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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

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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

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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

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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

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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.

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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

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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

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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.

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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?

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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

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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

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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.

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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).

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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

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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.

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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.

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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.

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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

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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.

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• 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?

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• 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

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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.

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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

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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

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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.

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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.

Figure

Figure 1. The basic institutional model (2007)
Figure 2. Porter´s five forces of competition framework (2008) Rivalry Between Established Competitors - concentration  -diversity of competitors - product differentiation - excess capacity and exit barriersInstitutions model -capital requirements -economi

References

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