TOWARD KNOWLEDGE BASED THEORY OF THE FIRM.

DEFINITION, Knowledge has been defined as that which is known CHARACTERISTICS OF KNOWLEDGE Transferabili ! an" a##r$#riabili ! Transferability is important not only between two firms but even more critically, within the firm. Two types of knowledge are critical i.e. explicit and tacit knowledge. here, explicit knowledge is revealed by its communication, this ease of communication is its fundamental property while tacit knowledge enable explain how, enable to know about facts and theories, is revealed through its application. Therefore, its slow, costly and uncertain. Efficiency of knowledge aggregation is greatly enhanced when expressed in terms of common language. e.g. statistics is a useful language for transferring certain types of explicit knowledge! therefore, the ability to transfer and aggregate knowledge is a key determinant of the optimal location of decision making authority within the firm. "ppropriability refers to the ability of the owner of a resource to receive a return e#ual to the value created by that resource. Knowledge is a resource which is sub$ect to uni#uely complex problems of appropriability. Tacit knowledge is not directly appropriable because it cannot be directly transferred, it can be appropriated only through its application to productive activity. %ost of the explicit and all tacit knowledge is stored within individuals, much of this is created within the firm and is firm specific. MA%OR &RO&OSTIONS OF KNOWLEDGE BASED 'IEW Kn$(le")e as an i*#$r an res$+r,e $f -e fir*, Knowledge is the most strategically and significant resource of the firm as it is difficult to imitate and socially complex, heterogeneous knowledge bases and capabilities among firms are the ma$or determinants of sustained competitive advantage and superior corporate performance. The knowledge based view extends beyond the traditional concerns of strategic management such as strategic choice and competitive advantage and address some other fundamental

concerns of the theory of the firm, notably the nature of coordination within the firm, organi&ational structure, the role of management and the allocation of decision making rights, determinants of firm boundaries and the theory of innovation. 'ere, knowledge is carried through multiple entities such as culture, identity, policies, routines, documents, systems and employees and builds upon strategic management literature and extends resource based view theory of the firm. The proponents of the knowledge based view argue that the resource based perspective does not go far enough, i.e. ()* treats knowledge as a generic resource, rather than having special characteristics and does not distinguish between different types of knowledge based capabilities. R$le $f inf$r*a i$n e,-n$l$)!, +nformation technology plays an important role in the knowledge based view of the firm, in that information system can be used to synthesi&e, enhance and expedite large scale intra and inter firm knowledge management. ,rant -.//.0 critici&ed through 1the emerging knowledge based view of the firm is not a theory of the firm in any formal sense 1 S#e,iali.a i$n in /n$(le")e, Knowledge ac#uisition is brought by the recognition that the human brain has limited capacity to ac#uire, store and process knowledge. Therefore, efficiency results when individuals speciali&e in particular areas of knowledge. Kn$(le")e is -e ,ri i,al in#+ in #r$"+, i$n an" #ri*ar! s$+r,e $f 0al+e, " firm creates value through production units transformed into outputs and moving products from one market to the next. 2undamental to a knowledge based theory of the firm is the assumption that the critical input in production and primary source of value is knowledge. This implies that the key task of a manager is to accumulate and protect valuable knowledge or capability. 3uch knowledge defines a firms capacity to efficiently convert its inputs into valuable outputs and update and enhance its knowledge.

Kn$(le")e f$r*a i$n as #r$ble* s$l0in). " managers fundamental knowledge based ob$ective is to sustain above normal profits by continually discovering new knowledge or new solutions that form from uni#ue combinations of existing knowledge. " firm knowledge can be advanced by either absorbing existing knowledge external to the firm or by developing new knowledge by first identifying a problem and then discovering a valuable new solution. 2or a firm to develop new knowledge, it must identify valuable problem and conduct an efficient solution search. *aluable solutions deliver value to the firm, either through enhancement or development of a product or service by reducing the cost of production or delivery. +n choosing a problem, managers in essence choose an unknown set of potential solutions, but once a problem is chosen, the task becomes identifying relevant knowledge and then maximi&ing the probability of discovering a high value solution. G$0ernan,e ,-$i,es an" /n$(le")e f$r*a i$n. The managers task is to identify relevant knowledge sets and to craft a mechanism of governance that supports or enhances the method of search appropriate for the chosen problem. 'ere, directional search is done based on feedback for decomposable problems involving limited interaction among design choices while, heuristic research is done for non decomposable problems involving extensive interactions among design choices here knowledge is to be shared among individuals to develop common cognitive maps!.'owever, two conditions impedes such knowledge sharing i.e. humans are cognitively constrained in the speed with which they can learn i.e. assimilate, accumulate and apply knowledge. "lso, they are prone to selfish interest which may include opportunistic forms of self interest. Therefore, a manager has three distinct governance choices in supporting knowledge formation which entails markets, authority based hierarchies and consensus based hierarchies. 2or any given knowledge, managers are concerned not only with its proper governance but also with its development and protection. T-e$re i,al basis f$r +n"ers an"in) $r)ani.a i$nal inn$0a i$ns an" b$+n"aries. "n interesting feature of the knowledge based approach is that it offers a theoretical basis for understanding a number for recent organi&ational innovations and trends. These include the renovation of traditional organi&ational forms including hori&ontal and team base structures and inter firm alliances.

