Competence Building and Leveraging in Interorganizational Relations 9781849505215, 9780762314669

Citation preview

COMPETENCE BUILDING AND LEVERAGING IN INTERORGANIZATIONAL RELATIONS

ADVANCES IN APPLIED BUSINESS STRATEGY Series Editors: Ron Sanchez and Aime´ Heene Volume 5:

Turnaround Research Series Editor: Lawrence W. Foster Volume Editor: David Ketchen

Volume 6:

(a) Theory Development for Competence-based Management (b) Research in Competence-based Management (c) Formulating and Implementing Competencebased Strategies Volume Editors: Ron Sanchez and Aime´ Heene Competence Perspectives on Managing Internal Processes Volume Editors: Ron Sanchez and Aime´ Heene

Volume 7:

Volume 8:

Volume 9:

Volume 10:

Competence Perspectives on Managing Interfirm Interactions Volume Editors: Ron Sanchez and Aime´ Heene Competence Perspectives on Resources, Stakeholders and Renewal Volume Editors: Ron Sanchez and Aime´ Heene Competence Perspectives on Learning and Dynamic Capabilities Volume Editors: Aime´ Heene, Rudy Martens and Ron Sanchez

ADVANCES IN APPLIED BUSINESS STRATEGY

VOLUME 11

COMPETENCE BUILDING AND LEVERAGING IN INTERORGANIZATIONAL RELATIONS EDITED BY

RUDY MARTENS Antwerp University, Belgium

AIME´ HEENE Ghent University, Belgium University Antwerp Management School, Belgium

RON SANCHEZ Copenhagen Business School, Denmark National University of Singapore, Singapore

Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2008

Copyright © 2008 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. No responsibility is accepted for the accuracy of information contained in the text, illustrations or advertisements. The opinions expressed in these chapters are not necessarily those of the Editor or the publisher. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-0-7623-1466-9 ISSN: 0749-6826 (Series)

Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne

Awarded in recognition of Emerald’s production department’s adherence to quality systems and processes when preparing scholarly journals for print

CONTENTS vii

LIST OF CONTRIBUTORS INTRODUCTION Rudy Martens, Aime´ Heene and Ron Sanchez

1

THE MANAGEMENT OF COMPETENCES IN THE CONTEXT OF INTERORGANIZATIONAL RELATIONS Fre´de´ric Prevot

7

ALLIANCES AS A STRATEGY IN VOLATILE ENVIRONMENTS – ALSO FOR MBA BUSINESS MODELS? Jo¨rg Freiling, Martin Gersch, Christian Goeke and Peter Weber

COMPETENCE-BUILDING THROUGH ORGANIZATIONAL RECOGNITION OR FREQUENCY OF USE: CASE STUDY OF THE LAFARGE GROUP’S DEVELOPMENT OF COMPETENCE IN MANAGING POST-MERGER CULTURAL INTEGRATION Gabriel Guallino and Fre´de´ric Prevot

v

37

63

vi

CONTENTS

A COMPETENCE-BASED APPROACH TO UNDERSTANDING THE ORCHESTRATION OF VALUE CHAINS IN THE DEVELOPMENT OF ‘‘NEW’’ VALUE ARCHITECTURES Heike Proff THE IMPACT OF CORPORATE VENTURING ON A FIRM’S COMPETENCE MODES J. Henri Burgers, Frans A. J. Van Den Bosch and Henk W. Volberda

93

117

INCREASING TECHNOLOGICAL INNOVATION COMPETENCE THROUGH INTRAORGANIZATIONAL COMMUNICATION NETWORKS Bhaskar Prasad and Rudy Martens

141

THE DISTRIBUTION OF LEADERSHIP SKILLS ACROSS A SINGLE-FOCUS COMPANY, A MULTI-FOCUS COMPANY, AND AN INDUSTRY: THREE CASE STUDIES Janice A. Black and Richard Oliver

167

DETERMINING CAPABILITIES IN PRACTICE Graham Hubbard

189

LIST OF CONTRIBUTORS

Janice A. Black

Department of Management, College of Business, New Mexico State University, Las Cruces, NM, USA

J. Henri Burgers

Department of Strategy and Business Environment, RSM Erasmus University, Rotterdam, The Netherlands

Jo¨rg Freiling

University of Bremen, LEMEX-Chair for Small Business & Entrepreneurship, Bremen, Germany

Martin Gersch

Ruhr-University Bochum, Institut fuer Unternehmensfuehrung, Bochum, Germany

Christian Goeke

Ruhr-University Bochum, Institut fuer Unternehmensfuehrung, Bochum, Germany

Gabriel Guallino

Department of Strategy and Entrepreneurship, Groupe ESC Chambe´ry Savoie Technolac, Le Bourget du Lac Cedex, France

Graham Hubbard

Adelaide Graduate School of Business, The University of Adelaide, Adelaide, South Australia, Australia

Rudy Martens

Department of Management, Faculty of Applied Economics, Antwerp University, Antwerp, Belgium

Richard Oliver

Department of Management, College of Business, New Mexico State University, Las Cruces, NM, USA vii

viii

LIST OF CONTRIBUTORS

Bhaskar Prasad

Department of Management, Faculty of Applied Economics, Antwerp University, Antwerp, Belgium

Fre´de´ric Prevot

EUROMED Marseille Ecole de Management, Domaine de Luminy, France

Heike Proff

Zeppelin University, Friedrichshafen, Germany

Frans A.J. Van Den Bosch

Erasmus Strategic Renewal Center, Department of Strategy and Business Environment, RSM Erasmus University, Rotterdam, The Netherlands

Henk W. Volberda

Erasmus Strategic Renewal Center, Department of Strategy and Business Environment, RSM Erasmus University, Rotterdam, The Netherlands

Peter Weber

Ruhr-University Bochum, Chair of Business Informatics, Bochum, Germany

INTRODUCTION Rudy Martens, Aime´ Heene and Ron Sanchez The competence-based perspective on strategy and management emerged in the beginning of the 1990s. This perspective aims to offer a new approach to developing strategy and management theory, research, and practice. The emergence of the competence approach has been partly a response to identified limitations in theory bases prevailing in the strategy and general management field and partly an aspiration to conceptually re-orient management theory and research in ways that lead to more useful recommendations for managers facing dynamics and complexity in their firm’s internal and external environment. The competence-based perspective started from a new focus on organizational competences – and the coordinated resources, capabilities, and processes that enable an organization to act coherently – as the fundamental units of analysis. Nearly two decades of research, theory development, and application in practice have demonstrated the significant potential of this fundamental focus on competences. The competence-based perspective is now providing a productive ‘‘broad church’’ for advancing theory development, research, and practice in both strategic and general management. Since 2000 a growing stream of competence-based theory development, research, and practice directly relevant to current management issues has appeared in the Advances in Applied Business Strategy series. A first set of three volumes published in 2000 (Sanchez & Heene, 2000a, 2000b, 2000c) was followed by a second set of three volumes in 2005 (Sanchez & Heene, 2005a, 2005b, 2005c).1 Given both the fruitful development of the competence-based perspective and its direct relevance to applied business Competence Building and Leveraging in Interorganizational Relations Advances in Applied Business Strategy, Volume 11, 1–6 Copyright r 2008 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1016/S0749-6826(07)11011-8

1

2

RUDY MARTENS ET AL.

strategy, we are pleased to present here two new volumes in the competencebased stream. The present volume (Volume 11 in the series) focuses on interorganizational processes for competence building and competence leveraging. Volume 10 is a companion volume that provides papers that further develop the competence perspective on learning and dynamic capabilities development. Taken together, these two new volumes provide theoretically provocative and managerially useful investigations into the ways in which an organization’s learning processes, capability development, and other internal processes affect its competence building, leveraging, maintenance, defense, and renewal. In keeping with the ‘‘four cornerstones’’ of competence-based theory’s representation of organizations and their management processes, the papers here explore the dynamic, systemic, cognitive, and holistic aspects of learning and capabilities development. The papers present both important theoretical developments and empirical research based on a variety of case studies and diverse industrial and geographical contexts, demonstrating the practical relevance as well as the conceptual richness of the competence perspective. In the 21st century, as network-based strategies become more and more important, firms will have to learn to cooperate in more effective ways in order to survive in dynamic and volatile environments. Therefore, in this volume we focus largely on how companies are learning to build new competences through interorganizational relationships.

COMPETENCE MANAGEMENT IN INTERORGANIZATIONAL CONTEXTS This volume begins with a literature review of the different approaches to the management of competences in interorganizational relations. In Fre´de´ric Prevot’s paper, ‘‘The management of competences in the context of interorganizational relations,’’ the existing literature is structured in a twodimensional model based on the nature of the relationship (cooperation or competition) and the actions taken on the competences (leveraging or building). Four objectives for the management of competences in the context of interorganizational relationships are thus derived: (1) sharing of competences, (2) protection of competences, (3) creation of competences, and (4) acquisition of competences. Each competence objective then requires specific management approaches to achieve.

Introduction

3

The next three contributions in this volume focus on competence building and competence reconstruction – applied in the contexts of the healthcare sector, the educational sector, the utilities market, and processes of mergers and acquisitions. The paper by Jo¨rg Freiling, Martin Gersh, Christian Goeke, and Peter Weber, ‘‘Alliances as a strategy in volatile environments – also for MBA business models?’’ focuses on the motives for setting up interorganizational networks for competence building. Three possible forms of cooperation among organizations are presented: gap-closing alliances, option networks, and steering alliances. Drawing on insights from the Austrian School of economics, the authors develop a co-evolutionary perspective on organizations and their environments, which is first applied in an explorative study of the German healthcare sector. This sector underwent a major change in 2004, with diverse types of alliances being formed. After this preliminary sector study, the authors present an in-depth case analysis of a collaborative project – the ‘‘executive MBA Net Economy’’ in Germany, which is an MBA program largely based on e-learning and realized cooperatively by a consortium of educational partners. The three motives for cooperative alliances (gap-closing, option network, and steering alliance) are all clearly illustrated through this case study. By combining market-level analysis with organization-level analysis in this framework, the authors offer insights into the processes of dynamic interorganizational competence building that can result, if managed effectively, in win-win benefits for all partners. Gabriel Guallino and Fre´de´ric Prevot’s paper, ‘‘Competence-building through organizational recognition or frequency of use: Case study of the Lafarge Group’s development of competence in managing post-merger cultural integration,’’ focuses on the issue of competence building in the context of mergers and acquisitions. Research shows that post-merger competence building is seldom realized as intended before a merger or acquisition, and the authors intend to suggest how this can be improved. They start their analysis with a model of competence building based on two dimensions: the level of recognition of the competence and the level of use of the competence. Their framework focuses on an organization’s capability in managing the implementation of mergers and acquisitions. The case of an acquisition by the Lafarge group is used to develop insight into how a firm might build up a capability for integrating companies. They suggest that frequency of use of a capability leads to a perception of the need to capitalize on this capability, but does not necessarily result in actual acquisition or improvement of the capability. The move from ‘‘ad hoc’’ response to more systematic ‘‘capitalization’’ of an acquired firm’s

4

RUDY MARTENS ET AL.

capability is argued to depend on the frequency of occurrence of situations in which the competence is applied. This finding suggests the benefits for capability building of applying a more explicit, systematic approach to competence management in mergers and acquisitions. The paper by Heike Proff, ‘‘A competence-based approach to understanding the orchestration of value chains in the development of ‘new’ value architectures,’’ focuses on suggesting how poor performing business divisions can benefit from ‘‘orchestrating’’ value chains in external networks. By orchestrating value chains, business divisions change their ‘‘value architecture’’ to include cooperative activities as a form of coordinated economic activity between hierarchy and the market. Such activities, if found to be beneficial, might eventually alter an industry’s structure. However, a new value architecture will only emerge if environmental changes force companies to deconstruct formerly integrated value chains. As such, it can be predicted that the greater the current and/or future decline in margins, the greater the willingness of a business unit to deconstruct formerly integrated value chains into more loosely linked and cooperative activities. The case of the German utilities market is used to illustrate how the orchestration of value chains can be used as a growth strategy. The environmental factor triggering this change in value-creating activities was the liberalization of the electric monopolies in April 1998. This resulted in the deterioration of the performance of the utility companies – and the perceived need to deconstruct their value chains and to start building new competence-focused value architectures.

INNOVATION AND COMPETENCE BUILDING J. Henri Burgers, Frans Van den Bosch, and Henk Volberda, in their paper ‘‘The impact of corporate venturing on a firm’s competence modes,’’ explore how corporate venturing influences an organization’s competences, taking into account the mediating role of market dynamism. Corporate venturing is seen as a tool to autonomously explore new competences within the boundaries of the parent firm. These new competences have to be reintegrated in the existing competence base of the organization, leading to processes of strategic renewal. The authors focus on two dimensions of corporate venturing by characterizing the relatedness of the newly developed competences along a product dimension (newness of the products) and a technology dimension (newness of the technology). The example of Philips’ entry into the electric toothbrush market illustrates how

Introduction

5

changes in competence modes need to be managed from an integrative perspective. In this process of new product development, interorganizational collaboration may prove to be an effective way to manage the re-alignment of a firm’s competences with its competitive environment. The process of internal venturing is also the focus of Bhaskar Prasad and Rudy Martens’ paper, ‘‘Increasing technological innovation competence through intra-organizational communication networks.’’ These authors analyze the development of innovation competence in technology-based firms. Commitment to long-term objectives and setting up an effective communication network are argued to be essential in building up a capacity for innovation. A case study in a multinational company illustrates how shared vision, a shared task, and social knowledge are drivers of learning in project teams. Thus sharing social knowledge and building trust should be central concerns for project leaders in innovation projects. Janice Black and Richard Oliver’s paper, ‘‘The distribution of leadership skills across a single focus company, a multi-focus company, and an industry: Three case studies,’’ argues that a central variable in effective competence management is the quality of leadership. They assess leadership skills for three different contexts: an organization, a ‘‘multi-foci organization,’’ and an industry. Based on the assumption that the rareness of leadership as a resource results in a higher value for a company possessing leadership, hypotheses are put forward. The research suggests that high ability levels in leadership skills do not appear to be rare in either firms or industries. Although specific leadership skill patterns may be effective and valuable, generic leadership skill may not necessarily result in a competitive advantage. In the last paper in this volume, ‘‘Determining capabilities in practice,’’ Graham Hubbard addresses the challenge of identifying capabilities in competence-based management practice. His paper focuses on how business units in a multinational firm perceive their strategic capabilities. He describes a process for capability identification and evaluation based on three questions: (1) Is the capability of value to the customer? (2) Is the capability better than most competitors’? (3) Is it difficult to imitate or replicate the capability? It appears that there is likely to be considerable diversity in managers’ perceptions of capabilities at the business unit level. Hubbard’s case study suggests that business units may actually have a rather small number of identifiable and strategically significant capabilities, perhaps ranging from 0 to 5, with most having 2–4. Hubbard’s research on the identification of competences at the business unit level suggests the value of more systematic classification schema for identifying types of capabilities.

6

RUDY MARTENS ET AL.

NOTE 1. Starting in 2005, more theoretical and empirical contributions to the competence perspective are now published in the peer-reviewed academic journal Research in Competence-Based Management (Sanchez & Freiling, 2005; Sanchez & Heene, 2005d, 2005e).

REFERENCES Sanchez, R., & Freiling, J. (2005). A focused issue on the marketing process in organizational competence. Research in competence-based management (Vol. 1). Amsterdam: Elsevier. Sanchez, R., & Heene, A. (Eds). (2000a). Theory development for competence-based management. In: Advances in applied business strategy (Vol. 6(A)). Greenwich, CT: JAI Press. Sanchez, R., & Heene, A. (Eds). (2000b). Research in competence-based management. In: Advances in applied business strategy (Vol. 6(B)). Greenwich, CT: JAI Press. Sanchez, R., & Heene, A. (Eds). (2000c). Formulating and implementing competence-based strategy. In: Advances in applied business strategy (Vol. 6(C)). Greenwich, CT: JAI Press. Sanchez, R., & Heene, A. (2005a). Competence perspectives in managing internal processes. Advances in applied business strategy (Vol. 7). Amsterdam: Elsevier. Sanchez, R., & Heene, A. (2005b). Competence perspectives on managing interfirm interactions. Advances in applied business strategy (Vol. 8). Amsterdam: Elsevier. Sanchez, R., & Heene, A. (2005c). Competence perspectives on resources, stakeholders, and renewal. Advances in applied business strategy (Vol. 9). Amsterdam: Elsevier. Sanchez, R., & Heene, A. (2005d). A focused issue on managing knowledge assets and organizational learning. Research in competence-based management (Vol. 2). Amsterdam: Elsevier. Sanchez, R., & Heene, A. (2005e). A focused issue on understanding growth: entrepreneurship, innovation, and diversification. Research in competence-based management (Vol. 3). Amsterdam: Elsevier.

THE MANAGEMENT OF COMPETENCES IN THE CONTEXT OF INTERORGANIZATIONAL RELATIONS Fre´de´ric Prevot ABSTRACT The management of competences in interorganizational relations refers to two fundamental domains in strategy: competence and co-operation. Thus, it constitutes an area of research which is at one and the same time complex and promising. The synthesis presented in the form of a literature review in this article allows us to look at the current state of approaches in the management of competences in interorganizational relations in the context of the resource-based view and the competence-based management perspective. We then propose a model based on two dimensions: the first is defined by the nature of the relationship (considered to be a space where either co-operation or competition predominates) and the second by the actions taken on the competences in the context of the relationship (oriented either towards creating new competences or leveraging existing ones).

Competence Building and Leveraging in Interorganizational Relations Advances in Applied Business Strategy, Volume 11, 7–35 Copyright r 2008 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1016/S0749-6826(07)11001-5

7

FRE´DE´RIC PREVOT

8

INTRODUCTION Developments in the resource-based view and competence-based management have led to the orientation of strategic thinking toward the company itself, rather than toward the environment. The explanations for competitive advantage are thus founded on the identification of resources and key competences which define the particularities of a company compared to its competitors. However, a company cannot be seen as isolated in its environment. Reflecting on the leveraging and the building of competences must include a perspective of interorganizational management. It is therefore convenient to underline the importance of taking into account interorganizational relations in the resource-based view and competence-based management, and in return, the resource based view and competence based management in the study of interorganizational relations (Eisenhardt & Schoonhoven, 1996; Coombs & Ketchen, 1999; Hitt, Dacin, Levitas, Arregle, & Borza, 2000). In this article we study four aspects of the management of competences in interorganizational relations. First, we examine the management of shared competences. As Teece (1986) showed, certain assets are co-specialized, which means that they only take on a value when in joint use with other assets. Thus there are external resources, which we will call boundary resources, that must be mobilized by a company although they are the property of other organizations (Nanda, 1996; Me´tais, 1997, 2004; Hall, 2000). For that reason, certain competences are shared between organizations; they are born out of the mobilization of boundary resources. This idea comes close to the notion of the offer system developed by Koenig (1996). Second, we consider the protection of competences. The establishment of links between competences and competitive advantage, at the center of research undertaken in the context of the resource-based view, shows the importance of protecting resources and competences from acquisition by competitors. The protection of competences is therefore the complementary aim of acquisition in the race to learn (Hamel, 1991; Khanna, Gulati, & Nohria, 1998). Third, we discuss the learning of competences of other organizations by way of interorganizational relationships. In the context of the creation of new competences or knowledge by a firm (Nonaka, 1994; Sanchez, Heene, & Thomas, 1996; Teece, Pisano, & Shuen, 1997), the acquisition of competences existing within other firms can allow for the acceleration of the process both by the integration of new competences and by the creation of combinations between new and existing competences (Huber, 1991). Thus, the learning of

Management of Competences

9

competences possessed by other organizations represents an important way to manage competences (Durand & Guerra-Vieira, 1997; Que´lin, 1997). Fourth, we analyze the creation of competences in common. The management of boundary resources, beyond the simple interorganizational mobilization of these resources, can lead to the creation of competences in common between two or more organizations (Dyer & Singh, 1998). We propose to deepen the theoretical study of the management of competences in an interorganizational context. There is a significant amount of research and it is necessary to distinguish the different approaches. Thus, we organize the review of literature conducted in this article into four research themes. In conclusion, we define a model which allows us to structure these four themes following two dimensions. The first of these dimensions relies on the distinction between two objectives of the management of competences: the leveraging of existing competences and the creation of new competences (Sanchez et al., 1996). The second dimension proposes a distinction following two concepts of interorganizational relationships: an orientation towards co-operation or competition. In order to avoid the risks linked to the polysemy of terms, we make use of the following definitions proposed by Sanchez et al. (1996). Asset: ‘‘anything tangible or intangible the firm can use in its processes for creating, producing, and/or offering its products (goods or services) to a market’’ (p. 7). Resources: ‘‘are assets that are available and useful in detecting and responding to market opportunities or threats. Resources include capabilities as well as other forms of useful and available asset’’ (p. 8). Competence: ‘‘is an ability to sustain the co-ordinated deployment of assets in a way that helps a firm achieve its goals [y]. To be recognized as a competence, a firm activity must meet the three conditions of organization, intention and goal attainment’’ (p. 8).

SHARING OF COMPETENCES The idea of sharing competences finds its origin in the notion of boundary resources (Nanda, 1996; Me´tais, 1997, 2004; Hall, 2000); certain competences are founded on the resources that a firm must mobilize although they are the property of other organizations. We analyze this notion of boundary resource and we will show how the concept of competences as ways to co-ordinate resources leads to defining the notion of shared competences. We then present the notion of offer system developed by Koenig (1996) and will thus illustrate the importance of shared competences.

10

FRE´DE´RIC PREVOT

Boundary Resources and Shared Competences The resources used by a firm are not all held by rights. Cool (2000) shows that certain resources are common (they are resources used by several companies which can be given, such as a railway line, or created in common, such as the brand Champagne). More particularly Sanchez et al. (1996) distinguish resources specific to a firm (firm-specific) from resources which are moveable or accessible (firm-addressable). This notion of addressable resources comes close to that defined by Nanda (1996) with the term boundary resource: ‘‘they are the relationship-specific intangible assets which link the firm with external constituencies’’ (p. 105). According to the conception of the author – based on the stock-flow distinction introduced by Dierickx and Cool (1989) – the flow which feeds these resources comes from the firm, but the stock is held by another firm. These resources are situated outside an organization but it can mobilize them and therefore maintain links with these resources; the term ‘‘boundary’’ underlines their external nature while still suggesting their proximity. The interrelations between resources are at the source of the definition of competences, as the two following concepts underline: system resource (where the value depends on the links between the component factors) (Miller & Shamsie, 1996), and structure network of competences (including the network of resources which make up the competence as well as the relationship between the competence and external networks; the internal and external interrelations make up the definition of the competence) (Black & Boal, 1994). It is useful to consider that the interrelations between resources are not limited to only the resources owned by a firm but include boundary resources. Thus Lenz (1980) shows that the capabilities of an organization are not limited to its stock of resources: ‘‘A factor influencing the capability of an organization to generate and acquire resources is the essential character of relationships between an organization and components of its environment’’ (p. 228). As Wernerfelt (1989) also emphasizes, a competence can rely on a relationship with a third party owner of a specific resource. One can therefore establish a link between boundary resources and competences. This link can be founded on the concept of co-specialized asset, defined by Teece (1986) as an asset whose value depends on its joint use with one or several other assets. Certain competences are founded on co-specialized assets and resources, which means that they are founded on the interrelations between resources owned by a firm and boundary resources; they can therefore only exist in interorganizational relationships.

Management of Competences

11

The elements presented above contribute to show that the definition of competences must take into account the importance of boundary resources, and therefore of interorganizational resources. This is also emphasized by the definitions of resources and competences established by researchers in the resource-based view and competence-based management perspective. Thus Barney (1991), in his definition of the categories of resources, underlines the importance of relations with the environment. Grant (1996) shows that the need for flexibility to integrate new knowledge leads us to the question of the boundaries of a firm, for integrating knowledge can be done by relational contacts (alliances and networks). In the following definition, Teece et al. (1997) express clearly the importance of interorganizational relations for the constitution of competences: ‘‘competences are typically viable across multiple product lines and may extend outside the firm to embrace alliance partners’’ (p. 516). The use of interorganizational relations is therefore particularly important in the management of competences. Alliances are ways to join resources and competences and to build new competences. They also allow flexibility and maximum efficiency by the fact that a large number of diverse resources and competences are grouped. Finally, they encourage innovation through interconnections. They are also ways of gaining time in the development of competences (Sanchez et al., 1996). As Que´lin (1997) stated, ‘‘Inter-firm co-operations are organizational mechanisms that firms adopt to gain access to capabilities that they do not possess internally, but which are useful for their development. [y]. Inter-firm co-operation plays, then, an important role in the extension of a firm’s knowledge base’’ (p. 157). The management of competences is inseparable from managing the limits of an organization. We will therefore define a shared competence as a competence relying on the joint mobilization of resources held by a firm and resources held by third parties.

Offer System and Management of Competences The notions of boundary resource and shared competence can be linked to the concept of offer system. Bringing a service or product to the market necessitates an infrastructure made up of a collection of assets and competences. This infrastructure is defined by Koenig (1996) as an offer system. This supports the collection of processes constituting the service or product. The offer system is composed of both resources and competences (physical assets, intangible assets, financial resources, individual and collective

12

FRE´DE´RIC PREVOT

competences, etc.). The company which is responsible for the offer rarely carries out all the tasks necessary for the realization of the service or product. The company’s role is therefore to assume the co-ordination of all the necessary tasks. As Koenig (1996) says, ‘‘what is important is not so much the possession of the resources as their mobilization, their arrangement and their control’’ (p. 147). The concept of the offer system therefore highlights the importance of interorganizational relations in the management of competences. This concept of offer system is strongly linked to the notion of boundary resources. We can, for example, establish a direct parallel with Teece (1986) who, in his definition of complementary assets, shows that the commercialization of an innovation requires that the know-how linked to the technology is used in conjunction with other assets or competences (linked to marketing, production, after-sales service, etc.). These complementary assets and competences are themselves often specialized (linked to one firm in particular or difficult to acquire), or even co-specialized (used jointly with other assets or competences). The notion of offer system emphasizes that the management of boundary resources and shared competences constitutes a fundamental activity for a firm. Hitt et al. (2000) even consider that the prime factor of influence in the choice of a partner for co-operation is a company’s research for external resources which are useable or allow it to use its own resources better. The co-operation will let a firm either learn the partner’s know-how (which will be studied in the following section) or co-ordinate the complementary resources by creating synergies. Thus, in the management of boundary resources, a company faces the alternatives of either developing a management in common or internalizing the resources. Verdin and Williamson (1994) represent this situation by defining four ways to access assets: (1) donation (for example, the inventor of a technology cedes the license to a firm which uses it); (2) acquisition (acquisition of rights linked to assets); (3) sharing (common use of an asset); or (4) accumulation (creation and protection of own assets). The approach that Durand and Guerra-Vieira (1997) take is based on this same logic but applied to competences. They establish four ways to mobilize competences: reinforcement of an existing competence (same competence necessary for a new activity), establishment of synergies between competences possessed by two different units of a company, use of a competence present in the network in which a firm is situated (interorganizational competence), or creation of a competence resulting from a permanent ability to learn. The analysis proposed by Que´lin (1997) summarizes the logic of managing shared competences and creating common competences. He shows that

Management of Competences

13

Table 1. Sharing of Competences. Authors

Concepts

Boundary Cool (2000) Nanda (1996), Me´tais (1997), and Hall (2000) Sanchez et al. (1996) Miller and Shamsie (1996) Amit and Schoemaker (1993) Black and Boal (1994)

resources Common resources Boundary resources Firm-specific/firm-addressable assets

Interrelations between resources Resource system Capability Structural network of competence

Boundary resources and definition of competences Organizational competences and relations with the environment Lenz (1980) and Wernerfelt (1989) Competences and relationships with third parties Teece et al. (1997) Competence and alliance partners Nonaka (1994) Environment and contribution of knowledge Grant (1996) New knowledge, flexibility, and frontiers of the firm Durand (2000) Resources and competences already held/not yet held

Barney (1991)

Management of shared competences Teece (1986) Co-specialized asset Koenig (1996) Offer system Verdin and Williamson (1994) Ways of accessing assets Durand and Guerra-Vieira (1997) and Durand Ways of accessing competences (2000) Que´lin (1997) Co-operation and competences

co-operation can allow three types of actions on competences: widening the application of actual competences (new possibilities of application), combining existing competences with complementary competences, or creating new competences. Table 1 summarizes the principal notions studied and their authors.

THE PROTECTION OF COMPETENCES Interorganizational relations can be conceived, as opposed to co-operation, as a race to learn. Firms should therefore protect themselves from the ‘‘learning’’ of their ‘‘partner-adversaries.’’ In this way they will improve

FRE´DE´RIC PREVOT

14

their chances of success if, in parallel to the development of their ability to learn, they develop mechanisms to protect their own competences. These mechanisms can be linked to direct protection or to the search for continuous development. Mechanisms of Protection In a race to learn, it is important to build protective mechanisms for a company’s key competences. It is often necessary to divulge certain competences to assure the good functioning of interorganizational relations, but firms have to clearly distinguish between competences which can be shared and those which should be protected. Barriers to the acquisition of competences by a partner consist essentially of mechanisms to limit transparency (Hamel, 1991). These can be established by limiting the range of the alliance contract, the control of everyday interaction (role of personnel at the interfaces, limitation of zones of contact for the domains which can be controlled), self-discipline of employees, and guarantees of their loyalty (Hamel, Doz, & Prahalad, 1989). Thus, the definition of the alliance agreement and the behavior of employees play a fundamental role. It is, however, possible to identify more formal mechanisms of protection. We will distinguish those linked to the legal domain from those linked to the nature of the competence. The mechanisms linked to the legal domain are limited because the competence itself is not one of the elements that can be the subject of legal protection. However, partial protection can be established by acquisition of the right to ownership of certain aspects of the competence (license, brand, copyright of instruction manuals, etc.), by contract with the parties who hold the competence (confidentiality clauses in the contract, confidential agreements with other companies, etc.), or by contract in the context of the alliance (limitation of markets or products or geographical limitations) (Calvo & Couret, 1995). These possibilities for legal protection are limited, and thus certain forms of protection can be added (Rivkin, 2001), such as exclusivity contracts with principal consumers or limited access to resources or distribution networks. However, these added forms of protection can be put in place only when the consumers are identifiable and limited in number and when the competence is directly linked to the fabrication of a product (in the case of exclusivity contracts), or when a company has sufficient bargaining power with suppliers and clients (in the case of limiting access to resources or distribution networks). The mechanisms linked to the nature of the competence refer to notions of causal ambiguity, tacitness, and complexity (Rivkin, 2001). However, in

Management of Competences

15

this case too, there are significant limits to the use of this type of protection. These limits are linked to the fact that a company has only limited concrete means of action on the nature of competences. In view of the number of limits to formal mechanisms of protection, Baughn, Denekamp, Stevens, and Osborn (1997) propose guaranteeing the protection of competences by defining a real methodology. They therefore propose a process of balance between disclosure (for the functional needs of the co-operation) and protection. This process follows four steps: (1) analysis before the alliance contract (to define the elements which must be protected, anticipate the partner’s intentions, and estimate its learning capabilities); (2) negotiation (to take into account the power relations and establish structural limits such as the division of tasks or the form of the alliance); (3) management and control of information flows; and (4) evolution of relations (development of interpersonal relationships to create a climate of trust).

Continuous Development and Relational Capital The mechanisms for protection of competences should be accompanied by consistent continuous development to invest in competences (Lei & Slocum, 1992). Continuous development is argued to be more efficient than protection itself (McGaughey, Liesch, & Poulson, 2000). Indeed, whatever the mechanisms for protection are, the efforts a company makes to improve the possibilities for replicating competences (codifying them to maximize their deployment in the company in order to multiply their applications) also contribute to increasing the risk of copying (Kogut & Zander, 1992). However, replication is necessary for a company’s growth. So the mechanisms for protection, including those relating to the nature of the competence, have only limited use since a company tends to diminish their range by deploying the competences. The objective is therefore to develop capacities to increase and speed up internal replication (rapid development of new markets, for example) so that replication becomes faster than imitation or acquisition by competitors or partners (Zander & Kogut, 1995). Thus Garud and Nayyar (1994) define the notion of transformative capacity which can be perceived as a response to the absorptive capacity of the ‘‘partner-adversary’’ in the alliance. It is a sort of absorptive capacity turned inwards which consists of constantly maintaining a company’s competences. This implies identifying and maintaining key competences in the long term. This may also imply reactivating some competences in order to grab an opportunity.

FRE´DE´RIC PREVOT

16

Table 2. Authors

Protection of Competences. Concepts

Mechanisms of protection Hamel et al. (1989) and Hamel (1991) Mechanisms for the limitation of transparency Calvo and Couret (1995) Mechanisms for legal protection Rivkin (2001) Mechanisms linked to the nature of competences Baughn et al. (1997) Methodology of control of the relationship Continuous development and relational capital Lei and Slocum (1992) and McGaughey Continuous development et al. (2000) Kogut and Zander (1992) and Zander and Ability to accelerate internal replication Kogut (1995) Garud and Nayyar (1994) Transformative capacity

Table 2 summarizes the principal notions studied and the authors.

THE ACQUISITION OF COMPETENCES Interorganizational relations can be considered privileged places of access to external competences. They can be the way to fill the gap between the existing competence base and the level of competences a firm wishes to have. Such an approach leads to considering co-operation as a form of competition. If, by co-operating, each partner tries to acquire the competences of the partner, a race to learn starts (Hamel et al., 1989; Hamel, 1991; Khanna et al., 1998). Learning the competences of a partner relies on a process of identification, acquisition, assimilation, and utilization (Huber, 1991). This utilization is done either for activities which are external to the alliance (Khanna et al., 1998) (the benefit for a company is therefore based on the leveraging of the acquired competences), or for activities linked to the alliance (Hamel et al., 1989). A company takes advantage of alliance activities to reinforce its competitive position in relation to its partner by the use of the alliance as a ‘‘window on the competences of the partner’’ (Doz & Hamel, 1998). The acquisition of a partner’s competences is not in itself enough; it must be accompanied by the ability to distribute and use these competences internally in order to increase their value (Simonin & Helleloid, 1993; Powell, 1998). This acquisition of a partner’s

Management of Competences

17

competences can be linked to the expected results, that is to say, to an intention to learn (Doz & Shuen, 1988; Hamel, 1991) or to unexpected opportunities (Ingham, 2000).

Co-operation and the Search for Access to Competences Alliances serve as ways for a company to access markets or technologies. A company has, among other things, the possibility, through its proximity to another company in the alliance, to learn the competences held by the partner. A company can then use alliances to develop its own competences. In this way, an alliance can be considered as a way to compete (Hamel et al., 1989). A company should try to acquire its partner’s competences while protecting its own competences from being acquired by the partner. This leads to a sort of paradox in the management of the alliance. In fact, if each of the partners only tries to acquire the other company’s competences, this risks creating conflicts and therefore an end to the alliance. It is therefore necessary to look for mutual benefits while staying within the context of the search for the acquisition of competences. This situation, according to Hamel et al. (1989), is possible when the partners’ strategic objectives converge while their competitive objectives diverge (each partner will create its own place in the same market) or when the size and negotiating power of each partner is negligible in relation to the sector leaders (the partners have to accept bilateral dependence). More generally, following this vision, co-operation is viable in the case where each partner thinks that it is capable of learning from the other while limiting access to its own competences. It is then a question of combining access to external competences and protection of internal competences. For a company to learn the competences of a partner, three methods of acquisition are possible according to the level of engagement (Lane & Lubatkin, 1998): passive (acquisition of knowledge and competences by means of large diffusion, for example, seminars or consultants’ services, etc.), active (benchmarking), or inter-active (proximity to the owner of a competence in order to also gain the most tacit elements of the competence). However, according to Hamel (1991), to be efficient, searching to acquire competences by way of co-operation must be truly active and connected to a well defined project. Hall (2000) thus showed that companies must manage all the sources of knowledge (whether internal or external) which are useful to the development of competences. To do that they should: (1) determine the type of useful knowledge; (2) localize this knowledge; (3) access it; (4) acquire

18

FRE´DE´RIC PREVOT

it; and then (5) apply it. This five-step process defines the method of filling what Hall (2000) calls a knowledge gap: the difference between the current knowledge base and the knowledge desired. This gap can be filled by existing internal knowledge, by external existing knowledge, or by knowledge to be created. Co-operation can also serve to increase the value of existing competences through access to other linked competences (for example, technological competence in product manufacturing with competences linked to access to a market), and to then look for a way to internalize these competences (internalization being defined as the capacity to use and develop new know-how independently of the partner). The alliance will therefore present learning opportunities in the case where a firm wishes to internalize a partner’s competences rather than continue to benefit from the partner in the context of the co-operation. This choice, between continuing the co-operation and learning in order to internalize a partner’s competences, depends on three main factors (Doz & Hamel, 1995): the extent of learning opportunities (can we then extend the use of these competences to other internal activities?), the perception of the behavior of the partner (is it to have the objective of internalizing our own competences or continuing the co-operation?), and the nature of the competences (complex and difficult to transfer or relatively accessible). The first factor – the extent of the learning opportunities – makes reference to the search for a balance between the expected impact of a competence and its acquisition costs (linked to the resources dedicated to learning) (Crossan & Inkpen, 1995). This notion can be expanded by the notion of flexibility. In effect, the choice of internalization or co-operation does not only depend on the opportunities for internal use of a competence, but also on the long-term nature of the opportunities. In a case of shortterm use, continuing the co-operation is preferable to the internalization of a competence because this co-operation can be considered as a flexible way to access the competence (Mody, 1993). The second factor – perception of the partner’s behavior – can be linked to the typology of learning in alliances established by Tsang (1999). Learning between partners linked to the search for the acquisition of competences can be asymmetric (linked to a large initial difference between the levels of the partners’ competences and the learning objectives) or symmetric. If it is symmetric, it can be non-mutual (the partners have the same objective, to learn from the alliance, but they do not learn from each other) or mutual. If it is mutual, it can be competitive (the partners are competitors who will take part in a race to learn) or non-competitive

Management of Competences

19

(the partners want to acquire each other’s competences with another objective than to compete with each other). The third factor – nature of the competences – refers to the accessibility of a competence. A partner’s competences which are the target for learning should not only be perceived as useful for a company (they have a value outside the alliance but cannot be developed without the alliance), but also be identified as accessible. This accessibility depends on three elements (Inkpen, 1998a): (1) the level of protection by the partner (restricted access); (2) the history of past contact between the partners and the level of trust (which allows a freer exchange of information); (3) the degree of complexity of a competence and a company’s absorptive capacity. Thus, when each of the partners has defined the objectives for accessing the other’s competences, they both engage in a race to learn.

Race to Learn We have just seen that the dynamic of alliances is affected by a tension between co-operation and competition (in the sense of the search for access to a partner’s competences). With regard to this tension Khanna et al. (1998) define the notion of a ‘‘race to learn.’’ The authors distinguish common benefits of an alliance (those linked to the activities of the alliance) from private benefits (those which a company benefits from in activities and markets linked to the alliance). If the ratio ‘‘private benefits/common benefits’’ is high, then we expect to see co-operative behavior becoming competitive behavior in an alliance. The notion ‘‘relative extent of activities’’ complements the ratio by defining a comparison between the extent of activities of each partner in markets linked to the alliance and those of activities in markets which are not linked to the alliance. Relative extent allows us to understand the commitment in terms of resources of each partner in the alliance and the motivation to invest. This motivation can be of two kinds: co-operative (each needs the competences of the other but is not trying to appropriate them); or competitive (a desire to appropriate the other’s competences). In the case of competitive motivation, the alliance becomes a race to learn. This notion of a race to learn comes close to that of ‘‘competitive co-operation’’ defined by Hamel (1991). In competitive co-operation, the internalization of competences is the primary objective of an alliance. All asymmetry of learning between partners will engender a modification of relative competitive positions. These asymmetries also modify the balance of negotiating power between the partners as well as the objectives of each one

20

FRE´DE´RIC PREVOT

in the alliance. Firms engaged in the alliance must then consider themselves as both partners and competitors. These links between inter-partner learning, negotiating power, and performance define the concept of an alliance as a race to learn. It is therefore fundamental to understand the determining factors of inter-partner learning.

The Determining Factors of the Acquisition of Competences Hamel (1991) identifies three major determining factors in the process of acquiring competences of another firm: intention, transparency, and receptivity. Intention represents the propensity of a company to consider the co-operation as a learning opportunity (Hamel, 1991; Tsang, 1999). It consists of defining the objectives of internalizing specific competences in order to fill an identified gap in competences. It is therefore necessary not only to limit the objectives and ambitions for the creation of an alliance to share the risks and investments, but also to define the learning objectives to reduce the risk of becoming a victim to asymmetric learning favoring the partner (Hamel et al., 1989). However, these objectives must be flexible. They must be adjustable in relation to the conditions of evolution of an alliance and the unexpected opportunities (Inkpen, 1998b). At the same time these objectives must not be affected by what Inkpen (1998b) defines as performance myopia: being too pre-occupied with short-term and financial results leads to the risk of relegating learning to the rank of secondary objective, thus leading a company to be overtaken in the race to learn. These objectives, once defined, will influence the nature of a company’s contributions to an alliance (Inkpen & Beamish, 1997). A company will look for a balance between the protection of its competences and the engagement of resources and competences which are sufficient to lead a partner to contributing what is expected (Hamel et al., 1989). Achieving these objectives or modifying them in the course of an alliance will lead to a re-negotiation of contributions and a re-balancing of negotiating power (Hamel, 1991; Inkpen & Beamish, 1997). Makhija and Ganesh (1997) define a collection of notions which represent the role of learning objectives in the evolution of an alliance. Asymmetry and needs are linked to differences between partners in terms of learning objectives and levels of competences (each partner must perceive that the other possesses the competences that it does not have – asymmetry – and the internalization of these competences must be considered crucial – needs). In relation to asymmetry and needs, negotiation will allow a satisfactory balance to be

Management of Competences

21

found in the perceived negotiating power. This balance comes from mutual dependence: each partner is in a position to facilitate or prevent the realization of the objectives of the other, since it possesses the competences which the other needs. How negotiating power is perceived is therefore influenced by the asymmetry of needs. Based on the balance of negotiating power, the partners will define control mechanisms for the alliance which will have a double role: to facilitate the diffusion of certain information and prevent access to other information. In relation to the nature of the learning in which the partners are engaged in and their differing absorptive capacity, the definition of control mechanisms will influence the partners’ learning. The satisfaction or lack of satisfaction vis-a`-vis this learning will lead to a redefinition of the asymmetry and needs. Transparency is influenced by the design of the interfaces between partners, the structuring of common tasks, and the ability of the company personnel in contact with a partner to protect information (Hamel, 1991). Asymmetry in the transparency of information leads to asymmetry in the learning. Receptivity is linked to absorptive capacity (Cohen & Levinthal, 1990). This is influenced by the possession of a base of competences in a domain which is linked to that in which the new competences needing to be integrated belong to. This base of competences constitutes in effect the motor for the search for new competences and the source of the means for interpreting, understanding, and integrating new competences (Shenkar & Li, 1999). However, the base of existing competences must be sufficiently different from the competences which could potentially be provided by a partner so that these can present an element of novelty which explains their appeal. This idea was highlighted by Cohen and Levinthal (1990): ‘‘Some portion of the prior knowledge should be very closely related to the new knowledge to facilitate assimilation, and some fraction of that knowledge must be fairly diverse, although still related, to permit effective, creative utilization of the knowledge’’ (p. 136). Absorption of new competences will follow a process to which Huber (1991) attributes four main steps: acquisition, distribution, interpretation, and memorization. This absorption can happen at different levels of an organization (Crossan & Inkpen, 1995): individual, group, or organization.

Strategy of Co-operation and Acquisition of Competences Interorganizational relations can be conceived as privileged places for access to competences. However, that presupposes a strategy which is welldefined and founded on a balance between co-operation and competition.

FRE´DE´RIC PREVOT

22

Two fundamental concepts allow for the structuring of the study of competence acquisition through co-operation: relative absorptive capacity and relational capital. Lane and Lubatkin (1998) propose using the concept of relative absorptive capacity more precisely than that of absorptive capacity (Cohen & Levinthal, 1990). Relative absorptive capacity relies on the idea that firms have a different learning capacity according to the partner whose competences they are trying to acquire. The concept of absorptive capacity must therefore be elevated to a dyadic level. The capacity of a firm to learn Table 3. Acquisition of Competences. Authors

Doz and Hamel (1998) Lane and Lubatkin (1998) Hall (2000) Doz and Hamel (1995) Crossan and Inkpen (1995) Mody (1993) Tsang (1999) Inkpen (1998a) Hamel et al. (1989) and Khanna et al. (1998) Khanna et al. (1998) Hamel (1991)

Concepts Access to competences Alliance as a window on the competences Levels of engagement in the learning process Competence gap Choice of continuity of the co-operation/ internalization of competences Balance between impact of the competence/cost of acquisition Alliance as a flexible mode of access to competences Typology of the learning processes in alliances Accessibility of competences Race to learn Race to learn Common/private benefits, relative range of activities Competitive co-operation

Determinants of the acquisition of competences Hamel (1991) Intention, transparency, receptivity Hamel (1991) and Tsang (1999) Co-operation as an opportunity for learning Hamel et al. (1989) Asymmetric learning Inkpen (1998b) Adaptive learning objectives Inkpen and Beamish (1997) Contribution to the alliance and negotiating power Makhija and Ganesh (1997) Asymmetry and needs, mechanisms for control Cohen and Levinthal (1990) Absorptive capacity Huber (1991) Acquisition, distribution, interpretation, memorization Crossan and Inkpen (1995) Level of absorption in the organization Strategy of co-operation and acquisition of competences Lane and Lubatkin (1998) Relative absorptive capacity Kale et al. (2000) Relational capital

Management of Competences

23

from another depends on the similarities between these two firms at the level of competence base, organizational structure, and strategic logic. The relative absorptive capacity will rely on the capacity to recognize, assimilate, and use the external competence. To protect oneself from opportunistic behavior while trying to acquire certain of a partner’s competences, which is at the basis of the race to learn, is generally perceived as being in opposition. Kale, Singh, and Perlmutter (2000) show that these two ways of behaving can be reconciled by building what they define as relational capital, which relies on close relations between individuals leading to the creation of a climate of trust. This relational capital, this climate of trust, favors learning: it facilitates the identification by the personnel of useful knowledge in the partner; it allows the development of an environment of exchange which facilitates the transfer; it improves transparency and reduces the fear of opportunistic behavior because of the existing trust. Relational capital also favors the protection of competences, because it allows the creation of informal social control relying on codes of conduct, often more efficient that formal control. Because of the climate of trust and the perceived mutual interests, the partners accept the sacrifice of certain individual interests. Through the concept of relational capital Kale et al. (2000) propose reconciling the logics of acquisition and protection of competences. Table 3 summarizes the principal notions studied and their authors.

CREATION OF COMPETENCES Aside from the management of shared competences, the protection of existing competences, and the acquisition of new competences, we define a fourth logic in the management of competences: the creation of competences in common. We present in this section a review of research on learning in alliances. In order to organize the presentation of this research we propose to distinguish four different forms of learning in alliances: learning a partner’s competences, learning linked to activities of an alliance and knowledge about a partner, learning about the management of alliances, and learning in common. We have presented the issues of learning the competences of a partner above. The issues related to this type of learning have been presented separately, because they need to be clearly distinguished from all the issues linked to other forms of learning in alliances (Ingham, 1994; Tsang, 1999).

24

FRE´DE´RIC PREVOT

Below we study the three other main types of learning linked to a vision of interorganizational relations oriented towards co-operation.

