drivers of using biofuel in the airlines industry are closely linked to the evolution of oil prices in the last decade, as well as to the risks associated with the use of petroleum fuel. First of all, the oil prices have continuously increased over the last decades and the evaluations that this would happen date back to after 2003.
As early as 2009, the predictions for the period 2009-2016 reflected oil was expected to increase by 50% (as a trend) from an average at that time of around $50 (Kitov, 2009). This was based on existing statistical facts and evaluations and past data, thus carrying a high level of abstract objectivity. These evaluations were translated in practice, with oil prices currently at $92. All this would translate into an increased cost for the airline carriers.
Even more worrying when it comes to oil is that much of the price is politically regulated and, as a consequence, subject to political risk. The group of exporting company, united in a cartel, decide when and whether the output of oil varies or not, which generates price fluctuations. Evaluations are that changes in the Middle East, in strategic oil producers such as Saudi Arabia, could increase price as much as $200-$300 (Farge, 2011). With the Arab Spring and important changes in the Middle East in the last years, it remains to be seen whether the stability of oil prices can still be supported.
Instability, difficult in access to this resource, and a trend that shows that the prices of oil will likely continue to increase, no matter what the period of time to which we are referring, seem to be the most important drivers for using biofuel. As such, the airline companies need to consider both political and economical risks when dealing with their supply of petroleum and oil fuels.
Another consideration should be given to the environmental pressures to which the companies are subjected, notably in terms of switching from oil to a more environmentally sustainable option. The trend has been clear over the last decades: more and more environmentalists have put significant pressures on companies to become more environmentally responsible, to develop in accordance with norms that have been adopted at a global level and to accept the realities of climate change and the impact that companies have on accelerating this process.
Another driver that should be considered is the fact that, over the long-term, biofuels may also be a more sustainable option from an economic point-of-view. The initial investment is certainly high and the entire transformational and change management is not an easy one. However, once the initial investment is made, the airline companies would be able to capitalize on lower fuel costs.
b. Prajogo and Ahmed (2006) proposed, in their Stimulus-Capacity-Performance (SCP) approach, that human capital and technological capital are the main factors that affect innovation performance and drive innovation capacity. The human capital includes four factors: leadership, people management, knowledge management and creativity management. The analysis here will start by looking at these four factors of human capital, with the belief that the human capital is more important than the technological capital when it comes to driving innovation capacity.
Of the four factors in human capital, the most important one seems to be leadership. In order to drive an innovatory process, such as switching to biofuel, both European and Australian airline managers need to prove leadership skills. Primarily, this would mean identifying that there are increasing risks with using petroleum and other related oil products and making the decision to start using biofuel, with all the challenges and implications that this has.
However, this is only a very incipient stage of a leadership process that is required here. As Chemers (1997) pointed out, leadership implies “social influence in which one person can enlist the aid and support of others in the accomplishment of a common task.” There are several dimensions to this definition. The common task has been identified and this is implementing biofuel to replace petroleum at the airline (European or Australian). The challenge is to convince all stakeholders that this is the appropriate solution and to enlist their aid and support, from the company employees to shareholders and to other partners involved.
This leadership process will significantly affect the entire innovation process, mainly because a successful leader will be able to drive the innovatory process ahead is a sustained manner, while also ensuring that the decision has support within the organization, that it is properly understood and embraced by the rest of the company. Leadership also means vision, the fact that the company leader can project in the long-term his idea on switching to biofuels.
People management is another important factor of the human capital, as defined in the model proposed by Prajogo and Ahmed. People management takes things to a more operational level, following the leadership component that has been previously discussed. In terms of people management, Dave Ulrich defines best the different functions of people management, namely aligning people management with the overall business strategy of the company, re-engineering organizational processes, communicating with the employees, and managing transformation and change (Ulrich, 1996).
The innovation performance will thus be driven also by the way in which the leaders are able to operationally manage the workforce. In this, the communication aspect seems one of the most important function that Dave Ulrich has mentioned. The leader will have to market the innovation process and appropriately communicate expectations to the workforce, as well as progress in implementation phases.
Just as essential is transformation and change management. It is obvious that switching to biofuels and the entire innovation process is a huge transformational process that the company leader will need to appropriately manage. This is, again, related to communication, but also to understanding and managing expectations of partners and employees, as implied by the period of change.