KNOWLEDGE BASED THEORY The /n$(le")e1base" -e$r! $f -e fir* considers knowledge as the most strategically significant resource of a firm. +ts proponents argue that because knowledge4based resources are usually difficult to imitate and socially complex, heterogeneous knowledge bases and capabilities among firms are the ma$or determinants of sustained competitive advantage and superior corporate performance. This knowledge is embedded and carried through multiple entities including organi&ational culture and identity, policies, routines, documents, systems, and employees. 5riginating from the strategic management literature, this perspective builds upon and extends the resource4based view of the firm -()*0 initially promoted by 6enrose -78980 and later expanded by others -:ernerfelt 78;<, )arney 7887, =onner 78870. "lthough the resource4based view of the firm recogni&es the important role of knowledge in firms that achieve a competitive advantage, proponents of the knowledge4based view argue that the resource4based perspective does not go far enough. 3pecifically, the ()* treats knowledge as a generic resource, rather than having special characteristics. +t therefore does not distinguish between different types of knowledge4based capabilities. +nformation technologies can play an important role in the knowledge4based view of the firm in that information systems can be used to synthesi&e, enhance, and expedite large4scale intra4 and inter4firm knowledge management -"lavi and >eidner .//70. :hether or not the Knowledge4based theory of the firm actually constitutes a theory has been the sub$ect of considerable debate. 3ee for example, 2oss -788?0 and 6helan @ >ewin -.///0. "ccording to one notable proponent of the Kn$(le")e1Base" 'ie( $f -e fir* 2KB'3 , 1The emerging knowledge4based view of the firm is not a theory of the firm in any formal senseA -,rant, .//., p. 7B90. KC5:>ED,E )"3ED *+E:. =onsiders knowledge as the most strategically significant resource of afirmE nature mainly intangtble n dynamic difficult to imitate n socially complex.

6resnt in organisations culture n identity, policies, routines, documents, systems n employees. Ts an extenstion of the ()* 52 T'E 2+(%. =apabilities n capacities lead to superior sustained performance because they are specific to each organi&ation. Knowledge resources are particularly impotant to ensure compe adv. are sustanable, as these resources r difficult to imitate =urrently we r witnessing a structural change in the productive paradtgm. the change from manufacture to services in the ma$ority of developed economtes is based on the mantpulation of info n symbols n not on the use of phystcal products. +nformation technology or systems can be used to synthesi&e, enhance n expedite large scale intra n inter firm knowledge management T">ECT ts recogni&ed as the main cretor of sustained adv. in high performance firms. The capacity to learn faster than competitors could be the only sustained competitive adv. This dynamic capability builds up overtime a historical or path dependecy, creating causal ambiguity -creating barriers to imitability n making it very difficult for other firms to recreate the uni#ue historical evolution each organi&ation develops0 n it establishes a basis for competitive adv. The firm absobs internal n external knowledge, combines them with pre ac#uired knowledge n creates new one. T'E 653T +CDF3T(+"> E=5C5%G T'"T +3 E%E(,+C, )"3ED F65C KC5:>ED,E '"*E %"DE E=5C5%+= 5(,"C+3"T+5C3 T5 )E=5%E *+(TF">, geographically dispersed, presenting knowledge networks highly dependet on computer based communication n technology. 2irms negotiate almost exclusively in the cyberspace n give extreme emphasis to learning n knowledge based work. es$+r,e1Base" 'ie( The resource4based view -()*0 is that a basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firmHs disposal. To transform a short4run competitive advantage into a sustained competitive advantage re#uires that these resources are -e er$)ene$+s in nature and not perfectly mobile. Effectively, this translates into valuable resources that are neither perfectly i*i able nor s+bs i + able without great effort. +f these conditions hold, the firms bundle of resources can help it sustain above average returns.

T-e 'RIN C-ara, eris i,s "fter identifying its potential key resources, the company must then evaluate whether these resources fulfill the following criteria -referred to as *(+C0I

*aluable J " resource must enable a firm to employ a value4creating strategy, by either outperforming its competitors or reducing its own weaknesses. (elevant in this factor is that the transaction costs associated with the investment in the resource cannot be higher than the discounted future rents that flow out of the value4creating strategy.

(are J To be of value, a resource must be rare by definition. +n a perfectly competitive strategic factor market for a resource, the price of the resource will be a reflection of the expected discounted future above4average returns.

+nimitable J +f a valuable resource is controlled by only one firm it could be a source of a competitive advantage This advantage could be sustainable if competitors are not able to duplicate this strategic asset perfectly. "n important underlying factor of inimitability is causal ambiguity, which occurs if the source from which a firms competitive advantage stems is unknown. +f the resource in #uestion is knowledge4based or socially complex, causal ambiguity is more likely to occur as these types of resources are more likely to be idiosyncratic to the firm in which it resides. Knowledge4based resources are 1Kthe essence of the resource4based perspective.A

Con4substitutable J Even if a resource is rare, potentially value4creating and imperfectly imitable, an e#ually important aspect is lack of substitutability. +f competitors are able to counter the firms value4creating strategy with a substitute, prices are driven down to the point that the price e#uals the discounted future rents, resulting in &ero economic profits.

" company should care for and protect resources that possess these characteristics, because doing so can improve organi&ational performance. The *(+C characteristics mentioned are individually necessary, but not sufficient conditions for a sustained competitive advantage. :ithin the framework of the resource4based view, the chain is as strong as its weakest link and therefore re#uires the resource to display each of the four characteristics to be a possible source of a sustainable competitive advantage -2igure 70.

2orecasts 3trategic %anagement 6rocessI 2i... ,ive us feedbackI ambiguity 3omething liable to more than one interpretation, explanation, or meaning, assuming it cannot be determined from its context. A&&EARS IN THESE RELATED CONCE&TS4

=ulture43pecific Cuances of Decision4%aking *ision "mbiguity

KC5:>ED,E )"3ED T'E5(G4K)T T-e KB' $f -e fir* re,$)ni.es /n$(le")e as -e *$s s ra e)i,all! si)nifi,an res$+r,e $f a fir*. I s #r$#$nen s ar)+e -a be,a+se /n$(le")e1base" res$+r,es are +s+all! "iffi,+l $ i*i a e an" s$,iall! ,$*#le5, -e er$)ene$+s /n$(le")e bases an" ,a#abili ies a*$n) fir*s are -e *a6$r "e er*inan s $f s+s aine" ,$*#e i i0e a"0an a)e an" s+#eri$r ,$r#$ra e #erf$r*an,e. T-is /n$(le")e is e*be""e" an" ,arrie" -r$+)- *+l i#le en i ies in,l+"in) $r)ani.a i$nal ,+l +re an" i"en i !, #$li,ies, r$+ ines, "$,+*en s, s!s e*s, an" e*#l$!ees. This knowledge is embedded and carried through multiple entities including organi&ational culture and identity, policies, routines, documents, systems, and employees. Knowledge resources are particularly important to ensure that competitive advantages are sustainable, as these resources are difficult to imitate they are the foundation for sustainable differentiation. The perspective of the K)* of the firm is consistent with the approach to organi&ations as cultures -)alogun and Lenkins, .//B0. =onsidering that organi&ations are conceptualised as cultures, they are suppose to learn through activities that involve cultural artefacts. 5rgani&ational learning allows the firm to ac#uire, to change and to preserve its organi&ational capabilities -=ook and Ganow, 78890. =ulture is most repeatedly defined after 3chein -3chein, 78;9, apub, )alogun