Learning Linked to the Activities of an Alliance Learning linked to the activities of an alliance has three aspects. The first aspect concerns the improvement of the daily management of an alliance. It is a question of learning through action; the daily performance of tasks improves as partners acquire experience in their collaboration (Doz & Shuen, 1988). This learning allows partners to learn how to develop the alliance and not simply to control it (to look for the creation of value rather than simple protection against opportunistic behavior). It relies therefore not only on formal mechanisms (Powell, 1998), but also on an informal system of behavior integration (Kanter, 1994). The second aspect concerns knowledge about a partner. It is a question of understanding a partner’s objectives, which can allow a firm to protect itself against its partner’s learning intentions (Hamel et al., 1989) or to understand its partner’s competitive logic (objectives, key competences) (Doz & Hamel, 1995). In this sense, it may appear to be similar to learning a partner’s competences in so far as it resembles obtaining information about the partner. But learning about a partner is not limited to obtaining information about it: in effect, better knowledge about a partner allows for improved realization of the tasks of the alliance and also better co-operation (Doz & Shuen, 1988; Parkhe, 1991; Powell, 1998; Inkpen, 1998a). The third aspect concerns a wider learning of the activities linked to an alliance. It can be a question of learning about the specific environment of an activity (Doz & Hamel, 1995), the realization of this activity in a given country (Tsang, 1999), the management of the novelty, or the management of activities in the context of environments in a process of change (Dodgson, 1993).

Learning about the Management of Alliances This level of learning consists of learning to co-operate, to manage the process of the co-operation (Kanter, 1994; Doz, 1996). On the basis of its successes and failures in past co-operations, a firm learns to better manage alliances in terms of negotiation of contracts, renegotiation in the course of the co-operation, and implementation of mechanisms for co-ordination and

Management of Competences

25

control (Simonin & Helleloid, 1993; Ingham, 1994). A higher level of this learning can be identified as learning to learn from alliances (Simonin, 1997, 2004). Gradually through alliances a firm develops the ability to draw out the benefits (Doz & Shuen, 1988). Learning about the management of alliances can therefore be considered on two levels. The first level concerns learning from a given alliance; it concerns the process of the evolution of this co-operation in particular. The second concerns learning about the management of alliances in general: it allows a company to improve its ways of managing the whole co-operation process. To know how to co-operate supposes having the ability to go beyond the differences between partners, to co-ordinate competences, and to capitalize on the experience drawn from an alliance. Doz (1996) proposes a modeling of the process of evolution of an alliance following a dynamic concept which highlights the role of learning. Learning is influenced by a partnership’s initial conditions (definition of tasks, partners’ routines, design of interfaces, and partners’ expectations) and can happen on five levels: (1) environment (better perception of the internal strategic context in terms of the place of the partnership within the strategies of each partner, or external in terms of markets and competitors of the partnership’s activities); (2) tasks (understanding the interdependence and experience in the realization of tasks); (3) co-operation process (going beyond differences in structure, differences in terms of routines in the context of the realization of tasks); (4) a partner’s competences (increased convergence in the competence bases of the partners); and (5) objectives and motives (revision, clarification of objectives). The evolution process of an alliance corresponds to an interactive sequence of learning cycles (in which the initial conditions will play a role either as facilitators or as limiting factors) which leads to a re-evaluation of the perception of efficiency (in terms of the realization of objectives), of the equity (in terms of contributions and the sharing of benefits), and adaptability (in relation to the new conditions or new objectives) of the alliance. This re-evaluation allows for the establishment of revised conditions in comparison to the initial conditions, which will in their turn facilitate or limit new learning. Given the importance of alliances to company strategy, being a good partner can represent a real competitive advantage that helps attract the best partners (Kanter, 1994; Tsang, 1999). Kanter proposes the notion of collaborative advantage which she defines as the capacity to create and maintain effective co-operations. That supposes a company is not focused on direct financial results and on controlling the alliance. It is a question of

FRE´DE´RIC PREVOT

26

developing mechanisms that go beyond the differences between partners. These mechanisms can be found on five levels: strategic integration (continuous contact between the members of top management), tactical integration (projects grouping the members of middle management), operational integration (implementation of daily operations), interpersonal integration, and cultural integration (going beyond the differences to become more open minded, to gain from the experience). To be a good partner also means knowing how to co-ordinate all the competences of the diverse actors in a network of alliances. A company must therefore present at one and the same time the capacity to build good relationships (mechanisms, rules, and behavior) and the capacity to co-ordinate a partner’s contributions (Lipparini & Fratocchi, 1999). These two capacities are grouped under the concept of relational capability defined in the following manner by Lorenzoni and Lipparini (1999): ‘‘Firms’ ability to develop, integrate and transfer knowledge across different actors in a network’’ (p. 320). To develop learning about alliance management is impossible without the capitalization of this learning, to be able to contribute to better performance in terms of benefits drawn from the future alliances of a firm. This capitalization happens in the form of ‘‘collaborative know-how’’ (Simonin, 1997, 2004). It appears at different levels of the alliance process: (1) identification and selection of a partner (definition of the possibilities for mutual benefits, understanding of the implications and strategic risks, analysis of advantages brought by a partner, anticipation of the response of a potential partner to the proposition of a co-operation); (2) negotiation of the agreement (evaluation of the legal implications), control of the management of the co-operation (choice of personnel in contact, construction of mutual trust, resolution of conflicts, transfer, protection and acquisition of knowledge, re-negotiation of the agreement); and (3) end of the alliance (to understand when it is useful to put an end to the alliance and to know how to do it).

Learning in Common When the realization of activities demands the mobilization of a vast collection of specialized competences, the source of competitive advantage is found in the capacities to co-ordinate external competences. This idea allows the introduction of a vision of interorganizational learning which is complementary to that of a dilemma between sharing and protection.

Management of Competences

27

The common creation of competences will in effect be added to the capacities of internal creation of a firm (combining the notions of acquisition and sharing). Furthermore, if the creation of an alliance is important to gain competitive advantage, a firm must be capable of attracting partners. Participation in successful alliances (in terms of levels of sharing and competence-building) allows a firm not only to acquire experience of co-operation, but also to create for itself a reputation as a ‘‘good partner’’ (Powell, Koput, & Smith-Doer, 1996). For this reason the transfer of competences can be favorable for the creation of new competences, but it can also, indirectly, be a means of attracting partners by benefiting from a ‘‘network effect.’’ Learning in common can be based on an information exchange between individuals. This informal exchange often occurs when there is already an individual network (for example, a specialist engineer employed by a firm makes up part of the external network linked to his or her area of specialization), and when the value of the exchange is too weak to justify a formal agreement (Von Hippel, 1987). The informal exchange of information through interpersonal relations can therefore benefit a company, because it allows a network to be created where the circulation of information can help to create competences (Schrader, 1991). However, interpersonal links are not sufficient for learning in common, because they are vulnerable to turnover and the diffusion of knowledge acquired within the organization necessitates an organized process. Thus learning in common must rely on more than just interpersonal links and requires what Dodgson (1993) qualifies as interorganizational trust which is characterized by a community of interests, organizational cultures receptive to external information, and development of continuous knowledge. This interorganizational trust is created by the links between partners on four levels: technical (relative to the technology used), mutual knowledge (relative to the knowledge of the other’s activities), administrative (common routines and procedures), and legal (contracts). Thus organizational mechanisms can favor learning in common. These mechanisms rely above all on the reduction of the diversity between partners. Certainly, competence bases must be sufficiently varied to allow for the creation of opportunities for new combinations necessary for the creation of competences. But if the diversity is too great, the transfer of competences will be impossible. This diversity can come from five sources (Parkhe, 1991): societal culture, national context, organizational culture, strategic direction, or management practices. Reducing this diversity is important for the creation of similarities

28

FRE´DE´RIC PREVOT

in the bases of competences and knowledge which will allow communication and absorption (Andersen & Christensen, 2000). Ingham and Mothe (2000) propose an approach to learning in common which summarizes the determining factors. They first distinguish determining factors of a behavioral nature: partners’ attitudes and type of relationship (the real attitude of co-operation, the fixing of the objectives, the number of contacts), trust (technical trust, meaning mutual recognition of technical ability, and general trust, meaning mutual conviction about the other’s good faith), motivation to learn (learning which is expected or not), and engagement in the co-operation (implication of individuals and top management). Then there are determining factors of a structural nature: nature of know-how and competences (level of codification), experience of domain and absorptive capacity of each, and distribution of tasks. These determining factors are situated at the relationship level. It is also possible to identify a collection of determining factors which are internal to a firm (Ingham, 1994): structure of the organization, information system, styles of management (incentive system, rotation of posts, hierarchical relationships), and behavior of top management. Interorganizational alliances may also give rise to what Dyer and Singh (1998) refer to as the possibility of the creation of relational rents: ‘‘We define a relational rent as a supranormal profit jointly generated in an exchange relationship that cannot be generated by either firm in isolation and can only be created through the joint idiosyncratic contributions of the specific alliance partners’’ (p. 662). The control of the process of rent generation is therefore defined at the collective level, not at the firm level (as in the resource-based view); but this collective level is defined by the partnership and not by the competitive system (as in Porter’s approach). Dyer and Singh (1998) distinguish four sources of the creation of interorganizational rents: (1) assets specific to a relationship (they allow the specialization necessary to maximize efficiency in the realization of activities; investment in these assets is linked to the duration of a relationship and the volume of transactions); (2) routines of sharing knowledge (they facilitate the appearance of new opportunities for exploiting current competences and creating new competences; they are based on the development of an absorptive capacity specific to the partner and motivated by transparency); (3) contribution in terms of complementary resources (the complementary nature allows for the creation of synergies and the generation of competences specific to a relationship; a company must therefore be able to identify potential partners who can contribute resources and complementary competences); and (4) efficient

Management of Competences

Table 4.

29

Creation of Competences in Common.

Authors

Concepts

Learning process of activities related to alliances Doz and Shuen (1988) and Powell (1998) Learning in the management of alliances Hamel et al. (1989) and Doz and Hamel (1995) Knowledge about the partner Parkhe (1991), Powell (1998), and Inkpen (1998a) Learning in the co-ordination of tasks Dodgson (1993) and Tsang (1999) Learning in the realization of activities Learning process of management of co-operations Doz (1996) Evolution process of an alliance Simonin and Helleloid (1993) and Ingham (1994) Mechanisms of co-ordination and control Simonin (1997) Collaborative know-how Kanter (1994) Collaborative advantage Lorenzoni and Lipparini (1999) Relational capacity Learning in common Powell et al. (1996) Reputation of being a ‘‘good partner’’ Von Hippel (1987) and Schrader (1991) Informal information exchange Dodgson (1993) Inter-organizational trust Andersen and Christensen (2000) Similarity of competence bases Ingham (1994) and Ingham and Mothe (2000) Determinants of learning in common Dyer and Singh (1998) Relational rents

governance (the contractual aspects must be accompanied by the creation of informal rules permitting flexibility). Table 4 summarizes the principal notions studied and the relevant authors.

CONCLUSION We have seen that a company rarely possesses all the competences necessary for the realization of its activities. This leads to it co-ordinating a collection of external competences in an interorganizational context. It can profit from these relationships to learn the competences of a partner. Since the reverse is also possible, it must protect itself against imitation. Co-operation can thus be the context for learning a partner’s competences. Repeated alliances can also lead to the accumulation of experience in the management of alliances. Furthermore, if a company is inclined to form alliances, it can take advantage of this co-operation by creating competences with its partners. This learning in common underlines the existence of interests which can go beyond the dilemma of protecting competences against imitation by a

FRE´DE´RIC PREVOT

30 Concept of the relationship Co-operation

Competition

Management of shared competences

Protection of competences

Creation of competences in common

Acquisition of competences Action on competences

Leveraging

Fig. 1.

Building

The Management of Competences in Interorganizational Relations.

partner while sharing competences to make co-operation and learning possible. In fact, co-operation can be conceived as a privileged learning space, because access to a partner’s competence bases can multiply the opportunities for the creation of new competences (Prevot, 2005; Prevot & Spencer, 2006). In addition, these competences will be specific to the relationship and will therefore by nature be more difficult for competitors to imitate. In this article we synthesize the theoretical approaches to the management of competences in the context of interorganizational relations. This synthesis proposes an organization of the varied concepts following four approaches: sharing of competences, acquisition of competences, protection of competences, and creation of competences in common. These four approaches can be distinguished in relation to two fundamental dimensions (see Fig. 1). The first dimension, concept of the relationship, refers to the nature of an alliance – whether interorganizational relationships are oriented towards co-operation or competition. The second dimension, action on competences, is linked to issues in the learning process, such as the exploitation/exploration distinction (March, 1991), and in the management of competences, particularly the leveraging of existing competences or the building of new competences (Sanchez et al., 1996). As the resulting matrix illustrates, if the concept of interorganizational relationships is oriented towards co-operation, then the approaches of ‘‘management of shared competences’’ and ‘‘creation of competences in common’’ apply. However, if the vision of the alliance is that of a competitive relationship, then

Management of Competences

31

the approaches of ‘‘protection of competences’’ and ‘‘acquisition of competences’’ are relevant. This matrix does not define the oppositions or divergences of theoretical positioning. Even if certain authors find themselves in a specific context, others position themselves in several or even all of the defined contexts. We are not trying to make different approaches converge because the literature review proposed here limits itself to a dominant approach. The objective is to identify the main issues and to associate them to fundamental concepts. We have therefore sought to present the various research in the domain in a relatively broad manner, while preserving a certain clarity in the organization of concepts. This implies limits because the field is vast, and this synthesis certainly contains gaps. For example, including frameworks other than the resource-based view and the competence-based perspective will likely reveal further distinctions in the concepts of managing competences in the context of interorganizational relationships. However, this article contributes to a structuring of the analysis in this field and proposes an identification of the fundamental issues. To go further in this analysis, one could seek to deepen one or another of the issues or go beyond the present synthesis by concentrating on elements which let us establish more precise relationships among these four contexts of analysis.

REFERENCES Amit, R., & Schoemaker, P. (1993). Strategic assets and organizational rent. Strategic Management Journal, 14, 33–46. Andersen, P., & Christensen, P. (2000). Inter-partner learning in global supply chains: Lessons from Novo Nordisk. European Journal of Purchasing & Supply Chain Management, 6, 105–116. Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120. Baughn, C., Denekamp, J., Stevens, J., & Osborn, R. (1997). Protecting intellectual capital in international alliances. Journal of World Business, 32, 103–117. Black, J., & Boal, K. (1994). Strategic resources: Traits, configurations and paths to sustainable competitive advantage. Strategic Management Journal, 15, 131–148. Calvo, J., & Couret, A. (1995). La protection des savoir-faire dans l’entreprise. Revue Franc- aise de Gestion, 105, 95–107. Cohen, W., & Levinthal, D. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35, 128–152. Cool, K. (2000). La durabilite´ des ressources uniques. In: B. Que´lin & J-L. Arregle (Eds), Le management strate´gique des competences. Paris: Ellipses.

32

FRE´DE´RIC PREVOT

Coombs, J., & Ketchen, D. (1999). Explaining interfirm cooperation and performance: Toward a reconciliation of predictions from the resource-based view and organizational economics. Strategic Management Journal, 20, 867–888. Crossan, M., & Inkpen, A. (1995). The subtle art of learning through alliances. Business Quarterly, (Winter), 69–78. Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage. Management Science, 35, 1504–1513. Dodgson, M. (1993). Learning, trust and technological collaboration. Human Relations, 46, 77–95. Doz, Y. (1996). The evolution of cooperation in strategic alliances: Initial conditions or learning processes? Strategic Management Journal, 17, 55–83. Doz, Y., & Hamel, G. (1995). The use of alliances in implementing technologies strategies. INSEAD Working Paper. Doz, Y., & Hamel, G. (1998). Alliance advantage: The art of creating value through partnering. Boston: HBS Press. Doz, Y., & Shuen, A. (1988). From intent to outcome: A process framework for partnerships. INSEAD Working Paper. Durand, T. (2000). L’alchimie de la competence. Revue Franc- aise de Gestion, (Janvier–Fe´vrier), 84–102. Durand, T., & Guerra-Vieira, S. (1997). Competence-based strategies when facing innovation: But what is competence? In: H. Thomas & D. O’Neal (Eds), Strategic discovery: Competing in new arenas. Chichester: Wiley, Chap. 4. Dyer, J., & Singh, H. (1998). The relational view: Cooperative strategy and sources of interorganizational competitive advantage. Academy of Management Review, 23, 660–679. Eisenhardt, K., & Schoonhoven, C. (1996). Resource-based view of strategic alliance formation: Strategic and social effect in entrepreneurial firms. Organization Science, 7, 136–148. Garud, R., & Nayyar, P. (1994). Transformative capacity: Continual structuring by intertemporal technology transfer. Strategic Management Journal, 15, 365–385. Grant, R. (1996). Prospering in dynamically-competitive environments: Organizational capability as knowledge integration. Organization Science, 7, 375–387. Hall, R. (2000). The management of external resources. Journal of General Management, 26, 56–68. Hamel, G. (1991). Competition for competence and inter-partner learning within international strategic alliances. Strategic Management Journal, 12, 83–103. Hamel, G., Doz, Y., & Prahalad, C. K. (1989). Collaborate with your competitors-and win. Harvard Business Review, (January–February), 133–139. Hitt, M., Dacin, T., Levitas, E., Arregle, J.-L., & Borza, A. (2000). Partner selection in emerging and developed market contexts: Resource based and organizational learning perspectives. Academy of Management Journal, 43, 449–467. Huber, G. (1991). Organizational learning: The contributing processes and the literature. Organization Science, 2, 88–115. Ingham, M. (1994). L’apprentissage organisationnel dans les coope´rations. Revue Franc- aise de Gestion, (Janvier–Fe´vrier), 105–121. Ingham, M. (2000). Apprentissages organisationnels dans le contexte de partenariats en R&D: le cas de la gestion de projets R&D chez ‘‘Alpha’’. In: B. Que´lin & J.-L. Arregle (Eds), Le management strate´gique des competences (pp. 192–233). Paris: Ellipses.

Management of Competences

33

Ingham, M., & Mothe, C. (2000). Les de´terminants de l’apprentissage organizationnel. Revue Franc- aise de Gestion, (Janvier–Fe´vrier), 71–79. Inkpen, A. (1998a). Learning and knowledge acquisition through international strategic alliances. The Academy of Management Executive, 12, 69–80. Inkpen, A. (1998b). Learning, knowledge acquisition, and strategic alliances. European Management Journal, 16, 223–229. Inkpen, A., & Beamish, P. (1997). Knowledge, bargaining power, and the instability of the international joint venture. Academy of Management Review, 22, 177–202. Kale, P., Singh, H., & Perlmutter, H. (2000). Learning and protection of proprietary assets in strategic alliances: Building relational capital. Strategic Management Journal, 21, 217–237. Kanter, R. (1994). Collaborative advantage. Harvard Business Review, (July–August), 96–108. Khanna, T., Gulati, R., & Nohria, N. (1998). The dynamics of learning alliances: Competition, cooperation, and relative scope. Strategic Management Journal, 19, 193–210. Koenig, G. (1996). Management strate´gique: Paradoxes, interactions et apprentissages. Paris: Nathan. Kogut, B., & Zander, U. (1992). Knowledge of the firm, combinative capabilities and the replication of technology. Organization Science, 3, 383–397. Lane, P., & Lubatkin, M. (1998). Relative absorptive capacity and interorganizational learning. Strategic Management Journal, 19, 461–477. Lei, D., & Slocum, J. (1992). Global strategy, competence-building and strategic alliances. California Management Review, (Fall), 81–97. Lenz, R. (1980). Strategic capability: A concept and framework for analysis. Academy of Management Review, 5, 225–234. Lipparini, A., & Fratocchi, L. (1999). The capabilities of the transnational firm: Accessing knowledge and leveraging inter-firm relationships. European Management Journal, 17, 655–667. Lorenzoni, G., & Lipparini, A. (1999). The leveraging of interfirm relationships as a distinctive organizational capability: A longitudinal study. Strategic Management Journal, 20, 317–338. Makhija, M., & Ganesh, U. (1997). The relationship between control and partner learning in learning-related joint ventures. Organization Science, 8, 508–527. March, J. (1991). Exploration and exploitation in organizational learning. Organizational Science, 7, 71–87. McGaughey, S., Liesch, P., & Poulson, D. (2000). An unconventional approach to intellectual property protection: The case of an Australian firm transferring shipbuilding technologies to China. Journal of World Business, 35, 1–20. Me´tais, E. (1997). Intention strate´gique et transformation de l’environnement concurrentiel. The`se de Doctorat. IAE d’Aix-en-Provence. Me´tais, E. (2004). Strate´gie et ressources de l’entreprise. Paris: Economica. Miller, D., & Shamsie, J. (1996). The resource-based view of the firm in two environments: The Hollywood film studios from 1936 to 1965. Academy of Management Journal, 39, 519–536. Mody, A. (1993). Learning through alliances. Journal of Economic Behaviour and Organization, 20, 151–170.

34

FRE´DE´RIC PREVOT

Nanda, A. (1996). Resources, capabilities and competencies. In: B. Moingeon & Edmonson (Eds), Organizational learning and competitive advantage (pp. 93–120). London: Sage. Nonaka, I. (1994). A dynamic theory of organizational knowledge creation. Organization Science, 5, 14–37. Parkhe, A. (1991). Interfirm diversity, organizational learning, and longevity in global strategic alliances. Journal of International Business Studies, 22, 579–601. Powell, W. (1998). Learning from collaboration: Knowledge and networks in the biotechnology and pharmaceutical industries. California Management Review, 40, 228–240. Powell, W., Koput, K., & Smith-Doer, L. (1996). Interorganizational collaboration and the locus of innovation: Networks of learning in biotechnology. Administrative Science Quarterly, 41, 116–145. Prevot, F. (2005). Managing interorganizational transfer of competence: A case study. In: R. Sanchez & A. Heene (Eds), Advances in applied business strategy: Competence perspectives on managing inter-firm interactions (Vol. 8, pp. 165–186). Oxford: Elsevier Science. Prevot, F., & Spencer, R. (2006). Supplier competence alignment: Cases from the buyer perspective in the Brazilian market. Industrial Marketing Management, 35, 944–960. Que´lin, B. (1997). Appropriability and the creation of new capabilities through strategic alliances. In: R. Sanchez & A. Heene (Eds), Strategic learning and knowledge management (pp. 139–160). Chichester: Wiley. Rivkin, J. (2001). Reproducing knowledge: Replication without imitation at moderate complexity. Organization Science, 12, 274–293. Sanchez, R., Heene, A., & Thomas, H. (1996). Towards the theory and practice of competencebased competition. In: R. Sanchez, A. Heene & H. Thomas (Eds), Dynamics of competence-based competition: Theory and practice in the new strategic management (pp. 1–35). Chichester: Wiley. Schrader, S. (1991). Informal technology transfer between firms: Cooperation through information trading. Research Policy, 20, 153–170. Shenkar, O., & Li, J. (1999). Knowledge search in international cooperative ventures. Organization Science, 10, 134–143. Simonin, B. (1997). The importance of collaborative know-how: An empirical test of the learning organization. Academy of Management Journal, 40, 1150–1174. Simonin, B. (2004). An empirical investigation of the process of knowledge transfer in international strategic alliances. Journal of International Business Studies, 35, 407–427. Simonin, B., & Helleloid, D. (1993). Do organizations learn? An empirical test of organizational learning in international strategic alliances. Best Papers Proceedings, Academy of Management Meeting, Atlanta. Teece, D. (1986). Profiting from technological innovation: Implication for integration, collaboration, licencing and public policy. Research Policy, 15, 285–305. Teece, D., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18, 509–533. Tsang, E. (1999). A preliminary typology of learning in international strategic alliances. Journal of World Business, 34, 211–229. Verdin, P., & Williamson, P. (1994). Core competences, competitive advantage and market analysis: Forging the links. In: G. Hamel & A. Heene (Eds), Competence-based competition (pp. 77–110). Wiley.

Management of Competences

35

Von Hippel, E. (1987). Cooperation between rivals: Informal know-how trading. Research Policy, 16, 291–302. Wernerfelt, B. (1989). From critical resources to corporate strategy. Journal of General Management, 14, 4–12. Zander, U., & Kogut, B. (1995). Knowledge and the speed of the transfer of organizational capabilities: An empirical test. Organization Science, 6, 76–92.

ALLIANCES AS A STRATEGY IN VOLATILE ENVIRONMENTS – ALSO FOR MBA BUSINESS MODELS? Jo¨rg Freiling, Martin Gersch, Christian Goeke and Peter Weber ABSTRACT The first part of this paper discusses why and how organizations join collaborative arrangements in transforming business sectors. In order to address this research question from an organization–environment coevolution perspective, the authors begin with working out a respective framework for analysis founded on competence-based theory under the umbrella of market process theory. The starting of point of the investigation are results from comprehensive qualitative research conducted within the currently highly turbulent German healthcare sector. Embedded into an interactive research design, the fieldwork reveals a taxonomy of three reasons to cooperate in volatile environments: (1) closing resource and competence gaps in so-called ‘‘gap-closing alliances,’’ (2) preparing for unexpected developments in so-called ‘‘option networks,’’ and (3) intending to exert influence on the relevant business environment in so-called ‘‘steering alliances.’’ Detailed findings and particularities for the field of competence research are briefly summarized. They emanate especially from an evolutionary angle and include timing Competence Building and Leveraging in Interorganizational Relations Advances in Applied Business Strategy, Volume 11, 37–62 Copyright r 2008 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1016/S0749-6826(07)11002-7

37

JO¨RG FREILING ET AL.

38

(reacting adequately to strategic windows in the market), historicity, path dependencies (on both the firm and market/industry level), and an evolutionary interpretation of resource/competence specificity. The central research question in the second part of the paper is whether and how competence-based management of alliances is applicable to the education sector and for deriving respective management implications. For this reason, an exploratory case study is conducted of the German MBA program ‘‘Net Economy,’’ featuring innovative teaching methods like blended learning arrangements, multimedia case studies, and transnational learning processes in an international learning network.

INTRODUCTION Periods of structural transformation have become more frequent than ever before and take place in various industry sectors (D’Aveni, 1994, p. 4; Wiggins & Ruefli, 2005, p. 895). Sometimes more, sometimes less, a crossfire of unforeseeable environmental jolts changes entire industry settings. Organizations are surprised and forced at least to adjust their business model/business system and strategies (Park & Mezias, 2005, p. 987; Meyer, 1982). Sometimes they will even implement entirely innovative business models in order to retain their competitiveness in these periods. These jolts can, for instance, be triggered by technological developments, governmental action, changing customer needs, international competition, or new competitors (e.g. Porter & Rivkin, 2000; Prahalad, 1995; Smith, 2000). Typically, changes cannot be traced back to just a single trigger as they are rather the consequence of a complex set of numerous triggering events and causal ambiguity. In scientific and practice-oriented literature on strategic management issues, it is increasingly argued that co-operation can be an adequate strategy for coping with environmental dynamics (Gomes-Casseres, 2006; Gulati, Nohria, & Zaheer, 2000; Nielsen & Rikama, 2004; Silverman & Baum, 2002). With the intent of anchoring this claim in (competence-based) strategic management theory, this paper examines why firms enter alliances especially in (fast) changing environments. Applying qualitative empirical research, this is conducted in two steps with two basic research questions: – Why do firms collaborate in volatile environments? – A comprehensive study on collaboration in changing environments was conducted by the

Alliances as a Strategy in Volatile Environments

39

authors. Essential results are briefly summarized in order to address the second research question. – (How) Can competence theory contribute to analyzing and managing cooperation for MBA business models in the currently changing German business education sector? Given the objective of making significant theoretical advancements as well, it seems inevitable to first develop an abstract framework for analysis. This is intended as a general contribution to the analysis of organization– environment co-evolution processes from a competence-based strategic management perspective. Such a framework should be able to encompass change processes at the firm level and the interrelated market/industry level in an integrated way. Such a co-evolutionary multi-level analysis is assumed to be necessary in order to reach a general understanding of a firm’s strategic challenges in a changing environment. In pointing out internal and external contextual ties, the evolutionary ‘‘competence-based theory of the firm’’ is applied because it is compatible with the New Austrian School in terms of philosophy of science and, therefore, enables an interrelated analysis of the organizational and market/industry levels. The competencebased theory of the firm allows for proactive entrepreneurship but at the same time considers environmental restrictions of action. Furthermore, it enables an understanding of the evolution of organizations in a market/ industry under transition itself (multi-level co-evolution) (Sanchez & Heene, 2004, pp. 46–49). We consider the framework presented in this paper, including its anchoring in market process theory, to be a contribution following Sanchez and Heene’s (2004) postulate of achieving a more dynamic, systemic, cognitive, and holistic strategic management theory based on the competence perspective.

RESOURCE-BASED AND COMPETENCE-BASED ALLIANCES To examine the nature and causes of competitiveness and competitive advantages, resource-based and competence-based approaches have gained an increasing popularity (Dierickx & Cool, 1989; Barney, 1991; Peteraf, 1993; Sanchez, Heene, & Thomas, 1996; Prahalad & Hamel, 1990; Teece, Pisano, & Shuen, 1997). In this context, organizations are understood as distinct bundles of resources and competences which have evolved over time (Penrose, 1959) and are embedded in their relevant business environments.

40

JO¨RG FREILING ET AL.

Within a firm, homogeneous assets which can typically be procured in markets are subject to a firm-specific upgrading process. This process is primarily made up of (re-)bundling and/or learning processes. Permanently required upgrades finally contribute to the actual and future competitiveness of a firm. Furthermore, competences comprise the repeatable ability of rendering competitive output with these resources, based on knowledge, and are usually non-randomly managed by rules and channeled by routines (Becker, 2004). Competences enable goal-oriented processes to facilitate future readiness for action and to potentially render concrete input to a market. Competences help to maintain competitiveness and even competitive advantage. Such upgrading processes necessarily follow idiosyncratic, firm-specific paths (Freiling, 2004; Freiling, Gersch, & Goeke, 2005). The initial work in this field is very much focused on a static analysis within the boundaries of organizations. However, recent research also stresses dynamic, systemic, cognitive, and holistic aspects as well as the significance of so-called firm-addressable resources and competences (Sanchez et al., 1996; Sanchez & Heene, 2004), which are external to a firm and can be leveraged to other firms, for example by various forms of collaborative arrangements. The emphasis in literature on collaboration for resource-based and competence-based reasons primarily aims at building up new firm-specific resources and competences. Moreover, opportunistic behavior in terms of ‘‘learning’’ from alliance partners is addressed in the case of resource-based and competence-based alliances (Hamel, 1991; Hamel & Doz, 1999). The individual and organizational learning perspectives seem to be central issues since there is a high embeddedness of knowledge in resources and competences. However, as learning opens the door to explicitly considering the time dimension, the authors argue that collaborative arrangements can have further features in developments over time. It transpires from recent surveys (e.g. Nielsen & Rikama, 2004) that agents assume advantages of cooperation and alliances when mastering volatile environments. However, we argue that such reasoning is not anchored too much in management theory, yet. This is one main motivation for our following work. The so-called ‘‘relational view’’ (Dyer & Singh, 1998) follows a different path by applying a network perspective to resources and competences; competition increasingly shifts from the firm level to alliances as owners of competences and the respective competitive advantages (Gomes-Casseres, 1994). However, the latter works have a slightly different focus of analysis. They rather analyze the network as a whole and its respective evolution,

Alliances as a Strategy in Volatile Environments

41

whereas our investigation centers on the single organization deciding whether or not to cooperate with others.

A COMPETENCE-BASED THEORY OF THE FIRM AS A KEY TO THE ANALYSIS OF CO-EVOLUTIONARY DEVELOPMENTS Numerous scholars in the field of strategic management argue that orthodox strategy and industrial organization-based analyses of change fail to adequately tackle existing and continuous change processes in the relevant business environment as well as the accompanying firm challenges (Lockett & Thompson, 2001). With their seminal ‘‘Evolutionary Theory of Economic Change,’’ Nelson and Winter (1982) developed a broad evolutionary perspective for contemporary strategic management research. They directly address shortcomings of contemporary orthodox theory as follows: ‘‘(y) explicit consideration of the way in which an industry moves from one equilibrium configuration to another should be, in our view, an essential part of any positive theory of firm and industry response to changed market conditions. And since there is in general no guarantee that the character of the equilibrium achieved is independent of the time path to it, we do not think that an adequate theory can be achieved merely by adding to traditional equilibrium theory a disequilibrium adjustment dynamic’’ (Nelson & Winter, 1982, p. 164). However, Nelson and Winter’s emphasis on biological analogies and general evolutionary principles has provoked controversial statements (Penrose, 1952, p. 819; Alchian, 1953). As we share this concern, we refer to the so-called New Austrian School (Vaughn, 1994; Gloria-Palermo, 1999) as an economic evolutionary school of thought (Witt, 1992) in order to analyze change processes with Schumpeter (1934), Hayek (1978), Mises (1949), Kirzner (1973), and Lachmann (1986) as the main theorists. In a nutshell, the New Austrian School considers entrepreneurship and players’ alertness to be the driving forces for economic development and change. A player’s knowledge is incomplete and asymmetrically distributed. Economic agents gain new knowledge through feedback loops in every market process (e.g. transactions) or by reflecting even small events in an environment. On the basis of new knowledge accessed, they revise their plans and market offerings, always seeking to enhance competitiveness (Prahalad, 1995), creatively destroying old ideas or concepts

42

JO¨RG FREILING ET AL.

(Schumpeter, 1934) and experiencing competition as a discovery process (Hayek, 1978). Totally different general conditions (as opposed to neoclassical considerations) apply to model market processes. The fundamental underlying assumptions are (1) subjectivism, (2) radical uncertainty, (3) methodological individualism, (4) ‘‘acting man’’/‘‘homo agents’’ as model of man, (5) non-consummatory approach in connection with moderate voluntarism, and (6) relevance of time (for a detailed discussion see Freiling, Gersch, & Goeke, 2005, 2006). The Austrian School represents a market theory which is not in a position to analyze single, heterogeneous firms in detail. However, this is deemed essential to perform a co-evolutionary analysis of development processes in the market and at the organizational level in an integrated way (Rothaermel & Hill, 2005). Hence, for a long time scholars analyzing works of the Austrian School argued that there is a ‘‘missing chapter’’ concerning the configuration and adjustment of firms to set up competitive offerings in the market (Witt, 1999; Fagerberg, 2003). The idea that resource-based and competence-based approaches have the potential to close this gap has already been indicated by some scholars (Lockett & Thompson, 2001) and has recently been proven fundamentally by Freiling et al. (2005). The latter introduced a reconceptualization of resource-based and competence-based approaches when targeting a ‘‘competence-based theory of the firm’’ (CbTF). They managed to trace CbTF back to the same basic assumptions 1–6 mentioned above. This allows for the complementing of market process theories by a ‘‘firm process theory,’’ which is compatible to the Austrian School in terms of philosophy of science. Therefore, the interplay of these two approaches allows the conducting of integrated analyses of the co-evolution of change processes at the firm and industry levels, all under the umbrella of market process theory. Jacobson’s (1992) synopsis visualizes why such an integrated ‘‘Austrian Economicsbased’’ analysis seems highly applicable to the analysis of change processes, even or especially in volatile environments (cf. Table 1). The contribution of the competence-based theory of the firm to a theoretical framework of analysis is therefore the ability to explain the action of single players when they configure their necessary readiness for action (i.e. building, leveraging, and maintaining resources and competences), market input, and the implementation of ‘‘lessons learned’’ from the ‘‘groping’’ (trial and error) when preparing conceived future readiness for action and market input processes. Within the research on timing and diffusion of technological innovations, there is the concept of so-called ‘‘windows of opportunity’’

Alliances as a Strategy in Volatile Environments

Table 1.

43

Differences in Perspective with Slight Modifications According to Jacobson (1992, p. 785). IO-Based Strategy

Strategic objective Market conditions Profitability modeling Nature of success factors

Restricting competitive forces Equilibrium Empirical regularities Observed strategic factors

New Austrian/CbTF Point of View Entrepreneurial discovery Disequilibrium Heterogeneity Partly unobservable factors on idiosyncratic paths

(Tyre & Orlikowski, 1994; Christensen, Sua´rez, & Utterback, 1998) to describe special phases after discontinuities as playing fields to explore and modify new alternatives. Leveraging this idea to a more general level of volatile environments, there are windows of opportunity continuously opening up during the market process that temporarily provide opportunities for alert and entrepreneurial firms to create new alternatives for future market offerings. Gaining new knowledge in a market process-based (New Austrian) rationale again and again prompts economic players to rethink their own ‘‘entrepreneurial theory’’ of what the future will be like (Harper, 1995, p. 136). At the same time it initiates a new round in the process of anticipating future market requirements and preparing to adjust a firm’s strategic architectures in order to be ready to serve corresponding requirements through a process of visionary shaping of firm resources and competences (Hamel & Prahalad, 1994; Koza & Lewin, 1998). These strategic architectures draw on required inputs, resources, and competences for competitive output. Hence, as a counterpart to the ‘‘windows of opportunity,’’ a kind of ‘‘window of readiness for action’’ in the form of respective resources and competences needs to be set up by a firm which is willing to react to new market offerings. Also, firm-addressable resources and competences can be elements of such ‘‘windows of readiness for action’’ and then constitute resource-based and competence-based alliances. Firms seize their own ideas and changes in their relevant environment, trying to improve their former ‘‘solutions’’ and offerings to the market. Following a general Austrian rationale, entrepreneurs (as well as the business systems they realize) can themselves be interpreted as drivers of developments in markets. Hence, the actions of entrepreneurs become ‘‘triggers’’ of change processes which determine the relevant market requirements at a certain point in time or a limited period of time for other players (current and potential market participants) as well. Anticipated changes

JO¨RG FREILING ET AL.

44

make players react; sequentially or coincidentally they further drive change process and are driven by external change at the same time. The so-called ‘‘triggers’’ for change which are often highlighted in the literature (e.g. Porter & Rivkin, 2000) thereby become initiators or ‘‘boosters’’ on basically endless, irreversible, and idiosyncratic paths. These paths are to a large extent formed accidentally and as a sequence of decisions (which sometimes also restrict future decisions) and events.

METHODOLOGY In order to address the first research question of why firms collaborate in changing environments, qualitative research was conducted in the German healthcare sector (Gersch, Goeke, & Freiling, 2007). Embedded into an interactive research design (Maxwell, 2005), this fieldwork was conducted against the background of the aforementioned theoretical framework and in order to expand its theory. Beginning with a comprehensive healthcare system reform in 2004, the German healthcare sector showed meaningful features of a volatile business environment, especially in the pharmacies’ market stage. Amongst other cornerstones, this reform entailed the legalization of mail-order drug retail (thereby shifting the scope of competition from a local to the national level through a new distribution channel), the establishment of chains of pharmacies (thereby enabling the formation of larger entities), an abolishment of price control for non-prescription drugs (thereby causing price competition), and a shift from value-based to a fixed commission for prescription drugs. All these changes became effective on January 1, 2004. In order to get evidence for a further understanding of organization/ environment co-evolution from this case, we performed a three round Delphi-analysis (Dalkey, 1969; Linstone & Turoff, 1975) with ten executives from different value-chain stages in the German healthcare sector from March to June 2005. Among other findings, this explorative survey revealed that players in the market increasingly join collaborative arrangements when the given business environment gets volatile. In a final focus group workshop (Morgan, 1997) held with the Delphi-experts in June 2005, a further exploration of this issue was conducted. In subsequent coding and categorizing (Glaser & Strauss, 1967; Charmaz, 2006) of the interactive group discussions, three major motivations for allying in dynamic environments were elaborated: (1) closing resource and competence gaps (in ‘‘gap-closing alliances’’), (2) creating a (strategic) option network to react

Alliances as a Strategy in Volatile Environments

45

adequately to uncertain and surprising future development paths, and (3) jointly exerting influence on the development of the relevant business environment in ‘‘steering alliances’’ (e.g. in form of lobbying or shaping the ‘‘critical mass’’ during standardization processes). These three motivations were further validated and grounded in case study research in the German healthcare sector (Yin, 2003; Eisenhardt, 1989; Leonard-Barton, 1990). The respective conclusions form the basis for the analysis of and implications for the German MBA market.

THREE TYPES OF COOPERATION TO MASTER VOLATILE ENVIRONMENTS Key findings as to the elaborated three motivations to ally in volatile environments, which were illuminated during the fieldwork in the healthcare sector, are summarized briefly in this section (for a more comprehensive discussion cf. Gersch et al., 2007) before applying them to management in the education sector. Gap-Closing Alliances Gap-closing alliances are set up in order to close identified resource and competence gaps to implement innovative/competitive market offerings. As shown in the framework for the analysis of co-evolutionary change processes, available resources and competences are crucial to the competitiveness of a business system and its ability to meet the requirements of upcoming windows of opportunity. Typically, the process of modifying existing and building new resources and competences – and finally turning them into market offerings – is based on trial and error and, thus, will take time. Given inevitable market feedback loops of adjustment and conceivable first-mover advantages (Lieberman & Montgomery, 1988), the period for synchronization of windows of opportunity and windows of readiness for action (as visualized in Fig. 1) can be extremely short. Especially in rapidly changing environments, necessary timing strategies will make it nearly impossible for a firm to build up required resources and competences by itself. Firms look for ways to attain their desired/ necessary readiness for action through cooperation with other players who possess the required resources and competences and who are able to leverage them into different contexts. An adequate absorptive capacity

46

Fig. 1.

JO¨RG FREILING ET AL.

Synchronization of Resources and Competences with External Windows of Opportunity.

(Cohen & Levinthal, 1990; Dyer & Singh, 1998) appears to be indispensable for integrating required resources and competences into a firm’s hierarchy through cooperation. For example, by means of a competence-gap analysis (Klein & Hiscocks, 1994) organizations will be able to figure out which resources and competences are necessary to achieve a strategic fit to the desired market offerings and anticipated market requirements. At the industry level, gap-closing alliances (Gersch, 2004) contribute to a kind of competition for single layers/modules in a formerly integrated value chain (Bresser, Heuskel, & Nixon, 2000), but also to the market entry of business systems from different industries or innovative service providers through collaboration with incumbents (Rothaermel & Hill, 2005). Additionally, there is radical uncertainty whether both future market requirements will evolve as imagined and whether the targeted resource/ competence accumulation process is successful. With regard to environmental uncertainty (will the market adopt the innovation/modification?) and the challenge of idiosyncratic migration paths, a gap-closing alliance appears to be an appropriate means to test a conceived strategic architecture without losing the flexibility to re-configure the business system adequately if required. This re-configuration can on the one hand be incremental in terms of reacting to the market’s feedback loops through every performed

Alliances as a Strategy in Volatile Environments

47

(or missed) transaction (concerning requirements on the product level, timing, or quantity). On the other hand, a complete strategic change (and annulment of the whole gap-closing alliance) is possible, too. Then the motto of gap-closing alliances is: ‘‘Firms form partners for the dance – but when the music stops, they can change them’’ (Richardson, 1972, p. 896). Especially in the early phases of new strategic architectures there is usually a continuous adaptation process as to the required profile of resources and competences. Here we can refer to Leonard-Barton’s (1992) findings that given a considerable external pressure for change, existing firm-specific resources and competences can contribute to organizational inertia. Those resources and competences with a high specificity regarding usage or firm attribution especially have the potential to become ‘‘core rigidities’’ (Ghemawat, 1991; Gersch & Goeke, 2006). Such an evolutionary angle on gap-closing alliances therefore gives a different view on collaboration for resource and competence reasons. Especially in changing environments, the main objective is not only ‘‘opportunistic learning from others,’’ but also achieving superior timing strategies through deconstructing and reconstructing the business model’s value chain (Bresser et al., 2000, p. 3). Returning to a broader evolutionary context, new alternatives on how to serve market requirements typically have an impact on the relevant business environment for other players as well by creating new knowledge as the basis for their individual plans and forcing them to react, sometimes initiating an endless sequence of processes of creative destruction of formerly competitive market offerings. Asked about the importance of remaining competitive in volatile environments as part of a written survey for healthcare executives in June 2006, about 60% of respondents judged forms of gap-closing alliances as highly important and another 35% as important. However, even intentions of cooperation, which do not directly aim at generating market input jointly were given an almost equally significant relevance. They shall be outlined in the following sections.

Option Networks Option networks aim at ensuring access to a large pool of resources and competences when necessary. While gap-closing alliances are required to take profit from windows of opportunity when a player is not able to set up an adequate readiness for action by himself, option networks serve as an earlier ‘‘line of defense’’ against unforeseeable developments and the

JO¨RG FREILING ET AL.

48

network partners do not necessarily work together to jointly generate market inputs today. It is a rather loose form of cooperation. On the other hand, option networks are useful for staying in touch with recent developments, enabling firms to initiate a new round of competition for intellectual leadership by developing new solutions efficiently and thereby possibly even impacting the whole industry. Embedded into a firm’s flexibility management, option networks serve as preparation for being able to adjust the readiness for action if necessary and with the help of the relations an option network offers. Facing a high degree of uncertainty regarding the development of a player’s relevant environment, there will be an endless sequence of triggers which initiate a new need for adaptation to ensure competitive market input which is able to result in successful market processes. As soon as players have an idea of probable future opportunities in the market, they will make preparations to be able to react adequately. Ideally, they create options to react to any conceivable change regarding the relevant elements and relations within the market. Specifically, they will create a network of options for action without exercising them immediately, acknowledging that such a network gives focal firms in particular the potential to access the resources of their contact partners. By goal-oriented development and the increasing value of one or more conceivable second-best alternatives for use, option networks can contribute to a de-specification of an organization’s resources and competences. They are typically set up to serve as an ‘‘emergency exit’’ when the first-best use is omitted for any reason and thus can contribute to sustained firm competitiveness.

Steering Alliances Steering alliances aim at goal-oriented attempts to jointly exert influence and to steer (1) changes in a relevant business environment, (2) basic conditions underlying every market process, or (3) migration paths of industry transformation. Acknowledging their discretionary potential to act, players also regard steering alliances as a way to achieve fit between market requirements and inputs by their resources and competences. This kind of strategy is especially applicable when firms lack the flexibility to adapt to environmental conditions which would evolve without exerting the abovementioned influence. Such inflexibility can be detected when organizations possess highly specific resources and competences. Instead of being forced to follow disadvantageous organizational paths, players might choose to

Alliances as a Strategy in Volatile Environments

49

jointly initiate, force, vary, and/or break them (Garud & Karnøe, 2001). Thereby, they are able to direct or at least influence the never-ending sequence of decisions and events determining the relevant business environment. Starting with the awareness of corresponding mechanisms (i.e. that players are well able to exert influence on their relevant business environment up to a certain extent), it is assumed that the influence can be activated through pooling interests and conducting joint actions in adequate networks. In our research, alliances prove to be more effective compared to autonomous actions with the same purpose. The players who team up in a steering alliance consider that having similar influences on their relevant business environment is adequate to foster the achievement of their individual goals. They are not necessarily from the same industry value chain stage or direct competitors. The activities of such steering alliances can be described in at least two ways: either as an intervention into the evolution of institutional rules or as managing the expectations of other market participants in the form of a selffulfilling (Merton, 1948) or a self-destroying prophecy. During the development of an industry (as was observed in the German healthcare sector), so-called ‘‘points of bifurcation’’ (Christensen et al., 1998) show up over time. At these points of bifurcation, a positioning of future cornerstones of the institutional contexts appears to be promising. This can comprise the setting of technical standards and norms, trade terms, accounting standards, or any further form of industry regulation or (de)regulative governmental action. When multiple players intentionally provide selective information to decision-makers on institutional contexts in a coordinated way, they enhance the likelihood of achieving their desired configuration of these institutions. Moreover, when multiple players intentionally show strong commitment for a specific scenario ‘‘X’’ in the undetermined future, the expected probability of other players that scenario ‘‘X’’ will effectively become true increases.

ALLIANCES AS A MEANS TO MASTER DYNAMICS IN THE EDUCATION SECTOR? – THE CASE STUDY OF THE GERMAN ‘‘EXECUTIVE MBA NET ECONOMY’’ In the form of a comprehensive case study (Yin, 2003), this section explores the relevance of the three above-mentioned alliance types in volatile

50

JO¨RG FREILING ET AL.

environments for a particular sector– namely the currently highly volatile German education sector. As a case, the ‘‘Executive MBA Net Economy’’ offered in Germany is chosen, since it stands out through its cooperative implementation by numerous partners involved. It remains to be seen whether they share the intention of allying in volatile environments as elaborated above in order to prove the transferability of competence-based alliance management to the education sector as well. If applicable, further management implications for education service providers based on the subsequent findings are expected to be derived.

