How dynamic capabilities influence performance frontiers

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How dynamic capabilities

influence performance frontiers

A resource based view

Name: Ruben J. F. Schaafsma

Student number: 1704419

Master: Technology and Operations Management

Supervisor: dr. ing. J. (Justin) Drupsteen

Second supervisor: dr. E. (Evrim) Ursavas

Supervisor Scania: M. (Marco) de Boer

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Abstract  1

Abstract

This study makes an effort to describe the relationship between the dynamic capabilities and their influence on the competitive priorities of a company. Through different performance improvement projects and paths, and by using the structures of the theory of performance frontiers and the resource based view, the relationship between the two concepts was described and the role of the dynamic capability highlighted. Through a case study at Scania Logistics Netherlands, the dynamic capabilities were found to play a role in the different strategic activities the company performs and the different dynamics were translated through the different performance improvement paths into an impact structure on the organization.

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Preface

This report is the final piece of work off my master Technology and Operations Management at the rijksuniversiteit Groningen. Although I did this project individually, I would like to take this opportunity to thank some people. First and far most, I would like to thank my supervisor, dr. ing. J. Drupsteen or Justin as he reminded me on since the first meeting. Without his support, advice and patience I cannot say the outcome would have been the same. Second, I would like to thank everybody at Scania for being as cooperative, open and friendly as they have been. This with a special notice to Marco de Boer, my direct contact with the company.

Also, I would like to thanks my parents for the support they gave me during this busy period. And off course, I would like to thank my study mates for surviving liters of coffee and helpful and encouraging moments.

Ruben Schaafsma

22-6-2015

First supervisor:

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Preface  3

Introduction

In what a company can optimally achieve and how it actually performs, a gap can be found. How managers can close this gap is one of the central debates in Operations Strategy (OS). According to the trade-off model (Skinner, 1974), a company must prioritize in its competitive priorities (being costs, quality, flexibility, dependability and speed) to bridge this gap and to increase the performance of the company. However, according to the law of trade-offs (Schmenner and Swink, 1998), a company cannot provide the highest level in all the competitive priorities, so it has to make choices among them.

To deal with this relationship between the different competitive priorities, trade-offs can be overcome, but cannot be eliminated. This can be done by changing the resources and/or capabilities in order to improve its competitive priority (Da Silva and Slack, 2001). The strategic processes dealing with these changes are referred to as dynamic capabilities. They are seen as abilities behind the creation, evolution and recombination of core competences into new sources of competitive advantage (Eisenhardt and Martin, 2000; Teece et al., 1997; Zhou et al., 2010; Hung, et al., 2010).

The dynamic capabilities originate from the resource based view (Barney, 1991), but since the definition by Teece (1997), this theoretical construct generated a growing flow of research (Barreto, 2010). The dynamic capabilities were proposed to extend the resource based view into dealing with the competitive advantage in dynamic environments. Because of the characteristics of dynamic capabilities, recombining the core competences, and the dynamics of a changing environment, trade-off decisions are inevitable. To find a position for these trade-offs, the performance frontiers (Schmenner and Swink, 1998) are used. These frontiers are ‘the maximum performance that can be achieved with a given set of competitive priorities and a given set of assets’ (Schmenner and Swink, 1998).

The balance which a company has in two priorities is a point on or under the performance frontier of that company. The space under the frontier is called the performance space. In the next chapter, this shall be explained more extensively.

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based view. To study these concepts, a case study shall be built around Scania Logistics Netherlands (SLN). SLN has become a separate logistic partner of the Scania Group in their production of trucks since 2013. In this process of being a separate department, SLN is currently facing the development of an operational strategy in a dynamic environment and will therefore be an appropriate case to focus this research on. In order to focus this research on right constructs, a research question shall be formulated.

The research question of this paper is:

How can dynamic capabilities reposition a company in their performance space?

In the second chapter, we will discuss the relevant literature on the different theories. It discusses the background of the theory of performance frontiers, whereupon the link is made with the resource based view and the dynamic capabilities. To operationalize the theoretical constructs and explain how the case study shall be organized, the methodology shall be presented in the third chapter. In the fourth chapter, the results shall be presented and they will be discussed in the fifth chapter. Finally, a conclusion shall be presented.

Literature review

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Literature review  7

Performance frontiers

In the theory of performance frontiers, two types of performance frontiers are distinguished (Schmenner and Smink, 1997). The upper frontier is the asset frontier and the lower frontier is the operational frontier, as shown in figure 1. The asset frontier is the frontier which represents the theoretical maximum performance of the assets of a company. The operational frontier is the maximum performance of a company, given its internal organization.

The distance between these frontiers can be seen as the utilization of the assets (Vastag, 2000). When the operational frontier moves closer to the asset frontier, utilization will approach 100% and more trade-offs will occur. This is in line with the law of trade-offs, as it shows that no manufacturing plant can simultaneously provide superior performance on all the different competitive priorities (Schmenner and Smink, 1997). However, performance improvement can be shown through four different steps in the performance frontiers.

Performance improvement steps

To explain which choices a company has in its strategic decisions, the movements on the performance frontier and in the performance space are illustrated through four different performance improvement paths, as structured by Van der Brink (2015). Considering the performance improvement described in the literature, a company can take 3 different operational improvement steps and one structural asset improvement step. Figure 3 describes the following

four steps graphically:

1. Improving through removing inefficiencies without changing operating policies (in one priority or the other) (Schmenner and Swink, 1998).

2. Bettering operating policies to shift the operating frontier closer to the asset frontier (Schmenner and Swink, 1998).

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3. Moving along the frontier, which makes it increase performance on the one priority while decreasing on the other and with that, facing a trade-off (Skinner, 1969).

