4. Appraising Resources
RESOURCE CHARACTERISTICS INDICATORS
Financial Borrowing capacity Debt/ Equity ratio
Internal funds/ generation Credit rating
Tangible Net cash flow
Resources Physical Plant and equipment: Market value of
size, location, technology fixed assets.
flexibility. Scale of plants
Land and buildings. Alternatives for fixed
Raw materials. assets
Technology Patents, copyrights, know how No. of patents owned.
R&D facilities. Royalty income
Intangible Technical and scientific R&D expenditure.
Resources employees R&D staff
Reputation Brands. Customer loyalty. Company Brand equity. Product
reputation (with suppliers, customers, price premium.
government) Recognition.
Human Training, experience, adaptability, Employee qualifications,
Resources commitment and loyability of customers pay rates, turnover.4
5. Resources
What a firm Has...
What a firm has to work with:
Tangible Resources
Financial
* its assets, including its people and
Physical
* the value of its brand name
Human Resources
*
Organizational
*
Resources represent inputs into a
firm’s production process...
Intangible Resources
Technological
*
such as capital equipment, skills
Innovation
* of employees, brand names,
finances and talented managers
Reputation
*
6. Capabilities
What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate individual firm
resources to achieve a desired objective.
Capabilities develop over time as a result of complex interactions that
take advantage of the interrelationships between a firm’s tangible
and intangible resources that are based on the development,
transmission and exchange or sharing of information and knowledge
as carried out by the firm' employees.
s
Capabilities become important when they are combined in unique
combinations which create core competencies which have strategic
value and can lead to competitive advantage.
8. Early contributions
• Edith Penrose 1959:
– Although firms may control similar ressource
bundles, the services they can derive from
resources may be very different.
– Services change through experiential learning.
– They rest on tacit knowledge.
9. Firms-Innovation
• The extreme proliferation of labels/taxonomies,
– ”the knowledge-based view,”
– ”competence perspective,”
– ”core competencies,”
– ”capabilities approach,”
– ”dynamic capabilities approach,”
• ”competence-based competition,”
– ”the resource-based view,”
– ”the evolutionary theory of the firm”
10. Firms-Incentives
Theory Central objective
Industrial organization Market structure [influence of
sectoral factors]
Transaction cost economics Existence and limits of firms
Positive agency theory Information asymmetries,
incentives
Resource-based theories Emphasis on internal
resources
Evolutionary theory Evolution of the firm in a
broader context [routines vs.
the selection process]
11. Empirical justification
• Inter-industry variation in returns significantly lower than
intra-industry variation
• For example, business level and corporation specific factors
accounted for 37% and industry factors for only 16% of the variation
in returns in Rumelt 1991, SMJ.
• Thus, i.e., factors internal to firms more important than the
environment.
• The increasing specialization in knowledge production
[strategic alliences designed to exchange knowledge in
technological fields like ICT and biotechnology]
• The importance of in-house integration capacity
• ICT is improving understanding and increasing complexity
• Creative destruction in organizational [not technological]
practises
12. To be practical, we are interested in this
intersection of four areas of research
Dynamic
capabilities
Know
Evolutio-
ledge-
nary
based
theory of
the firm
Competence-based
13. Background
• Why the rise of capabilities approaches –
particularly ”dynamic capabilities” approaches –
during the last decade?
• Knowledge economy background: Increasing
importance of innovation, knowledge assets account
for an increasing part of value added, ”innovation
driven competition,” [Lecture 3]
• A reaction against the neoclassical theory of
production (Lecture 2]
• The Resources Based approach is the <managerial
perspective> in this area of research with a static
quality in its analysis.
• Other theories focus primarily on internal factors.
14. Knowledge and Routines
• Knowledge:
– Knowledge forms:
– 1) private,
– 2) distributed,
– 3) shared, and
– 4) common.
– Firms are seen as systems of distributed knowledge –
”Only APPLE as a firm knows how to produce the
iPod.”
– Given the stock of knowledge , how is coordination
achieved?
• That brings us to Routines; ways to:
– Embed the firm’s knowledge.
– Coordinate dispersed knowledge.
15. Firms respond to pressure and
change: Routines
• “... an executable capability for repeated performance in
some context that has been learned by an organization in
response to selective pressures” (Cohen et al. 1996).
• Capabilities, competencies, etc. may be characterized
likewise.
• Change also take place through”dynamic routines.”
16. A basic vocabulary
From an evolutionary point of view, the firm is a
profit-seeking entity whose primary activities are
to build (through organizational learning
processes) and exploit commercially valuable
knowledge assets.
These assets co-determine the firm’s productive
opportunity set and are applied in production
through the operation of routines.
17. Dynamic Capabilities
• 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).
