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THE TAKE-OFF OF ISRAELIHIGH-TECH ENTREPRENEURSHIPIN THE 1990’s

A STRATEGIC MANAGEMENT RESEARCHPERSPECTIVE

TECHNOLOGY, INNOVATION, ENTREPRENEURSHIP AND

COMPETITIVE STRATEGY SERIES

Series Editors: John McGee and Howard Thomas

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Entrepreneurship: Perspectives on Theory Building

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Dynamics of Competence-Based Competition

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Corporate Strategy, Public Policy and New Technologies

BOGNER

Drugs to Market

SUSMAN & O’KEEFE

The Defense Industry in the Post-Cold War Era

NORDBERG

The Strategic Management of High Technology Contracts: The Case of CERN

SCHULZ & HOFER

Creating Value with Entrepreneurial Leadership and Skill-Based Strategies

SHAVININA

Silicon Valley North: A High-Tech Cluster of Innovation and Entrepreneurship

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Technovation

THE TAKE-OFF OFISRAELI HIGH-TECHENTREPRENEURSHIPIN THE 1990’s

A STRATEGIC MANAGEMENTRESEARCH PERSPECTIVE

AVI FIEGENBAUMTechnion – Israeli Institute of Technology, Haifa, Israel

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Contents

About the Author vii

Foreword ix

List of Tables xi

List of Figures xiii

1. Introduction — Take-off and the Challenge to StrategicParadigm Development 1

Part I: Globalization, Privatization, and Entry of Foreign Multinationals

2. Globalization in the World and in Israel 21

3. Privatization of Governmental Companies 33

4. The Entry of Foreign Companies into Israel 49

Part II: Israel Infrastructure for Technological Entrepreneurship

5. Strategic Management Perspectives of Technological Incubators 65

6. Strategic Management Perspectives of Incubator Startups 83

Part III: New Origins for Startups

7. Women as Technology Entrepreneurs 99

8. Elite Units of the Israeli Defense Forces – The Story of Unit 8200 111

Part IV: Competitive Strategic Leadership

9. Board of Directors and Companies’ Performance 127

10. Competitive Intelligence 143

Part V: Development of New Industries

11. Medical Technology A: Industry Analysis 163

12. Medical Technology B: Firms’ Analysis 175

Subject Index 193

vi Contents

About the Author

Professor Avi Fiegenbaum, former associate dean and currently the head of the stra-tegic management and entrepreneurship department of the Faculty of IndustrialEngineering and Management, Technion, Haifa. Professor Fiegenbaum received hisB.Sc. in Industrial Engineering and Management (1979) from the Technion, hisM.B.A. (1981) from Tel Aviv University and his Ph.D. from the University ofIllinois, Urbana-Champaign (1986). Upon conclusion of his doctoral studies, heconducted research and taught at the University of Michigan, Ann Arbor until 1991,when he joined the faculty of the Technion. Professor Fiegenbaum is the author ofnumerous scholarly articles and books as well as a frequent contributor to the press.He also lectures at universities worldwide and supervises graduate students in theTechnion’s advanced studies program. Professor Fiegenbaum was an owner-partnerin Ofer Technologies, where he served as the Chairman of the Board of Directors andhe also sits on the boards of several technological incubators and high-tech start-ups.

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Foreword

Avi is currently a senior academic in Israel at the Technion. I should point out,however, that Avi was one of the best doctoral students I have ever had –– hecompleted his thesis at the University of Illinois at Urbana-Champaign in the mid-1980s, when I was James F. Towey Distinguished Professor of Strategic Managementthere. Avi’s thesis, which went on to win a prize from the Business Policy Division ofthe Academy of Management, was formally grounded in the field of competitivestrategy and provided one of the first and most insightful studies about the conceptof strategic and competitive groups in the field of strategic management.

He published a series of well-cited papers, some of which I co-authored, in theStrategic Management Journal and the Academy of Management Journal over suc-ceeding years. He also moved from Illinois to a position on the Strategy faculty at theUniversity of Michigan and stayed there until the early 1990s. However, Avi alwayshad the desire to return to Israel and to pass on the results of his research to futuregenerations of students there. He was particularly intrigued with the success andgrowth of entrepreneurial Israeli firms, particularly in the areas of high technologyand medical research. Indeed, not only did he research these companies in depthduring the 1990s and early 2000s, but Avi also took part in the management anddevelopment of some of these firms as a first-hand participant.

This book represents the culmination of Avi’s research and practice in the Israelihigh-tech field and is an important volume for those scholars of strategy and en-trepreneurship who seek to understand strategy development and growth amongstentrepreneurial, fast-growing firms. The lessons from this study can provide insightfor policy makers in the entrepreneurial field but also important research insights forfuture scholars in the field of strategy and entrepreneurship.

I commend this manuscript to you for the depth and quality of its research. Avihas commissioned translators to take the text from Hebrew to English and I thinkthat the resulting text published here will prove to be an important monograph in thedevelopment of the field of strategy and entrepreneurship. I wish all readers the sameexcitement as I received when reading this book and hope it will provide the catalystfor further research in this area.

Howard ThomasDean, Warwick Business School

List of Tables

Table 1.1 The strategic paradigm applied to the Israeli high-techtake-off — summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Table 1.2 Reciprocal relations among the paradigm’s parameters(by analytic level) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Table 2.1 Investments of foreign residents in Israel from 1990through 1997 ($ million, current prices) . . . . . . . . . . . . . . . . . . 23

Table 2.2 Investments of Israelis abroad from 1990 to 1997 ($ million,current prices) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Table 3.1 Israeli privatized companies and method. . . . . . . . . . . . . . . . . . 37Table 3.2 Summary findings compared with the TASE . . . . . . . . . . . . . . . 41Table 3.3 Summary findings compared with the sector stock index . . . . . . 43Table 3.4 Post privatization and company value . . . . . . . . . . . . . . . . . . . 44Table 3.5 Chemical sector share returns compared to other sectors . . . . . . 44Table 3.6 Percentage return on the major companies compared with other

companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Table 4.1 Characteristics of the research sample. . . . . . . . . . . . . . . . . . . . 51Table 4.2 List of local and foreign companies . . . . . . . . . . . . . . . . . . . . . 52Table 4.3 Research variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Table 6.1 The association between product characteristics and

performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92Table 6.2 The association between general managers’ attention and

startup performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93Table 6.3 The association between planning and performance . . . . . . . . . . 93Table 6.4 The association between awareness to customers’ needs

and performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94Table 6.5 The association between strategic capabilities and

performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94Table 7.1 Association between strategic dimensions and performance . . . 108Table 8.1 Companies in the sample . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114Table 8.2 Definition of research variables and statistical

characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116Table 8.3 Impact of social network and industry structure on

number of company employees . . . . . . . . . . . . . . . . . . . . . . . 119

Table 8.4 Impact of social network and internal strategy on changein company market value . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

Table 8.5 Impact of social network and external strategy oncompany sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

Table 8.6 Impact of social network, external strategy and industrystructure on company sales . . . . . . . . . . . . . . . . . . . . . . . . . . 121

Table 8.7 Summary: impact of strategic components and correlationwith social network on company performance . . . . . . . . . . . . . 122

Table 9.1 The impact of board of directors on performance . . . . . . . . . . 132Table 9.2 Discriminant function classification results . . . . . . . . . . . . . . . 135Table 10.1 Topics of competitive intelligence . . . . . . . . . . . . . . . . . . . . . . 148Table 10.2 Organizational obstacles . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149Table 10.3 Improving organizational obstacles. . . . . . . . . . . . . . . . . . . . . 150Table 11.1 Medical technology firms in Israel . . . . . . . . . . . . . . . . . . . . . 167Table 11.2 Research perspectives, variables definition and differences

between the two time periods (1998 versus 1995) . . . . . . . . . . . 170

xii List of Tables

List of Figures

Figure 1.1 The research challenge: explaining the take-off of Israelihigh-tech. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Figure 1.2 The competitive model — strategic reference points . . . . . . . . . . 5Figure 1.3 A typology of organizational competitiveness based on

strategic reference points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Figure 1.4 A multi-level paradigm of the Israeli high-tech take-off from

a strategic perspective — sequential and interactive effects . . . . . 8Figure 2.1 Net export of goods (excluding polished diamonds) from

1990 through 1998 in $million . . . . . . . . . . . . . . . . . . . . . . . . 25Figure 3.1 Privatized state-owned enterprises share returns compared

to the TASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Figure 3.2 Privatized company stock returns compared to the sector

index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Figure 4.1 Competitive positioning of foreign and local companies . . . . . . 56Figure 4.2 Marketing positioning of foreign and local companies . . . . . . . 57Figure 5.1 Incubators’ general information . . . . . . . . . . . . . . . . . . . . . . . 68Figure 5.2 Incubators’ competitive strategy approach . . . . . . . . . . . . . . . . 71Figure 5.3 Positioning of 19 incubators’ competitive strategy approach . . . . 72Figure 5.4 Incubators’ strategic capabilities development . . . . . . . . . . . . . 74Figure 5.5 Incubators’ general directors recommendations for

improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75Figure 6.1 Startups’ descriptive statistics . . . . . . . . . . . . . . . . . . . . . . . . . 88Figure 7.1 Firm distribution by entrepreneur’s age . . . . . . . . . . . . . . . . . 104Figure 7.2 Firm distribution by entrepreneur’s marital status . . . . . . . . . 105Figure 7.3 Firm distribution by entrepreneur’s number of children . . . . . 105Figure 7.4 Firm distribution by entrepreneur’s educational level . . . . . . . 106Figure 7.5 Firm distribution by entrepreneur’s academic background. . . . 106Figure 7.6 Firm distribution by industrial sector . . . . . . . . . . . . . . . . . . 107Figure 7.7 Firm distribution by firm age . . . . . . . . . . . . . . . . . . . . . . . . 107Figure 7.8 Firm distribution by firm location. . . . . . . . . . . . . . . . . . . . . 108Figure 8.1 Sample company age distribution . . . . . . . . . . . . . . . . . . . . . 118Figure 8.2 Distribution of age of IDF technology unit veteran

involved in setting up companies. . . . . . . . . . . . . . . . . . . . . . 118

Figure 8.3 Distribution of number of IDF technology unit veteransinvolved in setting up companies. . . . . . . . . . . . . . . . . . . . . . 118

Figure 9.1 Board of directors demographics: high versus lowperformers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

Figure 9.2 Board of directors’ strategic profile: high versus lowperformers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

Figure 11.1 Age distribution—medical technology firm entrepreneurs . . . . 168Figure 11.2 Entrepreneurs’ field of study. . . . . . . . . . . . . . . . . . . . . . . . . 168Figure 11.3 Company age distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 169Figure 11.4 Cumulative number of companies . . . . . . . . . . . . . . . . . . . . . 170Figure 12.1 Companies positioning along their internal and external

competitive dimensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177Figure 12.2 Strategic frontiers advancement attempts . . . . . . . . . . . . . . . . 190

xiv List of Figures

Chapter 1

Introduction — Take-off and the Challengeto Strategic Paradigm Development

1.1. The Challenge — Understanding Take-off

The year 1990 represents a watershed for the State of Israel. Numerous events relatedto the political, security, social, and economic situations infused optimism into thelives of Israelis and neighboring states in the Middle East. The United States and itsallies in the Gulf War had brought the Iraqi army to its knees. In his victory speech,President George W. Bush, Sr. declared that this military triumph would open thedoor to a new world order. After the war was over, President Bush did in fact pushfor accelerated movement toward peace between Israel and the Arab states, a processthat culminated in awarding the Nobel Peace Prize to Israel’s Shimon Peres and thelate Yitzhak Rabin as well as to the Palestinian Authority’s Yassir Arafat. At thesame time, a massive wave of immigration from the former Soviet Union swelledIsrael’s Jewish population by almost one million. This influx of labor and consumersstimulated aggregate demand and supply, driving Israel’s economic growth. Con-currently, the Israeli government strove to liberalize its capital market and privatizegovernment corporations, steps that intensified local competition. In the context ofthis dynamic environment, Israeli high-tech was able to take off and carry the nationto heights previously unknown on any international standard.

In describing this phenomenon I have chosen to use the term take-off rather thanthe more moderate term growth because the advancement of Israeli high-tech duringthis decade was clearly as rapid and precipitous as the split-second ascent of a carrier-launched aircraft soaring into the stratosphere. Indeed, this rapid ascent was noted byand highly praised in the local and international press, for a number of reasons. First,the number of Israeli firms traded abroad, especially on NASDAQ, increased rapidly.If only five Israeli firms with an aggregate market value of a few tens of thousands ofdollars were traded on NASDAQ at the beginning of the decade, by the end of thesame decade close to 120 Israeli firms were traded with aggregate market value ofabout $120 billion(!). A closer look at each of these firms reveals a similar profile. Themajority were startups active in various branches of the high-tech industry.

Second, although the number of startups in this sector amounted to only a few dozenin the late 1980s, by the end of the 1990’s that number had swelled to almost 4,000. TheIsraeli government played an important if not pivotal role in this trend by inauguratingthe technological incubator program, headed by the Chief Scientist of the Ministry ofIndustry and Trade. The 27 incubators, established to provide seed conditions for newventures employing many scientists who had recently immigrated to Israel from theformer Soviet Union, helped transform Israel’s entrepreneurial infrastructure.

Third, this new entrepreneurial technological infrastructure was accompanied bythe establishment of new institutions to facilitate the flow of venture capital. Thestate made a considerable contribution here as well by establishing a government-financed venture capital investment fund that attracted numerous private funds. Atthe beginning of the 1990’s, total venture capital available equaled $100 million,while by the year 2000 available capital reached the $3 billion (!) mark.

In short, we are referring to a unique event by any standards. In less than 10 years,a new infrastructure supportive of technological ventures was constructed. Conse-quently, thousands of new firms were established, some of which were traded onNASDAQ, the world’s most competitive securities market. Israel consequentlyearned its place on the international map, becoming a site for pilgrimages by nationaldelegations keen to acquaint themselves first hand with the phenomenon and withIsraeli high-tech’s formula for success (see Figure 1.1)

In 1991, my family and I returned to Israel after 10 years in the U.S. My first yearsabroad were spent completing my doctoral studies at the University of Illinois, atUrbana-Champaign, after which, in 1986, I joined the faculty of the University ofMichigan at Ann Arbor, where I taught until our departure. During those years, Ispecialized in global competitive strategies while striving to construct a strategic the-ory. Concurrently, I empirically investigated events that had transpired in countriesand continents other than Israel and the Middle East. Before returning to Israel, I hadmade a ‘‘strategic’’ decision to continue to dwell on strategic theory construction but

I. Take-off

200303/2000

Indices of Success at the Take-off Peak About 120 firms traded on NASDAQ Total firm market value of about $120billion About 4,000 startups

Years

II. Crash III. Recovery?

1990

Hig

h-T

ech

Perf

orm

ance

Figure 1.1: The research challenge: explaining the take-off of Israeli high-tech.

2 The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

to focus my empirical research on Israeli firms. I also decided to conduct comparativeresearch by including foreign firms in the analysis but only when this would contributeto understanding Israel’s economy and promote devising directions for its growth. Asa result of my comparative research, I had come to understand that a nation’s econ-omy cannot develop without the entry of foreign firms into the local market.

Thus, the first question that intrigued me was why had so few foreign firms enteredIsrael between 1948 when the state was established and 1990. After all, foreign firmsbrought with them a wealth of essential resources, including knowledge, accompa-nied by the possibility of mergers that could offer Israeli firms an opportunity topenetrate domains marked by globalization, far beyond the nation’s borders.

In my first study of foreign firm strategic entry into the Middle East, some yearsbefore I returned to Israel, my collaborators were Miles Shaver, then a doctoralstudent, and Barney Young, a colleague who specialized in international economics.Focusing on the period 1986–1990, we managed to locate the 40-odd American firmsthat had entered the Middle East, only 12 of which had entered Israel. These figuresput me on alert and motivated the following research question: What is the strategicprofile of foreign firms that opted to enter this politically volatile and often dan-gerous region? The Arab boycott prevented the concurrent entry of firms into Arabstates and Israel. Among those firms that had penetrated the region, what was thestrategic profile marking those who chose to enter Israel rather than its Arab neigh-bors? Our investigation was motivated by the idea that constructing a strategic pro-file of those firms might assist Israeli firms interested in competing on global marketto locate appropriate partners. The resulting study was based on Kahneman andTwersky’s prospect theory and was published in Strategic Management Journal, theleading journal in the field. In this study, my American colleagues and I presented thestrategic profiles of the firms maintaining a presence in the countries of the region(Fiegenbaum et al. 1996).

Following that study, I realized that the major scholarly challenge awaiting me wasto discover how competitive strategy among firms could contribute to understandingeconomic development in Israel. Most insights to date regarding Israel’s economicgrowth had been in the context of macroeconomic and demographic/political the-ories, such as the roles of interest and inflation, immigration from the former SovietUnion, the peace process, and money market liberalization, as well as privatizationof state-owned enterprises. Insufficient mention was made of firm strategy and I sawthis lacuna as an opportunity. Henceforth, I will focus my future research aboutIsrael’s economic growth on analyzing global competitive strategies. My first studyon the entry of foreign firms into Israel and the Middle East thus became the nucleusof an analytic approach toward understanding the growth of Israeli industry, par-ticularly high-tech firms, from the perspective of global competition, a process I nowrefer to as take-off.

The Technion has provided me a fitting platform for completing this missionthrough the research papers written by my students at all levels of study (BSc, MSc,and DSc.). When I first came to the Technion, I had no clear image of how to focusmy research because I could observe no specific trends within Israel economy. Icertainly had no inkling of the phenomenon that I would later identify as take-off.

Introduction 3

Over the years, my commitment to studying strategy and to empirical investigationof strategic theories within the context of Israeli high-tech has led to disclosingvarious industry features and trends. At some point in the mid-1990’s I began tograsp just how exceptional this story was, and I began attempting to construct aparadigm to explain the take-off that I had observed. At the core of the paradigmproposed in this volume is a strategic approach rooted in the theory of strategic

reference points that I developed together with my colleagues, Professors Stuart Hartand Dan Schendel. This theory has been applied to domains as different as humanresources (Bamberger & Fiegenbaum 1996) and marketing (Shoham & Fiegenbaum2002). The theory’s main insight is that strategic management must be multidimen-sional and targeted if a firm is to respond to intensified competition. Put simply, thistheory argues that a firm must demonstrate improved strategy along the three com-petitive dimensions of strategic reference points simultaneously.

1.2. A Strategic Approach — Strategic Reference Points

The strategic literature focusing on organization management and survival offers anumber of approaches. Porter (1980) stresses the importance of positioning the or-ganization in the best place vis-a-vis its competitors. Based on Porter positioningfocus, Fiegenbaum et al.1 proposed a detailed theoretical analysis that incorporatesfactors of organizational self-definition with positioning, thus explaining how or-ganizations (or firms) can achieve a competitive edge. Utilizing management andeconomic theories, the authors identified three main dimensions — internal, external,and temporal — all of which capture the entire spectrum of the organizationaltheoretical strategic options and, effectively, represent the basis for definition of therelevant competitive space (Figure 1.2).

A firm’s internal dimension is comprised of two categorical variables — input andoutput — that in effect encompass all of an organization’s strategic variables. Viewedstrategically, output can symbolize an organization’s vision. Although it characterizesorganizational economic goals (e.g., return on investment, market share, firm networth), the theoretical emphasis here is on the long-term output resulting frompooling resources and utilizing them effectively, that is, organizational vision. Al-ternatively, organizational input (resources) can be considered as strategic capabil-

ities. We argue that complex strategic capabilities, dependent as they are on tangibleas well as intangible assets, are the only factors that ensure sustainable competitiveadvantages that can lead toward fulfillment of the vision.

The external dimension consists of three fundamental categorical stakeholders:customers, suppliers, and competitors. An organization wishing to survive in acompetitive environment must develop strategic capabilities sufficient for meetingcustomers’ future needs. Nevertheless, an organization cannot neglect its suppliers,for they provide crucial resources to be exploited when constructing strategic

1See Fiegenbaum— et al. (1996).


capabilities. Furthermore, some of these suppliers-resources are used by the organ-ization to weave networks of strategic partners. The third set of parameters refers tocompetitors. Strategic development is motivated by the need to reposition the firmmore optimally relative to its competitors, whether by means of direct competitionor, of late, by strategic entry into joint ventures or partnerships.

Time is the third dimension. A strategic perspective must focus on the past, thepresent, and the future. Organization theorists tend to distinguish between forces ofinertia rooted in an organization’s past and future-oriented strategic approaches thatstress the organization’s capacity to liberate itself from established routines, inno-vate, be creative, and take measured risks, as well as navigate toward a future in-dependent of the past.

Based on this three-dimensional competitive space delineated by strategic referencepoints, Fiegenbaum et al. (1996) proposed a strategic theory defined in the sameterms. They argued that, essentially, firms that apply this construct more effectively

Time

Internal

External

Output:Vision

Inputs:Strategic Capabilitie

Past

Present

Future

Customers

Suppliers

Competitors

Figure 1.2: The competitive model — strategic reference points.

Introduction 5

are more successful. Based on this conception of competitive space, that is, imple-mentation of strategic actions on internal as well as external dimensions focusing onthe future, we propose the following definition of winning strategic management.

Formulating a future (time dimension) vision and developing strategic capa-bilities (internal dimension) that will satisfy future needs of the customers, andwill benefit from the supplier network, in a better way than competitors, bothlocal and global wise (external dimension).

We suggest a matrix of typologies for assessing the efficiency of a firm’s strategy interms of strategic reference points (Figure 1.3) The figure presents a firm’s progresstoward the future in terms of the two competitive dimensions, internal (firm visionand strategic capabilities) and external (customers, suppliers, and competitors). Inorder for a firm to be assigned to a specific category or cell, its actions must becharacterized as efficient or inefficient along each of the two dimensions. If the firmmanages to delineate a vision and secure strategic capabilities (the internal dimen-sion), it will be placed in the efficient (as opposed to the inefficient) category. Sim-ilarly, if the firm meets its customers’ future needs and supplies in comparison to itscompetitors (the external dimension), it will be placed in the efficient (as opposed toinefficient) category.

The first type describes organizations that apply inefficient strategies internally aswell as externally. Organizations belonging to this category are destined for failureowing to their inability to develop the internal capacities necessary to survive in theircompetitive environment; hence, we have labeled these failure-prone organizationsas myopic organizations (Type 1). In contrast, organizations that have adoptedstrategies integrating vision with strategic capabilities on the internal dimension, andthat aim at meeting the future needs of customers and suppliers better than theircompetitors, are likely to survive overtime, and are thus categorized as competitive

Inefficient Efficient

Efficient

Inefficient

4. Effective firm

(competitive)

2. Efficient firm

(narcissistic)

1. Failed firm

(myopic)

3. Daydreaming firm

(amorphous)

External Dimension

Intr

a-or

gani

zati

onal

dim

ensi

on

Figure 1.3: A typology of organizational competitiveness based on strategic refer-ence points.


organizations (Type 4). Narcissistic organizations, that is, organizations enamored byself-adoration (Type 2), are characterized by a strategy focusing on internal organ-izational capacities yet ignoring the external competitive environment. Such entitiestend to apply strategic approaches aimed at increasing efficiency and improving theinternal environment, yet they remain myopic to threats and opportunities posed bythe external environment. Diametrically opposed to this type are organizations fol-lowing strategies aimed at responding to external challenges only; they make noattempt to delineate a vision or construct any strategic capabilities (Type 3). Suchorganizations are amorphous, meaning they lack any clear self-identity and are con-stantly searching for mechanisms originating outside the organization to salvagetheir operations. The ideal scenario for achieving a ‘‘winning strategy’’ is that of thecompetitive organization (Type 4). In strategic diagnosis of organizations, the goal isto strategically manage the organization in accordance with the competitive organ-

ization typology and thus ensure its survival. If such a goal is unfeasible, the or-ganization should at least aim in that direction, as indicated by the arrows inFigure 1.3.

When I was writing this book in the Fall of 2003, the history of Israeli high-techcould be encapsulated in Figure 1.1. The 1990’s, until the collapse of the US andother stock exchanges in March 2000, can be considered the take-off period. Cur-rently, we are still in the throes of the collapse; indicators such as market value showthat the precipitous decline of the high-tech industry (e.g., a loss of about 80% of themarket value of the firms traded on NASDAQ), is so much more rapid than thetake-off, and is continuing. We are all eager for Israeli high-tech to take off againattempting to devise strategies to generate the industry’s next period of growth. Yet,before recovery is achieved, and before other books relate the story of this sector’sdownward slide and subsequent books portray its recovery, I decided to review myformer students’ research on the subject, some supervised in collaboration with col-leagues. The result of that review was my decision to write this book, which presentsa new, national paradigm to explain the take-off of Israeli high-tech from a strategicperspective. Considered in terms of the paradigm, the majority of the works collectedin this volume refer fully or in part to the competitive space as defined by strategicreference point theory.

1.3. The Suggested Take-off Paradigm

Figure 1.4 presents a model of the take-off in the Israeli high-tech industry during the1990’s from a strategic perspective. The paradigm stresses two characteristics: pa-rameters and reciprocal relations. Parameters comprise five major factors: global-ization and the entry of foreign forms, national infrastructure supportingtechnological ventures, new sources of high-tech entrepreneurs, strategic leadership(senior management), and establishment of new firms and industries. Reciprocalrelations involve two mechanisms: sequential and interactive. The argument at thecore of the paradigm is that when viewed strategically, all the individual parameters

Introduction 7

as well as the interactions between the parameters contributed to take-off. Thefollowing discussion focuses on the paradigm and its characteristics.

1.3.1. The Paradigm’s Parameters

1.3.1.1. Globalization and the entry of foreign firms (international level) The firstparameter discussed in the book relates to global-competitive processes now char-acterizing Israel’s economy (Bartlett & Ghoshal 1987; Porter 1986; Prahalad 1990).Chapter 2 presents theoretical explanations of globalization in general as well aswithin the Israeli economy. We conclude that structural changes in Israel’s economyprecipitated globalization, competition, and openness to international players, thus

B.National Infrastructure

(National Level)

C.New Sources ofEntrepreneurs

(Individual Level)

D.Strategic Leadership

(Firm Level)

E.New Firms and

Industries(Industry Level)

A.Globalization

(International Level)

Take-off of IsraeliHigh-Tech

Entrepreneurship

Sequential

Interactive

Figure 1.4: A multi-level paradigm of the Israeli high-tech take-off from a strategicperspective — sequential and interactive effects.


enabling Israeli firms to take advantage of global opportunities. Chapter 3 discussesthe privatization of government corporations. The findings show that while the rateof privatization was slower than planned, nonetheless the level of privatizationachieved did create several business opportunities that improved the competitivepotential of many Israeli industries on international markets (Fiegenbaum et al.

1997). Chapter 4 discusses the entry of foreign firms into the Israeli market. Researchresults indicate that the strategic position of foreign firms was superior to that oflocal firms; hence, the inferior position of Israeli firms motivated them to search fornew strategic solutions. In summary, such changes on the global level as increasingglobalization, the entry of foreign firms and privatization of government corpora-tions exposed inchoate Israeli high-tech industries into a new international environ-ment whose challenges clearly stimulated the industry’s take-off (see Table 1.1).

1.3.1.2. National infrastructure supporting technological ventures The second pa-rameter, national infrastructure for technological entrepreneurship, stresses the piv-otal role of the state in take-off. As the Israeli economy began to feel the effects ofglobalization (Parameter A), industry and government leaders decided to create newinstitutions and facilities, forming an infrastructure appropriate to the new compet-itive environment. Chapter 5 discusses one of these institutions: the technologicalincubators established in 1990 by Yigal Erlich, then Chief Scientist of the Ministry ofIndustry and Trade. All told, 27 of these important venture-promoting operationswere established. The approach encouraged cooperation as well as competitionamong incubators, thus helping recruit promising projects and encouraging the in-cubators to provide improved services to the nascent firms. Chapter 6 expands thediscussion to how the startups within these incubators were managed. Findings in-dicate that in addition to the contribution made by the incubator’s top administra-tion and staff, the best predictors of a venture’s perceived success were theinnovativeness of the project’s core idea as well as its capacity to introduce strategicchanges and recruit strategic partners. In contrast, the best indicators of a venture’sperceived survival were the ability of the innovative product to reap high profits, thepersonal risks taken by the project manager, and the firm’s organizational learningcapabilities. State intervention in the form of technological incubators was thereforevital to industry take-off.

1.3.1.3. New sources of high-tech entrepreneurs The third parameter of the para-digm presents two different though complementary features in creating new sourcesof high-tech entrepreneurs. Chapter 7 focuses on women as high-tech entrepreneurs,for example Dr. Orna Barry of Ornet, Roni Ross of Panorama, and Ruth Allon ofNetvision. About 80% of the startups headed by women were initiated by establishedfirms, and almost 50% of these ventures survived for at least five years. About halfemploy fewer than 20 people, and the majority are located in urban areas, with aclear tendency to situate them close to home and in city centers. Moreover, a sta-tistical relationship was identified between the strategic capabilities of the femaleentrepreneur and the performance of the venture. Chapter 8 discusses another source

Introduction 9

Table 1.1: The strategic paradigm applied to the Israeli high-tech take-off — summary.

Part Chapter (Parameter) Research(Joint Supervisor)

Main Findings

Introduction: take-off andthe challenge to strategicparadigm development

Presentation of a national-levelstrategic paradigm explaining thetake-off of Israeli high-tech

1. Take-off of Israeli high-tech: national-levelstrategic paradigm

Challenge: model for managinghigh-tech take-off; the theory ofstrategic reference points

A. Globalization and entryof foreign firms into theIsrael market

Global processes transpiring onnational level, includingprivatization and entry of foreignfirms as motivating factors

2. Globalization in Israel All students Required state intervention3. Privatization of Israeli

firmsEran Turkel(Prof. Uri BenTziyon)

Privatization — Encouragingeconomic efficiency

4. Entry of foreign firmsinto Israel

Dovev Lavie ‘‘Landing’’ — threats andopportunities

B. National infrastructuresupporting technologicalventures

Establishment of competitiveinfrastructure for technologicalincubators, capital recruitment,startup management

5. Technologicalincubators

Dovev Lavie Competitive market for recruitmentand management of startups

6. Management of startupsparticipating intechnological incubators

Elitzur Cohen Competitive market for projectrecruitment

10

Th

eT

ak

e-off

of

Israeli

Hig

h-T

echE

ntrep

reneu

rship

inth

e1

99

0’s

C. New sources of high-tech entrepreneurs

Women as strategic managers; socialnetworks constructed by veteransof Israel Defense Forces (IDF)technological units

7. Women as technologicalentrepreneurs

Nira Boneh An important reservoir of strategicplanning capacity

8. Elite IDF units (8200) Eran Baram(Dr. ShaulGabai)

A reservoir of strategic planningcapacity and exploitation of socialnetworks

D. Leadership: seniormanagement andcompetitive information

Strategic management by board ofdirectors aided by collection ofcompetitive information improvesperformance

9. Boards of directors Dalit Lisitzky Strategic management by board ofdirections improves performance

10. Information aboutcompetitors

Yaniv Dinor(Prof. Ben Gilad)

Salience of competitive informationfor strategic management

E. Debut of new firms andindustries

Strategic and new venturecapabilities encourage entry intoand creation of new and attractiveindustries

11. Medical technology A— industry analysis

Ezra Cohen Salience of strategic capabilities andjoint ventures

12. Medical technology B— firm analysis

Lihu Avituv Multidimensional strategic actionsfor improvement of competitiveposition

Intro

du

ction

11

of potential high-tech entrepreneurs: veterans of Unit 8200, the elite technologicalunit of IDF. The peace process in the 1990’s induced a sense of euphoria, and manynewly discharged or recently retired officers joined the ranks of new high-tech en-trepreneurs. The research reported here focused on the impact of the strategies andsocial networks of the Unit 8200 veterans on business performance. It was found thatas the firms founded by these veterans improved their strategic capabilities, businessperformance increased. Similarly, a significant relationship was found between thenature of the entrepreneur’s social networks and the competitive environmentin which the ventures operated. For example, it was found that ventures operating ina competitive environment exhibited poorer performance when the social networksof their founders were smaller and more tightly knit (a mechanical structure).Alternatively, ventures operating in a dynamic, complex environment exhibitedimproved performance levels when the structure of their social network was moreorganic. That is, the findings indicate that it is not the size of the network thatdetermined venture performance but rather the degree of fit between network struc-ture, venture strategy, and environment characteristics. Put simply, individuals withthe appropriate skills, among them women and veterans of an elite IDF technologicalunit, contributed to a venture’s attractiveness, thus constituting a crucial factor in thegrowth of Israeli high-tech.

1.3.1.4. Leadership — senior management and competitive intelligence The fourthparameter discusses a firm’s senior management from the perspective of its board ofdirectors as well as with respect to competitive intelligence gathering. Chapter 9explores the contributions of the board of directors to company performance. Em-pirical findings of the study indicate significant, positive relationships between afirm’s financial performance and two types of boards’ perspectives: demographic andprocess issues such as size, diversity, and committees on the one hand and the profilesand capacities of its resources on the other. When the firms studied were divided intosuccessful and less successful groups, the proportion of firm members holding auniversity degree, board size, number of committees, board members’ reputation,and political connections were found to be higher in the successful than in the lesssuccessful firms. Chapter 10 focuses on the contribution of competitive intelligence.Intel’s legendary Andrew Grove once declared that ‘‘only the paranoid survive’’ in aworld where technology changes almost instantaneously. The most salient finding ofthe study was the degree of informality that characterized how Israeli firms gatheredcompetitive intelligence. No orderly system of data collection, analysis, or distribu-tion was identified; in comparison to American firms, Israeli firms lag far behind inthis area. Nonetheless, we should not underestimate the behavior of senior Israelimanagers in this area. Contrary to their American peers, Israeli managers will roll uptheir sleeves and get directly involved in intelligence gathering. But it is also clear thatwhen the requisite formal organizational structure is in place, satisfactory intelligencegathering is likely to increase. We cannot escape the conclusion that had Israeli high-tech firms succeeded in integrating the intelligence-gathering inclinations of theirsenior managers with orderly intelligence collection, analysis, and distribution, they


would have improved their competitive edge. In conclusion, the capabilities devel-oped among the senior management of a high-tech firm, including the ability togather competitive intelligence, constitute factors essential for industry take-off.

1.3.1.5. Debut of new firms and industries The fifth parameter in the model focuseson new industrial sectors established as the outcome of cooperation between localand foreign firms. Chapter 11 examines Israel’s medical technology industry, withemphasis on strategic management, including management of joint ventures. Basedon a sample of 45 firms, the main findings pointed to an environment of persistentchange and strategic adaptation. The entrepreneurs’ marketing experience and theirstrategic research and development (R&D) and marketing capabilities along witha global approach all contributed to improving firm performance. Moreover, localand international joint ventures in the area of marketing were associated with re-duced risk, whereas technological joint ventures were associated with increased risk.Chapter 12 addresses the medical technology industry while focusing on a differentmethodology. We monitored qualitatively six major firms from the time they wereestablished through discussions and interviews with their managers and/or founders:Uziah Galil, Elscint; Dr. Shimon Eckhaus, ESC; Ami Yakhin and Yitzhak Kaplan,Laser Industries; Eitan Miltz and Shaul Dukeman, CMT; Prof. Rafi Bayer, ShoshFriedman, and Amir Lushkov, Instant; Yitzhak Kaplan and Alex Harel, Optomedic.The research findings indicate that on the internal dimension these ventures tooksimilar strategic actions with respect to developing vision and strategic capabilities,while on the external dimension they were more successful than their competitors inmeeting the future needs of their customers. In summary, the large number of firmsentering several new and attractive global industrial branches served as an importantfactor in the take-off of the Israeli high-tech industry.

1.3.2. Reciprocal Relations: Sequential and Interactive

We propose two models to describe the reciprocal relations among the parameters ofthe proposed paradigm: the sequential model and the interactive model. The sequen-tial model assumes that one factor influences another, which affects still a third andso on in a sequential order. The model’s basic assumption is that processes developover time; each level requires its own timeframe for comprehending and respondingto the processes exerting some influence on it. In contrast, the interactive modelassumes proactive rather than reactive assumptions and strategic thinking. There-fore, the factors involved adapt themselves to the organizational processes, at thesame time affecting each other and being affected by each other.

The Israeli high-tech industry took off during the 1990’s, at a time when the Israelieconomy was undergoing wide-ranging transformations toward liberalization andfree competition, an about-face from the centralization that had dominated thecountry at the beginning of the decade. Hence, the assumption is that among thereasons for adopting the strategic reference points model (Fiegenbaum et al. 1996),

Introduction 13

the simultaneous movement along the internal and external dimensions, is the impactof government intervention. Once liberalization set in and began to be influenced bycompetition and globalization, it is reasonable to assume the dominance of the in-teractive model, with each factor influenced by, as well as influencing, the high-techtake-off. At this stage, the danger that a specific parameter would be inappropriatelymonitored and thereby bring the process to a standstill is minimal. Table 1.2summarizes the reciprocal relations among each of the paradigm’s five parameters.The first part of each statement in each cell describes the impact of the row parameteron the parameter in the relevant column, whereas the second part describes thereciprocal influence on each row parameter exerted by the parameter listed in therespective column.

1.3.2.1. The sequential mode The first parameter, globalization, and its impact onthe Israeli economy, including privatization and the entry of foreign firms, encour-aged decision-makers in the economic and technological arenas to suggest innovativedirections for confronting new challenges. The political, economic, and demographicchanges in Israel during this period must be kept in mind, notably the peace process,economic liberalization, and competition, and immigration from the former SovietUnion. In response, the state made an effort to create appropriate institutions — forexample, technological incubators and startup companies (Parameter B) — to sup-port new ventures. This infrastructure encouraged such new actors as women andveterans of elite IDF technological units to enter the high-tech field for the first time.These highly qualified individuals provided their firms with competitive advantages(Parameter C) through the strategies they developed for their firms as well as with thehelp of their social networks (especially veterans of Unit 8200). In order to imple-ment the competitive strategy that would provide the necessary competitive advan-tages, a model of strategic leadership was required for senior management. Venturesthus introduced competitive intelligence-gathering as well as constructed and man-aged their boards of directors to provide the competitive advantages necessaryfor success (Parameter D). Successful board leadership together with the affinity ofsenior management to direct their firms toward attractive projects led ventures toconcentrate on industries with international growth potential, such as medical tech-nology (Parameter E). In less than a decade, the new industries, the cornerstones ofthe new global economy, helped Israel’s high-tech industry take off rapidly and reachnoticeable international standards. These events affected Israel’s position in theworld market, concurrently influencing new global trends (Parameter A).

These events, in effect, demonstrate the sequential model suggested here: A. Glo-bal transformations - B. Country - C. Individuals - D. Firms - E. Industries- A. Take-off and international position (i.e., global transformations).

1.3.2.2. The interactive model The interactive model assumes that the paradigm’sfive parameters are characterized by simultaneous reciprocal interrelations. That is,each parameter affects and is affected by the others. Globalization (Parameter A)had an impact on all the other parameters by introducing threats as well as new


Table 1.2: Reciprocal relations among the paradigm’s parameters (by analytic level).

A. Globalization and

Entry of Foreign Firms

(World)

B. National

Infrastructure

Supporting New

Ventures (Country)

C. New Sources of

Industries and Firms

(Individual)

D. Strategic Leadership

of Senior Management

(Firms)

E. Debut of New

Industries (Industry)

A. Globalization and

entry of foreign

firms (world)

— Global threats

(opportunities)

inspire investment in

venture-supporting

infrastructure,

ventures that

improve firm’s global

position

Global threats

(opportunities)

inspire entry of new

entrepreneurs who

affect the firm’s

global position

Global threats

(opportunities)

inspire strategic

leadership that

affects the firm’s

global position

Global threats

(opportunities)

inspire creation of

new industries that

affect the industry’s

global position

B. National

infrastructure

supporting new

ventures (country)

Pro-venture

infrastructure

encourages entry of

new entrepreneurs

who reinforce this

infrastructure

Pro-venture

infrastructure

challenges strategic

management that

reinforces this

infrastructure

Pro-venture

infrastructure

challenges the

development of new

global industries that

reinforce this

infrastructure

C. New sources of

industries and firms

(individual)

New sources and

capacities encourage

strategic

management, in turn

encouraging further

new sources and

capacities

New sources and

capacities encourage

development of new

industries that

encourage further

new sources and

capacities

D. Strategic leadership

of senior

management (firms)

Strategic management

encourages

development of new

industries that

encourage further

strategic

management

Intro

du

ction

15

opportunities. These threats motivated policy changes on governmental level (Pa-rameter B), the individual (or entrepreneur, Parameter C), and the firm (i.e., seniormanagement, Parameter D), as well as stimulating realization of the need for startupsand industries (Parameter E). The second parameter, venture-supporting infrastruc-ture, served as an important basis for attracting new entrepreneurs (Parameter C),encouraging strategic management (Parameter D), and investing in attractive indus-tries (Parameter E). Similar processes evolved among the remaining parameters, assummarized in Table 1.2.

In conclusion, this book presents and discusses a paradigm based on a researchstream I had conducted during the 1990’s on ‘‘the take-off of Israeli high-tech in the1990’s.’’ At the time of incorporating the 10 years of research into a book, mainlyduring the 2002–2005 time period, the Israeli and global high-tech community haschanged dramatically following the March 2000 bubble burst. In contrast to thetake-off that occurred in the 1990’s, the current stage is one of decline and restruc-turing. Many firms have gone bankrupt and disappeared from the industrial map; themarket value of the Israeli firms traded on NASDAQ has shrunk relative to the highlevels reached before the March 2000 bubble burst. New companies have entered theindustry and new strategic forums have evolved. Although this book strives to un-derstand the processes contributing to take-off in the 1990’s, it is also important thatfuture research will focus on the after crash and directions leading to recovery. Myhope is that the current comprehensive research, with its historical perspectives, canenrich the insights about the strategic explanations for this phenomenon. Compre-hension of the past as well as of the processes that can redirect current trends andlead the industry to recovery can assist firms as well as the country to arrive at a newperiod of prosperity. Moreover, economic success and cooperative global businessventures between Israelis and Arab states can, indeed must, serve as a major instru-ment for promoting peace in the war-torn Middle East. The paradigm developed inrelation to Israel can also aid other small countries, geographically distant, that havean interest in entering the prosperity zone of the high-tech community. Big nationswith strong economies and technological infrastructure can find this perspective as animportant challenge in aiding this development as well as providing new sources ofgrowth for their own economies.

My intension in writing this historical and longitudinal perspective was to provideinsights that can aid academic researchers, company executives and public policy-makers. I hope my readers enjoy the outcome of the 10 years of committed researchabout Israeli high-tech take-off during the 1990’s.

References

Bamberger, P., & Fiegenbaum, A. (1996). The role of strategic reference points in explaining

the nature and consequences of human resource strategy. Academy of Management Review,

21(4), 926–958.

Bartlett, C. A., & Ghoshal, S. (1987). Managing across borders: New strategic requirements.

Sloan Management Review, 29, 7–17.


Fiegenbaum, A., Hart, S., & Schendel, D. (1996). Strategic reference point theory. Strategic

Management Journal, 17(3), 219–236.

Fiegenbaum, A., Shaver, M., & Yeoung, B. (1997). Which firms expand to the Middle East.

Strategic Management Journal, 18(2), 141–148.

Porter, M. (1980). Competitive strategy. New York: Free Press.

Porter, M. E. (1986). Competition in global industries. Boston: Harvard Business School Press.

Prahalad, C. K. (1990). Globalization: The intellectual and managerial challenges. Human

Resource Management, 29(1), 23–27.

Shoham, A., & Fiegenbaum, A. (2002). Extending the competitive marketing strategy par-

adigm: The role of strategic reference points theory. Journal of Academy of Marketing

Science, 27(4), 442–455.

Introduction 17

Part I

Globalization, Privatization, and Entry of Foreign

Multinationals

Part I discusses globalization issues as well as the entry of foreign companies intoIsrael. Chapter 2 considers the theoretical aspects of globalization, particularly inIsrael, and Chapter 3 discusses the privatization of government companies as part ofa necessary competitive process toward globalization. Finally, Chapter 4 focuses onthe entry of foreign companies into Israel, particularly their impact on the position-ing and strategic behavior of Israeli companies. The book’s central claim is thatglobal processes (Chapter 2), privatization (Chapter 3) and the entry of foreigncompanies (Chapter 4) were important factors influencing the Israeli high-tech mo-mentum in the 1990’s.

