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Technology and Small Business: A New Zealand Case Study Prof. Bruce R. DIXON Department of Strategic Management University of Waikato Private bag 3105 Hamilton, New Zealand Phone: (64) 7 838 4250 Fax: (64) 7 838 43 56 INTRODUCTION The fundamental basis for the development of technological innovations are inventions or discoveries. These inventions and discoveries are the result of creative processes which may in part have arisen through luck and are most certainly extremely difficult to predict or plan. Luck is of course perhaps not the best term to use as clearly significant preparation, foresight and opportunity are essential ingredients of all new technological developments. The criteria for success with regard to new discoveries and inventions have an important technical dimension (is it real?), but in addition, an important determinant of success is whether it is commercial, in the sense that a new business is able to form around the discovery or invention. Inevitably, there will be significant time lags inherent in this process from the time of initial conception through the development of prototypes and the transformation of the idea into a commercial business reality. The criteria for success with regard to technology maybe technical (can it do the job?) but the commercial dimension (can it do the job profitably?) is exceedingly important. "Technologies are usually the outcome of development activities to put inventions and discoveries into practical use"[1] The objective of this paper is to discuss a range of matters with regard to technological innovation in small companies. The case of Power Beat International Ltd, a company involved in technology origination and development in New Zealand, will be used to illustrate some of the inherent difficulties in the startup process. TECHNOLOGICAL CHANGE Technological change poses both threats and opportunities to all organisations whether they be large or small. The rate at which new inventions appear and have been converted into commercial realities has greatly accelerated in recent years. This increase in the rate of change puts new technology development companies under significant pressure especially when they are small. The innovation process is driven by basic factors such as:
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1.
A need or potential demand.
2.
Technical or operational means to satisfy that need.
3.
Financial, technical and operational means of undertaking the innovation.
4.
Timeliness of innovation.
5.
Access and rights to knowledge.
6.
Protecting these rights to knowledge.
Innovation is the major step in the development of new technology, without this, technology remains just an idea. The effectiveness of technological change and the speed with which it may be made a commercial reality by a new small business will depend on a range of factors. For example, market acceptance, investment capability, "robustness" of the technology and satisfying stakeholders are amongst the factors which an organisation must weigh up when deciding whether a particular prospect should be developed further. A technology development company is constantly faced with trying to evaluate the innovation potential of a new idea. Ideally, they would have a range of different products at different stages of development and of their life cycle. The following chart shows the link between stages in the technology life cycle and the potential for competitive advantage. Technology Life Cycle and Competitive Advantages Stages in Technology Life Cycle
Importance of Technologies for Competitive Advantage
I. Emerging technologies
Have not yet demonstrated potential for changing the basis of competition.
II. Pacing technologies
Have demonstrated their potential for changing the basis of competition.
III. Key technologies
Are embedded in and enable product/ process. Have major impact on valueadded stream (cost, performance, quality). Allow proprietary/patented positions.
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IV. Base technologies
Minor impact on value-added stream; common to all competitors; commodity.
