DEVELOPMENT OF SARI INDUSTRIAL SOFTWARE SALLINEN SUPPLIER FIRMS IN THE ICT Department of Marketing, CLUSTER University of Oulu An analysis of firm types, technological change and capability development OULU 2002 SARI SALLINEN DEVELOPMENT OF INDUSTRIAL SOFTWARE SUPPLIER FIRMS IN THE ICT CLUSTER An analysis of firm types, technological change and capability development Academic Dissertation to be presented with the assent of the Faculty of Economics and Industrial Management, University of Oulu, for public discussion in Keckmaninsali (Auditorium HU 106), Linnanmaa, on June 14th, 2002, at 12 noon. OULUN YLIOPISTO, OULU 2002 Copyright © 2002 University of Oulu, 2002 Reviewed by Professor Rod McNaughton Professor Thomas Keil ISBN 951-42-6709-5 (URL: http://herkules.oulu.fi/isbn9514267095/) ALSO AVAILABLE IN PRINTED FORMAT Acta Univ. Oul. G 12, 2002 ISBN 951-42-6708-7 ISSN 1455-2647 (URL: http://herkules.oulu.fi/issn14552647/) OULU UNIVERSITY PRESS OULU 2002 Sallinen, Sari, Development of industrial software supplier firms in the ICT cluster An analysis of firm types, technological change and capability development Department of Marketing, University of Oulu, P.O.Box 4600, FIN-90014 University of Oulu, Finland Oulu, Finland 2002 Abstract The present thesis analyses different software supplier types and the development of supplier firms in the context of the Finnish ICT cluster, which underwent rapid growth in the 1990s. The central brand-owner firms in the cluster have been accompanied by a high number of smaller industrial supplier firms that base their business on serving their large customer organisations. The research to date on the ICT cluster has largely focused on understanding the development and purchasing strategies of the large customer firms and thus does not provide a sufficient basis for understanding how supplier firms in the cluster operate and develop. It is this gap that the present study undertakes to address. The thesis begins by building a theoretical framework that identifies the main factors affecting the development of industrial supplier firms. The inner context of the framework is based on the resource- based view of the firm and the capability approach, while the outer context rests on principles drawn from theories of evolutionary economics. Supplier development is analysed as a change from one firm type to another. The empirical part of the thesis consists of a quantitative and a qualitative study. The former identifies five software supplier types and elaborates a typology capturing their main features, e.g., key resources, capabilities and operating logic. The latter then applies the theoretical framework in analysing the development of four software supplier firms within the ICT cluster. The empirical analysis generates a number of propositions on the development of software supplier firms that together constitute a description of the firms' typical development path and the most significant resources and capabilities enabling the development identified. The software suppliers' change from providing customised software services towards independent production of software products was found to be extremely difficult. The thesis concludes with a discussion of strategy-level choices that are relevant in managing this type of development. Keywords: industrial supplier, supplier typology, ICT cluster, software firm, development, resource-based view, dynamic capability Acknowledgements The process that has ultimately led to the publication of this thesis was set in motion the very first time I met my supervisor, Professor Veikko Seppänen, in December 1999. He was very enthusiastic about determining how a firm that develops customised software might start to produce software products of its own. At that time, he introduced to me a research project that would later gave me an opportunity to work closely with several software firms and collect valuable empirical material. As I was working on the thesis, Professor Seppänen introduced me to the world of software, gave me much important advice, and provided such great personal support that without him the work would have never been completed. I owe my greatest thanks to him. I have been fortunate in having another excellent supervisor, Professor Henrikki Tikkanen. I am especially grateful to him for guiding me into the fascinating field of literature on strategic management. Among other things, he gave me several valuable comments on how I should develop the theoretical part of the study. Professor Tikkanen was also the one who urged me to continue on to the postgraduate level at the University of Oulu in the first place, and he continued to encourage me consistently until the work was done. Thank you for this! There are also a number of other people