This essay pertains to a discussion of the concept of innovation with in management in general and about the Enterprise Resource Planning system in particular as a system of process innovation. According to Trott and Hoecht (2004),
“Innovation has been described as an information creation process that arises out of social interaction. In effect, the ﬁrm provides a structure within which the creative process is located. These interactions provide the opportunity for thoughts, potential ideas and views to be shared and exchanged,” (Trott and Hoecht, 2004:387).
Speaking of the concept of innovation in general, there is a well-established link between it and positive firm performance in academic literature (Davenport, 1998). It has often been cited and weighed up as a necessary ingredient for incorporating long term and competitive success in a firm’s performance (Barras, 1986). Innovation is an important part and consequence of effective knowledge capital management (Nonaka, 1991).
Apart from exploring the three levels of innovation (incremental, modular and radical innovations), the current literature also identifies about five different types of innovations, classified as they relate to products, services, market positioning, process and management (Cooper, 1999). The most critical stage in the case of any process innovation is indeed the implementation stage where it becomes imperative to avoid possible bottlenecks and barriers (Geroski, 1993). In case of the ERP implementation at Tesco, as will be discussed later below, Tesco’s success has mainly come from ensuring its human resources run in harmony with its newly implemented electronic tools. However there is a possibility that it may have lost its creativity and innovation to stringent ERP based administration practices.
The innovation strategy of any organisation allows it to find a clear market direction and should allow the entire organisation to find its creative strength for the future development of the firm (Lundvall, 1992). When a means of innovation is being utilized in a company for example in terms of process innovation, the management must focus upon strategies for bringing about a harmonious yet slow change with in the entire employee base (Sauer, 1993). This would involve training and adaptation to the new strategies. However the main barrier to effectively bring about innovation with in the firm is more often than not failure of the management to manage such “change”(Sauer, 1993). If the firm is essentially unprepared to accept and embrace technology it will fail to properly communicate to its employees the need to achieve an adaptation to the change and not fear it. This also means that adequate funding commitment will have to be allocated to innovation design and implementation before any such change is brought in (Souder, 1987).
As a concept innovation has become one of the most academically discussed success factors of firm performance and has been recognized as a major goal of working towards maximizing firm value (Trott & Hoecht, 2004). The relationship between innovation and the maximization of firm value remains debatable however especially where there is a discussion of process innovation tools like the ERP.Many academics have sung the praises of the magic of innovation in terms of how innovation serves as an important boost in terms of strategic positioning and advantage for a firm (Trott, 2004). In terms of boosting, encouraging and implementing innovation, it has often been pointed out by the business academia that while the main trigger factors for the identification, management and development of innovative practices in firm management are often talked about a lot, little has been done in practice to bring about their successful implementation (Twiss, 1992). One particular example is ERP (Enterprise Resource Planning), which is an example of “process innovation”, which has often been cited as an example of how radical and incremental innovation is misunderstood in application (Twiss, 1992). ERP is yet another example of how, knowledge management is imperative to harvesting the fruits of innovation towards maximum and long lasting advantage of the firm. To discuss the intricacies of process innovation, while utilizing the Enterprise Resource Planning System, the essay goes on to discuss Tesco’s ERP system as an example of the same.
ERP system as an example of process innovation
The ERP essentially made a debut as business software, and during the nineties it became the keyword mantra for success for many organisations like Microsoft and ICI (Troth and Hoecht, 2004). It was the radical shift in the working process and profitable returns that it brought to the firms utilizing it, which made it such a success (Troth and Hoecht, 2004). With technological innovations now making their headway into the retail and grocery system, the ERP as a software-based innovation has permeated into the process routines of many companies (Twiss, 1992). Mostly marketed and sold by software companies like Oracle and PeopleSoft, the system is cost and time intensive. In economic terms this means that a company would have to do a lot of pre-implementation evaluation and research before such a system is implemented. A lack of proper personnel training, preparation for change and proper research has also led to negative or nil effects (especially in terms of delays and unnecessary time lags for firms who have in the past blindly implemented the same) (Trott and Hoecht, 2004).
Despite blatant failures, firms have continued trying to bring in the ERP as a means of aiding success and growth in their firms. This points to the fact that the success that ERP can bring is directly related to the human effort itself and the way such change is perceived by the employees or personnel rather than the software design on its own. The ERP itself is not only a product of process innovation , but it has been claimed to be an important ingredient in bringing out an organization’s creative abilities. Academics like Trott & Hoecht (2004) have pointed out that the concept of the ERP in its current form and substance is a rendition of the MRP (Manufacturing Resource Planning systems), which found much popularity in the industrial world in the decades of the eighties (Twiss, 1992). However the benefits of the latter (the ERP) are no longer just confined to manufacturing itself and as the name suggests this system has now extended to other stages of production as well as the tertiary sector (Lundvall, 1992). The most cited benefits of the ERP pertain to better inventory keeping and supply chain relations. The software is believed to have brought an integrating effect towards the financial, production and marketing sectors of firms which utilize the ERP.Such an integration between the Human Resources and the R&D can effectively promise an innovative and creative boost indeed but many academics have been skeptical about the contribution a mechanized, IT based process can make to creativity.
