2009:059 MASTER'S THESIS

A Roadmap for Unbundling the Corporation

Mehrad Moeini Jazani

Luleå University of Technology Master Thesis, Continuation Courses Marketing and e-commerce Department of Business Administration and Social Sciences Division of Industrial marketing and e-commerce

2009:059 - ISSN: 1653-0187 - ISRN: LTU-PB-EX--09/059--SE MASTER'S THESIS

A Roadmap for Unbundling the Corporation

Supervisors: Dr. Amir Albadvi Dr. Deon Nel

Referees: Dr. Parastou Mohammadi Dr. Baradaran Kazemzadeh

Prepared by: Mehrad Moeini Jazani

Tarbiat Modares University Faculty of Engineering Department of Industrial Engineering

Lulea University of Technology Division of Industrial Marketing and E-Commerce

Joint MSc PROGRAM IN MARKETING AND ELECTRONIC COMMERCE

2009

2 2 Abstract

Growth of the many organizations is still limited mostly due to the fact that they are an amalgamation of three core yet conflicting business processes: infrastructure management business, product innovation business and customer relationship business. Leading companies have focused on their core capabilities and leveraging their growth by participating in networks of specialist companies. Unbundling the corporation, introduced by Hagel and Singer (1999), explains why the traditional corporations are not able to achieve the desired level of growth by doing every aspects of value chain themselves. However, rapid technological improvements in internet and networking have reduced the interaction costs which have made it possible for managers to focus on their organizational core capability and unbundle the rest to the specialized partners. Unbundling the corporation should be considered as a growth strategy. To be applied by practitioners, developing a roadmap for unbundling is essential. Considering the increasing trends in outsourcing specifically in the time of economic turmoil signify the necessity and importance of such a roadmap. In this research, we propose a roadmap for unbundling the corporation. Our roadmap has been derived from extensive case studies in order to increase its generalisability. The roadmap consists of two frameworks. The first framework assists practitioners to map their organizational capabilities and decided in which they should invest. Finally, the second framework indicates the relationship between core capabilities and network capabilities of an unbundled organization. Together the two frameworks help managers to devise their strategic approach toward unbundling and growth.

Keywords

Unbundling, Capability, Process, Networks, Leveraged Growth, Uncertainty, Specialization, Growth, Orchestration, Shaping and Adaptation

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Acknowledgement

Although writing a thesis is compulsory, to me it was a two-year journey of induction and deduction of contemporary theories and ideas. As one of the most memorable journeys I ever had, I learnt a lot from theories and I got familiar with renowned scholars. The most important achievement of this thesis to me is learning to conduct a piece of research in a timely and effective manner. As a master student of Marketing & e-Commerce who is still at the beginning of discovery, I should confess that this journey would not lead to the destination without the Almighty God generous supports and if the kind support and encouragements of many people did not exist. First of all, I would like to express my sincere gratitude to my local supervisor, Dr. Amir Albadvi whose deep insights, knowledge and kind support have always enlightened my way though the research. I learnt a lot from him during the almost two years of our regular weekly meetings at his office on Monday mornings. Secondly, I would like to thank my LTU supervisor, Dr. Deon Nel whose valuable comments had a great impact on the quality of the thesis at hand. I would also like to show my sincere appreciation to Professor Peter Naude' from Manchester Business School to whom I owe a lot. I am grateful for all his encouragements and patient supervision on some pieces of my work published as conference papers. The most important gifts he gave me were hope and endeavor. Special thanks to Professor Salehi the head of division of Industrial Marketing & e-Commerce at Lulea University for all his attempts in holding such a worthwhile joint master program. Moreover, many thanks to Professor Anne Engstr Öm for her kind hospitality in Sweden, in addition to her patient and considerate replies to my numerous emails. I wish her the best. Finally, I would like to assert my warmest gratitude to my dear parents for the love, affection and support they provided me on every step of my life specially my educations.

Mehrad Moeini Jazani, TehranTehran,, April 2009

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Table of Content

Abstract ...... 2 Keywords ...... 2 Acknowledgement ...... 3 Table of Content ...... 4 List of Tables ...... 8 List of Figures ...... 9 Chapter One ...... 10 Unbundling the Corporation: the New Growth Strategy for the New Era ...... 10 1. Unbundling the Corporation: the New Growth Strategy for the New Era ...... 10 1.1 Unbundling: The Origins ...... 11 1.2 Role of Technology in Revolutionizing Interactions ...... 13 1.3 Unbundling the Corporation ...... 17 1.3.1 One Company: Three Businesses ...... 17 1.3.2 More Evidences from Industries ...... 21 1.3.2.1 Energy Industry ...... 22 1.3.2.2 Global IT Outsourcing ...... 22 1.3.2.4 Newspaper Industry ...... 23 1.3.3 New Growth Strategy: Separation of Three Businesses ...... 25 1.3.4 Post Unbundling Era: More Opportunities for Growth ...... 26 1.3.5 New Mindsets as the Pre-requisites for Unbundling ...... 27 1.3.6 Contrasting Unbundling and Outsourcing ...... 28 1.4 Research Motivation ...... 29 1.5 Research Goals ...... 33 1.6 Research Approach and Organization of Thesis ...... 36 1.7 Summary ...... 38 Chapter Two ...... 39 Capabilities and Their Classification ...... 39 2. Capabilities and Their Classification ...... 39 2.1 Strategic Management and Emergence of RBV ...... 40 2.2 Resource Based View of the Firm ...... 42 2.2.1 Core Competence ...... 44 2.2.2 Competences ...... 47 2.2.3 Capability ...... 48

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2.2.4 Resource ...... 55 2.3 Linking RBV Concepts: Building a Unified Framework ...... 55 2.4 Capabilities and their Importance for Organizations ...... 59 2.5 Capabilities and their Relevance to Processes ...... 61 2.5.1 In Pursuit of a Practical Definition of Capabilities ...... 61 2.5.2 Organizational Processes as Capabilities: Definitions and Characteristics ..... 64 2.5.3 Key Processes of an Organization: APQC Framework ...... 66 2.6 Classification of Capabilities According to Unbundling Theory ...... 68 2.7 Summary ...... 71 Chapter Three ...... 72 Research Methodology ...... 72 3. Research Methodology ...... 72 3.1 Research Philosophy ...... 74 3.1.1 Positivism ...... 74 3.1.2 Phenomenology ...... 74 3.2 Research approach ...... 75 3.2.1 Deduction: Testing Theory ...... 75 3.2.2 Induction: Building Theory ...... 77 3.2.3 Comparison between deductive and inductive approaches to research ...... 77 3.3 Research Strategy ...... 79 3.3.1 General Research Strategies ...... 80 3.3.2 Time Horizon of the Research: Cross-Sectional vs. Longitudinal Studies ...... 83 3.3.3 Research Purpose: Exploratory, Descriptive and Explanatory Studies ...... 84 3.4 Data Collection ...... 85 3.4.1 Secondary Data ...... 86 3.4.2 Collecting Primary Data Using Interviews ...... 90 3.4.3 Sampling ...... 97 3.5 Conclusion ...... 102 Chapter Four ...... 103 Corporate Capability Mapping ...... 103 4. Corporate Capability Mapping ...... 103 4.1 A More Complete View on Unbundling Framework ...... 104 4.1.1 Case Study One: Unbundling the Mobile Value Chain ...... 107 4.1.2 Case Two: Lufthansa, Survived with Separate Entities ...... 110

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4.1.3 Case Three: 7-Eleven, Focusing on the Core ...... 114 4.1.4 Findings from Secondary Case Studies ...... 118 4.2 A Framework for Capability Mapping of the Corporation ...... 119 4.3 Applying the Capability Mapping Framework: Dell Inc. Case ...... 123 4.4 Conclusion ...... 131 Chapter Five ...... 133 Unbundled Companies in the Network Context: the Roles and Capabilities ...... 133 5. Unbundled Companies in the Network Context: the Roles and Capabilities ...... 133 5.1 Leveraged Growth and Different Network Roles ...... 135 5.2 Network Orchestration ...... 137 5.2.1 Case Study: Li & Fung ...... 138 5.2.2 Orchestration Capabilities ...... 140 5.2.3 Advantages of Loosely Coupled Relationship Management ...... 143 5.2.4 Can We Play an Orchestrator Role? ...... 146 5.3 Shaping a Technological Platform ...... 147 5.3.1 The Shaping Capabilities ...... 148 5.3.2 Can We Play Shaper’s Role? ...... 152 5.4 A Comparison of Two Roles ...... 154 5.6 Adapters Roles and Capabilities in the Network ...... 155 5.7 A Framework for Associating the Core Capabilities, Network Roles and Network Capabilities ...... 156 5.8 Conclusion ...... 158 Chapter Six ...... 159 A Roadmap for Unbundling the Corporation ...... 159 6. A Roadmap for Unbundling the Corporation ...... 159 6.1 Case Studies through Interviews: Facts and Figures ...... 160 6.2 Real Cases Studies: Assessment of Key Themes ...... 164 6.2.1 Company A: Pharmaceutical Industry ...... 164 6.2.2 Company B: Biotechnology Industry ...... 166 6.2.3 Company C: Retail Industry ...... 168 6.2.4 Results from Cases ...... 170 6.3 A Roadmap for Unbundling the Corporation ...... 172 6.4 Conclusion ...... 174 Chapter Seven ...... 175 Conclusion and Managerial Implications ...... 175 6

7. Conclusion and Managerial Implications ...... 175 7.1 Brief Review of the Research Objectives & Approach ...... 175 7.2 Findings: A Roadmap for Unbundling the Corporation ...... 178 7.3 Contributions ...... 180 7.4 Managerial Implications ...... 181 7.5 Limitations of Research ...... 181 7.6 Further Research ...... 182 References: ...... 183 Appendix One ...... 191 Explored Key Themes & Structure of Interviews ...... 191

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List of Tables

Table 1-1 Rethinking Traditional Organization ...... 19 Table 2-1 Classification of Capabilities based on Unbundling Theory ...... 70 Table 3-1 Major Differences between Deductive and Inductive Approaches ...... 78 Table 3-2 Different Types of Interviews Appropriate for each Research Purpose ...... 92 Table 3-3 Impact of Various Factors in Choice of Non-Probability Sample Techniques……………………………………………………………………………..100 Table 4-1 Rethinking Traditional Organization ...... 104 Table 4-2 a More Complete View of Unbundling the Corporation ...... 106 Table 5-1 Comparison of Loosely Coupled Business Process Networks & Traditional Supply Chains ...... 145 Table 5-2 Relationship between Core Capabilities, Network Roles and Network Capabilities ...... 157 Table 6-1 Relationship between Core Capabilities, Network Roles and Network Capabilities ...... 160 Table 6-2 Summary of Interviews Statistics ...... 163 Table 6-3 Findings from Cases ...... 172 Table 6-4 Association between Core Capabilities, Network Roles and Network Capabilities ...... 173

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List of Figures

Figure 1-1 Increasing Trends in Outsourced Innovation ...... 31 Figure 1-2 Shifts in Underlying Reasons for Outsourcing ...... 32 Figure 2- 1 Core Competence, Core Product and End Products Forming a Tree ...... 46 Figure 2-2 Capabilities of Market-Driven Organizations ...... 50 Figure 2-3 Hierarchy of RBV Concepts ...... 56 Figure 2-4 Hierarchy of RBV Concepts (Ljungquist, 2007) ...... 59 Figure 2-5 Porter’s Value Chain (1985) ...... 65 Figure 2-6 Organizational Process ...... 67 Figure 3-1 the Research Process Onion ...... 73 Figure 3-2 Deductive Approach ...... 76 Figure 3-3 Inductive Approach ...... 77 Figure 3-4 Types of Secondary Data ...... 87 Figure 3-5 Sampling Techniques ...... 98 Figure 4-1 Airline Customers and Product Segmentation ...... 112 Figure 4-2 the Lufthansa Portfolio ...... 113 Figure 4-3 Capability Assessment Matrix: Step One ...... 120 Figure 4-4 Capability Assessment Matrix: Step Two ...... 122 Figure 4-5 Forecasts of PC Sales ...... 125 Figure 4-6 Forecasts of PC Sales ...... 126 Figure 4-7 Forecasts of PC Sales ...... 127 Figure 4-8 Dell’s IMB Mapping in Capability Assessment Matrix: Step One ...... 128 Figure 4-9 Dell’s IMB Mapping in Capability Assessment Matrix: Step Two ...... 129 Figure 4-10 Dell’s CRM Mapping Capability Assessment Matrix: Step One ...... 130 Figure 4-11 Dell’s CRM Mapping in Capability Assessment Matrix: Step Two ...... 131 Figure 5-1 Shaping Role Capabilities ...... 149 Figure 6-1 the Roadmap for Unbundling the Corporation ...... 174 Figure 7-1 Roadmap Development Process ...... 178 Figure 7-2 Roadmap for Unbundling the Corporation ...... 179

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Chapter One Unbundling the Corporation: the New Growth Strategy for the New Era

1. Unbundling the Corporation: the New Growth Strategy for the New Era

Some companies simply specialize in a limited part of the value chain and outsource the rest. That is how Bharti Airtel has built up the largest mobile services in India – and the fastest growing one in the world in terms of subscribers – despite initially trailing better funded competitors. Outsourcing of IT services to IBM and of the development and management of its telecom network to Ericsson, Nokia and Siemens. These changes freed up Bharti’s capital, made its cost structure much more variable, and

10 allowed the company to target pricing levels of 1.5 to 2 cents per minute in advanced markets, all of which fueled rapid market growth and penetration. Bharti’s has focused on its capabilities to concentrate on customer care and regulatory interface (Ghemawat & Hout, 2008).

Specialized companies are emerging and new business models and strategies are born. More and more companies are concentrating on their core competencies and develop their capabilities in those areas and unbundle the rest part of their value chain in which other specialized companies are able to do the processes with higher quality and less costs. Traditional models no longer guarantee the growth and profitability of the organizations. Managers should ask themselves a very fundamental question "What business are we really in?" Their answers will determine their fate in an increasingly frictionless economy.

One of the recent theories, explaining these great transformations in business models, is unbundling the corporation presented in 1999 by Hagel and Singer in Harvard Business Review. The aim of this chapter is reviewing the unbundling theory and its origins at first. Then the importance of research on this topic has been clarified. After explaining the motivations of this research, the goals of the research or research questions in addition to the layout of the research have been presented. Finally, the conclusion section of this chapter has provided an appropriate guideline for surfing through different parts of this research.

1.1 Unbundling: The Origins

In order to better understanding of unbundling theory, one might pay attention to its underlying principles. One of the influential building blocks of unbundling theory is transaction cost economics (TCE) , created by Coase (1937) and further developed by Williamson (1971). This theory is one of the most popular theories in explaining the boundaries of the firm. According to this theory, all integration or disintegration decisions are driven by the goal to minimize the transaction costs, which are the coordinating costs for governing a relation (Williamson O. , 1971).

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To elaborate more on TCE 1, definitions of “Interaction” and “Interaction Costs” has been provided. Interactions are defined as searching, coordinating, and monitoring that people and firms do when they exchange goods, services, or ideas - encompass all economies, particularly those of modern developed nations (Butler, et al., 1997). These interactions occur within firms, between firms, and all the way through markets to the end consumer. They take many everyday forms - management meetings, conferences, and phone conversations, sales calls, problem solving, reports, memos - but their underlying economic purpose is always to enable the exchange of goods, services, or ideas (Butler, et al., 1997). Accordingly, "Interaction costs” represent the money and time that are expended whenever people and companies exchange goods, services, or ideas (Hagel & Singer, 1999)

Interactions and their relative costs are important determinants of how firms and industries are structured and how customers behave. Firms do trade off the value of specialization against the interaction costs associated with external suppliers when they set their boundaries and choose their focus. To be more specific, companies trade off the effectiveness of alternative organizational forms against the interaction costs involved in managing them. That is, they always think about being larger and form a big corporate by doing the worked themselves which in turn form a new organizational form. Are departments the natural way to configure a modern corporation, for example? Do they have to be co-located? Is a central structure needed to monitor them? Are ad hoc teams more effective than permanent structures? Are flat or hierarchical structures easier to manage? (Butler, et al., 1997)

When the interaction costs of performing an activity internally are lower than the costs of performing it externally, a company will tend to incorporate that activity into its own organization rather than contract with an outside party to perform it. All else being

1Transaction costs, as economists have defined them, include the costs related to the formal exchange of goods and services between companies or between companies and customers. Interaction costs include not only those costs but also the costs for exchanging ideas and information. They thus cover the full range of costs involved in economic interactions (Hagel & Singer, 1999)

12 equal, a company will organize in whatever way minimizes overall interaction costs (Hagel & Singer, 1999). In addition to affecting the boundaries of the firm and industry, interaction costs will affect customers too. Customers choose products and providers by trading off the interaction costs of additional search against the marginal value expected from it. In the world where searching costs nothing, consumers would search exhaustively until they found the exact product of their choice at the lowest price available.

In the theory, if interaction costs were negligible, an organization could be atomized into a collection of individuals, geographically dispersed but connected by a communications network. In reality, however, substantial interaction costs and the human aspects of effective interaction limit the range of such configurations (Butler, et al., 1997).

John Hagel III and Marc Singer (1999) proposed that the rapid change in technology specifically the networking and communications has facilitated the interactions and reduced their respective costs. In result, companies will be able to outsource non-core processes to other specialized companies with minute transaction costs and concentrate in their core businesses and capabilities. Such transformations in organizational structure and boundaries have been possible due to the great development in communication and networking technologies. That is why, increasing number of firms are exploring various sourcing mechanisms for their business processes for cost and strategic advantages. Once tightly coupled business processes in the firm’s value chain are being unbundled to exploit global sourcing opportunities around the world (Ge, Konana, & Tanriverdi, 2004). To demonstrate the undeniable impacts of emerging technologies on interaction costs, we will discuss their effect in the next section.

1.2 Role of Technology in Revolutionizing Interactions

All modern forms of interaction - whether they are as simple as writing a letter or as complex as solving a problem in a team - are being shaped by computing and communications technologies.

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New networking capabilities, technologies that enhance connectivity and bandwidth, and standards that drive new applications have come together to strengthen processing power and to deepen technological penetration. This potent combination heralds a new age of abundant interactive capability (Butler, et al., 1997).

The growing use of networks has created an explosion in the ability to interact. The emergence of a new set of standards has boosted network usage and applications development. In the face of a massive increase in interactive capability, many of our traditional assumptions about the natural forms of economic activity will fall by the wayside. The tradeoffs that shape economic activity – firms trading off specialization against interaction costs, customers weighing current selections against further search costs, organizations considering alternative configurations - will each find a new point of balance as one side of the scale tips down. New ways to configure businesses, serve customers, and organize companies are emerging. The new achievements for firms and industries are as follow (Butler, et al., 1997):

••• Productivity Enhancement: The most straightforward interpretation of the increase in interactive capability is that workers could do their jobs in less than half of the time they currently spend. This means that a salesman will be able to spend much more time with customers, for instance, while R&D staff will have to spend much less time collecting data and waiting for test results. For the US economy alone, such savings could translate into productivity gains worth at least $1 trillion, or a third of GDP. ••• Business Re-configuration: Vertical integration 2 will become less valuable and disaggregation, outsourcing, and the use of external markets will increase. Whether a company makes or buys depends on the comparative costs of transformation (production and transportation) and interaction. While outsourcing or purchasing from a market allows buyers to benefit from the superior economics of specialized suppliers, it tends to involve substantial interaction costs.

2 Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers. Contrary to horizontal integration, which is a consolidation of many firms that handle the same part of the production process, vertical integration is typified by one firm engaged in different aspects of production (e.g. growing raw materials, manufacturing, transporting, marketing, and/or retailing) (Perry, 1988).

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As these costs fall, the relative attractiveness of arm's-length purchases will rise. Integrated business systems will give way to more specialized ones, and disaggregation and outsourcing will burgeon. In contrast, horizontal integration and cooperation will become more economically attractive. Horizontal integration brings benefits when carrying out a set of activities jointly rather than separately yields economies of scope in the form of higher returns or lower costs. As falling interaction costs allow companies better to coordinate the marketing and distribution of a wider variety of products and services, the value of horizontal integration should increase.

Another important aspect in business re-shaping is that the strategic value of scale is likely to decline in many industries, although it will rise for networked businesses. In businesses where distribution or logistics originally made scale essential, falling interaction costs will reduce its importance. Outsourcing, alternative delivery channels, and the ability to variablize inputs will grow, reducing fixed costs. As a result, smaller firms will proliferate in such industries as consumer goods manufacturing, applications software, specialty retailing, and design services. By contrast, in networked businesses, where the number of possible interactions increases exponentially with the addition of each node, interaction efficiency is the key to competitive advantage. As recent acquisitions and mergers in telecommunications, transportation, banking, and mass retailing suggest, scale expansion is likely to take place in such businesses. In general, there will be a shift toward more networked forms of business configuration.

••• More efficient market mechanisms: The lower cost of search and communication will force a move to more efficient market mechanisms for exchanging goods and services. As interaction costs fall, some of the features associated with markets will come into play: lower transaction costs, more transparent prices, and a larger pool of buyers and sellers who can communicate with each other. Thousands of genuine electronic markets will be created by the open standards and low interaction costs of Internet.

Another facet is that the traditional role of intermediaries will disappear or be transformed into market making or synthesis. Intermediaries have traditionally exploited

15 the lack of transparency in supply and demand in circumstances where it is costly for buyers and suppliers to search for and communicate directly with one another. But as these interaction costs fall, more providers go directly to consumers via telephones and the Internet, and more consumers do their own searching using the new media and on-line search agents.

Moreover, Market-making opportunities will proliferate in almost any industry where a market can be created around information detached from the physical flow of goods.

••• Customer service: It will be far easier for any company, regardless of size, to reach new customers anywhere in the world. As interaction costs fall, traditional assumptions about distribution and consumer reach will be overturned. Once, giant multinationals with established brands and local presence were the only players that could aspire to reach consumers all over the world. Under the old model, a company sold its products locally and expanded gradually Being global was synonymous with being huge. This is no longer true. Many companies will be born global. Today, even the smallest start-up has access to a global market for its products. Aussie Lures, a tiny business run from a garage in Sydney, sells fishing lures to customers across the world via the Internet. In addition, direct sales and distribution will become the norm rather than the exception. Not only will finding and reaching new customers be simpler, tailoring products for them will be easier, faster, and cheaper as well (e.g. Levi Strauss, Customfoot, Time magazine, Amazon).

Also, Communication with customers - advertising, research, and marketing - will shift from broadcast to narrowcast mode as the cost of interacting with individual consumer falls. The "magic cookie" technology embedded in Netscape, for example, enables the software to maintain an automatic record of the sites a user visits. Eventually, it will be able to capture information about the interactions themselves, such as amount spent and items purchased.

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To sum up, by decreasing in interaction costs as discussed above, there will be revolutionary changes in the way industries and organizations define themselves and their structure as well as in a way that customers will be served and will be communicated. These great changes have already begun. In the next section, the theory of unbundling have been deeply discussed which will enable us to explain these ongoing changes

1.3 Unbundling the Corporation

In this section, the theory of unbundling, developed by John Hagel III and Marc Singer (1999), has been introduced and discussed in detail. Firstly, the framework of Hagel and Singer (1999) has been explained. This framework greatly facilitates the understanding of these phenomena by introducing three core businesses of the organizations. Afterwards, some examples of this concept have been presented in order to provide more support for our research purpose and showing the importance of the subject. Consequently, we have introduced unbundling as a new growth strategy for corporations and discussed over the new viewpoints that managers and practitioners should employ in order to fully exploit its advantages. Finally, we have described the differences between unbundling and outsourcing.

1.3.1 One Company: Three Businesses

Most companies today are still an unnatural bundle of three fundamentally different, and often competing, business types. These are core businesses or processes of an organization- which are those that other businesses shape due to their existence (Hagel, 2008). These core businesses are:

• Infrastructure management businesses (IMB ) – high volume, routine processing activities like running basic assembly line manufacturing, logistics networks or routine customer call centers • Product innovation and commercialization businesses (PIC) – developing, introducing and accelerating the adoption of innovative new products and services • Customer relationship businesses (CRM) – building deep relationships with a target set of customers, getting to know them very well and using that knowledge

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to become increasingly helpful in sourcing the products and services that are most relevant and useful to them

Although organizationally intertwined, these businesses are actually very different. They each play a unique role; employ different types of people; and have different economic, competitive, and even cultural imperatives (Hagel & Singer, 1999). Their different characteristics have been summarized in table 1.1.

To explain more about different aspects of the above table based on Hagel and Singer (1999), the role of an infrastructure business is to build and manage facilities for high-volume, repetitive operational tasks such as logistics and storage, manufacturing, and communications. In a bank, the infrastructure business builds new branches, maintains data networks, and provides the back-office transactional services needed to process deposits and withdrawals and present statements to customers. In a retailer, the infrastructure business constructs new outlets, maintains existing outlets, and manages complex logistical networks to ensure that each store receives the right products at the lowest possible cost.

The role of a product innovation business is to imagine attractive new products and services and figure out how best to bring them to market. In a bank, for example, employees within various product units or in a centralized business-development function research new products like reverse mortgages and ensure that the bank is capable of bringing them to market successfully.

Finally, a role of customer relationship business is to find customers and build relationships with them. For example, in a bank or a retailer, the marketing function focuses on drawing people into the branches or stores. Another set of employees - loan officers or store clerks, perhaps-assists the customers and tries to build personal relationships with them. Still other employees may be responsible for responding to questions and complaints, processing returns, or collecting customer information. Although these employees may belong to different organizational units, they have a common goal: to attract and hold on to customers.

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Core Business

IMB PIC CRM

Build and manage Conceive of attractive Identify, attract and facilities for high volume, new products and Role build relationship with repetitive operational services and customers tasks commercialize them

High cost of customer High fixed costs make Early market entry acquisition makes it large volumes essential to allows for a premium imperative to gain large Economics achieving low unit costs; price and large market shares of wallet; economies of SCALE is share; SPEED is key economies of SCOPE is key key

Cost focused; Stress on Employee Centered; standardization, Highly service oriented; Culture coddling the creative Predictability and Customers come first Stars Efficiency

Battle for Scale; rapid Battle for talent; Low Battle for Scope; rapid Competition consolidation; a few big barriers to entry; many consolidation; a few big players dominate small players thrive players dominate

0Table 1- 01 Rethinking Traditional Organization (Source: Hagel & Singer, 1999)

According to table 1.1, the characteristics of these core businesses are conflicting as declared by Hagel and Singer (1999): "When the three businesses are bundled into a single corporation, their divergent economic and cultural imperatives inevitably conflict. Scope, Speed, and Scale cannot be optimized simultaneously. Trade-offs has to be made."

To better understand the conflicting nature of these businesses, let’s consider the CRM in comparison with PIC. Because of the need to achieve economies of scope, customer relationship businesses naturally seek to offer a customer as many products and services as possible. It is often in their interests to create highly customized offerings to maximize sales. Their economic imperatives lead to an intently service-oriented culture. When a customer calls, people in these businesses seek to respond to the customer's needs above everything. They spend a lot of time interacting with customers, and they develop a sophisticated feel for customers' requirements and preferences, even at the individual level. In Contrast with CRM, in a product innovation business speed, not scope

19 drives the underlying economics. The faster it moves from the development to the market, the more money the business makes. Early entry into the market increases the likelihood of capturing a premium price and gaining a strong market share (Hagel & Singer, 1999). From the cultural point of view, product innovation businesses focus on serving employees, not customers. They do whatever they can to attract and retain the talented people who come up with the latest and best product or service. They reward innovation, and they seek to minimize the administrative distractions that might frustrate or slow down their creative "Stars." Not surprisingly, small organizations tend to be better suited than large bureaucracies to nurturing the creativity and fleetness required for product innovation (Hagel & Singer, 1999).

While scope drives relationship management businesses and speed drives innovation businesses, scale is what drives infrastructure businesses. Such businesses generally require capital-intensive facilities, which entail high fixed costs. Since unit costs fall as scale increases, pumping large amounts of product or work through the facilities is essential for profitability. In addition, the culture of infrastructure businesses is characterized by a one-size-fits-all mentality that dislikes all kinds of customization and special treatment. To keep costs as low as possible, they are motivated to make their activities and outputs as routine and predictable as possible. Where customer relationship businesses focus on customers and innovation businesses focus on employees, infrastructure businesses are impersonal - they focus on the operation (Hagel & Singer, 1999). The following example will clarify the negative impact of these three core businesses, if bundled together:

The Regional Bell Operating Companies (RBOC) is a local telephone carrier in the United States. The retail telephone operation within RBOC is a customer relationship business; it focuses on acquiring customers and keeping them happy. The wholesale telephone operation is, by contrast, an infrastructure management business; it maintains the RBOC's physical communications facilities and furnishes specialized support services like network management. To maximize their scale economies, the RBOCs could lease their retail operation to specialized telephone-service resellers, which focus on the customer relationship business. But the phone companies are

20 suspicious of entering into such relationships because they fear that the resellers will drain customers away from their own retail phone business. The RBOCs have, in other words, deliberately limited the growth and profitability of their infrastructure businesses to protect their customer relationship businesses. Their decision has encouraged specialized infrastructure businesses, operating their own fiber-optic networks, to enter the competitive fight in metropolitan areas, creating a further threat to the RBOCs.

In this section, the conflicting nature of these three core businesses has been illustrated. These three business types remain tightly bundled together within most companies today even though they have completely different skill sets, economics and cultures required for success. Inevitably, companies deeply compromise on their performance as they seek to balance the competing needs of these business types. More broadly, this tight bundling decreases agility and diminishes learning capacity (Hagel, 2008).

In recent years, large companies have expended a lot of energy and resources reengineering and redesigning their core processes. For many companies, streamlining core processes has yielded impressive gains, saving substantial amounts of money and time, and providing customers with more valuable products and services. But as managers have found, there are limits to such achievements.

While traditional companies strive to keep their core processes bundled together, highly specialized competitors, thanks to the development in communication and networking technologies, are emerging that can optimize the particular activity they perform (Hagel & Singer, 1999). They have focused only on one of the core businesses mentioned by these scholars.

1.3.2 More Evidences from Industries

The process is well underway, although proceeding at different paces in each industry and geography. For example, the broad trend towards outsourcing and off- shoring over the past decades can be understood as a systematic stripping out of infrastructure businesses from larger companies (Hagel, 2007). In this section we are

21 going to provide some evidences through real examples to shed light on the unbundling in different industries. Our evidences come are drawn from papers, websites and news.

1.3.2.1 Energy Industry

One of the most important issues in September 2007 among European commission members was related the unbundling of gas and electricity companies. Traditionally, in this area, active companies are doing all part of the business themselves (from the beginning point of supply to transfer and distribution). Al though separation of these vertically integrated companies is not an easy task and has caused protests by some of them, the commission insists in unbundling. This decision is due to the fact that between 1998 and 2006, in EU countries where the electricity networks were owned by the supply and generation companies, prices rose by 29 per cent, according to Commission figures. In countries where the networks were independent and separated, prices rose by just 6 per cent.

