No. 11/2014
Policy Brief: Finding a needle in a haystack – Do strategic choices help in recognizing the best and the brightest firms? Summary of the ReInRe ‐research project
How successful firms shape the renewal of manufacturing in selected industries? In the ReInRe ‐research project we focus on recognizing successful firms and comparing their strategic choices to their peers. We aim at investigating how successful firms shape the renewal of manufacturing in selected industries. Accordingly, we define the potential for industry‐level renewal based on the firm‐level prevalence of new methods and processes of production, such as the use of new technologies, strategies supporting learning and resource reconfiguration, and firms’ innovation capability. These manifest the entrepreneurial behavior as firms’ strategy. More specifically, the ReInRe‐project aims at: How entrepreneurial strategies influence firm‐
level success, and do they lead to industry‐
level renewal? Name of the project: Renewal of manufacturing – Study on the role of pioneering firms as engines of industry renaissance (ReInRe) Authors: Pekka Stenholm Jouni Saarni Elisa Akola Jarna Heinonen 1) Exploring the strategies of successful (pioneering) firms and their peers in selected industries. 2) Investigating the deeper insights of the agents of change (firms) and what kind of relationship they have with their socio‐technical and institutional surroundings. 3) Assessing the role of pioneering firms and their peers in the industry‐level renewal. We concentrate on food industry and industries related to ship building both of which are vital for the Finnish economy, and which have faced on‐going change. Empirically the project comprises two intertwined phases: quantitative analysis and qualitative studies which cover both case studies and workshop‐based data collection. Our findings this far suggest that firms’ strategic choices, which are assumed to enable above the average performance, seem not to be enough robust predictors of business performance over time. Even if some differences were found, they were not statistically significant. That being said, predicting the industry‐level change from the strategies of successful and less successful firms is not straightforward. Instead, our findings illustrate how firms, despite their categorization, emphasize different strategies that generate varying financial performance. Moreover, the findings suggest that strategies are not stagnant, but instead they need to be revised, adapted or sometimes even improvised in order to find a way to overcome barriers of success (see Eisenhardt et al., 2000). Based on the above our findings highlight that in policy making the cherry‐picking might not work (see Shane, 2009). Even if directing public policy interventions to the best and the brightest makes sense while the public finance is limited, the on‐going challenge stems from the difficult decision: To whom the public support should be directed at? Our findings highlight that it is difficult if not even impossible to find robust predictors of business performance which could later ease the pain of public policy making. In between the question remains: Where should policy makers look at if they are willing to picking up the winners among a certain population of firms? Tekesin Ohjelmatoiminnan strateginen tuki -yksikkö tuottaa innovaatioympäristöä palvelevaa tutkimusta
teemakohtaisilla hauilla. The importance of firms in the industry renewal The actions of successful pioneering firms amplify the renewal of industries. Instead of looking at the past financial numbers, the analysis of firms’ future potential could employ an investigation of strategies: At least firms themselves should know what and how they are doing and with which resources. We define the potential for industry‐level renewal based on the firm‐level prevalence of entrepreneurial strategies. The renewal of industries stems from the success of industries’ viable firms. They bring innovations to the marketplace, which facilitates their growth and prosperity across industries and later in the society (Alhstrom, 2010). This very activity––the actions of successful pioneering firms, disruptors launching novel products, services, or processes to market––amplifies the renewal of industries. Thus, in order to remain competitive, each firm, to a certain degree, has to match their skills and strategic choices to the requirements of an industry (Porter, 1985). However, there are increasing number of global examples such as, Skype, Amazon, Über, and AirBnB to name a few, which illustrate how novel ways of doing things can initiate enormously rapid changes within and across industries. Business environment is characterized by increased uncertainty, decreased ability to forecast, blurring firm and industry boundaries, and managerial mindset that pursue sensing, responding and even creating change (Eisenhardt et al., 2000). On the other hand, antecedents of change may arise from factor external to a certain industry: In the time of crisis, such as economic downturn, many requirements for renewal may arise. During the downturn less efficient firms are disbanded and firms with no tendencies for renewal will be downsized (Florida, 2010), while at the same time the turbulence can foster capitalization of innovations and lead to above‐average returns (Eisenhardt et al., 2000; Schumpeter, 1934). Whether the change is generated voluntarily or involuntarily within or outside of a particular industry, firm‐level regeneration of skills and capabilities is highly necessary for industries to evolve. Baumol (2002) essentially proposed that innovation has become a life‐or‐
