IIVARI KUNTTU Boundary considerations and joint learning in knowledge-intensive R&D collaboration ACTA WASAENSIA 378 BUSINESS ADMINISTRATION ACADEMIC DISSERTATION To be presented, with the permission of the Board of the Faculty of Business Studies of the University of Vaasa, for public dissertation in Auditorium Nissi (K218) on the 30th of June, 2017, at noon. Reviewers: Adjunct Professor Antti Lönnqvist, Dean University of Tampere Faculty of Management FI-33014 University of Tampere, Finland Professor Saku Mäkinen Tampere University of Technology Faculty of Business and Built Environment Laboratory of Industrial and Information Management P.O.Box 227, FI-33101 Tampere, Finland Opponents: Professor Pauli Kuosmanen, Dean Tampere University of Technology Faculty of Engineering Sciences P.O.Box 227, FI-33101 Tampere, Finland Adjunct Professor Antti Lönnqvist, Dean University of Tampere Faculty of Management FI-33014 University of Tampere, Finland III Julkaisija Julkaisupäivämäärä Vaasan yliopisto Kesäkuu 2017 Tekijä Julkaisun tyyppi Iivari Kunttu Artikkeliväitöskirja Julkaisusarjan nimi, osan numero Acta Wasaensia, 378 Yhteystiedot ISBN Vaasan yliopisto Kauppatieteellinen tiedekunta Johtamisen yksikkö PL 700 FI-65101 VAASA 978-952-476-750-7 (painettu) 978-952-476-751-4 (verkkoaineisto) ISSN 0355-2667 (Acta Wasaensia 378, painettu) 2323-9123 (Acta Wasaensia 378, verkkoaineisto) Sivumäärä Kieli 149 englanti Julkaisun nimike Organisaatiorajojen muodostuminen ja yhdessä oppiminen tietointensiivisessä tuotekehitysyhteistyössä Tiivistelmä Tämän väitöstutkimuksen tarkoituksena on pyrkiä ymmärtämään kuinka organisaatiorajateoriat selittävät teknologiayritysten tutkimus- ja kehitys (T&K) -toiminnan jakautumista yritysten sisäiseen ja kumppaneille ulkoistettuun työhön. Lisäksi työssä tutkitaan näissä suhteissa tapahtu- vaa oppimista ja sen vaikutusta yritysrajojen muodostumiseen. Työ koostuu neljästä artikkelista. Ensimmäinen artikkeli analysoi T&K- työn organisoitumista teknologiayrityksen toimittajasuhteissa käyttäen teoreettisena viitekehyksenään neljää yleisesti tunnettua organisaatioraja- teoriaa, jotka ovat kompetenssi, tehokkuus, voima ja identiteetti. Toinen artikkeli keskittyy yhdessä oppimiseen T&K-yhteistyössä, johon osallistuu sekä yrityksen sisäisiä että ulkoisia kumppaneita. Artikkeleista kolmannen tarkoituksena on varmentaa ensimmäisen artikkelin johtopäätös kompetenssin ja tehokkuuden keskinäisestä positiivisesta yhteydestä T&K-yhteistyössä, ja yhdessä oppimisen vaikutuksesta tähän yhteyteen. Neljäs artikkeli esittelee käytännön päätöstyökalun, jonka tar- koituksena on auttaa T&K-organisaatioita tekemään rationaalisia päätök- siä työn organisoimisesta sisäiseen ja ulkoistettuun työhön. Väitöstutkimuksen tulokset osoittavat, että organisaatiorajojen muodos- tumiseen käytännön tuotekehitysyhteistyössä liittyy eri tyyppisiä suhde- tason mekanismeja. Yksittäiset organisaatiorajateoriat eivät yleensä riitä selittämään rajojen muodostumista, koska teoriat liittyvät toisiinsa ja niiden keskinäiset riippuvuudet muuttuvat ja kehittyvät pitkäaikaisen yh- teistyön kuluessa. Erityisesti suhteessa tapahtuva yhdessä oppiminen vai- kuttaa tähän kehitykseen. Yhdessä oppiminen lisäksi edistää yhteistyös- sä luodun uuden tiedon hyödyntämistä yhteistyösuhteen sisällä. Asiasanat Organisaatiorajat, yhdessä oppiminen, tuotekehitysyhteistyö V Publisher Date of publication Vaasan yliopisto June 2017 Autho Type of publication Iivari Kunttu Doctoral thesis by publication Name and number of series Acta Wasaensia, 378 Contact information ISBN University of Vaasa Faculty of Business Studies Department of Management P.O. Box 700 FI-65101 Vaasa Finland 978-952-476-750-7 (print) 978-952-476-751-4 (online) ISSN 0355-2667 (Acta Wasaensia 378, print) 2323-9123 (Acta Wasaensia 378, online) Number of pages Language 149 English Title of publication Boundary considerations and joint learning in knowledge-intensive R&D collaboration Abstract Building on the theories of R&D collaboration, organizational boundaries, and relational joint learning, this dissertation seeks to contribute empirically to this research arena by answering the following research question: How do organizational boundary explanations interplay and coevolve in long-term collaboration partnerships and how does relational joint learning facilitate that development? This dissertation is composed of four interconnected articles. The first article analyzes the interplay of four organizational boundary theories (competence, efficiency, power, and identity) within the R&D supplier network of a global technology firm. In the second article, the theory of relational joint learning is analyzed in a case study examining relationships between a technology organization and its internal and external R&D partnerships. The third article validates a key result of the first article by means of quantitative research by showing that the relationship between competence and efficiency of R&D relationships is positive and mediated by joint learning. The fourth article introduces a managerial tool intended to support R&D organizations in their outsourcing and partner selection tasks. The results indicate that there is an extensive set of relational practices and mechanisms that explain the boundary formation between technology organizations and their R&D suppliers. The results also suggest that the organizational boundary theories investigated in this dissertation are connected to each other and coevolve in long-term R&D partnerships. Relational joint learning in particular is able to facilitate this development, and also facilitates the utilization of the jointly developed knowledge in the relationships. Keywords Organizational boundaries, relational joint learning, R&D collaboration VII ACKNOWLEDGMENT The journey toward this dissertation work started almost exactly 10 years ago when I joined Nokia Corporation’s R&D unit developing new technologies for mobile imaging. There, I had the privilege of working with a number of extremely competent colleagues on developing new technologies that had never been commercialized. Most of my work tasks related to this commercialization process, which involved collaboration with a number of small and large global technology providers, each developing and providing unique and valuable technologies. Very soon I realized that new technological solutions cannot simply be purchased from external suppliers and then commercialized as part of the customer company’s products. Instead, the partnerships with external partners provided the customer with sophisticated technologies and know-how that had to be integrated into the customer’s products in a long process of joint development, integration, mutual learning, and technology transfer. When this process was successful, both parties learned a great deal and were able to establish a long- term and mutually beneficial relationship. This journey continued in 2012, when I joined the research staff of the University of Vaasa. The Department of Management provided me an excellent opportunity to conduct research in the area of collaborative processes in R&D supplier involvement; an area that was familiar to me from my previous work. This new research area was an interesting but also demanding challenge for me, since my earlier research was related to a totally different area—image analysis and processing—that used a very different research approach and methodology to this new area. Very soon the idea of working for a second PhD in this research area crystallized, and now, after four years of research this work is ready. This journey to the research tradition of organizational and management sciences applied to a practical and interesting industrial problem field has proved an excellent learning experience in terms of theories, research traditions, and also wholly new viewpoints on this field. This journey has now reached its first main target, but it continues, in one form or another. A number of colleagues have supported me during this journey. I would like to thank my supervisor, Professor Marko Kohtamäki for guidance in this research field as well as for co-authoring the articles of this dissertation. I am also grateful to my employer, the University of Vaasa, for providing an opportunity to carry out this work in a flexible manner as a part of other research and teaching duties. I wish to thank all my colleagues at the Department of Management for creating a good, friendly, and inspiring atmosphere for research and providing me with help VIII in all small and larger matters that I have encountered during this journey. Among the department staff, I would like to particularly thank Tuomas Huikkola for the excellent collaboration in industrial projects. I am also grateful to Esa Virtanen and Mira Mikkola for their great work in collecting quantitative field data for my research. I would like to thank Andrew Mulley and the Academic Editing Ltd. team for helping with the copy-editing of this dissertation. I wish also to thank my thesis reviewers, Adjunct Professor Antti Lönnqvist and Professor Saku Mäkelä for their valuable comments and insights that really helped me to improve this dissertation. I am also grateful to my opponent, Professor Pauli Kuosmanen for his interest in this work and encouragement during the whole dissertation process. This research has been conducted in close collaboration with a number of industrial organizations in the Vaasa region. I am grateful to all the managers and other professionals who have committed their valuable time in meetings, interviews, and discussions related to this research. This work has been funded by the Funding Agency of Technology and Innovation (TEKES) and DIMECC through two research programs, Future Industrial Services (FutIS) and Services for Fleet Management (S4Fleet). This funding is gratefully acknowledged. Finally, I would like to express my greatest gratitude to my family, my loving and beloved wife, Leena and our children, Otava and Tähti. Leena, it was actually you who sowed the idea of undertaking this dissertation, and since then you have provided me endless support and encouragement in this work and also offered good advice and inspiration from your own professional experience. You have also been a wonderful mother to our wonderful children, who have taken care of reminding us of what is really important in life. You three are my rays of light, and nothing really important happens without you. In Vaasa, May 2017 Iivari Kunttu IX Contents 1 INTRODUCTION ................................................................................. 1 1.1 Background ............................................................................. 1 1.2 Research gap ........................................................................... 2 1.3 Research questions and objectives ........................................... 4 1.4 Structure of the dissertation .................................................... 6 2 THEORETICAL BACKGROUND ............................................................. 8 2.1 R&D Collaboration ................................................................... 8 2.1.1 Capabilities of knowledge-intensive R&D Collaboration ... 9 2.1.2 R&D Supplier involvement ............................................. 11 2.1.3 Explanations for technology alliance formation ............. 12 2.1.4 Supplier relationship development ................................ 13 2.2 Organizational boundaries ..................................................... 14 2.2.1 Efficiency and transaction cost economics .................... 16 2.2.2 Competence ................................................................. 20 2.2.3 Power and resource dependency view ........................... 23 2.2.4 Organizational identity ................................................. 25 2.2.5 Applying different boundary conceptions...................... 28 2.2.6 Relationships between boundary conceptions ............... 31 2.3 Relational joint learning in R&D relationships......................... 36 2.3.1 Knowledge sharing ....................................................... 