The relations between upgrading strategies in global value chains and design management capabilities: An investigation on firms operating in Turkish electrical and electronics sector

In the last twenty years, competition between firms and countries has been increasing, compelling both to produce better-qualified services and value-added products to ensure sustainable growth. In this context, design is emerging as one of the most important, non-price competition factors and a powerful tool used to meet the needs and expectations of users by creating high value products, services or interfaces for firms in developed countries and emerging markets alike. The increasing importance of integrating design into organizational processes and design as a strategic business tool is emphasized in academic studies as much as in business practices. The efficient use of design is related to its integration with other functions in the firm as well as effective management. Firms that are able to effectively manage design to deeply understanding key changes in social life, culture and technology create competitive products, services and interfaces, and integrate design management (DM) into business strategy at a strategic level. However, in practice, businesses integrate and use DM in their organizational processes at different levels. In the literature review conducted for this study, audit tools, models and conceptual frameworks developed to facilitate the integration of design into business strategy and to assess the design capabilities and DM levels of different firms were examined in detail. It was identified that the vast majority of recent studies were done in developed-country contexts and considered design and DM from this perspective only. It is also important to note that developing capabilities such as production, R&D, DM and sales-marketing for firms operating in emerging economies relates to how these businesses engage in the global economy. In the past two decades, the global economy has become increasingly structured around global value chains (GVCs), and governments have started to pursue GVC-oriented industrialization to develop key sectors. In Turkey, as a result of liberal policies pursued since the 1980s, firms have begun to follow export-oriented strategies. After entering the Customs Union with the European Union in 1996, the difference between domestic and foreign markets has effectively disappeared, and Turkish firms have started to pursue strategies appropriate to their changing environment. In this period, East Asian and Turkish firms alike have integrated into the global economy by entering GVCs as manufacturers for foreign transnational companies. These latecomer firms (LCFs) from emerging economies are taking advantage of their late entrance into the global market to catch up to transnational companies, following fast-track strategies to enter GVCs rather than learning entire technological development processes from the beginning. It appears that LCFs have used an original equipment manufacturer (OEM) strategy, through which they access outsourced knowledge, develop firm capability and catch up to developed-country firms by manufacturing final assembled products for transnational companies. While expanding production capabilities and acquiring new technologies to aid in the development of designs demanded by buyers is the main focus in the OEM strategy, learning dynamic capabilities and value-added activities for LCFs are necessary to upgrade in GVCs. Upgrading in GVCs, known as Asian innovation, is described as upgrading from OEM to original design manufacturer (ODM) and from ODM to original brand manufacturer (OBM) standing at the top of the value chain. The organizational learning processes that companies pass through during this upgrading trajectory in GVCs have allowed many companies to develop dynamic capabilities, integrate and reconfigure internal and external competencies and address rapidly changing environments. Specific and identifiable processes in companies, such as product development, DM and strategic decision-making are defined as dynamic capabilities. In particular, developing DM capability is necessary for LCFs targeting functional upgrading from OEM to ODM and OBM business strategies in GVCs. Each strategy followed by LCFs to position themselves in GVCs requires different DM capabilities. However, GVC-oriented industrialization of LCFs, particularly with respect to functional upgrading, is neglected in DM literature. Similarly, the different industrial development paths followed by LCFs in the global economy are not taken into consideration by conceptual frameworks assessing design capability and DM level. In this thesis, based on a review of existing DM assessment frameworks, a new framework is proposed, which leverages both GVC and DM theories to address the specific development patterns of LCFs. This research was carried out in two main phases. The first phase involved an extensive theoretical review of existing literature in DM and GVCs, in order to develop a theoretical model called the Design Management Capability Framework in GVCs. In this framework, OEM, ODM and OBM strategies in GVCs are linked with operational-functional-strategic DM capability-levels in the DM literature. While operational DM capability is sufficient for an OEM company, functional DM capability is necessary to move from an OEM to ODM strategy, and strategic