Context: The Transition of the German Education Sector Fueled by poor results in international rankings and the slow adoption of new technological developments in teaching methodology, the German education system has been heavily criticized and subjected to debate during recent years. The need for sustainable and pervasive changes was acknowledged for all education sectors, but at the same time the budgetary position of both the German federal government and the 16 states limited direct investment options. In the field of higher education, the German government resolved fundamental changes to the regulatory framework according to European discussions and agreements like the ‘‘Bologna process’’ and the ‘‘General Agreement on Trade in Services’’ (GATS) (European Commission, 2006; UNESCO, 2006). Their implementation and discussion represents a remarkable ‘‘point of bifurcation’’ for the entire sector’s development, since vital cornerstones of regulation were changed. The resulting consequences are wide-ranging and imply a fundamentally new self-conception of several traditional education institutions, especially universities. Selected features are: – Tuition fees for formerly free studies at public universities are introduced by nearly every state. – Universities are obliged to adopt a two-cycle system with bachelor and master degrees to replace the German diploma. – A so-called global budget shifts responsibility for universities’ business situation from the state governments to the universities themselves. – Professors’ and lecturers’ salaries are linked to their performance. Consequently, education offers are increasingly considered as marketable goods, while they previously have been regarded as a kind of public service. Competition has intensified and the affected actors face strong uncertainty

Alliances as a Strategy in Volatile Environments

51

about further developments in the sector, as there are numerous overlapping triggers for change. In combination with technological developments (e.g. the very fast and broad diffusion of personal computers and the internet) and social changes (e.g. the need for lifelong learning as a consequence of changing conditions in the labor market), the regulatory changes trigger a self-energizing transformation process of the education system, which forces the actors to reposition themselves in order to become and remain ‘‘competitive’’ (concerning the consequences of ICT developments for German universities see Zentel, Bett, Meister, Rinn, & Wedekind, 2004). First qualitative indicators outline the effects of the aforementioned transformation process of the sector (Gersch & Goeke, 2006), for example the rapidly evolving value chain (Bresser et al., 2000) and development of new business activities. These new activities comprise many master degree programs in the field of management education as well as electronic marketplaces for e-learning offers like ‘‘WebKollegNRW’’ (http://www. webkolleg-nrw.de) or online study offers like ‘‘Virtual University Bavaria’’ (http://www.vhb.org) or ‘‘AKAD’’ (http://www.akad-fernstudium.de). These innovative offerings (as results of or reactions to the above-mentioned triggers) themselves mean further changes to the relevant environment in the German education sector. An accelerating e-learning penetration in higher and continuing education can be stated in this context (Fiedler, Welpe, & Picot, 2006) and most universities consider e-learning as an indispensable strategic instrument for improving teaching and strengthening competitiveness. In Germany market experts see an urgent need for strategic approaches that allow sustainable and effective use of e-learning at an appropriate cost level as well as a systematic utilization of its didactical potentials, e.g., in the form of integrative ‘‘blended learning’’ arrangements (Gabriel, Gersch, & Weber, 2006). After decades of continuity and only incremental changes in the field of higher (management) education, the sector now conspicuously meets the characteristics of a volatile environment, accompanied by growing uncertainty and challenges for affected players. Along with the abovementioned shift of education offers from ‘‘public services’’ to ‘‘marketable goods,’’ we claim the necessity to interpret education providers as business model operators (business system operators). The representation of education activities with the help of acknowledged concepts for analyzing business systems like the integrated business model approach of Wirtz (2001) or the implications of understanding customers as ‘‘pro-sumers’’ in integrative production processes (Engelhardt, Kleinaltenkamp, & Reckenfelderba¨umer, 1993) can help the actors to

52

JO¨RG FREILING ET AL.

handle current challenges and their overall unpredictable situation. Such a perspective emphasizes a customer orientation, which still is rather unfamiliar for universities in Germany. The sometimes emotional German discussion about the character of education does not need to be addressed here, since the commercial treatment of continuing education (unlike higher education) is widely accepted and has been practiced for years. The new role of universities is currently the topic of intense discussion in Germany and other European countries (Mu¨ller-Bo¨ling, 2000; Bok, 2005; Sursock, 2004; CHE, 2006; Fiedler et al., 2006). In sum, the German higher education sector has recently become highly dynamic in terms of basic conditions and education offerings. This means a dramatic ‘‘paradigm shift’’ as to the ‘‘management’’ of education offers, especially for established players in the German education sector. The following case study of one innovative implementation of an MBA program shall explore the application of competence-based strategic management and alliances as strategies for volatile environments by education providers (interpreted as business systems) (Yin, 2003).

‘‘Executive MBA Net Economy’’ – Description of a Cooperative Business Model The case study of the ‘‘Executive MBA Net Economy’’ (http://www.neteconomy-mba.de) focuses on an MBA program which is implemented cooperatively by a consortium of several partners. It features an intense utilization of e-learning, so that the operators face a notably wide range of interdisciplinary challenges. The partners have undertaken many new tasks, since their ‘‘product’’ needs to be marketed in the highly competitive landscape of continuing education, although they deal partly with the same content as in their traditional teaching. The Executive MBA Net Economy is indicative of business activities in the volatile education environment as outlined above and thereby for organization–environment co-evolution, since – it is operated by university partners that currently need to (re-)position themselves; – it aims at a commercialization of higher education content in the form of a business system in the field of continuing education (diversification strategy); – it reflects the high level of uncertainty and competition that broad parts of the education system are currently facing.

Alliances as a Strategy in Volatile Environments

53

Executive MBA Net Economy appeals to practitioners in the field of New Media and Net Economy, who desire an interdisciplinary MBA degree as a consecutive education offer in the course of their career planning. An intense use of e-learning material in hybrid study settings (so-called ‘‘blended learning arrangements’’) is designed to allow compatibility of occupational and academic activities. The consortium running the Net Economy MBA consists of ten professorships of the cooperating universities Free University of Berlin, Humboldt University of Berlin, Ruhr University of Bochum, University of Trier, and University of Wuerzburg as well as CeDiS, a competence center specializing in the field of e-learning, multimedia, and content management. Net Economy MBA is founded on the results of a project which was funded by the German Federal Ministry of Research and Technology between 2000 and 2004 and aimed at the cooperative development of an online curriculum for management education (cf. http://www.internetoekonomie.org). Net Economy MBA is distinguished from traditional MBA programs in several ways. The following aspects are worth mentioning in particular: – the consortium of ten professorships of different disciplines in management education allows the pooling of expert knowledge; – the study concept follows a hybrid setting with alternating online and on-site phases (‘‘blended learning’’); – on-site phases take place in rotation at four locations all over Germany (Berlin, Wuerzburg, Trier, Bochum); – learning processes are managed and coordinated with a learning management system; – various kinds of multimedia content (including traditional lectures, literature, web-based-trainings, and multimedia case studies) are combined in learning arrangements according to state-of-the-art ‘‘instructional paradigms.’’ Based on the understanding of education offers as business systems, we performed comprehensive research in order to apply the competence perspective to the management of e-learning based MBA-business models. For a systematic analysis of new business systems following a four-step business system analysis (Gersch, 2004), it is first necessary to draw a ‘‘blueprint’’ of the business system in order to identify clusters of resources and competences vital for implementation of an e-learning based education offer. This was achieved with numerous structured and unstructured in-depth interviews held with experts in the German education sector between 2001 and 2006, as well as two half-day workshops on this topic with

54

JO¨RG FREILING ET AL.

approximately 100 participating experts each in June 2002 and June 2005. Furthermore, the two-year period between the workshops was a valuable source for longitudinal data and thereby enhanced the quality of the targeted resource and competence profiles. Categorizing (Glaser & Strauss, 1967; Charmaz, 2006) the input from the expert interviews, the following clusters of resources and competences were determined to be essential for setting up a competitive, e-learning based education business system: reputation, content/curriculum, didactics, commercialization, and information technology. The relevance of each resource and competence cluster for the Net Economy MBA is discussed in detail below.  Reputation/brand. The reputation of commercial MBA programs is deemed vital for the positioning and acceptance of the program/degree in the market. A direct correlation between a program’s reputation and the relevant target group’s willingness to pay can be assumed. However, details will differ from one target group to another: some participants aim for esteem from their supervisors, some for personal intellectual challenges, some for forming a network of contacts, and some only for easily achieving a degree. All in all, it is necessary for education business systems to be able to communicate their positioning and the respective value-added to the relevant target group. This can, for example, be handled by brand management. An umbrella brand strategy can be observed in the case of some universities that leverage a renowned brand to new (external/cooperative) offerings, hire ‘‘branded lecturers’’ (e.g. offer courses by famous professors), or leverage existing ‘‘products’’ (e.g. specific degrees) and/or certifying one’s own reputation through audits, etc. As the Net Economy MBA starts without a strong reputation of its own or recognizable brand, it uses the ‘‘Free University of Berlin’’ as an umbrella brand to position the offer while using ‘‘branded lecturers’’ to offer particular courses. These professors are marketed as acknowledged experts in their respective fields.  Content/curriculum. The composition of an e-learning-supported MBA program demands professionally developed high-quality content that is up-to-date and practical. Net Economy MBA accomplishes this task by placing the responsibility for content development with the participating professors as acknowledged experts. This locally arranged content development strategy emphasizes the importance of a consistent curriculum design and the provision of e-learning production tools.

Alliances as a Strategy in Volatile Environments

55

In addition, a convincing solution has to be found for the necessity of certification. In the case of Net Economy MBA, the Free Universita¨t Berlin is the official responsible body for the study course and therefore in charge of granting the degree.  Didactics. The various components of the offer need to be produced, combined, and arranged in a didactically adequate way. The distance learning phases require profound didactical knowledge in order to keep the participating students motivated and active despite their occupational activities. In this matter, MBA Net Economy for example introduces multimedia case studies with problem-based and practical learning scenarios to the students. The case studies help to combine online (distance learning) and on-site learning with different learning elements like web-based training, literature, and lectures. As a framework they also provide ongoing contexts for learning so that clear and motivating scenarios can be provided to students.  Commercialization. Since Net Economy MBA is designed as a commercial education offer, it requires sustainable solutions for all subsections of the underlying business system. After the design of an accepted and sustainable revenue model, the marketing activities are of particular importance because of the heavy international competition in this field. Special challenges arise from the novelty of the service offer and in particular from its partial intangibility and degree of customer integration (for details in this context cf. Gabriel et al., 2006; Reckenfelderba¨umer & Kim, 2004).  Information technology. A technical learning infrastructure needs to be developed in support of the didactical and commercial aspects. E-learning-based distance learning in particular requires adequate equipment on both the learners’ and the suppliers’ side. In the case of Net Economy MBA, special attention was given to the development of a web-based training and a case study tool that is compatible with the didactical intentions and allows the creation of technically applicable learning objects as well. Given the interdisciplinary challenges that arise when developing the essential clusters of resources and competence, a cooperative implementation of a blended learning-based MBA business model suggests itself, even in a static snapshot analysis. However, the authors argue that the aforementioned evolutionary perspective on alliances can reveal further useful implications for the analysis and management of the Executive MBA Net Economy and education services in general.

56

JO¨RG FREILING ET AL.

‘‘Net-Economy’’ from an Evolutionary Angle: Why do they Cooperate? While the general (static) relevance of alliances for e-learning suppliers has already been emphasized in scientific contributions (Picot & Jaros-Sturhahn, 2001; Hagenhoff, 2002), cooperative activities in the outlined manner also hold true for the evolutionary point of view on cooperation as outlined in the preceding section, emphasizing environmental dynamics and uncertainty. The Perspective of Gap-Closing Alliances It is clear that the interdisciplinary challenges are shared by the participating partners. Besides joining numerous fields of content together, the cooperation is also intended to lower the partners’ individual risk and to provide benefits from the expertise of others. Another motivation for cooperation is the short timeframe associated with developing e-learning based education offers. The underlying multimedia content is characterized by a short half-life and needs to be updated regularly. In addition, the positioning of Net Economy MBA as an innovative product is possible only as long as it fits the technical and social state-of-the-art requirements. Adequate revenues need to be generated in order to assure the necessary adjustments and further development of the program. The development of all necessary competences and resources by one organization appears highly unlikely, especially considering the multidisciplinary nature of the requirements. Against this background the cooperation behind Net Economy MBA allows the partners to take advantage of the short window of opportunity to be a first mover in implementing an e-learning/blended learning based MBA program in Germany. The Perspective of Option Networks In addition to the active cooperative activities described above, selected members of the Net Economy consortium also set up an international learning network of faculties interested in e-learning. As a result of these dyadic relations, single e-learning courses have been embedded into the traditional university curriculum. Current international partners include Tongji University (Shanghai), University of New South Wales (Sydney), and Marmara University (Istanbul). These activities have the character of option networks in at least two ways.

Alliances as a Strategy in Volatile Environments

57

First, in the case of a successful launch of the Net Economy MBA program (the first term in Germany is scheduled for spring 2007), the existing contacts facilitate the export of the program’s main elements (e.g. didactical design, learning management system, entire courses, or case studies), for example in the form of franchising (internationalization option). Second, while the Net Economy MBA is currently designed for the German market, the existence of international partners can enable an internationalization of the whole program, as the existing partners are already familiar with the main processes and content. The Perspective of Steering Alliances As already mentioned above, the currently existing standards as to auditing and certifying MBA programs are almost exclusively focused on traditional learning scenarios. Numerous aspects of e-learning and blended learning elements are so new and innovative that auditors are not familiar with them. Every member of the Net Economy consortium is keenly interested in the Net Economy program meeting future certifiers’ requirements and (e-learning) standards, as the consortium members have already developed a high specificity of resources and competences. As a result, many consortium members are active in influencing the development of standards and requirements which can be fulfilled by the Net Economy MBA (and better than by conceivable competing programs). This activity is measurable by the presence of consortium partners on many relevant conferences, expert discussions, and journal articles on this topic. The international learning network described above can also have the character of a steering alliance, as the cooperation influences the ‘‘e-learning development path’’ of the international partners. By making them familiar with the Net Economy concept, the probability of attracting them as potential franchise partners is enhanced.

SUMMARY AND IMPLICATIONS FOR EDUCATION SERVICE PROVIDERS This paper is intended to contribute to an understanding of organization/ environment co-evolution by addressing the research question of why organizations cooperate in volatile environments and by applying the Austrian School to analyze market and industry levels in combination with the competence-based theory of the firm to analyze the firm level. Starting

JO¨RG FREILING ET AL.

58

with a summary of a comprehensive study of the German healthcare sector, we described three – not necessarily mutually exclusive – forms of cooperation that contribute to an enhanced flexibility of organizations: gap-closing alliances, option networks, and steering alliances. However, reflecting on the findings from a broader perspective, a twofold role of collaborative arrangements in co-evolutionary developments is revealed: on the one hand, players are often pushed into cooperation due to environmental dynamics – but on the other hand, joining forces in cooperation increases the likelihood of advantageous developments from the associated network effects. An exploratory case study on the ‘‘Executive MBA Net Economy’’ was then presented to demonstrate the applicability of competence-based strategic management concepts to the education sector when understanding education services as business systems. Characteristics of all three alliances types were observed as strategies to master volatile environments by the Net Economy consortium in the case study. Cooperation helps consortium members to pro-actively develop and participate in new education service offerings while not becoming completely dependent on that particular path. Generally, a primary challenge for universities as business system operators is the enormous investment required when preparing entirely new curricula, infrastructures, and reputations. Especially in the case of a competitive commercial education sector, there is significant uncertainty connected to these investments. Ideally embedded into a flexibility strategy, such investments in a strategic architecture must be distinguished from competitors in a new segment while not being too specific in order to avoid falling into a flexibility trap (Gersch, 2006). The three forms of cooperation discussed in this paper seem to be recommendable strategies to meet both requirements. Furthermore, a ‘‘modularization’’ of education services (Sanchez & Mahoney, 1996) could also accomplish these goals. As no education provider can make certain predictions as to when and in what manner future (national and international) markets will evolve, universities also need entrepreneurial visions, flexibility, and patience.

REFERENCES Alchian, A. A. (1953). Biological analogies in the theory of the firm: Comment. American Economic Review, 43, 600–603.

Alliances as a Strategy in Volatile Environments

59

Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120. Becker, M. C. (2004). Organizational routines: A review of the literature. Industrial and Corporate Change, 13, 643–677. Bok, D. (2005). Universities in the marketplace: The commercialization of higher education. Princeton: University Press. Bresser, R. K. F., Heuskel, D., & Nixon, R. D. (2000). The deconstruction of integrated value chains. In: R. K. F. Bresser, M. A. Hitt & R. D. Nixon (Eds), Winning strategies in a deconstructing world (pp. 1–21). Chichester: Wiley. Charmaz, C. (2006). Grounded theory. A practical guide through qualitative analysis. Thousand Oaks, CA: Sage. CHE. (2006). Center for Higher Education Development (CHE): Reformradar, download from http://www.che.de/cms/?getObject=288&getName=ReformRadar on September 20, 2006. Christensen, C. M., Sua´rez, F. F., & Utterback, J. M. (1998). Strategies for survival in fastchanging industries. Management Science, 44, 207–220. Cohen, W., & Levinthal, D. A. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35, 128–152. Dalkey, N. C. (1969). The delphi study of group opinions. Rand Corp., RM 5888 PR. D’Aveni, R. A. (1994). Hypercompetition: Managing the dynamics of strategic maneuvering. New York: Free Press. Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage. Management Science, 35, 1504–1511. Dyer, J. H., & Singh, H. (1998). The relational view: Cooperative strategy and sources of interorganizational competitive advantage. Academy of Management Review, 23, 660–679. Eisenhardt, K. M. (1989). Building theories from case study research. Academy of Management Review, 14, 532–550. Engelhardt, W. H., Kleinaltenkamp, M., & Reckenfelderba¨umer, M. (1993). Leistungsbu¨ndel als Absatzobjekte. Zeitschrift fu¨r betriebswirtschaftliche Forschung, 45, 395–426. European Commission. (2006). The Bologna Process – Next Stop Bergen 2005, download from http://ec.europa.eu/education/policies/educ/bologna/bologna_en.html on September 20, 2006. Fagerberg, J. (2003). Schumpeter and the revival of evolutionary economics. Journal of Evolutionary Economics, 13, 125–159. Fiedler, M., Welpe, I., & Picot, A. (2006). Radical change in higher education. The case of the educational systems in German speaking Europe. FSAM World Congress. Berlin. Freiling, J. (2004). A competence-based theory of the firm. Management Revue, 15, 27–52. Freiling, J., Gersch, M., & Goeke, C. (2005). Let’s tackle some fundamental issues: Setting up a consistent competence-based theory of the firm. 7th international conference on competence-based management, June 2–4, Antwerp, Belgium. Freiling, J., Gersch, M., & Goeke, C. (2006). Eine ‘‘Competence-based Theory of the Firm’’ als marktprozesstheoretischer Ansatz-Erste disziplina¨re Basisentscheidungen eines evolutorischen Forschungsprogramms. In: G. Schreyo¨gg & P. Conrad (Eds), Managementforschung Band 16: Management von Kompetenz (pp. 37–82). Wiesbaden: Gabler. Gabriel, R., Gersch, M., & Weber, P. (2006). Education-service engineering: A first milestone on the way to a sustainable international learning network. In: Proceedings of the VIIIth

60

JO¨RG FREILING ET AL.

IFSAM World Congress, Berlin, Download from http://www.ctw-congress.de/ifsam/ download/track_17/pap00648.pdf on 5 October 2007. Garud, R., & Karnøe, P. (2001). Path creation as a process of mindful deviation. In: R. Garud & P. Karnøe (Eds), Path creation as a process of mindful deviation (pp. 1–38). London: Laurence Erlbaum Associates. Gersch, M. (2004). Business evolution or revolution? International Journal of Electronic Healthcare, 1, 17–32. Gersch, M. (2006). Unternehmerisches Handeln – das Beispiel flexibilita¨tsbedingter Unternehmungskrisen in fru¨hen Marktphasen. Bochum. Gersch, M., & Goeke, C. (2006). Industry transformation. Business-to-business markets in transition. Theory-based conceptualization from an evolutionary perspective and first empirical findings. In: K. Backhaus, M. Kleinaltenkamp & W. Plinke (Eds), 1st international conference on business market management, Berlin. Gersch, M, Goeke, C., & Freiling, J. (2007). Why do firms ally in dynamic environments? Empirical findings from a co-evolutionary perspective. European Academy of Management (EURAM) 2007 annual conference, Paris (France), May 16–19. Ghemawat, P. (1991). Commitment: The dynamic of strategy. New York: Free Press. Glaser, B. G., & Strauss, A. L. (1967). The discovery of grounded theory: Strategies for qualitative research. New York: Aldine de Gruyter. Gloria-Palermo, S. (1999). The evolution of Austrian economics. From Menger to Lachmann. London : Routledge. Gomes-Casseres, B. (1994). Group versus group: How alliance networks compete. Harvard Business Review, 72, 62–74. Gomes-Casseres, B. (2006). How alliances reshape competition. In: O. Shenkar & J. J. Reuer (Eds), Handbook of strategic alliances (pp. 39–53). Thousand Oaks, CA: Sage. Gulati, R., Nohria, N., & Zaheer, A. (Eds). (2000). Guest editors’ introduction to the special issue: Strategic networks. Strategic Management Journal, 21, 199–201. Hagenhoff, S. (2002). Universita¨re Bildungskooperationen: Gestaltungsvarianten fu¨r Gescha¨ftsmodelle. Wiesbaden. Hamel, G. (1991). Competition for competence and inter-partner learning within international strategic alliances. Strategic Management Journal, 12, 83–103. Hamel, G., & Doz, Y. L. (1999). Alliance advantage. Boston, MA: Harvard Business School Press. Hamel, G., & Prahalad, C. K. (1994). Competing for the future. Boston, MA: Harvard Business School Press. Harper, D. A. (1995). Entrepreneurship and the market process. London: Routledge. Hayek, F. A. V. (1978). Competition as a discovery problem. In: New studies in philosophy, politics, economics, and the history of ideas. London: Routledge. Jacobson, R. (1992). The ‘‘Austrian’’ school of strategy. Academy of Management Review, 17, 782–807. Kirzner, I. M. (1973). Competition and entrepreneurship. Chicago: University Press. Klein, J. A., & Hiscocks, P. G. (1994). Competence-based competition: A practical toolkit. In: G. Hamel & A. Heene (Eds), Competence-based competition (pp. 183–212). Chichester: Wiley. Koza, M. P., & Lewin, A. Y. (1998). The co-evolution of strategic alliances. Organization Science, 9, 255–264. Lachmann, L. M. (1986). The market as an economic process. London: Blackwell.

Alliances as a Strategy in Volatile Environments

61

Leonard-Barton, D. (1990). A dual methodology for case studies: Synergistic use of a longitudinal single site with replicated multiple sites. Organization Science: A Journal of the Institute of Management Sciences, 1, 248–266. Leonard-Barton, D. (1992). Core-capabilities and core-rigidities: A paradox in managing new product development. Strategic Management Journal, 13(Summer), 111–126. Lieberman, M. B., & Montgomery, D. B. (1988). First-mover advantage. Strategic Management Journal, 9, 41–48. Linstone, H. A., & Turoff, M. (1975). Introduction. In: H. A. Linstone & M. Turoff (Eds), The Delphi method. Techniques and applications (pp. 3–12). London: AddisonWesley. Lockett, A., & Thompson, S. (2001). The resource-based view and economics. Journal of Management, 27, 723–754. Maxwell, J. A. (2005). Qualitative research design: An interactive approach. Thousand Oaks, CA: Sage. Merton, R. K. (1948). The self-fulfilling prophecy. Antioch Review, 8, 193–210. Meyer, A. D. (1982). Adapting to environmental jolts. Administrative Science Quarterly, 27, 515–537. Mises, L. V. (1949). Human action: A treatise on economics. Irvington-on-Hudson, NY: The Foundation for Economic Education. Morgan, D. L. (1997). Focus groups as qualitative research. Thousand Oaks, CA: Sage. Mu¨ller-Bo¨ling, D. (2000). Die entfesselte Hochschule. Gu¨tersloh: Verlag Bertelsmann Stiftung. Nelson, R. R., & Winter, S. G. (1982). An evolutionary theory of economic change. Cambridge, MA: Belknap. Nielsen, P. B., & Rikama, S. (2004). Inter-enterprise relations: First results from the EUROSTAT ad hoc survey. OECD workshop on services. November 15–16, Paris. Park, N. K., & Mezias, J. M. (2005). Before and after the technology sector crash: The effect of environmental munificence on stock market response to alliances of e-commerce firms. Strategic Management Journal, 26, 987–1007. Penrose, E. T. (1952). Biological analogies in the theory of the firm. American Economic Review, 42, 804–819. Penrose, E. T. (1959). The theory of the growth of the firm. Oxford: Basil Blackwell. Peteraf, M. A. (1993). The cornerstones of competitive advantage: A resource-based view. Strategic Management Journal, 14, 179–191. Picot, A., & Jaros-Sturhahn, A. (2001). Kooperationen beim E-Learning aufbauen. In: A. Hohenstein & K. Wilbers (Eds), E-Learning: Expertenwissen aus Wissenschaft und Praxis. Ko¨ln: Dt. Wirtschaftsdienst. Porter, M. E., & Rivkin, J. W. (2000). Industry transformation, Note 9-701-008, Harvard Business School. Prahalad, C. K. (1995). Weak signals versus strong paradigms. Journal of Marketing Research, 32, iii–viii. Prahalad, C. K., & Hamel, G. (1990). The core competence of the corporation. Harvard Business Review, 69(May/June), 79–91. Reckenfelderba¨umer, M., & Kim, S. (2004). Markenfu¨hrung im WeiterbildungsbereichU¨berlegungen auf der Basis eines integrierten Image- und Identifikationsorientierten Ansatzes. In: A. Meyer (Ed.), Dienstleistungsmarketing-Impulse fu¨r Forschung und Management (pp. 53–82). Wiesbaden: Deutscher Universita¨tsverlag. Richardson, G. B. (1972). The organisation of industry. Economic Journal, 82, 883–896.

62

JO¨RG FREILING ET AL.

Rothaermel, F. T., & Hill, C. W. L. (2005). Technological discontinuities and complementary assets: A longitudinal study of industry and firm performance. Organization Science, 16, 52–70. Sanchez, R., & Heene, A. (2004). The new strategic management. New York: Wiley. Sanchez, R., Heene, A., & Thomas, H. (1996). Introduction: Towards the theory and practice of competence based competition. In: R. Sanchez, A. Heene & H. Thomas (Eds), Dynamics of competence-based competition: Theory and practice in the new strategic management (pp. 1–35). Oxford: Pergamon. Sanchez, R., & Mahoney, J. T. (1996). Modularity, flexibility, and knowledge management in product and organization design. Strategic Management Journal, 17(Winter special issue), 63–76. Schumpeter, J. A. (1934). The theory of economic development. Cambridge, MA: Harvard University Press. Silverman, B. S., & Baum, J. A. C. (2002). Alliance-based competitive dynamics. Academy of Management Journal, 45, 791–806. Smith, C. T. (2000). What health care can learn from banking. Health Forum Journal, 43, 46–49. Sursock, A. (2004). Hochschulbildung, Globalisierung und GATS. Aus Politik und Zeitgeschichte, Supplement to Das Parlament, B25, 41–46. Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18, 509–533. Tyre, M. J., & Orlikowski, W. J. (1994). Windows of opportunity: Temporal patterns of technological adaptation in organizations. Organization Science, 5, 98–108. UNESCO. (2006). GATS and Education, download form http://portal.unesco.org/education/ en/ev.php-URL_ID=21854&URL_DO=DO_TOPIC&URL_SECTION=201.html on September 20, 2006. Vaughn, K. I. (1994). Austrian economics in America. The migration of a tradition. Cambridge: University Press. Wiggins, R. R., & Ruefli, T. W. (2005). Schumpeter’s ghost: Is hypercompetition making the best of times shorter? Strategic Management Journal, 26, 887–911. Wirtz, B. W. (2001). Electronic business. Wiesbaden: Gabler. Witt, U. (1992). Turning Austrian economics into an evolutionary theory. In: B. Caldwell & S. Boehm (Eds), Austrian economics: Tensions and new directions (pp. 215–236). Boston: Kluwer. Witt, U. (1999). Do entrepreneurs need firms? A contribution to a missing chapter in Austrian economics. Review of Austrian Economics, 11, 99–110. Yin, R. K. (2003). Case study research: Design and methods. Thousand Oaks, CA: Sage. Zentel, P., Bett, K., Meister, D. M., Rinn, U., & Wedekind, J. (2004). A change process at German universities: Innovation through information and communication technologies? Electronic Journal of eLearning, 2(1), http://www.ejel.org

COMPETENCE-BUILDING THROUGH ORGANIZATIONAL RECOGNITION OR FREQUENCY OF USE: CASE STUDY OF THE LAFARGE GROUP’S DEVELOPMENT OF COMPETENCE IN MANAGING POST-MERGER CULTURAL INTEGRATION Gabriel Guallino and Fre´de´ric Prevot ABSTRACT Mergers have increased at a fast rate in the last 10 years. Nevertheless, practitioners and consultants point out the low rate of success for mergers. Considering this paradoxical situation, it would appear opportune to question the possibility of developing a specific competence within an organization for carrying out mergers and acquisitions. This research aims to propose a model for analyzing the development of such a competence. This paper presents a study of competence-building according to two

Competence Building and Leveraging in Interorganizational Relations Advances in Applied Business Strategy, Volume 11, 63–92 Copyright r 2008 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1016/S0749-6826(07)11003-9

63

64

GABRIEL GUALLINO AND FRE´DE´RIC PREVOT

aspects: level of recognition by the organization and level of use. The study model defines four forms that competence may take: ad hoc responses, capitalization, institutionalization, and dynamic competence. This model is used for the study of the development by the Lafarge Group of a competence in managing cultural integration after international mergers and acquisitions.

INTRODUCTION Knowledge and competence are at the heart of strategic management issues. In consequence, a competence-based school of research has developed since the mid-1980s and has now reached a formidable stage of development (Sanchez, Heene, & Thomas, 1996). It is applied in research on internal processes management (Sanchez & Heene, 2005a), as well as in research on inter-firm relationship management (Sanchez & Heene, 2005b). According to the researchers in this field, whether they follow a resource-based view (Wernerfelt, 1984), a knowledge-based view (Kogut & Zander, 1992), the concept of dynamic capabilities (Teece, Pisano, & Shuen, 1997) or a competence-based view (Sanchez et al., 1996), the central problem is still understanding how knowledge and competence are acquired or created within a firm, and how they lead to competitive advantage. Another recent development in international management concerns mergers and acquisitions, which have certainly existed for a long time. Capron (1995) dates the occurrence of the first mergers to the late 19th century, but in the last ten years they have increased at a considerably faster rate (their number increased by 461% between 1990 and 2000). In addition, practitioners and consultants point out the low rate of success of mergers (Kearney, 1999). Considering this paradoxical situation while considering also the importance of the competence concept, it would appear opportune to question the possibility of developing a specific competence within an organization for successfully managing mergers and acquisitions. This article aims to propose a model for analyzing the development of such a competence. The study herein investigates the development of competence in the management of a post-merger integration process. Many studies have shown the importance of this aspect in mergers (Buono & Bowditch, 1989; Schweiger & Walsh, 1990; Haspeslagh & Jeminson, 1991). The model developed is used in a case study of the Lafarge Group, the world leader in the cement industry, which has carried out many mergers and acquisitions in recent years for the purposes of

Competence-Building through Organizational Recognition

65

external growth. Through these mergers and acquisitions, the Lafarge Group aimed at doubling its size within ten years in a market that was originally very fragmented. In the first part of this paper, we define elements to structure the study, first of the competence concept, referring to research studies related to resource-based theory, and second of the characteristics related to the development of a competence, basing a literature review on the main contributions of research into organizational learning. The second part presents a model structured according to two aspects:  level of recognition of the competence by an organization;  level of use of the competence by an organization. This model proposes the study of four forms of competence: (1) Newly emerging competence in the form of ad hoc responses to demand by the environment; (2) Capitalization of a series of experiences and constitution of a competence that can be used in various situations; (3) Organizational recognition (function or project); (4) Dynamic competence recognized in an organization. Next, we show the advantage of creating a competence in post-merger integration management using the model for the Lafarge Group case study. Then finally, we discuss the results and implications of this research.

THEORETICAL FOUNDATIONS Defining Competence to Study its Development Sanchez et al. (1996) put forward a series of definitions that were used to structure the ‘‘competence-based’’ school of research. Competence is defined as the ‘‘ability to sustain the coordinated deployment of assets in a way that helps a firm to achieve its goals’’ (p. 8). There are two types of assets: tangible and intangible. Intangible assets may include a special category – capabilities – which are ‘‘repeatable patterns of action in the use of assets to create, produce, and/or offer a product to a market’’ (p. 7). Skills are specific abilities that are useful in a specialized situation or for using specialized assets. Therefore competence is much more than the simple use of assets. It is based on three conditions: ‘‘organization’’ (deployment of assets), ‘‘intention’’

GABRIEL GUALLINO AND FRE´DE´RIC PREVOT

66

Intrinsinc level • Combination of ressources • Related to an activity

Organizational level

Dynamic level

• Tends towards a goal • Stored in the organization

Dynamic Capability

COMPETENCE

Fig. 1.

Levels of Definition of Competence.

(the achievement of objectives must be based on a deliberate will that guides the use of assets), and ‘‘goal attainment.’’ On the basis of this definition, and using contributions from other authors, we propose six characteristics for structuring the definitions of competence (see Fig. 1). These characteristics are organized in three levels of definition: the intrinsic level (the competence is a combination of resources; it is related to an activity or a set of activities that it is used for performing); the organizational level (the competence tends towards a goal; it exists in the organization in the form of routines; it must be identified and recognized by the organization); and the dynamic level (in the advanced phases of its development, the competence may become a ‘‘dynamic capability’’). Intrinsic Level Here, the competence is defined at its basic level, at its creation or in its essence. (a) Competence is a combination of resources Most authors agree that competence is superior to resources (Nanda, 1996). The term competence is used to refer to a combination of different resources. In particular, we shall use Black and Boal’s (1994, p. 136) definition, which distinguishes contained resources (a simple network of factors) and system resources (a complex network of factors). Competence is defined as being composed of system resources, which are its factors (‘‘competence includes system resources as factors; competence’s local network will include all its component resources’ local networks, since a resource is defined in terms of its local network’’).

Competence-Building through Organizational Recognition

67

(b) Competence is related to an activity As shown by Collis and Montgomery (1995), competence cannot be identified in a compartmentalized field of a company and competence cannot be evaluated solely in relation to itself. It must be useful, it must play a role in the value creation process (Prahalad & Hamel, 1990), and it must provide an advantage on the market in relation to competitors (Barney, 1986). Competence is evaluated according to what it enables the company to do better than its competitors (Grant, 1991) to provide superior functionalities for customers (Prahalad & Hamel, 1990). Therefore competence only exists in the performance of an activity. Competence declines if it is not used. Competence is developed when it is applied and shared (Prahalad & Hamel, 1990; Rumelt, 1994). Organizational Level In this context, competence is defined in relation to what it provides for the organization and in relation to the level of recognition that this organization gives it. (a) Competence tends towards a goal Competence is developed by the organization in order to achieve a competitive advantage. All authors agree on this point (see particularly: Dierickx & Cool, 1989; Reed & De Filippi, 1990; Prahalad & Hamel, 1990; Grant, 1991; Amit & Schoemaker, 1993; Collis & Montgomery, 1995). This underlines the idea that competence is developed for the precise purpose of achieving a specific advantage. The previous discussion showed that a competence makes it possible to carry out given activities; here, we specify the fact that competence aims at achieving specific organizational goals. (b) Competence is stored in the organization in the form of routines The term routine is the basis of the definition of competence by many authors (Collis, 1991; Doz, 1994; Nanda, 1996). One speaks of organizational competence when it goes beyond the individual level (Doz, 1994). Competence is the result of an accumulated series of investments and functions on the basis of a stock/flow rationale (Dierickx & Cool, 1989). Therefore, it is more effective when it is used and when an organization constantly invests in it (Prahalad & Hamel, 1990; Doz, 1994), but it must also be renewed (Doz, 1994). (c) Competence must be recognized in an organization This point is less often raised in research literature due to two aspects, which are more generally studied by various authors. First, an organization must be capable of identifying its competence (Prahalad & Hamel, 1990).

GABRIEL GUALLINO AND FRE´DE´RIC PREVOT

68

Identification of the competence ORGANIZATIONAL RECOGNITION

Appreciation of the people who contribute to this competence Investments in development of the competence

Fig. 2.

The Importance of Organizational Recognition.

In this respect, McGrath, McMillan, and Venkataraman (1995) develop the concept of ‘‘comprehension,’’ referring to the ability to identify competences of value in an organization. However, it is not easy to identify competence, because competence is often tacit, or because it is something that is taken for granted, or even because an organization’s members may feel threatened by the highlighting of certain competences to the detriment of other competences (Tampoe, 1994). Second, if competence is the result of cumulative investments (Dierickx & Cool, 1989), then, since a company’s financial resources are limited, choices must be made regarding investments in different competences. Certain competences may be favored to the detriment of others, according to how they are seen by an organization. Therefore, we consider this recognition characteristic an essential element of the organizational aspect of a competence’s development (see Fig. 2), since it determines not only its revelation (identification), but also its future development (choice of investment). Dynamic Level This level refers to the aspects of a competence’s development. Teece et al. (1997, p. 516) define ‘‘dynamic capabilities’’ as ‘‘the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments.’’ Amit and Schoemaker (1993) and Grant (1991) use the term capability to define a complex aggregate and a mode of coordination of resources. This associates them with the term competence such as we have chosen to define it. On the other hand, Stalk, Evans, and Shulman (1992) define capabilities as cross-functional processes that determine the application and implementation of competence. Their definition places capabilities at a higher level in relation to competence. Collis (1991) defines capabilities as managerial modes that improve a company’s efficiency and adapt it to changes in its environment. This is close to the idea of ‘‘dynamic capability.’’ Thus, we can define a higher stage in the development of competence, when it reaches a level where it may be considered as a set of competences and where it contains its own means for structuring its development. At this level, competence

Competence-Building through Organizational Recognition

69

develops through its own actions on itself, and helps to create or develop a set of other competences; it is then similar to a ‘‘dynamic capability.’’ Acquisition and Development of Competence Research into organizational learning defines a series of elements for developing a model for studying competence development. Organizational learning is characterized by a change in a company’s behavior: ‘‘an entity learns if, through its processing of information, the range of its potential behavior is changed’’ (Huber, 1991, p. 89). This change may lead to a company to improve its actions: ‘‘organizational learning means the process of improving actions through better knowledge and understanding’’ (Fiol & Lyles, 1985, p. 803). Organizational learning is based on the acquisition of information or knowledge by an organization. This information or knowledge must be assimilated, then interpreted and transformed in order to then be used (Huber, 1991; Zahra & George, 2002). On the basis of a series of definitions, we may identify four characteristics of organizational learning in relation to our subject of study. Organizational Learning Involves Interaction with the Environment Fiol and Lyles (1985) make this characteristic the first point of consensus identified in the definitions. They name this aspect ‘‘environmental alignment.’’ Organizations must adapt to their environment in order to remain competitive and innovative. March and Simon (1993) show that exposing the firm to knowledge in its environment influences its decision-making. Taking this idea further, Van Wijk, Van Den Bosch, and Volberda (2001) explain that the quantity and depth of exposure to external knowledge influence an organization’s ability to use new or related knowledge. In their interactions with their environment, organizations select those things that are useful and are found to be effective (Huber, 1991; Levitt & March, 1988). However, simple exposure to information or knowledge does not imply internal development of new knowledge (Weick, 1991). The information or knowledge must be memorized and transformed by an organization. Therefore a low level of learning, consisting of reactions to external stimuli, does not involve the development of a competence by an organization, but simply involves adaptations that may be defined by the expression ‘‘ad hoc responses.’’ Organizational Learning Involves Capitalization To start to develop competence, organizations must not simply react to their environment. They must also be capable of capitalizing on their experience.

70

GABRIEL GUALLINO AND FRE´DE´RIC PREVOT

Fiol and Lyles (1985) show that organizational learning requires a potential for learning, unlearning, and relearning, based on an organization’s past behavior. Thus, an organization develops learning that not only influences its current members but can also be transferred to future members through the corporate legacy or through norms (Fiol & Lyles, 1985; Levitt & March, 1988). The knowledge acquired must be assimilated through routines and processes that are used for analyzing, processing, and interpreting it. It must then be transformed through routines facilitating the combination of existing knowledge and new knowledge, so that it can be put to use (Zahra & George, 2002). Therefore the organization must have an organizational memory, defined by Walsh and Ungson (1991, p. 61) as follows: ‘‘In its most basic sense, organizational memory refers to stored information from an organization’s history that can be brought to bear on present decisions. This information is stored as a consequence of implementing decisions to which they refer, by individual recollections, and through shared interpretations.’’ Spender (1996) shows that one may identify this memory in the form of standard procedures, routines, organizational culture, physical structure, informal structure, corporate legacy, or history. In developing competence, an organization must have stored a set of knowledge or information, either directly through its interaction with its environment (decision stimulus) or through organizational responses that have been given (Walsh & Ungson, 1991). Considering that the organization selects the information and knowledge that it finds useful (Levitt & March, 1988; Huber, 1991), the frequency of repetition of a situation or situations requiring similar responses will lead to the selection of associated knowledge and information that will then be stored in organizational memory. In order to lead to the development of a competence, the quantity of this stock must then be nurtured by an input of investments specifically for developing the competence (Dierickx & Cool, 1989). The competence may also be strengthened by repeated use (Levitt & March, 1988; Prahalad & Hamel, 1990). Organizational Learning may be Oriented by an Organization Fiol and Lyles (1985) postulate that in order to be able to identify organizational learning, there must be an improvement in organizational performance. Levitt and March (1988) define organizational learning as being oriented towards a goal. Huber (1991) opposes this idea, saying that learning may be unintentional and that one may learn in an incorrect manner. Whatever the authors’ positions regarding the goal of organizational learning and the achievement of better organizational performance,

Competence-Building through Organizational Recognition

71

they accept that the basis of organizational learning is the acquisition of information or knowledge considered useful for an organization (see in particular Huber, 1991). Therefore, learning is oriented by an organization. It is not always effective, but it is always oriented. Thus, Fiol and Lyles (1985) show that four main contextual factors, including three linked directly to an organization, affect organizational learning: culture, strategy, structure, and environment. Levitt and March (1988) show that routines founding organizational behavior are dependent on corporate legacy: They are based on an interpretation of the past; they grasp the lessons of history and are passed on through socialization, education, and imitation. On the basis of the collective memory in which routines are recorded, an organization develops collective frameworks for interpreting its experiences. Therefore, on the level of organizational learning, we find that recognition by an organization is an important factor. According to its own specific interpretative frameworks, an organization may decide to build up certain learning at the expense of others. This is distinct from capitalization. In this case, learning is oriented by an organization’s deliberate choices, rather than guided by repetition of a situation linked to an organization’s environment. Therefore, we may make a distinction between (a) a mode of competence development through an organization’s choice, which we shall call ‘‘institutionalization of competence’’ and (b) a mode of development due to the repetition of similar situations, which we described in the previous section and which we shall call ‘‘capitalization.’’ Organizational Learning Depends on a Balance between Improving Existing Competence and Developing New Competence March (1991) shows that an organization must find a balance between using existing competence and developing new competence. Competence-building is therefore a complex activity. Sanchez et al. (1996, p. 8) define competencebuilding as ‘‘any process by which a firm qualitatively changes its existing stock of assets and capabilities or creates new abilities to coordinate and deploy new or existing assets and capabilities in ways that help the firm achieve its goals.’’ These authors point out the risk related to inertia. A company needs to develop continuous in-house entrepreneurship that becomes the dominant rationale in an environment of competence-based competition. Therefore the competence-building process functions in a selfnurturing repetitive manner. It is activated by inputs received in the form of current and future strategic goals defined by an organization, and it also produces future strategic goals (Cremer & Meschi, 1997). To lead to competitive advantage, competence must be continually developed in advance

72

GABRIEL GUALLINO AND FRE´DE´RIC PREVOT

of competitors (Helleloid & Simonin, 1994; Eisenhardt & Martin, 2000). The problem lies in the paradoxical facts that (a) excessive variety in the search for new knowledge concerning competence development blocks circulation of this knowledge within an organization and prevents the development of efficient routines, but (b) too much uniformity and concentration on present know-how impedes learning and leads to organizational inertia. Therefore, it is necessary to simultaneously develop competences and fight against the inertia that they engender (Doz, 1994; Baden-Fuller & Volderba, 1997). Therefore there is a higher stage in the process of creation and competence development, at which competence is mastered by the organization that knows how to use it, and has a potential for developing and applying new opportunities. It is a higher level at which competence becomes fundamental for an organization and reaches the level of ‘‘dynamic capability.’’

MODEL FOR THE STUDY OF COMPETENCE-BUILDING From the definitions of competence and organizational learning, we can retain two fundamental dimensions to the study of the competence development process. First, the repeated use of a competence facilitates capitalization and strengthens the competence – this is the level of application. The level of application is evaluated in relation to the frequency of repetition of situations in which a competence is used. Second, the interest shown in a competence by an organization and the organizational recognition of this competence facilitate its development by showing appreciation for an organization’s members linked to this competence and increasing the level of investment given to development of this competence – this is the level of recognition. Recognition does not necessarily imply that the competence developed is useful and effective. The level of recognition is evaluated in relation to the internal perception of the advantage of a competence, either according to the financial weight of situations associated with it or according to power games between an organization’s members. In relation to these two aspects, we may distinguish four levels of competence development:  Ad hoc response (low level of use, low level of recognition): the competence does not really exist; it is nascent, in a latent, potential state. The organization is content to react to situations without investing in capitalization of experience.

Competence-Building through Organizational Recognition

73

 Capitalization (high level of use without particular recognition in the organization): the organization invests in development of a competence due to the repetition of situations associated with the competence, but there is no particular recognition in terms of its status or of the means made available.  Institutionalization (the competence is recognized in an organization, but is not necessarily used very frequently): a project team may be created, or specific functions may be assigned to individuals or groups of individuals in an organization, implying a recognized status and a specific level of investment, even if the competence does not necessarily refer to situations that occur frequently.  Dynamic competence (recognized and used frequently): an organization offers the individuals related to the competence a structure and stable recognition as well as a guaranteed level of investment. This competence is associated with situations that occur frequently, and it has all the conditions for developing according to situations within a defined organizational area. The individuals related to this competence must then find the management balance between exploitation and development of new applications (Doz, 1994). The model thus proposed (see Fig. 3) does not mean that competence goes successively through each of the stages of development. In fact, it proposes an interpretation of the form of development of a competence at a given instant ‘‘t.’’ This is because an organization may choose to invest a priori in developing a competence in the form of a project even if the situation for application of a competence has not presented itself (direct ‘‘institutionalization’’). The project may turn out to be a failure and the investment may be

Level of recognition

+ Institutionalization

Dynamic competence

ad hoc response

Capitalization

− −

Fig. 3.

Level of use

Recognition and Use of Competence.

+

74

GABRIEL GUALLINO AND FRE´DE´RIC PREVOT

abandoned (with no progress to a ‘‘dynamic competence’’). Competence may be the result of capitalization without ever being really recognized on an institutional level (it remains at the ‘‘capitalization’’ stage). Or again, the organization may choose or undergo permanent re-creation of competence without ever capitalizing upon it (it remains at the ‘‘ad hoc response’’ stage). Therefore the model does not present a competence development cycle by postulating the necessary sequence of different stages. Its goal is to define competence according to two indicators that influence the form of its development: the level of use and the level of recognition by an organization. This model is used to structure the analysis of the following case study. Its theoretical and managerial implications are then discussed. In particular we attempt to develop the definitions of the different concepts used to build the model by linking these concepts to past research.

