a capability perspective to organizational … · moderating factors that lead to the strategic...
TRANSCRIPT
A CAPABILITY PERSPECTIVE TO ORGANIZATIONAL CHANGE
WITHIN THE MNC CONTEXT
Paula Kilpinen
Helsinki School of Economics, Finland
Markus Paukku
Helsinki School of Economics, Finland
Abstract
The aim of this paper is to contribute to the organizational capabilities discussion by
drawing upon research in international business where the role of context is strongly
emphasized. This context rich analysis allows for a discussion on the impact of the
internal and external environment of the firm on capabilities during organizational
change. An understanding of the interplay between the internal and external
environment puts this capability research in a position to make an empirical
contribution in line with the co-evolution logic. Finally, reflecting on the basis of
negotiated and privileged access to the multiple case firms’ managers and data, the
paper’s research agenda puts forward the concept of equifinality and proposes that
capabilities scholars recognize the heterogeneity both within their researched firms
and their environments and the multiple paths that can lead to the same outcome.
Key words: International Business, Organizational Capabilities, Organizational
change, Dynamic Capabilities, Equifinality
Introduction
In seeking to explain a firm’s strategy, competitiveness and performance to its
managers, scholars have developed the concept of organizational capabilities. This
research stream has developed insights into different routines and changes within
organizations in contrast to previous research looking at mere market, competitive
dynamics or the position of the firm within its industry. In describing an increasingly
dynamic and unstable environment characteristic of globalization Grant (1996:)
found that “organizational capabilities rather than served markets… [have become]
the primary basis upon which firms establish their long-term strategies".
"The increasing turbulence of the external environment has focused attention upon
resources and organizational capabilities as the principle source of sustainable
competitive advantage and the foundation for strategy formulation" (ibid.: 375).
Subscribing to this statement, further attention must be paid to capabilities and the
moderating factors that lead to the strategic selection of certain capabilities over
others. This is intuitively evidently important for firms undergoing organizational
change. However, in order for the research agenda to progress further empirical
studies must be conducted. Without field research not only is the explanatory power
of the concept questionable but also one can ask do capabilities really exist?
Furthermore, even if scholars are able to isolate said capabilities, it is not enough to
merely to identify them. The capability concept must be taken out of its black box
and put into its relevant context. To achieve the stated goal of the OSWC, to
contribute to managerial practice, capabilities research must recognize the empirical
reality and changing context of the organizations researched. While firms seek to
understand their changing internal environments and the basis for organizational
change, as much of the organizational capability research posits, they do so under the
conditions of the interplay between the internal and external environment.
Pettigrew et al. (2001:697) claimed that "the field of organizational change is far
from mature in understanding the dynamics and effects of time, process,
discontinuity, and context" and to this day there is an under representation of the
temporal and spatial contextual factors that shape episodes of change within firms.
Thus, "theoretically sound and practically useful research on change should explore
the contexts, content, and process of a change together with their interconnections
over time" (ibid.: 698) such as capability selection under conditions of organizational
and environmental change. This call for contextualization is in line with Lewin and
Volberda (1999) call for a "dramatic increase in empirical research" within the co-
evolution logic.
By recognizing the importance of context to the capabilities research stream could
also answer to some criticism levied at firm-centric resource based theories. For
example, Priem and Butler call for a "synthesis of the resource- and environment
based perspectives" (2001: 31) and a deeper understanding of the "complex
interactions that occur over time between the firm's resources and its competitive
environment" (ibid.: 35).
The aim of this paper is to contribute to the organizational capabilities discussion by
drawing upon research in international business where the role of context is strongly
emphasized. This context rich analysis allows for a discussion on the impact of the
internal and external environment of the firm on capabilities. An understanding of the
interplay between the internal and external environment puts this capability research
in a position to make an empirical contribution to the co-evolution logic. Finally,
reflecting on the basis of negotiated and privileged access to the multiple case firms’
managers and data, the paper’s research agenda puts forward the concept of
equifinality and proposes that capabilities scholars recognize the heterogeneity
within, and the diversity in contexts of, their research firms and the multiple paths
that lead to the same performance outcome.
Capabilities and Context
Along the lines of Tallman (1991) in his suggestion that international studies may
have important value to refining strategy theories the aim of this paper is to explore
capabilities in the international business context and more specifically, that of the
multi-national corporation (MNC). The MNC provides a rich setting for research on
internal selection environments. The size and spread of the organization allows for a
coherent study of firm capabilities, such as capability replication, consistent with
previous capability research (e.g. Kogut and Zander, 1992, 1993 and 1995) that
focuses on the firm as isolated from its external environment.
However, as the MNC by its very nature is an organization that operates in many
different environments the international business perspective emphasizes the
relevance of the context external to the firm and its impact on capabilities and their
development. A deep understanding of the external environment is not only important
to international firms or MNCs that seek to align capabilities, or look for new
opportunities, across dynamic heterogeneous international contexts. While this paper
focuses on the MNC, a thorough assessment of firm capabilities and their context is
necessary for all firms simply due to the realities of increasing interdependence of
markets and competition arising from globalization.
Having placed the firm and its capabilities into their relevant context the research can
then progress to identify the key contingent factors of the internal and external
selection environment that influence or determine organizational change and the
developement capabilities.
Helfat and Peteraf (2003) suggest that the emergence and development of capabilities
are dependent on both of internal and external factors, that in the form of 'internal
and external selection environments' determine the development paths of capabilities.
The factors in the internal selection environment include managerial decisions, while
the factors in the external selection environment include changes in demand, science
and technology, availability of raw materials and government policy. Moreover, as
suggested by Helfat et al. (2007), firm capabilities are context dependent, and their fit
is determined by how well they perform in the internal and external environment of
the firm. Therefore “a source of change in this form of analysis is [due to] the
asymmetries between levels of context” (Pettigrew et al., 1995).
