Seeking and implementation of Innovation Opportunities by liuqingyan

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									               Project Leonardo da Vinci
Design of a model for joint university-enterprise innovation
                   U-SME Innovation


                        June 2001
Ing. Jiří Vacek (editor), doc. Ing. Jiří Skalický Csc., Ing Yvona Šlechtová, Ing. Emil
Vacík – Department of innovatios and projects, Faculty of Economics, UWB
PhDr. Božena Jiřincová, Department of Psychology, Faculty of Pedagogics, UWB
Ing. Zbyněk Doležal - BIC Plzeň

The project has been completed with the support of the Leonardo da Vinci programme.
The contents do not necessarily reflect the Commission's own position.
Table of contents
INTRODUCTION ..................................................................................................................................... 7
     0.1          OVERALL MODULE CONCEPTION ............................................................................................... 7
     0.3          INTRODUCTORY COMPANY EVALUATION FOR THE TRAINING PREPARATION .............................. 9
     0.3.1        THE QUESTIONNAIRE EVALUATION .......................................................................................... 10
     0.3.2        QUESTIONNAIRE ...................................................................................................................... 11
     0.3.3        EVALUATION FORM ................................................................................................................. 20
BLOCK ..................................................................................................................................................... 21

1        IMPORTANCE OF INNOVATIONS .......................................................................................... 23
     1.1          BASIC CONCEPTS ..................................................................................................................... 23
     1.2          INNOVATION PROCESS ............................................................................................................. 24
     1.3          EXAMPLES OF SUCCESSFUL INNOVATIONS ............................................................................... 25
     1.4          SUMMARY AND RECOMMENDATIONS....................................................................................... 29
     2.1    INTRODUCTION – NECESSITY OF SYSTEMATIC WORK WITH INNOVATIONS ............................... 30
     2.2    INNOVATION MANAGERS ......................................................................................................... 31
     2.3    SYSTEM DESCRIPTION .............................................................................................................. 32
     2.5    CONCLUSION ........................................................................................................................... 37
3        INNOVATION IMPULSES .......................................................................................................... 42
     3.1     SEVEN SOURCES OF INNOVATION IMPULSES ............................................................. 43
        Source 1: Unexpected events ............................................................................................................ 43
        Source 2: Contradiction ................................................................................................................... 45
        Source 3: Change of process ............................................................................................................ 46
        Source 4: Change in the structure of industry and market ............................................................... 47
        Source 5: Demography..................................................................................................................... 47
        Source 6: Change of attitudes .......................................................................................................... 47
        Source 7: New knowledge ................................................................................................................ 48
     3.2     IMPULSES FROM THE MARKET ENVIRONMENT ......................................................... 48
        Customers ......................................................................................................................................... 48
        Suppliers........................................................................................................................................... 49
        Competitors ...................................................................................................................................... 49
     3.3     INNOVATION IMPULSES OF THE R&D ........................................................................... 50
     3.4     INTERNAL IMPULSES ........................................................................................................ 50
     3.5     REGISTER OF IMPULSES ................................................................................................... 51
     3.6     LITERATURE ............................................................................................................................ 51
     APPENDIX 3.A: CUSTOMER‟S OPINION OF AN INNOVATION .................................................................... 52
     APPENDIX 3.B: INNOVATION IMPULSE REGISTRATION ........................................................................... 53
4        CREATIVITY DEVELOPMENT ................................................................................................ 56
     4.1 INTRODUCTION ................................................................................................................................ 56
     4.2 CREATIVITY STIMULATION............................................................................................................... 56
     4.3 METHODS OF CREATIVE ACTIVITY........................................................................................ 57
        4.3.1    Methods increasing the individual’s or team’s creative potential ..................................... 58
        4.3.2    Work methods increasing the creative output of an individual .......................................... 59
        4.3.3    Work methods improving team’s creative output ............................................................... 62
     4.4      CREATIVITY............................................................................................................................. 68
     4.5      LITERATURE ............................................................................................................................ 68

Seeking InnovationOpportunities                                                                                                                             3
5.       PROJECT MANAGEMENT ........................................................................................................ 69
     5.1       INTRODUCTION ........................................................................................................................ 69
     5.2       BASIC CONCEPTS ..................................................................................................................... 70
        5.2.1 Operation and project ............................................................................................................. 70
        5.2.2 Project product, product management .................................................................................... 71
        5.2.3 Program................................................................................................................................... 71
        5.2.4. Subproject ............................................................................................................................... 71
        5.2.5 Activity, summary activity, milestone ...................................................................................... 72
        5.2.6 Project resources ..................................................................................................................... 72
        5.2.7 Project participants ................................................................................................................. 72
        5.2.8 Pre-project activities ............................................................................................................... 73
     5.3       PROJECT LIFECYCLE AND PROJECT PROCESSES ........................................................................ 73
        5.3.1 Project stage, project lifecycle ................................................................................................ 73
        5.3.2 Project processes ..................................................................................................................... 74
     5.4       PROJECT AS A SYSTEM FOR THE PERFORMANCE OF CHANGES .................................................. 75
        5.4.1     Project product................................................................................................................... 76
        5.4.2     Project management........................................................................................................... 76
     5.5       SOFTWARE SUPPORT OF THE PROJECT MANAGEMENT .............................................................. 78
     5.6       LITERATURE: ........................................................................................................................... 79
6        TEAM WORK ................................................................................................................................ 80
     6.1          DEFINITION OF BASIC CONCEPTS .............................................................................................. 80
        6.1.1       Team definition................................................................................................................... 80
        6.1.2       Team effectiveness .............................................................................................................. 80
        6.1.3       Group structure and organization ...................................................................................... 81
        6.1.4       Group development ............................................................................................................ 82
        6.1.5       Roles in the team ................................................................................................................ 84
     6.2          ADVANTAGES AND DISADVANTAGES OF TEAM WORK.............................................................. 85
     6.3          ROLE OF A TEAM LEADER ........................................................................................................ 85
     6.4          TEAM COMMUNICATION .......................................................................................................... 86
     6.5          FORMATION OF INTERDISCIPLINARY TEAMS ............................................................................ 87
7        COMPANY INNOVATION CULTURE...................................................................................... 90
     7.1          COMPANY CULTURE ................................................................................................................ 90
     7.2          POSSIBLE ANALYSES OF COMPANY CULTURE ........................................................................... 91
     7.3          MANAGEMENT STYLES AND EMPLOYEES‟ MOTIVATION ........................................................... 92
     7.4          MOTIVATION OF EMPLOYEES ................................................................................................... 93
     7.5          MOTIVATION STRATEGY .......................................................................................................... 94
     7.6          COMPANY‟S MOTIVATION PROGRAM ....................................................................................... 96
     7.7          LITERATURE ............................................................................................................................ 97
8        RISK MANAGEMENT AND MANAGERIAL DECISION-MAKING ................................... 98
     8.1 RISK MANAGEMENT ......................................................................................................................... 98
     8.2 PROJECT RISK MANAGEMENT ........................................................................................................... 99
        8.2.1    Identification of risk factors ............................................................................................. 100
        8.2.2    Project risk definition and risk estimation ....................................................................... 103
        8.2.3    Decision-making theory ................................................................................................... 105
        8.2.4    Simulation using the Monte Carlo method ....................................................................... 114
        8.2.5    Preparation and implementation of measures for the risk reduction ............................... 116
        8.2.6    Operational risk management .......................................................................................... 117
     8.3      CONTROLLING, CRISIS SIGNALLING........................................................................................ 121
     8.4      PLAN OF CORRECTIVE MEASURES .......................................................................................... 123
     8.5      COMPUTER TECHNOLOGY AND RISK ...................................................................................... 125
     8.6      LITERATURE: ......................................................................................................................... 126
9. FINANCING OF INNOVATION ACTIVITIVITIES ................................................................... 127

Seeking InnovationOpportunities                                                                                                                          4
10.           FEASIBILITY STUDY .......................................................................................................... 128
     10.1     CHARACTERISTICS OF A BUSINESS PLAN FEASIBILITY STUDY ................................................ 128
        10.1.1      Business projects preparation .................................................................................... 128
     10.2     FEASIBILITY STUDY ............................................................................................................... 128
        10.2.1      Market analysis and marketing strategy .................................................................... 130
        10.2.2     Production unit size..................................................................................................... 130
        10.2.3      Technologies, material inputs and energies ............................................................... 133
        10.2.4      Production unit location............................................................................................. 135
        10.2.5      Human resources ....................................................................................................... 136
        10.2.6      Organization and management .................................................................................. 139
        10.2.7      Financial analysis and project evaluation ................................................................. 140
        10.2.3      Risk analysis ............................................................................................................... 141
        10.2.9      Sensitivity analysis ..................................................................................................... 143
        10.2.11    Implementation plan .................................................................................................... 144
     10.3     LITERATURE: ......................................................................................................................... 144
11       INNOVATION PERFORMANCE MONITORING ................................................................. 145
     STRATEGY ............................................................................................................................................
        11.1.1     Appropriate innovation strategy – the way to business success .................................. 145
        11.1.2     Financial indicators ................................................................................................... 152
     SYSTEM 155
     11.3     LITERATURA .......................................................................................................................... 157
DEVELOPMENT INSTITUTIONS .................................................................................................... 158
     12.1 MODELS OF THE UNIVERSITY – COMPANY COOPERATION............................................................. 158
     12.2 WHAT CAN THE UNIVERSITY OFFER TO SME ............................................................................... 160
     QUESTIONS FOR COMPANY ................................................................................................................... 162
     QUESTIONS FOR UNIVERSITY ................................................................................................................ 165

13       INNOVATION PROGRAMS AND EDUCATION .................................................................. 168
     13.1         ROLE OF EDUCATION IN THE COMPANY ................................................................................. 168
     13.2         LEARNING ORGANIZATION .................................................................................................... 169
     13.3         KEY COMPETENCIES .............................................................................................................. 170
     13.3         LITERATURA .......................................................................................................................... 170
14       PRACTICAL GUIDE TO THE SYSTEM INTRODUCTION ................................................ 171
     14.1   CREATION OF THE FUNCTION OF INNOVATION MANAGER ...................................................... 171
     14.2   SEEKING AND RECORDING OF INNOVATION IMPULSES .......................................................... 171
     14.3   CREATIVITY DEVELOPMENT .................................................................................................. 172
     14.4   MOTIVATION PROGRAM ......................................................................................................... 172
     14.5   ESTABLISHMENT OF COOPERATION WITH ACADEMIC INSTITUTIONS ...................................... 172
     14.7   INNOVATION PERFORMANCE MONITORING ............................................................................ 173
     14.8   INNOVATION MEETINGS ......................................................................................................... 173
     INNOVATIONS....................................................................................................................................... 175

Seeking InnovationOpportunities                                                                                                                              5
Introduction   6

0.1    Overall module conception
The aim of the module “Seeking Opportunities for Innovation” is to help small- and
medium-size enterprises (SME) to introduce a system allowing effective work on
innovations. It does not anticipate that the entrepreneurs do not know how to work with
innovations at all. However, it is based on the experience that the innumerous SME
management is busy with many urgent operational tasks and the innovation activities
are often postponed or dealt with on random basis, unsystematically. This, however,
endangers maintaining of their competitiveness in a long-term prospective.
Training will provide the company management with instructions for the
implementation of the innovation work system based on content- and time-obliging
procedures and creating of the function of the innovation manager, who supervises the
system observance and is responsible for it.
Besides the system introduction, the module consists of blocks focused on skills and
practices that are, according to the below-given hypothesis, characteristic for successful
innovating SMEs.
The basic training structure is fixed and it is divided into thee basic parts. The brief
introductory part in case studies identifies characteristic features of successful
innovating SMEs. The second, largest part describes the system of work with
innovations and individual components of the system in detail. In the last part the
company receives recommendations, which steps need to be taken in order to
implement the system. The training assists the company to acquire those characteristic
features of a successful innovating SME that were identified in the introductory part.
This basic structure, the training content and extent of individual blocks can be
modified according to the specific needs of the company, for which the training will be
carried out in the “in company” form. The training is preceded by the company
evaluation that should prove to what extent it currently uses its innovation
opportunities, or to what degree it is ready for the system implementation. The result is
then used for the training content modification. Furthermore, the company will be
informed about the evaluation results as a feedback at the beginning of the training and
partial results will be discussed in corresponding blocks.
The training module therefore consists of two stages:
    1. Evaluation
    2. Training

Introduction                                                                            7
0.2     Hypothetic characteristic features of successful innovating
Identification of characteristic features of successful innovating SMSC represents a
starting point for the creation of both stages of the training module (evaluation and
proper training). It is convenient to repeat here that the training is mainly focused on the
identification of gradual, incremental innovations. It is not targeted at looking for major
radical innovations. Even companies that do not operate on systematic basis can be
successful with incremental innovations, however probability of success of radical
innovation is very low.
According to the starting hypothesis the characteristic features of a company well
prepared to use innovation opportunities are the following:
On a strategic level:
  Long-term approach to the company management and inclusion of innovations into
   its strategy
   The management does not concentrate only on the horizon of several days, but it
   realizes that it is necessary to estimate the development of the market and the
   business conditions (legislation, scientific and technological development, political
   situation, new technologies…) as well as possible for several years ahead and
   according to that to set the long-term goals and ways of their achievement. The
   innovation opportunities are then evaluated with regard to those goals and they are
   given various priorities.
   Innovations are part of the long-term plans, they are viewed as a necessary
   precondition for the competitiveness and achieving of long-term goals of the
On middle level:
     Systematic work on the innovation from recording of the first impulse to its
      To achieve its innovation strategy, the company needs to work on systematic basis,
      rather than on random one. With the random approach, an important innovation
      opportunity can be missed.

The company needs to have the following skills, abilities, practices and habits to work
on innovations on systematic basis:
       Systematic collection of all impulses that could lead to innovation
       Creativity of employees
       Ability to evaluate the possibility of the innovation idea
       Good team work
       Project-based approach and ability to manage projects
       Cooperation with external experts (universities, research laboratories…)
       Proper rate of risk-taking
       Employees’ motivation (the employees are willing to improve the product
        and the operation of the whole company)
       Continued education of employees
       Ability to finance the innovation activities

Introduction                                                                              8
0.3     Introductory company evaluation for the training preparation
The purpose of the company evaluation is to find out to which degree the company
(SME) uses the innovation opportunities on systemic basis, or to which degree the
company is ready for the introduction of the system ensuring that the innovation
opportunities will be used. The whole training can be then modified according to the
results of the evaluation.
The questionnaire is the main instrument for the evaluation. It contains questions
relating to the individual characteristic features of the company (see 0.3.2) that can use
the innovation opportunities well.
In the questionnaire presented to the company managers the questions are not given in
the order according to their topics, as they are in this manual, but they are provided in a
fully random order.
The questions take form of statements, with which the respondent shows a certain
degree of agreement or disagreement.

               Degree of agreement              Evaluation points
               Fully agrees                              4
               Rather agrees                             3
               Rather disagrees                          2
               Fully disagrees                           1

The questionnaire is available either in electronic or printed forms. It is filled in either
by a company management representative or, particularly in smaller companies, by the
Written instructions are either part of the electronic version of the questionnaire or they
are enclosed in the form of a special card to the printed version. The time for filling in
the form is not strictly limited (however its completion should not take more than 20
minutes); the questionnaire should be filled in without making any breaks or
The first group of questions “Strategic approach to the company management and
inclusion of innovations into strategy” verifies whether the company meets this basic
predisposition. This area is dealt with in more detail in the questionnaire, which is a part
of the “Assessment of the Innovation Potential of a Company” module.
The questions relate to two subtopics:
      Whether the basic management approach is long-term at all
      Whether the innovations are included in the long-term plans
Considering the fact that the companies will be evaluated in detail in the “Assessment
of the Innovation Potential of a Company” module, the result showing that the company
does not use the long-term approach should not appear here. (Should this fact be
identified in the previous module, the company receives recommendation of measures
for learning the strategic management and its implementation using resources outside
the framework of this project). From this point of view, this subtopic is rather of
verifying character.
If the results of the second subtopic show that innovations are not incorporated into the

Introduction                                                                              9
long-term plans, it is necessary to pay more attention and space to the place of
innovations in the strategy in the introductory part.
The second group of questions explores how systematic is the company procedure of
work with innovations.
The questions are again divided into two subtopics:
       Whether any system exists in the company
      Whether it is observed
If the company does not have any system, a relatively simple system securing proper
work with innovations will be presented during the training. If any system exists (e.g.
related to Quality house, TQM, ISO), it is not necessary to present the prepared system
as the only possible approach during the training; it can be appropriately modified and
additions and improvements to the existing system can be suggested.
If the system is not observed according to the questionnaire results, as a solution the
training offers creation of the innovation manager function that will supervise its
observing and will be responsible for it.
The following nine groups of questions concern individual skills, abilities, practices and
habits that are according to the hypothesis necessary so that the company could work
with innovations according to the above-mentioned system. Here is the largest space for
the modification of the second part of the training according to the questionnaire results.
For example if it shows that there are very creative employees in the company however
they cannot manage projects, the block dedicated to the creativity development can be
considerably reduced or left out and the saved time can be used in the block focusing on
the project management or it can be supplemented by a more extensive practical
In every topic there is one or two statements (questions) that should reveal if the
management realizes the importance of this issue and whether its approach to this issue
is correct from the point of view of the hypothesis. If it shows that the management does
not consider this field important or does not have the proper approach to it, it is
necessary to strengthen the motivating and persuading part of the relevant training block
in the course of the training module modification according to the company‟s needs.

0.3.1 The questionnaire evaluation
In each investigated area, the average evaluation is determined on the basis of
individual answers separately for questions concerning the current situation of the
company and separately for questions concerning the proper approach of the company
management to the issue in question (see 0.3.3). The average value provides the basic
information, the evaluator can then analyze individual answers to infer more detailed
knowledge (e.g. the average evaluation implies that the weak point of the company is
motivation to innovations and the more detailed analysis reveals that the cause is the
insufficient communication between the management and the employees.
Questions are formulated both positively (the higher level of agreement corresponds to
better situation of the company) and negatively (the higher level of agreement
corresponds to worse situation of the company). Negative questions are indicated by
abbreviation “neg.”
Some questions are accompanied by the explaining comment, which is not presented
(displayed) to the person questioned.

Introduction                                                                           10
0.3.2     Questionnaire

1       Strategic approach to the company management and the
        incorporation of innovations into the strategy

Strategic approach

1.1     Management has the concrete idea about the company long-term goal and about
        the ways of its achievement.
1.2     Management regularly meets to evaluate the current situation of the company
        and to determine its further steps.
1.3     Management is so busy with urgent issues that it has no time to think hard about
        the long-term company situation and planning (neg.)

Evaluation of these 3 questions:
The basic condition for the systematic work with innovations – the company strategy
according to which the innovation ideas are evaluated and introduced - is/is not met.

Approach to the issue:
1.4   The company management must be based on the current situation. Long-term
      plans are not very useful, as they rely on the uncertain forecasts of the company
      environment (neg.)

Incorporation of innovations into the strategy

1.5     Our long-term plans rely on innovations of products and processes.
1.6     In our long-term plans we detach a part of human resources on seeking and
        implementation of innovations.
1.7     In our long-term plans we detach a part of financial resources on seeking and
        implementation of innovations.

Evaluation of these 3 questions: Innovations are/are not a part of the strategy.

Approach to the issue:
1.8   If we will not permanently improve something, we will loose our

Introduction                                                                         11
2      Systematic work with innovations from recording the first idea
       to its implementation

System existence

2.1    We know well what steps to take from the innovation idea to its realization. The
       corresponding procedure is implemented in our company.
2.2    When the innovation idea appears, nobody exactly knows what to do with it
       (there is no system of work with innovations) (neg.)
2.3    It happens that after some time spent on innovation (e.g. development of the pre-
       feasibility study or production of a prototype) nobody knows, what to do next

System observation (somebody works as an innovation manager)

2.4    We do not have time to deal with new innovation ideas, we have more urgent
       tasks (nobody works as innovation manager – does not supervise the system
       observation) (neg.)
2.5    We do not have time to finish innovation projects, they must be interrupted due
       to more urgent tasks (nobody works as innovation manager – does not supervise
       the system observation) (neg.)
2.6    We have reliable records about innovation ideas in reserve and about the
       innovations being realized (somebody works as innovation manager –supervises
       the system observation)

Approach to the issue:

2.7    Innovation idea is a good luck, systematic work cannot help much (neg.)

Introduction                                                                         12
3      Systematic collection of ideas that can lead to innovation

3.1    Even the minute idea for improvement is not lost, whether it comes from any
       department of our company or from the outside (there is a functioning system of
       recording the innovation ideas)
3.2    Our employees bring their own ideas how to improve work in their own
3.3    We know what our competitors do and we regularly ponder on the improvement
       of our competitive position.
3.4    Our company has employees (or we work with external specialists) who follows
       latest news in their specialization (professional journals, conferences, electronic
       conferences) and regularly inform on possible opportunities and threats for the
3.5    Our employees who are in direct contact with customers record their reactions
       and pass these records to other departments.
3.6    We continuously collect information about current and potential suppliers and
       corresponding opportunities.

Approach to the issue:

3.7    The keeping of written records of innovation ideas is time consuming and it is
       not effective. If the idea is really good, it wins its way anyway. (neg.)

4      Creativity of employees

4.1    Our competitors copy our ideas.
4.2    Our employees do not like to invent anything new, they prefer well-tried ways
4.3    Our employees often think if their work cannot be done better then up to now.
4.4    Fantasy and originality of our employees have already several times contributed
       to the improvement of our company competitiveness.
4.5    When our employees finish their exactly defined tasks, they are not interested in
       anything else. (neg.)

Approach to the issue:

4.6    The success of companies is determined in the decisive degree by the creativity
       of its employees.

Introduction                                                                          13
5      Ability to assess the potential of the innovation idea

5.1    We already had to pay for not performing the financial analysis of the activity
       before its start (neg.)
5.2    We consult technical feasibility of proposed changes of production or service
       processes with internal or external specialists.
5.3    We consult market potential (demand, competition) of proposed new products or
       services with internal or external specialists.
5.4    Before we embark upon the preparation of any new activity, we attempt to
       estimate its financial requirement as well as possible.
5.5    It happens that we waste efforts on the development of a new product or
       technology, which is then found technically not feasible (neg.)
5.6    In the past, we wasted efforts to realization of products (services) that were not
       successful at the market (neg.)

Approach to the issue:

5.7    It is more important to act fast then to perform complicated analyses beforehand

Introduction                                                                          14
6      Good team work

6.1    When working in teams, good ideas usually are not – after an initial enthusiasm
       – follow through (= there is nobody in the team who is hardworking and
       persistent, who gets things through) (neg.)
6.2    When working in teams, it does not happen that anybody misses an important
6.3    In our teams, there are not personal conflicts, only the conflicts of opinion (=
       there is somebody in the team who calms personal conflicts and creates good
6.4    Informal leaders of our teams are always recognized and respected by team
6.5    We take advantage of the team work, as it facilitates the emergence of good
       ideas and new, non-traditional solutions. (= team has creative members)
6.6    No important information can escape attention when working in team on an
       extensive task (= there is somebody in the team who concentrates on the
       provision of all the necessary information – white hat)
6.7    When working in team, we always – after an initial discussion – agree on the
       common decision (= there is somebody in the team who is able to unite team
6.8    Our employees usually do not enjoy working in teams. They have a feeling that
       it does not lead to good results and try to avoid it (= teams are not functional,
       something is wrong) (neg.)
6.9    The members of our teams are determined to reach the goals, they understand
       that the goals cannot be reached without cooperation with others and they feel
       the responsibility for the success of the whole team.
6.10   It is common in our teams that if somebody speaks, others pay attention and
       assure themselves they understood the message well.

Approach to the issue:

6.11   The individual person can solve a complicated problem better then a team
       composed of persons with different professions. (neg.)
6.12   The managers and supervisors should know the qualities of employees selected
       to problem-solving teams.

Introduction                                                                         15
7      Project approach and the ability to manage projects

7.1    Anybody working on an extensive project always well understands his/her
       responsibility and competence.
7.2    When the team works on an extensive project, there is always one person
       responsible for a project as a whole.
7.3    It happens that when the team works on an extensive project, two people do
       unnecessarily the same work (neg.)
7.4    It happens that we start work on an extensive project with delay and it is then
       difficult to keep original time schedule (neg.)
7.5    It happens that the work on an extensive project is delayed as the outcomes of
       the work of individual workers are not linked together (neg.)
7.6    We not always well estimate our capacity and then we have problems with time
       schedule and quality (neg.)
7.7    When the team works on an extensive project, there are regular meetings
       controlling the state of works and determining further activities.
7.8    We usually are not satisfied with services of external professional institutions
       (universities, research institutes …) from the point of view of keeping time
       schedules, quality, etc. (= we are not able to select good external co-workers)

Approach to the issue:

7.9    Even good employees can perform below average if their work is not well
7.10   The work on an extensive task has to be planned.

8      Cooperation with external professional capacities (universities,
       research institutes...)

8.1    Our company extensively cooperates with external professional capacities
       (universities, research institutes...).

Approach to the issue:

8.2    Universities, research institutes, etc. cannot significantly help to small and
       medium sized companies (neg.)

Introduction                                                                        16
9      Innovation culture of the company

9.1    All employees are informed about the company mission (identification,
9.2    In our company „the right hand often does not know what the left one does”
       (neg.) (=communication is not functional)
9.3    Company employees often comes with new ideas (= motivation is functional)
9.4    Our employees identify themselves with the company and are enjoy each
       success (identification)
9.5    Our employees are used to regular appraisals and they know they it takes into
       account also their innovation impulses (stimulation is functional)
9.6    Our company has numerous employees who show an interest in the company
       performance which crosses the borders of their professional specialization.

Approach to the issue:

9.7    The management cannot influence the personal initiative of employees in
       bringing new ideas (does the management recognize the importance of
       stimulation of employees to innovations?) (neg.)
9.8    The employees can be proactive in seeking innovation opportunities only if they
       know the company strategy (does the management recognize the importance of
       communication to motivation?)
9.9    The employees can be proactive in seeking innovation opportunities only if they
       are personally engaged in the improvement of the company performance (= it
       cannot work without motivation)
9.10   It is sufficient if the employees know their exactly specified task. It makes no
       sense to inform them about strategic plans of the company, it cannot contribute
       to their innovation initiative (neg.)
9.11   Good supervisor is interested in motivation of individual employees so that
       he/she is able to motivate them effectively to better performance.

Introduction                                                                        17
10     The ability to finance innovation activities
10.1   We are informed about various forms of financial support of innovation
       activities available to SMEs.
10.2   As we do not have sufficient financial resources, we cannot realize innovations
       we have in stock (neg.)
10.3   We allocate the part of company resources to innovation activities.

Approach to the issue:

10.4   There is always a way how to finance the realization of a good idea.

11     Continued education of employees
11.1   Our employees regularly take part in trainings, seminars, conferences and other
       educational activities.
11.2   Our company subscribes to professional journals and they are studied by
       appropriate employees.
11.3   The selection of trainings and seminars for our employees is not random, it is
       closely related to long-term goals of the company.

Approach to the issue:

11.4   A good professional does not need any other education (neg.)
11.5   If the company hires a good professional, it does not have to take care of his
       further education (neg.)

Introduction                                                                       18
12     Risk and decision making

12.1   Our company agrees that a reasonable risk is a necessary condition of the
       company development, we do not avoid it.
12.2   Our employees are not penalized for their decisions on innovations that in the
       end are incorrect, if they have not failed to take all the proper measures to
12.3   If we are not the hudred percent sure about the success of the innovation, we do
       not embark upon it (neg.)

Approach to the issue:

12.4   Only the company willing to take risk can be innovative.
12.5   In making decisions about innovations, it is necessary to keep in mind that not
       every decision will prove its correctness in the end.

13     Monitoring the company innovation performance

13.1   Updates of the company innovation strategy are based on the regular monitoring
       of its innovation performance.
13.2   We attempt to couple expenses and profits from realized innovations as well as
13.3   The compliance of current innovation activities with long-term company goals
       and objectives is regularly monitored.
13.4   The planned and actual results of innovation activities are regularly monitored
       and evaluated.

Approach to the issue:

13.5   There are no suitable tools for innovation performance assessment and for
       evaluation of innovation effectiveness (neg.)
13.6   It is not worthwhile to assess the innovation performance, as it is difficult to
       quantify it (neg.)

Introduction                                                                        19
0.3.3 Evaluation form

A. Strategic approach to company management and incorporation of
   innovations into strategy
      Total average evaluation:            1------2------3------4
                                        Current situation           Approach to the issue
      Strategic approach                1------2------3------4       1------2------3------4
      Incorporation of innovations      1------2------3------4       1------2------3------4

B. Systém práce na inovaci
      Total average evaluation:            1------2------3------4
                                        Current situation           Approach to the issue
      System existence                   1------2------3------4       1------2------3------4
      System observance                  1------2------3------4

C. Skills and activities that the company needs to be able to efficiently
   implement the systém of work with innovations.

                                        Current situation           Approach to the issue
   Collection of ideas                  1------2------3------4       1------2------3------4
   Creativity of employees              1------2------3------4       1------2------3------4
   Ability to evaluate the innovation   1------2------3------4       1------2------3------4
   Team work                            1------2------3------4       1------2------3------4
   Project management                   1------2------3------4       1------2------3------4
   Co-operation with external           1------2------3------4       1------2------3------4
   Innovation culture                   1------2------3------4       1------2------3------4
   Financing                            1------2------3------4       1------2------3------4
   Continued education                  1------2------3------4       1------2------3------4
   Decision making under risk           1------2------3------4       1------2------3------4
   Following the innovation             1------2------3------4       1------2------3------4

Introduction                                                                            20
 STRUCTURE OF THE „SEEKING                            OPPORTUNITIES             FOR

   1 Introductory block (motivating and introductory)
Aim: Participants
   - Realize that innovations and their inclusion into the company strategy are the
      conditions for maintaining of the company‟s competitiveness,
   - Identify the characteristic features of a successfully innovating company,
   - Learn that these characteristic features can be mastered with support of this
This block is based on case studies and characteristic features of successfully
innovating SMEs.

   2 Main block – System of innovation identification and implementation in the
Aim: Participants
   - Understand that they need content- and time-obliging system of work with
     innovations so that they would not forget about looking for innovation
     opportunities while being busy with the solution of operation tasks
   - Are introduced to the system (illustrated by means of practical demonstration)
   - Realize that there is space for cooperation with universities and R&D institutions

   Description of the system of identification and implementation of innovations
   in the company (with every stage its output and innovation manager’s tasks
   are explained and illustrating example is provided)

   Training focused on individual skills and activities that the company needs to
   be able to implement the system of work with innovations effectively:
       -   Identification of innovation impulses
       -   Creativity of employees
       -   Project management ability
       -   Team work
       -   Motivation of employees to innovations
       -   Relationship to risk and managerial decision-making
       -   Ability to finance innovations
       -   Ability to evaluate the innovation feasibility
       -   Monitoring of innovation performance
       -   Cooperation with universities and R&D institutions
       -   Continued education of employees

This block is based on the description of the system of work with innovations and
explanation of the innovation manager function (who is responsible for its
implementation) and his tasks in individual stages.

 Introduction                                                                      21
   3 Implementation block – Project of system implementation
   - The innovation manager acquires a specific idea how to proceed in the course of the
     innovation system building in the company, prepares his project in a written form.
   - Other participants understand their roles in the system, which would make the
     communication with them easier for the innovation manager when assigning tasks
     within the implemented system.

This block is based on a sample project of the work with innovation implementation
in the company.

  Introduction                                                                      22

Everyone has probably come across slogans claiming that innovations are essential for
the survival of a firm, organization, company and that only those who innovate have the
chance to face the increasing competition and global economy. In this part of the
training we will discuss what an innovation is, why it is so important and why it is today
discussed more often than several years ago. We will also provide some examples of

1.1     Basic concepts
The OECD manual1 defines technological innovation and the role of research and
development (R&D) in the innovation process in the following manner:
“Technological innovations are defined as new products and processes and major
technological modifications to products and processes. An innovation is considered
performed if it is introduced to the market (product innovation) or implemented in the
production process (process innovation). Innovation includes many research,
technological, organizational, financial and commercial activities.
R&D represents only one of these activities and can take place during various stages of
the innovation process. It can play not only the role of the original source of the
innovation ideas but also the role of problem solution framework, which can be turned
to at any stage of the implementation."
According to us it is possible to extend this definition to innovations that do not have
any technological base. The summary of activities given in the definition implies that,
with the exception of special cases, a wide range of experts is involved in the innovation
process and the requirements to their qualifications will differ.
In the definition and in the following text the term “product” means a summary name
for products and services.
It is necessary to realize that an innovation is deemed successful only after the
introduction of a new product or process to the market. Its goal is to modify the
economic and/or social environment, change the behavior of people as consumers or
producers. Rather than new knowledge the innovation forms new values or new
According to the degree of novelty innovations can be divided into:
     Incremental innovations: less significant ideas that are important for the
        improvement of products and processes (new PC, car series, opening of a new
     Radical innovations: important ideas influencing or causing major changes in
        the whole industry (introduction of transistor, stream jet engine, data transfer via
        optical cables);
     System innovations: ideas, performance of which requires various resources
        and considerable effort (communication networks, pension plans).

  OECD, Frascati Manual 1992 Proposed Standard Practice for Survey of Research and
Experimental Development, September 1992, Czech translation by the Ministry of Education,
Prague, 1999

1. Importance of Innovations                                                            23
The increasing importance of innovations results from the fact that in the today‟s ever
more interconnected and ever diminishing world the competition increases and the
products life cycle gets shorter. Therefore already at the moment when some of our
products are successful at the market we need to work on the innovations that will
replace them.

1.2     Innovation process
Innovation is a process including three main functional areas:
1. Research and development (R&D) that produces the ideas: basic and applied
    research and development
2. Production that produces, transformation of inputs into outputs according to
    instructions provided by the development
3. Marketing that sells them, product introduction to the market
Human resources, finances, organization, information system, control, maintenance,
service and other issues are supporting but inevitable process functions.
Successful entrepreneurs, regardless of their motivation – money, power, curiosity,
longing for fame and acknowledgement – try to create values. Their goals are high.
Improving or modification of existing things is often not enough for them. They want
to create new values, new needs, and form new, more effective combinations from the
existing resources. And the opportunity for something new, different is always based
on change. Systematic innovation takes root in the focused identification of changes and
in the systemic analysis of economic or social innovations based on these changes.
Innovators do not view any change as a threat but as an opportunity.
It is necessary to realize that particularly small- and medium-size companies can spend
only limited resources on innovations and therefore it is important that they use them in
the most effective manner and would not dissolve them in many various activities. As
Wijg2 writes, highly successful organizations focus either on operational output or top-
quality products or perfect knowledge of customers. Research shows that only excellent
organizations can simultaneously focus on more than one of these value lines:
      Operational output – emphasizes the convenience of price and customer
        satisfaction, that are reached by means of the operational cost minimization,
        elimination of redundant activities, decrease of transaction costs and
        optimization of company processes
      Top-quality products – emphasizes creation of a line of top-quality products
        based on creative approach, quick commercialization of ideas and thorough
        identification of new ideas, even at the price of elimination of one‟s own
      Perfect knowledge of customers – emphasizes customization and
        personalization in a manner satisfying the ever increasing specific and individual
        customers‟ requirements
Successful innovations have not occurred due to a coincidence or a random idea. They
represent a planned, managed process. Throughout the whole process it is necessary to
keep in mind that the later we discover a mistake we have made, the more expensive its
correction will be. Therefore it pays out to focus on the initial stage and try to “shoot”

  K.M Wijg: Knowledge Management: An Introduction and Perspective, The Journal of
Knowledge Management 1 (1)1997, 6-14

1. Importance of Innovations                                                          24
as many mistakes as soon as possible. During the first steps of the process the creative
thinking can be used most.
Proper definition of a problem is an important step in its solution. When solving a
problem we can make numerous kinds of mistakes that are summed up in the following

            Table 1.1: Classification of mistakes in solving a problem
            Problem                                    Solution
            Definition              Correct                 Incorrect
            Correct                 -                       A
            Incorrect               B                       AB

Real problems differ from the school ones: often we do not know the problems but just
their symptoms, we are stumbling in a sort of “fog”, in which we first need to find and
understand the problem. Understanding the problem does not mean understanding its
solution and understanding the solution is not even a purpose of this step. Often when
looking at a solution we say: “If only I would have thought about it.” Some other time
we look at the solution of non-existing problems saying: “I‟d never buy this.”
Innovation implementation can be considered a project and the project and strategic
management methods can be applied to it. When using these methods the problems
becomes formalized and structured. The relations among various aspects of the problem
become more obvious, the risk analysis and financial analyses become easier. If the
models are prepared on a PC with the use of suitable software, then it is not difficult to
analyze various models and scenarios in the process of decision-making and adjust
them to the changing conditions in the course of the project performance.
Successful entrepreneurs do not gamble. They evaluate risks and try to minimize them.
In chapter 8 you can learn about some methods that can be used for the risk analysis and
can be useful in the decision-making. Every economic activity is naturally a risky one.
But staying away from innovations means living from the past and that is even riskier
than creating a future.

1.3    Examples of successful innovations
In this part we want to present several examples of successful innovations of both
Czech and foreign companies.
A. Linet Želevčice3
Linet Želevčice was founded in 1990 a as a joint venture with the German company
Wissner Bossenhof, from which it took over production of simple hospital beds. After
ten years of development Linet introduced a new product generation to the market –
hospital resuscitation bed and universal modular hospital system (consisting of a bed
and a bed-table). Although the Czech health-care sector still lacks money, Linet reached
the turnover of about CZK 150 million at the Czech market and covers 70% of the
domestic market. It is represented in more than 45 countries around the world. Within

    M. Matějka: Radikální inovace i pro malé a střední podniky, Moderní řízení 8/2000
Z. Synková: Dopady a důsledky kvalitně řešeného designu

1. Importance of Innovations                                                            25
2-4 years the company expects the yearly turnover to multiply five times. Linet ranks
among medium-size companies – it has 220 employees. In 2000 the company won 2
awards of the Czech Design Center – National Design Award and Excellent Design
Award. Five international patents and several industrial designs apply to the new
How did the company manage to achieve such results? Its director, Ing. Frolik, says:
“From the very beginning we tried to make a high-tech design and high quality. We
preferred not only attractive but also functional design.”
The innovation impulse was a result of cooperation with customers and users (doctors
and nurses who commented the designs based on their day-to-day experience), experts
from universities and research, with leading industrial designers and material and
component producers. However the product innovation was not enough for the success.
It has proven that the information and management systems are the weak points and
therefore even process innovation was necessary placing much higher requirements on
the employees as it was necessary to overcome old habits and old ways of thinking. So
the production changes were followed by changes in other company processes.
The company‟s dynamic and successful development was possible due to the support
provided by the foreign partner.
And why was all this successful? Let the company director speak again: “We’ve learnt
to study and listen to our clients and analyze the psychology of their thinking. We
respected their wishes and requirements. We also took the customer’s position and role
into consideration… We’ve learnt to identify how we can subconsciously win the
customer’s trust to us, their conviction about the quality of our products.”
And let‟s add – Linet‟s management has learnt to win the trust and support of its
employees, without which the innovation would have hardly succeeded.

