The Environment Creating Mechanism of a Firm ---A Road to Sustained Survival and Growth:

Case Studies of Sony and Samsung

Presented at the 25th Fuji Business History Conference, January 5-8, 1998

First Revision: January 27, 1998

Dong-Sung Cho Professor of Strategy and International Business

College of Business Administration, Seoul National University Kwanak-ku, Seoul, Korea 151-742

Tel: 82-2-835-1350, Fax: 82-2-835-1351 E-mail: cho@ips.or.kr

I am grateful to the constructive comments made by participants of the 25th Fuji Business History Conference during January 5-8, 1998. In particular, my thanks go to Professors Seiichiro Yonekura, Pascal Griset, and Fumikatsu Kubo.

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The Road Not Taken "Two roads diverged in a wood, and I - I took the one less traveled by, And that has made all the difference."

- Robert Frost -

1. Introduction

Neo-classical economists preach that there is no firm that can enjoy above-normal profits in the long run. Reality defies them. Du Pont de Nemours in the chemical industry, GM in the automotive industry, and Cargill in the grain trading industry, all have been leaders in their respective industries for several decades with handsome profit margins over the years. Intel and Microsoft have also joined this elite group of companies based on their unchallenged technology leadership. One can witness such a superstar in virtually every single industry. More recently, a new generation of economists and business scholars has attempted to explain these phenomena. Porter (1980), for example, coined the terms “five competitive forces” and “three generic strategies” based on the industrial organization framework, while a newly formed “resource-based” school of scholars such as Mahoney and Pandian (1992) use “resources and capability” to explain them. These new streams of thought have successfully illustrated a possibility that these industry leaders could generate long-term above-normal profits by either choosing attractive industries, identifying competitive strategies, or possessing and creating unique resources and capabilities. Yet, they invariably treat the external environment as a given condition or constraint in the process of strategy development and implementation. If one carefully looks into the reality, however, one can easily detect that the relation between the firm and the environment is not as stereotyped as being unilateral. Every industry has its leaders. Exxon and Royal Dutch Shell in petroleum, Pohang Steel Corporation and Shin Nihon Detsu in steel, Mitsubishi Heavy Industries and Hyundai Heavy Industries in shipbuilding, GM and Toyota in automotive, Matsushita and Sony in home electronics, Intel and Samsung in

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semiconductor, and so the list goes on. These companies reveal that they have not only passively adapted to the environment but also actively created a new environment, thereby establishing sustainable industry leadership. Long-term profits above the industry average naturally followed. This paper challenges the traditional notion that a firm should adapt to the environment to grow. A firm may survive merely by adaptation. Chameleons, the most adroit adapter of all species, have been surviving for millions of years in the tropical climate surrounded by thousands of hostile creatures. It is, however, the human being that has become the master of the earth through their relentless pursuit for new invention and discovery. Adaptation was not what they depended on. This paper also challenges the more recent thesis that a firm should create resources and capability to gain competitive advantage. A firm may survive and grow in the short-run through such an effort, but it will never reach sustainable industry leadership in the long run. As D’Aveni (1994) argues, the advantages that a leading firm has will constantly change in the hyper-competitive market, and so is the market leadership. This paper contends that only the firms that actively and positively change, recompose, and create the environment have chances to reach long-term sustained survival and growth. Based on this contention, this paper offers the “environment creating mechanism of a firm” as a framework for analyzing a couple of Japanese and Korean firms that have been leading their respective industries. 2. Environment Adaptation and Resource Creation

A firm must adapt to the environment for survival. To adapt to the environment, a firm must utilize its internal resources in the most efficient manner. As shown in <Figure 1>, the traditional concept of strategy has been perceived as a process of matching external opportunities and internal strengths (Andrews, 1971). A firm’s objective and strategies would be chosen based on this match-up. Certainly, the chosen strategies would be implemented through the utilization of the firm’s internal resources in its attempt to adapt to the external environment. The result of this process would naturally be survival of the firm. Chandler (1962) explained the change of firm structure from the nineteenth century’s functionally oriented organization to the twentieth century’s multi-divisional organization as an inevitable process of adapting to the

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changing environment.

-------------------------------------------------------------------------------------------- <Figure 1> The Environment Adapting Mechanism

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As the managers are better educated and more experienced these days, the above-described environment adaptation mechanism has become widely recognized by a variety of firms, which often compete against one another. As a consequence, the firms in the same industry would respond to the environmental changes in the similar fashion, thus resulting in more or less the status quo. Slowly and gradually, managers began to understand the power of differentiation. This time, however, differentiation would take the form of resource differentiation (Wernerfelt, 1984). In a similar vein, Prahalad and Hamel (1990) emphasized a need to develop core competence, while Nonaka and Takeuchi (1995) stressed the importance of tacit knowledge. <Figure 2> shows the mechanism of resource creation, with which the firm is expected to utilize the created resources to gain industry leadership.

-------------------------------------------------------------------------------------------- <Figure 2> The Resource Creating Mechanism

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The traditional emphasis on environmental adaptation, and the more recent awakening of the need for resource creation have their raison d’être in the continuous changes that are taking place in the global environment especially since the 1970s at an accelerating speed. In reality, however, a firm’s environmental adaptation has its own cost of having to collect and analyze information about uncertain future. Even when a firm fully understands the uncertainty created by the changes in environment, the time lag caused by the accelerating speed at which the changes take place make it difficult for the firm to effectively adapt to the changes. In other words, when the changes are too quick for a firm to cope with, adaptation may be neither feasible nor desirable for the firm to implement. Instead, a firm would rather change the rules of the game by recomposing the existing industry or creating a new industry in which the firm can hold on to the competitive advantage that no other competitors can challenge. In essence, the

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mechanism to actively create the environment is a viable alternative to the mechanism of environmental adaptation in the firm’s effort to survive and grow. 3. The Environment-Creating Firms

