The Influence Factors of Dynamic Capabilities:
The Case of Innovation Speed at Korean Electronics Companies
DISSERTATION
of the University of St.Gallen,
Graduate School of Business Administration,
Economics, Law and Social Sciences (HSG)
to obtain the title of
Doctor of Business Administration
submitted by
Florian Fuhl
from
Germany
Approved on the application of
Prof. Dr. Li Choy Chong
and
Prof. Dr. Narendra Agrawal
Dissertation No. 3211
Druckerei Lauterberg, Ketzin, 2006
The University of St.Gallen, Graduate School of Business Administration, Economics,
Law and Social Sciences (HSG) hereby consents to the printing of the present
dissertation, without hereby expressing any opinion on the views herein expressed.
St.Gallen, June 12, 2006
The President:
Prof. Ernst Mohr, PhD
I
ACKNOWLEDGEMENTS
Many people contributed to the creation of this doctoral thesis. Even though they may
not be mentioned here by name, they are aware of their role and support during the
research process, for which I feel most grateful.
First of all, I am most indebted to Prof. Li Choy Chong, who has far exceeded his duty
as my supervisor by continuously supporting me throughout my doctoral thesis
project. The discussions with him in St.Gallen and Singapore were always fruitful and
inspiring. This is also true for my co-supervisor Prof. Narendra M. Agrawal, who
encouraged and challenged my work with his detailed comments.
I also would like to thank all my interview partners, whose statements represent a
building block of my empirical work. Especially, I would like to thank Albrecht “Ali”
Fromm, who reactivated his expatriate network in South Korea and thereby made the
contact to many interviewees possible. His friend Bernd Isslinger played an important
role in Korea and supported me with his industrial experience and connections. Mr.
Park, Dong-Seok, my old friend and fellow student, Ms. Song, Son-Jong, my
colleague, and Mr. Lee, Deok-Hyong also helped me with their various contacts to key
people and showed me a great time in Seoul. Prof. Lee, Seung-Joo from KDI School
supported me with his alumni connections.
Many thanks as well to my fellow doctoral colleagues in St.Gallen. We rejoiced and
suffered together. Thanks in particular to Guido, Markus, Christian, Zheng and
Claudia for a great time in Singapore and St.Gallen.
My warmest thanks go to my family both in Germany and South Korea, above all to
my parents, Kyung-Sook and Manfred Fuhl, for being the world’s best parents in
every stage of my life. For that reason, I dedicate this dissertation to them.
Munich, June 29, 2006
Florian Fuhl
II
TABLE OF CONTENTS
Page
ACKNOWLEDGEMENTS.................................................................................I
TABLE OF CONTENTS................................................................................... II
LIST OF FIGURES ........................................................................................... V
LIST OF TABLES ............................................................................................VI
LIST OF ABBREVIATIONS AND ACRONYMS ...................................... VII
ABSTRACT .......................................................................................................IX
1
2
INTRODUCTION......................................................................................... 1
1.1
RESEARCH FOCUS AND OBJECTIVE .................................................................................1
1.2
RELEVANCE OF RESEARCH .............................................................................................3
1.3
STRUCTURE OF THE THESIS .............................................................................................5
LITERATURE REVIEW AND THEORETICAL FOUNDATION ....... 8
2.1
DEFINITION OF COMPETITIVE ADVANTAGE ....................................................................8
2.2
THEORIES EXPLAINING COMPETITIVE ADVANTAGE .......................................................9
2.2.1
Competitive Forces...............................................................................................10
2.2.2
Strategic Conflict ..................................................................................................10
2.2.3
The Resource-Based View ....................................................................................10
2.3
DYNAMIC CAPABILITIES ...............................................................................................11
2.3.1
Evolution Factors of Dynamic Capabilities ........................................................13
2.3.2
Managerial Influence: Are Capabilities Born or Made? ....................................17
2.3.3
Idiosyncrasy and Sustainability of Dynamic Capabilities...................................19
3
RESEARCH QUESTIONS ........................................................................ 22
4
RESEARCH DESIGN ................................................................................ 26
4.1
QUANTITATIVE VERSUS QUALITATIVE METHODS ........................................................26
4.2
CASE STUDY RESEARCH ...............................................................................................29
4.2.1
Getting Started......................................................................................................30
4.2.2
Theoretical Sampling............................................................................................31
4.2.3
Data Sources.........................................................................................................33
4.2.4
Analyzing case study data ....................................................................................35
4.2.5
Theoretical Validation..........................................................................................35
III
4.3
5
CRITICAL REVIEW OF THE RESEARCH DESIGN ...............................................................36
THE CHAEBOL AND THEIR ENVIRONMENT ................................. 38
5.1
KOREA’S INDUSTRIALIZATION AND THE DEVELOPMENT OF THE CHAEBOL .................38
5.1.1
Emergence and Internationalization of the Chaebol (1950 - 1980) ...................39
5.1.2
Continued Growth despite Difficulties (1980-1996) ...........................................40
5.1.3
The Financial Crisis (1996 - 1998)......................................................................42
5.1.4
The New Era .........................................................................................................43
5.2
LG ELECTRONICS..........................................................................................................46
5.3
SAMSUNG ELECTRONICS ...............................................................................................48
6
IDENTIFICATION OF DYNAMIC CAPABILITIES ........................... 52
7
THE INFLUENCE FACTORS OF INNOVATION SPEED ................. 56
8
7.1
INFLUENCE OF THE COLLABORATION WITH GOVERNMENT AND UNIVERSITIES ...........56
7.2
THE INFLUENCE OF THE HOME MARKET ......................................................................63
7.3
VERTICAL INTEGRATION ...............................................................................................64
7.4
RELATED DIVERSIFICATION ..........................................................................................72
7.5
SUPPLIERS .....................................................................................................................73
7.6
MODULARIZATION ........................................................................................................75
7.7
CONCURRENT ENGINEERING .........................................................................................77
7.8
INFLUENCE OF MENTALITY ...........................................................................................80
7.8.1
Confucianism and Teamwork...............................................................................82
7.8.2
HAN Psyche and Public Praise/ Criticism ..........................................................84
7.8.3
Can-Do-Spirit and Stretch Goals.........................................................................87
DISCUSSION .............................................................................................. 92
8.1
THE INFLUENCE FACTORS OF INNOVATION SPEED .......................................................92
8.1.1
Best Practices .......................................................................................................96
8.1.2
Structural Factors.................................................................................................98
8.1.3
Contextual Factors .............................................................................................100
8.2
INNOVATION SPEED AS DYNAMIC CAPABILITY ..........................................................103
8.2.1
Conceptual Congruence .....................................................................................103
8.2.2
Innovation Speed and Competitive Advantage ..................................................105
8.2.3
Hierarchy of Capabilities ...................................................................................108
8.3
THE INFLUENCE FACTORS OF DYNAMIC CAPABILITIES ..............................................110
8.4
INFLUENCE OF MANAGERS ON DYNAMIC CAPABILITIES ............................................113
IV
8.5
9
IDIOSYNCRASY OF DYNAMIC CAPABILITIES ...............................................................116
CONCLUSION.......................................................................................... 121
9.1
TOWARDS AN INTEGRATED FRAMEWORK...................................................................121
9.2
TOWARD A NORMATIVE MANAGEMENT GUIDELINE ..................................................126
9.3
LIMITATIONS AND FURTHER RESEARCH .....................................................................128
REFERENCES ................................................................................................ 131
APPENDIX ...................................................................................................... 146
A. INTERVIEW SCHEDULE...................................................................... 146
B. LIST OF INTERVIEWEES..................................................................... 148
C. CURRICULUM VITAE........................................................................... 150
V
LIST OF FIGURES
Figure 1: Analytical Framework and Logical Sequence ......................................... 23
Figure 2a: GDP Growth in South Korea ................................................................. 42
Figure 2b: Reduction of Lending and Disbursements ............................................. 42
Figure 3: Development of South Korea’s Wealth ................................................... 45
Figure 4: Business Structure of LG Electronics ...................................................... 48
Figure 5: Samsung Electronics’ Global Market Shares in Selected Product
Fields and Reached Position .................................................................. 51
Figure 6: Innovation Process................................................................................... 55
Figure 7: Share of the Population with at least an Upper-Secondary Qualification 59
Figure 8: The Cooperative Innovation Process in Korea......................................... 62
Figure 9: Vertical Integration of LG Group ............................................................ 71
Figure 10: Sequential and Parallel New Product Development Process.................. 78
Figure 11: Comparison of Concurrent Engineering to Sequential Process.............. 79
Figure 12: Identified Influence Factors of Innovation Speed .................................. 96
Figure 13: Benefits of Innovation Speed as a Base for Competitive Advantage... 107
Figure 14: First and Second Order Capabilities of the Focal Companies.............. 109
Figure 15: Integrated Framework.......................................................................... 122
Figure 16: Transparent Capability-Cube cut into three Parts ................................ 124
Figure 17: Process of Active Capability Development ......................................... 127
VI
LIST OF TABLES
Table 1: Pros and Cons of Qualitative and Quantitative Approaches...................... 27
Table 2: Matching the Type of Research Question to the Research
Design...................................................................................................... 28
Table 3: The Accumulation of Semiconductor Technology at Samsung
Electronics ............................................................................................... 67
Table 4: Historical Trend of the Top 7 DRAM Producers ...................................... 67
Table 5: Comparison of Modular to Conventional Product Design ........................ 76
Table 6: Influence Factors of Innovation Speed Suggested by other
Researchers ............................................................................................ 102
VII
LIST OF ABBREVIATIONS AND ACRONYMS
CAGR
Cumulative Average Growth Rate
CDMA
Code Division Multiple Access
CEO
Chief Executive Officer
CFO
Chief Financial Officer
CTO
Chief Technology Officer
DRAM
Dynamic Random Access Memory
e.g.
exempli gratia — for example
et al.
et alii — and others
etc.
et cetera – and so on
ff.
and following pages
GDP
Gross Domestic Product
GNP
Gross National Product
i.e.
id est — that is
IMF
International Monetary Fund
ICT
Information and Communication Technology
IT
Information Technology
LCD
Liquid Crystal Display
No.
Number
OECD
Organisation for Economic Co-operation and Development
OEM
Original Equipment Manufacturer
p.
page
Ph.D.
Doctor of Philosophy / Philosophiae Doctor (lat.)
VIII
pp.
pages
R&D
Research and Development
SBU
Strategic Business Unit
TFT
Thin Film Transistor
TV
Television
US / USA
United States / United States of America
VCR
Video Cassette Recorder
IX
ABSTRACT
This doctoral thesis deals with the sources of a company’s competitive advantage that
allow that company to perform better than its competitors. Different theories try to
explain the sources of this competitive advantage. The most recent and promising
theory attributes the source of competitive advantage to so-called dynamic capabilities,
which allow a company to reconfigure its assets in order to adapt to a changing
environment.
Through the examination of the capability ‘innovation speed’ in an in-depth case study
of two Korean electronics companies, namely LG Electronics and Samsung
Electronics, this thesis not only identifies the different influence factors of dynamic
capabilities, but also brings fuller clarity to the topic regarding the influence of
managers on the development of dynamic capabilities and the transferability of those
capabilities to other companies, and thus, the sustainability of competitive advantage.
This thesis identifies three domains of influence factors, namely context, structure, and
best practices. The findings of the case study show that influence factors of dynamic
capabilities can neither be uniquely attributed to the environment of an organization,
nor exclusively to the organization itself. Depending on the idiosyncratic mix of a
specific capability’s influence factors, the manager’s possibilities of actively steering
the development of this capability and the transferability of it to other companies are
explained and finally combined with the identified origins of influence factors of those
dynamic capabilities.
The Influence Factors of Dynamic Capabilities
1
1 Introduction
1.1 Research Focus and Objective
The question is as old as management research itself: What distinguishes successful
companies from companies that are not successful? The reasons for such performance
differences play an important role in the survival of a company. The above average
performance of a company within a certain industry is commonly attributed to a
competitive advantage. Diverse theories in strategic management have emerged to
answer the question regarding the sources of this competitive advantage. The most
current approach assigns the evolution of a competitive advantage to the dynamic
capabilities of a company. This approach is seen as an extension of the ResourceBased View to the view of a dynamic environment and appears to be the most
promising approach to explain the emergence of a firm’s above-average performance
in terms of the accelerated dynamism of that organization’s environment. Increasing
global competition, shorter product life-cycles, and rapid technological advancement
are the drivers behind this dynamism and encourage researchers to extend the rather
static perspective of the Resource-Based View. According to this new approach to
explain competitive advantage, a more thorough understanding of an organization’s
dynamic capabilities is necessary.
Unfortunately, the research stream regarding dynamic capabilities is relatively new
and still under vivid scholarly debate. Ambiguity, vagueness of constructs, conflicting
views, and lack of empirical data are still predominant and represent challenges to
explaining a company’s competitive advantage in its entirety. For example,
contradicting views of idiosyncrasy and fungibility of dynamic capabilities leave the
question open as to whether dynamic capabilities are company-specific or can be
transferred to other companies through best practices. The influence of a company’s
environment on the evolution of such dynamic capabilities in contrast to the
organization’s internal sources also remains unclear. In addition, most empirical
research on dynamic capabilities has been completed in the West, mainly in the US,
The Influence Factors of Dynamic Capabilities
2
and thus, could be biased by local myopia. Consequently, practitioners often criticize
the limited normative inferences generated by this particular research stream.
This thesis uses a qualitative approach to applying case study research and inductively
aims to demystify the concept of dynamic capabilities further in order to contribute to
the explanation of a firm’s competitive advantage. By applying the theory of dynamic
capabilities to two real business cases, including the organizations themselves and the
aspects of their environments, the influence factors for the emergence of dynamic
capabilities can be more closely examined and better understood and thus performance
differences among companies can be more precisely explained. The findings generated
by a thorough analysis of secondary literature and 45 in-depth interviews as the main
source of data for this thesis helped to inductively develop a new theoretical
framework that reconciles the extant contradicting views on dynamic capabilities
within the research community.
To achieve this purpose, the dissertation aim is to shed a bit more light on the origin of
influence factors of dynamic capabilities, going beyond traditional explanations and
employing a holistic approach that includes internal and external influence factors that
can support the evolution of dynamic capabilities. Other studies often have relied on
the identification and analysis of one single source of a dynamic capability.
Unfortunately, these approaches are not able –and mostly not intended- to create the
whole complex picture of the evolution factors of a dynamic capability. The holistic
approach of this thesis aims instead to identify as many factors as possible, factors that
are then classified and categorized in the course of this dissertation. This holism
acknowledges the complexity and diversity of sources of a dynamic capability
including the nature of the organization itself and its environment. The approach
makes it possible to identify diverse influence factors of dynamic capabilities and to
categorize them into three precise domains, i.e. context, structure, and best practices.
In addition, this study contributes to the question pertaining to the possibilities of a
company to benefit actively from these influence factors, i.e. to what degree managers
can deliberately influence their development to steer the progress of dynamic
capabilities within their specific organizations. The study shows that a capability’s
The Influence Factors of Dynamic Capabilities
3
idiosyncratic blend of contextual, structural, and best practice factors does determine
the possibilities of a manager to actively steer the development and growth of a
dynamic capability within his or her organization.
For the sustainability of a competitive advantage, the transferability of dynamic
capabilities is decisive. Therefore, the included analysis of the idiosyncrasy of
capabilities leads to a better understanding regarding whether capabilities can be
transferred and copied to other companies. The study shows that the transferability of a
capability is – like managerial influence- determined by the mix of context, structure,
and best practices, which are sources of this capability.
Given these interdependencies, a model is created that combines the above findings
into a unified framework that allows a novel perspective on the Dynamic Capabilities
Approach. For the development of more practical insights, normative implications for
managers are also inferred. Tackling the above described domains of the Dynamic
Capabilities Approach, which not only represent heavily debated questions in strategic
management research, but also the most essential concerns in the practical world,
provides better understanding of a firm’s competitive advantage.
1.2 Relevance of Research
The relevance of this research affects different areas. First, this thesis contributes to
the research stream on dynamic capabilities, addresses the research gaps and
inductively generates new insights regarding the emergence of, the influence of
managers on, and the idiosyncrasy of dynamic capabilities, insights that also deepen
the understanding of the impact of a company’s context. This research does not
attempt to answer all questions about the emergence of dynamic capabilities fully.
Rather, it works to add a new perspective on topics that have not yet been understood
in their entireties. The author sees this thesis as a small brick in the wall of ongoing
research in strategic management in general and about dynamic capabilities in
particular and thus entailing more research on the topic from a broader viewpoint and
with adequate recognition of contextual factors. The spotlight of this thesis is an Asian
context, i.e. South Korea (hereinafter referred to as ‘Korea’). This focus also allows
the identification of influence factors of dynamic capabilities that are either new or, up
The Influence Factors of Dynamic Capabilities
4
to now, have been neglected by most Western companies. The work raises the
awareness and clarifies the importance of company context and generates transferable
insights that can serve to strengthen the competitiveness of other companies. With the
findings on dynamic capabilities, the contribution of this thesis can affect strategic
management in general, incrementally helping this research stream in the overall
further decoding of a firm’s competitive advantage.
Secondly, the author of this thesis intends to infer normative management insights to
promote the up-to-now rather neglected topic of ‘dynamic capabilities’ in the
practitioner world. Already, the raising of certain awareness of factors influencing the
evolution of dynamic capabilities should have value for managers, even though the
managers’ direct impact to manipulate these factors might be somewhat limited. In
addition, the in-depth presentation of two successful Korean companies will probably
impart new insights for managers of Western companies. Through the discussion of
the influence of managers on the development of dynamic capabilities and the
transferability of these capabilities, normative implications result that can equip
managers with a better understanding and more concrete guidelines for the nurturing
of a specific competitive advantage.
The third area of relevance for this research relates to the increasing importance of
dealing with different cultures and mentalities in terms of the fast pace of increasing
internationalization of companies and the spreading globalization of markets. Research
about Asia in general or Asian companies in particular often involves cross-cultural
aspects that can help decision-makers to learn about a different culture, enhance their
knowledge of that culture and sharpen their awareness of intercultural diversity. In that
way, decision-makers are able to adapt their conduct accordingly when dealing with
Asian customers or partners. At the very least, the insights into the background of
another business culture will raise understanding and tolerance for diverging beliefs
and behaviors. The special case of South Korea will probably also generate new
insights for other Asian managers, since certain Korea-specific characteristics are
closely addressed in this research. Even though the differences in mentality between
Korea and Japan, for example, may be smaller than those between Korea and the US,
The Influence Factors of Dynamic Capabilities
5
certain country-related phenomena that create unique traits for Korean employees, are
also discussed in this dissertation.
A final relevant field touched by this thesis is the research on the Korean
conglomerates or the chaebol. These companies were to a large degree responsible for
South Korea’s economic growth, but also for the financial crisis that occurred in 1997.
Due to their importance, the chaebol entail a large research stream to examine their
fast internationalization, but also their structural weaknesses, such as conglomerate
structure and unrelated diversification, which actually fueled the crisis. The period of
time after the crisis is indeed scarcely treated in the existing research, so that case
studies presented in this thesis will positively complement the existing literature on the
chaebol. The fast recovery of the analyzed companies from the Korean crisis and their
success today make these companies ideal examination subjects for strategic
management research.
In addition to the main contributions discussed above, a multitude of other disciplines,
such as organizational science or psychology, are touched on by the findings of this
study due to the variety of the influence factors. By focusing on innovation speed as a
dynamic capability, the findings support or contradict the results of other researchers,
who also have investigated the speed of the new product development process and its
main influence factors.
Hence, to summarize the contributions of this dissertation, the outcome of the
investigation and analysis can be understood as a combination of basic and applied
research that generates new insights that can indeed further advance the concept of
dynamic capabilities both, theoretically and practically.
1.3 Structure of the Thesis
First in Chapter 2, this thesis gives an overview of extant research about dynamic
capabilities embedded in a general literature review about competitive advantage and
the different theories that attempt to explain it.
Building upon the findings in the literature regarding dynamic capabilities, research
gaps are identified that lead to the key questions of this research presented in Chapter
The Influence Factors of Dynamic Capabilities
6
3. The research questions address the blind spots in the theory that relate to the
influence factors of dynamic capabilities, the steering possibilities of managers, and
the transferability of the influence factors and dynamic capabilities, respectively.
The appropriate design and methodology for the research is discussed in Chapter 4 by
evaluating the advantages and disadvantages of the different approaches and their
suitability for this special type of research problem.
The methodology description and justification are followed by the presentation of the
case units and their environment in Chapter 5. That presentation establishes a solid
ground of background knowledge. The description of Korean economic development
and that of the focal companies sketched out in this paper is necessary for a better
understanding of the special context of the firms.
In Chapter 6, the construct ‘innovation speed’ as the companies’ key dynamic
capability is introduced as a first result of the investigation and a starting point for
further inquiry.
By focusing on this identified dynamic capability, Chapter 7 describes the discovered
influence factors of innovation speed within the focal companies, as retrieved by the
holistic approach of the investigation, which also considered the different domains of
origin.
In Chapter 8, the findings are discussed. The declaration of ‘innovation speed’ as a
critical dynamic capability and its importance are proved. The identified influence
factors are classified and compared to the findings of other research which investigated
innovation speed. This comparison is also performed on a more generalized level for
the influence factors of dynamic capabilities, referring back to the literature review
presented in Chapter 2. Subsequently, insights regarding the influence of managers on
the development of dynamic capabilities and their transferability to other companies
are inferred from the case findings.
As depicted in Chapter 9, the underlying propositions are integrated into a framework
that unifies and explains the identified relationships and contributes inductively to the
existing theory on dynamic capabilities by reconciling diverging views in the scholarly
The Influence Factors of Dynamic Capabilities
7
debate about dynamic capabilities. To leverage these contributions, implications for
practitioners are deduced, leading to normative guidelines that acknowledge the active
role of managers in the development of dynamic capabilities. The final section of
Chapter 9 concludes the paper by discussing the limitations of this research.
Additional fields of empirical investigation are suggested that could address these
limitations and complement further the findings of this study.
As this overview illustrates, the dissertation uses linear-analytical reporting, which is
the most common structure for similar types of research and the most appropriate
means to present the main issues of this research project.
The Influence Factors of Dynamic Capabilities
8
2 Literature Review and Theoretical Foundation
In this chapter, the key terms of the research are defined and the theoretical foundation
for the study is built by reviewing the relevant literature.
2.1 Definition of Competitive Advantage
An above-average performance of a company is commonly attributed to a competitive
advantage that allows that company to dominate its competitors. But what exactly is a
competitive advantage? The roots of the concept can be found in the first works on
strategic management. Unfortunately, the authors often neglected to develop a clear
definition or conceptualization. For example, PORTER first used the term ‘sustainable
competitive advantage’ in 1985 without defining the concept, when he published his
ideas about the generic strategies of a company.1
The term ‘competitive advantage’ is defined by BARNEY (1991), who stated the
following: “A firm is said to have a sustained competitive advantage when it is
implementing a value creating strategy not simultaneously being implemented by any
current or potential competitors and when these other firms are unable to duplicate the
benefits of this strategy”.2 This thesis indeed uses BARNEY’s definition to describe a
competitive advantage.3
Other authors have tried to operationalize competitive advantage by quantifying its
outcome. According to HILL/JONES (1995), a company has a competitive advantage
when its profit rate is above the average profit rate of its industry.4 HILL/JONES defined
profit rate as the gross profit margin of a company or:5
Gross Profit Margin= (Total Revenues – Total Costs) / Total Costs
1
See PORTER (1985).
See BARNEY (1991), p.102.
RUMELT (2003) tries to answer the question “What in the World is Competitive Advantage?” and lists
additional definitions for the term.
4
See HILL/JONES (1995), p.104.
5
See HILL/JONES (1995), pp.104-106.
2
3
The Influence Factors of Dynamic Capabilities
9
Since total revenues equal the unit price multiplied by unit sales, the competitive
advantage induces either a higher unit price, lower unit costs compared to the average
company, or both. This definition is consistent with that of PETERAF (1993), who
classifies a competitive advantage as sustained above normal returns.
Coming back to the definition used in this thesis, BARNEY explains the concept of
competitive advantage by using the term “value creating strategy”. But what is meant
here by value? HILL/JONES and PETERAF deliver a definition, one that seems much
better suited to being operationalized, but also here, any operationalization of returns
or profits like return on sales (ROS) or shareholder value would be possible. The
problematic conceptualization of a rather abstract term is one of its biggest
weaknesses. In addition, the concept is often criticized as tautological (e.g. KLEIN
2001): “Successful firms are successful because they have competitive advantage,
which in turn cannot be defined in any other way than as a quality that brings about
success.”
Despite these drawbacks, the research stream in the area of strategic management that
has tried to explain the concept is rather broad. Certain theories and models have been
developed to deal with the competitive advantage of companies. After the following
short overview of these theories explaining the emergence of a competitive advantage,
the concept of dynamic capabilities is presented in more detail.
2.2 Theories Explaining Competitive Advantage
Different theories have emerged to explain competitive advantage and thus induced
research streams of their own. Whereas certain models emphasized the external
perspective, like PORTER’s Competitive Forces, other researchers reached inside the
companies for their idiosyncratic resources. For a bigger picture, the Competitive
Forces, the Strategic Conflict approach and the Resource-Based View of the Firm are
briefly sketched out below, before the Dynamic Capabilities Approach is presented in
depth.
The Influence Factors of Dynamic Capabilities
10
2.2.1 Competitive Forces
In the 1980s, PORTER’s framework for competitive forces, which emphasized industry
structure, was the prevalent paradigm. Five forces, including the threat of new
entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat
of substitutes and the rivalry among existing competitors, thus build the industry
structure.6 In this structure, the relative position of a company determines its success.
PORTER stated that a company could reach a competitive advantage by pursuing
certain generic strategies, either a cost leadership, a differentiation, or a focus strategy.
By applying these strategies, a company could reduce the forces in its industry, for
instance keeping new entrants away by realizing huge economies of scale. The
identified shortcomings of this model, like the missing internal perspective, did not
derogate the insights that were generated.7
2.2.2 Strategic Conflict
The strategic conflict approach uses game-theoretic tools to emphasize the ability to
influence the behavior of competitors as a source of competitive advantage.8 Thus,
SHAPIRO introduced a more dynamic view of strategy in his article “The theory of
business strategy” published in 1989.9 However, this approach fails to represent the
complexity of the problem area adequately, since these models only focused on a small
number of variables.10
2.2.3 The Resource-Based View
“Looking inside for competitive advantage” (1995) was the central slogan of
BARNEY’s Resource-Based View.11 Idiosyncratic assets, such as patents or brands,
were identified as being responsible for firm performance. A company had to ensure
that a firm’s resources add value, are rare, and costly to imitate. These resources would
6
See PORTER (1991), pp.100-102.
See COYNE/SUBRAMANIAM (1996), pp.16-17.
See TEECE/PISANO/SHUEN (1997), pp.511-513.
9
See SHAPIRO (1989).
10
See PORTER (1991), p.106.
11
See BARNEY (1995).
