Family Businesses
Long-term Orientation
– the Effect on their
Digital Transformation
MASTER THESIS WITHIN: Business Administration NUMBER OF CREDITS: 30 ECTS
PROGRAMME OF STUDY: Global Management AUTHORS: David Hetz & Joakim Trauntschnig JÖNKÖPING May 2020
Master Thesis
Title: Family Businesses Long-term Orientation – the Effect on their Digital Transformation – A multiple-case study within traditional industries
Authors: David Oliver Hetz and Joakim Trauntschnig Tutor: Tommaso Minola
Date: 2020-05-18
Key terms: Digital Transformation, Digital Technologies, Family Business, Long-term Orientation, Dynamic Capabilities, Traditional Industries
Abstract
Background: Digital technologies are disrupting firms of all sizes in all industries. This prompts firms to stipulate responses to the ongoing changes and challenges digitalization spawns. Especially family businesses, with their unique structural and behavioral characteristics and economic importance, in traditional industries must reinvent themselves and transform their business digitally to ensure longevity.
Purpose: Despite the recent increasing contributions of academia for the digital transformation phenomenon, attention for specific organizational forms, in particular family businesses is still scarce. A better understanding of how these organizations undergo a digital transformation is vital for family business adaptation and future survival. Therefore, this study emphasizes on the specific attribute of long-term orientation. Hence, the purpose of this study was to investigate family businesses’ long-term orientations impact their digital transformation process.
Method: For the intention to contribute to academia through theory building, we have chosen a qualitative, exploratory research design using a multiple case study of six selected family businesses. 14 semi-structured interviews with seven family managers and seven non-family managers were conducted to collect data. Conclusion: The results show that family businesses prepare a basis for their digital
transformation through the influence of their long-term orientation. Building on our findings we developed a model of a digital foundation for family businesses endeavors in their digital transformation process to manage the three phases of digital transformation. This digital foundation as a capability affected by a family business long-term orientation impacts their digital transformation process in
Acknowledgment
First of all, this is the very last piece of the puzzle we needed to get for our long-awaited master's degree. But at the same time, it also means that after two really exciting years we have to leave JIBS, with a crying but also a laughing eye, of course. Not only that we made good friends, but we have also been able to learn what cannot be taken for granted. Every end also means a new beginning and we think that the hard work and the intensive time at JIBS, but also our exchange studies, provided us with knowledge and life lasting experiences which we would not want to miss. We are leaving Jönköping with many great memories and are proudly graduating from one of the most prominent business schools in the Nordics.
Second, now that we are coming to the end, we would like to express our appreciation and gratitude, to the people who have contributed to our success and without whom much of what we do would not have been possible. This includes, of course, all the interview partners, without your willingness it would not have been possible to carry out this work as it is now. Your valuable and deep insights and experiences have been crucial in helping us to draw conclusions for our work. We really appreciate that you took your valuable time!
Dear Tommaso, your scientific knowledge and constructive feedback have always helped us to question ourselves. It's a great pity that Corona has sparked between us and we couldn't exchange ideas more often in person, but that didn't stop the good support from you. Thank you.
A big thank goes of course to our friends, who were always ready to lend an ear, and our colleagues who kept the motivation high and gave useful tips. We hope to stay somehow in touch with all of you who came across during our studies in Sweden. We also want to thank each other for the cooperation during this long and intensive thesis process. Despite the circumstances, such as Covid-19, we still knew how to bring in our strengths and compensate for each other's weaknesses.
Last but not least, and most importantly, of course, many thanks to our families. Without your patience and help, we would not be where we are today. The biggest thanks go to our ladies, Meike and Julia. You are the best.
Jönköping, May 2020
Table of Contents
1.
Introduction ... 8
1.1. Background ... 8
1.2. Problem Description ... 10
1.3. Purpose and Research Questions... 12
2.
Literature Review ... 14
2.1. Digital Transformation ... 14
2.1.1. The Three Phases of Digital Transformation ... 17
2.1.1.1. The Digitization Phase ... 17
2.1.1.2. The Digitalization Phase ... 18
2.1.1.3. The Digital Transformation Phase ... 18
2.1.2. Drivers of Digital Transformation ... 18
2.1.3. Digital Transformation Impacts and Dimensions ... 21
2.2. Family Business ... 22
2.2.1. Long-term Orientation ... 24
2.2.1.1. Futurity ... 26
2.2.1.2. Continuity ... 26
2.2.1.3. Perseverance ... 27
2.2.2. Digital Transformation in Family Businesses ... 27
2.3. Dynamic Capabilities ... 29
2.3.1. Microfoundations of Dynamic Capabilities ... 30
2.3.1.1. Sensing Capability ... 31
2.3.1.2. Seizing Capability ... 32
2.3.1.3. Transforming Capability ... 32
2.3.2. Dynamic Managerial Capabilities ... 33
2.3.3. Dynamic Capabilities in the context of Digital Transformation ... 33
3.1. Research Philosophy ... 37 3.2. Research Design ... 38 3.2.1. Qualitative Research ... 39 3.2.2. Research Purpose ... 39 3.2.3. Research Approach ... 39 3.3. Research Strategy ... 40 3.3.1. Methodological Choice ... 40 3.3.2. Selection of Cases ... 41 3.3.3. Data collection ... 44 3.3.4. Data Analysis ... 47 3.4. Research Quality ... 48 3.4.1. Credibility ... 48 3.4.2. Transferability ... 49 3.4.3. Dependability ... 49 3.4.4. Confirmability ... 49 3.5. Research Ethics ... 50
4.
Empirical Findings ... 52
4.1. Case Alpha ... 52 4.2. Case Beta ... 54 4.3. Case Gamma ... 55 4.4. Case Delta ... 56 4.5. Case Epsilon ... 58 4.6. Case Zeta ... 605.
Analysis ... 63
5.1. Family Influence ... 635.2. Long-term Orientation Components ... 64
5.4. Digital Foundation Influence on Long-term Orientation... 71 5.5. Other Aspects ... 75
6.
Discussion ... 77
7.
Conclusions ... 80
7.1. Theoretical Implications ... 80 7.2. Practical Implication ... 81 7.3. Limitations ... 81 7.4. Further Research ... 82References ... 84
Figures
Figure 1 The Three Phases of Digital Transformation ... 17
Figure 2 Categorization of Case Firms ... 64
Figure 3 Long-term Orientation Components ... 65
Figure 4 Framework of Digital Foundation Building ... 67
Figure 5 The Bidirectional Effect ... 72
Figure 6 The Digital Foundation Model ... 75
Tables
Table 1 Definitions of the Phenomenon Digital Transformation ... 15Table 2 Case Samples Overview ... 43
Table 3 Overview of Case Interviews ... 46
Appendix
Appendix 1 Definition Patterns of Digital Transformation... 91Appendix 2 The 10 Key Ethical Principles ... 93
Appendix 3 Governance in Case Firms ... 93
Abbreviations
DT………. Digital Transformation DC………. Dynamic Capabilities FB……….. Family Business
LTO………... Long-term Orientation OC………. Ordinary Capabilities
1. Introduction
The purpose of the first chapter is to introduce the rather unexplored phenomena of digital transformation within family businesses. After outlining the background of this thesis, the identified research gap is highlighted in the problem description, followed by the research problem. The chapter closes with the purpose and concomitant research question stating our approach to close the research gap.
