TUTKIMUSRAPORTTI- RESEARCH REPORT 152

Raija Salo- Anita Lukka

VALUE ADDED LOGISTICS IN SUPPLY AND DEMAND CHAINS EDYNET Part 1 VISION FOR SME SECTOR IN MRO BUSINESS FIELD

Tuotantotalouden osasto VALORE- Research Group Department of Industrial Engineering and Management

Lappeenrannan teknillinen yliopisto Lappeenranta University of Technology

FIN-53851 Lappeenranta, Box 20, Finland

ISBN 951-764-881-2 ISSN 1459-3173 Lappeenranta 2004

__________________________________________________________________

VALUE ADDED LOGISTICS IN SUPPLY AND DEMAND CHAINS (VALOSADE)

EDYNET: VISION FOR SME SECTOR IN MRO BUSINESS FIELD RAIJA SALO - ANITA LUKKA Lappeenranta University of Technology __________________________________________________________________ ABSTRACT The EDYNET research (E-business and Dynamic Networks in Alliances and Partnerships) is a sub-project of the VALOSADE research project, which is being conducted by the VALORE research group in Lappeenranta University of Technology. The VALOSADE project belongs to the ELO-program of TEKES. EDYNET will be carried out as a regional development project and as a case study in order to increase the competitiveness of the small and medium sized enterprises (SMEs) in maintenance, repair and operations (MRO) service business of large forest companies in the South Karelia region. The focus is on designing a generic business model for dynamic network cooperation in alliances and partnerships, where modern IT-technology solutions will be applied with standard procedures but flexibility in partnering. With this strategy a better demand /supply balance will be gained in the whole business network. The first stage of the research was to design and to introduce a mutual business strategy for SME sector enterprises and their customers in the MRO service business. The actual challenge during this phase was to convince the decision makers of the local MRO business that a shared strategy of the system is imperative in getting to the right track in the future. SWOT and scenario analyses (future mapping) were the tools in visioning, and finally in designing of the business strategy for the network system formed by the principals and local SMEs. SWOT and scenario analyses formed the main phases of visioning, as a result of which the pursued vision could be stated, and on basis of what the strategy of the system would actually be constructed. The vision is regarded as the desired outcome of a successful strategy. Scenario paths, on the other hand, can be described as results and consequences of various decisions in the business environment, leading to optional results with regard to different actors. Eventually, the strategy is the set of actions taken in the business environment, the best and deliberately mapped scenario path that actually leads to the desired outcome. Visioning started with the SWOT analysis that defined the as-is status of the CASE- Network and its business environment: the strengths, the weaknesses, the opportunities and the threats were brought out and discussed. The next phase of visioning was future mapping, including definitions of main actors and their decisions, mega trends, most relevant weak signals in the current MRO business environment and the alternate scenarios. All the data to these analyses and definitions were gathered from the interviews, management meeting discussions, workshops and literature overviews during the empirical part of the study. The SWOT analysis showed clearly, how many considerable opportunities the local SME sector enterprises have at the moment in South Karelia. One of the main success factors is the strong relationship with the surrounding industry. In contrast, there is a long list of threats confronting the companies as well. The strategy will, however, be based on the opportunities and strengths of the SMEs rather than on fighting against the threats. Thus, the best scenario was based on the system approach, where the principals and the local SMEs have a common strategy and long term planning with a strict roadmap for consistent development of cooperation and services. Finally, the vision states that the demand/supply of the MRO service business will be in better balance within the region in future as a result of reasonable organization of MRO supply service between the different actors in the region. One of the main actors in the business will be the local SME sector, which has implemented a new dynamic network model of operations and management, and has brought new excellence in performance to local services is general.

_____________________________________________________________ Key words: networking, SWOT-analysis, scenarios, vision

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CONTENTS ABSTRACT 1

2

INTRODUCTION.............................................................................................................. 6 1.1

Background ................................................................................................................ 6

1.2

EDYNET research...................................................................................................... 8

1.3

EDYNET objectives and content ............................................................................... 9

1.4

Research approach and methodology......................................................................... 9

1.5

EDYNET research milestones of the first research period ...................................... 10

1.6

Content of the research report .................................................................................. 11

CONTEMPORARY TRENDS IN BUSINESS PARTNERSHIPS AND NETWORKS 13 2.1

Partnerships, networks and alliances........................................................................ 13

2.2

Pros and cons of networking .................................................................................... 16

2.3

Models of enterprise networks ................................................................................. 19

2.3.1 Japanese network model.......................................................................................... 19 2.3.2 Western network model .......................................................................................... 20 2.3.3 Strategic enterprise networks .................................................................................. 21 2.3.4 Dynamic business networks and hubs..................................................................... 22 3

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SME SECTOR IN SOUTH KARELIA ........................................................................... 27 3.1

SME sector employs in Finland ............................................................................... 27

3.2

Cooperation between the principals and local SMEs............................................... 28

RESEARCH SETTING OF EDYNET ............................................................................ 31 4.1

MRO business of the forest industry in South Karelia............................................. 31

4.2

Research problem..................................................................................................... 36

4.3

Research process ...................................................................................................... 37

4.3.1 First stage: developing the strategy to the system................................................... 37 4.3.2 SWOT and scenario analysis framework: phases of visioning ............................... 38 5

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SWOT ANALYSIS OF THE LOCAL MRO SERVICES............................................... 40 5.1

Actors in MRO service business of the forest industry in South Karelia ................ 40

5.2

Competitive situation of the local MRO business.................................................... 44

5.3

Results and conclusions from the SWOT analysis................................................... 45

VISIONARY SCENARIOS............................................................................................. 49 6.1

Companies learn from scenarios .............................................................................. 49

6.2

Vision driven vs. decision driven scenarios ............................................................. 50

6.3

Tailoring scenario planning to the company culture................................................ 53

6.4

Scenario planning process as a part of future mapping in EDYNET....................... 55

6.4.1 Preparative scenario papers..................................................................................... 56 6.4.2 Scenarios up to 2008 ............................................................................................... 59 6.4.3 Results from the scenario workshop ....................................................................... 64 6.4.4 Conclusions from the scenario work....................................................................... 67 6.5

Vision is the desired future outcome of the best scenario........................................ 70

REFERENCES INTERVIEWS, MEETINGS AND WORKSHOPS

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FIGURES Figure 1: Business Logic Triangle (Osterwalder and Pigneur, 2002, p.3)................................. 6 Figure 2: Research milestones during the first stage of the study............................................ 11 Figure 3: Japanese model of networking.................................................................................. 20 Figure 4: Western model of networking. ................................................................................. 21 Figure 5: Model of strategic enterprise network. ..................................................................... 22 Figure 6: Network with a hub enterprise or an e-hub. ............................................................. 23 Figure 7: Forest industry MRO business and its counterparts. ................................................ 34 Figure 8: Pyramid of research stages. ...................................................................................... 37 Figure 9: Steps of empirical part during stage 1. ..................................................................... 38 Figure 10: SWOT and scenario work in phases of visioning................................................... 39 Figure 11: Actors in MRO service business in South Karelia. ................................................ 41 Figure 12: Basic assumptions of as-is status in the SWOT analysis........................................ 45 Figure 13: Elements of the future mapping in EDYNET......................................................... 56 Figure 14: Scenario setting in EDYNET.................................................................................. 57 Figure 15: First scenario setting. .............................................................................................. 59 Figure 16: Second scenario setting........................................................................................... 61 Figure 17: Third scenario setting. ............................................................................................ 63 TABLES Table 1: Perceived risks in the supplier network in metal industry. ........................................ 18 Table 2: SME sector in Finland in 2000 (Statistics Finland, 2003) ......................................... 27 Table 3: Results of the SWOT analysis. .................................................................................. 46 Table 4: Vision-driven vs. decision-driven scenarios (Courtney, 2003).................................. 50 Table 5: Four levels of uncertainties (Faley, 2003). ................................................................ 51 Table 6: Typology for decision-driven scenario planning (Faley, 2003, p. 17)....................... 52 Table 7: Scenario option 1. ...................................................................................................... 60 Table 8: Scenario option 2. ...................................................................................................... 62 Table 9: Scenario option 3. ...................................................................................................... 64

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1 INTRODUCTION 1.1

Background These days the need for new business models and changes in business structures are constantly emerging due to the development of electronic commerce and enterprise networking. Understanding and designing new business models are important research issues both within new e-commerce business and in traditional industry sectors where the modernizing of ways and division of work is taking place. Osterwalder and Pigneur (2002) claim, however, that recent research and development in business models is not well covered at the moment (Osterwalder and Pigneur, 2002, p.1). According to Petrovic et al. (2001), a business model describes the logic of a business system for creating value that lies behind the actual processes. Osterwalder and Pigneur (2002) state in a more detailed way that ‘a business model is nothing else but a description of the value a company offers to one or several segments of customers, and the architecture of the firm and its network of partners for creating, marketing and delivering this value and relationship capital, in order to generate profitable and sustainable revenue streams and addressing to product innovation, customer relationship, infrastructure management and financials’ (Osterwalder and Pigneur, 2002, p. 2) More importantly, Osterwalder and Pigneur (2002) see business models as the missing links between strategy and business processes. People responsible for strategic management in the company define the objectives and goals, whereas the operative personnel have to understand and implement this information. All this requires a rigorously defined communication of concepts between the implicated parties. This is why a business model can be seen as the conceptual and architectural implementation (blueprint) of a business strategy representing the foundation for the implementation of business processes and information systems. According to Osterwalder and Pigneur (2002) a business model, ‘put on the paper’, is an essential factor between the strategy and business processes (Osterwalder and Pigneur, 2002, p.3). It is something that might be intuitively clear and obvious to the managers and owners of the company, but not as easy to communicate to others. Furthermore, business strategy, model and processes should be clearly and consistently linked together, as seen in the figure 1. Planning level

Strategy

ICT pressure

Architectural level

Business Models

e-Business opportunities & change

Implementation

Business Processes

e-Business process adaptation

level

Figure 1: Business Logic Triangle (Osterwalder and Pigneur, 2002, p.3).

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In traditional industrial sectors, the need for re-evaluation of current business models is urgent since business managers have long been concentrated primarily on such issues as outsourcing, partnering, processes, ICT-systems, networks, and strategies, on one at a time. Process management has been brought into focus because the ICT-tools, business processes and organizations have not been convergent, and redesigning an actual business model has been of secondary importance so far. One could argue, that technology based ICT-architecture designs have recently been the only blue prints of business models drawn on the paper. This may be the case in Finland where business development projects have mostly been ICT-technology-drawn due to the new software tools constantly introduced by the ICT-system suppliers. It was the large firms that first took actions in 1990s and put the bases of their business operations and information communication on ICTsystems. Nevertheless ICT-technology is still a new domain within the small and medium sized enterprise (SME) sector despite of SME sector’s important role as a business partner to the principals. On the other hand, the concepts like outsourcing, network alliances and partnerships have dramatically restructured the business environment in Finland. Large enterprises have learned their lessons of focusing on core business and outsourcing as it has turned out to be a common and proper way to survive in the rapidly changing business environment. Outsourced functions have become the core business of the new business partners. The worldwide recession in early 1990s forced business actors to focus on adding value and reducing costs. The changes were accelerated by rapid advantages in technology and removal of communication barriers. Furthermore, maximizing of profit in individual transaction was seen only as a short-term strategy, and companies were forced to start working towards common goals. In 1990s relationships were also created with fewer suppliers (Boddy et al., 2002, pp. 253-254). Enterprise networks have been in focus of growing attention since the mid-1980s, but it was the emerging new ICT-technology in1990s that made the real networking of enterprises possible in Finland. According to Ollus et al (2000), networking issues were discussed already in 1970s because of the worldwide oil crisis, demand of lean and flexible production and new division of work, as well as due to the revolution of microelectronics technology (Ollus et al., 2000, pp.115-116). Finally, according to Heinonen (1999), it was the of economic boom in mid 1990s that pushed an individual SME to networking with other companies and actors in order to grow into first class actors. Pioneer companies became more involved with each other, also in strategic planning and development strategies. Companies needed to pay attention to associated communication links, quality systems and R&D development work, as the group of independent enterprises suddenly formed a dependent supply chain or supply network to the end customers (Hyötyläinen, 2000). Re-evaluation of business models between the strategy and business processes is essential if a network system acts as a strategic enterprise network or if some companies act as a system supplier to larger principals. So far this has not been the case in Finland where significant Finnish principals have outsourced their functions to a great extent but have lacked companies able to take responsibility for large entities as a part of outsourcing function (Hyötyläinen, 2000, pp.12-26).

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This report is one part of the subproject EDYNET of the VALOSADE research project funded by the Tekes ELO-program. The research project originated from the need of developing SME sector companies in Finland and focuses on such SME sector companies that provide services to big forest industry corporations acting in the role of principals. The forest companies of the case follow the common and recent trend: they use outside providers, subcontractors and suppliers in order to reach the competitive edge by specializing on their best business areas. Another aim is to establish cooperation with fewer suppliers than before. The suppliers are also expected to be able to deliver larger entities and systems instead of single units. The principals emphasize system supplying as the future objective and want to employ different types of suppliers: system, contract base regular and capacity /random suppliers. SME sector enterprises, on the other hand, still operate in a traditional way, individually and with traditional processes and tools. Some loose collaborative networks exist, however, with mutual quality and safety standards but quite recently, further development efforts have diminished essentially. Finally, the SME sector enterprises encounter increasing competition in their traditional business markets, while, at the same time, the forest companies face continual capacity problems due to unpredictable and strongly fluctuating demand.

1.2

EDYNET research EDYNET (E-Business and Dynamic Networks in Alliances and Partnerships) is a subproject of the VALOSADE (Value Added Logistics in Supply and Demand Chains) research project funded by Tekes, the National Technology Agency/ ELOprogram, and by the companies of REI-KE Oy, Sonera Oyj, YIT Service Imatra, JTT Konepaja Oy and Imatran Seudun Kehitysyhtiö The research is a qualitative case study of a single case with multiple units of analysis. The research is performed within VALORE-research group, supervised by professor Anita Lukka, Lappeenranta University of Technology (LTY). EDYNET research is closely connected to another VALOSADE subproject SMILE (SME-sector, Internet Applications and Logistical Efficiency), where information and communication technology (ICT) and e-business solutions for SME sector will be studied. The division of research work between EDYNET and SMILE is the following: EDYNET -

network strategies network business models change management

COMMON -

roles processes

SMILE -

information flows network information and communication systems

As the resource projects EDYNET and SMILE have one shared case under study, the empirical part during the first stage of the project has been conducted in close cooperation of the researchers.

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1.3

EDYNET objectives and content The focal purpose of the research project is to increase the competitiveness of SME sector enterprises in maintenance, repair and operations (MRO) business by designing a model for network cooperation. With this strategy the large principals can also cooperate better with the SME enterprises. The focus is on the flexibility of the business network, where modern IT-technology solutions will be applied, in order to gain new business opportunities and demand/supply balance in the whole business network. The first stage is to design and to introduce a mutual business strategy for SME sector enterprises and their customers in the MRO service business. The second stage is to create a generic business model for dynamic network alliances and partnerships utilizing modern e-business solutions with standard procedures but flexibility in partnering. The third stage is to create a model of managing and measuring the change.

1.4

Research approach and methodology The empirical part of the research is carried out using case study methodology. According to Yin (1981) the distinguishing characteristics of the case study is that it attempts to examine a contemporary phenomenon in its real-life context, especially when the boundaries between the phenomenon and the context are not clearly evident. As the principal aim of this study is to generate a new business strategy and a model for cooperation and networking within a certain business case, a pure theoretical approach would not be awarding. According to Neilimö and Näsi model (1980) the scientific approach of the study can be defined empirical, quite pragmatic and constructive as the research aims to build a solution construct, a business model based on theoretical knowledge and the research process itself (Vafidis, 2002, p. 53). This study applies also action-oriented approach as an implication of the verstehen kind of hermeneutic tradition, since the goal of the study is also to understand the research object, empirical evidence is gained from relatively few examples and the evidence is examined partly by informal but versatile methods (Vafidis, 2002, p.50). Positivistic approach would not bee suitable since the approach primarily strives to test theories through a predetermined framework (Vafidis, 2002, p.84). Arbnor and Bjerke (1997) have developed a model for categorizing research into three different approaches: analytical, system and actors approach. This research applies something between the system and the actors approach as in the system approach, knowledge depends on the entire system, and the part of the objects cannot be analyzed independently, and in the actors approach the data analyses are based on interpretations. In this case the research object is a network or networks (Vafidis, 2002, p. 54). As, for instance, Meredith (1998), Eisenhardt (1989) and Yin (1994) state, a case study uses multiple methods and tools for data collection from a number of entities by direct observer(s) in a single, natural setting that considers temporal and contextual aspects of the contemporary phenomenon under study, but without experimental controls or manipulations. The goal is to understand, that is achieved within a 9

framework of assumptions, beliefs, and perspectives specified by the researcher, usually his or her own. In a case study, we deal with only relational inference because the case is not intended to represent a sample from a population. We can directly observe the processes and use logic to deduce and infer relationships (Meredith, 1998, p. 447). With case studies we can use rigorous data collection, observation, and logic rather than mathematics or statistics to make our deductions and inferences. The evidence may be either qualitative (e.g. words) evidence or quantitative (e.g. numbers) evidence, or both. We strive to understand the variables that affect the phenomenon. Power is determined in case studies by the significance level, the effect size and the precision of estimates of the variables (Meredith, 1998, p. 448). The theory building process in a case study relies on past literature and empirical observation or experience as well as on the insight of the theorist to build incrementally more powerful theories (Eisenhardt, 1989, p. 548). Traditionally authors have developed theory by combining observations from previous literature, common sense and experience (Eisenhardt, 1989, p. 532). This study is an in-depth study of a single case with multiple units of analysis. The empirical part is based on an intensive work with open-ended, theme-guided face-toface interviews, workshops, and site visits where the researcher acts as an independent observer. During the first stage of the research, the interviews were mostly made together with researcher Erno Salmela of the SMILE subproject. This cooperation brought a lot of new insight to research questions as well as reliability in the interpretation of the results. The interviews were not recorded in order to get more open and honest atmosphere during the sessions.