7
8
The Influence Factors of Dynamic Capabilities
11
then be transformed into a competitive advantage by the organization. The assumption
that companies, at least in the short term, are stuck with the resources they have makes
the Resource-Based View a rather static model.12
2.3 Dynamic Capabilities
After the market power-oriented approach was used to explain the emergence of a
competitive advantage, the Resource-Based View became the major paradigm in
strategy research. But its inherent limitations also offered reason for continuous
criticism, especially the missing explanation for competitive advantages in situations
of rapid and unpredictable change (EISENHARDT/MARTIN, 2000). This blind spot is a
main weakness of the rather static Resource-Based View. Also, the introspective focus
on the firm itself was criticized.
The Dynamic Capabilities Approach emerged in the 1990s and added the missing
dynamic perspective to the Resource-Based View; this approach is thus today the
predominantly applied explanation for a competitive advantage. The concept of
dynamic capabilities provides helpful additional insights in answering the question
regarding the sources of a competitive advantage. This concept extends the ResourceBased View to an approach for a dynamic environment, i.e. increasing global
competition, shorter product life-cycles and rapid technological advancements.
The first thoughts that supported a capability approach can already be found in
NELSON/WINTER (1982). Chapter 4 of their book “An Evolutionary Theory of
Economic Change” introduced the concept of the skill metaphor, where a skill is
defined as ”a capability for a smooth sequence of coordinated behavior that is
ordinarily effective relative to its objectives, given the context in which it normally
occurs”.13
The article, which is today generally accepted as the founding paper for the Dynamic
Capabilities Approach, was written in 1997, by TEECE, PISANO and SHUEN. Their socalled Dynamic Capabilities Approach refers to a company’s ability to alter its
12
13
See TEECE/PISANO/SHUEN (1997), pp.513-515.
See NELSON/WINTER (1982), p.73.
The Influence Factors of Dynamic Capabilities
12
resource configuration through applying certain capabilities and thus adapt to changing
environments to achieve new forms of competitive advantage.14 With this
conceptualization, the authors emphasized two key aspects that were missing in the
preceding
approaches,
i.e.
dynamic
and
capability.
According
to
TEECE/PISANO/SHUEN, “the term 'dynamic' refers to the capacity to renew
competences so as to achieve congruence with changing environment. […] The term
'capabilities' emphasizes the key role of strategic management in appropriately
adapting, integrating, and reconfiguring internal and external organizational skills,
resources, and functional competences to match the requirements of a changing
environment.”
Even though the Dynamic Capabilities Approach has become a major research stream
in strategic management, confusion and scholarly debate are still predominant.
Plentiful articles trying to demystify the approach indicate the ongoing and prevailing
uncertainty, e.g. “Dynamic Capabilities: What are they?” (EISENHARDT/MARTIN,
2000); “Understanding Dynamic Capabilities” (WINTER, 2002); or “Explicating
Dynamic Capabilities” (TEECE, 2003).
Other authors even doubt the suitability of the Dynamic Capabilities Approach to
explain a firm’s competitive advantage. COLLIS (1994) dampens enthusiasm about the
concept by stating that capabilities can be valuable, but are not always a source for a
sustainable competitive advantage. He argues that capabilities are vulnerable to being
superseded by higher-order capabilities. The capability to innovate would thus be
superseded by the capability that develops the capability to innovate, and so on, which
leads to an infinite regress.15 According to COLLIS, strategic management research will
never be able to identify the ultimate source of a competitive advantage.
Organizational capabilities, just like certain assets, could be a part of a competitive
advantage, but just in certain settings and at a certain point in time.
A lack of empirical data intensifies the general confusion about dynamic capabilities.
DAVIS (2004), for example, criticizes strategic management research, especially the
14
See TEECE/PISANO/SHUEN (1997), p.516.
The Influence Factors of Dynamic Capabilities
13
Resource-Based theory of the firm and the Dynamic Capabilities perspective, for a
lack of “robust explicit measures of these concepts or compelling evidence of their
contribution to differences in performance at the firm-level.”16 He states that most
papers are primarily conceptual and more concerned with articulation of language
instead of including empirical data. Furthermore, extant empirical analyses often
concentrate on variables that can be measured what may exclude certain immeasurable
capabilities, which could be crucial for the firm.
By reviewing the extant literature on the relevant topics addressed in this thesis, the
confusion and the uncertainty become, in fact, apparent. In the following, the main
contributions are presented, contributions that deal with the evolution of dynamic
capabilities, the influence factors, including the managerial influence and the
idiosyncrasy of capabilities. These issues reveal the existing research gaps and seem to
offer the biggest potential to enhance the general understanding of the Dynamic
Capabilities Approach.
2.3.1 Evolution Factors of Dynamic Capabilities
Where capabilities come from, which influence factors exist, and whether these factors
are internal or external to the firm is heavily discussed among scholars. In the
following, the often contradicting contributions of different researchers, both,
conceptual and empirical, are reviewed.
According to TEECE/PISANO/SHUEN (1997), sources of competitive advantage based
on capabilities can be found in managerial and organizational processes. These
processes determine how things are done in a company. Asset positions, including e.g.
intellectual property or complementary assets and the future strategic paths available
to a company, shape the firm’s processes and thus influence the development of
dynamic capabilities. Certain factors that inhibit the emergence of dynamic
capabilities can be attributed to existing managerial beliefs. LEONARD-BARTON
(1992), for example, focuses on the new product development of companies by
15
16
See COLLIS (1994), p.148.
See DAVIS (2004), p.41.
The Influence Factors of Dynamic Capabilities
14
looking at core capabilities and finds that these capabilities are rooted in values that
not only can enhance, but also inhibit innovation in a company. This relationship has
been rather neglected in the research. Core capabilities are defined as distinctive
capabilities that differentiate a company strategically from its competitors. LEONARDBARTON suggests questioning traditional systems, skills and values what “may cause a
complete redefinition of core capabilities or initiate new ones.”17 TRIPSAS/GAVETTI
(2000) support her proposition of managerial beliefs as a constraining influence factor
for the emergence of dynamic capabilities. They employ case study research to
generate empirical evidence to illustrate the difficult adaptation to radical
technological change that established firms face. By analyzing the response of the
Polaroid Corporation to the shift from analogous to digital technology, these authors
examine the relationship between managerial cognition, i.e. the manager’s view of the
world and the evolution of capabilities. Their findings illustrate “the evolutionary
trajectory of organizational capabilities” and the influence of managerial cognition on
the development of new capabilities.18 TRIPSAS/GAVETTI see a potential for further
research by concluding: “Importantly, emphasizing cognitive elements in the
explanation of the genesis and evolution of capabilities raises both positive and
normative issues that traditional explanations in the evolutionary realm largely
overlook.”19
VERONA/RAVASI (2003) show with an exploratory case study that certain knowledgebased processes (knowledge creation, absorption, integration, and reconfiguration)
play a crucial role in the development of dynamic capabilities, in this case, the ability
to innovate continuously. They also recognize that “despite their increasing relevance
in several settings, in recent years dynamic capabilities have been predominantly
subject to theoretical debate.”20
GRIFFITH/HARVEY (2001) employ the concept of global dynamic capabilities to better
understand a firm’s power in international business relationships. Resource- and
17
See LEONARD-BARTON (1992), p.123.
See TRIPSAS/GAVETTI (2000), p.1147.
19
See TRIPSAS/GAVETTI (2000), p.1158.
20
See VERONA/RAVASI (2003), p.578.
18
The Influence Factors of Dynamic Capabilities
15
market-based assets that influence the power in international relationships are
analyzed. GRIFFITH/HARVEY understand global dynamic capabilities as the creation of
difficult-to-imitate combinations of resources on a global basis, thus generating a
competitive advantage. In their research, the firm’s power to influence the decision
variables of its partner and to align resources among companies is a key influence
factor for the dynamic capabilities of a firm.21
Other researchers argue that companies may have similar capabilities, but certain
factors lead to different performance. ZOTT (2003) explores intraindustrial
performance differences among companies from a dynamic capabilities perspective.
He discovers that these differences emerge through timing, cost, and learning effects
that differ for similar dynamic capabilities in different companies. Even small
variations of these effects, especially when combined, can generate significant
differential firm performances within the same industry.
Whereas these papers mainly focus on internal influence factors, other researchers
have tried to address influence factors of firm environment. COLLIS (1994) already
indicates the importance of context-specificity, a key focus of this thesis and which is
rather underrepresented in research on the influence factors of dynamic capabilities.
LEONCINI/MONTRESOR/VERTOVA (2003) concentrate on empirical bias with respect to
the internal and external perspectives. Their conceptual paper deals with the identified
gap between an organizational and an environmental approach to explain dynamic
capabilities. They found that in the literature about dynamic capabilities the focus is
alternatively either on the nature of the firm or on the nature of that firm’s
environment, and therefore biased. The highlighting of organizational learning in the
research stream of dynamic capabilities has led to strong emphasis on the internal
organization and thus disregards “the relational and contextual aspects affecting the
creation and development of dynamic capabilities.”22 To address this issue, the authors
compare an integrated approach that combines the organizational and environmental
21
22
See GRIFFITH/HARVEY (2001), p.597.
See LEONCINI/MONTRESOR/VERTOVA (2003), p.3.
The Influence Factors of Dynamic Capabilities
16
view to a model of the firm as an open, dynamic system, co-evolving in broader
technological systems.23
Empirical research that attempted to draw a more holistic picture of the evolution
factors of dynamic capabilities includes the work of LAWSON/SAMSON (2001). They
promote the concept that innovation management can be seen as a dynamic capability.
Using an in-depth case study of Cisco Systems, they developed a conceptual model of
an ‘innovation capability’ including the elements of vision and strategy, harnessing the
competence base, organizational intelligence, creativity and idea management,
organizational structures and systems, culture and climate, and management of
technology. Even though this company-wide approach can be seen as rather holistic,
the contextual factors of the company’s environment are underrepresented in their
model.
HELFAT/PETERAF (2003) are aware of internal and external factors that influence the
‘branching’ of capabilities or the altering of an original capability into other forms.
Accordingly, capabilities are a crucial development factor that can generate new
capabilities. They also introduced a capability lifecycle that described the general
patterns and paths in the evolution of organizational capabilities over time, including
the founding, development, and maturity stage.
RINDOVA/TAYLOR (2003) also took internal and contextual evolutionary factors of
dynamic capabilities into account by analyzing the impact of the attacks of September
11th on the biotechnology industry and the defense-related IT industry. They assigned
the evolution of dynamic capabilities to change processes that occur at two different
levels.24 The so-called micro-level includes the staffing of key positions with
experienced and skilled top management, and the delegation of responsibilities to
lower levels of the hierarchy. The macro-level concerns the development of new
competencies to respond to changing customer demands. Although internal and
external factors in the evolution of dynamic capabilities are addressed, their findings
23
24
See LEONCINI/MONTRESOR/VERTOVA (2003), p.5.
See RINDOVA/TAYLOR (2003), p.6.
The Influence Factors of Dynamic Capabilities
17
concentrate only on single factors and can be seen more as a potential excerpt of a
bigger picture.
ETHIRAJ ET AL. (2005) examined a company in the Indian software industry to answer
the question of where capabilities come from. They found that one class of
capabilities, the client-specific capabilities, evolves by learning from repeated
interactions with certain clients. The authors demonstrated that capabilities are often
context-specific and incur different costs and benefits.
As this overview shows, a common denominator for the evolution factors of dynamic
capabilities does not exist. Even though there is a multitude of answers to the question
regarding the origin of dynamic capabilities, researchers often focus on single
influences and rarely take the context of companies into account. As
TEECE/PISANO/SHUEN (1997) state: “Too often, the contextual dependence of original
performance is poorly appreciated,…”.25 Building upon this gap, this thesis thus aims
to draw a holistic picture of the main factors influencing the evolution and
development of dynamic capabilities and takes into consideration organizational as
well as contextual factors.
2.3.2 Managerial Influence: Are Capabilities Born or Made?
Linked to the discussion of the factors influencing the evolution and development of
dynamic capabilities, the question regarding the possibilities of managers to actively
manipulate this evolution is crucial, especially with regard to normative insights.
WINTER (2003) summarizes that discussion among researchers about capabilities as
follows: “Still others believe that they exist, but suspect that they are ‘born not made’
– i.e., they doubt that deliberate efforts to strengthen such capabilities are a genuine
option for managers.”26
In the last years, many researchers added empirical insights to this mainly conceptual
discussion in order to develop the theory further.
25
26
See TEECE/PISANOSHUEN (1997), p.525.
See WINTER (2003), p.991.
The Influence Factors of Dynamic Capabilities
18
RINDOVA/KOTHA (2001) examined the co-evolution of organizational form, function
and competitive advantage of the companies Yahoo! and Excite. They found that these
firms employ ‘continuous morphing’ to dynamically reach a strategic fit with a hypercompetitive environment. This process of morphing is based on the dynamic
capabilities of the firm and refers to continuous change in order to regenerate a
competitive advantage in hypercompetitive environments. Managers can actively steer
the process of morphing and consequently can have an influence on the development
of dynamic capabilities of their company.
WINTER distinguishes between zero level capabilities and dynamic capabilities,
building upon the higher-order capability idea of COLLIS (1994). Zero level
capabilities belong to the stationary process of “how can we earn a living now”. 27
They are needed to assure the constant revenue generation from customers. Dynamic
capabilities, in contrast, are associated with change, like that which occurs with new
product development. According to WINTER, change is also accomplished by ad hoc
problem-solving, what can be seen as a substitute for dynamic capabilities and may be
more cost-efficient than investments in dynamic capabilities. As a consequence,
managers should carefully evaluate whether they want either to invest in their dynamic
capabilities or trust their ad hoc problem solving skills. Since WINTER assumes that
managers can invest in dynamic capabilities, he implies a certain level of managerial
influence on the development of dynamic capabilities.
The earlier mentioned paper by ETHIRAJ ET AL. (2005) indicates that the project
management capabilities of the examined company emerge through deliberate and
continual investments in infrastructure. Due to the different costs and benefits of
dynamic capabilities, these authors suggest that managers should carefully evaluate the
investments in the development of capabilities. Hence, certain capabilities can be
intentionally cultivated by investments of resources. The authors are also aware of the
uncertainty about this subject: “Although there are a number of theoretical arguments
about the characteristics of resources or capabilities that yield competitive advantage
[…] and what prevents their imitation […], we have limited understanding of where
The Influence Factors of Dynamic Capabilities
19
capabilities come from or what kinds of investment in money, time, and managerial
effort is required in building them.”28
Regarding this outline, the question about the real influence that managers have on the
emergence and nurturing of dynamic capabilities remains unanswered and has been
rather treated as implicit assumption for other research subjects, and rarely as a focus
of an empirical investigation. This thesis is a research attempt to fill in some of these
blind spots.
2.3.3 Idiosyncrasy and Sustainability of Dynamic Capabilities
The sustainability of a competitive advantage depends on the transferability and
fungibility of a dynamic capability. A dynamic capability that is easily copied or
transferred to another company can hardly be the base of a sustainable competitive
advantage. The transferability in turn, depends on the kind of factors influencing its
evolution and development. To what degree dynamic capabilities are transferable is
heavily debated in academic circles. Some researchers argue that the evolution of
dynamic capabilities is based on the history of the company and consequently difficult
to replicate. KOGUT/ZANDER (1992) for example state that future options are pathdependent, since the creation of new skills is based on the extant capabilities of the
firm. They discuss the existence of firms from a new perspective, including
combinative capabilities and in contrast to the transaction cost theory. They see
organizations as superior to markets in sharing and transferring knowledge among the
members of the organization. Their suggested path-dependency means that history
matters and the special history of a company, its traveled path, determines its
capabilities today. To develop the thoughts KOGUT/ZANDER further, one could
conclude that dynamic capabilities are to a certain degree idiosyncratic and can not
that easily be transferred, since a firm’s traveled path is hardly copyable or repeatable.
This makes a competitive advantage sustainable.
27
28
See WINTER (2003), p.992.
See ETHIRAJ ET AL. (2005), p.25.
The Influence Factors of Dynamic Capabilities
20
TEECE/PISANO/SHUEN (1997) confirm that the paths available to a company are a
function of the current position, which in turn is a function of the traveled path. This
relationship makes the strategic choice of a company history-dependent and restricts
the transferability of competencies or capabilities even within a company, so that the
authors attach a certain idiosyncrasy to a firm’s dynamic capabilities. Consequently,
the imitation possibilities for competitors are limited, which in turn makes a
competitive advantage sustainable.
Also, GRIFFITH/HARVEY (2001) understand dynamic capabilities as the creation of
difficult-to-imitate combinations of resources. This suggestion is supported by
VERONA/RAVASI (2003), who infer from their study that dynamic capabilities are not
identifiable processes like new product development or strategic decision making as
advocated by EISENHARDT/MARTIN (2000). Rather they see a dynamic capability as a
composition of a company’s organizational resources. Since this composition can
differ between companies, the authors declare dynamic capabilities of a firm as
idiosyncratic and thus, as difficult to transfer.
Others believe that dynamic capabilities have many common features across
companies and are much more fungible. The hypothesis that capabilities are imitable
within the same organization is already proposed by ZANDER/KOGUT (1995). They
examined the speed of the transfer of capabilities throughout the organization and also
across borders and found that the speed is influenced by the degree of codification and
how easily the capabilities are taught. The easier that capabilities can be copied within
the firm, the easier they can be transferred to other companies. EISENHARDT/MARTIN
(2000) try to demystify the concept by arguing that dynamic capabilities are not vague,
but rather identifiable processes that have been researched extensively, for example,
product development or strategic decision making. These processes have common
features, what can be interpreted as best practice. The authors infer that consequently
dynamic capabilities are more fungible and can be more easily transferred between
companies
than
assumed
by
other
researchers.
Therefore,
according
to
EISENHARDT/MARTIN, a competitive advantage based on dynamic capabilities cannot
be sustainable over a longer period of time. The authors also distinguish between the
dynamism of markets: “In moderately dynamic markets, dynamic capabilities
The Influence Factors of Dynamic Capabilities
21
resemble the traditional conception of routines. They are detailed, analytic, stable
processes with predictable outcomes. In contrast, in high-velocity markets, they are
simple, highly experiential and fragile processes with unpredictable outcomes.”29
To sum up, there is no consensus about the idiosyncrasy of dynamic capabilities in the
academic world. These conflicting views legitimate further research about
transferability and hence the sustainability of a competitive advantage based on
dynamic capabilities.
29
See EISENHARDT/MARTIN (2000), p.1105.
The Influence Factors of Dynamic Capabilities
22
3 Research Questions
As the literature review just concluded reveals, the research stream about dynamic
capabilities contains certain and specific gaps and offers potential for additional
studies.
The discussion on the evolution factors of dynamic capabilities reveals the need for a
holistic analysis of these factors. Holistic means that the analysis aims at collecting as
much factors as possible, so that they can be classified and categorized, instead of
concentrating on one factor and fade out others. This leads to the first research
question:
Research Question 1:
What are the main influence factors that support the evolution and the
development of dynamic capabilities?
The identification of influences as well as their origin helps to clarify the emergence of
dynamic capabilities and contributes to the academic discussion, namely whether these
influences are internal to the organization, external, or both.
Depending on the type of influence factor, the degree to which managers can
deliberately steer the evolution of dynamic capabilities, if at all, may vary. Thus,
related to the first research question, the following issue needs clarification:
Research Question 2:
To what degree can managers deliberately influence the evolution and
development of dynamic capabilities?
The answer to this question has significant implications for the role of managers in the
development of capabilities, whether that role is reduced to a laissez-faire behavior or
enriched to a central role as an active manipulator.
The sustainability of a competitive advantage depends on the transferability of the
dynamic capabilities. From the research to date, the insights appear to be conflicting.
The Influence Factors of Dynamic Capabilities
23
Therefore, this thesis tries to contribute to clarity on the issue by answering the
following research question:
Research Question 3:
Are capabilities idiosyncratic or can they be transferred to other companies?
This question addresses the analysis of factors that inhibit or enhance transferability.
Since this thesis aims to deliver practical insights that can add value to managers, the
question regarding managerial implications seems quite relevant:
Research Question 4:
What are the normative implications for managers?
The strategy process in the practitioner’s world still relies predominantly on concepts
like PORTER’s generic strategies or the investing in idiosyncratic assets as suggested
by the Resource-Based View. Companies rarely try to identify dynamic capabilities,
since they are not aware of their existence, or if they are aware of such existence,
attribute little importance to them. Therefore, the answers to Research Question 4 will
probably promote the concept a bit further by leading managers with the suggestion of
concrete guidelines.
Figure 1 summarizes in an analytical framework the research questions, their starting
points and their logical sequence.
Identification
of key dynamic
capability
Research Question 1
Research Question 2
Research Question 3
Tracking of
influence
factors
Categorizing:
Can be
consciously
influenced or not?
Evaluation:
Inferences about
idiosyncrasy of
dynamic
capability
Normative Implications
Research Question 4
The Influence Factors of Dynamic Capabilities
24
Figure 1: Analytical Framework and Logical Sequence; Source: Author.
The procedure for answering the research questions illustrates the sequential structure
of the analysis, since the questions are based on and build upon each other. To answer
these questions, the case studies present two companies that exhibit a competitive
advantage based on the same capability. This pre-analysis is mainly based on
secondary literature and pilot interviews that helped to crystallize a capability as an
essential source for the companies’ competitive advantage.
After having identified the dynamic capability and the focal companies that rely on
this capability, the influence factors are examined from a holistic perspective. This
holism means that the investigation is not limited to one key factor or a special domain
of origin, but rather tries to discover all relevant influences from in- and outside the
firms. A ranking of the influence factors according to their impact on the development
of the dynamic capability is desirable, but would be out of proportion for the breadth
of this thesis.
When saturation is reached, i.e. no more additional factors can be determined and
enough insights about the influences are gained, the factors are classified and
categorized. This classification and categorization helps to answer the question,
whether a certain factor, and accordingly the development of a dynamic capability, can
be actively steered and manipulated by managers. In addition, the study contributes to
the academic discussion whether dynamic capabilities are ‘born’ or ‘made’, but also
takes into account the practical requirements of the rather abstract concept of ‘dynamic
capabilities’.
Also based on the characteristics of the influence factors is the transferability of the
capability to other companies or even within the same company, what determines the
sustainability of the competitive advantage. Therefore, the thorough examination and
classification of influence factors allows the deduction of propositions with respect to
the transferability of dynamic capabilities.
After this analysis, normative insights regarding the possibilities of nurturing the
evolution and the development of dynamic capabilities are inferred. Since this
The Influence Factors of Dynamic Capabilities
25
categorization of the factors and the inferences delivers new insights about the
dynamic capability, the process can be seen as recursive.
The insights gained through this sequential inquiry are integrated into a framework
that unifies the different propositions of this study.
The Influence Factors of Dynamic Capabilities
26
4 Research Design
The researcher always faces a wide range of methodologies to tackle a research
problem. This chapter gives a short overview of the different methods, their inherent
pros and cons, and their appropriateness for the specific research problem of this
thesis.
4.1 Quantitative Versus Qualitative Methods
Differentiating between quantitative and qualitative methods is a first distinction.
Quantitative methods are based on logical positivism. The positivist philosophy
“assumes that there are social facts with an objective reality apart from the beliefs of
individuals”.30 Quantitative research strives for objectivity by using experimental
designs and correlational studies. The logic employed here is often deductive, i.e.
phenomena are deduced from general models.
The qualitative methods rest on a post-positivistic, phenomenological worldview,
assuming “that reality is socially constructed through individual or collective
definitions of the situation”.31 Qualitative researchers try to collect data by doing case
studies and fieldwork so as to describe the found phenomena exhaustively in all
details. The logic used is mainly inductive, which means that the researcher
generalizes from specific findings.
Which path should the researcher follow to solve a research problem? These diverse
research designs disclose different characteristics, for example regarding the internal
or external validity. Internal validity concerns the cause-effect relationship. To be
internally valid, a relationship must show a true covariation between the variables.32
External validity relates to the generalizability of the findings. The higher the external
validity, the broader the found relationships can be generalized across time, conditions,
and units of analysis, e.g. individuals, companies, or species.
30
See FIRESTONE (1987), p.16.
See FIRESTONE (1987), p.16.
32
See SCANDURA / WILLIAMS (2000), p.1252.
31
The Influence Factors of Dynamic Capabilities
27
Table 1 depicts the major shortcomings and strengths of the qualitative and the
quantitative approaches.
Qualitative approach
• complete, detailed description of relationships
• allows for fine distinctions to be drawn because it is not
necessary to shoehorn the data into a finite number of
classifications.
• ability to adjust to new issues and ideas as they emerge
• can help secure access to minority/marginalized groups
• can help identify (non-obvious) instrumental variables
• Problematic generalizability of findings: can not
be extended to wider populations with the same
degree of certainty that quantitative analyses can.
• Credibility and quality of conclusions, e.g. by
policy makers
• data collection and analysis may be labor
intensive and time-consuming
• Distinct possibility of researcher bias
• Difficult to replicate, independently verify
Quantitative approach
• Findings can be generalized to a larger population, and
direct comparisons can be made.
• Allows others to independently replicate, verify
• “Objective”, impartial
• most appropriate for conducting needs assessments or
for evaluations comparing outcomes with baseline data.
• quantitative analysis is less rich than that obtained
from qualitative analysis
• decontextualizes human behavior in a way that
removes the event from its real world setting and
ignores the effects of variables that have not been
included in the model.
• tends to sideline rare occurrences resulting in a
loss of data richness.
Table 1: Pros and Cons of Qualitative and Quantitative Approaches, Source: Author,
adapted from: MILES/HUBERMAN (1994), WACKER (1998).
A complete, detailed description of relationships is weakened by a lack of
generalizability or external validity of the findings when using a qualitative approach,
whereas the quantitative approach shows contrary characteristics. Since the advantages
of the different research designs are mainly complementary, researchers tend to
combine different approaches to reach a higher validity. This combination of
approaches is also referred to as triangulation.33
As the advantages and disadvantages of the different methodologies show, not only do
the philosophical preferences of the researcher, if any, or his or her skills determine the
type of research design, but also the desired result, and therefore the nature of the
questions the researcher wants to answer. BLACK summarized the appropriateness of a
research strategy as shown in Table 2 by matching the type of research question to the
33
See SCANDURA / WILLIAMS (2000), p.1249.
The Influence Factors of Dynamic Capabilities
28
research design approach.34 He distinguished among the following types of research
questions:35
• Descriptive: What events or outcomes are occurring?
• Explorative: Which characteristics or details relate to observed events,
phenomena or reasoning?
• Evaluative: How well did a process or procedure work?
• Predictive: What will happen if one variable changes?
• Explanatory: What are the causes of an observed outcome?
• Control: What will happen to a second proposed dependent variable if the
independent variable is changed?
Research design approaches
Type of research
question
Descriptive
Case Study
Representative Samples
Qualitative
description
Descriptive Normative Correlative
(quasi-)
Ex post
statistics
Experimental facto
Explorative
Evaluative
x
x
x
Predictive
Explanatory
x
Control
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Table 2: Matching the Type of Research Question to the Research Design, Source:
BLACK (1999).
A look at the research questions posed for the introduced problem area of this thesis
indicates two types, the explorative and the explanatory type. YIN states that the more
the research question “seeks to explain how and why events occur, the more the case
study method will be relevant.”36 Especially the holism taking the special case
34
See BLACK (1999), p.47.
See BLACK (1999), pp.31-32.
36
See YIN (1998), p.233.