By recognizing the importance of the changing internal and external environment this
study aims to provide empirical insights into the research on co-evolution dynamics
as the "joint outcome of managerial intentionality, environment and institutional
effects" (Lewin and Volberda, 1999: 526). While a discussion of the institutional
effects is beyond the scope of this paper we aim to make an empirical contribution
through research that draws on a rich understanding of managerial decision-making
and firm strategy as well as a deep understanding of the studied firms’ industry
dynamics, domestic and international contexts and competitive environments. As
such, this research is in a position to empirically study change which, "can be
recursive and need not be an outcome of either managerial adaptation or
environmental selection but rather the joint outcome of managerial intentionality and
environmental effects" (ibid.: 526).
Finally, this paper aims to recognize the complexity inherent to the empirical
capabilities discussion by putting forward the concept of equifinality (Mahoney and
Goertz, 2006; Ragin 1997). Within organizational research, equifinality has been
defined as "the state of achieving a particular outcome through different types of
organizational configurations" (Payne, 2006), and has mainly been applied to
studying various strategy or structure configurations, or organizational design (Payne,
2006; Siggelkow and Rivkin, 2005; Gresov and Drazin, 1997; Gresov, 1989).
While the objective of managerial capability research has been to explain competitive
advantage, or another firm performance metric, the research has not explicitly
allowed for multiple causal paths to the same outcome. For example, in previous
international business research, capabilities have been identified as being critical to
two distinct outcomes during firm internationalization 1) the survival of the firm and
2) firm growth, however, these are two distinct outcomes and the relationship is not
linear or simple (Sapienza et al., 2006).
Within this paper we apply an approach recognizing equifinality in studying the
development of capabilities. The narrow but deep sample of the multiple case study
approach, combined with the unique access to data, of the study allows for a rich
enough understanding of the studied phenomena that capabilities can be studied in
their context without overzealous reductionism. In this light capabilities can be
studied as “intertwined processes [that] often have their own momentum, pace and
trajectory” (Pettigrew et al.2001).
In summary, by providing a more explicit discussion regarding the internal and external factors that influence organizational change and capability development, as
perceived by company managers, this study seeks to provide empirically based insights for future research within the co-evolutionary dynamics literature stream. Literature Review International Business – Multinational Corporation Perspective
Although firm resources and capabilities have only quite recently become the explicit
focus of research in the international business (IB) literature, the traditional theories
of firm internationalization were already highly compatible with the current
perspectives on resources and capabilities. These early IB theories implied the
importance of capabilities whether in the form of market knowledge and learning
(Johanson and Vahlne, 1977), organizational capacity (Welch and Luostarinen,
1988), or ownership advantages (Dunning, 1980, 1981). However, despite IB’s
emphasis on the location and environment of business activities the environment
external to the firm has not been explicitly linked to firm capabilities beyond the
development and deployment of firm-specific resources and capabilities as the result
of an incremental intra-firm process. Furthermore, the early models of
internationalization were limited in any analysis explaining the indirect effects of
external environments. In other words, any external environment only impacted the
firm in so much as the firm was directly engaged in that specific environment. This
has not only narrowed the explanatory power of IB theories in explaining the effect
of the external environment on internal capability processes but furthermore, it has
not been conducive to the study of the effects of processes and capabilities internal to
firm on the firm’s environment. In terms of informing the MNC, the aforementioned
IB theories primarily explained firm internationalization as an incremental
geographic expansion based on existing capabilities requiring some necessary
supporting learning or market specific capability development.
The more recent resource- and capability-based literature, particularly that focusing
on MNCs or firms in global industries, has explicitly identified organizational
capabilities as important determinants of performance and strategy in global markets
(Tallman, 1991; Tallman and Fladmoe-Lindquist, 2002; Collis, 1991; Luo 2000 and
2002; Kogut and Zander, 1992, 1993, 1995; Dunning and Lundan, forthcoming).
While the early internationalization research focused on how firms replicate or
leverage their capabilities globally or within specific foreign markets, the more recent
literature (Tallman and Fladmoe-Lindquist, 2002; Luo, 2002) has not only focused on
the leveraging or exploitation of firm capabilities but also on how firms build new
capabilities. Thus, this recent IB literature is in line with the recent dynamic
capabilities literature (Teece et al., 1997).
The recent research that recognizes the importance of both capability processes,
leveraging and building, has found these processes to be contingent on organizational
and environmental factors. Tallman and Fladmoe-Lindquist (2002) point to the
different strategies of international expansion and global integration, while Luo
(2002) investigates certain environmental (complexity, industrial structural
uncertainty and business cultural specificity) and organizational factors (entry mode
and market orientation) that influence the leveraging and building of capabilities in a
foreign market. In doing so, these studies have identified important determinants of
capability development and have offered a more refined perspective into the complex
issue of capability management in a global context. Building on these ideas, previous
research (Kilpinen, Paukku, Salonen and Gabrielsson, 2008) has looked at how
strategic capabilities are identified, developed and managed in the global context.
By differentiating between the strategy of international expansion and that of global
integration (in line with Tallman and Fladmoe-Lindquist, 2002) this research has
identified different logics and underlying capability bases depending on the strategic
focus of the firm. As the ‘internationalization logic’ of spatial expansion requires the
outward mobilization of firm activities the primary emphasis involves, in terms of a
‘capability logic’, the exploitation, replication and incremental development of firm
capabilities. In line with the established IB literature, the firm builds its international
strategy on its internal, mainly home-based capabilities and chooses the country
markets that provide the best application for its capabilities.
On the other hand, a strategy of ‘global integration’ firm activities, whether for
increased efficiency, internalizing of local learning, etc., requires the integration and
reconfiguration of capabilities, distinct from the expansion logic of
internationalization, in order to address external and internal interdependencies. The
'dynamic capability' logic involves not only modifying the firm's internal capability
base but also exploiting external capability networks in order to achieve a better fit
with the competitive, changing environment and is characterized by both linear and
non-linear capability trajectories.
However, despite the increasing amount of research within IB on firm resources and
capabilities, we identify a number of limitations in the current literature. First, there is
a shortage of research addressing the dynamism in capabilities (including the
potential non-linear development) during the international or global development of
the firm. Second, there is limited amount of investigation of elements external to the
firm, as they relate to capability development. Third, while there is very little
empirical research on capabilities in general (Newbert, 2007) this is particularly the
case within the international business literature. As a result, within these
perspectives, firm capability development has been seen as a rather linear process of
capability leveraging and building, and therefore they do not allow for the possibility
of multiple paths in capability development, nor do they account for the potential
non-linear capability trajectories during the international or global development of
the firm. In addition, although resources and organizational capabilities have been
identified as key to understanding organizational change (Becker et al. 2005,
Feldman, 2004, Zhou et al. 2006) this approach is still largely unexplored within the
MNC context.