CASE STUDY: POST-MERGER INTEGRATION – THE CASE OF THE LAFARGE GROUP The Concept of Competence in Post-Merger Integration The management of post-merger integration is considered a process (Jemison & Sitkin, 1986). Several authors have shown the influence of experience in managing successful post-merger integration (Shrivastava, 1986; Pablo, 1994; Zollo & Singh, 1998). This experience may be considered a real competence (Asheknas & Francis, 2000; Eisenhardt & Martin, 2000). Thus Searby (1969, p. 5) stresses the importance of competence in managing the acquisition process: ‘‘capitalizing on opportunities is a matter not of financial legerdemain but of skilful and strong-minded post-merger management.’’ This competence is the fruit of capitalization of experience in integration operations (Very, 2002). Integration of Acquired Companies and Experience The aim of this section is to determine how firms develop a capability for integrating several acquired companies. In terms of performance, ‘‘another important source of heterogeneity between acquiring firms concerns the degree to which they develop and master the process to integrate the two organizations’’ (Zollo & Leshchinskii, 2000). Research studies focused on integration of information systems have been performed in this sense (Thakor, 1999).

Competence-Building through Organizational Recognition

75

How does this capability of integrating acquired companies emerge within an organization? Two variables have an important influence:  The accumulation of experience through practice. Researchers have shown a link between the number of repetitions and the success of an integration. However, the results are mixed. Some studies found a positive impact of experience (Fowler & Schmidt, 1989; Bruton, Oviatt, & White, 1994). Others did not find significant results (Lubatkin, 1987). Recently, researchers found a U-shaped learning curve (Haleblian & Finkelstein, 1999). Based on behavioral theory, they show that learning has a negative impact in the first acquisitions because a company aims to reproduce a past experience. It is difficult to predict the effects of an acquisition on performance on the basis of past acquisitions. The degree of success of integration of an acquired company depends on the degree of similarity with past acquisitions and the organization’s ability to identify differences with a past experience.  The codification of knowledge accumulated at the time of acquisition. The development of manuals, lists of mistakes to avoid repeating, assessments, management charts, etc. These elements serve as tools and as an organizational memory for a company. They facilitate the dissemination of knowledge and clarify roles, responsibilities, and key dates. This codification is also important in a company’s evolution. With repeated acquisitions, the buying company develops its tools, subtly adapts and modifies them, and formulates new ideas for future integration of acquired companies (Zollo & Singh, 1998).  Several other types of experience that have an impact on the integration of acquired companies were identified: experience of the industry, experience of the country (Very & Schweiger, 2001), and international experience. Integration of Acquired Companies, Experience, and Form of Organization It is in an organization’s interest to transform this experience, which is often individual, into collective learning, and to institutionalize it in the form of an Acquisitions Department to ‘‘capitalize on the sum of individual competences’’ (Very, 2002, p. 157). This idea means that the process of coordinating a series of competence is another key element for establishing a formal organization for integrating acquired firms. For a long time, the responsibility for integrating acquired companies was assigned to the CEO or to an integration team or an Integration Manager. Guieu (1999) identifies three forms of organization according to the degree of repetition of acquisitions and of individual learning of the people involved (see Fig. 4):

GABRIEL GUALLINO AND FRE´DE´RIC PREVOT

76

Fig. 4.

Description of Integration Processes in a Company (Guieu, 1999).

Thus the study of competence development in managing post-merger integration appears particularly suited for analysis using the model developed in the previous section. Indeed, different research studies highlight important aspects of post-merger integration that are included in the model, such as the importance of repetition of the situation and of experience capitalization. Very (2002) studies the institutionalization aspect. Guieu (1999) shows that mastery of the acquisition process may remain the director’s prerogative and not involve capitalization. Zollo and Singh (1998) stress the importance of the evolution of tools developed to manage postmerger integration, so that they can be adapted to changing situations. The case study presented below illustrates the four situations of competence development in managing post-merger integration.

Case Study: The Lafarge Group Methodology The aim of our analysis is to study the development of a competence over time in order to trace the history of an observed evolution. In particular, this research is based on dynamic analysis of Lafarge’s successive integration of acquired companies. Our goal is to identify the different modes of development of competence in post-merger integration within the Lafarge Group, throughout a very long period of time. This case study is intended as an illustration and not a generalization. Our main objective is not to analyze a generic process describing the development of a post-merger integration competence, but to highlight mechanisms and to explain them (in relation to a given situation). Our goal aims to recreate the context, the post-merger integration process, and the dynamic of the competence. The Lafarge Group was selected for three main reasons: first, the large number of acquisitions made and the very long period of possible study (the existence of in-house and external documents, and people present in the

Competence-Building through Organizational Recognition

77

company for a long time); second, the importance of acquisitions in the strategy of companies in Lafarge’s line of business; and lastly, the very clear evolution in Lafarge’s form of management of acquisitions. The company went through each of the model’s four situations and can be used to illustrate each of the levels of development. The time period studied is very long. The first acquisitions studied took place in the late 19th century. For this type of acquisition, information was gathered from Lafarge’s in-house documentation sources and from external documents (books and articles from the economic press). A more precise study was performed of more recent acquisitions for which there are more documentary sources. For these acquisitions, in addition to in-house and external documentary sources, eight people who directly took part in the events studied were interviewed. They were chosen according to their degree of involvement according to the following criteria: their role in the management of acquisitions, their period of employment in relation to the sequence of the process, and their company of origin (Lafarge or acquired companies). Of the eight people, seven were from Lafarge and one from Blue Circle before its integration. Among the positions represented there are human resources (four people), department of integration management (three people), and information systems management (one person). The interviews were carried out in a non-directive manner to avoid forced answers by the interviewed person in case they had no real memory of the situation. In order to reduce the effect of rationalization with hindsight by the people interviewed, substantial work was done to cross-reference the information after re-transcription (interview/other interviews and interview/ documents gathered). The case study describes existing links between the Lafarge Group’s various acquisitions on a world level and the development of its competence in integration of acquired companies since the early 1990s. The development of this competence is not the fruit of a determined cycle. It could be qualified as contingent upon the various events that occurred at Lafarge (rate of integration, size of targets, importance of the acquisition process in the group’s strategy). The following case is broken down into four historical phases, symbolic of four developments in the Lafarge Group’s style of integration. Lafarge: Four Key Stages of Development Lafarge was founded in 1833 with the operation of a small-scale limekiln on the banks of the Rhone River near Monte´limar (France). Through the ups and downs of 150 years of history, and due to a policy of intense external

78

GABRIEL GUALLINO AND FRE´DE´RIC PREVOT

growth, it became a group of companies that is today the world’s leading cement manufacturer. Present in four lines of business (cement, plaster, aggregates and concrete, and roofing), the Lafarge Group became the world’s industry leader in tonnage when it acquired Blue Circle. Although it is relatively protected for economic and logistic reasons, the cement manufacturing sector is highly competitive. It is a capitalistic industry, in a process of concentration because firms aim to keep a minimum profit margin in a competitive dynamic where price is the most important key success factor. In parallel to this concentration process in progress among the industry’s giants, there are a very large number of small companies involved in tight competition (price, geographic proximity). Therefore the sector’s giants apply a policy of external growth in a large number of small structures. Lafarge’s leading position is the fruit of a dynamic external growth policy. The rate of acquisitions has greatly accelerated since 1997, when the Red Land Group was acquired and a 10-year vision of the Lafarge’s strategy was established. The Lafarge Group is now the world’s leader in terms of tonnage. However, in the early 1980s, the group was considered a mediumsized company. At the time, Blue Circle (now bought out by Lafarge) even envisaged buying Lafarge, but the target did not appear to be very attractive! Lafarge’s ability to integrate acquired companies did not develop in a linear manner. However, there are four clearly defined key stages. Until the 1980s, Acquired Companies were Integrated at a Slow Rate. External growth is a fundamental part of the Lafarge Group’s culture. In the late 19th century, the company absorbed a series of (mainly small) companies in its region and continued an expansionist policy throughout the 20th century. This policy developed along two lines: international development (Algeria in 1922, Canada Cement in 1970, General Portland in 1981) and product diversification (such as plaster in 1931). Three important acquisitions punctuated the Group’s growth:  The ‘‘honeymoon’’ with Canada Cement in 1970. Lafarge’s efforts resulted in increasing its growth rate from 8 to 20% per year. This was the first important acquisition for the group. By working on cultural integration, the people at Lafarge acquired substantial experience through this acquisition. However, there was no formalized method and it was based on the managers who carried out the integration.  The 1981 take-over of General Portland, a major American cement manufacturer. Cultural similarities and a similar product portfolio

Competence-Building through Organizational Recognition

79

facilitated integration of the structure within the Group, but no direct reference was made to the method employed for acquisition of Canada Cement.  The merger with the Coppe´e group in 1980 – a diversified group, particularly in bio-industries. Harmonious relations were facilitated by a similar Frenchspeaking culture (Coppe´e is Belgian) and an industrial and technical culture. This acquisition was seen as clearly different to the two previous acquisitions. It was carried out in a specific manner with no support from documents or people that were utilized in previous acquisitions. In the 1980s, Lafarge was more concerned with consolidating and defending its position than opting for an aggressive policy of company acquisition. The acquisition process of target companies was handled by the group’s management committee. At the time, the integration was only process-oriented (harmonization of methods). The technical dimension related to information systems was not given as much attention as today, and the acquired firms had a relatively high degree of freedom. The problems were mainly related to national cultures. In relation to the classification presented above, Lafarge’s response to its different acquisitions may be described as ad hoc: The documents produced during operations were not designed to be re-used, and experience was not capitalized on (for each new acquisition, Lafarge did not make use of previous documents and did not enlist the aid of those people who had taken part in previous acquisitions). In the 1990s, the Rate of Acquisitions Accelerated and Capitalization of Acquired Experience Started. The 1990s marked a clear acceleration of the Group’s integration policy, which was condensed in the CEO’s vision in early 1997. The Group’s goal was clear: to double cement production within ten years in order to maintain sufficient profit margins. Between the 1980s and 1990s, the number of acquisitions more than tripled. The English giant Red Land was acquired in 1997, and the number of employees increased from 30,000 to 50,000. These years clearly show how Lafarge needed to capitalize on its employees’ experience in integration of acquired companies. Until then, the technical culture had facilitated integration. Before the 1990s, integration practice was based on sending people abroad to the location of the acquisition. They were responsible for rebuilding processes and culturally integrating the structures, and they ensured the new company’s adaptation into the group. In the 1990s, acquisitions were considered one of the keystones of the group’s strategy. Management defined a consistent acquisition strategy. However, no

80

GABRIEL GUALLINO AND FRE´DE´RIC PREVOT

particular structure was created to manage acquisitions. Therefore there were no personnel specifically assigned to manage the acquisition and post-merger integration processes. For every new acquisition, different managers were responsible. However, documents were formalized and documents concerning past acquisitions in management of new acquisitions were utilized. The experience capitalization phenomenon is even more clearly seen through the establishment of a new management resource: after the integration of Red Land, the Lafarge Group started drawing up a methodological guide for integration management. However, in practice, the guide was only used rarely. Therefore competence in integration management potentially exists within the group through capitalization of experience. However, this competence was not used enough. Given the acceleration of the frequency of acquisitions and their increasing strategic importance, we noted the change in a situation that has been described in the capitalization model. No project group or specific function or post was created to manage acquisitions, but the advantage of benefiting from past experience was widely recognized. We shall see that, as of 1997, Lafarge Group’s practice of acquisitions underwent two profound transformations. The integration of the Red Land Group in 1997 led the company to create a specific project group to consider the financial, strategic, and organizational importance of this acquisition. Then the integration of Blue Circle in 2001 represented a new direction in the strategy for developing competence in post-merger integration. Integration of the Red Land Group, 1997: Setting up an Integration Project Team. In 1997, the Lafarge Group acquired through a public take-over bid Red Land, a company founded in the 19th century and which was involved in the following lines of business: concrete and aggregates and roofing (Braas Roofing). The acquisition of Red Land brought about two major events in the group’s history:  It was the first major acquisition for Lafarge. Its size, in terms of employees, increased by 50% (20,000 people joined the company).  The group changed from being organized by divisions (according to countries and products) to being organized by line of business (the previous organization was built on task forces). Five divisions were created (cement, plaster, aggregates and concrete, roofing, and specialist materials). These events reflected a significant transformation of the group. After this integration, one spoke of a ‘‘New Lafarge.’’ Even if Lafarge’s know-how was widely disseminated in Red Land, Lafarge’s ‘‘best practices’’ approach

Competence-Building through Organizational Recognition

81

led to a profound re-organization of the human resources integration processes. There was a proactive approach to bringing the two companies together to create a new entity. This integration was carried out by a project team in charge of merging the Red Land and Lafarge cultures. Considering the scale of the acquisition, project-based management was introduced and provided by the Boston Consulting Group (BCG). The team was composed of people experienced in Lafarge integration practices. BCG acted as coordinator (coordination of the players was a major source of added value in post-merger integration) between the different people to ensure that the project was completed within the allotted timeframe. Therefore one may speak of an institutionalization situation in this case, since the project group for managing the acquisition was specifically created to manage the Red Land acquisition. This situation is considered particularly important for the group. However, no use was made of the lessons learned from past experience – there was no real ‘‘capitalization.’’ Indeed, the Red Land situation was considered a separate case from the other acquisitions. Following the integration of Red Land, the number of small-scale acquisitions (1.5 million tons of cement) and the scale of Red Land’s operational integration led Lafarge to further institutionalize its capability to integrate companies by creating a merger and acquisition department within its cement division. This formal structure has many goals:  To reduce integration costs (average number of people sent abroad dropped from 12 to 3),  To ensure technical and procedural conformity of the purchased plant,  To set productivity goals, and  To integrate human resources and mix cultures. This structure’s performance variables are:  Assessment, budgeting, implementation, and supervision of the synergies to be established,  Minimization of the integration time needed to make the acquired unit contribute to the group’s profits, and  Minimization of the time required for the plant’s human resources to contribute to the various performance programs put in place by Lafarge. Therefore, after integrating Red Land, the Lafarge Group clearly institutionalized integration competence by creating a specific department for this purpose. However, this department managed a precise competence, closely

82

GABRIEL GUALLINO AND FRE´DE´RIC PREVOT

related to a given project. The department’s scope of action was limited to one of the four divisions of the Lafarge company, the cement division. Therefore no real possibility of this competence developing further can be seen. The close link between competence and a precise project was not a sign of any ability to adapt to different situations. In 2001, the Blue Circle Take-over Bid Illustrated a Transformation in Lafarge’s Integration Method. In October 1999, having identified Blue Circle (BCL) as a potential target, Lafarge launched a hostile take-over bid. The offer was turned down by the shareholders in May 2000. In January 2001, eight months after the first attempt, Lafarge made BCL a friendly take-over bid. This time the offer was approved by the shareholders. By February 2001, the pre-integration program had started at BCL. Teams were put in place for future integration of the company. This integration process lasted 10 months and was completed by December 2001. The synergies were budgeted in the operational units starting in 2002. Identifying these synergies was relatively easy. Since the core business of the two parties was similar, the departments concerned were able to rapidly pool their information to determine which organization would be optimal. However, while synergies were easily identified and budgeted, their achievement required the integration of operational units capable of implementing the budgets planned for 2002. Within Lafarge’s merger acquisition department, a steering committee was put in place. Again, this committee was supported by a major consultancy firm. This committee worked in tandem (Blue Circle/Lafarge) and was organized as follows:  a steering committee (manages the pre-integration process, assesses diagnostics and scenarios built by the various teams, and resolves key problems),  a coordination team (provides methodological support, controls the teams’ progress, provides feedback of problems and recommendations), and  a communications team (functional teams and geographical teams). Having acquired considerable experience and know-how, Lafarge deployed an exemplary methodology for integrating BCL while avoiding cultural clashes and facilitating the transfer of competence for achieving operational synergies. In order to put in place the announced synergy plan and to make the plants as efficient as possible, integration of the workforce is still the key point in the process. A pre-integration cultural audit was carried out with

Competence-Building through Organizational Recognition

83

Blue Circle and Lafarge executives. The aim of this first audit was to understand the cultural divide between the two groups and also to allow Blue Circle executives to express themselves in order to avoid undesired departures. Cultural integration was then carried out in two steps:  Closure of the Blue Circle head office while sharing experience on managerial methods and practices. Lafarge’s thinking on Blue Circle’s integration applied to the company’s different methods and practices on a world scale (marketing, logistics, etc.) and on the capability to retain the most important people from the head office.  The integration of operational units. Here the work was more systematic, with procedural and technical conformity of the plants and, in parallel, respect for national cultures and managerial practices. Therefore, the institutionalization of Lafarge’s capability to integrate an acquired company changed profoundly between the acquisitions of Red Land and Blue Circle. Lafarge’s competence gradually changed with these integration processes in order to adapt as well as possible to the target company. With the integration of Blue Circle, the integration department demonstrated an ability to adapt its competence to a new situation. The Lafarge Group demonstrated that it had a base of competence in terms of integration management and that, on this basis, it was capable of developing new competence (in this case, specific competence in cultural integration within international mergers) according to new situations.

DISCUSSION AND MANAGERIAL IMPLICATIONS Level of Use and Ad Hoc Responses or Capitalization The Lafarge case stresses the importance of two aspects: frequency of use and level of use of competence. The following graph (see Fig. 5) shows how the capitalization phenomenon occurs in a period when, for a limited time, the frequency of acquisition operations increases exponentially. The frequency of use of competence leads to perceiving the need to capitalize on past experience. However, competence does not necessarily reach a high level of organizational recognition (no specific function or position is created, no department is created for managing this competence, and so on) despite the repeated situations. The move from a situation of ad hoc response to a situation of capitalization seems to be related to the frequency of occurrence of situations where the competence is applied. The level of repetition is not, however,

GABRIEL GUALLINO AND FRE´DE´RIC PREVOT

84 90

Capitalization of acquired experience 68 Number of merger and acquisitions 45

Ad hoc integration

23

99

7

0 -1

-1

90 19

-1

80 19

-1

70 19

60 19

99

0 98

0 97

0 96

0

-1 50

19

-1

94

40 19

19

30

-1

-1 20 19

95

0

0 93

92

0 19

10

-1

91

0 19

00

-1

90

0

-1 90

-1

89 18

80 18

0

0

Fig. 5. Number of Acquisitions by the Lafarge Group since its Creation and Development of its Competence in Integration of Acquired Companies.

sufficient to determine the level of competence of the firm in integration. In fact, the time interval between two operations is not a neutral variable in the relation which can maintain performance and experience (Hayward, 2002). Time has an importance in the codification of an experience. Research shows that an interval between projects which is too long or too short prevents the development of a competence in the management of these projects (Brown & Eisenhardt, 1997; Gersick, 1994). According to Kusewitt (1985), acquisitions which happen too frequently do not leave sufficient time for integration. Successive acquisitions which have too frequent a rhythm can not be codified because people are more pre-occupied by the next acquisition than by the management of current operations. Firms are not capable of quickly codifying and diffusing their experience in order to exploit it again in a new project. Researchers have shown that managers cannot produce an analysis of successive acquisitions with too frequent a pattern (Haunschild, Davis-Blake, & Fichman, 1994). As Eisenhardt and Martin (2000) stated, ‘‘The evolution of dynamic capabilities is also affected by the pacing of experience. Experience that comes too fast can overwhelm managers, leading to an inability to transform experience into meaningful learning’’ (p. 111). Pre-occupied by the next external growth operation, managers do not take the time to produce knowledge linked to past acquisitions, especially if this knowledge is linked to errors committed or if they call into question the success of these acquisitions

Competence-Building through Organizational Recognition

85

(Haunschild et al., 1994). On the other hand, the managers are also tempted not to codify their experience when the time interval between two operations is too long (Winter & Szulanski, 1998). A very long interval limits the exploitability and accessibility of an experience (Argote, Beckman, & Epple, 1990; Ginsberg & Baum, 1998). The people responsible for the projects may have, for example, left the company and their individual knowledge is no longer available. In addition, directors are less inclined to want to codify an experience which they cannot make use of in the near future. Similarly, learning linked to an acquisition or integration process of a single merger or acquisition risks being very limited at a collective level. The relevant people have perhaps left the company or changed division. In addition, if this experience must be used again after a long time interval, the learning is no longer exploitable (the conditions have changed, the economic model has evolved, etc.). Given the importance of time and adding a new variable, which is that of risk control, the model we propose can be completed with reference to the one proposed by Baden-Fuller and Volderba (1997) (Fig. 6). This model proposes a wider vision of the action on competence. It is a model proposing to group, using the same approach, the analysis of the process and the contents of change in order to understand how organizations can resolve the paradox between renewal and preservation. Our model is based more particularly on how a given competence develops. We see again the importance of the paradox between continuity and change by taking into account the level of competence dynamic. However, in our model the interest is more weighted on the influence of level of use and level of organizational recognition on the form the competence takes (ad hoc response, institutionalization, capitalization, competence dynamic). We ask ourselves the reasons (level of use or level of recognition) explaining the form the competence takes at any given moment while the model proposed by Baden-Fuller and Volderba (1997) studies the question of the modes of action on the competences put

Revitalizing some of the existing competencies

Reordering core competencies and peripheral routines

Fig. 6.

Spatial separation (risk control is vital) Reanimating A middle-up process that may be especially suited to revitalizing existing competencies when speed is not vital but controlling risk Venturing A process of change that is best suited to occasions where speed is not important and where the need to control risk is high

Temporal separation (speed is vital) Rejuvenation A process that is most risky because the scope of the change is large and the content of the change is very difficult Restructuring A process of change most suited to attempts to reorder processes when speed is important

Four Mechanisms for Strategic Renewal (Baden-Fuller & Volderba, 1997).

86

GABRIEL GUALLINO AND FRE´DE´RIC PREVOT

in place by an organization. So the two models appear complementary in proposing a vision of competence development at two different levels: the form the competence takes and the type of action on the competence. Level of Recognition In the case of Lafarge, organizational recognition occurs in a situation where the acquisition is of major importance for the company in strategic, financial, and organizational terms (for example, the group absorbs a company corresponding to 50% of its size, or it increases its capability in its core business and incorporates new lines of business). A project group is created but the competence developed is specific and not necessarily adaptable to different situations. Organizational recognition brings investment in the development of a competence. Subsequently, it is through confronting new situations that this competence becomes adaptable (see Fig. 7). This diagram underlines the importance of formalizing and coding an experience in order to institutionalize the competence. To fully benefit from the capacity to consolidate the integration of two structures, it is necessary to build tools, codify know-how, and capitalize on highly skilled personnel (Very, 2002). Zollo (1998) shows that experience gained by repetition of actions is not sufficient. It is the degree of codification and articulation of an experience which improves performance. The codification must be pertinent for the managers in place. If the people who are in charge of an acquisition are not involved in the next one, the information codified cannot be exploited. Therefore it is not the raw experience which improves performance but the degree to which the company codifies and articulates the knowledge gained from this experience (Zollo & Leshchinskii, 2000). In effect, this codification can be found in:    

Organizational memory Clarification of responsibilities Improvement of processes Socialization of knowledge

Zollo (1998) provides concrete examples of codification: a training and conversion of information systems manual, product-training manual, financial evaluation guide, due diligence manual, team models, product models, project management ‘‘pack,’’ training ‘‘pack.’’ Zollo and Singh (2004) suggest that the performance of the integration process is influenced by the development of an ability to manage the process which is identified

Competence-Building through Organizational Recognition Insitutionalization

87

Dynamic Competence

Creation of a project group (recognized but specific competence)

Creation of the “integration department”

Development of new competencies on the basis of acquired experience

Strategic Importance of the situation

Recognition of need for capitalization

Confrontation with new situations

Red Land 1997

Post-Integration of Red Land

Blue Circle 2001

Fig. 7.

Change from an Institutionalization Situation to Dynamic Competence.

as key to the success of an acquisition. This ability is created by the accumulation of codified and articulated experience. It is therefore necessary to codify, but to do that, the competence must be recognized by the organization’s managers (organizational recognition). In effect, this recognition is the necessary condition for there to be willingness to invest in the development of a competence. However, as Dierickx and Cool (1989) stated, the competence will be the result of the sum of accumulated investment. The logical orientation of the accumulation of investments leading to a defined goal (development of a competence) supposes the identification of this competence and the recognition of its importance for an organization (Prahalad & Hamel, 1990; Tampoe, 1994; McGrath et al., 1995). This therefore supposes what we call organizational recognition. This notion of organizational recognition relates to the concepts highlighted in the research on the foundations of competence-based management, whose importance is still emphasized today by researchers. Dierickx and Cool (1989) demonstrate the importance of the accumulation of investment, Prahalad and Hamel (1990) insist on the importance of ‘‘communication, involvement, and deep commitment to working across organizational boundaries’’ (p. 82), McGrath et al. (1995) develop the concept of ‘‘comprehension,’’ Sanchez et al. (1996) underline the importance of ‘‘creating an appropriate information infrastructure to promote internal and external information flows, by using self-regulating teams to

88

GABRIEL GUALLINO AND FRE´DE´RIC PREVOT

achieve a flat non-hierarchical organization structure that encourages creativity and initiative by creating an explicit shared vision of the future to coordinate decisions and actions, and by accepting and using intuition, symbolism, and metaphors in processes for identifying, creating, and renewing competences’’ (p. 4). The concept of dynamic capability also highlights the importance of this organizational recognition in the development of competences (Teece et al., 1997; Eisenhardt & Martin, 2000; Sanchez, 2001). As Eisenhardt and Martin (2000) say: ‘‘Therefore, long-term competitive advantage lies in the resource configurations that managers build using dynamic capabilities, not in the capabilities themselves’’ (p. 1117). While the role of repetition in capitalization of experience is frequently highlighted, the study presented in this article aims to highlight the special role of organizational recognition, which may have many influences on competence development. In particular, there are three possible influences:  Due to recognition by an organization, individuals working on competence development must obtain greater material and financial resources. The interest shown by management facilitates allocation of these resources. The recognition of an organizational role also provides negotiating power with respect to resource allocation decisions.  Recognition by an organization makes a competence development team a more visible point in the information circulation system. This makes information resources available, in addition to the financial and material resources.  Recognition has an effect on individuals, who can then attain status (in the formal organization) or a reputation (informal recognition) and be given credit by the hierarchy (power). This can affect the individuals’ motivation and facilitate the development of competence. According to this characterization of the effects of organizational recognition, four elements may be determined to define the existence of this recognition:    

Size of budgets provided (wealth), Visibility granted in the organization (status), Credit given by the hierarchy (power), People also speak of it in an informal manner (reputation/renown).

CONCLUSION This article presents the first results of research that offers several opportunities for development. The contributions of the research presented

Competence-Building through Organizational Recognition

89

in this article are related to the construction of a model for describing the level of competence development and highlighting the importance of organizational recognition in this development. The theoretical model proposed (in Fig. 3) puts forward elements aimed at defining a situation of competence development. It is not a model structuring the study of a process, such as the Nonaka (1994) model that proposes a spiral schematic representation of knowledge, involving a sequence of different stages. Here, as we stated in the discussion, attaining a certain level of development does not necessarily require transition through the other levels. The model aims to highlight the influence on the form and means of competence development exerted on two levels (recognition and utilization). Therefore the model proposes an analytical framework for determining the level at which action must be taken in order to develop competence. The case study performed for the research presented in this article illustrates the model and shows how it is applicable in a given situation. This case study has helped us to understand our model better in terms of the dynamic capacity. In fact, the institutionalization of a competence does not necessarily, with experience, lead to a dynamic capacity. On the contrary, Ingram and Baum (1997) argued that a high level of experience increases the risk of failure (competence trap). Therefore, the case study demonstrates that a company constantly has to adapt to new situations. The Lafarge Group case study has revealed the non-linear character of the model and the existence of a transition ‘‘under certain conditions’’ from one situation to another. However, this research can be taken further according to the many opportunities for study that it presents. Quantitative analysis could verify the relation between the different forms of development and the two variables highlighted, and could also be used to define the elements for measuring these variables.

ACKNOWLEDGMENTS Grateful thanks to C. Sutherland, J. M. Aulotte, B. Leopardo, L. Marchal, and J. P. Berquand of the Lafarge Group for their involvement in this project.

REFERENCES Amit, R., & Schoemaker, P. J. H. (1993). Strategic assets and organizational rent. Strategic Management Journal, 14, 33–46. Argote, L., Beckman, S., & Epple, D. (1990). The persistence and transfer of learning in industrial settings. Management Science, 36, 140–154.

.

90

GABRIEL GUALLINO AND FRE´DE´RIC PREVOT

Asheknas, R. N., & Francis, S. C. (2000). Integration managers: Special leaders for special times. Harvard Business Review, 78, 108–116. Baden-Fuller, C., & Volderba, H. W. (1997). Strategic renewal. How large complex organizations prepare for the future. International Studies of Management and Organization, 27, 95–120. Barney, J. B. (1986). Strategic factors markets: Expectations, luck, and business strategy. Management Science, 32, 1231–1241. Black, J. A., & Boal, K. B. (1994). Strategic resources: Traits, configurations and paths to sustainable competitive advantage. Strategic Management Journal, 15, 131–148. Brown, S. L., & Eisenhardt, K. M. (1997). The art of continuous change. Linking complexity theory and time paced evolution in relentlessly shifting organizations. Administrative Science Quarterly, 42, 1–34. Bruton, G. D., Oviatt, B. M., & White, M. A. (1994). Performance of acquisitions of distressed firms. Academy of Management Journal, 37, 972–989. Buono, A. F., & Bowditch, J. L. (1989). The human side of mergers and acquisitions. San Francisco, CA: Jossey Bass. Capron, L. (1995). Les vagues de fusions-acquisitions aux Etats-Unis. Entreprises et Histoire, 10, 21–45. Collis, D. J. (1991). A resource-based analysis of global competition: The case of bearing industry. Strategic Management Journal, 12, 48–68. Collis, D. J., & Montgomery, C. A. (1995). Competing on resources: Strategy in the 1990s. Harvard Business Review, 73, 118–128. Cremer, E., & Meschi, P. X. (1997). Integrating corporate strategy and competence-building processes: A case study. In: A. Heene & R. Sanchez (Eds), Competence-based strategic management (pp. 215–244). Chichester: John. Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage. Management Science, 35, 1504–1513. Doz, Y. (1994). Managing core competence for corporate renewal: Towards a managerial theory of core competence. Working Paper, INSEAD, France. Eisenhardt, K. M., & Martin, J. A. (2000). Dynamic capabilities: What are they? Strategic Management Journal, 21, 1105–1121. Fiol, M., & Lyles, M. (1985). Organizational learning. Academy of Management Review, 10, 803–813. Fowler, K. L., & Schmidt, D. (1989). Determinants of tender offer post-acquisition financial performance. Strategic Management Journal, 10, 339–350. Gersick, C. (1994). Pacing strategic change: The case of new venture. Academy of Management Journal, 37, 9–45. Ginsberg, A., & Baum, J. A. C. (1998). The value of learning by doing: Acquisition experience and profitability. Working Paper, New York University. Grant, R. M. (1991). The resource-based theory of competitive advantage: Implications for strategy formulation. California Management Review, 33, 114–135. Guieu, G. (1999). Processus de prise de controˆle et changement organisationnel: la diversite´ des relations. Finance Controˆle Strate´gie, 2, 71–95. Haleblian, J., & Finkelstein, S. (1999). The influence of organizational acquisition experience on acquisition performance: A behavioural learning perspective. Administrative Science Quarterly, 44, 29–57. Haspeslagh, P. C., & Jemison, D. B. (1991). Managing acquistions. New York: Free Press.

Competence-Building through Organizational Recognition

91

Haunschild, P. R., Davis-Blake, A., & Fichman, M. (1994). Managerial overcommitment in corporate acquisition process. Organization Science, 5, 528–540. Hayward, M. L. A. (2002). When do firms learn from their acquisition experience? Evidence from 1990–1995. Strategic Management Journal, 23, 21–39. Helleloid, D., & Simonin, B. (1994). Organizational learning and a firm’s core competence. In: C. Hamel & A. Heene (Eds), Competence-based competition (pp. 213–240). Chichester: John. Huber, G. (1991). Organizational learning: The contributing processes and the literatures. Organization Science, 2, 88–115. Ingram, P., & Baum, J. A. C. (1997). Opportunity and constraint: Organizations’ learning from the operating and competitive experience of industries. Strategic Management Journal, 18, 75–98. Jemison, D. B., & Sitkin, S. B. (1986). Corporate acquistions: A process perspective. Academy of Management Review, 11, 145–163. Kearney, A. T. (1999). Corporate marriage: Blight or bliss. www.atkearney.com/pdf/eng/ MON_ Corp_Marriage.pdf Kogut, B., & Zander, U. (1992). Knowledge of the firm, combinative capabilities and replication of technology. Organization Science, 3, 384–397. Kusewitt, J. B. (1985). An exploratory study of strategic acquisition factors relating to performance. Strategic Management Journal, 6, 151–169. Levitt, B., & March, J. (1988). Organizational learning. In: W. R. Schott & J. F. Short (Eds), Annual review of sociology (Vol. 14, pp. 319–340). Palo Alto, CA: Annual Reviews. Lubatkin, M. H. (1987). Merger strategies and stockholder value. Strategic Management Journal, 8, 39–53. March, J. (1991). Exploration and exploitation in organizational learning. Organization Science, 2, 71–87. March, J., & Simon, H. (1993). Organizations. Oxford: Blackwell. McGrath, R. G., McMillan, I. C., & Venkataraman, S. (1995). Defining and developing competence: A strategic process paradigm. Strategic Management Journal, 16, 251–275. Nanda, A. (1996). Resources, capabilities and competencies. In: B. Moingeon & A. Edmonson (Eds), Organizational learning and competitive advantage (pp. 93–120). London: Sage. Nonaka, I. (1994). A dynamic theory of organizational knowledge creation. Organization Science, 5, 14–37. Pablo, A. L. (1994). Determinants of acquisition integration level: A decision-making perspective. Academy of Management Journal, 37, 803–836. Prahalad, C. K., & Hamel, G. (1990). The core competence of the corporation. Harvard Business Review, 68, 79–91. Reed, R., & De Filippi, R. J. (1990). Casual ambiguity, barriers to imitation and sustainable competitive advantage. Academy of Management Review, 15, 88–102. Rumelt, R. (1994). Foreword. In: G. Hamel & A. Heene (Eds), Competence-based competition. Chichester: Wiley. Sanchez, R. (2001). Building blocks for strategy theory: Resources, dynamic capabilities and competences. In: H. W. Volberda & T. Elfring (Eds), Rethinking strategy. Newbury Park, CA: Sage Publications. Sanchez, R., & Heene, A. (2005a). Competence perspectives on managing internal processes: Advances in applied business strategy (Vol. 7). Oxford: Elsevier Science. Sanchez, R., & Heene, A. (2005b). Competence perspectives on managing interfirm interactions: Advances in applied business strategy (Vol. 8). Oxford: Elsevier Science.

92

GABRIEL GUALLINO AND FRE´DE´RIC PREVOT

Sanchez, R., Heene, A., & Thomas, H. (1996). Towards the theory and practice of competencebased competition. In: R. Sanchez, A. Heene & H. Thomas (Eds), Dynamics of competence-based competition. Chichester: John. Schweiger, D. M., & Walsh, J. P. (1990). Merger and acquisitions: An interdisciplinary view. In: K. M. Rowland & G. R. Perris (Eds), Research in personal and human resource management. Greenwich, CT: JAI Press. Searby, F. W. (1969). Control of post merger change. Harvard Business Review, 47, 4–12. Shrivastava, P. (1986). Post-merger integration. Journal of Business Strategy, 7, 65–76. Spender, J. C. (1996). Organizational knowledge, learning and memory: Three concepts in search of a theory. Journal of Organizational Change Management, 9, 63–78. Stalk, G., Evans, P., & Shulman, L. E. (1992). Competing on capabilities: The new rules of corporate strategy. Harvard Business Review, 70, 57–69. Tampoe, M. (1994). Exploiting the core competences of your organization. Long Range Planning, 27, 66–77. Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18, 509–533. Thakor, A. V. (1999). Information technologies and financial services consolidation. Journal of Banking & Finance, 23, 697–701. Van Wijk, R., Van Den Bosch, F., & Volberda, H. (2001). The impact of knowledge depth and breadth of absorbed knowledge on levels of exploration and exploitation. Academy of Management Annual Meeting, Annual Reviews, Washington, DC. Very, P. (2002). Des fusions et des hommes. Paris: Ed. Economica. Very, P., & Schweiger, D. R. (2001). The acquisition process as a learning process: Evidence from a study of critical problems and solutions in domestic and cross-border deals. Journal of World Business, 36, 11–31. Walsh, J., & Ungson, G. (1991). Organizational memory. Academy of Management Review, 16, 57–91. Weick, K. E. (1991). The nontraditional quality of organizational learning. Organization Science, 2, 116–124. Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5, 171–180. Winter, S. G., & Szulanski, G. (1998). Replication as strategy. Working Paper, Wharton School, University of Pennsylvania. Zahra, S. A., & George, G. (2002). Absorptive capacity: A review, reconceptualization, and extension. Academy of Management Review, 27, 185–203. Zollo, M. (1998). Strategies or routines? Knowledge codification, path-dependence and the evolution of post-acquisition integration practices in the U.S. banking industry. Working Paper, Wharton School, University of Pennsylvania. Zollo, M., & Leshchinskii, D. (2000). Can firms learn to acquire? Do markets notice? Working Paper, Financial Institutions Center at The Wharton School. Zollo, M., & Singh, H. (1998). The impact of knowledge codification, experience trajectories and integration strategies on the performance of corporate acquisitions. Working Paper, Financial Institutions Center at The Wharton School. Zollo, M., & Singh, H. (2004). Deliberate learning in corporate acquisitions: Post-acquisition strategies and integration capability in U.S. bank mergers. Strategic Management Journal, 25, 1233–1256.

A COMPETENCE-BASED APPROACH TO UNDERSTANDING THE ORCHESTRATION OF VALUE CHAINS IN THE DEVELOPMENT OF ‘‘NEW’’ VALUE ARCHITECTURES Heike Proff ABSTRACT Growth strategies exist, specifically for business divisions with a poor competitive position, by ‘‘orchestrating’’ value chains in external networks. The theory of competence development provides a basis for successfully developing new value architectures, since massive changes in a business division can take place only if they are based on durable competences. Four steps to orchestrating value chains can be deduced: (1) identifying changes in the value architecture as a possible growth strategy, (2) creating the organizational prerequisites for the deconstruction of value chains, (3) selling nonspecific value-added and (4) building networks around the core business that link (nonspecific) noncore activities to the firm.

Competence Building and Leveraging in Interorganizational Relations Advances in Applied Business Strategy, Volume 11, 93–115 Copyright r 2008 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1016/S0749-6826(07)11004-0

93

94

HEIKE PROFF

INTRODUCTION Business divisions in many companies are finding growth difficult in the face of steadily declining margins which may be due to the deregulation or globalization of markets, the growing demands of capital markets, or as a response to rapid changes in consumer habits worldwide (Scha¨fer, 1998; Heuskel, 1999). However, potential growth strategies exist, specifically for business divisions with a poor competitive position, by ‘‘orchestrating’’ value chains in external networks. Orchestration of value chains occurs when business divisions use activities of formerly integrated value chains as a starting point for focusing on individual activities for value addition, such as development, marketing, or sales. At the same time, they coordinate the ‘‘value-added activities of a large number of integrated companies in a closely linked external network’’ (Hinterhuber & Hinterhuber, 2002, p. 278f; Heuskel, 1999, p. 57ff; Bresser, Hitt, Nixon, & Heuskel, 2000a). The business divisions thus create a new form of corporate network. Such networks are complex forms of coordinated economic activity, moving between hierarchy (in-house production) and (outsourcing to) the market to achieve competitive advantage. These networks are characterized by relatively stable relationships between legally independent companies (Sydow, 2001, p. 278). By orchestrating value chains, business divisions change their ‘‘value architecture’’ which is based on their core business (Bresser et al., 2000a; Heuskel, 1999, p. 26). The development of new value architectures is largely a company-driven manifestation. It alters the structure of an industry and its motivation is usually defensive (Hinterhuber & Hinterhuber, 2002, p. 178; Proff, 2004). It is thus an alternative to a traditional restructuring program, in which blanket cost cutting takes place for all value addition stages. Successful business divisions can continue to survive competition and achieve growth with the traditional, highly integrated value architecture since they define value addition according to their requirements (Sampler, 1998, p. 349). These business strategies are consistently directed towards cost leadership and/or differentiation as well as product innovation. The orchestration of value chains is a relatively new phenomenon, even though the partial outsourcing of individual value-added activities has occurred previously. Business divisions were traditionally focused on optimizing their overall advantage in manufacturing end products and therefore had a product-centric value architecture. According to Heuskel (1999, p. 22), the value chains of all suppliers in an industry were therefore similarly structured, including those in the electric utility market (electricity

Understanding the Orchestration of Value Chains

95

generation to transmission to the distribution and sale of electricity). Changes in the value architecture begin to emerge when, for example, utility companies transfer, but attempt to retain control over, individual valueadded activities such as electricity generation and transmission as well as wholesale and retail distribution to independent electricity generators, network operators, or wholesalers and retailers, while simultaneously focusing on being a one-stop source for various utility products. With these (distribution) activities, the utilities were ‘‘no longer active in one clearly demarcated competitive environment, but in several. There are different ‘‘rules’’ for each of these competitive environments’’ (ibid.). The value architecture of such firms or business divisions consequently becomes activity-centric. This paper will first define the orchestration of value chains in external networks as an option for developing ‘‘new’’ value architectures and attempt to explain this phenomenon by applying the theory of competence development and the transaction cost approach. Then the utilities market in Germany (the firms EnBW, E.on, RWE, and Vattenfall are examined) is used as a case study to illustrate how the orchestration of value chains can be used as a growth strategy. In conclusion, the final section discusses recommendations for managers on how to orchestrate value chains.

DEFINING VALUE CHAIN ORCHESTRATION IN EXTERNAL NETWORKS Information and communications technology has radically changed the way in which value addition takes place (Picot, Reichwald, & Wigand, 1998; Reichwald & Mo¨slein, 2000). It has enabled a significant reduction in the interdependence between various organizational units, while also making complex value-added structures easier to control. The development of new value architectures takes place when: 1. Isolated value-added activities of formerly integrated value chains break away and become stand-alone businesses and acquire independent market potential (Heuskel, 1999, p. 35). 2. A business division focuses on a few or just one of these value-added activities, thereby creating advantages of standardization. 3. The value-added activities that are retained by the business division are used to build up a new activity-centric value architecture, and there is a restructuring of the division of labor within and between business divisions.

96

HEIKE PROFF

These three requirements for the development of new value architectures usually occur in two phases. Initially there is a phase of deconstruction in which business divisions deconstruct their formerly integrated, product-centric value chains and then select and focus on individual activities. This is followed by a phase of reconstruction of a new, activity-centric value architecture around the value-added activities retained by the business division. The orchestration of value chains in the reconstruction phase represents one of several basic models of a new value architecture. An orchestrator (e.g. Heuskel, 1999) focuses on a few select value-added activities and coordinates the value-added activities of several associated firms in an external network (Model 2 in Fig. 1). For instance, the sports manufacturer Adidas merely carries out product development and marketing, while production is carried out by a network of independent firms that it controls. The basic model of traditional product-centric value architecture, i.e. the ‘‘integrator’’ with integrated value chains (Heuskel, 1999, p. 57ff; Bresser, Heuskel, & Nixon, 2000b), involves a majority of activities being carried out along a value chain which is controlled in its entirety (Model 1a in Fig. 1). Despite declining value addition, many automobile manufacturers still display this kind of integration (Proff, 2003a). Another possibility is a core Cross Industry

Within the Industry existing business

Basic models of a product centered product architecture

1a. Integrator

Basic models of activity centered product architecture

2. Orchestrator

Business unit 1

Business unit 2

1b. Cross industry integrator

3. Cross border specialist existing business unit Company 1

Company 2

(Innovation strategy)

Fig. 1.

4a. Pioneer

4b. Cross border pioneer

Basic Models of Value Architectures (Elaboration of Bresser et al., 2000b).

Understanding the Orchestration of Value Chains

97

business integrator across different industries. Despite the diversification of value-added activities, the firm would remain largely integrated and therefore product-centric (Model 1b in Fig. 1). DaimlerChrysler AG with its passenger car and commercial vehicle divisions is an example of this kind of a cross-industry integrator. A third basic model of new value architecture is the cross-border specialist who focuses on a few select value-added activities in order to utilize economies of scale and firm-specific knowledge in an internal network and expand it across industries (Model 3 in Fig. 1). (Human) pharmaceutical companies are examples of this kind. Firms such as Genta in the genetic engineering sector utilize their skills to develop active substances in several diverse areas of application. However, they transfer the production and marketing of the active substances to large pharmaceutical companies (Rothaermel, 2000, p. 112; Boehringer, 2002, p. 45; Schering, 2002). The last model is that of a pioneer who introduces a new value-added activity in existing value chains of an industry or business segment, focuses on information advantages within the industry, and later leverages these across industries (Model 4a and b in Fig. 1). Such pioneers offer a new value-added proposition, e.g. Amazon.com with Internet book retailing. This basic model thus corresponds to an innovation strategy adopted by firms new to a market. It is consequently not a defensive strategy of deconstructing previously (partially) integrated value chains adopted by established companies in response to declining margins. We can therefore distinguish two basic models of a new value architecture. Of these, only the orchestrator is able to achieve ‘‘networking’’ through the external coordination of networks.

UNDERSTANDING HOW NEW VALUE ARCHITECTURES DEVELOP There is inadequate theoretical knowledge about the development of new value architectures. Resource or competence-based and knowledge-based explanations, i.e. a competence approach and a transaction cost approach, are required for this purpose but have not been sufficiently applied (e.g. Heuskel, 1999, pp. 16–17, 26, 29, and 45). The theory of competence development provides a basis for successfully developing new value architectures, since massive changes in a business division can take place only if they are based on durable competences. It is not possible to create a sustainable growth strategy by deconstructing

98

HEIKE PROFF

an integrated, product-centric value architecture without thought to the capability to develop competences in future. The theory of competence development (Proff, 2003b) is based on a ‘‘model of resource refinement’’ or competence building (ibid., 2000), which models processes for the refinement of input resources into competences. Resources refinement or competence building must fulfill three main requirements in at least one business division: (1) creation of customer value, (2) limited tradability and imitability, and (3) coordination of competitive advantages and environmental dynamics. These three main requirements also form the basis of competitive advantage in a business division. Competences need to be (further) developed over a period of time, because changes in the external and internal environment of the firm pose a threat to the sustainability of competitive advantages (Proff, 2003b). There needs to be a cycling between competence renewal and competence upgrading. Changes in the environment can operate at the level of input resources as well as the three main requirements for refined resources. These can pertain to (1) changes in the financial resource base, (2) changes in the way managers perceive competences to create customer value, (3) the undesired diffusion of knowledge, and (4) changes in the environmental dynamics specific to a firm (external shocks). Such changes are drivers of competence development and comprise the elements of a theory of competence development. They can be combined into an adjustment hypothesis (AH) regarding the development of competences over a period of time, and form the core of a theory of competence development: AH: An ideal form of cyclical alternation exists between competence renewal and competence upgrading. Over a period of time, competence renewal becomes disproportionately more significant than competence upgrading because of an improved financial resource base and increasing levels of undesired knowledge diffusion. External shocks can determine the choice of one or the other form of competence development for individual firms. The transaction cost approach (e.g. Williamson, 1985) explains the outsourcing of value-added activities from a business division or firm (make) to the market (buy). According to this approach, business divisions will only perform activities internally if they expect to derive sustainable economic advantage from doing so.1 Market imperfections, e.g. due to entry barriers, are prerequisites for deriving economic advantage. Market imperfections are the result of a firm’s specificity (k), the firm’s internal transaction or governance costs (G), and the expected future returns. Williamson postulates that business divisions can only efficiently manufacture products after achieving a critical specificity k*. Critical specificity is

Understanding the Orchestration of Value Chains

Fig. 2.

