Network cohesion in global expansion: An evolutionary view Faith Hatani a , * , Sara L. McGaughey b , 1 a Manchester Business School, University of Manchester, Booth Street West, Manchester M15 6PB, UK b Department of International Business and Asian Studies, Griffith Business School, Griffith University, 170 Kessels Road, Nathan, QLD 4111, Australia 1. Introduction How organizations build and sustain competitive advantage across borders remains an enduring question of intense managerial and scholarly interest. In increasingly globalized markets, firms are interrelated with other firms. The resources and capabilities to which any one firm has access can extend well beyond that firm’s boundaries ( Dyer & Singh, 1998 ). Competitive advantage does not reside in a single firm’s capabilities and resources, but in interfirm networks that compete with other networks ( Gomes-Casseres, 1994; Gulati, Nohria, & Zaheer, 2000 ). Deployment of the network as a cohesive and coordinated organization is critical when the network operates globally ( Chen, 2003 ). In response to diverse business environments and location-specific events, interfirm networks evolve over time. In emerging markets, network members will confront uncertainty across heterogeneous business conditions ( Delios & Henisz, 2000; Hatani, 2009; Meyer, 2004 ), and need to coordinate a network-based division of labor and learning internationally. Maintaining network cohesion is essential in global expansion, and international competitive advantage is best understood in light of the evolution of the network, rather than a snapshot of a firm at a single point in time. In the paper, we explore this challenge by asking: How does global expansion, in particular entry into emerging markets, affect the cohesion of a large interfirm network, and with what consequences? We approach this question by, first, extending prior applica- tions of evolutionary theory at the functional (e.g., Fujimoto, 1999 ) or firm-level (e.g., Cui, 1998; Kogut & Zander, 1993; Zollo & Winter, 2002 ) to the network. The application of evolutionary theory to market entry allows us to move beyond firm-centric or ad hoc conceptualizations of international market entry, embedding market entry behavior in routines at a network level. We elaborate a cycle of network-level internationalization, in which learning and interfirm relationships play a key role. Our perspective thus complements recent understandings of internationalization em- phasizing networks, where the learning and commitment required to identify and exploit international opportunities takes place in relationships ( Johanson & Vahlne, 2006, 2009 ). We then apply our perspective of network evolution in global expansion to analysis of a longitudinal case study of the Toyota Group, comprising Toyota Motor and its key suppliers. Drucker (1972) once described the automotive industry as ‘‘the industry of industries’’ in which a number of firms are interrelated, forming large supply networks across borders. Over the past few decades, the Toyota Group has been an exemplar of a cohesive and highly effective learning network (e.g., Dyer & Nobeoka, 2000 ). However, relational patterns in the Toyota Group have evolved and changed over the Group’s history, with implications for network cohesion. Journal of World Business 48 (2013) 455–465 A R T I C L E I N F O Keywords: MNEs Supply networks Network cohesion Foreign expansion Evolutionary view A B S T R A C T Increasingly, competitive advantage does not reside in a single firm’s capabilities or resources, but in interfirm networks that compete with other networks. Recognizing that deployment of the network as a cohesive and coordinated organization is critical when it operates globally, we ask: How does global expansion, in particular entry into emerging markets, affect the cohesion of a large interfirm network and with what consequences? We examine this question through an evolutionary perspective, conceptualizing the process of variation–selection–replication–retention as one cycle of a network-level routine of global expansion. Movement through the cycle accelerates with high levels of network cohesion such that market entry and foreign establishment may become more rapid. We present a longitudinal analysis of the Toyota Group from founding through to its more recent entry into emerging markets, and identify the dangers of a diversion in any stage of this network routine. Our findings highlight the role uncertainty in the emerging market context and speed-based competition plays in the loss of network cohesion, and point to the ongoing, and possibly increased, importance of the core firm’s role in maintaining network cohesion and global competitive advantage. ß 2012 Elsevier Inc. All rights reserved. * Corresponding author. Tel.: +44 161 306 6602; fax: +44 161 306 3505. E-mail addresses: faith.hatani@mbs.ac.uk (F. Hatani), s.mcgaughey@griffith.edu.au (S.L. McGaughey). 