University of Cagliari, Faculty of Economics, a.a Business Strategy and Policy A course within the II level degree in Managerial Economics year II, semester I, 6 credits Lecturer: Dr Alberto Asquer Phone:

Business Strategy and Policy Lecture 3 Resources, distinctive capabilities, and dynamic capabilities

Plan of this lecture 1. The resource-based view of the firm – and of strategy 2. Resources and distinctive capabilities 3. The evolutionary view of the firm – and of strategy 4. Routines and dynamic capabilities Summary

1. The resource-based view of the firm – and of strategy In the neoclassical view, the firm is conceived as a “production function” that converts inputs (factors of production) into outputs (products and services) In the resource-based view of the firm, the firm is conceived as a bundle of heterogeneous and sticky resources (Penrose, 1959).

2. Resources and distinctive capabilities Resources are “special production inputs” because they: 1) are unique (they are possessed and controlled by one firm only) 2) cannot be easily imitated (replicated, reproduced, copied) by other firms 3) account for super-normal profits that the firm achieves. Resources may be conceived as tangible or intangible 'assets' that other firms cannot imitate because of some 'isolating mechanism'. Distinctive capabilities are a special type of resources: they consist in unique and non-imitable “ability of doing things” (know-how) better than competitors.

Sustainable competitive advantage arises from the ownership and control of resources and distinctive capabilities, because: 1) They allow firms to obtain unique products and services 2) Other firms cannot easily buy them in the market 3) Other firms cannot easily replicate, reproduce, copy them 4) Buyers are willing to pay a premium price for the exclusive price- value proposition of the firms' products and services (Compare with the five-forces analysis of the industry: that framework for analysis does not really posit any source of differentiation between firms within the industry) (Ultimately, the resource-based view of the firm builds on the idea of persistent imperfections in the factor markets that make firms heterogeneous) 2. Resources and distinctive capabilities

3. The evolutionary view of the firm – and of strategy Evolutionary economics is a distinct field of study within the discipline of economics “Evolutionary”' broadly refers to the property of individuals within a population to change their features over time “Evolutionary economics” broadly refers to the study of the dynamics of economic systems that originate from changing features of their agents – especially, firms – over time (Note: “mainstream” neoclassical economics is mostly interested in the study of the conditions related to the equilibrium of economic systems; evolutionary economics, instead, posits that economic systems are not in equilibrium as they are continuously transformed by inner “endogenous” forces)

Influential predecessors of contemporary evolutionary economics: C. Darwin, J. Schumpeter, T. Veblen, K. E. Boulding 3. The evolutionary view of the firm – and of strategy

Contemporary roots of evolutionary economics: “An Evolutionary Theory of Economic Change”, by R. R. Nelson and and S. G. Winter (1982) Firms are conceived as collections of routines Routines are the capability to repeat an activity in a certain context that has been learned by an organisation in response to selective pressures (in common-sense terms, routines may be understood as “standard ways of doing things” or “standard operating procedures” that people follow within any organisation because they learned from past experience that “they work, and this is how business is conducted here”) 4. Routines and dynamic capabilities

Contemporary roots of evolutionary economics: “An Evolutionary Theory of Economic Change”, by R. R. Nelson and and S. G. Winter (1982) Firms differ from each other because they consist of different “bundles” of routines (ways of doing things that each firm learned under specific circumstances) Firm's routines are repeatedly “tested” in the economic system – certain routines allow firms to accomplish higher performance than other firms Firms that possess low-performing routines are thrown out of the economic system (e.g., they go bankrupt) Firms that possess high-performing routines survive, and may be able to attract resources for the maintenance and improvement of routines

4. Routines and dynamic capabilities Contemporary roots of evolutionary economics: “An Evolutionary Theory of Economic Change”, by R. R. Nelson and and S. G. Winter (1982) As environmental conditions change (e.g., as features of the economic systems change: demography, consumers' taste, technology, regulations, etc.), old routines (that allowed firms to survive as they used to work well in the past) may not be well-performing any more Firms “evolve” – in the sense of developing, strengthening, and improving their routines that better “pass the survival test” within the economic system Dynamic capabilities refer to the organisational processes that make firms develop, strengthen, and improve their routines (Dynamic capabilities may be conceived as routines as well. They are the routines that relate to the generation of “new” routines)

4. Routines and dynamic capabilities Dynamic capabilities broadly refer to the organisational processes that make firms develop, strengthen, and improve their routines S. G. Winter (2003): “An organisational capability is a high-level routine (or collection of routines) that, together with its implementing input flows, confers upon an organisation's management a set of decisions options for producing significant outputs of a particular type” So – dynamic capabilities are a “special type” of routines, i.e., routines that enable the creation of “new routines” (note: routine is something that is learned, is highly patterned, repetitious or quasi-repetitious, founded in part in tacit knowledge; improvisation is not a routine)

4. Routines and dynamic capabilities Every firm has a “zero-level” or “baseline” set of routines, i.e., those that serve the purpose of producing and marketing the given products and services currently in the portfolio (“how we earn a living now”) Some firms have dynamic capabilities, i.e., those routines that relate to the innovation of products and services, to the innovation of the production process, or to the search and attraction of new customers, etc. - dynamic capabilities implement the change of “old” routines with “new” ones (Note: R&D is important) Possibly, a few firms have “further level” dynamic capabilities, i.e., those routines that relate to the innovation of the way innovation is pursued – e.g., highly creative “reconfigurations” of thinking and methods for innovating (Note: strategic entrepreneurship is very important)

4. Routines and dynamic capabilities Dynamic capabilities also relates to firms' capacity to develop and adopt disruptive technologies Disruptive technologies are innovations that create new markets while displacing (i.e., making obsolete) earlier technologies (C. M. Christensen, 1995)

4. Routines and dynamic capabilities Examples of disruptive technologies

4. Routines and dynamic capabilities Examples of disruptive technologies

4. Routines and dynamic capabilities Examples of disruptive technologies

4. Routines and dynamic capabilities Common theme of successful dynamic capabilities is “taking the game to a higher level”, by innovating products and processes in such a way as to make other firms' capabilities obsolete Investments and policies are needed to promote the advance of cumulative knowledge, diffuse technological solutions within the firm, and focus on visible, urgent, and frequent problems Any firm typically follows a “technology development path” – that is cumulative, path-dependent, and often quite binding (i.e., the firm become increasingly good at doing what it did in the past, it may perfect what it is very good at, while it may be unable to radically reconfigure its bundle of routines)

5. Summary Main points Resources and distinctive capabilities of the firm are sources of uniqueness that account for a sustainable competitive advantage. Dynamic capabilities are a kind of higher-order routines that relate to the “upgrade” of existing routines. Firms evolve along technological paths that are cumulative, path- dependent, and often quite binding.