4. Extending the structural assets so that the asset frontiers changes and the performance space is increased (Cai and Yang, 2014).

These steps show which paths a company can take when it wants to improve its performance. To describe the differences in the first two steps, note that in these steps, a difference in the steps was made between improving and bettering the operation frontier (Schmenner and Swink, 1998). The first three steps are relating to the operational frontier of the company. This operational frontier has a specific role in relation to the performance space and the asset frontier. In the next section, this specific role will be made through the connection with the resource based view.

Performance frontiers and the resource based view

According to Vastag (2000), the operational frontier represents this specific role as the ability to gain a sustained competitive advantage for a company. This advantage, as derived from the resource based view, is only there when the resources and/or capabilities of a company are valuable, rare, in-imitable and non-substitutable. The fact that the operational frontier represents the intangible and therefore unique resources, makes these resources and capabilities valuable, rare and specific to any given firm (Cai and Yang, 2014).

With this, Vastag (2000) shows that the idea of a sustained competitive advantage is measurable, while immeasurability was one of the critiques on the advantage (Kraaijenbrink, 2010). It also offers the opportunity to view the performance frontiers in such a way that we can stay conform to the conditions of the resource based view (Barney, 1991). With showing the operational frontier is such a context, it delivers evidence for the resource based view and also for the dynamic capabilities, which are an extension on the view. For a more extensive look on the resource based view, its background and some of its critiques shall be discussed.

Resource based view

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Literature review  9

of a company, the resource based view states that the resources and/or capabilities of a company must meet the four conditions in order to be a sustained competitive advantage (Barney, 1991). Therefore, the resource based view is a extensively used view on the strategic nature of companies. Apart from these insights, it also has been criticized.

One of the main criticisms of the view is the lack of accurate definitions for the key terms used (Priem and Butler, 2001). Because this negatively affects the validity and generalizability of empirical research, it creates problems for the empirical researches conducted through this view. In the extension of the lack of accurate definitions, the managerial applicability, and thus the usability of the view, is disputed (Kraaijenbrink et al., 2010). Though it is disputed, it is used to extent certain constructs from a more theoretical point of view, as with the example from Vastag (2000) from the performance frontiers. In this example, the resource based view did offer an extra dimension on the uniqueness of the operational frontier and its role as a performance frontier (Vastag, 2000).

These and other critiques can also offer important inputs in identifying possible areas of contribution and improvement on the resource based view (Alimarri and Gardiner, 2014). According to many scholars (Barney; 2001; Galbreath, 2005; Cecchini, 2013; Lin, 2014; Nieves, 2014) the lack of accuracy in the definitions in the resource based view is a reason to shift from the heterogeneous view of companies to another possible approach of the strategic movements. This was suggested to be an organizing approach or a dynamic capability approach. In this research, the dynamic capability approach will be chosen and these capabilities will be discussed in the next section.

Dynamic Capabilities

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In building these capabilities, a distinction is made between dynamic capabilities and ordinary capabilities (Winter, 2003). The ordinary capabilities are a way of making a living in the short term, while dynamic capabilities are explained as the ‘higher level’ capabilities to change the ordinary capabilities (Winter, 2003).

Although many other definitions have been developed in this line of research, the main constructs of the concept have been elaborated upon (Barreto, 2010). In this research, the following definition of the dynamic capabilities will be used: ’A dynamic capability is the firm’s potential to systematically solve problems, formed by its propensity to sense opportunities and threats, to make timely and market oriented decisions and to change its resource base.’ (Barreto, 2010). This multi-dimensional construct (Edwards, 2001) builds on the concerns about the previous definitions on the dynamic capabilities. These previous concerns were centered around the obscurity and intractability of the definitions, while this definition gives an operationalization of four dimensions, making it useful for empirical research (Barreto, 2010).

Synthesis

The resource based view gives an explanation why companies are heterogenic in nature and when they have an advantage in being heterogeneous, considering a static environment. The dynamic capabilities offer a solution when the environment is not static, allowing that companies to maintain their competitive advantage in this situation. This shift from a static to a dynamic environment will inevitably lead to a shift in resource base and with that, decisions need to be made which lead to movements on the performance frontier. The outcome of these movements can be found in the performance improvement steps for both the asset and operational frontier.

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Methodology  11

In the next chapter of this report, the methodology is introduced. In the methodology, the different steps in which research is performed are described. Based on these steps and the literature review, the research is performed and will be presented in the results section.

Methodology

In this chapter, the methodology of the report will be described. In the first section, the theoretical constructs presented in the literature will be operationalized. After this, the case study context will be discussed. Third, the research protocol is explained and the interviewees introduced. In the final section, the structure of the result section shall be explained.

Operationalizing the constructs

In order to find out how the dynamic capabilities influence the competitive priorities and how this can be linked to the strategy of the company, the goals of the competitive priorities and the different strategic activities to achieve these goals are collected from the interviews. For these activities, it is checked first whether they can be categorized in different types of activities. Once categorized, the role of the dynamic capability, when present, shall be described in the activities. Then, the activities are linked to the performance improvement paths. This linking is based on the different categories of activities.

Eventually, through the performance improvement paths, the activities and the dynamic capabilities can be linked to the performance objective. Also, in the different interviews shall be considered which resources or capabilities the employees see as unique in comparison to other companies. Through this, an attempt is made to find a sustained competitive advantage. If such an advantage is there to be found, the relationship with the dynamic capabilities and this competitive advantage shall be analyzed. In the next section, the case study description shall be given.