1.1. Background
The age of disruption set fundamental changes for the whole ecosystem and by so penetrating the whole sphere of our lives (Loebbecke & Picot, 2015). One cannot deny that today’s vast number of external factors and challenges are increasingly altering how our world looks like whereby we can find us in a world that is full of volatility, uncertainty, complexity, and ambiguity (Bennett & Lemoine, 2014). Not only that new ways of communicating, working, and cooperating were created, this age is denoted by fundamentally new ways how business organizations reinvent how to compete (Loebbecke & Picot, 2015).
However, in this unforecastable environment where the only certainty is the uncertain, organizations find themselves in the phenomenon of Digital Darwinism where the pace of societal and technological changes evolves faster than the players in the system can keep up (Goodwin, 2018). Those changes provoke that “natural adaption” might not be sufficient. Companies not able to adapt to the intense pressure of disruptive effects like technologically driven products and business model innovation (Millar et al., 2018), find themselves competing on two fronts – today and the future. The most adaptable and agile players will survive, while established companies, unable to keep up, adapt, and react, risk being thrown out and, exaggeratedly, left behind to disappear in the competitive landscape (Goodwin, 2018). Especially digital technologies are creating major disruptions with significant effects taking place in society and the global business environment - transforming markets, changing the nature of competition, changing the customer behavior, and rendering many business models obsolete (Bennett & Lemoine, 2014; Bharadwaj et al., 2013; Verhoef et al., 2019). Thus, digital technologies facilitate globalization as well as the evolution of new or enhanced products and services delivered to customers more efficiently (Gurbaxani & Dunkle, 2019; Karimi & Walter, 2015). On the other hand, ubiquitous digital connectivity altered consumers’ expectations and behaviors (Bennett & Lemoine, 2014; Bharadwaj et al., 2013; Vial, 2019).
The adaptability to tackle these technological disruptions is crucial for firms’ survival (Alonso et al., 2019), this is especially relevant for family businesses (FBs) as they strive to prosper across generations (Chirico & Nordqvist, 2010). FBs represent the majority of organizations worldwide and thus have a crucial role in the economic and social prosperity development (Chirico & Nordqvist, 2010; Fitz-Koch & Nordqvist, 2017). A FB is different compared to a non-family firm in some distinctive characteristics, such as having a long-term orientation (LTO) (De Massis et al., 2018; Kammerlander & Ganter, 2015). Thereto, in FBs an additional dimension is added, namely the family dimension (Chua et al., 2012; Daspit et al., 2019; König et al., 2013). Furthermore, this additional dimension of a business will arguably affect when and how they adopt disruptive technologies (König et al., 2013). In today’s dynamic markets the importance for FBs to relearn and adopt new ways of thinking and doing business is vital, as no industry or organization is immune to the effects of digitalization (Chirico & Nordqvist, 2010).
To attain a sustainable competitive advantage in a digital economy, companies in traditional industries must reinvent themselves and transform their business digitally (Verhoef et al., 2019) – they have to undergo a digital transformation (DT). This involves not only rethinking their business models and creation of value, but also identifying and exploiting new opportunities and reinvention of their vision and strategy (Matt et al., 2015). It also involves reinventing the organizational structure, processes, capabilities, and culture to sustain and attain competitive advantages in the digital world (Gurbaxani & Dunkle, 2019; Iansiti & Lakhani, 2014). Key for incumbent firms for a DT is to make use of new digital technologies, such as mobile, artificial intelligence (AI), cloud, blockchain, and the Internet of Things (IoT). These technologies enable the needed business improvements and/or adaptive moves for customer experience, streamlining operations, or for creating new business models (Verhoef et al., 2019; Warner & Wäger, 2019). Thus, DT is needed to respond to digital disruptions and maintain competitiveness, nonetheless, a DT requires firms to build new digital capabilities (Warner & Wäger, 2019).
Therefore, is the dynamic capabilities (DC) concept a suitable approach to investigate a DT, as it focuses on how firms build and modify their resources to fit with a changing environment (Schilke, 2014; Teece, 2007; Teece et al., 1997). It has to a large extent stemmed from the importance of adapting to rapidly changing markets, thus present more challenges to effective and efficient management (Barreto, 2010). Generally, DC refers to the ability to identify, realize, and alter innovation opportunities over time (Teece, 2007). Thereto, the
outcome of a DT depends on the firm’s ability to develop a wide range of capabilities (Warner & Wäger, 2019).
Naturally, the importance to develop capabilities will differ due to the market context and the firms’ goals (Reis et al., 2018). The majority of FBs are determined to pass the business on to the next generation of family owners and building a long-lasting family legacy. This concern for the future has led them to exhibit stewardship tendencies, for example, long-term commitments to employees, suppliers, and customers (Miller et al., 2008). Intrinsically, may the importance of short-term business opportunities be overlooked if it risks the established image or ability to preserve or generate goodwill. Therefore, due to FBs long-term prioritization of economic goals are they more likely to possess an LTO than non-family firms (Le Breton-Miller & Miller, 2006; Lumpkin et al., 2010). Thus, in rapidly changing environments could the LTO be a hindrance as it requires decision-makers to adjust their long-term priorities (Lumpkin et al., 2010). A short-term orientation may, therefore be, more suitable in times of uncertainty as it facilitates agility and fast response to these changes (Lumpkin & Brigham, 2011). Nevertheless, FBs valuable attribute of familiness can support their response to rapid changes and are not imperiled to short-term objectives, hence they invest in the long-term objectives that yield higher performance (Miller & Le Breton-Miller, 2005; Zellweger, 2007). Thereto, the familiness influences the firm’s DC which is reconfigured to align the firm with the dynamic market (Miller & Le Breton-Miller, 2005; Teece, 2014).
1.2. Problem Description
Research has confirmed that diverse industries are affected and under pressure because of the fast development of digital technology and the accompanying fast changes (Berman, 2012; Fitzgerald et al., 2013; Gurbaxani & Dunkle, 2019). The debate in the literature on DT (Berman, 2012) however, is becoming an imperative for the changes induced and the dynamic influences on various levels within society, industries, and organizations. Because of this, our study originates from an organizational point of view.
Failing to adopt new technologies and failing to “heed the need” for a DT will likely cause that organizations be ruled out of competition (Sebastian, Ross, & Beath, 2017, p. 208). We agree with Loonam et al. (2018) that DT is a fragmented literature set and the most recent contributions in the academic field have largely dealt with the provision of guidelines on certain aspects of DT (Hess et al., 2016). The current state of the literature on how
organizations can be successfully digitally transformed requires further conceptual and holistic understanding (Fitzgerald et al., 2013; Hess et al., 2016; Verhoef et al., 2019). Moreover, research calls for further understanding of how firms go through the phases of DT (Verhoef et al., 2019). Thus, to respond to the digital disruption and maintain competitiveness with a DT, firms need to build new digital capabilities (Sambamurthy et al., 2003; Warner & Wäger, 2019).
DC have an extensive literature breadth (Teece, 2007) and is regarded as one of the most popular approaches to strategic management research (Schilke, 2014), even though DC is a fairly new research paradigm (Teece, 2012). However, research from the DC perspective in the DT context has been scarce, especially in the area of FB. Thereto, can DC become obsolete in disruptive environments and thus forcing firms to frequently reinvent or modify their capabilities. The question of how this is managed is still rather unexplored (Schilke, 2014). Chirico and Nordqvist (2010) found that when DC is created from knowledge e.g. tacit knowledge, then FBs can to compete in disruptive markets.
