Systematic Chasing for Economic Success: An Innovation Management Approach for German SME's in Drive Technology Business

Table of Contents

List of Figures

List of Tables.

List of Abbreviation

1 Introduction
1.1 Problem description
1.2 Focus
1.3 Research method and proceedings

2 Drive technology industry, economic relations and structure
2.1 German mechanical engineering industry
2.2 German drive technology industry
2.3 Company structures
2.3.1 Drive technology industry in general
2.3.2 Example ball bearing companies
2.4 Conclusions for German drive technology industry

3 Strategies for SME's in drive technology industry
3.1 Options for competitive advantage
3.1.1 General overview
3.1.2 Competitive products
3.1.2.1 Cost leadership
3.1.2.2 Differentiation
3.1.2.3 Generic strategies
3.1.2.4 General remarks
3.1.2.5 Product-market growth strategies
3.1.3 Selection of a strategy for SME's in German drive technology industry
3.1.3.1 Assessment of strategies
3.1.3.2 Conclusion for selected strategy
3.1.3.3 Practical experience for SME's with selected strategy

4 Innovation Management Process for SME's
4.1 Basics of innovation management
4.1.1 General remarks
4.1.2 Innovation process
4.1.3 Interactions with other processes
4.1.4 Conclusions for the innovation management process
4.2 Main approach of innovation management for SME's

5 Idea management
5.1 Methods for idea creation inside SME's
5.2 Methods for idea creation outside SME's
5.3 Proposal for assessment of ideas

6 Project management

7 Innovation controlling
7.1 Internal view of Enterprises to Innovations
7.1.1 Approaches for accounting of innovation projects
7.1.2 Key data for innovations
7.2 Innovations in the scope of GCC
7.3 Proposal for innovation success calculation

8 Patent management
8.1 Assessment of values
8.2 Assessment for patent application
8.2.1 Necessity of patents
8.2.2 Proposal for patent management in SME's

9 Summary

10 Conclusion

11 Appendix
11.1 Principals of the used statistics
11.1.1 Multivariate methods for the analysis
11.1.2 Specific values
11.1.2.1 Frequency distribution
11.1.2.2 Position
11.1.2.3 Variation
11.1.2.4 Relations
11.1.3 Multiple linear regression
11.2 Detailed regression analysis of mechanical engineering industry
11.3 Detailed regression analysis of drive technology industry
11.4 Data of ball bearing companies
11.5 Innovation Success Calculation Sheet
11.6 Innovation management process for SME's

Literature

List of Figures

Figure 1 Turnover and income return of different product groups for German companies according to Stern et al. (2007 p. 5)

Figure 2 Share of mechanical engineering industry export for most important countries in 2009

Figure 3 Regression data and real growth rates of mechanical engineering industry

Figure 4 Development of standardized production volumes for different industry segments from 2000 to 2009

Figure 5 Regression data and real production volume of drive technology industry

Figure 6 Turnover and production volume from 1990-2008, correlation coefficient = 0,998

Figure 7 Share of company sizes in mechanical engineering industry from 2000 to 2007

Figure 8 Share of SME's in Germany according definition of IFM and EU

Figure 9 Numbers of German companies for 2008 according to Günterberg (2010)

Figure 10 Companies in ball bearing business as well as share of dealers and manufacturers, data from www.wlw-online.de (2011)

Figure 11 Main data of manufacturing companies in ball bearing business

Figure 12 Lifecycle of a branch according to Grant et al (2006 pp. 382,389)

Figure 13 Strategic cube according to Steinmann et al (2005 p. 234)

Figure 14 Porter’s generic competitive strategies according to Macharzina et al (2005 p. 228), Partridge et al (2005 p. 127)

Figure 15 Basic possibilities to create competitive products according to Homburg et al (2009 p. 143)

Figure 16: Cost leader, average players and margins, based on figures and information from Partridge et al (2005 p. 127), Lele (1992 pp. 97-98) and Müller (2007 pp. 33-36)

Figure 17 Differentiation in comparison to cost leader and average players, based on figures and information from Partridge et al (2005 p. 127), Lele (1992 pp. 97-98) and Müller (2007 pp. 33-36)

Figure 18 Improvement of differentiation by development of new technology in comparison to cost leader and average players, based on figures and information from Partridge et al (2005 p. 127), Lele (1992 pp. 97-98) and Müller (2007 pp. 33-36)

Figure 19 Combination of Porter's strategies

Figure 20: Possibilities to create competitive products Homburg et al (2009 p. 143) in combination with product-market- matrix according to Ansoff Volkmann (2010 S. 377)

