Economic Foundations of Strategy Chapter 5: Dynamic ResourceBased Theory: Capabilities

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Economic Foundations of StrategyChapter
5Dynamic Resource-Based Theory Capabilities

• Joe Mahoney
• University of Illinois at Urbana-Champaign

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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

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Itami and Roehl (1987)Mobilizing Invisible
Assets

• Itami and Roehl (1987) emphasize the vital role
  contribution of accumulated experience and
  information to a corporations strategic
  resources.
• The invisible assets of the firm are based on
  information.
• Invisible assets are often a firms only real
  source of sustainable competitive advantage.

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Itami and Roehl (1987)Mobilizing Invisible
Assets

• Invisible Assets
• Trade Secrets
• Data Bases
• Information
• Personal and organizational networks
• Know-how
• Brand name
• Reputation
• Corporate Culture

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Itami and Roehl (1987)Mobilizing Invisible
Assets

• Many invisible assets are quite fixed. 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.

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Itami and Roehl (1987)Mobilizing Invisible
Assets

• Accumulation of these resources requires
  on-going, conscious, and time-consuming 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.

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Itami and Roehl (1987)Mobilizing Invisible
Assets

• The important features of invisible assets they
  are unattainable with money alone, are time
  consuming to develop, are capable of multiple
  simultaneous use, and yield multiple,
  simultaneous benefits --- make it crucial to
  carefully consider strategies for accumulating
  them.

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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.

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Itami and Roehl (1987)Mobilizing Invisible
Assets

• Information flow is at the heart of invisible
  assets.
• Information can be classified as
• Environmental
• Corporate
• Internal

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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.

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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.

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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 firms 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.

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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.

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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.

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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.

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Nelson and Winter (1982)
An Evolutionary Theory of Economic
Change

• Argue that much of firm behavior can be more
  readily understood as a reflection of general
  routines and strategic orientations coming from
  the firms 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.

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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

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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 (RD), or advertising and
• Business strategies about product diversification
  and overseas investment.

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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.

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Nelson and Winter (1982)
An Evolutionary Theory of Economic
Change

• In their evolutionary theory, routine-guided,
  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.

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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

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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.

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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

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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.