Despite the recent increasing contributions of academia for DTs, there is still a lack of attention for specific organizational forms, such as, FBs. Previous research was often limited to certain industries (Hess et al., 2016; Liu et al., 2011), incumbent or large companies (Loonam et al., 2018; Sebastian et al., 2017), or small and medium-sized enterprises (SMEs) (Li et al., 2018; North et al., 2020). DT is a more managerial issue than a technical one, affecting all sectors of the business, where size does not matter (Li et al., 2018). Remarkably, that research did not specifically investigate FBs as they are one of the most prominent organizational forms in our economy (Chirico & Nordqvist, 2010; Fitz-Koch & Nordqvist, 2017). And as until now, a gap for organizational contextual elements for DT in FBs exists, we aim to clarify this. For instance, Hess et al. (2016) even had a FB as a case to investigate, but they have not further considered the specific nature of FBs in their reflections.
In the current uncertain environment, FBs are forced to meet both the short-term challenges, such as new or different customer behavior through digital technologies, and long-term challenges, such as legacy and succession. Thus, a LTO influences the strategy making and decision processes (Lumpkin et al., 2010) for a DT. FBs find themselves in a situation where their distinctive behavior could compromise the future for the present or the present for the future (Lumpkin & Brigham, 2011). It can be assumed that the pace of change brought by the introduction of digital technologies and shifts in consumer demands is accompanied by
an urgency and need to act quickly and decisively (Lumpkin et al., 2010), which means that acting too late can be fatal (Hess et al., 2016). De Massis et al. (2012) previously reported that a long-term perspective can enhance FBs propensity to respond to changes in technology with disruptive products that take years or even decades to deliver tangible returns. In line with that, a LTO can therefore influence the innovation behavior (De Massis et al., 2012), benefit innovation (Fitz-Koch & Nordqvist, 2017), and performance (Lumpkin et al., 2010). We further know that a typical long-term focus of FBs may relieve the pressure of short-term paybacks when managing for innovation projects (Dunn, 1996). However, academia emphasizes that a FBs’ LTO and long-term management can impede the sense of urgency, which is necessary to stay ahead of their competition (Lumpkin et al., 2010).
Surprisingly, we do not know how LTO and managing for the long run can hamper or favor FBs DT process. Neither do we know how the distinct LTO characteristic of a FB in a traditional industry affects the building of DC for a DT as they need to adapt and react. We see a need to empirically research how FBs, undergo the needed change for DT or not. Therefore, is it meaningful to investigate how the FB characteristic, the LTO (De Massis et al., 2012), which is often characterized by behaviors like the desire of passing the business to succeeding generations, the long-term health of the firm, a greater caution or conservatism of a FB contributes to their DT. Our study, therefore, covers established FBs that already passed the business on at least one generation. Their traditional sources of revenue, unlike born-digital organizations and fast-moving digital startups, still is significant from traditional products and services compared to their value generated with digital initiatives (Sebastian et al., 2017). Thus, we define traditional industries as “carriers of high-tech and/or knowledge-intensive science, including primary, manufacturing, engineering, and service industries” (p.21) falling into the low- and medium-technology industries (Woodfield, 2015), originating from the pre-digital age.
1.3. Purpose and Research Questions
Given the complexity and uncertainty involved in a DT as well as being a relatively new phenomenon in research, we find the area relevant for further investigation, making the purpose of the thesis exploratory. We follow the call of Verhoef et al. (2019) for more knowledge about how resources enable DT. Further, we believe that the evolvement of digital technologies will continue and the importance of FBs in the world’s economy with the complexity of their dual system, will continually play an extremely important role in the
situated, are put under immense pressure (Loonam et al., 2018; Warner & Wäger, 2019), thus following the call by Easterby-Smith et al. (2009) to explore the DC concept in such industries. Thereby is the purpose of this thesis to investigate FBs’ LTO, which is one of the most prominent characteristics and behavior that guides their decisions and actions. Whereby, we examine how this characteristic affects DC and in turn the DT.
The objective of this study is thereby to gain an in-depth understanding of the FB characteristic of LTO in the context of the phenomena DT through the creation of DC, to consequently draw theoretical and practical implications. For this objective, we address the current research gap through a qualitative multiple-case study. First, our practical purpose is to provide a greater understanding of how FBs manage and undertake a DT in traditional industries, by building on existing scholarly knowledge. Secondly, we aim to advance and supplement the current theoretical body of literature covering long-established FBs’ LTO and the DC concept in the DT context. Lastly, we intend to provide supportive recommendations for both academics, managers, and owners of FBs concerning DT. Therefore, the research question guiding this study is:
Research Question: How does a family business long-term orientation impact its digital transformation process?
2. Literature Review
After having identified gaps in the literature using a funnel approach that subsequently guided us to our research question, we now present an analytical summary of the theoretical background for our thesis in the light of the research topic.
Since this is a relatively unexplored topic, this literature review follows a traditional literature review process, drawing on the most interesting and relevant literature using high-quality journals (Easterby-Smith et al., 2015). Further, due to various definitions of all four major areas, we explicitly outline the meaning of the terms for our context.
2.1. Digital Transformation
The fact that technological innovations, especially digital ones, are driving the transformation of society and organizations, and technology heightens the interest in the literature on how companies’ abilities effectively counter to these technological changes (Gilbert, 2003; O’Reilly & Tushman, 2017). We encounter an important while complex organizational change which is often already highly prioritized and a subject on leadership agendas in traditional industries (Berman, 2012; Fitzgerald et al., 2013; Hess et al., 2016), known as the multifaceted phenomena DT. As the term DT became widely used, it consequently led to an unclear and blurred understanding (Legner et al., 2017; Tekic & Koroteev, 2019). Managers and business leaders are keen to change their organizational routines and structures, so that, digital challenges do not turn against them as existential threats, but rather to game-changing opportunities (Sebastian et al., 2017). We therefore frame the definitions existing, see Table 1, and then proposing our definition for this study. By listing current definitions for the DT phenomena provided by scholars, we intent to portrait the inconsistencies in literature but also provide a better understanding of the DT context.
The first contributions to the DT phenomenon can be traced back to the strategic Information Systems research from Venkatraman’s (1994) highly cited paper about IT-enabled business transformation. The article highlighted the alignment between IT and businesses by further mentioning that such transformation involves fundamental changes in business processes and business scope. Thereto, explicitly states Vial (2019) DT as an evolution of the IT-enabled transformation phenomenon.