37 2.3.2 Joint sensemaking ........................................................ 38 2.3.3 Knowledge integration .................................................. 39 2.4 Implications of learning and boundaries in R&D ..................... 40 2.4.1 Joint knowledge creation as resource development ....... 41 2.4.2 The learning race and R&D efficiency ............................ 41 2.4.3 Joint learning, resource dependency, and mutual trust.. 43 2.4.4 Learning as organizational identity ............................... 44 3. METHODOLOGY ................................................................................ 46 3.1 Scientific premises ................................................................. 46 3.2 Research design .................................................................... 48 3.2.1 Case study as research method .................................... 49 3.2.2 Definition of the sample ............................................... 49 3.2.3 Research questions and unit of analysis ........................ 50 3.2.5 Data collection .............................................................. 50 3.2.6 Reliability and validity ................................................... 52 4 RESULTS AND DISCUSSION ............................................................... 53 4.1 Summary of results ................................................................ 53 4.1.1 Boundary formation in R&D relationships ...................... 53 4.1.2 Learning in internal and external R&D collaboration...... 54 4.1.3 Relationship between resources and efficiency .............. 55 4.1.4 Managerial tool supporting R&D outsourcing decisions. 55 4.2 Theoretical contribution ........................................................ 57 4.3 Practical implications ............................................................. 60 4.4 Limitations and future work ................................................... 61 X REFERENCES ......................................................................................... 64 Figures Figure 1. Example image of setting of organizational boundaries. .. 16 Figure 2. Boundaries of efficiency are set at the point of minimum cost by comparing the costs of internal and external governance. ..................................................................... 17 Figure 3. Boundaries of competence are set to the point that maximizes the value of the firm’s resource portfolio. ....... 21 Figure 4. Boundaries of power are set at the point of maximum control over critical external dependencies ...................... 24 Figure 5. Boundaries of identity are set by resolving inconsistencies between identity and organizational activities. ................. 27 Figure 6. Factors affecting boundary formation in long-term R&D collaboration between customer and suppliers................. 54 Figure 7. The facilitators of joint learning in the R&D network containing a) internal and b) external relations. ............... 56 Tables Table 1. A summary of the Articles of this dissertation. ................. 6 Table 2. A summary of organizational boundary conceptions. ..... 29 Table 3. Relationships (upper corner) and synergies (lower corner) between organizational boundary conceptions. ............. 33 Table 4. A summary of the three phases of joint learning. ........... 40 Table 5. A summary of the relationships between boundary theories and learning. .................................................... 45 Abbreviations KBV Knowledge-based view R&D Research and development RBV Resource-based view TCA Transaction cost analysis XI Articles This dissertation is based on the four appended papers: 1. Bäck, M. Kohtamäki, Boundaries of R&D collaboration, Technovation, Vol. 45- 46, 2015, pp. 15-281. 2. Bäck, M. Kohtamäki, Joint learning in innovative R&D collaboration, Industry and Innovation, January 2016, pp. 1-252. 3. Kunttu, M. Kohtamäki, Relationship between supplier resources and governance efficiency – The impact of learning, Presented at XVIII ISPIM Innovation Conference, Vienna, Austria, on 18-21 June, 2017. 4. Kunttu, A managerial decision tool for R&D outsourcing and partner selection in high-technology industries, Technology Innovation Management Review, Vol. 7, No. 3, March 2017, pp. 25-323. 1 Reprinted with kind permission from Elsevier Inc. 2 Reprinted with kind permission from Taylor & Francis Inc. 3 Reprinted with kind permission from Technology Innovation Management Review 1 INTRODUCTION Not all smart people in the world work for us. We need to work with smart people inside and outside our company. Henry Chesbrough (2003) 1.1 Background Research and development (R&D) has been widely adopted as a strategy for innovation, and it has been recognized that collaboration has become crucial for R&D practices in a world where product innovation is increasingly challenging (Emden, Calantone, & Droge, 2006). Accordingly, technology firms today strive to acquire new, state-of-the-art knowledge available outside the firm’s boundaries, because they want to stay ahead of the firm’s competitors in product development outcomes and innovation performance (Asakawa, Nakamura, & Sawada, 2010; Un, Cuervo-Cazurra, & Asakawa, 2010), and therefore it has become imperative for firms to have the ability to network with other firms to enhance innovation (Dittrich & Duysters, 2007; Duysters & Lokshin, 2011; Nieto & Santamaría, 2007; Powell, Koput, & Smith-Doerr, 1996). Accordingly, in the spirit of the open innovation paradigm (Chesbrough, 2003), technology firms have opened their doors to collaboration with external actors providing valuable knowledge resources, competences, and capabilities (Enkel, Gassmann, & Chesbrough, 2009). As R&D has been seen as an important driver of competitive advantage for industrial firms (Dittrich & Duysters, 2007; van Echtelt, Wynstra, & Weele, 2007; Verona, 1999), the number of different kinds of R&D partnerships has been regularly growing since the 1960s (Hagedoorn, 2002). There is considerable evidence suggesting that involving external R&D partners extensively and early in product development can improve a firm’s performance in terms of productivity, speed, and quality (Johnsen, 2009; Ragatz, Handfield, & Petersen, 2002; van Echtelt, Wynstra, van Weele, & Duysters, 2008). Consequently, firms have extended their product development and innovation work across their boundaries by involving technology partners in their internal R&D work (Johnsen, 2009; Quinn, 2000; Wagner & Hoegl, 2006). This makes it possible for the technology firms to benefit from other firms’ resources as well as from other firms’ usage of their own resources (Emden et al., 2006). However, having access to valuable external resources alone does not mean that the firm will be 2 Acta Wasaensia able to fully utilize the knowledge or capabilities provided by the partnership. Instead, innovative collaboration within external partnerships requires firms have the ability to learn and jointly develop new knowledge in the partnership (Hurley & Hult, 1998; Kale & Singh, 2007; Kale, Singh, & Perlmutter, 2000), a capability that enables rapid innovation from external competence and knowledge resources (Davis & Eisenhardt, 2011; Huikkola, Ylimäki, & Kohtamäki, 2013; Un et al., 2010). For this reason, relational joint learning is seen as an essential phenomenon related to successful and innovative R&D collaboration between high-technology firms (Fang, Fang, Chou, Yang, & Tsai, 2011; Kuwada, 1998). This dissertation concentrates on the R&D collaboration between technology organizations and their R&D suppliers from two separate but related viewpoints. First, the dissertation examines the boundary setting between the focal technology organization and its R&D suppliers from the viewpoint of four organizational boundary theories by analyzing the factors and mechanisms explaining the boundary formation. Second, this dissertation investigates the effect of joint learning taking place between technology organizations and their external and internal R&D partners in long-term collaboration. Based on the outcomes of these two research areas, this dissertation contributes to the literatures on R&D supplier involvement, organizational boundaries as well as relational joint learning. 1.2 Research gap Managing the involvement of external partners as a part of the firm’s R&D activities requires decisions and activities related to coordinating, prioritizing, mobilizing, timing, and informing with regards to the tasks, resources, and responsibilities outsourced from external partners (van Echtelt et al., 2008; Wynstra, Weggeman, & van Weele, 2003). Hence, successful R&D supplier involvement requires firms to develop internal routines and practices to organize the collaboration with suppliers (Mishra & Shah, 2009), and develop competences to do so. Although collaboration across firm boundaries provides the firms with access to valuable sources of knowledge, there are also often challenges in transferring, interpreting, and integrating heterogeneous types of knowledge across organizational boundaries, and a lack of common understanding, different priorities, and coordination problems can impair the efficiency of the collaboration network (Stump, Athaide, & Joshi, 2002; Tortoriello & Krackhardt, 2010). The existing literature on R&D collaboration, which is mainly quantitative, pays relatively little attention to the collaborative Acta Wasaensia 3 process between customer and suppliers in the R&D relationships (Davis & Eisenhardt, 2011, pp. 160–161). Furthermore, as pointed out in prior research (Johnsen, 2009), there is a need to develop a greater understanding of the characteristics and management of ongoing R&D supplier relationships within and between supplier involvement projects (van Echtelt et al., 2008). Second, managing supplier involvement in R&D collaboration relationships is closely related to the explanations of firm boundaries (Santos & Eisenhardt, 2005), because the R&D organizations determine their boundaries by deciding which activities, tasks, or projects will be undertaken by the organization itself (hierarchical governance) and which will be outsourced to suppliers (market governance). Previous research in the field of organization studies has suggested four theoretically grounded explanations for organizational boundary formation (Santos & Eisenhardt, 2005). In knowledge-intensive high-technology areas, a firm’s capabilities, competences, and technological knowledge play an important role when decisions on boundaries are made (Argyres & Zenger, 2012; Barney, 1999; Jacobides & Hitt, 2005). Therefore, boundary explanations based on the theory of the resource-based view (RBV) suggests firms to improve their competitiveness by maximizing their access to valuable external resources (Lavie, 2006). On the other hand, a strong research tradition relying on transaction cost analysis (TCA) has argued for the importance of transactional efficiency considerations in boundary explanations (Hoetker, 2005; Rindfleisch & Heide, 1997). In addition, the risk considerations related to the resource dependence on external partners caused by technology partnerships (Gulati & Sytch, 2007) have been identified as a remarkable explanation for firm boundaries whereas organizational identity (Kogut & Zander, 1996; Weick, Sutcliffe, & Obstfeld, 2005) may also have a remarkable impact on the boundary decisions concerning the organization of R&D work. Different organizational boundary explanations have traditionally been understood as distinct rationales steering the boundary decisions between internal and external R&D work, and therefore previous studies typically analyze them separately or present them as competing. However, as argued by several scholars (Argyres & Zenger, 2012; Santos & Eisenhardt, 2005), the mutual interplay and interdependence between the organizational boundary explanations is so fundamental that it is better to investigate their interplay and combinations rather than examine them separately. Accordingly, previous literature calls for studies that extend the understanding of the interactions between boundary theories, which in practical collaboration relationships can coevolve and exert a joint impact (Santos & Eisenhardt 2005, p.503). 