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DYNAMIC CAPABILITIES
Dynamic Capability
The capability by which managers “integrate, build, and reconfigure internal and external competencies to address rapidly changing environments”.
Dynamic capabilities correspond to ”combinative capabilities,” i.e., the ability to aquire and synthesize
knowledge resources and build new applications from
those resources.
As a concept, it “emphasizes the key role of strategic management in appropriately adapting, integrating, and re-configuring internal and external organizational skills,
resources, and functional competencies toward a
changing environment”
Examples of dynamic capabilities:
• product development routines (e.g., Toyota). • superior ability to absorp external knowledge and
integrate it – e.g., alliance and aquisition routines (e.g., some biotech firms).
• ”patching”– reshuffling of corporate resources in response to changing demands (Dell’s ability to constantly segment operating businesses to match demands).
Example of Kodak
Kodak was the dominant firm in the imaging market when the market was still based on chemical processes rather than digital image processing.
When swithched to digital photography, Kodak was still well equipped with the needed resources to create a competitive advantage on selling film or processing the printing of images on paper. In the digital world however different resources were needed to provide a superior imaging experience.
• Technology wise there was the need to develop sensors to translate an image into a digital signal, write software that allows treating digital images and create digital photo albums so that customers can store, share and show their images.
• Most likely the needed resources for the digital world would also have included managerial abilities such as forming and managing alliances with partners that can contribute complementary assets, such as software companies or companies that can play complementary roles in the new value chain.
DYNAMICAL CAPABILITIES - ALLIANCES
Firms need to renew their competences to remain competitive, often by learning from other firms (competence building). Here, alliances provide a convinient climate for this learning;•firms in alliances discover the competences of their partners•firm dynamic capabilities allow them to utilize the competence
stock of their alliance partners when making necessary changes in their own competences•partnerships are developed or new ones are started during
the process of synthesizing and transforming competences.
Ex: When firms start to cooperate with competitors, they enter a ‘coopetitive’ strategy. In such an alliance, dynamic capabilities act as mediator of coopetition relationships.
Innovation
ServicesOrganizational Goods
Process Product
Technological
INNOVATION
Innovations are new and improved products and processes, new organizational forms, the application of existing technologies to new fields, the discovery of new resources, and the opening of new markets.
Innovation is an interactive (social) process by which firms master and get practice of product designs and manufacturing processes that are new to them, whether they are new to the world or not. The definition also includes,•new forms of organization•institutional innovations
Innovation is by definition a discontinuous process,
often described by phrases like “gales of creative destruction”, “distruptive technologies”.
INNOVATION IN THE KNOWLEDGE ECONOMY
Schumpeter: • goal is not efficiency but innovation • equilibrium is not the final outcome (e.g. technical change and innovation does not allow equilibrium to settle) • entrepreneurship (entrepreneur demands the capabilities to redesign the chain of complementary activities - supply driven) • creative destruction
Small Firms,Entrepreneurs
Innovation Economic Growth
Large Firms with Industrial
R&D Labs
Penrose: • goal is the growth of the firm (firm grows in order to
take advantage of excess capacity notably managerial
and technical capabilities - supply driven)• firm is a collection of productive resources that never reach equilibrium • it is never resources themselves that are the inputs in the production process, but only the services that the resources can render • the productivity of resources depends on each firm’s specific culture
In knowledge-based approach the firm;
• is an organization that knows how to do things, acting like a repository of knowledge about production
• naturally makes mistaken decisions in an uncertain world
• has inadequate knowledge base and a flawed capacity to utilize it
Hence, instead of taking uniformly efficient performance as the norm, one should consider the observed behavior and variations in it (why do firms are different in their performances?).
Example: Technology is a complex system. When making decisions about technology, firm faces many uncertainities which may not be completely reduced (ie. brought under control).
In the evolutionary approach, firm is a complex evolutionary system;
• that does not function in isolation (ie. independent of the others), but constantly interacting with a dynamic environment
• making exchanges of goods, services, information, knowledge etc. through its external links
• adapting to outside changes by learning and developing new routines
• changing its environment as it changes
• hence an element of a greater system.
It follows that, an innovator does not innovate alone!
