IE 463
Lec 4. Firm and External Cooperation-2
1
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
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
Product
Process
Technological
Organizational
Goods
Services
INNOVATION IN THE KNOWLEDGE ECONOMY
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”.
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
Large Firms
with Industrial
R&D Labs
Economic
Growth
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 relevant
knowledge.
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.
Performance
PROFILE OF SUCCESSIVE
TECHNOLOGICAL INNOVATIONS
successor technology
(automobile)
Physical limit of technology
discontunity
established technology
(horse and cart)
Effort (funds)
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
connectivity
multidisciplinary
Linkages
integration
Know-how
internal /external
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
Rest of World
incl. MNEs
Government
Private
Labs
Private & Public
Business
Support
Services
Financial
Institutions
: finance
Private
Corporations
: knowledge
OECD SYSTEMS OF INNOVATION PERSPECTIVE
Macroeconomic and
regulatory context
Education and
training system
Communication
infrastructures
Global
innovation networks
Product market
conditions
Firm’s
capabilities
& networks
Other
research
bodies
Science
system
Clusters of
industries
Regional
innovation systems
Knowledge generation, diffusion & use
Supporting
institutions
National innovation
system
National innovation capacity
COUNTRY PERFORMANCE
Growth, jobs, competitiveness
Factor market
conditions
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.
environment
Traditional view: enterprise
as the focal object
environment
enterprise
strategy
organization
E
enterprise
E
Expanded view: enterprise as
part of interacting system
E
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
Actors control resources
(alone or jointly). Actors
have a certain knowledge
of resources.
Resources:
heterogenous, human
and physical, and
mutually dependent
NETWORK
Activities link resources
to each other. Activities
change or exchange
resources through use of
other resources.
Actors perform activities.
Actors have a certain
knowledge of activities.
Activities: include
transformation act,
transaction act and
activity cycles
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
efficiency and
flexibility presure
firms
network
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
REASONS for LINKAGE CREATON
Transaction Cost Theory
. transaction cost
reduction
Resource Based Theory,
RBV
Network Theory
improve market power for . resource and knowledge
. resource and capability
acquisition motivated by
acquisition
social relations
. uncertainty management . effectiveness and
efficiency
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
- macro- and micro-positions (relationships between
individual firms vs. the firm's relationship to the
network as a whole) strength of relationship
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
• 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 productivity
Social 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
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:
A trusts B
B
A
C trusts B
then
A trusts C
A
C
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”