1 Tel.: +61 07 373 54889; fax: +61 07 373 55111. Contents lists available at SciVerse ScienceDirect Journal of World Business j o u r n a l h o m e p a g e : w w w . e l s e v i e r . c o m / l o c a t e / j w b 1090-9516/$ – see front matter ß 2012 Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.jwb.2012.09.002 Our paper makes both theoretical and empirical contributions. First, by applying an evolutionary perspective, we develop a model that conceptualizes a network-level routine in the global expan- sion of supply networks using a variation–selection–replication– retention cycle. We argue that with repetition of the network routine based on high levels of network cohesion, movement through the cycle accelerates such that market entry and foreign establishment may become more rapid. Second, we present a rich description of how the relationships between Toyota and its key suppliers evolved over the history of the network, and how their global expansion has affected network cohesion. We pay particular attention to the Toyota Group’s relatively recent expansion into emerging markets. Our analysis identifies how network relation- ship changes over time, while incremental, may cumulatively hold large consequences for market entry and global competitiveness. Third, using our historical account of Toyota Group’s network evolution as a springboard for further theorizing ( Alvesson & Sko ̈ ldberg, 2000 ), we argue that a diversion in the network routine of internationalization could occur at any stage of the cycle, with a loss in cohesion leading to fragmentation, impediments to learning and a threat to global competitiveness. We identify two contextual factors as key risks for such a diversion: the high uncertainty and speed-based competition experienced in many emerging markets. An important managerial implication of our study is the role of the core firm in sustaining network cohesion. We also caution against inappropriately applying insights derived from the more com- monly studied production-side of Toyota to network evolution in global expansion. 2. Theoretical background Networks are long-term and purposeful arrangements among distinct but related for-profit organizations used by managers to position their firms in a stronger competitive stance ( Jarillo, 1988 ). These arrangements allow network members to gain and sustain competitive advantage vis-a ` -vis their competitors outside the network. Dyer and Singh (1998) argue that individual firms’ critical resources are embedded in interfirm routines and processes in a cohesive network. Network cohesion is defined as a group-level property describing how a collection of actors is united ( Moody & White, 2003 ). Cohesive networks are characterized by a willing- ness of network firms to cooperate with each other without coercion in the complex set of social relations ( Stanley, 2003 ). A cohesive network thus enables its members to coordinate critical task interdependencies ( Gargiulo & Benassi, 2000 ) and to access knowledge and resources that are not readily available through market exchange ( Gulati et al., 2000; Rothaermel & Hess, 2007 ). Coordination is an enabling process, which provides the appropri- ate linkage between different task units ( Van de Ven, Walker, & Liston, 1979 ) and realizes ‘‘best practice’’ ( Eisenhardt & Martin, 2000 ). A network-based perspective is thus a ‘‘relational view’’ of competitive advantage ( Dyer & Singh, 1998 ). In the case of global supply networks, much scholarly work has focused on relationships within the vertical keiretsu of the Japanese automobile industry. As explained by Lincoln and Shimotani (2009, p. 28) , ‘‘Keiretsu organization is by definition network organization – a web of overlapping, reciprocated, direct and indirect ties, which enables loose but broad coordination among a set of independently-managed firms.’’ The vertical keiretsu of the Japanese automobile industry is characterized by a large core firm (e.g., Toyota, Honda) with numerous affiliate firms. 2 The ties binding firms within vertical keiretsu create a stable framework of exchange and patterns of periodic collective action, fostering network identity and mutual orientation and, as a corollary, network cohesion. Network identity can be understood as a sense of belonging to interfirm relationships with a certain boundary, in which common or complementary goals are shared. At the firm-level, Kogut and Zander (1996, p. 506) suggest that identification characterizes ‘‘the conventions and rules by which individuals coordinate their behavior and decision making’’ and ‘‘sets out the process by which learning is developed socially through the formation of values and convergent expectations’’. These functions also apply to interfirm networks. For example, the ability to rapidly disseminate information, continually learn and quickly develop new products is a capability residing in Toyota’s network, and widely credited with contributing to the Group’s competitive success ( Dyer & Nobeoka, 2000 ). 