Figure 21 Pugh matrix according to Mollenhauer et al. (2007 p. 157)

Figure 22 Modes of innovation according to Trommsdorff et al. (2006) and Spielkamp et al.(2006 p. 34)

Figure 23 Innovation efforts and turnover with new products for several German branches 2008 Schubert & Rammer (2010)

Figure 24 Drivers for innovations

Figure 25 Strategies for product development according to figure in Disselkamp(2005 p. 21)

Figure 26 Fundamental time depending development from invention to diffusion according to Grant et al (2006 p. 419)

Figure 27 Relation between invention and innovation Disselkamp (2005 p. 19)

Figure 28 Enlarged meaning of innovation according to Strebel (2007 p. 23)

Figure 29 Assumptions for innovations as 3D-Relation

Figure 30 Strategic Triangle according to Goffin (2009 p. 171)

Figure 31 Demand for innovations caused by gap between acceptable and unacceptable expectations according to Goffin et al (2009 p. 172)

Figure 32 Change of innovation focus in a branch Grant et al (2006 p. 470)

Figure 33 Kanao-analysis according to Reinecke et al (2007 pp. 102-104)

Figure 34 Innovation management process for SME's with main (blue) and complementary (gray) steps

Figure 35 Steps towards innovations culture according to Stübbe et al. (2008 p. 1)

Figure 36 Idea management process with main parameters

Figure 37 Four phases of lead user concept from Pötz et al. (2004 p. 5)

Figure 38 Idea management process with integrated lead user concept

Figure 39 Matrix for paired comparison according to Streibel (2002 p. 127)

Figure 40 Proposal for modified value benefit analysis

Figure 41 Proposal for idea Portfolio

Figure 42 Stage-Gate process by Cooper

Figure 43 Rough structure of innovation success calculation according to Littkemann (ed.) (2005 pp. 140-141)

Figure 44 Observed and steered innovation process and projects

Figure 45 Integrated innovation controlling based on innovation success calculation

Figure 46 Reasons for assessments in the scope of enterprise strategy and portfolio management

Figure 47 General assessment approaches

Figure 48 Patent protected technology area

Figure 49 Main steps for patent management

Figure 50 Recommended criteria for assessment of ideas regarding patent application within value benefit analysis

Figure 51 Categories and recommended proceedings for patents applications

Figure 52 Integrated patent management for SME's

Figure 53 Absolute frequency of a characteristic

Figure 54 Different correlation coefficients between X and Y

Figure 55 Analysis of residuals from regression model of mechanical engineering industry

Figure 56 Analysis of residuals from regression model of drive technology industry

List of Tables

Table 1 Definition of SME's according to IFM Bonn Günterberg (2009) and EU Europa (2006)

Table 2 Criterions for assessments of differentiation strategies

Table 3 Assessment of Porter's generic strategies with Pugh matrix

Table 4 Evaluation of literature concerning innovation activities abroad

Table 5 Evaluation of literature concerning innovation activities in Germany

Table 6 Success parameters for idea management

Table 7 Classification of scales

Table 8 Structure-testing techniques depending on scale

Table 9 Premises for the linear regression model

Table 10 Summarized values from regression analysis of mechanical engineering industry

Table 11 Summarized values from regression analysis of drive technology industry

List of Abbreviation

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1 Introduction

Innovations are a fundamental pillar for profitable company growth. Profitability can be reached by three set screws: volumes, costs and prices.^[1] The control over the price is strongly related to unique selling propositions. Therefore innovations are an essential set screw for successful and profitable companies.^[2] This will be stressed out by several studies, e.g. according to Stern et al. (2007 p. 5), with product innovations are higher profits possible than with old products (s. figure below).

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Figure 1 Turnover and income return of different product groups for German companies according to Stern et al. (2007 p. 5)

Successful innovations and in this way economic success are often related to an efficient innovation management The innovation management as well as the economic success will be supported by clear and well defined strategies, ideas and creativity of the employees. Ideas and creativity are not only supporting the innovation process, they are fundamental for innovations. Therefore a huge effectiveness and efficiency of innovation management that integrates idea management can be assumed. Effectiveness and efficiency can be improved by controlling of the innovation process too. Last but not least patents are an important result of the innovation process. Therefore the management of this should also be integrated in the innovation process. These are general views and statements in respect of all markets, products, services etc. For companies in separated markets or industry segments arise some questions in the scope of innovations. Do these general statements and views fit to them? How does a process look like and what kind of tools and/or methods should be used to be successful?

