The process of finding the balance between intra-firm causal and
inter-firm causal ambiguity with Knowledge Protection Mechanisms
Abstract
Causal ambiguity, which is ambiguity about the link between firm resources and sustained competitive advantage, protects resources from competitive imitation. There has been a lack of research on how organizations actively manage causal ambiguity. This research examines the relationship between intra-firm and inter-firm causal ambiguity as well as the knowledge protection mechanisms used when inter-firm causal ambiguity deteriorates. Based on an extensive literature review, a framework was developed, which organizations are able to use, to check if the factors that provide the organization with a competitive advantage are protected, either by inter-firm causal ambiguity or by another knowledge protection mechanism. A multiple case study was conducted to answer the research questions and investigate if the framework represents reality. Semi-structured interviews were held at a pharmaceutical organization and at a highly technological organization. The results of the multiple-case study indicated that organizations are actively trying to reduce the level of intra-firm causal ambiguity while competitors are actively trying to reduce inter-firm causal ambiguity. Secrecy as a knowledge protection mechanism is often used to increase the gap between intra-firm and inter-firm causal ambiguity. Finally this research contributed to the causal ambiguity concept by showing that mature industries can put less trust in causal ambiguity as a knowledge protection mechanism while in new highly knowledgeable industries inter-firm causal ambiguity can play a big role in protecting knowledge.
Keywords: Intra-firm Causal Ambiguity; Inter-firm Causal Ambiguity; Causal Ambiguity
framework; knowledge transfer; knowledge protection mechanisms;
Name: Jeroen Boerman Studentnumber: S2248395
E-mail address: jsboerman1@gmail.com Telephone: 06-41718866
Date: 14 July 2013 Word count: 25.803
2
Inhoud
INTRODUCTION ... 3
LITERATURE REVIEW ... 6
CAUSAL AMBIGUITY ... 6
Intra-firm causal ambiguity ... 8
Inter-firm causal ambiguity ... 9
KNOWLEDGE TRANSFER ... 10
KNOWLEDGE PROTECTION MECHANISMS ... 12
A FRAMEWORK FOR ORGANIZATIONS TO SUSTAIN THEIR COMPETITIVE ADVANTAGE ... 16
METHODOLOGY ... 19
INDUSTRY CONTEXT ... 19
FIRM SELECTION ... 20
DATA COLLECTING ... 21
CASE STUDY ... 22
WHICH FACTORS GIVE THE ORGANIZATION ITS COMPETITIVE ADVANTAGE? ... 22
WHICH KNOWLEDGE GIVES THE ORGANIZATION ITS COMPETITIVE ADVANTAGE ... 23
IS THE ORGANIZATION ABLE TO IDENTIFY THE LINK BETWEEN THE RESOURCES AND THE COMPETITIVE ADVANTAGE? ... 25
DO COMPETITORS HAVE THE RESOURCES TO IMITATE? ... 27
WHEN INTRA-CAUSAL AMBIGUITY IS LOW DOES THE ORGANIZATIONS IMPLEMENT KNOWLEDGE PROTECTION MECHANISMS TO PROTECT AGAINST IMITATION AND SPILLOVERS? ... 32
CONCLUSION ... 34
MANAGERIAL IMPLICATIONS ... 37
FUTURE RESEARCH AND LIMITATIONS ... 37
REFERENCES ... 39
APPENDIX 1: LETTER TO ORGANIZATIONS ... 42
3
Introduction
If you ask athletes why they are successful in their sport they will most likely tell you that it is a mix between talent, training, training facilities and the trainer. But in most of the cases they cannot exactly pinpoint the reasons of their success. In contrast, consider the case of the “klapskate” (“klapschaats”). The junior ice skating teams where the first who used the new klapskate. At first men did not take the new ice skate serious, however when the juniors shattered their personal records in the season ’94/’95, the laughing made place for interest and jealousy. The following year the Frisian junior team made the transition to the new ice skate and also broke their personal records. Therefore the correlation between the success and the klapskate could not be hidden anymore and the other ice skaters were able to identify the reason for this success, the klapskate. As a result of the identification of the competitive advantage by the competition, the Dutch ice skaters lost their advantage and by the next year everybody was using the new klapskate.
This simplistic example gives an indication of how the concept of causal ambiguity works. Causal ambiguity exists when the link between the resources controlled by the firm and a firm’s sustained competitive advantage is not understood or understood only very imperfectly (Barney, 1991: 108). In the literature causal ambiguity has been defined and examined in two ways: inter-firm causal ambiguity and intra-firm causal ambiguity (King, 2007). Intra-firm causal ambiguity is ambiguity among decision makers within the firm about the link between the resources of the company and the competitive advantage while inter-firm causal ambiguity is ambiguity among competitors. When intra-inter-firm causal ambiguity is high, managers are not able to understand the link between the competitive advantage and the critical resources. Therefore they cannot replicate the factors that have let the organization to success and transfer these factors to other parts of the organization. Some authors argue that when the level of intra-firm causal ambiguity is low it is just a matter of time before competitors are also able to understand the link between a firm’s resources and its competitive advantage (e.g. Barney, 1986; King, 2001).
If the link between the success of the Dutch team and the “klapscate” is unknown to the other athletes, the level of inter-firm causal ambiguity is high. Whereas, since this link is clear for the Dutch team, the level of intra-firm causal ambiguity is low. However, maybe because of the low level of inter-firm causal ambiguity on all other levels, e.g. training schedules, physical fitness of the skaters, the identification of the single difference between teams, the klapschaats, was relatively easy, enabling them to copy the factor of their competitive advantage.
4
But when causal ambiguity fails as a knowledge protection mechanism because inter-firm causal ambiguity is low, then how can the knowledge be protected against competitors using other knowledge protection mechanisms such as secrecy and patents? For example a company like Coca Cola who guards its recipe by keeping it a secret, has been very successful in protecting its knowledge. Pharmaceutical companies like Bayer and Sanofi use patents to protect medicines from being replicated. Accounting and consulting firms as KPMG and Deloitte, protect knowledge by special employment contract which limit the employees to work for a competitor. However these knowledge protection mechanisms are often expensive and competitors will try to work around it.
