TOWARD KNOWLEDGE BASED THEORY OF THE FIRM.DEFINITION,

Knowledge has been defined as that which is known

CHARACTERISTICS OF KNOWLEDGE

Transferability and appropriability

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.Appropriability refers to the ability of the owner of a resource to receive a return equal to the value created by that resource. Knowledge is a resource which is subject to uniquely 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. Most of the explicit and all tacit knowledge is stored within individuals, much of this is created within the firm and is firm specific.MAJOR PROPOSTIONS OF KNOWLEDGE BASED VIEW

Knowledge as an important resource of the firm,

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 major 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, organizational structure, the role of management and the allocation of decision making rights, determinants of firm boundaries and the theory of innovation. Here, 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. RBV treats knowledge as a generic resource, rather than having special characteristics and does not distinguish between different types of knowledge based capabilities.Role of information technology,

Information technology plays an important role in the knowledge based view of the firm, in that information system can be used to synthesize, enhance and expedite large scale intra and inter firm knowledge management. Grant (2002) criticized through the emerging knowledge based view of the firm is not a theory of the firm in any formal sense

Specialization in knowledge,

Knowledge acquisition is brought by the recognition that the human brain has limited capacity to acquire, store and process knowledge. Therefore, efficiency results when individuals specialize in particular areas of knowledge.Knowledge is the critical input in production and primary source of value,

A firm creates value through production units transformed into outputs and moving products from one market to the next. Fundamental 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. Such knowledge defines a firms capacity to efficiently convert its inputs into valuable outputs and update and enhance its knowledge.Knowledge formation as problem solving.A managers fundamental knowledge based objective is to sustain above normal profits by continually discovering new knowledge or new solutions that form from unique combinations of existing knowledge. A 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. For a firm to develop new knowledge, it must identify valuable problem and conduct an efficient solution search. Valuable solutions deliver value to the firm, either through enhancement or development of a product or service by reducing the cost of production or delivery. In 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 maximizing the probability of discovering a high value solution.

Governance choices and knowledge formation.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. Here, 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].However, 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. Also, 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. For any given knowledge, managers are concerned not only with its proper governance but also with its development and protection.Theoretical basis for understanding organizational innovations and boundaries.

An interesting feature of the knowledge based approach is that it offers a theoretical basis for understanding a number for recent organizational innovations and trends. These include the renovation of traditional organizational forms including horizontal and team base structures and inter firm alliances.

KNOWLEDGE BASED THEORY

The knowledge-based theory of the firm considers knowledge as the most strategically significant resource of a firm. Its proponents argue that because knowledge-based resources are usually difficult to imitate and socially complex, heterogeneous knowledge bases and capabilities among firms are the major determinants of sustained competitive advantage and superior corporate performance.

This knowledge is embedded and carried through multiple entities including organizational culture and identity, policies, routines, documents, systems, and employees. Originating from the strategic management literature, this perspective builds upon and extends the resource-based view of the firm (RBV) initially promoted by Penrose (1959) and later expanded by others (Wernerfelt 1984, Barney 1991, Conner 1991).

Although the resource-based view of the firm recognizes the important role of knowledge in firms that achieve a competitive advantage, proponents of the knowledge-based view argue that the resource-based perspective does not go far enough. Specifically, the RBV treats knowledge as a generic resource, rather than having special characteristics. It therefore does not distinguish between different types of knowledge-based capabilities. Information technologies can play an important role in the knowledge-based view of the firm in that information systems can be used to synthesize, enhance, and expedite large-scale intra- and inter-firm knowledge management (Alavi and Leidner 2001).

Whether or not the Knowledge-based theory of the firm actually constitutes a theory has been the subject of considerable debate. See for example, Foss (1996) and Phelan & Lewin (2000). According to one notable proponent of the Knowledge-Based View of the firm (KBV), The emerging knowledge-based view of the firm is not a theory of the firm in any formal sense (Grant, 2002, p.135).KNOWLEDGE BASED VIEW.

Considers knowledge as the most strategically significant resource of afirm; nature mainly intangtble n dynamic difficult to imitate n socially complex.

Presnt in organisations culture n identity, policies, routines, documents, systems n employees.

Ts an extenstion of the RBV OF THE FIRM.

