Beyond products: new strategic imperatives for developing competencies in dynamic environments* 1

J. Eng. Technol. Manage. 17 (2000) 357–377

Beyond products: new strategic imperatives fordeveloping competencies in dynamic environmentsq

Sally W. Fowlera, Adelaide Wilcox Kingb, Sarah J. Marshc,∗,Bart Victord

a Faculty of Business, University of Victoria, Victoria, BC, Canadab McIntire School of Commerce, University of Virginia, Charlottesville, VA, USA

c Department of Management, College of Business, Northern Illinois University, DeKalb, IL 60115, USAd Owen Graduate School of Management, Vanderbilt University, Nashville, TN, USA

Abstract

Strategy research has often taken a product-centered perspective. When firms compete in envi-ronments characterized by accelerating product life cycles, mass customization, and technologicaldiscontinuities, a product-centered perspective on strategy may help explain a firm’scurrentcom-petitive advantage. However, this perspective adds little guidance in making strategies that createcompetitive advantage in thefuture. In this paper, we present a perspective in which dynamic en-vironments require firms to focus on (1) building market-driven, technological, and integrationcompetencies, not a stream of product improvements, and (2) decoupling these competencies fromcurrent products in order to create and exploit new opportunities. We discuss the perspective of prod-ucts as a temporary integration of market and technology trajectories. Research propositions arepresented and future implications are discussed. © 2000 Elsevier Science B.V. All rights reserved.

Keywords:Competencies; Knowledge; Dynamic environments

1. Introduction

“The traditional ‘competitive strategy’ paradigm (e.g., Porter, 1980) focuses on onlythe last few hundred yards of what may be a skill-building marathon. The notion ofcompetitive advantage which provides the means for computing product-based advantageat a given point in time. . . provides little insight into the process of knowledge acquisitionand skill building” Hamel, 1991:83.

q The first three authors contributed equally as primary authors.∗ Corresponding author. Tel.:+1-815-753-6211; fax:+1-815-753-6198.

E-mail address:[email protected] (S.J. Marsh).

0923-4748/00/$ – see front matter © 2000 Elsevier Science B.V. All rights reserved.PII: S0923-4748(00)00029-1

358 S.W. Fowler et al. / J. Eng. Technol. Manage. 17 (2000) 357–377

Strategy research has often taken a product-centered perspective. Porter’s (1980) com-petitive forces approach views strategy as creating product market positions that exploit anindustry’s structural characteristics. Similarly, much of the diversification literature employsboth conceptual and methodological approaches that try to explain firm performance basedon the diversity of the products or services of the firm (Ramanujam and Varadarajan, 1989).The firm’s strategy is either characterized using SIC-based measures (e.g., Jacquemin andBerry, 1979; Caves et al., 1980; Palepu, 1985), or by diversification categories based on theproduct-market activities of the firm (e.g., Rumelt, 1974). As highlighted by Hamel (1991:83):

As highlighted above by Hamel (1991), a product-centered perspective provides littleinsight or guidance about the process by which a firm’s strategy can contribute to itsfuturesuccess. A product-centered perspective on strategy is much more helpful in providing away to explain a firm’scurrentcompetitive advantage than in making strategies that createcompetitive advantage in thefuture. Empirical research and practitioner experiences havealso called into question the product-centered perspective of the firm. Empirical studies ofthe relationship between corporate diversification and performance have yielded mixed andconfusing findings (Hoskisson and Hitt, 1990; Robins and Wiersama, 1995), for example.Firms that focus on products have had trouble keeping up with rapid changes in technologyand markets. Consider Encyclopedia Britannica’s experience. Encyclopedia Britannica wasso focused on their product, printed and bound information, that they failed to adapt theirstrategy to the emergence of multi-media technology and the new distribution channels(Shapiro and Varian, 1999).

In this paper, we present a perspective in which dynamic environments require firmsto focus on developing market-driven, technological and integration competencies, not astream of product improvements. We draw on the growing body of strategy literature thatdistinguishes between the firm’s products (or services) and the firm’s resources and capabil-ities (e.g., Snow and Hrebiniak, 1980; Hitt and Ireland, 1985; Barney, 1991; Farjoun, 1994;Henderson and Cockburn, 1994; Robins and Wiersama, 1995; Markides and Williamson,1996). Throughout this stream of conceptual and empirical literature, the integration of thefirm’s knowledge and skills into competitively superior competencies plays a central rolein creating competitive advantage and tomorrow’s product opportunities and profits.

The distinction between a firm’s products and the underlying competencies used to cre-ate its products has also led to increased exploration of how competencies are developedover time. In environments characterized by high velocity change, accelerating productlife cycles, narrowing customer niches, mass customization, and technological discontinu-ities, today’s product-market can appear and disappear quickly (D’Aveni, 1994); traditionalproduct-centered strategies provide little long-term strategic advantage (Christensen, 1998).These realities have led to renewed efforts to understand how the firm can develop “dy-namic capabilities” (Teece et al., 1997) which enable it to adapt, integrate, and reconfigurethe firm’s skills and competencies in order to adapt to a changing business environment(Teece et al., 1997). The dynamic process of developing the firm’s resources and competen-cies has also turned attention to a firm’s “collective learning” (Prahalad and Hamel, 1990)and the processes through which organizations apply existing knowledge and develop newknowledge that shapes the development of new competencies that are necessary to adaptto a changing environment (Kogut and Zander, 1992; Henderson and Cockburn, 1994). In

S.W. Fowler et al. / J. Eng. Technol. Manage. 17 (2000) 357–377 359

addition, this work has highlighted the need for a deeper understanding of how trajectoriesof knowledge and capabilities develop and how factors such as “absorptive capacity” (Co-hen and Levinthal, 1990) and “lock in” (Dosi, 1988) influence the process of knowledgeand capability development.