The following case studies of the two firms, a Japanese firm and a Korean firm, vividly show us how corporate leaders carry out the processes by which the corresponding firms create the external environment and internal resources in their pursuit for industrial leadership. Sony1: Sony today is one of Japan’s most global and giant corporations with its current profit of 312 billion yen from the sales of 5.7 trillion yen, with 72% of which coming from its non-Japanese market as of March 1997. Its affiliation includes 1,100 daughter companies such as Aiwa, Sony Computer Entertainment, Sony Music Entertainment (formerly CBS Records), and Sony Pictures Entertainment (formerly Columbia Pictures), and 53 related companies such as J Sky B (Nishino, 1997). Sony, the world’s largest maker of audio and video equipment today, was humbly started on the afternoon of May 7th, 1946, by a group of about 20 youngsters on the third floor of the Shiragi-ya Department store in Tokyo. Renaming of the company in 1958 manifested itself of its commitment to breaking old traditions and creating a new history: Masaru Ibuka (then President) coined the company name “Sony” by combining “sonus,” the Latin word for the sound, and “Sonny Boys,” the then popular music band in Japan. Sony was then written in kata-kana, which itself was the first of its kind among the Japanese companies. In Japan, kata-kana is used to write foreign words in the Japanese language, therefore, only foreign firms would write their names in kata-kana. Many Japanese questioned if a foreign company had acquired the company. Ibuka rejected Akio Morita’s (then Executive Director) suggestion to call the company “Sony Electronic Company,” on the basis that “Although this company is presently limited to producing electronic products, we don’t know what it is going to do in the future.” Ibuka’s vision was realized in the late 1980s, when Sony moved to businesses of recording music and making movies. Since the beginning, Sony has consistently defied the traditions of the competitors that would

1 The detailed description of this section is documented in Cho(1997).

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adopt traditional names on the product that they manufactured. Sony pioneered in developing new products, and created generic names for these products. Starting with tape recorders, transistor radios, personal TVs, color TVs, Walkman, Watchman, and Discman to passport-size Handicam, Sony continuously explored new frontiers in technology. It introduced the stereo sound system, invented the trinitron technology for color TV, improved the 3.5-inch floppy disc, and pioneered portable video camera. Instead of meeting expectations and demands of consumers, Sony set its objective to initiate, educate and create consumers. Ibuka once stated “We know what products are technologically feasible, while consumers would not know them until they are introduced in the market.” Instead of market research on consumer behaviors, Sony concentrated on developing and refining the mindset of the people working at Sony by establishing channels of communication with and education for general public, and creating new market for the products it developed. In a word, Sony created its own “Sonymen,2” loyal customers to Sony products. Having succeeded in miniaturizing tape recorders in 1950, Sony chose to develop a transistor radio. Most executives were hesitant about the idea of manufacturing radios, then the most popular product in the electronics industry. They feared that competition would be too intense on the product that had reached the market saturation rate of over 70% in the 1950s. Ibuka had a different opinion. “The market saturation rate only indicates the percentage of households that have radios. The market is unlimited if one considers the saturation rate on a personal basis.” He further imagined “Substituting transistors for vacuum tubes, we can make a radio small, light, and suitable for an individual person to carry. If radios can be made portable, they will create an entirely new market.” The first transistor radio called TR-52 was introduced in the market in 1955. Perhaps the most celebrated incident in the history of Japan’s electronics industry would be Morita’s refusal to Bulova’s offer to purchase 100,000 units of transistor radio on an OEM basis in 1955. When his counterpart at Bulova pointed to the fact that “Only Bulova with the tradition of 50 years can sell the product,” he was said to have answered “Nobody knew Bulova 50 years ago. Sony is taking the first step to its 50 year history starting today.” The next product that Sony attempted to develop was a transistor TV. While its competitors were following the trends for bigger screens, Sony chose to make smaller sets. TV8-301 with 8-inch screens was developed in 1959, which eventually set a new trend for “a TV per room,” and

2 I myself have coined the word “Sonyman” for the consumers loyal to Sony products.

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eventually “a TV per person.” The next product was a color TV. In spite of the repeated successes with transistor radios and TVs, Sony was still a David to Goliath of Matsushita, Hitachi and Toshiba in electronics. Sony needed to bolster its image as an electronics equipment manufacturer in the eyes of the public. It chose to develop color TV sets in 1960, the year color TV was broadcast in Japan for the first time. RCA’s shadow mask technology was firmly established as the industry standard, as it is today. Sony chose to take the road not traveled by, and that has made all the difference. Full seven years after its attempt to develop a new technology with sharper image and brighter color, Sony completed the trinitron technology for color TVs in 1968. Consumers responded with unequivocal applause of the product as the best quality. Sony decided to introduce something totally new to the market, as a way to celebrate its 33rd anniversary in 1979. It introduced TPS-L2, the first of Walkman series, which set the tone for a new wave of gigantic market, which had not been known until then. Music was something that had to be enjoyed at home, in a music hall, or any place with a ceiling. The Walkman series defied this traditional concept and commonsense about music. Walkman was designed as a simple, easy-to-use device for individual person who wanted to listen to music without disturbing others. The product itself was a maverick to Sony’s own traditional philosophy for pursuing higher performance and multiple functions. The name ‘Walkman’ was not chosen without internal argument. Morita (then Chairman) was away in New York, when the advertisement director put Walkman as the name of the product. Upon returning, Morita argued the name to be changed. Being fluent in English, Morita pointed out that the name sounded less prestigious to English-speaking consumers, as consumers would think of the product as something to be held by the men who walk on streets. However, it was already too late, as the major advertisement campaign had been started all over Japan. As a compromise, multiple names were chosen, such as “Sound-about” in the United States, “Store Away” in England, and “Free Style” in Sweden. Then foreign travelers in Japan began to purchase Walkman like hotcakes, bringing it with them to their home countries and helping advertise the product abroad. In 1980, Morita declared “We choose Walkman as the only name of the product,” making this somewhat weird name as the official brand throughout the world. The music recording industry flourished in the 1960s with the popularity of Elvis Presley and Beatles, then waned in the late 1970s due to the introduction of cassette tapes that displaced LPs.

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People would easily dub FM music with tape recorders and conveniently store them. Under these circumstances, technology initiated by NHK to digitalize sound was brought in to Sony through its developer Heitaro Nakajima. He was instrumental in developing the first successful CD player, D-50, in 1984. Without the support of the software (music-recorded CD), however, CD players could not be sold. Sony decided to make and distribute software itself, through its newly acquired CBS-Sony (presently Sony Music Entertainment). By 1989, CDs effectively substituted LPs, which subsequently comprised less than 1% of the music recording industry in Japan. Its success was attributed to the appropriate combination of hardware and software in the CD industry. It was in 1987 that Sony formed a team named “88 Project” that would develop a new handy-sized 8-mm VTR camera by 1988. Although the mission of the team was broadly defined to make “a smaller, lighter, and easy-to-use VTR camera,” the team set its own target of the product at the “passport-size” that had been prompted by the suggestion of one of its junior members. TR-55 was eventually developed in 1989 and has been advertised as the “passport-size VTR camera” since then. An even more difficult target was the weight. The target was set at 70g. To reduce the weight, the team had to go through trials and errors for mobilizing Sony’s technologies of internalizing recording microphones and miniaturizing all conceivable parts and components. Sony’s TR-55 ignited a race among the competitors for smaller and lighter VTR cameras. Yet neither Matsushita’s MV1 nor Hitachi’s VM-C1 which were introduced in 1990 could match TR-55 in terms size, weight, and functions, pronouncing Sony’s uncontested superiority in miniaturization technology. Japanese newspapers featuring employment opportunities in July 1991 had Sony’s advertisement titled “Challenge us with what you want to do.” It continued, “What is important is YOURSELF. Don’t tell us which university you are graduating from.” This advertisement by Sony was itself a challenge to the traditional norm of the Japanese society often dictated by personal connection, and especially the university alumni affiliation. Morita explained, “I want to get rid of cheap and lackadaisical way of evaluating employees by the reputations of universities they went through. We will make sure that each employee is evaluated by his/her own merit instead.” Sony was ranked first as the company that employees wanted to work at, due to its “future potential,” “superior technology,” and “ability to accommodate changes in social demands.” Parents also ranked Sony first as “the company that they wanted to send their children to,” on the basis of its “excellence in quality of products and services,” “innovation,” and “superiority in R&D and technology.”