Capabilities n capacities lead to superior sustained performance because they are specific to each organization.

Knowledge resources are particularly impotant to ensure compe adv. are sustanable, as these resources r difficult to imitate

Currently we r witnessing a structural change in the productive paradtgm. the change from manufacture to services in the majority of developed economtes is based on the mantpulation of info n symbols n not on the use of phystcal products.

Information technology or systems can be used to synthesize, enhance n expedite large scale intra n inter firm knowledge management

TALENT ts recognized 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 unique historical evolution each organization develops) n it establishes a basis for competitive adv.

The firm absobs internal n external knowledge, combines them with pre acquired knowledge n creates new one.

THE POST INDUSTRIAL ECONOMY THAT IS EMERGING BASED UPON KNOWLEDGE HAVE MADE ECONOMIC ORGANISATIONS TO BECOME VIRTUAL, geographically dispersed, presenting knowledge networks highly dependet on computer based communication n technology. Firms negotiate almost exclusively in the cyberspace n give extreme emphasis to learning n knowledge based work.

esource-Based View

The resource-based view (RBV) is that a basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm's disposal. To transform a short-run competitive advantage into a sustained competitive advantage requires that these resources are heterogeneous in nature and not perfectly mobile. Effectively, this translates into valuable resources that are neither perfectly imitable nor substitutable without great effort. If these conditions hold, the firms bundle of resources can help it sustain above average returns.

The VRIN CharacteristicsAfter identifying its potential key resources, the company must then evaluate whether these resources fulfill the following criteria (referred to as VRIN):

Valuable A resource must enable a firm to employ a value-creating strategy, by either outperforming its competitors or reducing its own weaknesses. Relevant 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 value-creating strategy.

Rare To be of value, a resource must be rare by definition. In a perfectly competitive strategic factor market for a resource, the price of the resource will be a reflection of the expected discounted future above-average returns.

Inimitable If 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. An important underlying factor of inimitability is causal ambiguity, which occurs if the source from which a firms competitive advantage stems is unknown. If the resource in question is knowledge-based 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. Knowledge-based resources are the essence of the resource-based perspective.

Non-substitutable Even if a resource is rare, potentially value-creating and imperfectly imitable, an equally important aspect is lack of substitutability. If competitors are able to counter the firms value-creating strategy with a substitute, prices are driven down to the point that the price equals the discounted future rents, resulting in zero economic profits.

A company should care for and protect resources that possess these characteristics, because doing so can improve organizational performance. The VRIN characteristics mentioned are individually necessary, but not sufficient conditions for a sustained competitive advantage. Within the framework of the resource-based view, the chain is as strong as its weakest link and therefore requires the resource to display each of the four characteristics to be a possible source of a sustainable competitive advantage (Figure 1).

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ambiguity

Something liable to more than one interpretation, explanation, or meaning, assuming it cannot be determined from its context.

APPEARS IN THESE RELATED CONCEPTS:

Culture-Specific Nuances of Decision-Making Vision Ambiguity

KNOWLEDGE BASED THEORY-KBT

The KBV of the firm recognizes knowledge as the most strategically significant resource of a firm. Its proponents argue that because knowledge-based resources are usually difficult to imitate and socially complex, heterogeneous knowledge bases and capabilities among firms are the major determinants of sustained competitive advantage and superior corporate performance. This knowledge is embedded and carried through multiple entities including organizational culture and identity, policies, routines, documents, systems, and employees. This knowledge is embedded and carried through multiple entities including organizational 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 KBV of the firm is consistent with the approach to

organizations as cultures (Balogun and Jenkins, 2003). Considering that

organizations are conceptualised as cultures, they are suppose to learn through

activities that involve cultural artefacts. Organizational learning allows the firm to

acquire, to change and to preserve its organizational capabilities (Cook and Yanow,

1995). Culture is most repeatedly defined after Schein (Schein, 1985, apub, Balogun

and Jenkins, 2003), as a set of assumptions and beliefs held in common and shared

by members of an organization, or as shared beliefs and knowledge after Nonaka

and Takeuchi (Nonaka and Takeuchi, 1995, apub, Balogun and Jenkins, 2003).

Organizational 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 (Balogun and Jenkins, 2003). A routine consists of behaviour that is learned,

highly patterned, repeated and founded, even if only partly, in tacit knowledge

(Winter, 2003).

