The dilemma of Polish

subcontractors - A study of sustaining competitiveness in a

changing environment

Authors: Ewa Chmiel

Johanna Köhnke

Pawel Kuska

Tutor: Dr. Joachim Timlon

Program: International Marketing

Subject: Business Administration

Level and semester: Masterlevel Spring 2008

Baltic Business School

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ABSTRACT

Our interest in this thesis is based on the discussion we had in previous courses about the

development of emerging countries. Since two of the writers of this thesis are from Poland we

tried to found a common interest, hence the relationship between the Polish subcontractors

and Swedish customer is analyzed.

Poland is also known as a low cost country and that make it favorable when it comes about

hiring subcontractors. The subcontractors in Poland are also known for the skills and expertise

to produce quality. Something that is important for many foreign companies. IKEA has more

than 40 subcontractors in Poland; the reason is just the factors mentioned above, to be able to

produce good quality to low cost. (www.ikea.com)

Earlier research indicate that Poland is developing rapidly compare to other emergent

countries in Eastern Europe. There have been and will be changes in the environment that

most likely will affect the competitive advantage that the subcontractors are the leader in. In

other words these changes might lead to that Poland loses its customers which choose other

markets that still are able produce at lower costs.

The main problem for the thesis is to investigate how can polish subcontractors cope with

environmental changes to sustain competitive advantage?

In order to answer this, we used a qualitative approach where the characteristics of a case

study are conducted. We collected and analyzed data in an abductive way. The interviews

with the three Polish subcontractors were made in a semi structure form via telephone. To be

able to solve the above problem an environmental analysis of Poland was done, in order to

found those factors that are mentioned as worries and are likely to change in the future. The

changes are presented from subcontractors’ perspective and recommendation how to cope

with them is given.

Keywords: subcontractors, Poland, furniture industry, environmental analysis, resources and

capabilities, sustain competitive advantage, strategy

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ACKNOWLEDGEMENTS

We would like to take the opportunity to thank our supervisor Dr. Joachim Timlon at Baltic

Business School for his valuable time, knowledge and patient guidance throughout the thesis

writing process.

We would like to thank all of our informants who answered our questions, which have made

to enhance the understanding of the subcontractors’ role in Poland.

Furthermore we would like to express our gratitude to Professor Hans Jansson for his

priceless advices during initial stage of the thesis.

Finally we would like to direct our thanks to PhD students: Mikael Hilmersson for his support

while defining our subject, and Susanne Sandberg for helping out with our interviews.

Baltic Business School, Kalmar, May26th, 2008

Ewa Chmiel Johanna Köhnke Pawel Kuska

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Table of Content

1. INTRODUCTION .................................................................................................................. 5

1.1 Background ...................................................................................................................... 5

1.2 Problem discussion ........................................................................................................... 7

1.3 Problem formulation ........................................................................................................ 7

1.4 Purpose ............................................................................................................................. 9

1.5 Delimitations and explanations ........................................................................................ 9

1.6 Disposition ...................................................................................................................... 9

1.7 Companies background .................................................................................................. 10

2.1 The approach of the thesis .............................................................................................. 12

2.2 Research strategy ............................................................................................................ 13

2.3 Research design .............................................................................................................. 13

2.4 Data collection ................................................................................................................ 14

2.4.1 Primary data ............................................................................................................ 14

2.4.2 Secondary data ........................................................................................................ 17

2.5 Research quality ............................................................................................................. 17

2.5.1 Internal validity ....................................................................................................... 17

2.5.2 External validity ...................................................................................................... 18

3. Theoretical framework ..................................................................................................... 20

3.1 Resources and capabilities.............................................................................................. 20

Resource based strategy ....................................................................................................... 22

The role of changes .......................................................................................................... 22

The role of resources and capabilities .................................................................................. 23

The Institutional model .................................................................................................... 23

Finding drivers of change in an environmental analysis ...................................................... 26

3.4 Competitive advantage ................................................................................................... 26

3.5 Synthesis ......................................................................................................................... 29

4. EMPIRICAL CHAPTER ................................................................................................. 32

4.1 What are your major resources? ..................................................................................... 32

4.2. What are your main capabilities? ............................................................................. 32

4.3. Environmental analysis ................................................................................................. 33

4.3.1 The societal sector ................................................................................................... 33

4.3.2 Organizational fields ............................................................................................... 36

4.4. Identify drivers of change ............................................................................................. 43

4.5. What is your competitive advantage? ........................................................................... 46

5.1 Resources and capabilities.......................................................................................... 48

5.1.2 Classifying capabilities ........................................................................................... 49

5.1.3 Resource based strategy .............................................................................................. 49

5.1.4 The role of change ................................................................................................... 50

5.2 Environmental analysis .................................................................................................. 50

5.2.1 Societal institutions ................................................................................................. 50

5.2.2 Organizational fields ............................................................................................... 50

5.2.3 Industry analysis ...................................................................................................... 51

5.3 Drivers of Change ...................................................................................................... 52

5.4 Competitive advantage ................................................................................................... 53

5.4.1 Establishing and sustaining competitive advantage ................................................ 53

5.4.2 Types of competitive advantage .............................................................................. 54

5.4 Summary of analysis ...................................................................................................... 55

5.4.1 Resources and capabilities ................................................................................ 55

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5.4.2 Environmental analysis ........................................................................................... 55

5.4.3 Competitive advantage ............................................................................................ 56

6. CONCLUSIONS AND RECOMMENDATIONS ............................................................... 57

6.1 Answer to research problem 1 ........................................................................................ 57

6.2 Answer to research problem 2 ........................................................................................ 58

6.3 Answer to research problem 3 ........................................................................................ 59

6.4 Answer to main research problem .................................................................................. 61

6.5 Recommendations .......................................................................................................... 62

LIST OF REFERENCES ......................................................................................................... 64

APPENDIX .............................................................................................................................. 66

Table of Figures

Figure 1. Basic institutional model .......................................................................................... 27

Figure 2. Porter´s five forces model ......................................................................................... 28

Figure 3. Functional classification of organizational capabilities ............................................ 32

Figure 4. Adjusted basic institutional model ............................................................................ 37

Table of Graphs

Graph 1. Pailed wood in mln cubic meteres ............................................................................. 44

Graph 2. Average monthly gross wages and salaries enterprise sector and budgetary sphere 46

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1. INTRODUCTION

In this chapter we present the background of our thesis. By doing this we want to create an

interest to the reader and provide the reader with the main reasons why this topic should be

studied. The background follows by the thesis research problem and ends with the purpose of

this thesis. Delimitation and disposition of the thesis is also presented.

1.1 Background

”Anybody can make a good-quality product for a high price, or a poor-quality product for a

low price. But to make good products at low prices, you need to develop methods that are

both cost-efficient and innovative”.

(http://www.ikea-group.ikea.com)

This quote was the start of this thesis. How it is possible to produce products both at low

prices and secure good quality. We further discuss this citation and since we have interest in

the Polish market and are familiar with the environmental changes this quote become the very

start of a long thesis process.

Our chosen topic how the subcontractors within the furnish industry in Poland can sustain

their competitive advantage is important to study out of three main reasons.

1. Enhance the understanding and high-light the vital need of creating a sustainable

competitive advantage to survive in a changing market.

2. Improve the knowledge about the Polish market and its characteristics that make

Poland a demanded market and its subcontractors an important sector.

3. Create an understanding how an awareness of the changes in the environment has to

be observed to sustain competitive advantage.

Enhances the understanding and high-light the vital need of creating a sustainable

competitive advantage to survive in a changing market, in other words, why firm need to

change their strategies in a changing world. To sustain competitiveness is a great concern for

every company. Making money in business requires establishing and sustaining competitive

advantage. Especially now in this age of global competition while the business environment is

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becoming more dynamic, companies need to develop strategies that could help them to stay

competitive. As competition has intensified across almost all industries, very few industries

environments can guarantee secure returns. To establish a competitive advantage is getting

more important than locating in an attractive industry (Grant, 2008).

Improve the knowledge about the Polish market and its characteristics that make Poland a

competitive market and its subcontractors an important sector. Poland is developing

dynamically; it is a stable economy, a member of the EU, which for Polish companies means

the access to the world`s biggest free market area. At the same time, Poland is a country of

much cheaper, but skilled and educated workforce. Finally, Poland is the biggest of the new

EU member states, with the biggest workforce resources, the most considerable scientific and

legal potential, and 38-million consumer market. All these advantages make Poland the most

attractive location for investment in Europe, both in the area of production and the services.

In many sectors, Polish manufacturing is much more competitive than e.g. Chinese. This

applies mainly to such sectors as: electric house appliances, metal products, automotive,

furniture. The reason for competitive advantage lies i.e. in the proximity of Poland to one of

the most important consumer markets – the EU, which also influences the costs of

transportation (http://www.business.gov.pl/Life,expenditures,78.html).

Due to the globalization the competition become more intense; to succeed it is of importance

to work with the most effective subcontractor. Companies use subcontractors in the parts of

the world where the labor costs are smaller and it is cheaper to by components to the

production (Hermansson, 2008).

Create an understanding how an awareness of the changes in the environment have to be

observed to sustain competitive advantage. Environments are hard to analyze and predict, as

they are perceived as being complex because they contain a lot of different factors that are

unfamiliar to decagons makers and are therefore hard to comprehend (Jansson, 2007). That is

why there is a need for an analysis of the industry environment in order to perceive what

forces influence the competitiveness or which forces change the advantage in a particular

industry or country.

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This background about competitive advantage, the vital role of subcontractors to the firms and

rapid development of Poland bring us to the problem discussion of this thesis.

1.2 Problem discussion

Poland is a market which has a great potential for Swedish firms. Poland has since 1984

developed to a market economy with higher GDP-growth than many other EU-members.

Comparisons to the old EU members the Polish producers have a competitive advantage in

price and costs. They are able to produce the chosen product cheaper than it is possible in

Sweden and still provide high quality. Many Swedish firms move their production and use

subcontractors in Poland because of these advantages. Unfortunately Poland is getting more

expensive due to environmental changes and countries like Ukraine and Bulgaria are

becoming the leader in low cost production. (swedishtrade.se)

Across the Eastern countries that have moved into the European Union, Poland will have

quite a big battle on to attract investments because labor rates have to rise. If they rise faster

than in countries that compete with Poland, Ukraine, Romania and Bulgaria, investors will

just go to those countries, rather than come to Poland. It will affect inward investment and it

will make Polish commodities more expensive on the global scale

(http://www.bieurope.com/cgi-bin/page.pl?pageId=816).

Earlier research showed that the rapid development in Poland may make that the cost

advantage decrease and Swedish firms might be seeking the subcontractors somewhere else.

Due to this environmental change firms are in need to recognize suitable areas where they can

maintain and create a competitive advantage.

1.3 Problem formulation

The above discussion leads us to the main problem of the thesis.

How can Polish subcontractors adapt to environmental

changes in order to sustain their competitive advantage?

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The problem is further divided into three research problems:

To understand and be able to provide recommendations there is a necessity to describe on

what Polish subcontractors currently base their competitive advantage. This will be the

starting point for further discussion concerning characteristics of and changes within external

environment and its influence on subcontractors:

The purpose of the research problem number two is to identify what kind of external factors

in the changing environment influence the subcontractors most. An environmental analysis is

required, here using the institutions approach. After analyzing these factors we are able to

move to the research problem number three:

Research Problem 2.