ERP at Tesco
The ERP’s effect on the organisations capability can be potentially measured on the basis of a fourfold framework, where as organisations who have tried to integrate the ERP as an evolution rather than a revolution have done considerably better at reaping the success it brings (Devenport, 1998). Souder (1987) suggests that it can be viewed in an evolutionary setting because the first step in this case would always be applying an ERP system to reinforce the efficiency with in the current state of firm operations. Only then can there be move towards the application of the same to new operations because at this point the current infrastructure and operations is in harmony with the integration of ERP.At this point only can then there be an introduction of new technology to undertake newer operations where as a firm basis for integration has been secured. A similar view has been taken by Geroski (1993) and Devenport (1998).
Tesco has emerged in the past one decade as one of the biggest food retailers of its times and is undeniably the envy of its contemporaries like Marks and Spencer, Asda and Lidl (Rowley, 2005). Its primary winning pawns in the competition game have been its ability to cut down costs. However in 1999 Tesco implemented its TIES system which was an ERP based system with in its almost 600 countrywide stores (Rowley,2005)
Before the TIES system was implemented Tesco was facing a number of problems in terms of an overall , “lack of shared processes, definitions and data to support joint decision making”, (Marinos and Irani,2001). Tesco also reported problems in its advertising, marketing and promotions management, which suffered due to a lack of co-operation and collaboration between similar value chain partners (Palmer, 2002). This also meant that the customers rated Tesco as low in terms of consumer satisfaction as it was unable to coordinate their needs with the stock brought in (Palmer, 2002:261).
The TIES system, when implemented ultimately brought about an integration in the their promotions and marketing management systems (Palmer, 2002.This was achieved by merging “legacy systems” into the Tesco business retail model so the customer preferences were communicated accordingly through data analysis to the suppliers (Marinos and Irani, 2001). It was also seen in time that the TIES brought about a virtual supply chain operating as a virtual organisation (Marinos and Irani, 2001). Working together with the stakeholders of the supply chain in order to improve organisation and effectiveness with in the supply chain it was possible to see that the entire supply chain was able to cope with the demands of the consumers more properly. Ultimately Tesco was able to reduce its over all annual profit losses by 33% and ultimately reported increased turnover and customer satisfaction (Marinos and Irani, 2001).
Another ERP based initiative taken by Tesco which has allowed it to increase its lead versus competitor supermarkets over the last decade allowing it to effectively build its market share and market capitalization is the Tesco Club Card (Palmer, 2002). This helps cold data and statistics bring about not only a warm relationship between Tesco and its consumer base but also helps Tesco to find out easily what types of products its consumers usually buy and from which retail outlets (Rowley, 2005). This helps the supply chain management and administration immensely. It has been reported that this ERP system works effectively by facilitating market information in terms of demand to signal what has to be and what should not be supplied. This cuts down production waste. In addition to this Rowley (2005) states that,
“…(O) nce a customer has an entry in the database, further records of customer purchases can be added, so that ultimately it is possible to build a profile of individual customer purchasing habits. This database of customer purchase profiles can then be used to segment the retailer’s customer base, for purposes of direct marketing and tailoring other marketing communications and special offers to customer requirements. In exchange for registration, the customer receives points that can be used in full or part payment for products or services” (Rowley 2005:194-206).
For Tesco, the ERP has thus been mostly applied in the form of Ecommerce tools which are networks integrating telecommunications, Internet and software based tools for quicker and more efficient communication with in the supply chain and with the consumer base (Palmer, 2002). Tesco’s ERP implementation to date has been unique in the sense that it is unique both in terms of it TIES and Loyalty Card system. The way these ERP tools have been utilized is more important actually. Till date Tesco’s ERP system has helped it to firmly integrate to and properly run its day-to-day business tasks like communication with its suppliers as well as quick financial settlements with the supply chain partners (Marinos and Irani, 2001).
Tesco’s ERP systems is also well integrated due to the fact that it uses a type of extranet combined with an intranet to keep the suppliers and managing personnel well connected at any given time of the day (Palmer, 2002). This type of ERP is also known as Enterprise Application Integration. Such a digitization of supply chain and consumer relationships have become common both in the US (Walmart) and Europe. In Europe the primary example is of course Tesco even though Sainsbury and Marks and Spencer also try and run similar ERP based systems. Basically what Tesco has done in terms of supply chain cooperation is that it uses radio frequency identification (RFID) systems in order to expedite quickly and efficiently its supply chain and warehousing tasks (Rowley, 2005).
When we look at Tesco it is a classic example of the application of the use of ERP in terms of e-business (both in terms of business to consumer and business to business operations). Many academics have cited Tesco to be one of those retail systems, which have benefited the least from the implementation of the ERP.One author, has remarked,
“. …(In) the context of e-business (and ERP)…. one of the largest supermarket businesses in Europe, Tesco, also has the largest B2C e-business in Europe and one of the few profitable ones. However, despite this the revenue from this business is only approximately £300 million, from a total turnover of £23 billion,” (Palmer, 2002:363).