Table 1 Definitions of the Phenomenon Digital Transformation
Author(s) Definition
Andriole, 2017
“digital transformation is not a software upgrade or a supply chain improvement project. It’s a planned digital shock to what may be a reasonably functioning system”
Bharadwaj et al., 2013
“an organizational strategy formulated and executed by leveraging digital resources to create differential value”
Fitzgerald et al., 2013
“the use of new digital technologies (social media, mobile, analytics or embedded devices) to enable major business improvements (such as enhancing customer experience, streamlining operations or creating new business models”
Gurbaxani & Dunkle, 2019
“digital transformation is the reinvention of the company - its vision and strategy, organizational structure, processes, capabilities, and culture”
Hess et al., 2016
“digital transformation is concerned with the changes digital technologies can bring about in a company’s business model, which result in changed products or organizational structures or in the automation of processes”
Li et al., 2018
“digital transformation highlights the impact of IT on organizational structure, routines, information flow, and organizational capabilities to accommodate and adapt to IT. In this sense, digital transformation emphasizes more the technological root of IT and the alignment between IT and businesses”
Liu et al., 2011
“an organizational transformation that integrates digital technologies and business processes in a digital economy”
Matt et al., 2015
“in contrast, a digital transformation strategy is a blueprint that supports companies in governing the transformations that arise owing to the integration of digital technologies, as well as in their operations after a transformation”
Verhoef et al., 2019
“a change in how a firm employs digital technologies, to develop a new digital business model that helps to create and appropriate more value for the firm”
Vial, 2019
“a process that aims to improve an entity by triggering significant changes to its properties through combinations of information, computing, communication, and connectivity technologies”
Warner & Wäger, 2019
“digital transformation is an ongoing process of strategic renewal that uses advances in digital technologies to build capabilities that refresh or replace an organization's business model, collaborative approach, and culture”
Westerman et al., 2014
“the use of technology to radically improve performance or reach of enterprises”
Based on the literature and on a pattern analysis in Appendix 1, we propose the following working definition of DT:
Digital transformation as a strategic transformation inducing a company-wide process, driven by digital technologies to create value that enables significant business improvements, affecting several dimensions such as fundamentally new business models, organizational performance, customer experience, and competitive advantage.
2.1.1. The Three Phases of Digital Transformation
Nascent contributions to literature foreground digital transformation as a staged process with three phases (Verhoef et al., 2019), in which DT has been evolving through three interlinked processes (North et al., 2020) – Digitization, Digitalization, and Digital Transformation – see Figure 1, resulting in strategic imperatives from organizations (Verhoef et al., 2019). Despite the case that we found several articles where digitization, digitalization, and often digital transformation where used interchangeably we agree with Legner et al. (2017) and Verhoef et al. (2019) that those terms should be separated.
Each phase is characterized by certain attributes and demands such as capabilities. Hence, Verhoef et al. (2019) question if incumbent firms in traditional industries better skip the first phase and initially start with digitalization. Additionally, the authors raise the question to which extent a company should digitally transform. However, this staged model seems useful to indicate the pervasiveness of the digital change a firm undertakes.
Figure 1 The Three Phases of Digital Transformation, adapted from Verhoef et al. (2019) 2.1.1.1. The Digitization Phase
Previous literature defined digitization as a technical process (Tilson et al., 2010), the conversion of analog information and signals into digital form, a technical transformation and process to encode analog signal into binary digits (Legner et al., 2017; Loebbecke & Picot, 2015; North et al., 2020).
Digitization Digitalization TransformationDigital
Phases of Digital Transformation
“The encoding of analog information into digital
format” (Yoo et al., 2010, p. 725)
”Through digitalization firms apply digital technologies to optimize
existing business processes” (Verhoef et al., 2019, p. 3)
”Digital transformation affects the whole company
and its ways of doing business” (Verhoef et al., 2019, p. 3)
2.1.1.2. The Digitalization Phase
While digitization refers to the technical process enabling computers’ storage of data to process and transmit it (North et al., 2020), the term digitalization goes beyond digitization. Digitalization is referred to as a two-folded dimensional definition: a socio- and technological phenomena (Legner et al., 2017) applying “digitizing techniques to broader social and institutional context that renders digital technologies infrastructural” (Tilson et al., 2010, p. 749). Therefore, digitalization describes the path how IT or digital technologies can be used to alter existing business processes, business models, and the digitalization of the way people interact through digital technologies using e.g. chat, social media, etc. (North et al., 2020; Verhoef et al., 2019).
2.1.1.3. The Digital Transformation Phase
The last phase is the most pervasive stage. This phase is characterized as the cross-cutting organizational change (Tekic & Koroteev, 2019) with wide organizational implications, based on the implementation of new digital technologies, that goes beyond the effect of digitalization (Li et al., 2018; North et al., 2020; Verhoef et al., 2019).
2.1.2. Drivers of Digital Transformation
To understand the DT phenomenon, we frame the drivers of DT. First and overarching the prevalence of digital technologies, which the literature inherently describes as disruptive (Karimi & Walter, 2015), play a vital role in driving DT as a source of disruption that is changing markets (Berman & Marshall, 2014; Hess et al., 2016; Matt et al., 2015) and industries (Fitzgerald et al., 2013; Westerman et al., 2014). Scholars highlight the transformational or disruptive implications of digital technologies (Nambisan et al., 2017, 2019). These technologies are often referred as SMACIT (social, mobile, analytics, cloud, and IoT) acronym (Kane et al., 2015; Sebastian et al., 2017; Vial, 2019). Nevertheless, the effects and usage of digital technologies such as big data, AI, robotics, and blockchain enable the development of new or enhanced products and services that are delivered to customers more efficiently (Gurbaxani & Dunkle, 2019; Iansiti & Lakhani, 2014). However, some scholars view digital technologies as “combinations of information, computing, communication, and connectivity technologies” (Bharadwaj et al., 2013, p. 471), inferring that the diffusion of innovative digital technologies impacts the creation of new and innovative digital business models and digital innovations. Thereto, digital technologies
as another external driver for DT (Berman & Marshall, 2014; Bharadwaj et al., 2013). However, Tekic and Koroteev (2019) argue that a business model is a DT driver that causes the outcome of the transformation, thus imply if the business model is ready or not for digital operations. Digital technologies not only enable digital innovations of incumbent firms (Nylén & Holmström, 2015; Svahn et al., 2017), they open new business opportunities. As digital technologies enhance firms digital innovation efforts, thus creating new possibilities and opportunities for growth such as the creation of new business models, increased customer experience, improved processes, and new or enhanced products (Berman & Marshall, 2014; Westerman et al., 2011).
Scholars emphasize that the challenges are often bigger for long-standing companies, who often failed to evolve, that previously savored success in a primarily physical world (Gurbaxani & Dunkle, 2019; Sebastian et al., 2017). Tekic and Koroteev (2019) state that “many established companies with long traditions and successful pasts have been struggling to change in a timely manner and have lost value; some even have disappeared” (p. 684). Furthermore, the existing literature highlights that strategies influence and enable DTs, whether it be a digital business strategy as a consolidated IT- and business strategy (Bharadwaj et al., 2013), or a DT strategy that supports the integration of digital technologies (Matt et al., 2015). Further Bharadwaj et al. (2013), stress the importance of a cross-functional strategy in a common digital business strategy, specifically with the integration of IT- and business strategy. However, Hess et al. (2016, p. 125) argue for the importance of a “standalone” DT strategy as it affects the firm more comprehensively than an IT strategy. Therefore stress Fitzgerald et al. (2013) and Westerman et al. (2014) the importance, that DT starts with a leadership vision. Further, they argue that a DT needs strategic decisions from the top, to prepare a roadmap for firms DT journey (Kane et al., 2015). Li et al. (2018) underline this in their study on SMEs and found that a DT is usually initiated by entrepreneurs through self‐transformation, which is necessary to start organizational capability building and induce strategic changes. However, North et al. (2020) recently found that SMEs “leaders try to foster digitalization and the implementation of some digital initiatives, processes and technologies, but they do not define clear strategies that can orientate a future digitally based growth and digital transformation” (p. 250). Further, a vision that aligns external digital opportunities with internal business processes can deploy strategic advantage (Loonam et al., 2018). Gurbaxani and Dunkle (2019) therefore state that the ability
to make financial investments in DT consistent with the strategic vision, the strategic alignment, is crucial for firms’ success. This includes whether the company is making the necessary financial commitments, whether it supports the financing of strategic digital initiatives with uncertain returns, and whether it is willing to cannibalize existing revenue streams and businesses in the short-term.