35
The Influence Factors of Dynamic Capabilities
29
embedded in its context into account is a convincing feature of qualitative data.37
Thus, for the purpose of this thesis an inductive qualitative inquiry has been chosen,
creating a ‘big picture’-view of the influence factors of dynamic capabilities. This
method is not only suitable for poorly understood or complex phenomena, but also
allows for developing extant theory further through its holistic approach. A
quantitative approach would require variables that are operationalizable and
measurable, characteristics that can rarely be found in strategic management. An
operationalization of an abstract concept such as dynamic capabilities or competitive
advantage, seems to be problematic. As ETHIRAJ ET AL (2005) notice, large-sample
empirical studies on dynamic capabilities “usually fall short either in the choice of the
independent variable employed to measure capabilities or the dependent variable used
to measure performance.”38 Another general weakness of a quantitative approach is the
insufficient consideration of the multi-causality of relationships, which can be often
found in management sciences. BLACK confirms that the correlative approach, for
example, is “unable to establish much support for causality…”.39 A reduction to a
simple correlative relationship would disregard all the other variables influencing the
observed outcome and also their interdependencies. These are reasons why often an
inductive logic is used to develop strategy theory.40
4.2 Case Study Research
Especially for strategic management research, the case study approach is popular.
Examples of research employing case studies for investigating dynamic capabilities
include RINDOVA/KOTHA’s (2001) comparison of Yahoo! and Excite and
TRIPSAS/GAVETTI’s (2000) in-depth case study of the Polaroid Corporation (see
Section 2.3). The qualitative description of a case study concentrates on relationships
within a restricted number of companies or even a single setting.41 Due to the
limitation to a small number of investigated units of analysis, several variables can be
37
See MILES/HUBERMAN (1994), p.10.
See ETHIRAJ ET AL (2005), p.29.
39
See BLACK (1999), p.46.
40
See SNOW/THOMAS (1994), p.457.
41
See WACKER (1998), p.375.
38
The Influence Factors of Dynamic Capabilities
30
examined. Case studies give the researcher not only the possibility to describe certain
relationships, but also to test theory for a special setting. The data generated by this
approach often leads to new insights for formulating theories. Thus, the approach uses
inductive logic.
The structure for case study research employed for this thesis is adapted and abridged
from the suggested roadmap of EISENHARDT (1989). The implementation of such a
case study approach includes the following steps:
• Getting Started
• Theoretical Sampling
• Data Sources
• Analyzing Data
• Theoretical Validation
The following section describes how these steps were implemented for the specific
research problem, phase by phase.
4.2.1 Getting Started
The formulation of a research question is essential in the beginning o the work to focus
the research process. In this phase, constructs that will be examined should be defined
even though they might be preliminary and in the end perhaps not relevant for the
analyzed relationships. EISENHARDT (1989) emphasizes that the researcher should not
be biased by existing theory, so the findings will help build theory in an uninfluenced
way and retain a certain theoretical flexibility.
The research problem of this thesis emerged from the professional background of the
author. The question why some companies perform better than others is essential for a
strategy consultant and crucial for any industry. The literature review and the
examination of the extant theory served as a first grounding of the topic and included
the identification of potentially relevant constructs. Since the existing literature
delivered only insufficient answers to the research problem, specific research
questions were developed to address these issues and add new insights to the theory
The Influence Factors of Dynamic Capabilities
31
(see Chapter 3). In addition to the literature review, pilot interviews were conducted as
a practical complement to the academic view and as a preparation for the data
gathering that would occur at a later stage of the research.
4.2.2 Theoretical Sampling
As EISENHARDT states, it makes sense to choose a case “in which the process of
interest is transparently observable”.42 This theoretical sampling, in contrast to
statistical sampling of quantitative methods, is thus not random, but rather relies on
cases that best contribute to the evolving theoretical insights.
For the purpose of this thesis, companies that exhibit a competitive advantage were
potential candidates as research items. This competitive advantage means that they
outperform their competitors in their industry in terms of profitability (compare to
Section 2.1). This condition should hold true not only for a short period, like one year,
but also be maintained for a longer time horizon, so that extraordinary short-term
effects can be excluded. Since contextual factors have up to now been rather
neglected, cases where these issues become more apparent were preferable.
Complementing the existing literature, companies with Asian origin were assumed to
contrast to some extent with certain influence factors that have remained less obvious
for Western researchers mainly investigating the Western world. For a comparison of
these influence factors, the focal companies should exhibit a competitive advantage
that is based on the same capability, what increases the internal validity. By comparing
two companies with a competitive advantage based on the same dynamic capability,
the insights about the influence factors gain an additional value, for example, by
answering the question of whether similar factors are responsible for the development
of the focal capability. Since dynamic capabilities refer to a company’s ability to alter
its resource configuration to adapt to changing environments, the history of the cases
should reveal certain specific phases of environmental dynamism. Finally, good access
to company data is crucial for an in-depth case study.
42
See EISENHARDT (1989), p.537.
The Influence Factors of Dynamic Capabilities
32
By meeting these criteria, the special cases of Samsung Electronics and LG
Electronics were chosen. These two South Korean companies maintained an
impressive business performance over the last few years. Although these companies
have been widely studied already, the focus of this past research lay mainly on their
successful cooperation with the Korean government during the industrialization period
of South Korea or the structural weaknesses of the chaebol that contributed to the
Korean crisis. Their history comprised numerous environmental changes that required
a dynamic adaptation, including both, fast growth and internationalization as
conglomerates during the industrialization of Korea, the Korean Financial Crisis in
1997, and the changeover from an analogous to a digital era. These two South Korean
Electronics companies recovered rapidly from the Korean crisis in 1997 and today
outperform established competitors like American General Electric, German Siemens,
and Swedish Electrolux. Their rapid recovery from the Korean crisis and their superior
performance today indicate a special competitive advantage for these two companies,
putting them ahead of most Western competitors. The Asian origin of these companies
also helps overcome a certain regional bias generated by research that concentrates on
Western companies. This geographical concentration may lead to myopia and an
overlooking of certain important influence factors.
In this case, the professional, academic, and personal background of the author assured
an adequate access to company information. The use of two cases from the same
industry and with comparable histories allows a search for cross-case patterns in
addition to within-case analysis and thus raises the external validity. The contrast of
similarities and differences between the two cases “can break simplistic frames.”43
With the companies’ almost congruent context, any analysis and comparison of the
influence factors of their capability gains an additional perspective, i.e. just how far
similar influence factors are responsible for the development of the investigated
capability. It is probably a rare occurrence to find two companies that exhibit a context
that matches as closely as it is the case for LG Electronics and Samsung Electronics.
Thus, it is interesting to see whether the competitive advantage of both companies that
43
See EISENHARDT (1989), p.541.
The Influence Factors of Dynamic Capabilities
33
is based on the same dynamic capability and that emerged in the same context rests
upon similar influence factors.
The case units, their history, and environment are depicted further in Chapter 5.
4.2.3 Data Sources
The use of multiple sources of evidence gives the researcher the possibility to tackle
his research problem from multiple fronts.44 SCANDURA/WILLIAMS (2000) examined
the use of research methods and found that this triangulation of data sources has
become more and more popular. Another point of their findings is that field studies
now increasingly dominate management research. SNOW/THOMAS (1994) discovered
similar tendencies for strategic management research.
4.2.3.1 Documentation
This dissertation tries to combine different sources of evidence with field study
methods as the methodological core. Documentation has been used as one source of
evidence and as a starting point for data gathering. Annual reports and publications
(e.g. from the homepages of the two companies) that represent the company’s
perspective as well as news articles that provide a third party view provided helpful
insights. Articles about the two companies that were obtained included analyses from
other researchers, for instance, in academic journals, but also often came from sources
like the International Monetary Fund, The World Bank, or Korean research
institutions. Reports from rival companies could be obtained that examined the two
focal firms as part of these rival companies’ competitive intelligence strategy. Taken
together, this secondary literature generated helpful background knowledge and a
constructive basis for the interviews.
44
See YIN (1998), pp.246-248 and MILES/HUBERMAN (1994), pp.40-43.
The Influence Factors of Dynamic Capabilities
34
4.2.3.2 Interviews
For a direct focus on the research topic, interviews were a main source of evidence and
thus were indispensable. Pilot interviews were conducted in Germany. The objective
of these pilot interviews was a validation and refinement of the initial research design
and framework. Also, a certain training effect with respect to the moderation of
interviews and relevant vocabulary and the development of a certain ‘real world’
business sense were intended and were observed.
The main part of the interview process was conducted in South Korea. Due to the
rather modest Korean language skills of the author, the interviews were carried out in
English, sometimes with an interpreter. The interviews lasted from 30 minutes to 3
hours. These semi-structured open-ended interviews were conducted individually and
in person only. The modus ‘semi-structured’ in this context can also be referred to as
focused. The researcher focuses on some research questions in mind instead of using a
prepared list of specific questions during the interview. That ‘semi-structure’ leads to a
high degree of flexibility and adaptation possibilities, as well as an increased sense of
freedom and openness for the interviewee and the interviewer. The list of interviewees
and the interview schedule can be found in the appendix of this dissertation. The
interview partners were selected according to their experience with and knowledge
about the Korean electronics industry in general and the two focal companies and their
context in particular. The selection process aimed at reaching complementary and
heterogeneous views of the interview partners and led to a variety of perspectives and
alleviated a potential bias. The group of informants included employees of the case
units, employees of competitors, but also clients and suppliers of the firms as well as
professors, consultants, and journalists. Since the access to Korean companies and
interview partners is rather limited, the author heavily relied on personal introduction
by a third party.45 Often, a preceding meeting was a good source for future interview
opportunities. Taking into account the Asian mentality, the interviews in South Korea
were designed to encourage interviewees to share their knowledge and experience
45
See also the experience of BORSTNAR (1999), pp.10-11.
The Influence Factors of Dynamic Capabilities
35
exhaustively, so they could become informants instead of respondents answering a
questionnaire.46 The interview schedule included the professional history of the
interview partners with respect to the case units as an overture and frequent use of
illustrative examples. However, it was avoided to refer to theoretical concepts, such as
dynamic capabilities, in order to prevent affecting the answers of the informant. The
interview references in this thesis are used as an exemplary indication of available data
sources. For this reason, not all interviews listed in the appendix may be found as
references in the footnotes. In addition, some interviewees demanded anonymity, so
they neither appear as a reference, nor are listed in the interview list. Their statements,
nevertheless, were certainly taken into account for the both data collection and data
analysis.
4.2.4 Analyzing case study data
YIN distinguishes among three different modes of analysis - pattern matching,
explanation building, and time series analysis - whereas EISENHARDT differentiates
between within-case data analysis and cross-case pattern analysis.47 The general aim of
a within-case analysis is “to become intimately familiar with each case as a standalone entity.”48 Accordingly, for the purpose of this thesis, each case is introduced by
building an individual case history. The explanation building by specifying causalities
of the observations is a key part of this analysis since the research questions require an
explanation of the observed phenomena. After this within-case analysis, a comparison
of the differences and similarities between the two cases delivers additional insights
about cross-case patterns. The continuous iterative process of comparing data with
theory is necessary for “iterating toward a theory that closely fits the data.”49
4.2.5 Theoretical Validation
When theoretical saturation is reached, i.e. there are no more additional insights, the
emergent theory is compared to both contradicting literature and literature with similar
46
47
48
See YIN (1998), p.247.
See YIN (1998), pp.250-253 and EISENHARDT (1989), pp.539-541.
See EISENHARDT (1989), p.540.
The Influence Factors of Dynamic Capabilities
36
findings. The comparison of the findings with research that contradicts them enhances
the internal validity of the study and raises the theoretical level of the inferences. The
comparison also adds an additional perspective of a rival explanation that helps to
generate new insights. Since qualitative theory-building mostly relies on a few case
studies, the comparison with literature that contains similar findings enhances the
overall generalizability of the findings. Accordingly, the generated theoretical
framework developed in this dissertation from the deduced propositions, is validated
by extant conflictive and similar literature in Chapter 8.
4.3 Critical review of the research design
No research is without its limitations. The special focus of an inquiry and resource
constraints like time, money, or personnel, set certain boundaries that are often
desired, but sometimes also limit the insights and the theoretical advancement of any
research.
The theoretical sampling of this research could include more cases, such as cases from
other industries or cases from other countries. This expansion would probably add
further insights, produce further interesting comparisons as well as an application of
the concept to a wider basis and thus would be a good complement to this research.
Unfortunately, the in-depth nature of the investigated cases and the holistic analysis of
an abstract concept contradict the use of a higher number of examined companies. A
cross-country analysis would be out of proportion for this thesis, especially in terms of
time limitations. Cross-sectional studies also seem less appropriate for investigating
above-average performance in an industry.50
The data gathering mainly depended on having access to relevant interview partners.
In Asia, and especially in Korea, the contacting of interview partners cannot be
accomplished by a simple telephone call. Rather, personal contacts and introduction by
a third person are necessary. Nevertheless, not all persons who were identified as
49
50
See EISENHARDT (1989), p.541.
See VERONA/RAVASI (2003), p.580.
The Influence Factors of Dynamic Capabilities
37
potentially valuable could be won as interview partners. In addition, talkativeness in
Korea is not as high as in the United States or Europe. Due to the author’s lack of
proficiency in the Korean language, the interviews were conducted in English, a factor
that deterred some potential interview partners from participating. The amount of data
gathered during certain interviews was also limited due to these same linguistic
barriers. However, the majority of interview partners did speak English fluently, and
the data gathering could be performed until saturation was reached.
The reliance on qualitative data also had some inherent trade-offs as explained in
Section 4.1. Especially, the inductive nature of the applied research design did not
generate broadly generalizable findings as it would be possible with statistical
methods. Building theories from case study research might even result in a theory that
only fits the specific setting of that case and is not transferable to other settings,
companies, or countries. Even though the generated theoretical findings from this
study may not be applicable to every setting, the suggested framework can be seen to
be rather generic with a broad applicability. Regarding the explorative nature of this
research, the strongest focus lay in the internal validity of the theoretical insights.
Validity checks by expert-panel reviews and repetitious feedback-loops were included,
as should be done for qualitative research.
In summary, despite these weaknesses, it seems that the chosen design was the most
appropriate for the research objectives of this thesis, i.e. answering the research
questions. As DAVIS (2004) already argued, extant empirical analyses in strategic
management research often concentrate on measurable variables what may exclude
certain immeasurable capabilities crucial for the firm’s competitive advantage. The
qualitative holistic approach of this study can accordingly be seen as an attempt to
acknowledge his criticism.
The limitations that became obvious during this research process are discussed at the
end of this thesis and linked to suggestions for further research in order to complement
the findings of this dissertation.
The Influence Factors of Dynamic Capabilities
38
5 The Chaebol and Their Environment
For the analysis of the influence factors of dynamic capabilities, the special cases of
Samsung Electronics and LG Electronics were chosen. For familiarization with the
special setting of the focal companies, this chapter provides background information
about the economic development of Korea, which is inseparably linked to the
development of the Korean conglomerates, known as the chaebol.
As shown in Section 2.3, the so-called Dynamic Capabilities Approach refers to a
company’s ability to alter its resource configuration by certain capabilities to adapt to
changing environments.51 Therefore, the main changes in the environment of the
Korean electronics industry are crucial for analysis. The illustration of these changes
helps one better understand the special setting of the focal companies with regard to
the idiosyncrasy of influence factors. The case studies used in Chapter 7 as illustration
of the findings, are introduced by a description of the companies’ histories and current
situation. By this description, the linkages between the identified influence factors and
the focal companies’ history and environment become obvious.
5.1 Korea’s Industrialization and the Development of the Chaebol
In 1961, South Korea’s gross national product (GNP) per capita was less than that of
Sudan.52 In only 30 years, this Asian country realized such a fast industrialization that
it belongs today in the top economic powers in terms of GNP.53 The rapid economic
development of South Korea is inseparably linked to the emergence and development
of the chaebol, the Korean conglomerates. The word “chaebol” can be literally
translated as through wealth reigning family.54 For the purpose of this research, the
broader development of the chaebol with a spotlight on the electronics industry is
presented via a chronological description.
51
See TEECE/PISANO/SHUEN (1997), p.516.
See KIM (1997), p.1.
53
See WORLDBANK, www.worldbank.org/data/databytopic/GDP.pdf.
54
See KANG (1993), p.37.
52
The Influence Factors of Dynamic Capabilities
39
5.1.1 Emergence and Internationalization of the Chaebol (1950 - 1980)
After the Korean War, the Korean economy was devastated and mainly based on
agricultural production. The US and international organizations assisted in Korea's
reconstruction, as the country was heavily dependent on foreign aid, which made up
58.4 % of the government's budget in 1956.55 General Park Jung-Hee became
President after a military-led coup in 1961 and made economic development a top
national priority. Since Korea lacked capital, technological know-how, and oil, the
government’s ultimate objective was to ensure the country’s ability to import what it
needed to advance its economy.
The Korean conglomerates developed mainly due to the heritage of industrial
infrastructure from the former Japanese colonial power. The government led this asset
transfer to private entrepreneurs, mainly those with good contacts with bureaucrats.
Foreign aid from the United Nations and the US, as well as preferential access to
governmental bank loans, helped these entrepreneurs to reconstruct the South Korean
economy by investing in plants and machines left from the Japanese and expanding
from this base to a diversity of industrial sectors.56 This diversification was necessary
because of the weak supplier structure within the country. The chaebol began in
sectors like textiles, sugar refining, and chemicals and they soon realized that the
existing firms in Korea could not meet their ongoing packaging and transportation
needs. Consequently, the chaebol set up their own transportation or packaging
business, which resulted, for example, in a strong position in shipbuilding. In addition,
the government supported heavy industry and the chemical industry to create a solid
base for self-sustaining economic growth.
The domestic demand in South Korea for consumer electronics was mainly met by
imports until the Korean government started to promote its juvenile Korean electronics
industry heavily by import substitution. First, the importing of electronics products,
mainly from Japanese companies, was banned. Up to this moment, Korean electronics
companies were mainly low cost assemblers for foreign companies because of their
55
56
See LEE/MCNULTY (2003), p.32.
See KOMM (2001), pp.33-34.
The Influence Factors of Dynamic Capabilities
40
cheap labor force, but also due to the Korean lack of knowledge. This focus on
assembly reduced their activities to the simple putting-together of components
imported from abroad. Due to the learning effects through licensing of foreign
technology, the Korean electronics companies rapidly advanced to low cost
manufacturers, incrementally integrating more and more value-adding activities. The
Korean government additionally supported the domestic production of parts and
components.
As a second means of orchestrating the growth of the chaebol, the Korean government
declared the electronics industry a strategic export industry for South Korea.57 This
declaration meant that the government saw the electronics industry as crucial for the
future economic development of the country. The government borrowed foreign
capital and reallocated it through banks to the chaebol who were engaged in strategic
sectors. Consequently, the government interventions and its role as a ‘benevolent
coordinator’ became increasingly significant. Through several 5-year plans, starting in
1962, the government dictated the growth targets of the chaebol, which were then
rewarded by preferential loans, tax incentives, and access to inputs exempt from
duties.58 The growth targets consisted mainly of output-, turnover- and market sharerelated goals; these targets incurred enormous investments in production capacities and
overseas expansion, mainly financed with borrowed capital from industrialized
countries. Due to low labor costs and the export support of the government, cheap
Korean electronics products were able to easily invade foreign markets like Western
Europe or the United States. With the electronics industry being a main pillar of the
Korean terms of trade, the country became the fastest growing export-nation
worldwide.59
5.1.2 Continued Growth despite Difficulties (1980-1996)
By the 1980s, the domestic heavy industries had experienced serious financial
problems, invoking skepticism about the government’s active role in the economy’s
57
See CHERRY (2001), p.61.
See KANG (1993), pp.55-64.
59
See LEE (2004), p.478.
58
The Influence Factors of Dynamic Capabilities
41
development. Additionally, major trading partners now pressured Korea for economic
liberalization including reduction of the government’s support to certain industry
sectors and reduced import barriers.60 As a consequence, the government emphasized
the development of market-based systems during the fifth economic development plan
(1982-1986), limiting its role to a regulatory approach and introducing democratic
structures in the country. To promote market competition, many restrictions on foreign
direct investment and new market entries were lifted. With the opening up of the
domestic market, the competition in the home market became a major issue for the
chaebol. New Asian competitors from Malaysia and Thailand emerged, threatening the
chaebol through their cost advantage. Also in overseas markets, the times got tougher.
The demand in the major export markets started to stagnate. In addition, many
countries like the US put up trade restrictions to protect their domestic industries from
the cheap electronics imports from Korean companies. Not only on the sales side, but
also on the cost side, the business environment deteriorated further. The strikes
organized by increasingly powerful unions led to sharp wage increases in South Korea.
Despite these challenges, the chaebol continued with their expansion overseas.
Concentration on their own brands, intensified R&D, and high-quality products
became the basis for a new strategy that helped the electronics industry overcome the
slump and nurture further growth. In 1996, when South Korea joined the OECD, the
turnover of the ten largest chaebol totaled more than 50% of the Korean gross national
product.61
On the other hand, the government faced huge overcapacities in the heavy, automobile
and other industries. Several attempts to push the conglomerates toward rationalization
and concentration on certain core sectors failed due to the reluctance of the chaebol.62
Still, the growth and size of the conglomerates were important factors for the founding
family members of the different chaebol clans and represented a high hurdle to
overcome for any restructuring effort.
60
See KIM/HOSKISSON/TILHANY/HONG (2004), p.18.
See LASSERRE/SCHÜTTE (1999), p.98.
62
See LASSERRE/SCHÜTTE (1999), p.99.
61
The Influence Factors of Dynamic Capabilities
42
5.1.3 The Financial Crisis (1996 - 1998)
The first signs of an economic downturn appeared in 1996. The relative appreciation
of the Korean Won weakened the competitiveness of Korean exporters. Increasing
domestic wages and interest rates as well as a slump in the world prices of computer
chips, ships, automobiles, and garments, affected over 50% of Korea’s total exports.63
The debt-equity ratio of the top thirty chaebol reached 519% in late 1997’s compared
to an average of 154% in the US.64 In 1997, the first bankruptcies of the chaebol
occurred.
Figure 2a: GDP Growth in South Korea;
Figure 2b: Reduction of Lending and
Disbursements;
Source: Asian Development Bank (2005).65
Figure 2a depicts the sharp decline in GPD growth from 1997 onward. The
International Monetary Fund, which had been demanded by the Korean government
for financial aid, insisted on a major restructuring and divestiture of the powerful, but
heavily, indebted business groups. In addition, the banking system was liberalized and
opened to foreign institutions to increase competition. The reduction in lending and
63
See ADELMAN/NAK (1999), pp.1-2.
See CHERRY (2001), pp.54-55.
65
Obtained from www.adb.org/Documents/Reports/Annual_Report/2001/kor.asp.
64
The Influence Factors of Dynamic Capabilities
43
disbursements was also demanded, a result of the reckless earlier borrowing to finance
the rapid economic growth of the country (Figure 2b).
The reform policy for restructuring the chaebol and hence, the entire economic system,
included the elimination of debt guarantees between affiliates, the reduction of debt-toequity ratios to below 200 percent, the ban on cross-shareholdings between affiliates,
and the ban on unfair trade between affiliates.66 To reduce overcapacities, the chaebol
were forced to divest themselves of certain unrelated businesses. However, from the
company side, the will to restructure became apparent. Past investment strategies had
to be reviewed and the debt-financed overseas expansion adjusted, leading to a
reduction in many overseas plants. The chaebol, for the first time in their history, now
engaged in massive layoffs that represented the end of the psychological contract of
lifetime employment in Korea.
5.1.4 The New Era
The crisis not only changed the economic, but also the political environment in South
Korea. The economic system shifted toward liberalized markets with Western
economies as a role model. The consolidation in the chaebol landscape led to the
adoption of certain strategies to overcome the structural weaknesses. The restructuring
was requested by the IMF and the World Bank as condition for financial aid. Holding
structures created clearer corporate governance, and international accounting standards
were introduced. Professional management was employed instead of family members
that still controlled the majority of shares. The members of the founding families often
quit active management, but still ensured their influence through holding of chairs on
the Board of Directors. The concept of value-oriented growth became the dominant
paradigm instead of solely focusing on sales and market share growth. Astoundingly,
as Figure 2a shows, Korea was able to recover from the crisis within two years by a
strict implementation of the reform policy.
66
See KIM/HOSKISSON/TILHANY/HONG (2004), p.21.
The Influence Factors of Dynamic Capabilities
44
Seeing this new growth after the crisis as a starting point for further rapid economic
development, South Korea still sticks to the reforms of the agenda launched after the
1997 crisis with the current objective being to reach the level of the G7 countries, i.e.,
doubling per capita income to 20,000 US $.67 According to the OECD Economic
Survey (2004), the reforms also include macroeconomic stability in the face of rapid
population aging, the development of a social safety net, the potential cost of
economic co-operation with North Korea, enhancing of employment flexibility, further
improvement of a corporate governance framework and accounting transparency,
better supervision of the financial sector, and continued opening of the economy to
international trade and foreign direct investment. Lacking natural resources, the
government now heavily promotes education to create a knowledge community of
highly skilled employees.
Today, South Korea has returned to growth rates achieved before the crisis and is one
of the fastest-growing OECD countries over the past five years, reaching an annual
growth rate of around 6%.68 Especially, the rapid growth of neighboring China
stimulates the Korean export industry and induces increased production in Korea.
Once again, the chaebol are the drivers behind the restarted economic growth. The
electronics industry, having diversified further and gained a strong foothold in the
increasingly important information and communication technology, is still a main
contributor to this development.
Figure 3 summarizes the economic progress of South Korea during the last 40 years.
Having portrayed the development of the Korean economy as the environmental
setting of the electronics companies, the focal organizations are introduced and
described in the following section. They will serve as exemplary illustrations for the
findings of this research.
67
68
See OECD (2004).
See OECD (2004).
The Influence Factors of Dynamic Capabilities
45
Figure 3: Development of South Korea’s Wealth. (2) Heavy and chemical industry.
Source: OECD (2004).
The Influence Factors of Dynamic Capabilities
46
5.2 LG Electronics
The LG Group was founded by Koo, In Hoe in 1947. A face cream called Lucky was
the group’s first product.69 As Koo faced problems with the bottle caps for their face
cream, he decided to produce his own containers. This decision became the start of
LG’s diversification and made Lucky Korea's first mass producer of plastic goods.
Since oil is the main ingredient for plastics, the company also engaged in the oil
business and by the mid-1970s became the country's largest and most diversified
chemical manufacturer.
LG also became South Korea’s first consumer electronics producer as it assembled the
first Korean-made radio in 1959 at that time under the name Goldstar, with parts and
components from Japanese electronics giant Sony. This radio became Korea’s first
exported radio with sales in the US and Hong Kong. The assembly of other products
followed, including Korea’s first refrigerator, black and white televisions, air
conditioners and washing machines. Until then, LG Electronics was pursuing an OEM
strategy, producing TVs and VCRs under licenses for companies with a better-known
brand that wanted to benefit from the low assembly costs in South Korea. The
‘Goldstar’ brand became famous, however, after Koo, Cha-Kyung, the eldest son of
Koo, In Hoe, took over the company as group chairman in 1970 and emphasized the
production of color televisions. In addition, he mass-marketed and popularized the
‘Goldstar’ branded microwave oven in the US.