1.5

EDYNET research milestones of the first research period The first part of the EDYNET research took place between the time period of 1.10.2002 - 20.07.2003. During this phase the following research milestones were reached: - State of the art, a pre-study of the contemporary trends in strategic networking of SME sector in Finland o Interviews, literature overview and benchmarking - Status of maintenance, repair and operation business (MRO) o Interviews, literature overview and benchmarking o Local and national view points - Research hypothesis of business models o Introduction of and discussions on hypothetical business models - SWOT-analysis o The current state and the competitiveness of local SME sector in MRO business based on interviews and previous studies - Visionary scenarios for the case network o Based on the SWOT-analysis, visioning and a workshop - Research hypothesis of the network strategy and the implementation roadmap.

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T H E R E S E A R C H M IL E S T O N E S s ta te o f th e a rt e - b u s in e s s a n d lo g is tic s

fa c e to fa c e in te rv ie w s

h y p o th e s is

n e tw o r k in g

s w o t-a n a ly s is

c o m p e titiv e n e s s o f th e S M E se c to r

d e v e lo p m e n t

w o rk s h o p s

s c e n a rio s

v is io n a n d s tr a te g y

ro a d m a p b u s in e s s m o d e l p ro ce sse s an d IC T im p le m e n ta tio n

cha nge

Figure 2: Research milestones during the first stage of the study.

1.6

Content of the research report This report in hand will document the progress and the findings of the first phase of the EDYNET research (see figure 2 on the previous page) excluding the results of the definite strategy writing and roadmap setting, which will be found in the next research report. In this research report, chapter 1 gives some background for the research project in general. The idea of the need for novel business models as well as the urgent threats to local enterprises caused by national and international competitors (MRO) service business direct this research of small and medium sized companies (SMEs) in South Karelia. The basic facts, the objectives and the methodology of the research are briefly described later in the chapter. Finally, the figure of the research milestones explains the progress of the study. Chapter 2 begins with some basic definitions of enterprise networks and of partnering relationships based on the literature overview of the study. In addition, contemporary trends as well as pro and cons of networking are discussed, as there is a lot of bias on this issue both in business and in academic world however. The chapter ends with the descriptions of quite prominent and basic models of networking, and moreover, with the initial ideas of dynamic business networks designed during the first stages of EDYNET. As this research focuses on SME sector enterprises in particular, it is worth pointing up a few statistical facts of this sector in Finland in the beginning of chapter 3. Later, the recent study of Esa Karhu (2002) is refereed in order to illustrate the current status of the business cooperation models between the principals and the SME sector in South Karelia in general. The findings of that study clearly give reason for further

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research and for further development plans with the local SME sector and the principals. From chapter 4 onwards, the progress and the findings of the empirical part of the study will be presented. In this chapter the research setting is clarified. The overview of trends and tendencies in MRO service business begins the chapter, after which the local MRO business as well as the local CASE-Network of mechanical MRO business are analysed. Based on these elements, among others, the definitions of both the research problem and the research process are stated. The chapter ends with the illustration of SWOT and scenario analyses framework, of the phases of visioning. SWOT analysis of the local MRO services is the main outcome in chapter 5. First, the main actors and the competitive situation of MRO service business as a whole are carefully considered in order to put the grounds for the SWOT analysis. Later in the chapter, the results and the conclusions of the analysis firmly state the need to further investigate the possible future outcomes of the business development, since there were as much threats as opportunities found in the analysis for local SME sector companies to face in the future. Finally, chapter 6 focuses on visionary scenarios and visions of the local SME sector enterprises in MRO service business. In the beginning of the chapter, theoretical viewpoints of scenario planning process are brought up in order to emphasize the importance of this tool in the whole strategy planning process. Further on, the scenario planning process, the scenario settings, options and tables as well as the scenario workshop and its results are presented. Conclusions and the stated visions end the chapter and the whole report.

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2 CONTEMPORARY TRENDS IN BUSINESS PARTNERSHIPS AND NETWORKS Castells (1996) argues that the change which business networking brings along is diversified and irrevocable, and will affect the whole surrounding society. Enterprise networks are superior due to their capability of utilizing information and new ICTtechnology in operations and flexibility as the major element of the strategy. However, enterprises will adopt new operational modes like networking on one condition only: the advantages must exceed the costs. Today the pioneers in networking have been the enterprises in electronic and modern high-technology industry, but according to Castells (1996), networking will most certainly change operational modes of all fields and organizations of business, including traditional processing industry as well (Ollus et al., 2000, pp. 115-116). In traditional fields of industry, networking is even imperative since it will restructure the traditional processes. In the following subchapters some relevant definitions of business relationships and networking are first discussed. Further on, possible motives for as well as perceived risks of networking are considered. Finally, the brief description of models of enterprise networks ends the chapter.

2.1

Partnerships, networks and alliances In developed countries, networking has recently emerged most intensively as a consequence of two main trends in business environment. Firstly, hard competition in business has forced the enterprises to establish long lasting seller-buyer relationships in order to guarantee excellence in all business performance. Secondly, as a result of focusing on core competencies large enterprises have been split up, and some of the support functions have been outsourced into networks. Hence, there is an ongoing debate and research on different types of networks with all kinds of definitions of business relationships in the business and academic world at the moment. Subsequently, it might be useful to point out some definitions of networks, partnerships and alliances relevant especially to this study: Networks are arrangements whereby two or more organizations work in collaboration without formal relationships (Johnson & Scholes, 1999, p. 341). Nikkanen (2003) has emphasized in his study the social side of the network: a network is a set of relationships between different parties i.e. a social structure of social and other relationships between the partners. Moreover, a unified entity of a network can be split up to smaller units like nets, and categorized according to such criteria as geographical, technological, functional or perceptional. According to him, ‘a network is actually a constellation of various, partly overlapping nets including tying actor bonds, which strengthen the relationships and which the roles/positions are based on’ (Nikkanen, 2003, p.11-54). Industry convergence is the coming together of the companies from different industries to provide goods and services to the customers (Norris et al., 2000, p. 20). Business networks can be seen as structures between pure market and hierarchy structures, the two traditional and extreme choices of a firm to interact in business. 13

Coase (1937) and Williamson (1975, 1985) have called it ‘a hybrid´, positioned in the middle of the continuum of governance mechanism types (Seppälä, 2001, p. 39). Synergy in a business network can occur in situations, where two or more enterprises complement each other to the extent that their combined effect is greater than the sum of the parts. Networking is justified when the advantages exceed, and the operative and coordination costs of networking beat production costs in a hierarchy or transaction costs in pure markets. Intentionally created, developed and organized cooperation is often identified as strategic networks or strategic alliances (e.g. Jarillo, 1988), the opposite of which is organic networks that have developed unplanned and as a result of long lasting, traditional buyer-seller relationship (Klint and Sjöberg, 2003). Networks in which the firms are primarily connected to supply relationships and collaborate to produce mostly tangible goods are designated supply (supplier) or production networks (Pfohl and Buse, 2000, p. 388). Pfohl and Buse (2000) have presented the following overview of four types of production networks based on the works of Miles and Snow (1992), Sydow (1992), Scholz (1994), and Mertens and Faisst (1995): 1. Strategic network (see also chapter: 2.3.3). Strategic network is a relatively stable network, which is guided by a large core firm and which is oriented towards the joint achievement of strategic advantages. The member firms are often closely linked to the focal firm but still keep their autonomy by offering their products also outside the network. Examples of such cooperation are suppliers in automotive industry, suppliers of Benetton, Nike, Adidas and Puma and so called keiretsus in Japan. Some of the production networks are claimed to be examples of a beginning transition from strategic network toward virtual enterprises. 2. Virtual enterprise. (see also chapter 2.3.3) In a virtual enterprise independent firms work together based on shared values and a common way of doing business. The cooperation is temporary and project-like. The firms have specific competencies, which can be combined synergistically. Additional features of a virtual enterprise are intensive use of information and communication technologies and absence of network specific investments. The structure or a contribution of a single actor may not be apparent to the end customer in a virtual enterprise. Good examples are ICT software development and services, content production and advertising. 3. Regional network. Regional networks are formed by small, highly specialized enterprises that are in spatial proximity of each other and cooperate regularly. The firms have a lot of potential partners, which can be activated depending on demand. Social relations are of extreme importance. Most famous examples can be found from textile and machinery production in northern Italy. 4. Operative network. The firm can get access to the partner’s or pooled resources at short notice in an operative network. Most often an inter-organizational IT-system and standardized procedures and transactions are imperative in this kind of network (Pfohl and Buse, 2000, pp. 392-393). Klint and Sjöberg (2003) have gathered a thorough overview of classification of strategic networks. One way to differentiate strategic networks is to determine weather

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they are vertically or horizontally organized. A supply chain network and a vertical market network represent vertical networking, where relationships are created among independent, specialized firms. Horizontal networks consist of companies from a similar sector, which join forces to improve their competitive position. Ager and Red (2000) have defined lateral networks as a mixture of vertical and horizontal networks. ((Klint and Sjöberg, 2003, p. 411). Cartels are one type of horizontal networks that do not focus on coordination of investments but on decreasing of competition (Ollus et al., 2000, p. 52). Networks that locate in specific geographical areas or regions are often called geographical networks (Klint and Sjöberg, 2003, p. 412), as a synonym to regional networks. Some researchers use the term local net, or even the concept of milieu in order to distinguish the networks of proximity (spatial, cultural and psychological proximity) and trans-territorial networks, i.e. global networks. In his study, Nikkanen (2003) comes to a conclusion that a focal net, where the focal firm ‘sets the boundaries of the net’, can be local, national, or international regardless of the geographical borders (Nikkanen, 2003, pp. 46-47). In classification of strategic networks Klint and Sjöberg (2003) cite Boekholt and Arnold (1999) in defining soft and hard networks. In USA, Australia and New Zealand soft networks involve information sharing between the partners whereas hard networks are based on structure and the underlying basic conditions. An interesting view in classification is to define strategic networks as open, permeable or close (Richter, 2000). Open networks are close to the market, and the barriers of entry and exit are low as well as the degree of mutual dependence. Japanese ‘keiretsus’, (as ‘chaebolis’ in South Korea and ‘guan xits’ in Taiwan) represent permeable networks. This type of networks can be further divided into production, capital and trans-networks. Closed networks are considered to be closest to hierarchy and to a form of tight vertical integration with a central firm surrounded by a network. Business opportunity networks (e.g. Boekholt and Arnold, 1999) are groups of firms with restricted membership, sometimes organized around customer needs and market opportunities. Hollow networks (defined by Piercy and Cravens, 1995) are most flexible marketing organizations thus able to shift to new sources of supply and business opportunities easily (Klint and Sjöberg, 2003, p. 412). Finally, Klint and Sjöberg (2003) write about institutional networks, which were originally created, supported and maintained by governmental or other institutional authorities. These networks are mainly formed by small and medium sized enterprises (SME) supporting each other, and are often part of governmental programs to support regional development. Many times such networks are part of so called ‘technology villages’ (Klint and Sjöberg, 2003, p. 413). Undoubtedly, networking requires more or less partnering between the enterprises. Partnerships are based on long-term relationship, tight cooperation and trust between the buyer and the seller. The philosophy of partnering is based on the TQM (Total Quality Management) work that was developed and used to rebuild the Japanese economy in the late 1940s. W.E. Deming stated that firms should work more closely with fewer suppliers, thereby enabling clear and unambiguous communication. Freeman (1990) refers to the history of formal R&D collaboration from the 1920s. Carter and William (1959) as well as Rotwell et al. (1974) reference studies of

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innovations from 1950s that focused on collaborations between suppliers and customers (Boddy et al., 2002, p. 253-254). A demand-supply chain can nowadays be perceived as a network, where suppliers and alliance partners together form the network of relationships. In order to distinguish the terms supplier and alliance partner, Christopher (1998) has stated that suppliers are the providers of physical resources or services to the business, whereas alliance partners supply competencies and capabilities that are knowledge rather than product based (Christopher, 1998, p.273). Nikkanen (2003), on the other hand, claims that difference between partnering and alliances can be defined according to core competences of the parties involved: partnership is a collaborative arrangement between parties with different core competencies, in alliances key competences are similar and non-complementing (Nikkanen, 2003, p. 98). In this study focus is on strategic and regional supplier networks, which exceptionally are supposed to be dynamic in nature as well, defined in more detail in the chapter 2.3.3.

2.2

Pros and cons of networking It is claimed, that the traditional organizational models are no longer valid in international business markets as networking has become an integral part of globalization. The world moves from the industrial economy to the networked and digital one. Heterogeneous companies intent to network, as these companies are focused on their core competencies. In a network, specialized companies will complement each other, since by networking the companies get access to other companies’ resources. Investments and risks can be shared to certain extent as well. There is, however, consistent (and justified) discussion on pros and cons of business networking, and research under way on possible risks that especially small and medium-sized enterprises (SME) might face in cooperation with larger firms. In this chapter some motives for networking as well as risks in it will be briefly discussed. The organizational structure of the company determines how easily it can acquire new information and knowledge into the company. In a hierarchical structure there is less interface to new information that in a network, and it takes time for a company to acquire tacit knowledge in particular. For instance, companies have actually no time to learning by doing all by themselves (Ollus et al., 2000). It could be argued that in a hierarchical organization, knowledge is power. In a modern business environment with the requirements on flexibility, the organizations must be aligned and matrixorganization models are applied. Thus knowledge is also more readily available for competitive attitude in making business. The relative status (rank) of the company defines the accessibility to other companies’ resources; furthermore this defines the attraction of the company as a partner in the network. Many commentators doubt the extent and nature of buyer-supplier relationships in partnering and networking, and state that partnering is still an exception rather than a rule. Some of the criticizers have stated that the relations are no philosophical changes in attitudes but pragmatic decisions by manufacturers with cost saving and more efficient production in mind. One of the most skeptic opinions comes from Lascalles and Dale (1989), Delbridge et al. (1990) and Cox (1998); ‘more collaboration relations simply mask attempts to extend and exert greater managerial control over dependent suppliers’ (Boddy et al., 2002, p.254). Actually, in most countries large 16

companies dominate the industrial structure despite of the effort to enhance the role of small and medium sized enterprises (SME). There is evidence that SME networks are more likely to connect by networking with large businesses than to operate independently (Hyötyläinen, 2000, p. 25). Small companies are typically responsive, innovative and flexible with relatively low operative costs, and the flexibility of SMEs might be both agility and passive adjusting. It can be a sign of trying to ensure customer relations in the future, and happens at the expense of SMEs’ own business objectives. On the other hand, the principal usually owns, and has the risk and the responsibility of research and development, of end customer markets and products and of major investments. However, from the SME sector point of view, one might state that in many recent cooperation cases the main profits and advantages has been gained by the principal, and the actual risks are taken by SMEs, especially during recessions when acting as capacity buffers. Conversely, a major concern of a large company might be the extent to which activities can be subcontracted or outsourced to a network or a business partner. It has been discussed that extreme forms of subcontracting or outsourcing could cause a severe strategic weakness in the long run, as the organizations can be devoid of core competencies and cut off from the learning. In worst cases, coordination and solving the conflicts may become difficult, if companies begin to maximize their own profits at the expense of total optimization. Hallikas (2003) has quite recently studied in his doctoral dissertation perceived risks of networking in a case study of the two vertical supplier networks of original equipment manufacturers (OEM) in electronics and metal industry. The suppliers were first tier suppliers. The findings of the study clearly show that the risks perceived by the suppliers may be more or less different depending on the business field. On the other hand, although the principals (OEM) and the suppliers perceived the risk quite similarly, the suppliers seemed to emphasize more the operational level and short-term activities in their risk identification. In other words, there seemed to be ‘a slight difference on the time horizon of risk between the OEMs and the suppliers’ (Hallikas, 2003, p. 43). One could argue, that mutual long term planning and strategy might bring the different parties closer together in the further development of cooperation. The following table will summarize the findings from the case network in metal industry (Hallikas, 2003, p. 42):

