A Process Model of Capability Development: Lessons from the Electronic Commerce Strategy at Bolsa de Valores de Guayaquil

Past literature using the resource-based view of the firm has concentrated on attributes of firms' capabilities and on strategies for exploiting existing firm-specific assets. Comparatively little research has been conducted on how a firm develops, manages, and deploys capabilities to support its business strategy. This study seeks to understand the process of capability development and to establish a model that has both theoretical and practical significance. A longitudinal case study of the electronic commerce strategy formation and implementation at Bolsa de Valores de Guayaquil, an Ecuadorian stock exchange, yielded qualitative data that allowed inductive modeling of the capability development process. The model reveals that capability development in support of a new strategy is a gradual process that is cumulative, expansive, and very dependent on the way that difficult-to-imitate resources and actions are combined. At Bolsa de Valores de Guayaquil, actions that supported the development of the firm's capability to strategize seem to have contributed the most in the initial phase of the strategy formation and implementation; actions that helped the development of the firm's capability to be flexible appear to have contributed the most during the middle phase; and actions that supported the development of the firm's capabilities to integrate and engender trust seem to have contributed the most in the final phase. In addition, the key resources that supported the overall capabilities development process included leadership, organizational culture, information technology, long-term view, and social networks. Implications of this model for both research and practice are discussed. (Resource-Based View of the Firm; Capabilities Development; Case Study; Electronic Commerce in Developing Countries; International Information Systems) 2000). It is becoming harder for firms to retain a competitive advantage based on physical or financial ssets, or even on a new technology, as competitors with access to the same open market conditions can easily acquire similar assets and technologies, and even leapfrog tonewer technologies. Consequently, firms need to concentrate ondeveloping distinctive capabilities that aremore difficult for competitors to imitate (Barney 1997, Wernerfelt 1984). Such development has become the focus of attention not only among academics, but also among business consultants, journalists, government officials, and business leaders (Miyazaki 1995). A prevailing paradigm for understanding how and why firms gain and sustain competitive advantage is the resource-based view of the firm (Mahone and Pandian 1992, Schendel 1994). From this perspective, capabilities and resources enable firms to conceive and implement strategies togenerate above-normal r tes of return (Barney 1997, Dierickx and Cool 1989). Sustainable competitive advantage is viewed as the outcome of discretionary ational managerial choices, selective capability accumulation and deployment, s rategic ndustry factors, and factor market imperfections. Notwithstanding ts important insights, the existing literature has concentrated onexplaining the exploitation of existing firm-specific capabilities and on the attributes offirm resources (e.g., their rarity, uniqueness, difficulty-to-copy, or nonsubstitutability). The research as assumed that economic motives drive capability procurement decisions, and economic factors in the firm's competitive and resource nvironments drive firm conduct and outcomes. But how do firms develop, manage, and deploy capabilities to influence the overall process of strategy formation and implementation? To answer this question, longitudinal studies are particularly appropriate. The research presented here used as its basis an indepth field study of the formation a d implementation of the electronic commerce strategy' at a Latin American The worldwide trends of globalization, deregulation, technical evolution, and market liberalization are restructuring markets and challenging traditional approaches to gaining competitive advantage (Chakravarthy 1997, Hamel ORGANIZATION SCIENCE, ? 2002 INFORMS 1047-7039/02/1305/0514/$05.00 Vol. 13, No. 5, September-October 2002, pp. 514-531 1526-5455 electronic ISSN This content downloaded on Thu, 13 Dec 2012 02:11:58 AM All use subject to JSTOR Terms and Conditions RAMIRO MONTEALEGRE A Process Model of Capability Development stock exchange, Bolsa de Valores de Guayaquil (Bolsa), in Ecuador. In 1996, Bolsa began providing static information about the stock exchange via the Internet. Then, in June 1997, it launched an organization-wide project dubbed "Mundo Virtual" (virtual world), aimed at exploring the interactive capability of the medium to attract foreign investors while capturing revenues from Ecuadorian institutional sponsors. During the same period, Ecuador suffered what have been described as the "most volatile years" of its history, with political instabilities, structural reforms, low savings and investment rates, lack of capital, high inflation, stagnant living standards, and deteriorating public services (The Economist 1997). Bolsa's managers knew that they had to develop their electronic commerce strategy fast, innovatively, and with world-class quality, but also with few people, modest information technology, and a small budget. The misfit between Bolsa's resources