B. Vella Náchod – Klu-Ski4
The Vella Náchod company is a sport equipment producer that was facing the problem
what to produce so that it could be sold on a market controlled by large and well-
established companies with whom the small Czech producers can hardly compete in
price. Only a development of a new product or an innovation of an existing one could
be the solution. The company started with the innovation of an existing product – two-
knife child skating shoes. With the innovation, that has proven to be successful, the
company has acquired experience with designing and has got courage to design a brand-
new winter equipment called Klu-Ski, intended mainly for bigger children in the cities.
It is a big plastic sandal that is attached with fixing stripes to normal shoes and thereby
it actually becomes a small snowboard. As this product is easy to store and use, it is
light and relatively cheap, the producer expects that it will sell well. It can be slid on icy
or tramped park paths or on practice slopes. It is not difficult to pack the Klu-Ski into a
backpack. This winter, when the product has been introduced to the market for the first
time, will show to which degree it meets the expectation.

    (dyk): Klu-Ski: Why and how they were developed and what are their chances

1. Importance of Innovations                                                              26
C. Controlling wind energy5
Wind turbine can become a valuable source of electric energy in country regions.
However regulation is a weak point of the transfer system: if the wind is strong and the
consumption is low, the voltage around the turbine can dangerously increase. John
Gillespie encountered this problem in Ireland when he wanted to build a small wind
farm. But because the local distribution company limited the output that he could supply
to the network to 1.5 MW, which is an output of approximately 2.5 turbines, this
investment was not competitive. John started to search for possible solutions and came
across a lecture from a conference dealing with the possible monitoring of local
distribution network and generator disconnection when the network safety limit is
approached. Several companies and research institutes from several EU countries
formed a consortium that has developed a regulation system with the support from the
EU THERMIE program. The distribution company then increased the allowed output to
3 ME and the wind farm, that started its operation in 1997 with 5 turbines, was so
successful that in the year 2000 it was extended with another 3 turbines. For the whole
time of operation the allowed limit was not exceeded. There is a great possibility that
the example of this farm will be followed because Ireland set a goal of obtaining 12% of
electricity from wind electric power plants.

D. 3M and Post-it notes6
The 3M company is known as an above-average innovative company, its rule being that
more than 50% of turnover from its ca. 60,000 products is generated by products that
are not older than 3 years. 3M is not a small company but with regard to its organization
it can be considered a sort of super organism consisting of many small and relatively
independent business units. So it can serve as an example for small- and medium-size
Self-adhesive notes represent one of the best-known products of the 3M company.
People use them all over the world and only a few people can imagine how they were
It all started in 1968 when the 3M inventor dr. Silver was trying to improve an acrylic
glue that the 3M company used for tape recorder and computer tapes. Almost traditional
innovation happened – dr. Silver discovered something totally different than he had
wanted to. The new glue was a suspension of small balls, each of them perfectly
sticking, but because the contact between them was weak, the glue was not strong
enough. What to do about it? Hiding the “failure” was one option. Fortunately, dr.
Silver did not do it. He started to look for application for his unusual product. At the
end he found a strong ally in Art Fry who took part in one of Silver‟s seminars and he
started to be interested in the weird glue. And again a coincidence intervened here: Art
Fry remembered his youth in a small town in Iowa and the Sunday church services,
during which his bookmarks kept on falling out from his book of prayers. And a new
idea was born: the imperfect glue was good enough to hold the bookmark but if needed
it can be removed and placed somewhere else.

 Controlling wind energy, research results for SMEs, SME and Innovation Unit, European
Commission, DG Research
 Art Fry and the invention of Post-it®Notes, http://www.3m/about3M/pioneers/fry.html, April 17,

1. Importance of Innovations                                                               27
However there were still some sceptics inside the company who kept on pointing out
the troubles that can occur in the course of production of a new product. Art Fry
answered them: “Really? It’s perfect like that! If it were simple then anyone could make
it.” Market research was the last obstacle. Who would buy a sticking bookmark when a
piece of newspaper can do the job? And so Art Fry set out in the streets with some
samples. In 1981 the notes were introduced to the market and a year later they became
an excellent product of the company. In 1981 Art was nominated a company inventor.
And today you will hardly find an office in which various parts of the furniture would
not be covered with messages on the self-adhesive notes. And the scale of products
based on the same principle is getting wider – you can see a little sample in the figure.

Fig. Products of the 3M company

E. iGo – distribution of batteries7
The iGo company is a supplier of batteries and accessories for notebooks, mobile
phones, video cameras and other appliances. It needed to increase its sales by means of
reaching high level of customers‟ satisfaction and winning their loyalty.
It decided to introduce an online catalogue and apply e-commerce with a search engine
that would be user-friendly, quick and safe.
The online catalogue allows a quick response, although there are more than 7,000 items
listed in it. The customers can easily find the product they need and order its necessary
Introduction of the new database product allowed handling of the increasing number of
the server visitors (monthly growth was 15%), increase the number of company clients
(B2B) and data collection from customers that enables the iGo company to perform a
targeted marketing and flexible response in the production lines. In 1997 the company‟s
turnover went up by 80% and in the following year it doubled.
The examples illustrate various sides of the innovation process. They show the
importance of reaction to the market requirements, possibility of turning a failure into
success, the importance of employees for the company and importance of the company
processes management. We believe that every company can find inspiration in one of
the examples for its own innovations and we are looking forward to news about your
successes. In the following edition of this handbook we would like to show some of you
as the examples, how things should be done.

7, March 9, 20001

1. Importance of Innovations                                                          28
1.4     Summary and recommendations
It is possible to find innovations that are created by a “flash of inspiration”. However
those innovations are unrepeatable, they can be neither taught nor learnt. Contrary to the
general notion they occur very rarely. On the other hand it is possible to learn thorough
innovation based on analysis, system and hard work.
What are the basic principles of innovations? Many activities must be carried out, and
some other must be avoided.

What to do:
  1. Thorough innovation starts with analysis and study of opportunities.
  2. It is necessary to go among people, ask questions, listen to them, and find out
      what needs the innovation can meet.
  3. Effective innovations are surprisingly simple, so simple that everybody would
      say: “That‟s clear. How come I didn‟t think about it?” And although innovations
      create new uses and new markets, it must be focused on specific needs that it
      satisfies and on specific final products that it produces.
  4. Effective innovation start on a small scale. Only then there is enough time for
      modifications that are almost always necessary for the innovation to be
  5. A successful innovation always tries to win a leading position. That does not
      mean that it needs to turn out to be “big business”. Strategies can be various but
      it is always important to try to play the leading role in the given environment. In
      other case you create opportunities for your competitors.

To avoid:
   1. Don‟t try to be too “clever”. All that is too sophisticated will almost certainly go
   2. Don‟t try to do too many things at once. Focus on the core of the problem.
   3. Don‟t try to make innovations for the future but for today. An innovation can
      have a long-term impact but there must be an immediate need for it.

Three conditions for innovations:
   1. Innovation means work, hard, concentrated and thorough work. It places major
      requirements on hard work, stamina and responsibility. If these qualities are
      lacking then there is no use for the big talent, cleverness or knowledge.
   2. Successful innovations must build on their strong points. An innovation must be
      in accord with the character of a person that introduces it. It is not possible to
      make good business in an industry that we do not appreciate. The innovation
      must be important to the innovator, otherwise he or she won‟t be willing to make
      sacrifices that patient, hard and often frustrating work related to innovations
   3. Innovation must focus on a market, must be controlled by the market.

1. Importance of Innovations                                                           29

The main objective of this section is to stimulate the management and other training
participants to introduce a system into the work with innovations in the company. After
finishing it the participant should have basic idea what activities the system includes
and they should realize its importance and feel the necessity to introduce it.
The goal of the introduction is to realize that the company management really (if it is
identified by means of the questionnaire) realizes that it loses opportunities by being
busy with solving of urgent operational tasks.

2.1     Introduction – necessity of systematic work with innovations
It is understandable that first of all we solve the most urgent operational tasks in the
day-to-day life, for which a close deadline is set and where it is obvious that any delay
would cause immediate problem. Particularly in small companies the managers (who
are usually the owners at the same time) are busy with such kind of problems. They deal
with the suppliers and customers, solve the staff issues, get involved in the production
management etc. Their employees and business partners turn to them all the time and
they try to meet their requirements as quickly as possible. So it can happen that the
manager works hard for weeks or months without managing to have time for the core
issue of the managerial work – to identify and to show the path that the company should
follow in the future. Then it can happen that the company stops to develop and all of
sudden it loses its ability to compete. Its more active rivals get ahead of it.
In these days the company‟s environment changes hastily. In order to survive the
company needs to follow this development and carry out changes preliminary,
simultaneously with the development or at least adjust to the changes as fast as possible.
Ideal situation occurs when the company not only knows its environment but also
actively influences it in order to prepare space for its product. However only several
large companies have this opportunity. Small companies cannot (with some special
exceptions) change their environment considerably, however using their advantages
(flexibility, adaptability) they can fill in the market niches, places that are not interesting
for large companies or where the mass production loses its advantages (specialized
customized production, local services…). In order to succeed in this field they need to
keep on collecting impulses for new improvements both outside and inside the
company, try to be always ahead of their competitors or at least by their sides. However
they will never manage that if the management keeps on postponing these seemingly
less pressing activities related to the innovation identification.
At this moment the tutor uses the result of the questionnaire evaluation of the systematic
use of innovation opportunities by the company – part two. He should initiate a short
discussion on this topic by means of suitably selected questions.
So that the small company management would not be overloaded with urgent
operational issues and the company could pay attention to still unspecific innovations it
is necessary to make use of a purposeful instrument. Such an instrument can be
represented by a system of work on innovations that is based on activities and
procedures with binding content and deadlines.

2. System of the Innovation Identification and Implementation                              30
2.2     Innovation managers
So that the system, if it were introduced at all, would really act as an instrument
securing continous work with innovations, it needs to be observed. Practically it can be
assured by appointing one of the existing or newly appointed management members to
the innovation manager position. He/she will introduce the system and supervise its
observing. Both financial means and certain part of his work time must be assigned for
this activity (part of his existing tasks must be secured in a different manner). Without
the introduction of the system and the innovation manager post the decision about more
intense innovative work means only a hollow gesture.
Managers usually do not postpone work on operational tasks as there is always a
specific person waiting for the result. A customer waits for the product, requires rapid
delivery, keeps on asking, postponing could mean a loss for the company. An employee
waits for the decision, otherwise he cannot continue the work. It is necessary to submit
the tax revenues to the financial authorities in time, otherwise it will impose a fine.
However the innovation activities are often postponed because there is nobody to
remind us of these activities and to demand their rapid performance. Therefore it is
necessary to create the innovation manager post.
Innovation manager should be a part of the company management. When selecting him,
it is not important if the person is itself creative and comes up with his own ideas. His
task is to require the observance of the agreed plan. Thanks to that, ideas of creative
colleagues will be carried out because these people often lack qualities necessary for the
systematic meticulous work. Ability to understand and value the agreed system of work,
inner conviction about its use, sense for order, thoroughness, stamina, authority and
identification with the company‟s strategy are the decisive qualities.
His first task is to introduce the system and later on supervise its observance. The
management will grant him powers to require observing of deadlines and contents of
individual activities and system outputs from everybody (including the management).
For that purpose he is equipped with instruments for both the positive and negative
stimulation (rewards, sanctions). It is suitable to use a certain form of reward even in the
case when the innovation is not implemented; on the other hand sanction must not be
applied in any case for unreal proposal or decision that will prove to be incorrect
regardless of the employee‟s responsible approach. Sanction can be imposed only in
the case that some of the employees fail to keep a deadline or task content. (E.g.
regardless of warning a department representative does not pass on innovation records
to the innovation managers by the agreed deadline, although he has taken them over
from the employees; in the course of the feasibility evaluation the selected employee
does not prepare his individual evaluation of the innovation feasibility in time.)

2. System of the Innovation Identification and Implementation                           31
2.3     System description
The aim of this chapter is to describe to a greater detail the system mentioned in the
introduction as an instrument for the performance of the day-to-day innovation
activities. Its scheme is shown in Fig. 2.1, detailed scheme with listings of outputs of
individual stages and innovation manager‟s tasks is provided in the Appendix 2.A.
Although the scheme might look intriguing at first sight, there is nothing complicated
about it.

                                 0 Company strategy

                     1 Collection of impulses for innovations

                   2 Setting of priorities for individual issues

                      3 Looking for innovation tasks (ideas)

                        4 Discussion over innovation ideas

                                  5 Feasibility study

                      6 Decision about project preparation

                                   7 Project preparation

                               8 Project performance

                    9 Monitoring of innovation performance

                      Fig. 1 Systematic work with innovations

Zero stage
Zero stage is not a part of the system, but it is its necessary predisposition; it means
forming of the company strategy, with regard to which the suitability of the individual
innovation intentions is evaluated, and including of innovations into the strategy, it
expresses the management‟s will to devote part of the effort and sources to innovations
as a necessary predisposition for maintaining the company‟s long-term competitiveness.

2. System of the Innovation Identification and Implementation                        32
First stage
The first stage of the systematic work with innovations is represented by the collection
of innovation impulses. An impulse is here defined as any piece of information that can
initiate occurrence of an innovation. So the impulse can take various forms. It can be
very unspecific – it is not obvious at the beginning how to react to it (e.g. modification
of the EU standards in the field of living environment, safe work conditions, drop in
sales of a certain company‟s product) or it can be very specific (e.g. proposal to replace
a specific metal part with a less expensive plastic part). It can be very simple (e.g.
decrease of product price by CZK 15, color modification of a product, replacement of
an original supplier with a less expensive supplier of the same input) or very complex
(e.g. launching of production of a brand new product, introduction of a comprehensive
information system, introduction of Internet sale). Although the recorded impulses can
form very inconsistent groups, their collection is essential for the further innovation
When introducing the system, the innovation manager‟s task is to inform all the
employees about the importance of the impulse recording; explain what needs to be
recorded and what will happen with it next – employees‟ participation in the seminar
will make it easier for him.
“When you have any idea, write it down immediately so that you would not forget it.
We will look into all the collected ideas, but first we need to know about them. Even a
seemingly stupid little thing can bring about an interesting result.”
The task of units selection (in smaller companies with up to 20 employees, the whole
company forms the unit) and appointing of contact employees for the ideas collection
(in smaller companies directly the innovation manager) is related to that; and require
transfer of the collected ideas (there will not be too many of them, rather just a few)
from the contact people on regular basis (e.g. by the end of each month).
Every unit will probably come up with a different kind of ideas:
   Sale people – mainly records of claims, customers‟, users‟ requirements and
 Production people – problems in production, new production processes, new
    technical solutions
 Marketing – information about competition, market development
 Human resources department – new methods of employees‟ stimulation, drawbacks
    of the recording system
 Innovation manager personally – ideas from partner offices at universities, in
    research institutes, from companies providing consulting and information services
In smaller companies these functions are integrated.
Of course anyone can bring ideas concerning any sphere.
The recording of the individual ideas is standardized.
In small companies the employees do not have enough space for the monitoring of the
scientific and technical development, they do not have access to professional foreign
press, specialized seminars and conferences etc. Here it proves effective to cooperate
with an academic office, university department with corresponding orientation (see
Chapter 12, Cooperation with the R&D institutions).
Another important task of the innovation manager at this stage, after the system has
been implemented, is to gather ideas, sort them out according to their topics, and inform
other colleagues about them by means of a summary report on regular management

2. System of the Innovation Identification and Implementation                         33
meetings about the innovation activities.
This issue is dealt with in more detail in Chapter 13, Innovation Ideas.
Second stage
The second stage is the decision making one. The task of the innovation manager is to
receive the management decision, based on the brief report, which topics have the
highest priority and therefore deserve further attention. (Considering the limited
capacity, a small company cannot give full attention to all groups of ideas). It is very
important and difficult to find the appropriate degree of the critical approach to the
impulses so that an unusual or just seemingly unreal idea, that actually has a very high
potential, would not be rejected.
Sometimes the ideas that seem to be the craziest and most pointless at the first sight can
lead to the best innovations. (“You are tearing up my wires, Cimrman!” “So try it
without the wires, Marconi”).
Third stage
In this stage the innovation ideas belonging to the selected priority topics should be
used as starting points for the generation of innovation plans. It is up to the innovation
manager to select suitable technique, define the problem and choose and invite suitable
experts. He records the results of the applied technique – innovation plan.

Example (for stage 1-3):
Producer of turbines for water power plants asked the local Euro Info Center to prepare
a study about the possible impact of the Czech legislation harmonization with the EU
legislation. Among other things the study pointed out stricter standard on the turbine
maximum noise level, which can represent a danger for the company or – in case of
flexible reaction – an opportunity. (Company‟s current products or competitors would
not meet the stricter standard.) In this case it represents an unspecific impulse for
innovation. The innovation manager introduces the impulse to the management and it
shall decide that it is a priority issue and it is necessary to pay further attention to it. The
innovation manager selects appropriate technique for finding of the specific innovation
plan and defines the goal. In this case he can select the brainstorming method, for
example, select suitable group members for this technique and formulate the problem to
be solved: “How can we react to the stricter turbine noise level standard?“ He organizes
a brainstorming meeting that he chairs or provides another chairperson. The moderator
will record the following uncritical list of proposals:
   Focus on markets outside EU where the stricter standard does not apply
   Modify the turbine construction
   Equip turbines with special anti-noise covers
   Supply with the turbine a set of anti-noise headsets for the power-plant operators
   Close the production
   Lob against the adoption of the stricter standard
Note: For some techniques it is suitable to invite external experts from universities and
R&D institutions. Those can be specialists from the relevant field but also from an area
seemingly unrelated to it. Particularly the latter can come up with an idea that the
company employee affected by the operational “blindness” or a specialist used to
viewing of the problem from the same point of view all the time would not think of.

2. System of the Innovation Identification and Implementation                               34
Fourth stage
This stage already critically evaluates the innovation proposals whether they were made
in the previous stage using some of the special techniques or they were recorded
directly as an innovation impulse. Separation of this stage from the third, respectively
first stage is intentional. It prevents the exclusion of odd ideas even before they are
registered and used as an inspiration for possible non-traditional innovation solutions.
It is the innovation manager‟s task to select the group members, provide them with the
proposals beforehand, ask for a quick evaluation and make sure that no proposal is
immediately excluded without thinking about it. The preliminary selection is carried out
because the following feasibility study is time-consuming (and therefore money-
consuming) and to carry it out for all the plans would not be effective.
Result of the group work is represented by a list of innovation proposals recommended
for feasibility studies, always accompanied with a brief justification by the group
Still within this stage the innovation manager will present the recommended proposals
to the management for the final decision for which of them the resources will be
assigned and the feasibility study will be performed.
Fifth stage
This stage evaluates the feasibility of innovations resulting from the selected innovation
proposals, from several points of view: financial, technical feasibility and market
This issue is in more detail described in Chapter 10. At this stage, it is also suitable to
use external specialists. There needs to be good communication among the team
members working on the study; the teamwork rules (see Chapter 6) apply here.
It is the innovation manager‟s task to form the team, assign the work and supervise the
This stage results in a relatively precise estimate of the intended innovation feasibility.
Sixth stage
Sixth stage is again decision making one. The innovation manager presents the
feasibility study results to the management and asks for decision for which one the
innovation project shall be developed. Simultaneously with this decision the
management should allocate company employees, financial resources covering services
of external experts and other necessary resources for the project development.
Example (continued for stages 4 – 6)
Innovation proposals were generated in the third stage in the brainstorming. The
company management discussed every proposal with its experts (technology experts,
businessmen according to the plan type) and with external specialists and after this short
evaluation the management decided about carrying on the feasibility study for the
following plans:
 Focus on markets outside EU where the stricter standard does not apply
 Equip turbines with special anti-noise covers
Based on their qualified opinion, the experts discovered barriers to successful
performance of other plans, without the necessity to spend more means on further
analyses. (Turbine construction modification – too expensive development and patent
protection, time demand does not correspond to the introduction deadline of the stricter
standard; anti-noise headsets – do not solve the problem with the standard; closing the

2. System of the Innovation Identification and Implementation                           35
production – too expensive retraining of employees, change of technological equipment;
lobbying – no chance to succeed against the EU pressure).
Evaluation of the current and anticipated development of markets outside the EU and
transportation cost played important role in the evaluation of the feasibility of focusing
on markets outside EU. Important moment of the feasibility evaluation of the
application of anti-noise covers was represented by the evaluation of the financial costs
of the license for their production and necessary production costs, e.g. evaluation of
costs for their sub-supplies. After performing the feasibility study sub-supplies of anti-
noise covers have proven to be the least risky and the most suitable from the point of
view of financial flows.
Seventh stage
During this stage an innovation implementation project is developed. Its goal and
individual activities are defined precisely, deadlines and costs are specified and
responsible persons are appointed. The innovation manager does not need to be an
executive member of the team preparing the project, however he supervises that its
content corresponds to the specification and the deadlines of the document preparation
are met.
Eight stage
The content of the eight stages is the project implementation after being approved by
the management. Again the innovation manager does not need to be an executive
member of the implementation team, but he plays monitoring and coordination roles.
The result of this stage is the innovation implementation into practice (introduction of a
new product to the market, launching of a new information system, modification of the
production process…)
Chapter 5 – Project Management - deals with the project development and
Example – continued for Stages 7 – 8
Within the framework of the prepared project, potential suppliers of anti-noise covers
were identified and addressed, tender was carried out, tailor-made cover prototype was
tested and a zero series of turbines equipped with the cover was sold.
Ninth stage
The ninth stage is defined as an evaluation of the effect of the innovation work. The
innovation manager writes a report comparing the costs and benefits. Considering the
fact that the effects are of a long-term character and they cannot be expressed by means
of exact numbers, it is by far not an easy task. Chapter 11 is devoted to this topic –
monitoring of the company innovation output.

2. System of the Innovation Identification and Implementation                          36
2.4     Introduction of regular meetings (obligatory terms and content)
Regular meetings dedicated to innovations are an important element for the functioning
of the system of work with innovations in practice. The innovation manager calls upon
the meetings, and they are attended by the company management and members of
individual teams, internal and external co-workers according to current situation and
needs. The progress and outputs of individual innovations stages are presented and then
followed by a discussion. The meetings could be convened quarterly or monthly.
    1. Sorting of collected impulses according to their topics
    2. Selection of the technique for development of innovation proposals based on the
        collected impulses (if they do not take a form of a proposal from the very
    3. Presentation of the generated innovation proposals and their handing over to the
        team for preliminary evaluation
    4. Presentation of preliminary evaluation results and their submitting to the
        management for the decision about the feasibility study performance for selected
    5. Report on the feasibility study results and their submitting to the management
        for the decision about the project development
    6. Report on the state of the prepared projects
    7. Report on the state of the currently performed projects
    8. Report on the monitoring results of already implemented projects
Some information should be passed on immediately and only brief information should
be presented at the meeting.
2.5    Conclusion
In order for a small- or medium-size company to be able to use the above-described
system, its management and employees need to have abilities and skills mentioned
already in the introduction among the hypothetical characteristic features of a
successfully innovating company. Those are:
       Systematic collection of all ideas that might lead to an innovation
       Creativity of employees
       Project-based approach and ability to manage projects
       Good team work
       Employees‟ motivation (the employees are enthusiastic to improve the product
        and the functioning of the whole company)
     Appropriate attitude to risk
     Ability to evaluate the feasibility of an innovation idea
     Cooperation with external experts (universities, research institutes…)
     Continued education of employees
     Ability to finance innovation activities
     Monitoring of the innovation performance
Further training sections will be focused on these issues to a various degree according to
the identified situation and company‟s needs resulting from it.
At the end the tutor presents the results of the questionnaire evaluation and conducts
discussion based on it with the participants. The tutor points out again that the
following sections will help the introduction of systemic work with innovations.

2. System of the Innovation Identification and Implementation                          37
Appendix 2.A: System (process) of work with innovations in the company

  Strategic part (necessary for the system implementation, but not part of the system

          0. Company strategy
          Starting point for the company innovation activities. It states the
          intention of the top management to devote a part of resources to
          the function of the innovation manager and to the innovation
          system as a tool for achievement of strategic goals. The pro-
          innovation company culture is stressed out.

                                   Pre-project part

          1. Collection of innovation impulses
          Output: thematically sorted list of impulses
          Task of the innovation manager:
             - Implementation of the system of recording of innovation
                 impulses in all company departments
             - Stimulation of departments and external partners to active
                 search of impulses
             - Regular collection and recording of impulses
             - Sorting of impulses according to their themes
          (Note: departments collect impulses from internal and external
          sources, including Internet.)

          2. Identification of priorities of themes
          Output: priorities of themes, according to which the impulses will
          be sorted
          Task of the innovation manager:
              - Preparation of documents for the management decision on
                  the assignment of priorities
              - Selection of impulses or themes for application of creative

2. System of the Innovation Identification and Implementation                       38
            3. Searching of innovation impulses
            Output: simple (uncritical) list of innovation impulses from
            creative sessions
            Task of the innovation manager:
                - Selection of suitable creative technique
                - Reformulation of impulses to the assignments for
                    creative techniques
            Note: some impulses can be formulated directly as assignments
                - Selection and invitation of creative team members
                - Moderation of creative session
                - Recording of generated impulses

            4. Discussion over innovation impulses
            Output: selection of impulses for the feasibility study
            Task of the innovation manager:
                - Invitation of the discussion attendants
                - Moderation of discussion
                - Recording of rejected impulses for later possible use
                - List of impulses for the feasibility study
            Note: Evaluation should avoid any prejudices; seemingly crazy
            ideas generated in creative session can lead to remarkable

            5. Feasibility study
            Output: decision on the feasibility of impulses and conditions of
            its feasibility
            Task of the innovation manager:
                 - Identification of suitable department or expert team
                     (internal, external, combined)
                 - Assignment of the task to selected department (team)
                 - Submittal of results to the management

2. System of the Innovation Identification and Implementation                   39
         6. Decision on preparation of the project of
         innovation impulse implementation
         Output: decision on impulses to be transformed into projects (=
         those best complying with the company strategy)
         Task of the innovation manager: get the decision of the
         management based on the submitted documentation.

         7. Project preparation
         Output: project of the impulse implementation (from the idea t
         actual innovation)
         Note: includes the definition of the goal, individual activities and
         corresponding competencies and responsibilities of team members,
         time schedule, allocation of resources, financial plan, budget – for
         all activities up to introduction of new technology, introduction of
         the product to the market, etc.
         Task of the innovation manager:
         - Project preparation together with members of the realization
         team, on the basis of conclusions of preceding stages.

2. System of the Innovation Identification and Implementation                   40
                                        Project part

         8. Project realization
         Output: Achievement of project goals
         (e.g. introduction of new technology in production, of a new
         product on the market, of the new marketing tool)
         Task of the innovation manager: Project management
         - Assignment of the project to the performing team
         - Project monitoring (partial outputs and terms, financing)
         - Coordination meetings, communication
         -     Creative tools can be used for partial tasks
         -     Project probably consists of the following parts:
               - Development of new product, technology, process
               - Poprojektová část
               - Implementation

             9. Monitoring
             Output: Report on costs and contributions of innovation activities
             Task of the innovation manager: Evaluation of the effectiveness
             of pre-project activities and individual development projects.

             Calling together regular meeting on innovations .

2. System of the Innovation Identification and Implementation                     41
Innovation process develops the original innovation impulse that must be in the
following stages transformed into the competitive qualities of a new product – its high
quality, acceptable price and good timing of its introduction to the market.
Sources of innovation impulses can be sought for either inside the company or in the
outer environment. Potential sources of innovation impulses are given in Table 3.1.
                      Table 3.1: Sources of innovation impulses
Inner environment                           Outer environment
       Own R&D                                    Customers
       Technical divisions – design,              Suppliers
        technology                                 Competitors
       Production divisions (production,          Consultants, R&D institutions
        provision of services)                     Schools, universities
       Marketing and sales                        Professional publications, Internet
       Logistics (purchase and supplies)          Exhibitions, fairs, specialized
       Guarantee and post-guarantee                seminars and conferences
        service                                    Advertising agencies
       Owners                                     Investors
                                                   Media
                                                   Authorized testing laboratories,
                                                    certification agencies
                                                   State institutions, public sector
                                                   Legislation
                                                   Globalization, accession to the EU

This list does not aspire to be exhaustive and does not try to rank the impulses
according to their frequency or importance – it is not possible for a wide range of
organizations as each of them has its specific conditions and priorities.
When collecting the impulses it is necessary to realize that two aspects apply here:
       Market pull: looking for the best way of satisfying a newly emerging customer
        demand. Innovation impulses are focused on the improvement of the existing
        products, extension of the existing offer or decrease of price. The market pull
        usually leads to occurrence of impulses for continuous, incremental innovations
        or for process innovations.
       Research and development push: looking for commercial use of new impulses
        resulting from the R&D results (one‟s own and from others), generating of new
        markets for conceptually different products. As the major innovations are aimed
        at the disclosure of new, so far undisclosed needs, they are riskier but if their
        introduction to the market is successful, they are also a source of high incomes.

3. Innovation Impulses                        42
Drucker [3-1] states seven sources of innovation impulses. With regard to the company
or institution, the first four of them are internal. They are relatively reliable indicators
of changes that have already occurred or they can be initialized with only small effort.
Those are:
     - Unexpected events – unexpected success or failure, unexpected external event
     - Contradiction – between the reality as it is and the reality we would like to have
     - Innovation based on the change of work process
     - Change in the structure of industry or market for which nobody is ready
Further three sources of innovations are external:
     - Demographic changes
     - Changes in the world view
      - New knowledge
These seven sources are listed according to their decreasing reliability and
predictability. Contrary to the general opinion the innovations based on new scientific
findings are the riskiest. And the other way around, common analyses of unexpected
successes or failures aren‟t too risky and innovations based on them usually bring
measurable results shortly after their introduction – as either successful or unsuccessful.
All these opportunities are characterized by occurrence of a change. So it is important to
realize in time that something has happened. And that is possible only under the
condition that the organization sets measurable indicators and monitors their
development. The indicators should be a part of business plans and the company
management should compare the planned trends with reality and thoroughly analyze
any divergences on regular basis.

Source 1: Unexpected events
      a) Unexpected success
Unexpected success opens the best way to innovation. Although it is the least risky one,
it is used surprisingly little as a source of innovations. Very often the management
refuses it, as it is not easy for the company management to accept and use the
unexpected success. It very often occurs in a field, in which the company does not
anticipate success, to the detriment of an area in which the company operates on long-
term basis, it is used to it, considers it its own and feels comfortable in it. And it is not
easy to accept the fact that the yesterday‟s “enemy” can become our best opportunity. It
is difficult for a department store specializing in fashion goods to accept that home
appliances and equipment have all of sudden become its most successful goods. A big
steelwork will object to the introduction of mini-furnaces.
Unexpected success tests the management‟s common sense. However, very often
nobody pays attention to it simply because the existing information channels do not
provide information about it. The management meetings deal with troublesome issues
but hardly anyone will look into area where the company reaches better than average
To be able to use the offered opportunities for innovations it is necessary to analyze
them. We need to ask: which changes are the most important in the company? Changes
in technology, management or sales? In case of unexpected success the management
should answer the following questions:

3. Innovation Impulses                          43
1. What will the use of the offered opportunity mean to us?
2. Where will its introduction take us?
3. What do we need to do for its implementation?
4. How can we achieve that?
Unexpected success is a source of opportunities but it is essential to be ready for it and
be able to use the best people for the innovation implementation.
A leading pharmaceutical company in the field of veterinary drugs has not developed its
own product. The drugs were originally intended for the treatment of people. When the
vets found out that they were also effective in the curing of animals they started to order
them although the originals producers were not too flattered, they even protested that it
was “abusing of the high-class medical science”. When the distributor of vet drugs
addressed various producers of “human drugs”, some of them were happy that they can
get rid of the degrading success and provided inexpensive licenses for the veterinary use
of the drugs developed by them. As the drugs for people are under a strong price
pressure and are subject to a strict control, the area of veterinary drugs has become the
most profitable segment of the pharmaceutical industry. However, the profit is not
enjoyed by those who have originally developed the products but by those who have
correctly analyzed their unexpected success.

The McDonald‟s company has come into being after its founder Ray Kroc (his family
came from the Pilsen region) had paid attention to the unexpected success of one of his
customers. Originally Kroc used to sell milk shake mixers to hamburger restaurants. He
noticed that one of his clients – a small stand in a provincial town – was purchasing
amount of those mixers considerably exceeding the possibilities provided by its location
and size. He found out that the old man (his name was McDonald), who owned the
stand, succeeded because he had systemized the whole preparation of the fast food.
Kroc bought his company and built up a chain that today epitomizes globalization and it
is actually based on the unexpected success of its original owner.

b) Unexpected failure
Even the failure cannot be ignored. However it is hardly ever viewed as a sign of an
opportunity. Majority of failures are results of errors, incompetence. But if something
fails although it was thoroughly planned and carefully performed then the failure
indicates that something has happened. And this change brings about new opportunities.
Unexpected failure cannot be remedied by means of studies and analyses. It is
necessary to go out among the people, watch, ask questions and listen. The change often
happens before the event by which we explain this change. It can be a change of the
population age structure, higher education or change of life-style.
Example: In 1957 Ford won strong positions in three of the four main segments of the
American car market: on the standard market thanks to the Ford branding, in the lower
middle segment with the Mercury model and with the Continental model in the upper
middle segment. The Edsel model was designed for the remaining segment of the higher
middle class that was the fastest developing market segment at that time. Ford paid
particular attention to the development of this model and translated the best available
information about the market and design into its construction and applied the latest
technical solutions and the highest standards of the quality management. And regardless
of that Edsel turned out to be a total failure. Ford did not react to this failure blaming the
“irrational customer”. The company concluded that something was happening that did

3. Innovation Impulses                          44
not meet their anticipations about reality, which were applied to the introduction of
Edsel. So the company went out and found out that a different type of segmentation,
segmentation according to the life style, was replacing the social and economic
segmentation defined in the 1920s by Alfred P. Sloan. As a result the Thunderbird
model was introduced and it has achieved the biggest success since 1908, when Ford
had introduced the T model to the market. And although even today nobody knows
precisely what and why happened, it was necessary to realize that something had
happened and to turn the unexpected failure into an opportunity for an effective and
targeted innovation.

c) Unexpected external event
The unexpected external event often does not translate into information according to
which the management controls the company. It is an opportunity to use the existing
knowledge in new applications. However its application requires more than good luck
or intuition – the company needs to look for the innovation opportunities and must be
organized and managed in such a manner so that it could make use of it. One of the
conditions of success in using unexpected external events is the correspondence of these
events to the company‟s knowledge and expert abilities. It is usually opportunity to
apply the existing knowledge to a new sphere of activity, however it does not modify
the character of the business. It requires not only product innovation but also process
innovation – services and distribution channels.
The IBM company and its PC from the turn of the 1970s can serve as an example here.
Until the first half of the 1970s the company saw its future in the room computers.
When the first home computers appeared teenagers started to play computer games.
Their fathers started to buy the small computers and found out that they can use them
for their work as well. As the PC success was not consistent with the company‟s long-
term strategy, IBM formed two mutually competing teams whose task was to develop a
personal computer for the company. This strategy led to success and introduction of PC
as an industrial standard.

Source 2: Contradiction
Contradiction is a discrepancy between the reality as it is and reality as we would like to
have it. Its sources can be found in:
   Non-compliance with economic reality: if a demand for a certain product increases
    we would expect that its economic results would also improve. If it is not like that,
    it indicates a certain contradiction. It often is a macroeconomic phenomenon and
    opportunity for the emergence of a new company, introduction of a new production
    process or service. The innovator who uses such contradiction can usually operate
    for quite a long time before the existing producers or suppliers realize what a
    serious competitor has occurred.
    Steel mini-mills or gas cogeneration units are examples of innovations that have
    successfully used the contradiction. In both cases the demand for steel or electricity
    was increasing but the profit was decreasing because every growth in the power
    plant or steel-works requires substantial investments. Therefore a unit with reserve
    capacity is built, but the capacity is not used for a considerable period of time. Steel
    mini-mills and cogeneration units allow capacity increase in gradual steps. Similar
    problem exists in the paper industry where the problem, however, has not been
    solved yet.

3. Innovation Impulses                         45
   Contradiction between reality and anticipations about it. Bad targeting of effort
    often results from misinterpretation of the reality. This type of discord
    characterizes the industry as a whole and the solution must be simple and specific.
    Cargo ships are a simple example. They are today successful not because faster and
    technically more prefect ships have been designed but because the container-type of
    transportation was adopted and it minimizes the time spent in the port.
   Contradiction between the anticipated and real behavior of customers and their
    values. Producers often do not understand what, which values the customers
    actually purchase. If the producer complains that customers act irrationally and do
    not buy things that are the best according to the producer, it proves the
    misunderstanding of values that the customers prefer. And it is the producers who
    should change.
    Let‟s take television and car as examples. Television and car are not understood
    only as “things” by the clients. In the case of cars the “wheels” have become a
    symbol of freedom, mobility. The television has become an access instrument to
    new world, new life. So the customer is not buying a thing but new values and he is
    willing to pay for them, particularly if he is offered an acceptable system of

Source 3: Change of process
We understand the change of process as an improvement of the existing process,
replacement of its bottlenecks, accommodation of the old process to new knowledge.
Sometimes introduction of a new process is allowed by discovery of a “missing
element” without the existence of which it was not possible to implement the process
In 1909 the Bell company prepared a fifteen-year forecast of the growth of the number
of telephone stations in the USA and the number of switchboard operators necessary for
the handling of the increasing number of calls if the manual switching was still used.
This forecast showed that by the years 1925 to 1930 all American women between 17 to
60 years of age would have to work as switchboard operators. Two years later the Bell‟s
technicians built and put into operation the first automatic telephone switchboard.

Only very few inventions won the market as fast as the photograpy. However until 1870
the photographer had to carry around heavy and brittle glass plates and similarly heavy
equipment, taking the picture took a long time and taking the picture of a moving object
was very difficult. In the middle of 1880s new knowledge appeared that allowed
George Eastman to replace the glass plates with light and resistant celluloid film and
build a light camera. Within a short period of time photography penetrated the wide
masses and the Kodak company has won a leading market position that it maintains up
to now.
To be able to use this source of innovation opportunities, the following conditions must
be met:
       We need to realize the necessity of change, identify the weak point of the chain
       We do not need to know what exactly needs to be done but we must be
        convinced that if something does not work the way it should, then it is
        necessary to attempt a change

3. Innovation Impulses                        46
       The solution must be convenient for those who will implement it. It must place
        moderate and feasible requirements.