4 Acta Wasaensia Third, in knowledge-intensive R&D relationships, the role of joint knowledge creation and learning is essential in the development of new, relation-specific capabilities (Kale & Singh, 2007; Selnes & Sallis, 2003). However, joint learning between R&D partners is not a widely researched topic, despite the fact that learning is an important contributor to creating valuable R&D capabilities and innovation performance in relationships (Davis & Eisenhardt, 2011; Dyer & Singh, 1998; Kale & Singh, 2007; C. Lin, Wu, Chang, Wang, & Lee, 2012). In R&D collaboration, joint learning between partners is particularly important, because it includes processes such as creation and sharing experimentally produced tacit knowledge that is often difficult to transfer or utilize (Chang & Gotcher, 2007; Huikkola et al., 2013; Selnes & Sallis, 2003). Therefore, there is a need to understand the mechanisms and collaboration practices facilitating joint learning and joint knowledge creation in R&D collaboration relationships. In light of these gaps, this dissertation aims to integrate three streams of research: R&D supplier collaboration, organizational boundaries, and relational joint learning. Doing so improves understanding of the mechanisms and practices of innovative R&D collaboration within supplier–customer relationships. In this research field, this dissertation aims to make several contributions. First, the dissertation contributes to the literature on R&D collaboration by employing firm boundary theories and by examining the interplay and interdependence between different boundary theories in this context. Second, this dissertation complements theories on organizational boundary formation with a relational joint learning approach by showing that joint learning facilitates the link between resources and the transactional efficiency of the R&D relationships. Third, the dissertation extends the prior literature on relational joint learning by analyzing the joint learning mechanisms in internal and external R&D collaboration relationships. Fourth, the dissertation makes a practical contribution by presenting a managerial tool based on organizational boundary considerations to support R&D outsourcing and partner selection decisions in R&D organizations. In sum, this dissertation seeks to lay foundations for future work on explaining the organization of R&D work and steering it toward internal and external tasks, and also on knowledge creation and learning in collaborative R&D relationships. 1.3 Research questions and objectives The primary objective of this dissertation is to address to the following research question: Acta Wasaensia 5 How do organizational boundary explanations interplay and coevolve in long- term collaboration partnerships and how does relational joint learning facilitate this development? This main question is approached by using more specific questions addressed in each article: Q1. Which practices are related to firm boundary theories, and how do they interplay and coevolve in long-term R&D relationships? (Article 1) Q2. Which factors in R&D collaboration practices facilitate innovative joint learning in an R&D network featuring internal and external relationships? (Article 2) Q3. What is the impact of resources provided by the R&D supplier relationship on the efficiency of the relationship, and how does joint learning taking place in the relationship facilitate this impact? (Article 3) Q4. How to facilitate rational organization of R&D work into internal tasks and tasks to be outsourced to suppliers? (Article 4) The first research question (Q1) in Article 1 seeks to identify the relational practices and mechanisms of boundary formation between a technology unit and its R&D suppliers by using a qualitative comparative case study examined in supplier relationships of a global technology firm. The article analyzes the interplay between boundary theories in R&D context, and complements them with trust and joint learning approaches. The second research question (Q2) addressed in Article 2 is related to one of the most important findings of Article 1, that is, the central role of relational joint learning as facilitator of efficient long- term R&D collaboration. Accordingly, Article 2 examines the learning related practices and mechanisms in internal and external R&D collaboration relationships of an industrial R&D organization and suggests that the linked role of mutual dependence, embeddedness, and innovation are the main factors behind relational learning process in the R&D relationships. Again, building on the findings of Article 1, the third research question (Q3) addressed in Article 3 aims at validating the positive relationship between RBV and TCA in the R&D relationships in terms of quantitative analysis, which in turn improves understanding of the interplay between these two boundary approaches. The study also confirms that relational joint learning mediates the link between these two approaches, as indicated in Article 1. The fourth research question (Q4) is addressed in Article 4, which presents a managerial outcome of the first article by introducing a practical tool intended to support R&D organizations in their 6 Acta Wasaensia outsourcing and partner selection tasks. The tool is based on the theoretical framework of organizational boundaries presented in Article 1. Table 1 summarizes the key characteristics of each article. 1.4 Structure of the dissertation This dissertation is structured in two parts. The first part consists of this introductory chapter followed by a theoretical chapter concerning R&D collaboration, concepts of organizational boundaries and relational joint learning, research methodology, and finally a results and discussion chapter. The purpose of the first part is to outline the theoretical background found in the literature of the research area influencing the dissertation. Part two contains four dissertation articles. Articles 1, 2, and 3 are co-authored by the author of this dissertation and Professor Marko Kohtamäki, whereas the fourth article is sole authored. The author of this dissertation is the lead author in all of the articles and had the main responsibility for data collection, analysis, composing, and writing the articles, and also for managing the review processes. Table 1. A summary of the Articles of this dissertation. Article 1 Article 2 Article 3 Article 4 Focus area Relational practices explaining organizational boundary formation in R&D collaboration and interplay between boundary explanations Relational practices and processes that facilitate relational joint learning in innovative R&D collaboration Verifying the link between resources and efficiency as organizational boundary explanations in R&D collaboration relationships, and the impact of joint learning on this link Presenting a practical tool for facilitating managerial decision making concerning organizational boundary formation in the R&D context Theory Organizational boundaries Relational joint learning Organizational boundaries and joint learning Organizational boundaries Research strategy Comparative multiple case study Comparative multiple case study Quantitative analysis based on a survey Multiple case study Research context Dyadic R&D collaboration in Dyadic R&D collaboration in R&D supplier– customer Dyadic R&D collaboration in Acta Wasaensia 7 a high- technology area (electrical engineering) a high- technology area (electrical engineering) relationships in high-technology industry a high- technology area (electrical engineering) Data collection methods Interviews, discussions, secondary sources Interviews, discussions, secondary sources Survey Interviews, discussions, secondary sources Main findings 1)Mechanisms and factors behind boundary formation in R&D supplier– customer relationships 2) Interaction between boundary explanations in R&D collaboration 1) Facilitators of joint learning in R&D supplier– customer relationships 2) Interlinked process of dependence, embeddedness, and innovation in R&D collaboration 1) Positive impact between RBV and TCA in R&D supplier– customer relationships 2) Mediating role of relational joint learning in this relationship A managerial tool that enables rational decisions on R&D outsourcing and insourcing and supplier selection 8 Acta Wasaensia 2 THEORETICAL BACKGROUND 2.1 R&D Collaboration During the last decades, different kinds of alliances have become a central part of technology companies’ strategy in terms of competitiveness and growth (Kale & Singh, 2009). These firms have realized that self-sufficiency is becoming difficult in a business environment that demands strategic focus and flexibility (Wittmann, Hunt, & Arnett, 2009; Yasuda, 2005). In addition accessing critical external resources and capabilities has been seen as a primary reason for entering alliances with external partners (Das & Teng, 2000; Yasuda, 2005). In this new way of thinking, relationships are not based on ownership but on partnership (Inkpen, 1996), since the firm might be able to utilize valuable resources by using alliance structures, without possessing them. Hence, strategic alliances that provide firms with an opportunity to leverage their strengths in collaboration with their partners, have become usual. Gulati (1995) defines a strategic alliance as “a purposive relationship between two or more independent firms that involves the exchange, sharing, or co- development of resources or capabilities to achieve mutual relevant benefits” (Kale & Singh, 2009). Accordingly, a strategic alliance is a form of business relationship that aims to deliver mutual benefit by utilizing the shared resources of the alliance partners. Previous literature on strategic alliances is divided into three main streams (Kale et al., 2000). The first stream attempts to explain the motivational factors related to alliance formation in terms of strategic or resource needs or cost-related rationales (Yasuda, 2005) by way of three viewpoints: strategy, transaction cost theory, and resource-based theory (Kale et al., 2000; Yasuda, 2005) Strategic considerations consider alliance structures as means to improve the firm’s strategic position in terms of efficiency or marker power (Ahuja, 2000; Stuart, 2000). Cost-related rationales see alliances as a means to reduce the production and transaction costs of the alliance partners (Dyer, 1996; Williamson, 2008), and transaction cost theory recommends choosing an alliance structure that minimize these costs. The resource-based theory sees firms as bundles of resources, and hence alliances arise when firms complement their own resources with external ones. In the context of resource complementarity obtained by entering strategic alliances, mutual learning, and joint development of new knowledge are central. Therefore, alliance formation can also be viewed as way to learn of and absorb new knowledge, skills, or capabilities from the alliance partners (Kale & Singh, 2007; Khanna, Gulati, & Acta Wasaensia 9 Nohria, 1998). The second stream of research concentrates on alliance governance structures and the organization of the alliances (Kale et al., 2000). This stream attempts to explain the interfirm linkages and alliances by analyzing the formation, organization, and governance structures of alliances. One set of explanations of alliance structures is focused on the transaction costs associated with an exchange with partners (Rindfleisch & Heide, 1997; Williamson, 1981). Its primary finding is that firms simply use external governance in situations where the costs of doing so are lower than those of internal governance. Another explanation, particularly in high-technology areas, is based on the resource needs of the firms. According to this view, firms form linkages with external partners to obtain access to assets, competences, or skills they require (Parmigiani & Mitchell, 2009; Wittmann et al., 2009), and thus the partnerships provide the firms access to new technologies and know-how previously unavailable from within the firm’s boundaries (Das & Teng, 2000). The third stream focuses on alliance performance and effectiveness (Kale et al., 2000). It aims to identify factors that influence the performance of the alliance or the partners in it (García, Sanzo, & Trespalacios, 2008; Mahapatra, Narasimhan, & Barbieri, 2010; Wagner, 2010). The research questions set in this dissertation are closely related to all three research streams on strategic alliances. From the first stream of research, the strategic and cost efficiency-related one, and also the resource-based reasons, are among the most important explanations of boundary formation in R&D relationships, as examined in the Article 1. Article 2, on the other hand, focuses on relational learning that is an essential motivational factor for alliance formation in the RBV. The second research stream considers the organization and governance structures of the alliances, which are also a central content of Articles 1 and 2 from the viewpoint of relational practices. Related to the third stream, relationship performance and the supplier selection process based on it are topics that are analyzed in a practical manner in Article 4. 