In this paper, we draw on this stream of literature in strategy, as well as literature in tech-nology and innovation and marketing, to address the question of why the success of firms indynamic environments requires a focus on competencies, not products. We develop a frame-work in which products represent only a temporary integration of market-driven and tech-nological trajectories. Then, we address the question of how technological, market-driven,and integration competencies contribute to a firm’s competitive advantage in dynamic en-vironments. By exploring the role of competencies and the ways that they are developed,we hope to develop a deeper understanding of the strategic focus necessary to succeed inrapidly changing environments.

2. The role of competencies

As product life cycles shorten and competition becomes increasingly innovation-based,increased attention has been given to explaining how firms generate competitive advantage(Teece et al., 1997). Much of this work highlights the role of knowledge and learning inbuilding and expanding the firm’s capabilities or competencies in order to adapt to thechanging business environment.1

In our view, a competence or capability combines knowledge and skills; it representsboth the underlying knowledge base and the set of skills required to perform useful actions(Bogner and Thomas, 1994; Iansiti and Clark, 1994). Core competencies (Prahalad andHamel, 1990) or core capabilities (Leonard-Barton, 1992) are the firm’s most importantcompetencies and form the basis for firm-specific competitive advantage (Lei et al., 1996). Afirm’s current competencies serve as platforms for the ongoing development and applicationof new competencies that are needed to sustain competitive advantage in the future (Prahaladand Hamel, 1990; Kogut and Zander, 1992). “Competencies evolve through an iteration ofdoing, learning, and doing some more. Each sequence expands knowledge and enrichescore competence” (Bogner and Thomas, 1994: 118). In addition, competencies can havemultiple and simultaneous uses without being diminished (Itami, 1987) because the valueof knowledge and skills often increases, rather than deteriorates, with use (Prahalad andHamel, 1990; Glazer, 1991).

The concept of dynamic capabilities or competencies emphasizes that the firm mustcontinually renew its competencies in order to sustain competitive advantage in rapidlychanging environments (Teece et al., 1997). Dynamic capabilities enable the firm to “con-sistently nurture, adapt, and regenerate its knowledge base, and to develop and retain theorganizational capabilities that translate that knowledge base into useful actions” (Iansitiand Clark, 1994: 563).

1 Consistent with general usage and much of the strategy literature (e.g. Hamel, 1994; Henderson and Cockburn,1994; Iansiti and Clark, 1994; Barney, 1995) we use the termscompetenciesandcapabilitiesinterchangeably inthis paper. When referring to prior literature we have tried to maintain the terminology used by the original authors.


Competencies are often tacit, or implicit and non-codifiable (Reed and DeFillippi, 1990).They are “invisible assets” (Itami, 1987) that are often difficult to identify, observe, and artic-ulate (Winter, 1987); they conform to a set of rules not known by the person following them(Polanyi, 1962). This tacitness protects the competencies from imitation by competitors.

Competencies may also be embedded in the social system of a team of individuals, intheir relationships, and their networks, and, therefore, may be context-specific (Galunic andRodan, 1998; Leonard-Barton, 1992; Badaracco, 1991). Because embedded competenciesare socially complex, any change to the organizational context in which they reside mayalter the social relationships and networks that give rise to their value. The immobilitythat results makes these competencies potential sources of competitive advantage (Barney,1991; Peteraf, 1993).

The development of competencies is a cumulative process through which, over time, thefirm develops “organizational routines” (Nelson and Winter, 1982) or organizing “principles”(Kogut and Zander, 1992) to create and transfer knowledge and skills among individuals,groups, and organizations. These routines or principles preserve and embody the patternsof interaction and knowledge creation and enable the organization to build its knowledgeand skills incrementally (Leonard-Barton, 1995; Nelson and Winter, 1982).

These routines or principles can create a path dependence, because they guide the ac-cumulation of physical and organizational resources over the history of the firm (Collis,1991); they create a “natural trajectory embedded in a firm’s knowledge base” (Peteraf,1993: 182). A trajectory may also result from a firm’s “absorptive capacity” (Cohen andLevinthal, 1990). A function of the firm’s prior related knowledge, absorptive capacity en-ables the firm to recognize the value of new information, assimilate it, and apply it (Cohenand Levinthal, 1990). A firm’s absorptive capacity can provide a platform that positions thefirm to recognize and capitalize on future opportunities more fully than competitors.

A product-centered strategy is different from a competence-based strategy in that it em-phasizes products rather than the underlying competencies that enable the firm to developand market its products (Teece et al., 1997). A product-centered strategy focuses on develop-ing incremental improvements to current products. In contrast, a competence-based strategyfocuses on the consolidation of “corporatewide technologies and production skills into com-petencies that empower individual businesses to adapt quickly to changing opportunities”(Prahalad and Hamel, 1990: 81). A product-centered strategy may be appropriate for stableenvironments in which technology and customer wants and needs remain predictable forlong periods of time. However, in the dynamic environments faced by many firms today,product-centered strategies do not develop the skills and knowledge necessary to competein the future (Chaudhuri and Tabrizi, 1999; Prahalad and Hamel, 1990). For example, of-fice automation pioneer Wang Laboratories focused its strategy on its extremely successfulminicomputer-based word-processing systems, rather than on its office automation compe-tencies. When competitors introduced personal computers and inexpensive software in thelate 1980s, Wang’s market collapsed and it eventually filed for bankruptcy (Bulkeley andWilkes, 1992). American Express Company based its strategy on its high-status green, gold,and platinum cards, rather than on building its customer needs assessment and customerservice competencies. Rivals MasterCard and Visa offered additional features (low or noannual fees, product discounts, frequent flier miles) and attracted many customers awayfrom American Express (Baig, 1996). American Express has been playing catch up ever


since. Researchers have also found that whether the firm’s strategy is based on productsor competencies can influence strategic decisions in a variety of important areas, includingacquisitions (Chaudhuri and Tabrizi, 1999), diversification (Collis and Montgomery, 1995),divestment (Prahalad and Hamel, 1990), and market entry (Teece et al., 1997).

