Competitive Advantage and Strategic Configuration of ‘Born Global’ Firms: A Modified Resource Based View
By
Tamar Almor
School of Business Administration
College of Management – Academic Studies
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Niron Hashai
JerusalemSchool of Business Administration
The Hebrew University
Mt. Scopus, Jerusalem 91905
Israel
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The authors wish to thank the Research Unit of the College of Management – Academic Studies for its financial support. They further wish to thank Ms. Susanne Tam and Mr. Michiel Dijk for their excellent work on the database.
Competitive Advantage and Strategic Configuration of ‘Born Global’ Firms: A Modified Resource Based View
Abstract
This paper presents a modified version of the Resource Based View (RBV), according to which firms create and sustain competitive advantage not only by strengthening superior capabilities, but also by compensating for inferior ones. This is done by choosing a strategic configuration that fits the firm’s resources and capabilities.
We demonstrate our framework by explaining how ‘born global’, hi tech firms compete globally despite their relative resource scarcity. We will show that these firms' superior R&D capability is strengthened by incorporating R&D in the value chain, internalizing it and locating it at home., Contrary to conventional wisdom,production is not viewed as a core capability and therefore frequently outsourced or performed through strategic alliances. Marketing is considered a core capability and is therefore incorporated in the value chain and internalized. Inferiority in marketing capabilities as a result of size and distance is compensated for by locating it in host markets and by focusing on market niches or commercial customers, thereby forgoing the need for extensive, world-wide marketing, sales and after-sales operations.
Introduction
The phenomenon of born-globals, although still regarded as novel, is becoming an accepted topic in literature. Although substantial research has focused on the emergence of ‘born global’ firms, no theoretical framework has been developed yet to explain their success over time (Oviatt and McDougall, 1999). The international success of ‘born global’ firms is, by definition, paradoxical. After all, how can one explain the fact that small firms with limited resources and little managerial experience, are able to operate globally and compete successfully as though they were large multinational corporations (MNCs)?
This study analyzes how ‘born global’ firms create and sustain competitive advantages in the international business arena by using a modified version of the resource-based view of the firm. In order to carry out the study we chose to analyze the competitive advantage of ‘born global’, knowledge-intensive firms that have matured. In this study we label these firms: knowledge-intensive, small and medium sized multinationals (knowledge-intensive SMMs). Taking into account the high ratio of knowledge-intensive start-up’s failures (Ruhnka et al., 1992; Timmons, 1999), this approach is underpinned by the assumption that knowledge-intensive SMMs are those ‘born global’ firms who survived the fierce competition in the international marketplace and succeeded to create and sustain competitive advantage.
The Resource Based View of the firm has been used to extend international business theories by specifying the nature of the resources and capabilities that provide ownership advantages (Peng, 2001), as well as to demonstrate how firms employ their resources and capabilities to exploit location specific advantages in host countries (Tallman, 1992; Trevino & Gross, 2002). The current paper aims to contribute to this field of inquiry by employing a modified version of the Resource Based View (RBV) to analyze how knowledge-intensive SMMs create and sustain competitive advantage.
A Modified Resource Based View
The Resource-Based View of the firm has gained influence during the last decade (Conner, 2002; Medcof, 2000). Scholars adhering to the resource-based view (e.g., Barney 1991; Peteraf 1993; Wernerfelt, 1984) suggest that firms’ competitive advantage may be best explained by the heterogeneity of firm-specific resources and their application rather than by differences in industry characteristics. According to the RBV, a firm may be perceived as a bundle of tangible, intangible and human resources (R) that are pooled together to create organizational capabilities. We refer to capabilities (C) as the capacity to undertake a particular function or value activity. While this capacity is dependent upon various factors such as organizational structure and firm-specific routines (Barney, 1995; Nelson & Winter, 1982), it is believed to be a positive function of the firm’s resources:
C=f(R) ; (1)
Thus, if we compare the resource stock of two firms: A and B, we may deduce that, other things being equal, if firm A’s resource stock is superior compared to firm B’s, we expect firm A’s capabilities to be higher than B’s.