and Lenkins, .//B0, as a set of assumptions and beliefs held in common and shared by members of an organi&ation, or as shared beliefs and knowledge after Conaka and Takeuchi -Conaka and Takeuchi, 7889, apub, )alogun and Lenkins, .//B0. 5rgani&ational culture is, in each moment, the stock of knowledge, coded or not, integrated in patterns and recipes of action to be taken before certain situations. Time and routines often make knowledge become tacit, embedded, and a drive for action -)alogun and Lenkins, .//B0. " routine consists of behaviour that is learned, highly patterned, repeated and founded, even if only partly, in tacit knowledge -:inter, .//B0. 2ollowing the words by Conaka -78870 1K the only true lasting competitive advantage is knowledgeKA.

THE RESORCE BASED 'IEW THEORY The resource based view of the firm is less a theory of firm structure and behavior as an attempt to explain and predict why some firms are able to establish positions of sustainable competitive advantage and in so doing, earn superior returns. The resource based view perceives the firm as a uni#ue bundle of idiosyncratic resources and capabilities where the primary task of management is to maximi&e value through the optimal deployment of existing resources and capabilities, while developing the firms resource base for the future. The resource based view of the firm recogni&es the transferability of the firms resources and capacities as critical determinant of their capacity to confer sustainable competitive advantage )arney,78;?!. The implications of ()* are unclear for two reasonsE The various contribution lack a single integrating framework and, >ittle effort has been made to develop the practical implications of this theory. The individual resources of the firm include items of capital e#uipment, skills of individual employees, patents, brand names, finance etc. 3ix ma$or categories of resources have been identified as physical

resources, human resources, financial resources, technological resources, reputation resources and organi&ational resources. The turnaround strategy is based on the idea that resources of the ac#uired company can be put to more profitable use. The returns from transferring the existing asset into more productive employment can be substantial, the turnaround of some companies in the F3 are evidence toward a sense4making re4thinking of ()* The (esource4)ased *iew is predicated on explaining performance differences between firms. The basic argument is that value creating resources and capabilities are heterogeneously distributed among firms, opening up the possibility of above average returns. The distribution of resources and capabilities can remain durably heterogeneous, due to failures in strategic factor markets, resource scarcity and uncertain imitability -)arney, 78;?bE )arney, 78870. 5ne of the key hypotheses of ()* is that the presence of strategic resources is sufficient to establish the potential for competitive advantageI there is a direct relationship between the resources and performance.

RESO7RCE BASED THEORY The res$+r,e1base" 0ie( -RB'0 as a basis for the competitive advantage of a firm lies primarily in the application of a bundle of valuable tangible or intangible resources at the firmHs disposal -%wailu @ %ercer, 78;B p7<., :ernerfelt, 78;<, p7M.E (umelt, 78;<, p99M499;E 6enrose, 7898 7!0. To transform a short4run competitive advantage into a sustained competitive advantage re#uires that these resources are heterogeneous in nature and not perfectly mobile -I .! p7/947/?E 6eteraf, 788B, p7;/0. Effectively, this translates into valuable resources that are neither perfectly imitable nor substitutable without great effort -)arney, 7887EI .! p77M0. +f these conditions hold, the bundle of resources can sustain the firmHs above average returns. The *(+5 and *(+C -see below0 model also constitutes a part of ()*. There is strong evidence that supports the ()* -=rook et al., .//;0. The key points of the theory areI

7. +dentify the firms potential key resources. .. Evaluate whether these resources fulfill the following criteria -referred to as VRIN0I
o

Valuable J " resource must enable a firm to employ a value4creating strategy, by either outperforming its competitors or reduce its own weaknesses -I .! p88EI B! pB?0. (elevant in this perspective is that the transaction costs associated with the investment in the resource cannot be higher than the discounted future rents that flow out of the value4creating strategy -%ahoney and 6andian, 788., pBM/E =onner, 788., p7B70.

Rare J To be of value, a resource must be rare by definition. +n a perfectly competitive strategic factor market for a resource, the price of the resource will be a reflection of the expected discounted future above4average returns -)arney, 78;?a, p7.B.47.BBE Dierickx and =ool, 78;8, p79/<EI .! p7//0.

In-imitable J +f a valuable resource is controlled by only one firm it could be a source of a competitive advantage -I .! p7/M0. This advantage could be sustainable if competitors are not able to duplicate this strategic asset perfectly -6eteraf, 788B, p7;BE )arney, 78;?b, p?9;0. The term isolating mechanism was introduced by (umelt -78;<, p9?M0 to explain why firms might not be able to imitate a resource to the degree that they are able to compete with the firm having the valuable resource -6eteraf, 788B, p7;.47;BE %ahoney and 6andian, 788., pBM70. "n important underlying factor of inimitability is causal ambiguity, which occurs if the source from which a firms competitive advantage stems is unknown -6eteraf, 788B, p7;.E >ippman and (umelt, 78;., p<./0. +f the resource in #uestion is knowledge4based or socially complex, causal ambiguity is more likely to occur as these types of resources are more likely to be idiosyncratic to the firm in which it resides -6eteraf, 788B, p7;BE %ahoney and 6andian, 788., pB?9EI .! p77/0. =onner and 6rahalad go so far as to say knowledge4based resources are 1 the essence of the resource-based perspectiveA -788?, p<MM0.