Source 4: Change in the structure of industry and market
It may appear that the industry and market are completely stable. Sometimes they do not
change for many years. In reality their collapse is often caused by a small change. And
then it is necessary to react quickly because continuing of the previous activity
guarantees a failure. Only those companies maintained their position on the car,
motorcycle, fashion, perfume etc. markets that managed to modify their strategies and
to find specialized market segments that are willing to pay luxurious prices for
luxurious products. On the other hand many companies aimed at the “traditional”
customer disappeared. Those companies that managed to make their services as
available to the customers as possible anytime and anywhere achieved success – see the
massive development of credit cards and telecommunication systems.
The main change indicators are:
    - Rapid growth of the industry
    - Identification of new market segments
    - Convergence of technologies (e.g. use of computers in telecommunications)
    - Rapid change of the industry and resulting need of a structural change
Innovations using the change in the industry are particularly effective if several large
producers or suppliers control the industry and the markets.
As examples we can point out:
   Broker companies focused on non-traditional investors
   Service organizations providing specialized services based on outsourcing (cleaning,
    catering etc.)
   New products of banks and insurance companies
   Products based on the convergence of technologies, particularly information and
    communication technologies

Source 5: Demography
From the external influences the demographic changes are the easiest to describe and to
predict. They influence what will be bought, who and in which amounts will purchase.
Changes of birth rate and mortality, level of education, labor structure, mobility of
people etc. are factors affecting the economics and politics to a higher degree and much
earlier then we often admit. Entrepreneurs who can in time react to the demographic
changes, as for example wave of increased birth rate or on the other hand shift of the
age structure towards higher age groups have always been and will be successful.
The speed of the current transition to robotics is mainly influenced by the demographic
situation. Majority of the necessary technical solutions is already known. Robotics
develops faster in Japan not because the Japanese have a considerable technical
advantage over the others but because their population has the highest share of older
people and they face the problem of the labor force shortage.

Source 6: Change of attitudes
From a mathematical point of view it makes no difference if we say “the glass is half-

3. Innovation Impulses                       47
empty” or “the glass is half-full”, but we can feel the distinctive difference in the
interpretation of these statements. Change in the approach to health causes changes in
all industries related to the health-care, food, and manners of spending the leisure time
and opens up new opportunities at the market. Existence of the “upper-middle class”
provides a chance to offer non-standard services at non-standard prices. It is necessary
to consider the increasing migration and such phenomena as feminism, regionalism etc.
Timing is essential for innovations based on the change of attitudes. It is necessary to be
the first. However, as it is not sure if the phenomenon is temporary or long-lasting, such
innovations must start on a small scale and need to be very specific.

Source 7: New knowledge
Innovations based on new knowledge are often considered to be the “proper”
innovations. Not only new scientific and technical knowledge but also social-based
innovations are source of this type of innovations.
For these innovations, the time between the new discovery and its application in
practice is the longest. They are usually based on convergence or synergy of various
kinds of knowledge and their success requires
       Thorough analysis of all factors. Most of all it is important to identify the
        “missing elements” of the chain and possibilities of their supplementing or
     Focus on winning the strategic position at the market. With this kind of
        innovation it is necessary to succeed at the first attempt, the second chance
        usually does not come. On the other hand, in case of success it is probable that
        the company will control the relevant market segment for some time;
     Entrepreneurial management style. Quality is not what is technically perfect but
        what adds the product its value for the end user.
Innovations based on new knowledge usually bring about a high rate of risk that is a
price for the fact that it can considerably influence not only the change of products and
services but the whole view of the world and our position in it.


Majority of innovation impulses comes from the customers. If a company wants to
succeed with its innovations it needs to know the needs and problems of its customers,
monitor their reactions and be ready for a flexible and fast reaction. Seemingly minor
things are often important for the product‟s success at the market.
The company should establish and maintain contacts with its customers or customer
associations and use these contacts to obtain information how the customers use the
products, which problems they encounter and how they deal with them. It is important
to gather the customers‟ ideas about the modifications of the existing products.
Although the general rules are the same, a company whose products are intended for a
different company (B2B type of business – business to business) will probably use
different procedures then a company whose products are intended for an end customer
(B2C – business to customer). There are the following differences between these two
types of clients:
B2B – fewer customers, history, more qualified reaction, more predictable behavior

3. Innovation Impulses                         48
B2C – many customers, often unpredictable reactions
Further steps leading to the final resolution about the possible impulse implementation
must follow after the acceptation and registration of the innovation impulse. However it
is suitable register even those incentives that are currently considered inapplicable, as
they can often be found useful later.
When processing the innovation impulse, it is possible to apply many innovation
techniques, detailed characteristics of which can be found in literature listed at the end
of this module. We would like to draw your attention to the handbook [3-4], which is an
output of the Innomat project of the LEONARDO program. Here we will mention only
several basic techniques that can be applied in the initial stage of the innovation impulse
Customer test of the conceptual idea of the new product
Preliminary testing of the innovation‟s potential for the market that can be one of the
inputs for the feasibility study can be a part of the innovation impulse analysis.
Specification, drawing, picture or model are presented to selected customers and they
are asked for their opinions whether the product caught their attention, whether (and
why) they would prefer it to competing products, whether they will be interested in the
product (and at what price), or how the product could be more adjusted to their needs.
During the product presentation we recommend the company‟s employee in charge to
observe several rules:
   The presentation must be realistic. Keep in mind that at the end the idea must be
    carried out, don‟t promise anything that you cannot deliver later.
 The presentation must be simple, demonstrative and precise. The customer needs
    to understand the principles of the innovation, its advantages and weak points. Use
    all the available instruments for that (pictures, charts, models, computer
    presentation). When preparing the presentation use the knowledge or direct
    cooperation with a teacher, psychologist, and graphic designer.
 Select a representative sample of customers. Customers, to which you present your
    conception, should statistically represent the anticipated target market.
 The presentation must be moderate. It is intended for the evaluation of the selling
    potential of the new product and you need a realistic reaction from the customer.
    The presentation mustn‟t give the impression that you try to force something upon
    the customer.
The Appendix 3.A provides an example of a questionnaire designed for the
identification of the customer‟s opinion of the innovation (see also Pitra, pp. 68-69).

The suppliers innovate their products and look for their applications. They can become
a source of innovation incentives taking roots in their innovation results.

Knowledge of the competitors‟ products and processes can represent an important
source of innovation impulses. We can enrich its conception and thanks to that
introduce a more perfect product to the market; we can specify markets or market
segments for our own products better. However bear in mind that our company can also
become a source of innovation impulses for the competitors.
Competitors analysis is a part of the preparation of a new or improved product. In the

3. Innovation Impulses                         49
course of it the existing or expected competing products are compared to the proposed
product and it is possible to evaluate the competitors‟ possible reactions to our new
product from the following points of view:
    Costs and quality
    Overall economic analysis
    Access to the market (customers, suppliers etc.)
This traditional analysis can be supplemented with benchmarking, in the course of
which we can identify processes requiring improvement, compare them with similar
processes in other organizations and use the acquired knowledge to the increase of the
operational and strategic effectiveness of the company.

R&D is an important source of innovation impulses and it plays an irreplaceable role
particularly in companies oriented on            technologies. Small- and medium-size
companies practically do not carry out basic research, for which major investments
exceeding the possibilities of the SMEs are necessary, the investment returnability
period is very long and the risk rate of the projects is too high for the SMEs.
First of all the idea that should lead to innovation needs to be identified. That is
performed by means of so-called identification research whose task is to monitor the
scientific, technical and economic information and identify innovation impulses
applicable in the company. It is well known that out of one hundred new ideas only one
or two ideas are commercially successful. Those then need to cover the costs necessary
for the emergence of all the one hundred original ideas and moreover create a reserve.
However if we do not research the one hundred original ideas, we would not discover
even the one or two successful ones.
The task of the applied research is to acquire knowledge and means applicable for the
meeting of specific, beforehand-defined goals.
Development is a process of systemic use of knowledge and means acquired in the
applied research for the creation of a new or improvement of the existing product or for
the creation or modification of processes.
Small- and medium-size companies often do not have enough capacity and resources
for their own research and development. Transfer of know-how, i.e. use of knowledge
created by a different organization, plays an important role. Outsourcing, which means
that the R&D performance or its part is ordered form an external company, often proves
to be a suitable solution. The company does not need to employ people, for whom it
has no other work or that cannot be fully used. As the R&D is cost demanding,
companies, that are otherwise competitors, more often join their means and resources
for a joint performance of research and development programs.
In all the R&D stages and in all the above-mentioned forms of cooperation with
external organizations, cooperation with universities can considerably help the small-
and medium-size companies (and on the other hand, cooperation with SME can benefit
the university). This topic is described in more detail in Chapter 12.

Impulses coming from the internal environment of the company are a frequent source of
innovation incentives. The first four from the above-mentioned sources of innovations
belong to them. These sources are usually combined with external sources. Creative

3. Innovation Impulses                       50
techniques (see Chapter 4 of this handbook) or innovation tools (see e.g. [3-4]) can be
applied for their development.

As original creative ideas are scarce and it‟s a pity to waste them, it is necessary to
create a system of work with innovation impulses inside the company. This system is
based on appointment of an employee (innovation manager) responsible for the
collection of innovation ideas, their registration and preparation for their feasibility
When collecting and registering the impulses we can make use of:
      Some suitable creative technique (creative board, on which everybody can place
       his or her idea)
       Information technology – if there is an information system implemented inside
        the company, it can be used for the collection of ideas. It is possible to make the
        forms available on the intranet, or create an application for the collection of
        ideas, however e-mail is also sufficient. It is necessary to bear in mind that
        some employees do not have any experience with IT and it is necessary to offer
        them some other options – pen and paper, telephone, personal interview.
In the Appendix 3.B we provide an example of a form for the innovation ideas
registration. When processing the impulse other related documents occur. To facilitate
the orientation in the documentation it is possible to use various approaches depending
on the information system used in the company. In the Appendix we show a simple
example using hypertext links formed by the MS Word text editor. For the creation of
the hypertext link use the icon “Insert hypertext link – Connect with file or URL address
– Browse”.

3.6   Literature
[3-1]     Drucker P.F.: Innovation and entrepreneurship,
[3-2]     Vacek J., Vostracký Z., Skalický J.: Integrovaný management inovací, ZČU
          Publishing, Plzeň, 1999
[3-3]     Pitra Z.: Inovační strategie, Grada, Praha, 1997
[3-4]     Innomat

3. Innovation Impulses                         51
Appendix 3.A: Customer’s opinion of an innovation
Dear customer,
We have presented the conception of our company’s new product to you and we would
like to ask you several questions. Please give us your objective answers that will help
us to develop a product satisfying your needs and requirements to the highest possible
Thank you for your cooperation
 1a.    What impression has the presented product conception made on you?
        Please, circle a grade on the scale from 0 to 9:
                Very negative          0123456789        very positive
  1b    Reason for evaluation:

  2a    How much did the new project conception catch your attention?
        Please mark one of the following options:
          Not at all    Almost not      Not much    Partially yes Considerably yes
  2b    Reason:

  3a    How do you like the new product conception?
        Please circle a grade on the scale from 0 to 9:
               I don’t like it at all 0 1 2 3 4 5 6 7 8 9   I like it very much
  3b    Give reason(s) why:

  4a    What is the probability that you will purchase the new product at the given
        price? Please mark an option for every price:
        CZK 10,000 Definitely Probably not Maybe              Probably Definitely
                           not                                   yes         yes
        CZK 15,000 Definitely Probably not Maybe              Probably Definitely
                           not                                   yes         yes
        CZK 20,000 Definitely Probably not Maybe              Probably Definitely
                           not                                   yes         yes
  4b    Give reason for your decision:

  5a    What do you consider the main advantage of the new product?

  5b    What do you consider the main weak point of the new product?

  5c    What do you recommend to change?

3. Innovation Impulses                         52
Appendix 3.B: Innovation impulse registration
Document 2001-0001.doc
Innovation impulse registration (do not fill in the yellow fields)
Abbreviation                         Date                      ID        2001-0001
Author                                                         Department
E-mail              Telephone               Fax                Address

Impulse description (give a brief description of the innovation core – impulse origin,
you can suggest possible solution and possible contribution):

References to further information:

Key words

Registered by:                                                 Date

If you need help with filling out the form, contact:


3. Innovation Impulses                            53
                                                             Impulse usability
        Innovation impulse evaluation                Immediate     After       Not yet
Does the impulse react to market requirements?
Will its implementation bring substantial
Is it in accordance with the organization‟s
strategic goals?
Is the impulse feasible from a technical point of
Is the impulse feasible from an economic point
of view; are there necessary resources for its
elaboration and use?
Do the competitors use similar solution?
Can the impulse bring a considerable
competitive advantage?
Can the idea be a subject to the intellectual
property protection (patent, copyright)?
Is the impulse elaborated in a comprehensive

Further work with impulse
Date        Contact person          Brief description (information, Reference - ID
                                    reaction, dissemination…)
30.4.2001     Technical director information                         2001-0002

3. Innovation Impulses                          54
                                                              Company name

Document 2001-0002.doc

To:        Technical Manager
From:      Innovation Manager
Date:      3/16/2011
Re:        Innovation impulse 2001-0001

Dear …
We would like to inform you about an innovation impulse concerning ….

3. Innovation Impulses                     55

4.1 Introduction
Every person is creative. However, courage and certain overview of the creativity
development possibilities are often necessary. That can be learned. Your habits, daily
hectic and thousands of prejudices, however, suppress your creativity. Being creative
means dealing with the aspects and possibilities of today and tomorrow. That requires a
person to be open to everything new, do not stick to things that we are all used to, do
not adhere to yesterday so much. We all need that kind of creativity regardless of who
we are and where we are. Creativity does not mean dreaming, it means productive
managing of specific tasks. Only a creative approach to the problem solution can be

4.2 Creativity stimulation
Creativity can be practiced as well as courage for it and ability to use every opportunity
for its development.
How can be creative thinking supported, stimulated? Creativity support can be summed
up into a sort of “ten Commandments”:
       Keep in touch with a creative person; show a sincere interest in his or her
        activities. Warm and open approach is encouraging.
       The second stimulating element is: Accommodate the effort to the targets. Many
        creative people need to feel a slight “tightening up of the reins”. They need to
        have a certain goal and at the same time a deadline that needs to be met. That is
        something different from a pressure forcing them to hurrying or permanent
        concentration. Very often creative person works best in sudden strokes. And
        even when it is not like that they need to have the space to work in their own
        pace; however it helps if a necessary feeling of urgency is created.
       Effort evaluation. Creative people need praise or help by means of purposeful
        criticism, they need to see the evaluation of their effort and appreciation of their
        work importance, or know the reactions of other people.
       Creative employees need to be protected. Sometimes the environment can be
        intolerant to creative people; it sees or points out their mistakes and drawbacks.
        For employed people it is represented for example by coming late to work.
        However creative people often work at the weekends, during holidays, late at
        night and a clever manager knows that and can defend the creative employees
        against the others. But the myth of creativity must not be abused.
       Give the creative people peace. Many people get the best ideas during the
        periods of leisure following immediately after the period of intense
        concentration. Then the ideas and inspiration are transferred from their
        subconscience to their conscience.
       Provide the creative people with security. No person can work well if he is too
        uncertain, scared, distracted. The problem itself that he wants to solve already
        raises a feeling of stress. Therefore the environment should evoke feelings of
        certainty, peace and comfort rather than more stress.
       Tolerate failures. You cannot be always successful. Creative ideas can
        sometimes be unreal or cannot be carried out but we cannot reject them because

4. Creativity Development                                                              1-56
       of that. We need to be more tolerant about the failure of a creative person;
       otherwise the fear of failure will block his or her creativity.
      Creative atmosphere. Comfortable and friendly environment that suits the
       creative person best supports the creativity. Somebody likes to listen to music
       while working, while other one prefers absolute silence. It helps majority of the
       creative people when they can talk about their problems, consult them even with
       somebody who does not understand the given topic.
      Evaluate the creative ideas quickly. Nothing will discourage a person more than
       the fact that the evaluation is far away and that the creative person needs to wait
       for the result for weeks.
      Stamina, persistence. Realize that nothing comes for free. If we want to achieve
       something, it requires energy, often hard work but also courage and enthusiasm.
       Support creative people in their will, in their effort to obtain expert knowledge
       or their effort to overcome something deep-rooted and outdated. It is possible to
       make use of all your positive qualities and thereby launch your ideas and dreams
       in the course of creative activity.

In general every solved problem represents double contribution: one in the final
solution, the other one in the found method of solution. There are many methods for the
increase of the creative output. From the random choice (Monte Carlo) to iteration
method, heuristic methods to vepol analysis. There exists large variety of them and they
can be specifically focused. Some of them are intended for an individual work, others
for creative teams.
Various special methods represent an important instrument of the creative work
rationalization; these methods provide sophisticated objective procedures for achieving
of the specified goal. Great importance of the rational methods of creative work is
proven by the fact that in many published works we can encounter large intentional
gaps. It’s because the “technological processes” of the mental creating are of a
greater importance and therefore they are kept more secret than the products of this
It is not necessary to learn and know all the methods, it is good to select some of the
following (in cooperation of the SME and the coach) and use them.
Creativity methods can be divided into:
3.1 Methods increasing the individual‟s or team‟s creative potential
3.2 Methods contributing to the improvement of the creative work conditions
3.3 Methods facilitating the problem solution (procedure)
The individual methods often overlap, supplement and enrich each other. From the
point of view of the whole creative process, more methods can be gradually used
depending on the creative process stage. Existence of the large number of methods
allows a high number of combinations that are usually based on a certain
comprehensive conception, overall strategy.

4. Creativity Development                                                            1-57
4.3.1 Methods increasing the individual’s or team’s creative potential
In practice two approaches of the individual (team) to the creativity can be
   Spontaneous (intuitive) – they are beyond planning and management, related to the
    activity of remarkable creative individuals
   Methodical – development of methodical approaches to the solution of complex
                – development of organized team activity in science, research and
Development of creative abilities can be speeded up by means of tenacious and
systemic effort developing certain mental qualities and forming the structure of
individual features. Cultivation methods are used for that and they can be divided into
    a)   Study
    b)   Training
    c)   Inspiration
    d)   Harmonizing
    e)   Regime
    f)   Conditioning
Ad a) Study methods
These methods are aimed at the overall broadening of one‟s and acquiring of orientation
in the deciding spheres of human activities in the past, presence and in certain
prognoses also in the future. They represent a starting point for the other methods. It is
not possible to get on a higher level from both the points of view of quantity and quality
without any study resources. However they cannot be overestimated as they mediate
only “book-based” knowledge that needs to be supplemented with experience from real
Ad b) Training methods
They include experimental creation that from a psychological point of view takes forms
of problem learning, training, and attempts in creative activity etc. The training
methods are related to and overlap with study methods and form their practical part.
They can be used at all stages of growth and preparation of a creative employee in many
varieties. Inventiveness can be practiced in individual etudes and psychological
predispositions for creative work can be formed. Also combination exercises and
reconstructions on a given topic, training of paying attention to data, searching or
identification, problem of looking for another arrangement etc. can be viewed as etudes.
Techniques for overcoming of mental barriers are of great importance. It is essential to
be able to identify the relevant barrier blocking some of the creative abilities and then
find and master certain technique by means of which it is possible to overcome this
Ad c) Inspiration methods
This is a special category of study methods (they are also based on the study of literary
and culture sources). Their task is to establish certain mental link with other authors.
They stimulate imitating, adopting but also critical evaluation and looking for one‟s
own way to solution. Comparisons of other people‟s present and past works with one‟s
own intentions contribute to the further development of the humankind and thereby its

4. Creativity Development                                                            1-58
methodical experience is formed. Individual forms of inspiration methods can be very
varied – from study, interview and learning from it to the activation of
superconsciousness and connection to noosphere (the Earth‟s information field created
by human mental activity). So pondering, meditation, deep concentration and
immersion in one self are very effective instruments of creative work. It is known that
many inventors found their solutions when traveling in a public transportation mean
(relaxation and submission), fishing etc.
Ad d) Harmonizing methods
These methods are focused on cultivating of the creative employee‟s effort to achieve a
certain balance between extreme poles of various experience situations. The balance
needs to face the deformation consequences that the demanding creative work could
have on the personality development. Harmonization aims at conscious development of
such lifestyle, in which the individual burdens compensate. Balance is not a rigid
position in life but it is dynamic, starting point for top activities and experiences.
Ad e) Regime methods
These methods are targeted on such organization of activities that will stimulate creative
development in a suitable manner. They anticipate introduction of weekly, monthly and
yearly regimes, however not in the common sense of certain deep-rooted habits, but
containing aspects of artificial relaxation, regime restructuring, application of creative
break in an activity, making use of random influences. Many of these methods are
known from the preparation of top sportsmen.
Ad d) Conditioning methods
These methods should ensure daily high performance and long years of virility and
vitality, lasting feeling of brightness to overcome demanding tasks and avert effects of
factors endangering the health and speeding up the aging. The condition methods can be
divided into active and passive relaxations, relaxing activating method (RAM) and
physiological procedures. Active relaxation and RAM anticipate the subject‟s active
participation in the process. RAM is an artificial method of relaxation and conditioning
with high effect and contrary to the active relaxation it requires training under expert
supervision. Passive relaxation aims at the renewal of the life energy and considerable
decrease of the mental and physical stress level. It is achieved by napping or sleeping,
breathing exercises, yoga etc. Physiological procedures achieve the same goals by water
therapy procedures, physiotherapy, massages, sauna, sunbathing etc. They are usually
performed under expert supervision. It is suitable to choose the procedures in a manner
compensating the potential one-sidedness of the lifestyle. The way of living and proper
eating habits are also very important elements of building up the necessary condition.
Already the Ancient Orient (China and India) attributed high importance to the
composition and manner of nutrition.

4.3.2 Work methods increasing the creative output of an individual
Creative work conditions for an individual and a team differ considerably and therefore
methods for the fostering of the creative activity effect will differ depending whether
they are applied to an individual or a team. An individual without training usually uses
the trial end error method sometimes called Monte Carlo. This method is not very
effective and in order to be at least acceptably effective it anticipates considerable
intuitive abilities of the inventor. Even the iteration method (method of gradual
approximation steps) is not very effective, particularly for its lengthiness. Therefore
other methods were sought for that would lead to higher effectiveness of creative work.

4. Creativity Development                                                            1-59
Methods described in this part are suitable for individuals, however individuals within
team creative work can use some of them. Individual operations and partial procedures
represent certain “building blocks” for the creation of methods facilitating the solution
of problems; therefore we speak about facilitating methods. It is very difficult to define
borders between the cultivating and facilitating methods. Some cultivating methods
(e.g. barrier overcoming techniques, trial improvisation) can be applied as facilitating
methods and vice versa. Again, the facilitating methods can be divided into several
categories. Those are:
    a) Orientation methods
    b) System analytic methods
    c) ARIZ inventing methodology

Ad a) Orientation methods
These methods help to overcome certain “deadlocks” in the process of problem solving
and help the inventor to go in the promising direction. They suggest questions to the
inventor that he might have forgotten or propose change in the attitude or approach.
Check list
Aim: stimulate the inventor to look systemically into many possible solutions by means
of purposefully given questions.
Performance: using the knowledge of heuristic operations and principles, elaborate
“sets” of provoking questions that should lead to the desired turnover in the inventors
thinking. These check lists are becoming an indispensable instrument of many
comprehensive methodologies (e.g. value analysis system, Wögebauer‟s constructive
technique [9], Osborn‟s brainstorming etc. are based on them). Various check lists can
be drawn up for various fields. Osborn worked up 9 heuristic principles – “Use in a
different manner?“ “Accommodate?“ “Modify?“ “Replace?“ “Enlarge?“ “Modify
again?“ “Turn?” “Combine?” - into more detailed questions. For example the “Turn?”
principle into the following questions: “Turn positive into negative or vice versa?“
“Turn it to the front or to the back?“ “Turn it out, down, up?“ “Turn upper part, bottom
part, other part?“ “Change placement?“ “Turn the tasks?“ “Turn the cause and
consequence?“ “Why this earlier than that?“ “Replace the more the less with the less the
more! Start from a totally different end?” etc.
Change of attitudes
Aim: achieve change in the attitude to a problem and thereby open up wider
possibilities of searching for solutions by means of some of the recommended
Performance: new view of a problem can be obtained by means of semantic or syntactic
redefinition of a problem, attempt to express the problem in synonymum concepts,
translation of the formulation into a foreign language and back into mother tongue,
explaining problem to people from other fields and leting them to retell it, problem
assessment from various points of view (e.g. technical problem from the point of view
of a producer, user, transporter, storage operator etc.), expressing the problem in
symbols or graphs etc.

4. Creativity Development                                                            1-60
Ad b) System analytic methods
These methods help to accumulate a maximum number of problem solutions (even only
theoretically possible ones) by means of various systemic and analytic procedures.
Morphologic analysis
Morphology is a science about the outer and inner shapes and changes in the organism
structure. It was introduced into the field of technology as an ordered method for
observing of objects, the result of which is systemic view of possible solutions to the
given problem. The method was developed for the research of rocket power units. Later
on morphological institutes were established that organize morphological courses.
Aim: by means of combining selected elements of the researched phenomenon (system,
problem) acquire such solutions that do not exist in practice yet and submit them to
analysis from the point of view of their practical application.
Performance: in general, the morphological method is about preparing a matrix in which
individual lines represent characteristic features (parameters) of the researched system
and possible solutions are added to these features into individual columns. Then all the
possible combinations of solutions are looked into. Total number of possible solutions is
given by the number of columns (parameters) powered by the number of lines
(executions). In case of partially empty columns, an average value must be taken into
consideration. If the morphological method is not supposed to be an end in itself, the
creative employee needs to compose the morphological matrix only from elements
relevant for the followed goal. Look-up and definition of individual features and
solutions is very demanding and sensitive and it needs to be based on qualified analysis
and if possible on heuristic approach.
Functional analysis
Aim: find various possibilities of technical solutions that will correspond to a certain
function (rather than to a certain product or its part).
Performance: from a methodical point of view the functional analysis can be performed
according to the morphological matrix pattern, system characteristic features in
individual lines are replaced by more abstractly defined functions. Functional analysis
has become a starting principle for the value analysis methodology where main and
secondary functions are distinguished for every product or equipment (e.g. not various
“cutting tool” realizations are looked for, but various performances of the “cutting”
functions, the solution space is broadened by that).
Performance: the process analysis is about decomposition of the process (production,
work, information) into individual operations. It is necessary to focus particularly on the
identification of mutually affecting basic elements, operator and operation, on direct and
indirect effects of their influence. During the first stage detailed description is carried
out, whenever possible in mathematic form (mathematical-logical model). Specific
ideas for the process improvement and conceptions of new or improved machines,
appliances and instruments can usually be immediately derived from the process
It would be possible to state many more system analytic methods, but those are usually
variations of the morphological method trying to overcome some of the drawbacks of
the basic morphological matrix or box (sequence morphology method or recognition
matrix method try to overcome the immeasureable amount of combinations). Individual
disciplines of system applications (operational analysis and system analysis of material,

4. Creativity Development                                                             1-61
control and information systems) and related system engineering are widely applied
Ad c) Inventing algorithm (ARIZ – algoritm rešenija izobratělskich zadač)
 In 1961-65 several works on the inventing methodology topic were published in the
U.S.S.R. and many people tried out the new methodical findings directly in practice.
This new methodology was called algorithm and this characterizes a problem solving
tactics that anticipates a finite, step-by-step procedure. The main principle of this
methodology is not only in the solving tactics but most of all in the use of dialectics and
evolution science.
  1. Before solving any problem it is necessary to clarify the goal at which the solution
     should aim. This goal becomes a point of orientation for the inventor. Knowing
     this goal he can avoid “going astray” in many directions, which often occurs with
     the trial and error method. Ideal solution, i.e. solution with maximum effect, is
     always the objective of this method. For example an ideal machine will be neither
     the largest not the most elegant one, but it will be a machine fulfilling its function
     with the least expenditures.
  2. At the core of every technical problem there is the contradiction between the
     required effects and technical means that are available. Usual compromise
     solutions are characterized with attempts to optimize the positive influences of
     one factor and simultaneously appearing negative influences another factors. By
     means of such compromises, only a minute technical contradiction can be
     removed as an obstacle preventing the achievement of higher effects.
  3. Gradually the inventing algorithm was enriched with mental operations and
     procedures contributing to overcoming of various psychological barriers (e.g.
     inflexible thinking, narrowly defined problems), to disclosing of technical or
     physical contradictions and particularly to the removal of these contradictions.
     Extensive information fond of heuristic procedures, physical phenomena and
     generalized solutions by means of which the identified technical or physical
     contradiction can be successfully removed, represents part of the algorithm.
     During the algorithm development, about 40,000 inventions were analyzed and
     about 1,200 kinds of contradictions were identified in them. About 40 types of
     solutions were applied to their removal.
The inventing algorithm, known as ARIZ, represents a mixture of dialectic logics,
fantasy and generalized knowledge of thousands of successful inventors of both the past
and the presence. Today this algorithm is available in the form of a computer dialogue
system leading the inventor to the target solution in an optimum manner (Invention

4.3.3 Work methods improving team’s creative output
Creative teamwork requires certain “personality socializing” so that the cooperation of
personalities (and all the creative employees definitely are personalities) would possibly
be without serious conflicts. Therefore sociologists and social psychologists have
developed many educational methods covered by the term “social training”. Manners of
learning about and tolerating other members of the team, building up mutual trust and
cooperation and resolution of possible conflict situations are analyzed. Instead of the
usual “who wins over whom” strategy, the non-zero summ (win-win) strategy is taught.

4. Creativity Development                                                             1-62
Some programs of the social training can be also focused on the stimulation of the team
creative thinking. Such programs are scheduled into several days (boarding form)
following with a break of one or several weeks (e.g. 3 x 5 days with 2 weeks break).
Usual topics and sequence of the practiced situations is as follows:
      1) Mutual learning – uses many non-traditional forms of introducing to each
          other (interview, mutual description, telling about oneself, social games etc.)
     2) Team forming – by means of joint experience (games) or works (drawings,
        play staging and performing, pantomime) or jointly organized events etc.
     3) Training in distinguishing abilities – mainly includes training in causal
        relations (exercise with the “why” topic), training in the analyses of defects of
        individual objects, exploration of motivation, improvisation, evaluation and
        description training, feeling oneself into various starting positions (“try to
        walk a mile in my shoes” game) etc.
     4) Training of the “try it in a different manner” skill – is focused on the
        overcoming of the usual world view and stepping away from fixed or
        unchangeable facts (answering questions “What can be done about it?”,
        “How can we do without it?”, “What if…?” “Different place, different time
        and period…”, “Seven ways to problem solution” “Pro and con” game etc.)
     5) Training in seeking and making use of analogies – analogies are the richest
        sources of creative thinking. “Looking for similarities”, “Work with examples
        and metaphors”, “Schematic picturing”, “Application of simple and symbolic
        allegories”, “Personal analogies and analogies of relationship” are practiced,
        playing the “It‟s like …” game
There are many methods allowing the development of the team‟s creative atmosphere
and they have many advantages and disadvantages. They can be divided into three
      a) Discussion methods
      b) Methods with postponed evaluation
      c) Methods of creative confrontation
They all belong to the category of intuitive methods.
Ad a) Discussion methods
These methods are based on a person‟s needs to be recognized by the team, be
acknowledged, dominate, compete and win with one‟s opinion. Mutual reactions of the
discussion participants to the partner‟s opinions are the dynamic element. Those are
strong activating factors of a social character that influence the creative process in a
positive manner. It is necessary to avoid negative tendencies hidden in the fact that the
discussion participant can forget about the final target and focuses only on putting
through his or her opinion. Emotional atmosphere of such performances can disturb the
logical argumentation, increases the opinion extremity and prevents solving objective
contradictions that are turning into personal disputes!
Socrates’ method
Aim: disclose the contradiction and reach a new finding (the truth) by means of
overcoming it
Performance: Socrates elaborated “the art of dispute” into two stages: in the first stage
(irony) it was necessary to bring the partner to contradiction with himself and admitting

4. Creativity Development                                                           1-63
of his own ignorance by means of systemically asked questions. The second stage was
about overcoming of these contradictions with the goal of knowledge achievement. The
issue of properly conducted dialogue is topical up to now, it‟s the basic precondition of
all team discussion methods.
Creative seminars and external evaluations, videoconferences
Aim: obtain critical comments, advice and help concerning the certain solution from
selected experts.
Performance: neutral area is the most suitable environment for such seminars or
evaluation meeting where the borders between organizations and fields and barriers
formed between subordinates and bosses can be easily overcome. Videoconferences are
a modernized variety of the above-mentioned ones. They are called by a circular in the
computer network about 2 weeks ahead so that the interested parties and participants
could get ready for the given topic. Home environmnet of every participant and
computer support in argumentation and looking for the solution are the advantages.
Necessary office equipment can be its drawback.
Ad b) Methods with postponed evaluation
In the natural course of thinking it is possible to distinguish two kinds of intellectual
   a) Creation of ideas
   b) Evaluation of ideas
In everyday life these activities keep on alternating and intervening. However that can
lead to premature rejecting of ideas that could be elaborated into a promising form if
they were not prematurely rejected. The first successful method using the postponed
evaluation principle was named brainstorming and it was created by A. F. Osborn.
Gradually it was worked up into further varieties. It ranks among the most widely used
methods of problem solving.
Traditional brainstorming
Aim: obtain the widest possible scope of ideas for a given problem solution and find
quality in the quantity.
    a) Preparation – clearly and precisely defined problem is presented to a selected
        team (5 to 12 people) or the team defines the problem. The team meeting is
        chaired by an experienced moderator (organizer and at the same time director
        and inspirer) who creates an open informal atmosphere stimulating the creativity
        of all the team members. It is necessary to eliminate the fear of mistaken or
        unreal solutions and fear of taunting and criticism (basic rule of brainstorming!)
   b) Intuitive part – it creates possibility of following-up and combination of
      individual ideas, an absolute freedom is provided for ideas. The moderator‟s
      assistant writes down all the individual ideas and spontaneous ideas on notice
      boards or blackboards. If the stream of ideas is getting obstructed, the moderator
      stimulates, points out the main drawbacks of the current state and inspires by
      means of further questions. It depends on the amount of ideas but this part
      should not exceed 60 to 90 minutes. Detailed elaboration of the idea is not
      required from the participants, just the expression of an idea.
   c) Analytic part – meeting in a smaller group (can be with different people as well),
      during which the presented ideas are registered in a form, critically evaluated

4. Creativity Development                                                            1-64
       and the best ones are selected for further elaboration. This meeting can give an
       impulse for the second round of brainstorming, in which the problem will be
       defined in a different manner, eventually it will focus on the elaboration of the
       selected ideas and the way of their implementation.
Main features of brainstorming are:
      Simple handling
      Simple application
      Low overall costs
      Making use of group output
      High degree of knowledge
      Group dynamic conflicts
      Expensive evaluation of ideas
      Danger of divergences (“straying away”)
      Danger of excessive problem extension
      Only for simply structured problems
Another varieties of this method:
Anonymous brainstorming
Performance: Organizer receives the solution ideas from the participants in a written
form beforehand. At the meeting one idea after another are analyzed (without naming
the author) and the team tries to further develop and improve every idea.
Didactic brainstorming
Performance: First of all the organizer presents the problem to the team in a generalized
form; more detailed information about the problem and more specific data is usually
provided at further meetings (a whole series of meetings is anticipated). A more
thorough problem explanation is reached and the participants are prevented from taking
a one-sided view of the problem (which is relatively precisely specified). At the same
time gradual introduction to the problem allows the participants to let the problem
mature gradually and expose it in their subconscious.
635 Method (written brainstorming = brainwriting)
Performance: each of 6 participants receives beforehand prepared form, into which three
possible solutions are sketched out and after five minutes is it passed on to the neighbor
and the whole procedure continues with the difference that now every participant can
look for inspiration in the previous suggestions already given in the form. After 6
rounds, i.e. after half an hour to 40 minutes, it is possible to receive up to 108 various
solutions to the problem.
“DISCUSSION 66” method
Performance: This variety is suitable in the cases when it is necessary to put together a
larger team for the problem solution. This team is then divided into groups of 6
members, each of them having its own moderator, assistant and spokesperson. After
about six minutes of work in the groups, the whole team meets up and spokespersons of
individual groups present the ideas to it. The ideas are discussed in this broad meeting.

4. Creativity Development                                                            1-65
If a new problem issue is encountered, its solution is again divided among the groups
and then the results are again discussed at the common meeting.

Ad c) Methods of creative confrontation
These methods are based on the finding that the creativity can be more considerably
stimulated if the creating person manages to master the psychological core of the
creative process and understand its functioning. The emphasis is placed on the
emotional and irrational part of the creativity: various techniques stimulating conscious
use of these elements are tried out.
Synectics (traditional) – from Greek, meaning “connection of seemingly unrelated
Aim: Disturb the traditional view of a problem and acquire unusual, original solutions
Performance: The problem solving takes a form of a relaxed discussion in a group of 5
to 7 participants well introduced to the synectics method under the guidance of an
experienced supervisor (psychologist). The head of the synectics group observes the
following rules:
      Postpones immediate solution, leads the discussion to looking for aspects rather
       than solutions
      Approaches the problem as an autonomous object
      Switches between high engagement in the problem detail and retreat from the
       problem (effort to see a problem as a part of a bigger complex)
      Inspires the use of metaphors (even random things can be used as ideas for
It makes use of the fact that every problem has its unusual side that can be closer
approached by concentrated analysis, during which new elements are discovered (stage
at which unusual becomes ordinary). Such a deep analysis allows re-formulation of the
solved problem.
In the following stage the “analogy and metaphor‟ mechanism is used that will break
the usual view of the problem and show possibilities of the variations development.
Thereby the problem appears in its full scope. The purpose of the mechanisms is to turn
the usual into unusual. Thereby the inventors get into the creative state of engagement
and necessary retreat and speculation. Climate for the full development of creative
abilities is prepared.
Furthermore, technical possibilities of implementation are identified and alternatives are
researched from the newly acquired point of view. Final stage represents either the
solution as such or clearly formulated development action plan.
Synectics offers four instruments by means of which usual can be turned into special:
those are personal, direct, symbolic and fantastic analogies. Without these instruments
no creative thinking takes place, however if they are understood from synectics point of
view, these instruments have the advantage that they can be learned, reproduced and
they are capable of evoking and renewing the creative process. They can be exercised
and their knowledge can be tested.
Synectics relies on the team member cooperation during solution of the given problem
but at the same time it tries to free the maximum individual abilities inside the team by

4. Creativity Development                                                            1-66
means of forcing every participant to formulate his or her ideas and feelings during the
creative process.
In practice well-educated and experienced people capable of encyclopaedic view of the
researched question prove to be good team members.
The synectics group should be set for the period of at least one year while the individual
members can be changed on running basis according to the character of the solved
This method is suitable for a narrow circle of demanding and complex problems; it
requires creative tension and wit. It is more complcated than brainstorming, however it
is very fruitful from the psychological point of view. It is estimated that the creativity
effectiveness increases three times. It was developed by W.J.Gordon from the U.S.A.
Synectics conference
Performance: It includes the important elements of the traditional synectics, however
the discussion does not take place in such a strict, multi-stage process. It is
characterized by a discussion style, in which various analogies are developed in a free
manner and from them inventive ideas are formed by means of creative confrontation
(competitive style). (The “retreat from the problem” stage is missing here). The
conference participants should be familiar with the synectics method.
Association chain
Performance: The synectics group discussion is influenced by means of random choice
of various terms (e.g. opening of a random dictionary page); the task of the group
members is to make associations leading to some problem solution. For example in the
“force-fit” variation one team defines a word and the other team needs to find an
association to it.
Visual synectics
Performance: Random pictures are shown to the synectics group. The participants
describe and analyze the pictures together (retreat from the problem, alienation stage).
Then invention ideas are derived from the elements and relations identified in the
picture. If the formation of ideas stops, the group proceeds to the further picture
Integration of surrounding inventive fields
Performance: The synectics group members are stimulated to explore the problem
“surroundings” and find there impulses for the problem solution. The process goes in
three steps:
      Surrounding areas in relation to the searched solution are defined
      5 to 15 elements from these surrounding fields are identified by means of
       suitable associations
      Found elements are evaluated in relation to the solved problem.
Semantic intuition
Performance: While in the everyday life, first the inventive idea occurs and then it is
given a certain name, here the reverse procedure is applied. A new name is selected
(e.g. of so far non-existing product) and then an invention that would allow the “birth”
of the new product is looked for.

