The impact of automotive industry
interconnectedness on supplier firms’ strategies
Master’s Thesis
MSc Business Administration – International Management Student: Noël Geessink
Student ID: 10734481
Supervisor: Dr Johan Lindeque Second reader: Dr Lori DiVito
Date: 25 March 2016
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Statement of originality
This document is written by Noël Geessink who declares to take full
responsibility for the contents of this document.
I declare that the text and the work presented in this document is
original and that no sources other than those mentioned in the text and
its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the
supervision of completion of the work, not for the contents.
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Abstract
The automotive industry has seen important changes since the beginning of the 1990s. In particular the introduction of modular supply, a combination of modularization and outsourcing, has had a major impact on the industry. It made supplier firms more powerful and consequently led to the emergence of the emergence of global-tier one suppliers (Sturgeon et al., 2008; Humphrey, 2003; Diab & Pucik, 2015). Suppliers have become less dependent automakers and automakers more dependent on them, but suppliers’ dependence is argued to remain considerable (Sturgeon et al., 2008; Reichhart & Holweg, 2008). A stream of research that seems an obvious choice for studying this interdependence between suppliers and automakers is resource dependence theory (Pfeffer & Salancik, 1978). However it has received little attention in the automotive industry scientific literature. Therefore, the aim of this study was to investigate its applicability in explaining automotive suppliers’ strategies. In order to achieve this a multiple-case study was conducted on three major players in the automotive supply industry. The study’s analysis resulted in two important findings. Firstly it revealed significant change in the position of global tier-one suppliers, implying that arguments made in previous research (Sturgeon et al., 2008; Reichhart & Holweg, 2008) should be rethought. Secondly, the study has demonstrated the usefulness of resource dependence theory (Pfeffer & Salancik, 1978) in explaining the motivation behind global tier-one suppliers’ strategies.
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Acknowledgements
I would like to thank a number of people, that have helped me greatly with the realization of this master’s thesis. First and foremost I would like to thank my supervisor, Dr Johan Lindeque, for his great support, guidance and patience. Secondly I would like to thank my parents for the opportunity they gave me to study and the support they have given me over the years. Thirdly I would like to thank my younger brother for his technical support at the end. Finally I would like to thank my friends, for the mental support they have given me in times I needed it most.
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Table of Content
1. Introduction... 7
2. Literature review... ... ... ... 9
2.1 Semi-Globalization and the Regional Multinational Enterprise... 9
2.1.1 (Semi-) Globalization... ... ... ... 9
2.1.2 The Regional Multinational Enterprise... ... 10
2.2 The Liability of Foreignness and the Regional Multinational Enterprise…… 11
2.2.1 The Liability of Foreignnes……… 11
2.2.2 Firm-Specific Advantages………. 12
2.2.3 MNE Dependence on External Resources………. 14
2.3 The Automotive Industry and the Position of Parts Suppliers……….. 16
2.3.1 Industry Structure……….. 16
2.3.2 Asset Specificity………. 17
2.3.3 Buyer-Supplier Relationships... ... ... 20
2.3.4 Globalization, Regionalization and Co-location... 23
2.4 Chapter Conclusion……… …….. 28 3. Methodology... ... ... ... ... 29 3.1 Research philosophy... ... ... ... ... 29 3.1.1 Research paradigm... ... ... ... 29 3.1.2 Ontology... ... ... ... 29 3.1.3 Epistemology... ... ... ... ... 30
3.2 Multiple-case study research design... ... ... ... 30
3.3 Case selection………... 32 3.4 Data collection…... 34 3.5 Data analysis... ... ... ... ... 35 4. Results…………... 37 4.1 Within-case analysis... ... ... ... ... 37 4.1.1 Johnson Controls... ... ... ... 37 4.1.2 Robert Bosch... ... ... ... 45 4.1.3 Denso………... 50
4.2 Cross-case analysisAsset specificity... ... ...57
5. Discussion... ... ... ... ... ... 63
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6.1 Limitations of the research... ... ... ... 65
6.2 Scientific relevance of the research findings... ... ... 66
6.3 Suggestions for future research... ... ... ... 66
7. References... ... ... ... ... ... 67
8. Appendices…... 71
Appendix A... ... ... ... ...71
Johnson Controls list of mergers and acquisitions (source Orbis) Appendix B... ... ... ... ... ... 73
Robert Bosch list of mergers and acquisitions (source Orbis) Appendix C………... 75
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Index of Tables
Table 1: Description of cases 33
Table 2: Sources table 34
Table 3: Coding book 36
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1. Introduction
The automotive industry has received much attention from researchers over the past two decades. There are a number of reasons for this. Firstly, in many countries the automotive industry is a matter of national prestige (Sturgeon et al., 2008; Humphrey, 2003), especially in countries where automakers originate. Secondly, the nature of the automotive industry has been changing significantly since the early 1990s. Globalization and regionalization have made its mark on it (Sturgeon et al., 2008; Humphrey, 2003; Rugman & Collinson, 2004; Diab & Pucik, 2005) and the relationship between suppliers and automakers has been changing as well (Diab & Pucik, 2015; Sturgeon et al., 2008; Reichhart & Holweg, 2008; Humphrey, 2003).
Due to the modularization (the supply of complete modules such as steering system, breaking system, suspension, etcetera) of automotive components, and automakers outsourcing both production and R&D, suppliers have gradually become more powerful. This trend/process has resulted in the emergence of a relatively small number of large suppliers, called the global tier-one suppliers (Sturgeon et al., 2008; Diab & Pucik, 2015). Modularization and outsourcing has also brought the need for closer collaboration and therefore higher interdependence between suppliers and automakers.
Resource dependence theory (Pfeffer & Salancik, 2003) could provide valuable insights into the interdependent relationship between suppliers and automakers. Despite this theory’s apparent usefulness for studying the relationship between suppliers and automakers it has received little attention in the automotive industry scientific literature. Therefore the aim of this study is to investigate the applicability of resource dependence theory in explaining the strategy of global tier-one suppliers. The added value of this research also lies in the specific focus on supplier firms, as studies that focus on them are underrepresented in the automotive industry scientific literature.
This research was conducted using a multiple-case study design for which three case companies were selected on the basis of their salience in the supply industry. For the companies secondary longitudinal data was collected for a period of approximately ten years, which allowed for detecting developments in their strategies. The research question that was
8 posed to guide this study, is the following:
How well does resource dependence theory explain the strategies of the world’s largest car parts manufacturing MNEs over the last ten years?