3 Such advantages provide a powerful incentive for individual actors to stay within the inter-organizational network. Identification thus affects motivation, and is a strong psychological mechanism for sustaining cohesion that both enables and constrains individual action ( Jacobides, 2006 ). Mutual orientation refers to complementarity between the objectives of member firms in a network ( Easton, 1997 ). These objectives may be commonly held or largely instrumental in the sense of each firm seeking to gain different ends by the same means. Firms in the network are willing to interact with each other and expect each other to do so. Mutual orientation thus reflects at least some level of interdependency between network members and implies cooperation ( Easton, 1997 ). Mechanisms of cohesion, such as identification and mutual orientation, help explain coordination of firms in an interfirm network in circumstances where perspectives based on, for example, transaction cost economics or agency theory are inadequate ( Jacobides, 2006 ). Uzzi (1997) , for example, observes a willingness of firms embedded in an interfirm network to forgo immediate economic gain and pool resources, assisting adaptation in ways that could not be achieved through the price mechanism or self-interested calculations alone. Importantly, both network identity and mutual orientation develop through repeated interactions ( Pillai, 2006 ). Repeated interaction implies that networks need not be static, even if somewhat stable. Seemingly static networks are, in fact, continually reconstructed through relational interactions in the context of unfolding complex histories. In response to specific events and diverse contexts, interfirm networks evolve over time ( Lorenzoni & Lipparini, 1999; Madhavan, Koka, & Prescott, 1998 ). Here, evolutionary perspec- tives offer insight. 2.1. Evolution of global supply networks Evolutionary perspectives are diverse and have previously been applied to develop a conceptual model of the multinational enterprise (MNE) ( Kogut & Zander, 1993 ), to analyze the competitiveness of Toyota’s manufacturing system and detail its operational excellence ( Fujimoto, 1999 ), and to explore the co- evolution of learning mechanisms in the shaping of dynamic capabilities (e.g., Zollo & Winter, 2002 ). While we build on such contributions in developing our perspective of network evolution, we also acknowledge these studies as residing at the level of the 2 Such networks are distinguished from industrial networks which do not have natural centers or any clear boundaries, and usually have no core firm with which to identify ( Ha ̊ kansson & Snehota, 1995 , cited in Huemer, Becerra, & Lunnan, 2004 ). 3 While these advantages may, in large part, be attributed to the vertical keiretsu network, it would be a mistake to reify this form of network in particular. Indeed, the nature of ties and operations within vertical keiretsu structured around different core firms of the automotive industry varies markedly ( Ahmadjian & Lincoln, 2001 ). Further, while Lincoln and Shimotani (2009) document a recent decline in keiretsu networks within the automotive industry, other industries (e.g., consumer electronics) exhibit a drift toward more keiretsu-like forms ( Ahmadjian & Lincoln, 2001 ). F. Hatani, S.L. McGaughey / Journal of World Business 48 (2013) 455–465 456 firm, rather than network, as largely ‘geography free’, and with limited historical scope. In contrast, while we adopt a four-step (variation–selection–replication–retention) evolutionary model by Zollo and Winter (2002) , we develop it for supply networks in global expansion over an extended period. Our focus is the overall competitiveness of the global supply network rather than a specific firm’s performance or the network’s market share in a specific country. The network level of analysis and changing international business context is central. The key feature in the evolutionary perspective is the concept of routines. Routines are sequential interactions between organizational members to coordinate activities ( Nelson & Winter, 1982 ) that reflect ‘‘stable patterns of behavior that characterize organizational reactions to variegated, internal or external stimuli’’ ( Zollo & Winter, 2002 , p. 340). Routines hold a key to understanding drivers of endogenous organizational change and their impact on the organization ( Becker, Lazaric, Nelson, & Winter, 2005 ). In their definition of inter-organizational routines, Zollo, Reuer, & Singh (2002) emphasize the partner- specific interaction among firms, which develop in the course of repeated collaborations. Routines can be transferred within a MNE network, or developed by members in a local context of a foreign country ( Cantwell, Dunning, & Lundan, 2010 ). In either case, routines should incorporate continuous learning processes through network members receiving and interpreting messages from other members of the