The management of intra-firm causal ambiguity has not been adequately investigated, nor has research been conducted regarding the awareness of managers of the phenomenon and its potential dangers. It could be argued that intra-firm causal ambiguity is always managed because an organization wants to know why it is successful. However is a firm aware of the inter-firm causal ambiguity, thus are competitors or potential imitators able to identify the reasons for success? And if so, how are they trying to protect their knowledge? Especially when the level of inter-firm causal ambiguity decreases. Although it could be argued that when there is a high level of causal ambiguity the factors that have provided the competitive advantage cannot be precisely determined (even ex-post), and that it is therefore impossible to produce a list of all factors that have contributed to the success and of how they interact. Some factors could be tacit and cannot be codified like experience while other, maybe more obvious factors contribute in a nonobvious way (Rumelt, 1984).
This research focuses on how organizations in different industries sustain their competitive advantage. How is causal ambiguity influencing this? Can the success in one part of the organization be replicated in the other? Does a better understanding of the reasons for success increase the risks of competitors being able to identify and imitate the critical resources underlying this success? In other words when the intra-firm causal ambiguity decreases does this also affect the inter-firm causal ambiguity. When this occurs, the focal firm needs to protect itself against knowledge spillovers but it might not even be aware of the risks that are being taking.
The objective is to critically discuss the strategy literature that addresses this issue and try to find empirically based answers to the following research questions:
(1) How does intra-firm causal ambiguity influence the existence of inter-firm causal ambiguity?
(2) How are formal and informal knowledge protections mechanisms used to delay the reduction of inter-firm causal ambiguity, when intra-firm causal ambiguity is low? (3) How are formal and informal knowledge protection mechanisms used to sustain a
5
To help answer these questions a framework is developed, based on an extensive literature study. The framework can help organizations in reviewing the factors of the competitive advantage and the knowledge protection mechanisms.
This research focuses on two industries one highly technological and the pharmaceutical industry. This allowed the comparison between a very new industry and a more established and mature industry. Causal ambiguity manifests itself in particular in knowledge because knowledge is often not codified and resides in experience and memories of staff, employees and technicians. Therefore it is hard to grasp which knowledge provides the advantage. These industries were chosen because in both the level of knowledge can provide an organization with a competitive advantage. Furthermore the development of knowledge is especially important in sustaining this advantage. In order to investigate the role of intra-firm causal ambiguity and inter-intra-firm causal ambiguity within these organizations semi-structured interviews were conducted. This method was chosen because causal ambiguity is a concept that is hard to grasp: the conduction of a semi-structured interview provided the opportunity to answer questions and clarify concepts.
This research contributed to the existing literature by showing that intra-firm causal ambiguity is a concept which is actively managed within organizations. Both organizations are trying to reduce the level of intra-firm causal ambiguity to enable factor mobility and exchange best practices. Competitors are actively trying to reduce inter-firm causal ambiguity, thus trying to understand the knowledge and factors that give the organization its competitive advantage. It was found that in the newer industry the organization was much more able to rely on causal ambiguity as a knowledge protection mechanism. This might be because the knowledge is still being developed and therefore there are less people able to understand the knowledge. In the more mature and established industry the organization could not rely on causal ambiguity and therefore they protected their knowledge with formal and informal knowledge protection mechanisms, no matter how high or low the level of causal ambiguity is. Secrecy is the most used knowledge protection mechanisms to increase the gap between intra-firm and inter-firm causal ambiguity. On the one hand by not sharing the newest knowledge and on the other hand keeping the factors for a competitive advantage secret. Furthermore organizations are aware of the dangers of intra-firm causal ambiguity increasing and inter-firm causal ambiguity decreasing when employees go to competitors or start for their own.
6
Literature review
Causal Ambiguity
With seminal articles in 1986 and 1991, Barney established the foundations of the resource based view. In the 1991 article he states that for a firm to have a sustainable competitive advantage, the resources and competences of the firm should be: valuable, rare, imperfect imitable and substitutability. Within the concept of imperfect imitability, Barney (1991) distinguished three factors: history dependency, causal ambiguity and social complexity. With regards to causal ambiguity, Barney (1991: 109) states: ‘If a firm with a competitive
advantage understands the link between the resources it controls and its advantage, then other firms can also learn about the link, acquire necessary resources (assuming they are not imperfectly imitable for other reasons) and implement the relevant strategies’.
Causal ambiguity, which is ambiguity about the link between firm resources and sustained competitive advantage (Reed and DeFillippi, 1990; Barney, 1991), protects resources from competitive imitation (Lippman and Rumelt, 1982; Barney, 1986). Rumelt (1984) argues that with a high level of causal ambiguity the factors that have provided the competitive advantage cannot be precisely determined (even ex-post), and that it is therefore impossible to produce a list of all factors that have contributed to the success and of how they interact. Some factors could be tacit and cannot be codified like experience while other, maybe more obvious factors contribute in a nonobvious way. Barney (1986) argues that at extreme levels of causal ambiguity, imitation may only be achieved by luck, or as Mosakowski (1997) argues, through random events. Thus although it might be better to know the precise reasons of success, it could be impossible to determine what these reasons were. Rikvin (2000) attributed with his findings about strategy, namely: suppose that a would-be imitator attempts to match the entire strategy of a focal firm and it succeeds in imitating most of the decisions but misses on a handful. Then because of the effects of the decisions are tightly knit together; the overall imitation attempt will probably be a failure.
In 1989 Dierickx and Cool found that sustainability of a firms assets position is related to how easily it can be substituted or imitated. They argued that causal ambiguity helps determine imitability. The research by Peteraf (1993) contributed to the concept of causal ambiguity by identifying that causal ambiguity is not only a barrier to imitation but also a barrier inside a firm to leverage resources. Reed and Defillippi (1982:1509) state about causal ambiguity:
Inability to fully specify the factors that play a role in the asset accumulation process. They
7
transaction specific skills and assets that are utilized in the production processes and provision of services for particular customers. Simonin (1999) added four more dimensions in which causal ambiguity is a full mediator on knowledge transfer within a strategic alliance: experience, partner protectiveness, cultural distance and organizational distance. Experience refers to the experience an organization must have with certain knowledge to understand it.
Partner protectiveness refers to a partner who is actively trying to create causal ambiguity
about the knowledge because of fear of losing ownership, to a position of privilege or superiority, to inadequate rewards or simply to the unwillingness to devote time and resources towards that end (Simonin, 1999:602). Cultural distance raises barriers for communication and for understanding the nature of their competitive advantage.