This thesis is structured in the following way. It starts by presenting the conceptual foundation of this study, based on existing theory on the topics involved. The literature section also contains a number of working propositions, which are based on the existing theory. The literature section is followed by the methodology section, in which the research methodology is described more in detail and the validity and reliability of this study is accounted for. After this part, the results of this multiple-case study are presented, first within-case wise and subsequently cross-case wise. These results are then elaborated on in the discussion section. Finally, a conclusion is drawn in which the study is summarized and in which the main findings, research limitations, scientific relevance and suggestions for future research are presented.
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2. Literature review
This chapter contains three main parts and a conclusion. It starts with covering the (semi-) globalization and regionalization literature in order to discuss general international business issues and set the tone for the following sections. The second part discusses the problems that firms can encounter when doing international business (the liability of foreignness), the measures they have at their disposal to overcome these (firm-specific advantages) and the dependence of firms on external actors (resource dependence theory). Finally the automotive industry scientific literature is discussed, in which theory on the main constructs under study is presented, and in which the working propositions are presented.
2.1 Semi-Globalization and the Regional Multinational Enterprise
2.1.1 (Semi-) Globalization
A question that occupies many researchers is to what extent today’s world is globalized. Garrett (2000) has written much about the causes of and perspectives on globalization, but his study is more a description than a verdict on the state of globalization. Ghemawat (2003) argues that the world is somewhere in between the two extremes of total insulation and total integration of domestic markets; he refers to this state as semi-globalization. Semi-globalization thus covers a broad and therefore also complex range of degrees of integration. Levels of integration, Ghemawat (2003) says, are higher than ever before (as shown by several different measures), but market integration is far from complete. Extrapolating from previous growth rates, and not to mention setbacks, the completion of globalization could still take a long time (Ghemawat, 2003).
Semi-globalization has several implications for international business strategy. One such implication is that it gives importance to location-specificity. Although location-specificity is also present in the case of complete insulation, that would be a less challenging condition, since international business strategy could then just be “chunked up into applications of mainstream (that is, single-location) strategy, performed location by location – although some problems of coordination would still remain” (Ghemawat, 2003, p. 139).Location-specificity of key activities, resources, etcetera gives companies the possibility to add value through cross-border operations.
10 2.1.2 The Regional Multinational Enterprise
The factor location-specificity is also reflected in a notion on globalization similar to semi-globalization and central in this thesis, namely that of the regionalization of MNEs. The pioneers of the concept of regionalization, Rugman and Verbeke (2004), came up with their new view on globalization after researching the geographical spread of sales of the 500 biggest MNEs. Rugman and Verbeke (2004, p. 5) chose sales data, a downstream globalization measure, because according to them it is “the ultimate reflection of market success”. Rugman and Verbeke’s (2004) view was quite different from the conventional, mainstream perspective which used macro-level data such as growth patterns in trade and foreign direct investment (FDI) and compares these with national GDP growth rates. This way, Rugman and Verbeke (2004) say, the actual (micro-level) driving force behind globalization, the MNEs, and their growth data are neglected.
By Rugman and Verbeke’s (2004) chosen standard, to be considered global MNEs are required to have substantial sales in all three triad regions (>20% in all three regions and ≤50% in any one region).The triad consists of North-America (NAFTA region), the European Union (EU) and Asia-Pacific, traditionally the three most developed regions in the world. Rugman and Verbeke (2004) found that, at the time of their research, very few firms (only nine) could be considered truly global. Of the 380 firms for which geographical sales data was available as much as 320 were found to be home region oriented (≥50% sales in home region),25 firms were found to be bi-regional (≥20% in each of two regions and ≤50% in one region) and 11 firms were found to be host region oriented (≥50% in region other than home region). These figures have more or less been the same in recent years (Fortune Global 500 Index, 2012), there are still few global firms.
Regionalization thus refers to MNEs being strategically oriented towards one or two extended Triad regions, in most cases only their home region. As an addition to locational specificity used by Ghemawat (2003), Rugman and Verbeke (2004) introduce the term regional specificity, which refers to the importance of the region as a level of analysis for analyzing MNE strategy and the differences between regions. According to them the business world is still divided into regions.
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2.2 The Liability of Foreignness and the Regional Multinational Enterprise
2.2.1 The Liability of Foreignness
A major reason for regionalization is the liability of foreignness (LOF), which Zaheer (1995) argues, lies at the core of theories of the multinational enterprise. The liability of foreignness, or the additional costs of doing business abroad that result in a competitive disadvantage for an MNE subsidiary compared to competitors in the host country, is caused by unfamiliarity with the foreign (institutional) environment, cultural, political and economic differences, and the need for coordination across geographic distance (Zaheer, 1995).
Zaheer (1995) identifies four types of (sometimes related) additional costs: (1) costs directly related to geographical distance, such as the costs of travel, transportation, and coordination over distance and across time zones; (2) firm-specific costs that result from a particular company's unfamiliarity with and lack of roots in a local environment; (3) costs associated with the host country environment, such as the lack of legitimacy of foreign firms and economic nationalism; (4) costs associated with the home country environment, such as restrictions on exporting certain products. The relative importance of the abovementioned costs and the strategic options firms have to deal with them varies by company, industry, home country and host country.
In the regionalization literature liability of foreignness is divided into intra and inter-regional LOF (Rugman & Verbeke, 2004). Intra-regional LOF applies to host countries inside the home region, whereas inter-regional LOF applies to host countries in an extended Triad region other than the home region. The latter will usually be bigger, because of the higher distance of various kinds (economic, cultural, institutional and geographic) between regions than within (Rugman & Verbeke, 2004). This is the main reason for companies to be regionally oriented and unable to become global (Rugman & Verbeke, 2004). Because of the smaller distance between countries, operating in the home region has various advantages (Arregle et al., 2009). Firstly, the higher geographic proximity positively influences the transmission of knowledge and agglomeration benefits. Secondly, regional economic integration and/or institutional proximity will decrease the intra-regional liability of foreignness compared to the inter-regional liability of foreignness.
12 2.2.2 Firm-Specific Advantages
To overcome the liability of foreignness companies have to transfer firm-specific advantages (FSAs) to the host country (Rugman & Verbeke, 1992). Each firm possesses a unique set of FSAs that provides them with competitive advantage. These FSAs are created when a firm has developed special knowhow or a capability that is unavailable to competitors and cannot be imitated by them, except in the long term with high costs (Rugman et al., 2011). FSAs mostly arise from upstream research and development (R&D) efforts that lead to new products or production processes. Alternatively innovation happens more downstream, possibly leading to differentiated product lines, thereby generating an FSA in marketing or distribution. Finally, an FSA can also be embodied in a unique element of its management structure or core organizational routines (Rugman et al., 2011).