A primary reason cited for the same, as noted above is the inability of Tesco to more fully co-ordinate product information in terms of stock, customer response and administration than its rivals and contemporaries. There have of course been efforts in Tesco’s rival companies like Sainsbury’s and Asda to bring about better interconnectivity with in the supply chain but it seems that Tesco has done better with its TIES system in this regard. Infact the TIES system has often been nicknamed as the “leader” in the world ERP based supply chain interconnectivity. The TIES system has brought about a standardization with in the retail and supply system.
This contention above, then prompts the query as to whether this standardization brought with it a cost for Tesco’s creative ability?
The answer lies in the analysis of Palmer (2002:261-262) who states that,
“…Whilst the introduction of standards can aid the adoption of new technologies and is of obvious importance with IT based products, paradoxically it can also slow the rate of future innovation … Once a new standard has emerged then mental, financial and organisational commitment exists providing reasons not to innovate further. This is not unfounded as risk reduction, rather than the size of the opportunity for application, is a preferred aim with respect to technological innovation. (Palmer, 2002:261-263).”
This quote has explained the main problem in finding a positive link between ERP’s and its impact upon an organization’s ultimate acumen to achieve creativity and ultimately innovation. As an innovation in itself, an ERP based system can have a rather disturbing effect if imposed upon an unsuspecting, untrained employee base. Such a sudden change can even bring about a negative behavioral change with in the human resource with in a firm unless the current employee-base already possesses such skills and capabilities, which can smooth over the transition of such an innovation of the technological process.
From the example of Tesco it is possible to see the good, the bad and the ugly of the Tesco’s ERP system. It has been seen from relevant literature that there is caution to be given to the firms, which are over-enthusiastic about reaping immediate fruits of ERP implementation. This caution is that rather than seeing ERP as a direct means of achieving organisational success, it should be viewed as a means to an end of achieving sustainable growth that should not be allowed to interfere with the firm’s creative processes. This is something the post-modernists warned us about in the sixties: the curse of networks and concrete jungles, which would discipline and monotonize the thinking mind to a state of creative paralysis. The diagram below taken from (Trott and Hoecht, 2004:389) shows how sometimes the objectives of innovative organisations and the ERP (Enterprise Resource Planning) Systems can essentially conflict with each other.
One might ask oneself then, if the diagram above actually explains why many as a classic case of “mass production” often view Tesco? Does the lack of creativity come as a cost of standardization and participation in pre-designed processes? The answer is in many cases, yes! At the same time this also prompts the query whether it is possible to have faith in a strictly administrative application as a means of achieving creativity. Surely organisation and discipline can aid creativity and innovation but it may not in many ways provide the proper conditions in which innovation can be brought about. In other words as Trott and Hoecht (2004:389) point out there is a lack of “individual autonomy” in an environment regulated by the ERP which can essentially mean that cold data and its accuracy and uniformity end up being prioritized instead of actual professional accountability and competence.
This has also been known to bring about a lack of intrinsic motivation with in the employee base when automated processes take over situations, which actually require a human touch in terms of management interventions (Trott and Hoecht, 2004:390). This problem is adequately summed up by Troth and Hoecht (2004) who state that
“Efficiency in existing operations, however, is not the same as innovation. …(The) innovation management literature emphasizes tacit knowledge; richness of information exchanged and opens participation in cross-functional teams. This is not the same as participation in pre-designed processes where systematic data requirements provide a forum for speedy information exchange but restricted information content. (Trott and Hoecht, 2004:390)”
On the other hand the importance of the ERP as a means to achieving and nurturing more innovation cannot be understated. In the absence of ERP many modern retail markets still suffer the problems of managing large enterprises particularly with large branches and information structure (Cooper,1999).This is because the obvious advantage of the ERP is clear in the sense that it brings about an integrated, automated and a digitized , virtual environment which helps the organisation to look at its supply and demand needs viz a viz each other (Trott,2004). The problem was not solved previously with information management systems, which helped strategic planning in the seventies, but was not compatible with the current systems of the company trying to undergo change. The information management systems when compared with the ERP systems were task specific and did not help with integration or multitasking. However things might change for the better in the future, as it can be hoped so!
This essay has argued using the example of the ERP in Tesco about the demerits of using ERP as a means of bringing in and retaining a culture of innovation. It has been seen that the integration of functions and information at all levels does not mean that there cannot be automation at all levels as well. This has led to many new organisations discarding the idea of solely relying on the ERP as a means of supply chain and demand management and instead integrating ERP with their current systems. This may be because there has yet to be an ERP system, which is solely customized to match organisational, needs rather than generalized formats and designs of the same. The standardization of the ERP itself has become its main Achilles heel in the sense that it is feared that any organisation adopting it faces the risk of standardizing itself while changing which can take its own uniqueness away.
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