However, EU commission argues the companies' fears are unwarranted, at least as far as investors are concerned. The shares of unbundled companies have performed at least as well as those of their integrated rivals. British Gas, for example, was split into three businesses that have all been successful (Crooks & Laitner, 2007).

1.3.2.2 Global IT Outsourcing

The growth of global IT outsourcing will continue and up to 25 per cent of traditional IT jobs will be relocated from developed to developing countries by 2010, according to Gartner, the IT consultancy. The prediction comes as the US-based group presents its analysis of outsourcing trends and other current IT issues at its annual Spring Symposium in Barcelona, Spain. Gartner identifies the growth in offshore outsourcing to India and other developing countries as one of the most significant shifts in IT in the near term.

By 2005, Gartner predicts, 30 per cent of leading European businesses will include outsourcing IT services in their business and IT plans. As a result, the offshore

22 contact centre industry and business process outsourcing will represent the highest opportunity for growth (Taylor, 2004).

1.3.2.3 Healthcare Industry

In the recent past, many healthcare services and administrative functions are being unbundled and sourced from globally dispersed vendors. For example, information systems maintained in India are used to manage patient profile, insurance, and regulatory compliance. Teleradiology systems allow radiologists in Israel to review digitized X-rays sent from U.S. hospitals. Indian firms (e.g., Wipro Technologies) convert 2-dimensional MRI images into 3-D images for U.S. hospitals for better diagnosis. Physicians in the U.S. make clinical decisions with the help of a decision support systems operated in Ireland. Pharmacy claims are processed in Philippines. Physicians’ voice recorded notes on a case are transcribed in India. A panel of doctors from Israel may recommend authorization of an expensive surgery on behalf of a U.S. insurance company. Thus, healthcare providers are increasingly unbundling their processes to leverage global sourcing. There is also a flow of tasks from offshore countries to the U.S. healthcare system due to advances in information technology. Rarely seen medical conditions (e.g., a rare tumor case) that are difficult for physicians in other countries to diagnose or treat are now diagnosed without physical presence of the patient in the U.S. With the advent of telemedicine, all pertinent medical information of the patient (e.g., X- rays, CT scans, lab tests, etc.) is digitized and electronically transmitted for remote diagnosis at a fraction of total cost. In most cases, the patient can be treated in his or her home country without the expensive trip to the U.S. (Ge, Konana, & Tanriverdi, 2004).

1.3.2.4 Newspaper Industry

Not so long ago, all three core processes were tightly integrated in most newspapers. A paper took on full responsibility for attracting its customers-both readers and advertisers. It developed most of its product-the news stories presented in its pages. And it managed an extensive infrastructure, printing its editions on its own presses and distributing them with a fleet of its own trucks.

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Today the industry is beginning to look very different. Much of the typical newspaper's product is outsourced to specialized news services; the average metropolitan newspaper depends heavily on wire services, syndicated columnists, and publishers of specialty magazine inserts for the words and images that fill its pages. In addition, many newspapers want to shed their scale-intensive printing facilities and rely instead on specialized printing companies to produce the paper each day. As they move away from product innovation and infrastructure management, the newspapers are able to concentrate on the customer relationship portion of the business helping to connect readers and advertisers.

Newspapers like the Los Angeles Times, for example, are creating special sections geared to particular regions or interests, which enable advertisers to better target specific sets of readers. The unbundling is making the newspaper business much less capital intensive, allowing more resources to be devoted to building customer relationships (Hagel & Singer, 1999).

1.3.2.5 Banking Industry

A similar unbundling is taking place in many areas of the banking industry. Credit cards, for example, began as a product offered by traditional banks, which operated their credit card businesses as a tightly integrated bundle of activities. Each bank designed and introduced its own credit cards, acquired and maintained its own customer relationships, and handled all the back-office processing for every credit card transaction (while relying on MasterCard and VISA to establish general protocols for those transactions).

Over the past decade, however, the credit card business has rapidly unraveled as specialized players have focused on each of the three activities. Affinity groups-from the AARP to American Airlines-have assumed responsibility for finding customers and maintaining relationships with them. Specialized credit-card companies like CapitalOne and Providian Financial are focusing on product innovation, creating new features and pricing programs. And a range of infrastructure companies are processing transactions, managing call centers, and performing other scale- intensive tasks. In fact, infrastructure

24 specialists like First Data now process more than half the credit card transactions in the United States (Hagel & Singer, 1999).

1.3.3 New Growth Strategy: Separation of Three Businesses

As it was discussed in section 1.3, the fast growth of computing and networking technology has been changed the interactions and drastically reduced the correspondent costs. Due to reduction in interaction costs, customers gain greater power as they can search with near zero costs and compare suppliers and choose the best. Therefore, vendors experience increasing margin squeeze and the natural reaction is to cut costs in order to keep their customers but many companies lose sight of the fact that cutting costs alone is a losing game. In increasingly competitive markets, cost savings are rapidly competed away and captured by customers. The result is a steadily shrinking business. The only way to continue to create value in this kind of environment is to find major new growth strategies (Hagel, 2007). Here, an important question rises in mind of managers: “How can we save our businesses and how our business will be able to grow?” the answer is unbundling!

When thinking of separation of the company in to its core businesses the conventional wisdom was that interaction costs required coordinating them would be too great. Therefore, near a century, these activities were combined within a single company and managers could not imagine removing a core process from their company without somehow undermining their company's identity (Hagel & Singer, 1999)

Although, new technologies have enabled customers to be more powerful than before –in terms of search and selection, these developments have enhanced the ability to collaborate across institutional and geographic boundaries too. By providing an opportunity to access and mobilize complementary resources, they offer powerful platforms for leveraged growth – delivering greater value to customers by bringing together third party resources (Hagel, 2007). In another terms, by decreasing the interaction costs, old paradigms indicating that “everything should be done within the company” are violated. By focusing on their core businesses and unbundling the others to

25 other external specialists, not only do traditional companies reduce their costs but also achieve a platform for their growth through specialization and providing higher value to their customers. It is also has been predicted in McKinsey’s 1997 paper:

“It is predictable that organizations start to reconfigure themselves. It is no more required for a company to do everything. Activities within a firm can be outsourced to specialized companies who are able to do them better. Firms will focus on their core activities. That is, vertical integration will be eliminated. In contrast, horizontal integration and cooperation will become more economically attractive” (Butler, et al., 1997)

1.3.4 Post Unbundling Era: More Opportunities for Growth

After the first phase of transformation, unbundling the corporation, the specialized and focused organization will inevitably needs to cooperate with other companies specialists in other part of value chain. For example, a company which has focused on infrastructure management business needs to cooperate with specialists on product innovation and commercialization as well as customer relationship management – the other two core business processes. Put it in another terms, the new form of value creation will emerge: Networks .

After joining a currently available network or by shaping a new network of businesses, an unbundled company will benefit from two new growth opportunities. Firstly, by cooperation with specialized members of the network and providing higher quality products and services and reducing the costs, whole network members benefit from more profit by delivering higher value to consumers (Seely Brown, Durchslag, & Hagel, 2002; Hagel, 2002).

In addition to advantages of a business networks and flexibility which it will provide for all members, there would be another opportunity for growth: Rebundling . Two of the business types – infrastructure management and customer relationship – are driven by economics that favor large scale or scope based operations, so there will be accelerating concentration and consolidation in these two business types. In these arenas,

26 unbundling will be prelude to a much more focused process of rebundling, driving significant growth (Hagel, 2007). In other terms, companies who are specialists in infrastructure management will integrate through mergers, acquisitions and other types of increasing scale. It would be a similar case in CRM companies to gain economies of scope. On the other hand, production innovation and commercialization – is more likely to fragment over time given the importance of attracting and retaining the most creative talent and the importance of agility in the economics of speed (Hagel, 2007).

1.3.5 New Mindsets as the Pre-requisites for Unbundling

As discusses in previous sections, unbundling the corporation, should be considered as a growth strategy for traditional, fully integrated companies. The advantages of employing such strategy are manifold: quality improvement, costs reduction, faster time to market, exploiting more innovation through network members, more flexibility through loosely coupled structures in networks, risk reduction, resource mobilization and leverage to name a few.

However, exploiting the advantage of such a strategy needs different mindsets than those that currently are running the traditional companies. As evident from previous sections, two important points should be considered. Firstly, an internal view about the organization and its capabilities is needed. That is traditional organizations that are performing all the three core businesses in their boundaries, should determine in which core businesses they have more competitive advantage and focusing on that while unbundling the other two. After deciding over this decision, the organizations should determine about the network in which they are going to join or form. In another term, they should decide over the decision that whether they are going to orchestrate or shape a network or to be a member of an existing network and be an adapter (Hagel, Seely Brown, & Davison, 2008 ; Hacki & Lighton, 2001).

In brief, corporations need two types of decision to make: the first one is related to their current boundary and capabilities and the second one is related to network and developing new capabilities to exploit its advantages. Managers and practitioners necessarily required to develop such mindsets. They should be able to simultaneously and

27 systematically decide over the above two important points if they want to successfully benefit from advantages of unbundling strategy.

1.3.6 Contrasting Unbundling and Outsourcing

In general terms when corporations decide (for whatever reason) to outsource some functions and processes of their previously integrated structure to other external parties, it can be considered as some degrees of unbundling. These reasons can be short- tem financial ones as many of outsourcing models in the literature have been developed by such mind sets or more long-term strategic ones which need more sophisticated tools (Mclvor, 2008).

In general, outsourcing, disintegration and disaggregation may be considered as synonyms of unbundling; however, unbundling as provided by Hagel and Singer (1999) is more strategic as it looks beyond cost reduction which is the dominant goal of outsourcing. In fact, unbundling is a growth strategy through specialization and is not solution for cost reduction as many models of outsourcing are used to be. Moreover, in unbundling theory, the focal point is core processes while, in outsourcing, some of non- core processes may be candidates to be outsourced.

Another important difference between unbundling and outsourcing is the concept of network orchestration or adaptation which is not strongly and directly discussed in outsourcing models. And finally, rebundling is another different point between these two issues. While unbundling will explain the Rebundling concept, outsourcing does not provide any explanation about future growth strategies.

In brief, although it is possible to find literally differences among “Outsourcing”, “Disintegration” and “Unbundling” but practically, the rising trend of outsourcing and disintegrations can be viewed as ongoing unbundling strategy while, some of acquisitions and mergers can be viewed as “Rebundling”. So we may conclude that unbundling is a growth strategy by virtue of concentrating on core businesses and capabilities and sourcing the non-core businesses from other specialized partners outside the company. As it is evident, unbundling is a type of strategic organizational transformation which

28 results in a network of specialized companies working together to achieve common goals and growth.

1.4 Research Motivation

A survey conducted by CFO magazine and AMR Research found that business process outsourcing, or BPO, has already become popular among companies of all sizes for a variety of reasons, and will likely gain steam in future (Banham, 2001).

In this report it has been mentioned that “ saving money is a prime motivator, of course, but advocates claim that strategy also enters into the equation ” it has been asserted by Frank J. Casale, CEO of The Outsourcing Institute, a Jericho, New York, that "It is no longer seen solely as a cost-cutting measure, a last-ditch effort to save money and perform financial triage. Outsourcing has become a management tool, freeing companies to build upon their core competencies by leaving the noncore stuff to specialized providers” His institute estimates that 36 percent of all companies with sales of more than $50 million outsource today, up from 29 percent in 1996; while the respondents to CFOs survey showed a significantly higher number.

Also one may pay attention to the following sentence in CFOs report: Altogether, outsourcing (both BPO and traditional IT) represents some $345 billion in resources that lie outside corporate boundaries, indicating that what was once considered a project- based tactical move is now a standard business practice.” In another part of this report, it has been asserted that "Companies are fed up with managing complicated, messy things outside their core function," says Christine Ferrusi Ross, an analyst with Forrester Research in Cambridge, Massachusetts.

Below, some of the questions that have been asked from respondents have been presented:

1- Percent citing each reason as a "very important" rationale for their BPO efforts .

• Focus on core competencies: 67.3% • Save money: 61.1% • Tap vendor domain expertise: 55.5%

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• Focus on strategic growth: 37.4% • Maintain/reduce head count: 34.6% • Redirect capital budget: 22.7% • Reduce assets on books: 7.6% • Other: 2.8%

2- A majority of companies already engage in some form of business process outsourcing:

• Currently doing BPO: 68.3% • Plan to do BPO in 1-2 years: 2.0% • No BPO plans: 29.7%

3- How do you foresee your firm's overall use of outsourcing?

• Increasing: 63.6% • Staying the same: 28.6% • Decreasing: 2.4% • Don't know: 5.3%

As clear as sunshine, according to this report, the trend of outsourcing is increasing. Not only does CFOs survey in 2001 admits the increasing trend in outsourcing, but also the recent research done by Booz Allen Hamilton and India’s Association of Software and Service Companies (NASSCOM) approves such an increasing trend in 2006.

According to this report, outsourcing is getting much more strategic and it is shifting from IT and HR activities to even more complex activities such as product and component design, plant design, process engineering, and plant maintenance and operations across automotive, aerospace, technology/ telecommunications, utilities, and construction and industrial machinery sectors (Dehoff & Sehgal, 2006). Global spending on off-shored engineering in 2006 was 15 $ billion which has been estimated to reach to

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150-225 $ billion in 2020 indicating an increasing market for outsourcing (See Figure 1.1)

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Figure 1-1 Increasing Trends in Outsourced Innovation

In addition to above trend, another interesting statistics has been published in the report which has been presented in figure 1.2.

As it is evident from figure 1.2, the underlying reasons for outsourcing are changing. Cost which still is the first and most important reason is being replaced by other strategic parameters as like as market access, quality of supply and etc. This is obviously demonstrating the importance of strategic thinking and change behind the new trends of outsourcing. Finally, it is noteworthy to consider the recent article published in November 2008 at the time of global economic crisis3. In that article, it has been mentioned that the global economic crisis- started from U.S and affected the other

3 At the time of writing this thesis, we are still in global economic crisis (Author: 19 November, 2008) 31 countries- will have a positive effect on the increasing trend of business process outsourcing (Goolsby, 2008).

0 Figure 1-2 Shifts in Underlying Reasons for Outsourcing

In section 1.3.6, we mentioned that the increasing trend in outsourcing can be regarded as a systematic procedure of greater and more strategic issue –Unbundling. Above mentioned reports in addition to evidences that have been presented in section 1.3.2 of this chapter and numerous other examples that have not presented in this chapter are all indicating the importance of unbundling the corporation.

Beside all facts and figures, the key issue for managers is considering the unbundling as a growth strategy. It was discussed that this phenomenon is an inevitable challenge for all vertically integrated corporations in today’s volatile business

32 environment. If treated proactively by managers, they will enable their respective organizations to exploit such an opportunity. Of course, taking advantage from this strategy and rapid changes in business environment will require organizations to transform themselves. For that reason developing a roadmap enabling managers and professionals to cope with this opportunity is a must.

As Hagel and Singer (1999) have proposed, it is the time for managers to once again ask themselves the very fundamental question that "What Business are we really in ?" Their answers will determine their fate in an increasingly frictionless economy. In addition to this question, managers should think of their position in the collaboration network which will emerge after specialization and unbundling.

Providing firms with a framework to enable them to formulate their future strategy in confronting unbundling is an interesting work. Assisting managers to answer the fundamental question presented by Hagel and Singer, in addition to helping them to develop network capabilities is not only practically important but also academically seems to be fruitful.

1.5 Research Goals

In previous sections the unbundling theory, its underlying causes and its future trend was thoroughly discussed. The important framework presented by Hagel and Singer (1999) was explained. Their framework is a useful tool for both scholars and practitioners to understand what the core businesses of an organization are and why they are naturally conflicting. In another terms, Hagel and Singer will deliberately illustrate that why unbundling theory can be considered as a growth strategy and why it is unavoidable for organizations. Although useful in explaining this phenomenon, their work does not provide any roadmap for scholars, consultants and managers to enable them in confronting such a foreseeable event. Clearly, they have not provided the answer to the question of “ How managers should be prepared to confront such a great transformation in their business and industry?"

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To put one step forward, the aim of this research is to answer "How" question by proposing a roadmap for unbundling the corporations. Hagel (2007) has presented three questions helping managers to find an answer in developing a roadmap:

• Where do we have distinctive and world-class capabilities today and where do we generate the most significant economic returns? • Are we compromising those capabilities and returns by participating in the other two business types? • Are we doing everything we can to access and leverage world-class capabilities in the other two business types?

Scrutinizing the above questions, the first and foremost point is “Organizational Capabilities”. In the first question, the emphasis is on identifying the organizational capabilities and measuring them. The second question tries to adapt the unbundling framework in classifying capabilities. It asks for categorizing the organizational capabilities in core businesses introduced by Hagel and Singer (1999) and cross check whether they are exacerbating each other. The third question tries to formulate the growth strategy through leveraging organizational capabilities development in addition to exploiting other specialized companies outside the boundaries of company resulting in a network form of collaboration. These three questions are well aligned with our discussion of section 1.3.3 to 1.3.5 of this chapter.

According the above questions and all the materials presented in this chapter, the goal and research questions of this research has been formulated as below:

The goal of this research is to develop a roadmap for unbundling the corporation as a new growth strategy for organizations by answering the following research question:

1. What are the organizational capabilities? 2. What is the appropriate framework for identification of organizational capabilities?

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3. What is the classification of capabilities according to unbundling theory? 4. Based on classification of unbundling theory, how traditional organizations should evaluate their capabilities in order to determine in which of three core processes they have the most competitive advantage? 5. What are the roles an unbundled company may play in a process network? 6. What are the specific capabilities companies should develop in a process network according to their roles? 7. How companies should decide which role to play? 8. What would be the general roadmap for unbundling the corporation as a new strategy for growth?

Once managers find in what core business and capabilities they should invest, they will start to outsource the other non-core processes to specialists. To do this, managers should find their respective organizations' capabilities, classify them in three core processes and decide in which core business they should focus on which to unbundle. As unbundling will result in a network form of organizations, thus some additional capabilities seems to be essential for organizations to apply this strategy.

The first three research questions will try to define and introduce the capabilities embedded in a typical organization. Having the capabilities identified, it is possible to derive a framework for organizations to assess their internal capabilities and determine in which of three core processes they should focus. This point will be addresses by research question number four. After determining the core businesses in which an organization should focus, we will try to explain network related decisions and provide clues for managers to better decide about this important concept. Questions five to seven will provide the answer for this concern. Finally, we will devise a general roadmap for unbundling the corporation as a growth strategy.

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1.6 Research Approach and Organization of Thesis

As we are going to build and testing a theory based on the above research question and due to the lack of direct literature on the topic at hand, we have done extensive literature review, in addition to case studies in order to gain new insights over the unbundled organizations. Some of case studies have done through secondary sources. All of the cases have been chosen as extreme cases, that is, they are all clear examples of unbundled organizations in order to facilitate our process of theory building.

In parallel, the related theories which help us to develop the roadmap have been studied as well. Resource Based View of the firm and Outsourcing models available in literature has been investigated in particular as well as literatures about process networks and orchestration capabilities. Resource Based View will enable us to define and identify capabilities and give us some measures for their evaluations. Moreover, one may find more measures and insight by reviewing the literature on outsourcing. The remaining literature helped us to define network capabilities.

Finally, we conducted three real cases from unbundled companies active in three separate industries to test our findings and frameworks. The cases were conducted through semi-structured interview method. The organization of thesis chapter will be as follow:

••• Chapter One- Unbundling the Corporation: as already presented, this chapter introduces the concept of “Unbundling the Corporation” thoroughly. In addition to introduction, the underlying reasons explaining why this strategy can lead to growth have been discussed. Also, the need for developing a roadmap for managers and scholars was explained and the goals of research in addition to research questions have been presented.

• Chapter Two- Capabilities and their classifications: the aim of this chapter is to provide a practical definition for capabilities. After defining and identifying

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capabilities of organizations based on resource based view of the firm, they have been classified according to unbundling theory.

• Chapter Three- Research Methodology : the aim of this chapter is to clarify the approach toward answering to research questions developed in chapter one.

• Chapter Four- Corporate Capability Mapping: The aim of this chapter is to explain different criteria and aspects that should be taken into account when deciding over capabilities of the organization. The parameters have been extracted from both literature review and secondary case studies.

• Chapter Five- Unbundled Companies in the Network Context: The Roles and Capabilities: the aim of this chapter is to provide the network insight for managers and scholars based on leveraged growth opportunities that networks provide for unbundled companies. Accordingly, different roles and their required capabilities have been discussed. The chapter has been developed by means of theory and secondary case studies in order to provide further evidence of discussion. • Chapter Six- A Roadmap for Unbundling the Corporation: after testing our previously developed theories by conducting real cases, This chapter introduces the roadmap for unbundling the corporation.

• Chapter Seven- Conclusion and Managerial Implications: in this chapter, we have presented the step by step approach we have developed through this research for unbundling the corporation. In addition we have mentioned to research limits and needs for further developments.

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1.7 Summary

In this chapter, the theory of unbundling the corporation was discussed. Its underlying causes were explained and it was mentioned that unbundling should be considered as a growth strategy for organizations. We presented numerous supportive examples regarding this strategy which is well on the way for all industries although with different paces. To exploit this new growth strategy, organizations need a roadmap for unbundling. The aim of this research is, therefore, to develop a roadmap for unbundling the corporation. Research questions developed according to this aim were demonstrated and finally, the research approach and organization of the thesis were discussed.

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Chapter Two Capabilities and Their Classification

2. Capabilities and Their Classification

In chapter one it was discussed over the necessity of developing a roadmap for unbundling the corporation. Accordingly, we proposed five research questions in order to be able to systematically build the roadmap. The essential point in developing a roadmap is defining and classifying the capabilities of an organization in a practical manner. In this chapter, we will provide answers of the three first research questions:

• What are the organizational capabilities? • What is the appropriate framework for identification of organizational capabilities? • What is the classification of capabilities according to unbundling theory?

Based on one the most prominent theories in strategic management, Resource Based View of the Firm (RBV), first, we have defined the capabilities. After achieving a practical definition of capabilities in literature, we have introduced frameworks for their

39 identification in organizations and finally we have classified them based on unbundling theory.

2.1 Strategic Management and Emergence of RBV

The fundamental question in the field of strategic management is how firms achieve and sustain competitive advantage (Bitar & Hafsi, 2007). Competitive advantage results from differentiation among competitors. These differences must be felt in market place (Coyne, 1986). To answer this fundamental question, there have been different paradigms developed by scholars in the field of strategic management. The field of strategy has largely been shaped around a framework first conceived by Kenneth R. Andrews in his classic book The Concept of Corporate Strategy (Collis & Montgomery, 2008).

Andrews (1971) defined strategy as the match between organizational strengths and weaknesses within the environmental opportunities and threats. As a result those resources and competencies which are distinctive or superior to that of rivals may become the basis for competitive advantage if they are matched appropriately to environmental opportunities (Andrews, 1971; Thompson & Strickland, 1990).

Although the power of Andrews’s framework was recognized from the start, managers were given few insights about how to assess either side of the equation systematically. The first important breakthrough came in Michael E. Porter’s book Competitive Strategy (1980). Porter’s work built on the structure-conduct performance paradigm of industrial-organization economics. This approach emphasizes the actions a firm can take to create defensible positions against competitive forces (Teece, Pissano, & Shuen, 1997). The essence of the model is that the structure of an industry determines the state of competition within that industry and sets the context for companies’ conduct – that is, their strategy. Most important, structural forces determine the average profitability of the industry and have a correspondingly strong impact on the profitability of individual corporate strategies (Porter, 1980). This analysis put the spotlight on choosing the “right industries” and, within them, the most attractive competitive positions. Although the

40 model did not ignore the characteristics of individual companies the emphasis was clearly on phenomena at the industry level (Collis & Montgomery, 2008).

As recently as ten years ago, it was thought that most of what it was needed to know about strategy has been developed. Leading companies, such as General Electric, built large staffs that reflected growing confidence in the value of strategic planning. The dominant paradigm in the field during 1980s was the competitive forces approach developed by Porter (1980).

But the rigor of those methods and tools did not last for too long. At the business unit level, the pace of global competition and technological change has left managers struggling to keep up. As markets move faster, managers complain that strategic planning is too static and slow. Strategy has also become deeply problematic at the corporate level. In the 1980s, it turn out that corporations were destroying value by owning the very divisions that had seemed to fit so nicely in their growth/share matrices. Threatened by less smaller, less hierarchical competitors, many corporate underwent dramatic transformation programs and internal reorganizations (e.g. GE an ABB).

Not surprisingly, waves of new approaches to strategy were proposed to address these multiple assaults on the premise of strategic planning. Many focused inward. The total quality management, reengineering, capability based competition, and concept of “excellent companies” as well as learning organizations were born. These approaches, assumed that the roots of competitive advantage has embedded inside of the organization and therefore the external environment received little, if any, attention (Collis & Montgomery, 2008).

Each approach made its contribution in turn, yet how any of them built on or disproved the previously accepted wisdom was unclear. The result: Each compounded the confusion about strategy that overwhelmed managers. After all, a framework that has the potential to cut through much of this confusion emerged from the strategy field: Resource Based View of the Firm.

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2.2 Resource Based View of the Firm

The emerging resource-based view of the firm helps to bridge these seemingly disparate approaches and to full fill the promise of Andrews’s framework. Like the capabilities approaches, the resource-based view acknowledges the importance of company-specific resources and competencies, yet it does so in the context of the competitive environment (Collis & Montgomery, 2008; Teece, Pissano, & Shuen, 1997).

The approach is grounded in economics, and it explains how a company’s resources drive its performance in a dynamic competitive environment. Hence the umbrella term academics use to describe this work: the resource based view of the firm (RBV). The RBV combines the internal analysis of phenomena within companies (a preoccupation of many management gurus since the mid-1980s) with the external analysis of the industry and the competitive environment (the central focus of earlier strategy approaches). Thus the resource-based view builds on, but does not replace, the two previous broad approaches to strategy by combining internal and external perspectives. It derives its strength from its ability to explain in clear managerial terms why some competitors are more profitable than others, how to put the idea of core competence into practice, and how to develop diversification strategies that make sense. The resource-based view, therefore, will be as powerful and as important to strategy in the 1990s as industry analysis was in the 1980s (Collis & Montgomery, 2008).

While the previous approaches are outside-in processes where the planner starts with external analysis and then performs internal analysis, RBV put emphasis on inside- out processes (Teece, Pissano, & Shuen, 1997). According to this theory a detailed analysis of the firm’s resources, capabilities and competences will result in a better understanding of the sources of competitive advantage. Such in-depth understanding can lead to better match between external opportunities and internal strengths because once the corporation knows its areas of strength; it can search the external environment to identify possible ways of better exploiting those strengths (Hitt & Ireland, 1986). RBV assumes that firms own different types of resources which enable them to develop different strategies. A company has a sustained competitive advantage to the extent that it

42 can effectively exploit its resources and to the extent that its competitors are unable to imitate its strategies (Grant, 1991; Peteraf, 1993). Competitive advantage lies behind product markets and rests on the firm’s idiosyncratic and difficult-to-imitate resources.

It is evident that the resource-based perspective focuses on strategies for exploiting existing firm-specific assets. However, the resource-based perspective also invites consideration of managerial strategies for developing new capabilities (Wernerfelt, 1984; Collis & Montgomery, 2008). Indeed, if control over scarce resources is the source of economic profits, then it follows that such issues as skill acquisition, the management of knowledge and know-how learning (Shuen, 1994 Cited by Teece et al, 1997), become fundamental strategic issues. Applying RBV approach in an organization may result in investing in resources and capabilities, upgrading them or leveraging them. So, the RBV perspective is not static, but it considers the need for change and developing new capabilities and resources. Such strategic implications of the RBV come from criteria developed by scholars in order to assessing the resources and capabilities in the organization. One of the most important characteristics of these criteria is that they are market and industry based. In that RBV, to evaluate the resources and capabilities, apply many of the important issues in competitive forces paradigm. This is why RBV is more complete paradigm in strategic planning. We will discuss more over the criteria that should be considered in evaluating the capabilities of the organization in chapter 4 of this thesis.

Reading through the RBV literature, one may face different terminologies such as Core Competence, Competence, Capability and Resources. The aim of RBV is to explain how resources and capabilities of the firm can turn into competitive advantages in the market. To understand what capabilities are, it is required to have review on above terminologies and study their relationships. Although, some scholars have used these concepts interchangeably (e.g. Barney, 1991; Collis & Montgomery, 2008), in the following sections these concepts have been introduced separately based on literature in order to give us necessary insights in continuing our roadmap development process.

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2.2.1 Core Competence

Prahalad and Hamel (1990) have tried to clarify the concept of core competence of the corporation. They develop the idea that competitive advantages stem from core competence of companies. They argue that in long run, competitiveness derives from an ability to build, at lower cost and more speedily than competitors; the core competencies that generate unanticipated products. The real sources of advantage are to be found in management's ability to consolidate corporate wide technologies and production skills into competencies that empower individual businesses to adapt quickly to changing opportunities (Parahalad & Hamel, 1990).

Parahalad and Hamel (1990) consider diversified corporation as a large tree. The trunk and major branches are core products, the smaller branches are business units, the leaves, flowers and fruit are end products. The root system that provides nourishment, food, and stability is the core competence. They believe that one can miss the strength of competitors by looking only at their end products. (See Figure 2.1)

They define the core competencies as: "Core competencies are the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies." For example Sony's capacity to miniaturize can be assumed as as its core competencies. The theoretical knowledge to put a radio on a chip does not in itself assure a company the skill to produce a miniature radio no bigger than a business card. To bring off this achievement, Sony must harmonize Know-How in miniaturization, microprocessor design, material science, and ultra thin precision casing- the same skills it applies in its miniature card calculators, pocket TVs and digital watches (Parahalad & Hamel, 1990).

Moreover, they emphasize on the relation between value and core competencies "If core competence is about harmonizing streams of technology, it is also about the organization of work and delivery of value." Considering Sony's competencies in miniaturization, Sony must ensure that technologists, engineers, and marketers have a shared understanding of customer needs and of technological possibilities. In fact, core

44 competencies should turn into marketable products and they should satisfy needs and demands of customers (Parahalad & Hamel, 1990).

Finally, describing the characteristics of core competencies, Parahalad and Hamel (1990) point out to the very important issues. "Core competence does not diminish with use, unlike physical assets, which do deteriorate over time, competencies are enhanced as they are applied and shared. But competencies still need to be nurtured and protected; knowledge fades if it is not used. Competencies are the glue that binds existing businesses. They are also engines for new business development. Patterns of diversification and market entry may be guided by them, not just by attractiveness of markets."

