Dynamic Capabilities and Pain Points in the Icelandic Energy Sector

Lokaverkefni til MS–gráðu í stjórnun og stefnumótun

Oddur Sturluson

Febrúar 2016

Dynamic Capabilities and Pain Points

in the Icelandic Energy Sector

Oddur Sturluson

Lokaverkefni til MS-gráðu í stjórnun og stefnumótun Leiðbeinandi: Gunnar Óskarsson

Viðskiptafræðideild Félagsvísindasvið Háskóla Íslands Febrúar, 2016

Dynamic Capabilities and Pain Points in the Icelandic Energy Sector.

Ritgerð þessi er 30 eininga lokaverkefni til MS prófs við Viðskiptafræðideild, Félagsvísindasvið Háskóla Íslands.

Prentun: Háskólaprent Reykjavík, 2016

Table of Contents

I. Introduction ...... 1 Need for the research ...... 2 Research problem ...... 5 Nominal definitions ...... 7 Context ...... 11 Environmental analysis ...... 15 Porter’s five forces analysis ...... 16 Consumer market analysis ...... 21 PESTEL analysis ...... 22 Analysis of the Internal environment ...... 26 The value chain ...... 26 VRIO analysis ...... 31 SWOT matrix ...... 32 II. THEORY ...... 36 Theoretical foundations ...... 36 Literature ...... 41 Model ...... 44 III. METHODS ...... 46 Design ...... 48 Sample ...... 49 Measurement ...... 53 Analysis ...... 59 Validity ...... 60 Assumptions ...... 61 IV: FINDINGS ...... 63 Brief overview ...... 63 Results ...... 63 Descriptive analysis ...... 77 Validity/reliabilit ...... 78 V. DISCUSSION ...... 81 VI. CONCLUSION ...... 84 Summary ...... 84 Conclusions ...... 86 Implications ...... 86

Table of figures:

PICTURE 1: BARNEY'S CONCEPTUAL MODEL (PICTURE FROM NEWBERT, 2007) ILLUSTRATES THE DIFFERENCE BETWEEN RESOURCES THAT RESULT IN COMPETITIVE ADVANTAGE AND SUSTAINED COMPETITIVE ADVANTAGE...... 8 PICTURE 2: ANALOGY BETWEEN BEHAVIORAL AND GRAMMATICAL ENTITIES (GERSICK, C. J. G. & J. R. HACKMAN, 1990). THE ANALOGY BETWEEN BEHAVIORAL AND GRAMMATICAL ENTITIES SERVES AS AN EXAMPLE OF HOW ROUTINES FUNCTION ...... 10 PICTURE 3: PORTER'S FIVE FORCES ...... 17 PICTURE 4: PESTEL ANALYSIS (MCGEE ET AL., 2010) ...... 23 PICTURE 5: AN EXAMPLE OF CULTURAL INSENSITIVITY...... 25 PICTURE 6: PORTER'S VALUE CHAIN (MCGEE ET AL., 2010)...... 27 PICTURE 7: SUPPLY CHAIN (FELLER ET AL., 2006)...... 30 PICTURE 8: VRIO ANALYSIS (BARNEY & HESTERLY, 2011) ...... 32 PICTURE 9: SWOT MATRIX (GRIFFIN, 2008) ...... 34

QUESTION 1: ...... 65 QUESTION 2: ...... 66 QUESTION 3: ...... 66 QUESTION 4: ...... 67 QUESTION 5: ...... 67 QUESTION 6: ...... 68 QUESTION 7: ...... 68 QUESTION 8: ...... 69 QUESTION 9: ...... 70 QUESTION 10: ...... 70 QUESTION 11: ...... 71 QUESTION 12: ...... 71 QUESTION 13: ...... 72 QUESTION 14: ...... 72 QUESTION 15: ...... 73 QUESTION 16: ...... 73 QUESTION 17: ...... 74 QUESTION 18: ...... 74 QUESTION 19: ...... 75 QUESTION 20: ...... 75 QUESTION 21: ...... 76 QUESTION 22: ...... 76 QUESTION 23: ...... 77 QUESTION 24: ...... 77 QUESTION 25: ...... 78 QUESTION 26: ...... 78

I. Introduction

“Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” – Andy Grove (Isaacson, W. (2014). The Innovators. Pg. 196, Simon & Schuster: New York.)

The core topic of strategic management as a field of study is how firms achieve and maintain competitive advantage. The concept of dynamic capabilities, which draws from the resource-based view, organizational learning, contingency theory and evolutionary economics for its theoretical foundation, is one of the most influential paradigms in this field. Capabilities can influence a firm’s performance on many levels and can be used to change short-term competitive positions into long-term competitive advantages. Dynamic capabilities offer managers a way to change their firm’s competencies, knowledge systems and culture to adapt to a dynamic environment, ensuring organizational survival.

In this thesis the theoretical and practical benefits of dynamic capabilities will be explored in relation to the Icelandic energy sector. In the first chapter, we explain the goals and value of my study, as well as providing background information about the Icelandic energy sector and performing basic internal and external strategic analyses such as VRIO and PESTEL. In the second chapter, we review the theoretical foundations of dynamic capability research and the process model to be used in this study. It begins with a literature review of dynamic capabilities that touches on several theoretical streams: Contingency theory, innovation management and theory of the firm, to name a few. The scope of the study and theory behind the process model are also discussed in this section.

The research methods, design and data analysis are examined in the third chapter. The goal of this research is to clarify the Icelandic energy sector’s pain points from the dynamic capabilities view (DCV) by conducting a questionnaire based survey study on the experiences and opinions of individuals currently employed in the Icelandic energy sector. An analysis of the results will be used to suggest further avenues of research based on survey data collected from a sample of

1 Icelandic firms functioning in the energy sector. Managers and other staff working for energy production firms, or engineering, consulting or service firms that operate in the energy sector were invited to take part in the study via e-mail.

The fourth chapter discusses the research findings, perform a statistical analysis, provide suggestions for validity tests and improvements for future use. The next chapter turns to a discussion of the implications of the research and analysis. In this section the analysis will be more descriptive than statistical. Finally, we review the conclusions and limitations of the paper with suggestions for future research.

Need for the research

The field of strategic management is relatively young, having been known as business policy until 1979 (Nag, Hambrick, & Chen, 2007), when Schendel and Hofer (1979) renamed it with a new emphasis on the concept of strategy. Since then scholars have analysed, debated and proposed numerous avenues of research within the field of strategic management. Nevertheless the field’s scope of study is still widely considered ambiguous (Nag et al., 2007).

In their search for a broadly accepted definition of strategic management Nag, Hambrick and Chen considered explicit definitions given by several influential scholars over the years (Nag et al., 2007). One of the most recent, and applicable to recent academic trends in the field is the definition given by Bowman, Singh & Thomas (2002) in the Handbook of Strategy and Management: “The strategic management field can be conceptualized as one centred on problems relating to the creation and sustainability of competitive advantage, or the pursuit of rents” (Pg. 45). While this is definition is certainly appropriate it is broad and reflects the open- ended nature of strategic management as a field of study. Nag et al. (2007) also drew attention to the importance of resources and assessments of inner and outer environments, as did Thomas, Hunger and Rangarajan (2008).

The field’s ambiguity does not diminish its scientific value. The renowned philosopher of science, Thomas Kuhn said that scientific communities don’t need

2 unifying paradigms to justify or confirm their existence (1962). What they truly need is a shared identity. Owing to its theoretical underpinnings in economics and the social/behavioural sciences, strategic management research can encompass a large array of different perspectives, one of which is dynamic capabilities. Dynamic capabilities are not a fully developed scientific theory per se (Helfat & Peteraf, 2009). The term has been in use for less than 30 years, and it has only been roughly 20 years since Teece and Pisano (1994) seminally used the concept “dynamic capabilities” as we know it today in their work. It is therefore neither surprising nor discouraging that a theory of something as complex as dynamic capabilities should still be fairly conceptual and formative. Vigorous empirical analysis of subjects relevant to this phenomenon is a key factor towards the development of a viable theory.

Countless scholars have studied innovation but two of the most influential in modern academia are Oskar R. Lange (1943) and Joseph Schumpeter (1912, 1942). Schumpeter, famous for his “gales of creative destruction” and his later view that capitalism would lead to monopolies and the suffocation of innovation and entrepreneurialism defined innovation as “the setting up of a new product function” (p. 87). Lange’s definition was a change in product functions “which make it possible for the firm to increase the discounted value of the maximum effective profit obtainable under given market conditions”. Put simply this means that innovation is a value-creating manifestation of an idea or invention. It should be emphasized that it is not enough to simply create something. For this manifestation to truly be considered innovative, its production has to be cost efficient. It could achieve that goal by lowering production costs or creating new value chains for example.

Innovation can be either evolutionary (continuous) or revolutionary (disruptive). The former is an innovation that incrementally improves an existent technology or capacity whereas the latter is completely new and can often render existent technology obsolete (Yu & Hang, 2009). Innovation usually involves risk, especially in dynamic markets where innovation is constant and disruptive, such as the software or digital media industries. Innovative firms are trailblazers and it’s

3 usually impossible to know with certainty whether the trail will lead to hidden treasures or off a proverbial cliff. In spite of such uncertainty, studies show that there is a positive correlation between a firm’s capacity for innovation and its performance (Hitt, Ricart i Costa and Nixon, 1998; Raffa & Zollo, 1998; Ireland and Hitt, 1999). Such a capacity facilitates growth and profits and makes a firm more adaptive to external changes.

With improvements in communications and technology, the speed of market change has accelerated. With a firm, factual understanding of the relationship between dynamic capabilities and innovation, managers have a foundation for adapting to internal and external changes. The most concrete method for gathering hard facts about the possibilities and limits of capabilities is quantitative research. That’s why research such as this is relevant to both academics in management fields as well as firm managers.

To evaluate the effect of dynamic capabilities on innovation it is vital to consider what positive or negative effects such capabilities might have. The use of dynamic capabilities can cause an increase in production and revenues or a decrease in costs, benefitting firm performance (Teece, Pisano & Shuen, 1997; Teece, 2007; Drnevich & Kriauciunas, 2010). However, capabilities also require cultivation and management. Resources spent on the fostering of dynamic capabilities are resources that could otherwise be spent on ordinary or managerial capabilities (Helfat et al, 2007; O’Reilly & Tushman, 2008; Drnevich & Kriauciunas, 2010).

While there is significant data to indicate that dynamic capabilities positively influence firm performance (Yeoh and Roth, 1999; Baum, Locke and Smith, 2001; Lee, Lee and Pennings, 2001; Danneels, 2002; Makkonen, Pohjola, Olkkonen and Koponen, 2013; Wilden, 2013; Yung-Chul, 2013; Wang, Senaratne and Rafiq, 2015), there is also a considerable amount of data that supports the ecological position that most firms are in fact inert and unable to adapt. Change occurs instead through an “evolutionary process of variation-selection-retention” (O’Reilly & Tushman, 2008, p. 186). If the assumption that most companies are incapable of adaptation were true it would mean that strategic management was redundant and that owners and

4 managers should focus on extracting residual value before allowing their firms to fail. Clearly this serves as an important caveat to the desirability of pursuing dynamic capabilities. Should management waste precious resources, causing negative externalities and increasing industry costs simply to struggle against the inevitable?

While some scholars such as Dew, Goldfarb and Sarasvathy (2006) consider strategic management “futile in the face of environmental disruptions” there is a wealth of studies that conclude that dynamic capabilities are important factors in enhancing profitability and competitive advantage (Yeoh and Roth, 1999; Baum, Locke and Smith, 2001; Lee, Lee and Pennings, 2001; Danneels, 2002; Makkonen, Pohjola, Olkkonen and Koponen, 2013; Wilder, 2013; Yung-Chul, 2013; Wang, Senaratne and Rafiq, 2015). It would seem that while organizations do generally become more inert and less adaptable as they grow older others are able to adapt. Dynamic capabilities are in fact at the root of what differentiates those firms that can overcome their inertia and escape path dependencies from those that are doomed to fail. Since it is management’s function to keep firms alive and preferably profitable it would be counterintuitive to encourage managers to “cannibalize” a firms resources. Strategic management must offer ways to ensure continued survival. The underlying position that management should strive for competitive advantage, against all odds undoubtedly influences the tone and assumptions of this type of research.

Research problem

Before making specific decisions about what form would be optimal for a quantitative study of dynamic capabilities and innovation it’s necessary to properly define and isolate these concepts to avoid tautology. Dynamic capabilities are the processes by which firm managers ‘integrate, build, and reconfigure internal and external competencies to address rapidly changing environments’ (Teece et al., 1997: 516). It should be clear that capabilities are related to, but separate from resources and core competencies.

5 It is also necessary to take market dynamism into account. Dynamic capabilities have different attributes in moderately dynamic or high-velocity markets. In moderately dynamic markets, they resemble traditional organizational routines. This means that they are stable, predictable processes that emphasize analysis and variation. In high-velocity markets however, they are experiential, unstable, adaptive but unpredictable and the evolutionary emphasis is on selection. This difference not only alters the way dynamic capabilities are formed but how they should be used to achieve competitive advantage

As stated earlier the focus of this thesis is not primarily the relationship between dynamic capabilities and firm performance. The focus of this study is on how dynamic capabilities relate to the paint points of a dynamic and innovative market e.g. the Icelandic energy sector. Whether dynamic capabilities improve energy firm performance is beyond the scope of this particular thesis. Studies on the relationship between innovation and firm performance will be briefly discussed in chapter II. The main focus of this thesis however, will remain on the research question:

What sort of dynamic capabilities are common in Icelandic energy firms and what can they tell us about industry pain points?

Research in the field of dynamic capabilities often incorporates themes of innovation and entrepreneurship. Clearly innovation is highly valuable, not only in gaining competitive advantage in existing markets, but in creating entirely new markets. This is important since dynamic capabilities do not only enable firms to react to market changes, but to cause market changes as well. Managers seeking to increase in-firm innovation need to know how dynamic capabilities interact with innovation and which capabilities result in the greatest innovative capacity.

To be clear, this study’s separation of a firm’s innovation from its performance is not pleonastic. While innovation plays an important role in dynamic capabilities, which in turn can serve as a catalyst for competitive advantage, innovation is not always necessary or beneficial for a firm’s

6 performance. Ambidexterity, the capacity to simultaneously exploit existing assets and explore new possibilities is key in achieving and sustaining competitive advantage. If exploration comes at the cost of exploitation it can spell financial ruin, as has been the case with many research-intensive tech companies, who have been unable to recap the high cost of R&D. Achieving a balance between these two factors means tying together two radically different organizational alignments. On the one hand successful exploitation necessitates a quick and efficient strategy based on incremental and continuous innovation. On the other hand a successful strategy for exploration would have to be flexible and potentially disruptive (O’Reilly & Tushman, 2008). If a firm attempts to excel at both without the right balance it runs the risk of being good at neither.