Chapter 2

Globalization in the World and in Israel

2.1. Globalization — Theoretical Background

In the two last decades of the 20th century, a new reality established itself in thebusiness arena, characterized primarily by economic globalization and global com-petition (Porter 1986). The term globalization is used to describe the industrialcompanies’ more and more widespread practice of conducting business activitiesacross geographical borders (The Manufacturers Association of Israel Report 1997).The term globalization refers to the cross-national–cross-continental trend in whichthe impact of economic, geographical, cultural, and national borders is diminished asa barrier that interferes with business interactions, reinforcing worldwide economic,cultural, informative, technological, and often political integration, and graduallyestablishing comparable consuming patterns across the globe.

Global activities can range from indirect export and import (via intermediaries),through direct export and import via marketing subsidiaries, licensing agreements,and other forms of cooperation, and up to direct foreign investments, mergers, andacquisitions. The extent of globalization in an organization or a state depends,therefore, on the extent and nature of its business activities abroad. Globalizationbegan immediately after WWII and accelerated during the 1980s. After WWII, theworld’s economy was marked by regional division of commerce into separate groups,such as the US, the Soviet Bloc, and the communist states of Eastern Europe.Commerce between these regions was difficult, mainly due to high customs duties,strict quotas, and regulation over the transfer of capital and cash, and high exchangerates. Since then, this trend toward separate economic regions has weakened, with astrong opposing trend developing instead toward economic and financial integrationsof a large part of the world.

The standard of living in countries around the world has become more similar,leading to similar consumer needs and demands. Hence, similar products can bedistributed and marketed in different locations worldwide. Moreover, mergers oflocal capital markets to form a global capital market have led to an increased flow ofcapital among countries. Furthermore, barriers to international commerce and in-vestments put in place in the 1920s and 1930s in an attempt to protect local products,have begun to be eliminated. These barriers included, among other things, highcustoms duties on imported goods, which led to a slowdown of world demand andcontributed to the recession of the 1930s. Learning the lessons of this recession,Western countries, under the leadership of the US, decided to remove barriers toenable the free flow of goods and services. This decision led to signing the GeneralAgreement on Tariffs and Trade (GATT) agreement. Today’s constant and ongoingtechnological development contributes to creating communication channels as well

as establishing stockpiles of information and distributing know-how among variousorganizations worldwide. Organizations strive to connect with other organizationsthat have technological know-how in order to attain access to technological re-sources not at their disposal, and by so doing reduce the costs of acquiring theseresources. New technologies also help organizations adapt their products more easilyto changing demands and needs of particular regions. An international labor markethas developed, which is primarily managerial, professional, and technical. A globalnetwork of inter-organizational connections has also come into existence, as moreand more organizations connect with other organizations by means of differentcooperation options intended to increase their competitive advantage and their stra-tegic capability to operate in the international arena.

The World Investment Report (1996) notes a number of indicators of acceleratedglobalization during the 1990’s: growth of international commerce significantly ex-ceeding growth of world output, trends toward direct investments transcending in-ternational borders, and the extent of imports. Between 1980 and 1990, world outputincreased by 32%, while the scope of international commerce increased by more than55%. From 1984 to 1989, foreign investments worldwide increased at the rate of29%; three times greater than the increase in the scope of international commerce.The year 1995 saw an increase of 40% in foreign investments worldwide, amountingto $315 billion. That year, developed countries invested $270 billion outside theirborders, and received foreign investments of $203 billion. Developing countries re-ceived foreign investments in the $100 billion range, and invested $47 billion outsidetheir borders. The value of cross-border mergers and acquisitions worldwide doubledin the period 1988–1995, totaling $229 billion, $135 billion of which consisted ofacquisitions representing more than 50% of acquired company. In 1971, US importsreached 4.1% of the gross national product (GNP), in 1980 — 9.1%, and in 1989 —more than 18%. This was the global background for the Israeli high-tech take-offduring the 1990’s.

2.2. Globalization of the Israeli Market

While globalization is not new, its implications on Israeli industry began to be feltmore and more in the 1990’s (Fiegenbaum et al. 1997). These implications can bedivided into two main areas: local and international markets (Globalization in theIsraeli Industry 1997).

Among the most important implications of globalization on the local Israeli mar-ket are the following: an increase in competitive imports, rapid penetration of in-ternational brand names, and the entry of foreign companies. In 1994, competitiveimports of goods in sectors in which at least 20% are manufactured in Israel as wellincreased to about 30% of the total industrial products on the local market, com-pared with 27% in 1992 and 25% in 1990 (The Manufacturers Association of IsraelReport 1997). Imported goods totaled $15.1 billion in 1990 versus $28.3 billion in1995 (Foreign Commerce Department, the Central Bureau of Statistics 1995), rep-resenting an increase of 87.5% in imports. These data indicate the extent to which the


Israeli companies are vulnerable to imports from countries with which it has bilateralcommercial agreements, as well those with which it does not have such agreements,for example, Third World countries. Nevertheless, note that from 1996 to 1997,the rate of imports decreased. In 1997 imported goods (excluding diamonds) tota-led $23.9 billion, compared to $24.8 billion in 1996, representing a decrease of$927 million or 3.7% (The Economic Department, The Export Institute 1997).

In the wake of the peace process in the Middle East, penetration of internationalbrand names has accelerated rapidly. These international brand names are eitherimported to Israel or manufactured in Israel under license agreements. Indeed, inrecent years many Israeli companies have chosen to market foreign brand names(The Manufacturers Association of Israel Report 1997). Massive penetration of for-eign companies into Israel has been evident since the early nineties. The number offoreign companies entering Israel increased from a few dozens in 1986–1990 to sev-eral thousand in 1991–1997 (Fiegenbaum et al. 1996). A partial list of these foreigncompanies at various stages of entry, provided by the Business Promotion Head-quarters in the Ministry of Industry and Commerce, includes more than 50 majorcompanies and is growing all the time (The Manufacturers Association of IsraelReport 1997). Foreign companies enter Israel in different ways and for differentreasons, aided by the positive climate established in the region in the wake of thepeace process; these ways include establishing plants, acquiring ownership of Israelicompanies, establishing joint ventures, and cooperating with Israeli companies.Among the multinational companies and corporations that have entered the Israelimarket are Unilever, Danone, Nestle, McDonalds, Office Depot, Motorola, Vishay,Intel, Microsoft, and others as well. Foreign investments in real sector Israeli cor-porations grew from $170 million in 1993 to $903 million in 1995, and then droppedto $584 million in 1996. Real sector investments of foreign residents in privateplacements and mergers of Israeli companies abroad increased from $270 million in1993 to $470 million in 1996. Furthermore, in 1996 74% of foreign residents’ realsector investments in Israel were in industry (Bank of Israel 1997). Table 2.1 presents

Table 2.1: Investments of foreign residents in Israel from 1990 through 1997($ million, current prices).

Year Total Marketable Securities Direct Investments

1990 81 �20 981991 366 15 3751992 505 �35 5191993 756 176 5601994 626 183 4151995 1,975 386 1,5161996 2,441 331 2,0291997 3,406 712 2,569

Source: Bank of Israel Foreign Currency Supervision, Central Bureau of Statistics (1998), and

Bank of Israel.

Globalization in the World and in Israel 23

the scope of investments of foreign residents in Israel between 1990 and 1997, demon-strating an increasing trend in foreign investments in Israel.

Globalization has also led to increasing the activities of Israeli companies oninternational markets, as seen in a number of signs and trends: an increase inthe investments and activities of Israeli companies abroad, an increase in capitalmobilization abroad, a major increase in exports, and gradual changes in the globalstrategy of Israeli companies. The Bank of Israel Report (1997) identifies severalmain trends pointing to an increase in investments and activities of Israeli companiesabroad. The net real sector investments of Israeli companies abroad increased from$664 million in 1993 to $766 million in 1996. From 1993 through 1996, ten Israelicompanies from different industrial sectors acquired holdings in companies abroadtotaling around a billion dollars, representing about half of the foreign acquisitionsfor 1996. The number of Israeli companies that own companies abroad increasedfrom 177 in 1991 to 489 in 1996. The number of companies operating abroad that areheld by Israeli industrial companies reached 1,037 in 1996. The average investmentabroad in industrial companies amounted to $5.4 million per company in 1996.Significant differences can be found among the industrial sectors, with $8.5 million ininvestment in the electronics and communications industry and $3.8 million in thefood industry. Table 2.2 shows the scope of Israeli investments abroad in the period1990–1997, indicating the increase in investment activity both in stocks and in directinvestments.

From 1990 to 1994, Israeli companies raised more than a billion dollars abroad. In1996 alone, Israeli companies raised $1.2 billion abroad (The Manufacturers Asso-ciation of Israel Report 1997). Figure 2.1 clearly shows the major increase in ex-ported goods (excluding diamonds) in 1990–1998. Industrial exports increased from$3.3 billion in 1980 to $12.3 billion in 1995, with the major growth emanating fromelectronics and machinery, which increased from $1.25 billion in 1980 to $6.3 billionin 1995, and from chemicals and plastics, which increased from $851 million in 1980to $3.2 billion in 1995. This growth trend continued in 1996 and 1997 as well,

Table 2.2: Investments of Israelis abroad from 1990 to 1997 ($ million, currentprices).

Year Total Marketable Securities Direct Investments

1990 152 �14 1651991 769 345 4231992 1,577 926 6511993 684 �79 7631994 433 �303 7351995 630 �15 6461996 667 �76 7431997 821 150 670

Source: Bank of Israel Foreign Currency Supervision (1990–1996), Central Bureau of Sta-

tistics, Bank of Israel.


although at a more moderate rate. Exported goods (excluding diamonds) in 1997amounted to $15.7 billion, compared to $14.4 billion in 1996 (an increase of 17%compared to 1995), i.e., an increase of $1.3 billion or 9.1%. Industrial exports (ex-cluding diamonds) in the first six months of 1998 amounted to $8.3 billion, indicatingthe following three points. First, there was no decrease in the growth rate of about10% per year, surprising in light of the crisis in Southeast Asia. Second, the accel-erating trend of increasing exports in labor-intensive sectors was noteworthy: 18.3%for half a year. Third, the distribution of exports by countries showed some changes:a major increase in exports to the US and the European Union totaling $5.1 billionor 87% of the total exports.

In the 1990’s, gradual changes in the global strategy of Israeli companies becameapparent. Increasing competition on world markets, shorter product life cycles, rapidtechnological changes, along with a shortage of technical and professional manpoweron the one hand and cheap manpower available abroad on the other have forcedIsraeli companies to shift large segments of their business operations to foreigncountries. This shift involves manufacturing abroad, as well as acquiring, mergingwith or somehow working together with foreign companies. Young high-tech com-panies that developed unique products have been forced to supplement their strategiccapabilities, primarily by marketing through cooperation with companies abroad.The Manufacturers Association of Israel Report (1997) lists Israeli companies invarious sectors that have implemented a global strategy. These examples illustrate thegradual changes in global strategic thinking among Israeli companies.

The peace process has offered a new opportunity to the Israeli textile industry:transferring plants from Israel to neighboring countries with which Israel signedpeace agreements, for example Egypt and Jordan. In these countries the cost of laboris lower than in Israel, a significant advantage in the labor-intensive textile sector. Asa result, about 59 sewing workshops in Israel have closed in recent years, with asimilar number of plants rapidly opening in Egypt and Jordan. Lodzia-Rotex openeda branch in Jordan, Delta Galil opened one plant in Irbid in Jordan and another inEgypt, and swimwear plants owned by Oberson and Gottex transferred some of theiractivities to Jordan. Textile imports to Israel have increased significantly in recent

Figure 2.1: Net export of goods (excluding polished diamonds) from 1990 through1998 in $million. Source: Israel Export Institute International Media Division 1997.


years, constituting about 25% of clothing goods (The Manufacturers Association ofIsrael Report 1997).

With the aid of strategic consultants from Harvard, Strauss has begun to thinkstrategically as well as to introduce changes in its organizational structure as requiredby the peace process. One of the main conclusions of this strategic thinking is that inthe near future the borders between Israel and its neighbors will be open, and theMiddle East will be a free trade region. This conclusion, together with the difficultyinvolved in penetrating US and European markets, led the company to the conclu-sion that they must continue to focus on Israeli and Middle Eastern markets. In anattempt to protect its interests in the ice cream sector, where it has a tremendousshare of the market, it decided to cooperate with the giant foreign company Unilever,among other reasons to reduce Unilever’s threat to Strauss’ business operations.

Elite is a multinational company, with a major share of its sales abroad. Thecompany has 15 manufacturing plants in seven countries and marketing centers ineleven countries. In 1992 Elite acquired the European companies Excella for man-ufacturing sweets and Union for manufacturing coffee, thus helping it enter Euro-pean markets. ECI Telecom has begun optimizing its business operations. For anumber of its production lines, for example DCME (Digital Circuit MultiplicationEquipment) development and manufacturing is carried out in Israel, while marketingis executed via agents abroad. For other products that are not niche products, thecompany develops, manufactures, and markets through joint ventures or through itssubsidiaries abroad, in order to survive in the competitive market. About a third ofECI Telecom’s employees are not Israelis, but rather employed by its subsidiaries indifferent locations worldwide. Globalization at Elscint can be seen in its marketingoperations only. Elscint develops and manufactures its products in Israel and mar-kets them through its subsidiaries in 14 countries around the world. About 40% ofElscint’s employees are abroad.

The findings of a survey called ‘‘Globalization in Israeli Industry’’ shed light on theimplications and scope of globalization on the Israeli market. This survey, carriedout in October–December 1996, was initiated and directed by the Committee forStrategic Thinking and the Economics Division of the Manufacturers Association ofIsrael, and was planned and analyzed by M.A.P Planning and Marketing CounselingLtd. Respondents included senior executives from 134 Israeli companies. The surveyshowed that the decisive majority of executives (79%) indicated that globalization isvery important or important for their companies. Executives of medium and largecompanies (companies with a sales turnover over $10 million and more than 100employees) indicated that globalization was very important, more than did executivesof small companies. Its importance was perceived as particularly high among high-tech sector executives, and lower (although still important) for the consumer goodssectors, including food, textile, and clothing. The survey also provides some objectivedata. For example, 80% of the companies are still active abroad, mainly throughexports; about a third have manufacturing subsidiaries abroad; 30% of the com-panies also operate abroad by acquiring control of foreign company; approximately50% of the companies are highly involved in joint ventures with foreign companies;around a third anticipate they will make foreign investments of over $5 million in the


coming five years. As expected, the survey showed that big companies are planninglarge investments, in excess of $10 million.

2.3. Factors Accelerating Globalization in Israel

Lavie (1997) presents a broad overview of economic, political, technological, busi-ness, and cultural attributes of the State of Israel that have helped attract foreigncompanies to Israel in particular and accelerate globalization in general. Severalpositive economic indicators can be seen in the Israeli market in the nineties. Whilethe Israeli economy has had its ups and downs, the bottom line is that its achieve-ments surpassed its failures. These achievements are measured mainly by comparingthe level of contemporary Israeli economy and to its level at its inception. Thepopulation of Israel has increased six-fold since 1949, to about six million, repre-senting an average annual growth rate of 3.7%. The GNP today (2003) is about$100 billion, with per capita income of $17,000. In 1950 the GNP stood at$4.5 billion (in current prices), and average per capita income was $3,500. That is, theGNP average annual growth rate is 6.8%, and the average per capita income growthrate is 3.4%. Israel’s economic structure has also undergone far-reaching changes. Inits early years, the Israeli economy was characterized by a large agricultural sectoremploying 22.5% of the total number of business sector employees. The industrialsector consisted of traditional industries, which sold their products mainly to thelocal market and employed 27% of the total number of business sector employees. Inthe late 1990’s, only 4% of the business sector employees work in the agriculturalsector. The percentage of employees working in industry has reached 25%, withabout half employed in the high-tech sector. About 48% of industrial production isintended for export, with around two-thirds emanating from the high-tech sector. Asthe Israeli economy has matured, service industries have grown significantly, con-stituting about half of the business output in the market and half the jobs. The publicsector in Israel comprises about 30% of the total number of jobs. This is relativelylarge compared with other countries in the world, and it points to the central rolethat this sector has played in the course of Israel’s history. Over time, the size of thepublic sector has been decreasing, and this trend is likely to continue.

Israel’s modern and diverse infrastructure provides Israeli companies the oppor-tunity for rapid and innovative technological development. The country’s topinstitutions of higher education, among them the Technion, Tel Aviv University,the Weizmann Institute, and the Hebrew University in Jerusalem, support thesecompanies through research and by training future employees in technology, ad-ministration, and the sciences. Israel’s business-supportive environment featureswell-established industrial parks, venture capital funds for financing high-tech com-panies, and major funds for supporting joint ventures. All these help accelerateglobalization in Israeli companies.

An educated and skilled workforce is likely to improve the reputation of Israelicompanies when negotiating with companies abroad to achieve cooperation agree-ments, acquisitions, or mergers. Israel is ranked the most educated country in the


world with respect to the percentage of the population who are university graduates.Israel has 140 engineers and technicians per 10,000 employees, compared to around80 in the US and 75 in Japan. The massive immigration from the former USSRcountries in 1991–1992 brought an infusion of educated manpower, including thou-sands of scientists and engineers bringing new knowledge and technologies to Israel.

Israel’s commercial ties and legislative system serve to enhance the globalizationprocess. Israel has free trade agreements with the US as well as with the countriesof the European Union and of the European Free Trade Association (EFTA).Moreover, Israel has entered agreements to avoid double taxation with developedindustrial countries such as Great Britain, Germany, France, Denmark, Sweden,Argentina, and others, and has preferred customs arrangements with Japan, Canada,Austria, Finland, and Norway. Israel offers government assistance and incentives,including bi-national funds that provide financing for approved joint R&D projectsbetween Israeli and foreign companies, thus helping companies more easily establishtechnological cooperation relationships with foreign companies.

The peace process has helped accelerate globalization in Israel. The signing of theOslo Accords in September 1993 brought about a change in Israel’s status in theMiddle East in particular and in the world in general. In the wake of the OsloAccords, Israel signed a peace treaty with Jordan, and began establishing relationson different levels with the Gulf emirates and other Arab countries. The peaceprocess has gradually turned Israel into a legitimate commercial partner in manycountries worldwide, and has given Israel market exposure in countries with which itdoes not have bilateral commercial agreements. The political process even reducedthe level of Israel’s security risk, and lowered expectations that war would break outin the region. In 1996–1997, Israel’s international status changed to some extent; thestandstill in the political process, as well as negative economic indicators such as theslowdown of market activity, decelerated globalization processes in Israeli compa-nies, both locally and internationally. Locally, entries of foreign companies sloweddown. The 1997 data from the Investments Center of the Ministry of Commerce andIndustry showed a decrease of 30% in foreign investments in Israel. Internationally,imports grew more slowly, as did export profits, as a result of high market interestrates.

In a survey initiated by the Committee for Strategic Thinking of the Manufac-turers Association of Israel Report, executives were asked about the main factorsenhancing globalization and those obstructing it. The survey sheds light on theimportance of certain factors in catalyzing or blocking the process. The three mainenhancing factors, as indicated by the entire sample regardless of sector, companysize, or level of international involvement, are as follows, according to order ofimportance: size of market and international opportunities it offers, possession ofup-to-date technology or R&D, and existing ties with international companies. Thethree obstructing factors are: shortage of funds or lack of insurance against politicalrisk, the political situation in Israel and in the peace process, and the harsh com-petition with companies in the target countries.

The survey’s results are to some extent congruent with those factors in the Israelisociety serving as catalysts for the globalization. The political process appears as an


obstructing factor in the survey, since the survey was conducted at the end of 1996,when the process was at a standstill. Government incentives and grants for develo-ping new technologies and for R&D, along with enhanced technological infrastruc-ture and skilled manpower indeed helped, according to the survey, accelerateglobalization. The executives claimed that the existence of up-to-date R&D andtechnologies served as a catalyst for accelerating the process. Yet the executivesbelieve there have not been sufficient financing sources to encourage direct invest-ments abroad.

2.4. Globalization and Managerial Challenges

The trend toward globalization offers fascinating business opportunities for man-agement. Yet at the same time, companies operating in the global arena must copewith a number of new pressures and demands they did not have before, and mustconsequently reexamine their strategy and adapt their operating strategies to the newreality. Before the 1980s, organizations tended to adopt one-dimensional strategiesthat focused on efficiency, response capability, or development of learning skills. Thegrowing trend toward globalization calls for adopting new, multidimensional strate-gies adapted to a new business environment characterized by complexity and highuncertainty (Bartlett & Ghoshal 1987).

Fiegenbaum et al. (1996) proposes such a multidimensional strategy. They arguethat companies operating in the global arena should look for a strategy that providesthem with a relatively competitive advantage, one that defines the output-visionand the input-strategic capabilities to help in achieving this vision. This should beaccomplished so as to satisfy customers’ future needs and meet the future require-ments of interested parties better than competitors, from both the local and theglobal perspective.

The uniqueness and complexity of global operations is competently reflected in themajor managerial problems facing executives in the global arena (Yehezkel 1993).Porter (1986), and Prahalad (1990) specify several such problems: seeking ways tointegrate networks operating in different geographical regions under one organiza-tional responsibility; achieving a competitive advantage in the international market;establishing strategic partnerships in the international arena, in many cases withcompeting organizations; developing organizational strategies adapted to the differ-ent countries in which the organization operates, while considering political, eco-nomic, and cultural factors.

Local companies operating in a global business environment must face new pres-sures. These pressures come from the local and global markets at the same time —pressures exerted by customers, competitors, and other interested parties. One is thepressure to reduce costs; technological changes as well as improvements in commu-nication and computer systems enable organizations to become more efficient, andtherefore customers exert pressure to reduce prices. The entry of new competitors tothe local and the global arenas along with the drive to encourage new innovation leadto constant pressures to improve product quality. A company operating in many


markets must satisfy different customers, each exerting its own unique pressures.McDonalds, for instance, was obliged to sell ‘‘kosher’’ products in some of itsbranches in Israel, due to pressures from the orthodox religious sector. The pressuresexerted by interested parties on companies operating in the global arena differ fromcountry to country, and include, among other things, governmental demands forroyalties in return for permission to operate in their country and bank requirementsregarding credit lines, guarantees, and loan-return periods.

One strategic solution to the challenges posed by the above-mentioned reality isorganizational cooperation in a variety of forms. In recent decades, such cooperationhas become common and popular. Small organizations enter into cooperationagreements with large corporations and multinational organizations in order toenhance their strength and their resources. Their size enables them to adjust relativelyeasily to the new environment and respond quickly to rapid changes. This mayexplain why so many small and medium companies have entered into internationalstrategic cooperation agreements (Lawrence & Vlachoutsicos 1993).

In summary, globalization and the Middle East peace process constituted impor-tant factors affecting the new business infrastructure in the 1990’s. These forcescreated a broad and well-situated field for global activity of all sorts of companies,particularly those in the high-tech field. Technological companies focused theirattention on product and capital markets outside Israel. Strategic partnerships withmultinational corporations provided a convenient springboard for rapidly enteringthe global arena, despite the difficulties in managing partnerships of this kind.

References

Bartlett, C. A., & Ghoshal, S. (1987). Managing across borders: New strategic requirements.

Sloan Management Review, 29, 7–17.


Management Journal, 17, 219–235.



Israel Export Institute International Media Division (1997). Healthy growth in health care,

January.

Lavie, D. (1997). Foreign entry to Israel: Marketing perspectives of strategic reference point

theory. MSc thesis. Technion — Israeli Institute of Technology (in Hebrew).

Lawrence, P., & Vlachoutsicos, C. (1993). Joint ventures in Russia: Put the locals incharge.

Harvard Business Review, Boston, 71(1), 44–51.

Porter, M. E. (1986). Competition in global industries. Boston: Harvard Business School Press.

Prahalad, C. K. (1990). Globalization: The intellectual and managerial challenges. Human

Resource Management, 29(1), 23–27.

Hebrew Sources

Bank of Israel — Foreign Currency Supervision (1990–1996). Annual survey.


Globalization in the Israeli Industry (1997). The report of the committee for Strategic Think-

ing in the Manufacturers Association, June.

The Central Bureau of Statistics (1998). Data taken for the internet site.

Yehezkel, A. (1993). A connection between differentiation in structural– managerial and cultural

variables of the parent organizations of the international common venture, and the effective-

ness of the venture. Unpublished doctoral dissertation, Tel Aviv University, Tel-Aviv.


Chapter 3

Privatization of Governmental Companies1

This chapter investigates the privatization process in Israel in the period 1986–1995from a number of perspectives, including the response of investors in the capitalmarket. The main findings of the research show privatization during that period notvery intense, focusing primarily and focused mainly on smaller companies operatingin traditional sectors, such as minerals, service industries, and the building trade. Italso shows the negative return to stock purchasers in privatized companies comparedto a control group, as indicated, for example, by market average and/or averagereturn per sector.

3.1. Privatization of Government Companies in Israel

Privatization of governmental companies has accelerated in recent years, constitutinga central issue in the global economy as well as in Israel. The first country to institutea large-scale privatization program was Great Britain, which since the early 1980s hasprivatized major governmental companies, such as telephone companies, automobilemanufacturing companies (Jaguar, Rolls Royce), and the gas company. In Israel, theprocess is in its early stages, and until this research only about 20 companies (out of160) have been privatized, among them Paz, Shikun U’Pituach, and Bezeq (partiallyprivatized). Privatization has several major goals: reducing government involvementin the economy, increasing company efficiency, increasing competitiveness, strength-ening the capital market, and raising capital for financing the budgetary deficit inmany countries worldwide. Privatization is also important to the Israeli high-techtake-off, as it constitutes the infrastructure for sector competitiveness, providingservices and raw materials to high-tech companies. Competitive prices as well asavailability of quality raw materials depend upon broad competitiveness, which inturn is dependent on the level of privatization of government companies.

In 1986 the government of Israel decided to reduce the share and influence ofgovernmental companies in the Israeli economy by privatizing them. Since 1986the government has sold shares in government companies totaling over $2 billion.Nevertheless, an analysis of the development of the economy in 1990–1994 showsthat the government has not succeeded in reducing the share of government com-panies in the GDP, and most of the large government companies have not yet been

1This chapter is based upon the thesis of Eran Terkel (1996) as part of the requirements for the MSc degree.

The thesis supervisors were Prof. Uri Ben-Zion and Prof. Avi Fiegenbaum, and it was submitted for

approval to the Senate of the Technion – Israel Institute of Technology in November, 1996.

privatized. In this section we examine and compare theories and findings aboutprivatization worldwide with Israeli privatizations in 1986–1995, including method,percentage, type of privatization, size of privatized companies, and line of business.The history of privatization in Israel can be divided into three periods:

(1) 1970–1977: In May 1970, the government decided to investigate the need forcontinuing its ownership of some government companies. Following this deci-sion, the Government Companies Authority suggested formulating criteria fordetermining which companies should remain under government ownership andwhich should be sold, but the proposal met with political and ideological re-sistance. In fact, during this period the government sold shares in 46 govern-mental companies, but most were small companies with the government holdingonly a small percentage of their share capital.

(2) 1977–1981: In the 1977 political upheaval, the Likud party came to power. Evenbefore the elections, the Likud’s political platform made a commitment to in-troduce sweeping changes in the structure of the Israeli economy, including en-couraging competition, reducing bureaucracy, and decreasing governmentinvolvement in the economy. In March 1978 the new government decided tosell 48 government companies, with the goal of raising $100 million within oneyear. Difficulties were encountered in implementing this program, and during theperiod shares were sold in 16 governmental companies, raising $42 million. Themain companies privatized during this period included the following (percentageof shares sold in parentheses): The Maritime Bank of Israel Ltd (100%), HaifaChemicals (52%), Vitko Chemicals (40%), El-Op (50%), Bank Tefahot (7%),Arkia (50%), Orlite Industries (100%).

(3) 1981 and after: Based on the progress of privatization worldwide, especially itsexpansion in Great Britain, the Israeli government decided in 1986 to privatizecompanies. This government decision had two components: (1) formulating aprogram for privatizing the government companies, and (2) immediately begin-ning the sale process. It was determined that the Government Companies Au-thority, which reports to the Ministry of Finance, would handle the project, sothat the minister in charge of privatization policy was the Minister of Finance.The government refrained from establishing a special entity (privatization ad-ministration) to deal exclusively with this project, as is customary in manycountries. This decision likely stems from the fear of establishing yet anothergovernmental body as well as from internal Ministry of Finance motives. Yet,conflicts of interests could arise within the authority, in its capacity as responsiblefor and supervising government companies on the one hand and its role in theprivatization process on the other.

The goals of privatization, as defined by the government, are2: First, removing gov-ernment from involvement in business, broadening the economy, and increasing

2From the decision of the Ministers’ Committee on Privatization — January 1993.


competition within the economy. Second, improving government monopolies andmaking them more efficient. Third, attracting foreign investments and integrating theIsraeli economy in international business and economic activities. Fourth, receivingappropriate return for sold assets/companies, to be used as a source for reducing theinternal debt and channeling resources to investments in infrastructure and in in-vestment assets. Fifth, making the labor market more flexible on the one hand, andhaving company employees share in the ownership, on the other. Sixth, developingand enlarging the capital market.

One of the goals of privatization is to raise capital for the state budget. ‘‘Receivingappropriate return for sold assets/companies, to be used as a source for reducing theinternal debt and channeling resources to investments in infrastructure and in in-vestment assets.’’ In the period 1986–1995, the state raised capital3 in the amount of$2,038 million from privatizing companies, and most of it was transferred to thestate’s budget (only a small part was invested in the companies).

In addition, in the above period the state sold part of its shares in the banks for theamount of $1,396 million. The distribution of income over time shows that incomewas on the rise (except in 1994, when the trend was stopped due to the stockexchange crisis). The increase in income over time is typical of privatization. Forexample, Vickers & Yarrow (1988) indicate that at the beginning in Great Britain,relatively small companies were privatized, and the sums of money raised increasedover time, when shares in large governmental companies were sold, for example thetelephone company, British Telecom. During the 1970–1983 time period, Britishcompanies were sold in an average sum of 300 million pounds per annum, whereas inthe years 1984–1987, the raised sum grew to 2,000 million pounds per annum.

3.2. Research Questions

Privatization means that the state sells part of its assets. One of the central issues inexamining privatization worldwide is whether the government received reasonablepayment for selling the companies (assets). Evaluating the financial considerationreceived from selling companies that are not traded on the stock exchange is com-plicated and is usually based on an accounting test of the company’s total assets(equity) plus expected future profits. The daily share price determines the companyvalue for publicly traded companies, and therefore it is easy to check whether thepayment that the government received for the company was reasonable based uponits market value after privatization.

The literature discusses this issue in depth. According to Valentiny et al. (1992),most of the government companies in Great Britain were sold at a low price, leadingto criticism of the privatization process by the National Audit Office. Jenkinson &Mayer (1988) examined the return on shares of privatized companies in Great Britain

3All the sums of income from privatization are stated in dollars according to the reporting method used by

the Government Companies Authority.

Privatization of Governmental Companies 35

and France in the days following privatization. Their findings show that the returnon shares of these companies was 10% higher than the average return on privatecompanies issued in these countries. Moore (1992) notes that the British governmentpreferred to sell the companies to the public at a low price in order to promoteprivatization and encourage the public and entrepreneurs to acquire shares in gov-ernment companies. Menyah et al. (1995) examined the long-term return (400 days)in a sample of privatized companies in Great Britain and found that privatizedcompanies were a good investment over the long term. On the other hand, Levis(1993) examined the return on companies issued on the stock exchange, including 12privatized government companies, and found out that shares in government com-panies, as in private ones, were issued at a high price and that their long-term return,up to three years, was negative.

The Israeli government denoted one of the goals of privatization as receiving anappropriate payment for the companies sold, to be used as a source for reducing theinternal debt and freeing resources for investments in infrastructure and investmentassets. This study examines the payment that the government received for selling thecompanies by testing the rates of return, from one month to one year, for purchasersof the shares of Israeli government companies. The rate of return for every shareoffering is examined compared to the rise of the TASE (Tel Aviv Stock Exchange)index, as well as to the index for the sector of the company’s area of operations.4 If,the evidence shows that the rates of return are significantly higher than the increaseof the TASE and sector indexes, this would point to a loss for the government, sinceit is likely that the company could have been sold for a higher sum had the gov-ernmental companies been managed more strategically. In summary, the low priceindicates the competitive inefficiency of the government companies.

Specifically, the following questions were considered: First, was the investment ingovernment company shares worthwhile? Second, are there significant differences inreal return resulting from company characteristics or the privatization characteris-tics, such as sector, company size, privatization method?

3.3. Research Method

3.3.1. Sample

Data were collected for a total of 25 privatization transactions in the period1986–1995. Data about transactions since 1991 were gathered from the Noga da-tabase. Of the 25 transactions, 15 were executed via TASE share offerings. In 16 ofthese transactions, the impact on the company’s value of the announcement regard-ing pursuance of the privatization could be examined (from available data about theshare price one month prior to share offering). Table 3.1 presents the transactions

4In this paper, the long run for share sholdings is defined as one year, as opposed to acquiring a share for a

few days only.


Table 3.1: Israeli privatized companies and method.

PrivatizedCompany

Sector PrivatizationMethod

Year Previous Month SharePrice Available

1 Shekem 1 Commerce Public offering 1993 None — first shareoffering

2 Shekem 2 Commerce Investor 1994 Yes3 Lapidot Oil Public offering 1994 None — first share

offering4 ICL 1 Chemistry Public offering 1992 None — first share

offering5 ICL 2 Chemistry Investor 1995 Yes6 Ashot Metals Public offering 1992 None — first share

offering7 Bezeq 1 Services Public offering 1990 None — first share

offering8 Bezeq 2 Services Public offering 1991 Yes9 Nafta 1 Oil Public offering 1989 Yes — company’s

shares were tradedon the stockexchange before1986

10 Nafta 2 Oil Public offering 1993 Yes11 Periclas 1 Chemistry Public offering 1986 None — first share

offering12 Periclas 2 Chemistry Public offering 1991 Yes13 Periclas 3 Chemistry Investora 1995 Yes14 Cavley Zion Metals Investor 1988 Yes — the company’s


15 Calcalit 1 Real estate Public offering 1987 None — first shareoffering

16 Calcalit 2 Real estate Private investor 1989 Yes17 Maman 1 Services Public offering 1989 None — first share

offering18 Maman 2 Services Investor 1991 Yes19 Taasia 1 Real estate Public offering 1988 None — first share

offering20 Taasia 2 Real estate Public offering 1989 Yes21 Taasia 3 Real estate Investor 1993 Yes22 Haifa

ChemicalsChemistry Investor 1986 Yes — the company’s



examined in this research. It should be noted that for a company that was privatizedin several stages, each stage is numbered separately, by numbering Maman 1 for thefirst privatization stage, Maman 2 for the second stage, etc.

3.3.2. Calculation of Returns

Every privatization transaction involving a state-owned enterprise carried out since1986 was assigned to one of the following groups: (1) share offerings (for example,issuing 35% of the shares of Shekem in 1993); (2) selling shares of a state-ownedenterprise traded on the stock exchange to a strategic investor (for example, the saleof the controlling interest in Israel Chemicals to the Eisenberg Group in 1995 at atime when the public held 25% of the company’s shares); (3) selling shares in com-panies not traded on the stock exchange to a strategic investor (for example, sale ofShikun U’Pituach). Since there are no data regarding the value of companies nottraded in the stock exchange (category 3), these companies are not included in thestatistical analyses. Based on the data, the per share return was calculated relative tothe TASE index as follows:

Rij ¼ðPij � Pi0Þ

Pi0�ðMij �Mi0Þ

Mi0ðA:1Þ

whereRij ¼ return on share i relative to the TASE after j months.Pij ¼ share price after j months after the shares were issued.Pi0 ¼ share price on the day the shares were issued.Mij ¼ TASE j months after the company’s shares were issued.Mi0 ¼ TASE on the day the shares were issued

23 Deshanim 1 Chemistry Public offering 1994 Yes — the company’sshares were tradedon the stockexchange before1986

24 Deshanim 2 Chemistry Investora 1995 Yes25 Magen Oil Investor 1993 Yes — the company’s


aPart of sale of ICL to the Eisenberg Group.

Table 3.1: (Continued).

PrivatizedCompany

Sector PrivatizationMethod

Year Previous Month SharePrice Available


For instance, on January 1, 1993, the government offered 20% of the shares ofCompany A (i ¼ 1) to the public. The offering price was NIS 100 per share, and theTASE index on the day of the offering was 200 points. After one month (j ¼ 1), theshare price was NIS 105, i.e., an increase of 5% and the TASE was 202 points, i.e., anincrease of 1%. Therefore, according to formula (A.1) the excess return is R11 ¼ 4%;i.e., after one month the increase in the share price exceeded the increase in the TASEby 4%.

In addition to comparing the per share return to that of the TASE, the per sharereturn was also compared to the index of the sector to which it is attributed, as follows:

Sij ¼ðPij � Pi0Þ

Pi0�ðBij � Bi0Þ

Bi0ðA:2Þ

where:Sij ¼ return on share i relative to the index for its sector after j months.Pij ¼ share price after j months after the shares were issued.Pi0 ¼ share price on the day the shares were issued.Bij ¼ sector index j months after the company’s shares were issued.Bi0 ¼ sector index on the day the shares were issued.

We continue the previous example, and here assume that the company was in thecommerce sector. On the day that the shares were issued, the sector’s share index was400 points, and a month later it was 412 points, an increase of 3%; hence S11 ¼ 2%,i.e., the return on the company’s shares one month after the shares were issued was2% higher than the return on the shares in its sector (and 4% above the TASEindex). Subsequently, an average Rij and an average Sij were calculated for each j forall transactions, as well as an average for each type of sale (public offering and sale toa strategic investor). For example, for j ¼ 1 (one month after the public offering/saleto a private investor), the following returns are calculated relative to the rise of theTASE index:

1. The average excess return �Ri compared to the TASE, one month after the sale/offering for the transactions.

2. The average excess return compared to the TASE, one month after the offeringfor public offering transactions only.

3. The average excess return compared to the TASE, one month after sale of sharesto a strategic investor.

Similarly, �Si is calculated for each j. The results as dependent on time elapsed ( j)are presented graphically, both in relation to the TASE and to the sector index. Inorder to check whether the results are statistically significant, a t-statistics is calcu-lated to test the following two questions:

1. Do the resulting averages differ significantly from zero? That is, does the resultingreturn at a specific time for privatized companies differ significantly from thereturn on the TASE/sector index?

2. Is there a significant difference in return between the different types of sales?


3.4. Results

Because the shares of Magen and of Deshanim suffered heavy losses that led todelisting during part of the period under examination (Deshanim 1, Deshanim 2),there were downward irregularities in the data and it was decided to remove themfrom the study.

3.4.1. State-Owned Enterprise Return Compared to the TASE

The average return on the studied companies (after offsetting changes in the TASE)is presented in Figure 3.1.

This figure shows that shares in state-owned enterprises were sold at a high priceand caused investors losses over the long run relative to the average return on thestock market. The main part of the loss occurred within a specific period of timeduring which the share was traded, in particular from three months to one year afterthe date of privatization. In contrast, no major change was seen in the share’s priceimmediately after privatization. Whoever purchased shares in a state-owned enter-prise on the day of a public offering that did not involve transferring control in thecompany from the government to a private enterprise lost an average of 28% after ayear, compared to someone who purchased stock in such a company (publiclytraded) on the day it was sold to a private investor.

To test the significance of the results compared to the H0 hypothesis that thereturn on the examined shares did not differ from the TASE, statistical tests wereconducted on the hypotheses. Their main results are presented in Table 3.2. The

Figure 3.1: Privatized state-owned enterprises share returns compared to the TASE.


hypotheses tested refer to the following questions:

1. Is the total share performance lower than the TASE?2. Does the share performance in each method individually (share offering/investor)

differ from the TASE?3. Is there a significant statistical difference in share performance between the two

privatization methods?

3.4.2. A Comparison versus the Sector Index

The average return compared to the sector share index is presented in Figure 3.2.Returns on shares in privatized companies compared to their sector index are

similar to those presented in comparison with the TASE: an average loss for inves-tors, where the main part of the loss occurred a relatively long period (about threemonths) after the privatization, and a greater loss for purchasers of shares in publicofferings. A comparison of the figures shows that the average return compared to thesector index (Figure 3.2) is higher. For example, after a year, the average returncompared to the TASE is �14%, while compared to the relevant sector it is �9%.That is, the relative return for shares issued on the stock exchange compared to thesector index was significantly higher than compared to the TASE. For example, after

Table 3.2: Summary findings compared with the TASE.

Characteristic Hypothesis Result

(a) All privatizedcompanies

Purchaser experiences a loss after amonth

Not significant

Purchaser experiences a loss afterthree months

Significant at 90%confidence level

Purchaser experiences a loss after sixmonths and onward


Negative return from one month toone year after share offering


(b) Privatizationthrough shareoffering

Loss after six months and onward Significant at 95%confidence level

Loss in period from one month to oneyear


(c) Privatizationthrough sale toinvestor

Purchaser experiences loss No significant resultPositive return between six and 12months


(d) Differencebetweenprivatizationtypes: shareoffering versussale to investor

After one year from date oftransaction, return is preferablewhen selling to a private investor



a year, the share return on shares issued on the stock exchange compared to thesector index was �10%, while compared to the TASE it was �24%.

For sales to a private investor, the results are opposite. Therefore, in Figure 3.2the difference in the results for the two methods of sale (share offering/private in-vestor) is small and insignificant. Table 3.3 presents the main significance tests for theresults shown in Figure 3.2.

Most of the results compared to the sector index are insignificant, yet the tendencytoward significance found in the comparison with the TASE exists. Note that thesector index is much more affected by share performance than the TASE index, forbig companies such as Israel Chemicals and Bezeq, which have a significant impacton their sector indices. Hence, it was expected that the results in Figure 3.2 would beless significant.

3.4.3. The Impact of Privatization on Company Value

For a company privatized in stages, the question arises of how the shareholders willrespond to an announcement of the intention to continue privatizing the company.There are several main stages in the privatization process, depending on how thegovernment chooses to sell the shares (share offering/sale to an investor).

1. The government announces its intention to sell company shares.2. A bid is offered/a prospectus is prepared.3. A buyer is chosen (in case of a strategic investor)/a share offering is floated.

Figure 3.2: Privatized company stock returns compared to the sector index.


At any stage, the government can reconsider its intention to sell shares in a com-pany. Examining the impact of each of the above announcements on company shareprices is quite complicated because data are not always available. Moreover, in somecases several announcements were made, as well as announcements of deferral of theprivatization. Another way to evaluate the impact of the sale process is to examinethe rate of return from a specific date prior to the sale (before completing the processand choosing a purchaser) until the day the privatization is executed. In this sectionwe examined company return in the month prior to privatization relative to theTASE and the sector index. Of a total of 13 transactions (see Table 3.1, after ex-cluding Deshanim and Magen), in eight the shares were sold at the end of the samemonth to a strategic investor (and control of the company was transferred to thisinvestor), and in the remaining five, the government offered additional shares to thepublic (without transferring control). The results are presented in Table 3.4.

The results indicate that the average share prices declined in the period leading upto the share offering. Tests of outcome significance (for all transactions) show thatthis outcome is significant at a 95% confidence level (in both cases). In addition, thetendency in share return after sale (see Figures 3.1 and 3.2) shows a preference forselling to a strategic investor rather than a share offering, especially compared to theTASE index. Due to the small sample, results are not significant. The trend towardno increase in share prices even in cases of selling to a private investor indicates thatshareholders did not expect that transferring the company to private control wouldbring about a significant improvement in company performance, so the company’smarket value did not rise.

Table 3.3: Summary findings compared with the sector stock index.

Characteristic Hypothesis Result

a. All companies The return after half ayear is lower than theaverage return persector


The return after a year islower than the averagereturn per sector

Not significant

Investor experienced aloss in the periodbetween a month and ayear from the sale

Not significant(significant at 88%confidence level)

b. Privatization via shareoffering

Return is lower thanaverage

Not significant for anyperiod of time

c. Privatization via sale toa private investor

Return is lower thanaverage


d. Difference betweentypes of privatizations:offering versus sale

There is a difference inreturn between themethods



3.4.4. The Impact of Company Characteristics on Investors’ Returns

This section examines return rates a year after the date of sale according to charac-teristics of the privatized companies. Since the number of transactions in each group issmall, the results are usually not significant, but do represent an existing trend.

