MMRCDISCUSSION PAPER SERIES

No. 528

Factory based new business development- Diversification strategies through organizational capability of
manufacturing Masayasu, NAGASHIMA
mnagashi@fc.ritsumei.ac.jp
Ritsumeikan University
Junjiro, SHINTAKUThe University of Tokyo
Takahiro, TOMINO
Meiji University
May 2020

東京大学ものづくり経営研究センター
Manufacturing Management Research Center (MMRC)
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Factory based new business development- Diversification strategies through organizational
capability of manufacturing Masayasu, NAGASHIMA
mnagashi@fc.ritsumei.ac.jp
Ritsumeikan University
Junjiro, SHINTAKUThe University of Tokyo
Takahiro, TOMINO
Meiji University

Abstract
This paper aims to explore how to implement diversification strategies successfully todevelop a new business through organizational capability of manufacturing factories in
the Multinational Company (MNC).
Although diversification strategies mainly have been argued from perspective of headquarter, we focus on the role of factory. This study explored some important findings.
First, when resources transfer from head quarter to overseas factory proceeds to someextent, overseas factory develops new business to meet special local needs.
Second, what made it possible to implement diversification strategies successfully wasinteraction from factories to head quarter that was led by strong subsidiary initiative.
Keywords: Diversification strategy, organizational capability, subsidiary initiative