The existing literature contemplates beside digital technologies and innovation (Hinings et al., 2018; Loebbecke & Picot, 2015), two more main drivers for DT that can be seen as paradigm shifts. First, digital technologies contribute through their ubiquitous presence in everyday life (Yoo et al., 2012) to a profound impact on mobility, connectivity, and social networks that change customer expectations, consumer behaviors, and subsequently digital customer behavior (Vial, 2019). These together drive firms DT endeavors (Berman, 2012; Fitzgerald et al., 2013; Hess et al., 2016; Kane et al., 2015), making the consumer one of the major external trigger (Sebastian et al., 2017; Warner & Wäger, 2019). Second, as digital technologies disrupt industries and markets they are creating a digital competition (Gurbaxani & Dunkle, 2019; Verhoef et al., 2019), which generates market pressure. Thereafter changing the competitive environment (Mithas et al., 2013) with new competitors such as start-ups that provide new offerings (Yoo et al., 2010). This force incumbents to differentiate to remain competitive, thus being pressured to digitally transform (Berman, 2012).
Kane et al. (2015) explicitly stress that digital technologies are not the only key drivers, but also internal drivers such as digital skills, strategies, cultures, and talent development. Research agrees that to undertake a DT, digital resources (Verhoef et al., 2019) and capabilities such as DC (Warner & Wäger, 2019), digital capabilities (Yoo et al., 2010), resources such as digital assets (Verhoef et al., 2019), and competencies for digital innovation are necessary. Therefore, should these be built to be competitive in a digital world (Bharadwaj et al., 2013; Karimi & Walter, 2015; Li et al., 2018; Nambisan et al., 2017). A critical component for success is the know-how a firm possesses (Gurbaxani & Dunkle, 2019). As leadership, culture, and mindset drive a DT, recent developments in literature have suggested the framework of digital maturity (Kane et al., 2017; North et al., 2020), the ability to respond appropriately to changes (Vial, 2019) and thus a fundamental dynamic capability (Warner & Wäger, 2019). Another driver of DT, agility, concerns the ability to sense and seize market opportunities (Lee et al., 2015). Some researchers go further and emphasize that
digital agility is necessary to change the way of doing business by recombining digital assets with other organizational resources. Thereto, are also employees and partners drivers of DT (Hess et al., 2016; Legner et al., 2017; Verhoef et al., 2019). Further, DT is not an isolated process and therefore is the support of the entire organization crucial. Kane et al. (2015) stress that a tech-savvy workforce can embrace change and enable DT.
Undoubtedly financial aspects drive DT (Hess et al., 2016; Matt et al., 2015) such as decreasing profitability and revenue, but also operational drivers such as potential increased efficiency and potential process improvements are seen as internal drivers (Andriole, 2017; Kane et al., 2015; Liere-Netheler et al., 2018). DT naturally depends on the financial resources available, thereby inferring that companies under financial pressure might lack external ways to finance a transformation (Hess et al., 2016; Matt et al., 2015). Thereto, low financial pressure on the core business may reduce the perceived urgency to act (Matt et al., 2015).
2.1.3. Digital Transformation Impacts and Dimensions
As a DT is triggered by a substantial number of internal and external drivers, previously mentioned, thence there are results of them, the impacts. Thus, we only frame impacts that cause effects on the business.
DTs impact how businesses create and capture value is widely acknowledged and a central and often the major aspect in the literature (Gurbaxani & Dunkle, 2019; Liere-Netheler et al., 2018; Nambisan et al., 2019). DT can affect the whole value chain (Andal-Ancion et al., 2003), value system, and network by creating and/or changing value proposition, for example by offering new or enhanced value-generating business models, products and services to the consumer (Berman, 2012; Gray et al., 2013; Kane et al., 2017). Within the value chain, DT impacts the organizational processes dimensions, thus operational efficiency (Vial, 2019) e.g. through automation, business process improvements impacting cost savings through e.g. lower workforce costs or time-savings (Iansiti & Lakhani, 2014). Further, it impacts streamlining operations (Andriole, 2017; Fitzgerald et al., 2013) and increasing organizational performance (Karimi & Walter, 2015).
As customer behavior is driving DT, there are impacts on the customer (user) experience dimension, thus customer experience and engagement can be highly enhanced through a DT. For example, through the beforementioned improvements in the generated value in business
models, services, products, etc. (Fitzgerald et al., 2013; Lucas et al., 2013). Moreover, DT affects value networks and improved relationships, e.g. through social media, or when customers become co-creators (Lucas et al., 2013) or when facilitating changes with firms network e.g. in the supply chains (Loebbecke & Picot, 2015; Matt et al., 2015). The impact of a DT can reshape the customer value proposition, thus differentiate from competitors (Berman, 2012; Schallmo et al., 2017). For example, Li et al. (2018) argue that DT can enable firms to exploit their resources, which leads to a new business model that enhances the firm’s competitive advantage.
As DT is a highly complex, company-wide endeavor (Hess et al., 2016), it accompanies structural changes that affect the humans in the organization. The human aspect consists of the impact on the organizational culture, especially when firms e.g. create a more flexible and employee-friendly work environment, enhances knowledge sharing, and fostering a digital culture (Kane et al., 2017; Westerman et al., 2014). Hence, not only are the employees’ roles and skills affected, but also their workplace. However, leadership as a driver is also impacted, meaning that leaders must work to ensure that their organizations develop a shared digital mindset while being capable of responding to the disruptions associated with the use of digital technologies (Hansen et al., 2011; Vial, 2019). Through process improvements, for example, through data analytics or IoT, can managers be supported in their decision-making or workers be supported with smart machines (Wilson & Daugherty, 2018). Further, Gurbaxani and Dunkle (2019) recently found that a strategic vision is needed to understand digital needs and the desired “to-be” state.
Furthermore, it is important to highlight the negative characteristics and barriers for a DT. One negative impact of DT can be the potential loss of jobs caused by the introduction of digital technologies, such as the replacement of humans by robots (Vial, 2019). However, technologies will rather augment human capabilities rather than replacing them, according to Wilson and Daugherty (2018). Thereto, is inertia and resistance seen as barriers for DT in recent literature contributions (Svahn et al., 2017; Vial, 2019). Firms can avoid cultural resistance towards DT, by possessing an innovation culture (Gurbaxani & Dunkle, 2019).
2.2. Family Business
Researchers have not yet agreed on a definition of FB, though this study follows Chua et al. (1999) definition:
A business governed and/or managed with the intention to shape and pursue the vision of the business held by a dominant coalition controlled by members of the same family or a small number of families in a manner that is potentially sustainable across generations of the family or families. (p. 25)
As the term FB is most often used to define organizations that are controlled by a family dominated coalition, where the family’s vision influences the behavior and relationships between actors in the firm, across generations (Chua et al., 1999).