Nominal definitions

Before delving into the theoretical foundations of this research, certain key concepts and terms should be defined or clarified. The first and perhaps most important concept to be familiar with is capabilities. Capabilities are the organizational skills, competences and processes necessary to successfully utilize a firm’s strategic resources. Capabilities are to organizations what skills are to individual employees: the aptitudes needed to accomplish tasks and improve their strategic position. The main focus of this thesis is dynamic capabilities, a firm’s ability to respond to and create environmental change (Teece, 2007), and how such capabilities affect innovation.

To keep the framework within which dynamic capabilities are researched from being vague or tautological it is important to make a clear distinction between dynamic capabilities, resources and routines (Eisenhardt & Martin, 2000). Dynamic capabilities as defined by Teece, Pisano and Shuen (1997: 516) are “the firms ability to integrate, build and reconfigure internal and external competences to address to rapidly changing environments”. Teece later described dynamic capabilities as “…the particular (nonimitability) capacity business enterprises possess to shape, reshape,

7 configure and reconfigure assets so as to respond to changing technologies and markets and escape the zero-profit condition” (Teece, 2009: 87). While seemingly insignificant, Teece’s emphasis on escaping the zero-profit condition in his later definition not only reflects a more established theoretical foundation for the importance of dynamic capabilities in establishing and maintaining competitive advantage, but also a subtle reference to the problem of success traps.

Resources are firm-specific, inimitable assets such as trade secrets or tacit knowledge (Teece et al., 1997; Armstrong & Shimizu, 2007). The value of specific resources depends on the context in which they are used, due to differing effects on firm efficiency and effectiveness (Barney, 1991). If a resource is valuable, rare and difficult to imitate it can help a firm achieve sustained competitive advantage. Usually the inimitability of such resources results from a firm’s unique history, the social complexity of the resources or ambiguity as to how the resource results in competitive advantage (Dierickx & Cool, 1989; Lippman & Rumelt, 1982).

Picture 1: Barney's conceptual model (picture from Newbert, 2007) illustrates the difference between resources that result in competitive advantage and sustained competitive advantage.

Routines are activities undertaken by individuals or groups in a relatively automatic fashion to employ firm-specific assets (Gant, 1996; Teece et al., 1997). While routines may appear simple or random they allow complex interactions between individuals and firms to take place in the absence of formal rules or directives (Pentland & Rueter, 1994; Gant, 1996). Such routines have pros and cons. Without routines, organized social systems as well as most social interactions would be impossible (Gersick & Hackman, 1990). As demonstrated in Ellen Langer’s (1989)

8 influential work on mindful and mindless cognitive processing however, some routines are dysfunctional and survive purely out of habit rather than gain. Some behavioural routines can be so socially engrained that they persist despite being unpopular amongst those they affect (Gersick & Hackman, 1990).

Put simply, a firm’s resources (often referred to as firm-specific assets) are valuable assets that the firm owns or has access to. Capabilities on the other hand are activities the firm can use to gain and protect its resources. For example, if an engineering firm were studied, engineering experience would qualify as a firm specific asset. An example of a routine would be new employee orientation and a dynamic capability would be the firm’s ability to hire new engineers or fire redundant staff to adapt to current market trends.

9 Picture 2: Analogy between Behavioral and Grammatical Entities (Gersick, C. J. G. & J. R. Hackman, 1990). The analogy between behavioral and grammatical entities serves as an example of how routines function.

For an empirical study of dynamic capabilities to be valid the relevant capabilities must be clearly defined as a set of specific processes. Most identifiable dynamic capabilities can be found in one of the following four categories (Eisenhardt & Martin, 2000):

• Resource integration: e.g. product development routines. • Resource reconfiguration: routines for copying, transferring and recombining resources, tacit knowledge in particular. • Resource gain: knowledge-creation, alliance and acquisition routines designed to bring new resources into the firm. • Resource release: jettison routines to remove redundant resources.

It is important to keep in mind that dynamic capabilities are an extension and improvement of the resource-based view. The RBV has been criticised for being unspecific and glossing over the reconfiguration and building of resources in dynamic

10 markets. After all many resources, especially knowledge-based and tacit resources are inimitable and take a long time to develop (Eisenhardt & Martin, 2000). To accurately explain why certain firms are better at adapting to sudden and substantial changes in the market it is important to take instability into account (Priem and Butler, 2000).

Context

The simple definition of dynamic capabilities belies how complex the concept can become in realistic market situations. After all, to quantitatively measure competitive advantage and firm performance over time might require different criteria depending on the relevant industry’s characteristics. Market dynamism plays an integral role when it comes to correctly analysing capabilities and routines after all (Eisenhardt and Martin, 2000). In stable and moderately dynamic markets capabilities are similar to routines but in highly dynamic markets the difference between them is more pronounced. It could be argued that the need for quantitative research is greater in highly dynamic sectors, to make up for a lack of experience in that sector. More stable sectors are often older, less uncertain and more established so that participants and investors have had time to gain experiential and tacit knowledge about how the sector functions.

Major environmental shifts are becoming increasingly common in todays market (Wiggins and Ruefli, 2005). To successfully manage a firm in this hypercompetitive market, managers must be able to achieve competitive advantage by adapting to external changes. In highly dynamic markets, where innovation is frequent and often unpredictable, the current resources held by a firm might not be enough to maintain its competitive advantage. A firm’s ability to adapt to and exploit innovations and market changes are a better indicator of whether or not a firm will thrive in such a market. Dynamic capabilities also give managers a more pliant managerial measurement than traditional tools such as VRIO or the value chain. As Warren (2002) pointed out in his book Competitive Strategy Dynamics, the static nature of such measurement tools can cause reinforcing feedback, where the in- or

11 outflow of resources drives a further in- or outflow of that same resource. For example, actions to save costs might not have an immediate effect on the firm’s ability to function but might curtail investment and resource building, eventually leading to collapse. Sustained competitive advantage, which is the primary goal of strategic management might require expenditure in the short term but can save a firm from the zero-profit trap of highly competitive industries in the long term.

Iceland is a sparsely populated island with approximately 320,000 inhabitants, roughly 200,000 of which live in the greater Reykjavík area. The island itself is about 103,000 square kilometers. 10% of the country is covered in glaciers and much of the interior is mountains and highlands, devoid of settlements and people (Askja Energy Partners (a), 2015). Iceland is also located on top of the Mid- Atlantic Ridge between the North American and Eurasian tectonic plates, resulting in some volcanic and seismic activity. Life expectancy is high, infant mortality is low and the country is considered one of the most developed and wealthy nations in the world. Iceland has a free market economy and is a member of the European Free Trade Association (EFTA) and the European Economic Area (EEA). Although the country formally applied for EU membership in 2009, political opposition has at least temporarily suspended the application (Ministry for Foreign Affairs, 2015).

Renewable energy constitutes almost all of Icelandic energy production, with 71% of generated electricity coming from hydropower and 29% from geothermal energy sources. A small amount of electricity is generated by wind power and fossil fuels but it is so small that many sources simply omit to mention it (National Energy Authority, 2015). Hydropower and geothermal energy also account for about 85% of Icelandic energy consumption (Statistics Iceland, 2015). Electricity prices in Iceland are also substantially lower than in most other OECD countries. Iceland is the world’s largest electricity generator per capita at approximately 55,000 kWh annually (17 TWh total) with considerable potential for increased production, not only in hydro- and geothermal power but also in wind and maritime power (Askja Energy Partners (b), 2015). The majority of Icelandic energy is sold to energy intensive industries such as the aluminum industry. This creates a steady flow of foreign currency into the

12 Icelandic economy, which has proved especially valuable in the wake of currency depreciation caused by the collapse of the banking system in 2008. Icelandic energy exports may increase in the near future if plans to build a submarine electrical cable between Iceland and the United Kingdom pan out. Iceland imports almost all fuels used for transport and shipping. The recently initiated search for hydrocarbons on the Icelandic continental shelf could change that as well as the larger formation of Icelandic energy production, if it proves successful.

The state has a considerable presence in the Icelandic energy sector. The largest energy company is the state-owned Landsvirkjun, which produces about 75% of all Icelandic electricity and manages more than 96% of the country’s hydropower production. Lansdvirkjun also owns a 65% share in the Icelandic Transmission System Operator (Landsnet). Landsvirkjun does not sell directly to households, selling primarily to industry or public utilities (Askja Energy Partners (c), 2015).

Orkuveita Reykjavíkur (OR) is another of Iceland’s main energy firms and services the greater Reykjavík area. A 93.5% share is owned by the city of Reykjavík with the rest split amongst a few adjacent municipalities. It not only produces energy but is also the largest local provider of electricity and heating to end-users. It also distributes hot and cold water as well as operating a sewage system for Reykjavík and several adjacent municipalities. Many of the countries energy consumers purchase their electricity and heating from OR due to the large proportion of the Icelandic population living in the capital. Their largest single customer is the Norðurál aluminum smelter (Askja Energy Partners (c), 2015).

The third of the three largest energy-producing companies is HS Orka. Formerly a state-owned company, HS Orka’s majority shareholder is the Canadian energy company Alterra Power. In addition to these three firms there are a number of smaller energy producers, almost all owned by the Icelandic state and/or Icelandic municipalities. These include HS Veitur, Norðurorka, Orka Náttúrunnar, Orkubú Vestfjarda, Orkuveita Húsavíkur, Metanorka and Rarik. There are also numerous engineering, service and consulting firms that work with the energy-producing firms and constitute part of the Icelandic energy sector as a whole (Askja Energy Partners

13 (c), 2015).

With rising global energy consumption and increased public interest in renewable energy, the Icelandic energy sector has numerous potential avenues for growth. To increase exports would necessitate an increase in national energy production as well as investment in more sophisticated transmission and distribution systems, for example submarine cables to countries such as Greenland, Canada or the UK. Increased exports also depend on competitiveness on an international scale. A firm with suboptimal management may thrive within the constraints of the tariffs and miscellaneous protections granted to nationalized industries but to compete internationally it must have a competitive advantage.

The international renewable energy market is a dynamic field with high learning rates, rapid cost decreases and the constant specter of political intervention. To achieve sustained competitive advantage in a dynamic market such as this, firms must have dynamic capabilities that exceed those of their competitors. It is with this in mind that the decision was made to complete a study of dynamic capabilities and innovation in the Icelandic energy sector. In the next chapter we will review the relevant literature on dynamic capabilities, the resource based view and other schools of thought that influence and guide the methodology of this research.

To properly analyse Icelandic energy firms we reach for the usual Strategic Management approach of splitting our analysis into two parts: organizational and environment (also referred to as inner and outer context) (Rasche, 2007). This approach allows us to separate circumstantial issues from organizational or practical issues. A certain strategy might work well in one environment but not in another and vice-versa after all, and to allow managers to securely make strategic decisions it is necessary for them to know both what characterizes their environment and what strategies are (or aren’t) likely to succeed in such an environment. This is one of the most fundamental tenants of the pursuit of competitive advantage, which is the main goal of strategic planning (McGee et al., 2010).

14 Basing decisions on observations of past events serves to create a cultural “common sense” awareness of what common pitfalls and hazards to avoid but is a flawed method. Perspectives on the past are often biased, inaccurate or incomplete. It is this uncertainty that results in the difference between intended and realized strategy (McGee et al., 2010). Intended strategy fits the traditional concept of strategy as a plan or prediction. Such strategies represent management’s assumptions about the future and their goals, based on their current and past resource base as well as analyses of environmental factors. Such strategies often don’t go according to plan or change as time progresses. There are many possible explanations for why such plans go astray and being able to deviate from a strategy to accommodate unforeseen opportunities or threats, both in the inner and outer context, should not be seen as a bad thing.

Until now we have only discussed the DCV and RBV which both focus on the organization itself, unlike the market-based view (Klug, 2006) in which the outer environment is the point of focus. In the next section, we will examine the outer environment with a special emphasis on dynamism in the energy sector.

Environmental analysis

Before performing an environmental analysis we must begin by defining the relevant environment. There are numerous criteria for what could be considered the relevant environment. The environmental factors are any external factors that influence management decisions. Factors such as these can include government, consumers, competition, suppliers, lobbyists as well as scientific and technological advances. Managers need to be acutely aware of external factors and the effect they might have on their firms to respond appropriately to competitive forces and achieve competitive advantage. In this chapter we discuss the external environment, using strategic methods and tools.

Industry analysis

15 An industry analysis is an assessment of a certain industry or market, used by firms to map threats and opportunities stemming from the development of the industry. Profit margins vary between industries due to differences in their structures (Porter (a), 1998). A firm’s performance will therefore be significantly influenced by its position in an industry and how that industry is structured. Is the industry monopolistic or in perfect competition? Where does the firm fit in? Can the firm specialize in such a way as to have an advantage in certain sectors of the industry? Can the firm compete in terms of price or quality? To answer these questions and more, we’ll use Porter’s (1998) five forces analysis.

Porter’s five forces analysis

Porter’s five forces analysis is one of Michael Porter’s strategic frameworks, which include the value chain and generic strategies. This framework gauges industry attractiveness by determining competitive intensity based on five forces. These forces are: the threat of new entrants, threat of substitutes, the bargaining power of buyers, bargaining power of suppliers and rivalry among existing firms (Porter, 2008). If these forces drive industry profitability down, the industry is considered unattractive. An example of an unattractive industry would be one with perfect competition and normal profits. Attractiveness does not necessarily translate to equal profits between firms however; firms in attractive or unattractive industries can achieve higher than average returns by using their core competencies to achieve competitive advantage (McGee et al., 2010). This sort of analysis can help managers plan for short-term profit opportunities.