Rugman and Verbeke (1992) and Rugman et al. (2011) identify three types of FSAs: (1) stand-alone FSAs, e.g. patented knowledge or a brand name; (2) routines, i.e. the organizational way of working; (3) recombination capabilities, i.e. the ability to effectively increase the company’s current resource base by adding newly accessible resources. According to Rugman et al. (2011) researchers traditionally think that every one of these FSAs builds upon home country CSAs (country-specific advantages). This typically leads to location-bound FSAs (LB FSAs), connected to the home country. However, some of a firm’s FSAs can become transferable, deployable and profitably exploitable across country borders, making them non-location bound FSAs (NLB FSAs). NLB FSAs include managerial capabilities, system integration capabilities, R&D knowledge, easy access to capital, and in some cases (when foreign customers value them) brand names. Notably, upstream FSAs are normally much more NLB than downstream FSAs (Rugman et al.,2011).
NLB FSAs can be transferred across borders via the intra-firm network of the MNE, but usually they must be complemented with investments in new LB FSAs in the host country (Rugman et al.,2011). The MNE might have to acquire complementary resources possessed by foreign external actors. Solely with these complementary resources, and the LB FSAs that come with, is the company able to access host country CSAs (e.g. access to a large consumer market). In case the complementaryresourcesare available on the market, the company will develop the new LB FSAs by itself. If not, joint ventures and other kinds of alliances may result, especially if the company prefers to maintain a degree of direct control over its proprietary NLB FSAs transferred to the host country (Rugman et al., 2011). If the markets
13 for resources have strong imperfections and there are no suitable joint venture partners, the only option is a merger or acquisition. This way the MNE is forced to not only buy the resources needed for access to the foreign market, but a local firm as a whole, with all the possible unwanted assets and capabilities (Rugman et al., 2011). Of course, when the MNE can complement its internationally transferable NLB FSAs with self-created LB FSAs, controlled completely by the MNE through its internal network, FSA dissipation risks are much less of a problem (Rugman et al., 2011).
If FSAs are location-bound or non-location bound is determined by a number of factors (Rugman & Verbeke, 1992). As the word location implies, the place where the FSA is developed and/or deployed is one of those factors. According to Collinson and Rugman (2008) there are certain home-region characteristics that can make FSAs location-bound, or as they call it home-region bound. This makes their geographic scope limited and it makes them difficult to transfer (Collinson & Rugman, 2008). In their study on Japanese firms, the authors identify a number of home-region characteristics that impede a firm’s ability to transfer their FSAs to a host region. They found that in the case of Japan the impeding home-region characteristics include low labor mobility, employment as a social contract, firm-employee loyalty and obligation, Keiretsu business system and patient capital markets(Collison & Rugman, 2008).
Another factor that plays a role in FSA transferability is type of industry. According to Asmussen and Goerzen (2013) international dispersion varies between industries. For example wholesale and retail industry is found to be less dispersed across the cultural dimension, “suggesting that the ability to satisfy shopping preferences is a location-bound FSA that is less fungible across cultural space” (Asmussen & Goerzen, 2013, p. 144).
In general, FSAs become harder to transfer across borders as the liability of foreignness an MNE experiences increases. As mentioned, the inter-regional LOF is usually larger than the intra-regional LOF, because the distance of various kinds between an MNE’s home country and the host country tends to be greater when that host country is in a different extended Triad region (Rugman & Verbeke, 2004). Therefore FSA transferability is lower inter-regionally than intra-regionally. As a result global strategies and global NLB FSA bundles are very rare (Rugman et al., 2011).
14 With respect to distance, Rugman et al. (2011) point to the compounded distance, the need to manage various distance dimensions at the same time. They argue that previous international business research has focused too much on measuring individual dimensions of distance (economic, cultural, institutional and geographic) and adding those up to determine the distance between countries. These dimensions however, cannot be seen independently from each other. For instance, regional economic integration is often associated with institutional integration, as well as contributes to an increased mobility of labor and managerial best practices which can decrease the cultural distance (Rugman et al., 2011). So there are possible multiplicative effects at work, which Rugman et al. (2011) argue are more likely to occur at the inter-regional level than the intra-regional level.
2.2.3 MNE Dependence on External Resources
The necessity of complementing NLB FSAs with investments in new LB FSAs in the host country, which entails the MNE having to acquire complementary resources from external actors, creates a dependency for the MNE. This dependency on external actors for acquiring resources is known as resource dependence. Resource dependence (Pfeffer & Salancik, 1978) is a stream of theory that is very useful to examine the (constantly changing) relations in the automotive industry. Pfeffer and Salancik (1978), noted that up until the time of their research organizational theory focused primarily on the organization itself and its internal environment, merely pro forma acknowledging elements like social constraints, the external environment and open systems. But Pfeffer and Salancik (1978) see the external environment as the leading factor for shaping organizational behavior.
In essence, resource dependence theory (Pfeffer & Salancik, 1978). argues that organizations are never autonomous, but are constrained by a network of interdependencies with other organizations. In order to function organizations need resources (financial, human, physical and knowledge). Without these resources the survival of the organization cannot be guaranteed. But since organizations do not always possess all needed resources, they are dependent on other actors to acquire them. This gives the actors that possess needed resources a certain power over the organization (Pfeffer & Salancik, 1978). According to Ulrich and Barney (1984) organizational power is reflected in the degree to which an organization depends on other organizations to acquire and maintain valuable resources, and the degree to which other organizations depend on it. Organizational success is defined as maximizing this
15 organizational power. Thus, to maximize power an organization has to decrease its resource dependence on others and increase others’ resource dependence on the organization.
Davis and Cobb (2009) explain this exchange-based power as follows. Company B is dependent on company A because it possesses certain resources that B needs that are not available elsewhere, giving A power over B. Power and dependence thus are opposites. But in practice power and dependence are almost never absolute, in the sense that one party has all the power and the other is completely dependent. Company A and B can both have power over each other and they are interdependent. To illustrate this the authors use the example of General Motors being dependent on a company called Fisher Body for auto bodies that were not readily available elsewhere in large volumes. Fisher Body however is also dependent on General Motors, because it is the most important buyer of its auto bodies.
To decrease uncertainty regarding the acquisition and maintenance of essential resources and to provide autonomy and legitimacy to itself, organizations seek to make interorganizational arrangements such as mergers and acquisitions, joint-ventures, boards of directors interlocks, alliances and in-sourcing (Drees & Heugens, 2013). Pfeffer and Salancik (2003) themselves identify five options that firms have to minimize environmental dependencies: a) mergers and acquisitions; b) joint ventures and other interorganizational relationships; c) boards of directors interlocks; d) political action; e) executive succession. Apart from these general options, the authors name organizational growth and restriction on the distribution of information as other organizational processes or actions to accomplish the same.