In the following sections, we describe three types of competencies: technological, market-driven, and integration competencies. We then characterize the dynamic process that un-derlies their development, and suggest propositions that can guide academics and managersto a deeper understanding of the strategic focus necessary to compete in rapidly changingenvironments.

3. Technological competencies

Technological competence refers to the ability to combine knowledge about the phys-ical world in unique ways, transforming this knowledge into designs and instructions forcreating desired outcomes. More specifically, technology is “a set of pieces of knowledge,both directly ‘practical’ (related to concrete problems and devices) and ‘theoretical’ (butpractically applicable although not necessarily already applied), know-how, methods, pro-cedures, experience of successes and failures and also, of course, physical devices andequipment” (Dosi, 1984: 13–14). Because technological problems are ill-structured, theirsolutions require problem-solving that draws on previous experience as well as formaltechnical knowledge (Dosi, 1988).

Technological competence requires a deep understanding of scientific principles, as wellas the ability to generate new knowledge, regardless of its application (Wheelwright andClark, 1992). Technological knowledge is different from science, however, in that it is“much less well articulated than is scientific knowledge, much of it is not written down andis implicit in experience, [and] skills” (Dosi, 1984: 15).

Leonard-Barton (1995) describes the technological competencies that enabled ChaparralSteel to develop its near-net-shape casting process. By combining knowledge and skillsfrom multiple individual sources, such as Chaparral’s scientific knowledge of metallurgy, itsinteraction and consultation with industry experts and European suppliers, and its in-houseexpertise in molding, “the whole technical system can be greater than the sum of its parts,”creating a tacit competence that is very difficult to imitate (Leonard-Barton, 1995: 22).

Technologically-driven organizations demonstrate capabilities in scientific discovery, in-vention, development, innovation, or broad application (Abernathy and Townsend, 1975),as well as the ability for each of these activities to inform the other activities. Developingtechnological competencies requires significant commitment to and investment in a con-tinuing search for applications, combinations, and refinements which can solve a multitudeof emerging problems (Reich, 1991). For example, Intel has built a competence in opticallithography that has enabled it to integrate new process technologies through six generationsof PC chips (Chaudhuri and Tabrizi, 1999). Advancing technological competencies requiresfirms to propel developments in the current technology, as well as understand and makeconnections with complementary or facilitating advances in related technologies (Teece,1992). Technologically competent firms develop systems and processes that enable the firmto engage in shared problem solving, implement new technical processes and tools, experi-


ment and develop prototypes, and import and absorb technological knowledge from outsidethe firm (Leonard-Barton, 1995).

4. Market-driven competencies2

There are three important elements of market-driven competencies: customer knowledge,customer access, and competitor knowledge. Market-driven competencies are based on aprofound “understanding of customers’ current and future needs and the factors affectingthem” (Kohli and Jaworski, 1990: 3). The ability to understand and satisfy customer needs,both articulated and unarticulated, requires that companies understand why relationshipswith customers have been “successful in thepastand understand thepresentstructures,relationships, and motivations” of current customers (Day, 1991). In addition, market-drivenorganizations influence the direction of demand changes (Dickson, 1996; Slater and Narver,1998). Market-driven organizations must have superior capabilities in finding, interpreting,disseminating, and capitalizing on information about current customers (Kohli and Jaworski,1990; Huber, 1991; Sinkula, 1994) and about potential or emergent customer groups (Slaterand Narver, 1998).

USAA provides an example of a company that deeply understands its customers and iscommitted to building the market-driven competencies necessary to shape and serve thesecustomers’ needs in a dynamic environment. The Texas-based mutual company primarilyserves military personnel and their families (95% of US military officers are members). Theorganization originated in the 1920s to meet the challenges transient military personnel facedin getting insurance and continued to focus on insurance products for the military throughthe 1980s. However, in the last decade, significant changes in the military, as well as changesin the insurance industry, have introduced considerable uncertainty to USAA’s competitiveenvironment. USAA has continued to flourish in this dynamic environment, however, bystaying committed to building competencies to serve its “homogenous, well-educated, andrelatively affluent” customer base (Elam, 1988). Its success in building market-driven com-petencies has led USAA to integrate technologies from a wide range of product marketsthat serve the needs of its customers, including “discount brokerage and investment man-agement, banking, real estate development. . . and merchandise. . . in seasonal catalogs”(Hoover’s Company Profile, 1999).

Organizations must also have access to their customers; market-driven competenciesenable firms to manage channels of distribution to better serve current customers and to reachnew customers (Stern et al., 1996). For example, Edward D. Jones, a mid-size brokerage firmheadquartered in St. Louis, has targeted and is committed to serving the individual investor.To better serve this customer, the firm defied industry norms and shifted its channels ofdistribution to single-person offices in small communities (Markides, 1999). Competenciesbuilt around managing this channel of distribution help the firm better understand currentneeds and identify emerging trends that may go unnoticed by competitors who serve abroader range of investors.

2 Consistent with marketing literature (e.g. Shapiro, 1988; Deshpande et al., 1993; Slater and Narver, 1995) weconsider the terms market-driven, market-oriented, and customer-focused to be synonymous.


