A CAPABILITY PERSPECTIVE TO ORGANIZATIONAL CHANGE WITHIN THE MNC CONTEXT. Paula Kilpinen Helsinki School of Economics, Finland

Transcription

1 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

2 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

3 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 coevolution 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

4 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

5 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

6 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

7 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

8 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 routinebased (Nelson and Winter, 1982) or knowledge-based (Grant, 1996; Kogut and Zander, 1993) and are capable of accommodating change when influenced by factors

9 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, 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

10 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 contextdependent 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

11 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 coevolve 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

12 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

13 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. time Internal Selection Environment Change in Firm Capabilities Firm Capabilities Organizational Change PERFORMANCE External Selection Environment Change in the External Environment

14 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 nonlinear 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,

15 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

16 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 2 a) Identify organizational change process and patterns in global capability development and management 2 b) Examine the implications of the organizational and global capability management subject to the market context Multiple Case Study Multiple Case Study Multiple Case Study Semi-structured interviews, secondary sources Semi-structured focus group interviews. secondary sources Semi-structured interviews, secondary sources 4 firms (Nokia, Kone, Wärtsilä, Perlos) 4 firms (Nokia, Kone, Wärtsilä, Perlos) 4 Chinese subsidiaries (Nokia, Kone, Wärtsilä, Perlos) 34 top executives (CEO to Director) selected by company representatives for their expertise 30 informants involved in 6 focus group discussions: TMT members (3 firms) or experts (2 firms) at the HQ level 12 informants: 3 informants at the HQ level, 9 informants at the subsidiary level (subsidiary top management, CEO to Director)

17 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.

18 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

19 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.

20 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

21 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

22 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.

23 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

24 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.