Institutional Path Dependence in Competitive Dynamics: The ...

Institutional Path Dependence inCompetitive Dynamics: The Case of Paper

Industries in Finland and the USAJuha-Antti Lamberga,*, Juha Laurilab and Tomi Nokelainenc

aDepartment of History and Ethnology and School of Economics and Business, University of Jyväskylä, Jyväskylä, FinlandbTurku School of Economics, University of Turku, Turku, Finland

cLaboratory of Industrial Management, Åbo Akademi University, Turku, Finland

Prior research on competitive dynamics has failed to offer tools to understand distorted pat-terns of competition that emerge from distinct institutional and historical contexts. Our analy-sis suggests that a joint effect of institutional rules, governance structures, and shared cognitionplays a pivotal role in firm-level competitive behavior and capability development. We showhow globally significant market positions can result from specific institutional arrangementsbetween firms and governments, especially if coupled with interfirm contractual commitments.Our results call for more attention to these interfirm commitments that are built on formalrules and governmental support, but whose impact they yet exceed. Copyright © 2016 JohnWiley & Sons, Ltd.

INTRODUCTION

Strategic management research has advanced multipleperspectives on understanding competition, such as in-dustrial organization (Porter 1980), the resource-basedview (Wernerfelt 1984), the dynamic capabilities per-spective (Teece et al. 1997), and competitive dynamics(Smith et al. 1991). The competitive dynamics perspec-tive stands out from the others by viewing competitionas interaction between rival organizations (Grimmet al. 2005). With individual competitive action as theelementary unit of analysis, a key question related toexplaining organizations’ competitive behaviors andthe resulting outcomes asks how to understand the pro-cesses that generate such actions.

According to existing research on competitive dy-namics, such action-generating processes involve notonly managers’ intentions and cognitions (Hambricket al. 1996) but also the use of existing capabilities(Ndofor et al. 2011). These two elements are combinedin the awareness–motivation–capability (AMC) frame-work (Chen et al. 2007; Livengood and Reger 2010),which the competitive dynamics tradition has widelyadopted as the key theoretical perspective for theorizingabout and predicting competitive behavior. Accordingto the AMC framework, for an organization to initiatea competitive action, its decision-makers must first be-come aware of an opportunity for a particular actionand then become motivated to undertake the action. Fi-nally, the organization as a whole must have the capabil-ity to carry out the action. Although not all research onfirms’ competitive behavior explicitly employs theAMC framework, the vast majority shares the frame-work’s key premises of managerial decision-making(A and M) and organizational capabilities (C) driving

*Correspondence to: Juha-Antti Lamberg, Department of History andEthnology and School of Economics and Business, University ofJyväskylä, Jyväskylä, Finland. E-mail: [email protected] in alphabetical order. All authors contributed equally.

Copyright © 2016 John Wiley & Sons, Ltd.

MANAGERIAL AND DECISION ECONOMICS

Manage. Decis. Econ. (2016)

Published online in Wiley Online Library(wileyonlinelibrary.com) DOI: 10.1002/mde.2839

competitive behavior and (eventually) competitive per-formance. The firm-specific nature of the AMC frame-work, however, has prevented competitive dynamicsresearchers from identifying alternative explanationsfor competitive behavior.

The alternative approach that we propose is rooted innew institutional economics (NIE) that see any eco-nomic behavior as largely determined by prevailing in-stitutional rules and governance structures (Williamson2000; Zenger et al. 2000). Despite some exceptions(e.g., Miller and Chen 1996; Livengood and Reger2010), action-based literature on competitive strategyhas treated competition as reacting to events in compa-nies’ immediate market surroundings, thus excludingthe possibility that actions’ premises could beinterpreted to reflect the institutional environment inwhich firms are embedded (Granovetter 1985). Themost salient exception to this dominant view is the rec-ognition of behavioral conformity typical in an industry,with ‘continuation of traditions’ and ‘industry experi-ence’ as contributing factors (Miller and Chen 1996:1209). Similarly, although some studies of competitivebehavior have explicitly incorporated the national con-text in their investigation, they have viewed that contextfrom the perspective of regulatory protection and avail-ability of resources in the economy (e.g., Meyer andSinani 2009). Overall, a more thorough integration ofNIE into the understanding of competition and firm-level competitive dynamics remains missing.

New institutional economics researchers have explic-itly linked competitive interaction and the institutionalenvironment in which such interactions occur.Mantzavinos et al. (2004) view the interaction betweeninstitutions and competition as a crucial element in eco-nomic evolution:

What kind of competition prevails during the pro-cess of exchange depends crucially on the institu-tions that prevail at the time. Institutions determinenot only the kind of competitive game, but also itstempo. So the players’ tempo of learning dependson the intensity of the competition,which is in turnset by the institutional framework. Because ofcompetition, the agents suffering from pecuniaryexternal effects are motivated to learn more to en-sure their survival in the economic struggle.

Despite this relatively obvious link between compet-itive dynamics and NIE theorizing (cf. Denzau andNorth 1994; Ingram and Silverman 2000), most re-search on competitive strategy has not posited the sur-rounding institutional environment as an importantcondition for the phenomenon, instead treating signs

of such influence as anomalies (e.g., Miller and Chen1996). In contrast, the purpose of our research is to offeran institutional explanation for historically contingentpatterns of competitive behavior. We build our theoriz-ing on a comparative setting in which we observe thecompetitive actions of two distinct groups of firms:one group (US forest-industry firms) with firm-specific“strategy as choice” (Porter 1996) behaviors that resultin heterogeneity at the industry level and another group(Finnish forest-industry firms) displaying mutually sim-ilar behaviors that result in group-level mimicry with re-spect to the industry as a whole. However, after a longrivalry between these very different groups, the globaltop 10 list of forest-industry firms contains firms fromboth of these groups. In line with Allen’s (2011) andLanglois’s (2013) works, the mystery that we want tosolve is the following: Which economic problems didFinnish forest-industry firms tackle by acting in concertand which types of features in their institutional environ-ments explain their competitive behavior? We explainthe rationale driving strategic decisions and capabilitydevelopment as interplays of path dependence (David1994; Pierson 2000) on three levels: informal and for-mal institutions, governing structures of transacting,and shared cognition among an industrial elite.

THEORETICAL BACKGROUND

Situational Logic in Existing Competitive DynamicsResearch

Research in action-based competitive strategy is pre-mised on studying what companies actually do andhow they interact when they compete, with a specificdiscrete action as a basic unit of analysis (Smith et al.1992). Along these lines, even if competition is notdetermined, it is at least strongly shaped by tension be-tween companies, as perceived by their decision-makers(Chen et al. 2007), self-defined identity domains (LeBreton-Miller et al. 2011), and perceived competitive‘turfs’ that companies are especially motivated to de-fend, beyond the extent warranted by rationality(Livengood and Reger 2010).

Competitive dynamics research continues to lack nu-anced theorizing about the connection between the pro-cess that drives competitive behavior and theinstitutional and historical contexts in which firm ac-tions are embedded (Chen and Miller 2012, p. 146).Consequently, the processual mechanisms underlyingthe identified associations between different variablesremain largely implicit. According to Chen and

JUHA-ANTTI LAMBERG ET AL.

Copyright © 2016 John Wiley & Sons, Ltd. Manage. Decis. Econ. (2016)DOI: 10.1002/mde

Hambrick (2012), a viable path forward in this regardwould be to build connections to institutionally orientedeconomic theory, which has well-established traditionsthat explain economic behavior as an inherently contex-tually embedded phenomenon. To date, despite the po-tential of this line of inquiry with respect to providinga theoretically solid foundation for bridging micro andmacro phenomena in this area, institutional notions inaction-based competitive strategy research essentiallyrefer to behavioral patterns that conform to an industry’sprevailing norm, that is, ‘average’ competitive behavior(Miller and Chen 1996; Podolny 1993).

Thus, although it is well acknowledged that com-petitive behavior is characteristically path dependent(Lamberg et al. 2009) and defines a company in the eyesof its stakeholders (Parmar et al. 2010), who constantlyjudge the company and its legitimacy (Bitektine 2011),very little is known about how the institutional environ-ment is enacted by the company over time and how thecompany is reified and perceived by its stakeholders inturn (Chen and Miller 2012). In particular, the competi-tive dynamics literature makes strong yet implicit as-sumptions of the rationalities that drive competitiveactions, regardless of their historical and institutionalcontext.

