Home » Business »Corporate »Phin Upham »Technology » Currently Reading:

Why Firms Win, by Phin Upham

September 20, 2011 Business, Corporate, Phin Upham, Technology No Comments

Why do some firms, like IBM or GE succeed while others fail?  In this essay Phin Upham explores some of the seminal points of view in the field of organizational theory.

There are many views in organizational theory which can explain why some firms are better at doing certain things than others, why some firms have a sustainable “competitive advantage.”  One source of advantage for firms can be argued to be a form of the dynamic capabilities view.  The so-called capabilities view, alone, is a very powerful group of ideas.  It explains, I think, much of the successes, failures, and sources of struggle that the business world travails.  The dynamic capabilities view adds some complexity – and it is especially valuable in times of uncertainly to change.  But its added value is, I believe, sometimes overstated by the authors of essays on the topic.  While it is important, a firm that has good capabilities and a fairly rational structure captures much of the competitive advantage that is relevant.  Dynamic capabilities, which adds on the “learning to learn” piece of the puzzle, as far as it goes beyond normal firm learning (it would be unfair to say that every firm, even a normally well functioning one, has a dynamic capability to learn from itself – this would debase the term into a truism.  So I limit it to well above average or explicit sorts of abilities to “learn to learn”), is a marginal improvement.

The capabilities point of view for organizations is underpinned by the work of Nelson and Winter (1982) “Organizational Capabilities and Behavior.”  This view begins with the level of the individual – suggesting that in individuals, skilled behavior is a product of routine, tacit knowledge and a product of past behavior/learning.  This essay relaxes some of the assumptions of classical micro-economics including inputs are homogenous, entrepreneurs are identical, firms optimize, etc..  In fact, Nelson and Winter argue, decisions in organizations may not be optimal, they may just be the descriptions that either personal experience or organizational memory imply.  Organizational memory, accessed and contributed to by individuals, exists in individuals personal and organizational experience, external memory (such as files), and the physical state of the plant itself.  Nelson and Winter generalize from this individual perspective (influenced by the work of Simon on organization and Kohneman and Tversky on heuristics) to apply this view of “evolutionary economics” to an organizational level.  So, the theory is build up from the micro to the macro level in such a way as there is both a conceptual parallel between the micro and the macro, and that there is also a causal link between the behavior of individuals in a firm and the nature and behavior of the capabilities of that firm.

Nelson and Winter go on to construct a picture of organizational routines that are in effect truces between organizational and individual motivations.  Organizational routines, which are build up as a confluence of both the individual skills and the organizational physical memory and physical equipment configuration, allow for organizational capabilities.  This view provides the foundation of the capabilities view and also generates some interesting consequences.  The first is that organizational routines (and thus organizational capabilities) resist changes, even ones that are for the better.  Secondly, this implies that the organizational capabilities are very hard to imitate by outside firms that attempt to copy a given ability.  In fact, even replication inside the firm can be difficult since as Dosi, Giovanni, Nelson and Winter – editors (2000) argue, not only are the attributes necessary to accomplish a skill unknown but the successful execution of the skill requires a complex interconnection of these attributes. This resistence to change is a soure of the the ability for capabilities to be seen as a competitive advantage as well.  It a fimr could simply modify itself to be like another fimr – routines and all – then it would not be a very log lasting advantage for theother firm.  But the path dependency and lack of simplicity of capabilities lends them much of the r power as sources of durable competitive advantage.

Capabilities, though, cannot be of the common garden variety if they are to be valuable.  Jay Barney (1991) argues that if capabilities are to confer strategic advantage, they must be of a special type.  They must do more than be useful, they ust confer a sustained competitive advantage.  This implies that other firms are unable to duplicate (at least in the medium term) the advantages that the capabilities confer.  In order for a resource (or capability, which can be seen as a sort of resource) to act as a source of competitive advantage, it must be valuable, rare, imperfectly imitable, and without common, imitable, or strategically equivalent substitutes.  Dericks and Cool (1989) elaborate further on how these firm level capabilities might work.  They describe how strategic asset stocks can be seen as flowing over time – either rising or falling.  Thus, many capabilities grow over time, they cannot be acquired immediately.  This is due to time compression diseconomies, asset mass efficiency, causal ambiguity, and a number of other factors elaborated on.  Lastly, Jan Rivkin (2001) describes how capabilities must not be too complex or they will be un-imitable within the company (the company cannot take full advantage of them) nor to simple, or every other competitor will copy them (a la White Castle in Winter and Szulanski (2000)).  So capabilities must be of a certain sort to be durable competitive advantages – hard to imitate, rare, non-substitutable, but able to be replicated (in fact, a non-replicable capability might even be a better source of competitive advantage then a replicable one – since it will likely be  more sustained, but it is also less valuable since it is less leveragable.).