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2.3 The Automotive Industry and the Position of Parts Suppliers
2.3.1 Industry Structure
The automotive industry has both characteristics in common with other globalized industries like apparel, consumer goods and electronics, as well as characteristics that differentiate it (Sturgeon et al., 2008). The first common characteristic is that FDI, global production and international trade have increased enormously since the end of the 1980s. Market growth and potential for it, alongside an enormous pool of cheap though skilled labor in developing countries like India, Brazil and China, have attracted great amounts of FDI to supply local markets and to export products back to the countries the FDI originated from, the developed countries (Sturgeon et al., 2008; Humphrey, 2003). These global sourcing patterns have come up aided by trade and investment liberalization, materialized via World Trade Organization (WTO) agreements (Humphrey, 2003; Sturgeon et al., 2008). The second common characteristic is that outsourcing has increased and suppliers have become responsible for more value-adding activities. Consequently, car parts suppliers from developed countries have become more active in trade and FDI, and car parts suppliers from developing countries have become more capable (Sturgeon et al., 2008).
There are a couple of characteristics that really set the automotive industry apart. The extremely concentrated firm structure is one of them (Diab & Pucik, 2015; Sturgeon et al., 2008; Humphrey, 2003). The automotive industry has been experiencing and is continuing to experience a worldwide consolidation (Diab & Pucik, 2015; Humphrey, 2003).This has led to relatively few large global companies who have a huge amount of power over the smaller ones and are capable of exercising control over their complete supply chain (Diab & Pucik, 2015;Sturgeon et al., 2008; Humphrey, 2003). The power in the automotive industry is concentrated in the three Triad regions – the United States (North-America), Europe and Japan (Asia) – and within these regions domestic assemblers are a lot more successful than foreign ones (Rugman & Collinson, 2004). To illustrate the extremely concentrated firm structure:
“Eleven lead firms (automakers) from three countries, Japan, Germany and the USA, dominate production in the main markets. The global scope of both lead firms and the largest suppliers was enhanced by a wave of mergers and acquisitions, and
equity-17
based alliances in the 1990s. Lead firm concentration, though not as extreme as in some industries, such as commercial aircraft, has blunted efforts to establish the sort of industry-level technical and business process standards that prevail in less concentrated industries”
(Sturgeon et al., 2008, p. 9).
At the same time, car parts suppliers are in a similar process of global consolidation. But unlike production of automotive parts, which is increasingly being distributed worldwide, R&D stays mostly centralized at main automotive hubs like Detroit, Stuttgart or Nagoya (Diab&Pucik, 2015; Sturgeon et al., 2008).
Since the early 1990s car manufacturers, in particular European and North-American ones, have gradually shifted more complexity and responsibility to the suppliers, both production wise as well as R&D wise (Sturgeon et al., 2008; Diab & Pucik, 2015; Humphrey, 2003; Foy, 2014). This has shifted the balance of power more towards the largest 20-30 suppliers (Sturgeon et al., 2008; Foy, 2014), increasing auto manufacturers’ resource dependence on suppliers. Nowadays the big suppliers can together build 85% of a car’s internal systems (Foy, 2014) and automakers outsource design and production activities to suppliers that can add up to as much as 80% of the vehicle costs (Diab & Pucik, 2015). As a consequence, large global suppliers have come up, who are able to offer worldwide R&D and production capacity. As mentioned, R&D in most cases is still centralized but it is offered worldwide, keeping in mind that upstream FSAs are easier to transfer across borders than downstream ones. Another reason for the emergence of global suppliers is that suppliers have been forced to become global, by the condition of local production of car parts that many automakers set nowadays for winning contracts (Sturgeon et al., 2008).
2.3.2 Asset Specificity
The degree of asset specificity differs per industry. The automotive industry, the focal industry of this thesis, is known for its high degree of asset specificity (Sturgeon et al., 2008; Dyer, 1996; Nobeoka et al., 2002; Peng, 2002; Dyer & Hatch, 2006). There are three different types of assets (Morris et al, 2004). First there are non-specific assets, which are re-deployable. Then there are specific assets, which are dedicated to one particular business relation. Finally there are mixed assets. If the original business relation where the assets
18 where dedicated to ceases to exist, mixed assets can be re-deployed to a new business relation, but at an important loss to the owner. Morris et al. (2004) give the example of a supplier’s factory with assets to produce sub-assemblies. Although the sub-assembly (module) might be generic in many ways, there are also characteristics specific to a particular vehicle model. Those characteristics are determined by the overall design of the vehicle and of the interfaces between models, which are the intellectual property of the automakers. Therefore recurrent transactions where mixed assets are used should occur on the basis of harmonious, long-term relations between buyer and supplier (Morris et al., 2004).
In the automotive industry the number of module variants is high (Reichhart & Holweg, 2008) and car parts and modules (configurations of multiple parts) are often specific to vehicle platforms and vehicle models (Sturgeon et al., 2008).
“The absence of open, industry-wide standards undermines value chain modularity and ties suppliers to lead firms, limiting economies of scale in production and economies of scope in design. Suppliers are often the sole source for specific parts or module variants. This creates the need for close collaboration, raises the costs for suppliers that serve multiple customers and concentrates most design work into a few geographic clusters, typically near the headquarters of lead firms. Because value chain modularity is limited, linkages between lead firms and suppliers tend to be relational or captive in character.” (Sturgeon et al., 2008, p. 9).
This illustrates the high mutual resource dependence that is created by the high degree of asset specificity: suppliers are tied to automakers and their ability to develop economies of scale and scope is constrained, making them dependent on automakers, while at the same time automakers are dependent on suppliers if they are the only source for specific parts or module variants.
WP 1: Lowering their degree of asset specificity is a way for suppliers to decrease their resource dependence on automakers
Peng (2002) mentions the high degree of asset specificity at Japanese car parts suppliers, which are often part of the same Keiretsu network as their buyers.
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“Specifically, within such a network, independent suppliers seem to be willing to site their factories close to major manufacturers such as Toyota and Honda, in the absence of a long-term contract. Such a high degree of asset specificity creates economic value by reducing delivery time and costs and increasing the efficiency of more just-in-time deliveries”
(Peng, 2002 p. 254).
Peng (2002) says that according to Western research a degree of asset specificity that high is undesirable. It is likely to lead to high transaction costs due to a significant drop in value of suppliers’ location-specific assets when automakers scrap contracts or suppliers want to supply automakers elsewhere. Therefore parts suppliers are thought to be reluctant to site their business in a vulnerable location, forcing automakers to invest in expensive vertical integration (Peng, 2002). As opposed to such reasoning, some Japanese firms have accomplished both a high degree of asset specificity and low transaction costs, leaving researchers puzzled (Peng, 2002). This duality leads to a big advantage for Japanese automakers. They can avoid expensive vertical integration that is frequently seen at Western car manufacturers, and still reap the benefits of close cooperation with parts suppliers (Peng, 2002).