Threat of new entry: Competitive rivalry: • Time and cost of Threat of • Number of entry new competitors • Specialist entrants • Quality knowledge differences • Economies of • Other scale differences • Cost advantages • Switching costs • Technology • Customer

Rivalry Bargaining among Bargaining power of existing power of suppliers competitors buyers

Supplier power: • Number of Buyer power: suppliers • Number of • Size of suppliers Customers • Uniqueness of • Size of each service Threat of order • Your ability to substitutes • Differences substitute between • Cost of changing competitors • Price sensitivity • Ability to Picture 3: Porter's Five Forces (Porter (a), 1998)

New entrants often bring a new approach, new ideas and innovation, disrupting the status quo and forcing incumbent firms to reorganize their business models and strategies (Porter (b), 1998). There are certain barriers that keep new entrants at bay however. These entry barriers fall into seven categories (Porter, 2008):

1. Supply-side economies of scale: firms that produce in large volumes achieve greater economies due to decreasing marginal costs of production. Fixed costs are spread over a larger number of units and larger firms often have more negotiating power. Supply-side economies of scale mean that potential entrants either have to take a substantial risk by entering the industry on a

17 large scale or compete with incumbent firms on worse terms (Porter, 2008). This barrier is highly relevant in Iceland, where new and smaller energy firms have to compete with large state run firms with deep pockets. 2. Demand-side benefits of scale: Also known as network effects, benefits of scale affect customer’s willingness to trade with a firm based on how large the firm is. Larger and better-known firms are either considered more reliable when it comes to supplying crucial products or customers see value in belonging to a large network of consumers. The best way for a new entrant to overcome this barrier is to differentiate itself from incumbent firms and specialize to address different customer concerns than their competitors. 3. Customer switching costs: Once a buyer has become accustomed to purchasing from a certain supplier, switching has explicit and hidden costs. Staff must be retrained, new data gathered and new systems put in place. If the cost of switching to a new supplier outweighs the benefits new entrants will find it difficult to gain clients. 4. Capital requirements: this barrier is one of the most straightforward. Entry into an industry requires capital investment. Although the amount of investement may differ between industries, there is always a need for facilities, inventories, marketing and other such things. The lower the need for financial resources, the less of a barrier this is. Also worth keeping in mind is that if expected returns are high, capital requirements present less of a problem because investors will be more willing to finance the firm. 5. Incumbency advantages independent of size: incumbents may have certain advantages that new entrants can’t easily replicate, even with a large amount of financial resources. These advantages can include accumulated experience, brand recognition, professional networks, proprietary technology and a host of other advantages not available to new entrants (Porter (b), 1998). 6. Unequal access to distribution channels: New entrants are usually at a disadvantage when it comes to distributing their goods and services. Incumbents have easier access to distributors, retailers and wholesalers for a number of reasons; established networks and reputation and exclusive

18 partnerships among others. If access to distribution is enough of a barrier, it might prove easiest for new firms to create entirely new distribution channels 7. Restrictive government policy: governmental policy decisions regarding important subjects such as foreign investment can directly influence the attractiveness of an industry. Governments can impose licensing requirements or restrictions, which hinder new entrants but they can also make entry easier by lowering tariffs or fees (Clegg, Carter, Kornberger og Schweitzer, 2011). Governments also indirectly support entry by funding research centers and subsidizing education for example, lowering the cost of entry for new firms.

Although all seven barriers are relevant in the context of the Icelandic energy sector, the first and seventh are especially noteworthy. Not only do large, pre-existing firms dominate the market, but the government also keeps the industry under its thumb. The Icelandic public is highly critical of big industry, especially foreign owned firms seeking to make headway in the Icelandic market.

The power of suppliers

Suppliers, when in a strong position, can lower over-all industry profitability by charging higher prices, lowering quality and service standards or shifting costs to industry participants (Porter, 2008). Firms can become over-reliant on suppliers with whom they’ve done business and formed a relationship due to switching costs. There are several reasons suppliers can become more powerful compared to their buyers. If suppliers offer an unsubstitutable product, if they offer differentiated products, if they do not receive a large portion of their revenues from the industry in question and so forth.

The power of buyers

In a nutshell, the power of buyers is the opposite of the power of suppliers. Buyers can lower industry profitability by demanding lower prices, higher quality and

19 service standards and manipulating industry participants into competition. If the demand for goods is elastic the buyers are in a stronger position and can make more demands towards the industry participants. If there are few buyers, low switching costs or the goods are easily substituted, buyers can threaten to look elsewhere.

The threat of substitutes

Substitutes are products that perform the same or a similar function as a different product and can replace that product. Substitutes can pose a risk to industry participants if they can achieve similar quality at a lower price. A well-executed substitute should be able to affect the profitability of its competitor product. If the competitor is unable to convince buyers that their product is superior or worth the higher price, its profitability will decrease. Substitutes are not always directly related to their competitor products and changes in different industries might unexpectedly create substitutes, such as with plastic materials that became good enough to substitute steel in automobile manufacturing. There is no real substitute for electricity of course and while one could argue that different forms of production represent a substitute, such as choosing to use solar generated electricity rather than geothermally generated electricity for example, the low price for electricity in Iceland means that there is less need for alternative modes of production.

Rivalry among existing competitors

Highly competitive rivalry, especially price competition, can decrease industry attractiveness by transferring profits from the industry to buyers and in some cases by skewing economic signals. Rivalry can take on many forms, for example advertising campaigns, product introductions and price discounting. If sufficiently rigorous, competition of this nature can raise costs. Porter (a) (1998) said that it was the intensity and the basis on which industry participants compete that dictates the degree to which rivalry will affect profitability. Rivalry is intense if there are many participants and they are homogenous in terms of size and power, if the industry is growing slowly or exit barriers are high. Exit barriers are the opposite of entry barriers and exist when for practical, legal or emotional reasons management feels

20 obliged to remain in a particular business even though profitability may be low (or even negative) (Porter (b), 1998).

The basis of competition, whether companies compete in terms of price, service, convenience, advertising or something else and whether companies compete on the same basis also affects profitability. As mentioned earlier, price competition is especially detrimental to profits, as it spurs retaliation and trains customers to ignore other features and focus solely on price (Porter, 2008). Rivalry between firms serving different customer segments, with different needs and wants, can prove much more profitable and beneficial for the growth of the industry as a whole.

Consumer market analysis

Consumer analysis can be used in a number of ways to help firms develop marketing strategies. Understanding what consumers think and how they feel, whether on an individual or group level can help management identify their target market and set marketing objectives. Consumer research should be continuous so as to allow the firm to adapt and improve its strategy. Target marketing is one form of consumer analysis. It has three major steps: segmentation, targeting and positioning.

First bases for segmenting the market are identified and profiled. When segmenting a market there are numerous factors that determine how segments are chosen. Segments are based on the needs and desires of potential buyers, their geographical locations, their purchase history and their fiscal status amongst other things (Weinstein, 2004). Secondly the attractiveness of those segments is measured through research methods such as focus groups and appropriate segments chosen. Finally, a marketing mix is developed to appeal to that market segment and the firm positions itself to implement their marketing campaign. Knowing the relevant segment is important to be able to effectively market to consumer tastes (Kotler, Armstrong, Wong og Saunders, 2008). Geographic location has historically been the most important factor in deciding market segments for Icelandic energy firms with the exception of the Orka Náttúrunnar (ON Power) which markets itself as a

21 environmentally conscious energy firm, offering fast-charging stations for electric cars and experimenting with CO2 and H2S emission reduction.

Targeted marketing helps managers decide whom they should be marketing to by measuring the potential for profit in different segments. Is the segment growing, stagnant or shrinking? Is there untapped potential in this segment? Does our firm conform to the demands of this segment? There are many questions managers need to consider before embarking on an expensive marketing campaign. Once a sufficiently attractive segment has been chosen a firm has to dedicate itself to a marketing strategy aimed at that segment. Succesful strategies often have three common features: the point of parity, the point of difference and image (Kotler et al., 2008).

The point of parity refers to features that the product has in common with competitor products whereas points of difference are the opposite. While managers often emphasise advertising the point of difference, the point of parity offers buyers some context. Say for example that Coca-Cola wanted to convince Pepsi drinkers to start drinking their titular soft drink instead. Obviously offering Pepsi drinkers something completely different might not resonate with them. After all, they like Pepsi. In such a situation it would be more effective to market Coca-Cola as being “like” Pepsi only better somehow. The third feature, image, plays an important role in this stage of the marketing campaign. Using a marketing mix of advertising, packaging, presentation, price, service and location firms can selectively aim for their intended segment. That is precisely what ON Power has done in recent years, most likely in a bid to appeal to the urban sensibilities of Reykjavík inhabitants, which is their main service area.

PESTEL analysis

The PESTEL analysis is a tool used to analyze the macro environment for marketing and strategic planning. Its name, PESTEL, is an acronym for the six categories the analysis is based on: Political, Economic, Social, Technological, Environmental and

22 Legal factors (Witcher and Chau, 2010). These six categories are examined to create a holistic view of external factors influencing the industry’s future.

Political factors

Politics and government policy play an important part in the viability of business ventures and have become increasingly important to businesses with the rise of globalization. Firms need to be aware of the threats and opportunities in the political

Legal

Political Environment

Technology Economic

Social

Picture 4: PESTEL analysis (McGee et al., 2010)

environment before entering a new market and even when deciding whether to stay in an established one. Political decisions such as tax policies, trade regulations, trade agreements and political stability have a significant impact on the economy (Clegg et al., 2011).

23 Economic factors

Economic factors refer to macroeconomic factors such as currency valuation, interest rates, inflation and growth. Macroeconomics and politics are highly connected factors due to the influence political leaders can have on central banks, public image and other things which influence currency value, the state of education and the workforce and expectations for the future (Hitt, Ireland and Hoskisson, 2009). What economic factors are considered desirable depend largely on the needs of the firm seeking entry. High wages may make for a more expensive workforce but they also mean that the populace has more money to spend on goods and services.

Social factors

Not to be overlooked, social conventions and structures must be handled tactfully to avoid public-relations disasters. Different beliefs, cultures, languages and histories create a metaphorical minefield of potential problems. Social development and status also affects the types of products needed (Hitt et al, 2009). If you were to compare an urban environment with a rural one for example, you might find very different consumption habits due to what sort of consumption is considered socially acceptable. Ethnocentricity can have substantial consequences for firms, as was the case when Kenneth Cole disastrously tweeted an off-colour joke in 2011 about unrest in Cairo. A joke that might be considered amusingly risqué in a comfortable American office environment was offensive and insensitive to millions directly affected by the unrest spreading across the Middle East.

Picture 5: An example of cultural insensitivity.

Technological factors

Technological innovation can (and frequently does) cause rapid change in markets by reducing costs, increasing efficiency and ease distribution (Clegg et al, 2011). There’s a wealth of recent examples of technological innovation disrupting preexisting markets: the internet, e-mail, the smart phone are all very recent but have completely changed the business world. New technology can do more than disrupt markets however; it can also keep an existing product or service from becoming obsolete

Environmental factors

Environmental factors are increasingly important due to public concern over climate change and environmental protection. Governments are under pressure to address pollution with new laws, regulations and fees. This change in public opinion might also entail a change in consumption habits; sustainability and waste reduction don’t exactly go hand in hand with unbridled consumerism.

Legal factors

25 Like economic factors, legal factors are also closely tied to political factors, due to government’s role in making laws but are more specifically about existing regulations such as employment or health and safety regulations. Being aware of legal factors is essential to avoiding unnecessary legal costs and complications, which can impede firm performance (Clegg et al, 2011). It is quite common for countries to have laws regarding foreign ownership of real estate or foreign-based businesses for example, which might affect the feasibility of the firms business plan.

Analysis of the Internal environment

Analysis of the internal environment is mainly about examining the resources and capabilities a firm has or can easily access. This includes knowing the firms resources, how they can be employed and how they can help the firm achieve competitive advantage. Knowing a firms strengths and weaknesses are vital to be able to decide which external factors are necessary for success. In this chapter we discuss some analytical tools that managers can use to analyze their inner environment as well as their core competencies, corporate values and goals.

The value chain

The value chain is an analytical tool used to determine and clarify how a business unit produces value and where its profits come from. It is a financially oriented method where the firm’s activities are put forward as a chain. In it, the unit’s activities are put into two categories: primary and support activities. The primary activities are inbound logistics, operations, outbound logistics, marketing and sales and service. The support activities are procurement, human resource management, technological development and infrastructure (Johnson et al., 2011). The value chain not only gives managers a clear idea of where to look to lower costs and increase value-formation but what it is that their customers value most in their product (McGee et al., 2010).

26 Firm infrastructure Human resource management Technology development Procurement

Inbound Outbound Marketing Customer Operations logistics logistics & sales service

Picture 6: Porter's Value Chain (McGee et al., 2010)

Put simply, a firm’s value is determined by the customers demand for its products or services (Feller, Shunk and Callarman 2006). “Don’t find customers for you products, find products for your customers” as Seth Godin said. Firms can’t push their products on customers but have to use a pull approach instead, seeking to fulfill customers’ needs as they experience them.

Primary activities:

• Inbound logistics refers to the management, movement and storage of inbound resources, materials, products and other inventory from suppliers. • Operations are concerned with turning inputs such as raw materials and labour into outputs such as goods and services. • Outbound logistics are related to the storage and movement of final products to end-users. • Marketing and sales are an especially important group of activities when it comes to increasing revenue since this part of the value-chain represents customers’ main source of information from the firm. • Service refers to all service required to meet the customers’ standards after they have bought the product. Service can directly affect the value of the product and the firm’s image.

Support activities:

27 • Firm infrastructure refers to clerical tasks necessary for production such as accounting, legal, quality assurance and strategic management. • Human resource management includes all activities pertaining to staff: recruitment, training, dismissal, compensation et cetera. • Technological development refers to the technology, equipment, hardware, software and technical knowledge used in transforming inputs into outputs. • Procurement is all acquisition of goods and services from external sources.

All these activities are interconnected and offer managers opportunities to reduce costs and increase revenue. Each block of the chain can have three subactivities that affect value formation: direct activities, indirect activities and quality assurance. Direct subactivities create value by themselves. Sales and marketing are examples of direct activities. Indirect activities create value by making direct activities run smoothly, like management and record-keeping. Quality assurance ensures that the activities meet the standards and demands required. If we think of marketing as a direct activity, proofreading advertisements would be an example of quality assurance (McGee et al., 2010). The value chain offers some insight into the very reason the firm exists, what need they are fulfilling. There are certain risks to overemphasizing the value chain however. Focusing too much on cost minimization might not only make future investments and growth impossible but might even make it impossible to maintain current quality standards and services. The value chain doesn’t take people, products, capacity or customers into account and can distort the goal of running a business by causing inappropriate attention to eliminating costs. There are after all, some costs that cannot be avoided if one wants to successfully run a company; staff salaries, maintenance, marketing and product development, amonst many other examples.

The value chain analysis for assessing competitive advantage

When performing a value chain analysis with the goal of assessing competitive advantage there are a few things that must be kept in mind (McGee et al, 2010).

28 • Each element in the value chain must be defined within context of competitive advantage. • The cost and importance of activities haave to be evaluated in each element to calculate the total cost. • The cost of elements should be compared and the most expensive ones identified. It can be useful to compare the costs to those of competitors. • Costly activities should be identified. Minimizing cost there will prove most beneficial to the firm. • The relationship between elements and activities should be clarified and known to management. • Management has to be on the lookout for opportunities to decrease cost, especially in high cost activities.

When the flow of goods and service is managed within value chain, we refer to it as supply chain management.

Supply chain management

Supply chain management is the management and arrangement of upstream and downstream product flows between suppliers, the firm and buyers. It is a cross- functional approach that includes the movement of input (raw material, labour, et cetera) and output resources (finished goods) from start to finish. With increased globalization and the advent of hypercompetitive markets these functions have more commonly been outsourced to specialized firms that can more efficiently and effectively complete the task. Supply chain management was developed as a way to

Demand signal Customers Suppliers Sales, Central Distribution, marketing Transportation Procurement manufacturing assembly & & customer repair service

Product flow

Picture 7: Supply chain (Feller et al., 2006)

29 improve trust and cooperation between an increasing number of supply chain partners

In a way, the supply chain represents the flip-side of the value chain in that the former is more similar to a push system where products are manufactured based on sales predictions and then pushed onto the buyer via marketing (Kotler et al., 2008). Supply chains are diverse and give a good indication of what unique features a firm has and what its core competencies are.