3.4.4.1. Sectors’ impact About half of all privatizations are companies from thesector dealing with chemicals and oil exploration (12 out of 25, including Deshanimand Magen). The performance for the companies in the chemicals sector versus thoseof all of the privatized companies is presented in Table 3.5.

The indicated trend is that the return on companies in the chemical sector is lower.This outcome is consistent both compared to the TASE index and to the sector index.

3.4.4.2. Company size impact In privatizing the large companies (Bezeq, IsraelChemicals, Shekem, and Paz), the state raised 52% of the total capital raised byprivatization to that point. The percentage of capital raised by large companiestraded on the stock exchange was even higher, amounting to 63%. But beyond thefinancial importance, the result of issuing the large companies on the stock exchangehas a significant impact on the success of the entire privatization process. Thus, it isreasonable to assume that the government will try to make the share offering asuccess by lowering the price, so that the return on these companies will be relativelybetter. In Great Britain, issuing British Telecom shares on the stock exchange formedthe basis of the success of the entire privatization process, and according to Moore(1992), the government granted 10% bonus shares to purchasers among the public(‘‘small investors’’) for holding these shares for a period of three years, with the aimof encouraging the public to hold these shares for a long period of time.

In Israel, the Bezeq and Israel Chemicals share offerings were the largest issues ofshares on the stock exchange until that time, and the Government Companies

Table 3.4: Post-privatization and company value.

Compared toTASE

Compared toSector Index

(a) All companies �7% �7%(b) Privatization via public offering �1% �6%(c) Privatization via sale to investor �16% �10%

Table 3.5: Chemical sector share returns compared to other sectors.

Chemicals and Oil Exploration Other Sectors

� Compared to the TASE index 24% (30%)a 7%� Compared to the sector index 14% (22%) 5%

aIncluding Deshanim 1, Deshanim 2, and Magen.


Authority attributed great importance to their success. But, unlike the British policyof encouraging the public to purchase and hold these shares for a long period of time,a similar attempt was not made in Israel. Table 3.6 shows the returns of the largecompanies (Bezeq, Shekem, and Israel Chemicals) after a year compared to otherprivatized companies.

Though the big companies seem to show a better return, this result is insignificant.An examination of this return shows that except for an exceptional positive returnfrom Shekem’s first share offering (a return of about 60% above the TASE index)and the sector index, the remaining returns are negative, and if we do not take theShekem share offering into consideration, the return to investors on buying shares inthe big companies is identical to that attained from medium and small companies.Israel Chemicals’s share offering resulted in an especially negative return (�30%versus the two indices), and these losses damaged the public’s trust in the entireprivatization process. Since that share offering, the government has not tried to raisefunds of such magnitude on the stock exchange.

3.4.4.3. Time period impact The privatizations in the years 1986–1995 were dividedinto two periods: 1986–1991 and 1992–1995. This division into periods is appropriateboth for the number of transactions (13 in the first period, 12 in the second period)and for the change in the political leadership in Israel in 1992. Calculating the rates ofreturn during the two periods shows that there was no significant difference betweenthem.

3.4.4.4. Unprofitable companies impact Privatizing unprofitable companies is prob-lematic, as explained in the previous section. While privatization may serve to re-habilitate some of the unprofitable companies, on the other hand, the privatizationand the consequent withdrawal of government support may lead the company tobankruptcy. Therefore, an investor in shares of such companies takes a greater riskthan when purchasing shares of profitable companies, on which he can expect toattain a higher average rate of return. As indicated, to date the government hasbegun privatizing only a few unprofitable publicly traded companies, among themare Shekem, Deshanim, and Ashot. Due to the small number of unprofitable com-panies, no statistically significant conclusions can be drawn; hence each company isexamined separately below.

Ashot: 30% of the company’s shares were issued in 1992. After the offering, itbecame evident that the company’s condition was more serious than both the

Table 3.6: Percentage return on the major companies compared with other com-panies.

Large Companies Other Companies

� Compared to the TASE index �6% �17%� Compared to the sector index �2% �11%


government and the buyers had thought, and the share price declined by 60% incomparison with the TASE index (51% in comparison with the sector index).

Shekem: The company was privatized in two stages: first by offering 35% of theshare capital to the public, and a year later by selling the remaining shares to astrategic investor. The return for buyers in the share offering was the best achieved todate from purchasing shares in a state-owned enterprise (60% compared to the twoindices). This return may be the result of purchaser assumptions that the governmentsold the company for a low price (relative to prices for similar companies in thesector, such as Supersol), and that the recovery process after privatization would berapid. About a year later, the government sold the remainder of its holdings inthe company to a private investor at a price similar to the market price at thattime. But right after this sale, the share price declined by about 15%. The reason forthis decline in value may stem from the public’s understanding that the recoveryprocess (as seen in recent reports) would be long, even though privatization had beencompleted.

Deshanim: Deshanim shares were traded on the stock exchange prior to 1986. In1994 the government sold 5% of the company’s shares5 and in 1995 control in thecompany was transferred to the Eisenberg Group as part of the privatization of theparent company. In 1994–1995 it became evident that the company was experiencingdifficulties and that its ability to continue operating was uncertain. As a result, theshare price dropped drastically. The company’s shares have decreased by more than70% since 1994 compared to the TASE index.

In summary, the apparent trend is that the unprofitable companies were sold for ahigh price, and that the purchasers became aware that recovery for these companieswas more complicated and time-consuming than expected. On the other hand, notethat the sample is very small, so it is not correct to draw decisive conclusions basedsolely on these companies.

3.5. Summary

This research has examined the payment that the government received from publiclyselling traded government companies by testing the real return rates of the shares ofthese privatized companies during a period of one year after the date of sale. Themain findings are summarized below.

First, the return to buyers of shares in privatized companies was lower than theaverage return on these shares on the stock exchange. Second, the returns on sharesof companies sold to a strategic investor were higher than those on companies issuedon the stock exchange. Third, the return on buying shares of companies in thechemical sector was lower than the return on shares from other sectors. Fourth, thereturn on buying shares in large government companies was not different from thatof shares of medium or small companies (and it was negative). Fifth, the drop in

5A major part of these shares were purchased by ICL, the parent company.


share prices of government companies took place from three months to a yearafter sale, rather than immediately after the offering. Sixth, an announcement offollow-up privatization, in companies privatized in several stages, led to a decline incompany value in the period from one month prior to privatization until the day ofprivatization.

These findings are contrary to the research expectations, since most studies thathave surveyed share performance of privatized companies (in Great Britain andFrance) showed high rates of return. In addition, reports of the State Comptroller in1989 regarding the sale of Paz and the Jerusalem Economic Corporation claimed thatthese companies were sold at a high price, and it can be assumed that this trendcharacterized the other privatizations as well.

Perhaps the main reason for the decline in share prices after a relatively longperiod of time was the public’s expectation that after privatization the companywould immediately and drastically improve its performance, and hence they esti-mated company value accordingly. But since the change in company performance didnot meet the expectations, the public revised the company value, leading to a declinein share price.

The fact that the trend of declining share prices was focused in shares of companieswhose control was transferred reinforces this claim for the following reasons.First, the public’s knowledge of these companies at the time of sale was limited, sincemost had not been traded on the stock exchange. Second, some of the privatizedcompanies, such as Bezeq, were unique in the Israeli market, and it was difficult forthe public to evaluate their value prior to privatization, whereas the GovernmentCompanies Authority was more familiar with these companies and could sell themfor a high price. Third, the prospect of improving performance of companies thatremained under governmental control was small.

In companies that were sold to a strategic investor, privatization did not bringabout an increase in company value. A possible explanation is that these companieswere publicly traded at least a year prior to their sale to a strategic investor, andtherefore were well known to the public, who probably assumed that privatizationwould not lead to a significant change in their performance in the short run. Inaddition, in companies that had been publicly traded for a long time, it is unlikely tofind assets that have not been priced correctly at the time of sale,6 mainly real estateassets that might have brought a high return to the investor.

The findings of the current research show that the government received fair com-pensation from selling its assets and perhaps extra. But the fact that the return to thepurchaser of the shares on the stock exchange was negative led to a slowdown inprivatization and a lack of support on the part of the investing public in the process.These results, and particularly the losses experienced by the buyers of Israel Chem-icals’s shares in what was the largest government company share offering to date,probably damaged the government’s ability to raise large amounts of money by

6In many cases of issuing governmental companies for the first time, there is an expectation to ‘‘discover’’

assets which have not been cost accounted correctly at the time of determining the price of the stock issue.


selling companies on the stock exchange. Hence, in future large stock offerings, thegovernment will have to exert great efforts to convince the public that investing in theshares will be profitable.

To summarize, in the short run the government gained at the expense of theinvestor. This finding may have an impact on the future success of privatization,which in turn will negatively affect the level of sector competitiveness and ultimatelyinfluence Israeli high-tech sector’s ability to continue to soar.

References

Jenkinson, T., & Mayer, C. (1988). The privatization process in France and U.K. European

Economic Review, 322, 482–490.

Levis, M. (1993). The long-run performance of initial public offers: The U.K. experience,

1980–1988. Finance Management, 22, 28–41.

Menyah, K., Paudyal, K., & Inyangete, C. G. (1995). Subscriber return, under pricing and

long-term performance of U.K. privatization initial public offers. Journal of Economics and

Business, 47, 473–495.

Moore, J. (1992). British privatization — taking capitalism to the people. Harvard Business

Review, 70, 115–124.

Terkel, E. (1996). Testing the influence of privatization of Israeli firms performance. MSc thesis,

Technion — Israeli Institute of Technology (in Hebrew).

Valentiny, P., Buck, T., & Wright, M. (1992). The pricing and valuation of public assets:

Experiences in the UK and Hungary. Annals of Public and Cooperative Economics, 63,

601–620.

Vickers, J., & Yarrow, G. (1988). Regulation of privatised firms in Britain. European Economic

Review, Amsterdam, 32(2,3), 465–472.


Chapter 4

The Entry of Foreign Companies intoIsrael1

Since the early 1990’s, foreign companies have entered the Israeli economy in un-precedented numbers. The literature discussing the entry of foreign companies iscomprehensive and varied, but it makes almost no mention of the Israeli market. Theaim of the current research is to examine whether the entry and positioning of foreigncompanies in Israel poses a threat and/or an opportunity to Israeli companies. Thestudy compares foreign and local companies with respect to marketing and strategicpositioning, as perceived by Israeli customers of both Israeli and foreign companiesduring the period 1995–1996. A total of 406 questionnaires were distributed, out ofwhich a sample of 104 companies was constructed, 56 Israelis companies and 48foreign companies. A comparison between the foreign and local companies showsthat Israeli consumers attribute better strategic capabilities to foreign companiesthan they do to local companies, as well as greater investment in satisfying custom-ers, relating to their needs, and making more varied changes in their operations.

4.1. Theoretical Background and Research Hypotheses

The number of foreign companies entering Israel has increased, from a few dozen inthe period 1986–1990 (Fiegenbaum et al. 1997), to several thousands in 1991–1997.Foreign companies have entered by a variety of means, among them establishingsubsidiaries, purchasing ownership in Israeli companies, purchasing shares in Israelicompanies, establishing joint ventures, and granting franchises and import licensesfor manufacturing and marketing international brand names through local repre-sentatives. As part of this trend, international companies and corporations suchas Unilever, Danone, Nestle, McDonalds, Pepsi, L’Oreal, Johnson & Johnson,Haagen-Dazs, Office Depot, Motorola, Intel, Microsoft, and others as well haveentered different sectors in the Israeli economy.

The motivation behind the entry of foreign companies is wide and covers manyaspects: The Middle East peace process, the curbing of the Arab Bocott in the wakeof the Gulf War, the growth of the Israeli market, privatization of governmentcompanies, encouragement of foreign investors by means of the Law of Encouraging

1This chapter is based upon the thesis of Dovev Lavie (1997) as part of the requirements for the MSc

degree. The thesis supervisor was Prof. Avi Fiegenbaum, and it was submitted for approval to the Senate

of the Technion–Israel Institute of Technology in October 1997.

Capital Investments, accumulated international experience in Israel, and strategic-competitive motives of foreign companies (Porter 1986; Prahalad & Doz 1987). Theentry of foreign companies and international brand names into Israel exposed thelocal consumer to a wide variety of products, and posed difficulties but alsochallenges for local companies stemming from the need to cope with internationalcompanies.

Only a few studies have examined the characteristics of foreign companies oper-ating in Israel. Fiegenbaum et al. (1997) examined the characteristics of Americancompanies operating in the Middle East and in Israel from 1986 to 1990, and showedthat the companies operating in Israel were significantly smaller than those operatingin the Arab countries. It can be assumed that the Arab boycott prevented interna-tional corporations from entering Israel, so it is reasonable that during the researchperiod, when the impact of this boycott has been curbed, that large corporations suchas Pepsi, McDonalds, L’Oreal, and others have begun operating in Israel as well. Inaddition, the companies that entered Israel, compared to American companies thatentered the Arab countries, are R&D intensive, make lower investments in adver-tising, and have a relatively larger scope of international activity.

The current research is a followup that explores the massive entry of foreigncompanies to Israel and their strategic positioning during the mid-1990’s. The basictheoretical argument is that large and competitive multinationals had entered theIsraeli market and hence they will be better positioned than their Israeli counterparts(Prahalad & Doz 1987). We compare Israeli companies and multinational foreigncompanies that entered Israel on three main issues: business performance, marketpositioning, and competitive strategy. The first hypothesis, which refers to businessperformance, is that the local customers of foreign companies will be more satisfiedthan customers of local companies (Samiee 1994). The second hypothesis is thatthe local customers of foreign companies will position their products at a higher levelof quality and price than will customers of local companies (Kotler 1991). The thirdhypothesis is that the local customers of foreign companies will perceive the com-petitive strategy of foreign companies as preferable to that of the local companies(Dunning 1981; Porter 1986; Bartlett & Ghoshal 1987).

4.2. Research Methodology

4.2.1. The Sample

The sample comprises local and foreign companies operating in Israel. For the pur-poses of this research, Israeli companies under foreign ownership, local franchisees ofbrand names of foreign companies, and imported products are all categorizedas foreign companies. The companies included in the sample operate in varioussectors, and were divided into seven categories: food, cosmetics-toiletries, textile-clothing, high-tech, marketing and distribution networks, chemicals, and aviation.The number of questionnaires distributed in each sector for local and foreign com-panies is presented in Table 4.1. Overall, 406 questionnaires were collected, from


which a sample of 104 companies was constructed, which comprised 56 Israeli and48 foreign companies.

The research questionnaires were completed by Israeli customers of the companiesincluded in the sample during the period 1995–1996. The sampled companies werechosen randomly among the companies operating in the different sectors. The com-panies in the sample are listed in Table 4.2.

4.2.2. The Questionnaire and Research Variables

The questionnaire distributed among the subjects included the statements specifiedin Table 4.3, together with 7-point response scale, with 7 indicating full agreement,4 indicating neutrality, and 1 indicating complete disagreement. The questionnairealso included an identification of the company name and the sector it belonged to, itsclassification as foreign/local company, and the subject’s demographic details, suchas age, education, income, and extent of familiarity with the company. In examiningthe demographic differences among subjects regarding foreign and local companies,there have been found no significant differences that can explain the variance ofanswers in this category.

Table 4.3 presents the variable definition (first column), and a description of thevariable (second column). The third and fourth columns present the averages of localversus foreign companies, to be explained in the results analysis. The variables weredivided into five categories, covering a wide range of business activities. CategoriesA, B, and C refer to the three competitive dimensions of the strategic space, i.e.,internal, external, and time, respectively (Fiegenbaum et al. 1996). The category Drefers to market positioning (Kotler 1991), and the category E refers to companyperformance (Porter 1980). A scale was constructed for each category, including anumber of questions representing the specific aspect.

Table 4.1: Characteristics of the research sample.

Israeli Companies Foreign Companies

Sector No. ofCompanies

No. ofQuestionnaires

No. ofCompanies

No. ofQuestionnaires

Food 17 74 20 74Cosmetics-toiletries 11 40 8 32Textile-clothing 6 28 5 28High-tech 12 23 5 31Marketing anddistribution networks

6 28 6 28

Chemicals 2 2 2 2Aviation 2 8 2 8Total 56 203 48 203

The Entry of Foreign Companies into Israel 51

Table 4.2: List of local and foreign companies.

Company Name Sector Company Name Sector

A. Local (Israeli) Companies

Ahava Cosmetics Tempo-manufacturer ofMaccabi

Drinks

Osem Food Tene-Noga/Tnuva Ice creamEl-Al Aviation Barkan Wines DrinksElbit Electronics Golan Heights Winery DrinksAmir-Tafnukim Diapers Carmel Olefin

PetrochemicalsChemistry

Arkia Aviation Carmel Mizrahi DrinksBurger Ranch Fast food Michlol Office equipmentGazoz Textile McDavid Fast foodGeotech Communication Mashov—manufacturer

of MagicSoftware

Gali Shoes Meshubach FoodGan-Li Toys Matim Li TextileGrinberg Marketing

networkNecca Chemicals Toilet products

Dr. Lek Ice creams Sod cosmetics andcleaning products

Toilet products

Dr. Fisher Cosmetics Steimatzky BooksDvir SoftwareProducts

Software Elite Food

Dagesh Software Polgat TextileDorel Computers Popolo Fast foodDelta Textile Castro TextileVita Food Kravitz Office equipmentVitko Cosmetics Careline CosmeticsHome Center Marketing

networkStrauss Food

Neft-Ptil Chemistry Tadiran ElectronicsJeneusse Cosmetics Cosmetics Telma (Tami) FoodHogla Diapers Tamam CommunicationHashavshevet Software Trima — manufacturer

of MaternaFood

Tower Semi-conductors

Company Name Sector Entry Mode Country of Origin

B. Foreign Companies

Abbott Food Local import IrelandAce Marketing network Franchise USAAntinory Winery Drinks Local importBen & Jerry’s Ice creams Franchise USABenetton Textile Franchise ItalyBarton & Guestier Drinks Local import FranceBritish Airways Aviation Local representative Great BritainBurger King Fast food Franchise USA


Table 4.2: (Continued )

Company Name Sector Entry Mode Country of Origin

CPC Food Ownership in a localcompany

Germany

Calvin Klein Textile Franchise USACarlsberg Drinks Franchise DenmarkCiba Geigy Hygiene Local import SwitzerlandColgate Toilet products Franchise USADelrina Computers Franchise CanadaDow Chemical Chemistry USAGeneral Electric Electronics Local import USAHaagen-Dazs Ice creams Franchise USAHeinz Food Franchise USAHerbalife Hygiene Franchise USAIntel Electronics Subsidiary USAKellogg’s Food Local import USALancome Cosmetics Franchise FranceLever Cosmetics Franchise GermanyLevis Textile Franchise USALin Books Franchise RussiaLitton Communication USAL’Oreal Cosmetics Ownership in a local

companyFrance

McDonald’s Fast food Franchise USAMicrosoft Software Subsidiary USAMondavi Winery Drinks Local importMotorola Electronics Subsidiary USANaf Naf Textile Franchise FranceNestle Food Ownership in a local

companySwitzerland

Nutrasbit FoodOffice Depot Office equipment Franchise USAP&G pampers Diapers Franchise USAPierre Smirnoff Drinks Local import USAPizza Hut Fast food Franchise USAReebok Shoes Franchise USARevlon Cosmetics Subsidiary USASans England Chemistry Great BritainShapeware ComputersSony Electronics Local import JapanSuper-Office Office equipment Franchise USAToys R Us Toys Franchise USATWA Aviation Local representative USAUnilever Food Ownership in a local

companyUSA

Universe Club Marketing network Franchise USAVin & Spirit Drinks Local importWrigley Food Local import USA


Table 4.3: Research variables.

Variable Definition Variable Description LocalAverage

ForeignAverage

A. Internal dimensionStrategic capabilities in1. Marketing The company has better

marketing capability than itscompetitors

4.24 5.26

2. R&D The company has capability todevelop (present) newproducts better than itscompetitors

3.91 4.98

3. Manufacturing The company has capability tomanufacture products betterthan its competitors

4.19 5.11

4. Human resources Level of human resources in thecompany is higher than thatof its competitors

3.99 4.42

B. External dimension1. Competitor

activitiesThe company better adjustsitself to competition than itscompetitors

4.22 5.08

C. Time dimension1. Frequency of

changesThe company constantly makessmall changes

4.57 4.69

2. Variety of changes The changes are made along anumber of dimensionssimultaneously(advertisement, reductionsy)

4.49 4.87

D. Market positioning1. Price Prices of products (services) are

higher than those ofcompetitors

4.05 4.72

2. Product quality The products (services) arebetter than those ofcompetitors

4.29 5.21

3. Service efficiency I waste time standing in line topurchase product or receiveservice

4.78 4.70

4. Advertising policy The company’s advertisinginfluences my decision topurchase from the company

4.01 4.68

5. Company’spositioning

The company’s locationinfluences my decision topurchase from the company

4.42 4.54


4.3. Research Results

Table 4.3 describes the averages for the two groups. First, the differences between theforeign and local companies were examined along a matrix of strategic referencepoints (SRP): internal dimension (strategic capabilities), external dimension, andtime dimensions (categories A, B, C).

For the internal dimension, the findings show that the foreign companies have, onaverage, better marketing capabilities than the local companies, as well as morepreferable R&D capabilities. In addition, the manufacturing capabilities of the for-eign companies are better than those of the local ones, and they also have betterhuman resource capabilities than do the local companies. Since for all the strategiccapabilities examined, a significant preference for the foreign companies was found,it may be said that consumers in Israel attribute better strategic capabilities to foreigncompanies marketing their products on the local market than to local companies, inthe areas of R&D, manufacturing, marketing, and human resources.

Regarding the external dimension, the findings show, at a sufficient confidencelevel, that the foreign companies better adjust themselves to competition than do thelocal companies. Furthermore, the foreign companies invest more thought in sat-isfying customers and in catering to their needs. Hence, the findings support theexistence of an advantage to the foreign companies on the external dimension of theSRP matrix. Regarding the time dimension, although the average of the foreigncompanies is higher than that of the local companies, statistical testing showed no


Variable Definition Variable Description LocalAverage

ForeignAverage

6. Payment policy The installment payments policyinfluences my decision topurchase from the company

3.89 3.43

7. Promotion policy Special sales promotionsinfluence my decision topurchase from the company

4.58 4.59

E. Company Performance1. Service satisfaction I am satisfied with the service

given by the salespeople4.64 4.80

2. Purchasingsatisfaction

I enjoy purchasing from thecompany

4.49 5.25

3. Repeatedpurchasing

I’ll go on buying from thecompany in the future

5.05 5.75

4. Satisfaction withcompany’s attitude

I am treated courteously by thecompany

4.93 5.31

5. Brand loyalty I vacillate between the companyand its main competitor

4.00 4.20


significant difference between the groups with respect to frequency of changes madeby foreign companies versus local companies. On the other hand, for the variablethat refers to the distribution of changes over the different dimensions, the foreigncompanies were found to have an advantage over the Israeli companies at a sufficientconfidence level. Hence, it can be said that the findings to some extent support thenotion that the foreign companies are more dynamic than the local ones.

In summary, the findings referring to differences in competitive strategy indicatean obvious advantage for the foreign companies over the local companies on the SRPmatrix, hence pointing to preferred strategic capabilities, an advantage in forwardthinking along the external axis, and also an advantage along the time dimension.

The classification presented in Figure 4.1 illustrates differences between the com-petitive strategy of the local companies versus that of the foreign companies.According to this classification, the foreign and the local companies are situatedalong the two competitive dimensions, i.e., the internal dimension (strategic capa-bilities) and the external dimension (competitors). Each dimension was divided at theaverage, resulting in four cells. The upper right cell describes companies that arecompetitive because they are characterized by high inward (into the organization)and outward relations. The left bottom cell, in contrast, represents companies belowthe average of the two dimensions; organizations in this cell are myopic and hencedoomed to failure. Organizations falling in the upper half of the internal dimensionbut in the lower half of the external dimension are narcissistic organizations. Incontrast, organizations that are above average in relation to the external dimensionbut below average on the internal dimension is myopic.

Topology of Sample Company Averages

Internal Dimension

Sample Average

Sample A

verage

Amorphous

Ext

erna

l Dim

ensi

on

Myopic

6.0

5.5

5.0

4.5

4.0

3.5

3.03.0 3.5 4.0 4.5 5.0 5.5 6.0

Narcissistic

Effective

ForeignCompanyAverage

LocalCompanyAverage

Figure 4.1: Competitive positioning of foreign and local companies.


Figure 4.1 shows the advantage of the foreign companies over the local companies.On average, the foreign companies are more adaptive and competitive (upper rightcell) relative to the local companies, which are perceived as myopic (bottom left cell).A ‘‘myopic’’ organization is an organization with a high probability for failure, sinceit has neither the internal nor the external capabilities to satisfy its customers betterthan its competitors. In contrast, a competitive organization that looks inward aswell as outward to its competitors and customers is capable of adjusting itself to thechanging environment. The results show very clearly that the foreign companies havea competitive advantage over the local ones.

The study also examined the market positioning of the foreign and local companies(category D in the questionnaire). The position of the foreign and local companiesalong the price/quality matrix presented in Figure 4.2 and statistically examined. Thefigure indicates that the foreign companies positioning was higher quality but alsohigher price. The statistical tests showed that the quality as well as the price of theforeign companies was significantly higher than those of the local companies. Thisindicates that there is no dominate strategy that will eliminate the other.

One indication for validating the finding of an ownership advantage for the localcompanies can be found in the variable referring to the installment payment policy inthe price component. The results show that the installment payments policy ofthe local companies is more effective than that of the foreign companies, though thefinding is not significant. The findings of the statistical tests also indicate that theadvertisement policy of the foreign companies is more effective than that of the localones. With respect to the other marketing policy components, among them efficiencyof service, sales promotion, and placement, no significant differences were foundbetween the foreign and the local companies. But although no difference was foundin the customers’ perceived effectiveness, this finding points to preferred effectivenessin positioning for the foreign companies. Local companies are more responsive tomarket needs; they have a superior infrastructure for local coverage and are familiarwith the local market. But despite all this, the positioning policy of the foreign

Topology of Company Market PositioningSample Average

5.5HIGH

LOW

LOW HIGH

5.0

4.5

4.04.0 4.5 5.0

Sample A

verage

Qua

lity

Price

ForeignCompany Avg.

LocalCompanyAvg.

Figure 4.2: Marketing positioning of foreign and local companies.


companies is still as effective as that of the local companies, hence pointing to thesuperiority of the foreign companies.

The study also examined the performance differences between foreign and localcompanies (category E in the questionnaire). For each of the variables representingcustomer satisfaction, a higher average was found for foreign companies’ customerscompared to local ones. Foreign companies have an insignificant advantage withrespect to customer satisfaction with service. A significant difference, however, wasfound in the courteous attitude of foreign companies toward their customers versusthat of the local companies. Regarding customer satisfaction from the process ofbuying in the company, the findings showed significantly higher satisfaction amongcustomers of foreign companies compared to those purchasing from the local com-panies. Foreign companies also show an advantage over the local ones regardingthe variable representing intention to make a repeat purchase.

4.4. Summary and Conclusions

This study presents results illustrating the differences between foreign and localcompanies from the consumer’s point of view. The findings show that the competitivestrategy of the foreign companies is preferable to that of the local companies, as isevident in their development of preferable strategic capabilities in R&D, manufac-turing, marketing, and human resources, as well as their emphasis on customer needsand competitor behavior. Finally, the foreign companies have proven to be moredynamic through their implementation of broader changes and competitive adjust-ments along the time dimension.

These obvious differences between foreign and local companies in their competi-tive strategy lead to differences in performances as well (Fiegenbaum et al. 1997). Theforeign companies are more adaptive than are the local companies, and therefore canadjust themselves better to the competitive environment and hence implement a moreeffective strategy. An examination of the source of the strategy differences betweenthe foreign and the local companies showed that the foreign companies havesome fundamental characteristics lacking in the local companies, which in turn con-tribute to developing a successful strategy along all the SRP dimensions. Thesecharacteristics may possibly include advantages of size, international experience,unique organizational structure, and others as well.

The results reveal a significant advantage for the foreign companies over the localones along the main dimensions of marketing policy effectiveness, and none of thefindings point to an advantage for the local companies. The foreign companies alsoexhibit an obvious advantage regarding positioning of their products along the price/quality matrix. On average, the foreign companies offer more expensive products andservices, but this is not sufficient to define a competitive advantage/disadvantage inthe eyes of the customers.

This finding, together with the finding regarding quality of products/servicesquality, where the foreign companies have a clear advantage as well, indicatesthat ultimately the foreign companies have an advantage over the local companiesbased on customer calculations of price/effectiveness. A local product will be more


expensive than a foreign product of the same quality, even though in general localproducts are cheaper than foreign ones. Hence, the research identifies a difference incompetitive positioning among the foreign companies, with the local companiesfocusing on cheaper and lower quality products than the foreign products, which areperceived as more prestigious. An additional dimension of this marketing mix, inwhich the foreign companies have an advantage over the local ones, is their adver-tisement policy. The foreign companies’ advertisement policy is more effective thanthat of the local companies, but this effectiveness is not merely from the giganticinternational advertising budgets at the disposal of the multinational companies.Rather, it derives from their preferred competitive strategy, which identifies customerneeds while using a variety of outstanding strategic capabilities in order to meetcustomer needs better than local competitors. Note that on the other two dimensionsof the marketing mix, positioning, and sales promotion, no significant difference wasfound between the foreign and the local companies. These areas are the only ones,with the exception of price, in which the local companies have tools to compete withthe foreign companies. The local companies have an inherent advantage in posi-tioning, due to their familiarity with the market and existing infrastructure for ac-cessing customers, providing them the means for a good local response. Nevertheless,the local companies have not managed to implement any of these advantages or offera more effective marketing policy than that of the foreign companies.

The contribution of the current research is not merely academic. Executives offoreign and local companies operating in Israel can make efficient use of its con-clusions in order to improve their performance and identify the areas for improvingtheir competitive advantages. The research also provides tools and means forapplying a strategy that may lead to achieving a competitive advantage under thenew competitive conditions in the Israeli market in the wake of globalization and theentry of foreign companies.

Because the current study examined unique aspects of foreign and local companiesoperating in Israel, it can be used as a basis for strategic recommendations to foreigncompanies operating or planning to begin operations in Israel, as well as forlocal companies that must cope with multinational foreign companies in the Israelimarket.

The research findings point to a competitive advantage for the foreign companiesover the local ones. Hence, the recommendations for foreign companies will focus onhow to maintain their competitive advantage and improve their performance in areaswhere they have no advantage. The recommendations for the local companies, on theother hand, will focus on how to improve their positioning to achieve a competitiveadvantage that will enable them to survive and even succeed in light of the new globalmarket reality.

4.4.1. Strategic Recommendations for Foreign Companies

� To maintain their superior strategic capabilities through the transfer of knowledgeand international experience while exploiting existing capabilities for operating inthe local market.


� To recruit local partners, establish joint ventures, or acquire local companies as ameans of increasing local responsiveness to the unique needs of the local market.� To emphasize prestigious positioning for establishing their reputation.� To make local service more efficient, for instance, by selecting leading franchisees.� To improve their positioning in the marketing mix, for example by using well-established local distribution channels or distribution companies and local mar-keting networks.� To improve effectiveness of sales promotion operations, for example, by usinglocal public relations companies who are more familiar with the behavior andpreferences of local customers.� To offer a more attractive pricing policy after establishing themselves in the localmarket, in order to apply an overall strategy to reach customers with a lower pricethreshold as well.� To use preferred means of advertisement in order to develop loyalty to the brandname, thus overcoming the consumption habits of local customer who are accus-tomed to local brand names.� To establish strategic ties with local suppliers and customers, mainly governmen-tal and institutional bodies, that can contribute to the foreign company’s Israelioperations.� To make use of government support, Israel’s foreign commerce connections, andhigh quality human resources in order to optimally develop their Israeli operations.

4.4.2. Strategic Recommendations for Local Companies

� To develop long-term strategic capabilities in R&D, manufacturing, marketing,and human resources.� To apply a niche strategy, i.e., to focus on niches where the local company has acompetitive advantage, or where there is no significant threat from multinationalcompanies.� To cooperate with and establish joint ventures with foreign multinational companies.� To cooperate with and establish joint ventures with leading local companies, andto implement acquisitions and mergers.� To redefine the borders of their activities and reexamine the profitability of stayingin a sector.� To look toward the global market and adopt a global strategy with the aim ofpenetrating the global market.� To emphasize the advantages of Israeli products compared to foreign ones.� To examine competitors’ activity in light of the entry of foreign companies, and toconstantly monitor changes in customer needs and competition characteristics inthe local market.� To improve responsiveness, take the initiative, adopt a dynamic policy, and becapable of making quick changes, to improve company strategy along the time axis.� To exploit the competitive advantage of being familiar with the local market andcustomers in order to better meet customer needs.


� To exploit the advantage of cost, while emphasizing the advantages of purchasinglocal products, and at the same time improving the quality of products and servi-ces, as well as their perceived quality through enhanced advertising and salespromotion activities.� To enhance the quality of products and services, and to make efficiency the mostimportant strategic goal.� To allocate larger budgets for advertising and sales promotion, while associatinglocal products with international attributes, thus positioning the local companiesin line with the multinational companies from the customer’s point of view.� To exploit the advantages of location, easy customer access and local distributionchannels in order to achieve better performance.� To emphasize service and orientation to the customer in order to improve satis-faction and develop loyalty to the brand name.

Despite the theoretical and potential applications, a number of possible limita-tions must also be taken into account. The basic model did not consider sectorclassification except for the distinction between high-tech and other sectors. More-over, the use of subjective customer evaluations should be considered. An alternativewould have been to use evaluations of company executives, or objective data re-garding company performance, such as rates of sales, market share, profitability, andso on. These alternatives have their own disadvantages, and do not provide a fullerpicture within the marketing context investigated in the current study. Another limi-tation with respect to possible business applications is that the study did not examinethe level of the single company. Future research can provide direct and more detailedrecommendations to executives of foreign and local companies operating in a spe-cific sector.

References

Bartlett, C. A., & Ghoshal, S. (1987). Managing across borders: New organizational responses.

Sloan Management Review, 29(1), 43–54.

Dunning, J. H. (1981). International production and the multinational enterprise. London: Allen

and Unwin.





Kotler, P. (1991). Marketing management. Englewood Cliffs, NJ: Prentice-Hall.

Lavie, D. (1997). Foreign entry to Israel: Marketing perspectives of strategic reference point

theory. MSc thesis. Technion — Israeli Institute of Technology (in Hebrew).

Porter, M. E. (1980). Competitive strategy. New York: Free Press.

Porter, M. E. (1986). Competition in global industry. New York: Free Press.

Prahalad, C. K., & Doz, L. Y. (1987). The multinational mission. The Free Press.

Samiee, S. (1994). Customer evaluation of products in global market. Journal of International

Business Studies, 3, 579–602.


Part II

Israel Infrastructure for Technological Entrepreneurship

Part II presents issues related to the state of Israel infrastructure in terms of thegovernment technological incubators program. We explore the strategic managementaspects of both technological incubators (Chapter 5) and their startup companies(Chapter 6).

Chapter 5

Strategic Management Perspectives ofTechnological Incubators1,2

5.1. Background and Research Questions

The technological incubator program has been operating since 1991 under the aus-pices of the Chief Scientist of the Ministry of Industry and Trade. Despite the factthat incubators have been operating in Europe and the US for many years, theprogram in Israel is unique in that it was established in the actuality of the immi-gration of scientists from the Former Soviet Union to Israel and it focuses on tech-nological projects. Within a very short period, within the decade of the 1990’s, Israelitechnological incubators and their startup companies became known worldwide.

Incubators are a major source of growing new firms worldwide. According to theUS National Business Incubation Association, there are approximately 950 businessincubators in North America, an increase of 160% over the last five years; 37% areclassified as technology incubators and 25% are sponsored by academic institutions(Linder 2003, Phan et al. 2005). Fry (1987) outlined the profile of a typical incubator.The average American incubator is two years old. It engages in some eight projects;on an average one fails and one or two more will be marketed and stand on their ownmerit in commercial companies. An average project has approximately 31 employeesand in most cases one person is in charge of the incubator’s administration.According to the European Commission’s Enterprise Directorate General, therewere 850 business incubators in the European Union, as of 2001. In Asia there aremore than 200 science parks with a major growth rate, with Japan topping the list at111 parks.

1This chapter is based upon the research of Dovev Lavie (1995) as part of the requirements for the BSc

degree. The project supervisor was Prof. Avi Fiegenbaum, and it was submitted at the Technion — Israel

Institute of Technology in October 1995.2I would like to thank the following for cooperating on this research that allowed us to learn about this

project and get data that was used for the analyses: Yehoshua Gleitman, the Chief Scientist of Israel

Minister of Industry; Rina Pridor, in charge of the technological incubators; Yossi Tur-Caspa, Director of

the Altam incubator, Matam, Haifa; Ami Levenstein, Director of the Technion incubator, Nesher Science

Park; Yehuda Yarmot, Director of the Altam project, Matam, Haifa; Dr. Lev. Diamant, Director of the

Golan Entrepreurial Center incubator, Katzrin; Yossi Dar, Director of the Arad technological incubator;

Yoel Varshavsky, Director of the Patir incubator, Jerusalem; Dan Rogel, Director of the Nayot incubator,

Upper Nazareth; Jacque Azran, Director of the technological industries incubator, Ashkelon; Avraham

Afori, Director of the initiatives incubator, Granot Technological Center, Emek Hefer; Yirmi Agrat,

Director of the business incubator at Mt. Hotzvim, Jerusalem; Clara Oren, Director of the Kiryat Yam

incubator; Abir Mulad, Director of the Hamaniya incubator, Netanya.

The technological incubators program in Israel was set up following mass immi-gration from the countries of the former Soviet Union. In 1995, only four years afterthe establishment of the government program, there were 26 technological incubatorsand a few hundred projects had graduated the incubators, with 45% success rate.The total private investment obtained thus far is in excess of US $773 million (Shefer& Frenkel 2002).

In the Israeli model the government is a full partner in setting the incubatorprocess. Within the framework of the technological incubators the entrepreneurs aresupported with a wide range of offerings including, financial resources, professionalguidance, and administrative assistance. During its two years support within theincubator, a startup company is established and meant to turn its abstract ideas intoproducts of proven feasibility, innovative advantage, and competitiveness in theinternational marketplace. The entrepreneur’s stay in the technological incubatorprovides him with legitimacy, which assists him to attract additional financialinvestment required for extending the product development and production after thetwo ‘‘incubation’’ years.

From a financial point of view, the office of the Chief Scientist provides 85%financial grants of the approved budget for a period of two years. In the mid-1990’s,the commitment of the government for the startup was about $125,000 per year.However, the requirement is that the startup company raises a match up of privatemoney for the other 15%. This way the government assures that private money andinvestors share the risky nature of the project.

The equity of the startup is split in the following way. The entrepreneur gets 50%,the incubator gets 20%, the private investors get 20% (although they invest theequivalent of 15% of the budget), and the startup employees get 10%. Although thegovernment does not get shares in the startup, in case that the startup succeedsand has sales in the future, it receives royalties of 3%, which are reinvested in theincubator.

Given that the research was done in the mid-1990’s, only four years after theestablishment of the technological incubators, the current study explores in a de-scriptive manner (compared to normative manners) the strategic management modelof technological incubators. It is too early to link the strategy of the incubators withthe economic success of the projects. We hope that future studies will take thischallenge into account and will explore the impact of the strategy on long-termsuccess. The long-term success indicators can include the survival rate, the percentageof Israeli ownership (in contrast to foreign ownership in case they were sold), marketvalue, and the number of employees.

The study presents four different but complementary research questions: First, weexplore some general descriptive information about the incubators regarding theprojects, employees, and the financial aspects. Second, we explore the strategicapproach of the incubators along the three competitive dimensions of the SRP’sspace (Porter 1980; Fiegenbaum et al. 1996). Third, we explore the various types andcharacteristics of incubators’ strategic capabilities (Barney 1991). We also explore thetype of resources that are most important for their development as well as the impactof various stakeholders, such as general directors, board of directors, and the Chief


Scientist’s Office, to their development. Finally, we present strategic manage-ment recommendations for the technological incubators as suggested by their generaldirectors.

5.2. Methodology

Data were collected in 1995 over a number of stages. In the first stage, personalinterviews were conducted with people involved in the incubators. These includedproject managers, incubator directors, and the Chief Scientist’s Office’s referents.After developing the research questions, it was decided that the major research toolwould be a structured questionnaire and that the research population would includethe directors of all the incubators. Second, pilot questionnaires were completed bytwo general incubator directors and the questionnaires were updated in light of theircomments. Third, a meeting took place in attendance of the research team, the ChiefScientist, and the person in charge of the incubator project. Formal authorization todistribute the questionnaires was essential in order to achieve a sufficient response.Finally, following the Chief Scientist’s approval, the questionnaire was distributed tothe incubator general directors.

In a letter attached to the questionnaire, the directors were guaranteed confiden-tiality of both the executives and the incubators all for the purpose of ensuringa reasonable response and reducing bias. The final sample included 19 incubatordirectors, or 68% of the entire population. This is a representative sample, butis nevertheless a statistically small sample. This fact determined the nature of theexploratory statistical analysis where means and standard deviations were calculated.

5.3. Results and Discussion

5.3.1. Research Question 1: General Information

Figure 5.1 summarizes the first research question’s findings concerned with theincubators’ general information and it is categorized into three aspects: projects,employees, and finance.

5.3.1.1. Projects The first two questions explore the scope of incubator’s activitiesrelated to the projects. On an average, 9.15 projects are operating in each techno-logical incubator. The general directors reported that 4.63 projects are still operatingafter they graduated the incubator’s two-year staying. The third question indicatesthat during their stay in the incubator, 0.89 project ceased operations. This figuredemonstrates the advantage of the technological incubator in promoting projects atthe startup stage. In discussions with incubator directors the point was raised that theaccumulated experience and learning from the many projects contributed greatly toimproving the incubator’s performance at a later stage. A case was described of a

Strategic Management Perspectives 67

project that failed and the lessons that were drawn contributed to the success of aproject that began operating later in the same incubator.

The fourth question focuses on the incubator’s offerings to the projects and itcovers 14 perspectives. The highest contribution of the incubator is in terms ofadministrative services (item 2; 9.26). The incubator also provides a high level ofbusiness (item 5; 8.63), marketing (item 6; 8.36), and legal support (item 7; 8.68). Thecontribution of the incubator is also significant in making contacts in the community(item 8; 8.36), in providing assistance in finding strategic/financial partners (item 10;8.42), and finding complementary financing (item 11; 8.36).

Reasonable but not exceptional quality of service can be found on several otherperspectives. Because there are incubators that have relatively little contact withacademic institutions (item 9; 7.26) or connection to a technological database (item14; 7.78), these services do not obtain as high an average as those services mentionedabove. With regard to access to scientific equipment and laboratories (item 3; 5.94),scientific advise (item 4; 6.68), taxation relief (12; 5.42), and the promotion of the

A. Projects1. Number of projects in the incubator: (9.15, 2.77)2. Number of "graduated" projects that are still operating: (4.63, 3.53)3. Number of projects that ceased operating during their stay in the incubator: (0.89, 0.93)4. Type of Incubators' offerings to the projects: Scale of 1 (low) and 10 (high)-

1. Working areas (8,15, 2.00) 8. Contacts in the community (8.36, 1.06)2. Administrative (9.26, 1.04) 9. Contacts in academia (7.26, 2.72)

3. Scientific equipment (5.94, 3.70)10. Assistance in finding a

strategic / financial partner (8.42, 1.12)

4. Scientific advises (6.68, 3.41)11. Complementary financing

sources (8.36, 1.92)5. Business support (8.63, 1.11) 12. Taxation relief (5.42, 3.89)

6. Marketing support (8.36, 1.01)13. Assisting immigrants’

education and knowledge (5.73, 3.12)7. Legal support (8.68, 1.41) 14. Technological database (7.78, 2.50)

B. Employees5. Number of employees in the incubator: (41.52, 13.5)6. Number of new immigrants among the employees: (30.84, 11.49)

C. Finance7. The incubator’s overall annual budget (NIS): (750,000, 400,000)8. Incubator’s sources of financing, and their relative share:

1. The Chief Scientist: (68.6%)2. Other (specify): (31.4%)

9. Number of projects currently operating in the incubator that have found:1. A financial investor only: (16%, 0.23%)2. A strategic investor only: (0 %, 0 %)3. A financial investor who is also a strategic investor: (16%, 22%)

10. Number of "graduate" projects that have found:1. A financial investor only: (26%, 22%)2. A strategic investor only: (9%, 21%)3. A financial investor who is also a strategic investor: (16%, 22%)

Figure 5.1: Incubators’ general information. Note: Means and standard deviation inparentheses, respectively.


immigrants’ education and knowledge (item 13; 5.73), the incubators’ performancewas relatively low.