Organizational distance, which was also identified by Mosakowski (1997), refers to how two
different organizational cultures can create causal ambiguity.
8 Intra-firm causal ambiguity
As stated above, the expression intra-firm causal (e.g., King and Zeithaml, 2001; Szulanski, 1996; Zollo &Winter,2002 ambiguity is synonymous with characteristic ambiguity as used by some authors (e.g. Reed and Defillippi, 1990) .
In the early conceptualizations of causal ambiguity, there were claims that the benefits of causal ambiguity only arise if causal ambiguity exists among all firms, including the focal firm, regarding the sources of sustainable advantage for the focal firm (Lippman and Rumelt, 1982; Barney, 1991). These authors argued that when this is not the case it will be a matter of time before the competitors identify the link and are able to imitate or improve the critical resources. However Reed and Defellippi (1990) argue that causal ambiguity among managers benefits a firm because it protects a firm’s competitive advantage from imitation, but causal ambiguity could also impede imitation of valuable resources within the boundaries of the firm; this factor immobility, limits managers’ abilities to leverage resources for competitive advantage. When the key competency is unclear for the managers they could make the mistake of changing the resources which provide the firm with the competitive advantage or it could impede the replication of the key competences in different parts of the organization. In fact, a clear understanding of a key competence could encourage middle managers to refine and extend the execution of these resources in ways that make imitation more difficult (King and Zeithaml, 2001). Furthermore King and Zeithaml (2001) found evidence that the benefits of intra-causal ambiguity, like factor mobility, outweigh the disadvantages of increased risk of imitation which come with a low level of inter-firm causal ambiguity. Limited factor mobility can occur when causal ambiguity is so great that managers do not understand intra-firm causal relations and may impede the imitation of valuable resources within the boundaries of the organization (Reed and Defillippi, 1990). Other authors found evidence that intra-firm causal ambiguity could be the source of disputes and tensions within an organization. For instance Szulanski (1996) shows in his research that an arduous relationship (i.e. laborious and distant) between source and recipient of knowledge is correlated with causal ambiguity, because the recipient might not understand the link between the knowledge and the success. Coff (1997) argues that shareholders are more vulnerable to moral hazard because of causal ambiguity. Moral hazard refers to shirking, motivation problems, or even the subversion that can occur when individual contributions are difficult to observe (Coff, 1997:379). This difficulty to assess the contributions made by individuals could be caused by intra-firm causal ambiguity.
9 Inter-firm causal ambiguity
Inter-firm causal ambiguity occurs when competitors cannot determine which factors are responsible for the competitive advantage of an organization and therefore this raises the barriers of competitive imitation (e.g., Barney, 1986, 1991; Lippman and Rumelt, 1982; Reed & DeFillippi, 1990). A competitor’s failure to identify or understand how a focal firm uses a key resource severely limits competitor’s options for closing the gap with regard to that resource (King, 2007:167). Lippman and Rumelt (1982) argue that inter-firm ambiguity may deter a competitor from even attempting to imitate a competency because decision makers may fail to recognize the value of the resource. Lado, Boyd and Hanlon (1997) found evidence that competitors who do recognize the value may choose not to imitate it because of the risk involved in attempting to do what they recognize they do not know.
Ahuja and Katila (2001) argue that the reasons for partnering with a firm or even mergers and acquisitions are because of a high level of inter-firm causal ambiguity. An organization might be unable to identify the link between the resources and the competitive advantage of a competitor that it decides to acquire the competitor. It is therefore good to acknowledge that there are situations were inter- and intra-firm causal ambiguity are reversed. Consider mergers and acquisitions, at first there is inter-firm causal ambiguity in the negotiations and due diligence phases. When these are completed there is intra-firm causal ambiguity during the post-merger integration phase (Ranft and King, 2004).
10 Knowledge transfer
When an organization has a competitive advantage, it is important to protect the knowledge that has led to this advantage. The kind of knowledge makes an important difference in how it can be protected. In the literature there is a distinction made between two types of knowledge: tacit and explicit. Tacit knowledge is the knowledge acquired by experience, the value of tacitness is the inability to codify the information (Reed and Defillippi, 1990). Explicit knowledge is knowledge that is codified and therefore more easily copied then tacit knowledge, which in turn affects the ease of imitation (Teece, 1986). Nonaka (1991) found that a significant component of knowledge that organizations acquire may be tacit and not easily codified.
Causal ambiguity plays an important role when transferring knowledge, because it could limit the success of the transfer (e.g. Simonin, 1999; McEvily, Das and McCabe 2000; Szulanski, Cappetta and Jensen, 2004). Of course this is a benefit when this involves knowledge which is transferred to competitors or potential imitators, but a disadvantage when knowledge is transferred within the organization or partners within a strategic alliance. Argote and Ingram (2000: 151) define knowledge transfer in organizations as the process through which one unit (e.g., group, department, or division) is affected by the experience of another. They describe how knowledge initially is transferred through individuals but that knowledge can change without the involvement of individuals. For example when knowledge is codified or implemented in software and transferred throughout the organization. When this knowledge was only known to the individual there was a high level of intra-firm causal ambiguity, however when the software was developed it became clear for the whole organization and the level of intra-firm causal ambiguity decreased. Of course this not only goes for software but also for example with manuals and standard operating procedures. Studies have shown that technological knowledge embedded in products leaks out more rapidly to competitors then when it is embedded in organizational processes or routines (Mansfield, 1985). The level of intra-firm causal ambiguity decreases because of the knowledge embedded in the software and it is easier to transfer internally but it also speeds the spillover to competitors because of the lower level of inter-firm causal ambiguity.
Knowledge transfer is often undertaken to reproduce superior results observed elsewhere within the organization (Szulanski, Cappetta and Jensen, 2004). As stated before causal ambiguity could form a limitation when transferring knowledge because the routines, or the knowledge itself could not be comprehended by any of the individuals who receive the knowledge (e.g. Simonin, 1999; McEvily, Das and McCabe 2000; Szulanski, Cappetta and Jensen, 2004).