New Institutional Economics Perspective on Firms’Competitive Behavior

Whereas the competitive dynamics literature focuses onmicro-level economic transactions and recognizes some

connections between them and the surrounding institu-tional environment, a perspective informed by NIEwould turn this setting upside down. As indicated inour model illustrated in Figure 1, new institutionaleconomists see competitive actions as ‘third-ordereconomizing’ (Williamson 2000: 597) or ‘strategizing’(Williamson 1991), which is determined by first-orderand second-order economizing, that is, informal and for-mal institutions and governance structures. This posi-tioning of competitive actions as a specific layer in alarger institutional system calls into question many ofthe explicit and implicit assumptions about decision-making criteria in the competitive dynamics literatureand has a substantial potential to theoretically enrich thatliterature.

Our model of the institutional process that leads todistinct patterns of competitive actions is particularly in-spired by Williamson (2000: 597) and Denzau andNorth (1994: 18; see also Greif 1993, Greif and Laitin2004). The model’s key elements are competitive ac-tions embedded in a specific institutional context andgovernance structure, on the one hand, and the restric-tion of these actions by the firms’ capabilities to performthem on the other hand. Later, we further explicate ourmodel and propose research questions that we then seekto address in the subsequent empirical analysis.

Managerial Cognition and the Exchange Problem

The first difference between competitive dynamics andthe NIE literature concerns rationality in general and

Figure 1. Model of the emergence of competitive actions in their institutional context.

INSTITUTIONAL PATH DEPENDENCE IN COMPETITIVE DYNAMICS


the definition of an exchange problem in particular. Inthe competitive dynamics literature, the problem thatdrives firms to behave in certain ways in the marketplaceis straightforward: the need to maximize short-term rel-ative marketplace advantage over rivals competing overthe same customer-purchasing power (Williams 2007).Usually, the goal of such behavior is operationalized interms of market share (Ketchen et al. 2004). On theone hand, firms’ key goals are assumed to be minimiza-tion of adverse responses to their own actions. On theother hand, these goals are assumed to involvedefending against one’s own loss of market position inthe face of threatening peer actions. Thus, the key trig-ger for competitive actions is the (implicitly motivated)maximization of a firm’s share of customers’ purchasesand sometimes its ability to secure access to valuable re-sources (cf. Williamson 1991).

The NIE literature takes a substantially differentstance on rationality and managerial cognition. AsLanglois (2013) summarizes in his review of Allen’sbook (Allen 2011), ‘rather than labeling puzzling behav-iors as ignorant and inefficient … the NIE attempts toexplain such puzzles as responses to the costs, con-straints, and scarcities the economic actors face.’Therefore, from the NIE perspective, organizationalactors—entrepreneurs, managers, and others—observeand interpret the institutional environment and the con-tracts that guide actions and act accordingly (Ingramand Silverman 2000). North and his colleagues (North1990; Denzau and North, 1994; Mantzavinos et al.2004) further emphasize the role of cognition and ‘men-tal models’ (cf. Robertson and Langlois 1994; Greif andLaitin 2004) as intra-firm mechanisms that make certainbehaviors more viable than others. Mental models are‘cognitive filters’ in the sense that actors perceive ele-ments in their institutional and contractual environmentas related to economic transactions resulting in, for ex-ample, decisions on competitive behavior (cf. Langlois1986: 241; North 1990: 141 and 143). These works war-rant particular attention on how managerial perceptioninfluences firm-level competitive actions and lead us toformulate our first research question. Research question1: How do aspects of the institutional environment, asperceived by managers in particular, materialize infirm-level competitive actions?

Contractual Environment and GovernanceStructure

The competitive dynamics literature pays little attentionto the specific nature of firm governance structures.Firms’ contractual environment is considered primarily

a transactional space between mutually competingfirms, their customers (Williams 2007), and sometimesresource suppliers (Markman et al. 2009); individualstudies focus on differences among firms (Chen andHambrick 1995; Ferrier et al. 1999) and cooperativelinks between them (Gnyawali and Madhavan 2001).For example, it has been found that implicit social con-tracts (i.e., shared understanding) (Yu et al. 2009) existbetween rivals related to which markets ‘belong’ towhom (and to what extent). The overall picture, how-ever, remains centered on firms without explicitly in-cluding the contractual environment as a variableaffecting their competitive behavior.

In contrast, the contractual nature of economic be-havior is a key element in the NIE literature (Aokiet al. 1990). This is especially true of transaction costeconomics (TCE) (Williamson 1985). Following Coase(1992) and especially Williamson (1975, 1985), manyNIE scholars use contractual perspectives (Hart andHolmström 1986), not purely market-based transac-tions, to explain why firms exist (Argyres andLiebeskind 1999). Williamson (e.g., Williamson 1991:76) himself is very explicit in emphasizing the funda-mental role played by contracts and the organizing ofeconomic transactions (i.e., economizing) comparedwith strategizing (e.g., competitive actions). Conse-quently, firms are constrained in their competitive be-havior. For example, all firms have made formalcontracts with other firms and constituents (e.g., laborunions), and violating these contracts is often either im-possible or very costly (Nickerson and Silverman 2009).Simultaneously, the contractual environment both al-lows and motivates some actions. Williamson’s (1991)example of the role of national governance system as akey factor underlying Japanese firms’ commercial suc-cess since the Second World War is illuminating in thisrespect (cf. Mowery and Teece 1993; Teece 1992).

Thus, the key messages that TCE sends to competi-tive dynamics research can be condensed into two no-tions. First, firms are linked in various contractualways to their environments (Ketokivi and Mahoney2015), and their internal governance structure stronglyaffects managerial decision-making (Hart 1995).Whereas TCE generally focuses on single transactionsand contractual issues related to economizing thesetransactions, North (1990) and many management-oriented NIE scholars (e.g., Robertson and Langlois1994; Langlois and Foss 1999; Lazonick 1979; Teece1992), along with Williamson (1991), treat firms’ con-tractual environment as either a network (Granovetter1985) or a system (Hodgson 1998) in which firms areembedded. Second, governance structures are formed



and maintained in specific historical contexts. Accord-ing to Argyres and Liebeskind (1999), governancestructures are sticky outcomes of past choices and mightnot be optimal when the context in which they wereformed no longer prevails. Moreover, governance struc-tures are particular because each economic commitmentis tied to a specific set of stakeholders with heteroge-neous interests. Although it would enhance efficiencyto change one commitment, doing so would trigger anetwork-wide series of renegotiations with respect toother commitments, which in practice implies inertia(Aoki et al. 1990; Nickerson and Silverman 2009).Taken together, if we take the overall message of theNIE literature seriously, we need to pay more attentionto the period-specific effects that governance structuresmay have on firm-level competitive actions, which leadsus to our second research question.

Research question 2: How does a firm’s governancestructure influence its competitive actions over time?

Institutions: Both Informal and Formal

Because of the sociological orientations of some of itskey originators, competitive dynamics research has em-phasized the internalized nature of institutions. Accord-ingly, competition is perceived as a game of market-performance maximization in which firms search foran appropriate behavioral profile that will not hurt theirperformance by violating social expectations (Shafferet al. 2000). In addition, firms might perceive a ‘typicalbehavioral style’ as an industry norm and mimic thatstyle to avoid ‘doing the wrong thing and suffering mar-ket performance losses’ (Miller and Chen 1996). It hasalso been a commonplace for empirical studies to ex-clude variation in the institutional environment (e.g., de-regulation or significant changes in the industrystructure) during the research period to avoid ‘externalsources of contamination’ of the focal action data (see,e.g., Miller and Chen 1996, p. 425). Finally, Grimmand Smith (1997) noticed the potentially constrainingeffect of Antitrust Laws on large firms’ competitive ac-tions, but to our knowledge, this has not resulted in em-pirical research.

North (1990: 118) provides a clear contrast to thecompetitive dynamics research tradition in that heregards institutions as the ‘rules of the game’—devicesthat affect competitive behavior. As explicated byWilliamson (2000), formal and informal rules are sym-biotically related because the former (e.g., laws andregulations) build on the latter (e.g., norms andconventions). Accordingly, changes in any rule gradu-ally transform the entire institutional system. However,

this is not to say that it is a commonplace for entrepre-neurs to interpret the changing of rules as rational but in-stead that rule following is not predetermined even incontexts that contain strong rule-enforcing mechanisms(e.g., the state) (North 1990: 73; Henisz and Delios2000). This recognition of an interpretative leewayamong the actors involved with regard to the actions thatthey initiate encourages us to pose our third researchquestion.

Research question 3: How does managerial actors’interpretation of the prevailing formal and informalinstitutions as either stable or susceptible to change in-fluence competitive actions over time?