Case study

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exploration, building, testing and extension of theory (Voss et al., 2002). For this research, the explorative and testing purpose are employed. We explore the empirical usage of the performance frontiers and dynamic capabilities. The testing element of the research lies in the fact that the usage of dynamic capabilities by companies in the context of their performance improvements paths is examined, as described by in the literature review. Moreover, the usability and meaning of the performance frontiers is also explored in an empirical setting.

Unit of analysis

In this research, the unit of analysis is the single case study. In this single case, the focus shall be on the current strategic settings of SLN, being the logistic subsidiary of the Scania Group. SLN currently performs two services in their warehouse and works on growth through integrating and expanding the number of services.

Selecting the case

As different from surveys, cases are not selected from a population through a stratified sample (Voss et al., 2002). For this case, the company was selected by a signaling a present consideration of competitive priorities in the company’s operational strategy. In order to investigate how dynamic capabilities are influencing these decisions, the case was built around SLN.

Scania Logistics Netherlands

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Methodology  13

costumer. For the LC process, the next user in the supply chain is the production site in Zwolle. This means that when a mistake is made in the process, the result of this mistake is experienced differently in respect to timing and momentum of feedback on, for instance, quality or costs. More shall be explained in the methodology section.

Research protocol

The reliability and validity of a case study research will be enhanced by a well-designed research protocol (Yin, 1994). For this case-study research, three phases of data-collection were performed. In table 1, a summary of the three phases is given. To increase internal validity, all of the phases in this research were iterative (Yin, 1994).

Pre-study phase Study phase Clarifying phase Goal To get familiar with the

activities, constructs and methods of the company.

Obtain the

information to answer the research question.

To clarify ambiguities which arose from the analysis of the interviews Activities - Attending a kaizen

meeting - Attending a team- leader meeting - Interviewing the HRM manager of SLN - Conducting interviews - Emailing and calling the respondents Tools - Semi-structured interviews - Field notes - Semi-structured interviews - Recorder - Email - Phone

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Interview protocol

For conducting the interviews, an interview protocol is developed (Appendix 1). All of the interviews start by noting the general background of the participant in the company. These backgrounds consist of the participants’ years of work for the company, their former jobs in the company, their department and the role of the interviewee and its department in the strategy of SLN. As a last question of the general questions, the participants were asked which capabilities were needed to work in that department.

To clarify the context around the competitive priorities, the interview commenced by asking the participants to list the four priorities in order of importance to them for SLN. After this had been made clear, the rest of the semi-structured interview questions where related to the competitive priorities, the company and its recourses, and the strategic activities which were performed to influence the priorities. Also, it was determined which of the resources used could be indicated as a sustained competitive advantage in this context.

Interviewees

In table 2, the list of interviewees is presented. To give information on the background and experience of all the interviewees, for every employee, its function, age and years of experience in the company are given. In the third column, the subjects discussed with the interviewee are provided to create an overview which of the topics were discussed. To increase the internal and external validity of the research, a mixture of employees from all the different departments of the company was selected for interviewing.

Function Years’

experience

Topics for discussion

Controller (Finance) 1.5 - Financial perspective on strategic projects - Capabilities needed in the department

Head Engineer 15 - SLN in market perspective

- Basic skills (standard) training

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Methodology  15 CO Scania Logistics

Netherlands

28 - Entrepreneurship in the organization - Throughput times

- Strategic plan development

- Role of the Scania Group in strategy - Important resources for the organization

Operational Manager 28 - Capability development on the work floor - Strategy in daily operations

- Flexibility in new products and product change - Improvement projects (kaizens)

Process Engineer 3.5 - The role of the department in the strategy - His role in the department

- The role of projects in the company

- The different flexibilities (Product introduction and change)

Trouble shooter 32 - Role of the trouble shooter in the organization

- Problems with the volume flexibility and capability buildings

- Mentors on the work floor - Personal capability building

Table 2: Interviewees

Reliability and validity

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Analyzing the data

The data of all the interviews shall be the leading data on which the main conclusion shall be based. This will be supported or refuted by the other gathered data through triangulation. The interview data can be found in Appendix 7.

Framework of constructs

In figure 2, a framework shows the different constructs are linked to each other in this research. Performance objectives are achieved through the different performance improvement paths, as identified in the literature review. These paths are then connected through the specific characteristics of these activities. After this, the role of the dynamic capabilities in these strategic activities is described in the relation with each other. Through these different steps, the dynamic capabilities are linked to the performance objectives among the different priorities, which can be described through the performance frontiers.

Results

In this section, the results of the research are presented. To follow the structure as presented in figure 2, in the first section will contain an explanation of the current performance and performance objective of the competitive priorities for SLN. In the second section, the different types of strategic activities which SLN has in its organization will be discussed and ordered, based on their characteristics. In the third section, the different strategic activities discussed in the interviews will act as examples how the four performance improvement paths are performed by SLN. These paths, as discussed in the literature review, shall be used to explain the different movements in the performance space for SLN. This shall be done through a case dynamics matrix, which makes it able to explain the different dynamics which are present in this case study (Miles and Huberman, 1994). After this, the impact of the different strategic activities and the dynamic capabilities are discussed. In the last section, the findings considering the sustained competitive advantage shall be presented.