Following the words by Nonaka (1991) the only true lasting competitive

advantage is knowledge.

THE RESORCE BASED VIEW 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 unique bundle of idiosyncratic resources and capabilities where the primary task of management is to maximize 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 recognizes the transferability of the firms resources and capacities as critical determinant of their capacity to confer sustainable competitive advantage [Barney,1986].The implications of RBV are unclear for two reasons; The various contribution lack a single integrating framework and,

Little effort has been made to develop the practical implications of this theory. The individual resources of the firm include items of capital equipment, skills of individual employees, patents, brand names, finance etc. Six major categories of resources have been identified as physical resources, human resources, financial resources, technological resources, reputation resources and organizational resources.

The turnaround strategy is based on the idea that resources of the acquired 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 US are evidence toward a sense-making re-thinking of RBV

The Resource-Based View 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 (Barney, 1986b; Barney, 1991). One of the key hypotheses of RBV is that the presence of strategic resources is sufficient to establish the potential for competitive advantage: there is a direct relationship between the resources and performance.

RESOURCE BASED THEORY

The resource-based view (RBV) 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 firm's disposal (Mwailu & Mercer, 1983 p142, Wernerfelt, 1984, p172; Rumelt, 1984, p557-558; Penrose, 1959[1]). To transform a short-run competitive advantage into a sustained competitive advantage requires that these resources are heterogeneous in nature and not perfectly mobile (:[2] p105-106; Peteraf, 1993, p180). Effectively, this translates into valuable resources that are neither perfectly imitable nor substitutable without great effort (Barney, 1991;:[2] p117). If these conditions hold, the bundle of resources can sustain the firm's above average returns. The VRIO and VRIN (see below) model also constitutes a part of RBV. There is strong evidence that supports the RBV (Crook et al., 2008).

The key points of the theory are:

1. Identify the firms potential key resources.

2. Evaluate whether these resources fulfill the following criteria (referred to as VRIN):

Valuable A resource must enable a firm to employ a value-creating strategy, by either outperforming its competitors or reduce its own weaknesses (:[2] p99;:[3] p36). Relevant 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 value-creating strategy (Mahoney and Pandian, 1992, p370; Conner, 1992, p131).

Rare To be of value, a resource must be rare by definition. In a perfectly competitive strategic factor market for a resource, the price of the resource will be a reflection of the expected discounted future above-average returns (Barney, 1986a, p1232-1233; Dierickx and Cool, 1989, p1504;:[2] p100).

In-imitable If a valuable resource is controlled by only one firm it could be a source of a competitive advantage (:[2] p107). This advantage could be sustainable if competitors are not able to duplicate this strategic asset perfectly (Peteraf, 1993, p183; Barney, 1986b, p658). The term isolating mechanism was introduced by Rumelt (1984, p567) 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 (Peteraf, 1993, p182-183; Mahoney and Pandian, 1992, p371). An important underlying factor of inimitability is causal ambiguity, which occurs if the source from which a firms competitive advantage stems is unknown (Peteraf, 1993, p182; Lippman and Rumelt, 1982, p420). If the resource in question is knowledge-based 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 (Peteraf, 1993, p183; Mahoney and Pandian, 1992, p365;:[2] p110). Conner and Prahalad go so far as to say knowledge-based resources are the essence of the resource-based perspective (1996, p477).

Non-substitutable Even if a resource is rare, potentially value-creating and imperfectly imitable, an equally important aspect is lack of substitutability (Dierickx and Cool, 1989, p1509;:[2] p111). If competitors are able to counter the firms value-creating strategy with a substitute, prices are driven down to the point that the price equals the discounted future rents (Barney, 1986a, p1233; Sheikh, 1991, p137), resulting in zero economic profits.

3. Care for and protect resources that possess these evaluations, because doing so can improve organizational performance (Crook, Ketchen, Combs, and Todd, 2008).

The VRIN characteristics mentioned are individually necessary, but not sufficient conditions for a sustained competitive advantage (Dierickx and Cool, 1989, p1506; Priem and Butler, 2001a, p25). Within the framework of the resource-based view, the chain is as strong as its weakest link and therefore requires the resource to display each of the four characteristics to be a possible source of a sustainable competitive advantage

RESOURCE BASED THEORY

.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.