Capabilities

The competitive dynamics literature assumes that tocarry out a particular action, a firm is required to possessspecific capabilities (Chen et al. 2007). Moreover, insome studies, competitive actions also encompass firms’actions in the resource factor market, that is, acquisitionsof desirable capabilities (Markman et al. 2009). Typi-cally, however, these capabilities are considered aggre-gates of various types of capabilities with no particulardistinctions among them. Therefore, the competitivedynamics literature, for example, does not explicate adifference between technological and other capabilities.Usually, the only distinct capability is top manage-ment’s cognitive capacity both to process (detect andinterpret) information and to translate it into appropriateactions (e.g., Ferrier 2001), although this ability isimplicitly captured by the notions of awareness andmotivation in the AMC framework and consequentlyis disconnected from ‘actual’ capabilities (Chen,1996). Accordingly, and with respect to the sources ofcompetitive simplicity and inertia, for core competitivedynamics researchers, a lack of capabilities is a suffi-cient cause for competitive inaction.

More generally, the largely accepted idea in the capa-bility literature (e.g., Teece 2014) is that firms can eitheracquire new capabilities by developing skills andknowledge inside or seek complementary or new capa-bilities outside firm boundaries, for example, byconducting mergers and acquisitions. In both cases, thehistory of past decisions largely determines the universeof possible competitive actions (Winter 2006; Page2006a).

Analogously to Schumpeter (1934), who considerstechnological change as a means for entrepreneurs todisrupt equilibrium, both North (1990: 78) andWilliamson (1988) emphasize the role of technologyand knowledge in how and why institutions change



and affect economic behavior. Economies thus operatein a constant state of disequilibrium, as technological,political, social, regulatory, and other types of changeoffer a continuous supply of new information aboutdifferent ways to use resources to enhance wealth (cf.Shane and Venkataraman 2000: 221). To supplementthis perspective, other NIE scholars and evolutionary re-searchers (e.g., Langlois and Foss 1999; Lazonick 1979;Teece 1992) offer illuminating insights into the symbi-otic role played by capabilities and institutions in theexplanation of firm behaviors. The basic argument inthese works is that the co-evolution of capabilities andinstitutions works in both directions. First, contractualcommitments and institutions can enhance the effect ofpath-dependent (Page 2006b) routines and capabilities,thus inducing, for example, adaptation to major techno-logical changes (Langlois and Robertson 1995). At theindustry level, such inertia-enhancing institutions in-clude protective regulation (North 1990), educationalpolicies (Langlois and Robertson 1995), and public pur-chasing, all of which buffer firms (Gawande andBandyopadhyay 2000) from external competition andthus demotivate learning (cf. Repenning and Sterman2002). Second, some institutional designs may enhancelearning. Japan (Williamson 1991; Teece 1992), Israel(Breznitz 2007), and Ireland, for example, have beenidentified as well-functioning institutional environmentsfor firm-level and industry-level innovativeness.Murmann’s studies (Murmann 2003; Murmann 2013)on the co-evolution of firm-level capabilities and gov-ernment policies are important for our study becausehe offers a detailed account of the complex mechanismsthat are necessary for obtaining competitive advantagein global competition. Together with the studies alreadymentioned, these works suggest that capabilities and in-stitutions may operate as sources of both inertia andchange in competitive behavior, which leads us to ourfourth research question.

Research question 4: How does capability evolution,as an interplay between firm-level actions and the insti-tutional environment, affect the patterns of competitiveactions over time?

EMPIRICAL ANALYSIS

Research Setting and Data

The forest industry changed substantially during the pe-riod under study. These changes were brought about byglobalization, new technological innovations, and therelative decline in demand for printing paper, which is

the industry’s traditional high-end market (cf. Ojalaet al. 2012; Järvinen et al. 2012a; Klepper andThompson 2006; Ghosal and Nair-Reichert 2009; Teece1982; Hetemäki 2005). In our study, the forest industryfunctions as a natural experiment with five Finnish firms(Enso-Gutzeit, United Paper Mills [UPM], Metsäliitto,Kymi, and Serlachius) whose competitive actions wefirst compare with four US-based firms (Champion, In-ternational Paper, Mead, andWeyerhauser). The sampleeffectively represents a large portion of the largest firmsin the global competitive setting. Additionally, the UScompanies function as a control group tomake the depthand nature of strategic change among the Finnish com-panies more apparent. In the latter part of our analysis,we provide an institutional explanation for the distinc-tive characteristics of the Finnish firms indicated by thiscomparison.

Our data collection process was divided into fourphases that resulted in systematic datasets on the invest-ment and divestment decisions made by the studiedfirms (Table 1). Our data are different from the firstwave of empirical competitive dynamics studies (e.g.,Chen and Hambrick 1995; Smith et al. 1991) in two re-spects. First, we have triangulated each identified actionby using data frommultiple sources. Second, because ofits relatively low industry ‘clock speed’ (Nadkarni andNarayanan 2007), we studied the forest industry over along period, 1945–2000, and we therefore examined areasonable number of strategic actions by each firm.The number of actions in the resulting database is1378. The latter part of our analysis is based on a varietyof archival data (cf. Kipping et al. 2014; Üsdiken andKipping 2014) that are contemporaneous with the com-petitive actions in our database. These materials containtens of thousands of pages, have a strong in situ flavor,and have not been manipulated by biased recollectionor organizational storytelling (cf. Bingham and Kahl2013; David et al. 2013). Moreover, we also have acomplementary material, as defined in Table 1.

In our analyses, we first visualized the competitivebehavior of the studied companies. The comparison isillustrated by a principal component analysis (PCA)in which a 22-dimensional variable space populatedby companies’ competitive actions was projected ontoa two-dimensional plane to graphically illustrate thetemporal development of the companies’ competitivebehaviors at a 1-year resolution (Appendix). The latterpart of the analysis constitutes an in-depth, historicalcase study (cf. Jacobides 2005) that is intended to pro-duce an institutional explanation for the distinctivebehavioral characteristics revealed by the PCA. Ouranalysis incorporated a classic approach to historical



Tab

le1.

Description

oftheResearchPha

ses,So

urces,an

dObjectives

Phase

Phase1:

periodizationand

contextualization

Phase2:

externalmeasuresof

competitivebehavior

and

performance

Phase3:

analysisof

firm

-levelcognitionsand

capabilityevolution(i.e.,aw

arenessandcapability)

Phase4:

analysisof

institu

tionaland

governance

mechanism

s(i.e.,motivation)

Objectiv

eToacquirean

understandingof

the

dynamicsin

theinstitutio

naland

marketenvironment,weengagedin

asynthesizing

effortthatresultedin

abroadanddetailedaccounto

findustry

dynamicsbetween1945

and2000.

Tosystem

atically

understand

differencesandsimilaritiesin

firm

performance

and

competitivebehavior,w

eengagedin

theidentifi

cationand

classificationof

competitive

actions,w

hich

resultedin

avisual

presentationandcomparisonof

thecompetitiveactivities

ofthe

analyzed

firm

s(inboth

Finland

andtheUSA

).

Tounderstand

andsystem

atically

map

thecognitive

andcapability-relatedprocessespotentially

explaining

realized

competitiveactions,w

eengaged

inaqualitativ

eanalysisof

inform

ationgathering,

filtering,interpretation,

anddecision-m

akingin

Finnishfirm

s.

Tostudyandunderstand

theinstitutio

nal

andgovernance

mechanism

,essentially

modifying

andconstraining

themotivations

precedingcompetitiveactio

ns,w

estudied

theevolutionof

theinstitutio

nalstructure

asamacro

phenom

enon

(i.e.,thesocietal

evolutionof

norm

sandrules)andthe

micro-levelinterpretatio

nsof

thesame

norm

sandrules.

Prim

arydata

Books

andarticlesfocusing

oneconom

icsandtheeconom

ichistory

oftheforestindustry,industryand

firm

histories,andhistoricaland

otherstudieson

internationaltrends

intheforestindustry.

SeeseparateAppendix.

Strategicplanning

documents,investm

entp

lans,

boardmeetin

gmem

osandtranscripts,

correspondence

betweencorporateheadquartersand

business

units,and

otherrelatedarchivalmaterial.

Professionalmagazines

(Paperiand

Puu

andTalouselämä),board

meetingmem

os,

andreportsof

theFinnishFo

restIndustry

Association(the

major

specialinterest

grouprepresentin

gforest-industryfirm

s).