2.1.1 Capabilities of knowledge-intensive R&D Collaboration Knowledge has been recognized as source of organizational competitiveness (Grant, 1996; Spender, 1996; Teece, Pisano, & Shuen, 1997), and interorganizational relationships facilitate the exchange, development and joint creation of new knowledge (Galunic & Rodan, 1998; Weck & Blomqvist, 2008). As technological development and innovation are among primary arenas for competition in R&D-intensive industries (S. L. Brown & Eisenhardt, 1995), the role of knowledge accessibility, knowledge creation abilities as well as 10 Acta Wasaensia competence considerations are emphasized as facilitators of competitiveness (Kapoor & Adner, 2012; Macher, 2006). Thus, privately held knowledge is seen as valuable resource (Conner & Prahalad, 1996; Galunic & Rodan, 1998), and firms often compete by developing new knowledge more quickly than their competitors (Macher, 2006). Consequently, R&D collaboration networks are often built on knowledge-intensive relationships, in which knowledge is transferred, developed and created between partners. The definitions of knowledge intensity are rather vague in the previous literature, especially when one considers not only formal, scientific knowledge, but also more encultured and embodied versions of it (Alvesson, 2000; Blackler, 1993). However, it has been conceptualized as the output of a joint activity that relies on a substantial body of complex knowledge (Ritala, Hyötylä, Blomqvist, & Kosonen, 2013). Knowledge intensity can be seen as a characteristic of an organization by practices, routines and equipment (Starbuck, 1992), or on individual level by competent individuals acting on different levels of organization (Alvesson, 2000; Ritala et al., 2013). R&D collaboration refers to complex services offered and exchanged, including product design, feasibility studies, usability analyses, prototype development, and testing, manufacturability analyses, and product customization (Huikkola et al., 2013). Accordingly, R&D collaboration with external partners can provide a firm with the resources, knowledge, and technological expertise it lacks, which in turn can have a positive effect on innovativeness (Dittrich & Duysters, 2007; Faems, De Visser, Andries, & Van Looy, 2010; van Echtelt et al., 2008). Defined as the “capacity to introduce some new process, product, or idea in the organization” (Hult, Hurley, & Knight, 2004; Hurley & Hult, 1998) innovativeness is largely dependent on accumulated and jointly-created knowledge, shared experience, and a joint learning process taking place between the partners to R&D collaboration relationships (Fang et al., 2011; Hoecht & Trott, 2006; Nieto & Santamaría, 2007). However, in addition to innovation, collaboration with external partners tends to be beneficial for technology firms in several other areas (Un et al., 2010). For example, both the firm and its external partner benefit from the access to complementary resources and capabilities without the need to develop them internally or acquire the partner (Un et al., 2010, p. 674). In addition R&D collaboration can improve R&D performance in terms of reduced costs and time as well as improved quality (Ragatz et al., 2002). High-technology firms often operate in the dynamic environments characterized by strong competition, rapid changes, accelerating product life cycles, changing customer expectations and product discontinuities (Marsh & Stock, 2003). To successfully develop and sustain their competitiveness under these Acta Wasaensia 11 environmental circumstances, firms need to develop dynamic capabilities that enable them to draw on, to extend and redirect their technological capabilities and R&D resources (Marsh & Stock, 2003). Dynamic capabilities have been defined as: “The firms’ processes that use resources—specifically resources to integrate, reconfigure, gain, and release resources—to match and even create market change. Dynamic capabilities thus are the organizational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve, and die.” (Eisenhardt & Martin, 2000; Teece et al., 1997). Accordingly, dynamic capabilities represent organizational processes by which the organizational actors employ their resources to develop new value creation strategies (Marsh & Stock, 2003; Teece et al., 1997). Creating and maintaining resources provided by interorganizational R&D collaboration networks can be an important dynamic capability in supplementing the internal product development activities of technology organizations (Blomqvist, Hara, Koivuniemi, & Äijö, 2004). In the collaborative relationships between technology firms and their R&D suppliers, cross-functional, and cross-organizational teams and routines for product development, joint knowledge creation and knowledge transfer are identified as important elements of dynamic capabilities facilitating successful R&D and innovation development (Eisenhardt & Martin, 2000). 2.1.2 R&D Supplier involvement A technology alliance between a focal firm and its R&D partners can be defined as a “formal arrangement between otherwise independent firms that pool together technological resources” (Faems et al., 2010). These collaborations can take place in the relationships between a product development organization’s relations with its R&D suppliers (Johnsen, 2009; Quinn, 2000; Wagner & Hoegl, 2006), customers, or users (Al-Zu’bi & Tsinopoulos, 2012; Menguc, Auh, & Yannopoulos, 2014; Wagner, 2010), universities or research institutes (Laursen & Salter, 2004; Perkmann et al., 2013), and even potential or existing industrial competitors (Chuang, Morgan, & Robson, 2014). Based on the previous literature, there are several reasons behind the finding that the technology organizations are able to improve their innovation and R&D capabilities by utilizing interorganizational collaboration networks and partnerships (Faems et al., 2010; Faems, Van Looy, & Debackere, 2005). First, collaboration provides the firms with access to complementary assets that can be used to develop commercially successful and innovative products and services (Teece, 2006; Verona, 1999). Second, working in collaboration with external organizations facilitates and encourages the transfer of valuable knowledge that is often tacit and codified (Galunic & Rodan, 1998; Lambe, Spekman, & Hunt, 2002; Tsai, 12 Acta Wasaensia 2001). This, in turn, helps develop relation-specific resources and capabilities that would otherwise be difficult to develop (Das & Teng, 2000; Wittmann et al., 2009). Third, interorganizational R&D collaboration is able to help to spread the costs of product development among different parties in the collaboration network (Hagedoorn, 2002; Veugelers, 1997), resulting in a notable reduction of the risk related to innovative R&D projects. In this dissertation, the focal area of interorganizational R&D collaboration is the relations between technology organizations and their R&D suppliers. This field of research is referred as R&D supplier involvement, and it has been greatly expanded during last 30 years. The main reason for that might be the fact that an increasing number of technology firms have outsourced parts of their product development activities to suppliers (Johnsen, 2009; van Echtelt et al., 2008). Previous literature offers several definitions of R&D supplier involvement. Fundamentally it concerns the integration of the capabilities that suppliers can contribute to the customer organization’s R&D projects (Dowlatshahi, 1998). According to the definition of (van Echtelt et al., 2008, p. 182), R&D supplier involvement “refers to the resources (capabilities, investments, information, knowledge, ideas) that suppliers provide, the tasks they carry out and the responsibilities they assume regarding the development of a part, process or service for the benefit of a buyer’s current or future R&D projects.” The interaction between customer and R&D suppliers can range from screening the supply base for new technologies and innovations or consultations with suppliers, to making suppliers fully responsible for the design of the customer’s products (Wagner, 2010) Previous research has shown that there are certain benefits for the customer firms in involving suppliers in R&D activities rather than working independently in the central areas of R&D. These benefits include improved innovative performance, better time-to-market or quality, or reduced R&D costs or risks (Wagner, 2010; Wagner & Hoegl, 2006). 2.1.3 Explanations for technology alliance formation As described in the first section of this chapter, in addition to the expectations of strategic benefits such as competitive advantage, shared risks, new markets, or other market benefits, the main motivational reasons for firms to enter into alliances with external partners are based on two primary explanations, the resource-based theory and the transaction cost approach (Kale et al., 2000; Yasuda, 2005). The resource-based theory explains R&D collaboration with technology suppliers as the employment of external technological resources, skills, and capabilities. Accordingly, the customer organization benefits from the Acta Wasaensia 13 collaboration with suppliers, by obtaining access to external specialized, complementary resources that it lacks, and which would be difficult to develop internally. This is particularly important in the high-technology areas of rapid technological changes and increased complexity of products (Daniel, Hempel, & Srinivasan, 2002; Yasuda, 2005). The transaction cost theory in contrast holds that firms choose to utilize external R&D capabilities if the cost required for joint development and the relationship governance is lower than the cost of their own, internal R&D (Yasuda, 2005, p. 766). Managing the collaborative relationships with R&D suppliers is a challenging task for the customer organization, since it involves decisions and activities related to coordination, information sharing, problem solving and negotiations with regards to the tasks, projects, responsibilities, and resources (Wynstra et al., 2003). For this reason, the transaction costs related to management, coordination, problem solving, and information transfer can be significant in comparison to the costs related to internal R&D (Yasuda, 2005). However, in successful R&D alliances, the collaboration with competent suppliers tends to yield reduced development costs, which in turn favors outsourcing, also from the viewpoint of transaction cost. 2.1.4 Supplier relationship development Supplier relationship development and adaptation between R&D partners includes a wide range of factors concerning the long-term process of mutual integration (Johnsen, 2009). The suppliers have to adapt to their customers’ internal R&D working procedures and processes. These kinds of