Facing sharp wage increases in the 1980s, new low cost competitors from developing
Asian countries, and the stagnating demand in overseas markets, which had started to
protect their own industries from cheap products, LG Electronics realized it could not
rely on its low cost advantage alone. It identified a focus on high quality products
based on an intensified research and development as priority number one. This
strategy also had as its objective development of its own brand. By successively
replacing the OEM business by the sales of products with the Goldstar brand, the
69
See AJELLO (1996), giving a good overview of LG’s emergence and history. In addition, information was
complemented by data from LG’s and LG Electronics’ homepages www.lg.com, and www.lge.com,
respectively.
The Influence Factors of Dynamic Capabilities
47
company could realize higher margins. The internationalization process continued with
sales subsidiaries outside Asia, e.g. in 1980 in Germany. Also production-wise LG
Electronics expanded internationally, building up manufacturing bases in China, the
US, India, and Brazil, for example. In addition, the acquisition of Zenith, a large US
television producer, in 1995 helped LG Electronics to gain a stronger foothold in
America. Also in 1995, the brand name was officially changed from Goldstar to LG
Electronics. The objective was to establish a new brand image that was not affected by
the image of the rather low-end products of the past, a brand image that would support
global expansion with high-quality products and innovations.
Being one of the less diversified chaebol, the LG Group overcame the Korean
financial crisis in 1997 with its ‘select & focus’ strategy, getting rid of non-core
activities and focusing on strong businesses like electronics to improve its cash flow
situation. KIM/HOSKISSON/TILHANY/HONG (2004) describe the implementation of this
strategy as follows: “For this purpose, non-core businesses (defined as businesses with
limited growth potential) were liquidated, sold off, or spun off; and core or related
businesses were also consolidated. In 1999 alone, LG sold off four companies, spun
off three companies, liquidated one company, and consolidated eight companies.” The
CEO took even advantage of the crisis by using the weak Won to boost exports of
home appliances and raising the company’s share of overseas sales from 30% before
the crisis to 70% after the crisis.
The continued emphasis on innovation led to new product divisions that produced flat
panel monitors and mobile phones. Figure 5 shows the businesses that LG Electronics
operates today. LG Electronics doubled its sales from 1997 to 2002 and raised its
profit by a factor of six in this same time frame.70 Today, the company employs 64,000
people, working in 76 overseas subsidiaries and marketing units around the world.
Sales reached more than US $ 23 billion in 2004 with a return on equity of astonishing
20.4%.71
70
71
See LG Electronics’ homepage 2004, www.lge.com/about/corporate/html/company_overview.jsp.
See MOON ET AL (2005) and LG Electronics 2004 KSE Conference presentation.
The Influence Factors of Dynamic Capabilities
48
Figure 4: Business Structure of LG Electronics; Source: Homepage of LG Electronics
(www.lge.com).
Global Number 1 positions in terms of market share could be achieved, e.g. for
microwave ovens and air conditioners. Building on recent success, the company’s
objective is to be among the Global Top 3 electronics companies by 2010. In 2004, LG
Electronics was selected by Business Week as the number one company in the
magazine's Information Technology 100 list.72
5.3 Samsung Electronics
Samsung was established in 1948 by Lee, Byung-Chul as a trading firm and went on to
sugar and textiles. It early diversified also into the life insurance sector.73 In 1969,
Samsung Electronics was founded, beginning by producing black–and-white
televisions in a joint venture with Japanese electronics giant Sanyo. Samsung
Electronics then expanded internationally, leveraging its economies of scale with
washing machines, refrigerators, color televisions, and microwave ovens. The first
overseas plant was established in 1982 in Portugal. The company’s engagement in
72
73
See Bahrain Tribune (2004).
See KANG (1993), p.86 and LEE/MCNULTY (2003), p.35.
The Influence Factors of Dynamic Capabilities
49
high-technology was intensified with the founding of Samsung Semiconductor and
Telecommunications Co. in 1978, which belongs today to Samsung Electronics and
produced Korea’s first DRAM chips.
In the 1990s, Samsung Electronics encountered the first problems with its low cost
strategy. The exclusive focus on sales volume led to a neglect of quality and
efficiency. Regarding the emergence of new competitors and the modest
competitiveness of his own company, Chairman Lee got so angry that the famous
Frankfurt declaration turned into a one-hour-yelling tirade at his top managers.74 His
key message was: “Change everything, but your wife and children!” At the core of this
company transformation was the new focus on quality and marketing.
The crash in memory-chip prices followed by the Asian financial crisis in 1997 caused
profits to drop from US $194 million in 1996 to $87 million.75 In addition, Samsung
Electronics' long-term debt of US $18 billion was triple its equity. Its restructuring
initiative comprised the lay-off of 16,000 employees, one third of the workforce,
which meant a departure from the policy of lifetime employment. The restructuring
further included the massive reduction of debt and the divestiture of unprofitable
business units and manufacturing facilities. Another big issue was the company’s
dependence on the memory chip business, characterized by volatile sales due to
demand and price fluctuations. In 1995, memory chips generated 90% of total profits
and half of all sales.76 Unprofitable investments, like the chairman’s US $ 3.5 billion
venture into Korea's consolidating car industry, were sold. To save money, not only
were the salaries of senior managers cut back by 10%, thermostats in the headquarters
were “set so low that execs wear thermal underwear.”77 Through these means,
Chairman Lee fulfilled the conditions to receive financial support from the IMF, an
achievement that finally saved the company.78
74
See NAKARMI/NEFF (1994).
See LEE/LEE (2004), p.2.
76
See MOON ET AL. (1999).
77
See MOON/BREMNER (1998).
78
See PREISSNER (2003).
75
The Influence Factors of Dynamic Capabilities
50
A novel emphasis was laid on those new products with future growth potential and
innovative features like Liquid Crystal Displays and mobile phones. These products
would balance the company’s dependence on the semiconductor business. As a result,
memory chips now account for about 20% of sales. Offered products became
competitive not only on price, but also on quality and innovation. This was a new
strategy since Samsung Electronics was, like LG, previously known as a low cost
manufacturer without any brand reputation. Using these more competitive products, a
rapid international expansion - sales- and production-wise -, and an enormous
international branding campaign, Samsung Electronics has become the company with
the fastest growing brand equity value over the last years, increasing from US $ 6.4
billion in 2001 to US $ 12.55 billion in 2004 and generating a turnover of more than
US $ 55 billion.79
Furthermore, Samsung Electronics became the biggest manufacturer of digital mobile
phones using code division multiple access (CDMA) technology and passed Number 1
producer Motorola in handsets sold in terms of overall global revenues.80 Samsung
also beat out Sony and Mitsubishi in the market for televisions priced at US $3,000
and above. In the market for dynamic random-access memory chips Samsung went
ahead of Micron Technology, Infineon Technologies, and Hynix Semiconductor.
Figure 2 illustrates the global market shares of Samsung Electronics in 2002 and the
company’s reached position in the world market.
79
80
See PREISSNER (2003) and financial highlights of Samsung Electronics under www.samsung.com.
See EDWARDS/MOON/ENGARDIO (2003).
The Influence Factors of Dynamic Capabilities
Printer (Mono LPB segment)
51
9,60%
3
3
10,00%
TV
1
10,00%
DVDP
2
Camcorder
3
Flash Memory
2
Optical Disc Drive
2
TFT LCD
1
Monitor
1
Mobile Phone
CDMA Mobile Phone
1
Microwave Oven
1
VCR
1
SRAM
1
DRAM
1
14,80%
15,10%
15,40%
16,30%
17,60%
22,00%
23,00%
25,10%
25,40%
27,60%
32,20%
Figure 5: Samsung Electronics’ Global Market Shares in Selected Product Fields and
Reached
Position,
Source:
(www.samsung.com; 2004).
Homepage
of
Samsung
Electronics
The Influence Factors of Dynamic Capabilities
52
6 Identification of Dynamic Capabilities
For the investigation of the influence factors of dynamic capabilities, the focus on a
certain capability and the subsequent in-depth study of the major variables that can
have an impact on this capability was fundamental. This research used two case units
that exhibited the same dynamic capability as a major source of their competitive
advantage, including the validation by the in-depth analysis of secondary literature,
pilot interviews, and the later confirmation through interviews. This similarity makes
Samsung Electronics and LG Electronics ideal research units for the investigation of
the influence factors of dynamic capabilities. As an analysis of the history of these two
companies discloses, both faced the same environmental dynamism and adapted their
strategies in similar ways. A pattern-matching analysis across both cases delivered
valuable insights on the influence factors of the focal capability.
There was a broad consensus among the interviewees that the speed of their innovation
process represented a major source of competitive advantage of the focal companies.81
That the speed of their innovation process characterized a dynamic capability that
generates a competitive advantage is also supported by the secondary literature on
Korean electronics companies. KIM (1997) described the speed of LG Electronics’
innovation process when it introduced its first color TV.82 The process and project
management of LG Electronics’ new product development was also used as a case
study by the Fraunhofer Institute to show how one could speed up the innovation
process.83 This innovation speed played a crucial role for LG Electronics as a strategic
pillar. Whereas a company has to continually adapt to a changing environment, there
are certain core ideals that remain relatively stable and provide a long-term guidance
for strategic decision-making. These ideals and values form the business vision and are
often expressed in the mission statement of a company. In the mission and vision of
LG Electronics, the highest level of strategic planning, the speed of the company’s
81
Interviews No. 01-08, 14-18, 20, 23, 24, 27, 28, 33-39.
See KIM (1997), p.136.
83
See WAGNER/LENTES (2003).
82
The Influence Factors of Dynamic Capabilities
53
new product development was highlighted.84 LG Electronics emphasized ‘Fast
Innovation’ as a main pillar of its growth strategy, stating “Fast innovation also means
[…] new product development and unveiling that are faster by 30%, and technology
development and establishment of corporate value three years ahead of competitors.”
As for LG Electronics, the speed of Samsung Electronics’ innovation process was
often mentioned as competitive advantage. For Samsung Electronics, KIM (1997)
noticed that speed already helped the company when General Electric wanted to
outsource its microwave oven production: “Samsung engineers completed overnight a
proposal that would have taken U.S. companies four to six weeks.”85 In comparison
with Japanese companies The Economist stated that “The ‘new S’ is Samsung
Electronics, a South Korean firm that innovates faster than a speeding bullet and leaps
whole generations of technology in one bound.”86 Clients praise this ability by stating
that “they come out with more models faster than others and with more features.”87
EDWARDS/MOON/ENGARDIO (2003) confirmed these findings: “The final ingredient is
speed. Samsung says it takes an average of five months to go from new product
concept to rollout, compared to 14 months six years ago.” In addition, the authors
found that Samsung managers realize a shorter approval time, “speeding up their
ability to seize opportunities.” They cite a customer of Samsung Electronics who
declared, “They'll get a product to market a lot faster than their counterparts.” Like LG
Electronics, Samsung Electronics explicitly mentions ‘speed’ in their Digital Vision.
Emphasizing the operational side more, the acceleration of the R&D management
process is identified as crucial for the future success of the company. Samsung
Electronics’ Chairman Lee is often cited, emphasizing the importance of innovation
speed: “Competitiveness in the future means being at the very forefront of change. It is
determined by how much faster one company develops new technology and gets new
products into the market place than the others”.88
84
Obtained from the company’s website: www.lge.com.
See KIM (1997), p.139.
86
See THE ECONOMIST (2004).
87
See MOON ET AL. (1999).
88
See FISHLOCK (2001), p.1.
85
The Influence Factors of Dynamic Capabilities
54
These findings from the secondary literature were backed-up by interviews, e.g. with
managers from rival companies and industry experts. There was a broad consensus
among the interview partners that the speed of new product development is a key
capability and crucial for the competitive advantage of both firms.
Since speed seems to be the distinguishing feature of the innovation process, making it
extraordinary, the dynamic capability analyzed can be termed as the ‘ability to
innovate faster than competitors’. This capability is in the following discussion
referred to as ‘innovation speed’. Within the scope of this thesis, innovation is
understood as successful exploitation of new ideas.89 The term ‘innovation process’ is
used here interchangeably with ‘new product development’, even though the concept
may be defined differently in the literature. This definition also indicates that for the
purpose of this thesis, process innovations are not considered. Regarding product
innovations, the analysis is not limited to a certain degree of perceived extent of
change, but rather covers the whole range of change from incremental to radical
innovation. The construct ‘innovation speed’ does not necessarily imply a higher
innovativeness of a company. A company can be less innovative than its competitors,
but master the innovation process in a certain way. The term ‘speed’ of the construct
‘innovation speed’ relates to the time elapsed between the beginning and the end of the
innovation process.90 To operationalize the construct ‘innovation speed’, the
innovation process of the companies provides a framework for the analysis of the main
factors that influence the dynamic capability innovation speed and hence, contribute to
the companies’ competitive advantage (see Figure 7).
89
90
See TIDD/BESSANT/PAVITT (1997), p.24.
Other authors who investigated ‘innovation speed’ use similar definitions, e.g. KESSLER/CHAKRABARTI
(1996), p.1144.
The Influence Factors of Dynamic Capabilities
Scanning
Selecting
55
Resourcing
Implementatio
Implementation
Figure 6: Innovation Process; Source: Author, adapted from TIDD/BESSANT/PAVITT
(1997).
The innovation process consists of four steps.91 The scanning phase includes the
detection of signals about the potential for innovations. These potentials could be
found in the environment or within the company. In the selecting phase, the costs and
benefits as well as the risks of the different potentials are assessed. Conformity with
the overall business strategy and with the technical and marketing competence of the
company are checked. Based on these criteria, management decides which projects to
focus on. Afterwards, the combination of new and existing knowledge is used to create
a first draft of a solution and is crucial in the resourcing phase. This aspect also implies
considerations of the in-house development or the transferring of technologies from
outside the firm. In the implementation phase, the concept is finally turned into the
developed innovation, first as a prototype, and then as a product that is ready to
launch. During this phase, the market is prepared for the final launch, and the
structures and systems of the company have to be adjusted to mass-produce the item.
A comparison of the existing literature and theories about innovation speed and its
influence factors with the findings of this research is discussed in Chapter 8 following
the guidelines of EISENHARDT (1989) for building theories from case study research.
91
See TIDD/BESSANT/PAVITT (1997), pp.40-47.
The Influence Factors of Dynamic Capabilities
56
7 The Influence Factors of Innovation Speed
By concentrating on the speed of the innovation process as a dynamic capability of the
focal companies, the study aimed to analyze the influence factors, not only for a
holistic picture of the sources of dynamic capabilities, but also to infer specific
propositions regarding the influence managers have on this evolution and the
idiosyncrasy of capabilities (see Research Questions, Chapter 3). The re-examination
of featured articles and the in-depth interviews aimed to encircle the influence factors
of the identified capability in order to classify and categorize them.
In this chapter, the factors that stand behind the companies’ innovation speed are
presented. The insights from the two case studies illustrating the answers to the
research questions of this thesis are included in an anecdotal way, whenever possible.
Insights from certain academic articles are added for explanatory reasons. A
comparison to the theory about factors that influence innovation speed follows later in
the discussion part of this thesis.
One outcome of the data analysis was the finding that the mentioned factors that
influence the dynamic capability ‘innovation speed’ originate at different levels. Even
though, in this chapter, all mentioned influence factors are listed without being
grouped or categorized. The categorization already represents an evaluation of the
influence factors and is presented in the subsequent chapter.
In the following, each identified influence factor is introduced with data from the
interviews. To supplement and validate this data, secondary literature has been
analyzed, including news articles, academic journals, and books. Findings from this
analysis are added in this chapter not only to validate the interview findings, but also
to deliver important background knowledge.
7.1 Influence of the Collaboration with Government and Universities
The innovation speed of Korean electronics is partly linked to the general success
story of South Korea’s industrialization, driven by the chaebol and the Korean
government. The development of new technologies is accelerated by the fruitful
The Influence Factors of Dynamic Capabilities
57
cooperation of the industry with the Korean government and universities.92 The
division of development tasks among these players not only reduces the development
costs for the electronics companies, but also shortens the required development time of
the new technologies. The centrally coordinated research and development efforts
impact the innovation speed of Korean electronics companies especially for radical
innovations. Interviewees pointed out that this collaboration of electronics companies
with the government helps the companies to create new technologies faster than it is
possible for competitors: “LG and Samsung can build on adequate basic research of
universities and state-owned research institutions. They deliver almost customized
technologies, from which the companies generate their innovations. German
companies would have to do the whole invest by themselves, but they lack the money
and the time to do everything by themselves.”93 Even though this collaboration speeds
up the innovation of Korean electronics companies, some interviewees expressed
concerns: “It comes close to a plan economy.”94
Regarding the interview statements, a closer look at this collaboration seems
necessary. The successful collaboration between the Korean government and the
industry has been a major driver for the fast industrialization of South Korea. In the
beginning of the country’s industrialization, the demand for consumer electronics was
mainly met by imports until the Korean government heavily promoted domestic
production by import substitution and declared the electronics industry as a strategic
export industry for South Korea. The government directed the development of the
conglomerates, and therefore, the total economic growth by import substitution and
export promotion of certain industries. Through several 5-year plans, the government
dictated the growth targets of the chaebol, which were then rewarded by preferential
loans and access to inputs that were exempt from duty.
During the financial crisis in 1997, the government created a crisis resolution strategy
that included measures for macroeconomic policy adjustment, structural reforms and
the largest financial aid package in the history of the IMF. After the IMF crisis, the
92
93
Interviews No. 10, 12, 17, 24, 28, 37.
Interview No. 37.
The Influence Factors of Dynamic Capabilities
58
Korean government returned to its former successful strategy by directing the growth
of certain strategic sectors, especially electronics products with future growth
potential.
The collaboration with universities is the third column of this R&D collaboration and,
with the stronger innovation focus of the Korean electronics companies, gained more
and more importance. Education in Korea has one of the highest standards in the
world. The literacy rate is 97.6%.95 A high percentage of high school graduates enter
universities, and roughly 20% of college graduates obtain advanced degrees. In Korea,
it is an absolute priority to educate the population at all levels. Non-Korean
respondents often expressed their surprise, realizing the huge number of Ph.D.’s
among Korean employees. The Korean Science and Engineering Foundation (KOSEF)
has established about 30 university centers of excellence for science and technology,
all of which are required to cooperate with several other institutions and are strongly
encouraged to attract supplemental support from industry. The international
comparison in Figure 7 indicates the remarkable transformation of Korea from a
society with mainly unskilled workers and farmers to a knowledge society with highly
qualified employees.
94
95
Interview No. 10.
See KELLY/GRAY/MINGES (2003), p.2.
The Influence Factors of Dynamic Capabilities
59
Figure 7: Share of the Population with at least an Upper-Secondary Qualification;
Source: OECD (2004)
The Korean Advanced Institute of Science and Technology (KAIST), once established
by the government to secure a certain supply of well-trained engineers and basic
research during the industrialization period, is now seen as Korea’s academic thinktank. Respondents often mentioned this school as benchmark for Korea’s education
system. Even though it is under the reign of the Ministry of Science and Technology, it
offers up to triple the salary of other public universities to recruit the best scholars
worldwide. The professors are chosen and the curriculum is designed according to
research fields defined by the Ministry of Science and Technology as being strategic
national priorities.
Also, the Korean industry takes the position that a well-educated workforce is crucial
to innovation. About half of the research budget in the most highly regarded
electronics programs, such as those of KAIST, comes from the industry. Often,
company executives develop close relationships with individual professors to establish
confidence in their abilities to attract and train top students that the companies will
ultimately employ. As a consequence, professors often have a certain unique influence
within the industry. TREMBLAY (2003) states that “The large Korean business groups
The Influence Factors of Dynamic Capabilities
60
and universities work well together. Samsung and LG are both financing electronics
research at universities or institutions, such as the Korea Research Institute of
Chemical Technology and the Korea Institute of Science & Technology. The projects
yield valuable researchers who are often recruited by the chaebols.” With their reached
position, many electronics companies have also started their own educational
institutions, some of which are accredited universities offering degrees up to the
doctoral level, for example, the Samsung Advanced Institute of Technology. These
private universities are completely independent of government agencies and funded
exclusively by the parent companies.
Today, the government has placed a high priority on improving the country's local
technological capabilities and creating a world-class industrial infrastructure by
supporting a strong collaboration between government, industry and universities.
As one WTEC Report on the Korean Electronics Industry stated: “It (the Korean
government) has maintained an emphatically proactive position with respect to internal
development of advanced technology...”. This report identified four ways for how the
government contributes to the innovation strength of the electronics industry in Korea:
• By setting a legislative frame for growth of the high-technology industry
through means that were already used during the rapid industrialization of
Korea, such as national banking regulations, low-interest loans, tax incentives,
and duty-free import of selected capital goods.
• By promoting education and R&D for the electronics industry and financially
supporting public and non-profit institutes, universities, and other educational
institutions. Often established and emerging companies cooperate in cost
sharing for new product development under the guidance of the government.
• By funding infrastructure improvements, including highways and transportation
systems, rapid dissemination of Internet-type services, etc., and also creation of
"science parks."
• By using its leadership in cooperation with industry, the educational
institutions, and also the media, to promote the development of a state-of-the-
The Influence Factors of Dynamic Capabilities
61
art technoculture in Korea (for example: Korea has the 3rd highest Internet
penetration in the world and the highest broadband Internet access penetration.).
The goal of governmental R&D-spending and –cooperation with industry and
universities today is to be competitive in selected science and technology areas at a
level comparable to the G-7 countries. To reach this goal the government initiated
different programs, such as the Highly Advanced National (HAN) program, which
spent $4.7 billion on R&D programs focused on strategic technologies. Also, another
five-year plan (1997–2002) for innovation was agreed upon by the government. Under
this plan, the public sector would increase its investment in R&D to at least 5 percent
of the total government budget by the year 2002 and public investment in basic
research would rise to 20 percent of total government R&D by 2002.
One impressing example for this collaboration-induced innovation speed is the flatpanel television and monitor technology. Already in the beginning of the 1990’s, the
Korean government chose this area as a strategic product field in close interaction with
the electronics industry. EDIRAK, the Electronic Display Industrial Research
Association of Korea, was established, centrally planning and controlling the joint
effort to become the world-leading nation for this technology. Under this guidance,
R&D efforts for flat panel technology were shared among governmental research
centers, research centers of Korea’s leading universities and the R&D departments of
electronics companies like Samsung Electronics and LG Electronics. Figure 8
exemplifies this cooperation that nurtured the capability of ‘innovation speed’ and
finally led to Samsung Electronics’ and LG Electronics’ dominance of the world
market for flat-panel television technologies.96
96
Among others: Interviews No. 15, 37.
The Influence Factors of Dynamic Capabilities
62
• Government chooses strategic technologies as national
priority projects in close interaction with the industry.
• Research Agencies established to coordinate future
research and development efforts in order to avoid
redundancies in research.
• Financial incentives for companies‘ investments in new
technology.
Government
Universities
• Universities adjust their curriculum.
• Establish research centers with funds from
the government and the industry.
Industry
• Industry establishes own R&D centers in
close interaction with government and
universities
• Recruits researchers from the universities.
• Finally markets the new technology / product.
Figure 8: The Cooperative Innovation Process in Korea; Source: Author.
Confronted with this collaboration and the potential duplication of development efforts
Samsung Electronics’ telecommunication President Lee, Ki Tae answered, “To
encourage competition and maximize creativity, a certain amount of duplicate
development effort is unavoidable.“97 He sees the cooperation between government,
industry and universities as extremely important for information and communication
technology (ICT): “Korean ICT research institutions include those managed by the
government, corporations, and universities. Each center’s research themes should be
based on its objectives, capabilities, and competitiveness. The government and its
research centers should be in charge of macroscopic and long-term technology
development activities. That is, they must conduct large-scale technology development
projects that will bring national competitiveness, obtain information concerning global
technology trends, and provide information about where our country should be headed.
Corporate research centers should focus on technology development geared toward
excellent service and product development to strengthen business competitiveness.
97
See LEE (2003), pp.28-29.
The Influence Factors of Dynamic Capabilities
63
University research centers need to focus on pure science and then move toward
developing core technology for industry through strong industry and university
cooperation.”
The collaboration with the government and the universities played a crucial role for
the innovation speed and thus for the competitive advantage of Korean electronics
companies. This finding is supported by CHO/TANSUHAJ (2003), who identified
networking capability and response to the signals from the government as key
determinants of the competitive advantage of Korean flat panel display producers.
Since the collaboration among government, universities, and companies from strategic
important sectors is an industry-specific phenomenon, this factor influences the
innovation speed of both focal companies in a like manner.
7.2 The Influence of the Home Market
There was a large consensus among many interviewees that the continuous rivalry
among Korean electronics companies led to increased competitiveness in terms of
speed of the innovation process.98 The intense domestic competition to be first to
introduce an innovation to the market led to a strong commitment to innovation speed.
This commitment built up the companies’ awareness of the influence factors of
innovation speed and arming themselves with the means to accelerate their innovation
process. Today, operating globally, international competitors can hardly keep up with
the increased Korean innovation pace: “The continuous competition between the two
companies over decades led to a pressure that made them fast, including the ability to
innovate. Fast innovation is paramount, when you compete for the same customers in
the same market.”99
Even the companies themselves saw in this rivalry more positive aspects than negative
ones.100 Woo, Nam Kyun, President of LG Electronics’ digital television operation,
admits regarding rival Samsung that “Their presence as a very strong competitor in our
98
Interviews No. 02, 08, 19, 36, 38, 41.
Interview No. 24.
100
See for example MOON/EDWARDS/CROCKETT (2005).
99
The Influence Factors of Dynamic Capabilities
64
neighborhood has always kept us alert and awake. This has helped us compete in
overseas markets as well. I can be more successful with Samsung’s success.”101
This continuous competition has been most severe in the home market, which had an
educational effect on the Korean consumer. It increased his product knowledge and
made him demanding of features and innovations in electronics products. A
‘technoculture’ emerged, which has been also supported by infrastructural support
from the government. One example is that South Korea has the highest penetration rate
of private households with broadband Internet access. These conditions make Korea an
ideal test market for Korean electronics company innovations, turning the country into
“the world’s biggest technology lab”.102 “Korean customers are probably the most
demanding when it comes to electronics products. They always want the latest features
and innovations. When you are a latecomer, you are out.”103 The possibility to test
innovations in a demanding Korean home market is seen as an accelerator for the
innovation process of Samsung Electronics and LG Electronics, because, according to
Kwan, Chief Executive of Samsung Electronics’ telecom division, “When they hit
here, we have a product that's absolutely ready to go.”104
7.3 Vertical Integration
Especially, the organizational structure of the focal companies was found to positively
influence the innovation speed. The higher degree of vertical integration of Korean
electronics companies, especially when compared to Western companies, is based on
their striving for technological independence. Whereas Western companies followed
the paradigm of a ‘focused factory’, i.e. concentrating their activities on one part of the
value chain, like manufacturing, and outsourcing the rest, the investigated Korean
companies had a different philosophy. They do not limit their activities to the
developing and manufacturing of electronics products; they also integrated the
preceding value-adding activities by developing and manufacturing the components
101
See SCHUMAN (2004).
See PREISSNER (2003).
103
Interview No. 08.
104
See MOON/ENGARDIO/KUNII/CROCKETT (1999), Interview No. 24.