The two final factors in terms of human capital management, according to Prajogo and Ahmed, are knowledge management and creativity management. Since this is an innovation process, these two factors will play an essential role as well. In terms of knowledge management, one of the important elements to be mentioned is that an appropriate knowledge management will ensure that knowledge is efficiently internalized at all levels of the company. In turn, this means that innovation performance will be improved, because knowledge will not be solely retained at a particular level or department in the organization, but will be disseminated throughout, making the implementation phase much easier.
The model proposed by Nonaka and Takeuchi (1995) is worth mentioning here in the context of knowledge management. They look at knowledge as a continuous, spiral-like process, which is, at times, both internalized and externalized, thus ensuring a connection between the external and internal environments of a company. In this particular case, the idea is that the innovation process is not solely internal or internally driven: it is closely linked to the evolutions in the external environment, to the new innovation trends that may appear in the biofuels industry. To all these, the company needs to be properly connected and to be ready to internalize such external processes.
Within this context, it is clear that technological capital will also play a significant role in the innovation process, as the hardware basis onto which the process will be implemented, however, between the two (human and technological capital), human capital is determinant. Technological capital, on the other hand, will require a significant investment and high costs. The European and Australian airlines will either subcontract the entire innovation process to technological companies or will develop their own technological platform, onto which they would be able to build the process. In both cases, the costs will be considerable.
Question 2
a. One of the risks associated with biofuels is that this still represents, to a certain degree, an uncharted territory for companies that will switch in the future to this new type of fuel. An uncharted territory comes with a lot of risks that the companies are likely not aware of at this point, as well as significant costs. The primary risk is that the investment in switching to biofuels will eventually not translate into company revenues and profits over the medium and long terms.
From the case study, one can also deduct the fact that, with biofuels, supply remains a problem. There are still few producers and, even more so, few producers that are able to use sustainable input. The case with the coconuts reflects the situation of an industry where the input is still unclear: not all biofuels producers have access to the needed resources. Waste seems to be the best producing options, but this also means that companies need to be able to access it.
This all translates into the following economic risk for the company: despite a strong initial investment into the transformational process and into switching to biofuels, the airline company could find itself, at some point in a situation where it will not have enough fuel to fly, due to biofuel shortage. At that point, bankruptcy would likely be the only remaining option, since the airline would not be able to switch back to petroleum.
This risk is emphasized also by existing competition in the airline industry: if all the airline companies would switch to biofuels, is there enough production to support. In the incipient phases, it is likely that it would not and it remains to be seen whether the industry has enough resources to pump into the innovation processes before going bankrupt, in order to obtain palpable results.
b. The risk of acceptance is reasonably high, especially because of the novelty of the idea and the spectrum of change it is likely to produce after its implementation. However, the customers are likely to accept and embrace the idea fairly easily, especially since this will likely translate into a reduction of fuel costs and, as a direct consequence, a reduction of the price of tickets as well.
The risk of acceptance is likely higher in the airline companies themselves, especially among those categories of employees who have a greater experience and who have been working with traditional means for decades. It will be difficult for these employees to understand why the change needs to be made and they are likely to bring in arguments such as the risks associated with the change etc.
The traditional partners of airline companies, including fuel suppliers, will also elevate the risk of acceptance for the innovation process management. Other stakeholders are likely to motivate that the process is too expensive and that it will take a long while for its positive aspects to be seen and to have an impact on the overall development of the airline industry.
c. According to Van de Panne’s model, there are several critical factors for innovation success. First of all, a group of three includes the strength of competition, the intensity of research and development and top management support (Bei Ju, 2012). The first critical factor to be discussed is competition from the other companies in the airline industry. One can agree on the fact that the adoption of biofuels as an alternative to petroleum is a trend that will be followed by most, if not all, of the companies in the industry.
This creates a peer pressure, because the successful completion of the innovation process is likely to create a significant competitive advantage for the first adopters. Innovation success will thus be driven by competition in the industry and will influence the commitment that companies have towards the development and implementation of biofuels.
The intensity of research and development is also fundamental. The intensity can be characterized both by the volume of human and financial resources that are allocated to the R&D activity and by the commitment that management has towards the timely completion of the process. The innovation process will not work properly unless research and development is given appropriate attention and that includes resources, but also the timeframe. The intensity of research will determine the timeframe in which the innovation process is likely to be completed and the degree to which this will positively affect the development of the company and its performance on the market.