Furthermore, literature about FBs highlights the overlap between the family system and the business system, the larger the overlap is the higher the influence of the family (Habbershon & Williams, 1999). Thereto, FBs with a larger overlap behave differently than non-family firms (Chua et al., 1999; Habbershon & Williams, 1999). The influence increases by how the decision-making and actions of the firm is affected by the values, culture, and norms of the family (König et al., 2013). Thus, the family influences the business through both formal and informal mechanisms. Formal are, for example, family ownership and involvement in the board and/or management (Chua et al., 1999), whereas informal are, for example, influences through language and narratives that by time become shared throughout the firm (Sirmon & Hitt, 2003). Thereto, family members often act as stewards of the firm due to the long tenures and relationships. Stewardship is often featured as shared values between the family and firm, their LTO, and the family identification with the firm. Thus, family influence reduces firm-specific attributes and non-economic goals (Gómez-Mejía et al., 2007; Habbershon & Williams, 1999). FBs may therefore pursue objectives that reflect their values and heritage as a family such as socioemotional wealth referring to the non-economic value members can derive from their long-term ownership (Gómez-Mejía et al., 2007).
Moreover, research argues that FBs possess valuable, rare, inimitable, and non-substitutable resource (VRIN) (Barney, 1991) such as production facilities, know-how, and experience which are hard, if not impossible, to replicate, especially as those often contain tacit knowledge (Teece et al., 1997). The interaction between the family system, business system, and the individual members create this bundle of capabilities and resources (Habbershon & Williams, 1999), known as familiness resulting in an extraordinary commitment for development (De Massis et al., 2018). Further, familiness is connected to both economic and non-economic goals which reflect the values, attitudes, and intentions of the dominant coalition (Chua et al., 1999). For example, FBs desire to build a legacy for the next generation
and maintain their socioemotional wealth supports the willingness to invest in innovation (Classen et al., 2014). Thereto, FB owners are more likely to use internal funds to finance their investments to maintain control. This approach of using the family’s personal wealth for funding investments is due to family members reluctance to dilute ownership and unwillingness to increase debt levels, ultimately to maintain control (De Massis et al., 2018; Gómez-Mejía et al., 2007). However, the potential negative effect of limited resources is mitigated by a strategy that includes community embeddedness and superior employee relations, which are attributes of FBs (De Massis et al., 2018). This may also enhance the ability for internal financing and foster a long-term mindset (De Massis et al., 2018). Classen et al. (2014) perfectly pronounced the disputing relationship between a FB and innovation as the representation of a double-edged sword and stated “while allocating funds to innovation significantly enhances a firm’s likelihood of long-term survival, intensive innovation investments also entail substantial risks” (p. 604).
2.2.1. Long-term Orientation
Sirmon and Hitt (2003) argue that a LTO is a type of resource that businesses can leverage and Lumpkin and Brigham (2011) emphasize that LTO is a dominant logic – shared cognitive map or schemas – among the dominant coalition. Thereby, in regard to those arguments, LTO is a shared logic that enables the FB to obtain, assess, and act on information to leverage their resources thereby influencing the decision process. This study follows Lumpkin et al. (2010) definition of a LTO “as the tendency to prioritize the long-range implications and impact of decisions and actions that come to fruition after an extended time period” (p. 245). This is in line with Chua et al. (1999) previously described definition of a FB, where there is a shared logic within the dominant coalition that considers the transition of control to the forthcoming generations of family owners. Thus, a LTO reflects a temporal perspective with three dimensions; futurity, continuity, and perseverance, which influences the strategy and decision process (Le Breton-Miller & Miller, 2011; Lumpkin & Brigham, 2011). Moreover, FBs view on time-sensitive decisions depends partly on their temporal reference point – past, present, or future – as the criteria for decision. LTO values the future and therefore extends the time horizon of decisions (Lumpkin & Brigham, 2011).
Aside from the influence of transgenerational succession intentions, Lumpkin and Brigham (2011) posit that a LTO is more likely to represent a dominant logic if characteristics such as long tenures of the CEO and top management (Gómez-Mejía et al., 2007; Habbershon &
Williams, 1999; Miller & Le Breton-Miller, 2005), building a long-lasting family legacy (Chua et al., 1999; Lumpkin & Brigham, 2011), patient capital (Sirmon & Hitt, 2003; Zellweger, 2007), and non-economic goals (Gómez-Mejía et al., 2007; Kammerlander & Ganter, 2015; Lumpkin & Brigham, 2011) are present. Hence, supporting the notion that FBs have a longer strategic time horizon than non-family firms. However, does not every FB have a LTO, but the general belief is that their time horizon is longer than for non-family firms (e.g., Gómez-Mejía et al., 2007). Moreover, Lumpkin et al. (2010) propose that LTO is positively associated with the entrepreneurial orientation dimension of proactiveness, autonomy, and innovativeness. Proactiveness refers to a firms’ efforts to recognize, track, and monitor changes, technologies, and customer behaviors in the business environment, and subsequently seize them. Additionally it refers to acting on opportunities ahead of the competition and taking action in anticipation of emerging problems or future demand (Venkatraman, 1989).
Miller and Le Breton-Miller (2005) contributed that the LTO is a major reason for high-performing FBs compared to non-family firms. They also tend to have stronger financials and to be more effective (Le Breton-Miller & Miller, 2006). Therefore, intend FBs to find new ways to outcompete their competitors with their available resources to survive and thrive in the long-term (De Massis et al., 2018). However, in the disruptive environment of today with the extraordinary pace of change firms need to compete in both time-horizons (Karimi & Walter, 2015; Loonam et al., 2018). Le Breton-Miller and Miller (2011) therefore argues the required approach is a multitemporal orientation, which is the ability to manage for the long-term while staying healthy and agile in the short-term. Lumpkin and Brigham (2011) underlines that a short-term orientation may enable strategic agility and rapid responses to uncertain and changing conditions. However, this perspective might put an overemphasis on current conditions for short-term economic gain while weakening future gains. Lumpkin and Brigham (2011) explain that decisions with a time horizon is referred to as intertemporal choice and can be problematic when the strategic action is suitable in the short-term but inefficient in the long-term. Ultimately, the conditions surrounding intertemporal choices make it difficult to keep a LTO, even if the family holds a LTO (Lumpkin & Brigham, 2011). However, the success depends on the ability to balance considerations in the short-, medium-, and long-term instead of concentrating on one time horizon (Le Breton-Miller & Millermedium-, 2011).
Consequently, will the dominant coalitions way of framing complex issues and decisions-making be influenced by a LTO (Lumpkin & Brigham, 2011), especially when striving for long-term survival and perseverance. Further, there is convincing support that a LTO provides a strategic advantage, which positively contributes to the financial well-being and the socioemotional wealth creation (Gómez-Mejía et al., 2007; Lumpkin & Brigham, 2011). This is described in more detail below, under the three dimensions that compose a LTO (Le Breton-Miller & Miller, 2011; Lumpkin & Brigham, 2011).