102
The Influence Factors of Dynamic Capabilities
65
themselves. “In Germany or the United States companies think they are faster by
outsourcing non-core processes. Often, the only process that remains is the assembly
of the final product and the sales, as it is the case for car manufacturers. Asian
companies, especially from Japan and South Korea, believe they can innovate faster
when they produce everything in-house.”105 LG Electronics’ linear compressor for
example, which is used for refrigerators and air-conditioners, is sold to many
competitors. According to interviewees, having all relevant activities under the same
roof is seen as an accelerator for innovation speed, since it reduces the time for
coordination and monitoring of other companies.106 Due to the strict hierarchy present
in Korean companies, these internally organized activities can be performed faster than
it could be done, if many external partners were involved.107 This vertical integration
does not exclude alliances, which are still used today as a means to learn from partners
and then internalize the technological know-how.
The striving for technological independence can also be explained by a closer look at
the historical developments and the experiences of the focal companies. For an
innovation project, a company can source the required technology from inside the
company or from external suppliers. Since Korean electronics companies used to be
latecomers in most of the industries they are operating in today, the imitation and
further development of competitors’ products with technology from external sources
used to be the dominant strategy of Korean electronics companies (KIM, 1997). But
the aim of the companies was always to internalize the technology and build-up their
own development competences to become independent from external sources. The
history of the two focal companies shows what interviewees confirmed: LG
Electronics and Samsung Electronics often invaded industries without having any
technological know-how. In parallel to the external sourcing of technologies by
strategic alliances, these companies accumulated the required knowledge, mainly by
reverse engineering, and gradually built up their own technological base.108 One
interviewee summarized this strategy as follows: “Learn from your competitors how to
105
Interview No. 15.
Interviews No. 06, 07, 15, 23, 24.
107
Interview No. 17.
106
The Influence Factors of Dynamic Capabilities
66
do it, and then do it faster.”109 This strategy is seen as a crucial accelerator for radical
innovation projects, e.g. when a new industry is entered.
One impressive example is the semiconductor industry, which was formerly
dominated by Japanese companies. Despite the high entry barriers, Samsung
Electronics decided to enter this industry.110 Lee, Byung-Chull, the founder of
Samsung Group, was obsessed with narrowing his country's gap with Japan in
semiconductor technology: “Don't worry about the cost, just give me the chips.”111
Lacking the main technologies, the company was dependent on alliances. But with
every new generation of semiconductors, the company built up more and more internal
know-how and processes. Japanese and American partners eventually began to tighten
up on the sharing of secrets, fearing a ‘boomerang’ effect. Samsung Electronics
Executive Director, Kim Hoon, was aware of that problem: “They see us as a
threat.”112 But finally, Samsung Electronics was able to perform all relevant activities
in-house without relying on external sources. Table 3 shows the stepwise accumulation
of technology with every new generation of semiconductors, so that eventually, all
relevant processes could be done in-house without relying on the technology of
external sources.
108
Interview No. 24.
Interview No. 28.
Also LG Electronics entered the semiconductor business with a joint venture with Japanese Hitachi, but was
forced to give LG Semicon up during the structural reforms of the Korean Financial Crisis in 1997 that were
dictated by the IMF.
111
See NAKARMI/GROSS/HOF (1992).
112
See NAKARMI/GROSS/HOF (1992).
109
110
The Influence Factors of Dynamic Capabilities
67
Table 3: The Accumulation of Semiconductor Technology at Samsung Electronics;
Source: BAE/SONG/UM/LEE/HOBDAY (2002).
With this stepwise accumulation of technologies, Samsung Electronics succeeded in
finally reaching the No. 1 position among the DRAM producers and beating the
established Japanese competitors (see Table 4).
Table
4:
Historical
Trend
of
the
Top
BAE/SONG/UM/LEE/HOBDAY (2002).
7
DRAM
Producers;
Source:
The Influence Factors of Dynamic Capabilities
68
Today, competitors like Microsoft, Dell, and Nokia, are dependent on Samsung
Electronics’ chips technology for their own products.113
A similar development can be observed in the recent entry of Samsung Electronics
into the mobile phone business.114 Being a follower, Samsung Electronics is highly
dependent on foreign companies for core technologies like core CDMA base-band
chips from Qualcomm and sophisticated camera-phone modules from Japanese firms,
but steadily Samsung tries to internalize more and more knowledge so as to eventually
be independent from other companies’ technologies.
LG Electronics used to be a latecomer in many industries too, but succeeded in
accumulating knowledge very rapidly. For example, in the mid-1960s, seven engineers
of the television division were given the goal to assimilate and master television
production technology. Learning from Hitachi through training and observations and
by reviewing the relevant literature, the team accomplished a fast transfer of
significant technological knowledge from Hitachi; then LG Electronics could produce
television sets without any reliance on external technology sources.115
Knowledge transfer is not always uniquely based on learning. In the interviews it was
admitted that often the poaching of R&D key personnel from competitors is a crucial
part of the knowledge transfer.116
Recognizing the importance of technological independence for innovation speed, LG
Electronics and Samsung Electronics began to focus more and more on their own
technology generation. KIM (1997) states that these companies evolved from
duplicative imitation to creative imitation and innovation. The in-house R&D of
Samsung Electronics was identified as a main factor of the technology gap reduction
when compared to established competitors in the US and Japan.117 Instead of learning
from others, both companies declared that they want to be at the forefront of
innovations by being innovation leaders instead of mere followers. This emphasis was
113
See PREISSNER (2003).
See LEE/LEE (2004), p.17.
115
See KIM (1997), pp.135-136.
116
Interviews 11, 18 and THE ECONOMIST (2004).
117
See YU (1999), p.63.
114
The Influence Factors of Dynamic Capabilities
69
underlined by the LG Electronics Institute of Technology (LG Elite), which aims at
developing “core technologies ahead of others to create opportunities for new business
and promotes business competitiveness by maintaining and strengthening the core
technologies in the existing fields of business.”118 In addition, LG Electronics’ VicePresident for Strategic Planning affirmed that: “We can no longer take cues from
others. We should be the one introducing products with new features.”119
This paradigm shift to stronger in-house development without relying on external
sources of technology is a crucial part of the vertical integration philosophy of the
focal companies and an important factor for their innovation speed. The comment that
“We can innovate faster than competitors, when everything is under our control,”
perhaps best summarizes the influence that the vertical integrated structure of
Samsung Electronics and LG Electronics has on their innovation speed.120
Even electronics materials needed for their products are developed in-house.121 In
Chemical and Engineering News this further vertical integration was confirmed: “Now
that they have become heavyweights in consumer electronics and electronic
components, these Korean chaebols - centrally coordinated groups of companies - like
Samsung and LG are striving to establish themselves as suppliers of electronic
materials.”122 Relying on the same components as their Japanese competitors for
example, would limit the innovativeness of Korean electronics companies to a
follower status and inhibit the possibilities of fast innovation. Especially during the
resourcing phase of the innovation process, where existing and new knowledge is
combined, a higher degree of vertical integration results in a faster amalgamation of
know-how.123
Not only are the key components and materials developed in-house; the conglomerate
structure of LG and Samsung Group intensifies the combination of knowledge and
technologies and supports a fast innovation process. This structure can be defined as
118
Obtained from www.lgcit.com.
See MOON (2002).
Interview No. 08.
121
Interview No. 18.
122
See TREMBLAY (2003).
123
Interview No. 17.
119
120
The Influence Factors of Dynamic Capabilities
70
an inter-conglomerate vertical integration. Several informants argued that the
conglomerates’ coordination and monitoring efforts are less, compared to dealing with
companies outside of the group network. Thus, this structure supports the acceleration
of the new product development.124 This conglomerate structure comprises almost the
whole chain of value-adding processes from producing raw materials to producing
finished electronics products. Thus, the conglomerate structure complements the
vertical integration of both companies. For example LG Chemical & Energy and LG
Services are suppliers of LG Electronics for plastics and IT services. LG Chemical
develops lithium-ion accumulators for LG Electronics’ products and certain
electronics materials like polarizers used in TFT-LCDs. LG Innothek produces
components and parts for electronic devices. LG CNS develops software for different
products of LG Electronics and takes care of the IT support for the operations. LG
Construction is a big client for project business, i.e. new apartment blocks are
equipped with products from LG Electronics, giving the company the opportunity to
consumer test certain innovations. On the other hand LG Construction builds plants
and warehouses for LG Electronics. These interconnections between the companies of
the LG Group are sketched out in Figure 9.
The emergence of this conglomerate structure and the vertical integration was less a
strategy than a necessity since the markets for intermediate products were hardly
developed after the Korean War. LG Chairman Koo, Cha-Kyung explained the
group’s successive vertical integration in the following way125: “My father and I
started a cosmetic cream factory in the late 1940s. At the time, no company could
supply us with plastic caps of adequate quality for cream jars, so we had to start a
plastics business. Plastic caps alone were not sufficient to run the plastic molding
plant, so we added combs, toothbrushes, and soap boxes. This plastics business also
led us to manufacture electric fan blades and telephone cases, which in turn led us to
manufacture electrical and electronic products and telecommunication equipment. The
plastics business also took us into oil refining, which needed a tanker shipping
company. The oil refining company alone was paying an insurance premium
124
Interviews No. 08, 12, 38.
The Influence Factors of Dynamic Capabilities
71
amounting to more than half the total revenue of the then largest insurance company in
Korea. Thus, an insurance company was started. This natural step-by-step evolution
through related businesses resulted in the Lucky-Goldstar group as we see it today.”
Electric and industrial
materials, plastics
Consulting, System/Network-Integration, IT,
Software
Electronic components
Electronics
Retail business
Project business
Plant/Warehouse
construction
(Engineering &
Construction)
Figure 9: Vertical Integration of LG Group; Source: Author.
For the Samsung Group an analogous network of 27 independent affiliated companies
applies. Samsung Electronics obtains digital and mobile display technology from
Samsung SDI as well as rechargeable batteries. Samsung Electro-Mechanics develops
and produces key electronics parts and components like chips, circuit boards, mobile
communication components and computer components. Glass, coating, ceramic and
optical materials for electronics products are provided by Samsung Corning. Samsung
SDS supports Samsung Electronics with consulting, system integration, and software
development.126
125
126
KIM/HOSKISSON/TIHANYI/HONG (2004), p.15.
Interview No. 15.
The Influence Factors of Dynamic Capabilities
72
The in-house development of core components, together with these intra-group
connections, is seen as crucial factor for the combination of technologies. This
combination possibilities speed up the resourcing phase of the new product
development of LG Electronics and Samsung Electronics.
7.4 Related Diversification
The engagement in certain related electronics areas like mobile phones, computing,
and home appliances can be interpreted as related diversification. This diversification
could be identified as another structural factor that positively influences the innovation
speed of the two companies.127 The cross-fertilization of different technologies and
know-how from the different divisions leads to new innovative components and
products. Particularly with the anticipated convergence of technologies, a related
diversification seems to become even more beneficial. EDWARDS/MOON/ENGARDIO
(2003) give an example for this structure: The handset is the main product of Samsung
Electronics’ telecom division. The cell phones’ chips come from the semiconductor
division, and the display is developed with know-how from the digital media division.
The mobile phone itself is a key component for the digital appliances division, serving
as a command centre for networked home appliances like refrigerators, washing
machines and microwave ovens.
Michael Ahn, a top manager of LG Electronics’ US operations, also points out the
importance of cross-fertilization due to related diversification: “The synergies are
more important in areas of convergence and networking. LG is in a much better
position to bring those types of product to market because we have several
technologies in-house, including computing, consumer electronics, mobile phones, and
appliances.”128 And regarding their competitive advantage LG Electronics’ Chief
Technology Officer notes: “LG is very strong in traditional electronics sales, and we
have the ability to combine all these different electronics areas through home
networks.”129 According to LG Electronics’ former CEO, John Koo, the merger
127
Interviews No. 03, 08, 14, 20, 28.
See WOLF (2004).
129
See TARR (2004), p.12.
128
The Influence Factors of Dynamic Capabilities
73
between LG Electronics and LG Information & Communications had as its objective
to create a structure that would enable the company “to flexibly respond to market
changes resulting from the integration of the electronics and information and
communications industries.”130
Mr. Hirlinger, a member of Samsung Electronics’ Board of Directors, stated during his
interview with the author that he sees the related diversification as essential for the
company’s speed of new product development and thus, its competitive advantage.131
He emphasizes the generated synergies as crucial for a faster creation of innovations.
In an interview with German magazine Der Spiegel, Choi, Gee-Sung of Samsung
Electronics’ top management noted that due to convergence of technologies, his
company is in a favorable position, because they have knowledge in diverse areas like
computer technology or consumer electronics, whereas competitors are mainly
specialized in one area.132 The merger of Samsung Electronics and Samsung
Semiconductor and Communications in 1988 indeed served as a first step toward the
convergence of systems and technology.133
With the anticipated convergence of technologies in the field of electronics, the
accelerating impact of related diversification on the innovation process may even
increase further, thus sustaining innovation speed as a basis of Samsung Electronics’
and LG Electronics’ competitive advantage in the future.134
7.5 Suppliers
In the speed of an innovation project, the speed of suppliers can become a crucial
bottleneck. When a company implements an innovation, not only do the company’s
systems and processes have to be adjusted, but also the systems and processes of its
suppliers, those who are providing the materials, the components, the tooling or
services for the new product. The knowledge exchange with suppliers can also be an
130
See LG Electronics Corporate Brochure, CEO’s message, p.8. Obtained from www.lge.com.
Interview No. 08.
See KERBUSK (2004).
133
See YU (1999), p.60.
134
Interview No. 30.
131
132
The Influence Factors of Dynamic Capabilities
74
important source for innovations and can result in a strong integration of the supplier
into the innovation process. Thus, the influence of the supplier network on the
innovation speed of a company is significant.
Suppliers with little negotiation power and dependence on Korean electronics
companies as clients are another mentioned influence factor for the focal companies’
innovation speed.135 This often monopson-like situation can put a certain pressure on
the suppliers to increase flexibility.
For LG Electronics especially, the resulting speed of the suppliers’ tooling, estimated
as 40% faster than for its competitors, is seen as an advantage for the new product
development process.136 The suppliers are highly integrated into the value adding
processes of the company and consequently are situated close to the factories or even
within the plants by shop-in-shop solutions. The suppliers are supported and trained by
special consulting teams of LG Electronics and provided with the necessary systems
for a smooth flow of information.
The influence of the supplier network also applies to Samsung Electronics. Suppliers
are made a ‘member of the company’.137 It is seen as a privilege, and the suppliers
benefit from the reputation from being a partner of Samsung Electronics. To maintain
this privilege, the suppliers endure high pressure to fulfill the needs of their client in a
timely fashion. On the other hand, delays by the suppliers incur penalties, like the
publication of bad results on the factory floors of Samsung Electronics due to
unsatisfactory performance.138 The emphasis on innovation speed is consequently
transferred to the supplier network and, when necessary, they are taught how to
become faster.139 One employee of Samsung stated that “The speed of our suppliers
and the interface between them and us is critical for our ability to speed up the new
product development.”140
135
Interview No. 17 and PREISSNER (2003).
Interviews No. 01, 02.
Interviews No. 20, 27.
138
Interview No. 15.
139
Interview No. 27.
140
Interview No. 30.
136
137
The Influence Factors of Dynamic Capabilities
75
7.6 Modularization
An electronics product is made of discrete components that produce the desired
functionality when they are combined and work together. Modularization means to
design components of a product in such a way that the components can be treated
independently.
characteristics:
Modular
components
or
‘modules’
have
certain
definite
141
• Modules are co-operative subsystems that combine to a product, manufacturing
system, business, etc.
• Modules have their main functional interactions within rather than between
modules.
• Modules have one or more well-defined functions that can be tested in isolation
from the complete system.
• Modules are independent and self-contained and may be combined and
configured with similar units to achieve a different overall outcome.
A modular design allows for changing a certain module without affecting the design of
other components of the product. Thus, an innovation can be introduced by adding
innovative features to one component with little or no changes to the rest of the
product. The resourcing phase and the implementation phase of the innovation process
are thus critical when a product with modular components is designed. In the
resourcing phase, new and existing knowledge is combined. When using modular
components, the need for new knowledge or technologies is reduced, since some
modules may be reused unchanged. The existing knowledge about these components
can be re-employed and leveraged for future innovations. In the implementation phase,
the design of the product includes the interface between the modules, which is
important for the independent usability of the modules. Their structure and systems do
not have to be adjusted for a whole new product, but rather only for the new modules.
As a result, the introduction, especially of incremental innovations, can be accelerated,
141
Adopted from IPPS Modularity Page, http://www.lboro.ac.uk/departments/mm/research/productrealisation/res_int/ipps/mod1.htm
The Influence Factors of Dynamic Capabilities
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since a modular design reduces the complexity of the resourcing and implementing
phase of the innovation process.142 The time needed for the tooling for a new
production line, the tooling for suppliers, and the time for product tests can thus be
reduced. The main differences between modular design and conventional product
design are summarized in the following table.
Design
Development
Conventional product
design
Desired functionality is decomposed into
components, but component interfaces are
not specified in details.
Component development and product design coevolve in a reiterative process. Product
architecture is defined by the final product design,
i.e., as the output of the development process.
Modular Product
design
Modular product architecture fully specifies
component interfaces and constrains
subsequent component development.
Component development processes are
concurrent, autonomous, and distributed. Product
architecture defined at design stage does not
change during development.
Table 5: Comparison of Modular to Conventional Product Design. Adapted from:
HUANG (2000).
According to the informants, Samsung Electronics makes heavy use of modular design
of components to save time for the introduction of new products. One example given
by an interviewee for Samsung Electronics was the introduction of a new generation of
washing machines. First, the development team considered using 8bit electronics for
the more expensive high-end new generation washing machines and simpler 4bit
electronics for the low-priced model.143 However, after realizing how much time could
be saved, the team decided to use modular 8bit electronics for all the models. This
decision resulted in a complexity reduction that led to faster product development of
the washing machine models.
Also at LG Electronics the benefits of modularity are emphasized. One manager stated
that “modular components are of essential value for innovation speed, because they are
known and no new processes, tools or tests are necessary.”144 The philosophy of CEO
Kim with respect to modular architecture of products was obvious from the following:
142
See BALACHANDRA (2002), p.7.
Interview No. 02.
144
Interview No. 20.
143
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77
“The first principle of innovation is applying the idea of ‘eating hand-rolled cooked
rice.’ It is comparable to consuming a meal by eating hand-rolled rice one at a time,
rather than setting a sumptuous table and enjoying the meal leisurely. If one function,
thus far, required five components, we must now think about how to integrate all five
into one component.”145 LG Electronics made use of modularization of components
e.g. with the in-house developed linear compressor for improved energy efficiency.
The linear compressor was designed in a way so that it can be used for refrigerators
and air conditioners with minimal changes of the rest of the product.146 In addition to a
faster introduction of new refrigerator and air conditioner models, the realized
economies of scale led to lower production costs.
7.7 Concurrent Engineering
In the traditional new product development process, the product idea is generated and
then transferred to a design team, which converts the original concept into a product
with physical dimensions, performance information, and possibly specified material
for different components. Once the design is agreed upon, a first prototype of the
product is developed. The appropriate production process has to be engineered.
Finally, manufacturing starts the production.
Concurrent engineering is a business strategy, that replaces this sequential new product
development process by a process with parallel phases. Figure 10 depicts the new
product development process comparing sequential to concurrent engineering. The
process as presented in Figure 10 is a fraction of the innovation process sketched out
in Figure 6 and corresponds to the implementation phase of the innovation process.
145
146
See 10 Innovation Keywords of S.S. Kim, obtained from www.kimssangsu.com.
Interview No. 23.
The Influence Factors of Dynamic Capabilities
78
Figure 10: Sequential and Parallel New Product Development Process; Source:
Concurrent Engineering and Agile Manufacturing Research Laboratory.147
Accordingly, concurrent engineering becomes particularly beneficial, when the
concept is generated, the product design is agreed upon in detail, a prototype is
developed, and finally turned into reality. The implementation phase of the innovation
process permits the biggest potential for the parallelization of sub-phases. Crucial for
this parallelization is the unbalanced distribution of activity during a specific phase.
Except for the concept generation, the activity level increases at the end of each phase,
so that each phase can start earlier, but with little activity in the beginning.
Especially the modular design of components raises the potential for concurrent
engineering.148 Modules of a new product can be designed and developed
independently from each other, which allows for parallelization instead of sequentially
developing the components.
Concurrent engineering may reduce the number of design changes by the sharing of
information between engineering and manufacturing, but more importantly, the
147
148
Obtained from http://hyperserver.engrg.uwo.ca/ceamrl/Publications/1996/96_03/team.htm.
See BALACHANDRA (2002), p.7.
The Influence Factors of Dynamic Capabilities
79
changes will occur earlier in the product development process as illustrated in Figure
11. The information flows between the different phases and the involved teams are
crucial for time saving, since “Time-to-market, with its inherent product and process
design, is a function of the speed of information.”149
Concurrent
Engineering
Production
Design Changes
Sequential
0
Time
Figure 11: Comparison of Concurrent Engineering to Sequential Process; Source:
VESEY (1991: 30).
As indicated by the interviewees, concurrent engineering (CE), i.e. the parallelization
of phases of the development process, is a strategy that is employed both at Samsung
Electronics and LG Electronics to speed up the innovation process.150
One interviewee from LG Electronics explained that the information exchange
between the different departments is crucial for the parallelization of phases. “When
the next phase shall start earlier, the team needs also early information. Otherwise they
cannot start.”151 One way to support this early information exchange is the use of
cross-functional teams, i.e. teams with members from different functional areas. One
149
See VESEY (1991), p.30.
Interviews No. 02, 09.
151
Interview No. 23.
150
The Influence Factors of Dynamic Capabilities
80
interviewee said that Samsung Electronics was able to reduce the time needed for
implementing a new product into production by 50% with concurrent engineering.152
In addition, the development team achieved a substantial improvement of product
quality. The main challenge was to convert a very hierarchical organization into teams.
The role of cross-functional teams as an accelerator for the innovation process is
described separately in the next chapter.
7.8 Influence of Mentality
Certain characteristics of the working morale of Korean employees represent a critical
foundation for innovation speed of Korean electronics companies. In addition, the
focal companies introduced different systems that leverage these characteristics and
further strengthen the speed orientation of their employees. Thus, the influences of the
Korean mentality presented here are linked to the corresponding programs and systems
implemented by the firms, which intensify the mentality’s accelerating influence on
the innovation process.
Sociologists found certain phenomena of the Korean mentality that influence their
time-related beliefs and behaviors and create a certain speed-orientation of these
people. The word most frequently spoken by Koreans is ‘bali bali’, what means
‘hurry-up’.153 That the speed of the innovation process is based on these characteristics
of Korean employees was the most frequently mentioned answer given by the
interviewees. However, the behavior of the management also plays a crucial role in an
interplay with the working habits of the employees. The special cultural background of
Korean employees creates a mentality that impresses foreign managers as well as
academics. “They don’t know inertia.” was one statement used to describe the working
morale of Koreans.154 The companies are aware of this behavior and implement certain
means to optimize this speed-orientation in a beneficial sense to reach the company
goals. A Human Resources Manager from Samsung Electronics admitted that a certain
152
Interview No. 02.
See KIM (1997), p.71.
154
Interview No. 13.
153
The Influence Factors of Dynamic Capabilities
81
sense of urgency is cultivated within the company.155 The fulfillment of a task before
the deadline is, on the other hand, one of the most important factors for the evaluation
of an employee. Not only employees, but also managers, exhibit this work enthusiasm.
S.H. Kim, the President and Executive Director of LG Electronics’ Air conditioning
Business Unit from 1991-1994, is said to have appeared in his office 362 days a
year.156 LG Electronics prior CEO, John Koo, speeded discussions and decisions by
having no chairs for visitors in his office to remind everybody that there is no time for
lengthy discussions.
Especially expatriates and managers who have already worked in Korea or negotiated
with Korean business partners are impressed by their work enthusiasm, militaristic
discipline, loyalty of Korean employees toward their companies, and an absolute
commitment to fulfill their objectives.157 One German interview partner stated that
“Koreans would die to reach their goals.”158
Often, Koreans cannot fully explain this phenomenon although they are aware of their
behavior. They admit that employees try very hard to reach their goals.159 The reason
that interviewed Korean employees did not stress this point too much is probably due
to the avoidance of self-praise-like statements. Sociologists have researched the
reasons behind this phenomenon and found explanations, which are here briefly
described and enriched with statements from interviews. In the subsequent sections of
this chapter, this mentality as a source of the analyzed dynamic capability and the
explanations given from informants and found in the literature are described. In
addition, the programs and systems implemented by the focal companies are sketched
out in connection with the relevant social-cultural phenomena.
155
Interview No. 11.
See LEE (2000), p.34.
Interviews No. 06, 11, 35, 36 and PREISSNER (2003).
158
Interview No. 39.
159
Interview No. 18.
156
157
The Influence Factors of Dynamic Capabilities
82
7.8.1 Confucianism and Teamwork
Confucianism represents the dominant social and political ethics in Korea; it
emphasizes behavior standards in interpersonal relations. The basic principles include
five relationships:
• father and son,
• superior and subordinate,
• husband and wife,
• older and younger,
• friend and friend.
Except for the last relationship, all others are based on differentiating and
subordination and form a strong social hierarchy.160 Three key rules include:
• Learn to be a son by reverence and respect toward the father.
• Learn to be a subject by having loyalty toward the king.
• Learn to be a friend by trust.
These principles strongly influence the daily life and the work ethics of Koreans as
well as their management style.161 The management practices that are based on
Confucian principles are believed to have contributed to the success of many
companies from East Asian countries including Taiwan, Singapore, and Korea.162
According to Confucian rules, the boss is seen as a benevolent father, who leads the
‘family’ (e.g. the department) with authority. The management style of Korean
superiors is often called ‘benevolent authoritarianism’. A Korean superior is also
characterized by active interest in the private and family life of the employees, e.g. by
participation in funerals or birthday celebrations, whereas the employees show full
respect and strict obedience toward their boss. This view of obedience leads also to an
absolute execution of instructions and acceptance of decisions. The superior is also
160
See HONG (1997), pp.52-53 and KANG (1993), p.104.
Among others: Interviews No. 10, 37.
162
See SANER-YUI/SANER-YUI (1984), p.28.
161
The Influence Factors of Dynamic Capabilities
83
responsible for the professional development of employees, especially by sending
them to corporate training.
The company takes the role of a family clan. A person is measured according to what
extent he or she works toward the goal of the group. Successes are seen as group
achievement. Therefore, the maxim of a Korean is to generate the highest contribution
to this group relationship. Family-like harmony between the coworkers is supported by
many common socializing activities.163 At the headquarters of LG Electronics, the
company sponsors a monthly get-together for all employees, including a free flow of
beer. Hiking trips to the mountains in the surrounding area of Seoul are very popular
outings for LG Electronics and Samsung Electronics, intensifying the group harmony
of the companies. A strict separation of work and private life as occurs in Western
cultures is not common in Korea. The circle of friends consists usually of colleagues.