As an explanation for this accomplishment in Japan and elsewhere in Asia, Peng (2002) points to the difference between the East and West, especially in culture. The Japanese are characterized by a cooperative attitude, that is reflected in a high cooperation between companies. In line with this explanation, other studies propose the (informal) institutional frameworks that Japanese firms are embedded in as an explanation (Peng, 2002). These argue that even though Japan has adopted a number of formal legal frameworks that resemble the post-World War II American model, it is the informal constraints that are used most when doing business. Consensus- and trust-building are valued more than formal contracts (Peng, 2002; Dyer, 1996).
Dyer (1996) mentions that in advanced modern economies, interfirm co-specialization has become a common practice within value chains. Individual firms invest in specialized assets that are specifically accommodated to the exchange relationship. These transaction/relation-specific investments increase productivity and bring in revenues much in excess of the
20 original costs. Dyer’s (1996) research indicates that differences in value chain governance and interfirm asset co-specialization are two of the reasons why Japanese companies active in complex-product industries frequently possess a competitive advantage. Dyer (1996) found that Japanese automakers (value chains) tend to have a greater interfirm asset co-specialization than their U.S. counterparts (who rely more on markets and hierarchies). This provides them with a competitive advantage due to superior coordination, information sharing, and learning, which are critical in complex-product industries (Dyer, 1996).
2.3.3 Buyer-Supplier Relationships
The biggest and most powerful car parts suppliers are the so-called global tier-one suppliers. They fall into the general supplier category – independent of the type of industry – of modular suppliers, meaning they have specialized competences and are in business with various customers (Humphrey, 2003). There are relatively few of them and they are characterized by intense worldwide cooperation with the top auto manufacturers (Diab & Pucik, 2015). Because of this intensified cooperation, the relationship that the global tier-one suppliers have with the automakers has changed from a transactional relationship to a more relational one (Diab & Pucik, 2015; Sturgeon et al., 2008; Humphrey, 2003). The relationship between both parties has become more complex and is of a more long-term character (Humphrey, 2003;Diab & Pucik, 2015; Sturgeon et al., 2008). The practices of single sourcing and contracts for the entire period a car is produced, or even the entire life cycle of a component (including the aftermarket) have become common (Humphrey, 2003; Reichhart & Holweg, 2008).In Japan, with its Keiretsu system, close relationships between suppliers and automakers and consequently long-term contracts and single sourcing, have existed for decades already (Peng, 2002; Humphrey, 2003). In Europe suppliers and automakers cooperate on the R&D of components for particular cars, which is essential for suppliers to win future contracts, but there is open bidding for every new vehicle contract and supplier firms have a portfolio of different automaker customers (Diab & Pucik, 2015; Humphrey, 2003).This opens up the possibility for joint innovation, which is an important qualification for suppliers to win future contracts.
Dyer and Hatch (2006) confirm that cooperation with suppliers, and the network knowledge resources that result from it, is beneficial to automakers. In their study they compared Toyota to U.S. automakers (GM, Ford and Chrysler) using a sample of U.S. suppliers that were selling to both Toyota and the U.S. automakers. They found that greater knowledge sharing
21 on the part of the Japanese automaker resulted in a steeper learning curve at the suppliers, decreasing the number of defects in the production of auto parts, which in turn benefits the automakers. A major factor contributing to this quality difference were the interorganizational routines and policies at the three major U.S. car manufacturers, which acted as barriers for the transfer of knowledge (Dyer & Hatch, 2006). Knowledge sharing from the customer to the supplier leads to the supplier developing certain production capabilities or FSAs. These FSAs are relation-specific and not easily transferable to other settings (Dyer & Hatch, 2006). Therefore/For this reason, a supplier’s production capabilities can be different for every customer: their number of defects can be 500 parts per million for customer A, but 700 for customer B.
However, Nobeoka et al. (2002) argue that FSAs developed in one buyer-supplier relationship can be used elsewhere. They point to the fact that most studies on automaker-supplier cooperation have looked at the automaker’s point of view, neglecting the strategic options
suppliers have to obtain competitive advantage over their rivals. According to Nobeoka et al.
(2002) less exclusive ties to automakers leads to the best performance. A broad customer scope strategy increases performance mainly because of the learning opportunities it offers (Nobeoka et al., 2002). A portion of the knowledge suppliers develop in the interaction with buyers is relation-specific, but another part is re-deployable. Re-deployable knowledge, like technical knowledge or market knowledge, benefits the supplier in their interaction with other customers as well (Nobeoka et al., 2002). Suppliers should develop customer management capabilities that enable them to engage in highly cooperative interfirm relationships with different automakers at the same time (Nobeoka et al., 2002). Having multiple customers not only increases performance, it also decreases the resource dependence of suppliers on automakers. The more customers a supplier has, the less their resource dependence on individual customers (Pfeffer & Salancik, 2003; Davis & Cobb, 2009). Diab and Pucik (2015) confirm that assembling a global portfolio is a way to counteract automakers’ buying power.
WP 2: Having a broad portfolio of customers decreases suppliers’ resource dependence on individual automakers
The close relationship between suppliers and automakers, together with the extremely concentrated firm structure in the automotive industry, has created a high entry barrier for newcomers (Diab & Pucik, 2015;Sturgeon et al., 2008). The extremely concentrated firm
22 structure limits the upgrading prospects for smaller companies (Sturgeon et al., 2008). This way the majority of local suppliers are either forced into the second-tier, with little or no R&D activity, or they serve as ‘build to print’ suppliers who get involved once new products have already been developed (Diab & Pucik, 2015). Another reason for this is the increased modularity in the automotive industry (Reichhart & Holweg, 2008). Cars are assembled by putting together different modules, such as a steering system, a breaking system, the suspension, etcetera. Automakers prefer suppliers that can offer complete modules. Usually only large global suppliers are able to offer these.
Global tier-one suppliers are able to do product development in a proactive manner (Diab & Pucik, 2015), as they can understand automakers’ needs even before the automakers articulate them in design and product development requests. These suppliers are usually able to intensify their R&D activity at an early stage, so that they can shape their future technological footprint (Diab & Pucik, 2015). Another important capability is that global tier-one suppliers are committed to long-term investment (Diab & Pucik, 2015).
“The superior networking and informal information flows between value chain partners and even among competitors enables global suppliers to invest in support of long-term commitment to their key customers. However, based on a solid understanding of the business and how the industry may evolve, global suppliers invest not only in R&D, but also in building their global production network and value chain structure in anticipation of future customer needs. At the same time, with a high level of market intelligence they can assemble a global portfolio of customers and counteract automaker’s buying power”
(Diab&Pucik, 2015, p. 4).