network as well as the broader external environment. Table 1 summarizes our perspective on supply network evolution in global expansion. Foreign entry is the ‘‘whole process by which firms enter foreign markets over long periods of time and not just the characteristics of the [isolated] entry decision and modes of entry’’ ( Axelsson & Johanson, 1992 , p. 219). In global expansion, the four steps in the evolutionary process are conceptualized as one cycle of a network-level routine of internationalization. The network repeats this cycle each time the members enter new markets. Movement through the cycle over time may accelerate as key members become more accustomed to the process through repetition and as knowledge is more readily transferred across the network and adapted to new contexts. Variations are the creation of novel patterns of behavior or structures ( Van de Ven & Poole, 1995 ). They arise through external stimuli (e.g., differing national regulations, competitive behavior) and internally generated behavior based on prior experience of routines built over time in the context of the network. Network members generate functionality and meaning around what they confront across borders, and derive novel and sometimes unexpected practices ( Garud, Kumaraswamy, & Karnoe, 2010 ). While the organization may retain existing routines (e.g., common approaches to new market entry), it could also adapt the routines using newly acquired knowledge in the face of new external stimuli, thereby allowing variations in routines to occur ( Barnett & Burgelman, 1996; Nelson, 1994 ). Variations often manifest themselves as adaptation and readjustment of exiting best practices across different national contexts. These are subject to both firm- and network-level selection pressures. Selection pressures include evaluations of the current or potential effectiveness of the novel practice (i.e., the variation) within the context of a shared understanding of prior experience and established power structures and interdependen- cies within the network (cf. Jacobides & Winter, 2005 ). In a more dynamic and competitive business environment, or one charac- terized by institutional uncertainty, the internationalization of a network may require a more rapid selection process ( Eisenhardt & Martin, 2000 ). Selection is followed by replication of the new practice, often simultaneously in spatially diverse contexts. Our network evolu- tion perspective recognizes each foreign entry as redeployment of network resource to new markets, typically based on prior experience (cf. Johanson & Vahlne, 2009 ). Abstract activity patterns can be replicated in sites where similar coordination and relationships are available based on organizational memory ( Nelson & Winter, 1982; Winter, 1990 ). Replications across diverse national markets can create the ‘‘raw data’’ of new practices for further variations ( Cepeda & Vera, 2007 ), and through access to these network resources, member firms’ activities are evaluated and adjusted. While the replication ability can be enhanced through greater international experience ( Contractor, 2007 ), replicability of practices is also essential if many parties are involved ( Nelson, 2003 ), and this requires network cohesion. Through multiple replications over time, novel practices or activity patterns may become routinized. If a successful pattern is mutually recognized, it may become member firms’ behavioral norm, leading to retention. Retention involves forces that perpetuate or maintain existing practices, and serves to counteract the self-reinforcing loop between variations and selection ( Van de Ven & Poole, 1995 ). A variety of best practice can thus be retained in the network as relational patterns. It is these relational patterns, backed by network cohesion, that enable the flow of information and learning in multiple directions between network members, and across multiple tasks in foreign expansion. In a globally operating supply network, member firms (suppliers) have to replicate their routines across diverse national contexts while retaining their integrity ( Sturgeon & Lee, 2004 ). When network cohesion, based on network identification and mutual orientation, is strong, members will act in a coherent manner even though they may use different modes of entry, and different practices complement each other. Multiple repetitions tend to make the new practice evolve towards a more tacit form as it is embedded in the network members’ collective behavior, such that it becomes taken for granted (cf. Dosi & Marengo, 2007; Zollo & Winter, 2002 ). As network firms together carry out similar practices and familiarize themselves with network routines, they may eventually accelerate task fulfillment and achieve ‘‘economies of speed’’ – intensive capital utilization and faster throughput is one of the most important advantages of large modern corporations ( Chandler, 1992 ). Thus, if member firms share an ‘‘organizational