1.1 Problem description

The German drive technology industry is dominated from SME's and must supply its products to customers around the world. In addition this industrial segment is challenged by competitors from many other countries as well as from customers with very different needs. Therefore SME's are faced to two main questions. First challenging question "what will be the best strategy to create competitive advantage?", second: "what are the necessities to carry out this strategy effectively and efficiently?".

1.2 Focus

Based on an analysis of the industrial segment the structure and essential needs and boundary conditions will be derived. In addition a suitable strategy to reach a competitive advantage will be analyzed and assessed. For this strategy a suitable innovation management process as well as a toolbox for SME's to implement this process into the company will be developed.

1.3 Research method and proceedings

A market analysis and descriptive research based on secondary data (market and economic) will be carried out at first. In this analysis descriptive statistics will be partly used to deduce dependency, needs and challenges for the German drive technology industry. In addition the structure of this market will be analysed.

For the definition of suitable strategies and structures of innovation processes a descriptive research based on secondary data and literature (books, articles and other publishing's) to deduce possible solutions, aims and objectives will be carried out in the second step. This will be focused for use in SME's. Afterwards an assessment and selection of the best solution (strategy and innovation process) by use of value benefit analysis and Pugh matrix will follow. The results of assessment will be evaluated by use of descriptive research based on secondary data and literature (books, articles and other publishing's).

The development of a suitable innovation management process with focus on SME's is the following step. For this descriptive research based on secondary data and literature (books, articles and other publishing's) to deduce an pragmatic innovation management process in combination with a suitable method/toolbox for SME's is used, as well as the evaluation of the innovation management process and methods/toolbox use descriptive research based on secondary data and literature (books, articles and other publishing's).

2 Drive technology industry, economic relations and structure

Preliminary to a development of an approach for an innovation management process the demand for innovation management within the German drive technology industry will be analysed. This will be conducted on the basis of economical relations and interactions of this industry segment with other industrial segments as well as with the international economy. At first the relation between the international economic and the German mechanical engineering industry will be shown in detail. Afterwards the interaction between the mechanical engineering industry and the drive technology as a sub-part of the mechanical engineering industry will be described. These relations and interactions will be used to show couplings between drive technology industry and international economy. This will help to understand the kind of market and also the limitations for companies in the drive technology market. After the analysis of the economic situation the company size and owner structure will be analyzed. Finalized will this chapter by a summary regarding company and market structure of the German drive technology industry. This will be used in the following chapter to show the demand for a suitable innovation management.

2.1 German mechanical engineering industry

The German mechanical engineering industry supplies its products in more or less every country around the world and creates a turnover of 205 billion € in 2008. That means that nearly 70% of the products have been exported abroad. Round about 2/3 of export have been delivered to 20 countries in 2009, see figure below.^[3]

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Figure 2 Share of mechanical engineering industry export for most important countries in 2009

A regression analysis between the growth rate of the turnover of German mechanical engineering industry and the growth rates of GDP of most important countries (listed countries in Figure 2 plus Germany) from 1978 to 2009 shows a strong and positive relation. More in detail, 90% of variation in the growth can be explained by a linear combination of the GDP from mentioned countries (more details of regression analysis in appendix).

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Figure 3 Regression data and real growth rates of mechanical engineering industry

That means the German mechanical engineering industry is strongly coupled to the economic success in the world represented by GDP of 21 nations.

2.2 German drive technology industry

The German drive technology industry is the biggest part of the German mechanical engineering industry based on turnover (17 bn€ in 2008) and employees (89.000 in 2008)^[4]. This segment is dominated by component suppliers^[5] for several other industry segments. Especially for other mechanical engineering segments e.g. machine builder industries^[6] the drive technology is an important subsystem supplier.^[7] Therefore it seems to be logic that the German drive technology industry is coupled very strongly to the economic success of nations listed in Figure 2, too. The reliability of this assumption will be analysed in the following by standardized production volumes of the different industry segments within the German mechanical engineering industry.

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Figure 4 Development of standardized production volumes for different industry segments from 2000 to 2009^[8]

Figure 4 shows strong changes and variations in production volumes of 10 industry segments as well as the summarized production volume. If there is an economic dependency between these 10 industry segments and the drive technology industry it should be possible to show this by a regressions analysis. Figure 5 shows the result of a regression analysis. There is a very strong relation between the industry segments. Round about 99% of variations in production volume of the drive technology industry can be explained by production volume of the other industry segments. Therefore exists a sufficient high probability for a strong economic relation.