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In response to these ratings, Sony’s Personnel Director Takahashi stated, “We thank those who have rated us highly. There are two approaches to coordinate between the employees and the firm. One is to fit the people to the objective and shape of the firm. The other is to fit the firm to the people that volunteer to prove their ability. Your high ratings of us seem to reflect our persistent effort to implement the second approach. We are here in the office not to choose the students with outstanding scholastic performance, but to identify pearls that shine in the midst of self-esteeming indulgence and arrogance.” In 1990, Sony surprised people in and outside the company by announcing the promotion of General Manager Morio to the position of Executive Director, bypassing 16 seniors. Japan’s legendary system of seniority was broken. It is not to say that Sony is without errors. Sony was so proud of the superiority in its SL-6700, the first Betamax-type VTR that Sony invented, so it decided to adhere to the own brand policy. Naturally in 1976, Sony flatly refused Hitachi’s order to provide machines on an OEM basis. JVC, on the other hand, recognized the inferior quality of its VHS-type VTR, thus was willing to provide the machine to Toshiba, Hitachi, and mighty Matsushita on an OEM basis. The majority of software makers sided with the VHS machines, which had captured bigger market share through the combined efforts of its OEM partners, and gave Sony a clean loss. The present monopoly position of Betamax machines in the professional market such as TV stations shows that Sony, in spite of its superior quality in its own product, could not make it in the market due to its mischievous strategy. Sony, nevertheless, had learned a lesson from this incident. Realizing the importance of software such as video movie films as the key success factor for its hardware, Sony has made sure its entire product to be supported by software. Sony acquired CBS Records in 1988, only a few years after it introduced D-50, the first CD player, and Columbia Pictures in 1989 in time for its major inroad to VTR camera market. A totally new vision slowly emerged from these acquisitions. What Sony managers realized was that customers were buying Sony products not because Sony was producing superior quality machines but because they were interested in enjoying themselves through entertainment facilitated by these machines. Sony recognized a need to provide customers with maximum pleasure from entertainment. A new, totally revolutionary vision was thus created in three words: “Total Entertainment Group.” In preparation for the 21st century, Sony has chosen three strategic thrusts: globalization, digitalization, and multi-media. Sony knows that its major competitors have similar strategies. Yet, Sony differentiates itself from the others in the approaches to implement these strategies.

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With the backup of strong software businesses in three areas---music, movie, and game---Sony is poised to achieve what it is aiming at. Sony has broken common sense and traditional rules with its free-style idea generation. Sony has consistently moved ahead of its competitors by going abroad in the 1950s; exploring new business opportunities in movie, satellite broadcasting, and advertisement. Sony offered its shares in the New York Stock Exchange; disintegrating its organization to more than 1,100 daughter companies; instituting the two-tier organizational system with its headquarters in Japan and the U.S. respectively; and reducing the number of directors to 10 (Nishino, 1997). It is this innovative spirit of Sony that has allowed it to leap toward industry leadership in Japan and in the world. The firm has not been timid in breaking away from industry traditions. It has also learned from its own mistakes. In essence, Sony has developed a mechanism to decompose existing norms in and outside the firm and recompose them into a new set of environment and resources. Together with the case of Samsung’s semiconductor division that follows, the Sony case provides us with rich sources of materials that can be used to construct a mechanism for creating the environment and resources.

Samsung Semiconductor Division3: The most commonly quoted as Samsung Group’s vision has been “First-ism,” that is to become the leading company in every business the group is in. When Samsung decided to make a major investment in semiconductor manufacturing in 1982, it was a distant follower---in terms of technology and human resources---of global leaders such as Intel and NEC. Yet its Chairman Byung Chull Lee declared his vision of making the firm a global leader in the semiconductor industry upon its entry to the industry in the late 1970s. Existing competitors and experts in the industry were puzzled by, and some ridiculed, Lee’s rosy vision. The industry experience up to then proved that no country in the world without a strong base in physical science and electronics, would succeed in the semiconductor manufacturing. Another entry barrier that industry experts asserted was the extensive period of technology and human resources development that a new entrant had to go through. Lee defied these traditional views, and chose to follow the path not endorsed even by his closest subordinates---professional managers within the firm.

3 The detailed description of this section is documented in Cho(1995) and Mathews and Cho(1998).

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A story recounted of Chairman Lee by Sang Woo Lee, one of Korea’s foremost professors of political science captures Chairman Lee’s vision involved in taking Samsung on its high technology odyssey. On a day in 1980, Chairman Lee invited Professor Lee to his office for a talk. After the pleasantries, the chairman got down to business and asked Professor Lee for his opinion regarding North Korea. Having studied North Korean politics and military forces, he said he would be ready to answer any questions that Chairman Lee might have. Chairman Lee asked, “Do you know the average yield from North Korean rice patch?” Somewhat surprised and bewildered, Professor Lee answered, “I am sorry that I do not have the data about North Korean agricultural productivity. But I would easily answer if you had asked the numbers of fighters, tanks, or submarines that North Korean military maintains.” Chairman Lee responded, “I bet the unification of South and North Korea would in large part be determined by the crop yield in the North.” Professor Lee then thought that the chairman was implying that North Korea would never get out of the agricultural stage of economic development, and would thus never be in a position to challenge the South. Today, almost two decades after his talk with Chairman Lee, the professor confesses that he misunderstood Chairman Lee’s contention that the day of Korean reunification would be when North Korean regime cannot feed its people any more. Returning to the dialogue between the two Lee’s. Chairman Lee continued, “I understand that you are a member of the Korean Future Society.” “Yes, I am. Are you interested in anything about our society?” “Can you name what you think would be the most important industry in the 21st century?” When again the professor demurred, Chairman Lee offered his view. “It seems to me that transportation industry is becoming more important as the economy grows and expands. In this industry, horse-led carriage was the predominant mode of transport in the 19th century. But, automobile undoubtedly has become the most important mode of transport in the 20th century. Likewise, the aerospace industry would become centrally important in the 21st century.” Then the chairman asked a third question. “Have you heard of semiconductors?” Again the professor admitted that he hadn’t. Chairman Lee said he felt that they would prove to be a sort of “industrial rice,” the most important components for future industrialization – and in particular for future aircraft manufacturing (Cho, 1995).