4. Creativity Development                                                            1-67
Delphi method
Performance: The leader (delphist) prepares a system of questions in the form of a
questionnaire that is copied and distributed among the group members. The group is
usually formed from 10 to 20 top experts coming from various fields. These experts
must not be in any contact before or after the questioning (anonymity). The experts‟
opinions are of subjective character. Suppositions need to be separated from knowledge.
The leader collects all the filled-in questionnaires and evaluates them including the
estimate of the opinion weight of every expert and decides, which results will be
submitted to the experts and then the second round is initiated. It usually does not make
much sense to have more than three rounds, as it does not bring any more ideas. This
method was originally prognostic, however gradually it has started to be used for the
solution of specific tasks. The following scheme is proposed for the questioning:
1st round: What steps can you see in the solution of the given problem? Give solution
steps spontaneously!
2nd round: You have received a list of various solution steps to the given problem.
Please, go through the list and make further suggestions that will occur to you or that
have occurred to you while reading the list of the solution steps!
3rd round: You have received the final evaluation of the both rounds, during which the
ideas were identified. Please, go through the list and write down those suggestions that
you consider best with regard to the implementation. Give reason for your eventual
disagreement with any solution!

4.4    Creativity
It is not necessary to explain the known quotation “Cogito, ergo sum”, “I think,
therefore I exist” by the French mathematician and philosopher René Descartes. He
emphasizes thinking as a first-rate ability of a human being. However it is necessary to
develop and support this specific quality and that should be everybody‟s aim. Not just to
memorize facts but to learn creative thinking.
Creative thinking represents a combination of logic and intuitive approaches. Intuitive
thinking corresponds to the man‟s natural character, it represents the ability to react
immediately, and it is a specific form of learning and recognition. Logic thinking
values the principles of the occurrence and development of correct, step-by-step linear
deduction and reaching conclusions.
In the course of the creative thinking it is necessary to supplement the logic thinking
with the intuitive one so that an innovation could emerge; and on the other hand the
intuitive thinking needs to be supplemented with the logic one so that the correctness of
the idea would be verified, explained to everybody and be applicable for the final
solution. Real creative thinking, that forms the base for the innovation, requires merging
and connecting, the use of lateral thinking (Edward de Bono).

4.5     Literature

[4-1]   Dacey J.S., Lennon K.H.: Kreativita, Grada Publishing, Praha, 2000
[4-2]   Diekmeyer, M., Kirst W.: Trénink tvořivosti, Portál, Praha, 1998

4. Creativity Development                                                            1-68

5.1     Introduction
Main points: brief history, sources, on which the project management is based,
organization of project managers
Goals: The attendee will be positively motivated to listen to more information about
project management.

Project management has been discussed since World War II, but there are works in the
world proving that projects (although they were not called this name) existed in the
ancient history. Proves in the form of the Egyptian pyramids, the Great Wall of China,
Greek temples, Roman aquaducts and many others survived thousands of years. If we
leap over the Middle Ages to our time, we can name many major projects, to which the
project management was applied, for example the Manhattan project (development of
nuclear bomb in the USA), invasion to Normandy, Apollo project, Eurotunnel etc. Even
in our country there are projects that are or used to be managed according to the project
management theory, e.g. underground (metro) construction in Prague, construction of
nuclear power plant in Temelin or highway bypass around the city of Pilsen. Large
projects concern a high number of citizens and therefore it is important that they are of
high quality. The latter two projects prove how much project management and system
approach quality matter, as not too favorable results of those projects are generally
However, it is not only about large projects. Even small projects are important from the
point of view of small- and medium-size companies. Company strategy implementation
means performance of goals defined in the strategy and those are essential tasks for the
company. Product innovation does not include mere implementation of some idea,
solving of a technical problem, but it comprises everything from the idea itself to the
pre-production and productions stages, including the introduction of the innovated
product to the market. Product or process innovation implementation should be carried
out by means of project management as well as any larger change in the company. The
project management theory offers proven procedures and methods for the management
of these changes. By applying this approach we can reduce to minimum the risks and
uncertainty in implementing something new.
Sources, from which the modern theory of project management takes its roots, are
cybernetics - control theory, systems theory and management theory. Mathematics,
economics, psychology and instruments from the field of informatics and computer
support are tools used in the project management.
Those who manage projects or work on them associate in organizations to share
experience, publish expert publications and organize seminars and conferences. In the
Czech Republic there exists Project Management Association ( that is a
member of the International Project Management Association, where mostly European
countries are organized (websites: American Project Management
Institute in USA is another large organization with over 50 thousand members and
worldwide activities ( In 2000 this institute published a guide to the
project management knowledge “A Guide to the Project Management Body of
Knowledge” [5-1]. As this guide deals with the subject in a very systematic manner, it
serves as one of the sources for this module.

5. Project Management                                                               1-69
5.2     Basic concepts
Main points: operation, project, project product, project management, program,
subproject, project activity, milestone, resources, project participants, pre-project
Goals: After studying this text the attendees will be able to use the basic concepts of the
project management.

5.2.1 Operation and project
People perform work. There are two kinds of work. Those are either operations or
projects. Operations and projects have many things in common, for example:
         They are performed or at least initiated by people.
         They usually have to cope with limited resources.
         They are planned, performed and monitored.
The basic difference between operations and projects is that operations repeat in time
(e.g. growing and harvesting of grain, car production, supplying of department store
etc.), while project are limited in time and unique. Therefore project can be defined
using terms expressing its characteristic features - project is work effort limited in
time leading to the creation of a unique product or service.
Time limitation means that every project has a defined start and end. Project end is
reached by meeting the project goals or when it is clear that the project goals cannot be
achieved and the project is cancelled. The temporary character does not necessarily
mean a short duration; many projects run for several years. In any case the duration time
is definite; projects are not repeated activities.
Purpose of a project is to create something that has not existed so far. Product or service
can be unique although they use something that is repeated or reused several times. For
example many city housing estates were built where there were dozens of houses of the
same type, but each of these housing estates was a project as it was constructed in a
different environment, had a different architecture design, other suppliers etc. The
presence of some repeating elements cannot influence the uniqueness of the whole.
What are the project qualities:
      Project has three dimensions: costs, time and scope. It is necessary to define all
       the three dimensions at the very beginning, as there is a very tight link among
       them. If one dimension is changed, e.g. it would be defined later, it influences
       the other two. The project manager needs to treat these dimensions
       simultaneously as a complex, as a system.

           Expensen                            Scope

               Fig. 5.1: Three project dimensions

5. Project Management                                                                 1-70
      Project usually goes across the organizational structures, as it needs to make use
       of skills and knowledge of many professions or even organizations.
      Project differs from what has been done earlier; it contains a certain element of
       uncertainty and risk and there is usually some capital invested into it that is at
      Project is a temporary activity; it has its beginning and end. Project also has its
       lifecycle. It goes through several stages that are characterized by:
           o At the beginning the costs and number of employees are low, they
               increase towards the end and decrease as the project approaches its end.
           o At the project beginning the probability of a successful project
               completion is low and the risk and uncertainty is high. The probability of
               the successful project completion grows progressively in the course of
               the project and the risk decreases towards the project end.
           o Project participants‟ ability to influence the final characteristics of the
               final project product and final project costs is the highest at the beginning
               and it progressively decreases in the course of the project.
           o Participants‟ enthusiasm is usually great at the beginning and it gradually
                vanishes with the amount of overcome obstacles.

5.2.2 Project product, product management
There are two sides to a project:
      The first one is a project product, main project‟s goal, because of which the
       project is carried out and that is at the end passed over to the user in the form of
       a delivery of a tangible (a structure) or intangible (study, program) character or a
       delivery of a service.
      Its management – project management – is the second side; optimum path from
       the project beginning to its end, i.e. project goal implementation. The project
       management means the application of knowledge, skills, tools and techniques to
       the project activities so that the requirements and expectations of project
       investor or customer would be met or exceeded. Achieving or exceeding of the
       investor‟s and customer‟s requirements and expectations means balancing
       between frequently opposing requirements and different factors such as:
           o Scope, time, costs, quality and project quality degree
           o Project participants with various needs and expectations
           o Identified requirements (needs) and unidentified requirements

5.2.3 Program
Program is a group of projects that have a main goal in common. Their management is
coordinated and their synergic effect is used. NASA – Apollo program serves as an

5.2.4. Subproject
Projects are often divided into several components, subprojects, that can be managed in
a simpler manner. Subprojects can be subcontracted from a sub-supplier or to another
functional department inside the performing organization. Subprojects examples: one
project stage, water or electricity installation in a construction project etc.

5. Project Management                                                                  1-71
Subprojects can be considered smaller projects and can be also managed in that manner.

5.2.5 Activity, summary activity, milestone
Project activity is a basic work activity is not further subdivided. The project consists of
these activities. In large projects there are even several thousands of such activities and
to structure such a project, several activities can be united into a summary activity.
Important events in the project, e.g. end of subproject or some stage, are called
Note: Project and project documentation
        In the Central European region the concept of project is often understood only
        as the preparation of technical plans according to which the required aim is
        performed. For example construction project of a family house, electric
        installation design etc. In this text project will always be understood as all
        activities according to the project definition. Project management will not mean
        managing of the technical documentation, plans preparation (although it could
        be a project too) but we always mean a change performance management. It is
        better to use the term project documentation to describe drawings and
        descriptions according to which the project is carried out.

5.2.6 Project resources
Project resources are means with which the project activities are executed. The
resources are employees, materials, instruments, equipment, software etc. Variable and
fixed costs are related to resources (wages, material prices, leasing, etc.).

5.2.7 Project participants
Project participants are physical persons or organizations that are involved in the project
or whose interests could influence the project performance or its successful completion
either in a positive or negative manner. The project managing team needs to identify all
the participants, define their requirements and expectations and then control and
influence them in such a manner that a successful project course would be secured.
Basic participants of every project are:
   Project manager – person in charge of the project management
   Customer - person or organization that will use the project product
    There, of course, can be multiple customers. For example, among the customers of a
    new pharmaceutical product there are physicians prescribing it, patients using it and
    insurance companies that will pay for it.
   Performing organization – company whose employees are directly involved in the
    execution of project works.
   Investor – person or a group of persons within the customer or performing
    organization or existing independently that provides financial resources either in
    cash or in a different forms suitable for the project.
If other categories of participants also become the project participants, their
identification and specification of their requirements are extremely important. They can
be, for example, owners and shareholders, suppliers, team members, stakeholders,
media, individual citizens etc. Tasks and responsibilities of the project participants can
overlap. For example, an engineering company can prepare a factory construction

5. Project Management                                                                  1-72
project and at the same time participate on the financing of the construction.
Coordination of the project participants‟ expectations is very often quite difficult as they
can have various objectives that are often contradictory. For example:
An owner of a real estate will be in a project concerning the development of this real
estate interested in the project time scope, local authorities can be interested in
maximum tax collection, a group of environmentalists wishes minimum of negative
influences on the enjvironment and nearby neighbors of the concerned real estate try to
relocate the project.
It can be generally concluded that the differences between the project participants must
be solved in favor of the customer. That, however, does not mean that needs and
expectations of other project participants should be completely neglected. Looking for
the suitable solutions to these conflicts is one of the main tasks of the project

5.2.8 Pre-project activities
How does a project come into being? At the beginning there is an idea, e.g. an idea for
an innovation, new product, new niche appears at the market or there arises demand for
some product of a company or some organization. So at the beginning there is always
an idea that needs to be transformed into a project. This initial stage is called pre-project
activity that used to be called in the Czech Republic an intention, technical and
economic study and introductory project all together. For large projects costs of this
activity are not negligible and therefore this activity is viewed as the first project stage
for the purpose of the financial resources creation.
From the point of view of the project itself these activities are very important because
on the basis of their conclusions the feasibility study decides whether it is feasible to
execute this project or not. Feasibility study is a topic of Chapter 10.

5.3    Project lifecycle and project processes
Main concepts: project stage, project lifecycle, groups of project processes
Goals: after studying the following text the attendees will have a clear idea of the
importance of the project division into stages and the project lifecycle. They will be
introduced to five groups of project processes and to the systemic view of them.

5.3.1 Project stage, project lifecycle
Projects are unique pieces of work and therefore show a certain degree of uncertainty.
In order to secure better management and control, organizations performing projects
usually divide every project into several project stages.
Every project stage represents one or several specific closed units (it is usually a
delivery of goods or services). Their aims or outputs are certain tangible and easy to
check work results, as for example feasibility study, detailed construction
documentation or a prototype production. These work units and therefore also stages are
parts of the overall sequential logic proposal of the project itself.
Completion of the project stage is usually characterized by a control of project outputs
so that (a) it would be decided if the project will continue in another stage or it will end,
(b) divergences would be discovered and effectively corrected, e.g. in costs.
The sequence of the project stages is defined by the subject matter sequencing of the
project activities, such as requirements – proposal, design – production etc. Activities of

5. Project Management                                                                   1-73
the preceding stage must be completed before the following stage starts. Sometimes the
following stage can start earlier if the related risk is acceptable. This practice is called
overlapping of stages and it can be used in case of project deadline delay.
We need to distinguish precisely between the project lifecycle and product lifecycle. For
example a project with the goal of introducing a new desk computer to a market is only
one stage of the lifecycle of the product– new desk computer.

5.3.2 Project processes
Projects consist of processes. Process is a series of activities bringing the desirable
result. Project processes usually fall within one of the two main categories:
      Project management processes
     Product-oriented processes
Project management processes and product-oriented processes mutually overlap and
mutually interact during the project duration. For example, project scope cannot be
defined without the basic knowledge about the project product creation.
Project management processes are usually divided into five groups:
       Initializing processes – they identify that a project or its stage should begin and
        act at its initialization.
     Planning processes – activities connected with the creation of a real work
        scheme that will meet the business and trade needs, for the purpose of which the
        project is performed.
     Executive processes – coordinate human and other resources in such a manner
        that they would work according to the plan.
     Control (regulation) processes – secure that project goals are achieved by means
        of monitoring and measuring of the project course and that in case of need a
        corrective measure is adopted.
     Final processes –they conclude the project or its stage from a formal and
        subject-matter points of view and lead the project to its successful end.
The process groups are interconnected by means of their inputs and outputs: result or in
other words output of one process is an input for another process. During the project the
process activation repeats, except the initializing and final processes. The planning first
continues with the project plan execution, and then the regulation and control processes
take place supplying current data according to the project state back to the planning
processes. The plan is adjusted and performed according to the real project state. These
links are shown in Fig 5.2. The groups of the project management processes are not
discreet, they are not single events, but they are overlapping activities occurring during
the course of every project stage with changing intensity. Fig. 5.3 demonstrates how the
process groups overlap and how their intensity changes during the project stage.

5. Project Management                                                                  1-74
   Initialization            Planning
    processes               processes

             Control                   Execution
            processes                  processes


       Fig. 5.2: Links among the process groups in the project stage

Process                                       proc.
                                      Planning                     Completion
                                        proc.                        proc.
                Init.                              Control
               proc.                                proc.

        Phase                          Time                               Phase
         start                                                             end

       Fig. 5.3: Overlapping of process groups in the project stage

5.4    Project as a system for the performance of changes
Main concepts: project as a system, project product, project management, project
management subsystems, project specification and planning, organization and human
resources, monitoring and supervision, project closing.
Goals: In this texts the attendees will acquire the basic knowledge of methods of project
The elementary view of a project as a system divides it into two subsystems:
      Project product
      Project management

5. Project Management                                                               1-75
5.4.1 Project product
Creation of a project product is an issue for experts in specific fields of the project e.g.
development of a new technical product – designer, design engineer, technology expert;
creation of new software – system engineer, programmer; creation of new organization
in the company – CEO, officer in charge of organizational issues etc.). Although it
might appear that the project product creation is an issue only for specialists, some
general rules can be identified that the project product specialist from various branches
should follow:
    a) User will be using the project product and therefore it is necessary that it first of
        all meets the user‟s requirements. User‟s participation is necessary in the course
        of specification of the product‟s functions and qualities.
    b) Project product is a system; therefore it is necessary to define the limits of this
        system and its links to the system environment at the very beginning. (e.g.
        interfaces with cooperating external systems).
    c) The procedure of product realization goes from system analysis to solution
        proposal (creation of a system model, project documentation), production
        preparation (engineering) and at the end production of this system. Production
        is here defined as any manufacturing of the project product.
    d) Project product can be a system, on which experts from various branches and
        sometimes from several organizations cooperate and therefore it is necessary to
        secure their cooperation and coordination. Project documentation creation,
        production preparation and production can be individual project stages or
        individual projects and should be managed according to that (cf. Project
Besides these general rules, there exist other general procedures and skills typical or
certain branches. For example:
      Product division into groups of individual hierarchic levels representing more
       detailed product division. This product structure (PBS – product breakdown
       structure) usually defines the product scope for technical products.
      Special procedures for product design, e.g. CAD – Computer Aided Design for
       work in development and design, CASE – Computer Aided System Engineering
       for design of control systems or application of development diagrams for the
       definition of the control program function.
      Technical standards and regulations are used for the quality assurance of the
       technical product. For supplies to foreign countries the product needs to meet
       local standards and traditions.
      Certain technical risk is related to a new product. It is necessary to analyze the
       risk and to minimize it using technical calculation, models, simulations and
       alternative proposals.

5.4.2 Project management
The project management subsystem consists of the following systems:
      Project specification and planning
      Organization and human resources
      Monitoring and supervision
      Project closing

5. Project Management                                                                  1-76
Project management means management of processes from which the particular systems
of project management consist. Every process requires some inputs and produces some
outputs. Majority of outputs serves as inputs for some other processes. Inside the
process the inputs are transformed into outputs by means of methods, procedures and
tools. Project definition and planning
At the beginning of the process it is essential to define the project‟s elementary
attributes: project‟s name, project‟s main target, milestones, investor, performing
organizations (chief designer, project owner), customer, project user. If the project
forms a part of a program, then also the program‟s name and names of related projects.
It is popular to use a form for the project definition.
At the project‟s beginning it is necessary to realize that the project management needs
to correspond with the European standard that is a national standard for quality
management both in the EU countries and the Czech Republic [5-5].
Project planning is not a one-off action but it is repeated several times during the project
lifecycle so that the plan would become more precise. The project planning is based on
the definition of all activities that need to be carried out within the project and that
result from the project scope. The defined project scope contains all the work in the
project (none is missing, none is redundant); in order to reach that it is recommended to
introduce work structure (WBS – work breakdown structure) containing all the levels of
hierarchy on which the works are defined in a more detailed manner. Sequences in
which works need to be performed, which works can take place simultaneously and
other links between the starts and ends of activities are defined. It is possible to use the
network graph to define the sequence. Resources are allocated to individual activities
and duration of activities is estimated. That is a starting point for the time schedule of
the project (graphic representation by Gantt‟s chart) and costs plan for the project
(graphic representation by means of cumulative costs in time, S-curve). It is possible to
use the traditional critical path method or the new critical chain method.
Besides these basic project plans it is necessary to plan the communication both inside
and outside the project (team meetings, control meetings during the project
performance, project presentation to the public etc.). Risk management, containing the
identification of risk factors or opportunities, their quantification and planning measures
for risk limitation or for use of suitable opportunities, represents an important part of the
plan. Cooperation with external organizations is inevitable for majority of projects; it is
necessary to plan it and secure it with suitable purchasing business activity. Organization and human resources
There exist various organizational structures in companies that are adjusted to their
main activity. Both the general and strategic managements deal with the company
organizational structures. They study the suitability of individual organizational
structures for the project management, from a functional structure, via matrix structure
to project structure. It is not possible to give any universal recommendation for the
introduction of some organization in the company. It depends on many circumstances:
company‟s size, job description, company‟s location etc. Nevertheless we believe that
the matrix structure, i.e. appointing a project manager, person in charge of the project
with relevant authorities, and people forming the team, can be recommended for smaller
companies and solution of their innovation projects. It is important to make clear to the
team members how they shall divide their working hours between their regular work
tasks and tasks resulting from the project solution. Outsourcing can be taken into

5. Project Management                                                                   1-77
consideration and some development projects can be done by an external organization,
e.g. university. However it is necessary to appoint a liaison person inside the company
and participate in the project management and its supervision.
Human resources management is further described in Chapters 6 and 13. Monitoring and project supervision
In the course of the project the activities are performed according to the project plan. As
not always everything goes according to the plan, it is essential to monitor the project
progress and compare it to the plan at certain time intervals. Time deviations (in
meeting deadlines) and cost deviations (in meeting costs) are evaluated. The Earned
Value Analysis (EVA) methodology has been developed for the project evaluation and
forecast of its course from the actual date of check to its end.
Requirements for changes in the project that can be useful for the end product user are
highly probable to occur during the project. In the course of the project new facts can
appear that were not obvious at the beginning. The executing organization should
prepare procedures for treating these events so that they could be approved and accepted
by all the project participants, whom they concern, incorporated into the project
documentation and business contracts and performed.
This methodology is called change management and sometimes also configuration
management. Project closing
This subsystem represents the last stage of the project. It involves processes such as:
delivery of the project product to its user, training of the user‟s operators, drawing of the
delivery record describing eventual defects and manner and deadlines of their removal,
preparation of the internal final report on the project, from which it is possible to learn
for further projects.

5.5   Software support of the project management
Main concepts: How can a computer program support the project management
Goals: Introduce the attendees to the possibilities of the software support of project
Every management of a social and technical system, which a project definitely is, is
based on certain methods and procedures that can be algorithmized and on procedures
concerning the managing of people and depending on the manager‟s ability to use
psychology, use emotions and other so-called soft management tools.
Computers and recently computers connected in a network can assist in precisely
described and quantified procedures and in the communication between the manager
and project teams members. Those are particularly:
      Planning tasks:
          - Creation of network graph
          - Gantt‟s diagram calculation, setting of the project end deadline,
              definition of critical activities, possibility to create many varieties of the
              project schedule
          - Allocation of resources to individual project activities, monitoring of
              their exploitation and possible removal of the resources overload
          - Setting costs according to resources, according to activities, etc.
          - Monitoring and project supervision tasks

5. Project Management                                                                   1-78
       Recording of the project progress into the Gantt‟s diagram
           - Calculation of earned value and relevant indicators etc.
       Communication tasks
           - Support in the creation of reports on the project status, list of finished
               tasks, list of open tasks, list of delayed tasks etc.
           - On-line connection between a team member and a manager, e.g. a team
               member can record work progress on the assigned task in the project‟s
               Gantt‟s diagram and this piece of information is immediately available to
               the project manager
       Multiprojecting tasks
           - Simultaneous planning and monitoring of several projects, which is
               particularly important when the same resources are used for various
Many programs for the project management support meet these tasks. Majority of them
do not differ considerably. For example the MS Project 2000 program can be
recommended for the management of medium-size projects including multiprojecting
and Internet support of communication [5-6].
The project management software support represents substantial help to all the project
participants and today projects are only rarely managed without it. However that must
not mislead us to forgetting that people with relevant knowledge and skills are the most
important project resource.

5.6   Literature:
[5-1]     A Guide to the Project Management Body of Knowledge, PMI, USA, 2000,

[5-2]     Project Management Body of Knowledge, Association for Project
          Management, UK, 1999, on
[5-3]       SKALICKÝ J., VOSTRACKÝ Z. Project management, OWB Publishing,
            Plzen, 2000 (in Czech)
[5-4]       ROSENAU M.D. Project Management,
[5-5]       ISO 10006 Quality Management – Quality Guidelines in the Project
            Management, 1999
[5-6]       User‟s Manual to the MS Project 2000 application, Microsoft Corporation,

5. Project Management                                                              1-79
6         TEAM WORK
Σ At the beginning the tutor will present the result of the pre-training company
evaluation from the teamwork point of view to the participants.

6.1       Definition of basic concepts

6.1.1 Team definition
Team is a group of people whose individual members share a common goal, their expert
skills and personal abilities are complementary and in which the members work
activities and skills are purposefully and smoothly linked together.
Teamwork is necessary for many tasks. Although it is not always essential to work as a
team, it is possible to increase the output in this manner and strengthen the feeling of
work satisfaction.
Σ The tutor finds out how the participants view the concept of a team, if necessary
explains the difference between a team and a work group. He or she points out the
importance of teamwork for the successful performance of the innovation program in
the company.

6.1.2 Team effectiveness
A team functions effectively if there is a dynamic balance among three basic issues:
         Necessity to perform a joint task
         Individual needs of team members
    Necessity to maintain a team
Team‟s effectiveness drops if any of the above-mentioned issues is overvalued at the
expense of the others. Maintaining the balance among these issues is one of the most
important tasks for the team manager.
The power of an effectively functioning team comes from the synergic effect. To
achieve this effect, it is necessary:
         Every member contributes to performance of the mutual task with his or her
          expert knowledge.
         Every member adopts specific functions (roles) necessary for the effective team
       Every member tries to contribute to the satisfaction of the individual needs of
        other team members.
Σ The tutor moderates the participants’ discussion in order to find the basic
characteristics of a functional team. The tutor particularly points out the necessity of
attention to needs of individual members as their sufficient satisfaction contributes to
the reduction of stress and increase of creativity.
When selecting people for the team it is necessary to take into consideration not only
the professional skills of potential members but it is also necessary to take into account
their individual qualities and understanding for team work. Team effectiveness also
depends on the degree, to which its members realize the relative power of the team and
to which degree they accommodate to it.
Excessive emphasize on an individual can be as harmful for the effective teamwork as
excessive emphasize on the team. However, some individualists are essential for the

6. Team Work                                                                           1-80
team – those who have considerably independent way of thinking and action (creative
people). It is demanding to manage and control individualists. They will positively
respond to good managers whom they will trust and respect. They are allergic to routine
work and bureaucracy.
Σ At this point the tutor highlights probable problems resulting from possible tendency
to individualism with research and development employees that are members of an
interdisciplinary team.
Σ In the following part it is possible to make use of individuals’ independent work to
draw the characteristics of a successful and unsuccessful team and supplement the list
in the follow-up discussion.
Successful team characteristics:
      Team members identify themselves with the team
      There is relaxed, non-bureaucratic atmosphere. Interest in achieving joint goals,
       optimistic work mood.
      Tasks and goals are clear to all members and all identify themselves with them.
       Differences in opinions are accepted. Disputable points are discussed and a
       solution is looked for.
      Communication is open, spontaneous, and fluent. Team members are sincere to
       each other. Mutual listening. Criticism is constructive and it is not taken
      Team management is of participative, eventually consulting, character. Rules are
       clearly defined.
Unsuccessful team characteristics:
      Team members do not identify themselves with team.
      There is strained atmosphere. Communication is blocked, the ability of mutual
      listening is lacking. Team members hide their real feelings and opinions.
    There is autocratic type of supervision. Discussion about goals and tasks is not
    Diversity of opinions leads to conflicts blocking the group. Disagreement with
      a decision is not openly expressed; the decision is undermined.
    Criticism leads to increased tension. Personal issues are settled by means of
      criticism. People gossip.
     The rules are not clearly defined; nobody knows precisely what to do.

6.1.3 Group structure and organization
A group is a living dynamic unit that can have both formal and informal organizational
structures. Structure = hierarchy of roles in the group or organization.
      Formal structure = clearly visible, represents distribution of work among the
       team members in order to ensure performance of certain functions.
    Informal structure = influences procedures, in which things are actually done –
       prestige of people, their influence, power, seniority, ability to convince others
       play roles there.
Work group structure should have direct link to the joint task, it should be flexible and
adaptable to changes.
Σ The tutor emphasizes the importance of the group permeability and its openness
towards new members in dependence on the development of the work task. At the same

6. Team Work                                                                        1-81
time it points out the obstacles related to building of a new team or to coming of a new
member to already functioning team.
Establishment of a new team:
Team members come to the meeting of a new team with certain expectations:
      They can either have a clear idea about what is going on or they can feel
       uncertain as they don‟t know what is going to happen
      They can either look forward to that or feel worried
      They can be either very interested or indifferent
       Fixed framework can be set for the group meeting or the framework is defined
        so badly that the group does not know what limits or restrictions apply to its
As the members meet for the first time → they devote a lot of energy to the effort to
learn about each other. They also need to agree on what needs to be done and manner of
achieving it.
Functioning team:
It is well informed about the situation, the members know what they can expect from
each other and how it is necessary to define the team‟s task. The manner, in which the
individual team members cooperate, has already developed! At the same time, habits
decreasing the team effectiveness (e.g. unpunctuality, insufficient attention to others‟
suggestions, wasting of time) could have developed.

Σ In the following block the participants will try to define factors that can influence the
innovation team output in either positive or negative manner.

What influences relations in the team:
      Formal leader‟s personality
      Team management style
      Character of individual team members
      Standards that the group respects
      Informal leader‟s personality
      Core of the jointly performed activity
      Environment, in which the group works

6.1.4 Group development
     Forming
     Storming
     Norming
     Performing
Σ The tutor highlights that there are some specific stages in the development of any
team, describes them and particularly points out the possible problems of forming an
interdisciplinary team, the members of which are not only people from their own
company but also from other organizations, particularly from specialized and scientific

6. Team Work                                                                          1-82
Considerable hesitation and uncertainty. Certain stress level. Learning about members
or newly coming ones. Perception of others is influenced by previous experience,
knowledge, usual roles. Attempts to identify the situation character. The members look
for response to the question, what the task is like and they want to learn about the rules
and methods that will be applied. They estimate what help they can expect from the
team leader (persons who puts the team together). Effort to learn what kind of behavior
will be suitable of unsuitable.
Opinions get polarized. A conflict between subgroups occurs. People give irritated
reactions to the demands of the task. Task‟s value and its feasibility are doubted.
Somebody doubts the authority and competence of the leader. The individuals show
negative reactions to the leader‟s effort to manage them. An informal leader appears.
Standards start to evolve.
Harmony starts to appear, awareness of solidarity or unity shows for the first time.
Opinions and points of view start to be shared. After the conflict resolution and
overcoming the aversion, the norm of behavior start to emerge. Mutual support
emerges. The cooperation on the task starts. Plan are elaborated and work standards are
The structure most suitable for a given task is being established. Roles are viewed from
the functional point of view in relation to the task. Constructive work on the task gets
ahead; ever more group effort is targeted at reaching effectiveness in the acomplishment
of the joined task. People start to realize the achieved progress.

There do not exist unequivocal and final development stages, however there are
consistent sequential changes. In some groups the change takes a form of a cycle or a
spiral, there is periodic movement back and forward. In other groups the change
progresses in leaps, between them there are periods, during which nothing changes.
Sometimes there is regression and then there is sudden dramatic and unpredictable turn.
The team can be affected by loss of interest in the issue, indecisiveness, and conflict.
Sleeping stage = decrease stage → the team is governed by routine and existing systems
=> everything goes according to the defined procedure, the team spirit becomes blocked
in the general peace and satisfaction. Activity on the task drops both in amount and
quality – it does not disturb the group and it lives on what has been achieved in the past.
Not all the groups behave in that manner.
Σ When forming a team it is necessary to pay appropriate attention to the selection of a
suitable personality, with whom both formal and informal authorities are anticipated.
The tutor draws attention to problems that can occur in the team in relation to hidden
struggle for power.
Struggle for power
It occurs when there is an unsolved problem of who is going to lead the group. The
struggle participants are those:

6. Team Work                                                                           1-83
      Who wish the things to develop according to their ideas
      Who would like to manage the others.
      Who long for power as such.
=> in situations with unclear leadership these people resort to various methods of
lobbying (granting of advice, confrontation), to manipulation methods.

6.1.5 Roles in the team
In a structured group its members fulfil various roles. Person taking a role is to a certain
degree a recipient of other people‟s expectations concerning the suitability of his or her
behavior within the role. Personal qualities of individual members predestine them for
certain roles, but on the other hand they limit their success in fulfilling other functions.
Every team needs balance of team roles. Optimum balance is defined by the goals.
Only a team with balanced team roles that are performed by suitable people is capable
of using all technical resources in optimal manner.
    a) The following overview lists possible team roles. The tutor points out the
        importance of these roles for effective team functioning and shows specific risks
        resulting from the fact that one of the important roles is not fulfilled (e.g.
        coordinator, finisher, recorder…).
    b) In order to understand the personality requirements for individual team members
        and their roles, the participants test themselves using questionnaires to find out
        for which team role suits them best. It is possible to use the Dr. R. Meredith
        Belbin questionnaire.
It is good to have the following people in the team:
      Initiator, contributor: suggests to the team new ideas, new group objectives or
       new problem definitions, new procedures, manners of handling some troubles,
       or new forms of organization
      Company employee: conservative, honest, reliable, organizational qualities,
       common sense, hard work, discipline.
      Chairman: calm, self-assured, self-controlled, ability to accept and welcome the
       contribution of all the potential contributors without any prejudice, considerable
       sense for purposefulness
      Forming person: tense, open, dynamic, instinctive will and willingness to
       struggle with inertia, ineffectiveness, complacence and self-delusion
      Operational employee: individualist, serious and unorthodox, talent,
       imagination, intelligence, knowledge
      Coordinator: points out relations between various ideas and suggestions or clears
       them up and tries to make a link between them, tries to coordinate activities of
       members or some other subgroups
      Resource researcher: extrovert, enthusiastic, curious and communicative, ability
       to make contacts with people and explore everything new, ability to respond to a
      Observer, evaluator: sober in tone, rational, cautious, sensibility, tact, practical
      Team worker: sociable, rather mild, sensitive, ability to react to people and
       situations, develops team spirit
      Finisher: concentrated, ordered, assiduous, meticulous, ability to bring things to
       their ends, perfectionist

6. Team Work                                                                           1-84
      Orienting member: defines the team‟s position with regard to its goals, sums up
       what has happened, points out deviations from long-term directions, asks
       questions concerning the direction, in which the team‟s discussion is going
      Energy supplier: supports the team in action or decision-making, tries to
       stimulate or spark up the group to “bigger‟ or “better‟ activity
      Recorder: records suggestions, takes records of decisions made by the group, he
       or she is team‟s “memory”
      Harmonizer: smoothens the differences among other members, tries to
       harmonize disagreeing points of view, decreases the tension in conflict situations
       by means of humor, calms down stormy waters etc.
One person can have several roles in the team at the same time. If any of the roles is
missing and it is important for the team, then it is necessary that one of the team
members, or the team leader, adopts it.

6.2     Advantages and disadvantages of team work
Forming a team from suitable experts capable of effective mutual cooperation
represents a decisive factor of the innovation project success. Mutual cooperation can
strengthen the trust between the members and it allows mutual support in performing
the tasks.
In many situations a team is capable of adopting better decisions than an individual. The
teams often accept more risk than individuals. It seems that shared responsibility can
lower the personal responsibility if the decision proved wrong.
Effective teams produce high quality ideas by means of accepting the conflict and
exploring differences in the individual members‟ opinions.
Σ It is necessary to emphasize the advantages of forming the team from experts of
various professions and coming from various environment (company, university or
other specialized offices) and stress out the role of effective communication and other
social and psychological skills of team members for successful achieving of goals.

Group cohesion – a weapon with two blades:
Advantages of cohesive group: larger degree of cooperation, better communication,
higher resistance against frustration, lower fluctuation and absences, lower level of
tolerance towards lazy people
Disadvantages of cohesive group: difficult for new members, limited possibility to
enforce new ideas, opposition against changes in work procedures.

6.3    Role of a team leader
Relations in every team have two dimensions:
    a) Task
    b) Human
Σ Based on the participants’ introduction to the following text, the tutor stresses out the
responsibility for the selection of a suitable candidate for the team leader position as
there is a direct link between the leader’s quality and team’s effectiveness.
The task of the creative team leader is to secure conditions for undisturbed
implementation of creativity of all its members‟. The leader‟s main function is: to help
the team to accomplish the mutual task, keep the team united and make sure that every

6. Team Work                                                                          1-85
member contributes according to his or her best possibilities.
Leader‟s role requires certain personal and character traits. If the leader cannot adjust
his or her behavior to circumstances and when his or her behavior is unacceptable for
the team, it can have considerable influence either on the whole team‟s performance or
on its individual members‟ satisfaction.
To the outside the team leader acts as a mediator representing the team‟s results in a
suitable manner and shows effort to implement them in the company‟s environment.
If people are supposed to interact in a manner that will bring the biggest benefit, they
need to preserve their individualities and at the same time respect the individuality of
another person.
One of the most demanding tasks of a leader: to reach balance between interests of
every individual and expressing his or her personality on one side and the team‟s
interests on the other. It can be reached best by means of a joint task – it unites the
people and strengthens the unity.
Team forming by a manager
Manager                       On the way to rigidity            On the way to teamwork
Defines                       Everything if possible            Vision
Prefers                       Conformity                        Individuality, mutuality
Believes in                   Plan, task, control               Trust, motivation climate
Views the problem solving     As denial of his/ her             As natural and necessary
by the team                   authority, waste of time
Communicates with team        When they require it or need      As much as possible
members                       it
Conflicts inside or outside   Ignores them or solves them       Opens them for team
the team                      him- or herself                   solving before they become
Understands group unity       As a potential threat to his/     As necessity
                              her position
Anticipates                   People‟s worries of               Independence and
                              responsibility                    responsibility of people

6.4     Team communication
From the point of view of effective communication, team size of 5 – 7 members appears
to be optimum, 10 – 12 is maximum. Further on, the tendency to division into
subgroups occurs.
Interaction and communication among team members substantially influences the team
effectiveness. It is the fastest to adopt solutions or conclusions in the “star”, and it is the
slowest in the “circle”. In the star communication scheme, abilities of the central person
are the decisive element. In complex cases multi-channel scheme is applied. It is
participative, it produces good quality solutions. It requires enough time and resists
pressure poorly. Communication in the team gets considerable better if every member
is capable of speaking, listening, writing and reading. Good listener is a person who
considers listening positive, cognitive, active and cooperative activity. Every member
should know his or her profile, his or her strong and weak sides. Communication skills
training leads to the increase of the team effectiveness.