An American employee working for Samsung Electronics described this relationship
as a close-knit group or even a family of workers.164
The unveiled corporate management philosophy of LG Electronics called the ‘LG
Way’ is based on Confucianism (SMITH, 2005). LG Electronics’ CEO Kim emphasizes
collectivism stating that “In Korea, where Confucian ideas are prevalent, family ties,
priority of community or group over the individual, enthusiasm for education and
diligence are prioritized. I firmly believe in the priority of the whole over individuals,
which lays an emphasis on ‘we,’ not ‘I.’”165
Regarding innovation speed, the group orientation provoked by Confucian principles
is leveraged by the frequent use of cross-functional teamwork. A cross-functional team
is composed of at least three members from diverse functional entities, like
engineering and marketing, working together towards a common goal.166 An
innovation project requires input from several functional areas; therefore group
collaboration with multi-disciplinary knowledge is crucial. The early integration of
market know-how from marketing experts, for example, raises the possibility of
163
See BORSTNAR (1999), pp.110-111.
Interview No. 11.
165
See CHOONG (2004).
166
See Berkeley Expert Systems Technology, http://best.me.berkeley.edu/.
164
The Influence Factors of Dynamic Capabilities
84
innovation market success. A cross-functional team usually stays together for the
whole innovation process, blending and aligning the different functional perspectives,
what increases the innovation speed. A study found that the development time for new
products decreased by 30%-50% by using cross-functional teams.167
At LG Electronics cross-functional teams for new product development are a part of
the Tear-down & Redesign (TDR) program. TDR teams work on a project basis in a
TDR room, and every employee of the company can be part of a TDR team.
Innovations, market entries, or process re-engineering are examples of TDR projects.
Team members have to stay in the TDR rooms until the problems concerned are
resolved, which often leads to overnight and week-end work. Thus, the TDR room was
called then ‘Room of Tears’ when the program was introduced. LG Electronics has
organized over 1,000 TDR teams to date. According to CEO Kim “The TDR tool has
now become the company's No. 1 in-house innovation course, the most sought-after
course among employees.” A typical development team at LG Electronics consists of
10 employees from R&D, quality, manufacturing, marketing, design, purchasing,
electronic engineering, mechanical engineering, and process-engineering departments.
The teams mostly work on different innovation projects in parallel.
Although the strong hierarchical principles of Confucianism seem to contradict
successful teamwork, induced striving for group harmony knits employees from
different functions and departments together. The higher working morale, together
with the strict obedience encouraged by Confucianism, results in a strong will to work
harder and longer. With these preconditions, Korean cross-functional teams may be
more efficient than teams from other cultural backgrounds. At least, the positive
effects on the speed of innovation projects become evident.
7.8.2 HAN Psyche and Public Praise/ Criticism
General thinking and acting is also affected by a strong feeling of frustration and the
tenacity to endure hardship called the HAN psyche, which was formed over centuries
and particularly due to the invasions and the reign of foreign powers, especially the
167
See WILLIS/JURKUS (2001), pp.25-26.
The Influence Factors of Dynamic Capabilities
85
Japanese and the associated chronic poverty of Korea.168 This HAN psyche can
provoke profound emotional reactions and lead to a ‘we versus them’ attitude, often
resulting in an increased eagerness to work. Additionally, Koreans are generally
considered hotheads in Asia with a certain potential for aggression, which is contrary
to the behavior Japanese are known for. The national pride of Koreans intensifies the
effect of the HAN psyche. The will to bring one’s own country economically forward
is a tremendous source of intrinsic motivation in South Korea. Combined with this
motivation, the HAN psyche also includes a certain catch-up mentality. According to
the interview with Lee, S.-J., Professor of Strategy at the KDI School in Seoul and
former consultant and Director of Research at McKinsey, the Japanese dominance in
the
electronics
industry
particularly
fueled
this
catch-up
mentality.169
NAKARMI/KELLY/ARMSTRONG (1995) support this catch-up mentality by stating
“What drives Samsung, as it does all Koreans, is an obsession with beating Japan.”
This obsession induces the employees and managers of Korean electronics companies
to accept long working hours: “Because they are outgunned in money and technology,
the Koreans figure the only way they can win the battle is through sheer determination,
working late into the night while the Japanese sing karaoke.”170
One example is the shift from analogous to digital technology in the electronics
industry. LG Electronics and Samsung Electronics saw this transformation as an
opportunity to beat Japanese competitors, who always used to be ahead in that
technology in the past. Samsung Electronics declared the year 2000 as Samsung’s
initial year of digital management with the objective of becoming the winner of the
digital era in the 21st century. By thorough scanning and identification of digital
innovation potentials and an absolute determination of employees and managers, the
company succeeded in becoming the technology leader in numerous markets for
digital products. Samsung Electronics’ CEO Yun underlines the importance of
innovation speed for the digital age: ”In the analog era, it was difficult for a latecomer
168
See for example PHAU/CHAN (2003), pp. 159-160.
The LG Group is one of McKinsey’s biggest clients in Korea.
170
See NAKARMI/GROSS/HOF (1992).
169
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86
to catch up. But in the digital era, if you are two months late, you're dead. So speed
and intelligence are what matter.”171
At LG Electronics, the HAN psyche led to a similar dedication to the digital era. John
Koo, LG Electronics’ CEO at that time, stated, that “Back in 1999, LG Electronics
unveiled a new vision known as ‘Digital LG.’ This vision represents our ambition to
be a leader in the digital era. And we will do whatever it takes to become ‘Digital
LG.’”172 Having become an innovation leader in many digital technologies, LG
Electronics’ Chief Technology Officer Woo Hyun Paik describes this achievement as
follows: “With the goal of becoming a Global Top Leader of the 21st century's digital
age, LG Electronics has been focusing our resources and capabilities in the area of
R&D from early on to create a digital world that enriches and empowers people. Our
efforts are now bearing fruits by allowing us to secure core digital technologies and
realizing innovation in product development and digital R&D.”
The dedication to the digital era in order to beat the Japanese competitors is also
expressed by the corporate identity of the companies by emphasizing ‘digital’, for
example, in their company mottos: LG Electronics combines its name with “digitally
yours”. Samsung Electronics created the appendix “DIGITall”. Their impressive
success with digital products is to a large degree attributed to the commitment of both
companies and the will to be ahead of Japanese competitors, which in turn is based on
the HAN psyche.
The intense will to excel in all aspects of life to win approval from superiors is also a
result of the HAN psyche.173 Therefore, performance appraisals are a very important
part of Korean management practices.174 Due to the HAN psyche, the superior’s praise
for or criticism of an employee’s work has an enormous emotional effect. Rankings of
employees’ performance and rating scales are popular methods of appraisal that help
motivate employees to work faster, which helps to accelerate processes like
manufacturing or new product development.
171
See EDWARDS/MOON/ENGARDIO (2003).
See LG Electronics Corporate Brochure, CEO’s message, p.8. Obtained from www.lge.com.
173
See KIM (1997), p.70.
174
See SANER-YUI/SANER-YUI (1984), p.28.
172
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87
LG Electronics introduced so-called standing ceremonies where all employees and top
management gather outside their offices and stand quietly together to show their
respect for the performances of the top employees.175 This appreciation of the
employees’ work fuels the HAN psyche as a crucial emotional motivator.
On Samsung Electronics’ factory floors it can be observed that the slowest working
team receives the banner ‘worst line’.176 This humiliation is a strong emotional
motivator for the teams, who will eventually try their hardest to get rid of the banner.
Using this method Samsung Electronics realized huge productivity gains, since their
employees accomplished more and more work in a shorter time. This method also
reduced the time for innovation projects of Samsung Electronics’ development
teams.177
Thus, the HAN psyche, together with public praise or criticism of performance, is a
pillar of the speed-orientation of employees at the focal firms.
7.8.3 Can-Do-Spirit and Stretch Goals
The fast and successful economic development of the last few decades developed a
‘can-do-spirit’ in the Koreans, which is often interpreted as a fighter attitude, warrior
mentality, or even arrogance.178 Koreans believe they are able to achieve anything,
which often results in unrealistically high targets and ‘all-or-nothing’ strategies.179 The
IMF crisis in 1997 was, therefore, regarded as national humiliation and as a loss of
face for all Koreans. In order to master this crisis, the Koreans donated large parts of
their private gold and jewellery. Samsung’s Chairman Lee donated US $ 70 mio of his
private wealth to save the company. The amazing speed of the recovery of the country
after the economic crisis strengthened this ‘can-do-spirit’ even further (compare to
Section 5.1.4).
175
Interview No. 18.
See PREISSNER (2003).
177
Interview No. 02.
178
Interviews No. 09, 34, 37 and BORSTNAR (1999), p.113.
179
Interview No. 24.
176
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According to a manager of LG Electronics, the company is leveraging the can-dospirit of employees by using stretch goals. For the development of a new product, for
example, the base goal is nine months. The stretch goal is six months, which is almost
impossible to achieve. Nevertheless, the development team will do everything it can to
come as close as possible to the stretch goal.180 CEO Kim emphasizes this attitude for
innovation by stating “If a goal is given, some people may think that it is impossible to
achieve, even before they are ready to do so. Such negative attitude will not achieve
success. Negative thinking is a fatal enemy of innovation.”181 Therefore, he relies on
setting high goals, such as Global Top 3 by 2010, motivating himself and his
employees by creating a corporate culture that continuously creates higher goals.182
Samsung Electronics ‘emergency mode’ is another example of the leverage of the cando-spirit to speed up the innovation process. This mode is used to accumulate
knowledge in a very short time for innovation. For example, a team of Samsung
Electronics’ semiconductor business had the task to develop a working production
system for 64K-DRAM chips within six month.183 The so-called ‘emergency mode’
comprised working around-the-clock and living together in the laboratories. A team
leader of the project revealed: “I was so immersed in working on 64K DRAM that I
stopped smoking and drinking. I hardly slept any more than three or four hours a day
for six months.”184 LG Electronics’ experience with the development of its first color
television has been similar.185 This emergency mode is only feasible due to the can-dospirit of team members and the resulting commitment to fulfil tasks and reach goals.
Another factor used by the focal companies to leverage the can-do-spirit of employees
is the incentive systems for the fast development of new products.186 Development
teams are rewarded for speed by different means. Besides financial incentives, the
recognition of successful development projects by top management is a strong
motivator for innovation speed. This recognition ranges from the simple
180
Interview No. 18.
See 10 Innovation Keywords of S.S. Kim, obtained from www.kimssangsu.com.
See CHOONG (2004).
183
See SHIN (1998), p.5.
184
See KIM (1997), p.155.
185
See KIM (1997), p.136.
181
182
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89
communication of good results throughout the company to the official nomination of
development teams for certain innovation prizes, which are not necessarily always
linked with financial incentives.
Financial incentives motivate engineers at LG Electronics and reward them for fast
implementation of an innovation project. LG Electronics’ CTO emphasizes the
importance of their incentive system: “LGE has also ensured that outstanding R&D
results are recognized by responding strong compensation in order to motivate its
researchers to do their best in their respective projects.” One example is the 1997
introduced TL2005 Project, with TL standing for Technology-Leadership. Part of this
project that aims at cultivating an innovation speed-oriented culture is the ‘Digital
Incentive program’, which is a performance-based compensation system where
employees who show strong performance are awarded with 500,000 won to 100
million won. ‘Strong performance’ means minimizing the time needed during the
implementing phase.
A Human Resource Manager at Samsung Electronics noted that also for their
company, speed is the most important performance measure of an innovation project,
which is underlined by a speed-oriented incentive system that rewards development
teams that finish a project within or before the deadline.187
The Korean can-do-spirit also has an influence on the decision-making of Korean
managers. Decisions on innovation projects and their resulting prioritization are
mainly based on criteria like market success, especially with regard to exporting to
overseas markets and the potential of becoming one of the top global players in that
market. As one example it was brought up that division managers at Samsung
Electronics are asked to choose two to three strategic products where the company can
become No.1 in the world market.188 LG Electronics distinguishes between ‘must-win’
businesses and ‘high priority businesses’. This prioritization steers the commitment of
employees according to the relative importance of an innovation project. For
prioritization of innovation projects, a strong emphasis is placed on the upside
186
187
Interview No. 03.
Interview No. 11.
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90
potential of an innovation. This emphasis is supported by HITT/DACIN/TYLOR/PARK’s
(1997) comparison of strategic decision-making of Korean and American executives.
According to the authors, Korean managers emphasize industry attractiveness, sales,
and market share because of their growth-oriented policies. This limited risk-aversion
is supportive of an innovation-oriented strategy and helps to accelerate the innovation
process since the time allocated for analysis and weighing of pros and cons is shorter
compared to those for competitors. However, the strong emphasis put on the upside
potential of an innovation bears also disadvantages. Interview partners mentioned that
the fast decision of which innovations to commit to in the future, is made at the
expense of a thorough risk-analysis of the options. A manager of Samsung Electronics
admitted that the analysis may not be as detailed as in Japanese companies, but that
this process is often an advantage, since Korean companies have already acted, when
the Japanese competitors are still analyzing.189 YU (1999) confirms that Samsung
Electronics gained dominance in many industries by making decisions on product
development and technology far ahead of competitors and implementing the
innovation projects very quickly.190 This success can be, at least partly, attributed to
the can-do-spirit. When a manager is convinced that he and his employees can reach a
certain goal, the analysis and the weighing of pros and cons for decision-making
become less important.
To sum up, all these socio-cultural phenomena form an overall base for a speedorientation of the Korean society and are an important source for speed in the daily
work effort in Korean companies. The increased motivation and working morale based
on the principles of Confucianism, the HAN psyche, and the can-do-spirit represent
crucial influence factors of the innovation speed as dynamic capability. The companies
in the case study exhibit certain programs and systems that take the special cultural
background of Koreans and its inherent benefits into account.
Nevertheless, interviewees also admitted that Confucianism, the HAN psyche, and the
can-do-spirit belong more to the older generation of Koreans. The attitude of the
188
189
Interview No. 15.
Interview No. 16.
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91
younger generations is steadily changing and developing more and more toward
Western principles.191 Younger Koreans, often educated abroad, are not willing
anymore to dedicate their lives to their companies. Therefore, the selection and
training of people becomes important for LG Electronics and Samsung Electronics, so
that the Korean traditional principles remain strong in the heads of the employees and
in the culture of the companies.192 Maybe it is only a question of time in terms of how
long the positive influence of the Korean mentality reagarding innovation speed can
prevail.
190
See YU (1999), pp.65-66.
See KIM (1997), p.78.
192
Interview No. 17.
191
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8 Discussion
This thesis aims at improving the understanding of the factors influencing the
development of dynamic capabilities from a holistic perspective. By undertaking indepth studies of two Korean electronics companies, innovation speed or the ability to
innovate faster than the competition, could be identified as a source of the companies’
competitive advantage. The succeeding analysis of the influence factors of innovation
speed revealed the complexity of the relationships. In this part of the thesis, the
findings of the research are discussed and compared to existing literature and theories,
either conflicting or similar. First, the identified factors that influence the innovation
speed of the focal companies are categorized and compared to empirical findings of
other researchers, which either support or contradict the findings of this thesis. This
approach, as suggested by EISENHARDT (1989) for building theories from case study
research, helps to enhance the internal validity and the generalizability of the findings.
Second, ‘innovation speed’ as a dynamic capability is further discussed, concretized,
and conceptualized by reviewing extant literature about this construct. The suitability
of innovation speed as dynamic capability is validated by the congruence of the
construct with the constituents of a dynamic capability and its potential to generate a
competitive advantage as suggested by other researchers. Third, the findings for
innovation speed are expanded to dynamic capabilities in general. Subsequently,
insights about the influence managers have on the development of dynamic
capabilities and about the idiosyncrasy of them are inferred. The insights of the
emerging theory are presented by several propositions and lead to the development of
a framework that provides comprehensive guidance for practitioners and academics
with respect to the origin and development of dynamic capabilities.
8.1 The Influence Factors of Innovation Speed
The holistic presentation of the main factors that influence the innovation speed of the
investigated companies clearly shows the multi-causality of aspects with numerous
influence factors on different levels. Thus, it would be too simplistic to limit the
emergence of innovation speed to a single factor. Rather, innovation speed is a product
The Influence Factors of Dynamic Capabilities
93
of a complex system of different influences, which can be interrelated and mutually
enforcing.
The inductive approach of this thesis, i.e., employing the case studies of Samsung
Electronics and LG Electronics, led from a holistic viewpoint to the identification of
factors that have a major influence on innovation speed. Close cooperation of the
electronics industry with governmental and academic research institutions resulted in a
coordinated development approach for radical innovations like new technologies. By
the sharing of tasks and know-how, the innovation process could be accelerated in a
way that would be difficult for companies to achieve without this collaboration. In
addition, the rivalry between the two companies made them increasingly competitive
in terms of innovation speed, since they always tried to introduce an innovation faster
than their rival, which sharpened the general awareness of innovation speed and the
openness to creative solutions to accelerate the innovation process. The immediate
testing possibility in the home market is another factor that accelerates the introduction
and the rollout of a new product. The vertical integration of the two focal companies
results in a huge in-house technology base, which accelerates the combination of
knowledge for an innovation and reduces coordination and monitoring efforts with
external partners. The related diversification and the supplier network complement this
structure. The innovation process itself is speeded up by concurrent instead of
sequential engineering. The use of modular components simplifies the process since
certain phases can be shortened or skipped. The special mentality of the Koreans was
found to lay a solid ground for innovation speed. By certain means and systems, the
focal companies directed and leveraged this mentality to accelerate the innovation
process.
The similarity of influence factors for both companies is a special case since both
companies emerged in the same context and exhibited an identical development. This
similarity not only raises the external validity of the findings, but also indicates the
importance of the similarity of influence factors for the development of similar sources
of a competitive advantage.
The Influence Factors of Dynamic Capabilities
94
If one tries to group the influence factors according to their origin, it seems necessary
to define mutually exclusive domains. A split into best practices, structure, and context
is suggested here. Best practices, as described earlier, are systems and strategies that
directly influence innovation speed by determining how the innovation process is
executed. A best practice is a generally accepted as the ‘best way of doing a thing’.
One definition suggests that “A best practice is formulated after the study of specific
business or organizational case studies to determine the most broadly effective and
efficient means of organizing a system or performing a function. The idea behind best
practices is to create a specification for what the best methodology is for any given
situation.”193 These best practices are based on and propagated by academic studies or
practical experiences already codified in management books. In the course of the
study,
concurrent
engineering,
modularization
of
components
and
certain
arrangements like cross-functional teams could be identified as best practices to speedup the new product development of the focal companies. Not necessarily, every
implemented best practice nurtures a dynamic capability. The implementation of best
practices is crucial for every process of an organization in order to keep up with its
competitors or even beat them in certain disciplines due to superior implementation of
certain best practices.
Whereas the identified best practices directly influence the innovation speed of the
focal companies, the development of this capability is enhanced or restricted by the
firm’s structure. The structure is defined as how the parts relate to each other or how a
company is ‘put together’. This definition includes the firm’s internal and external
linkages and contrasts with process, which requires a viable structure to be
executed.194 Whereas best practices influence the process, structural factors build the
frame in which the capabilities then can evolve. This frame can be enhancing or
restraining. As it was shown in the study, the vertical integration and the related
diversification of the companies positively influenced their innovation speed. External
linkages are here seen as part of the structure as well. Even though these aspects lie
rather outside the organizations, they are crucial determinants of the firm’s overall
193
Definition found in Wikipedia – The Free Encyclopedia, http://en.wikipedia.org/wiki/Best_practices.
The Influence Factors of Dynamic Capabilities
95
organizational architecture. As the case studies revealed, the integration of suppliers,
the conglomerate network, and collaboration with government and universities are also
enablers of innovation speed.
The remaining influence factors, i.e. factors that do not affect the development of
innovation speed directly and do not belong to the structure, are attributed to context.
Context is used here as the entirety of the conditions in which a company exists and
includes all factors that are path-dependent, such as the rivalry between the companies
and country-or industry-specific factors, like the Korea-specific mentality of
employees. These factors support the development of innovation speed, but have no
direct accelerating influence. They can be seen as enhancing conditions of the setting –
but not of the company itself like structural factors- and constitute the frame in which
innovation speed emerges.
It is important to note that the split into best practices, structure and context results in
mutually
exclusive
categories,
but
does
not
exclude
the
possibility
of
interdependencies and interconnections among influence factors. For example a certain
best practice may be performed better due to a supporting structure of the organization
or the special mentality of employees. Figure 14 illustrates the described
categorization of the identified influence factors in contextual and structural factors
and best practices.
194
Definition found in Wikipedia – The Free Encyclopedia, http://en.wikipedia.org/wiki/Structure.
The Influence Factors of Dynamic Capabilities
96
Contextual Factors
Structural Factors
Home Market
Supplier Network
Vertical Integration
Best Practices
Modularization
Mentality:
Lever:
• Confucianism
• HAN Psyche
• Can-Do-Spirit
Cross-functional teams
Public Praise and Criticism
Stretch Goals,Incentive System
Related
Diversification
Domestic Rivalry
+
Concurrent
Engineering
+
Innovation
Speed
+
Collaboration with
Government and Universities
Figure 12: Identified Influence Factors of Innovation Speed; Source: Author.
Regarding the special capability known as ‘innovation speed’, theoretical
advancements and empirical research about the specific factors that facilitate
innovation speed can hardly be found (KESSLER/CHAKRABARTI, 1996: 1148). In the
following, the existing findings or propositions are compared to the findings of this
thesis as summarized above.
8.1.1 Best Practices
The main body of literature about ‘innovation speed’ deals mainly with best practices.
These are optimal modes of executing a certain process like new product development.
These best practices can influence each other or go hand in hand. For example,
concurrent engineering is easier when components have a modular design and the
development team consists of members from different functional areas. The positive
influence of cross-functional teams, or at least the closer interaction of R&D with
other functions on the speed of new product development seems to be undoubted
(GOLD, 1987; ROSENAU JR., 1988; VESEY, 1991; BROWN/KARAGOZOGLU, 1993;
SONNENBERG, 1993; ZAHRA/ELLOR, 1993; WILLIS/JURKUS, 2001). GUPTA/WILEMON
(1990) argue from the opposite perspective and found that functional groups delay new
The Influence Factors of Dynamic Capabilities
97
product development because they fail to give the project priority and can barely adapt
to the continually changing requirements of an innovation project. Poor inter-group
relations and slow response in general were other arguments against purely functional
teams.
The benefits of cross-functional teams are often discussed in connection with
concurrent engineering as another best practice to accelerate new product
development. Whereas most authors emphasize the advantages of concurrent over
sequential engineering regarding shortened development time (GOLD, 1987; VESEY,
1991;
SONNENBERG,
1993;
ZAHRA/ELLOR,
1993;
WILLIS/JURKUS,
2001),
MCDERMOTT (2000) notes that concurrent engineering is more appropriate to speed up
incremental innovations, not for radical new technologies. ELLIS/CURTIS (1995) could
not find any statistically significant relationship between the use of concurrent
engineering and financial performance, but suggest it as an appropriate means to
reduce development time.
LG Electronics and Samsung Electronics use stretch goals and an appropriate reward
system to raise the speed-orientation of their development teams. Time-related goals
are seen as suitable tools to accelerate new product development, which is also
proposed by other researchers (e.g. MILLSON/RAJ/WILEMON, 1992). VESEY (1991)
suggests time-to-market goals set by top management as key criteria for concurrent
engineering. WILLIS/JURKUS (2001) recommend stretch goals of at least 50%
reduction in cycle time. Interviews with managers revealed that the use of benchmarks
is assumed to speed up the innovation process (BROWN/KARAGOZOGLU, 1993).
Incentive systems that reward employees for risk-taking and time saving are seen as
appropriate technique to create a speed-oriented R&D culture (GOLD, 1987; GUPTA/
WILEMON,
1990;
BROWN/KARAGOZOGLU,
1993;
KESSLER/BIERLY/
GOPALAKRISHNAN, 2000; LANGERAK/ HULTINK, 2005).
Few authors mention the benefits of modular designed components for innovation
speed (BALDWIN/CLARK, 1997). Often modularization is described as a facilitator for
concurrent engineering (e.g. VESEY, 1991; HUANG 2000) or, in a broader sense, as the
reduction of parts what speeds up new product development (MILLSON/RAJ/WILEMON,
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98
1992; LANGERAK/HULTINK, 2005). The lack of literature on modularization as an
accelerator of new product development is probably due to the fact that modular
design has an even higher impact on the costs of the innovation process
(BALACHANDRA, 2002). In addition, the positive impact of a modular design on speed
and costs affects every stage of the product life-cycle and cannot be uniquely
attributed to new product development (ISHII, 1998).
8.1.2 Structural Factors
Whether the vertical integration of a company can enhance innovation speed is
controversially debated. For the innovation process especially, the choice between
external sourcing of technologies or in-house development is of central importance.
The findings of this study contradict the results of authors, advocating the reliance on
external
sources
for
technology
development
(e.g.
GOLD,
1987).
Also,
KESSLER/CHAKRABARTI (1996) suggest that external sourcing increases innovation
speed, since the building of knowledge is a rather lengthy process. Still, they found
that research teams may not be open to external technologies or knowledge and rely on
in-house development. This is also referred to as ‘not-invented-here syndrome’.195 In a
later study of 75 new product development projects of 10 large US firms from
different industries KESSLER/BIERLY/GOPALAKRISHNAN (2000) could not verify this
proposition. They found that internal technology sourcing is superior to external
sourcing for innovation speed.196 They explain that in the early stages of an innovation
project, external learning can become detrimental, since the team members identify
less with the project and show less commitment to the successful completion
compared to internal sourcing right from the beginning. EMMANUELIDES (1991) also
proposes that the transaction speed of vertical integration positively affects the speed
of new product development by reduced coordination and monitoring time, which
supports the finding of this study. In cases where research teams are going to ‘reinvent
the wheel’, external sourcing may be preferential for innovation speed as suggested by
KESSLER/CHAKRABARTI (1996).
The Influence Factors of Dynamic Capabilities
99
The supplier network has been identified as another influence factor that accelerates
the innovation process. The close interaction with suppliers and their integration into
the innovation process, including open information-sharing, co-location of supplier
design personnel, and joint future technology planning reduces coordination efforts
and smoothes the development process. EMMANUELIDES (1991) suggests a close
cooperation with suppliers alternatively to vertical integration to increase innovation
speed. CAMPBELL (1997) found that Thai textile exporters achieved faster innovation
with buyer-supplier networks. Also McDermott (2000) suggests that the effective
integration of suppliers increases the speed of new product development, which is
validated by LANGERAK/HULTINK’s (2005) study of the development speed of 233
manufacturing firms.
The advantages and disadvantages of related diversification are broadly discussed in
academic circles, but rarely with respect to innovation speed. A study of McKinsey
shows for example that moderate diversification led to superior performance in terms
of cumulative excess returns to shareholders compared to focused and diversified
companies.197 Regarding innovation speed, EMMANUELIDES (1991: 345) proposes that
the level of organizational experience in developing similar products or employing
related technologies will be associated with reduced product development time. Since
related diversification is characterized by the use of related technologies, his
suggestion supports the beneficial effect of related diversification on innovation speed.
The collaboration among industry, government and universities has been examined in
the broader context of national innovation, probably because the direct influence of
this cooperation on innovation speed is not so obvious. ETZKOWITZ ET AL. (2000) for
example examine the institutional roles of university, government, and industry and
found that these are in transition. Universities are more and more looking to
commercialize research while companies are looking to provide training and to source
out their research work. Governments are offering incentives for academic institutions
195
See KESSLER/CHAKRABARTI (1996), p.1166.