Resources must be valuable, rare, in imitable and non substitutable.

Resources can be divided into two; resources and capabilities. resources are trdable n non specific to the firm; 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 acquired through learning by doing) complexity(large no. of interrelated resources being used) n specificity(dedication to certain resources to specific activities) will result in a competitive barrier.

Certain resorces are accumulated overtime n a competitor cannot perfectly imitate such resources e.g company reputation

strength of early entrants over late entrants; 1.technological know how that enable them to perform at superior level 2.have developed capabilities with time that enable them to out perform lae entrants 3.switching costs incurred to customers if they decide to migrate 4.customer awareness n loyalty.

However, 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 RBV IS ANTI COMPETITIVE I.E a world of non competitive imitation.

IN AN EVER CHANGTNG ENVTRONMENT, NEED TO 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 environments; hence organisations should engade in resource management n resource development.

RESOURCBASED THEORY

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 know-how ,patents trademarks ,brand awareness and managerial ability .(chamberlin,1993;Leonaerd et al ,1965 penrose,1959;Wernefelt ,1984).

The focus of the resource based model of competitive advantage is on the relationship between an organizations resources and its performance (furer et al,2008).Resource based view sees above -average profitability as coming from effective deployment of superior or unique resources that allow firms to have lower costs or better products rather than from tactical manoevring or product market postioning (Fahy 2000).Such resources include tangble assets ,such as a plant and equipment ;intangible assets ,such as patents and brands;and capabilities such as the skills ,knowledge and aptitudes of individuals and groups .

RESOURCE DEPENDENCE THEORY

Resource dependence theory (RDT) is a study of how external resources to an organization affect the behavior of the said organization. Both Strategic and tactical management of any company are adversely affected by the procurement of external Human Resources. Dependence theory has implication regarding the optional division structure of an organization recruitment of Board members and employee, production strategies , contract structure ,external organization links to mention a few.The basic argument of RDT is as follows:- Organization depend on resources

The resources come from its environment

The environment also contain other organization

Resources needed by one organization come from other organizations

The resources are basic power

Legally independent organization can depend on each other

Note that organization As power over organization B is equal to organization Bs dependence on organization As resources. Manages throughout organization know that their success depends on customers demand. In this case customers demand become the ultimate resource to any organization. (http://en.wikipedia.ok)

According to this Article in Wikipedia, dependence theory recently has been under scrutiny in several reviews and meta-analytical studies, Hillman et al (2009); Davis and cob (2010); Drees & Heugens all in their discussion about this topic agreed that the resource dependence theory is one of the many theories of an organization behavior and does not explain the organizational performance per se.According to Davis & cobb (2009), in their research article they consolidated many works including that of Jeff in 1978, the argument on dependence theory they explained it as the reason for mergers and Boards interlocks so that organizations relationships can be used to put into control organizational market failures. This is because the main preposition of this theory is dependence of resource by organization and the resource mostly coming from their environmental counterparts.

This theory focuses on three aspects

The social context matters

Organization strategies to enhance their interest

Power that will come from resources

The main strategic position for any organization is to attempt to alter their dependence relationship by minimizing their own dependence on other organization or by increasing the dependence of other organization on them. In this context organization are viewed as coalitions altering their structure and patterns of behavior to acquire and maintain needed external resources. RDT Proposes that organizations 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

Organizations 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 organization survival

Organization are assumed to work toward two related features i.e. Acquiring control over resources that minimize their dependence on other organization and controlling resources that maximize dependence of others on themselves (pffer, 1978) . RESOURCE DEPENDENCE THEORY

Introduction

The Resource Dependence Theory (RDT) was first developed by Pfeffer and Salancik (1978) in which they characterized the corporation as an open system, dependent on contingencies in the external environment. Nienhuser (2008) studied the extent to which Resource Dependence Theory (RDT) was able to explain the behavior of organizations, and the results of decision making actions such as organizational structures and processes. He 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 organizational structures such as mergers. Davis and Cobb (2009) interpreted the RDT as having three core ideas: social context matters; organizational strategies to enhance autonomy and pursue interests; and the importance of power for understanding internal and external actions of organizations.