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Table 1: Perceived risks in the supplier network in metal industry. Demand Risks perceived by OEM

-

-

Risks perceived by suppliers

-

Delivery Performance

cyclical demand economic fluctuations demand forecasting industry specificity of suppliers geographical depression spill-over of confidential information end customers trust on supply network size of suppliers

-

customer competitiveness failures in customer products changes in ownerships changes in purchasing personnel supplier position in network

-

-

-

Cost Management and pricing

substitution of key personnel personnel know-how delivery of large assemblies delivery reliability quality failures capacity shortage changes in specifications asymmetry in relationships larger responsibility development resources

-

availability of multiskilled personnel shortening delivery times capacity shortage utilization of new production facilities forecast accuracy global deliveries customer specifications contract management production planning delivery of large assemblies delivery reliability quality failures of own suppliers

-

-

-

-

constant pressure for price reduction financing of investments production costs increase working capital increase lack of OEM’s price benefits on purchases

lack of profitable customers constant pressure for price reductions customer stocks shifted to supplier working capital increases information accuracy in investment decisions size of investments

Recent discussion suggests that the horizontal collaborative network of multiple partners quickly begins to replace the tightly controlled ‘four-walls’ models of a vertical industry. This is a natural continuation of the matrix organization. Only hightech companies that align their business models with the hyper competitive future one in which horizontal business models offer strategic advantage- will succeed. Competitors encroach horizontally; horizontal companies with single-minded focus will deliver best-of-class products or services within narrow area of the value chain. Kapur et al (2003) write; ‘Collaboration is the glue that will virtually ‘re-aggregate’ the network- bringing partners together, deepening relationships, providing economic motivation, integrating technologies, and maintaining visibility across the network. Collaborative networks, which enable rapid connectivity and communication among partners, will become essential. The creation of e-hubs --offering a single solution for connectivity and collaboration-- will be the preferred means of coordinate multiple players with complementary roles (Kapur et al., 2003, pp. 38-40). Vertical relationships are easier to manage than horizontal ones; horizontal relationships are often relationships between competitors and characterized by fear that competitors will abscond with the results. Nevertheless, absence of trust will 18

cripple the collaboration especially in horizontal networks. Companies that have internal relationships based on distrust may experience any network relationships with other companies difficult, because the rules of networking are not properly understood. This is also seen in the difficulties of obtaining true supply chain visibility and collaboration. Pfohl et al. (2000) found out in their qualitative study of a production network of a German car manufacturer, that knowledge sharing routines within a network are of limited importance, since firms being system suppliers viewed their own logistics knowledge as a potential source of competitive advantage and wanted to prevent an uncontrolled transfer of such knowledge via the manufacturer to other suppliers or logistics service providers (Pfohl et al., 2000, p. 401). Decentralization of decisions and management is a central key to the ability to quick response and flexibility in a network (Ollus et al., 2000, p.80). It should be kept in mind that an individual company is no more efficient or flexible in a network than it would be independently. Thus it is also important to consistently develop each company’s internal efficiency and ability to meet the challenges.

2.3

Models of enterprise networks Successful solutions of networks cannot be imitated but must be tailored for each. There exists a whole range of ’shades of gray ’between the following pure types of network models: the Japanese and the Western models that represent mainly vertical network integration, and the dynamic and strategic networks that represent more flexible and additionally horizontal networking.

2.3.1 Japanese network model A hierarchical pyramid describes well the Japanese network model as there are typically three types of suppliers in it: first-tier suppliers with a direct link to the principal, specialized suppliers at the next level, and unspecialized at the lowest level. First-tier suppliers are system suppliers with such responsibilities as integration of system delivery by combining suppliers and manufactures on a lower level, quality control, development activities and special investments according to principals’ wishes. The principal awards the first-tier supplier with long-term contracts, technology transfer and support (Hyötyläinen, 2000). The principal has only one first-tier supplier for each activity and the first-tier supplier is linked only to one or to a couple of principals at most. On the middle level there are the suppliers with special expertise in products and services. They may have direct links to other networks or principals as well. The suppliers at the lowest level act as capacity buffers and have no special areas of expertise. They work in projects in different networks and have number of different customers (Hyötyläinen, 2000). In Finland, this type has been seen in large building construction projects and in qualified networks of electronics and machine industry.

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Nooteboom (1999) as well as Stuart et al (1998) have criticized the Japanese model that it offers insufficient learning potential in a world of rapid changing and complexity. Furthermore, for instance Stuart (1988) has stated that the Japanese model does not guarantee the transfer of benefits to the suppliers but mutual hierarchical relationship best serves the principals (Hyötyläinen, 2000).

Japanese model of networking Different responsibilities on different levels

Principal

(1.) 1. Tier suppliers (2.) 2. Tier suppliers (3.) 3. Tier suppliers (4.-x.)

• 1. Tier suppliers: system deliveries, coordination, quality management, R&D, only one supplier per business function • 2. Tier suppliers : special expertise, specialization • 3. Tier suppliers : act as capacity buffers, standard products and services, some mutual strategy setting

Figure 3: Japanese model of networking.

2.3.2 Western network model In western model, cooperation is based on competitive bidding of subcontractors and between the principal and the subcontractor. Activities are based on short-term agreements as principals may have many suppliers for the same purpose at the same time. The principal takes the whole responsibility of the product and service development and provides the subcontractors with manufacturing specifications. System suppliers have typically a wide range of products and services. In Western model principals emphasize independence; buyers do not want any of the suppliers to be more than 30-50% dependent on them. Likewise there is less commitment to mutual development in the Western system than in the Japanese one (Hyötyläinen, 2000).

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Western model of networking Competitive bidding between the suppliers

Principal

Principal: R&D management, complete specifications to the suppliers Suppliers compete with each other

• based on competitive bidding between the suppliers, and between the principal and suppliers • short term contracts • no specialization, many suppliers for the same business function • no common strategy

Figure 4: Western model of networking.

In the western model, networking means basically arranging supplier markets into an organized form of business relationships that helps the everyday operations. According to studies of Nooteboom (1999), the traditional Western model is applicable in a ‘Fordist world’ where there is little need for information transfer, learning or cooperative development. There has been some movement toward Japanese networking models in Europe and US business operations during the last decade (Hyötyläinen, 2000). In Finland, this model has appeared in electronics, machine and forest industry.

2.3.3 Strategic enterprise networks This study concentrates especially on strategic enterprise networks. A strategic enterprise network has a common strategic goal (see also chapter 2.1). The strategic goal can be based on a mutual long -term plan of the enterprises, or it can be based on an idea of a virtual enterprise model that is created for a certain task or a project and broken up afterwards. In a virtual enterprise, network partners with limited expertise integrate resources horizontally and vertically. In their study, Nagel and Dove already in 1991 talked about the formation of ‘virtual companies enabled by information exchangeability’ and ‘modular plug compatible organizational structure and production facilities’. In their words:’ the quickest route to the introduction of a new product is selecting organizational resources from different companies and then synthesizing them into a single electronic, business entity: a virtual company’ (Browne et al., 1996, p.70). The figure below describes the idea of a strategic network with virtual enterprises (Hyötyläinen et al.1999):

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Strategic enterprise network • • • •

technological and innovative capabilities emphasized along price and quality, development of operations, products and services focus on fewer suppliers but still many different partner relationships, alliances and value chains organizing of operations based on strategic goals includes project or delivery based virtual enterprises

Strategic enterprise Partners Virtual enterprise 1

Enterprises with spot contract

Virtual enterprise 2

Virtual enterprise 3

Figure 5: Model of strategic enterprise network.

According to the findings of this study, a network based on Japanese network model can also be considered strategic in a sense that the network partners should have a mutual strategy for business development. The future form of a strategic network might actually be one that has Japanese type of hierarchic structure in order to define the division of work between the enterprises, and Shared long-term strategy of enterprises in order to develop the business to mutual direction, and Project-like operations and collaboration in order to maintain flexibility within the network. In the next chapter one example of a strategic network, the concept of a dynamic business network will be introduced.

2.3.4 Dynamic business networks and hubs As small and medium sized enterprises continue to specialize in narrow business expertise, horizontal networking will emerge in addition to basic vertical networking. Thus, the new circumstances in business require novel concepts of SME networks in order to be able to respond jointly to customer demands. Dynamic business networks are networks with rapid connectivity between the partners and with the focus on flexibility in partnering. Optimizing of the network capacity and supply performance according to customer demand is essential. In other words, a dynamic supply network pledge for better demand/supply balance in the whole business system. Modern ebusiness solutions and standard procedures make this possible.

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Horizontal networking involves coordination of operations more than traditional vertical networking, as enterprises are more independent than in a vertical one, where a member on the upper tier in the network usually coordinates the member on the lower level. Coordinating hub-enterprises and/or e-hub solutions enable the collaboration within dynamic networks, and between the network and the customer. The hub acts also as one contact point and an interface between the main customer and the network. The idea of a hub is introduced in the figure 6.

Dynamic network Rapid connectivity and flexibility in partnering

The customer’s customer

The customer

The hub

Capacity optimizing

Supply/Demand optimizing

Figure 6: Network with a hub enterprise or an e-hub.

Norris et al. (2000) have described an e-supply chain in a way that could be applied to the ideas of dynamic networks as well. Dynamic networks, like e-supply chains in general, are based on collaborative use of technology to enhance business-to- business processes, agility, real-time control and speed in business operations. At its best, information visibility across the network can become a substitute for inventory, and must be managed with strict policies, discipline and daily monitoring. Developing of technology standards will reduce both information sharing costs and the costs of switching partners. As more companies enter the networks, the cost of changing the supplier will be even reduced (adapted: Norris et al., 2000). Despite of the fact, that in a dynamic network the competition between the partners will push apart many long-standing relationships and forces suppliers to compete continually on price and service, dynamic networks might offer an appropriate solution for a disperse ‘network’ of enterprises to unite together, for instance locally, in order to get the most out of those companies in serving the customers. Low costs or no costs of switching partners and excellent sharing of information might make ad hoc combinations of enterprises and sub-networks possible case by case, thus optimizing 23

of the total capacity and supply of the network. From the customer point of view, a dynamic network can satisfy the customer better in the long run by system deliveries (coordination of supply) and less ´stock-outs’. Hub-enterprises According to Norris et al. (2000), each enterprise in a Web-technology based supply network can be an information hub. The key of being an information hub is to own the customer interface and providing value to the customer and to the network. So forth, as information is easily available using the Web-based technology, the opportunity exists to create new business strategies based on transforming a value chain into an integrated value network. In order to create real dynamics and network economies of scale, coordination must be in place in addition to communication in a network as ‘business is working toward frictionless information flows to more places more easily’ (Norris et al., 2000, pp. 38-40). In case the hub is a coordinating company between the customer and the supplier, rather than an e-hub, one major question is the ownership of the hub, since it determines more or less the ownership of the supplier business as well. In respect of the main purpose of this study, i.e. increasing of the local SME supplier sector competitiveness, the ownership of the hub of supplier networks is a major concern, and will be discussed later in this study in more detail. Some kinds of company-hubs have already been implemented in the MRO business networks in Finland. According to this study at least the following types of hubs can be identified in Finland when characterized by the management or ownership of the hub: 1. -

Hub owned by local SME companies and managed by One single company or Limited companies with a managing director or Loose network with an executive manager

2. Hub owned and managed by both a principal and a (inter) national MRO actor 3. Hub owned by one big national or international MRO actor 4. Hub owned by a principal - In-house mill services, subsidiary Hubs owned or managed by local SME companies Hubs that are managed and owned by SME sector companies typically serve and coordinate a relatively small network with maximum of seven to ten network companies. This is the case with hubs that not only take care of the marketing of the network but also actively coordinate and develop the operations of the network. However, behind this tightly coordinated system is often a network of independent enterprises acting as capacity buffers and competitors to the focal one. Hubs that focus

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mainly on marketing are more common in Finland and able to serve essentially larger networks. Based on the interviews of experienced managers and designers of hub-network systems, the key success factors of performance are: Restricted number of enterprises in the network, Active coordination of operations, Upright marketing and Consistent training and development of the network partner. In some cases, a coordinator manages the whole system without any network-wide ICT-system, which naturally emphasized the importance of limiting the number of partners. The extra power gained from this kind of hub-network system is in its agility and cost efficiency, in tight relationships and trust between the network partners. Hubs owned and managed by both a principal and a national MRO actor This kind of hubs can be seen as a compromise between absolute outsourcing and inhouse services. In such cases, the MRO service company has usually the main responsibility of the operative MRO services and respective spare part management, while the principal has the overall responsibility of the business performance and MRO strategy in general. The MRO service company acquires work force from outside and inside the focal company depending on the number and competence of principal’s own personnel. This type of arrangements of MRO services brings savings to the principal at least in the development efforts and investments (spare parts, equipment and tools, personnel). Additionally, sharing of responsibilities helps the principal to focus on the priorities without totally loosing the control of MRO functions of the company. Correspondingly, the MRO service company gets the most out of the loyal and stable customer relationship, and is able to employ the whole network of partners and MRO specialists freely across the business environment. In order to get all the stuff employed in all times, big MRO service providers tend to transfer their employees intensively from one customer to another. This can cause extra costs to the MRO services in general due to travel expenses. Hubs owned by one big national or international MRO actor A hub owned by one big national or international MRO actor is an example of complete outsourcing of MRO services of the principal. In this case, the MRO service provider takes care of daily operations and all decisions concerning them. The principals have naturally the responsibility for the overall strategy of the firm’s procurement and MRO strategy, and thus eventually ‘the final word’, whether to buy from the partner or not in the long run. Transferring of the service provider’s own work force according to demand from one customer to another might also increase the total costs of MRO services in this case as in the previous (2) one.

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Hub owned by a principal Many principals have organized their MRO services into a subsidiary (4), which first and foremost prefers to organize the services internally, but may purchase specialized services outside the company as well, if necessary. In this arrangement big corporations have an opportunity to keep the total control of the services in their own hands. The in-house work force can be moved from one manufacturing plant to another within the corporation, and can be sold out project- wise as well in the future. E-hubs In the Internet consumer markets (B-to-C) and in business-to-business markets different types of e-hub solutions have emerged based on intensive use of new Webbased technology. E-commerce application have enabled such new virtual business models and professionals to emerge in the Internet like: Infomediaries, consolidating buyers and sellers in fragmented markets Aggregators, which pull together fragmented markets for buyers Auctioneers, which provide reliable channels for sellers Exchangers, which match bid and ask prices as a neutral third party. On the other hand, pioneer applications in technology based selling and services (help desks, call centres, etc) have generated new ideas of all kind of virtual shared services and e-hub options. Kapur et al. (2003) have written about e-hub solutions the following: ‘Assembling collaborative network with modern IT-solutions helps practical networking, and sometimes an e-hub can alone do the coordination of the network operations. The term E-hub describes the platform that will emerge to enable effective collaboration, both within and across organizations. E-hubs combine enterprise applications and connectors (EAI, portals, Web services) into a single solution for connectivity and collaboration. For predictable, high volume transactions you may use tight system-tosystem coupling. For variable, low-volume transactions with unstructured data, you may use loose coupling via portal technologies. Supply chain e-hubs will be used to create high velocity. In recent times many observers have been as sceptical of web-powered advantages as they were on credulous. Underestimating the impact of the Web, however, may ultimately prove even more costly than overestimating the Web. History also suggests that companies that learn how to develop and deploy the right business and organizational models exit difficult periods of transformation with strong and enduring positions’ (Kapur et al., 2003, p. 42). The sub-project SMILE by Erno Salmela focuses on E-hub solutions. Different types of hubs, their roles and responsibilities will be discussed further also in the next report of EDYNET.