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Competitive priorities for SLN

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Results  19 Competitive

Priorities

In perspective of SLN Quotes to clarify Current performance

Flexibility 1. Volume 2. New service

introduction

1. ‘Ability to breath with the market’ CO

2. ‘to be able to help a costumer with quality if he stands in front of the door today’ Process Engineer

1. ‘100% flexibility through a complete flexible floor staff’ CO

2. ‘At the moment, SLN is not that old yet. This advantage is that everything is very flexible. Not many routines have been built yet. Do we need to build something? Then we build it. Now it is really flexible’ Process engineer

Quality 1. No damage to the parts delivered

1. ‘When a part is damaged when it is needed to be shipped, it has to be found and changed’ Trouble-shooter

2. 700 PPM, a deviation of 700 on a million parts (goal for 2018: 300)(nr 2 on the platform)

Speed 1. Throughput times 1. ‘I can do it in three days. I get an order and 3 days later it is in a container.’ CO

1. Three days

Costs 1. Labour

2. Euro’s per unit

1. ‘That has a certain cost per square meter, with the rent etc. and with these costs can be allocated to the buildings, numbers, and peoples’ Controller

1. 10% (goal for 2018; <25% relative to2014)

(nr 3 on the platform)

Dependability 1. Reliability of the promised date 2. Transparency of

process

1. ‘When a part is missing, a new part has to be sent by plane and the truck cannot be build’ Operational Manager 2. Which parts I put in the boxes

and how do I keep my costumer informed about the process?’ CO

1. Container close date: 90 % for KD (goal for 2018: 95%) (nr 1 on the platform)

Unit delivery date:”97% for LC (goal for 2018: 98%) (nr 1 on the platform)

2. Developing an integrated order to delivery process. (nr 4 on the platform)

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Performance improvements for SLN

To influence the competitive priorities, SLN has three options of strategic activities with the intention of improving. These activities can be categorized in: rewriting the standard, the kaizen and the project. The nature of these activities, as described in table 3, differs in the number of employees which are involved in it, the duration of the activity and whether the employees work part- or fulltime on the project.

Rewriting the standard

In order for SLN to make an improvement in routines on the floor, the ‘standard’ of working needs to be adapted. This standard is the best way known for performing a routine on the work floor, and can be adapted by every worker who thinks he can improve his routine. In order to change this standard, the employee addresses his mentor or operational manager, and together they run through the different priorities as they are described in table 4. Is the result of a change an improvement, then the standard is re-written with the new routine. To give an example, the operational manager is quoted when he describes the context in which the standard plays a role in the strategy of the company:

There are a number of principles: create a standardized ‘normal’ situation within the process, deliver your personal service without error and produce on consumption and above all of these; a continuously improving cycle. That is the Scania production system.’

The standard can be seen as one of the main principles within the strategic organization of SLN. It plays an important role in the continuous improvement objective of the company.

Kaizen

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Results  21

‘Well, a kaizen is translated into: change in favor of. What we do is that within our organization, we want to improve continuously on productivity and quality’

Throughout all the layers of the organization, kaizens are performed. The core of the activity is that a group of managers, which have knowledge of the possible improvement, are working fulltime for a period of averagely 5 days on this problem. The outcome of this activity should be an improvement on the same priorities as they were stated with rewriting the standard.

Project

The third type of activity is called a project. This is performed over a longer period on a part time basis, mainly by the managers from the engineering department who work together on the improvement and implementation of complete processes and on the improvement through reducing costs. When a process is started, different ideas are tested in the pre-study phase on whether they are feasible or not and if they focus on the right goals. After this, the project goes into the concept phase where the project is conceptualized to be tested in the field study. Finally, the outcome is implemented into the process. To exemplify the role of the engineer in this, the head engineer is quoted:

‘In our ambitions of this year, we tried to choose what is realistic and it is especially in the economical part, so waste reduction, which is 100% work of engineers.’

These projects mainly arise from the strategic platform, but can also be subtracted from problems on the working floor, as they are part of the ‘waste reduction’ of SLN. In the following table, the names of the improvements projects as they are within SLN are in the first column. In the second column, it is explained what this change means for SLN. In the third column, the duration of such a change is noted. In the fourth column, it is noted who from SLN participates in such an activity.

Types of changes:

What does it involve? Duration Who does it involve?

Rewriting the standard

When employees on the floor think that their routine can be improved, they discuss this in a team meeting

1 team meeting 1 employee, the

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with their operational manager. In this discussion, the improvement is checked on whether it improves:

1. safety and environment, 2. whether it increases

production or quality 3. whether it increases delivery

4. whether it increases costs

attendants.

Kaizen When employees are thinking that part of the process needs to change or when strategic goals need to be followed, a kaizen can be started. In this, a group of employees starts a project, after the checks on priorities are performed, on that single change and that group examines how this part of the process can be improved.

3 till 10 days, fulltime.

a mixture of employees, from different departments

Project When a complete process design or a specialized function in the process is changed, a project is started. This project, performed by a working group, consist of 4 phases:

1. Pre-study 2. Concept phase 3. Test/field study

4. Implementation

Several weeks till months, part-time.

an interdisciplinary team

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Results  23

Linking the constructs

To link the different types of activities to the performance goal of the company, the characteristics of these activities are used to make this connection. As described in the literature review, four different performance improvement paths can be identified. According to these paths, the activities shall categorized in the following case dynamics matrix. In this matrix, the link is made between the different strategic activities SLN is performing, the dynamic capabilities which play a role in these activities and the performance improvement paths to which they can be assigned to, based on their characteristics. For the table, the strategic activities which could generate the most insightful perspective when linking to the dynamic capabilities active in SLN were chosen. Also, when found during the interviews, other capabilities were noted and they are all summarized (Appendix 6).

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1. Rewriting the standard (R) Improved working standard creating more flexibility. 1 - Routines - Systematic problem solving*

- When knowing what the employee does (routine) and in which context (awareness), he can think about improving its work.

- When attending the meetings (Appendix 2) all decisions taken where done through the four principles of SLN. Through this, all the issues were solved through systematic problem solving. 2. Changing the

packing material (P)

Lowering the packing costs

1 - Changing resource base* - Process thinking

- Budgeting

- In order to reduce costs, the packing of the different parts was taken into consideration.