partner-specific adaptations are based on previous experiences of joint collaboration between partners, and therefore they facilitate effective future collaboration between them (Walter, 2003). Adaptation has the potential to tie the supplier to its customer, which in turn supports interaction and information sharing between partners, improves the efficiency of the relationship, and also creates entrance barriers for competitors (Brennan & Turnbull, 1999; Walter, 2003). The partners’ mutual adaptation in the collaboration requires that there is mutual trust and commitment in the relationship (Blomqvist, Hurmelinna, & Seppänen, 2005; Brennan & Turnbull, 1999). Trust has been found to be a complex construct that encompasses the integrity, honesty and confidence that one party places in another (Coulter & Coulter, 2003). Relational trust (Selnes & Sallis, 2003) is defined as the perceived ability and willingness of the other party to behave in ways that consider the interests of both parties, and hence trust is seen as a facilitator of effective collaboration in customer-supplier relationships. Previous research has identified several mechanisms for building mutual trust (Kale & Singh, 2009). An organization is able to build mutual trust by showing that it 14 Acta Wasaensia trusts its external partners by making unilateral commitments, or voluntarily assuming a vulnerable position in the relationship. An alternative way involves a partner demonstrating its own trustworthiness by scrupulously honoring all commitments by ensuring it can deliver on any actions it commits to. A third driver of interfirm trust is relational capital (Kale et al., 2000), which refers to the level of mutual trust, respect, and friendship that arises in close interactions at the individual level within the relationship between partners. Previous research has shown that partners in close relationships with high levels of trust actually learn to collaborate effectively by adapting to each other’s processes and ways of working (Kale & Singh, 2007; Zollo & Winter, 2002). (Zollo & Winter, 2002) propose that joint efforts dedicated to technology development and knowledge creation in the relationship act as a basis for improving a firm’s skills to manage the collaborative relationship more effectively. This learning process is a dynamic capability referred to as alliance capability building—a process through which a firm learns, accumulates, and leverages its alliance management skills and expertise (Kale & Singh, 2007, p. 984). Accordingly, building alliance capabilities requires firms to develop an ability to adapt to the collaboration and learn the collaboration practices within the partnerships. 2.2 Organizational boundaries As described in the previous chapters, knowledge-based capabilities, and technological know-how are crucial resources for industrial high-technology organizations, who have to continuously build, integrate, and reconfigure internally available resources and the opportunities provided by external actors to address environmental changes and challenges arising from competition (Grant, 1996; Spender, 1996; Teece et al., 1997). Accordingly, R&D organizations have to extend their activities across their boundaries by outsourcing R&D work to their technology partners (Johnsen, 2009; Quinn, 2000; Wagner & Hoegl, 2006). Therefore, making decisions concerning organizational boundaries and deciding which activities are to be performed internally by hierarchical governance, and which are to be outsourced to suppliers by market governance (Pisano, 1990; Robertson & Gatignon, 1998) are essential strategic and operational choices affecting the firms’ innovativeness and R&D performance. In general, technology firms have three basic alternatives to access external technological knowledge and capabilities (Lambe & Spekman, 1997; Steensma & Corley, 2001). They can 1) develop technological capabilities internally, 2) acquire another company that already possesses these capabilities, or 3) enter Acta Wasaensia 15 into a technology sourcing arrangement, which means an alliance between customer and supplier firm (Jacobides & Billinger, 2006). Therefore, if the firm lacks the capabilities necessary to make the technology development internally, and other organizations already have the technology or capabilities to develop it, management can consider external sourcing (Steensma & Corley, 2001). Accordingly, the problem of accessing crucial external capabilities for a firm’s technology development leads to a basic question: when should an individual transaction be carried out internally, externally, or through an alliance? (Jacobides & Billinger, 2006, p. 250). Organizational boundaries are imagined demarcation lines that can be drawn to separate an organization from its surrounding environment (Fiol, 1989), and they are formally defined as “the demarcation between the organization and its environment” (Santos & Eisenhardt, 2005). Accordingly, the boundaries specify how the organization’s internal roles and functions may be distinguished from those of external actors. Therefore, boundaries define, and also delimit corporate relationships in terms of autonomy, control and interdependence (Fiol, 1989), and understanding what are the actual factors that determine firm boundaries and the choice between interacting in a firm or a market is one of the most important issues in economics (Lafontaine & Slade, 2007), in which the main function of organizational boundaries has been seen as distinguishing a firm from other separate but related firms, with which the firm collaborates. In this context, the question about determining firm boundaries often involves considerations on what activities the firms govern internally through hierarchical governance and which they outsource from the market (Argyres & Zenger, 2012). Figure 1 presents an example illustration of the boundary setting. A firm’s legal boundary is the demarcation of the firm’s internal and external activities, whereas a salient boundary represents the sphere of internal and external activities that are included in the firm’s operations, and therefore also contains the activities that are outsourced from external actors. The firm might change its salient boundaries by making decisions on which activities are performed internally based on hierarchical governance, and which activities are performed through alliances with external partners by market governance. The boundary decisions are typically influenced by external forces such as the unpredictability of the operating environment, competition, laws and regulations, and also rapidly changing consumer demands (Rindfleisch & Heide, 1997). Moreover, as industrial managers in charge of the organization of R&D work have to regularly decide how best to utilize an external supplier’s resources and simultaneously deploy and develop their firm’s own internal product development resources, rational outsourcing, and insourcing decision making is an important topic. 16 Acta Wasaensia Figure 1. Example image of setting of organizational boundaries. Scholars have for decades attempted to understand why firms adopt different modes of governance, such as the make, buy, or ally? approach. (Coase, 1937) was the first to observe that entrepreneurs and managers make decisions on firm boundaries by considering the benefits of internal production against the costs and risks caused by the use of external partners from the market (Jacobides & Billinger, 2006). Since then, several kinds of theoretical and practical viewpoints have been nominated as theoretical lenses on the topic of organizational boundaries. This dissertation uses a theoretical framework of interorganizational relations to analyze how firms organize and manage R&D in their supplier network. The framework applied consists of four boundary conceptions that are used to study the relationship: efficiency, competence, power, and identity (Santos & Eisenhardt, 2005). Each of these boundary conceptions are presented in the following sections. 2.2.1 Efficiency and transaction cost economics Coase’s (1937) question of make, buy, or ally? prompted early empirical studies on firm boundaries to consider individual transactions as a guide to examine decisions concerning buying or making components for manufacturing (Dyer, 1996), comparisons between joint ventures or a fully owned subsidiary (Hennart, 1991) and performing internal product development versus technology partnerships (Pisano, 1990; Robertson & Gatignon, 1998). With the introduction of the theory of transactional cost analysis (TCA) (Williamson, 1981), the Acta Wasaensia 17 transaction-based firm boundary explanations were based on the argument that the precise terms of transactions between customer firms and its external partner are costly to define, monitor, and enforce, which in turn leads to incomplete contracts between those partners (Santos & Eisenhardt, 2005). Therefore, the choice between hierarchical governance and market governance should be based on minimizing these transactional costs (Argyres & Zenger, 2012; Rindfleisch & Heide, 1997), Accordingly, internal hierarchical governance was seen as preferable to market governance in situations where transaction costs are high enough to exceed the cost advantages provided by market governance (Rindfleisch & Heide, 1997; Williamson, 1981). In the efficiency conception of the organizational boundary explanation, transactional costs caused by the governance of activities are central (Santos & Eisenhardt, 2005). As these costs are different when the activities are outsourced to external markets from the costs caused by internal governance, this conception suggests that the boundary should be set at the point that minimizes the governance cost (Rindfleisch & Heide, 1997; Santos & Eisenhardt, 2005), as illustrated in Figure 2. For example, the costs caused by negotiation, execution and monitoring the agreements between partners are a remarkable part of transaction costs taking place in the relationships between firms (Rindfleisch & Heide, 1997). In addition asset specificity, the extent to which one party’s investments in the specialized assets that are dedicated to the transactions in the relationship with the other party (Dyer, 1996; Zaheer, Mcevily, Perrone, & Barney, 1998), has an impact on the transaction cost, since the firms have to safeguard their partnership-specific investments (Williamson, 1981; Zaheer et al., 1998). Figure 2. Boundaries of efficiency are set at the point of minimum cost by comparing the costs of internal and external governance. 