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It was March 1982, in Seoul. The speaker was Chairman Lee of Samsung. Lee was making his most important announcement in the course of his long and distinguished career. Samsung intended, he said, to become a world player in memory chip production. He was prepared to put in excess of $300 million, the largest investment in Korean history then, behind his assertion to be spent over the next four years. In effect, he was betting his company on its success in semiconductors (Mathews and Cho, 1998). Samsung had acquired great expertise in manufacturing electronics goods throughout the 1970s, making major inroads into the world, and especially the US markets for products such as TV sets, microwave ovens, radios and audio systems. It had also acquired modest expertise in semiconductor production, having been involved in wafer fabrication for LSI chips destined for consumer electronic goods since the mid-1970s. But VLSI memory chips were a different ball-game altogether. There was a world war raging in DRAMs at that very moment, between Japanese and US giants – a war, which the Japanese would win. How could a Korean firm think of making an impression in such a tough business? Lee was no stranger to challenges. He navigated Samsung through a series of them. He received education at Waseda, one of the highly coveted universities in Japan by his peers in Korea in that era. Under the heavy influence of Confucian culture, most of its graduates would prefer serving as a public officer in the government upon graduation from universities such as Waseda. Instead, Lee chose to start a small rice mill in his hometown in 1936. He would buy rice patch in quantity when farmers were deserting their land to go to the cities for a job. With the profit accruing from rice and real estate, he started trading, then sugar and woolen textile production in the 1950s. His expansion strategy was at its height in the 1960s. A daily newspaper, a broadcasting company, a paper company (to supply the newspaper), a department store, a land development company, a construction company, an insurance company, and so the list went on. In 1969 Samsung made a major move into electronics. This was effected in the fashion that Lee understood very well – by bringing the necessary resources such as process technologies for manufacturing home electronics from foreign industrial leaders. Utilizing a close network between its executives and government officers Samsung had successfully lobbied the Korean government into amending Oejadoib-bub (the Foreign Capital Inducement Law) in March 1973. The newly amended law enabled Samsung to attract Japanese firms with up to 50% share of the capital. Sanyo for consumer items and NEC for components

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were also keen to invest in Korea to utilize low-waged and highly disciplined workers. With the necessary technologies acquired, Samsung eventually took control of these operations. The 1970s saw Samsung Electronics keep abreast of the world’s best in consumer and industrial electronics, largely through OEM contracts with US retailers like Sears, J.C. Penney and K-Mart. The firm also gained some involvement in LSI wafer fabrication (Mathews and Cho, 1998). Thus by 1982, when the 72-year old Lee announced the big gamble in VLSI semiconductors, he had an advantage that made the enterprise bold – but not foolhardy. Samsung group had built up an unrivalled capability in founding new industries by creating the necessary resources and environment. Samsung exercised these capabilities in the new semiconductor venture. It opened offices and labs as ‘listening posts’ in both Silicon Valley and Tokyo, then the twin capitals of the semiconductor world. It recruited Korean engineers working for US semiconductor firms in a so-called ‘reverse brain-drain’ fashion. Some were paid three times the salary of the company president. It also hired Japanese engineers to help with assembling the process equipment. The Japanese engineers moonlighted from Japan to Korea on weekends. It built a huge new plant with state-of-the-art equipment. It then established marketing channels for VLSI chips in the US and around the world. Nevertheless, the much needed DRAM design was not easily secured. Major firms in the U.S. and Japan were approached, but none complied. Eventually, Samsung secured a product design for 64K DRAM from the US start-up, Micron, based outside Silicon Valley in the potato belt of Idaho. DRAM process technology was acquired from Sharp, an outsider that had been excluded from the MITI-organized semiconductor ‘club’ in Japan. Samsung established two parallel development teams, one to produce a working version of the Micron design, and the other to assemble the process technology at the new plant. The development teams responded to the internally generated crisis atmosphere, working day and night. The teams developed both the product and the process for producing it within six months, by November 1983. In 1985 Samsung was ready to mass-produce 64K DRAMs. But it was at the height of the bitter DRAM war between the U. S. and Japanese interests, just as the bottom fell out of the market in a cyclical recession. Samsung faced grievous, even ruinous losses. The Korean government, stung by popular anti-Chaebol sentiment, refused to offer financial distress

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relief. The picture looked hopeless for Samsung. At this point Lee showed his mettle. He drove his engineers to go on to produce the next-generation 256K DRAM chip, investing in a whole new round of equipment, and pushed the engineers to raise yields quickly. By mid-1986 Samsung was ready with mass production of its new 256K DRAMs. The necessary fund had been secured through “cross-subsidization” by Samsung Group’s cash generating affiliated companies, the practice that only the mightiest Chaebols could attempt. And at this point, out of the blue, the US government handed Samsung a completely unexpected present, in the form of the US-Japan Semiconductor Trade Agreement. At a stroke, Japanese DRAM exports to the US were restricted, and a floor was set below which prices would not be allowed to fall. US DRAM producers had been devastated by the war with the Japanese, and were unable to respond to the clamoring demand for DRAMs from US computer manufacturers like IBM and Hewlett-Packard. So to whom did they turn? Samsung was suddenly in business in VLSI semiconductors, and was actually making a profit – far earlier than anyone anticipated. Samsung Electronics not only was saved but also began to prosper. Yet, no other companies but Samsung, that had prepared itself for such opportunities, were there to take advantage of it. Even before the 64K DRAM chips were ready for sale, Lee had ordered new development teams to start on the next-generation 256K DRAM. He displayed strong nerves against the trend of the world industry and against the advice of his own senior executives. This time, two parallel development teams were set to work, one in Korea working with a new product design licensed again from Micron, and the other in Silicon Valley working to produce their own product. The Korean team produced a working die of 256K DRAM by July 1985, matched with then the best process technology of 5-inch wafers, allowing the firm to get mass-produced 256K DRAM chips into the US market by 1986. Lee died in 1987, a national hero in Korea. He had already passed on the reins at Samsung to his third son, Kun-Hee Lee, who took Samsung through its next series of challenges. Meanwhile Samsung was plowing ahead in its chosen strategy of keeping abreast of the world’s best product technology in the memory chips, producing its own designs for 1M and then 4M