How does the Polish market look like and how is

it changing?

Research Problem 1.

What is Polish subcontractors current source

of competitiveness?

Research Problem 3.

What are the consequences for the Polish

subcontractors and their source of

competitiveness?

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In this research problem we are going to discuss the results of the influence of the identified

factors on the Polish subcontractors resource base.

1.4 Purpose

The purpose of this thesis can be summarized into following points:

Describe the current competitive advantage of the Polish subcontractors based on their

resources and capabilities.

Analyze the environment and identify the factors which have the biggest impact on

subcontractors’ resources and capabilities due to the changes.

Provide recommendations how Polish subcontractors can sustain their competitive advantage

in order to keep their position on the market.

1.5 Delimitations and explanations

Due to limits in time and resources a few limitations needed to be done.

• We would like to narrow our research area to the subcontractors within the

furniture industry in Poland.

• The subcontractors we interviewed have one major customer in common, IKEA.

• Interviews were conducted through the telephone.

• Our chosen subcontractors are dealing with the production.

1.6 Disposition

• Chapter 1. In the first chapter we introduce the background of our thesis. To clarify

our purpose we also present our research problem that is divided into three sub

problems. Delimitations and explanations are also introduced.

• Chapter 2. In this chapter our methodology is presented, such as research approaches,

design and quality.

• Chapter 3. This third chapter includes the theoretical framework that helps us to

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answer our research problems and increase the understanding of our subject.

• Chapter 4. Here we present our empirical findings. Based on primary and secondary

data an environmental analysis is made. Also the findings we received from the

interviews about the subcontractors’ current situation.

• Chapter 5. The fifth chapter includes the analysis we made from our empirical and

theoretical findings.

• Chapter 6. The conclusion is presented in this chapter. The aim is to answer our

research problems. Further on we will provide recommendation how subcontractors

are able to sustain their competitive advantage.

1.7 Companies background

The subcontractors we interviewed chose to be anonymous in our thesis. All the information

concerning IKEA has been collected from secondary data.

Subcontractor A is one of the top Polish manufacturers of small garden architecture and

large size building structures from glued wood. It has three production institutes in Poland in

which over 300 000 m3

of wood is processed.

Subcontractor B is present on the furniture market since 1967. It produce chairs, armchairs

and tables, however production range keep growing. Company specialized in garden oiled

furniture production.

Subcontractor C is one of the biggest chair manufacturer in Europe and one of the leading

companies in this sector in the world. Company X connects high technology with

contemporary design, at the same time saving the balance between tradition and modernity.

Customer: All case companies have one major customer, IKEA, in common. It is important

to describe it here because majority of production is dedicated to satisfy IKEAs orders.

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The main factors that drive IKEA`s way of doing business and at the same time are the reason

why it cooperates with Polish subcontractors are:

Quality home furnishing products at affordable prices

Low prices are the cornerstone of the IKEA vision, business idea and concept. The basic

thinking behind all IKEA products is that low prices make well-designed, functional home

furnishings available to everyone.

They are constantly trying to do everything a little better, a little simpler, more efficiently and

always cost-effectively. All IKEA units play an important part in creating their low prices

which then they are able to offer their customers.

Distribution and purchasing

The IKEA Group has 31 distribution centers in 16 countries, also in Poland, supplying goods

to IKEA stores, and 45 trading service offices in 31 countries. This enables them to develop

close relationships with their 1,350 suppliers in 50 countries. (www.ikea-group.ikea.com)

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2. METHODOLOGY

The aim for this chapter is to present the methods and approaches we used in our research. It

starts with which approach we used for our thesis, followed by the research strategy design

and data collection. In the end a discussion about the quality of the thesis is introduced.

___________________________________________________________________________

2.1 The approach of the thesis

The structure of the thesis is determined of the chosen methodology. The approach can be

either quantitative or qualitative depending on the way the research question is asks. The

research question in a qualitative study is a statement that identifies the phenomenon to be

studied (Corbin, 1998).

Qualitative research means any type of research that produces findings not arrived by

statistical procedures or other means of quantification (Corbin, 1998). Basically there are

three major components of qualitative research. The first component is data which come from

various sources such interviews, observations, documents, records and films. The second

components are the procedures that researches can use to interpret and organize the data. That

includes for example sampling. The third component is written and verbal reports, as articles

or books (Corbin, 1998).

According to Merriam (1998), qualitative research is a concept that helps us to understand and

explain the meaning of social phenomena with as little disruption of the natural setting as

possible. Qualitative researches are interested in understanding the meaning people have

constructed. The key concern is to understand the subject of interest from the participants’

perspectives not the researches.

Due to our research problem we want to create an understanding of the problem and explain

the causes behind the phenomenon. Since we are collecting our data from interviews and

books we feel that the qualitative approach is best suited to our thesis.

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2.2 Research strategy

Based on our thesis approach there are few strategies to consider before conducting the

research. The major one are, according to Yin (2003), experiment, survey, archival analysis,

history and case study. Each one of them represents certain way of collecting and analyzing

data and is relevant in different situations. In order to decide which strategy suits best the

analyzed situation should start with defining the types of research questions. Next step is to

define the extend of control the investigator has over the events and the degree of focus on

contemporary as opposed to historical events.

Yin (2003) continues with that a situation where the posed questions are how and why, the limited

control the researcher has over events and when the focus is on a phenomenon within its real-life

context, the preferred research strategy is the one of case study.

Yin (2003) defines a case study as:

“Investigates a contemporary phenomenon within its real-life context: when the boundaries

between the phenomenon and context are not clearly evident: and in which multiple sources of

evidence are used”.

Adapting a case study the questions what can be seen as a case occur. It can be a group, an

organization or a situation. The aim is to explain, understand or describe a certain area.

Based on our research area where we want to investigate, understand and describe a situation

a case study is best suited. There is a need or multiples sources of evidence to fulfill our

purpose. We needed to collect data from interviews and secondary data to be able to answer

our research problem.

2.3 Research design

The research design functions as a basis for the methods used to collect and analyze the data.

There are three approaches how to do this, deduction, induction and abduction (Fisher, 2004).

The author continues with using the deductive design the researcher bases the arguments on

certain theories and literature within the research area. The arguments are the logic conclusion

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from the general laws. The advantages by using a deductive approach are that the objectivity

in the research strengthens since it is based on existing theory. The disadvantage is then that it

can be hard to explore new information. Induction is the opposite situation where the

arguments are made on the base of experience and they are transferred into general rules. The

researcher assumes that observed situation is highly probable to happen in the future (Fisher,

2004). The abductive approach can be seen as a combination of deduction and induction in

order to maximize the advantages and reduce weaknesses of both approaches. The abductive

way of collecting data the researcher starts from an inductive approach and later turns into a

deductive approach. The advantage of this approach is that the researcher´s work be more

open and are not so strictly forced into one way of thinking. The disadvantage is that most of

the time the researcher allready has an understanding or experience of the study and in that

way it can be hard to start completely in an inductive way.

Due to the need of constant change of receiving the information to our study an abductive

approach is chosen. We used an abductive approach when collecting and analyzed our data.

Therefore will our discussion be open for new information and during the data collecting can

create new ideas and solutions.

It is important to point out that all ready had knowledge and in some way experience of our

research area. Through earlier research we created an awareness of our research problem and

what we might found. Due to this pre knowledge we tried to be objective so a deeper

understanding and findings could be found and collected.

2.4 Data collection

There are two ways of collecting data. Using primary or/and secondary sources. Both ways

are important for our research. We decided to make interviews as the primary data in addition

to various related theory and other document as the secondary data. The process of collecting

both the primary and the secondary data is explained below.

2.4.1 Primary data

Primary data is based on sources that have not been used before. Primary data refers to raw

data and data structures that have not yet had any form of meaningful interpretation. It is

15

about discovering something new (Fisher, 2004). The most common exploratory qualitative

methods to collect primary data include interviews, observations, panels and questionnaires.

We have been using interviews to collect our primary data. Having interviews is necessary

and the only way for us to understand our research area and receive the answers we need.

Interviews Interviewing is a common way of collecting qualitative data. In all forms of qualitative

research, some and occasionally all of the data are collected through interview (Merriam,

1998). The main purpose of an interview is to obtain a special kind of information. The

researcher wants to find out what is “in and on someone else`s mind”.

Yin (2003) argues that, interviews are an important source of information. The author means

that during the interview, the interviewer need to concentrate on two things: 1) to follow one’s

own line of inquiry, as reflected by the case study protocol; and 2) to ask the questions in an

unbiased manner that also achieves the needs of one’s line of inquiry.

Interviews may be highly structured, semi-structured or unstructured (Merriam, 1998).

Interviewing in qualitative investigations is more opening ended and less structured. A less

structured alternative is the semi-structured. In other words the semi-structured interview is a

mix of the two mentioned above. In this type of interview the questions are more flexible but

they are still following a guided list with questions. In this way the interviewer and the

respondent will be more open to new ideas on the topic. This kind of interview is good when

the researcher do not know enough about the subject.

In our thesis, the semi-structured interview has been chosen, based on a number of factors.

Although the questions were written out on beforehand, there was the possibility, to a certain

degree, of being flexible once conducting the interview. Many of the questions were therefore

open-ended and rather broad in its structure, since it was desired that the interviewees would

expand on the topics and issues.

The initial contacts with the potential interview candidates were made by sending an email

with all the basic information concerning which who we are the background about our

research area, our research problem and the focus of our thesis. In the next step we contacted

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our interviewees in order to confirm their participation in our research. In the end we

proposed a telephone interview to make them ready for our call.

Each of the interview took approximately 45 minutes. Our respondents received questions

before the interview so they were familiar with the purpose of the research and had a chance

to prepare the most updated answers. As the questionnaire had a semi-structured form we

were allowed to ask more questions in order to gain deeper and wider problem analysis.

We recorded the interviews so we could go back and listen to them later. This was also

necessary since there was a need to translate the interviews from Polish into English.

Since the all the interviews were conducted over phone the ability to free discuss the

questions was limited. The interviews was followed in order of the questions and expanded in

those areas the interviewees had an interest in. That is the reason why few areas of the

questions are more developed than other in the interviews.

An interview conducted face to face is recommended, but due to time and distance the choice

of phone interviews was necessary. We feel that we still collected the information that was of

importance to our study.

Sampling A statistical procedure for finding cases to study. Sampling has two functions, it allows you to

feel confident about the representativeness of your sample and such representativeness allows

you to make broader inferences. According to Fisher (2002), the number of samples is a

critical matter. The purpose is to obtain a result that is representative for the whole population

without interviewing each member.

The chosen interviewees were picked in order to help and enhance the information to our

research problem. We started with narrowing our subject to Polish subcontractors cooperating

with the same company in Sweden within the furniture industry. In our next step we built the

sampling frame of names and telephone numbers of all the companies in the appropriate

population, in this case a furniture industry. In order to receive a representative sample we

contacted random companies from the list until we had the proper number of samples. Thanks

to such an approach each company has an equal chance of being included in the sample. In

order to collect the most appropriate results we contacted managers from certain departments.