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3 SME SECTOR IN SOUTH KARELIA 3.1

SME sector employs in Finland Traditionally, establishing of small family business has been less prevalent in Finland than in other Western European countries. Drastic changes during the economic depression of the early 1990s however stimulated the growth of SMEs in Finland. The major downsizing of the public sector and the restructuring of the industrial sector led to the rediscovery of the small –scale economic activities (Littunen, 2001). According to Statistics Finland (2002) over 99% of Finnish firms can be categorized into SME sector (employing less than 250 employees). Small firms with less than 10 employees account for 92,9% of firms (Rantanen, 2001, p. 8). SME sector accounts for 61,5 % of all employees in Finland and 52 % of the total turnover (Statistics Finland, 2003). From all Finnish people at working age, 6,9 % are entrepreneurs (Kauppalehti, 2004). Table 2: SME sector in Finland in 2000 (Statistics Finland, 2003)

Size of personnel Enterprises 0– 9 10– 49 50–249 250–499 500–

207 004 13 014 2 237 296 266

92,9 5,8 1,0 0,1 0,1

Employees 1000 320 250 224 104 403

Employees % 24,6 19,2 17,2 8,0 31,0

Turnover % 16,4 16,2 18,0 10,2 39,2

An Organization for Economic Cooperation and Development (OECD) 1997 report that about 60 per cent of small and medium-sized companies in the OECD countries operate in mature conventional industries, another 30 % operate in mature, global industries and only up to 15 per cent in emerging niche industries as the hightechnology sector (Edelman et al., 2002, p. 237). The structure of Finnish industry can be divided into roughly three types: Large scale enterprises, which continue to grow. The development challenge for these enterprises is the ability to centralize into core areas and strengthen their international position. Niche companies, often innovative and expertise-based SMEs, exporting in own market segment. Most Finnish companies are SMEs. In South Karelia and Kymeenlaakso there was around 6200 enterprises with total of 33853 employees in 2001 (Karhu, 2002). The number of enterprises and of employees slightly decreased during the year 2002 down to the total of 5855 and 29663, respectively (Etelä-Saimaa, 2004). Sixty per cent of the enterprises are from different fields of service. The fact that around fifty per cent of the Finland’s forest industry is located within this district explains why large forest industry companies and local service suppliers have strong and traditional history of cooperation.

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3.2

Cooperation between the principals and local SMEs In this chapter, the fundamental results from the research of Esa Karhu (2002) are introduced. Karhu describes in his research the as-is status of different forms of cooperation between the principals and the suppliers in the forest industry in South Karelia and Kymeenlaakso. Thus, the information from the research has been used as one baseline for indicative to the research. It is self evident that forest industry companies have a dominant position in cooperation. Total cost optimization is a prevailing issue, and the main criteria for supplier selection is profit maximizing of the principal and thus that of the stakeholders. The major ‘macro level’ criteria in evaluation of the suppliers were total costs of the delivery (competitive price), quick and flexible deliveries, (perfect deliveries, on time, complete, error free, high quality of products and services) and the development potential, innovativeness and shared values. In practice this means from the principal point of view (micro level): good service, former references and experiences, special expertise, locality, good personnel and network relationships. Furthermore the principals emphasized such criteria as flexibility in delivery times, ability to delivery in small and big lots as well as environmental issues (Karhu, 2002, pp.172-178). The main barriers for the development of the cooperation between the principals and the SME sector companies were according to the principals the following factors: lack of capacity of the suppliers (small orders are not preferred), outsourcing is prohibited by the trade union, suppliers’ and even the whole district‘s lack of expertise, large companies intend to keep the basic expertise by themselves, no system deliveries or in time system deliveries and finally, selfishness in partnerships. Seen from SME company perspective, problems in cooperation were partly the same and partly a bit different. Suppliers argued that orders from the principal come too suddenly; in fact, suppliers seem to want more of all kind of mutual planning with the principals. In general, suppliers argued for long-term relationships in order to be able to serve better in the future. External suppliers are considered as major threads since the principals address lots of orders to them. Fluctuation of demand and too big order lots decrease the service quality (Karhu, 2002, pp.178- 197). As a conclusion it seems that lack of a mutual strategy between the counterparts is the major pitfall in the cooperation. Trade union’s impact on outsourcing and on erratic demand of services (fluctuation) can be counted as a major problem. Instructions from the parent organization of the trade union are often attributable to simultaneous shut downs in different mills, and to causing capacity problems (Karhu, 2002, pp.193-194). The capacity problem of the suppliers involves mainly big investment projects of the principals. According to Karhu (2002) networking of the suppliers could be one solution to this problem. However following obstacles, at least challenges for networking are pointed out in the research: How to define legal rights and obligations of the participants of the network Forest industry representatives do not believe in network relationships 28

Decentralization of management in the network demand tight control Mutual dependency makes individual companies vulnerable Network coordination requires a lot of resources Network might break up Need for a key coordinator (one legal entity) Threat of cartels Despite of all of this, network model was considered to be appropriate in some constantly ongoing maintenance and repair operations. In that case, the network should be managed consistently with clearly defined responsibilities. Networking should undoubtedly add value to the operations and be able to be organized up most flexibly (dynamic) (Karhu, 2002, pp. 181-188). Based on the interviews, it is rather unlikely that new firms will emerge delivering extra expertise to the principal in the near future, as special operations would require large investments in local SME sector. In case small enterprises grew into medium size enterprises the investments were easier to accomplish (Karhu, 2002, pp. 188-189). Breeding ground thinking and a threat of external suppliers urge for a new system supply concept of local companies. Global and large national service providers gain competitive advantage at present due to excellent performance of products and services (economies of scale). System deliveries associate also to the idea of fewer suppliers in the future. The following recommendations were stated in the research: Shut downs should be staggered Networking between the principals and suppliers Public registers of suppliers (in the Internet) Recommendation system Open and on line information and communication SME sector development and new markets elsewhere Large principals should take the leading role in the development of cooperation Long term relationships with the win-win policy Make the most of the local supply (Karhu, 2002, pp.195-196). Prevailing modes of cooperation Karhu surveyed the prevailing modes of cooperation in South Karelia, opening up with the options of Strategic networks, Operative networks, Strategic alliances, Partnerships, Subcontractor bidding, Subcontractor cooperation, None. During the research it became quite obvious that all the terms and modes of cooperation were not totally clear to the respondents thus the result might only be indicative.

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The three most prevailing modes of cooperation in South Karelia within the SME sector were (sample of 94= answers): none (28,7%), partnerships (18,8%) and subcontractor cooperation (17,5%). The three most prevailing modes of cooperation in South Karelia between the SME sector and the principles were according to the principles (sample of 7= answers): subcontractor cooperation (7/7), subcontractor bidding (5/7) and partnerships (3/7). The three most prevailing modes of cooperation in South Karelia between the SME sector and the principles were according to SME suppliers (sample of 12= answers): subcontractor bidding (4/12), partnerships (3/12) and, subcontractor cooperation (2/12), partnerships (3/12). As a conclusion, SME sector enterprises consider the prevailing modes of cooperation more based on bidding than the principals. The low rate of answers should be taken into account. Recommended modes of cooperation The three most recommended modes of cooperation in South Karelia within the SME sector (sample of 94= answers) were: operative networking (28,1%) none (17,5%) and partnerships (15,6%). The three most recommended modes of cooperation in South Karelia between the SME sector and the principles were according to the principles (sample of 7= answers): subcontractor cooperation (6/7), partnerships (2/7) and all the others (1/7). The three most recommended modes of cooperation in South Karelia between the SME sector and the principles were according to SME suppliers (sample of 12= answers): subcontractor cooperation (5/12), all the other options (3/12) (Karhu, 2002, pp. 164-170). Conclusions The research of Karhu (2002) clearly points out the need for deeper and more consistent cooperation between the principals and local SME sector in South Karelia. As the study indicates that all the terms and modes of co-operation were not totally clear to the respondents, one might suggest, that the forms of cooperation should be revised, clarified and unified in order to keep especially the SME sector more up to date in business and more competitive and enviable to other customers as well. The development project for SME sector networking might start up quite easily by the SMEs themselves since one clearly positive result in the research was that SME sector enterprises look for operative networking with each other.

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4 RESEARCH SETTING OF EDYNET Based on the research results of Karhu (2002), one might suggest that the small and medium sized enterprises in South Karelia do not have enough knowledge or understanding about their opportunities of supplier networking with the principals. Equally, the principals do not seem to have enough trust or appreciation to deeper collaboration with the SME networks either. Any groundbreaking and active collaboration between the principals and SME sector may require some kind of change in everyone’s attitudes since the prevailing and the recommended mode of operations were the same: subcontractor cooperation. So far, no call for deeper collaboration exists according to the respondents of the questionnaire. Nevertheless, in order to keep their traditional business positions and relationships with the principals, the local MRO service providers should urge for a tighter form of collaboration with their customers in forest industry. It is also imperative that the SME entrepreneurs are well aware of the as-is status and trends in service business of manufacturing industry in general. It is self evident, that global and common business trends have a habit of spreading around with an accelerating speed and will reach the CASE district sooner rather than later. As described in the following chapters, large product manufacturers intent to increasingly integrate services into their product offerings, which might mean a totally new competitive situation for small and medium sized enterprises also in South Karelia. This chapter will clarify, in more detail, the as-is status of MRO services in question, beginning with the assumptions, conjectures and basic data of the business in South Karelia. Secondly, the research problem and questions are discussed in more detail. Finally, the framework and the process of the first stage of the study will be explained. The SWOT analysis, in the chapter 5, will bring more insight to the consequences of the prevailing competitive situation.

4.1

MRO business of the forest industry in South Karelia One recent and widespread tendency of product manufactures is to integrate services into their core product offerings. According to the article of Oliva and Kallenberg (2003), there are three main reasons to such a strategy: first, a substantial and stable source of revenue can be generated from services of the installed base of products of long life cycle. Secondly, customers increasingly demand and outsource services when focusing on core competencies, and finally, services are more difficult to imitate as being labor dependent and less visible thus offering an competitive advantage to the companies (Oliva and Kallenberg, 2003, p. 160). Despite of the opportunities of new profits in service business, the transition from products to services has been relatively slow thus far. For instance, it has taken a lot of time for traditional product manufacturers to realize that they actually need to concentrate on new business areas as they are in mature markets with slow growth and less technological innovations. Entering to such new markets calls also for new business strategy, new capabilities, personnel and infrastructure and maybe a totally new business models, which are not easily implemented. Additionally, many

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organizations have struggled to sell their services (Oliva and Kallenberg, 2003, pp. 161, 168). The results of the empirical part of this study implicate that the recent development among the machinery and equipment manufacturers of forest industry applies exactly to these trends. The manufacturing corporations are strongly focusing on after sales services and penetrating into MRO service business especially in their traditional markets that are fairly mature. Based on the interviews, discussions and observations of this study, the trend is ubiquitous: the same phenomena can be documented in South Karelia as generally as elsewhere in global markets. As one result of this development, MRO business is increasingly centralized to large firms’ business. In addition to the initial interest of the manufacturing firms to enhance their service business, the following reasons boost the centralizing progress as well: Corporation-wide procurements and purchasing policies Big national and international actors in MRO business Modern IT-systems’ ability to support all kind of centralized operations Smaller firms’ disability to develop appropriately As the business markets of large MRO service companies are becoming mature, and the traditional business of machinery and equipment manufacturers is decreasing, both these business actors try to gain more market share by delivering and serving comprehensive after sales solutions to the customers. In practice, big MRO companies and equipment manufacturers do no more supply only traditional maintenance and repair services but offer predictive maintenance with periodic diagnostics and remote analysis, engineering and management, spare part service and warehousing, even ITand administrative services. In other words they offer service agreements with allinclusive solutions. These competitors of local SME actors have new business opportunities, solutions, and models in order to serve the customer better. Corporate wide solutions involve economies of scale in all operations. This means that a big actor in business can supply such services to the customer that are competitive in price and quality at least in the short run. Modern ICT-systems might support the idea of corporate wide centralizing of business, since the ICT-systems enable the information visibility, sharing and gathering around the companies without difficulty. Implementation of centralized solutions and systems unifies at the same time all kinds of standard operations procedures across the corporation as well. Such heavy, expensive and structured solutions have not been available so far to SME sector companies as a means of collaborating with the principals. On the other hand, MRO business is traditionally local business. Local MRO service suppliers are still, at the moment, competitive in price and quality of services, but not in providing new kinds of services to the customers. In particular, local suppliers are not able to update machinery specific expertise due to the lack of access to training. Consequently, there is a hard struggle in MRO business going on between the corporate wide solutions suppliers and local supply that is not only dependant on the actors themselves but also on a variety of decisions makers nationally and internationally.

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A few definitions and key figures of MRO business in South Karelia and Kymeenlaakso district will be introduced in the next section of the chapter based on the study of Pöllänen (2003). The figures above include only service sales but no material costs of MRO operations. MRO services in forest industry are a major business for local SME companies in South Karelia (SK) and Kymeenlaakso district. From the annual turn over of a principal, MRO costs are approximately 4-6 per cent. From the total MRO business turnover of 215 M€ per year approximately 70 M€ is made by the local SME service suppliers in the whole area. South Karelia alone accounts for 47% of the volume (= 32.9 M€/ year). The volume of MRO services has been growing (€), for example in South Karelia MRO costs have increased 36M€ from 1994 to 2001 (Pöllänen, 2003). In the whole geographical district, the major business area, mechanical MRO, accounts for 118 M€ (= 55%) annually, from which 40 per cent are outsourced to local and external suppliers by the principal (= 47M€/ year). In South Karelia development trends of mechanical MRO are promising, at least from the service suppliers’ perspective: despite of the fact that the volume in MRO is not increasing in total, outsourcing is supposed to grow from 40 to 60 per cent annually (approximately 25 M€/ year). From outsourced mechanical MRO services 84% (around 40 M€/ year) is purchased locally, from which 75 % from the partner-suppliers. Of all the partners 60% belong to cooperation networks (Pöllänen, 2003). Four main actors provide MRO services in forest industry: in-house services (mill services) in a forest company, local MRO suppliers near the factory, external national or international MRO suppliers, and machinery and equipment operators. Lots of MRO services are purchased locally due to lower overhead costs of the services and easier access to local suppliers than in case with external services providers. Machinery and equipment suppliers have also had initials for cooperation with component suppliers (Pöllänen, 2003).

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Machinery and equipment suppliers

The principal (forest industry) In-house MRO service providers

Component suppliers Outsourced service providers

C1

C2

A B

C

C3

Figure 7: Forest industry MRO business and its counterparts.

Quite recently various actors have expressed a relatively clear demand for local rearrangements in MRO service sector. A lot of research is also on the way on the subject. Increasing competition, external threats and rationalizing of work in large forest industry companies have raised the subject into a valid topic. According to the report of Pöllänen (2003) there are, at the moment, around fifty SME sector enterprises or internal units of large companies of different fields, which are able to deliver appropriate MRO services to the principals in South Karelia, another fifty companies can be scored in Kymeenlaakso. These firms are well managed, financially stable and have potential to develop in future. In addition, there are also at least another fifty small companies in South Karelia, which work actively in MRO sector, but these firms might be considered too small or unqualified for big development project of cooperation by the principal. The MRO service provider sector is heterogeneous, which makes it difficult to operate with. Too many transactions, too many ways of work and processes still exist in the ‘system’. As an indication of limited service capacity of SMEs and lack of SME sector cooperation there is a constant challenge in balancing demand and supply in the local markets. System deliveries to the principals are exceptions due to the unorganized setting. Some SME sector enterprises have already accomplished cooperative relationships and loose networks with large forest companies. The relationships are traditional, long- established and working well. Relations are more or less based on personal relationships, as most of the participants know each other also in the community.

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CASE-Network of the study is one good example of networking and partnerships. Large forest industry companies and the suppliers established the network in 1996. The network has been considered as one of the pioneers in the whole Finland. At the moment the CASE- Network consists of representatives from four main forest industry companies in Finland and of fourteen SME sector suppliers of mechanical MRO services in Simpele - Lappeenranta area. Approximately 10 per cent of all MRO business in South Karelia is supplied by the CASE-Network. The network will be gradually extended up to 60 SME sector enterprises beginning in 2004, and comprising new enterprises from different fields of industry and services. The members of the CASE-Network have regular meetings where different management and development issues are agreed. Furthermore, the CASE-Network has its own extranet solution (CASE-NET) based on an Internet application and enabling mutual information sharing in the network. Coordination of work and processes, even electronic transfer of documents can be exploited in the CASE-NET at the moment if necessary. Most of the cooperation work has, however, been focused on training programs, quality management system and a shared contract management system so far. There is no significant collaborative production or system delivering within the network In the CASE-Network, all individual companies act as equal competitors in the market. They have certain kind of a partnership relation to the principals with threeyear contract of cooperation, but the companies have to compete with each other in almost every single (bigger) case of a tender. Thereby, the mode for cooperation between the principal and the suppliers is near the Western model of networking. In the Western model principals have many suppliers for the same purpose, and the relations are based on competitive bidding. In the Western model the principal typically manages product development and R&D, and the suppliers are more or less unspecialized. It is worth noticing, that in addition to the cooperation in the CASE- Network, most of the SME - members belong also to another ‘virtual’ network, which is mostly focusing on marketing of MRO services in the Internet and in exhibitions. The marketing network is independent of local principals and helps the SMEs in getting to new business markets. Johnson and Scholes (1999) have defined the different organizing of networks particularly in relation to how the interface with customers is structured. According to this classification the current status of the CASE-Network is ‘a service network’. The categories according to Johnson and Scholes (1999) are: A one stop-shop: involving real and physical presence and dealing with clients’ inquiries. The function is to put together a complete package of services by coordinating the various services provided. A turn -key constructor in civil engineering might operate this way, using its own expertise in project management and managing the network suppliers, but not actually undertaking any actual work itself.