memory’’ ( Nelson & Winter, 1982 ) of network-level foreign market entry, and collectively adopt the explicit and tacit knowledge into their subsequent foreign expansion, market entry and establishment may become more rapid. Consequently, the network could attain a higher performance in the global market than an individual firm Table 1 Evolutionary framework for the global supply network. Global supply network evolution Object Competitiveness of a global supply network as a whole Logic of variation Geographical expansion of the network induces adaptation of existing routines. Member firms’ experience and the new market context may trigger changes in routines Logic of selection Long-term elimination of low performing routines by readdressing most critical tasks in a new market. Rather ‘rapid’ selection of routine is assumed Logic of replication Redeployment of network resources in another market based on the network’s organizational memory, and members’ mutual orientation and network identification Logic of retention Progressive changes of existing routines and ‘best practice’ as relational patterns. Routines may be sped up in a collective manner Source : Categories in the first column were adapted from Fujimoto (1999, p. 283, Table A.1) F. Hatani, S.L. McGaughey / Journal of World Business 48 (2013) 455–465 457 would achieve. The preceding discussion suggests the following propositions: P1a: The stronger the network identification and the higher the mutual orientation among member firms, the greater the level of network cohesion. P1b: The greater the level of network cohesion, the more rapid the cycles of the network-level routine of foreign entry. Ruigrok and van Tulder (1995) posit that competitiveness of large networks, such as Toyota Group, is positively influenced by high degrees of cohesion. As a network becomes larger, how key members cohere in the network is thus critical for further expansion and enhancement of network competitiveness. As noted previously, interfirm networks evolve over time. How global expansion – in particular entry into emerging markets – affects the cohesion of a large interfirm network and with what consequences remain questions of intense managerial interest. We turn now to a description of the method used to explore these questions. 3. Methods 3.1. Research setting In studying change, we are concerned with describing and explaining the temporal sequence of events ( Van de Ven & Huber, 1990 ). To explore network evolution and its key attributes, our study adopts longitudinal case research. Since there is no isolated time in evolution, the periodic update of longitudinal case analysis provides important insights into network analysis. Our study uses Toyota Motor’s supply network as an exemplar of vertically coordinated interfirm network. We focus on the Toyota Group, the core part of Toyota’s supply network. The Toyota Group refers to a set of firms comprising Toyota itself and its fourteen ‘‘Toyota Group Suppliers’’ in the company’s official terms. These suppliers are organizationally close to Toyota based on spin-offs or acquisitions during the Group’s history. Notably, this core Group has remained very stable over time. 4 The supply network consisting of Toyota and these prime Group suppliers is an ideal case to develop the analysis of network evolution for three main reasons. First is the competitiveness of Toyota in the global market: as of 2011, Toyota’s market value is more than US $139 billion, well above the second ranked carmaker, Daimler at US $75 billion. 5 Second, its well-coordinated network structure allows the researcher to define a network boundary for analysis. Third, a substantial volume of historical data and prior studies, not only about Toyota but also about Group suppliers, is available for longitudinal study. To explore recent changes in relationships within the Group and, as a corollary, network cohesion, we pay special attention to their entry into emerging markets, notably China and Central and Eastern Europe (CEE), at the beginning of the 2000s. 3.2. Research design The research encompassed four steps often used in longitudinal studies (e.g., McGaughey, 2007; Mintzberg & McHugh, 1985 ). Step 1 involved the collection of existing information concerning the histories of Toyota and the Group suppliers. These qualitative data were used to investigate the historical development of the Toyota Group’s globally operating supply network. Data collection was initiated in mid 2001, firstly through surveying companies’ websites and existing literatures available in the UK. Subsequent- ly, sizeable data were collected in Japan, mainly at Nagoya University, which holds a wealth of archival data about the Toyota Group. Step 2 involved arranging data in chronological order and identifying patterns. The work at this stage was concentrated on finding causal linkages between individual member firms’ activities. This analysis was informed by the development of our