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2.4.2 Secondary data

Secondary data is based on sources that have already been reported. It concerns scientific

concepts and theories published in books, articles, journals, the internet as well as analysis of

company performance based on annual reports. The purpose of secondary data is to broaden

the subject perspective and improve the quality of the research (Fisher, 2004).

We have collected data from various books, articles, journals, reports and official web-pages

related to our research problem. We consider these data to be helpful complement in our study

so that we can gain enhance our knowledge about the subcontractors and environmental

changes before conducting the interviews and a help to answer our research problem.

2.5 Research quality

In qualitative research, the reader often has to depend on the researcher’s description of what

is being researched. A result is trustworthy when there has been some accounting for their

validity and reliability. These aspects underlie the quantitative research so it takes different

forms in the qualitative research (Merriam, 1998). Ensuring validity and reliability in a

qualitative research involves conducting the investigations in an ethical manner. Yin (2003)

mentions several of ways that can be used to establish quality of any research.

2.5.1 Internal validity The internal validity refers to if an investigator is trying to determine whether one event led to

another event (Yin. 2003). Merriam (1998) argue that internal validity deals with the question

of how research findings match reality. In the qualitative research is that reality is holistic,

multidimensional and ever-changing. In the primary collection of data the interpretations of

reality are accessed directly through observations and interviews. When reality is viewed in

this manner internal validity is a definite strength of qualitative research.

The author continues with that are several factors that can enhance the internal validity. For

us the following factors are relevant.

Triangulation- where using multiple investigators or multiple sources of data that confirm the

findings.

Peer examination- asking someone else to comment the findings the researcher makes.

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In order to improve our internal validity we used various sources of information. We

interviewed different companies within furniture industry. We also contacted certain

departments of the companies to collect the most valid data from specialists. We ask similar

questions in our interviews to find out if we receive the same answers. A deep environmental

analysis was based on different sources of secondary data; we used statistics, articles, books

and web pages to improve our knowledge so we could use it as a foundation for our analysis

and confirm our findings. We have been supervised by people that have knowledge in the

subject that also give this thesis a high level of validity.

2.5.2 External validity The external validity refers to establishing the domain to which a study´s findings can be

generalized (Yin, 2003). Merriam (1998) claims that external validity is concerned with the

extent to which the findings of one study can be applied to other situations. The author

continuous that the issue of generalize ability centers on whether it is possible to generalize

from a single case and so in what way.

We have not tested this study in other situations and that is why we cannot generalize our

findings. On the other hand since the subject concerns a small part of the subcontractor sector

matched with a deep environmental analysis the research can be further discussed and

developed in similar areas.

2.5.3 Reliability Silverman (2005) defines reliability as the degree of consistency with which instances are

assigned to the same category by different observes or by the same observer on different

occasions. In other words if the study is repeated will there be the same results (Merriam,

1998). Yin (2003) claims that the emphasis is on doing the same case over again, not on

“replicating” the results of one case by doing another case study. The author continues with

that reliability is about to minimize the errors and biases in a study.

Since there are so many interpretations of what is happening there is no benchmark by which

to take repeated measures and establish reliability in the traditional sense (Merriam, 1998).

What it is of importance to point out the connection between the reliability and internal

validity. From a traditional perspective is more valid if there are repeated observations have

resulted in same outcome. In a qualitative research the question is not about if the findings

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will be found again, but whether the results are consistent with the data collected (Merriam,

1998).

There are several techniques to ensure that results are dependable.

The investigator´s position- the investigator should explain the assumptions and theory behind

the study, his or her position the group being studied, and the basis for selecting informants

and description of them, and the social context from which data were collected.

Triangulation- especially in terms of using multiple methods of data collection and analysis,

triangulation strengthens reliability as well as internal validity.

Audit trail- in order for an audit to take place, the investigator must describe in detail how

data were collected, how categories were derived and how decisions were made throughout

the inquiry.

All of our respondents were familiar with the subject of our research. In order to increase the

reliability of our studies we use the same questionnaire in every interview. We provide our

respondents with questions their native language. We have been using tape recorder while

interviewing in the companies to avoid the risk of misunderstanding the answers while

translating them into English. We were also aware that our research might be influenced by

the issue that the interviews was held in different language than the language of the thesis.

However, thanks to that we might be able to access information we would have not received if

the interview was in foreign language.

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3. THEORETICAL FRAMEWORK

In this chapter we present the theoretical framework for our thesis. This include theories that

provide us with knowledge necessary to build foundations for answers to our research problems.

Since in our first research sub-problem we are going to answer what is Polish subcontractors

current source of competitiveness the theory concerning resources and capabilities is

provided. Then to analyze the Polish market we use the institutional model and Porter`s five

forces model. In order to answer the second research sub-problem we use institutional model

and for the third one the theory connected with the competitive advantages. With the

theoretical background gained in this chapter we will be able to start building the answer to

our main research problem which is: how can Polish subcontractors adapt to environmental

changes in order to sustain their competitive advantages?

___________________________________________________________________

3.1 Resources and capabilities

According to Grant (2008) resources are the productive assets owned by the firm; capabilities

are what the firm can do. It is important to point out that resources does not give competitive

advantage, they have to work together to create organizational capabilities.

There are three types of resource: tangible, intangible and human. The tangible consist of

financial and physical resources. The intangible are technology, reputation and culture. The

human includes the skills, know-how, capacity for communication and collaboration and

motivation. As mentioned earlier resources are not productive on their own, they have to work

together with other resources. An organizational capability is a “firm capacity to deploy

resources for a desired end result”. Grant (2008) discuss further that the interest is to find

which capabilities can provide a basis for a competitive advantage.

Classifying Capabilities

To identify a firm`s capabilities, we need to have some basis for classifying and

disaggregating its activities. In this Master Thesis a functional analysis is being used. A

functional analysis identifies organizational capabilities in relation to each of the principal

21

functional areas of the firm. The table below classifies the principal functions of the firm and

identifies organizational capabilities pertaining to each function, Grant (2008).

A functional classification of organizational capabilities

Functional area Capability

CORPORATE

FUNCTIONS

� Financial control

� Strategic management of multiple

businesses

� Strategic innovation

� Multidivisional coordination

� Acquisition management

� International management

MANAGEMENT

INFORMATION

� Comprehensive, integrated MIS network

linked to managerial decision making

RESEARCH &

DEVELOPMENT

� Research

� Innovative new product development

� Fast-cycle new product development

OPERATIONS � Efficiency in volume manufacturing

� Continuous improvements in operations

� Flexibility and speed of response

PRODUCT

DESIGN

� Design capability

MARKETING � Brand management

� Promoting reputation for quality

� Responsiveness to market trends

SALES AND

DISTRIBUTION

� Effective sales promotion and execution

� Efficiency and speed of order processing

� Speed of distribution

� Quality and effectiveness of customer

service

22

Resource based strategy

According to Grant (2008) the strategy can be seen as a link between the firm and its

environment. The firm embodies three sets of element which are: goals and values, resources

and capabilities and structure and systems. The industry environment represents the core of

the firm´s relationship with its customer, competitors and suppliers. Grant (2008) continues

with that the task of the business strategy is then to determine how the firm will deploy its

resources within its environment so it can satisfy its long-term goal, and how to organize itself

to implement that strategy.

Grant (2008) claims that the strategy needs to be consistent with the firm´s external and its

internal environment. In a turbulent environment strategy must embrace flexibility and

responsiveness. When the firm is surrounded of threats and new opportunities are appearing

then the strategy becomes a vital tool for the firm.

The role of changes

Grant, (2008) claims that competitive advantage emerges when change occurs. The source of

the change may be external or internal to the industry. The author continues that for an

external change to create a competitive advantage, the change must have differential effects

on companies because of the different resources and capabilities. The impact of external

change also depends on firm´s ability to respond to change. As markets become increasingly

turbulent the responsiveness to external change has become more important as a source of

competitive advantage. As an industry evolves, companies must adjust their strategies and

their capabilities to shifting key success factors. Grant (2008) further discuss that the

responsiveness to the opportunities provided by external change requires on key resource-

information which is necessary to identify external change, and one key capability- flexibility.

The faster a firm can respond to changing market circumstances the less it needs to forecast

the future. It can be done by being aware of “early warning system” through direct

relationships with customers, suppliers and competitors.

Grant (2008) further discuss that competitive advantage may also be internal, in other words

innovation. That will say create value for customers from novel experiences, products,

product delivery or bundling.

23

The role of resources and capabilities

Strategy is concerned with matching a firm´s resources and capabilities to the opportunities

that arise in the external environment.

Since competitive advantage has become the primary source of superior profitability in the

unstable environment the resources and capabilities within a firm has been vital to work with.

In other words the greater the rate of change in a firm´s external environment the more likely

it is that internal resources and capabilities will provide a secure foundation for a long term

strategy (Grant, 2008). Internationalization has increased competitive pressure within most

sectors. Establishing competitive advantage through development and deployment of

resources and capabilities has become a primary goal for strategy.

3.2 The institutional network approach

Analyzing the environment can be done through an institutional network approach (INA).

Jansson (2007) claims that being combined in the INA, it provide an approach to interpreting,

understanding and managing the external environment. It also makes it possible to uncover

the societal organ of the information.

By using the institutions model events, trends and patterns are analyzed. Knowledge is created

through analysis, which is done by finding patterns in the external environment of relevance

to the business strategy and analyzing the structural factors behind this pattern (Jansson,

2007).

The Institutional model

The basic structure of institutions consists of groupings segmented into different societal

levels which are embedded in each other.

The institutional model is divided into three levels of description for the rules: micro

institutions, meso institutions and macro institutions (Jansson, 2007).

24

These basic types of societal organizations affecting the company or the sector are segmented

into two major grouping or institutional systems, organizational fields and societal sectors.

Organizational fields are described at two levels, at the micro institutional level, specific

within the organizational field, for example the sector's major customers, product and market.

The other one is government which consists of ministers and authorities that share common

frames of references and ways of acting typical for this field. The macro level is defined as

societal sector.

Figure 1. The basic institutional model (2007)

The societal sector creates a foundation of the market. All these influence the company

indirectly but are important to consider while developing the strategy. The societal sector and

the organizational field linked together create specific country environment organized as an

institutional framework. It is of importance to point out that the parts that being analyzed

should be relevant to purpose of the analysis (Jansson, 2007).

The organizational fields consist of the labor market, product/service market, government

and financial markets. These institutions influence the company directly and create formal

rules, which are a result of influence from societal institutions.

The Company

Business mores Professional and interest associations

Societal sector Country culture Educational/training system

Government

Product/service market

Family/

clan

Religion

Political

system

Legal

system

Financial market

Labour

market

Organizational fields

25

3.3 Porter`s 5 Forces Model

These five forces include three sources of horizontal competition: Competition from

substitutes, entrants and established rivals. Two vertical sources of competition are also

shown: the power of suppliers and power of buyers.