Introduction
Today, when existing business declines, factories under its umbrella would be closed
down, and their accumulated technical expertise and organizational capability would bealso lost. In particular, since product life cycle is shortened recently, factories would be
easily closed when there is replacement of business. Under such circumstances for thefactory, it is necessary to build a new capability for survival. Therefore, this paper aims
to explore how to implement diversification strategies successfully based on theorganizational capability of manufacturing factory in the MNC.
In previous studies, diversification strategies of MNC mainly have been argued fromperspective of the head quarter. However, we focus on the role of factory. Small andmedium-sized firm specialized in the core process technology (such as press, molding,and casting), is mostly developing new customers and new businesses based on theprocess technologies of their factories. Even in large firm of MNC, there are factories thathave strong competitiveness in the core process technology. Such knowledge unique tothe factories has evolved and developed as organizational capability, which is source of1competitive advantage of the firm. Therefore, developing a new business to survive by
utilizing the organizational capability of factories is more likely to contribute tomaintaining the long-term competitiveness of firm.
However, it is not easy for large firm of MNC that takes the divisional structure, topropose new business from factories that are only production sites. Because
diversification strategies tend to be implemented by central decision making designed byhead quarter (R&D or corporate planning section) that details how to create synergy
effects on product technologies and/or on sales.
This paper addresses the following research question: How MNC could implement
diversification strategies successfully to develop a new business through organizational
capability of manufacturing factories? In order to explore our research question, we apply
a conceptual framework defined by Schmid et al.(2014). In our discussion ofdiversification, we firstly argue that developing a new business to survive by utilizing theorganizational capability of factories is more likely to contribute to maintaining the longterm competitiveness of firm. In this line of arguments, we will emphasize a focus on
how to implement diversification strategies successfully. In our case analysis, the focus
is on how to build organizational capability of manufacturing subsidiaries for new
business development. Based on the case study, we draw an insight on what made it
possible to implement diversification strategies successfully was interaction frommanufacturing factories to head quarter that was led by strong subsidiary initiative.
However, the generalization will remain a topic for future research.
Our methodology is case-based. Diversification under the framework defined by
Schmid et al.(2014) is contended in this study. It is expected to contribute boththeoretically and practically to MNC, hence, enriching the existing literature.
Literature Review
The literature on the key factors associated with new business development, including
diversification strategy, resources-organizational capability-diversification performance,and subsidiary initiative.
Diversification Strategy
Diversification strategy, in terms of entering into a related or unrelated business and/or
entering into a new geographic market is considered to be of crucial importance to anorganization's long term leadership position in its own industry (Hoopes, 1999; Goerzen& Beamish, 2003; Nachum, 2004; Narasimhan & Kim, 2002). Another definition ofdiversification strategy is a strategy implemented by the top executives in order to achievebusiness growth by entering new businesses and attaining above-average returns bytaking advantage of the incoming opportunities (Narasimhan & Kim, 2002). Strategic
management literature has studied extensively the costs and the benefits of diversification
strategy and its effect on competitive advantage for an organization (Chakrabarti, Singh,& Mahmood, 2007; Palich, Cradinal, & Miller, 2000; Ramanujam & Varadarajan, 1989).
Researchers have particularly focused on the effect of product/service diversification
which is defined as the synergy in different lines of business (Berger & Ofek, 1995; Bettis& Mahajan, 1985) and, international diversification or geographical diversification in adifferent market (Fang, Wade, Delios, & Beamish, 2007; Ghoshal, 1987; Kim, Hwang,& Burgers, 1993) on firm performance.
Thus, the center of attention in the diversification strategy field, mainly laid down
towards on how to manage diversification so to improve the performance. However, thereis few empirical research that has investigated how the management decision to be taken
for the effective diversification strategy.
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Resources, Organizational Capability, Diversification Performance
For resource-based view (RBV) scholars, a firm is a bundle of resources and capabilities(Wernerfelt,1984). Amit and Schoemaker (1993) define resource as stocks of available
factors that are owned or controlled by the firm. Resource consist of tangible components
like financial and physical assets like property, plant and equipment, and intangible
components like human capital, patent, technology knowhow (Grant, 1991; Amit &Schoemaker,1993). Capability is defined as the ability of the firm to use its resource toeffect a desired end (Amit & Schoemaker,1993). It is like intermediate goods generated
by the firm using organizational processes to provide enhanced productivity to its
resources (Amit & Schoemaker,1993). Capabilities are invisible assets, tangible orintangible organizational processes developed by a firm over a period of time that cannot
be easily bought (Teece, Pisano, & Shuen,1997).
RBV argues that firms will have different nature of resources and varying levels ofcapabilities. Firms' survival depends on its ability to create new resources, build on its
capabilities platform, and make the capabilities more inimitable to achieve competitive
advantage (Day & Wensley, 1988; Peteraf, 1993; Prahalad & Hamel, 1990). Thus, merepossession of superior resources cannot achieve competitive advantage for the firm, but
how a firm deploys its scarce resources, put its capabilities to best use, invest andcomplement its existing capabilities infrastructure can bring immobility and inimitability
to its resource-capability framework (Peteraf, 1993; Song et al., 2007). There has been
extensive use of RBV framework to analyze firm performance (Dutta, Narasimhan, &Surendra, 1999; Liebermann & Dhawan, 2005), to understand the interaction between
organizational capabilities and their effect on performance (Song et al., 2007; Song,
Droge, Hanvanich, & Calantone, 2005; Song, Nason, & Benedetto, 2008).
According to RBV, a firm diversifies to extend its resources into new markets andbusinesses. Resources and capabilities such as business knowledge, technologicalexpertise, and international diversification experience are transferred between the parent
company and its business subsidiaries (Fang et al., 2007; Lu & Beamish, 2001). RBV
posits that as firms diversify within the scope of their resources and capabilities, theyobtain economies of scale through lower operational costs and leverage superior businessefficiency through shared fixed assets like common production facilities, distribution
channels, or even brand names (Hitt et al., 1997). In addition, RBV theory suggests thatfirm performance is due to initiative of resources that have differential productivity(Makadok, 2001).
Although there are factories in MNC that developed the core process technology andsuch knowledge unique to the factories has developed as a source of strengths of the firm,
it is not easy for MNC to propose new business from factories. Because diversification
strategies tend to be implemented by central decision making designed by head quarter
that details how to create synergy effects on product technologies and/or on sales(Chandler, 1962; Hoskisson, 1987; Nath et al., 2010). Consequently, new businesses
based on the factory’s technological expertise and organizational capabilities have beenrarely developed.
Subsidiary Initiative
Subsidiary initiatives are proactive, autonomous and risk-taking activities that originate
outside the home country in a foreign subsidiary of a MNC and are initiated by actors inthe subsidiary. The study of subsidiary initiatives constitutes a growing literature in theInternational Business field (Verbeke et al., 2011). Subsidiaries pursue entrepreneurial
opportunities for local and global application, often even independently of the parent
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organization (Birkinshaw, 1997; Ghoshal and Bartlett, 1988; Scott and Gibbons, 2009;
Williams, 2009). Although the potential benefits of subsidiaries taking their own
initiatives are increasingly acknowledged, the concept of subsidiary initiatives was evenrecently labeled a troublesome and little-understood concept (Ambos et al., 2010).
Julian Birkinshaw (1997) defined subsidiary initiative as a type of dispersed
entrepreneurship in which initiative is undertaken by an MNC subsidiary outside thehome country and not by the corporate center. Following Kanter (1982), he defined
initiative as a discrete, proactive undertaking that advances a new way for the corporation
to use or expand its resources. A successful subsidiary initiative, adds Birkinshaw, is anentrepreneurial process that begins with the identification of an opportunity andculminates in the commitment of resources to that opportunity.
Since the initial definition of subsidiary initiatives laid heavy emphasis on
entrepreneurial subsidiary behaviour and few detailed literature review on the topic how
to construct subsidiary initiatives, Schmid et al.(2014) conducted a systematic search inin all relevant academic business journals to derive a framework that helps to distinguishbetween different types of subsidiary initiatives. Some initiatives may involve mainlyorganizational entrepreneurship by MNC subsidiaries, reflecting their increasing weight
within the operations of the parent organization and their increasing potential over time
to cause periodic organizational disequilibrium within the MNC. Other initiatives,
however, may involve a high level of market entrepreneurship to take advantage ofbusiness opportunities deriving from special demographical and social characteristics ofthese mega-markets (Figure 1).
Degree of Organizational Entrepreneurship
Initiative for HQ
to Augment
Subsidiary’s
Position in the
MNC