18 Acta Wasaensia This kind of safeguarding problem can arise when a firm deploys specific assets and fears that its partner can opportunistically exploit those investments (Rindfleisch & Heide, 1997). Different types of uncertainties are important transaction attributes that have also been argued to reduce the efficiency of market governance relative to internal, hierarchical governance (Santos & Eisenhardt, 2005). Environmental uncertainty refers to the unanticipated changes in circumstances surrounding an exchange between a firm and its external partner, and it is caused by unpredictability of the operating environment (Rindfleisch & Heide, 1997). This is typical in rapidly changing business areas such as high-technology consumer products in which consumer trends can vary rapidly (Heide & Weiss, 1995), and where environmental changes can lead to costs arising from communicating new information, renegotiating agreements, or taking coordination actions to reflect new circumstances (Rindfleisch & Heide, 1997). Behavioral uncertainty, in turn, is caused by the fear of opportunistic behavior of the other party to the relationship (Dyer, 1996), and the partners have to control and safeguard their relationship-specific investments and assess the performance of their transaction partner (Rindfleisch & Heide, 1997). Therefore, transaction cost theory suggests that firms should internalize those activities that are vulnerable to market opportunism (Argyres & Zenger, 2012; Williamson, 1981). The benefits of the internal hierarchical governance model in this context include the fact that internal organizations have more powerful mechanisms to control and monitor activities by measuring and incentives, and internal organizations are capable of providing long-term rewards, such as promotion opportunities (Rindfleisch & Heide, 1997). This way, internal organization enables better managerial oversight and allows better aligned incentives to motivate desired behavior (Santos & Eisenhardt, 2005; Williamson, 1981). Relationship governance costs can also arise from knowledge and information transfer problems in the relationship (Rindfleisch & Heide, 1997; Santos & Eisenhardt, 2005; Williamson, 1981). These difficulties can occur as information asymmetries owing to partners protecting information that they feel is valuable to themselves or opportunistically sharing sensitive information in the relationship. Information transfer problems can also occur in cases where partners provide the other party with information or knowledge in a form that cannot be utilized or integrated by that party, meaning the partners are likely to have different views on how to accomplish the tasks (Conner & Prahalad, 1996). This, in turn, generates coordination costs in the relationship, especially in an environment marked by high uncertainty (Santos & Eisenhardt, 2005). Typical Acta Wasaensia 19 mechanisms utilized to manage information problems in the relationships between partners include the development of project management, monitoring, and communication practices, as well as processes and agreements (Rindfleisch & Heide, 1997). The literature on efficiency conception suggests that this boundary conception is most applicable in the industries that are characterized by intense price competition and a stable structure (Santos & Eisenhardt, 2005). This is because in these less dynamic business environments, the transaction attributes such as asset specificity, information asymmetries and different kinds of environmental and behavioral uncertainties are likely to be fixed through the identification of optimal governance mechanisms, adaptation, and partner selection based on cost minimization (Santos & Eisenhardt, 2005). Nevertheless, high-technology industries usually represent dynamic environments of high environmental uncertainty. It is typical that in these kinds of dynamic environment market requirements, competition and speed of technology renewal (Heide & Weiss, 1995) necessitate a constant need for developing and sustaining product innovation capabilities. Therefore, in dynamic environments, the value of knowledge resources and special, unique competences (Lambe et al., 2002; Wittmann et al., 2009) available in R&D partnerships are emphasized and dynamic capabilities of the collaborative R&D relationship become crucial (Teece et al., 1997). However, also in these relationships the role of governance efficiency is central in several areas. First, in knowledge-intensive relationships, the role of information transfer between partners is crucial, and any difficulties caused by information asymmetries between partners increase the costs of the governance of the relationship (Rindfleisch & Heide, 1997; Teece, 2007). Information sharing issues are closely related to the meeting practices in the relationships, since finding a common understanding and solving any problems in a collaborative relationship requires discussion and close interaction between partners (Kogut & Zander, 1996). Detailed interactions and active information sharing facilitate the joint sensemaking that is required for knowledge creation between collaboration partners (Huikkola et al., 2013). Second, to ensure seamless joint action in the relationships, the partners have to agree on partnership-specific practices. As described earlier, the suppliers have to adapt to the customer’s internal R&D processes, tools, and way of working (Walter, 2003). Adaptation facilitates interaction and information sharing between the partners, which in turn improves the efficiency of the relationship (Brennan & Turnbull 1999; Walter 2003). The partners’ mutual adaptation in the collaboration with each other requires there to be mutual trust and commitment in the relationship (Brennan & Turnbull, 1999). Trust is seen as a primary facilitator of governance efficiency, since it reduces behavioral uncertainty in the collaborative 20 Acta Wasaensia relationship (Gulati & Sytch, 2008; Rindfleisch & Heide, 1997; van Echtelt et al., 2008). Third, the role of written agreements is also closely related to the governance costs in the relationship between technology partners (Leiblein & Miller, 2003; Rindfleisch & Heide, 1997). In addition, in this context the role of mutual trust in the relationship is essential, since in mature relationships encompassing high levels of trust, the need for written agreements is reduced. This, in turn, improves the governance efficiency by reducing the transaction costs associated with negotiating and writing agreements between partners (Dyer & Chu, 2003; Leiblein & Miller, 2003; Zaheer et al., 1998). 2.2.2 Competence Whereas the efficiency conception and transaction cost theory dominated the early research on boundary explanations, during the 1990s several scholars reported on to the limitations of these efficiency-based boundary theories (Jacobides & Billinger, 2006). For example, (Ghoshal & Moran, 1996) and (Kogut & Zander, 1996) suggested that the threat of market opportunism alone is not a sufficient explanation for firm boundaries, and the firms are much more than transactional havens, because they provide organizational backdrops for sharing, developing and applying knowledge (Jacobides & Billinger, 2006; Steensma & Corley, 2001). Therefore, the new thinking on organizational boundaries was based on the idea that the boundaries could be explained by the opportunity to create and sustain competitive advantage through effective coordination of resources (Conner & Prahalad, 1996; Kogut & Zander, 1996). The theory behind this thinking is known as the resource-based view (RBV) (Conner & Prahalad, 1996; Eisenhardt & Schoonhoven, 1996; Lavie, 2006). It suggests that firms seek ways to complement and extend organizational resources with valuable external resources that can be sources of competitive advantage and improved innovation performance (Long & Vickers-Koch, 1995). Accordingly, as firms’ resources are heterogeneous, and also imperfectly mobile (Eisenhardt & Schoonhoven, 1996; Lavie, 2006), firms have to complement their internal resources with those available externally. Therefore, from the viewpoint of the RBV, partnerships can be seen as ways to complement and extend the firm’s own competences (Parmigiani & Mitchell, 2009), and also to share the costs and risks of innovation projects (Eisenhardt & Martin, 2000). Accordingly, the RBV suggests that firms’ resources should be valuable, rare, inimitable, and non-substitutable (VRIN). Accordingly, due to their unique nature, they can lead to competitive advantage and sustainable performance for the organization that can fully utilize them (Santos & Eisenhardt, 2005). Acta Wasaensia 21 Figure 3. Boundaries of competence are set to the point that maximizes the value of the firm’s resource portfolio. The second conception for organizational boundary setting, competence, is based on the theory of the RBV. In this conception, the organization is conceptualized as a unique bundle of resources (Santos & Eisenhardt, 2005), and it focuses on how organizational members gather, exploit, and renew firm-specific and resource-based advantages by considering the valuable resources, competences, and capabilities owned by the organization. When firms decide to utilize external resources to complement their own competences and capabilities, those external resources can contribute to the focal firm’s performance (Gulati, 1998; Lavie, 2006). Accordingly, the purpose of the boundary formation in the conception of competence is to maximize the value of the resources to which the organization has access (Figure 3). In high-technology industries, the role of knowledge is emphasized, and knowledge resources are seen as valuable, since access to external knowledge through relationships has the capacity to improve the firm’s innovative performance and thus deliver competitive advantage (Ahuja & Katila, 2001; S. L. Brown & Eisenhardt, 1997; C. Lin et al., 2012). In terms of knowledge-based innovation inputs, firms will look to their partners to provide the resources and technological capabilities they lack and seek to combine the partners’ resources and exploit complementarities (Gulati, 1998; Nieto & Santamaría, 2007). Knowledge-based view (KBV) is a theory built on RBV, and which emphasizes the importance of knowledge as a strategic resource and source of competitive advantage (Grant, 1996; Spender, 1996). According to KBV, the differences of 22 Acta Wasaensia knowledge resources owned by the organizations are able to explain the differences in their performance (Weck & Blomqvist, 2008). Moreover, firms’ objectives related to knowledge creation, development and transfer effect on their decisions on how they organize their functions, determine their boundaries (Grant, 1996) and utilize partnerships in technological development (Macher, 2006). According to (Galunic & Rodan, 1998, p. 1194) knowledge resources are typically tacit, context specific, and dispersed. Tacit, experience-based knowledge is difficult to codify into a form that can be easily detected or utilized by outsiders; who lack the experience that has been contributed to accumulate this knowledge (Galunic & Rodan, 1998, p. 1196). Context specificity refers to how contextualized the knowledge resource is, which means that the valuable resource is likely to be of little use outside of the relatively narrow context for which it was developed. Dispersion refers to the extent to which the knowledge is concentrated in the heads of individuals instead of the minds of many (Galunic & Rodan, 1998), which in turn affects the movability this kind of system-embedded knowledge. Previous literature has shown that dynamic knowledge-based resources enable innovative activities in relationships, but that finding is greatly influenced in practice by a firm’s ability to utilize the new knowledge developed in the relationship (Landry, Amara, & Lamari, 2002; C. Lin et al., 2012; Nieto & Santamaría, 2007). Competitive advantage and innovation capability flows not from knowledge resources themselves but from how they are utilized in the organization (Grant, 1996; Weck & Blomqvist, 2008). Accordingly, those firms that have the ability to acquire, assimilate, and exploit the externally available knowledge have better chance of achieving a high level of innovation performance (C. Lin et al., 2012). This ability is referred as absorptive capacity, and is defined as the firm’s ability to “recognize, the value of new, external knowledge, assimilate it, and apply it to commercial ends” (Cohen & Levinthal, 1990, p. 128). Accordingly, organizations that are open to collaboration with external partners and willing to utilize the results of the joint development work, are the most successful in terms of achieving competitive advantage (Ahuja & Katila, 2001; Landry et al., 2002) In the knowledge-intensive high-technology industries, the external resources utilized by organizations are typically more loosely coupled than in firms operating in less dynamic business environments (Eisenhardt & Schoonhoven, 1996; Santos & Eisenhardt, 2005). In dynamic environments, the value of knowledge resources tends to be emphasized, and hence the dynamic capabilities of partners are crucial (Eisenhardt & Martin, 2000; Teece, 2007; Teece et al., 1997). In collaborative R&D relationships, the role of product innovation Acta Wasaensia 23 capability is emphasized. That capability is defined as “the ability to pool, link and transform several different types of resources and knowledge to create a solution that is different from existing ones” (Chandy & Tellis, 1998; Menguc et al., 2014). A firm’s innovation capability is largely dependent on cumulative knowledge built over many years of experience (Hoecht & Trott, 2006; Nieto & Santamaría, 2007), and therefore close and long-term R&D partnerships in which joint experience is accumulated between partners are seen as very valuable. Therefore, the active involvement of external partners in internal R&D activities brings new, external capabilities, and knowledge into the firm, which is central to the building of innovation capability, especially in those firms that operate in knowledge-intensive high-technology areas (Johnsen, 2009; Wagner, 2010; Wagner & Hoegl, 2006). 