TECHNOLOGICAL INNOVATIONS AND ENTREPRENEURSHIP The primary criteria for success in the area of technological innovation are commercial rather than technical. A successful innovation is one that returns wealth to investors. Innovations are the outcome of a process which can be defined as "The combined activities leading to new, marketable products and services and/or new production and delivery systems".[2] Different types of innovation have been identified. These include: Incremental Innovations -- the adaptation, refinement and enhancement of existing products and services. Radical Innovations -- these involve entirely new products and services. Architectural Innovations -- reconfigurations of the system of components which make up the product or service. Entrepreneurship involves exploiting or making the most of an opportunity. Clearly, entrepreneurship is a vital driver of the technological innovation process. The objective is to bring together both the technological and commercial dimensions in a profitable manner. The previous Exhibit[3] (omitted) illustrates some of the key relationships in the technological innovation process. It has been reported by NEHEM[4] (1987) that innovative companies are more successful in terms of both turnover and profits. They report "the ever decreasing life cycle of products necessitates continuous product innovation". Some twenty percent of the companies that participated in this study were explicitly in favour of innovation. This seems surprisingly low as the concept of innovation has long past the stage of being a fad (perhaps it would be different today if this study were to be repeated). Innovation is a permanent necessity if companies wish to thrive and stay ahead of the competition. Idea generation is important but perhaps more important is the development of appropriate technology and market development to bring that idea to a commercial reality. Successful innovation requires effective implementation in order that environmental issues and the needs and wants of customers are given appropriate emphasis in the development process. As is shown in the pentagram[5] below (omitted), the interrelationships inherent in the technology development process are very complex. MANAGING TECHNOLOGY -- STRATEGIC ASPECTS
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Development of new technology must be managed extremely carefully if the organisation is to have an on-going competitive advantage in the market place. This is especially so where the new technology development is undertaken within a small firm rather than as a division of a large organisation. These small emerging businesses are incredibly fragile and the line between success and failure and in particular its timing is very fine. Strategy development is concerned with the range of options which the organisation chooses in order to compete in the market place. Strategic planning and strategic management aid the refinement of matters which are fundamental for the organisation's continuity and success. Strategic planning is broad in scope and adopts a longer term time frame. It explicitly addresses issues associated with ensuring continuity, profitability and survival. Small enterprises have traditionally not been good at strategic planning. One suspects this is mainly because management is much more concerned with day to day issues rather than long term issues. Effective strategic planning encompasses all aspects of management of the organisation. What is the attitude towards risk? What emphasis should be on new product development as opposed to commercialising established inventions? What are the constraints from investors joint venture partners and customers? Michael Porter had developed a detailed and often quoted paradigm of competitive strategy.[6] It is based on the proposition that business success rests on satisfying customer needs. In order to be successful, new small businesses in the technology field, must devise strategies in order to have a sustainable advantage in offering superior value to customers. Three options are available, cost, differentiation and focus. Of these three it would seem, that differentiation is most likely to be the strategy which is followed. In following this strategy it must be appreciated that it is uniqueness on a long term basis which is being pursued. Strategic Planing in new businesses in the technology field need to address the following questions: 1.
What kind of enterprise are we?
2.
What kind of world do we expect to be living in?
3.
What do we as a management wish to accomplish with this enterprise?
4.
What has to be done to convert those three questions into a coherent course of action?
It is the last of these questions which is probably the most difficult. A technology development business, in order to be
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successful, needs a stable of on-going successful products as well as a number of emerging products which are still being developed and defined to suit the needs of customers. If all products are in the emerging field, then it is unlikely that the company will have the necessary profitability to continue on a long-term basis. THE ROLE OF SMALL BUSINESS IN R&D AND INNOVATION Opinions differ as to the significance of the role played by small firms in the research and innovation process and in the development of new technology. J K Galbraith[7] contends that only large organisations have the capacity to develop major innovations especially when sophisticated technology is involved. "There is no more pleasant fiction than that technical change is the product of the matchless ingenuity of the small man forced by competition to employ his wits to better his neighbour. Unhappily it is a fiction... Most of the cheap and simple inventions have to put it bluntly and unpersuasively, been made... because development is costly, it follows that it can be carried on only by a firm which has the resources which are associated with considerable size". But not all researchers hold this view. Jewkes[8] reports that of seventy major inventions in this century, most were due to universities, private inventors or small firms, rather than to large firms. The conflict between these two views is more apparent than real. Jewke's study was principally in the process of development by which inventions are translated into commercially viable innovations. Approximately two thirds of the inventions listed by Jewkes eventually became successful commercial innovations as a result of the efforts of large firms. Statistics for Australian manufacturing firms suggest that they undertake less research and development activities than do larger firms. A number of researchers have used patent statistics as a measure of the output of research and development programmes in the absence of better alternatives. The work of Scherer in the United States, of Smythe, Samuels and Tzoannos in the United Kingdom and of Johannison and Lindstrom in Sweden produced results suggesting that the number of patents issued or applied for does not increase in the same proportion as the size of the firm.[9] A further study undertaken by Freeman in the United Kingdom[10] reports that small firms were responsible for about ten percent of all the identified innovations. This is rather lower than one would expect based on employment, however, for certain of the manufacturing industries the figure is higher than ten percent. It is suggested that small firms are likely to be more successful innovators in industries where the capital intensity of production
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is low and heavy development expenditure is not required to bring an invention to the stage of commercial production. THE EXPERIENCE OF POWER BEAT IN NEW ZEALAND BACKGROUND Power Beat International Ltd (Power Beat) was established in 1989 primarily to launch the Binary Electric Automotive Technology (BEAT) Battery System. Considerable thought was given to developing a "catchy name" -- beat stands for "binary electric automotive technology". Emphasis was also given to the development of a logo which was three dimensional and in colour. The founder and Managing Director of the held the controlling interest, the Maori held a twenty percent interest and other twenty nine percent share capital in the
company Mr. Pita Witehira Development Corporation small shareholders held a company.