Augmented
Subsidiary
Contribution to
MNC Value Chain

Subsidiary
Initiative
Showcased forWider Adoption
in the MNC

Promotion to
Operational
Center of
Excellence

Global Market
Initiatives
Local-For-Global
Adaptive Innovations
Local Market
Initiatives

Subsidiary
Initiative
Confined toLocal Level
Increasing Org.
Disequilibrium

Global-Internal
Initiatives

Local-For-Local
Adaptive Innovations
Additive New
Business
Initiatives

Operational
Improvement
Initiatives
Increasing Market
Disequilibrium

Local-For-Global
Disruptive
Innovations

Local-For-Local
Disruptive
Innovations
Disruptive Business
Creation: QuasiSchumpeterian
Entrepreneurship

Degree of Market Entrepreneurship(Source: Schmid et al., 2014)

Figure 1-Integrative framework of different subsidiary initiatives type
However, they lack any clear-cut case of a subsidiary initiative belonging in the lower
left-hand corner, i.e. very low on both market entrepreneurship and organizational
entrepreneurship. Then, this paper tries to show some specific examples in this area so tocontribute to clarify a total concept of integrative framework of different subsidiary
initiatives type defined by Schmid et al.(2014).
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CasesThis paper considers an exploratory case study of new business development in the realworld. Yin (1994) claims that case studies are most appropriate for exploratory research.
A Japanese Manufacturing Company X makes digital still camera in a product assembly
factory B of a subsidiary in China, a lens (aspheric lens and lens units) component factory
A in a subsidiary in north Japan, with the R&D head quarter in central Japan. In Company
X, in-house production of aspheric lens and lens units are defined as black box technology
to achieve the best picture quality, which are regarded as their competitive advantages.
This study highlights technology transfer from one lens factory in Japan to an assembly
factory in China.
The cases represent a series of backward integration in China with the support of coretechnology transfer of lens from Japan. This core technology transfer helped the factoryin China to make significant financial improvement in 2015, recovering from the pastfinancial deficit while the global market of DSC declined to almost one-third in quantityand almost half in amount in 2015 versus 2010.
Data used
To confirm the validity and reliability of the research results, three different sources ofdata were used for this case study. First, qualitative data were collected by conducting indepth interviews with 22 diverse executives from Company X from 2015 to 2017. Thoseinterviewed included 5 managers from the head quarter in Japan, 5 from the lens factoryin Japan, and 12 (6 each Japanese and Chinese managers) from the assembly factory ofCompany X in China. These managers are responsible for planning, R&D, procurement,
production, and marketing as they are in a core position to obtain information to identify
the background, motives, objectives, structures, processes, roles and responsibilities, andperformance evaluation between head quarter and subsidiaries. Each interview was
documented carefully with their permission. All the interviews were tape-recorded anddocumented in detail. Formal, structured interviews were conducted to maintainconsistency. Post interview analysis included comparison of the multiple interview resultswith the findings of earlier studies and additional questions were probed as needed.
Second, performance results and evolution of the Company’s X factory in China from2011 to 2015 are used as a key performance indicator of the adequate retaining ability of
beneficiaries to transfer the technology. The comparative figures of the sales, fixed cost,
marginal profit ratio, stock days, and profit ratio during 2011–2015 were collected. Suchlongitudinal case studies allow the examination of the stable and up-to-date evolving setsof manufacturing practices.
Third, to measure the global demand of DSC, the market data from 2009 to 2015 wereobtained from Camera and Imaging Products Association (CIPA) in Japan. The market
share data for Japanese manufacturers in 2011 of GfK, a market demand researchcompany, were also used.
Digital Still Camera Market
Owing to commoditization of the compact category and decline in total demand, there
has been stiff competition in the digital camera market. Camera-embedded smart phones
have posed a big threat. There has been a sharp decline in the global demand for thecompact category of DSCs since 2010. The global demand in 2015 versus 2010 was at
level of one-third in quantity base, half in amount base (Table 1). Table 1 shows the global
shipment evolution of Japanese manufacturers for DSC from 2009 to 2015 based on datafrom the CIPA in Japan. Since Japanese manufacturers represent a majority of the global
5market share for DSCs (77.9% for total DSC, 99% for interchangeable lens camera in2011 based on the Gfk in Table 2), global shipment evolution of Japanese manufacturers
for DSC could indicate the basic trend of the global market demand for DSC.
Table 1-Global demand evolution of DSC (Shipment base by Japanese Manufacturers)(Source: data of Camera and Imaging Products Association in Japan)
Table 2-Global market share of DSC by Japanese Manufacturers(Source: Gfk/Jan–Dec 2011)
Diversification process and strategy from two factories.
The following cases represent a series of activities as to diversification process andstrategy from two factories.
Factory A in JapanThe factory A in north Japan started operation as a component factory producing magnetic
heads, lens barrels and cylinders for video cameras in 1982. But around 2000, as thedemand for video cameras declines the factory faced a crisis of closure. Therefore, inorder to overcome this crisis, the factory has implemented a diversification strategy thattakes advantage of the organizational capability of core process technology cultivated by
the factory in the past.
In particular, factory A began to develop aspheric lens and lens barrel for digital stillcamera (DSC) based on core process technology such as cutting, molding and polishing(Figure 2). At the same time the factory itself also cultivated new external customers.
Previously the customer was only an in-house subsidiary.
In addition, they continued to develop and evolve a set of technologies while listening
to external customer request, and also advanced into automotive related business.
As a result, sales have doubled and the crisis of factory closure has gone out without
fail.