and its aspirations would have led most observers to challenge the feasibility ofits goals. The company's ambitions belied its meager resource base. Yet Bolsa's electronic ommerce strategy was a great success: (1) It was launched on time-a very unlikely achievement in such a challenging (some might even say "hostile") business environment; (2) it was paid for with the income generated in the first three months of operation; (3) one year after it was launched the Ecuadorian Congress and the Chamber of Production recognized it as the best national initiative in "promoting development of the national securities market and our country in the international market in order to foster foreign investment;" and (4) in January 2000 Bolsa signed an agreement with Brady Net-a pioneer and leader of online information fixed-income securities in emerging markets-to provide (bradynet.com) with Ecuadorian stock market information. There are at least three important reasons for studying the Bolsa case. First, given that he resource-based view of the firm proposes that capability selection and accumulation are a function of both within-firm decision making and external strategic factors (Oliver 1997), and given the market imperfections a d resource scarcities faced by a developing country,2 this case provides an opportunity to investigate how one local firm developed firm-specific capabilities within a volatile environment. Second, the period described in the case corresponds tothe arrival of a new CEO who instituted organizational change, including the introduction f information technology, within an organization that had seen very little change. Thus, the Bolsa case provides an opportunity o trace the development of capabilities from the beginning because so little was there at the start of the investigated period. Third, since many firms in the world are building their plans of growth at least in part on electronic commerce, this case provides an opportunity o begin to identify the process that can be used to develop organizational capabilities to support such efforts. This paper uses the Bolsa case as the basis for developing a process model of capability development. Tomotivate the need for such a model and to provide some additional context for this work, the following section reviews the existing resource-based view of the firm literature. The third section describes the research approach used to study the Bolsa case to develop inductively a process model of capability development. The fourth section is organized around the phases of the strategy formation and implementation that were observed and incorporated inthe model. The fifth section draws upon the case analysis and interpretation, as well as prior literature, to identify key capabilities developed at each phase of the model. The sixth section discusses the implications of the model. The last section summarizes and concludes the article. Theoretical Background The resource-based view of the firm sees a firm as a bundle of resources and capabilities. Resources are firmspecific assets and competencies controlled and used by firms to develop and implement their strategies. They can be either tangible (e.g., financial assets, technology) or intangible (e.g., managerial skills, reputation) (Barney 1997). Resources are heterogeneous across firms, and some resources are valuable yet rare, difficult toimitate, or nonsubstitutable, giving the firms that have them distinctive core capabilities. Resources that provide sustainable advantage tend to be (1) causally ambiguous (e.g., transformational le dership), (2) socially complex (e.g., culture), (3) rare (firm-specific), or (4) imperfectly imitable (e.g., distinctive location) (Barney 1997). Capabilities are a firm's abilities to integrate, build, and reconfigure internal nd external assets and competencies so that hey enable it to perform distinctive activities (Teece et al. 1997). The resource-based approach focuses on the characteristics of resources and the strategic factor markets from which they are obtained. Past research using the resource-based view associates rent potential, i.e., greater than normal returns (Alchian 1991), with two possible paths (McGrath et al. 1996). The first involves external factors, including buyer and supplier power, intensity of competition, and industry and product market structure, that influence what resources the firm selects, as well as how they are selected and deployed (Schoemaker and Amit 1994). The second path to the capture of rents involves creating idiosyncratically productive combinations ofresources (Peteraf 1993). ORGANIZATION SCIENCENVol. 13, No. 5, September-October 2002 515 This content downloaded on Thu, 13 Dec 2012 02:11:58 AM All use subject to JSTOR Terms and Conditions RAMIRO MONTEALEGRE A Process Model of Capability Development Firms cannot expect to garner rents by merely owning and controlling resources. They should be able to acquire, develop, and deploy these resources in a manner that provides distinctive sources of advantage in the marketplace. The traditional conceptualization of the resource-based view has not looked beyond the properties of resources and resource markets to explain enduring firm heterogeneity. In particular, past research has not addressed or examined the process of resource development (Oliver 1997). Firms' decisions about selecting, accumulating, and deploying resources are characterized as economically rational within the constraints of limited