to whom I owe a debt of gratitude. Professor Kimmo Alajoutsijärvi has given me much practical advice on managing the doctoral thesis and has inspired me to take part in international conferences. I am also grateful to my two official examiners, Dr. Thomas Keil and Professor Rod McNaughton, for reading the thesis carefully suggesting improvements. Thanks are also due to Dr. Juha-Antti Lamberg for acting as my opponent in the public defence. My discussions with Dr. Petri Ahonkangas were also valuable, especially in the early phase of my research. The empirical part of the study would not have been possible without the co-operation of the different parties involved in the Pro-X research project. I would like to express my gratitude to all these companies and persons. One particularly important institution I would like to thank is the Finnish Doctoral Program for Business Studies, KATAJA. During the past two years, I have taken part in four excellent courses organised by the Program, which have provided valuable insights into the principles of academic research in the area of marketing and management. In addition, I would like to thank Liikesivistysrahasto, Tauno Tönningin säätiö, Jenny ja Antti Wihurin säätiö and Marcus Wallenbergin liiketaloustieteellinen tutkimussäätiö. Their financial support gave me the opportunity to concentrate on my research full time, and their belief in my work provided much personal motivation. Thanks are also due to Lecturer Richard Foley, who checked the language of the thesis very carefully on a very tight schedule. Dr. Seppo Eriksson, Leena Ervasti and Marketta Holmberg have provided invaluable assistance in editorial and practical issues. My final thanks go to my family and friends for their strong support and faith in me. My fiancé, Tommi, has offered me a lot of comfort and, by his own example, encouraged me to always use my common sense even when problems seem impossible to solve. My parents and grandfather have never lost their interest in my work. At least once during each phone call or discussion, they have asked how my thesis is going and when I am going to finish my work. Lastly, I would like to mention my dearest friend Taisa and my colleague Pauliina Ulkuniemi. Pauliina has shared the joys and troubles of my research process from the very beginning - physically by working in the same room with me and spiritually by being the best kind of listener, support and motivator. Oulu, May 2002 Sari Sallinen Abbreviations and symbols 1G First-generation analogue networks 2G Second-generation analogue networks 3G Third-generation digital networks 4G Fourth-generation networks B-to-B Business-to-Business CMM Capability Maturity Model COTS Commercial off-the-shelf software EDI Electronic Data Interchange EMS Electronic Manufacturer Service provider GSM Groupe Special Mobile (a mobile telephone standard) ICT Information and Communication Technology IPR Intellectual Property Right ISO International Standardisation Organisation IT Information Technology NMT Nordic Mobile Telephone Network (a mobile telephone standard) OEM Original Equipment Manufacturer RBV Resource-Based View of the Firm SPICE Software Process Improvement and Capability Determination Reference Model TQM Total Quality Management Figures Figure 1. Structure of the thesis..................................................................................... 36 Figure 2. Development continuum of industrial supplier firms. ................................... 39 Figure 3. A preliminary framework for analysing industrial supplier firm development. 46 Figure 4. Location of the theories on the dynamic-static and internal-external dimensions. 49 Figure 5. Elaborated inner context of the industrial supplier development framework. 68 Figure 6. Large-firm managed innovation, according to Schumpeter (1945). .............. 71 Figure 7. Possible supplier integration points in new product development (Handfield et al. 1999). .................................................................................. 73 Figure 8. Elaborated ‘outer context’ of the industrial supplier development framework. 75 Figure 9. The refined framework industrial supplier development analysis. ................ 76 Figure 10.Typical supply chains for customised and packaged software. ..................... 79 Figure 11.Segmentation of the IT industry (Hoch et al. 1999). ..................................... 82 Figure 12.The two-dimensional supplier type framework. ............................................ 85 Figure 13.Suppliers’ dependence on the key customer. ................................................. 90 Figure 14.Supplier typologies differentiated along two dimensions.............................. 91 Figure 15.The constituents of information and communication