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Figure 5 Regression data and real production volume of drive technology industry^[9]

In addition to the economic relation between drive technology industry and other industrial segments a relation to the GDP growth rate of 21 nations, analyzed in the chapter before, can be assumed. Production volume and turnover of mechanical engineering industry are correlating with a coefficient of 0,998, see Figure 6 for more details. That means there is a 1:1: relation between turnover and production. Small differences can be explained by time shifts between turnover and production. Thus production volume of the drive technology industry and in this way the economic success of this industry segment is mainly coupled to economic development in 21 nations.

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Figure 6 Turnover and production volume from 1990-2008, correlation coefficient = 0,998^[10]

2.3 Company structures

In the chapter before the dependency between international economy and economic behavior of the German drive technology industry has been analyzed. This chapter will be used to analyze the company structure, especially the company sizes as well as ownership structure.

2.3.1 Drive technology industry in general

At first it will be assumed that German drive technology industry as the biggest sub segment shows a similar employee structure like the German mechanical engineering industry. This is necessary because detailed information is existing only for the German mechanical engineering industry. Data for the German mechanical engineering industry are shown in Figure 7. This figure shows that less than 2% of companies have more than 1000 employees. Summarized can be said that more than 95% of the companies have less than 500 employees. For the verification of the assumption regarding company sizes within the German drive technology industry it is useful to look at members of research association of drive technology (FVA e.V.)^[11]. All roundabout 200 members of this association are companies of German drive technology industry and can be understand as a cross section of drive technology industry. A list of these members can found on FVA (2010), most of these companies (>90%) have less than 500 employees.

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Figure 7 Share of company sizes in mechanical engineering industry from 2000 to 2007^[12]

The drive technology industry with a share between 90% and 95% of company sizes less than 500 employees will be compared in the following with the structure of small and medium sized enterprises (SME's) in Germany.

At first it is useful to understand the definition of SME's. A broad range of descriptions can be found, especially for national in comparison to international levels. In the case of Germany two important definitions for SME's exist; at first the definition of the European Union in Europa (2006 p. 14). Second one is the definition of IFM in Bonn in Günterberg (2009). Both are compared in the table below. In addition to the table Figure 8 shows the shares of companies with certain sizes in Germany according to both definitions.

Table 1 Definition of SME's according to IFM Bonn Günterberg (2009) and EU Europa (2006)

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Figure 8 Share of SME's in Germany according definition of IFM and EU^[13]

According to data from Schmiemann (2006) and Günterberg (2010) in terms of the IFM definition more than 99% of the companies in Germany are SME's. Moreover are 95% of SME's are family-owned companies. That means round about 3.42 Mio. companies in Germany are family-owned companies and most of them are SME's.

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Figure 9 Numbers of German companies for 2008 according to Günterberg (2010)

The structure of the German drive technology industry is very comparable with the structure of German SME's in terms of employees. Thus it is permitted to assume that companies in German drive technology industry are mainly owned to private persons (family companies). Important facts for the next chapter which must be considered are a company size with less than 500 employees and family owned structure.

2.3.2 Example ball bearing companies

After this general view to the structure of companies within the German drive technology industry a closer look to a subpart of will be done. This look shall proof the results from general analysis in the chapter before.

The ball bearing business is a good example for the drive technology industry, because ball bearings are used in a very broad range of plants and machines. According to online portal "wer liefert was?"www.wlw-online.de (2011) are more than 400 companies are active in ball bearing business. Only a quarter of these companies are manufacture. Most of them are dealers.

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Figure 10 Companies in ball bearing business as well as share of dealers and manufacturers, data from www.wlw-online.de (2011)

In order to compare this business with the analysis in the chapter before a sample of these companies will be examined more in detail. Based on financial reports from 2008 respectively 2009 from www.ebundesanzeiger.de for nine manufacturing companies listed in appendix 11.4 details have been listed in Figure 11. The diagram figures out that company in broad range occurs. E.g. the number of employees varies from 30 to more than 66000 in which most of the companies have less than 400 employees. Thus this sample shows a comparable company profile than the general view to the German drive technology industry.