Core competencies

Core competencies are a firm’s main strategic strengths, based on their skills and resources. They should be both difficult to replicate and support expansion into new markets. It should also be of significant value to end customers (Prahalad and Hamel, 1990). Core competencies lie at the foundation of competitive advantage because they are essentialy what differentiate firms from their competitors.

Core values

Core values are the fundamental beliefs and moral tenets of an individual or organization, although the term is usually used in strategic management to refer to organizational values. There are countless examples of values and which values matter most depends largely on the industry, culture and individuals involved. Examples of values are reliability, honesty, innovation, sustainability and so forth. Values usually reflect the organizations social and legal environment but are not the same thing as cultural norms. It’s advisable for firms to choose and stick to their core values to set an example for employees and reassure clients.

Choosing values requires some honest introspection. For an organization to be able to dedicate itself to its values, they must be realistic. It is also important not to choose too many values so as to spread themselves too thin. They must genuinely represent the organization and be immune to shocks and stand up to criticism.

30 VRIO analysis

The VRIO framework is another form of internal analysis based on four factors: value, rarity, imitability and organization. Tangible and intangible resources and skills are examined with the goal of finding new avenues for reaching competitive advantage. Tangible resources are physical things like tools and machinery while intangible resources are things that have no physical presence but can still be owned by the company such as brand reputation and property rights (Barney and Hesterly, 2011). The four factors mentioned above can be thought of as questions whose answers make it easier for organizations realize potential opportunities to compete more effectively.

• Value: “Is the firm able to exploit an opportunity or neutralize an external threat with the resource/capability?” Value is created by the resources the firm has that increase the customer’s utility (Barney, 1991). Low value is a bad sign for firms, making it difficult to make plans and investments for growth. Companies without valuable resources are ill equipped to compete (Barney og Hesterly, 2011). • Rarity: “Is control of the resource/capability in the hands of a relative few?” Rarity refers to resources that can only be acquired by one or few firms. If a resource is not rare, it leads to competitive parity. It is therefore important that firms are aware of how rare these resources are and whether or not they can be used as a point of difference (Teece, Pisano and Shuen, 1997). • Imitability: “Is it difficult to imitate, and will there be significant cost disadvantage to a firm trying to obtain, develop, or duplicate the resource/capability?” Imitability is necessary to turn temporary competitive advantage into sustained competitive advantage. Even if a firm has a rare resource it must be inimitable or else competitors will quickly imitate or substitute for that resource. • Organization: “Is the firm organized, ready, and able to exploit the resource/capability? Is the firm organized to capture value?” The answer to this question hinges on the previous answers. Organization includes

31 compensation, formal and informal management and strategy (Teece et al., 1997).

The picture below illustrates how the VRIO analysis can be visually put forward.

No Competitive disadvantage Valuable?

No Competitive parity

Rare? Temporary No competitive advantage

Costly to imitate? Temporary No competitive advantage Organized to capture value?

Sustained competitive advantage

Picture 8: VRIO analysis (Barney & Hesterly, 2011)

SWOT matrix

The SWOT matrix is a useful tool for evaluating the strengths, weaknesses, opportunities and threats involved in a business venture. It is often used when introducing a new product or strategy. The matrix takes both internal and external factors into account and organizes them based on whether or not they are beneficial to the success of the venture (Griffin, 2008). The degree to which the internal environment matches the external is referred to as strategic fit. Internal factors are

32 the strengths and weaknesses of the venture and can include the qualities of the product itself, the location, marketing, personnel and so on. The external

Internal factors Strengths (S) Weaknesses (W) External factors

SO Strategies WO Strategies - Use strengths to take - Beat weaknesses to Opportunities (O) advantage of take advantage of opportunities. opportunities

ST Strategies WT Strategies - Use strengths to - Minimize weaknesses Threats (T) avoid threats. and avoid threats.

Picture 9: SWOT matrix (Griffin, 2008)

environment offers opportunities and threats in the form of macroeconomic and technological changes, cultural factors, competition and legislation. It is important to note that with different goals and contexts the same factors can be either beneficial or detrimental to the success of a product or strategy (Humphrey, 2005).

Strengths

A business venture’s strengths are internal factors that have a positive effect on the success and profitability of said venture. Furthermore, strengths should increase competitive advantage. Firm strengths can be either tangible or intangible resources such as equipment, clientele, distribution networks, patents, management, IT and so forth. Identifying strengths depends on manager’s insight and judgement as to which factors are beneficial, which are not and what strengths they can attempt to gain.

Weaknesses

33 Just as important as being aware of a firm’s strengths is identifying and addressing it’s weaknesses. Examples of weaknesses could be a bad location, poor promotional work or inexperience in a certain field. There are countless potential weaknesses and managers should not shy away from being honest about what could potentially be a weakness. It is important to be able to judge whether a venture has any chance of success before resources are poured into attempting it.

Opportunities

Opportunities are external factors that have a beneficial effect on the profitability of the firm or venture. These opportunities include not only macroeconomic factors such as altered consumer tastes or greater cash flow but also small scale opportunities presented by suppliers and competitors such as if a competitor were to be involved in a scandal.

Threats

Threats are negative external factors such as a supplier raising prices or a competitor lowering prices. Although the SWOT matrix is often used to predict strengths, weaknesses, opportunities and threats to new ventures or firms, established products and firms are also susceptible to unforeseen threats such as tax hikes or distribution issues.

Strategic planning

When an organization has enough information and data regarding all relevant internal and external factors it can begin the process of defining its strategy and allocating resources to implement this strategy. Strategic planning is similar but separate from strategic thinking. The former is more systemic and formalized whereas the latter is more creative and flexible. Strategies can be formed on either the business-level or the corporate-level. Business strategies regard the way a company creates, maintains and uses its competitive advantage, while corporate strategy regards how to diversify and merge with other businesses. Corporate strategy is therefore only relevant to larger corporations since small businesses only

34 have one strategic decision make on the corporate-level: which industry to enter (McGee o.fl., 2010).

A successful strategy requires efficiency, realism and clarity. Wishful thinking can be fatal for managers and staff hoping to make the most of the firm’s resources. But it is also imperative that the firm’s goals and organization are clear to managers and staff alike. No wind is favourable if you don’t know where you’re sailing.

35 II. THEORY

Theoretical foundations

At its core, the DCV is closely related to innovation and entrepreneurship. Stevenson and Amabile defined entrepreneurship as “the pursuit of opportunity beyond the resources you currently control” (1999). Based on this definition, entrepreneurship is not only for enterprising individuals with nothing but an idea and bootstraps by which to pull themselves up, but also for organizations and firms seeking to survive intense competition. Corporate innovation is often written off as an oxymoronic buzzword, seen by critics as trying to have the best of both worlds: the steadiness and stability of a large corporation combined with the creativity and exponential growth of startups. But while the management of established corporations and startups will never be exactly the same and there might be some truth to the claim that those who espouse corporate innovation are simply trying to have their cake and eat it too, there is plenty of proof that corporations can innovate. Just not the same way startups do.

That’s because not every innovation has to be a revolutionary new technology or groundbreaking discovery. In a manner of speaking, innovation doesn’t even have to be new. That is to say, the technology behind it doesn’t have to be new. As Rogers and Shoemaker (1972) put it:

It matters little, as far as human behaviour is concerned whether or not an idea is “objectively” new as measured by the lapse of time since its first use or discovery… if the idea seems new and different to the individual, it is an innovation.

We can take some of the most emblematic examples of innovation and entrepreneurship in the past decade as examples. The technology underlying Facebook, Twitter and Uber was not new – but the way this technology was combined and consumed was. This is referred to as cultural entrepreneurship. This type of innovation can be small, incremental and more realistically attainable for

36 larger (and hence slower) corporations. But for that to happen, the firm must purposefully pursue a course of innovation management.

In a way, innovation management mirrors Coase’s (1937) theory that transaction costs are the cause of firm-formation. Good innovation management lowers the cost of using or retaining specific resources, for example inventions and innovations that bring factors of production together by lessening spatial distribution such as e-mail or social network sites. While initially positive the advantage of such innovation can later be diminished by what Kogut and Zander referred to as “the paradox that creativity works by rules of exclusions” (1996: p. 515). Put simply, path-dependence can lead to sub-optimal circumstances where firms are bound by existing thought processes. Due to this a firm can follow “best procedure” and still be unprofitable.

Again, one of the key foundations of successful strategy is a clear goal. Basing innovation management on the DCV requires that we determine what purpose dynamic capabilities have – why are they important and what do we stand to gain by investigating them? Our conclusion will likely depend on the definition we’ve chosen to lean on. Are dynamic capabilities meant to make firms more adaptable to rapidly changing environments (Teece, 1997) or to instigate changes in the market (Eisenhardt and Martin, 2000)?

It has been mentioned before that the DCV is an extension of the RBV and that they share many of their theoretical underpinnings. It would be a mistake however to ignore the differences between the two. While the RBV assumes Ricardian rents, the DCV assumes Schumpeterian rents. Ricardian rents occur when similar goods or resources are of different quality and yield. Schumpeterian rents occur in the time between an innovation is introduced and it becomes widely disseminated. As an illustrative example, consider two energy firms that both produce electricity from geothermal sources. Let’s assume that the quality of their services and products are identical. If one of the companies is situated in a highly active geothermal area and the other is not, that company can produce at a lower cost, and create more rent. That’s an example of Ricardian rent. But lets say that one

37 of the firms invents a new method of extracting geothermal energy which greatly decreases the cost of production and gives the inventing firm a competitive advantage until eventually, the other company manages to catch on to what the inventor firm is doing and does the same. Schumpeterian rent is the surplus profit the inventor firm achieves during their temporary competitive advantage.

While the Ricardian position views rents as market inefficiencies that remain despite equilibrium, the Schumpeterian perspective places a greater emphasis on the role of the entrepreneur and temporary imbalances created by innovation. Schumpeter’s routinely cited idea of “creative destruction” captures the essence of his theories quite aptly. Economies gravitate towards stagnant equilibrium and it is the role of the entrepreneur to instigate change and make old modes of production obsolete.

Whereas the RBV is primarily concerned with a firm’s resources, the DCV pays more attention to the processes and path-dependencies that cause the formation of a firm’s resource base. The former is focused on resource substitutability while the latter is focused on inimitability. Helfat et al. (2007) refer to these differences by the biology-based terms technical versus evolutionary fitness. These terms are quite suitable in describing the difference between the two perspectives albeit in a slightly heavy-handed way. Proponents of the DCV criticized the static nature of the RBV and just as it is not necessarily the strongest, fastest or most intelligent species that passes on it’s genetic material, the largest, richest and most famous companies do not always survive. What truly sets survivors apart then, is adaptability.

Simply drifting with the current, without any course or strategy is also a recipe for disaster. A firm does not become innovative by chasing every technological or management trend that comes along, nor is it likely to achieve structural success. How can managers decide what risks to take and what to avoid? If there were any simple answer to that question, it would result in an entirely different economy than the one we know. What we know is vital however is being capable of organizational learning and avoiding common observational biases that

38 impede innovation, such as the certainty effect (Kahneman and Lovallo, 1993) which causes risk aversion.

Being prepared for every eventuality is neither possible nor practical for most firms, so what is the optimal way for management to organize their firms? According to the contingency theory there is no best way to organize a corporation, lead a company or make decisions. Instead, the optimal course of action is contingent upon the internal and external situation. While this might sound like management is just supposed to “wing it” what it really means is that relation and task-oriented behaviour has to be taken into account and a fit between that behaviour and the resources and power structure of the organization has to be found at the beginning. This brings us back to the RBV.

To understand the philosophical and practical assumptions which form the foundation of the resource-based view, contingency theory and innovation management the theory of the firm should be considered (Knight, 1921; Coase, 1937; Cyert and March, 1963; Williamson, 1975; Nelson and Winter, 1982; Grant, 1996). The term theory of the firm may be a bit misleading, seeing as how there is no single, universally accepted theory, but rather several non-exclusive theories about what purpose firms serve. Knight’s theory was that firms existed as a sort of risk preference conduit, allocating risk in such a way as to meet different individual needs (1921). That way, risk-seeking entrepreneurs could employ the skills of risk- averse professionals.

Later management scholars considered Knight’s theory insufficient and expanded on it (Grant, 1996). Coase (1937) and Williamson (1975) emphasised the relative efficiency of contract-based, hierarchical organizations. Others sought to further integrate economics and organizational studies into the theory of the firm (Cyert and March, 1963; Nelson and Winter, 1982), resulting in the behavioural and evolutionary theories of the firm. While the resource-based view of the firm is “less a theory of firm structure and behaviour as an attempt to explain and predict why some firms are able to establish positions of sustainable competitive advantage” (Grant, 1996: p. 110), all of these approaches have influenced it.

39 While the DCV has become the most prominent branch of RBV research, there are two other categories commonly used (Armstrong & Shimizu, 2007): The Schumpeterian view and the hypercompetition view that sustained competitive advantage is actually a series of competitive advantages over time. There are also three major paradigms in addition to dynamic capabilities (Teece, Pisano and Shuen, 1997). On the one hand there are two that emphasize exploitation of market power: the competitive forces approach (Porter, 1980) and the strategic-conflict approach (Shapiro, 1989). On the other hand there are those that emphasize efficiency: the resource-based perspective (Penrose, 1959; Rumelt, 1984) and the DCV. These research categories and paradigms will not be discussed in much detail in this thesis to avoid confusing the issue, but there is a wealth of interesting literature on the subject.

Dutta, Narasimhan and Rajiv (2005) put forth an interesting view of capabilities as “the efficiency with which a firm uses the inputs available to it (i.e., its resources, such as R&D expenditure), and converts them into whatever output(s) it desires (i.e., its objectives, such as developing innovative technologies)”. This view encapsulates the connection between the DCV, innovation management and contingency theory. In nutshell, the three are connected because they all deal with the unquantifiable factors that decide competitive advantage. Efficiency is a poorly quantifiable concept, much like capabilities. It is specifically because they are difficult to measure and observe that they are inimitable and provide competitive advantage (Schumpeter, 1942; Penrose, 1959; Nelson & Winter, 1982; Prahalad & Hamel, 1990).

Because of this difficulty and despite growing interest, dynamic capabilities are underrepresented in quantitative research (Newbert, 2007). If capabilities and core competences are more significant in explaining competitive advantage than resources it might seem strange that they have received comparably little empirical attention. This is likely in part due to the difficulty of measuring capabilities and competitive advantage. A firm’s dynamic capabilities are largely moulded by its history and path dependency. Despite knowledge management’s attempts to codify

40 tacit knowledge most learning is still local (Teece, Pisano and Shuen, 1997). A “one size fits all” approach to organizational routines and competences is misguided in diverse and dynamic environments where technology and circumstances are constantly changing.

