IE 463

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IE 463
Lec 4. Firm and External Cooperation-2
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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

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• 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 (Dells ability to
  constantly segment operating businesses to match
  demands).

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• 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.

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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.

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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
Process
Product
Services
Organizational
Goods
Technological
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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.

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• 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
Economic Growth
Innovation
Large Firms with Industrial RD Labs
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• 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
  firms specific culture

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• 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).

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• 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.

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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).
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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?
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• 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,
• from steam engine to gasoline engine
• from chemical medicines to molecular medicines

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• 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.

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PROFILE OF SUCCESSIVE TECHNOLOGICAL INNOVATIONS
successor technology (automobile)
Performance
Physical limit of technology
discontunity
established technology (horse and cart)
Effort (funds)
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SYSTEMS VIEW OF INNOVATION

• the rate of technological change and companies
• effectiveness
• do not depend simply on the scale of RD
• but also, on the way available resources are
• managed and organised

System of Innovation
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CHARACTERISTICS OF THE INNOVATION SYSTEM
interactivity multidisciplinary
connectivity Linkages
integration Know-how internal /external
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• 1. Network of institutions that interact to
  initiate, import and diffuse new technologies
• government policy
• corporate RD
• 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 RD intensity
• nature of RD organization

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Public RD/Labs
Public Sector ST Users
University
Rest of World incl. MNEs
Government
Private Corporations
Private Labs
Financial Institutions
Private Public Business Support Services
finance
knowledge
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OECD SYSTEMS OF INNOVATION PERSPECTIVE
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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.

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• 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.

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Traditional view enterprise as the focal object
environment
environment
strategy
enterprise
organization
E
enterprise E
Expanded view enterprise as part of interacting
system
E
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• 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)

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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 perform activities. Actors have a certain
knowledge of activities.
Actors control resources (alone or jointly).
Actors have a certain knowledge of resources.
NETWORK
Activities link resources to each other.
Activities change or exchange resources through
use of other resources.
Activities include transformation act,
transaction act and activity cycles
Resources heterogenous, human and physical, and
mutually dependent
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• 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

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• 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

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• 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 firms 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

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• 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
network
firms
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• 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

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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
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• 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 partys activities
  together
• 3. The distinctive capabilities of an
  organization develop
• through interactions in its relationships
  that it maintains
• with other parties

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• 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

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REASONS for LINKAGE CREATON
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
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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.

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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

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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

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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

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Networks as process
- macro- and micro-positions (relationships
between individual firms vs. the firm's
relationship to the network as a whole) strength
of relationship

• 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

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• 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

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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
  societys 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 groups ability to work jointly
• the concept identifies the structure created from
  collaborative effort as capital.

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• 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

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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
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• 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.
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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
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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