Capabilities and Organizational Change Within the MNC Context In order to examine organizational change from a capability perspective, this study
draws upon evolutionary theory (Nelson and Winter, 1982) and the dynamic
organizational capability literature (Teece et al., 1997; Helfat and Peteraf 2003;
Helfat et al., 2007; Eisenhardt and Martin, 2000). With a focus on the firm’s strategic
capabilities, defined as those clusters of organizational capabilities that determine the
strategic position of the firm in global competition (Dosi et al., 2002; Collis, 1991),
the research investigates the role of dynamic capabilities, reflecting the capacity of an
organization to create, extend or modify its internal and external capabilities (Helfat
et al., 2007; Teece et al., 1997) when addressing and seeking to achieve a better fit
with the rapidly changing, globalizing environment. In line with Helfat and Peteraf
(2003) we distinguish between organizational capabilities, that can be either routine-
based (Nelson and Winter, 1982) or knowledge-based (Grant, 1996; Kogut and
Zander, 1993) and are capable of accommodating change when influenced by factors
internal and external to the organization, while dynamic capabilities are those
specific capabilities that modify other resources and capabilities within the firm's
capability base (Helfat, 2007; Teece et al., 1997). This position is compatible with the
concept of 'combinative capabilities' (Kogut and Zander, 1992), referring to the firm's
ability to exploit its existing knowledge to new opportunities and to deal with change
by transforming existing capabilities into new ones. This idea has also been
developed further in that a firm, by the means of its dynamic capabilities, can not
only respond to exogenous but can even create market change (Eisenhardt and
Martin, 2000).
The significance of organizational capabilities becomes increasingly important in a
globalized business environment characterized by spatial and temporal
interrelatedness. These capabilities provide the firm with the necessary
complementarities that allow it to cope with the complexity of the environment
(Levinthal, 2002).
Organizational change
Many researchers in studying the developments of the business environment and
markets under the rubric of globalization have concluded that the pace of
technological change is rapid, the nature of future competition and markets difficult
to determine and that firms face high competition (Bettis and Hitt, 1995. Teece et al.,
1997, Kogut and Zander, 1995). Within this type of environment “due to the force of
competition and changes in consumers’ needs, the firm’s long-run survival and
growth depend on its ability to develop new products and methods of organisation”
(Kogut and Zander, 1995, p.76), which has led to both an increase in the amount of
change and in its very nature. As a result, change has become endemic to the way
many organizations compete and has become not only critical in terms of
performance but in some industries necessary simply to ensure the survival of the
firm (Brown and Eisenhardt, 1997).
Extant literature differentiates between episodic and continuous change (Pettigrew et
al., 2001). Episodic change includes organizational changes that are rare,
discontinuous and intended, while continuous changes include changes that are
ongoing, evolving and cumulative (Brown and Eisenhardt, 1997; Tsoukas and Chia,
2002). Consequently, a change need not be a distinct event or episode but may also
be conceptualized as an ongoing process. Zhou et al. (2006) have further
distinguished between organizational changes as technical organizational changes
(products, services and production process technology) and as administrative changes
that involve organization structure and administrative processes.
Resources, organizational capabilities and routines have been identified as key
concepts leading to the understanding organizational change (Nelson and Winter,
1982, Becker et al. 2005, Feldman, 2004, 2000, Zhou et al. 2006), as they capture
important drivers of endogenous organizational change and help to identify the
pathways and mechanisms by which exogenous change has an impact on an
organization (Becker et al., 2005). Feldman (2004) has suggested that while resources
and routines may either promote or inhibit change, and that it is the context-
dependent and dynamic nature of resources and capabilities that enable continuous
change to occur. Brown and Eisenhardt (1997) have argued that within highly
competitive, high-velocity oligopolies the "ability to engage in rapid and relentless
continuous change" becomes a survival capability in and of itself (Brown and
Eisenhardt, 1997: 1)
Organizational change has been central to organization research but has been said to
be difficult to both explain and manage (Van de Ven and Poole, 1995). Explaining
change within an MNC is even more complex because the organizational context of
development and change extends over space and time, and is characterized by both
spatial and temporal interrelatedness. International comparative research has been
called for in order to complement the current understanding of change with respect to
its content, direction, process and pace across national boundaries, in the culturally
diverse and globally competitive world (Pettigrew et al., 2001).
The Internal and External Selection Environment
Helfat (2007) argues that firm capabilities are context dependent, and the 'fit' is
determined by how well the capabilities perform in the internal and external
environment of the firm. The factors in the internal selection environment include
managerial decisions, while the factors in the external selection environment include
changes in demand, science and technology, availability of raw materials and
government policy. Pettigrew (1987) has defined the 'outer context' as the entire
social, economic, political, and competitive environment in which the firm operates,
and the 'inner context' as the structure, corporate culture, and political context within
the firm through which the ideas for change has to proceed. Similarly to the concept
of fit, a source of change may be the asymmetries between the micro and macro-level
contexts. Therefore, the rate and path of change in an industrial sector facing
significant boundary changes may be much faster than the sensing and adaptation of
the individual firms within the sector that are driving the change. The relative lag in
the adaptation process of a firm, and its failure to recognize that the basis of
competition may have changed in their sector, can be a key factor explaining its loss
of competitive performance. (Pettigrew and Whipp, 1991; Pettigrew et al. (2001).
The co-evolutionary dynamics theory allows for a less dichotomized context where
the boundaries between the internal and the external context are less clear. Therefore,
through the interaction of the internal and external environment organizations co-
evolve with their environments and thus changes are joint outcomes of managerial
action and environmental effects. For example, change in the institutional
environment (e.g. regulatory environment) may affect the firm and the industry, but
the firm or the industry may also have influenced or caused theses changes. (Lewin
and Volberda, 1999). This perspective also lends to the analysis of the institutional
context which is directly related to organizational change as the embeddedness of
organizations in their institutional context affects the firm's resistance to change
(Lewin and Volberda, 1999).