Figure 2. Porter´s five forces of competition framework (2008)

Rivalry Between

Established

Competitors - concentration

-diversity of

competitors

- product

differentiation

- excess capacity and

exit barriers

Institutions model

-capital requirements

-economies of scale

-absolute cost

advantage

-product differentiation

-access to channels of

distribution

-legal and regulatory

barrier

Threat of Substitutes The Threat of Entry

- buyers’ propensity to

substitute between

alternatives

- the existence of close

substitutes

Buyers` price

sensitivity - cost of purchases as

%

of buyer’s total costs.

- differentiation

- intensity of

competition between

buyers

Relative bargaining

power - size and

concentration of

buyers relative to

sellers

- buyer’s information

- ability to backward

integrate

Power of Buyers

Factors determining power of suppliers relative to

producers; they are symmetric to those

determining power of producers relative to

buyers.

Power of Suppliers

26

Finding drivers of change in an environmental analysis

The process of finding drivers of change starts by approaching the environment from the

perspective of the sector inside out mode. The purpose is to determine the most critical

structural factors of the environment influencing the subcontractor; these are defined as key

factors for future success for example the next five years. They are coming from both

secondary and primary data, both from a combined analysis of the environment and the

sector. The aim is to divide them into two groups. Key factors that are possible for the sector

to influence and key factors that are impossible for the sector to influence, Societal and

organizational fields. The findings of the factors that are essences of each institution are

crucial for future success for the sector (Shoemaker, 1995).

The author continues with that the next step is interviewing people in various positions to find

out how they imagine these factors will look like for the companies in the future. After that

return to the environment and study the key factors by deepening the environmental analysis

we started on earlier. The purpose is to describe further the institutions identified through

these key factors and target ones relevant to the organizational fields related to the factors

impossible to influence. An important part of this process is to broaden the analysis of the

environment in order to look for factors or institutions that might be important for future

development.

The aim for this process is to extract those institutional factors that are a source of change.

3.4 Competitive advantage

“When two or more firms compete within the same market, one firm possesses a competitive

advantage over its rivals when it earns a persistently higher rate of profit”.

(Grant 2008, p205)

As competition has intensified across almost all industries, very few industry environments

can guarantee secure returns. The goal is then to establish a position of competitive advantage

for the firm (Grant, 2008). According to Grant (2008) a competitive advantage may not be

revealed in higher profitability, a firm may abstain from current profit favor of investments in

market share, technology, customer loyalty or executive advantages.

27

Establishing competitive advantage

According to Grant (2008) for a resource o capability to establish a competitive advantage,

two conditions must be present: scarcity and relevance. If a resource or capability is widely

available within the industry, then it may be essential to compete, but it will not be a

sufficient basis for competitive advantage. A resource or capability must be relevant to the

key success factors in the market.

Sustaining competitive advantage

Profiting from competitive advantage requires that the firm first establishes a competitive

advantage, and then sustains it competitive advantage long enough to reap the rewards (Grant,

2008). The competitive advantage in production markets requires complex combination of

resources and capabilities. The greater heterogeneity of firms´ resources and capabilities the

greater is the potential for competitive advantage.

According to the author how long the advantage is sustained depends on whether resources

and capabilities are durable. Since some resources are more durable than others and that leads

to a secure competitive advantage, and whether rivals can be imitated. Resources are imitable

if they are transferable or replicable. That will say the extent to which they are mobile

between companies. Sources of immobility include geographical immobility of natural

resources, large items of capital equipment and some types of employees. Imperfect

information regarding the quality and productivity of resources creates risk for buyers. In

other words the hiring decisions are based on little knowledge how the person is going to

perform. The organizational capabilities are also immobile since they are based on team’s

resources. The dependence of the team in a wider network of relationships and corporate

culture may create difficulties for recreating the capability in the new company. Finally, If a

firm cannot buy a resource it has to build it otherwise it would be very hard to remain

competitive.

Types of competitive advantage

Competitive advantage can translate into profit potential in two ways (Porter, 1985). Cost

advantage and differentiation advantage.

28

Cost advantage means that the firm can supply an identical product at a lower cost. It creates

a unique low-cost way of making the product available. This allows the supplier to make

available a competitively priced product, with some additional margin left to enhanced profits

in other words cost leaderships. Grant, (2008) explain that cost leaderships require that the

firm must find and exploit all sources of cost advantage.

Differentiation advantage occurs when, according to Grant, (2008) it provides something

unique that is valuable to buyers beyond simply offering a low price. Porter, (1985) claims

that to create a differentiated product the characteristics of which cannot match the

competition, and for which the customer is prepared to pay a superior price, the profit

potential derives from price premium.

Grant (2008) discuss that differentiation is concerned with a firm´s positioning within a

market in relation to the product, service and image that influences the customer´s choice.

Differentiation is concerned how a firm competes, the ways it can offer uniqueness to its

customer. Such uniqueness might relate to consistency, reliability, status, quality and

innovation.

Successful differentiation involves matching customers´ demand for differentiation with the

firm´s capacity to supply differentiation. In other words successful differentiation is to

understand the customers. It also depends on a firm’s ability to offer differentiation. To

identify the firm´s potential to supply differentiation a need to examine the activities the firm

performs and the resources it has access to be necessary is the drivers of uniqueness. They are

product features and product performance, complementary services, intensity of marketing

activities, technology embodied in design and manufacture, the quality of purchased inputs,

procedures influencing the conduct of each activity, the skill and experience of employees,

location and the degree o vertical integration.

The Drivers of Uniqueness

Differentiation is concerned with the provision of uniqueness. A firm’s opportunities for

creating uniqueness in its offerings to customers are not located within a particular function or

29

activity, but can arise in virtually everything that it does. Michael Porter identifies a number

of drivers of uniqueness which are decision variables for the firm:

Product features and product performance.

Complementary services (e.g., credit, delivery, repair).

Intensity of marketing activities (e.g., rate of advertising spending)

Technology embodied in design and manufacture.

The quality of purchased inputs.

Procedures influencing the conduct of each activities (e.g., rigor of quality

control, service procedures, frequency of sales visits to a customer).

The skill and experience of employees.

Location (e.g., with retail stores).

The degree of vertical integration (which influences a firm’s ability to control inputs and

intermediate processes).

According to Grant (2008) the two sources of advantage define two different approaches to

business ideas. A firm that competing on low cost is distinguishable from a firm that

competes through differentiation in terms of, market position, resources and capabilities and

organizational characteristics. Cost advantage is highly vulnerable to unexpected sources and

to new technology and strategic innovation. Hence sustained high profitability is associated

more with differentiation than cost leadership.

3.5 Synthesis

Aim of synthesis is shortly answering to the research questions stated in the first chapter. The

answers are based on the theoretical framework.

1. What is Polish subcontractors current source of competitiveness?

30

• Resources and capabilities of the firm are the source of its competitiveness. By

identifying three principal types of resources: tangible, intangible and human

resources we will find out about Polish subcontractors current state of resource base.

• Because resources are not productive on their own, and to perform a task a team of

resources must work together the key issue are organizational capabilities. To be

competitive a firm needs to have many different capabilities in different areas of its

activity. Resources and capabilities are very important as they are the source of firm`s

profit. If we know a firm resources and capabilities we can define its competitive

advantages.

• As we already know the Polish subcontractors can supply their customers with an

identical product at a lower cost. This is the starting point for our thesis, that is why

we can answer that they are competitive because of the cost advantage.

2. What does the Polish market look like and how is it changing?

• By using institutional model we are able to describe the Polish market. By defining

different factors in the societal sector and in the organizational fields we are able to

observed what influence this factors have on the subcontractors. What is more, by

analyzing the environment we can determine the drivers of change. These factors have

the biggest influence on the subcontractors.

• By using Porter`s 5 forces model we gain information about the furniture industry. As

there are many features that determine the intensity of competition and level of

profitability we are going to use this model to describe the current state of industry.

We are going to focus on the competition from established rivals, competition from

substitutes, competition from entrants, the bargaining power of suppliers and buyers.

By doing this we know how the relations between the actors in the industry look like.

3. What are the consequences for the Polish sub-contractors and their current source of

competitiveness?

31

• To stay competitive a firm needs to know how to establish a new competitive

advantage. A firm needs to have two conditions present for a resource or capability to

establish a competitive advantage, which are: scarcity and relevance.

• Of key importance for every firm is not only establishing the competitive advantage

but also sustaining it. A company`s ability for sustainability depends on whether

resources and capabilities are durable and whether rivals can imitate the competitive

advantage.

• As the consequence companies may have to turn from the cost advantage to the other

type of a competitive advantage. This can be a differentiation advantage. By

differentiating itself from its competitors and providing something unique a firm can

stay competitive. The uniqueness can concern tangible and also intangible

characteristics. A company can compete for example with the performance of the

product or service.

Below we present a model which consists of our research questions and the theory that we

use. The aim of it is to present how research questions relate to each other and to the

theory.

Research Problem 1

What is Polish subcontractors

current source of

competitiveness?

• Institutional model:

- Societal sector

- Organizational fields

• Porter`s 5 forces model

• Establishing competitive advantage

• Sustaining competitive

advantage

• Differentiation advantage

Research Problem 2.

What does the Polish market look

like and how is it changing?

Research Problem 3.

What are the consequences for

the Polish subcontractors and

their source of competiveness?

How can Polish subcontractors adapt to environmental changes in order to sustain their

competitive advantages?

• The resources of the firm

• Organizational capabilities

• Cost advantage

32

4. EMPIRICAL CHAPTER

This chapter presents our empirical findings. First the current state of subcontractors

resource base as well as their capabilities are introduced. Then the environmental analysis is

conducted. We present the parts of the different institutions in Poland that are of importance

to the subcontractors. Then interviews are presented in a way that follows the structure how

do our companies feel about the institutions. Finally the companies’ competitive advantages

are described.

4.1 What are your major resources?

For company A the employees are the main strength. Moreover company claims that the own

research laboratory and well equipped park machine are of great importance.

Company B says that the most important resources are its employees together with the

modern machinery park, which is crucial while dealing with mass production of different and

constantly changing patterns of goods.

According to C, the company position in the market was achieved due to their modern

technology. Company connects this technology with contemporary design; at the same time

keep the balance between tradition and modernity. C continues with that the main resource is

qualified employees.

All interviewed companies stress that human resources play the crucial role in the companies'

performance. Without employees and their skills companies would not be able to achieve

their current position. However human resources are not enough to provide company with

decent profit in this industry. Tangible resources like modern machinery parks were

mentioned as vital by all of our interviewees. Companies notice as well the importance of the

intangible resources and the role of Research and Development department in improving

company's performance.

4.2. What are your main capabilities?

33

All interviewed subcontractors are aware that in order to use resources in most efficient way,

the company need to have certain capabilities. All interviewees claim to have the ability to

manage their costs and expences, in other words, the capability of financial control. This is

reflected in strong will to have more than one customer in order to secure profits in case one

of the customers leave. All subcontractors have capability of providing high quality of

products together with decent speed of distributon and customer service.

4.3. Environmental analysis

Figure 4, Adjusted Basic Institutional Model, Jansson (2007)

4.3.1 The societal sector

Legal System The Polish legal system is based on a mixture of Continental (Napoleonic) civil law and

holdover Communist legal theory; changes being gradually introduced as part of broader

democratization process (www.cia.worldfactbook).