11
difficulty during the implementation phase. Causal ambiguity predicted difficulty of transfer throughout all phases of the transfer process. Szulanski, Capetta and Jensen (2004) have identified three possible ways for a recipient to approach the reproduction of this knowledge under circumstances of knowledge with a high level of intra-firm and inter-firm causal ambiguity. At a minimum knowledge of superior results can be used to set expectations for future performance. Furthermore the recipient can study the actual practices that underlie those results, thus reducing the level of intra-firm causal ambiguity of the source of the knowledge and decreasing the level of inter-firm causal ambiguity of the recipient. However, as Szulanski, Capetta and Jensen (2004: 601) argue: both of these
approaches are likely to involve redundant and possibly costly rediscovery of information that already exists. As a result, the recipient can plausibly be expected to first seek the advice of
12 Knowledge protection mechanisms
When inter-firm causal ambiguity deteriorates, it loses its effect as a protection mechanism, and competitors are able to identify the link between the resources and the competitive advantage. An organization needs to identify which resources and/or knowledge are critical and determine which mechanisms offer the best protection. Besides when the factors that provide the competitive advantage can be protected relatively easy by patents or other formal protection mechanisms, then inter-firm causal ambiguity may be less useful as a protection mechanism, as competitors may not easily attain access to these resources. In the literature several means have proven themselves effective in protecting knowledge these can be either formal like patents (Cohen et al., 2000; Levin et al., 1987) and trade secrets (Towse, 2000) or non-formal, such as Secrecy (Arundel and Kabla, 1998; Hannah, 2005); market lead time (Lieberman and Montgomery, 1998) and the bundling of resources (Mol and Wijnberg, 2011).
Patents are legally granted rights to exclude others from making, using, selling or importing an innovation for a limited time, within a given country (James, Leiblein and Lu, 2013: 1126).
13
As patents entail the disclosure of information, secrecy, as a protection mechanism refers to protecting knowledge of an organization by withholding knowledge from public dissemination (James, Leiblein and Lu, 2013). The downside of this is that while patent offer, over a predefined period guaranteed protection, secrets run the risk of leakage continuously (Arundel and Kabla, 1998). With non-compete, confidentiality agreements, and trade secrets law the government is helping organization keeping knowledge secret (Winter, 2000). However these secrets only enjoy legal protection as the underlying formula, method, technique or process derives independent economic value from not being known and the owner of this information makes reasonable efforts to maintain its secrecy (James, Leiblein and Lu, 2013). Kultti et al. (2007) have found evidence that secrecy might be more costly then patenting when a firm operates in a competitive technology space. Furthermore the success of secrecy as a knowledge protection mechanism differs with the type of knowledge. Secrecy with product innovations is less effective because these can be reversed engineered by competitors, while process innovations are less visible outside the organization and therefore much harder to identify by competitors (Mansfield, 1985; Teece, 1986). When the level of intra-causal ambiguity decreases, and the reasons of success become more visible for managers within an organization secrecy could be an important knowledge protection mechanism to limit the deterioration of the level of inter-causal ambiguity.
Levin et al., (1987), Arundel (2001) and Cohen et al. (2002) have suggested in their research that market lead-time is one of the most effective protection mechanisms. Zander and Kogut (1995:80) state that: “the ability of the innovating firm to improve the product should deter
imitation, even if important aspects of the manufacturing capability are widely diffused”.
Companies can overcome appropriability problems by being the first to enter the market with a new product and/or being ahead of their rivals (Hurmelinna-Laukkanen and Puumalainen, 2007: 97). Lieberman and Montgomery (1998) who have researched the empirical studies that have been done after their influential work in 1988, draw four general conclusions (1998: 1116; 1998:1121):
1. Entry order effects exist, especially with respect to market share, but they are better specified as interactions than as direct effects.
2. The magnitude of first-mover advantages varies greatly across product categories and geographic markets.
3. First-mover advantages dissipate over time but are enhanced by longer lead times before competitive entry.
4. Entry order effects, although significant and robust, are weaker than ‘marketing mix’ effects related to price and advertising. Later entrants can utilize this result to catch up to and surpass pioneers.
14
cannot “catch up”. However to sustain the competitive advantage gained by the first-mover advantage it could be important that competitors cannot pinpoint the reasons for success. Furthermore because of the first mover advantage it could be possible that inter-firm causal ambiguity is created because competitors are unable to understand the link between the resources and the competitive advantage.
Another way of protecting knowledge is by the bundling of resources. As Mol and Wijnberg (2011:85) state: “when a competitive advantage is realized through the bundling of
heterogeneous resources, performance only manifest itself in the aggregate level”. The
bundling of resources has the effect that it is not only for the competitor harder to identify which resources are critical for the success but also for the employees. This could be a way to limit employees power to negotiate better terms. For the bundling of resources it is necessary to have a high understanding of the resources and thus a low level of intra-firm causal ambiguity. By bundling these resources the level of inter-firm causal ambiguity could increase because rival firms could be unable to identify which resources provide the competitive advantage and as such limit imitation (Mol and Wijnberg, 2011). This could also be the reason in the financial industry that whole teams are lured away from competitors because of the difficulty of identifying the value of an individual trader on the commodity and stock exchange (Rao and Drazing, 2002). However as Simon, Gove and Hitt (2008) pointed out the bundling of sets of resources could require a substantial amount of expertise and knowledge, from which the most part is tacit.
The costs of maintaining certain rights may turn out to be too high, and the rights may be given up before the legal expiry date has been reached (Hurmelinna-Laukkanen and Puumalainen, 2007: 100). Employment law may be valued as a protection mechanism, because it is at a company’s disposal all the time, but it only binds its current employees. Furthermore it is difficult to prove that (former) employees (un)intentionally have spilled valuable knowledge. Moreover, the force of the different knowledge protection mechanisms changes over time (Hurmelinna-Laukkanen and Puumalainen, 2007). Secrecy may deter as time passes, while patents may lose their use as new inventions and solutions are developed. The same goes for causal ambiguity and bundling resources, which in the beginning could form difficulties for competitors and imitators to identify the factors of a competitive advantage. But as time develops these factors could become more clear, by a decreasing level of intra-firm and/or inter-firm causal ambiguity.
15
16
A Framework for organizations to sustain their competitive advantage
Scenario 1: although not a competitive advantage, knowledge protection
mechanisms are needed Yes
No
Scenario 2: Research to which resources are critical for the
competitive advantage No
Yes
Scenario 4: competitors are not able to imitate. No
actions needed
Are Knowledge protection mechanisms implemented
which protect the organization from imitation and/or knowledge spillovers
Yes No
Scenario 6: knowledge is protected. Periodic evaluation of knowledge protection mechanisms is needed
Scenario 5: implement knowledge protection mechanisms to protect against
imitation and knowledge spillovers No
Yes
Does the organization have a sustained competitive
advantage?