Key Predictions (Propositions) According to Nienhuser (2008) the fundamental proposition stated that organizations [or organizational sub-units] controlling resources that other actors (executives) need have power over these actors (executives). Resources differ and are relative to each particular context. Burkhardt and Brass (1990) 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 Saidel (1991)

A second closely related proposition is: the larger the dependency on resources of actor A from actor B, the more likely A is to meet the demands of B. This has been empirically proven in a study of Israeli managers by Pfeffer (1972a) who found a positive correlation between the share of turnover, which the company attained by selling products to state organizations, with the willingness to meet demands (hypothetically named to those surveyed) of state actors. Salanciks findings (1979) showed that women are thus more supported in firms that are dependent on jobs from state organizations. Those firms more dependent on such jobs are more likely to meet demands of state organizations for equal rights than less dependent ones.

The third proposition is that uncertainty will trigger off strategies to reduce uncertainty. Pfeffer (1972b) empirically tested that mergers occur more often in industries highly dependent on resources and where uncertainty is high more so; where, markets are concentrated to a moderate extent. Similarly, according to Pfeffers (1972c; 1973) findings, size 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 (1985) examined the connection between resource dependency and organizational structure. The greater the resource dependency, the more the organization can differentiate itself according to this dependency. Dunford (1987) analyzed 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. Baker and Aldrich (2003) examined how company founders react to the dependency on employees who possess qualifications as critical resource by reducing their dependency.

Implementing correct strategies to reduce uncertainty has a positive effect on organizational performance. According to this proposition, successful organizations should have different, more strongly interweaved connections between management and control instances than those less successful. Pfeffer (1972c) found out that firms that correspond rather with optimal board structure and size are more successful. Sheppard (1995) tested that the amount of controlled resources, the number of personal interconnections that a com pany has (number of board members in other companies), but also the stability of the industry (low uncertainty) has positive effects on the ability of firms to survive.

A fifth proposition can phrased thus: Powerful actors use their power to their advantage; 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 organizations. It has been proven that powerful actors in firms have a longer period of service to the firm than those less powerful. Ideally, they are needed for longer due to the functionality of the resources controlled by them and thus they remain in the organization for longer periods of time. Powerful managers can better defend themselves when environmental change occurs and they retain their positions for longer, using their abilities to secure resources. ( Pfeffer and Salancik, 1977; Allen and Panian 1982)

In conclusion, RDT does not view organizations as formations with homogeneous interests but assumes different interests that leads to conflicts in which the actors within and outside the organization use their power to realize their interests. The power mechanism, striving for retaining and extending power, plays a major role without ignoring the importance of efficiency. It is not environment or resources that determine how organizational core groups decide or act, but cognitively and socially constructed environment. The organization is not viewed as simply adapting to more or less dynamic environment. Rather Resource Dependence Theory assumes organizations create their environment too, change, disapprove resistance and negotiate mergers.

On the whole, Resource Dependence Theory thus significantly contributes to explaining behavior, structure, stability, and change of organizations. It can explain behavior of organizations well.

DYNAMIC CAPABILITY THEORY

According to David Teece the originator of this theory (Dynamic capabilities) 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 quick equipments turns on the line, this is after 25 yrs of practice and experience by Toyota company.

Dynamic capabilities are unique to each company and are rooted deep in the companys history. (kleiner, 2013 para 1) Gratton and Ghoshall called them signature process 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 journal, dec 2007) 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 environment), seizing (mobilizing resources to capture the opportunities), and transforming (continuous renewal), 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, multi-displinary approach to managerial decision making (Teece 2010).

The clusters of activities mentioned earlier as propositions may be elaborated as follows:

Sensing involves exploring technological opportunities in the environment, listening to customers, probing members etc.

Seizing is a capability of designing business models to satisfy customers and add value. Securing capital and human resources. Companies that successfully build assets within the eco-system stand to profit more. Employee motivation is very vital. Apple inc. maintained an estimated 40% gross profit from the value chain on its hard-drive based I-pods, even though it did not manufacture any single part of the product (Linden etal 2009).

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 long-term competitive advantage. Its known that this capability grew out of resource based view of the firm and the concept of routine in evolutionary theories of organization.

