Economic Foundations
of Strategy
Chapter 5:
Dynamic Resource Based
Theory: Capabilities
Joe Mahoney
University of Illinois at
Urbana-Champaign
Resource-Based Theory, Dynamic
Capabilities and Real Options
 Itami and Roehl (1987):
Mobilizing Invisible Assets
 Nelson and Winter (1982):
An Evolutionary Theory of Economic
Change
Itami and Roehl (1987):
Mobilizing Invisible Assets
 Itami and Roehl (1987)
emphasize the vital role of
accumulated experience and
information to a corporation’s
strategic resources.
 The invisible assets of the firm
are based on information.
 Invisible assets are often a firm’s
only real source of sustainable
competitive advantage.
Itami and Roehl (1987):
Mobilizing Invisible Assets
 Invisible Assets:
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Trade Secrets
Data Bases
Information
Personal and
organizational networks
Know-how
Brand name
Reputation
Corporate Culture
Itami and Roehl (1987):
Mobilizing Invisible Assets
 Many invisible assets are
quite fixed (at least in the
short run). There is no easy
way to obtain a well known
brand name or advanced
technological production
skills in the market. Nor
can money buy an
instantaneous change in
corporate culture or
employee morale.
Itami and Roehl (1987):
Mobilizing Invisible Assets
 Accumulation of these
resources requires on-going,
conscious, and timeconsuming efforts; you
cannot just go out and buy
them off the shelf. For this
reason a firm can
differentiate itself from its
competitors through its
invisible assets.
Itami and Roehl (1987):
Mobilizing Invisible Assets
 The important feature of invisible assets are:
• Unattainable with money alone;
• Time-consuming to develop;
• Capable of multiple simultaneous uses; and
• Able to yield multiple,
simultaneous benefits.
Itami and Roehl (1987):
Mobilizing Invisible Assets
The information that you
learn on your current
project can become the
basis for your next
project and the potential
for such spillover effects
should be taken into
account.
Itami and Roehl (1987):
Mobilizing Invisible Assets
 Information flow is at the heart of
invisible assets.
 Information can be classified as:
• Environmental
• Corporate
• Internal
Itami and Roehl (1987):
Mobilizing Invisible Assets
 Environmental Information
• Environmental information
flows from the environment
to the firm, creating
invisible assets related to
the environment. This type
of information flow includes
production capabilities,
customer information, and
channels for bringing in
information.
Itami and Roehl (1987):
Mobilizing Invisible Assets
 Corporate Information
• Corporate information
flows from the firm to the
environment, creating
invisible assets stored in the
environment. This category
includes such invisible
assets as corporate
reputation, brand image,
corporate image, and
influence over the
distribution channel and its
parts suppliers, as well as
marketing know-how.
Itami and Roehl (1987):
Mobilizing Invisible Assets
 Internal Information
• Internal information originates
and terminates within the firm,
again affecting the invisible
asset stock. This category
includes corporate culture,
morale of workers, and
management capability, as well
as the firm’s ability to manage
information, the employees’
ability to transmit and use the
information in decision
making, and the employees
habits and norms of effort
expended.
Itami and Roehl (1987):
Mobilizing Invisible Assets
 Information has three
characteristics that make
synergy possible:
• Information can be used
simultaneously for multiple
purposes;
• Information does not wear
out from overuse;
• Bits of information can be
combined to yield even more
information.
Nelson and Winter (1982):
An Evolutionary Theory of Economic Change
 Nelson and Winter (1982)
develop an evolutionary theory
of the capabilities and behavior
of business firms.
 The firms in their evolutionary
theory will be treated as
motivated by profit and engaged
in search for ways to improve
their profits, but their actions
will not be assumed to be profit
maximizing over well defined
alternatives.
Nelson and Winter (1982):
An Evolutionary Theory of Economic Change
 The theory
emphasizes the
tendency of more
profitable firms to
drive the less
profitable firms
out of business.
Nelson and Winter (1982):
An Evolutionary Theory of Economic Change
 Maintain that much of firm behavior can be
more readily understood as a reflection of
general routines and strategic orientations
coming from the firm’s past than as a result of
a detailed survey of the remote twigs of a
decision tree extending into the future.
 Firms are modeled as having, at any given
time, certain organizational capabilities and
decision rules. Over time these organizational
capabilities and rules are modified as a result
of both deliberate problem-solving efforts and
random events.
• Translates into a description of a Markov
process.
Nelson and Winter (1982):
An Evolutionary Theory of Economic Change
 They describe their theory as unabashedly
Lamarckian in emphasizing adaptation: the
evolutionary economic theory of the firm
contemplates both the “inheritance” of
acquired characteristics and the timely
appearance of variations under the stimulus
of adversity.
 Individual Skills
 Organizational Capabilities and Routines
Nelson and Winter (1982):
An Evolutionary Theory of Economic Change
 Routines
• Well specified technical routines for
producing things;
• Procedures for hiring and firing,
ordering new inventory, or stepping up
production in items in high demand;
• Policies regarding investment, research
and development (R&D), or advertising;
and
• Business strategies about product
diversification and overseas investment.
Nelson and Winter (1982):
An Evolutionary Theory of Economic Change
 In their evolutionary theory, these
routines play the role that genes play in
biological evolutionary theory.
 Most of what is regular and predictable
about business behavior is plausibly
subsumed under the heading of
“routine.”
 In evolutionary theory, decision rules are
treated as simply reflecting at any
moment in time the historically given
routines governing the actions of the
business firm.
Nelson and Winter (1982):
An Evolutionary Theory of Economic Change
 In their evolutionary theory, routineguided, routine-changing processes are
modeled as “searches.”
 The concept of search is the counterpart
of that of mutation in biological
evolutionary theory.
 Through the joint action of search and
selection, the firms evolve over time, with
the condition of the industry in each
period bearing the seeds of its condition
in the following period.
Nelson and Winter (1982):
An Evolutionary Theory of Economic Change
 Search for entrepreneurial
(Schumpeterian) economic rents:
• New products and new markets
• New technologies and methods
of transportation
• New sources of supplies
• New types of organizational
arrangements
Nelson and Winter (1982):
An Evolutionary Theory of Economic Change
 Search for entrepreneurial
(Schumpeterian) economic rents:
• Ideas that strike not at the
margins of the profits and
outputs of the existing firms but
at their foundations and their
very lives. The fundamental
impulse that keeps the capitalist
engine in motion is: The process
of creative destruction.
Nelson and Winter (1982):
An Evolutionary Theory of Economic Change
 Several Functions of Routines:
– Routine as Organizational Memory
– Routine as Intra-organizational
Truce
– Routine as Target: Control and
Replication
– Routines and Skills: Parallels
Nelson and Winter (1982):
An Evolutionary Theory of Economic Change
 Nelson and Winter (1982)
conclude that the attempt to
optimize and accordingly to
control technological advance
will, according to evolutionary
theory, lead not to efficiency
but inefficiency.
 They emphasize the
importance of experimentation
in complex systems.