perspective for network evolution (shown in Table 1 ), and used to guide field interviews. Step 3 involved field research. While continuing archival data collection, interviews took place in Japan and China between January and April 2003, and in four countries in Europe (the Czech Republic, Hungary, Poland, and the UK) between May and December 2005. During these two periods, 52 people in the Toyota Group were interviewed. The number accounted for 33 units of 12 organizations (namely, Toyota Motor and 11 Group Suppliers 6 ). Table 2 provides the distribution of persons interviewed. The initial contact made was with Toyota Motor’s headquarters in Japan. To minimize potential respondent bias, direct contact was then made with the Japanese headquarters of supplier firms and with their local operation units abroad. Interviewees were contacted by utilizing a snow-balling method, and chosen for their involvement in international and interfirm activities. Following Glaser and Strauss (1967) , interviews were carried out until we received similar descriptions and information repeatedly. Interviews were semi-structured and open-ended. The main focus was on the interviewees’ motivation to enter the emerging markets and how their motivation and entry processes differed from the previous entries. This enabled us to explore change in the network relationships with entry to emerging markets through the experiences and perception of those directly involved, without imposing our second order constructs (e.g., network identification and mutual orientation) on the interview process itself ( Schutz, 1973 ). Interviews lasted at least an hour, but many of them took two hours or longer. Particular attention was paid to the context and the time about which the interviewees were talking and to what entity they were referring when they used the first-person plural nouns: ‘we’, ‘our’ and ‘us’ could mean the company itself, suppliers in general, or the group as a whole. All interviews were conducted in Japanese and recorded when permission was granted. Typewritten copies of interviews, the information from documents provided by interviewees and other data collected made up more than 250 pages of notes. These notes, along with archival data, media reports and prior studies, formed the data set of this study. Step 4 involved analysis of the interview data, in conjunction with the archival data. The mode of analysis was iterative, involving ‘‘shuttling’’ between data collection and analysis and enfolding of the literature to draw preliminary and verified conclusions ( Huberman & Miles, 2002 , p. 396). We adopt a contexualist approach to our case study research, in which we identify ‘effects’ (i.e. changes in network cohesion) and then seek ‘causes-of-effects’ explanations ( Welch, Piekarri, Plakoyiannaki, & Paavilainen-Ma ̈ ntyma ̈ ki, 2011 ). The longitudinal research design of our study enabled us to discern patterns in network changes from observed instances , and hence make generalizations 4 One of 14 Group suppliers changed its company name as a result of merger (i.e. merger with another Toyota’s supplier). Although an additional member of the Group (Toyota Housing Corporation) was recently added, this was also Toyota’s spin-off, but not an auto-parts supplier. Otherwise, the composition of the Group has remained largely the same throughout Toyota’s history. 5 Based on the data provided in Financial Times (FT) Global 500 in 2011. 6 For this study, we contacted 11 Group Suppliers out of the fourteen Group Suppliers. Three organizations in the Toyota Group, namely Hino Motors, Daihatsu Motor, and Toyota Central Research and Development Laboratories were excluded, because both Hino Motors and Daihatsu Motor are also car assemblers with their own FDI strategies, while Toyota Central Research and Development Laboratories is a R&D unit with no involvement in foreign entry processes. F. Hatani, S.L. McGaughey / Journal of World Business 48 (2013) 455–465 458 ( Eisenhardt, 1989 ). The Toyota Group is thus an instrumental case study ( Stake, 1978 ), where generalizability (or ‘‘transferability’’) is limited to similar cases and theory, rather than to populations ( Guba & Lincoln, 1994; Wolcott, 1999 ). That is, explanation is contingent and, hence, context forms an integral part of explanation ( McGaughey, 2004 ). We derived three key outcomes from this analysis: (1) the identification of five different phases in relation to the Toyota Group’s expansion in the international market since founding; (2) a model depicting a network-level routine of global expansion; and (3) identification of two key contextual factors affecting network cohesion in global expan- sion. 4. Network evolution of the Toyota Group The Toyota Group’s evolutionary path can be divided into five phases, as summarized in Fig. 1 The sixth phase – the shaded area in Fig. 1 – remains unlabeled to reflect an on-going process in the Toyota Group’s evolution. Each phase is