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. Strategic scholars Gregory Ludwig and Von pemperton (2011), In 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 (Wikipedia article, dynamic capabilities)

DYNAMICS CAPABILITIES THEORY

Competitive advantage is unlikely to remain static forever .Competitors, technology, managers, customers, and many other factors are likely to change over time. There should be proactive strategy to manage this process. Organizations should seek to manage and shape the dynamics of the environment.

The organizations 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.

1. Sensing the changes in the environment

2. Seizing the opportunities that such changes present

3. Surveying the outcomes of such changes, not just in a reflective way but also to shape the future change.

Dynamics capabilities are organizations abilities to develop and change competences to meet rapidly changing environment. Environments are changing faster .There is need for organizations to put emphasis on the organizations capability to change, innovate, be flexible and learn how to adapt to a rapidly changing environments.

DYNAMIC CAPABILITY THEORY

The Dynamic Capabilities Approach (DCA) which emphasizes the mobilization of the firms

capabilities to achieve superior performance came as an extension to the RBV. While it recognizes the

importance of developing unique, hard-to -copy resources and capabilities, the DCA 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, Pisano et al. 1997; Teece 2007). The key to sustainable

competitive advantage from the DCA 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 DCA is rooted in the Schumpeterian 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. It highlights the critical importance of competencies that transcend technical

capabilities and infuse the firm with nimbleness, innovativeness and evolutionary fitness for it to thrive.

In this respect, the DCA is often viewed as an extension of the RBV (Teece 2007).

In contrast to resources, capabilities are intangible and non-observable; they are resistant to monetary

valuation and cannot be traded except in their entirety (Hoopes, Madsen et al. 2003). 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. It would require the acquisition of the entire unit.

Organizational 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 (Helfat and Peteraf, 2003). In this

regard, organizational capabilities are firm specific, socially complex attributes which reside within

corporate culture and network of employees(Amit and Schoemaker 1993; Collis 1994) . As such,

organizational capabilities are built rather than bought (Makadok 2001).

The firm does not exist except for resources, and even if resources are present it cannot produce

without organizational capabilities. Resources are observable and substantial inputs. Capabilities tend to

be nebulous and harder to pin down. Metaphorically speaking resources are the body and capabilities are

the soul of strategy.

The dynamic capability approach focuses

attention on the firms ability to renew its resources

in line with changes in its environment.

Dynamic capabilities refer to the firms ability to

alter the resource base by creating, integrating,

recombining and releasing resources (Eisenhardt

292 C. Bowman and V. Ambrosini

and Martin, 2000). They may involve processes

of coordination, replication, learning and reconfiguration

(Teece, Pisano and Shuen, 1997). In

these two major contributions to the DCV,

Teece, Pisano and Shuen (1997) and Eisenhardt

and Martin (2000), they make no clear distinction

between capabilities performed at corporate rather

than SBU level.

Dynamic capabilities are built rather than

bought in the market, and they are embedded

in the organization (see Makadok, 2001 for an

elaboration of this point). These capabilities are

likely to be path dependent routines (Eisenhardt

and Martin, 2000) and as such they may resist

imitation by rival corporations.

This source of competitive advantage, dynamic capabilities, emphasizes two aspects. First, it refers to the shifting character of the environment; second, it emphasizes the key role of strategic management in appropriately adapting, integrating, and re-configuring internal and external organizational skills, resources, and functional competences toward changing environment. Only recently have researchers begun to focus on the specifics of developing firm-specific 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 firm's processes, and conditioned by its history. It 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 USA and elsewhere.The Dynamic Capabilities Framework helps identify the factors likely to impact enterprise performance. It is gradually developing into a (interdisciplinary) theory of the modern corporation (Teece, 2010).

The Dynamic Capabilities perspective goes beyond a financial-statement view of assets to emphasize the soft assets 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 specialization. It recognizes that to make the global system of vertical specialization and co-specialization 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 joint solution to business problems that customers will value.

Dynamic capabilities can usefully be thought of as belonging to three clusters of activities and adjustments: (1) identification and assessment of an opportunity (sensing); (2) mobilization of resources to address an opportunity and to capture value from doing so (seizing); and (3) continued renewal (transforming). These activities are required 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. Performance of these activities draws on all the skills and disciplines used in the curriculum of business schools everywhere. The Dynamic Capabilities Framework helps organize and harness (academic) disciplinary knowledge so as to apply it to the task of building durable competitive advantage at the enterprise level.