99

Increased Outsourcing to the Market when the Financial Resource Base is Poor and External Shocks are Greater than in the Preceding Period.

achieved if, assuming absolute opportunities for specialization in the market, the generally lower average production costs (C) of the market as compared to the business division are over-compensated by the lower transaction costs in the business division (Riordan & Williamson, 1985, p. 370–374 and Fig. 2). Theories about the development of new value architectures must include both phases of this development. Therefore, the deconstruction of integrated value chains in order to focus on select activities will first be examined followed by a discussion on the choice of one of the three basic models (orchestrator, partial specialist, or specialist) for the reconstruction of new value architectures. Deconstruction of Integrated Value Chains In order to understand the development of new value architectures, it is necessary to first understand the deconstruction of formerly integrated value

100

HEIKE PROFF

chains into individual, marketable value-added activities. The deconstruction of the value chain is a prerequisite for activity-centric operations and a primary requirement for developing new value architectures. The focus on a few (or in extreme cases, one) select value-added activity(ies) will subsequently be examined. Explanations for the Break up of Integrated Value Chains Integrated value chains will only disintegrate into isolated value activities if there is considerable pressure to break up the existing structures and rules of a business division, or even of an entire industry.2 A change in well established value structures and rules, after all, is associated with risk since it is new and unpredictable. This kind of pressure is created primarily by steadily declining economic rents and consequently steadily declining margins (e.g. Hinterhuber & Hinterhuber, 2002, p. 278), with no expectation of improvement in the medium term. However, pressure can also arise due to expectation of a future decline in profit margins. Thus the first hypothesis for developing new value architectures can be stated as follows: H I. The greater the current and/or future decline in margins, the greater the willingness of a business unit to deconstruct formerly integrated value chains into isolated value-added activities. Explanations for the Focus on Selected Value-Added Activities When margins decline or if there is a poor financial resource base, the theory of competence development dictates that business units will be unable to develop new competences. They must upgrade existing competences to be able to increase their margins. This, in fact, creates the conditions for subsequent competence renewal, as required by the cyclical alternation between competence upgrading and competence renewal. When margins decline, the phase of competence upgrading must consequently be of longer than average duration and the phase of competence renewal must correspondingly be postponed. According to the theory of competence development, above average durations for the phase of competence upgrading are not just driven by a poor financial resource base, but also by competence chaos, low undesired diffusion of knowledge, and greater external shocks than in the preceding period. These four drivers of competence upgrading promote the outsourcing

Understanding the Orchestration of Value Chains

101

of value-added activities from a business division to the market (buy). This implies focusing on a few remaining activities, thereby increasing the critical specificity from k* to k** after which value-added activities take place internally within a business division. This will now be examined for each of the four drivers of competence upgrading by using the transaction cost approach (e.g. Knolmayer, 1994, p. 317). When the financial resource base is poor (1st driver of competence upgrading), a business division will attempt to increase profits and consequently its margins. It is concerned not so much with absolute profit as with (relative) profit in relation to expected profits for the business division. The financial resource base can only improve if actual profit lies above expected profit (i.e. (profit/expected profit) – 1W0). Relative profit increases with an increase in specificity. At the critical specificity k* it becomes 0 (see also Dyer, 1996, p. 272; Reed & DeFillippi, 1990 and Fig. 2). Thus, a business division will outsource to the market when the financial resource base is poor in order to focus on select value-added activities, since it will achieve higher relative profits at k**Wk* as compared to k*. This leads to the second hypothesis for developing new value architectures: H II. When the financial resource base is poor, a business division is more likely to attempt to increase relative profit by focusing on select valueadded activities. An increase in relative profits also underlies the increased outsourcing of value-added activities and the focus on select activities, if external shocks were greater than in the preceding period (4th driver of competence upgrading, see also Fig. 2). When external shocks are greater than in the preceding period, expectations about future returns become highly uncertain. Higher relative profits are then required for adopting measures to increase flexibility to be able to better respond to such external shocks (SchneeweiX & Ku¨hn, 1990, p. 370 and Dyer, 1996, p. 289). Thus, the third hypothesis for developing new value architectures can be stated as follows: H III. When external shocks are greater than in the preceding period, a business division is more likely to attempt to increase relative profit by focusing on select value-added activities. If managers perceive competence chaos (the second driver of competence upgrading) to be high, the governance or transaction costs in a firm rise in comparison to the market (DGuWDG in Fig. 3). Organizational stress

102

Fig. 3.

HEIKE PROFF

More Outsourcing to the Market when Managers Perceived Competence Chaos to be High.

(Huff, Huff, & Thomas, 1992, 1994)3 increases the critical specificity (k**Wk*). Thus more value-added activities are outsourced to the market and there is a greater focus on select value-added activities. We can thus derive the fourth hypothesis for developing new value architectures: H IV. When managers perceive competence chaos to be high, governance costs in a business division rise in comparison to the market and increase critical specificity, which in turn necessitates greater focus on select valueadded activities. A business division can only focus on select value-added activities if there is low knowledge diffusion from the firm or when the rate of acquiring new knowledge is at least as high as the rate of diffusion (3rd driver of competence upgrading). If this were not the case, knowledge from the value-added activities retained by the business division would flow to the market where it would ultimately result in a complete division of labor (Langlois & Robertson, 1995, pp. 30–44). The production costs in the market would consequently continue to fall vis-a`-vis the production costs of the business

Understanding the Orchestration of Value Chains

103

division. The difference in production costs for the business division would therefore be higher than the market (DCuuWDCu, see Fig. 4), and the specificity of the firm k** (according to hypotheses H II–H IV) would continue to rise (e.g. to k*Wk**) to a point where no value added activities would be left in the business division. The outsourcing of activities of the business division to the market, however, would be driven by the market and not the business division. It would not result in competence upgrading, but would necessitate constant competence renewal in order to prevent activities in the business division from becoming wholly specialized. When diffusion of knowledge is low, this kind of market driven outsourcing can be avoided. Only then is the business division-driven focus on select activities possible in a meaningful manner (Venkatesan, 1993, p. 98 or Combs & Ketchen, 1999).

ΔProduction cost (ΔC) Δ Governance cost (ΔG) ΔC´+ ΔG´ ΔC´´

ΔC´´+ ΔG´´ High unwanted diffusion of knowledge Low unwanted diffusion of knowledge

ΔC = ΔC´ ΔG´

k**

market

k´

Faktor specifity

organization

outsourcing Fig. 4.

More Outsourcing to the Market when Undesired Diffusion of Knowledge is Low.

104

HEIKE PROFF

The fifth hypothesis for developing new value architectures thus states: H V. When the undesired diffusion of knowledge from a business division to the market is low, a business division-driven focus on select value-added activities becomes more likely. Hypotheses II–V demonstrate opportunities or triggers for focusing on value-added activities. The extent of this focus is dependent on the basic model used for the reconstruction of a new value architecture. This will now be examined in the next section. Selection of One of the Three Basic Models for Creating a New Value Architecture The transaction cost approach is able to explain the choice of a basic model for creating a new value architecture to some extent. However, it is too undifferentiated because 1. The basic model of an orchestrator cannot accurately be explained either by production within the firm or business division (make) or complete outsourcing to the market (buy). This is because, according to Hinterhuber & Hinterhuber (2002, pp. 278–279), the orchestrator creates economic rents as not all outsourced value-added activities are fully transferred to the market; instead they are coordinated in an external network in which resources are conserved (e.g. also Combs & Ketchen, 1999, p. 871). Therefore, the transaction cost approach needs to be extended to include an intermediate form between external market transactions and internal coordination within firms to take into account the external coordination of networks (e.g. Picot et al., 1998, p. 275 or Reichwald & Mo¨slein, 2000, p. 120). 2. The basic models of partial specialist and specialist, while representing the internal coordination of value-added activities (make), are not sufficiently explained or differentiated. The transaction cost approach, therefore, again needs to be extended to take into account the risks that lead to diversification in other business divisions (e.g. Fandel & Lord, 1999). Extending the Transaction Cost Approach to Include External Coordination in Networks Networks which deal in information and goods are created when outsourced activities are linked to a firm (Schmidt, 2000, p. 17). Marshall (1920, pp. 290–308) first examined network approaches, and these have undergone further refinement since (Cohendet, 1998, p. 94). Networks between linked

Understanding the Orchestration of Value Chains

105

players are designated through nodes (firms) and edges (links between the firms) (e.g. Kutschker & Schmid, 1995, pp. 5–6). The higher the density of linkages in the firm, the more easily it is able to exchange information and procure services and preliminary products as there are many transaction channels. It would otherwise either be unable to procure these in the market or the handling and monitoring costs in the anonymous market would be high (Easton, 1992, p. 8). Being part of a highly dense network with enhanced information interchange (Langlois & Robertson, 1995, p. 36) thus lowers the transaction costs in the network as opposed to within the firms, but it also lowers the costs in the market. Thus, the transaction costs of a firm, which, up to a specificity of k*, are already high as compared to the market, become even higher in relation to the favorable transaction costs of exchange in the network. If, as in most network theories, a constant difference of production costs is assumed between firms and the market, as well as between firms and the network, then the line (DC=DCu=constant) shifts to the right. The critical specificity therefore also shifts to the right from k* to k**, i.e. activities are shifted from the firm to the network. Firms are unable to wholly outsource firm-specific value-added activities through participation in a network. If factor specificity is low, they are able to continue to link activities outsourced to the network and may even attempt to control network activities. At the same time, even firms in a network will carry out firm-specific activities internally. Coordination in a network is characterized by a lower degree of activities that are completely outsourced to the market, i.e. in which there is a lower focus on select valueadded activities than coordination within the firm. During internal coordination, the firm retains only a few specific value-added activities and completely outsources the rest (k**Wk*). It is thus more strongly focused on select activities. When the transaction cost approach is extended to include the external coordination of networks, the form of coordination where the degree of focus on select value-added activities is dependent on factor specificity can be used to explain the choice of the basic model for creating a new value architecture. The basic model of the orchestrator (external coordination of value-added activities with low-factor specificity in the network and a low focus on select value-added activities) can thus be defined and distinguished from the basic models of the partial specialist and the specialist (internal coordination with a high focus on value-added activities with high factor specificity). However, no additional coordination mechanism is introduced to explain the choice between the two basic models of internal coordination,

106

HEIKE PROFF

the partial specialist and the specialist. The extended transaction cost approach does not suffice in this case, and an explanation would be possible only by differentiating the factor specificity (average, high, and very high). The transaction cost approach must thus be further extended. The transaction cost approach also needs to be extended to take into account the risks that lead to diversification in other business divisions. The choice between the two basic models of internal coordination brings risk considerations into the equation. Firms with a high focus on select value-added activities need to carry out a risk analysis because a firm focused on a few value-added activities will find it difficult to offset revenue shortfalls, e.g. those caused by a recession. On the other hand, less focused firms, i.e. firms that are still largely integrated, are able to deal with even severe revenue bottlenecks through optimization along the entire value chain. During a recession, if procurement prices drop, for instance, cuts in production costs are easier to achieve and there is greater readiness for new market activities. Thus, a high focus on select value-added activities creates a firm-specific risk that is neglected in the basic model of the transaction cost approach, since it does not take into account recessions or cyclical fluctuations. This risk can only be spread if there is activity-centric diversification of a few value-added activities in several business units (e.g. Fandel & Lord, 1999). The lowering of risk through diversification is derived from the model of portfolio management as put forward by the neoclassical, capital market-oriented investment and financing theory (e.g. Schmidt & Terberger, 1996). If a certain amount is distributed across n shares, returns do not increase since the total returns on the portfolio, i.e. the expected value at the end of the investment period, will equal the average returns of the individual investments. However, there is an advantage in terms of risk. Environmental dynamics underlie the distinction between the basic models of a partial specialist and a specialist, based on the extent of diversification due to risk considerations. Environmental dynamics is also neglected in the basic model of the transaction cost approach, which assumes a largely stable environment with no frequent or serious changes (e.g. Williamson, 1985). According to the distinction made by Sanchez (1997), this assumes an environment with no change (stable) or at most an environment experiencing incremental change. It does not consider a radically changing environment. The assumption of a stable environment, however, holds true for very few industries, e.g. the mineral oil or the

Understanding the Orchestration of Value Chains

107

foodstuff industries, and not for other industries like pharmaceuticals or communications technology. Lawrence and Lorsch therefore stated as early as 1967 that coordination is dependent on the environment (see also Proff, 2003a). Firms that wish to maximize their profits by constructing a new value architecture should therefore select a form of coordination that is the most cost effective in relation to the firm’s environment (Lawrence & Lorsch, 1967, pp. 95–96). In a dynamic environment the firm-specific risk is so high that if there is a heavy focus on select value-added activities, only internal coordination within the firm through diversification in several business divisions is cost effective. In such an environment it is essential to constantly find new innovative solutions that create monopolies over time. This necessitates highly specialized knowledge, i.e. an understanding of the management focus underlying management processes (know what, Sanchez, 1997) in order to be capable of radical changes in a firm’s structure. Building up this knowledge for value-added activities and safeguarding it against undesired diffusion requires significant resources. Firms operating in a dynamic environment must further focus their valueadded activities, coordinating just one activity internally in extreme cases, so as not to waste their usually limited resources and run the risk of underspending (Segler, 1986, p. 172) due to allocation considerations. When there is such a strong focus on value-added activities, the risk considerations mentioned above necessitate an expensive diversification across several business divisions. However, diversification of more value-added activities in a small number of business divisions is inefficient and consequently even more expensive in a dynamic environment. It should be added that external coordination in a network operating in such an environment would create very high coordination and monitoring costs, and still not be able to prevent the undesired diffusion of the required, highly specialized knowledge. On the other hand, internal coordination in a largely stable environment becomes meaningful only through diversification in a few business divisions. In this kind of environment, the market requires only incremental innovations that tie up fewer resources. Concentrating all resources on one value-added activity would therefore contain the inherent risk of overspending (Segler, 1986, p. 172). At the same time, expensive diversification into new business divisions when there is a low focus is only possible to a limited extent (few business divisions) due to the risk considerations outlined above. Here too it should be noted that the external coordination of valueadded activities, for example in a network, can be cost effective in a largely

108

HEIKE PROFF

stable environment. The form of coordination is determined by diverse contracts and agreements with external partners who rarely require adjustment in this kind of environment. They require non-specific information and consequently less specialized knowledge (know how, see Sanchez, 1997), which diffuses easily. When the transaction cost approach is extended to include risk considerations that lead to diversification, the choice of a basic model for a new value architecture can be explained by the extent of diversification of value-added activities in other business divisions due to risk considerations and as a factor of environmental dynamics. The basic model of the partial specialist (diversification in few business divisions in a largely stable environment) can thus be distinguished from that of the specialist (diversification in many business divisions in a dynamic environment). If we now consider the initial extension of the basic transaction cost model, two distinctions can be made:  The orchestrator can also be defined as a basic model with no diversification in a largely stable environment.  The focus on select value-added activities must be lower in the case of a partial specialist than a specialist. This allows us to derive three further hypotheses: H VI. The basic model of an orchestrator is selected if there is a low focus on value-added activities, and if among these, individual activities with a low factor specificity can be transferred to an external network, but still remain linked to the firm without diversification in other business divisions in a largely stable environment. H VII. The basic model of a partial specialist is selected if there is an average focus on select value-added activities with a high factor specificity and these activities can be coordinated internally through diversification in few business divisions in a largely stable environment. H VIII. The basic model of a specialist is selected when the focus in an extreme case is on one value-added activity with a very high factor specificity, and this activity can be coordinated internally through diversification in many business divisions in a dynamic environment.

Understanding the Orchestration of Value Chains

109

ORCHESTRATION OF VALUE CHAINS IN THE EXTERNAL NETWORKS OF UTILITIES IN GERMANY – A CASE STUDY The orchestration of value chains has presented an attractive growth strategy for utility companies in Germany (see also Heuskel, 1999, Rothaermel, 2000). The liberalization of the electricity monopolies in April 1998 led to a deterioration in the utilities’ competitive position, with investors becoming restless. The liberalization of the electricity market resulted in a revenue drop of 20% (Schiffer, 2003, p. 185). Since the installed generation capacity is sufficient to meet the slow growth in energy demand (0.5%–1% per annum), the utility companies now competing in the market are in an unenviable situation because electricity is an undifferentiated product, with price being the sole factor. This led to a concentration of electric utilities. The remaining companies regard the orchestration of value chains as a strategy for drastic cost cutting and a prerequisite for future growth. In 2003, four companies EnBW, E.on, RWE, and Vattenfall, were the only largely (vertically) integrated companies operating in the electric generation, transmission, and distribution sectors, while the number of companies in 1998 was eight.4 These four integrated companies have regionally divided up the German market amongst themselves. RWE operates in Rhineland and Rhineland Palatinate, EnBW in BadenWu¨rttemberg, Vattenfall in eastern Germany, and E.on in central Germany. Despite the fact that these are integrated companies, there are indications of increased orchestration of value chains in all four companies. The basic models of integrated, product-centric value architectures in the utilities market are depicted in Fig. 5 in order to identify these value chains. Three different types of value-added activities are distinguished: generation, transmission, and distribution of electricity. In 2003, the four companies together accounted for 89% of the electricity generated in Germany. RWE cornered the largest share with 33%, ahead of E.on (29%), Vattenfall (14%) and EnBW (13%). RWE also had the largest share of the electricity trading market and the distribution of electricity in the German market (31% and 34%). All four companies taken together accounted for 80% and 78% of the overall market for these value-added activities. Electricity transmission was divided entirely among the four companies (RWE 32%, Vattenfall 30%, E.on 29%, and EnBW 9%). Since the mid-nineties, a trend towards deconstructing value chains and reconstructing new activity-centric architectures has been visible in the

110

HEIKE PROFF

Fig. 5. Basic Model of Integrated Value Architectures in the Utilities Market According to Price Waterhouse Cooper (1999), Rothaermel (2000), Kearney (2002), Hinterhuber and Hinterhuber (2002), Credit Suisse Equity Research/First Boston (2003) and Schiffer (2003).

four utility companies. EnBW, E.on, RWE, and Vattenfall have structured elements of their value chains into legally independent divisions (e.g. RWE Power and E.on Kraftwerke in electric generation, RWE Netz and E.on Netz in electric transmission, RWE Plus and E.on Sales & Trading in the sale/distribution of electricity; RWE, 2003; E.on, 2002, p. 27). Using the eight hypotheses derived above, we will now demonstrate that utilities represent a good example of value chain orchestration. The margins of utility companies fell drastically due to liberalization, which also had a negative impact on the financial resource base of these traditionally resource rich utilities. The emergence of new competitors in the wake of liberalization can be regarded as an external shock. The more or less failed attempts of the utility companies to diversify into telecommunications created competence chaos in many of the companies. The undesired diffusion of knowledge is not very significant among utilities because they possess enormous material assets (e.g. power plants) rather than nonmaterial assets, as is the case in the hightech industry. The business models of all the utility companies displayed a low focus and a tendency towards low specificity of activities. EnBW and Vattenfall are in the process of consolidating their valueadded activities in 2003–2004 and, after a change in management, are attempting to focus their activities and simultaneously cooperate with independent companies, which will, however, remain coordinated by them

Understanding the Orchestration of Value Chains

111

(Schiffer, 2003). RWE and E.on have already considerably focused and coordinated their activities. Both companies no longer own power plants in all markets. Instead, for (nonspecific) electric generation, they cooperate with (nonspecific) independent electricity generators in which they have a minority stake or no stake at all. Thus, while E.on is active in 17 European countries, it has significant capital investments in just six countries (E.on, 2003, p. 3). While RWE continues to generate 78% of the electricity it sells, E.on now only generates 62% (Commerzbank Securities, 2003, p. 11). In (the similarly nonspecific) electric transmission sector, the supply networks have also been partially outsourced (RWE, 2003), although these are cooperative ventures. RWE and E.on have, to some extent, also moved out of the wholesale market, although they still attempt to control it. In the electric retail market and in distribution to end customers they are also focusing their activities by proposing to sell off individual nonspecific activities, e.g. call centers, billing (periodic dispatch of several million bills to customers), and metering. The intention however, is to continue to control these activities. Both companies (still) emphasize the benefits of control over the entire value chain (E.on, 2002, p. 9; RWE, 2003, p. 7). RWE’s 100%-owned subsidiary in England, Innogy plc., has been outsourcing an increasing number of value-added activities without linking them to the company. Together with another 100%-owned RWE subsidiary, Thames Water plc., a water utility, it is attempting, as part of a multi-utility strategy, to diversify mainly distribution activities by moving away from just electricity to supplying electricity as well as gas and water (RWE, 2003). The utility companies, primarily RWE and E.on, have already outsourced many, largely nonspecific, activities and coordinated these in external networks. So far, they still have a relatively low focus because they have retained parts of all three value chains (electric generation, transmission, and distribution). They thus display the characteristics of orchestrators of value chains (see section on Defining value chain orchestration in external networks). The diversification efforts of RWE also display characteristics of a partial specialist.

HOW TO ORCHESTRATE VALUE CHAINS – RECOMMENDATIONS FOR MANAGERS AND RESEARCHERS How is a traditional integrator with a poor competitive position able to orchestrate value chains in external networks? For managers of firms with

112

HEIKE PROFF

low competitiveness in which the focus on specific value-added activities is not yet very advanced, there are four steps to orchestrating value chains: 1. Identifying changes in the value architecture as a possible growth strategy by developing industry scenarios, identifying core competencies, and defining core and noncore businesses. This provides clarity about business processes and their probable future development. 2. Creating the organizational prerequisites for the deconstruction of value chains. To do this, there must be a focus on functional organization, the minimization of organizational interdependence, and the transfer of employees, material, and nonmaterial assets to the core business. This ensures the saleability of value-added activities. 3. Selling value-added activities that are no longer required (nonspecific). A focus on value-added activities in the core business will succeed if industry scenarios determine value maximizing buyers, and if activities for bundling value-added activities for such buyers are developed. This results in maximum profits from the sale of value-added activities and prevents them from being inadvertently sold. This step winds up the deconstruction phase and leads to the phase of reconstruction. 4. Building networks around the core business that link (nonspecific) noncore activities to the firm. The proceeds from the sale of value-added activities must be reinvested in the network. This is usually not easy because of demands to pay out at least part of the proceeds. Speed is therefore of the essence in establishing a budget for strategy change (Welge & Al-Laham, 1999, p. 563; Wheelen & Hunger, 2002, p. 194; Kaplan & Norton, 2004, p. 53) through which investments are made in controlling the network and bringing about a process of transformation which would weaken resistance in the rest of an organization. The building up of an external network and investments in the capability to control the network require suitable partners, usually the existing business partners (Howaldt, 2003). The management of networks poses high demands vis-a`-vis the capability of an organization to share information and respond to developments (Friedrich von der Eichen & Stahl, 2003). Individual steps need to be carefully monitored, even where cooperation and mutual trust exist. Resource allocation needs to suitably designed and the quality of the network strictly controlled. Agreements and activities must be documented and the performance of the network periodically evaluated (Howaldt, 2003). While the deconstruction phase can be implemented by a few persons in an organization, all employees must pitch in during reconstruction. The strategy must be sold to the capital markets so that

Understanding the Orchestration of Value Chains

113

management’s hands are not tied. A firm with a poor competitive position which has not yet focused heavily on highly firm-specific valueadded activities can thus once again become a growth organization. The orchestration of value chains is the responsibility of top management, because decisions on changes in a value architecture have a far reaching impact on a firm and cannot usually be corrected over the short or medium term. The analyses have also illuminated issues for further research into the orchestration of value chains. First, the derived explanations need to be generally verified with a regression analysis, over and above the German utility example. Second, it would also be desirable to develop this paper’s approach by integrating an extended transaction cost approach that takes into account that the high specificity of investments in a situation of imperfect contracts leads to hold-up problems in the distribution of the benefits of a contract within trade negotiations.

NOTES 1. Simplified models assume that market operations and operations within the firm have the same quality (Knolmayer 1994, p. 319). 2. The break up of integrated value chains is generally different from the modularization of a firm because modules are sub-elements of a value activity (e.g. Dyer, 1997). 3. Thus for simplicity, a parallel displacement of the DG curve is assumed. 4. Schiffer (2003), for instance, provides a comprehensive overview of the energy market in Germany.

ACKNOWLEDGMENTS Helpful comments from an anonymous reviewer are gratefully acknowledged.

REFERENCES Boehringer, I. (Ed.) (2002). Value through innovation. Annual report 2002. Bresser, R. K. F., Hitt, M. A., Nixon, R. D., & Heuskel, D. (Eds). (2000a). Winning strategies in a deconstructing world. Chichester: Wiley.

114

HEIKE PROFF

Bresser, R. K. F., Heuskel, D., & Nixon, R. D. (2000b). The deconstruction of integrated value chains: practical and conceptual challenges. In: R. K. F. Bresser, M. A. Hitt, R. D. Nixon & D. Heuskel (Eds), Winning strategies in a deconstructing world (pp. 1–21). Chichester: Wiley. Cohendet, P. (1998). Network, interactions between economic agents and irreversibilities: The case of the choice among competing technologies. In: P. Cohendet, P. Llerena, H. Stahn & G. Umbhauer (Eds), The economics of networks (pp. 93–121). Berlin. Combs, J. G., & Ketchen, D. J. (1999). Explaining interfirm cooperation and performance: Towards a reconciliation of predictions from the resource-based view and organizational economics. Strategic Management Journal, 20, 867–888. Commerzbank Securities. (Ed.) (2003). E.ON/RWE: Grand old twins. London: Commerzbank Securities. Credit Suisse Equity Research/First Boston. (Ed.) (2003). European utilities: Riding the cycles. London: Credit Suisse Equity Research/First Boston. Dyer, J. H. (1997). Effective interfirm collaboration: How firms minimize transaction costs and maximize transaction value. Strategic Management Journal, 18, 535–556. E.on (Ed.) (2002). Strategie und Kennzahlen 2002. Du¨sseldorf: E.on. E.on (Ed.) (2003). E.on. Gescha¨ftsbericht 2002. Du¨sseldorf: E.on. Easton, G. (1992). Industrial networks: A review. In: B. Axelsson & G. Easton (Eds), Industrial networks (pp. 3–27). London: Routledge. Fandel, G., & Lord, M. (1999). Portefeuilletheoretische U¨berlegungen zur Entscheidung u¨ber Eigenferti-gung oder Fremdbezug. Zeitschrift fu¨r Betriebswirtschaft, 69, 1423–1444. Friedrich von der Eichen, S., & Stahl, H. K. (2003). Brauchen wir ein neues Management. In: Frankfurter Allgemeine Zeitung vom, December 29. Heuskel, D. (1999). Wettbewerb jenseits von Industriegrenzen: Aufbruch zu neuen Wachstumsstrategien. Frankfurt/M. Hinterhuber, A., & Hinterhuber, H. H. (2002). Die Orchestrierung von Wertscho¨pfungsketten. In: H. Albach, B. Kaluza & W. Kersten (Eds), Wertscho¨pfungsmanagement als Kernkompetenz (pp. 277–301). Wiesbaden: Gabler. Howaldt, J. (2003). Unternehmensnetzwerke – Organisationsform der Zukunft. Pra¨sentation auf dem VDEB-Infotag, November 7, Aachen. Huff, J. O., Huff, A. S., & Thomas, H. (1992). Strategic renewal and the interaction of cumulative stress and inertia. Strategic Management Journal, 13, 55–75. Huff, J. O., Huff, A. S., & Thomas, H. (1994). The dynamics of strategic change. In: H. Daems & H. Thomas (Eds), Strategic groups, strategic moves and performance (pp. 31–62). Oxford: Elsevier. Kaplan, R. S., & Norton, D. P. (2004). Strategy maps. Converting intangible assets into tangible outcomes. Boston, MA: Harvard Business School Press. Kearney, A. T. (Ed.) (2002). Mastering innovation management: Collaborating for speed and profit. Du¨sseldorf: A. T. Kearney. Knolmayer, G. (1994). Zur Beru¨cksichtigung von Transaktions- und Koordinationskosten in Entscheidungsmodellen fu¨r make-or-buy-Problemen. Betriebswirtschaftliche Forschung und Praxis, 14, 316–334. Kutschker, M., & Schmid, S. (1995). Netzwerke internationaler Unternehmen, Ingolstadt. (= Diskussionsbeitra¨ge der wirtschaftswissenschaftlichen Fakulta¨t Ingolstadt). Langlois, R. N., & Robertson, P. L. (1995). Firms, markets and economic change. London: Routledge. Marshall, A. (1920). Principles of economics. London: MacMillan & Company.

Understanding the Orchestration of Value Chains

115

Picot, A., Reichwald, R., & Wigand, R. T. (1998). Die grenzenlose Unternehmung. Wiesbaden: Gabler. Price Waterhouse Cooper (Ed.) (1999). European utilities: An overview. London: Price Waterhouse Cooper. Proff, H. (2003a). Explanation of the development of new value architectures in the automotive industry. International Motor Vehicle Program (IMVP), Working paper, Boston. Proff, H. (2003b). Grenzen innovativer strategischer Unternehmensfu¨hrung in ‘‘emerging markets’’. In: T. Peske & R. Schrank (Eds), Strategieinnovationen und innovative Unternehmensfu¨hrung (pp. 205–229). Lohmar: Eul Verlag. Proff, H. (2004). Erkla¨rung der Entwicklung neuer Wertarchitekturen aus der Theorie der Kompetenzentwicklung und aus dem Transaktionskostenansatz. In: S. A. Friedrich von den Eichen, H. H. Hinterhuber, K. Matzler & H. K. Stahl (Eds), Entwicklungslinien des Kompetenzmanagements (pp. 71–113). Wiesbaden: Gabler. Reichwald, R., & Mo¨slein, K. (2000). Nutzenpotential und Nutzenrealisierung in verteilten Organisationsstrukturen. In: H. Albach, D. Specht & K. Wildemann (Eds), Virtuelle Unternehmen, ZfB-Erga¨nzungshelft (Vol. 2, pp. 117–136). Reichwald, Mo¨slein: ZfB-Erga¨nzungshelft. Riordan, M. H., & Williamson, O. E. (1985). Asset specificity and economic organization. International Journal of Industrial Organization, 3, 365–378. Rothaermel, F. T. (2000). The virtual reconstruction of value chains: Complementarity process innovation in the biopharmaceutical industry. In: R. K. F. Bresser, M. A. Hitt, R. D. Nixon & D. Heuskel (Eds), Winning strategies in a deconstructing world (pp. 107–133). Chichester: Wiley. RWE. (Ed.) (2003). Gescha¨ftsbericht 2002: Integration – der Schlu¨ssel zum Erfolg. Essen. Sampler, J. L. (1998). Redefining industry structure for the information age. Strategic Management Journal, 19, 343–355. Sanchez, R. (1997). Managing articulated knowledge in competence-based competition. In: R. Sanchez & A. Heene (Eds), Strategic learning and knowledge management (pp. 163–187). Chichester: Wiley. Scha¨fer, A. (1998). Management business migration: Grenzga¨nger. Managermagazin, 10, 106–112. Schering, (Ed.) (2002). Gescha¨ftsbericht 2002: Making medicine work. Berlin: Schering. Schiffer, H.-W. (2003). Energiemarkt Deutschland. 8., vo¨llig neu bearb. Aufl., Aachen. Schmidt, H. (2000). Die O¨konomik der Information. In: Frankfurter Allgemeine Zeitung vom, October 4, S. 17. Schmidt, R. H., & Terberger, E. (1996). Grundzu¨ge der Investitions- und Finanzierungstheorie (3. Aufl). Wiesbaden: Gabler. Sydow, J. (2001). Zum Verha¨ltnis von Netzwerken und Konzernen. In: G. Ortmann & J. Sydow (Eds), Strategie und Strukturation. Strategisches Management von Unternehmen, Netzwerken und Konzernen (pp. 269–296). Wiesbaden: Gabler. Venkatesan, R. (1993). Make-or-buy: Die Sta¨rken des Endproduktes stu¨tzen. Harvard Business Review, 12, 98–108. Welge, M. K., & Al-Laham, A. (1999). Strategisches Management. Wiesbaden: Gabler. Wheelen, T. L., & Hunger, J. D. (2002). Strategic management and business policy. Upper Saddle River: Prentice Hall. Williamson, O. E. (1985). The economic institutions of capitalism. Firms, markets, and relational contracting. New York: Free Press.

THE IMPACT OF CORPORATE VENTURING ON A FIRM’S COMPETENCE MODES J. Henri Burgers, Frans A. J. Van Den Bosch and Henk W. Volberda ABSTRACT In this conceptual paper we investigate how corporate venturing influences an organization’s competences. The impact of various types of corporate ventures on the portfolio of strategic options of a firm’s competence modes (Sanchez, 2004a; Sanchez & Heene, 2002) will be assessed by distinguishing two fundamentally different dimensions of corporate venturing: technology and product (Block & MacMillan, 1993). We argue that the level of product and factor market dynamism mediates the effect of corporate venturing on a firm’s competence modes. Corporate ventures that significantly increase the level of product or factor market dynamics will increase the flexibility in all five competence modes. These ventures have a direct effect on the lower-order competence modes and an indirect, lagged effect on higher-order competence modes through feedback loops. The developed framework and the propositions contribute to managing the ability of a firm to change its coordination, resource, and operating flexibility in order to sustain value creation.

Competence Building and Leveraging in Interorganizational Relations Advances in Applied Business Strategy, Volume 11, 117–140 Copyright r 2008 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1016/S0749-6826(07)11005-2

117

118

J. HENRI BURGERS ET AL.

INTRODUCTION The competence perspective has evolved into a major line of thinking in contemporary management literature. While there is a vast body of knowledge about what competences are and how they should be managed, there is still insufficient understanding of how competences are developed. Small project teams within existing units are likely to enhance the existing base of competences. To develop new competences for a company, the development should take place in units that are managed separately from existing units (Benner & Tushman, 2003; Hill & Rothaermel, 2003; McGrath, 2001). Corporate venturing is a tool to autonomously explore new competences within the boundaries of the parent firm (Block & MacMillan, 1993; Guth & Ginsberg, 1990; Zahra, Nielsen, & Bogner, 1999). These newly developed competences have to be reintegrated in the existing competence base of the organization, leading to processes of strategic renewal (Guth & Ginsberg, 1990; Volberda, Baden-Fuller, & Van den Bosch, 2001). In this paper we take a competence perspective to investigate these renewal processes, and in particular the effect of corporate venturing on firms’ competence modes. The performance of firms improves if their competence modes are aligned with the level of environmental dynamism (Sanchez, 2004a). Furthermore, the impact of corporate venturing on an organization is contingent on the competitive environment (Stopford & Baden-Fuller, 1994; Zahra, 1993). Corporate ventures can trigger an increase in market dynamism, to which the firm has to react by adapting its competence modes. The purpose of this paper is, therefore, to investigate the impact of corporate venturing on firm’s competence modes, taking into account the mediating role of market dynamism. The paper proceeds as follows. First, we will introduce our three building blocks of the framework: corporate venturing, competence modes, and the competitive environment. Second, we will develop a conceptual framework and propositions by distinguishing two effects of corporate venturing on a firm’s competence modes: ventures fitting within the existing level of market dynamism and competence modes, and ventures enlarging the flexibility of the competence modes through an increase in market dynamism. We will conclude with a discussion of the implications and point out issues for future research.

CORPORATE VENTURING Researchers have since long argued that creating new businesses versus managing existing businesses are two fundamentally different processes

The Impact of Corporate Venturing on a Firm’s Competence Modes

119

(Duncan, 1976; Gibson & Birkinshaw, 2004; March, 1991). Corporate venturing contributes to solving this tension between exploration and exploitation. Initially authors restricted corporate ventures to new venture divisions, which were managed separately from all other businesses and reported directly to the board of management of the company (Burgelman, 1983b; Fast, 1979). The underlying assumption is that the less related the venture is to the parent firm’s competence base, the more autonomy the venture needs (Burgelman, 1984; McGrath, 2001; Sorrentino & Williams, 1995; Thornhill & Amit, 2001). From that perspective, a new venture division was seen as a tool to develop businesses lying outside the company’s base of competences. Later authors broadened the definition of corporate venturing by including ventures in other parts of the organization that are more closely related to the parent’s competence base in their definition (Block & MacMillan, 1993; Burgelman & Va¨likangas, 2005; Husted & Vintergaard, 2004; Sharma & Chrisman, 1999). We adhere to these later definitions and define corporate venturing as the creation of new businesses within an existing organization aimed at the development of new competences. Corporations can start venture programs for a variety of reasons, but a predominant one is that successful venturing can rejuvenate a mature business (Burgelman, 1983a; Sharma & Chrisman, 1999; Zahra, 1996). Corporate ventures achieve this by creating or enhancing competences for the parent firm (Guth & Ginsberg, 1990; Zahra et al., 1999). To what extent the venture develops competences new to the organization can be measured by a concept called relatedness (Burgelman, 1984; Sorrentino & Williams, 1995). Block and MacMillan (1993) distinguished three dimensions of relatedness of a corporate venture: product, technology, and market.

Dimensions of Corporate Venturing The product dimension measures the newness of the products a venture develops compared to the current offerings of the parent firm. Ventures developing new products can either complement or substitute a product in one of the firm’s existing markets (Methe, Swaminathan, Mitchell, & Toyama, 1997). Ventures adding a new product strengthen a firm’s market position through broadening the product range by launching complementary products. Microsoft’s launch of MS-Office and Internet Explorer, for example, was aimed at broadening the product range and strengthening the dominance of, respectively, Windows 95 and Windows 98. Ventures aimed

120

J. HENRI BURGERS ET AL.

at replacing an existing product strengthen the firm’s position by raising the value of the offered product. Microsoft, for example, relentlessly introduced newer versions of Windows even though Microsoft had already obtained a 90 percent market share for Windows in 1992 (Rebello, 1992). The technology dimension refers to the extent a venture develops new technological competences relative to the parent firm. This type of venture is associated with competence destroying innovations, as it makes the existing technology obsolete. When Pilkington invented the float glass process in the 1950s, it made the existing grinding process obsolete as ‘‘a float line would ultimately more than halve labor requirements; it would lower energy costs by about 50 percent; the 15–25 percent of glass ground away in earlier processes would be saved; y equipment investment would be about one-third y production space requirements would drop by over 50 percent; and process interruption costs would virtually disappear’’ (Quinn, 1989, p. 862). However, the product itself did not change, as ‘‘it would not be sufficiently better than existing plate to demand a premium price because of its quality’’ (Quinn, 1989, p. 862). The market dimension refers to whether a venture aims at new markets. Competences regarding new markets refer to the ability of opening up new distribution channels, trying out new marketing approaches with different sets of customers or geographically different markets. A venture developing a new market could trigger an integration of this new market with the firm’s current markets or it could be used to leverage the company’s current technological or product competences in new markets. Honda uses this type of venture as it leverages its competence of building world-class small engines to products like cars, motorbikes, and lawnmowers. In the remainder of this paper, we will focus on the product and technology dimension of a venture.

COMPETENCE-BASED MANAGEMENT AND COMPETENCE MODES There is a long-standing tradition in management literature to view a firm as a bundle of resources (Barney, 1991; Dierickx & Cool, 1989; Penrose, 1959; Wernerfelt, 1984). Even the origins of entrepreneurship result from this point of view, as entrepreneurship is about the creation of new bundles of resources (Kirzner, 1973; Schumpeter, 1934). Barney (1991) argued that among others, resources must be unique and inimitable to achieve a sustainable competitive advantage. This led many researchers to question whether the traditional, more physical, resources could lead to competitive

The Impact of Corporate Venturing on a Firm’s Competence Modes

121

advantage, as many firms could possess them. This led to the extension of the resource-based view of the firm with the concepts of dynamic capabilities and competences. Dynamic capabilities are the routines by which firms reconfigure resource combinations (Eisenhardt & Martin, 2000; Jansen, Van den Bosch, & Volberda, 2005; Teece, Pisano, & Shuen, 1997). Although of a higher-order and more tacit than resources, dynamic capabilities in essence still depend on resources. Their competitive advantage results from the resource configurations and not from dynamic capabilities per se (Eisenhardt & Martin, 2000). Prahalad and Hamel (1990) developed the concept of core competences, which span across units and businesses and are the collective learning in an organization, in particular the coordination of production skills and the integration of multiple streams of technology (Prahalad & Hamel, 1990; Rumelt, 1994). Originally the concept of core competences referred to more technical competences, like Honda’s world-class ability to build small engines or Sony’s competence in miniaturization. Later work has extended this notion to ‘‘higher-order’’ competences, including the ability to define alternative strategic logics and a direct link with organizational and strategic flexibility (Hamel & Heene, 1994; Sanchez, 2001, 2004a; Sanchez, Heene, & Thomas, 1996). Competence-based management focuses on conceptualizing and analyzing the competences of organizations including how competences may help to adapt organizations to changing environments. This perspective views organizations not only by their resource base, but also by their strategic goals, strategic logics, and by the different ways in which organizations coordinate deployment of resources (Sanchez et al., 1996). Competencebased management has contributed to our understanding of firms as open systems which pursue strategic goals according to a strategic logic. This logic, in turn, shapes the management processes that determine how a firm acquires and uses resources – either within a firm’s boundaries (firm-specific resources) or outside its boundaries (firm-addressable resources) (Sanchez & Heene, 1997).

Five Competence Modes Sanchez and Heene (1997) proposed a model of the firm as an open system consisting of various layers: strategic logic, management processes, intangible and tangible assets, operations, and finally product offerings. Sanchez and Heene (2002) and Sanchez (2004a) extended this model by

122

J. HENRI BURGERS ET AL.

proposing five competence modes, each mode addressing different sources of flexibility creating different portfolios of strategic options. A competence mode ‘‘results from a distinctive kind of organizational flexibility to respond to changing and diverse environmental conditions’’ (Sanchez, 2004a, p. 523). Fig. 1 shows the five competence modes and their respective flexibility. Each competence mode is related to a distinct aspect of the organization, with the highest mode of strategic logic on the left to the resources on the right. The level of flexibility (Volberda, 1998) refers to the ability to define alternatives for the existing resources or to the ability to put the existing resources to different uses. In other words, the higher the level of flexibility, the broader the range of strategic options and corporate ventures a firm is able to develop. The first competence mode operates at the highest level of strategic logics (see Fig. 1). The cognitive flexibility of top and senior managers to define alternative strategic logics creates a portfolio of strategic logics. The broader and more varied this portfolio, the better top management is able to perceive opportunities to create value. The second competence mode relates to management processes and the cognitive flexibility of top management to define alternative management processes to create value (see Fig. 1). It is of a lower level in the sense that this competence mode refers to the flexibility in creating different management processes for a single strategic logic. Through feedback loops management processes could also trigger the definition of new strategic logics. The management processes-in-use determines to some extent the ability of a company to manage resource chains. The third competence mode refers to the coordination flexibility to identify, configure, and deploy chains of resources. This competence mode taps most directly into the original thinking in the fields of entrepreneurship and dynamic capabilities (cf. Schumpeter, 1934; Teece et al., 1997). Through feedback loops, new

Competence Mode I Competence Mode II Cognitive flexibility to Cognitive flexibility to define alternative define alternative management processes strategic logics

Fig. 1.

Competence Mode III Coordination flexibility to identify, configure, and deploy resource chains

Competence Mode IV Resource flexibility to be used in alternative operations

Competence Mode V Operating flexibility in using available resources

Balanced Competence Modes and their Flexibility Mix. Source: Based on Sanchez (2004a).

The Impact of Corporate Venturing on a Firm’s Competence Modes

123

configurations of resources can also lead to the definition of alternative strategic logics. The inherent flexibility of resource chains to be used in alternative operations is the fourth competence mode. The flexibility of this resource can be defined according to the range of possible uses for the resources, including the time and costs required to change the use of a particular resource (Sanchez, 2004a). This flexibility of a resource to be deployed in alternative ways could also create new opportunities to configure new resource chains. The fifth and final competence mode focuses on operating flexibility in applying skills and capabilities in uses of available resources (see Fig. 1). This flexibility relates in particular to the design of operating processes, like moving the order point downstream through use of modular product architectures (Sanchez & Mahoney, 1996). Mastering the skills of operating flexibility could in turn lead to higher flexibility in ‘‘higher-order’’ competence modes, as these skills might be applied in alternative resource chains, management processes, or even strategic logics. When portraying the competence modes as some kind of flexibility funnel through which ideas have to flow (see Fig. 1), the broader the portfolio of strategic options created by each competence mode, the more flexible and adaptive the firm will be. To avoid bottlenecks in the flexibility funnel, the coherence of the portfolio and the complementarities of the five competence modes need to be managed (Sanchez, 2004a). Bottlenecks limit the overall competence of an organization and have an impact on the other competence modes ‘‘because each of an organization’s competence modes will tend to equilibrate with the least flexible competence mode of the organization’’ (Sanchez, 2004a, p. 528). This suggests relating the type of competitive environment with the competence modes that may operate as the most limiting factor regarding flexibility. For example, in a stable environment it makes no sense to have substantial cognitive flexibility of top and senior managers. In dynamic environments characterized by frequent and uncertain changes in market preferences and available technologies, however, the cognitive flexibility to define alternative strategic logics and management processes, i.e. the first and second competence modes, is the most critical.

COMPETITIVE ENVIRONMENT The firm’s competitive environment, and in particular environmental dynamism, is a frequently addressed factor in corporate entrepreneurship

124

J. HENRI BURGERS ET AL.

research (e.g. Lumpkin & Dess, 2001; Zahra, 1996). Researchers have focused on both the perceived and the objective environment. The enacted environment is the basis for managerial action (Penrose, 1959; Weick, 1979). Zahra (1993) found that the perceived level of environmental dynamism significantly and positively influences the venturing activities a firm undertakes. Whereas the perceived environment leads to managerial action, the objective environment determines the quality of the opportunity for a venture (Tsai, MacMillan, & Low, 1991). In other words, all managerial action will ultimately be put to the test in the market place. In this paper, we apply a normative perspective about what a manager should do instead of focusing on why a manager takes certain action. Our focus is therefore on the objective environment. Significant increases in the level of dynamism of a firm’s industry might indicate that some disruptive change has taken place, for which firms have no option but to adapt.

Four Generic Types of Environment Sanchez (2004a) distinguished three types of environment by differentiating between the amount of change in market preferences and technologies. We propose to extend this model by suggesting that the level of change in technologies and market preferences do not necessarily have to be the same. Following Floyd and Lane (2000), we make a distinction between product and factor market dynamism. We focus on dynamism as it captures the frequency and intensity of change in a firm’s industry (Volberda, 1998). Product market dynamism refers to positioning strategies, market preferences, and competence-enhancing behavior, while factor market dynamism refers to changes in technologies and competence-defining behavior (Floyd & Lane, 2000). Fig. 2 combines product and factor market dynamism to create a 2  2 matrix of four generic types of environment: stable competition, product-driven competition, technology-driven competition, and hypercompetition. Stable competition is characterized by both stable product and stable factor market conditions. The frequency and intensity of changes are low, allowing firms to remain passive with respect to their environment and focus on short-term efficiency instead of flexibility. The focus will be on competence mode V to focus on operational efficiency and flexibility (Sanchez, 2004a). Under the condition of stable competition, managers who tend to follow the industry rules will not initiate corporate ventures that focus on their existing markets. These ventures would disturb the market’s

The Impact of Corporate Venturing on a Firm’s Competence Modes

125

Product Market Stable

Dynamic

Stable competition

Product-driven competition

• Competence deployment • Critical competence mode: V

Dynamic

• Competence definition and deployment • Focus on new technologies • Critical competence mode: III

Factor market

Stable

Technology-driven competition

• Competence modification and deployment • Focus on new products • Critical competence mode: IV Hypercompetition • Continuous competence redefinition and modification • Focus on new products and new technologies. • Critical competence mode: I and II

Fig. 2. Four Generic Types of Environment: Contingencies and Competence Subprocesses. Source: Based on Floyd and Lane (2000) and Sanchez (2004a).

equilibrium by increasing the level of dynamics, which would be in conflict with the focus on stability. Firms encountering stable competition focus on entry barriers to restrain the rivalry within the industry (D’Aveni, 1999), providing incumbent firms with a steady cash flow without having to incur high R&D costs. A high level of dynamism in product markets and a stable factor market characterizes product-driven competition (see Fig. 2). With this type of competitive dynamics the underlying technologies remain relatively unchanged, which allows firms to enhance their current set of core competences by constantly improving the product range of the company (D’Aveni, 1999) or engage in customer segmentation (Floyd & Lane, 2000). D’Aveni (1999, p. 131) argued that incumbent leaders in a competenceenhancing environment ‘‘sustain their leadership by layering new competences on top of old ones.’’ In this type of environment the emphasis will be on competence mode IV, as resources need to be applied and leveraged in different products. Technology-driven competition with the associated technological discontinuities and patterns of punctuated equilibria has been extensively documented in the literature (e.g. Anderson & Tushman, 1990; Tripsas, 1997; Tushman & Anderson, 1986). These companies face dynamic factor markets but relatively stable product markets. Firms will focus on defining new competences (Floyd & Lane, 2000). The emphasis will be on competence mode III, as firms develop new resource chains to cope with the dynamics in factor markets.