death matter for established businesses in free market economies. Previous research shows that firms willing to exploit new business opportunities by obtaining entrepreneurial actions play an important role in the process of technological change amplifying innovations and the renewal of industries (Acs & Audretsch, 2005). These firms play a key role in diffusing the technological changes and novel knowledge into the industry via new products and processes (Acs et al., 2008). However, recognizing these entrepreneurial firms beforehand is challenging. In a business environment characterized by uncertainty predicting firm’s future performance from current or past financial numbers is ever‐challenging. Instead of looking at the past business numbers, the analysis of firms’ future potential could employ an investigation of firms’ strategies: Firms themselves should know what and how they are doing and with which resources. If skillful enough, firms are able to adjust their strategies and resources according to the changes in their environment. And if these adjustments turn out to be successful, not only the companies will succeed but their example will also foster an industry‐level change and renewal. In this research project we focus on recognizing successful firms and comparing their strategic choices to their peers. We aim at investigating how successful firms shape the renewal of manufacturing in selected industries. Accordingly, we define the potential for industry‐level renewal based on the firm‐level prevalence of new methods and processes of production, such as the use of new technologies, strategies supporting learning and resource reconfiguration, and firms’ innovation capability. These manifest the entrepreneurial behavior as firms’ strategy. More specifically, the ReInRe‐project aims at: 1)
2)
3)
Exploring the strategies of successful (pioneering) firms and their peers in selected industries. Investigating the deeper insights of the agents of change and what kind of relationship they have with their socio‐technical and institutional surroundings. Assessing the role of pioneering firms and their peers in the industry‐level renewal. Tekesin Ohjelmatoiminnan strateginen tuki -yksikkö tuottaa innovaatioympäristöä palvelevaa tutkimusta
teemakohtaisilla hauilla. We focus on two industries: food industry and industries related to ship building. The former is vital for the entire society, while the latter, sea cluster, has been one of the backbones of the Finnish economy. Sea cluster is under constant restructuration and moving to other fields of businesses as facing enormous challenges. Data and methodology The ReInRe‐project comprises two intertwined phases: quantitative analysis with survey data and qualitative studies which cover case studies and workshop‐based data. In order to take a closer look in the mechanisms between firms and their surroundings, we have investigated the successful firms and their peers by employing quantitative methodologies. This approach illustrates the possible strategic regimes the successful firms have exploited and enable us to compare these with their peers. The following phase of the ReInRe ‐research project will cover a qualitative investigation of the agents of change (firms) and study the fit between firms’ strategic choices and their socio‐technical environment. In more detail the ReInRe‐project comprises two intertwined phases: quantitative analysis with survey data and qualitative studies which cover both case studies and workshop‐based data collection (Figure 1). By this combination we adopt a research design which deeply explores the phenomena based on strong scientific evidence built in both phases. Figure 1: Research design of the ReInRe‐project In the ReInRe‐project we match data on firms’ strategic choices with financial data. In this Policy Brief we will focus on findings of the quantitative analyses (see Figure 1). These results are conducted with a previously collected survey data on companies´ strategic choices which was updated with financial data. The survey data was collected in 2009 from Finnish firms operating in the food industry, and the sea cluster, including ship building and any sub‐contracting sectors (engineering, furnishing, maintenance etc.). Data comprises 290 firm‐level observations collected through computer‐aided telephone interviews. This data on strategies were augmented and updated with official financial statement data retrieved from Orbis database in spring 2015. This enabled us to explore the company strategies and the success of firms by comparing subjective perceptions about the firm‐level strategies in 2009 and matching them with objective financial data covering multiple years (2005–2013). Tekesin Ohjelmatoiminnan strateginen tuki -yksikkö tuottaa innovaatioympäristöä palvelevaa tutkimusta
teemakohtaisilla hauilla. Firms were defined as successful if they had grown in scale and profitability more than the average in the same industry. Our interest is in the entrepreneurial strategies which cultivate a culture that encourages curiosity, learning, and innovation, and foster the identification of novel business opportunities. Even if the studied strategies are assumed to predict above the average business performance, they seem not to differentiate better performing firms from their peers. First, we analyzed the firm’s performance in order to classify them into successful and less successful firms by industry. A firm was defined as a successful firm if it had grown its scale and profitability more than firms on average in the same industry. We measured the growth with two variables: The growth of turnover (scale) and EBITDA margin (profitability) over 2010–2012. The former shows the amount of money a firm generates, and the former is a measurement of a firm's earnings before interest, taxes, and depreciation. Moreover, we selected the time span from 2010 to 2012 because of the reasonable coverage of financial data. All 290 firms were listed per industry according to the two selected performance measures (Table 1). If a firm was listed among top 30 or lower 30 performing firms with both measures, if was categorized accordingly. Table 1: Categorization of studied firms per industry Top performance Average performance
Lower performance Total Food industries, % (n=128) 8 80
12 100
Sea cluster, % (n=162) 6 87 7 100