A number of logical justifications can be offered for this situation. Some incubatordirectors claim that it is not the incubator’s role to supply R&D services to projectsthat are functioning independently in his incubator. Tax relief is dependent on thepolicy of the local authority in whose area of jurisdiction the incubator is located,while the promotion of the immigrants’ education and knowledge is not the mostnecessary service in that it does not contribute directly to the performance ofthe projects. Nevertheless, a number of incubator directors whom we intervieweddid mention in-service training courses for the project employees, especially Hebrew-language enrichment and managerial knowledge. This type of activity is not generallyundertaken in most of the incubators.

5.3.1.2. Employees The average number of employees in an incubator is 41 ofwhom 30 (74%) are new immigrants from the former Soviet Union. This figure ishigher than the 50% minimum requirement determined by the Chief Scientist. On anaverage each incubator contains about 9 projects, each project employs three to fourpeople. It is highly respected that the governmental project was able to establish anew entrepreneurship infrastructure and at the same time to provide the Russianimmigrants with a wonderful economic challenges.

5.3.1.3. Finance Questions 7 and 8 relate to the total budget of the incubators andtheir sources. The average incubator budget is NIS 750,000 (question 7), in whichparticipation by the Chief Scientist’s Office is 68% (question 8). Some incubatorsare content with the Chief Scientist’s financing, while the budget in other incubatorscan reach NIS 1 million. An incubator that manages to raise a higher budget ismore successful. On an average, the participation by the Chief Scientist in theincubator’s budget is 450,000 while a number of financing sources (usually 2 or 3)make up the remaining 31.4% of the budget.

Complementary financing sources include the Jewish Agency, the local author-ities, private companies, donors, and various organizations. A sponsor’s donation isnot only expressed in money terms. Governmental and private companies, academicinstitutions and various consultants contribute access to laboratories, business con-sultation, their reputation, and other means that promote the activity of the tech-nological incubator. One of the goals of the incubators’ management is to turn theincubators into economically independent entities maintaining themselves from theproceeds of the projects and with support from private investors. The results showthat the technological incubators are moving in this direction, despite the fact thatthey are currently dependent to a large extent on financing from the Chief Scientist.

Questions 9 and 10 focus on the project’s, not incubator’s, fund sources. Animportant index of the incubator’s performance is its ability to attract investors andstrategic partners for its projects, in view of the risk in the initial stages of theirdevelopment. The results show that on average 16% of the projects operating in theincubator found a financial investor, and a similar percentage found a financial


investor who is also a strategic partner. On average, 32% of projects operating inincubators found an external partner or investor (question 9) during the two years ofincubation within the incubator.

Applying the same indicator to mature projects (question 10) shows that on av-erage 26% of these projects found a financial investor, 9% found a strategic partner,and 16% found a financial investor who is also a strategic partner. Overall, 51% ofthe mature projects found a financial investor or a strategic partner. The fact that aproject has not found a partner or an investor does not necessarily point to its beingunattractive. On the contrary, a project might succeed in standing on its own feet andfinancing its continuing operations from the proceeds of its sales, or is not interestedin sharing ownership with an outsider at an early stage. It is noteworthy that 100%of the mature projects in some incubators found a financial investor or a strategicpartner.

5.3.2. Research Question 2: Competitive Strategy Approach

A competitive strategic approach based on the SRP space is defined as the attentionpaid to developing and exploiting strategic capabilities (internal dimension) in a waythat will satisfy the needs of the projects and respond to the stakeholders’ require-ments in a better manner than their competitors (external dimension). This processshould consider both past experiences and future intentions (time dimension). Theresults of the incubators’ competitive strategy approach are presented in Figure 5.2.

5.3.2.1. Internal dimension (A) Regarding internal factors, we examined the activi-ties of the incubator’s director with respect to several aspects. The general directorshave paid most attention on staying close to the project (item 3; 9.63) and slightlybelow it they paid attention to projects’ marketing needs (item 1; 9.00). This is fullyunderstandable given the small size of the startup team and their lack of marketingskills and experience. The lowest attention was paid to business plans (item 2; 6.57)and guidelines from the suppliers (item 7; 6.58). This is probably because of thechanges needed at this early stage and the limited time the directors have that need tobe shared among many projects. The other aspects were between the two and theyinclude attention to future milestones (item 4; 8.10), budget (item 5; 8.58), andguidelines from the Chief Scientist (item 6; 8.63).

5.3.2.2. External dimension (B) Regarding external factors, we examined theactivities of the incubator’s director with respect to the stakeholders, including in-cubators’ competitors. Major attention was devoted to identifying and assimilatingnew projects (item 4; 8.84), as well as attracting investors (item 5; 8.57). With regardto working with the various stakeholders, it seems that the incubator directors adopta selective approach and prefer to focus on whom they see as the more importantstakeholders. Much attention was devoted to working with the Chief Scientist’sOffice (item 1; 8.68), and we can conclude that it is this contact that led to obtaining


the required assistance from the Chief Scientist, and which led to the projects meetingtheir budgets and time schedules. Less attention was devoted to working with othersuppliers. Particularly scant attention was devoted to the needs of the local com-munity (item 3; 4.00), and most incubator directors did not view this as relevant giventheir tight schedule and other missions.

In regard to incubator’s competitors, we found a low level of devoted attention.There is little awareness of the positioning of the incubator or the activities of otherincubators (item 6; 3.27). More specifically, incubator directors pay little attention tothe best incubator (item 7; 3.52), similar ones (item 8; 4.21), and the worse one (item9; 2.47). We were informed of cases of cooperation between a number of incubatorsfor promoting joint projects.

5.3.2.3. Time dimension (C) Incubator directors’ decision-making process is afunction of their past experience on the one hand (item 1; 8.90) and their plans andfuture directions on the other (item 2; 9.15). The results show that there are nosignificant differences of awareness in either direction on the time axis, and bothdirections are viewed as important. On average, the future-based activity is regardedas more important than what happened in the past, but not significantly so. These

1. Internal Dimension: The general director focuses on the following activities:

1. Have a marketing orientation (9.00, 1.05) 2. Work according to a detailed business plan (6.57, 2.14) 3. Am closely in touch with the projects in the incubator (9.63, 0.60) 4. Devote considerable time to future milestones (8.10, 1.33) 5. Manage to keep within the budget and the time schedule (8.58, 1.38) 6. Obtain the required guidelines from the Chief Scientist (8.63, 1.42) 7. Obtain the required guidelines from the suppliers (6.58, 2.77)

2. External Dimension: The general director focuses (attention) on the following stakeholders

1. Chief Scientist’s guidelines (8.68, 1.67) 2. Suppliers needs (7.57, 2.91) 3. Local community's needs (4.00, 2.77) 4. New projects initiatives (8.84, 1.01) 5. Investors (8.57, 1.07) 6. Incubator’s competitors (3.27, 2.58) 7. -Best incubator (3.52, 3.42) 8. -Similar incubators (4.21, 3.08) 9. -Not as good as mine (2.47, 2.58)

3. Time dimensions: The general director focuses on:

1. Work according to past experience (8.90, 1.00) 2. Work according to future programs and directions (9.15, 0.90)

4. Market values: An assessment of the projects' average expected value by the end

of their stay in the incubator ($1,000,000). (1.77, 2.02)

Figure 5.2: Incubators’ competitive strategy approach. Note: Means and standarddeviation in parentheses, respectively.


conclusions are corroborated by the response to the question posed to the directorsof the extent to which they devote time to future planning.

5.3.2.4. Positioning of incubators’ competitive strategy approach Figure 5.3 presentsthe positioning of the incubators on the external–internal surface of the SRP matrix.It is less important to consider the time dimension in that the incubators are neutralin the sense that their past and future foci are similar.

The figure reveals the strategic approach of the 19 incubators in the sample. The1–10 scale indicates the awareness of stakeholders on the external dimension, andcapabilities attention on the internal dimension. The more the incubator is located inthe upper right-hand quadrant direction on the strategic map, the better is its strategicapproach. From the viewpoint of internal capabilities, we cannot characterize failingincubators. But regarding the attitude to stakeholders some of the incubators areborderline. Besides one incubator with a weak approach on the external dimensionand three with a dominant approach on this plane, most incubators are concentratedaround a similar positioning on the strategic map. The upper-right quadrant rep-resents ‘‘adaptive’’ incubators whose chances of success are theoretically the highest.

5.3.2.5. Market value (D) Finally, incubator directors were asked to asses theirexpectation about the monetary value of the projects at the end of their stay in theincubator. This figure could be an important indicator of success, despite the factthat the assessments are subjective and cannot be used as a reliable measure forstartup economic performance. The project’s expected market value goal at the endof its stay is valued on average at about 1.77 million dollars. Of course this is theirintention-expectations and probably wishful thinking and we leave this parameter

10

5

1

1 5 10Internal

Ext

erna

l

Figure 5.3: Positioning of 19 incubators’ competitive strategy approach.


for future studies that will link the strategy and market value expectations of theincubators with indicators of objective indicators of economic performance.

5.3.3. Research Question 3: Strategic Capabilities

With respect to strategic capabilities, the exploration is divided into four majoraspects as summarized in Figure 5.4. First, we explore their various types. The secondand third perspectives explore the contribution of various resources and partners,respectively, toward the building of strategic capabilities. Finally, we explore thepractices and contributions of the board of directors.

5.3.3.1. Types of strategic capabilities (A) Based on the pilot studies that we per-formed with the incubators, we identified a wide range of 16 types of strategiccapabilities that are oriented toward assisting the projects. The highest capabilityreported by the general directors is that of providing administrative services to theprojects (item 10; 9.00). The incubators are also proficient in constant learning (item3; 8.94) and their ability to develop and implement new ideas for the projects (item 4;8.94). Additional capabilities characterizing the incubators, albeit to a lesser extent,are those of developing special services for projects (item 5; 7.570), flexibility in theface of external changes (item 6; 7.68), and attracting investors (item 12; 7.68) andpartners (item 13; 7.57). The incubators’ capability of providing R&D services (item11; 6.90) and managing an information system (item 14; 7.05) is lacking. In sum, thegeneral directors report that they have provided a wide range of assistants that isconsidered to be important strategic capabilities.

5.3.3.2. Resource contributors to strategic capabilities (B) Based on the pilot study,we have split the resources into two groups: The first four items relate to the in-cubators in general while the other four relate to the general director as a majorresource since he is the experienced guy and that the stuff of the incubator is verylimited. The results revel that all eight items reveal high levels. The most importantresources include reputation (item 1; 8.94) and general directors experience (item 6;8.94) and skills (item 1; 8.94). Objective data collected to support the nature ofincubator directors’ personal skills show that the average general director has apostgraduate degree and 10–12 years of professional and managerial experience.

5.3.3.3. Partners contributors to strategic capabilities (C) Another important aspectin understanding the process of building strategic capabilities is that of identifyingstakeholders’ contributing to the incubator’s success. It transpires that most of thestakeholders contribute significantly to the success of the incubator, and in somecases this contribution is decisive. The most important contribution is that of theincubator’s general director (item 3; 9.31), followed by that of the project managersand employees (item 4; 9.00).

The Chief Scientist’s Office is important for the incubator’s success (item 1; 8.73),but here we need to differentiate between two kinds of contribution. The Chief


A. Types of Incubator's Strategic Capabilities: Contributing the projects along: 1. Ability to initiate and execute changes (8.58, 1.12)2. Ability to take risky decisions (8.42, 1.12)3. Ability for constant learning (8.94, 0.85)4. Ability to develop and implement new ideas (8.94, 0.91)5. Ability to develop special services (7.57, 2.03)6. Ability to respond to external changes (7.68, 1.73)7. Ability to locate projects (8.00, 1.56)8. Ability to finance (8.26, 1.88)9. Ability to provide marketing services (8.21, 1.13)10. Ability to provide administrative services (9.00, 1.00)11. Ability to provide R&D services (6.90, 2.90)12. Ability to attract investors (7.68, 1.25)13. Ability to attract strategic partners (7.57, 1.17)14. Ability to manage information systems (7.05, 2.24)15. Ability to meet deadlines (8.36, 1.11)16. Ability to reduce costs (8.21, 1.84)

B. Resource contributors to Incubator’s Strategic Capabilities:1. The incubator’s reputation (8.94, 0.97)2. Integration and internal coordination in the incubator (8.05, 1.61)3. Information and control in the incubator (8.11, 1.60)4. The incubator’s organizational culture (8.05, 2.12)5. General director's knowledge and formal education (7.52, 2.39)6. General director's practical experience (8.94, 1.17)7. General director's skills (8.94, 1.13)8. General director's personal contacts (8.26, 1.99)

C. Partners' contributors toward building the Incubator’s Strategic Capabilities:1. Chief Scientist’s Office (8.73, 1.24)2. Incubator’s Board of Directors (7.78, 2.15)3. Incubator’s Director (9.31, 0.67)4. Project Managers and Employees (9.00, 0.94)5. Suppliers (6.68, 2.33)

D. Board of directors practices and contribution:1. Frequency of meeting of the board of directors during the year1 1-3 times 2 4-8 times 3 9-12 times 4 More than 12 times

(1.89, 0.73)2. Average duration of meeting:1 Less than

1 hour2 One to

two hours3 Two to

four hours4 More than 4 hours

(3.00, 1.45)

3. The contribution of the incubator’s board of directors to the success of the projects in the areas detailed below:

1. Management (6.31, 2.68)2. Marketing (5.15, 2.16)3. R&D (5.42, 2.71)4. Legal aspects (5.84, 2.45)5. Recruiting strategic partners (5.68, 2.03)6. Recruiting financial investors (6.36, 2.43)7. Reputation (7.42, 2.50)

Figure 5.4: Incubators’ strategic capabilities development. Note: Means and stand-ard deviation in parentheses, respectively. The scale is 1 (low) and 10 (high).


Scientist’s financial input is essential, without which the incubator could not succeed.Regarding the non-financial contribution, opinions among incubators are mixed.Most incubator directors feel it is less important than the financial contribution. Thecontribution of the incubator’s board is somewhat marginal (item 2; 7.78), while thatof the suppliers is the least important (item 5; 6.68), probably because they are notdirectly involved in the incubators’ day-to-day activities.

5.3.3.4. Board of directors and strategic capabilities (D) The questionnaire providesmore detailed data on the activity of the incubator’s board of directors. The resultsshow that the board convenes two to three times a year (item 1) for two to four hours(item 2). The third question explores the contribution of the board of directors to thesuccess of the projects considering various aspects of the projects. In contrast to theprevious questions, the general directors assigned relatively low levels of directors’contribution in the range of 5–7. The most important contribution is directors’ repu-tation (item 7; 7.42), and the least important is their contribution to the marketingactivities of the projects (item 25; 5.15). Their ability to attract financial investors(item 6; 6.36) and strategic partners (item 5; 5.68) also received relatively high values.

5.3.4. Research Question 4: Suggested Improvements

This last research question is based on suggestions raised by the incubator generaldirectors. The questionnaire included questions pertaining to possible improvementsin policy and at the level of the Chief Scientist’s supervision of the incubators and theprojects operating within them. These questions were formulated in the wake ofpreliminary research in which we interviewed a number of incubator directors andother involved stakeholders. The questionnaire includes also an open question inwhich incubator directors are asked to make additional suggestions for improve-ment. The responses to the structured questions are presented in Figure 5.5 and adiscussion on the figure and the open question is next presented.

A. Budget: Flexibility in determining a different budget for each (8.05, 2.34) project B. Salary: Flexibility in determining the salary paid to the (7.78, 2.39) projects’ workers C. Immigrants: Flexibility in determining the percentage of new (6.84, 2.83) immigrants in the projects D. Project Duration: Flexibility in determining different lengths (7.94, 2.46) of stay for each project in the incubator E. Ownership: Flexibility in determining the structure of (6.94, 2.85) ownership of the projects F. New Projects: Flexibility in determining the process of (4.41, 3.26) choosing new projects for the incubator

Figure 5.5: Incubators’ general directors recommendations for improvements. Note:

Means and standard deviation in parentheses, respectively. The scale is 1 (low) and10 (high).


5.3.4.1. Budget flexibility for each project (A) The incubators’ general directorsattribute the highest importance (8.05) to this suggestion. When the research wasconducted, the Chief Scientist provided about $125,000 per project for each of thetwo years, without differentiation. In reality, some projects require more fundingthan others. The differences are a consequence of the complexity of development, thefield the project is in, marketing and administrative needs, the scale of the equipmentrequired, etc. A suggestion was raised in the interviews that the incubator wouldreceive a budget (or a budget ceiling) based on the number of projects it is workingon, and the decision on allocating the budget would be predicated on objectivecriteria of the project’s needs. This suggestion would entail expanding the authorityof the incubator’s general director, but this person does have the required qualifi-cations to assess the needs of the projects he manages. A second possibility is that acommittee in the Chief Scientist’s office would decide objectively on the size of thebudget for each project. These changes would not necessitate increasing the ChiefScientist’s budget for projects, and could lead to a more equitable division of thebudgetary pie. It might even be possible to save money in that some projects demandthe budgetary ceiling even though they do not require it. The current system is notsufficiently flexible in this regard, and despite the difficulty of implementing thechange, it should be seriously considered.

5.3.4.2. Salary flexibility for each project (B) This suggestion was considered asrelatively important (7.79). Two aspects underlie this problem. Initially, claims weremade that the existing salary ceiling is too low and does not allow the incubator toemploy workers with a sufficient level of expertise for developing new products. Theresult is that the project employs new immigrants who are prepared to work at lowersalaries. The problem is that the inventory of new immigrants with the appropriateskills is diminishing.

The other aspect is the absence of differentiation between employees. The salaryceilings are uniform, but each worker contributes differently to the project. In thecurrent situation the R&D leader (sometimes the entrepreneur) enjoys no salarydifferentiation from the other workers. The salary ceiling needs to be adapted to thecontribution each worker makes to the project, possibly to be decided by the projectmanager.

The importance of this suggestion lies in the demand to improve the quality ofpersonnel working on the projects. Projects that wish to reach the technologicalcutting edge have to employ people with exceptional knowledge and expertise. Thestructure of the current salary ceiling is not attractive to this target population. It isimpossible to hire some professionals because the salary they are offered outside theincubator is far greater. There is also a danger that the relatively high salaries offeredoutside will lead to a brain drain from the incubator. The financial contribution of aspecialist employee to a project far exceeds the extra cost of employing him. Againstthe above claim is the argument that the percentage of ownership granted to theemployees constitutes a supplementary incentive beyond salary (the employees re-ceive 10% of the ownership). However, some general directors feel that this incentive


is insufficient, and that it is too distant a goal for both the entrepreneur and theworkers.

Greater flexibility in determining salaries for project workers could answer theproblems that have been raised.

5.3.4.3. New immigrants flexibility in each project (C) This suggestion obtained ascore of 6.84. At present, as the Chief Scientist requests, at least 50% of the em-ployees in the incubator have to be new immigrants. In reality, about 75% ofthe incubators’ employees are new immigrants. The problem is complex because thesalary level makes it virtually impossible to employ anyone other than a new im-migrant. The real problem, however, is that the number of new immigrants with thenecessary expertise is declining, while the low salaries do not allow the requiredquality of personnel to be employed.

The incubator program was inaugurated during a period of massive intake ofnewcomers chiefly from Russia, and it is now (1995) necessary to examine the role ofthe incubator from a slightly different perspective. It will obviously not be possible toobtain government financing for a program that is not based on assistance for newimmigrants. Still, other suggestions should be examined in these veins, which arecompatible with the business needs of the program in general and of the projects inparticular.

A problem that emerged from an analysis of this suggestion is not one of em-ployment constraints but rather a budgetary problem. The budgetary constraints arewhat dictate the existing situation regarding the employment of new immigrants.While the Chief Scientist, on his part, has met the incubator directors halfway bymodifying the definition of what constitutes a ‘‘new immigrant’’ and has extended itto more longstanding immigrants, a more fundamental solution is required. Not allthe incubator general directors, however, view this suggestion for improvement asessential, because de facto the budgetary constraint dictates the employment con-straints.

5.3.4.4. Project duration flexibility (D) This suggestion obtained one of the highestscores among incubator directors (7.95). Each project can spend two years in theincubator. There are many instances of projects requesting an extension of the timein the incubator. No differentiation regarding the length of stay is made betweenprojects with different needs. Thus, for example, some software projects require lessthan a year to complete their initial development, while others in the biotechnologicalfield usually continue for more than two years. There should be room to allocate eachproject a period of stay according to its needs. The authority for deciding on thisissue could be delegated to a committee in the Chief Scientist’s Office, taking intoconsideration the opinion of the incubator’s director.

An outgrowth of this issue is the question of funding the projects that are grantedan extended stay. It is thus necessary to combine the flexibility in determining theprojects’ financing with that of determining time schedule limitations. Some incu-bator directors feel that most of the projects require more than two years, and


recommend extending the stay in the incubator to 2.5 years. We also should notignore other considerations affecting the extension of stay in the incubator, such asbudgetary limitations and the desire for the project to operate independently as soonas possible. The danger exists that if the period of stay is extended, projects willcontinue the R&D stage beyond what is necessary and will not cut back on costs. Themost appropriate framework thus needs to be found for making decisions aboutprojects’ time of stay in the incubator. One of the incubators is built according to aslightly different mode (a business incubator) and has flexibility of the type sug-gested. We could use the accumulated experience in this incubator when makingdecisions concerning this suggestion for improvement.

5.3.4.5. Ownership structure flexibility for each project (E) This suggestion obtaineda relatively high score (6.95) from the incubator managers. During the research, theownership structure of a project is fixed and uniform. The entrepreneur owns 50%,the incubator up to 20%, an external investor up to 20%, and the workers at least10%. The fact that the division of ownership is not under the discretion ofthe incubator director and the project manager leads to difficulties in conductingnegotiations with external investors who are fully aware of the limitations underwhich the project manager operates. Sometimes there is a need to reduce the en-trepreneur’s share in order to attract a strategic partner. Some claim that entrepre-neurs do not always deserve 50% ownership when their contribution is limited.

There are other problems as well, such as when one of the project workers leavesand continues to hold a percentage of ownership, etc. Flexibility in determiningownership percentages has considerable ramifications. The limitation sometimesdictates an unnatural division of the shares of the project. This limitation also hasadvantages, but a way needs to be found to reduce the disadvantages of the method.Each project is an independent entity, so that the division of ownership should bedecided on its merits, thereby neutralizing the problems caused by the current limi-tations. Because of the danger of creating anarchy, this suggestion for improvementshould be considered taking all the expected ramifications into account. There isflexibility in this area, but it is insufficient. The issue of ownership should be re-examined and decisions on change in the ownership structure should be based onaccumulated experience.

5.3.4.6. New projects selection flexibility (F) This suggestion obtained the lowestscore (4.41) among incubator general directors, their general response being ‘‘there issufficient freedom’’. The suggestion arose in the context of granting the incubatordirector more authority in the selection process. Incubator directors seem to feel theyhave sufficient freedom, and do not have any limitations in the process of filteringnew projects. In some cases, the incubator directors proposed accepting a projectthat was rejected by the examining committee in the Chief Scientist’s Office, but theultimate decision was made on the basis of objective considerations. The real prob-lem, according to a number of incubator directors, is the insufficient opportunity toconduct in-depth feasibility examinations for all new projects entering the incubator.


The program does not allocate special funds for conducting preliminary examina-tions of this kind, and the incubator director has to grapple with deciding whether toundertake preliminary examinations with the incubator budget, or to dispense withsome of the examinations. Possibly, a budget addition for this purpose could savefuture expenses on problematic or failing projects.

As mentioned, while the incubator directors feel that they have sufficient freedomfor choosing projects in the current situation, they do not always find the financialresources to reach optimal decisions.

5.3.5. Suggestions for Improvement — Open Question

The suggestions in this section are drawn from interviews with the directors of theincubators and their responses to the open-ended question in which they were askedto offer suggestions for improvement. The following discussion relates to their sug-gestions and offers a wider perspective to that gleaned from the closed questions inthe questionnaire. The major problems raised and discussed are time schedule lim-itations, budget, and bureaucracy.

Regarding time schedule, the trend was to extend the stay of the project in theincubator for various reasons. One approach claims that in the initial organizationalstages, the entrepreneur/project manager is required to assemble a team of workersand to undertake preliminary preparations even prior to starting the R&D. Thesepreparations take time, so that the effective period of stay in the incubator is even lessthan two years. Possibly for this reason it is important to extend the stay in theincubator and to allocate time for preparatory activities of this kind. Beyond this,they felt that the stay in the incubator should be determined according to the specificneeds of the projects.

A variety of streamlining suggestions flowed from the budgetary problems. Al-most all incubator directors complained about the budgetary framework’s rigidity.The Chief Scientist’s Office does not permit sufficient flexibility in transferring fromone budgetary section to another, a situation that could result in wastage in one areaand a shortage of funds in another. Possibly more discretion should be given to theincubator’s director to transfer from one budgetary section to another. This viewdovetails with the claim of allowing flexibility in the budget allocated to projects, andof raising the existing budgetary ceilings. Special attention was focused on marketing.The incubator directors feel that the marketing services should be concentrated inthe incubator (the marketing budget is currently dispersed among the projects), thatthe budget earmarked for this purpose should be increased, and that greater dis-cretion should be given to the incubator director in using this budget. It is possiblyworth considering the appointment of an assistant/deputy incubator director with amarketing-economic orientation.

The problem of the salary ceiling recurs constantly. The salary is insufficientlyattractive for employees with expertise in the areas required for the projects. Thesupply of workers (especially new immigrants) with appropriate skills who are willingto work at the proposed salary is extremely low. Outside the incubator they are


offered far higher salaries. Even then, according to the incubator directors, the salarypaid to project managers is too low.

An additional budgetary suggestion is to permit a non-uniform division of theproject budget between the first and the second year. The expenses incurred in de-veloping the project are not uniform and change with the progress of the project. Asituation could arise in which a project does not exploit its budgetary ceiling in thefirst year and experiences financial distress in the second. Possibly, the unspentbudget could be transferred from the first to the second year.

Finally, the incubator directors claim that the existing bureaucratic proceduresshould also be improved. The budgetary and time schedule limitations lead to asituation in which every deviation is bound up with bureaucratic procedures and anunnecessary workload. A decision to increase flexibility will reduce the bureaucraticpressure on the incubator’s director, and enable him to channel his energy in moreproductive directions. Reducing the amount of paperwork required for the finan-cial reports is inextricably bound up with increasing budgetary flexibility. In additionto the absence of budgetary flexibility, the problem was raised of authorizingtrips abroad by the project manager for promoting the project. In many cases this isa vital need, which encounters bureaucratic delays on the part of the program’sadministration.

In addition to the above specific suggestions, the incubator directors feel that theprogram’s learning mechanisms should be improved. These mechanisms did not existpreviously because the program was still in its infancy, but it is now possible to usethe accumulated experience in the incubators for the benefit of all of them. Theexperience obtained in the incubator program can be used to implement similarcomponents for supporting startup companies that operate with the direct support ofthe Chief Scientist’s Office. Possibly too, concerted action could be taken by theincubators’ administration to deal with problems that all the incubators face, such as:obtaining authorizing to exempt them from municipal taxes, tax relief for financersand supporters of the incubators, business courses for incubator directors and projectmanagers, increasing awareness on the part of the government’s economic repre-sentatives in Israel and abroad of the incubator program’s potential, establishing abusiness information system or links to international information networks, etc.

We emphasize that despite the suggestions for improvement, incubator directorsfeel that the existing mechanism is well organized and efficient. They praise the ChiefScientist and the role of Rina Pridor (August 22, 1991) that leads this program fortheir willingness to assist and for their understanding of the issues on the agenda. Thespecial incubator framework should be maintained because of its outstanding con-tribution to absorbing new immigrant scientists, and because of its development ofinnovative projects of the first order for Israeli industry.

5.4. Summary

The results reveal four important strategic aspects of the technological incubators.The first research question reveals some general information about the incubators.


Probably the most interesting findings out of this part is the relatively high averageprojects per incubator (about 9), and the high success rate, in terms of survival,following the two years within the incubator (about 50%). In regard to the secondresearch question, the data reveals that most of the technological incubators haveapplied a competitive strategy approach along internal, external, and time dimen-sions. Namely, general directors have paid attention to building internal capabilitiesas well as external stockholders. However, it should be noticed that the directorsreported that they do not see the other incubators as competitors nor do they con-sider their relative strategic positioning. Although they are competing on receivingnew projects and attract investors and strategic partners, they have reported the highcooperative mode and support that they provide to each other.

In regard to the third research question, we have revealed that the general directorshave addressed a wide spectrum of strategic capabilities and they were able to iden-tify both their resources and partners’ contributions. However, the contributionof the board of directors to the capabilities building received relatively low levels.This is where future management improvements can aid to strengthen the incubators’strategic capabilities. The last research question focused on strategic improvementssuggested by the general directors. While all responded revealed their high respect tothe way that the government runs this activity, they have also provided detailedsuggestions for further improvements along: budgetary, timing, and bureaucraticperspectives.

References

Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of

Management, 17(1), 99–120.



Fry, L. F. (1987). The role of incubators in small business planning. American Journal of Small

Business, 12, 51–61.

Lavie, D. (1995). Technological incubators in competitive strategic approach. Final project

submitted towards BSc degree. The Technion — Israel Institute of Technology (in Hebrew).

Linder, S. (2003). 2002 state of the business incubation industry. Athens, OH: National Business

Incubation Association (NBIA), Publications.

Phan, P. H., Siegel, D. S., & Wright, M. (2005). Science parks and incubators: Observations,

synthesis and future research. Journal of Business Venturing, 20(2), 165–182.

Porter, M. E. (1980). Competitive strategy. Free Press.

Shefer, D., & Frenkel, A. (2002). An evaluation of the Israeli technological incubators program

and its projects. Final Report. The S. Neaman Institute for advanced studies in Science and

Technology, Technion, Haifa.


Chapter 6

Strategic Management Perspectives ofIncubator Startups1

In 1991 a program for technological incubators was established in Israel by theChief Scientist’s Office. Its goal was defined as the development of a supportiveinfrastructure for the initial stage of technological entrepreneurship, combined withactivities designed for absorbing new immigrants from the former Soviet Union(Harish, M. (1993). The activities of the Ministry of Industry, Trade and Labor,before a discussion in the Knesset of the budget and ministry’s activities in the 1993fiscal year). Whereas the former chapter addresses the strategy of technologicalincubators that host technological startup companies, the present study offers acomplementary perspective in that it focuses on the strategy of startup companies inthe technological incubators, including the support they get from the technologicalincubator. The study contains two major aspects. The exploratory part describes fivedifferent strategic perspectives at the startup level: the product, the employees’background, the strategic capabilities, the board of directors, and the incubatorfocus and support. The normative part explores the association among some of thestrategic perspectives and startup performance measures in terms of perceived suc-cess and survival. Findings show that the best predictors of perceived economicsuccess are the uniqueness of the product and the strategic capability to initiatechange and attract strategic partners. On the other hand, the best predictors ofperceived survival are the product capability to generate a large profit, and theability to reduce costs.

6.1. Theoretical Background

The literature attribute startup companies success to a wide range of strategic per-spectives representing the startup and its associated technological incubator.

At the startup level, studies show that time spent in the incubator compels projectsto conduct more in-depth planning, and more frequently than an enterprise outsidethe incubator (Fry 1987). It is reasonable to assume that the level of planning is oneof the important factors in the relative success of startups in incubators. Lumpkin &Ireland (1988) defined success factors critical to incubator startups including financialrelationships, project managers’ demographic characteristics (age, gender, varied

1This chapter is based upon the thesis of Elitzur Cohen (1996) as part of the requirements for the MSc


of the Technion—Israel Institute of Technology in 1996.

skills, character traits, and level of investment in the project), as well as diversemarket factors. Findings of an in-depth study of two incubators in the US show thata startup main profit lies in the opportunity given to the entrepreneur to develop arelationship with other entrepreneurs in the incubator. Another important reportedsource of success is manifested through the building of strategic capabilities such asmarketing (mainly sales) and costs reduction.

Numerous studies were conducted in the US in the 1980s on technological incu-bators, which at the time were a new phenomenon that aroused a great deal ofinterest. These studies focused on the incubators and startup strategic perspectivesthat contribute to their success. Incubators were set up in the US mainly in responseto an acute increase in the failure rate of new businesses, and were regarded as thecrucial force in developing and creating new jobs. Incubators in the US provide theentrepreneur business with low rental fees, a variety of administrative services,equipment and consulting services vis-a-vis marketing and financing. Some of theincubators also provide direct financial assistance, albeit significantly partial and inmost cases manifested solely in loans.

A preliminary study carried out by NBIA (National Business Incubator Associ-ation) shows that incubators’ startups strategic perspectives increased the probabilityof project survival from 20% to approximately 80%. Feeser in 1988 examined‘‘graduate’’ projects after they left the incubators and studied factors that explainedtheir performance. He defined performance in terms of growth rate and differentiatedbetween projects whose growth rate was rapid, and those whose growth was slow.The differentiating factors included incubator’s as well as startup factors such as size,technology, product focus, customer focus, and the niche strategy.

In sum, this background review indicates that both startups and technologicalincubators contribute to the success of the startup companies. At the startup level itincludes such aspects as the opportunity idea, the product, the manager, and thestrategic capabilities. At the incubator level, it includes the added value activitiesprovided by the incubators based on their accumulated experience and resources thatcan be shared among the startup companies. The first part of the study exploresvarious strategic aspects mainly at the startups but also at the technological incu-bator levels. The second normative part hypothesizes the association among startupsstrategic perspectives and performance.

6.2. Method

In this section we describe the sample, questionnaires, and the choice of performancemeasures. It should be noticed that the study was carried out during the 1994–1996time period just three years after its inception.

6.2.1. Sample

The research population comprises startup (projects) managers in technologicalincubators in Israel. In accordance with the Chief Scientist’s division, the startups


belong to five main fields of activity: electronics, software, medical equipment,chemistry and substances, and miscellanea. The sample’s distribution according tofields of activity is similar to the distribution of the project population. Question-naires were administered to all startups in all the technological incubators. Ofthe 230 questionnaires administered, 55 were returned at a response rate of 24%. Theprojects participating in the study originated from 22 of the 28 technologicalincubators operating in Israel.

6.2.2. Questionnaire

Information was gleaned from primary sources addressing the activities of the ChiefScientist and the technological incubators. Additionally, interviews with several se-lected startups managers, incubator managers, and senior officials in the Chief Sci-entist’s Office were conducted. In accordance with the information collected aquestionnaire was formulated for the startups managers in the technological incu-bators. Self-addressed and numbered questionnaires were distributed to the techno-logical incubator managers, and they in turn distributed the questionnaires to thestartups managers in their incubators. To ensure anonymity the questionnaires werereturned by mail directly to the researchers, without going through the incubator’sgeneral director another time.

A pre-test on a small sample comprising two incubators and two startups wasconducted for delineating the questionnaire. It comprised in-depth interviews withthe incubator and startups managers in order to understand the unique character ofthe incubator. A theory-based questionnaire was compiled together with consultationwith the responders to the questionnaire. Conclusions, based on the pre-test, called forreformulation of the questionnaire. The questionnaire was composed of several parts:(1) product characteristics; (2) employees background; (3) startups strategic capabilities;(4) startups board of directors; and (5) technological incubator practices and support.

In order to better understand the essence of the technological incubatorsprogram and boost the questionnaire’s response rate, several meetings were heldwith Ms. Rina Pridor, director of technological incubators program. An additionalmeeting was held with the Chief Scientist, Dr. Yehoshua Gleitman. In the meetingsthe study’s goals and the way that it was carried out were presented. Ms. Pridorand Dr. Gleitman acknowledged the importance of conducting a study on the sub-ject, which had not yet been thoroughly studied in Israel, and agreed to cooperate inarranging the research. As a result, a letter signed by Ms. Pridor was attached to eachquestionnaire, which explained the importance of the study and accorded it an offi-cial imprimatur. A telephone followup of the questionnaires was conducted overseveral months: in most cases the liaison was the incubator manager or one of his/herassistants. After several telephone rounds the response rate rose to 24%.

6.2.3. Performance Measures

The process of choosing performance measures comprised several stages. The firstexamined the ways of determining the performance measures of a startups, and later

Strategic Management Perspectives of Incubator Startups 85

the alternatives to the questions, which would examine these performance measures.Following are the measures together with the advantages and disadvantages of each.

6.2.3.1. Domestic and international sales These variables were derived from re-sponses to the questions related to the projected market size worldwide and in Israelfor the main product, and the projected market share in the first year after produc-tion commencement. These measures are correlated with economic performance asindicated in the literature. However, several problems regarding this measure wereobserved, beyond the question of whether it constitutes an appropriate performancemeasure. It leans heavily on respondents’ subjective evaluation, and is accordinglybiased by their level of optimism and familiarity with the market, contrary to ob-jective financial measures. An initial difficulty exists in defining the market in which astartup company operates, and in most cases it can be expanded into a genericsphere, reduced to a specific sphere, and thus artificially modifies the market space.According to interviewees it appears that it is more difficult to evaluate the expectedsales volume, and easier to evaluate the expected market share and size. We decidedto include both expected sales and market share.

6.2.3.2. Market capitalization This measure constitutes the main measure for theeconomic success of technological startups given that it incorporates their futureprofits and competitive positioning (Hamel & Prahalad 1989). The introduction of anoutside investor in fact determines the possibility of the startup’s survival after theconclusion of the incubator period. Only a few projects succeeded in surviving with-out outside financing after the conclusion of the incubator period because the ma-jority of entrepreneurs had originally come to the incubator without noticeablefinancial resources. Several questions were formulated in the questionnaire exam-ining directly and indirectly, the presence of an outside investor.

6.2.3.3. Perceived versus objective measures Previous research indicates that topmanagement team’s perception of how well their firm had performed—measured in asubjective and relative sense—was consistent with how the firm actually performed(r ¼ 0.694, po0.001) (Dess & Robinson 1984). The subjective measures should beused as ‘‘alternative to remove the consideration of performance from research de-sign’’ (Dess & Robinson 1984: 271) and may be useful also in attempting to ope-rationalize broader dimensions of performance.

In the absence of more reliable and precise objective measures during the operationof the projects, and not post factum, the subjective indices for success were defined asthe dependent variables in the study model. Given the early stage of the incubatorstartups and the difficulty to achieve subjective data, we used performance measuresas perceived by the startup’s general managers. We used two measures: success andsurvival and these variables were measured respectively by position sentences: ‘‘I think

my project is successful’’, and ‘‘I am sure that my project can stand on its own feet

independently even after the conclusion of the incubator period’’. These sentences weremeasured, like the other position sentences, on a 10-entry nominal scale.


6.3. Findings and Discussion

6.3.1. Descriptive Exploration

Figure. 6.1 below presents the questionnaire and summarizes the descriptive findings.

6.3.1.1. (1). The product The average startup was accepted into the technologicalincubator in January 1994, approximately two years after the idea that led to itsestablishment was conceived (first question). On one hand, it can indicate that theentrepreneurs were thinking about the idea for about two years and entered theincubator after it was well thought. On the other hand, it can indicate a slow processof accepting the projects. Item 2 explores the number of technology applications interms of product development. It is always an issue of whether focusing the limitedresources on one product-application or spreading the limited resources on severalproducts and by that the startup reduces the development risk. On average, we canlearn that each company developed two product-applications but we can also learnthat respondents reported a wide range varying from one to six applications.

Questions 3 and 4 concern with the sales aspects of the products. About a yearafter production commenced the main product is expected to gain a market shareof approximately 20% in Israel (question 3), of a yearly market of approximatelyUS$ 4,000,000 (question 4), and a market share of approximately 7% worldwide, ofan average market of US$ 240,000,000. These numbers are very high and mightrepresent either wishful thinking or the limited ability of the startup at the early stageof the industry to understand the nature of product development.

Questions 5 and 6 concern with competitive aspects of the products. Question 5explores the product characteristics according to the criteria developed under re-source-base view of the firm (Barney 1991). Four questions have addressed theirproducts VRIN (value, rare, inimitable, non-substitute). The two top ranking wererare (8.57) and value (8.37) and they can explain the high levels of sales and marketshare that were reported on the former 3rd and 4th questions. On the contrary, thelowest level was reported on the non-substitute (5.96) and inimitable (6.41) criteria.These results can indicate that the entrepreneurs also understand that their technol-ogies and products are not immune from future products’ competition.

Question 6 explores the competitive advantages, relative to competitors, of start-ups products (Porter 1980; Fox & Kotler 1980). The highest values were reported onquality (8.62) and quite below it technological advantage (8.38). The lowest wasreported for having a patent that can protect them (5.26). The range distributionindicates that entrepreneurs reported the highest value (10) for all items as well aslowest values of 1 and 3. We can conclude that the startup companies developed theircompetitive advantages along a wide range of product characteristics.

6.3.1.2. (2). Employees’ background A number of previous research studies estab-lished the importance and impact of the scope of management background andexperience on organizational performance (Burch 1986; Bantel & Jackson 1989;


1. Product1. The Idea

a. Date of conception of enterprise idea-opportunity (12.1991; ±3.1 years).b. Date of entrance into the incubator: (01.1994; ±7.5 month).

2. Number of new products developed out of the idea: (2.2; ±1.3; 1-->-6)3. Expected market size for main product (in millions of dollars per year)

a. In Israel: (3.8; ±6.4; 0-->28) b. Worldwide: (240; ±360; 0-->999)

4. Expected market share (%) one year after production commencement:a. In Israel: (20; ±26; 0-->99)b. Worldwide: (6.7; ±16; 0-->99).

5. The product characteristics are: a. Value: Can generate high profits (8.37; ±1.52; 3-->10) b. Rare: Very unique (8.55; ±1.63; 4-->10) c. Inimitable: Difficult to imitate (6.41; ±2.86; 1-->10) d. Non substitute: Has no alternative products (5.96; ±2.99; 1-->10)

6. The competitive advantages (positioning) of the product are manifested in: a. Low costs (7.07; ±2.64; 1-->10) b. High quality (8.62; ±1.31, 5-->10) c. Technological superiority (8.38; ±1.88; 3-->10)d. Simplicity (7.43; ±2.29; 2-->10) e. Having a protected patent (5.26; ±3.20; 1-->10)

2. Employees Background1. Academic: Number of salaried employees with university degree

a. BA: (0.52; ±0.77; 0-->4) b. MA: (0.35; ±0.65; 0-->3) c. PhD: (0.25; ±0.48; 0-->2)

2. Experience (years): a. Entrepreneur’s years of managerial experience: (10.5; ±9; 0-->30) b. Project manager: (11.8; ±10; 0-->35) c. Entrepreneur’s years of engineering experience: (16.6; ±11; 0-->40)d. Project manager: (16.1; ±12; 0-->40).

3. Start Up Capabilities1. I, as general manager

a. Feel a strong connection to the incubator (7.51; ±2.51; 1→10) b. I don't need the assistance of the incubator (3.23; ±3.10; 1→10) c. Receive assistance from the incubator (7.74; ±2.86; 1→10)d. Believe my incubator is good (7.79; ±2.51; 1→10) e. Operate according to a detailed business plan (6.38; ±2.45; 1→10) f. Devote a great deal of time to future planning_(7.53; ±2.02; 3→10) g. Adhere to the planned budget (9.47; ±0.89; 7→10)h. Adhere to the planned schedule (8.58; ±1.63; 4→10)

2. Evaluation of start up capabilities (At Entrance -----A year from now)a. Cost reduction (5.83 ---- 6.85) b. Customers' response (5.63 ---- 8.58)c. Marketing (3.93 ---- 7.68)d. Attracting investors (4.02 ---- 7.94)e. Attracting partners (3.79 ---- 8.00)f. Innovation (7.62 ---- 8.47)g. Learning new things (7.67 ---- 8.41)h. Initiating change (7.24 ----8.44)

Figure 6.1: Startups’ descriptive statistics. Note: For three numbers in parentheses,the first and second numbers represent the mean and standard deviation, respec-

tively. The third number represents the range of answers.