Dunning and Lundan (forthcoming) have also emphasized the importance of the role
of the institutional context of the firm, particularly with respect to the MNC. The case
of the MNC requires particular analysis of the differences that arise from different
institutional environments prevailing in the home and host countries. They consider
that the ability to reduce uncertainty and to create institutional innovation by
combining locally embedded capabilities with those that are mobile across borders
constitutes a fundamental dynamic capability of an MNC. Due to this characteristic
the MNC can be particularly influential in its role in the diffusion of organizational
capabilities.
The figure below illustrates the capability perspective adopted in this paper.
Capabilities are considered both as drivers and objects of change. First, the impetus
to change may come from the lack of fit between firm capabilities and its internal
(managerial decisions), or external selection environments. In line with the
coevolutionary logic, change need not be an outcome of either managerial adaptation
or environmental selection but is rather the joint outcome of managerial intentionality
and environmental effects (Lewin and Volberda, 1999). This perspective combines
the teleological and lifecycle perspectives of development and change (Van de Ven
and Poole, 1995): on the one hand, an organizational entity proceeds toward a goal or
end state in a purposeful and adaptive manner, and on the other hand, the external
selection environment, comprising of a number of institutional rules or programs,
might require certain developmental activities to "progress in a prescribed sequence"
(ibid., p. 515).
Second, organizational change is dependent on the firm's capacity to change. The
increasing complexity and uncertainty of the globalizing environment emphasize the
role of dynamic capabilities, both in renewing the firm core competences, and in a
form of 'strategic response capabilities' referring to an ability to sense environmental
change, conceptualize a response to that change, and to reconfigure resources to
execute the response (Bettis and Hitt, 1995). Eisenhardt and Martin (2000) argue that
firms need dynamic capabilities to both respond to exogenous change as well as to
create market change. Thus the firm must have the capability to not only adjust to but
also drive changes in its operating environment. When taken to the context of firm
globalization, firms must both adapt to industry globalization or institutional forces,
and when possible and desirable, attempt to shape these forces to the firm’s benefit
(Bartlett and Ghoshal, 1989; Dunning and Lundan, forthcoming).
Third, organizational change is looked at as a process with a specific goal, that by
definition, modifies firm capabilities and might even change the operating
environment of the firm. Although an organization might be constrained by its
external environment, requiring it to undertake certain prescribed sequences or
events, this framework does not assume a prescribed trajectory of sequences but
incorporates instead the assumption of equifinality, that assumes several equally
effective ways to achieve the goal (Van de Ven and Poole, 1995). In previous
research, capabilities have been identified as being critical to two distinct outcomes
1) the survival of the firm and 2) firm growth (Sapienza et al., 2006). Firm
performance provides a focal point for the investigation and enables the examination
of variations in context or process as they lead to variability in performance outcomes
(e.g. growth) across firms subject to comparative investigation (Pettigrew et al.,
2001), or exploring multiple causal paths (equifinality) to the same performance
outcome, e.g. survival.
External Selection Environment
Internal Selection Environment
Organizational Change
Change in Firm Capabilities
Change in the External
Environment
time
PERFORMANCE Firm Capabilities
Methodology and Data
Pettigrew et al. (2001) have suggested that organizational change research should
"move away from the variables paradigm toward a form of holistic explanation" since
causality and change explanations are not attributable to single variables or
relationships between independent and dependent variables, but should, instead, be
viewed "as an interaction between context and action" (p. 699) Similarly, research on
coevolution dynamics and complex systems of relationships, that may involve non-
linear feedback paths and multidirectional causalities, "dependent-independent
variable distinction become less meaningful since changes in any one variable may
be caused endogenously by changes in others" (Lewin and Volberda , 1999: 527)
Because of the complexity and context dependency of the research problem, a case
study seemed to provide the best research strategy, as it is both contextualized and
enables investigation of complex interactions between the firm's internal and external
selection environments, as well as to observe the multiple paths of capability
development. According to Pettigrew (1997), a case study enables capturing dynamic
processes and linking events and chronologies to analytical frameworks, by first
searching for patterns in the processes and then unraveling the underlying
mechanisms that shape patterning in the phenomena under investigation.
In line with the coevolution logic (Lewin and Volberda, 1999), this study
incorporates firm and industry levels of analysis, and investigates possible
interactions between firm-level, capability-related processes (replication of routines,
capabilities and competences) and the macro-level processes (dynamics of
competition and selection). Empirical findings, emergent concepts and theory is
compared with extant literature for the purpose of extending theory, as suggested by
Eisenhardt (1989) and Eisenhardt and Graebner (2007).
The research design is a multiple case study, where "replication logic" (Yin, 2003;
Eisenhardt, 1989; Eisenhardt and Graebner 2007) is applied. Out of the 6 case firms
initially studied, 4 firms were selected for further analysis based on theoretical
sampling and replication to enable both within and cross-case examination. The four
technology-intensive firms operating in industries strongly affected by globalization,
were expected to undergo some organizational changes in order to survive global
competition, as leading firms within their respective industries, and to achieve
congruence with the changing environment. Interestingly, one of the case firms was
acquired during the time of the research, and transformed into a negative case, which,
however, did not undermine the research design as case research enables
investigation of both positive and negative, or non-conforming, cases for the purpose
of theory refinement (Ragin, 1997).
Despite the literal replication logic that assumes uniform results across cases, causal
uniformity was not assumed or even anticipated, instead, different combinations of
causes were expected to produce the same outcome (Ragin, 1997) This idea of
equifinality assumes that there are multiple causal paths to the same outcome, and in
terms of multivariate explanations, the objective is to find combinations of variables
that are sufficient for outcomes of interest. Equifinality is expressed using the INUS
approach to causation, where each INUS cause in neither individually necessary nor
individually sufficient for the an outcome. The difference between quantitative and
qualitative research is that quantitative work aims at finding an "average path"
despite the existence of multiple paths while qualitative work aims at identifying
different possible paths to the same outcome. (Mahoney and Goertz, 2006; Ragin,
1997)
Data collection and analysis
Data was collected sequentially and included both real-time and retrospective data.
