IMP Journal - IMP Group

THE

IMP Journal INDUSTRIAL MARKETING AND PURCHASING

ISSUE 8 6 ISSUE13 VOLUME VOLUME

2014 2012

Forum for research into business interaction, relationships and networks.

The IMP Journal Volume 8. Issue 1, 2014

Editor

Lars Hallén Mälardalen University, School of Business

Håkan Håkansson BI Norwegian Business School

Debbie Harrison BI Norwegian Business School

Executive Board Håkan Håkansson BI Norwegian Business School

Stefan Henneberg Manchester Business School

Annalisa Tunisini Catholic University, Milan

Lars Huemer BI Norwegian Business School

Peter Naude Manchester Business School

Tibor Mandjak Corvinus University

Editorial Board

Lars-Gunnar Mattsson Stockholm School of Economics

Helén Anderson Jönköping International Business School

Stefanos Mouzas Lancaster University

James Anderson Northwestern University

Kristian Möller Helsinki School of Economics

Luis Araujo Lancaster University

Ann-Charlott Pedersen Norwegian University of Science and Technology

Björn Axelsson Stockholm School of Economics

Thomas Ritter Copenhagen Business School

Enrico Baraldi Uppsala University

Robert Salle EM Lyon

Keith Blois Lancaster University

Asta Salmi Helsinki School of Economics

Roberta Bocconcelli Urbino University

Judit Simon Corvinus University

Anna Dubois Chalmers University of Technology

Ivan Snehota University of Lugano

Geoff Easton Lancaster University

Robert Spekman University of Virginia

David Ford University of Bath, School of Management

Alexandra Waluszewski Uppsala University

Lars-Erik Gadde Chalmers University of Technology

Ian Wilkinson University of New South Wales

Simone Guercini Florence University Aino Halinen Turku School of Economics and Business Administration

Publisher

Louise Young University of Western Sydney Judith Zolkiewski Manchester Business School

IMP Group, ISSN 0809-7259, www.impjournal.org


The IMP Journal Issue 1, Volume 8 Contents

A letter from the editor IMP - Making sense of the interactive business world Call for pappers

This is not a Building: the Abductionist Journey of a Publicly Funded Regional (non-)Innovation Project Andreas Brekke & Synnøve Rubach, Thomas Hoholm Boundary Decisions of the Firm: Make, Buy, Cooperate Filipe J. Sousa

1 13

Activity Interdependence in Industrial Networks - Exploring the Structural Interconnectedness of Activities and Resources 22 Lars Bankvall The Conceptual Model of Success in Buyer-Supplier Relationship Aniko Bodi-Schubert

Produced by IMP Group in cooperation with Manchester Business School Catholic University - Milan BI Norwegian Business School PDF and Layout, made by Kooperaivet Mediagruppen Karlstad. http://mediagruppen-karlstad.se/

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A letter from the editor Welcome to the first issue of volume 8. Four interesting papers are presented covering issues from failures to success, from extensive empirical cases to theoretical models and concepts and from personal relationships to technical combinations of activities and resources. The four articles are 1. Brekke, A., Rubach, S., Hoholm, T., This is not a building: The abductionist journey of a publicly funded regional (non-) innovation project 2. Sousa, F., Boundary decisions of the firm: Make, Buy, Cooperate 3. Bankvall, L., Activity interdependence in industrial networks – exploring the structural interconnectedness of activities and resources. 4. Bodi-Schubert, A., The conceptual model of success in buyer-supplier relationships The first article by Andreas Brekke, Synnøve Rubach and Thomas Hoholm takes up problems with a rather typical government initiated development of networks where the ambition is to create more or less local innovative networks. With the authors own words: “The article starts with the intention to report research findings related to the microprocesses involved in networked innovation processes. However, it ends up with a description and critique of how a publicly funded project becomes a tool for the production of little more than new projects.” The second article by Filip Sousa discusses the classical boundary problem of the firm and concludes that the make and buy decision now must be changed into a make-buy-cooperate one. Furthermore, the author claims that inter-firm cooperation

is in itself a third governance structure, in alternative to the hierarchical and the market modes of coordination. The third article by Lars Bankvall includes a thorough discussion of the interconnectedness of activities and resources in different supply situations. Four alternative interdependency types are presented as a tool for description and analysis of how activities connect through resources in industrial networks. The final article by Aniko Bodi-Schubert takes up the problems with identification and conceptualizing of success in buyer-supplier relationships. The article concludes that success in buyer-supplier relationships can be understood as a subjective, organizational-level perception, which evolves following the fulfilment of both business and relationship success goals. In this issue we also have a call for papers for three workshops in 2015 and for one IMP-symposium in 2016 to celebrate the first IMP-project meeting taking place in Uppsala in 1976. In a classical IMP collective way we hope to produce something that both is conclusive and challenging and which also is summarizing and an interesting point of departure for future studies.

IMP - Making sense of the interactive business world CALL FOR PAPERS

collective process. Therefore, three workshops focusing on some main important implication of IMP research will be organized; for management practice, for economic policy and for further research. The three workshops will be held in Manchester, Uppsala and Lugano in 2015. For further details on the three topics see the attached calls for papers. Submission process. This is following the model developed at IMP journal seminars. For each paper submitted editorial prereview will be provided in 30 days after the submission deadline. When a paper is accepted three reviewers / discussants will be appointed – one from the Symposium advisory board and another two chosen among other contributors to the workshop. The main review of papers prepared for each workshop will be the discussion at the workshops. Outcomes. We expect the papers to be published in special issues of the IMP Journal and other relevant and interested journals, and chosen papers will be included in the Symposium monograph. Workshop format. We expect up to twenty papers for each of the workshops and thanks to the financial support from Tore Browalds, Jan Wallanders and Tom Hedelius Research Foundation we can provide hotel accommodation and meals. For further information and taking contact with the organizer visit the Symposium web page: http://www.impgroup.org/symposium2016

THREE WORKSHOPS 2015 & SYMPOSIUM 2016 In 2016 it will be forty years of IMP research that, starting with the first international project in 1976, have pioneered the empirical observations of the main characteristics of the business landscape, as well as the theoretical concepts of interaction, business relationships, and business networks. Since then IMP research have resulted in extensive studies and publications – which gives reason to revisit the step-stones of the past research and to outline challenges for future studies. Organizing a symposium in 2016 is an occasion to systematically examine the implications of the main research findings and to address present and future challenges; for research, for management and for economic policy. The symposium shall result in a significant monograph on these topics. Following the IMP spirit we see the opportunity to mobilize the IMP research community, both senior and younger researchers, willing to contribute to the aim of the symposium. The ambition to produce a significant monograph requires a stepwise,

Sunne May 2014 Håkan Håkansson Editor


Call for papers to Workshop 1 Managing in an interactive business world Manchester 21-23rd of April 2015

IMP research findings regarding the presence of close inter-business relationships, the network form of business markets and the centrality of the interaction processes have rather far-reaching implications for management. Past research in the IMP tradition has observed and examined some of these and a number of propositions have been formulated regarding a number of different areas of management, managerial issues and various business contexts. Firstly, the past research dealt with how the observed characteristics of business networks affect various management areas and investigated implications not only for marketing management but for a variety of management areas; the more important ones have been purchasing and supply chain management, logistics and distribution, technological development and innovation, accounting and international business. Secondly, past research also show consequences for a large variety of management issues. It has formulated implications both for strategy management, organizational issues and operations in various areas from sales to R&D. Thirdly, studies in the IMP research stream has dealt with a large variety of business contexts, ranging from large heavy industrial companies, over different type of

Call for papers to Workshop 2

Policy making in an interactive business world Uppsala, 26-28th of May 2015 The studies carried out in the IMP setting have started out from interaction among two or more counterparts and have focused on how interaction processes, relationships, and networks influences the behaviour of each single firm; its daily operations and its development. As a natural development, there are quite a number of studies that have dealt with extended business networks rather than with dyads or limited network relationships. These studies have clearly shown what some other scholars suggested, that business network structures have important and interesting consequences for society at large and raise a number of new economic policy issues. For example, studies of innovations and regional or national innovation policies, and studies of logistics and distribution networks, offer interesting insights into transnational business network structures and the consequences that these have for the economic development and policy in the context of a particular country. For instance, these studies have shown how network structures affect location of production units, the commercialisation of research, and the distribution of costs and gains across industrial sectors, regions and organizations. While various forms of network structures appear to be praised and presented in the economic debate as largely positive phenomena, in the IMP approach interaction and networks have

medium-seized product and service companies to various bodies in business landscape such as special governmental and regional supporting units. In all the three fields the IMP research has produced a wealth of significant insights mostly of the ‘positive’ type, based on empirical evidence from observing circumstances and their consequences in various management situations. The normative indications, however, have rarely been at centre of the interest. Indeed, the IMP research has sometimes been criticized for limited concern with “translating the findings” into normative managerial implication. With regard to the implications for management we expect various types of contributions. We welcome in particular contributions of two types: The first is empirical studies adding to the above picture (not only cases) that outline and illustrate specific implications for a particular management area (e.g. purchasing, R&D, sales, new-venture development, marketing), special type of issues (e.g. investment decisions, management incentives, capability development, mergers and acquisitions), and a particular business context (e.g. business services, international companies, SMEs, hi-tech industries). The second type of contributions we aim at is studies and essays that bring together and integrate findings and results from various studies and elaborate a more holistic picture of how the key features of business networks affect any managerial area.

consequences which have both bright and dark sides. Many IMP studies have also produced more balanced views of the implications of these emerging and increasingly dominant business network structures for various stakeholders. Furthermore, several studies have observed largely unanticipated and problematic aspects of network structures that have rarely been raised in the economic policy debate or addressed as issues that may require regulatory interventions or re-balancing. Since we strongly believe this topic will become more and more important we invite all types of contributions in this area. We expect at least two types of contributions here: One is studies that examine various aspects of network structures that have or may have severe implications for the broader policy, such as overall distribution of power and wealth in society, economic growth or renewal capabilities and economic and environmental sustainability that may have implications for economic policy. Another type of contributions that we expect is studies focusing on various areas of public – private interests and intersection on topics such as in regional development, innovation support, new business and industrial development support, and in health care provision. The latter studies would produce interesting contributions from studies of phenomena that are increasingly emphasized as areas of ambitious political interventions and search for adequate economic policies, better organizing models and improved capabilities to carry out complex improvement projects.


Call for papers to Workshop 3

Theories and methods in an interactive business world Lugano, 6-8th of October, 2015 One implication from the first IMP study in 1982 was to challenge some basic assumptions in theoretical frameworks prevailing at that time. Over the years a number of novel analytical concepts and models have been proposed in IMP studies building on empirical observations of the existence and function of business relationships, the existence of connectedness between relationships leading to the network effects and, a central role of interaction processes in inter-organizational business relationships. While the past IMP research has been characterized by emphases on empirical studies it turned out to be fruitful in developing and proposing novel conceptual frameworks often as alternative theoretical explanations on several central phenomena in business. There have also been an interesting variation in different theoretical conclusions regarding the same phenomenon and

there are some interesting controversies among IMP-scholars. It appears timely to review and relate more systematically the more significant conceptual developments. Postulating centrality of relationships, network forms and interaction processes raises also some interesting methodological issues that regard how these can be approached, observed and analysed. Theoretical constructs identified and developed have consequences for research methodology. The past IMP research has led, for instance, to use within marketing and purchasing case studies to a much larger extent compared to studies based on other theoretical approaches but also to use of multiple methods in approaching the phenomena central in the IMP theorizing. We therefore invite papers taking up both conceptual/theoretical and methodological issues. We expect two types of papers: the first would be studies examining and integrating the conceptual developments on various issues and possibly relate more systematically various more partial theory concepts; another type of papers we expect is papers that probe the relationship between research methodology approaches and theoretical issues.

The IMP Journal Volume 8. Issue 1, 2014 1

This is not a Building: the Abductionist Journey of a Publicly Funded Regional (non-)Innovation Project Andreas Brekke, Synnøve Rubach & Thomas Hoholm

COWI AS Ostfold Research, BI Norwegian Business School

Abstract

The article starts with the intention to report research findings related to the microprocesses involved in networked innovation processes. However, it ends up with a description and critique of how a publicly funded project becomes a tool for the production of little more than new projects. The article consciously shows the abduction process underlying the research and thus provides an opportunity to learn from practice. Insights into the relations between innovation policy and innovation are outlined. KEY WORDS: Innovation theory, abduction, financing innovation, innovation networks, policy, actor-network theory, construction industry

0. Prologue: A reader’s guide Several authors concerned with industrial networks and innovation have argued for – and explored – abductionist approaches to research (e.g. Kjellberg, 2001; Dubois & Gadde, 2002; Dubois & Araujo, 2007). However, fewer have demonstrated abductive research in writing. We hope that writing this paper more in line with how the abductive research process actually evolved will reveal to a greater extent the potential (and challenges) of abductive studies of networks and innovation processes. A relevant parallel to our paper is the detective story where social science researchers investigated the rise and eventual killing of Aramis – a highly innovative public transport system project in France – which shows the power and also the vulnerability of the political, social and technical relationships of an emerging innovation network (Latour, 1996). In his account, Latour includes the investigators in the story, demonstrating how the sociology/technology/economy divide in academia leads to flawed explanations of technology development. In our account, the researchers’ inclusion in the story has an even stronger rationale; some of the researchers were participants in parts of the story – sometimes as action researchers, sometimes as consultants, and sometimes in a traditional/less involved ethnographic mode. The article starts with the intention to report research findings related to the microprocesses involved in networked innovation processes. However, it ends up with a description and critique of how a publicly funded project becomes a tool for the production of little more than new projects. The article consciously shows the abduction process underlying the research and thus provides an opportunity to learn from practice. In line with Waluszewski (2011a), insights into the relations between innovation policy and innovation are outlined. Thus, the article has two aims: 1) to further our understanding of the challenges of publicly spon-

sored networked innovation projects; and 2) to give a real account of an abductionist research process.

1. Introduction Innovation is absolutely necessary for nations, regions and companies to survive in today’s world. It ensures economic growth and prosperity and attracts the best people. At least, this is the picture presented in business, in the media and in politics. Thus, innovation becomes very important to understand and foster. This was the basis for an innovation project in a Norwegian region, where regional actors searched for the best means to enhance innovation through interaction of the triple helix actors1 in a regional innovation system.2 This article scrutinises one of the subprojects in the innovation project. First, to create knowledge about the challenges of publicly sponsored innovation projects, but secondly, to also produce insight into why there are sometimes no innovations and what consequences this has. Public money is put into processes where research institutions and industrial firms meet to transform research knowledge into commercial products. Boundary organisations3 are often involved in order to transfer knowledge to and from the different actors. Hopefully, this process will in turn strengthen both the research bodies and the industry in the region where the processes take place. For a regional administration overseeing such pro1. The triple helix denotes industry-government-university relationships and triple helix actors are thus actors representing policymaking, research and industrial production. 2.”Regional innovation systems” is a concept endorsed by both academic researchers and policymakers where the focus is on geographical proximity as a driver for innovation. 3. Boundary organisations are organisations that transgress boundaries (Schneider, 2009) and the term is a development from the seminal work on boundary objects by Star and Griesemer (1989).


cesses the outcome, i.e. the specific innovations and innovation networks, of such a process is also linked to problem solving in other areas. The administration is responsible for delivering a range of functions related to, for instance, schools and health services. There is a belief that regionally bottom-up-produced innovations will be better adjusted to local conditions, but still be exportable to a global market if they work locally. How is innovation best managed and organised? This is the golden question for a range of actors and the underlying question for this article. However, we must warn the reader already that we will not present the success story and the final recipe. Rather, the article contains the story of what appears to be a widespread norm for projects attempting to create environments for innovation. Through an abduction approach in writing, the article shows how a publicly financed project on the energy-efficient rehabilitation of buildings gets disconnected from industrial reality and reinforces the disconnectedness in a seemingly conscious fashion. We are taken through three stages of empirical material, where: 1) the expectation for “real” innovations created through a network of triple helix actors is alive; 2) the absence of industrial actors becomes obvious and the work is done mostly on a non-material level; and 3) the researchers4 start to reflect upon and examine how the project becomes stabilised.

2. Method: Abduction in practice and in writing The article is based on a chronological presentation of a project called “Regional Development (RD): ‘Energy–efficient’ rehabilitation of buildings” (hereafter denoted the ERB project) and on the researchers’ models used to gather and to make sense of the empirical data in and about the project. The format of the article and the methods employed thus go hand in hand. In order to keep the article at a reasonable length and readable for a wider audience, both the empirical parts and the theory parts are kept short. Abduction, introduced by Peirce (1931), has been employed by several researchers linked to the IMP tradition (e.g. Kjellberg, 2001; Dubois & Gadde, 2002; Dubois & Araujo, 2007). It is a position to be understood neither as pure induction nor pure deduction. Instead, “the process of abduction involves a successive reinterpretation of both theory and empirical observation” (Kjellberg, 2001:p.62). An important point when conducting a case study with an abductionist approach is the systematic work involved in developing theory or analysing empirical material or both. The approach necessitates a conscious outline of the theoretical position from the beginning (Dubois & Gadde, 2002) with which the empirical material should be matched. If the theoretical position and the empirical material do not match, another conscious process of deciding whether to develop the theoretical position or to create a new one must be undertaken. Throughout the project, the researchers have been confronted with the mental models they have used when entering the empirical world. The duration of the project work included in each empirical section is steered by the theoretical approach guiding the understanding of the process. Each section is numbered accordingly: from E0 and T0 in the pre-project phase, E1 and T1 in the first project phase and so on. The paper consists of two layers, so to speak. The first layer 4. The term “researchers” in this paper will – if nothing else is noted – refer to the authors of this paper, as well as their close colleagues. Other, typically technological, researchers are often involved in innovation, however not much so in this particular story.

describes the processes the researchers were taking part in. Here, the research questions guiding the researchers at different points in time are presented. All the time, the research is focused on creating knowledge about innovation in networks, but the actual research questions change according to empirical findings or when the theoretical grounding is changed. The second layer is the abductionist retrospection of the research journey. This layer is almost a meta layer situated in the structure of the article and in small reflexive paragraphs. Here, the overarching research question is: How could research on innovation in networks be conducted? At the end, we aim to contribute to both these layers and want to present findings from both the actual research process and from the reconstruction of the abduction taking place. Whereas one of the aims is to produce new knowledge about innovation in networks, it could have been useful to present how the authors define innovation. Researchers interested in the processes of innovation have often adopted a relatively pragmatic definition of innovation as the realization of something new to the involved actors (e.g. Van de Ven et al., 1999), rather than insisting on more objective definitions related to the economy (e.g. the Schumpeterian definition, such as in Fagerberg, 2005:6), to products and services that are “new to the world”, or other. In our case study, the concept of innovation is used in several somewhat different ways, whether by public administration, private actors, or academics. Thus, rather than deciding on the definition of what innovation is a priori, this has been part of what has been studied. Information for the empirical sections is partly gathered through the researchers’ participation either as engaged members (Levin & Ravn, 2007; Van de Ven, 2007) or as observers in the organised network(s) (Van de Ven, 2007). Interviews have been conducted with key actors to complement information. We acknowledge that some of the material may be confusing to the reader because of the rather large number of actors, meetings and work groups involved. We have strived to make it as readable as possible. Nevertheless, the complexity of the project has, at times, also been confusing for the directly involved parties.

2.1 T0 and E0: Networked innovation and bridge walkers in organised industrial networks facilitated by researchers T0 denotes both the point in time where the project starts and the initial theory, or preconception, guiding the researchers. This does not mean that T0 is an accumulation of all the theories the researchers have ever become acquainted with. Rather, T0 is the theory specifically picked for a specific project. Such a theory can be picked because it has been shown to be fruitful for explanations within the empirical domain the study refers to, or perhaps the programme plan of the sponsor requires it. E0, in a similar fashion, is the empirical starting point. As for theories, this does not mean that E0 is the accumulation of all empirical instances. Rather, each researcher has a pool of empirical accounts from their own experience or reading. Different parts of this pool can be activated in specific instances when needed, although there is always a danger that relevant parts are forgotten, dismissed or in other ways disregarded. Both T0 and E0 will, for a specific research project, be anticipations of what will be encountered in the project. In the research project accounted for here, anticipations were quite clear. A group of researchers were about to write a research proposal for a second project period for a project previously undertaken. Naturally, the researchers were planning to draw upon experi-


ences from the first project period when writing the proposal. These experiences, both theoretical and empirical, are presented briefly in the following and can be seen as T0 and E0 for this article. The earlier conducted project and the new proposal to be written were both situated within a research programme related to Regional Development and Innovation (RD) in the Research Council of Norway. The programme had a first project period between 2007 and 2010 in which 15 regions in Norway ran projects. Every project was required to consist of two subprojects: one “interaction project” where co-operation between industrial companies, R&D institutions and regional administrations should take place, and a “research project” where one or more research institutions should conduct academic innovation research on the activities running in the interaction project. The interaction project for the first RD period had been divided into several subprojects defined by company networks within a sector or a theme. The programme plan for the first period stated a number of means to be tested in the interaction projects such as mobility between industrial companies and academic institutions, action research and employee-driven innovations. All these means were tested in the first project period and the researchers were planning to study their influence on innovation in more detail.