Non-substitutable J Even if a resource is rare, potentially value4creating and imperfectly imitable, an e#ually important aspect is lack of substitutability

-Dierickx and =ool, 78;8, p79/8EI .! p7770. +f competitors are able to counter the firms value4creating strategy with a substitute, prices are driven down to the point that the price e#uals the discounted future rents -)arney, 78;?a, p7.BBE 3heikh, 7887, p7BM0, resulting in &ero economic profits. B. =are for and protect resources that possess these evaluations, because doing so can improve organi&ational performance -=rook, Ketchen, =ombs, and Todd, .//;0. The *(+C characteristics mentioned are individually necessary, but not sufficient conditions for a sustained competitive advantage -Dierickx and =ool, 78;8, p79/?E 6riem and )utler, .//7a, p.90. :ithin the framework of the resource4based view, the chain is as strong as its weakest link and therefore re#uires the resource to display each of the four characteristics to be a possible source of a sustainable competitive advantage

(E35F(=E )"3ED T'E5(G .based on application of valuable tangible or intangible resources at the firms disposal. should be heterogenous in nature n not perfectly mobile , i.e not perfectly imitable nor substitutable without great effort inorder to sustain the firms above average returns. (esources must be valuable, rare, in imitable and non substitutable. (esources can be divided into twoE resources and capabilities. resources are trdable n non specific to the firmE capabilities are firm specific n used to engage resources in the firm, such as implicit processes to transfer knowledge within the firm. Tacitness-accumulated skill based resources ac#uired through learning by doing0 complexity-large no. of interrelated resources being used0 n specificity-dedication to certain resources to specific activities0 will result in a competitive barrier. =ertain resorces are accumulated overtime n a competitor cannot perfectly imitate such resources e.g company reputation strength of early entrants over late entrantsE 7.technological know how that enable them to perform at superior level ..have developed capabilities with time that enable them to out

perform lae entrants B.switching costs incurred to customers if they decide to migrate <.customer awareness n loyalty. 'owever, revolutionary technology changes will eliminate the advantage of early entrants...make resources invalid or out dated n curtail firms dominance. sustainable competitive advantage discussed in ()* +3 "CT+ =5%6ET+T+*E +.E a world of non competitive imitation. +C "C E*E( ='"C,TC, EC*T(5C%ECT, CEED T5 exploit exising business opportunities ustng present resources while generating n develo ping a new set of resources to sustain its competitiveness in he future market environmentsE hence organisations should engade in resource management n resource development.

(E35F(=)"3ED T'E5(G The resource based view grew from the work of economists who, in seeking to identify the factors which gave rise to imperfect competition and supper normal profits ,drew attention to differences between firms in terms of technical know4how ,patents trademarks ,brand awareness and managerial ability .-chamberlin,788BE>eonaerd et al ,78?9 penrose,7898E:ernefelt ,78;<0. The focus of the resource Jbased model of competitive advantage is on the relationship between an organi&ations resources and its performance -furer et al,.//;0.(esource based view sees above 4average profitability as coming from effective deployment of superior or uni#ue resources that allow firms to have lower costs or better products rather than from tactical manoevring or product market postioning -2ahy .///0.3uch resources include tangble assets ,such as a plant and e#uipment Eintangible assets ,such as patents and brandsEand capabilities such as the skills ,knowledge and aptitudes of individuals and groups .

RESO7RCE DE&ENDENCE THEORY (esource dependence theory -(DT0 is a study of how external resources to an organi&ation affect the behavior of the said organi&ation. )oth 3trategic and tactical management of any company are adversely affected by the procurement of external 'uman (esources. Dependence theory has implication regarding the optional division structure of an organi&ation recruitment of )oard members and employee, production strategies , contract structure ,external organi&ation links to mention a few. The basic argument of (DT is as followsI4 5rgani&ation depend on resources The resources come from its environment The environment also contain other organi&ation (esources needed by one organi&ation come from other organi&ations The resources are basic power >egally independent organi&ation can depend on each other

Cote that organi&ation "s power over organi&ation ) is e#ual to organi&ation )s dependence on organi&ation "s resources. %anages throughout organi&ation know that their success depends on customers demand. +n this case customers demand become the ultimate resource to any organi&ation. -httpINNen.wikipedia.ok0 "ccording to this "rticle in :ikipedia, dependence theory recently has been under scrutiny in several reviews and meta4analytical studies, 'illman et al -.//80E Davis and cob -./7/0E Drees @ 'eugens all in their discussion about this topic agreed that the resource dependence theory is one of the many theories of an organi&ation behavior and does not explain the organi&ational performance per se. "ccording to Davis @ cobb -.//80, in their research article they consolidated many works including that of Leff in 78M;, the argument on dependence theory they explained it as the

reason for mergers and )oards interlocks so that organi&ations relationships can be used to put into control organi&ational market failures. This is because the main preposition of this theory is dependence of resource by organi&ation and the resource mostly coming from their environmental counterparts. This theory focuses on three aspects The social context matters 5rgani&ation strategies to enhance their interest 6ower that will come from resources

The main strategic position for any organi&ation is to attempt to alter their dependence relationship by minimi&ing their own dependence on other organi&ation or by increasing the dependence of other organi&ation on them. +n this context organi&ation are viewed as coalitions altering their structure and patterns of behavior to ac#uire and maintain needed external resources. (DT 6roposes that organi&ations lacking essential resources will always seek to establish relationships with the ones who have enough of the resources, so that they can depend on them The theory has the following assumption 5rgani&ations are assumed to be comprised of external and internal conditions which emerge from social exchanges Environment is assumed to contain scarce and valued resources essential to organi&ation survival 5rgani&ation are assumed to work toward two related features Ji.e. "c#uiring control over resources that minimi&e their dependence on other organi&ation and controlling resources that maximi&e dependence of others on themselves -pffer, 78M;0 .