DM capability is crucial to shift the organization from an ODM to OBM strategy. Different from current models of DM, this theoretical framework highlights the importance of developing DM capability particularly for the economic and social upgrading of developing countries as well as the dynamic movement of LCFs in GVCs. In the second phase of the research, three firms were chosen as case studies to test the Design Management Capability Framework in GVCs. DM capabilities were explored in three large-scale manufacturers following OEM-ODM-OBM strategies in GVCs from the Turkish electronics and white goods industry. The case studies specifically focused on how firms develop their design management capabilities; the relationship between design and other firm functions, such as manufacturing, R&D and marketing; how firms structure the relationship between design and business strategy; the detailed definition and qualifications of DM capabilities in OEM-ODM-OBM strategies; and major barriers and enablers in the process of functional upgrading in GVCs. The case studies revealed that research focused on DM capability should consider the different strategy or strategies followed any firm operating in GVCs, because the level of DM capability in an organization is dependent on the business strategy the follow in GVCs. In addition to the strong link between DM capability and business strategy, it was revealed that firms can follow multiple strategies simultaneously in GVCs and make transitions between strategies. They also do not have to follow a linear upgrading trajectory from OEM to ODM and ODM to OBM. The most surprising finding was the upgrading of a firm from an OEM to OBM strategy without pursuing an ODM strategy in between. It was concluded that pursuing an ODM strategy for many years in GVCs can be a barrier for the transformation of an organization into a global brand. According to the findings of this study, there is a correlation between operational DM capabilities and export activities in GVCs. The research showed that the three case-study firms developed their operational DM capabilities by following OEM strategies in GVCs. While external factors are more prevalent in the development of DM capabilities in OEM-ODM firms, internal factors are predominantly influential in the development of strategic DM capabilities in OBM firms. The development of strategic DM capabilities and the high-level integration of design in an organization are driven by major changes in business strategy, such as changes in market focus, transition to a brand strategy targeting global markets and restructuring brand architecture and product management strategy. In this context, the integrated management of product design and brand strategy seem to result in the spreading of design culture across the organization. The major differences between DM capabilities developed within OEM-ODM-OBM strategies appear in user research, the position of design in an organization, the level of design awareness and the integration of design into business strategy. The findings reveal that design function is structured under R&D in the organization in OEM-ODM strategies, while it is structured under marketing function in OBM strategies. Additionally, it is clear that user research in the context of design processes is not a capability that is widely developed in OEM-ODM firms due to the business-to-business (B2B) nature of their strategies. On the other hand, firms that follow OBM strategies in GVCs have developed extensive user research methods to get insight about end-users from different markets. According to the findings, firms focused on upgrading to OBM strategy and governing the value chain were required to take control over their supply chain of raw material. Because dependency on importing raw materials can be an obstacle to becoming a global brand, particularly for electronics companies. Notably, the three firms explored in the case studies are also business-group companies, and it seems that business groups expand the globalization of firms by supporting them in their international activities. It is also important to underline the effect of government policies on the development of industries and firms in the GVCs. Consequently, the first output of this thesis is the theoretical framework, which indicates the relationship between strategies followed in GVCs and the DM capabilities of LCFs. This theoretical framework fills the gap in the existing DM literature by inserting latecomer and value chain perspectives. It also integrates DM with firms' other capabilities, such as production, R&D and sales-marketing with the aim of presenting a holistic view for future studies. The proposed Design Management Capability Framework in GVCs was tested by conducting case studies of the three large firms Arçelik, Vestel and Termikel, which are producers of a significant share of the manufactured goods exported from Turkey every year. It was concluded that these case studies validated the underlying theoretical framework and provided new inputs for developing the model. The framework and the case studies in this thesis provide valuable insight into how firms develop their DM capabilities through processes of internationalization and use the appropriate level of DM capability in certain GVC strategies. This thesis also contributes to the extent of government incentive programs intended to support global brands.