This quote shows nicely how suppliers are developing FSAs, and also strengthens the second working proposition. They develop FSAs by conducting R&D, building a global production network and value chain structure, and gathering market intelligence. The developed FSAs give suppliers a degree of power over automakers, or put differently, decrease supplier’s resource dependence on key buyers.
23 Another way of obtaining possession of FSAs is by acquiring them through mergers and acquisitions, strategic alliances, joint ventures, etcetera. As was discussed in section 2.2, literature on resource dependence theory (Pfeffer & Salancik, 2003; Drees & Heugens, 2013) refers to these actions as interorganizational arrangements to decrease uncertainty regarding the acquisition and maintenance of essential resources (resource dependence) and provide the organization with power, autonomy and legitimacy.
WP 3b: Acquiring new FSAs decreases suppliers’ resource dependence on key buyers
2.3.4 Globalization, Regionalization and Co-location
Since the mid-1980s the automotive industry has moved from separate national industries to a more integrated global industry (Sturgeon et al., 2008). Through global integration companies became part of larger regional and global-scale structures of sourcing, innovation, production, consumption, command and control. Despite the global scope of both the top automakers and tier-one suppliers, a pattern of regional integration can still be seen in the automotive industry, as opposed to other major high-volume, consumer-oriented manufacturing industries such as clothing and electronics, which are characterized by complete global integration (Sturgeon et al., 2008). Final assembly, along with car parts production, has mainly been kept close to end markets due to political sensitivities, though market saturation, high levels of motorization and the tendency to ‘build where they sell’ have also stimulated auto manufacturers to locate their factories in a wide variety of countries (Sturgeon et al., 2008).
Market differences can force automakers to adapt the design of vehicles to market idiosyncrasies. Examples are driver’s seat side (left or right), heavier suspension and larger fuel tanks for developing countries, pick-ups for countries like Australia and Thailand, etcetera (Sturgeon et al., 2008). “While many vehicles are designed with global markets in mind, an increasing number are developed with inputs from affiliated regional design centres, where designers and engineers help to tailor vehicles to national and regional markets” (Sturgeon et al., 2008, p. 12). According to Rugman and Collinson (2004) the automotive industry predominantly works in clusters of localized activity within every Triad region. “There are networks of key suppliers, other suppliers, key distributors, other partners, and the OEMs assemble cars from imports of literally thousands of suppliers, all location bound” (Rugman & Collinson, 2004, p. 474).
24 This trend towards regional integration is mainly apparent at the production side. Both automakers and parts suppliers have multiple regional production systems in place. In North-America, South-North-America, Europe, Southern Africa, and Asia regional parts production usually supplies assembly plants that produce cars for regional markets (Sturgeon et al., 2008). Inside the different regions, companies are increasingly locating in countries with lower costs of operations: the southern part of the United States and Mexico for North-America, Eastern Europe and Spain for Europe, and South East Asia and China for Asia (Sturgeon et al., 2008). However, apart from production, automotive companies perform various other downstream activities and after-sales functions that are highly regionally-specific (Rugman & Collinson, 2004).These activities include maintenance and repairs, insurance, emergency rescue services, parts and accessories and financing, and they form an important share of the total revenues for the larger companies.
The regionalization pattern in the automotive industry can be attributed to a number of factors, which can be of political, cultural, technical and economic kind (Sturgeon et al., 2008). The factor of politics is an important one:
“The high cost and the visibility of automotive products, especially passenger vehicles, can provoke political backlash among the general population if imported vehicles account for too large a share of vehicles sold and when local producers are threatened by imports. More importantly, powerful local lead firms and industry associations, large-scale employment and relatively high rates of unionization increase the political influence of the automotive industry in many countries”
(Sturgeon et al., 2008, p. 14)
Therefore carmakers have decided on restricting exports and produce locally to prevent potential political sensitivities, even when export restricting measures such as import tariffs and local content regulations are absent or predicted to decrease with WTO legislation (Sturgeon et al., 2008).
There are also technical and economic factors contributing to regionalization. The high transportation costs, caused by the fact that cars and car parts are often big, heavy and at times
25 fragile, keep production close to final markets (Sturgeon et al., 2008). That way it fosters regionalization. Finally, culture also plays a role in giving salience to regions. In Europe people favor performance cars with good engines, whereas Americans prefer large comfortable cars (Rugman & Collinson, 2004). Cultural differences exist within regions as well. Rugman and Collinson (2004) mention the NAFTA region, where American and Canadian cars usually have automatic transmission, while in Mexico they mostly have manual transmission. Apart from the general factors discussed above, there are other things that make countries or regions different from each other and present barriers to globalization. Examples of these, are environmental regulations, automotive design regulations (noise control, fuel economy) and import tariffs (Rugman & Collinson, 2004).
Despite mainly discussing the regionalization of automakers, at the supplier side the pattern of internationalization and therefore regionalization is very similar. This has a lot to do with the high interdependence between automakers and suppliers, which often leads to suppliers locating their businesses/facilities in close proximity to an automaker’s assembly plant. This phenomenon is known as co-location. Since the beginning of the 1990s co-located supplier clusters, also known as supplier parks, have emerged (Reichhart & Holweg, 2008). Supplier parks paired with assembly plants create clusters that can be characterized by geographic concentration and a sense of common interest (Morris et al., 2004). According to Sturgeon et al. (2008) “supplier parks have become an important complement to (and enabler of) global sourcing strategies aimed at minimizing the total cost for each component” (p. 15).
There are a number of reasons for the emergence of supplier parks. The change to modular supply played a vital role in stimulating co-location (Reichhart & Holweg, 2008).Modular supply, which is a combination of modularization and outsourcing, has increased the collaboration and therefore interdependence between automakers and tier-one suppliers. Because of this high interdependence, a good example of this being the sequential JIT delivery of parts and modules to the automaker’s assembly plant, suppliers have been stimulated to co-locate with automakers (Reichhart & Holweg, 2008).To illustrate the high interdependence that comes with sequential JIT delivery: suppliers often only have a few hours between the automaker requesting a certain module and the delivery of it (Reichhart & Holweg, 2008). For JIT delivery, co-location is not necessarily the only option. This can also be accomplished within large continental regions with a reliable infrastructure and good logistics services, like Europe and North-America (Sturgeon et al., 2008).Co-location is the
26 preferred option in two instances (Sturgeon et al., 2008). Firstly, when car parts have high transportation costs, as is the case with large, fragile and bulky modules such as finished car seats or dashboards. Secondly, when it is required that components are delivered on a sequential JIT basis, because the assembler needs a specific color or model variation at that (specific) moment.