While Prahalad and Hamel (1990) have made a great contribution in defining the concept of core competence, but there are still some vague expressions in their definitions. There are two problems with their definition (Javidan, 1998). First, it is too narrow, that is, it only focuses on a limited aspect of the company’s value chain, mostly in manufacturing, ignoring the many possibilities in other steps throughout the value system. Second, their definition has generated some confusion as to the relationship between competencies and capabilities. Without a clear operational definition, it is difficult for an organization to embark on a process of identifying and exploiting its competencies. Javidan (1998) has tried to better clarify this definition when he states "Core competencies are the corporation’s fundamental strengths. They are things that the company does very well". Once core competencies are identified, the company can then examine possible opportunities where such competencies can lead to new products or new markets (Grant, 1991).

At least 3 tests can be applied to identify core competencies in a company (Parahalad & Hamel, 1990):

• First, a core competence provides access to a wide variety of markets. • Second, a core competence should make a significant contribution to the perceived customer benefits of the end products.

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• Finally, a core competence should be difficult to competitors to imitate and it will be difficult if it is a complex harmonization of individual technologies and production skills. A rival might acq uire some of the technologies that comprise the core competence, but it will find it more difficult to duplicate the more or less comprehensive pattern of internal coordination and learning.

In addition to above criteria, the core product may be an approp riate way in identifying the core competences. The tangible link between identified core competencies and end products is what we call the core products - the physical embodiments of one or more core competencies . Honda's engine, for example, is core produ cts, linchpins between design and development skills that ultimately lead to a proliferation of end products. Core products are the components or subassemblies that actually contribute to the value of the end products .

Figure 02-1 Core Competence, Core Product and End Products Forming a Tree

Source: Parahalad & Hamel (1991 )

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Based on what has been provided above, one can see that identifying core competences is a difficult task in practice. It is a complex and challenging concept: it is difficult to specify theoretically, to identify empirically as a phenomenon, and to apply in practice. Make it practical, we can take the three criteria into account in specifying core competences. So based on Parahalad and Hamel (1990), a competence that satisfies the above criteria are taken as core competence (Ljungquist, 2007). The criteria imply a hierarchy of quality between a core competence and a competence; the former is more advanced, but to determine the former we first need to define and identify the latter.

2.2.2 Competences

Competencies are commonly agreed to reside in individuals and teams of individuals, implying that the competence concept involves a cumulative hierarchy. This cumulative hierarchy notion is evident in many streams of research concerning the RBV concepts: i.e. single-, double-, and triple-loop learning, which are based on competencies, capabilities, and dynamic capabilities, respectively (Savory, 2006). Another researcher has adopted similar notions of hierarchy: i.e. first-order competence, which comprises customer and technological competencies; integrative competence, which is the ability to combine the previous competencies; and second-order competence, which is the ability to create first-order competencies (Danneels, 2002).

A competence has been defined as “ a cross-functional integration and co- ordination of capabilities and as a set of skills and know-how resident in strategic business units ” (Javidan, 1998). Another scholar has defined the concept as “ the ability to sustain the coordinated deployment of assets in ways that help a firm achieve its goals ” (Sanchez, 2004). Ljungquist (2007) believes that the first quotation is quite vaguely expressed, and since we do not know what the scholar means by “co-ordination” and “integration”, it is difficult to apply Javidan’s definition. The second quotation is expressed differently, implying a capacity directed towards goals. Still, an expression such as “. . . sustain the coordinated deployment of assets . . .” blurs the meaning, and makes it inapplicable to practice.

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As discussed above a competence refers to a quality inherent in individuals or teams of individuals, a quality that develops and refines something (e.g. capabilities, resources), occasionally to a visionary end (e.g. to generate sustainable profits). Ljungquist (2007) applies the general notion and conceptually defines a competence as developments made by individuals and teams . In another study, he proposes that a competence should have improvements as its main empirical characteristic and therefore he defines a competence as improvement f or example, an R&D department’s competence to innovate, to develop products with external partners (Ljungquist, 2008).

If we apply the definition of Ljungquist (2007), it would be more likely to identify competences in a practical manner. Moreover, by considering the three criteria proposed by Parahalad and Hamel (1990) it would be possible to distinguish core competences out of competencies.

2.2.3 Capability

Capabilities play a critical role in the RBV theory. The notion of dynamism and adapting with changing environment derive from their extension. Due to their importance there are so many literatures about them. In this section, it has been tried to present this important concept in a modular way and make it understandable for readers. Before going to any classification, firstly the general definition and concepts related to capabilities have been presented.

Stalk et al. (1992) believes that competition is now the "war of movement" in which success depends on anticipation of market trends and quick response to changing customer needs. Successful competitors move quickly in and out of products, markets, and sometimes even entire business. In such an environment, the essence of strategy is not the structure of company's products and markets but the dynamics of its behavior. And the goal is to identify and develop the hard to imitate organizational capabilities that distinguish company from its competitors in the eyes of customers.

Stalk and his colleagues (1992) introduce four principles of capability based competition as follow:

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1. The building blocks of corporate strategy are not products and markets but business processes. 2. Competitive success depends on transforming a company's key processes into strategic capabilities that consistently provide superior value to the customer. 3. Companies create these capabilities by making strategic investments in support infrastructure that links together and go beyond traditional SBUs and functions. 4. Because capabilities necessarily cross functions, the champion of a capabilities based strategy is the CEO.

They define capability as set of intertwined business processes strategically understood. Every company has business processes that deliver value to customer. But few think of them as the primary objective of strategy. Capabilities- based companies identify their key processes, manage them centrally, and invest in them heavily, looking for a long-term payback (Stalk, Evans, & Shulman, 1992).

Moreover, Stalk and his colleagues (1992) address the important point which is embedded in their definition of capabilities 'Strategically understood'. “What transforms a set of individual business processes into strategic capability is to connect them to real customer needs. A capability is strategic only when it begins and ends with customer. These companies consider the organization as a giant feedback loop that begins with identifying the needs of customer and ends with satisfying them.”

2.2.3.1 Classification of Capabilities

There are some classifications of capabilities available in the literature. One important point about these classifications is that they are all due to extending RBV in facing with changing environment. In this section, based on literature, some of these classifications have been presented. To make them distinctive, the name of scholar, whose ideas have been used, has been applied as a title of subsection in two of the following subsections.

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2.2.3.1.1 George Day: Market Driven Capabilities

This scholar defines capabilities as “complex bundles of skills and collective learning, exercised through organizational processes that ensure superior coordination of functional activities. Capabilities and organizational processes are closely entwined, because it is the capability that enables the activities in a business process to be carried out.” (Day, 1994)

He classifies capabilities into three categories, depending on the orientation and focus of the defining processes (See Figure 2.2): At one end of the spectrum are those that are deployed from the Inside-out and activated by market requirements, competitive challenges, and external opportunities. Examples are manufacturing and other transformation activities, logistics, and human resource management, including recruiting, training, and motivating employees. At the other end of the spectrum are those capabilities whose focal point is almost exclusively outside the organization. The purpose of these Outside-in capabilities is to connect the processes that define the other organizational capabilities to the external environment and enable the business to compete by anticipating market requirements ahead of competitors and creating durable relationships with customers, channel members, and suppliers.

0Figure 2-2 Capabilities of Market-Driven Organizations Source: Day (1994)

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Finally, Spanning capabilities are needed to integrate the inside-out and outside- in capabilities. Strategy development, new product/service development, price setting, purchasing, and customer order fulfillment are critical activities that must be informed by both external (outside-in) and internal (inside-out) analyses.

After, presenting the above mentioned classification, he introduced the concept of “Market-driven organizations” which are organizations with superior market sensing, customer linking, and channel bonding capabilities. The processes underlying their superior capabilities are well understood and effectively managed and deliver superior insights that inform and guide both spanning and inside-out capabilities. The effect is to shift the span of all processes further toward the external end of the orientation dimension (Day, 1994). For example, one may consider the dramatic change in human resource management if rewards will be based on customer satisfaction or recruitments will be based on customer problem-solving skills. That is, bonding and orienting the internal processes and capabilities by external capabilities (Day, 1994).

2.2.3.1.2 Collis Classification of Capabilities

Collis (1994) has proposed three levels capabilities: the first category of capabilities are those that reflect an ability to perform the basic functional activities of the firm, such as plant layout, distribution logistics, and marketing campaigns, more efficiently than competitors . One may consider other scholar definitions similar to the first category of capabilities introduced by Collis (1994). For instance, Amit and Schoemaker (1993) define capabilities as “developed in functional areas, e.g., brand management ; Stalk et al. (1992), as “a set of business processes strategically understood”; and finally, Grant (1991) observes that “capabilities can be identified and appraised using a standard functional classification of the firm's activities”.

Collis (1994) defines the second category of capabilities as “the common theme of dynamic improvement to the activities of the firm”. Moreover, similar definitions are identifiable in literature as a support for this definition. For instance, “repeated process or product innovations, manufacturing flexibility, responsiveness to market trends, and short development cycles” (Amit & Schoemaker, 1993); “dynamic routines that govern

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'the ability of an organization to learn, adapt, change and renew over time (Teece, Pisano, & Shuen, 1994)

The third category of capabilities, although closely related to dynamic improvements, comprises the more metaphysical strategic insights that enable firms to recognize the intrinsic value of other resources or to develop novel strategies before competitors. Analogous definitions are available in literature such as Barney (1992) when he defines capabilities as “those organizational characteristics that enable an organization to conceive, choose and implement strategies” (Brney, 1992), or “the organizational abilities to deploy the firm's resources and to develop new ones” (Henderson & Cockburn, 1994).

It is difficult to make hard and fast distinctions among the three categories of capabilities since they all concern the ability of firms to perform an activity (be it static, dynamic or creative) more effectively than competitors with otherwise similar resource endowments (Collis, 1994)

2.2.3.1.3 Dynamic Capabilities

The importance of dynamic capabilities is to enable RBV to explain the success of companies in rapid changing markets such as semiconductors (Teece, Pissano, & Shuen, 1997). Some scholars distinguished capabilities as being either operational or dynamic. Operational capabilities include all the routines generally involved when performing an activity such as manufacturing, whereas dynamic capabilities are those that build, integrate, and reconfigure operational capabilities (Helfat & Peteraf, 2003; Eisenhardt & Martin, 2000).

Although the term “Dynamic Capabilities” has been investigated separately in this section, the concept is much similar to what has been explained by Day (1994) or Collis (1994) in previous sections. For example, Day (1994) introduced outside-in capabilities which their very aim is to proactively prepare organization for needed changes initiating from market. Also, the third category of capabilities introduced by Collis (1994) is completely the same as dynamic capabilities. Due to the abundant literature which is

52 available in dynamic capabilities, we have briefly introduced the concept in a categorized manner.

• Definitions

Teece et al., define dynamic capabilities as "the firm's ability to integrate, build and reconfigure external and internal competences to address rapidly changing environment" (Teece, Pissano, & Shuen, 1997). An important point here is the definition of competences in their above explanation. They call processes and routines as competences of an organization. Considering this, one may easily notice that underlying bases for dynamic capabilities are processes and routines. However, those built to respond the changing environment of the organizations.

In another definition, “ Dynamic capabilities are the antecedent organizational and strategic routines by which managers alter their resource base—acquire and shed resources, integrate them together, and recombine them—to generate new value-creating strategies " (Pisano, 1994; Grant, 1996a) As such, they are the drivers behind the creation, evolution, and recombination of other resources into new sources of competitive advantage (Henderson & Cockburn, 1994).

• Characteristics

Eisenhardt and Martin (2000) have identified some characteristics of dynamic capabilities as summarized below:

A. First, dynamic capabilities consist of specific strategic and organizational processes like product development, alliancing, and strategic decision making that create value for firms within dynamic markets by manipulating resources into new value-creating strategies. Dynamic capabilities are neither vague nor tautologically defined abstractions.

B. Second, these capabilities, which often have extensive empirical research streams associated with them, exhibit commonalities across effective firms or what can be

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termed ‘best practice.’ Therefore, dynamic capabilities have greater equifinality, homogeneity, and substitutability across firms than traditional RBV thinking implies.

C. Third, effective patterns of dynamic capabilities vary with market dynamism. When markets are moderately dynamic such that change occurs in the context of stable industry structure, dynamic capabilities resemble the traditional conception of routines. That is, they are complicated, detailed, analytic processes that rely extensively on existing knowledge and linear execution to produce predictable outcomes. In contrast, in high-velocity markets where industry structure is blurring, dynamic capabilities take on a different character. They are simple, experiential, unstable processes that rely on quickly created new knowledge and iterative execution to produce adaptive, but unpredictable outcomes.

• Toward a New Perspective on the RBV

As noted earlier, effective dynamic capabilities have commonalties across firms in terms of key features (popularly termed, ‘best practice’). Therefore, they violate the RBV assumption of persistent heterogeneity across firms (Eisenhardt & Martin, 2000).

So, while firms with more effective dynamic capabilities such as superior product innovation and alliancing processes are likely to have competitive advantage over firms with less effective capabilities, dynamic capabilities are not themselves sources of long- term competitive advantage. “So where does the potential for long-term competitive advantage lie? It lies in using dynamic capabilities sooner, more astutely, or more fortuitously than the competition to create resource configurations that have that advantage. Therefore, long-term competitive advantage lies in the resource configurations that managers build using dynamic capabilities, not in the capabilities themselves. Effective dynamic capabilities are necessary, but not sufficient, conditions for competitive advantage” (Eisenhardt & Martin, 2000)

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2.2.4 Resource

Resources are basic to an organization and are natural objects of study, since they form inputs to the value process (Grant, 1991; Eisenhardt & Martin, 2000). Resources are identified as sources of sustainable competitive advantage if they are valuable, rare, inimitable, and non-substitutable (Barney, 1991). Ljungquist (2007) defines resources in accordance with the general sense found in the literature reviewed (e.g. Grant, 1991), as inputs to the value process in an organization.

Barney (1991) categorizes resources into three groups: physical resources such as plant, equipment, location and assets; human resources such as manpower, management team, training and experience; and organizational resources such as culture and reputation. Some resources are tangible and physical such as plant and equipment and others are intangible like a brand name.

Resource heterogeneity and immobility is the basic assumption in RBV theory (Barney, 1991) although some scholars believe that this assumption is dissipating due to the rapid changing environment (Collis, 1994; Eisenhardt & Martin, 2000).

2.3 Linking RBV Concepts: Building a Unified Framework

The RBV concepts (Core competencies, competencies, capabilities, and resources) are not mutually exclusive, according to literature, there are associations among them. In this section, two major frameworks connecting the concepts of RBV theory together, have been introduced and explained. The first framework belongs to Javidan (1998). He assumes a hierarchical structure among RBV concepts (See Figure 2.3).

Each corporation has a bundle of resources, but not every firm can put its resources into best use. Companies vary in how they leverage their resources. Javidan (1998) defines the Capabilities as the corporation’s ability to exploit its resources. Therefore, they are the second level in the hierarchy and consist of a series of business

55 processes and routines that manage the interaction among its resources. A process is a set of activities that transform an input into an output (Javidan, 1998).

0Figure 2-3 Hierarchy of RBV Concepts

Source: Javidan (1998)

Javidan (1998) believes that the distinguishing feature of capabilities is that they are functionally based. A capability is resident in a particular function. For example, there are marketing capabilities, production capabilities, distribution and logistics capabilities and human resource management capabilities.

Javidan (1998) then introduces a competency as the third level in the hierarchy, and defines it as a cross-functional integration and co-ordination of capabilities. In a multi-business corporation, competencies are a set of skills and know-how’s housed in an SBU. They result from interfaces and integration among the SBU’s functional capabilities. For example, a particular SBU may possess the competency of developing successful new products. Such a competency may be the consequence of integrating MIS capabilities, marketing capabilities, R&D capabilities and production capabilities.

Finally, core competence would be at the top of the hierarchy as it is created from the interaction between different SBUs’ competencies. Core competencies are skills and areas of knowledge that are shared across business units and result from the integration and harmonization of SBU competencies. A core competency is a collection of competencies that are widespread in the corporation (Javidan, 1998).

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Several features are important about the hierarchy in figure 2.3. First, each level in the hierarchy is based on the level below. It results from the integration of the elements in the lower level. Secondly, each level encompasses a higher level of value added for the company. Resources on its own add little value. Functional capabilities generate value by deploying resources. Competencies add greater value because they expand the boundaries of capabilities. They result from synergies among capabilities. Core competencies add the greatest value since they exploit resources and capabilities at the broadest level, across the corporation as a whole. Take the case of a consulting firm with several offices located in different cities. Each geographic location may have developed, over time, a series of specific skills, such as consulting to health care organizations or to the upstream oil industry. To the extent that the firm can leverage this knowledge across its network of offices, it can realize greater value. So it can develop and possess a core competency in health care management consulting by ensuring that the particular office with this expertise is available to others, and that it helps other offices develop the same set of skills if they choose to (Javidan, 1998).

Finally the fact that the higher levels of the hierarchy have a broader organizational scope means that they are more difficult to accomplish. Developing a functional capability requires co-operation of the individuals in one function. Achieving competencies requires the integration and co-ordination of several functions in the same SBU. Exploiting core competencies depends on the corporation’s ability to achieve integration, communication and co-operation between the different SBU’s and other parts of the company. The larger the number of the individuals involved, and the greater the variety of skills and backgrounds, the harder it is to make it happen (Javidan, 1998).

The second framework, linking RBV concepts together, belongs to Ljungquist (2007). While Javidan (1998) puts them into hierarchy Ljungquist (2007) believes that this hierarchy does not necessarily exist. He believes that the framework of Javidan is representation of two hierarchies. Firstly a cumulative one, since the concepts are described as building on each other, and secondly a qualitative one, since higher-order concepts are assumed to be of greater organizational value than lower-order concepts are. He then tries to show that both of these hierarchies are not verified based on literature.

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In his paper Ljungquist (2007) Scrutinizes different definitions on the RBV concepts and defines each in a very practical manner. For core competence he does not provide any definitions and believes that the definition of Parahalad & Hamel (1990) is vague in practical manner. He then tries to define the competence. As discussed in previous section of this chapter, Ljugquist (2007) defines competences as developments achieved by individual and teams. Having competences identified, He can apply the three criteria proposed by Prahalad and Hamel (1990) to distinguish core competences.

He also defines capabilities as "systems and routines ". He, finally, considers resources as inputs of the value process in organization (Ljungquist, 2007).

Having these concepts distinguished by practical definitions, he concludes that "from basic definitional factors we can both conceptually and empirically de-verify most of the notions of hierarchy pertaining to the particular concepts. The associated concepts do not limit each other’s scope. That is, the hierarchical link of the competence concept to the core competence concept does not imply that the capability and resource concepts are similarly linked. Resources, for example, may be of more value to some organizations than capabilities and competencies are. Accordingly, we cannot verify the qualitative aspects of the hierarchy of competencies that Javidan (1998) suggest." (Ljungquist, 2007).

He then continues that "Furthermore, Javidan (1998) also suggests a cumulative hierarchy, though the findings of the review do not support that notion. On the contrary, the review made it obvious that the associated concepts have different characteristics, namely, improvement, support, and utilization. Accordingly it is essential to acknowledge the differences between them”. Thus, Ljungquist proposes that the associated concepts all reside at the same hierarchical level. In a particular company, any one of the associated concepts could be of higher or lower organizational value than is typical. (See Figure 2.4)

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0Figure 2-4 Hierarchy of RBV Concepts Source: Ljungquist (2007)

As evident from figure, competencies are detected by means of improvements, capabilities by supports, and resources by core competence utilizations. Competence improvements are used to manage and change core competencies, capability supports reinforce and create structure before, during, and after change, and resource utilizations are operative and need daily attention.

2.4 Capabilities and their Importance for Organizations

Reviewing the literature on RBV one may find different reasons indicating the undeniable importance of capabilities, making them distinguished among other RBV concepts. Some of those reasons have been summarized in this section. First of all, capabilities play a bridge-like role between two prominent paradigms in strategic management: competitive forces approach and resource based view of the firm. Bridging and connecting these two prominent paradigms in strategic management is essential as it enables companies to exploit strength points of both approaches and therefore better utilize their resources for positioning in the market. The most important difference between the two paradigms is that competitive forces approach toward strategic planning is outside-in while the RBV approach is inside-out. More precisely, according to competitive forces approach, companies should develop capabilities that enable them in scanning their industry and environment in order to better position themselves among active and potential players. However, based on RBV competitive advantage lies behind

59 product markets and rests on the firm’s idiosyncratic and difficult-to-imitate resources and capabilities.

Reminding from section 2.2.3.1.1 of this chapter, one admit that organizations can develop outside-in capabilities to enable them to track the industry environment, product market and competitors (potential or active). Simultaneously, they can develop inside-out capabilities to utilize resources to enable them to achieve the sustainable competitive advantage (Day, 1994). Not only Day’s (1994) classifications of capabilities, but also the notion of dynamic capabilities presented in section 2.2.3.1.3 may illustratively point toward the bridge-like role of capabilities between two strategic management paradigms. In fact, the most noticeable issue about the dynamic capabilities is the emphasis on their ability to address rapidly changing environment (Teece, Pissano, & Shuen, 1997).

The second important aspect of capabilities derives from their intrinsic differences with resources. Whereas resources usually considered to be finite in supply and to diminish in value when shared with other parties, capabilities refer to dynamic, nonfinite, firm specific, and path dependent processes that are not obtainable in the market place, are difficult to copy and are accumulated over time and continuous learning (Spanos & Prastacos, 2004).

The last important aspect of the capabilities is due to their contribution toward core competences in the organization which in turn can be the source of competitive advantage (Grant, 1996b; Grant, 1996a). In section 2.3 of this chapter, two frameworks, explaining the relationship among RBV concepts, were proposed. As it was discussed, in one model (Javidan, 1998) the relationship was articulated through a hierarchy. Therefore, capabilities will play an indirect role in building core competencies. It is noteworthy that although in that model, the capabilities are not directly affecting core competence but they are assumed as the building blocks as the lower levels are cornerstones of higher levels in the hierarchy (See Figure 2.3). However, the second framework, linking RBV concepts, in section 2.4 of this chapter indicates the direct relationship between capabilities and core competencies of the organization (Ljungquist, 2007). As depicted in figure 2.4, capabilities have a supportive role for core competencies

60 of the organization. Whatever effect capabilities have on core competencies and competitive advantage (direct or indirect), the main point is their incontrovertible contribution in building competitive advantage.

In conclusion, the importance of capabilities for organizations have discussed based on three important points derived from literature. First, their contribution in bridging two traditional paradigms of strategic planning, second, their intrinsic differences with resources, and finally, their indisputable effect on competitive advantage. In the coming sections, we will focus on providing the answers of first three research questions of this thesis by means of previous sections discussions as enablers.

2.5 Capabilities and their Relevance to Processes

In previous sections of this chapter, in consistency with literature, the RBV and its associated concepts have been introduced. In this section, we will try to answer the two research questions: “ What are organizational capabilities?” and “What is the appropriate framework for identification of capabilities?” by providing a practical definition for capabilities and then introducing a framework for their identification.

2.5.1 In Pursuit of a Practical Definition of Capabilities

As stated in part 2.2.3, Stalk and his colleagues (1992) introduced four principles of capability based competition as follow:

1. The building blocks of corporate strategy are not products and markets but business processes. 2. Competitive success depends on transforming a company's key processes into strategic capabilities that consistently provide superior value to the customer. 3. Companies create these capabilities by making strategic investments in support infrastructure that links together and go beyond traditional SBUs and functions. 4. Because capabilities necessarily cross functions, the champion of a capabilities based strategy is the CEO.

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In the first principal, one can see that capability based organizations must focus on processes. It indicates that there should be relations between these two concepts. In addition, in the second principal, again one can find the importance of key processes in the organization to create value and competitive advantage. It is logical to assume that these scholars have considered processes as building blocks of capabilities.

The above statements will be proved if one pay attention to Stalk and his colleagues' (1992) definition of capabilities. They define capability as "set of intertwined business processes strategically understood". They believe that every company has business processes that deliver value to customer. " Capabilities- based companies identify their key processes, manage them centrally, and invest in them heavily, looking for a long-term payback " (Stalk, Evans, & Shulman, 1992).Based on above mentioned statements, one can come up to this point that the building blocks of capability-based companies are processes.

George Day (1994), as the second evidence, also mentions to the processes when he defines the capabilities as "complex bundles of skills and collective learning, exercised through organizational processes that ensure superior coordination of functional activities". Then, he adds "Capabilities and organizational processes are closely entwined, because it is the capability that enables the activities in a business process to be carried out". So, based on Day (1994) statement, one may conclude that capabilities are the spirit embedded in processes. Capabilities are imperative material for processes to be run effectively and efficiently. Also, when processes are effective and efficient, they indicate the existence of capabilities (For detail discussion of Day (1994) see section 2.2.3.1.1).

Thirdly, referring the Collis (1994) classification of capabilities and his definition in section 2.2.3.1.2, one may find more evidence on the relationship between capabilities and processes. Collis (1994) defines organizational capabilities as the socially complex routines that determine the efficiency with which firms physically transform inputs into outputs. In his definition, Collis (1994), points out to the notion of "routine" which is the similar to process in definition.

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The fourth evidence comes from dynamic capabilities definition proposed by Teece et al. (1997) presented in section 2.2.3.1.3. They define dynamic capabilities as the firm's ability to integrate, build and reconfigure external and internal competences to address rapidly changing environment . Moreover, they define competences as routines and processes in their article (Teece, Pissano, & Shuen, 1997). So, one can come up to the following definition of dynamic capabilities: "The firm's ability to integrate, build and reconfigure external and internal processes and routines to address rapidly changing environment ". Again the processes are considered as building blocks of capabilities.

Our fifth evidence comes from the Eisenhardt & Martin (2000). In naming the characteristics of dynamic capabilities they mention that " Dynamic capabilities consist of specific strategic and organizational processes like product development, alliancing, and strategic decision making that create value for firms within dynamic markets by manipulating resources into new value-creating strategies."

Our sixth evidence comes from Barney (1991) and Peteraf (1993). Barney and Peteraf have considered the dynamic capabilities as embedded processes in the firm. And finally, our seventh evidence comes from Ljungquist (2007) as he defines capabilities as systems and routines.

Seven evidences from literature in which scholars have regarded processes as building blocks of capabilities have been demonstrated. In some cases, scholars have considered capabilities, processes and routines as the same. Whatever the processes are, either building blocks of capabilities or capabilities themselves, the important point extracted from literature is that they are the focal point in studying the capabilities.

It is noteworthy to be mentioned that considering the processes as capabilities makes the study more convenient (For example, Barney (1991), Peteraf (1993), and Ljungquist (2007)). Accordingly, we accept the definition of these scholars on capabilities in this research. Accepting capabilities as organizational processes, we have provided a practical answer to the first research question “ What are organizational capabilities?” Due to the fact that organizational processes have been well discussed in

63 management science and quality management literature, it will easier to find frameworks for their identification and therefore providing the answer to the second research question.

2.5.2 Organizational Processes as Capabilities: Definitions and Characteristics

Davenport (1993) defines a process as: "A structured, measured set of activities designed to produce a specific output for a particular customer or market. It implies a strong emphasis on how work is done within an organization, in contrast to a product focus’s emphasis on what. A process is thus a specific ordering of work activities across time and space, with a beginning and an end, and clearly defined inputs and outputs: a structure for action. ... Taking a process approach implies adopting the customer’s point of view. Processes are the structure by which an organization does what is necessary to produce value for its customers” (Davenport, 1993).

This definition contains certain characteristics a process must possess. These characteristics are achieved by a focus on the business logic of the process (how work is done), instead of taking a product perspective (what is done). Following Davenport's (1993) definition of a process, one can conclude that a process must have clearly defined boundaries, input and output, that it consists of smaller parts, activities, which are ordered in time and space, that there must be a receiver of the process outcome- a customer - and that the transformation taking place within the process must add customer value.

In another definition, some scholars define a process as "a collection of activities that takes one or more kinds of input and creates an output that is of value to the customer" (Hammer & Champy, 1993) . Rummler & Brache (1995) try to distinguish between two types of processes as they define "A business process is a series of steps designed to produce a product or service. Most processes (...) are cross-functional, spanning the ‘white space’ between the boxes on the organization chart (indicating the cross- functional characteristics of process). Some processes result in a product or service that is received by an organization's external customer. We call these primary processes. Other processes produce products that are invisible to the external customer but essential

64 to the effective management of the business. We call these support processes" (Rummler & Brache , 1995).

The above definition distinguishes two types of processes, primary and support pro cesses, depending on whether a process is directly involved in the creation of customer value, or concerned with the organization’s internal activities. In this sense, Rummler and Brache's definition follows Porter's (1985 ) value chain model, which also b uilds on a division of primary and secondary activities (See Figure 2.5).

Figure 2-5 Porter’s Value Chain (1985)

Summarizing the definitions above, we can compile the following list of characteristics for a business process.

1. Definability: It must have clearly defined boundaries, input and output. 2. Order: It must consist of activities that are ordered according to their position in time and space. 3. Customer: There must be a recipient of the process' outcome, a customer . 4. Value-adding: The transformation taking place within the process must add value to the recipient, either upstream or downstream.

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5. Embeddedness: A process cannot exist in itself; it must be embedded in an organizational structure. 6. Cross-functionality: A process regularly can, but not necessarily must, span several functions.

Having identified the characteristics of organizational processes, we are ready to introduce a complete framework developed by American Productivity & Quality Center in 2006 which enable both academics and practitioners to identify organizational processes or in another term, capabilities.

2.5.3 Key Processes of an Organization: APQC Framework

All the necessary processes of an organization can be categorized in the Porter's (1985) Value Chain. But not necessarily all the organizations have all the processes embedded in the value chain. For instance, Yahoo! has its focus on customer relationship management which can be categorized as marketing processes and unbundled the other processes to specialized partners. While the value chain framework illustrates the key processes of a typical organization, it does not go deeper in order to explain each of those processes in detail and enumerate their respective activities (as it is necessary for capabilities or processes to have definite activities and explanations).

As the aim of this research is to develop a roadmap for unbundling the corporation, being specific is required. It is needed to apply tools that enable both academics and scholars to exploit them in a very easy and simultaneously detail manner. Thus, we introduce a model developed by American Productivity & Quality Center (APQC, 2008). This framework has a general map which seems to be an extended version of Porter’s value chain. This map illustrates the key processes of a typical organization. It should noteworthy again to be reminded that all of these capabilities or processes are not necessarily embedded in an organization. As discussed in chapter one, unbundled organizations focus on some part of this map in which they have more competitive advantage and expertise and release the remaining processes to the other specialized partners. For our current purpose, it is necessary to introduce this framework as a whole.