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Figure 11 Main data of manufacturing companies in ball bearing business

2.4 Conclusions for German drive technology industry

The German drive technology industry is not able to grow stronger than the common German mechanical engineering industry. In addition is the whole German mechanical engineering industry coupled the GDP growth rate of 21th most important customer nations. This could be derived with a high probability from the conducted analysis. Therefore it is very probable for the drive technology industry to grow only with the world economy or the 21 dominating customer nations. An independent growth from world economy was not observable in the past and seems very unlikely for the future. According to criteria in Pebels (2006 p. 516), Grant et al (2006 p. 389) and Maas (2006 p. 60) German drive technology industry is in maturity. A representative example for drive technical products, ball bearing, has been analyzed. Several comparable competitors for ball bearings with standardized, high quality products in the market exist. A strong share of dealers occurs in the market. The company structure is, like the whole German drive technology industry, dominated from SME'. Therefore it can be assumed that drive technology industry is dominated in the broad range by a crowding out market. A separate company in this industry segment can only grow more than the market if another looses market share, if mergers & acquisitions will be excluded. This is one boundary condition for the development of strategies to generate more economic success in comparison with competitors in the market.

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Figure 12 Lifecycle of a branch according to Grant et al (2006 pp. 382,389)

A second boundary condition is the market structure of the drive technology market. The market is international and the companies in the German drive technology industry are dominated by family owned SME's. The development and implementation of ways and strategies to increase economic success have to consider this.

3 Strategies for SME's in drive technology industry

This chapter will be used to analyze and select strategies for family owned SME's to grow more successful than competitors in the drive technology industry as well as more independent from economic development in the main customer nations. Independent and extraordinary growth can only be reached if a separate company is able to offer more customer advantage than the competitors in the market. Therefore the different options for a competitive advantage will be analyzed. Afterwards suitable options for SME's in the German drive technology industry will be assessed.

3.1 Options for competitive advantage

3.1.1 General overview

The strategic cube is an instrument for developing a competitive strategy according to Steinmann et al (2005 p. 221). It combines the three basic questions of strategic orientations:

1) Where does competition take place? (place of competition)
2) Which are the rules of competition? (rules of competition)
3) In which direction does competition take place? (focus of competition)

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Figure 13 Strategic cube according to Steinmann et al (2005 p. 234)

Place of competition^[14]

The first question is targeted on the different possibilities of market coverage. The decision has to be made if a company focuses on a specific market niche or if the products should be offered on the core market. For companies with special strengths it would be better to follow a niche strategy, because they better fit in the niche than in the total market. Consequently, this will generate higher earnings. A niche strategy can be successful, if other competitors are not able to produce a similar product according to technology, logistic, price or quality reasons. But a niche strategy is also characterized with some risks. Following a niche strategy also means to waive potential earnings. Another risk is that the cost differential between suppliers of the total market and niche suppliers can widen, which neutralizes the strength of the niche supplier. In addition, the difference between products of the core market and of the niche market decrease.

Rules of competition^[15]

The second question deals with the structure of the business segment and leads to the decision if the present business segment structure should be followed or if an alteration of the rules of competition should be aimed. In the case of adaption the business segment structure is given and an optimal positioning of the company in the given strength field is searched. The adaption strategy can also be classified as a conservative strategy. The alteration strategy on the other side tries to change given rules on the market.

Focus of competition^[16]

Finally, within the third question it will be decided what differentiation can be used for the product. The company can focus on reasonable costs or on product differentiation. These so called competitive strategies describe how the business unit can reach advantages over a long period of time compared to the relevant competitors.

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Figure 14 Porter’s generic competitive strategies according to Macharzina et al (2005 p. 228), Partridge et al (2005 p. 127)

Regarding to Porter, competitive strategies became the main focus of strategy research. In his opinion the company’s position in the competitive environment has to be clearly defined. Porter stated that a company's strength ultimately falls into one of two main subjects: cost advantage and differentiation. These strengths can be applied in either a broad or narrow scope so that three generic strategies result: cost leadership, differentiation and focus, see Figure 14. In summary he identified the two competencies “product differentiation” and “product cost efficiency” as most important, see Figure 15 .

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Figure 15 Basic possibilities to create competitive products according to Homburg et al (2009 p. 143)

3.1.2 Competitive products

The main choice for companies in any industry environment is how to compete in a certain market following Partridge et al (2005 p. 127). Therefore Porter suggests regarding Figure 14 two key questions^[17]:

1. “What will be the basic of our competitive advantage?”

2. “In what area of our market will we seek to use this competitive advantage?”

The German drive technology industry is selling its products worldwide, because customers are located around the world and they expect suppliers which supply them with products in every part of the world as well as independent from certain applications. Thus these questions can be reduced here to the first one. In addition Porter underlined the competencies “product differentiation” and “product cost efficiency” as most important. Therefore according to Figure 15 these both competencies will be analyzed more in detail in this chapter.