The gap in firms capabilities is expected to result with firm A having a competitive advantage over firm B, i.e. being able to create a higher economic value to its customers. The RBV further proposes that sustainable competitive advantage (SCA) stems from having a set of unique resources that create value in the marketplace (Medcof, 2000). Sustainable competitive advantage is defined as the firm’s ability to outperform its competitors for the long run, i.e. when competitive advantage persists despite efforts to duplicate or neutralize it (Barney, 1991). Firm A will be able to sustain its competitive advantage over firm B only if the resources that create superior capabilities are: (1) durable, (2) non-transferable and (3) non-replicable (Barney, 1991, 1995; Dollinger, 1999; Peteraf, 1993).
Although the insights of the RBV are powerful in explaining the competitive advantage of firms, this framework says little regarding situations where some of the firm’s capabilities are superior compared to its competitors, while other capabilities are inferior (e.g. when a firm has a technological advantage but lacks marketing experience). Conceptually, firm x overall capability (Cx, x=A,B) can be regarded as the product of its specific capabilities:
Cx = Cx1 * Cx2*…* Cxn (2)
Expression (2) reflects the concept of the value chain; lack of a specific capability will destroy the overall capability of a firm.[TA1]
We can therefore deduce that firm A has a competitive advantage over firm B if:
CA > CB (3a)
or
CA1 * CA2*…* CAn > CB1 * CB2*…* CBn (3b)
Expressions (3a) and (3b) imply that the higher is the CA/CBratio, the larger is firm A’s competitive advantage. This competitive advantage can be achieved if firm A outperforms or at least matches each of firm B’s specific capabilities, as specified in expression (4):
; for each i=1..n (4)
This task however is not trivial at all. When firm A has a superior capability over firm B (i.e. CAi > CBi), firm A will seek to maintain or widen the gap between the firms’ capabilities. This is feasible as long as the resources that create these capabilities are durable, non-transferable and non-replicable. But, how can firm A close the gap and neutralize its disadvantage in resources which infer an inferior capability (i.e. CAi < CBi)?
One way to close the gap is to develop resources that will create additional capabilities (Itami, 1987; Porter, 1991). While, this view is consistent with the emergent literature on dynamic capabilities (Eisenhardt & Martin, 2000; Teece, et al. 1997), the basic notions of the RBV imply that this task is extremely difficult, requires tremendous resource investment over long periods of time and sometimes is even impossible.
Thus the scope of maneuver left for firm A is quite limited. Firm A can acquire the required capabilities from firm B or from the market. However, if certain capabilities are available in the market it is reasonable to assume that the concerned capabilities have a minor contribution to the process of creating customer’s value, i.e. these capabilities are not a ‘core competency’ (Prahalad & Hamel, 1990).
If firm A wishes to compensate for inferior ‘core’ capabilities its only choice is to operate in environments where its disadvantages are minimized. This is particularly likely to reflect upon the product offering of firm A and its market selection. For example, if firm A has an inferior technology or low quality production capability, it may aim to compete in markets segments that are price sensitive rather than quality oriented. On the other hand if firm A is disadvantaged in its marketing capabilities it may choose to limit its market scope.
In this paper we argue that firms create and sustain competitive advantageby choosing a strategic configuration that maximizes their advantage in superior capabilities and minimizes their disadvantages in inferior capabilities. This view is depicted in Chart 1. As detailed in the next section strategic configuration refers to the firm’s decisions: (1) which functions or value activities to perform; (2) whether to externalize or internalize these activities; (3) where to locate each activity; and (4) the nature of markets targeted by the firm.
[Insert Chart 1 about here]
Next, we demonstrate how our modified resource base view applies to ‘born global’ firms that have matured, i.e. knowledge-intensive SMMs. We start by characterizing the resources and capabilities of these firms. Then we present a conceptual framework that identifies how knowledge-intensive SMMs create and sustain the superiority of their capabilities and how they neutralize their inferiority in disadvantaged capabilities. Our framework is then empirically tested and finally we present our findings and discuss their implications.