Seizing 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. Good incentive design is a necessary but not sufficient condition for superior performance in this area. Strong relationships must also be forged externally with suppliers, complementors, and customers.

Companies that successfully build and orchestrate assets within the ecosystem stand to profit handsomely. Apple retained an estimated 40 percent of the gross profits from the entirety of the value chain on its hard drive-based iPods, despite manufacturing no part of the product itself (Linden et al., 2009). This is not counting the revenue from licensing makers of iPod accessories or sales from the iTunes Music Store.

Transforming capabilities are needed most obviously when radical new opportunities are to be addressed. But 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. A firms assets must also be kept in alignment to achieve the best strategic fit: firm with ecosystem, structure with strategy, and assets with each other. Complementarities need to be constantly managed (reconfigured as necessary) to achieve evolutionary fitness, avoiding loss of value should market leverage shift to favor external complements.

Apple has proved to be a paradigmatic practitioner of dynamic capabilities as it has created and transformed a series of markets. Table 2 shows how each of its major product introductions reflected aspects of the major categories of dynamic capabilities. In particular, Apples strategy implementation has created and shaped markets.

References

Teece, David J. (2007). Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Performance, Strategic Management Journal, 28(13): 1319-1350.

STRATEGY & BUSINESS E-JOURNAL Published:November 11, 2013

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The Dynamic Capabilities of David Teece

To U.C. Berkeley's long-standing strategy thinker, companies gain an edge only when they evolve in ways no one else can match.

by Art Kleiner

Photograph by Jonathan Payne

Every great company is involved in building great capabilities: gaining competitive advantage from the things it does exceptionally well. In the last few years, the growing recognition of capabilities importance in management strategy and business innovation has made David Teeces work particularly relevant. A professor at the Haas School of Business at the University of California at Berkeley, Teece originated the theory of dynamic capabilities 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 required Teece to turn against his own academic heritage. Originally from New Zealand, he studied economics at the University of Pennsylvania, where one of his mentors was Nobel laureate Oliver Williamson. (Teeces work, in turn, influenced management strategy theorist Gary Pisano and business innovation expert Henry Chesbrough, who were his students and collaborators.)

Teece sat down with us at the Berkeley Research Group in Emeryville, Calif.a firm that he cofounded in 2010 and chairsto talk about the origins of the theory, the relationship of economic value to capabilities-driven strategies, and the ever-challenging quest to define how companies can reliably develop dynamic capabilities of their own.

S+B: What is a dynamic capability?TEECE: A capability is a set of learned processes and activities that enable a company to produce a particular outcome. Ordinary 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 quick equipment turns on the line. It took 25 years, but every company has now learned the Toyota production system. You can learn it by taking an engineering class here at U.C. Berkeley.

Dynamic capabilities, unlike ordinary capabilities, are idiosyncratic: unique to each company and rooted in the companys history. Theyre captured not just in routines, but in business models that go back decades and that are difficult to imitate. Lynda Gratton and the late Sumantra Ghoshal called them signature processes. They are the way things are done around here.

S+B: Where do these signature processes come from?TEECE: Usually theyre based on things that the company has done in the past, going back to its origins. But I dont buy into the deterministic view that once a company gets going, everything it does is locked in place. Instead, companies adapt, in a process much like evolutionary fitness. As the business niche changes, the capability changes accordingly.

Companies adapt, in a process much like evolutionary fitness.

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Twitter LinkedIn Facebook Google PlusThat doesnt just happen on its own. Three types of managerial activities can make a capability dynamic: sensing (which means identifying and assessing opportunities outside your company), seizing (mobilizing your resources to capture value from those opportunities), and transforming (continuous renewal). This framework, which I described in my paper Explicating Dynamic Capabilities [Strategic Management Journal, Dec. 2007] explains how to get the future right: how to position todays resources properly for tomorrow.

For example, Nokia missed the smartphone revolution because the company was not well equipped for sensingespecially compared to Apple, which was embedded in the milieu that was breeding the next generation of smartphones. Based here in the San Francisco Bay Area, Steve Jobs sensed what customers wanted, and he knew what technologists were doing. Even more importantly, he built the capabilities that Apple needed, step by step. For example, to make the iPod work, Apple developed capabilities in digital rights management and handheld device design. Jobs and his team learned how to cut deals with studios and recording companies, and how to bring together user-friendly technology in a very appealing form factor.