Is the organization able to identify the link between the
resources and the competitive advantage?
Do competitors have the resources to imitate? Are competitors able to identify which resources are
critical?
Yes
Scenario 3: Inter-firm causal ambiguity functions as a
17
Scenario 1: although not a competitive advantage, knowledge protection mechanisms are needed
Although the organization is not successful it is still possible that competitors want to imitate the resources and/or there is a risk of knowledge spillovers. The organization should be aware of these risks and gain a better understanding about its (critical) resources, in other words lowering the level of intra-firm causal ambiguity. A better understanding of the resources could make managers better able to leverage the resources. (Mol and Wijnberg, 2011) Furthermore firms need to understand the link between key resources and success, and may develop or attain these resources when they do not have them available. Because the organization does not have a competitive advantage the focus in this scenario is not on the market leader but more on the laggard.
Scenario 2: Research to which resources are critical for the competitive advantage
In this scenario the organization is successful but does not understand how. Although Barney (1991) argues that when a firm understands the link between its resources and its competitive advantage then it only is a matter of time before other firms are also able to understand the link. However several authors have found evidence that the benefits of a low level of causal (e.g. factor mobility) ambiguity outweigh the disadvantages of increased risk of imitation (e.g. Reed and DeFillippi, 1990; Szulanski, 1996; Coff, 1997). Also understanding the link is critical because otherwise a firm might not protect the right knowledge and/or resources. It could be argued that in more established and mature industries the link between the resources and the competitive advantage is more clear than in a newer industry, because links might become clearer as an industry develops.
Scenario 3: Inter-firm causal ambiguity functions as a knowledge protection mechanism
Competitors are not able to identify the link between the resources and the competitive advantage because of inter-firm causal ambiguity. The organization should identify if this is sufficient protection for its valuable knowledge. Besides the organization should be aware that competitors might be able to identify the link as time passes (Barney, 1991). Therefore an organization should try to make the transfer of knowledge outside the organization as difficult as possible to delay the reduction of inter-firm causal ambiguity.
Scenario 4: competitors are not able to imitate.
18
to acquire this “resource”. Another reason why a competitor cannot copy a success could be because the knowledge which provides an organization with a competitive advantage is too difficult to understand. Thus although a competitor might acquire the knowledge they are not able to use it to gain a competitive advantage. This could be the case with knowledge about nuclear processes or nanotechnology. However an organization should be aware that competitors could acquire employees who are able to understand this knowledge or acquire the resources at later stages. Therefore the organization should implement knowledge protection mechanisms to delay the efforts of competitors who want to imitate these key resources. Furthermore an organization should be aware that the resources and/or knowledge that provide the competitive advantage could lose its value as time passes because superior knowledge is developed or in the case of Messi who gets injured.
Scenario 5: implement knowledge protection mechanisms to protect against imitation and knowledge spillovers
The organization has a low level of intra-firm causal ambiguity, and thus a good understanding about the competitive advantage and the knowledge. However competitors are able to figure out which resources are critical and have the resources to imitate, thus inter-firm causal ambiguity does not function as a knowledge protection mechanism. To protect the organization against spillovers, knowledge protection mechanisms should be implemented, to prevent this from happening. The organization should identify which knowledge protection mechanisms offer the best protection. This could be for example patents, secrecy or employee contracts. It can be argued that there is a better understanding of the own resources and the resources of competitors in mature markets then in newer markets, because links might become clear as time passes.
Scenario 6: knowledge is protected. Periodic evaluation of knowledge protection mechanisms is needed
19
Methodology
The goal of this research is to investigate the relationship between intra-firm and inter-firm causal ambiguity as well as the knowledge protection mechanisms used when inter-firm causal ambiguity deteriorates. Furthermore, to investigate if the framework represents correctly the steps in order to identify causal ambiguity and establish whether the knowledge protection mechanisms are sufficient. In this research a multiple case study approach was used. Eisenhardt (1989) defines the case study approach as “a research strategy which focuses on understanding the dynamics present within single settings” and employs multiple levels of analysis and multiple types of data collection.
The method of the semi-structured interview was used because causal ambiguity cannot be defined a priori, but varies according to the context, depending very much on the type of organization. Therefore, it might be difficult for managers to grasp its meaning. As King and Zeithaml (2001) point out to research causal ambiguity, managers must be able to identify and describe the resources or competences that are associated with superior performance. Furthermore competency is an often used but poorly defined and measured concept (Schendel, 1996: 3). Managers cannot refer to objective accounting data or market valuations; valuable resources such as competencies must be considered within limited industry and temporal contexts (Collis and Montgomery, 1995: 120). Furthermore, it could be argued that the concept of causal ambiguity is simply unknown to a manager. With semi-structured interviews the interviewer was able to explain and/or clarify certain concepts during the interview. In addition, the interviewer was able to elaborate on the answers given by the interviewee and extending on the answers.
Industry context
Industries were identified for which it can be argued that causal ambiguity plays an important role. In these industries knowledge is one of the important reasons for a competitive advantage. In high knowledge industries, causal ambiguity plays an important role, because knowledge is often tacit and resides within people their head. Consequently, the identification of the knowledge factors that provide the organization with a competitive advantage is a complex matter. In contrast, in an industry in which knowledge does not play an important role it might be much easier to identify the reasons for a sustained competitive advantage, e.g. a grain farm might have a competitive advantage because it owns large stretches of land and not because it has more knowledge then competitors. The factors that give the grain farm a competitive advantage are easily identified and causal ambiguity does not play a role.
20
to identify reasons of success and knowledge protection might not be an issue. In contrast, in a high competitive environment it is of major importance. Moreover, two industries were chosen to provide a broader perspective to the research.
The industries which were identified as suitable for this research were the pharmaceutical industry and a highly technological industry. These industries are chosen because both are highly technological industries in which knowledge is crucial. For the pharmaceutical organization this is knowledge in lots of different fields, while the other is more specialized in a couple of fields. For both can be argued that they have employed some of the best individuals in their field, because both have employees who publish regular in scientific top journals. Both operate in the top of their industry.