3. Empirical part 1 (E0): Getting ready for a project This empirical section explores the phase leading up to the Research Council of Norway’s eventual decision to finance the project and tries to answer questions like: What is the project about; why and how was a proposal written; and who were the involved parties? The researchers had rolled up their sleeves at the beginning of 2010, ready to write a research proposal underlying the establishment of RD 2, i.e. a second project period of the RD project. A programme plan had been issued by the Research Council and an application deadline set for the autumn of 2010. According to the content of the programme plan and experiences from the first RD project, the researchers maintained a focus on innovation in networks and research on different means to accompany such innovation processes. Different research groups were working on defining themes for networks of involved companies and developing an initial research proposal. In parallel to the research project, the application also needed to include an interaction project proposal consisting of descriptions of how the networks should be organised. The County Council, who would be the owner of the eventual project, took charge of the overall process and organised a team of process facilitators and editors who were responsible for putting the final application together. The network descriptions to be part of the final application were evaluated and ranked by an organ at the County Council called the Competence Initiative. This organ is set up to “help [the County] become the leading region in Norway in entrepreneurship and innovation” (County report, 2013) and consists of members from Innovation Norway, regional chapters of the Norwegian Confederation of Trade Unions and the Norwegian Confederation of Enterprises, the regional university college and political representatives. Five network descriptions were picked to take part in the final application and three out of these five had not been part of the RD 1 project. The project application had to include a description of: the interaction project (i.e. the network descriptions), the research project and an overriding part on how the two projects should be integrated. In order to study the inno-

vation project, researchers described a similar approach to that used in RD 1 based on action research and engaged researchers in the interaction project. Integration between the interaction project and the research project was, however, inadequately described and the Research Council rejected the application in the late autumn, 2010. Nevertheless, the Research Council had money to support regional initiatives and invited all regions that had project applications rejected to resubmit revised applications before April 2011. Again, the County Council took charge of the application process but this time hired a person from Innovation Norway to edit the proposal. The interaction project was, in this second round, described by invited partners. A criterion made by the Research Council was that the focus areas in the application should be thematically connected to the central tasks for the County council as described in their own strategic plans. Three themes were selected for which networks would be organised: 1) energy technology; 2) health-care technology; and 3) energy-efficient rehabilitation of buildings (hereafter denoted ERB as this theme will be more in focus in the following). ERB aimed at “increasing the volume, and the rate of, development and introduction of new products and solutions for energy-efficient rehabilitation of buildings”. A non-regional actor, the BI Norwegian Business School, was invited to head the research project based on a recommendation from the Research Council. Researchers from BI set the research agenda and introduced new and more processoriented approaches towards understanding innovation. The method for the research project shifted from an action research approach to a more ethnographically oriented approach. For each of the network themes in the interaction project, especially interesting research issues were defined. Some of the researchers who had invested much time in the networks present in the first RD project were disappointed with the discontinuation of established networks. An important contribution of one of the PhDs produced in the first phase was related to the difficulty of getting networks up and running and even more the difficulty of getting useful contributions to flow between the network and the involved organisations (Rubach, 2011). Now, network activities had been terminated at the time when they were just up and running. Disappointment was not the only negative emotion created in the application phase. The County Council’s handling of the application process where central researchers in the first RD project were denied responsibility and where research approaches became politically steered made some refuse to take part in the revised project. The initial theories and expectations of empirical material preceding the application writing had been wrecked and new ones established. The remaining researchers had to adjust their theories and approaches in the field accordingly.

4. Theoretical part 1 (T0): Networked knowledge acquisition and dual organisation-development in the construction industry This theory part describes the theories that were presented in the (accepted) research proposal related to the ERB project. The research project proposal within the overall RD proposal stated two main goals: 1) to strengthen the understanding of innovation processes in networks involving companies, public actors and users; and 2) to develop local research competence at an international level within the innovation field. The proposal further emphasised the private actors’ (i.e. companies’) role in interaction and innovation in the region. To reach the goals,


Figure 1 The dual OD model (from Rubach, 2011, printed with permission from the author)

ethnographic case studies of the activities going on in the interaction project were to be employed. The local competence building would be guaranteed via collaborative research seminars, as well as relating a postdoctoral researcher with her PhD experience from the previous RD project to the new research project. This had implications for the theoretical approach to make sense of the work in the interaction project. The postdoc candidate started to work on her initial analytical framework. Within ERB, she decided to further develop the model that was one of the contributions from her PhD (Rubach, 2011): the dual organisation-development model (as shown in Figure 1). The model focuses on the link between intra- and interorganisational learning processes and innovation. The model shows that learning (or innovation) processes in networks mimic those going on within organisations. For learning to occur, there must be information that “travels” with people from the participating organisations to the network and vice versa. Rubach (2011) showed that the intermediating persons, the bridge walkers, are important for gaining learning from and utilisation of network participation. Thus, there are three important processes taking place: 1) the intraorganisational process; 2) the interorganisational process; and 3) the bridging process between the intraorganisational and interorganisational level. The dual OD model was further developed by the researchers into a new, combined theoretical model with Håkansson and Ingemansson’s (2011) perspective on networked knowledge acquisition. Håkansson and Ingemansson (2011) explore connections between innovation and knowledge in the construction

industry. They propose a taxonomy for five different types of interaction and explain the knowledge involved for each type. The five types are: 1) pure exchange; 2) minor social exchange; 3) technical exchange; 4) co-operation and 5) networking. The degree of interaction increases from type one to type five, and so do the knowledge involved and the learning. Pure exchange is explained as interaction deriving from exchange of products and services for money. Resources remain unchanged by the interaction and there is no knowledge transferred except the one existing in the product. Minor social exchange is set to include some social sentiments developing through repetitive exchanges. This can result in minor changes in the orientation and/or knowledge of the involved actors but only regarding the counterpart’s existence and features. Technical exchange is explained as interaction that results in changes being made to the product and/or production facilities where specific technical knowledge can be transferred. Co-operation is defined as interaction that results in changes being made to multiple tangible and intangible resources, where both sides in the relationship are affected. The knowledge content is often extensive. Finally, networking is explained as interaction that results in changes being made to several tangible and intangible resources and where several parallel knowledge processes appear. Here more than two parties are affected. Increases in the degree of interaction enhance the possibilities for innovation. However, Håkansson and Ingemansson (2011) claim that the construction industry is characterised by interaction of the three first types, involving little interaction where

Table 1 Combining interaction categories and the elements of the dual OD model

Pure exchange Minor social exchange Technical exchange Co-operation Networking

Intraorganisational innovation processes No No Yes, minor Yes Yes

Interorganisational innovation processes No No No Yes Yes

Bridging intraorg. and interorg. No No No Yes Yes


companies instead handle development and attempts at innovation internally. The combined model, shown in Table 1, makes the connection between the five types of interaction from Håkansson and Ingemansson (2011) and the three processes of network learning from Rubach (2011). Rubach, Hoholm and Brekke (2012:p.7) stated that “if the building construction industry is going to develop and live up to the demand for a more environmentally sound development, the industry must be included and involved in initiatives where knowledge transfer and creation of joint knowledge are focused”. For the building construction industry, as well as the individual firm, to develop and innovate, the purchasing of standardized products and services will not force this wanted development, instead ending in pure exchange or minor social exchange interactions (Håkansson & Ingemansson, 2011). Table 1 indicates that co-operation or networking, which promotes bridging the intraorganizational and interorganizational processes, should be cultivated in order for the total industry as well as the individual firm to develop and innovate. Thus, when Håkansson and Ingemansson’s (2011) taxonomy of innovation in the building construction industry was combined with the dual OD model from Rubach (2011), the researchers were equipped with a “tool” for what empirical instances to search for. The ERB project seemed to be the perfect setting for scrutinising the proposition of the connection between networking and innovation and finding the right empirical instances. The researchers planned to follow how actors from the business construction industry were enrolled in the project, how all actors (hopefully) shared and developed new knowledge, and how they co-operated towards the goal: energy efficient rehabilitation of buildings. Would they really explore new solutions together? What would contribute to or restrain the possibilities for finding new and innovative solutions? Would the project reach the set goals, or would it end up demanding the well-known and/or the cheapest solutions? And finally; how would this affect the possibility of ERB to facilitate the enhancement of competence and innovation in the regional industry related to energy efficient rehabilitation of buildings? Now, let us dive back into the empirical sea.

5. Empirical part 2 (E1): The project gets underway and mutates The second empirical part started in a large meeting room in a hotel on 14th June, 2011. The appointed project leader for ERB opened a workshop organised by the RD project with the title: “Energy-efficient rehabilitation of buildings” (meeting I). An audience of about 30 people was present, representing the construction industry, entrepreneurs, consulting firms, political bodies, research institutions and others. They were there to be informed about the project and contribute in a session denoted a “mini-foresight” where groups were supposed to answer three questions: 1) What important drivers affect energy-efficient rehabilitation as a sustainable industry in a ten-year perspective (up to 2020)?; 2) What actors have – or should have – a role in energy-efficient rehabilitation of buildings in the region? How can the actors complement/strengthen each other?; and 3) What kind of network do we need? What strategic question(s) should the network address? The workshop was clearly focused on how a network should be assembled. There was a more or less defined theme (energyefficient rehabilitation of buildings) that relevant actors were

invited to discuss. It is noteworthy that the seminar was held a week before the project application was approved and the project was granted money from the Research Council. The next common meeting place was a seminar on 14th October of the same year with 80 people attending (meeting II). Most of the people were from the political establishment, many were researchers or consultants and a few were industry representatives. Between these two seminars, a work group consisting of the project leader of ERB, an architect and representatives from two research institutions, two consulting firms and the regional administration had been formed. The work group had organised the seminar but was also responsible for a report on what ERB should be all about. Also, the County Council had offered to use one of their buildings as a test arena (the actual building had to be selected by the project). Participants at the seminar gave feedback expressing disappointment over the slow progress of the project and lack of written material available prior to the meeting. The final words of the résumé from the seminar say: “We experienced a great interest and many who want to be contacted, and we look forward to establishing the pilot project where the County Council will be in the driver’s seat” (meeting II). The work group spent two months on preparing the report that was sent to the County Council. The report suggested that two more work groups should be formed: one work group for technical assessment, which should choose a building as a test arena and propose measures to be part of the rehabilitation. The group should include competence in the physics, architecture, energy distribution and technical installations of buildings. The other group should, according to the group’s memo, focus on the organisation of the building project and give advice as to how the actual project can be undertaken. The group was required, according to the report, to have good knowledge of public procurement and models for building processes. The report was accepted by the County Council on 20th January 2012 and frames for the work were laid out. The work group responsible for the report was assigned the task of choosing the building to serve as the test arena. The actors in the work group were paid 65% of their normal hourly rates, as the County Council demanded that the participants contribute the rest as their own effort (“in kind” hours). This was done in order to recruit actors that were serious about building this up as a new development area for the region. The work group were also responsible for inviting interested parties from the construction sector. The work group accepted the terms a week later and a professor from the University of Life Sciences was handed the task of editing the work. During the early spring of 2012, the work group conducted site visits to four candidate buildings. A high school in a city centre (next to the County Council) was chosen because of its inherent ability to create transferable knowledge to be applied on other buildings, its potential for energy efficiency, its placement and its shape (County meeting memo, 2012). The other candidates were either old buildings with special requirements related to keeping the facade intact or deemed to be atypical for the buildings the County Council is responsible for. Soon after, a new workshop was held with invited actors to discuss the implementation of possible solutions to make the building into a reference rehabilitation project (meeting III). This time, there were no representatives from the construction industry, albeit several consultants and organisations did work with buildings in general and energy use in buildings in particular. Many issues of interest to consultants and researchers were brought to the table. The majority of them were related to


how buildings can be insulated and how systems for automated control of building energy can contribute to creating energy-efficient buildings to the passive house standard. Passive houses will have little need for heating in winter and subsequently little need for cooling in summer. At the same meeting, it was decided to raise the sustainability ambitions for the rehabilitation project. It should not only aspire to energy class “A” (the best level in the Norwegian energy grading system, http://www.energimerking.no/ 2013), but an aim was also set to rehabilitate it to a classification of “Excellent” in the BREEAM-NOR classification scheme. BREEAMNOR is the Norwegian version of the Building Research Establishment Environmental Assessment Method (BREEAM) for buildings developed by BRE in the UK. The scheme contains ten different themes (e.g. energy, materials and waste) with several subthemes for which a score can be granted. As a result of the workshop, the work group was split in three: one with responsibility for process and progress; one responsible for defining how the building could be used for R&D; and the third for specifying how the building could be used for educational purposes. All three groups developed reports that were put together and presented to the County Council in late summer 2012. The report also includes a so-called BREEAM-NOR pre-analysis in which measures to achieve the “Excellent” classification are described. None of the work groups’ reports include much reference to (product) innovation in the construction industry. With a dose of goodwill, there are traces. The report from the process and progress group includes mention of a supplier development programme: “The project has the ambition to create new opportunities for the business in [the County]. This requires time in the schedule for suppliers to develop the solutions asked for by the competence group before the delivery is due. The supplier development programme should be described early in the project but executed later”. In addition, the research and development group describes project ideas that can be used as platforms for product development and includes a paragraph on a new measurement chip to be tested in the project (Project workgroup memo, 2012). Actually, although it anticipates the course of events, the measurement chip is the only material evidence that smells of product innovation in the project. The work groups’ preliminary reports were presented to the County Council at the end of May, 2012 (meeting IV). The project leader of the ERB project welcomed everyone and explained how the ERB project, and a second project on energy-efficient rehabilitation sponsored by the Norwegian State Housing Bank, could provide useful input to the upcoming rehabilitation of the high school. Present, in addition to people from the ERB project and from the Competence Initiative, were a handful of leaders from the building management section at the County Council. These leaders are responsible for the actual rehabilitation of the high school. They were presented with the findings from the report and a suggestion on how the actual building process should proceed. They did, however, make it clear that they had standard procedures related to both the process and to procurement. ERB could be one of the sources of information guiding the project, but the leaders made it absolutely clear that the responsibility for rehabilitation was the building section’s domain and not that of a project. Also present at the meeting were representatives from the high school, including the principal. He had an engaging speech about how and why the rehabilitation process had to involve the users and their needs. His vision was a “transparent” school where activities are visible and daylight is allowed throughout the building. This vision does not fit well with a su-

per-insulated passive house, as large window panes and requirements for insulation do not go well together. The researchers left the meeting somewhat bewildered. After almost a year, company representatives had barely got their teeth into the project, creating few opportunities to investigate industrial renewal or product development processes. Now it turned out that even other members of the County Council and the building’s users had little interest in the ERB project. How and why had the boundaries around the ERB project, a second project on energy-efficient rehabilitation and the project of actually refurbishing the high school become so fuzzy? How could the ERB project be employed to teach anyone anything about innovations? How could the postdoc researcher employ the combined model of networked knowledge acquisition and dual organisation-development in the construction industry?

6. Theoretical part 2 (T1): Ideas or activities? Well, she could not. The framework presented in the first theoretical part did not appear to be the right equipment out in the field. Of course, the dual OD model could still be employed for the network activities in order to investigate how the participants brought knowledge back and forth from network arenas and how that in turn created learning and innovation in the different organisations. However, the types of interaction proposed by Håkansson and Ingemansson (2011) are clearly linked to industrial activities and without any industrial actors the typology seems less relevant. Industrial actors were only indirectly involved as industry was going to be asked for specific deliveries. The industrial actors were clearly not to be involved in the processes of defining the new solutions, as this was to be done by other actors (for instance R&D institutions). This equals technical exchange in Håkansson and Ingemannson’s (2011) typology and may lead to some intraorganisational learning in involved companies (Rubach, 2011). There are, however, fewer opportunities for interorganisational learning processes and thus innovation (Rubach, 2011). One can claim that the activities observed in the project included the two “highest” forms of interaction, namely co-operation and networking, but without any forms of exchange (comprising the three “lowest” forms of interaction) there is little substance, and it is difficult to see how any resources get affected. How could the researchers proceed? The researchers had to go back to the drawing board to find other models to capture the events in the empirical material. What was more natural than to start investigating the gap between the expected and the actual findings in the project? A seminal book by Håkansson and Waluszewski (2002) called Managing Technological Development: IKEA, the environment and technology is both a landmark in the IMP tradition and an exploration of how technological development takes place. The book shows how environmentally friendly catalogue paper is developed through changes in resources, actors and activities. At the outset, there are similarities to the ERB project. Both relate to a demand for a new and “greener” product where the product specifications at the starting point are fuzzy. Håkansson and Waluszewski discuss how the idea of a “green” paper can be translated into an actual product and how the activated structure (i.e. the physical production processes) is transformed in the process. To create a better understanding of this not just being a straightforward process where an idea can immediately be turned into a product, Håkansson and Waluszewski introduce a distinction between the image level, where idea structures of how different resources relate are situated, and the activity level,


where actual processes happen. Ideas are cheap, while physical resources may refuse to change, or as Håkansson and Waluszewski (2002) write: In the struggle for new ideas a large number of hypothetical solutions are brought forward and discussed. These may include ways of changing the production processes, development of existing products, the creation of new technical solutions, the establishment of new laws and the creation of voluntary agreements… [An] idea structure includes different kinds of alternatives to the solutions realized in the activated structure. Hence, the idea structure is characterized by a surplus of suggestions. (p.81) This suggests that a struggle for the right representation of an idea structure can take place without connections to the activated structure, much as experienced within the ERB project. In the research project connected to ERB, we wanted to employ this idea to see whether there were indeed any connections between the idea structure in the ERB project and the real activated structure in the construction industry in the region. Shih (2011) used a similar analytical vantage point to discuss what role public policy can play in the formation of business networks. With the Taiwanese semiconductor industry as a case study, he shows how policy acted on or towards different resources. He concludes that: 1) the development of the semiconductor industry in Taiwan cannot be seen as a linear development from R&D through production to use but rather as moving back and forth; 2) new resources are combined with existing resource structures (or in other words an existing activated structure); and 3) the industry development was clever in not competing with the multinational companies but instead offering complementary resources to their value chains. He praises Taiwanese policymakers for being good network actors through granting the industrial actors enough flexibility to pursue relevant national and global network partners, and he warns that the advantageous characteristics of policymakers are far away from controlling the network. Shih’s (2011) paper creates a platform for understanding how triple helix actors can form relationships to enhance innovation and emphasises the same “heaviness” of existing activated structures as Håkansson and Waluszewski (2002). Another interesting study is Waluszewski’s (2011a) investigation of hindrances and opportunities for public policy to influence industrial renewal. She shows how innovation policy is influenced by at least three different theoretical ideas: 1) sources of innovation are outside the business landscape; 2) organised co-operation among universities, industry and government will create innovation; and 3) development and economic utilisation takes place in close spatial proximity. These ideas stem from different theoretical approaches, such as the “National Innovation System” approach (also identified as a precursor for “Regional Innovation Systems” (Cooke, Uranga & Etxebarria, 1997)), the “Triple Helix” approach and the “Cluster” approach. She further argues that these ideas and theoretical approaches lack a good understanding of innovation taking place in interaction between industrial firms and also of the different logics of academia and business. We have already encountered the approaches she describes in T0 and T1, but then mostly as unquestioned assumptions about how innovations take place. This reinforces Waluszewski’s arguments about how innovation policy is played out in reality. At the same time, Waluszewski offers an explanation both for why the public financing of innovation projects is set up as it is and why innovation in such projects is unlikely. This is again consistent with a model where there is a mismatch between the idea structure and the activity structure. The idea

structure tells the policy practitioners to use public money to fund projects where researchers with research findings will cooperate with companies to make the findings into useful products. This rarely happens, however the regime still remains. The researchers started to speculate whether these insights and analytical tools could be used to investigate if everything in the ERB project happened on the idea level and if reasons were related to a lack of interfaces with the activated structure. The second empirical part showed how production companies and entrepreneurs failed to take part in the project work for more than a few start-up meetings, either because of their own lack of interest or because the project didn’t find their ideas interesting. In the third empirical part, we pay closer attention to the actors involved in the project and scrutinise their interests in and relations to activated structures to study whether the distinction between the idea level and the activity level is useful for understanding the project, or more generally to study the lack of material innovations from politically managed/governed network projects.