2.2.1.1. Futurity
As previously mentioned, firms that place high importance to long-term considerations of decisions and actions, demonstrate a belief that planning for the future is valuable for the firm (Lumpkin & Brigham, 2011). Futurity, therefore, refers to the idea that it is useful to consider the future reflecting on the consequences in the medium- and long-term of decisions taken today (Le Breton-Miller & Miller, 2011). Thus, FBs with a LTO are expected to demonstrate a greater futurity than non-family firms, because of their attention for control across generations, succession planning, and long-term outcomes (Chua et al., 1999; Le Breton-Miller & Miller, 2011; Lumpkin & Brigham, 2011). Essentially, futurity refers to the view that planning, forecasting, imagining, and projection for the future has utility (Le Breton-Miller & Miller, 2011; Lumpkin & Brigham, 2011).
2.2.1.2. Continuity
Continuity refers to the permanence across time (Lumpkin & Brigham, 2011). Hence, it represents how the firm’s past such as heritage, accumulated wisdom, and history influences and affects the future (Le Breton-Miller & Miller, 2011; Lumpkin & Brigham, 2011). Further, previous research highlights the long tenures of CEOs fosters continuity through their engagement and tacit knowledge about the firm as well as a reluctance for risky or opportunistic decisions (Habbershon & Williams, 1999; Miller & Le Breton-Miller, 2005; Sirmon & Hitt, 2003). This also manifests in the usually long-lasting relationships FBs have with customers, suppliers, and employees (De Massis et al., 2018; Miller & Le Breton-Miller, 2005). Moreover, FBs characteristics such as the intention to pass the business on to future generations and desire for long-term strategies rather than short-term maximization, indicate the desire for continuity across generations (Chua et al., 1999; Gómez-Mejía et al., 2007; Lumpkin & Brigham, 2011).
2.2.1.3. Perseverance
Perseverance considers the conscientiousness and persistence needed in the short-term for reaching the objectives of the future. It originates from the belief that what is done today will pay-off in the future, indicating patience as a main aspect of perseverance (Lumpkin & Brigham, 2011). Thus, perseverance is common in FBs as their LTO and patient capital enables them to make investments for long-term benefits (Lumpkin & Brigham, 2011; Zellweger, 2007). Sirmon and Hitt (2003) stress that the use of patient capital is presumed as a strength of FBs and this enables them to make an equal amount of value as non-family firms, but with less risky investments as they tend to persevere in their decision (Zellweger, 2007). Furthermore, perseverance is needed for survival and is commonly represented in FBs’ attitude towards professionalizing the management. For example, the efforts to advance the family’s values and goals by building new management practices, supporting long-term planning, and including non-family members in the governance and management (Hall & Nordqvist, 2008). Le Breton-Miller and Miller (2011) emphasized that perseverance is ensured by the governance mechanisms that integrate non-economic goals, stewardship, and parsimonious use of capital. In other words, perseverance enhances FBs ability to compete and achieve the objective of long-term survivability and effectiveness (Chua et al., 1999).
2.2.2. Digital Transformation in Family Businesses
Aside from the dual system of FBs, DT in FBs is a relevant research area because there is convincing theoretical reason to believe that the effects of digital technologies are different in FBs than in non-family firms. For example, the adoption of technologies may differ in firms controlled by a dominant coalition, due to their LTO (Zellweger, 2007; Zellweger et al., 2012). Additionally, might the desire to keep their socioemotional wealth (Gómez-Mejía et al., 2007) reduces the tendency for collaborative endeavors (De Massis et al., 2012). Thereto, may the family involvement create unique resources (Habbershon & Williams, 1999), which can be leveraged to positively influence a DT. Additionally, Zellweger (2007) states that unique resources and LTO can benefit the implementation of innovation and stimulate learning and innovation.
Furthermore, a disruptive environment can make it difficult to retain a LTO and some decisions may, therefore, force the economic and non-economic goals to compete (Lumpkin & Brigham, 2011). For instance, the speed of new digital technologies requires FBs to change and such changes might be expensive and risky, therefore, challenging the financial security
which makes it hard to prioritize socioemotional objectives. Nevertheless, Kammerlander and Ganter (2015) explain that FBs non-economic goals such as the desire for control, power, or passing the business on to a new generation, can manifest in a timely identification of current trends and thereby benefit both medium and long-term economic goals. Thereto, non-economic goals often require a LTO to be realized. However, as FBs are heterogeneous and just as there is variation in non-economic goals pursued, there is also variation in their LTO (Lumpkin & Brigham, 2011).
FBs tend to avoid external technological collaborations, which can result in incremental rather than radical innovations (Fitz-Koch & Nordqvist, 2017). Kammerlander and Ganter (2015) explain the family CEOs’ non-economic goals as the decider for FBs’ adaption of technologies, thereby constraining the available set of responses. However, the LTO might increase the tendency to respond to disruptive technologies that take years to provide economic returns (De Massis et al., 2012). It also enables FBs to create and maintain enduring relationships with external partners, however, these relationships may become so close and personal that they limit the sphere of opportunities (Miller & Le Breton-Miller, 2005). Additionally, the top management mental models might freeze because of their long employments and therefore create a barrier for adopting disruptive technologies (König et al., 2013).
Since digital technologies are rapidly changing every industry and the traditional business models, firms might be pressured to innovate to survive. Hence, this is particularly important for FBs as their vision is to survive through generations (Lumpkin & Brigham, 2011; Nambisan et al., 2017). Lumpkin et al. (2010) state that the LTO can benefit innovations by prolonging the time for creativity to reach the objectives and increase the tolerance for experiments. Thereto, are FBs rate of disruptive innovations different, because of their higher LTO (De Massis et al., 2012; Zellweger et al., 2012). Further, König et al. (2013) argues that FBs sense disruptive technologies later than their competitors but implement adoption decisions faster and with more resilience.
Furthermore, Habbershon and Williams (1999) explain that FBs generally have a lower turnover of employees, which has several benefits such as cost savings, enabling people to absorb the culture, and thereby preserving both tacit social and tacit knowledge within the business (Sirmon & Hitt, 2003). In disruptive environments will FBs move employees from the old contexts to the new in order to reduce unrest, however, these staff members might
lack the competence or skills to perform in this new technological environment (König et al., 2013). Hence, technologies enable automation and new decision-making processes, thus firms need to develop the skills of existing employees. This demands the firm to assist their employees in this transition (Karimi & Walter, 2015; Singh & Hess, 2017).
Furthermore, long-term investments might be less useful in industries with a rapid changing environment (Le Breton-Miller & Miller, 2006). However, Teece (2014) states that the more or faster the environment changes the greater the importance of intangible assets (including relationships) and the more vital a good strategy and strong DC become for firms’ growth and economic performance. This will be explained more in the next subchapter.
2.3. Dynamic Capabilities
Globalization has led to both greater specialization and more rapid competitive responses, which made DC increasingly grown in importance (Teece, 2012). Scholars agree that Teece et al. (1997) paper first conceptualized the term, DC, referring to the exploiting existing internal and external firm-specific competences to address changing environments. Teece et al. (1997) defined DC “as the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” (p. 516). Whereto, dynamic refers to the capacity to renew competences to fit with a changing environment where technologies, competition, and markets are rapidly changing and uncertain. Capabilities, on the other hand, underline the strategic aspect of adapting, integrating, and reconfiguring both internal and external resources, competences, and assets to fit the dynamic environment (Teece et al., 1997).