126

J. HENRI BURGERS ET AL.

Hypercompetition is characterized by inherent instability and change (D’Aveni, 1994). Firms try to gain a series of short-lived advantages by actively destroying their own competences (D’Aveni, 1994, 1999; Floyd & Lane, 2000). Organizations in these contexts need speed-based processes and greater flexibility to handle the combination of dynamic factor and product markets (Volberda, 1998). Firms facing hypercompetition need to continuously create new competences and disrupt the environment before rivals do (D’Aveni, 1999). Firms focus on competence modes I and II, as having a broad portfolio of strategic logics and management processes is critical in coping with a variety of situations encountered in hypercompetitive environments.

CONCEPTUAL FRAMEWORK AND PROPOSITIONS Corporate ventures develop new businesses and present new strategic options to a firm. By doing so, corporate ventures might need new management processes, new strategic logics, or new combinations of resources. If the needs of a corporate venture are beyond the flexibility of the competence mode, the level of flexibility in the respective competence mode needs to be increased. Burgelman (1983a) argued that ventures will first need to build a strategic context before changes will take place on a broader scale in a firm. We argue that the need to increase flexibility in competence modes is not triggered by the corporate venture directly, but that the level of product and factor market dynamism mediates the impact of various types of corporate ventures on the flexibility of a firm’s competence modes. Corporate venturing and the competitive environment have frequently been linked to each other (Tsai et al., 1991; Zahra, 1993). Miller and Friesen (1982, p. 6), for example, pointed out: ‘‘because innovation prompts imitation, the more innovative the firms, the more dynamic and competitive (hostile) their environments can become.’’ In other words, innovative corporate ventures have a significant impact on the competitive environment of the parent firm. Management needs to align the firm in response to changes in its competitive environment (Burgelman, 1991; Burns & Stalker, 1961; Floyd & Lane, 2000; Huff, Huff, & Thomas, 1992; Naman & Slevin, 1993). Volberda and Lewin (2003) argued that self-renewing organizations should at least match the internal rate of change to the rate of change of their environment. This suggests, the level of flexibility in competence modes needs to be adjusted in response to changes in a firm’s competitive environment. If the corporate

The Impact of Corporate Venturing on a Firm’s Competence Modes

127

venture does not have a major impact on the environment, the competence modes of the firm are already adapted to handle this new venture. In developing our conceptual framework, we discern two possible effects of corporate venturing on the level of environmental dynamism and modes of competence. The first effect of a corporate venture is maintaining fit with the parent firm’s competitive environment. We define fit as the degree to which firms in that particular industry are used to dealing with the changes resulting from the corporate venture. Firms in the consumer electronics industry are, for example, used to dealing with the emergence of new standards like the VHS, CD, or DVD, just as firms in the fashion apparel industry are used to frequently modifying their product lines according to the latest trends. From an alignment perspective the parent firm will be capable of handling these changes, and the relatively small deviation from the existing situation does not call for increased flexibility in the competence modes of the organization. The firm will stay inside its box of competitive dynamics (see Fig. 2). The second effect of a corporate venture is changing the rules of the industry giving rise to a significant increase in the level of competitive dynamism in the parent firm’s industry. In that case there is a misfit with the competitive environment, as firms are not used to dealing with these kinds of changes. For example, banking and specifically stock trading has significantly changed since the emergence of the Internet. Many banks had serious difficulty in adapting to the new situation, as the banking industry had remained stable for decades. These ventures will initiate a transition from one box of competitive dynamics to another, which will require increasing the flexibility of the competence modes to realign the firm with its competitive environment.

Ventures Fitting within the Competitive Environment and the Existing Flexibility of the Competence Modes The alignment perspective has gained widespread ground in management literature (Floyd & Lane, 2000; Naman & Slevin, 1993). Sanchez (2004a) suggested that the level of flexibility in each competence mode should fit with the environment. Over time, excess flexibility will decrease until all modes are in balance (see Fig. 1). Burgelman (1991) suggested that internal selection processes regarding corporate venturing can only be effective in the long run when they resemble environmental selection pressures. In other words, the competence modes of a parent firm will be able to handle corporate ventures that do not increase the level of product and factor

128

J. HENRI BURGERS ET AL.

market dynamism. The venture develops new product or technological competences which a firm has to incorporate in its strategy. But these adjustments of the technological and product base of a company can be handled by the existing flexibility of the firm’s competence modes. The corporate ventures that fit with the competitive environment should not face bottlenecks when moving through the competence modes (see Fig. 1). Product market dynamism refers to new product introductions and positioning strategies, and is associated with competence enhancing behavior (Floyd & Lane, 2000). Dynamic product markets are characterized by a low intensity, but high frequency of change. Firms are able to adapt to this strategic need of frequently launching new products and modifications through product development ventures, as the technological base of existing product lines remains intact. Zahra (1993) empirically verified that managers who perceived a great demand for new products (i.e. dynamic product markets) strongly preferred product innovation. From an alignment perspective, ventures developing new products will fit with dynamic product markets. As such, firms operating in dynamic product markets do not have to adjust their competence modes when developing a product development venture. Technology development ventures fit with dynamic factor markets. Factor market dynamism is associated with changes in technologies and processes, and with competence destroying behavior (Floyd & Lane, 2000). It is characterized by a low frequency but high intensity of change. Anderson and Tushman (1990) suggested that radical technological changes lead to a short period of ferment, characterized by rapid competence destroying turbulence, followed by a longer period of relative stability. Environments with abundant technological opportunities (i.e. high factor market dynamism) are positively associated with technological entrepreneurship (Zahra, 1993). Corporate ventures developing new technologies will not lead to changes in the flexibility of the competence modes if the firm has its competence modes already geared towards dynamic factor markets.

Ventures Increasing the Required Flexibility of the Competence Modes In the previous section, we argued how certain types of ventures can achieve fit with competitive environments. But what if these ventures are initiated in a stable product or factor market and change the competitive dynamics of a firm’s industry? Ventures deliver new value propositions for a market, but they can also challenge the way firms compete with each other. Competitors

The Impact of Corporate Venturing on a Firm’s Competence Modes

129

are likely to follow a product introduction or counter-attack with an even better product or technology, resulting in an increase of market dynamism (D’Aveni, 1999; Miller & Friesen, 1982). These rule-changing ventures push a firm to another ‘‘box’’ of competitive dynamics (see Fig. 2), forcing the firm to enlarge the flexibility of its competence modes. This significant increase in competitive dynamics cannot be handled within the systems-inuse. Changes in competence modes will be necessary, ranging from new managerial cognitions to operational processes (Barr, Stimpert, & Huff, 1992; Forte, Hoffman, Lamont, & Brockmann, 2000; Sanchez, 2004a; Stopford & Baden-Fuller, 1994). In a stable market, a firm would most likely have a narrow and balanced ‘‘flexibility funnel’’ (see Fig. 1). However, when such a firm is confronted with a dynamic market, the flexibility mix of the firm will be too narrow. Being able to deal with dynamic markets requires new management processes and cognitive logics to increase the portfolio of strategic options. Sanchez (2004a) argued that over time the system is likely to equilibrate, as excess flexibility at one of the competence modes is likely to diminish towards the flexibility level of the bottleneck. In other words, a transition from a stable to a dynamic market triggers changes in the level of flexibility in all five competence modes. Ideally these changes should be managed simultaneously, but in reality changes will be made more sequentially. Changes in the flexibility of the competence modes are subject to increasing dynamic response times, and the pace of change will therefore be set by the inertia associated with the managerial cognitions in the highest competence modes (Tripsas & Gavetti, 2000; Sanchez, 2004a). The realignment process will only be complete when all five competence modes have changed, but corporate ventures can temporarily escape the selective effects of the current cognitive context of competence modes I and II (Burgelman, 1983a). Over time such a corporate venture will trigger changes in the strategic and structural context, when top management retroactively rationalizes the venture and approves the changes in the competence modes (Burgelman, 1983b). The venture has by that time already become part of the lower levels of the organization. Top management may approve the changes in higher-order competence modes such as alternative strategic logics or changes in management processes, but the venture will have ignited changes in the more downstream competence modes of operational flexibility and reconfiguration of resource chains. Below we will outline the order in which the level of flexibility of the competence modes increases, based on changes in product and factor market dynamism (Floyd & Lane, 2000; Sanchez, 2004a).

130

J. HENRI BURGERS ET AL.

Product Development Ventures Increasing Product Market Dynamism An innovative product development venture could change a stable into a dynamic product market, due to imitation behavior of competitors. Dynamic product markets are characterized by a high frequency of change, but the intensity of the individual changes is relatively low. With this type of competitive dynamics the underlying technologies remain more or less the same. This allows firms to enhance their current set of core competences by constantly improving the product range of the company (D’Aveni, 1999), or engaging in customer segmentation (Floyd & Lane, 2000). Sanchez (2004a, p. 526) suggested that ‘‘in an environment in which market preferences are evolving rapidly, the flexibility to redeploy an existing resource chain from one product offer to a new or modified product offer will be of paramount importance in sustaining value creation.’’ We suggest that a corporate venture developing new products and triggering a change towards a dynamic product market will first influence competence mode IV (see Fig. 3). The resource chains will stay the same, but will be put to different use in new products. Due to the increased flexibility in competence mode IV created by the product development venture and the resulting increase in product market dynamism, there will be a temporary imbalance in the competence funnel with bottlenecks arising in competence modes I–III and V. The increased flexibility in competence mode IV will put direct pressure on competence mode V to enlarge its operating flexibility to put the new resources to use, as the product development venture facilitated by the flexibility in competence mode IV should not be constrained by Competence Mode I Cognitive flexibility to define alternative strategic logics

Competence Mode II Cognitive flexibility to define alternative management processes

Competence Mode III Coordination flexibility to identify, configure, and deploy resource chains

Competence Mode IV Resource flexibility to be used in alternative operation

Competence Mode V Operating flexibility in using available resources

Indicates direct pressure from a venture to increase the level of flexibility in a downstream competence mode. Indicates indirect, lagged pressure from a venture to increase the level of flexibility in an upstream competence mode to adapt to changed environmental circumstances and to remove bottlenecks in the flexibility funnel.

Fig. 3.

From Stable to a Dynamic Product Market: Product Development Ventures Increasing the Level of Flexibility in all Five Competence Modes.

The Impact of Corporate Venturing on a Firm’s Competence Modes

131

mode V. The shorter response time for competence mode V relative to IV (Sanchez, 2004a) should solve this problem. However, as the firm now has to cope with a dynamic product market, it will also need new management processes and strategic logics. These adaptations will take more time and will only retroactively be initiated. These lagged effects are represented by the dotted arrows in Fig. 3. Proposition 1. In the context of a stable product market, a successful venture that develops new products will significantly increase the level of product market dynamism and is likely to raise the level of flexibility of all five competence modes, through a direct effect on competence modes IV and V and an indirect, lagged effect on competence modes I–III. Technology Development Ventures Increasing Factor Market Dynamism A second possible transition is from a stable to a dynamic factor market. Ventures that develop new technologies can trigger competitive reactions and initiate a shift to a dynamic factor market. The effects of technological discontinuities have been extensively documented in the literature, but mostly from an industry perspective (e.g. Adner, 2002; Anderson & Tushman, 1990; Arend, 1999; Christensen, 1997). However, such a discontinuity and shift from a stable to a dynamic factor market also has consequences for a firm and the flexibility of its competence modes. New technologies have implications for an organization’s value chain, as firms might need new suppliers, ways of producing, and the like. Volberda et al. (2001) suggested that these technological changes, which are deeply rooted in an organization, require transformational renewal. Sanchez (2004a, p. 526) argued that in environments in which ‘‘technologies are changing, the flexibility to define and assemble new resource chains based on newly available technological resources or to integrate new technologies into existing resource chains will be critical.’’ A venture developing new technologies in a firm operating in a stable factor market will therefore first trigger a need for more coordination flexibility (see Fig. 4). The need to introduce the products developed by the venture into the market will trigger an increase in flexibility in competence modes IV and V. Again, because ventures are autonomous initiatives that have escaped the selective effects of the cognitive mindsets of a firm, the effect on competence modes I and II will be lagged (see Fig. 4). In the long-term an increase in cognitive flexibility will be necessary to remove the bottlenecks that will occur due to the technological development. Moreover, operating in a technologically challenging environment will demand new management

132

J. HENRI BURGERS ET AL.

Competence Mode I Cognitive flexibility to define alternative strategic logics

Competence Mode II Cognitive flexibility to define alternative management processes

Competence Mode III Coordination flexibility to identify, configure, and deploy resource chains

Competence Mode IV Resource flexibility to be used in alternative operations

Competence Mode V Operating flexibility in using available resources

Indicates direct pressure from a venture to increase the level of flexibility in a downstream competence mode. Indicates indirect, lagged pressure from a venture to increase the level of flexilibility in an upstream competence mode to adapt to changed environmental circumstances and to remove bottlenecks in the flexibility funnel.

Fig. 4. From Stable to Dynamic Factor Market: Technology Development Ventures Increasing the Level of Flexibility in all Five Competence Modes.

processes and strategic logics to ensure firm survival. An ability to quickly react when facing a technological discontinuity has been deemed paramount for continuing firm survival (D’Aveni, 1999; Volberda et al., 2001), suggesting the following proposition. Proposition 2. In the context of a stable factor market, a successful technology development venture will significantly increase the level of factor market dynamism and is likely to increase the level of flexibility of all five competence modes, through a direct effect on competence modes III–V and an indirect, lagged effect on competence modes I and II.

Increasing Flexibility in all Competence Modes: The Case of Philips’ Electronic Toothbrush Product Development Venture We will illustrate how a product development venture increases the flexibility in all competence modes with the efforts of Philips entering the electronic toothbrush market. During the early 1990s, the Domestic Appliances and Personal Care (DAP) division within Philips was active in several markets that were rapidly maturing, like shaving products, vacuum cleaners, and coffeemakers. The exploitation-driven activities made DAP one of the most profitable businesses within Philips, but during the early 1990s it appeared that growth in these markets was nearing its end. A major opportunity for additional growth became the electronic toothbrush

The Impact of Corporate Venturing on a Firm’s Competence Modes

133

market. Braun launched a revolutionary electronic toothbrush in 1991, which spurred growth rates to double digit figures, with peaks of around 30 percent market growth in the mid 1990s. As a result, DAP started to develop these toothbrushes internally.1 Oral Healthcare started as an autonomous venture team in Japan and was transferred to Klagenfurt, DAP’s competence center for personal care products, after a year. For a division that aimed at exploiting its existing businesses for over a decade, the development of a new business in a market that experienced fast growth rates and frequent establishment of new standards required increasing the flexibility in all five competence modes. Although the resource chains in terms of R&D were largely in place, the flexibility of competence mode IV had to be increased, as resources had now to be applied in new operations. Operations were new in two ways: (1) it was a new product category for DAP, and (2) it was new business development as opposed to the product development DAP usually did. In 1994 the first products appeared, which indicates DAP had succeeded in increasing the resource flexibility of competence mode IV. This put pressure on competence mode V to increase its flexibility to reliably and efficiently produce the electronic toothbrushes. The first products that appeared on the market had serious quality problems and high field call rates. The venture team found out it lacked the skills to test the product on durability, which pressured DAP to increase its flexibility in mode V by developing new testing skills. Once the products were on the market, the pressure on competence modes I–III was building to increase flexibility, as the cognitive flexibility, management processes, and resource chains were not suited for the oral healthcare market for a number of reasons. First, the market had a strong medical aspect to it, as success was dependent on professional endorsements by dentists and clinical trials. This required a new strategic logic for DAP, where the sales force had to move away from traditional electronic retailers to professional dentists. DAP had to rethink its communication strategy, as the buying process for medical-oriented products is more complex and longer than for traditional products of DAP. If consumers buy a coffeemaker, for example, they go to the store and buy one. For an electronic toothbrush, consumers would ask their dentist, their family and friends, read about it, etc. before they decide to buy one. Second, Braun had become the market shaper and could set the pace of innovation and the product standard. The managerial cognition of DAP’s management was aimed at achieving quick results from the position of a market shaper like in shaving. Yet in oral healthcare DAP was a challenger

134

J. HENRI BURGERS ET AL.

and the cognitive flexibility had to change to either becoming a market shaper in the long-term or achieve quick results through undercutting Braun’s prices. The strategy of the oral healthcare venture switched back and forth between both strategies during the 1990s, as it proved very difficult to change the dominant strategic logic. Third, in particular in the early 1990s the lead market for electronic toothbrushes was the US, which had traditionally been a difficult market for DAP. To solve these issues DAP partnered with Jordan in 1997 which had the brand credibility and a network of dentists. Jordan would manufacture the brush heads and DAP would concentrate on the body of the electronic toothbrush. The alliance not only required a further increase in cognitive flexibility, as DAP did not use alliances before, but it also required an increase in coordination flexibility to switch from firm-specific resources to firm-addressable resources. The alliance became an immediate success with Philips capturing significant market share in Europe. Soon after that, however, problems started as the in-company focus of both parties led to mutual distrust of each other. Management processes and the cognitions of both companies did not provide flexibility to deal with alliances. The alliance with Jordan was discontinued in 1999 and DAP refocused on in-house development again. At the same time there was increasing price pressure from Braun, which triggered increasing the operating flexibility of competence mode V. It needed to both raise quality and reduce the cost and Philips moved the order-decoupling point in its supply chain downstream through a modular architecture of the electronic toothbrush (Sanchez, 2004b). Quality was indeed markedly improved and costs significantly reduced. At that point the lower competence modes (IV and V) had a sufficient level of flexibility to successfully develop a business in electronic toothbrushes. DAP’s management also recognized it needed a position in the US and a superior product to Braun. A remaining problem was that DAP still did not have the capabilities to build professional endorsements and it lacked the time to develop a superior product. The lessons learned from its endeavors in the oral healthcare market (almost 10 years) had raised the coordination flexibility to such an extent that it was able to look for external parties. A start-up (Optiva) had successfully challenged Braun’s market leadership in the US by producing a toothbrush with superior cleaning capabilities and the decision was made to acquire Optiva in October 2000. In 2001, the Oral Healthcare business started to contribute to DAP’s profitability after almost 10 years of struggling. The former business manager of oral healthcare suggested that they would never have been able to successfully acquire

The Impact of Corporate Venturing on a Firm’s Competence Modes

135

Optiva without first having learned what it takes to compete in the oral healthcare market. This example illustrates the effects a venture can have on all competence modes, and indicates the importance of envisioning the changes needed in all five competence modes, instead of focusing on one or several competence modes.

DISCUSSION In this conceptual paper we sought to identify how corporate venturing influences an organization’s competences. The level of product and factor market dynamism mediates the impact of various types of corporate ventures on the flexibility of a firm’s competence modes. Two effects were pointed out: ventures that achieve fit with the environment and the firm’s competence modes, and ventures that significantly increase the level of market dynamism and the amount of flexibility in all five competence modes. The developed framework enhances our understanding of the competence-based view by addressing the effect of corporate ventures and the competitive environment on the five competence modes developed by Sanchez (2004a). Several implications result from this paper. First, it is important to realize that changes in competence modes should be managed from an integrative perspective, as a change in one competence mode will eventually trigger changes in all other competence modes. Although these effects might be lagged, they have to be managed to re-align a firm with its competitive environment. Increases in the flexibility of competence modes might also lead to the identification of additional opportunities for a firm, which were initially not realized within the existing strategic logic of the firm. A second implication is that corporate ventures and their impact on a firm’s competence modes should be carefully managed. Researchers have criticized corporate venturing for only developing peripheral activities and its cyclical behavior (Burgelman & Va¨likangas, 2005; Campbell, Birkinshaw, Morrison, & Van Basten Batenburg, 2003). We argue that corporate ventures can deliver substantial growth opportunities for a firm, if the firm manages these ventures and its effects on the firm’s competence modes. It is, however, often difficult to manage these ventures. The nature of their activities requires a more arm’s length approach, while managing the impact on the competence modes requires a more integrative style of management. Failure to grasp the possible consequences of a venture for a firm and its environment places the firm in a much more precarious situation of a new

136

J. HENRI BURGERS ET AL.

entrant commercializing the ideas originally invented in the parent firm, which could ultimately lead to failure of the incumbent firm (Christensen, 1997). Third, our framework helps managers in assessing ex ante the consequences of a corporate venture. Previous research on disruptive technologies has been criticized for only being able to analyze post-hoc the disruptiveness of a technology (Danneels, 2004; Govindarajan & Kopalle, 2006). Our conceptual framework serves as a first step in making a priori predictions on the consequences of a corporate venture. To function as such a tool, however, at least two other questions should be investigated with further research. First, we need more research regarding the situation in which a corporate venture leads to significant changes in the competitive environment and a firm’s competence modes. Is there a specific level of dynamism that separates stable from dynamic markets, or is there a gray area in which the effect of ventures on dynamism and a firm’s competence modes varies from industry to industry? Second, if managers want to be capable of making ex ante predictions, their enacted environment should match with the objective reality, but this is not necessarily the case (Tosi, Aldag, & Storey, 1973). To facilitate progress in this field of research, it is important to develop objective, quantitative metrics that measure the level of dynamism of the competitive environment and the newness of a corporate venture. Another issue inviting further research is the process dimension of venturing. Ventures undergo several stages from idea development to rollout, and it is worthwhile investigating in which phase of the venture life cycle the venture has certain kinds of effects on product and factor markets and on the competence modes. It seems worthwhile to be aware of these effects as early as possible in the venture life cycle. Besides the technology and product dimension of corporate ventures addressed in this paper, the market dimension could also be incorporated into our framework. Corporate ventures focusing on new markets influence a firm’s competence modes, but this effect might be more lagged compared to product and technological innovations (Burgers, Van den Bosch, & Volberda, 2007). Markets that lie far away from what a firm is currently doing could have an effect on the cognitive flexibility of top management, as they would need to define alternative strategic logics for this new market and venture. We call upon researchers to develop a more thorough understanding of this relationship through empirical testing. Developing appropriate methodologies and metrics will, however, be a major challenge for future researchers.

The Impact of Corporate Venturing on a Firm’s Competence Modes

137

Concluding, we believe investigating the under-researched area of the interplay between corporate venturing and competence modes will benefit from our framework and propositions. These efforts will put corporate ventures high on the strategic agenda of top management, as aligning corporate venturing with a firm’s competence modes taking into account the mediating effect of environmental dynamics will be a key issue for sustainable value creation.

NOTE 1. The case discussion is based on company documents, annual reports, publicly available secondary sources and interviews.

ACKNOWLEDGMENTS The authors gratefully acknowledge the valuable comments from the editors, reviewers, and from the participants of the Seventh International Conference on Competence-Based Management, June 2–4, 2005, Antwerp, on a previous version of this paper. We would like to thank an anonymous reviewer for helping to clarify the relationships between our constructs.

REFERENCES Adner, R. (2002). When are technologies disruptive? A demand-based view of the emergence of competition. Strategic Management Journal, 23, 667–688. Anderson, P., & Tushman, M. L. (1990). Technological discontinuities and dominant designs: A cyclical model of technological change. Administrative Science Quarterly, 35, 604–633. Arend, R. J. (1999). Emergence of entrepreneurs following exogenous technological change. Strategic Management Journal, 20, 31–47. Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120. Barr, P. S., Stimpert, J. L., & Huff, A. S. (1992). Cognitive change, strategic action, and organizational renewal. Strategic Management Journal, 13, 15–36. Benner, M. J., & Tushman, M. L. (2003). Exploitation, exploration, and process management: The productivity dilemma revisited. Academy of Management Review, 28, 238–256. Block, Z., & MacMillan, I. C. (1993). Corporate Venturing. Boston, MA: Harvard Business School Press. Burgelman, R. A. (1983a). A model of the interaction of strategic behavior, corporate context and the concept of strategy. Academy of Management Review, 8, 61–70.

138

J. HENRI BURGERS ET AL.

Burgelman, R. A. (1983b). A process model of internal corporate venturing in the diversified major firm. Administrative Science Quarterly, 28, 223–244. Burgelman, R. A. (1984). Designs for corporate entrepreneurship in established firms. California Management Review, 6, 154–166. Burgelman, R. A. (1991). Intraorganizational ecology of strategy making and organizational adaptation: Theory and field research. Organization Science, 2, 239–262. Burgelman, R. A., & Va¨likangas, L. (2005). Managing internal corporate venturing cycles. Sloan Management Review, 46, 26–34. Burgers, J. H., Van den Bosch, F. A. J., & Volberda, H. W. (2007). Why new business development projects fail: Coping with the differences of technological versus market knowledge. Long Range Planning, 40(6), 531–642. Burns, T., & Stalker, G. (1961). The Management of Innovation. London: Tavistock. Campbell, A., Birkinshaw, J., Morrison, A., & Van Basten Batenburg, R. (2003). The future of corporate venturing. MIT Sloan Management Review, 45(fall), 30–37. Christensen, C. M. (1997). The Innovator’s Dilemma. Boston, MA: Harvard Business School Press. D’Aveni, R. A. (1994). Hypercompetition: Managing the dynamics of strategic maneuvering. New York: The Free Press. D’Aveni, R. A. (1999). Strategic supremacy through disruption and dominance. Sloan Management Review, 40, 127–135. Danneels, E. (2004). Disruptive technology reconsidered: A critique and research agenda. Journal of Product Innovation Management, 21, 246–258. Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage. Management Science, 35, 1504–1511. Duncan, R. B. (1976). The ambidextrous organization: Designing dual structures for innovation. In: R. H. Kilmann, L. R. Pondy & D. P. Slevin (Eds), The management of organization design (pp. 167–188). New York: Elsevier. Eisenhardt, K. M., & Martin, J. A. (2000). Dynamic capabilities: What are they? Strategic Management Journal, 21, 1105–1121. Fast, N. D. (1979). The rise and fall of corporate new venture divisions. Ann Arbor, MI: V.M.I. Research Press. Floyd, S. W., & Lane, P. J. (2000). Strategizing throughout the organization: Managing role conflict in strategic renewal. Academy of Management Review, 25, 154–177. Forte, M., Hoffman, J. J., Lamont, B. T., & Brockmann, E. N. (2000). Organizational form and environment: An analysis of between-form and within-form responses to environmental change. Strategic Management Journal, 21, 753–773. Gibson, C. B., & Birkinshaw, J. (2004). The antecedents, consequences and mediating role of organizational ambidexterity. Academy of Management Journal, 47, 209–226. Govindarajan, V., & Kopalle, P. K. (2006). The usefulness of measuring disruptiveness of innovations ex post in making ex ante predictions. Journal of Product Innovation Management, 23, 12–18. Guth, W. D., & Ginsberg, A. (Eds). (1990). Guest editors’ introduction: Corporate entrepreneurship. Strategic Management Journal, 11(Special issue), 5–15. Hamel, G., & Heene, A. (Eds). (1994). Competence-based competition. Chicester: Wiley. Hill, C. W. L., & Rothaermel, F. T. (2003). The performance of incumbent firms in the face of radical technological innovation. Academy of Management Review, 28, 257–274. Huff, J. O., Huff, A. S., & Thomas, H. (1992). Strategic renewal and the interaction of cumulative stress and inertia. Strategic Management Journal, 13(Special issue), 55–75.

The Impact of Corporate Venturing on a Firm’s Competence Modes

139

Husted, K., & Vintergaard, C. (2004). Stimulating innovation through corporate venture bases. Journal of World Business, 39, 296–306. Jansen, J. J. P., Van den Bosch, F. A. J., & Volberda, H. W. (2005). Managing potential and realized absorptive capacity: How do organizational antecedents matter? Academy of Management Journal, 48, 999–1016. Kirzner, I. M. (1973). Competition and Entrepreneurship. Chicago, IL: University of Chicago Press. Lumpkin, G. T., & Dess, G. G. (2001). Linking two dimensions of entrepreneurial orientation to firm performance: The moderating role of environment and industry life cycle. Journal of Business Venturing, 16, 429–451. March, J. G. (1991). Exploration and exploitation in organizational learning. Organization Science, 2, 71–87. McGrath, R. G. (2001). Exploratory learning, innovative capacity, and managerial oversight. Academy of Management Journal, 44, 118–131. Methe, D., Swaminathan, A., Mitchell, W., & Toyama, R. (1997). The underemphasized role of diversifying entrants and industry incumbents as the sources of major innovations. In: H. Thomas & D. O’Neal (Eds), Strategic discovery: Competing in new arenas (pp. 99–116). New York: Wiley. Miller, D., & Friesen, P. (1982). Innovation in conservative and entrepreneurial firms: Two models of strategic momentum. Strategic Management Journal, 3, 1–25. Naman, J. L., & Slevin, D. P. (1993). Entrepreneurship and the concept of fit: A model and empirical tests. Strategic Management Journal, 14, 137–153. Penrose, E. (1959). The Theory of the Growth of the Firm. New York: Wiley. Prahalad, C. K., & Hamel, G. (1990). The core competence of the corporation. Harvard Business Review, 68(May–June), 79–91. Quinn, J. B. (1989). Pilkington Brothers Plc. In: H. Mintzberg, J. B. Quinn & S. Ghoshal (Eds), The strategy process. Hemel Hempstead: Prentice Hall. Rebello, K. (1992). Microsoft: Bill Gates’ baby is on top of the world. Can it stay there? Business Week (February 24), 62–64. Rumelt, R. P. (1994). Foreword. In: G. Hamel & A. Heene (Eds), Competence-based competition (pp. xv–xix). Chicester: Wiley. Sanchez, R. (2001). Building blocks for strategy theory: Resources, dynamic capabilities and competences. In: H. W. Volberda & T. Elfring (Eds), Rethinking strategy (pp. 143–157). London: Sage Publications. Sanchez, R. (2004a). Understanding competence-based management: Identifying five modes of competence. Journal of Business Research, 57, 518–532. Sanchez, R. (2004b). Creating modular platforms for strategic flexibility. Design Management Review, 15(Winter), 58–67. Sanchez, R., & Heene, A. (1997). Competence-based strategic management: Concepts and issues for theory, research and practice. In: R. Sanchez & A. Heene (Eds), Competencebased strategic management (pp. 3–42). Chicester: Wiley. Sanchez, R., & Heene, A. (2002). Managing strategic change: A systems view of strategic organizational change and strategic flexibility. In: J. Morecroft, R. Sanchez & A. Heene (Eds), Systems perspectives on resources, capabilities, and management processes (pp. 71–91). Oxford: Elsevier Science. Sanchez, R., Heene, A., & Thomas, H. (1996). Towards the theory and practice of competencebased competition. In: R. Sanchez, A. Heene & H. Thomas (Eds), Dynamics of

140

J. HENRI BURGERS ET AL.

competence-based competition: Theory and practice in the new strategic management (pp. 1–35). London: Elsevier. Sanchez, R., & Mahoney, J. T. (1996). Modularity, flexibility, and knowledge management in production and organization design. Strategic Management Journal, 17(Special issue), 63–76. Schumpeter, J. A. (1934). The theory of economic development. Cambridge, MA: Harvard University Press. Sharma, P., & Chrisman, J. J. (1999). Toward a reconciliation of the definitional issues in the field of corporate entrepreneurship. Entrepreneurship Theory and Practice, 23, 11–27. Sorrentino, M., & Williams, M. L. (1995). Relatedness and corporate venturing: Does it really matter? Journal of Business Venturing, 10, 59–73. Stopford, J. M., & Baden-Fuller, C. W. F. (1994). Creating corporate entrepreneurship. Strategic Management Journal, 15, 521–536. Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18, 509–533. Thornhill, S., & Amit, R. (2001). A dynamic perspective of internal fit in corporate venturing. Journal of Business Venturing, 16, 25–50. Tosi, H., Aldag, R., & Storey, R. (1973). On the measurement of the environment: An assessment of the lawrence and lorsch environmental uncertainty questionnaire. Administrative Science Quarterly, 18, 27–36. Tripsas, M. (1997). Unraveling the process of creative destruction: Complementary assets and incumbent survival in the typesetter industry. Strategic Management Journal, 15(Summer), 119–142. Tripsas, M., & Gavetti, G. (2000). Capabilities, cognition and inertia: Evidence from digital imaging. Strategic Management Journal, 21, 1147–1161. Tsai, W. M., MacMillan, I. C., & Low, M. B. (1991). Effects of strategy and environment on corporate venture success in industrial markets. Journal of Business Venturing, 6, 9–28. Tushman, M. L., & Anderson, P. (1986). Technological discontinuities and organizational environments. Administrative Science Quarterly, 31, 439–465. Volberda, H. W. (1998). Building the flexible firm: How to remain competitive. London: Oxford University Press. Volberda, H. W., Baden-Fuller, C., & Van den Bosch, F. A. J. (2001). Mastering strategic renewal: Mobilising renewal journeys in multi-unit firms. Long Range Planning, 34, 159–178. Volberda, H. W., & Lewin, A. Y. (2003). Co-evolutionary dynamics within and between firms: From evolution to co-evolution. Journal of Management Studies, 40, 2105–2130. Weick, K. E. (1979). The social psychology of organizing. Reading, MA: Addison-Wesley. Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5, 171–180. Zahra, S. A. (1993). Environment, corporate entrepreneurship and financial performance: A taxonomic approach. Journal of Business Venturing, 8, 319–340. Zahra, S. A. (1996). Technology strategy and financial performance: Examining the moderating role of the firm’s competitive environment. Journal of Business Venturing, 11, 189–219. Zahra, S. A., Nielsen, A. P., & Bogner, W. C. (1999). Corporate entrepreneurship, knowledge, and competence development. Entrepreneurship Theory and Practice, 23, 169–189.

INCREASING TECHNOLOGICAL INNOVATION COMPETENCE THROUGH INTRAORGANIZATIONAL COMMUNICATION NETWORKS Bhaskar Prasad and Rudy Martens ABSTRACT Innovation competence has become an essential requirement for technology-based organizations to survive in the new economy. Commitment to long-term objectives and learning are considered as indispensable for building innovation competence. Communication networks play a crucial role in both these aspects. In this context management faces the question of how the characteristics as well as the contents of communication present in the network will influence the innovation competence. In this paper a literature study is done to present an understanding of the relationships between communication networks and innovation competence. The paper proposes that the characteristics of communication (frequency, diversity, and centrality) along with the content of communication (shared vision, shared task knowledge, and shared social knowledge) significantly affect the elements necessary to build technological innovation. Competence Building and Leveraging in Interorganizational Relations Advances in Applied Business Strategy, Volume 11, 141–165 Copyright r 2008 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1016/S0749-6826(07)11006-4

141

142

BHASKAR PRASAD AND RUDY MARTENS

INTRODUCTION Past studies have established that the ability to innovate is an important aspect of achieving competitive advantage. Considering the significance of innovation, analysis has shown that various organizational factors including structure and processes (Brockman & Morgan, 2003; Kanter, 1988) affect the development of the ability to innovate. An important purpose of innovation is the long-term survival of an organization (De Brentani & Kleinschmidt, 2004). However, innovation can also be a source of significant risk. As a result, organizations explore ways to create structures and processes to improve their ability to innovate. Studies have identified two determinants that underpin an organization’s ability to innovate: (1) commitment to the long-term objectives of an organization (De Brentani & Kleinschmidt, 2004; Hamel & Prahalad, 1989) and (2) enhancement of the bases of knowledge and skills through learning (Romijn & Albaladejo, 2002; Dodgson, 1991). In both of these components, constant interactions and exchanges of information and messages among organizational members are important. These interactions and exchanges of information and messages lead to communication networks that play a critical role in building innovation competence. Also, communication supports the improvement and preservation of organizational objectives when an organization is visualized as a constantly changing system of interactions (Sosa, Eppinger, Pich, McKendrick, & Stout, 2002). In this study, the development of innovation competence will be studied from the perspective of communication in intra-organizational networks in technology-based firms. Research in this study concentrates on the content of communication (Sosa et al., 2002) and the characteristics of communication (Monge & Contractor, 2001; Ebadi & Utterback, 1984) in communication networks. (See Fig. 1 for a graphical representation of the research framework.) Research projects in an organization in the telecommunications industry will be used as case studies for examining the building of innovation competence.

THE CONCEPT OF INNOVATION COMPETENCE AND ITS DETERMINANTS A review of the technological innovation literature shows that a necessary activity of the initiation stage in innovation is the openness to innovation (Zaltman, Duncan, & Holbek, 1973), which is determined by whether the

Increasing Technological Innovation Competence

143

Communication Network

Communication Content • Shared vision • Shared task knowledge • Shared social knowledge

Communication Characteristics • Frequency • Diversity • Centrality

Commitment to long-term objectives

Learning

Innovation Competence

Fig. 1.

The Research Framework.

members of an organization are willing to consider the adoption of or are resistant to innovation (Hult, Tomas, Hurley, & Knight, 2004; Hurley & Hult, 1998). This openness in an organization to new ideas is referred to as innovativeness. It is identified as the propensity of an organization to innovate (Ettlie, Bridges, & O’Keefe, 1984) and is an assessment of the organization’s orientation towards innovation. After the initiation stage, implementation is also a vital stage for technological innovation. The critical element in this stage is the ability of the organization to adopt or implement new ideas, processes, or products successfully, which is defined as innovative capacity (Burns & Stalker, 1971). As both abilities are necessary for technological innovation, it is the combination of innovativeness and innovative capacity that forms the innovation competence of an organization. Studies have been conducted on the important factors for innovation in an organization (West & Iansiti, 2003; Kanter, 1988; Keller, 1986), the significant determinants for innovativeness (Sethi, Smith, & Park, 2001) and the key indicators for innovative capacity (Lemon & Sahota, 2002). These studies indicate that clarity of organizational long-term objectives facilitates an innovation network’s ability to control the process by which important

144

BHASKAR PRASAD AND RUDY MARTENS

innovative ideas are generated (Sethi et al., 2001). In addition, long-term objectives are an important source of motivation for organizational members to ensure the successful implementation of innovative ideas (Lemon & Sahota, 2002). Thus, commitment from individuals to long-term objectives is considered an essential factor in the development of innovation competence. To achieve technological innovations, an organization must also increase its innovation input capacity, which is the ability of an organization to continuously absorb, accumulate, and create the knowledge necessary to spur new ideas. Researchers have emphasized the role of learning in how organizations acquire, share, and manage information and knowledge (Bontis, Crossan, & Hulland, 2002; Slater & Narver, 1995) and how this learning affects both innovativeness and innovative capacity (Hult et al., 2004; Hurley & Hult, 1998). Studies have also noted that for better acquisition of knowledge and sharing of information there is a need for effective communication (Slater & Narver, 1995). Thus, learning in effective communication networks is another necessary element for innovation competence.

Commitment to Long-term Objectives Distinct approaches in defining commitment (Siders, George, & Dharwadkar, 2001; Mowday, Steers, & Porter, 1979; Reichers, 1985) can be found in the management literature. We consider commitment as an orientation towards an organization, which attaches the identity of the person to an organization. The components of this orientation consist of identification with the objectives of an organization and high involvement in its work activities (De Ridder, 2004; Porter, Steers, Mowday, & Boulian, 1974). If members are committed to a unitary and salient organizational identity, their commitment tends to be focused toward a common end (Fiol, 2002). Organizations can then use this commitment to drive individual behavior in achieving overall organizational objectives. This would then facilitate the assessment of the relationship of commitment to the ability to innovate, as those who exhibit high levels of commitment to an organization can easily identify and pursue organizationally designated objectives (De Ridder, 2004). Commitment is important for technological innovation as greater involvement in work activities tends to engage committed employees into innovativeness (Katz & Kahn, 1978) and effective association with organizational objectives engages employees in implementing innovative

Increasing Technological Innovation Competence

145

ideas which leads to improved innovative capacity. To create this kind of commitment, a clear definition of where an organization wants to be in the long term is required as employees will extend themselves to take responsibility of achieving the objective of building innovation competence only if they have information about the organization’s mission, which defines the purpose of the organization; about the organization’s vision, which expresses how the future will look; and about the organization’s strategy, through which the organization can fulfill its mission. Once a clear definition of the long-term objectives of the organization is available, a collective commitment to the objectives is required in order to focus the activities towards successful achievement of those objectives. Those who are committed to their organization are more likely to demonstrate an encouraging approach toward it (Fiol, 2002; Ashforth & Mael, 1989) and to take decisions that are coherent with organizational objectives. Thus, commitment to the long-term objectives of an organization will promote employees to perform in accordance with its purpose for technological innovation. To enhance this commitment, identification of an organizational member with the organization is critical and researchers have shown that communication facilitates this identification (Huff, Sproull, & Kiesler, 1989). Consequently, the effectiveness of a communication network is closely connected to the commitment of network members to the long-term objectives of an organization to build innovation competence.

Learning Learning has been defined in many different ways in the management literature. According to the evolutionary economics school which sees the growth of an organization in biological terms (Nelson & Winter, 1982), learning describes the ways in which organizations develop by building on their experiences to survive, and innovation is an essential part of survival. Taking into account this link between innovation and learning and the relevance of knowledge in both (Bontis et al., 2002; Cohen & Levinthal, 1990), it is important to understand that an organization aiming for innovation competence should be capable of creating, acquiring, and transferring knowledge, able to gain new knowledge and insights (Nevis, DiBella, & Gould, 1995), and focused on information acquisition, information dissemination, and shared interpretation (Slater & Narver, 1995). Most of the literature dealing with learning draws a distinction between learning as behavioral change and learning as cognitive change.

146

BHASKAR PRASAD AND RUDY MARTENS

Behaviorism advances that learning is the modification of the behavior of individuals through conditioning (Levitt & March, 1988). Unlike behaviorism, cognitivism underlines the need to take into account the internal complexity of learning. In this discussion, learning is treated as a cognitively driven concept. From the cognitive standpoint, behavioral change is a natural consequence of cognitive change. Cognitive learning may be regarded as awareness, knowledge acquisition, conceptual learning, or combination (Leroy & Ramanantsoa, 1997). Combination refers to the creation of explicit knowledge through re-configuring existing and already explicit information. A key aspect of this process is dialogue (Bontis et al., 2002). In dialogue the network explores complex difficult issues from many points of view. Individuals suspend their assumptions but they communicate their assumptions freely. The learning organization increases its ability to take on new ideas, processes, or products successfully, thereby improving its capacity to innovate (Burns & Stalker, 1971) and to achieve necessary technological innovations. Hence learning is an essential element for managing knowledge and enhancing individual expertise required for technological innovations. Based upon the review of relevant literature, learning is defined in this study as the acquisition of knowledge (knowledge recognition) and the communication of knowledge (knowledge absorption) through an organization.

COMMUNICATION CONTENT FOR BUILDING INNOVATION COMPETENCE In the research on innovation activities, there are studies explaining different types of communication content in communication networks. For instance, Allen (1986) discusses two different types of communication that occur in technological organizations. The first is coordination-type communication, whereby team members transfer technical information in order to coordinate tasks and conduct their work. The second is knowledge-type communication, which allows individuals to remain abreast of technical developments in their field and whereby team members consult with one another, learn, and develop new skills that may or may not directly relate to the project at hand. Researchers have emphasized the benefits of using the existing knowledge in an organization (Postrel, 2002; Weick, 1993) to improve an organization’s ability to recognize and exploit new opportunities (Brockman & Morgan, 2003). In addition, there is also inspiration-type communication, which motivates and inspires individuals (Sosa et al., 2002; Allen, 1992; Morelli,

Increasing Technological Innovation Competence

147

Eppinger, & Gulati, 1995). Based upon these types of communication, it can be inferred that the content of communication needs to have the following attributes for successful innovation activities. The content must encourage and motivate organization members, which can be realized by the shared vision that provides members with a clear sense of the organization’s identity (Carrero, Peiro, & Salanova, 2000). Communication content must also encourage organization members to remain informed of technical developments, which can be achieved by using shared task knowledge (Snyder & Morris, 1984), and finally it should aid members in coordination, which can be made possible by the use of shared social knowledge. Thus, this study will focus on shared vision, shared task knowledge, and shared social knowledge as the three elements of communication content necessary for building innovation competence in an organization.

Shared Vision The establishment of a shared vision is fundamental to aligning individuals to the long-term objectives of an organization. An organization’s vision communicates norms for behavior and provides guidance for the type of knowledge to be pursued. The vision is the image of a possible and desirable future state of an organization and this image must be claimed throughout the organization (Barber & Warn, 2005; Bennis & Nanus, 1985). Since organizations cannot be commanded to change, an influential vision can draw the employees to a common required course (Senge, 1990). A shared vision constitutes the purpose of an organization, an integrating factor that leads to commitment and also conditions the capacity of an organization’s members to learning. It has been found that without a shared vision, learning by members is less likely to be meaningful (Verona, 1999). In other words, even if they are motivated to learn, it is difficult to know what to learn. Initiative from leaders of innovation projects in communicating an organization’s vision to the team with an affirmation, appeal, assurance, or announcement can be a proactive step in fostering commitment (Barber & Warn, 2005). Previous studies have shown that the promotion of a shared vision can facilitate knowledge sharing and integration among individuals or groups by providing a purposeful meaning to their actions (Szulanski, 1996; Sinkula, Baker, & Noordewier, 1997). The establishment of a shared understanding and awareness of the meaning of an organization’s vision can result in the credibility needed for individuals’ commitment to the vision (Hwang, Khatri, & Srinivas, 2005).

148

BHASKAR PRASAD AND RUDY MARTENS

By fostering conditions conducive to learning and commitment to longterm objectives, promotion of a shared organizational vision can contribute to building an organization’s innovation competence. Communication networks can be used to ensure that the vision is communicated throughout the organization. Studies have shown that communication networks serve as mechanisms that expose people, groups, and organizations to information, attitudinal messages, and the behavior of others (Monge & Contractor, 2001; Contractor & Eisenberg, 1990). Researchers studying communication networks have put forward the notion of contagion theory which seeks to explain the knowledge, attitudes, and behavior of organizational members on the basis of information, attitudes, and behavior of others in the network they are linked to (Monge & Contractor, 2001). Thus, effective communication networks can be used by managers to ensure the existence of a shared vision of technological innovation in an organization.

Shared Task Knowledge Task knowledge refers to knowledge which is relevant to a task appropriate for technological innovation. Studies have shown that task knowledge has an important role in determining how knowledge is utilized in organizations (Cummings, 2004; Levine & Moreland, 1991) and that task knowledge affects exploitation of existing knowledge and assimilation of new knowledge which ultimately affects the innovative capabilities of an organization (Cohen & Levinthal, 1990). The task knowledge shared by network members can help networks to coordinate, especially when individual tasks have interdependencies with other tasks. Such interdependencies are often high in the case of innovation activities. The more knowledge the network member has about the tasks of other members, the more information that member will have available to anticipate what others will need from him and what he will need from others. In addition, it has been found that networks need to enable the sharing of the detailed knowledge necessary to facilitate the development of innovative actions (Harvey, Pattigrew, & Ferlie, 2002). Studies have demonstrated benefits for networks that engage in task-related communication within the network (Katz & Tushman, 1979). Successful networks not only take advantage of the perspectives, talents, and ideas of different members, but also create a common understanding of the organizational context through sharing knowledge about the task (Cummings, 2004). In order to ensure that the existing task knowledge is spread across employees leading to its

Increasing Technological Innovation Competence

149

exploitation and thereby improving the innovative capacity of an organization, access to the knowledge stored in other members is required. In the perspective of technological innovation, an organization benefits from these communication networks as they provide individuals with the possibility to combine their task knowledge with that of others to pursue innovative activities, which are essentially making new combinations of knowledge (Schumpeter, 1934). Shared Social Knowledge Social knowledge is knowledge concerning local norms, values, language schemes, and subcultures which have been proposed to affect how a problem is defined and what is the appropriate solution (Katz & Tushman, 1979). Social knowledge is more likely to remain tacit than task knowledge because many aspects of behavior and coordination in organizations are not easily described in words and symbols. It covers the intuitive judgment of whom to trust (Edmondson, 2002) and awareness of who knows what (Edmondson, 2003; Moreland, 1999). Thus social knowledge encompasses both tacit and explicit elements. The explicit element, which covers the awareness of who has expertise in which area of specialization within the network, is needed so that there is a possibility of relevant knowledge gathering (Edmondson, 2003). In addition, awareness of who can be the source of particular information can reduce the time and energy spent on learning (Borgatti & Foster, 2003; Wegner, 1987). Social knowledge can transform the awareness of a technological innovation developed initially by an individual into an organization-wide asset through validation among other organization members. In this context, social knowledge increases the relevance of networks. This paper suggests that an organization should take advantage of the communication network to impart social knowledge so as to encourage the tendency to innovate, which is the innovativeness that contributes to increased innovation capacity, and in that way building innovation competence.