Nokia had a research lab in Berkeley, but their base of operations was far away, in Finland, and they relied too much on their own R&D. They tapped into the science, but they missed the state of mind.

S+B: How did your idea of dynamic capabilities evolve?TEECE: In the 1980s and 1990s, I taught classical microeconomics to MBA students at Stanford and Berkeley, and one of the ideas we discussed was that a firm was a black box. [This theory implied that] managers of different firms would respond in the same way to external events. Some 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. It was also present in the cases we studiedbut went unrecognized.

For instance, my own early work had focused on why companies profited (or didnt profit) from innovation. In 1986, I had published a case story on the EMI Group, a wonderfully innovative company that failed in the marketplace. Until it went bankrupt and was sold in 2012, EMI was a diversified technology enterprise based in London. During World War II, it built the first airborne onboard radar, on the Bristol Beaufighter aircraft. In the 1960s, it was the Beatles first recording label. Then in 1967, an EMI electrical engineer named Godfrey Hounsfield started work on the first commercially viable computed tomography (CT) scanner. He introduced it at a radiology conference in 1971, and it became instantly famous in the profession. This was a brilliant effort, the greatest contribution to radiography since X-rays, one of the earliest devices to combine hardware and software into a single dedicated machine, and a machine that changed the world. Hounsfield won the Nobel Prize in 1979 for it. But EMI never profited from the CT scanner. It made only a few of them at first, one of which it sold to General Electric.

Stories like this tend to be told as failures of strategy. But EMIs leaders knew that the United States was the most viable market for their product. Unfortunately, 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, GE and Siemens had reverse engineered the CT scanner and taken the market over. EMI ended up with nothing, other than copyright claims in an infringement lawsuit. It wasnt a failure in strategy. They lacked capabilities.

So I set out on my own inquiry about capabilities. I found intellectual support from non-mainstream economists who were interested in innovation and evolutionary economics: Sidney G. Winter (then at Yale, now at Wharton) and Richard R. Nelson [now professor emeritus] at Columbia. In 1997, I published my first paper on the subject [Dynamic Capabilities and Strategic Management, Strategic Management Journal, August 1997], with Gary Pisano (now at Harvard) and Amy Shuen (who went on to teach at San Jose State). Along with Jensen and Mecklings paper on the agency theory of the firm, its one of the two most cited papers in economics and business.

S+B: How do intellectual property rights and capabilities fit together?TEECE: Unless you have truly fundamental inventions that no one else can copy, you need both. Strong 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. But sooner or later, youre going to get copied, so youve got to move quickly 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. In most companies, the general counsel and the top strategy people dont talk much to each otherbut they should.

S+B: How can dynamic capabilities be scaled up throughout a large company?TEECE: I may be the only economist who is a strong believer in corporate culture; I explain corporate culture to my economist friends as control on the cheap. Corporate culture is about getting people to do things without necessarily having to bribe or threaten them. [Using] dynamic capabilities requires that you infuse this entrepreneurial culture throughout the organization. Only then does top management have a chance of actually making the organization robust.

Corporate culture is about getting people to do things without necessarily having to bribe or threaten them.

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Twitter LinkedIn Facebook Google PlusS+B: Is there a reliable theory that tells you how to build dynamic capabilities?TEECE: Not yet. I 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 Popper sense: You cant disprove, for example, that a company built dynamic capabilities without doing any sensing.

Its very hard to figure out which capabilities are most important, which aspect of the way things are done around here is the one that leads to superior performance. Sometimes people in an organization dont know why their own capability is successful. They attribute their success to the wrong factors. In the early 1980s, many U.S. industries went down a lot of blind alleys trying to reverse engineer the reason for Japans success. First, they thought it was Japans lower cost of capital, then it was government subsidies, or possibly even robotics. Then maybe it was their calisthenics at lunchtime. If youre going to copy something, as Dick Rumelt says, you have to understand how the underlying system works.

Thats the contribution we make with dynamic capabilities. A 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. It provides an intellectual structure for businesspeople to start thinking systematically about why companies succeedor fail.Author Profile:

Art Kleiner is editor-in-chief of strategy+business.