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One advantage of this framework in comparison with Porter’s value chain is that APQC has named the sub processes of each key process in the framework. In this way, scholars, consultants and managers will be easily able to evaluate their capabilities in detail and decide better over the unbundling decision. The following picture is demonstrating level zero of APQC capabilities. They have introduced sub-processes in detail in more additional three levels (See Figure 2.6)

0Figure 2-6 Organizational Process Source: APQC (2008)

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As evident from figure 2.6, there are two categories of capabilities or processes identifiable in an organization: operating and supportive processes. Operating processes are those which are directly affect the creation of value for external customers. On the other hand, management and support services are those which its customers are mostly internal members of an organization. However, in addition to internal customers, the supportive capabilities or processes can also serve members of a network cooperating with each other (Unbundled Organizations). We will discuss over those capabilities more in detail in subsequent chapters.

2.6 Classification of Capabilities According to Unbundling Theory

As discussed in detail in chapter one of this thesis, managers and scholars should simultaneously think to two interrelated and subsequent aspects of unbundling theory. First of all, they should determine in which of three core processes, proposed by Hagel and Singer (1999), they have the more competitive advantage and expertise. Based on theory of unbundling, there are three core business processes in many existing traditional organizations: infrastructure management business (IMB), product innovation and commercialization (PIC) and customer relationship management (CRM). As explained, the underlying economics, culture and even competition of these processes are conflicting and traditional companies are unnatural bundles of these three core processes. This unnatural bundle, results in a less efficient and effective company. It was also discussed that these three capabilities cannot be simultaneously optimized.

The second aspect of applying this strategy for exploiting growth is thinking of network that will emerge after unbundling the core processes. A corporation after making decision about focusing on one of those core processes and unbundle the two others, will have two options in general to achieve more growth opportunities: to enter an existing network of specialized companies and adapt the policies of the organizer of that network and try to collaborate with its members or to form a new network and play the role of a

68 leader (shaper or orchestrator) for members joining that network. Whatever the role of the company, managers need to think of network capabilities and processes which facilitate the coordination and relationships among members. These types of capabilities, in this research are called network capabilities. By term network capabilities we imply general capabilities that each company, regarding its role in the networks should develop and have to better coordinate and align its internal processes with those of networks. These capabilities in addition to being a support for internal processes of an organization may have a great impact on network members (e.g. IT and communication capabilities). In addition to these general network capabilities, there are specific capabilities based on the role a company chooses to play in a network. These types of capabilities have been discussed in detail in chapter 5.

In the following table, we have classified the organizational processes list of APQC (2008) by asking some of scholars to assign each process to its specific core category (IMB, PIC or CRM). Detail classification of sub-capabilities and processes would be similar and as the same as the classification in the general level. For example if Marketing and Sales capabilities of APQC are classified as CRM (based on unbundling) all of their sub-processes in the APQC list of processes, will be classified as CRM capabilities.

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Unbundling Theory Classification

Supportive 4 & General Network Level Zero: Key Capabilities of an Organization IMB PIC CRM Capabilities 1.0 Develop Vision and Strategy X 2.0 Design and Develop Products and Services X 3.0 Market and Sell Products and Services X 4.0 Deliver Products and Services X OPERATING

CAPABILITIES 5.0 Manage Customer Service X 6.0 Develop and Manage Human Capital X 7.0 Manage Information Technology X 8.0 Manage Financial Resources X 9.0 Acquire, Construct, and Manage Property X 10.0 Manage Environmental Health and Safety X (EHS)

SUPPORTIVE SUPPORTIVE 11.0 Manage External Relationships X MANAGEMENT 12.0 Manage Knowledge, Improvement and CAPABILITIES AND AND CAPABILITIES X Change Table 02- 01 Classification of Capabilities based on Unbundling Theory

4 By the term “supportive” we imply the internal aspects of these capabilities. In fact, these capabilities have applications in both internal affairs of an organization and in networks of its external environment. For instance, IT capabilities are required both for managing internal works in an organization and for external relationships with partners. Therefore, we have named the column as Supportive and Network capabilities.

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Applying the APQC list of capabilities (processes) and adapting it with the theory of unbundling enable us to develop useful tools assisting managers and scholars in better decision making over processes. Table 2.1 is the answer to our third research question “What is the classification of capabilities according to theory of unbundling?”

2.7 Summary

The aim of this chapter was to answer to the first three research questions of this thesis. As the focal point of those research questions was the concept of organizational capabilities, we need firstly to introduce Resource Based View of the firm as one the most prominent theories in strategic management field. Introducing RBV and its related concepts enabled us to practically define organizational capabilities. Having capabilities defined as processes, we then introduce a very inclusive framework of APQC (2006) for process identification in an organization. Answering the first two research questions, we then explained unbundling capabilities and classify APQC capabilities according to them and thus having the third research question answered.

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Chapter Three Research Methodology

3. Research Methodology

The importance of developing a roadmap for unbundling the corporations have been discussed in previous chapters. It was also argued that the Resource Based View of the Firm can be applied as an underlying theory in order to enable us to build our roadmap on. The resource based view of the firm provides salient answers to some of our research questions which have been discussed in previous chapters. Still some of the research questions remain unanswered and need further investigation. In order to completely answer to the research questions and therefore deriving a roadmap for unbundling the corporation, we need to gather both secondary and primary data with more emphasis on the latter as the subject of the study has not directly and sufficiently discussed in the literature. In this chapter, our scientific process toward answering the research questions of this study has been discussed. In the next coming

72 chapters, the data gathered and related analysis and results have been presented, leading to a complete picture of the roadmap. The methodology utilized in this research has been designed in a stepwise manner which has been depicted in figure 1. The process (The Research Onion) has different layers each containing different parts. The outer layer of this onion is where the methodology starts. The approach toward deriving a sound methodological approach is from top to bottom. As it gets through the inner layers of the onion, the methodological steps which have been taken become more specific and clear. In the following sections, firstly, the research philosophy behind this study has been debated. Then, the research approach and research strategy have been derived. Consequently, the data collection method has been discusses. After all, the validity and reliability of the methods have been discussed and finally the sampling procedure is presented.

0Figure 3-1 the Research Process Onion

Source: Saunders, Lewis, & Thornhill (2000)

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3.1 Research Philosophy

The research philosophy depends on the way that researcher thinks about the development of knowledge. Two views about the research process dominate the literature: Positivism and Phenomenology . They are different, if not mutually exclusive, views about the way in which knowledge is developed and both have a crucial part to play in business research (Saunders, Lewis, & Thornhill, 2000). Although it is not practical in doing a research, the importance of knowing the research philosophy is to give the researcher a global insight into the way he/she is contributing to the process of knowledge development. Identification oneself philosophy, the researcher can better select approaches and strategies toward the research project.

3.1.1 Positivism In this realm, the researcher adopts the philosophical stance of the natural scientist (Saunders, Lewis, & Thornhill, 2000). The end product of such research can be law-like generalizations similar to those produced by the physical and natural scientists (Remenyi, Williams, Money, & Swartz, 1998). There would be an emphasis on a highly structured methodology to facilitate replication (Gill & Johnson, 1997) and quantifiable observations that land themselves to statistical analysis (Saunders, Lewis, & Thornhill, 2000).

3.1.2 Phenomenology Those in favor of phenomenological philosophy acclaim that business situations are complex and unique and are function of particular set of circumstances and individuals. The phenomenologist would argue that generalisability is not of crucial importance. As the business environment is sufficiently turbulent they believe that the circumstances of today may not apply in future, therefore some of the value of generalization is lost. In addition, as organizations are unique entities again generalization will have less value (Saunders, Lewis, & Thornhill, 2000). However, the strongest argument the phenomenologist could mount is the necessity to discover “the details of the situation and the reality working behind them” (Remenyi, Williams, Money, & Swartz, 1998).

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Accordingly, as “Unbundling” has not sufficiently discussed in the literature, there is not any model or roadmap developed to enable managers and scholars in order to apply it in different contexts and organizations. That is, the philosophy of positivism can’t be applied for this study at the beginning. To develop a roadmap, the need for discovering the details and underlying realities behind the unbundled organizations seems to be necessary. Therefore, the research philosophy of phenomenology is required. However, completing each step in our research, we have tested our findings in order to increase the reliability of our roadmap. Testing theory will be categorized as positivistic philosophy. Therefore, the philosophy of this research is a combined and mixed one.

3.2 Research approach

The extent to which the researcher is clear about the theory at the beginning of the research process determines the approach being applied: deductive or inductive (Saunders, Lewis, & Thornhill, 2000).

3.2.1 Deduction: Testing Theory

This approach to research owes much to what we think of as scientific research. It involves the development of a theory that is subjected to a rigorous test. As such, it is the dominant research approach in the natural sciences where “laws provide the bases of explanation, permit the anticipation of phenomena, predict their occurrence and therefore allow them to be controlled” (Hussey & Hussey, 1997). Robson (1993) lists five sequential stages through which deductive research will progress: • Deducing a hypothesis (a testable proposition about the relationship between two or more events or concepts) from the theory. • Expressing the hypotheses in operational terms (i.e. ones indicating exactly how the variables are to be measured) which propose a relationship between two specific variables. • Testing these operational hypotheses. This will involve an experiment or some other form of empirical inquiry.

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• Examining the specific outcome of the inquiry. It will either tend to confirm the theory or indicates the need for its modification. • If necessary, modifying the theory in the light of the findings. An attempt is then made to verify the revised theory by going back to the first step and repeating the whole cycle. A schematic view of deductive approach has been depicted in figure 3.2.

Figure 3-2 Deductive Approach

In addition, Saunders , et al, (2000) enumerate some of the characteristics of the deductive approach as follows: • The search to explain causal relationships between variables by building hypotheses. • Controlling the testing environment of the model in order to ensure validity • Testing of hypotheses through statistical and quantitative approaches. • Applying a highly structu red methodology to facilitate replication to ensure reliability. • Using principles of reductionism as the general problems will be broken down to the simplest possible elements in order to be better understood. • Having access to sufficient sample size is cr ucial in order to facilitate generalization of the theory.

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3.2.2 Induction : Building Theory

An alternating approach to conducting research is induction. The purpose here would be to get a feel of what was going on, so as to understand better the nature of the problem (Saunders, Lewis , & Thornhill, 2000). The task of the researcher is developing a theory based on the data he or she has collected. In an inductive approach the theory would follow data rather than vice versa as in the deductive approach (Saunders, Lewis, & Thornhill , 2000) (See Figure 3.3).

0Figure 3-3 Inductive Approach

Research using inductive approach would be particularly concerned with the context in which such events were taking place. Therefore, the study of a small sample of subjects may be more appropriate than a large number as with the deductive approach. Researchers in this tradition are more likely to work with qualitative data and to use various methods to collect these data in order to establish different views of phenomena (Easterby-Smith, Thorpe , & Lowe, 1991).

3.2.3 Comparison between deductive and inductive approaches to research

Major di fferences between deductive and inductive approaches have been summarized in table 3.1.

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Deduction emphasizes Induction emphasizes

Scientific principles
A close understanding of the research context
Moving from theory to data
The collection of qualitative data
A more flexible structure to
The need to explain causal permit changes of research relationships between variables emphasis as the research progresses
The collection of quantitative
A realization that the researcher is data part of the research process
The application of controls to
Less concern with the need to ensure validity of data generalize
The highly structured approach to ensure reliability
Researcher independence of what is being researched
The necessity to select samples of sufficient size in order to

generalize conclusions

0Table 3-1 Major Differences between Deductive and Inductive Approaches

Source: Saunders et al., 2000

Cresswell (1994) suggests a number of practical criteria to ease research approach adoption. Perhaps the most important of these is the nature of the research topic. A topic on which there is a wealth of literature from which you can define a theoretical framework and a hypothesis lends itself more readily to the deductive approach. With research into a topic that is new and exciting much debate, and on which there is little existing literature, it may be more appropriate to generate data and analyze and reflect on what theoretical themes the data are suggesting.

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Another important issue regarding the selection of the research approach is the time available for conducting the research. Deductive research can be quicker to complete, albeit that time must be devoted to setting up the study prior to data collection and analysis. On the other hand, inductive research can be much more protracted. Often the ideas, based on a much longer period of data collection and analysis, have to emerge gradually. In terms of risks, the deductive approach can be a lower risk strategy albeit that there are hazards, such as the non-return of questionnaires. With induction the researcher has constantly to live with the fear that no useful data patterns and theory will emerge. Above, key different points between deductive and inductive approaches have been discussed. However, it would be misleading to impress that there are rigid divisions between two approaches. Not only is it perfectly possible to combine approaches within the same piece of research, but it is often advantageous to do so (Saunders, Lewis, & Thornhill, 2000). In this research, we have combined the two approaches. Our roadmap consists of two important aspects: internal aspects of an organization and network aspects. For each of these two aspects, we will develop a framework which can be applied by practitioners. Having the frameworks developed (inductive approach), we will test them through secondary and real case studies (deductive approach). So the approach of this research is a combination of both inductive and deductive ones.

3.3 Research Strategy

The research strategy is a general plan about answering the research questions. It will contain clear objectives, derived from research questions, specify the sources of data collection and consider constraints (e.g. access to data, time, location and money, ethical issues) which a researcher would face in future (Saunders, Lewis, & Thornhill, 2000). Fundamentally, the research strategy reflects the fact that the researcher has thought carefully about why he/she is employing a particular strategy. Finally, a clear distinction between strategy and tactics should be made. The former is concerned with the overall approach a researcher adopts, the later is about the finer detail of data collection and analysis (Saunders, Lewis, & Thornhill, 2000).

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In addition to deciding over the general research strategy, the researcher needs to determine the time horizon and also the purpose of the research, all of them have been discussed subsequently.

3.3.1 General Research Strategies In this section we are going to briefly introduce different research strategies and explain the appropriate strategy which has been adopted in this research. General strategies for conducting research include: experiment, survey, case study, grounded theory, ethnography, and action research.

3.3.1.1 Experiment

Experiment is a classical form of research that owes much to the natural sciences, although it features strongly in many social science researches, especially psychology. It involves the definition of theoretical hypothesis, sample selection, allocation of samples to different experimental conditions, introduction of planned change on one or more of the variables, measurement on a small number of variables and control of other variables (Saunders, Lewis, & Thornhill, 2000). In such research, there is a tendency to make use of hypotheses which the experiment seeks either to support or refute, so experimental research is usually categorized as deductive (Gray, 2004).

3.3.1.2 Survey

Surveys are described as a system for collecting information to describe, compare, or explain knowledge, attitudes and behavior (Fink, 1995). But many surveys go further than this, looking for associations between social, economic and psychological variables and behavior (Gray, 2004). The survey method is usually but not always associated with the deductive approach. As survey allows the collection of large amounts of data from sizeable populations in highly economical ways (often questionnaires), it is exceedingly popular among business and management scholars. Three main data collection devices which belong to the survey category are: questionnaire, structured interview and structured observation (Saunders, Lewis, & Thornhill, 2000).

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However, the data collected by the survey method may not be as wide ranging as those collected by the qualitative methods. There is a limit to the number of questions that any questionnaire can contain if the goodwill of the respondent is not to be presumed on too much (Saunders, Lewis, & Thornhill, 2000).

3.3.1.3 Case Study

Case study is defined as the development of detailed, intensive knowledge about a single case, or a small number of related cases (Robson, 1993). This strategy will be appropriate if the researcher wish to gain a rich understanding of the context of the research and the processes being enacted (Morris & Wood, 1991). The case study approach also has considerable ability to generate answers to the question “why” as well as “what?” and “how?” questions (Robson, 1993), although “what” and “how” questions tend to be more the concern of the survey method (Saunders, Lewis, & Thornhill, 2000). The data collection methods employed in this kind of research may include questionnaires, interviews, observations and documentary analysis (Saunders, Lewis, & Thornhill, 2000), but the main reliance is on qualitative data (Cooper & Schindler, 2003). In spite of the unscientific feel this kind of research has, a simple well-constructed case study can enable the researcher to challenge an existing theory and also provide a source of new hypotheses (Cooper & Schindler, 2003; Saunders, Lewis, & Thornhill, 2000) and constructs simultaneously and have a significant scientific role (Cooper & Schindler, 2003).

3.3.1.4 Grounded Theory

Grounded theory (Glaser & Strauss, 1967) is often thought of as the best example of the inductive approach, although this conclusion would be too simplistic. It is better to think of it as a theory building through a combination of induction and deduction. In grounded theory, data collection starts without the formation of an initial framework. Theory is developed from data generated by series of observations. These data lead to the generation of predictions that are then tested in further observations which may confirm, or refute, the predictions (Saunders, Lewis, & Thornhill, 2000).

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3.3.1.5 Ethnography

Ethnography is also firmly rooted in the inductive approach. It emanates from the field of anthropology. The purpose is to interpret the social world the research subjects inhabit in the way in which they interpret it. This is obviously a research process that is very time consuming and takes place over an extended time period. The research process needs to be flexible and responsive to change. Data collection in this realm is usually through observation methods including: participant observation and structured observation . The former is qualitative and derives from the work of social anthropology earlier in the previous century which emphasizes on discovering the meanings which people attach to their actions. By contrast structured observation is quantitative and is more concerned with the frequency of those actions (Saunders, Lewis, & Thornhill, 2000).

3.3.1.6 Action Research

There are three common themes within the literature about action research (Saunders, Lewis, & Thornhill, 2000). The first focuses on and emphasizes the purpose of the research : management of a change (Cunningham, 1995). The second relates to the involvement of the practitioners in the research and in particular a close collaboration between practitioners and researchers. Eden and Huxham (1996) argue that the findings of action research results from “involvement with members of an organization over a matter which is genuine concern to them”. Therefore, the researcher is part of the organization within which the research and change process are taking place (Eden & Huxham, 1996; Zuber-Skerritt, 1996). The final theme suggests that action research should have implications beyond the immediate project; in other words, it must be clear that the results could inform other contexts. Action research differs from other forms of applied research because of its explicit focus on action, in particular promoting change within the organization (Marsick & Watkins, 1997). To develop a roadmap for unbundling the corporation as a growth strategy for uncertain and turbulent business environment, gaining rich insights and information 82 about unbundled organizations seems to be mandatory. Scrutinizing unbundled organizations help us in answering our research questions which most of them are in forms of “How” and therefore case study can be considered as an effective strategy for providing the answer to them. Two types of cases were used in this research: secondary and firsthand. The cases have been chosen from unbundled organizations and have been used for both theory building and theory testing. The cases empower us in gaining new insights about unbundled companies in addition to letting us to probe our findings and test our theories.

3.3.2 Time Horizon of the Research: Cross-Sectional vs. Longitudinal Studies As discussed before, one of the important issues to be determined in the face of research strategy design is related to the time horizon of the research. In particular, it should be determined that the research is Cross-sectional or longitudinal . Selection of either one depends on the research questions and the available time and resources the researcher possesses.

3.3.2.1 Cross-sectional Study

If the research question would be satisfied by the study of particular phenomenon (or phenomena) at a particular time, then the study is cross-sectional. In other words cross-sectional studies are snapshots of an event in a particular time (Saunders, Lewis, & Thornhill, 2000). Most research problems undertaken by academics are cross-sectional due to the time constraint. Cross-sectional studies often employ the survey strategy (Robson, 1993; Easterby-Smith, Thorpe, & Lowe, 1991). They may be seeking to describe the incidence of the phenomenon or to compare factors in different organizations. However, they may also use qualitative methods as many case studies are based on interviews, conducted over a short period of time.

3.3.2.2 Longitudinal Study

The main strength of the longitudinal research is the capacity that it has to study change and development. In this type of research the basic question is “Has there been any change over a period of time?” (Bouma & Atkinson, 1995). Even with time

83 constraint it is possible to introduce a longitudinal element to the research, for example by using from massive amount of published data collected over time by previous research (Saunders, Lewis, & Thornhill, 2000). In conclusion, when the change over time is a matter of consideration in research questions longitudinal studies would be applied. As in this research the effect of change over time is not the matter of consideration, therefore the research time horizon is categorized as cross-sectional. It is also noteworthy that conducting the longitudinal study over such a strategic issue needs the researcher to study many (or some) organizations for a long time which is not feasible in the time constraints of this study. Finally, as the purpose of this research is to develop a new and basic roadmap for unbundling the corporations, cross- sectional case studies can provide fruitful insights for this purpose.

3.3.3 Research Purpose: Exploratory, Descriptive and Explanatory Studies The last issue that should be answered in decision making over research strategy is related to the purpose of the research. According to Saunders et al. (2000) research purpose is classified in three folds as: Exploratory, Descriptive and Explanatory.

3.3.3.1 Exploratory Studies

Exploratory studies are valuable means of finding out “what is happening; to seek new insights; to ask questions and to assess phenomena in a new light” (Robson, 1993). It is a particularly useful approach if the researcher wishes to clarify his/her understanding of the problem. There are three principal ways of conducting exploratory research: • A search of the literature. • Talking to experts in the subject. • Conducting focus group interviews. Exploratory research could be likened to the activity of the traveler or explorer (Adams & Schvaneveldt, 1991). Its great advantage is that it is flexible and adaptable to change. That is, the researcher can change the direction as the result of new data which appears and new insights which occur to him (Saunders, Lewis, & Thornhill, 2000). Adams and Schvaneveldt (1991) reinforce this point by arguing that the flexibility inherent in exploratory research those not mean absence of direction to the enquiry. What

84 it does mean is that the focus is initially broad and becomes progressively narrower as the research progresses.

3.3.3.2 Descriptive Studies

The object of descriptive research is “to portray an accurate profile of persons, events or situations” (Robson, 1993). This may be an extension of, or forerunner to, a piece of exploratory research. It is necessary to have a clear picture of phenomena on which you wish to collect data prior to the collection of the data. Although description in management and business research has a very clear place, scholars tend to go further and to draw conclusions from data. They use to develop the skills of evaluating and synthesizing data and ideas which are higher order skills than those of accurate description. Descriptive methods should be thought of as a means to an end rather than an end in itself (Saunders, Lewis, & Thornhill, 2000).

3.3.3.3 Explanatory Studies

Studies which establish causal relationships between variables may be termed Explanatory studies. The emphasis here is on studying a situation or problem in order to explain the relationships between variables (Saunders, Lewis, & Thornhill, 2000). Such studies usually apply quantitative analyses in order to test the relationship between variables and explain them. As discussed, the exploratory research is appropriate for gaining new insights and assessing phenomena in a new light. In this research, we are required to study unbundled companies in order to gain appropriate information to be able to develop a roadmap for unbundling the corporations. Through exploring case studies, we can find out the underlying advantages, disadvantages and the factors that should be considered in decision making about separating a company into its core processes.

3.4 Data Collection

According to figure 3.1, the research process onion, research strategies can apply different research tactics or in the other terms, data collection methods. Appropriate data 85 collection method will be chosen according to the research strategy and research questions. According to Saunders et al. (2000) there are four data collection methods, including: secondary data, observation, interviews and questionnaires. Two data collection methods have been applied in this research: Secondary Data and Interviews. Secondary data has been applied in order to find some insights from very scarce sources on some unbundled companies. In addition, we have gathered primary data through interviews in our case studies of unbundled organizations in order to scrutinize their structure and to confirm our findings from secondary sources and theories. In the following sections, the secondary data and interviews as the data collection methods of this research have been discussed thoroughly.

3.4.1 Secondary Data

When considering how to answer the research questions or to meet their objectives, few researchers consider the possibility of re-analyzing data that have already been collected for some other purpose (Hakim, 1982). Such data are known as secondary data. Although most researchers think in terms of collecting new (primary) data, secondary data can provide a useful source for research questions to be answered or at least they can be considered as a beginning to answer research questions. Most research questions are answered using some combination of secondary and primary data. Where limited appropriate secondary data are available, the researcher will have to rely mainly on data he/she collects himself/herself (Saunders, Lewis, & Thornhill, 2000). Secondary data about unbundled companies was a great help for us in the process of roadmap development. Although the information in those sources was published for another purpose, in many cases that information assisted us to know more about the structure of those organizations. In addition, those sources helped us to understand why some companies decided to undertake unbundling as a growth strategy and what factors they have considered for decision making. In the following sections, types of secondary data and issues related to validity and reliability of those kinds of data have been discussed.

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3.4.1.1 Types of Secondary Data

Secondary data include both quantitative and qualitative data and can be used in both descriptive and explanatory research. Saunders et al. (2000) have built three main sub groups of secondary data: Documentary data , survey-based data and those compiled from multiple sources (See Figure 3.4).

0Figure 3- 04 Types of Secondary Data

Source: Saunders, Lewis, & Thornhill (2000)

Documentary data are often used in research projects that also use primary data collection methods. Documentary data include written documents and non-written documents. Written documents include notices, correspondents, reports to share-holders, transcripts of speeches, administrative and public records, books, journals and magazine articles, and newspapers. These documents can provide qualitative data such as managers’ reasons for decisions or they can be used to generate statistical measures of profitability derived from company as instance (Bryman, 1989). Non-written documents include tapes, video recordings, pictures, drawings, films and television programs (Robson, 1993). Documentary data can be analyzed both quantitatively and qualitatively. In addition, they can be used to help to triangulate findings based on other data such as written documents and primary data collected through observations, interviews or questionnaires (Saunders, Lewis, & Thornhill, 2000). Survey-based data refers usually to data collected by questionnaires which have already been analyzed for their original purpose. Such data can refer to organizations, people or households (Hakim, 1982). These data have been collected through one of three

87 distinct types of survey: Censuses, Continuous/Regular surveys or Ad hoc surveys (Saunders, Lewis, & Thornhill, 2000). Multiple source data can be based entirely on documentary or on survey data or can be an amalgam of the two. The key factor is that different data sets have been combined to form another data set prior to the researcher assessing the data. This category includes: Area-based and Time-series based data (Saunders, Lewis, & Thornhill, 2000). While time-series based data are combination of some secondary data related to the same sample over time, area-based data are combination of different sources that have the same geographical base (Hakim, 1982). In this research we have used from secondary sources of data in the form of documentary- written materials.

3.4.1.2 Evaluating Secondary Data

Secondary data must be viewed with the same caution as any primary data that researcher collects (Saunders, Lewis, & Thornhill, 2000). Most authors suggest a range of validity and reliability against which the researcher can evaluate potential secondary data. Saunders et al. (2000), based on previous works, have suggested the following criteria to evaluate secondary data. • Measurement validity : One of the most important criteria for the suitability of secondary data sets is measurement validity. Secondary data that fail to provide the information that researcher needs to answer his/her questions or to meet his objectives will result in invalid answers (Kervin, 1999). This concept can be applied both for quantitative and qualitative data. For quantitative data, as an example, a manufacturing organization may record monthly sales whereas the researcher is interested in monthly orders. In another example, for qualitative data, a researcher may be using minutes of company meetings as a proxy for what actually happened in those meetings. These are likely to reflect a particular interpretation of what happened, the events being recorded from a specific view point, often the chair person’s. The researcher therefore needs to be cautious

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before accepting such records at face value (Saunders, Lewis, & Thornhill, 2000; Denscombe, 1998).

• Coverage and unmeasured variables : The researcher needs to be sure that the secondary data cover the population about which you need data, for the time period he/she needs, and contains data variables that would enable him/her to answer his/her research questions.

• Reliability and validity : The reliability and validity of the secondary data is a function of the method by which the data were collected and the source. If the source of secondary data is well-known and reliable the data is likely to be trustworthy (Saunders, Lewis, & Thornhill, 2000). In addition, relying on their procedures for their collecting and compiling the data is eligible.

Validity and reliability of collection methods for survey data will be easier to assess where the researcher can find a clear explanation of the methodology used for the data collection. This needs to include the clear explanation of any sampling techniques used and response rates as well as a copy of the survey instrument (questionnaire). Secondary data collected through a survey with a high response rate are also likely to be more reliable than from that with a low response rate (Saunders, Lewis, & Thornhill, 2000). On the other hand, examining the validity and reliability of the qualitative data is more difficult. For some documentary sources such as diaries, transcripts of interviews or meetings it is unlikely that there would be a formal methodology describing how the data were collected. The fact that the researcher didn’t collect and were not present where these data were collected will also affect the analysis. Full analysis of in-depth interview data requires an understanding derived from participating in social interactions that cannot be fully recorded on tape or by transcript (Dale, Arber, & Proctor, 1988). The secondary data which have been used in this research were gathered from published academic and professional sources such as Harvard Business Review, McKinsey Quarterly and etc. which are globally recognized. So, the validity of the data

89 will be based on the trustworthiness of its source. Also, due to the high referrals of the other researchers to those sources we can accept their reliability as well.

3.4.2 Collecting Primary Data Using Interviews An interview is a purposeful discussion between two or more people (Kahn & Cannell, 1957). In the following sections I firstly discuss over the different types of interviews and then appropriate situations favoring interviews will be introduced. Finally I have derived the appropriate type of interview for this research and thoroughly discuss over the validity and reliability issues.

3.4.2.1 Types of Interviews

One typology which is commonly used and is related to the level of formality and structure about interviews is as follow (Saunders, Lewis, & Thornhill, 2000): • Structured Interviews • Semi Structured Interviews • Unstructured Interviews Structured Interviews use questionnaires based on a predetermined and standardized or identical set of questions. The questions will be read and then the responses will be recorded on a standardized schedule, usually with pre-coded answers. While here is social interaction between the researcher and the respondent, such as explanations which the researcher needs to provide, the researcher should read out in the same tone of voice to prevent any bias (Saunders, Lewis, & Thornhill, 2000). By comparison, semi-structured and unstructured interviews are non-standardized. In semi-structured interviews, the researcher will have a list of themes and questions to be covered although may vary from interview to interview. This means that the researcher may omit some questions in particular interviews, given the specific organizational context which is encountered in relation to the research topic. The order of questions may also be varied depending on the flow of conversation. On the other hand, additional questions may be required to explore your research questions and objectives given the nature of the events in the particular organizations (Saunders, Lewis, & Thornhill, 2000).

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Unstructured interviews are informal. The researcher would use these to explore in depth a general area in which he is interested. Therefore, these types of interviews are also called in-depth interviews. There is no predetermined list of questions to work through in this situation. The interviewee is given the opportunity to talk freely about the events, behaviors and beliefs in relation to the topic area, so that this type of interaction is sometimes called non-directive (Saunders, Lewis, & Thornhill, 2000).