The law in Poland is favourable for FDI. This is mainly because of implementing the

Economic Freedom Act which came into force on 21 August 2004 to improve the business

Polish Subcontractors

Legal system Economic system

Societal institutions

Labour market Product/Service market

Government Financial market

Organizational fields

34

climate in Poland by removing many restraints and uncertainties that had burdened

entrepreneurs.

The far-reaching Act introduces provisions which make setting up a business activity easier

than ever before as well as simplifying day-to-day operations. New regulations provide a

more business-friendly environment and protect entrepreneurs' interests more efficiently.

The number of documents required to commence business activity has been reduced, cutting

the time needed to fulfil all formalities. The number of business activities requiring a licence

has been also cut, as have inconveniences related to government inspections. Entrepreneurs

have never had so much freedom while conducting business activity in Poland as they do

today. Foreign persons from the EU and European Free Trade Agreement zones belonging to

the European Economic Area may undertake and run business on the basis of the same rules

applicable to polish entrepreneurs (Polish Information and Foreign Investment Agency

www.paiz.gov.pl).

Economic system Polish economy went through the transition from communism into capitalism. Poland

experienced two opposite systems, both have their strong and weak points however visible

advantages of free market seem to overweight ideology behind central planned economy.

In a free economy scarcities are resolved through changes in relative prices of goods. If the

product is in a short supply relative to the number of people who want to buy it, price of it

will rise until balance between supply and demand sides is reached. Producers and sellers will

make higher profits and production will increase to meet the demand. When the situation is

opposite, the market is over served; prices of products will fall in order to attract new buyers.

In a free market, buyers and sellers come together voluntarily to decide on what products to

produce and sell and buy, and how resources such as labor and capital should be used

(http://canadianeconomy.gc.ca/english/economy/freemarket.html).

The Polish economy experienced rapid growth in the mid-1990s, slowed considerably in 2001

and 2002, and reach high growth rates again in 2003. In early 2002, the government

announced a new set of economic reforms known as the Hausner Plan. The main aim of the

plan was to improve Poland's investment climate, particularly the conditions for small and

35

medium-sized enterprises, and prepare the economy to compete on European markets as an

EU member. Second part of the plan was to heal Polish public finances in order to create

demanded environment for eventual adoption of euro. However the plan was not completely

realized it has a significant consequences regarding Polish development (www.state.gov).

According to Gdansk Institute for Market Economics (IBnGR) the last quarter of 2007 was a

period of the fastest economic growth in 10 years. Domestic demand was the key driver of

growth, both in the last quarter and in 2007 as a whole. This high growth in domestic demand

was largely due to a fast increase in investment spending. The high increase in investment can

be regarded as a signal that the favorable economic situation will continue in the coming

years. Growth in individual consumption was slightly lower, though still high in the 4th

quarter of 2007 and the year as a whole. The high rate of growth in consumption results from

current trends on the labor market: job creation and a significant increase in wages.

According to The IBnGR predictions the GDP growth rate may reach 5.4% in 2008. In 2009

grow will be slightly slower but should not fall below 5% - the IBnGR projects it at 5.1%.

Weaker economic growth in 2008-2009, as compared to 2007 will be caused by two major

factors. A deterioration of global economic conditions and higher inflationary pressure in

Poland.

The impact of global slowdown will depend on strength and long lasting of the effect of the

US recession. In many forecast, including the latest IMF (International Monetary Fund) report

on the subject of the European economy, it is estimated that the economic slowdown will be

less dramatic in Central and Eastern Europe than in USA and the Euro zone. If the global

slowdown turns out to be temporary, in later years the investment dynamic is expected to be

at a level above that of increase in GDP. The highly activity level of national industries will

be supported by the inflow of FDI, capital from the EU funds and from transfers of foreign

incomes from work abroad. The high investments dynamic will increase the rate of future

GDP growth: on one hand, investments lead to greater efficiency of labour, on the other hand-

as shown by the NBP research regarding FDI- it leads to a modernization and increases in the

levels of innovativeness in the economy.

36

According to press interview with Slawomir Skrzypek, President of National Bank of Poland,

in the medium term it may be assumed that the Polish economy will deploy quickly and in a

balanced manner. This is supported by strong foundations: the intensive modernization of

manufacturing industry and infrastructure with the assistance of national and international

investments, the large numbers of newly created workplaces and decreasing rate of

unemployment, together with the maintenance of macroeconomic stability.

4.3.2 Organizational fields

Government Special Economic Zones (SEZ) is a governmental regulation introduced by the Ministry of

Economic Affairs and Labor that combines the needs of the investors with the needs of the

particular regions, in which they have been situated. Each zone is an administratively separate

part of Polish territory where companies can run businesses on preferential terms.

The purpose of SEZ is to speed up development of the Polish regions, develop new technical

and technological solutions in the national economy, increase the competitiveness of goods

and services, develop the potential of industry and the infrastructure and create new work

places

According to the purpose of SEZ, companies intending to enter it must fulfill certain

requirements. First of all it should create new work places; the number is specifically defined

and depends on the rate of unemployment in the region. A further important criterion is an

ability to support the development of high-tech, IT and R&D investments (www.paiz.gov.pl).

SEZ offers preferential tax conditions, as well as special premises on which entrepreneurs

may conduct business activities without being subject to the payment of income taxes

(www.mg.gov.pl).

As a part of SEZ, company has an access to fully equipped, specially prepared part of land for

a competitive price. Permission to begin trading via SEZ is granted by the management board

of each zone; which also assist in the investment process, for example by helping to contact

local authorities, or central administration and in questions relating to the purchase of the land

for investments.

37

New investments within SEZ have a significant impact on the economic development of the

Polish regions, in the decrease of unemployment and the increase in the competitiveness of

the country economy. Currently, there are 14 Special Economic Zones in Poland, each of them

consisting of several sub-zones (www.mg.gov.pl).

Product/Service market

Rivalry between firms

The competition between firms is not very high since all the subcontractors that work within

the furniture sector and are IKEA´s suppliers all have different productions. The concentration

is high since Poland is IKEA´s leading country of subcontractors (Ikea.se).

Bargaining power of customer

The bargaining power of the customer is very strong since IKEA tends to intrude their

regulations. When the cooperation starts there are a lot of requirements that IKEA puts into

the contract (case company A,B and C).

Relationship with domestic suppliers

To understand the relationship with the domestic suppliers a general discussion about tree

regulation has to be introduced.

Tree regulation

Poland as a member of European Union obeys rules and regulations that are implemented by

EU organs. In 2003 the European Commission approved Forrest Law Enforcement,

Government and Trade – FLEGT). This communication proposes the implementation of a

specific process and a package of measures to address the problem of illegal logging and

related trade, which is becoming an increasing concern. Illegal logging takes place when

timber is harvested in violation of national laws.

The principal objective is to improve governance in timber-producing countries and to set up

voluntary partnerships with them so that only legally harvested timber enters the EU. The

Action Plan targets four key regions and countries which, taken together, contain nearly 60%

of the world's forests and supply a large proportion of internationally traded timber - Central

38

Africa, Russia, Tropical South America and Southeast Asia. The Union will set up a long-

term dialogue process with timber-producing and timber-consuming countries, with a view to

extending international collaboration in the fight against illegal logging and setting up a

multilateral framework as a basis for action. In the near future, a voluntary licensing scheme

will be proposed whereby partner countries issue a permit attesting to the legality of timber

exported to the EU. The Commission will propose a regulation setting up the scheme. This

regulation will define the products to be included and describe the licence authorisation

required.

The FLEGT regulation, although is necessary because it fights against corruption and help to

protect forest resources, means less wood for all the European entrepreneurs

(www.europa.eu).

When it comes about the domestic regulations in Poland they are not favourable for Polish

furniture industry. There are limitations on the amount of wood that can be cut during the

year. These regulations are hold by the Polish institution called Lasy Państwowe. They allow

to cut about 50 – 60% in the increase, the amount of wood of which the forest resources

increase every year. The European standard is cutting 60% of the increase. In the

Scandinavian countries they are allowed to cut 85% of the increase. That is what Polish

entrepreneurs demand, but the reply of Lasy Państwowe is that economy of this kind would

damage the forest resources. In some way Lasy Państwowe slow down the furniture sector -

argue Polish entrepreneurs. The factories do not extend their production capacity because of

the lack of wood in Poland. What is more there is not worth to import wood for example from

the neighbourhood country as Slovakia. Because of the high cost of transport it is worth only

to import big amounts of wood. Most of the companies in the sector (90%) are small ones and

they do not have money to rent the train to transport the wood.

Lasy Państwowe is obliged to obey the regulation number 52 which was implemented in the

day 23.10.2006. It concerns the general way of selling the wood by the State Forest Farm

State Wood (Państwowe Gospodarstwo Leśne Lasy Państwowe). It takes into consideration

regulations on activities by Lasy Państwowe which have to base on principle of financial

independence regulatory. It states that every cost of activities must be cover from gotten

revenues. As manager of property of treasury, units of Lasy Państwowe have duty to sell

39

wood raw material in order to take care of balance on market in the way to assure the proper

level of income simultaneously respecting the act about consumer and competition protection

(www.lp.gov.pl).

The role of The Polish Economic Chamber of Wood Industry is very important in adjusting

regulations. They are anxious for legal regulations which would secure equal access to supply

sources based on known and accepted rules. Among others, they solicit for a regulation of

VAT on wood raw material adjusted to the EU standards (www.pol-wood-

chamber.drewno.pl).

*forecasting

Graph 1. Rzeczpospolita, 21.01.2008

There is still lack of wood in the market; deficit is amounted to 5 mln cubic meters

Supplier`s price sensitivity - suppliers of wood are of the utmost importance for

subcontractors in the furniture industry. The wood is the key raw material for the production.

When it comes about differentiation there are limited types of wood. The level of competition

between suppliers is not very high. They can sell every amount of wood that they have to their

customers as there is not enough wood on the market (www.lp.pl).

Supplier`s bargaining power – suppliers size is relatively similar to buyers size, they are

small firms operating in the sector. But they have strong bargaining power as they sell the raw

material which cannot be very easily received because of its low availability. The backward

40

integration is possible, but it is very hard to operate in the industry. From supplier role it is

hard to get wood from Lasy Państwowe, the new comer who does not have necessary

experience and did not take the part in negotiation in the past will have difficulties in

receiving the wood.

Labour market

For the last three years wages in Poland rose rapidly. In 2007 almost a 10% growth in wages

was observed and according to press interview with Jan Rutkowski, the World Bank expert,

this level can be reached this year as well. This is a consequence of well prospering country

economy; Poland experiences the stage of expansion in the business cycle. The increase in

wages is caused by two major factors: decreasing number of qualified workers and the

current country position in the business cycle.

According to Polish Central Bank Report concerning the situation on the labor market in

Poland 2/3 of diagnosed companies claim that they have to raise the wages to keep current

and attract new employees because they have problems with fulfilling the market demand.

According to the report, approximately 40% of polish companies are planning to increase

wages this year and the figure is higher than in previous years. Also the amount of rise is

higher than in past three years, reaching the average level of 5%. One in three diagnosed

companies is going to increase wages by 5% and one in ten is planning 10% rise. On the other

hand employees put pressure on employers and demand higher wages. According to the

report more and more companies perceive that pressure as a barrier for growth.