Secondarydata

Statisticalinform

ationfocusing

onmacro-leveleconom

icand

socialchangesin

theforestindustry-

specificmarketand

institutio

nal

environm

ent.Atthe

sametim

e,articlesfrom

business

magazines

that

prom

oted

ideasaboutradicalchanges

intechnology

and/or

business

logic

wereused.

SeeseparateAppendix.

Businessmagazines

with

anem

phasison

interviews,

localn

ewspapers,andacadem

icresearch

interested

inforestindustry

evolution.

Firm

histories,business

magazines,

company

internalmagazines,and

general

bookson

Finnishpoliticalandeconom

ichistory.

Interactions

with

managersand

otherindustry

specialists

Asapartof

thelarger

background

project,wepresentedourinitial

ideason

twooccasionsto

forest

industry

managersandex-m

anagers

andused

theinform

ationfrom

these

interactions

torefine

ourchoice

ofresearch

period.

Wepresentedourinitialtim

eseries

andPC

Afiguresto

currentand

retired

executives

onmultip

leoccasionswithin

thecontexto

fseminarsor

workshops,and

with

twoexecutives

viaem

ail.These

interactions

verified

ourchoice

ofmeasuresandtheinitial

interpretatio

nof

results.

Inthisphase,weconductedseveninterviews(w

ithaform

erChief

Executiv

eOfficer(CEO),Chief

FinancialO

fficer(CFO

),strategy

officer,R&D

manager,m

illmanager,and

twomiddle-level

managers)thatcomplem

entedourknow

ledge

draw

nfrom

archivaldataandmoreim

portantly,

helped

isinterpreto

urfindings

andinsights.

Duringthisphase,weengagedin

two

typesof

interactions.F

irst,w

epresented

ourinitialresults

intwoindustry-specific

workshops

andseminars.Second,w

ere-

interviewed

threeinform

antsto

better

understand

theperceptionof

the

institutio

naland

governance

mechanism

srelatedto

themotivationto

engage

incertaintypesof

activ

ities.



data (Carr andDavies 1961; Collingwood 1946) focusedon the qualitative interpretation of competitive actionsthat can be traced and reconstructed using multiple dataitems to verify the trustworthiness of the researcher’s in-terpretation (Bryant 1994; Mahoney et al. 2009; Vaaraand Lamberg 2016). Finally, in the spirit of nonlinearconstant theorizing (Martin 2014), we continued the iter-ation between data collection and interpretation until wecould recognize plausible causal mechanisms behind theobserved patterns of competitive behavior.

The Competitive Behaviors of Finnish and US-basedFirms

We start the twofolded presentation of findings byreporting the results of the PCA analysis on the compet-itive actions of Finnish and US-based firms (Figure 2).The immediate observation from the PCA illustrationis that the two groups of companies differed consider-ably during the period under study. First, the US-basedfirms weremore active in changing their competitive be-havioral directions and postures, whereas their Finnishcompetitors performed fewer actions, and the proportionof radical actions was also lower. Because travel to theright in Figure 2 is characterized by the dominance of in-vestments over divestments (and vice versa), this resultalso implies that the US-based firms were more

expansive than the Finnish-based firms. In other words,even though all of the companies pursued a generalstrategy of expansion, the US-based companies did soto a greater extent and in a wider variety of businessareas. Moreover, the paths of the Finnish companiespoint in roughly the same general direction along thefirst principal component axis in Figure 2, indicatingsimilar patterns of competitive behavior.

Second, whereas the Finnish-based firms were rela-tively similar to each other in their behavioral styles,the companies with US origins were characterized bysignificant differences in their behavioral paths. Interna-tional Paper and Mead traveled largely together towardthe upper right-hand corner of Figure 2, andWeyerhaeuser traveled to the lower right-hand corner.Champion’s path was aligned along the first principalcomponent axis, especially from the 1940s to the1980s and again from 1990 onward, suggesting a con-servative behavioral pattern similar to that of the Finnishcompanies. The paths of the US companies progres-sively diverged from each other over the study period,indicating the presence of qualitatively different behav-ioral patterns—and more radical strategic changes—over that period (cf. Toivanen 2004; Ahola 2006).

The most salient observation from the PCA analysisis that all of the studied companies followed a relativelyconsistent internal path throughout the study period,

Figure 2. Principal component analysis (PCA) results illustrating the competitive behaviors of the studied companies. IP, Inter-national Paper; MEAD, Mead; WEYER, Weyerhaeuser; CHAMPION, Champion; KYMI, Kymi; SERLA, Serlachius; UPM,

United Paper Mills; ENSO, Enso-Gutzeit; ML, Metsäliitto.



with the exception of Champion from 1980 to 1990.Overall, Finnish companies manifested higher behav-ioral consistency than did their US counterparts. The re-sults suggest that although the forest industryexperienced an overall globalization process in termsof the increasing importance of supranational serviceproviders, shared production standards, and close con-nections among companies, Finnish companies weresystematically more inert than US companies in theircompetitive strategy. Moreover, the PCA analysis dem-onstrates strong similarities among the Finnish compa-nies, whereas the large US firms tended to adopt morefirm-specific strategic postures. The comparison withUS companies and the relative inertia in terms of chang-ing strategic directionwithin the context of globalizationand an increasingly dynamic business environment callfor a theoretically informed historical explanation thatis especially sensitive to the institutional environmentin which the firms are embedded. Accordingly, the nextsections offer a historically informed institutional expla-nation for the distinctive patterns of Finnish firms’

competitive behavior that was especially characterizedby internal conformity and simplicity across the periodunder study. Table 2 presents an overview of theprocess.

Institutional Environment

In our research framework, the institutional environ-ment of firms consists of three elements: embeddinginformal institutions, formal institutional rules, andgoverning structures of transacting. These three ele-ments then constitute the basis of managerial decision-makers’ cognition, which then materializes in theactions that they initiate. Finally, the actions conductedmoderate the capability base, which then influencesthe viability of different types of future actions. Becausewe have already depicted the competitive actions of theFinnish forest-industry firms, in this section, we analyzethe other elements in our framework in four subsequentsubsections. In its entirety, the analysis aims to addressthe sources and mechanisms behind the substantial

Table 2. The Historical Evolution of Cognitions, Institutions, Governance Structures, and Capabilities inthe Finnish Forest Industry, 1940–2000

Managerial cognitionInstitutions and governancestructure Capabilities Main activities

1940s Firms focus on rebuildingtheir business networksafter the Second WorldWar.

Highly collaborative institutionalenvironment emphasizing nationalinterests, with no influences orpressures from abroad

Skills and knowledge focusedon low-end products.

First investments inupstream productioncapacity

1950s US firms are seen asglobal leaders of theindustry and thus a targetfor imitation.

National competitiveness is evenmore important; government-supported system to acquireknowledge about the managementof US and Swedish firms.

Increasing emphasis on high-end products while maintainingin-house capabilities, forexample, in machinery

Adoption of a newtechnological generationenabling a large-scale shiftto higher end products

1960s Globalizing competition isseen as a threat.

The partial liberalization offinancial regulation allows businessoperations outside the Finnishborders; collusion is legallyaccepted and is a norm.

Highly diversified set of skillsand knowledge

First internationalexpansions

1970s The global economy isseen as a problem thataffects Finnish firms’performance.

Societal aspects of business andheavy industrial regulation channelthe interests of even the largestfirms.

High heterogeneity in skills andknowledge unrelated to paperand pulp industry

Wave of diversification

1980s Finnish firms areincreasingly aware thatthey can participate ininternational competition.

Increasing influence frominternational business environmentemphasizes the need for firm-specific strategic agenda.

Reduction of skill set inproduction and technology andsimultaneous built-up ofmarketing capabilities

Most investments focus onpaper productiontechnology.

1990s Firms begin to see globalcompetition as anaggressive matching ofdominating US firms.

Finnish firms list on foreign stockexchanges and adoptinternationally recognizedcorporate governance practices andmanagement techniques.

Highly focused skill set in paperand paperboard production andsales

Investments in coreproduction facilitiescontinue in the form ofmandatory responses tointernational competition.

2000s Firms are first excited tobe leading global firms butthen become aware thatthe industry is rapidlyeroding.

Market decline and facility closingsdecrease the institutional power offorest-industry firms, which areincreasingly global in terms ofpractices and norms.

A continuing high level of focuson paper and paperboardproduction with an increasingemphasis on diverse skills andknowledge

Divestments of paper-production facilities



stability and lack of cross-organizational diversity in thecompetitive behavior of Finnish firms during our periodof study.