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DRAMs through Herculean efforts by product development teams. Its manufacturing operations were being overturned every two years to make way for the new generation product; at each turnover, new, state-of-the-art equipment was bought, enabling Samsung to approach the world’s best standards in yield and efficiency. In this process, contracts for supply of chips to existing players, to be sold under own brand name were of critical significance. Samsung secured an important contract to supply DRAMs to Intel, after the US firm decided to pull out of the DRAM market. Other such OEM contracts were concluded with IBM, Hewlett Packard and many more US computer makers. Business in Korea cannot be run smoothly without blessing and supervision of the government. Samsung was no exception. Samsung was one of the initiating members of the government-led R&D consortia that would jointly develop next generation semiconductors. It has also actively participated in the consortia, both learning from the members and guiding the late movers through capital contribution, seminars, and exchanges of personnel. In the slight recession of 1991, Samsung again continued to invest heavily in new fabrication equipment, while leading Japanese producers such as NEC and Toshiba either eased back, or pursued diversification strategies to the profitable microprocessor market. This gave Samsung an opening that it was quick to take advantage of. In 1992 Samsung was one of the first to market a 4M DRAM, thus securing a substantial world market share. Likewise in 1993 Samsung invested heavily in 16M DRAM production facilities, to underwrite its continued dominance of this product sector. In September 1992 Samsung announced its successful development of the world’s first 64M DRAM; only nine months later it was producing engineering samples, and during 1994 it built a sixth fabrication line to mass produce the 64M product in 1995. Being first to market gave Samsung enormous price advantages over its competition, particularly the competitors from Japan. Thus Samsung was using the weapon of heavy capital investment, which the Japanese turned on the Americans in the early 1980s, against the Japanese themselves. Samsung Electronics is presently investing heavily in R&D in order to strengthen and deepen its technological hold in the fast-changing semiconductor sector. Samsung Electronics has its own Research center, in addition to the corporate Samsung Advanced Institute of Technology (SAIT), which has links with R&D Centers around the world. Samsung is now able to draw on its own technical resources to develop new DRAM products, and is entering international alliances to

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spread the costs and risks involved. Samsung’s technology alliances now bring it into collaborative arrangements with the world’s best. For example in 1994 it was announced that Samsung and NEC would share development efforts for the 256M DRAM, which would cost in excess of $1 billion to bring to market in the late 1990s. At the same time Samsung is working hard to diversify its output from memory chips to other forms of ICs and semiconductor products. It has announced its intention of bringing non-memory products up to 50% of its output by the year 2000. Another significant step is Samsung’s move towards LCD production, which is the next mass production area dominated by the Japanese. In 1994, Samsung announced investment in facilities of $1.87 billion, including significant expenditure on LCD lines. This brings it abreast of Motorola and behind only Intel in the world semiconductor investment stakes. Surpassing Toshiba as the world’s leading supplier of memory chips in 1992, Samsung entered the top ten list of world semiconductor companies, achieving seventh position in 1993. Samsung Electronics racked up sales of $10.2 billion, including $3.22 billion from semiconductors in 1993. This stunning performance was eclipsed by the 1994 results, which saw total electronics sales reach $14 billion, and semiconductor sales just exceeded $5 billion. This was more than the rest of the Korean semiconductor suppliers’ combined efforts. Samsung’s goal is to secure semiconductor sales of US$ 15 billion by the year 2000, giving it 5 percent of the world market, which by then is expected to amount to $300 billion. This does indeed seem achievable. Dataquest predicts that Samsung will be the world’s number one semiconductor company – spanning memory chips, logic chips, microprocessors, everything – by the year 2005, i.e. within the next decade. Although such a rosy picture is yet to be realized, Samsung nevertheless has shown its own mechanism of creating necessary resources through multiple channels. It started a series of mergers and acquisitions of the U.S. firms with advanced technologies, and the so-called reverse brain drain to attract Korean nationals, who had gone abroad, studied and accumulated industrial experiences. It also created an external environment by proposing strategic alliances with major competitors, and initiating government-sponsored research consortia. Much of the needed

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financing was made available through cross-subsidization of Samsung-affiliated companies. In about a decade, Samsung moved to the world’s number one position in memory chips. Some may argue that Samsung’s success should be attributed in part to the changes in American semiconductor market in 1986 and the agreement between the U.S. and Japanese governments. Indeed, it is true that these changes in the environment provided Samsung with a window of opportunity. Yet no one would call Samsung an opportunist, as it was Samsung late Chairman Lee’s far-reaching vision into the 21st century that ignited the whole process of recomposing the global semiconductor industry. 4. Analyses of the Cases The cases of Sony and Samsung enable us to develop a model: the mechanism to create not only resources but also the environment. This mechanism differentiates itself from the previous two mechanisms in terms of two main features---vision making, and recomposing internal resources and external environment. At the same time, the two cases also show that specific approaches to the mechanism building do not have to be uniform. Sony’s top managers led the company through their clear vision, yet they allowed free spirit flow around within the company. Samsung’s top manager also had a clear vision of what the company should head toward, yet he instituted a highly refined control system that pulled the maximum efficiency out of the firm’s rather limited human and capital resources. Nevertheless, their similarities on the nature of the vision and the recomposing processes seem to overwhelm the differences, thus provide us with a solid basis for constructing the aforementioned mechanism as a proposition.. Vision making: The two cases vividly illustrate the importance of top managers’ vision as a guiding light in the direction that a company pursues. Let us start with the case of Sony. The history of Sony reveals three elements that independently and interdependently form its visions. They are “Freedom with no boundaries,” “Differentiation from its competitors,” and “Integration of ideas and businesses.” In terms of “Freedom,” Sony has broken four boundaries: product-boundary within home electronics, market-boundary within Japan, people-boundary within elite universities, and