Power Beat was looking for a business which would have an impact on consumer technology. New Zealand is small in size and options are limited. What they were looking for was technology which affected masses of people and which would sell millions (or at least had the potential to do so). Mr Witehira is strongly of the view that knowledge is power and intellectual property is a country's greatest wealth. He sees five categories of technology which are worthy of investigation and commercial development. These are: Medical science. The food industry. Telecommunication/computer systems. Energy management. Waste management. Each of these affect, in different ways, significant portions of the world. He wanted to create significant new wealth and to be able to do this from and for New Zealand. Pita Witehira had read of the need for a change in battery technology and his invention followed from this. The technology initially developed by Power Beat included -*
An advanced automotive battery which allows the vehicle user to start the vehicle in harsh conditions in the normal way. That is, by turning the ignition key to the start position even after the headlights, for example, have been left operating for long periods of time, including overnight.
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*
Electrode plates compatible with the advanced battery design which are designed to reduce weight and protect the battery from long term damage when or if it is subjected to abuse.
*
High power electrode plates for all batteries which are designed to provide for higher power to weight ratios.
*
Electric power management and distribution technologies which when used in conjunction with the advanced battery allows for reduced hydrocarbon emissions, increased vehicle reliability and added convenience for the vehicle user. THE BATTERY
The Power Beat system was specifically developed for the automotive industry. The battery is able to be manufactured in various sizes but is typically similar in mass and output to a conventional battery, the unique features are that it has duel output terminals, which when used in conjunction with a simple automotive control system, independently provides optimum power levels to the starter motor, ignition and engine management system while the engine is being started. Because of its unique cell construction, battery provides for an uninterrupted power flow for the engine starting, without power serges, even when auxiliaries have drained it flat. In lay terms, this battery is similar to duel cell batteries except that this system has a smart DMS discharge system built in that automatically controls discharge and holds reserve power for starting. In any other duel system available there is a requirement to manually control the system which leaves it susceptible to error and inconvenience to the user. This unique ability is a result of a combination of the cell configuration and the DMS control system. In addition the battery is able to withstand competitive complete discharging and recharging without rapid deterioration of the cells. These features are beyond the ability of conventional batteries. Power Beat batteries are made from the same materials as conventional batteries and are therefore equally able to be recycled which is a feature growing in importance to consumers. Similarly, of growing interest to the consumer is the length of service from resources used and Power Beat technology offers a system having a longer average life than conventional batteries. This is born out by their warranty period of three years full replacement, versus one year full replacement with one extra year pro-rata warranty of the conventional manufacturers. There is available on the market a 'Switch' battery that is marketed in competition to Power Beat, however, this is simply a battery with a built in reserve. The technical structure and operation of this battery is more akin to a conventional battery than the Power Beat system. Pita Witehira sees the battery development as falling within
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the energy management field. There is a desperate need world-wide to have an efficient means of storing electricity. As we become more sophisticated, there is a greater emphasis on portability and therefore better batteries are needed. POWER BEAT DISCHARGE MANAGEMENT SYSTEM (DMS) This system has a number of features that give it significant functional advantages over a conventional battery. *
It prevents voltage spikes occurring when the engine is being cranked at starting which could otherwise damage the electronics of modern vehicles.
*
The DMS system prevents the vehicle's accessories from draining the power, thus rendering the vehicle unable to start. The DMS retains sufficient power to be able to start the engine, even in adverse conditions.
*
Vehicle manufacturers are able to rationalise their electrical architectures by reducing the warning systems that advise of power drain when the engine is not running. This feature will become more significant if the trend of adding more and more accessories to vehicles continues.
*
The DMS system affords complete freedom for those who have need to frequently leave accessories operating for extended periods while the engine is not running. The DMS ensures the vehicle will be able to be started afterwards.