Both organizations operate worldwide, however the pharmaceutical organization is the only one who has branches in other countries. The headquarter of the pharmaceutical organization is not based in the Netherlands. This research only focuses on the Dutch branches because of time and travel constraints. Furthermore there is a considerable difference in size, the pharmaceutical organization has over 30.000 employees while the highly technological organization has around 70 employees.
The pharmaceutical industry is highly competitive while the other is less competitive. The pharmaceutical industry is a mature and established industry while the other organization operates in a new industry.
The differences in industry and organizational characteristics enabled complementary interviews. Furthermore a comparison could be made between a relative new industry and a mature and established industry. Therefore this research has a broad perspective and the framework could be tested in different settings. The most important characteristics for this research of the two organizations and their environment can be seen in the table below.
Pharmaceutical organization highly technological
organization
Size > 30.000 > 70
Branches Worldwide None
Operations Worldwide Worldwide
Industry Established and Mature New
Knowledge High High
Importance of knowledge Very High Very High
Competitiveness Very high High
Table 1: the most important characteristics for this research of the two organizations and
their environment Firm selection
21
their cooperation. This letter was in Dutch for the convenience of the reader. The translation in English has been added in appendix 1. As soon as a company was willing to cooperate, appointments were made for interviews with someone of the higher management. Within the pharmaceutical organization the medical director was willing to cooperate while in the highly technological industry an associate of the organization was willing to cooperate. Data collecting
First a literature review was conducted in which academic articles from high qualitative journals were reviewed in order to underline the importance of the research and to identify theoretical gaps. The literature review provided the basis for the framework and an outline for the interview. Some of the questions came from earlier research of Lippman and Rumelt (1982); Winter (1987); Szulanski (1996) and King and Zeithaml (2001). While other questions resulted from the framework and the extensive literature review. The interview has been added in appendix 2.
The interviews were done with the CEO or someone of the higher management of the company and was recorded to capture all the details. As stated before during the interviews a semi-structured interview technique was used which allowed the possibility of asking additional questions for more in-depth information. Eisenhardt (1989) identified that it could capture interviewees perspective on the topic, and it can confirm insights and information gained in the theoretical part of the research.
22
Case study
Which factors give the organization its competitive advantage?
The pharmaceutical organization indicated that they had a competitive advantage and were clear about the factors that had given them this advantage. Namely: the combination of the right people, knowledge, products, financial resources and organizational structure. (key resources) Furthermore it is important for a pharmaceutical organization to have lots of products in the “pipeline” (products under development). All these factors are equally important for success. For example an organization that has multiple products under development, but does not have the financial resources or organizational structure to market these products cannot have a competitive advantage. As the interviewee remarked:
“Essentially you have nothing then”. What is related to these factors is the ability to take
hits. It can take up to 15 years to develop one new medicine and to follow all stages of medicine development and approval. Thus medicines that are now available for patients were in 1998 in the discovery phase. The average costs to research and develop a successful drug is about 800 million to 1 billion dollar (PHRMA,2007). This also includes the number of failures because from the 5,000 – 10,000 compounds that are discovered only 1 receives approval. These high risks combined with high costs make an organization vulnerable, however all pharmaceutical organizations have to deal with these risks. Nevertheless when things do not go as planned for a smaller organization with less financial resources there could emerge a lot of issues which might potentially damage the continuity of the organization.
Although it is clear till a certain level which factors gave the organization its competitive advantage, it was acknowledged that it was impossible to indicate the precise reasons for success. The interviewee of the pharmaceutical organization indicated that: “There are
successful companies who have a different structure than ours but you can’t really pinpoint, because it involves so many factors, that successes come from precisely these factors.” This
confirms the findings of several authors researching causal ambiguity that it might be impossible to precisely pinpoint what the reasons of success are (e.g. Rumelt, 1984; Barney, 1986; Mosakowski, 1997).
23
technology: “Thus we pioneered with this technology and performed the subsequent
pioneering activities. We are still trying to optimize the technology to ultimately make the product cheaper.” The organization operates within a niche market where they are the
biggest player. They have employed lots of experts within different fields. (resource) Competitors do not have the capacity to employ each of these experts and keep them busy 40 hours a week in their specialism. (competitive advantage) Because they are the biggest and the first the organization was able to build a solid reputation, although they ask a price premium, they stand for good quality.
Thus for the highly technological organization it is clear why they have a competitive advantage. Namely because of the technology and the combination of experts. (resources) However it is not improbable that there are other factors which give them a competitive advantage. The interviewee of the organization was certain that the factors as described above give the organization its competitive advantage, thus they perceive a low level of intra-firm causal ambiguity. However because there are no other big competitors it could be that there are certain factors that provide a firm with a competitive advantage which are unknown to the organization right now.
Which knowledge gives the organization its competitive advantage
The knowledge that provides a competitive advantage in the pharmaceutical industry is a mix of market, product and R&D knowledge. (resources) Pharmaceutical organizations continually monitor markets and market data is collected on a large scale. The interviewee stated: “If this knowledge is better in one organization oppose to the other is hard to say”. In general pharmaceutical organizations are huge with over 30.000 employees worldwide and have large product portfolio’s. It is therefore hard to indicate precisely which knowledge provides the competitive advantage. The interviewee argues: “Thus it could be that on a
product level for a certain drug we have better information than a competitor. However that same competitor could have a competing product in which they are better informed.”
Furthermore because of the size of the organizations there are many different departments e.g. departments that work with the side effects of medicines, safety and regulatory affairs. All these departments have unique knowledge and all this knowledge combined is needed to be successful. (resources) Therefore it cannot be said at which management level the critical knowledge resides. In the middle management levels there is more technical knowledge while in the higher management there is more knowledge about the overall operations. In the higher management competitors are observed on a different level and how the organizations performs as an organization. There has to be access to all these different kinds of information to make decisions as a high ranking manager.
24
tried to be codified as much as possible and employees use standard operating procedures. However the interviewee estimated that most of the knowledge is articulated and therefore is not as easy to copy as when it would be codified.
The competitive advantage of the highly technological organization comes from the product and R&D knowledge. It is essentially a combination of different disciplines. Staff have a technological background e.g. mechanical engineering for the pumps, geographic biologists that try to predict groundwater currents, energy advisors who research the energy consumption within buildings. (resource) The bundling of these specialisms within a project, is what makes the organization unique. (competitive advantage) Because they are the biggest organization in an environment that is less competitive then the pharmaceutical organization they are less monitoring the environment. Furthermore they were able to say that this combination of different kinds of knowledge gave them the competitive advantage. As the interviewee stated: “Our competitors are not that big and do not have all these
specialisms in house. They do not have the capacity to employ each of these experts and keep them busy 40 hours a week in their specialism.”