Scherer & Huh 1992; Wiersema & Bantel 1992). The first question indicates that onaverage, each startup has less than one employee that holds a BA degree, MA degree,and a PhD. However, the range varies from 0 to 4, 3, and 2, respectively. Given thaton average each startup employs about four people, it indicates a relatively high level

3. Contributors to the start up capabilities and success:a. The Chief Scientist’s Office (7.16; ±2.97; 1→10)b. Incubator manager (6.96; ±2.68; 1→10)c. Entrepreneur (8.53; ±1.94; 2→10)d. Project manager (8.67; ±1.55; 3→10)e. Employees (8.08; ±1.67)f. Investor (6.50; ±2.89)g. Other (8.00; ±2.83; 6→10)

4. Start Up (Project) Board of Directors1. Does the start up have a board of directors (total number-%)

a. Has (43-80%) b. Has not (11-20%)

2. Frequency of board meetings during the year a. 1-3: (10) b. 4-8 (19) c. 9-12 d. Over 12 (5)

3. Duration of board meetings a. Less than an hour (7) b. 1-2 hours (22) c. 2-4 hours (11) d. Over 4 hours (0)

4. Areas where board of directors contribute: a. Management: (6.20; ±2.88; 1→10) b. Marketing: (5.73; ±2.88; 1→10)c. R&D:(4.35; ±2.40; 1→8) d. Legal aspects:(5.33; ±2.99; 1→10) e. Attracting investors: (5.28; ±3.09; 1→10)

5. Incubator1. My incubator's general director focuses attention on:

a. The projects’ needs (7.83; ±2.56; 1-->10) b. Work with the Chief Scientist (8.28; ±1.82; 1-->10) c. Work with suppliers (7.36; ±2.36; 1-->10) d. Attracting new projects (8.06; ±2.10; 1-->10) e. Development of the incubator’s unique capabilities (6.78; ±2.95; 1-->10) f. Positioning the incubator vs. other incubators (6.15; ±3.16; 1-->10)

2. The kinds of decisions taken at present in the incubator are affected by: a. The incubator’s past experience (7.43; ±2.34; 1-->10) b. The incubator’s future directions (6.96; ±2.88; 1-->10)

3. For future success the incubator should develops:a. R&D capabilities (6.25; ±2.89; 1-->10)b. Managerial capabilities (7.27; ±2.40; 1-->10) c. Marketing capabilities (7.00; ±2.56; 1-->10) d. Capabilities for attracting investors (7.35; ±2.58; 1-->10)

4. I am pleased with the contribution of the incubator's general manager to my project (7.88; ±2.50; 1-->10)

Figure 6.1: (Continued)


of employees’ academic background. As indicated from the second question, bothentrepreneur and project managers have about 11 years of managerial experience,and 16 years of engineering experience.

6.3.1.3. (3). Startups’ capabilities The first question focuses on the attention of thegeneral manager since it directs and affects the type and kind of strategic choicesmade (Cohen & Levinthal 1990). Items (1–4) concern with the incubator-startupattention. It can be seen that the startups’ general managers assigned a high level tothis kind of relationship since they are connected (item a; mean 7.51), and get as-sistance (item c; mean 7.74) and believe that their incubator is good (item d; mean7.79). This was also supported by their agreement with the statement that they do notneed the assistance of the incubator (item b; mean 3.23). However, all four itemsreceive a wide range of response from 1 to 10 indicating that there are managers thateither do not agree or highly agree with this aspect.

In regard to planning, the questions have explored four different but comple-mentary perspectives. The highest attention was paid to budget (item g; mean 9.47)and schedule (item h; mean 8.58). In addition, the range went as high as 10 but didnot go below 7 and 4, respectively. This can be understood because of the strictrequirements of the Chief Scientist’s Office for ongoing operation. On the otherhand, developing future planning (item f; mean 7.53) and operating according tobusiness plan (item e; mean 6.38), received less attention.

The second question focuses on the attention made on capabilities building at twopoints of time: a year ago (or the time of entry of the incubator) and a year from thetime of the questionnaires. Strategic intent (Hamel & Prahalad 1993) is an importantaspect in adapting the nature of the startup to the changing nature of the competitiveenvironment (Porter 1980). The first item indicates that cost reduction is relativelylow at the two points of time although the respondents provided a higher level in ayear’s time from now (6.85) relative to the period a year ago (5.83). The next twoitems indicate a big shift in the respondents’ attention in regard to customersand marketing in general. Especially, marketing attention (item c) has shifted from3.93 to 7.68.

The next two items relate to attracting partners to the startups. Both, attractinginvestors (item d) and partners in general (item e) received high values close to 8 andthey reveal almost 3 units of change (on a scale of 1–10) from the previous timeperiod. This indicates that staying in the incubators had shifted their attention to-ward the particular importance of investors and strategic alliances in general. Thelast three items focus on organizational issues. All three items received high values atboth time periods and all have revealed a positive shift as well. The respondentsunderstood the importance of innovation (item f), learning (item g), and changes(item h).

The third question focuses on the contributors toward the startup capabilitiesbuilding and overall success. Project managers believe that the overall contributionto the startup’s success is mainly their own (item d; 8.67), the entrepreneur’s (item c;8.53), and the employees’ (item e; 8.08). A lesser contribution is attributed to the


Chief Scientist’s Office (item a; 7.16), the incubator manager (item b; 6.69), and theinvestor (item f; if there is one — 6.50).

6.3.1.4. (4). Startups’ board of directors From a legal point of view, boards areresponsible for the overall organization’s strategy and its resulting performance. Theorganizational strategy literature is divided on this issue and reports two polarizedtheoretical perspectives supported by empirical findings. On the one hand, the lit-erature refers to the board as ‘‘rubber stamps’’ (Herman 1981), which abstain fromthe company strategy and leaves the leadership to the top management team (Pfeffer1972). On the other, the board is considered as the leading force of the organizationthat directs the top management team and affects organizations’ performance (Galen1989; Johnson et al. 1993).

The first three questions explore process issues of the board. Question 1 revealsthat only 80% of the companies have board of directors. Most of the companies meet(19 startups) 4–8 times a year (item c of question 2). However, 10 companies reportedthat they meet only 1–3 times a year. In regard to the board meeting duration time(question 3), 7 companies meet for less than an hour (item a) and most of thecompanies (22) meet for 1–2 h. These are definitely short meeting. Question 4 revealsthat the managers do not think that the board contribution to the company is high.Most of the items reveal values around 5 where the management contribution is thehighest (item a; 6.20) and the lowest is R&D (item c; 4.35). However, the range ofresponses varies from 1 to 10 for all type of contributors.

6.3.1.5. (5). Incubator support Finally, we focus on the technological incubatorsupport for the startup from various perspectives. The first question explores theincubator’s general director attention as seen by the startup general manager.The highest value received the work with the Chief Scientist (item b; mean of 8.28)and attracting new projects (item d; mean of 8.06). The lowest was reported forpositioning against other incubators. It should be noticed that responses varied from1 to 10. The second question explores the time orientation of the decision taken. Bothpast (item a; mean of 7.43) and future (item b; mean of 6.96) received very similarresults and indicate a relatively high level of past and future orientations in theiradvices to the startups. The third research question addresses the future emphasisthat the startup manager recommends the incubators. The highest are the develop-ment of the management perspectives of attracting investors (item d; mean of 7.35),managerial capabilities (item b; mean of 7.27), and marketing capabilities (item c;mean of 7.00), while the lowest is R&D capabilities (item a; mean of 6.25). Finally,the startup manager revealed that he is highly satisfied with the work of the incu-bator’s general manager (mean of 7.88). This is especially important since it indicatesthat the idea of the incubator as a support mechanism and the role of its generaldirector to manage these mechanisms are highly appreciated by the most importantconstituent. Namely, the startups’ general managers.


6.3.2. Normative Exploration

6.3.2.1. The association between product characteristics and performance Table 6.1presents the results of two regression models that explain performance. The firstmodel explores the factors that are associated with our measure of success, and theoverall model is statistically significant and it explains about 30% of the adjusted R2.The product characteristics that positively associated with success are: uniquenessand value (the ability to generate higher profits). Surprisingly, the difficulty in im-itating the product was negatively correlated with success. One possible explanationis that this high-risk aspect affected negatively the success level of the startup. Thesecond regression explains survival rates and it explains 24% of the adjusted R2. Theproduct characteristics that were significant are: product value (the ability to gen-erate higher profits), the quality of the product, and the difficulty of imitating theproduct. This is in line with the arguments made by the resource-based view ofthe firm (Barney 1991; Amit & Schoemaker 1993). In addition, it was found thatthe number of products application is positively associated with survival rate. Thisfinding supports the risk management explanation, namely that several applicationsare better from a survival point of view but not from an economic success. In sum,product characteristics are correlated with success and survival rate of the startupcompany.

6.3.2.2. The association between startup managers’ attention and performance

Table 6.2 presents the results of two regression model that correlate attention andperformance. The first model explains success and the overall model is statisticallysignificant and it explains about 48% of the adjusted R2. Potential customers andattracting investors’ variables were found to have a positive and significantassociation. The second regression explains survival rates and it explains 304% ofthe adjusted R2. The variables that were significantly associated with survival rate

Table 6.1: The association between product characteristics and performance.

Performance: Product Characteristics Success Survival

Intercept 4.04�� 4.28� Number of developed products 0.511��

Uniqueness of the product 0.381��

Difficulty of imitating the product �0.171�� 0.182��

� Value (ability to generate high profits) 0.288�� 0.776��

� High quality of the product 0.564��

R2 0.3658 0.3316R2 adjusted 0.3076 0.2427F factor 7.3�� 4.5��

Degrees of freedom 38 37

��po0.05.��po0.01.


are potential customers and administrative work. In contrast to success, the survivalprobability is highly correlated with administrative work and it justifies the findingsthat we reported earlier about the importance of following the Chief Scientistguidelines.

6.3.2.3. The association between startup planning and performance Results of theregression on perceived success show that planning significantly explains 13% of thevariance (Table 6.3). The variable found significant in explaining the variance aredevotion of time to future planning. Results of the regression on perceived survivalindicate that planning significantly explains 29% of the variance. These variablesinclude the two adhering aspects to planning: adhering to planned schedule butsurprisingly, negative correlation with adhering to planned budget. This might in-dicate that too much focusing on the budget can heart and it is consistent with somewriters of management that too much planning can be an impediment for futuregrowth (Hamel & Prahalad 1993).

Table 6.2: The association between general managers’ attention and startup per-formance.

Performance: Manager Attention Success Survival

Intercept 5.32�� 0.55� Potential customers 0.197� 0.465�

� Attracting investors 0.294��

� Administrative work 0.523�

R2 0.54 0.36R2 adjusted 0.48 0.30F factor 9.4�� 4.7�


�po0.1.��po0.01.

Table 6.3: The association between planning and performance.

Performance: Planning Success Survival

Intercept 4.04�� 8.39��

� A great deal of time devoted to future planning 0.223��

� Adhering to the planned budget �0.889��

� Adhering to the planned schedule 0.846��



��po0.01.


6.3.2.4. The association between marketing focus and performance As the marketingand entrepreneurial literature argue, it is important to incorporate marketing focus atan early stage of the startup company. Table 6.4 provides support for this claim. Theoverall model explains about 19% of the adjusted R2. Significantly affecting per-formance are two complementary aspects: the manager focus on potential customersand by that, learning about their needs. Then, the second factor represents thegeneral manager ability to respond to the customers; identified needs. No significantresults were found on the regression on perceived survival.

6.3.2.5. The association between strategic capability and performance The results ofthe regression on perceived success show that strategic capabilities significantly ex-plains 49% of the adjusted R2 (Table 6.5). Significantly affecting success are theability to produce a prototype, the ability to attract strategic partners, and the abilityto initiate changes. In regard to survival, different strategic capabilities have a sig-

Table 6.4: The association between awareness to customers’ needs and performance.

Performance: Awareness to Customers Success

Intercept 3.61��

� Manager focus on potential customers 0.204��

� Ability to respond to the customers’ needs 0.409��

R2 0.23R2 adjusted 0.19F factor 4.5��

Degrees of freedom 36

��po0.05.

Table 6.5: The association between strategic capabilities and performance.

Performance: Strategic Capabilities Success Survival

Intercept 0.78 6.01��

� Ability to reduce costs �0.326��

� Ability to respond to the customers’ needs 0.204��

� Ability to attract strategic partners 0.313��

� Ability to innovate 0.435��

� Ability to learn new things 0.371��



��po0.05.��po0.01.


nificant impact and they include learning, responding to customers’ needs, and costreduction explain. Together, they explain 36% of the adjusted R2. The findingsindicate that cost reduction was negatively associated with survival indicating thatcost reduction at an early stage might reduce survival rate since it deviates attentionfrom product innovation focus. The two models clearly support the theoreticalfoundations of resource-based view of the firm (Barney 1991; Amit & Schoemaker1993).

6.4. Limitations and Future Directions

Data are based on the subjective reports of the startup managers. There is alwaysthe risk that respondents did not correctly evaluate the product characteristics andcapabilities or its degree of success and chances of survival. The imprecision ofevaluation can derive from two major sources; insufficient awareness of the project’scapabilities, or an attempt to present the project in a positive light as far as possiblein order to justify the manager’s role.

The study population related only to startup in the technological incubators inIsrael; hence, generalizing on other populations should be made with extreme cau-tion. Notwithstanding the relatively high-response rate, the overall research popu-lation was too small to make significant inferences. In this vein, the results should beinterpreted with caution but may, however, be regarded as suggestive for futurestudies.

Causality; one of the questions raised for discussion was whether the variablesexamined affect startup success, or in certain cases, whether success affects the var-iables examined. According to the strategic perspectives including resource-basedview, the main direction of the relationship shows that strategic capabilities and othergroups of variables affect the degree of success. Situations exist in which the successof a startup affects its ability to recruit resources and develop certain capabilities asproposed in the discussion. Cross-sectional data preclude any substantial inferencesfor the other way around namely, performance effect on strategic issues. Therefore,we hope that future studies will be able to get time series data and build dynamicmodel which simulates impact of strategy on performance and performance onstrategy.

It would also be advantageous to compare startup at the same developmental stage— upon entrance into the incubator, in the middle of the period, and at its con-clusion. It would also be possible to examine the strategic behavior of a single startupover time. Sampling the startup over a longer period could provide more objectivesuccess indices, such as finding an investor, sales or profit, which could be projectedon the data of this study, and validate or refute its conclusions more significantly.

In sum, in spite of its limitations and future possible directions, we hope that thereported findings that were collected and analyzed during the 1994–1996 time period,three years after the take-off, are unique. They can serve future studies to develophistorical perspectives of the evolution of the incubators and startup companies inIsrael.


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strategic change. Academy of Management Journal, Briarcliff Manor, 35(1), 91–122.


Part III

New Origins for Startups

Part III discusses the origins of new startup sources of Israeli high-tech take-off.Chapter 7 considers the theoretical aspects and empirical examination of women andChapter 8 discusses the new startup companies that came out of elite units in theIDF. This part’s central claim is that women and IDF were important factors in-fluencing the Israeli high-tech momentum in the nineties.

Chapter 7

Women as Technology Entrepreneurs1

7.1. Research Motivation

Why do some companies succeed and others fail? What do the following companies— and others — have in common: Ornet Datacom, sold to electronics giant Siemensfor $30 million; Panorama Software, sold to Microsoft for an undisclosed sum;NetVision — a top-level Internet service provider; Hashavshevet — a successfulsoftware house; Pnina Rosenblum — cosmetics manufacture and marketing? All aresuccessful private corporations in high-tech and light industry, fields that are tra-ditionally considered male provinces, but each of the above companies is headed by awoman (Ornet — Dr. Orna Berry; Panorama — Rony Ross; NetVision — RuthAlon). What characterizes and motivates women to set up private technology firms?Business entrepreneurship in general — and among women in particular — hasdeveloped steadily over the past few years, as reflected in research literature (e.g.,Buttner & Moore 1997; Moore 1999; Chandler et al. 2000; Bliss & Garratt 2001;Weiler & Bernasek 2001; Gatewood et al. 2003). Nevertheless, little is known aboutwomen who set up private companies in traditionally ‘‘masculine’’ fields such asadvanced technology. The current study provides two angles about Israeli woman astechnology entrepreneur. First, we provide an exploratory aspect, which describessome characteristics of the entrepreneur and their companies. Second, we provide anormative part, which explores the association between firm strategy in terms ofSRPs and firm success along four different measures: cost, quality, profit, and risk.

7.2. Literature Review

Participation of women in the workforce rose steadily throughout the 1990’s, with anincreasing percentage of married women and/or mothers working outside theirhomes. A decisive majority favors working in fields such as education and the socialsciences, while very few opt for heavy industry or advanced technology. The liter-ature delineates ‘‘masculine’’ and ‘‘feminine’’ occupations according to the gender ofthe majority of their practitioners. As private enterprise continues to develop, inIsrael and elsewhere, an increasing percentage of the overall workforce — and ofwomen in particular — tends to favor entrepreneurship as a career choice. Private

1This chapter is based upon the thesis of Nira Boneh (1999) as part of the requirements for the MSc degree.

The thesis supervisor was Prof. Avi Fiegenbaum, and it was submitted for approval to the Senate of the

Technion — Israel Institute of Technology in 1999.

business entrepreneurship may have been perceived as a ‘‘masculine’’ occupation, butthe number of self-employed women is on the rise. While self-employment maydemand considerable time and serious commitment, it also allows for flexible work-time scheduling.

Most female entrepreneurs work in ‘‘feminine’’ fields. Some experts perceive thisdevelopment as a kind of ‘‘expansion’’ of traditionally feminine home functions (suchas cooking, childcare) or hobbies (e.g., art, design). Mirroring these developments,the literature includes numerous studies concerning general, technological, andwomen’s entrepreneurship, but little has been written about women’s business in-roads into ‘‘masculine’’ fields, including high-tech. Most studies examine entrepre-neurs’ profiles and motives for selecting their respective fields, assessing differencesbetween men and women in this respect. Less attention has been devoted to factorsaffecting business performance in private enterprise.

There are several perspectives of entrepreneurship. Schwartz & Felsenstein (1990)differentiate between two levels of entrepreneurship: The lower level, at which theentrepreneurs are owners/managers who take risks and maintain or acquire andmanage economic units. The higher level, at which entrepreneurs also carry outinnovative entrepreneurial activity, as reflected in producing a new product or serv-ice, identifying new markets, corporate restructuring, or discovering new sources ofinvestment. According to this stringent definition, the status of ‘‘entrepreneur’’ doesnot continue after the initial stages. A broader definition speaks of individuals whomaintain a new business that they own and control (Cromie & Hayes 1988).

On the contrary, one may function as an ‘‘entrepreneur’’ even within a majorcorporation. Hisrich & Brush (1985: 15) define entrepreneurship as ‘‘a process ofcreating something different with value by devoting the necessary time and effort,assuming the accompanying financial, psychological, and social risks, and receivingthe resulting rewards of monetary and personal satisfaction’’.

Over the past few decades, especially during the 1980s, certain environmentalchanges have encouraged development of private entrepreneurship in general andwomen’s entrepreneurship in particular, leading business organizations and privateentrepreneurs to adopt economic initiatives that increase the likelihood of commer-cial success. Gilbert (1991), for example, perceived a marked tendency toward es-tablishment of small enterprises up to five employees. As private enterprise initiativesflourished, the female entrepreneur sector began to increase steadily, with an esti-mated annual growth rate equal to twice that of its male counterpart (Bowen &Hisrich 1986; Loscocco & Robinson 1991; Smith et al. 1992). In the US, for example,although female business owners began penetrating high growth fields such as in-dustry and construction (Loscocco & Robinson 1991), the most outstanding growthrates among businesses owned by women were observed in services and retail com-merce, as women tend to open ‘‘traditional’’ or ‘‘stereotypical’’ businesses (Watkins& Watkins 1983; Hisrich & Brush 1985; Bowen & Hisrich 1986; Loscocco &Robinson 1991).

One key assertion derived from the literature maintains that ownership of a privatebusiness represents a potential escape route for employees disgruntled with thesalaried job market and is especially attractive to disadvantaged groups, such as


immigrants and minorities, whose market opportunities are limited (Cromie & Hayes1988; Carter 1992c). In a business world perceived as ‘‘masculine,’’ women may alsobe considered a minority group without a secure position. Many women open privatebusinesses after having encountered some kind of obstacle in the salaried job en-vironment (Cromie & Hayes 1988; Loscocco & Robinson 1991; Carter 1992c), inwhich the male gender generally prevails (Smith et al. 1992).

There are drawbacks to entrepreneurship as well. The literature indicates thatsmall business owners are in economically low and vulnerable positions and suffera high failure rate. For women, moreover, the small business sector constitutes a‘‘peripheral economic niche’’ and not an escape route from inequality (Aldrich et al.1983; Cuba et al. 1983; Loscocco & Robinson 1991).

The literature pays considerable attention to women’s empowerment. Much em-phasis has been placed on the long-term rise in women’s participation in the work-force, in Israel and elsewhere (Shifrin 1979; Gerson 1985; Bowen & Hisrich 1986;Izraeli 1989). Several outstanding social developments are relevant to this observa-tion. Working women have become the norm. The percentage of young marriedwomen working increased steadily; women exhibit an overt tendency to work outsidetheir homes throughout their lives; women are investing more and more resources inacquisition of higher education and it has become increasingly evident that women’sachievements in studies and in the professional sphere enhance family prestige(Wolkinson et al. 1981/1982).

Nevertheless, the impressive influx of women into the workforce has not beenaccompanied by a parallel change in family gender roles, i.e., division of functionsbetween men and women. The social atmosphere regarding such division of labor hasimproved somewhat, but the situation is still far from egalitarian, as married womenbear responsibility for the lion’s share of household and family chores. At the sametime, women are employed for fewer hours than men, working at occupations withlow status and salaries; they are discriminated at work and receive less pay and fewerbenefits than men for performance of the same job (Wolkinson et al. 1981/1982;Cuba et al. 1983; Malakh-Pines 1989).

Gerson (1985) claims that women make a ‘‘hard choice’’ between family life andworking life. As an example, she notes the negative correlation between women’sparticipation in the workforce and the birthrate in the United States: An increase inthe percentage of working women versus a drastic decline in births. These obser-vations underscore the significance of special studies of working women, inquiringwhether there are any work performance differences between men and women andwhether such differences, if any, are affected by the functional conflict noted above.

Female entrepreneurs’ economic success and the performance of their businesseshave hardly been evaluated in research literature. Most studies on the topic are basedon small samples and very few compare such businesses with those owned by men(Loscocco & Robinson 1991; Lerner et al. 1997). One noteworthy major, long-termcomparative study was conducted by Kalleberg & Leicht (1991), assessing the per-formance of companies according to survival and success parameters and findingdifferences between men and women in terms of tendency to succeed or fail. Incontrast to previous claims that women occupy an inferior position, these scholars

Women as Technology Entrepreneurs 101

maintained that both men and women have similar survival and success rates, notingthat the processes underlying small business performance are not affected by theentrepreneur’s gender. Birley, Moss, & Saunders (1987) identified a few differencesbetween women but directed their focus primarily toward characteristics of the re-spective entrepreneurs and companies.

Various indicators of company performance have been proposed. Several studiesuse ‘‘hard’’ objective indicators: Lerner et al. (1997) examined a number of employees,sales, income, and profitability. Loscocco & Robinson (1991) chose indicators ofprofitability and total company sales, claiming that they serve as the best barometer ofsexual inequality. Their data show that in the United States, the percentage of overallprofits generated by companies owned by women is lower than their proportionalrepresentation in the business population. Cuba et al. (1983) used profit and salesindicators as well, adding company age as an additional measure of survivability.

Performance analysis may also use subjective indicators, especially when samplesconsist of private companies whose financial data is inaccessible. Shoham (1998)shows that subjective indicators provide results similar to and as reliable as objectiveones. We attempted to collect objective data on profitability and sales for this study,but only a small minority of companies in the sample agreed to share this infor-mation, rendering it necessary to use subjective indicators instead.

7.3. Research Questions and Hypotheses

The study focuses on two aspects. First, we provide exploratory data on the womantechnology entrepreneur in terms of both her personal and company profile. Weexplore perspectives that have been covered in the literature such as age, experience,and marital status. In regard to the company, we explore the type of ownership andsize of the company. The second part is a normative part and relates women tech-nology company’s strategy with performance.

The strategy is operationalized along the three competitive dimensions of SRPs(Fiegenbaum et al. 1996), which has been explained in the introductory chapter. Theformal hypothesis states that woman technology entrepreneurs business performanceis positively associated with their strategy. It is defined as developing the internaldimension of vision and strategic capabilities, considering both past experience andfuture trends, in such a way that will satisfy future needs of the customers andstakeholders in a better manner than their competitors.

7.4. Methodology

7.4.1. Research Population

The research population definition and criterion for participation was: women whoinitiated or established a high-tech business alone or together with female partners.To reach this population, we conducted a comprehensive examination of information


available in 1996–1997. These include such various sources as: technological incu-bators, advanced industrial zones, women’s organizations, women’s chambers ofcommerce, and through articles in the press and personal contacts. The resultsyielded 43 women who responded to our criteria. We succeeded in locating 38 ofthem, contacting them first by telephone. After 31 responded, we arranged interviewsor sent out questionnaires. Sixteen interviews were conducted by the author and fourquestionnaires were filled out and returned. One incomplete questionnaire and oneincomplete interview were rejected. Twenty-one companies were included in thesample, constituting about 48% of the original population and 67% of those thatreceived questionnaires.

During the process management, we realized that the topic was important tofemale entrepreneurs: combined emphasis on women, entrepreneurship and tech-nology, coupled with a personal appeal (telephone call plus interview or question-naire at participants’ discretion), yielded response. Some women were hesitant aboutthe exposure entailed by the study and appeared reluctant to participate.


The questionnaire, formulated especially for this study, comprised several sectionsfocusing on evaluation of each company’s strategic profile, the entrepreneur profile,and company performance. A pre-test with one of the women was conducted fordelineating the questionnaire. It comprised in-depth interviews in order to under-stand the unique character of the entrepreneur and the company. A theory-basedquestionnaire was compiled together with consultation with the responses to thequestionnaire. Conclusions, based on the pre-test, called for reformulation of thequestionnaire.

The independent explanatory variables included competitive strategic manage-ment, examining the three SRP dimensions: internal, external, and time. Addressingthe internal dimension, to strategic capabilities and strategic vision according to fivefunctional aspects of management: Human resources, information systems, logistics,marketing, and R&D. Several scale groups were formed according to the theory andresults, all with a Chronbach’s a greater than 0.7.

For the dependent variable, we apply the following procedure. As quantitativeand objective data provided by entrepreneurs were impossible for most companies,our analysis focused on four subjective measures: cost of product relative to that ofcompeting products, quality of product, company profitability, and company risklevel. All scales were found to have a high a coefficient (0.78–0.85).

7.5. Findings

7.5.1. Descriptive Exploration

The descriptive exploration contains two parts; aspects related to the profile of thewoman entrepreneur and the company. In regard to the entrepreneur, we have five


different perspectives. First, in regard to age, the majority of the women fall withinthe 41–50 age bracket (Figure 7.1). This indicates that the woman technology en-trepreneurs have accumulated business experience before they entered the entrepre-neurship field. Interestingly, none of them was in the young age range of 21–30 or inthe oldest 61–70.

In regard to the second question, the marital status, the figures relate to fourdifferent types (Figure 7.2). First, most (62%) of the respondents are married. Inaddition, 14% have not married and some of them were divorced (19%) or separated(5%). Second, in regard to the number of children (Figure 7.3), the majority have twochildren (48%), three children (24%), or one child (14%).

The fourth question explores their education background (Figure 7.4). Only 25%do not have a university degree. The ones that pursued an academic degree hold abachelors degree (40) and also an advanced degree. Interestingly, 25% have a PhDand 10% have a masters degree. The fifth question explores the academic back-ground of the woman entrepreneur (Figure 7.5). The majority hold a degree in hardsciences such as computer engineering (42%), mathematics (14%), physics (5%),and chemistry (5%). It should also be noticed that only 19% hold a businessdegree. These numbers definitely support the high-tech orientation of the womanentrepreneurship.

In regard to the companies of the entrepreneurs, we have explored four differentaspects. First, we have explored the industry sectors of the entrepreneurial activity.As can be seen from Figure 7.6, most of them are in the high-tech sectors such aselectronics (29%), software (37%), and biochemistry (5%). The second question

0

2

4

6

8

10

12

14

# o

f In

itia

tive

s

21-30 31-40 41-50 51-60 60Age group

Figure 7.1: Firm distribution by entrepreneur’s age.


explores the firm ages. Figure 7.7 indicates that most of the companies are young andabout 5% of them are less that five years old. The third finding reveals the number ofemployees. Not surprisingly, the young age is also correlated with relatively smallnumber of employees. About 50% of the companies have less than 10 employees andonly 15% employs more that 80 employees. Finally, the location of these companies(Figure 7.8) is in a city area, which is close to the entrepreneurs houses.

0

2

4

6

8

10

12

14

14%

62%

19%

5%

Single Married Divorced Separated

Figure 7.2: Firm distribution by entrepreneur’s marital status.

10

9

8

7

6

5

4

3

2

1

01 2 3 4

Figure 7.3: Firm distribution by entrepreneur’s number of children.


7.5.2. Normative Exploration

Table 7.1 describes the regression results relating to the impact of strategy on per-formance. The strategy construct was operationalized via the impact of the threestrategic dimensions: internal, external, and time. Given the various aspects of per-formance at an early stage of a company, and the difficulty to get market capital-ization data, we have estimated the strategy impact on several performance measuresseparately. They include cost, quality relative to competitors and profitability, andrisk. All of them were measured on a scale of 1–10. It should be noticed that all fourmodels explain a fair amount of adjusted R2 ranges between 0.53 and 0.69.

In regard to the internal dimension, the first item, human resource capability, hasa significant and positive association with the fist performance measure namely cost.

Other10%

Certificate10%

Pratical Engineer5%

Bachelors Degree40%

Masters Degree40%

Doctorate25%

Figure 7.4: Firm distribution by entrepreneur’s educational level.

Computers and Programming42%

Did Not Study5%Data Unavailable

5%Physics5%

Chemistry5%

Mathematics14%

Economics and BusinessAdministration

19%

Figure 7.5: Firm distribution by entrepreneur’s academic background.


Given the very competitive high-tech market in Israel, human resource managementhas to deal with attracting qualified people and keeping their salaries and bonuses aslow as possible. The research and development capability was associated positivelyand significantly only with the quality of the products. This finding is not surprisingbecause R&D is considered to be an investment that hurts the short-term perform-ance of the company but hopefully affects the long-term survival and success.

In regard to the external dimension, attention to various stakeholders has an impacton all four types of performance but in a different way. Attention and learning from

Biochemistry5%Consulting and

Services19%

Industry10% Software

37%

Electronics29%

Figure 7.6: Firm distribution by industrial sector.

Figure 7.7: Firm distribution by firm age.


Figure 7.8: Firm distribution by firm location.

Table 7.1: Association between strategic dimensions and performance.

Performance P1 P2 P3 P4

Competitive Dimension Cost Quality Profitability Risk

Constant 0.316� �1.141 5.813�� 24.001�

A. InternalHuman resources 0.277R&D 0.556� �0.480

B. ExternalCompetitors �0.438�

Stakeholders 0.096 0.637�

Suppliers �0.994��

C. TimeUsing past experience �0.593� 0.469�� 0.908��

Reference to futuretrends

�0.715�

Adjusted R2�0.593�� 0.532�� 0.559�� 0.697�

�po0.1.��po0.05.��po0.01.


competitors indeed is correlated with cost reduction. Learning from stakeholders ingeneral is positively correlated with profit and attention to suppliers is correlated withrisk reduction. In regard to the time dimension, learning from the past has a positiveimpact on three performance measures. It is correlated with cost reduction, enhancedquality, and profit. Future attention is positively correlated with risk reduction.

7.6. Summary

This study has explored important aspects of the new phenomena in Israel, namely,women as technological entrepreneurs. This is especially important from a socialpoint of view in terms of an equity society and equal opportunities. The exploratoryfindings reveal the ‘‘inequity’’ of women as technological entrepreneurs. We couldnot find documents at the time of the research that provide a list of companies withwomen as entrepreneurs. Following our own method of data collection, we were ableto identify only 53 companies (in which only 21 responded to our questionnaire). Thesampled firms reveal aspects related to the entrepreneurs as well as their companies.In regard to the personal profile, most of the respondents are married (62%) andhave one to three children (86%). Only 25% do not have a university degree and25% have a PhD and the majority have an academic degree in hard sciences (66%).Only 19% hold a business degree. Most of the entrepreneurs’ companies are in thehigh-tech sector (71%). They are young and have a very small number of employees.In regard to the competitive strategy and performance hypotheses, our data revealthat all three competitive dimensions are correlated with performance measures(cost, quality, profit, and risk) although different ones.

By applying SRP theory, this analysis may assist organizations in understandingthe variables that correlate with different measures of organizations’ performance.We hope that these findings may help female entrepreneurs determine investmentpriorities for their companies according to the various dimensions of competitionand functional spheres of management.

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Hisrich, R. D., & Brush, C. G. (1985). Women and minority entrepreneurs: A comparative

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Chapter 8

Elite Units of the Israeli Defense Forces –The Story of Unit 82001

Veterans of technology units in the IDF have attracted much attention in Israel’shigh-tech community. In an interview in the high-Tech supplement of the Israeli financialdaily Globes (Natan, N. (2000). From the IDF to the desktop. Globes, High-TechSection (June 21), 30–34.), Tal Keret, a veteran of the IDF Computer Unit and a founderof Rich FX, was asked what persuaded so many leading venture capital funds to invest$12 million in the company. He responded: ‘‘They had successful experience with youngfounders who have backgrounds similar to ours. The founders of Check Point were ourage and served in the same computer units. I think that helped calm investors’ nerves.’’

This study assesses differences in business performance among high-tech compa-nies set up by veterans of IDF technology units focusing on the interrelationshipsamong organization’s competitive environment, strategy, and social network andtheir effect on company performance. The main research hypothesis stipulates thatthe performance of high-tech firms set up by veterans of IDF technology units isinfluenced by the extent to which social network structure is compatible with thecompany environment and strategy.

The principal finding reflects compatibility between the social network structure ofhigh-tech companies set up by veterans of IDF technology units and the competitivetask environment in which the companies operate. It was found that the smallerthe social networks and the stronger the ties therein, the poorer the performanceof companies in competitive environments (mechanistic structure). By contrast,companies that operate in a highly turbulent environment achieve better results withlarger, weaker, and more varied social network (organic structure). Similarly, com-panies characterized by an organic social structure achieve better results when theyfocus on the external dimension of SRPs,; satisfying customers’ needs in a bettermanner than their competitors do.

8.1. Research Motivation – An Interview with an IDF Unit 8200

Veteran

The venture was launched the day Mr. __ was discharged from military service in anIDF technology unit. Mr. __ is a practical electrical engineer (14 years of schooling)

1This chapter is based upon the thesis of Eran Baram (2000) as part of the requirements for the MSc

degree. The thesis supervisors were Prof. Fiegenbaum, Gabbay, and Lenders and it was submitted for

approval to the Senate of the Technion — Israel Institute of Technology in 2000.

who spent most of his military service (nearly six years) developing, installing, andmaintaining communication network management systems. Mr. __’s father, himselfa practical electrical engineer, served in the IDF for over 20 years in systems main-tenance, development, and management positions. He retired from military serviceand started his own electronics business at the time his son was on active duty,introducing an entrepreneurial spirit at home and encouraging Mr. __ to start hisown business. Mr. __ teamed up with two college friends who were serving in otherIDF technology units. During their last year of service, the team met with CEOs ofseveral large communication network firms in Israel and examined the opportunitiesand challenges they would be confronting in a network management solutions ven-ture. The meetings were arranged through Mr. __’s father’s connections, as well ascontacts the three partners had met during their IDF service (parts suppliers, projectsubcontractors, etc.). The venture was started as a project subcontractor with anowners’ equity of approximately $25,000 and no projects to work on. The first thingthe three partners did on day one was to assemble a list of their contacts andacquaintances, including veterans of their respective units who were well positionedin relevant communications firms, so they could start scheduling business meetings.The first project was obtained three days later, followed by several more. A year intooperation, the venture established itself as a network management solutions sub-contractor. At the same time, the founding partners are progressing well towarddevelopment of a generic network management product. One employee (working onsubcontracted projects) was recruited, and Mr. __ is looking forward to attractingyoung veterans of his IDF unit to join his promising business.

8.2. Theoretical Development

The explanation of what makes an organization more successful than another is thecore of competitive strategy. The current study focuses on organizational corporatesocial capital in terms of its network and relates it to performance. As Gulati et al.(2000) suggested, in a world in which firms are embedded in networks of social,professional, and exchange relationships with other organizational actors, the con-duct and performance of firms can be more fully understood by examining thenetwork of relationships in which they are embedded. Many of the company’s com-petitive advantages depend on the flow of information among network firms (Burt1992; Moran & Ghoshal 1999). The central interest in this article is to explain hownetwork properties enable firms to achieve high performance. We argue that a focalfirm’s network interaction and fit with the organization’s environment and strategy,affect performance. The network ties of organizations act as the vehicle that allowsfirms to align environment and strategy in order to enhance performance. But it canalso impede firms from creating this alignment.

A major part of a firm’s network environment is uncertainty (Duncan 1972). It hasbeen characterized along a number of dimensions such as unpredictability and com-plexity (Lawrence & Lorsch 1967; Mintzberg 1979; Covin & Slevin 1989). Higherlevels of environmental uncertainty demands more information on the firm’s


environment. When firms are confronted with high levels of unpredictability, theyneed to create and maintain structures that can quickly extract and filter requiredinformation. In a highly uncertain environment the firm’s network should be largeand heterogeneous. Relationships may be short-lived as changes in the environmentmay render them unproductive. In such environments, organic networks are muchmore effective than mechanistic ego-networks (Podolny 1994; Stuart 1999). There-fore, we propose that the better the fit between firm’s network and its environmentthe higher is its performance.

The second aspect of the study is the fit between firm’s network and its strategy.Various business strategies have been identified in the literature such as Porter’s(1980) generic strategies and resource-based view of the firm (Barney 1991). Thestrategy literature emphasizes efficiency in terms of cost leadership as well as differ-entiation. In regard to cost leadership, strategy research prefers a low number oflarge volume suppliers. Moreover, the costs associated with controlling and handlingmany small sized suppliers are high. For a differentiation strategy an organic networkis more fitting. When following a differentiation strategy, firms require a widervariety of scarce resources, especially information, than do organizations pursuingthe strategy of cost leadership. Therefore, we propose that the better the fit betweenfirm’s network and its strategy, higher is its performance.

8.3. Methodology

The research sample comprises of 68 technology firms (Table 8.1) established byveterans of IDF technology units, primarily during the 1990’s. As no single sourceidentifies companies according to their founders’ backgrounds, we assembled thesample using snowballing methodology, ensuring that it included companies repre-senting a wide variety of fields, technology units, and performance levels. Researchdata were gathered in personal interviews with the entrepreneurs of the designatedcompanies. During each interview, the entrepreneur was asked to fill out a structuredquestionnaire based on previously validated studies. Despite the extensive scope ofthe questionnaire and the duration of the interviews (about an hour and a half, onthe average), participants were highly cooperative, contributing time and informa-tion very generously.

8.3.1. Industry Characteristics

Constructs were developed and they are summarized in Table 8.2. Two scales wereconstructed for industry structure that display various aspects of the industry, ofwhich the first (IND_A) is based on Porter’s (1980) five-force model. This modelclaims that industry characteristics contain the bargaining power of its customersand its suppliers, the threat of alternative products and newcomers to the market andcompetition among existing companies. One question was phrased for each of thesefive forces and a factor analysis of all five forces was conducted, the results of which

Elite Units of the Israeli Defense Forces — The Story of Unit 8200 113

Table 8.1: Companies in the sample.

Company Name Major Field of Activity Year Founded

1. Actelis Broadband communication 19982. Algotech Medical imaging 19933. Aliroo Information security 19944. ART Advanced recognition technologies 19905. ARX Information security 19866. AudioCodes Packet voice communication 19937. Box G-Sites Internet systems development 19968. Butterfly Short-distance wireless communication 19929. Buywiz E-commerce 199910. CheckPoint Information security 199311. Chromatis Fiberoptic relay networks 199712. Class Data Internet communication 199613. Combox Fast Internet access 199714. Conduct Network management 199615. Contact.com Internet software 199716. ContactNow Internet software 199917. EBSure Internet software 199918. Floware Wireless communication 199619. Forsight Technology and business consulting 199320. Frameworx Generic PCBs 199821. Giganet Wireless communication 199622. Gilat Comm. Satellite communication 199023. Gilat Networks Satellite communication 199024. Goulite Optical motion measurement 199825. Interbit Software consulting 199526. Internative Internet systems development 199727. Isp-Focus Internet communication 199828. Iweb Internet software 199829. Jacada Software development tools 199030. Kinetika Internet systems development 199631. Libit Broadband communication 199332. Magicom Network management 199833. Maximal Business intelligence 199734. Memco Information security 199035. Merlynet Internet systems 199936. Modules Embedded software 200037. MTI System engineering 199338. Nectaris E-Commerce 199839. New Dimension Operating system utilities 198340. Nexus Wireless communication 199241. Nice Digital data solutions 198442. Onset Unified messaging 199143. Orckit XDSL communication 199044. Perfecto Information security 199745. Powerdesign Communication hardware components 1995


point to a reasonable coefficient of consistency (Cronbach’s a ¼ 0.61). The averagescore is 4.1 on a 1 (no competition) to 7 (high competition) indicating that mostrespondents attest to moderate competitiveness in their industries. The second scaleis based on several industrial performance parameters, measured according to ques-tions inquiring about size (total sales), growth rates, and return rates. There were58 respondents and the coefficient of consistency was high (Cronbach’s a ¼ 0.73).

8.3.2. Social Network

Respondents were asked to answer two questions regarding their company’s socialnetwork: one concerning the number of social ties their company’s founders maintainwith entrepreneurs who are veterans of IDF elite units and the other relating to theintensity of these ties. To focus responses to the second question, a matrix of thevarious ties and their respective intensities were constructed for each entrepreneur,from which data on overall intensity was calculated. The number of respondentsanswering the two key research questions was high (68 and 60, respectively). For thefirst question, the average network size was 8.5 persons and the average intensity ofties was 3.5 on a scale of 0–5.


Company Name Major Field of Activity Year Founded

46. RAD Data communication 198147. RadLinks IBM gateways 199048. RadWin Wireless communication 199749. RadWiz Telphony communication 199750. Rosh Kesher Wireless communication 199751. Roveh Keshet Wireless communication 198852. RTView Embedded software 199653. Softov Medical information systems 199754. Spearhead Information security 199855. Surf Advanced communication protocols 199656. Synopsis Software development tools 199257. Techomatix 3D simulation 198358. Teleknowledge Billing software 199759. Telemessage Unified messaging 199960. Textray Advanced search engines 199761. Tici Software systems 198262. Trivnet E-commerce 199763. Veon Broadband Internet 199464. Vianet Small office communications 199865. Vigil Business intelligence 199766. Vocaltech Voice over IP 198967. WaveAccess Wireless Internet access 199368. WebGlide Advanced video communication 1997


Table 8.2: Definition of research variables and statistical characteristics.

Construct Scales

Name N Min Max Avg Stdv a Content

Industry IND_A 68 1 7 4.3 1.1 0.61 Five items: threat of alternativeproducts and newcompetitors, bargaining powerof suppliers and buyers, andrivalry among firms currently

IND_B 58 0 7 4.8 1.6 0.73 Three items: industry sales, salesgrowth rate, and return onsales

Corporate socialcapital (CSC)

CSC_Size 68 0 19 8.5 4.2 Size of social network

CSC_Strength 60 1 5 3.5 1.0 Average strength of ties in socialnetwork

Strategy Internal 59 1 7 5.4 1.0 0.65 Four capabilities (technology,marketing, fund raising, andhuman resources) and oneoverall vision (clear vision-future positioning).