RESO7RCE DE&ENDENCE THEORY In r$"+, i$n The (esource Dependence Theory -(DT0 was first developed by 6feffer and 3alancik -78M;0 in which they characteri&ed the corporation as an open system, dependent on contingencies in the external environment. Cienhuser -.//;0 studied the extent to which (esource Dependence Theory -(DT0 was able to explain the behavior of organi&ations, and the results of decision making actions such as organi&ational structures and processes. 'e elaborated the influence of external and internal agents controlling critical resources and the power that they weld which influences behavior and the emergence of different organi&ational structures such as mergers. Davis and =obb -.//80 interpreted the (DT as having three core ideasI social context mattersE organi&ational strategies to enhance autonomy and pursue interestsE and the importance of power for understanding internal and external actions of organi&ations. Ke! &re"i, i$ns 2&r$#$si i$ns3 "ccording to Cienhuser -.//;0 the fundamental proposition stated that organi&ations or organi&ational sub4units! controlling resources that other actors -executives0 need have power over these actors -executives0. (esources differ and are relative to each particular context. )urkhardt and )rass -788/0 examined knowledge as a resource of individuals in companies and their positions of power. They suspected that people that adopt and use new technologies first have a more central network position and are more often sought for advice and possess a stronger position of power. This was confirmed from the results of two surveys done by 3aidel -78870 " second closely related proposition isI the larger the dependency on resources of actor " from actor ), the more likely " is to meet the demands of ). This has been empirically proven in a study of +sraeli managers by 6feffer -78M.a0 who found a positive correlation between the share of turnover, which the company attained by selling products to state organi&ations, with the willingness to meet demands -hypothetically named to those surveyed0 of state actors. 3alanciks findings -78M80 showed that women are thus more supported in firms that are

dependent on $obs from state organi&ations. Those firms more dependent on such $obs are more likely to meet demands of state organi&ations for e#ual rights than less dependent ones. The third proposition is that uncertainty will trigger off strategies to reduce uncertainty. 6feffer -78M.b0 empirically tested that mergers occur more often in industries highly dependent on resources and where uncertainty is high more soE where, markets are concentrated to a moderate extent. 3imilarly, according to 6feffers -78M.cE 78MB0 findings, si&e and composition of the board of directors are affected by resource dependency. The probability of cooptation increases with the extent that an individual controls resources and thus reduces uncertainty. Tolbert -78;90 examined the connection between resource dependency and organi&ational structure. The greater the resource dependency, the more the organi&ation can differentiate itself according to this dependency. Dunford -78;M0 analy&ed how companies gain control over new technologies and information about these technologies to reduce dependency or to increase resource control through patent rights and company trade secrets. )aker and "ldrich -.//B0 examined how company founders react to the dependency on employees who possess #ualifications as critical resource by reducing their dependency. +mplementing 1correctA strategies to reduce uncertainty has a positive effect on organi&ational performance. "ccording to this proposition, successful organi&ations should have different, more strongly 1interweavedA connections between management and control instances than those less successful. 6feffer -78M.c0 found out that firms that correspond rather with 1optimalA board structure and si&e are more successful. 3heppard -78890 tested that the amount of controlled resources, the number of personal interconnections that a com pany has -number of board members in other companies0, but also the stability of the industry -low uncertainty0 has positive effects on the ability of firms to survive. " fifth proposition can phrased thusI 6owerful actors use their power to their advantageE that also means that they try to extend their power over and above their contribution to resource control. Their power is reinforced and cannot be reduced again easily by changes in resource demands of the organi&ations. +t has been proven that powerful actors in firms have a longer period of service to the firm than those less powerful. +deally, they are needed for longer due to the functionality of the resources controlled by them and thus they remain in the organi&ation for longer periods of time. 6owerful managers can better defend themselves when environmental change occurs and

they retain their positions for longer, using their abilities to secure resources. - 6feffer and 3alancik, 78MME "llen and 6anian 78;.0 +n conclusion, (DT does not view organi&ations as formations with homogeneous interests but assumes different interests that leads to conflicts in which the actors within and outside the organi&ation use their power to reali&e their interests. The power mechanism, striving for retaining and extending power, plays a ma$or role without ignoring the importance of efficiency. +t is not environment or resources that determine how organi&ational core groups decide or act, but cognitively and socially constructed environment. The organi&ation is not viewed as simply adapting to more or less 1dynamicA environment. (ather (esource Dependence Theory assumes organi&ations create their environment too, change, disapprove resistance and negotiate mergers. 5n the whole, (esource Dependence Theory thus significantly contributes to explaining behavior, structure, stability, and change of organi&ations. +t can explain behavior of organi&ations well.

DYNAMIC CA&ABILITY THEORY "ccording to David Teece the originator of this theory -Dynamic capabilities0 he explained that a capability is a set of learned processes and activities that enable a company to give participator outcomes. The practices typically start in one company and or two then may spread to entire industry. Today every automobile company know how to build an assembly plant or how to get relatively #uick e#uipments turns on the line, this is after .9 yrs of practice and experience by Toyota company. Dynamic capabilities are uni#ue to each company and are rooted deep in the companys history. -kleiner, ./7B para 70 ,ratton and ,hoshall called them 1signature processA and Teece explains this signature process as things that a company has done in the past going back to its origin. The dynamic part of this theory is that as the business niche changes the capabilities also change accordingly.

The proposition of this theory as explained by Teece -strategic mgt $ournal, dec .//M0 is that companies have to get the future right by positioning todays resources properly for tomorrow. This can be done through sensing -indentifying opportunities outside your environment0, sei&ing -mobili&ing resources to capture the opportunities0, and transforming -continuous renewal0, this framework is referred to as explicating dynamic capabilities. The business ecosystem today has developed new elements of competition which among others include human capital research and education institutions etc. in order to embrace these new elements of competition dynamic capabilities framework has emerged. This is for the purpose of offering comprehensive, multi4displinary approach to managerial decision making -Teece ./7/0. The clusters of activities mentioned earlier as propositions may be elaborated as followsI 3ensing involves exploring technological opportunities in the environment, listening to customers, probing members etc. 3ei&ing is a capability of designing business models to satisfy customers and add value. 3ecuring capital and human resources. =ompanies that successfully build assets within the eco4system stand to profit more. Employee motivation is very vital. "pple inc. maintained an estimated </O gross profit from the value chain on its hard4drive based +4 pods, even though it did not manufacture any single part of the product ->inden etal .//80. Transforming capabilities are needed when radical new opportunities are to be addressed, also they are needed to periodically soften the rigidness that develop overtime from asset accumulation, standard operating procedures and insider misappropriation of rent streams. This is always because of the changing niche of the business and its environments. The basic assumption of dynamic capabilities is that core competences should be used by companies to modify short term competitive positions that may later be used to build long4term competitive advantage. +ts known that this capability grew out of resource based view of the firm and the concept of routine in evolutionary theories of organi&ation.