Capabilities are made up of a web of interconnecting routines, skills, bases of knowledge, firm-specific assets, and physical setups.  They are based around tasks not products (Wernerfelt 1984) and reside at the firm level.  Strategy at the capability level involves extracting rents from rare firm-specific resources.  Competitive advantage in this view lies upstream from products in idiosyncratic and difficult to imitate resources.  Thus, a firm in this view must be aware not only of its situation but also of its intra-firm advantages (strengths) and disadvantages (weaknesses) and attempt to take advantage of these factors and gain a durable source of competitive advantage.

This foundation of capabilities is can be built upon and made more rich by the idea of dynamic capabilities which focuses on, according to Teece, Pisano and Shuen (1997), the firm’s ability to achieve success by being responsive to change, build organizational mechanisms to encourage rapid and flexible product innovation, as well as management’s ability to “effectively coordinate and redeploy internal and external competencies.”  This approach focuses on how organizations renew their competencies, about the management and reconfiguration of competencies to achieve new and innovative forms of competitive advantage as it is about exploiting existing competencies.  Competitive advantage, thus, lies not only in the specific assets embedded in the form but also in the managerial and organizational processes which manage these resources, by the path dependencies and market positions taken by the firms

Henderson and Cockburn (1994) attempt to tease apart some aspects of dynamic capabilities.  They differentiate between component competence, or the competence embedded in local areas of the firm and architectural competence which they see as the competence that allows for the integration and flexible use of component competencies.  Pisano’s (2000) detailed study of how organizations manage their learned knowledge is a good example of the complex but vital thrust of dynamic capabilities.  Pisano argues that organizations received two benefits from doing an action – that of the product or result of the action, and also the knowledge that this production generated. If an organization only focuses on exploiting its resources, this second sort of knowledge is not fully utilized.  Thus, Pisano argues for the strategic use of action such that it will allow one to build knowledge bases and generate more capabilities that did not originally exist.

The idea that dynamic capabilities brings into the strategic framework – that both capabilities and the generation of new capabilities as well as the flexible combination of capabilities in response to changes in the market are vital – is extended by Collis (1994) who points out explicitly that since dynamic capabilities or “learning to learn” are, in some senses, the 2nd order of normal capabilities, why could we not take a 3rd and 4th order capabilities in order to gain competitive advantage.  He concludes that there will never be a final, ultimate source of competitive advantage since one cannot avoid infinite regression in capabilities.  Dynamic capabilities build on the resource based view and extend the literature into the sort of evolutionary and complex world that Nelson and Winter envision for strategy.  They lend an important component to the dynamic capabilities view – one which emphasizes how a firm renews and maintains capabilities – advantages – over time and through change.  We can see this idea of dynamic capabilities, with the idea of capabilities within this lending a large part of its power, being a powerful candidate for sustained competitive advantage.

Jay Barney’s to essays in this classes readings make a powerful argument about sustained competitive advantage.  The first, 1986, argues that any capability that is valuable must be acquired and thus it will, barring superior insight or luck, be as expensive as it is valuable.  So if a firm can gain competitive advantage from dynamic capabilities to, say, encourage information flow between R&D and manufacturing, and this advantage was well known, then all firms would acquire this ability up to the point where the cost of this ability was equal to its advantage.  Then this would not be a source of competitive advantage.  This argument is somewhat less powerful than it appears when applied to dynamic capability/capability mix since 1) firms are heterogeneous in their paths and abilities so a strategy pursued in one firm might not be possible or successful in another, so a valuable competitive advantage in one attribute might not be quickly devalued as others try to imitate of they cannot imitate (Diericx and Cool would agree in their 1989 piece).  Barney attributes the ability of a firm to gain competitive advantage through competency in this article to uncertainty while I attribute it more to heterogeneity of firms.  Barney moves closer to this view in his second article in 1991.  He argues that a resource must be valuable, rare, imperfectly imitable, and without common or imitable strategically equivalent substitutes.  He also claims that sustained competitive advantage is one which cannot be copied by others even over time.

