Dynamic capabilities: a key factor in small and medium sized enterprises’ internationalization and growth
- Autores: Leonardo Iebra Aizpurua
- Directores de la Tesis: Oskar Villarreal Larrinaga (dir. tes.), Cristina Iturrioz Landart (dir. tes.)
- Lectura: En la Universidad de Deusto ( España ) en 2015
- Idioma: inglés
- Tribunal Calificador de la Tesis: Jesús María Valdaliso Gago (presid.), Aitziber Elola Ceberio (secret.), Àlex Rialp Criado (voc.)
- Materias:
- Enlaces
- Tesis en acceso abierto en: repositorio.deusto.es
- Resumen
Purpose of the dissertation With the aim of advancing business literature and providing valuable tools for internationalizing SMEs, scholars and government institutions have long been focusing on the identification of the driving factors that determine firm performance. Despite the great interest and the numerous research projects addressing this issue, there are still numerous unanswered questions and several conflictive issues still open to debate.
Business researchers agree that in order to be successful in domestic and international markets, firms need to develop a pool of resources and capabilities that are relatively unique and inimitable (Penrose, 1959; Wernerfelt, 1984; Barney, 1991). Additionally, since markets are continuously changing, businesses need to develop capabilities to adapt to the environment, and to identify and respond to new business opportunities (Teece et al. 1997). Adaptations could take many forms: the transformation of organizational processes, the reallocation of resources, or the development and transfer of new knowledge (Easterby-Smith et al., 2009). The ability to generate, adapt, allocate and use resources is a critical element driving business success.
Despite the importance of capabilities on business’ internationalization success, business literature has almost exclusively looked at personal, cognitive and behavioural characteristics of entrepreneurs and business owners (Knight and Cavusgil, 1996; Moen, 2002; Kundu and Kat, 2003; Rialp, Rialp, Urbano and Vaillant, 2005; Jones and Coviello, 2005). Unfortunately, the focus on these cognitive characteristics has not managed to properly explain why some SMEs are able to internationalise, while others are not (Gassmann and Keupp, 2007). There is a need to pay attention to the structural and organisational characteristics of SMEs that enable internationalization and the development of competitive advantage. Particularly, it is important to understand what the specific capabilities are that an SME needs in order to influence its performance and competitiveness. Yet, little is known about how capabilities evolve in international firms (Easterby-Smith et al., 2009), and what specific capabilities are needed to successfully enter and grow in international markets (Zahra et al., 2000; Ethiraj et al., 2005).
This dissertation attempts to partly fill this knowledge gap in the business literature by exploring how a specific set of capabilities, dynamic capabilities (Teece et al. 1997), affect growth and internationalization in small and medium sized enterprises. It will try to determine whether international businesses need to develop unique capabilities to succeed in international markets, and to understand the role of the knowledge management capability in SME internationalization success.
Theoretical underpinning Underneath the overarching umbrella of enterprise competitiveness, this dissertation is at the crossroads of three distinct but interrelated lines of research: 1. dynamic capabilities; 2. internationalization of the business; and 3. business growth. At the heart of these three research areas we find knowledge management.
Dynamic capabilities are, in essence, capabilities that allow a firm to mutate and adapt to market changes. Some researchers have identified knowledge management processes in general, and learning processes in particular, as the critical element underlying and driving dynamic capabilities (Zollo and Winter, 2002; Winter, 2003). The notion of dynamic capabilities seems to be linked with that of double-loop learning (Argyris, 1977; Argyris and Schön, 1978), as it implies a learning process which changes the values and operating assumptions of the organisation, in the same way that dynamic capabilities change the configuration of resources (Zahra and George, 2002a).
Knowledge and knowledge management capability play a central role in the gradualist approach to firm internationalization. The Uppsala model and its extensions (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977 and 1990; Bilkey and Tesar, 1977; Cavusgil, 1980; Reid, 1981; Czinkota, 1982) describe the internationalisation of the firm as a learning process based on the accumulation of experimental foreign market knowledge (Rialp and Rialp, 2001). The International Entrepreneurship (IE) model of internationalization (Oviatt and McDougal, 1994; Knight and Cavusgil, 1996) has also put knowledge at the core of its theoretical architecture. It is the manager’s prior stock of knowledge that allows the firm to correctly process information about potential markets, and develop the necessary capabilities to engage in international transactions short after starting operations. Writings on early internationalization theory suggested that the knowledge acquired through internationalization is mainly experimental and context specific, therefore difficult to articulate and transfer. Business literature emphasize that the ability to create and transfer knowledge internally is one of the main competitive advantages of multinational firms compared with their domestic counterparts (Ghoshal, 1987; Anand and Kogut, 1997). Both, the Uppsala and the IE model pay little attention to the way tacit or experimental knowledge is transformed into objective knowledge that could be stored and used throughout the firm to develop skills and capabilities. These models either assume that mechanisms exist within the firm that would allow efficient and effective transfer knowledge between the different parts of the business; or neglect their importance due to the context-specificity of experimental knowledge. Several researchers have stressed the need for additional research and a more in depth understanding of the knowledge construct. Blomstermo and Sharma (2003) as well as Eriksson et al. (1997) argue that there is a need for more research on the nature of knowledge and how it is shared.