Finally, organizations must have a deep understanding of their competitors. Competi-tors provide benchmarks to help firms understand consumers’ preferences (Day, 1994a;Hunt and Morgan, 1995). In addition, understanding competitors’ competencies will alsohelp a firm effectively assess the sustainability of value of the customer knowledge andchannel access that a firm currently possesses. Many firms, such as IBM, Ford and Xerox,systematically explore competitors’ processes (Main, 1992). Firms require a variety of ca-pabilities to gain deep understanding of competitors’ competencies. Day (1994b) providesa framework to guide competitive intelligence efforts. The first process is open-mindedinquiry into a wide range of competitors’ processes and decisions throughout the valuechain. Second is distribution of these findings within the firm so important knowledge isdisseminated. A third critical process is effective interpretation of information. To deeplyunderstand competitors’ competencies, managers need to avoid the trap of confusing datawith intelligence, and must institute processes that interpret data to come to conclusionsregarding the underlying logic of competitors’ actions (Simpson, 1997). The fourth pro-cess stores the knowledge about competitors so it is accessible throughout the organizationwhen it is needed. The final process involves systematic reevaluation of current competitiveintelligence, as well as the competitors who are targeted. Because competitors’ capabilitiesare dynamic, ongoing monitoring is necessary to accurately reflect competitive realities. Inaddition, a fundamental assumption of competitive intelligence is that a firm knows who itscompetitors are. However, many successful firms have been blindsided by the emergenceof competitors who were not recognized until late in the game (e.g., Sears and Wal-Mart;Encyclopedia Britannica and Microsoft) (Simpson, 1997). The aim of achieving, and thendefending, a stable position of market efficiency has become obsolete in a wide range ofcompetitive environments (Dickson, 1996). In a dynamic marketplace, unanticipated com-petitors will often emerge, so firms need capabilities to scan the environment and conductongoing efforts to anticipate and evaluate competitors’ competencies.

5. Integration competencies

Integration competencies enable the firm to combine the wide-ranging capabilities, in-formation, and perspectives necessary to develop products that succeed in the marketplace(Grant, 1996). Integration requires the combination of “two interrelated segments: one thatis primarily ‘technical’ in character, another that is ‘commercial”’ (Rosenbloom, 1985: 308),and it draws on the organization’s “combinative capabilities,” “architectural competence”(Henderson and Cockburn, 1994), “organizational routines” (Nelson and Winter, 1982) or“principles” (Kogut and Zander, 1992) through which a firm creates, transfers, and combinesknowledge within and outside of the firm. Integration competencies enable the organization“to generate new applications of existing knowledge” (Kogut and Zander, 1992: 391), andthey guide the problem-solving strategies that shape the development of new competencies(Henderson and Cockburn, 1994).

Integration competencies are often demonstrated in new product development activitiesin which cross-functional development teams work to access the functional knowledgeintrinsic to the product and then integrate that knowledge to create a new product (Non-aka, 1990; Clark and Fujimoto, 1991; Wheelwright and Clark, 1992; Grant, 1996). For


example, 3M is a company that has successfully integrated its technological and market-ing competencies to introduce hundreds of successful products in a wide range of productmarkets. Complex interactions are required to combine and exploit the technological andmarket-driven competencies of the firm in order to create product functions and featuresthat meet market demand (Teece, 1992; Grant, 1996). In concept development activities,for example, the organization incorporates its knowledge of customer needs, competitoractions, and new concepts of form and function to identify attractive concepts. These activ-ities may also include the probing of technological possibilities through experimentation orprototype construction (Iansiti and Clark, 1994). Through an iterative process of probing themarket environment and exploring technological possibilities, an attractive concept may bedeveloped. Effective integration of technological and market demand issues has been foundto have a significant impact on the speed and success of product development (Cooper andKleinschmidt, 1986; Souder, 1987; Clark and Fujimoto, 1991).

Integration competencies, however, not only involve combining the organization’scur-rent technological and market-driven competencies, but also help define and propel thedevelopment ofnewmarket-driven and technological competencies (Henderson and Cock-burn, 1994; Iansiti and Clark, 1994). As the organization works to solve the problemsencountered when integrating its market-driven and technological competencies, it identi-fies anddeepensits current knowledge in ways that may advance the development of itstechnological and/or market-driven competencies (Iansiti and Clark, 1994). For example,the marketing knowledge about the commercial potential of an innovation often guidesimportant choices about how a technology develops (Rosenbloom, 1985; Leonard-Barton,1995). New product concepts or prototypes may be developed by users, and then passed up-stream to manufacturers (von Hippel, 1977, 1988; Teece, 1992), if the firm can successfullyintegrate this information. For example, 3M is developing a new integration competencegeared to producing breakthrough products. Called the lead user process, this approachdraws on the market knowledge identified by lead users to develop leading-edge productsand influence the advancement of technological competencies (von Hippel et al., 1999).

The integration process may also lead the organization tore-direct the development ofits market-driven and technological competencies in order to create future value. Throughthis dynamic process of integrating current competencies and defining and propelling thedevelopment of new ones, the integration process can lead to significant advancement ofthe organization’s technological and market-driven competencies.

6. Trajectories

Over time, competencies develop along a trajectory, or path of development. These tra-jectories develop based on the firm’s experience, and they create certain dynamics thatcan enhance or inhibit a firm’s ability to develop new knowledge. A firm may experienceincreasing returns in its development of a given technological competence, for example,because the technological search processes in a firm are cumulative and constrained bypast experience (Dosi, 1988). In each technology there are elements of tacit and specificknowledge that cannot be codified, thereby magnifying the role of experience in generat-ing new knowledge. The exploration of a technology increases a firm’s capabilities in that


particular technology, and, thus, increases its incentive to continue its explorations. “Thesetechnology-specific forms of dynamic increasing returns tend to ‘lock in’ the processes oftechnological change into particular trajectories, entailing a mutual reinforcement (a posi-tive feedback) between a certain pattern of learning and a pattern of allocation of resourcesinto innovative activities where learning has already occurred in the past.. . . ” (Dosi, 1988:1148). Similarly, the knowledge that firms use to recognize valuable and changing marketopportunities and competitor actions is developed and nurtured through experience.