6. Team Work                                                                               1-86
Σ Considering the fact that communication skills are the usual weak point of team
members, it is essential to place particular emphasize on this section and propose to the
participants possibilities how to improve these skills (reading of relevant specialized
literature and particularly specialized training under supervision of experts, e.g. from
departments of psychology at universities). It is necessary to call attention to possible
differences in the understanding of individual concepts by people from practice and

6.5     Formation of interdisciplinary teams
It is almost always necessary for the small- and medium-size company to cooperate
with external specialized institutions in systematic innovative work; SME does not have
and cannot have sufficient capacity in all necessary disciplines.
In such interdisciplinary teams it is extremely important to pay attention to observation
of effective interaction and communication rules. Interdisciplinary team leader plays a
major role, great emphasize is placed on his or her competence. Besides expert
knowledge and broad overview this person needs to meet the effective leadership
requirements. It means that he or she needs to be not just a good expert, but at the same
time he or she must be a good psychologist, must be familiar with the social aspects of
the team effort, needs to have leader‟s qualities and must serve as a role model.
When forming interdisciplinary teams, it is necessary to take into account differences in
viewing the reality, thinking and cultural patterns of individual team members. It
prevents the occurrence of misunderstandings and conflicts.
Role of interdisciplinary teams in the systematic innovation work of a company
Already at the zero stage – including innovations into company‟s strategy that creates
the framework for further innovation work – it is suitable to supplement the managerial
team preparing the strategy with external experts. They can then help both with the
strategic planning methodology and knowledge of its basic principles (experts in
company strategic management etc.) and with the specialized discussion about the
further development of the company based on the assumptions about the development
of market and scientific and technical environment (experts in the field, in which the
company works, eventually in a field into which it supplies or from which it receives
deliveries. For example, a company manufacturing construction machines can make use
of machinery expert‟s opinion, but also construction expert that knows the trends in the
industry in which the customers are, eventually opinion of expert in new materials, i.e.
in the field the company‟s suppliers.)
At the first stage – gathering of innovation impulses – there is no team in the proper
sense of word (individual members even don‟t necessarily know about each other), but
even this is the work of a group of people with the same goal and so it is necessary to
harmonize the group target with the individual ones. Again, it is very suitable here to
learn to communicate with people from other than company environment and
understand their goals. People working at universities and research institutions have
much more space for following professional literature, they keep in touch with foreign
experts and thanks to that they can bring up valuable ideas.
At the second stage – assigning priorities to individual groups of impulse topics – the
manager can make individual decisions, eventually discuss the option with the same
team as in the zero stage.
At the third stage – looking for innovation tasks – special innovation techniques and
tools are applied. Many of them use the teamwork and rules for team forming are

6. Team Work                                                                        1-87
elaborated into details for individual techniques. Particularly in creative techniques it is
suitable to involve experts from seemingly unrelated spheres that can provide a brand
new point of view.
At the fourth stage – discussion over innovation ideas – the same as at the zero and
second stage.
At the fifth stage – feasibility study – experts from three fields – financial, marketing
and technical – need to communicate and cooperate. They need to share information, as
they depend on each other. Person evaluating the financial feasibility of the project
needs information about potential demand, about the financial demand of technical
solution, about input process etc. The person evaluating the technical feasibility needs
to know the market requirements for technical solution and eventually financial
limitations. A marketing specialist needs to receive information how the innovation will
influence prices, needs to know the technical aspects as precisely as possible to be able
to judge the chance for success at the market, or eventually give impulse for their
modification. All three of them need to communicate continually and provide each other
with feedback.
Sixth stage – decision about the project preparation – the same as in the fourth, second
and zero stages.
At the seventh stage - project preparation - project manager prepares the project,
defines the goal, plans individual activities, their sequence, deadlines, responsible
people and need of financial resources. Manager consults its practicability with the
future project team members. (It is not the teamwork in the proper sense of the word).
At the eighth stage – project performance – project team carries out the project prepared
in the previous stages. This stage provides the largest space for the application of the
teamwork rules. If it is an innovation based on a new technical solution, cooperation
with external experts is inevitable for a small company; it is not effective for such a
company to have its own development capacities. Upon involvement of an external
expert, the team manager‟s task becomes more difficult as he needs to give the expert
broader introduction to the situation and aims in the company and the project. The
employees know the situation and it is the manager‟s task just to sum up the starting
points and define the goal. With the external expert‟s participation, it is necessary to
describe the situation from the very start and devote effort so that the expert would
understand the culture and manner of thinking of people in the company. Scholars often
focus just on the technical solution of the problem and do not take the practical issues of
the problem solution into account very seriously. It is necessary to realize this fact, look
in it the opportunity and eliminate potential danger. It is necessary to define the
external expert‟s tasks and expected outputs more precisely; his or her perception of
time and some concepts can differ from the company‟s employees‟ understanding.
Selection of external colleagues for interdisciplinary teams
If the SME cooperates with an R&D institution, it is suitable to build up some sort of
informal partnership with one or several specific persons. Their knowledge of the
company will considerably simplify their involvement into further projects and
accidental consultations. Thanks to the knowledge of the company‟s problems the long-
term external colleague can come up with innovation impulses. Such partnerships
benefit both the parties and it pays out to maintain it.
When establishing the partnership with the R&D institutions it is suitable to take into
account not only the fact that the specialist deals with the issue concerned at the
department or in some other specialized institution. It is also necessary to consider their

6. Team Work                                                                           1-88
practical experience with similar projects. Curriculum vitae listing the performed
projects and references from other companies are important material, personal interview
is the second one, it will show us best if we can find a common language with the
specialist for further work.
Involvement of students into solution of problems related to innovations in the company
can be also recommended. Although they require more time and attention than people
with practical experience, they are not burdened with habits from the operation and
prejudices and thanks to that they can propose original and nontrivial suggestions.
Merging the theory with company practice offers to the student an opportunity to master
the issues of the field concerned. However, in the course of cooperation with students it
is also recommended to be in touch not just with the student but also with the student‟s
supervisor. For example ideas of a thesis consultant can differ from the ideas of a
company that the result of the student‟s effort should benefit.
Student‟s recommendation by a long-term colleague represents the best predisposition
that these ideas will be in harmony.

The tutor moderates the participants discussion focused on the understanding of the
importance of the cooperation between SME and academic institutions in the field of
innovations and sums up the predispositions of this cooperation, its advantages and
risks as it was stated earlier in this chapter.

6. Team Work                                                                        1-89

7.1     Company culture
Organization culture means a pattern of ideas, opinions and attitudes that majority of
people in the company understands, respects, acknowledges, adopts and relates to them.
It includes attitudes, ethical standpoints, predispositions and prospectives that the
employees share and that influence their behavior and treating each other and their
relation to customers. All these processes form inner organization structure in which the
company‟s activity takes place controlled by management.
Organization culture has immediate influence on the company‟s economic success and
together with strategy it is an aspect of competitiveness.
Company culture quality reflects upon the work enthusiasm of the people, their
independence, feeling of real appurtenance with the company, success of the
competitiveness strategy implementation and time horizon that is planned for (the lower
the company culture quality, the more detailed and of a shorter term are the plans).
Organization culture is changeable. Its content is influenced by the current stage of the
organization development depending on the organization targets. Changes of the
external environment and pressures coming from it are also important.

Σ The tutor focuses not only on the explanation of the company culture concept, but
particularly on emphasizing the relation between its quality and pro-innovation trends.
In the following part the tutor leads the participants to independent analyses of the
given concepts and realizing in which spheres their company has some lacks or
During the concept explanation stress is placed on the fact that the company culture
forming is an issue for all its employees, not just of the company management, although
it plays the most important role.

Main elements of the company culture
       Behavior standards – unwritten rules that the individuals and groups follow.
        These standards form the inner climate, management style, and manner of
        cooperation among employees and with the managers; at the same time it
        reflects their attitudes to the company (motivation, dynamics, cooperation etc.)
       Key values – are influenced by the management‟s opinion and they represent
        the employees‟ basic conviction about what is good or bad for the company.
        Their full acceptation is expected. Summary of opinions of behavior towards
        employees and customers.
       Management and leadership style – manner in which the mangers on all levels
        achieve results in cooperation with their colleagues, authority application style,
        manner of reacting to employees‟ mistakes, support of cooperation or rivalry,
        simplicity or difficulty of contact or communication between subordinates and
       Roles - define manner of behavior at a position. A newcomer needs to adopt
        such behavior in order to be accepted by other organization members.
       Organizational structure and diversification – renders the degree of

7. Company Innovation Culture                                                        1-90
       flexibility or inflexibility that the organizational structure allows, defining the
       formal and informal manner of information exchange. Structure allowing the
       formation of work teams helps informal exchange of information a lot.
Furthermore the organizational structure condition is influenced by:
          Organization‟s strategy
          Organization‟s system
          Level of cooperation between the individual organization structures
          Employees‟ abilities

Σ “Clean types” of organizations do not exist in real life, but their classification for the
purpose of orientation helps the participants to realize the individual characteristics of
their companies and reach the conclusion about what needs to be used and changed in
order to strengthen the pro-innovation climate.

Four basic extreme types of orientation:
      Organizations preferring powers
      Organizations preferring roles
      Organizations preferring tasks
    Organizations preferring human sides of their employees
Each of these basic types is suitable for certain conditions.
Attention! Strict application of rules in the company, particularly in creative times, can
have negative impact on the relaxed creative cooperation atmosphere and can have
negative influence on the desirable development of the pro-innovation culture in the

7.2     Possible analyses of company culture
In order to identify the main features of the company culture it is necessary to answer
particularly the following questions:
      What is the relation of the management to the employees and vice versa?
      What behavioral standards are expected in the course of fulfilling job duties?
      Is it habitual that the employees show their ambitions or hide them?
      How are the managers‟ powers applied? Is it derived from their power or expert
       competences? Is it centralized or decentralized?
      How does the organization value the loyalty of its employees? Does it
       particularly appreciate “long-serving” employees or does the company prefer
       their exchange using the required professional skills resulting from the
       requirements of the production program innovation?
      Do the employees have an easy access to the management or is everything
       decided about behind closed doors?
      What sort of distance is maintained in mutual relations?

7. Company Innovation Culture                                                          1-91
At this spot the tutor will inform the participants about the results of the pre-training
evaluation of the company innovation culture:
           -  Company realizes the importance of building up and maintaining of
              company culture (Approach to the issue)
           - Implemented company culture shows positive influence on the company
The tutor supports discussion what the company culture is like.

Σ By means of looking for answers to the mentioned questions the tutor leads the
participants not only to realizing the specific situation in the company but at the same
time the tutor motivates the participants “to do something about it”.

7.3    Management styles and employees’ motivation
It has been proven that lack of social readiness is the biggest obstacle for the
introduction of research and technical changes. At the same time every employee and
every group can be a source of innovation, participate on the creation of company goals,
accept co-responsibility for the company‟s results.

Σ The tutor can use the following quotation:
“With a new machine we also take over its technical documentation, technological
processes, rules of operation and instructions. It is all very demanding on the
engineering level – there are millions at stake! We write the pass over reports, take over
reports, approval for use reports; many people are involved in it for a long time. What
kind of expert’s report do we have about the most expensive investment – a person?
Our knowledge about the people in the company is only empiric and intuitive and
mostly random and superficial. Knowing the responses to questions in which the
supervisor or manager is interested in means knowing your intuitive way around people
and not everybody is capable of it. Moreover the question is whether our common
sense is enough. And because we are the managers, intentionally or unintentionally we
claim our judgments and opinions and we consider them complete. There can’t be more
misjudgment in our management!” Milan Ždímal

Therefore modern management also emphasizes social aspects of management.
Management humanization represents considerable quality change in the work of
managers. It is desirable that the managers change their attitudes to every employee
from influencing to cooperation. Mere dividing the task, “organizing” it, defining its
manner of passing over etc. is not managers main task anymore, instead of that it
becomes reaching cooperation inside the managed team and with its environment.
There is shift from directive to participative style of management.

Σ The tutor leads the participants to understand the necessity of studying people and
their behavior. Particularly managers with technical or economic education have
considerable reserves in this field and instead of targeted application of psychological
knowledge they use the attempt and failure method. In this sphere there are substantial
reserves for the development of creativity and innovations.

7. Company Innovation Culture                                                        1-92
Change in the management style requires that the managers use their knowledge of
psychology much more and besides management study also leadership.
4 basic management styles
    Exploiting authoritative
   The managers actually “use” their subordinates and manipulate them, focus on the
   task, make all the decisions on their own and they care little about the well being of
   their subordinates. That has considerably negative influence on the employees‟
   willingness to take an active part in the company results and get involved in the
   innovation program. Positive effect of this management style is only of short-term
   character, and its output is low from the long-term prospective.
    Benevolent authoritative
   Managers focus on the task and make all the decisions on their own but they take
   care of their employees in the same manner as parents take of their children. As
   they usually take negative attitude to the ideas of their subordinates (they haven‟t
   come up with it themselves), block the creativity and suppress the innovation
   climate. The organization output is much lower than it‟s employees are capable of.
    Consultative
   Managers focus both on the task and the subordinates with whom they consult
   decisions concerning the office. The subordinates are motivated to cooperation and
   the company innovation environment is supported. There is a good output in the
    Participative
    Managers focus both on the task and the subordinates and enable them to
    participate in the planning and decision-making process. Pro-innovation climate in
    the company substantially influences the organizations effectiveness and its

Σ In the final summary of the previous text the tutor points out the necessity of
    psychological education for managers and draws attention to the possible creation
    of interdisciplinary teams with the participation of experts from universities that
    can contribute to the solution of innovations in the company culture field as a
    starting point for successful implementation of the innovation program in the given

7.4    Motivation of employees
Success of company‟s business activities is conditioned by the highest possible work
output of every employee. The output level is based on three basic factors:
     Employee‟s personal dispositions
     Working conditions
     Motivation
Leadership means making people to be willing to do things. A manager should
understand how people get stimulated and why they produce energy to produce what
they want. Based on that understanding a manager should be able to create such
organization environment-satisfying majority of both the company‟s and its members‟

7. Company Innovation Culture                                                       1-93
Σ The tutor accentuates the need of deeper understanding of both the theoretical
motivation principles in relation to the existing social and economic changes and
understanding of the motivation application in practice. The tutor also points out the
mutual relation between the motivation quality and employees’ creativity development
and impact on the company’s pro-innovation policy.
The concept of motivation describes moving powers of behavior or its causes, the
concept of motive means inducement, cause for person‟s activities or acting.
M o t i v e s are factors stimulating, maintaining and focus the behavior. They have
moving and emotional sides. Every motive has direction, intensity and duration.
Human behavior is usually purposeful and specialized. However the purpose and
specialization often take unusual forms and people act in a seemingly illogic manner.
We can comprehend the human behavior if we understand not just the obvious but also
hidden motives of a person‟s behavior. The motivation study tries to answer the
question why a person acts in the way he or she does. Understanding groups must take
roots in understanding individuals, as teams are groups of individuals first of all. A
team manager needs:
    a) Understand what all people have in common – what individuals will certainly do
        and what they will be like
    b) Understand what is different, special, and eventually unique in the person.
Individual‟s motivation profile is formed by a set of his or her prevailing needs and set
of his or her predominating characteristic features and qualities. In order to be able to
predict and successfully influence a person‟s work behavior the manager needs to know
the person‟s motivation profile.
Motivating an employee means:
     Stimulate his or her work activity on purpose
     Direct it to a pre-selected goal
     Keep it going
Needs are the basic behavior motives. Instincts, interest, tendencies, ideals etc. are other
forms of motives. Needs are complex psychological conditions related to the biology of
an organism but also to person‟s social existence. Individual‟s personality, his or her
hierarchy of values, experience so far, abilities and acquired skills affect the motivation
Σ If the participants are not capable of defining the basic need structure, the tutor can
use the scheme of Maslow’s pyramid of need and recommend to carry out analyses of
satisfaction of these needs in their companies.
The tutor stimulates discussion about what inner motives lead people to active
approach to innovations.

7.5      Motivation strategy
It is the manager‟s task to influence the others. However the manager‟s behavior will be
influenced by his or her interpretation why his or her subordinates think and act in the
way they do. The starting predisposition for the motivation success is first of all
reaching mutual congruence of opinions and attitudes. Therefore the manager needs to
master the art of recognizing people – needs to know whom he leads and whom he
wants to motivate.

7. Company Innovation Culture                                                          1-94
Σ At this point it is necessary to re-emphasize the need to improve the company’s
management education in the field of applied psychology and the offer of universities
and other specialized offices for the cooperation in the field of company education.

Work activity is not just a necessary source of living but also a source of satisfaction
from the course and results of this activity. The employees expect something from their
jobs (they have certain ideas about what they want to achieve so that they would be
satisfied – interesting work, over-standard earnings, prospective of rapid promotion
etc.). They are willing to work to reach their goals. The core of the company
development managerial strategy is in the formation of such system of work with people
and for people who will have the feeling that they really live in the company and they
are useful.
Set of human behavior predispositions written by McGregor called Theory X and Z
points out an important fact – people behave in the same way they are treated. If the
manager helps the people to work better, supports the subordinates and stimulates them
to better performance, the “Pygmalion effect” works – if the people are convinced “they
can do it”, they want to give a good performance themselves.
Experience of success and recognition are considerable motivating factors. It is
important that the people know the evaluation of their performances – that they have
information feedback and they learn what affect their work has had. If the employee
knows clearly what he or she is supposed to do, why and when and receives the
feedback, his or her interest in work considerably increases.
The opportunity to participate in the negotiation of the annual report on the company‟s
activities and results is an important motivating instrument. Many people are motivated
by awards for selected employees, others by possible promotion; others react positively
to the delegation of powers and responsibilities. Floating items of salaries immediately
related to achieving of a certain performance can be also motivating.

Business-oriented motivation system
Looks for ways and manners of earning more and paying more to people. Person
looking for ways in cost reductions and decrease of salaries is not a businessman. Basic
rule of rewarding: the same money for the same performance. Other rule: all are equal at
work but they have various tasks and therefore various rewards. People perceive real
and supposed injustice in rewarding very sharply and often attribute more weight to
them then to the real amount of their rewards.

7. Company Innovation Culture                                                      1-95
In order to reach sufficient motivation and satisfaction of employees, every individual
needs to:
     Feel his or her personal success at work
     Feel that he or she positively contributes to the company‟s, organization‟s goal
     To feel responsibility corresponding to abilities
     Receive acknowledgement for his or her performance
     Feel that he or she is acquiring new experience and develops his or her abilities
Motivation is not limited just to the sphere of individual needs, but it also results from
the tasks of a group, team, and company. Membership in a good team helps a person to
overcome his or her limit as for knowledge, abilities and performance. The performance
itself and its improvement can be an impulse for further activities.

      Σ The tutor brings attention to the interconnection of personal needs of
       individual employees and need to fulfill task 9achieve a goal) and need to keep
       the functioning team together. The tutor recommends suitable literature on this
       issue (J. Adair).
      The tutor opens discussion about what stimulants the management can apply
       and thereby support the employees in the active approach to innovations.

7.6     Company’s motivation program
Company‟s motivation scheme is defined by its social role, its goals and tasks and at the
same time by its organizational culture, its values, standards and behavioral patterns.
Sometimes the employees motivation takes spontaneous and improvised form, however
it should have systemic character in the form of a motivating program including a set of
stimulants corresponding to the company‟s missions and tasks, work teams structures
and employees‟ motivation profiles. The motivation program reflects the company‟s
human resources and social policy and therefore it is very specific.
The motivation program construction has two phases:
      Analytic phase – collection and evaluation of necessary information
      Phase of preparation and work program implementation
           -   Evaluation of the existing employees motivation forms and looking for
               weak points
           -   Setting of long-term and prospective goals of the motivation program
               and its focusing to relevant spheres of activities
           -   Preparing characteristics of the current efficiency of employees and their
               comparison to the ideas of desirable performances
           -   Selection of suitable stimulating instruments with regard to the
               considerable differences of individual groups of employees
Stimulating instruments – stimulants including, besides the material and moral
appreciation, also the possibility of professional growth, career promotion, employment
perks etc.
Motivation program receives a form of a company document, to which all the
employees are introduced. Its publication also secures the control and monitoring of the
stimulating instruments efficiency, which allows possible modification.

7. Company Innovation Culture                                                        1-96
Motivation program is based on the organization‟s needs at the given stage of its
development and therefore its regular updating is essential.
The tutor opens discussion how motivation to innovations can be incorporated in a
small- or middle-size company, in the specific trained company respectively, evaluates
opinions and suggests specific steps to the introduction or improvement of the
company‟s motivation program.

Σ At the end of this lesson the participants should understand that the motivation quality
is in direct relation to the company’s competitiveness and its economic results and
therefore it is necessary to pay extraordinary attention to its implementation. The tutor
emphasizes the possible cooperation of the company’s management with specialized
offices in the course of the company’s motivation program formation.

7.7     Literature

[7-1]    Adair, J.: Vytváření efektivních týmů. Praha, Management Press 1994
[7-2]    Pitra, Z.: Inovační strategie. Praha, Grada Publishing 1997
[7-3]    Rýznar, L. - Vítek, M.: Trendy evropského managementu. Hradec Králové,
         Gaudeamus 2000
[7-4]    Výrost, J. - Slaměník, I.: Aplikovaná sociální psychologie I. Praha, Portál,

7. Company Innovation Culture                                                        1-97
8   RISK MANAGEMENT                      AND      MANAGERIAL               DECISION-
Goal: Attendees or readers will understand the importance and significance of the
project risk management and learn about the tools for managerial decision-making.

8.1 Risk management
People are generally familiar with the concept of risk. We usually associate it with some
positive or negative important event. In business the concept of risk is on one hand
related to the hope of achieving of particularly good economic results, on the other hand
it is accompanied with the danger of business failure that can lead to losses, which can
have such serious impact that they significantly damage company‟s stability and as a
consequence they can cause its bankruptcy.
Although the concept is generally known it is purposeful to put it more precisely by the
following definition: Risk means exposure to uncertainty. This definition contains
two concepts: the terms exposure and uncertainty. Lack of knowledge is a synonym
for uncertainty. It is a lack of knowledge of the future situation. This lack of
knowledge is of a strongly subjective character and it varies according to the awareness
of the person making the decision under the specific conditions and who is going to bear
the responsibility for the decision‟s impact. In the current “turbulent” environment, i.e.
environment where the future cannot be successfully predicted based on the past trends,
the importance of coping with uncertainty increases.
Lack of appreciation of this fact leads the management to the illusion that they are
making the decision under certainty, by which they endanger their business prosperity.
Roots of managerial illusions mostly are in:
     1. Inappropriate trust in prognosis
     2. Unjustified optimism (trust that no major problems can occur in the course of
         the business plan performance)
The concept of risk is closely related to revenues. There is usually direct proportion –
the higher risk, the higher revenue can be achieved and vice versa. The positive side of
the business risk is related to the hope of success and achieving high profit. The
negative side of business risk shows in the danger of reaching worse then anticipated
economic results, what can result in a possible bankruptcy.
In practice we face various risks. Here we would like to mention the following ones:
     1. Market risk – financial risk resulting from the uncertainty of the future market
         value of the monitored portfolio of assets or liabilities. For example, the market
         price change on spot market can negatively influence the current value of the
         portfolio of concluded contracts.
     2. Credit risk – uncertainty expressing the business partner‟s ability or willingness
         to keep the contractual conditions. For example, a client may not be able to pay
         for supplied electricity.
     3. Liquidity risk – is related to the time availability of resources for business
         activities. That risk can be understood in two contexts, either with regard to
         companies or with regard to the market. In case of companies it is, for example,
         lack of financial funds in order to meet payment conditions. In case of the
         market it is a situation when companies want to sell or buy some assets at a
         certain price and they cannot find a counter-party at the given time. Such
         liquidity risks reflect the margin between the purchase and selling price.

8. Risk Management and Managerial Decision Making                                     1-98
       Insufficient market liquidity can also reflect the manner in which the companies
       perceive the credit risks at this market.
    4. Operational risk – type of risk originated in human errors, insufficient control or
       failure of systems within processes and organization internal processes. This
       risk can be alleviated for example by means of internal audit or process and
       procedure revision, however so far there are no standardized procedures for the
       measurement of such risks.
    5. Legislation risk – occurs when there exists possible loss caused by imperfection
       in contracts, legislation, frauds etc.

Risk management means a rational and systemic attitude to work with risks and
uncertainty (risk integration into key managerial decisions) using risk management
instruments and methods. Carefully defined business strategy is particularly necessary
for the prosperity in the market environment. If a company decides for a certain
strategy, then it is essential that it identifies risks important for it and starts dealing with
them intensively. It would be very lengthy (and often impossible) to compare individual
strategies and their potential risks because, as it was already stated at the beginning, risk
is a subjective concept and two companies dealing with the same activity can consider
various factors as risks.

8.2 Project risk management
The elementary goal of the project risk management is to increase the probability of
their success and to minimize the danger of such failure that could endanger the
company‟s financial stability and lead to its possible bankruptcy. Therefore the work
with risk should go across the whole project preparation from its beginning to the final
decision about its adoption or rejection.
The project risk management goal is to find out:
        Which factors (cost structure, price construction, structure and costs of used
         capital, demand and its development, customer‟s further requirements,
         contractual guarantees, milestones and deadlines, etc.) are important and
         influence the given project‟s risk most
     Which factors can be neglected
     How big is the project risk and if it is within the defined acceptability range
     Which measures can be used to reduce the risk to acceptable and at the same
         time economically purposeful level
Four basic risk management steps can be identified:
    I.       Risk identification and determination of their importance (it is recommended
             not to work with more than 3 – 8 factors)
    II.      Project risk specification and estimation
    III.     Preparation and implementation of measures for risk reduction
    IV.      Operational risk management
Steps I, II are called Risk analysis. Steps III, IV are called Risk management
All the above-mentioned stages usually overlap in the actual course of the project risk

8. Risk Management and Managerial Decision Making                                          1-99
8.2.1 Identification of risk factors
Identification of risk factors means definition of values, the possible future development
of which could influence (positively and negatively) company‟s economic results or
other selected criteria. Knowledge and expert experience of employees is the base for
the risk factors identification as many factors are rather uncertain from a prognostic
point of view and it is necessary to look for analogies in similar already executed
The risk factors definition can be simplified by project decomposition into subsequent
stages and following identification of the project vulnerability and potential problems
that could occur during its implementation and execution.
Evaluation of important project from the past can be a supportive instrument for it, if
these project are evaluated retrospectively from the risk point of view.
Result of this activity is represented by a list of all the risk factors that can endanger the
project and eventually company‟s all business activity. This “check-list” is usually
introduced into the company risk database, where they can be further processed.
The risk factors importance can be established either by expert evaluation or by
sensitivity analysis. Expert evaluation
The core of the expert evaluation of important risk factors lies in the fact that the
importance is judged from two points of view. First of them is the probability of the
risk factor occurrence and the second one is the intensity of the negative influence of
the considered risk factor. A risk factor is the more important the more probable is its
occurrence and the higher is the negative influence intensity of the factor on the overall
project effect in case of the factor occurrence. In this procedure, a value from 1 to 3 is
assigned to both the risk factor occurrence probability and the intensity of its negative
influence, which means:
 1. Low occurrence probability (negative influence intensity)
 2. Middle occurrence probability (negative influence intensity)
 3. High occurrence probability (negative influence intensity)
Factors whose occurrence probability and negative influence intensity reaches at least
level 2 and furthermore factors whose probability occurrence is low but their negative
influence intensity is high, need to be deemed important. The important risk factors can
be then separated from the less important risk factors.
List of the most important factors (approximately 10) is the result of the carried out
expert evaluation.

8. Risk Management and Managerial Decision Making                                      1-100
                                                                            CRITICAL AREA
                                                                               project in
 Level of importance                                                           jeopardy


                                      Low                Medium                High

                                               Probability of occurence

                                             Fig. 8.1 Expert risk evaluation                         Sensitivity analysis
The purpose of this analysis is to find out the sensitivity of a given project economic
criterion to factors influencing this criterion. It means to define how certain changes of
this factor influence the selected project economic criterion. Factors, whose certain
changes, or devaitions from the most probable or anticipated value, cause only slight
change of this criterion can be deemed of little importance – i.e. the selected criterion
sensitivity to these factors‟ changes is low. On the other hand factors with which the
same deviation cause considerable changes of the selected criterion can be classified as
Let‟s use the following example as a demonstration of a simple sensitivity analysis:
Influence of the risk factors occurrence on EBIT (economic result before taxation) is
investigated. It can be defined as the difference between revenues generated by the
manufactured product sale and its costs. The costs are the sum of fixed and variable
costs, where depreciation (ratio of the investment purchase price and its anticipated
lifespan period) is treated as an independent part of fixed costs.
The dependence of the given project‟s yearly profit on influencing factors can be
expressed by the following relation:
                       EBIT = P * c – {(v1 + v2 + v3) * P + f1 + f2 + I/T}
P                      -            is yearly production volume
c                      -            is product sale price
v1, v2, v3             -            are components of unit variable costs
f1, f2                 -            are components of yearly fixed costs
I                      -            is investment volume (purchase price)
T                      -            is anticipated investment lifespan

8. Risk Management and Managerial Decision Making                                           1-101
All the qualities constituting the monitored economic result before taxation are potential
risk factors of the given project. Now so-called “realistic“, i.e. the most probable values
of these factors are specified:
            Risk factor                  Value (realistic)                Unit

                  P                          100 000                       pcs.
                  c                           2 500                     CZK/pc
                 v1                            100                      CZK/pc
                 v2                            750                      CZKč/pc
                 v3                             80                      CZK/pc
                 f1                             20                      mil. CZK
                 f2                             47                      mil. CZK
                  I                            400                      mil. CZK
                  T                             10                        years

After substitution of these values into the above-given formula, the EBIT “realistic”
value is calculated, which amounts to CZK 50 million.
To perform the sensitivity analysis, the perturbation of every initial “realistic” value,
e.g. by 10%, is made, EBIT calculation is performed and both its the absolute and
relative change are compared to the “realistic” variant:

 Risk         Value         Changed value         EBIT decrease         EBIT decrease
factor      (realistic)    (deviation 10%)        (absolute in mil      (relative in %)
   P         100 000            90 000                  15,7                  31,4
   c          2 500              2 250                   25                       50
  v1           100                110                    1                        2
  v2           750                825                   7,5                       15
  v3            80                 88                   0,8                       1,6
   f1           20                 22                    2                        4
   f2           47                51,7                  4,7                       5,4
   I           400                440                    4                        8
   T            10                 9                    4,4                       8,8

The sensitivity analysis shows that the most significant decrease of the monitored
economic result before taxation (EBIT) is caused by the c factor (price decrease), then
follow the P factor (production decrease) and increase of the variable input v2. These
factors can be marked as the key risk factors of this demonstration project.
On the other hand, the sensitivity of the economic result before taxation to factors v3, v1
and f1 is low. These factors can be neglected in further considerations. The EBIT shows
middle sensitivity to the remaining risk factors. In case of a more detailed project
analysis it can be suitable to deal with these factors.

8. Risk Management and Managerial Decision Making                                       1-102
Important note: The starting consideration took into account deviation of max. 10%
from the “realistic” variant. If the real change of the considered risk factors is more than
10%, than this fact needs to be taken into account in the analysis. Not only sensitivity
analysis results but also evaluation of uncertainty in the range of individual risk factors
is important for the risk factor importance evaluation.
Identification of key risks, that must be taken into account in further analyses, is the
result of the sensitivity analysis.

8.2.2 Project risk definition and risk estimation     Project risk definition
Project risk is usually defined in:
         Numerical form using the statistic characteristics (dispersion, standard deviation,
          variation coefficient). To calculate their values, we start with the determination
          of the probability distribution of the monitored economic criterion. The
          decision-making theory and computer simulation by means of the Monte Carlo
          method can be used here.
       Indirect project risk identification includes two approaches deriving the project
        risk rate from the size of negative influences of the risk factors changes on the
The first approach is based on the assumption that the impact of the risk factor changes
on the project depends on two aspects
    Robustness, i.e. the influence of the external factor changes on the project and
     its economic results. As an example, we can mention the break-even point
     (BEP) method belongs, explained in Chapter 11, Innovation performance
     Flexibility, i.e. company‟s ability to respond to changes factors in the business
        environment in a timely and effective manner
The second approach is based on the definition of the project financial stability using
the methods of financial analysis. This analysis allows the definition of the company‟s
financial situation under various conditions and business environment factors variations.
If the pessimistic variant is taken into account based on the prognosis of substantially
unfavorable development of the project business environment, the result is so-called
project warning scenario.          Risk definition in a numerical form
The risk definition in numerical form is based on the determination of statistical
characteristics of variability (dispersion, standard deviation, variation coefficient),
which is based on the probability distribution of the monitored economic criterion,
using the decision-making theory and computer simulation by the Monte Carlo method.
The smaller is the variability of the monitored risk factor the higher is the informative
value of its arithmetic average. There are many variability rates however the below-
given ones are the most widespread applied in practical problems. The absolute rates
characterizing the statistic set variability are called absolute variability rates; they
measure variability in the same units, in which the measured quantity is expressed
(variation interval, dispersion, standard deviation). When variabilities of various sets are
compared, the relative variability rates are used, measuring the variability in the ratio

8. Risk Management and Managerial Decision Making                                      1-103
to the average value in the set. The dimensionless expression then allows to compare the
variabilities of quantities expressed in different units.
Variation interval is defined as the difference between the largest and smallest value of
the monitored quantity:
                                       R = xmax - xmin
Both the limit points, on which the variation interval is based, can be random. The
single extreme value can then lead to a considerable size of the variation interval.
Dispersion is defined as an average of the sum of variance squares of individual values
from their arithmetic average:

                                               (x    i    x )2
                                        Sx 
                                         2     i 1


where ( xi  x ) is the difference of the value from the arithmetic average, n is the number
of values.

Standard deviation is a square root of the dispersion. It can be interpreted so that the
majority of the monitored values do not differ from the average more then is calculated
from the following formula:
                                            Sx  Sx

Where S x2 = dispersion
Variation coefficient is defined as the ratio of the standard deviation and the arithmetic
average. It is a dimensionless number, the hundred-multiple of which expresses the
variability in percent. If the variation coefficient is higher than 50%, it usually means
the incoherence of the statistic set.
                                               Vx 
where Sx is standard deviation, x is the arithmetic average        Project risk evaluation
Project risk evaluation is strongly interconnected with the project context and the
specified limit for the risk acceptability in the course of project realization. There is no
universal procedure for reaching the conclusion about the project risk acceptability or
unacceptability. Rejection of certain risk projects targeted for example into the field of
new product and technologies can lead to the acceptation of a risk resulting from the
future weakening of the company‟s competitiveness.
The consideration about the project risk and its acceptability and the choice of measures
for the risk reduction depends on many factors concerning the specific situation of the
company and its environment.
Certain business risk have to be accepted; its size depends on the manager‟s or team‟s
business experience and intuition, their willingness to accept the risk and carry out
systematic measures for the project risk reduction both during the project
implementation (tenders, contracting, project management… for more detail see e.g.
[8-9]) and during the following stage of the project product operation.