See KESSLER/BIERLY/GOPALAKRISHNAN (2000), p.221.
197
See HARPER/VIGUERIE (2002).
196
The Influence Factors of Dynamic Capabilities
100
to go beyond performing the traditional functions of education and research and make
a more direct contribution to wealth creation. The authors outline the new
entrepreneurial paradigm of the university regarding technological innovation. It is
conceivable that the relationship of this industry-government-university collaboration
with the innovativeness of a country comprises a positive influence on the innovation
speed of the country in general and the respective companies in particular. A centrally
coordinated development process limits redundancies of the involved parties and
surely enhances the development of technologies. The positive effects on the
innovation speed of companies seem undeniable, but need to be clarified by further
research.
8.1.3 Contextual Factors
The influence of contextual factors emerging from the environment of companies
seems underrepresented within the literature on innovation speed.
The results of the case studies indicate that the rivalry between Samsung Electronics
and LG Electronics heavily influences their speed orientation regarding the
introduction of new products. EMMANUELIDES (1991) assumes that competitive rivalry
leads to a shortening of development time, but does not offer any empirical evidence.
SAKAKIBARA/PORTER (2001) examined the effect of domestic rivalry on international
trade performance. Their results show a positive relationship and indicate a higher
international competitiveness of companies with strong domestic competition. These
results can probably be seen as a proxy to support the findings of this thesis, that
intense rivalry in the home market has a positive influence on innovation speed.
The country-specific beliefs and behaviors of the actors, which were mentioned as an
important factor for the acceleration of the development process of the investigated
companies, is rarely listed as a critical influence on the innovation speed of companies.
VINTON (1992: 8) mentions the importance of recognizing different individual beliefs
and perceptions of time, which are also affected by the national background and
ethnicity of the employees. LEVINE (1988) studied the different paces of life across
different countries, but unfortunately not including South Korea. He measured the
The Influence Factors of Dynamic Capabilities
101
conception of punctuality, walking speed, and work pace. In his six-country
comparison, the Japanese were highest on all measures.198 His studies reveal that huge
cross-national differences in the perception of time do exist. Perhaps the cultural
proximity of South Korea to Japan, combined with the findings of this thesis allow for
the inference that Koreans have a similar perception of time, which results in their
general speed orientation.
Table 6 presents an overview of other authors who have also identified the influence
factors of innovation speed that were discussed above. As the overview shows, other
authors identified additional factors that complement the findings of this research.
Factors like top management commitment (REINERTSEN/SMITH, 1998), the use of IT
(SONNENBERG, 1993), or lead user involvement are important accelerators of new
product development and supposedly also play a crucial role in the innovation speed of
the focal companies, even though they were not identified during the course of this
study. The possible reasons for this gap are assessed in the final discussion of the
limitations and suggestions for further research found in the last section of this thesis.
198
See LEVINE (1988), pp.51-53.
Table 6: Influence Factors of Innovation Speed Suggested by other Researchers; Source: author
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103
8.2 Innovation Speed as Dynamic Capability
After having discussed the influence factors of innovation speed, the link with the
Dynamic Capabilities Approach is imperative to answer the research questions
exhaustively. The capability innovation speed can be identified as a pillar of the focal
companies’ competitive advantage. But is the ability to innovate faster than the
competition a dynamic capability and thus a potential source of a company’s
competitive advantage? A comparison with the constituents of this concept will help to
answer this question and indeed show the congruence of innovation speed and
dynamic capabilities. Since competitive advantage is the core of the dynamic
capabilities concept, the results of other researchers are presented, those who studied
innovation speed as a source of a competitive advantage. Furthermore, the idea of a
hierarchy of capabilities is briefly presented and discussed.
8.2.1 Conceptual Congruence
The congruence of innovation speed with the concept of dynamic capabilities needs to
be evaluated as well. This posteriori comparison allows for theoretical insights by
either supporting the suitability of the Dynamic Capabilities Approach or falsifying it.
Dynamic capabilities are these strategic or organizational routines by which a
company achieves new resource configurations in order to adapt to a changing
environment
(e.g.
TEECE/PISANO/SHUEN,
1997:
516).
According
to
TEECE/PISANO/SHUEN (1997) the sources of a competitive advantage based on
dynamic capabilities lie in the organizational and managerial processes, the strategic
positions, and the paths of the company. With processes, the authors refer to the
patterns of current practice and learning. With respect to innovation speed, patterns of
current practice can be observed with the application of best practices, e.g. the use of
cross-functional teams, concurrent engineering, or motivation by stretch goals. These
practices are continuously developed by experience or new knowledge, which gives
them a dynamic dimension, corresponding to the term ‘learning’. Best practices were
identified as factors positively influencing the innovation speed of the companies and
thus, their competitive advantage. With ‘position’, the authors subsume assets like
structural, institutional, and market assets. The structure of a company and its
The Influence Factors of Dynamic Capabilities
104
boundaries are determinants of that position (TEECE/PISANO/SHUEN, 1997). The
vertical integration and the related diversification created the position of LG
Electronics and Samsung Electronics. Their supplier relations could be recognized as
an important factor for innovation speed as well and represent another crucial asset of
these companies. The suitability of Korea as a test market for innovations and
collaboration of the companies with government and universities are further market
and institutional assets. Certain influence factors also exhibit a path-dependency, i.e.
they limit or expand the strategic alternatives of the company. The rivalry between the
two companies and the speed orientation of the employees based on their mentality has
history-dependent roots, i.e. they developed over time and shaped a certain path that
the companies travelled.
Other authors like EISENHARDT/MARTIN (2000: 1106) propose that dynamic
capabilities consist of specific processes, such as product innovation, strategic
decision-making, or alliancing. The innovation process integrates resources like varied
skills and functional backgrounds to create revenue-producing products. Analogous to
EISENHARDT/MARTIN (2000: 1108), the ability to innovate faster than the competition
can be interpreted as the more effective execution of the new product development
process compared to other firms. Similarly, the definition of ZOLLO/WINTER (1999)
emphasizes the improved effectiveness caused by the systematical generation and
modification of operational routines through a dynamic capability, which is a learned
pattern of collective activity. The ability to innovate faster than competitors can be
interpreted as a pattern of collective activity that modifies operational routines by
bringing together varied skills and functional know how. This capability is also an
attempt to adapt to a changing environment, characterized by increased global
competition,
rapid
technological
changes,
and
changing
market
demands
(GUPTA/WILEMON, 1990). The environmental dynamism faced by the two companies
in the case study confirms the importance of the capability ‘innovation speed’ and
illustrates the need to adapt to changing conditions like the Korean Crisis in 1997, the
shift from analogous to digital technology, or the increased competition from emerging
Asian countries.
The Influence Factors of Dynamic Capabilities
105
As this comparison of ‘innovation speed’ to existing definitions of dynamic
capabilities shows, the congruence of the construct with the definitions seems to
justify the suggestion to interpret innovation speed as a dynamic capability and as a
genuine source of competitive advantage.
8.2.2 Innovation Speed and Competitive Advantage
This study identified ‘innovation speed’ as a crucial dynamic capability for the
competitive advantage of the focal companies. ‘Crucial’ here means that the existence
of other dynamic capabilities of the investigated companies is not denied. Rather, it is
assumed that several dynamic capabilities are the base for a competitive advantage.
Among them, innovation speed seems paramount for the focal firms of the case
studies. A look at the literature reveals just how far this result is supported by other
researchers.
Speed in general has been the subject of research especially in the 1990s as the new
strategic paradigm, often touching innovation speed as a side topic. STALK (1989)
introduced the term ‘time-based competition’ in his McKinsey Award-winning article
“Time – the next source of competitive advantage”. He highlighted the importance of
speed or time as a main source of competitive advantage and presented the
implications for companies regarding their manufacturing, sales, distribution, and
innovation. The book Competing against Time followed one year later (STALK/HOUT,
1990) and provided a description of time-based competition and its relationship with
business, money, customers, and innovation. It was the first book exclusively devoted
to speed as competitive advantage. BLACKBURN (1991, 1992) was another important
contributor to this topic, emphasizing the needed mind shift of managers from a cost to
a time focus.
Later articles and books followed that focused more on new product development and
thus
on
innovation
speed
(e.g.
VESEY,
1991;
BLACKBURN,
1991a;
KESSLER/CHAKRABARTI, 1996; KESSLER ET AL., 2000; WILLIS/JURKUS, 2001). Most
researchers agree that innovation speed is a crucial pillar of a company’s competitive
advantage, even though “it is one of the least studied factors in the product
The Influence Factors of Dynamic Capabilities
106
development literature” and the empirical support for it is rather weak.199 Regarding
the
relationship
between
innovation
speed
and
competitive
advantage,
TIDD/BESSANT/PAVITT (1997: 5) concurred by saying “’Competing in time’ reflects a
growing pressure on firms not just to introduce new products but to do so faster than
competitors.” TEECE/PISANO/SHUEN (1997) agreed saying, “Winners in the global
marketplace have been firms that can demonstrate timely responsiveness and rapid and
flexible product innovation.” According to GUPTA/WILEMON (1990), increased
competition, rapid technological changes, and changing market demands cause this
need for speed.
The competitive advantage is based on the correlation between innovation speed and
the success of a development project. The existing empirical research indicates that
speed has stronger influence on the success of an innovation project than does cost and
quality.200 The advantages of innovation speed are numerous. Increasing profit
margins, higher market share, establishing industry standards and locking up
distribution channels are examples of the arguments for a fast innovation process with
a short time-to-market (DUMAINE, 1989). The operational and strategic benefits of
innovation speed that constitute the competitive advantage are presented in Figure 12.
199
200
See KESSLER/BIERLY (2000).
See KESSLER/BIERLY (2002).
The Influence Factors of Dynamic Capabilities
107
Innovation Speed
Strategic Advantages:
Operational Advantages:
•Preempting competitors
•Lower costs
•Setting standards
•Skill development
•Initial monopoly
•Potential economies
•Name recognition
•Name recogniton
Improved Company Performance:
•Growth
•Profitability
Figure 13: Benefits of Innovation Speed as a Basis for Competitive Advantage,
adapted from: ZAHRA/ELLOR (1993: 10).
Even though the majority of researchers emphasize the advantages of innovation speed
and support therefore the findings of this thesis, namely that innovation speed can be
the main pillar of a competitive advantage, some authors do doubt the pure beneficial
effect of innovation speed on a company’s financial performance. VON BRAUN (1990)
coined the term ‘acceleration trap’ to describe the failure of increasing innovation
speed to raise financial performance. He assumes the existence of a threshold, after
which additional time reductions can even deteriorate the financial performance of the
firm. As an explanation he suggests that further acceleration yields no further lifetime
revenues for the product; the benefits last for a shorter time because the product life
cycle starts or ends sooner; additional costs are incurred, but the customer sees no
value and won't pay more; or the competition forces lower prices.201 ELLIS/CURTIS
201
See ELLIS/CURTIS (1995).
The Influence Factors of Dynamic Capabilities
108
(1995) confirm this acceleration trap by showing a positive relationship between the
length of the research and the development period and the earnings before interest and
taxes ratio to sales, i.e. the longer the innovation time, the better the financial
performance. They advise companies to abstain from increasing innovation speed for
profitability reasons, unless doing so is required by competitive pressures.
Although there might be a threshold for innovation speed, the benefits of a thoughtful
managed acceleration of the new product development process seem convincing and
are supported by the majority of researchers.
8.2.3 Hierarchy of Capabilities
The findings also indicate the existence of higher-order capabilities as argued by
COLLIS (1994) and WINTER (2003). Identified factors like the Korean mentality create
a speed orientation that not only influences the innovation process, but also every
process of the organization. For example, the Appliance Magazine mentions the
‘speedy’ decision-making of LG Electronics’ management.202 In general, speed as a
key capability also helped the chaebol to overcome the Korean crisis in 1997.203
Therefore, it can be inferred here that there exists a higher-order capability that can be
termed as ‘the ability to do things faster than competitors’ or as the construct ‘speed’,
respectively. This capability can be seen as some kind of first order capability that
influences second order capabilities (see Figure 13) which consist of specific processes
like new product development or strategic decision-making as described by
EISENHARDT/MARTIN
(2000).
This
hierarchy
may
remind
the
reader
of
HELFAT/PETERAF’s (2003) ‘branching’ of capabilities, i.e. the altering of an original
capability into new capabilities. Also KOGUT/ZANDER (1992) proposed that the
creation of new skills is based on the extant capabilities of the firm.
202
203
See ABU-SHALBACK (2002), p.LG-5.
See CHONG ET AL. (2001), p.55.
The Influence Factors of Dynamic Capabilities
1st order
capability
2nd order
capabilities
New product
development
109
Speed
(the ability to do things faster than competitors)
Strategic decisionmaking
Manufacturing
Customer Response
Management
…
Figure 14: First and Second Order Capabilities of Focal Companies, Source: Author.
The second order capabilities may also influence each other. For example, fast
decision-making has a positive influence on the innovation speed of a company.
The existence of higher-order capabilities nurtures the critics of the dynamic capability
concept, and one can argue that the capability innovation speed is superseded by the
capability that develops the capability innovation speed and so on, leading to an
infinite regress (e.g. COLLIS, 1994). Taking this criticism into account, it can be
counter-argued, that this weakness of the concept does not lead to a failure of the
concept itself. It is important to be aware of the existence of higher-order capabilities,
even though this awareness might impede the attributing of a competitive advantage to
a certain capability. However, already the identification of the order-structure and the
involved influence factors allows insights and delivers normative implications that are
valuable to a company and its management. The argument that second order
innovation speed cannot be the ultimate source of competitive advantage, since this
capability is superseded by the higher-order capability ‘speed’, is noteworthy, but
irrelevant, when it is the capability innovation speed, where the competitive advantage
of the capability ‘speed’ becomes the most apparent. Another aspect is that the higher
the order, the more vague and abstract the capability gets and the more difficult it
becomes for managers to identify influence factors and find starting points to
manipulate the development of the capability. In addition, it is conceivable that a
capability has numerous higher order capabilities. For the ability to innovate faster
than competitors, different higher-order capabilities seem to have an impact on
innovation speed, like the ability to do things faster than the competition in general,
the ability to learn and create knowledge, and the ability to innovate. Thus, it is critical
The Influence Factors of Dynamic Capabilities
110
to focus on a certain part or connection of the chain and to determine then where to set
the boundaries.
As a summary, the findings of this thesis support the researchers who argue in favor of
innovation speed for a company’s financial performance and consequently for its
competitive
advantage.
Congruence
with
TEECE/PISANO/SHUEN’s
(1997)
conceptualization of dynamic capabilities could be confirmed. Furthermore, the
identification of innovation speed as a critical dynamic capability is consistent with
EISENHARDT/MARTIN’s (2000) proposition, that dynamic capabilities are neither
vague nor tautological routines, but consist rather of specific processes like product
innovation. Dynamic capabilities are based on specific processes of an organization.
The identified capability innovation speed is based on the new product development or
innovation process of the companies, which supports EISENHARDT/MARTIN’s (2000)
suggestion and contradicts that of VERONA/RAVASI (2003). After having compared the
congruence of innovation speed as a dynamic capability to the findings of other
researchers, the found influence factors of innovation speed are generalized to the
Dynamic Capabilities Approach by a comparison to similar and conflicting scholarly
results.
8.3 The Influence Factors of Dynamic Capabilities
This thesis identified innovation speed as dynamic capability and employed this
capability to analyze the factors that influence its development. These factors could be
clustered in best practices, structural factors, and contextual factors. Based on the
inductive logic of this research, the findings are further generalized to the research on
dynamic capabilities.
Systems and strategies implemented to nurture a dynamic capability can be subsumed
under ‘best practices’. In the case studies, these included the use of cross-functional
teams, modular design, concurrent engineering, stretch goals, and reward systems.
These factors were found to accelerate the innovation speed of the company, which
confirms the proposition of EISENHARDT/MARTIN (2000) that dynamic capabilities
exhibit commonalities in the way they are executed, i.e. best practices. Also
LAWSON/SAMSON (2001) validate the positive influence of reward systems, stretch
The Influence Factors of Dynamic Capabilities
111
goals, and cross-functional teams on the development of their analysed dynamic
capability. Even though this perception contradicts the general perspective of
TEECE/PISANO/SHUEN (1997), they too see sources of competitive advantage based on
capabilities in managerial and organizational processes, which determine how things
are done in a company. This definition would also include best practices, which
determine how a certain process is executed. Thus, the understanding of the different
authors is not that divergent as usually claimed. The notion of best practices as
influence factors of dynamic capabilities embraces also the increasing recognition of
knowledge and knowledge creating routines as one of the fundamental issues of a
firm’s strategic success (NONAKA/TAKEUCHI, 1995; DAVENPORT/PRUSAK, 1998; VON
KROGH ET AL., 2000) and as a pillar of dynamic capabilities. The successful
implementation of best practices is largely based on the knowledge of existing best
practices for a certain process and the understanding of putting these processes into
practice within the organization.
The structure of the companies could be identified as an influence factor of dynamic
capabilities. Whereas TEECE/PISANO/SHUEN (1997) see the structure more as an
outcome of dynamic capabilities, the findings show that the organizational structure
can impede or enhance the emergence and development of dynamic capabilities as
proposed by LAWSON/SAMSON (2001). LUO suggests that capabilities that are
embedded in the organization may require greater control over transactions, which
would result in the internalization of certain activities (LUO, 2000: 358). This
suggestion is consistent with the argument of KOGUT/ZANDER (1992), who see
organizations as superior to markets in sharing and transferring knowledge among the
members of the organization. Their argument is supported by the findings of this
thesis, i.e. that vertical integration has positive influence on the development of
innovation speed of the companies as a dynamic capability.
Regarding related diversification, TEECE/PISANO/SHUEN (1997) note that this structure
can be seen as meritorious from a capability point of view, when the diversification
builds upon or extends the existing capabilities. Stating this, they imply an influence of
related diversification on the extension of a company’s capabilities, which is validated
by the findings of this thesis. Especially for capabilities that rely on the combination of
The Influence Factors of Dynamic Capabilities
112
different knowledge, like innovation-related capabilities, diversifying into related
fields of products or technologies seems beneficial for the development of these
capabilities within a company. Furthermore, TEECE/PISANO/SHUEN (1997: 517)
acknowledge that “The very essence of most capabilities/competences is that they
cannot be readily assembled through markets.” They add, “properties of internal
organizations cannot be replicated by a portfolio of business units amalgamated just
though formal contracts”. Consequently, they indicate the importance of an
organization’s structure for a company’s dynamic capabilities.
Rarely, authors investigated the influence of the context of the companies on dynamic
capabilities, even though the importance of that influence is often assumed (e.g.
COLLIS, 1994; ETHIRAJ ET AL., 2005). The case studies support these assumptions by
revealing the impact of the environment on the development of dynamic capabilities.
Contextual factors of a firm’s environment like the domestic rivalry become obvious,
which have been rather neglected in research on dynamic capabilities. Few studies
have investigated contextual factors like country-specific beliefs and behaviors. Within
this thesis, the mentality of the involved actors could be identified as a crucial
influence what is in line with findings of other research on the impact of individual
beliefs and behaviors of the involved actors on the emergence of dynamic capabilities
as an enabling factor (e.g. RINDOVA/KOTHA, 2001; WOOTEN/CRANE, 2004) rather
than as a constraining one (LEONARD-BARTON, 1992; TRIPSAS/GAVETTI, 2000).
Regarding the influence factors of dynamic capabilities, this thesis makes several
contributions. First, the study shows the complexity of influences on dynamic
capabilities. The development of dynamic capabilities cannot be limited to one single
factor. Rather, the holistic approach of this study reveals a complex system of
interrelated and mutually affecting causes that influence their emergence and
development. Second, the findings reveal that influence factors cannot be uniquely
attributable to the internal dimension of companies. In addition, the context of the
companies could be identified as an important source of influence factors for dynamic
capabilities. The comparison to existing literature shows that most studies on
innovation speed limit that perspective to best practices but rarely include contextual
influences. This finding is consistent with the research gap shown in this thesis’
The Influence Factors of Dynamic Capabilities
113
literature review of dynamic capabilities. Also, LEONCINI/MONTRESOR/VERTOVA
(2003: 2) stated: “By centring upon the internal organization of the firm, it has in fact
somehow neglected the relational and contextual aspects affecting the creation and
development of dynamic capabilities.”
The findings also suggest a less strict separation of strategy and best practices,
contradicting the propositions of PORTER (1996). He clearly separated operational
effectiveness via best practices from the strategy agenda. The results of this thesis
indicate that best practices and strategy not only complement each other, but also
evolve hand in hand and may indeed create the basis for a competitive advantage.
Consequently, regarding the sources of dynamic capabilities, the following is
proposed:
Proposition 1: Dynamic capabilities are based on specific identifiable processes of an
organization and emerge through a complex system of best practices,
structural and contextual factors.
This proposition does not exclude that certain factors may have a stronger influence
than others. The differentiation and ranking of factors according to their influence on
the emergence of dynamic capabilities was not a focus of this thesis. But it is assumed
that different capabilities exhibit a diverging combination of influence factors
according to their origin. For some capabilities, the context may be more important
than for others. Analogous can be assumed for structural factors and best practices.
8.4 Influence of Managers on Dynamic Capabilities
As the literature review has shown, there exists scholarly debate about the possibilities
of the deliberate efforts of managers to actively steer the development of dynamic
capabilities (WINTER, 2003: 991), or in other words, whether capabilities are ‘born or
made’. The results from this study suggest a certain influence of the manager within
limitations. As the preceding chapter has shown, some of the factors that influence the
innovation speed of the focal companies emerge in the firms’ environments and build
a supporting frame. Some particularities of South Korea can be found in other
countries, too, but are not under control of the companies’ managers. Also, the special
The Influence Factors of Dynamic Capabilities
114
mentality of Korean employees, which contributes strongly to the innovation speed, is
a given condition. However, as the case studies show, companies can introduce
systems that leverage certain characteristics of this mentality like an appropriate
incentive system linked to stretch goals. Other so-called best practices like the
modularization of components, the use of concurrent engineering and cross-functional
teams are examples for implemented innovation strategies of managers and disclose
their influence on the development of dynamic capabilities.
Although the organization structure may be designed in such a way that the emergence
of a certain capability is supported, managers face boundaries when they try to
optimize the structure to support the development of a specific capability. First, the
structure of the company often evolves over time and cannot easily be changed. It can
hardly be seen as a variable that can be optimized. Of course, there surely exists an
optimal degree of vertical integration or related diversification, but the probability of
finding it is rather low since the complexity of a structural transformation makes the
process time-, cost- and effort-intensive. Second, whereas best practices can be
introduced to directly influence the development of a certain capability, the change of
the structure involves a multitude of issues that have to be considered. An ultimate
transformation of the structure to a nurturing frame for a special dynamic capability
would probably have negative consequences for other domains of the organization. For
example, increasing the vertical integration for an acceleration of the innovation
process would affect the general coordination within the company and also on
manufacturing, purchasing, and sales, probably resulting in a lower flexibility to react
to changes of its environment.
Based on these inferences, it can be proposed that managers have influence on the
development of dynamic capabilities which supports the findings of other authors
(RINDOVA/KOTHA, 2001; ETHIRAJ ET AL., 2005). The influence of managers is
twofold: On the one hand they can steer the capabilities’ development by the
implementation of best practices, which determine how a capability is executed. On
the other hand, managers can set a supporting frame for the development of dynamic
capabilities. Still, the influence of managers is limited by certain boundaries, which are
set by the structure and the context of the companies. The examples of this study show
The Influence Factors of Dynamic Capabilities
115
that country-, culture-, or path-specific factors have an impact on the emergence of
dynamic capabilities. The mentality of the Korean employees is a source of a deeprooted speed-orientation that can be recognized and maybe leveraged by managers, but
hardly influenced. The special infrastructure of Korea as a test market and the fruitful
collaboration with the government and universities can be supported by investments or
lobbyism, but a direct influence of the manager is barely possible. Consequently, the
higher the influence of the context on the development of a special capability, the
lower is the steering possibility of the managers. The degree of influence of the
context on the development of a dynamic capability is referred to as contextspecificity. Analogous can be said for a company’s structure, since it cannot be that
easily changed. Thus, the higher the degree to which structural influence factors have
an impact on the development of a capability, referred to as structure-specificity, the
lower is the influence of management. The highest influence that managers have on
the development of capabilities is through the implementation of best practices. The
influence of managers is increased when a solid base of best practices exists for the
capability of interest. The magnitude of availability of best practices, which is
determined by the accumulated experience and the existing research about a certain
capability or process, is referred to as the elaboration level of best practices. The
higher this level, the higher are the possibilities for a manager to introduce relevant
best practices and actively steer the development of a certain capability.
In short, the study has shown that dynamic capabilities are ‘born’ and ‘made’, which
leads to the next proposition:
Proposition 2: Managers can actively steer the development of dynamic capabilities
by the implementation of best practices and the creation of a
supporting frame within boundaries set by the context of the company.
Proposition 2a: The influence of managers rises with the increasing elaboration
level of relevant best practices.
Proposition 2b: The influence of managers decreases with the increasing
structure-specificity of a dynamic capability.
The Influence Factors of Dynamic Capabilities
116
Proposition 2c: The influence of managers decreases with the increasing
context-specificity of a dynamic capability.
These propositions imply that the role of managers in the active development of
dynamic capabilities should not be limited to the simple allocation of financial or
human resources. The identification of influence factors, the assessment of the
possibilities to create supportive structures and systems, and the implementation of
them thus becomes a crucial task for management. Even if certain contextual variables
cannot be influenced, the manager who is aware of these factors might find ways to
leverage them. Another aspect is that the boundaries are not static, but instead
dynamic. New factors may evolve, and known factors may disappear. For example, it
is possible that the deep-rooted speed-orientation of Korean employees vanishes with
the growing-up of the younger generations. Thus, the continuous monitoring of the
influence factors of a capability should become a significant task for the responsible
manager. The role of the active manager is discussed in detail in Section 9.2, where
normative guidelines are suggested.
8.5 Idiosyncrasy of Dynamic Capabilities
The origin of the influence factors not only determines the influence managers have,
but also the idiosyncrasy of a dynamic capability and thus the transferability of it. Best
practices could be identified as important factors for the development of dynamic
capabilities. They can be seen as an optimal mode of executing a certain activity or
process. One inherent characteristic of best practices is that other companies can adopt
them. As one source suggests: “The management movement of best practices might
imply that many if not most situations are repeatable and that, if we can sufficiently
distill a set of experiences, we can predict all or most of the possible scenarios and the
way to best handle them. Best practice may be a euphemism used in corporate
management theory to avoid the negative image involved in ‘copying a competitor's
business model’.”204 For example, almost any electronics company uses crossfunctional teams for their innovation projects since practical experience and academic
204
Definition found in Wikipedia – The free Encyclopedia, http://en.wikipedia.org/wiki/Best_practices.