Literature

As mentioned in the introduction, the dynamic capabilities view has garnered substantial interest since it appeared in Teece, Pisano and Shuen’s (1997) influential “Dynamic Capabilities and Strategic Management”. That interest has spread beyond the field of strategic management and into other management fields such as entrepreneurship and business administration (Barreto, 2010). The fast growth of research, reviews and literature on the subject has presented us with a wide range of perspectives, interpretations and criticisms. Several distinct definitions have been put forward, and while this thesis follows Teece’s (2009) definition of dynamic capabilities as inimitable capacities to shape, reshape, configure and reconfigure assets so as to respond to changing technologies and markets, a closer look at other definitions can provide deeper understanding of the direction in which researchers have taken dynamic capability research.

Teece and Pisano (1994) initially introduced the concept in 1994 in an article in Industrial and Corporate Change but it was not until 1997 when Teece et al. (1997) published their famous article in Strategic Management Journal that the dynamic capabilities view of strategic management was developed as we recognise it today. Their vision of the DCV was an extension of the RBV, designed to rectify its static view of competitive advantage. DCs were not a resource but rather, an ability to utilise internal and external competences to achieve sustained competitive advantage in rapidly changing environments. These abilities were usually tacit and could not easily be bought or traded and were assumed to be path-dependent and heterogeneous across firms. As well as the RBV, Teece et al. (1997) were heavily influenced by entrepreneurial and evolutionary economics (Schumpeter, 1934; Schumpeter, 1947; Nelson & Winter, 1982), as can be seen in their emphasis on

41 evolutionary paths, organizational learning and reconfiguration. Following the publication of their influential article, more researchers dedicated their attention to the DCV as a key element of study. Numerous articles were published in prestigious academic journals such as Strategic Management Journal, Academy of Management Journal, Journal of Management and more, spanning not only strategic management, but several other business administration fields as well (Barreto, 2010).

The definitions given for DCs and the DCV in the following years varied slightly, with some emphasizing the RBV and others leaning more heavily on evolutionary economics. An example of this difference is that while Teece et al. (1997) described DCs as abilities or capacities, some others emphasised their repeatability, viewing them as more similar to routines or processes (Eisenhardt & Martin, 2000; Zollo & Winter, 2002; Helfat et al., 2007). The former view echoes the RBV concept of competencies (Stalk et al., 1992) and the latter is based on organizational learning which is a view often employed in evolutionary economics (Nelson & Winter, 1982). Other than that the most important points for debate are how DCs are affected by environmental dynamism, how they should be characterised and what results they can be expected to have on firm performance.

While Teece et al. (1997) clearly emphasise the importance of external changes, there has been some disagreement as to how relevant environmental dynamism is to the DCV. Some, such as Zollo and Winter (2002) consider environmental dynamism to be almost irrelevant. This might sound somewhat confusing at first with regards to the DCV’s criticism of RBV as static but they consider the dynamism of the capabilities themselves as paramount to the theory, differentiating dynamic from ordinary capabilities (Winter, 2003) or substantive capabilities (Zahra et al., 2006). Other types of capabilities have been suggested such as the capability to develop opportunities and avoid threats (Teece, 2007) but since these capabilities are typically considered dynamic capabilities, they will not be specifically taken into account here.

42 What lessons are there to be gleaned from the path dependencies of successfully adaptive firms? This is where evolutionary economics and environmental dynamism come back into play. Repetition, reflection and articulation are the learning mechanisms, which equip firms with the necessary experience to thrive (Eisenhardt and Martin, 2000; Zollo and Winter, 2002; Zahra et al., 2006). Learning mechanisms such as these can be either tacit or explicit. Tacit would be through discussions and peer-to-peer observation whereas explicit learning would be through codified knowledge such as manuals or routine specifications. In a moderately dynamic environment variation is the key to survival whereas selection more relevant in high-velocity environments (Eisenhardt and Martin, 2000). Likewise, learning from experience is more important to older firms than startups.

Another thing that makes dynamic capabilities harder to measure is the lack of heterogeneity between firms (Eisenhardt and Martin, 2000) and the lack of a clear relationship between DCs and performance. Most influential writers on the subject of dynamic capabilities seem to assume a positive relationship between DCs and firm performance (Zollo and Winter, 2002, Teece, 2007). There are those however who approach the question of DCs positive outcome with more caution. Eisenhardt and Martin (2000) consider DCs to be contributive, but not directly responsible for improved firm performance. Not only is it problematic to ascertain what positive affect dynamic capabilities might have but what affect they might have in general. Two firms with identical capabilities might end up with completely different resource bases depending on their circumstances after all. There is also the question of the trade-off – by cultivating and employing dynamic capabilities managers neglect other possibilities (Winter, 2003).

Unsurprisingly the large body of work dedicated to the DCV and the popularity of the concept has received a good deal of criticism. This criticism is worth examining. Some argue that the concept is tautological or poorly defined (Williamson, 1999) whereas others argue that the theory is not universally applicable (Winter, 2003; Newbert, 2007). Much of the criticism seems to stem from a lack of clarity regarding the conceptualization, procedures and scope that have hitherto

43 been used to research the DCV. Helfat and Peteraf (2009) deftly answered criticisms that dynamic capabilities lack a clear scientific theory. DCV is a young and evolving theoretical standpoint. For it to evolve into a viable scientific theory, great care must be taken to properly define concepts properly.

Model

When deciding what process to use in the execution of this research a plethora of options was available. Originally the plan was to delve into Schumpeterian theory, researching Kondratiev waves and how they could be used in management decisions. Structural equation modelling, a statistical technique for testing and estimating causal relationships using a combination of statistical data and qualitative causal assumptions (Pearl, 2000) seemed to be the next way to go. In the end it was decided to keep it simple and use survey analysis to pinpoint industry pain points. This was decided after preliminary research indicated that the target population was too small to be able to form a statistically viable control group for the dependent variable.

By surveying individuals employed in the Icelandic energy sector on dynamic capabilities as business processes, we could ascertain what capabilities are lacking and therefore, where improvements are needed. Business processes are actions that firms engage in to accomplish some objective. Thus, business processes can be thought of as the routines or activities that a firm develops in order to get something done (Nelson and Winter, 1982; Porter, 1991). Examples of business processes include the process for acquiring supplies and other raw materials, the process of producing products or services, the process of delivering products or services to customers, and the process of providing after sales service (Porter, 1985). (Ray, Jay and Muhanna, 2004).

This study relies on the exceptional work of scholars who inspect a basic question that continues to pester DC researchers: How can something as fluid and constantly changing as dynamic capabilities be quantitatively measured in a consistent and replicable way? Although this line of inquiry might initially seem more

44 (or even exclusively) relevant in an academic context, being able to reliably quantify dynamic capabilities is increasingly important to managers who are expected to simultaneously develop and deploy their DCs (Ambrosini and Bowman, 2009). Dynamic capabilities cannot be purchased or attained in the same way that other assets can (Teece, 1997) and being able to accurately gauge what capabilities are and what they do can save managers vast amounts of time and resources spent developing the wrong capabilities.

While this research is not on how to measure capabilities, it is grounded on an analysis of quantitative information received through a questionnaire that was sent to all Icelandic energy firms as well as service and engineering firms with connections to energy firms. Orignially, all management staff was invited to take part, with a total of between 300-400 potential participants. The study benefitted from the assistance and good faith of several agents in upper management that granted us a greater level of access than we would have otherwise received. Nonetheless, this proved inadequate and the criteria was later broadened to include all staff in these firms to increase the number of participants.

There are a number of limitations and delimitations in this research. Of course time and budget are the biggest constraints, as well as lack of prior experience. There is also the small size of the target population, the fairly broad parameters that were necessary to find a sufficiently large population and the lack of a control group. These limits are partly inherent in the design of the research and outside of the researchers control but some of the blame undoubtably lies with the author.

45 III. METHODS

Quantitative research is a type of empirical investigation, focusing on observable and verifiable observation rather than theory or logic. It’s called quantitative (as opposed to qualitative) because its findings are expressed numerically, usually through statistics or other mathematics. While qualitative research attempts to gain broad insight and form hypotheses about phenomena, quantitative research is used with the goal of reaching an unbiased result that is applicable to larger populations. To that end, a researcher will study a subset of the population called a data sample, manipulating key variables to observe and explain how those variable affect the subject. Quantitative research has three main tenets:

• Observation and explanation • Data collection • Analysis

Observation and explanation is where research begins. The explanation to an observation can be put forth in the form of a question or hypothesis, which has to be proved or disproved. Numerical data is then gathered and statistically analysed with the goal of reaching a verifiable and generalizable conclusion.

The four most basic type of quantitative research are: survey, correlational, causal-comparative and experimental. This study is a survey study. Survey studies use polls, questionnaires and interviews to study behavior and attitudes. They can be conducted with one sample or used to compare several samples. When conducting a survey study it is important that sampling is conducted in such a manner as to properly reflect the population. While this is often done through simple random sampling, such as when the goal of the survey is to measure public opinion, surveying completely at random would not work in this case. A stratified random sample method was used instead: the sample was originally a group of managers, chosen at random from the larger population of all managers working for firms in the Icelandic energy sector. It was later broadened to encompass all employees working for firms in the Icelandic energy sector.

46 Not only sampling but also the method by which the survey is conducted can influence the outcome of the study if done improperly. There are a number of ways that surveys can be conducted but for this study it was conducted through the website SmartSurvey, which employs a mix of e-mail contact and self-administration, and direct polling. The former method offers participants more control and greater anonymity. Unfortunately, it also means that participants are more likely not to finish the survey or ignore it. Therefore, direct polling was performed in many cases if the participant approved.

As mentioned in the second chapter quantitative research has been lacking in the subfield of dynamic capabilities. Newbert (2007) suggested that this might be due to the “relative ease of measuring resources as compared to capabilities and core competencies” and added that “compared to resources, measuring capabilities and core competencies often necessitates a greater need for primary data collection techniques and often introduces a greater potential for slippage and respondent bias (Newbert, 2007).” This research has two main goals, the first of which is to examine ordinary and dynamic capabilities in the Icelandic energy sector and what they tell us about the industries pain points. To achieve that the survey data will be analysed in the context of general data on industry performance, environmental dynamism and heterogeneous capabilities. The second goal is to assess the viability of quantatitive methods that have been used elsewhere to study dynamic capabilities in the Icelandic energy sector. There are therefore three main questions that lead the development and conduct of the survey:

1. What difficulties face a researcher attempting to perform quantitative research on the Icelandic energy sector? 2. Research in which sectors could be used as a model or foundation for research in the Icelandic energy sector? 3. Do the findings fit our expectations based on theory and in comparison with the findings of the model research?

47 Design

Survey research is often used because it is inexpensive and simple. It has become widely used in market research and is especially useful for assessing opinions and trends but must be designed carefully to avoid biased results. Managers have an incentive to manipulate the information to portray themselves in a more positive light, but misinterpreting the data can lead to disastrous strategic planning. How then do we avoid designing a biased and inaccurate survey? While it is impossible to create a perfectly accurate survey, due in part to the fluid nature of opinions and trends as well as financial and time constraints, there are steps we can take to make the survey as accurate as possible.

Self-criticism and reflection are vital to achieving an accurate survey. The goals of the survey must be clear and concise. Too broad or too narrow and the survey will be flawed. The sample must be chosen in such a way as to ensure accuracy and representation. While it is one of the researchers goals to gather data from as broad a base as possible, not all respondents are relevant to the study. If the survey were about political opinion or ethics, anybodies opinion would be valid, but in studies such as this, which are specifically about the opinions of employees in the energy sector it would be fruitless to survey a larger cross section of the wider population In this study the sample is chosen at random from the entire population of energy sector employees in Iceland. This was possible due to the small size of the Icelandic energy sector. In conversation with instructor Gunnar Óskarsson, a sample size of roughly 100 respondents was mentioned as a good reference quantity to produce significant results. The total population of people working in management positions within the energy sector as defined in this study was roughly 350. I attempted but was unsuccessful in acquiring enough participants from this population, and so broadened the parameters to encompass all staff employed with firms in the energy sector, which roughly quadrupled the number of potential participants. Enough responses were secured, albeit barely. It was challenging and required three attempts and the help of insiders in the sector. The challenges faced will be discussed in more detail in the fifth chapter: Discussion.

48 When choosing how to reach people it’s important to consider the goal of the research and the nature of the sample. While face-to-face surveying is accurate it is also time consuming and can feel embarrassing to participants worried about privacy and the security of their responses. Sending e-mails and allowing the participants to self-administer the survey allows them greater privacy but unfortunately people are less likely to participate without some form of incentive. Convincing people to participate was one of the biggest challenges faced in doing this research. Without any incentive to encourage people to take the time to fill out the survey and considerable concerns about the security and anonymity of the data gathered, gathering the required number of responses was more time consuming than had been planned.

The survey was kept as short and clear as possible to avoid confusion. Rating questions were used rather than multiple choice questions due to the dynamic nature of the subject matter. While it is slightly more difficult to analyze the results gleaned from multiple-choice questions and the risk of bias is greater, they are more open-ended and allow for extreme views. Mixing up and randomizing the questions was not considered necessary because the nature of the research did not need to be disguised from the participant. It was considered more important that the questions and subject matter be clear to the participant. Finally, the responses were numerically coded and tested.

Sample

Before sampling the target population must be identified. The population is a complete group of people or objects that share some defining common characteristic established by the researcher. Usually, the target population is not the same as the accessible population. The former is the entire group whereas the latter is the portion of the population the researcher has access to. In large studies the difference between the target and accessible populations can be considerable but due to the small size of the target population in this study (employees in the Icelandic energy sector), the entire target population was accessible. Since the goal

49 was to find a sample of roughly 100 participants the choice was made to invite the as much of the total population to participate in the hopes of gathering enough data to be statistically relevant.

Fortunately for the purposes of this study, information on Icelandic energy firms and their management is readily available online, as well as from the Directorate of Internal Revenue. The following e-mail was sent to all Icelandic energy firms, as well as engineering and service firms that had worked with or for energy firms:

Kæri viðtakandi,

Tilgangur þessa tölvupósts er að bjóða fyrirtækinu þínu þátttöku í nafnlausri rannsókn um aðföng fyrirtækja. Þátttaka í rannsókninni er opið öllum þeim sem sinna stjórnunarstörfum hjá fyrirtækjum sem starfa í orkugeiranum auk verkfræði- og þjónustufyrirtækja sem hafa starfað með orkufyrirtækjum.

Rannsóknin er unnin af Oddi Sturlusyni B.A. undir leiðsögn Gunnars Óskarssonar Ph.D. og gildir til M.Sc. gráðu í Stjórnun og Stefnumótun.

Ekki er hægt að rekja svör til einstakra fyrirtækja og algjör nafnleynd þátttakenda verður gætt. Vinsamlegast smelltu á hlekkinn til að taka þátt: https://www.esurveycreator.com…

Allar athugasemdir og spurningar má senda á netfangið [email protected].