2.2.3 Power and resource dependency view Whereas the competence conception and the RBV view organizations as entities whose success and survival depends on their ability to complement their internal resources with capabilities and skills provided by external partners, organizations can also be seen as vulnerable entities often affected by the uncertainty of environmental factors (Gulati & Sytch, 2007). Accordingly, the third conception for organizational boundary setting, power, considers the dependencies between firms that operate within value systems, and analyzes the ways in which they control the exchange relations they are directly or indirectly involved in (Santos & Eisenhardt 2005). The roots of this conception are in the organizational economics and resource dependency tradition, in which firms are conceptualized as organizations that aim to reduce uncertainty and exercise power over external forces to improve their own performance (Gulati & Sytch, 2007; Pfeffer & Salancik, 1978). According to this boundary conception, the organizational boundaries should be set at the point that maximizes strategic control over crucial external forces and critical external dependencies, as presented in Figure 4. In environments where external dependences reduce an organization’s bargaining power and also make it more vulnerable to the external actor’s opportunism, firms often favor reducing dependence asymmetries in their external collaboration relationships (Gulati & Sytch, 2007), or alternatively evaluate influence mechanisms to increase their control over critical external dependencies (Santos & Eisenhardt, 2005). 24 Acta Wasaensia Figure 4. Boundaries of power are set at the point of maximum control over critical external dependencies. Dependence asymmetry in interorganizational relations refers to differences in the partners’ dependence on each other in their relationship. For example, if an actor is more dependent on its exchange partner, that dependence can be constructed as a source of power for the partner. Similarly, if the partner is more dependent, then the actor has the dependence advantage and is thus in a position of relative power in the relationship (Gulati & Sytch, 2007, p. 35). Therefore, increasing power, and reducing dependence in the exchange relationship are seen as two sides of the same coin, since both target having greater control over external forces (Santos & Eisenhardt, 2005). Reducing dependence on external forces is important, since if the organization fails to do so it might be forced to adopt or limit certain activities against its own organizational goals. In a similar manner, if the organization fails to consolidate its power over external forces, it can lose opportunities to enhance its performance by actions such as raising prices or increasing scale (Santos & Eisenhardt, 2005). In the dynamic environments of knowledge-intensive technology areas, it is usual that firms are dependent on their key partner companies’ specialized and unique skills, capabilities and competences (Davis & Eisenhardt, 2011; Roseira, Brito, & Henneberg, 2010; Wagner, 2010). The capabilities of these kinds of partnerships are usually difficult to substitute using other suppliers or to imitate by the customer organization itself in the short term (Gulati & Sytch, 2007). A Acta Wasaensia 25 customer’s commitment to the selected partner suppliers with valuable capabilities make the customer organization vulnerable to opportunistic behavior on the part of the supplier. In addition, relationship-specific investments into the collaboration by both sides to the relationships can make switching partner costly in cases where the customer organization decides to end the collaboration (Heide & Weiss, 1995). Therefore, the costs accruing from partner switching are central when firms consider the risks related to their dependence on suppliers. Because suppliers with special capabilities might be crucial to the customer’s R&D performance and innovativeness, customers either have to tolerate dependence on these partners to maintain and sustain their performance (Gulati & Sytch, 2007), or alternatively internalize their strategically important R&D activities to avoid dependence, which in turn means that the customer loses its access to the suppliers’ valuable competences (Mayer & Nickerson, 2005). Previous research has shown that the partners in knowledge-intensive relationships learn to build mutual trust facilitated by relational capital in long- term collaboration (Davis & Eisenhardt, 2011; Lewicki, Tomlinson, & Gillespie, 2006), which in turn helps the firms tolerate dependency in their mature high- technology relationships. Moreover, it is usual in these relationships that the partners are dependent on each other (Gulati & Sytch, 2007). This kind of mutual dependence can lead to the formation of more embedded ties between partners and also the emergence of mutual trust (Gulati & Sytch, 2007, 2008). 2.2.4 Organizational identity In the identity conception, organizations are conceptualized and defined holistically as social contexts by organizational members’ personal and shared interpretations relating to the organization (Santos & Eisenhardt, 2005; Weick et al., 2005). Accordingly the organizational members make boundary decisions by asking who are we? and therefore organizational boundaries are set to achieve coherence between the organizational identity and its activities (Santos & Eisenhardt, 2005). Accordingly, managerial identity evolves based on the creation of meaning and the development of mental models that define the identity-based boundaries of the organization (Figure 5). Identity conception emerges from two main theories, managerial cognition, and organizational identity. The first, managerial cognition and sensemaking analyzes managers’ cognitive frames that shape their actions (Prahalad & Bettis, 1986; Walsh, 1995; Weick et al., 2005) and the interpretations of their environmental factors (Daft & Weick, 1984). As argued by (Daft & Weick, 1984), interpreting the surrounding environment is a fundamental task for 26 Acta Wasaensia organizational members, particularly in complex or ambiguous environments. Therefore, collective sensemaking among organizational members can boost their understanding and awareness of new information as well as the meaning of their prior action and of environmental changes (Weick et al., 2005). Accordingly, an organization emerges from its members’ sensemaking: “[an] organization is an attempt to order the intrinsic flux of human action, to channel it toward certain ends, to give it a particular shape, through generalizing and institutionalizing particular meanings and rules” (Tsoukas & Chia, 2002, p. 570). Accordingly, organizational sensemaking performed by organizational members can serve to create cognitive frames that serve as information filters for decision making and also reduce ambiguity caused by environmental uncertainty (Prahalad & Bettis, 1986; Santos & Eisenhardt, 2005). When an organization has successfully created cognitive frames, they can be used to guide subsequent actions and decisions by developing cognitive coherence (Walsh, 1995). The second theory of identity conception, organizational identity helps members to make sense of their position and situation in the organization by clarifying the purpose and direction of the organization. Identity builds on cognitive frames developed through organizational sensemaking (Santos & Eisenhardt, 2005), but these frames are able to shape the identity only when they are shared among organizational leaders and widely communicated in the organization. As the identity reflects the organizational members’ shared values and norms that constitute the central and distinctive character of the organization (A. D. Brown & Starkey, 2000; Dutton & Dukerich, 1991; Kogut & Zander, 1996), its roots emerge from several sources. At the inception of the organization, identity was shaped by its founders’ beliefs and institutional conditions (Elsbach & Kramer, 1996; Kimberly, 1979). However, identity evolves over time shaped by interactions and among its members, and also with external parties (Porac, Thomas, Wilson, Paton, & Kanfer, 1995) or external institutions (Gioia & Thomas, 1996). Identity-based decisions and actions determine the firm’s managerial attitudes and behaviors in interfirm relationships, where the organizational members perceive which are the appropriate courses of action for an organization (Kogut & Zander, 1996; Weick et al., 2005) and thus identity steers decisions concerning organizational boundaries. Organizational members interpret external and internal stimuli by sensemaking aligned with organizational identity (Daft & Weick, 1984; Tripsas, 2009), and managerial actions are then shaped by the process of managerial sensemaking (Walsh, 1995; Weick et al., 2005). Acta Wasaensia 27 Figure 5. Boundaries of identity are set by resolving inconsistencies between identity and organizational activities. The literature indicates identity-based boundary conception is a particularly relevant guide for boundary decisions in ambiguous environments, in which environmental uncertainty and rapid changes are typical, and other guides to decision making might not be available (Santos & Eisenhardt, 2005, 2009). In these situations, managerial cognition, and sensemaking might be based on searching for analogies developed elsewhere, which can provide managers with templates of imported identities capable of guiding organizational actions and supporting boundary decisions in ambiguous environments (Rindova & Kotha, 2001; Santos & Eisenhardt, 2005, 2009). This way, identity-based reasoning in organizational decision making can provide the focus and distinctiveness for companies operating on rapidly changing business areas. In addition, hiring new employees, such as senior executives from outside the organization is an important mechanism for changing the identity-based boundaries of the firm (Santos & Eisenhardt, 2005), since the new leader can lead the organization to adopt a new identity that reflects his/her experience and the reality in the business sector concerned (Galunic & Rodan, 1998; Santos & Eisenhardt, 2005). This way of using boundary crossers as a means to alter organizational identity 28 Acta Wasaensia can be effective in situations when organizational survival is at stake (Siggelkow, 2001). However, despite these potential competitive advantages, organizational identity can also be a competitive weakness, when managerial decision makers in the organization ignore, reject, or misinterpret the information that might challenge the currently accepted organizational identity (A. D. Brown & Starkey, 2000; Walsh, 1995). Accordingly, identity can often dominate the other boundary decision mechanisms, because information or evidence that challenges the current organizational identity is not easily accepted (Santos & Eisenhardt 2005, p.502; Brown & Starkey 2000). However, clear environmental changes or demands from the market or other external actors can alter the status quo created by the identity accepted by organizational members. This, in turn, can trigger the process of managerial sensemaking and the re-evaluation of organizational identity (Louis & Sutton 1991), leading to the formation of new boundaries (Santos & Eisenhardt 2005, p.502). 