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A one-start shop: again involving a real and physical presence dealing with clients’ inquiries, but mainly diagnosing client’s needs and referring them to the most appropriate provider. A one- start shop can undertake some parts of the work itself. A service network is where there is no single starting point of the clients in the network. The customers can access all the services of the network through any of the members of the network. Some service networks have a one-start service shop facility, e.g. hotels may form a network of independent hotels, but customers can make bookings in any independent hotel (Johnson & Scholes, 1999, p.414). As discussed earlier in this study, the current state of the MRO service supply of local SME sector is not satisfactory. The form of collaboration in the field is not sufficient. The expanding of CASE-Network and readiness for e-commerce by 2005 especially emphasizes the need for some kind of organizational change. Above all, a more unified model for local cooperation is imperative as a signal to the outside world of fighting off emerging threats.

4.2

Research problem Osterwalder and Pigneur (2002) argue that a business strategy, a business model and business processes should all be linked tightly together in an organization. This statement is one of the main base lines in this study. The focus of the study is on the SME sector companies of the CASE-Network in MRO services business field. In the study, this loose network forms ‘a system’ together with its main customers of large forest companies in South Karelia, and has competitors inside (in-house mill services and other SMEs in the network) and outside the system. This approach is imperative in order to be able to see the business as a whole, and to guarantee a systematic and consistent proceeding including all parties in the study. The argument is that the system should have a mutual MRO business strategy, a dynamic business model of network cooperation, and finally common business processes with shared ICT-systems in order to ensure the competitiveness of local enterprises against external MRO business actors. No local actors (e.g. micro sized enterprises) should be left out from the strategy planning, as actual implementing of the strategy will more or less dictate the future of all enterprises anyway. The development should be conducted together with all parties involved and led by the principals. The research question is: What kind of a mutual MRO business strategy, a dynamic business model of network cooperation and business processes should the system have, and how should they be implemented? How the change is managed? A sub question is: what kind of a modern ICT solution should be chosen for the network in order to make the operations easy and flexible in the business? (Conducted in cooperation with SMILE).

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4.3

Research process This research is conducted as a case study. Empirical data is gathered mainly by observations, interviews and workshops. In a case study interviews must be made as long as a researcher has come to the point that no more new and essential data would be available by continuing interviews further. In this study, most of the interviews are conducted together with Erno Salmela, the researcher of SMILE project, in order to increase the reliability of the results and collaboration between SMILE and EDYNET projects. More about the research methods is discussed in the chapter 1. The research project is divided into three stages in order to relate to the framework of Osterwalder and Pigneur (2002) introduced in figure 8 below. The first stage: the development of the strategy to the system. The second stage: the development of the business model (model of network). The third stage (with SMILE): the development of the processes to the model. Additionally the research process itself is considered to be one essential part of the change process.

1. stage

Planning level

Strategy

ICT pressure

Architectural level

Business Models

e-Business opportunities & change

Implementation

Business Processes

e-Business process adaptation

2. stage 3. stage

level

Figure 8: Pyramid of research stages.

In this report the phases and results of the first stage are discussed.

4.3.1 First stage: developing the strategy to the system The challenge during the first phase is to convince the decision makers of the local MRO business that a shared strategy of the system is imperative in getting to the right track for the future. Another challenge is to point out, that the principals should be strongly involved with the whole strategy process. Finally, the third challenge is the strategy itself and the plan for its efficient implementation. The first stage includes the following steps: 1. State of the art: interviews, benchmarking, observation, workshops and literature 2. SWOT analysis and scenario (visioning): working papers and workshops 3. Mission and vision statement: working papers and discussions

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4. The strategy and the roadmap for the strategy implementation: working papers and workshops. As discussed earlier in the chapter 1.5, hypothetical business models have been introduced during the research process to clarify the possible future outcome of each idea. In the figure 9 below the first steps of the research milestones are described.

Mission Vision State of the Art Strategies developed by the other actors

SWOT analysis and scenarios

Option 1, new strategy

Option 2…n new strategy

Iteration

Testing of the ideas

Nothing new is developed

Evaluation of the research setting

Selectable strategy

Roadmap

Figure 9: Steps of empirical part during stage 1.

4.3.2 SWOT and scenario analysis framework: phases of visioning A SWOT analysis summarizes the key issues from an analysis of the business environment and the strategic capability of an organization (Johnson & Scholes, 1999, p.190). Strengths, weaknesses, opportunities and threats of an organization are listed so as to specify and to identify, weather an organization is capable of dealing with the future changes in the business environment, or weather it has opportunities or a relevant strategy to exploit further the resources and core competencies successfully. A SWOT analysis is a good instrument of bringing up and under discussion the critical success factors of an organization. Critical success factors are the components of the strategy in which the organization should excel to outperform competition (Johnson & Scholes, 1999, p.192).

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SWOT and scenario analyses (future mapping) were the tools in developing the business strategy for the network system formed by the principals and local SMEs. SWOT and scenario analyses formed the main phases of visioning, as a result of which the pursued vision could be stated, and for what the strategy of the system is actually constructed. The vision is the desired outcome of a successful strategy. In this study, visioning is defined as a process of imagining and planning of the different outcomes of different scenario paths. The best option of the outcomes will be chosen for the to-be vision of the system. Visioning starts with the SWOT analysis that defines the as-is status of the system and is the starting point of the scenario paths. Scenario paths, on the other hand, can be described as results and consequences of various decisions in the business environment, and leading to optional results in regard with different actors. Scenario paths will be presented in scenario tables later in the study. Eventually, the strategy is the set of actions taken in the business environment that actually leads to the desired outcome.

Phases of visioning • •

SWOT-analysis Future mapping

VISION

development

– actors and their missions – mega trends – weak signals • pre-phases of change

– scenarios (scenario tables)

SWOT

scenario tables

• decisions and consequences

•

Vision

•

Strategy – roadmap time

Figure 10: SWOT and scenario work in phases of visioning.

In order to progress efficiently in the strategy planning process, the following principles and impediments were accepted: Plan and design from scratch Introduce and test the ideas as much as possible with people of different positions even in most early stages of the research Accept and ignore the possibility that there might be, at this point of the research, some corporate level (or other level) strategies behind the scene, and not expressed in public, and thereby effecting to the results of the research later.

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5

SWOT ANALYSIS OF THE LOCAL MRO SERVICES In this study, the SWOT analysis was carried out in order to convince the parties of the CASE-Network of the current state in the local MRO business, and of the need for the mutual strategy of the CASE-Network companies. The SWOT analysis was also a starting point to scenario planning that followed the SWOT analysis work in the study. The research started by getting acquainted with the business environment and different parties in it, including tens of interviews, observations, previous studies and literature overviews as well as lots of discussions and argumentation during the workshops sessions and management team meetings. SWOT analysis was composed based on those findings. As a conclusion of the SWOT analysis, critical success factors of the SMEs were taken as the base line of the strategy planning later in the study. The results of the SWOT analysis are the main outcome of this chapter. The chapter begins with discussion on the major actors and their competitive situation in local MRO service business in more detail in order to put the grounds for the SWOT analysis. Later in the chapter, the results and the conclusions of the analysis firmly state the need to further investigate the possible future outcomes of the business development, since there are as much threats as opportunities listed in the SWOT analysis for local SME sector companies to face in the future.

5.1

Actors in MRO service business of the forest industry in South Karelia Traditionally, maintenance has been considered as a support and a non-productive function. During the last ten years, many companies have recognized that maintenance of assets and machines is an essential part of the operations and have a significant effect on the performance of the whole business. Huge increase in the number and variety of physical assets to maintain, increasing automation and complexity, new maintenance techniques and changing views on maintenance organizations have changed the attitudes toward this business in general. Demand for effective use and coordination of information and resources in order to handle emergency, routine and preventive/predictive maintenance has made this field of business more challenging not only to maintenance service providers but to maintenance ICT- system suppliers as well. The more complicated and central the business becomes, the more actors will get interested in it. In South Karelia, the MRO service business value in forest industry is around 102 M€ annually (2001). From this value forest companies outsource yearly around 40 M€. The outsourced value is supposed to grow up to 60 M€ in the near future. Mechanical MRO compose the biggest part of the MRO business with 55 per cent of the total (app. 56M€) from which 23 M€ per year is outsourced. Current CASE-Network of mechanical MRO companies have altogether around 10 per cent market share of the total outsourced business value, i.e. around 2,5 M€. Current CASE-Network business with the principal is allowed to be maximum 50 % of the SME company’s turn over. Expanded CASE-Network, which will represent also other MRO business fields than mechanical MRO, will deal at first with the business volume of 40M€ per year, and according to estimates from Pöllänen (2003) later with 60M€ annually. The figures above include only service sales but no material costs of MRO operations.

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The main actors in MRO business in South Karelia are from the local SME sector perspective the following: 1. In-house mill services owned by Principal alone or Together with a national or international MRO service provider 2. CASE-Network enterprises 3. Competitors, mainly Specialized MRO service providers of large corporations and Machinery and equipment manufacturer 4. Other local SMEs outside the CASE-Network In the figure 11 below, the status of MRO services of the case is presented.

As-is status at the beginning of the extended case network AA

BB

MRO

CC

MRO

DD

MRO

MRO Vendor Managers

Y1 Y2

Competitors: big national and international MRO service suppliers

1

2

3

Y3 Local suppliers

4

5

6

7

8

9

10

8

Figure 11: Actors in MRO service business in South Karelia.

1. In-house mill services Competitive position of the in-house mill services in the system is privileged as an internal part of the principal. The positive factors of the mill services are the manageability of the personnel, locality, cost competitiveness (to some extent)) and typically personnel with long experience in maintenance and repair. On the other hand, there might be a problem ahead of aging and retiring of the employees as well as of inflexibility to development and changes in some cases. The trade union has a major impact on whatever decisions concerned with the employees in the forest company thus making any changes slow and difficult.

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Attitudes, attained privileges, and on-going ICT system implementation programs may just now hinder middle management’s willingness to radical development of in-house MRO services in MRO departments. Additionally, maintenance operations and procurement activities related to it have not traditionally been regarded as core competence or core business in forest industry, and have not had an important enough role in the top management’s mind. As some has also argued, that maintenance engineers (middle management) might neither have modern business competence nor ‘the big picture’ of efficient and effective MRO procurement operations, the overall management of operations might be insufficient. In such a situation the decision makers are also vulnerable to all kind of marketing efforts coming outside the company. Only one principal in South Karelia have organized its in-house mill services into a joint company owned together with a national MRO service provider. 2. CASE -Network companies At the moment, the CASE-network is composed of fourteen small and private enterprises and of representatives from four principals. The SME enterprises represent local and utmost expertise in mechanical maintenance and repair in general, but not as much specialization due to the lack of resources or eager to invest and focus on any special field of MRO. SMEs consider specialization and investing in it as a risk at the moment. The CASE companies have usually a three-year partner contract with the principals but have to compete for actual orders with other CASE companies. This may be a negative factor in network relationships where uniform targets and cooperation are essential. One of the main problems at the moment is that none of CASE-enterprises is big enough to handle system deliveries and big contracts. The enterprises do some subcontracting within the network but not enough to satisfy the demand of the principals. In such cases principals turn to the competitors who are able to deliver in bigger amounts and to offer also extra expertise if necessary. Local MRO service providers are typically small or micro enterprises rather than medium sized, and suffering of poor resources or capabilities to face fierce competition at the moment. Likewise, extra expertise in MRO business requires nowadays more potential to development and training in new technical issues than the local SMEs currently have. This disadvantage of local suppliers is naturally an advantage to external challengers with all the potential in growth. The CASE-companies need a particular strategy for future development in order to survive. With some kind of a vision of the future, the SME sector might take radical actions like mergers and acquisitions, and put better grounds for a new generation of entrepreneurs to get more interested in the business. So far, the SME sector enterprises employ the most in South Karelia. The CASE- NET is an Extranet solution based on an Internet application enabling mutual information sharing in the CASE- Network. Different kind of organization of work and processes, even electronic transfer of documents could be exploited in the Net (Kaski, 1999.) So far the portal has only been used as a register of company

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information and for marketing purposes. Members of the network do not see much worth in communication via CASE-NET. As the CASE-Network will expand with new enterprises and requests for e-commerce is constantly emerging, a new solution for e-communication will obviously be imperative. 3. Main competitors The MRO business field is facing increasing competition. In-house mill service departments of principals as well as the joint companies of the principals and national service providers are undoubtedly constant competitors of the local SME sector. The positive feature of those competitors has so far been that these competitors at least employ more or less local work force instead of bringing totally new forces to the business. However, in the near future the main competitors of the locals will increasingly be representatives of Global corporations of machinery and equipment manufacturers (e.g. for paper industry) with extra expertise in respective industry, and International and national MRO service providers that seek for new market instead of staying in mature ones. These actors have volume and competence advantages compared to local SMEs, and they are able to supply with extra performance and with system delivering. These companies cooperate often with local subcontractors as well in order to save in labor expenses. (See also the chapter 4.1) Despite of the extra costs due to travel expenses and a different cost structure, the expertise of these companies is eventually a major factor when choosing a MRO service provider by the principals. In order to be able to compete against this kind of challengers, local enterprises in South Karelia need to combine the strengths immediately. 4. Local SME- environment The local SMEs outside the CASE-network are small or micro enterprises and thus most often limited in resources. Their position in the system is acting as capacity buffers to other suppliers and principals. The other locals might also belong to some other SME sector networks than CASE-Network and provide services to the competitors or other customers. Some of the other locals have chosen not to take part in the CASE –network or other network in the area, because the contract agreements have not been suitable for the companies. Some representatives of those companies argue that for example price negotiations have not been satisfactory or the advantages not reciprocal enough in order to get the win-win situation between the contract partners. The local SMEs are of utmost importance to the area, as their represent independent entrepreneurship and give work to lot of people. The role of these companies is important as subcontractors of bigger companies, which demands for consistent

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development in these companies as well in order to guarantee invariable quality and performance standards overall in the business environment.

5.2

Competitive situation of the local MRO business As explained in previous chapters, the competitive situation in MRO service business is constantly getting harder in South Karelia. The trend is global, and currently seen not only in MRO service business, but in various service business fields as a general rule. One major reason to this phenomenon is the latest tendency of large corporations to enter new markets by focusing more on service business and on after sales services, instead of merely on producing and selling physical products in mature markets. Another reason is the tendency of centralizing of operations in customer companies: support operations and functions in the company will be outsourced to large service companies or subcontractors, which will then take care of the outsourced business in a corporate wide manner. Thus the big companies will step by step enter new businesses that formerly were run by the customer company itself or together with local SME suppliers. The local small and medium sized enterprises would be in real jeopardy in case the principals decided to focus on in-house services and on conducting most of the operations by themselves, or expanded their in-house services spatially and regionally from one mill to another in order to optimize the work force capacity. In the short run, this orientation would be even more fatal to the local SMEs than fierce competition with the big actors, since the in-house mill services and the local SMEs compete mostly in the same competence areas and costs levels. It might be worth pointing out, that some kind of competitive threat might also emerge, if MRO specialists or work force came to work in Finland from abroad like Russia or the Baltic countries, and would be under-paid compared to Finnish work force. That might totally crumble the competitive advantage of the local SME sector. So far this has not been the case in South Karelia. SWOT analysis is a suitable tool in listing out in more detail the factors that should be taken into account when deciding, what option to choose and what actions to take in a competitive situation. Critical success factors of SME sector companies found in SWOT analysis take the major role in making the conclusions and defining the strategy later on. The following figure 12 below illustrates basic assumptions of the as-is status of competitive position between the different actors in the business. ‘The headquarters’ in the figure describes the corporate level decision making of forest industry companies.

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Basic Assum ptions in SW OT-analysis Mill services

Corporate level decisions and requirements

Challengers

Headquarters Lobbying

Machinery and equipment based services

Traditional cooperation

Local services

Increasing cooperation

11

Figure 12: Basic assumptions of as-is status in the SWOT analysis.

In the next chapter, the results and the conclusions of the SWOT analysis are stated. The analysis is performed from the SME sector point of view.