3.1.2.1 Cost leadership

To gain a cost leadership a company has to achieve lower costs than its rivals for offering its products and services. Additionally the company has to identify what its customers are prepared to pay, thus the quality has to be acceptable. The goal here is to achieve a cheap cost base for manufacturing and supplying products and services, not necessarily to sell them to customers at the cheapest prices Partridge et al (2005 p. 127) and Shaw (2007 p. 85) . Summarized, a company seeks a position of suitable profitability by obtaining cheaper general costs than its competitors at an acceptable quality level and by changing comparable prices for its products and services Partridge et al (2005 p. 127) and Porter (1998 p. 12), see also figure below. Therefore the company is able to create better margins than average companies.

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Figure 16: Cost leader, average players and margins, based on figures and information from Partridge et al (2005 p. 127), Lele (1992 pp. 97-98) and Müller (2007 pp. 33-36)

To reach this low cost level, businesses might use the approach of the economies of scale, economies of experience or the attention to costs along the whole supply chain - from suppliers, through both internal operations and supports to distributors Hoskisson et al (2008 p. 136), Partridge et al (2005 p. 127) and Porter (1998 p. 73).

3.1.2.2 Differentiation

A company differentiates itself from its competitors if it can be unique at something valuable for the Partridge et al (2005 p. 127). Differentiation is usually expensive since the company incurs costs to gain a unique or superior position. By following the differentiation strategy the company does not ignore the costs; “they are simply not its primary strategic focus English (2001 p. 87)”. The strategy is successful if the value accepted by the customers exceeds costs of differentiation English (2001 p. 13). A successful differentiation strategy leads to a comparable margin level like the cost leadership, see figure below.

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Figure 17 Differentiation in comparison to cost leader and average players, based on figures and information from Partridge et al (2005 p. 127), Lele (1992 pp. 97-98) and Müller (2007 pp. 33-36)

The difference should be something that customers recognize and value like quality, reliability, status or advertising. Additionally it should be something rivals cannot easily copy. Against copying companies can protect themselves for example through patents, however also a good reputation can protect and provide lasting benefits Bacon et al (2004 p. 164) and Partridge et al (2005 p. 127). Developments to reach new technologies especially at equal or higher customer value in combination with lower costs can be a good approach too Lele (1992 p. 97), see figure below.

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Figure 18 Improvement of differentiation by development of new technology in comparison to cost leader and average players, based on figures and information from Partridge et al (2005 p. 127), Lele (1992 pp. 97-98) and Müller (2007 pp. 33-36)

As mentioned above, differentiation can be reached by development of unique pro-

ducts or services with added values for potential customers and/or superior marketing are necessary. For example the company has successfully demonstrated to customers how product or services meet their wants and needs or they have to develop a brand which procures loyalty Partridge et al (2005 p. 127) and Porter (1998 p. 73). Successful differentiators know who their customers are and what they want, need and at least value Bacon et al (2004 p. 164).

3.1.2.3 Generic strategies

Porter’s strategies can also be combined. Low-cost producers should strive for differentiation, “even if the difference established is eventually the reputation for being reliable as the low-cost supplier Partridge et al (2005 p. 128).” This is at least an advantage for those companies following a low-cost strategy. Comparably, companies which follow a differentiation strategy still have to manufacture to the lowest possible costs in order to profit from the differentiation advantage or have to develop new technologies to meet customer requirements with lower costs, see Figure 18. However, the most dangerous situation is too stuck in the middle. This is the position where a company neither is gaining low costs nor differentiation. Therefore a company should decide for certain strategy (step 1) and try to reach the optimal position (step 2), see Figure 19

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Figure 19 Combination of Porter's strategies

3.1.2.4 General remarks

Generally it is significant to bear in mind that the requirements in industry changes continuously. Through new technology, entrants as well as competitor innovation and new customer needs, companies have to monitor their procedures against the environment. It is unrealistic to think that a position of an organization is unchallenged for long. The generic strategies of Porter support companies to find a compatible and consistent way for orientation of the business Partridge et al (2005 p. 128), Porter (1998 p. 13) and Eldring (2009 p. 10).

3.1.2.5 Product-market growth strategies

Porter focused on cost and differentiation strategies, Ansoff focused on product-market combinations as a basis for strategy development. His strategy of product-market growth stated that it is possible to use different strategies at the same time. The Ansoff model is illustrated in a matrix, Bachmeier (2008 p. 2). The matrix is formed by the novelty degree of products (product) and the novelty degree of the market (market). Further, the dimensions of both product and market are differentiated into existing (present/ old) and new. Central question of the strategy is whether existing products or new products should be sold on existing or old markets.