7. Empirical part 3 (E2): Activities in a world of ideas Equipped with a model that discriminates between a level of ideas and a level of activities, the researchers waited for the interaction project to initiate the next activities. A report had been handed to the County Council at the end of August 2012. Based on its content, in late September the County Council decided to allocate resources to the establishment of a competence group and initiate activities to analyse the conditions of the school building. On 16th November, the work group that had been involved in the writing of the report met at the high school potentially to be renovated, to discuss which feasibility studies and analyses were required to implement the Council’s decision (meeting V). The principal welcomed everyone and gave a presentation about the building’s present (poor) condition. Thereafter, the ERB project leader and a representative from the County Council talked about the Council’s decision and about relations between the RD project, the County Council, the project at the high school and other research and development projects. They described the ERB project as successful based on the number of workshops held and new project proposals being worked on as a spin-off from the project. After these introductory presentations, the floor was opened for everyone to discuss how we could proceed with facilitating analyses to make the building a true example of energy-efficient rehabilitation. The only company present that delivered a product different from words or drawings was a start-up company offering a measurement sensor and transfer technology. They had prepared a presentation of what their technology could offer. Finally, after a short round of discussion, it was decided to create two new subgroups, one to work on the development of Building Information Modelling (BIM) and the second to work on the design of a measurement programme, data collection and analysis connected to energy and indoor climate parameters at the high school. Each group appointed a leader to convene group meetings. During the period between the end of 2012 and the beginning of 2013, the two subgroups held several meetings and started to hammer out how the BIM and how the measurement programme should be designed. Different experts, almost exclusively from outside the region, became involved and interesting research questions were posed, for instance related to how the BIM could contain sustainability data or how measurements of indoor air


quality could be coupled to the building’s function. However, these questions seemed a bit far from the realisation of commercial products, except for competence products to be sold by consultants and advisors. During the winter of 2013, some of the researchers were sitting in one of the researchers’ office. Once again the problem of the missing industrial companies had been discussed. The research project was meant to investigate how the means for regional innovation had affected the introduction of innovations or the possibility of innovating in the construction industry in the region. The research proposal had even emphasised that the research should focus on the private actors’ (the companies’) role in interaction and innovation in the region. How could they focus on the companies when there were none? Nevertheless, there were plenty of events taking place, meetings being organised, reports written and actors busy making themselves useful. So, what if these activities are described through focusing on the involved actors’ raison d’être and their activity structures? Would that tell a story about why the project proceeded as it did? Let us move back in time to the writing of the first (refused) project proposal. At least two main actor constellations were working on a research and an interaction project proposal, respectively. The RD programme plan had explicitly stated that the research project and the interaction project should be coordinated but still the communication between the two groups was limited. We have already speculated that this was due to conflicting interests between members in each group and different perceptions of what the RD 2 proposal should end up being. One of the constellations consisted of researchers, most of whom had been working with, and even managing, the first RD project. There were good reasons for these researchers to continue to use the methods (action research) and even the empirical areas (the networks) from the first project period. Three years is not a lot of time for scientists to get material published, especially if they are organising the networks where empirical data are collected. They also showed concerns over the continuation of the (still fragile) networks if they were not funded through the new project. The researchers thus had an established research activity structure they wanted to continue. The other constellation mainly consisted of people from the County Council. These had good reasons for wanting the control of the second period of the RD project. The project was supposed to foster the region’s innovation capability, and the County Council had, over the last couple of years, been given a stronger role related to business development and innovation in the region. In the first project period, their influence on which network was to be organised had been small, as was the connection between the political ambitions of the County and the project’s content. From the outside, it became obvious that the first (refused) project process had to fail. But not so with the second process, where the County was given a second chance to submit an application. This time, two innovation incubator companies (boundary organisations) were invited to construct the network descriptions and a more prestigious national academic institution headed the research proposal. Previous research environments had to choose whether to join in or not. The needs of the project proposal fitted well with all the invited partners’ activity structures. They all had experience in the requirements for getting public finance and the ability to mobilise the right words to trigger the interest of the decision makers in the other end. One can say that their writing activities fitted well with the decision makers’ ideas of what a proposal should be.

When the project was accepted and money granted, the involved actors had to work from a rather abstract and overriding ambition in three different themes. This can help explain why the first event was a workshop where several actors had to help in explaining what the project should be. During the first and the second event, people from producing companies in the construction sector were present (meetings I and II). Then they never showed up again. When the organisers of the ERB project were confronted with the absence of industry, they said: “They didn’t really want to be part of the project and they just wanted to push their insulation products; nothing new.” Clearly, there were differences in the perception of what could be gained from such a project, and a fuzzy project probably did not fit well into the activity structures of the producing companies. Neither did the products of the companies fit well with the project organisers’ ideas about innovation in the construction sector. The owners of the project, the county council, seemed to have forgotten the promise of industry involvement and never questioned the disappearance of industry representatives. The ERB project group still needed to make the project more concrete to survive and progress. This could have been done through coupling the project to ongoing development in the industry. However, considering the vast number of people from adjacent organisations (e.g. consultants, advisors, politicians and architects), the search for the one building to investigate seemed like a sensible choice. This made it easier to make the project relevant for all the involved institutions’ activity and idea structures, and the activity and idea structures would coincide. Diving into the project activities and materials, one can find hours of meetings, hundreds of pages written and numerous academics and other experts. These have contributed 35% of the financing of the project through their own time use and there have been mutterings that the ERB project isn’t exactly a lucrative project. Nevertheless, energy efficiency in the rehabilitation of buildings is a growing part of the idea structure related to the construction industry. The ERB project has in fact provided a platform for developing knowledge and relations with other actors within the field, and thereby access to proposal-writing activities. The researchers could use the project as an arena for conducting research on the connections between rehabilitation and energy efficiency, and they could use knowledge developed in the project in research proposals. Hence, the ERB project has fitted well with all the research partners’ activity and idea structures. The County Council and the ERB project could both gain from the linkages made between the Council’s refurbishment activities, the ERB project and other projects within the same area. The metrics used for measuring the output from the projects are not related to commercial products; rather they consist of counting events, attendees, project proposals and similar. Through its good performance in such metrics, the ERB project thus appears to be a successful project. The County Council in turn becomes the sponsor of a successful project engaging with one of the central themes of the Council. Again, there seems to be a good match between the activity and idea structures. T1, i.e. the theories underpinning the second empirical stage (E2), thus showed great power in explaining the empirical findings the researchers made in both the second and the first empirical stages. The use of a separation of activity and idea structures created a neat description of how actors mostly connected to idea structures became involved in the project and industry actors never did. There seemed to be a good match between the theories used, and the empirical material encountered. However,


employing the theories made the researchers ask why disentangled activities and idea structures could continue under one common umbrella. In the spring of 2013, the County Council held a hearing about the high school and its future (meeting VI). Prior to the hearing, a consultancy firm had been engaged by the Council and had evaluated the school as being in too bad a shape for rehabilitation. Demolition of the old building and construction of a new one would be the better alternative. In the hearing, the Council explicitly asked the RD project (which is here denoted the ERB project) to respond to the conclusions from the consultancy firm. And the ERB project started working on the issue...

8. Theoretical part 3 (T2): A heterogeneous actor network with common aims Wait! How can the ERB project work on anything? Isn’t the project an arena for doing work related to energy-efficient rehabilitation of a high school? How can it suddenly be granted actor status? Who would be legally responsible for the answers the project gives? The third empirical part showed that the actors discussing the idea structure connected to “energy-efficient rehabilitation” of buildings do indeed have their own activity structures coupled to the themes, although not their own industrial activity structure. We saw that the study object changed character depending on which actor was scrutinized. We even found an innovation, the measurement equipment further developed within the frames of the project and coupled to models for “prototyping” buildings. From the second theoretical part, the researchers had become equipped with an understanding of a possible separation between an idea structure and an activated structure. Returning to the empirical enquiries, they found that this model helped them understand why there was no industry present in the project and further that the ideas underlying the project (such as “triple helix” and “regional innovation systems”) were disconnected from activated structures. Nevertheless, the project seemed successful to many of the involved actors and it became clear that to them, there were real connections between the idea structures and the activated structures related to the project. Even if the project could not produce industry renewal or product innovation, it could participate in fulfilling some of the involved actors’ aims. This finding could not be elaborated only with the theoretical foundations as laid out in the theoretical part 2. Waluszewski (2011a) can tell us what underlying ideas make publicly funded innovation projects rigged the way they are and also why they will never produce any innovations. However, she cannot give insight into why such projects keep getting financed. This insight might be enhanced by searching for other theories to provide more pieces for the puzzle. There is no clear-cut answer as to how to best search for theories or concepts to develop already existing theories or concepts in an abductionist research process. However, it is probable that the researcher(s) will gain from scanning their own reservoir of knowledge. All the researchers involved in the described project had earlier experience with Actor-Network Theory (ANT) and discussed whether this approach could contribute to the project. ANT has a processual view of the world that can be claimed to coincide with the IMP approach in many important aspects (Brekke & Hoholm, 2005; Brekke, 2009). For instance, both are well suited to studying product development and innovation (Hoholm & Olsen, 2012), basing their analysis on interaction and the embedding of socio-material relationships. The basic

idea of ANT is that the stability (or truth) of anything – be it, for instance, a product, an organisation or an idea – is dependent on the number and quality of relations between heterogeneous actors. Both humans and non-humans are granted actor status within ANT, even on the same level, requiring the researcher to find a symmetrical position between the man-made (social) and the non-human (natural). In an ANT description, a building can act to change a human actor just as much as a human actor can act to change a building. What does ANT state of relevance to publicly funded regional innovation projects that does not produce innovations? The argument of stability granted as a consequence of relations can be applied to the empirical material we have encountered (and also in further studies in the same field). The symbiotic relationship between boundary organisations and political bodies has been hinted at but not scrutinised properly. Similarly, the metrics for innovation projects seem to be well in concert with activities well suited for (or tightly related to) non-industrial actors developing or managing knowledge. In our specific project, the ERB project, relationships between the project and industrial actors were never actively developed and industrial actors only showed up in a paragraph in a report as someone who could get an order from “the competence group”. Instead, close relations were induced between the project and a specific building, the high school. This building had a design and technical systems that acted upon the experts (researchers and consultants) to make them choose it as an example. The characteristics of the building became connected to the decision makers’ realities in the process. Through this, a myriad of relationships were made possible through the selection of the example building from the project to, users, media, heat exchangers, caretakers, a principal, a sports hall, the building management section at the County Council and all similar buildings in Norway. Each of these actors could reinforce the project’s status and ability to continue. All of these relationships may, however, turn out to be deceitful just as the building management section at the County Council who threatened not to care about the ERB project at all. An empirical part number four would start out from here and investigate whether the actor network created by the ERB project could explain its journey towards stability as well as its potentially stabilising effect on future publicly financed innovation projects. ANT could provide a vocabulary and a way to sort and describe the empirical material from the journey – as hinted about in the previous paragraph – that could both increase the understanding of the actual case and develop IMP theories. Socio-material and socio-economic alignments, negotiation of interests, as well as the production of meaning would be brought to the fore. Instead of starting that journey, we end the tour here, and move to the concluding section.

9. Concluding section We have followed two different tracks, one focusing on how an innovation project evolved and the other on the development of the theoretical approaches to guiding the research. The tracks converge as we reach the final stages of the project’s financed time period and this article. Descriptions of the empirical data start to match with theoretical approaches to make sense of the empirical materials. Together they give insight into two issues: 1) what we can learn from a publicly sponsored innovation project, and 2) how the method of abduction can be employed as systematic shifting between theory and empirical material. These two areas of insight are presented separately in the following.


9.1 What can be learnt from a publicly sponsored innovation project? What can be learnt from studying a project that seems to produce almost nothing? We started out with the belief that we should add to the knowledge of how innovation takes place in a network of triple helix actors. We were hoping to add understanding to how bridge walkers, i.e. those individuals taking information back and forth between a company and a network, can induce more effectively both intra- and interorganisational learning processes. We especially wanted to provide insights into how the construction industry can engage in better networking interaction processes to create innovations. None of these desires were fulfilled, for one simple reason. There was not a lot of innovation going on, and few participating companies. Instead we had to shift our reference points and our desires. We could still follow the intention of being close to practice, but the practice was not linked to that of industrial actors striving to develop innovations, but rather “word-producing” actors: the professional project administrators, consulting firms, the regional administration, research institutions and educational institutions. And we could still provide descriptions that can be useful to all “triple helix” actors, regional or international. Examples have been shown in the empirical material of what can be claimed to be process innovations. The County Council has involved a multitude of actors in a new fashion in its decision processes. However, the institutionalisation of this process needed in order for it to be a true innovation cannot be judged yet. An innovation project with little useful material outcome is nothing new. Waluszewski (2011a; 2011b) made thorough accounts of how public policy attempts to foster innovation and the ideas such attempts are founded on. Her articles hint at these attempts being unfruitful for creating industry renewal and specific innovations. This article has provided empirical insights into one specific public policy-driven innovation project that supports her thesis. This again could mean that there is a danger that money flows in the wrong directions, if we really want innovation to take place. In the specific case reported here, the regional administration wants to ride two horses at the same time, both to foster innovation activities in the region and to provide better services for the people in the region. This was emphasised already in the project proposal writing where networks were selected both for their political and industrial relevance. The refurbishment project thus became a platform for both. There is no reason to believe that similar ambitions to achieve synergies are unheard of in other places. Instead, there might be good reasons for looking for synergies in the work of a County Council, but mixing up the industry products to be produced in a region with the content of the services to be provided in the same region is probably not one of them. The theoretical approaches described in the later stages of the article describe innovation both as non-linear (Hoholm, 2009) and as transnational industrial interaction projects (Waluszewski, 2011a; 2011b; Håkansson & Waluszweski, 2013). As these insights are based on thorough empirical studies, there might be good reasons to try to learn from them. Most regions in the industrialised world probably have a policy document stating that they should be a leading region related to innovation. At the same time, the concentration of product innovation to a limited number of transnational industrial firms and networks is evident in many industrial sectors, hence companies anywhere in the world must relate to such transnational networks in order to take part in producing innovations

(Waluszewski, 2011b; Håkansson & Olsen, 2012; Fitjar & Rodriguez-Pose, 2011). County Councils probably do not possess the necessary tools to outperform professional industrial firms, not even as process facilitators. We would argue that instead they can be more proficient both as a service provider and as an enabler for regional industry by cultivating each separately and refraining from the enchanting of innovation. Using taxpayers’ money, public services should be as efficient as possible and therefore probably consist of the best material products. The likeliness of such products being innovated in the local region is small at best, and a County Council would get better value for money if it worked on the adjustment of the globally distributed best products. In other words, adaptation rather than innovation. In many cases, regional industry might be better off by adapting rather than innovating. The exception to this is in cases of highly specialised regional competences. However, in such cases, the involved network is likely to be highly embedded into transnational production networks already. Of course, adaptation may require innovation within the company itself, but the company does not have to beat the companies with a capital base larger than most of the world’s nations. It is highly questionable whether innovation projects can be managed as a planned process with an expected outcome, as innovation projects by necessity will encounter unexpected events with an open outcome (Håkansson & Waluszewski, 2007; Hoholm, 2011). The latter is a central point in the aforementioned theoretical approaches. We encountered this when the renovation of the school was stopped, partly because of suggestions from the ERB project itself. A major challenge of innovation projects evolving in between “planned processes” and the “unexpected” is the important nurturing of actor relationships in the network. Bringing in and engaging both users and producers early in the innovation process, as well as keeping them engaged as the process evolves, will enhance the likelihood for success (see for instance Harrison and Waluszewski, 2008). The ERB project never managed to form relationships with producers, and users were only partly engaged throughout the process. A shift from the belief that an innovation can both start and end in a single (local) company to a process with numerous actors on the global level requires a rethinking of the underlying models. In the empirical material, we encountered several instances where a linear and rather local approach to innovation was employed. One example was the instance where the ERB project group described the process and the timing of industry involvement, where it expressed the idea that any product can be made to specification and the innovative competence is situated in the formulation of the specification. If the County Council recognises that innovation can consist of local companies adapting to needs of transnational producer networks, the tools they employ for industrial development may change. This would also imply a shift in the model underlying how new products and services are introduced locally, where solutions are no longer thought to be produced locally but adaptations are made to globally produced solutions. This anticipation of a future public policy domain with adaptation rather than innovation as the buzzword and thing to achieve may well serve as T0 for the next project.

9.2 How can the method of abduction be used to develop case studies? From the outset, an abductive approach may seem like laziness or irresoluteness. Something invented by researchers not willing


to take a stand on whether the empirical material or the theories should be given priority. We hope that the article has shown that this is not the case. Abduction rather forces the researcher to take a stand, although not once and for all. Both the theoretical and the empirical domain must be scrutinised one after the other and in the process both the understanding of the empirical material and the content of the theoretical approach are developed. Most projects start out with either theoretical or empirical foundations that they later cannot escape. When there is a requirement to use a particular theoretical approach, the project’s success depends on the empirical material’s ability to provide instances in accordance with theory. When the project is linked to a certain theme or event, researchers are at the mercy of the involved actors to do something of research interest. With an abductive approach, the foundations of the project can be less of a straitjacket. Researchers are granted a way, although tedious and demanding, to create images of the world more in line with activated structures. This abductionist account of a regional innovation project has shown how the ideas and suggestions described in the project proposal were never realised. If the researchers had been forced to stick with the initially selected theories, there would be no account from the project and nothing interesting to report. This would have been fine if the reason was non-activity. However, there were myriads of things happening, just not related to innovation in companies. To stick with the project, the researchers then had to search for different theories, which again asked for different takes on the empirical material. Abductionism thus provides a way for both theory development and for improved analysis of empirical materials. Hopefully, the way this is described or played out in the article can reveal some of the dynamics of abductionist research, and hence be of inspiration to future research projects among network and innovation researchers.

10. Epilogue: Where does a project end? (E3) Just before finishing the writing of the article, The education, culture and health committee at the County Council recommended building a new school instead of refurbishing the old one. The recommendation was partly built on advice given by project members in the ERB project. There is still a political process to be undertaken before the final destiny of the present high school building is decided. However, there is little reason to believe that the building will survive, as the recommendation explicitly states that a new building will provide better functionality with lower costs and better environmental performance. Until the decision is made, the old building’s energy performance and indoor climate will be measured and monitored. A complete BIM model has been produced and the proposed R&D activities seem to be completed. However, how can the outcome be used to accomplish the initial aim of energy-efficient rehabilitation of buildings when the building is gone and the RD 2 project has come to an end? Well, the County Council has applied to the Research Council of Norway for a third RD project, probably starting from April 2014. A new building has already been launched as a potential R&D arena related to the construction industry in the region – an old administration building belonging to a private industrial company. A search conference (Klev & Levin, 2009) was held in January 2014 where invited actors were asked to identify specific research and development tasks that have to be performed to rehabilitate the building into attractive and sustainable premises for tomorrow’s knowledge-based businesses. It remains to

be seen whether RD 3 is granted money and – in the eventual implementation of the project – if any industrial actors will be involved.

References Brekke, A., 2009. A bumper?! An empirical investigation of the relationship between the economy and the environment. PhD thesis.BI Norwegian School of Management, Oslo. Brekke, A. and Hoholm, T., 2005. Sociology of translation versus economics of interaction: a rap battle - the ANT and IMP approaches compared. In: 21st IMP-conference: dealing with dualties. Rotterdam, the Netherlands, 1-3 September, 2005. Rotterdam: IMP Group. Cooke, P., Uranga, M.G. and Etxebarria, G., 1997. Regional innovation systems: institutional and organisational dimensions. Research Policy, 26 (4-5), pp. 475-491. Dubois, A., and Araujo, L., 2007. Case research in purchasing and supply management: opportunities and challenges. Journal of Purchasing and Supply Management, 13 (3), pp. 170181. Dubois, A. and Gadde, L.E., 2002. Systematic combining: an abductive approach to case research. Journal of Business Research, 55 (7), pp. 553-560. Fagerberg, J., 2005. ‘Innovation. A guide to the literature’. In The oxford handbook of innovation (1st ed.), J. Fagerberg, D. C. Mowery & R. R. Nelson (eds.), New York: Oxford University Press, pp. 1-26. Fitjar, R.D. and Rodriguez-Pose, A., 2011. When local interaction does not suffice: sources of firm innovation in urban Norway. The Institute iMdea working paper series in Economics and Social Sciences (http://www.socialsciences.imdea.org). Harrison, D. and Waluszewski, A., 2008. The development of a user network as a way to re-launch an unwanted product, Research Policy, 37(1), pp. 115-130. Hoholm, T., 2009. The contrary forces of innovation. An ethnography of innovation processes in the food industry. PhD thesis. BI Norwegian School of Management, Oslo. Hoholm, T., and Olsen, P. I., 2012. The contrary forces of innovation: a conceptual model for studying networked innovation processes. Industrial Marketing Management, 41(2), pp. 344-356. Håkansson, H., and Ingemansson, M., 2011. Construction companies and how they acquire knowledge through business interaction. IMP Journal, 5(2), pp. 67-78. Håkansson, H. and Olsen, P.I., 2012. Innovations in the health care and construction industries in light of new global interaction patterns and local dependencies. In: 28th IMP-conference: Combining the social and technological aspects of innovation: relationships and networks. Rome, Italy, 13-15 September 2012. Rome: IMP Group. – Håkansson, H. and Waluszewski, A., 2013. A never ending story: interaction patterns and economic development. Industrial Marketing Management, 42(3), pp. 443-454. Håkansson, H. and Waluszewski, A., 2002. Managing technological development. IKEA, the environment and technology. London: Routledge. Kjellberg, H., 2001. Organising distribution. Hakonbolaget and the efforts to rationalize food distribution, 1940–1960. PhD thesis. EFI, Stockholm. Klev, R., and Levin, M., 2009. Forandring som praksis: Læring og utvikling i organisasjoner. Bergen: Fagbokforl. Latour, B., 1996. Aramis, or the love of technology. Cambridge,


MA: Harvard University Press. Levin, M. and Ravn, J., 2007. Involved in praxis and analytical at a distance. Systemic Practice and Action Research. 20 (1), pp. 1-13. DOI 10.1007/s11213-006-9045-1 Peirce, C.S., 1931. The collected papers of Charles Sanders Peirce, Vols. I–VI. Hartshorne, C. and Weiss, P. (eds.), Cambridge, MA: Harvard University Press. Rubach, S., 2011. Company learning in a network: a dual organization-development (OD) process. PhD thesis. NTNU, Trondheim. Rubach, S., Hoholm, T. and Brekke, A., 2012. A collaborative mode of innovation related to energy efficient renovation of buildings. In: 28th IMP-conference: Combining the social and technological aspects of innovation: relationships and networks. Rome, Italy, 13–15 September 2012. Rome: IMP Group. Schneider, A.L., 2009. Why do some boundary organizations result in new ideas and practices and others only meet resistance? Examples from juvenile justice. The American Review

of Public Administration, 39(1), pp. 60-79. Shih, T. 2011. The role of public policy in the formation of a business network. Working papers in contemporary Asian studies no. 33, Lund: Lund University. Star, S. L., and Griesemer, J. R., 1989. Institutional ecology, ‘translations’ and boundary objects: amateurs and professionals in Berkeley’s Museum of Vertebrate Zoology, 1907–39. Social Studies of Science, 19(3), pp. 387-420. Van de Ven, A.H., Polley, D.E., Garud, R. and Venkatamaran, S., 1999. The Innovation Journey. Oxford: Oxford University Press. Van de Ven, A. H., 2007. Engaged scholarship. A guide for organizational and social research. New York: Oxford University Press Inc. Waluszewski, A., 2011a. Rethinking innovation policy. The IMP Journal, 5(3), pp. 140-156. Waluszewski, A. 2011b. The policy practitioners dilemma – the national policy and the transnational networks. Vinnova report VR 2011:07, Stockholm: Vinnova.