Furthermore they were also able to identify were the critical knowledge resides, namely with the experts. (resource) The organization works with advisors and specialists. The advisors are the one who communicate with the customers and the specialists are the ones with the critical knowledge. Most of this critical knowledge is accumulated through experience. To give an indication of how hard it would be to codify the knowledge the interviewee stated: “We recruit HBO or academic schooled people. Our technology cannot be
learned on school. So new employees need half a year to gain experience to be able to work with the technology. So someone has basic knowledge from a certain HBO or university but the profession is learned at our organization by running along with people who already work here.” There have been made efforts within the organization to codify a larger part of the
25
Thus both the pharmaceutical as the highly technological organization state that the critical knowledge that provides the competitive advantage is accumulated through experience and cannot be easily codified. (resources) On the basis of this knowledge, people work together in groups and develop new ideas and concepts, directing the search and development strategies for new products. This knowledge base is implicit: it is essentially undefinable and emerges during the creative process of making and producing a product. It is opposed to the explicit knowledge which results from this process, e.g. Pharmaceuticals, new machines or other products. Because of the undefinable nature there is a high level of causal ambiguity, both intra-firm because it is hard to define within the organization as inter-firm as it is hard for competitors to identify.
Is the organization able to identify the link between the resources and the competitive advantage?
The two most important factors within the pharmaceutical industry that make a product a success are: the product itself and the people. (competitive advantage/ resources) Of course as a precondition the product has to be functioning as it supposed to and there has to be no safety issues. Secondly the people who work with the product have to be experts. This involves not only the specialist knowledge about the product but requires especially marketing. As the interviewee stated to emphasize the importance of marketing: “In the past
we had products of which we thought were going to sell itself, and therefore we did not really marketed the product. Well guess what? That didn’t went well.” Because of the
“failure” of products the organization was able to identify marketing as one of the success factors. Thus because of the disappointing results the intra-firm causal ambiguity was reduced and the success factor became visible: marketing. (resource) It could be argued that this factor is visible to all pharmaceutical organizations, because in the pharmaceutical industry no new products are launched without a large marketing campaign. Thus although it is a very important success factor for a competitive advantage, there is also a low level of causal ambiguity surrounding it. However within the marketing, there could be factors and knowledge which provide the competitive advantage that have a high level of causal ambiguity.
Consequently although products are monitored extensively and continuously the reasons for success cannot be identified completely. This could indicate a certain level of intra-firm causal ambiguity. Furthermore it is not always clear what these reason for success or failure were. Some reasons were clear like for example crazy PR but other reasons were less obvious and could only be determined ex-post with formal investigations or market research. With these investigations the level of intra-firm causal ambiguity was reduced. The interviewee stated: “It is difficult to pinpoint the exact reason, but even if you would know
26
However it could be argued if the precise reasons were identified because as Rumelt (1984) argues some non-obvious or seemingly non-important factors could contribute to the success or failure in a non-obvious way. An example was given by the interviewee: “the
organization tries to develop close relationships with doctors, because they are ultimately the ones who prescribe the medicines”. Therefore the organization had a strategy of being
unobtrusive and pleasant company and did not aggressively push their product. Because of this strategy the doctors wanted to visit conferences held by the organization oppose of having to ask them. Since the organization had a good reputation among doctors, they were prescribing their medicine more than that of a competitor with a similar product. This illustration describes how it does not always involve a superior product. These factors of a success are much harder to identify. As the interviewee state: “sometimes there are
‘strange’ selection criteria why a doctor choses a certain type of product and these criteria are much harder to identify. It could be that a doctor just has a better feeling with a certain pharmaceutical company.” These factors of success have a high level of intra-firm causal
ambiguity and maybe it is even not clear for the doctors themselves why they choose a certain product.
Although the interviewee indicated that the reasons for success could be made explicit, there was no lists of these factors. The cause is that the reasons for success is partly the experience of people and that the factors of success differ per product. There are different situations, sometimes the product is important, while in other cases the people are more important. The importance of the people was also illustrated in the previous example. However it was acknowledged that people do double the work because some teams did use certain lists, but there is no standard (…). However it is known which competences give the biggest chance for success and which knowledge is needed. Per product and market is identified which competencies and knowledge is needed. (resources) (future) Employees are selected who have these competencies and knowledge. It was indicated that extensive employee training is offered specifically regarding this competency and knowledge and that there is extensive written documentation about these competences.
27
For the highly technological organization their competitive advantage resonates from the technology that enables them to deliver “sustainable cold”. Sustainable cold is a sustainable alternative for cooling and air-conditioning systems, which have the biggest energy consumption in buildings within Europe. However the organization acknowledges that focusing on this technology alone makes them too vulnerable. Therefore the last five years they have introduced new services to broaden their scope. However as the interviewee state: “That we achieved, however with the economic crisis of the last couple of years we
have seen that certain services aren’t being bought anymore.”
The organization is the market leader in the Netherlands and within the market is said:
“when this organization does something it is good”. Which gives an indication about the
reputation of the company. (resource) The organization indicated that they are the most expensive provider. However, according to the organization the most important factor is that an organization delivers quality. As the interviewee stated: “We guarantee the quality
and robustness of the systems and advice we deliver.”
Just as the pharmaceutical organization they do not have a list for to replicate success. But success within the organization resonates from experts (resource) within the organization, which were also the reason for the competitive advantage. As the interviewee remarked:
“we notice is that people who are employed for 10 -15 years have a smart ‘Gyro Gearloose’ way of thinking.” Like the pharmaceutical organization the employees exchange best
practices. Once a month workgroups come together to exchange best practices and transfer knowledge.
Both organizations are able to identify the reasons of success till a certain point. However their might always be reasons that contribute to the competitive advantage in a non-obvious way. Both organizations also exchange best practices for which a relative low level of intra-firm causal ambiguity is required, because otherwise it will be hard to exchange best practices if these are ambiguous. Experience is what makes the difference in both industries. Without experience success is impossible.
Do competitors have the resources to imitate?