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Figure 20: Possibilities to create competitive products Homburg et al (2009 p. 143) in combination with product-market- matrix according to Ansoff Volkmann (2010 S. 377)

The figure above shows the four-field matrix of Ansoff containing the four specific strategies and associated basic suggestions for action. The four strategy types are called market penetration, market development, product development and diversification Volkmann (2010 S. 376). In addition to Ansoff's matrix Porters competitive advantages are shown. Especially for superior products according to Porter new products and thus product development are necessary. Therefore product development and diversification will be described more in detail.

Product development is focused on the development of new products in existent markets. The intention is to attract further potential customers, keeping existent ones as well as raising the market share. Offering new products means to enhance the existent ones while maybe also developing new products as an innovation. Product development has the advantage that the company is still dealing with the adequate customer needs. Thus the company has experience in its existent market which is important of the nowadays world of shortened product life cycles and product developments Campbell et al. (2002 p. 175ff).

Diversification means business growth through new products in new markets. It is an alternative if other markets are saturated or the life cycle of a specific product is running out. Through diversification synergies in product development and risk because of the broadened product and market portfolio can be improved Campbell et al. (2002 p. 175ff).

All forms of development are related to risks. The risks can be minimized if development is mainly based on existent core competences in existent markets. The risks are greatest if development demands entry to unrelated markets. The degree of risks depends on the current position of the company and situation of its products as well as markets. Entering new markets depends on the company’s assessment of options in new markets in comparison to options in its current existent markets Campbell et al. (2002 p. 175ff).

3.1.3 Selection of a strategy for SME's in German drive technology industry

For a selection of the best strategy in comparison with all strategies a selection process by use of Pugh matrix will be helpful. The Pugh matrix developed by Pugh (1991) has been successful used in the comparison of design concepts based on specific parameters. The possible concepts (strategies) will be compared with an existing or well known concept (strategy) Mollenhauer et al. (2007 p. 156). The use of the Pugh matrix is shown more in detail in the next chapter. After the use of the Pugh matrix for selection of the best strategy the selected strategy must be proved by practical experience in an own chapter. Practical experience means e.g. empirical studies from other markets, regions or products.

3.1.3.1 Assessment of strategies

The use of the Pugh matrix, see figure below, can be explained in short as follows Mollenhauer et al. (2007 p. 156):

1) A basic strategy will be determined and in every criteria set to zero.
2) Assessment criteria will be determined as well as weighting of criteria.
3) Alternative strategies will be compared for every criteria with basic strategy, an assessment which is better gets a +1 and a worse one a -1.
4) Sum up of better, worse and same as well as weighted better and weighted worse.

The following information can be extracted Mollenhauer et al. (2007 p. 157) :

1) Which strategy dominates?
2) Why dominates the strategy?
3) Can weaknesses in dominating strategy eliminated by ideas from other strategies?

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Figure 21 Pugh matrix according to Mollenhauer et al. (2007 p. 157)

In this case all strategies will be compared with "stuck in the middle" within the Pugh matrix. That means "stuck in the middle" is the basic strategy which must be improved because every company should avoid this position in the market. The parameters (criterions) for the comparison must be selected in knowledge of the situation of SME's in the German drive technology industry (see analysis in chapter 2). A table of suitable criterions is listed below.

Table 2 Criterions for assessments of differentiation strategies

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Based on the chapters before, several strategies can be derived from the strategic cube in Figure 13. In the case of German drive technology industry these strategies can be reduced to four main strategies according to competitive advantage or competitive products. That means differentiation or cost leadership at broad or narrow market. These four strategies will be assessed in the following within the Pugh matrix.

Table 3 Assessment of Porter's generic strategies with Pugh matrix

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3.1.3.2 Conclusion for selected strategy

Porter's generic strategies in case of German drive technology industry will be reduced by the assessment of Pugh matrix strategies regarding differentiation on broad market. This fits into the structure of the German drive technology industry which has to focus on a broad range of application as well as to international markets. This can be explained on the example of ball bearing business (see chapter 2.3.2). Ball bearings will be used e.g. in tooling machines, plastics machinery automotive applications as well as many other applications where shafts and axels are rotating Schlecht (2010 p. 243). In the same application often simple and standardized bearings as well as specialized bearings are needed. Therefore it is not suitable for ball bearing manufacturers to focus only on niche markets. In addition are customers of the ball bearing manufacturers located around the world. Thus it is also not suitable only to focus on separated regions.