Other reasons why it is beneficial to co-locate, all of which stem from the high interdependence, are that staying close to customers is vital for global tier-one suppliers to enhance the quality of interaction, while at the same time decreasing transaction costs and increasing the speed of decisions (Diab & Pucik, 2015; Sturgeon et al., 2008; Reichhart & Holweg, 2008; Morris et al., 2004).
WP 4: The high mutual resource dependence in the automotive industry stimulates suppliers to co-locate
There is also evidence that the relationship is the other way around. Reichhart and Holweg (2008) argue that dedicated (co-located) assets create a high degree of mutual resource dependence between automakers and module suppliers, that serves as a mechanism to ensure commitment to one another. This interdependence makes contract fulfilment the wisest decision for the supplier and the automaker (Reichhart & Holweg, 2008). Modular supply, according to Reichhart and Holweg (2008), makes the automaker highly dependent on the suppliers of modules, the tier-one suppliers. At the same time the requirement for the suppliers to invest in co-located assets makes them highly dependent on the automaker.
WP 5a: Co-location, in turn, (further) increases the mutual resource dependence
The degree of mutual resource dependence that results from co-locating, depends on its form (Reichhart & Holweg, 2008; Sturgeon et al., 2008).The first dimension in which the form of co-location can vary is ownership of facilities. The co-located facilities can either be owned by the automaker or the supplier, or the supplier can rent the facilities from the automaker, local government authorities or third parties (Reichhart & Holweg, 2008; Sturgeon et al., 2008).The supplier’s resource dependence on the automakers is highest in the case of the automaker owning the facility in which the supplier is co-located. Owning the facilities themselves makes suppliers less dependent on the automaker whose assembly plant they are
27 co-located with, and it makes the automaker more dependent on the module supplier. The automaker cannot easily turn to another supplier of that same module due to limited space for co-located facilities around the assembly plant, and because switching costs are high. For this reason automakers try to maintain or obtain ownership or control over land surrounding their factory, as land here is usually scarce (Reichhart & Holweg, 2008). They choose their own strategic flexibility over suppliers’ possible long-term commitment (Reichhart & Holweg, 2008). Renting facilities is another way for suppliers to decrease resource dependence on automakers, while at the same time lessening costs (Sturgeon et al., 2008). Reichhart and Holweg (2008) argue renting also decreases the degree of reciprocal commitment.
The second dimension in which the form of co-location can vary is local value-added. Local value-added is the amount of work that is done on parts or modules at the co-located facility. It can range, in order of increasing local value-added, from mere sequencing, via quality checks, late configuration/pre-assembly to full manufacturing operations (Reichhart & Holweg, 2008). The more value is locally added by the supplier at its co-located facility the higher the degree of resource dependence on the automaker, since a high local value-added requires high investments in the co-located facility as well as more space (Reichhart & Holweg, 2008). The expensive assets in the co-located facility are subject to the risk of losing much value if the automaker decides to discontinue the business relationship. Again, it also works the other way, as full manufacturing operations require more space (Reichhart & Holweg, 2008). More space occupied by the supplier in the immediate surroundings of the assembly plant means a higher resource dependence of the automaker on that supplier, as explained above.
The third dimension in which the form of co-location can vary is spatial integration and infrastructure (Reichhart & Holweg, 2008). Spatial integration refers to the location of the supplier facility relative to the automaker’s assembly plant. Infrastructure refers to physical arrangements made to facilitate the transport of parts or modules to the assembly plant, such as conveyor belts, tunnels or bridges. Within the spatial integration and infrastructure dimension five forms of co-location can be identified (Reichhart & Holweg, 2008). The first form is loose co-location, where suppliers are located around the automaker not more than a few kilometers away (Reichhart & Holweg, 2008). The second form is a dedicated area for suppliers that is not in the immediate surroundings of the assembly plant (Reichhart & Holweg, 2008). This is usually the case when more assembly plants from one automaker are
28 close to each other. Suppliers are then expected to co-locate in a dedicated area that is within reasonable distance from all assembly plants (Reichhart & Holweg, 2008). The third form is a dedicated area for suppliers in the immediate surroundings of the assembly plant, but without the presence of a dedicated infrastructure (Reichhart & Holweg, 2008). In this area, parts or modules are delivered by the suppliers on a JIS (just-in-sequence) basis to a single assembly plant (Reichhart & Holweg, 2008). However, JIT or batch shipments to other assembly plants occasionally occur, but mostly to plants of the same automaker (Reichhart & Holweg, 2008). The fourth form of co-location is equal to the third, a dedicated area in close proximity to the assembly plant, but with the presence of a dedicated infrastructure (Reichhart & Holweg, 2008). In the fifth and final form of co-location, called a modular consortium, suppliers are actually located inside the automaker’s assembly plant (Reichhart & Holweg, 2008). Here they either build up their modules and send them to the place of final vehicle assembly on a small conveyor belts, or they even assemble the modules onto the vehicle themselves, so that they build the vehicle together with the other module suppliers (Reichhart & Holweg, 2008). What the previous description makes clear is that the degree of spatial integration and infrastructure gradually increases from the first to the fifth form of co-location. The more spatially integrated suppliers and automakers are and the more advanced the infrastructure, the higher the mutual resource dependence.
The three dimensions, illustrated above, in which the form of co-location varies, suggest that the degree of mutual resource dependence varies along with those forms.
WP 5b: The form of co-location determines the degree of mutual resource dependence
2.4 Chapter Conclusion
This chapter has presented the conceptual foundation for this study and developed a number of working propositions. These two parts serve to set the mind frame of this study and guide the research design, which is presented in the next chapter. It also serves as the basis for relating the eventual findings to.
29
3. Methodology
This chapter presents the research methodology adopted for this study. It starts with describing the research philosophy underlying the study, in which the research paradigm, ontology and epistemology are discussed. After that the multiple-case study research design is presented, discussing its main features and addressing the four quality criteria. Subsequently, the case selection, data collection and data analysis are presented.
3.1 Research philosophy
3.1.1 Research paradigm
In qualitative research, which this research is, four epistemological paradigms can be distinguished: positivism, post-positivism, critical theory and constructivism (Guba & Lincoln, 1994). A fifth paradigm can be added to this, which involves the participation of the researcher him or herself in a type of research called action research (Brannick & Coghlan, 2007). Positivism and post-positivism adhere to realism and both presume an objective world that exists independent of man’s subjective cognition and can be shown by scientific data and theory (Gephart, 2004). Post-positivism distinguishes itself from positivism by acknowledging that realism has its boundaries in the sense that humans can just imperfectly and probabilistically apprehend reality (Guba & Lincoln, 1994). Like most organization and management studies, for this research the positivist paradigm is adopted. Adopting post-positivism automatically determines the ontology and epistemology of the research.