8. Risk Management and Managerial Decision Making                                     1-104
8.2.3 Decision-making theory
Decision-making is an integral part of the operation management. Successful decision-
making has many steps, the first and most important being proper problem definition.
Routine decision-making processes use quantitative models, system approaches and
sensitivity analyses of the final solutions. The decision-making theory is the general
method of the risk management including many various techniques that can be
classified according to the uncertainty degree related to the specific decision-making
Decision-making process can be defined as a process of solving of decisive problems
with at least two possible solutions. The process of choice consists in evaluation of
individual variants with following selection of a variant to be executed. For example,
capacity planning, proposal of product development and its service, selection of
equipment or construction site belong to issues requiring managerial decision-making.
The importance of decision-making shows particularly in the fact that the quality and
results of these processes have major influence on the functional effectiveness and
company‟s‟ future prosperity. At the same time, the decision-making importance is
influenced by the volume of corresponding resources (particularly financial ones) to be
impacted by the decision. Considering the significant consequences of the decision-
making for the company‟s economic results and its prosperity, the managers try to
achieve the best quality of their decisions. The quality is mainly influenced by the
implementation of sufficient information equipment, proper process procedure and
decision-making models that can be applied for the solution in certain stages of the
decision-making processes. Decision-making matrices allow to represent the
consequences of the decision-making variants with regard to the selected quantitative
evaluation criterion (e.g. profit). The decision-making matrix is a table with decision-
making variants as the lines (e.g. considered unit size) and possible future situations as
the columns (e.g. uncertain values of future demand), matrix elements are the values of
selected economic criterion (e.g. profit for every considered variant). The decision-
making matrix can then serve as a starting point for the preferential arrangement of
variants applying certain decision-making rules under risk or uncertainty. Probability
trees serve for the determination of the risk variants consequences in dependence on the
risk factors. These trees represent a graphic tool showing the time sequence of activities
burdened with risks (e.g. product research and development, its semi-operational
testing, introduction into mass production and introduction to the market). The
probability trees have form of graph with activities as the knots and their possible
outcomes as the edges initiating in these knots. Activities depicted by the knots can be
evaluated from an economic point of view (e.g. costs, yield etc.) and then a probability
evaluation can be assigned to possible results in the form of the edges; this enables to
determine the probability distribution of the risk of individual variants.
Decision-making trees are formed in the same manner and they serve for the
representation and determination of the optimum strategy of multi-stage decision-
making processes under risk, i.e. the sequence of optimum decisions for individual
process stages (e.g. decision about the production unit size when the production unit
size is decided in the first stage and possible extension of this unit in case of favorable
demand development is decided in the second stage).
The decision-making matrices, probability and decision-making trees represent suitable
tools for the support of solution of decision-making problems with discrete risk
factors, i.e. factors that can attain only a few values. In case of decision-making
problems with continuous risk factors (e.g. in the prediction of the foreign exchange

8. Risk Management and Managerial Decision Making                                    1-105
rate development) the Monte Carlo method simulation can be applied to determine the
consequences of the risk variants in the form of their probability distribution and to the
risk quantification.
Computer programs, allowing easy indication of the sensitivity of selected solutions to
the input factors changes, can assist the effective application of the majority of the
above-stated methods and instruments for the solution of decision-making problems in
the business practice.
Decisions falling within the decision-making theory framework are characterized by the
following features:
      There exists a set of possible future states having impact on the decision-making
    Manager makes selection from a list of alternatives
    Profitability is determined for every alternative depending on possible future
In order to be able to apply this approach it is necessary to follow the following
      Identify possible future states (e.g. demand will be low, average, high; number
       of concluded contracts will be lower then planned, within the planned estimate,
       higher than planned; a competitor will introduce a new product to the market or
       a competitor will not introduce a new product to the market).
     Make a list of possible alternatives including the possibility of not doing
     Determine or estimate the revenues related to every alternative for every
       considered future state
     If possible, determine the probability of every possible future state
     Evaluate alternatives according to some decision criterion (e.g. expected profit
       maximization) and select the best alternative
Information for the decision-making is often summarized into a decision-making matrix
expressing expected revenues for every alternative in various future states. These
matrices is help in the selection from the alternatives by their mutual comparison.
Example of a decision-making matrix for a planning problem:
                                                 Possible future demand
                                       Low               Average             High
Small production unit              CZK 10 mil          CZK 10 mil         CZK 10 mil
Middle-size production unit         CZK 7 mil          CZK 12 mil         CZK 12 mil
Large production unit              CZK - 4 mil          CZK 2 mil         CZK 16 mil

Revenues are given in the table fields and they represent the differences between the
expected future incomes and costs in permanent prices. The decision-maker should
select one of the alternatives given in the matrix. The evaluation of alternatives depends
on the degree of certainty related to the possible future states.
There are the following three possibilities:
           - Decision-making under certainty
           - Decision-making under for uncertainty
           - Decision-making under risks

8. Risk Management and Managerial Decision Making                                   1-106         Decision-making under certainty
If it is known with certainty, which of the future states will take place, the decision-
making is relatively direct – the alternative with the highest profitability is selected. In
case of the above-given example, if it is known that the demand will be low, then it is
clear that a small production unit with realized profit of CZK 10 million will be the best.
On the other hand, if we know precisely that the demand will be average, the middle-
sized production unit (profit CZK 12 million) will be selected. Similarly, large
production unit is the most effective in case of high demand.
The possibility to make a decision based on absolute certainty is very rare, much more
often we must make decision under risk and uncertainty.        Decision-making under uncertainty
Decision-making under uncertainty is the reverse extreme than the decision-making
under certainty; there is no information available about possible future. Under these
circumstances, four possible decision-making criteria can be applied:
      Maximin (pessimistic) – identifies the worst possible profitability for every
       alternative and then it selects the best alternative of them (“the best worst”)
     Maximax (optimistic) – identifies the best possible profitability and selects the
       alternative corresponding to it
     Laplace – assumes that all states have the same probability
     Minimax – identifies the worst opportunity loss for every alternative and then
       selects the alternative corresponding to it (“the best worst”).
If we continue the illustrative example then:
    o Maximin strategy means defining the worst profitability for every alternative:
       - Small production unit                CZK       10 mil
       - Middle-size production unit          CZK       7 mil
       - Large production unit                CZK       – 4 mil
       The small production unit would be selected according to the Maximin strategy.
       It is obviously a pessimistic strategy. Real situation is usually better than the
       “guaranteed minimum” of this strategy.
    o Maximax strategy – defines as the best the profitability of CZK 16 mil
       corresponding to the large production unit. This strategy is very optimistic, it
       does not consider any other alternative than the optimum one.
    o According to the Laplace criterion, the sum of all the profitabilities for every
       considered production unit is calculated and the result is divided by the number
       of states (in this case = 3).
                                                  Total sum            Average value
          Small production unit                       30                    10,00
          Middle-size production unit                 31                    10,33
          Large production unit                       14                     4,67
     The highest average profitability value corresponds to the middle-sized
     production unit (CZK 10.33 mil).
   o When using the Minimax strategy, the lost opportunities matrix must be
     prepared, the elements of which are differences of the from the best one in the
     given column:

8. Risk Management and Managerial Decision Making                                    1-107
        Losses of opportunities                               Future states
        Alternatives                           Low          Middle      High    maximum
        Small production unit                    0            2             6         6
        Middle-size production unit              3            0             4         4
        Large production unit                   14           10             0      14
        The alternative corresponding to the maximum difference (lost opportunity) is
        selected in the second step. Those are listed in the “Worst” column. The best
        alternative is then selected from them – i.e. the one with the lowest difference,
        which amounts here to CZK 4 million and it corresponds to the middle-size
        production unit.
The biggest disadvantage of all these methods (with the exception of the Laplace
method) is that they do not take all the revenues into consideration. Instead of that they
focus either on the worst or best values and it decreases their information value. The
disadvantage of the Laplace method is assigns to all the states of natures the same
probability. However under the given circumstances (total uncertainty) each of the
methods presented here brings some benefits to the decision-maker.         Decision-making under risk
Decision-making under risk lies between the two extremes represented by the absolute
certainty and uncertainty. In this case the probability of the occurrence of every state
can be estimated (the sum of all probabilities must be equal to 1.00). Expected
Monetary Value Criterion (EMV) procedure can be applied under these circumstances.
The expected value is calculated for every alternative and then the alternative with the
identified highest expected value is selected. The expected value is the weighted sum of
revenues, every revenue is weighted by the probability of the relevant future state. The
criterion of the expected monetary value defines the expected revenue of every
alternative and selects the alternative with the best possible revenue.
If these procedure is applied to the previous demonstration example, where the
probabilities of the states occurrences are the:
future demand: low= 30%, average= 50%, high=20%, (sum = 100%),
then the expected value for every alternative is calculated by multiplying the probability
the state occurrence by corresponding revenue and consequent addition:
EMV                                                  Future demand
                                    Low          Middle              High       Sum
Small production unit             0,3 * 10       0,5 * 10         0,2 * 10       10
Middle-sized production unit       0,3 * 7       0,5 * 12         0,2 * 12       10,5
Large production unit             0,3 * (-4)      0,5 * 2         0,2 * 16        3

In this case the middle-sized production unit has the highest expected value (CZK 10.5
In decision-making under risk and uncertainty, and particularly in the stages of the
evaluation of alternatives and selection of the alternative to be implemented, the
decision-makers attitude to the risk plays an important role. The decision-maker can
have either aversion to risk when he or she tries to avoid the selection of rather risky
alternative and looks for less risky variants that promise to reach the goals with

8. Risk Management and Managerial Decision Making                                     1-108
considerable certainty that is acceptable for them, or he or she prefers to take the risk,
which means that he or she prefers alternatives having chance of reaching particularly
good results but they are also related to a higher danger of losses. With a decision-
maker with neutral attitude to risk the aversion and tendency to risk are in a mutual
The EMV method is suitable in the case when the decision-maker has a neutral
approach to the risk.
The decision-makers attitude to the risk is influenced by several factors. The most
important ones are his or her personality, past experience and environment, in which the
selection of risky alternatives takes place. The decision-makers attitude to risk can be
also expressed in a quantitative manner using the utility function (see e.g. [8-10], chap.
5.3). Differences in the attitudes of various decision-makers to risk lead to the fact that
various decision-makers can prefer various decision-making alternatives in the same
situations.        Decision-making trees
The decision-making tree is a schematic representation of alternatives available to the
decision-maker including their possible impacts. Although the decision-making trees
can be replaced by the decision-making matrices, they are particularly useful for the
analysis of situations where it is necessary to perform sequential decision-making. For
example, if the decision-maker originally accepted the solution to construct the small
production unit and then he found that the demand considerable exceeds the expected
volume, he can make second decision whether the original production unit should be
extended or another one should be built.
The decision-making tree consists of many knots and edges. The square knots represent
points at which the decision is made, circular knots mark impulses and opportunities
conditioning the decision-making. Similarly, the edges coming out of the square knots
represent alternatives while edges coming out of circular knots represent possible states.
The decision-making tree is analyzed from left to right. Alternative promising the
highest revenues is selected in every decision. If the decision is followed by an
opportunity, the alternative with the highest expected monetary value is chosen.
Let us modify the original example to demonstrate this procedure:
First of all, analysis of the decision-making tree is carried out for the decision problem
to build a small production unit or a large production unit. The decision-making
criterion is the maximization of the expected monetary value.
The monetary data at the ends of the branches (in mil CZK) are estimated revenues
(they are usually given in current prices). Probabilities are given at the edges
representing alternatives.

8. Risk Management and Managerial Decision Making                                    1-109
                                                                      (   0,4 40
                                                                 an d
                                                           d   em
                                                   Hig                                   noth
                                                       h   de                          Do Overtime
                       m     all                                ma
                                                                  nd                                   50
                     ds                                                (0,
                Bui l                                                     6)

                                                                                                   g   (10)
                  Bu                                                                       o no
                       ild                                                             D
                                g   e                                 )
                                                                  0, 4
                                                              an                   Re
                                                       d    em                       duc
                                                   Low                                  ep
                                                                                              s        50
                                                       h   dem
                                                                                ) 70

                                        Fig. 8.2 Decision-making tree

Example of the decision-making tree analysis:
    a. It is determined which alternative should be selected for the second decision-
       making. In case of a small production unit and high demand, there are three
            o Do nothing
            o Introduce overtime work
            o Extend the production unit
       The alternative of the production unit extension shows the highest revenue and
       therefore it will be selected here as the decision-making result.
       Similarly there are two alternatives for a large production unit and low demand:
            o Do nothing
           o Decrease prices
       The alternative with price decrease will be selected as it shows higher expected
b. Revenues of weighted opportunities are calculated at the branches of possible states:
    o Small production unit:
              Low demand … 0.4*40=16 (mil CZK)
              High demand … 0.6*55= 33 (mil CZK)

8. Risk Management and Managerial Decision Making                                                      1-110
   o Large production unit
              Low demand … 0.4*50= 20 (mil CZK)
            High demand … 0.6*70 = 42 (mil CZK)
c. Expected value of every original alternative is defined:
    o Small production unit … 16 + 33 = 49 (mil CZK)
    o Large production unit … 20 + 42 = 62 (mil CZK)
The decision to build a large production unit will be the selected choice as it shows
higher expected value than the small production unit.        Expected Value of Perfect Information – EVPI
Under certain circumstances it is in some cases possible to precise the information
concerning the probability of the occurrence of future states. The acquisition of the
additional information is then evaluated either from the point of view of time necessary
for it or from the point of view of price at which the information can be gained. In other
words, it is expected that the expected revenue will exceed the expected expenses spent
on perfect information.
The expected value of the perfect information is the difference between the expected
revenue under certainty (with perfect information) and expected revenue under risk.
There are two ways of the EVPI determination:
The first one consists in the calculation of revenues under certainty and subtracting from
them the expected revenues under risk. In our case, it means to find out the best
revenues for every state (it was found out earlier, they are in the case of low demand =
10 mil CZK, middle demand = 12 mil CZK, high demand = 16 mil CZK). These values
are then weighted by probabilities related to every state (i.e. 0.30*10=3; 0.50*12=6;
0.2*16=3.2). The expected revenue under certainty is given by the total sum
Under the risk, the highest expected value according to the EVM calculation,
corresponding to the middle-sized unit, is 10.5 mil CZK.
The anticipated EVPI is determined as the difference between the expected revenue
under certainty and expected revenue under risk (here 12.2 - 10.5 = 1.17 mil CZK). This
value represents the upper limit of expenses at which it would be economic for the
decision-maker to obtain the perfect information. If the cost of the perfect information
exceeded this sum then it would be more economic to select the alternative with the
highest expected yield.
The second approach is based on the lost opportunities matrix. We look for the
minimum sum of weighted values of lost opportunities.

8. Risk Management and Managerial Decision Making                                   1-111
                                          Weighted values of lost opportunities
Alternatives                        Low                 Middle      High             Sum
Small production unit              0,3 * 0              0,5 * 2    0,2 * 6           2,2
Middle-size production unit        0,3 * 3              0,5 * 0    0,2 * 4           1,7
Large production unit              0,3 * 14             0,5 * 10   0,2 * 0           9,2

The minimum sum of the weighted values of lost opportunities is 1.7 mil CZK. The
identified value and following conclusions are the same in the previous case.        Sensitivity analysis
Decision-making problems discussed in the demonstration cases were based on
information about the revenues and estimated probabilities of possible states. However
it can be useful for the decision-maker to make use of more information concerning the
consequences caused by changes of one or more parameterized quantities. In typical
practical problems it is usually not possible to consider all the possible combinations of
all parameters. One of the decision-maker‟s possibilities is to compare the expected
values of alternatives and deal on only with the best ones. If the decision-maker
considers some of the parameters in the selected alternatives less stable, he will focus on
them and monitor the expected development of revenues upon their modifications.
If there are only two possible future states, the graphical solution is possible.
The following table gives the revenues for both states:

                                                     Revenues ( mil CZK)
                                              state 1                      state 2
                  A                             4                            12
                  B                             16                           2
                  C                             12                           8

The probability range <0,1> is placed on the horizontal axis, e.g. for state 2. The
revenues corresponding to possible states are placed on the vertical axis.
First of all the A alternative is constructed. Revenue (4) corresponding to state 1 are put
on the left side and revenue (2) corresponding to state 2 are put on the right side. The
remaining alternatives B, C are constructed similarly.
Now it is possible to conclude that in the case of state 2 probability in the range 0 – 0.4
the A alternative is the most suitable, for probability range 0.4 – 0.67 the B alternative is
the most suitable, and for the 0.67 – 1 probability range the C alternative is the best.
Inverse conclusion applies to probability ranges of state 1, as P(1)+P (2)=1.
If we prefer analytic approach, we have to determine equations of lines. The general line
equation is y=a+bx, where a is the y value at x=0 (line intersection with verticalaxis), b
is the line gradient. In our case the x axis corresponds to probability P(2). The line
gradient is defined as the change of y upon unit change of x (in our case it is the
difference between the two considered states on the vertical axis):

8. Risk Management and Managerial Decision Making                                      1-112
                            Revenues (mil. CZK)
 Alternatives                                                Gradient      Line equations
                      State 1               State 2
         A                  4                 12            12 – 4 = 8       4 + 8P(2)
         B              16                       2         2 – 16 = -14     16 – 14P(2)
         C              12                       8          8 – 12 = -4      12 – 4P(2)

By calculating the intersection point of the B and C alternatives (visible in the graph)
the relevant P (2) is defined. Here it is 0.4. Similarly in the case of the C and A
alternatives‟ point of intersection P (2) equals to 0.67. P(1) can be calculated by
subtracting these values from 1. The corresponding values are P (1)=0.60; P (1)= 0.33,

         16                                                                   16

         14             B                                                     14

         12                                                      A            12

         10                                                                   10

#1                                                                                    #2
Payoff    8                                                                       8   Payoff

          6                                                                       6

          4                                                                       4

          2                                                                       2
                    B best                 C best                A best

              0       0.2           0.4              0.6       0.8          1.0

Fig. 8.3: The graphical determination of the span of P(2) with the selection of
          optimum alternative

8. Risk Management and Managerial Decision Making                                     1-113
8.2.4 Simulation using the Monte Carlo method
The Monte Carlo method models the probability distribution of random processes.
Randomly selected samples with the specific probability distribution are analogical to
observations of the system itself. The higher is the number of samples the more the
simulation results approximate the probability behavior of the real system. The
sampling is accompanied by the use of random numbers. This method is used in the
risk management to determine the project risk curves.
The basic process steps are the following:
    1. Identify probability distribution for every random system component.
    2. Define such representation that the random numbers intervals will correspond to
        the probability distribution.
    3. Obtain random numbers.
    4. Interpret the results.
Computer generated random numbers are the most frequent source of random numbers
for the Monte Carlo simulation; in small cases it is also possible to use the random
number tables. The random number sets serving as source for the simulation have the
following basic qualities:
    o The numbers are evenly distributed. It means probability of their occurrence is
        the same.
    o It is not possible to predict the sequence of numbers.
In modelling, it is important to take into account that it is not possible to start always
from the same place, as it would always lead to the same sequence of numbers. There
exist various methods for the selection of the random starting point.
The Monte Carlo method is applicable if the investigated process has random
Let us present here simple example to demonstrate the procedure:
Manager of a machinery production plant is interested in the prediction of machine
failures for a period of ten days. From the failure monitoring in the past hundred days it
can be observed:
Number of                                          Cumulative         Weighted number
               Frequency       Probability
 failures                                          probability           of failures
     0              10             0,10               0,10               0*0,10 = 0
     1              30             0,30               0,40             1*0,30 = 0,30
     2              25             0,25               0,65             2*0,25 = 0,50
     3              20             0,20               0,85             3*0,20 = 0,60
     4              10             0,10               0,95             4*0,10 = 0,40
     5               5             0,05               1,00             5*0,05 = 0,25
  Total            100             1,00                                      2,05

Now the random numbers interval is assigned so that it corresponds with the failures
cumulative probability. (As the cumulative probability is given with two decimal digits,
two-digit numbers are used, while the last number of every random numbers interval is
smaller by 1 than the cumulative probability and then the following interval starts with
the cumulative probability value of the previous interval; the first interval starts 00):

8. Risk Management and Managerial Decision Making                                   1-114
 Number of                                          Cumulative          Corresponding
           Frequency              Probability
  failures                                          probability        random numbers
      0        10                    0,10              0,10                00 – 09
     1              30               0,30               0,40                   10 – 39
     2              25               0,25               0,65                   40 – 64
     3              20               0,20               0,85                   65 – 84
     4              10               0,10               0,95                   85 – 94
     5               5               0,05               1,00                   95 – 99
   Total            100              1,00

Let us use random numbers from the random numbers table:
               1     2       3        4     5      6      7       8       9          10
    1          18    20      84      29     91     73     64      33      15         67
    2          25    19      05      64     26     41     20      09      88         40
    3          73    57      80      35     04     52     81      48      57         61
    4          12    48      37      09     17     63     94      08      28         78
    5          54    92      27      61     58     39     25      16      10         46
    6          96    40      65      75     16     49     03      82      38         33
    7          23    55      93      83     02     19     67      89      80         44
    8          31    96      81      65     60     93     75      64      26         90
    9          45    49      70      10     13     79     32      17      98         63
   10          01    78      32      17     24     54     52      44      28         50

If we select column no.1, then the numbers from this column model number of failures
in ten consecutive days in such a way that a random number is assigned to the
corresponding interval, from which number of failures is then derived.

                          Random number
         Day                                     random numbers        Number of failures
                           (column no. 1)
          1                    18                     10 –39                     1
          2                    25                    10 – 39                     1
          3                    73                    65 – 84                     3
          4                    12                    10 – 39                     1
          5                    54                    40 – 64                     2
          6                    96                    95 – 99                     5
          7                    23                    10 – 39                     1
          8                    31                    10 – 39                     1
          9                    45                    40 – 64                     2
         10                    01                    00 – 09                     0
           Total sum of failures                                                17

8. Risk Management and Managerial Decision Making                                         1-115
Average predicted number of failures for every day of a ten-day-cycle is 1.7, while the
data from the past 100 days predict the value of 2.05 failures per day.
The performed simulation is only illustrative; considering the relatively small sample
size, another result would be achieved using other random numbers.
In real cases solved by the Monte Carlo simulation it is necessary to work with much
larger sample in order to receive more reliable conclusion.
Both these conclusions can be practiced so that another column (line) of the table of
random numbers is selected and the sample size will be gradually increased. The results
should approach the average number of predicted failures per day, i.e. 2.05.

8.2.5 Preparation and implementation of measures for the risk reduction
The presence of risk is always inevitable and therefore it is necessary to adopt measures
for its reduction. The business risk reduction procedures can be divided into two groups:
    a) Offensive procedures – focusing on the removal or weakening of the risk
         occurrence causes; their aim is to influence the risk causes in such a manner so
         that no considerably unfavorable situations for the project would occur in the
         future. Those are preventive measures.
    b) Defensive procedures – focusing on the reduction of the unfavorable
         consequences of the risk; these measures focus on the reduction of negative
         impacts of the occurrence of certain risk situation. These measures are prepared
         only in a form of certain plans and they are implemented only in the case of a
         certain risk situation occurrence. They are corrective measures.
A. Offensive approaches
      Use of power - depends on the company‟s position and its real possibilities e.g.
       to influence certain legislature measures or in setting the negotiating position
       with partners.
      Risk transfer - again it depends on the company‟s negotiating position; it usually
       reflects upon the content of concluded contracts and agreements with company‟s
       partners (payment conditions, guarantees, manner of delivery, insurance etc.)
      Customer-based approach - including of a customer into the company‟s internal
       processes reduces the risk of losing the market position because a customer
       defect to the competition
      Project logic frame – upon project initiation so-called “internal project logic”
       (missions, goals, outputs, activities) needs to be considered as a necessary
       condition and risks accompanying each of the above-mentioned steps, or “outer
       project logic” as a sufficient condition
      Vertical integration – if it is found out that it is more economical to replace the
       purchase of semi-finished products by one‟s own production (e.g. by acquisition
       of suppliers)
      Outsourcing – on the other hand, if it is found out that it is more effective to
       retreat from one‟s own production of sub-components and replace it by purchase
       from outside.

8. Risk Management and Managerial Decision Making                                   1-116
B. Defensive approaches
      Project flexibility – performing of measures in the organizational structure,
       application of motivation and simulation systems and such cost structure leading
       to shortening of the company‟s response period to occurred changes at the
      Diversification – actually means risk distribution, e.g. into:
            Production program (production assortment)
            Distribution channels and company‟s logistics
            Customers
            Geographic areas
       Risk reduction achievable by diversification is the higher the less dependent the
       individual components are on each other.
      Joint-Venture – formation of joint-ventures is motivated by risk reduction
       related to very expensive projects and long periods of investments returnability;
       the advantage is that the share of every participant is only such that its loss in
       case of failure would not endanger company‟s financial stability
      Insurance – e.g. of commercial risks of export business operations (in CR:
       EGAP – Export guarantee and insurance company; insurance condition being
       that at least 60% of the supply is of domestic origin). The insurance rates depend
       on the type of insurance, its length and risk in the territory.
      Term hedging – focuses on the protection against unfavorable changes of
       interest rates and exchange rates (future rate agreement, interest rates swaps,
       option strategies upon purchases)
      Staging of the project performance – every following stage depends on the
       results of the previous stage
      Formation of reserves – preferably in the form of liquidity, by means of which
       impact of possible risks can be operatively solved.
Risk reduction and thereby higher project security cannot be achieved without expenses.
Therefore in the decision-making process it is necessary to evaluate the achievable
degree of risk reduction at costs that are still economically acceptable for the company.

8.2.6 Operational risk management
Projects can be influenced throughout their performance by many external influences
that can deviate them from the path forecasted during their preparation. If the project
construction scheme (mission, goals, outputs, activities), i.e. internal project logics are
considered necessary conditions, then the risks forming the project‟s outer logics are
sufficient conditions. Well-based project takes into account all necessary and
sufficient conditions. Critical factors of the project success are those conditions that
need to occur (be met) so that the project would be successful but which the project
bearer (project team) cannot directly influence. The project management needs to
respect the causal relations between targets and all relevant connections influencing the
final result. Reaching the goal is conditioned by harmony of many outer (uncertain)
circumstances lying outside the scope of activity of the problem solver (project team).
To them also belong predispositions and expectations of all stakeholders that can
influence the course and results of the project performance. These predispositions and
expectations need to be:

8. Risk Management and Managerial Decision Making                                    1-117
       Known as soon as possible
       Fully transparent and unequivocal
       Negotiated and approved in advance
       Expressed in quantified threshold values
       Specific (with low level of generality)

                Internal project logic
               = necessary conditions


   MISSION            … then                                          … and …

                     if …
   GOAL              … then                                          … and …

                     if …
   OUTPUTS           … then                                          … and …

                     if …
   ACTION            … then                                             if …

                                                    External project logic
                                                    = sufficient conditions

        Fig. 8.4: Relation of project and environment upon risk consideration

The project risks are divided into two main groups:
    Internal
           - Objective (outputs do not guarantee achievement of the goal)
           - Time (delay)
           - Financial (budget exceeding)
    External
           - Other (social, political, economic…)

8. Risk Management and Managerial Decision Making                               1-118
Action risk analysis means ability to work with important risks in order to minimize
their occurrence and final impact on the project. Among the most important rules there
       Define and specify key risks (identify project risks)
       Express risks in quantified acceptable threshold values
       Evaluate risks (evaluate intensity of their impact and probability of their
       Propose a manner of their handling = ACTION PLAN (what needs to be done)
           o Preventive measures (offensive)
           o Corrective measures (defensive)
       Modify project framework and plan
    Negotiate the project action plan implementation
The following table can be used in this analysis:

Key       Importanc Occurrence           Risk rate – Priority     Recommended actions
risks     e - impact probability         project
                                         danger                 Prevention   Correction

                     Fig. 8.5: Model chart for action risk analysis

8. Risk Management and Managerial Decision Making                                   1-119
Risk management process is an iterative process. Dynamic strategy of risk management
should be its output:

       Risk                                                    Risk
    appreciation                                            management
                                & analysis
    What are the causes         What tools / methods        What are the                management
    of risk?                    can be used?                possibilities of            strategy
                                                            risk management?
    What risks are connected    How can be the risk
    with our contracts?         measured?                   What limits have
                                                            to be set?
    What are financial          How can be the risks
    impacts of these            understood?                 How these limits
    risks?                                                  reflect the changes
                                                            in the market?

                          Fig. 8.6: Risk management strategy

Some methods of risk measurement and calculation:
Each of the following instrument for risk measurement contributes by monitoring the
market risks from various points of views:
    o Mark to Market – evaluates prices and contract portfolio compared to market
        prices at a given moment (daily balance)
    o Matrix of risk exposure – describes the level of exposure to market risk related
        to contract portfolio
    o Sensitivity analysis (stress tests) – analysis of what happens if any of the
        considered risks occurs (e.g. input price increase by 20%)
    o Value at Risk (VaR) – measures potential losses in the market value of certain
        contract portfolio in predefined time horizon with a given reliability value (what
        volume of finances can be lost over the time horizon)
There are many ways of risk calculation but none of them can predict reliably all the
questions related to risks. Worth of output from every instrument is based on the input
data quality; incorrect input data cause misleading results.
Strategic information system of the project allows risk monitoring throughout the
project course and their potential control. The following procedure actions can be
adopted according to the project course evaluation:
      Do nothing – accept risks and advantages of the current situation
      Modify the extent and/or project focus – extend outputs or activities; modify
       project goal
      Initiate other projects – those projects ensure meeting of critical predispositions
      Cancel project – identify what consequences it will bring about

8. Risk Management and Managerial Decision Making                                    1-120
Importance of action risk analysis:
      It is an instrument of open and down-to-earth communication between the
       project manager, his or her subordinates and partners.
      It allows joint continuous monitoring of success probability and necessity of
       corrective measures.
      It allows setting of the project team responsibility scope.
      It allows creation of an open environment, in which possible failure of
       assumptions can be discussed in advance.
      It allows timely signalling of critical changes in the external environment
       endangering the project.
      It allows forming of strategic information system for project management
      It is a condition for transition to comprehensive management by means of

8.3     Controlling, crisis signalling
The term controlling, originally meaning an institution with a control function, has been
known since XV century. Originally this institution was established on a national level
(France, Spain, England); in the U.S.A. it was incorporated into the companies
organizational structures at the break of XIX and XX centuries and mainly in the first
half of XX century.
Control system represents a group of control activities that are mutually interconnected.
The following steps needs to be addressed when forming a control system:
     Purpose and sense of control (why control)
     Object of control (what control)
     Controlling subject (who controls)
     Control periodicity (when to control)
     Manners and methods of control (how to control).
The original conception of controlling focuses on the status of meeting the company‟s
intentions (plans, budgets, projects). Based on plan-to-reality findings the real picture of
the controlled object state is created at given moments in time, deviations from the
desired state are defined and corrective measures are adopted. Economic indicators of
the project plan, time aspects (meeting deadlines) are the objects of interest and recently
other criteria are being introduced (customer satisfaction, innovation effectiveness,
benchmarking with competition). The task of the controlling is mainly viewed as a part
of the organization‟s economic management. Project financial plans are the basis for the
project economic management. Financial indicators like cash flow, cash-to-cash,
profitability, costs, productivity etc. are the typical criteria for the economic
management. Controlling starts from the comprehensive registration of all the
monitored economic project events and aims at objective and unequivocal evaluation of
the obtained information. In the interpretation of conclusions the desired situation
(what should have been achieved) is compared to the actual situation (what has been
achieved) and there follows evaluation of deviations including the identification of
places and causes of their origin and attributing responsibility for them. Suggested
measures for the relevant levels of the project management can form a part of the
controlling conclusions.
Secondary controlling product are data files that then serve for the adjustment of

8. Risk Management and Managerial Decision Making                                    1-121
calculations, determination of future costs, budgets of new projects, which then impacts
the financial plans of the whole company. Proper implementation of computer
technology allows to perform controlling in relatively short time periods and to involve
and analyze a wider scale of influences having impact on the project state (e.g. impact
of price development of inputs, costs changes, changes of standards etc. on the project
outputs). Controlling then becomes a method of internal company management
monitoring the economic behavior of the project teams with the aim of drawing the
relevant managers‟ attention to deviations from the real development in timely manner
compared to the adopted tasks and therefore in a broader point of view support the
fulfilment of the company‟s strategic intentions. After the project completion, it is
useful to perform a comprehensive analysis of the project and thereby acquire the
project evaluation from the risk point of view. This procedure is called post-audit and its
purpose is to identify the causes of success or failures in the project implementation and
participate on the creation of risk database in the company.
The controlling conception focused on the system of timely warning gains new content.
The task of controlling is flexible provision of information signalling not only failure
conditions but also possible dangers to planned tasks, or eventually signalling danger
from the side of competition.
Organizational requirements to successful controlling are:
      There exists system of planning and priority planning in the projects.
      There are established procedures for reporting and evaluation of the project state
       in relation to the plan.
      There exists functional process of change management in the project.
      Environment for open feedback is created.
      There is established system of project documentation and archiving functions.
      There functions a system of education and development of project managers and
       function managers on lower levels.
      There exists system for the project management improvement.

8. Risk Management and Managerial Decision Making                                    1-122
Methods of project risk monitoring
As an example of risk monitoring in the course of a project, let us compare risk
treatment in two projects A and B):
Project risk
                          Weight     Scale                 Classification Evaluation
                                                             A        B       A       B
Initial project risk      15         1 – does not exist
analysis                             4 – complete, good       3       4     0,45     0,6
Project danger from       15         1 – low;
                                     4 – high                 2       3      0,3     0,45
Performance of            30         1 – wrong;
activities for risk                  4 – errorless            2       4      0,6     1,2
Deviation from            20         1 – considerable
planned costs caused                 4 – minimum
by unpredicted risk                                           3       2      0,6     0,4
Performance of         20            1 – outside the
extraordinary measures                   plan scope
                                     4 – in accordance        3       3      0,6     0,6
                                         with plan
TOTAL                     100                                               2,55     3,25

Evaluation of the total risk treatment in the monitored projects (scale: 1 – risk is not
treated/managed; 2 – risk is treated/managed insufficiently; 3 - risk is treated/managed
in the main points; 4 - risk is fully managed/treated):
In the project A the risk is managed on an average level, in the project B it is managed
above the average level and therefore sufficiently.

8.4     Plan of corrective measures
The scope of unfavorable effects of the occurrence of risk situations depends to a
considerable degree on the speed and quality of the company‟s response to the risk
situation. Therefore it is convenient to draw a plan of corrective measures in advance,
during the project preparation. Sophistication of such scenarios is important in
situations when it is decided upon certain indications that a critical situation has
occurred and this situation is then usually accompanied by time pressure and pressure
from the occurring emergency circumstances, which decrease the quality of the
operational decisions. In such situation, emphasis is placed upon the reaction‟s speed
and effectiveness. The plans of corrective measures are prepared for key situations that
are in a close relation to the important risk factors of the company‟s business activity. It
is important to define the moment, at which the company starts to behave according to
the relevant corrective measure. It means that during the project preparation it needs to
be specified from which deviation of the real situation (monitored value) compared to
planned assumptions the project course is so deviated that it cannot be corrected by
means of usual management instruments.

8. Risk Management and Managerial Decision Making                                    1-123
Corrective measures are always viewed as intervention into the project strategy.
Therefore they are usually approved on the strategic management level in the company.
The project gets on a new path and its management needs to correspond to that.
Future risk situations do not represent only danger to the company, some of them can
have the character of an opportunity. Again it depends on the company‟s readiness to
react rapidly and flexibly in order to make use of the opportunity. It is important for
companies functioning in a market environment to have a sophisticated system of
marketing information collection, transfer and evaluation that present the occurred
situations precisely.
It is necessary to meet certain conditions in order to make effective use of prepared
plans of corrective measures focused on immediate response to risk situations of both
the crisis and opportunity type. Those are particularly:
           Updating of the plans of corrective measures as they quickly become
            outdated in the turbulently changing environment and the initial
            predispositions for their implementations can become irrelevant.
           Creation of reserve resources, mainly financial, so that the activities defined
            in the plan of corrective measures would be covered and therefore
          Functioning system monitoring the development of important risk factors
           that in a decisive manner influences the emergence of critical situations or
           opportunities for the company.
Individual procedures of the business risk reduction (either of a specific project or
business activity in general) do not usually function isolated but they are mutually
interconnected, when more of these procedures and measures forming company risk
policy are applied simultaneously. Sophisticated risk policy is one of the basic
predispositions for the companies‟ long-term successful business strategies.

Example of a simplified outline of a company’s plan of corrective measures:

          Crisis situation indicator                Action

 According to marketing information         Reduce overheads by 3%. Limit hiring
 the revenues will 5% lower than            of administrative forces. Reduce the
 planned values for the same period         storage supply reserves.
 According to marketing information         Reduce the advertising and promotion
 the revenues will 10% lower than           costs by 17%. Decreases shifts (to max.
 planned values for the same period         2), cancel Saturday and Sunday work.
                                            Stop the purchase of a new technology
                                            (cut down investments by 30%)
 According to marketing information         Cut the advertising and promotion costs
 the revenues will ¨15% lower than          by another 10%. Reduce the number of
 planned values for the same period         production workers by 15. Postpone the
                                            new product introduction to the market
                                            by 6 months. Freeze the planned wages

8. Risk Management and Managerial Decision Making                                    1-124
8.5     Computer technology and risk
The managerial practice usually works with a higher number of risk factors that it is
possible to handle manually, as the mutual dependence of the monitored economic
criteria can be rather complex. Computer support systems are commonly used today.
The risk management components is usually part of the business software. This type of
software can be divided according to the department, in which it is used, into Front
Office, Middle Office and Back Office. The components can gain or lose importance in
dependence on the strategies and/or implementation of business processes within the

           Sales                  Risk Management                     Controlling

      Front Office                Middle Office                      Back Office
                                  Risk monitoring
 Evaluation / structuring         & management                  Confirmation of analyses
 Material & financial markets                                   Account analyses
    Energy                                                      Profit analyses
                                Analyses supporting:
    Gas, oil                                                    Bookkeeping analyses
                                  Credit risk management
    other commodities                                           Audits
                                  Market risk management
 Sales, distribution
                                  Backward testing
 Market research
                                  Stress tests
                                  Value at risk analysis

Fig. 8.8: Business organization for the use of software support in risk management

On the Front Office level there is the Business Transaction component that supports the
processes of business transactions administration, monitoring of business transactions,
business transaction authorization and monitoring of the company‟s competitive
position. These functions are quite standard and they are well supported by the software
The Risk Management component corresponds to the Middle Office concept and it is
also quite well supported by the software products, particularly if the market price
behavior follows that of standard commodity or financial markets. As ever more
emphasis is recently placed on the process customization, development of the
company‟s own approach to risk management is supported on this level.
The Accounting component corresponds to the Back Office concept. Although the
financial accounting of standard contract types are solved by means of program
packages, considerable part of this component needs to be tailored to individual markets
depending on their rules. From a functional point of view this block is includes
controlling procedures allowing the performance of audits.
Note: The tree above-mentioned components are implemented in independent
departments that are strictly separated from an organizational point of view (Front
Office – sales department, Middle Office – risk management department, Back Office –
controlling department)

8. Risk Management and Managerial Decision Making                                          1-125
Program module for sensitivity analysis is, for example, part of the PROVALEX system
that is available at the Prague School of Economics. This software carries out
sensitivity analysis for financial analysis and project evaluation. PROVALEX can
determine break even points. Furthermore the system allows to perform alternative
analyses of project cash flows. The software generate graphical representation of the
sensitivity analysis that provides vivid idea about the risk factor importance. Computer
sensitivity analysis allows to obtain different graphical representations of the monitored
project criterion upon a change of any of the risk factors. The software models the
dependence of the monitored criterion upon simultaneous change of several risk factors.
Information systems help in a decisive manner to build up effective company risk
management system. However that anticipates systemic approach that allows to identify
risk and to prepare corrective measures in advance. At the same time it increases the
company‟s flexibility. The basic assumption is development and maintenance of
database of risk factors and identification of measures reducing them.

8.6   Literature:
[8-1]     Obchodování s energií a řízení rizik, Accenture company analysis, 2001
[8-2]     J. Fotr: Podnikatelský plán a investiční rozhodování, GRADA Publishing,
[8-3]     An Overview of Risk Management Techniques, Logica,UK company
          materials 1998, 2001
[8-4]     O. Landa, Rámec projektového myšlení,Inventa, 2001
[8-5]     W. J. Stevenson: Production / Operations Management, Irwin Inc., USA
[8-6]     J. Veber a kol : Management, Management Press, 2000
[8-7]     Vosse : Risk Analysis, library of the Prague School of Economics

8. Risk Management and Managerial Decision Making                                   1-126

This part of the training is strongly country dependent, as it depends to a great extent on
the national schemes of SMEs support.
The Czech version of this chapter describes possibilities available in the Czech

9. Financing of Innovation Activities                                                         1-127
Aim: Attendees or readers will understand the importance of the feasibility study for the
project implementation.

10.1 Characteristics of a business plan feasibility study

10.1.1        Business projects preparation
Company entering business activities need to evaluate the basic predispositions for their
business and express the directions of their intended development in the company
strategy. Business strategy is formalized by business project preparation and
implementation that consists of 3 stages:
     Pre-investment
     Investment
     Operational
Business project success is based on a thoroughly carried out pre-investment
preparation stage when information of marketing, technological, financial and economic
character are processed and the project feasibility study is prepared. The aim of the
pre-investment stage is to confirm the economic profitability or discover economic
unprofitability of the intended project, define its risk rate and prevent the adoption of
unqualified decisions that would lead the company into future problems.
At the beginning of every project there is an idea the aim of which is to identify an
opportunity. Such an opportunity can be introduction of a new product to the market,
major innovation of an existing product, entering a new market segment, discovery of a
client‟s specific need, provision of services etc. If the opportunity is identified,
collection of information starts from which an introductory study – opportunity study
can be prepared, and based on which the opportunity can be evaluated from the point of
view of its performability. If the opportunity is found performable, it is necessary to
elaborate pre-feasibility study representing a step between the opportunity study and
detailed feasibility study. Its aim is to define under acceptable costs whether:
         All possible project variants were analyzed and evaluated
         Certain project aspects are so important that their detailed analysis by means of
          supportive and supplementing studies, such as marketing researches, laboratory
          tests, are required
         The basic idea is sufficiently attractive for a certain investor or group of
         The project character and content justifies its detailed analysis in the form of the
          project feasibility study.

10.2 Feasibility study
Feasibility study is the most important activity of the pre-investment stage of the project
life-cycle, based on which it is decided about its performance. So the aim of the study
is to give an answer to the question whether it is possible and reasonable to carry out the
project. Feasibility study provides all the documents necessary for the investment
decision-making. The basic approach to its elaboration is an iterative optimization
process with feedbacks when the selection of basic project characteristics is attained in a
sequence of optimization steps respecting the existing dependence among project
characteristics (e.g. dependence of the production unit size and technological process

10. Feasibility study                                                                            1-128
volume, etc.). Result of the feasibility study is a detailed elaboration of technical,
economic, financial, managerial, eventually other project aspects. These elements are
mutually interconnected and cannot be evaluated in an isolated manner.
Success of the whole project to a considerable degree depends on the completeness and
correctness of the feasibility study. Therefore the study has to take into account new and
changing facts and to outline development trends. Also eventual personal or group
interests, or influence and power of lobbying, affect the project implementation and
should be included into the comprehensive feasibility study.
Feasibility study can be considered starting point for the decision about the project
realization from the point of view of:
       Business (market potential, market segmentation, competitive position, project
        business goals and possibility of their meeting, goal achieving strategy, demand
        development, price development, customers reactions)
       Technological (material and raw material inputs, energy requirements,
        evaluation of project location, environmental impact, technological and
        production facilities, construction modifications, human resources,
        implementation plan)
       Economic (investment profitability rate, returnability time, profit ration and

Quality of the feasibility study outputs mainly depends on the input information quality.
The information precision is also related to the project risk rate estimate and measures
specified for the risk elimination.
Feasibility study content:
    1. Market analysis and marketing strategy
    2. Production unit size
    3. Technology, material inputs and energy
    4. Production unit location
    5. Human resources
    6. Organization and management
    7. Financial analysis and project evaluation
    8. Risk analysis
    9. Sensitivity analysis
    10. Probability study
    11. Implementation plan
Putting the feasibility study together is a variation process. At all the above-mentioned
stages it is necessary to formulate and evaluate as many production program variants as
possible, its placement to the market, processing technology, financing possibilities. As
the starting point serve mainly the information of market character. Feasibility study
should present results achieved by selection of individual elements of the business
project and record those aspects of the optimization process that has lead to those
The demanding character of the feasibility study preparation also reflects in the
financial costs of the study. While the cost of the opportunity study are in the range of
0.2 – 1% of investment costs, the costs of the feasibility study can reach up to 3% of
total investment costs.