External 54 1 7 4.1 1.8 Degree competitors areconsidered by firm

Performance P_Sales 45 0 340 30.4 65.6 Total annual firm sales for 1999in $M

P_Employees 43 0.48 3.2 1.81 0.62 Log of number of employeesP_MV 51 1 7 6.1 1.6 Extent at which firm value rose

in the last year in $M

11

6T

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eliH

igh

-Tech

En

trepren

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ipin

the

19

90

’s

8.3.3. Company Strategy

Questions addressing the strategy along the two competitive strategy dimensions ofinternal and external were presented to the IDF veterans. On the internal dimension,we examined development of strategic capabilities enabling companies to realize theirrespective strategic capabilities. The first four questions address the intensity withwhich companies develop technology, marketing, capital raising, and human resourcecapabilities, while the fifth inquires whether the company has a vision regarding futuredevelopment intentions. The coefficient of consistency was reasonable (a ¼ 0.65), withan average score of 5.4 (on a scale of 1–7), attesting to a relatively high emphasis onthe internal dimension. For assessment of the external dimension, we asked respond-ents to indicate the extent of their attention to competitors when planning and de-veloping their internal strategic capabilities. The average score, 4.1, was lower thanthe average for the external dimension (5.4), indicating that most companies pay moreattention to internal capabilities development relative to their external positioning.

8.3.4. Performance

Three distinct company performance variables were examined — sales, number ofemployees, and company market value — with 45, 43, and 51 respondents answeringthe respective questions. The number of respondents is clearly lower for this questioncategory than for others, possibly because of the sensitivity and confidentiality itentails. Average sales of companies in the sample come to $30.4 million, with thehighest and lowest values $340 million and $65.6 million, respectively. The secondmeasure was the number of employees and we performed a logarithmic transfor-mation. The third measure related to the market value change that took place incompany value over the preceding year. The average was $6.1 million, with thelowest value $1.6 million and the highest $7 million.

8.4. Results

The first part represents three demographical aspects of the sample. In terms ofcompany age, the companies in the sample range from 1 to 20 years old. The averageage at the time of writing was 5.9 and it can be seen that most of the companies fall inthe range of 2–5 years (see Figure 8.1). In terms of age, Figure 8.2 presents thebreakdown of age of entrepreneur, most of the entrepreneurs fall into the secondcategory of 25–30 years and the average age is 63. Finally, Figure 8.3 presents thenumber of IDF veterans that were involved in founding a company. There were 177entrepreneurs involved in the establishment of the 68 companies, of whom 134 wereveterans of IDF technology units. An average of 2.6 entrepreneurs was involved inthe establishment of each company and 2.1 involved in establishment of companiesset up by IDF technology unit veterans. In sum, the average age of the IDF veteranfounders and their associated companies are very young. On average about two


0%

5%

10%

15%

20%

25%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21Age

Pro

po

rtio

n o

f S

amp

le

Figure 8.1: Sample company age distribution.

0%

5%

10%

15%

20%

25%

30%

35%

40%

20-25 25-30 30-35 35-40 40-45 45-50 >50Age

Pro

po

rtio

n o

f E

ntr

epre

neu

rs

Figure 8.2: Distribution of age of IDF technology unit veteran involved in setting upcompanies.

0%1 2 3 4 5 6 7 8

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Total Number of Entrepreneurs

Pro

po

rtio

n o

f S

amp

le F

irm

s

Figure 8.3: Distribution of number of IDF technology unit veterans involved insetting up companies.


veterans founded a company. It should be noticed that only one of the entrepreneursin the sample is a woman. The absence of women in Israeli high-tech industries hasalready been reported by Kagan (2000) and discussed extensively in the chapter:woman as technology entrepreneurs.

8.4.1. Social Network, Industry Structure, and Performance

Table 8.3 presents two models that represent the effect of the corporate social net-work structure with industry structure on performance in terms of the number ofemployees of a given company. Model (1) shows that corporate social capital hasa positive and significant impact on performance in terms of total number of em-ployees, with the model explaining about 10% of the variance in this performancevariable. Model (2) considers the additional impact of industry structure and theinteraction effect with social network on performance. The findings are interestingsince there is no main effect of either social capital size or industry structure. On theother hand, the interaction between the social network and the industry’s attractive-ness displays a significant negative correlation, meaning that the more attractive anindustry is and the larger the companies’ social networks, the poorer their achieve-ments. We conclude that an attractive industry encourages companies to focus onsmaller and more manageable social networks. Because of the industry’s attractiveness,a smaller network, that can yield more rapid results, is preferable to a larger one thatembodies more opportunities but demands greater investment over a longer period oftime. The model explains about 27.6% of the variance in this performance variable.

8.4.2. Social Network, Internal Strategy, and Performance

Table 8.4 presents two models that examine the effect of social network and theinternal dimension of strategy on performance in terms of market value change.Model (3) shows the main impact of social capital size of performance and it ispositively correlated, but not significantly, with the model explaining about 1.5% ofthe variance. However, when the internal strategy was added as represented byModel (4), it indicates strategy does not affect performance but it is the interactionterm between strategy and network size. The interaction term has a negative and

Table 8.3: Impact of social network and industry structure on number of companyemployees.

Model No. Independent

Construct

Independent Scales Dependent Scale Coefficient R2Adj. R2 N

1 CSC CSC_Size P_Employees 0.05�� 0.103 0.128 41

2 CSC CSC_Size P_Employees 0.32 n.s. 0.276 0.321 37

IND IND_B 0.03 n.s.

CSC� IND CSC_Size� IND_B �0.18��

��po0.01.


significant impact on performance, meaning that the more a company investsin development of internal strategic capabilities and the larger social network, thepoorer its performance will be. We may conclude that development of internal stra-tegic capabilities encourages companies to focus on a smaller and more manageablesocial network. As companies display high internal capabilities and a unique vision, asmaller network, that can yield more rapid results, is preferable to a larger one thatembodies more opportunities but demands greater investment over a longer period oftime. The model explains about 10% of the variance.

8.4.3. Social Network, External Strategy, and Performance

Table 8.5 presents the effect of the regression equation that correlates social networkstrengths, company external strategy, and performance in terms of sales. Model (5)reveals that social network strength has a significant negative impact on performanceand it explains about 6% of the adjusted R2. Model (6) shows two additional newfindings. Although social network strength correlates negatively with company sales,focusing external company strategy on monitoring competitors has a positive effecton sales. In such cases, companies learn from their competitive experience (Cyert &March 1963). Furthermore, the interaction between social network strength andexternal strategy is negatively and significantly correlated with company sales. Themore the company invests in studying its competitors and the stronger the ties in itssocial network, the poorer its performance will be. Concentration on competitorsrequires interaction with new social loci and a certain detachment from the veterans’network. The model explains about 36% of the adjusted R2.

8.4.4. Social Network, External Strategy, Industry Structure, and Performance

Table 8.6 sums up the regression equation showing the correlation between socialnetwork, company strategy, and industry structure with company performance interms of sales. The social network is expressed in terms of intensity of ties, strategy interms of the external dimension, and industry structure in terms of Porter’s five-forcemodel. Model (7) shows that the effects of the social network and company strategy

Table 8.4: Impact of social network and internal strategy on change in companymarket value.

Model

No.

Independent

Construct

Independent Scales Dependent

Scale

Coefficient R2 Adj. R2 N

3 CSC CSC_Size P_MV 0.06 n.s. 0.015 0.022� 40

4 CSC CSC_Size P_MV 0.09 n.s. 0.101�� 0.132 35

Strategy STR_Internal 0.18 n.s.

CSC�Strategy CSC_Size�STR_Internal �0.25��

�po0.1.��po0.05.��po0.01.


resemble those reflected in the findings displayed in Table 8.5. Namely, a socialnetwork with stronger ties correlates negatively and significantly with company sales,while strategy has a positive impact. Industry competitive structure correlates withsales positively and significantly. We identified two significant interaction compo-nents in the model. As reported in the previous table, there was a significant negativecorrelation between intensity of social network ties and external company strategy.By contrast, a significant positive correlation was found between intensity of ties andindustry competitiveness. This means that the more competitive the industry (ac-cording to Porter’s five-force model), the more adverse the effect of strong social tieson company sales. The explanation may be that a competitive industry requirescontacts with external social networks and not those of IDF technology unit vet-erans. The model explains about 58% of the adjusted R2.

8.5. Discussion

Table 8.7 sums up the research findings according to models developed and presentedin the previous section. Columns 1–3 describe the effects of the research modelconstructs representing social network, strategy, and industry structure, respectively,on company performance. Columns 4–5 show the interaction between the social

Table 8.5: Impact of social network and external strategy on company sales.

Model

No.

Independent

Construct


Scale

Coefficient R2Adj. R2 N

5 CSC CSC_Strength P_Sales �18.51� 0.059 0.082 40

6 CSC CSC_Strength P_Sales �50.7�� 0.366�� 0.441 35

Strategy STR_External 22.3��

CSC� Strategy CSC_Strength� STR_External �15.1�

�po0.1.��po0.05.��po0.01.

Table 8.6: Impact of social network, external strategy and industry structure oncompany sales.

Model

No.

Independent

Construct


Scale

Coefficient R2 Adj. R2 N

7 CSC CSC_Strength P_Sales �41.9�� 0.581 0.643 35

Strategy STR_Exernal 33.6��

Industry IND_A 36.6��

CSC�Strategy CSC_Strength� STR_External �34.9��

CSC� Industry CSC_Strength� IND_A 41.2��

��po0.05.��po0.01.


network and industry structure and company strategy constructs, respectively.Column 6 represents the performance indicator selected. The major finding indicatesthat the coefficient among the various scales of each of the construct has a differentialeffect on different performance measures.

The table shows the importance of the interaction between the social networkvariable and the other strategic variables: Industry structure (Models 1 and 2), in-ternal strategy (Models 3 and 4), external strategy (Models 5 and 6), and the in-teraction of industry structure and strategy (Model 7). The most interesting finding isthat in all models but one, the interaction coefficient of social network and strategy isnegative, meaning that the larger the social network, the poorer a company’s per-formance, provided the industry has a high growth rate (Models 1 and 2) and thecompany has developed internal strategic capabilities (Models 3 and 4). Similarfindings were reported when the social network ties were of high intensity and com-panies developed external strategic capabilities (Models 5 and 6). This finding re-inforces the theoretical assertion that a social network may also constitute a liability.On the other hand, Model 7 indicates that high intensity social ties do increasecompany sales in highly competitive industries.

8.6. Summary

The principal message derived from the present study is of particular importanceto executives and practitioners, indicating that the structure of a company’s socialnetwork constitutes a strategic component that affects performance significantly.Compatibility between social network structure and industry and company strategyis a precondition for achievement of a competitive edge but not a sufficient one. Onthe other hand, incompatibility between the social network and various other com-ponents often prevents high-tech firms from tapping on the advantages inherent in itstask environment and the strategic measures it institutes. The study findings confirmthat a social network may serve as an asset to the company and as a liability thataffects performance adversely.

Table 8.7: Summary: impact of strategic components and correlation with socialnetwork on company performance.

Model No. Independent Variables Dependent

Variables

1. CSC 2. STR 3. IND 4.

CSC� IND

5.

CSC�STR

6. PER

1, 2 Size (Not Sig.) Growth (Not

Sig.)

�Sig. #Employees

3, 4 Size (Not Sig.) Internal (Not Sig.) �Sig. Market

Value

5, 6 Strength (�Sig.) External (+Sig.) �Sig. Sales

7 Strength (�Sig.) External (+Sig.) Rivalry (+Sig.) +Sig. �Sig. Sales


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Part IV

Competitive Strategic Leadership

Part IV discusses organization-level strategy of Israeli high-tech startup companies.Chapter 9 considers theoretical aspects and empirical examination of board of di-rectors and Chapter 10 discusses the role of competitive intelligence. This part’scentral claim is that both board of directors and competitive intelligence were im-portant factors influencing the Israeli high-tech momentum in the 1990’s.

Chapter 9

Board of Directors and Companies’Performance1

Do boards of directors of technology-intensive industrial companies, such as Teva,Adacom, Indigo, Scitex, Geotek, and Tower Semi Conductors, contribute to theirperformance? The board of directors is the top echelon of a company’s senior man-agement and it is responsible for its corporate governance. The current study ex-plores four different but complementary perspectives of board of directors and theirimpact on corporate performance: boards’ demographics, working processes, stra-tegic approach, and strategic resources profile. The data for the empirical exami-nations are based on financial statements (objective evaluation) and questionnaires(subjective evaluation), which were collected from 51 chairs and board members ofIsraeli industrial companies traded on the TASE (Tel Aviv Stock Exchange TradedCompanies Financial Data 1994). The findings mainly support our hypothesis thatthe four boards’ perspectives contribute to companies’ performance. The researchfindings reinforce government and legal decisions concerning directors made in thepast and also add some new perspectives for future considerations for having a moreefficient and competitive board of directors.

9.1. Background

There are two polarized view points about the role of the board of directors. On the onehand, the board is a ‘‘rubber stamp’’ for companies’ management decisions and that ithas no part in affecting the strategy and performance of the company. On the other,that directors do have an impact on organizational behavior and performance. In thelast few years we have witnessed a new phenomenon among public Israeli companies,where shareholders sue (or threaten to sue) members of the board of directors forconsiderable amounts of money subsequent to a decline in the company’s market value.In their opinion, the members of the board that are supposed to represent the interestsof various interested parties did not do enough to represent their interests.

The Government Companies Law was amended in 1993 states that a ‘‘qualified’’director is someone with an academic degree in economics, business administration,

1This chapter is based upon the thesis of Dalit Lesitzky (1995) as part of the requirements for the MSc

degree. The thesis supervisor was Prof. Avi Fiegenbaum and it was submitted for approval to the Senate of

the Technion — Israel Institute of Technology in 1995. We wish to thank Mr. Eli Hurvitz (Teva’s Pres-

ident) and Mr. Dov Shaphir (director and chairman of the operating committee of Teva) and all of the

directors who cooperated with us.

law, accounting, public administration, engineering, labor studies, or in the area thatthe company is engaged in. In a precedent setting ruling in 1993, the directors of theNorth American Bank were fined heavily, 100 million dollars US, for negligence infulfilling their tasks as directors. The judge saw the directors responsible for thecollapse of the bank and claimed that their lack of involvement in management andcontrol of the management were the main causes for the bank’s failure. Legislationwas proposed to the ‘‘Knesset’’ (Israel Cabinet) in 1994 to prevent Knesset membersfrom serving as board members claiming conflict of interests and exploitation of theirstatus and connections as members of parliament by the companies. These factsprove that there has been a change in the perception of the role of directors, frompassive personas enjoying the prestige of the position, to active internal stakeholders,who ought to be professional and skilled, because they bear responsibility for thecompany’s well being, functioning, and performance.

The current study intends to explore various aspects of board of directors and theirimpact on corporate performance. The importance of the subject, its relevance, andits potential contribution to Israeli companies confronting the reality of global com-petition, encouraged us to carry out this research. We explore the impact of boards’four different theoretical perspectives on their performance: Boards’ demographics,processes, strategic approach, and strategic profile (resources).

9.1.1. Board Demographics

Companies must have a clear strategy and qualified managers capable of effectivelymanaging the company and leading to achieve its objectives. Therefore, it is impor-tant that the executives would have knowledge and experience (Murray 1989). Gross(1989) lists the advantages of appointing outside directors. Outside directors bring inknow-how, experience, and judgment and are likely to balance differing opinions.Outside directors examine the subjects under discussion more objectively, are distantfrom the everyday work, which hinders a comprehensive and unbiased examinationof the subjects at stake. Outside directors can express objective positions wheneverdifferences of opinion between diverse groups in the company exist. Knowledgeable,well-connected outside directors who bring in their expertise are likely to add animportant professional dimension to the board (Bantel & Jackson 1989; Baysingeret al. 1991; Boeker & Goodstein 1991)

9.1.2. Boards Process

It is essential that boards ensure checks and balances. It should be an independentbody, constituting a thoughtful and judicial body that will scrutinize managementwhile keeping the whole picture in mind (Judge & Zeithaml 1992). Likewise, boardsmust have the prerogative to take harsh and uncompromising measures when needbe, including replacement of CEOs. The role of the board includes, inter alia, seeingto the continuity of management in the company, and the appointment of seniorofficers (Zajac 1990). It is important that the directors dedicate time to the company’s


activities and not just in participating in meetings affecting the overall risk-taking ofthe company (Singh & Harianto 1989).

9.1.3. Board Strategic Approach

Directors should be available to the management for advice, guidance, and assist-ance. Legally, the board of directors is the uppermost corporate echelon directing thecompany’s activities and accountable to owners and most other stakeholders. Theboard of directors carry out their task by appointing the company’s senior man-agement, delineating the company’s strategy, instructing and approving long- andshort-term policies and operational programs, and reviewing the company’s activ-ities. A board should have this competitive approach in order to affect performance(Lang & Lockhart 1990; Kesner & Johnson 1990).

9.1.4. Board Resources

The board has an obligation of fidelity to the company and bears the final respon-sibility for its operations and financial results (Norburn & Birley 1988). The board mustbe faithful not only to the shareholders, but to all stakeholders, internal and externalalike. The board is a source of strategic resource that can affect the strategy andperformance of companies (Boyd 1990; Pearce & Zahra, 1991). Because of the im-portance that Parliament attributed to the appointment of directors of state-ownedenterprises, various options for defining a ‘‘qualified’’ director have been on the agenda.The 1993 amendment to the Government Companies Law in the matter of qualificationto hold the position of director (paragraph 16a) elaborates the following conditions:

‘‘1. He/she has an academic degree in one of the following subjects: economics,business administration, law, accounting, public administration, engineering,labor studies or another academic degree or completed other advanced edu-cation studies in the area that the company is engaged in.

2. He/she has at least five years of experience in one of the following, or has atleast five years cumulative experience in two or more of the following:

a. A senior business management position in a corporation having significantenterprise scope.

b. Serving in a senior public position in the public services dealing with eco-nomic, commercial, management or legal matters.

c. A senior position in the company’s primary areas of business’’ (Reshumot[Official Knesset Gazette], Code of Laws 1993).’’

As early as the amendment to the Government Companies Law 1993, it can beseen that emphasis was placed on the individual qualifications of board membersfrom the perspective of academic education, managerial experience, or in the

Board of Directors and Companies’ Performance 129

company’s area of operations, under the assumption that these capabilities can con-tribute to the company’s success.

Therefore, based on the former review, we hypothesize that board of directors’perspectives in terms of demographics, process, approach, and resources will becorrelated with companies’ performance.

9.2. Methodology

9.2.1. Sample

The research population includes the board chairmen and directors of industrial com-panies traded on the TASE. Because of confidentiality the participated companies arenot listed. The industrial companies traded on the TASE are divided into eight sectors:food and tobacco, textiles and clothing, metal, electricity and electronics, buildingmaterials, chemicals, wood and paper, industrial investment and miscellaneous. All thecompanies chosen for the study were from the aforementioned industrial sectors ex-cluding companies belonging to the industrial investment and miscellaneous sectors,177 companies in total (out of 185). Another eight companies were not included in thesample owing to lack of pertinent data. Of the 177 companies comprising the entirepopulation, 51 answered the questionnaires or a response rate of 29%; 62.7% wereanswered by the chairmen of the board and approximately 37.3% by directors.

Collection of the data was based on three sources. Demographic informationabout the directors was gleaned from the companies’ periodic reports (TASElibrary). Data on the companies’ financial performance was based on the ‘‘Tel AvivStock Exchange Companies Financial Data’’ booklet, published by the TASE. Thedata include financial statement for the years 1989–1993 and are published annually.The questionnaire was mailed to all chairmen of the companies included in the study.Where the chairman served as chairman of more than one company, a questionnairewas sent to a member of the board.


The first part includes demographic details. Items included the following aspects:position on the board, time serving on the board, is he/her the CEO of the company,number of other board of directors he/she serves on. The second part includedquestions relating to the directors’ resources and intangible capabilities2 (subjectiveevaluation not attainable from financial reports). For uniformity, a profile of the

2The research methodology in the strategy area recommends and encourages the use of various approaches

to gathering information (‘‘triangulation’’). The big advantage of financial statements is their ability to

present objective data about the organization. On the other hand, important information not able to be

presented objectively is missing from the statements. That is the reason that we constructed a questionnaire

to attain important and relevant information connected with the organization’s and board of directors’

functioning.


resources and capabilities was attached to each questionnaire. The questions in-cluded the following types of board resources: the directors’ reputation, connectionswith stakeholders (suppliers, customers, politicians) and resources (foreign markets),the capacity to bring about changes, the capacity to innovate and to initiate, form thecompany’s strategy, the capacity to critique the management, communication withthe management, and group cooperation. Likewise, questions were asked about theexperience and knowledge (education) in the following areas: marketing, researchand development and engineering, finance, law, personnel, manufacturing, generalmanagement, and the activity of the board of directors.

The third section included general questions concerning the company (companyage, size-employees, and number of board members). The fourth section includedquestions relating to the board processes (frequency of annual meetings, meetingduration, and board committees). The fifth section focused on the chairman’s/boardmember’s perceived level of competition in the sector and strategic approach.

In regard to companies’ performance, we used six measures of organizationalperformance reflecting a wide spectrum of activities. First, the total amount of equityas registered in the book. Second, market value divided by equity known as TobinQ ratio. It actually represents the extent to which the market values the futurecapacity of the company, and the greater the better. Third, total sales indicatesbusiness effectiveness or monopoly power. Fourth and fifth measures consider theprofitability aspects of the company and we consider both operating profit and netprofit. Finally, we consider a risk perspective known as the financial leverage and it iscalculated as the ratio of equity-to-total assets. The larger the ratio and the moreclosely it approaches 1, the less external debt the company has and hence less risky(Norburn & Birley 1988; Finkelstein & Hambrick 1990).

9.3. Results

9.3.1. The Association between Company Board of Directors and Performance

Multiple regressions were run to examine the impact of each of the four modelsseparately as well as a combined model. The first model, the impact of the boarddemographic variables, explains 27% of the adjusted R2. The two most significantvariables are the average age and the number of board members. The second model,the impact of the board working practices, explains 18.5% of the adjusted R2. Themost significant variable is the number of committees. The third model, the impact ofthe board strategic orientation, explains 12.7% of the adjusted R2. The most signifi-cant variable is relating to companies’ competitors. The last single set of explanatoryvariables, the impact of the board strategic profile, explains 16.5% of the adjusted R2.Know-how and experience in finance had a significant and positive impact on per-formance. However, connections with customers indicate a surprising negative impact.

The fifth model incorporates all significant variables that were reported in theprevious four models. This model explains the highest adjusted R2 of the value of49%. Except two variables, all other five variables entered the model and their


impact is similar to the separated model. This indicates that very low multicolinearityexists among the variables. However, number of committee and know-how andexperience in finance did not enter the model (Table 9.1).

9.3.2. Comparing Boards of Directors: High versus Low performing Companies

For each company, we calculated an average performance measure based on each oneof the six performance measures after it was normalized. Companies with an averagescore above the mean were defined as high performers relative to low performerswhose average score was below the mean. The objective was to test if there aredifferences between the high and low performers with respect to the four perspectivesof the board of directors’ variables: demographic, work practices, strategic orientation,and strategic profile (resources and capabilities profile). A one-way ANOVA test wasperformed after the companies were divided into the ‘‘high’’ and ‘‘low’’ performers.

9.3.2.1. Demographic differences The demographic make-up of the boards of di-rectors included in this study shows on average: eight members, 52.74 years of age,serving on the board approximately 5.01 years, 78.65% having a college education,74.91% having managerial experience — and 44.55% inside directors. The Anovashows statistically significant differences between the two groups with respect to anumber of variables (see Figure 9.1). As to the number of board members, the averagenumber of high performers was nine and it is statistically greater (po0.05) than thefive members of the low performing companies. The proportion of directors with

Table 9.1: The impact of board of directors on performance.

Theoretical Aspect Independent

Variable

Model 1 Model 2 Model 3 Model 4 Model 5

(Combined)

Demographic

variables

Average age 0.36�� 0.34��

Number of board

members

0.40�� 0.38�

Working practices Number of

committees

0.44��

Strategic

orientation

Relating to

competitors

0.38� 0.32��

Strategic profile Know-how and

experience in

finance

0.33�

Connections with

customers

�0.32� �0.38��

Global market

connections

0.31� 0.43��

R2 0.295 0.202 0.148 0.217 0.551

Adj. R2 0.265 0.185 0.127 0.165 0.492

�po0.1.��po0.05.��po0.01.


college education among the high performers companies is 88.5% and it is statisticallygreater than less performers firms; 74.4% (po0.05). For the rest of the variables thevalues of the high performers were greater than the low performers. However, nostatistical significant differences were found (age, proportion of internal directors,proportion with managerial experience, and average number of years on the board).

9.3.2.2. Work practices The variance analysis shows statistically significant differ-ences high and low performers (po0.001) with respect to the number of board levelcommittees. High performers companies’ boards had about three committees onaverage and the low performer ones had on average two committees. No statisticallysignificant differences exist between the two groups with respect to the remainingwork-practice variables.

9.3.2.3. Strategic orientation No statistically significant differences between the twogroups were identified with respect to the strategy variables: relating to competitors’boards providing future direction and contribution to management and performance.

9.3.2.4. Strategic profile The variance analysis shows statistically significant differ-ences between the two groups (po0.05) with respect to a number of variables(Figure 9.2). The reputation resource was higher (X ¼ 4.25) among the high

0# of Members Age Educational Level Inside Directors Management

ExperienceYears on Board

10

20

30

40

50

60

70

80

90High Performers

Low Performers

Figure 9.1: Board of directors demographics: high versus low performers. Note: Thevariables education level, inside directors, and management experience are presentedin percentage points. Statistically significant differences (po0.05) between the groups

are identified only relative to the number of members and educational level.


performers companies as opposed to low performers ones (X ¼ 3.57). Politicalconnections were higher among the high performers (X ¼ 3.42) as opposed to lowperformer companies (X ¼ 2.75). The other variables also have indicated higher levelfor the high performer groups although the statistical significance was a bit lower.Specifically, with respect to connections with international markets, strategy design,general management experience, and know-how (po0.01). No statistically significantdifferences are observed between the two groups with respect to the remaining stra-tegic profile variables.

A discriminant analysis was used to build a function predicting whether or not a firmis high performer based on the board’s make-up, where the independent variables werethe four perspectives of the boards of directors. The discriminant function evaluated inthis study ‘‘correctly’’ classified firms as successful or unsuccessful in 77.87% of thecases. ‘‘Correct’’ classification is where the function based on the board’s components isidentical to their categorization according to the financial performance measures. Theresults of the classification show that 10 companies were incorrectly classified by thefunction. The function succeeded to predict 22 out of the 28 high performer firms and 12out of the 16 less performer firms (Table 9.2). It should be noticed that seven obser-vations removed from the discriminant analysis because at least one value was missing.

9.4. Summary

The purpose of this study is to examine empirically the relationship between boardsof directors and corporate financial performance where four aspects of the board

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Reputation PoliticalConnections

InternationalConnections

Strategy Design GeneralManagement

Not Successful

Successful

Figure 9.2: Board of directors’ strategic profile: high versus low performers.


have been examined: (a) demographic variables, (b) work practices, (c) strategicorientation, and (d) strategic profile (resources and capabilities profile).

9.4.1. Board Demographics

It seems that the higher the number of members on the board, the average age, theproportion of academic-educated board members, and the average time board mem-bers have served, the higher the financial performance.

In light of the positive statistical association found between directors’ average ageand financial performance, one can ask what the average age of directors should befor the company’s financial performance to be high. It is not possible to respond tothis question and determine a specific age from the results of our study, notably sincethe difference between the successful and the less successful companies in terms ofdirectors’ age is relatively small (55 in successful and 52 in unsuccessful companies).Nevertheless, it can be observed that in both high and low performer companies’directors’ age is within the 50 years range. That is to say, boards manned by seasoneddirectors ensures more experience and, according to the results of the study, higherreputation.

Among the high performer companies, the proportion of directors having aca-demic education was 88.5% and among the low performer ones was 74.4%. Thisresult corroborates decisions taken by the Government of Israel in the past few years.It is specified in the 1993 Amendment to the Government Companies Law pertainingto qualifications for serving on boards (paragraph 16a). Indeed, the government ofIsrael viewed academic education as a matter of utmost importance in order for adirector to be able to function professionally and advance the company they lead andthis research reinforces the decision.

Finkelstein & Hambrick (1990) identified a relationship between market tenureand corporate performance near the sector average. We found a positive relationshipbetween average number of years on the board and the performance measures. Thisfinding can be explained in that an organizational group active for a considerableduration of time is acquainted with the history of the organization, structure, prob-lems, successes, and failures and so is capable of contributing to the organization inmore so than others devoid of this varied experience. A group active in an organ-ization for a long time knows which strategies were effective, which new directions

Table 9.2: Discriminant function classification results.

Group Number ofCompanies

Low PerformerCompanies

High PerformerCompanies

Low performercompanies

28 22 678.9% 21.1%

High performercompanies

16 4 1224.0% 76.0%


developed truly advanced the company and which did not. The substance of theknowledge existing in the group can contribute much to formulating an appropriatestrategy and high performance thereof. However, one must be wary of the negativeaspects of long terms on the board such as dullness of senses and inertia in the wrongdirections.

A statistically significant relationship between the proportion of inside directorsand proportion of directors having managerial experience was however not sup-ported by the data. Norburn (1986) alleges that the average age of the companyboard members in growth companies is lower and, on the other hand, decliningcompanies have older board members. On the one hand, younger age may be as-sociated with innovation; ‘‘new blood’’ flowing in the group, new knowledge broughtin from the academia and transferred to the board with the assistance of studentswho have completed their studies in the last few years. On the other hand, olderdirectors are often more experienced, and with seniority comes reputation. A positivecorrelation between reputation and the average age of board members was identifiedin our study (r ¼ 0.33, po0.01).

It is possible to summarize and state that companies going to put together theirboard of directors should consider several demographic variables, which contributeto financial performance. We observed that the number of board members, theiraverage age, their tenure on the board, and the proportion having academic edu-cation — all are positively correlated with financial performance. The demographicvariables explained approximately 29% of the variance in the companies’ financialperformance.

9.4.2. Board Work Practices

The following variables illustrate work practices; frequency of board meetings duringthe year, average meeting duration, and the number and type of board level com-mittees. No relationship with performance was identified between the meeting fre-quency and duration. In fact, it can be said that on the basis of the findings there isno importance to the number of board plenum meetings and the duration of themeeting. These findings contradict our expectations, since we assumed that a boardthat dedicates more time to the company, which it heads by frequent and longermeetings will be more involved in the ongoing management of the company and thusits contribution to performance will be more conspicuous.

It is possible to learn about the importance of the board’s involvement in theongoing management of the company that it heads from a 1993 verdict for the boardof directors of the North American Bank following the collapse of the bank. Theruling is described in a newspaper article:

Unprecedented ruling decided by Judge Bazak in the matter of the board ofdirectors of the North American Bank on 27.12.93. The judge found that thedirectors are responsible for the collapse of the bank in 1985. In the ruling,Judge Bazak determined that the bank’s directors were negligent in fulfilling


their duty and brought about the collapse of the bank. It became clear, that

most of them did not participate in meetings of the board of directors, were not

acquainted with one another, did not take an interest in what was taking place

at the bank from the management, investment, or loan collateral perspectives. Thedirectors assumed that their membership on the board was an honour or forthe purpose of granting prestige to the bank, and did not understand that thesubject of discussion was a real job, imposing responsibility for managing thebank’s affairs on them. Consequent to the deficiency in the involvement ofthe directors, there was no control over the members of the executive manage-ment team which was responsible for the ongoing, day-to-day managementof the bank, and it was managed without strictness to elementary banking pro-cedures, in disorder and total irresponsibility. The directors’ complete neglect ledto the executive’s behaving as they saw fit, irresponsibly and negligently. Theycommitted criminal acts and caused enormous damage to the bank. The judgeruled that a board of directors of a bank which performs its duties diligently andresponsibly, and oversees what is done in the bank, thus sends a message to themembers of the executive that they are not entitled to do as they please, but thatthey are being watched and listened to. (‘‘Yedioth Ahronoth’’, 28.12.94).

Although no relationship between frequency of meetings or duration of meetingsand the company’s financial performance was corroborated by this study, indeedanother finding explains the inconsistency. We identified a positive correlation be-tween the number of board level committees and the company’s financial perform-ance. The board level committees are important in that they provide support to theCEO who can always consult with the directors serving on them. The committeesmeet separate from the full board meetings and all committee decisions are broughtbefore the entire board for approval.

In practice, the board level committees are each responsible for its area and tracksmatters in those same areas on an ongoing basis. The essence of their ongoingactivity discharges the need to convene the whole board frequently, and so the lowfrequency of board meetings does not necessarily indicate their lack of involvementin the company’s management. In light of the widespread claim that directors arebusy people who find it difficult to find free time, the task of assembling a group ofsuch people at a specific hour on a specific date, which will be convenient for all is notan easy task and opens up the possibility that directors will be absent from themeetings. It is worthwhile to split all the directors into deputy committees, with eachresponsible for a specific area in which it specializes and is responsible for supervisingthat area on an ongoing basis. The committee includes relatively fewer members thanthe full board and thus the members’ capacity to maneuver with respect to coor-dinating the time and frequency of meetings.

Indeed, the number of board level committees was found to explain the variance inthe financial performance significantly and was also found to discriminate betweenhigh and low performer companies in a significant manner. Thus, it is possible torecommend to directors that they adopt the practice of working by means of deputycommittees.


9.4.3. Board Strategic Approach

The strategic approach was defined by three measures: relating to competitors’boards, provision of future direction to the company, and their contribution tomanagement and performance. A relationship was identified only between the com-petitors’ boards of directors variable and the company’s financial performance (re-garding a portion of the performance measures). Despite the importance of thisvariable, it was found that only 13.3% of the boards in the study relate to coun-terparts’ boards. We received additional reinforcement, pertaining to the fact that noconnection was found between the other two variables: delineating the company’sfuture direction and contribution to management, and the company’s financial per-formance, from other questions relating to the resources and capacities profile of theboard. In preparing the profile, the respondents were asked, inter alia, to addressthree questions pertaining to strategy: the board of directors’ ability to innovate andinitiate the capacity to bring about change and the capacity to strategically design thefirm. These three questions were highly positively correlated with the questions per-taining to the board’s strategy and a connection between them and the company’sfinancial performance was also not identified.

In summary, according to the findings of the study — the board of directors’capacity to provide future direction for the company, to contribute to managementand performance, its capacity to innovate and initiate, to bring about change anddelineate corporate strategy — all of these variables are not associated with thecompany’s financial performance. Notwithstanding, we would not rush to concludethat there is no importance to the boards’ capacity to bring about change and toprovide future direction for the company. Since a key task of the board is to plan,delineate, and monitor the corporate strategy, it is recommended that the subject becontinued to be studied in depth and the connection between the board’s strategicapproach and organizational performance be investigated from different and com-plementary organizational and strategic aspects.

In order to advance the research in the aforementioned direction, we would rec-ommend that studies of the board of directors strengthen the association with thestrategic theory that addresses strategic groups (Fiegenbaum & Thomas 1995). Thetheory claims that each firm belongs to a strategic group defined as a cohort ofcompanies within same industry having comparable strategy. These groups in factconstitute the SRP for the companies making up the same group and the organ-ization can decide if it is interested in and has the ability to move to a better group(characterized by a higher performance potential). For this purpose, the board mustbe acquainted with competitors’ boards of organizations in the same strategic groupand other groups in the industry, thus it is desirable that boards have a more com-prehensive knowledge of competing boards, and become acquainted with personasofficiating in the board, be familiar with their demographic background, head to theboard’s activities, and formulate their company’s strategy accordingly and advan-tageously. The findings of this study support the hypothesis that the more the boardrelates to competitors’ boards within the same industry, the higher the financialperformance.


9.4.4. Board Strategic Profile

The strategic profile is based on the resource-based view of the firm (RBV). When acompany realizes an asset that has value, rare, inimitable, and non-substitute(VRIN), it provides a source for a sustainable competitive advantage (Hitt & Ireland1985; Aaker 1988/1989; Barney 1991; Hall 1992; Amit & Schoemaker 1993).

In this study, we attempted to apply the RBV with respect to the company’s boardand examine if there is a relationship between the board’s strategic profile (resourcesand capabilities) and financial performance. Rotem (1994) investigated the relation-ship between the company, characteristics of its environment, and success and foundthat the company’s strategic resources explain 40.5% of the variance in the com-panies’ financial performance. In our study we found that the strategic profile, in-cluding the board’s resources and capabilities explain 21.7% of the variance in thecompanies’ financial performance. Of the 19 strategic profile variables, a positiverelationship with the financial performance variables was identified only for repu-tation, political networking, links with foreign markets, experience and know-how infinance, experience and managerial know-how. The political networking and rep-utation variables were found to discriminate in a significant way between high andlow performance firms.

Israeli companies tend to appoint reputed and politically networked personas,such as ex-members of parliament as directors with the view of cashing on politicalconnections and advancing companies’ interests. Likewise, linkages with overseasmarkets was also found to explain the variance in the companies’ financial perform-ance. This finding reinforces future strategic directions. Companies aspiring to ex-pand business and increase their financial performance will need to break out of thedomestic and enter foreign markets, either by exporting products or by establishingmultinational companies (Hamel et al. 1989)

To sum, in this study we found that the four perspectives of boards explain about55% of the variance in the firms’ financial performance. Average age and number ofmembers among the demographic variables should be focused on, with average agehaving greater contribution. Relating to competitors’ boards should be focused onwith respect to strategic orientation. Connections with customers, overseas markets,and experience and know-how in finance should be focused on with respect to theresources and capabilities profile. The number of board level committees, which wasfound to discriminate in a significant way between high and low performer com-panies should be focused on with respect to working practices, although this factorwas not found to explain the financial performance variance at a statistically sig-nificant level in the combined model.

9.5. Limitation and Future Directions

We are cognizant of the several limitations in drawing conclusions regarding thefindings of this study. Limitations regarding internal validity pertain to the extent towhich the conclusions drawn in the study are correct relative to the sample


population. The limitation in the study may reside in the bias emanating from thesource of the information. Collection of some of the data was based on subjectivereporting of the directors. It is likely that the chairman/director did not correctlyassess the boards’ resources and its contribution to management and performance.Inaccuracy in this essential evaluation could emanate from two sources; insufficientawareness as to the resources of the board and the extent of its contribution, or anattempt to present the board in a positive light in order to justify its role. To over-come biased responses, future research will be well advised to send questionnaires toall directors, and not a single member of the board and then cross-check the in-formation. Nonetheless, the fact that the source of the information in each companywas identical (in most cases the chairperson and in a few cases a director) and relyingonly on a single source, will cause bias, if any exists, to be consistent in all companies.

Another limitation pertains to external validity. The sample was relatively small(N ¼ 51), but representative (a population of 177 companies), the research popu-lation included solely industrial companies traded on the stock exchange. Thus thegeneralization to another population, other than industrial-traded companies is notnecessarily correct. Nevertheless, it is possible to use the results of this study as abasis for future research on other populations.

Another limitation is associated with the inability to accurately evaluate if thecurrent board under study actually contributes to the companies’ financial perform-ance in 1993. Notwithstanding, the financial performance that the study was basedon relates to 1993, and the directors’ average seniority was five years, it is possiblethat there exist firms whose financial performance was brought about by the suc-cesses of boards that preceded the present one.3 If we rely on the average score ofseniority of the board of directors, five years as previously stated, this is a reasonabletime between the outset of the boards’ activity until the measurement of the compa-nies’ performance. Since we did, for lack of access, track replacement of directors andthe percentage replaced each year, we do not rule out a situation in which new direc-tors have replaced others and have yet to contribute to corporate performance andso the newly appointed ‘benefit’ from their predecessors’ achievements or ‘absorb’their failures.

Other unexamined factors that could expand boards’ knowledge base include in-teraction between variables that may potentially influence performance. For examplesuch essential factors as industry effect, type of corporate strategy, characteristics ofthe organizations’ senior management, and the CEOs. Future investigators will beable to reach more comprehensive and accurate results should they incorporate theseavowedly important explanatory variables and by so doing will tap on additionalcorporate factors that may explain performance more accurately and comprehen-sively.

Other unanswered questions are whether financial performance affects boards’characteristics investigated in the present study. We recommend that future studies

3This is a known limitation pertaining in most research focusing on a specific point in time and not in a

number of points in time (cross-sectional versus time series analyses).


also focus on the direction of the relationships investigated in the current study. Itseems clear that the directions are bidirectional (simultaneous) and dynamic. In otherwords, the board influences performance and performance affects the board. In thisvein, a longitudinal study is called for in order to produce more causative and robustresults.

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Chapter 10

Competitive Intelligence1

This is an exploratory study based on a questionnaire developed and applied by TheFuture Group in the US. The study focuses on competitive intelligence perspectivesand then compares and discusses them with foreign companies mainly the US ones.Based on a sample of 30 companies, the major findings reveal the lack of formality inintelligence operations. There is no organized system for gathering, analyzing, anddistributing intelligence, and Israeli companies are far behind their American coun-terparts. On the other hand, as opposed to their American counterpart, Israelimanagers will roll up their sleeves and gather intelligence directly. This fact enhancesthe strategic use of intelligence; perhaps even more than what is customary in theUnited States.

10.1. Introduction

After many years of submarine duty and more than a few years of equally bitterstruggles on the battlefields of the business world, I found that the experiencesof captains in these different fields were quite similar. Both the submarinecaptain and the company CEO must navigate hostile waters most of the timeand must make decisions quickly under conditions of stark uncertainty. Thesubmarine commander has a skilled support system that zealously collects thefew fragmented signals the submarine receives from the depths of the sea andprocesses them into a stable picture of the situation to provide a basis for hisdecisions. However, the CEO must face an entirely different reality (YanivDinor 1999).

Andrew Grove, Intel founder, who led the company to become the largest com-puter processor manufacturer, wrote a book about his life at Intel whose title, Only

the Paranoid Survive, captures the essence of his doctrine. Grove’s message is that ina world where technologies change in the blink of an eye and innovation flowsincessantly, competitors are waiting with bated breath for their business rival’s mo-ment of weakness, and a company that wishes to survive must be on guard 24 hours aday 365 days a year.

1This chapter is based upon the thesis of Yaniv Dinor as part of the requirements for the MSc degree. The

thesis supervisors were Prof. Avi Fiegenbaum and Prof. Ben Gilad and it was submitted for approval to the

Senate of the Technion — Israel Institute of Technology in 1999.

If we accept the fact that a company is in a battle for survival in a competitiveworld, then, as in war, the commander must understand that without an intelligencegathering and analysis system, without building a picture of competitor operations(products, research directions, marketing channels, and more) and market activities(mergers, trends, capital markets, etc.) and most of all, customer behavior (tastes,preferences, etc.), he does not have the tools at his disposable to win the battle.Paraphrasing Grove, it is not enough to be aware of the risk (or to ‘‘suffer fromparanoia’’); rather, we must create working tools to fight it. The first and foremosttool required is competitive intelligence. Competitive intelligence enables a companyto understand itself better, to avoid surprises, to identify the threats and opportu-nities, and to achieve competitive advantage by improving its strategic and tacticalprograms as well as by reducing its response time, thus bringing about improvedperformance (Kahaner 1996; Gilad 1996).

Peter Drucker (1998), the prophet of modern management theory, suggests thatexternal intelligence gathering will be the forefront of company administration in thenext 15 years. The findings of the current study indicate that Israel is not there yet,even though Israeli senior executives understand they should be there. The percep-tion that the road to this goal passes through formalization of processes has yet topermeate the avenues of domestic management.

10.2. Theoretical Background and Research Questions

Herring (1992) describes competitive intelligence as a systematic program for gath-ering and analyzing information about competitors’ operations and about generalbusiness trends in order to advance one’s own company’s objectives. Herring presentsthe six functions of competitive intelligence in a business organization: (1) increasingmanagement’s sensitivity to competitive activities in its business environment;(2) creating a set of specific criteria for comparing the company to its competitors;(3) legitimizing proposals and suggested lines of activity; (4) inspiring ideas to helpidentify what other companies would do in similar circumstances; (5) assisting formalplanning processes; and (6) contributing to operational and tactical decision-makingprocess.

A number of leading researchers have focused on the mission of business intel-ligence in its more strategic capacity. Accordingly, Herring (1992) and Gilad (1996)defined the main role of business intelligence in examining fundamental assumptionsand blind spots in an organization’s strategic thought process, with the aim of de-veloping new strategies and determining the suitability of current strategies to thechanging competitive environment.