The e-mail was only sent out in Icelandic but for the sake of the reader I will include this English translation of that e-mail:

Dear recipient,

The purpose of this e-mail is to invite your company to participate in an anonymous survey about company resources. Anybody who serves a managerial role for a company that is active in the energy sector, as well as for engineering and service companies which work with energy firms is welcome to participate.

50 The study is developed and conducted by Oddur Sturluson B.A. under the supervision of Gunnar Óskarsson Ph.D. and will be used as the foundation of a thesis for a M.Sc. degree in Strategic Management.

Answers can’t be traced to individual companies and participation is completely anonymous. Please click the link to participate. http….

All comments and questions can be sent to [email protected].

In the following week, 24 individuals participated in the survey. The week after that, only 3 participated. It was at this point that I first realized that convincing enough people to participate would be a more difficult task than I had imagined and indeed the most difficult part of the entire process. After two weeks and 27 responses I sent another e-mail to reiterate the invitation:

Kæri viðtakandi,

fyrir rúmlega tveimur vikum síðan var fyrirtækinu þínu boðið að taka þátt í nafnlausri rannsókn um aðföng fyrirtækja. Við viljum þakka þeim sem hafa tekið þátt en jafnframt hvetja þá sem eiga það eftir að taka þátt áður en lokað verður fyrir þáttöku þann 20. mars næstkomandi. Þátttaka í rannsókninni er opið öllum þeim sem sinna stjórnunarstörfum hjá fyrirtækjum sem starfa í orkugeiranum auk verkfræði- og þjónustufyrirtækja sem hafa starfað með orkufyrirtækjum. Vinsamlegast athugið að þetta gildir um alla sem sinna stjórnunarstörfum, óháð deild eða sérfræðisvið.

Rannsóknin er unnin af Oddi Sturlusyni B.A. undir leiðsögn Gunnars Óskarssonar Ph.D. og gildir til M.Sc. gráðu í Stjórnun og Stefnumótun.

Ekki er hægt að rekja svör til einstakra fyrirtækja og algjör nafnleynd þátttakenda verður gætt. Vinsamlegast smelltu á hlekkinn til að taka þátt: https://www.esurveycreator.com…

Allar athugasemdir og spurningar má senda á netfangið [email protected].

Here is the English translation of that e-mail:

Dear recipient,

51 Approximately two weeks ago your company was invited to participate in an anonymous survey about company resources. We would like to thank those that have already participated and encourage those who have not to do so before the survey is closed march 20th, 2015. Anybody who serves a managerial role for a company that is active in the energy sector, as well as for engineering and service companies which work with energy firms is welcome to participate. Please note that this includes all managers, regardless of department or field.

The study is developed and conducted by Oddur Sturluson B.A. under the supervision of Gunnar Óskarsson Ph.D. and will be used as the foundation of a thesis for a M.Sc. degree in Strategic Management.

Answers can’t be traced to individual companies and participation is completely anonymous. Please click the link to participate. http….

All comments and questions can be sent to [email protected].

Following the second email, 11 more people participated and I had a total of 38 participants by the time I had planned on closing the survey, still well below the approximately 100 responses I needed. At this point I decided that a more “hands on” approach was needed and contacted several managers with whom I had been in contact for previous school projects and asked for their help in gathering participants. Three of them expressed lack of interest or time but the rest were of great assistance and in the next two months the total and final number of participants rose to 93. While slightly below the goal, it was sufficient for the purposes of thes study. The challenges faced in gathering enough responses and how that challenge was overcome will be discussed in more detail in chapter 5.

As a general rule, samples should be as large as possible to improve how well they represent the population and to avoid sampling error. While the sample used in this study is fairly small compared to the samples used in many studies conducted on larger populations, it represents a larger portion of the target population than would

52 usually be the case abroad and is sufficiently higher than the minimum of 30 participants needed for the use of the central limit theorem. There are also only three variables, which decreases the need for a large sample.

Measurement

When assessing the validity and reliability of a quantitative study it is important to be aware of the errors and biases to which the researcher might be susceptible. There are two main types of errors: Type I and II. A Type I error is when the researcher mistakenly rejects a true null hypothesis and accepts a false alternative hypothesis. A Type II error is when the researcher accepts a false null hypothesis and rejects a true alternative hypothesis. The probability that either a Type I or II error will occur is referred to as alpha or beta respectively. Alpha is established by the researcher prior to analysis and is represented as a percentage. An alpha of .05 for example means that there is a 5% chance of mistakenly rejecting a true null hypothesis. The probability of rejecting the null hypothesis and reaching a statistically significant result on the other hand is 1 minus beta or power.

At first performing a power analysis was considered to estimate the likelihood of committing a Type II error, or to rely on the standard values of .05 for alpha and .8 for beta. The point of a power analysis is to measure the effect of the independent variable on the dependent variable. To perform a power analysis would have meant to estimate the population effect size, gamma, based upon a t-test of the difference between the mean of the data with the mean of the data from the research the method was based on. While this was initially thought to be a good idea a colleague pointed out that despite the similarities between the subjects of these studies and the subject of this study, certain variables were vastly different and could warp the conclusion. We then pivoted from the original research subject to this one.

The survey used Likert scale questions, which contained 5 options. One end was labeled “Strongly Disagree” while the other was marked “Strongly agree” with the middle option representing a neutral response. The first section of the survey

53 asked respondents about their opinions on energy sector innovation and the role it plays in their firm’s success and the second section asked respondents about basic and measurable types of capabilities.

Drnevich and Kriauciunas’s (2010) study on the contribution of ordinary and dynamic capabilities on relative firm performance was the inspiration and foundation for this research. They theorized and tested the contributions of capabilities on firm performance, considering the conditions under which ordinary and dynamic capabilities increased firm performance amongst a sample of Chilean firms. They did so, not only by examing the contributions of the capabilities themselves but also by examing the effects of environmental dynamism and capability heterogeneity. They found that a dynamic environment decreased the positive effects of ordinary capabilities while increasing the positive effects of dynamic capabilities to firm performance. The same was true of capability heterogeneity.

Building on the conclusion that dynamic capabilities positively affect firms in dynamic environments and with heterogeneous capabilities I immediately became interested in how this might affect the Icelandic energy sector, which is both dynamic and heterogeneous, but quite small on an international scale. A survey was developed based on the survey method they had used, which used three independent variables four main categories of dynamic capabilities. The first section of the survey was originally intended to categorize respondents into three categories depending on their position towards innovation and their opinion of how innovation affects their firm. The categories were “managers interested in innovation”, “managers neutral towards innovation” and “managers disinterested in innovation”. These categories were also supposed to function as the independent variables that the study would hinge on. The general hypothesis was that managers who are interested in innovation would work for firms with greater dynamic capabilities, either because their interest in innovation increases the odds that their firm supports innovation or because they work in an innovative environment. We therefore expected managers who belong to the “interested” category to score their

54 firm’s dynamic capabilities higher than the other two categories. After broadening the target population this section had to be reconsidered however, since it would most likely skew the results, making them less representative.

Section two depends on the four basic and tangible types of dynamic capabilities that are used as a measure of the firm’s dynamic capabilities. These are product development routines, knowledge management routines, acquisition routines, and exit routines. This study does not specifically address the questions of life-cycle stage theory in the same way that Capaldo et al. (2003) did in their study of dynamic capabilities in small software firms. According to the life-cycle stage theory, a firm’s life cycle can be segmented into separate and steady stages separated by changes in the firm’s internal or external environments. Examples of events that could cause stage changes might be the beginning or end of a cooperative partnership with another firm or the termination of a key employee. These events and the stages between them are usually identified by analysing data and interviews with the firm’s management. The reason life cycles were not specifically addressed is because the study is not longitudinal and so data is only gathered during one stage. This is not to say that the information would not be of some value in a longer and more expensive study but that for the purposes of this study it is unnecessary.

The researcher informally inteviewed several individuals working in the energy sector to gain some practical insight into what questions should be asked to gain a relevant working knowledge of the sector. Their feedback was also sought regarding the survey and some of the wording was altered based on their feedback to ensure clarity. After that a mass e-mail was sent out to all energy firms as well as engineering and service firms working in the energy sector, inviting them to participate in the study. After participation, participants were asked to comment on their opinion of the survey in the hopes of gaining further insight into the data. Participants answered the survey anonymously on the website e-Survey. The original Icelandic version of the survey is included in the appendix but the English translation is shown here:

55 I: Independent variables: Statements regarding innovation within the firm and its impact on performance. These statements will be included in the general survey in the form of a 5-item scale (where 1= strongly disagree and 5= strongly agree).

A. I consider myself well informed about energy sector innovation. B. Innovation played an important role in the firm’s performance in the last 5 years. C. Innovation will continue to play an important role in the firm’s performance in upcoming years.

I (continued): The following are 3-item multiple-choice questions.

D. Do you think energy production will increase, remain the same or decrease in the next decade? E. Do you think energy consumption will increase, remain the same or decrease in the next decade? F. Do you think the rate of energy sector innovation will increase, remain the same or decrease in the next decade?

II: Dependent variables: These are 5-item scales measuring the responses to the following statements concerning firm specific dynamic capabilities (where 1 = strongly disagree and 5 = strongly agree).

The questions in the following section are about product development routines. Product development routines refer to the process firms need to undergo to bring a new product or service to market. This includes concept work, product design and market research. Please answer on a scale of 1 to 5 how much you agree or disagree with the following statements if 1 = strongly disagree and 5 = strongly agree.

A. Product development routines. a. The firm has an effective product development system. b. There is a common understanding of how product development can improve firm performance.

56 c. There is open communication and teamwork between those responsible for product development. d. There is coordination between internal departments to develop products. e. The firm’s policies and procedures make product development easy.

The questions in the following section are about knowledge management routines. Knowledge management routines refer to the definition, recording and development of knowledge employees have as well incentives for employees to share and gain knowledge. Please answer on a scale of 1 to 5 how much you agree or disagree with the following statements if 1 = strongly disagree and 5 = strongly agree.

B. Knowledge-management routines. a. The firm has an effective knowledge-management system. b. There is a common understanding of how knowledge-management can improve firm performance. c. There is open communication and teamwork between those responsible for knowledge-management. d. There is coordination between internal departments to manage and disseminate knowledge. e. The firm’s policies and procedures make knowledge-management easy.

The questions in the following section are about acquisition routines. Acquisition routines refer to the acquisition of all resources that a firm or organization needs for operations, production or services, whether it be funds, property, labour, knowledge, technology, materials or other merchandise. Please answer on a scale of 1 to 5 how much you agree or disagree with the following statements if 1 = strongly disagree and 5 = strongly agree.

C. Acquisition routines. a. The firm has an effective resource acquisition system.

57 b. There is a common understanding of how resource acquisition can improve firm performance. c. There is open communication and teamwork between those responsible for knowledge acquisition. d. There is coordination between internal departments to acquire and deploy resources. e. The firm’s policies and procedures make resource acquisition easy.

The questions in the following section are about exit routines. Exit routines refer to jettison of all obsolete resources. Please answer on a scale of 1 to 5 how much you agree or disagree with the following statements if 1 = strongly disagree and 5 = strongly agree.

D. Exit routines. a. The firm has an effective resource jettison system. b. There is a common understanding of how the jettison of obsolete resources can improve firm performance. c. There is open communication and teamwork between those responsible for the jettison of obsolete resources. d. There is coordination between internal departments to jettison obsolete resources. e. The firm’s policies and procedures make the jettison of obsolete resources easy.

As mentioned earlier the second section of the survey is divided into four categories based on basic and observable dynamic capabilities. The categories are product development routines, knowledge management routines, acquisition routines, and exit routines. A high score in these categories indicates a high level of dynamic capabilities and vice versa. A generally poor grade in one or more of these categories could indicate what needs to be addressed for the Icelandic energy industry to become more competitive on an international scale.

58 Analysis

In this section we’ll list the way the answers are quantified and explain what sort of results we expected. The possible scores are listed below.

I: Independent variables:

A. 1-5 B. 1-5 C. 1-5 D. 1-3 E. 1-3 F. 1-3

Possible total: 24

II: Dependent variables:

G. 0-24 H. 0-24 I. 0-24 J. 0-24

Possible total: 96

The original idea was for participants to be divided into three categories based on their responses in the first section. Participants could therefore fall in the “managers interested in innovation”, “managers disinterested in innovation” or “managers neutral about innovation” category. The probability of falling in any category was equal but since it is to be expected that a large portion of managers would be found around the mean, the curve was expected to be normal. The opinions of managers who are slightly interested or disinterested would really have been of slightly less importance to us in this version of the study than the opinions of those managers that represent the extremes of being very interested or disinterested. We expected to find that managers in the “interested” category score higher in the second section

59 than those in the other two categories and that those in the “disinterested” category score lower than the rest.

Validity

There are several factors that require consideration when ensuring that a survey returns valid and reliable results. The way the questions are ordered, worded, formatted and structured can all affect the participants experience of the survey and indeed whether they choose to participate at all. Validity is the accuracy of the data we gather while reliability is the consistency of data we gather using this method. There are a few different types of validity that are used to measure the accuracy of different aspects of the study. Most surveys have the appearance of validity or face validity but what might seem like legitimate questions or design on the surface might not stand up to serious scrutiny. A good survey should have content, internal, and external validity.

Content validity means that the questions reflect the subject accurately, by not excluding important issues or giving undue weight to unimportant issues. If we were to ignore the effect of environmental dynamism on the contribution of capabilities for example, we might assume that our results were applicable to less dynamic industries. Internal validity means that we can reasonably expect the questions to explain the subject. In other words this means that the questions should be formatted with the goal of finding a relationship between the independent and dependent variables in mind. External validity means that our results can be generalized to the target population. This form of validity is closely connected to sample representativeness and requires that the sample be statistically similar to the population. Qualitative research can improve the validity of surveys by imbuing the researcher with a deeper understanding of the subject and the cultural concerns of his target population.

Reliability is related to internal consistency and the consistency of our results. This refers both to the consistency of our respondents’ answers, even when the wording and design of our questions is changed aswell as the degree to which

60 different questions measure the same element. There are several ways to test for reliability, including but not limited to split sample comparisons or Cronbach’s Alpha. Validity and reliability do not always go hand in hand and even an invalid study can be reliable if it is repeatedly wrong in the same way.

Assumptions

Assumptions are things that are accepted as true withouth having been proved. They are essential and it would be impossible to conduct research without them. Assumptions can be simple, like that people will tend to act in their own best interest or that participants will be honest when they respond to the researchers questions. While it is not necessary to prove ones assumptions, they must be justified. It is not enough simply to state ones assumptions. For example, a researcher could justify his assumption that participants will be honest by ensuring his participants’ anonymity and security, giving them no reason to answer dishonestly. It can also help to allow participants to comment and ask questions about the survey to assure them that the results will faithfully reflect their answers and not be taken out of context.