10. Feasibility study                                                                        1-129
10.2.1         Market analysis and marketing strategy
From the marketing strategy point of view it is important to identify demand based on
which tradable volume of production and price level, determining total revenues
volume and allowing the profit planning, can be determined.
Besides price policy, marketing strategies are formed by other important elements:
      Product and service distribution channels; the attention is paid to the use of
       one‟s own sales personnel, use of distributors, retail sale, wholesale, delivery
       sales, etc.; different costs should be considered for every distribution channel
      Activities focused on promotion and sales support (participation on fairs,
       exhibitions, advertising on TV, in press, after-sale services, guarantees, warranty
       conditions etc.)
     Product quality, packaging, etc.
Definition of market position and conditions, under which the set turnovers are to be
achieved, results from the marketing strategy conception. It is essential to respect the
fact that the conclusions will always be defined as a prognosis. The feasibility study
treats the uncertainty rate of this prognosis by analyses of costs of alternatives and of
consequences of the sale price modifications. Potential risks are the third source of
uncertainty as they can significantly influence the planned result. Methodology applied
in the feasibility study to treat the impact of above-mentioned phenomena is described
in other parts of this chapter ( 8.2.8, 8.2.9, 8.2.10)

10.2.2         Production unit size
Among factors influencing the lower limit of the production unit size belongs mainly
minimum economic size that applies in some industries (chemical, automotive).
Generally the investment costs and many items of production and other costs do not
grow proportionally with the production capacity, but they grow more slowly.
Generally, if the production capacity increases (providing full use of the production
capacity), the cost of a production unit decreases. The growth of the production unit
size increases the profit and profit rate. In certain industries, the effort to reach the
highest possible profit rate results in continuous growth of the production unit size and
therefore increase of their minimum economic capacity. Smaller production units are
then less competitive unless they are capable of compensating the higher costs with
higher product quality. Upper limit of the production unit size is limited by the
resources (raw materials, labor force, however most of all financial means).
Another element limiting our decision-making space is the standardization of the
production unit size. When product lines exist, then the investment costs are the lowest
for standardized sizes.
In order to select the production unit size it is necessary to confront the marketing
forecasts about the anticipated volume of production that can be realized in the relevant
market segment.

10. Feasibility study                                                                        1-130
The investment cost growth can be generally expressed as the power function in the
                                  N2 = N1 × (K2 / K1)x
   N2 - investment costs of a production unit of a size K2
   N1 - investment costs of a basic production unit of a size K1
     x - exponent characterizing the cost growth in dependence on the production
          capacity growth. Its value depends on an industry and it varies within the
          range 0,4 - 0,9. If the production capacity growth is achieved by growth of the
          production equipment dimensions, the exponent approaches the values of 0.4;
          if the higher production capacity is achieved by means of installing a larger
          number of machines, the exponent approaches the value of 0.9.
Note: The same power dependence also applies to some production costs items
(production workers wages) and majority of overhead costs items whose size is
proportional to the size of investment costs (depreciation).

Let us present as an example two industries. The values of the exponent x of the first
and second industries are 0.8 and 0.4, respectively. Let‟s assume that the investment
cost of building a production unit of a basic size K1 = 100.000 pcs/ year amounts in
both industries to CZK 80.000.000 = N1. Now let‟s calculate the total investment costs
Ni for the i-multiple production capacity Ki (i= 2,3,4).
1. production branch, x=0.8
                                       K1          K2             K3            K4
Production capacity (pcs/year)      100.000      200.000        300.000       400.000
                                       N1          N2             N3            N4
Investment cost (thousands of        80.000      139.300        192.600       242.500
                                     N1/K1       N2/K2           N3/K3         N4/K4
Specific investment costs             800        696,50           642          606,2
                                               K2/K1:N2/N1 K3/K1:N3/N1 K4/K1:N4/N1
Economy of size                                   2:1,74      3:2,4       4:3,03

2. production branch, x = 0,4:
                                       K1          K2             K3            K4
Production capacity (pcs/year)      100.000      200.000        300.000       400.000
                                       N1          N2             N3            N4
Investment cost (thousands of        80.000      105.600        124.100       139.300
                                     N1/K1        N2/K2          N3/K3         N4/K4
Specific investment costs             800          528           417,7         348,2
                                               K2/K1:N2/N1 K3/K1:N3/N1 K4/K1:N4/N1
Economy of size                                   2:1,32      3:1,55      4:1,74

10. Feasibility study                                                                       1-131
The comparison shows that in the second production branch the economy of size is
more significant. It can be said that the lower is the exponent x the more pronounced is
the economy of size. The depreciations copy the investment costs.
Note: Statements concerning the economy of size apply only when the production unit
is fully used, in other words if it is possible to sell the whole production capacity.
However that cannot be guaranteed because:
      The sales plans are based on certain assumptions that do not need to be attained
       in the future
        The uncertainty in the production sale estimate applies both to the sales volume
         and its development in time.
Therefore the future demand uncertainty is treated by elaboration of alternate prognoses
using optimistic, realistic and pessimistic estimates.
So it is obvious that the anticipated sales cannot unambiguously determine the selection
of the production unit size for its whole lifetime. Therefore various alternatives of the
production unit size are considered and evaluated.
Smaller production unit reduces the risk of this unit not being fully used for pessimistic
sales prognoses. At the same time investment costs for such unit will be lower in
absolute numbers. However with higher demand such a unit works with higher unit
costs then fully used unit of a larger size and there is the danger that part of the demand
will not be satisfied. From the investment point of view there prevails low risk; from the
point of view of expected economic effect, high attractiveness cannot be anticipated.
In case of favorable demand development large production unit can bring considerable
economic effect. Selection of such capacity can prove significantly risky in case of
demand drop when losses can occur as a result of non-used capacities.
Production unit with possible enlargement is currently preferred as a progressive
solution. In the first stage, a production unit of a smaller size is built but the project
already anticipates its enlargement and infrastructure is adapted to allow the
enlargement. The extension of production capacity is then performed according to the
demand development. Adjustment of investment costs to the demand development and
their distribution over a longer period of time, reducing requirements to the initial
starting capital, represent substantial advantage of this strategy. On the other hand,
increase of investment costs compared to one-off construction (compared to the final
capacity) and the influence of inflation development in an investment spread over in the
time seems to be a relative disadvantage.
So the selected production unit size is always more or less a compromise between
achievable economic effects and possible risk factors. Variability of considerations in
the feasibility study is based on the determination of revenues, costs and achieved profit
for intended production capacities and their usage or non-usage as a result of demand
drop. When defining the costs it is essential to respect the various character of costs
items with regard to the production volume (fixed and variable costs).
If the expected sales volumes determine that the production capacity size is less then its
minimum economic size, lower competitiveness of this unit is to be expected. If this
disadvantage cannot be compensated by a lower level of some costs items compared to
competition (low taxes, low wages etc.), the project is predestined for rejection as
The production unit choice allows preparation of plans for space location and thereby
specifies requirements to the necessary operational buildings and additional operations.

10. Feasibility study                                                                         1-132
Based on this, investment costs of machinery and construction parts can be determined.

10.2.3         Technologies, material inputs and energies       Technologies and production facilities
Selection of technologies is influenced by many factors, many of which have the
character of limiting conditions:
     Availability and quality of raw materials
     Available sources of financing
     Basic characteristics of a business project
In order to define the basic initial assumptions it is necessary to evaluate all possible
alternatives in a greater detail. Here we deal with the following factors:
      Costs of the technology necessary for the selected production unit size
       (including eventual leasing or license fees)
     Production costs, in which the individual technologies differ (including
       operational costs)
     Technology novelty (certification, references)
     Labor force requirements (time expectation for mastering of operation)
     Environmental impact (according to Environmental Impact Act No. 244/1992
       Sb. – possible necessity to elaborate the EIA study)
     Other factors (service availability, lifespan, guarantee, producer‟s brand etc.)
At every level of the selection procedure the above-given factors need to be confronted
with the required and expected effectiveness. Besides the basic specification of
production volumes other market segment attributes play an important role here
(customer – his requirements to the product, purchasing power, price tolerance, demand
for products; competition – its market position, technical solution, branding; market –
open or closed, saturation degree, development trends, barriers to entry, etc.). Also the
consideration of the intended product assortment is very important as it, together with
the product quality, influences sensitivity to fluctuations in the demand.
The following aspects also should be taken into account in the selection of the
production equipment:
      Investment costs – they should be optimized to prevent the occurrence of extra
       costs as a result of miscalculation or incompetence and resulting additional
       modifications under already unfavorable commercial conditions.
      Timing of investment cost spending – according to the delivery schedule it is
       necessary to negotiate optimum payment conditions with regard to the period
       between the contract conclusion and the start of the production unit operation.
      Phasing of introducing into operation – it is convenient to define an elementary
       production unit and put it into operation in an integral phase. Further production
       extension takes place already under partial cash flow. It is necessary to work
       with financial plan.
      Investment resources origin – it is necessary to make basic decision whether
       company‟s own or other (credit) investment resources will be used. In the case
       of credit resources it is necessary to evaluate conditions under which the loan is
       provided. We can compare when it is more suitable to choose, e.g., project
       financing by issue of shares and when it is better for the company to opt for a
       credit. Both the variants represent a change in the company‟s capital structure

10. Feasibility study                                                                       1-133
       and for example in a shareholding company they have different influence on the
       net profit per share. If the company achieves lower operational profit then it will
       be probably better to use the financing by issue of shares, as the fixed interest
       rates are not increased. However net profit per share is distributed over a higher
       number of shares. If the operational profit level is higher the company should
       manage the credit burden better and the net profit per share should be higher (it
       is distributed over a lover number of shares).
       Investment cost returnability with regard to the project‟s economic life span – it
        is necessary to follow the ratio between the investment returnability period and
        company‟s growth parameters. If the project is partially covered from external
        resources, the increase of the external capital share leads to the improvement of
        economic effectiveness, which will be reflected in the current net value and
        internal yield percentage. External resources, however, deteriorate the project‟s
        financial stability.
Methods used for investment evaluation can be divided into:
1. Static methods – advantage of these methods is the simplicity of their calculation.
Certain limitation of static criteria results from the fact that they do not take into
consideration the whole period of the investment life span but they are limited only to a
certain period of the project duration. They also ignore the time distribution of revenues
and costs over the period of the investment use. Among them belong:
    Return on Investment (ROI) – compares project profit and investment and so it
     informs about return on the invested capital.
     Returnability period – returnability period can be defined as a number of years,
       in which the capital expense is paid off with monetary income from the
       investment. Every year during the project economic life-span profit after taxes,
       depreciation and interest rates (if a loan was used) are determined and these
       amounts are summed up in a cumulative manner. The year when the cumulative
       sum of incomes equals the investment expenses defines the period of the
       investment returnability.
2. Dynamic methods – these methods are based on evaluation of cash-flow generated
by the investment during its life span. They respect the distribution of effects and
changes of currency. Particularly two dynamic methods of investment evaluation are
applied in practice:
    Net Present Value (NPV) – expresses the absolute difference between the
     existing value of monetary income from the investment and updated value of
     capital expenses on the investment.
    Internal Rate of Return (IRR) – this method determines an interest rate at which
     the net current value of the investment equals zero. Discount rate is looked for
     that secures economic effectiveness for the given investment economic life span.
     The internal rate of return value expresses the profit rate level of the investment.
     If the required profit rate is higher than the calculated IRR, the investment is
     deemed unfavorable. If the required profit rate is lower than IRR, the investment
     is favorable.

10. Feasibility study                                                                        1-134       Material inputs and energies
The technical equipment selection to a certain degree determines material inputs to the
production process. Attention should be paid mainly to basic materials and raw
materials forming the substantial part of the production costs. In the course of that the
following is usually considered:
      Availability of the basic raw material during the project life-span
      Possibility of the material substitution
      Raw material quality
      Distance for the raw material transportation, packaging, effective advance
       supplies, storage
     Price level
Besides the input raw materials, the scope of the preparation of semi-finished products
should be clear. Today‟s companies seriously analyze what is more economical to
purchase as a whole sub-supply and what to produce in the own factory. The
outsourcing means selection of suppliers, specification of purchase conditions and
requirement of guarantees of the reliability of supplies. Repeated purchase allows using
of bulk discounts and other discounts from the suppliers. If it is proven that it is not
possible to reach lower costs of internal production than is the lower (usual) price of a
sub-supply, a step is made in the industrial chain from securing of sub-supplies to
assembling. Purposeful logistics of supplies allows the application of the JIT (Just In
Time) method – (see e.g. [10-5]).
Knowledge of necessary inputs for a production unit together with the knowledge of
their prices and development trends allows to determine this important item of
production costs per a production unit and for the overall planned production volume.
Based on the knowledge of consumption, production process character and limiting
volumes of purchased inputs it is possible to set the optimum level of storage supplies
and eventually dimensions of necessary storage areas.
Energy prices are also reflected in the production costs. So it is a part of the feasibility
study to define precisely the consumption of all energy media and analyze their
availability. Proper consumption dimensioning and negotiation of optimum rates,
eventually effective use of waste heat for cogeneration is the more important the more
energy-consuming the process is.

10.2.4         Production unit location
Selection of the production unit location is a two-stage process, during which first the
sites (geographic areas) are reviewed and then (within the site) alternative locations of
the unit are evaluated. Initial information for the choice of the location is based on the
conclusions of previous feasibility study parts. It is always essential to evaluate the
basic predispositions of the location (e.g. paper-mills and electrical utilities have to be
located near the water source with sufficient capacity).
Transport cost minimization, for both the inputs and the final products, is a significant
factor for the location selection. In extreme cases of substantial materials processing
(production of cement, construction materials, fertilizers) location is chosen close to raw
material sources. In some cases it is possible to locate the production close to cargo
terminals (ports, loading storages etc.). On the other hand, for products whose durability
is limited and where undifferentiated end users can be anticipated (foodstuffs) it is
convenient to place the production unit near the place of consumption.

10. Feasibility study                                                                          1-135
To secure the basic functions of a production unit the existing infrastructure should be
considered in the selection of optimum location. Under infrastructure we usually
understand access roads, transport network, energy networks, communication
capacities, human resources). Costs for building of infrastructure that the project
requires needs to be evaluated for each alternative.
In the course of evaluation of regions categories falling within social and political and
legislation spheres are separated. These factors can play a very important role in the
final decision. Political stability in connection with functional legislation condition the
investor‟s trust, transparent structure of taxes and administrative procedures together
with duties and market openness are necessary for the implementation of business
Other issues resulting from the above:
      Possibilities of liquidation of waste and harmful substances while observing
       legal provisions applicable to environmental protection
      Available human resources, their qualification, mentality, life style
        Stimulating pro-investment measures (tax holiday, state subsidies, free business
         zones, duty-free modes etc.)
Production unit location is always a planned process. It means that it necessary has its
time development. So it is purposeful to evaluate how it is possible to meet the
production unit foundation schedule, how long the approving administrative process
will take, when the production unit‟s introduction into operation can be expected and
adjust the planned investment returnability. The biggest mistake distorting the planned
project‟s economy is the failure to respect local traditions and necessities, respectively
basing the estimates on situation at a place where the production unit will not be
Final location selection depends on the evaluation of many factors starting with climatic
and geophysical conditions of the location to development tendencies of macro- and
mezzo-environment. It is impossible to define a unified procedure as every business
sphere has its specific aspects that need to be taken into account and gives various
priorities to the evaluation factors.
World market globalization at the end of the XX century and outlook at the beginning
of the XXI century points out the importance of this part of the feasibility study.
Motivation for the production unit relocation is either competition in the industry
leading to search for profit achievable by possible cost reduction at the site or creation
of new market segments at various locations.

10.2.5         Human resources
Definition of production unit size, sales volumes and technological process and
equipment selection provide necessary information for setting the requirements to labor
force according to individual categories (production workers, non-production workers,
technical and administrative employees, management). When planning the human
resources for the business plan it is necessary to consider:
    General conditions on the labor force market at the production unit location
    Labor force evaluation from the qualification point of view
    Legislation conditions (Labor Code)
    Working time fund (universal 200 days/ year)
Important moment of the feasibility study preparation is clarification of the need of key

10. Feasibility study                                                                         1-136
management workers that have to participate already in the pre-production stage –
investment project stage.
Besides issues related to the labor force selection the following needs have to be
planned for the feasibility study purpose:
      Necessary training and education at various stages of business project
       preparation and implementation, set expenses that have to be considered for
       these purposes
      Wages and salaries as a part of costs (direct wages as variable costs, overhead
       salaries as fixed costs)       Cost definition for a labor force
As costs for labor force we define paid gross wages and mandatory payments (health
and social security, general liability for employees)
Direct costs of labor force – those are costs of labor force directly involved in the
production process. They can be defined by the following formula:
       Costs of direct labor force / 1 produced piece =
       = production time x costs of employees in production / number of pieces
       produced during the production time
When estimating the direct costs of labor force it is possible to make mistakes resulting
    Disharmony of work team in production
    Overtime
    Unrealistic performance estimate
    Lost time
    Unpredictable increase of wages
Monitoring of costs of direct labor force:
1. Timesheets. Every employee receives a form, in which he or she marks down the
    kind of job (order number, operation code etc.) and time spent on this activity
    during the week. Timesheets are checked and signed by a supervisor. The
    disadvantage is that the employee tends to distort the data into his or her favor so
    the method that does not require acquisition costs is mainly suitable for smaller
    operations where the employees‟ activities can be supervised.
2. Clock cards. Movement of employees is registered by installed monitoring and
    recording equipment with time indication into which card needs to be inserted upon
    passage. The data about the employee movement are evaluated by a computer and
    the following is thereby noted:
      o Name
      o Productive labor time
      o Time of waiting for work
      o Time of waiting for material
      o Other unproductive time (snack, lunch etc.)

10. Feasibility study                                                                       1-137
Indirect costs of labor force - there can be various origins of these costs:
   1. Wages paid to non-production workers. Non-production workers are those not
       working directly on the product or service production. Those are for example
       employees of maintenance, internal company services and administration.
   2. Wages paid to production employees whose activity cannot be included in the
       product or services. There are specific activities in production and technological
       operations when the production time monitoring is not economic.
   3. Overtime rewards. They are usually considered indirect costs although they are
       paid to production workers. Overtime rewards are deemed as extra costs.
       Products made during the overtime are more expensive than those made during
       regular working hours.
   4. Wages for work outside regular workdays. Extras for work on holidays,
       weekends and outside the usual working hours (late afternoon, night, morning)
       are set in order to compensate the employee for work outside the officially
       defined workday. They have the same basis as the overtime.
   5. Paid holiday. It is common with majority of profession that the employee is paid
       during taking regular holidays. Compensation is usually determined from the
       employee‟s average yearly wage.
   6. Other payments also related to production workers. There belong all benefits
       negotiated in collective agreements and other payroll taxes (social security – in
       the Czech Republic currently 26%, health security 9%, general liability for
       employees – tenths of % according to company type).
   7. Wasted work time. Not using of working hours under extraordinary
       circumstances (disasters, strikes etc.) viewed as extra costs.

10. Feasibility study                                                                       1-138
10.2.6         Organization and management       Project management and company organizational structure
Project management can be applied in various company organizational structures:
   Section project management – without changes in line organization, it is suitable for
    small projects. Management and coordination are either:
     Without appointing the project manager where the project is performed in
      individual departments according to its content.
     Through headquarters coordinator (authorized person)
   Matrix project management – matrix organizational structure
   Pure project management – company organizational structure created exclusively
    for the project purposes:
     In the existing organization (the team of appointed employees is created besides
      the existing organization)
     “On the scratch” (typical for project of investment character – economically
      independent project organization is created)
   Network project management – there is permanent organization of project planned
    and implemented simultaneously (teams take over one task after another)       Project implementation management
It is about securing of management and controlling processes within implementation of
a certain project. Project manager is the employee in charge forming the team with
corresponding empowerment. Activities are based on the project implementation plan.
Project implementation management can be divided into:
     System of implementation control (plan control)
     Information system (identification, collection, analyses)
     Implementation modification (steps to harmonize the plan and implementation
    Decision-making
    Motivating
    Administration
Team managed by the project manager usually works with the following documents:
       Approved project management organizational scheme
       Schedules, charts, employees hiring curves etc.
       Documents for quality management that were made for the purpose of the
       Risk analyses that were prepared for the project
       Detailed project cost plan, their timing, etc.
       All binding contractual obligations and stipulations concerning the project

10. Feasibility study                                                                       1-139       Existing elements and knowledge of reengineering methods for the
               modification of organizational and management processes
Well-known process management principles are logically consistent with the project
management principles. To give the full picture we provide the most important rules:
   If possible, try to integrate large amount of tasks under the responsibility of a small
    number of team members.
   It is good to have representatives of customers and suppliers in the project team.
   First of all the process map should be prepared and from it the project management
    organization should follow .
   Change the team members‟ responsibilities for tasks to responsibility for the process

10.2.7          Financial analysis and project evaluation
This is a major and essential part of the feasibility study. It can be based only on the
company‟s financial plan based on the product originality and market demand; those are
the basic attributes. Financial expression of a marketing plan will show its effectiveness.
To define concepts given in this part it is necessary to emphasize:
   Business plan is an investment decision (program – activity) causing financial
    decision (financing – liabilities).
   The whole business plan process is described by the project cash-flow (incomes and
    expenditures during the project life-span):
     Investment costs
     Incomes and expenditures of the business process itself
   Financial plan is formed by traditional planning instruments:
     Business plan balance
     Business plan profit and loss statement
     Cash-flow plan
   Other financial processes will describe:
     Methodology of identification of optimum project financing
     Instruments for the project economic effect evaluation

10. Feasibility study                                                                         1-140
10.2.3          Risk analysis
Risk analysis of business projects is in detail described in Chapter 8. In connection with
the feasibility study we would like mention here the risks to be dealt with, where to
expect risk factors and where to look for possible measures for coping with risks.        Classification of the main risk factors
Some level of risk is an indispensable part of the business strategy. The success of the
business plan implementation to a great extent depends on the extent of the risk that is
influenced by internal and external risk factors.
Among internal risk factors belong for example the following:
     The length of the period to which are the goals of the business plan related
     Adaptability of the business plan to changes of conditions
     Diversification of the business plan (diversification of inputs, distribution
      channels, production program, etc.)
    Extent of financing from external resources
    Share of the innovations being introduced in the current financial structure.
External risk factors are:
     Significant demand changes
     Changes in sales prices of individual products
     Underestimation of investment expenses
     Changes in technology causing moral obsolescence of underlying concepts
     Political, economic and legislation changes
     Stability of the business environment
Risks can be categorized as those that can be influenced and those that cannot.
A. Industrial and business risks
      Production/manufacturing risks, risks in purchasing raw materials, risks
       connected with sub-suppliers
      Technological risks and risks connected with research and development
      Risks connected with information technology – protection of data, access rights
      Risks in distribution
      Social risks – human factor of the enterprise
B. Financial risks
      Insolvency risks – related to customer and associated risks (legal, bankruptcy,
    Bank risks – liquidity, solvency, profitability, indebtedness, productivity,
      interest rates
    Price risks
C. International and inflation risks
      Export risks – political, inflation and legal differential, specific risks (risks
       arising in mistakes in outlining the long-term export policy, business strategy
       and in tactical errors)
      Political risks – risks in transfer of financial, technological and human resources,
       risks arising in legal, taxation, economical and financial barriers created by
       states or other economic agents)
      Currency risks – forecasts of exchange rates, role of international financiers
      Inflation risks – reflection of inflation into business activities (stocks), indexing

10. Feasibility study                                                                          1-141
        of loans and debts, inflationary bookkeeping)
In the risk analysis the company must diagnose significance of risk factors and
perform risk evaluation. The establishment of significance of risk factors and their
evaluation are based on the knowledge, experience and intuition of company staff.
Probabilistic significance of risk factors and intensity of negative influence of risk
factors on the project are established by expert evaluation. Results are reflected in the
sensitivity analyses of the planned economic outcome to influencing factors.
The risk evaluation will influence the operational space and rests on assessment of
financial stability in so called warning scenario.       Measures for risk monitoring and elimination, company risk policy
To eliminate risks associated with projects, companies choose either offensive risk
strategies, aimed at preventive elimination of causes of risks, or defensive approaches,
aimed at the reduction of negative impacts of risks after their occurrence.
Offensive risk strategies are:
    Exploitation of company strengths and competitive advantages
    Transfer of risk
    Quality of information
    Increased security of resources
    Simple limitation of risks
Defensive risk strategies are:
     Project flexibility
     Risk sharing
     Safeguarding
     Insurance
     Creation of reserves for unexpected conditions
To enable prompt reaction to risky situation that can arise in the business project, the
company should prepare in advance the plans of corrective measures to be applied in
serious circumstances characterized by specific risk factors. So that the application of
these plans of corrective measure be efficient, it is necessary:
      to monitor significant risk factors:
        External factors: competition, customers, economic factors, suppliers, world
         economic development
        Internal factors: company financial flows, reduction of expenses,
         requirements and expectations of employees, etc.
      To specify the conditions under which individual plans of corrective measures
       will be applied or upgraded
      To create reserves necessary for the performance of corrective measures

10. Feasibility study                                                                       1-142
The a posteriori analysis allows optimum use of the knowledge and experience learned
from errors, difficulties and successes in preparation and realization of important
strategic decisions. This will in the final effect influence the effectiveness of resources.
This analysis aim before all on the establishment and evaluation of:
      Compliance of basic assumptions used in the business plan development with
       the actual situation (investment costs, contracted volumes, sales prices)
      Compliance of assumed economic results and effectiveness ratios with achieved
      Significant factors having unfavorable impact on the project
      Ways of resolution of eventual critical situations in relation to plans of
       corrective actions
      Significant factors having positive impact on the implemented alternative
     Contributions of the implemented alternative to the overall company strategy
Risk policy of the company should be applied through controlling as a specific concept
of the business management based on the complex information and organizational
interconnection of planning and control processes. Controlling is applied both as a
strategic controlling, following strategic indicators (technology, products, markets,
investments, research) aimed at the assurance of the future business existence, and as an
operative controlling, aimed at optimization of objective, time and value parameters of
the business plan activities.
After the implementation of the information system, the subsystem of the company
controlling quality improves by the addition of a financial controlling as a means
assuring the company financial stability in all areas of its activities (planning and
control, financing of business cases, provision of financial resources, financial
investments, system of payment, taxes and insurance) and of a profit controlling that
deals with planning and control, analysis, company bookkeeping and calculations,
system development and data processing.

10.2.9          Sensitivity analysis
Sensitivity analysis is performed for the most significant financial indicators (revenue,
EBIT, net profit, ROI, etc.). In the evaluation of scenarios have to be identified those
critical factors that influence monitored indicators (sales prices, production prices,
variable expenses – wages and materials, inflation, exchange rates, etc.). Their selection
is strongly dependent on the character of the forecast and on the time horizon of the
If each of the factors is changed while the others remain constant, it is possible to follow
the sensitivity of the result on the change. These factors that influence the followed
resulting values most, are identified as the most critical and the greatest attention has to
be paid to them.
Sensitivity analysis has two main steps:
     1. To identify critical factors and pay the increased attention to possibilities of their
     2. To determine vulnerability (sensitivity) of the overall forecast, to establish
        possible tolerance of every critical factor and to follow the impact of those
        factors on the selected indicators.

10. Feasibility study                                                                            1-143
10.2.11        Implementation plan
The implementation phase starts by the decision on the acceptance of the business
project; the following phases are the preparation of the technological documentation,
conclusion of contracts, construction of facilities, operational tests, launching the
operation and handing over (taking over) of the production unit with appropriate
Development of the implementation plan of the business project and its realization
should follow the principles of project management (see [10-6]).
The implementation plan of the business project should include financial considerations
(capital resources and their structure, project financial liquidity, evaluation of indicator
for the assessment of the project economic viability and the sensitivity analysis of the

10.3 Literature:
[10-1] J. Fotr: Příprava a hodnocení podnikatelských projektů,VŠE, Praha 1993
[10-2] T. Lawton: Corporate Aspects of Corporate Planning, Institute of Chartered
       Accountants in England and Wales, London 1975
[10-3] Cost and Management Accounting, The Open College Limited and Certified
       Accountants, London 1991
[10-4] I. Bureš: Finanční řízení marketingových projektů, Management Press, Praha

10. Feasibility study                                                                          1-144
11.1 Identification of financial indicators related to the company
     innovation strategy
11.1.1          Appropriate innovation strategy – the way to business
For competitiveness it is necessary to react properly to changes in external and internal
environment. The company can be successful in conditions of today‟s global markets
with supply significantly higher than demand only if it purposefully and efficiently
applies the three basic tools:
     innovation
     organizational and financial transformation
     strategic alliance
The company has to innovate its products (goods and services) in compliance with the
development of users‟ needs, wishes and requirements (often even in advance). To be
able to react timely and adequately, the company must change its internal environment.
It cannot wait long for the creation of necessary resources, they must be ensured nearly
immediately through strategic alliances with suitable partners.
Innovation is the first item of the list, what corresponds to its importance to business
success. The right orientation of the innovation strategy is the necessary, but not the
sufficient condition of success in the competition. For every company, such success is
not only craved for, but necessary for its survival. The markets are not accessible to
those who cannot be successful.
The innovation strategy of the company is the basis of its business strategy and as such
it must be developed and implemented. As each strategy it must be directed to creation
of business opportunities in the company environment.
In the internal company environment, the innovation strategy is implemented as a
complex of innovation programs realized by innovation projects. The innovation project
can be successful only if its managers observe – in confrontation with the competition –
principles given by the strategy.
Under performance we usually understand the ability of the company to valorize
investments into business activities. From this definition it can be concluded, that only
such company is efficient that has no problems with its economic performance.
However, such understanding is incomplete. Moreover, the business performance is
evaluated differently by different players on the market. It is evaluated differently by
stakeholders, by managers and by customers.
For the customer the performance of the company means its ability to forecast his needs
and requirements at the moment of their formation and offer the quality product for the
price corresponding to his idea about the value he is willing to pay for the satisfaction of
the need. According to the customer, the criteria of the company performance are
quality, timeliness and price.
For the manager, the company is well performing if it is prosperous. Its market share is
                stable, customers are loyal, costs are low, financial flows balanced,
                liquidity and profitability excellent. The business concept offers the
                strengthening of its competitiveness. These abilities are measured by the
                promptness of the reaction to changes in the external environment and to
                the creation of new entrepreneurial opportunities.

11. Innovation Performance Monitoring                                                          1-145
The stakeholders want their capital to be valorized. They consider the company
performing well if it is able to do it as much and as quick as possible. The effectiveness
is evaluated by such indicators as return on investment (ROI), economic added value
(EVA) and company assets (value of the share).
Managers at all management hierarchical levels must pay attention before all to all
strategic aspects of the successful business development. It means to look in external
environment for possible sources of entrepreneurial opportunities, but also of
accompanying threats.
Some opportunities and threats, namely in the macro-environment, cannot be influenced
by the company. But what the company can influence is its ability to react adequately
on the arising opportunities and threats employing its strengths and protection its
weaknesses. It means that the management has to pay attention also to the internal
Commercial opportunities represent a chance to use the company strengths in marketing
and sales activities following the principles of the marketing mix:
   To produce only products that answer customers‟ requirements or bring him higher
    utility then the product of the competition. The company must follow the principle:
    To produce only what can be sold!
   To open only such distribution channels that will get products to the customer with
    the lowest possible expenses and in time they are demanded. The company must
    follow the principle: Only such products can be succesfully sold which are at the
    right time at the right place!
   To promote the product so that it the customers are persuaded that the products
    offered by the company are these which can The company must follow the
    principle: satisfy their needs The company must follow the principle: (even if they
    are not able to precisely define their needs). The company must follow the principle:
    The customers must believe that the products of our company can satisfy their
    requirement, even the future ones.
   To apply such price policy that the customer is willing to pay the price for the
    corresponding quality, while the income from sales ensures the profitability of the
    company. The company must follow the principle: Our costs should allow to
    decrease the price anytime to stimulate demand.
Technological opportunities offer to the company the possibility to gain competitive
advantage using its strengths in operations and logistics; management strategy in these
areas should answer the following questions:
   1. How to provide capacities necessary for the creation of new products?
   2. How to organize these capacities into production and technological processes?
   3. Which inputs do we need?
   4. What technologies should be purchased, for how much?
   5. What properties should the product have to be competitive?
   6. Which distribution channels can ensure the timeliness of its introduction to the
   7. How to distribute the products?
The development of new products should follow the principle: The company should
develop only what it is able to produce and sell!
The business strategy of the company relies on various aspects of its innovation
strategy, which aims to effectiveness of all business activities as means of attaining of

11. Innovation Performance Monitoring                                                        1-146
unique competitive advantages. The basic questions, answers to which allow to
formulate well (mission statement), are therefore targeted at areas decisive for the
preparation of the company budget. They are the following:
   1. What level of costs is affordable for the company to remain competitive?
   2. To which products and technologies should the company invest?
   3. Which market segment have the highest priority for the company?
   4. Who is the best potential partner for the realization of the company strategic
Answers to these questions are reflected in the following instruments of the business
   1. product innovation programs;
   2. programs of upgrading and development of new technologies;
   3. programs of development of information technology applications;
   4. programs of organizational changes in the internal company structure;
   5. acquisition policy;
   6. policy of creation of strategic alliances.
The choice of the business strategy is limited by two main sources:
    capital strength of stakeholders;
    liabilities and social responsibility of the company.
One of the conditions of successful implementation of the innovation program is the
financial restructuring, which is targeted as a minimum:
   affordable level of the debt part of liabilities;
   optimization of work capital;
   parameters of company activity in short- and long-term perspective.
To think strategically about the industry and its competitive position means to realize:
    what are the dominant economical features of the industry;
    who are the competitors and how strong is the influence of individual competitive
    what can change the industry structure;
    which companies have the strongest/the weakest competitive position;
    who can do specific strategic decision, of what character and with what
    which key factors determine the competitive success in the industry;
    is it the attractive industry with the possibility of over-then-average profits.
To think strategically about the situation of the company means to evaluate how well
the current strategy functions, i.e.:
    what opportunities and threats the company faces, what are its strengths and
    whether the company costs are competitive in comparison with its rivals;
    how strong is the competitive position of the company;
    which strategic issues have to be solved.
The theoretical basis of the strategic management in the last decade enforces the shift
of attention from the meticulous following of results to the management processes. The
strategic turn has always to be linked to fundamental organizational transformation
(financial restructuring, process reengineering, strategic alliance, company culture
change, balanced scorecard). The majority of accomplished restructurings of this type

11. Innovation Performance Monitoring                                                      1-147
    fundamental restructuring of marketing and sales activities,
    fundamental changes in the responsibility of the sales manager for the whole process
     development – sales,
 new system of purchasing of materials and supplies based on principles of strategic
 transformation of manufacturing to centers manageable with minimum expenses.
In the current turbulent environment the company must maintain its superiority over
competitors, must constantly attract interest of consumers and must have stabilized
revenues. This can be achieved by flexible and adaptive reaction to the changes in
external conditions. The company must permanently change its entrepreneurial behavior
– it must innovate permanently.
To innovate means to create something new. It always has potential to attract the
attention of the customer. The successful innovation is able to keep the attention of
customers for a longer time and it can, at least temporarily, to strengthen the
competitive position of the company. To keep the attained position, eventually to
improve it, requires the strategic shaping of the innovation effort. The majority of
product innovation impulses comes directly from customers. Two aspects play role in
the collection of innovation:
 market pull, leading to impulses for incremental innovations.
 R&D pull, leading to impulses for radical innovations.
Incremental innovations adequately react to changes in needs and requirements of
customers and by them the company responds to the development of customers‟
Radical innovations are targeted at the creation of new needs of customers and they are
the a priori reactions – they respond to the assumed needs that the customers still do not
demand. Therefore such innovations are much more risky. However, when they are
successfully introduced to the market, they can create high revenues and profits..
Innovation activities must be therefore an indispensable part of the company business
strategy that is targeted at keeping the competitive position in rapidly changing external
environment. The innovation strategy relies before all on the creativity of employees
and unique entrepreneurial competencies of the company. It is realized by programs of
development of new products and upgrades in technologies of their production and
sales. The formulation of the innovation strategy must take into account:
 Prevailing technological regime of the industry. Technological regime of the industry
  is the specific combination of conditions, opportunities, level of accumulation of
  technological knowledge and company traditions. It is the partial characteristic of the
  entrepreneurial activities represented by the combination of technological level and
  competencies, related to requirements of commercial opportunities. The concept of
  technological regime can be used to explain differences in innovation processes in
  various industries. There are two basic types of technological regimes:
  - Routine ones, where innovation impulses of the market can be elaborated within
      the framework of the traditional organizational structures of big capital intensive
  - Entrepreneurial ones, where innovation impulses must be treated besides the
      bureaucratic company structures that reject to react helpfully on the non-routine
      requirements from the outside..

11. Innovation Performance Monitoring                                                        1-148
 The assumed product life cycle (which can be in principle represented by the BPM

                                                             Profit share

                                                        Volume of sales
     Growth in sales

                                   II. Stars            I. Problem child

                                III. Cash cow                    IV. Dog

                            1                          0,5                        0
                                               Market share

                                         Fig. 11.1: BPM Matrix

 Application areas of the new product and their further development.
 Applicable company (specific) knowledge of two main categories:
  - Technological knowledge (technological competencies, qualification of
     employees, patents, inventions).
  - Entrepreneurial knowledge (project management, manufacturing and logistics,
     marketing and sales).
  The task of the management is to integrate technological and entrepreneurial
  knowledge so that new products will be successful at the market.
 Opportunities for innovations.
 Risks connected with the introduction of the innovation to the market.