3.4.2.2 Linking Interviews to the Purpose and Strategy of the Research

Each of the above types of interviews has a different purpose. Structured or standardized interviews can be used in survey research to gather data, which will then be the subject of quantitative analysis. Semi-structured and in-depth, or non-standardized, interviews are used in qualitative research in order to conduct exploratory discussions not only to reveal and understand the “What” and the “How” but also to place more emphasis on exploring the “Why” (Saunders, Lewis, & Thornhill, 2000). In brief the following points should be come into account when deciding over the choosing of interview method according to Saunders et al., (2000):

• In an exploratory study, in-depth interviews can be very helpful to ‘find what is happening and to seek new insights’ (Robson, 1993), semi-structured interviews may also be used in relation to an exploratory study; • In descriptive studies structured interviews can be used as a means to identify general patterns; • In an explanatory study, semi-structured interviews may be used in order to understand the relationship between variables, such as those revealed from descriptive studies. Structured interviews may also be used in relation to an explanatory study, in a statistical sense. The above points have all been summarized in the following table (See Table 3.2):

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Exploratory Descriptive Explanatory

Structured ++ +

Semi-Structured + ++

In-depth ++

0Table 3-2 Different Types of Interviews Appropriate for each Research Purpose Source: Saunders et al. (2000) +: less frequent, ++: more frequent

When undertaking an exploratory study, or a study that includes an exploratory element, it is likely that a researcher will include interviews in his/her approach (Cooper & Schindler, 1998). Similarly, an explanatory study is also likely to include interview in order for researcher to be able to infer causal relationships between variables (Saunders, Lewis, & Thornhill, 2000). Essentially, where it is necessary to understand reasons for the decision which research participants have taken, or to understand the reasons for their attitudes and opinions, it will be necessary for researcher to conduct an in-depth interview (Saunders, Lewis, & Thornhill, 2000). Semi-Structured and in-depth interviews also provide the researcher with the opportunity to ‘probe’ answers, where the researcher wants his/her interviewees to explain, or build on, and their responses. This is very important if the researcher is adopting phenomenological approach (Saunders, Lewis, & Thornhill, 2000).In addition to all above points, there is still a very practical point regarding the advantage of interviews: Managers are more interested in interviews rather than filling a questionnaire. Finally, it is noteworthy to present some of the scholars’ point of view on conducting interviews which is mostly based on the nature of questions to be investigated (Healy, 1991; Easterby-Smith, Thorpe, & Lowe, 1991; Jankowicz, 1995): • Where there are a large number of questions to be answered; • Where the questions are either complex or open-ended; • Where the order and logic of questioning may need to be varied. A semi-structured or in-depth interview will be most appropriate for the latter two types of situation.

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Our very aim in gathering primary data through interviews was to gain approval or disapproval on themes we had devised from secondary case studies and available theories. In fact our important goal was to confirm our findings by gaining information from pure unbundled companies from different industries. The need for a flexible method seemed to be necessary. In one hand, there was a need to explore the cases and let the managers discuss freely over their decisions and their underlying reasons which would help us in completing our roadmap and at same time, there was a need for approving or disapproving themes found out in the literature. Consequently, the semi-structured interviews were chosen as a flexible method enabling us to gain our goals. Structured interviews are mostly appropriate for surveys in which all the questions and different elements of a model are clear. Besides, in depth interviews were not appropriate for our purpose because we had some themes at hand that should investigate their validity.

3.4.2.3 Data Quality Issues: Validity, Reliability and Generalisability

A number of data quality issues can be identified in relation to the use of semi- structured and in-depth interviews (Saunders, Lewis, & Thornhill, 2000): • Reliability • Forms of bias • Validity and Generalisability We first explain each of the above in the interviews and then explain the strategies that should be applied in order to prevent bias and increasing the reliability and validity. Reliability in these interviews (Semi-structured and in-depth interviews) is concerned with whether alternative interviewers reveal similar information (Easterby- Smith, Thorpe, & Lowe, 1991; Healy & Rawlinson, 1994). The concern about the reliability in this kind of interviews is also related to the issue of bias (Saunders, Lewis, & Thornhill, 2000). There are various types of bias to consider:

• Interviewer Bias : This is where the comments, tones or non-verbal behavior of the interviewer creates bias in the way that interviewees respond to the questions being asked. It is also possible that the researcher impose his belief or frame of reference through the questions he/she asks. It is also possible that the researcher

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demonstrates bias in the way he/she interprets responses (Easterby-Smith, Thorpe, & Lowe, 1991). Finally, where the researcher will not be able to develop trust of the interviewee, or perhaps where his/her credibility is seen to be lacking, the value of the information given may also be limited, raising doubts about its validity and reliability (Saunders, Lewis, & Thornhill, 2000). • Interviewee Bias : the interviewee may decide not to reveal some information about the organization or phenomena under study specifically in probing questions. It is also possible the due to the time consuming process of these types of interviews, the willingness to participate in such interviews will be reduced by interviewees. These are all causes of interviewee bias (Saunders, Lewis, & Thornhill, 2000).

Validity and Generalisability are also other issues that should be considered in such qualitative interviews. The validity in these types of research means the extent the researcher has gained full access to the knowledge and meanings of informants’ (Easterby-Smith, Thorpe, & Lowe, 1991). The high level of validity that is possible in relation to carefully conducted qualitative interviews is made clear by the following quotation (Saunders, Lewis, & Thornhill, 2000): “The main reason for potential superiority of qualitative approaches for obtaining information is that the flexible and responsive interaction which is possible between interviewer and respondents allows meanings to be probed, topics to be covered from a variety of angles and questions made clear to respondents”. However, qualitative research using semi-structured or in-depth interviews will not be able to be used to make generalization about the entire population where this is based on a small and unrepresentative number of cases. This will be the situation in a case study approach (Yin, 1994).

3.4.2.4 Overcoming Data Quality Issues

Reliability : one response to the issue of reliability is that findings from using non- standardized research methods (semi-structured and in-depth interviews) are not necessarily intended to be repeatable since they reflect reality at the time they were

94 collected, in a situation subject to change (Marshall & Rossman, 1999). The assumption behind these types of research is that the situations are complex and dynamic. The value of using this non-standardized approaches are derived from the flexibility that researcher may use to explore the complexity of the topic (Saunders, Lewis, & Thornhill, 2000). Therefore, an attempt to ensure that qualitative, non-standardized research could be replicated by other researchers would not be realistic or feasible without undermining the strength of this type of research. However, it is suggested that the researcher using these methods should make and retain notes relating to the design of the research, the reasons underpinning the choice of strategy and methods, and the data obtained (Marshall & Rossman, 1999). Interviewer and interviewee bias: in order to prevent the sources of bias discussed, the following points have been highlighted by Saunders and his colleagues (2000): • Preparation and readiness for the interview • Level of information supplied to the interviewee : providing the participants with a list of the interview themes before the event will promote validity and reliability through enabling the interviewees to consider the information being requested and allowing them the opportunity to assemble supporting organizational documentation from their files. Interview themes may be derived from the literature, the theories that the researcher considers, the researcher’s experience of the particular topic, common sense, discussion with co-workers, fellow students, tutors, and research participants, or some combination of these approaches (Saunders, Lewis, & Thornhill, 2000). • Appropriateness of the researcher’s appearance at the interview : Robson (1993) advises researchers to adopt a similar style of dress to those to be interviewed. • Nature of the opening comments to be made when the interview commences : when the interviewee has not met the researcher before, the first few minutes of the conversation may have a significant impact on the outcome of the interview. It is also useful for establishing the credibility. Also, if there is any question in the interviewees mind regarding the nature of the data the researcher needs, it is the responsibility of the researcher to explain everything clearly. Finally, if there

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seems any need for more explanation of the topic of study, the researcher should deliberately spend his/her time explaining everything to the respondents • Approach to questioning: the questions need to be clearly phrased and should be asked in a neutral tone of voice. Long questions containing two or more other questions should be avoided. Finally, questions should be avoided to have too many theoretical concepts and jargons. • Nature and impact of the interviewer’s behavior during the course of interview : the researcher need to project interest and enthusiasm through his/ her voice, avoiding any impression of anxiety, disbelief, astonishment or other negative signals. • Demonstration of attentive listening • Scope to test understanding: the researcher may test his or her understanding by summarizing the points and providing them to the interviewee to ‘evaluate the adequacy of the interpretation and correct where necessary’ (Healy & Rawlinson, 1994) • Approach to recording data : the records of interview should be compiled as soon as the interview has been taken place.

Generalisability : as discussed earlier, due to the small number of cases in these methods the Generalisability is not feasible but to the extent that the significance of findings can contribute to the theoretical propositions the results can be generalized (Bryman, 1989; Yin, 1994). Where the researcher is able to relate its research project to existing theory, he/she will be in the position to demonstrate that his/her findings have a broader effect than the case or cases he/she has studied (Marshall & Rossman, 1999). In order to overcome the reliability and validity issues in this research the points mentioned above were operationalized. First of all, regarding the reliability issues, as discussed above, the reliability depend on the appropriate selection of approach, strategy and the method itself which have been thoroughly discussed in this chapter. In addition to methodology, the matter of biases (Interviewer and interviewees) prevented in its maximum extent by applying principles presented above.

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Before conducting the interview, I reviewed the extracted themes and the fax would be sent to the organizations two days before the interview, informing the selected managers about the points which were going to be discussed. At the first session of my interviews with managers, I introduced myself and briefly explained my background in addition to handing my introductory letter from university in order to ensure the interviewees about the scientific aims of conducting the research and therefore increasing the trust. At the beginning of each session, a brief review of the points mentioned by managers in the previous session was discussed. This helped me to increase the validity and reliability of the results by getting feedback from interviewees. If there was any jargon or scientific point that need to be explained before questioning, I explained it in detail for managers (usually at the beginning of the sessions). As there were some themes, extracted from the literature and secondary case studies, a list of themes was developed as a guideline for conducting interview and ensuring that the interview is in its direction and track (presented in Appendices Section of the Thesis). The theme list helped me in increasing the reliability and validity of the interview. Moreover, in order to prevent from exhaustion caused by time consuming interviews, each session was not exceeded from 90 minutes. Finally, in addition to writing their points, I recorded their voice in each session facilitating the process of analysis for me. Regarding the Generalisability of the results, it should be mentioned that we have conducted three case studies to gain primary data which is a small sample. However, by reviewing the extensive literature on Resource Based View of the firm in addition to finding valuable information from secondary case studies relating to our work, it seems that there is a strong contribution between our findings and the literature. Therefore, the results and the roadmap developed in this research can be generalized more than the scope of three cases. Although, the need for testing this roadmap in different contexts and environments seems to be inevitable in future researches.

3.4.3 Sampling Due to restrict of time, money and access to organizations (Cases), sampling techniques can be applied in order to help researcher to provide answers in his/ her study.

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Sampling techniques provide a range of methods that enable the researcher to reduce the amount of data he/she needs to collect by considering only data from a sub-group rather than all possible cases or elements (Saunders, Lewis, & Thornhill, 2000). The sampling techniques available to a researcher can be divided into two types (See Figure 3.5): • Probability or Representative Sampling • Non-probability or Judgmental Sampling

0Figure 3-5 Sampling Techniques

Sources: Saunders, Lewis, & Thornhill (2000)

With probability samples the chance, or probability, of each case being selected from the population is known and is usually equal for all cases. In other words, in order to understand the characteristics of the population, the researcher requires conducting statistical estimates. Consequently, probability sampling is often associated with survey and to a lesser extent experiment research (Saunders, Lewis, & Thornhill, 2000). For non-probability samples, the probability of each case being selected from the total population is not known and it is impossible to answer research questions or to address objectives that require you to make statistical inferences about the characteristics of the population. The researcher may still needs to generalize from the non-probability sampling about the population, but not on statistical ground. For this reason, non- probability sampling (other than quota sampling) is more frequently used for the case study research (Saunders, Lewis, & Thornhill, 2000).

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As in this study, the aim is to explore and scrutinize three organizations in order to reach deep insights about the topic at hand –unbundling the corporation- the non- random sampling techniques were chosen. In addition, time constraints and access to the organizations were the additional reasons in selecting this sampling technique other than the nature of the topic and research questions.

3.4.3.1 Selecting the most appropriate non-probability sampling technique

A range of non-probability sampling techniques are available. At one end of this range is quota sampling which, like probability samples, tries to represent the total population. Quota sampling has similar requirements for sample size as probabilistic sampling techniques. At the other end of the range are techniques based on the need to obtain a sample as quickly as possible where the researcher has little control over the content and there is no attempt to obtain representative sample. These include convenience and self selection sampling techniques. Purposive and Snowball sampling techniques lie between these extremes. (Saunders, Lewis, & Thornhill, 2000). For the above techniques, except quota sampling, the issue of sample size is ambiguous and there are no rules. Rather it depends on research questions and objectives (Patton, 1991). This is particularly so where that the researcher is intending to collect qualitative data. The validity and understanding that will gain from data will be more to do with data collection and analysis skills than the size of the sample size (Patton, 1991). As such it is the logic behind the sample selection which is important (Saunders, Lewis, & Thornhill, 2000). The above mentioned methods have been summarized in the table 3.3. In this table different aspects of decision making over the selection of the appropriate method have been illustrated. In order to confirm our findings from secondary case studies and theories and as it was necessary to deeply explore the unbundled cases to gain new insights about them for roadmap development, a very small number of cases were selected.

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Likelihood of sample being Types of research in which Control over Relative Costs Sample Type representative useful sample contents Where costs constrained/ data Moderately high to Quota Reasonable to High Relatively high needed very quickly reasonable Low although dependent to Where working with the researcher's choice: very small samples

Extreme Case/ Focus: Unusual, Special Purposive Heterogeneous/ Focus: Key Themes Reasonable Reasonable Homogeneous/ Focus: In-depth Critical Case/ Focus: Importance of Case Typical Case Focus: Illustrative

Low but cases have characteristics where difficulties in identifying Snowball Reasonable quite low desired cases Self- where exploratory research low but cases self-selected low low Selection needed where very little variation in Convenience very low low low population

Table 3- 03 Impact of Various Factors in Choice of Non-Probability Sample Techniques Source: Saunders, Lewis, & Thornhill (2000)

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3.4.3.2 Purposive Sampling

This form of sample is often used when working with very small samples such as in case study research and when you wish to select cases that are particularly informative (Neuman, 1997). Purposive sampling may also be used by researchers following the grounded theory approach (Saunders, Lewis, & Thornhill, 2000). Such samples can’t, however, be considered to be statistically representative of the total population. Saunders et al. (2000) have enumerated 5 types of purposive sampling which briefly discussed below: • Extreme Case : sampling focuses on unusual or special cases on the basis that the data collected about these unusual or extreme outcomes will enable the researcher to learn the most and to answer the research questions and to meet his/her objectives most effectively. This is often based on premise that findings from extreme cases will be relevant in understanding or explaining more typical cases (Patton, 1991). • Heterogeneous or Maximum variation : this kind of sampling enables the researcher to observe key themes within the sample as the sample contains cases that are completely different. • Homogeneous Sampling : focuses on particular sub-group in which all the members are similar. This enables to study the group in great depth. • Critical Case : in this sampling critical cases will be selected on the basis that they can make a point dramatically or because they are important. The focus of data collection is to understand what is happening in each critical case so that the logical generalization can be made. • Typical Case: in this kind of sampling the researcher’s aim is to provide an illustrative profile using a representative case. Such a sample will enable the researcher to provide an illustration of what is a ‘typical’ case to those who are not familiar with the subject at hand.

In this research, the extreme cases have been chosen in order to help the researcher to learn a lot about unbundled organizations. In addition, extreme cases

101 enabled us to easily evaluate our findings from secondary case studies and literature. In this way, the process of roadmap development for unbundling the corporation got much more convenient. Extreme cases were chosen in both our primary data gathering as well as our secondary data about companies which all have undertaken unbundling.

3.5 Conclusion

The aim of this chapter was to illustrate the scientific process applied in this research. As discussed depending the nature of topic and research question, different approach and strategies can be utilized. Research approach applied in this thesis is the combination of both inductive and deductive. Firstly, due to the lack of literature on unbundling, it was necessary to exploit the inductive research approach. We built a roadmap for unbundling the corporation through secondary case studies and reviewing the related theories. In this section, our research strategy was secondary data analysis. Secondly, we test our findings (deductive approach) through conducting real case studies chosen among extreme cases of unbundling. This enabled us to deeply explore companies’ structure and validate our findings. Our research strategy for this part of our research was conducting semi-structured interviews. The sampling was a non-random purposive sampling in which extreme cases have been chosen in order to give the researcher the maximum insights about unbundled organizations. The results of the interviews (Primary Data) as well as the themes, derived from the literature, have been presented in the next chapters (Chapter 4-6).

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Chapter Four Corporate Capability Mapping

4. Corporate Capability Mapping

In previous chapters, three research questions have been answered. Capabilities of an organization have been practically defined as processes and the standard framework of APQC was introduced for their identification. Finally, processes were classified based on unbundling theory. The aim of this chapter is to provide a framework to evaluate capabilities or processes of an organization. Developing such a framework, in addition to answering the fourth research question of this thesis, will enable managers to assess their processes and to be able to determine in which of three core processes – CRM, PIC and IMB- they should focus.

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In this chapter, we will firstly provide a more complete view on the unbundling framework. Afterward, by means of three secondary case studies, we will develop evaluation factors that should be considered when assessing the processes for unbundling. Consequently, we will introduce our framework for evaluation of processes according to different frameworks available in the literature. At the end, we will apply our framework on Dell case and explain its recent decision on unbundling according to our framework.

4.1 A More Complete View on Unbundling Framework

Although the framework introduced by Hagel and Singer (1999) explains why the three core processes are contradictory in nature, it is possible to add more dimensions to this framework (See Table 4.1). Core Business

IMB PIC CRM Build and manage Conceive of attractive Identify, attract and facilities for high new products and Role build relationship with volume, repetitive services and customers operational tasks commercialize them High cost of customer High fixed costs make Early market entry acquisition makes it large volumes essential allows for a premium imperative to gain large Economics to achieving low unit price and large market shares of wallet; costs; economies of share; SPEED is key economies of SCOPE is SCALE is key key Cost focused; Stress on Employee Centered; standardization, Highly service oriented; Culture coddling the creative Predictability and Customers come first Stars Efficiency Battle for Scale; rapid Battle for talent; Low Battle for Scope; rapid Competition consolidation; a few big barriers to entry; many consolidation; a few big players dominate small players thrive players dominate Table 4-1 Rethinking Traditional Organization Source: Hagel & Singer (1999)

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The concept of “Value Disciplines” introduced by Treacy and Wiersema (1993) will enable us to study the conflicting nature of these three core processes from additional perspectives. Their study indicates that companies that have taken leadership positions in their industries typically have done so by narrowing their business focus, not by broadening. Their idea is very much in line with the theory of unbundling as they point out that companies who have leadership position in their industries have focused on delivering superior customer value in through one of three value disciplines- customer intimacy, product leadership and operational excellence (Treacy & Wiersema, 1993). These three value disciplines are very well compatible with three core processes in the unbundling theory as one may compare customer intimacy with CRM, product leadership with PIC and finally the operational excellence with IMB. However, the very important point in their studies is defining the concept of value from customer’s point of view. They have shown that these three value disciplines need three different types of goal formulation and satisfy three different customer needs. Treacy and Wiersema (1999) believes that the first decision on selecting a value discipline is to determine which of the customer needs (See Table 4.2) the company wants and is capable to serve. However, this decision mandates a company to takes into account its capabilities and cultures as well as competitors strength (Treacy & Wiersema, 1993). In brief, corporations should focus on capabilities that maximize their competitive advantage. “Competitive Advantage” of a firm is related to how can customers be encouraged to choose its offer rather than those of rivals. “Competitive Advantage” involves two concepts: the noun “Advantage” refers to the benefits that customers want; the adjective “Competitive” refers to the requirement, not just to be good, but to better than the firm’s competitors (Doyle, 1995).

According to above points, in developing a framework for facilitating of process selection, we should consider all aspects such as industry and its trend analysis, competitors and customers systematically and simultaneously. In continue, we have presented three secondary case studies as evident indications on the important role of industry, competitors and customers in affecting the firm’s strategy and boundaries.

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Core Business

IMB PIC CRM

Conceive of attractive new Build and manage facilities for high Identify, attract and build relationship with Role products and services and volume, repetitive operational tasks customers commercialize them

Reliable products and services at The latest trend, fashion Customers need products that have been competitive and low prices with minimal and version. They want designed just for them. They are ready to Customer Needs difficulty in delivery. These customers are state- of- the-art products sacrifice in price or delivery if the product ready to sacrifice quality for price and and components or service meets their unique requirements convenience

Early market entry allows High fixed costs make large volumes High cost of customer acquisition makes it for a premium price and Economics essential to achieving low unit costs; imperative to gain large shares of wallet; large market share; SPEED economies of SCALE is key economies of SCOPE is key is key

Cost focused; stress on standardization, Employee centered; Highly service oriented; customers come Culture predictability and efficiency coddling the creative stars first

Battle for talent; Low Battle for scale; rapid consolidation; a few Battle for scope; rapid consolidation; a few Competition barriers to entry; many big players dominate big players dominate small players thrive

0Table 4-2 a More Complete View of Unbundling the Corporation

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4.1.1 Case Study One: Unbundling the Mobile Value Chain

In the early days of the mobile industry, technologies, business processes and channels to market were not yet established. Mobile network operators (MNOs), such as Vodafone, Orange and T-Mobile, employed dedicated armies of network engineers to build and manage industry infrastructure. Network quality and geographic footprint were critical sources of competitive advantage. Network coverage and capacity management were focused on voice-based services, which accounted for almost 100 per cent of customer demand until the late 1990s. In many European countries, the network operator also controlled the distribution channel, managing everything from supply chain strategy to sales and marketing. Operators acquired broad retail footprints, as well as extensive agency networks, and frequently worked with vendors to build and manage their own billing systems and other supporting technologies. Simultaneously many operating companies built direct sales forces to service the important business segment. MNOs even built and managed their own billing systems because vendors, such as Amdocs and Convergys (an IT spin-out from Cincinnati Bell), were not yet delivering the breadth of off-the shelf software and services required when the industry was in its infancy. To deal with the incredibly rapid growth of the industry during the late 1990s, MNOs needed to build highly integrated operations, focused on scaling up the capacity to support rapid acquisition of new voice subscribers. Not surprisingly, the operational processes of both large and small mobile operating companies tended to extend to extremes of the value chain. The extent of this integration has deepened for many firms as complex product and service offerings have broadened the typical MNO value chain. However, there are evidences in this industry that support the idea of disintegration of value chain. The main reason of such evidences is the technological change underlying this industry in addition to regulations which are two important factors to be considered when analyzing the industry. From technological change perspective, the emergence of technological standards in maturing formats (such as SMS and WAP), not just for network infrastructure but also billing enablement, IT and other business critical processes has enabled integrated

107 business models to go for unbundling. For instance, consider the Australian mobile businesses Orange and Hutchison 3. Hutchison Whampoa Group outsourced its entire network infrastructure to Ericsson, largely exiting the traditional operator company activity of network management. Under the agreement Ericsson takes care of build-out and day-to-day network operations, operating Hutchison’s 2G, 3G and paging networks, as well as the services platforms. Hutchison retains ownership and full control of its network assets, and continues to have responsibility for strategic design and planning, as well as equipment purchasing decisions. The Hutchison initiative provides a new approach for network and IT support in mobile communications, including the technologically sophisticated multimedia services environments (2G and 3G). It is expected to reap cost benefits for Hutchison of 25 to 30 million € over seven years. A specialist unit will be established within Ericsson dedicated to managing services for Hutchison, with about 240 Hutchison technical and IT staff transferred to Ericsson to complement the existing Ericsson team already devoted to Hutchison business in Australia. Hutchison believes that this will allow its management to focus on key elements of its business strategy, such as branding, sales, marketing and customer service, rather than technology management. Not only, this type of business has benefits for Hutchison, but also Ericsson has indicated that it plans to extend upon this experience with Hutchison to build a global business in network infrastructure management and, as of the end of 2003, had won seven managed service contracts around the world. Moreover, the emergence of Mobile Virtual Network Operators (MVNOs) has been fastened by regulators placing increasing pressure on incumbents to provide access to their network infrastructure for new entrants, specifically in Europe. MVNOs have been even more radical in their approach to the typical industry value chain. There are a range of MVNO models, but a key similarity is their typical lack of ownership of network infrastructure. As a result, the services offered by an MVNO are to a degree dependent upon the commercial agreement with the MNO and the amount of infrastructure controlled. In theory pure MVNOs are able to offer highly differentiated services as they can control some of their own technical platforms. But the typical MVNO market entry strategy is to own as little infrastructure as possible. As a result, MVNOs usually provide

108 basic voice and data (SMS) services as the primary offering, operating over an established 2G network with spare capacity. Both the MNO and MVNO operate within acceptable risk/reward areas in foreseeable cost structures. Arguably the fastest growing MVNO is Telmore, a Denmark-based service provider. Telmore is as an internet enabled company with an aggressive price strategy targeted at the discount or low-end segment, a segment where many strategic innovators have discovered block-buster businesses. Like many low-cost airlines, it offers a basic service and primarily deals with customers over the web. It has no high-street shops, nor does it own a network. Instead, it resells airtime on a network owned by TDC, Denmark’s incumbent, and customers check their balances via text messages. There are no subscription fees or paper bills. After less than three years on the market Telmore has 400,000 customers and, during the third quarter of 2003 alone, more than 100,000 new customers chose the company. The company was forecast to reach 500,000 customers by the end of 2003, with Telmore moving past Telia as the fourth largest mobile network operator in Denmark after TDC, Sonofon and Orange. Telmore has captured 7 per cent of the Danish market for voice, and 15 per cent for data. The company has fewer than one hundred staff, which compares to some national MNOs in Europe that have roughly the same number of customers but up to ten times the employee headcount. Telmore has also taken advantage of the fact that as incumbent network operators have moved to bring more and more sophisticated services to market they have overshot the needs of many customers. And to deliver all things to all customers, most of these incumbents (both large and small) have built high-cost and bloated organizational structures spanning the breadth and width of the value chain. In this respect, and just like the budget airlines Ryanair and easyJet, a company such as Telmore is a classic disruptive innovator. It brings noncomplex, cheap services to market which are on many measures not as good as the services offered by incumbent firms, but which are good enough value for customers who are interested in a simple offering. These services are supported by a low-cost structure that reduces or eliminates those processes needed by full-service vendors, but not required to service the low-end of the market. It is a cost structure that allows Telmore to deliver mobile voice and data services at prices that are

109 virtually impossible for the incumbents to match with their existing full-service business models, single brands/cultures, and supporting infrastructure. In comparison with MVNOs, MNOs who have extensive infrastructures and are able to provide complex services may focus on those segments of the market which value the more complex data and multimedia services. In this way even the traditional highly integrated MNOs will be able to benefit from unbundling and they will not be required to compete with flexible MVNOs in niche low-end markets. Furthermore, applying unbundling, the traditional players will be able to benefit cost reductions by not having control over all parts of value chain. In result, MVNO entrants like Telmore have recognized that value chain integration is no longer crucial for a company’s success in the mobile industry, and by aggressively lobbying regulators these upstarts have been able to gain access to industry subsystems such as network infrastructure (Christensen, Raynor, & Verlinden, 2001; Anderson & Williams, 2004). This case shows the important role of industry regulations and technological change and its effect on the structure of highly integrated firms playing in those industries. In other terms, the case is evidently indicating the role of industry analysis that should be taken into account when deciding over unbundling the corporation.

4.1.2 Case Two: Lufthansa, Survived with Separate Entities

External shocks, such as terrorist attacks, wars in Afghanistan and Iraq, the SARS epidemic and the worldwide economic downturn hit the aviation industry badly. Many airlines posted substantial losses, and according to the chairman of Lufthansa’s supervisory board, Jurgen Weber, about half of the airlines were de facto bankrupt (Webber, 2003) . Thus, most experts agreed that the slump was not a typical downturn and that the external shocks uncovered much deeper problems in the industry. The presently dominant network carriers are particularly affected, whereas most low-cost carriers are operating with high profitability. Furthermore, the network carriers’ most important customer group, business/frequent flyers, has changed their flying behavior. To reduce travel costs, large companies have negotiated volume discounts and changed travel policies partly

110 restricting business class bookings. Besides, travel substitutes such as video conferencing have gained attractiveness due to security concerns after 9/11. To add to this all, new competitors have entered the market with a completely different business model. The so- called low-cost carriers have successfully designed a focused operation providing them with a significant cost advantage. Experts estimate that they operate with up to 60% lower unit costs than network carriers (Hansson, Ringbeck, & Franke, 2003).

These circumstances led to a downward trend in travel volume and yield. As a counter measure, network carriers started typical restructuring activities, such as cutting variable cost by grounding aircraft or reducing fixed costs by laying off staff. However, these measures were not sufficient and effective. Full service carriers have continually introduced new product features and services to stay ahead of the competition because they operate in a market with a high technical homogeneity of input factors (e.g. aircraft, staff, and airports). However, due to the low imitation barriers, any competitive advantage based on product differentiation is most likely to erode in a short time. In fact, the vital business customers receive indistinct product that did not satisfy their expectations with regard to travel-time, convenience and price. At the same time, full-service carriers delivered an over-engineered product to leisure customers who were more price and less time, service and convenience sensitive. By trying to cater to everybody, network carriers ended up with a product that was neither able to satisfy the business customers quality and service demand, nor the price expectation of the leisure customers. Furthermore the continuous broadening of the scope of operation, service for all possible customer types and wishes through the same organization (production platform) had raised the complexity cost of the operation significantly. In the end, the strategy for maximization of product range and minimization of costs simultaneously seemed to lead to a dead end. The network carriers did not have cost leadership (focusing on infrastructure) strategy nor did they have customer intimacy strategy. The analysis of market and customers behavior led to a four distinct segments depicted in picture 4.1. These four categories will be characterized as follow:

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• Intercont-Product: Carriers and their partners focus on intercontinental travel offering a three class product with differentiated services on the ground and in the air (e.g. for first class customers: special lounges, highest convenience and comfort, priority baggage handling, specially trained staff, in-flight entertainment). The network of global alliances secures worldwide coverage. The local alliance partners handle connecting flights. Most flights are routed through the major international hubs. Nonlocal traffic is fed by the other business streams. • Premium-continental-product: Offering frequent point-to-point (P2P) services to all major cities on the continent. Product features focused on the needs of the time sensitive business/frequent flyers. Less focus on onboard frills, such as entertainment or top quality food, however special focus on fast and convenient pre- and after-flight services on the ground (e.g. no touch environment, late check-in, quick security check possibly using biometric scanners, no luggage check-in).

Figure 4-1 Airline Customers and Product Segmentation

Source: Lindstadt & Fauser (2004)

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• Standard-continental-product : Offering domestic and continental direct and connection flights with standard services. Standard frills included, however extra services on the ground (e.g. lounges, ticket changes, oversized luggage) and in the air (e.g. magazines, in- flight entertainment) are either not offered or available at extra cost. • Low-cost-product: Business model purely focused on a superior cost structure. Simplicity of all processes is the key success factor. Serving large markets, mostly from smaller side airports with direct flights. Offering no frills such as flexibility, connection flights, upgrades, different classes, pre-, on- or after flight services.

Analyzing the above mentioned segments, it was evident that bundling them in a unified entity makes trouble for integrators. Integrators neither enjoy a cost advantage nor do they possess market power that allows them to skim abnormal rents or capabilities that give them a sustainable competitive advantage. Similar to other industries, the business model of incumbents functioned well, as long as the competitors used the same business model. However, as success factors in airline industry changed and new companies with a very different, in most cases simpler and more focused business model entered the market, the situation changed dramatically. In this new environment, incumbents were required to establish distinct business streams that are organized separately.