Phin Upham has a PhD in Applied Economics from the Wharton School (University of Pennsylvania).  Phin is a Term Member of the Council on Foreign Relations.  He can be reached at phin@phinupham.com.

Read more by Phin on The Academic Ledger

Comment on this Article:

RSS Tech Digest World

  • BitTorrent Dips Toes Into Ad Stream June 24, 2016
    BitTorrent on Thursday announced a revamp of its Bundle offering as a pilot project, giving it a new name, "BitTorrent Now." Heavily used by independent musicians and filmmakers, as well as the BBC and other organizations, the service now accepts ads. BitTorrent Now's first streaming app is available for Android. Apps for iOS and Apple TV are […]
    Richard Adhikari
  • Study: Third-Party Apps Pose Risks for Enterprises June 23, 2016
    Since mobile computing put an end to the good old days when IT departments had absolute control over software deployed in the enterprise, there's been a rise in employees' use of third-party applications -- a rise that poses security risks to corporate environments. That is one of the findings in a report CloudLock released last week. […]
    John P. Mello Jr.
  • Headphone Jack-less iPhone 7 Rumor Gains Ground June 22, 2016
    The rumor that Apple will get rid of the headphone jack in the iPhone 7 resurfaced Tuesday. Apple is expected to launch the new iPhone later this year. The iPhone's Lightning connector reportedly will do double duty as its charging port and headphone connector. The result will be a thinner device and better water resistance. If true, the move "is r […]
    Richard Adhikari
  • Twitter Applies '140' Rule to Video Seconds June 22, 2016
    Twitter on Tuesday launched enhanced video services that will allow users to post longer videos -- up to 140 seconds. It also announced a new platform for celebrities and public figures to share their stories. Because sports, news, music and other videos increasingly are the type of content that goes viral on Twitter, the company decided to expand content pa […]
    David Jones
  • Docker Tunes Up Engine Orchestration June 22, 2016
    Docker on Monday announced Docker Engine 1.12 with built-in orchestration, which allows automated deployment and management of Dockerized distributed applications and microservices at scale in production. Users can select Docker Swarm mode to turn on built-in orchestration, or they can use their own custom tooling or third-party orchestrators that run on Doc […]
    Richard Adhikari
  • Google Makes It Easier to Do the 2-Step June 21, 2016
    Google on Monday began rolling out a new two-step authentication feature, Google Prompt, targeting enterprise employees. The new option consists of a pop-up that displays a mobile user's name and profile image, and that specifies the location and device involved in the attempted sign-in. The device owner is asked whether to allow or deny the sign-in. […]
    Richard Adhikari
  • Gadget Ogling: Pliable Phones, Clever Kicks, and Sumptuous Speakers June 21, 2016
    Lenovo has peeled back the curtain on a smartphone that you can wrap around your wrist, sporting a full-color screen. The "CPlus," as Lenovo calls the prototype, runs Android and has a 4.26-inch display. It will be available in 12 colors if and when it goes on sale. It's clear bendable smartphones will be a viable consumer product in the near […]
    Kris Holt
  • Plume Podifies Home WiFi June 21, 2016
    Plume last week introduced its eponymous self-optimizing WiFi system for the home. Plume adapts in real life to the different network demands made by various devices and ensures that each gets the fastest speeds possible, according to the company. The recommended setup is one pod per room and connecting space, such as a hallway, plus any cable or DSL modem o […]
    Richard Adhikari
  • Linux Snap Package Format Goes Multi-Distro June 20, 2016
    Snapcraft -- the Linux package format Canonical developed for Ubuntu -- now works on multiple Linux distros, including Arch, Debian, Fedora and various flavors of Ubuntu. They're being validated on CentOS, Elementary, Gentoo, Mint, OpenSUSE, OpenWrt and RHEL. "Distributing applications on Linux is not always easy," said Canonical's Manik […]
    Richard Adhikari
  • AI for President June 20, 2016
    Andy Rubin, Android's daddy, last week made some interesting comments about quantum computing and artificial intelligence. The part I agree with is it won't be long until most things we have are connected to an intelligent machine. However, when referring to something that will be far smarter than we are, the use of the term "artificial" […]
    Rob Enderle