The assumptions we use in quantitative research are not the same as the ones used in qualitative or mixed research. The most important assumptions of quantitative research are that it takes an objective stance to trying to answer or understand questions or phenomena – the subjective state of the research topic or of the researcher are not addressed. It is supposed to be unbiased and free of values. It is positivist and deductive, stemming from hypotheses and leading to observations. The results of properly done quantative research in social fields are considered to be generalizable in different social situations and the positivistic scientific method is considered the cornerstone of reaching the correct conclusions. In short, the assumptions used in quantitative research are based on the idea that people, experiences, phenomena and reality are independent of personal experience and objectively measurable. If something is not measurable it is ignored.

61 These assumptions permeate the quantitative method with strengths and weaknesses. Due to the vast amount of published research on which researchers can base their studies and stringent rules and guidelines quantitative research is consistent and can be easily compared to other research on the subject. Since the researcher is less visible criticism is more likely to be focused on the research itself rather than critics’ opinion of the researcher. The researchers objectivity also decreases the effect he or she has on the subject being studied, although some scholars have cast doubt on the degree to which this is true. Further more, quantitative research can be conducted fairly quickly and returns a solid answer rather than an interpretation or opinion on the subject.

These strengths have a flip side however: stringent rules and guidelines can also mean that researchers interpret data so that it is consistent with prior research rather than take the risk of their research being discounted. It is a common criticism by proponents of qualitative research methods that the results of quantitative social research do not fit with the experience of those involved in the subject. While quantitative data can seem consolingly precise and clear cut, the reality of a situation might belie a simple explanation. Despite the different assumptions used in different research paradigms there is much to be learned from the different approaches, given that they are properly used and interpreted.

Another thing the researcher has to be aware of and address are weaknesses in the study called limitations that are beyond the researchers control. These can be time, money, or the scope of preexisting data on the subject. Delimitations are limits to the scope of the study that are in the researchers control. These can be the goals of the research, the research method and the variables. All reseach has limitations and delimitations; indeed the very act of choosing a specific research subject represents delimitation since it excludes all other subjects. The delimitations elucidate the criteria participants must fulfill and what population I can generalize the results to. For example, the results of this study are generalizable to managers (1), who currently work for firms active in the energy sector (2) in Iceland (3).

62 IV: FINDINGS

Brief overview

What sort of dynamic capabilities are common in Icelandic energy firms and what can they tell us about industry pain points?

This is the research question that lies at the heart of this study. It is a humble contribution to the research on the contribution of dynamic capabilities to innovation and of dynamic capabilities and innovation to firm performance but worth exploring. With that goal in mind I performed the aforementioned survey with the hope of shedding some light on the subject.

In a nutshell, the results of the survey are concurrent with other research on the subject and in line with my expectations. There are of course a number of other related questions that are left unanswered however. Do managers feel the same as other employees? Do their firms actually have more dynamic capabilities or are they simply more likely to identify them due to their interest in innovation? These questions and more will be addressed in the next chapter: Discussion.

For now I will restrain myself to discussing the data itself. To recap, the four categories of dynamic capabalities used were product development, knowledge management, acquisition and exit routines. It’s interesting that some categories were generally rated higher than others across the board. Unfortunately data to compare the Icelandic energy sector to other countries’ energy sectors was unavailable. I am therefore unable to speculate whether this characterizes the energy industry as a whole or is a culturally specific phenomenon.

Results

The first 6 questions, regarding innovation within the firm and its impact on firm performance were split into two categories. The first three were 5-item scales where

63 1 = strongly disagree and 5 = strongly agree. The next three after that were 3-item multiple-choice questions where the options were: Increase, Remain the same and Decrease. These first six questions represented the independent variable of the study, where respondents would be categorized according to their knowledge of, and interest in, innovation. In response to the first statement “I consider myself well informed about energy sector innovation”, 17 disagreed or strongly disagreed, 24 were neutral and 52 agreed or strongly agreed. Seeing as how the respondents work in the energy sector, it is not particularly surprising that they would consider themselves well informed about innovation in that sector, especially if they compare their knowledge of the subject to that of people uninvolved in the sector. There is also the chance that the respondents are overestimating their knowledge, although it is difficult to surmise what effect such psychological factors might have on participant responses. All things considered, a predominantly positive response such as this one indicates that the chosen target population is suitable for the subject being discussed.

Question 1: (1:9, 2:8, 3:24, 4:34, 5:18)

The next two questions hint at an interesting foundation for further research I had not anticipated. While 44 agreed or strongly agreed that innovation had played an important role in their firm’s performance in the last 5 years, 60 agreed or strongly

64 agreed with the statement that innovation will continue to play an important role in the firm’s performance in upcoming years.

Question 2: (1:9, 2:16, 3:24, 4:35, 5:9)

This seeming discrepancy raises the question: what has changed? If people do not think innovation has been important in the past, why do they expect it to be important in the future? Has their been some external development recently that could explain this view?

Question 3: (1:17, 2:8, 3:8, 4:56, 5:4)

65 The responses to the next three questions show an overwhelming view that energy production, consumption and innovation will increase in the future. It is safe to assume that many of those respondents who think that production or consumption will decrease think that innovation will trend towards greater utility and efficiency in the energy sector. I say this since it is unlikely that a growing population will need less energy or be easily convinced to decrease their consumption, meaning that energy will have to be more efficiently distributed and utilized.

Question 4: (1:8, 2:4, 3:81)

Question 5: (1:9, 2:16, 3:68)

Question 6: (1:2, 2:13, 3:78)

The following 20 questions were split into 4 sections: product development routines, knowledge management routines, acquisition routines and exit routines. These are all 5-item scales measuring the responses to statements made regarding dynamic capabilities where 1 = strongly disagree and 5 = strongly agree. These 4 sections represent the dependent variables used in my analysis. Questions seven to eleven were about the process firms need to undergo to bring a new product or service to market, called product development routines.

Question 7: (1:13, 2:17, 3:24, 4:34, 5:5)

67 Product development routines include concept work, product design and market research. When looking at the responses regarding product development routines, the firms in question seem to be doing alright. There are more who agree with the statements than disagree with the statements but there is also a significant amount that responded neutrally.

Question 8: (1:10, 2:22, 3:22, 4:33, 5:6)

The statement that received the most neutral responses was number 9: “There is open communication and teamwork between those responsible for product development.” 34 people responded neutrally while 21 disagreed or strongly disagreed and 38 agreed or strongly agreed. The responses in the product development section seem to be rather normally distributed, with few respondents answering strongly one way or the other.

Question 9: (1:2, 2:19, 3:34, 4:36, 5:2)

The next question: “There is coordination between internal departments to develop products.” received a majority of positive responses. This is interesting because question 9 and 10 are quite similar. How can internal departments coordinate to develop products if there isn’t open communication and teamwork between those responsible for product development? There would seem to be some ambiguity regarding the degree to which managers control coordination between departments.

Question 10: (1:1, 2:19, 3:26, 4:45, 5:2)

Question 11: (1:0, 2:25, 3:32, 4:35, 5:1)

Questions twelve to sixteen were about knowledge-management routines. Knowledge-management routines refer to the definition, recording and development of knowledge employees have as well incentives for employees to share and gain knowledge. Interestingly, 55 respondents disagreed with the statement that the firm they work for has an effective knowledge-management system and 6 strongly disagreed.

Question 12: (1:6, 2:55, 3:13, 4:17, 5:2)

70 This result would seem to be a damning condemnation of knowledge-management routines in the Icelandic energy sector. The responses to the following statements in the knowledge-management section would seem to confirm this notion.

Question 13: (1:9, 2:9, 3:48, 4:25, 5:2)

Question 14: (1:3, 2:17, 3:38, 4:33, 5:2)

Question 15: (1:4, 2:25, 3:37, 4:25, 5:2)

The majority of respondents in all 5 questions respond neutrally or in disagreement. This indicates that participants consider their firm’s knowledge-management systems subpar.

Question 16: (1:9, 2:16, 3:41, 4:26, 5:1)

Questions seventeen to twenty-one are about acquisition routines. Acquisition routines refer to the acquisition of all resources that a firm or organization needs for operations, production or services, whether it be funds, property, labour, knowledge, technology, materials or other merchandise.

Question 17: (1:11, 2:9, 3:26, 4:37, 5:10)

The responses in this section were largely positive. It was only in question 18: “There is a common understanding of how resource acquisition can improve firm performance,” that positive responses were not the majority.

Question 18: (1:3, 2:26, 3:25, 4:28, 5:10)

Question 19: (1:2, 2:26, 3:13, 4:51, 5:1)

Question 20: (1:1, 2:23, 3:17, 4:47, 5:4)

Question 21: (1:1, 2:25, 3:11, 4:54, 5:2)

Questions twenty-two to twenty-six are about exit routines. Exit routines refer to the jettison of all obsolete resources.

Question 22: (1:10, 2:9, 3:46, 4:27, 5:1)

The responses to these questions were similar to the responses in the knowledge- management section, which is to say largely neutral or negative.

Question 23: (1:8, 2:28, 3:36, 4:12, 5:9)

Question 24: (1:8, 2:9, 3:54, 4:19, 5:3)

Question 25: (1:8, 2:27, 3:40, 4:15, 5:3)

Question 26: (1:9, 2:17, 3:47, 4:19, 5:1)

Neutral responses, while not explicitly negative, can be viewed as a certain failure on the part of the firms in question. If employees are unfamiliar with the subject, we can assume that management is not placing much emphasis on it.

Descriptive analysis

The data is interesting although when analysed in context with existing research on the energy industry and the Icelandic market, not especially surprising. The Icelandic

77 energy sector is small and dynamic, with an emphasis on technological skill and an interest in innovation. The luke-warm responses to questions about knowledge management seem to echo prior research about the lack of consistent and explicit knowledge management in Icelandic firms. Likewise, resource jettison is difficult in a market with many financially significant long-term investments. The inclusion of staff in addition to managers may also mean that many of the recipients are unfamiliar with their firm’s resource jettison routines.

Validity/reliability

To perform a validity and reliability analysis of the results would require more time and resources than are available, but we can judge what sort of analysis would be suitable from the methods used in this study. As mentioned earlier, reliability is the degree of stability exhibited when a measurement is repeated under identical conditions. Validity on the other hand is how well a survey measures what its intended subject. The unstable nature of the subject being studied creates a certain lack of reliability. People’s opinions frequently change and don’t necessarily reflect real, objective changes in the industry. To assess the reliability of the study, there are three types of analysis that could be performed: a test-retest analysis, alternate- form analysis and internal consistency analysis.

The test-retest analysis is the most commonly used reliability test in survey research and is performed by asking the same respondents to take the same survey twice at different times to check how stable their responses are. The results are quantified with a correlation coefficient (r). If an observer gathers data, intraobserver reliability can be gauged by having the same observer make two separate recordings. The stability problem mentioned in the last paragraph can be countered by retesting the survey shortly later. Opinions are more likely to change over a long period of time. It is important to avoid overusing this method though, or else the practice effect, which occurs when individuals become familiar with the survey answer based on their memory of the last answer rather than their sincere response, inflating the reliability estimate.

78 Another commonly used test is the alternate form analysis, in which questions measuring the same things are worded or ordered differently. The researcher must be careful to change the questions slightly so that they are similar but not identical. It is important that the question still clearly refer to the same subject. One can also avoid altering the wording of the question by changing the order or wording of the response options without changing their meaning. This compels participants to read the response options carefully and genuinely consider their answer. Whichever method is chosen, it is imperative to have the two forms equivalent and with the same degree of difficulty, otherwise the attributes being measured will not be the same. The alternate-form analysis can be performed at the same time or at separate points in time. When performed at the same time the sample can be split in half and the halves compared. If the sample is large enough, you can split it into more forms.

The third form of analysis is the internal consistency analysis, which is applied to multiple items that measure the same concept. This form of analysis uses Cronbach’s coefficient alpha to measure how well different items measure different attributes of the same variable. Internal consistency reliability is not the most relevant form for this particular study.

In addition to the reliability analyses, it would be prudent to perform validity measures to check how well the survey measures the subject is was supposed to measure. Technically speaking there are four types of validity, although face validity is not universally considered a real measure of validity. Face validity refers to how valid the survey appears at a glance, even to people without prior knowledge or training in that field. Content validity is another qualitative measure of validity although reviewers familiar with the subject at hand measure this one. In a nutshell, content validity means that the survey includes (and excludes) everything it should. A more quantitative form is of criterion validity, which measures how well the research model or instrument used compares to other models or instruments. The most difficult and valuable form is construct validity. This measures how accurately the research model or instrument measures the subject. If several differing research

79 methods all had a high degree of construct validity they would return similar results about the same subject. This is the most work-intensive measurement, since it requires different approaches performed by multiple researchers on the same subject, which must not be confused with similar subjects.

80 V. DISCUSSION

The findings of this study seem to indicate that knowledge management and resource jettison routines need improvement in the Icelandic energy sector. The findings can be interpreted in a number of ways however, which are not mutually exclusive. Participants could have a skewed opinion of what routines are working well based on their own departments, the results may apply to firms in other comparably dynamic sectors, the results may not be bound to the Icelandic energy sector and so on.

All of these possible interpretations provide intriguing possibilities for further research. If we rely solely on existing literature on the DCV however, it would seem that the staff’s capabilities likely have more influence on the corporate culture than the other way around. In their critique of the importance of dynamic capabilities, Eisenhardt and Martin (2000) concluded that resource configurations are more important than dynamic capabilities in deciding long-term competitive advantage. If this is the case it would mean that the configuration of individual level skills and interest in innovation are more important to the success of the firm than the firm level capabilities to alter those configurations.

This scope of this study is of course, much too small to be able to declare with any certainty whether individual level skills or firm level capabilities come first in this proverbial “chicken or the egg” scenario. In fact, due to the pivot from researching only managers to researching all staff in any capacity, the study became less about management and more about corporate culture. This pivot was unavoidable, due to the difficulty of producing a statistically viable sample from such a small population as managers in the Icelandic energy sector. In hindsight, the best way to perform a quantitative study of such a small population would be to perform a longitudinal study. Time and resource constraints make such a study beyond the reach of an M.Sc. student but would return the most reliable results.

If we consider the results in the context of DCV criticisms however, we can see some interesting implications from the results of this study. Let us first consider

81 capabilities and how they are developed or learned. Capabilities can be gained or lost and the current level of capability can be changed by new inflows or outflows of capabilities. Inflows and outflows and organizational learning are affected by the current configuration of resources and capabilities, both at an individual and at a firm level. While interpreting the data it struck me that the main resource, human resources, was underrepresented in the questionnaire. No questions were about the recruitment and selection of new human resources, which should be seen as an immensely important capability.

Knowledge management was another section that could have been done differently. The difference between tacit and explicit knowledge, as well as the unspoken and varying assumptions made by respondents make such a rudimentary inspection of knowledge management routines superficial. After all, it tells us nothing of what kind of knowledge is relevant or how respondents define knowledge. Firms also don’t really seek to make all tacit knowledge or behaviour explicit or codified, even if they could. Corporate culture and the way knowledge is transferred in the work place is a highly social phenomenon and often difficult to put into words. Besides the difficulty of codifying tacit knowledge, there is also a degree of risk involved. Some procedures, systems and behavior are suitable for codification and stringent implementation, but some preexisting knowledge or procedures can be flawed, outdated or detrimental. Once they are made explicit however it can prove difficult to get rid of them, since they become part of “how things are done around here”.