18. Knowledge and economic
organization
• We will consider these recent attempts to turn ideas
into a full theory of the firm in the sense of a theory
that addresses the following aspects of knowledge
development:
– Existence -- why aren’t all knowledge transactions
mediated over the market?
– Boundaries -- what explains the firm/market
boundary?
– organization -- what explains the firms formal
and informal structure?
19. A theory on knowledge development provides
hypotheses on the following questions:
• Understanding the demand aspects of
why resources are ”valuable.”
• The creation and dynamics of resources
(”dynamic capabilities”).
• Organizing resources, organization as
a source of competitive advantage.
• Which resources to create?
• Protecting resources through entry
deterrence, understanding the context of
competition.
• System effects between resources.
• Understanding firm heterogeneity and its
dynamics.
• Understanding how value sharing
impacts on value creation.
20. Key Ideas
• A theory of firm level specialization based on knowwledge
constraints.
• Firms should be seen as heterogeneous agents of largely tacit
knowledge assets (e.g., ”capabilities”).
• They underlie competitive advantages and innovative
performance (”dynamic capabilities”).
• Economic organization shaped by attempts to capture rents
from such assets (including economizing with the costs of
building, protecting and leveraging them).
21. Market selection as an evolutionary
processes
• Processes which generate variation in the pool of
characteristics in a population
• Processes which restrict and guide possible
patterns of variation in behaviour
• Processes which change the relative frequency of
different entities within the population
• Processes which determine the rate at which the
above three processes change
• Processes which determine the overall direction
of evolutionary change
Source: Metcalfe, J.S. (1998), Evolutionary Economics and Creative Destruction, London, p. 23
24. Learning and Productivity in the Assimilation of Process Industry
Technology
Activities Affecting the Productivity of Capital and Labour Accumulated via Process
Industry Investment Projects
(a) Project implementation (b) Start-up and subsequent
operation
Specification Procurement of Project Initial Subsequent
of product & inputs for selected Integration and Commissioning incremental
process Technology completion and Start-up product/process
Technology performance innovation
improvement
(1) Firm-level Investment in training
capability Acquisition
and experience-
creation and/or
Acquisition
(“Learning- Development
by- of Technology
Operations and + +
Spending”) for New
maintenance
Major
Investment
Design, engineering
+ + + + + Projects
and project
management
Execution of: Project
(3)
Cumulative implementation
Mobilisation Design/Engineering
ASSIMILATION OF TECHNOLOGY EMBODIED IN PROJECT CAPITAL
of Learned Technology
Capabilities Development
Experience Experience Experience Experience Experience Experience
(2) Learning-by-doing
25. THE LEARNING HIERARCHY IN TECHNOLOGY FOLLOWERS
Large
Large TNC
Domestic
R&D Occasionally Present (Rarely in TNCs)
Scale Limited. Depleted by Crisis
TECHNOLOGY Capabilities Limited, When
DESIGN AND UPGRADING Present Often Limited
ENGINEERING REVERSE ENGNRG Technology Development Role
Usually Present, Often Focus of
TECHNOLOGY Intensive Training Efforts,
ACQUISITION AND Selected Key Skills Sometimes
ASSIMILATION Weak
BASIC OPERATING
Present, Often Strong
SKILLS AND
and Regularly Upgraded
TECHNOLOGY USE AND OPERATION
CAPABILITIES
26. INNOVATIVE CAPABILITY ACCUMULATION IN THE MALAYSIAN
ELECTRONICS INDUSTRY
Proportions of Firms Mastering Different Capability Levels
TNC All Local Local
Capability Levels Sub- Local Linkage Independent
Mastered sidiaries Firms Firms firms
(26) (27) (14) (13)
Routine Operation 100% 100% 100% 100%
Basic Innovation 100% 100% 100% 100%
Intermediate Innovation 85% 85% 86% 86%
Advanced Innovation 31% 37% 43% 31
Research-Based Innovation 8% 0 0 0
Norlela Ariffin: DPhil Thesis
27. INNOVATIVE CAPABILITY ACCUMULATION IN THE MALAYSIAN
ELECTRONICS INDUSTRY
Times Required to Master Different Capability Levels
TNC Local Local
Capability Levels Mastered Sub- Linkage Independent
sidiaries Firms firms
(n = 26) (n = 14) (n = 13)
Years Years Years
Routine Operation (From entry) 3.8 2.9 3.4
Intermediate Innovation (From RO) 9.0 5.5 7.0
Advanced Innovation (From RO) 15 8.8 7.0
Research-Based Innovation (From RO) 20 - -
Norlela Ariffin: DPhil Thesis
28. Technology Strategies in Developing Countries
Role in Markets The Technology Dimension
1 Passive importer (pull) Assembly skills, basic production capabilities
Cheap Labor assembly Mature Products
Dependent on buyers for distribution
2 Active sales of capacity Incremental process changes for quality and speed