The first stage focused on analyzing the context, using both highly structured and
detailed frameworks on the globalization drivers (market, cost, competitive and
government) and levers (Yip, 1989; 2003), industry structure and value chain
analysis (Porter, 1980, 1985), as well as a semi-structured elaboration on key factors
in the external selection environment. The latter phases focused specifically on
organizational change and capability development. First the overall patterns of
capability development within the MNC were identified. This was followed by an
analysis of capability development subject to a specific market context. Following a
content analysis, as classified utilizing NVivo software, of the respondents’ answers
regarding the structured questions regarding globalization as well as the spontaneous
descriptions of the impact of globalization, China and its emerging market identified
as a key driver of globalization and was associated with organizational change within
the firm.
Both real-time and retrospective data was collected through interviews and secondary
sources, such as annual reports, company web pages, articles and press releases, and
multiple informants were interviewed to avoid informant bias. In addition, the key
informants (top management team members and experts) can be considered highly
knowledgeable, able to view the focal phenomenon from a diverse perspectives
(Eisenhardt and Graebner 2007). Data was collected by multiple researchers, which is
likely to enhance the richness of the data and confidence (Eisenhardt, 1989;
Eisenhardt and Graebner 2007). Triangulation was performed both among different
data sources and researchers to ensure high reliability of the data. The data analysis
included both within-case and cross-case analysis and following methods: content
analysis of the interviews, processual analysis, and pattern matching. Results of the
data analysis were disseminated to company representatives through reports and
workshop representations to validate the interpretation made by researchers.
The Table 2 below resumes the different stages in the data collection.
Stage Objective Method
Data sources Firms Key informants
1 Analyze the context
Multiple Case Study
Semi-structured interviews, secondary sources
4 firms (Nokia, Kone, Wärtsilä, Perlos)
34 top executives (CEO to Director) selected by company representatives for their expertise
2 a) Identify organizational change process and patterns in global capability development and management
Multiple Case Study
Semi-structured focus group interviews. secondary sources
4 firms (Nokia, Kone, Wärtsilä, Perlos)
30 informants involved in 6 focus group discussions: TMT members (3 firms) or experts (2 firms) at the HQ level
2 b) Examine the implications of the organizational and global capability management subject to the market context
Multiple Case Study
Semi-structured interviews, secondary sources
4 Chinese subsidiaries (Nokia, Kone, Wärtsilä, Perlos)
12 informants: 3 informants at the HQ level, 9 informants at the subsidiary level (subsidiary top management, CEO to Director)
Case Analysis
The following sections will cover the four in-depth case studies that were conducted
for this study. First, the emergence or strategic rise in importance of the Chinese
market will be outlined as a driver of globalization in the case of the four case firms.
Then the impact of China will be evaluated from each case firm’s perspective in
terms of organizational change as well as evaluated with respect to its impact on
capability development. Building on the co-evolution approach the impact of the
internal and external environment subject to the impact of the organizational change.
The Emergence of China
As part of the pre-study 34 senior managers from the four of the case firms were
interviewed with respect to the impact of globalization and a thorough checklist of
specific drivers (Yip, 2003). Managers were first interviewed about the impact of
globalization drivers on their firm’s industry overall and subsequently, on the impact
of their firm specifically. During the course of the semi-structured interviews each
firm’s representatives raised the increasing significance of China and its market to be
the most important change in their business environment, more specifically, from an
emerging market to that of a primary market The rise of Asia, and specifically China,
was seen as both as either a significant challenge and an opportunity for the case
firms.
“It’s kind of like either you are competitive in China, or you’re not competitive globally... as you extend in China you have to expand your global capability. Expanding on both sides [HQ/ subsidiary] to keep up with the capability”
- Kone, Respondent
The case firms identified China to be the lead market that set the competitive strategy
for other markets. The high degree of competition, cost efficiency requirements
combined with the large volumes of the Chinese market resulted one specific market
becoming highly significant for the global competitiveness.
“Lead markets from the market growth perspective are China, again,
if you are not there it is very hard to have very much scale.”
- Nokia, Respondent 2
“If you are out of China, you are out of one third of the elevator market. “
–Kone, Respondent 3
“Also it’s a fact that the Chinese market is very competitive at the moment, everybody is entering China.”
– Kone, Respondent 4
The importance of China was explained not only in terms of the potential market and
source of revenue but as a strategic location due to the fierce competition, which in
turn would impact the overall industry structure and could even determine the
potential exit of certain industry players.
"So the one that wins here wins globally. We have to beat our main competitors here”
- Kone, Respondent 3
Organizational Change
The continuous change in the external environment that is the emergence of China is
on-going, evolving and cumulative (Brown and Eisenhardt, 1997; Tsoukas and Chia,
2002). The emergence and the importance of the China from the case firm
perspective is not a distinct event but rather the process of many institutional, policy,
economic, demographic, etc. effects. Consequently, the impact of China on the case
firms cannot be characterized by a specific or distinct event or episode and thus must
be analyzed as an ongoing process.
However, the impact or role of the firms that are active in the Chinese business
environment, due to internal decision-making environment, cannot be accounted for
without taking a co-evolution approach. In other words, the emergence of China has
caused an organizational change within each of the respondents’ firms due to the fact
that each of the firms and their competitors, in combination with the aforementioned
reasons, ranging from economic development to policy decisions, etc., were present
and competing in China.
The following case descriptions will assess the impact of the increased significance
of the Chinese market on each of the case firms in terms of organizational change and
the response it prompted in terms of capabilities.
Case 1: Kone (New Elevator Business Division)
Kone Corporation is in the business of designing, manufacturing, installing,
maintaining and modernising elevators and escalators. While some 60% of its
turnover comes from Europe there has been a significant shift in the relative
importance of the Asia, emerging markets with aging populations and particularly the
growing Chinese market, which currently represents over 30% of the global elevator
market.