information, cognitive biases, and causal ambiguity (Schoemaker and Amit 1994, Peteraf 1993). Additionally, the traditional resource-based view is limited to relatively stable environments (Leonard-Barton 1992). Barney (1997, p. 171) warns, "if a firm's threats and opportunities change in a rapid and unpredictable manner, the firm will often be unable to maintain a sustained competitive advantage." Only recently have researchers begun to focus on the specifics of how some organizations first develop firmspecific capabilities and then how they renew competencies to respond to shifts in the business environment (see, for example, lansiti and Clark 1995, Henderson 1995). The dynamic capabilities approach (Teece et al. 1997) is an extension of the resource-based view of the firm that was introduced to explain how firms can develop their capability to adapt and even capitalize on rapidly changing technological environments. Dynamic capabilities emphasize the key role of strategic management in appropriately adapting, integrating, and reconfiguring internal and external organizational skills, resources, and functional competencies within a changing environment. The development of such capabilities is limited by the firm's existing base of capabilities, and is shaped by its current market position and past history of developing capabilities (Grant 1996, Teece et al. 1997). The difference between the traditional conceptualization of the resource-based view of the firm (Barney 1997, Grant 1991, Wernerfelt 1984) and the dynamic capabilities view (Teece et al. 1997) is that under the traditional view, current firm resources and capabilities are exploited to the opportunities in the marketplace, whereas under the dynamic capabilities view, the firm needs to develop new capabilities to identify opportunities and respond quickly to them (Jarvenpaa nd Leidner 1998). Although Teece et al. (1997) outlined the dynamic capabilities approach, they did not provide empirical evidence to help understand how these capabilities are developed. Following this approach, a handful of models have been proposed to explain how resources and capabilities are built up over time (see, for example, McGrath et al. 1996, Miyazaki 1995, Oliver 1997). All these models are empirically grounded; however, they have all followed a factor-oriented, or variance theory, approach. Process theories are less common in the resource-based view of the firm literature, and have yet to be developed for explaining the resource and capability development process. Process theories focus on sequences of activities to explain how and why particular outcomes evolve over time (Mohr 1982, Shaw and Jarvenpaa 1997). The literature review undertaken did not identify a single process model of capability development. The prevailing wisdom seems to be that capability development is a lengthy, complex process influenced by multiple organizational dimensions. Based on an analysis of the events that transpired at Bolsa, a grounded process model of the phenomenon is presented here that reveals it is a cumulative and expansive process where path dependency matters, but it also suggests the process can be strategically planned, one step at a time over time. The model clearly shows that the process of capability development is not simply a black box, and it is not random. Instead, the findings uggest that this process needs to be seen in the light of the firm's overall strategy formulation and implementation. This inductively derived model serves as the central contribution of this research. Research Approach Consistent with the focus of this research, an in-depth case research approach was followed (Yin 1994). This approach allowed the study to focus on the development of capabilities in a natural setting. Moreover, case research affords an opportunity toengage in theory building in an area where relatively little prior research has been conducted (Benbasat et al. 1987). The contemporary nature of this case also meant that extensive documentation was accessible and the key actors were available for interviewing. Data Collection This investigation began "as close as possible to the ideal of no theory under consideration and no hypotheses to test" (Eisenhardt 1989, p. 536). In accordance with the approach advocated by Eisenhardt (1989), the research problem was formulated and the existing RVB literature was reviewed in order to "specify some potentially important variables," but "thinking about specific relationships between variables and theories as much as possible, especially at the outset of the process" was avoided. Research access was negotiated with Bolsa in July 1997; over the next six months the field research was 516 ORGANIZATION SCIENCENVol. 