Absorptive capacity also contributes to the development of trajectories. Absorptive ca-pacity enables a firm to recognize the value of new external information, assimilate it, andapply it to commercial ends (Cohen and Levinthal, 1990). Absorptive capacity is cumulativein that it is largely a function of the firm’s level of prior related knowledge. “Once a firmceases investing in its absorptive capacityin a quickly moving field, it may never assimi-late and exploit new information in that field, regardless of the value of that information”(Cohen and Levinthal, 1990: 136, italics added). Lack of absorptive capacity can lead to“lockout” from a particular trajectory for two reasons. First, a firm that has not developedabsorptive capacity in a given area may not recognize new opportunities that arise in thatarea. Second, because absorptive capacity is cumulative (prior knowledge facilitates theabsorption of new knowledge), the lack of initial investment in absorptive capacity maymake it prohibitively expensive to develop later as the trajectory moves forward, even if afirm recognizes technological opportunities.

Market-driven trajectories are also influenced by absorptive capacity. Gathering, main-taining, and updating information about customer wants and needs also requires the abilityto absorb, assimilate, and apply external information. A firm that has invested in building aknowledge base about the needs of a certain customer group possesses absorptive capacitywith respect to those customers. Because it knows its customers very well, it will be moresensitive to their needs and to changes in their needs. Similarly, a deep knowledge base ofits competitors enables the firm to better recognize and exploit new information about thosecompetitors. Being able to sense, adapt to, and guide future changes in customer needs andcompetitors is particularly important today given the number and velocity of changes inmarkets. A competing firm that lacks this absorptive capacity regarding customer needs willhave to make a larger investment to catch up and may not be able to catch up at all due tothe time compression diseconomies of knowledge development (Dierickx and Cool, 1989).Consider, for example, the knowledge base that Wal-Mart has built about its customers(Saporito, 1994). Through its information infrastructure, Wal-Mart keeps track of 6000consumer purchasing variables. “The plan is to customize each linear foot of shelf space ineach department in each store with goods in the right quantity at precisely the right time,and to advertise to a market segment of one” (Saporito, 1994: 64). Other retail outlets arehaving to make a huge investment of time and money to develop the knowledge Wal-Martcurrently has about its customers, and during that time Wal-Mart continues to enhance itscapabilities and maintain its lead. In addition, Wal-Mart is able to use this knowledge toanalyze and more deeply understand consumer desires as it attempts to respond to the WorldWide Web as a distribution channel in today’s rapidly changing retail space.

Integration competencies may also develop along a trajectory, although their developmentmay differ from that of technological and market-driven competencies. The development oftechnological and market-driven competencies is greatly influenced by external changes in


technologies and markets, while integration competencies are more likely to be developedinternally through experience.3 As firms learn through successful integration experiences,their integration competencies become more effective. Because integration competenciesmay be embedded in the social and/or physical systems of the organization, they may createa path dependence that inhibits rapid imitation (Lei et al., 1996).

7. Propositions

In rapidly changing environments, products represent the temporary integration of dy-namic trajectories of technological and market-driven competencies. New product devel-opment activities combine the firm’s current competencies in marketing (reflecting its un-derstanding of current and future customer needs, its access to distribution channels, andits knowledge of competitive competencies and objectives) with its current technologicalcompetencies (reflecting its understanding of scientific principles and generic technologies,as well as specific product and process technologies) to create commercially viable prod-ucts. Because the trajectories continue to advance as new competencies are developed, thepotential for new products that embody new knowledge is created.

Corning, for example, has succeeded in multiple product markets by constantly advanc-ing its knowledge of glass-melting technology and applying this knowledge to many dif-ferent types of markets, including light bulbs, cookware, and fiber optics (see Fig. 1).With each product success, Corning continued to build on its previous competence ofglass-melting, and it developed new opportunities to integrate this competence with mar-ket needs. Corning’s strategy was competence-based in that it focused on advancing itstechnological competencies in glass-melting. In contrast, a product-centered strategy couldhave focused on developing new products for the home entertainment or cookware mar-kets, by either fine-tuning its current products or by developing new home entertainmentor cookware products that do not draw on Corning’s technological competencies in glassmelting.

Amazon.com exemplifies a firm that demonstrates a commitment to building market-drivencompetencies in understanding customers. Amazon.com’s strategy is to gather customerinformation in order to target each customer with “unique, irresistible offers” (Hamm, 1999)that meet recognized and latent demands. Amazon.com has leveraged this deep customerknowledge to meet a wider range of its current customers’ needs, to increase customer in-volvement, and to identify and serve new customers. As founder Jeff Bezos explains, “ourvision is that we want to be the world’s most customer-centric company. In many ways,we’re a one-trick pony. It’s just a good trick. And that is we focus incessantly on trying toget the customer experience right. . . See, we’re not a book company. We’re not a musiccompany. We’re not a video company. We’re not an auctions company. We’re a customercompany” (Hof, 1999).

When a firm’s strategy emphasizes competencies rather than products, the firm’s invest-ments focus on how to best extend and build on the firm’s current market-driven and/or

3 This argument assumes that integration takes place within the firm. If integration involves combining thecompetencies of more than one firm, then integration may have a more external focus.

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technological competencies, not on extending the life of a current product. In fact, the de-velopment of market-driven and technological competencies may require cannibalizing orabandoning current products (Bower and Christensen, 1995). Or, more formally:

Proposition 1. Firms with strategies that focus on developing technological, market-driven,and integration competencies will place less emphasis on product-centered strategies.