The Rules of the Game

Whereas most economists would consider firms asadapting to prevailing institutions, in Finland, the eco-nomic importance of the forest industry was such thatmany institutional arrangements were planned to pro-mote instead of constrain its evolution. Simply put, itis difficult to overstate the historically and geographi-cally grounded reasons for the prominence of the forestindustry in Finland’s economy and society (Moen andLilja 2001; Kuisma 2008). Although Finland’s firstforest-industry production units and companies werefounded relatively late—during the 1840s and 1850s—by the First World War, the industry had alreadyestablished its position as the country’s most importantindustrial sector. In the beginning, most of the productoutput was exported to the closely located Russian mar-kets. After the initial years of Finland’s independence(1918–1921), forest industry in the form of pulp and pa-per production became the predominant export industry,representing nearly 80% of Finnish exports. From the1920s to the 1950s, the forest industry’s flagship posi-tion was further strengthened through substantialnational-level support with respect to foreign trade andeducational arrangements (Ahvenainen 1984;Heikkinen 2000; Peterson 2001; Järvinen et al. 2009).

The forest industry was truly under the special pro-tection of the Finnish government. As an example of thisnational-level support, the primary target in all ofFinland’s trade agreement negotiations, including theEuropean Free Trade Association and European Eco-nomic Community in 1960 and 1973, respectively,was to secure the forest industry’s competitive positionin its main export markets (Jensen-Eriksen 2007a). Ad-ditionally, until its 1995 EU membership, the Finnishgovernment never questioned the legal status of theindustry’s sales and purchasing cartels (Schröter 1996)and self-regulation (e.g., Jensen-Eriksen and Ojala2015). With respect to education policy, Finnish gov-ernment systematically considered the forest industry’sinterests in building the national educational and aca-demic system. For example, the industry’s R&D activi-ties were strongly promoted both financially by publicagencies and culturally by presenting the forest industryin a form that would appeal to investors, researchers,and business and engineering graduates alike (Nykänenand Paulapuro 2005). Taken together, the forest industryenjoyed a privileged position in the Finnish institutional

system in both the formal and informal sense throughoutthe 20th century. This also implied that little national in-stitutional pressure would have indicated a need for indi-vidual firms to change their modus operandi. Moreover,the signals that were given were formulated as if onerecipe would meet the needs of all firms. This approachis manifested in a report by the Ministry of Trade andCommerce, in which government authorities explicitlyencouraged Finnish forest-industry firms to focus ontheir existing competencies, on the one hand, and to in-ternationalize, on the other hand:

If Finland wants to maintain its position as a lead-ing forest industry producer and avoid being amarginal player in the value chain, internationali-zation is not an option but is mandatory. Only byaiming for international operations can we use theopportunities that our know-how offers. (Scenarioprepared by Jaakko Pöyry for the Ministry ofTrade and Commerce, Pöyry 1979: 33)

Governance Structure

The governance structure of the Finnish forest industrywas strikingly similar to how Williamson (1990) de-scribes Japanese industries: efficient and systemic man-agement of contractual relations supported andincentivized by the government and formal institutions.It was also in line with Chandler’s (1990: 398) descrip-tion of financial capitalism, in which ‘large multipur-pose banks played a major role in providing funds …to achieve the economies of scale and scope… the rep-resentatives of banks sat on the boards of many enter-prises, and so participated in [their] top-leveldecisions.’ Similarly, most Finnish forest-industry firmswere controlled by one or two major commercial banksor were owned by the Finnish state (cf. Williamson1991: 89), which had a concrete impact on the commit-ments that the firms and their executives perceived. Forinstance, the strategic mission of the state-owned Enso-Gutzeit was to be profitable, although not at the expenseof its relatively ambiguous ‘social responsibilities’. Incontrast, its close bank-controlled competitors Kymiand UPM operated as ‘normal’ for profit firms but werenonetheless involved in hegemonic struggles betweenthe financial spheres under these banks. As a result,the Finnish firms had considerable leeway to developtheir operations as long as they did not encounter severeprofitability problems and/or disturb their network ofcommitments (Argyres and Liebeskind 1999). As manyof these corporatist governance practices had diffused toFinland from Germany in the late 19th and early 20thcenturies (Moen and Lilja 2001), it was not until the



1980s and 1990s that Finnish firms started to convergewith the increasingly dominant US-based firms (Kuisma2008). Consequently, these interfirm governance solu-tions and contractual systems also largely explain whyFinnish forest-industry firms manifested strong simila-rities in their competitive behavior during the periodunder study.

The industry-level contractual arrangements for sev-eral important managerial functions can be consideredan important source of conformity in the developmentalstrategic trajectories of Finnish forest-industry firms.Here, we may recognize four important arrangements.First, at the beginning of the 20th century, most firmswere relatively small, and it was difficult for them tohandle contacts with the international markets on theirown. This resulted in sales-cartel arrangements that con-tinued from the early 1920s until the mid-1990s (Jensen-Eriksen 2007b, 2011). Finnish law allowed these cartels,each of which focused on selling a specific product seg-ment to the international markets (see, e.g., Eloranta andOjala 2005; Jensen-Eriksen 2007a) and thus providedsignificant economies of scale, at least as far as the costof market operations is concerned. However, there wasalso a significant downside to this arrangement. For ex-ample, the largest cartel, Finnpap, had defined which ofits member companies were to produce particular papergrades, and the member companies’ main task was tomeet the cartel’s expectations and quality criteria insteadof having direct relationships with the customers andlearning about those customers’ preferences withoutmiddlemen (Heikkinen 2000).

With respect to the second contractual ‘buy ratherthan make’ arrangement, since the early decades of the20th century, Finnish companies outsourced theirR&D activities to a jointly owned unit called KCL(Levlin 2010). This implies that a substantial proportionof Finland’s product-development efforts were coordi-nated across individual firms, which had little proprie-tary knowledge that could have been turned intoidiosyncratic products. Third, in addition to the fact thatmost of the top managers of Finnish forest-industryfirms during our period of study were paper engineersby training, most had also graduated from the same aca-demic department at the Helsinki University of Technol-ogy (Nykänen and Paulapuro 2005). Thus, the engineersheading the individual companies typically knew eachother personally and had little incentive to break awayfrom the tight network of paper engineers. This similar-ity in educational background and belonging to an ‘in-ner circle’ implies homogeneity in the cognitiveschemas with which environmental changes were mon-itored, interpreted, and acted upon. For example, when

following their US-based competitors, the engineerssystematically concentrated on technical instead of stra-tegic issues (Alajoutsijärvi 1996; Nykänen andPaulapuro 2005). Fourth, the Finnish firms’ mostinnovative actions during the period of study were con-ducted jointly by several of them; those actions thenoperated as an additional force homogenizing their stra-tegic behavior. For example, whereas in the 1960s, theacquisition of Nordland Papier in Germany was a jointventure of two firms, the construction of a Eurocanpulp mill in Canada was a joint venture of five Finnishfirms. It is important to note that a document that jus-tifies the latter venture also refers to the general Finnishinterests involved: The contractual commitments wereexhaustive and not primarily based on economiccalculations.

Eurocan Pulp and Paper Co Ltd has been foundedby Enso-Gutzeit Corporation, Myllykoski PaperMill, Kymi Ltd, and Tampella Ltd together withCanadian entrepreneurs […] The new jointoperation aims to support competitiveness in thetraditional international markets [for Finnishfirms]. Simultaneously, the project offers exportopportunities for the domestic metal industries.(Internal Memo, Kymi Corporation, 1965)

Decision-makers’ Cognitive Interpretation of theEnvironment

Engineer-dominated management and the absence ofstrong stakeholders that could have challenged the engi-neers’ worldview largely explain the stability withwhich the various types of tangible changes in the firms’competitive environment were interpreted. We can con-sider two indications of this observation from the periodof study. First, by the end of the 1970s, Finnish forest-industry firms had already grown to the extent that fur-ther growth opportunities had to be sought primarilyfrom the international markets, and as the followingquotations show, internationalization as an opportunityfor further growth was clearly on the managementagenda.