The main difference between the resource based view of the firm and the dynamic capabilities view is that the latter focuses on competitive survival rather than achievement of sustainable competitive advantage. Today the most pressing issue in business is competitive survival. 3trategic scholars ,regory >udwig and *on pemperton -./770, +n one of their empirical studies on this topic show that its important to focus on the process of dynamic capability building rather than generating further abstracts -:ikipedia article, dynamic capabilities0

DGC"%+=3 ="6")+>+T+E3 T'E5(G =ompetitive advantage is unlikely to remain static forever .=ompetitors, technology, managers, customers, and many other factors are likely to change over time. There should be proactive strategy to manage this process. 5rgani&ations should seek to manage and shape the dynamics of the environment. The organi&ations should balance between supporting its long term sustainable advantage and at same engaging in the constant change and renewal. There should be laid down guide lines to exploit real benefits of dynamic strategic process .This concept is guided by the concept of having continuous flow of resources and changes competitive advantage rather than strategic list. There is no clear way restructuring the concept of a business that has dynamic strategy .The three concept frameworks is built around a three stage approach to dynamics. 7. 3ensing the changes in the environment .. 3ei&ing the opportunities that such changes present B. 3urveying the outcomes of such changes, not $ust in a reflective way but also to shape the future change. Dynamics capabilities are organi&ations abilities to develop and change competences to meet rapidly changing environment. Environments are changing faster .There is need for organi&ations to put emphasis on the organi&ations capability to change, innovate, be flexible and learn how to adapt to a rapidly changing environments.

DGC"%+= ="6")+>+TG T'E5(G The Dynamic =apabilities "pproach -D="0 which emphasi&es the mobili&ation of the firms capabilities to achieve superior performance came as an extension to the ()*. :hile it recogni&es the importance of developing uni#ue, hard4to 4copy resources and capabilities, the D=" contends that in and by themselves those characteristics do not provide the basis for sustainable competitive advantage in an environment of high velocity change -Teece, 6isano et al. 788ME Teece .//M0. The key to sustainable competitive advantage from the D=" perspective resides in a kind of flexible tenacity, a perennial alertness and an evolutionary fitness that enable the firm to perpetually renew itself in order to establish and maintain extraordinary performance in an ever changing business environment. The D=" is rooted in the 3chumpeterian perspective of the business environment and is constructed on the premise that it is the adroit deployment the firms resources and capabilities that provides the source of sustained success. +t highlights the critical importance of competencies that transcend technical capabilities and infuse the firm with nimbleness, innovativeness and evolutionary fitness for it to thrive. +n this respect, the D=" is often viewed as an extension of the ()* -Teece .//M0. +n contrast to resources, capabilities are intangible and non4observableE they are resistant to monetary valuation and cannot be traded except in their entirety -'oopes, %adsen et al. .//B0. This is to say that if a firm wants to get the exact capabilities that resides in a unit of a competing company they cannot be

replicated simply by hiring a couple of the workers. +t would re#uire the ac#uisition of the entire unit. 5rgani&ational capability is the ability to coordinate the tasks performed by the firm and exploitation of the available resources to achieve a well defined output or outcome -'elfat and 6eteraf, .//B0. +n this regard, organi&ational capabilities are firm specific, socially complex attributes which reside within corporate culture and network of employees-"mit and 3choemaker 788BE =ollis 788<0 . "s such, organi&ational capabilities are built rather than bought -%akadok .//70. The firm does not exist except for resources, and even if resources are present it cannot produce without organi&ational capabilities. (esources are observable and substantial inputs. =apabilities tend to be nebulous and harder to pin down. %etaphorically speaking resources are the body and capabilities are the soul of strategy. T-e "!na*i, ,a#abili ! a##r$a,- f$,+ses a en i$n $n -e fir*8s abili ! $ rene( i s res$+r,es in line (i - ,-an)es in i s en0ir$n*en . D!na*i, ,a#abili ies refer $ -e fir*8s abili ! $ al er -e res$+r,e base b! ,rea in), in e)ra in), re,$*binin) an" releasin) res$+r,es 2Eisen-ar" 9:9 C. B$(*an an" '. A*br$sini an" Mar in, 9;;;3. T-e! *a! in0$l0e #r$,esses $f ,$$r"ina i$n, re#li,a i$n, learnin) an" re,$nfi)+ra i$n 2Tee,e, &isan$ an" S-+en, <::=3. In -ese ($ *a6$r ,$n rib+ i$ns $ -e DC', Tee,e, &isan$ an" S-+en 2<::=3 an" Eisen-ar" an" Mar in 29;;;3, -e! *a/e n$ ,lear "is in, i$n be (een ,a#abili ies #erf$r*e" a ,$r#$ra e ra -er

-an SB7 le0el. D!na*i, ,a#abili ies are b+il ra -er -an b$+)- in -e *ar/e , an" -e! are e*be""e" in -e $r)ani.a i$n 2see Ma/a"$/, 9;;< f$r an elab$ra i$n $f -is #$in 3. T-ese ,a#abili ies are li/el! $ be #a - "e#en"en r$+ ines 2Eisen-ar" an" Mar in, 9;;;3 an" as s+,- -e! *a! resis i*i a i$n b! ri0al ,$r#$ra i$ns.