Firms that compete in dynamic environments face important challenges. Many firmscompete in environments characterized by rapid and significant changes, including dra-matic shifts in technology, very short product life cycles, rapid diffusion of know-howand business practices, and the aggressive entry of global competitors (D’Aveni, 1994).Any given product advantage is likely to be short-lived. In these environments, sustain-able competitive advantage depends on building the competencies required to stay at theleading edge of technological and/or market developments. Consider Canon’s success indeveloping a stream of different products (including cameras, printers, fax machines, andcell analyzers) based on its core competencies in precision mechanics, fine optics, andmicroelectronics (Prahalad and Hamel, 1990). In contrast, Wang Laboratories centered itsstrategy on its word-processing product and failed to develop either the technological ormarket-driven competencies necessary to compete in the rapidly changing office automationmarket. IBM is another example of a firm that became so focused on its successful 360/370series mainframes that it failed to develop technological competencies in microprocessingand networking; as a result, IBM was slow to develop and market smaller computers andnetworked systems, suffered enormous losses, and required a major restructuring to regainprofitability. In dynamic environments, identifying and investing in competencies that aremost likely to support the ongoing development of valuable products and services is criticalto the firm’s future competitive advantage (Teece et al., 1997). Therefore,

Proposition 2. In dynamic environments, firms with strategies that focus on developingtechnological, market-driven, and integration competencies will be more likely to createcompetitive advantage than will firms with product-centered strategies.

Advancing a firm’s technological competencies is required to assure that product func-tions and features meet market demand. Because the value of any competence depends onits ability to distinguish the firm from its competitors (Leonard-Barton, 1992), investmentin the development of technological competencies and the systems and processes necessaryto propel their development is a competitive process. Firms that fail to advance their tech-nological competencies may find that the product functions and features that embody thesecompetencies fail to create commercial success.

Technological competencies can require the firm to draw on a number of scientific disci-plines that are each advancing along a trajectory (Christensen, 1998). They are also affectedby advancements in facilitating technologies outside the firm’s current technological base(Teece, 1992). For these reasons, the firm is required to develop systems and processesthat provide real-time access to relevant knowledge that is being developed outside thefirm (Cohen and Levinthal, 1990). These systems may include alliances with universities,national laboratories, consortia consisting of competitors or non-competitors, or customers


(Leonard-Barton, 1995). Access to important external technological knowledge also re-quires processes by which firms can scan broadly for external technology developmentsand continuously monitor for new information and knowledge (Cohen and Levinthal, 1990;Leonard-Barton, 1995). Processes that nurture technological gatekeepers and their abilitiesto sift through and disseminate technological knowledge to colleagues and create boundaryspanners who can translate between the external sources of new knowledge and the inter-nal “receivers” of this knowledge are also important means to improving the firm’s abilityto recognize, absorb, and exploit external technological knowledge (Cohen and Levinthal,1990; Leonard-Barton, 1995). Therefore,

Proposition 2a. The development of technological competencies will be associated withcompetitive advantage in dynamic environments.

Dynamic environments also require a commitment to advancing market-driven compe-tencies. The growing diversity of market demands and exponential increase in the availabil-ity of market data (Sinkula, 1994) increase the knowledge investment required to developmarket-driven competencies. At the same time, the growing complexity and challengesincrease the value of building market-driven competencies (Sinkula, 1994; Day, 1991).

In order to recognize, shape, and serve the needs of an identified customer base betterthan competitors (Peters and Waterman, 1982; Deshpande et al., 1993; Day, 1994a), a firmneeds a sturdy foundation of knowledge in the ways in which market demands are changing,and the actions that can create changes that will be positive to the organization. Buildingmarket-driven competencies is a dynamic process that combines “the art and science ofcreating change (disequilibrium) in markets in such a way that the change benefits the firm. . . and, consequently, comparatively ‘disadvantages’ rivals” (Dickson, 1996: 102). In dy-namic environments, a successful firm, therefore, will relentlessly initiate market change. Inaddition, it will be in the position to react positively to competitive actions, as competitorscontinue to build on their own competencies in an effort to attract and serve customers. Thiscan be particularly challenging as changes in consumer demands or channels of distributionmay introduce an entirely new set of competitors that need to be considered and under-stood. The dynamism of these ongoing changes of customer demands, market channels,and competitor capabilities makes the development of market-driven competencies criticalto organizational success. Therefore,

Proposition 2b. The development of market-driven competencies will be associated withcompetitive advantage in dynamic environments.

Neither market-driven competencies nor technological competencies in and of them-selves will assure competitive advantage in an environment characterized by rapidly chang-ing technology, intense competition, and demanding customers (Clark and Fujimoto, 1991).The ability to integrate knowledge about technology and markets rapidly and efficiently isnecessary to develop product functions and features that meet market demands (Clark andFujimoto, 1991). If a firm cannot combine its competencies with the necessary complemen-tary competencies, it is likely to deliver products that are either technically inadequate orunsatisfactory to the target market. A profound understanding of the customer or competitors


is not sufficient to deliver products that offer the technological performance that customersdemand. Similarly, technological competence does not imply commercial success becausethe technological abilities, however advanced, may not be appropriately combined withmarket knowledge to ensure commercial success. In fact, many technological advancesmay be totally unexploited due to the inability to apply them to current markets (Garudand Nayyar, 1994). Xerox PARC, which developed the first personal computer and otherleading technologies, is a classic example of an organization that pursued a technologicaltrajectory effectively yet missed opportunities due to lack of integration competencies.

Integration competencies can also be important to the firm’s performance because they areusually tacit, which makes them difficult to identify, observe, and articulate (Grant, 1996).As a result, they may form the basis for competitive advantage (Barney, 1991). Hendersonand Cockburn (1994) found that firms’ tacit experiences of integrating knowledge wereimportant contributors to sustainable competitive advantage in the pharmaceutical industry.