*
There is a trend towards micro processors controlling more of the electronic functions of a vehicle, and these processors require a constant source of current, free of voltage spikes. The DMS will keep Power Beat at the forefront of automotive power supply as vehicle electronics technology continues to develop.
*
The DMS complies with the current and growing requirement for convenience by users. Drivers resist the requirement to physically locate and alter switches to obtain reliable power supply. The DMS is automatic, thus enabling the driver to simply operate the ignition in the normal manner.
The technology still has room to be developed as motor vehicles are predicted to require 150-200% more reserve power by the year 2000. There is also the likely demand for a new generation battery to enable development of a viable long range electric vehicle. INDUSTRY TRENDS
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Alternatives to the combustion engine have been sought from the time of its inception. This search has intensified during oil shocks and more recently as a result of environmental concerns. Currently there is no immediately viable alternative, thus assuring its use for the next decade. As opposed to the constancy of the engine type in cars there have been changes in expectation of cars from both designers and users. Car users expect a means of travel (a tool), not a machine to tinker with or be controlled by. Designers are including more use of micro-processors for control functions. Micro-processors require a constant current source free from fluctuations of voltage spikes (some using two batteries). In addition, environmental issues are becoming more important, both in the development of efficient or cleaner combustion process and the disposal of used parts. Consequently, all the materials used in the lead-acid battery are recyclable. Industry trends can be summarised as: * * * * * *
Life of the internal combustion engine. Increasing amounts of electronics in vehicles. Vehicle users expect a means of travel that is reliable and available. Environmental concerns increasing. Increased expectation of battery life in vehicle. Increased on-board power requirements in new vehicles. INDUSTRY COMPETITIVENESS -- PORTER Competitive Rivalry
The battery manufacturing industry has a number of major players. Competition is pitched mainly on price with features and performance being either a non-issue or equal. Rivalry on price however, is fierce with the recommended retail listing price rarely achieved by the outlets. Although Power Beat list retail at $146 versus $80-$100 for comparable batteries, in practice the differential the customer pays is more like $50 than the $25-40 indicated. There is also quite an aggressive advertising presence by the conventional battery manufacturers. Threat of New Entrants The market is so competitive that it is unlikely that any new operation would start up to manufacture conventional batteries, which is a well served market already. There could be some threat of a conventional battery manufacturer developing new technology, triggered by the threat posed by Power Beat, that may threaten the perceived competitive advantage Power Beat currently hold. The industry does not rate as attractive, which together
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with high establishment costs reduces entry threats. Threat of Substitutes The motor industry is very high tech and has vast financial resources. With increasing demand for environmentally friendly transport systems there is every likelihood that the major vehicle manufacturers are working on power systems for electric or other forms of drive units for vehicles. Solar energy use is already available but not practical for mass usage yet, but development continues. Magnetic energy is a relatively undeveloped field of research that is understood to be under research at NASA and is likely to be on the minds of transport system developers. Buyer Power This is the key to Power Beat's success or failure. The buyer is forced, by either failure of an existing battery or is buying a new vehicle, to be in the market to buy a battery. That however is the extent of the motivation, in the purchase decision the consumer/buyer has absolute power of the decision of what to buy. There is an extensive range of choice very often with negotiable price offerings. Power Beat is the most expensive and least negotiable of all the options. The mass market is controlled almost absolutely by the major car manufacturers. If they don't see an application for the battery on a mass basis, they virtually give it the 'kiss of death' in terms of credibility and mass appeal. Niche markets are available to this product such as the marine and emergency services vehicles where reliability can be a matter of life and death. But again, the buyer has considerable discretion and in most cases could be deemed to be operating under budgetary constraints that may be of concern to Power Beat. Supplier Power There is no information that indicates that suppliers have any special products or services that are not duplicable. Power Beat have ownership control over the key inputs to their product so have restricted supplier power to the peripherals. It is possible that existing major manufacturers may feel threatened enough by this new product to jointly exert pressure on raw material suppliers to withhold or otherwise make less attractive the supplies. THE START UP PHASE It is extremely difficult to create a technology development company
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particularly in the Mass Technology area. In 1992, Pita Witehira estimated that it would take 6 to 10 years to get to market and that the process would be highly challenging. He was right! The distance of New Zealand from other Mass Technology developments, the small population base and attitudes generally in getting into mass markets were factors that made the development even more difficult in New Zealand. Power Beat was a pioneering company in technology development in New Zealand -- it was not a run of the mill corporate. Attracting investors with similar vision to the founder has not proved to be easy. Investors are looking for short term returns and are frustrated by the delays in getting the battery to market. Not surprisingly, they are also frustrated because share prices in Power Beat have fallen greatly following the many problems faced by the company. SOME OF THE PROBLEMS ENCOUNTERED BY POWER BEAT *
Power Beat was a public company -- this attracts much publicity which has often not been positive.