Andreas Brekke, COWI AS, Department of Environment and Waste, 0663 Oslo, Norway. Tel.: +47 45 48 61 22. E-mail: [email protected] Synnøve Rubach, Ostfold Research, Stadion 4, 1671 Kråkerøy, Norway. E-mail: [email protected] Thomas Hoholm, BI Norwegian Business School, Department of Innovation and Economic Organization, 0442 Oslo, Norway. E-mail: [email protected]


Boundary Decisions of the Firm: Make, Buy, Cooperate

Filipe J. Sousa University of Madeira Abstract

Firms are not atomistic hierarchies only linked with one another at arm’s-length distance in markets. Instead, a myriad of long-lived, highly cooperative relationships between suppliers and customers are pervasively found in the B2B world. And it is within those enmeshed relationships and networks that the co-evolution of capabilities and business specialisms is brought about and developed. If that is the actual ‘topography’ of the business landscape, then the coordination of economic activities in general, and the boundary decisions of each and every firm in particular, are unlikely to be reduced to a (dual) choice between ‘making’ or ‘buying’. Inter-firm cooperation is in itself a third governance structure, in alternative to the hierarchical and the market modes of coordination. And, what is also equally important to note, it is through the make-or-buy-or-cooperate decisions that the (embedded) firm is able to change its nature and scope, redefine its (fuzzy) boundaries, and thus adapt to an ever-changing business setting.

KEY WORDS: Make-or-buy-or-cooperate decisions; vertical boundaries; nature; scope; theories of the firm

1. Introduction No firm is a self-contained organisational entity, which is only occasionally connected with a few faceless counterparts via market transactions (Hakansson and Snehota 1989). The hierarchymarket dichotomy prominently featured in mainstream economics - that presumes that firms are ”islands of conscious power in an ocean of unconscious cooperation like lumps of butter coagulating in a pail of buttermilk” (Robertson and Dennison 1923, p. 85) - has no touch with the real-life intricacies of the business setting in which firms do compete, transact, and cooperate with one another (Granovetter 1985). As long as the pervasiveness of B2B cooperative arrangements is acknowledged, firms can no longer be depicted as “islands of planned coordination in a sea of market relations” or likewise as “autonomous units buying and selling at arm’s-length in markets” (Richardson 1972, p. 883). The business world is populated by a multitude of firms, which develop and sustain among themselves both aggregates of discrete transactions and ensembles of inter-related cooperative relationships (i.e., markets and networks respectively). One may easily provide evidences on the ubiquity of those business relationships and networks and reaffirm, à la Richardson (1972), the Smithian view that specialisation and interdependence necessarily go hand in hand in the B2B terrain.

1.1 Hierarchies, Markets, and Networks The coordination of economic activities is made either through (i) the ‘visible hand’ of hierarchies or (ii) the ‘invisible hand’ of markets or in alternative, via (iii) a relational governance structure. The decisions pertaining to the so-called division of labour depend largely on the (relative) costs and benefits of (a) using the authority within the firm, (b) ‘playing the market’, or

instead of (c) entering into and nurturing cooperative linkages with counterparts. That is to say, a given economic activity may be coordinated (and consequently its outputs may be brought about) (i) within the boundaries of a single firm, or instead those outputs may be (ii) traded in markets (through inter-firm transactions) or otherwise (iii) systematically exchanged through mutually rewarding buyer-seller interactions (and lasting cooperative arrangements). So, the firm either ‘does things by itself’ (i.e., it ‘makes’) or ‘gets things done by others’ in markets or in networks (i.e., it ‘buys’ from or ‘cooperates’ with counterparts, respectively). While the similar activities (which require the same set of resources and capabilities for their undertaking) are often housed within a firm, the closely complementary (yet usually dissimilar) activities are likely to be found inside the boundaries of counterparts with which the firm cooperates (Richardson 1972). As a consequence, vertical cooperation is bound to be critical to the internal functioning and/or development of each and every firm (Axelsson and Easton 1992). Understandably, the ‘strategic importance’ of customer-supplier cooperation has been frequently stressed in the B2B literature (e.g., Sousa 2010).

1.2 Boundary decisions: make or buy or cooperate The extensiveness of B2B interactions and relationships makes it unlikely that the core business of a firm is defined (and its boundaries are delimited) merely as the result of that firm choosing either (i) to perform internally a certain economic activity (and then sell that activity’s outcome in a product market) or (ii) to acquire an external activity’s output (in a factor market). Inter-firm cooperation is also a possibility, alongside the common options of (i) organic development and (ii) engagement in purely transactional relations with counterparts. The nature and role of the long-lived and complex B2B re-


lationships seem to provide valid grounds for the primary analytical thrust of this paper: that the make-or-buy dichotomy (and its related theorizing, usually transaction cost-inspired) (e.g., Zenger, Felin et al. 2011) is less than satisfactory to explain how and why the firm makes boundary decisions (concerning which activities are to be kept inside its boundaries and which activities are to be left outside, and thus which resources and capabilities are to be internally developed, bought in factor markets, or instead accessed and explored via cooperation). It seems almost intuitive that the ‘vertical disintegration’ increasingly observed in the business world needs to be justified by considerations other than the ones supplied by Oliver Williamson’s (1979) transaction cost minimising ‘recipe’ for an efficient match between exchange transactions (which differ in terms of the degree of frequency, uncertainty, and asset specificity) and coordination mechanisms (namely, hierarchical, market, and relational ones). Plus, that dual firm-market reasoning leaves little room for explaining the emergence and development of the heterogeneous governance structures (e.g., of a different size, composition, and modus operandi) that are found to co-exist in the business world. For one does not only come across either large, vertically integrated hierarchies or spot B2B (factor and product) markets. This paper also follows Holmstrom and Roberts (1998) in their attempt to downgrade the Organizational Economics’ rationale that vertical integration is the primary (if not the ‘only’) solution (i) to avoid or solve hold-up problems (i.e., the expropriation by an opportunistic counterpart of the firm’s quasi-rents, which are the returns on its relationship-specific investments made in excess of the respective opportunity costs) and/or (ii) to provide balanced incentives to (or promote the alignment or shift of incentives between) two cooperating parties. Given the aforementioned conceptual state of affairs, this paper primarily aims to provide a few building blocks for a robust theoretical foundation to emerge in favour of the make-or-buyor-cooperate decisions of the firm. The paper is organised as follows. In the next section, one discusses briefly the division of labour in the business world and its causes and consequences. The third section of the paper addresses the (heterogeneous) nature and scope of the firm, in particular the different kinds of capabilities and the activities that the firm is likely to develop and perform internally. In the fourth section, one strives to add to the (incipient) analytical framework on the make-or-buy-or-cooperate decisions, therefore rejecting the quasi-axiom - à la transaction cost economics - that there is only a polar boundary choice on offer (namely, either the firm makes itself or buys from others). The final section includes the theoretical implications.

2. Specialisation and cooperation: the co-evolution of business specialisms Adam Smith (1776) was the first to identify the substantial advantages that are likely to result from the division of labour, namely (i) the increasing dexterity and efficiency in the performance of each activity (and its sub-activities) and/or (ii) the development of ‘local’ innovations. The analysis of various ‘businesses’ operating in the 18th century (most notably, the pin-maker factory) led him to two major claims: (i) that, given each individual’s ‘power’ (and ‘disposition’) to engage in exchanges of productive surpluses, self-interest may stand out as the primary cause of the division of labour; and (ii) that the conspicuous inequality of human expertise promotes and is reinforced by increases in the division of labour (Smith 1776, pp. 109, 119, 120).

But Adam Smith also made an important caveat. Though largely beneficial, specialisation cannot be pursued limitlessly. It is limited by ‘the extent of the market’, as George Stigler’s (1951) dictum made clear later on. That is to say, any increase in the productivity of an activity (i.e., in the form of a higher efficiency and/or a greater throughput) has to be accompanied by the growth of the market demand for that activity’s outcome. The Smithian rationale was extended a century and a half later by Allyn Young (1928), who was focused on the ‘increasing returns’ that were often brought about by the deployment of a high-throughput machinery. Young argued that the division of labour sets in motion a series of changes both within firms and across industries (e.g., novel know-how, activities, and products, or new startups). All those changes (not only of a qualitative kind) are the result of a cascade of teaching and learning processes taking place inside as well as beyond each firm’s boundaries. Those (in- and out-) flows of knowledge may help explain why the internal economies of otherwise large, multi-product firms are likely to give way to the internal and the external (also know as Marshallian) economies of highly specialised firms (Young 1928, p. 538). Firms may thus take advantage of their own economies (of a limited scope) as well as of the economies explored by (highly specialised) counterparts. Young (1928, pp. 528, 538) further acknowledged the B2B embeddedness by claiming that (i) the external economies usually exceed the sum of all firms’ internal economies and (ii) the growth of some industries is contingent on the growth of other, mostly vertically related (ancillary) industries. So, inasmuch as firms are often engaged in lasting vertical cooperative arrangements with each other, their nature and scope are likely to be inter-connected (Granovetter 1985). That is to say, the nature and the scope of a firm affect and are affected by, to varying extents and in diverse ways, the nature and scope of the counterparts with which that firm is directly and/or indirectly connected (e.g., a supplier and a customer’s customer, respectively). Given the ‘generalised connectedness‘ of firms (as well as of their cooperative relationships), ‘co-evolution’ is likely to be a notorious feature of the B2B world (Levinthal and Myatt 1994, p. 49).

2.1 Division of labour inside and among firms: differentiation and interdependence Though one intuitively understands that the division of labour necessarily features the increasing (sub-)division of economic activities (i.e., ‘differentiation’), one is not usually ready to grasp the attendant ‘integration’ of the resulting outcomes. But what is often the case, the specialisation of firms goes hand in hand with the development and reinforcement of B2B cooperation (Piore 1992). Regardless of the respective field of expertise, being (or becoming) a specialist does not make one self-sufficient; the contrary is the norm. The division of labour impels the (specialist) firm to access and explore the dissimilar yet closely complementary resources and capabilities (that are likely to be found within the boundaries of counterparts), often through vertical cooperative arrangements. This specialisation-cooperation duality inherent in the division of labour, firstly alluded to by Adam Smith (1776, pp. 116-7) who stated that final products were the joint outputs of a diversity of labour efforts, was explicitly recognised by Alfred Marshall (1890). By taking advantage of a biological, evolution-


ary outlook on the survival and development of organisms in the natural world, Marshall (p. 241) foretold the concurrence of differentiation and integration in the business landscape: “(...) that the development of the organism, whether social or physical, involves an increasing subdivision of functions between its separate parts on the one hand, and on the other a more intimate connection between them. Each part gets to be less and less selfsufficient, to depend for its well-being more and more on other parts, so that any disorder in any part of a highly-developed organism will affect other parts also”. Allyn Young also seemed to share that view, by remarking that “(…) an increasingly intricate nexus of specialised undertakings has inserted itself between the producers of raw materials and the consumer of the final product” (1928, p. 538, emphasis added) and recommending that “industrial operations [should] be seen as an interrelated whole” (1928, p. 539). And Wroe Alderson’s (1965) functionalist theory of marketing also argued for the existence of a sequence of interrelated B2B exchanges (i.e., ‘transvections’) in each distribution and marketing channel. So, it is no surprise to say the division of labour entails the emergence and the co-evolution (and increased interdependence) of business specialisms over time. One should bear in mind that the primary benefits of the division of labour, efficiency gains (e.g., reduced production costs) aside, include both the enhancement of the existing resources and capabilities of the firm and/ or the development (or co-development) of new resources and capabilities. Marshall (1890, p. 241, emphasis added) also made this point: “This increased subdivision of functions, or ‘differentiation’, as it is called, manifests itself with regard to industry in such forms as the division of labour, and the development of specialised skill, knowledge and machinery (...)”.

3. The embedded firm Given that the firm is endowed with only a limited set of resources and capabilities, it is always in need of external (closely complementary yet dissimilar) resources and capabilities for its survival and/or growth. That limitedness (and heterogeneity) is arguably the major reason for the notorious embeddedness of the firm; but one should also take into account that the heterogeneous nature of the firm is likely to be ‘fed’ by its embeddedness. It thus makes little sense to depict each firm as a fully independent and clearly bounded hierarchy, which is surrounded by a wider environment over which it has but a smaller influence. The real brick-and-mortar firm has no rigid (vertical) boundaries and is semi-autonomous, being deeply entangled in a variegated texture of economic, social, and technological linkages with multiple counterparts (Hakansson and Snehota 1995).

3.1 Business setting: context and environment The firm does not operate only in a hostile and uncontrollable environment that exists independently of that firm’s intents (and surely predating it and enduring after its demise), and with the impact of which the firm needs to cope. Besides those faceless and all-powerful environmental forces (e.g., political, economical, technological, and social ones), the firm is to be found within a context (Hakansson and Snehota 1989). That context includes all the distinct, full-faced counterparts that the firm knows relatively well and with which it interacts directly and/or indirectly over time, mostly via cooperative relationships (namely, suppliers, customers, suppliers’ suppliers,

customers’ customers, and even competitors and complementors). Any context is therefore (co-)created and shaped, to varying extents, by each of the participating firms. Each firm should no longer be taken to be a mere (unilateral) decision-maker and resource controller (Ford, Hakansson et al. 1986). The firm is mostly interaction-oriented, thus being much more than a production function.

3.2 Nature and scope: resources, capabilities, and activities When looked in detail, the firm is nothing more than a heterogeneous bundle of resources and capabilities (Penrose 1959). Many resources are available for purchase in factor markets; yet, the most ‘valuable’ resources usually can only be developed inside the firm and at a substantial cost. Imperfectly imitable resources, such as reputation or brands, are examples of the latter (Barney 1986). In addition to resources, one is also likely to find within the firm’s boundaries a certain mix of capabilities. Corporate capabilities (either individual or collective) are the distinctive know-how internally developed over time as a result of the repeated and varyingly skilled performance of a given set of activities (so-called ‘routines’), which often involves the combined deployment of several resources (e.g., blue collar workers, machinery, electrical power, and organisational culture to mention a few) (Dosi, Nelson et al. 2000). In short, capabilities may be seen as a knowledge-based, idiosyncratic by-product of the firm’s routinised praxis over time, in both doing things and getting things done (Loasby 1998). Any capability development process is likely to be time-consuming and costly, for both trial-and-error learning and huge investments are needed in order to create, refine, and revise the firm-specific and ‘sticky’ tacit knowledge of ‘how to do competently (some but not all) things’ (Nonaka and Takeuchi 1995). Each firm can be seen as a highly specialised organisational entity that knows how to do a few things by itself and consequently, that needs to (and does) know how to get other things done by others (Nelson and Winter 1982). That is to say, the firm has direct and indirect capabilities, both of which contribute decisively to its survival and growth (Loasby 1998).

4. Either make or buy... Why not cooperate? Each firm is an interdependent hierarchy with fuzzy (vertical) boundaries within which resources and capabilities are somewhat developed, deployed, combined, and modified as well as activities are performed with varying degrees of efficiency, efficacy and/or proficiency. Those boundaries are not fixed once and for all; regardless of how vertical boundaries are ‘drawn’ at a given point in time, they can be changed yet often at a cost (e.g., if the firm needs to cope with rapidly changing product market conditions).

4.1 Boundary decisions, neither twofold nor discrete For the firm, keeping or changing boundaries is basically about choosing (i) which resources, capabilities, and activities reside (or should be brought) internally and consequently, (ii) which resources, capabilities, and activities are to remain ‘outside’ (and thus be left promptly accessible and explorable through cooperative relationships with counterparts or to be intermittently purchased in markets). This is the basic thrust of each of the mul-


tiple make-or-buy-or-cooperate decisions that the firm makes over time, for which there is no definitive recommendation. Different theories and conceptual frameworks are bound to issue contrasting normative guidelines on boundary decisions, that is to say, ‘where’ the firm should define its (vertical) boundaries and therefore ‘what’ is likely to be the (limited) scope of the firm. At the forefront of those theories is likely to be the transaction cost economics, which argues that the firm should opt for the organic development (instead of the internalisation of inputs or even the vertical integration of the respective suppliers) whenever the overall costs of the ‘making’ option are exceeded by the costs potentially incurred in the ‘buying’ (e.g., see Williamson 2005). The firm should thus opt for the efficiencymaximising governance structure that brings about the lowest (relative) costs of coordinating the relevant economic activities. One of the most important shortcomings of the transactioncost minimising rationale is that it neglects for the most part the substantial impact that B2B cooperative relationships usually have over where the firm’s vertical boundaries are to be ‘drawn’. That impact, which has been lent both analytical and empirical support, mostly under the research umbrella of the markets-asnetworks theory (e.g., Araujo, Dubois et al. 2003) but also elsewhere (e.g., Barney 1999), can be grasped as follows: the firm may keep its vertical boundaries unchanged while, at the same time, extending (or reducing) its scope by engaging in (or terminating) cooperation with competent counterparts. The firm may thus alter its scope without having to redefine its boundaries, that is, without needing to opt for making or buying things. With that relational impact in due consideration, two arguments are likely to be brought to the foreground of analysis: (i) that the boundary decisions of the firm need to be examined in a greater detail; and (ii) that the definition of vertical boundaries is unlikely to be the outcome of a series of discrete boundary decisions taken by the firm over time. The boundary decisions of the firm are seldom discrete and dichotomous (cf. Williamson 1975). Firstly, those decisions are likely to be closely connected to each other over time, as well as somewhat linked with the boundary decisions of the significant counterparts with which the firm maintains strongly cooperative arrangements. Holmstrom and Roberts (1998, p. 92) seem to take a similar viewpoint: “It is (...) questionable whether it makes sense to consider one transaction at a time when one tries to understand how the new boundaries are drawn. In market networks, interdependencies are more than bilateral, and how one organises one set of transactions depends on how the other transactions are set up.”. Secondly, and more importantly, the boundary decisions of the firm are threefold given the availability of a third option, namely that of cooperating with others in alternative to the conventional make or buy choices (Gibbons 2001). The firm is not necessarily obliged to either develop organically or internalise all the resources and capabilities that it needs in order to do the things that it does (or aims to do), since there may be the possibility of accessing and exploring (at a cost) those externally available resources and capabilities, primarily through vertical cooperation.

4.2 The (few) things that the firm does, hence the (other) things that it gets done There seems to be a relevant argument that is largely overlooked in any of the mainstream theories of the firm: that the things that the firm does by itself and the things that it gets done by others, which are both ‘consequences’ of the multiple make-or-buy-

or-cooperate decisions the firm took over time, are likely to be inter-related to some extent (Araujo, Dubois et al. 1999). First, one knows that the firm does the things that it is capable of doing with the inputs at hand. That is to say, the firm performs the activities for which it has the required (internal) resources and capabilities as well as by taking advantage of some externally available resources and capabilities. But there may also be the case that the firm does some things by itself only because it is unable to get those things done timely, efficiently, and/or proficiently. For (i) there may be no (highly) competent counterpart(s) with respect to the demanded activities and (ii) the firm is unable to persuade others to do the things that it would aim to get done, most likely because very high dynamic transaction costs were to be incurred. The ‘relatedness’ of the things that the firm does and the things that it gets done is a corollary to the fact that there are always some things that the (highly specialised firm) is in need of and can only found outside its boundaries: and in those cases, the firm may choose to get those things done either through arm’slength relations or by engaging in cooperative relationships with counterparts. To grasp that relatedness, one may think of, for instance: (i) a particular firm that requires a specific set of resources and capabilities (which are closely complementary yet dissimilar compared to those that it owns and controls internally) in order to perform a given set of activities and to obtain the respective outputs; and (ii) that such set of resources and capabilities is externally available (e.g., can be found within the boundaries of a clearly identified supplier). What is the firm to do then? Should the firm internally develop that set, even if the standalone option incurs a great amount of organic development costs and entails a lot of time and a higher risk of failure (e.g., given the absence of previous experience in such resource and capability development processes)? Or in alternative, is the firm advised to readily acquire that set of resources and capabilities in an open market? Or instead of internalising the aforementioned set, should the firm access and explore it through a long-standing cooperative arrangement? Regardless of the firm’s basis for making each of its boundary decisions (and the outcomes that it expects to obtains from that decision), one may always wonder why that was the case. As Richardson (1972) presciently argued, there is likely to be no comparative advantage whatsoever for a particular set of closely complementary yet dissimilar resources and capabilities being brought within the boundaries of the firm, through internal development, internalisation, or vertical integration. That potential ‘disadvantage’ may help explain the firm’s choice for exploring important resources and capabilities through cooperation, given that a relational governance structure is likely to be more advantageous (e.g., allowing the firm to take advantage of a greater productive efficiency or a higher level of proficiency in a particular activity or even in a given field of expertise). One should always bear in mind that the costliness of developing or internalising resources and capabilities (especially the dissimilar ones) warrants a careful assessment by the firm (Barney 1999). For in many observed instances, the hierarchical as well as the market governance costs to be potentially incurred by the firm are likely to outweigh the costs resulting from engaging in the alternative of B2B cooperation. Plus, the benefits of adopting a relational governance structure may largely exceed the potential benefits of opting for the internal development or the internalisation of those needed resources and capabilities or even for the vertical integration of a highly resourceful, compe-


tent counterpart. Interestingly, Williamson’s (1979) analysis suggests that the relational benefits and costs may be more ‘attractive’ than the benefits and costs being brought about in either the hierarchical or the market governance structures whenever the asset specificity under consideration is symmetrical (and not too high). This may be the case regardless of the degree of contractual incompleteness and the frequency of the inter-firm exchange episodes under consideration, and assuming that there is a moderate uncertainty concerning the future ‘states of the world’ (namely, forthcoming contingencies and the respective ‘appropriate’ actions to be taken by the firm). In the event of any or both of the two above-mentioned conditions being observed (i.e., the relational benefits outweigh the hierarchical and/or the market governance benefits and the relational costs are less than the hierarchical and/or the market governance costs), inter-firm cooperation is very likely to emerge and thrive. And it is the conjunction of those two conditions that may well put flesh on the bones of Richardson (1972), who first advanced the raison d’être of the mutually rewarding cooperative arrangements developed amongst buying and selling firms over long periods of time. Needless to say, the B2B cooperation goes alongside the heterogeneity of firms, with the latter demanding and reinforcing the former.