… it is obvious that growth and profitability in thefuture depend on the increasing importance of in-ternational markets. (Strategy document, KymiCorporation, 1982)

[The] paper industry in the year 2000 will consistof a few conglomerates that have specialized unitsand [a] systematically managed investment pol-icy. (Paper and Timber, 1984 (4), 500)



The main business areas of Enso … are so largethat they can only compete and expand based onthe worldwide market and production. (Minutesof the meeting of the Enso board of directors,December 15, 1988)

At the same time, however, these firms’ manage-ment regarded the industry’s increasing internationali-zation more as a threat than as an opportunity. Forexample, by the early 1960s, the Finns were alreadystunned by the acquisitions made by the US-basedfirms in Europe, which the former had considered theirexclusive territory. This development encouraged theFinns both to initiate similar types of acquisitionsand to join forces for major international greenfieldprojects. Against the background of these mimetic re-sponses, we note that from the 1940s onward, theFinnish firms had very consciously begun to engagein direct imitation of the production-related knowledgeof their most advanced competitors, which at the timewere deemed primarily to reside in the USA. For ex-ample, Finnish paper-industry students and engineersvisited North American mills until they realized thatthey themselves, along with related Finnish machineindustries, had reached equal or superior levels of en-gineering. As a senior executive recalled in aninterview,

It was a common practice to travel to the U.S. forshorter and longer periods of time … U.S. firmswere very open; they showed us everything, andwe copied all the best practices. Then, in the1960s and the 1970s, there was a general under-standing that we [Finnish paper engineers] no lon-ger had anything to learn from U.S. firms. (formerUPM executive)

Second, the stability of interpretation also material-ized in the overwhelming production orientation withwhich the Finnish firms responded to constantindustry-level changes. For example, they recognized aneed to expand their companies and individual produc-tion units with the help of new technology. However,these expansions mostly concentrated on escalatingcurrent activities instead of attempting to radicallyreposition them in ways that would open up newindustry-level avenues, which implied a totally differentpositioning than the one that, for example, the big USforest-industry firms had adopted. This implied that theFinnish firms mostly focused on efficiency and processinnovations. This was the case even when the firms’management claimed to be market oriented, as thequotations indicate:

The corporation has decided to focus on the ser-vice business. Therefore, the whole organizationneeds to adopt a market-oriented attitude that em-phasizes the satisfaction and needs of customers.With this strategy, it is possible to (a) gain marketshares in the publishing paper market, (b) be aleading firm in the efficient use of paper ma-chines, (c) improve productivity in chemical pa-per making, and (d) build a very competitivepaper mill integrated in Kuusankoski andVoikkaa [two neighboring paper mills in thesoutheastern part of Finland]. (Strategy Docu-ment, Kymi Corporation, 1985)

Since 2001, we have made big changes in… ourEuropean mills. We have closed pulp mills andfour paper machines and, in addition, restructuredour mechanical forest industry operations. This isnot the first time the company has changed, yetthis turbulence is so intense and so fast that wehad to react more forcefully. (Interview of UPMCEO Jussi Pesonen, Talouselämä, May 12, 2006)

In addition, all aspects not under the direct companycontrol, such as the provision of raw materials, appearedas an unpleasant dependency upon external actors. Eventhe aforementioned major cross-Atlantic Greenfieldendeavor was motivated more as a way to removethen-present resource constraints than to enter newend-product markets. The quotation illustrates thisreasoning:

… because of constantly increasing productioncosts and a fear of insufficient raw materials,Enso-Gutzeit Corporation has explored opportu-nities to expand production and serve customersbetter in more suitable environments … over thepast decade, British, German, Belgian, Italian,Danish, and Swedish companies focused their at-tention on new sources of raw materials. It is nat-ural that our country cannot ignore this rapidinternational development. (Internal memo,Enso-Gutzeit Corporation, May 24, 1965)

When we combine these two examples with the no-tion that the Finnish firms’ management clearly con-structed themselves as a group with joint interests anddid not pay attention to diversity among the strategiesof their foreign peers, it is possible to understand theconformity and relative simplicity of these firms’competitive behaviors. In part, the apparently similarcognitive schemas of the management of individualfirms also led them to interpret competitive conditions



analogously. For example, when the consulting groupJaakko Pöyry, the main consultancy firm in the field ofmarket forecasting and technical planning, predicted inthe 1980s that the forest industry would not be threat-ened by the progressing changes in communication,the message quoted later raised no suspicions amongthe Finnish firms. This suggests that the heads of theFinnish companies were more eager to obtain supportfor an idea of status quo than for an idea of upheaval.Simultaneously, it is possible to rule out the Finnishmanagers’ unawareness of their foreign competitors(cf. Järvinen et al. 2012b), the increasingly internationalnature of competition and the ongoing changes in the in-dustry as an explanation for the observed patterns ofcompetitive behavior.

Communication by means of information printedon paper will persist in the electronic age simplybecause it works and works well in most situa-tions. The new technologies will introduce newpossibilities of communication that will both en-hance and in some cases substitute for paper.The trend is, however, toward more paper beingconsumed rather than less. Books, magazines,and newspapers will retain their unique andwidely appreciated qualities. (Rennel 1984: 227)

Capabilities as Enabling and Restricting AvailableActions

The production-centered actions performed by the Finn-ish forest-industry firms during the period of study alsoinfluenced the nature and evolution of the capability basethat operated as a platform for further actions. Althoughtheir competitive actions gradually provided the Finnishfirms with the highest production efficiency, those sameactions restricted their ability to initiate other types of ac-tions. This characteristic was further enhanced by thefact that many functions with no direct connection toproduction were conducted through various industry-level joint arrangements, which then prevented firm-level capability extensions in these areas. Consequently,and as the quotation indicates, the overall industry wasconsidered something that only engineers could manage:

Production capacity in the paper industry hasreached a saturation point. Automation hasproceeded quickly, and because of that, firms donot need more engineers than are educated at themoment. The only stimuli for possible scaling upof engineering education are the higher integrationrate of production facilities and the renovation andclosing of old production facilities. (Report byKeijo Mäkelä, DIAKTA 1980-project, 1980).

Furthermore, because most of the important innova-tive actions by the Finnish firms were conducted collec-tively, they extended the previous capability basesimilarly across individual companies, further blockingopportunities for company-specific strategic openings.The increasing drift toward focused companies rein-forced this pattern. For example, whereas many Finnishforest-industry firms (e.g., Enso-Gutzeit) operated in amulti-divisional form until the late 1970s, divestmentsaway from areas not directly related to paper and pulpbegan soon thereafter (e.g., Ahvenainen 1992) merelybecause all available assets were required to be investedto obtain enhanced productivity in the core business(Järvinen et al., 2012c) and to satisfy the assumedinternational capital markets’ demands for focusedcompanies. As a result, mergers between Finnishforest-industry firms became common. The followingexcerpts illustrate these aspects.

Kymi Corporation must continue producingcertain products simply because of the existingmachinery and raw material solutions. We cannotmake dramatic changes without heavy invest-ments, yet the current product portfolio and strat-egy allow competitiveness in internationalmarkets. Therefore, it is of crucial importance toconstantly improve our production efficiency,make focused and well-planned investments,and concentrate on knowing our customers’needs. (Strategic Vision, Kymi Corporation,1985)

Intensive international competition calls forefficient, fully integrated paper mills. Mergersbetween existing producers enable this kind of de-velopment. (CEO Speech, Kymi Corporation,1986)

Inevitably, individual firms’ opportunities to makeidiosyncratic innovations were severely constrained bytheir commitments to the aforementioned joint bodiesof marketing and R&D. As an example of the former,the Finnish firms’ strong emphasis in printing-papergrades was partly an outcome of Finnpap having sig-naled continuous growth in those grades and its failureto offer alternatives (cf. Heikkinen 2000). Althoughsome of the largest firms (e.g., Enso and Kymi) hadestablished their own marketing departments in the1980s, for the other firms in these circumstances, itwas easiest to stick to their knitting and satisfy the de-fined needs as cost-efficiently as possible (Järvinenand Linnakangas 2012). This characteristic was further



enhanced during times of international recession or var-ious resource shortages caused by unsuccessful interna-tional endeavors (Peterson 2001; Kuisma 2008). Thenegative effects of the joint R&D arrangements on theFinnish forest industry’s capability base materializedin several indicators (see Peltoniemi 2013). These indi-cators suggest that before 2000, the industry was charac-terized by (i) a narrow patent portfolio; (ii) a narrowtechnological focus on ‘giant machines’ that could effi-ciently produce paper but were relatively useless forother purposes; (iii) a lack of sponsorship of academicresearch activities aimed at developing alternative usesof wood materials; and (iv) an extremely specializedcorporate structure (compared with, for example, thatof US firms) (Appendix). The reasoning underlying thisoverall pattern is illustrated in the following quotation:

The future is always challenging. For example,the growing up of the so-called ‘2nd televisiongeneration’ in the 1990s may change the marketentirely, as they are used to receiving informationfrom a screen […] It seems obvious that onlylarge fully integrated mills will survive, whereasthe small, the old, and the weak must die. (Strat-egy Document, Kymi Corporation, 1985)

DISCUSSION AND CONCLUSIONS

The motivation for our study was to enrich and developthe current theoretical understanding of competitive dy-namics. Overall, our study constitutes a step toward adetailed analysis of the mechanisms that convert envi-ronmental stimuli into firm-level competitive actions.Our results unambiguously suggest that competitive dy-namics—including both rivalry itself and the interplayof organizational processes and competitive interaction—is a substantially more nuanced and complex phe-nomenon than the extant competitive strategy literature(e.g., Ketchen et al. 2004; Porter 2008) has depicted.In particular, our results seriously call into question theprevailing view in the competitive dynamics literatureaccording to which competitive behavior primarily rep-resents reactions to new events and pieces of informa-tion in companies’ immediate market surroundings inthe interest of achieving or defending market positions(cf. Williams 2007).