After this categorization we assessed the firms based on the survey data from 2009. In this analysis we investigated the strategic approaches and possible differences between top performers and their peers, and rest of the studied firms. In this Policy Brief we focus on the strategies which imply coping with uncertainty and development of firm. Strategic choices vary, but differences are not significant More specifically, our interest here is in the entrepreneurial strategies. By employing these kinds of strategies firms cultivate a culture that encourages curiosity, learning, and innovation, and try to identify and leverage novel business opportunities (Amit et al., 2000; Lumpkin & Dess, 2001). We analyzed the prevalence of innovativeness, risk‐taking, knowledge integration and spillover, seizing and sensing, and systematic reconfiguration among the studied firms. These strategic choices reflect what kind of tendencies firms have with regards to their competitive advantage and how firm are trying to learn from the changes in the environment. Accordingly, assessing the above strategic dimensions enables us to investigate the strategic choices of successful firms that may later initiate industry‐level renewal. Next we summarize the findings on the strategic choices in Figures 2 and 3. Figure 2 covers studied firms from food industries and Figure 3 illustrates the findings from the sea cluster. In both figures the horizontal axis shows the firms based on their performance category and the vertical axis is scaled from 1 to 7, in which 1=”Totally disagree” and 7=”Totally agree”. In food industry firms the strategic choices vary to some degree (Figure 1). The results show that none of the recognized differences between strategic choices are statistically significant. Thus, even if the studied strategies are assumed to predict above the average business performance, they seem not to significantly differentiate better performing firms from their peers. A closer look indicates that top performers seem to have slightly more tendencies for innovation and exploit knowledge spillover than their peers. This implies that top performers might more often exploit and make sense of their surroundings in order to find novelties which would benefit their competitive advantage. But in comparison low performers seem to lean more often towards integrating new, external knowledge into their behavior than their top counterparts. Moreover, they seem more often to reconfigure their resources than top performers. These results show that less successful firms seek to acquire new knowledge and resources through external connections. This can, however, require an excessive amount of time in dynamic markets, which may imply that these investments generate costs much before the related revenue is generated. Tekesin Ohjelmatoiminnan strateginen tuki -yksikkö tuottaa innovaatioympäristöä palvelevaa tutkimusta
teemakohtaisilla hauilla. Figure 2: Strategic choices by firm performance level among studied food industry firms Among the studied firms operating in sea cluster the strategic choices differ slightly, albeit the noted differences are not statistically significant (Figure 3). Thus, the outcome of the analysis is similar to the food industries: Strategic choices might not differentiate successful and other firms during the studied time frame. In sea cluster, low performers seem to pursue innovativeness more than their peers. Accordingly, low performers perceive that they have introduced many new lines of products and services, some of which might have been even quite dramatic. This suggests that new products and/or services may be launched in order to correct prevailing financial situation of the firm or that new product introductions generate their growth effect only after a longer period of time. With regards to other strategic choices the studied firms seem to employ relatively similar strategies. Figure 3: Strategic choices by firm performance level among studied sea cluster firms Tekesin Ohjelmatoiminnan strateginen tuki -yksikkö tuottaa innovaatioympäristöä palvelevaa tutkimusta
teemakohtaisilla hauilla. Discussion Several factors in the market, such as dynamism, changes in technologies, new entrants, might suppress the potential of strategic choices. Our findings highlight two issues. First, firm‐level strategic choices, which are assumed to enable above the average performance, seem not to be enough robust predictors of business performance over time. Even if there are slight differences, they are not statistically significant. A closer look on the indicative results suggests that in the food industries’ top performers might focus more often on innovation and try to exploit knowledge spillover than their peers. In the sea cluster the differences were the opposite: Low performers seem to pursue for innovativeness more than their peers. On the hand, in the food industries’ less successful firms seek to acquire new knowledge and resources through external connections in order to stay competitive. That being said, predicting the industry‐
level change from the strategies of successful and less successful firms is not straightforward. Instead, our findings show that specific strategies do not remarkably differentiate low and high performing firms within industries. One possible explanation for this is the moderation arising from business environment (Lumpkin & Dess, 2001). Several factors in the market, such as dynamism, changes in technologies, new entrants, might suppress the potential of strategic choices. Importantly, our findings suggest that strategies are not stagnant, but instead they need to be revised, adapted or sometimes even improvised in order to find a way to overcome barriers of success (see Eisenhardt et al., 2000). Based on the first main finding, our second finding is that in policy making the cherry‐picking might not work (see Shane, 2009). Policy interventions to support growing and innovative firms are justified by job creation and several other contributions to the economic development (Bridge & O’Neill, 2013). Even if directing public policy interventions to the best and the brightest makes sense while the public finance is limited, the on‐going challenge stems from the difficult decision: To whom the public support should be directed at? Our findings highlight that it is difficult if not even impossible to find robust predictors of business performance which could later ease the pain of public policy making. In between the question remains: Where should policy makers look at if they are willing to picking up the winners among a certain population of firms? Accordingly, one aspect is easy to agree on as Björn Lomborg put it: “wishful thinking is not sound public policy”. Challenges for the public policy making If the public policy making follows the “picking up the winners” ‐strategy, on which basis the selection of the firms should be done? 