External relationships and network structures are required to ensure the success of innovations.
TECHNOLOGY, INNOVATION
Paradigm“A model and a pattern of solution of selected technological problems, based on selected principles derived from natural sciences and on selected material (relevant) technologies”
Within a paradigm problem solving behaviour is developed: The selected principles generate routines, heuristics. Together they constitute relevantknowledge.
Heuristic: A rule of thumb or guideline (as opposed to an invariant procedure).
Technological Paradigm A core concept of new economics. The term technological paradigm is used within field of the economics of technological changes, to explain the radical changes in technology as the material basis of production of goods and services. A technological paradigm denotes a specific solution to the existing technological and economic problems.
Ex: water mill, eletrical machinery, internal combustion engines, aircraft trchnology, microchips, biotechnology,
etc.
Q: What are the next important technological paradigms?
When new technology;• revolutionizes the structure of the industry• dramatically alters the nature of competition• requires companies to adopt new strategies to
survive
it represents a technological paradigm shift.
Ex: Technological change,
i.from steam engine to gasoline engine
ii. from chemical medicines to molecular medicines
Paradigm shifts are more likely to occur when;• the established technology in the industry is mature and
approaching its natural limit (e.g. semiconductors)• a new disruptive technology has entered the
marketplace and is taking root in niches that are poorly
served by incumbent companies using established
technology (e.g. microcomputers)
Technological trajectories: Once a paradigm is chosen,
technological artifacts developed within this paradigm
stand a good chance of being improved into new products
or processes. This improvement pattern is a technological
trajectory.
Perf
orm
an
ce
Effort (funds)
Physical limit of technology
PROFILE OF SUCCESSIVE TECHNOLOGICAL INNOVATIONS
established technology (horse and cart)
successor technology (automobile)
discontunity
SYSTEMS VIEW OF INNOVATION
the rate of technological change and companies
effectiveness; • do not depend simply on the scale of R&D• but also, on the way available resources are
managed and organised …
System of Innovation
CHARACTERISTICS OF THE INNOVATION SYSTEM
interactivity
multidisciplinary
integration
Know-how internal /external
connectivity
Linkages
1. Network of institutions that interact to initiate, import and diffuse new technologies;• government policy• corporate R&D• education and training system• structure of industry
2. Patterns of interaction between firms as collective learning process in acquisition and use of new knowledge;• internal organization of firms• network of interfirm relationships• role of public sector• degree of R&D intensity• nature of R&D organization
Public R&D/Labs University
Public Sector S&T Users
Private Labs
Private Corporations
Rest of Worldincl. MNEs
Government
Private & Public Business SupportServices
Financial Institutions
: finance : knowledge
OECD SYSTEMS OF INNOVATION PERSPECTIVE
Macroeconomic andregulatory context
Education andtraining system
Clu
ster
s of
indu
strie
s
Globalinnovation networks
Reg
iona
lin
nova
tion
syst
ems
National innovationsystem
Communicationinfrastructures
Factor marketconditions
Product marketconditions
COUNTRY PERFORMANCEGrowth, jobs, competitiveness
National innovation capacity
Knowledge generation, diffusion & use
Supportinginstitutions
Sciencesystem
Otherresearchbodies
Firm’scapabilities& networks
NETWORK THEORY
A wider perspective of relationships:
• relationships to single specific counterparts does not reflect the whole picture
• one-to-one relationships do not exist in isolation, but the partners at “both ends” also are in relationships with other firms
• thus, relationships are part of a larger net of relationships, a network
If relationships with firms more distant in the value chain
are important, and if the capability of the firm to fulfil its
objectives (and its performance) depends partly on those,
then the development and performance of firms will be
explained by their ability to develop relationships.
The business relationships are processes of,• adaptation• cooperation and conflict• social interaction• routinization
These relationships are,• essential for economic performance• connected
By focussing on relationships and their connectedness, a business enterprise acquires quite another face than the one in the management literature, as an island, an isolated unit with clear boundaries and with standardized exchange with its environment.
enterprise
organization
strategy
environment
enterprise E
E
E
environment
Traditional view: enterprise as the focal object
Expanded view: enterprise as part of interacting system
Hakansson and Johanson:The function of business relationships can be characterized with respect to activities (which linked in which ways)• actors (who; how they are related)• resources (which; which patterns of
adaptation)
Actors, Resources and Activities Model
Actors: at different levels (from individuals to groups of companies), actors aim to increase their control of the network
Activities: include transformation act, transaction act and activity cycles
Resources: heterogenous, human and physical, and mutually dependent
Actors control resources (alone or jointly). Actors have a certain knowledge of resources.