Innovation development is targeted at such measures in the company internal
environment that will result in increased utility of offered products for the customers, in
reduction of supply time and to reduction of production costs.
The innovation development could concentrate either on selected products of the
company that should confirm the role of the company as an industry leader or to

11. Innovation Performance Monitoring                                                         1-149
substantial diversification of the assortment that should address the broadest possible
group of customers by various modifications of the same product.
The innovation development is very demanding and puts high requirements to all
resources. Even big organizations join their efforts in common R&D to cope with its
high costs.
The success of the innovation will not come without efforts - the company has to apply
corresponding measures.
New products are critically important to the company success in the competition.
However, many products is not successful at the market. The reason can be either
incorrect choice of innovation strategy or errors in its implementation. Innovation
process is in its root the system task aiming at the improvement of the company
competitiveness. To be successful, you must react sooner then competition and sooner
than the window of opportunity closes. The speed pof the innovation process is a
significant part of the success, but it is not the only factor. For the innovation process to
be successful means:
    To choose the proper room for the applicability of its results.
    To respect market conditions, concentrate on.
    To ensure the qualified preparation of the innovation project and its consistent
      management and control.
    To think systemically, strategically, to be creative.
Generally, those products are considered new, which represent substitution of products
that has been offered by the company at the market. They can be:
1. Original products that are new to the world; results of discoveries and inventions.
2. Products new for the manufacturer; they are known in the world, but up to now they
   have not been offered by the manufacturer. They result for the know-how transfer.
3. Extension of an existing product line as a reaction to customers requirements.
4. Improvement of existing product, improvement of its properties as a reaction to
   customers requirements.
5. Extension of the applicability of an existing product.
To be successful, innovation must be not only feasible, but its product must be
marketable. It must raise attention of customers and their willingness to buy the product.
Therefore the innovation project must deal with an important aspect - the behavior of
customers at target markets. Today's world markets, with supply prevailing over
demand, force every company preparing introduction of a new product to the market, to
concentrate its innovation efforts on the customer. In application of entrepreneurial
approach concentrated on the customer, the marketing and manufacturing activities
must be much more closely interconnected. In connection with this change it is also
necessary to change the company culture and information system..
Concentration on customers is a result of the long-term, carefully planned and
consistently implemented organizational change. The change in attitudes of employees
to their daily tasks can be expressed by questions: How can my work activities best
contribute to the satisfaction of customers with the company products?
To ensure the competitiveness of a new product by concentration of processes of its
development on the requirements of the customer is one of the main objectives of the
innovation project management. The basic assumption for this is a good marketing plan.
The majority of managerial decisions on the innovation project is made under
conditions of limited rationality of the decision-making. It means that the decision-

11. Innovation Performance Monitoring                                                           1-150
maker does not have the complete (deterministic) model of the situation and therefore
he must rely on his intuition. The methodology of the innovation project preparation
must take into account the needs of risk management:
 the bet on a new product (i.e. costs on its development).
 the uncertainty of the prognosis of the environment trends.
If the uncertainty is high, then the bet should be kept low. If the uncertainty decreases,
the bet can be increased. The manager must not be afraid of risks inherent to decision
making. In every decision-making situation it is possible to determine the level of the
risk, to include this risk into decision-making procedures and to reduce it subsequently.
If the decision is made under risk, then it is necessary to prepare corresponding
corrective measures. If the results of the decision does not meet expectations, then the
decision must be modified.
The decision about the debt on a new product or the evaluation of risks connected with a
new product development can be analytically evaluated with the use of the GE matrix.
In the area below its diagonal the risk is high, there is a danger of low achievable
profits, and therefore the bets should be low. On the contrary, in the area above the
diagonal the bets could be high.

                                                    Good bets

              Risk                          Optimum prospects


               Do not bet                   EBIT low

                     Competitive position

                                     Fig. 11.2: GE Matrix

Risks connected with the entry of a new product to the market can be assessed by the
Ansoff matrix that distinguishes four strategies of the placement of products at the
- Strategy of market penetration - aims at the employment of the market potential
   of existing products at existing markets by more intensive use of the product by
   existing customers or by winning new customers, which have been buying at the
   competition or have not known the product;
- Strategy of market development - aims at the penetration to new markets with
   existing products or at winning of new market segments by customization for

11. Innovation Performance Monitoring                                                        1-151
    various target groups. Here the biggest risk is the technological one;.
-   Strategy of a new product development - consists in an offer of new products for
    existing markets or the extension of the offer by development of new modifications
    of existing products. To win new customers by superiority over well-established
    products represents the high commercial risk..
-   Strategy of diversification - penetration of new product to new markets is always
    highly risky. Both technological and commercial risks are combined.

                                           Hihg risk


                                           Technical &

                        Commercial risk
                                           commercial risks

                           Market            Product

                         penetration       development
                                           Technical risk
                           Current             New


                                 Fig. 11.3: Ansoff Matrix

11.1.2          Financial indicators
Financial objectives can be different in various stages of the life cycle of the business
unit. In principle, three basic stages can be identified:
    growth
    maturity
    maximum revenues (harvesting)
Growing business units are in the early stage of their life cycle. Their products or
services have large growth potential. To take advantage of this potential, they have to
mobilize significant resources for the development of new products, to construct or
extend production facilities, to invest into systems, infrastructure and distribution
networks and to contact customers. In this stage, the business unit can work with
negative financial flows and low ROCE { = (net profit + interest) / (long-term liabilities
+ own assets)}, if they invest into intangible assets or capitalize them for internal use.

11. Innovation Performance Monitoring                                                        1-152
The investments into future can be higher than cash-flow, which can be generated by
the limited sales to the limited target group of customers. The financial goal of this stage
is the rate of the growth of revenues and sales in target market segments and customers
The companies in the maturity stage also have an active investment policy, but they
demand high return on capital, ROI = net profit / investments. It is expected that these
companies will keep or even increase their market share. Innovation projects are
concentrated more on the extension of capacities and on incremental innovations.
The financial goals of the majority of companies in the maturity stage are concentrated
on profit. It can be measured by indicators related to accounting profit, e.g. to
operational or gross profit. These indicators use investment capital as an exogenous
quantity and force managers to maximize profits. As an example of such indicators we
can mention ROA {(return on assets) = net profit / total assets}, ROE {(return on equity
= net profit / equity}, or the economic added value, EVA.
The economic added value (EVA) method is based on the economic profit that respects
all capital costs, i.e. both own and external capital costs. I that it differs for the classical
financial analysis, namely from indicators of return on capital, which are based on
accounting profit. Eva is calculated according to the relation:
                                 EVA = PHV * (1 - sdp) - n * K
        PHV - operational economic result
        K - invested capital
        sdp - revenue tax
        n      - weighted capital costs, given by:
                            n = nv * VK / K + rú * (1 - sdp) * CK / K
        nv - own capital costs
        rú    - interest rate
        sdp - revenue tax
        VK - own capital
        CK - external capital
        K      = CK + VK

EVA is an important method for the evaluation of the company development from the
point of view of its stakeholders. If EVA is positive, then the wealth of stakeholders
growth, as the company increase the value of the capital more than are capital costs. If
Eva is negative, then the wealth is decreasing. It is therefore useful for stakeholders to
monitor not only the absolute value of EVA, but also its time development.
To the three strategies - growth, maturity and harvesting - correspond three financial
areas supporting them. They are summarized in the following table.

11. Innovation Performance Monitoring                                                              1-153
                                                                                            Strategic themes

                                                      Turnover growth,                  Decrease of expenses,
                                                                                                                              Exploitation of resources
                                                        product mix                      productivity growth

                                                      Level of sales growth
                                                                                                                                 Investment (% of sales)
                                                      accroding to segments

                                                                                                                                Research & development
                                                     Turnover share from new                Turnover per employee
     Strategie podnikatelské jednotky

                                                                                                                                       (% of sales)
                                                      products, services and

                                                     Share on target customers
                                                                                                                                      Working capital
                                                            and accounts
                                                                                                                               (CASH – TO – CASH cycle)

                                                                                          Expenses compared with
                                                                                                 competition                      ROCE according to key
                                                     Turnover share from new
                                                                                            Ratio of cost decrease                  categories of assets
                                                  applications of existing products
                                                                                          Indirect costs (% of sales)           Indicators of exploitation of
                                                   Profitability of customers and

                                                   Profitability of customers and

                                                             technology                             Unit costs                        Time to return
                                                   Percentage of non-profitable       (per unit of output, per transaction)      Performance, throughput

                                                   Fig. 11.4: Measurement of strategic financial issues

It is possible to achieve higher effectiveness of financial flows by optimization of the
working capital. One of the indicators of the effectiveness of working capital control is
the cycle cash - to - cash (see Fig. 11.5). Cycle cash - to - cash represents time
necessary to convert liabilities to receipt of cash from customers.

11. Innovation Performance Monitoring                                                                                                                           1-154
      Purchase of raw                                         Product sale
   materials or purchase of
    goods from suppliers

                                     days in warehause                      maturity of deots

                 maturity of liabilities                 cash - to - cash cycle

                               Payment to supplies                                      Receipt of cash from
                                                                                           the customer

                                           Fig. 11.5: Cycle CASH-TO-CASH

Financial goals represent the long-term goals of the company, i.e. the high return on
capital invested into the company. The financial forecast assists to the management not
only to specify method of evaluation of the long-term business profitability, but also the
variables that should be monitored for the purpose of identification and monitoring of
long-term goals. Financial health of the company is the necessary assumption of the
company growth.

11.2 Measurement of the contribution of innovations in the Balanced
        Scorecard system
To be able to make right decisions, the managers at all levels must be able to evaluate
the company performance. They need a set of tools allowing to evaluate different
aspects of the company activities in achievement of specified goals and objectives. The
Balanced Scorecard system provides such a set of tools. It measures the company
performance using four balanced areas - financial, customer, internal processes and
learning. It allows to monitor not only the financial results, but also the ability of the
company to take care of tangible and intangible assets, necessary for its growth and
competitiveness, the ability to create value for current and future customers, and the
preparedness to improvement of human resources and work processes, which all are
necessary for the possibility of future performance growth. Balanced Scorecard is not
only an operational set of indicators. It is used by innovative companies as a strategic
management system, i.e. the system for management of their long-term strategy and to
realization of the following critical management processes:
    - Clarification and transformation of the mission to concrete.
    - Communication and interconnection of strategic plans.
    - Planning and setting of goals and tuning of strategic initiatives.
    - Improvement of the strategic feedback and of learning processes.
Traditional systems of performance monitoring concentrated only on processes of

11. Innovation Performance Monitoring                                                                          1-155
supplies of existing products to existing customers. Balanced Scorecard understand
innovation as a critical internal process.

                Innovation process              Production process          service         Satisfaction
   Finding of
                Market           Creation     Production     Delivery           Service          of
   customer's   identification   of product   of product /   of product /       provision
                                 offer        service        service                        customer's

                                      Fig. 11.6: innovation Process

In R&D activities, the relation between inputs and outputs is much more unclear than in
the case of manufacturing. Indicators are usually based on the importance assigned to
various aspects of the innovation cycle. They can have marketing character:
    percentage of sales generated by new products
    percentage of sales generated by products protected by intellectual property rights
      (licenses, patents)
    introduction of a new product to the market in comparison with competition, in
      comparison with plan
    time of the development of the new product generation
or the financial character:
    return on R&D costs
    comparison of operational profit before taxes in some time period with R&D
The R&D process effectiveness can be monitored by BET (break-even time), measuring
time from the start of the R&D to the product introduction to the market. This indicator
unites three critical aspects of the R&D:
1. To reach BET, the company must recover the invested resources. As the BET
   measures not only output form the product development, but from the whole process,
   it stimulates all participants to higher effectiveness of the process..
2. Marketing managers, workers in development and manufacturing are lead to
   cooperation on the project that will respond to actual needs of customers, is sold

11. Innovation Performance Monitoring                                                                      1-156
   through effective distribution channels and the price of which allows to generate
   revenues sufficient to cover the product development costs.
3. The indicator includes time and therefore stimulates the introduction of the product
   to the market sooner than the competition.
The BET indicator naturally has its limitations. It gives excellent results for subsequent
projects. However, it is difficult to determine values of BET across projects. The actual
value of BET can be often found only long after the product development completion.

Costs and




              A         B                   A - market research

                  Fig. 11.7: Break Even Time (BET) Determination

11.3 Literatura

[11-1] Fotr J.: Podnikatelský plán a investiční rozhodování, GRADA Publishing, 1999
[11-2] Kaplan R.S., Norton D.P.: Balanced Scorecard, Management Press, 2000
[11-3] Pitra Z.: Jak uspět v konkurenční soutěži na světových trzích, Praha 1999
[11-4] Porter M.E : The Competitive Advantage of Nations, Harvard Business Review,
       Vol. 68, No.2, 1990, 73 - 93
[11-5] Systémy managementu jakosti, EN ISO 9000:2000, Český normalizační
       institut, 2001

11. Innovation Performance Monitoring                                                        1-157

12.1 Models of the university – company cooperation
Three models are typical for the cooperation of companies with universities: traditional,
market and partnership models.
    Traditional model: University research develops a new product that can be used
     by companies. The researcher does not pay attention to the companies‟ needs, he
     tries to develop something what the companies will be able to use later. This
     strategy is characterized as the research push.
     The interaction process management depends on the researcher, as he is the only
     one to have all the knowledge necessary for the performance of the research, whose
     result can be used by a company. The research focus is monodisciplinary. The
     researcher carries out research in the field of his specialization or he has already
     developed the product or he produced the research report and now he looks for the
     application of his results.
     The product can be offered by means of educational programs, seminars, fairs,
     workshops etc. It is a traditional relationship, in which the researcher maintains his
     autonomy in the selection of the topic for his research. The company adopts the
     university knowledge. So it is possible that within this process new research
     projects will occur for the university; it will increase the research performance of
     the researcher and creates additional financial resources for the research.
    Market model: The researcher is interested in the application of his research
     results. The research therefore takes the market needs into account and creates
     specific products. A company under market pressure looks for the solutions to its
     problems at the university. So its managers turn to the university and meet the
     researchers working in the fields close to their issues. This strategy is characterized
     as market pull.
     It is in the researcher‟s interest to obtain necessary resources for the university.
     Those can be acquired by provision of specialized services to companies. As the
     company is interested in the research results, the researcher is responsible for the
     project management but the company management participates in it. Thereby the
     feedback is created. The research focus can be either multi- or interdisciplinary
     because the participation of various disciplines can contribute to the development
     of the product that will meet the customer‟s requirements in the best manner.
     In this model the mutual relationship is planned. If the market requirements are
     known then it is possible to create a program and define the course of research
     activities. Clients‟ satisfaction is the indicator of success.
    Partnership model: New economic and social trends influence both the companies
     and the universities. Both types of organizations need to get ready for the future.
     The companies are getting more open and the universities are starting to think about
     their roles in the new reality.
     In the partnership model, the balance between the offer created by the university
     and research institutes and requirements that are occurring or can occur in the
     immediate future at the market is searched. In this model both partners aim to
     create joint and mutually convenient strategies.
     Both the partners bear the responsibility for the process management. The decisions

12. Cooperation with Universities and R&D Institutions                                         1-158
       influence both organizations and therefore they are adopted after a bilateral
       agreement. The research focus is still interdisciplinary but the stress is placed on
       integrated activities leading to the innovation development.
       The relationship of both partners has a symbiotic character, i.e. partners depend on
       each other in their effort to reach a certain advantage. So the company and the
       university form a mutually convenient relationship with the purpose of the process
       or product innovation. The university has the knowledge and the company has the
       market, at which results of the knowledge application can be used. However the
       university and the company need to communicate and exchange information.
       The research financing is often supported by the government as the partnership
       results often contribute to the local or regional economic development. In order to
       simplify and strengthen the cooperation in this model, mechanisms such as
       technological companies incubators, spin-off companies, technology transfer
       centers and technological parks are often developed.
       The success of the cooperation process is indicated by the client‟s success in the
       introduction of the product based on the research results to the market and
       deepening of the researchers‟ knowledge, often in different areas.

Basic characteristics of these three models are summarized in the Table 12.1:

                  Table 12.1: Models of the university – company cooperation8
    Model               Traditional model Market model              Partnership model
    Strategy            Research push        Market pull            Balance between
                                                                    technology and market
    Responsibility for Researcher            Researcher with the    Researcher together with
    the project                              company participation the company
    Research focus      Monodisciplinary     Multi- or              Interdisciplinary with
                                             interdisciplinary      integrated activities
    Relationship         Traditional               Planned                      Symbiotic
    Success indicator    Transfer of               Customer satisfaction        Customer satisfaction
                         knowledge to                                           and deepening of the
                         company                                                researcher‟s knowledge

 N.C.Viana da Cunha, E.M.Fracasso: University-enterprise interaction in biotechnology in the south of
Brasil, The Journal of Knowledge Management 3(1)1999, 66-74

12. Cooperation with Universities and R&D Institutions                                                  1-159
12.2 What can the university offer to SME
Besides the above-mentioned forms of cooperation on the solutions to specific projects,
particularly in the last partnership model of cooperation, the university can offer the
companies further support in the identification of innovation ideas and their further
   Technology transfer: The university can provide support in the transfer of the
    research and development results into practice. Specialized laboratories,
    technological parks etc. are often founded for the support of the technology
    transfer. It is important to realize that mobility of employees of the university
    (including the students and doctoral students) and of the companies is also a part of
    the technology transfer.
   Formation of spin-off companies: The university can create suitable conditions
    for the emergence of spin-off companies that are very effective in the introduction
    of new technologies to the market and at the same time they provide essential
    feedbacks from the business environment to the research.
   Information support, source of innovation impulses: Universities often have
    very good direct and indirect contacts with domestic and foreign workplaces of
    similar orientation, access to information sources, researchers participate in various
    conferences, workshops and similar events. All these activities can be a rich source
    of information about new developments in the field and about what‟s going on in
    the world. The university has the potential to replace the former centers of
    scientific, technical and economic information that have been cancelled in the large
    companies and the SMEs can hardly afford them.
    In order to be able to use these services the SMEs must be able to define their
    requirements, e.g. in the form of a key words list from fields that are of interest to
   Preparation of studies: University can form a multidisciplinary team that can
    prepare studies for SME according to specific definition that can cover a wide range
    from a technical solution to business, financial, legal and social and economic
   Use of experimental facilities: In some cases the university has a unique
    experimental equipment at its disposal the free capacity of which can be offered for
    the use of the SME.
   Cooperation with students: SMEs have the opportunity to cooperate with the
    students by means of assignment of a solution to some problem in the form of
    semester or bachelor papers or thesis. In the course of that the company can identify
    suitable future employees.
   Education of management and SME employees: Education represents
    university‟s basic activity. In many cases the university can adjust and supplement
    the existing courses so that they would meet the SME requirements. At present it is
    not difficult to make use of the available information and communication
    technologies and using them create distance or on-the-job courses and trainings that
    are available at time and place convenient for the trained employees.
Cooperation of small- and medium-size companies with universities gets considerable
easier if the university has an office in charge of the transfer of research and
development results into companies and of their commercialization. This liaison office

12. Cooperation with Universities and R&D Institutions                                       1-160
serves as a contact point that maintains contacts with the business environment,
searches for and collects ideas from the companies and processes offers of the
university departments.
In the framework of the U-SME Innovation project of the LEONARDO program, the
database of the University of West Bohemia, containing brief characteristics of the
university departments and employees, their offers and contacts was created in the MS
Access environment. This database can be browsed with the help of full-text searching
tools. SMEs can find here the information on who from the university could help them
with solving of their problems and how to get in touch with this person. The database is
available on the web site of the project and on CD-ROM.

12. Cooperation with Universities and R&D Institutions                                     1-161
Appendix 12.1         Evaluation of the company – university cooperation –
                      several questions for company
If you already cooperate or you have ever cooperated with a university or research and
development institution (research institute etc.), go to Table 12.1.A, if not, go to Table

Table 12.1.A: Mark one or more answers:
In the course of cooperation with a university or research or development institution:
     We have no problems

     We are not satisfied with the service quality

     We consider the service price too high

     We are not satisfied with the deadlines (delivery terms)

     It is difficult to find a common language with the academicians, their approach is too
     It is difficult to find the proper institution or expert that can help us to solve our
     Other problems occur:

We cooperate
   With university (which one): …………………….……………………..

      With research or development institution (which one): ………………………..
We cooperate with the following workplaces of the university:
   DEPARTMENTS (which ones):

      Other workplaces (which ones):

We use the following university services:
   Courses and trainings

   Testing and measurement

   Other expert services according to our precise definition (which ones):

      Joint development of new products and technologies

12. Cooperation with Universities and R&D Institutions                                       1-162
We cooperate with the university in the following field:


We would appreciate if the university offered the following services in the following


In the future we would like to use the following university services:
     Courses and trainings

     Testing and measurement

     Other expert services according to our precise definition (which ones):

      Joint development of new products and technologies
      Other services (which ones):


In the future we would also like to cooperate with the university in the following field:


12. Cooperation with Universities and R&D Institutions                                      1-163
Table 12.1.B: Mark one or more answers:
So far we haven‟t cooperated with any university or research or development institution
     So far we haven‟t though of it

     We don‟t think that experts from these institutions could help us with something

     We tried to establish the cooperation but it failed after the first contact

     These institutions have too long delivery terms, they are not flexible considering our
     Services of these institutions are not of sufficient quality

     Cooperation with these institutions it too demanding from administrative point of view

     It is difficult to find a common language with the academicians

     We don‟t know about experts (institutions) in the relevant area

     Services of these institutions are too expensive for us

     We are planning the cooperation but so far there hasn‟t been any time for it

     Other reason:

In the future we would like to use the following university services:
     Courses and trainings

     Testing and measurement

     Other expert services according to our precise definition (which ones):

      Joint development of new products and technologies
      Other services (which ones):


In the future we would like to cooperate with the university in the following field:


12. Cooperation with Universities and R&D Institutions                                 1-164
Appendix 12.2          Evaluation of the company – university cooperation –
                       several questions for university
If you are a university research department try to answer the following questions. Yours
answers will not be a subject to evaluation, their aim is to help you realize what are your
weaker and stronger points with regard to the cooperation with companies.

                       Table 12.2: University – company cooperation
                 Try to select or formulate answers to the following questions:
1   Is your department interested to work within the university business and
    consulting center for SMEs?                                                         yes/no
    What support do you expect from such a center?

2   Is your department equipped with staff and equipment allowing provision of    yes/no
    customer services on a standard professional level?
    Can you provide comprehensive customer service with certified output product? yes/no
    If not, are you getting ready for the acquiring of the relevant certificates? yes/no
    Within which time scope?
    Which obstacles do you encounter in the course of that?

3   What part of your capacity do you devote to work with SMEs?                         %
    Do you consider increasing this share?                                              yes/no
    What problems do you encounter in the course of that?

4   Do the employees of your department participate in conferences, exhibitions,        yes/no
    fairs and/or other events in which potential partners from the industry, public
    sector etc. take part?
    If so, are those partners interested in your experience or equipment?               yes/no
    How many cooperation offers lead to the contract conclusion?                        %
5   Do you meet suppliers of equipment, services etc. that supply to the potential      yes/no
    Could you identify some applications of your technologies that could be of          yes/no
    interest for them?
    Do you consider inviting them to your department (laboratory)?                      yes/no

12. Cooperation with Universities and R&D Institutions                                        1-165
                       Table 12.2: University – company cooperation
                 Try to select or formulate answers to the following questions:
6   Do you organize visitors„ days or similar events in which potential partners        yes/no
    from SMEs could participate?
    Do you maintain contacts with your former students?                                 yes/no
7   What share of theses (bachelor, doctoral) assigned by your department is            %
    written in narrow cooperation with SMEs?
8   Does anyone use processes that you research?                                        yes/no
    If so are they interested in widening the spectrum of their products?               yes/no
    Can you help them with solving their problems?                                      yes/no
    Can you help them to improve their products or processes?                           yes/no
9   What are the key parameters of products, processes or services that you deal

    Could you come up with any other applications in which these qualities could
    be used?

10 Do the products (processes) that you deal with have any unique qualities?            yes/no

    Where else (how else) could they be applicable?

11 Do you have any technical equipment with unique qualities or possibilities?          yes/no
   Are they unique in the region, country, internationally? (Tick off)
   Who else could be interested in them?

12 Do you work on a technology, product, process that has specific favorable            yes/no
   qualities related to environmental impact?
   Would it be possible to apply them in the industry?                                  yes/no
   Who could be interested in their application?

13 Do your people increase their qualification in disciplines related to the increase   yes/no
   of innovation potential (basic business and management skills, work with
14 What is the share of financial resources obtained from the research and              %
   development activities in your department‟s budget?
   What share of this income comes from the contracts with companies?                   %

12. Cooperation with Universities and R&D Institutions                                      1-166
Try to formulate vision of the customer-oriented services development for your
department and add a brief budget.

Try to prepare the department‟s service offer for business and public sector.

Try to carry out an expert panel (with the participation of internal and external experts)
the aim of which will be:
     Identify potential applications of your research and development results,
     Estimate the commercial potential of these applications,
     Propose suitable organizations and contacts

We recommend the use of the following procedures:
   Technical presentations followed by discussion during which the participants
      can better understand the key issues and limitation,
   Preliminary analysis during which every expert will suggest several possible
      areas of application and after which open discussion follows,
   Structured brainstorming, if possible conducted by an experienced facilitator,
   SWOT analysis in which you will compare the selected application
      (applications) with possible competitors and you will identify and analyze the
      critical factors of success.

12. Cooperation with Universities and R&D Institutions                                       1-167
13.1 Role of education in the company
With the development of economy and society, the focus of the initiative shifts do the
entrepreneurial sphere, which is transforming itself – its values and ways of thinking,
management styles, strategies, financial and organizational structures, decision-making
procedures, relations to customers and many other established, well-rooted procedures.
The relation to education is tightly linked to the pro-innovation company culture.
Education and training become an unavoidable investment into the development of
capabilities and work performance of every employee. Due to knowledge explosion, the
society has became the information society and knowledge and the capability to employ
it equals to power (information and expert knowledge)
„If you have any free resources and if you hesitate - to invest either into technology or
into qualification of your people - it is more effective to invest in people.“

Today‟s entrepreneurial practice is ever more complex, often hectic, rapidly changing.
New companies significantly differ in their structure, form, procedures and vitality from
their predecessors. The market becomes the moving force that urges the company to be
more accommodating to the customers, as the satisfied customer is one of the best
advertisements. All this forces the companies to create entrepreneurial environment
that actively supports the initiative at lower levels of the management hierarchy,
where the team work functions without the barriers implied by hierarchy and where
people are motivated and empowered to take over the individual responsibility. The
stress is put on the ability to take over the initiative, think and behave as entrepreneurs,
suggest and implement strategies, on the ability to communicate and negotiate (with
partners within the company, with customers, etc.). The greater attention is given to the
negotiation of problematic issues (instead of the hierarchical commanding). As the
manager cannot rely only on his own knowledge, experience, qualification and intuition,
he must rely on capabilities of others. The power is redistributed: the manager must be
able to recognize, choose and develop loyal expertise with knowledge necessary to
realize common goals. The manager needs to change not only his working style and
methods, but also his role and personal traits.
The company management must realize that the changes it enforces and effort to change
the wee-rooted practice impact people working at different jobs in the company, that the
changes disturb the established organizational structures.
Decentralization means several „bosses“ at lower management levels, decision-making
becomes horizontal (lateral). It implies the sharp rise of requirements to the managerial
education – more people at lower management levels needs to be educated in
managerial skills.
Inflexible organizations, not capable of rapid accommodation to changing conditions,
will get into trouble rapidly and unavoidably. The accommodation requires learning.
What knowledge, skills and attitudes should the managers and employees have? The
requirements change with the level of responsibility, function, industry, etc.
The industry „know - how“ usually consists in the three following components:
 1. the complex of basic knowledge on the products and services, on everything
     concerning the industry development, before all on technologies, manufacture,
     distribution, marketing and servicing;
 2. intimate knowledge of the environment and working of competitive forces within

13. Innovation Programs and Education                                                          1-168
   the industry;
3. creation of personal relations with people involved in the industry, as such relations
   are an important part of the intellectual capital that the manager accumulates during
   his career.

13.2 Learning organization
Formerly, when somebody returned from the training and tried to recommend
something what he has learned, he was often laughed at. Currently some companies try
hard to become „learning organizations“ – organizations where everybody is learning.
The propensity to learning of teams tends to increase of motivation and to higher
quality due to exchange of experience and cooperation within the team. Different people
react differently to the same stimuli and opportunities! Therefore the generalized
approach to learning is not correct – the more methods are used, the greater is the
chance of involvement of everybody.
The education in the company must be closely linked to the business strategy, to the
solution of practical issues, to search for new ways and methods of creation and keeping
of competitive advantages. In compliance with intentions, activities and strategy of the
company, the employees should be prepared not only to the use of new technologies,
production of new products, but also to „soft skills“ – creativity, team work, etc. The
personalities of all employees should be versatile.
The education that does not follow the specific objective and does not improve the
results, is a luxury the company cannot afford.

To reach extraordinary goals, the motivation of the individual must be internal. The
internal motivation is extremely important if high standard and long-term quality are
expected, if they should be permanent. A person with some experience is usually wiling
to learn, if he is motivated to reach better results. The adults do not learn for the
learning itself, they learn to be able to do something, to solve some problem or to
improve the quality of his life.
Leaning has been effective if a person knows something he has not known earlier and
he can do something what he has not been able to do earlier..

The systematic education of managers increases the quality and capability of action of
the company management and the company gains the important competitive advantage.
The mission of the managerial education is the development of the competencies
and performance of managers
The personal traits of the manager should develop to greater social adaptability,
cooperation, emotional stability, competitiveness, activity, creativity, dexterity, social
and entrepreneurial skills. The stress is put on the willingness to continual learning,
taking over new, up to now unsolved tasks and responsibilities, to make decisions and
bear the risks and responsibility, to work with others, to accept the initiatives of
subordinates, to diagnose situations and environment, to estimate impacts of
entrepreneurial decisions, on the informality, imagination, etc.
If the employee only passively executes tasks of his job, then an extraordinary effort,
strain, interest can be hardly expected.

13. Innovation Programs and Education                                                        1-169
Practical reasons for the education of managers
1. Management theory and practice are rapidly developing, the school knowledge gets
   obsolete, personal experience is limited, incomplete. It is important to keep in touch
   with new knowledge.
2. Manager gradually carries out various functions and he always needs to perfect one‟s
3. The exchange of knowledge and mutual contacts are stimulating and inspiring.
4. The manager sets out the arrangement of the working life of his subordinates and
   significantly determines the quality of their lives. Therefore the managers should be
   interested in the broad education..
During their careers, the managers pass among different jobs and often the requirements
of the system and procedures of the new job are not quite clearly specified. Specifically
the passage from a specialist to generalist jobs require the improvement of leadership
The manager learns mainly from experience, from his job, solving everyday problems in
communication with others, by critical re-evaluation of his opinions, attitudes, decisions
and activities. Newly appointed managers often learn from doing - they follow what
they observe with their more experienced colleagues..

13.3 Key competencies
a/ technical qualification
      includes technical knowledge, skill, talent and attitudes related technologic,
      economic, financial, structural and procedural aspects of work
b/ behavior and acting
     includes all components related to work with people, influencing the communication
     and dealing with individuals and groups both within and outside the.
1. The development and selection of education and training programs must také into
     account the basics of the managerial work in real situations; it must be reflected in
     the content, methods and goals.
2. If the training programs should help managers to play various roles, their goals have
     to be defined as behavioral changes – attention is paid to the improvement of
     behavior and motivation and not only to acquisition of various technical skills.
3. The active training methods should be preferred before passive ones. The abstract
     concepts should be rooted in the practical experience of companies.
Improvements of the learning process
Before the start of the training, it should be defined:
   What we want to achieve (goals)
   How we want to achieve the goals (methodology)
   How the progress will be monitored (monitoring)
   How the results will be evaluated (evaluation)

13.3 Literatura
[13-1] Vzdělávání a rozvoj manažerů, editoři: J. Prokopenko, M. Kubr a kol., nakl.
       Grada Publishing 1966
[13-2] H. Belz, M.Siegrist: Klíčové kompetence a jejich rozvíjení, Portál, Praha, 2001

13. Innovation Programs and Education                                                        1-170
The preparation of the project of implementation of the system of work with
innovation in the company
In this last, resuming training block, the tutor should, together with the participants,
summarize and put in concrete terms how the knowledge acquired in preceding training
blocks can be applied in implementation of the system of work with innovations.

In Chapter 5, Project Management, we defined a project as the work effort leading to
the creation of a unique product in a limited time (and with limited resources). In the
context of this block, under unique product we do not understand a product to be
offered by the company at the market, but the implementation of the system of work
with innovations. So that the company management or innovation manager can
implement the system in the company, he needs to prepare a project defining individual
activities, milestones and responsible workers.

14.1 Creation of the function of innovation manager
The first partial group of tasks (pre-project activities) is targeted at the function of the
innovation manager. Before the start of the training, he could have been appointed
intuitively, without exact specifications of his authorities and responsibilities and of the
requirements to his qualification and personal competencies. Now, the occupation of
this position should be re-evaluated in the light of acquired information. If the person
originally selected does not feel comfortable with the job (or the company does not feel
comfortable with him), this position should be re-appointed by the more suitable
employee. If the function is newly created, the person for the job should be appointed
with respect to the acquired information about the job. His present tasks should be in
part (or wholly) transferred to other employees, so that he can devote a part of (or all)
his capacity to his new function. Simultaneously, it is necessary to exactly define the
authorities and responsibilities of the new function.
While this group of tasks is not yet a part of the project and is is executed by the
company management, the following activities are already the task of the innovation
manager. His first task is to write down the project, to coordinate and implement it. The
following part of this chapter is a guide to those activities.

14.2 Seeking and recording of innovation impulses
The first group of activities of the project itself consists in the introduction of the system
of searching and recording of innovation impulses (see Chapter 3). First of all, it is
necessary to realize from where could innovation impulses come. The most obvious
source are all the internal and external workplaces cooperating with the company. All
the persons concerned (practically all employees and external partners) should be
informed about the goals and the form of the system being introduced. This process can
be simplified by their participation at the training. This task is closely related to the
motivation system of the company and stimulation of employees to look systematically
for possible innovation impulses. The system of records should be designed, small
companies can use the MS Word forms employing hypertext links (see Appendix 3.B).
The innovation manager should prepare illustrative examples of innovation impulses
expected from the employees, as only general specification could be difficult to
understand or even misunderstood. In larger companies it can be suitable to appoint
contact (responsible) persons for different areas of the company activity (sales,

14. Practical Guide to the SystemIntroduction                                          1-171
manufacture, service, …). This group of activities creates situation, in which all
employees understand the system of collection of innovation impulses and its objectives
and they are motivated to participate on it.

14.3 Creativity development
The following group of activities is related to the development of creativity of company
employees. The innovation manager should first evaluate the current state (the test
referred to in the Chapter 4 can be used) and identify the barriers to creativity in the
company. On the basis of these findings he should suggest how to overcome the barriers
and what procedures and tools to use for the creativity development. The result is the
state in which the barriers have been removed (or the procedure of their subsequent
removal has been designed) and specific ways of creativity development (seminars,
trainings, special exercises) have been approved.

14.4 Motivation program
The next group of activities is related to motivation program. If such a program exists
and only its interconnection with innovation system is missing, it is sufficient to
complete this link. In the opposite case it is necessary to perform the analysis of
motivation profiles of individual groups of employees and to find de-motivating factors
influencing them. Only after elimination of these factors it is reasonable to select and
start to use stimuli supporting innovation activities. These stimuli are based on exactly
specified goals of the motivation program and should be recorded in the written
document. This group of activities culminates in the release of the document and it is
the starting phase of introduction of the innovation program into current practice.

14.5 Establishment of cooperation with academic institutions
The establishment of cooperation with academic or other professional institutions is the
objective of another group of activities of the innovation manager. He should start with
compilation of the list of institutions with which it can be meaningful to cooperate.
They need not be specialized only in the main field of the company activity, but also in
other fields related or even seemingly unrelated to company activities. It is possible to
employ some of the creativity techniques to identify possible partners, as these
techniques can help to create ideas about joining efforts in new areas, which can lead to
interesting opportunities. After that, the innovation manager or the employees
authorized by him should prepare the way of contacting of selected external partners;
before the meeting, they should prepare the brief information about the company and
the purpose of the cooperation. It could be send to the partners beforehand or distributed
during introductory meetings. It can be suitable to prepare also the proposal of the
agreement about the cooperation.
Further partnerships with R&D institutions will be naturally developed after the
implementation of the system as a response to the needs and requirements of the

14. Practical Guide to the SystemIntroduction                                      1-172
14.6 Introduction of system of education and training of employees
This group of activities should create such a state in which the educational and training
activities are not considered only a marginal activity, but they are understood as a basic
prerequisite of keeping and improving the competitiveness of the company and
therefore the proper attention is paid to them. The innovation manager has to identify
the priorities of specific groups of employees and to ensure earmarking of
corresponding financial resources from the company budget. Further on, the manager
should follow the offers of educators and submit proposals on the participation of
employees. After consulting them with the employees and the management the
innovation manager together with personnel department take corresponding measures

14.7 Innovation performance monitoring
The Balanced Scorecard (BSC) method was suggested in Chapter 11.2 for the
innovation performance monitoring. The innovation manager can use the knowledge
gained in the training and the assistance of external consultant.

14.8 Innovation meetings
The innovation manager proposes the time schedule of regular meetings on innovations
and their content (Chapter 2.4). Their final form will be decided on together with the
company management.

The whole project of the system implementation should be completed by the kick off
meeting that will describe in detail the system structure and activities. After this
meeting the system should be fully functional.
This block is the stepping stone for launching the cooperation of the company
management with external consultant(s) on the preparation of the project of
implementation of the system in the company. In that, information from Chapter 5,
Project Management, and from other chapter of this guide can be used.
The Appendix 14.A contains the sample of the checklist for planning of activities
described in this chapter.

14. Practical Guide to the SystemIntroduction                                      1-173
14. Practical Guide to the SystemIntroduction   1-174
Appendix 14.A: Checklist for preparation of implementation of system of work with innovations

Group of activities                 Partial activities                                                 terms   Responsible   external
                                                                                                               person        consultant
Establishment of the innovation     - check of the proper appointment of the function
manager function
                                    - shift of partial workload of the person appointed to the
                                    - specification of innovation manager authorities and
Creation of the system of           - identification of persons responsible for the collection of
collection of innovation impulses     innovation impulses
                                    - selection of the method of recording
                                    - implementation of the system in practice
                                    - information of employees and particularly of responsible
                                      persons with the collection system and its purpose
Creativity support                  - evaluation of creativity of employees
                                    - identification of creativity barriers in the company (relation
                                      to motivation program)
                                    - proposal of measures for elimination of barriers
                                    - proposal of procedures for the creativity development
Creation of the motivation          - analysis of the motivation structure of the company
program                               employees
                                    - identification of demotivating factors
                                    - elimination of demotivating factors

14. PracticalGuide to the System Introduction                                                                                       1-175
Group of activities                Partial activities                                              terms   Responsible   external
                                                                                                           person        consultant
                                   - setting the motivation program goals with regard to
                                     searching innovation opportunities
                                   - specification of proper stimuli
                                   - compilation of motivation program as a document and its
                                     circulation within the company
Searching partners at R&D          - identification of suitable R&D institutions
                                   - preparation of meetings, proposal of cooperation
                                   - introductory meetings
                                   - signature of contracts, mutual agreements
Implementation of the system of    - identification of goals and principles for the selection of
education and training               meaningful educational activities
                                   - earmarking of financial resources
                                   - appointing the person responsible for selection of
                                     educational activities
Implementation of the innovation   - implementation a of the BSC method
performance monitoring system
Innovation meetings                - time schedule of meetings
                                   - content of meetings

14. PracticalGuide to the System Introduction                                                                                   1-176

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