Finally, firms that can rapidly and efficiently combine their market-driven and technolog-ical competencies to develop successful new products will be able to generate the financialresources necessary for further investment in the market-driven and technological compe-tencies required to assure future competitive superiority. Therefore,

Proposition 2c. The development of integration competencies will be associated with com-petitive advantage in dynamic environments.

Rarely, if ever, do the firm’s competencies correspond directly with its product devel-opment needs. When integrating the knowledge necessary to develop a new product, firmsengage in a problem-solving process in which they must develop new capabilities to solveunanticipated problems. The integration process uncovers the need for new capabilities and,thus, serves as a primary driver for the development of new capabilities (Iansiti and Clark,1994).

The integration process may identify the need to deepen current competencies. For ex-ample, observing how early adopters use a new product may demonstrate the need for morein-depth understanding of customer behaviors that may not directly influence the use of acurrent product. The integration process may uncover the need for market-driven and tech-nological competencies that require significant re-direction of the firm’s capability-buildingefforts to assure future competitiveness. For example, new developments in technology atan industry-level or by a single competitor may dramatically change the performance char-acteristics of a new technology, making it necessary to re-direct the development of thefirm’s technological competencies (Christensen, 1998).

In addition, the routines and principles that enable an organization to create and transfercurrent knowledge in the course of developing and marketing a successful product can makethe development of new and different competencies slow, difficult, and complex (e.g., Nelsonand Winter, 1982; Dierickx and Cool, 1989; Leonard-Barton, 1992). Failure to decouplethe knowledge gained through integration can create “rigidities” (Leonard-Barton, 1995)that result from the firm’s “dominant logic” (Prahalad and Bettis, 1986) or its “center ofgravity” (Galbraith and Kazanjian, 1986).

Using its integration competencies, the firm must be able to detect and act on the informa-tion gained from the integration process about its capabilities and those of its competitors in


ways that are not constrained by the current set of products. By decoupling its market-drivenand technological competencies from its current products, the firm will be better able tofocus on developing the dynamic capabilities which form the basis for future, currentlyunanticipated, products. Therefore,

Proposition 3. The ability to decouple the knowledge gained in the integration processin order to deepen and re-direct market-driven and technological competencies will beassociated with competitive advantage in dynamic environments.

8. Implications and conclusions

In this paper, we have proposed that dynamic environments require firms to focus theirstrategies on the technological, market-driven, and integration competencies that underlieproduct development, not the products themselves. Clearly, not all firms operate in compet-itive environments that are dynamic; many companies may be extremely successful withproduct-centered strategies. Increasingly, however, firms must compete in rapidly changingenvironments and find that successful products provide short-lived competitive advantage(D’Aveni, 1994; Teece et al., 1997). These dynamic environments require a new perspectiveon strategy. The dynamic competencies perspective that we have presented in this researchdefines new strategic imperatives for managers and researchers alike.

From a managerial perspective, the new strategic imperatives of a dynamic competen-cies perspective require managers to conceptualize and implement strategy in new ways.Much like the dichotomous choice presented in Porter’s (1980) low cost and differentiationframework, this perspective suggests that being ‘stuck in the middle’ by trying to man-age around products can be a recipe for failure in environments characterized by rapidlychanging markets or technologies. In highly dynamic environments, current products rep-resent only a temporary integration of technological and market-driven trajectories. Firmstrategies, therefore, should focus on the dynamics of competence development, rather thanremaining ‘stuck’ at the nexus with a product focus.

From a research perspective, the competence-centered perspective presents new chal-lenges, as well. Researchers have begun to explore how competence-centered strategiesmay create different outcomes than product-centered strategies, especially as they relateto diversification (Collis and Montgomery, 1995), acquisitions (Chaudhuri and Tabrizi,1999), divestment (Prahalad and Hamel, 1990), and market entry (Teece et al., 1997). Ourresearch introduces a number of additional research issues that could add to our under-standing of competence-centered strategies and their contribution to a firm’s competitiveadvantage.

Our research highlights how particular factors (such as absorptive capacity and “lock in”)influence the development of a firm’s competencies in technology, marketing, and integra-tion. For example, higher levels of absorptive capacity in a market-driven or technologicalcompetence increases the firm’s ability to recognize and apply new external knowledge tocontinue the firm’s competence development. Given the importance of advancing the firm’stechnological, market-driven, and integration competencies in dynamic environments, howcan firms increase their absorptive capacity?


The perspective presented in this paper also highlights the need for greater explorationof how organizational structure can contribute to successful development and managementof dynamic competencies (Hitt, Ireland, and Hoskisson, 1999). Previous researchers haveidentified organizational factors that can impede the development of new competencies,because they lead to “core rigidities” (Leonard-Barton, 1995), a “dominant logic” (Prahaladand Bettis, 1986), and a “center of gravity” (Galbraith and Kazanjian, 1986). We see multipleavenues for fruitful research investigations that focus on more clearly identifying thesebarriers and how they can be overcome so that the firm can develop new competenciesmore effectively.

In many dynamic markets, firms increasingly look to acquire or ally with other firms inorder to extend current competencies or develop new ones (Hitt et al., 1998). If a firm is tryingto acquire new competencies and continue their development, the issues surrounding theintegration of the underlying knowledge may be significantly different than integrating newproducts into the firm (Ranft and Zeithaml, 1998; Chaudhuri and Tabrizi, 1999). A betterunderstanding of the key issues surrounding the successful acquisition of competencies isrequired.