Resources and Capabilities of Knowledge-intensive SMMs
Our modified version of the RBV is applied to the resources and capabilities of knowledge-intensive SMMs, by relating to specific value activities. Following Buckley & Casson (1976), Jones (1999) and others, we focus on firms’ capabilities to undertake three major value activities: (1) R&D – creation of knowledge and consumable technology, (2) production – transforming inputs into outputs, (3) marketing - which includes promotion, sales, distribution and after-sale services.
Knowledge-intensive, small and medium sized multinationals (SMMs) can be generally characterized as relatively innovative, young and small firms that operate internationally.
Proprietary technology is a resource around which distinctive capabilities (Selznick, 1957) and the firm’s profit earning potential are developed (Grant, 1998). Technology based firms will usually enjoy first mover as well as monopolistic advantages, denoted by Wernerfelt (1984) as resource position barriers. Thus, unique know-how and proprietary technology are a significant resource upon which a competitive advantage can be created. Knowledge-intensive SMMs frequently introduce a new technology that is so unique that it might be claimed that they are actually inventing their own markets. Thus, technological capability is definitely a superior capability that drives SMMs to the international markets in order to exploit first mover advantages and monopolistic gains (Amin & Thrift, 1994; Keeble et al., 1997; McNaughton, 2000). We therefore conclude that knowledge-intensive SMMs have a superior R&D capability (Cx,R&D) compared to larger MNCs:
CSMM, R&D > CMNC,R&D(5)
Firm age and size play an important role in achieving a sustainable competitive advantage in the international business environment. While smallness usually encourages the firm towards innovation and flexibility (Narula, 2002; Peng, 2001), small and medium sized firms clearly suffer from disadvantages in financial and managerial resources and capabilities (Buckley, 1989; Kaufmann, 1995; Lu & Beamish, 2001), which prevent or limit them to compete internationally (Calof, 1993; Lindell & Karagozoglu, 1997). Large and mature companies have more resources, can control a greater market share, can ride the experience curve faster, enjoy a strong bargaining power with suppliers and customers and can weather more mistakes without incurring failure (Aharoni 1994). This observation is crucial when we compare the production and marketing capabilities of SMMs and MNCs.
While production processes of knowledge-intensive products vary considerably from one product to another, it is possible to classify them into three categories. One category refers to products that require basic or intangible production processes. The production of these products incurs negligible marginal costs, whereas the developed knowledge is transferred into a medium that is then distributed to customers (e.g. copying software into a CD-rom or e-mailing software to customers). The second category consists of products of which the developed knowledge is embedded in a larger system (for instance knowledge embedded in a chip which allows high quality digital photography). The third category relates to products in which mass manufacturing of the product is required (e.g. mass production of a newly developed drug).
None of the categories presented above match the capabilities of knowledge-intensive SMMs. In the first case production is virtually non-existent, or production skills are so common that many firms can easily provide them. A knowledge-intensive SMM does not gain a particular competitive advantage from engaging in production of such products. The second and third categories require substantial economies of scale and/or production efficiency that is gained through a superior position on the experience curve, both of which inhibit young and small firms from gaining a competitive advantage in production. We therefore conclude that production is not a ‘core’ capability for knowledge-intensive SMMs who are inferior in their production capabilities (Cx,P) compared to larger MNCs, as specified in expression (6):
CSMM, P < CMNC,P(6)
The relatively young age and small size of knowledge-intensive SMMs becomes critical when we consider their international market dispersion. While ‘being global’ enables knowledge-intensive SMMs to exploit more opportunities by catering a larger set of customers, it also requires the ability to operate and control multiple dispersed activities and serve customers that are situated at distance from the firm's home country. In that respect the capabilities of knowledge-intensive SMMs are inferior compared to larger MNCs that have more resources and experience to establish and coordinate an internationally dispressed marketing infrastructure. Hence we conclude that:
CSMM, M < CMNC,M(Cx,M-marketing capability) (7)
As noticed by Teece (1986) a firm is not likely to reap the benefits of proprietary innovation if it does not control complementary assets such as production and marketing. Thus, the relations in expressions (5)-(7) may well imply that the overall capability of larger MNCs is superior compared to that of knowledge-intensive SMMs. Based on the notation of expression (3b) we expect that:
(R*P*M)PSMM < (R*P*M) MNC (8)
So how do knowledge-intensive SMMs compensate for their inferior overall capability and compete globally with larger MNCs? We pose that the answer lies in the choice of a strategic configuration that enables them to maximize their R&D advantage and minimize their disadvantages in production and marketing.