2.2.5 Applying different boundary conceptions In this chapter, four theoretically grounded conceptions for organizational boundaries have been presented, and their central characteristics have been summarized in Table 2. All these boundary explanations approach the role and nature of the organization in different ways and thus apply their underlying boundary theories to their own organizational view. As these boundary conceptions explain the setting of the organizational boundaries from the viewpoint of their own theoretical roots, they are also applied in the organizations operating in different environments. Therefore, it is not logical to compare the conceptions directly against each other, and it is preferable to adopt a contingency perspective by asking “When does each theory apply?” (Steensma & Corley, 2001). As described earlier in this chapter, the efficiency conception and transaction cost approach have traditionally been regarded as the boundary explanations that are most valid in traditional industries characterized by intense price competition and stable operating environments (Santos & Eisenhardt, 2005), such as car manufacturing (Dyer, 1996; Dyer & Chu, 2003), or the trucking industry (Nickerson & Silverman, 2003). This argument is based on the view that in less dynamic environments, it is possible for the customer firms to manage their supply chains to select appropriate partners, find optimal governance and adaptation mechanisms, and hence to effectively minimize the governance costs arising from supplier involvement (Nickerson & Silverman, 2003; Rindfleisch & Heide, 1997; Santos & Eisenhardt, 2005). However, in the Acta Wasaensia 29 dynamic environments of high-technology industries, this kind of approach is not always possible, and the value of knowledge and capabilities is emphasized over the direct cost of transactions (Yasuda, 2005). Therefore, in the competence conception, and the RBV, the viewpoint is changed from examining individual transactions to the utilization of external resource opportunities that might be crucial to the competitive advantage of the customer firm. Table 2. A summary of organizational boundary conceptions. Efficiency Competence Power Identity Conception of organi- zation Governance mechanism relying on monitoring and incentive alignment A unique bundle of resources configured for competitive advantage Institution that exercises power over its environment to control external dependence Social context that is a result of its members’ sensemaking Theoretical roots Transaction cost analysis (TCA) The resource- based view (RBV) Resource dependency tradition Organizational identity Salient boundary setting Transactions undertaken with the organization Resources to which the organization has access Domains over which the organization exercises influence Dominant mindset of “who are we?” Central goal Minimizing governance costs of transactions Maximize the value of an organization’s resources by complementing internal resources with market opportunities Maximize strategic control over external relationships by controlling instances of critical dependence and extending market power Aligning organizational activities with organizational identity Operational environ- ment Traditional industries characterized by intense price competition and stable operating environment Competitive environments Regulated, oligopolistic, or ambiguous environments Complex and/or ambiguous environments 30 Acta Wasaensia Metrics Costs caused by negotiation, execution, information sharing, safeguarding and partner monitoring Valuable competences, capabilities, skills, and knowledge that can enable competitive advantage Dependence (a)symmetries and influence over external forces Costs caused by partner switching Managerial sensemaking Drivers for hierarchical governance Environmental uncertainty Behavioral uncertainty Information asymmetries Needs to increase internal competences and capabilities Vulnerability to the external partner’s opportunistic behavior Activity is aligned with organizational identity Drivers for marker governance Cost advantages provided by market governance Valuable externally available knowledge or resource complementary that can bring competitive advantages Market governance is possible when the customer is in a position of relative power in the relationship, or there is a dependence symmetry in the relationship (interdependent partnerships) Activity is not aligned with organizational identity Accordingly, the competence conception raises the level of the boundary explanation from the transactional efficiency and cost analysis to the resource portfolio owned by the organization. This means that the focus of the competence conception is on more strategic organizational issues of creating and maintaining the firm’s resources, which in turn relates to improving and sustaining competitive advantage, profitability, and growth (Santos & Eisenhardt, 2005). In addition, the power conception clearly has a strategic emphasis, in the same manner as the competence conception, since both recognize collaborative alliances between firms as non-ownership mechanisms offering access to influence over external forces (power), and externally available resources (competence) (Santos & Eisenhardt, 2005). However, these two conceptions are optimal boundary explanations in slightly different environments. Competence, which stresses access, possession, and deployment of valuable resource configurations, is relevant in competitive environments. Power emphasizing Acta Wasaensia 31 control over strategically crucial external relationships to gain influence and reduce dependence, is the most relevant boundary explanation in environments with well-identified and influential players. This means that the power conception can best be applied in regulated, oligopolistic, or ambiguous environments, and also ambiguous or dynamic environments (Santos & Eisenhardt, 2005). The conception of organizational identity is based on the managerial interpretations of operational environments (Daft & Weick, 1984). Therefore, the boundaries of identity are often unconscious boundaries resulting from the sensemaking of organizational members rather than demarcation lines between organizations created and evolved based on a rational evaluation of alternatives (Santos & Eisenhardt, 2005). Since these boundary choices with organizational members’ emotional attachment are consistent with organizational identity, they are relatively independent of other boundary choices based on rational reasoning. However, since they are not based on a particular rationale or metrics, they are particularly applicable in environments of high complexity or ambiguity, in which other guides for boundary choices might not be available (Daft & Weick, 1984; Tripsas, 2009; Weick et al., 2005). 2.2.6 Relationships between boundary conceptions Relying merely on one conception is rarely enough to explain the boundary setting in reality. This is because firms operating in the high-technology arena are today typically facing challenges around how to integrate the valuable external knowledge opportunities provided by suppliers, while simultaneously protecting themselves against supplier opportunism by limiting dependence. At the same time, managers making boundary decisions are under pressure to keep the cost of relationship governing activities low. In the earlier organizational literature, different boundary explanations were traditionally understood as distinct explanations for boundary choices, and researchers attempted to validate single theories such as TCA or the RBV to explain make-or-buy decisions in different organizational contexts, or regarded these theories as competing alternatives when investigating which one was best able to explain the focal boundary choices (Argyres, 1996; Poppo & Zenger, 1998). However, during the 1990s researchers recognized the complexity of boundary decisions in firms, and also observed that firms actually forge alliances and participate in networks rather than merely making decisions on making or buying (Dyer, 1996; Jacobides & Billinger, 2006; Poppo & Zenger, 1998; Powell et al., 1996). Recently, several scholars have also examined the interdependence and interplay between boundary explanations (Argyres & Zenger, 2012; Poppo & 32 Acta Wasaensia Zenger, 1998). For example, Argyres and Zenger (2012, p.1) argue in the context of comparing the RBV and TCA: “interdependence between these two boundary explanations is so fundamental that bald statements about the relative importance of capabilities or transaction costs for a particular boundary choice lack a logical basis.” Therefore, explaining individual boundary choices should not be based on single theory but rather on the combination of several conceptions. For this reason, exploring relationships among boundary conceptions has been recognized as a new stream of research in the field of organizational boundary theories (Santos & Eisenhardt, 2005). Table 3 summarizes some major relationships and synergies recognized in the literature between organizational boundary explanations. Efficiency and competence conceptions both assume competitive environments, but competence often dominates efficiency because it has greater strategic relevance (Jacobides & Hitt, 2005). This is particularly remarkable in dynamic environments where valuable resources are more germane than governance cost minimization (Jacobides & Hitt, 2005; Yasuda, 2005). However, efficiency conception has been shown to have synergistic relationship with competence conception in areas such as value chains (Jacobides & Hitt, 2005; Santos & Eisenhardt, 2009) and new industry structures. The synergies can be achieved when firm executives use efficiency-based reasoning to reduce governance costs, and in this way free up resources to deploy and internalize strategically more valuable activities (Santos & Eisenhardt, 2005). An organization might also develop resources and then outsource the related activities of low strategic value and that have low governance costs, which in turn frees internal resources for internalizing activities of higher strategic value (Jacobides & Hitt, 2005; Santos & Eisenhardt, 2009). When considering the relationship between efficiency and power, it should be noted that these two conceptions should be applied in different environments: efficiency fits a stable industrial structure with strong price competition well, whereas the power conception applies to ambiguous or dynamic environments with well-identified and influential players (Santos & Eisenhardt, 2005). In these kinds of environments, the role of control on strategic relationships is often viewed as more important than the cost efficiency of single transactions. Moreover, strategic relationships include other actors such as complementing firms and competitors, and institutional players such as regulators, not only industry value chain (buyers and suppliers). However, despite the fact that the power conception focuses on more strategic implications for industry control, power, and efficiency can provide similar boundary explanations on single make- Acta Wasaensia 33 or-buy decisions in stable markets, since from the power view, efficiency is seen as relevant boundary choice (Santos & Eisenhardt, 2005). Table 3. Relationships (upper corner) and synergies (lower corner) between organizational boundary conceptions. Efficiency Competence Power Identity Efficien- cy - Competence tends to dominate efficiency owing to its greater strategic meaning, especially in dynamic environments Control of strategic relationships (Power) is often seen as more important than governance of cost efficiency, especially in ambiguous, or dynamic environments with well- identified and influential players Identity often dominates efficiency-based reasoning in boundary considerations, because efficiency-based boundaries that question taken- for-granted boundaries are not easily accepted among organizational members Compe- tence Minimizing governance costs (efficiency) can help the organization to free up resources to invest in strategically valuable new resources (competence) - Power view te