The theoretical link between knowledge and growth was first established by Penrose (1959) when she argued that it is the ability to create knowledge what helps to explain the firm’s ability to grow. As she put it in the foreword to the 1995 edition of her book: “[T]he growing experience of management, its knowledge of the other resources of the firm and the potential for using them in different ways, create incentives for further expansion as the firm searches for ways of using the services of its own resources more profitably”. Central to Penrose's growth theory are the adjustment costs of growth and the productive opportunity set facing the firm. The adjustment costs of growth only affect those firms that have been able to identify and exploit a growth opportunity, and consist of the time and effort required to integrate new managers and operations, and to learn new routines when the business expands its activities. The identification and exploitation of growth opportunities is linked to managers’ subjective assessment of their productive opportunity set, which is influenced by the resources of the firm, particularly by its knowledge base. Knowledge provides firms with a platform for proactively pursuing opportunities and taking entrepreneurial actions (Sapienza et al., 2006; Yli-Renko et al., 2002). Along the same lines, the Knowledge Based View of the firm emphasizes the importance of knowledge acquisition in the enhancement of a firm’s growth prospects (Grant, 1991b). Kogut and Zander (1996b) argue that “what a firm has done before tends to predict what it can do in the future”; and that the firm’s future expansion is determined by the knowledge accumulated by it. Furthermore, Grant and Baden-Fuller (2004) believe that “Knowledge is the overwhelmingly important productive resource in terms of market value and the primarily source of Ricardian rents”. Bessant et al. (2005) and Phelps et al. (2007) propose a framework that links together the notion that growing firms face problems and crises - tipping points (Gladwell, 2000) -, and that the firm’s ability to use and process knowledge - absorptive capacity (Cohen and Levinthal, 1990) -, will determine the firm’s growth path.
At each point in time, firm’s existing capabilities, processes and resource endowment – particularly knowledge – determine the firm’s growth and internationalization choices. Although a firm may expand its skills over time, in the short run, it is restricted by its current skill set, which will shape the future strategic options that its management is capable of rendering (Penrose, 1959). Furthermore, changing a firm’s existing strategic approach is often perceived as costly because a new set of activities must be learned and coordinated (Greve, 2003). Managers have also been shown to depend heavily on recent strategies in order to reduce their cognitive burdens and simplify information processing (Steiner and Rain, 1989; Amburgey and Miner, 1992; Hogarth and Einhorn, 1992).
All these factors influence the manager’s perceptions of risks and opportunities as well as the business’ absorption capacity. According to Shane (2000), prior knowledge is the sine qua non of the discovery of entrepreneurial opportunities, as “each person’s idiosyncratic knowledge creates a “knowledge corridor” that allows him/her to recognise certain opportunities, but not others”. Cohen and Levinthal (1990) argue that for the business to become competitive it should develop the ability to use existing knowledge in order to recognize the value of new information, assimilate it, and apply it to create new knowledge and capabilities. It is then possible to suggest that the firm’s stock of knowledge applied through the firm’s capabilities to the discovery and exploitation of business opportunities also has a positive relationship with the firm’s performance, and this relationship becomes stronger in firms with a strong entrepreneurial strategic orientation (Wiklund and Shepherd, 2003).
Knowledge takes two forms, tacit knowledge that represents all non-codified, non-articulated knowledge built through time thanks to experience and learning by doing, and explicit knowledge arising from manuals, textbooks, theories, etc. (Nonaka and Takeuchi, 1995). It is believed that in the case of SMEs and its managers, tacit knowledge makes up the main component of prior knowledge, particularly in the early stages of the firm’s life. One could be inclined to believe that sound business decisions are based on clearly understood, well-articulated and codified knowledge, and that the predominance of tacit knowledge among SMEs would represent a serious weakness when it comes to make key strategic and operational decisions. This is not necessarily the case. Researchers have found that proper sharing of tacit knowledge within the organisation is “the best tool for SME in enhancing competence and organisational performance which suits its needs and background” (Ngah and Jusoff, 2009).
Independently of the selected growth and/or internationalization path or its degree of success, the business would generate a large stock of new information and increase the know-how of certain key individuals within the business. The availability of this new knowledge is a direct consequence of the business exposure to the market and the nature of the business processes. The degree to which the new information and the newly acquired individual know-how become embedded in the firm’s DNA and is used to improve its effectiveness and efficiency would depend on three filtering factors: 1. the existing stock of knowledge; 2. the existing capabilities (other than knowledge management capability); and 3. the existing knowledge management capability. These three factors allow the SME to transform newly acquired information into knowledge, appropriate it, processes it, transfer it and use it throughout the organization. New knowledge could then be used to develop and/or improve capabilities that would allow the SME to better understand its clients and to design an offer that would meet the needs of its customers better than the competition. The SME’s ability to transform information into knowledge, to internalize and disseminate it, and to use it to improve the effectiveness and efficiency of its processes, is in itself a dynamic capability (Nielsen, 2006). In the empirical part of this work we will analyse how these factors affect the performance of international SMEs.