5.3

Results and conclusions from the SWOT analysis The results from the first stage of this study were gathered from tens of interviews, observations, previous studies and literature overviews as well as lots of discussions and argumentation during the workshops sessions and management team meetings. The findings concerning the competitive situation and the strategic capability of the investigated SME sector and the CASE- Network in particular of the sector are summarized in the SWOT analysis. The list may not be complete but rather a list of the major issues valid and relevant to this study. The opportunities and the strengths of SME sector listed during the analysis formed the basis of the strategy planning later in the study. The strengths, the weaknesses, the opportunities and the threats of the SME sector companies in MRO business in South Karelia are presented on the table 2, next page.

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Table 3: Results of the SWOT analysis.

Strengths

Weaknesses

independency entrepreneurship reasonable investments basic competence good relationships with partners good relations with the customers locally well-know loose networking with the partners moderate premises and equipments experienced personnel so far equable and even employment a lot of industry around good price/quality ratio financial stability good reputation

Opportunities

no active and outspoken long term planning poor negotiating power aging personnel and management micro and small sized companies no development resources not enough development capabilities no ambitiousness no continuator of entrepreneur poor possibilities to get access to high technology not enough collaboration with partners no active marketing or business elsewhere partly outdated processes and it-systems no leader in the networks no coordination in collaboration with the partners poor recognition of change no specialization

Threats

focused marketing and lobbying long term planning with business partners predictive alertness in changes outsourcing in forest industry increasing new power in negotiations by networking new partners (challengers) available activeness in training and investments activeness in specialization coordination and management of networks support and respect from government and authorities on going development projects privileged status as a local company price competitiveness excellence in performance( quality) local education existing customer relationships

hard competition with challengers foreign underpaid employees lack of understanding of business lack of understanding of entrepreneurship in the customer interface no commitment from current customers short term planning in general too tempting offers from business buyers no collaboration locally envy lack of development corporate level decisions of the customers centralization of operations in customer companies fluctuation of customer demand unemployment overwhelming demands and expectations from customers forest industry will not invest in Finland anymore aging and retiring personnel lack of qualified employees down markets within the region

Conclusions from the SWOT analysis The analysis shows clearly how many opportunities the small and medium sized enterprises currently have in South Karelia. Controversially, one might state that there

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are as many threats on the list as well. Hence, the SWOT analysis enlightens the need for immediate actions to overcome the threads by concentrating on the opportunities. Main opportunities and strengths One of the major opportunities and a critical success factor in the competition is the fact, that there is still a lot of industry in the area indicating continuous prospects for the SME sector. This opportunity should be taken into account seriously and instantaneously in order to keep a sufficient share of the available business in the forest industry. Namely, some business trends indicate that the forest industry is increasingly investing abroad instead of Finland in the future, at which point there might not be that much of new business opportunities left in Finland. Accordingly, it may be assumed that most of the future market shares will be divided between the different actors right now and in the near future for a long period of time. Business relations form one part of firm’s strategic assets (Ford, 2004). Another great opportunity of the SME sector in question is its more or less privileged status in the local MRO business. The SME sector companies already have good relationships with the local customers, which is important in the tough and competitive situation; it is at least easier to keep the relationships than to establish totally new ones. Initiatives for mutual long term planning and a strategy at this point would surely bind the companies more tightly together also for the future business relationships and cooperation. That kind of partnership would inspire the customers, alert the competitors and knock up the SMEs. Vertical as well as horizontal networking, dynamic partnerships and alliances of the local actors are imperative tools of competition against bigger actors in the case business environment. In other words, it is particularly important and a great opportunity for the SMEs and micro enterprises to get more capacity and substance by joint efforts and system supplies in the local markets. Networking and other forms of alliances give the enterprises the opportunity to cooperate and to share risks and investments as well. At the same time, these firms would keep their independence and support entrepreneurship within the region. Furthermore, it is of utmost importance that the local enterprises would not end up representing second-tier enterprises with only basic competence in a professional sense of expertise, since there are opportunities to develop and grow in the business in the area. Good basic competence in MRO business, skilled performance in price/quality ratio and financial stability of the firms are the factors that support the local supply at the moment. In addition to these attributes, a whole range of extra expertise an specialization should be acquired in cooperation with the customers, the competitors and by education. Modern SME sector enterprises could be referenced to new customers by the current customers as a result of the most positive progress. All kind of input and support to development and education efforts from authorities and public sector administration might also help the enterprises to build up further business choices. Finally, essential success factors of SME sector enterprises are their locality, flexibility and agility in operations. These features make the whole business in such companies

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efficient, effective and adaptive thus ensuring the cost competitiveness compared to competitors. Main weaknesses and threats The plausible threats encountered by the local companies have already been discussed from the competition point of view in the previous chapters. Besides the competitors, the companies themselves can generate threats if they are not ready to accept the change in their mindset of business orientation in general. As David Ford (2004) has stated, ‘the key to success comes from accepting the facts’. Prejudices and narrowmindedness to all kind of new thinking when cooperating with different partners might endanger the kind of development the current business environment requires. Some of the demands of change can be overwhelming: horizontal networking, for example, demands for more openness and trust than ever before in the relationships with partners. Exploiting of modern ICT- technology is another good example of obligatory duties that cannot be avoided. Marketing might also be a weak point in an ordinary small and medium sized company used to relaying on personal and traditional contacts in business management and marketing. Based on the findings of this study, the competitors use a lot more intensive ways of approaching the customers than the local SME sector managers nowadays, and they consistently address the marketing efforts to corporate level management thus ignoring the local middle management that might have too tight relationships with local suppliers. On the other hand, representatives of big corporations’ top and middle management level might not appreciate or understand enough the business of the SME sector. This weakens the status of small companies in big customers’ minds, and can lead (intentionally or accidentally) to drastic diminishing of procurement from local companies even on a national scale. Hence, the major threats are those generating from the attitudes and decisions of the main big customers. Decisions of all kind of centralization of service business to big (inter) national actors, underestimating of local competence and capacity, and the indifference to social and regional consequences of possible new directions in business strategies intimidate the existence of small and medium sized enterprises the most. Ford (2004) has argued that a network cannot be managed as a whole, but a member of it can control only its own position in the network. Nonetheless, based on the findings of this study, the CASE-Network undoubtedly lacks continuous coordination of development projects, system supplies and planning among other things. Coordination of legally independent entities requires in this case at least some kind of promoting of common operations and marketing. In the next chapter the consequences of optional decisions and strategies will be discussed in the form of scenario planning.

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6

VISIONARY SCENARIOS Scenario planning was chosen for one development tool of the future mapping in the empirical part of the study. It was used in questioning and justifying common beliefs during the study. According to Fahey (2003), scenarios can directly challenge conventional bits of wisdom, and so-called business orthodoxies that weaken individuals’ ability to correctly perceive what is happening in the world around them, including clues to the future. In short, scenarios provide a critical means to continually challenge how organization thinks and what it thinks about. Scenarios often alert managers to new threats or threats likely to emerge from unanticipated sources (Fahey, 2003, p. 12). This chapter focuses on visionary scenarios and visions of the local SME sector enterprises in MRO service business. In the beginning of the chapter, theoretical viewpoints of scenario planning process are brought up. Further on, the scenario planning process, the scenario settings, options and tables as well as the scenario workshop results are presented. Conclusions, the stated visions, and the ideas of further research end the chapter and the whole report.

6.1

Companies learn from scenarios ‘Scenarios are descriptive narratives of plausible alternative projections of a specific part of the future, also a set of what-if questions.’ Scenarios serve two purposes: first, scenarios foster preparedness: managers can anticipate a range of potential futures and get ready. Secondly, scenarios afford managers a forum in which to consider and determine what they should do each future to materialize (Fahey, 2003, p 7). Stephen M. Millett (2003) states that even though the future cannot be reliably forecasted, it can be imagined and lived in as a means of learning from it (Millett, 2003, p. 20). Scenario development can create the over-all framework for our thinking and the starting point for development of roadmaps for a strategy. According to Fahey (2003), few frameworks of analysis are so ideally suited to link the strategy and knowledge management as scenarios. Scenarios have become an important part of the standard strategy planning in many leading firms but have value only to the extent they inform decision makers and influence decision-making. The heritage of scenario planning is external – an outward-in approach designed to get people to rise above the current concerns and viewpoints (Mason and Herman, 2003, pp. 23-31). Scenarios are not a one-time event but essential work in developing strategy alternatives, so managers should not pay too much attention to details. ‘In each step of developing scenarios the emphasis must be on identifying, challenging ad refining the substance of managers’ mindsets and knowledge. Alternative projections must challenge managers’ current mental models by creating tension among ideas, hypotheses, perspectives and assumptions. The dialogue and discussions of alternative futures directly affect managers’ tacit knowledge (Fahey, 2003, pp.7-9).

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6.2

Vision driven vs. decision driven scenarios The aim at planning scenarios at this point of the EDYNET study is mainly to foster preparedness and to alert managers to business threats as well as in designing the future vision to strive towards to. Courtney (2003) has written that the first essential step in any successful scenario planning process is to clarify the purpose of the process including its expected end products. These expectations will define whether to use vision-driven or decision-driven scenario planning process that are designed to address very different company needs. The nature of the scenario planning in this study is mostly vision-driven since the purpose is to generate new strategic ideas that lead to the pursued vision. The table 4 below shows the differences between these two approaches (Courtney, 2003). Table 4: Vision-driven vs. decision-driven scenarios (Courtney, 2003). Vision-driven scenarios

Decision-driven scenarios

Nature of scenarios

Emphasis on broad, macroeconomic and global drivers of change. Longer term (5-10-20+ years)

Focus on specific uncertainties that drive decision. Generally shorter term (driven by time necessary to evaluate pay-off to decision).

Nature of process

Emphasis on divergent thinking and broad perspectives. Heavy reliance on outside experts, consultants and facilitators.

Data-driven and analytical when possible. Heavy reliance on internal expertise and industry experts (unless major confidentiality concerns).

How scenarios are used

Generate new strategic ideas. Develop shared sense of possible futures and need for change. Launch follow-on projects and analyses to further develop implications of the scenarios.

Test opinions for a specific decision against the range of potential outcomes and develop implications for which option to choose.

Furthermore, Faley (2003) writes in his article that managers need to commit to identifying and grabbling with strategy uncertainties. A true test of that commitment is whether your organization allows and fosters tension between different kind of perspectives on the future and the present. Thereby scenarios cannot be developed without identifying and assessing key uncertainties: Do we know the shaping forces of our current and emerging business environment, and what are the driving forces? Do we know what driving forces might not change over the scenario period? Do we know which of these forces have more uncertainty associated with them and how these forces might interact to one future rather that another (Fahey, 2003, p.10)?

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In this research, listing the possible and plausible threats and opportunities in the SWOT-analysis concerned and explicated the uncertainties. The results of the SWOTanalysis were consensual and based on several very colourful discussions. There is no one-size-fit-all approach for scenarios that focus on near term strategic decisions. How to build the scenarios depends on which kind of uncertainty you face. There are four levels of uncertainties: a clear enough future, alternate futures, a range of futures, and true ambiguity (Faley, 2003). However, Courtney (2003) reminds that one should focus both on adapting and shaping future scenarios. One should avoid the tendency to be overconfident in one’s ability to predict future (Courtney, 2003, pp. 14-22). Table 5: Four levels of uncertainties (Faley, 2003). Levels of uncertainty

Description

Example sources of uncertainty

1.

A clear enough future: can define point forecasts that are ‘close enough’ for the decision at hand.

Returns on common investments in mature, stable markets. Customer and competitor reactions to strategies that reposition well-established brands.

McDonnald’s / new restaurant location. 2.

Alternate futures: Can define a limited set of possible future outcomes, one of which will occur. George W. Bush vs. al Core

3.

A range of futures: Can define a range of possible outcomes. Airbus A380 super-jumbo jet building. Instability in Argentina

4.

True ambiguity: Cannot define even a range of possible future outcomes.

?

Potential regulatory, legislative or judicial changes. Unpredictable competitor moves. All-or-nothing industry standards competition. Demand for new products or standards. New technology performance and adaptation rates. Unstable macroeconomic conditions. The outcomes of major technologic, economic or social discontinuities. Market evolution in markets that just are beginning to form.

United Airline’s safety strategy on the 12th of September 2001.

Monitoring change indicators is also important. As Faley (2003) states ‘the world around us is complex adaptive system, meaning everything is connected to everything and small events or local decisions can have a major impact. It means, that attention 51

should be paid to the indicators furnished by each scenario and how they are associated with the driving force. Furthermore is should be determined what is the appropriate sequence in which a set of indicators might be apparent or might evolve over the course of a scenario. Sometimes one indicator must occur before another event can take place (Fahey, 2003, p. 13). Table 6: Typology for decision-driven scenario planning (Faley, 2003, p. 17). Levels of uncertainty

Nature of scenarios

Nature of process

How the scenarios are used

1.

N/A

Model the impact of uncertainty through sensitivity analysis, if at all

N/A

2.

Mutually exclusive, collectively exhaustive set of scenarios that describe each potential outcome.

Develop implicationsfinancial and otherwise-of each outcome for the industry and company. Assign probabilities to each outcome, if possible. Describe the dynamic path to each outcome.

Assess the pay-offs to each strategic option in each scenario. Assess how each strategic option may influence the probability of each scenario. Combine these assessments with decision analysis techniques to choose the optimal strategic option.

3.

Representative set of 3-5 scenarios that largely cover the range of potential outcomes.

Choose representative points along the continuum of possible outcomes. Develop implications and describe each dynamic path to each outcome.

Assess the pay-offs to each strategic option in each scenario. Assess how each strategic option may influence the likelihood of different points along the continuum of outcomes. Combine these assessments with qualitative decision analysis logic to choose the desired strategic option.

4.

Integrated sets of assumptions that one would have to believe about the future to support different proposed strategic options.

Work back words from potential strategic options to scenarios that would support such options. Test for logic, likelihood and internal consistency through analogies and reference cases.

Test scenario assumptions through comparison with analogies, reference cases, and executive experiences. Determine the set of assumptions (i.e. the scenario) that the management team is most comfortable supporting at this time.

?

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Devising scenarios According to Millett (2003) any team of individuals constructing a scenario must structure and develop four interrelated scenario elements: an end-state, a plot, driving forces, and logics: End state refers to the state of the world at the end of the scenario period Plot details what would have to happen for the end state to occur, Driving forces shape the plots: the events, decisions and actions of various organizational entities that would cause the plot to evolve in a particular way, Logics provide a rationale for why a particular plot and associate end-state would unfold; why new e-business technologies would emerge, why new rival would be able to enter the marketplace etc. Contemplating what a set of futures might look like (end-states), how these futures might unfold (the plots), and why they would do so (alternative logics), causes managers to raise and then link together a number of unavoidable strategy issues and questions (Fahey, 2003, p.15). All in all, as Millett (2003) puts it: Scenario probabilities involve some calculations but mostly judgements. The probabilities reflect our own expectations and analysis of major trends, subject to revisions (Millett, 2003, p. 20).

6.3

Tailoring scenario planning to the company culture In this chapter some basic ideas of different cultural aspects of organizations to scenario planning are cited most directly from the article of Mason (2003). In organizations there must be an agreement on the purpose of the scenario planning effort and understanding about how scenarios might help different organizational cultures and styles. There are three cultural types of organizations: Leader driven (like computer system company), Plan driven (like telephone company) and Evidence driven (like oil company). Each of these types of organizations uses scenarios for three different purposes: Directional strategy, Contingency planning, Learning and team building (Mason, 2003, p. 25). Leader-driven cultures There are few organizations of typical leader-driven cultures. These organizations use scenarios as a way to structure the discussion. These kinds of cultures like to be labelled revolutionaries. They try to upset the status quo and failures are expected and accepted. Employees expect management to set the directions, but they recent detailed task planning. 53

Directional strategy in this kind of organizations mean direction setting by the leaders and middle management gets the work done. Scenarios are often basic directional strategy, where is the company trying to go? Scenario planning is a framework used to structure such a debate and workshops, but in the end the leader decides and everybody follows. Sometimes leader-driven cultures use scenarios for contingency planning, for sensitising to possible changes. Learning and team building is opening up the idea space in the organization in search of out-of-the-box ideas and inputs (Mason, 2003, pp. 25-26). Plan-driven cultures Plan-driven cultures are found in more stable business environments. These organizations are built to deliver a completely reliable service or products; failure to deliver is simply unacceptable. They value stability. They want to see change coming in advance and manage their way through it with a minimum of disruption. Directional strategy includes critical path listed but not only vision or end state. For each event they describe the outcome they want, the resources they require, and the time frame for action; then they assign responsibility to individuals or teams. They want to know what the success or failure looks like at each step of the way so that they can correct course as early as possible if they need to do so. Scenarios are part of formal training about how the company will respond to a particular event or series of events. Plan-drive cultures should try to make scenario planning a tool for common use (Mason, 2003, p. 26). Evidence-driven cultures Evidence-driven cultures develop in highly capital-intensive industries that have very long time horizons. There are huge costs to being wrong. Real evidence is of paramount value to these cultures. These cultures do not make decisions on hypothetical constructs; scenarios provide only a framework of expectations to match up with the real world as it develops. Accumulating evidence will eventually make the change of being wrong unlikely. With mounting evidence it is only a matter of time there is sufficient confidence to make a decision (Mason, 2003, p. 27). An investment that works under all the scenarios is a much better idea than a move that only works under one scenario. In such a culture, once a decision is made, managers are alert for every warning event that suggests the decision should be reviewed or reversed. Such cultures want to be the first to know they made a mistake so they can alter their strategy before the market finds out (Mason, 2003, p. 28). Large operations use scenarios as a way to reach out broadly, constantly seeking ideas and inputs that enhance or threaten the future of the operation. They seek to learn everything that might be relevant.