Sutton (1988) suggested that competitive intelligence enables organizations to un-derstand themselves better, to avoid surprises, to identify threats and opportunities,and to gain a competitive advantage by improved planning and reduced responsetime. On the other hand, cultural differences must be considered in evaluating howcompanies use competitive intelligence. It was expected that an a priori analysis ofthe competitive situation in Israel would reveal that high awareness regarding the


importance of intelligence would be reflected in a high level of intelligence within thecompanies as well. And since a large number of former high-ranking IDF officershold senior positions in the Israeli economy, it can be assumed that their under-standing of this subject will be higher than average. Hence, it can be assumed thatmost Israeli companies will adopt the concept of intelligence wholeheartedly. As acounterargument, it can be said that Israeli management culture is not as developedas in America and is not characterized by the definition of clear formal processesrequired for constructing and implementing an effective competitive intelligencesetup.

Taking into consideration Israel’s unique experience in the area of military intel-ligence, it is even more interesting to examine how Israeli companies perceive busi-ness intelligence and how they implement business intelligence operations. Byapplying on Israeli companies the same tool used to examine the role of businessintelligence in American companies, we can make significant comparisons betweenthe two countries.

The study is divided into two main questions. The first is an attempt to understandthe practices of Israeli organizations toward strategic competitive intelligence. Thequestionnaire constructed for this purpose focuses on the level of formality, areas ofcoverage, organizational obstacles, information gathering sources, and structure ofcompetitive intelligence units (Prescott & Smith 1989; Stanat 1993; Prescott &Bhardwai 1995; Ostriches & Eagles 1995; Hall & Bensoussan 1996; Simon & Blixt1996). The second question provides global competitive perspectives by comparingand discussing the findings of Israeli competitive intelligence practices relative toforeign companies (Ghosal & Westney 1991).

10.3. Methodology

The questionnaire developed for this purpose is based on the extensive questionnaireprepared by Ostriches and Eagles (1995) from The Future Group consulting firm.The questionnaire includes 18 questions as described in the appendix. They containthe major aspects of competitive intelligence provided in the background section.Each one of these questions will be described and analyzed in the results section.

In regard to data collection, first, a preliminary version was constructed and pre-sented to managers of business companies. Based upon this pilot study, the ques-tionnaire was modified. Second, 350 questionnaires were distributed to a list ofcompanies ordered from Dun & Bradstreet. The sample included the 250 largestcompanies in Israel, without focusing on any particular business or operational area,in order to present the broadest picture possible in this initial study. In addition,another 100 questionnaires were distributed to smaller companies, among themstartups in order to examine size of corporate maturity differences between the twogroups of companies. Response rate was 8.6% (30 questionnaires were returned).Among the large companies (sales exceeding NIS 300 million) the response rate was7.6%, while among the smaller companies the rate was 11%. This low response rateis typical of broad samples, such as that of Stanat (1993).

Competitive Intelligence 145

10.4. Results

10.4.1. Descriptive Statistics

10.4.1.1. Level of formality in competitive intelligence (question 1) This questionexamined the level of organizational formality in supplying competitive intelligenceto decision-makers. On a scale of 1 (no formal setup) to 7 (formal setup), the averagescore was 3.53, with a standard deviation of 1.7, mirroring a relatively informalsituation in the total sample.

10.4.1.2. Intelligence gathering structure (question 2) This question examined thefirm’s intelligence gathering structure; 40% of the responses indicated that intelli-gence was gathered by senior management, while an additional 37% reported onintelligence gathering on the strategic, organizational, or divisional level. This findingis reinforced by the responses to question 5 below, indicating that Israeli manage-ment both gathers and uses intelligence.

10.4.1.3. Goal of intelligence gathering (question 3) This question examined how thegoals of intelligence gathering are perceived. The majority of respondents (25, or83%) skipped this question. Therefore, the question was excluded from the analysis.

10.4.1.4. Formality of competitive intelligence (question 4) This question examinedthe degree of formality in an organization’s business intelligence by means of thenumber of individuals involved (complement question 1 about the level). In 60% ofthe organizations, not a single person was engaged in business intelligence on a full-time basis. At the other end of the scale, one organization had eight full-time em-ployees and another had four full-time employees whose jobs involved gathering andanalyzing competitive intelligence. These two organizations were state-owned enter-prises specializing in defense-related manufacturing and export. In response to thesecond part of the question, we identified that two-thirds of the organizations had atleast one person employed half-time in the area of competitive intelligence. In 30% ofthe organizations, one or two people held such half-time positions, with the averagestanding at 3.5 half-time positions. For both parts of the question, the answers werebiased upwards by four organizations in the defense sector. The above findingsclearly show that despite the upward bias from the defense organizations, in generalthe level of formality in intelligence gathering in Israel is noticeably low.

10.4.1.5. Consumers of competitive intelligence (question 5) This question attemptedto discover who the intra-organizational consumers of competitive intelligence are.This item was formulated as an open question, and the answers were used to con-struct a scale of seven responses. More than 80% of the responses indicated that the


consumers of competitive intelligence in the organization included the CEO, thedeputy CEOs, and the marketing and business development managers.

10.4.1.6. Implementation of competitive intelligence (question 6) This question ex-amined the level of implementation based upon ‘‘success’’ percentages assigned bythe respondents. The findings indicate a noticeably broad range in respondents’satisfaction with the success of the intelligence setup in their organizations (an av-erage of 50 out of 100, with a standard deviation of 25).

10.4.1.7. Measuring the effectiveness of competitive intelligence (question 7) Thisquestion examined the way in which competitive intelligence is measured. The re-sponses indicated that this measurement (when it exists) is primarily qualitative. Inaround 25% of the organizations, effectiveness was measured by examining theactions taken as a result of competitive intelligence, in another 22% effectiveness wasmeasured by examining new sales opportunities, and 20% did not measure theeffectiveness of the company’s competitive intelligence setup.

10.4.1.8. Sources of competitive intelligence gathering (question 8) The first part ofthis question examined the sources of competitive intelligence gathering in the sam-pled companies, offering nine possible responses. The second part of the questionattempted to focus the responses in order to determine the two main sources. Inresponse to the first part of the question, the following sources received the highestscores: publicity and advertising (16.1%), events and meetings (16.1%), companyemployees (14.9%), Internet (13.7%), and company suppliers and customers(13.1%). The other responses, among them on-line services, commercial data bases,experts in the field, and outsourcing of competitive intelligence, received less than10% response.

In the second half of the question, the best source of competitive intelligence wasfound to be company suppliers and customers (27.1%), after which were the Internetand company employees (18.6% each) and publicity and advertising (13.6%). It isinteresting to note that events and meetings were ranked lower than 12%, indicatingincorrect and inefficient use of exhibitions and conferences for intelligence gathering.

10.4.1.9. Current and future competitive intelligence topics (questions 9A, 9B, and

9C) Combined the three parts of question 9 constitute a research tool we refer to as‘‘covering the topic.’’ The variable was calculated in two stages: the average of the sixstatements in question 9A (a ¼ 0.87) and then the average of all the statements inquestion 9, including the new score for question 9A (a ¼ 0.84). The question ex-amined the situation with respect to issues for which the intelligence gathering system(formal as well as informal) provides information and to what degree this informa-tion is provided. In order to obtain an overall picture of the situation for the sample


population, Table 10.1 summarizes the answers to each of the questions asked as anaverage of the entire sample: column A related to question 9A namely current topics.

The view of intelligence that emerges from analyzing these results is an interme-diate level. A somewhat higher level of intelligence than the general average for theanswers was found for changes in the market or sector structure (4.97 average), theglobal economic situation and the emergence of technological changes (both with anaverage of 4.87) and the marketing aspect of competitors’ activities (4.57 average).The lowest level of intelligence was found for production aspects of competitors’activities (average of 3.47). An analysis of the range shows that it covers the entirespectrum from not at all (1) and very much (7).

Question 9B was a followup of question 9A, though in contrast it does not at-tempt to draw a picture of the existing situation, but rather to understand the wishesof the sampled population regarding the changes they would like to see. This ques-tion attempts to present the wish list of a company’s topics of intelligence infor-mation and it is presented in column B (Table 10.1). 1Column C presents thedifferences between the current situation (question 9A) and the optimal situation asthe respondents would like it to look (question 9B).

The most conspicuous lack of intelligence is in the area of competitors’ commer-cial activities. Other noticeable gaps can also be identified in the need for economicand marketing intelligence regarding competitors’ activities as well as in customerand supplier operations and in competitors’ production activities. On the other hand,the findings also show that in a number of areas the information provided by thecompetitive intelligence system exceeds the need shown in this study. This indicatesthat in certain areas, the energy invested in intelligence gathering is not channeled tothe organization’s actual needs.

Table 10.1: Topics of competitive intelligence.

A. Current:Mean (SD)

B. Future:Mean (SD)

C. Differences(B�A)a

A. Competitive activitiesTechnical 4.30 (1.64) 4.80 (1.73) 0.50Economic (financial) 3.73 (1.70) 5.27 (1.64) 1.54Marketing 4.57 (1.13) 5.97 (1.06) 1.40Production 3.47 (1.81) 4.37 (2.17) 0.90Commercial 3.83 (1.39) 5.43 (1.30) 1.60Legal 3.63 (1.63) 4.50 (1.87) 0.87

B. Changes in market or sector structure 4.97 (1.65) 5.50 (1.38) 0.53C. Customer or supplier activities 4.40 (1.40) 5.70 (1.42) 1.30D. Global economic situation 4.87 (1.83) 3.83 (1.78) �1.04E. Emergence of technological changes 4.87 (1.55) 4.60 (1.77) �0.27F. Intentions and activities of

government agencies4.13 (1.87) 4.90 (1.73) 0.77

G. Political situation 4.30 (1.76) 4.07 (1.80) �0.23

aNote: Most differences reported in column C are statistically significant.


Question 9C gave respondents the opportunity to freely list the problematic areasin their company’s intelligence system. From these answers, a scale of eight responseswas constructed. The categories mentioned as the factors most lacking in the or-ganization’s competitive intelligence were as follows: an organized procedure forhandling intelligence (33.3%); economic information (22.2%); capabilities for com-pleting information (18.5%); and analytical focus (11.1%). Recognition of the needfor a formal procedure to handle intelligence is of dual significance here.

The need for economic information as one of the requirements of a competitiveintelligence system corroborates the findings of question 9B. That question indicateda large gap (ranked 2) between wishes and reality with respect to the need foreconomic information. In effect, the next two identified categories, ability to com-plete information, and analytical focus, represent the outcome of a formal and pro-fessional system of competitive intelligence.

10.4.1.10. Satisfaction and obstacles for improvement (questions 10A and 10B)

Question 10A reexamined the degree of satisfaction of sample respondents with theeffectiveness of the intelligence system in their company, on a scale of 1 to 7. Thisquestion, after standardization, represents, together with question 6, a measure ofintelligence performance. The answers to this question revealed a bi-polar distribu-tion, indicating one of the following: either a high level of dissatisfaction with theeffectiveness of the system (30% of the answers were 1 and 2), or a very high level ofsatisfaction (47% of the answers were 5 and 6), though 7 was not chosen by any of therespondents. Question 10B is a measure of ‘‘organizational obstacles’’ (reliability0.72). The question proposed eight factors presenting obstacles to improving theeffectiveness of the company’s intelligence system. The answers are summarized inTable 10.2.

The top ranking is that there is no formal procedure and it corroborates the majorfinding of question 9C, which points to the recognition and need for a formal pro-cedure for gathering and handling competitive intelligence. Shortage of skilled per-sonnel in this area as an obstacle of great import is raised for the first time in this

Table 10.2: Organizational obstacles.

Rank Answer Percentage ofResponses

1 No formal company procedure for information transfer 27.12 A shortage of skilled personnel in this area 25.73 Insufficient awareness on the part of management 20.04 A lack of a sponsor in the company (at the higher echelons) 8.65 Do not see the value of activities in this area 7.16 Insufficient awareness on the part of the board of directors 5.77 People in this area don’t understand management’s needs 2.98 Legal and ethical concerns regarding this matter 2.9

Total 100.0


study. The 20% response to this question should be augmented by the 5.7% responseto the question addressing with the insufficient awareness on the part of the board ofdirectors in order to gain a complete understanding of the true weight of this var-iable. Despite management’s direct involvement in intelligence gathering, and per-haps because of this involvement, management is seen as being unaware ofintelligence operations on the lower levels of the organization or of the need for aformal system of intelligence. The low percentage (7.1%) that gave the answer ‘‘Do

not see the value of activities in this area’’ corroborates the assumption that, at least inIsrael, the defense background of senior managers leads them to understand the needfor intelligence, even if they do not agree on its formal nature.

10.4.1.11. Organizational obstacles (question 11) This aspect examines the reliabil-ity of the previous question in constructing a measure of organizational obstacles.The question proposed ten factors constituting obstacles to improving the effective-ness of the competitive intelligence system in the firm, taking into consideration thepossibility that the company has no organized intelligence procedure. Out of a sam-ple of 30, the following 22 responses were received (Table 10.3).

The responses indicate that if we collect all answers related to an insufficientawareness on the part of management (1, 3, 4, 5, and 6), we will discover that thiscategory received the highest score as an organizational obstacle to setting up aformal system of intelligence.

10.4.1.12. Competitive intelligence (questions 12– 14) This category explores threequestions related to the Israeli companies’ awareness of competitive intelligenceoutside the company and their understanding about the meaning of the term. Ques-tion 12 examines whether particular companies in Israel and worldwide have man-

Table 10.3: Improving organizational obstacles.

Rank Answer Percentage ofResponses

1 No formal company procedure for information transferand sharing

19.2

2 Insufficient awareness on the part of management 17.83 A lack of skilled personnel in this area 17.84 Insufficient awareness on the part of the board of directors 12.35 Do not see the value of such a process/organized procedure 12.36 A lack of a sponsor in the company (at the higher echelons) 6.87 No understanding of what such a process can contribute 6.88 Legal and ethical concerns 4.19 Do not understand what it is 2.710 Those involved in this area do not understand

management’s needs0.0

Total 100.0


aged to create an image of making good use of competitive intelligence. The intentionwas to try to analyze the list of companies according to industry and from this todraw conclusions regarding their competitiveness and their use of competitive in-telligence as a tool in coping in a hypercompetitive business environment. Due to thesmall size of the sample, the resulting list was not sufficiently focused, but ratherquite distributed over industries, so that it was impossible to draw any conclusions.The only company in Israel that mentioned a significant number of times (total ofseven) was ECI, while among the foreign companies Motorola and IBM mentionedthe greatest number of times (five times each).

Question 13 examined respondents’ subjective perception regarding whetherthey thought their competitors had ever gathered and analyzed intelligence to beused against their company; 93% of the respondents answered that they believedtheir competitors had used competitive intelligence against them. This finding isunanticipated for it was expected that such a high percentage would have beenaccompanied by a higher percentage of companies investing in a formal intelligencesystem.

Question 14 attempted to discover how respondents understand the conceptof competitive intelligence. An analysis of these results could contribute a great dealto understanding how this topic is perceived among the respondents and what eachexpects of a competitive intelligence system. Unfortunately, we only receivedtwo answers to this question. It seems that the respondents saw this open-endedquestion as some form of test and therefore preferred not to answer at all. Futureresearch should attempt to present this issue in the form of a multiple-choice ques-tion, since it may shed light on our understanding of how competitive intelligence isperceived.

10.5. Discussion and Conclusions

In order to evaluate the state of competitive intelligence among Israeli companies, wecompare some of the study findings with the global competitive intelligence situation,particularly in the United States.

10.5.1. Level of Formality (Question 1)

In Prescott & Smith’s (1989) survey of 95 American companies, it is difficult toestimate how many of the intelligence systems can be considered formal. All 95respondents were experts in competitive intelligence in their companies, and theentire survey was geared to members of the Society of Competitive IntelligenceProfessionals (SCIP). Therefore, from the outset the survey was directed towardformal systems. Even though the survey’s authors did not define a formal intelligencesystem, answers to two of the survey’s questions shed light on this topic. The answersto one of these questions revealed that only 62% of the respondents had a budgetdedicated to intelligence. Responses to the other question indicated that only 50% of


the companies were organized for supplying ongoing competitive intelligence, whilein the remaining companies the competitive intelligence was related to a givenproject. Though the focus of this research would suggest that the scores on these twoquestions should be higher, it is clear that these findings are significantly higher thanthose for the Israeli companies in the current study. In Stanat’s (1993) study of408 companies, of which 78% were American, the issue of formality in the intel-ligence system was studied much more directly and resembled the way in which it wasexamined in the current study. The findings show that 74% of the companies had aformal system of intelligence, to some extent or another. In a study conducted by TheFutures Group (TFG) by telephone interviews with senior managers in 104 Amer-ican corporations, the findings indicated that more than two-thirds (68%) of thesurveyed companies adopted an organizational approach of providing intelligence todecision-makers. In a study of Australian industry, Hall and Bensoussan (1996)found that around 30% of the respondents had a formal system of intelligence.

10.5.2. Intelligence Gathering Factors (Question 2)

While our study shows a tendency to gather intelligence among senior managementpersonnel, the Prescott and Smith (1989) survey indicates no such tendency. In con-trast, American corporations gather intelligence in a decentralized manner throughplanning or marketing units. Further validation for this conclusion can be found byanalyzing the answers to question 5 in the questionnaire. The findings indicate that inIsrael, senior management (CEOs, deputy CEOs, marketing managers, and businessdevelopment managers) makes strategic use of the products of competitive intelli-gence. In other words, there is no clear separation, as there is in American com-panies, between those who gather the intelligence and those who use it.

10.5.3. Number of People Engaged in Intelligence (Question 4)

Our survey of Israeli companies shows that on average less than one person wasengaged in intelligence on a full-time basis, and in most companies not even oneperson was engaged. The Prescott and Smith (1989) survey reports on an average ofthree full-time employees engaged in intelligence. Stanat’s (1993) survey indicates thatin 80% of the companies surveyed, five or fewer people worked in intelligence on afull-time basis, while six to ten were so engaged full time in less than 10% of theorganizations. Regarding the number of employees engaged part-time in intelligence,Prescott & Smith survey reports on two such part-time employees. Stanat’s surveydoes not report on part-time positions, though 36% of the organizations did report onan organized intelligence network, suggesting that a significant number of people wereengaged on a part-time basis in intelligence. An organized intelligence network in anAmerican firm includes employees whose job descriptions involve dedicating part oftheir job specifically to gathering and analyzing competitive intelligence. In a typicalAmerican organization, the number of such employees can range from 50 to 100.


10.5.4. Sources of Intelligence (Question 8)

Regarding sources of intelligence, Stanat’s (1993) study reports that 58% identifiedsecondary sources as their preferred sources of intelligence. Field sources and humansources received only 39% from the respondents. In any case, as expected, regionaldifferences were found, and these differences were dependent upon the accessibilityof secondary sources in the region. The studies in Eastern Europe and Australia thatwe reported, indicate a great deal of dependence on human sources, while studiesfrom Western Europe, show a higher level of dependency on data bases. Our studyindicates that Israeli companies rely on human sources, with intelligence gathering bycompany employees, exhibitions, customers, and suppliers receiving the highestscores. Moreover, in Section 8.1. company customers and suppliers were rankedhighest. Among the secondary sources, only the Internet received a high score. Pre-scott and Smith’s (1989) study does not show any such preference for human sourcesover secondary sources.

10.5.5. Current and Future Competitive Intelligence Topics (Questions 9A– C)

A number of interesting differences were found regarding intelligence coverage.Prescott and Smith (1989) did not indicate a difference between the various sources,and their categorization does not match the categories we used in this study. Instead,they used the following categories: ongoing, periodic, and occasional. Accordingto Prescott and Smith model, the following sources of information were indicatedas ongoing (high score): competitors (technical, economic, and market), marketchanges, and technological developments. Sources of information identified asperiodic (intermediate score) related to aspects of competitors’ commercial activitiesas well as to information about customers. The rating of occasional (low) scorewas assigned to suppliers, the global economic situation (which explains why theeconomic crisis in Asia came as such a surprise), government agencies, and politicaldevelopments. Not surprisingly, Israeli companies, which are more affectedand regulated by government decisions, pay a great deal more attention to thistopic.

In regard to intelligence deficiencies (questions 9B and 9C), Israeli companiesresemble American companies in their view of the deficiencies in their competitiveintelligence operations. In Stanat’s (1993) sample, 57% reported that their majorproblem was how to infiltrate competitive intelligence to their decision-makers.Prescott and Smith (1989) reports on this issue as one of the three most problematicissues. This can be compared to the need for ‘‘an organized procedure for handlingintelligence’’ reported on in this study, which was indicated by the Israeli companiessampled as the most deficient area (33.3%). Likewise, in Ostriches and Eagles (1995)study as in the current study, considerable gaps were identified between existingintelligence and what was actually required. Competitive operations remained infirst place, followed by changes in market structure and customer and supplieractivities.


10.5.6. Ranking Obstacles of Intelligence Issues (Question 10)

There is a great deal of similarity between Israeli and American companies in rankingthe issues constituting obstacles to improving the efficiency of competitive intelli-gence. Indeed, these obstacles appear to be universal. In Prescott and Smith’s (1989)study, the following obstacles received a high score: lack of trained personnel, in-sufficient awareness among management, and lack of a formal procedure for trans-ferring information. These obstacles are similar to those reported by the Israelicompanies. Similarly, both lack of a sponsor and lack of understanding of the ben-efits of intelligence was ranked only of medium importance both in Israel and in theUS. The only significant difference was in the category ‘‘legal and ethical concernsregarding this matter.’’ American companies are more aware and suspicious of thelegal and ethical problems involved in intelligence than in Israel, where the issue isnot even a matter of concern. In the Ostriches and Eagles (1995) study, the questionequivalent to 10A in our study (but on a scale of 1 to 10) referring to evaluation ofthe effectiveness of the system received an average score of 5.86, as opposed to 3.87 inthis study.

10.5.7. Competitive Intelligence (Questions 12 and 13)

Question 12 explored what is the company ‘‘model’’ for competitive intelligence. It isinteresting to note that Motorola, the company that, along with IBM, was mostadmired by Israelis for its use of intelligence, was also in first place in the Ostrichesand Eagles (1995) study. In that study, IBM was in the fifth place, after GE, Mi-crosoft, and HP. In regard to competitors (question 13), contrary to Israeli com-panies, 93% of which believe their competitors have used competitive intelligenceagainst them, the results of the Ostriches and Eagles (1995) study surprised itsAmerican researchers as well; 25% of the respondents reported believing that nocompetitive intelligence techniques whatsoever had been applied against them. Theresearchers referred to these companies as ostriches and noted that this finding wassurprising to them, particularly in light of the fact that half of the companies in thesample had an annual turnover in excess of a billion dollars.

10.6. Summary

In conclusion, the results of this study show that competitive intelligence in Israel canbe described as quintessentially Israeli. On the one hand, the most salient finding isthe lack of formality in intelligence operations. There is no organized system forgathering, analyzing, and distributing intelligence, and Israeli companies are far be-hind their American counterparts in this vein. On the other hand, the role of thesenior Israeli managers should not be minimized. As opposed to their Americancounterpart, Israeli managers will roll up their sleeves and gather intelligence directly.


This fact enhances the strategic use of intelligence, perhaps even more than what iscustomary in the United States.

The clear disadvantage of this individual and informal method of intelligencegathering is exactly what one would expect. It is not systematic, it does not reachevery corner of the organization, and it does not provide effective coverage of thecompetitive environment. Proof of this can be found in the gaps between existing anddesired intelligence, as well as in the gaps in perceiving the effectiveness of intel-ligence. It turns out that in Israeli companies much like their foreign counterpartswhen relying on a formal organization, the level of satisfaction increases. Hence, wecannot escape the conclusion that if Israeli companies were to learn to integrate theintelligence tendencies of senior management with an organized system of intelligencegathering, analysis, and distribution, they would benefit a significant competitiveadvantage.

Drucker (1998) assumes that external intelligence gathering will be the forefront ofcompany administration in the next 15 years. This study shows that Israel has not yetreached this front, even though senior Israeli managers understand they need to bethere. The understanding that the path requires formalization of procedures has notyet permeated Israeli management. Let us hope that this study will in some small wayhelp Israeli and global management to reconsider their competitive intelligencepractices.

Appendix — Questionnaire: Competitive Intelligence in Israel

1. Does your company have a formal setup or organized method for providingcompetitive intelligence to decision-makers? (Circle the appropriate answer.)

1 2 3 4 5 6 7

No setup Formal setup

2. If yes, indicate the type of intelligence gathering structure in your organization:a. Overall organizational structure (vacuum cleaner).b. Divisional structurec. Gathering by senior management.d. Other — Details: _______________________________________________

3. In your opinion, what are the goals of intelligence gathering? ____________

4. How many people are involved in the area of competitive intelligence?Full-time basis ________________ Part-time basis _________________

5. Who are the job holders in your organization that use the results of competitiveintelligence? _________________________________________

6. How do you assess the success of the intelligence system in your organizationin achieving the goals indicated in question 3 above?________________________


7. How is the effectiveness of the intelligence setup or method (formal orinformal) measured in your organization?a. Steps taken as a result of competitive intelligence.b. New sales opportunities that emerged.c. Changes in market volume assessment.d. Development of new products.e. Achievement of financial goals.f. Other — Details: _______________________________________________

8A. What are your main sources of competitive intelligence? (Circle the appropriateanswers.)a. Publications you read (newspapers, professional journals, etc.).b. Clipping services (on-line or printed).c. Commercial data bases (in the library or direct access).d. Internet.e. Company employees.f. Experts in the sector.g. Events and meetings.h. Company suppliers and customers.i. Outsourcing — suppliers of competitive intelligence.j. Other — Details: ______________________________________________

8B. Of the above sources, indicate the best two: (a)___________ (b) ________

9A. For which of the following topics do you currently receive intelligence (eitherformally or informally)?

To a largeextent

Notat all

A. Competitor activitiesTechnical 7 6 5 4 3 2 1Economic (financial) 7 6 5 4 3 2 1Marketing 7 6 5 4 3 2 1Production 7 6 5 4 3 2 1Commercial 7 6 5 4 3 2 1Legal 7 6 5 4 3 2 1

B. Changes in market structure 7 6 5 4 3 2 1C. Customer or supplier 7 6 5 4 3 2 1D. Global economic 7 6 5 4 3 2 1E. Emergence of technological changes 7 6 5 4 3 2 1F. Intentions and activities of government 7 6 5 4 3 2 1G. Political situation 7 6 5 4 3 2 1H. Other — details


9B. For which of the following do you require better intelligence in order to makedecisions.

To a largeextent

Notat all

A. Competitor activitiesTechnical 7 6 5 4 3 2 1Economic (financial) 7 6 5 4 3 2 1Marketing 7 6 5 4 3 2 1Production 7 6 5 4 3 2 1Commercial 7 6 5 4 3 2 1Legal 7 6 5 4 3 2 1

B. Changes in market structure 7 6 5 4 3 2 1C. Customer or supplier 7 6 5 4 3 2 1D. Global economic situation 7 6 5 4 3 2 1E. Emergence of technological changes 7 6 5 4 3 2 1F. Intentions and activities of government 7 6 5 4 3 2 1G. Political situation 7 6 5 4 3 2 1H. Other — details

9C. What is missing for you in the competitive intelligence in yourorganization?______________________________

10A. On a scale of 1 to 7, where 7 is the best, how effective, in your opinion, is yourintelligence system (or your informal intelligence gathering and analysis)?

Not at all 1 2 3 4 5 6 7 Very effective

10B. What are the obstacles to improving effectiveness? (Circle the appropriateanswers):a. A lack of skilled personnel in this area.b. Lack of understanding of management’s needs on the part of those in-

volved.c. A lack of a sponsor in the company (at the higher echelons).d. Insufficient awareness on the part of the board of directors.e. Insufficient awareness on the part of management.f. No formal company procedure for information transfer and sharing.g. Legal and ethical concerns.h. Do not see much benefit from such activities.i. Other — Details: ______________________________________________

11. If your company does not have an organized procedure for businessintelligence, what are the reasons for this lack?a. No understanding of what such a process can contribute.b. A lack of skilled personnel in this area.c. Those involved in this area don’t understand management’s needs.


d. A lack of a sponsor in the company (at the higher echelons).e. No formal company procedure for information sharing and transfer.f. Legal and ethical concerns.g. Insufficient awareness of expected benefits of an organized procedure/setup.h. Insufficient awareness on the part of the board of directors.i. Insufficient awareness on the part of management.j. No understanding of the topic.k. Other — Details: ___________________________________________

12. List three companies that you believe make good use of competitiveintelligence:

In Israel Abroada. ______________________________ a. ______________________________b. _______________________________ b. _______________________________c. _______________________________ c. _______________________________

13. Do you think that any of your competitors have ever used competitiveintelligence against you (circle the right one): (a) Yes (b) No

14. Define ‘‘competitive intelligence.’’______________________________________

15. Indicate your company’s annual sales turnover.a. Less than 1 million shekels.b. From 1 million to 5 million shekels.c. From 5 million to 300 million shekels.d. Over 300 million shekels.

16. To what business sector does your company belong? (Circle appropriateanswer.)

a. Electronics e. Defense industry i. Metallurgyb. Computers f. Communications j. Textilesc. Chemicals g. Software k. Medical equipmentd. Services h. Food l. Other: ______________

17. Would you like to receive a copy of the study’s findings? (a) Yes (b) No

18. In order to make sure to receive a copy, please fill in the following informationand return the questionnaire in the envelope provided.

Name: ____________________________________________

Position: __________________________________________

Company: _________________________________________

Address: __________________________________________


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Part V

Development of New Industries

Part V discusses the development of new industries. Both chapters focus on the samemedical technology industry although with different complementary perspectives.Chapter 11 considers theoretical aspects and statistical examinations of the entireindustry. In contrast, Chapter 12 discusses six companies and describes and analyzestheir evolution and it is based on interviews made with the companies’ founders. Thispart’s central claim is that both methodologies are important to understand the roleof the new medical technology industry to influence the Israeli high-tech momentumin the 1990’s.

Chapter 11

Medical Technology A: Industry Analysis1

Globalization presents organizations with fascinating economic opportunities butalso intensifies pressure and imposes new demands, mandating strategic reassessmentand action to suit changing realities (Bartlett & Ghoshal 1987). These changes arecharacterized by high uncertainty and complexity, frequent technological changes,increasing competition in global markets, and dependence on resources of varioustypes.

The study explores the development of the industry and the changes adoptedbetween 1995 and 1998. The sample comprised 45 Israeli medical technology firms.Research questionnaires were filled out during interviews with each company’s CEOor other senior executives. We demonstrated that the industry and its componentfirms changed substantively during the designated three-year period and then focusedon the influence of various factors on company performance. First, we found thatboth industry globalization and attractiveness increased. Second, those companiesenhanced their strategy in terms of strategic capabilities. Finally, the companies havechanged their performance goals as well.

11.1. Review—Medical Technology Development in Israel

Since the 1950s, Israel has been considered a worldwide pioneer in medicine. Israelihospitals and research institutes constitute a paragon of research activity andinnovation for physicians in a broad range of specialties but did not cultivate com-mercial applications for clinical discoveries. The first such application was animaging device produced by Elscint in 1969. It was only two decades later that themedical technology field began to develop in Israel, soon becoming a significantcomponent of the country’s high-tech industry. Such companies as Laser Industries,ESC, InStent, Medinol, and Biosense paved the way for the dozens of Israeli startupsactive in the late 1990’s that sought medical solutions incorporating special tech-nological developments.

In the 1970s and 1980s, research foundations of academic institutions consented toinvest in pharmaceuticals and biotechnology but avoided medical technology. Theagencies determining high-tech investment at that time were Elron — that establishedElscint — and the Kremerman and Yehudai families, a group of investors who

1This chapter is based upon the thesis of Ezra Cohen as part of the requirements for the MSc degree. The

thesis supervisor was Prof. Avi Fiegenbaum, and it was submitted for approval to the Senate of the

Technion—Israel Institute of Technology in October 1999.

financed the establishment of Laser Industries. Despite the difficulties indicatedearlier, several medical technology companies were established during the 1980s(Mennen Medical, Orgenics, Mego Afek, Savyon Diagnostics, and others). Lackingsubstantive sources of financing, they had to use income from sales to promotedevelopment, as they could not allow themselves to sustain operative losses de-manding private investment.

Throughout that period, medical technology industries had no financial sourcesavailable. Difficulties in financing development led two such companies to raisecapital on U.S. stock markets: Elscint raised $4 million in 1972 and another$17 million in 1980 and Laser Industries first raised $6.6 million in 1981 and another$31 million in 1985–1986. The situation began to improve in the early 1990’s. Yozma,a venture capital fund set up with the support of the government, began formingextensive cooperation agreements to set up several specialized funds. One of them,Medica, was established with a budget of $20 million for investment in the medicalfield alone. Other Yozma specialized funds invested in this field, although to a morelimited extent (the Nitzanim Fund invested $1 million in ESC). Besides these gov-ernment-assisted funds, some private venture capital funds that began operating inIsrael opted for investment in medical industries, enabling new companies to raisesubstantive capital at various stages of establishment.

Another significant factor in this respect was the interest in Israeli medical tech-nology companies displayed by several private experts, particularly Lou Pell, who lefthis position as a broker with Bear Stearns and provided several companies (Biosense,InStent, and Influence) with the benefit of his vast experience, extensive contacts, andeven his private capital. For experts in Israel, as well as analysts abroad, the term‘‘Lou Pell companies’’ is still used to describe the firms in which his intense involve-ment increased their chances of success significantly.

Fledgling companies, especially those participating in technological incubators,were also eligible for allocations from the Chief Scientist’s Office of the Ministry ofIndustry and Trade. The State of Israel’s R&D budget was and remains earmarkedfor R&D-based companies, but during the period under study, the Chief Scientist’sOffice began participating more aggressively in medical technology company budgets— 35% of the companies that received grants or loans for development in 1996 werein the medical technology field, a percentage that has remained constant up to thetime of writing (see Chapter 2 — technological incubators).

Israel possesses several competitive advantages applicable to medical technologydevelopment (Cohen 1999): First, research institutes and hospitals at the highestprofessional level that are ready and willing to adopt innovations through clinicaltrials and intra-organizational research funds; second, extensive technological infra-structure in a variety of fields and technologies that are applicable in medicine andhave considerable experience in development process management; third, more thantwice the worldwide average number of physicians per capita.

The life sciences were consistently the least developed sector of high-tech indus-tries, compared to such fields as electronics, software, and communications. By 1994,28 Israeli high-tech companies had issued stock on American exchanges, only two ofwhich — Elscint and Laser Industries — were in the medical technology field. While


Israeli high-tech industries continued to acquire marked presence on American stockexchanges during the 1990’s (about 100 companies as of the end of 1999), fewer than10% of them specialized in the life sciences, mostly pharmaceuticals.

Analysts and experts in the field note several principal factors that prevent morerapid development of the industry in Israel: A shortage of specialized marketingpersonnel who are capable of using their knowledge to establish and develope med-ical technology companies. In traditional high-tech industries, managerial skills andknowledge-intensive product marketing capabilities largely developed in militaryorganizations and defense industries that invested considerably in HR development,relevant well-established Israeli firms (ECI, Aurec, Comverse), and internationalcompanies with development centers in Israel that invest in and develop trainingprograms for their employees. The medical technology field did not have a man-agement-training tradition because so few companies were involved and even fewerwere marketing their products independently.

The market’s unique structure renders independent activity difficult: expendituresfor health range between 7% and 13% of the GNP of Western countries. These largesums of money are allocated primarily for acquisition of services and products forthe health system. Prevailing trends over the past few decades led to the emergence oftwo central blocs, HMOs and equipment suppliers, with the latter enjoying criticaladvantages of scale and conducting efficiency measures as consumers unite to de-mand constant price reductions and cuts. The presence of giant corporations withexclusive marketing pipelines leaves few alternatives for fledgling equipment suppli-ers, but to form that takeover by one of the conglomerates as the only option formarketing products.

Complex, extended, and costly regulations as an integral part of the medicaltechnology company life: compliance with FDA and CE standards entails a longprocess (ranging from at least six months up to five to six years for more complexproducts). The clinical trials required by the FDA are costly as well and demandcomplex management. Most such activities take place at hospitals throughout theworld, using international monitoring and services that increase costs considerably.

Returns on investments begin to accrue much later than they do in alternativefields (software, communications), deterring investment by venture capital funds.Developmental improvement is insufficient — revolutionary change is required.Unlike software and hardware products, for which a 20% improvement in perform-ance over existing solutions means success, medical technology applications have toprove that they institute revolutionary change to succeed in the medical market.

11.2. Theoretical Background

The research explores three fundamental components of industry and competitivestrategy (Porter 1980). First, we explore the nature of the industry in terms ofglobalization and industry attractiveness (Porter 1986). Second, we explore the na-ture of industrial firms in terms of their strategic capabilities (Barney 1991). Finally,we explore the nature of industrial firms’ performance measures that cover a wide

Medical Technology A: Industry Analysis 165

range such as cost reduction, profit, and risk. The major hypothesis of the study isthat, given the changing nature of the industry, both industrial firms and perform-ance will change in order to keep the fit with the environment.

11.3. Methodology

Research data were gathered through the questionnaire described below. Responseswere received from 45 medical technology firms in Israel, constituting the researchsample (see Table 11.1), provided by each company’s CEO or CFO, marketing ordevelopment managers. Initially, we conducted a preliminary test of the question-naire with the participation of three academic experts in questionnaire drafting andthree industrial managers whose comments and clarifications were taken into ac-count in formulating the final questionnaire. At this stage, the research question-naires were sent to 80 companies listed under the ‘‘medical technology’’ heading invarious on-line information sources, such as those of the Israel Export Institute, theIsrael Ministry of Industry, Trade and Labor and Dun’s Guide. Most questionnaireswere filled out during an interview that took place with one of the company exec-utives and a few were faxed back by participants. Responses consisted of the par-ticipants’ subjective evaluation of statements referring to two periods of time: theyear the study was conducted (1998) and three years earlier (1995). Research var-iables are ranked on a scale of 1 to 7 according to reactions to statements, with ascore of 7 representing full agreement, 4 indicating indifference, and 1 total disa-greement. The questionnaire comprises eight parts:

(1) Company entrepreneurs, their age, education and previous place ofemployment.

(2) Entrepreneurs’ technological and marketing background and globalmanagement experience.

(3) Global strategic assessment of the company in its principal spheres ofactivity: R&D, production, and marketing.

(4) Performance, product quality, costs, response to customer needs,adherence to schedule, and risks taken by the company.

(5) Attractiveness of area of specialization and extent of its globalization.(6 and 7) Alliances: Participants were asked to indicate the type of alliances

their companies maintain in various spheres of activity and to assessthe degree of trust and efficiency of both local and internationalalliances.

(8) Significant sources of financing for company operation.

11.4. Results

First, we describe specific aspects of the industry and then we address dynamicchanges that took place in this industry between 1995 and 1998.


Table 11.1: Medical technology firms in Israel.

No. Company Specialty

1 Medisal Orthopedics2 Influence Medical Diagnostics3 Biosense Israel Cardiology4 Algotech Systems Computer systems5 N.A.S.S. Medical equipment6 Degania Silicon Medical equipment7 Medispec Urology8 Opgal Cardiological imaging9 Sightline Technologies Medical imaging10 Aerotel Cardiology11 Trans Scan Diagnostics12 Lipogen Electro-optics13 Galilee Medical Electro-optics14 Carmel Biosensors Diagnostics15 Optimedic Electro-optics16 Diasonics Israel Diagnostics17 Z.M.L. Medical Equipment Industries Medical equipment18 Danex Medical equipment19 Dec-Tec Electro-optics20 Shai Sig Innovations and Motion Electro-optics21 Medisim Medical imaging22 Savyon Diagnostics Diagnostics23 Digident Electro-optics24 Applied Spectral Imaging Diagnostics25 Bargold Electronics Medical imaging26 ELGEMS Nuclear medicine27 Elbit Medical Imaging Medical imaging28 Applied Not specified29 Biomedical Instrument Biotechnology30 Cecil Gottlieb Medical equipment31 Rimlin Orthopedics32 Talia Technology Not specified33 Medical Intelligence Diagnostics34 Omrix Biopharmaceuticals Biotechnology35 Contac Medical Not specified36 Odin Technologies Medical equipment37 Telesense Not specified38 CMT Cardiology39 Medical Dynamics Medical equipment40 Biotest Biotechnology41 ESC Electro-optics42 MIS Not specified43 Elscint Medical Imaging44 Organix Biotechnology45 Rotem Industries Not specified


11.4.1. Entrepreneurs’ Age

The average age is 40. Furthermore, most entrepreneurs are apparently between theages of 45 and 55 and few are relatively young (25–35) or old (65–75). Figure 11.1present their distribution.

11.4.2. Background

A vast majority of entrepreneurs (87%) possess undergraduate degrees, mostly inengineering (37%); 22% are physicians and a decisive majority previously held sal-aried positions. Figure 11.2 presents their academic background and we can learnthat only 20% have a social science degree while the others have engineering, science,and medicine degree.

0

5

10

15

20

25

30

35

25-35 36-45 46-55 56-65 66-75

Age

Inc

iden

ce

Figure 11.1: Age distribution—medical technology firm entrepreneurs.

Naturalsciences

3%

Exactsciences

17%

Medicine23%

Socialsciences

20%

Engineering37%

Figure 11.2: Entrepreneurs’ field of study.


11.4.3. Company Age

Most companies are young; the average company age in 1998 was 7.44 years.The early 1990’s mark the beginning of a sharp increase in number of com-panies established (Figure 11.3). Some 61.5% of all companies participating in thesample were established after 1992 and were thus under six years old at the time ofwriting.

11.4.4. Sales and Number of Companies

Sales volume of most companies did not exceed $10 million (about 57% of allcompanies participating in the study). These figures conform with the relativelyearly development status of a majority of these firms, characterized by low salesvolume, as the companies were still at the R&D stage or only taking their firstcommercial steps.

From Figure 11.4 we can learn that the number of new companies started at 1998was much higher than the number of companies till that year. We can see a sharp‘‘take-off’’ and all these companies were global oriented.

To sum up, the outstanding features of medical technology entrepreneurs are:relatively advanced age (38–48 when enterprise established), undergraduate degree inengineering or M.D. degree, professional experience. They are young (establishedafter 1992), private and small (relatively low sales volume, few employees).

11.5. Evolutionary Perspectives: Comparing 1998 and 1995

The scales representing the research variables are classified according to the threecategorical variables: industry, strategy, and performance (Table 11.2). The averageand standard deviations were calculated for each. Finally, the Cronbach’s a coeffi-cient was calculated for each scale and their calculated coefficients was more than0.6. It can be seen that all values in 1998 were significantly higher in 1998 than in1995. We now describe each one of these three perspectives.

30

20

10

0`1-6 `7-12 `13-19 `25-31

24

10

Company Age (years)

No

. Co

mp

anie

s in

Cat

ego

ry3 2

Figure 11.3: Company age distribution.


11.5.1. Industry

We can learn (Table 11.2) that globalization of the industry in 1998 was significantlyhigher than the average for 1995. This means that the business environment in whichmedical technology companies operated became more global, with international

Table 11.2: Research perspectives, variables definition and differences between thetwo time periods (1998 versus 1995).

Perspective Variables Avgerage

1998

Avgerage

1995

Difference Significance

(2-tailed)

% Change

A. Industry Attractiveness 4.99 4.15 0.84 0.00 20

Globalization 6.14 5.66 0.48 0.02 9

B. Strategy

(Capabilties)

R&D 4.82 3.58 1.25 0.00 35

Production 3.70 2.68 1.02 0.00 38

Marketing 5.70 4.13 1.56 0.00 38

Knowledge 4.03 3.43 0.60 0.00 18

Vision 5.41 4.10 1.31 0.00 32

C. Performance Cost (reduction) 4.68 4.33 0.34 0.05 8

Customers

(satisfaction)

5.79 5.12 0.67 0.00 13

Quality

(improvement)

5.63 4.67 0.97 0.00 21

Time (reducing) 5.64 4.93 0.71 0.01 15

Risk (taking) 4.12 4.57 �0.44 0.03 �10

Year Founded

Cu

mu

lati

ve N

o. o

f C

om

pan

ies

40

35

30

25

20

15

10

5

0

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

Figure 11.4: Cumulative number of companies.


customer centers and competitors playing a more significant role than domestic ones.The industry’s attractiveness also increased significantly meaning that sales volumeand demand grew and average profitability was high.