Firms’ capabilities exist on various levels, firstly organizational knowledge is a collection of what is known or understood and ordinary capabilities (OC) are the collection of things the firm can perform. These mutually help identify the DC that requires adaptation due to the changing environment (Alonso et al., 2019; Zahra et al., 2006). Besides, OC are the routines that enable firms to deploy their assets to earn a living in the present (Eisenhardt & Martin, 2000; Teece, 2014; Teece et al., 1997). These are in a sense more rooted in the firms’ routines than DC, as routines are a repeated action sequence (Teece, 2012). However, firms need OC, but they do not need to necessarily own them or practice them as those can be outsourced (Teece, 2014; Teece et al., 2016). In other words, new routines such as product development is an ordinary capability, while the ability to change such capability is a DC (Zahra et al., 2006). Thus, the next level of capabilities allows and governs the rate of change in firms’ OC
and assets, the DC (Eisenhardt & Martin, 2000; Teece, 2007, 2014; Zahra et al., 2006). These DC can to a high degree not be acquired in the market, instead, they need to be developed internally (Schilke, 2014; Teece, 2014; Teece et al., 2016), because knowledge and capabilities are scarce and often difficult to imitate (Teece et al., 2016). Thereby, are DC strategic and separate from OC because firms can layer DC on top of OC, thus extending and maintaining a competitive advantage (Teece, 2012). Although firms possess OC and DC of varying strengths (Zahra et al., 2006).
Moreover, the external challenges firms experience such as globalization, disruptive technologies, new emerging industries, and rapidly changing customer demands pressures them to reflect upon and change their way of doing business (Eisenhardt & Martin, 2000; Teece, 2007; Zahra et al., 2006). Thus, this may be an impetus for firms to develop and deploy DC to reconfigure their OC (Zahra et al., 2006). Thereto, Agarwal and Helfat (2009) clearly describe the DC as the intermediary between strategy (long-term) and business models (short-term), that ensure the strategic renewal of the firm. Withal, firms need a system of DC to enable strategic renewal (Warner & Wäger, 2019).
Furthermore, DC are the organizational and strategic routines by which firms achieve new resource configurations (Eisenhardt & Martin, 2000; Sirmon & Hitt, 2003) to fit changing external markets (Schilke, 2014). Thus, referring to the strategic function of management to find new value improving combination internally and externally, especially inside the organization as there resides the most valuable and rare knowledge related assets (Teece, 2007). Thereto, a long-term competitive advantage comes from using the DC earlier, faster, and more fortuitously than other firms to build resource configurations possessing advantages (Eisenhardt & Martin, 2000).
To conclude, DC emphasizes the ability for firms to adapt and modify their asset base to increase their fit with the dynamic environment and assure survival, thereby extending the resource-based view of the firm (Schilke, 2014; Schilke et al., 2018; Teece et al., 1997). To fit with the environment, the firm has to include internal processes, partners, customers, and the business environment, which probably requires strong DC (Teece, 2007, 2014).
2.3.1. Microfoundations of Dynamic Capabilities
Teece (2007, p. 1319) broke down the DC concept into three microfoundations, namely, sensing, seizing, and transforming on an organizational level (Teece, 2014). These mutually
shape the firm’s DC (Fitz-Koch & Nordqvist, 2017). In the context of DT, Warner and Wäger (2019) revealed sub-capabilities that support the creation of digital sensing, digital seizing, and digital transforming capabilities. Moreover, the cognition of top management highly influences and contributes to these three microfoundations of DC. In agreement with Vial (2019), DT research can benefit from engaging with the three capabilities constituting DC and Warner and Wäger (2019) believe it is a strategic necessity to build DC to ensure firm survival.
2.3.1.1. Sensing Capability
Firms’ or individuals’ ability to sense opportunities differ as it requires them to have both access to information and the ability to identify, sense, and shape developments. The ability to identify opportunities depends on the knowledge and learning capacity of the firm in which the individual belongs. It requires them to interpret information from various sources and then compound and filter this gathered information to create an assumption of the future evolution (Teece, 2007). In other words, it requires firms to scan the external environment for possible trends that may disrupt the firm (Loebbecke & Picot, 2015). Additionally, this digital age of information abundance (Bharadwaj et al., 2013) requires firms to build sensing capabilities that are ever more digitized (Nambisan et al., 2017; Sebastian et al., 2017). Furthermore, Teece (2007) argues that research & development (R&D) can be seen as a search for new products and processes, but this activity is usually internal. However, this is just one of the components, firms additionally need to search in the core and outer rim of their business environment. Thus, the search needs to embrace possible collaborators e.g. customers, consumers, and suppliers.
Warner and Wäger (2019) state that to make sense of the unforeseen trends in this disruptive environment, digital scouting and digital scenario planning capabilities are vital to create and develop. However, the creation of these capabilities is contingent on the digital mindset crafting. Thereto, a digital mindset and culture throughout the firm is critical for creating sensing capabilities that enable them to seize unexpected trends.
Furthermore, some individuals in the firm may have the required skills for sensing, however, these are more desirable to embed into the firm. Hence, the firm would be vulnerable if these individuals decide to leave (Teece, 2007). Teece et al. (1997) note that a decentralized organization with more local autonomy is better prepared to sense technological and market
developments because information decay as it moves through hierarchical levels. In other words, those on how to embed sensing capabilities throughout the firm may benefit due to more diverse information and insights of external trends (Teece, 2012).
2.3.1.2. Seizing Capability
Firms do not just face the problem of when, where, and how much to invest, they also need to select or build a business model. Besides, firms need seizing capabilities that tolerate them to experiment with digital platforms and new business models to respond to emerging opportunities and threats (Teece, 2007). Thereby, is seizing somewhat an experimental capability that underpins firms’ actions and commitments through methods such as rapid prototyping to balance between risks and rewards (Warner & Wäger, 2019).
Warner and Wäger (2019) argue that digital seizing consists of the sub-capabilities strategic agility, rapid prototyping, and balancing digital portfolios. Agility refers to firms capacity to efficiently and effectively redeploy their resources for more value-enhancing, protecting, and seizing activities (Teece et al., 2016). Firms can increase their strategic agility by using rapid prototyping. It requires firms to create innovation labs that experiment with low viable products to gather customer feedback more or less in real-time, where it can be used for responding to trends. Sambamurthy et al. (2003) argue that firms may overcome inertia by experimenting with the agility to seize opportunities. Consequently, DC in rapid prototyping fosters the possibility of accelerating the DT. Moreover, Sambamurthy et al. (2003) refer agility to activities such as co-creating user experiences, orchestrating an ecosystem of external partners, achieving speed, agility, and cost efficiencies. Thus, strategic agility is essential for competing in disruptive environments and fast decision-making is central for seizing technological opportunities (Teece et al., 2016).
2.3.1.3. Transforming Capability
Firms need transforming capabilities to implement and make the full use of the new strategic change (Bharadwaj et al., 2013; Karimi & Walter, 2015), thus supporting the continuous renewal of assets and structures to respond to the disruptive environments and sustained growth (Agarwal & Helfat, 2009; Teece, 2014). Further, the most prominent aspect of DC to address radical opportunities or threats is the transforming capability, which needs to be practiced occasionally to reduce rigidities that evolve due to asset accumulation and operational standards. Additionally, divergence from routines will increase anxiety in the firm