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6.4

Scenario planning process as a part of future mapping in EDYNET Scenarios can be described as stories of decisions and their consequences. In the EDYNET research process, the scenario analysis was carried out as a final part of future mapping. Stories were written in order to be able to draw ‘a picture’ for decision makers of the CASE-Network about the possible future outcomes of diverse decisions and actions. The scenario work was done at this stage of the study also in order to emphasize the importance of the input that the local SME sector has and will provide to the principals and for the region, and vice versa. The pursued vision for the whole network system would be the most optimal outcome of one of the scenario stories. Future mapping itself was about gathering together the main actors, mega trends and so called weak signals of the business environment that were affecting to the actual scenarios of the case at the time of the study. The whole process was conducted as an elementary work for developing the business strategy for the network system formed by the principals and local SMEs. The work was based on the entire evidence dig up during the research process and on the SWOT analysis. The idea of the elements of future mapping is illustrated in the figure 13 on the next page. The list of the main actors and the mega trends was quite easily figured out early during the progress of the study (please see the figure 13, where some of major trends are listed). On the contrary, that was not the case with the speculations of the decisions and with the so-called weak signals. Weak signals are seen as pre-phases of change that might be significant to the development in case to materialize. Defining of weak signals turned out to be a most difficult and a most biased effort, since there is never any absolute truth regarding such issues. However, the following weak signals were considered as most obvious and relevant to the development of the future business environment around the CASE- Network: signals of Future investment plans in Finnish forest industry, Promising support to SME sector companies from public opinion and authorities in Finland, Compromising of entrepreneurship in SME sector, Actual intentions of the forest industry corporations in MRO service business Foreign work force penetration into the region Lack of qualified work force Finally, the scenario writing in EDYNET study was a kind of summarizing of all the facts gathered from future mapping components.

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Som e elem ents of future m apping •

Actors and their decisions – – – – – –

•

custom ers S M Es com petitors other local netw orks business environm ent authorities in public sector

V IS IO N dev elopm ent

SW OT

scenario tables

M ega trends – – – –

business globalization business concentration outsourcing e-business

•

W eak signals

•

Scenarios (scenario tables)

tim e

– future investm ents in Finland etc

Figure 13: Elements of the future mapping in EDYNET.

In practice, the actual scenario planning process had three parts: Preparation of scenario papers based on the speculations on various factors of the future, Workshop, where the participants discussed the scenario options, and Analysis of the results from the workshop.

6.4.1 Preparative scenario papers The preparative scenario papers included: Description of the scenario setting, List of arguments and assumptions about contemporary business, Three tables of scenarios, and Questions concerning each scenario. These papers were the working papers in the workshop held during the CASENetwork meeting. The papers were distributed to the participants of the workshop in advance in order to strengthen the common view and understanding of the main ideas before the meeting. The first scenario was based on the idea, that the local MRO business environment should be regarded as a system of the principals from forest industry and the local SME enterprises having partly common strategies and goals concerning MRO business issues.

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The second best scenario supports the idea, that the forest companies and the SME sector are collaborating partners but do not state common interests of future. The worst scenario was based on the idea that local SMEs do not get enough support and commitment from the principals, and eventually end up working for the competitors, and loose independency as entrepreneurs. The figure 14 below illustrates the scenario setting.

It is im portant to focus on the whole local ’system ’ in the developm ent of the network •

• • •

the local system: the network of the principals and SME companies, the principals (customer): forest industry companies Network suppliers: local SME companies, competitors: national or international companies increasingly penetrating into the local m arkets

LOCAL MRO SERVICE BUSINESS, AS-IS Customers In house: ~60% market share

IT-system not in use.

E-Network suppliers ~10 % market share

System deliveries and management

Competitors National and international MRO service providers

~ 30 % market share?

Other local suppliers

Figure 14: Scenario setting in EDYNET.

List of arguments and assumptions about contemporary business behind the scenarios The list of the arguments and the assumptions about the current and future state of the business environment were made in order to create some tension and questioning among the workshop participants. The list describes some change indicators in the local business environment as well as in decision-makers’ mind and thinking. The list of arguments was delivered to the participants at the same time with the scenarios. 1. The basic question in business is, how to balance between customer satisfaction and cost efficiency. Competition will be even harder in future, and the winner makes the most and the best with the same or less resources than its competitors. Thus R&D of products and services is essential, but so are the costs, in order to keep the prices on a reasonable level. In order to find all the non-value adding activities (costs) we need to focus more and more on details in all operations. 57

2. The principals compete in the international markets. They need to buy services where the total costs of operations are the lowest. The principals need to calculate the total costs per a business option. The total costs consist either of o outsourced services: negotiations + in house paper work + price + management + claims + checking etc. o or in- house costs: wages + overhead costs, materials, obsolesce, quality costs, training and education etc. o or a sum of both above-mentioned options. 3. Even competitors have competitors: they have already been forced to develop their business. The results of the development can be perceived in the variety of services they supply, as well as in prices. The competitors will acquire know-how and work force from local actors. No market is too small for the competitors, and they will penetrate into new markets piece by piece. A united and organized group of local enterprises would be a difficult challenger to the competitor. 4. The principals need the local SME companies as much as the local companies need the principals. The principal determines as a purchaser how the supplier should operate. The local enterprises should be worried if there is no demand or willingness for development. The principals and the SMEs ought to agree upon the development costs included in prices. 5. Strategic procurement will be increasingly important due to increasing outsourcing in all business. The trend requires focus on what is worth paying. The less costs the lower price. Suppliers learn to produce according to demand (in volume and quality). Suppliers should learn to require the same quality of services from their own suppliers as well. 6. Development of operations. Standardized processes in operations help most the principals. That is the way it should be, since the principals have to be competitive in the international markets. Standardized processes make the business efficient and effective within the SME network as well. Standardized processes mean discipline: usually it is no harm unless it makes the operations inflexible. While waiting any corporate-wide development to be implemented, smaller development projects could be run in order to start harmonizing and modernizing of the operations in the network. 7. The local SME sector enterprises compete in the international markets via their customers. Thus the rules and the requirements of international competition must be acknowledged. Need for development is obvious to keep price/quality relation of services competitive. Development is costly, but the costs must be put into the prices; so do the customers and competitors as well. Local companies should develop, coordinate and sell system deliveries and al-included services, competing only with prices won’t be enough in the long run.

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6.4.2 Scenarios up to 2008 The scenarios predict the future from the viewpoint of the region, the system, the principal and the SMEs. The argument is, that the first scenario is the most optimal one, since the system approach gives the best result from every perspective. In the first scenario, the SME sector and the principals regard the local (MRO) business as a system of enterprises with common interest and benefits. Business decisions will be seriously thought over from the region’s point of view as well. This means that decision makers need to question some of the development trends, like centralizing of business and decision-making, consistently. This is important to the locals, but no loss or inconvenience to the principals either. The business margin will be made and kept within the region by local enterprises, total costs of the principals will be reasonable due to the local supply, and the SMEs will prosper. The scenario setting is in the figure 15 below.

The first scenario option Local SMEs and the principals form a system that collaborates intensively

BB

AA

CC

Competitor Competitor

IT-HUB HUB ‘ cooperation in special expertise’ ITIT- HUB IT- HUB

Local SMEs form a first tier supplier network and have direct customer relationships with the principals.

1

2

3

4

Some suppliers serve the competitors

5 6

77

8

9

Figure 15: First scenario setting.

The end state of the first scenario (system and the region), and the actions of the principals and the SME sector, are described in the table 7. The table shows the consequences of the decisions of different actors to the system and to the region in particular. The first scenario option to materialize requires concurrent and reasonable decision-making of all enterprises in question. The principals and the local suppliers work consistently together; the system they form will act as an entity, and finally, total optimizing of all possible resources may unfold.

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Table 7: Scenario option 1. Region perspective

System perspective

Principal perspective

SME perspective

A prosperous region

Companies have customers also outside the area. Local SMEs are regarded as referenced and qualified suppliers.

Principals commit to the local enterprises consistently and accept the idea of a system and total optimization.

SMEs sell services straight or through the principals outside the area. High market shares locally

Flourishing large companies and successful SMEs in the region

The system acts as an entity: Optimizing in operations and costs, based on specializations and rationalization of work

Principals focus on total costs of procurements. Principal have set strict development requirements on SME sector

SME sector have organized and specialized. System deliveries and modern operations. New division of work within the network.

Stable employment in the region, entrepreneurship, independency and efficiency

Demand /supply in balance locally.

Strong leadership and management toward the suppliers. Development and coordination with pure business attitude.

Coordination and management of networks. Collaboration with the principals and new business ideas

Competitors are not able to serve better than the locals. Principals buy services from the competitors only in special cases. Competitors are not a real threat to the locals.

Mutual plans in the system: vision, strategy, objectives, roadmap and procedures. Commitment for the future, new business opportunities due to specialization and coordination.

Open communication and commitment. Corporate level decisions are questioned, new definitions of strategic procurements Only long-term results count.

The will to gain success together is prevalent: Recognition of the real competitors. Common contract models, documentations, service products, processes, it-systems, marketing, training, R&D and trust in order.

Continuous development within the region, new entrepreneurship.

Development of the whole system is observed, cooperation in training and education.

Demand for continuous development to suppliers, partners and own personnel.

Training and education in place, no easy solutions, and development projects is a must not a punishment.

Coordination of the system.

There might be strong bias against the argument, that the principal would gain the best results especially in the cooperation with the small and medium sized enterprises in MRO business at this point, when the big companies are, at the same time, intensively focusing on cooperation between each other. Hence, there will be further argumentations and discussions on the division of work between the competitors

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(large and specialized companies) and the SMEs later in this study, as the strategy is under consideration. The second scenario describes nearly the as-is status of the case. This scenario depicts the circumstances were the principals have a dominant position in cooperation, SMEs have their own role as partners, but there is some sort of juxtaposition between the SME network and the principals as if there was a competition between the customers and the suppliers. The argument is that this scenario is the second best of the three scenarios, but might end up to the third (worst) scenario, if no improvement actions take place. The figure 16 describes the scenario setting.

The second scenario option The relationship between the SMEs and the principals is mostly based on competitive bidding

AA

Competitors Competitors

CC

BB

Increasing cooperation

IT- HUB IT- HUB

Local SMEs loose market share to competitiors

IT-HUB HUB IT-

Suppliers serve competitors

7

Figure 16: Second scenario setting.

In the table 8, the scenario is based primarily on the consequences that would emerge due to the attitudes and actions of the principals. As stated earlier, the principals have at the moment a quite dominant position in cooperation with the local service suppliers, which is not always the case with the competitors of the SMEs who represent worldwide organizations. Should the principals be satisfied with the offerings of the competitors regardless of other options, and the SMEs be afraid of strongly developing and offering their own expertise, so might the second scenario be realized. Unambiguous business thinking of the local counterparts might lead to circumstances where the centralizing trend is taken for granted. Based on the interviews, some SME sector enterprises that do not take part in any cooperation with the local forest industry, regard the negotiation power of the principals too strong at the moment. These quite successful and qualified firms have the main customers outside the district.

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Table 8: Scenario option 2. Area perspective

System perspective

Principal perspective

SME perspective

Business development is slower in the region than in other regions in Finland. The big actors’ existence and influence on local business is obvious. Business margins drift away from the region with the competitors.

System is not seen as a whole: contradictions. Money and income from outside the region due to the principals.

Corporate level decisions control the procurements: the corporate wide operations are dominant in decisionmaking. Cost competition and pressure on details.

SMEs sell services mainly locally, sometimes elsewhere through loose networking. Occasionally the challenger (competitor) can also act as a principal and offer work.

Flourishing large forest companies. A good number of SMEs increasingly acting as subcontractor and suppliers to the competitors.

Sub-optimization in the system: Total costs of operations are not known, they are not right allocated, or are ignored

Challengers act increasingly as main suppliers, local SMEs take care of bulkoperations. No clear demand for development of SME sector, except in safety and quality issues

SMEs rely on independent decisions and on easy solutions. No input to radical development because of the cost…the operations costs won’t decrease… the competitive position gets worse.

Fluctuation in demand depending on investments in the industry. Fewer entrepreneurs, less independency and efficiency in the region.

Unbalance in local demand and supply, also in quality requirements The system needs competitors input, and the total costs of principals will boom, in the long run.

Open communication in operational issues and ‘in small portions’ only. Short term planning, No win-win thinking but confrontation No special input to coordination

No special input to coordination. SME is being rated continuously within the network. Different kind of agreements and contracts with different partners.

Challengers are a constant threat to the locals. It’s only a question of time when a break through takes place.

No mutual long term planning, some cooperation and common procedures, development and quality agreements.

Collaboration but not enough open communication. Local procurement is not considered strategic.

Recognition of common threats, but no reaction. Common contract models, quality agreements, and training. No active marketing efforts.

Development projects in many different hands. Development models applied from outside the region without questioning.

Some R&D and training projects.

Corporate wide decisions (or waiting for them) slow down the development locally.

Exhaustion in all kind of development. No risk taking by specialization or entering to new markets.

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The third scenario is based on the assumption that the principals have chosen challengers to their main suppliers and subcontractors. Local SME companies have lost their competitiveness as independent entrepreneurs in the local market, as they are forced to work through the challengers and as their suppliers. This is the worst scenario. The results of the third scenario are presented in the figure 17 and explained in the table 9.

The third scenario option The competitors act as system suppliers of the principals. BB

AA

CC

Competitors Competitors IT-HUB HUB IT-

??

1

2

3

4

5 6

1/19/2004

77

8

9

18

Fewer local SMEs

More suppliers of competitors

Figure 17: Third scenario setting.

The third scenario might take place, if the SMEs do not take actions in order to enhance their competitive situation actively. The third scenario clearly shows the consequences of loosing the privileged positions of the locals compared to the competitors; the locals become second tier suppliers. In such a situation, the local suppliers have dramatically lost their direct customer contacts with the principals and have actually given the markets and business control to the competitors as well. All in all, the third scenario may further lead to such solutions where even the job opportunities are lost in the area. In other words, the MRO workers are brought elsewhere by the competitors to do the concrete work in order to balance the workload of the their companies. In fact, some big actors in MRO service business perform this way already.

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Table 9: Scenario option 3.

Area perspective

System perspective

Principal perspective

SME perspective

SME companies are not an attractive option to young job applicants or entrepreneurs In addition to business margins, also earned income drift away from the region with the competitors.

No system thinking locally, only independent companies working together occasionally. Some small enterprises have still partnership contracts with the principals.

As local enterprises have deteriorated, principals rely on competitors and their system deliveries, which are partly carried out by local employees.

SME companies work as suppliers to the competitors. Some spot jobs outside the region.

Wealthy large forest companies, and fewer SMEs. Production lines of the forest companies are managed through corporate level suppliers.

SMEs compete with each other; some enterprises have vanished due mergers and acquisitions.

Corporate level decisions control the principal operations. Decisions concerning local operations are made elsewhere. Economies of scale justifications are dominant

SMEs have not recognized their opportunities early enough and have shut off themselves from development. No trust to partners, and/or tired of entrepreneurship in general.

Hirelings, less entrepreneurs, especially young ones. Still work as subcontractors and suppliers.

Local supply and demand occasional. Coordination in many hands.

Long contracts with the competitors, coordination to the locals through the competitors, or through many different representatives.

The coordination of work and operations in principals’ (= more often challengers’) hands.

Local procurements are not regarded as strategic. Manual procedures are acceptable since there isn’t many left at this point.

Slow development in operations, a whole spectrum of ways of work

Development projects with the large suppliers

There are no inspirers. The development demanded from the challenger done.

Competitors in a dominant position in competition against disunited group of the local SMEs

Common quality and industrial safety instructions.

There is no consensus on how to develop SME business in the region.

There is more confidence in principals than in fellow SMEs.