11.5.2. Strategy

An examination of strategic capabilities’ changes show that all were statisticallyincreased although with a different rate. Four capabilities were increased with morethan 30% from the 1995 time period: R&D, production, marketing, and vision. Thelowest relative change was observed with knowledge.

11.5.3. Performance

Differences in company performance over time may be derived from the followingvariables: risk taking, adherence to schedule (time), product and service quality(quality), response to customer needs (custom), and cost reduction (cost). For each ofthese variables, the findings show significant differences (po0.05). The measures costreduction, customers’ satisfaction, quality improvement, and time reduction, thechanges are positive and they range from 8% to 21%. For risk taking, the 1998 valuein 1998 (4.12) is significantly lower than in 1995 (4.57) indicating that risk taking isperceived to be lower over time when the companies and managers are more ex-perienced.

11.6. Discussion

The study clearly indicates that the medical technology industry in Israel has becomehighly globalized. The most outstanding signs of this development include principalcustomers and competitors located overseas, control by foreign corporations and thebulk of sales aimed at global export markets as attested to by a comparison ofcurrent and past industry globalization. Interviews with company executives showthat the medical technology has developed into one of Israel’s chief export industries,with most products developed, manufactured, and marketed globally.

In regard to strategic capabilities, the findings indicate that companies drew moreattention during the second time period. The executives reported that the most im-portant one is marketing (5.7) and that indicates the importance of looking forwardinto the marketing arena, which is distanced from the home headquarters of Israelicompanies. Interestingly, this aspect also received the highest change from the 1995time period. Israeli executives realized the importance of marketing although most ofthem had either engineering or a science degree. The lowest one in 1998 is productioncapabilities (3.70) that also got the lowest at 1995 (2.68). This indicates that Israelimanufacturing capabilities do not have a competitive advantage and represents themovement of production outside Israel.


Noteworthy are the clear differences in changes in company global strategicmeasures, global outlook, R&D, production, marketing, and performance during thetwo respective periods studied (1998 versus 1995). The results show that companiesare increasing their overseas activity and that a global outlook is a key and vitalcomponent of their business strategy. These results are supported by several statisticsobtained in an industry survey, most prominent of which is the rapid growth ofexports from $623 million to $900 million and the sale of these products on morethan 250 distinct overseas markets. Concurrently, the research findings show differ-ences in company performance between those two respective years and the compa-nies’ respective ages. Improvement is evident in lowered costs, response to customerneeds, service and product quality, and risk reduction.

The substantive change in global activity among medical technology companies isalso explained by nationwide factors. The peace process, a modern infrastructure fortechnological development, educated and skilled personnel, government assistance,and a conducive business atmosphere are nationwide factors that help accelerateglobalization, augmented by such industry-specific factors as strong research infra-structure, extensive medical experience and numerous startup firms involved inmedical technology.

With the rise in demand for company products and the increase in profitability, com-petition intensifies. All these developments led Israeli companies to develop a globaloutlook and deploy their R&D, production, and marketing activities abroad, as well as toseek executives with international marketing and technological backgrounds and expe-rience and to form alliances, primarily for marketing (Yeheskel et al. 2001). The com-panies thus seek to develop global strategic capabilities to improve their performance.

11.7. Conclusion

Over the years, medical technology developed into one of Israel’s principal exportindustries, rendering Israel a world leader in the field. Israeli medical firms offer a widerange of products meeting the highest standards of restrictive legislation, sold on over250 export markets and tailored to meet their specific demands. Exports in the medicalindustry rose from $623 million to $900 million between 1995 and 1997 and subse-quently surpassed the billion dollar mark. This industry, that displayed acceleratedglobalization, was selected to test the proposed research model. The study indicatesthat changes in the industry in terms of globalization and attractiveness were followedby firms’ changes in terms of strategic capabilities and performance.

References

Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Man-

agement, 17, 99–120.

Bartlett, C. A., & Ghoshal, S. (1987). Managing across borders: New organizational responses.

Sloan Management Review, 29(1), 43–54.


Cohen, E. (1999). Strategy and globalization of medical technology companies in Israel. MSc

Thesis. Technion — Israel Institute of Technology (in Hebrew).

Porter, M. (1980). Competitive strategy. Boston, MA: Harvard Business School Press.

Porter, M. (1986). Competition in global industries. Boston, MA: Harvard Business School

Press.

Yeheskel, O., Shenkar, O., Fiegenbaum, A., & Cohen, E. (2001). Cooperative wealth creation:

Strategic alliances in Israeli medical technology ventures. Academy of Management Exec-

utive, 15(1), 16–24.


Chapter 12

Medical Technology B: Firms’ Analysis1

During the last two decades of the 20th century, Israeli companies became an integralpart of worldwide competition in electronics, communications, and software. On theother hand, developments in medical technology took place at a slower pace because ofdifficulties and obstacles in technology, medicine, development, regulation, and mar-keting. Development activity and investments in the industry in the early 1990’s stead-ily dissipated, compelling companies to develop prudent strategies to attract investorsand develop a lasting competitive edge (Israel Statistical Abstract 1970–1999; Incu-bator Authority Report 1998; Israel High-Tech Yearbook 1999; Giza group 2000).

This study contains three parts. First, we describe the competitive development ofsix key medical technology companies in Israel (Elscint, Laser Industries, CMT,ESC, InStent, and Optomedic). Second, based on the former inductive part, wedescribe the competitive positioning of the 6 companies along the internal–externaldimensions and their relationships to performance via the concept of strategic fron-tiers. Finally, we formulate firms’ strategic moves along the map we have developed.Basically, it is motivated by firm’s intention to move from a low strategic frontier to ahigher strategic one.

12.1. Background

In order to explore strategy and competitive positioning in an in-depth manner, thecurrent study focuses on six Israeli companies that have developed around medicaltechnologies and products. These firms were selected following discussions with ac-ademics and field personnel possessing the relevant expertise, and the following shortreview presents some major and important descriptive characteristics.

12.1.1. Elscint

Established in 1969 by Elron and Dr. Avraham Suhami, the company developed,manufactured, and marketed computerized imaging systems for non-invasive

1This chapter is based upon the thesis of Lihu Avituv (2000) as part of the requirements for the MSc


of the Technion — Israel Institute of Technology in 2000. We extend our gratitude to Uzia Galil (Elscint),

Ami Yachin (Laser Industries), Dr. Shimon Ekhaus (ESC), Prof. Isaac Kaplan (Laser Industries, Opt-

omedic), Alex Harel (Optomedic), Eitan Melitz (Fidelity), Shaul Dukeman (CMT), Shosh Friedman

(InStent), Amir Lushkov (InStent) and Prof. Rafael Beyar (Technion) for their cooperation, having do-

nated their precious time for interviews and helpful remarks concerning this study. We also thank Eran

Cohen, Rani Yaffe, Limor Sandach, Guy Yachin (Naiot Technological Incubator CEO), Shlomi Katz,

Ezra Cohen, and Guy Manor who helped by providing feedback and work interviews.

diagnosis. Elscint was the first Israeli company to issue stock on an American ex-change (in 1972) and was the flagship of all Israeli high-tech industries for years. Thecompany had four key imaging product lines, each based on a unique technologythat combined marked physical capabilities with advanced, sophisticated engineeringsystems.

12.1.2. CMT

Most company income originated in development and production of OEM embed-ded hardware and software systems for the digital medical x-ray imaging systems ofmajor companies in the field. The company was established in 1984 as AMSI andlater changed its name to Fidelity. After a complex incident involving false regis-tration of stock issue in 1991, the company was sold to a group of Israeli investors fora price covering its liabilities alone. Its name was then changed to CMT.

12.1.3. InStent

Established in 1991 by an urologist and engineer, InStent developed stents for re-construction of damaged carriers of vital body fluids. During its first five years ofoperation, the company manufactured a series of products for the genito-urinary,digestive and circulatory systems. In 1995, it issued stock on an American exchangeat a value of $120 million. In March 1996, InStent was acquired for $250 million byMedTronic, one of the world’s largest manufacturers of medical equipment.

12.1.4. Laser Industries

Established in 1973 to develop, produce, and market medical instruments based onlaser technologies for a variety of surgical purposes, this company was among thepioneers in Israel’s medical industries and one of the first medical laser producers inthe world. The company first issued stock on a U.S. exchange in 1981 and achievedpeak sales of about $60 million, having developed one of the strongest brands in thesurgical field, Sharplan. The company was acquired by ESC in 1997 in one of thelargest mergers in Israeli industry.

12.1.5. ESC

This company, founded in 1991, developed, produced, and marketed medical devicesbased on laser and light pulse technology for a variety of non-invasive treatments,including varicose veins, depilation, dermatology (cancer, wrinkles, and reconstruc-tion), and esthetic surgery. The company also develops and markets a line of lasersurgery products for electroencephalography (EEGs), gynecology, cardiology, andneurosurgery. The company went public in the United States in January 1996.


12.1.6. Optomedic

Established in 1992 by Prof. Isaac Kaplan and his son-in-law after Kaplan resignedfrom Laser Industries, Optomedic developed, manufactured, and marketed small,low priced, laser-based surgical instruments. The company raised $10 million in astock issue in 1998 but went bankrupt in 2000.

We focus on these six companies and raise the following three research questions.

12.2. Research Questions and Theoretical Framework

The study raises three challenges. First, we describe six in-depth case studies ofmedical technology companies in order to better understand their evolution andsuccess. We describe the events that transpired for each company, noting key mile-stones in development, production, marketing, financing, and business positioning.Most information of this type was obtained from printed material on each company,including prospectuses, financial reports, and stock notices, augmented by relevantinterviews. Second, we compare and contrast the strategy of the six companies viatheir positioning on the matrix of the internal–external dimensions as presented inFigure 12.1.

Finally, we use the former map in order to formulate firms’ competitive moveswithin an industry.

6. ESC

CMT INSTENT

EX

TE

RN

AL

OPTOMEDICLASER

INDUSTRIES 1. ELSCINT

LowLow

High

High

INTERNAL

SF3

SF4

SF2SF1

Figure 12.1: Companies positioning along their internal and external competitivedimensions.

Medical Technology B: Firms’ Analysis 177

12.3. Methodology

12.3.1. Sample Selection

The selected companies have several features in common that led to their inclusion inthis study. First, they are Israeli Origin: all companies were established by teams thatcomprised or at least included Israeli entrepreneurs. All maintained developmentcenters in Israel and some production centers as well. A decisive majority receivedfinancing from the Chief Scientist’s Office for some of their development and mar-keting activities. Second, they specialize in Medicine and Technology: all companiesdeveloped special technologies for medical applications. Third, all companies areGlobal: all companies identified global markets as the object for their products. Alarge majority conducted much of its long-term development work through inter-national medical institutions. Finally, they have a Clear Market Value: each of thecompanies went public or was sold to a third party, reflecting the overall quality oftheir performance.

12.3.2. Data Sources

Three primary sources have been used in order to collect the data required for thiskind of research. First, published material. Taken from Israeli and internationalbusiness journals, articles, relevant websites, books about entrepreneurs, and com-panies, etc. In some cases, data gathering included reading trade newspapers andperiodicals to gain a better understanding of the technologies and their medicalapplications. Also included were articles concerning dozens of well-placed industri-alists in technology and management.

Second, prospectuses, financial reports, and stock notices. They include such re-ports as progress in investment, sales, profits, and business activity in general andsurveys and professional assessments of the markets in which the companies areactive. Third, in-depth interviews with entrepreneurs (at least one from each com-pany), executives, and investors. Eleven such interviews were carried out, rangingbetween 45minutes and 3.5 hours in duration, as required. All interviews were re-corded. They included conversations with Uzia Galil (Elscint), Shimon Ekhaus(ESC), Ami Yachin and Isaac Kaplan (Laser Industries), Eitan Melitz and ShaulDukeman (CMT), Rafi Beyar, Shosh Friedman and Amir Lushkov (InStent), andIsaac Kaplan and Alex Harel (Optomedic).

12.4. Findings 1: Six Companies’ Case Studies

12.4.1. Elscint (Positioning: High Internal, Low External)

Elscint, established by Elron and Avraham Suhami, developed medical imagingequipment. As a subsidiary of Elron, the only high-tech firm at the time, it enjoyed


more convenient financial and professional backing than other Israeli companies.Elscint began as a small player on an imaging market controlled by several giantmultinational corporations with a combined sales volume of hundreds of millions ofdollars. The imaging market was relatively stable for the medical field, but compe-tition was fierce and complex. Numerous technologies were available, demandingconsiderable resources for R&D. Prices of products ranged from tens of thousands tohundreds of thousands of dollars and each sale entailed long technical and marketingprocedures.

Elscint carried out several impressive strategic steps while still in its early stages,including an agreement with General Electric (GE) and a preliminary stock issue in1972. The agreement with GE yielded a great deal of know-how concerning imagingmarket activity, brand name development, and market recognition. It also helpedElscint issue stock, improving its financial robustness and its image in dealing withpotential clients.

During its first six years (up to 1975), Elscint focused on one medical imagingproduct, CT scanners, while developing several laboratory instruments as well. In1975, Elscint decided to concentrate on imaging exclusively and abandon laboratoryequipment development, constituting the most significant milestone in the company’shistory. By doing so, it adopted a highly appropriate strategy for a small firm in ahypercompetitive market. Elscint initiated focused development of products for awell-defined niche market. After accomplishing market penetration with the assist-ance of a partner, it began using its development capabilities to enter an alliedmedical imaging field.

Another substantive change occurred in 1982, when the company’s board of di-rectors approved Suhami’s five-year plan, calling for concentration on all types ofmedical imaging and gaining a substantive market share for each, aiming at anannual sales volume of a billion dollars. The management realized that this ambitiousstrategy did not suit a small company in a competitive market, but the board believedthat the company needed to become a major market player to survive. Flawedimplementation of the five-year plan resulted in a temporary collapse of Elscint thatincurred, in turn, major losses. Its subsequent impressive turnaround restored anormal sales pace and allowed the company to continue functioning. Ultimately,Elscint’s sale for $375 million in 1998 proved the key contention that there is noroom for small players in the imaging market.

12.4.1.1. SRP model analysis Vision: The company image, essentially defined in1975, calls for focus on the imaging market alone. The organizational vision wasreformulated on implementation of Suhami’s 1982 five-year plan, which perceivedElscint as a technological leader in all spheres of the imaging market with salesgrowth up to $1 billion. Fulfillment of this vision required Elscint to rely on itsstrategic capabilities, tangible and intangible alike.

The company initiated the five-year plan without the required financial resources,believing it would succeed in raising the funds along the way. Its hopes went un-realized, however, leaving the company in a multidimensional crisis regarded as one


of the most severe in the annals of Israeli industry. As noted by SRP, a vision’srealization must be supported by capabilities and resources. Elscint defined a com-petitive, ambitious vision but failed to carry it through because it lacked the nec-essary resources and capabilities.

Capabilities: Observers contend that Elscint developed the most intensive andimpressive technology in Israel’s medical industry. The technological developmentteam led by Suhami attained outstanding achievements in imaging and was even thebest imaging development team in the world throughout most of the company’sexistence. Elscint’s strongest strategic capability originated in its technological team’sextension of scientific knowledge to the development of additional imaging products,thereby building an entire product line.

Stakeholders: Elscint’s placement in the external dimension is somewhat surprisingand questionable. Although the company sold more that $3 billion worth of mer-chandise throughout its lifetime, its poor service quality adversely affected its imageto customers. Throughout its long years of competition against major players, itfailed to gain a substantive share of the imaging market. Even Elscint’s shareholdersdid not perceive long-term successful results. The share price drop resulting from thecompany’s collapse in the mid-1980’s engendered a lack of trust on the capital mar-ket. Resumption of regular commercial activity restored investors’ trust, but thecompany’s value continued to decline slowly throughout most of the 1990’s.

Its performance notwithstanding, Elscint played a substantial role in Israeli in-dustry when it served as the flagship of Israeli high-tech. Although it only partiallysatisfied the wishes and demands of its principals, it spearheaded a breakthrough forcivilian technology and yielded much benefit for Israel. ‘‘Patriotic’’ results of thiskind prevented the company management from instituting such ‘cold’ strategicmeasures as sale to a multinational corporation in the early 1980’s or liquidation in1985.

12.4.2. Fidelity/CMT (Low Internal, Moderate External)

Fidelity developed digital upgrade systems for analog angiogram imaging equipmentand CMT manufactured digital x-ray imaging systems. The discussion below differ-entiates the two companies, each of which formulated a different strategy, haddifferent shareholders and management teams, and developed different products.

Fidelity was established by two former Elscint employees who identified marketneeds: digital imaging began to become the standard in the medical field, but ac-quisition of new systems was a costly and extended process. Fidelity offered itscustomers an inexpensive and rapid upgrade of existing systems to digital standards.The company faced two types of competition: major corporations that offered cus-tomers new, expensive and high-quality equipment and smaller companies thatoffered cheap upgrades. Throughout its activity, Fidelity realized that it was oper-ating within a window of opportunity offered by the worldwide presence of analogequipment. Installation of new digital systems or upgrades would halt subsequentorders of company products.


Fidelity failed to develop innovative technology that would accord it added valueover other available alternatives. Furthermore, it did not calculate the results ofmeasures instituted (attempts at becoming an OEM for major players adverselyaffected its financial situation) and did not succeed in positioning its products pref-erentially on the market. Fidelity was consistently dependent on the active capitalraising efforts of one of its founders, Ephraim Landa, whose regular solicitationssustained the company through its constant losses. Termination of capital influx ledto a marked slowdown in activity in 1990–1991 and the legal problems that accom-panied stock issue in 1992–1993 led to the company’s sale to a group of Israeliinvestors for no consideration whatsoever.

SRP theory analysis offers no encouraging conclusions. The company did notmanage to develop substantive strategic capabilities (its technology resembled an-other already on the market), nor to define its activity vision once its window ofopportunity closed (in an interview, Eitan Melitz indicated that the company did notdecide which strategic guidelines to follow with the capital raised in the 1991 stockoffering). The situation is similar in the external dimension: Fidelity did not offerproducts superior to those of its competitors, nor did it satisfy investors, who sawtheir money being exhausted as time went on.

Company acquisition by Israeli investors did not lead to the desired change. Onlythe appointment of Shaul Dukeman as CEO achieved a strategic revolution in thecompany that had changed its name to CMT. The business strategy mapped out byDukeman suited most recommendations for a small firm in a hypercompetitivemarket.

� New product definitions and a focused market as the heart of strategic activity:CMT began manufacturing full systems as a replacement for the upgrade line itgradually abandoned.� Business focus concerning both product nature and appropriate work partneridentification: at the first stage of market penetration, CMT decided to focus onone partner only and on generating income, realizing the limitations of the re-sources it had available.� Joining a business partner as an OEM: this step, demonstrating strategic focus andcomprehension of the company’s financial situation, enabled CMT to concentrateon R&D alone, a field in which it excelled.� Appeal to Toshiba as a business partner: after Toshiba was designated a suitablepartner, attesting to company initiative and activism, CMT invested all its resourcesin developing a technological platform that could respond to Toshiba’s needs.

12.4.2.1. SRP model analysis Vision: From the time he first began working for thecompany, Dukeman instituted a strategic change that focused on the vision ofbuilding CMT as a leader in development of digital imaging systems to be integratedin major companies’ products. To realize this vision, the company management drewup a plan for raising initial capital and recruiting suitable scientists and engineers and


began to develop ties with Toshiba, that soon integrated CMT products in its ownsystems.

Capabilities: The innovative technology developed by CMT (the first company tointroduce a charged-coupled device (CCD)-based imaging system) provided an op-tion for defining technological capability as strategy. Another strategic capabilitywas the company’s ability to create partnerships with relevant firms in the imagingfield. These intangible capabilities were then in their earliest stages, and theirsubsequent application and development should be examined.

Stakeholders: Company positioning in the external dimension is affected by thesatisfaction of its shareholders. Stock offerings that enabled investors to realizesome of their investments with a handsome profit, as well as improvement inshare price over time (the stock doubled in value about a year after it was issued)satisfied investors. Company employees enjoyed a work environment that wasnot only technologically fascinating but also financially rewarding owing to stockoptions.

As of 1999, Toshiba became the source of most company revenues. Toshiba usedCMT’s OEM platform to improve its status in the market and continued jointdevelopment for the mutual benefit of the two companies. CMT’s effective focus onsatisfying the needs of its chief customer enabled the company to introduce its digitalplatform among other major manufacturers of imaging equipment, who believed inthe qualitative and technological advantages of its products.

12.4.3. Laser Industries (Moderate Internal, Low External)

Laser Industries was established in 1972 by a group of private investors. The found-ing group, that enjoyed stable financial backing, was involved in innovative devel-opment of laser-based surgical instruments. Laser Industries is one of the firstcompanies to introduce laser technology for surgical purposes. Today, such tech-nology is an integral part of most operating rooms throughout the world. Thissubstantive innovation imposed marked obstacles to company growth in a hyper-competitive market. Besides addressing numerous development issues, Laser Indus-tries had to satisfy regulatory authorities and influence public opinion notablyamong physicians. These struggles extracted considerable company resources fromthe outset, hindering rapid sales growth and market penetration.

Sales only began to pick up in the early 1980’s, about a decade after the company’sestablishment, thanks to aggressive marketing activity. Although the company soldproducts for tens of millions of dollars since 1985, it later encountered markeddifficulties (losses of $28 million in 1988–1989) and was sold to Arie Genger for$20 million. At that time, the company was crushed by increased market competitionand the recession then affecting the medical field. Stagnation continued as a resultof the company’s inability to introduce change at a sufficiently rapid pace. LaserIndustries’ recovery in the mid-1990’s was the outcome of a change in strategicdirection and an appeal to esthetic as well as clinical medicine.


12.4.3.1. SRP model analysis Vision: Laser Industries’ vision, even if not definedformally, perceives laser technology as an essential component of surgical theatersworldwide. This impressive and focused vision simultaneously constitutes the com-pany’s key problem, as it entails ‘‘reeducation’’ of the medical community — anapproach more suitable to giant corporations with extensive financial resources andpowerful brand names.

Capabilities: At its founding, Laser Industries possessed several substantive ca-pabilities originating primarily in the personal attributes of Prof. Kaplan (contacts,vision, familiarity with the market), who was with the company throughout most ofits life. It also enjoyed stable economic backing, enabling it to withstand long-termlosses. One more impressive capability is its development team that was capable ofapplying its technological skills to develop a comprehensive laser-based product line(beginning with CO2 lasers and rapidly advancing to other types). In time, LaserIndustries derived critical strategic value from the power of its brand name amongphysicians. Sharplan became a well-known name among surgeons and constitutedone of the company’s key assets.

Stakeholders: High positioning in the external dimension demands that a companysatisfy its customers and shareholders better than its competitors do. Laser Industriesdid not always achieve optimal results. Despite its success in supplying high-qualityproducts to its customers during the mid-1980’s, as reflected in sales growth, thetremendous losses it incurred attest to customer dissatisfaction and abandonment forcompetitors. Investors, too, derived no benefit from their stake in the company. Afterabout 15 years of activity, Laser Industries was sold for $20 million, following twosuccessful U.S. stock issues. Poor performance weighed heavily on the company forsome time, as its share price indicated. Moreover, the increase in share value after thebusiness turnaround and sale to ESC for $270 million underscore Laser Industries’failure to develop trust among its investors. Although both companies displayedsimilar performance at the time of the merger, ESC enjoyed far higher costing. Theperson who gained the most from the company’s sale was Arie Genger, who suc-ceeded in improving company value significantly.

12.4.4. ESC (Low Internal, High External)

ESC was set up in 1991 by Dr. Shimon Ekhaus, a physicist who spent most of hiscareer in the laser field. After reading a medical article describing laser treatment ofvaricose veins, he decided that the company would develop light, pulse-based in-struments for this type of treatment. In time, the company developed a broad prod-uct line based on this technology for various types of esthetic treatments.

ESC followed most recommendations applying to small companies in hypercom-petitive markets. Clearly identifying and focusing on the target market (esthetictreatment), providing rapid research/technological response to the problem andoffering a preferred treatment solution for end users (patients) and a preferred eco-nomic solution for intermediaries (physicians in private clinics). Asset Protection: ESC


learned to protect its technology and its applications rapidly and efficiently throughpatents and quick, focused market penetration. Finally, within a brief period of time,ESC raised very large sums of money (two stock issues in six months during 1996) thatimproved its financial situation substantially by enabling accelerated marketing proc-esses and rapid acquisition of technologies.

12.4.4.1. SRP model analysis Vision: ESC’s focused vision that called for light pulsetechnology penetration of the esthetic surgery market, was a breakthrough for theentire industry. At its peak, ESC controlled 50% of the market, having introduced avariety of products to remove varicose veins, tattoos, unwanted hair, wrinkles, etc.

Capabilities: The company’s ambitious vision had to be matched and supportedby resources and capabilities that the company sought to develop throughout itslifetime. ESC specialized in light pulse technology — application of powerful,short-duration pulses of light to the area treated. In technological terms, thiswas somewhat of a retreat from the laser devices then used for esthetic treatments.Nevertheless, ESC managed to maintain its rights to the relevant know-how andconsolidated significant status for itself in the market.

ESC’s chief problem, according to Ekhaus and capital analysts, concerned man-agement during a period of fast growth. Top management team found it difficult tohandle the company’s rapid acquisition of other firms to better its status on theproduct market. Attempts at increasing and improving the team did not succeedeither, as the company grew faster than anyone could anticipate. Its (temporary)failure resulted from inability to stabilize an organization providing strategic, man-agerial, and operative support of sales growth.

Stakeholders: In the external dimension the situation appears different. ESC’scustomers acquired its products at a steadily increasing pace, attesting to their sat-isfaction with the results of treatment. Physicians, who enjoyed creative and profit-able (for them) payment plans, were equally satisfied. One of ESC’s problems was theperception of pulse technology as obsolete. ESC addressed this problem in a uniquemanner by branding the technology (IPL) and developing awareness of the brandname, rather than the method behind it. This is an excellent example of how acompany can cope with external issues, compensating for failure of internal capa-bilities by positioning a brand name that is technologically meaningless yet possessesa substantive marketing advantage.

ESC’s performance compared with that of its competitors clearly underscores itsdominance of the product market, with a share exceeding 50%. Its products areconsidered to be of high quality, enabling ESC to build a brand name in the estheticsurgery market. In some cases, to improve its status on this market, it acquiredpotential competitors and made their products part of its own line. This approachalso improved satisfaction among key company shareholders, who enjoyed an ac-celerated rise in share prices following the stock issue. ESC was long believed to bethe best venture capital fund investment in Israel, but the public that bought itsshares on the stock exchange enjoyed impressive returns as well. After the merger,ESC became the first medical technology company to attain a value of $1 billion.


The collapse of company stock after the merger with Laser Industries obviouslychanged much of what was described above. The merger was planned as a necessarymeasure for ESC, which aspired to penetrate additional niches by acquiring thestrategic capabilities developed by Laser Industries (technological, branding, andpresence at hospitals).

The measure’s failure was partly the result of ESC’s major problem — failure tomaintain a stable organization capable of supporting rapid growth. The inclusion ofLaser Industries, that was supposed to improve the merged company’s performance,instead caused to an organizational crisis. The cultural confrontation between or-ganizations, neither of which was supported by an experienced top managementteam (TMT), engendered serious friction within the merged or newly formed man-agement, that ultimately led to the dismissal of ESC’s founder from the company.

12.4.5. Optomedic (Low Internal, Low External)

Optomedic was founded by Isaac Kaplan and Alex Harel in 1992. After years ofinvolvement at Laser Industries, Kaplan envisioned a dramatic increase in thenumber of surgeons using laser equipment. He proposed the idea of compact, in-expensive laser systems to Laser Industries, which turned it down. Having no otherchoice, he began to develop the first such project with Harel, his son-in-law, seekingto market it to private clinics, small hospitals, and outpatient clinics.

Optomedic initiated several substantive measures during its first year of operationthat conform with recommendations applying to small companies in hypercompet-itive markets:

� Effectively identifying its target niche in terms of product and customer.� Investing much thought in product costing and positioning for customers.� Focused R&D for the first product’s components.

Despite these measures, however, the company subsequently failed in several respects:

� Optomedic did not react timely to events in the product market One unfortunateexample involves delays in replacing its American distributor: the first time, fi-nancial damage resulted that delayed the company’s debut and wasted resources;the second time, it led to the company’s collapse.� Optomedic failed to protect its assets: even after acquiring a sizable share of theGerman market, it abandoned it as a result of a serious product malfunction,causing an extended decline in reputation and enabling competing companies torecover their share of the market.� Worldwide distribution of the first products that still suffered from ‘‘childhoodailments,’’ pointing to flawed planning and substantive failure to focus marketingactivity.� The constant deficit in financing for activities began to show signs even at the earlystages, affecting most company activities.


The company’s collapse was affected by the above malfunctions that intensified andescalated as company activity developed.

12.4.5.1. SRP model analysis Vision: The company did not define any vision for itsactivity, although it did have a clear objective: development, production, and mar-keting of surgical lasers unique for their low price, small size, and convenience. This isa focused objective for whose achievement the company required several capabilitiesand resources. Optomedic began with sufficient financial resources ($2.25 million)that it raised from problematic sources. Some of its capital was obtained from privateinvestors (without any added value for company activity) but most originated in bankloans. The banks loomed heavily over company activity, which focused on R&D,while private investors failed to inject additional capital when necessary. Cash flowproblems exacted heavy toll throughout the firm’s activity.

Capabilities: Significant strategic capabilities, based on the personal attributes ofIsaac Kaplan, served Optomedic well. Kaplan enjoyed close acquaintance with themarket, product marketing processes and numerous physicians. He was a well-known surgeon who served for a long while as head of the International YAG LaserSociety. The company used Kaplan’s superior services as early as the planning stageto map out a convenient and effective interface for surgeons. Optomedic’s productsindeed stood out in this respect. According to the company’s customers, reliance onKaplan continued even when the company was making its first sales. Kaplan con-tacted several physicians he knew who conducted initial sale of instruments. Salesbegan too early because of cash flow constraints and products were distributedthroughout the world without adequate performance monitoring or service to thephysicians and institutions that bought them. Over-reliance on Kaplan’s abilitieshurt the company severely.

Stakeholders: Insofar as the external dimension is concerned, the situation appearseven more serious:

� Optomedic utterly failed to satisfy its customers. The company sold about 150devices throughout its active life, a vast majority of them with serious technicalproblems that precluded their long-term use. These problems damaged the com-pany’s reputation in Germany and made it difficult to continue activity elsewherein Europe.� Optomedic’s shareholders were dissatisfied as well. The company’s collapse led tothe dismissal of all its employees, who never had the opportunity to realize thestock options they held: Although Optomedic issued stock, its shareholders werenot allowed to sell on the free market and were thus left with shares that had nobuyers when the company closed.� Although it managed to sell 40 devices in Germany within three months and toacquire a sizable share of the market at an early stage of its development, Opt-omedic failed to achieve additional sales after disappointing its customers. Despitehaving obtained excellent feedback from physicians using properly working equip-ment, it could not cope efficiently with competitors on the product market.


Optomedic also failed to cultivate effective, long-term relationships with its distrib-utors. After developing substantive dependence on them — the entire Optomedicmarketing process relied on distributors — the company discovered that its selectionof distributors was flawed. Loss of contact with distributors led to collapse of theOptomedic business model and it was only a short time thereafter that the companyceased operation.

12.4.6. InStent (Moderate Internal, Moderate External)

InStent, established by Dr. Mordechay (Motti) Beyar and engineer Oren Globerman,developed stents of various types. As a startup in the implant field, it entered ahypercompetitive industry. At InStent’s founding, blood vessel implants were con-trolled by a lone major player, Johnson & Johnson, which began to acquire newcompetitors who developed better stents and made inroads into its market share.The influx of major medical firms into this profit-rich field led to huge investmentsin R&D.

InStent followed most recommendations applying to small companies in hyper-competitive markets:

� Precise segmenting of target markets: InStent began working on stents for thedigestive and urinary systems, with a constant eye towards the blood vessel field.� Focused R&D that was of great assistance in understanding basic scientific aspectsof medicine and materials. InStent switched to mesh stents only after deciding tohalt development of the coil variety. Similarly, it began to develop blood vesselstents only after completing development of other types.� Active initiated measures throughout the company’s lifetime: the company choseto abandon pointless R&D, forgo marketing of unprofitable products and more.By reserving its resources for worthwhile projects only, as exemplified by its ces-sation of the development and marketing of urinary stents, InStent proved itself tobe a focused and innovative company.� Lou Pell was a leading, world class business partner in setting up InStent and otheryoung Israeli medical firms, using his abilities and connections with giants in theindustry to their best advantage.

InStent performed impressively, considering the hypercompetitive nature of the stentmarket. The company began activity in the blood vessel field after investing severalyears accumulating extensive knowledge of stent development, greatly facilitatinginitial development. It also protected the technology it developed through constantdevelopment and patent registration.

Realizing the limitations affecting a small company in a competitive market,InStent initially linked with a major player in the field (Bard), seeking familiaritywith market processes, distribution, and competition. When the company realizedthat the partner it had selected was unsuitable, it terminated engagement promptlyand began aggressively seeking another. In an interview, Shosh Friedman describes a


procession of potential partners and buyers passing through the office. Its businessacumen also motivated the issuing of stock only three years after the company’sestablishment, motivated by the need to raise capital quickly and boost financialcapabilities.

InStent’s most aggressive move was sale of the company to MedTronic. AlthoughInStent had set itself up as a company with its own clinical, financial, and techno-logical values, shareholders chose to sell it to a major industrial corporation. Opin-ions are divided regarding whether InStent was intended for sale to a third partyfrom the outset, but there is no doubt that throughout its activity, even at the earlystages, it was prepared for such a sale (the 1993 agreement with Bard included anacquisition option). Motivation for sale may originate in failure to believe that suc-cessful product sales on worldwide markets would continue, or perhaps in the natureof the company’s shareholders. It seems clear though that InStent intentionally andaggressively exploited its window of opportunity, realizing when to sell at the rightprice.

12.4.6.1. SRP model analysis Vision: It is difficult to determine whether InStenthad a clearly defined vision on its founding, but the presence of Lou Pell on itsfounding team indicates that the company’s concentration on implant technologydevelopment for treatment of constriction problems in a variety of bodily passageswas selected to facilitate eventual sale to an international corporation. Lou Pelljoined InStent after conducting several similar transactions on the American market,in which he was involved as an active investor. All concluded in sale of companies toone of the medical giants.

Capabilities: Strategic capabilities are embodied by the inclusion of Pell — with allhis experience and extensive ties — in the company’s impressive leading team. TheInStent management consisted of superior technologists, innovative and renownedphysicians, and experienced investors with a proven track record. InStent’s uniquecoil stent technology, protected by extended know-how agreements and patents,constitutes part of its strategic capability as well, but the most impressive strategicasset of all is its unique stent-development process. After abandoning coil technol-ogy, InStent proceeded to develop mesh, balloon-expandable stents (beStents),achieving remarkable results within a very short time. This innovation is the result ofthe extensive knowledge that the company accumulated in engineering, medicine,and the combination thereof. Prahalad & Hamel (1990) notes that strategic capa-bilities are those that increase in value the more they are applied. Development of thebeStent, the principal reason for InStent’s acquisition, constitutes a most interestingexample of this type. It should be indicated that all InStent’s capabilities are intan-gible except its equity following stock issue — a normal situation for young tech-nology firms.

Stakeholders: InStent’s ability to deal with external factors is noteworthy as well.The company developed technology and products preferable to those of its com-petitors, as evidenced by its eventual acquisition. InStent was sold for $215 millioneven though its total cumulative sales as an independent company came to less than


$5 million. Shareholders and employees — who enjoyed stock options and an in-teresting and challenging work environment — felt that the company responded totheir needs.

The most problematic aspect of the external dimension, addressing customer de-mands, reached a turning point on sale of the company. InStent adjusted its customerdefinition as its business life progressed, shifting from physicians purchasing stents tocommercial bodies acquiring companies. According to this indicator, its effortsproved highly successful. Several competitors negotiated for the company’s outrightpurchase. InStent’s customer definition renders it superfluous to assess companyperformance in the product sphere.

12.5. Findings 2: Induction-Based Theoretical Development

The six events provide the basis for theoretical ‘‘strategic frontiers’’ analysis. Thematrix shown in Figure 12.1 positions the six companies participating in the samplealong the two key axes, internal and external and their relationship to firmperformance.

12.5.1. Strategic Frontiers

We assume that there is a trade-off between the value of the internal and externaldimensions in terms of their impact on performance. Then, we define a strategicfrontier as groups of companies with similar strategic performance although theycan be achieved along different values on the internal and external dimensions(Figure 12.1). Five strategic frontiers may be observed. As indicated, companies onthe same axis have similar output, such Laser Industries and CMT on the secondfrontier from the left. Similarly, the upper right front has higher output than the oneto the left of it. The rightmost has the highest output and the leftmost (Optomedic)the lowest. The output of each frontier comprises the company performance in termof market value (or any other measure of performance).

12.5.2. Company Value (Performance)

A company’s value, whether measured according to its stock value or sale price toanother company, is an indication of its strategic competitive positioning. Among thecompanies in the sample, ESC managed to climb to a value of a billion dollars andInStent to $215 million, thus obtaining the capital market’s confirmation of theirpotential and future performance.

An organization’s ability to maximize its stock value constitutes a basic indicatorof its success, as it enables external objective bodies to determine the extent of theirinvolvement in company processes. The value of a company depends on a lastingcompetitive edge and on investors’ expectations of growth derived from the


company’s defined vision and the development of its strategic capabilities, as well assatisfaction of customers’ and shareholders’ needs in a better manner than its com-petitors. The three companies positioned on the highest frontier succeeded in de-veloping substantive value within a short time: Elscint was sold about eight yearsafter its founding for $100 million, while InStent and ESC were sold some six yearsafter they were established for $215 million and $1 billion, respectively.

The strategic frontier analysis emphasizes the need for stress on both external andinternal positioning. An organization that concentrates on one dimension only islimited in its ability to advance through the strategic frontiers. As shown in thisstudy, Elscint, InStent, and ESC are positioned along the same strategic frontier,each thanks to a different mix of internal and external positioning along the com-petitive dimensions.

12.6. Findings 3: Strategic Frontiers and Strategy Formulation

Elscint’s advancement to a preferred strategic frontier (Figure 12.2) is contingent onits ability to address the external dimension, satisfying its customers and shareholdersbetter than its competitors can. ESC’s progress, in turn, depends on its ability tofocus on the internal dimension — developing strategic capabilities, includingsubstantive improvement in the organization’s ability to handle meteoric growth.Medical technology firms should position themselves as close as possible to the centerof the front in which they are situated (near the center arrow in Figure 12.2),facilitating their advancement toward additional strategic frontiers.

ESC

High

Low High

EX

TE

RN

AL

INTERNAL

ELSCINT

Following asuccessful merger

with LaserIndustries

Followingsuccessful five-year

planimplementation

Figure 12.2: Strategic frontiers advancement attempts.


This study considers several examples of companies that strove to advance onstrategic frontiers (D’Aveni 1994; Fiegenbaum & Thomas 1995). Elscint, on theextreme frontier, enjoyed very high internal positioning originating in its vision andmarked strategic capabilities. Simultaneously, it had to cope with weaknesses in theexternal dimension. To improve its positioning on the external dimension as well, thecompany formulated an ambitious five-year plan in the early 1980’s, aimed at re-inforcing the external dimension (dramatic intensification of the pace of sales growthand improvement in share price) while continuing investment in the internal one(technological leadership in imaging). The five-year plan failed because of weaknessesin Elscint’s strategic capabilities (financial and administrative), yet it posited a correctand clear vision regarding the firm’s need to advance to the succeeding strategicfront.

Another example is the merger of ESC and Laser Industries. ESC is positionedhigh in the external dimension and displays weakness in the internal one, while LaserIndustries developed impressive strategic capabilities. Their combined efforts shouldhave propelled the merged company to a preferred strategic frontier. The merger’sfailure, the result of intra-organizational difficulties, led to a severe drop in companyshare prices, but did not detract from the clear vision that stood behind the strategicmeasure.

12.7. Limitations and Future Research Directions

The study concerns six key Israeli companies that were active in medical technologybetween 1948 and 2000. Many other companies in this field, including several out-standing firms (Medinol, Biosense, and Compugen, among others) that were notincluded in the study should serve as the objective of future research.

Analysis of each company was based on objective (prospectuses, financial reports,analysts’ reports) and subjective materials (interviews with entrepreneurs and exec-utives). Documentation of events in general and administrative strategic analyses inparticular was greatly influenced by the data gathered in interviews and by inter-pretation of the events. In future studies, a comprehensive series of interviews carriedout by several investigators should be conducted with additional parties to reflect anoptimal picture of the events taking place. Additional qualitative techniques shouldbe applied such as triangulations and structured tabulation of data to ease bothcomparison and interpretation.

The study is based almost entirely on the SRP Model, whose capabilities anddrawbacks should be assessed by application to additional Israeli medical firms andother high-tech companies (communications, software, hardware, biotechnology,etc.), assessing and comparing the competitive strategies adopted by each.

Global and quantitative aspects also require examination. A quantitative modelshould be developed to address issues not covered sufficiently in the present study.The results will yield more objective insights for the benefit of researchers and hands-on managers alike. The SRP Model should also be applied in other countries highlyinvolved in technological developments. Such studies may delineate differences in


local culture and their effects on the growth of technological firms and provide toolsfor achievement of a nationwide competitive edge.

References

Avituv, L. (2000). The competitive strategy of medical technology companies in Israel:

1948– 2000. MSc Thesis. Technion — Israel Institute of Technology (in Hebrew).

D’Aveni, R. (with Gunther, R.) (1994). Hypercompetition: Managing the dynamics of strategic

maneuvering. New York: Free Press.

Fiegenbaum, A., & Thomas, H. (1995). Strategic groups as reference groups: Theory, modeling

and an empirical examination of industry and competitive strategy. Strategic Management

Journal, 16(6), 461–476.

Giza Group (in cooperation with IVA) (2000). Venture capital fund activity in Israel, 1999

(Hebrew).

Incubator Authority Report (1998). (http://www.incubators.org.il) (Hebrew).

Israel Hi-Tech Yearbook (1999). Tel Aviv: D&A Hi-Tech Information (Hebrew).

Israel Statistical Abstract (1970–1999). State of Israel, Central Bureau of Statistics.


http://www.incubators.org.il

Subject Index

Board demographics, 128, 131, 135Board of directors, 125, 127–134,

136–138, 140Board processes, 131Board resources, 129, 131

Company value, 35, 42, 44, 47Competitive dimensions, 102, 108, 109Competitive intelligence, 143–158Competitive strategy, 70–72, 81Corporate social capital, 112, 116, 119

Effectiveness of competitive intelligence,147

Evolution, 161, 169

Firms’ Analysis, 175Foreign direct investments, 21–24, 29Formality of competitive intelligence,

146

Globalization, 19, 21, 22, 24, 26–30

High-tech entrepreneurs, 7, 9, 12

Israeli Defense Forces (IDF), 111Incubator startups, 83, 86, 90Industry analysis, 163Industry characteristics, 113Israeli market, 22, 23, 26, 27

Managerial challenges, 29Managers’ attention, 92, 93Market value, 66, 71–73

Medical technology, 161, 163–172, 175,177, 184, 190, 191

Middle East, 23, 26, 28, 30

Network, 111–116, 119–122

Organizational obstacles, 145, 149, 150

Performance measures, 83–86Positioning, 175, 177, 178, 181–185,

189–191Privatization, 33–48Privatization method, 36–38, 41Products, 83–88, 92, 95

Startup companies, 65, 66, 80State-owned enterprises, 38, 40, 46Strategic capabilities, 66, 70, 73–75,

81Strategic frontier, 175, 189–191Strategic management, 3, 4, 6, 11, 13,

15, 16Strategic positioning, 49, 50Strategic profile, 128, 131–135, 139Strategic reference points, 4–6, 10, 13Strategy formulation, 190

Take-off paradigm, 7Technological incubators, 63, 65–67, 69,

80, 81

Women as Technology Entrepreneurs,99

avi fiegenbaum-the take-off of israeli high-tech entrepreneurship during the 1990's_ a...

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