COMMUNICATION CHARACTERISTICS FOR BUILDING INNOVATION COMPETENCE Studies on the characteristics of communication networks elaborate the different measures to describe entire networks, measures for individual

150

BHASKAR PRASAD AND RUDY MARTENS

members, and measures for network ties (Monge & Contractor, 2001). Ebadi and Utterback (1984) provide an empirical study on communication in technological innovation. We adopt here the three characteristics of communication examined in their study which are frequency, diversity, and centrality.

Frequency The frequency of communication refers to the amount of interaction among organizational members. The more frequently members of a communication network interact, the more opportunities they will have to interpret accurately the information, attitudes, and behavior arising from others. Such intensive communication facilitates individuals to build stronger ties (Krackhardt & Kilduff, 2002; Krackhardt, 1992) and share the point of view of others. In view of that, frequent communication between managers and employees is an efficient means of disseminating awareness of the vision across different levels of an organization. Through frequent communication within the network, members will be mutually influencing and informing each other which will create homogeneity (Borgatti & Foster, 2003). Thus frequent communication can lead to convergence, thereby achieving a shared meaning for innovation (Borgatti & Foster, 2003; Rogers & Kincaid, 1981). A process of contagion takes place causing the knowledge, attitudes, and behavior of organizational members in a network to become related (Monge & Contractor, 2001; Carley & Kaufer, 1993) to those of the manager to which they are linked. Such a contagion process helps to reinforce the organizational vision for technological innovation. Therefore, the greater the frequency of communication between managers and employees, the more effectively the vision for building innovation competence will be translated across an organization, resulting in better deployment of a shared vision. Thus intensive use of communication networks is constructive for members of an organization to develop a common understanding of the vision for innovation competence. By frequently communicating an organization’s vision, managers can inspire workers (Hwang et al., 2005; Westley & Mintzberg, 1989) and thereby enhance their commitment to long-term objectives for technological innovation. For learning to taking place, it is helpful for employees to be involved in communication networks where they can actively share knowledge about the latest developments in their area of work. As a result of frequent

Increasing Technological Innovation Competence

151

communication, the distribution of essential knowledge to various parties within the network can happen repeatedly which will be beneficial in detecting any problems and their potential solutions (Reich & Benbasat, 2000). Thus frequent communication helps not only in the recognition of task knowledge required for technological innovations that is available from network members, but also in the absorption of this existing task knowledge by other members in the network. Since knowledge recognition and absorption constitute the learning process, frequent communication of task knowledge facilitates the learning needed to achieve technological innovations.

Diversity Diversity in a communication network refers to the degree to which the members of an individual’s communication network are heterogeneous in some relevant dimension (Monge & Contractor, 2001; Rogers & Kincaid, 1981). For instance, it has been studied that functional diversity among members involved in communication encourages innovativeness (Keller, 2001; Ancona & Caldwell, 1992). It is this heterogeneous dimension associated with the diversity of communication that influences the sharing of knowledge in a network. Studies have found the existence of more two-way communication among members from different functional backgrounds (Keller, 2001). The rearrangement of existing knowledge is an important component, especially in innovation activities, as it is understood that recombining the constituents of diverse systems can be a source of innovation (Schumpeter, 1934). This new combination implies a new interpretation of existing knowledge that will be necessary for innovation (Fleming, 2001; Galunic & Rodan, 1998). A dependable source of new ideas that can drive innovation is the recombination of existing thinking through the interaction of people with diverse knowledge, disciplines, experiences, and values (Fleming, 2001). Breakthrough ideas that turn into an innovation need not happen often. More often, existing ideas are brought together in a new way or in a new context that opens up new possibilities (Fleming, 2001). The notion of innovation as new combinations is illustrated in an empirical study by Ebadi and Utterback (1984), who found that diversity of communication sources correlates positively with technological innovation. Thus the greater the diversity of communication between managers and employees, the more effectively can task knowledge for building innovation competence be extended across an organization.

152

BHASKAR PRASAD AND RUDY MARTENS

In the course of increasing communication with experts, the diversity in the composition of task knowledge can contribute to technological innovation (Carlile, 2002; Ancona & Caldwell, 1992). Individuals with specialized knowledge in different domains may have developed different habits of thought (Hayek, 1989) that may lead to different evaluations of the relevance of the same knowledge item. Organizational members may be reluctant to change their knowledge and skills, and a significant challenge in increasing diversity is to encourage members to both influence and be influenced by others’ knowledge (Carlile, 2002). A diverse communication network increases the number of information sources, and diversity in expertise of an organization increases its capacity to innovate (Cohen & Levinthal, 1990) and its information search efficiency (Ginsberg, 1990).

Centrality The centrality of a network and its effect on communication has been an important focus of research on communication networks. It specifies the extent to which a member is central to a network. Researcher have argued that network centrality corresponds to an individual’s access to technical innovation requirements (Obstfeld, 2005; Ibarra, 1993). Therefore, centrality implies different degrees of access to and control over valuable resources (Ahuja, Galletta, & Carley, 2003; Burt, 1982). Centrality can involve the degree of centrality, the closeness of centrality, and the betweenness of centrality (Freeman, 1979). Degree of centrality is the number of direct links an actor has with other actors in the network; closeness of centrality is the extent to which an actor is close to or can easily reach all the other actors in a network; betweenness is the extent to which an actor mediates or falls between any other actors. The extent to which an individual is linked to others in a network can be regarded as a measure of how closely the individual belongs to the network (Ahuja et al., 2003). The measure of centrality in a communication network has been empirically associated with several important variables that might lead to superior performance. Most important are influence, cognition, attitudes toward technology, and involvement in innovation (Ahuja et al., 2003; Ibarra, 1993). Since learning depends on obtaining a wide range of information and on keeping up with developments, the centrality of communication is closely related to it. In a centralized network, the central member is the focal point of the network to which all other members are joined. In addition, all periphery members do not keep regular contacts with one another. In such a

Increasing Technological Innovation Competence

153

network a high number of unfamiliar workers are able to share through the focal point the task knowledge required to improve learning. Such networks facilitate the communication of unacquainted co-workers to provide useful advice and solve problems (Levin & Cross, 2004; Constant, Sproull, & Kiesler, 1996). The structural context of a member influences, or even determines, the member’s interpretations of events, perceptions, cognitions, and behaviors. As a result, members in structurally central positions can benefit from others’ experiences and perceptions (Levin & Cross, 2004). Therefore, the greater the centrality of a communication network, the more effectively task knowledge for building innovation competence can be reached across the organization.

RESEARCH METHODOLOGY In our research we focus on the process of building innovation competence (the ‘‘how’’ question). The aim of this research is explanatory and as such, the case study research methodology is viewed as the preferred qualitative research method. We will adopt the multiple-case embedded design (Yin, 2003), as evidence from multiple cases is often considered more compelling and the overall study is therefore regarded as being more robust (Herriott & Firestone, 1983). The contexts in which we will study innovation competence are research projects in an organization in the telecommunications industry. In order to check the value of the constructs and the proposed relationships between them, a pilot case study is established. Form our pilot case study we will obtain an empirically grounded pattern. When building theory from case study research, the triangulation method made possible by multiple data collection methods and the combination of qualitative with quantitative data provide stronger substantiation of constructs and theory (Eisenhardt, 1989). In our research several different data sources will be used: (1) interviews with project members, (2) survey results (with questions to be answered on a Likert scale), and (3) company documents. The interviews, survey, and communication network study will be used as primary sources of information while the company documents will be the secondary source of information. A secondary source of information is important in qualitative case study research as it provides the required unobtrusive measures (Webb & Weick, 1979). Unobtrusive measures are those that do not require the researcher to interfere in the research context. These measurements presumably reduce the biases that result from the intrusion of the researcher or measurement instrument.

154

BHASKAR PRASAD AND RUDY MARTENS

THE PILOT CASE STUDY The primary objective of the pilot case study is to establish an empirically grounded pattern of the improvement of technological innovation competence (TIC). The empirical information distilled from the pilot case is compared with the theoretical framework. The result is an empirically grounded pattern of TIC improvement in which various findings for comparison can be identified. Other objectives of our pilot case study are to discover constructs in the context of improving TIC and to develop items to measure the constructs.

Case Description The company Alpha is situated in the telecommunications sector. Projects are the way of structuring innovation in this company. In this company the different business units will be asking for a certain type of innovation. The customer for the project taken up for case study was the Access Networks Division business unit. The scope of the project was the study and demonstration of intelligent access and edge nodes. It involved the fiber aggregator, which aggregates the traffic from various remote units and its evolution to an application enabling an intelligent access platform. The rationale behind this project is that unlike the existing non-intelligent layer of access networks, the intelligent access platform will incorporate application enablers and service awareness in the access network elements. The application enablers will allow access network operators to deliver new applications, which may generate additional revenues. The growing demand for bandwidth, fueled by the availability of richer content on the Internet and new services, will lead to a time when central-office based deployments of technologies like Asymmetric Digital Subscriber Line (ADSL) no longer suffice to offer the data rates desired by subscribers. This trend necessitates an evolution towards high-bandwidth technologies that either rely on deployment over copper from remote units, or on fiber to the premises.

Case Analysis and Findings The interviews conducted in the case study consisted of orienting questions (Yin, 2003). The aim of these questions was to keep the data collection

Increasing Technological Innovation Competence

155

during the interviews on track. In order to understand the characteristics of the case study, a categorization of the features of the project was used (Miles & Huberman, 1994). This categorization is based on the coding list prepared to analyze data from the interviews. The coding list comes from the conceptual framework, the research question, the propositions, and the problem areas of the research study (Miles & Huberman, 1994). Pre-primary Stage of Technological Innovation The empirical information collected during the pilot case shows that in addition to the initiation and implementation stages of TIC improvement, there is also a pre-primary stage during which the organization’s objectives and vision are communicated. Statements from members of the pilot case project indicate the need for the leader of the team to interpret the objectives and vision of the organization to the team in order to connect the purpose of the project to that of the organization. Communication of vision specified the circumstances which led to the necessity for the technological innovation and identified the future end purpose of the technological innovation. The objectives and vision can then be utilized to guide the project to improve the TIC. In this way, the pre-primary stage influences the primary and secondary stages of the project. Members of the network relied on announcements, directions, and notices to focus their attention on what the project was expected to do for the future of the organization. This was essentially the translated vision of the organization for the project. The leader of the project had taken the initiative in communicating the vision to the team with an affirmation, appeal, assurance, and announcement:  Affirmation – We have to do something to allow the access network operators to deliver new applications.  Appeal – Will you support our mission to proceed towards highbandwidth technologies?  Assurance – We will achieve the realization of intelligent access and edge nodes.  Announcement – We will aggregate the traffic from various remote units and lead its evolution to an application enabling intelligent access platform. These declarations formed the pre-primary stage for improving TIC. From this it was inferred that the shared vision within the project was influencing the commitment to the strategic direction of the project. The communication of vision in the pre-primary stage helped to instill meaning and develop shared understanding among the members. It was pointed out

156

BHASKAR PRASAD AND RUDY MARTENS

by members that the shared understanding and awareness of the meaning of the project established the credibility needed for their commitment to it. Commitment of members to the long-term objectives of improvement in TIC was indicated by the high involvement of team members in work activities as reported in company documents such as the project plan, work package description, and phase reviews that served as secondary sources of information. Such high involvement in work activities created opportunities for bringing up innovative ideas and also opened up the path for suggestions and criticisms to improve those ideas, which is defined in this study as innovativeness. Accordingly it could be inferred that commitment to the long-term objectives influenced positively upon the innovativeness in the initiation stage and thereby on TIC. Concentration on Learning During the initiation phase of the project, there was heavy dependence on understanding the relevant technological developments, and learning was initiated from the necessity to have a firm grasp of the technology needed to bring out ideas and then to implement those ideas. The need to generate innovative ideas, proactively criticize them, and suggest means to improve them led to the use of brainstorming. This technique involves sharing the task knowledge which members in the network already possess as well as generating new knowledge through communication across the network. In brainstorming sessions new knowledge emerged as a result of sharing existing task knowledge. The learning that resulted improved the innovativeness of the team in the initiation phase of the project. From the company documents, we studied the tasks involved in the implementation stage of the innovation project during which a prototype was developed. Segments from the interview data related to the prototype developing stage also indicated the effectiveness of sharing task knowledge, such as the identification of critical areas to be considered during the implementation of ideas. The sharing of task knowledge was again evident in the discussions which determined crucial design features of the prototype. These instances showed the importance of knowledge recognition and absorption in the implementation of innovative ideas, and demonstrated the link between sharing task knowledge and learning. Communication in the prototype development phase was also focused on producing the necessary actions for implementation of ideas. The shared task knowledge was directed to formulate problems, generate alternatives, evaluate solutions, and make the final choice, actions that were part of the learning process required for technological innovation.

Increasing Technological Innovation Competence

157

A different conclusion arises with respect to the relation between sharing social knowledge and learning. The interview data did indicate that members of the project considered themselves to be in different social planes and accepted the necessity for team work to generate ideas and discuss implementing processes. There were technical uncertainties within the project which demanded the team to have productive interactions among each other. The relatively low emphasis on the sharing of social knowledge seems to arise from the informal way that sharing of this knowledge was taking place. The fact that social knowledge played an important role was apparent as the members were aware of the distribution of expertise within the project. Also, the knowledge provided by a member established as an expert was given more credence in the network than knowledge provided by someone perceived as not having a high level of expertise. Thus social knowledge played a role in the retrieval and integration of the existing technical expertise among the members. Another point to be noted from the interviews is that social knowledge sharing aided in understanding the disagreements that arose on certain issues during the innovation project and facilitated the consensus that resolved these issues. Thus insight into the reasons for disagreements was critical for the learning process to progress during the course of technological innovation. Intra-organizational Communication Network The pilot case study also provided information on the role of an intraorganizational communication network in the improvement of TIC. The interviews and company documents were the primary source of information for this purpose. Data from the interviews suggested that an intraorganizational communication network, through its contents and characteristics, influences learning and commitment to strategic direction and thereby TIC. The agendas and notes of project members showed that the frequency, diversity, and centrality of communication did help to improve TIC in several ways. Data collected on the frequency of communication showed two important points. First of all, frequent communication of the vision leads to significance and justification for the technological innovation objectives. This in turn leads to the interest, contribution, and support of team members to achieve the objectives, which is essentially the commitment of members. Thus the frequent communication of shared vision invigorates the commitment essential for technological innovations. Secondly, frequent communication disseminates shared knowledge into different directions, making knowledge available for discovering and solving

158

BHASKAR PRASAD AND RUDY MARTENS

problems. Frequent communication of task knowledge helped to explain and create significance for the various aspects of the technological innovation proceedings, fostering collective appreciation for these aspects. This allowed team members to make sense of the progress in the technological innovation project and also to determine what other steps should be taken to make further advances. Again the communication of social knowledge was acknowledged as necessary to create a sense of reliability among the members, and this reliability was considered as having impact on what one learns from the other members. The accounts from the interviews indicated that communication among members with different functional experiences assisted in defining the scope and relationship among the various features of a problem. Thus the functional diversity of the team helped the learning process. Again there was evidence from the interviews that the ability of the network to recognize and differentiate among the various aspects of a problem helped in implementing the ideas brought forward by the team. To a great extent the benefit of the diversity of communication came from the varied collection of knowledge the members were able to access and share in the network. In addition, the diversity in communication gave members the chance to observe opportunities or threats that needed to be addressed while proceeding with the technological innovation. Thus, sharing task knowledge through the diversity of communication enabled learning and thereby helped to improve the innovative capacity of the team. Two indications were noted about the centrality of the network. Firstly, the members had direct links with each other in the project. This helped them to have straight access to the task knowledge possessed by the different members. This in turn facilitated the straightforward sharing of task knowledge. Secondly, the ease with which members could be reached was rated highly by those interviewed, as it facilitated the sharing of task knowledge.

Implications of Pilot Case Study The purpose of this case study was to create a detailed understanding of the pattern of the improvement of technological innovation competence. It was identified that two important prerequisites for innovation processes are commitment to long-term objectives and learning. Shared vision, which is an important aspect of communication content, influences both commitment to long-term objectives and learning. Shared vision motivates the network to

Increasing Technological Innovation Competence

159

produce innovative ideas and also provides the common direction which ensures that these innovative ideas are implemented. But even if the network is dedicated to learning and has a shared vision, learning will be inadequate if there is no sharing of knowledge. In this regard, the two other aspects of communication content – shared task knowledge and social knowledge – become relevant. The pilot study also implied that the structural characteristics of the communication network – frequency, centrality, and diversity – are significant for sharing the vision and knowledge required for improving innovativeness and innovation capacity.

MANAGERIAL IMPLICATIONS Primarily this study indicates that when applying certain managerial actions on a team the focus should be on increasing commitment to long-term objectives and learning. Commitment to long-term objectives and learning will shape the framework of team interactions and resulting team accomplishments. Hence when performing any managerial interference, management needs to instill confidence among teams of its credibility to the long-term objectives. This is especially critical for teams involved in innovative activities. Secondly the learning process that enhances innovative activities also needs to have management attention. It is important for management to understand that learning opens up new areas in which the members can come up with innovative ideas. It was shown in this study that the contents of communication strongly influence the building of commitment to long-term objectives and learning within innovation teams. It is critically important for managers to understand the effect of having a shared vision as they consider enhancing the commitment of team members to the long-term objectives. The sharing of a vision in a network of organizational members can lead to the adoption of long-term objectives systems as standards for teams and direct their innovative actions. When considering the learning process, management should recognize the significance of shared task knowledge and social knowledge within teams. Management is likely to place high importance on task knowledge but may not be as aware of the significance of social knowledge to the learning process of a team. Social knowledge can facilitate the development of trust and bonding among team members and also the necessary awareness of each member’s strengths (who knows what). Thus, managing the communication contents within innovation networks should always be on the agenda of

160

BHASKAR PRASAD AND RUDY MARTENS

team leaders and management. Managers will need to learn how to appreciate, employ, and extract value from the correct use of communication contents. Finally the study provides the characteristics with which communication networks can be examined in teams. By studying these characteristics within teams, the knowledge that is needed for managing communication in innovation teams can be obtained. One important factor identified in this study for managing the network relationships among innovation team members is frequency of communication of vision, task, and social knowledge. The finding that frequent communication of vision influences the commitment of the team to the long-term objectives expressed by management has implications for managers in shaping the progress of innovative activities. This means that shared vision is an important lever that managers can to use to obtain greater motivation from the team to be innovative. While considering the management of task and social knowledge, management needs to be aware of the frequency, centrality, and diversity of communication existing among team members. While it is understood that these characteristics of communication influence the sharing of task and social knowledge, it is up to management to interact with the team and to ensure that the team is reaping the benefits of such communication.

CONCLUSIONS AND IMPLICATIONS FOR FURTHER RESEARCH This study has attempted to contribute theoretically to a better understanding of the relationships between communication networks and innovation competence. The exploratory conceptual framework developed herein and the formulated propositions will be useful to guide further research design. The exploratory conceptual framework shows that in order to investigate the role of communication networks in building innovation competence, it is first necessary to study empirically how organizations develop innovation competence. In particular, this involves understanding the manner of building innovation competence by examining the role and importance of commitment to long-term objectives and learning in a particular research setting of innovation projects in an organization. Subsequently after having understood the process of building innovation competence, the next step is to explore the role of communication networks

Increasing Technological Innovation Competence

161

in this process. Thus while the above discussion addresses the important contents and characteristics of communication networks for building innovation competence, more research studies are necessary to provide the required evidence for the stated relationships. This study has a few limitations which should be taken into account when conducting comparable studies in the future. One limitation of this research is that the analysis is based upon a single case study. In order to extend the study of the characteristics of communication networks and the contents of communication in innovation settings, more cases and larger sample sizes need to be used. A larger sample size can help to examine the building process of innovation competence more precisely, and can also help to refine the framework on a more solid database. Also, future research in this area of study can employ longitudinal research designs to better control for specific changes over time within innovation teams. A longitudinal research setting could help to create further understanding of the impact of communication networks in the different stages of an innovation process. For instance, an examination of how the sharing of social knowledge at different stages of the same innovation project through a longitudinal study could be carried out to understand whether social knowledge has the same level of importance as task knowledge in the different stages. Future research can also inspect for explanatory variables to control for mediating effects and to create more valid knowledge for companies. The relational characteristics of the networks and their effects on the various contents and characteristics of communication networks might be studied to reveal their influences on innovation competence. For instance, it would be interesting to note how the different dimensions of trust can mediate the sharing of knowledge and vision in intra-organizational networks. Also it would be valuable to examine the structural characteristics such as strength of ties mediating the sharing of vision, task, and social knowledge. Overall the present study is an attempt to develop a framework using case study methodology to understand the influence of the contents and characteristics of communication on the intra-organizational networks existing in technology-based firms for improving innovation competence. In addition to contributing to the existing literature on communication and innovation, the present study also contributes to the wider body of literature on intra-organizational relationships and has implications for researchers and managers regarding competence building with in intra-organizational networks.

162

BHASKAR PRASAD AND RUDY MARTENS

REFERENCES Ahuja, M. K., Galletta, D. F., & Carley, K. M. (2003). Individual centrality and performance in virtual R&D groups: An empirical study. Management Science, 49, 21–38. Allen, T. J. (1986). Organizational structure, information technology, and R&D productivity. IEEE Transactions on Engineering Management EM, 33, 212–217. Allen, T. J. (1992). Distinguished speaker speech. TIM Division of the Academy of Management, Las Vegas, August. Ancona, D. G., & Caldwell, D. F. (1992). Demography and design: Predictors of new product team performance. Organization Science, 3, 321–341. Ashforth, B. E., & Mael, F. (1989). Social identity theory and the organization. Academy of Management Review, 14, 20–39. Barber, E., & Warn, J. (2005). Leadership in project management: From firefighter to firelighter. Management Decision, 43, 1032–1039. Bennis, W., & Nanus, B. (1985). Leaders: The strategies for taking charge. New York: Harper and Row. Bontis, N., Crossan, M. M., & Hulland, J. (2002). Managing an organizational learning system by aligning stocks and flows. Journal of Management Studies, 39, 437–469. Borgatti, S. P., & Foster, P. C. (2003). The network paradigm in organizational research: A review and typology. Journal of Management, 29, 991–1013. Brockman, B. K., & Morgan, R. M. (2003). The role of existing knowledge in new product innovativeness and performance. Decision Sciences, 34, 385–419. Burns, T., & Stalker, G. M. (1971). The management of innovation. London: Tavistock. Burt, R. S. (1982). Toward a structural theory of action. New York: Academic Press. Carley, K. M., & Kaufer, D. S. (1993). Semantic connectivity: An approach for analyzing symbols in semantic networks. Communication Theory, 3, 183–213. Carlile, P. R. (2002). A pragmatic view of knowledge and boundaries: Boundary objects in new product development. Organization Science: A Journal of the Institute of Management Sciences, 13, 442–455. Carrero, V., Peiro, J. M., & Salanova, M. (2000). Studying radical organizational innovation through grounded theory. European Journal of Work and Organizational Psychology, 9, 489–514. Cohen, W. M., & Levinthal, D. A. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35, 128–152. Constant, D., Sproull, L., & Kiesler, S. (1996). The kindness of strangers: On the usefulness of weak ties for technical advice. Organization Science, 7, 119–135. Contractor, N. S., & Eisenberg, E. M. (1990). Communication networks and new media in organizations. In: J. Fulk & C. W. Steinfield (Eds), Organizations and communication technology (pp. 145–174). Newbury Park, CA: Sage. Cummings, J. N. (2004). Work groups, structural diversity, and knowledge sharing in a global organization. Management Science, 50, 352–364. De Brentani, U., & Kleinschmidt, E. J. (2004). Corporate culture and commitment: Impact on performance of international new product development programs. Journal of Product Innovation Management, 21, 309–333. De Ridder, J. A. (2004). Organisational communication and supportive employees. Human Resource Management Journal, 14, 20–30.

Increasing Technological Innovation Competence

163

Dodgson, M. (1991). Technology learning, technology strategy and competitive pressures. British Journal of Management, 2, 133–149. Ebadi, Y., & Utterback, J. (1984). The effect of communication on technological innovation. Management Science, 30, 572–585. Edmondson, A. C. (2002). The local and variegated nature of learning in organizations: A group-level perspective. Organizational Science, 13, 128–146. Edmondson, A. C. (2003). Speaking up in the operating room: How team leaders promote learning in interdisciplinary action teams. Journal of Management Studies, 40, 1419–1452. Eisenhardt, K. M. (1989). Building theories from case study research. Academy of Management Review, 44, 532–550. Ettlie, J. E., Bridges, W. P., & O’Keefe, R. D. (1984). Organization strategy and structural differences for radical versus incremental innovation. Management Science, 30, 682–695. Fiol, C. M. (2002). Capitalizing on paradox: The role of language in transforming organizational identities. Organization Science: A Journal of the Institute of Management Sciences, 13, 653–666. Fleming, L. (2001). Recombinant uncertainty in technological search. Management Science, 47, 117–132. Freeman, L. C. (1979). Centrality in social networks: Conceptual clarification. Social Networks, 1(3), 215–239. Galunic, D. C., & Rodan, S. (1998). Resource recombinations in the firm: Knowledge structures and the potential for Schumpeterian innovation. Strategic Management Journal, 17, 1193–1201. Ginsberg, A. (1990). Connecting diversification to performance: A sociocognitive approach. Academy of Management Review, 15, 514–543. Hamel, G., & Prahalad, C. K. (1989). Strategic intent. Harvard Business Review, 67, 63–76. Harvey, J., Pattigrew, A., & Ferlie, E. (2002). The determinants of research group performance: Towards mode 2? Journal of Management Studies, 39, 747–774. Hayek, F. A. (1989). The pretence of knowledge. American Economic Review, 79, 3–7. Herriott, H. E., & Firestone, W. A. (1983). Multisite qualitative policy research: Optimizing description and generalizability. Educational Researcher, 12(2), 14–19. Huff, C., Sproull, L., & Kiesler, S. (1989). Computer communication and organizational commitment: Tracing the relationship in a city government. Journal of Applied Social Psychology, 19, 1371–1391. Hult, G., Tomas, M., Hurley, R. F., & Knight, G. A. (2004). Innovativeness: Its antecedents and impact on business performance. Industrial Marketing Management, 33, 429–438. Hurley, R. F., & Hult, T. G. (1998). Innovation, market orientation, and organizational learning: An integration and empirical examination. Journal of Marketing, 62, 42–54. Hwang, A., Khatri, N., & Srinivas, E. S. (2005). Organizational charisma and vision across three countries. Management Decision, 43, 960–974. Ibarra, H. (1993). Network centrality, power, and innovation involvement: Determinants of technical and administrative roles. Academy of Management Journal, 36, 471–501. Kanter, R. M. (1988). When a thousand flowers bloom: Structural, collective, and social conditions for innovation in organization. Research in Organizational Behavior, 10, 169–211. Katz, D., & Kahn, R. L. (1978). The social psychology of organizations (2nd ed.). New York: Wiley.

164

BHASKAR PRASAD AND RUDY MARTENS

Katz, R., & Tushman, M. (1979). Communication patterns, project performance, and task characteristics: An empirical evaluation and integration in an R&D setting. Organizational Behavior and Human Performance, 23, 139–162. Keller, R. T. (1986). Predictors of the performance of project groups in R&D organizations. Academy of Management Journal, 29, 715–726. Keller, R. T. (2001). Cross-functional project groups in research and new product development: Diversity, communications, job stress, and outcomes. Academy of Management Journal, 44, 547–555. Krackhardt, D. (1992). The strength of strong ties. In: N. Nohria & B. Eccles (Eds), Networks and organizations (pp. 216–239). Boston, MA: Harvard Business School Press. Krackhardt, D., & Kilduff, M. (2002). Structure, culture and simmelian ties in entrepreneurial firms. Social Networks, 24, 279–290. Lemon, M., & Sahota, P.S. (2002). Organizational culture as a knowledge repository for increased innovative capacity. Technovation, Article in Press. Leroy, F., & Ramanantsoa, B. (1997). The cognitive and behavioral dimensions of organizational learning in a merger: An empirical study. Journal of Management Studies, 34, 871–894. Levin, D. Z., & Cross, R. (2004). The strength of weak ties you can trust: The mediating role of trust in effective knowledge transfer. Management Science, 50, 1477–1490. Levine, J. M., & Moreland, R. L. (1991). Culture and socialization in work groups. In: L. B. Resnick, J. M. Levine & S. D. Teasley (Eds), Perspectives on socially shared cognition (pp. 257–279). Washington DC: American Psychological Association. Levitt, B., & March, J. G. (1988). Organizational learning. Annual Review of Sociology, 14, 319–340. Miles, M., & Huberman, A. (1994). Qualitative data analysis (2nd ed.). Thousand Oaks: Sage. Monge, P., & Contractor, N. (2001). Emergence of communication networks. The new handbook of organizational communication. Newbury Park, CA: Sage Publications. Moreland, R. (1999). Transactive memory: Learning who knows what in work groups and organizations. In: L. Thompson, J. Levine & D. Messick (Eds), Shared cognition on organizations (pp. 3–31). Mahwah, NJ: Lawrence Erlbaum Associates. Morelli, M. D., Eppinger, S. D., & Gulati, R. K. (1995). Predicting technical communication in product development organizations. Transactions on Engineering Management, 42, 215–222. Mowday, R. T., Steers, R. M., & Porter, L. W. (1979). The measurement of organizational commitment. Journal of Vocational Behavior, 14, 224–247. Nelson, R. R., & Winter, S. G. (1982). An evolutionary theory of economic change. Cambridge: Harvard University Press. Nevis, E. C., DiBella, A., & Gould, J. M. (1995). Understanding organizations as learning systems. Sloan Management Review, 36, 73–85. Obstfeld, D. (2005). Social networks, the tertius iungens orientation, and involvement in innovation. Administrative Science Quarterly, 50, 100–130. Porter, L. W., Steers, R. M., Mowday, R. T., & Boulian, P. V. (1974). Organizational commitment, job satisfaction, and turnover among psychiatric technicians. Journal of Applied Psychology, 59, 603–609. Postrel, S. (2002). Islands of shared knowledge: Specialization and mutual understanding in problem-solving teams. Organization Science: A Journal of the Institute of Management Sciences, 13, 303–320. Reich, B. H., & Benbasat, I. (2000). Factors that influence the social dimension of alignment between business and information technology objectives. MIS Quarterly, 24, 81–113.

Increasing Technological Innovation Competence

165

Reichers, A. E. (1985). A review and reconceptualization of organizational commitment. Academy of Management Review, 10, 465–476. Rogers, E. M., & Kincaid, D. L. (1981). Communication networks: Toward a new paradigm for research. New York: Free Press. Romijn, H., & Albaladejo, M. (2002). Determinants of innovation capability in small electronics and software firms in southeast england. Research Policy, 31, 1053–1068. Schumpeter, J. A. (1934). The theory of economic development. Cambridge: Harvard University Press. Senge, P. (1990). The leaders new work: Building learning organizations. Sloan Management Review, 32, 1–17. Sethi, R., Smith, D. C., & Park, C. W. (2001). Cross-functional product development teams, creativity, and the innovativeness of new consumer products. Journal of Marketing Research, 38, 73–85. Siders, M. A., George, G., & Dharwadkar, R. (2001). The relationship of internal and external commitment foci to objective job performance measures. Academy of Management Journal, 44, 570–579. Sinkula, J. M., Baker, W., & Noordewier, T. G. (1997). A framework for market-based organizational learning: Linking values, knowledge and behavior. Journal of the Academy of Marketing Science, 25, 305–318. Slater, S., & Narver, J. (1995). Market orientation and the learning organization. Journal of Marketing, 59, 63–74. Snyder, R. A., & Morris, J. H. (1984). Organizational communication and performance. Journal of Applied Psychology, 69, 461–465. Sosa, M. E., Eppinger, S. D., Pich, M., McKendrick, D. G., & Stout, S. K. (2002). Factors that influence technical communication in distributed product development: An empirical, study in the telecommunications industry. IEEE Transactions on Engineering Management, 49, 45–58. Szulanski, G. (1996). Exploring internal stickiness: Impediments to the transfer of best practice within the firm. Strategic Management Journal, 17, 27–43. Verona, G. (1999). A resource-based view of product development. Academy of Management Review, 24, 132–142. Webb, E., & Weick, K. E. (1979). Unobtrusive measures in organizational theory: A reminder. Administrative Science Quarterly, 24, 650–659. Wegner, D. (1987). Transactive memory: a contemporary analysis of the group mind. In: B. Mullen & G. Goethals (Eds), Theories of group behavior (pp. 185–208). New York: Springer. Weick, K. E. (1993). Organizational redesign as improvisation. In: G. P. Huber & W. H. Glick (Eds), Organization change and re-design (pp. 346–379). Oxford: Oxford University Press. West, J., & Iansiti, M. (2003). Experience, experimentation, and the accumulation of knowledge: The evolution of R&D in the semiconductor industry. Research Policy, 32, 809–826. Westley, F., & Mintzberg, H. (1989). Visionary leadership and strategic management. Strategic Management Journal, 10, 17–32. Yin, R. K. (2003). Case study research: Design and methods (3rd ed.). Thousand Oaks, CA: Sage Publications. Zaltman, G., Duncan, R., & Holbek, J. (1973). Innovations and Organizations. New York: Wiley.

THE DISTRIBUTION OF LEADERSHIP SKILLS ACROSS A SINGLE-FOCUS COMPANY, A MULTI-FOCUS COMPANY, AND AN INDUSTRY: THREE CASE STUDIES$ Janice A. Black and Richard Oliver ABSTRACT Strategic resources are critical for the survival of organizations. One such critical strategic resource is the quality of leadership found within an organization. The competitive advantage provided by any intangible resource like leadership is predicated upon two bases – an adequate level of skill and the skill’s relative rarity in the market. Just how rare are patterns of leadership skills within an organization, a multi-foci organization or even an industry? Leadership skills are assessed for these three contexts. We find great similarity of patterns within each type of entity and across all three contexts. This argues that some leadership $

This paper is based in part on work funded by the Southwest Consortia of Environmental and Regional Planning.

Competence Building and Leveraging in Interorganizational Relations Advances in Applied Business Strategy, Volume 11, 167–188 Copyright r 2008 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1016/S0749-6826(07)11007-6

167

168

JANICE A. BLACK AND RICHARD OLIVER

patterns may indeed be effective in a variety of contexts but may not be the only strategic resource contributing to the competitive advantage of an organization since on their own they are not rare.

INTRODUCTION Intangible resources are recognized to hold the potential to lead to a competitive advantage. The resource based view (RBV) prescribes a network of resources leading to a competitive advantage that are valuable, rare, hard to copy, and utilizable by the company (Barney, 1991; Black & Boal, 1994). Following the decision tree for competitive advantage provided by Black and Boal (1994), we can see that a skill-based intangible resource’s ability to provide a competitive advantage is predicated upon two bases – an adequate level of skill and the skill’s relative rarity in the market. After a resource has been determined to provide a competitive advantage, one can then evaluate how long that advantage can be maintained. Sanchez and Heene (1997) argued for the importance of the deployment of that skill which fits into the utilization of the skill assessment. Leadership is one such skill-based intangible resource that has been identified as strategically important (Boal & Hooijberg, 2001). However, leadership, in general, is not rare since each firm potentially will have multiple leaders. Thus, for leadership to be an intangible resource that leads to a competitive advantage, one must assess the skill level of leadership present in an industry and determine the degree of ‘‘rareness’’ of either patterns of leadership skills or very high levels of leadership skills (Barney, 1991; Reed & DeFillippi, 1990). To assess the level and scope of leadership skills found at various sites requires that we define the set of leadership skills. After having a set of skills to consider, we need to then understand the pattern of skills present at a firm or industry. Assessment of each circumstance would then follow. This paper begins with a short review of the leadership literature and the choice of a particular set of leadership skills to use. Hypotheses will be developed with regards to the criteria required by RBV. In the Methods section, the two organizational sites and the industry to be examined will be presented along with our data collection efforts. The results of the study will then be presented. The paper will conclude with implications for research, practitioners, practitioners in this industry, and future directions of research.

Distribution of Leadership Skills

169

LEADERSHIP REVIEW Leadership research has addressed a range of definitions (see for example: Howell & Costley, 2006; Yukl, 1989). Indeed, there has been an ongoing discussion between what is leadership versus what is management (Howell & Costley, 2006). While these issues can be very interesting theoretically, pragmatically, organizations are interested in people who can lead towards the future while maintaining or improving current levels of performance. This is particularly important given the impact of executive leadership on organizational performance (Waldman, Javidan, & Varella, 2004). Leadership is very context sensitive (Humphrey, 2003; Howell & Costley, 2006), and some researchers have addressed this problem of context sensitivity by examining each organization on a case-by-case basis using qualitative research methodologies (Hunt & Ropo, 1992; Gronn, 1999; Mumford, Dansereau, & Yammarino, 2000; Mumford & Van Doom, 2001). Such research is limited in application beyond the cases depicted. Recent studies of leadership have begun to include specifics about the context in their models and to address the need of leaders to vary their actions in differing contexts (Howell & Costley, 2006; Graeff, 1997; Hersey, Blanchard, & Johnson, 1996). Other research has focused on the social networks, their impact on and demographics of strategic leaders (Gulati & Westphal, 1999; Carpenter & Westphal, 2001; Westphal & Milton, 2000). Thus like many strategic resources, the network or set of resources in use matters (Black & Boal, 1994). For this paper, we needed to include a set of leadership skills that is not necessarily industry-specific but which were considered necessary for successful organizations. Our goal is not to take one side or another on the divisions between management skills and leadership skills (McLean, 2005), but rather to be inclusive of both sets of skills. Quinn, while calling such a balanced view a ‘‘Master Manager’’ (Quinn, Faerman, Thompson, & McGrath, 2003), has a set of skills that combine both those found when discussing leaders and those found when discussing managers (Black, Oliver, Howell, & King, 2006). Although other broadly based approaches exist (see Antonakis, Avolio, & Sivasubramaniam, 2003; Yukl, 2003), we chose to use the competing values framework (CVF) set of leadership skills since it was inclusive of both managerial and leadership skills. The competing values framework was also valued because it addressed specific sets of skills promoted by the set of different schools of management focused on by researchers over the years (Quinn et al., 2003).

170

JANICE A. BLACK AND RICHARD OLIVER

Quinn’s Competing Values Framework Quinn and associates have developed an approach to analyzing and viewing effective management from a competing value perspective (Quinn & Cameron, 1983; Quinn, Spreitzer, & Hart, 1992; Denison, Hooijberg, & Quinn, 1995; Quinn et al., 2003). Their model, which integrates four major historical models of efficient organizations (Quinn et al., 2003), identifies four general competing values and associated roles (see Fig. 1.). Control Value Systems compete with Flexibility Value Systems. Internal Focused Values Systems compete with External Focused Value systems. These competing values require a leader to take on different roles with attendant different behaviors – Mentor, Facilitator, Monitor, Coordinator, Innovator, Broker, Producer, and Director. The roles are composed of leadership skills. The skills are complementary to the skills of the other role within a single quadrant and contrast directly with the roles in the opposite quadrant (Fig. 1: The four quadrants are connected by solid lines.). Ability levels in these skills will collectively reflect the leader’s pattern of leadership skills or profile and are associated with the roles (Bullis, 1992; Hart & Quinn, 1993; Hooijberg, 1996). The complementary roles of Mentor and Facilitator are in the InternalFlexibility Quadrant. The Mentoring role’s set of behaviors consists of understanding yourself and others, being able to communicate effectively and being able to develop your followers. The Facilitator role behaviors

Flexibility Innovator

Mentor Facilitator

Broker

Internal

External Monitor

Producer Director

Coordinator Control

Fig. 1.

Quinn’s Competing Values & Roles.

Distribution of Leadership Skills

171

include building teams, using participative decision making, and being able to manage conflict. Competing roles are found in the External-Control quadrant. The Complementary roles in this quadrant are the Producer and Director. The Producer role behaviors include working productively and being able to manage time and stress while fostering a productive work environment. The Director role behaviors require a manager to design and organize the work including delegating effectively while being able to envision where the organization is going and planning how the organization will get there. It also includes being able to set goals. In the Internal-Control quadrant are the complementary roles of Monitor and Coordinator. The Monitor role’s set of behaviors includes managing collective and organizational performance, as well as monitoring individual performance. The Coordinator role behaviors mean being able to manage projects and design work processes including managing across functional areas. Competing roles to the Internal-Control quadrant roles are found in the External-Flexibility quadrant. The complementary roles in this quadrant are the Innovator and Broker roles. In the Innovator role, skills include being able to live with and create change that also requires thinking creatively. The Broker role competencies include being able to build and maintain a power base, being able to present ideas, and being able to negotiate agreement and commitment. Quinn and associates have detailed some leader profiles (or patterns of leadership skills in use) and designated some as effective and others as ineffective (Quinn et al., 2003). The ineffective profiles are Chaotic Adaptives (relatively strong in facilitating, mentoring, and innovating and weaker elsewhere), Abrasive Coordinators (relatively strong in monitoring and coordinating and weak elsewhere), Drowning Workaholics (weak everywhere but stronger in producing), and Extreme Unproductives (again weak everywhere but slightly stronger in mentoring and weakest in producing). These ineffective profiles reveal that the leader has low ability levels in one or more of the roles and that the leader is unbalanced by not having at least minimally useful ability levels in all roles. The effective profiles are: the Aggressive Achiever (slightly weaker in facilitating and stronger in producing), the Conceptual Producer (weaker in monitoring and coordinating), the Peaceful Team Builder (weaker in producing and brokering), and the Master Manager (balanced ability levels of skills in all roles). All of these effective profiles have at least minimally effective ability levels in the roles, and the differences in competing role levels are not as pronounced as is found in the ineffective

172

JANICE A. BLACK AND RICHARD OLIVER

profiles. The Master Manager leader is one who can manage across all roles and accurately use the needed behavior for a given context (Hooijberg & Quinn, 1992; Hooijberg, 1996). Such action is called behavioral complexity (Hooijberg & Quinn, 1992).

The Resource-Based View Resource Based View (RBV) recognizes that there is economic value in things that are rare and which can be used in ways that provide value (Barney, 1991). From the late 1960s and early 1970s (Kaczka & Kirk, 1967; Fiedler, 1972), intangible resources such as the skill and effectiveness of leaders were considered a good candidate for being a strategic resource. Such resources were considered to be bundles of embedded resources and not just bundles but rather groups of resources with specific relationships between them (Black & Boal, 1994). It is the combinations of resources, skills, capabilities, and competences present within an organization that provide competitive advantage according to the competence-based perspective (Sanchez & Heene, 2004).

Hypotheses To contribute to a sustainable competitive advantage requires that a resource be valuable, rare, inimitable, and that the organization be utilizing that resource (Barney, 1991). With regards to leadership skills, all organizations are assumed to be utilizing their leaders. One issue with this resource-based orientation is that it is circular: a resource is valuable if successful in the industry, which is also the definition of the outcome. By noting that leadership skills have certain ability levels apart from any industry understanding (i.e. you can either be a good mentor or not), using Quinn’s CVF Leadership roles helps to untangle the causality issues. Thus a leadership skill is valuable if there is a basic ability level in that particular skill. So the real issue for leadership becomes, ‘‘How rare is any one pattern of leadership skills?’’ This focus on the patterns of leadership skills within a company (single or multi-focused) or across an industry allows us to focus on the basic issue of whether or not leadership can lead to a competitive advantage. If we find that a particular type of leadership pattern is present within a single focus organization, we may have to look closer to determine just what about

Distribution of Leadership Skills

173

leadership is rare. If on the other hand a pattern is not spread across a single organization, then perhaps that leadership pattern may be rare. The same would be true if we find a predominant pattern in the industry. If it is not rare, is leadership alone really capable of providing a competitive advantage? Because we are interested in whether or not there is pattern of leadership skills present and not generalizability to all conditions, case studies are appropriate and we do not need to hold any one contextual factor constant (i.e. we do not need to hold the single focus organization, multi-focus organization, or industry constant). However, from Quinn’s work, we know that a certain minimal ability level of leadership skills is necessary. Our first hypothesis addresses the presence of that minimal level of skills, but we do not anticipate that this minimal level would meet the requirements of being rare. Our research questions then are ‘‘What is the average ability level of these leadership skills present in an organization or industry?’’ and ‘‘What is the pattern of ‘profiles’ present?’’ (Recall that a profile is simply a particular pattern of leadership skills as defined by Quinn.) As discussed earlier, the presence of a particular leadership profile within an organization may matter. Thus we will examine separate types of organizations to determine if patterns of leadership profiles exist. Two cases will be used, that of a single focus organization and that of a multi-focus firm. These two cases allow us to examine the context that one could argue would call for a relative homogeneous set of profiles, the single focus firm and a context that one could argue would call for a relative heterogeneous set of profiles, the multi-focus firm. The third case to be examined is that of a single industry. Given that there exists a minimum ability level of skill required for leaders of at least 3 on a Likert scale ranging from 1 to 7 (Quinn et al., 2003), we expect that the average leadership present for either an organization or a firm to be at least that level of 3. We expect that this will hold true for all three contexts. Thus, Hypothesis 1A. The average ability level across all leadership skills within a single focus organization will be at or above 3. Hypothesis 1B. The average ability level across all leadership skills within a multi-focus organization will be at or above 3. Hypothesis 1C. The average ability level across all leadership skills within an industry will be at or above 3.

174

JANICE A. BLACK AND RICHARD OLIVER

We expect that the pattern of ability levels present may be rare. Patterned ability levels of leadership skills are presented as leadership profiles by Quinn (Quinn et al., 2003). Thus, the second question for leadership regarding the pattern of leadership present within an organization or industry is really about the presence of predominant profiles. Quinn had eight profiles ranging from a highly effective Master Manager to an extremely ineffective Extreme Unproductive. Given a single focus organization (i.e. one operating in a single market), we would expect the pattern of hiring and training would result in a narrow range of patterns. If the organization has survived long enough we would expect that pattern to be similar to one of the effective profiles suggested by Quinn. Following work done on organizational failures, where the average age at failure was very wide across industries at early ages and very low and similar by age 10 (Nucci, 1999) with an average age across all industries of 9.5 (Fredland & Morris, 1976) and which appears to be stable across time (Toftoy & Chatterjee, 2004), we chose to examine organizations of at least 10 years of age. Thus, we would expect to see a predominance of effective leadership profiles present in a single focus organization at least 10 years old. Hypothesis 2A. The majority of leadership profiles in a single-focus organization at least 10 years old will be effective leadership profiles. For a multi-focus organization, we would expect a greater range of leadership profiles since there are a variety of organizational foci. This case reflects a context which relaxes the assumption that an organization is operating in only one market or industry. We expect this due to the literature on the contextual sensitivity of effective leadership (Black et al., 2006; Yun, Faraj, & Sims, 2005; Justis, 1975; Fiedler, 1972). Thus, Hypothesis 2B. No single pattern of leadership profiles will be dominate in a multi-focus organization at least 10 years old. Since industries have a range of successful firms, we would again anticipate that there would be a range of leadership profiles present. In other words, we would not expect any one leadership profile to be dominant within an industry. Hypothesis 2C. No single pattern of effective or ineffective leadership profiles will be dominant in an industry. Since we are interested in the use of leadership as a strategic resource, we will also examine the number of leaders who respond who have high to very high ability levels in their leadership profiles. Recall that Quinn and his

Distribution of Leadership Skills

175

colleagues argue that there is a profile which is best – the Master Manager. We expect that there will be relatively few Master Manager profiles since this requires higher ability levels on all leadership skills; however, one can also argue that if leadership has been used as a competition point in the past that there may be a higher ability level of skill required simply for competitive parity (Powell, 2003). To control for the use of leadership as a competition point, we will examine the overall ability levels of leadership skills found in the industry and preclude using an industry where this is greater than six. As mentioned earlier, there are eight archetypical profiles presented by Quinn. If we assume that each of these leadership profiles is equally represented across all industries and individuals, we would expect profiles from the industry to match up with an archetypical profile about 1/8th or 12.5% of the time. However, given that it is difficult to gain expertise in roles which are displayed opposite to each other on Fig. 1; it should be the most difficult to attain the Master Manager profile. To allow for this, we would adjust our expectations of the percent of leaders to have a Master Manager profile to 10%. From RBV, at less than 10% the Master Manager profile becomes ‘‘rare’’ and can potentially provide a competitive advantage. Thus, Hypothesis 3. In an industry, there will be less than 10% of the leader profiles which are closest to a Master Manager profile.