The prevailing trend in the elevator industry has been one of industry consolidation
with larger companies acquiring local firms closely linked to the local construction
industry. The result has been that presently the four largest global companies account
for about 60% of the global market. The growth-oriented strategy was reflected upon
by a Kone manager,
“When I think of Kone, we internationalized by buying markets, or we sought to cut costs. Then there were a few very specific cases, where we really bought capabilities, consciously bought new capabilities.”
- Kone, Respondent 1
As the Chinese market developed in importance and became more competitive, Kone
found that they needed to better leverage and develop their capabilities as scale was
simply not enough to sustain competitiveness. While many of the industry players in
the Chinese market competed on cost, Kone managers saw the emerging market as a
lead market for technological innovation and focused on the high-end segment.
“China is the biggest elevator market in the world. And to operate there you have to be fairly competitive, … so it’s really that sense having a very quick impact on everything we do.”
-Kone, Respondent 4
“…it’s technically demanding, tall buildings, high performance is required. So there are number of elements that make China a sort of must, to be innovative in order to succeed in China.”
- Kone, Respondent 3
In order to systematically transfer and develop capabilities Kone instituted the Kone
Way project of integrating the best technological, R&D and service know-how best
practices worldwide. The result of the organizational change was a company that
would be based on geographically dispersed units that could better serve local market
needs, such as China, which could then be exploited worldwide.
“The whole Kone Way project is based on choosing the best practices and spreading them, and at the same time there is a drive to build competence centres that would be more [geographically] balanced than the current ones.”
-Kone, Respondent 3
In summary, to compete in the Chinese industry Kone challenged the industry’s
prevailing scale based logic of inorganic growth through acquisitions and focused on
delivering high-technology products to a growing market. In order to accomplish this
Kone had to undergo an organizational change in terms of building the transfer
capabilities that would not only serve Asian markets but would allow the rest of the
firm to learn from China, the lead and most competitive market in the industry.
“The elevator (industry) of course is considered globally quite a (mature one), but in many ways in China you can take things and turn them on their heads.”
-Kone, Respondent 5
Case 2: Wärtsilä (Ship Power Division)
The Ship Power division of Wärtsilä produces ship machinery, propulsion,
manoeuvring solutions for vessels and offshore applications. The interviewed
managers stated that the industry is characterized as slow moving relative to other
industries due to high investments and mature technologies. A major effect of
globalization in the ship engineering industry has been the geographical shift of
shipyards, the industry’s main customers, to Asia and a growth in demand for its
products arising from the current boom in the Asian shipping industry.
"Actually the shipping industry has been very traditional...but now that the business environment is changing, with the rise of Asia, this has to change. There are going to be new rules in the game."
- Wärtsilä, Respondent 3
Both the relocation of major customers and the need to improve cost competitiveness
is forcing Wärtsilä to undergo an organizational change and place a higher emphasis
on the role of Asia with the main focus on China. Wärtsilä, however, has historically
relied on its tacit home-based capabilities to compete through superior technology
and R&D and has been hesitant on whether the right conditions exist to acquire or
build higher order capabilities in Asia.
" In my opinion, I think that it is quite a strength to Wärtsilä that these guys in Vaasa, have been working on R&D from one generation to another... it is an advantage to us, its our strength, it is not easy to copy"
- Wärtsilä, Respondent 1
The current boom in the shipping industry in Asia has forced Wärtsilä the role of its
Chinese subsidiary into a strategic business unit and develop capabilities in
transferring existing knowledge as well as build its capability base to leverage its
presence in the Asian markets. The management of projects that were previously
managed from Europe and increasingly managed from the local Asian subsidiary.
“If really want to realise this target, then you need a lot of activities
here in China in the near future”
- Wärtsilä, Respondent 4
In summary, despite the fact that Wärtsilä has had to overcome the challenges
of uprooting tacit knowledge from its home-base and has not been
particularly rapid in its organizational change and capability development in
its Chinese subsidiary it has been able to remain competitive relative to slow
moving industry rivals and who also have been buoyed up by the current
industry-wide boom. However, as the managers at Wärtsilä forecast that the
current high demand conditions could not last indefinitely there is reason to
develop capabilities that would enable the firm to react faster in terms of
organizational change.
"... to be able to read the signals that come from the external environment, and at the same time being able to make fast decisions on how to adapt to them. In fact it is not, it should not be considered only in manufacturing but it should be considered wider."
- Wärtsilä, Respondent 2
Case 3: Nokia (Nokia Devices Division)
Nokia is the market leader in the mobile telephone handsets followed by its main �competitors Motorola, Samsung, Sony Ericsson and LG. The rising importance of the Chinese mobile market did not have as significant impact on Nokia compared to the other industry players. Nokia entered the Chinese market ahead of its competition and gained a first mover advantage in the local market and allowed it to consolidate its position ahead of its rivals’ entry. In order to achieve the market share that allowed Nokia to benefit from the economies of scale its needed to be present in China.
“A decision that we made was let’s enter China. It was several years back. And when you are the first mover in that kind of situation that gives you huge advantages. Now 70 percent market share there.” - Nokia, Respondent 1
The firm’s experience from global operations also resulted in the transfer of highly codified capabilities and knowledge that could be utilized to compete in the Chinese market. While the importance of the Chinese market is clearly significant, in terms of volumes for example, Nokia was able to compete in the specific market by relying on its internal processes of deploying global competences and capabilities.
“Nokia is today quite agile in adapting good things done in one part of the world and deploying them elsewhere. Create once, deploy many. In similar markets like China, India, Turkey, Russia, there are a lot of commonalities…” - Nokia, Respondent 3
The rise in importance of the Chinese market, however, did cause changes in the external environment that benefited Nokia at the relative expense of its competition and have. The large market for lower cost, so-called entry-level mobile phones, has grown significantly with the emergence of China. The key to success in this market was the ability to secure enough market share to be more cost effective than the competition, a position which Nokia found itself in not only as the world market share leader but as the early entrant into the Chinese market. The importance of the Chinese market also coincided with the beginnings of the maturation of the mobile telephone. Both of these factors resulted in the average sales price per mobile phone decreasing, again favoring the firm benefiting from the largest economies of scale and efficient processes.