*
They were listed on the stock exchange which for a technology company was unique in New Zealand. Again, this created publicity and a "let's watch them" attitude.
*
Power Beat has always been explicit about the risk involved to investors but inevitably, not all could see the benefits of continuing R&D (without a lot of income) -- many investors expected immediate returns and not more losses.
*
Capital for promotion and development was a problem. Because the Company knows it's not well looked on, they tend not to ask for enough when they go to the market. This means they have to go back again sooner than is desirable.
*
It's hard to get the right people for the money in New Zealand.
*
Any company with a major technological advantage must have dollars if it is to succeed.
*
New Zealand companies do not spend enough on research and development. This is essential for a technology development company like Power Beat but doing so without a flow of income is a problem.
*
There is a shortage of a critical mass of investors who are prepared to take the risk associated with a venture of this sort. Power Beat tends to have lots of small investors with
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an average holding of about 2,000 shares. *
The finance through the Maori Development Corporation became a problem when they expected instant success and returns on their investment. A huge amount of effort went into simply trying to make peace between the different shareholder factions, rather than getting on with the job. Perhaps some 12 to 18 months have been wasted recently in terms of development -- corporate battles gain little.
*
The company is currently suspended from the stock exchange and recently the MDC have opted for a passive role. The company has recently announced that they will delist but will endeavour to set up a market for their shares via Internet.
*
The first significant commercial development of the battery is scheduled to start in early 1996. This is in a factory in the middle east. This is an important development as it will give an income flow to the company which is badly needed. SUMMARY COMMENTS
The path to progress for new technology companies seems riddled with potholes and maybe ones guide has at least some of the characteristics of a rogue. In order to survive companies in this industry need to be sufficiently well developed to have a range of technology innovations at different stages of development. Power Beat is a fragile company operating in a small business environment, competing with international giants. Their inventions have huge potential for users in highly competitive world markets. They currently face many obstacles, but when one looks back many obstacles have been overcome. The drive and ambition of the founder continue to be strong. They have the will to survive. Will they be given the chance? ACKNOWLEDGMENT The help of Pita Witehira in preparing this paper is gratefully acknowledged. Errors and omissions are however the author's. Appendix 1 POWER BEAT INTERNATIONAL LTD Timeline -- Selected Highlights July 1989
--
Power Beat established as a private company to launch BEAT Battery System.
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September 1989
--
Power Beat listed as public company.
September 1989
--
Full pre-production programme started for DMS Battery System.
October 1989
--
Additional Share Capital issued.
August 1990
---
First Annual General Meeting. Pre-production programme completed.
September 1990
-----
Power Beat Australasian formed. 95,000 batteries produced. Japan field testing programme commenced. North American feasibility study with Mitsubishi Corporation.
October 1990
--
Japanese feasibility study with Mitsubishi Corporation.
November 1990
---
Japanese Business Plan prepared. Power Beat product launch in Australia.
December 1990
---
North American feasibility study concluded. Japanese joint venture negotiations.
January 1991
----
USA field testing. European feasibility study commenced. European partner negotiations.
July 1991
--
First battery sales in Hamilton.
January 1993
--
Nissan offer Power Beat system as optional extra.
October 1993
--
Semi conductor breakthrough announced.
November 1993
--
Mitsubishi project manager joints Power Beat as General Manager.
December 1993
--
Battery sales start through Nissan. Retail $146.25 against $80-$100 for conventional batteries. $500,000 interim profit announcement.