Quality and cost-based Reverse engineering of products
Foreign buyer dependent
3 Advanced production sales Full production skills
Marketing department establis Process innovation
Overseas marketing started Product design capability
Own designs marketed
4 Product marketing (push) R&D for products and processes begun
Sell direct to retailers Product innovation capabilities
and distributors overseas
Build up product range
Start own-brand sales
5 Own-brand (push) Competitive R&D capabilities
Market directly to customers R&D linked to market needs
Independent distribution channels, Advanced product/process innovation
direct advertising
In-house research
Sources: Marketing stages derived from Wörtzel and Wörtzel (1981): Technology stages derived from Hobday (1995a)
29. A checklist of T echnology Strategy in latecomer Firm s
P rod u ct
S tru cture
S ize
B u sin ess Strategy
T ech n ology strategy
Selection, Specialization & E m bodim ent
Sources of Technology
C apability B uilding
International C onform ance
Innovation N etworks
R &D Investm ent
R &D O rganization
M an ufacturin g Strategy
L inks with C orpo rate/Technology Strategy
L ocation
C apacity
Practices
Process
T raining
L ikely T rajecto ry
T echnology C haracterization
Product O bsolescence
Process O bsolescence
Firm Trajectory
Strategic T echnological C hallenges
31. The Innovation Development System: A Framework
CUSTOMERS INDUSTRY LINKAGE OTHER KNOWLEDGE
SOURCES
Research
Large TNC Knowledge Linkage, Institutes
Transfer and
Development
Export
Organisations
Large Universities
Domestic
Metrology and
Vocational
Standards
Training
SME
Domestic
Foreign
Start-Ups
Technology
Sources
Policy and Incentive Systems Financial and Funding Systems
Legal Frameworks Organisational Structures
INSTITUTIONAL CONTEXT
32. The linkage structure of NIS’s
An NIS consists of institutions, Facts:
– The degree of complexity of modern
technology requires a) specialisiation AND
– that formulate policy goals and co- b) cross-disciplinary cooperation
ordinate (govt. agencies) – Technology becomes more science based
(science based patents increased from
– that finance and fund R & D
17000 in 1987 to >50000 1994)
(science funds, special loan
– Labour is the most powerful transmission
programmes, etc)
mechanism of “tacit knowledge”
– that act as bridge between decision
Policy instruments for “high growth and
making and fund redistribution:
innovativeness” goal:
research councils and associations
– that are responsible for knowledge
• Different depending on
creation: private R&D labs,
universities – industrial structure,
– degree of development of knowledge
– That forster diffusion: technology
creation institutions
transfer and diffusion, promotion of
– given strength of science technology
technology-based firms, human
linkages
resource mobility
33. BASIC SYSTEM CONCEPTS
(see Edquist, for overview)
1. ‘National’ Systems (Freeman, Nelson, Lundvall, etc.)
2. ‘Sectoral’/Technology Systems (Carlsson, Malerba, etc.)
3. ‘Regional’ Systems (Cooke & Morgan, ‘Milieux’, etc)
4. ‘Cluster’ Systems (Saxenian, Schmitz, Bell and Albu, etc.)
System Scope - What is ‘in’ the system? What is ‘Outside’?
34. IMPORTANT SYSTEM CHARACTERISTICS
1. Scale - relative to…………
2. Internal Structure - relative importance of actors/activities
3. Internal ‘Coherence’ - (relative) strength of links
4. External Links - ‘openness’ to inputs, collaboration
- ‘Active/Passive’ learning
35. KEY ANALYTICAL ISSUES FOR POLICY
Origins, Evolution and Change in System Characteristics
Differing Characteristics : Effectiveness at Different ‘Stages’
Rates of Change in Key Characteristics
Responsiveness of Rate to Policy (What Policy? Whose Policy?)
36. A first analytical step: the specialisation
pattern of a NIS
• Where lies the intellectual and technological
strength of a nation?
• How does knowledge generation change in
reaction to new policies, technological innovation,
etc. ?
Revealed Technological Advantage (RTA)
– Science: e.g. France, Germany and Italy are specialised
in chemistry, physics, mathematics; USA wide spread
– Engineering: e.g. Austria, Netherlands, Nordic
countries, UK specialisation in clinical medicine;
39. A case study in our list of
readings [Cohen, at al.]
• Comparison of appropriability conditions and
spillovers between Japan and the US
• Puzzle to explain: higher R&D spending in Japan
but difficult to protect rents
• A NOTE: the creation of secure assets in new
technological knowledge has been one of the main
characteristics of the US technological innovation
in the 19th century [NBER, 10966]
40. Readings…
• An overview of theories: Galende
• The evolutionary perspective and dynamic
capabilities: Nelson, Teece
• Firm level analysis: large firms in advanced
countries (Pavitt), technoloogy followers
(Forbes) [additional reading: Hobday]
• NIS: Cohen