5. Implications This paper builds upon three major analytical stepping stones: (i) Richardson’s (1972) view on the three governance structures co-existing in the business world (namely, hierarchies, markets, and inter-firm cooperation); (ii) Nelson and Winter’s (1982) and Loasby’s (1998) arguments on the business relevance of both the direct and the indirect capabilities of the firm (i.e., the firm’s know-how to do things by itself and its know-how to get things done by others, respectively); and (iii) Holmstrom and Roberts’ (1998) analysis on the determinants of boundary choices. It primarily endorses a knowledge-based view of the firm, thus taking that highly specialised hierarchical entity as competing in markets as well as being deeply embedded in wider B2B cooperative arrangements and networks. Each business specialism evolves gradually on account of the firm’s routinised performance of (and the associated development of the idiosyncratic, tacit knowledge of how to do distinctively well) only a limited number of activities within a given field of expertise, through the combined deployment of a restricted bundle of internal and external resources and capabilities. The (potentially expandable) scope of the firm, which is grounded in the limitedness of the internal resources, capabilities, and activities, is likely to lead to the appropriation of substantial specialisation gains (e.g., a higher throughput or a greater productive efficiency). The magnitude of those gains is likely to justify at large the extent of vertical disintegration (and B2B cooperation) found throughout the business world. In short, the firm often chooses to be a specialist, thus striving to become increasingly competent at performing only a few (core and ancillary) activities. And as Young (1928) stressed, that decision implies that the firm deliberately relies on some (‘significant’) external business specialisms, with which it is often connected through cooperative arrangements. So, the firm’s rule of thumb is to be both highly specialised and strongly linked with (vertically related) specialists, both upstream and downstream. This (knowledge- and network-based) view of the firm im-

plies that a different conception of the boundary decisions and of the strategy development process needs to be brought to the foreground.

5.1 Make or buy? There is no such thing as a twofold boundary decision! No firm is a business island, which is only occasionally linked to other firms through purely economic transactions. As the Richardsonian (1972) analysis made clear, three governance structures co-exist in the business world: hierarchies, markets, and inter-firm cooperative arrangements. So, to think of the boundary decisions of the firm as a twofold and discrete decision-making process is a delusive way to conceptualise the way the firm proceeds to change its nature and scope, mostly in order to adapt to evolving contextual and environmental conditions. The (trichotomous) boundary decisions of the firm are hence about choosing what things it makes by itself and what things it gets done by others (either buying from or cooperating with them). That is to say, the firm chooses one of three alternative options: (i) to internally develop the resources and/or capabilities it needs and to perform the required activities in-house; or (ii) to internalise the valuable resources and capabilities it is in need of, by engaging in transactions with counterparts (or even by vertically integrating those counterparts as a whole); or (iii) to access and explore those (external) resources and/or capabilities by developing and sustaining cooperative arrangements with competent counterparts.

5.2 The (quasi-extended) nature and scope of the firm By taking boundary decisions, top managers often intend inter alia to change the nature and scope of the firm (e.g., by choosing to ‘make X’ or ‘buy the input Y from supplier A’ or ‘cooperate with supplier B in order to explore the input Z’). The make-or-buy-or-cooperate decisions are likely to lead to (mostly incremental) modifications in both the things that are to be found within the boundaries of the firm (i.e., its internal resources and capabilities) and the things that it is capable of doing and of getting done (i.e., internal and external activities). But while the making and the buying options imply the expansion of the firm’s vertical boundaries (given that new resources and/or capabilities are organically developed or are internalised, respectively), the (bilateral) decision to cooperate with a counterpart does not necessarily bring about any boundary change. So, it is worth stressing that the alternative of engaging in cooperative arrangements allow to extend the nature (and more importantly, the scope) of the firm while leaving unaltered its increasingly fuzzy vertical boundaries. The nature and scope of the firm are greatly delimited by its (vertical) boundaries; but the fuzziness of those boundaries, in face of the widespread B2B cooperation, makes unlikely that the nature and scope of the firm are defined once and for all by boundaries alone. Cooperation provides for the possibility that the nature and scope of the firm can be both enlarged (or reduced) even if the firm’s vertical boundaries stay unchanged: for instance, consider the case of a large multinational firm that chooses to expand its scope of activities on the basis of newly explored, external resources and capabilities, which are accessed through a recently developed cooperative relationship with a foreign and highly proficient supplier. As Patel and Pavitt (2000, p. 329) correctly stress, the (inter-


nal) resources, capabilities, and activities make up the nature or ‘core’ of the firm, rather than trace unequivocally its (vertical) boundaries. Moreover, that threefold nature sets at large the scope of the firm, that is to say, the things that the firm both does and is capable of doing with varying degrees of efficiency, efficacy, and/or proficiency. But one must also bear in mind that the scope of the firm is not unrelated to the scope of (significant) counterparts: for the firm’s scope is likely to be affected by (and to affect), to varying extents, the scope of the (most important) suppliers and customers with which the firm develops and maintains strong and long-lived cooperative arrangements over time.

5.3 A new view... of corporate strategy? The mainstream strategic management literature often depicts corporate strategy largely as a tool at the firm’s disposal, which is aimed at the creation and renewal of competitive advantages in a cut-throat business setting (e.g., by means of putting to work a low cost leadership) (Porter 1980). But, as Axelsson (1992) and Gadde et al. (2003) point out, the embeddedness of the firm and the co-evolution of capabilities (and of business specialisms) are likely to demand a very different outlook on corporate strategy. Strategising in the highly networked B2B world is more likely to boil down to (re)defining the nature and scope of the firm over time, that is to say, making decisions and taking actions concerning (i) what the firm owns and controls within its (fuzzy) boundaries and (ii) the things the firm both does and gets done by others, at present and in the future. Strategy-making, in essence, may be all about deciding: (i) which resources and capabilities are to be owned and controlled by the firm (and thus being kept within boundaries) and which activities the firm is to perform (and is capable of performing); as well as (ii) which external resources and capabilities (and activities) are to be accessed and explored by the firm via (mostly vertical) cooperative arrangements. If this is so, a ‘good’ strategy-making process is likely to add to the likelihood of business survival, by promoting the dynamic alignment of the firm with (i) a changeable context (e.g, rapidly shifting customer preferences or modifications in a major supplier’s productive process and output) and/or (ii) an unpredictable environment (e.g., new regulation, economic stagnation, or a technological breakthrough) (Hakansson and Snehota 1989). This said, it seems that a quite different analytical view on the intricacies of the (embedded) strategy development processes taking place in the B2B world is to be advanced (e.g., see Sousa 2010). One hopes that such a theoretical account, among other possible lines of research on the firm, may built upon the arguments put forth in this research paper.

Acknowledgements The author greatly appreciates the in-depth criticisms and constructive remarks of one anonymous reviewer to earlier drafts of the paper, yet taking full responsibility for all remaining errors and omissions.

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Activity Interdependence in Industrial Networks - Exploring the Structural Interconnectedness of Activities and Resources Lars Bankvall Chalmers University of Technology

Abstract

Industrial activities are never undertaken in isolation, but need to be connected to each other in order to enable the production, exchange and use of industrial products and services, and related processes. This paper focuses on this connectedness by exploring upon the interdependence existing between individual activities. Three existing interdependency typologies are drawn upon, represented in Thompson (1967), Richardson (1972), and Håkansson et al (2009). All these have been extensively used in relation to the Industrial Network Approach (INA), and are subsequently recognized as relevant starting points for further exploration. The four alternative interdependency types presented in this paper enable the description and subsequent analysis of how activities connect in industrial networks. In relation to the existing typologies within the INA, these alternative types do not only enable an increased specification of how activities actually connect to each other. They also draw upon an underlying principle of the network model (Håkansson, 1987) by exploring upon one network dimension, resources, in the analysis of another dimension, activities. KEY WORDS: Activity interdependencies, industrial networks, activities, resources,

1. Introduction Industrial activities are never undertaken in isolation, but need to be connected to each other in order to enable the production, exchange and use of industrial products and services, and related processes. Activity interdependencies target the structural representation of this connectedness. Several industrial developments emphasize the increased importance of how industrial activities interdepend, within as well as across firm boundaries. With the pursuance of for example specialization (e.g. Brush and Karnani, 1996), outsourcing (e.g. Weigelt, 2009), offshoring (e.g. Meixell and Gargeya, 2005), globalization (e.g. Leavitt, 2007), customization (e.g. Natarajan, 2004) and inter-organizational activity coordination (e.g. Sakakibara et al, 1997), the activities of a firm are challenged in a variety of ways. To be able to undertake fewer activities and handle boundary-crossing activity interdependencies to disparate counterparts and in different ways, firms need to interact more closely. As a result, the distinction between internal and external activity interdependencies becomes blurry and a main challenge of a firm seems to be the management of its boundarycrossing activity interdependencies. The connectedness of industrial activities has concerned many scholars in a variety of research traditions. Several researchers in the organizational and social science and business economics, for example, have acknowledged interdependencies among activities. For example Thompson (1967: 54), who stated: “if we wish to understand organization structure, we must consider what is meant by interdependence and by coordination, and we must consider various types of these”. Also Galbraith (1977) explored the interdependence between subtasks, resulting from the division of labour. In addition, several other scholars, such as

March and Simon (1958), Penrose (1959) and Van de Ven et al (1976) have explored the connectedness between the activities of a firm. These scholars approach the exploration of activity interdependencies primarily from an intra-organizational perspective. An alternative approach is offered by exploring upon the assumptions of the Industrial Network Approach (INA), developed within the Industrial Marketing and Purchasing (IMP) tradition, which point to the importance of inter-firm relationships and argue the need to develop conceptual frameworks appropriate to describe and explain them (Håkansson and Snehota, 1995). Axelsson and Easton (1992: xiv) speak of industrial networks as “a model or metaphor which describes a number, usually a large number, of entities, which are connected…The entities are actors involved in the economic processes which convert resources to finished goods and services to be consumed by end users whether they are individuals or organizations”. Such models of industrial networks allow the identification of extended patterns of interdependent activities (Håkansson et al, 2009). These patterns include the activity undertakings of several firms, connected through business relationships. Interdependence is a key concept within the IMP tradition. It has for example been used to describe connectedness between everything from individual companies (Ford et al, 1998), to business relationships (Håkansson and Snehota, 1995), and individual activities (Håkansson and Snehota, 1995; Håkansson et al, 2009; Gadde, Håkansson and Persson, 2010). In this paper, we focus on the interdependence existing between individual activities. Despite an overall interest in the existence and consequences of inter-organisational activity interdependencies within the INA, few attempts have been made to try and specify these activity interdependencies more in detail. Håkansson et al


Figure 1. The network model (Håkansson, 1987: 17). (2009) explored upon three types of interdependence in activity pattern. Pursuing the analysis of interaction in the activity layer, they did so by analytically separating the activity dimension from the resources and actors with which it is related. However, according to the network model (Håkansson, 1987), also referred to as the ARA model, the interconnectedness between the activity, resource, and actor dimensions is one of the key features upon which the analysis of industrial networks relies. As stated by Håkansson and Johanson (1992), “Actors are defined as those who perform activities and/or control resources. In activities actors use certain resources to change other resources in various ways. Resources are means used by actors when they perform activities. Through these circular definitions a network of actors, a network of activities and a network of resources are related to each other.” (p. 1). Focusing specifically on the interconnectedness between activities and resources, it is recognized that activities change and exchange resources through the use of other resources (Håkansson, 1987). In this paper, we therefore draw upon the resource dimension to pursue a specification of activity interdependencies in industrial networks. The primary focus in the paper will be on resources rather than actors (in relation to activities), and on structure rather than change. It is believed that this focus represents a valid analytical starting point in the specification of activity interdependencies, allowing for future analytical expansion into both the actor dimension and the continuous change of activity patterns. The purpose of this paper is to specify an activity interdependency framework through the exploration of the structural interconnectedness between activities and resources.

1.1 Outline This paper is conceptual in nature. As a result, no empirical investigations are accounted for. Instead the structure of the paper centres on the description and relating of three existing typologies of activity interdependencies. These allow the identification of four principal ways in which activities display interdependence. Based on these alternative interdependency types, the paper then draws upon the connectedness of resources and activities to enable the specification of an activity interdependency framework. To improve readability, the identification of interdependency types is supported by illustrative examples related to the activities of a small fictitious woodworking company, responsible for cutting, painting, assembling and packing a range of wood products. These examples are drawn upon throughout the paper to illustrate the principal empirical relevance of the

specific activity interdependency types. Before exploring existing activity interdependency typologies, the paper starts with a brief introduction to activities in light of the so-called network model (Håkansson, 1987).

2. Activities according to the network model A business network is characterized and analysed in the dimensions of activities, resources and actors, conceptualized in the network model (Håkansson, 1987), also referred to as the ARA model. According to Håkansson (1987), the three dimensions can be understood as the basic elements of industrial structures. According to the specification in Figure 1, activities are undertaken by actors (Håkansson, 1987). In connection with these activity undertakings, resources are activated (Håkansson, 1987). Depending on analytical intentions, activities can be identified and separated in a number of ways. For example, Dubois (1994) distinguishes between transformation (production) and transaction (exchange) activities. Transformation activities are identified as activities undertaken by individual actors, whereas transaction activities are undertaken between actors (Håkansson, 1987). In contrast, Holmen (2001) distinguishes between transformation and transfer activities, where transformation activities are activities through which resources used for the activity are changed in some way or another, whereas transfer activities are activities in which control over resources is exchanged between actors. Both authors thus relate activity undertakings to the other two dimensions of the ARA model, where Dubois (1994) is concerned with the ways in which activities relate to actors, while Holmen (2001) relates primarily to the resource dimension. How industrial activities are organised and undertaken influences the efficiency of a firm and has been a fundamental theoretical concern in previous research. As stated by Håkansson and Snehota (1995: 50); “activities performed and the way they are carried out are determinants of the costs and revenues of a company”. More specifically, Holmen et al. (2005: 1244) argue that “by linking activities, firms may capture efficiency gains by coordinating which…activities are carried out for whom, when and for what amounts of time”. The undertaking of industrial activities can thus be focused on from different but related perspectives. The first quote in the paragraph above indicates a primary interest in the undertaking of the activities of a firm, while the second emphasizes the linking of activities, i.e. how activities are undertaken in combinations and across firm boundaries. In essence, Dubois and Håkansson (1997) argue that one of the key problems in indus-


trial firms is that their activities have to be related to those of others. This is captured with the exploration of individual activity interdependency types.

3. Activity interdependency typologies Three interdependency typologies are presented and related in this section. The work of Thompson (1967) has, despite its intra organizational focus, been extensively used in relation to the INA (see e.g. Håkansson and Jahre, 2004; Håkansson and Persson, 2004; Bankvall et al., 2010). Research by Richardson (1972) has also proven useful for the development of the conceptualization of the INA (see e.g. Dubois, 1994; Gadde and Håkansson, 2001). In addition, the state of the art ambition of the work of Håkansson et al (2009), where, influenced by Thompson and Richardson, they suggest an alternative typology for activity analysis in industrial networks, is also represented in this section. Thompson (1967) discusses the existence of internal interdependence among parts (possibly business units) which belong to a complex organization. As such, he does not focus specifically on activity interdependencies. “To assume that an organization is composed of interdependent parts is not necessarily to say that each part is dependent on, and supports, every other part in any direct way” (Thompson, 1967: 54). He continues with the identification of a ‘pooled interdependence’ between parts of an organization which “render a discrete contribution to the whole and each is supported by the whole” (Thompson, 1967: 54). The substance of the particular interdependence is not specified; instead it is the relationship between two parts belonging to the same organization that conditions the interdependence. Take, for example, two different business units in the same parent organization. Although they have no direct contact and might not even know of each other’s existence, they both contribute to the same organization. As a result, if one of the units performs poorly, this can have an adverse effect also on the other. In addition, a ‘sequential interdependence’ represents direct interdependence between certain parts, with a specified order (Thompson, 1967). All parts that have sequential interdependence also have pooled interdependence. In the identification of sequential interdependencies, Thompson refers to the inputs and outputs of individual organizational parts, thus implicitly targeting the activities these parts undertake and the outputs that result from these undertakings. Sequential interdependence is, for example, identified between two business units in an organization if they are in direct contact and one of them provides the other with input for its operations. Finally, ‘reciprocal interdependence’ refers to a situation where two parts of an organization penetrate each other; i.e. “the outputs of each become inputs for the others” (Thompson, 1967: 55). All parts that have reciprocal interdependence also have sequential interdependence. The interdependency types thus display an increasing level of contingency. Reciprocal interdependence can be exemplified by an organization that operates and maintains a vehicle fleet. The use of the vehicles calls for repairs, which in turn enable their further use. More specifically, the output from the transport unit is, among other, vehicles that need to be serviced. These vehicles are then input to the service unit. The output from the service unit is vehicles that have been serviced for further use. Richardson (1972) develops a framework for the analysis of coordination among activities. Interdependencies between activities are thus explicitly focused on in the exploration of distinct coordination forms, and thus ‘the organization of industry’.

The framework consists of two principal interdependency types. Having identified these types, Richardson (1972: 887) aims to provide an “explanation of the principle of the division of labour between firms and markets and of the roles within a capitalist economy of planned and spontaneous coordination”. The first is labelled complementarity and exists among activities “representing different phases of a process of production and require in some way or another to be coordinated” (Richardson, 1972: 889). The output of one phase is thus input for another. Consider, for example, the different stages of a production process, in which each successive stage delivers an output which becomes input for the next stage. The coordinated need then originates from the realization that the second stage is dependent on the first for receiving its required input. At the same time, the first stage is dependent on the second for directing its delivered output. In addition, close complementarity is identified if there is a need to “match not the aggregate output of a general purpose input with the aggregate output for which it is needed but of particular activities” (Richardson, 1972: 891). The activities have the same input output related interdependence as described in complementarity, but they are also directed specifically towards each other. Consider the same production process as above, only this time the different stages of production are coordinated to deliver a final output customized with regard to all these stages. Thus the stages together facilitate the customization, and all the individual stages are undertaken specifically with it in mind. The second type of interdependence is labelled similarity and exists among activities that require the same capabilities for their undertaking (Richardson, 1972). The notion of capabilities in turn derives from the recognition that “activities have to be carried out by organizations with appropriate knowledge, experience and skills” (Richardson, 1972: 888). Although that the notion of capability is somewhat vague, it is still believed to have analytical use. As argued by Richardson (1972: 888): “the capability of an organization may depend upon command of some particular material technology, such as cellulose chemistry, electronics or civil engineering, or may derive from skills in marketing or knowledge of and reputation in a particular market”. Inspired by these two classifications, Håkansson et al (2009) distinguish between three types of interdependence. Serial interdependence is present in situations in which “a specific activity cannot be performed until another one has been completed” (Håkansson et al, 2009: 105). All sequential manufacturing and distribution processes have this type of interdependence between the individual activities. Each activity requires input and delivers output. The input is in turn delivered as output from an upstream activity, whereas the output is required as input for a downstream activity. This type of serial interdependence is synonymous with complementarity as specified by Richardson (1972). Dyadic interdependence is present in situations in which “the output from one activity serves as input for the other activity and vice versa” (Håkansson et al, 2009: 106). They exemplify this with the “interaction for the provision of business services where production and consumption activities occur more or less simultaneously” (Håkansson et al, 2009: 106). They also put forward a less direct type of dyadic interdependence which corresponds to Thompson’s (1967) definition of reciprocal interdependence. Finally, joint interdependence “occurs when the performance of one activity is dependent on another, because both of them are related to a third activity” (Håkansson et al., 2009: 107). This can be exemplified with two suppliers who supply the same


production process. The activities of each of these suppliers are serially interdependent with the activities of the production process. As a result, the activities of these suppliers also affect each other. “If the activities of one of the suppliers are not adequately performed, this affects the activities of the other since the processes of the customer, to which both suppliers are related, are disturbed” (Håkansson et al., 2009: 107). The activities of these suppliers are thus interdependent through the joint direction of their outputs. These three frameworks were developed with different purposes in mind and therefore have both commonalities and differences. It is acknowledged that the divergent purposes with which the individual frameworks were developed inevitably result in differences which are not necessarily weaknesses in the individual frameworks. It is, however, relevant to reflect specifically upon the commonalities they represent in the context of this paper. First, the typologies all recognize serial (sequential) interdependence and they all acknowledge that a process of production is separable into individual activities which need to be undertaken in a certain order. This order is conditioned by the input requirement and output delivery of individual activities. Two activities are thus seen to depend on each other as a result of one of the activities delivering output required as input for the other. As such, there is an input output related interdependence between them. In addition, two further specifications of this interdependence are identified. The first recognizes an input output related interdependence between activities which are specific to each other and not general. The second identifies a mutual input output related interdependence between two activities in that they require inputs and deliver outputs reciprocally. The joint interdependence identified by Håkansson et al (2009) connects activities which have a joint direction to their individual outputs. This is also described by Thompson (1967: 54) when he specifies that “each part renders a discrete contribution to the whole”. In light of the input and output of individual activities, two activities are thus identified as connected when they both deliver outputs required as input for a common third activity. In addition, Thompson (1967: 54) states that “each is supported by the whole”. This indicates interdependence between two activities which have a joint input, that is, which both require input delivered as output from a common third activity. In addition, this notion of being ‘supported by the whole’ relates to Richardson’s (1972) definition of capabilities. Capabilities are the knowledge, experience and skills of an organization, which are activated when the activities of the organization are undertaken. The activity undertakings are thus enabled by these specific capabilities. As such, this type of interdependence is separate from the input and output related interdependencies discussed above. In relation to the three activity interdependency typologies, table 1 suggests four principal ways in which activities display interdependence. These ways are also exemplified when considering our fictitious woodworking company responsible for cutting, painting, assembling and packing a range of wood products. With these activity interdependency types in mind, the resource dimension of the network model is now explored in relation to activities, allowing the further specification of the interdependency types identified in this section.