0Figure 4-2 the Lufthansa Portfolio Source: Lindstadt & Fauser (2004)

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Lufthansa was one those incumbents facing aforementioned problems. Lufthansa has tackled this problem by building separate companies that satisfy different customer needs and conduct more focused business model. First of all, Lufthansa owns a minority stake in Eurowings, which is a regional carrier serving smaller destinations on the continent. In addition, Germanwings, which is a subsidiary of Eurowings, is a typical low-cost carrier founded in 2002. All in all, Lufthansa owns equity stakes in two clearly focused carriers, operating with separate brands, staff, fleets and management two independent point-to-point networks. This example shows one option for incumbents that considers the path dependencies and at the same time enables the network carrier to indirectly compete in focused segments with dedicated firms. Both niche carriers are clearly focused and operate with the adequate operation and cost structure. The incumbent on the other hand does not need to sell discount tickets, which are unprofitable and damaging to the premium brand, to stop the low-cost competitors from gaining market share. As it is evident from this case, the changing nature of industry (due to the political and economic changes) in addition to shifts in customers behavior have all affected the decision over unbundling the Lufthansa (Lindstadt & Fauser, 2004).

4.1.3 Case Three: 7-Eleven, Focusing on the Core

To illustrate the power of capability sourcing, let's take a detailed look at one dramatically successful practitioner which began as a most traditional, vertically integrated company. Back in 1991, the company was losing both money and market share as the major oil companies added minimarts to more and more of their gas stations making the convenience store industry crowded and cutthroat which in result put both revenue and margins under intense pressure. To attract more customers, 7-Eleven needed to cut its operating costs substantially, expand the range of its products and services, and increase the freshness of food items. Conducting a business review program to rebuild competitive advantage, it was revealed that 7-Eleven was trying to do too many things and was not good enough at any of them. The core of the business was merchandising skill-the pricing, positioning, and promotion of gasoline, ready-to-eat food, and sundries for consumers driving cars.

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However, 7-Eieven had always been vertically integrated, controlling most of the activities in its value chain. The company operated its own distribution network, delivered its own gasoline, made its own candy and ice. It even owned the cows that produced the milk it sold. Managers were required to do lots of things other than merchandising - store maintenance, credit card processing, payroll, and IT systems management. It was clearly evident that hardly the company could be best-in-class in every one of those functions. After investigating the business industry thoroughly, the executive team concluded that the best way to save the company was to "outsource everything not mission critical and managing the network of partners instead." This marked an abrupt and deliberate break with the company's vertically integrated past. The executives provided a list of all activities and processes conducted within the firm boundaries. They even evaluated strategic functions such as product distribution, advertising, and procurement, attempting to identify outside partners with greater expertise and scale. Simply put, if a partner could provide a capability more effectively than 7-Eleven could itself, then that capability became a candidate for outsourcing. Over time, the company relinquished direct ownership of many parts of its business, including HR, finance, IT management, logistics, distribution, product development, and packaging. Yet despite moving at a rapid pace, the executive team remained cautious about losing control and avoided the temptation to take a one-size-fits-all approach to outsourcing. The way 7-Eleven has structured each partnership depends on how important each function is to the company's competitive distinctiveness. For routine capabilities like benefits administration and accounts payable, 7-Eleven picks providers that can consistently fulfill cost and quality requirements. More strategic capabilities require more complex arrangements. Gasoline retailing, for example, represents an important source of revenue for many 7-Elevens, as gas is often the reason customers come to the stores. So while the firm outsources gasoline distribution to Citgo, it maintains proprietary control over gas pricing and promotion - activities that could differentiate its stores if done well. The company has paid similarly close attention to its relationship with Frito- Lay, since snack foods are one of the most important product lines for convenience stores. By allowing Frito-Lay to distribute its products directly to the stores, 7 Eleven has been able

115 to take advantage of the chip maker's vast warehousing and transport system. But unlike other convenience store companies 7-Eleven doesn't allow Frito-Lay to make critical decisions about order quantities or shelf placement. Instead, the retailer mines its extensive data on local customer purchasing patterns to make those decisions on a store- by-store basis. The choice 7-Eleven has made to maintain control over product selection and stocking illustrates a critical issue in strategic sourcing partnerships: when to keep vital data confidential and when to share them with a partner. Similarly key was 7-Eleven's decision to rely on an outside vendor, IRI, to maintain and format detailed customer purchasing behavior data while keeping the data themselves proprietary. This gives 7- Eleven a picture of the mix of products its customers want in different locations without relying on outside decision makers like Frito-Lay for such information. In this way, 7- Eleven is able to structure its supplier relationships to gain a capability without relinquishing control over decisions that could make or break its business.

For a few targeted product segments, 7-Eleven has identified opportunities that call for an even deeper level of collaboration. Company executives figured out that their traditional, do-it-yourself approach to creating branded products was cutting the company off from the superior scale, resources, and creativity of major food suppliers. So they began sharing information with a select group of manufacturers, allowing them to create custom products for 7-Eleven stores. For example, 7-Eleven worked with Hershey to develop an edible straw based on the candy maker's popular TWizzler treat. In return, Hershey gave 7-Eleven the exclusive right to sell the straw for its first 90 days on the market. To further promote the unique product, 7-Eleven joined with its syrup supplier, Coca-Cola, to come up with a Twizzler flavored version of its proprietary Slurpee drink. Such exclusive arrangements reduce the strategic risk of sharing customer information while greatly expanding the set of unique products 7-Eleven can offer. Likewise, when the data on beer sales showed that certain packaging options were more successful than others, 7-Eleven forged a tight partnership with Anheuser-Busch to build sales in those categories. Anheuser-Busch helped 7-Eieven develop a product assortment and establish merchandising standards for a new display. The beer giant also

116 agreed to give 7-Eleven first-look opportunities at new products. In return, 7-Eieven shares its customer information so together the two companies can develop innovative marketing programs, such as a cobranded NASCAR promotion targeting 7-Eleven's core customers and a Major League Baseball promotion campaign. Anheuser-Busch is also using 7-Eleven store data, provided daily by IRI, to test a new order forecasting system that would link the retailer's orders more tightly with deliveries from the brewer's wholesalers. In addition to restructuring and enhancing existing activities, 7-Eleven has used creative sourcing partnerships to pioneer entirely new capabilities. It realized, for example, that by being a one stop source for a broad range of products and services, it could gain a leg up on more narrowly focused competitors. So it has set up a consortium to provide multipurpose kiosks in its stores. American Express supplies ATM functions, Western Union handles money wires, and CashWorks furnishes check-cashing capabilities, while EDS integrates the technical functions of the kiosks. Here, too, 7- Eleven maintains control over the data-in this case, information on how customers use the kiosks-which it views as critical to its competitive edge. Some of 7-Eleven's outsourcing relationships tie suppliers' financial interests to its own. The company took an equity stake in Affiliated Computer Services, for instance, one of its major IT outsourcers. 7-Eleven also agreed to share productivity gains from a services agreement with Hewlett-Packard. In an even deeper collaboration, the company created a joint venture with prepared foods distributor E.A. Sween: Combined Distribution Centers (CDC) is a direct store delivery operation that supplies 7-Elevens with sandwiches and other fresh goods. By drawing on the skills and scale of a specialist, 7-Eleven was able to cut its distribution costs from more than 15% of revenues to 10% and eventually hopes to cut that figure in half again. But cost reduction is only a secondary benefit. The real gains have come in service. When it owned its own distribution network, 7-Eleven delivered fresh goods to its stores only a couple of times a week. CDC now makes deliveries to stores once, and soon twice, a day. More frequent deliveries mean fresher products, which draw more customers into the stores. By almost any measure, 7-Eleven's sourcing strategy has transformed the company. In narrowing its focus to a small, strategically vital set of capabilities- in-store

117 merchandising, pricing, ordering, and customer data analysis-the company has reduced its capital assets and overhead while streamlining its organization. It reduced head count 28% from 43.000 in 1991 to 31,000 in 2003 and flattened its organizational structure, cutting managerial levels in half from 12 to six. Today, 7-Eleven consistently outperforms competitors. Same-store sales have grown in four out of the last five years. In the 2004 and 2005, it has dominated the industry's vital statistics, with same-store merchandise growth at almost twice the industry average, revenue per employee at just about two and a half times higher, and inventory turns at 72% more than the industry average. Furthermore, after its acquisition of two regional U.S. chains (Christy's Markets in the Northeast and Red D Mart in the Midwest), the firm's new business model helped grow sales by more than 30% and increase gross profit margins by 2%. 7-Eleven's stock appreciation over the past five years has outpaced all major competitors, including Casey's General Stores, the Pantry, and Uni-Mart (Gottfredson, Puryear, & Phillips, 2005).

4.1.4 Findings from Secondary Case Studies

The three case studies presented above are all extreme cases representing the unbundling processes in different industries. Conducting industry analysis, a company will find the opportunities for making profit through value creation for customers better than competitors. Yet, companies need to analyze their relative industry in terms of future in order to be able to well anticipate the future emerging trends. The future trend anticipation and identification of profit making opportunities if done precisely may have great impact on strategy formulation of organizations (Porter, 2008). The first case study presented above indicates the importance of this issue. Emerging new technologies and competitive regulations in mobile industry has greatly facilitated the advent of new virtual mobile service providers which are able to create value for their customers by focusing on customer relationship management without having any infrastructure. One of the well known tools in analyzing future trends in an industry is the five forces model of Michael Porter developed in 1979 and has been revised by him in 2008 published in Harvard Business Review.

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In the second case, the role of customer needs and wants and their effect on corporate boundaries was discussed. Although customer needs and wants are in general part of the industry analysis, considering whether our capabilities create value for our customers is the most important phase of evaluating the organizational capabilities and it can be done more specifically. As depicted in Table 4.2, considering customer characteristics is one the important aspects of decision making about unbundling the corporation. Finally, in the last case, one may see various aspects of unbundling we have discussed before. It is evident that changes in retail industry have affected the profitability of 7-Eleven. It forced the company to focus on its core capabilities (CRM) and unbundle the other capabilities to specialized partners. These partners were selected based on two important factors of quality and price. 7- Eleven, in addition to focusing on its core capabilities, orchestrate its network of partners . We will discuss more about the network capabilities in the next chapter. In addition to these points, 7-Eleven by acquisition of two regional U.S. chains (Christy's Markets in the Northeast and Red D Mart in the Midwest) have developed its business more and more through rebundling . It has been mentioned that businesses focusing in CRM and IMB will follow more growth through rebundling. The aforementioned points and cases assert emphasis for considering the effects of industry, competitors and customers in developing a framework for capability mapping of corporation. In the following section, we have introduced a framework for capability mapping taking all the above points into account.

4.2 A Framework for Capability Mapping of the Corporation

There are different frameworks for outsourcing in the literature. However, most of those frameworks are base on the cost reductionist approach. There are a few frameworks considered outsourcing as a strategic issue and a tool for growth (Mclvor, 2008). Accordingly, we have chosen two of these few frameworks and by means of them we have built a new three-stage framework for capability evaluation. In this section we will introduce the framework.

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The first step evaluates capabilities (processes) of the corporation in comparison with those of competitors and industry standards based on two factors depicted in the matrix below. (See Figure 4.3)

0Figure 4-3 Capability Assessment Matrix: Step One

The vertical axis determines the proprietary nature of capability in comparison to those of competitors by asking managers with two questions: firstly, does our company carry out the capability XYZ in a way that generates measurably more value than its competitors? And secondly, would our company suffer a high degree of strategic damage if rivals could imitate that capability? (Gottfredson, Puryear, & Phillips, 2005) In the horizontal axis, the manager should determine the commonality of the process XYZ across the industry. That is, practitioners should determine whether a capability is common enough that outside suppliers could achieve scale or other advantages by supplying it to multiple companies? To do this analysis, practitioners and managers should look outside their company- even their industry. They should try to

120 identify capabilities in which outside suppliers are building scales across their industry or across several industries (Gottfredson, Puryear, & Phillips, 2005). While applying the above matrix will help managers to identify the capabilities that are of high priority for outsourcing, the procedure still continues. Putting the Resource Based View in to work, we will find additional criteria for capability evaluation. According to RBV a resource and capability is valuable when it satisfies three characteristics: to be scarce, to stimulate demands in market and finally to be valuable (in terms of profit) for the company (Collis & Montgomery, 2008). To evaluate these three characteristics a resource or capability should be hardly imitable by competitors, should be durable at least for a long period of time and not depreciate in short period of time (depending on the nature of the industry), and should makes value for the company, should not be substituted in near future and finally should better than those of competitors (Collis & Montgomery, 2008). As it is clear from the above criteria, RBV considers both current and future of the industry in evaluating resources and capabilities. In addition, it considers both internal and external aspects of the company in capability evaluation. In the first step of our framework, we have analyzed the industry (whether the capability is common across the industry or not) in addition to competitive superiority of assumed capability by asking for imitability and value creation in comparison to competitors. Our first step analysis looks to both current and future of the industry and competitors. Yet, durability and substitutability of the capability in future has not been investigated. In addition according to table 4.2 of this chapter and case studies presented in earlier sections, customers should be taken into account as their behavior and characteristics play an undeniably important role in determining the firm boundaries. Therefore, we developed a second step for more investigation of those capabilities which are labeled as “Low or Medium Priority for Outsourcing”.

The second step considers the sustainability of the capability and customers’ needs simultaneously with respect to future (See Figure 4.4). This step can be assumed as a double check step for evaluating those capabilities which in the previous step have

121 fallen into Medium or Low priority for outsourcing. In developing this matrix, we have gained insights from the framework developed by (Mclvor, 2008).

Sustainability theof Capability Futurein

0Figure 4-4 Capability Assessment Matrix: Step Two

In the vertical axis, sustainability of the capabilities in future will be investigated by questions like “Will the capability be substituted in near future?” and “will our company be able to perform this process with high quality in future (durability)?” As evident, to answer the first question, once again the industry analysis is a must. In the horizontal axis, managers should ask themselves “Who are the customers of this process based on our industry?”, “Is their need to this process will still exist in future?” As it is also evident, answering to these two questions also requires a detailed analysis of industry and customers. After conducting the above two steps for all processes identified in the organization, and categorizing capabilities as “to be outsources” and “to be kept in

122 house”, the final step of our evaluation framework should be applied. Looking at the category of processes which are labeled as “to be kept in house” managers and executives should adapt them with the unbundling theory using our classification presented in chapter two and once again ask themselves “ Are we compromising those capabilities and returns by participating in more than one business types?” This question will ensure the organization that it has not lost its focus and if so, executives and practitioners should once more conduct elaborate evaluation of remaining capabilities to decide over in which of three core businesses the corporation should focus based on unbundling theory. In conclusion, in framework presented in this section, we have tried to consider all important factors may have impacts on unbundling decision which have been found in our case studies: industry analysis, competitor analysis and finally customers. In brief, the first step evaluates the capabilities according to industry commonality and competition superiority. Then, in the second stage, the capabilities which seems should be kept in house once again would be assessed by considering future sustainability of that capability within the corporation and industry and future customer wants and needs. Finally the third step compare the remaining capabilities with unbundling framework to prevent from any potential compromise among core business processes- CRM, PIC and IMB. In the final section of this chapter, the framework developed in this part has been applied in a real case Dell Inc.

4.3 Applying the Capability Mapping Framework: Dell Inc. Case

To show how our developed framework can be applied, we have considered the Dell Inc. case. The aim of this section, of course, is not to scrutinize the Dell Inc. in detail. However, the very aim is to analyze the recent decision of Michael Dell indicating his strategy toward more specialization and focus as the rapid change has been taken place in PC industry. Dell is most famous for his direct model selling PCs directly through internet to its customers. For years, Dell had focused on its most profitable segment of its customers which were among large companies, midsize companies, government and educational

123 centers supplying them with various product categories in addition to PCs (Mobility, Software peripherals, Servers & Networking, Services, and Storage devices) (DATAMONITOR, 2008). By managing network of suppliers, Dell assembled different parts in its dispersed manufacturing centers and send finished products to the customers (Magretta, 1998). The most important outcome of Dell’s business model is its ability to provide customers with PCs lower costs than competitors. In fact, Dell has focused cost as its primary value proposition for customers. Like so many other companies in the PC industry Dell has so many parts of value chain in its boundaries. However, Michael Dell has been smarter than its competitors when launching the company. Instead of developing different manufacturing lines to produce every component of PCs and Laptops from scratch – as some of its competitors did- Dell buy those components from its suppliers and just assemble them and send them to its customers. In this way, in addition to cost cutting, Dell has been able to hasten the cycle of build to order facilitated by its direct model. The direct model enabled Dell to order to its suppliers what was really supposed to be sold and therefore reducing the risk and costs of inventory. Dell reduced the stock time of its products to four days while its competitors had the average of 80 days which makes a business in a great stake at such a rapid changing industry (Magretta, 1998 b). However recent analysis and trends in the PC and computer industry shows great changes in this industry that requires shifts to be taken in Dell’s strategy. While master in PC manufacturing and sales at low cost, the trends of PC sales in U.S show stable sales volume in future and growing trends outside the U.S (See Figure 4.5). This is not good news for Dell as it has PCs as its most profitable product category (32% of Dell’s sales based on DATAMONITOR (2008)). For years, Dell had its focus mostly in U.S businesses and by increasing the competition and maturity of the market; it may lose its market share. In addition, its lack of strong presence outside the U.S. is a disadvantage for Dell.

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Number of U.S vs. World Wide PC Sales Worldwide PC Sales (#M) U.S. PC Sales (#M)

0Figure 4-5 Forecasts of PC Sales Source: www.eTForecasts.com

Yet, other categories of products estimated to have an increasing trend specifically outside the U .S. (See Figure 4.6 ). To be brief and specific , analyzing the recent trends in industry, one ma clearly underst and that the market shifted. The market shifted from desktop computers to much more standardized notebook PCs. The customers shifted as well – consumers became a much more significant part of the market (Tyson, Cannon, & Schukenbr ock, 2008 ). They tended to favor purchases through traditional retail channels, rather than the direct selling channels favored by large corporate buyers, which undermined the opportunity to differentiate through on -demand customization. The focus of manufacturing and logistics shifted from rapid turnaround of direct sales orders for highly customized desktop computers to cost -effective manufacturing of large numbers of relatively standardized notebook PCs for retailers. Dell’s system has been optimized for the former and was n ot designed for the latter (Hagel, 2008).

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World Wide Market Segment

- Worldwide PC Server Sales (#M) Worldwide Desktop PC Sales (#M) Worldwide Mobile PC Sales (#M)

Figure 4-6 Forecasts of PC Sales Source: www.eTForecasts.com

On the account of those facts, Dell Inc has started to shift its strategy. In a rece nt report publicized by Wall Street Journal (2008 ), Dell has announced its decision to close a great proportion of its manufacturing systems and go for contractual agreements by specialized companies to assemble its product components (Mortiz , 2008). Doing this, Dell is aimed to focus on relationship management aspects of its business rather than manufacturing and infrastructure according to theory of unbundling. This strategy is also in line with the growth and profitability wh ich has been prognosticated for service and customer relationship in this industry (See Figure 4.7).

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0Figure 4-7 Forecasts of PC Sales Source: Tyson, Cannon, & Schukenbrock (2008 )

It is possible to scrutinize the shift in Dell’s strategy according to the framework which has been developed in the previous section. Consider the manufacturing and logistics processes of Dell for instance. Assessing those capabilities which are categorized as infrastructu re management business (IMB) according to unbundling theory, it is evident that Dell is the best company who is able to run such a complex business model enabling the company to reduce inventory level and cycling in comparison to its rivals. Therefore, thi s capability can be summarized as proprietary for Dell in addition to the fact that if others have been able to imitate it, Dell would have suffered a great loss. Yet, there are third party companies who are able to assemble Dell’s products components as D ell’s partners. These companies are available specifically in India and south eastern Asia. Therefore, we located Dell’s IMB capabilities in lower cells of our first- step matrix (See Figure 4.8). As it was discussed in the previous section, those capabili ties which are assumed to have low or medium priority for outsourcing should be checked again in the next step. The second step, evaluate the capability in terms of future customer needs and sustainability. However, as it was discusses, the trends in indus try and customer needs are changing in computer industry.

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0Figure 4- 08 Dell’s IMB Mapping in Capability Assessment Matrix: Step One

While business customers need more service and support, consumer market is also getting bolder and has significant growth in PC and Laptops. These consumers tend to go to stores and malls for shopping and do not use direct model which is more suitable for business customers. Therefore, IMB as Dell conducts it seems to be less valuable in future. In fact, Dell should go toward retailers and distribution channels instead of eliminating them in consumer market. This is the market that Dell has ignored it for long time and it has turned to be a valuable market. According to the Forrester Research report in 2007, the value of consumer market will be as equal to business market in 2011. As a result, it is eligible to locate Dell in “Medium” in our evaluation of “Future Customer Needs”. It is noteworthy to be mentioned that our mapping is in line with Dell’s strategic movements (Ogg, 2008; Chang & Lynn, 2007; Einhorn, 2007; Schenker, 2007). It has decided to go for retail channels and have signed various contracts with big retailers around the world such as Wal-Mart, Staples, Gome and etc. Finally, the criteria of sustainability of the capability in future will fall also in medium to high range as Dell is able to run this type of business model even in future but it does not have previous

128 amount of customers (See Figure 4.9). Dell’s IMB capability is located in the area which needs more investigation.

0Figure 4-9 Dell’s IMB Mapping in Capability Assessment Matrix: Step Two

Continuing our analysis, we should now look for Dell’s service and support processes in addition to relationship management capabilities. Dell’s direct business model has enabled this company to have a large customer base and information about its customers. Also, Dell has long had the customer intimacy approach by giving its customers the consulting services about what software and hardware best suit them. Dell also customized the software required by its customers, specifically business customers. Dell, depending on the importance of customer, will give its customers different levels of services. For instance, Dell has located some of its professional employees at Boeing to continuously service this valuable customer in site. Yet, Dell is not so strong in relationship with retailers and channel members of consumer market. Dell, to gain more share of consumer market, needs to improve its design- the strategy in which Apple is the

129 premier. Finally, there may be third parties to whom Dell should be able to outsource some or whole of this capability. In result, Dell’s ability in CRM will be located at the middle of the first matrix which is “Medium Priority for Outsourcing” cell (See Figure 4.10).

0Figure 4-10 Dell’s CRM Mapping Capability Assessment Matrix: Step One

Consequently, the CRM capability should be investigated in the second matrix of capability assessment procedure. As the needs for this capability in both consumer and business markets are high and due to the ability of Dell to perform such processes, Dell will be located in the area of “Invest and Upgrade”. (See Figure 4.11) Evaluating Dell’s capabilities, we now have two capabilities at hand. The first is its traditional capability of IMB and producing low cost products specifically for business customer and the other is CRM capability. While IMB capability is located in the middle of the second matrix and in fact needs more investigation, the CRM capability was located in the definite area of the Matrix. Yet, the third step of our assessment procedure has not been conducted. It is the time for asking “Are these two capabilities are compromising each other according to the theory of unbundling?” and the answer is YES! This is because the IMB capabilities need scale while CRM needs scope and these two, as discussed before, cannot be simultaneously managed.

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0Figure 4- 011 Dell’s CRM Mapping in Capability Assessment Matrix: Step Two

In conclusion, Dell should invest in one of those capabilities and outsource the other. It is better to invest in CRM as it has better future and outsource its IMB processes to the partners around the world who are able to perform the tasks with higher quality and less costs. In fact, Dell should position itself in an orchestration level and try to manage its network of partners while at the same time focusing on CRM with both its consumer channel members and business customers. The last but not the least is that our findings and results from framework is in line with Dell’s latest strategic shifts released in news (See for instance www.cnn.money.com or www.businessweeks.com on Dell).

4.4 Conclusion

In this chapter, we developed a framework for capability assessment of a corporation. In developing such a framework, we conducted secondary case studies in addition to literature review on RBV criteria for evaluation of capabilities and resources. Finally, we come up with the three-step procedure for evaluation of corporate

131 capabilities. The framework is inclusive and compromises the whole points we found important and effective in unbundling decision making. At the end, we examine our framework with a real case of Dell Inc. and found our results the same as real actions Dell has taken recently in the industry. Developing such a framework, we have answered to the fourth research question of this thesis. In next chapter, we will study the network aspect of unbundling decision making process and provide the answers to the related research questions.

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Chapter Five Unbundled Companies in the Network Context: the Roles and Capabilities

5. Unbundled Companies in the Network Context: the Roles and Capabilities

As discussed in chapter one, unbundling the corporation is an inevitable growth strategy for companies in today very turbulent business era packed with uncertainties. We explained that there are three possible stages of the growth for companies choosing to apply the unbundling strategy: • The First Stage: of growth will result from focusing on core capabilities and unbundling the non-core capabilities. It will help the company to gain more focus

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and reduce its costs. This will also reduce the risks the company may take by conducting “everything” itself. Gaining more flexibility, the company which has focused on its core capabilities may leverage its expertise in different industries or network and achieve more profitability. • The Second Stage: of growth relates to the opportunities a company will achieve by participating in the existing process networks or by forming a new network. By sourcing its non-core capabilities from other specialist partners, a company will be able to satisfy all its required processes with higher quality and less cost for its target market and consumers which is the case of orchestrators. Moreover, a company may introduce new technology standards for network members and play a dominant role in the network platform development as we will discuss in detail about the shapers. • The Third Stage: of growth is related to the re-bundling which will happen for companies focusing on CRM and IMB core processes. As argued in chapter one, for those companies which will focus on Scale or Scope, the rebundling process has been expected in order to achieve more scale and scope. In another terms, companies which have focused on IMB (Scale) start to merge in order to save cost and increase profitability by achieving more scale. This is the same for companies with CRM as their core process.

Accordingly, in this chapter, our perspective to networks is based on achieving growth. This is of course is a special type of growth which we call “Leveraged Growth” – the type of growth which does not require a company to own all resources and capabilities to expand. In fact, unbundled companies are able to benefit from the advantages of leveraged growth by forming or participating in the process networks with specialist members. In the following sections, we will firstly introduce the concept of leveraged growth and its advantages in brief. In addition, we will introduce different roles which unbundled companies may play in a network and benefiting from leveraged growth. Then, we will introduce these roles in detail in consequent sections separately and explain what capabilities each of those roles requires. Finally, we will come up with questions that

134 managers should answer before deciding over choosing their roles in the network. Taking all the above steps, we have provided the answers to the fifth, sixth and seventh research questions of this thesis: “what are the roles a company may play in a process network?”, “What are the specific capabilities companies should develop in a process network according to their roles?” and “How companies should decide which role to play?”

5.1 Leveraged Growth and Different Network Roles

The traditional routes to business growth – organic expansion and acquisition- share a common requirement: investment in proprietary assets. To grow organically, companies build new assets and to grow through acquisition, companies need to buy other companies and facilities. Either way, the growth was equal to owning the assets- whether tangible or intangible ones. Owning is what makes the traditional growth strategies risky because the managers and investors should firstly invest and wait while the pay offs may come later or never to come (Hagel, 2002). However, there is another kind of growth strategy with substantially less risks and more profit: leveraged growth . This type of growth is specifically adaptable to companies which have applied the unbundling strategy or those which born unbundled from the beginning. It begins with the realization that it is not always necessary to own the assets required to expand. In fact, in the leveraged growth strategies, growth of the unbundled company is intertwined into its web of partners. In another term, if the web does not maximize the value, neither can the enterprises within it (Hagel, 1996). Before discussing over different types of leveraged growth strategies, we have provided a simple example to show how leveraged growth strategies can work. EXAMPLE: Imagine that you are successful manufacturer of high-end stoves for the home. You spot an opportunity to enter the microwave oven business using recent innovations in microelectronics technology. Traditionally, to capitalize on the opportunity, you would hire a new engineering and design group with the appropriate technical skills, or you would buy a small microwave oven manufacturer. Using a leveraged growth strategy, though, you would find independent home-product designers and encourage them to work with contract engineering groups to develop innovative oven designs. You would also develop relationships with various manufacturers specializing in

135 different stages of the production process and use them to actually make the ovens. Your role would be to manage the process network, facilitating the collaboration of these three groups of companies. They would go along with the arrangements because your broad distribution, sales and marketing capabilities would speed the new line’s acceptance in the market. By tapping into other’s assets rather than either building or buying your own, you reduce your financial risk, break into markets more quickly, and stay responsive to future technological and market shifts (Hagel, 2002). As illustrated in the example, there are some advantages for this kind of strategy such as: • speed time to market, • financial and technological risks reduction by leveraging on others assets • being responsive and flexible to changes in the market, • cost reduction and quality improvement due to utilizing specialized members in the network, • improving the level of innovation by leveraging on more companies and specialists The advances in internet and communication technologies have made it possible for companies to exploit the invaluable benefits of this type of strategy (Hagel, 2002). Companies applying the unbundling decision unavoidably face with the challenge of choosing their roles in the network of specialized companies. There are two main modes of decision in front of managers entering to the world of networks: to play a role of a leader in a network formed by their unbundled organization or to join an existing network and play a role of a member. Choosing either of these two decisions will enable a company to benefit from advantages of leveraged growth, however for those who are able to play the role of a leader the opportunities for growth are much more significant (Hagel, Seely Brown, & Davison, 2008). There are two types of leveraged growth strategies available for leaders of networks: Orchestration and Shaping (Hacki & Lighton, 2001). These two roles are different in nature and characteristics. They need different capabilities and managerial decisions. Therefore, we will study these two important roles in the networks separately.

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5.2 Network Orchestration

Before beginning to think about deploying a network strategy, managers must realize that not every company is cut out for the orchestrator’s role. Each company that has built a successful network began with a strong and close relationship with the ultimate consumer of network’s products. Unless a business has already created demand among end users and developed insight into their needs from having served them, it is not likely to succeed in persuading other businesses to clamber onto its strategy and platforms. A would-be network orchestrator will then of course have to promise them a continual flow of market intelligence and new strategic opportunities (Hacki & Lighton, 2001). In another terms, it is much more feasible for unbundled companies which have focused on CRM capabilities and processes. This is due to the information that they have from the real orchestrators of the network which are consumers or end business customers. To better understand the important role of orchestrator of a network, it is necessary to define the “business process networks” . Business process networks are a group of companies each is specialized in one or more processes of value chain which together form a complete value chain. They cooperate with each other in order to deliver a service or product to the end business customer or consumers of the network. In fact, the term “ business process networks” gains its real meaning and spirit under the unbundling theory and concepts. As companies are focusing more and more on their core capabilities and unbundle their non-core processes, the born of process networks in different industries is increasing (eBay, Schwab, Li &Fung, Amazon.com, Nike and so many others). The role of orchestrator is then to lead the participants of the process network in a way that the outcome of network will satisfy end customers. Before more proceeding about orchestration role in process networks, we have chosen a pure orchestrator in apparel industry, Li & Fung, to present in the following section. This case study will enable us to explain the characteristics and responsibilities of an orchestrator in a given process network in consequent sections. The following materials have been extracted from (Magretta, 1998 a), (Hagel, 2002), (Seely Brown, Durchslag, & Hagle, 2002) and (Seely Brown & Hagel, 2006).