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time-boundary within the past and the present. From the firm’s early period Ibuka made it clear that Sony’s business domain would not be confined to electronics. He rejected Morita’s proposal to add the word “Electronic” in the name of the company, breaking the often frozen mentality of managers and engineers at Sony who would regard themselves as hardware people. This incident indicates Sony’s preparedness to move to software businesses in music, movie and home video games without any internal resistance in the 1980s. If Ibuka’s vision was along the product dimension as his eyes were reaching beyond home electronics, Morita’s vision was along the market dimension, by reaching beyond Japan. While Ibuka spent most of his time in Japan at Sony’s laboratories for new product development, Morita spent much of his time abroad playing the role of Sony’s salesman. It is no coincidence that Morita became a de facto ambassador from Japan, when the name Sony became associated with the image of Japan. Having listed its stocks in the New York Stock Exchange, having established dual headquarters in Tokyo and New York, and also drawing 72% of its total revenue outside of Japan, Sony is uniquely qualified as non-Japanese company. Sony’s commitment to hiring only the talented people irrespective of their graduating universities manifests itself another set of freedom, freedom from the names of famous universities. This freedom cannot be underestimated in the Japanese society where one’s whole life is to a large extent predetermined by the schools each individual is from. Nevertheless, more significant of this freedom is the ability of the people at Sony to tear down the existing traditions in society, and to think freely without social inhibition or prejudice. In part due to its freedom of existing traditions that are essentially thing of the past, Sony is moving ahead along the time dimension in an effort to fit itself to future trends of the people. Sony is the first and foremost in introducing new business ideas that would blossom only in the future. In terms of “Differentiation,” Sony has refused to be compared to others. Sony’s unique profiles can be identified in three aspects: corporate identity, marketing identity, and product identity. Naming of the company as Sony in 1958 and writing of it in Kata-kana was no coincidence. It

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was when neither practitioners, academics, nor consultants had the slightest idea of corporate identity or visual identity. Sony had implemented it, separating its image apart from its contemporaries. Morita’s painful, but at the same time, proudly chosen decision not to accept Bulova’s OEM order shaped Sony’s image as an innovation leader of the world. The series of new products introduced and their generic brands characterized the firm’s commitment to unchallenged excellence, thereby differentiating itself from the rest in the market. Sony’s approach to marketing differentiation would not have been successful, had it not chosen to be excellent in new product development and product quality. Starting with tape recorders, color TVs, Walkman, and CD players to VTR cameras, Sony’s talented pool of engineers were able to stay ahead of their competitors in maintaining product identity. In terms of “Integration,” Sony has shown its effort in four aspects: integration of marketing and technology people, young generation and old generation, integration of hardware and software, and integration of consumer needs and firm competence. Sony was not the first in introducing the concept of project team composed of various functional experts, but it was well ahead of others in efficiently utilizing the mechanism. As the team was given full and utmost authority commensurate with corresponding responsibilities, its decision could in a number of cases refute opinions of senior executives. Naming of Walkman by the team in spite of Morita’s disagreement manifests itself of the freedom and independence it had maintained. A number of anecdotes in Sony’s history suggest its affirmative, if not equal, attitude toward young generation managers. Acceptance of a junior member’s suggestion on “passport-size” as the key concept in the development of VTR cameras is one. Promotion of Morio to the position of Executive Director, bypassing 16 seniors, is another. Still another is the practice of the personnel department to choose those with self-esteeming indulgence and arrogance. Sony made an audacious move to acquire music recording and movie making, software businesses for audio and video equipment, based on its painful experience of failure in Betamax VTR. This practice of integrating software and hardware has been repeated in home video game, in which Sony is now leading the industry by dwarfing Nintendo and Sega.

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The aforementioned areas of integration—functions, generations, and software-hardware—are playing the role of a tripod at Sony in its eventual goal of integration. All the synergy effects stemming from the integrated approaches in three areas would be meaningless unless they can be translated to customer satisfaction, and to long-term profitability. In this sense, all of Sony’s internal resources—functional expertise, people, and products—are designed to help create satisfaction of consumers. Although Sony had officially declared in 1988 that it would pursue “Total Entertainment Group” as its vision, it would be grossly misleading if one literally take it as the entirety of Sony’s vision. The wording “Total Entertainment Group” is only a tip of an iceberg called Sony’s Vision. Underneath the water are these three elements---freedom, differentiation, and integration. <Figure 3> graphically illustrates the holistic picture of Sony’s vision that explicitly shows the official version as well as the implicit elements.

-------------------------------------------------------------------------------------------- <Figure 3> Sony’s Vision

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Samsung Group’s Chairman Lee was second to none when it came to visionary leadership. During his tenure as the leader of the group, Lee displayed his vision of the group along three elements. They were leadership of the Samsung Group in the 21st century by moving to aircraft manufacturing, semiconductor business as a stepping stone to aircraft manufacturing, and superiority in technology as a key success factor in semiconductor business. His choice of aircraft manufacturing as the leading sector in the 21st century was based on a strikingly simple reasoning. He constructed his reasoning on the premises that the mode of transportation would become more important as the economy grows and expands, and that the predominant mode of transportation would shift from automobile to airplane in the future as it had shifted from horse-led carriage to automobile a century ago. Whether his projection of the future proves to be right or not is not what we want to learn here. It is his insight in grasping the essential elements in life and economy, and his ability in adhering to these elements for reaching a projection in an unmistakable, no-nonsense manner. The next step in his development of a vision was based on his own experience in life. Instead of

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public service, Lee chose to start a rice mill. This business gave him enough material means to move to trading, sugar refining, textile, and others. Based on this experience in his earlier years, he chose to start a business that would eventually provide him with necessary capital enough to move into aircraft manufacturing in a major way. The choice of semiconductor was not totally unrelated to his expertise. In such a way rice business had allowed him to invest in other businesses, semiconductors—industrial rice—were apparently the right choice for him. Lee obviously saw common characteristics between rice and semiconductor. When Lee was investing in rice milling and real estate, his eyes were beyond his current business to reach trading and manufacturing. Likewise, when Lee was investing in semiconductors, his eyes were beyond the semiconductor industry for reaching the 21st century leadership in aircraft manufacturing, which he believed to be the leading sector of the global economy in the future. On a similar vein, Lee chose to invest in the industries when their demand was down. As had been the case of his investment in real estate in the 1930s, Lee’s bold investment in semiconductor plants at the bottom of the industry cycle in 1985 manifested itself of his style in realizing the vision. In semiconductor business, Lee did not resort to becoming subservient to international majors in the United States and Japan. Instead, he chose to develop technologies for independence, and eventual leadership of industry. He made relentless investment not only in securing most advanced technologies and equipment, but also in recruiting most talented and knowledgeable engineers. Lee knew superiority in technology would be the only vehicle that would bring Samsung to the elite league of major players in semiconductors. Although ‘First-ism” is commonly quoted as Samsung Group’s vision, it is misleading for outsiders to simply believe it. Behind this word lies layers of reasoning , premises, and basis on which Samsung people can strive toward becoming the first in any business they are in. <Figure 4> shows, again in a tip of an iceberg style, the three elements discussed above that lie underneath the more explicitly stated vision of Samsung Group.