There is also the issue of anonymity in a market where one firm is by far the largest. While anonymity is considered important to reach an unbiased solution as well as for the protection of the privacy of the participants, it also means that there is no way of knowing whether one or more firms are overrepresented. This should not be a problem due to the randomization of respondents, but it would have been preferable for the researcher to have some way to be able to tell what firms were being discussed without jeopardizing the respondent’s anonymity.

82 By far the most interesting result of this study was the neutral response that the sections on knowledge management and resource jettison received. This neutrality can be interpreted as a lack of familiarity with the subject and the routines employed by the firm, or indeed that the lack of familiarity stems from the lack of any formal routines. It has been noted in earlier research that knowledge management is widely lacking in Icelandic firms and so a general lack of understanding in that field is not entirely surprising, what is surprising is the lack of familiarity with jettison routines, which are the flip side of acquisition routines. This could indicate that the emphasis within the firm is so firmly placed on resource acquisition that getting rid of obsolete resources is not even given a second thought. This brings to mind an anecdote about the recent redecoration of Gamla Bíó, the oldest theatre in Iceland. Those who had purchased it wanted to redecorate the interior, and so without giving it a second though ripped out the old furnishings and threw them out into trash containers to be taken away. Designers, woodworkers and many others saw the famous old chairs and furniture and immediately jumped at the opportunity to own these beautiful and historical furnishings which would have otherwise have ended up in a landfill. The new owners hadn’t even given it a second thought that these old but still functional resources could be of any value.

83 VI. CONCLUSION

Summary

In the introduction of my thesis I discussed the need for this sort of research, what problem it is that I hoped to illuminate and discussed the theoretical and practical context of my research. In the chapter Theory I reviewed the relevant literature, layed out the scope of the study and justified my choice of research model. In the chapter after that, Methods, I went into further details about the research model and how it was employed, as well as how I planned to test for validity and what methodological assumptions I made. In Findings I discussed the data gathered during the implementation of the research method. I go into how I would test for validity and test the hypotheses. I then discuss the application of the research method and provide a short descriptive analysis in the next chapter, Discussion. In this final chapter, I will discuss my thoughts now that I have completed the study, what implications the findings have and what I would do differently if I were to repeat the study, as well as offering several suggestions for further research on the subject.

The topic of this study has changed considerably since I wrote the first research plan, both in reaction to external challenges as well as the development of my own knowledge on the subject matter. At first my goal was to contribute to the quantitative research needed to illuminate the dynamic capability view. My impetuousness caught up with me and the further I proceeded with my research the more my limitations and the limitations of my study due to time and resource constraints became clear. Originally, my goals were to improve the position of academic research in the field of strategic management, especially in the subfield of dynamic capabilities and to improve managerial decision making in the Icelandic energy sector. Unsurprisingly, these rather ambitious goals took on more specific and attainable forms in the months to come.

While strategic management does have limitations, it is nonetheless a valuable tool for firms to position themselves to be able to react quickly and

84 appropriately to unforeseen external factors. This is especially true when pursuing long term competitive advantage in a dynamic environment, such as the energy sector. Dynamic capabailities and innovation are intrinsically linked concepts and the main goal of this study was to gain further insight into the relationship between them. I decided to perform a quantitative study due to the perceived need for more quantatitive research in the field of strategic management. In hindsight, I think that the Icelandic energy sector requires further qualitative research, due to cultural factors that differentiate the Icelandic energy sector from the global and American sectors on which most of the relevant literature is based. Any further quantitative research would in my opinion be most productive if it used a longitudinal format and received in-depth access to numerical data from the subject firms – something that was beyond my reach and the humble scope of my research. The primary goal of this research was to test whether this form of quantitative study could be used on a small population. Judging from my experience, this method is insufficient for the needs of any researcher hoping to reap meaningful quantitative data from such a small sample. Different methods are needed.

There are a number of interesting possibilities that could not be confirmed or denied with the data collected. This is not to say that the data is of no value but that the format originally intended to categorize the respondents into groups of “uninterested”, “neither uninterested or interested” or “interested” was insufficient to account for the overwhelmingly “interested” response the study received in the first section. This is indicative of the fundamental shortcomings of the method in this environemt but is also likely due to two errors on my part: the name of the study given and its explanation may have been more likely to attract respondents interested in or positive towards innovation. The first section should also have been more thorough and randomized, so as to check internal validity. The nature of the population also changed midway through the study, which no doubt influenced the responses I received. When it became clear to me that of the roughly 350 individuals who perform a managerial role in the Icelandic energy sector, less than 40 would be willing to answer I realised that I needed to cast a wider net. I then resent my invitation to include all staff of firms that produce, distribute or sell energy and the

85 engineering and service companies that work with them. While this gave me a much larger target population and made it much easier for me to receive the roughly 100 responses I had hoped for, I worry that the study’s relevance and accuracy suffered as a result.

Conclusions

The responses to our questionnaire lead us to a few important conclusions, albeit not the ones we were looking for. Knowledge management and resource jettison systems can be seen as lacking in this field, although product development routines and resource acquisition are relatively strong. This gives the impression that the Icelandic energy sector is in general more preoccupied with rapid growth than with rapid adaptability. This is also reflected in the overwhelmingly optimistic responses gathered that energy consumption, production and innovation were likely to increase in the future. It is also reflected in media coverage and public statements by Icelandic energy firms, who continuously announce new projects and plans for further expansion. In a way it makes sense – Iceland has grown and become increasingly modern, industrial and hungry for energy. The Icelandic energy sector emphasizes rapid growth at the expense of adaptability because things only seem to be able to go up from here. What’s particularly interesting however is that few of the respondents seem to consider that an increase in energy sector innovation would result in less consumption, and less need for expanded operations. Instead, the goal seems to be to expand operations abroad to justify further growth.

Implications

As I’ve mentioned a few times before in this essay, the method I used could have been better suited to the environment, but another limitation I now realize affected the validity of my study is the ambiguity surrounding what methods are to be used in dynamic capability research and indeed what constitutes a dynamic capability. I would therefore first and foremost advise that further qualitative research is performed on the subject of dynamic capabilities in the Icelandic energy, as a

86 foundation on which to decide which quantitative research methods and experiments would be most suitable in the future. Due to the small size of the target population, an in-depth longitudinal study, taking place over a span of a few years would in my opinion be the most likely to return reliable and important results. All four categories of dynamic capabilities studied in this thesis: product development, knowledge management, resource acquisition and resource jettison offer important avenues of research for future studies. The original goal of findind industry wide pain points gives way to studying the relationship between individual level skills and firm level capabilities – is it the capable organization that picks and creates skilled staff or is it the skilled staff that pick and create a capable organization – is also a very exciting and important subject, although it might be unhandy for such a small statistical population.

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95 Appendix.

Spurningalisti vegna rannsóknar á aðföngum fyrirtækja

Síða 1

Eftirfarandi er rannsókn til M.Sc. gráðu í Stjórnun og Stefnumótun og er ætluð fólki sem sinnir stjórnunarstörfum hjá fyrirtækjum sem starfa í orkugeiranum auk verkfræði- og þjónustufyrirtækja sem hafa starfað með orkufyrirtækjum.

Þátttaka er nafnlaus til að tryggja nafnleynd þáttakenda.

Rannsóknin er unnin af Oddi Sturlusyni undir leiðsögn Gunnars Óskarssonar Ph.D..

Öllum athugunum og spurningum má senda á netfangið [email protected].

Síða 2

Vinsamlegast svaraðu á bilinu 1 til 5 hversu ósammála eða sammála eftirfarandi staðhæfingum þú ert, þar sem 1 = mjög ósammála og 5 = mjög sammála.

Ég tel mig vel upplýsta/nn um nýsköpun í orkugeiranum.

Nýsköpun hefur gegnt veigamiklu hlutverki í afkomu fyrirtækisins sem ég starfa hjá á síðustu 5 árum (1 = mjög ósammála - 5 = mjög sammála).

Nýsköpun mun áfram gegna veigamiklu hlutverki í afkomu fyrirtækisins á komandi árum (1 = mjög ósammála - 5 = mjög sammála).

Síða 3

Vinsamlegast veldu það svar sem þú telur endurspegla þína skoðun á eftirfarandi spurningum.

Heldurðu að orkuframleiðsla eigi eftir að aukast, standa í stað eða minnka næsta áratuginn?

Aukast.

Standa í stað.

Minnka.

96 Heldurðu að almenn orkuneysla og orkunotkun eigi eftir að aukast, standa í stað eða minnka næsta áratuginn?

Aukast.

Standa í stað.

Minnka.

Heldurðu að nýsköpun í orkugeiranum eigi eftir að aukast, standa í stað eða minnka næsta áratuginn?

Aukast.

Standa í stað.

Minnka.

Síða 4

Eftirfarandi spurningar eru um vöruþróun. Með vöruþróun er átt við það ferli sem þarf að ganga í gegnum til að ný vara eða þjónusta komist á markað, til dæmis hugmyndamótun, vöruhönnun og markaðsrannsóknir. Vinsamlegast svarið á bilinu 1 til 5 hversu ósammála eða sammála eftirfarandi staðhæfingum þú ert þar sem 1 = mjög ósammála og 5 = mjög sammála.

Fyrirtækið býr yfir árangursríku vöruþróunarkerfi.

Starfslið fyrirtækisins gerir sér í heildina grein fyrir þeim áhrifum sem vöruþróun getur haft á afkomu fyrirtækisins (1 = mjög ósammála - 5 = mjög sammála).

Opin samskipti og samvinna ríkir meðal þeirra sem bera ábyrgð á vöruþróun (1 = mjög ósammála - 5 = mjög sammála).

Mismunandi deildir innan fyrirtækisins vinna saman til að þróa vörur (1 = mjög ósammála - 5 = mjög sammála).

97 Stefnur og aðferðir fyrirtækisins auðvelda vöruþróun (1 = mjög ósammála - 5 = mjög sammála).

Síða 5

Eftirfarandi spurningar eru um þekkingarstjórnun. Með þekkingarstjórnun er átt við hverskonar skilgreiningu, skrásetningu og uppbyggingu á þekkingu starfsmanna í fyrirtækinu auk hvatningu til starfsfólks að deila og afla nýrri þekkingu. Vinsamlegast svarið á bilinu 1 til 5 hversu ósammála eða sammála eftirfarandi staðhæfingum þú ert þar sem 1 = mjög ósammála og 5 = mjög sammála.

Fyrirtækið býr yfir árangursríku þekkingarstjórnunarkerfi.

Starfslið fyrirtækisins gerir sér í heildina grein fyrir þeim áhrifum sem þekkingarstjórnun getur haft á afkomu fyrirtækisins (1 = mjög ósammála - 5 = mjög sammála).

Opin samskipti og hópvinna ríkir meðal þeirra sem bera ábyrgð á þekkingarstjórnun (1 = mjög ósammála - 5 = mjög sammála).

Mismunandi deildir innan fyrirtækisins vinna saman til að stjórna og miðla þekkingu (1 = mjög ósammála - 5 = mjög sammála).

98 Stefnur og aðferðir fyrirtækisins auðvelda þekkingarstjórnun (1 = mjög ósammála - 5 = mjög sammála).

Síða 6

Eftirfarandi spurningar eru um öflun aðfanga. Aðföng eru allt það sem fyrirtæki eða stofnun þarf til eigin rekstrar, framleiðslu eða þjónustu, hvort heldur fjármunir, húsnæði, vinnuframlag, þekking, tæki, efni eða annar varningur. Vinsamlegast svarið á bilinu 1 til 5 hversu sammála eða ósammála eftirfarandi staðhæfingum þú ert þar sem 1 = mjög ósammála og 5 = mjög sammála.

Fyrirtækið býr yfir árangursríku kerfi til að afla aðfanga.

Starfslið fyrirtækisins gerir sér í heildina grein fyrir þeim áhrifum sem öflun aðfanga getur haft á afkomu fyrirtækisins (1 = mjög ósammála - 5 = mjög sammála).

Opin samskipti og samvinna ríkir meðal þeirra sem bera ábyrgð á öflun aðfanga (1 = mjög ósammála - 5 = mjög sammála).

Mismunandi deildir innan fyrirtækisins vinna saman að öflun og nýtingu aðfanga (1 = mjög ósammála - 5 = mjög sammála).

99 Stefnur og aðferðir fyrirtækisins auðvelda öflun aðfanga (1 = mjög ósammála - 5 = mjög sammála).

Síða 7

Eftirfarandi spurningar eru um losun úreldra aðfanga. Vinsamlegast svarið á bilinu 1 til 5 hversu ósammála eða sammála eftirfarandi staðhæfingum þú ert þar sem 1 = mjög ósammála og 5 = mjög sammála.

Fyrirtækið býr yfir árangursríku kerfi til að losa úreld aðföng.

Starfslið fyrirtækisins gerir sér í heildina grein fyrir þeim áhrifum sem losun úreldra aðfanga getur haft á afkomu fyrirtækisins ((1 = mjög ósammála - 5 = mjög sammála).

Opin samskipti og hópvinna ríkir meðal þeirra sem bera ábyrgð á losun úreldra aðfanga (1 = mjög ósammála - 5 = mjög sammála).

Mismunandi deildir innan fyrirtækisins vinna saman til að losa úreld aðföng (1 = mjög ósammála - 5 = mjög sammála).

100 Stefnur og aðferðir fyrirtækisins auðvelda losun úreldra aðfanga (1 = mjög ósammála - 5 = mjög sammála).

» Redirection to final page of eSurvey Creator (change)

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Question: 1 2 3 4 5 6 7 8 9 10 Strongly disagree 9 9 17 X X X 13 10 2 1 Disagree 8 16 8 X X X 17 22 19 19 Neutral 24 24 8 X X X 24 22 34 26 Agree 34 35 56 X X X 34 33 36 45 Strongly agree 18 9 4 X X X 5 6 2 2

Question: 11 12 13 14 15 16 17 18 19 20 Strongly disagree 0 6 9 3 4 9 11 3 2 1 Disagree 25 55 9 17 25 16 9 26 26 23 Neutral 32 13 48 38 37 41 26 25 13 17 Agree 35 17 25 33 25 26 37 28 51 47 Strongly agree 1 2 2 2 2 1 10 10 1 4

Question: 21 22 23 24 25 26 Strongly disagree 1 10 8 8 8 9 Disagree 25 9 28 9 27 17 Neutral 11 46 36 54 40 47 Agree 54 27 12 19 15 19 Strongly agree 2 1 9 3 3 1

Question: 4 5 6 Increase 81 68 78 Remain the same 4 16 13 Decrease 8 9 2

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