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5.2.1 Case Study: Li & Fung

Established in 1906, Li & Fung, based on Hong Kong, began as a family-run trading company that acted as a broker between Asian manufacturers and overseas merchants for transactions involving apparel, mainly. By the mid-1970s, when brothers Victor and William Fung took over, the company's margins were under pressure. Brokerage fees were being squeezed as the buyers and manufacturers became increasingly comfortable dealing with each other directly. In response, the brothers remade the business . Rather than connecting just two levels of the value chain, Li & Fung became a much broader intermediary, connecting and coordinating many different links in the chain. It became, in other words, an orchestrator of a process network. To produce a garment for the European market, for example, the company might purchase yarn from Korea that is woven and dyed in Taiwan, cut in Bangladesh, then shipped to Thailand for final assembly, where it is matched with zippers from a Japanese company and, finally, delivered to geographically dispersed retailers according to schedules specified well in advance. Li & Fung owns none of the facilities involved in processing the raw material into finished goods. It owns none of the equipment that transports the products through the various stages of production. It does, however, have privileged access to some 7,500 supply and manufacturing companies across 39 countries around the world that possess specialized production and distribution capabilities. By using its own knowledge of the apparel market to leverage these other companies' assets, Li & Fung has been able to achieve impressive growth in the slow-growing apparel industry. The company doubled its revenue, to $3.2 billion, over the five years from the beginning of 1996 to the end of 2000. During the same period, its net after-tax income nearly tripled. In fact, during this period of double-digit annual growth , Li & Fung consistently delivered a return on equity of more than 30% in an industry notorious for its thin margins. The high returns can be traced directly to the company's leveraged growth strategy. It operates with very limited fixed assets, the book value of which amounts to only 5% of revenue. Its financial leverage is minimal, with a debt-to-equity ratio of .05. And its employee productivity is high: By 2001 fiscal year, Li & Fung generated $5

138 billion in revenue with only 4,200 employees--more than $1 million in sales per employee. When the Fung brothers shifted the company's strategy, they also overhauled its organization. They moved away from its traditional geographic divisions to a new customer-centric structure . Now, dedicated divisions serve each of the largest apparel designers-companies like Abercrombie & Fitch, Laura Ashley, and Levi Strauss. To serve smaller customers, other divisions focus on specific segments like theme stores. Each division is run by a person who is responsible for developing a deep understanding of customers' needs and then fulfilling them by mobilizing the necessary resources within Li & Fung's process network. To preserve the entrepreneurial spirit, each division is kept relatively small, averaging about $30 million to $50 million in revenue. On the supply side, the company's knowledge is equally deep. Through its experience with the thousands of suppliers in its network, Li & Fung maintains a detailed, up-to-date view of supplier performance in a wide variety of contexts. For example, some apparel cutters may do well with coarser forms of wool but lack the expertise or machinery required to maintain high quality and high throughputs for more delicate forms of wool like angora or cashmere. Such operational information helps the company not only allocate work across the process network but also give its suppliers in-depth feedback, which leads to ever stronger performance. It would be no exaggeration to say that Li & Fung understands the relative value of its suppliers' assets better than the suppliers themselves do. This broad knowledge of manufacturer and supplier capabilities enables the company to quickly tailor the supply chain to meet each customer's particular needs. One of the company's divisions, StudioDirect, is able to begin production within six hours after receiving a customer's order over the Internet. The process network can also be quickly reconfigured to adapt to unanticipated events. Within a week of the September 11 terrorist attacks, for instance, Li & Fung had shifted production out of facilities based in potentially unstable countries to more secure plants to avoid disruption in supply. Why are so many companies willing to shape their own operations to fit Li & Fung's strategy? because Li & Fung offers them compelling economic incentives. Its long-standing relationships with leading apparel designers and retailers enable the

139 company to deliver substantial and steady business to its partners. Although the group of companies that's mobilized to fill any particular customer order varies greatly, Li & Fung strives to maintain strong, continuing relationships with all the partners in its process network. Its goal, in fact, is to account for between 30% and 70% of each supplier's production capacity over the long run. It tries not to go below 30% because it believes it needs at least this level of activity to get priority attention from the partner and to maintain a clear view of the partner's capabilities. It tries not to go above 70% because it wants to avoid making partners totally dependent on Li & Fung for their business ; it believes that partners can enhance their capabilities by working with other customers as well. Beyond being a source of substantial revenues, Li & Fung offers another important incentive to suppliers: the ability to steadily improve their skills and performance. Because the company establishes detailed benchmarks across its process network, it can give all participants valuable insight into their particular strengths and weaknesses. Suppliers' managers then have the opportunity to work with Li & Fung's employees to understand how they can address their performance gaps. The result is a powerful platform for continuous performance improvement.

5.2.2 Orchestration Capabilities

Li & Fung is a very good example of pure orchestrator. As discussed, although not having facilities and resources by its own, there are some critical capabilities which Li & Fung has mastered them in its genes in order to be able to orchestrate such vast array of companies in its process network. All process networks operate in similar ways-- and differ considerably from traditional business processes which have its focus on departments within boundary of a firm (Hagel, 2002). Accordingly, in this section, we will introduce the required capabilities of orchestrators by looking at their responsibilities in the process networks. The following points are critical functions that should be performed by orchestrator of the process network (Hagel, 2002; Seely Brown, Durchslag, & Hagle, 2002; Seely Brown & Hagel, 2006):

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1- Defining the requirements that companies must meet to participate in the process network 2- Recruiting companies to participate, 3- Setting standards for communication and coordination among companies and structuring an appropriate information architecture, 4- Tailoring the process to the needs of particular products or customers by specifying who will participate and what their roles will be, 5- Loosely coupled managing of relationships for more innovation and flexibility by defining milestones and action points 6- Assuming ultimate responsibility for the final products of the process, 7- Creating performance feedback mechanisms so participants can continually improve performance 8- Structure appropriate incentives for participants; encourage increase specialization over time 9- Cultivate deep understanding of processes and practices to improve quality, speed, and cost-competitiveness of network continually 10- Replacing low-performance participants

If one tries to classify the above capabilities in more general categories, he/ she may reach to four main groups as: recruiting and certifying members, specifying consumer needs and breaking them down into processes available at network, relationship management and communication with members, and finally performance evaluation to improving the network outcomes and members. Regarding the first category of orchestrator’s capabilities, recruiting and certifying members, we can consider the role of orchestrator as the gatekeeper, certifying the capabilities of the companies before they are admitted. Both Cisco and Nike, for example, have rigorous certification procedures to determine whether a company is qualified to join their networks. Once in, companies must regularly be recertified to ensure that they continue to meet the performance criteria. Regarding the second capability which is related to translating the consumer or end business customer needs, we can think of process networks as modular systems, with

141 each member company serving as a discrete module. As the modules become more specialized and refined, the entire system becomes more adaptable in its ability both to precisely meet customer needs and to achieve ever stronger levels of performance (Hagel, 2002). Regarding the communication and relationship management in process networks, it would be unusual for orchestrator to have the power to impose rigid work rules on a large number of other companies. Therefore, the orchestrator of a process network does not try to manage the work that's performed by each participating company. It manages the process at a more macro level, deciding which participants to involve at what points and specifying their outputs. It manages, in other words, the connections between modules, not the activities within modules. Each service provider decides what it needs to do to deliver the specified outputs. If the service provider performs well--meeting or exceeding time and quality requirements for its outputs--it is rewarded with more work. If it performs poorly, the orchestrator shifts work to other service providers. This type of managing is called loosely coupled management (Hagel, 2002; Seely Brown, Durchslag, & Hagle, 2002). To coordinate all the steps in a traditional process, the process manager needs full information transparency--he or she needs to know exactly what's going on at any particular moment. That's why business process reengineering so often requires massive efforts to overhaul corporate databases. Fragmented and imperfect information becomes a source of inefficiency. But to manage a more loosely coupled process network, the orchestrator can be more selective in processing information and need only exchange key bits of information with service providers at key moments (Hagel, 2002). The service providers typically need two types of operating information from the orchestrator. First, they must have detailed information on product specifications to perform the task at hand. Li & Fung, for example, invests significant effort in communicating to its partners the exact tinge the customer requires for each item of apparel. Second, partners have to know how products and customers' needs are evolving so they can plan their future development. Cisco, for instance, provides its channel partners with regular updates regarding the evolution of its product line (Hagel, 2002). This is the duty of orchestrator to establish a common communication platform which will be accepted as an standard among partners and customers (Hacki & Lighton, 2001).

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In return, the orchestrator needs timely information about each service provider's progress toward delivering its required outputs. Defining and tracking milestones thus becomes critical to the overall performance of the process network. The orchestrator needs to know when a milestone is completed or is in danger of being missed. If a milestone is in jeopardy, the orchestrator can call in an, other service provider to get the process back on track or modify the process to minimize any disruption (Hagel, 2002). Finally, the performance measurement capability of the orchestrator company will enable it to improve the performance of different participants in micro level and the whole network in a macro level. Either the customer or the orchestrator can enforce performance standard. In the case of eBay, both the sellers and buyers rate each other while in Charles Schwab’s network, the company itself rank and monitor its members (Hacki & Lighton, 2001). Benchmarking is one of the useful tools for performance evaluation which is easily applicable in a loosely coupled managed network. As discussed, Li & Fung in the course of monitoring its network constantly compares the performance of hundreds of different companies. It then shares the information with all of them, giving them a detailed understanding of their performance gaps, ideas for addressing them, and strong incentives for taking action (Hagel, 2002). Incentives can be in the form of more working loads or any other type. Low-performance participants will be automatically ejected and will be replaced by new entrants in the network.

5.2.3 Advantages of Loosely Coupled Relationship Management

Loosely coupled processes are the building blocks of process networks and orchestration (Seely Brown, Durchslag, & Hagle, 2002). This is the big difference between traditional supply chain management and network orchestration. The management paradigm in many supply chains is based on tightly coupled relationships and management in which the leading company will control the internal activities of its suppliers. This type of managing relationships will damage the level of suppliers’ innovation drastically. In addition to having a negative effect on the level of innovation in the network, today’s broad preference for the tight management of relations with partners carries an inevitable corollary: cutting the number of suppliers to a minimum. Also, such tight integration requires resources, the attention of management, lengthy negotiations,

143 detailed contracts, and the extensive monitoring of performance. In short, the coordination costs are steep. In contrast, in a loosely coupled relationship management, the suppliers will be evaluated based on their outcomes and the way they perform the operation. In another terms, the way they reach the results is not important to the orchestrator. This will allow suppliers to apply local innovations to better perform the tasks and therefore reduce the costs and improve the quality in their processes and in consequence for the whole network (Seely Brown & Hagel, 2006). Moreover, the loosely coupled relationship management will increase the flexibility of the network in response to market changes. The orchestrator is easily able to arrange specific processes available in the network to the customized orders of its end customers without any need to radical changes in the structure of network. It is also possible to quickly reconfigure the network in response to unforeseen events. As discussed in the case, Li & Fung quickly shifted production from high-risk countries to lower-risk ones following the September terrorists attacks in U.S. however, companies with tightly coupled processes can also re-source production, but not quickly—and only at considerable expense. Li & Fung, on the contrary, moved hundreds of millions of dollars in merchandise in just seven days (Seely Brown, Durchslag, & Hagle, 2002). Additionally, the loosely coupled relationship management will enable the orchestrator to attract more unbundled and specialists to the network which in results improve the flexibility, specialization and innovation of the network (Seely Brown & Hagel, 2005). As a result of the ongoing benchmarking and certification efforts, service providers will tend to focus on ever narrower sets of activities --those in which they have truly distinctive capabilities—and unbundle their non-core processes. In result, as the orchestrator will divide the process into finer and finer segments, additional providers populate in each segment. That's the process Li & Fung went through as it categorized fabric cutters according to their ability to deal with different sorts of wool (Hagel, 2002). By attracting more and more suppliers, the coordination costs per supplier will fall considerably in the loosely coupled relationship management. Yet, the aggregate coordination costs that the orchestrator incur may be higher than those of managing

144 tightly coupled relationships in traditional supply chains because the orchestrator will work with so many of them (Seely Brown, Durchslag, & Hagle, 2002). According to above points, it is possible to compare the advantages of orchestrating the loosely coupled process networks with traditional supply chain as follow:

Loosely Traditional Supply Coupled Business Chain Process Networks Level of Innovation in Network High Low Functional Units and Unit of Analysis Processes Corporations Specialist Participants Large Limited (Number of Members) Internal Outcomes and Focus on procedures of suppliers, Innovation efficiency Coordination Costs per Low High Supplier Capability of Customization High Low Level of Resource Ownership Low High Capability in Coping with High Low Unseen Events Table 5-1 Comparison of Loosely Coupled Business Process Networks & Traditional Supply Chains

The final point which is worth to be mentioned is the growth of process networks. Such a network eventually faces a test: it must continue to grow so that service providers within it can continue to expand their own businesses. Here, we should differ between two types of process networks: Open Process Networks and Close Process Networks . Li & Fung operates what might be called an open process network. Because it does not make or sell any products under its own brand, it can offer the services of its process

145 network to any and all product vendors without worrying about conflicts of interest. Other companies operate closed process networks--networks that they orchestrate to make or sell their own, branded products. Nike, for instance, coordinates a far-flung network of suppliers to produce its athletic gear, and Cisco manages complex groups of both suppliers and distributors to make and sell its networking equipment. As a basis for growth, open networks are generally more powerful than closed ones. That's because the growth opportunities of a closed network are bounded by the orchestrator's product offerings. If those products lose their appeal--if, for instance, Nike's swoosh falls out of fashion--the ability to add value through a process network declines accordingly. But the growth of an open network is not constrained by the market shares of any particular products. The orchestrator can address the needs of all product vendors in the categories it targets--and, often, it can quickly extend its orchestration capabilities to new categories, as Li & Fung has recently done in expanding into different kinds of manufacturing like home furnishings and toys (Hagel, 2002).

5.2.4 Can We Play an Orchestrator Role? It is important to understand that almost any company can benefit from the advantages of orchestration and loosely coupled managing of relationships by working with their current top tier suppliers. However, the following questions can be considered as an appropriate guide for managers and scholars to assess the capability or readiness of an unbundled organization for orchestration role (Seely Brown, Durchslag, & Hagle, 2002): 1- Do you have close relationships with customers who honestly reveal their needs, how well their needs are being met, and how those needs are likely to change? 2- Does your organization have detailed knowledge of the broad set of practices and core processes being coordinated? 3- Do you have close, trusting relationships with partners that possess the specialized skills needed to deliver a product or service with a competitive advantage? 4- Do you understand the economics and profit-and-loss hurdles for all partners and customers?

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5- Can you create incentives to expand dynamically and move the process network toward increased specialization and continuous improvement over time?

To sum up, based on all points presented in section 5.2 and its subsections, we have introduced one of the most important roles which unbundled companies can play in their networks: orchestration. We have discussed over the key capabilities and characteristics that this role requires and finally we provide five key questions for managers to be able to check their organizational readiness for playing such a beneficial role in their networks. In the subsequent section of this chapter, we will introduce another key role which unbundled companies can play in their networks: to be a shaper.

5.3 Shaping a Technological Platform

In this section, we will discuss over the second role which unbundled companies may play in their networks. As previously explained, this role, to be a shaper , is another type of leveraged growth strategies available for unbundled and specialized companies. Although, to some extent is similar to orchestration role, this type of role has specific characteristics which makes it distinct from orchestration role. The first question which may arise is related to the term “shaping”. Shapers are those companies which have developed a technological platform attracted many companies which have applied those platforms in their businesses. In addition, to bring that platform to market, there are usually many suppliers cooperating with each other under the core technology owner- shaper. Therefore, to put it in simple terms, shapers are owners of a core technology which develop it continuously and transform it – by cooperation of partners- into a platform which will be utilized by so many other companies. There are numerous examples of shaping strategies in different industries such computing, telecommunications, electronic appliances, semiconductors, enterprise software, data storage, automobiles, alternative energy technology, Web portals and electronic payment systems (Cusumano & Gawer, 2002 a). Going forward, these

147 strategies have particular value in industries with lots of potential participants and widespread uncertainty about the future, usually stemming from disruptions related to technology, public policy, or both (Hagel, Seely Brown, & Davison, 2008). To elaborate more, we can consider the example of the two of the most well- known shapers of our time: Intel and Microsoft. Intel is the market leader of producing microprocessors. This company, by means of its partners such as Microsoft, has established a technological platform in that many other companies have planned their business activities. Today, in most PCs and laptops and other related computing equipments, finding the footprints of Intel and Microsoft is so easy. In another terms, although there are many components in a PC, the microprocessor and the PC’s operation system resemble the heart of the PC. Simply, because of the importance of these two parts, other partners will develop their complementary technologies based on standards provided by Intel and Microsoft (Cusumano & Gawer, 2002 b). Clearly, when discussing about shaping strategy, two important sections in these networks are identifiable. The first part is related to the supply side, a group of companies which are cooperating to produce a technological platform under the vision of shaper. The second part consists of those many companies which will apply those products and as their number increases, the network and the shaper will gain more power. The shaping company, playing a leading role in these networks, should have specific capabilities regarding these two important sections of the network. In the following sections, we will explain the required capabilities by shapers.

5.3.1 The Shaping Capabilities

As the shaping strategy or role forms around a core technology, from unbundling perspective, it is persuasive to accept that those companies with the focus on product innovation and commercialization (PIC) capabilities are more prone to such a role. However, not all companies which focus on PIC capabilities have the additional and required capabilities which are specific to this role. The specific capabilities of this role in the network can be classified into three elements. These three inter-related elements should be provided by the leader of the technology network, the shaper. (See Figure 5.1)

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Figure 5- 01 Shaping Role Capabilities

Source: Hagel, Seely Brown, & Davison (2008)

A Shaping View : The first step in shaping an industry or market to one’s advantage is to change the way potential participant perceive market opportunities. By altering mind-sets, shapers can materially influence the perceived economic incentives to participate. They start with a clear and compelling long-term view of the relevant industry or market. The view makes sense of the fundamental forces at work, helps participants envision the rewards and act accordingly, and reduces perceived risk by making the positive outcomes appear inevitable. The shaping view is never very detailed; it leaves much room for refinement. But it is clear enough to help participants make difficult choices in the near term.

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The classic shaping view articulated by Bill Gates in the early 1980s motivated many executives to make the trek to Redmond, Washington, during a time of great turmoil and uncertainty in the computer industry. They came away reassured that someone had a compelling view of the industry’s direction. Even more important, Gates shaping view helped these executives understand where to invest. At a time when many options were competing for investment, an invitation to focus clearly on the highest- return opportunities proved extremely valuable. For Microsoft, this shaping view was incalculably important to the company’s early success (Hagel, Seely Brown, & Davison, 2008). To conclude, platform leaders need to have a vision that extends beyond their current business operations and the technical specifications of one product or one component. The ecosystem can be greater than the sum of its parts if companies follow a leader and create new futures together. Complementors need to understand the vision of the platform leader in their industry and make some bets on what that vision means for their own future. But it is the platform leaders, with the decisions they make, that have the most influence over the degree and kind of innovations that complementary producers create. Platform leadership and complementary innovation by outside companies are not things that happen spontaneously in an industry. Managers with vision make them happen.

A Shaping Platform: The second component of a shaping strategy is the shaping platform, a set of clearly defined standards and practices that help organize and support the activities of many participants. Shaping platforms provide leverage; they enable participants to do more with less. Leverage is always valuable in times of high uncertainty because it reduces the investment and effort required to target potential rewards, and it often accelerates returns, thereby reducing risk (Hagel, Seely Brown, & Davison, 2008). These platforms around technologies are the most advanced that emerged in the business to date (Hagel, 2002). The shaper has the core technology at hand. However, most platform leaders do not have all the capabilities and resources to create complete systems by making all the complements themselves. They need to collaborate. Actually, due to this reason, a

150 network of specialized and unbundled companies will emerge in the supply side of technology networks. The combined efforts of platform leader and complementary innovators increase the potential size of the pie for everyone. Still, this is the responsibility of the leader to provide an appropriate modular architecture that determines who does what type of innovation in different sections of the platform (Cusumano & Gawer, 2002 b). The modular design will encourage the specialization and unbundling among members and investors. Another important issue on platform is its continuous development. The evolving and improving platform will be able to attract more users and therefore increasing the profitability of the suppliers. However, evolving of the core and complementary technologies at the same time is not an easy task. In fact, it is one of the most challenging tasks that the shaper should be able to handle in its network. Although, the core technology is the heart of the platform, the heart without other complementors will not have any value. So persuading others to innovate at the pace of the leader is very important for survival of the network (Cusumano & Gawer, 2002 b). This can be done through incentives which are result of attracting more end users by improving the platform with the help of partners. These incentives, from leader, may have different forms such as sharing the technical information about the core technology with some of the partners and enabling them to better innovate, venture investments and acquisitions or financial incentives (Cusumano & Gawer, 2002 a).

Shaping Acts and Assets: The shaping company’s acts and assets themselves constitute the third element of a shaping strategy. Even the most compelling shaping view and most robust shaping platform can be undercut by would-be participants’ enduring concerns that the shaper may lack the conviction or capability needed for success. Conversely, participants are also likely to worry that their own business niches might become vulnerable to competition from a powerful shaper. Selected bold acts by the shaping company and careful use of its assets can assuage those concerns. In this domain, large established companies have a potential advantage as shapers. Their massive assets can attest to the credibility of the shaping view and platform. Few

151 would doubt that these companies have the resources to support a shaping strategy. On the other hand, a smaller new entrant faces a significant challenge on this front. Anyone considering investing in its strategy will understandably wrestle with the concern that it may not have the necessary assets. The risk of stranded investment becomes very real. A smaller new entrant can gain access to needed assets through strategic relationships with larger, better- known companies. For example, Microsoft in its early days enhanced its credibility by negotiating an important relationship with Intel, the leading manufacturer of microprocessors (Hagel, Seely Brown, & Davison, 2008). The above three capabilities should be assessed by managers and practitioners before deciding about their organization to be shaper in their industry. Consequently, in the following section, we have provided the assessment tests helping managers and scholars to better decide about their roles in the networks.

5.3.2 Can We Play Shaper’s Role? Three tests should be passed if an unbundled company wants to play the role of a shaper. These tests are related to three types but interrelated capabilities of a shaper’s role. The followings are tests that can be used when assessing an organization for shaping strategy based on Hagel, Seely Brown, & Davison (2008). Capability #1: Shaping View Test 1. Does the view express a perspective on the long-term direction of a broad industry or market and highlight how it will change? 2. Does it clearly identify attractive business opportunities for a wide range of participants? 3. Does it tie these opportunities explicitly to broader economic, cultural, and technological forces at work on the business landscape? 4. Is the view at a sufficiently high level to allow for unexpected developments, yet specific enough to direct and focus the thinking of executives faced with difficult choices? 5. Has it been aggressively and continually communicated by senior management to external audiences and to employees?

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Capability #2: Shaping Platform Test 1- Does the platform promise financial benefits to potential participants, especially by reducing their cost of entry, accelerating the prospect of generating revenue, or both? 2- Does it support a diverse set of participants and offer opportunities for creating value in many distinct niches? 3- Can the platform scale up by accommodating large numbers of participants without adding unacceptable costs for the shaper? 4- Is it likely to generate increasing returns as participation grows? 5- Will its functionality continually evolve, providing an incentive for participants to engage regularly with the platform owner and share their own learning and plans? Capability #3: Shaping Acts and Assets A) Larger incumbents 1- Given all your other business initiatives, how can you convince potential participants that you are in this venture for the long haul, even in the face of setbacks? B) Smaller entrants 1- How will you gain access to assets that will prove to potential participants that you have sufficient resources to pursue a successful shaping strategy? C) All shapers 1- What have you done to assure potential participants that you won’t eventually compete with them? 2- Do your senior management team, board members, and key investors have the tolerance for risk and the patience required to commit the assets and take the actions essential to being a successful shaper? 3- Is your company capable of attracting and mobilizing enough participants to realize the full potential of shaping platforms?

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4- Does your leadership team – and especially the CEO – have a forceful enough personality to build a shaping narrative that is plausible, vivid, and alluring to participants?

5.4 A Comparison of Two Roles

As it is clear from the materials presented in this chapter, the most important distinction between these two roles lies in the core capability of Orchestrator and Shaper. While CRM is the core capability of an orchestrator, PIC (Product Innovation and Commercialization) is the core capability of Shaper. Moreover, the intercompany relationships in shaper’s web are much looser than in process network of orchestrator. Participants enter and leave on their own initiative, guided by their own interests. But the shapers do play an important indirect role in influencing who joins or leaves the web by the choices they make in shaping the underlying platform. For instance, as Microsoft has modified its operating system to function in portable devices, it has attracted a broad range of portable-device manufacturers and related product and service vendors into its web. This has expanded operating system sales (Hagel, 2002). Finally, the key tactical step for a shaper is to share the technology it wants to see become a standard with companies that, it hopes, will stimulate further demand for the technology by developing valuable applications. “Sharing the standard” (usually by publishing the source code of the software involved) has become a revered new-economy precept: winning companies (such as Microsoft) do it with their suppliers. Orchestrators, however, do not share their core technologies. It is unnecessary for them to do so, since the viability of a network doesn’t depend on its attracting a huge number of partners and persuading them about the future success of a new piece of technology (Hacki & Lighton, 2001). Conversely, there are also similarities between these two important roles as follow: 1- Both are types of leveraged growth therefore bringing all the advantages of such strategy into account (See section 5.1) 2- Both are most appropriate for unbundled companies 3- Both encourage more unbundling in their supplier’s networks

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4- Both are able to handle large number of participants (loosely coupled management of relationships) 5- Both emphasize on modular design of products, activities and processes 6- The growth of each member has locked into the growth of others (the whole network) 7- Both needs incentives formulation for participants 8- Both increase the level of innovation in the network Not all unbundled companies are orchestrators or shapers. There are other roles available for companies who are not able to play the role of orchestrators or shapers. In fact there are growth opportunities for those companies too choosing to be adapters.

5.6 Adapters Roles and Capabilities in the Network

The unbundled companies choosing to join an existing network are adapters. Although their growth opportunities are less in comparison with those of orchestrators and shapers, there are possible roles for them to increase their growth. The main capability of an adapter is its expertise which will enable it to participate in a network. By the means of framework developed in chapter four, the adapters are able to find in which processes they have to focus. There are two possible roles for a company which decides to join an existing network regardless of the role of a leader of the network (whether to be an orchestrator or a shaper): Disciple or Hedger. Disciples are those specialized companies who are exclusively committed to one network and its strategy. The benefit, therefore, would be the more focus they have in their strategic intentions. To grow more, they should try to build strong relationship with the network leader in order to gain more market share in the network or to influence the leader wherever they need it. However, if the network will not grow as they expect, they will incur lots of costs. Specifically in the case of shapers as leaders, it is possible that the supported platform will not be adopted in the market (Hagel, Seely Brown, & Davison, 2008). Therefore, keeping their eyes into the market trends and analysis is one of the

155 essential capabilities that prevent Disciples from falling. In another terms, Disciples should be quick in spotting the opportunities in the market and join the network which they think would be the most successful (Hagel, Spider versus Spider, 1996). Dell’s exclusive commitment to Wintel platform is one of the clear examples of such a role. Hedgers , on the other hand, develop their product or services to serve multiple networks and platforms. The benefit, therefore, would be the risk reduction in their business continuation and growth by spreading eggs across several baskets. Though, higher costs can be incurred if effort is duplicated to meet multiple network standards for Hedgers. Advertisers that participate in both Google and Microsoft advertising platforms are obvious examples of this role (Hagel, Seely Brown, & Davison, 2008). Choosing between the above two roles depends on the situation of each adapter and the context in which the company exists. Considering the pros and cons of each role in addition to the market and industry analysis will enable companies to better decide over their roles in the network. In addition, there is no specific test for being an adapter. If a given company will not pass the test of orchestration or shaping, it should be an adapter.

5.7 A Framework for Associating the Core Capabilities, Network Roles and Network Capabilities

According to secondary cases and theories reviewed in this chapter, it is now possible to propose a framework to associate the core capabilities, network roles and network capabilities of unbundled organizations (See Table 5.2).

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Product Innovation Infrastructure & Customer Relationship Core Capability Business Commercialization Management (CRM) Management (IMB) (PIC) Potential Role Adapter Shaper Orchestrator in the Network (Hedger or Disciple) Network Shaper's Capabilities Orchestration Capabilities Supportive and Capabilities in addition to in addition to Supportive General Network Required by Supportive and and General Network Capabilities Role Network Capabilities Capabilities 0Table 5- 02 Relationship between Core Capabilities, Network Roles and Network Capabilities

It seems that companies with the focus on IMB as their competitive advantage are more prone to play the role of an adapter in the business networks. Running their infrastructure, these companies are capable of following the policies of an orchestrator or a shaper. Network capabilities required by these companies are supportive and general network capabilities (See Table 2.1, Chapter2). On the other hand, for those unbundled companies with focus on PIC or CRM capabilities, playing the role of a platform shaper or an orchestrator are respectively possible. We emphasize on the term “potential” because not all unbundle companies with their focus on PIC or CRM are capable of playing the role of a shaper or an orchestrator in their respective network. Specific capabilities are required to be met by companies wanting to play these two roles. In previous sections of this chapter, we have enumerated those capabilities required by these two important roles. In table 5.2, we have briefly named these capabilities as shaper’s and orchestrator’s capabilities. Companies with the focus on PIC or CRM capabilities which do not have the required network capabilities are still capable of playing the role of an adapter. To ensure about the reliability and validity of our findings which have been summarized in table 5.2, we decided to apply a deductive approach by conducting three real case studies. These cases, presented in the next chapter, were all selected from

157 unbundled companies enabling us to deeply verify our findings and wherever required make corrections on the above framework.

5.8 Conclusion

In this chapter, we explained the second phase of unbundling decision making which is related to the network position of an unbundled company. As discussed, these roles were all based on the leveraged growth which is mostly possible for unbundled companies. It was discussed that there are two general roles for an unbundled companies to choose: to form a new network and acting as a leader of the network or to be an adapter and joining an existing network. We then explain the characteristics and capabilities of each role individually and introduce some practical tools for managers to be able to gauge their organizational capabilities for playing such roles in their respective networks. As it was the aim of this chapter, by completion of this chapter, we have answered our fifth, sixth and seventh research questions of this thesis: • “What are the roles a company may play in a process network?” • “What are the specific capabilities companies should develop in a business network based on their roles?” • “How companies should decide which role to play?”