- Changing the material of the staging from steel into wood, creates a cost saving of 80%, without changing the operations of the process

3. New pick and pack method (K)

Lower costs and higher utilization

2 - Changing the resource base*

- Systematic problem

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Results  25 solving*

- Designing/ changing routines

measuring the tests.

- One person was responsible for the new method (kaizen-leader), but a whole team worked full time on it for a week

4. 200% quality check of parts

Higher costs and higher quality, but the costs out-weighted the quality (costs of re-sending a part by plane)

3 - Seeing opportunities and threats (through balancing costs and quality)*

- Quality check routines - Support creating

- When starting SLN in the

Netherlands, because of complete new methods, a double check was introduced in the quality check. After this way of working was evaluated, the check was deleted because the costs were too high.

5. Complete flexible floor staff

- High flexibility and a lower quality

- Lower total labour costs but a decrease in quality through a lack of capabilities

development.

3 - Building routines - Sense opportunities and

threats*

- Because of the market in which SLN is in, the need for volume flexibility is high. Considering the labour laws and environment in the Netherlands, this flexibility could be offered here. - To gain this flexibility, SLN hired

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next week.

- When new employees are entering the process, their capabilities need to be built first. With the high

throughput of employees, the quality of work can be to low when the capabilities are not build enough or the ‘wrong’ people are hired.

6. Integrating new products in the organization (P)

Higher flexibility (number of products offered) for a certain price of investing which increases performance space on these products

4 - Project leading

- Changing resource base*

- The responsibility of integrating the new services was given to one man, which build a team around him to do the project.

- As for SLN, producing a new service within the existing system requires them to integrate in one another. 7. Opening a new

location (P)

Higher flexibility for a fixed price, having a new building for an expansion of

activities

4 - Project leading

- Sense opportunities and threats*

- Budgeting

- For opening the new location, a team worked for a period to design all the resources around this new location.

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Results  27

This table makes the connection between the different activities, the dynamic capabilities and the competitive priorities. It shows which of the different (dynamic) capabilities appear in the different strategic activities. To elucidate the table, the different activities will be explained and quotes shall be used to link and clarify the explanation.

1. For all the routines of SLN, a standard is present. With rewriting this standard, a routine is changed. This can be seen as an improvement and not as a betterment, because it does not change the substance of the operating policy (Schmenner and Swink, 1998). The dynamic capability lies in the role of the manager, who should evaluate all the different possible improvements in a systematic way, to make the system work. This activity happens continuously on the work floor and is part of the core principles of SLN:

‘There are a number of principles: create a standardized ‘normal’ situation within the process, deliver your personal service without error and produce on consumption and above all of these; a continuously improving cycle.‘ Operational Manager

This activity creates an constant improvement on the first performance path. In the next part, more shall be elaborated on the impact of this step for SLN.

2. The second activity is a project, which is part of the daily tasks of the engineering team. In this example, the engineering team took on one of the projects from the strategic platform, being lowering the packing costs (Appendix 5, number 5). In this type of project, the engineers’ search for improvements in the process, and in this case, a potential improvement was found in the packing of the truck cabin. Through the different stages of the project, they found the improvement by changing the packing material, so by changing the resource base. This was based on specialist knowledge of the resources and in being able to design a new packing structure. Through this improvement in costs of almost 80%, the strategic goal was almost achieved of that year, being 2014, and this goal was not on the platform of 2015 anymore. This can be best explained by the process engineer:

‘Then we looked at; can’t we make these stands of wood. This is better for the environment and a lot cheaper. Then, an engineer got working and designed a wooden stand for the containers for almost 1/5 of the price of a steel one’

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3. The third activity is a kaizen which followed from the strategic platform (Appendix 5). In this kaizen, the infrastructure of packing the boxes was changed and a higher utilization could be realized through an bettered pick and pack method. This change of resource base can be seen as an improvement of the operational frontier, being step two in the performance improvement steps. This improvement was done by the team of managers which was part of the initiative that led to the improvement, when the strategic platform was being designed. Because in this type of project, a problem has to be solved systematically by using the standards of the system and the organization of SLN, the systematic problem solving capability was found in this strategic activity. Linking the dynamic capability to this activity, the operational manager is quoted;

‘Are you looking in you process, am I doing it today the day better or smarter than yesterday… And a good

example is this kaizen. This is a new pick and pack method. In the old way of working we put 35.7 m3 in a container, and in the new way of working we use 26.9 m3 in 1 container.’

4. This fourth strategic activity cannot be linked to one of the three types of activities, because it was more a start-up operation for SLN. However, the rationale behind the strategic decision is that the CO had convinced his management team that he could deliver quality, with the new SLN site instead of the current KD practices in Brazil. To deliver this quality, all the products were checked double before leaving SLN. However, when the operations were set-up and the routines became more evolved, this trade-off was not worth the money anymore to the organization and the extra check was canceled. This extra mistakes that were made because of that, were cheaper as the double check. To illustrate this, the CO is quoted:

‘Brazil’s thoughts were: 100% customer satisfaction. But they forgot one thing, and that was balancing it with the costs. At a certain moment, you need to understand the entrepreneurship game between quality and costs.

Through this example, the CO describes how he saw opportunities in getting the organization to the Netherlands. To make sure that the quality was delivered, the extra quality check was installed, until the point where it became too expensive.