4. Resource and activities The three analytical dimensions of the ARA model are inter-

related. The interest in activity interdependencies is therefore not seen as an interest directed solely at the activity dimension. Instead, the activity focus of this paper implies the analysis of activities by means of resources. Several IMP researchers have conceptualized the nature of resources in inter organizational settings (see e.g. Baraldi and Bocconcelli, 2001; Wedin, 2001; Håkansson and Waluszewski, 2002). In accordance with the network model, activities connect resources to each other (Håkansson, 1987). More specifically, activities “change or exchange resources through the use of other resources” (Håkansson, 1987: 17). Furthermore, “in activities actors use certain resources to change other resources in various ways” (Håkansson and Johanson, 1992: 1). Thus, resources are distinctly related to activities and actors, and the identification of resources can derive from these two other dimensions of the ARA model. According to Håkansson (1987), activities change and exchange resources through the use of other resources. In light of this specific connectedness between activities and resources, resources can be separated and identified to allow for their classification. For example, Holmen (2001) distinguishes between resources that are material, such as e.g. equipment, facilities, manpower, raw materials and financial resources, and resources that are immaterial, such as skills, knowledge, trust, and goodwill. Dubois (1994) also speaks of the refinement of materials for the creation of end products. With regard to the resources used for the change and exchange of other resources, Hulthén (2002) identifies “transformation resources”, which can be either ‘fixed’ or ‘connecting’. Those of the fixed type include facilities, factories and warehouses, whereas those of the connecting type are, for example, trailers and trains (Hulthén, 2002). Hulthén (2002) also identifies three types of ‘objects’: conglomerate resources, transformation outputs, and end products. These objects are changed and exchanged through the use of transformation resources and are identified from the transvections according to Hulthén’s activity analysis. By definition, “conglomerate resources and transformation outputs are resources used as inputs in transformation activities. These resources come out of the transformations with new features, as transformation outputs” (Hulthén, 2002: 33). As made evident in previous sections, and stressed further here, resources and activities are interconnected. The specification of this interconnectedness aids the further exploration of activity interdependencies. The notion of activities that ‘change and exchange resources through the use of other resources’ is drawn upon. Not only is this distinction recognizable in the previous research presented in this section, it can also be related to the types of interdependence suggested in the previous section. An activity requires certain inputs and delivers certain outputs which, according to Hulthén (2002), is identified as object resources, or the objects on which the activity is undertaken. As such, the outputs represent a processed version of the inputs. The inputs and outputs are thus changed and exchanged by the activity. In addition, some kinds of resources are required to facilitate this changing and exchanging, referred to in this paper as enabling resources. These are resources used to change and exchange inputs into outputs, which enable the activity undertakings. Enabling resources can, for example, include facilities, manpower, knowledge and skills, i.e. everything required to undertake an activity. With regard to the activity interdependency types specified above, the notion of capabilities is interpreted as the enabling resources of an activity. To support the further exploration of activity interdependencies, a basic illustration of

The IMP Journal Volume 8. Issue 1, 2014 26 Table 1. The suggested types of activity interdependence (*this type of interdependence includes two additional specifications, in accordance with the discussion above)

Description

Input-output related

Joint origin of inputs

Joint direction of outputs

Shared capabilities

Definition

Example

Relatedness with previous typologies Sequential, reciprocal The cutting activity delivers an output, (Thompson, 1967) An activity delivers outrecognized as pieces of wood cut in Complementarity, close put, which is required as some appropriate dimensions, which complementarity (Richardinput by another activity* is required as input by the painting son, 1972) activity. Serial, dyadic (Håkansson et al, 2009) The outputs of the painting activity are painted (and cut) pieces of wood. These pieces are then sometimes combined with other pieces in the assemPooled Two activities require bling activity, whereas sometimes they (Thompson, 1967) inputs which are outputs are packed individually, without first from a common third ac- being combined with other pieces. Similarity Through this setup, the assembling tivity (Richardson, 1972) and packing activities require inputs (painted pieces of wood) which are outputs from a common third activity, the painting activity. The assembling activity takes different pieces of wood and combines them. Some of them have been previously Pooled cut and painted, whereas other pieces Two activities deliver out(Thompson, 1967) have just been cut. The cutting and puts which are inputs to a painting activities thus deliver outputs Joint common third activity (pieces of wood, some of which have (Håkansson et al, 2009) been painted) which are inputs to a common third activity, the assembling activity Within the woodworking company, there is knowledge and skills residing with individual employees. One of Pooled Two activities require the these is the company mechanic, who (Thompson, 1967) same knowledge, experi- is responsible for making sure that the ence and skills for their machines supporting the cutting and Similarity painting activities are up and running. (Richardson, 1972) individual undertaking These two activities thus both require his knowledge, experience and skills for their individual undertaking.

the suggested connectedness between activities and resources is presented in Figure 2. An activity is thus related to two types of resources; object (2) and enabling (1) resources. The object resources are, in turn, divided into inputs (2a) and outputs (2b), depending on whether

Figure 2. An activity connected to enabling (1) and object (2a b) resources.

they are required for, or the results of, the activity undertakings. Related to the activities of our fictitious woodworking company, this connectedness can be exemplified with the painting activity. The enabling resource is then recognized as the machine used

to undertake the activity and the knowledge and skills of the mechanic maintaining and repairing this machine. The object resources are cut pieces of wood (2a) and painted (and cut) pieces of wood (2b). The output is thus a refined version of the input. This notion relates to Hulthén (2002: 33), who says that inputs “come out of the transformations with new features, as transformation outputs”. Most object resources are labelled as both an input and an output, depending on the specific activity to which they are related. With this specific relatedness in mind, resources are suggested to play a distinct role in the specification of activity interdependencies.

5. An activity interdependency framework Activity interdependencies concern how two activities are connected. Thus, with the activity-resource relatedness illustrated in Figure 2, this section approaches the issue of connected activities. The specific relatedness between activities and resources


means that activities intersect resource ties, and resources intersect activity links. One dimension thus “bridges” the connection of the other and an activity connects with other activities through its resources. Activity connections are made specific with the activity interdependencies discussed previous in the paper and with the illustration of activity-resource relatedness in Figure 2 as starting point it is now also possible to specify these interdependencies further. Input-output related interdependence is illustrated in Figure 3. Figure 3 also highlights an important notion presented above. An individual object resource is often labelled as both an input and an output, depending on the activity to which it is related. Furthermore, this interdependency type represents a kind of structural backbone for activity analysis. All activities are exposed to it and two of the interdependency types presented below derive from this input-output related interdependence between activities.

Figure 3. Two activities subject to inputoutput related interdependence.

Distinguishing between inputs and outputs in accordance with Figure 3, the bridging resource is an output in relation to the first activity (2b), and an input in relation to the second (2a). With regard to the activities of the woodworking company, input-output related interdependencies can be observed in relation to all activities. For example, considering the cutting activity and the painting activity, the bridging resource is cut pieces of wood, recognized as output in relation to the cutting activity, and input in relation to the painting activity. Also the assembling and packing activities experience this interdependence as the output of the assembling activity, the assembled pieces of wood, are input to the packing activity. The definition of joint interdependence given by Håkansson et al (2009) aids the specification of the second and third activity interdependency types. These acknowledge interdependence between activities which have joint direction of outputs and joint origin of inputs, respectively. Joint direction of outputs exists when two activities (individually) deliver outputs required as inputs for a common third activity. In the woodworking company, some of the outputs of the cutting and painting activities are jointly directed at the assembling activity, which in turn combines both painted and unpainted pieces of wood. In contrast, joint origin of inputs exists when two activities require inputs which are delivered as outputs from a common third activity. With regard to the activities of the woodworking company, the outputs of the painting activity are required as inputs to both the assembling and packing activities. These activities thus experience a joint origin of inputs. These types of interdependency are illustrated in Figures 4 and

Figure 4. Joint direction of outputs (in accordance with Figure 2, both elements of the bridging resource are outputs in relation to the two activities (2b)).

Figure 5. Joint origin of inputs (in accordance with Figure 2, the bridging resource is an input in relation to both activities (2a))

5. With regard to the illustration of joint direction of outputs, the two resource elements of the bridging resource are clearly identifiable (illustrated as a puzzle with two pieces) as they are separate outputs from two different activities. In relation to all three types of activity interdependency the intermediate resource is an object resource, but an enabling resource can also connect two activities when they require the same enabling resource for their undertaking. Here, they are connected through their shared activation of an enabling resource. The mechanic in the woodworking company is responsible for the maintenance and repair of machines used in the production process. As machines are used in relation to both the cutting and painting activities, these activities experience a shared activation of an enabling resource. This type of activity interdependency corresponds to what Richardson (1972) targeted with his analysis of similarities among activities, and it was also indicated in the specification of pooled interdependence by Thompson (1967). The shared activation of an enabling resource is illustrated in Figure 6.

Figure 6. Shared activation of an enabling resource.

These four types of activity interdependency represent distinct ways in which activities connect. Two activities might connect in a way involving several of the interdependency types specified above. If so, they are separated into several individual activity interdependencies. An activity can thus have several interdependencies to another given activity. In addition, indirect activity interdependencies are also identifiable among activities, following the basic interdependency logic of industrial networks. With this typology, such indirect interdependencies can be separated into any combination of the four suggested activity interdependency types, making also indirect interdependencies specific and traceable. The subsequent activity interdependency framework is summarized in Figure 7. With this framework in mind, the paper now approaches the issue of how these individual activity interdependency types can be used for the depiction and subsequent analysis of industrial networks.

6. Industrial networks of interdependent activities Taking the point of departure in previous activity interdepen-


Figure 7. Activity interdependency framework.

Figure 9. A network of connected activities.

Figure 8. The activity structure of the woodworking company (as described previously in this paper).

dency typologies, this paper has suggested an alternative classification, permitting the specification of activity interdependencies through the resources with which individual activities are related. The separation of three resource types enables the identification of four distinct types of activity interdependence. These types allow the identification and depiction of larger arrangements of connected activities. Figure 8 illustrates parts of the activity structure of the fictitious woodworking company, as described in the examples throughout this paper. This very simple illustration is not intended to capture all activities and resources of the woodworking company, but merely provide illustrations for the proposed activity interdependency framework. Even so, the illustration highlights that an activity can be part of multiple activity interdependencies, also of different types. In the same vein, a resource can bridge multiple activity interdependencies. Following the same structural logic, entire industrial networks can be depicted through the identification of individual activities, connected via bridging resources. This is illustrated in Figure 9, showing a principal depiction of an industrial network of interdependent activities. In this network, the resources are recognized as either object or enabling resources. In addition, from the perspective of an individual activity, an object resource is distinguished as an input or an output (for reasons of clarity not illustrated differently in the figure). As is clear in this illustration, each resource which is intermediate to two (or more) activities is identified as a bridging resource, in addition to being characterized as either an object or an enabling resource. The illustration of the woodworking company in Figure 8 indicates some small parts of the complexity when identifying and representing the context in which all activity interdependencies reside. For reasons of clarity, very little of this complexity is seen in Figure 9. Instead the figure is meant to illustrate the potential of the proposed framework, to map and specify larger networks of connected activities through the identification of individual activity interdependencies.

In the network of connected activities illustrated in Figure 9, all four types of activity interdependence are represented. In addition, indirect activity connections are also recognizable among activities which connect through other activities. In other words, indirect interdependencies are identified through sequences of direct connections which specify the interdependence even between activities undertaken seemingly far from each other in the network. Figure 9 indicates different ways in which a specific indirect activity connection can be traced through the network. Activities which have a direct activity connection to each other may also connect in multiple indirect ways. This paper explores a novel way in which the resource dimension of the network model (Håkansson, 1987) can be used to explore the structural connectedness of activities. As such, it proposes an alternative classification of activity interdependency types. Whereas the exploration has only concerned a structural representation of how activity interdependencies can be made specific by the use of resources, it is argue that this exploration can support both the analysis of change in industrial network, as well as include the role of the actor, undertaking individual activities and developing activity interdependencies. The structural depiction of a network of interdependent activities forms the basis for the exploration of change processes. Specific activity interdependencies both precede initiatives of change and follow from them. Figure 9 can be used to tentatively reflect on the nature of change in a context of multiple direct and indirect activity interdependencies. There are several possible ways in which change might affect an individual activity, derived from the direct and indirect activity interdependencies of which it is part. Consider for example the activities of the woodworking company depicted in Figure 8. If the company is suddenly to experience the demand for a new type of wood product, requiring the production of additional pieces of wood, this will potentially affect all activities of the company. First off, the cutting activity will possibly need to be developed. In accordance with this, the enabling resources of the cutting activity,


in this case recognised as the machine and mechanic, will be modified to somehow support the inclusion of an additional cutting profile. As a consequence, the output of the cutting activity, cut pieces of wood, will also be modified; impacting both the assembling and painting activities, as these now are undertaken with a modified input (the painting activity also experiences a modified enabling resource in the shared mechanic). These activities are thus adjusted in accordance with these modifications, in turn potentially affecting their enabling and output resources etc. This way, a change initiative has the potential, through direct and indirect activity interdependencies, to affect larger activity structures. The proposed activity interdependency framework enables the analysis of such change initiatives in the activity layer of industrial networks. As actors undertake activities and activate resources, also these can be positioned in the industrial network by support of the illustration in Figure 9. The boundaries of an actor separate internal and external activities and thus represent the perimeter of the actor’s direct influence. As a consequence, the bridging resource of an activity interdependence where two different actors undertake the activities, a so-called boundary crossing activity interdependence, is activated by both actors in a business relationship. The boundaries of these actors therefore intersect with this bridging resource. This dual resource activation marks the starting point for an actor’s indirect influence and is therefore an important element in the analysis of industrial networks. In relation to the woodworking company, the cutting activity is the first activity in its activity structure. If the input to the cutting activity is an unrefined board material, which is purchased from one of the company’s suppliers, this unrefined board material is recognized as a resource that bridges a boundary crossing activity interdependence. In the example above, the woodworking company wanted to address the demand for a new type of wood product. This was achieved through several activity adjustments and resource modifications related to the internal operations of the company. Had the desired change required a modification of the input resource to the cutting activity, the unrefined board material, the activity structure of the supplier would have been affected accordingly. To implement such a change, interaction with the supplier would then have been required. Arguably, due to far reaching activity interdependencies, few change initiatives only affect the activities and resources within the boundaries of an individual actor. Here, the recognition of boundary crossing activity interdependencies enable the analysis of how change initiatives in the activity layer of industrial networks are transferred between individual actors. In conclusion, the concepts in this paper enable the description and subsequent analysis of how activities connect in industrial networks. In relation to the dominating activity interdependency typologies within the IMP, the typology suggested here allows the specification of activity interdependencies by the use of resource. This approach does not only enable an increased specification of how activities actually connect to each other, it also draws upon an underlying principle of the network model (Håkansson, 1987) by exploring upon the interconnectedness of activities and resources.

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Lars Bankvall, Chalmers University of Technology

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The Conceptual Model of Success in Buyer-Supplier Relationship Aniko Bodi-Schubert

Corvinus University of Budapest

Abstract

This article focuses on to introduce the results of empirical research, which aims to create a conceptual framework on the meaning and role of success in buyer-supplier relationship’s operation and development. Related to this, a further research point is to analyze the time-dimension of success: how success changes and develops over time. The basic elements of my research are the relationships between supplier and buyer business partners, so my empirical study will focus on these dyads. At the theoretical grounding of the article I highly focused on the introduction of the appearance forms of buyer-supplier relationships and their development. Based on the research result the conceptual model of success was developed. Its most important statement is that success in buyer-supplier relationships can be understood as a subjective, organizational-level perception, which evolves following the fulfilment of both business and relationship success goals. KEY WORDS: Buyer-supplier relationship, relationship success goals, business success goals, relationship development

1. Aim and scope of the article

different forms at each development stages of the relationship?

This article focuses on to introduce the results of empirical research, which aims to create a conceptual framework on the meaning and role of success in buyer-supplier relationship. From a theoretical approach the core research problem of the article can be defined through answering the following research questions: 0. Can business success and relationship success be understood as substantive phenomenon in buyer-supplier relationships? The confirmation of the statement – created based on the literature review part – can be apprehended as the pre-requisite of research question’s examination. According to it, the idea of success in business relationships may be separated into two major parts: business-success – measurable by financial indicators and understood mostly on single actor (company) level – and relationship-success – measurable by soft performance indicators and understood as the fulfilment of the partners’ common goals and joint performance. 1. How can success be understood in a buyer-supplier relationship context? The aim of this research question is to define the idea of success in buyer-supplier relationships, to understand how the cooperating parties define and describes the idea. How can the content of this phenomenon be apprehended in certain relationships? 2. What is the role of success in buyer-supplier relationships, and how does it change over time? In order to provide a complex approach of success in business relationships, it is necessary to analyse what is the role of success in the functioning of relationships. What is the exact meaning of success – as an abstract idea – in business relationships, and how does it affect the operation of the relationship? Can the assumption – created by the joint understanding of several literature reviews’ result – be justified that success appears in

2. Theoretical framework of the research The research focus of the article is the buyer-supplier relationship. Within this, I highlighted the relationship approach of the Industrial Marketing and Purchasing Group (hereinafter IMP Group), so mainly the IMP concept was applied in the article. To understand the complex content of buyer-supplier relationships, it is important to interpret how a relationship comes into existence. The exchange or transaction can be identified as the starting point of a relationship. Ford el al. (2008: p.7.) define exchange “as a transfer between actors of unchanging entities: products, services or money.” Håkansson (1982) identifies repeated series of several discrete exchanges with different focuses as episodes. These episodes can be divided into four elements: product or service exchange, information exchange, financial exchange and social exchange. Individual or mutual actions are embedded in the interorganizational episodes and transactions (Holmund, 2004); these can materialize in the form of discussions on operational details, set-up and fulfilment of orders, deliveries or even phone calls. Hence, actions contain the independent activities of each parties, and the continuous interconnections of the actions incorporate the episode itself. Interaction is also related to episodes, as it is created through a series of episodes between actors and develops into a structure between two parties over time, which is created by both counterparts, but none of them can fully control and govern the structure (Ford et al. 2008). Interaction can be interpreted as a set of complex, substantive processes, which is generated by the actors, but grows above them and can be managed by the counterparts’ joint and mutual intentions. According to the approach of IMP researchers (Håkansson 1982; Ford et al. 1986), the series of repetitive episodes evolves into the interaction process, which results in the routinization of episodes. The episodes will be the part of


Figure 1. The systematization of the approach of business relationships

interorganizational routines which support further institutionalization of the interaction processes. This routinization helps parties to reduce the personal and organizational distances between them and can result in clear expectation about the counterparts’ roles and responsibilities. Over a period of time these expectations and processes become institutionalized, and mutual adaptation of them also takes place. Transaction costs decline, and bonds arise and strengthen between the parties, which grow to be interconnected with each other. Figure 1. systematizes the introduced relationship considerations, which are mainly based on the IMP Group’s approach. Continuing the introduction of the publications of the IMP researchers on the characteristics of relationships, the following section reviews Ford’s (1998) theory of the development of relationships. The evolution model of buyer-supplier relationships in industrial markets and more specifically the process of establishing and developing relationships over time have been interpreted and analyzed by Ford (1980, 1998). The author identified four development stages in the process, which are the following: 1) pre-relationship stage1, 2) early stage, 3) development stage, and 4) stable stage. The model presented by Ford (1998) illustrates the most significant processes in early relationship formation and enhances the key focuses of each stage which are important from the development point of view. This model is especially used to introduce mutual commitment, even deeper and more efficient joint activities (resource and capability transfer), as a knowledge curve that finally ends up with a stable relationship. The development process is manifested in increasing experience, reduction of uncertainty and distance, growing adaptation and mutual learning. In the final stable stage the relationship has become institutionalized and routines have developed. Some downturns can appear even in the stable stage which can result in reversals in the relationship’s development process. On the other hand, relationships can also exist which can be described by continuous, unbroken development (Ford et al. 2008). In order to clearly understand the framework of my article, it is necessary to define the phenomenon of business and relationship success. Although the majority of the publications do not provide strict rules for defining the difference, the two ideas can be clearly distinguished based on their content and sense. 1. During the processing of the case study I have understood the prerelationship stage as the beginning of the early development process, in which phase only some limited transactions have been done between the actors. This interpretation differs from Ford’s original theory.