3.1.2 Ontology
Ontology is how one views the world (Fleetwood, 2005), the philosophy of the nature of reality (Shadish et al., 2002).As people’s views and therefore researcher’s views differ, the ontology underlying a study can differ too. In principal, two ontological views can be identified, that is objectivist (realist) and subjectivist. The former view assumes there is an objective reality which exists independently of the human brain (Brannick & Coghlan, 2007), i.e. reality is external to the observer (Saunders & Lewis, 2012).The latter view assumes that reality is subjective and a product of the human brain (Morgan & Smircich, 1980). As this research adopts the paradigm of post-positivism it takes an objectivist (realist) stance on ontology.
30 3.1.3 Epistemology
Epistemology is what one thinks can be known about the world (Fleetwood, 2005), the philosophy of the justifications for knowledge claims (Shadish et al., 2002). It is a consequence of the ontology of a study, since one’s perception of knowledge about reality is based on how one views it. Since this research took an objectivist ontological stance, the epistemological stance will be objectivist as well: a theory-neutral language is possible, i.e. one can excess the external world in an objective manner (Brannick & Coghlan, 2007).
3.2 Multiple-case study research design
For this study a multiple case study research design was adopted. A case study can be characterized as a research strategy which aims to understand the dynamics at work in specific settings (Eisenhardt, 1989). The work of Yin (2009) served as an important point of reference for the multiple case study design of this study. According to Yin (2009) case study research is particularly appropriate when the research question is of the ‘how’ or ‘why’ type, when the researcher has little or no control over the events he or she investigates, and when the research concerns contemporary phenomena in a real-life context.
There has been plenty of criticism on the case study as a research design (Yin, 2009). One major point of critique is its supposed lack of rigor: “too many times, the case study investigator has been sloppy, has not followed systematic procedures, or has allowed equivocal evidence or biased views to influence the direction of the findings and conclusions” (Yin, 2009, p. 14). Another important point of critique is that it is deemed problematic to generalize from case studies. Yin (2009) responds to this by saying that case studies, like experiments, are generalizable to theory, not populations or universes. This type of generalization is called theoretical generalization or analytical generalization. It differs from statistical generalization which is used in survey research for example and where the aim is to generalize from a sample to a larger universe (Yin, 2009). To deal with the mentioned concerns over rigor there are four tests to assess the validity and reliability of a case study (and any type of research). For each test there are certain tactics available to pass it (Yin, 2009).
The first test is that of construct validity. Construct validity means selecting the right operational measures for the concepts under study (Yin, 2009).One tactic for establishing
31 construct validity used in this study is using multiple sources of evidence, also referred to as data triangulation (Yin, 2009). See section 3.4 ‘Data collection’ for more details about the sources used. Another tactic used in this study, also proposed by Yin (2009), is establishing a clear chain of evidence.
The second test concerns the internal validity of a study. Internal validity deals with the correctness of the claimed causal relationship between the two variables studied. According to Yin (2009) the test of internal validity only applies to explanatory case studies and not to descriptive and exploratory case studies, as they do not specifically study a particular causal relationship. As this research is at least partly explanatory, internal validity should be ensured. This is accomplished by making sure any claims about a causal relationship between the variables studied, in this case resource dependence and regionalization strategy, are based upon existing literature (Yin, 2009). A second way to strengthen the internal validity is making use of both qualitative and quantitative data. Combining qualitative and quantitative data leads to a more synergistic view of the evidence (Eisenhardt, 1989). As multiple case studies are considered highly qualitative in nature, “quantitative evidence can indicate relationships which may not be salient to the re-searcher”, plus it can “keep researchers from being carried away by vivid, but false, impressions in qualitative data, and it can bolster findings when it corroborates those findings from qualitative evidence” (Eisenhardt, 1989, p.538).
The third type of validity test is external validity. External validity refers to the generalizability of the study results. As mentioned, for case study research analytical generalization is applicable, which means generalizing case study results to some broader theory (Yin, 2009).The most obvious way to enhance the external validity of a case study is to use multiple cases. This makes it possible to compare between them and determine whether certain findings are unique to a case or consistently replicated across multiple cases (Eisenhardt & Graebner, 2007).Therefore, “theory building from multiple cases typically yields more robust, generalizable, and testable theory than single-case research” (Eisenhardt & Graebner, 2007, p. 27). To ensure a multiple case study passes the external validity test it needs to have a good replication logic (Yin, 2009). This study uses a literal replication logic. The literal replication logic lies in the deliberate selection of three case companies with a similar company profile, therefore similar results are predicted among them. See the next section (3.3 ‘Case selection’) for the exact sampling reasons used for selecting the cases.
32 Finally, there is the test of reliability. For a case study to be reliable a different researcher should arrive at the same findings and conclusions when repeating it, given that he or she follows the same procedure (Yin, 2009). Establishing reliability serves to minimize the errors and biases of a study (Yin, 2009). To ensure reliability this research aims to make its steps as operational and transparent as possible (Yin, 2009). Another tactic to deal with reliability that is used in this research is having a case study database (Yin, 2009), i.e. all the data used in this study is openly accessible.
3.3 Case selection
For the multiple case study the three cases are selected using theoretical sampling, which means cases are selected for theoretical reasons, not statistical ones (Eisenhardt, 1989). In the theoretical sampling approach “cases are selected because they are particularly suitable for illuminating and extending relationships and logic among constructs” (Eisenhardt and Graebner, 2007, p. 27).Theoretical sampling reasons used in this research are as follows. As the subject in the research question is large car parts manufacturing MNEs, the cases were selected as such. They were selected from the Fortune Global 500 list of 2012, a well-known list that ranks the world’s five hundred largest companies in terms of revenues. The three suppliers selected are all in the top 4 worldwide in terms of revenue (Fortune Global 500, 2012), and each supplier is the largest in its own extended Triad region. In order to make a comparison between the three extended Triad regions and potentially discover differences, one case from each of the three regions was selected, i.e. one European, one North-American and one Asian parts supplier: Robert Bosch from Germany, Johnson Controls from the US and Denso from Japan. Table 1 shows a description of the case companies. Another theoretical sampling argument for selecting these three cases was that they have a similar company profile: a diverse product portfolio, active in at least one other sector apart from auto parts, and the largest car parts supplier in their region. Having three cases which are similar to each other, makes comparison more valid.
Only three cases were selected, because the market of large global suppliers is highly concentrated (Diab & Pucik, 2015;Sturgeon et al., 2008; Humphrey, 2003).The sixteen major automakers build and sell over one million vehicles per year which are built up from parts of only 10 suppliers (Foy, 2014). Another reason for having a small number of cases is that it allows for a more in-depth analysis.
