Buyers
Supplier-specific Supplier-independent
Suppliers openness openness
Buyer-specific capabilities Relationship co-evolution Buyers open new space to specific suppliers and these suppliers develop customer-
specific competences
Buyer-independent capabilities Industry co-evolution Suppliers leverage generally
applicable competences across open business model
customers in different knowledge domains
6.5.3 Dynamic from below and above
These insights suggest that there is a top-down and a bottom-up dynamic that have begun to reinforce each other. It is not possible based on the present empirical information to shed equal light on all the causal mechanisms involved. Yet Figure 6.4 seeks to summarise the interplay between the dynamic from above and below as identified in this study.
A key point is that co-evolution unfolds at the relationship level (unilateral relationship co-evolution) as well as the aggregate level (multilateral industry co- evolution). The information in this study provides stronger evidence of the former than of the latter. To some extent, this reflects the fact that in methodological terms, industry co-evolution is difficult to examine empirically. In order to do this one would need detailed aggregate data on buyer inputs and supplier outputs over a long period. Such data do not exist, partly because of quantitative measurement
problems and partly because buyers are located in many different parts of the world. Yet this study provides certain insights – or hints – into how the dynamic unfolds. Previous chapters showed that relationship co-evolution – often based on a very supplier-specific type of openness on behalf of the buyer – was also associated with a high degree of resource provided by the buyer. Suppliers may benefit passively from information exchange with the buyer, but in relationship co-evolution, the buyer is often an activeprovider of resources (ideas and investments). Over time, however,
the supplier may consolidate buyer-specific competences and develop generally applicable competences (bottom left arrow). This development of new capabilities facilitates – along with a range of other factors – the shift to supplier-independent openness in established firms and the establishment of open start-up firms on the demand side (top right arrow). The analysis in the two preceding chapters showed that relationship-specific as well as supplier-independent openness guide buyer strategies. The material does not provide the basis for determining the balance. Yet it suggests that to some extent relationship-specific co-evolutions may develop, like rings on the water, to include more firms. In this scenario, suppliers leverage widely applicable competences across customers that operate in different domains.
6.6 Conclusion
This chapter examined how suppliers built innovative capability in and around select projects. The existing literature tends to give primacy to regional dynamics. This literature builds on the observation that the global software industry exhibits a location pattern of ‘concentrated dispersion’ (Ernst 2002; Zaheer and Manrakhan 2001). Because software firms are clustered in regions like Bangalore, theory leads us to believe that innovation-enhancing synergy effects can arise. In principle, the adoption of open business models should enhance such dynamics. Such open business models are likely to be accompanied with an organisational decomposition of the innovation process (ODIP), and supply-base clusters can provide the arena for making connections between different types of ODIP which will therefore reinforce each other (Schmitz and Strambach 2009).
Despite the proposition in the theoretical and empirical literature, it was found that ‘local’ sources of capability were of a second order. The evidence suggested that the existence of strong inter-firm linkages in the cluster was not as important as
81 This was exemplified by the ‘Bosch Model’ in which the German supplier of technology and auto parts had achieved a level of dynamism between different units located in Baden-Württemberg which was otherwise normally associated with collaboration between firms.
the literature suggests. Other factors are external to ‘the model’, but they are likely to play a role. The quality of engineering graduates, for instance, influences the long-term ‘upgrading’ of the industry (Patibandla 2006).
It was shown that the concurring attainment and demonstration of new capability was heavily dependent on ‘intrapreneurship’ and knowledge management in and around select projects. This questions the received wisdom which has tended to view this firm-centricity insufficient (Chaminade and Vang 2008b; Vang and Chaminade 2006). NASSCOM argues that ‘ingrained mental models are preventing firms from innovating more’; and one of the perceptions most heavily criticised is that, ‘Collaboration is not really needed in the services space to innovate – firms are better off on their own’ (NASSCOM 2007b:10). This study suggests that the strategies, priorities and practices of leading managers are more effective than commonly anticipated.
Curiously, however, the concept of the local innovation system is useful as a loose metaphor for what goes on inside supplier firms. These firms combine different stocks of knowledge and tailor them to customer needs. This involves labour rotation and joint action between different business units and it gives rise to significant knowledge spillover from project to project. This requires flexible
organisational structures around distinct capability domains and this enables multi- domain suppliers to achieve within the firm what certain clusters achieve between them. Almost 20 years ago, a similar observation was made in a different part of the world. Analysing the importance of flexible specialisation in Germany, Sabel (1989) observed this type of organisation was not only present in regional economies, but also within firms: ‘As large firms reorganise, they try to recreate among their specialised units the collaboration characteristics of relations among firms in the flexible specialisation economies’ (Sabel 1989: 103).81
It is clear from the analysis in the present chapter that global actors play a key role in the emergence of intra-firm innovation systems. In many outsourcing relationships, the supplier benefits because of a high degree of information exchange which arises as an ‘externality’ of the transaction. Of particular
importance to this study is the relatively high level of active involvement or support provided by buyer firms – often so-called alpha customers – in bilateral
relationships. Unlike other industries, intensive interaction is a necessity in certain types of outsourcing. This chapter has shown that active forms of learning and leveraging with and from customers were crucially important.
This chapter has also shown how the dynamic from below has important knock-on effects. It has shown the importance of the supply base in an evolutionary and self-reinforcing cycle. It has unfolded some of the ‘pull’ dynamics by describing some of the direct and indirect feedback mechanisms (back to buyer firms) that were important in this case. The next chapter argues that the dynamic from below is an important element in the shift to new successive phases. Whereas previous research has shown that the development of supplier capabilities has primarily
enabledco-evolution, this report suggest that supplier firms have become one of