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<Products>
Camera module
Optical pickup
Lens unit
Aspheric lensAuto parts<core process technologies>
Molding

Polishing

Joining

Deposition

Optical

Semiconductor mounting

Cutting

Figure 2- Diversification strategy based on core process technology

Factory B in China
The factory B of a subsidiary in China started operation as a audio related factory
producing radios, portable CD players and so on. After that, since 2005 the factory has
been producing DSC and lenses.
However, global demand for DSC will sharply decrease due to the rapid growth of thesmartphone market from around 2011. Along with that, the profit structure of factory B
worsened. Therefore, Mr.Y who has manipulated a series of diversification strategies offactory A got a position as the factory B director, and also executed a similar
diversification strategy there.
Up to around 2011, the factory B was a management structure that completely depends
on DSC demand. To escape from only DSC production the factory devised somestrategies.
First, the factory B has evolved the core process technology such as die machining,molding, mounting, and precision assembly which the factory A has cultivated up until
then, and established a development department (optical design, electrical design, molddesign, lens barrel design, mechanical design) in 2014. After that, the factory advanced
into new fields such as medical equipment for Chinese domestic market and the drone foraerial photography. Second the factory also sold products himself to create sales to suchnew customers.
Backward integrated manufacturing and downstream activity helped factory B in China
to enter into diversified business that could lead to make significant financial
improvement in 2015, recovering from the past financial deficit while the global market
of DSC declined to almost one-third in quantity and almost half in amount in 2015 versus
2011 (Table 3).

Table 3- Performance evolution of China factory7Notes: Figures in 2015 are calculated based on the index 100 in 2011

Findings
This study explored three important findings.
First, in case that the transfer of management resources from head quarter to overseas
subsidiary proceeds to some extent, overseas subsidiary develops new business to meet
special local market needs, which is difficult for head quarter to follow it.
Second, what made it possible to implement diversification strategies successfully wasinteraction from manufacturing factories to head quarter that was led by strong subsidiary
initiative.
Third, overseas subsidiaries developed their organizational capabilities to launch new
business while receiving the resources transferred from head quarter.
Today, factory that produces conventional product is far away from the decisionmaking of diversification designed by interaction from head quarter so that new
businesses based on the factory technology expertise and organizational capability offactory could be rarely developed.
Theoretical contribution
These findings have some important theoretical contribution.
First, an overseas subsidiary launches a new business under the initiative of thesubsidiary regardless of the mission of the head quarter and the source of such local
initiative comes from not only market needs but also organizational capability of
manufacturing factories.
Second, it is necessary for head quarter (R&D or corporate planning section) of MNC
to know how to make the effective decision making of diversification strategy, not only
based on synergy effects on product technologies and/or on sales, but also, based on theorganizational capability of manufacturing factories.
Third, this paper showed some specific examples in lacking area of concept of
integrative framework of different subsidiary initiatives type defined by Schmid et al.
(2014) so to contribute to clarify how to construct subsidiary initiatives in total.
This study has a unique contribution in that we explored how to implement
diversification strategy successfully based on the organizational capability of
manufacturing factories. We do hope that researchers as well as MNC managers canbenefit from this research to make the successful implementation of diversification
strategy that could lead to high performance outcomes.
Acknowledgments
This study was supported by the grant by Japan Society for the Promotion of Science in2017 (Code: 17H02568) and 2018 (Code: 18H00888). We sincerely express our gratitude
to the Society for the support.
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