The Influence Factors of Dynamic Capabilities
117
research have proved to have advantages over functional teams when it comes to the
speed of new product development. Consequently, EISENHARDT/MARTIN (2000) infer
that dynamic capabilities can be more easily transferred between companies than
suggested by other researchers. Without considering the context of a company,
EISENHARDT/MARTIN would probably be right. If a company succeeds in
implementing all best practices at the same level like a competitor, ceteris paribus, a
similar effect on the development of the capability could be assumed. The occurrence
of performance differences could then be attributed to the dimension and quality of
implementation of best practices. Of course the availability of best practices, which
evolve by experience and learning, is crucial for the successful inter-firm transfer of a
dynamic capability, since it facilitates the adoption of this capability by other
companies. The level of availability and elaboration correlates to the experiences in
the practitioner’s world that are made with a certain process and the extant results of
academic research on that process. The new product development process, for
example, is well-researched, and a strong consensus about the benefits of concurrent
engineering and cross-functional teams on innovation speed exists among scholars and
practitioners. But for other capabilities, the level of best practices might be less
elaborated. For example, when Toyota first introduced its manufacturing system, little
experience about just in time production existed. Toyota could benefit from this
advantage over several decades, before other companies realized the benefits due to
their own experiences or intensified academic attention. Thus, the higher the
elaboration level of best practices, the higher the transferability of a capability and
consequently the lower the sustainability of a competitive advantage. Best practices
can therefore be interpreted to be a kind of codification of dynamic capabilities, since
they allow the transfer of knowledge to other organizations. This is consistent with the
argument of ZANDER/KOGUT (1995), who claim that the transfer speed of capabilities
throughout the organization and to other companies is influenced by the degree of
codification and how easily capabilities are taught.
When the focus is limited to best practices, a certain transferability and fungibility of
capabilities is implied. Even still, it seems that other companies do not reach the same
development level of the examined capability, despite the adoption of all available best
The Influence Factors of Dynamic Capabilities
118
practices and a comparable quality of implementation.205 This can be seen as an
indicator for the limited adoption possibilities due to the context- and / or structurespecificity of the capability. The results of this thesis contradict the proposition of
EISENHARDT/MARTIN (2000) regarding the transferability of capabilities, because the
findings show that the influence factors of dynamic capabilities cannot be reduced to
the dimension of best practices. Particularly, the up to now rather neglected contextspecificity of dynamic capabilities discloses that capabilities cannot be transferred like
commodities across companies, since influence factors of the context are not as
repeatable as best practices. In addition, companies vary with respect to their structure,
which may result in a different magnitude of structural factors supporting the
development of a special capability. Also, the existence of contextual and structural
factors supports the argumentation for a path-dependency of dynamic capabilities.
History also plays a crucial role for contextual factors that emerge over time, like the
time-related beliefs and behaviors of Koreans or the rivalry between the two focal
companies. Structural factors are often history-dependent as well, since the special
conglomerate structure of the focal companies, the degree of their vertical integration
and diversification has developed over time. Regarding the related diversification,
companies cannot that easily copy the structure of a competitor by diversifying via the
simple adding of new business units. DAVIS (2004) supports this argument by stating
that the perspective of the firm as a portfolio investor is too narrow, since “it ignores
the long sweep of history in which firms have diversified in ways that draw on
economies of scope extending beyond the single SBU, as eloquently described by
CHANDLER (1972), and hence how firms predominantly expand into products and
markets that are ‘related’ in some fashion to the existing business.“206 This pathdependency supports KOGUT/ZANDER’s (1992) argument, stating that the future
options are constrained by history, since the creation of new skills is based on the
extant capabilities of a firm. Consequently, the imitation possibilities for competitors
are limited, which in turn makes a competitive advantage sustainable.
205
206
Otherwise the competitive advantage of the focal companies would be already vanished.
See DAVIS (2004), p.40.
The Influence Factors of Dynamic Capabilities
119
Path-dependent influence factors are often based on past decisions and can be seen as
quasi-irreversible commitments to a certain domain of capabilities, which supports the
view of TEECE/PISANO/SHUEN (1997). They confirm that the paths available are a
function of the current position, which in turn is a function of the traveled path: “At
any given point in time, firms must follow a certain trajectory or path of competence
development. This path not only defines what choices are open to the firm today, but it
also puts bounds around what its internal repertoire is likely to be in the future.” The
path-dependency limits the transferability of capabilities and indicates a certain
idiosyncrasy.
For example, path-dependent factors like country-specific beliefs and habits may
constrain the future options of the company by cognitive inertia. Although the pathdependency of certain factors limits the scope of future options, it may enhance that
commitment in one special domain of capabilities as shown in the case study for this
dissertation.
Having discussed the idiosyncrasy of dynamic capabilities and the determinants of
their transferability, the third proposition can thus be formulated as follows:
Proposition 3: The transferability of a dynamic capability depends on the origin and
magnitude of its influence factors, i.e. the particular mix of contextual
factors, structural factors, and best practices, and their individual
impact on the capability.
Proposition 3a: The transferability rises with an increasing elaboration level
of relevant best practices.
Proposition 3b: The transferability decreases with an increasing structurespecificity of a dynamic capability.
Proposition 3c: The transferability decreases with an increasing contextspecificity of a dynamic capability.
These propositions imply that different capabilities exhibit diverging contextspecificities. The term ‘context-specificity’ is used here to describe just how far
contextual factors are relevant for the development of a certain capability. It is
The Influence Factors of Dynamic Capabilities
120
reasonable to assume that certain capabilities are less influenced by contextual factors
like the ability to implement a new IT system. The ability to successfully integrate
another organization after a merger or an acquisition exhibits assumingly more
tangencies with the company’s context and thus a higher context-specificity.
The cross-case analysis of Samsung Electronics and LG Electronics for this
dissertation delivers interesting insights, since both companies developed in the same
context and both implemented the same best practices regarding their new product
development process. This resulted in the mastering of the capability innovation speed
at both companies and indicates that companies within the same context with a
comparable structure and a comparable extent of implemented best practices can build
up similar dynamic capabilities as their basis of competitive advantage.
The Influence Factors of Dynamic Capabilities
121
9 Conclusion
This dissertation investigated the factors responsible for the development of dynamic
capabilities from a holistic point of view. The complexity and heterogeneity of factors
influencing this development has certain implications for the influence of managers
and the transferability of dynamic capabilities and thus the sustainability of a firm’s
competitive advantage. Having discussed these implications in Chapter 8, certain
propositions could be deduced. These propositions are integrated into a framework that
unifies the theoretical insights of this study.
9.1 Towards an Integrated Framework
First, this inquiry has identified different factors that influence the development of
dynamic capabilities. These factors could be clustered in the domains best practices,
structural factors, and contextual factors. Second, the influence of managers is
disclosed. The higher the elaboration level of best practices, the better are the
opportunities for a manager to manipulate the development of a capability by the
introduction of these best practices. This influence is constrained by the structure- and
context-specificity of a capability. Third, the transferability of dynamic capabilities
increases with augmenting elaboration level of best practices. The transferability too is
constrained by the structure- and context-specificity of a certain capability. Implicitly,
it can be assumed then that the higher the transferability of a capability, the less
sustainable a competitive advantage based on this capability will be. To integrate these
propositions, the framework in Figure 15 is suggested, which unifies the three
discussed dimensions of dynamic capabilities.
The Influence Factors of Dynamic Capabilities
122
1
ici
ty
2
low
low
w
lo
ur
eSp
ec
if
Context-Specificity
high
h
ru
ct
g
hi
St
high
Elaboration Level of Best Practices
Influence of Managers:
Dynamic Capability:
Competitive Advantage:
Low
Low Transferability
→ High Sustainability
Medium
Medium Transferability → Medium Sustainability
High
High Transferability
1
Lowest
Lowest Transferability → Highest Sustainability
2
Highest
Highest Transferability → Lowest Sustainability
→ Low Sustainability
Figure 15: Integrated Framework; Source: Author.
The different domains of influence factors, namely context, structure, and best
practices, are combined with the influence of managers on the development of
dynamic capabilities and the transferability of them. The x-axis represents the
elaboration level of best practices for a specific capability, which can lie on a
continuum between the two extremes, low and high elaboration level. The left extreme
point would stand for a capability, for which no knowledge and experience and thus,
no best practices exist. This may be due to the novelty or rareness of the capability.
The right extreme point of the x-axis demarcates a capability that is exhaustively
researched and thus a lot of experience about the underlying process could be
accumulated in the practitioner’s world. Based on this knowledge a multitude of
comprehensive best practices could be developed.
The Influence Factors of Dynamic Capabilities
123
The y-axis constitutes the context-specificity of the capability. A capability with only
limited tangencies to the context and only a small impact of its contextual influence
factors shows a low context-specificity, whereas the other extreme point is explained
analogously.
The z-axis, marking the third dimension of the framework, represents the continuum of
structure-specificity of a capability. A capability that displays only a few structural
factors with limited influence on the capability’s development has a low structurespecificity. With an escalating number of structural factors and increasing influence on
the development of the dynamic capability, the structure-specificity rises.
The space of all possible combinations creates a cube. The movement from the lower
right corner in the front of the cube to the upper left corner in the back of the cube
corresponds to a decreasing influence of managers, a decreasing transferability of the
capability, and consequently, an increasing sustainability of the competitive advantage
based on this capability.
The extreme points are marked with the numbers 1 and 2. Point 1 refers to a high
context- and structure-specificity of a capability. This means that the factors
influencing the development of this capability have their origin to a large degree in the
context of the company, for example a country-specific mentality of the employees,
and the structure, like a high degree of vertical integration. This is combined with a
low elaboration level of best practices, i.e. the accumulated experience and knowledge
of this capability or of the underlying process are rather low, and the most effective/
efficient execution modes have not yet crystallized. This combination of high contextand structure-specificity with low elaboration level of best practices implies a low
influence of the manager on the development of this capability. The contextual factors
can be hardly steered and, like structural factors mainly influence the development
indirectly. Structural factors are difficult to adapt, since this would often incur other
(negative) consequences for the organization. In addition, the manager can only
introduce practices on a trial-and-error basis, since best practices do not exist or are
little elaborated. Hence, Point 1 stands for the lowest influence of a manager on the
active development of a dynamic capability. This combination also incurs the lowest
The Influence Factors of Dynamic Capabilities
124
transferability of the capability. A capability that is mainly based on contextual and
structural factors can be hardly replicated, unless a company has a similar structure
and evolved in a similar context, as for example did Samsung and LG. Consequently, a
competitive advantage based on this capability would be very sustainable.
Extremum 2 combines low context- and structure-specificity with a high elaboration
level of best practices. A manager is provided with a multitude of best practices that
nurtures the focal capability. His influence is not constrained by contextual or
structural factors, which play only a minor role. This makes repeatability within other
organizations easy. With a comparable magnitude and quality of implemented best
practices, a company may also reach a comparable performance regarding the special
capability. In this case, the capability can hardly be the source of a sustaining
competitive advantage.
This whole cube can be divided by slicing it into three parts as it is illustrated in Figure
15 by the different shading. For a better visualization, Figure 16 shows the cube from a
transparent perspective.
C
B
A
Figure 16: Transparent Capability-Cube cut into Three Parts; Source: Author.
The Influence Factors of Dynamic Capabilities
125
Geometrically speaking, two tetrahedrons, named A and C, and a regular octahedron,
named B, result.207 A tetrahedron is composed of four triangular faces, three of which
meet at each vertex. An octahedron is composed of eight faces, each of which is an
equilateral triangle and four of which meet at each vertex.
Tetrahedron A in Figure 16, which corresponds to the striped part of the cube in Figure
15, depicts the fraction of the cube that contains all combinations of context-,
structure-specificity and elaboration level of best practices of a dynamic capability,
resulting in a high influence of the manager on the development of the capability, a
high transferability, and consequently a low sustainability of a potential competitive
advantage based on the capability. Qualitatively speaking, a competitive advantage
based on factor combinations in Space A is the less sustainable, because the influence
factors are only to a low degree context- and structure-specific, whereas the
elaboration level of best practices is high for most combinations in Space A. A
favorable value on one axis, for example, high context-specificity, is counteracted by
unfavorable values on the other two axes, i.e. high elaboration level of best practices
and low structure-specificity.
The Octahedron B in the middle, which matches the part with the spotted lines in
Figure 15, contains all combinations of context-, structure-specificity, and elaboration
level of best practices of a dynamic capability resulting in a medium influence of the
manager and a medium transferability of it. The consequential medium sustainability
of a competitive advantage is due to the fact that most combinations in Space B are
based on medium values of the three axes.
The upper left part of the cube’s back, Tetrahedron C, encloses all combinations that
lead to a low influence of the manager, a low transferability and thus a high
sustainability of a competitive advantage based on this capability. Space C contains
the most favorable combinations regarding the sustainability of a competitive
advantage, because for all combinations an unfavorable value on one axis, e.g. high
elaboration level of best practices, is compensated by favorable values on the other
two axes, i.e. high structure- and context-specificity.
207
All geometrical definitions come from: www.wikipedia.org.
The Influence Factors of Dynamic Capabilities
126
This ‘capability cube’ is a rather generic framework, since for all capabilities their
individual combination can be found within it. Knowing the position of a capability
within the cube gives managers interesting insights into their potential base of a
competitive advantage and its sustainability. For example, a company that identifies a
capability that lies at Point 2 as a main source of the organization’s competitive
advantage should consider the creation of alternative capabilities for the future that
may replace the existing one instead of blindly relying on this single capability alone.
Although the capability cube helps to classify a capability along the three dimensions,
the cube hardly allows further normative inferences, since movements on the axes can
barely be steered by managers or organizations. Thus, the following section introduces
a guideline for the active role of a manager in the development of a dynamic capability
and hence, in the building of a competitive advantage.
9.2 Toward a Normative Management Guideline
The propositions for this thesis have several implications for the practitioner’s world.
Management can play an active role in the development of dynamic capabilities and
the following suggestions combine the insights of this dissertation to from a normative
guideline.
The process in Figure 17 represents this guideline. To a certain degree the process is
similar to the analytical framework employed in this thesis. It is adapted here for a
more convenient use in companies, but represents more of an overview that needs
more operationalization. For example, the screening for capabilities will be probably
an interactive process including discussions in workshops with responsible managers
from different functions. This concrete implementation is not described in the course
of this dissertation, since the particular arrangement is probably dependent on the
means with which the manager feels comfortable. In addition, the description would
fill a whole book of its own and thus is out of proportion for this work.
The Influence Factors of Dynamic Capabilities
Screening for dynamic Identification of main
Evaluation of impact:
capabilities:
influences:
What are the main
What is the base for my
Which are the best
levers?
firm’s (potential)
practices and contextual
competitive advantage?
factors?
127
Implementation:
How to translate the
insights within the
organization?
Continuous
monitoring:
Still the most important
capability / influence
factors?
reiterative process
Figure 17: Process of Active Capability Development; Source: Author.
A manager should start by identifying existing or potential dynamic capabilities of his
company. When his company is already realizing above-average returns, he should
investigate the relevant capabilities that contribute to this competitive advantage. If
this is not the case, he should screen his company for capabilities that are promising to
create this advantage and have the potential to be developed further.
The next step includes the identification of influence factors and their origins. This
involves the accumulation of knowledge about existing best practices that are relevant
for the underlying process. Which academic research and which management
handbooks exist that describe practices to enhance the specific capability? In addition,
the structural and contextual factors that enhance or constrain the development of the
particular capability should be determined.
A prioritization follows, in which the manager decides, which factors represent the
main levers to nurture the capability and how far he can manipulate them. Which best
practices have a high and direct impact on the capability? Are there any structural or
contextual factors that inhibit further development? Can the manager turn a
constraining structure to an enhancing structure without negatively affecting other
areas of the organization? Are there systems that leverage certain beneficial factors
rooted in the firm’s context? Are there factors that create a certain idiosyncrasy of the
capability and thus may increase the sustainability of the competitive advantage?
After answering these questions, implementation follows. Having identified the factors
and their impact on the development of a capability, a scorecard should help to
The Influence Factors of Dynamic Capabilities
128
monitor the relevant factors. The quality of implementation may be an important
source of performance differences among companies regarding the particular
capability. The firm’s idiosyncratic setting may either alleviate or inhibit a successful
implementation. The findings should be communicated throughout the company as
part of the general strategy process, since commitment of the employees is needed.
Finally, the active manager should continuously monitor the development of the
capability and the influence factors as part of the company’s general strategic analysis
process. Due to the dynamism of the environment, certain influence factors may lose
their importance, or new insights about specific best practices may evolve. In addition,
the importance of a capability may vanish over time. This can be due to environmental
changes or due to the limited sustainability of a capability. For a capability that is
mainly based on best practices, the management can anticipate that the benefits from
this capability may be short-lived. Thus, the process is represented as recursive, as it
should be performed on a regular basis.
9.3 Limitations and Further Research
A research project most often represents only a small brick in a big wall of a certain
research area and is unquestionably limited by its focus, not allowing the answering of
other important questions. These limitations may be seen as potentials for further
research that will complement the findings of this study.
The inherent shortcomings of the methodology have already been discussed in Section
4.3. The weak external validity, which generally results from case study research,
provides a potential for quantitative approaches that could increase the generalizability
of the findings. The suggested framework needs to be validated by further empirical
data.
Regarding the data sources, the answers of interviewees could be biased. For example,
company representatives may more likely attribute sources of a dynamic capability to
their management achievement than to external factors and rarely express critical
statements about their organizations.
The Influence Factors of Dynamic Capabilities
129
Content-wise, the findings contribute little to the question regarding in which context
innovation speed is an appropriate basis for a competitive advantage. Undoubtedly, the
sole reliance on innovation speed and an uncontrolled acceleration of the innovation
process surely bears risks. The nature of the industry or the type of the innovation may
moderate the benefits of this capability. The risks or disadvantages of an
overemphasizing of innovation speed have only been touched upon within the
discussion about contributions of other authors and need further clarification.
In addition, this study does not aim at creating a ranking of influence factors that
represents their relative importance for innovation speed. For example, a large
majority of interviewees attributed the innovation speed to the mentality and the
inherent speed-orientation of Korean employees as a main source of the companies’
innovation speed. Nevertheless, the author abstained from creating a ranking based on
the interviewees’ statements, since it would have little meaning regarding the number
of interviews. With the applied holistic approach, the identification of the influence
factors was intended. Empirical research that relies on a larger sample size and
employs questionnaires is surely better suited to generating answers for the question
about which factor has the strongest influence on the focal capability.
Furthermore, the study does not claim to be completely exhaustive, even though it
employs a holistic lens. Other factors having impact on innovation speed may exist, as
suggested by other researchers, but probably play only a minor role for the focal
companies. The findings of other researchers, including, for example, the benefits of
top management involvement in innovation speed, can be seen as an important
complement to the results of this thesis. For the special cases examined in this study,
other factors would have probably appeared with the inclusion of interviewees from
other functional areas. Since the identified influence factors are to a large degree
idiosyncratic, dissimilar contextual or structural factors can surely be found in other
companies, influencing the same capability. The magnitude of this inquiry already
allowed the clustering of the influence factors, and it is assumed that additional factors
would have delivered no more supplementary insights regarding their origin, i.e. best
practices, structure, and context.
The Influence Factors of Dynamic Capabilities
130
Further empirical data including a cross-analysis among different industries would also
enhance the understanding of the potentially differing value of certain influence
factors for firms with different industrial backgrounds. The importance of the
contextual factors should be validated by the extension of the research scope to other
countries, as this study focused on one country and its specific characteristics. Also,
the time variable would add interesting insights about the correlation between
influence factors and their importance over the different stages of a company’s
existence or an industry’s maturity. There are probably factors that are more important
in the start-up of a new business and other factors that become relevant for more
mature stages of an organization.
For the research on dynamic capabilities analogous can be claimed. The focus on a
single capability leaves the question open as to how far other capabilities differ with
respect to their particular mix of influence factors and which other best practices, and
structural and contextual factors play a role on their development. Also, the discussion
about a hierarchy of capabilities has only been touched upon, since it does not lie in
the focus of this research, even though the research results disclosed insights into it.
Moreover, the inquiry focused on enablers, not on constraints, with respect to the
development of dynamic capabilities. All beneficial factors are meaningless, if there is
one constraining factor that does not allow a development of the capability. Hence, the
knowledge about factors that inhibit a capability’s development is a valuable
complement to the findings of this thesis and should be addressed by future research.
This thesis tried to reconcile diverging views in the research about dynamic
capabilities by proposing an integrated framework. It suggested new directions for
further studies, hopefully entailing more research that employs a broader lens and
acknowledges the importance of context and normative practical inferences for the
further promotion of the Dynamic Capabilities Approach in order to explain just why
some companies perform better than others.
The Influence Factors of Dynamic Capabilities
131
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The Influence Factors of Dynamic Capabilities
146
APPENDIX
A. INTERVIEW SCHEDULE
The interviews were conducted as semi-structured, which means that the interviewer
did not have to cling to an inflexible structure, but rather could adapt the questions
accordingly to the interviewee and to the development of the interview. Before each
interview, individual questions were created to address the special background of an
interviewee and to include new insights from preceding interviews. To give an idea
about the information-gathering during an interview, the rough structure of the
interviews including exemplary questions can be depicted as follows:
A) Opening:
• Introduction of interviewer: personal, academic and professional
background, research project, research questions, preceding interviews /
interview partner
• Introduction of interviewee, position, professional experience and
development
B) Case study units:
• How is your job / your company linked to Samsung Electronics / LG
Electronics?
• From where do you have the information about the two companies?
C) Competitive Advantage:
• How do you rate the performance / success of the two companies
compared to competitors?
• What do you think is the major reason for this success?
D) Innovation Speed as Competitive Advantage:
• Why do you think / In how far do you think that speed is a major pillar
of this competitive advantage?
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147
• Why do you think / In how far do you think that the ability to innovate
faster than the competition is important for the companies’ success?
E) Sources of Innovation Speed:
• What are the major reasons for the innovation speed of the two
companies?
• Are these reasons rather country-specific, organization-specific, or not
specific at all?
• Would you rate variable X as potential lever for innovation speed?
F) Influence of managers:
• How do you think managers can speed up their innovation process?
• What are the necessary conditions?
• What are the limitations?
G) Idiosyncrasy / transferability:
• Do you think other companies can reach the same level of innovation
speed? Why or why not?
• Do you think other companies can copy this innovation speed or its
sources?
• What are the major barriers?
• Do you think this competitive advantage is sustainable? Why or why
not?
H) Closing:
• Further remarks / questions?
• Can you recommend other information sources / potential interview
partners?
• May I come back to you in case of further questions?
The Influence Factors of Dynamic Capabilities
148
B. LIST OF INTERVIEWEES
Interview
No.
Name of
Interviewee
Company
Position
1
Bauer, Dr.,
Peter
Bosch und Siemens Hausgeräte GmbH
Head of Product Division
Refrigeration
2
Choi, ByungHo
Paseco
President
3
Chu, Dr.,
Woosik
Samsung Electronics
Senior Vice President Investor
Relations
4
Chung, Sang
Wook
Fine Appliances, Korea
President
5
Colberg, Dr.,
Wolfgang
Bosch und Siemens Hausgeräte GmbH
CFO
6
Gerke, Roland
Bosch und Siemens Hausgeräte GmbH
General Manager, BSH China
7
Gutberlet, Dr.,
Kurt-Ludwig
Bosch und Siemens Hausgeräte GmbH
CEO
8
Hirlinger, Franz
Herrmann
Samsung Electronics
Outside Director
9
Hrubesch,
Kersten
Bosch und Siemens Hausgeräte GmbH
Head of Product Marketing,
Refrigeration Division
10
Isslinger, Bernd
Degussa, Korea
President
11
Johnson, Jason
Samsung Electronics
HR Development, Business
Management Team
12
Joo, Nam
Korean Development Bank
Manager
13
Junker, Hans
ABB Ltd. Korea
former President
14
Kim, Dong-Su
Samsung Electronics
Manager Investor Relations
15
Kim, Kunje
Core PMG
President
16
Kim, MyungKun
Samsung Electronics
Senior Manager Investor
Relations
17
Kim, Prof. Dr.,
Josef
Korea Business Services
18
Kim, WooKyung
LG Electronics
Manager, Investor Relations
19
Kim, Yong
Kang
Korean Development Bank
Senior Manager
20
Kwon, Ki-Suk
LG CNS
Project Manager, Supply Chain
Management Team
21
Lee, Chang
Ouk
Samsung Life Insurance
Manager Financial
Administration
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149
22
Lee, Deok
Hyong
Fine Appliances
Senior Manager Import/ Export
Division
23
Lee, Jae-Sung
LG Electronics
Senior Manager Home
Appliances Division
24
Lee, Prof. Dr.,
Seung-Joo:
KDI School
Professor for Strategy
25
Lee, Sang-Hee
Fine Appliances
Managing Director
26
Lee, Seong
Jong
Samsung Life Insurance
Vice President HRD &
Recruiting
27
Oh, Hank
Lot Vacuum
President
28
Park, Dong
Seok,
Korean Economics Times
Journalist
29
Park, Joon
GfK Seoul
Manager
30
Park, Jung Hee
Samsung Electronics
Regional Strategy Group
31
Son, KwangJoo
Posco
Manager
32
Song, Son Jong
Siemens Korea Ltd.
Assistant Manager
33
Strobel, Gerd
Bosch und Siemens Hausgeräte GmbH
Head of Product Division
Cooking
34
Strziga, Jürgen
Bosch und Siemens Hausgeräte GmbH
Head of Product Marketing
Laundry Care Division
35
Toedter,
Michael
Bosch und Siemens Hausgeräte GmbH
Head of Sales, Asia / Pacific
36
Traub, Michael
Bosch und Siemens Hausgeräte GmbH
Head of Sales, China, North
America, South America
37
Vogel,
Bernhard
German-Korean Chamber of
Commerce
Director
38
Wellmann,
Wilfried
Korea Business Services
Consultant
39
Winter, Josef
Siemens Ltd. Korea
CEO, President of GermanKorean Chamber of Commerce
40
Yang, ByungGil
Hanpae
41
Yoon, Il-Sook
Miele Korea
Manager
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150
C. CURRICULUM VITAE
Florian Fuhl
Born on September 28, 1976 in Berlin, Germany
Email: florian_fuhl@hotmail.com
University Education:
10/2003 – 10/2006
University of St.Gallen, Switzerland
Doctoral program (Dr. oec.) in International Management/ East Asia,
Research Associate at the Asia Research Center
09/1999 – 11/2001
Leipzig Graduate School of Management (HHL), Germany
Graduate Studies in Business Administration,
Scholar of Stiftung der Deutschen Wirtschaft
07/2000 - 12/2000
KDI School of Public Policy and Management, Seoul, South Korea
10/1997 – 08/1999
Humboldt-Universität zu Berlin, Germany
Participation in the MBA class “Strategy and Global Management”
Bachelor, Business Administration
Practical Experience:
Since 01/2002
Project Manager for Strategy and International Corporate Development
for a German industrial group
01/2001 - 04/2001
Yellout AG, Berlin, Germany
Internship, Department of Business Development
01/2000 - 04/2000
Andersen Consulting, Strategy, Frankfurt, Germany
11/2000 - 02/2001
ACGT Progenomics, Leipzig, Germany
Internship, strategy project in the German utility industry
Created business plan for biotech start-up, consultative support for the
entrepreneur
09/1995 – 09/1997
G+F Entertainment, Berlin, Germany
Self-employed, organizing of promotion and events