This source of competitive advantage, dynamic capabilities, emphasi&es two aspects. 2irst, it refers to the shifting character of the environmentE second, it emphasi&es the key role of strategic management in appropriately adapting, integrating, and re4configuring internal and external organi&ational skills, resources, and functional competences toward changing environment. 5nly recently have researchers begun to focus on the specifics of developing firm4specific capabilities and the manner in which competences are renewed to respond to shifts in the business environment. The dynamic capabilities approach provides a coherent framework to integrate existing conceptual and empirical knowledge, and facilitate prescription. This paper argues that the competitive advan is tage of firms stems from dynamic capabilities rooted in high performance routines operating inside the firm, embedded in the firmHs processes, and conditioned by its history. +t offers dynamic capabilities as an emerging paradigm of the modern business firm that draws on multiple disciplines and advances, with the help of industry studies in the F3" and elsewhere. The Dynamic =apabilities 2ramework helps identify the factors likely to impact enterprise performance. +t is gradually developing into a -interdisciplinary0 theory of the modern corporation -Teece, ./7/0. The Dynamic =apabilities perspective goes beyond a financial4statement view of assets to emphasi&e the 1soft assetsA that management needs to orchestrate resources both inside and outside the firm. This includes the external linkages that have gained in importance, as the expansion of trade has led to greater speciali&ation. +t recogni&es that to make the global system

of vertical speciali&ation and co4speciali&ation work, there is an enhanced need for the business enterprise to develop and maintain asset alignment capabilities that enable collaborating firms to develop and deliver a $oint 1solutionA to business problems that customers will value. Dynamic capabilities can usefully be thought of as belonging to three clusters of activities and ad$ustmentsI -70 identification and assessment of an opportunity -sensing0E -.0 mobili&ation of resources to address an opportunity and to capture value from doing so -seizing0E and -B0 continued renewal -transforming0. These activities are re#uired if the firm is to sustain itself as markets and technologies change, although some firms will be stronger than others in performing some or all of these tasks. 6erformance of these activities draws on all the skills and disciplines used in the curriculum of business schools everywhere. The Dynamic =apabilities 2ramework helps organi&e and harness -academic0 disciplinary knowledge so as to apply it to the task of building durable competitive advantage at the enterprise level. 3ei&ing capabilities include designing business models to satisfy customers and capture value. They also include securing access to capital and the necessary human resources. Employee motivation is vital. ,ood incentive design is a necessary but not sufficient condition for superior performance in this area. 3trong relationships must also be forged externally with suppliers, complementors, and customers. =ompanies that successfully build and orchestrate assets within the ecosystem stand to profit handsomely. "pple retained an estimated </ percent of the gross profits from the entirety of the value chain on its hard drive4based i6ods, despite manufacturing no part of the product itself ->inden et al., .//80. This is not counting the revenue from licensing makers of i6od accessories or sales from the iTunes %usic 3tore. Transforming capabilities are needed most obviously when radical new opportunities are to be addressed. )ut they are also needed periodically to soften the rigidities that develop over time from asset accumulation, standard operating procedures, and insider misappropriation of rent streams. " firms assets must also be kept in alignment to achieve the best strategic 1fitAI firm with ecosystem, structure with strategy, and assets with each other. =omplementarities need to

be constantly managed -reconfigured as necessary0 to achieve evolutionary fitness, avoiding loss of value should market leverage shift to favor external complements. "pple has proved to be a paradigmatic practitioner of dynamic capabilities as it has created and transformed a series of markets. Table . shows how each of its ma$or product introductions reflected aspects of the ma$or categories of dynamic capabilities. +n particular, "pples strategy implementation has created and shaped markets. Referen,es Teece, David L. -.//M0. 1Explicating Dynamic =apabilitiesI The Cature and %icrofoundations of -3ustainable0 Enterprise 6erformance,A Strategic Management Journal, .;-7B0I 7B7847B9/.

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6hotograph by Lonathan 6ayne Every great company is involved in building great capabilitiesI gaining competitive advantage from the things it does exceptionally well. +n the last few years, the growing recognition of capabilities importance in management strategy and business innovation has made David Teeces work particularly relevant. " professor at the 'aas 3chool of )usiness at the Fniversity of =alifornia at )erkeley, Teece originated the theory of 1dynamic capabilitiesA to explain how companies fulfill two seemingly contradictory imperatives. They must be both stable enough to continue to deliver value in their own distinctive way and resilient and adaptive enough to shift on a dime when circumstances demand it. The dynamic capabilities concept is noteworthy for its explicit repudiation of the economics mainstream, which re#uired Teece to turn against his own academic heritage. 5riginally from Cew Qealand, he studied economics at the Fniversity of 6ennsylvania, where one of his mentors was Cobel laureate 5liver :illiamson. -Teeces work, in turn, influenced management strategy theorist ,ary 6isano and business innovation expert 'enry =hesbrough, who were his students and collaborators.0 Teece sat down with us at the )erkeley (esearch ,roup in Emeryville, =alif.Ra firm that he cofounded in ./7/ and chairsRto talk about the origins of the theory, the relationship of economic value to capabilities4driven strategies, and the ever4challenging #uest to define how companies can reliably develop dynamic capabilities of their own.

S?B4 W-a is a "!na*i, ,a#abili !@ TEECE4 " capability is a set of learned processes and activities that enable a company to produce a particular outcome. 5rdinary capabilities are like best practices. They typically start in one or two companies and spread to the entire industry. Every automobile company knows how to build an assembly plant, or how to get relatively #uick e#uipment turns on the line. +t took .9 years, but every company has now learned the Toyota production system. Gou can learn it by taking an engineering class here at F.=. )erkeley. Dynamic capabilities, unlike ordinary capabilities, are idiosyncraticI uni#ue to each company and rooted in the companys history. Theyre captured not $ust in routines, but in business models that go back decades and that are difficult to imitate. >ynda ,ratton and the late 3umantra ,hoshal called them 1signature processes.A They are 1the way things are done around here.A S?B4 W-ere "$ -ese si)na +re #r$,esses ,$*e fr$*@ TEECE4 Fsually theyre based on things that the company has done in the past, going back to its origins. )ut + dont buy into the deterministic view that once a company gets going, everything it does is locked in place. +nstead, companies adapt, in a process much like evolutionary fitness. "s the business niche changes, the capability changes accordingly. =ompanies adapt, in a process much like evolutionary fitness.