Actors perform activities. Actors have a certain knowledge of activities.
Activities link resources to each other. Activities change or exchange resources through use of other resources.
NETWORK
What is a network?
“A set of two or more connected business relationships, in which each exchange relation is between business firms that are conceptualized as collective actors”.
Connected means the extent to which “exchange in one relation is contingent upon exchange (or non-exchange) in the other relationship”
• The actors (companies) may or may not have a common goal, but there exist some shared beliefs about the activity pattern as well as the resource constellation
• In network models of resource allocation, transactions occur neither through exchanges nor by administrative fiat, but through networks of individuals engaged in reciprocal, preferrential, mutually supportive actions
• A network has no clear boundaries, nor any centre or apex. It exists as an “organization” in terms of a certain logic affecting the ordering of activities, resources and actors. It can be seen as an organization as it affects how companies are reciprocally related and positioned. As a form of organisation it will only be kept together as long as the network logic is accepted by enough actors
• Formal or informal, networks are replacing simple market based transactions and traditional bureaucratic hierarchical org.s
In network approach,• firm is an agent of economic relations, a partner in the
network (a system) of organizations operating in the market
• network is a rather stable market structure which,
- predetermines the role and place of the firm in it
- affects the results of its activities
- modifies firm’s management system• networks are highly specialized, decentralized,
dynamic, flexible, high trust (shared vision, ideologies
and values) organizations with rich communication flows• pressures towards efficiency and flexibility are pushing
firms into network relations as part of their strategy• modern economy is distinguished with its cooperation
between suppliers and customers
Networks become relations of power and trust through which org.s • exchange information and resources• take advantage of economic efficiencies
Trust or social cohesion is the key organizational requirement for high-performance network. Trust is• dyadic interpersonal phenomenon• socio-economic notion which is a consensual
ideology
firms network
efficiency and flexibility presure
Therefore, network analysis is characterised by;
• multidisciplinary description of companies in a market • emphasis is on relationships of these companies with
other companies (market is a set of actors with different role sets linked to each other via reciprocal exchange relations)
• trust, which is at the center of network management
Kaman:
1. No actor can fulfill his dreams without the assistance of other actors: this puts him in paradoxial position, he either remains independent (and sub-optimal) or he increases his dependence (and improves his performance)
2. Relationships are based on mutual trust and are the subject of
social cohesion. But can change into opportunistic behaviour
and betrayal
3. The result of network behaviour is a synergetic surplus
4. The nature of a relationship between actors influences all other relationships in the network (complexity)
5. Each actor tries to maximise his share of the synergestic surplus
6. Each actor carefully balances dependence and freedom in
order to improve the percieved optimal mix of effectiveness,
efficiency, profitability and continuity
Hakansson and Snehota (“No Business is an Island”) :
1. Business organizations often operate in a context in which
their behaviour is conditioned by a limited number of
counterparts, each of which is unique and engaged in
pushing its goals
2. In relation to these entities, an org. engages in
continuous interactions that constitute a framework for
the exchange process. Relationships make it possible to access and exploit the resources of other parties and to link the party’s activities together
3. The distinctive capabilities of an organization develop
through interactions in its relationships that it maintains
with other parties
4. Since the other parties to the interaction also operate
under similar conditions, organizations’ performance is conditioned by the totality of the network as a context, i.e. even by interdependencies among third parties
Transaction Cost Theory Resource Based Theory, RBV
Network Theory
. transaction cost
reduction
improve market power for
. resource and capability
acquisition
. uncertainty management
. resource and knowledge
acquisition motivated by
social relations
. effectiveness and
efficiency
REASONS for LINKAGE CREATON
SUMMING UP: PERSPECTIVES ON NETWORKS
• networks as relationships• networks as structures• networks as positions• networks as process
See: ‘networks as relationships, structures, positions and processes.