Another thing about the intensity of research is that it determines the way that the company deals with its competition. Faster and more efficient research means that the company will switch faster to biofuels, become more cost-effective on the market and be able to stay ahead of competiton.
The intensity of research is closely linked to the management support and to the way that this support is manifested in the organization. The fact that things are pushed top-down, starting with the management, has been discussed throughout this paper. In fact, leadership was an important factor in the innovation process that could play a positive impact in the innovation success. Management not only provides support, but it also is the decision factor in the resource allocation process, thus determining the second factor, the intensity of the research and development process. The interconnection between these factors will be vital in the eventual success or failure of the entire innovation process.
Another category includes cooperation, communication and organization integration (Mei-Fang, Wu, 2011). These are all elements closely linked to what has been discussed in the previous paragraphs. It is an extension of the three factors that have been previously discussed. The first one, cooperation, refers to the relation and coordination between all levels of the organization. The idea here is quite simple: the innovation process is not a solitary action taking place only in the research and development department. At the same time, it is not a process that should be solely supported by the organization’s management or other areas of the company directly affected by it.
The innovation process should be supported, through a cooperative mechanism, at all levels of the organization, in a coordinated manner. While the coordination is to be ensured by the company leadership, cooperation between the departments and support for the innovation process should be something that every member of the company should promote.
In this context, it is important to emphasize the role of communication in the entire process. Communication would have several different roles. First, it would appropriately describe the innovation process and the strategy that the company has with it. This would include references to the advantages and benefits of switching to biofuels, including as these would translate for the company’s employees.
Second, communication would support the cooperation process that has been discussed previously. If people know and understand the process, they are more likely to support it in a manner that is both efficient and successful. Third, communication also means the interaction with the external environment. As mentioned, this is not a solitary, isolated process: the research and development process is itself part of the larger efforts of the research community, to which the company needs to remain connected.
Finally, when it comes to organizational integration, one needs again to refer to the fact that the innovation process is not an isolated action within the company. It is integrated into the organizational framework in a manner that is both cohesive and realistic. It coordinates with other branches of the company to produce results.
Bibliography
1. Prajogo, DI & Ahmed, PK. 2006. Relationships between innovation stimulus, innovation capacity, and innovation performance. R&D Management, vol.36, no.5, pp.499 — 515
2. Smith, Andy. 2011. Management practices and innovation capacity in enterprises. On the Internet at http://avetra.org.au/wp-content/uploads/2011/05/20.00.pdf. Last retrieved on August 6, 2012
3. Chemers M. 1997. An integrative theory of leadership. Lawrence Erlbaum Associates, Publishers
4. Ulrich, Dave (1996). Human Resource Champions. The next agenda for adding value and delivering results. Boston, Mass.: Harvard Business School Press
5. Nonaka, Ikujiro; Takeuchi, Hirotaka. 1995. The knowledge creating company: how Japanese companies create the dynamics of innovation. New York: Oxford University Press
6. Bei Ju. 2012. An Evaluation of Critical Factors Influencing Product Innovation in the Food Industry — A Case Study of China Mengniu Dairy Company. International Journal of Business and Management Vol. 7, No. 3; February 2012
7. Van der Panne, G., van Beers, C., and Kleinknecht, A. (2003). Success and failure of innovation: a literature review. International Journal of Innovation Management, Vol. 7 No.3, pp. 309-38.
8. Mei-Fang Wu, Pao-Long Chang, Singa Wang Chiu. 2011. An innovative new product development strategy: The Key success paths approach. International Journal of the Physical Sciences Vol. 6(25), pp. 5922-5936, 23 October, 2011
9. Kitov, Ivan. 2009. Predicting Oil and Gas Prices: 2009-2016. On the Internet at http://seekingalpha.com/article/145069-predicting-oil-and-gas-prices-2009-2016. Last retrieved on August 7, 2012
10. Farge, Emma. 2011. Oil could hit $200-$300 on Saudi unrest-Yamani. Reuters. On the Internet at http://af.reuters.com/article/energyOilNews/idAFLDE7340MU20110405?pageNumber=3&virtualBrandChannel=0&sp=true. Last retrieved on August 7, 2012
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