On the other hand, some very real limitations to competence development may exist.Although large, well-established firms may be able to manage concurrent development ofmultiple competencies, smaller and/or newer firms may choose to focus on the developmentof one or two sets of competencies, but not all. As highlighted earlier in this paper, the com-petencies required to maintain technological leadership are different from those requiredto stay at the leading edge of changing customer needs, and effective integration of thesecompetencies requires an additional set of capabilities. Can a firm focus its strategy on thedevelopment of one type of competence (either market-driven or technological, for example)and integrate its competencies with firms that have complementary competencies? Firmsmay have the option to “unbundle” these different types of competencies, concentrate on onearea, and link to other competence areas located outside the firm (Hagel and Singer, 1999).For example, a firm with strong integration competencies might act as a broker to combinethe technological competencies of another firm with the market-driven competencies of athird firm. Alternately, a firm with leading-edge technological competencies might developintegration capabilities but rely on outside firms to supply the appropriate market-drivencompetencies. Strategic alliances, joint ventures, and outsourcing agreements can serve asvehicles for integrating market-driven and technological capabilities. Even large firms canbenefit from strategic efforts to access capabilities outside the organization and quickly cap-italize on valuable, but transient, internal competencies. What kind of requirements and/orconstraints does this impose on a firm? These issues could also include increased investiga-tion of new organizational forms and how they influence the development and integrationof competencies. For example, is the “N-form” model of organization structure, with itsemphasis on the importance of middle managers and lateral communications (Hedlund,1994), more effective at helping firms develop and integrate competencies?

Additional research on how to create structures and systems that reward the developmentof competencies (and avoid creating “rigidities”) is also needed. These structures and sys-tems require creative and novel approaches that assess and reward activities and individualsthat propel the development of the organization’s competencies (Leonard-Barton, 1995).Management incentives and organization structure must increasingly focus on the “learn-


ing added,” and the potential that today’s actions have to create valuable platforms for newopportunities tomorrow (Kogut and Zander, 1992).

In this framework, market-driven, technology, and integration competencies are identi-fied as central to creating competitive advantage in dynamic environments because theyform the basis for the development of new products and services. Other complementarycapabilities, in financial management or human resources, for example, may be necessarybecause they support or enable the firm to advance its technological, market-driven, andintegration competencies in certain environmental contexts. For example, competencies inmanaging government relationships can influence the competitive advantage of firms whengovernment regulation introduces dynamism into a competitive environment. Microsoft’srecent battles with the Department of Justice exemplify the risks that firms face if theydo not develop competencies in managing powerful government regulators. Microsoft’slate start in gaining competencies in managing government relationships has influenced thefirm’s ability to capitalize on market-driven, technological, and integration competencies.In contrast, VISX, the foremost firm in the laser vision correction industry, has particu-lar competencies in government relations, especially as they relate to securing regulatoryapproval. VISX is able to leverage these competencies to secure even greater competitiveadvantage from its market-driven, technological, and integration competencies. “CurrentlyVISX’s laser systems are approved to treat all three major vision disorders, including my-opia, astigmatism, and hyperopia. These broad indications differentiate VISX lasers fromthe competition, since no other company has secured all these approvals” (King, 1999: 11).

The challenges associated with exploring the wide range of research questions and man-agerial challenges that accompany a competence-based perspective are significant. Mea-surement issues abound for researchers and managers. Managers must recognize and un-derstand the underlying knowledge in a firm if they are to make strategic decisions that leadto competitive advantage. This is easier said than done. Competencies are soft assets that donot appear on the balance sheet; assessing their value is an essential, elusive, and growingproblem for managers and accountants (Stewart, 1994). Failure to recognize embedded,often tacit competencies can have devastating effects on a firm’s ability to compete (Cohenand Levinthal, 1990; Bettis et al., 1992).

Measurement of competencies is difficult, because they are intangible and dynamic.Clearly, significant study is necessary to better describe and measure market-driven, tech-nological, and integration competencies. Competitive advantage, the dependent variablein our model, also raises measurement issues. Current competitive advantage can be mea-sured by comparing profitability or market share statistics. Stock market-based measuresmay give more indication of a firm’s future competitive advantage, but the intangible andembedded nature of the firm’s competencies may call into question the market’s ability toassess them, especially if the firm’s environment is changing. In Table 1, we offer somepotential measures for the different types of competencies that may spur the developmentof meaningful measures of these constructs.

The critical subject of dynamic environments, dynamic competencies, and competitiveadvantage crosses the boundaries of multiple academic disciplines, including technologyand innovation, marketing, strategic management, and epistemology. This complex and, bydefinition, dynamic area of research requires rich and diverse research methods for empiricaltesting. A series of detailed field studies, such as those conducted by Henderson (1995) and


Table 1Measures of market-driven, technological and integration competenciesa

Measures of market-drivencompetencies

Measures of technologicalcompetencies

Measures of integrationcompetencies

Spending per customer Cycle time Product profitabilityNumber and percent repeat

customersUnit cost Percent of sales from new

productsReferral customers Yield Variety of productsCustomer complaints Set up time Warranty costsResponse to customer requests Common parts/common technologies Cost of quality as percent of salesOn time delivery Number of competitors able to

produce this technologyActual introduction scheduleversus plan

Number of competitors servingthis customer

Profile of competitors’ technologicalcompetencies

Number of competitors deliv-ering similar products

Profile of competitors’market competencies

Profile of competitors’integration competencies

a Sources: Kaplan and Norton (1992); Tatikonda and Tatikonda (1998).

Brown and Eisenhardt (1997, 1998), would provide fertile contexts to test the relationshipswe propose, as well as offer preliminary insights into processes that successful organizationsemploy to develop dynamic competencies. In this paper we have integrated learning froma variety of disciplines to clarify and suggest relationships that may provoke thought andadd value to meaningful conversations regarding learning, knowledge management, andperformance. We hope that the research that we have presented here forms the basis for animproved understanding of the strategic challenges that firms and managers face in dynamicenvironments.

Acknowledgements

We would like to thank the co-editors Mike Hitt and Duane Ireland and the two anonymousreviewers for their helpful comments and suggestions during the preparation of this paper.

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Beyond products: new strategic imperatives for developing competencies in dynamic environments* 1