6.4.3 Results from the scenario workshop Three visionary scenarios, present trends and foreseeable challenges quided the scenario workshop. The scenarios were acknowledged by a preparative document that had been distributed to the participants beforehand.

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Representatives of all four principals and of the fourteen CASE-Network SMEs were present. The workshop participants were divided into three subgroups. Each group worked with one scenario and was led by one representative of each principal. After a short briefing and discussions the groups had to generate answers to the specific questions asked about each scenario. All the answers of the group were a kind of a consensus made during the group work. One might state, that in such general issues as the questions represented the whole CASE group was very unanimous. A lot of discussion and explanatory opinions were, however, heard during the session. 1. The questions of the first scenario were: Which assumptions in the scenario table are not going to materialize, and why in the future a) from the principal perspective? b) from the SME perspective? c) from the system perspective? The first questions was actually understood as why such development has not taken place so far, that would have made the change to direct to the best possible circumstances for the whole system of companies. By asking the participants to answer to the questions, the focus was put on the core points of the issues at the moment. The answers and discussions concerning the questions were, respectively: a) ‘The principal will not have commitment to the local SMEs, if the results of cooperation and the consequences in the long term are not clear, shown and put on the paper.’ This answer was explained by one representative of the principals causing a lot of discussion among the participants. At least among the SMEs, there was finally a mutual understanding that the results will not be shown in advance but later on and only with consistent collaboration between the partners. There was a lot of argumentation whether it is the principal that should kick off the development or not. On the other hand it was admitted and self evident that the SME network should be more active in cooperation. b) ‘Coordination of development in the SME sector does not work at the moment. The development costs are not transferable into the service prices of SMEs.’ The concern of coordination was highlighted several times during the workshop session. This can be a symptom of larger problems in the SME network, and might give a clear impulse to further development of a new business model for the network. Open communication about the prices, and especially about increases in prices, is obviously very difficult within the system at the moment.

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Open communication and justification on price increases would allow the local SME sector enterprises to invest and deploy more on business development. This is the way in which the large companies justify price increases to their own customers as well. In business, customers will pay, sooner or later, all the costs of the seller. c) ‘TES, the collective labor agreement, hinders regular demand in MRO business. Corporate wide decisions hinder local contracting.’ The subject of TES collective agreement was not discussed further. Corporate wide decisions were not clear to SME sector representatives. This was regarded as a real obstacle for SME sector in preparing for future challenges. It was agreed upon that the principals could do a lot more in decision-making to assist the locals, for example, by questioning the corporate level agreements if possible. It was mentioned that the locals should correspondingly inform the principals more about their competences and future plans. 2. Questions concerning the second scenario were: a) What are the competitive ‘weapons’ of the challengers? b) What are the SMEs’ alternative courses of action in the competitive situation? c) What kind of development in the current business environment cannot be avoided? The answers and discussions concerning the questions were, respectively: a) ‘The competitors try to make the contracts with the principals by addressing big promises. The competitors support the corporate wide agreements. Furthermore, the competitors try to make joint after sales service agreements in maintenance and repair during the equipment delivery.’ b) ‘The local SME sector should conducts system deliveries as well. They should try to get access to machinery and equipment expertise, and update and upgrade their MRO competence continuously. More collaboration with the buyers is required.’ Shared training and practice in MRO business operations with the principals is crucial. SME sector must be active in creating connections. c) ‘Internationalization, corporate wide contracts and agreements, and increasing interference of the machinery and equipment suppliers in the MRO markets.’ The answers of the second question were surprisingly unanimous and clear. The answers were almost identical to the answers derived from the former face-to-face interviews in the study. The answers made the researcher wonder, why nothing much is done yet, even though the threats and the concerns are so obvious and predictable within the partners. The lack of coordination of the development in the SME sector might be one answer (see question 1). 3. Questions concerning the third scenario were: a) Why would a local SME company begin to work for the competitors? b) What can prevent such development?

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c) Who kicks off the change? The answers and discussions concerning the questions were, respectively: a) ‘It is essential in order to get any work. The competitor buys the company. The development was seen unavoidable, due to the decisions of the principals.’ There was a common understanding in the meeting, that mergers and acquisitions will take place in the future due to aging of current entrepreneurs and lack of new ones. It is preferable that the region could keep as many local companies purely local as possible. Decisions of the local principals can have a major effect on the progress of the situation. Through supporting the locals the principals could help the SMEs to prosper, and make the companies more attractive to young job applicants. In the long run the result should benefit all. b) ‘Actions taken by the buyer should prevent such development. Consistent development of the whole region is necessary. SMEs should have at least the same or better competence and qualifications than the competitors. Local suppliers should start managing in the network, and supply managing services to the principals as well. Better collaboration within the network. Profitable MRO business.’ c) ‘Development in SMEs decreases. Currently the SMEs cannot compete with the challengers.’ This question c) was not understood in the way the researcher had predestined.

6.4.4 Conclusions from the scenario work Fahey (2003) was cited previously in this report in the statement, that scenarios can serve mainly two purposes: first, the scenarios foster preparedness of managers to anticipate a range of potential futures, and secondly, scenarios afford managers a forum in which to consider and determine, what they should do each future to materialize (Fahey, 2003, p 7). The scenario workshop, and the future mapping work as a whole during the EDYNET research has clearly served the two purposes defined by Fahey. The three scenarios for the CASE-network brought up the urgent MRO business issues and made them to topics in a way, that was necessary right at the moment in the local business discussion. Even though there had been dialogue over the subjects earlier as well, it was of utmost importance that the whole group of CASE- Network companies was kicked off to serious thinking as the competition is just about to get harder in all service business. Even during the first year of the research, some alarming signals have become more conspicuous, just to mention the aggressive strategies of competitors, corporate level centralizing of operations, and uncertainties on future investments of forest industry. Additionally, scenario work made a major contribution to the results from the interviews and literature overviews made earlier in the study. Most identical evidence of possible future outcomes and of important focus areas of the local SME sector was 67

received from both data sources. In fact, the answers expressed in the scenario workshop concerning the competitive situation of the local SME sector were the same as the arguments listed in the chapters 5.1 and 5.2 for the SWOT analysis. The best scenario in the case is understandably the first scenario based on the system approach. The system approach concentrates on the demand/supply balance within the region as a whole, and supports the idea of mutual long term planning and strategy in all cooperation and development between the suppliers and the customers. This kind of an alliance is not that rare between the large companies, but would be a revolutionary solution in favor of the local companies. The first scenario, when materialized, would ensure a fair share of local MRO business to the local SMEs as well as optimal supply of MRO services in the local forest industry. One of the main findings in scenario work was, that the immense diffusion of competitors in the local business couldn’t be entirely evaded. Thus, the local SMEs should rather grip to the best opportunities and make the most out of them, than to try fighting against the competitors. This also means, that it is no use of concentrating any further to the second and the third scenarios. Those scenarios were written and presented only to emphasize the threats and catastrophes that might be ahead if nothing was done. The many opportunities of the local SMEs listed in the SWOT analysis show that the best scenario might be realistic and exploitable through a long-term strategy that would consistently lead the deployment of efficient collaboration. Additionally, a road map with milestones to guide the strategy is imperative. In other words, the upcoming strategy planning requires practical solutions that accomplish the opportunities and the prerequisites of the first scenario. Moreover, the network of SMEs must be a driving force in all kind of development at this point despite the fact, that the principals have a major role in the implementation of the mutual strategy eventually. As a consequence, practical solutions should be found quickly to such concerns like Coordination of cooperation and development, Principals’ role in collaboration, SME development, New business opportunities, Long term planning, and System deliveries. The scenario workshop underlined the importance of constant communication. The partners might now be colleagues and fellows, but not necessarily and automatically in the future when there will be a huge change in personnel at least in the principal organizations. In practise, one solution leads to another; thereby it is important to focus on the key themes and on the critical success factors in the strategy, by which the other, minor issues will be solved accordingly. In more detail, the following three key topics for strategy planning and implementation can be picked up from the previous results:

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Coordination of the development work Both ways in the o Open communication system: o Long term planning - Coordination in the o Strategy system from the o Trust principle and the SME o Collaboration network Business thinking o Corporate wide perspective vs. local concerns Top and o Understanding of total costs middle o Understanding of entrepreneurship management of o Questioning of corporate level decisions the principals o Regional aspects Organization of the network o Network model The coordinator of o Coordination of work the network and the o Development of SME sector companies managers of SMEs o New business opportunities o Specialization o System deliveries The critical success factors (best opportunities and strengths picked out of the SWOT analysis) direct the strategy work and road mapping in the following sections of the EDYNET research. The dynamic network business model will in time be formulated and implemented to support the chosen strategy and implementation of collaboration in the system. In case the planned development strategy would not work, or would not get enough commitment from the different parties of the system, the second scenario option would overcome. As stated before, the second scenario option describes nearly the asis status and might lead to the worst scenario in the long run. Additionally, a great deal of good will and determination is yet required to all rigid plans and statements in order to prevent the worst scenario circumstances to occur. Micro or SME sector companies, in particular, have traditionally conducted MRO services of big forest companies in South Karelia. The trends described in this report, may change this tradition and lead to new circumstances, where the work will be handed over to international and national MRO business actors in the name of rationalizing of operations of the customer companies. Under such risk, small and medium sized enterprises have roughly the following options, (one at a time or many in sync): 1) Grow and develop themselves furiously to be more enviable Keeping the market share locally, 2) Seek for new customers inside and outside the area Gaining new market share elsewhere, 3) Look for mergers and acquisition potential Growing from a small to a medium sized enterprise, 4) Network with each other Establishing cooperation and system supplies, 5) Become subcontractors of their competitors

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Giving the markets to the competitors, 6) Sell their business to competitors 7) Terminate their business. On the list above, the options from 5 to 7 are most harmful choices from the regional point of view. Undoubtedly, the options would lead to decreasing of entrepreneurship and thus more sluggish development in business in the region. Ultimately, it is worth noticing that the weak signals were not totally tackled in the future mapping process. Weak signals are pre-stages of possible changes of the future, and might have a major effect on circumstances when strengthened and materialized. In scenario writing of the study, some weak signals were only stated and discussed, but not taken intensively into account in designing actual scenario paths and tables. The scenarios were mainly based on the mega trends and the results from the SWOTanalysis, with the time frame up to the year 2008…2010. In case the weak signals and the consequences of them had been taken into deeper consideration, it would have required additional scenario options to be written, or at least setting of a longer time frame for the scenarios. This might have widened the focus of the study out of the primary scope. Besides, most of the weak signals were more or less pessimistic, (for example, the forest industry will withdraw investments in Finland in the future), and would possibly cause such problems that would harm the whole service business regardless of the business owner. Solutions to such devastating troubles, as to the current ones, are very similar: business development, new innovations and assuring of the competitiveness of the company.

6.5

Vision is the desired future outcome of the best scenario In the research case, the vision of the system is more or less stated in the first scenario option. The shared vision is the desired future state of the system. From the system perspective the vision might be the following: The system formed by the companies performs as an entity of total optimizing in operations, costs and quality in the local MRO business. The system is based on specialization between the partners and rationalizing of work thus balancing demand and supply locally. Shared vision and plans are expressed to different parties of the system, which brings trust and commitment between the counterparts. Contribution of the principals, in particular, widens the potential of the SMEs. Likewise will the SMEs prosper, perform even better and gain new markets elsewhere as well. From the principals point of view the system supplies qualified and cost competitive services in MRO business. Principals have committed to the local service provides in order to maintain the competitive MRO companies next to the mills also in the long run. MRO services are conducted both by in house and by outsourced local services. MRO services that require special expertise are bough from national or international actors. Personnel in the principal companies are most qualified in strategic procurement and have competence on understanding entrepreneurship.

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The SME sector vision is focused on a new business model that combines the ideas from the long-term strategy and daily operations. Small and medium sized companies have an organized network with different kind of responsibilities and obligations of enterprises. Modern operations and IT-tools, system deliveries, qualified personnel and efficient marketing have made the companies desirable partners to various project networks and customers. The network has strong management and leadership focusing on new service models and new customers. The SME sector is an attractive option for young job applicants. Further research This research continues on to perform the next logical step of strategy planning based on an individual company view, the system (company network) view and on cooperation with the principals. The strategy will give the goal for which the approach, the roadmap, is needed. The research will also suggest the roadmaps for each strategy view and combine them into a total view. The strategy planning work starts on the grounds of the scenario papers and the results from the scenario workshop. The results of strategy planning and roadmaps will be presented in the next report of the EDYNET research.

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Etelä-Saimaa, 15.01.2004, p. 15. Lappeenranta Kauppalehti, 09.01.2004. Helsinki

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Conducted Interviews, Meetings and Workshops in Chronological Order Name and Position

Time

Haapala, Risto Purchasing Manager StoraEnso Oyj,

7.10.2002

Kemppinen, Risto, Managing Director Reike Oy

8.10.2002

Karhu, Esa, Researcher Lappeenta University of Technology (LUT)

14.10.2002

Pöllänen, Esa, Managing Director, Consultant EP-Consulting Oy

18.10.2002

Ylä-Jussila, Yrjö, Project Manager EKAMK

5.11.2002

Management team meeting

7.11.2002

Pöllänen, Esa, Managing Director, Consultant EP-Consulting Oy

22.11.2002

Kaski, Iiro, ICT- System Designer EKAMK, Hypermedia Center

29.11.2002

Pylkkänen, Olli, Maintenance Manager UPM-Kymmene, Lappeenranta

2.12.2002

Development team meeting

3.12.2002

Niiranen, Heikki, Maintenance Manager StoraEnso Oyj, Imatra

9.12.2002

Kemppinen Risto, Managing Director Reike Oy

10.12.2002

Kemppinen Risto, Managing Director Reike Oy Haapala, Risto Purchasing Manager StoraEnso Oyj

19.12.2002

Pentikäinen, Markku, General Manager StoraEnso Oyj, Imatra

22.1.2003

Pöllänen, Esa, Managing Director, Consultant

22.1.2003

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EP-Consulting Oy Management team meeting

31.1.2003

Hietala, Arto, Area Manager, Eastern Finland YIT-Service Ltd. Imatra

6.2.2003

Hentunen, Kalevi, Managing Director JTT Konepaja Oy

11.2.2003

Knuutila, Kari, Maintenance Coordinator UPM-Kymmene Oyj, Kaukas,

13.2.2003

Kauppinen, Juha, Maintenance Manager M-Real, Oyj, Simpele

13.2.2003

Kiljunen, Timo, Managing Director Lappeenrannan Konemetalli Oy

19.2.2003

Viitakangas, Jorma, Maintenance Coordinator Kölli, Pekka, SAP Project Manager StoraEnso Oyj, Imatra

26.2.2003

Paananen , Jaakko, Consultant T:mi Rat-Paja Management team meeting

3.3.2003

Kangas, Timo, Key Account Manager YIT Service Ltd.

12.3.2003

Rask, Timo, Vice President, Production Kankkunen, Mauri, Material Manager, Paloniemi, Mauri, IT-Manager Normet Corporation, Iisalmi

20.03.2003

Koivuniemi, Viljo, Development Manager Johtamistaidon opisto JTO

20.03.2003

4.3.2003

Luojus Juha, Nokia Mobile Phones/Erno Salmela Haapasalo, Hannu, Purchasing Manager Metsä Botnia, Oy Botnia Mill Services Ab, Joutseno

15.4.2003

Forström, Seppo SAP Finland, Espoo

16.4.2003

Pöllänen, Esa, Managing Director, Consultant EP-Consulting Oy

23.4.2003

78

Albayrak, Ali, Development Manager Elma Oy

28.4.2003

Mäkynen, Matti, Manager Lapuan Yrityskehä Oy, Lapua

29.4.2003

Development team meeting

8.5.2003

EKY-Scenario Workshop SMES and Principals of EKY-Network

12.5.2003

Management team meeting

19.5.2003

Iikkanen, Jouni, Vice President Skandinavian Mill Service,

14.8.2003

Development team meeting

18.9.2003

Management team meeting

3.10.2003

Strategy session, Entrepreneurs (SMEs), Imatra Imatran valtionhotelli

7.10.2003

Hietala, Arto, Area Manager YIT-Service Ltd. Imatra

9.10.2003

Pöllänen, Esa, Managing Director, Consultant EP-Consulting Oy

15.10.2003

Parri, Hannu, Managing Director Imatran Teräsvalmiste Oy, Imatra

28.10.2003

Tuomainen, Asko, Managing Director Beranger Oy, Imatra

29.10.2003

Pöllänen, Esa, Managing Director, Consultant EP-Consulting Oy

17.11.2003

Snellman, Jari, Material Manager Loviisa Nuclear Plant, Loviisa

18.11.2003

Karkkila, Sami, Business Area, Manager TeliaSonera Oyj

10.12.2003

Juha Helkala, General Manager StoraEnso Oyj, Imatra

29.01.2004

79