-------------------------------------------------------------------------------------------- <Figure 4> Samsung’s Vision

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Recomposing Resources and Environment: In terms of the two companies’ recomposing internal resources and external environment, one can identify three components. The first component is key players (S: Subject of change). Top management such as Ibuka and Morita of Sony, and Lee of Samsung, is undoubtedly the most important of all. Key staff members and field mangers such as personnel director and project managers of Sony, and electronics engineers recruited from the United States at Samsung, also play vital roles. The second component is resources and environment that can be made available as agent of changes (A: Agent). The resources can be human resources, tangible assets, or intangibles. The environment can also be human resources, tangible assets, or intangibles. The third component is resources and environment that would be created as object of changes (O: Object). Based on two criteria, agent and object of changes, we can classify the incidents described in Sony and Samsung into four categories of changing and recomposing resources and environment. <Figure 5> schematically shows these four categories.

-------------------------------------------------------------------------------------------- <Figure 5> Four Categories of Recomposing Resources and Environment

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1) Category A: Resources as Agent (RA), Resources as Object (RO) Sony used its own technologies (RA) to develop a series of new products such as miniaturized tape recorders, transistor radio, color TV with trinitron technology, walkman, Discman, and 8-inch VTR camera (RO). In turn, the successful introduction of these products (RA) enabled Sony people to establish confidence in their “unchallenged leadership (RO).” Sony’s new personnel system doing away with seniority and university-based evaluation system (RA) allows the firm to recruit the most innovative (RO) among the candidates. Similarly, the practice of doing away with seniority (RA), resulting in surprising promotion, helped the create corporate culture that would motivate the employees within the firm (RO). This culture (RA) in turn became a basis on which to introduce the merit system (RO). On a somewhat different note, Sony converted their mistakes in the marketing of the Betamax-type VTR as a source of learning(RA) in their move to build competitive advantage through integration of hardware and software (RO).

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Samsung utilized its strong manpower and cross-subsidized capital for investment (RA) to develop a series of DRAM products (RO). On occasions, it would create an artificial competition between two parallel teams (RA) on their way to develop next generation DRAM products (RO). 2) Category B: Resources as Agent (RA), Environment as Object (EO) Sony created an entirely new market (EO) in the already saturated market for radios through “a radio per person” campaign with small transistor radios (RA). Sony did it again, creating an entirely new market (EO) in the already saturated market for TVs through “a TV per room” campaign with 8-inch TVs (RA). With trinitron color TVs (RA), Sony created “discriminate consumers (EO)” who would pay premium price for the superior quality. Walkman (RA) literally created “a new breed of consumers (EO)” who are now listening to music on the street, in the subway, and in an open air. CD players (RA) literally obliterated the traditional LP market in music recording, and created “the new CD industry (EO).” In essence, the series of successful new products (RA) helped create “Sonyman,” who would follow wherever Sony leads them to (EO). Samsung’s persistent investment in the state-of-the-art technologies (RA) impressed major US users of high-quality semiconductor chips, making them steady customers (EO). 3) Category C: Environment as Agent (EA), Resources as Object (RO) In general, competitors and consumers are two most important elements in the environment. Suppliers and government may also play critical roles in certain industries. Global economy, which includes such incidents of oil crises, unexpected changes in foreign exchange rates, and intermittent wars are all important in certain periods. Sony seems to be focusing on developing and depending on internal resources than external environment. Yet, Sony is also susceptible to external crises or competitive pressures. Sony is not immune to failures. When it refused to supply the Betamax-type VTRs to its competitors, they handed in a clean defeat by forming a formidable consortium around its competing technology, JVC’s VHS-type VTRs. From this external pressure (EA), Sony learned a lesson (RO) that hardware alone cannot sell. Since then, Sony has been integrating hardware and software in music industry, movie industry, and home video industry. As a means to expedite the process of

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integrating them within itself (RO), Sony acquired CBS Records and Columbia Pictures (EA). Samsung established a number of licensing and other forms of agreement with major foreign semiconductor firms (EA), thereby receiving needed technologies (RO). One of the reasons why Samsung has invested so heavily in semiconductor industry (RO) is the competitive threats posed by Hyundai and LG (EA) which have been investing major portions of their budget in semiconductor manufacturing. 4) Category D: Environment as Agent (EA), Environment as Object (EO) Sony has created a substantial number of ardent followers of Sony products (EO). These consumers have been created in part by Sony’s own effort in product development and marketing, and in part by external changes, such as increased level of consumption by the younger generation, and their lenience toward leisure and recreation (EA). In this regard, even the “Sonymen” are in part the product of environment. Samsung utilized government bureaucrats that is a part of its external environment (EA) in its attempt to amend the Foreign Capital Inducement Law in 1973 (EO) that eventually helped the firm search for needed technologies abroad.. 3. The Environment-Creating Mechanism

We have reviewed two cases, Sony and Samsung, in an attempt to identify the causes that have had direct impact upon their industry leadership positions respectively. What we have identified was quite different from what we would normally find from the two existing mechanisms—the environment adapting mechanism and the resource creating mechanism—which we have discussed in Section 2 of this paper. Two features stand out as most vivid that we found in the two companies but not in the previous two models. One is the vision of the top management, the other is the firm’s ability to recompose and create both internal resources and external environment. Using these two features as the critical building blocks, we can now develop a model of environment creating mechanism as shown in <Figure 6>.

-------------------------------------------------------------------------------------------- <Figure 6> The Environment Creating Mechanism

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Managers of the firm intending to create new environment start with the vision of the firm’s future. Vision is the image of what a firm aspires to in the future (Westly and Mintzberg, 1989), and the shared value of the firm’s constituents on what they should be doing (Shoemaker, 1990). Vision has three characteristics: dream, innovation, and shared value. Vision is a paradise that the constituents dream of the firm’s future. Yet it is not a simplistic rosy dream, but the kernel of innovation for new rules of the game based on top management’s insight. The firm’s constituents who perceive the vision as a means to fulfill their own cherished ideas must approve of the firm’s vision. Both Sony and Samsung have shown dream, innovation, and share value in their respective visions. Among Sony’s three elements of vision, “freedom with no boundaries” represents Sonymen’s dream, “differentiation from its competitors” represents their innovation, and “integration of ideas and businesses” represents their share value. Samsung’s three elements of vision also show the three features. “Future leadership based on aircraft manufacturing” represents their dream, “semiconductor business as a stepping stone to aircraft manufacturing” represents their innovative idea, and “superiority in technology in semiconductor business” represents the value shared by the people at Samsung. Managers of the environment-creating firm also go through the match-up process of external opportunities and internal strengths, as in the case of the environment-adapting firm. Nevertheless, the purpose of the match-up is different. In the environment-adapting firm, managers simply attempt to find ways for maximum use of internal resources given the external environment. In the environment-creating firm, managers keep their eyes on the vision that has been identified in the previous stage as they scan the environment and the resources in search for the substances that would be needed in realizing the vision. In this respect, both the environment and the resources would be categorized into three components: the first component exists and is needed to realize the vision, the second component exists but is not needed, and the third component does not exist but is needed. The environment-adapting firm without the vision would simply find ways to utilize the first and second components that exist. The environment-creating firm, on the other hand, would strengthen the first component to help realize the vision, do away with the second component, and create the third component on its way to realize the vision.