The Strategic Configuration of Knowledge-intensive SMMs
Table 1 outlines the expected strategic configuration of knowledge-intensive SMMs, according to their decisions which value activities to incorporate in their value chain; whether to externalize or internalize these activities; where to locate each activity; and the nature of their targeted markets. The rational for these decisions is detailed below.
[Insert Table 1 about here]
Incorporation of activities in the value chain
Since ownership of technology is one of the most important bases for the development of competitive advantage (Kogut & Zander, 1992) we expected knowledge-intensive SMMs to incorporate R&D activities in their value chain in order to create a competitive advantage around their unique know-how and proprietary technology.
On the other hand, the inferior production capabilities of knowledge-intensive SMMs leads us to expect that production may not necessarily be part of their value chain, and it may be outsourced to independent firms. This is feasible as long as proprietary know-how is protected (e.g. by patents).
Along this line of reasoning we would expect marketing not be included in the value chain of knowledge-intensive SMMs. However we pose that marketing, unlike production, is a core capability for knowledge-intensive SMMs since it has a major contribution to the process of creating customer’s value. Marketing activities constitute the basis for the firm interaction with its customers. Tight supplier-customer relations allow firms to receive feedback regarding their technology through the processes of distribution and after-sales services and may lead to further technological innovations. Moreover, knowledge-intensive products require more frequent interactions between the supplier and its customers compared to non knowledge-intensive products (Almor & Hirsch, 1995; Hirsch, 1989). These interactions require unique skills and specific expertise in the processes of distribution and after-sales services and are crucial factors in building customer's loyalty and developing a strong clientele base. Knowledge-intensive SMMs therefore need to incorporate marketing in their value chain in order to upgrade proprietary technological knowledge and to establish long-term relations with its client base.
Following the discussion above, we hypothesize that:
Hypothesis 1: Knowledge-intensive SMMs incorporate R&D and marketing in their value chain more frequently than production.
The question how knowledge-intensive SMMs compensate for their inferior marketing capability still needs to be resolved. We address this issue when we discuss the preferred control model over value activities.
Control of value activities within the value added chain
In order to sustain competitive advantages firms need to make sure their resources and capabilities are durable, not easy to imitate, and difficult to transfer or replicate (Barney, 1991, 1995; Dollinger, 1999; Peteraf, 1993). One way to enhance such sustainability is by exploiting in-house resources, with which the firm will have the capability to undertake certain value activities independently from other firms. While the role of cooperative ventures (e.g. joint ventures or strategic alliances) in achieving competitive advantage by leveraging the firm’s resources and capabilities has been discussed extensively in the literature (e.g. Contractor & Lorange, 1988; Dunning, 1995), it is also clear that cooperative ventures may threaten competitive advantage if its resources and capabilities are made redundant through the venture, e.g. in the case of leakage of propriety know-how and loss of favorable access to customers (Buckley & Casson, 1988; Inkpen & Beamish, 1997). Hence, the firm’s decision whether to internalize a value activity (i.e. perform it within the boundaries of the organization) or to engage in a cooperative venture, is expected to play a crucial role in its ability to sustain competitive advantage. We refer to this decision as the chosen control mode over value activities.