dominated by a specific pattern and underlying idea defining network relationships in the Group’s internationalization. No clear line or point in time marks the cessation of one phase and the beginning of another, with each stage being part of an incremental process of global expansion (cf. McGaughey, 2007 ). We describe the defining characteristics of each phase in relation to the Toyota Group’s network evolution. We pay particular attention to Phases 4 and 5, which reflect a marked and relatively recent change in network cohesion in global expansion, offering a brief account of Phases 1–3 for contrast. Phases 1–3 Phase 1 is the foundation period of the Toyota Group. Since Toyota Motor was established in 1937, the company has made an effort to establish a sense of oneness between Toyota and its suppliers. Close relationships were formed with suppliers located in geographical proximity to the core firm. Toyota’s purchasing rules, codified in 1939, stated: Once a firm is nominated as Toyota’s supplier, it should be regarded as a Toyota branch factory. In principle, Toyota shall not easily switch to others, and shall make every effort to improve its performance (cited in Kyohokai ed., 1994, p. 18 , translated by the authors). Fig. 1. The evolutionary phases of the Toyota Group. Table 2 Distribution of persons interviewed. By job title a Numbers Toyota Motor General Managers, Global Purchasing Center, Japan 2 Group Manager, Global Purchasing Center, Japan 1 Chief Representatives (overseas units) 2 Senior Manager, Logistics Department (overseas unit) 1 Group suppliers Chairman (overseas unit) 1 Presidents (7 of overseas units*; 1 of the Japan headquarters) 8 Executive Vice President (overseas unit) 1 Chief Representative (overseas unit) 1 Managing Director (Production Engineering Division), Japan 1 Director (Finance & Administration Deptartment, overseas unit) 1 General Managers (Business Administration Deptartment/Planning Deptartment) 14 Senior Manager (Sales Deptartment, overseas unit) 1 Senior coordinators (Logistics Deptartment, overseas units) 2 Managers (Business Planning Deptartment/Purchasing Deptartment/Finance Deptartment) 9 Functional Executives (Production Administration Deptartment/Auto-parts Planning Unit) 7 By geographical distribution Country/Region Japan Europe b China Numbers 20 10 22 Total 52 a Information on interviewees’ precise affiliations and locations are omitted to meet their preference for higher anonymity. *Four out of the seven presidents concurrently hold the title of Director. b Locations where interviews were conducted include both sample firms’ administration units in Western Europe and production units in CEE. F. Hatani, S.L. McGaughey / Journal of World Business 48 (2013) 455–465 459 Toyota’s limited capital resources in the foundation period necessitated establishing close ties and mutual commitment with suppliers. Toyota’s suppliers association, Kyohokai , aimed at fostering intimate ties between Toyota and local suppliers, was also formed in this early phase. Network cohesion of the Toyota Group was immature during this foundation period, and the relationships between Toyota and suppliers, including the princi- ple of reciprocity, needed to be codified. In the 1960s, Japan’s import liberalization in passenger cars led to the transition of the Toyota Group into Phase 2, which is characterized by integration. Toyota exercised its strong leader- ship and used production systems to enhance the interconnected- ness of network members. In this phase, Toyota’s main task was to establish a solid production system – commonly known as ‘‘just- in-time’’ (JIT). This contributed to functionally linking Toyota and its suppliers ( Liker, 2004; Womack, Jones, & Roos, 1990 ). In addition to its ‘‘Group suppliers’’, the size of Toyota’s supply network as a whole expanded to more than 150 first-tier suppliers, 4000 second-tiers and 31,600 third-tiers ( Small and Medium Enterprise Agency, Japan, 1977 ). Backed by this large network at home, Toyota embarked on internationalization. Phase 3 is characterized by global expansion through network- based foreign direct investment (FDI). Since the 1970s, and more so in the 1980s, the Toyota Group expanded their production base abroad in Southeast Asia. In North America and the U.K., Toyota’s Group suppliers collectively followed the core firm’s (i.e., Toyota’s) international market entry in a sequential manner ( Clark & Fujimoto, 1991; Dyer & Nobeoka, 2000 ) and Toyota helped less- competitive suppliers’ entry into the U.S. ( Hatani, 2009 ). Multiple network-level knowledge sharing routines within the Toyota Group facilitated both bilateral and multilateral knowledge creation and diffusion ( Dyer & Nobeoka, 2000 ). 