Business success can be understood as a measurable output of a company’s performance which can be expressed – in most cases – via financial indicators, such as increasing income and profit margin, decreasing costs and also a rising market share, company size and portfolio (Ellram 1995; Chikán-Czakó 2009). The basic essence of business success is that its variables are always applied only for one company’s output; its success dimensions measure the operational efficiency of a company as an individual. In contrast to the above, relationship success can be considered as the fulfilment of the relationship members’ common aims for the joint management of the relationship’s processes and development. Based on their quantitative research, Mohr and Spekman (1994) defined two main indicators, which express relationship success: dyadic sales and satisfaction. They interpret dyadic sales2 as an objective factor: the higher the indicator, the deeper the relationship is. Satisfaction is a so-called emotional factor that summarizes the soft dimensions and plays a pre-requisite role in the development of a relationship. Ellram (1995) analyzed 80 different buyer-supplier relationships with various levels of intensity and focus and more than 5 years of track record in the USA. Based on the quantitative results, relationship success can be interpreted as a set of smooth cooperation, continuous reduction of administration and transaction costs, growing mutual value-creation, limitation of the one-sided dependency on buyer/supplier side, and creation of a balanced power situation. In order to achieve this relationship success, it is necessary for the cooperating parties to have supportive success factors such as two-way information sharing, top management commitment to relationship development, common aims that can be accepted by all members, sharing examples of success with each other, and each partner should add distinctive value to the relationship. Summarizing the results of the results of the literature review done, the theoretical distinction between business and relationship success can be described with the following statements. Business success refers to the fulfilment of single actor-level business objectives (mostly financial indicators), relationship success expresses the fulfilment of both actors’ common aims and mutual expectations about the relationship’s processes, and can determine the relationship’s future and development. In some cases, business and relationship success can have similar variables, but basically the two ideas have a different focus.

2. Dyadic sales is defined as the sales volume channelled between the relationship parties.

The IMP Journal Volume 8. Issue 1, 2014 33 Table 1.: Buyers in the case study and their key parameters

Accentuated parameter of the buyer/relationship Ownership structure Managed product portfolio Share in the supplier’s turnover Changes in the power position with the supplier in the last 3 years Development path of the relationship with the supplier in recent years

Buyer “A” Hungarian private individuals Wholesale and retail of petcare products Drastically decreasing, currently around 5 % Strong supplier dominance Significant downturn after a promising start

Buyer ”B” Hungarian private individuals Wholesale and retail of petcare products Continuously increasing, currently around 30% After initial supplier dominance, balanced power position exists Dynamic, smooth development

Coordination and management tools of the relationship

Application of rough management tools, frequent ad hoc processes, primarily arms-length style

Significant level of awareness, application of continuously professionalized management tools, coordinated by the supplier, joint learning

Development level of interpersonal relationships

Balanced, smooth interpersonal relationships, which turned bad after unsuccessful cooperation

Positive atmosphere after initial uncertainties, some turns can happen.

3. RESEARCH METHODOLOGY As it has already been mentioned, my research definitely has an exploratory scope. That is why; the case study method has been applied in my research. It can be considered as an adequate choice, because it provides opportunity to thoroughly open up and understand the analysed context; and based on the processed cases, it ensures the inductive theory-building (Yin 1994). According to Eisenhardt (1989), the case study method is a typical step-by-step theory building research form. It does not aim to test prior hypothesises, but it focuses on understanding phenomena and identifying problems with observing the researched subjects, and draws conclusions from these observations. A detailed case study (a supplier’s relationship with two key buyers) was done during the research. All of the case study members belong to the FMCG3 sector, and within this to the petcare4 industry. The “fixed” point of the case study is a multinational supplier company, which entered the Hungarian market into 2001 as the supplier. Selection of the key buyer relationships was undertaken together with the sales director and other members of the sales team of the supplier. We tried to select those relationships, in which several critical incidents had happened in recent years, and these incidents had materially changed the subsequent development path. Another important focus was that the turning points in the relationships selected resulted in several important consequences for both counterparts. Table 1. below 3 Fast Moving Consumer Goods: for instance food products, perfumes, etc. 4 The petcare industry is one of the most dynamically growing industries in Hungary and belongs to the FMCG product categories. Local market size larger than detergents, or over HUF 50 billion (around EUR 180 million) in nominal terms. The market share of private label products is one of the highest within the food sector, reaching around 60%. Source: AC Nielsen, 2008.

summarizes the main parameters of the selected buyers from the supplier’s viewpoint. I collected those parameters of the buyers which can appropriately illustrate their relationship with the supplier, and they provided their consent for publication. During the research, the following data collection techniques were used during the application of the case study method: - Structured and partially structured interviews – altogether 29 – with the CEOs, Sales and Procurement managers, and their employees, who had important positions at the respective companies. All interviews were recorded, and then typed. During the interviews I took notes, and wrote down some key words and sentences, so the processing and coding of the interview-texts were more focused. - I studied and analysed the available formal documents and databases at the subjected companies (contacts, business presentations and reports, etc.). - Although it cannot be understood as a classical data collection technique, but it was a useful experience for me that I was an employee between 2004 and 2008 at the supplier company. During this period, I could follow the development of the analysed relationships as a participative observer. This job-experience helped me a lot in the retrospective analysis during the interviews. The elapsed two and a half years were also useful from the point that it helped me to become objective and raised “distance” from the analysed incidents and the interviewed persons.

4. RESEARCH RESULTS The companies participating in the study refused to consent to the publication of their names or any kind of information, from which they could be identified. This does not, however, obstruct the research process, because my research aims to analyze the dynamics of buyer-supplier relationships and to understand the


role of success in them, and I do not intend to study the sensitive financial aspects of their relationships.

4.1 Case Part One – Relationship with Buyer “A” A medium-sized company owned by Hungarian private individuals is the buyer in the subject relationship. The buyer entered the market in the early 1990s as a petcare products wholesaler with a small production capacity. In the beginning, it was a small family-owned enterprise, but it continuously grew. In the early 2000s, it founded a purchasing association with one of its biggest competitors, and thus became the second largest market player in the specialist channel. The buyer-supplier relationship dates back to the early 2000s, when the supplier entered the Hungarian market. At that time, the buyer represented only a relatively small share of the supplier’s buyer portfolio. The relationship existed only on an episode level and was mainly focused on the sale of giant-packed economy, standard quality wet and dry products. This operation form fit in well with the marketing concept of both partners. Their strategy was aimed at intensive growth and increasing market share – independently of each other. This phase can be considered as the early development phase, when partners establish contacts by way of transactions which are continuously repeated and develop into episodes. Analyzing the story from the buyer side, the beginning of the relationship was also smooth and was supported with the attractive price/value ratio of the supplier’s products. ”Practically, our relationship started at the time of the most intensive development period of the local petcare market. It was the heyday. We were quite a small market player back then with huge ambitions, and were mainly looking for suppliers offering good quality products at affordable prices and flexible service conditions. The supplier in question absolutely fulfilled these requirements, so as our portfolio of (retail) buyers had grown, logically the number and volume of our orders also grew,” explained the owner-manager of the buyer, describing the early years of the relationship. The key concepts at the early development stage were as follows: application of the tools of collaborative management style and high level of supplier performance in operative processes. For the buyer, the following expectations had absolute priority: attractive price/value ratio of the products, wide product range and precise customer service. The supplier’s expectations were dominated with the growing number and volume of orders, low level of customer care and on-time payments. The expectations of both partners were fully met, so everything seemed to be good for continuing the relationship. In line with the gradually growing number and volume of orders from the buyer, the supplier was forced to pay more attention to this buyer. Thus, the usual visits of the area sales representatives were changed to contacts with key account managers, and in parallel to the normal orders there were more and more tailor-made promotions offered to the buyer. The turnover of the buyer steadily grew year after year and reached a respectable size, especially after establishing the purchasing association with one of its competitors. The years between 2001-2005 can be considered as the exploratory stage of the relationship, when routines took place on an operative level in the cooperation, and the support processes of the sales activity also grew closer. ”It seemed that we were able to work together on a higher level as well. The targeted numbers were met, and there were no significant problems,” summarized the key account manager of the buyer, speaking about the essence of the first half of the

2000s. The relevant concepts of this relationship development stage can be summarized as: thanks to the good interpersonal relationship among partners – “we personally knew each other, we were almost friends” – continuously increasing sales results, and smooth operational processes, a supportive atmosphere evolved in the relationship. Then came 2006, the year of the turnaround… Between 2006 and 2007, the supplier changed its corporate strategy, because the market expansion strategy had come to a dead-end: raw material prices increased, potential sales channels were saturated, and as a result the relatively cheap, giant-packed volume products did not generate a profit any longer. The profitability of the supplier company weakened and it was clear that the practices from the previous year were no longer sustainable. Furthermore, the European top management set even higher expectations for the Hungarian division: following the initial support of market share growth and “focus on tons”, they switched their efforts to monitoring profits and costs. As a consequence of the aforementioned circumstances, the supplier company revised its strategy and put more emphasis on value instead of volume. The Sales Director of the supplier recalled the necessity of this strategic change as follows, “Practically speaking, it happened that we did everything in the same way just like in the past, but it only resulted increasing stocks, falling turnover and extremely declining profits and no positive financial figures. At first, we did not understand what was going on; that is why we could not react immediately. After the first shock, we tried to figure out the main causes of the problem and understand our situation. We came to the conclusion that we sold quite high volumes of the relative low-profit products, while the profitable products only accounted for a limited share of our sales turnover. That is why we decided that the only option was to get rid of the low margin products and customers, and focus on the high margin products. Summarizing in a few words, the value-strategy was born this way.” This change in the supplier’s strategy resulted in the rationalization and revision of the product portfolio. The absolute first priority was to increase sales of the most profitable superpremium and premium products, and in parallel to this to decrease sales of the previously dominant volume products. The supplier decided to decrease the number of its low profitability customers, and – based on the previous experiences – it concentrated on partners, who might have enough potential to participate in the execution of the new strategy. During the execution of the value strategy, the supplier decided to provide the rights of its superpremium product’s sales to a sole-buyer (wholesaler), in order to increase the market development potential. Summarizing the essence of these changes, the supplier’s Sales Director explained, “There was no other option if we wanted to realise profits. It was clear that we had to dynamically increase the sales volume of the superpremium products and develop their market. We were of the opinion that the best way for this is to work with a sole distributor to sell our products in the specialist channel. It seemed to be a good choice, because we supposed that it will not require so complex task-management from our side, and the market development of our superpremium products can be ensured in a more professional and deliberate way. And maybe, it is easier to manage the relationship with only one customer than ten or twenty ones occasionally.” The buyer in this case study received the sole Hungarian distribution rights for the aforementioned superpremium products. The Business Development Manager of the supplier remembers the decision-making and the selection of the buyer for the sole distributor position as follows. “It was


not difficult to declare the withdrawal of the distribution of superpremium products to all wholesalers and to select one wholesaler for this purpose. Actually, there were only two options. We either provide this right to the largest market player or choose the second one. Serious trust problems came up, however, in the case of the number one player, because it was also the sole local distributor of our biggest competitor. So we could not imagine that they could reassuringly handle our products and our competitor’s products as well, thus we skipped over them quite early. As a result, the second player remained as our only possible option. This company was not the sole distributor of any other competitors and we believed that its medium-sized, flexible operation and ambitious CEO could all be advantageous. Based on the above, we thought that we could find creative and effective ways of cooperation forms.” Initially, both partners were very optimistic. The verbal agreement was rapidly followed by the signing of a framework contract. Very challenging targets were set up for the buyer in the contract that focused on providing smooth sales-growth and brand development of the supplier’s superpremium products. In order to support these goals, the supplier provided enhanced marketing support and organized regular trainings on the management of premium and superpremium brands for the buyer’s employees. Additionally, the buyer received special care in terms of logistic services through flexible customer services and payment conditions. Despite the initial goodwill, trust and support, the relationship went in the wrong direction. Serious problems arose concerning the sales activity of superpremium products, and it was clear even after 2-3 quarters that it would not be possible to reach the initial goals. The buyer’s performance was significantly below the targets, and the supplier did not understand the reason for its passivity. The supplier expected higher and higher orders from the buyer, and tried to indirectly convince the buyer to generate higher growth. At first, they applied different price promotions to encourage higher orders. As the buyer did not want to lose the supplier’s goodwill and the offered business opportunity, they kept on ordering products. But practically, the ordered products did not leave the wholesaler’s warehouses and that materially deteriorated its financial situation and thus they had to request the restructuring of payments to the supplier. After one year, the wholesaler almost ordered the whole initially targeted volume of superpremium products from the supplier, but it could sell only a small part of that to retailers. As a consequence of the above, the liquidity crises at the buyer became even worse, and in parallel to that outstanding invoices kept on increasing at the supplier as well, as the buyer could not settle the invoices on time. The “Excellent Petshop” network did not develop: there were a couple of members, and of course it did not cover the country. The expansion strategy for the breeders’ network also failed, and the existing members were unsatisfied and complained a lot. The initial optimism turned into deep lethargy, and it came out that none of the partners could continue the cooperation in the current form. “It was absolutely horrible what happened. In the reports almost the whole expected turnover appeared, but in practice we could only see overcrowded warehouses, marketing promotions with zero effect and increasing outstandings. We could not understand what was happening. After the initial enthusiasm and positive decisions, there were no positive results at all, moreover our most valuable products were jeopardized. There was no other way: we had to negotiate with the wholesaler and discuss the whole situation thoroughly, step by step. Of course. he was not against this, because it was clear for him as well that there is no other chance to continue the

relationship in its existing form,” recalled the Business Development Manager of the supplier, speaking about the incidents at the end of 2007. After long discussions, the parties decided to withdraw the sole distribution rights for superpremium products following a three-month interim period, and the supplier would try to find another solution. During this interim period, the buyer should make serious efforts to settle the accumulated outstandings, and a financial manager would monitor and schedule all the orders until their liabilities declined to an acceptable and healthy level. The accumulated outstanding liabilities forced the buyer to get rid of its huge warehouse stocks as rapidly as possible, and switch to “safety operation” in order to be able to repay its debts to its suppliers and other debtors. Thus, after an initially smooth development and an uncertain upsurge, the relationship turned to a “very weak and limited” stagnation phase. Dyadic sales – in parallel with the market position of the buyer – fell drastically. Due to the overall stagnation and downturn generated by the economic crisis, further deterioration in the financial situation of the buyer forced the owner to sell his business to the largest competitor. In reading the case, the question arises as to what were the variables that resulted in disruption of the relationship development following a promising beginning. From the point of the “research questions”, I analyzed the kinds of elements that resulted in the failure of the relationship together with my interviewees and focused on those elements that would have been necessary to meet the relationship success goals. In the introduction of the text and the conclusions of the interviews, the key concepts for the potential causes of the failure and for the success goal categories will be indicated in bold font. All of the results are based on the coding method. During the interviews, the Sales Director of the supplier company identified the significant differences between the two companies’ knowledge and management skills as the main reasons for the failure. “It was clear from the beginning that there was a big difference between the two companies in terms of knowledge, organizational structure and management. Essentially, the wholesaler was a one-man show, and the operation of the company was entirely based on the owner’s market knowledge, interpersonal relationships and passion. During the period of market expansion strategy, all the above did not cause any problems, because as long as someone did not make a big mistake, he or she could grow intensively with the dynamics of the industry. … But later on, when the wholesaler would have to sell highly valuable and knowledge-intensive products on a saturated market, this was not possible simply based on enthusiasm and old routines.” The Business Development Manager of the supplier summarized the main reasons for the failure as follows and emphasized their own mistakes as well. The preliminary evaluation on the wholesaler’s ability to manage the expected duties should have been thoroughly analyzed before contracting. The lack of necessary merchandising and other sales capabilities, and the underdeveloped management and leadership capabilities of the buyer also played an important role in the failure, as well as the excessive push for high sales turnover from the supplier’s side. According to the interviewed manager, it was also a major mistake that they started this high-level cooperation without any prior detailed business plans and relationship goals. The Key Account Manager of the supplier added the following to the evaluation of the failure of the relationship. The supplier did not recognize in time that the distribution tasks of superpremium products generated too huge management challenges for the buyer. So, over

The IMP Journal Volume 8. Issue 1, 2014 36 Table 2. The goal structure of relationship “A”

Relationship development stage/ Variables of the theory

Pre-relationship stage/ Early development stage

Exploratory stage

Development stage

Business success goal

Increase in own sales and market share

Dyadic sales increase, dominant market position

Intensive growth of superpremium products sales, development of their local distribution network

Relationship success goal

Relation of business and relationship success

High level management of customer servicing process – fair business behaviour

Relationship success goals are definitely subordinated

the short run, a relatively small company is not able to develop so much on its own to cope with such challenges. Of course, I also asked the wholesaler to provide his opinion about the drivers of the unsuccessful cooperation. The owner-manager of the buyer summarized the main reasons as follows. The tasks deriving from the distribution of superpremium brands represented a huge step in the development of the relationship and parallel to that in their life as well. He should have more precisely assessed the ability of his company to cope with the challenges, and it also would have been necessary to define the requirements and related duties in advance. Furthermore, he considered the acceptance of the supplier’s power dominance in the field of order pressure as a further mistake, and he felt that his company did not get the supplier’s support in time.”

4.2 Summary evaluation of success in Relationship A Table 2. identifies the understanding of business and relationship success in relationship “A”, based on the results of the case study. The significant relationship development stages were differentiated by applying – a little bit modified version of - Ford’s model (1980, 1998). In my opinion this relationship did not reach the highest, stable stage. Ford (1998) also added that development phases do not always appear in a clear and distinguishable form in all cases. Based on that, my limitation of the identified development stages can also contain subjective sentiments. Summarizing the relationship history discussed in this chapter, the following statements can be made in relation to success in supplier-buyer relationships: business and relationship success appear simultaneously in the operation and development of relationships. During the initial phases, it is mainly the business success goals which dominate the partners’ behaviour, but the importance of relationship success goals rapidly increases in parallel with the institutionalization of the relationship; after a promising start, the major reason for the failure of the buyer-supplier relationship discussed above was that the partners did not recognize the role of relationship success goals in relationship development;

Adaptation of operative processes – joint operative goal-setting focusing on customization of customer service processes and promotion policies Business success goals are still dominant, however the role of relationship success goals are also strengthening

Development of the strategic level, medium-term cooperation frameworks – but partners did not identify relationship success goals that would be necessary to realize the business goals Business success goals remain dominant; partners did not recognize the importance and necessity of relationship success goals

the context and complexity of relationship success continuously increase from the initial reliability and high level of operational performance. Relationship success goals are built on each other at the different development phases; and the higher-level goals are built on the lower-level ones; based on this case, the development process of the relationship can be interpreted in the following way. Partners set up business and common relationship success goals at each development stage, and the fulfilment of these goals results their mutual satisfaction. Everything that supports taking the next development step in the relationship also triggers new, higher-level goal-setting. During this development process, the managed goal structure of the partners continuously broadens, and relationship success goals gain even higher importance within this; the key categories of relationship success are presented in their development order: high performance of operative processes and reliability, adaptation of operative processes, and joint highlevel development capabilities; the fulfilment of business and relationship success goals of each development phase can only be realized if their support factors appear in the relationship context as well. These success factors are different in all development phases, but the most important ones are: attractive price/value ratio of the products, appropriate supplier operation ensuring high-level customer service performance, enhanced payment morale and fair behaviour of the buyer, (mainly interpersonal) trust, supportive business environment, complementary strategic aims, harmonization of operational processes, long-term strategic way of thinking and a similar level of organizational knowledge; the analyzed relationship justifies the pre-condition of the literature review that the meaning of business and relationship success can be separated, but these variables simultaneously appear in relationships. This statement is relevant especially at the higher development stages.