“if you are not there it is very hard to have very much scale. It is a scale driven business and scale advantages are significant. You need to be there.” - Nokia, Respondent 2
While Nokia found itself to be able to respond to the challenge of serving and competing in the Chinese market without significant organizational change Nokia’s capability strategy was affected indirectly. Faced with decreasing revenue per unit in mobile telephones, due to industry maturation and the shift in new demand to the emerging economies, Nokia underwent a major reorganization in 2008 in order to develop its internet, content and services business and is currently implementing the changes necessary to develop the relevant supporting capabilities.
“now entering the service business, … we have seen that we are lacking capabilities and it would take too much time and we [can’t develop them internally so quickly. So in that sense, the capability development has also changed” - Nokia, Respondent 3
Case 4: Perlos
Perlos, an electro-mechanical component manufacturer, operates mainly as a supplier
to the mobile phone industry and is one of the world’s largest suppliers of mechanical
modules for mobile phones. Perlos became one of Nokia’s key suppliers and partners
in the early phase of the ICT industry. Since 1995, the growth the mobile handset
industry triggered Perlos’ rapid internationalization. Perlos internationalized and
grew rapidly in Nokia’s footsteps and set up manufacturing operations serving Nokia
worldwide.
The mobile phone subcontractor sector has also witnessed the increasing importance
of Asia and the Chinese market. Though the oligopolistic group of end customers has
remained the same their operations and consequently their supply chains have
increasingly moved to Asia. The relatively low labor costs in China combined with
the booming Asian mobile market has placed added emphasis on, for example,
Nokia’s manufacturing and supporting supply chain operations in China. Therefore,
Western firms like Perlos not only face their traditional Western competitors but now
also compete with Asian companies for smaller unit profits arising from low-cost
segment products. The subcontractor sector faces pressure to consolidate into into
large volume, vertically integrated entities capable of delivering large modules,
subassemblies, and even complete phones.
As the demand for mobile telephones grew in China, Nokia, Perlos’ major customer,
increased its production in China in order to serve the market. The senior managers
all acknowledged the important role that the Chinese market would play in their
industry and it was to be a catalyst for
Perlos in terms of developing capabilities that would better enable the firm to survive
in the competitive Chinese market.
Perlos had tied up its resources in internationalizing and building factories to support
its client’s activities with a global footprint. Perlos’ capabilities were focused on
replicating its home based capabilities internationally rather than develop new
capabilities.
" it was like a copy paste operation at that time"
- Perlos, Respondent 1
“We had a damn good relationship with Nokia and the kind of resources that could work with them”.
- Perlos, Respondent 2
However, due to the rapid internationalization in the footsteps of its major customer,
Perlos did not have enough slack resources that would have enabled it to develop
capabilities that would have allowed it to compete in the Chinese market.
“We were running so fast with Nokia that just to be able to keep up was an achievement...”
- Perlos, Respondent 2
The level of resources required to develop new capabilities in order to be remain
competitive in the Chinese market with its decreasing margins was too high for
Perlos.
Perlos’ investment into its internationalization capability was in fact a threat to the
company. As Perlos did not have the necessary resources to develop new capabilities
to compete it was acquired by a Taiwan based competitor.
“certain technical processes etc. that we don’t control internally and have bought from the external market. With the acquisition of Perlos (by a competitor) we are now part of a bigger firm that has those capabilities…This is a condition of staying alive and growing in this market.”
- Perlos, Respondent 3
While Perlos had managed to serve Nokia successfully based on its home based
capabilities and its rapid internationalization, the shift in the industry to China
combined with the lower revenue from emerging markets and the maturing of the
mobile telephone were too much for the firm’s resources.
In summary, Perlos had developed capabilities to internationalize at the rapid pace
demanded by the industry. However, when the industry shifted a significant portion
of the manufacturing to Asia to meet the demand of emerging markets, combined
with the decreases in margins due to industry maturity, Perlos did not have the
resources that would have enabled it to follow through with the necessary
organizational change and underlying capability development.
Discussion
In order to explain competitiveness researchers studying organizations have put
forward the concept of organizational capabilities. This study has taken this concept
and shown that they must be taken out of their black box deep within the organization
and contextualized. In order to access firm capabilities this paper has examined the
concept within the MNC, drawing upon the international business literature where
context is seen has having central impact to the performance outcomes of the
organization.
In order to access firm capabilities the case studies examined capabilities through a
period of organizational change. While this specific example of change, the rise of
the Chinese market, has been studied extensively the emergence of the market has not
been treated empirically through the co-evolutionary logic. The interaction between
the firms’ internal constraints or opportunities combined with the external
development of the context must be studied together in order to get a holistic and
accurate picture of the capability outcomes. Furthermore, this study proposed that the
concept of equifinality be utilized in order to better integrate the variance resulting
from the interactions between a specific firm’s internal and external environments.
The different paths that firms may take to arrive at the same performance outcome,
such as firm survival, may depend on different combinations of environmental and
firm interactions including as institutional forces, competitive dynamics, cost
pressures, etc.
This study calls for future research to access the capability development processes
within the firm and further open up the black box of capabilities, not only as an intra-
firm process but a process that recognizes its context.
REFERENCES
Barney, J.B. 1991. Firm Resources and Sustained Competitive Advantage, Journal of Management, 17/1, 99-120.
Becker, M.C., Lazaric, N., Nelson, R.R. and Winter, S.G (2005) Applying Organizational Routines in Understanding Organizational Change, Industrial and Corporate Change, Vol. 14, No 5, 775-791
Bettis, R.A. and Hitt M.A. (1995) The New Competitive Landscape, Strategic Management Journal, Vol 16, Special Issue, pp 7-19
Brown S.L. and Eiserhardt, K.M. 1997, The Art of Continuous Change: Linking Complexity Theory and Time-Pace Evolution in Relentlessly Shifting Organizations, Administrative Science Quartely, 42, 1, 1-34
Collis, D.J. 1991. A Resource-Based Analysis of Global Competition: The Case of the Bearings Industry, Strategic Management Journal, 12, 49-68.
Dosi, G., Nelson, R.R. and Winter, S.G. 2002. The Nature and Dynamics of Organizational Capabilities, New York: Oxford University Press.