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Results  29

Apart from this, a trade-off was found between the flexibility of the organization and the delivery of quality by this organization. All the people working on the floor for SLN are hired on a part time base through a labor agency. This makes that there is a high throughput of employees. This high throughput was disputed during the interviews, claiming that a trade-off was found in the quality because of this way of operating. To clarify this, a quote from the troubleshooter will be used:

‘We need to build these standards in working for our employees. But if we don’t build this standard, the way of working will below the quality we demand’

In building this standard, the building of routines was a priority according to him. However, throughout the interviews, no consensus was found on whether the flexibility of the organization was the malefactor, or whether other factors played a role. It was claimed that the flexibility of staff could not directly be linked to the possible decrease in quality, but other factors (concentration, internal training) were to blame. The reason that the company did keep this flexible staff, is the degree in the labor costs while increasing the production numbers.

Although this is not a quote with a description of the connection between the dynamic capability and the project, this quote describes the trade-off well. Last December, SLN started the basic skill training for building the routines and capabilities of their employees. Therefore, the building of routines has been found as a capability in this context. In the discussion, more shall be elaborated on this capability.

6. For integrating new services, an interdisciplinary team with a team leader works on the creation of the logistic center through a project. For the dynamic capabilities in this process, the change, or better said, integration of resource base is the nature of the activity which need to be achieved. Specialist knowledge of the resources and routines needs to be used. For this, the best explanation can be given by the process engineer:

‘With the new logistic center, how are all the processes integrated into this center. One person gets the responsibility of starting the logistic center; good luck with it and go for it. He then starts with a working group and asks everybody, especially operations, how everything goes on the work floor.’

Although the delivery of new processes mainly runs through the CO, the integration and optimization of them is mostly the work of the engineering department.

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location, which is a type of flexibility. To achieve this, a team of employees realized this project. Although no concrete dynamic capabilities could be quoted to this action, the field note (Appendix 2) describes that there was a chaos at the company on the days this new location was started but not fully integrated. No quotes can be addressed to the connection between the dynamic capabilities and the project. Still, this activity was seen as an important strategic decision for SLN.

In order to explain the impact of the dynamic capabilities on the performance of SLN, the dynamic capabilities will be linked more generally to the performance improvement paths in the last section of this chapter

Impact of the performance improvement paths

Now that we have linked the constructs of the dynamic capabilities and the performance improvement paths with examples and quotes, the impact of the performance improvements for SLN is shown in table 7. Looking at the pattern which can be found between the dynamic capabilities and the performance improvement paths for SLN, it can be said that the SLN performs the first two performance improvement paths continuously, through the different types of activities SLN has (rewriting the standard, kaizen and project). For the kaizen, it does not matter whether which competitive priority is attained, as long as it brings an improvement as a result. For the projects, which are mainly done by engineers, the main goal is to reduce ‘the waste’ in the organization, which can translated by the strategic platform into improvements in costs, process quality and efficiency (Appendix 4 and 5).

The third path can be best described by decisions from the top-management which were intended to give a certain performance, but as the time went by, the disadvantages of this way of working came out. For the quality check, it was until the levels of quality in part picking were high enough, this activity was performed. When costs became too high relative to the number of mistakes that was found at the check, the 200% check was cancelled.

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Results  31

The fourth path is performed whenever a new product is initiated by the CO and therefore, when needed, the capacity of structural frontier needs to be expanded. Also, the integration of the introduction of new services can be seen through this fourth step.

PI path Dynamic capabilities Activity Impact of PI path for SLN

1. - Systematic problem solving

- Change the resource base

- Adapting the standard - Changing the

packing material

- Performed frequently and unplanned through a system of continuous improvement by changing the standard of working to increase quality of work.

- Performed constantly through mostly planned projects of the engineering department which aims at reducing waste, which can best be described as cost reductions.

2. - Systematic problem solving

- Changing the resource base

- New pick and pack method

- Performed through the kaizens which the company performs frequently, planned but also initiated. This specific kaizen was aimed at decreasing costs, but kaizens are not specific for competitive priority.

Expert knowledge of the change is found through a team of the department. 3. - Seeing opportunities and threats - Market seeking - 200% quality check - Complete flexible floor staff

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costs became the trade-off and the check was cancelled. - When looking for the needed

flexibility, the labour regulations in the Netherlands were

preferred to cope with the needed volume flexibility for SLN.

4. - Changing the resource base - Seeing opportunities and threats - Introducing new products to the organization - Opening a new location

- For the introduction of new products, this activity is only performed when the demand is there for these new products. The demand for new products goes through the CO, and the project is performed by an interdisciplinary team

- With the expansion of products and therefor the expansion of buildings, as the asset expansion step is.

Table 7: Linking the performance paths to the impact on SLN

Sustained competitive advantage

Considering the answers around the issue of the sustained completive advantage, which would make the company unique in performance; different resources and capabilities of the company were mentioned as giving such an advantage. The different answers are shown in table 6:

VRIN-resources Mentioned by: Quote

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Results  33 The lean manufacturing

system

CO

Operations manager

‘We are unique in lean and in being able to adjust quickly with capacity to the market.’ CO

‘we continuously improve our processes all the time, throughout the whole company. Many companies use lean only for the short term, but we have it really implemented’ Operations manager

The employees Process engineer ‘Well, for me, the most important resources are the people. If the computers are off, I at least have the people to solve the problems.’

The KD method CO ‘And in the Netherlands, we are really unique in this story. The concept what we developed here in KD, cannot be found anywhere.’

