge to improve innovation

32. ERP and KM initiatives • Implementation of SAP (the selected ERP system of the company) has drastically improved the time to produce and gather critical information for strategic decision making • Help in effective coordination activities from SAP • The implementation of KM was found to facilitate the effective and systematic exploitation and exploration of knowledge • Both intra- and inter-organizationally • Improved continuous learning from past actions • Organization of innovation communities created an environment where products and processes were constantly under evaluation • Involvement of retired engineers and suppliers

33. Organizational efficiency and flexibility • Impact of implementation of ERP and KM to suggested mechanisms (transparency) in Company A • Partitioning • Pre-existed in Company A and had not really been influenced by the ERP and KM initiatives • On the other hand efficiency and flexibility were achieved achieved simultaneously by different divisions • The KM initiative had opened up opportunities for improving flexibility even in divisions where efficiency was the primary goal

34. Organizational efficiency and flexibility (cont.) • Metaroutines • Both ERP and KM appeared to promote the enactment of metaroutines • Adoption of ERP enabled standardized activities of information processing and management • New organizational processes were designed and implemented to maximize the potential of ERP • The KM initiative transformed continuously non-routines to routines while ERP stopped this process once the system was implemented and solidified processes

35. Organizational efficiency and flexibility (cont.) • Job enrichment • The ERP system hindered enrichment because it encouraged process dependencies on pre-defined routines • The ERP system did not take into account non-routine tasks • Maximized efficiency with the cost of flexibility • The KM initiative encouraged innovative communities to generate knowledge on non-routine basis • Forming of various pilot teams for process and product innovation

36. Organizational efficiency and flexibility (cont.) • Switching • The ERP system also hindered switching activities in some divisions • E.g. The Product division has to have standardized activities to accomplish following advantages: • Predictability • Feasibility • Efficiency • The KM initiative encouraged switching in particular through involvement in training and participation in innovation communities • Ability to exchange, reassess and refine what he had learned in routine work

37. Conclusions • The study has demonstrated how a particular organization was able to promote both flexibility/innovation as well as efficiency • ERP and KM initiatives revealed that the two systems can be successfully implemented in tandem • While ERP emphasizes the improvement of information processing efficiency, KM can facilitate the simultaneous development of organizational knowledge exploration and exploitation capability

38. Criticism • The study did not discuss in more depth that should different divisions implement both ERP and KM • E.g. is there any use for KM in the production department and if it is implemented, what should be the proportion between the use of ERP and KM in daily routines and activities (80-20 rule)