In three quarters of 2007, average monthly gross wages and salaries in Polish economy

amounted to 2685, 71 PLN, i.e. they were by 8.6% higher than in the same period of the last

year. In the public sector they amounted to 2964.71 PLN (an increase by 7.7% as compared to

the same period of the last year), while in the private sector they amounted to 2527.16 PLN

(an increase by respectively 9.6%). Compared to the nine months of 2006, a growth in wages

and salaries was observed in all sections of the Polish economy. The growth in manufacturing

section to which we can include the furniture industry amounted to the level of 9.6%. This can

be stated as a good result comparing to the other sectors. During the period of three quarters

of 2007, average gross monthly wages and salaries excluding annual bonuses in the national

41

economy amounted to 2637.34 PLN; it was by 8.7% higher than the previous year. When it

comes about growth in average gross monthly wages and salaries excluding annual bonuses it

was 9.6% in manufacturing. What is important the growth is stable in the whole Poland.

Compared to the nine months of 2006, a growth in average gross monthly wages and salaries

and gross monthly wages and salaries excluding annual bonuses was observed in all counties.

Graph 2. Główny Urząd Statystyczny (GUS), Poland

A growth in wages and salaries in years 2004 – 2007 is observed in all Polish sectors of

economy.

Financial market

Central Bank interest rates

The interest rates are regulated by the Monetary Policy Council, created in 1998 within the

National Bank of Poland. The President of the NBP is also the Chairperson of the Monetary

42

Policy Council. One of the main responsibilities of the Monetary Policy Council and the NBP

is to manage the stability of Polish currency, which includes controlling and monitoring

inflation rates. One of the financial instruments used by the Monetary Policy Council is the

control over short-term interest rates.

There are four main types of interest rates set by the MPC - referential, lombard, deposit and

rediscount rates. The policy of MPC is usually defined by the changes in the referential rate.

Deposit and lombard rates mark the fluctuation of overnight interest rates on the interbank

market. The last one - rediscount rate - is not an instrument for counteracting inflation

(nbp.gov).

Since 2007 NBP lift the interest rates four times, eventually by 1%. Current rate is 5, 75% and

economics forecast it may not be the final rise (www.marketwatch.com). Although increasing

rates did not affect the financial market. Polish currency kept the strong position on the

market. The changes in interest rates were caused by growing inflation in Poland. Inflation

grows rapidly from 2% last year to 4.1% in March 2008. Consumer prices were 4.1% higher

in March, well above the central bank's inflation target of 2.5%. The bank said it "does not

rule out that bringing inflation down to the target in the medium term would require further

monetary-policy tightening” (Puls Biznesu – www.pb.pl).

Increasing inflation is caused by two external factors: rising prices of food and oil worldwide.

Since Poland is too weak to influence world prices it has to adapt. High inflation create

unstable market situation, people are not confident with keeping cash as it loses value, so they

make quick purchase decisions to spend money. Central Bank fights inflation by increasing

rates, what leads to expensive capital (Gazeta Prawna). When a capital is expensive because

of high interest rates, people want to put money into the bank and earn interest. That also

attracts foreign capital to put money into the polish bank accounts. On the other hand bank

credits are more expensive and clients have to pay more for the money they want to borrow.

Companies do not take credits and do not have chance to invest money. As a result companies

are less competitive, what lead to lower profits and cost reductions.

Inflation is very valuable for the country economy but it has to be highly coordinated. Low

inflation stimulates economy to grow, helps to build stable position. Polish Central Bank

43

(NBP) controls the inflation and tries to reach the target level between 2, 5-3, and 5%.

However the task is very hard since inflation is caused by external factors.

Banking system

Polish banking system is strong and stable. Since the political transformation in 1989, Poland

managed to avoid serious shocks, experienced by other countries of the region.

Polish banking system was shaped by the processes running in this market for several years

now. From among 51 commercial banks (as of July 2007), most are fully or partially

privatized. Their privatization was realized by the biggest financial institutions in Europe and

the world. As a result, a considerable amount of Polish banks' equity is in the hands of foreign

investors.

The most important phenomena in the banking sector in the last years are: dynamic

development of credit and loan activities (mainly mortgage credits and loans), and

considerable progress in online banking, offered now by numerous banks. Moreover, over the

recent years Polish citizens started to invest their savings via investment funds and other

financial institutions. This is a sign of wealth; it means that Poles feel secure with their

income. As of the beginning of 2007, the financial resources allocated in investment funds

operating in Poland amounted to PLN 95 billion, which marks a 23% rise over the last year,

and 25% of total savings of the Poles. The development in this area shows that Poles begin to

adjust to the praxis of highly developed countries

(http://www.business.gov.pl/Banking, system, and, financial,services,in,Poland,108.html).

4.4. Identify drivers of change

Company A´s employees are more educated and experienced because the company invests in

training. The company does claim that the increasing salaries can lead to problem within the

company. A restructure of the production must then happen so the company can afford rises.

Labour market: The increasing cost of labor?

Skills of workers?

Employing new workers?

44

Company B claims that they have difficulties with recruiting new employees. The company

experienced problem to find the right person while searching for specialists. However

company admits that workers are more skilled and experienced than they used to be 3 years

ago. Company B is aware of increasing costs of labor and increases their salaries regularly.

Company C tries to respond to employees requests. They are aware of the present tendency in

Poland, which is Polish employees moving abroad due to better chances to find a well paid

work. This awareness leads to that C tries to protect itself from losing workers. The company

has now started to realize how important workers are to the result of the final product.

Understanding how vital the workers are to the firm made the company more conscious of the

need to increase payments and they plan to do it in the next five years

company A cooperating with IKEA means a lot of restrictions required by IKEA. There are

special production requirements which have to be consistent with IKEA´s standards. IKEA

conducts controls very often to check if the rules are obeyed. According to the interviewee,

IKEA is perceived as a powerful entrepreneur who can find another subcontractor anytime.

The rules concerning the raw material are something which has to be taken under

consideration. Company A gains wood only from the best ecological plants in Europe. All of

their products have a certificate which ensure the high quality and ecologically origin of the

material used in the production.

Company B stated that all the subcontractors within the furniture industry in Poland cooperate

within a platform. This means that knowledge is transferred as well as training sessions and

conferences for all the member companies are handled. The purpose is to increase

Product/Service market

Relationship with customers?

Relationship with wood suppliers?

Competitors?

Raw material?

45

productivity and lower the costs. On the other hand, IKEA also respects its subcontractors and

provide access to new technology and innovations so the total costs could be lower.

Company B was influenced by increasing prices of wood. As the rise reached the level of

almost 30%, company was forced to increase the prices in order to gain return on sales. On

the other hand IKEA was insisting on making the prices even lower. Company decided to

raise their prices. As a result IKEA moved some of the orders to China, because even though

the transport costs were higher, the total cost was still lower. However, IKEA is still the main

customer of the company and will not end this relationship fast because of the long, fruitable

cooperation based on trust and high product quality.

According to company C the bargaining power of IKEA is very strong. When they started the

cooperation a contract was signed concerning strong requirements. At the beginning of the

cooperation with IKEA they received a large order. This led to that the company had to adjust

their product line, build new plant and implement new technologies, so they could fulfill

IKEA´s requirements. Eventually IKEA changed its mind and canceled the order. It caused

the company C almost bankrupted.

The company further states that it is very hard to negotiate with IKEA; they have hard

restrictions and tend to put their conditions on force. Everything is governed to the IKEA's

way of doing business.

According to Company C their main competitors, which are companies from Slovakia and

from Poland do not have the required resources and capabilities to imitate the company.

Subcontractor C does not have any problems with raw material. They have very good

relationships with wood supplier. Mainly due to long cooperation with wood supplier they

have established their current position which means that they can get the ordered amount of

wood. They plan to increase the turnover up to 50%.

Financial Market

Do you take bank credits?

Are there any obstacles to borrow money?

Are you planning to use credit in the next five years?

46

Company A has taken a loan to enlarge its park machine. Although, comparing to the past, the

slowdown in the investment rate can be noticed. When it comes to the currency, they

cooperate with IKEA in PLN. It is favorable for the company as Polish zloty is strong.

Company B has taken credits in the past, before the prices of credits increased. Company is

not planning to take credits in the next 5 years due to previous liabilities.

As a part of SEZ, companies do not pay income taxes. This is a great benefit of being a part of

the zone, it regulates and helps the companies when they started and provide additional

advantages as the company grow. All of the subcontractors stated that they expect an increase

in their turnover during the following years, company C plans to increase its turnover even up

to 50%.

4.5. What is your competitive advantage?

According to company A their competitive advantage is that they gain wood only from the

best, ecologically leaded plants in Europe. Another advantage is timelines of delivery adjusted

to the high requirements. Long experience in cooperation with domestic and foreign partners

is also perceived as a vital capability that keeps them competitive.

Company B explains their competitive advantage as the quick implementation of various

types of products.

Government

Are there any other institutions that help you?

Do you receive any help from government, if so what kind?

Do you expect any help in the future?

What performance do you expect in the next 5 years

according to country economy?

47

Company C says that they do not focus on prices, as they do not see their prices as a

competitive advantage; instead they focus on service and high quality. The interviewee also

claims that their competitive advantage is based on the unique method of wood bend.

4.6 Synthesis The aim of empirical synthesis is to sum up all the empirical information relevant for

answering the research questions. It is necessary also for the further synthesis of analysis

which combines empirical findings with theory.

1. What is Polish subcontractors current source of competitiveness?

• All the interviewed companies realize that their current resource base is crucial for

being competitive on the market. Subcontractors work on their resource base in order

to constantly improve it.

• Companies A, B, C know how important for the state of their company are training

their employees and investing in new technology.

• The interviewed companies are aware that comparing with other countries

subcontracting for IKEA they are able to produce at lower cost.

2. What does the Polish market look like and how is it changing?

• All the interviewed companies claim to be influenced indirectly by two factors from

societal sector which are: legal system and economic system.

• Additionally, they are effected directly by four factors from organizational fields,

which are: government, product/service market, labour market, financial market.

3. What are the consequences for the Polish subcontractors and their current source of

competitiveness?

• All of the interviewed subcontractors are conscious of the environmental factors that

can cause consequences for them.

• The subcontractors are afraid that factors may have changed their current resource

base. They are aware of the fact that costs increase and they would have to adjust their

resources and capabilities to the new situation.

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5. ANALYSIS

In this chapter we analyze our empirical findings connecting it with the theoretical

framework, introduced in chapter 3. The analysis is based on our synthesis of both theoretical

framework and empirical data. The starting point are resources and capabilities of the

subcontractors. Then, in order to enhance the understanding of environmental influence on

the companies and identify the drivers of change we have to clarify the different institutions'

impact on the subcontractors. Additionally, the competitiveness of the subcontractors will be

analyzed. The aim for this chapter is to find answers to our research problems.

___________________________________________________________________________

5.1 Resources and capabilities

5.1.1 Resources

The interviewed companies have many different resources, based on the theory we can divide

them into three groups and they are: tangible, intangible and human resources.

When it comes about tangible resources, there are physical assets that can be identified as the

same in the case of more than just one Polish subcontractor. There are modern plants with

equipment of high quality. Subcontractor B claims to have very modern machinery park. This

machinery park is of key importance in producing many different patterns of commodities.