Table 8: VRIN resources

To exemplify how most of the respondents reacted when they considered the question which part of SLN makes the company unique to its competitors, the following quote illustrates this reaction best:

‘We would love to compare ourselves more with the competition; however this is very hard for us.’ Head engineering

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Discussion

Through the gathered data and the structure created though this data, evidence was found on whether and how dynamic capabilities where influencing the competitive priorities and through that, the performance frontiers of the company. However, evidence was also found indicating that other factors contributed to the influence on the competitive priorities. In this section of the report, the dynamic capabilities found shall be explained through elucidating what role these capabilities play in the influence on the competitive priorities. Secondly, an addition to the definition of a dynamic capability shall be discussed. Third, the basic skills training shall be discussed in the context of building routines. Fourth, other found capabilities which also played a role in the strategic activities shall be discussed and compared to the dynamic capabilities. Finally, to clarify on the mentioned resources and capabilities, the results considering the sustained competitive advantage of the case shall be reflected upon by considering their role in the different strategic activities mentioned.

Dynamic capabilities

In the results, evidence was found for all of the four dimensions of the dynamic capabilities, as defined by Barreto (2010). All these four dimensions will be analyzed in the next sections.

Opportunity sensing

The dynamic capability of opportunity sensing could only be discussed in depth by the CO of the company. Through his ideas, SLN commenced the operations and offered the quality and flexibility he promised to his management team, whereby within 3 years, asset expansion was realized through opening a new location and integrating new products into the organization. During the research, it was not considered that all of these activities were solely the contribution of the CO, but he did play a central role in many of these activities.

Market oriented decisions

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Discussion  35

in the last section of this chapter. Another explanation can be found through the idea of the focus factory (Skinner, 1974). This idea explains how the improvement of results can be achieved through focusing on a specific department. Because SLN was only a separate department for 2 years, having the focus on the logistical side, the performance was relatively good. Once the operational frontier will reach the asset frontier in this context, more trade-offs might occur (Vastag, 2010) and the improvement will be less, relatively to the years before. This might imply that there shall be more focus on the market conditions and demands by the higher management.

As stated before, SLN was included in the organization of Scania Production until 2012. In 2013, SLN officially became the separate logistic center of the Scania Group, including the two products, KD and LC. As the other departments from the Scania Group, SLN got its own board and management team to focus on the operations. So, although SLN facilitates the KD process, they do not have a direct link with their market, which is the responsibility of another division of the Scania Group. The most direct link there is with the market is the CO, which explains why both of these capabilities, opportunity sensing and market oriented decisions, can be linked to this person and his position. Because of this, the market seeking capability could not be directly linked to the strategic activities. It can be assigned to the CO because he initiated the startup of SLN. However, this is out of the scope of this research and therefor will be not considered.

The fact that the CO can be assigned to two of the four dynamic capabilities seems to be a sensitive situation. If the CO disappears, can the organization maintain it (internal) advantages in comparison to the other departments? This is seen as a complicated process of transferring these unique strategic strengths and maintaining this advantage (Barney, 1995) and in the opinion of the researcher, it has the potential to weaken the performance of SLN because of this.

Systematic problem solving

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‘It should not be considered that somebody was personally judged upon making a mistake, but more that his actions cause a disruption in the process. This disruption needs to be fixed and on that should be the focus.’

So, the internal view on problems is from the perspective of the process, and this is systematically solved by performing improvement projects. This relates closely to the definition of dynamic capabilities by Zollo and Winter (2002): ‘a learned and stable pattern of collective activity through which the organization systematically generates and modifies its operating routines in pursuit of improved effectiveness‘. According to Anand et al (2009), this capability can only be a dynamic capability when: ‘it includes a comprehensive organizational context.’ Although in this definition no market seeking constructs are used for the dynamic capabilities, this definition and the organizational context do fit SLN well. To exemplify this, the operational manager can best be quoted, although similar acknowledgements were mentioned throughout all the interviews:

‘We are not unique in the usage of lean manufacturing. But what we do, and because of that; better than others, is that we continuously improve our processes all the time, by everybody, throughout the whole company.’

With this, he not only endorses how he sees that the people of the organization should strive for continuous improvement, but also that implementing continuous improvement in an organization by simply training people for this improvement without placing the proper mechanisms, is a fallacy (Anand et al., 2009).

Changing the resource base

Considering the dimension of changing the resource base as a dynamic capability, SLN largely outsources this capability to an employment office. To respond to the whimsical market of the KD trucks, SLN has absolute volume flexibility in their deployment of staff on the floor, making it possible to hire a different capacity of labour every week. The hiring, planning and contracting of these employees is all done through an employment office, which makes it no longer an internal capability, but more the result of a strategic decision. The main reason for SLN to make this decision can best be explained through a quote of the CO:

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Discussion  37

This statement is supported by the findings of Hallgren and Olhager (2009), which found a significantly better performance on cost for companies with high levels of flexibility as for companies with a low level of flexibility. However, and this was one of the initial triggers for SLN to participate with this research, a trade-offs for SLN was found in this. This is shown in table 4 of the results. This trade-off can be described best through a quote of the troubleshooter:

‘We are building a house of cards, I think that we have to build a solid base, and from that you build on the rest of the house. We need to build these standards in working for our employees.’

Through the analogy of the house of cards, he describes how the routines of the employees on the working floor should be built, so that they are able to do their jobs in delivering quality. The quality of these routines was often a subject of discussion in the interviews, considering the quality of operations of SLN. The volume-flexibility in deployment of employees is one of the conditions why SLN is located in the Netherlands, and therefore it seems to be an important strategic decision for the company. However, building on their routines and capabilities is considered to be very important for the strategic goals of the company, as shown through the standard. With the complete flexible working staff, building these routines and capabilities is seen as the trade-off for the company. This trade-off should be taken seriously because discontent was found with the employees who work in the daily operations. This discontent is not in line with their strategic goals, as shown on the strategic platform (Appendices 4 and 5).