Both, the stock of knowledge and the business’ absorption capacity are positively correlated with the existence of knowledge management processes. One would expect that businesses that have in place well-functioning knowledge management processes, also show higher levels of absorption capacity, higher growth rates in the stock of knowledge, and greater flexibility to market changes.
Given that knowledge is used to develop, update, upgrade, deploy and discontinue processes, and given that processes are the constituent parts of dynamic capabilities, it is therefore logical to assume that knowledge management processes are key determinants of the speed and degree of capability development. In other words, that the speed of learning and the way the SME codifies, stores, disseminates and protects its knowledge, drives the speed and the nature of the SME’s growth and internationalisation.
Despite the fact that knowledge management has been part of the SME research agenda for some time (Braun et al., 2005; Politis, 2005), careful attention to the processes and initiatives by which entrepreneurs’ experiences are transformed into knowledge, and its effects on SME’s capability development for growth and internationalization is lacking.
Research questions Based on the previous argumentation this research work will try to answer three research questions: Research question one deals with the question of whether new capabilities are needed to succeed in international markets.
RQ 1: Does the international business need to develop unique capabilities to succeed in international markets over and above those needed to succeed in domestic markets? The second research question is related to the strategic choices that the business makes vis-à-vis international markets.
RQ 2: Does the existence of knowledge management capability allow the manager of an exporting SME break the path-dependency of its strategic internationalization decisions by enlarging the firm’s productive opportunity set? The third research question is operational in nature as it aims at understanding the link between the business’ knowledge management capability and other business capabilities.
RQ 3: Does the existence of knowledge management capability facilitate the improvement of existing, and development of new, capabilities (operational or dynamic) critical for the success of the export business? Research methodology The methodology that will be used in this work is the case study methodology. This methodology, if designed and applied with scientific rigour, is suitable for analysing and solving practical business problems, as well as for building and testing new business theories. The case study methodology is qualitative in nature and it offers the opportunity to increase our understanding of business strategic decisions and the development of dynamic capabilities within the business (Helfat et al., 2007).
This research work will take the form of a contemporary, multiple and embedded case study based on a pre-established theoretical model that encompasses three distinctive and interrelated research areas. This methodology is characterized by the in-depth study of each participating enterprise, and is based on the methodological framework proposed by Villarreal (2007) and Villarreal and Landeta (2010).
Contribution to the literature This work’s contributes to the business literature in three important ways. First, it designs and empirically tests the validity of a theoretical model that encompasses all areas of the SME linking strategy with operations and explaining how capabilities are built to succeed in domestic and international markets. Second, it empirically tests the impact of dynamic capabilities on strategic decisions and on management’s ability to identify profitable business opportunities. Third, it explores the link between one specific dynamic capability - i.e. knowledge management – and international competitiveness by means of understanding the impact on the development and/or improvement of other capabilities.
This research work fills a gap in the literature by developing a holistic business model that provides a robust and complete description of the SME encompassing knowledge driven internationalization, knowledge management, and the development of competences and capabilities. The model is used to test the notion that domestic and international SMEs are intrinsically the same and that there is no need to develop unique capabilities to succeed in international markets. Furthermore, the model supports the notion that SMEs differ from each other because they are able to envisage different futures thanks to their capability to generate and manage knowledge, and this way they can shape their environments rather than being shaped by them.
Dissertation structure The remainder of this work is organized in three parts and thirteen individual chapters.
Part one is theoretical in nature and is composed of five independent but interrelated chapters: chapter one reviews the literature on enterprise competitiveness and dynamic capabilities; chapter two summarizes our understanding of firm growth and internationalization; chapter three analyses knowledge management in the context of firm internationalization and growth; chapter four briefly summarizes the gaps in the literature identified as part of the previous review of the literature and presents an in-depth analysis of each research question.
The second part presents the theoretical and empirical contributions of this work. This part is composed of seven chapters. Chapter five presents the theoretical model that will guide the analysis of empirical evidence. Chapter six articulates the purpose of the empirical research, discusses the research methodology, and presents the research protocol. Chapter seven describes the evidence gathering and analysis tools that will be use as part of the field work. Chapter eight describes the machine tool sector in Europe and the Basque Country. Chapters nine to eleven present the cases studied during the field work conducted in the Basque Country between September and December 2.014.
The third and final part of this work presents the conclusions of the research. This last part starts with a comparative analysis of the enterprises studied followed by an individual analysis of each research question in chapter twelve. Chapter thirteen is the last chapter of this work and provides the concluding remarks and some implications for future work.