7 In Southeast Asia, Toyota formed a cross-border supply system by organizing Group suppliers’ FDI ( Fourin ed., 1990 ). In Phase 3, best practices were replicated and retained in the Toyota Group as successful relational patterns, despite the considerable difference of business environment in the U.S. and Southeast Asia. Toyota orchestrated a network-based division of labor to leverage intra-network member heterogeneity (as members differ in size, product segment, resources and capabilities) and learning to ensure that the implementation of existing practices or selection of variations were in accord with network needs. The level of network cohesion was high, based on strong mutual orientation by both the core firm and group firms. Phase 4 Since the 1990s, the intense competition in the global market has propelled the Toyota Group to cover larger geographi- cal areas to increase its market share. A combination of the bursting of the bubble economy in Japan in the early 1990s and increasing business opportunities in emerging markets drove the shift from Phase 3 to Phase 4. Phase 4 is characterized by Toyota’s key suppliers accelerating their foreign entry routines and deploying themselves in emerging markets such as China and CEE. The accelerated process relied heavily on tacit knowledge in the network, and a high degree of mutual orientation and network identification. A Group supplier described the priority of the company’s business in China: ‘‘We (the supplier) are working at our top speed, because the [Chinese] market is changing very quickly. The fastest setting- up [of a production base] is the priority shared among all of us [in the Toyota Group].’’ (President, a Group supplier’s local unit in China. Interviewed in February 2003.) Other interviewees in China also made similar comments, emphasizing the speed of foreign expansion. In a departure from the Toyota-led market entry of Phase 3, some of Toyota Group suppliers entered China even before Toyota’s official announce- ment of entry into China in the mid 1990s. One of the Group suppliers that entered China before Toyota’s official announce- ment expressed the reason for its FDI in China as follows: ‘‘To compete in the international market, our FDI project should play a part in Toyota’s strategy. From the early stage of its China project, Toyota has emphasized the need of local-based purchasing. For us, the indication was obvious enough – almost a matter of course – that we ought to have our production base in China even though we were not told to do so.’’ (General Manager, a Group supplier’s local unit in China. Interviewed in March 2003.) The Toyota Group’s entry into the Chinese market was largely based on the successful memory of their previous foreign entry undertaken in Phase 3. The key variation was the advance entry of suppliers. Mutual orientation and interdependence are essential for a network to carry out replication in a progressive manner. A well-integrated network is capable of avoiding rigid replication of existing practices in new market contexts by utilizing experience and tacit knowledge that member firms share ( Anand & Delios, 1997; Kuwada, 1998 ). Indeed, Group suppliers entered the Chinese market and began to build supply clusters even before the core firm Toyota launched its assembly factory in the country ( Hatani, 2009 ). Thus, the cycle of network- based entry into China was much quicker than previous entry into the U.S. While group suppliers gathered speed of the entry process in this phase, Toyota’s approach to co-ordination altered. Specifically, Toyota’s hands-on coordination of Group suppliers’ FDI that was so evident in Phases 1 to 3 became more limited. A Toyota general manager who was responsible for the China project said: ‘‘When we [Toyota] announced our intention to enter China, we also explained our plan to our suppliers through Kyohokai But we never told them to go ahead of us. FDI in China is such a complex task that we can’t detail everything for each supplier. We would be pleased to advise them when they ask for our suggestion. However, the decision and initial FDI plan should arise from them.’’ (Interview in January 2003.) Historic bonds can be enduring even in the face of changing competition and network governance. One of Toyota’s prime Group suppliers, which has been aggressively expanding non- Toyota business outside the network globally, still expressed loyalty to Toyota based on the norms of co-evolution and interdependency: ‘‘ we are just doing our best to increase our (the supplier’s own) competitiveness after all, our growth as a global supplier will contribute to Toyota’s growth, and Toyota’s growth as a carmaker helps us to grow more. Walking away from this network is unimaginable.’’ (General Manager, a Group supplier’s Japan headquarters. Interviewed in January 2003.) While the above illustrations may reflect a high degree of mutual orientation and an organizational memory of network- based entry, at least on the part of Group suppliers, a more market- based attitude toward Group suppliers was evident among Toyota staff, especially in Toyota’s headquarters in Japan. One Toyota executive stated: 7 These included a supplier associat