Other capabilities

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directly captured in the chosen definition. To solve problems systematically, the solutions offered to these problems need to be adopted by the rest of the employees. To illustrate this, the CO can best be quoted:

‘And through these kaizens, you get enormous positive results. And very quickly. Because it is not my change, it is their change, and with that, our change’

To make a problem into ‘our change’, the manager needs to gather support for the different solutions; otherwise the solutions he offers might be ignored or not supported. As a result of this research, the definition of the dynamic capability of systematic problem solving is proposed and states: Systematic

problem solving through support creating.

Another capability which appeared in a strategic activity, is the capability of building routines. As a reaction to the possible loss of quality because of the flexible staff, the basis skill training was started. In this training, the routines of the new employees are build and they are also taught which role they have within the process. When considering this building of routines, Zollo and Winter (2002) distinguish two types of routines; the routines employed during the operations of the organization and those routines that are dedicated to the modification of operational routines, being a dynamic capability. In this light, this basic skills training can be seen as a dynamic capability of the organization.

Other capabilities which came back in several strategic activities were mostly in relation to the different forms of activity SLN has, being kaizens or projects. In a project, examples of capabilities can be found in leading a project and budgeting. Considering budgeting, a project leader has to deal with the budget that is assigned to that project. Dealing with such a budget implies interrelated actions of budget controlling and budget information clarification of a project, as can be explained best through a quote of the process engineer:

‘The project leader has its own budget for the project. When he needs extra money, he needs to proof and inform why he does need this extra money to an independent steering committee.’

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Discussion  39

budgeting can be seen as a capability. This can also be explained because the routes which lead to this capability can be described through specific and identifiable routines, which outlines the possible pathways to capacity building (Peng et al., 2008).

When considering leading a project, it could be argued that leading a project is more of a dynamic capability, because it is hard to pinpoint these possible pathways which lead to leadership (Peng et al., 2008). However, because of the different predetermined steps a project has, these pathways to leading a project can be seen as a capability which is important in performing strategic activities in the organization of SLN, but not a dynamic capability.

Sustained competitive advantage

When considering the findings on whether SLN had either resources or capabilities which gave the organization a sustained competitive advantage, no clear answer could be given. Because SLN is a subsidiary of the Scania Group and functions through the channels of this organization, it was hard to pinpoint this sustained competitive advantage. In the interviews, four topics were mentioned when asking about what made this organization unique. The role of these resources is described through the strategic activities of SLN to exemplify of role of the Scania Group in the activities of SLN.

VRIN-resources Role in strategic activities:

The IT system In all of the activities where the resource based was changed, the IT system plays an important role. This system makes it possible for SLN to pick and pack the trucks in their daily operations, but also tracks down all the different packages and containers

The lean manufacturing system As the continuous improvement is said to be the key part in the lean manufacturing system, the dynamic capability solving the problems systematically can be also seen as a role in this system.

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strategic system of continuous improvement. All of the capabilities occurred within the different layers of the organization, whereas the market seeking and opportunity sensing capability can be attributed to the CO.

The KD method Through the opportunity sensing of the CO, the KD method of working was transferred from Scania Brazil to the Netherlands, whereby they collectively are producing trucks through the KD method.

Table 8: The role of VRIN resources in projects.

Through the different activities, it can be seen that these resources play an important role in the strategic activities of SLN. Because they all find their origin in the Scania Group, either in development or training, the link between these important resources needs to be made with the Scania Group. Because the Scania Group is not in the scope of this research, further strategic impact of these resources and capabilities can only been seen in the context of SLN.

Finalizing the this chapter, it can be concluded that the role which the dynamic capabilities plays in the strategic activities and on the performance frontiers of a company, offers a rich area to further explore research on the empirical testing of the dynamic capabilities. When considering looking for a sustained competitive advantage, it should be considered how they can relate to, and interact with the market it is in.

Conclusion

This study makes an effort to describe the relationship between the dynamic capabilities and their influence on the competitive priorities of a company. Through different performance improvement projects and paths, and by using the structures of the theory of performance frontiers (Schmenner and Swink, 1998) and the resource based view (Barney, 1991), the relationship between the two concepts was described and the role of the dynamic capability highlighted.

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Conclusion  41

through the usage of systematic problem solving in continuously rewriting the standard and performing engineering projects. In these engineering projects, expert knowledge is used to change the resource base where possible. For improving operating policies (path two), the systematic problem solving is used in kaizens to change the operating frontiers in order to improve the operations. For this improvement, it is possible that the resource base has to be changed, as it was in the strategic activity in this report. The trade-off decision (path three), the seeking of opportunities is involved; whereby the opportunity of flexibility not became the potential that was expected of it and turned into a trade-off. For increasing the performance space with expanding the assets frontier (path four), seeing opportunities in the expansion of services (and because of that, buildings), and thereby changing the resource base, was found to be the major force behind this strategic activity. In all of these activities, several unique resources and capabilities were found. They could be all linked to the Scania group, which made it out of the scope of this research.

This report contributes to the existing theory in several ways: it empirically (1) showed the dynamic capabilities through examples, it (2) illustrated how the dynamic capabilities are influencing the competitive priorities of SLN and (3) it proposed an extension to the current definition of dynamic capabilities (Barreto, 2010); creating support in the context of group activities of a company. Also, it showed how other capabilities play a role in these strategic actions. Although this paper has made a number of theoretical contributions, a number of managerial applications can also be found. Through the empirical exploration of the dynamic capabilities, practical evidence for performance improvement is delivered whereby the theoretical improvement steps were linked to practical examples. This can offer clarification in the amounts of articles, configurations and explanations of the dynamic capabilities. Also, it offers insights in the strategic actions of a company by connection empirical evidence to theoretical constructs and definitions.

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References  43

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How dynamic capabilities influence performance frontiers