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That doesnt $ust happen on its own. Three types of managerial activities can make a capability dynamicI sensing -which means identifying and assessing opportunities outside your company0, seizing -mobili&ing your resources to capture value from those opportunities0, and transforming -continuous renewal0. This framework, which + described in my paper 1Explicating Dynamic

=apabilitiesA Strategic Management Journal, Dec. .//M! explains how to get the future rightI how to position todays resources properly for tomorrow. 2or example, Cokia missed the smartphone revolution because the company was not well e#uipped for sensingRespecially compared to "pple, which was embedded in the milieu that was breeding the next generation of smartphones. )ased here in the 3an 2rancisco )ay "rea, 3teve Lobs sensed what customers wanted, and he knew what technologists were doing. Even more importantly, he built the capabilities that "pple needed, step by step. 2or example, to make the i6od work, "pple developed capabilities in digital rights management and handheld device design. Lobs and his team learned how to cut deals with studios and recording companies, and how to bring together user4friendly technology in a very appealing form factor. Cokia had a research lab in )erkeley, but their base of operations was far away, in 2inland, and they relied too much on their own (@D. They tapped into the science, but they missed the state of mind. S?B4 H$( "i" !$+r i"ea $f "!na*i, ,a#abili ies e0$l0e@ TEECE4 +n the 78;/s and 788/s, + taught classical microeconomics to %)" students at 3tanford and )erkeley, and one of the ideas we discussed was that a firm was a 1black box.A This theory implied that! managers of different firms would respond in the same way to external events. 3ome business students began asking why the theories ignored the fact that different companies had different levels of capabilities, which was obvious to anyone in the technology industries. +t was also present in the cases we studiedRbut went unrecogni&ed. 2or instance, my own early work had focused on why companies profited -or didnt profit0 from innovation. +n 78;?, + had published a case story on the E%+ ,roup, a wonderfully innovative company that failed in the marketplace. Fntil it went bankrupt and was sold in ./7., E%+ was a diversified technology enterprise based in >ondon. During :orld :ar ++, it built the first airborne onboard radar, on the )ristol )eaufighter aircraft. +n the 78?/s, it was the )eatles first recording label. Then in 78?M, an E%+ electrical engineer named ,odfrey 'ounsfield started work on the first commercially viable computed tomography -=T0 scanner. 'e introduced it at a radiology conference in 78M7, and it became instantly famous in the profession. This was a brilliant effort, the greatest contribution to radiography since P4rays, one of the earliest devices

to combine hardware and software into a single dedicated machine, and a machine that changed the world. 'ounsfield won the Cobel 6ri&e in 78M8 for it. )ut E%+ never profited from the =T scanner. +t made only a few of them at first, one of which it sold to ,eneral Electric. 3tories like this tend to be told as failures of strategy. )ut E%+s leaders knew that the Fnited 3tates was the most viable market for their product. Fnfortunately, they lacked the marketing and manufacturing capabilities to succeed there. They spent a couple hundred million dollars getting a factory in place, but by the time it was complete, ,E and 3iemens had reverse engineered the =T scanner and taken the market over. E%+ ended up with nothing, other than copyright claims in an infringement lawsuit. +t wasnt a failure in strategy. They lacked capabilities. 3o + set out on my own in#uiry about capabilities. + found intellectual support from non4 mainstream economists who were interested in innovation and evolutionary economicsI 3idney ,. :inter -then at Gale, now at :harton0 and (ichard (. Celson now professor emeritus! at =olumbia. +n 788M, + published my first paper on the sub$ect 1Dynamic =apabilities and 3trategic %anagement,A Strategic Management Journal, "ugust 788M!, with ,ary 6isano -now at 'arvard0 and "my 3huen -who went on to teach at 3an Lose 3tate0. "long with Lensen and %ecklings paper on the agency theory of the firm, its one of the two most cited papers in economics and business. S?B4 H$( "$ in elle, +al #r$#er ! ri)- s an" ,a#abili ies fi $)e -er@ TEECE4 Fnless you have truly fundamental inventions that no one else can copy, you need both. 3trong intellectual property protection, in itself, will only help you on the first round of innovation. During that time, you can rent other peoples complementary capabilities. )ut sooner or later, youre going to get copied, so youve got to move #uickly to build the capabilities you need for the second round, and to try and preserve as much of the proprietary aspect of the technology as you can. The most important factor is the integration of intellectual property with the overall corporate strategy. +n most companies, the general counsel and the top strategy people dont talk much to each otherRbut they should.

S?B4 H$( ,an "!na*i, ,a#abili ies be s,ale" +# -r$+)-$+ a lar)e ,$*#an!@ TEECE4 + may be the only economist who is a strong believer in corporate cultureE + explain corporate culture to my economist friends as 1control on the cheap.A =orporate culture is about getting people to do things without necessarily having to bribe or threaten them. Fsing! dynamic capabilities re#uires that you infuse this entrepreneurial culture throughout the organi&ation. 5nly then does top management have a chance of actually making the organi&ation robust. =orporate culture is about getting people to do things without necessarily having to bribe or threaten them.

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S?B4 Is -ere a reliable -e$r! -a ells !$+ -$( $ b+il" "!na*i, ,a#abili ies@ TEECE4 Cot yet. + can give corporate leaders a sense of what they need to do, but dynamic capabilities theory is not tightly predictive. Thats in part because the theory is not falsifiable in the Karl 6opper senseI Gou cant disprove, for example, that a company built dynamic capabilities without doing any sensing. +ts very hard to figure out which capabilities are most important, which aspect of 1the way things are done around hereA is the one that leads to superior performance. 3ometimes people in an organi&ation dont know why their own capability is successful. They attribute their success to the wrong factors. +n the early 78;/s, many F.3. industries went down a lot of blind alleys trying to reverse engineer the reason for Lapans success. 2irst, they thought it was Lapans lower cost of capital, then it was government subsidies, or possibly even robotics. Then maybe it was their calisthenics at lunchtime. +f youre going to copy something, as Dick (umelt says, you have to understand how the underlying system works.

Thats the contribution we make with dynamic capabilities. " useful theory is one with some descriptive validity that helps integrate and relate disparate ideas that you know are important. The dynamic capabilities theory does that. +t provides an intellectual structure for businesspeople to start thinking systematically about why companies succeedRor fail. A7THOR &ROFILE4

Ar Kleiner is editor4in4chief of strateg !business.