Dunning, JH (1981) International production and the multinational enterprise. Allen and Unwin, London
Dunning, J.H. and Lundan, S.M. (forthcoming) The Institutional Origins and Diffusion of Dynamic Capabilities in Multinational Enterprises, Industrial and Corporate Change
Eisenhardt, K.M. (1989) Building Theories from Case Study Research, Academy of Management Review, 14, 4, pp. 532-550
Eisenhardt, K.M and Graebner, M.E. 2007. Theory building from cases: Opportunities and Challenges, Academy of Management Journal. 50/1: 25-32.
Eisenhardt, K.M. and Martin, J.A. 2000. Dynamic Capabilities: what are they? Strategic Management Journal, 21/10-11, 1105-1121.
Feldman, M.S. (2000) Organizational Routines as a Source of Continuous Change, Organization Science, Vol 11., No. 6., 611-629
Feldman M.S. (2004) Resources in Emerging Structures and Processes of Change, Organization Science, Vol 15., No. 3, 295-309
Grant R.M. (1996) Prospering in Dynamically-competitive Environments: Organizational Capability as Knowledge Integration, Organization Science, Vol 7., No. 4, 375-387
Helfat, C.E., Finkelstein S., Mitchell W., Peteraf, M.A., Singh, H., Teece, D.J and Winter, S.G., 2007. Dynamic Capabilities, Understanding Strategic Change in Organizations, Blackwell Publishing.
Helfat, C.E. and Peteraf, M.A. 2003. The Dynamic Resource-Based View: Capability Lifecycles, Strategic Management Journal 24/, 997-1010.
Johanson, J. and Vahlne, J.E. (1977) The Internationalization Process of the Firm: A Model of Knowledge Development and Increasing Foreign Market Commitment, Journal of International Business Studies 8: 23-32
Kogut, B. and Zander, U. 1992. Knowledge of the Firm, Combinative Capabilities and the Replication of Technology, Organization Science, 3/3, 383-397.
Kogut, B. and Zander, U. 1993. Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation, Journal of International Business Studies, 24/4, 625-645.
Lewin A.Y. and Volberda, H.W. (1999) Prolegomena ofn Coevolution, Organization Science, vol 10. No 5., 519-534
Luo, Y (2000), Dynamic Capabilities In International Expansion, Journal of World Business, 35 (4): 355-378
Luo, Y. 2002. Capability Exploitation and Building in a Foreign Market: Implications for Multinational Enterprises, Organization Science, 13/1, 48-63.
Nelson, R. & Winter, S. 1982. An Evolutionary Theory of Economic Change. Harvard University Press: Cambridge
Newbert, S.L. 2007. Empirical Research on the Resource-based View of the Firm: An Assessment and Suggestions for Future Research, Strategic Management Journal, 28: 121-146 Mahoney, J. and Goetz, G. (2006) A Tale of Two Cultures: Contrasting Qualitative and Quantitative Research, Political Analysis, 14, 227-249 Mathews, J.A. and Zander I. (2007), The International Entrepreneurial Dynamics of Accelerated Internationalization, Journal of International Business Studies, 38: 387-403 Meyer, K.E. (2006) Global focusing: from domestic conglomerates to global specialists, Journal of Management Studies, 43(5): 1109-1144 Payne, G.T. 2006. Examining Configurations and Firm Performance in a Suboptimal Equifinality Context, Organization Science, Vol. 17, No 6., 756-770 Pettigrew, A. 1997, What is processual analysis? Scandinavian Journal of Management, 13 (4): 337-348 Pettigrew A. and Whipp, R. 1991. Managing Change for Competitive Success. Oxford, England, Blackwell. Pettigrew A., Woodman R. and Cameron Kim (2001) Studying Organizational Change and Development: Challenges for Future Research. Academy of Management Journal, Vol 44, No 4., 697-713 Porter ME. 1980. Competitive strategy. New York: Free Press. Porter ME. 1985. Competitive Advantage: Creating and Sustaining Superior Performance. New York: The Free Press.
Priem R. and Butler, J. (2001) Is the Resource-Based "View" a Useful Perspective for Strategic Management Research? Academy of Management Review, 26/1: 22-40 Ragin CC. (1997) Turning the Tables: How Case-Oriented Research Challenges Variable-Oriented Research, Comparative Social Research, 16, 27-42 Sapienza H., Autio E., George G. and Zahra S. 2006. A Capabilities Perspective on the Effects of Early Internationalization on Firm Survival and Growth. Academy of Management Review, Vol. 31, No 4., 914-933 Solberg, C.A. (1997), A Framework for Analysis of Strategy Development in Globalizing Markets, Journal of International Marketing, 5 (1): 9-30
Tallman, S 1991, Strategic Management Models and Resource-based Strategies among MNEs in a Host Market, Strategic Management Journal, 12, 69-82
Tallman, S. and Fladmoe-Lindquist, K. 2002. Internationalization, Globalization and Capability-Based Strategy, California Management Review, 45/5, 116.
Teece, D., Pisano G. and Shuen, A. 1997. Dynamic Capabilities and Strategic Management, Strategic Management Journal, 18/7, 509-533.
Tsoukas H. and Chia R. (2002) On Organizational Becoming: Rethinking Organizational Change, Organization Science , Vol. 13, No. 5, 567-582
Van de Ven, A. and Poole M.S. (1995) Explaining Development and Change in Organizations.. Academy of Management Review. 20/3: 510-540
Yin, R.K. (2003) Case Study Research: Design and Methods, 3rd edn., Thousand Oaks: Sage
Yip G. 2003. Total global strategy II. 2nd ed. Upper Saddle River: Prentice Hall. Welch and Luostarinen (1988) in Buckley P.J. and Chauri, P.N., eds The Internationalization of the Firm, A Reader, 2nd ed., Thomson Learning, London, UK
Wernerfelt, B. 1984. A Resource-based View of the Firm, Strategic Management Journal, 1, 171-18
Zander, U. and Kogut, B. 1995 Knowledge and the Speed of the Transfer and imitation of organizational capabilities: an empirical test. Organization Science 6(1): 76-92
Zhou K.Z., Tse D., and Li J.J. (2006) Organizational Changes in Emerging Economies: drivers and consequences, Journal of International Business Studies, 37, 248-263