RSS Wired Top Stories

  • So Hey You Should Stop Using Texts for Two-Factor Authentication June 26, 2016
    A string of recent SMS hacks means security-conscious users should switch to a more secure login system. The post So Hey You Should Stop Using Texts for Two-Factor Authentication appeared first on WIRED. […]
    Andy Greenberg
  • This $15K Electric Motorcycle Made Me Love Riding in NYC June 26, 2016
    Alta Motors’ electric RedShift SM may be the ultimate commuter bike. The post This $15K Electric Motorcycle Made Me Love Riding in NYC appeared first on WIRED. […]
    Jonathan Welsh
  • An MIT Algorithm Predicts the Future by Watching TV June 26, 2016
    Using neural networks and shows like “The Office” and “Big Bang Theory,” CSAIL’s system was able to predict how actors were about to greet each other. The post An MIT Algorithm Predicts the Future by Watching TV appeared first on WIRED. […]
    Tim Moynihan
  • LA’s New Skyslide Is in Good, Heart-Attack-Inducing Company June 26, 2016
    Cubes slide out from buildings, windows tilt out. Heart attacks are waiting to happen on top of today's towers. The post LA's New Skyslide Is in Good, Heart-Attack-Inducing Company appeared first on WIRED. […]
    Sam Lubell
  • Security News This Week: Brexit Edition (Hey, at Least Bitcoin Is OK) June 25, 2016
    Each Saturday we round up the news stories that we didn’t break or cover in depth at WIRED, but which deserve your attention nonetheless. The post Security News This Week: Brexit Edition (Hey, at Least Bitcoin Is OK) appeared first on WIRED. […]
    Brian Barrett
  • This Is One Seriously Cool Garage-Door Opener. Seriously. June 25, 2016
    The Ryobi Ultra-Quiet Garage Door Opener lets you add a Bluetooth speaker, some lasers, and a battery pack to its modular base unit. The post This Is One Seriously Cool Garage-Door Opener. Seriously. appeared first on WIRED. […]
    Tim Moynihan
  • How the House Sit-In Went Down, From the People Who Made It Happen June 25, 2016
    Members of Congress livestreamed nearly every minute of their historic 26-hour sit-in. This is how government works now. The post How the House Sit-In Went Down, From the People Who Made It Happen appeared first on WIRED. […]
    Issie Lapowsky
  • Brexit Could Make Space Boffins All Topsy Wopsy, Innit? June 25, 2016
    Space transcends political boundaries, but access to it is still subject to the decisions made here on Earth. The post Brexit Could Make Space Boffins All Topsy Wopsy, Innit? appeared first on WIRED. […]
    Nick Stockton
  • A Gold-Leaf Brain Lights Up With the Awesome Complexity of Neurons June 25, 2016
    "When you have this gigantic thing looming in front of you with the lights draping over it and it’s just exploding with activity, even a little kid can look at that and just be like, 'Holy shit! This is really complicated.'" The post A Gold-Leaf Brain Lights Up With the Awesome Complexity of Neurons appeared first on WIRED. […]
    Brendan Cole
  • A Few Thor: Ragnarok Updates, Straight From Its Director June 24, 2016
    The director is hard at work on his new Marvel project. Here's what he had to say about the movie so far. The post A Few Thor: Ragnarok Updates, Straight From Its Director appeared first on WIRED. […]
    Angela Watercutter

ABOUT US

The Tech Rundown is news curator and information aggregator. The content is curated by several editors and a vast social network built around great tech stories.

The Tech Rundown publishes original articles by some of the most accomplished tech writers working today, at lengths that allow them to be read in a single sitting. Featured articles typically range between 10,000 and 35,000 words and are available in digital form, with select titles also available as audio or print-on-demand books. They tackle compelling stories across the wide world of tech and tech-related news.

Readers can quickly discover, share, and discuss stories on The Tech Rundown with a community of fellow readers, gadget heads, and news junkies. The Tech Rundown also acts as a platform for up and coming tech writers, enabling them to connect directly with their audience.

The Tech Rundown - Covering Tech All Day and All Night