Networks as relationships
Relationships comprise four elements;• mutual orientation• dependence that each partner has, or believes it has,
upon the other• bonds of various kinds and strengths• investments each partner has made in the
relationship
Networks as structures
• interdependence introduces constraints on the actions of individual firms
• basic assumption: networks are heterogeneous in nature
• role of the division of labour• concepts of social network analysis:
– structuredness: general level of interdependence in a network
– homogeneity: similarity of firms in terms of their bond types, relative importance of firms and the functions each firm may undertake
– exclusiveness: extent to which a network is insulated from other networks
Networks as positions
• level of analysis: focus is at least partly upon single firms rather than the network
– network is seen as aggregation of interlocking positions
– position: a role that the organisation has for other organisations that it is related to, directly or indirectly
– the firm is expected by other firms to behave according to the norms associated with the position
• characteristics of position:– function: that firms are held to perform– identity: if the net changes then the expectations
change and so does the position– relative importance of the firm in its net: correlates of
power
Networks as process
• coordination of firms in an industrial system is effected by three kinds of mechanisms:– Market– Firm (hierarchy)– Networks: firms are not too independent but neither so
dependent that the market controls their actions• strong relationships exert a coordinative influence on the
system through the need for coordination at the level of the dyad
- macro- and micro-positions (relationships between individual firms vs. the firm's relationship to the network as a whole) strength of relationship
• direction of change is governed by the pattern of relationships that the participant firms judge, on a resultant rather than a collective basis, to be most favourable
• network processes are dominated by the distribution of power and interest structures. Some firms in the network have access to more and better resources than others
• networks are stable but not static• any change in a network requires resources to be
mobilised
SOCIAL CAPITAL
Physical/Human Capital: Tools and training that enhance individual productivitySocial Capital: Features of social organization, such as relationships, networks, norms, sanctions and trust that; • facilitate coordination and cooperation for mutual benefit• shape the quantity and co-operative quality of a society’s
social interactions
The notion of social capital enlargens our understanding of "cooperation" in two significant ways; • linking cooperation to the economic concept "capital"
signals the investment or growth potential of a group’s ability to work jointly
• the concept identifies the structure created from collaborative effort as capital.
Well-functioning partnerships, consortia, and networks are themselves "forms of social capital." Capital is located both in the sharable resources held by individual institutions in a network and in the overall structure--the relationship--among the institutions in a network.
The constituent elements of social capital are,
• trust
• norms• networks
AC
B
A
A trusts B
C trusts B
then A trusts C
1. Trust is developed over time as individuals gain confidence in the reliability of others in a series of interactions. Networks may exhibit generalized trust without close personal contact among all members, as can be seen in the below case:
Trust allows actors to engage in productive collaboration, but trust also provides a necessary condition for fraud and other illegal activities
2. Norms of appropriate behavior develop as a social
contract is negotiated among actors. Examples: • Norm of reciprocity is essential to valueable relationships
• Norm of upholding group-interest over self-interest may yield bigger gains
Norms decrease transaction costs and regulate behavior,
but when improperly used, they may stifle the creativity
and diversity of opinion necessary for solving novel and
complex problems
trustworthiness networks of social exchange norms of reciprocity
Norm: A way of behaving or believing that is normal for a group or culture. All societies have their norms, they are simply what most people do.
3. Actors in collaborative networks look for partners with
reputation for trustworthiness. Social capital is preserved
by careful selection of network players and strict
sanctioning of inappropriate (network-destroying)
behaviors. A network develops when a group of
individuals or organizations develop reliable, productive
communication and decision channels and a more or less
permeable boundary to define members.
Networks of firms collaborating to produce new technologies or applications widely report the benefits of cooperation; cartels, unfortunately, also understand the benefits of network approaches to production and distribution.
networks as creators of social capital
Social capital is a powerful resource that develops from productive social ties. Its use depends entirely upon the values and objectives of the actors involved.
Putnam:
“Cooperation is facilitated if a community has inherited a substantial stock of social capital in the form of norms of reciprocity and networks of civic engagement”