4.3 Case Part Two – Relationship with Buyer “B” In this relationship the buyer is local wholesaler, also fully owned by Hungarian private individuals. The wholesaler has a relatively wide activity range: along with the wholesale of petcare products (petfood and accessories), it also dealt with animal healthcare products and operated an animal hospital as well. The company entered local petcare market in the mid-1990s, and has become the market-leader wholesaler through continuous business development and several acquisitions. Based on its local market share and corporate size, the relationship can be described with a balanced power situation of the buyer and supplier. Similar to the previous case study, I start with the introduction of the relationship by summarising the interviews and citing the relevant parts. The early years of this relationship were very similar to the previous case. The “common history” of the two companies started at the beginning of the 2000s, when the multinational supplier entered the Hungarian market. Initially, there were occasional transactions between the partners, focused on sales of so-called volume products in large quantities. The supplier’s products were very popular among wholesalers, and so these transactions were repeated quite frequently and thus became episodes. Besides the usual orders, the wholesaler started to buy additional branded products from the supplier. Similar to the first case, the buyer emphasized the attractive price/value ratio of the products, on-time deliveries and precise customer service as the most important expectations vis-à-vis the supplier. ”The relatively low prices and attractive price/value ratio of the products of the supplier suited the needs of our retail buyers. Besides, their payment, ordering and delivery conditions were also acceptable for us. In short, all the conditions were in place for ordering more and more frequently,” said the Head of Petcare Division of the wholesaler, describing the early years. During these episodes, the partners were basically satisfied with each other. The supplier delivered its valuable products in the requested quantity on time, and the buyer also settled the invoices on time and ordered more frequently and in larger quantity; so there were no difficulties in the relationship. Similar to previous case, the following key categories of relationship success goals were identified: high level performance of operational processes and fair behaviour. Additionally, both partners had the feeling that there was more business potential in this cooperation, but their ideas remained only at the concept level. “Both of us felt that we could reach more with this cooperation, but we had not found the right ways for it. Besides we were also committed to other directions and developed our businesses separately,” explained the Sales Director of the supplier in the interviews. This stage can be identified as the pre-relationship5 and early development stages of the relationship. Due to the frequently repeated transactions in growing volumes and for a widening product range, the supplier was satisfied with the performance of the buyer and “paid more attention” to the wholesaler. The sales representative frequently (at first monthly, then weekly) visited the purchasing colleagues of the buyer and discussed the needs of the product range to be sold and ordered. In these meetings, the supplier offered different kinds of price and other promotions to encourage the buyer’s trading activity. Smooth operational level cooperation developed between the partners step by step. The buyer’s demand stabilized at a relatively high level, but its orders were still dominated by lower quality volume products and the share of premium and superpre-

mium brands was quite low. Nevertheless, the buyer accounted for a significant share in the supplier’s portfolio, which was continuously strengthened with the annual framework contracts. It can also be seen that partners set up common yearly targets and applied some customization in their customer service and sales operations. These steps can be considered as signs of more intensive cooperation. Of course, it took years to reach this level that can be identified as the exploratory stage based on Ford’s (1998) model. Based on the interviews, the mutual smooth and high level performance of the partners were important drivers of this development. ”When we ordered something, it was delivered on time. When we asked for direct delivery from the factory, it was also possible. And we only complained if something was really not working and we always paid on time,” stated the buyer’s Sales Director, speaking about the most important dimensions of reliability expectations. The thriving industrial environment was a further supporting success factor, as intensive sales growth and market extension were the strategic aims of both partners. But it must also be noted that during these phases, the relationship processes were governed by short-term decisions and a long-term way of thinking was not typical. Both of the partners’ goals were dominated by market expansion in the early years. The basics of the relationship development included the high operational performance, timely and accurate financial settlement and fair market behaviour. At this time, we reach the turnaround in the relationship history, which is caused by the previously discussed change in the supplier’s strategy. As mentioned in the first case study, the supplier significantly changed its strategy in 2006 and started to concentrate more on the high-margin premium and superpremium products, instead of the low-profit volume products. This strategy change resulted in a slowdown in this relationship as well. As introduced in the previous case study, the supplier selected the competitor of wholesaler “B”6 for the sole domestic distribution of its key superpremium products. The reasons for this decision have already been discussed, but I find it expedient to further analyze the motivation of the supplier in selecting the other wholesaler and also to gain insight on that from the perspective of the current buyer. The Sales Director of the supplier told the following story about the influencing factors in the selection process. “I would not say that we hesitated too much between the two wholesalers, because it would not be not true. … We did not want to cooperate with company “B”, because at that time they were also responsible for the distribution of our main competitor’s superpremium products. We assessed that to be a quite serious concern, practically in terms of trust. So we skipped the opportunity to build up a stronger cooperation with them. We simply could not imagine that the representatives of the wholesaler would visit a shop and recommend “XX” branded superpremium brand, and one week later he or she would go back and recommend “YY” brand, our one. … We could not imagine that joint management of these two superpremium brands was doable. Moreover, the competitor brand already had an excellent market position, while ours had just been launched on the market, or at least it to be intensively developed. In fact everything was in favour of selecting wholesaler “B”, except for the above reason. Its organizational processes, knowledge, market experience and managers were better than at company “A”. We already knew at that time that “B” would be much better than “A”. But we did not believe in them, just because of the distribution of the competitor brand.”

5. Please note that I have understood pre-relationship phase as the beginning of the early development process.

6. As the chapter discusses case “B”, I substituted the name of this wholesaler with letter “B”.


Evaluating this interview part, it can be stated that it was mainly the lack of goodwill trust from the supplier’s attitude – mentioned also by Creed and Miles (1996) and Doney (1998) – which obstructed the deepening of its relationship with this wholesaler. Although the organizational features and market knowledge definitely suggested the ability of the buyer to handle the distributor position (so the basics of competence-based trust were available), the supplier still did not believe that the buyer would be able to fulfil its obligations. The buyer evaluated the decision as a disruption in the relationship history, but it was not so serious for them. The buyer was more afraid of the success of the other relationship, because that could have resulted in the strengthening of its competitor wholesaler. As introduced in the previous case study, the relationship of the supplier with wholesaler “A” turned critical within one year, and thus the supplier decided to end its sole distribution contract with wholesaler “A”. At that time, the supplier was faced with new dilemmas, but new perspectives appeared in the context of the supplier’s relationship with wholesaler “B”. The above is introduced by citing the relevant parts of the interview with the Business Development Manager of the supplier. ”We were in a situation that our relationship with “A” had broken down, our superpremium products were performing really poorly on the market, our financial situation was also quite serious and the outlook was even worse. This caused a serious dilemma for our top management. Practically, everyone was still committed to continue the value strategy, as we did not think about turning back to the volume strategy, because we felt that it would be a dead-end. We only knew that we must build our business on the premium and superpremium products, but we had no idea how to do that. Actually, we had two possible options. Either we in-source the whole distribution and build our own sales team or select wholesaler “B” for the sole distribution, because there were no other potential wholesalers on the market. The advantages of insourcing were that we did not take the risk of cooperation again and could be our own masters. But it also had serious disadvantages such as the huge operational expenses; it would have been quite challenging to solve this task in our SAP system, and it would have required significant developments in that. So we decided to give a chance to wholesaler “B”, thus our CEO together with the Sales Director visited the Managing Director and Sales Director of wholesaler “B”.” The first CEO meeting was more about discussions about the actual market situation and general trends of the industry, but it was really useful for the management to revise their trust concerns. The Sales Director of the buyer had the following view about the discussions. ”It was a very positive sign for us, especially from a psychological point of view, because it was not so typical that a multinational supplier negotiates on the highest organizational level. We had the feeling that they took us seriously and considered us as a key buyer. I think we all liked each other. … Of course, it was a formal meeting with many protocol elements, but it had the message that we were mutually important to each other and there was probably a good deal of untapped business potential for us.” The partners assessed the meeting as highly valuable, despite not agreeing on any specific details about the development of their relationship. The only outcome of the first meeting was that the partners decided to meet again in a few weeks or months and reconsider their position again. According to the Sales Director of the supplier company, the high level of care was necessary, because their company needed time to draw the consequences from the previous failure and they did not want to start a relationship without the appropri-

ate preparations again. Meanwhile, the wholesaler also felt that the CEO-level meeting had special aims, and a positive change could also happen in the relationship history. By recognizing the attractive business potential of a stronger cooperation, both parties started the negotiations about the possible avenues of relationship development on a positive note. The negotiation lasted for several months, and its key question was how the wholesaler could reassuringly manage the distribution of superpremium products. The negotiation process had a positive atmosphere, and both parties aimed a solution that had the highest value for them. They finally agreed in all points by the end of 2008. The parties signed a framework agreement, which contained the following key points. The supplier will provide the exclusive rights of distributing the superpremium products on the Hungarian market to wholesaler “B”, and if they are satisfied with each other’s performance – measurable key performance indicators were also formulated in advance – the buyer will have the opportunity to receive the distribution rights of the whole product range of the supplier in the specialist channel. The wholesaler undertook the task of establishing a subsidiary for the distribution of the supplier’s products and to set up a separate sales team for the management of the superpremium brands. Besides, the development of the “Excellent Petshop” network, nationwide sales-coverage and an intensive increase in superpremium brand turnover were also mentioned among the objectives of the wholesaler. To fulfil these requirements, the wholesaler needed to invest heavily, but the supplier also took significant part in the business development. It is clear that along with the significant relationship-specific investments of the buyer, the supplier also wanted to be an active partner in the brand and market development processes, so it provided extensive support to the buyer in order to meet the targets. The supplier did not want to make mistakes in this case and tried to formulate a framework for the relationship which would be advantageous for both parties. The buyer brought in its market knowledge and superpremium brand distribution experience, while the supplier brought in its highquality products and its contribution to marketing and business development. The partners tried to establish the cooperation on the basis of their individual strengths. ”We managed to set up the basics which were mutually advantageous for both partners. We entered into the business with the development of a brand new sales team, and responsibility for logistics; both of course consumed a huge amount of money. Certainly, our market knowledge and prior experience were also necessary. The supplier provided the high quality products and took part in the market development activity. This seemed to be a sustainable set-up,” explained the Sales Director of the buyer. The negotiations between the partners to identify the most appropriate form of relationship were very similar to complementary capabilitybased cooperation. Of course, it does not mean that there are no conflicts between the partners, but the problems which occur can be solved on a middle management level, and mainly derive from planning or logistic challenges. According to the partners, the smooth management of the differences between them deriving from their different organizational structure and operation need to be developed most in the future. Based on the achieved results, it can be stated that the partners established the proper conditions for a successful, long-term relationship. Only one serious conflict occurred since the start of the relationship which weakened their strong cooperation to a certain extent. Although none of the partners considered the incident as highly important and it did not jeopardize the relationship, it is still interesting to analyze it, because of the conclusions

The IMP Journal Volume 8. Issue 1, 2014 39 Table 3. The goal structure of relationship “B”

Relationship development stage/ Variables of the theory Business success goal

Pre-relationship stage / Early development stage

Exploratory stage

Dyadic sales increase, Increase of own sales dominant market and market share position

Relationship success goal

High level management of customer servicing processes – reliability

Relation of business and relationship success

Dominant business success goals, relationship success goals are definitely subordinated

Development stage

Stable stage

Intensive growth of superpremium products sales, development of their local distribution network

Joint strategy building, continuous growth in the superpremium segment

Execution of joint Adaptation of opera- Establishment of straterelationship-specific intive processes – joint gic level cooperation cavestments, continuous operative goal-setting pabilities –“transferring” development of joint focusing on of joint business goals routines and complecustomization of into relationship goals, mentary capabilities, customer service pro- development of routines, maintenance of existcesses and promotion increasing institutionaling results, evolution policies, reliability ization processes of mutual commitment Business success Balanced relationship: Balanced relationship, goals are still domithe fulfilment of relalimited movement nant, however the tionship success goals is towards the dominance role of relationship necessary to meet busi- of relationship success success goals is also goals ness success goals strengthening

that can be drawn. There was a change in the supplier’s CEO, so certain points of the agreement had to be defined again, because there were several so-called ‘gentleman’s agreements’ in everyday operations. Naturally, this caused some uncertainties on the buyer’s side, because they had already fixed the sensitive cooperation points relating to the sharing of costs and benefits and the annual sales targets in the contracting phase. But these points had to be renegotiated with the new CEO from the very beginning. “I do not think that it seriously affected us. We considered it as a conclusion that contacts should have been defined more precisely. Cooperation between partners can be driven by mutual sympathy and trust, but its form cannot be determined by them,” said the Business Development Manager of the supplier, evaluating the incident and illustrating his point with a symbolic example: ”It works like a marriage. After a long period of dating, we get married and we have to accept and manage each other’s weaknesses. Plenty of patience is necessary to be able to cooperate smoothly. This conflict did not jeopardize the basic values, but it did cause some uncomfortable moments.” I emphasized this critical incident in the relationship history, because it appropriately illustrates that interpersonal trust has significant importance at the mature relationship development stages as well. The institutionalization level of the relationship was much higher, so this kind of incident did not threaten to put an end to the relationship, but it was still able to “shake the partners and cause a temporary slow-down in the relationship development,” according to the Petcare Division Head of the buyer.

4.3 Summary evaluation of success in Relationship B Table 3. systematizes the understanding of business and relationship success in the context of this case study. Of course, the

limitation is also valid here that success goals and factors can be overlapping at different development stages, because their identification is not clearly linked to one single phase. It is very fortunate for my research that this relationship has an unbroken development history and – apparently – reached its stable stage. Summarizing the buyer-supplier relationship history and the text of the interviews, the following statements can be made in relation to success in supplier-buyer relationships: business and relationship success goals appear simultaneously in the operation and development of relationships, and the importance of relationship success goals increases during the development progress of the relationship through institutionalization; it was a milestone in the history of this buyer-supplier relationship that the partners recognized the necessity and importance of relationship success goals in the establishment of their strategic level cooperation at the developing stage; this case also justified the previous result that – based on the high level performance of operational processes and reliability – the complexity of relationship success continuously increases during the relationship development process; the results of the case study justified the pre-condition of the literature review that the meaning of business and relationship success can be separated especially at higher development stages; the fulfilment of business and relationship success goals resulted the mutual satisfaction of the partners at each development phases which supported the step towards the next development stage; the key categories of relationship success in order of their development process were as follows: high-level performance of operative processes and reliability, adaptation of operative pro-


Potential step forward to higher level success goals Breakpoint: Decision about the future of relationship

Satisfaction deriving from success

Unfulfilled success goals ~ Failure

Fulfillment of success goals ~ Success

Perception

Effective performance

Set up business and relationship goals

Figure 2. The meaning and role of success in buyer-supplier relationships

cesses, maintenance of common strategic level cooperation; this case confirmed the previous conclusion that relationship success can only be reached if the supporting success factors materialize in the relationship context as well. These supporting success factors can be different at each relationship development stage, but at the higher development stages those factors will be in focus which support adaptation and institutionalization; finally, the case also confirmed the pre-condition that the longterm orientation continuously increases during relationship development.

5. Conclusion The initial proposition – which is also considered as a prerequisite for analysis of the research questions – was that success in buyer-supplier relationships can be understood in the form of business and relationship success goals which can be separated from each other. Based on the results presented by the case study, this statement can be accepted with the following considerations: Business and relationship success appear simultaneously in the operation and development of relationships, but their relevance changes over time. During the initial development phases, the individual business success goals play a dominant role. Later, at higher relationship development phases, the importance of relationship success goals grows and it is not possible to reach the corporate business aims without them. Clear separation of business and relationship success can principally occur starting from the so-called development phase. Business success goals derive from the corporate strategy of the relationship members in most cases. They are measurable and they usually appear in the form of individual, mostly financial or business performance indicators (such as revenues, market share, profit, cost level, etc.). Relationship success goals are difficult to quantify; relationship members usually jointly set up and manage them. They focus on the joint operational processes, management tools and institutionalization of the given buyer-supplier relationship and can also be characterized with mutuality.

In the initial development phases, relationship success goals are subordinated to the execution of business success goals, but the importance of relationship success continuously grows throughout the development of the relationship. Relationship success goals are built on each other in the different development phases, and achievement of the lower-level goals is necessary to reach the higher-level ones. In the case of business success goals, this kind of hierarchy does not necessarily appear. Business success goals can change significantly during the development of a relationship, as was shown in the case studies, where the strategy of the supplier changed. Based on the results of the introduced cases the following answer can be provided on the first research question. Success in buyer-supplier relationships can be understood as a subjective, organizational-level perception, which evolves following the fulfilment of both business and relationship success goals. It derives from the joint relationship performance of the relationship members, achievement of their prior expectations, and results in their mutual satisfaction. Having already answered the second research question, the following can be stated concerning the time-dimension and role of success in buyer-supplier relationships and in relationship development. Success can be understood as a subjective, organizationallevel perception of the relationship members about their actual and joint relationship performance, and thus the fulfilment of the business and relationship success goals. This perception is typically non-repetitive, and not individual, rather than organizational. As a result, it is significantly different from the perception of Parasuraman et al. (1985). Both business and relationship success goals change over time. In general, the importance of relationship success goals increases at higher relationship development stages; and the content of business and relationship success goals deepen and deepen as time goes by. The change of behaviour over time is however absolutely depending on the context of the relationship. Contrary to the growth-orientation, there are several relationships with the aim to sustain the existing situation. In such kinds


Figure 3. Actualization of the conceptual model for the case studies

of relationships, the diversity of success goals is limited (they are constant in certain cases). Reaching the success goals results in the mutual satisfaction of relationship members, and can lead to step forward in the relationship development. It however should be emphasized that success in itself is only a necessary, but not a sufficient condition of development, because the potential directions and possibilities of the development are significantly determined by the prior aims of the parties and the relationship context. Additionally, development can take place in a relationship following an unsuccessful situation as well; in case parties can learn from the failure and/or there is no other available partner to realise their initial aims. Concluding the above, the relation of success and development absolutely depends on the relationship context, and there is no general deterministic relation among them. It should be also noticed that even the mutual satisfaction – generated by success – can not result in a linear “straightaway” development. Development can be understood as a learning curve (see Grant 1996, Teece et al. 1997, Kyläheiko 1995), in which the progress is supported by satisfaction – generated by success –, but there is no causality between the two variables. Based on the above, the role of success in buyer-supplier relationships and relationship development can be interpreted with the following dynamics. Relationship members set up business and relationship success goals, and the materialisation of them depends on both their own and joint performance in the relationship. In case success goals are met, and the parties understand it positively; it can lead to their satisfaction, which can be the basis for further development. But in case, their perception on the performance of the relationship is negative, success can not be identified, and it can be a breakpoint in the relationship development. This breakpoint however not necessarily results in a break in the development or the end of the relationship as a whole, because the relation of success and development depends on the actual relationship context. In general, the basic goal-structure is the same at each development phases: success (or the lack of success) can be identified following the perception on the fulfilment of the individual-level business goals and the joint relationship

goals. The dynamics of success in buyer-supplier relationship is illustrated by Figure 2.

5.1 Limitations In my consideration the conclusions of this case study provided many inputs to the responses on the research questions. But the generalization of the relationship success model above should be limited because of the following factors: This conceptual model of this article is based on the results of only one case study. This case provided many impressions for theory-building, but limits the generalization of the results. The analyzed relationship-members in the case study are typically a multinational supplier and local distributors on the buyer’s side. There is a big difference among these companies in the field of: company size, applied management tools (operation’s management processes) and local market knowledge (the multinational supplier doesn’t know so much about the members and opportunities of the local market.) These kinds of differences provide special characteristics to the analyzed relationships. The processed relationships in the case study cannot be described as a classic supplier-buyer one. The relationship members on the buyer side are in a special position: they can be considered as a middlemen (wholesalers), not a retailer (end-user).

5.2 Applying the conceptual model to the analyzed case In this chapter, I apply the above introduced conceptual model to the studied case to describe the possible role and appearance form of success at each relationship development stage. In my conceptual model of the understanding of success in business relationships, I have identified elements essential for the balanced development of relationships as the supporting atmosphere based on the results of the case studies and the conclusions of the interviews. A balanced/ non-opportunistic power situation is also essential, as is shown in the first case: if either of the parties relies exclusively on its power dependency to manage the relationship, mutuality suffers and long-term develop-


ment can be hampered. Collaborative management style and smooth communication is important, because they play a key role in forming a positive, conflict-free atmosphere around the relationship. Dynamic and growing industrial environment also has positive and motivating effect. At the pre-development and early development stages, the major business success goal of the relationship is to maximize the individual turnover, and the key basic relationship success goals are the high-level performance of operational process and reliable business behaviour. The latter two, however, have high relevance at the further development stages as well. Research results confirm that if the above business and relationship success goals are not reached in the early development stages, the development of the relationship simply cannot evolve. I consider dyadic sales growth as the most significant business success goal at the exploratory stage, as it can be the foundation of long-term cooperation. As a relationship success goal, I emphasize the adaptation of operational processes that can materialize in the appearance and fulfilment of mainly short-term – typically one-year – relationship goals. These goals include turnover expectations, assortment configuration, joint promotions, and various (partially) customized marketing campaigns. The fulfilment of these goals contributes to step towards the mature relationship development phases. Business success goals are difficult to generalize at the development and stable phases. As the case studies showed, the members tightly link their corporate strategy to their business goals in the relationship at these development stages. These strategies and goals obviously vary for different companies. Relationship success goals are related to the establishment of long-term, deep cooperation capabilities. The main focus is to set up the organizational-institutional frameworks for cooperation, and to institutionalize the operative processes through the complementary capabilities. Relationship success at the stable stages is to sustain and deepen the achieved results. Success goals include the execution of partner-specific investments, identification of longterm strategic aims and a higher level of institutionalization. The above introduced actualization of business and relationship goals at each development stage is illustrated in Figure 3. The role and existence of the atmosphere is represented with the dashed lines, also showing the difficulties in drawing the borders of the atmosphere. As Ford applied, I also drew ellipses picturing business and relationship success goals to reflect the tight links between the two ideas. The letters B and R show the respective business and relationship success goals, and the arrows indicate the related supportive success factors at each development stage.

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Aniko Bodi-Schubert, Corvinus University of Budapest, Department of Logistics and Supply Chain Management 1093 Budapest Fővám tér 8. E-mail: [email protected]


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