Our empirical study and the resulting theoretical in-sights emphasize that both the emergence and evolutionof competitive strategies are deeply embedded in spe-cific institutional and historical contexts (Granovetter1985; Zenger et al. 2000). This is caused not only by

insufficient management capabilities and difficulties inrecognizing a firm’s competitive position (c.f. Chenet al. 2007) but also by the prevailing ‘rules of the game’and governance structures that enforce firms’ adherenceto diverse contractual commitments (Argyres andLiebeskind 1999; Aoki et al. 1990). Our study showsthat the aspects of the institutional environment, espe-cially as perceived by managers, substantially influencefirm-level competitive actions and that those formal andinformal institutions that management interprets as sta-ble then largely define how it allocates its attention whenconsidering new actions (cf. Henisz and Delios 2000).Additionally, our cross-comparative analyses of theFinnish and US paper industries suggest that theevolution of firms’ capability base and institutionalenvironment are closely related to each other. In the caseof Finland, this relation materialized in the overall priv-ileges enabled by the state for this industry in general,but even more importantly in its allowance of intra-industry joint investment, marketing, and R&D opera-tions, which then restricted or even prevented certaincourses of action. In contrast, the firm-centric R&Dphilosophy in the USA combined with more distinctstrategic profiles allowed more radical changes in prod-uct offerings and competitive action patterns (cf.Toivanen, 2012; Ahola 2006). In line with Toivanen(2004), we do not exclude the influence of US industrialgovernance arrangements on the technological trajecto-ries of its paper industry; however, we argue that thesearrangements were much more subtle by nature thanwhat was the case in Finland.

In a theoretical sense, our study extends and chal-lenges the previous competitive dynamics literature.The unique features and strengths of this research streamhave been its narrow focus on the interchange of com-petitive actions between rival firms (Chen and Miller2012), through which it has laid a foundation for theunderstanding of micro-level market competition. How-ever, the focus on competitive actions and the processespreceding the launch of these actions (Chen et al. 2007)has resulted in strong emphasis on top managementteam qualities and decision-making effectiveness(Ferrier and Lyon, 2004). In contrast to this ‘agentic’perspective, which views competitive behavior as ‘jock-eying… that sabotages [a] rival’s profits’ (Ketchen et al.2004: 780), our findings suggest that competitive behav-ior is strongly influenced by the company’s institutionalsurroundings and prior behaviors. That is not to say thatmanagers would not be important but instead thatmanagers are not merely market advantage-maximizinginformation processors (Smith et al. 1991): Their roleand intentions are embedded in and therefore to a large



degree determined by particular institutional envi-ronments. As in our empirical case, the Finnish firmscame to be seen as constituting a national ‘flagship’ in-dustry that was practically an informal institution inand of itself (Lamberg and Laurila 2005; Laurila andRopponen 2003). Such an institutionally strong position(cf. George et al. 2006), especially when conjoined withnational pride (Hope et al. 2011), did not provide anysignificant motivation to alter the firms’ behavioral pos-ture. Instead, it served as a reinforcing mechanism(Sydow et al. 2009) to continue along an establishedstrategic trajectory. However, to enact and thereby fur-ther solidify the institutional position, in contrast tojockeying for firm-specific market advantage, the firmsexpanded their geographical scope and business vol-ume. In this light, the focal companies’ competitive tra-jectories, as depicted in Figure 2, are entirelyunderstandable when set alongside the essential ele-ments of the surrounding institutional environment andgovernance structures. These characteristics of the insti-tutional environment also had an impact on the individ-ual managers, who were primarily (i) a homogenous andtightly linked group of paper engineers and (ii) who feltpersonal responsibility not only for the profitability ofthe companies that they headed but also for the eco-nomic and political development of Finnish society.Overall, the small size of the Finnish economy and thetightness of its industrial elite encouraged intra-industrial conformity. In contrast, international compar-isons (Crossland and Hambrick 2011; Quigley andHambrick 2015) demonstrate that the US corporate cul-ture encouraged a higher degree of risk taking, CEO au-tonomy, and more radical changes in competitivepositions.

Moreover, our findings suggest that in the institu-tional environment in which the company is embedded(Granovetter 1985), the initiation of competitive actionsis constrained by an institutional matrix (North 1990)that determines ‘how things are’ and ‘how one shouldbehave’ (Beckert 1999; Miller and Prentice 1996),which significantly exceeds the adopting behavior typi-cal of an industry that fears adverse market performance(Chen and Hambrick 1995). Because a firm is also anentrepreneurial actor in this institutional environment,there are expectations of conformity to prevailingnorms, and consequently, any departure from thosenorms requires extra effort and creates the risk of sanc-tions attributable to the loss of legitimacy (Suchman1995; Nickerson and Silverman 2009). On the institu-tional level, the most salient firms experience thegreatest pressures. In our study, the focal firms were so-cietally established and therefore were subject to highly

significant expectations related to their predictabilitythat discouraged them from engaging in exploring newcompetitive postures. The stickiness of competitive be-havior also regresses to the largest firms’ contractualcommitments. These commitments and the governancestructure of the industry as a whole further strengthenedthe weight of formal institutions, allowing some formsof collaboration and prohibiting some forms of competi-tion. As an example of the latter, Finnish universitieswere not allowed to increase their intake of students spe-cializing in the forest industry, which could have poten-tially increased the strategic diversity among firms.

Our study also contributes to the previous researchon strategy that takes the NIE research as its startingpoint (Zenger et al. 2000). Ever since the pioneeringworks by Williamson (1975) and North and Thomas(1973), the NIE perspective has continued to inspirestrategy research in international business (Cantwellet al. 2010; Meyer 2004), corporate political activity(Ville 2007), diversification (O’Brien et al. 2014), andother areas. However, within these stream studies onthe micro-foundations of institutional inertia and changeremain rare. The primary reason for this failure to scru-tinize firm-level activities could be the theoretical as-sumption of the marginality of fourth-orderinterventions on higher order institutional order. For ex-ample, on several occasions, North (1990: 104;Mantzavinos et al. 2004) has underlined the importanceof entrepreneurial activities as a source of institutionalchange; however, his theorizing has stopped short atthe question of ‘how’ entrepreneurs create this change.

As a response to this void, our study brings new ev-idence of the complexity related to those patterns offirms’ competitive behavior that catalyze institutionalinertia and change. The history of Finnish forest-industry firms’ competitive actions reveals both theubiquitous nature of institutions and governancestructures as stabilizing forces in the evolution of thisindustry and the role of distinctive firm-level actionsand capability development paths as triggers for institu-tional change (Henisz and Delios 2000). In retrospect, itis possible to identify the main characteristics of thissystem lock-in, resulting in strong group thinking andan extremely narrow, long-lasting perception of howthe industry should strategically operate. However, thecomplexity inherent in those ‘entrepreneurial’ actions(North 1990) that did yield institutional change is theo-retically illuminating. For example, our study addressesthe abandonment of the sales cartels that the Finnishfirms applied for more than 70 years until the arrange-ment was banned when Finland joined the EuropeanUnion in 1995. At the surface level, this change in the



formal rules seems a necessary and sufficient cause forthe abandonment of sales cartels. A detailed analysisof the pre-abandonment process that began in the late1970s, however, reveals much more nuanced dynamicsunderlying this event. These dynamics include (i) forestindustry associations’ proactive lobbying for Finland tojoin the European Union (Kuisma 2008) despite the lat-ter’s well-known hostility toward cartels; (ii) frictionamong the largest firms about how to proceed with salescollaboration; and (iii) the Kymi and Enso-Gutzeit cor-porations’ activities during the 1980s to develop theability to operate without cartels. Finally, (iv) whenUPM revealed to public authorities a purchasing cartelin which it was one of the key actors, the resulting con-flict also meant the end of collaboration in research anddevelopment and other traditional forms of cooperationamong the Finnish firms. Taken together, the process re-sulted in the end of one contractual commitment amongthe firms involved a complex web of causalities inwhich firms’ actions and capability development playeda major role. This analysis in which firm-levelcontractual commitments and formal institutions areintertwined is all but absent in Williamson’s framework(Williamson 2000). However, our findings suggest thatthere may be cross-firm coordination and an industryculture that is closer to governance than the formal insti-tutions inWilliamson’s framework. This further empha-sizes the importance of paying continued attention to themicro-foundational level of institutional change (cf.Zenger et al., 2001) and the connection betweenmicro-level and macro-level of analysis in general(Granovetter 1973) in future research.