13, No. 5, September-October 2002 This content downloaded on Thu, 13 Dec 2012 02:11:58 AM All use subject to JSTOR Terms and Conditions RAMIRO MONTEALEGRE A Process Model of Capability Development conducted (on-site observation, interviews, and documentation review). Thus, the research involved a longitudinal study of the process of capability development at Bolsa.3 The longitudinal focus allowed enabled the activities and decisions that occurred during the course of the electronic commerce strategy formation and implementation to be studied, while the collection of multiple types of data from different sources provided triangulation and increased the reliability of the study. Interviews were arranged with all middle and top managers (12 people), the leaders of technology implementation (6 people), Mundo Virtual users (27 people), and stock exchange experts and directors (15 people). All interviews were tailored to each person, focusing on the interviewee's perceptions of what happened and why, how decisions and actions were influenced and made, and how conflicts were resolved. Interviews also addressed the interviewee's role, attitude, and motivations. The interviews were tape recorded and transcribed, and additional observations were noted at the time of the interview. At the end of each interview, the subject was asked to suggest other individuals who would be important sources for understanding the implementation of the company's strategy. Written data included both primary sources (annual reports, company archival analyses, organizational charts, strategic planning documents, minutes of meetings, Mundo Virtual documents, and internal correspondence and memos) and secondary sources (investors' reports, industry and stock exchange documents, trade magazines, newspapers, and relevant Internet publications). Data Analysis Despite its significance, the resource-based view of the firm has not gone unchallenged. In particular, although resources and capabilities are at the heart of the resourcebased view of the firm, they often are described in vague terms that have been criticized as being tautological, endlessly recursive, and nonoperational (e.g., Priem and Butler 2000, Williamson 1999). Precisely, the purpose of this paper is to extend our understanding of capabilities and how they develop in organizations. This understanding will, in turn, enhance the resource-based view of the firm. Thus, it is important o first note that in this paper resources are input factors (assets and competencies) controlled and used by Bolsa in the formation and implementation of its electronic commerce strategy. Capabilities consist of identifiable and specific organizational processes that were observed to create value for Bolsa by manipulating resources in the formation and implementation of the new value-creating electronic commerce strategy. Second, some of these resources and capabilities used have often been the subject of extensive empirical research in their own right. The analysis of the data was conducted in several steps following the recommendations by Glaser and Strauss (1967) and Elsbach and Sutton (1992) to move back and forth between the empirical data and possible theoretical conceptualization. First, background ocuments, publicly available information, and transcripts of interviews and meetings were used to create a detailed narrative history of the electronic commerce strategy. This narrative was then written up more formally in the form of a Harvard Business School teaching case (Montealegre t al. 1998). Though the case is descriptive in nature, it provided a mechanism for condensing the large volume of data and moving toward a more in-depth, within-case analysis (Eisenhardt 1989). In both the case study database and the case write-up, I endeavored to create what Yin (1994, p. 84) calls a "chain of evidence" that allows others to "follow the derivation of any evidence from initial research questions to ultimate case study conclusions." Together, both of these tools facilitated other researchers to examine the data for themselves and determine whether they would draw the same or different conclusions. Such an approach increased the reliability of the entire study (Yin 1994). A key step in the analysis was to first create an event listing, a technique that can provide insight into "what led to what, and when" (Miles and Huberman 1994, p. 110), and then a critical incident chart (Miles and Huberman 1994) depicting the sequence in which capabilities were developed. The resources and capabilities themselves represent the researcher's interpretation based on evidence gathered from interviewees. The final step in the analysis involved a variation on qualitative pattern matching between theory and data (see Campbell 1975 and Yin 1994). First, the resources and capabilities that appeared to have influenced formation and implementation of the electronic ommerce strategy at Bolsa were compared and contrasted with the array of resources and capabilities that have been discussed in the resource-based view of the firm literature. Interview transcripts were cross-checked to verify that each resource or capability was supported by at least two sources of evidence. Then the sequence of resources and capability development was mapped, and the map was reviewed by several contacts at the case site. The entire analysis was highly iterative and involved moving back and forth among the data, the existing literature, and the concepts that emerged as salient at the research site. This process continued until it was possible to explain the process that had been observed, and no additional data were being collected, developed, or added ORGANIZATION SCIENCE/Vol. 13, No. 5, September-October 2002 517 This content downloaded on Thu, 13 Dec 2012 02:11:58 AM All use subject to JSTOR Terms and Conditions IDAMI X 4 TR4 A4IRF A Prnr,-,. Alfndol nf C.nnaIiitv flovmnnmont to the set of resources and capabilities-a situation Glaser and Strauss (1967) refers to as "theoretical saturation." The Electronic Commerce Strategy at Bolsa This section presents background information about Bolsa, and describes the formation and implementation of its electronic ommerce strategy. It highlights the process that was followed, and