METHODOLOGY This study combines Yin’s (2004) critical case approach with survey research methodology. We find specific cases of interest and administer the questionnaires to the leaders involved in those cases. The three critical case sites chosen were a single focus organization, a multi-focus organization, and an industry. The single focus case held industry/market and organizational factors constant. In the multi-focus case, we held the organizational factors constant but allowed the industry/market influences to vary. In the industry case, we held the industry/market factors constant and allowed organizational factors to vary. We cannot hold the industry constant for each boundary case condition, since by definition the multi-focus organization will be in multiple industries. Each case then is a stand-alone example of its particular condition. While each case is a stand-alone assessment of the conditions of interest, finding things in common across these conditions allows us to argue for a more robust finding that may be generalizable

176

JANICE A. BLACK AND RICHARD OLIVER

beyond these particular cases. The diversity of industries, organizations, and markets helps strengthen the robustness claims. The questionnaires, sites, and data acquisition processes are detailed next.

The Questionnaire Quinn and his colleagues had already developed a questionnaire to determine self-reported ability levels associated with leadership skill associated with their competing roles. Questionnaires were developed to help diagnose an individual’s leadership style (profile of behaviors used) by assessing the level of skill for behaviors associated with the roles and the frequency that each behavior is used. The CVF questionnaire has demonstrated discriminant, convergent, and nomological validity (Denison et al., 1995). Quinn and his colleagues (Faerman, Quinn, & Thompson, 1987; Quinn et al., 1992) have used these questionnaires to link roles to specific leader behaviors (Faerman et al., 1987). Because leadership skills are considered contextually sensitive, the choice of sites was important. To hold constant outside influences all organizations and industries were chosen from the southwestern part of the United States. Further site boundaries are given next.

The Successful Single Focus Organization The long-time single focus organization chosen for this case is one that has been in business providing service since 1921. It was a hospital located in a large multi-hospital city in the region. The nursing staff of the hospital was chosen as a typical example of the people involved at the hospital. Granted with only information from a professional job category, it may be difficult to expand this to other non-professional areas. The containment over the years of the hospital to just being a hospital meets the long-time single focus organization requirements.

The Multi-Focus Organization As mentioned earlier, the three case sites do not need to be constrained to a single industry but rather must meet the case criteria. Thus the next case criteria is that of an organization with multiple foci, or in other words, is

Distribution of Leadership Skills

177

engaged in activities in multiple markets. An example of market categories is that of service and manufacturing. Thus having an organization that is engaged in both manufacturing activities and in service activities is necessary for this next case. The purpose of examining a long-time multi-focus organization was to allow for a context which had a wide range of market influences and thus potentially a wide range of leadership profiles while holding constant the organizational influences. To ensure that there is diversity among the foci of the organization, a multi-focus organization site was chosen where there was present a wide range of both product production and service production. Furthermore, a comprehensive assessment of all leaders in the organization needed to be feasible. A county government was chosen since it met the two preceding criteria.

The Industry The third case is one that rather than focusing in on the organization focuses across organizations. We choose to identify an industry that has multiple foci to enable as broad a set of effective leadership skills as possible. This factor along with the potential of a variety of ages of firms in an industry provides stronger support for a particular leadership profile being critical for the industry, if we find a single leadership profile prevalent in this context. Both manufacturing and service industries have found these leadership skills useful (Quinn et al., 2003). When assessing an industry, it is important not only to examine competitors but also to include as many of the drivers of performance as possible (Porter, 1980). Thus, it would be valuable to identify an industry that was relatively small but which had both service and manufacturing components and was geographically bound. We chose for our industry the hydrology system along a section of a river. The hydrology system is comprised of those organizations concerned with the acquisition, treatment, distribution, and collection of waste water, and the treatment and redistribution of water. There are both service and ‘‘manufacturing’’ components. The service is in the distribution of water and the manufacturing is in the extraction, collection, and treatment of water. Other key industry competition drivers are various local, state, and federal agencies who regulate, monitor, or research water issues. Some water acquisition, treatment, and distribution systems are public and some are private. Thus we needed to collect data from the following categories of

178

JANICE A. BLACK AND RICHARD OLIVER

organizations: public water organizations, private water organizations, local and county governmental agencies, state governmental agencies, federal governmental agencies, and educational/research organizations.

The Data Collection Process Questionnaires were made available as paper copies or online. The organizations in the industry were contacted via email or phone and invited to respond. The two organizational sites had letters of support from top management but employees were allowed to respond or not. The Single-Focus Organization Site Eight leaders from the General Surgery and Obstetrics departments responded. These eight leaders will be treated as one type: nursing professional leaders. This was not a large proportion of the total population of all leaders. The Multi-Focus Organization There were four basic categories into which the various county agencies and departments were assigned: Detention (Service – which included running the county jail); Sheriff (Service – which included all deputies and county sheriff responsibilities); Transportation (Product – which included all road maintenance and traffic light maintenance) and General (Service – which included all other county departments and agencies). There were 11 Detention leaders, 13 Sheriff leaders, 12 Transportation leaders, and 23 General leaders. About two-thirds (67%) of all potential respondents participated. The Industry Site Organizations in each of the categories mentioned above were contacted both to respond to the questionnaires and to attend a workshop on high performance organizations. Nineteen organizations were originally contacted to participate. Responses were obtained from nine organizations and 20 leaders for a response rate of 47%. We received an average of two responses from each organization. There were responses in each category of organization. The average skill level across all roles and leaders needed to be assessed to be sure that it is below 6. The average across all roles and leaders for this industry was 5.06 which allowed us to proceed.

Distribution of Leadership Skills

179

THE RESULTS The score for the ability levels in each of the roles’ skills was calculated for each of the respondents. Then simple averages across respondents for each category were then calculated. The resulting scores were compiled (individual, organizational category, summary) and the profiles displayed. To determine similarity to Quinn’s profiles, values for each of Quinn’s profiles were extrapolated from Quinn et al. (2001) and these values were then used in difference calculations. Similarity to a particular profile was determined by the total of the absolute value of the differences for each of the roles. The smallest difference across all roles was determined to be the archetype profile type. Each hypothesis is discussed next. Hypothesis 1. Hypothesis 1 is that the average ability level across all leadership skills will be at or above 3. Recall that the leadership skills are grouped into roles by Quinn. To examine this hypothesis the average profile was graphed on a radiogram (See Figs. 2a,b,c). Hypothesis 1A. For this hypothesis, we examine the summary chart for all eight nursing supervisors who responded. The summary radiogram is presented in Fig. 2a. From the figure it is evident that for all of the roles, the hospital nursing supervisory staff has an average ability level of at least 3. The weakest area for these leaders is in the producer role and they are well balanced in all of the other roles. Hypothesis 1B. For this hypothesis, we examine the summary chart of all 59 leaders at the county. A summary of the average profile of the leaders present at the county appears in Fig. 2b. From the figure it is evident that all of the roles have ability levels of at least 3. These leaders are the weakest in coordinating and highest in mentoring. Hypothesis 1C. The average profile of leadership skills in the industry shows a relatively balanced profile (see Fig. 2c). From the figure it is evident that all of the roles have ability levels greater than 3. The lowest ability level in this industry is in the role of being a Director. The highest ability levels are found in the Facilitator and Broker roles. Thus, given that all three components of Hypothesis 1 have support separately, Hypothesis 1 is supported.

180

JANICE A. BLACK AND RICHARD OLIVER Mentor 7.00 6.00 Innovator

5.00

Facilitator

4.00 3.00 2.00 Broker

1.00

Co. Ave.

Coordinator

Producer

(a)

Monitor

Director Mentor 7.00 6.00

Innovator

5.00

Facilitator

4.00 3.00 2.00 Broker

1.00

Producer

(b)

Monitor

County

Coordinator

Director Mentor 7 6

Facilitator

5

Innovator

4 3 2 Monitor

1

Fig. 2.

Ind. Average

Producer

Coordinator

(c)

Broker

Director

(a) Hypothesis 1A: Nurses; (b) Hypothesis 1B: County; (c) Hypothesis 1A: Industry.

Distribution of Leadership Skills

181

Hypothesis 2. Hypothesis 2 regards the pattern of leadership profiles present across leaders in an organization or in an industry. There is expected to be some variation in patterns. To examine these hypotheses requires that each responding profile be compared to and categorized into Quinn’s archetypical profiles. Categorization (see Table 1) was done by examining the average absolute difference between Quinn’s archetype profiles and the focal leader’s profile. The leader’s profile was categorized as the profile with the smallest overall difference. Hypothesis 2A. Since the single-focus organization is known for being long lived, we anticipate a pattern of effective profiles present; otherwise we expect there to be no real discernable pattern of profiles present. That is we expect the number of effective profiles to be larger than the number of ineffective profiles. Examining Table 1 indicated that there are 6 profiles closest to the Master Manager and 1 profile closest to the Conceptual Producer for a total of 7 effective profiles. Only one ineffective profile was present and that one was closest to an Extreme Unproductive profile. This supports Hypothesis 2A. Hypothesis 2B. For the multi-focus organization, we did not expect to have any discernable pattern between effective or ineffective profiles. Thus, we expect the total effective profiles to be roughly equal to the ineffective profiles. Again examining Table 1 reveals that there were 48 effective profiles and 8 ineffective profiles. This does not Table 1. Archetype Profile

Aggressive Achiever Conceptual Producer Peaceful Teambuilder Master Manager Chaotic Adapter Abrasive Coordinator Drowning Workaholics Extreme Unproductives

Categorization of Profiles.

Number of Profiles Number of Profiles Number of Leader in Single-Focus in Multi-Focus Profiles in Industry Organization Organization 0 1 0 6 0 0 0 1

2 10 1 35 3 2 1 2

0 6 1 11 2 0 0 0

182

JANICE A. BLACK AND RICHARD OLIVER

support the hypothesis of there being no predominant pattern in the multi-focus organization. Hypothesis 2C. In this last hypothesis, we expected that no single pattern of leadership skill levels or that no single leadership profile will dominate in an industry. Table 1 shows the results of this categorization. From this table, we can see that a majority of the profiles were similar to one archetype, the Master Manager, and/or were effective profiles (18 out of 20). Thus, Hypothesis 2C is not supported. In looking at the results for Hypothesis 2, we found contrary to our hypothesis that it is not only the long-lived single focus organization which has a pattern of effective leadership profiles, but that all three cases have such an overall pattern. What we do notice is that the variation available is highest in the multi-focus organization with multiple industry/market involvements. Hypothesis 3. Hypothesis 3 called for less than 10% of the leader profiles in the industry to be similar to a Master Manager profile so that the use of that profile as a strategic resource would be ‘‘rare,’’ enabling strategic competitive advantage to some firms over other firms. Again examining Table 1, for this hypothesis not to be rejected we would need to have no more than 2 (10% of 20 leaders) closest to the Master Manager profile in the industry column. That is not the case. There are 11 or over half of the leaders had profiles most similar to the Master Manager profile by simple distance measures. However, a secondary quality of the Master Manager profile was having equivalent ability levels in opposing skill areas. To check this refined definition of the Master Manager, we limit the difference to no more than the smallest difference between competing values that is not zero (a difference of no more than .2). When we examine the profiles for this attribute as well, 5 of the profiles remain categorized as Master Managers and the remaining 6 are approaching the Master Manager profile but are not there yet. This amount is still more than 2. Thus from both criteria, Hypothesis 3 is not supported.

CONCLUSIONS AND IMPLICATIONS In this region, for firms which have some history, most of their existing leaders exhibit effective leadership profiles most similar to the most effective

Distribution of Leadership Skills

183

leader profile suggested by Quinn. Thus, high ability levels in leadership skills do not appear to be rare in either firms or industries. However, their dispersal through both firms and the industry studied argues that for this particular group of firms, leadership skills add value in the marketplace. This predominant leadership skill pattern, the Master Manager, occurs at the level of a single focus organization, multi-focus organization, or even an industry. The context diversity implies that profile is widely effective. Thus it would be valuable but not be something that would lead to a competitive advantage. However, since the industry was screened an average ability level below that of a level 6 and the Master Manager definition begins with a balanced set of skills at a level of 5; it may be that marginal Master Managers are fairly prolific but high ability level Master Managers are rare. Future research is needed to determine if that is the case.

Implications for Practitioners Since the predominant profile present for each case was the Master Manager profile, it appears to be important to leverage leadership skills through acquiring and retaining leaders with not only effective leadership profiles, but the best leadership profiles no matter the focus orientation of your firm or where in the industry your firm lies (large market share, small market share, etc.). Given the predominance of the Master Manager profiles at this single case of a long-lived single focus firm, it appears that this profile is the most valuable effective profile. However, this study drew upon the supervisors of professional staff, and for other non-professional occupations other profiles may be more predominant. Another point to be acknowledged is that relatively few leaders responded to the invitation to participate. It may be that only the Master Manager leaders responded. Research in other areas and/or other service organizations may help to clarify this point. Furthermore, given that this organization is a service organization, the study also needs to be duplicated in a manufacturing firm to verify that the Master Manager is also appropriate in the long term there as well. Since this was a long-lived firm, once could also argue that the firm had grown more bureaucratic over time. If that were the case, the presence of the Master Manager may simply reflect that bureaucratic nature. Again, additional studies will help us to better understand why the Master Manager profile was so prolific in this single focus environment. Thus, managers of professionally oriented service organizations may want to strive for the

184

JANICE A. BLACK AND RICHARD OLIVER

Master Manager pattern of skills, but managers in other types of service organizations and in manufacturing organizations will need to be cautious about applying the results from only this portion of the study. Despite that caution, since the multi-focus organization also had a dominant Master Manager pattern, our concerns on the limited applicability of our findings may be overstated. The widest range of leader profiles present was in the multi-focus organization. Since this is a single case, it is difficult to determine if this is due to the multi-focused part of the organization (i.e. having both service and manufacturing components) or simply unique to this particular organization. However, since even though there was a wide range of styles present, the predominance of the Master Manager even in this environment would argue that reducing the variation among leaders present within an organization to that of the Master Manager may be a competence that could lead to strategic competitive advantage. That is, it may be a needed organizational level competence of a relatively narrow range of leadership profiles present or of obtaining or developing leaders to have a Master Manager profile that could lead to a competitive advantage. On average in this industry, leaders have effective ability levels of leadership skills. There are more effective leader profiles than not and the profile with the largest number of leaders is the Master Manager. Although some Master Managers are still balancing out their skill levels across the roles, over half of the industry has leaders with skills high enough and balanced enough to be considered Master Managers. This implies that leadership in this industry may already have been a competition point and that pure leadership skill levels may no longer be a competition point. For leadership in this industry to be a source of competitive advantage, it may require leaders to also know when to take action as well as what action to take and their skill in taking that action. It may also be that this industry, the hydrology system, has faced such changes and turbulence in the past that leaders had to acquire a high level of the each of the competing roles simply to remain in a leadership position. Additional work examining the historical context of this industry is needed to determine if it was competitive action or turbulence due to some other elements that drove a specific pattern of leadership profiles to be present. Examining other geographically bound hydrology systems may help us to understand if it is the hydrology industry in general or simply this particular one that has such a strong pattern of Master Managers present.

Distribution of Leadership Skills

185

Implications for Research Future work includes extending the assessment to more single focus firms. This would include firms that are still in the entrepreneurial stage (less than ten years). It would be good to examine this for small firms (those with very few leaders, as well as for those classified as successful, and those that are merely surviving). This expansion would enable us to determine if the use of effective leader profiles is something that firms are actively building or simply acquiring. The same expansion for multi-focus organizations would reveal if this organization is relatively in a stronger competitive position or not. An expansion into other industries across competing firms would provide more information into the use of leadership skills for competitive parity or if fine-tuned differences such as the variation of skills present within a firm might make a difference in the firms’ effective competing. All of the above also need to be duplicated in another region to determine if the predominance of the Master Manager profile is region or country specific. Future research could also examine the relative skill levels of leadership present in a firm by firm basis for the industry since relative skill differentials could enable transitory competitive advantage. Thus from these case studies further extension research along other potentially critical boundaries is required to enable us to have more robust conclusions about single focus organizations, multi-focus organizations, and industries regarding if leadership skill levels in the competing roles is a source of competitive advantage. This expansion would reveal if leadership skill profile patterns are sensitive to the region, successful single focus firms, or the industry context, or if all firms need more effective leaders simply to stay in the game. With regards to illuminating research done using a resource-based view of the firm, this project illustrates how value can be determined separately from success in an industry. By evaluating leadership skills using existing questionnaires which reflect skill ability levels and not market success as the basis for value, we are able to disentangle the causality web that early researchers stumbled over. This set of case studies reveals that it is possible to assess ‘‘absolute’’ quality of a strategic resource while it is deployed in an organization. Furthermore, the distribution of higher ability levels throughout firms and markets implies that there is also value creation happening in the marketplace. Further work is needed, however, to determine if this particular resource would be a stand-alone strategic resource or must be coupled with one or more other resources to provide competitive advantage.

186

JANICE A. BLACK AND RICHARD OLIVER

Given that our strategic resource is leadership skills, we suggest that it is very reasonable to conclude that it indeed only brings competitive advantage when coupled with other strategic resources available to a firm.

CONCLUSION The Master Manager profile is a pattern of leadership skills that appears to be effective across a wide range of conditions. Whether a minimal ability level is sufficient for competitive parity, if high ability levels can lead to competitive advantage on leadership alone, or if a relative advantage in leadership skills can enable a competitive advantage remains to be determined. An alternative explanation for the widely distributed Master Manager profile is that leadership by itself cannot provide competitive advantage but rather it is that leadership profile in conjunction with the rest of the resources, skills, competencies, and competences of the firm that provide the competitive advantage.

REFERENCES Antonakis, J., Avolio, B. J., & Sivasubramaniam, N. (2003). Context and leadership: An examination of the nine-factor full-range leadership theory using the multifactor leadership questionnaire. Leadership Quarterly, 14, 260–295. Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120. Black, J. A., & Boal, K. (1994). Strategic resources: Traits, configurations and paths to sustainable competitive advantage. Strategic Management Journal: Special Summer Issue on New Paradigms, 15, 131–148. Black, J. A., Oliver, R. L., Howell, J. P., & King, J. P. (2006). A dynamic simulation of leader and group effects on context-for-learning. The Leadership Quarterly, 17(1), 39–56. Boal, K. B., & Hooijberg, R. (2001). Strategic leadership research: Moving on. Leadership Quarterly, 11, 515–549. Bullis, R. C. (1992). The impact of leader behavioral complexity on organizational performance. Unpublished doctoral dissertation. Texas Tech University, Lubbock, TX. Carpenter, M., & Westphal, J. (2001). The strategic context of external network ties: Examining the impact of director appointments on board involvement in strategic decision making. Academy of Management Journal, 44, 639–660. Denison, D. R., Hooijberg, R., & Quinn, R. E. (1995). Paradox and performance: A theory of behavioral complexity in leadership. Organization Science, 6, 524–541. Faerman, S. R., Quinn, R. E., & Thompson, M. P. (1987). Bridging management practice and theory. Public Administration Review, 47, 311–319.

Distribution of Leadership Skills

187

Fiedler, F. E. (1972). The effects of leadership training and experience: A contingency model interpretation. Administrative Science Quarterly, 17, 453–471. Fredland, J. E., & Morris, C. E. (1976). A cross section analysis of small business failure. American Journal of Small Business, 1, 7–18. Graeff, C. L. (1997). Evolution of situational leadership theory: A critical review. Leadership Quarterly, 8, 153–170. Gronn, P. (1999). Substituting for leadership: The neglected role of the leadership couple. Leadership Quarterly, 10, 41–62. Gulati, R., & Westphal, J. (1999). Cooperative or controlling? The effects of CEO-board relations and the content of the interlocks on the formation of joint ventures. Administrative Science Quarterly, 44, 473–506. Hart, S. L., & Quinn, R. E. (1993). Roles executives play: CEOs, behavioral complexity and firm performance. Human Relations, 46, 543–574. Hersey, P., Blanchard, K. H., & Johnson, D. E. (1996). Management of organizational behavior: Utilizing human resources (7th edn.). Upper Saddle River, NJ: Prentice-Hall. Hooijberg, R. (1996). A multidirectional approach toward leadership: An extension of the concept of behavioral complexity. Human Relations, 49, 917–946. Hooijberg, R., & Quinn, R. E. (1992). Behavioral complexity and the development of effective leaders. In: R. L. Phillips & J. G. Hunt (Eds), Strategic management: A multiorganizational-level perspective (pp. 111–130). Greeenwich, CT: JAI Press. Howell, J. P., & Costley, D. L. (2006). Understanding behaviors for effective leadership (2nd ed.). Upper Saddle River, NJ: Pearson Education. Humphrey, R. H. (2003). The many faces of emotional leadership. Leadership Quarterly, 13, 493–504. Hunt, J. G., & Ropo, A. (1992). Stratified systems theory and dynamic case study perspectives: A symbiosis. In: R. L. Phillips & J. G. Hunt (Eds), Strategic management: A multiorganizational-level perspective (pp. 179–194). Greeenwich, CT: JAI Press. Justis, R. T. (1975). Leadership effectiveness: A contingency approach. Academy of Management Journal, 18, 160–168. Kaczka, E. E., & Kirk, R. V. (1967). Managerial climate and organizational performance. Academy of Management Proceedings, 101–112. McLean, J. (2005). Management and leadership. British Journal of Administrative Management, 49, 16. Mumford, M., Dansereau, F., & Yammarino, F. (2000). Followers, motivations and levels of analysis: The case of individualized leadership. Leadership Quarterly, 11, 313–340. Mumford, M., & Van Doom, J. (2001). The leadership of pragmatism: Reconsidering Franklin in the age of charisma. Leadership Quarterly, 12, 279–309. Nucci, A. R. (1999). The demography of business closings. Small Business Economics, 12, 25–40. Porter, M. (1980). Competitive strategy. New York: Free Press. Powell, T. C. (2003). Varieties of competitive parity. Strategic Management Journal, 24(1), 61–87. Quinn, R. E., & Cameron, K. S. (1983). Organizational life cycles and shifting criteria of effectiveness: Some preliminary evidence. Management Science, 29, 33–51. Quinn, R. E., Faerman, S. R., Thompson, M. P., & McGrath, M. R. (2003). Becoming a Master Manager: A competency approach (3rd edn.). Hoboken, NJ: Wiley. Quinn, R. E., Spreitzer, G. M., & Hart, S. (1992). Integrating the extremes: Crucial skills for managerial effectiveness. In: S. Srivastava, R. E. Fry & associates (Eds), Executive and

188

JANICE A. BLACK AND RICHARD OLIVER

organizational continuity: Managing the paradoxes of stability and change. San Francisco, CA: Jossey-Bass. Reed, R., & DeFillippi, R. J. (1990). Causal ambiguity, barriers to imitation and sustainable competitive advantage. Academy of Management Review, 15, 88–102. Sanchez, R., & Heene, A. (1997). Competence-based strategic management: Concepts and issues for theory, research, and practice. In: R. Sanchez & A. Heene (Eds), Competencebased strategic management. New York: Wiley. Sanchez, R., & Heene, A. (2004). The new strategic management: Organization, competition & competence. New York: Wiley. Toftoy, C. N., & Chatterjee, J. (2004). Mission statements and the small business. Business Strategy Review, 15, 41–44. Waldman, D. A., Javidan, M., & Varella, P. (2004). Charismatic leadership at the strategic level: A new application of upper echelons theory. Leadership Quarterly, 15, 355–380. Westphal, J., & Milton, L. (2000). How experience and network ties affect the influence of demographic minorities on corporate boards. Administrative Science Quarterly, 45, 366–398. Yin, R. (2004). Case study methodology (4th edn.). Culver City, CA: Sage. Yukl, G. (1989). Managerial leadership: A review of theory and research. Journal of Management, 15, 266–286. Yukl, G. (2003). Leadership in organizations (5th edn.). Upper Saddle River, NJ: Prentice-Hall. Yun, S., Faraj, S., & Sims, H. P., Jr. (2005). Contingent leadership and effectiveness of trauma resuscitation teams. Journal of Applied Psychology, 90, 1288–1296.

DETERMINING CAPABILITIES IN PRACTICE Graham Hubbard ABSTRACT This paper explains how a variety of business units within a listed corporation have tried to define their strategic capabilities, as part of a process of developing independent business strategies within the corporation’s corporate strategy. This paper describes the processes by which strategic capabilities were identified in each unit, the differences and similarities between the capabilities identified at the business unit level, and their consistency (or otherwise) with an overall corporate strategic positioning. This paper is based on the author’s consulting experience with both the parent corporation and its individual business units over a period of 15 years, and most recently on an intensive relationship with one division of the corporation and its 13 business units began three years ago. An objective of these relationships has been clarifying each business unit’s strategy and any basis for sustainable competitive advantage of its strategic capabilities. What emerged from this process is a set of definitions of business unit strategic capabilities which are both similar to, but in some cases different from, the corporate parent’s perceptions of the strategic capabilities of its business units. This paper describes the process by which a first representation of ‘‘strategic capabilities’’ emerged in each business unit. For each unit, the Competence Building and Leveraging in Interorganizational Relations Advances in Applied Business Strategy, Volume 11, 189–206 Copyright r 2008 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1016/S0749-6826(07)11008-8

189

190

GRAHAM HUBBARD

agreed descriptions of strategic capabilities helped guide strategic decision making and implementation and assisted each unit in clarifying its strategic positioning in its markets. However, considerable differences remain in the articulation of each unit’s capabilities and in what capabilities are considered to exist in the business units. This paper is designed to give practitioners and academics a case study through which to consider practicalities involved in articulating and operationalizing strategic capabilities in general and in defining corporate strategies in particular.

INTRODUCTION Strategy formulation is a critical process in developing and managing an organization. Whatever model is used, strategy formulation includes environment assessment, internal organizational assessment (including capability assessment), organizational performance assessment, and the choice of a particular strategy to match or align those elements. One of the least clear aspects of strategy formulation is the identification and assessment of the strategic capabilities of an organization – i.e., those capabilities that the organization possesses that give it a strategic advantage over its competitors (Chiesa & Manzini, 1997). Yet correct identification and assessment of such capabilities is essential to being able to carry out whatever statement of strategy the organization formulates. An organization that has a strategy that plans, for example, to deliver exceptional customer service must have or develop one or more capabilities that together actually create ‘‘exceptional customer service.’’ While a great deal of attention is often given to analyzing an organization’s external environment, to formulating a strategy, and to monitoring performance of the organization, actual capability analysis is often quite limited. Generally speaking, processes for determining strategic capabilities in practice seem to be underdeveloped in many organizations’ strategy processes. This paper analyses how business units within a listed corporation have tried to define their strategic capabilities as part of the process for developing individual independent business strategies within the corporation. The paper is based on the author’s consulting experience with both the corporation and the individual business units over a period of 15 years, and especially on an intensive relationship with one part of the corporation and its 13 business units begun three years ago. A key part of that relationship has involved working with each business unit on strategic formulation,

Determining Capabilities in Practice

191

clarifying its business strategy, and its possible basis of sustainable competitive advantage based on its strategic capabilities. This paper considers the process by which strategic capabilities were identified for each unit, the differences and similarities in the capabilities identified at the business unit level, and their consistency (or otherwise) with the corporate parent’s strategic positioning and views of its business units’ capabilities. This paper is quite practical, but it applies important concepts from the resource-based view (Mahoney & Pandian, 1992) and the competence perspective on strategic management (Sanchez, Heene, & Thomas, 1996; Sanchez & Heene, 2004). It is designed to give practitioners and academics a reference case for discussing the practicalities involved in articulating and operationalizing strategic capabilities.

Background Over the period 1990–2000, I worked closely with an Australian organization (‘A’) which applied my business strategy model1 as the basis for its annual strategic planning process. In 1998, this company was acquired by a major international firm (‘R’) that also had operations in Australia in the same industry as A. After acquiring A, R hired an international consulting firm to develop a corporate strategy for its combined Australian operations. Generically, the corporate strategy selected was to be a ‘‘specialist focused’’ player in its industry, with the aim being for each business unit to be in the top 3 of its chosen (narrow) market. The basis of corporate specialization, however, was not stated. The idea was that each business unit should find a focus, become a specialist, and excel through that combination to be a leading player in its defined market. (Competitors were seen as large scale operators or generalists). Thus each business unit was given the implicit task of developing its own specialized focus, with no clear direction from corporate as to what that should be. Subsequently, R’s Australian operations acted quite independently of their international owner, as the geographical markets had no overlapping competitors or customers. After the acquisition, the CEO of A became CEO of a group of similar businesses owned by R (the ‘‘D Division’’). He then asked me to assist by applying my model as a strategic planning framework for the other businesses in his group. Because of the success of D Division businesses, his equivalent in another division of the corporation (‘‘V Division’’) asked me to become involved in looking at his group of 13 smaller (typically

192

GRAHAM HUBBARD

$50–100 m turnover) businesses by applying the same business strategy model. Further, he decided to introduce the essence of my strategy process model as the template for preparing annual business plans in order to develop consistency in strategic thinking and planning across V Division. Over the period 2004–2006, I worked with the various business units in organizing and facilitating a business strategy workshop for each unit. In this process, all business units have been required to prepare a business plan that includes assessments of their strategic capabilities, using the same process and concepts for capability analysis in all workshops. As a consequence, in 2006 there are now 15 different businesses which have all developed definitions of their strategic capabilities by using the same process and concepts. In the workshop, business unit managers are asked to apply three tests to assess if a capability has strategic value (Hubbard, 2004) i.e.: 1. Is the capability of value to the customer? 2. Is the capability better than most competitors? 3. Is it difficult to imitate or replicate the capability? Each capability assessed in this manner must pass all three tests to be considered a strategic capability. In the course of this process, I became very interested in how managers in each business unit saw their unit’s own capabilities and how they then came to a view about what capabilities met the three tests. The process for identifying strategic capabilities began by brainstorming about what any individual in the group considered possible strategic capabilities. Then the three tests were applied to each proposed capability. Through facilitated discussion – usually over a couple of hours – a view would emerge from the group of managers about which of the proposed capabilities really met the three tests, about which capabilities had the potential to become strategic capabilities if developed further, and about what strategic capabilities were needed if the business unit’s intended strategy was to be implemented. For most of the managers involved, applying these three tests proved to be a new – but powerful and valuable – way of thinking compared to their previous strategy process experiences. In particular, I found that the managers in most business groups – did not have the information or evidence about competitors to properly address point 2 – had people willing to challenge whether the tests were genuinely met

Determining Capabilities in Practice

193

– were able to rapidly eliminate most items that had been volunteered as possible strategic capabilities in the brainstorm period – through discussion came up with subtle variations on the originally proposed capabilities to develop more nuanced final statements of perceived strategic capabilities – agreed on the final versions of statements of the perceived strategic capabilities – developed a unique and independent perspective on their business unit’s strategic capabilities that did not merely slavishly reflect corporate ideas At the end of 2006, the organization had completed two rounds of strategic capability assessment, so that the original statements of strategic capabilities have been discussed, tested, and modified, with a more sophisticated view of the strategic capabilities now being reflected in the units’ business plans. However, each business unit, being somewhat independent, has its own view and way of expressing itself, so the language used to define strategic capabilities does vary from unit to unit.

Stated Strategic Capabilities – Commonalities and Differences Summaries of the identified ‘‘core competencies’’ – the term used by the corporation to denote business units’ strategic capabilities2 – are given in appendix in the words developed in the business strategy workshops wherever possible, rather than being ‘‘homogenized.’’ As such, their analysis obviously requires informed and careful interpretation to elicit the similarities and differences in the capabilities each unit identifies. Table 1 summarizes the common types of strategic capabilities identified by the business units and also lists some ‘‘other unique capabilities’’ that are distinctive to a specific business unit. The following observations may be made from Table 1:  Each business unit felt that it only has a small number of capabilities that meet the criteria of being of strategic value and capable of creating a sustainable competitive advantage. The number of strategic capabilities identified by a business unit ranges from 0 to 5 with most in the range of 2–4. This is consistent with my previous consulting experience, and suggests that the business units have been quite rigorous in their analysis – particularly the two business units that concluded they had no strategic capabilities (one of these units has subsequently been closed!). Although the summary does not show it, all units started with a large list

A B (A unit) B (B unit) C D E F G H I J K L M N

Business Unit

5 3 2 2 4 3 2 1 3 4 3 4 0 4 0

Number of Strategic Capabilities Identified

X

X X X

X

X

X

X X

X

X X

Customer Knowledge/ Expertise

X

X

Ability to Tailor Solutions

X

X

X

Relationship Management

XX

X X

X X

X

Claims Processing

Strategic Capability Analysis Outcome by Business Unit.

Underwriting

Table 1.

X

Customer Service

1

2 2 1

2 1 3

3

Other Unique Capabilities (Number)

194 GRAHAM HUBBARD

Determining Capabilities in Practice

195

(generally 15–20) of potential capabilities which they gradually whittled down to the list shown in Table 1.  No common strategic capability seems to be found in all business units. This is consistent with each unit being independent and ‘focused’ on some particular target market segment, rather than being similar units within a large generalist organization. In fact, no specific potential strategic capability was mentioned by more than half the units, indicating there is much more diversity than similarity amongst their various approaches to the market. While consistent with independence, such differences in capabilities do pose a problem for the corporation as it implies limited economies for operating the units within a ‘related’ corporate framework. I return to this point later.  The individual units are, however, all aligned more or less with the corporate parent’s ‘‘focused specialist’’ generic strategy. For example, no business units are pursuing a low cost generic strategy, and most are focused on a differentiating specialist theme, or at least a specific market segment, usually requiring customized solutions or intimate customer knowledge. In considering the raw data in appendix from which Table 1 is drawn, we can also see that the conclusions in Table 1 do manage to homogenize what is at first look quite heterogeneous. In particular, although the process followed was the same for all units, the wording of the capability descriptions that emerge from the process in different units is quite variable. From this we can surmise:  A standard ‘‘template’’ – i.e., a standard brainstorming process and a set of questions to be answered in assessing identified capabilities – while helpful in focusing and standardizing approaches to strategic analysis, is still likely to be interpreted by individual managers in quite unique ways. This could be because:  There may be differences in the ways the managers themselves understand the strategic concepts involved. This resulted even though most managers had been involved not only in one or two strategic workshops specifically devoted to the template and its concepts, but had also taken a graduate school program in which the template formed an essential part of the course framework.  Different levels of complexity are recognized and analyzed by different business units – i.e., some managers are simply better skilled at analysis than others.  Managers express themselves in different ways.

196

GRAHAM HUBBARD

 The business units themselves are significantly different (not just their managers’ analytical skills).  The businesses face significantly different environmental and competitive situations.  People who have not participated in the workshops are involved in providing information used in completing the templates in the business units.  Regardless of how ‘‘good’’ or ‘‘bad’’ the expressions of strategic capabilities are, the outcome for the business unit will depend on the quality of managers in each unit, and this may not correlate highly with their writing or expression ability.  The quality of the analysis will depend on the quality of the evidence used to assess whether or not a unit does in fact have some stated strategic capabilities. For example, if a unit thinks it is ‘‘better than most competitors,’’ how does it really know that? Further, the more subtle an identified strategic capability is, the harder it becomes to compare it with the capabilities of other organizations and thus ‘‘measure’’ whether or not a unit really is better than its competitors.  Since all business units are not equally competent, all claims to having capabilities are not equally true. Some business units are more likely to actually be able to deliver their capabilities than others. (This key issue is, of course, not tested by the strategy process discussed here.) In spite of these reservations, it does seems that the framework provides a reasonably rigorous first step in assessing strategic capabilities in a business unit, and that there is an ability to reach various outcomes within the standard process framework. Further refinements in the use of the strategic capability assessment process can be expected to occur over time. This is suggested by comments often made to me during workshops along the lines of: When we did this the first time last year, I really didn’t understand what I was doing. Now I have a much clearer idea of what the ideas are all about and we are much sharper in our analysis.

CORPORATE AND BUSINESS UNIT PERSPECTIVES ON CAPABILITIES Identifying perceived strategic capabilities in its business units is important for corporate parents hoping to find synergies among the sets of strategic capabilities with some commonalities. The synergy benefits that could be

Determining Capabilities in Practice

197

facilitated by better identification of business unit capabilities would include:  Better cross-unit learning could be possible – e.g., business units focusing on customer service may well be able to learn from each other about what customers like or dislike and what methods work or don’t work for them. This knowledge sharing could help each unit improve their own learning and, hence, their delivery of a specific strategic capability.  Units could work together better – e.g., if two or more units are focused on insurance underwriting as a strategic capability, their joint development of underwriting skills and practices could be more economic than if each had to do so on its own. The more units that share a need for a specific strategic capability, the greater the chance that capability identifications will suggest areas in which working together would be beneficial.  Units may benefit from developing consistent approaches to common issues – e.g., if all units are focused on claims processing as a strategic capability, the corporate parent could promote claims processing as a corporate capability regardless of which unit’s products were involved. This could enhance the corporate parent’s market positioning and bring uniformity to the parent’s dealings with each unit on this issue.  If business unit capabilities are better aligned, the corporate parent may be able to add value by seeking economies of scope in the development of superior claims service. Of course, in the case described here and in other contexts, the independence of business units and their very different focuses within a corporate portfolio may limit the opportunities for creating synergies in capability building and leveraging without interfering with business unit decision making. In addition, the proliferation of small units may not be the best way for a corporate parent to become a large player in the longer term, when developing common ideas across business units may be the way to develop capabilities with broad value to the market. For instance, if all the direct customers of the small units are largely in the same group of wholesalers (as they are in this case here), having 15 units marketing individually to those wholesalers may not be as effective as having a single customerfocused sales force with 15 product lines to offer. In this regard, using the process for identifying strategic capabilities described here can support corporate strategies in which individual business units either pursue more or less independent focused specialist strategies or work more closely together in developing common capabilities.

198

GRAHAM HUBBARD

IMPLICATIONS FOR PRACTICE It is sometimes assumed that business unit strategy formulation will be conducted within a framework imposed by a corporate parent to assure alignment across the corporation. However, in many corporate portfolios, business units have a significant degree of independence, and business units develop business strategies that are not necessarily specifically aligned with corporate positioning. Moreover, diversity in business unit strategies can occur even when there is corporate guidance about overall strategic intent and even when there is a common framework for the strategy formulation process. The main proposition of this paper, therefore, is that the development and articulation of strategic capabilities by business units in any corporate setting is a more difficult process in practice than is assumed by many models of the strategy formulation process. After several cycles using the template described here to identify their strategic capabilities, the business units in this case are still developing their own more detailed and individualistically styled concepts of strategic capabilities, and it seems likely that further cycles will be necessary before significant consistency emerges in the business units in their understanding and articulating their strategic capabilities.

NOTES 1. Hubbard, G. (2004). 2. In the competence literature, a capability is a ‘‘repeatable pattern of action’’ usually performed by a group or department within an organization, while a ‘‘competence’’ (or ‘‘competency’’) is an organizational characteristic composed of sets of capabilities that are coordinated and targeted in ways that help an organization achieve its overall goals (see, for example, Sanchez et al., 1996, Chapter 1).

REFERENCES Chiesa, V., & Manzini, R. (1997). Competence levels within firms: A static and dynamic analysis. In: A. Heene & R. Sanchez (Eds), Competence-based strategic management (pp. 195–214). Chichester: Wiley. Hubbard, G. (2004). Strategic management: Thinking, analysis and action (2nd edn.). Sydney: Prentice-Hall. Mahoney, J. T., & Pandian, J. R. (1992). The resource-based view within the conversation of strategic management. Strategic Management Journal, 15, 363–380.

Determining Capabilities in Practice

199

Sanchez, R., & Heene, A. (2004). The new strategic management: Organization, competition, and competence. New York: Wiley. Sanchez, R., Heene, A., & Thomas, H. (Eds). (1996). Dynamics of competence-based competition. Oxford: Elsevier Pergamon.

APPENDIX. STATED CORE COMPETENCIES, GENERIC STRATEGY AND BUSINESS STRATEGY BY BUSINESS UNIT 1. A Our core competencies (those that pass all three tests) are considered to be:    

deep historical data, complete manufacturing and delivery structure, the only fully integrated computer system, deep industry/political relationships, and the best industry resources/expertise. Business Strategy

Our point of differentiation is our dominant position in the XX market, including ownership of resources, access to market and deep historical data.

2. B (A UNIT) AND (B UNIT) What are your current capabilities/core competencies Our core competencies (those that pass all three tests) are considered to be:  Claims service  Expertise – breadth of underwriting expertise  Expertise – access to expertise – national representation Our current points of differentiation are based around:  Specialized and targeted approach to chosen market segments  Experienced and knowledgeable underwriting specialists dedicated to providing advanced product solutions and service  Fast and responsive service through a dedicated material damage claims team embedded in the business

200

GRAHAM HUBBARD

(a) Business unit: basis of differentiation  Underwriting expertise-ability to underwrite complex and technical construction and erection projects  National representation  Claims service (b) Business unit: basis of differentiation  IT solution  National representation Business Strategy B will pursue a focused differentiation strategy to grow and sell existing as well as new ‘related’ products, to our core target markets in:  developing a customer intimacy second to none by excelling in customer attention and customer service.

3. C Our core competencies (those that pass all three tests) are considered to be:  Underwriting expertise  Risk Control Business Strategy Develop a depth of knowledge in our target industry markets to enable us to risk select the better clients as well as display to the market and be recognized for superior underwriting expertise in these segments. This knowledge will be developed within the group structure that has already been established.

4. D Our core competencies (those that pass all three tests) are considered to be:  Strong customer network  Risk engineering expertise

Determining Capabilities in Practice

201

 Technical skills  Web functions We have developed our strategic ideas. These ideas addressed the customer needs that were identified being:  Understanding my business – this did not mean industry as each customer sees themselves as individuals  Peace of mind  Help me to understand the game  Build my career  Broker needs Significant gains can be derived from our simple ability to better manage relationships with our end customers as well as brokers and we feel this work can be achieved in tandem with the broader program including:  Underwriter/client relationship  Leader in risk management  Recognition Business Strategy The overarching strategy for D is to maintain and grow our existing portfolio through development of an additional Industry segment, whilst adopting a Differentiated Focus Strategy and continuing to outperform on profitability with a minimum ROC of XX%.

5. E Our core competencies (those that pass all three tests) are considered to be:  Technical underwriting knowledge  Claims handling and segmentation  Innovation in delivery and customer support systems Business Strategy E strategy is to develop process and systems that will lead to cost savings and competitive advantage through segmentation and automation of certain business classes, that adapt readily to this to utilize the implementation of

202

GRAHAM HUBBARD

our Differentiation initiatives, simplify process and adopt a Customer Service culture focused on providing solutions and making it easier for our Customers to deal with (us).

6. F Core competencies are  Underwriting Capability  Claims function Business Strategy Profitable Growth (both organic and acquisition) through  Segment tailored Differentiated customer propositions  marketed through two tiers of customer segments  achieving top 2 market position based on share of profits With the objective of increasing our market share by 50% within five years.

7. G Our core competencies (those that pass all three tests) are considered to be:  Regional underwriting expertise Business Strategy The one-stop shopping concept of our product offerings represents an advantage to us. We are the only local player in the market offering retail products, along with all wholesale products. The main target area will continue to be Australia.

8. H Our core competencies (those that pass all three tests) are considered to be:  Industry Leading Claims Management Approach  Delivery of risk management solutions to clients to reduce costs  Consistency of end customer and broker relationships (staff retention)

Determining Capabilities in Practice

203

Brokers deal with us because they know that they can rely on high quality service and year on year consistency in our approach. They are also confident that their clients will achieve the best possible outcomes for their businesses. We differentiate on total costs of claims – encompassing claims management and risk management/improvement.

Business Strategy We have a growth strategy through strong focus on target markets. The available Australian market size is $XX m and our market share is modest. Our best opportunity is to remain focused on existing markets through our differentiated product offer.

9. I Our core competencies (those that pass all three tests) are considered to be:    

Understanding the market Product leadership Ease of purchase through the distribution network Our claims process (relationships, responsiveness and communication) Business Strategy

H is pursuing a growth strategy by focusing on intermediated dealer business. Objectives are to  Grow the portfolio to $XX by 2010, while meeting or exceeding target ROC.  Be considered a true Niche Brand by securing dealer market dominance and providing a value proposition that is synonymous with a specialist insurer  Maintain and enhance our current distribution network.  Increase retention levels by building awareness of our brand with the end consumers via push-pull marketing strategies.  Develop our Corporate–Partner relationships to build their awareness of H.  Maintain excellence of our current core competencies: specialist, service and claims.

204

GRAHAM HUBBARD

10. J Core capabilities are considered to be:  specialist knowledge and experience in the market,  relationship management & training  decision-making authority of customer service staff. Business Strategy The existing strategy of focusing on penetrating our key distributors and increasing operational efficiencies is considered the most effective approach in the current market conditions. Retention of our key distributors is essential to maintaining current income and profitability targets. Further enhancements to our product range will also be essential to retaining our market leading position.

11. K The key capabilities are  Underwriting expertise and quality systems that allow us to tailor a solution that reflects the Clients risk and claims profile  Tailored claims management where we can reduce vehicle downtime and disruption to the business using best practice processes  Our claims handling capabilities can also extend to self insured losses where Clients have large self retentions and we have the systems to effectively manage this  We also have good reporting tools (Web & Excel based) and risk management capabilities that provide trend analysis and assistance with loss mitigation strategies. Business Strategy To consistently outperform our competition by attracting, retaining and developing a team that will achieve;  $XX m by 2009 through increased penetration of our target by better understanding customer needs and translating this insight into differentiated services and products;

Determining Capabilities in Practice

205

 Company of choice status with clients and their Intermediaries;  Better than market ROC.

12. L Our core competencies (those that pass all three tests) are considered to be:  Very difficult to find. Business Strategy K is seeking to achieve modest organic growth within the broader homogenous risks, across multi distribution channels within Australia. All actions will focus on delivering results in the most cost-effective basis possible, whilst still improving services and offering a value for money product.

13. M Our core competencies (those that pass all three tests) are considered to be:  Tailored and bundled services  Leveraging knowledge and expertise of the buying drivers of the individuals across our distributors  Training and tools to assist our customers sell better  Intermediary relationships Business Strategy L aims to continue working with key distributors of the product to grow the portfolio using targeted distribution methods. An increased focus on retention rates for existing members will assist in achieving growth rates. Focus on developing enhanced differentiation that will assist in creating further barriers to entry.

14. N Our core competencies (those that pass all three tests) are considered to be: None.

206

GRAHAM HUBBARD

Business Strategy Summary of the business strategy is  We aim to position M as a specialist with a strong brand around target differentiated segments. We would seek to build advantage around portfolio management, a more refined segmentation approach. specialist underwriting, customer focus in developing solutions and paying claims supported by enabling technology  Our generic strategy is a narrow focus approach with differentiation in distinct segments  We would continue focus in 3 areas.  Brokers and other intermediaries will continue to be our focus.