Acknowledgements

We thank the discussants and reviewers of various Academy of Man-agement and EURAM Conferences, EGOS meetings, and workshopsand seminars at the Helsinki University of Technology and Universityof Jyväskylä during the years 2005 and 2016 for their comments andinsights. Also, we are indebted to Jari Ojala, Rodolphe Durand, JukkaLuoma, Henrikki Tikkanen, and Kimmo Alajoutsijärvi for their com-ments and help. Also, special thanks to Henri Schildt and HenriSuur-Inkeroinen for their contributions in the earlier versions of the pa-per. Finally, we acknowledge research assistance of Anna Ahola incollecting parts of the statistical information. The project was partiallyfunded by the Academy of Finland.

NOTES

1. Enso-Gutzeit merged with Stora in 1998, forming Stora-Enso;Metsäliitto acquired Serlachius in 1986, forming firstMetsä-Serla and later Metsä-Group; UPM and Kymimerged in 1995, forming UPM. We use the original namesthroughout the paper.

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APPENDIX. DESCRIPTION OF THE COMPAR-ATIVE METHOD

Our sources for data on the competitive actions of bothFinnish-based and US-based companies for the periodof study were Moody’s International Industry Manual,company annual reports, company histories (electronicand hard copies), Talouselämä, Business Week, Forbes,the electronic news aggregator Factiva, and to some ex-tent, earlier research reports in the cases of Mead,Georgia-Pacific, and Weyerhaeuser (Ahola 2006),UPM, and Kymi (Ojala, 2006). We relied on priorindustry research with regard to the relevant action cate-gories. These categories encompass two types of actions—investments and divestments—in 11 domains ofstrategic action, yielding a 22-category action typology.This typology is presented in Table 1.

In identifying and classifying (i.e., coding) the ac-tions into the 22 action categories, we again followedestablished practices in the empirical research. In thefirst phase of compiling the action database, two re-search assistants and twomembers of the research groupwere provided with a formal coding manual describingeach of the 22 action types. They read the source

materials to identify the actions of the sample companiesduring the period of study. This step resulted in four listsof actions, which were then compared. The final deci-sions concerning the actions to be included in the analy-ses were made jointly by the research group. Thisprocedure resulted in 1378 different actions, which werethen coded into the 22 categories, and the results of theindependent coding efforts were compared. Ifdisagreements in coding were detected, the researchgroup resolved the discrepancies. No initial action wasexcluded from the analysis during the coding stage.Table 2 enumerates the number of different actions per-formed by each company.

After coding, the actions of each company were an-nually and cumulatively aggregated. Cumulative in-stead of non-cumulative aggregation is used toemphasize the path dependence of strategic behavior,which is reminiscent of the paths taken by companiesin competitive landscapes (Gavetti and Levinthal,2000; Siggelkow and Levinthal, 2003). In other words,if a company did not perform any actions in a givenyear, it preserved its location in the variable space(where the variables are the 22 action categories),and if the company performed certain actions in an-other year, it ‘traveled’ in the variable space accord-ingly. To illustrate this movement graphically(Figure 2), the variable space had to be reduced totwo dimensions (a plane). This dimensional reductionwas accomplished through principal component analy-sis (PCA), which is a computational method that canbe used to project multidimensional data onto a lowerdimensional subspace with minimal loss of informa-tion (Jolliffe, 1972, 1973). However, PCA loses someinformation; therefore, we chose to also measurechanges in the behaviors of the studied companies witha lossless measure of behavioral consistency. To de-velop this measure, a company is located somewherein the 22-dimensional variable space each year basedon its past behavior. The actions performed by thecompany during that year determine whether it movesto a new location in the variable space (if any actionsare performed during that year). This travel from a pre-vious location to a new location is represented by acertain distance d (between the two points in the vari-able space). The direction of this travel has an angularrelation (angle α) to the direction in which the com-pany traveled in the previous year. Thus, a particularpoint in the variable space has a distance d from theprevious point and an angle α between the twovectors points to and from that point. Using these dand α constructs, we defined behavioral consistencyC using Equation (1).

Table A1. Typology of Strategic Actions Employedin the Study

a

Mode of action

Domain of action Invest Divest

1. Wood and recycled fiber resources (1) (2)2. Sawn timber and wood products (3) (4)3. Pulp (5) (6)4. Paper production (7) (8)5. Cardboard and containerboard production (9) (10)6. Sheet products (11) (12)7. Packaging and converting products (13) (14)8. Selling and distribution (15) (16)9. Other related activities (17) (18)10. Several of the above (19) (20)11. Unrelated activities (21) (22)

aAction categories in parentheses.



C ¼ 11þ αd

0 < C < 1ð Þ: (1)

According to this definition, if a company has madefrequent significant changes in its competitive behavior,the measure of behavioral consistency would yieldvalues that are close to 0, whereas if the company hasbehaved somewhat similarly each year, the measurewould yield values that are close to 1. After completingthe analysis of the strategic actions that enabled a com-parison of the behavior of Finnish-based firms to thatof their US-based counterparts, we addressed the Finn-ish firms’ managerial perception and interpretation pro-cesses along with their institutional underpinnings. Thedata for the former included material from the archivesof individual companies (e.g., minutes of meetings andmanagement memos), coverage by industry-specificjournals and other similar outlets, and historical casestudies for individual companies. The material for the

last category included historical studies of Finnish soci-ety in general and the Finnish business system in partic-ular. The analysis of these factors took place in the spiritof a qualitative contextual analysis (Miles andHuberman, 1984). The PCA loadings provide a moredetailed indication that travel toward the lower right-hand corner, particularly as exhibited by Weyerhaeuser,is characterized by investments in wood and recycled fi-ber resources (action type 1), sawed timber and woodproducts (3), sheet products (11), other related activities(21), and to some extent, investments in selling and dis-tribution (15). Travel toward the higher right-hand cor-ner, exhibited by International Paper and Mead inparticular, is characterized not only by investments inpackaging and converting products (action type 7) andpaper production (4) but also by investments incardboard and containerboard production (5) andinvestments that concern several domains simulta-neously (10).

Table A2. Number of Different Types of Action Performed by Each Company

Domain of action (mode of action: investment/divestment)

1 2 3 4 5 6 7 8 9 10 11 ΣINT 7/2 11/0 10/2 31/26 12/3 5/0 77/12 13/0 6/1 28/5 23/4 223/55MEA 2/2 2/1 5/0 16/3 12/5 4/0 37/10 20/3 1/2 19/4 21/25 139/55WEY 28/2 27/6 10/1 14/3 10/3 19/6 23/2 20/2 13/2 19/3 28/13 211/55CHA 8/12 7/6 7/0 10/3 0/3 6/2 8/4 9/2 2/0 15/11 17/8 89/43KYM 1/1 7/2 8/2 35/6 0/1 3/1 0/2 13/2 1/0 9/2 16/12 93/31SER 3/0 7/1 21/4 22/5 8/0 4/1 8/0 2/0 2/1 2/0 9/3 88/15UPM 2/0 6/1 15/2 29/11 4/0 1/1 15/8 2/1 4/1 6/1 27/8 111/34ENS 1/1 12/6 7/1 6/2 9/1 5/1 0/0 0/2 3/1 15/2 10/8 68/25ML 4/0 6/1 4/0 9/1 1/0 2/0 5/0 3/0 0/0 10/0 0/1 44/3Σ(ΣΣ)

56/20(76)

85/24(109)

87/12(99)

172/60(232)

56/16(72)

49/12(61)

173/38(211)

82/12(94)

32/8(40)

123/28(151)

151/82(233)

1066/312(ΣΣ 1378)

INT, International Paper; MEA, Mead; WEY,Weyerhaeuser; CHA, Champion; KYM, Kymi; SER, Serlachius; UPM, United Paper Mills; ENS,Enso-Gutzeit; ML, Metsäliitto.



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