The subcontractor A also states to have modern and well equipped park machine. They are

one of the biggest Polish companies in the furniture industry. Only one of the interviewed

Polish subcontractors has direct access to the resources of the wood, but still the amount of

the wood which can be gained from the forests is strictly regulated by the institution Lasy

Państwowe.

For most companies, intangible resources are more valuable than tangible resources. In the

case of Polish subcontractors intangible resources play a vital role. In the case of the company

C R&D is of the utmost importance, the company position in the market was achieved due to

their modern technology, the innovative method of wood bending. Sharing platform opens up

the opportunity for new innovation.

The main and most important resource for all of our subcontractors are human resources.

Employees skills and know how are the base of the competitiveness. Unfortunately, as

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mentioned in the environmental analysis, some difficulties in recruiting new employees

occurred in Poland recently, and this is something that Company B notice. Company B claims

to have problem with that as many Polish workers tend to search for work abroad. On the

other hand, the employees who are hired are well educated. What is more company invests in

training of the employees so they can gain new skills. Although identifying and appraising the

stock of human resources within a firm is difficult. According to the interviewed

subcontractors if the companies want to keep the employees working for them they have to

reply to their requests. For example company C realizes that these are employees who are so

important to the result of the final product so that is why they should be adequately paid.

5.1.2 Classifying capabilities

Capabilities are what the firm can do. To perform a task, a team of resources must work

together. The resources are deployed for a desired end result – that is what is called firm`s

capacity. All of the subcontractors have capability of the financial control in the area of the

corporate function. This is the ability to manage firms’ costs and expenses in relation to

budgeted amounts. It is connected with the amount of the customers that a subcontractor has.

It is more secure to have a couple of customers to which a company can sell 80% than one big

entrepreneur to which it sells 100% of the commodities. For instance the company C has

some problems with the control of their finance after the failed cooperation with IKEA. They

almost bankrupted because of the Swedish entrepreneur. Other capabilities are research and

innovative new product development in the area of R&D which each company uses in its

sector. The design capability in the area of product design is a capability that is common for

all the interviewed subcontractors. Additionally company C has capability of efficiency and

order processing, speed of distribution; and quality and effectiveness of customer service, all

of them in sales and distribution area.

5.1.3 Resource based strategy

According to Grant the strategy can be seen as a link between the firm and its environment.

The internal environment has to match the external; otherwise the firm will not be successful.

Since our subcontractors work together within the platform, where customer, competitors and

suppliers are the same the issue is how they will deploy their resources within their

environment so it can satisfy its long-term goal. The external environment was analyzed in the

previous part under the product/service market.

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5.1.4 The role of change

Competitive advantage emerges when change occurs (Grant 2008). If so, Polish

subcontractors have an unique chance to improve their resources and capabilities in order to

achieve competitiveness. Polish market went through great transformation although further

changes are yet to come. The external environment highly influence subcontractors and force

them to react to changes if they are willing to survive on the turbulent market. The success

depends on how well can subcontractors respond to external changes and create a sustainable

competitive advantage based on their resource and capabilities.

5.2 Environmental analysis

5.2.1 Societal institutions

“The high rate of growth in consumption results from current trends on the labor market: job

creation and a significant increase in wages”.

The situation in Poland has introduced few advantages and disadvantages for our

subcontractors. Due to the economic situation companies are generating high profits and in

that turn they can invest in high qualitative machines. This investment leads to that they are

able to produce qualitative products at low cost. This is the reason why big, foreign

companies hire subcontractors in Poland to build components. While gaining new client,

subcontractors have to produce more and they can earn higher profit. This income can be

further invested into new technology or employees. As company`s production increases, new

workers are required in order to satisfy the demand. However, new employees mean more

salaries to pay and this can be a problem for a company since wages have increased in recent

years. Subcontractors face the dilemma: if they increase production, more workers will be

needed and higher salaries will have to be paid. On the other hand, if the company do not

increase the production, it may be destroyed by competitors.

5.2.2 Organizational fields

The height of interest rates is crucial while planning credit decisions. Interest rates determine

the prices of capital. When the credit is expensive, company will postpone the decision until

the prices decrease. This can lead to that companies do not take credits and do not have a

51

chance to invest money. As a result companies are less competitive what leads to lower profit

and cost reductions. However, companies need credits in order to invest into further

development of the company. If the subcontractor is not growing it may became less

competitive and lost favorable position on the market. The possibility of taking a loan helps

for example with enlargement of park machines.

The rate of inflation is also important for the company. It determines the growth in prices of

products as well as the raw material. The increasing in prices of the raw material can be seen

as a hinder for further development to the subcontractors. The rise in prices of wood reached

the amount of 30 %. This affected relationship with IKEA since the company B had to

increase the prices and IKEA was insisting on making prices even lower. Due to that IKEA

moved some of the orders to China.

5.2.3 Industry analysis

Bargaining power of Customer The interviews all indicated that the bargaining power of the main customer is very strong.

Since a subcontractor is hired to perform a specific task in order to reduce costs, the

bargaining power of the customer is a major aspect to point out.

Two of the case companies claimed that when they start the cooperation they signed a

contract including very strong requirements.

Subcontractor B mentioned that being a supplier to a major customer can both be defined as a

main advantage and the main threat. Company tries to avoid the situation when IKEA

becomes the only client.

The advantages of working with a leading customer are, as mentioned before, the chance to

grow and develop for the firm. IKEA is an important client since they order most of the

goods. To receive the best quality from the subcontractors they build up the platform. The

subcontractors can grow and develop in a way that would not be possible if they operate on

their own.

Bargaining Power of Supplier

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The Legal System has direct impact on the laws and regulations that have to be obeyed by the

companies in Poland. Additionally, Poland as a member of European Union obeys rules and

regulations that are implemented by EU organs. The role of the Polish institution called Lasy

Państwowe is very important in adjusting regulations. Because of all the rules implemented

by Lasy Państwowe Polish subcontractors cannot get enough amount of the raw material. As

a consequence they cannot produce as much as they want. Having a good and long

relationship with the supplier makes the situation better. It is hard, though for the new comer

to get access to the amount of wood that is needed. The bargaining power of supplier is

strong.

Because of the lack of the raw material and increasing in prices Polish companies are getting

less competitive comparing with companies in other countries. In some way Lasy Państwowe

slow down the furniture sector - argue Polish entrepreneurs. If they had more wood they

could have produced more.

Rivalry between firms As mentioned before Polish subcontractors cooperate within the platform. This includes

knowledge transfer as well as training sessions and conferences for all the member

companies. The purpose is to increase productivity and lower the costs. On the other hand,

IKEA also respects its subcontractors and provide access to new technology and innovations

so the total costs could be lower. It is easy to observe that companies are not competitors to

each other because they compete in different sectors of the furniture industry. They

subcontract different commodities to IKEA.

5.3 Drivers of Change

Based on the analysis of the environment and the data from interviewees the following drivers

of change have been noticed:

Labour market

“Since the more understanding of how vital the workers are to the firm made the company

more conscious of the need to increase payments and they plan to do it in the next five years”.

“We are worried of the increasing cost of labour, if it happens we will have to find money for

higher wages for employees”.

53

Due to the change in the labour market the salary will rise. In the same time the human

resources have been noticed as an important resource to stay competitive.

“The bargaining power of IKEA is very strong”.

All the firms are highly depended on IKEA. The awareness of this cooperation´s advantages

and disadvantages created a discussion concerning all of the interviewed companies.

The company B was influenced by increasing prices of wood. The rise reached the level of

almost 30%. Company was forced to increase the prices in order to gain return on sales.

Polish subcontractors have been influenced by the rising prices of the raw material. As there

is still lack of wood on the market prices are going up.

5.4 Competitive advantage

5.4.1 Establishing and sustaining competitive advantage

The competitive advantage in production markets emerge from complex combination of

resources and capabilities. Companies want to generate high profits. The best way to do it is

to establish competitive advantage. But this is just the beginning, the hard part is to make it

last long enough to earn income. According to Grant (2008) long lasting competitive

advantage depends on both how easily it can be imitated by rivals and durability of the

resources. In the case of Polish subcontractors production is mainly aimed at IKEA´s needs.

IKEA helps and suggests how companies` production can be developed.

All of our companies mentioned that to be able to produce the high quality products, their

customer requires the work with modern machinery park and skilled workforce. These create

organizational capabilities that are not very easy to transfer. The external environment in

Poland and the IKEA´s recommendation is the essence of the immobility of the

subcontractors’ competitive advantage.

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5.4.2 Types of competitive advantage

It is hard to separate two types of competitive advantage: cost and differentiation advantage in

the case of Polish subcontractors since they all combine low cost production with

differentiated products. From the subcontractors perspective the low cost of production is not

very obvious. The cost of production is low in Poland comparing to other countries of the EU.

5.4.2.1 Cost advantage

We consider a situation of the case companies from the perspective of the Swedish client.

Poland is the country with one of the fastest emerging market in the EU. Poland still need to

improve a lot to reach the level of maturity of the old EU members but due to these

inequalities Poland is so attractive to mature countries. Polish GDP per capita is lower than in

the old EU member countries. Hence majority of services and products have the same quality

as in mature countries but the cost of production is lower. This is determined by differences in

the cost of labor, raw material and capital. According to the essence of the cost advantage,

that the firm can supply an identical product at a lower cost, that is exactly what Polish

subcontractors offer to Swedish client.

5.4.2.2 Differentiation advantage

Differentiation advantage occurs when; according to Grant (2008) company provides

something unique that is valuable to buyers beyond simply offering a low price. This

uniqueness can be related for example to reliability, quality or status. The issue of

differentiation is to understand the customer demand for differentiation and match it with the

company's capacity to supply differentiation. Each one of the companies managed to create

unique value for their customers. Company A discovers the demand for products made of

high quality, ecologically grown wood. In order to satisfy the customer needs, each product

has a certificate which confirms the ecological origins. Company also provides their

customers with the warranty. Since the warranty period company offers is the longest on the

market, it can be perceived as another competitive advantage. Company B fights the

competition by high quality of the products and an ability of fast implementation of new

production lines. Thanks to this, it is able to be one step ahead the competitors what is crucial

while dealing with constantly changing patterns of products. Company C differentiation

advantage is an unique method of wood bend. Company achieved its position due to modern

55

technology. Company C has also an ability to combine this high technology with traditional

design, and keep the balance between modern and classic style.

5.4 Summary of analysis

5.4.1 Resources and capabilities

• Modern plants with equipment of high quality.

• Difficulties to access the source of the raw material.

• Importance of Research and Development for all the Polish subcontractors.

• Modern technology.

• Human resources as the most important resource.

5.4.1.2 Classifying capabilities

• Resources working together to perform a task.

• Capability of financial control.

• Security of having more than one customer.

• Design capability.

• Capabilities in sale and distribution area.

5.4.2 Environmental analysis

5.4.2.1 Societal sectors

• The stable and favorable situation has introduced few advantages and disadvantages

for our case companies.

• Companies are generating high profits that lead to more investments.

• Companies experience pressure to increase salaries if they want to keep their

employees.

• Prices of credits are rising so companies are not willing to take credits for new

investments.