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Sony and Samsung provide us with exemplary cases in this regard. Sony wanted to integrate hardware and software in VTRs on its way to become a “total entertainment group”. Sony searched for the internal resources that it would need in realizing this vision. Sony found superior technologies for developing and manufacturing next generation VTRs. Sony also found a fairly large pool of good people needed to implement the integration of hardware and software, but perhaps not enough. However, it could not find the critically needed resource—the capability to develop the software side of the business from within. Sony utilized its technological superiority to introduce new generation products and strengthened management pool by recruiting those talented and aggressive. More importantly, Sony acquired Columbia Pictures that would give its management instant access to the software business of movie making. Samsung wanted to become a leading force in semiconductor manufacturing. Samsung searched for the internal resources that it needed to build most advanced facilities. Samsung found some, but not enough, experience in home electronics and wafer fabrication. Samsung did not have enough capital, however, to buy necessary equipment and technologies. Instead of compromising with its limitations, Samsung decided to mobilize all its financial resources from its affiliated member companies. The semiconductor business became a group-wide project. At the same time, Samsung actively searched for state-of-the-art technologies from global players. Through joint ventures, OEM supply contracts, and other means of strategic alliances, Samsung was able to tap in the most valuable resources in the semiconductor industry. Samsung also searched for external environment that would be needed in realizing the vision. It found the rapid rise in global demand for semiconductor chips. It also recruited capable engineers in electronics from the United States in a reverse brain drain fashion, but it was not enough for them to fill all the necessary manpower for the plants. Yet some critically needed environment was missing. Blessing of the Korean government was one, and cooperation with major semiconductor producers was another. Samsung initiated the government-sponsored research consortia, through which it was able to secure an amicable relation with the Korean government. Samsung created complementary relationship with the world’s most powerful players in the industry such as Intel, IBM and HP. Samsung also set up listening posts in Silicon Valley and Tokyo, thereby establishing a global network. There is no new creation under the sun. When a chemist invents a new material, he or she is simply redefining the existing formula and recomposing the ingredients, thereby creating one.

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Managers in the environment creating firm do the same. They would first search for the environment that offers an opportunity for them to reach out for the vision. If they are successful, fine. If not, they would create a new environment by redefining the existing environment differently from competitors, restructuring existing pieces of the environment in a creative way, and by recomposing them into a new set of environment not available until then. This environment creating mechanism requires the firm’s fully utilizing internal resources. When it does not have appropriate resources for creating the desired environment, it should redefine and restructure the existing resources, and recompose them into a new set of resources. It can also internalize a part of the external environment as a captive resource. When new sets of environment and resources are recomposed and created, managers can develop strategies to realize the vision in the form of objectives. By the time the environment-adapting competitors recognize the changes in the environment caused by the environment-creating firm, the latter would be far advanced in the market, beyond the reach of the former. As the mechanism of environment creation is repeated, the environment-creating firm can accumulate the know-how and expertise through the organizational learning, thereby establishing the internalized environment-creating mechanism. In so doing, the environment-creating firm is likely to capture the industry leadership and sustain it. <Figure 6> shows the processes of the environment-creating mechanism.

-------------------------------------------------------------------------------------------- <Figure 6> Environment Creating Mechanism

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If the environment-adapting mechanism determines the survival of the firm, the environment-creating mechanism allows the firm to dwarf the environment-adapting competitors and hold on to the industry leadership. At the center of the environment creation lie the vision of the top management and the ability to recompose the environment and resources so as to realize the vision. Although more detailed analysis will be made in the next chapter, <Figure 7> succinctly illustrates the mechanism of Sony’s creating new environment and resources through decomposition and recomposition.

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-------------------------------------------------------------------------------------------- <Figure7> Sony’s Environment Creating Mechanism

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<Figure 8> illustrates Samsung’s mechanism of creating its own environment, thus becoming the industrial leader.

-------------------------------------------------------------------------------------------- <Figure 8> Samsung’s Environment Creating Mechanism

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6. Conclusion We have analyzed Sony and Samsung as two cases in which the environment-creating mechanism was found to lead them to their respective industry leadership, as compared to the environment-adapting mechanism that we can find in survival-oriented firms following the industry leaders. The mechanism proposed in <Figure 6> is unilateral in nature. One may, therefore, question the salience of the model as less than dynamic. In reality, the firm may go through multiple iterations of the environment creating mechanism, creating a loop in the processes. Future study may address this dynamism of the mechanism. As such, this paper has focused on the merits of the environment creating mechanism. In reality, however, one may need to understand the two mechanisms as complementary rather than substitutive. The environment-adapting firm can secure long-term survival and growth only when the environment-creating mechanism supplements it. By the same token, the environment-creating firm needs to survive in the short run through the environment-adapting mechanism before it can ever attempt to make a long-term industry leadership. Perhaps one may create a more comprehensive “grand” mechanism by juxtaposing the two mechanisms and integrating their processes. The two mechanisms may be neither clearly dichotomized nor easily detected as being one or the other. Rather their classification depends on the perspective of the top management. The

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implication is that those who can identify potentials for the environment-creating mechanism are the industrial heroes. They have the vision, and fresh insight into the external environment and internal resources so as to redefine them, recombine and restructure the part of them, and recompose them into newly created sets of environment and resources. Yet, their contemporaries seldom recognize such industrial heroes. In this sense, it is not easy to identify a priori the vision and capabilities of the heroes. In this paper, I postulate that the environment creating mechanism may exist in many firms, especially among the firms that lead their respective industries. Yet I do not claim any generally accepted theory from this paper that is based on two extensive case studies. The environment-creating mechanism proposed in <Figure 6> should be considered as a mere hypothesis for more rigorous empirical studies. Also, the present state of art as presented in this paper does not enable us to understand how a firm can create the environment, that is, a detailed description of the process with which a firm decomposes and recomposes its resources and environment. Some may argue that the environment creating mechanism is the process of creation, the exclusive domain of the God and the God only. Future challenge is on us to see if it really is. If this is the case, can we, and should we open this secret garden unvisited by human beings? Frost the Poet may have an answer to this challenging question in this time of Dolly the clone sheep.

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