28
protection. DiMasi and Faden (2009) found that in the 1970’s 23 percent of the first-in-class medicines already had competition in the phase II of clinical testing1. This number has increased to 90 percent in 1995. These numbers give a representation of how competitive the market is. Apparently this knowledge cannot be easily protected against competitors and potential imitators. This was also remarked by the interviewee who states: “It is known that
in the whole world the level of knowledge is developing in an equal pace. There are multiple examples of the simultaneous discovery of certain viruses or certain antibiotics in different parts of the world. Thus what can be observed is that within a couple of years, products are introduced based on these substances.”
A high degree of knowledge in the pharmaceutical industry resides within the public domain. Researches and doctors publish their findings and knowledge is shared on conferences between peers. This is also the reason that the interviewee indicated that market and product knowledge were to a large degree inimitable by competitors. Pharmaceutical organizations on a quest to capture this knowledge send teams of experts to these conferences to acquire as much knowledge as possible. This is also an opportunity to capture knowledge from competitors and products under development.
However as stated before a lot of knowledge resides within people their heads and is not codified. Therefore competitors can potentially acquire these employees and obtain the tacit knowledge. This is also one of the biggest fears when it comes to competitors, besides introducing a superior product and/or incorporate their processes in such a way that competitors obtain a competitive advantage. It is known that when pharmaceutical organizations want to enter new markets or fields they acquire employees from competing firms. Because when entering new markets or fields experts are needed. (resources) Although there are non-disclosure and non-competing clauses in contracts, it cannot always be prevented that an employee goes to a competing firm. The organization than has the risk that an employee (un)intentionally spills knowledge about the factors that provide the organization with a competitive advantage. The interviewee remarked about this risk:
“Of course we are always afraid that an employee will go to a competitor and shares his knowledge about our organization unintentionally. This is also ‘not done’, and we will never ask this of an employee who just came from a competitor, to tell about the insights of that competitor. One of the reasons we don’t do this is because we don’t want others to do this with our employees. You can never prevent that former employees unintentionally give away knowledge but this will never concern documents.”
Assume that a very knowledgeable employee is acquired by a competitor and that the employee unintentionally tells about the success factors which give the organization its competitive advantage. In one blow the level of inter-firm causal ambiguity would be
1 After phase II there is phase III clinical testing, afterwards an pharmaceutical organization can start the
29
reduced. The intra-firm causal ambiguity within the organization could be then an important protection mechanism. Hence the employee cannot spill the knowledge that is not known. When asked is it easy to identify the people who have the knowledge needed the answer was: “Yes, this is relatively easy”. The ability to identify critical people has improved significantly in the last years. On social network sites like LinkedIn it is easy to find people who possess certain types of knowledge. The only thing somebody needs to do is fill in a keyword in LinkedIn and a whole list is compelled of people who know something about a certain therapeutic field for example. Furthermore people give information about which skills and expertise they have and therefore it is very easy to identify which people are professionals in their field. Besides social network sites it is relatively easy to identify knowledgeable people by the information acquired at conventions and by analyzing publications. However if these people are the ones with the critical knowledge will only be apparent as the employee starts working.
Nevertheless it is a bit overdone to assume that when an employee goes to a competitor al knowledge will be spilled and that the level of inter-firm causal ambiguity is completely vanished. However it remains a risk and it can be argued that the level of inter-firm causal ambiguity decreases because the competitor might have a better understanding of the firms processes. There are safeguards that limit the access to certain critical knowledge. Only employees who need certain critical knowledge have access and within the IT system there are passwords. Furthermore in the IT system, safeguards have been established, in which an employee needs to have certain rights to access information. When asked “people who doesn’t concern certain knowledge don’t have access?” the answer was: “No they don’t have
access. Probably they don’t even care.” Thus although for certain critical knowledge the level
of intra-firm causal ambiguity is low, a high level of inter-firm causal ambiguity is maintained by the deployment of safeguards to prevent knowledge spillovers.
An interesting aspect of the pharmaceutical industry is that when an pharmaceutical organization fails competitors do not only benefit but this could also harm the industry as a whole. As stated above research is conducted simultaneously around the world. Now assume that there is a safety issue with a product. All products within the same class will be under close monitoring because these medicines also have a higher chance of having the same safety issue. Besides when it concerns misbehavior of a pharmaceutical organization the whole industry encounters reputational damage. The interviewee remarked:
30
Because of these reasons it could be argued that maybe protecting knowledge is not always the way to go. For example, when a pharmaceutical organization improves processes within the organization, which have a high level of inter-firm causal ambiguity, and give the organization a competitive advantage. Assume that these processes benefit the safety of medicines. Even when you look purely from a business standpoint it might be better to share these processes with other organizations to prevent reputational damage. This was also argued by Korn and Stanski (2005) who identified the problem of excessive secrecy, “data hoarding” and efforts to gain exclusive rights to basic research tools and data through the patent system which work counterproductive.
The highly technological organization encounters a different situation because it is the market leader and the biggest organization within the industry. Competitors do not have the knowhow and resources to imitate. The interviewee indicated that it is not hard to identify the key success factors. However until now competitors have not been able to create systems identical or superior to the organization. Therefore competitors are not able to compete on technique or knowledge but only on price. The interviewee remarked that they use the following sales statement: “it is better to invest more now, because the return on
investment will be much better”.
When asked if competitors were able to benefit from mistakes the interviewee stated: “No I
don’t think they are able to benefit from our mistakes. Because we have such a technological knowledge, and are so far ahead of competition. Thus when we make mistakes we are also the only ones who can fix it.” The not being able to compete on technique or knowledge and
benefit from mistakes resonates from the fact that they do not have the knowledge to imitate.(competitive advantage) However it could also indicate a certain level of inter-firm causal ambiguity which limits their ability to imitate successfully.
However competitors are continuously trying to acquire knowledge and identifying the reasons of success. Although it might not be hard to identify the reasons for success namely the technological sophistication of the organization the knowledge is much harder to imitate. As stated before most of the knowledge is experience and thus hard to copy. Furthermore the experts that work for the organization are highly knowledgeable within their field and maybe the only ones who possess the knowledge in the world. To indicate how specific the knowledge is the interviewee stated when asked if they received training for critical knowledge: “No because the knowledge is very specific. In the Netherlands there
are no people who can give training to us”. Furthermore to prove that employees are
experts within their field they are required to publish an article once a year and in some cases they give guest lectures on universities.