A cost leadership strategy shows a better assessment than only "stuck in the middle" but a worse assessment than differentiation. A cost leadership is more difficult for SME's than for big enterprises, they can use the factor of scale in a better way Karami (2007 pp. 51-52).

Differentiation to realize competitive products, technical competitive products in the case of drive technology industry, is the best assed strategies. According to Karami (2007 pp. 51-52) have been SME's successful with unique selling propositions (USP's) at their products. That means SME's in Germany have to develop superior products with USP's. According to Ansoff (see Figure 20) superior products means product development. Trommsdorff et al (2006 p. 45) created a matrix of innovation modes (the broad range of innovation modes will be analyzed more in detail in the next chapter) according to Ansoff's matrix (see figure below). This matrix shows conformity between Ansoff's product development and technical innovation.

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Figure 22 Modes of innovation according to Trommsdorff et al. (2006) and Spielkamp et al. (2006 p. 34)

That means according to Figure 22 technical innovations are necessary for differentiation in German drive technology industry. However especially technical innovation implies a high risk concerning success as well as relatively high investments, therefore is a long-term strategy necessary Georgy (2010 p. 14). To reach the objective of innovative and unique products a suitable and overall innovation management is necessary Stern et al. (2007 p. 26). SME's have to develop and implement a pragmatic and compatible innovation management which can be realized with limited capacities. In addition the innovation management should consider an efficient and effective use of the limited resources Wördenweber et al. (2008 p. 11) This is an important boundary condition especially for SME's. But a maximum of protections of the developed innovations/USP's is very important, too Schuh et al., 2011 (2011 p. 283).

3.1.3.3 Practical experience for SME's with selected strategy

In the last chapter the product differentiation as strategy for competitive advantage was selected after systematic assessment. As discussed this leads to product development and innovation management. In this chapter it should be verified how intensively other branches and countries use innovation management especially in SME's. In addition it will be analyzed what kind of experience as well as recommendations can be derived for SME's in other branches and countries.

In general according to Tolksdorf (1971 pp. 186-190) is cost leadership a suitable strategy for big and financial strong enterprises. Smaller as well as financial weak enterprises should avoid this kind of strategy. In addition cost leadership may motivate to start a crowding out strategy by price. This can lead according to Schulz (2003 pp. 167-168) to problems with competition policy. Car manufacturers can be seen as a general example. Becker (2007 p. 28) figures out that OEM's facing the crowding out more and more with innovative products.

A brief look into the mechanical engineering shows that this branch invest 4,6% of its turnover for innovations (R&D activities, product and process innovations), see figure below. In comparison with other branches mechanical engineering is on place 7 within the top ten regarding innovation intensity. According to this high innovation effort the mechanical engineering branch with 28% share of turnover with new products is on place 3 within the top ten branches.

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Figure 23 Innovation efforts and turnover with new products for several German branches 2008 Schubert & Rammer (2010)

The mechanical engineering branch is in comparison with all other branches (in Schubert & Rammer (2010) 21 branches are listed) in the upper quarter of innovation activities and efforts. For supplier industry that means in general also a high innovation effort. Therefore a differentiation with innovative products seems not only to be the best strategy in the assessment, it is also a necessity from customer side (in chapter 2 the interaction between drive technology industry and other segments in this branch has been shown).

[...]

^[1] Cf. Disselkamp (2005 p. 29).

^[2] Cf. Disselkamp (2005 p. 30).

^[3] Data based on VDMA (2009)

^[4] Data based on VDMA (2009)

^[5] Components can be e.g. bearings, clutches brakes, couplings and transmissions etc..

^[6] Machines in this case can be e.g. excavator, street grinders, gensets, combine harvester, tooling machines, ships etc..

^[7] Cf. Schäfer (2009) and Decker (2005)

^[8] Production statistic data for the years 2000 till 2009 from VDMA (2009).

^[9] Data from VDMA (2009).

^[10] Data from VDMA (2009).

^[11] FVA e.V. is an abbreviation for Forschungsvereinigung Antriebstechnik e.V. (Research Association of Drive Technology registered association, department of VDMA)

^[12] Data from VDMA (2009).

^[13] Diagram based on data from Schmiemann (2006 p. 2)

^[14] Cf. Steinmann et al (2005 p. 221) and Danner (2002 p. 79)

^[15] Cf. Steinmann et al (2005 p. 223)

^[16] Cf. Macharzina et al (2005 p. 227)

^[17] According to Partridge et al (2005 p. 127)