-January 1994
----
Trend vision technologies threaten action for US$100M. over failure of technology transfer agreement. Power Beat announced $562,000 profit. Power Beat revise profit announcement to
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---
loss of $151,000 due to dishonoured cheque from Trend Vision. New R&D begins on high capacity storage for housing. R&D on multiplexing switch system for vehicles.
August 1994
----
Power Beat Chairman resigns. Deal with Hyundai extended. Agreement signed to manufacture under license in United Arab Emirates.
September 1994
--
Asian backing offered for Power Beat to build manufacturing plant in New Zealand.
October 1994
--
Power Beat battery selected by US R&D Magazine as one of 100 most technologically significant new products in 1994.
November 1994
--
Friction over Director appointments.
February 1995
--
Rumours cause share prices to soar. Later denied.
May 1995
----
Malaysian bid for Power Beat. Mix up over voting at special AGM. Power Beat suspended from NZ Stock Exchange. Witehira steps down as Managing Director.
-June 1995
--
Three MDC Directors resign.
September 1995
--
Power Beat loses $4.3M.
December 1995
--
Auditors do not seek re-appointment at AGM.
Appendix 2 POWER BEAT LTD - S W O T Analysis Strengths *
Significant financial strength from equity partners.
*
Board of Directors with high technical expertise.
*
Advanced technology battery:
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* Battery delivers optimum power levels to starter * Provides power in a constant flow, without surge and fluctuations * Retains auxiliary starting current even when flat * Fits any make of vehicle * Withstands repeated total recharging without deterioration * Longer battery life * Comparable manufacturing costs * Out performs conventional batteries *
Patents obtained or pending in numerous countries throughout the world.
*
Fully recyclable.
*
Warranty of 3 years full replacement versus 1 year replacement, 2nd year pro-rata.
*
Manufacturing process compatible with existing manufacturing plants. Weaknesses
*
Board of Directors lacking in marketing and international expertise.
*
Lack of strategic expertise among Board members
*
Only available in one size
*
Price on the market is significantly above comparable size conventional battery. Opportunities
*
The increasing usage of intelligent electronics in modern vehicles.
*
Ability of existing manufacturing plant to convert easily.
*
Vehicle manufacturers can save by reducing some of their electronic devices.
*
Specialist situations where non-flattening batteries significant advantage.
*
User friendly for consumer usage patterns.
*
Offer longer warranties than conventional batteries.
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*
Wide range of organisational structure options for world wide distribution. Threats
*
Market reaction by conventional battery manufacturers.
*
Manufacturing costs raising above expectations and becoming uncompetitive.
*
Loss of credibility from existing users misunderstanding the capabilities of the battery.
*
An existing major manufacturer developing technology that leap frogs Power Beat.
*
Vehicle manufacturers dropping the batteries and converting back to conventional type.
[1]
Burgelman, R A, Maidique, M A, Wheelwright, S C "Strategic Management of Technology and Innovation" 2nd Edition, Irwin, Chicago, p.2.
[2]
Ibid p.2.
[3]
Ibid p.3.
[4]
NEHEM (Stichting Nederlandse Herstructureringsmij) 1987: Kiezen voor de jaren negentig. Hertogenbosch.
[5]
Kervoort M J van 1986: Innovatie in de praktijk. In H O Goldschmidt and J de Haan (eds), Innovatiestrategie, Gravenhage: SMO.
[6]
Porter Michael E, Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press, New York, 1985.
[7]
Galbraith J K, American Capitalism, rev. edn (Boston, Houghton Mifflin, 1956) pp.86-87.
[8]
Jewkes, J Sawers D and Stillerman R, The Sources of Invention, rev. edn. (London McMillan 1969).
[9]
Scherer, F M "Firm Size, Market Structure, Opportunity and the Output of Patented Inventions", American Economic Review, vol. 55, No 5 (December 1965), pp 1097-1125. Smyth, D J, Samuels J M and Tzoannos J, Patents,
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Profitability, Liquidity and Firm Size, Applied Economics, vol.4 (June 1972), pp. 77-86. Johannisson, B and Lindstrom C, "Firm Size and Inventive Activity, Swedish Journal of Economics, vol.73 No.4 (December 1971) pp 427-42. [10] Freeman, Christopher, The Economics of Industrial Innovation, (Penguin 1974) pp 210-217.
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