identifies the key capabilities developed. First, the antecedent condition is introduced. Then, the case facts are presented in three phases-establishing direction, focusing on strategy development, and institutionalizing the strategy. Finally, the consequence or initial outcome of the strategy formation and implementation is discussed. Antecedent Condition In Ecuador, the need of a capital market to finance the productive activities and allow for a more dynamic creation of enterprises by efficiently channeling capital from savers to companies originated the establishment of two stock exchanges in 1969, Bolsa in Guayaquil and another in Quito. These stock exchanges were established under the sponsorship of the World Bank, the Ecuadorian Securities Commission, and the National Finance Corporation-a private entity that finances private sector development projects in Ecuador. In 1993, under the promulgation of the Capital Market Law, this picture changed. The law targeted evelopment of an efficient, organized, integrated market hat strongly emphasized full and fair disclosure and safeguarding investors' interests. The Capital Market Law provided the judicial framework for transforming the securities market and regulating the activities of the institutions involved with it-exchanges and brokerage houses, public offers, issuers, and intermediaries. The first step in the renovation process was to transform the Guayaquil and Quito exchanges into civil nonprofit organizations that were empowered to autoregulate themselves and to issue rules and regulations to control and monitor the operation of the securities market. After this transformation, Bolsa began its operations, which were conducted by distinguished personalities from the Ecuadorian business community on its board of directors. This board appointed one of its members, Enrique Arosemena, as Bolsa General Director. Since then, institutions wishing to negotiate in the stock market had to become members of Bolsa by paying membership fees. By mid-1990, 27 brokerage houses were members of Bolsa, and 96 issuers of security titles from the private-sector issuers and five from the government sector were listed with the Bolsa. Upon the issuance of the Law of the Securities Market, Bolsa also began an accelerated transformation process in technology, operations, information dissemination, and administration, and pursued the creation of revenues for the institution, independent from operations. Arosemena believed that the survival of the institution could not depend exclusively on revenues derived from transaction commission. In the mid1990s, the most significant challenge Bolsa faced was the decline of investor confidence in response to Ecuador's slumping economic performance. The country's economy had suffered a series of adverse shocks, as shown in Table 1. Despite several attempts at stabilization and structural reform, inflation had risen, and savings and investment rates had declined. Failure to reestablish sustainable economic growth and the government's inability to meet the basic needs of the population were reflected in stagnant living standards and deteriorating public services. Arosemena recalled his thoughts when, during the period of national turbulence, he accepted the challenge to modernize Bolsa. The way I saw it, we had two options. The first one was to sit in the shadow and wait until the investment environment became stable and the conditions were appropriate. The second option was to gain time, weather the storm, and get ready for times when the external factors would enable us to attract foreign investment. We followed the second option. We had only 18 people, no resources, and the money collected from transaction fees was insignificant. We had to develop the Ecuadorian stock market without an economic boom, and we had to selfsupport our operations and innovations. The precarious economic situation in Ecuador required management o build an organization that could respond quickly to opportunities and threats. Arosemena explained: I always tell my management eam, "we have to keep asking ourselves, what would happen if there was an economic boom in Ecuador? Are we going to be prepared to be there? But at the same time, we must think, what would happen if another crisis or period of instability took place? We always have to be ready. We must create new products and services, open new opportunities, execute them with high quality, and get ready to attract foreign investment." To be prepared, according to Arosemena, meant understanding the market and providing innovative products and services with world-class quality to attract international investment and to earn national and international credibility. He was aware that learning occurs through observation as well as reflection and internal analysis. "Some of the most interesting ideas," he explained, 518 ORGANIZATION SCIENCE/Vol. 13, No. 5, September-October 2002 This content downloaded on Thu, 13 Dec 2012 02:11:58 AM All use subject to JSTOR Terms and Conditions RAMIRO MONTEALEGRE A Process Model of Capability Development Table 1 Ecuador's National Context Factors (1995-1998) Date Context Factors January 1995 An armed conflict with Peru over 49 miles of unmarked border broke. Although the conflict ended on February 17 of that year, uncertainty over future conflict caused interest rates to rise. August 1995 An electric power rationing program left businesses without electricity as many as 16 hours per day, generating huge