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In the contemporary business environment predicting firm’s future performance is ever‐
challenging. This also obstructs the estimates of the pace and magnitude of industry‐level changes. Even if one could pick up the best firms among a population of many firms, it might not generate the expected outcomes (e.g. return on public investment). If the policy making is following the “picking up the winners” ‐strategy, on which basis the selection of the firms should be done? Finding the right firms could benefit from investigating firms’ strategies: At least firms themselves should know where they are heading at. Moreover, in comparison to predicting firm’s future performance, the firm’s strategic choices are easier to grasp and understand. Unfortunately, the most successful firms’ strategies do not vary significantly from their peers’ strategic choices and good performance cannot be predicted based on the preceding strategies. As enough robust predictors are yet to be defined, the “picking up the winners” policy making is difficult to justify. Tekesin Ohjelmatoiminnan strateginen tuki -yksikkö tuottaa innovaatioympäristöä palvelevaa tutkimusta
teemakohtaisilla hauilla. Implications In public policy making it is vital to better understand the processes which link firms’ strategies and resources into prevailing market conditions. 
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While making public policies it is essential to better understand the processes which link firms’ strategies and resources into prevailing market conditions. If they are better recognized, the stimulation of firm‐level strategies and improving their institutional environment may also foster the renewal of industry. At the firm‐level supporting the sense‐making of the firms’ environment is essential. Several factors in the market might defeat the successfulness of strategic choices, and thus, companies should be sensitive to their business environment. Companies also need to be willing and able to revise and adapt their strategies and resources according to the industry’s requirements. If successful, these choices might become the “new ways of doing things” in particular industry. Selected readings Acs, ZJ., DB. Audretsch. 2003. Innovation and technological change. In Handbook of Entrepreneurship Research. An Interdisciplinary Survey and Introduction. Ed. Z.J. Acs & D.B. Audretsch. Boston, MA: Kluwer Academic Publishers, pp. 55–79. Acs, Z.J., P. Braunerhjelm, DB. Audretsch, B. Carlsson. 2008. The knowledge spillover theory of entrepreneurship. Small Business Economics, 32 (1), pp. 15–30. Ahlstrom, D. 2010. Innovation and growth: How business contributes to society. Academy of Management Perspectives, 24 (3), pp. 11–24. Amit, RH., K. Brigham, GD. Markman. 2000. Entrepreneurial management as strategy. In Entrepreneurship as Strategy. Competing on the Entrepreneurial Edge. (Eds.) G. Dale Meyer and Kurt A. Heppard. Sage Publishing, Thousand Oaks, CA: USA. pp. 83–99. Baumol, WJ. 2002. The Free‐Market Innovation Machine: Analyzing the Growth Miracle of Capitalism. Princeton University Press: Princeton, NJ. Bridge, S., K. O’Neill. 2013. Understanding Enterprise. Entrepreneurship and Small Business. Palgrave Macmillan, UK. Eisenhardt, KM., SL. Brown, HM. Neck. 2000. Competing on the entrepreneurial edge. In Entrepreneurship as Strategy. Competing on the Entrepreneurial Edge. (Eds.) G. Dale Meyer and Kurt A. Heppard. Sage Publishing, Thousand Oaks, CA: USA. pp. 49–62. Florida, R. 2010. The Great Reset: How New Ways of Living and Working Drive Post‐Crash Prosperity, HarperCollins. New York, NY: USA. Lumpkin, GT., GG. Dess. 2001. Linking two dimensions of entrepreneurial orientation to business performance: The moderating role of environment and industry life cycle. Journal of Business Venturing, 16 (5), pp. 429–451. Porter, ME. 1985. The Competitive Advantage: Creating and Sustaining Superior Performance, Free Press. New York, NY: USA. Schumpeter, JA. 1934. The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle (Trans. R. Opie), Harvard University Press, Cambridge, MA: USA. Shane, S. 2009. Why encouraging more people to become entrepreneurs is bad public policy. Small Business Economics, 33 (2), pp. 141–149. Tekesin Ohjelmatoiminnan strateginen tuki -yksikkö tuottaa innovaatioympäristöä palvelevaa tutkimusta
teemakohtaisilla hauilla.