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Chapter Six A Roadmap for Unbundling the Corporation

6. A Roadmap for Unbundling the Corporation

In previous chapter, we introduced different roles an unbundled company may play in its network. In addition, based on literature review and secondary case studies, we introduced the network capabilities required by each role. Moreover, we proposed the questions enabling managers in order to evaluate their companies for playing each specific role. Finally, we proposed a framework in which we have indicated the association between core capabilities, potential network roles, and network capabilities of an unbundled organization.

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The proposed framework facilitates our process of roadmap development as it clearly illustrate the relationship between the core capabilities and network issues of a company undertaking unbundling as a growth strategy. However, to ensure about its reliability and validity, we conducted three real case studies and check the framework we had devised from secondary cases and theories in previous chapter.

Consequently, in this chapter, we briefly explain the procedure of conducting case studies and the methods being applied. In continue, we present the cases separately and highlight the themes of our framework in each case. Finally, we introduce the roadmap for unbundling the corporation.

6.1 Case Studies through Interviews: Facts and Figures

As discussed in chapter three of this research, the research approach in this thesis is a combination of inductive and deductive. In chapter 4 for instance, we have applied a combination of both approach. Through inductive research approach, we firstly develop a framework for capability mapping and then we tested it through Dell case. The same can be done regarding the framework we proposed in previous chapter (See Table 6.1).

Infrastructure Business Product Innovation & Customer Relationship Core Capability Management (IMB) Commercialization (PIC) Management (CRM)

Possible Role in Adapter (Hedger or Shaper Orchestrator the Network Disciple)

Network Shaper's Capabilities in Orchestration Capabilities in Supportive and General Capabilities addition to Supportive and addition to Supportive and Network Capabilities Required by Role Network Capabilities General Network Capabilities 0Table 6- 01 Relationship between Core Capabilities, Network Roles and Network Capabilities

To ensure about the reliability of our findings, we conducted three real case studies among Iranian companies. All of those companies were selected from unbundled companies. Extreme cases of unbundling allowed us to deeply explore and verify our findings. To increase the generalisability of our findings, we selected three unbundled companies from three different industries: Pharmaceutical, Biotechnology and Retail.

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Interview was selected as a method for data collection. Our very aim in gathering primary data through interviews was to gain approval or disapproval on themes we had devised from secondary case studies and available theories in previous chapter. The need for a flexible method seemed to be necessary. In one hand, there was a need to explore the cases and let the managers discuss freely over their decisions and their underlying reasons which would help us in completing our framework and at the same time, there was a need for approving or disapproving themes found out in the literature. Consequently, the semi-structured interviews were chosen as a flexible method enabling us to gain our goals.

Other types of interviews were not appropriate for our purpose. For instance, structured interviews are mostly appropriate for surveys in which all the questions and different elements of a model are clear which is not true about our research. Besides, in depth interviews were not appropriate for our purpose because we had some themes at hand that should investigate their validity.

To ensure about the quality issues (reliability, validity and generalisability) of our interviews the following points were considered:

Regarding the reliability, as discussed in chapter 3 of this thesis, qualitative methods such as interviews are not necessarily repeatable (Marshall & Rossman, 1999) mostly because they are context dependent and the assumption behind them is that the situations are dynamic and complex (Saunders, Lewis, & Thornhill, 2000). However, it is suggested that the researcher using these methods should make and retain notes relating to the design of the research, the reasons underpinning the choice of strategy and methods, and the data obtained (Marshall & Rossman, 1999).

Notes relating to the design of the research, reasons underpinning the choice of strategy and methods are all presented in the chapter three. In addition, the results from interviews are all presented in the following sections of this chapter. Finally, to improve the reliability, we have publicized the themes and questions which have been probed in our interviews in the Appendices.

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To reduce the interviewer and interviewee biases which are parts of reliability and validity issues, the following tasks were conducted:

• As there were some themes, extracted from the literature and secondary case studies, a list of themes was developed as a guideline for conducting interview and ensuring that the interview is in its direction and track (presented in Appendices Section of the Thesis). The theme list helped me in increasing the reliability and validity of the interview • Faxing the themes and questions of each session two days before meeting with managers in order to ensure the preparation and readiness for interview by managers • At the first session of my interviews with managers, I introduced myself and briefly explained my background in addition to handing my introductory letter from university in order to ensure the interviewees about the scientific aims of conducting the research and therefore increasing the trust. • The total time of the first session in all interviews with organizations was spent on introducing the topic of the research and explaining important issues regarding the topic to the participants. This increased the validity of our work • When questioning, we prevented from too long questions. We also prevented from questions in which there are lots of jargons or scientific phrase and whenever we felt necessary, we completely explain our questions to the participants in order to prevent any bias • At the beginning of each session, a brief review of the points mentioned by managers in the previous session was discussed. This helped me to increase the validity and reliability of the results by getting feedback from interviewees • In order to prevent from exhaustion caused by time consuming interviews, each session was not exceeded from 90 minutes • In addition to writing the points asserted by managers, I recorded their voice in each session facilitating the process of analysis and increasing the validity Generalisability is not feasible but to the extent that the significance of findings can contribute to the theoretical propositions the results can be generalized (Bryman,

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1989; Yin, 1994). Where the researcher is able to relate its research project to existing theory, he/she will be in the position to demonstrate that his/her findings have a broader effect than the case or cases he/she has studied (Marshall & Rossman, 1999). We have conducted three case studies to gain primary data which is a small sample. However, by reviewing the extensive literature in addition to valuable information from secondary case studies relating to our work, it seems that there is a strong contribution between our findings and the literature. Furthermore, we have selected our cases from three different industries in order to increase the generalisability of the results. Although, the need for testing this roadmap in different contexts and environments seems to be inevitable in future researches.

Below we have summarized the types of organizations, number of participants, their positions and hours of interviews in each organization (See Table 6.2):

Number of Total Hours Organization Industry Positions Participants of Interviews CEO Strategic Planning Manager 450 min Daroupaksh (A) Pharmaceutical 4 Production Manager (5 Sessions) CFO CEO Human Resource Manager 450 min Pazhouhan e Sabz (B) Biotechnology 5 Senior Researcher 1 (5 Sessions) Senior Researcher 2 External Relationship Manager CEO Marketing Manager 630 min Saman Edible Oil Co. (C) Retail 4 Supply Chain Manager (7 Sessions) Production Manager 0Table 6-2 Summary of Interviews Statistics

The participants were all among top executives of organizations and in total consist of 13 people. In addition the total number of interviews is 1530 minutes (25 hours and 30 minute) which in total leads to 17 sessions of interviews. Next section of this chapter presents our findings from cases.

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6.2 Real Cases Studies: Assessment of Key Themes

In each case, we have firstly introduced the background of the company and then we have presented the important themes which we have devised from theories and secondary cases. These themes are as follow:

• The core capability and focus of the organization (IMB, PIC or CRM) • Competitive, cultural, and economic imperatives in each company • Role of the company in its network (Adapter, Shaper or Orchestrator) • Network capabilities they have developed or are developing

6.2.1 Company A: Pharmaceutical Industry

Established in 1950, the company was born as a corporate having every aspect of the value chain. The company had modern and expensive production facilities, distribution systems and technologies, R&D sections working on new formulas and raw material purchasing department.

However, after four decades of work and as the competition was intensified by the emergence of other companies the profitability of the company seemed to be at risk. The managers have understood the value of specialization to reduce the profitability risks. The executives found out that not all businesses under their administration are gainful. They unbundled the non-core processes of the traditional fully integrated company and focused on production and manufacturing processes in 1990’s.

Regarding the unbundling decision, the CEO says “It was not possible for executives to optimize all the activities in the value chain. In addition, CEO’s assigned by board of directors, managed the company based on personal interests. For instance, some CEO’s believed in distribution systems as a main activity of the company, while some others believed in manufacturing. Still there existed some others believing in marketing and exports. No clear direction did exist for company’s policies. Focus on the

164 most profitable activities was required, activities in which we have a competitive advantage.”

The company is now the market leader in Iran’s pharmaceutical industry with 25% market share due to large product variety. Strategic planning manager adds “R&D processes need the culture of research as well as high amount of budgets. Moreover, a research project to achieve a new formula takes a long time. These factors can be found in research institutes or universities which are able to conduct those activities much better than companies. We therefore decided to outsource R&D.”

Furthermore, the production manager adds “at the beginning, there were a few number of third party logistic service providers (LSPs) in Iran. Thus, most companies prefer to have their own distribution systems. However, in 1990’s, the number of LSPs increased from 6 to 25. These new LSPs were able to take responsibility of distributing the products almost everywhere in the country. They were able to distribute with higher level of coverage, with less delay in satisfying orders, and with less costs. It was not economic for us to continue with our own distribution system, so we decided to outsource our outbound logistic activities.”

He also states that “We are so good at manufacturing. It is where we have competitive advantage. The companies under our supervision benefit from the latest technologies and facilities. We are so strict in standards that should be applied in pharmaceutical environments such as GMP. We have all the attempts focused on standardization, work and time study, optimizing manufacturing facilities and quality control in order to increase our scale. To be profitable, scale is very important for us. We look for formulas for them there is a high demand in the market.”

The CFO also asserts that “ We had to reduce our costs in order to keep our leading position in the market in comparison with our competitors. The price of drugs in Iran is determined by the government and companies are not allowed to sell their own brands. Therefore, cost reduction is one of the most important concerns of all companies. This because we put emphasize on the standardization of production processes.”

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“As we focused on manufacturing, in order to increase our scale, we decided to buy some successful companies such as Aboureyhan, Razak, Exir, Zahravi, Damlouran each of which is specialized in producing specific drugs” Says the CEO.

Regarding their role in the network, the strategic planning manager states that “Some drugs considered as strategic and we should produce them due to the request of health agencies. In Iran, we are obeying the policies of MOH but we are intended to increase our profitability by dedicating some part of our capacities to foreign R&D companies in order to produce their formulas by taking their license.”

The CEO also adds “Attracting globally recognized pharmaceutical companies to cooperate with, in addition to gaining international standards such as GMP, requires other capabilities. For instance, we have employed expert people which are negotiating with globally recognized pharmaceutical companies in order to persuade them to give us the licenses. External relationship management is very important for us.”

Finally, the CFO adds “as we are supervising 6 companies at the same time, budgeting is very important. We are also so strict at cost based accounting of our companies.”

6.2.2 Company B: Biotechnology Industry

Established in 1998, the company was specifically dedicated to scientists in the field of agricultural engineering. The center was established with the aim of conducting agricultural research to invent formulas for fertilizing the soil and plants. However, by rapid technological and knowledge developments in the area of biotechnology, this company is now a multidisciplinary research center in which experts of different fields (e.g. Genetics, Agricultural engineering, Chemistry) have gathered together and are conducting research on technological products and new formulas used in farms.

“In this research center, most researches are conducted with aim of producing products which will enhance the growth of plants in the fields . We have applied the latest technologies here. In addition, we have employed the best researchers in the country who are supervising the research teams. We have also asked from some of the Iranian 166 scholars outside the country to virtually participate in our knowledge edge researches” says the CEO who is one the scholars in the field.

A senior researcher in the center explains that “the research in biotechnological products specifically in the area of agriculture is of high degree of importance. This is because of many folds. First of all, a large amount of lands in our country is being used for farming. So, findings in this center can drastically improve the farming condition and outcomes of those lands. In addition, there is a global competition in this area among research centers and scientists. Therefore, publicizing our findings can improve the scientific position of the country among others having these types of technologies and research. Finally, the results of this center, after testing successfully, will be sold to manufacturing companies which are interested in mass producing of those products or formulas. This way is one of the ways through which the center is making profit.”

Another senior researcher, experts in chemistry states “speed is very important in our projects. We do our best to shorten the project lifecycles. This is mostly due to the global competition which exists. When we succeed in achieving a new formula, we will be granted for continuing our research or defining a new one. In addition to global competition, internal research agencies should be taken into account. Any center which is faster in findings new formulas will be able to sell its patent to manufacturers and make profit.”

Regarding attraction of expert people into this center, the HR manager asserts that “one of the most important challenges we have currently dealt with is attracting and retaining the expert and knowledgeable staff. You can’t treat these highly talented people like usual staff in other organizations. Most of them are highly academic gurus. The payment is very different to them. They should be paid very well otherwise internal or external research centers may attract them with the better payment. In addition, facilities are one of most determinant factors in attracting these scholars. They should be ensured that our facilities will meet their project requirements. Although satisfying them is one of our difficult challenges, it is worth for us to do so.”

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In relation to network role and position, external relationship manager indicates that “to conduct our research we need to keep close relationships with farmers. The more, the better. This is due to the fact that, we need natural conditions, in addition to laboratory conditions we already have, to gain data to evaluate our new formulas. These data will be gathered and transferred to the center via special gadgets which should be installed in farmers’ lands. The most important aspect of our relationship development process is related to the initial stages when we should persuade farmers to cooperate with us. We invite them to the center and hold seminars for them. In those seminars, we explain our purpose for farmers in addition to the benefits they will achieve if they join to our program. We sometimes use money to motivate them to participate. Farmers who join to our program should adapt their planting and water supply habits with our regulations.”

6.2.3 Company C: Retail Industry

Born unbundled, this company started its activities in 2005. The company is the producer of refined edible sesame oil for consumers. However, none of the activities related to production and distribution is being conducted by the company. The company has all its focus on CRM capabilities and network orchestration.

“We have focused on our customers both end users and business ones. Through innovative and close relationships with them, we will guarantee the profitability of the company in a world of intense competition. This is an approach which is not so common among edible oil producers. Most of our human capitals include marketing people who are handling both our CRM and SRM activities (supplier relationship management)” Says the CEO who is one of major shareholders of the company. He adds “our product is not a new one, but the way we are dealing with our customers is something new which has differentiated us among competitors.”

Regarding the CRM approaches of the company, the marketing manager states that “we have two types of customers: consumers and businesses. Regarding the consumer market, in contrast with our competitors who used to mass advertising and

168 mass distribution, we have precisely targeted our consumers and communicate with them through direct marketing approaches. We have a panel of 200 loyal consumers who participate in our regular marketing research programs. In addition, through our website, all consumers can be in touch with us and give us their ideas.”

In addition, on the subject of business customers, marketing manager also explains “a major portion of our profitability comes from this section. Our approach toward this section also is the customer intimacy. We have targeted the industries which are capable of using our oil in their products. We hold meetings with the executives of those companies and motivate them about using sesame oil. We even introduce our business customer products in marketing campaigns to our consumers. Whatever grade of oil they require, we will provide for them. Close relationship with them is our principle.”

About product scopes, the CEO indicates that “increasing our product portfolio has been always a key strategy for us. We have now diversified sesame oil through introducing different tastes. Furthermore, we are intended to add olive oil and grape seed oil into our product portfolio. Our customers want more products and tastes and we should make them satisfied.”

The supply chain manager explains the network and the role of the company in it “for sesame oil, we need sesame seeds as a raw material. The seed will be supplied by Indian and African companies with them we have established a reliable relationship. For olive oil, bottles and PET bottles, we have established close relationship with Italian suppliers. We have discusses the intense competition exist in Iran for them and they have agreed to supply us with the minimum price and the highest quality. In return, we have committed to work with them unless they violate the quality.”

He also asserts that “quality inspection is one the most important aspects of our work. We do not infer in our supplier processes but we check the quality of their outputs. If not satisfied, we will return their products and give them a major warning which will be registered in their profile. If their quality issues will not be resolved, they will be

169 automatically ejected from our network. This strict behavior is due to the importance of quality before our customers.”

In continue, regarding the processes conducted in Iran, the production manager adds “as the seeds and bottles are received in Iran, we will send the seeds for extraction in a company which is under our contract. We have established specific reservoirs for our oil achieved from seed extraction there. After the extraction, the raw oil (crude oil) will be sent to another company specialized in refinement and packing. This company is also under our contract. We have tried to regularly supply these two companies with large amount of working loads to keep them satisfied and eager to continue their works. Their infrastructure is very important for us. There are also other alternatives for these two but we are cooperating very well with each other.”

The production manager also mentions “marketing forecasts the demand for a year and announce it monthly to production and supply chain managers. We are responsible for administration of companies at our hand. We specify the amount of oil we need for our suppliers as well as the due dates and quality. Close relationship with customers and suppliers enables us to be flexible in response to market changes.”

Finally, the supply chain manager asserts that “to optimize our relationship with both internal and external suppliers, we are now launching a portal through with we will be able to be in touch with our suppliers. All the forecasts, demands and due dates as well as quality specification will be uploaded by us and in return, our suppliers will announce their current capability, capacity and stock to meet our demand. This makes the planning and relationship much faster.”

6.2.4 Results from Cases

Our aim of conducting the above three cases were to complete the deductive section of our research and to test whether our findings in chapter 5 would be admitted. As explained before, the key themes about which managers talked were mostly related to the core processes of an organization as well as competitive, cultural, and economic imperatives of these organizations. In each case, to the extent that possible, we asked

170 managers to explain about their business network, the role in which their company play and the capabilities required by each role.

Company A has its focus on infrastructure management capabilities as its executives announced that they have invested in production and manufacturing. Achieving scale is very important to them. They have even bought other companies in order to increase their scale. They put emphasize on standardization of work and are in the favor of cost reductionist approaches. Related to their network, until recently, they have been following the policies of health agencies in Iran (Disciple) but they are now intended to increase they profitability by participating in foreign companies’ networks and taking their formulas to produce (Hedger).

Company B, on the other hand, has its focus on product innovation and commercialization. Their very challenge is the attraction and retaining the stars, those highly talented researchers inside and outside of the country. Speed is very important to them because it increases their scientific reputation as well as making money for them. Also, they have provided a shaping view among farmers who are volunteers to participate in programs. They have the shaping platform through knowledge, formulas and as the number of participant increase the value of their works increase as well. Finally, they have the shaping acts and assets by providing their researchers with latest technologies required in addition to those gadgets installed to the farmers’ lands.

Company C, as the last case, has its focus on CRM capabilities. Its strategy is customer intimacy both with consumers and businesses. They emphasize on the importance of scope. Moreover, their human capitals are all service oriented people (marketing people) to them customer is very important. In relation to their network role and capabilities, they are playing the role of an orchestrator. They try to manage their relationship with their partners in a loosely coupled based. They specify the quality and the amount of product they need as well as the due dates and suppliers in return try to satisfy the company’s requirement to achieve more workloads in future.

Briefly, the following points can be extracted about the case (See Table 6.3):

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Core Network Company Competition Culture Economics Network Role Capability Capabilities cost focused; Adapter (from battle for economies of General Network A IMB stress on Disciple to Scale Scale is key Capabilities standardization Hedger) employee Shaping battle for centered; economies of Capabilities & B PIC Shaper Talents coddling the Speed is key General Network creative stars Capabilities highly service Orchestration battle for oriented; economies of Capabilities & C CRM Orchestrator Scope customers Scope is key General Network come first Capabilities Table 6-3 Findings from Cases

Our findings in table 6.3 are in line with our findings from theories and secondary case studies proposed in table 6.1. In fact, our deductive approach through these cases enables us to more generalize our findings from inductive section of the research in chapter 5. We are now able to build up our roadmap based on the two important frameworks developed in chapter 4 and 5. In the next section, we will propose a roadmap for unbundling the corporation which can be applied by practitioners as a growth strategy in traditional organizations.

6.3 A Roadmap for Unbundling the Corporation

After developing and testing two important frameworks in chapter 4 and 5, we are now at the stage to introduce a roadmap for unbundling the corporation and therefore answering the last research question.

As discussed thoroughly, unbundling should be considered as a growth strategy for traditional organizations which are still unnatural bundles of three core yet conflicting core processes: IMB, PIC and CRM capabilities. Focusing on their core capabilities and leveraging their business partners’ resources, unbundled organizations will be able to benefit from the growth in the uncertain and turbulent business environments.

According to all our findings in this chapter and previous ones, the following steps should be taken as roadmap by practitioners interested in exploit unbundling as a growth strategy:

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According to the above figure, the following steps should be taken:

1- Determining the core capability of an organization (IMB, PIC or CRM) using the 3-step framework developed in chapter 4

2- Determining the potential role in the network considering the association table between core capabilities, network roles and network capabilities, presented in chapter 5 (See Table 6.4)

3- For those companies with the focus on PIC and CRM, their network capabilities should be evaluated using the tests introduced in chapter 5. Those with the focus on IMB will play the role of an adapter

4- Those companies with the focus on PIC which will pass the shaping capability test will play the role of a shaper in their networks. On the other hand, those with focus on CRM passed the orchestration test will play the role of an orchestrator. On the case of rejection, companies play the role of an adapter

Infrastructure Business Product Innovation & Customer Relationship Core Capability Management (IMB) Commercialization (PIC) Management (CRM)

Potential Role in Adapter (Hedger or Shaper Orchestrator the Network Disciple)

Network Shaper's Capabilities in Orchestration Capabilities in Supportive and General Capabilities addition to Supportive and addition to Supportive and Network Capabilities Required by Role Network Capabilities General Network Capabilities

0Table 6-4 Association between Core Capabilities, Network Roles and Network Capabilities

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Below we have depicted the scheme of the framework (See Figure 6.1):

R R

e e

j

je e

c c t t

Figure 6-1 the Roadmap for Unbundling the Corporation

6.4 Conclusion

In this chapter, testing our theory proposed in chapter 5 by conducting three real case studies, we could propose our roadmap for unbundling the corporation and answered the last research question of this thesis.

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Chapter Seven Conclusion and Managerial Implications

7. Conclusion and Managerial Implications

In this chapter, we review the research questions and our findings in this thesis. We briefly review the methodology being applied in order to provide answers to the research questions and after proposing our findings, we indicate the implications of this research as well as limitations and further research.

7.1 Brief Review of the Research Objectives & Approach

In chapter one, we discussed that still many organizations are unnatural amalgamations of three core yet conflicting business processes: infrastructure

175 management businesses (IMB), product innovation and commercialization (PIC) and customer relationship management (CRM). It was explained that the existence of other organizational processes lay on these three core processes. However, the nature of these three core processes in terms of economics, cultural and competitive imperatives are very different and conflicting. Due to this fact, companies which have bundled these three processes, although spending a lot of money on BPR, never achieve the desired level of performance (Hagel & Singer, 1999). Accordingly, to gain a higher level of the growth, mangers should seriously think of unbundling the corporations. Traditional wisdom regarding the separation of the company into its core processes was that the interaction costs regarding to managing those unbundled parts would be high in comparison of conducting inefficient processes internally. Though, rapid technological improvements in internet and networking have drastically reduced the interaction costs and therefore put an end to the traditional wisdoms. Unbundling the corporation should be considered as one the most influential growth strategies for organizations particularly at the time of intense competition and high uncertainty. Increasing trends in outsourcing can be measured as the indicator of this strategy being applied by organizations to unbundle their infrastructure businesses. However, there is not any specific roadmap in the literature in order to enable managers and scholar to exploit the full capacities of this strategy. Consequently, the very aim of this research was defined as: “To develop a roadmap for unbundling the corporations as a new growth strategy” In order to develop such a roadmap, it was thoroughly discussed that two important aspects should be taken into account. First of all, executives should be enabled to determine their organizational core capabilities. Secondly, as one the evident consequences of unbundling, managers should think of their business networks strategically. This is because, after unbundling, organizations should cooperate with their specialized business partners who are performing those unbundled capabilities with less costs and higher quality. So thinking about the roles which unbundled companies may

176 play in the business networks and the required capabilities of each role is essential for formulating an effective strategy. To develop the roadmap, we formulated the following research questions: 1. What are the organizational capabilities?

2. What is the appropriate framework for identification of organizational capabilities?

3. What is the classification of capabilities according to unbundling theory?

4. Based on classification of unbundling theory, how traditional organizations should evaluate their capabilities in order to determine in which of three core processes they have the most competitive advantage?

5. What are the roles an unbundled company may play in a business network?

6. What are the specific capabilities companies should develop in a business network in associate to their roles?

7. How companies should decide which role to play?

8. What would be the general roadmap for unbundling the corporation as a new strategy for growth?

Research questions formulated in this thesis can be divided into two sections. For each section, we applied a mix research approach. That is, for each section, we developed a framework (inductive approach) and then test it by conducting case studies (deductive approach). Questions 1 to 4 are related to the internal aspects of the organization. The aim of these four research questions are to provide managers with a framework enabling them to determine in which of three core capability they have to focus. To develop such a framework we heavily relied on the resource based view of the firm, outsourcing and

177 secondary cases of unbundled organizations. After developing a framework (inductive approach), we tested the framework by applying it into Dell case (deductive approach). Questions 5 to 7, on the other hand, are related to the network aspects of unbundling strategy. Here, reviewing the literature and conducting the secondary cases, we firstly developed a framework through which we associated the core capabilities of an unbundled organization to its potential network role and required network capabilities (inductive approach). Then we tested our proposed framework by conducting three real cases (deductive approach).

0Figure 7- 01 Roadmap Development Process 7.2 Findings: A Roadmap for Unbundling the Corporation

As depicted in figure 7.1, all steps taken in this research ultimately led to a roadmap for unbundling the corporation. This roadmap is heavily relying on two frameworks developed in chapter 4 and 5 of this thesis. The first framework consists of three steps, presented in chapter 4 assists practitioners to find their organizational core

178 capability. In addition, applying this framework those processes that should be outsourced will be identified. Our next framework is related to the association of core capabilities, potential roles of an unbundled company in business networks and network capabilities.

Combining these two frameworks which we tested their reliability through case studies, the roadmap for unbundling the corporation emerges. Below we have presented the roadmap (See Figure 7.2):

0Figure 7-2 Roadmap for Unbundling the Corporation

According to the above figure, the following steps should be taken:

1- Determining the core capability of an organization (IMB, PIC or CRM) using the 3-step framework developed in chapter 4

179

2- Determining the potential role in the network considering the association table between core capabilities, network roles and network capabilities, presented in chapter 5

3- For those companies with the focus on PIC and CRM, their network capabilities should be evaluated using the tests introduced in chapter 5. Those with the focus on IMB will play the role of an adapter

4- Those companies with the focus on PIC which will pass the shaping capability test will play the role of a shaper in their networks. On the other hand, those with focus on CRM passed the orchestration test will play the role of an orchestrator. On the case of rejection, companies play the role of an adapter

7.3 Contributions

Our research and findings have two types of contribution: Theoretical and Empirical . In the theoretical side, our findings provide scholars with the roadmap for unbundling the corporation. Although, some scholars have discussed over the importance of unbundling as a growth strategy, none of them has proposed a roadmap for exploiting this type growth strategy. Two theoretical contributions of this research are the two proposed frameworks.

Scholars who for the first time introduced the concepts of unbundling the corporation have not addresses how to measure or map the capabilities of an organization. Our proposed framework in chapter 4 addresses this issue. Moreover, scholars have not discussed over the consequences of unbundling the corporation. In fact, they have not addressed the concept of networks and leveraged growth for unbundled companies. Though, our second framework links the concept of core capability to the network aspects of an organization by introducing the network roles and capabilities an unbundled organization may play in business networks.

Regarding the empirical contributions, It should be mentioned that we have tried to make our framework as practical as possible by conducting various case studies. These empirical contributions have been discussed in the following section.

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7.4 Managerial Implications

Still many companies are unnatural bundles of the three core processes: IMB, PIC and CRM. This unnatural amalgamation of processes has limited the growth of those companies. Managers and executives in those companies are spending a lot of money in order to increase their company efficiency and effectiveness. Intense competition and highly uncertain business world put pressure on practitioners to devise appropriate strategies for growth of their companies quickly.

Our developed roadmap for unbundling the corporation can be considered as a growth strategy for organizations. As a step by step approach, our roadmap can be applied by practitioners such as executives or consultants who are interested in applying new growth strategies specifically in the time of high uncertainty or turmoil. To generalize, we have tried to select our cases from different industries. Choosing extreme cases have facilitated the process of roadmap development. Including various cases also made the results more practical.

7.5 Limitations of Research

Regarding the limitations of the research, the following points can be outlined:

1- Lack of enough and direct literature on unbundling as a growth strategy: unbundling as a growth strategy has not been studies in literature although there a large amount of literature in outsourcing. We therefore forced to collect the necessary theories from RBV, Outsourcing and other related topics.

2- Lack of enough literature on shaping role in the networks: although orchestration has been thoroughly discussed in the literature, the shaping capabilities have not. We have a few sources to rely on when we were building our theory about shapers mostly from (Cusumano & Gawer, 2002 a; Cusumano & Gawer, 2002 b; Hagel, Seely Brown, & Davison, 2008).

3- Lack of secondary cases and documents on unbundled organizations: Unbundled organizations have not publicized their strategies in the net. Although, everyday there are bunch of news about the outsourcing policies of famous organizations which is mostly

181 the indicator of their IMB spin offs but detail investigations of them from unbundling perspective have not been done.

4- Lack of unbundled organizations in Iran in order to conduct more case studies: most companies in Iran are still in the traditional forms. They are unnatural bundles of three core processes. Although this fact limited us in case selection, this can be assumed as an opportunity for those who are interested in applying the roadmap developed in this research in those organizations.

5- Time consuming exploratory research approaches such as case study and data collection methods such as interviews limited the number of cases being studied.

7.6 Further Research

The following points can be proposed as further research:

1- Applying our capability mapping framework in organizations interested in finding their core capabilities and making necessary adjustments in the framework

2- Quantifying the capability mapping framework presented in chapter 4

3- Applying our roadmap for unbundling traditional organizations and reporting the results (and if necessary refine it)

4- Assessing the business relationships in shaper’s business networks

5- Assessing the types of business relationships in orchestrators’ networks (Our Relationship Assessment Tool: Academy of Marketing 2009)

6- Assessing the power of adapters in the business networks depending on their roles: disciples or hedgers

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Appendix One Explored Key Themes & Structure of Interviews

1- Interviewer Introduction • Education profile • Work experience 2- Topic Introduction: Unbundling the Corporation • The background of topic • Underlying reasons for Unbundling • The importance of Unbundling for growth • Examples of Unbundled companies (Yahoo!, Seven-Eleven, Fung-Li) • Indicating the importance of the study • The reason why the case has chosen • Ensuring interviewees regarding the confidentiality of information 3- Attaining personal information of interviewees • Name • Education level • Organizational position • Work experience 4- Investigation of topic by asking the following themes from interviwees: • Company background • Current structure of the organization • Which core capability they have the more competitive advantage (IMB, PIC or CRM)? • The structure of the industry and competitors using 5 force model of Porter (2008) • What is the key underlying economics of the organization (Scale, Speed or Scope)? • What is their approach toward human resource management? • What are their customer’s characteristics? • Who are the business partners of the company?

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• How does the company have/being influenced the influence on/by them?  If Orchestrator: probing their Orchestration capability  If Shaper: testing Shaper’s capability  If Adapter: exploring whether they are Hedger or Disciple • Is the company inducing its strategy and vision to its business partners? • How the company is managing the relationships with its partners? How much IT has been applied for relationship management? • What is the future plan of the organization in gaining more Scale/Scope or Speed?

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