• IKEA provide access to new technology and innovations so the total cost can be

decreased.

• The increasing of raw material can be seen as a hinder or further development to the

subcontractors.

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5.4.2.2 Organizational fields

• The bargain power of the customer is strong.

• Being a supplier to a major customer can both be defined as a main advantage and a

main threat.

• Because of the lack of raw material and increasing prices Polish subcontractors is

getting less competitive with companies in other countries.

• The platform makes a non-competitive environment to IKEA´s subcontractors.

5.4.2.3 Drivers of change

• Rising salaries.

• Increasing prices of raw material.

• Strong bargaining power of customer.

5.4.3 Competitive advantage

• Two types of competitive advantage are hard to separate, as all of the case companies

combine low cost production with differentiation.

• Majority of services and products have the same quality as in Sweden but the cost of

production is lower in Poland.

• Warranty, ecologically grown wood, high quality, unique methods of production and

fast implementation are the differentiation advantages.

• The modern machinery parks and skilled workforce create organizational capabilities

that are not very easy to transfer or imitate.

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6. CONCLUSIONS AND RECOMMENDATIONS

The goal of our thesis is to answer the question: how can Polish subcontractors adapt to

environmental changes in order to sustain their competitive advantages.

The conclusion aims to integrate findings from our study. To answer the main question we

have developed three research problems concerning subcontractors’ resource base, changes

in the subcontractors’ environment and the third one which deals with the companies’

competitiveness.

In the last part we provide recommendations which are necessary for Polish subcontractors

to sustain their competitive advantage.

___________________________________________________________________________

6.1 Answer to research problem 1

What is Polish subcontractors current source of competitiveness?

As stated earlier, Poland is a very attractive market for mature countries to search for

subcontractors. Poland is situated in the heart of Europe what makes it a close low cost

country for old EU members. Polish subcontractors provide high quality service at very

attractive price. Poland is now a member of EU, although it would not access the Union if it

had not the potential to grow and reach the level of development of the old 15 EU members.

Nowadays Poland is one of the fastest developing markets in the European Union. Poland still

has the cost advantage, but it can be lost as Polish economy is growing in strength.

It is easy to observe that the cost advantage of Polish subcontractors is not entirely dependent

on their unique ability to produce at the low cost. It is rather a result of current constellation of

external factors described previously. As the environment in Poland has been changing, the

cost of labour is rising and prices of the raw material are going up Polish subcontractors may

lose their cost advantage. All of our case companies have managed to create differentiation

advantages, products they supply are first of all of high quality and innovative. It is mainly

due to modern machinery parks. As the competitive advantage we can consider also the

longest on the market warranty for the products, they also provide their customers with

products made from wood of ecological origin. They compete also with unique methods of

production and fast implementation.

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6.2 Answer to research problem 2

What does the Polish market look like and how is it changing?

Making an environmental analysis from an institutions approach is vital especially when the

market is influenced by changing factors. Conducting this approach gives an insight how the

different institutions influence each other and the company´s business strategy.

In order to identify the factors that influence our chosen subcontractors in Poland a scanning

of the environment need to be done and later analyzed from the subcontractors’ perspective.

By analyzing the companies’ environment we have found the factors that are of relevance for

our case companies. The favorable economic situation has a great impact on the labour

market. Companies are generating higher profits and that leads to new investments. Due to the

changes in the labour market the salaries are increasing and the companies feel pressure to

increase them if they want to keep their employees.

Even though the economic favorable situation gives the subcontractors an opportunity to

develop their productions, the height of interest created a situation where the companies do

not take credits. As a result the companies are less competitive what leads to lower profit and

cost reductions.

The financial sector also influences the subcontractors since that the rate of inflation. It

determines the growth in prices of the raw material and this can been seen as a hinder to

further development.

When analyzing the product and service market we have noticed that our chosen

subcontractors work in a special situation. They are suppliers to a very big entrepreneur in the

furniture industry - IKEA which bargaining power is really high. On the other hand the

relationship with a strong customer created a platform for all the subcontractors that help

them to share knowledge and increase productivity to lower costs.

The regulation of wood is also a factor that created some worries in the product market.

Because of these restrictions prices of the wood tend to go up.

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The economic situation leads to two drivers that are important to the subcontractors’ future

success, the increasing of salaries and rising prices of the raw material. The relationship of the

customer has also to be taken under consideration. Because of their strong bargaining power

they can end the relationship if the subcontractors do not fulfill their requirements.

6.3 Answer to research problem 3

What are the consequences for the Polish sub-contractors and their current source of

competitiveness?

The drivers we stated in previous research problem will influence the subcontractor heavily.

They concerns two vital aspects that includes two major and important resources of the

subcontractors; human resources and raw material.

Human resources are the main and the most important resources in the case of all the

subcontractors. As the prices of labour are rising the companies have to pay more. To keep

the employees the companies need to find additional money in order to raise salaries of the

employees. On the other hand the increase in salaries will lead to that the situation when well

qualified prefers to work abroad as they can earn more than in Poland come back. As a result

the problem of finding specialized labour will disappear.

The amount of wood is another factor of key importance to the subcontractors’ resource base.

Without the right amount of this resource they cannot develop their business in the way they

intend to as wood is the base for their activity.

Since a subcontractor is determined of its customer there a lot of other resources that will be

affected if the changes are so drastic so the customer decides to leave them and search for

other subcontractors. As mentioned before is IKEA a major customer for all our companies.

As the low cost change, due to higher labour costs, or the increasing prices in raw material

might IKEA end the cooperation.

When it comes to the modern plants, the factor of strong bargaining power of IKEA has a

great impact on it as it is the driver which pushes the companies to adjust their plants to the

requirements of IKEA. In practice it means improving the assets, improving plants and park

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machines. As stated earlier had one of the subcontractor problem to use their new machines

after leaving IKEA, since the machine parks are constructed to fit IKEA´s requirements.

The intangible resources are most likely to change, or example the influence of rising cost of

labor on R&D, Polish subcontractors have problems with hiring the best experts in that field

and pay them the salaries the employees demand.

When it comes to the influence on the intangible resources IKEA´s bargaining power is the

driver that slowdowns the working of R&D departments in the case of all the subcontractors.

The IKEA tends to impose their designs of products. That is why there is no need for Polish

subcontractors to look for different designs while cooperating with IKEA. Such a strong

bargaining power of IKEA means also introduction of new technologies which are advised by

IKEA.

The capabilities such as design capability, efficiency and order processing, speed of

distribution, quality and effectiveness of customer and service all effects if the above

resources will change. Even here is IKEA an aspect to highlight if the relationships will

change. The financial capability is very determined on IKEA presence that it can be hard for

them to sustain finance control as there are strongly dependent on the entrepreneur.

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6.4 Answer to main research problem

How can Polish subcontractors adapt to environmental changes in order to sustain their

competitive advantages?

Environmental changes have significant influence on subcontractors and this is the reason

why they should be noticed and described. The main threat is that the subcontractors will lose

their cost advantage due to these changes. Hence it is very important for the subcontractors to

think about future sources of competitiveness. They should start considering sustaining the

competitive advantage at the present time. According to our research several changes are

about to come. If the companies lose their cost advantage they will have to turn to another

competitive advantage as for instance differentiation.

Due to fast country development prices of labour are growing. As a result companies are

forced to pay their employees more. In order to be able to do that, the price of product will

have to rise to cover the expenses. Foreign companies which use Polish subcontractors

because of low costs of products may start search for another low cost production in different

cheaper countries. Here the chance for Polish subcontractors is the fact that even a product is

more expensive it is cheaper than in other countries. Polish subcontractors have the ability to

provide products of certain good quality. They should put effort to sustain this competitive

advantage. The key issue here is the differentiation advantage which should be further

developed in order to both keep the client close and sustain the competitive advantage.

Another occurring change, which is raising prices of wood, has at least two sources:

decreasing amount of wood on the Polish market and an overall rise in prices of goods,

including raw materials. This problem concerns the most one of our case companies which is

using ecologically origin wood. As the amount of the resource is decreasing the price of it will

rise. The consequences are similar as in the previous part- to cover the expenses the total cost

of product will grow.

In order to sustain the competitive advantage companies must be aware of consequences of

the changes and prepare them to cope with them. This requires flexibility and innovation in

creating unique value for the customer.

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It is very important for the subcontractors to cope with these changes. If they lose their cost

advantage there is a possibility that IKEA will leave them and search for other subcontractors.

6.5 Recommendations

Based on all of our findings we provide several recommendations to our case companies. As

stated in the conclusion the best way to remain competitive is to establish and sustain a

differentiation advantage. Due to this statement we recommend the following:

Improve relationships with current customer- Since IKEA plays such a major role and has

such an impact on the resources and capabilities there is a need to develop a strong

relationship. That creates the opportunity to get support and hold on to the cooperation.

The cooperation with IKEA can be seen as a great help since they all ready provide the

companies with knowledge and experience. Due to that the subcontractors should use this

knowledge in order to be more differentiated.

Establish new customer- The subcontractors should expand the customer size and try to

contact more companies so they are not so depended on one customer. Focus more on

differentiation the market opens up and the subcontractors are able to attract other bigger

customers that want specialized products.

Invest in human resources – As the human resources are the most important resources for all

the Polish subcontractors there should be further developed. As salaries in Poland are

increasing there is a trend for employees to work in the country. Companies should try to

attract expert employees with adequate payments. This will lead to extending the knowledge

and be able to produce highly specialized products.

Gain the raw material of the high quality- In order to gain the required amount of the raw

material, good relationships with suppliers must be sustained. The raw material of the high

quality, which in our case is the ecologically origin of wood is very important as the input to

the quality of the final, product.

Focus on intensifying marketing activities- Start to work with marketing activities is a good

way to attract new customers and to increase of the sales volume and increase income. The

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marketing should high light the competitive advantage that will never change. This is the

central – European location of Poland. The location can decrease the costs of transportation.

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APPENDIX

Interview guide

• What is your competitive advantage?

• What are your major resources?

LABOR MARKET

• The increasing cost of labor?

• Skills of workers?

• Employing new workers?

PRODUCT / SERVICE MARKET

• Relationship with customers?

• Relationship with wood suppliers?

• Competitors?

• Raw material?

FINANCIAL MARKET

• Do you take bank credits?

• Are there any obstacles to borrow money?

• Are you planning to use credit in the next five years?

GOVERNMENT

• Are there any other institutions that help you?

• Do you receive any help from government, if so what kind?

• Do you expect any help in the future?

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The University of Kalmar

The University of Kalmar has more than 9000 students. We offer education and

research in natural sciences, technology, the maritime field, social science,

languages and humanities, teacher training, caring sciences and social service.

Our profile areas in research are: biomedicine/biotechnology, environmental

sciences, marine ecology, automation, business administration and informatics, but

we have research proceeding in most subject areas of the University.

Since 1999, the University of Kalmar has the right to accept students in

postgraduate studies and to examine doctors within the subject area natural

sciences.

Baltic Business School,

at the university of Kalmar

Visiting address: Kalmar Nyckel,

Gröndalsvägen 19

SE-391 82 Kalmar, Sweden

Tel: +46 (0)480 - 49 71 00

www.bbs.hik.se