IE 463

1. IE 463 Lec 4. Firm and External Cooperation-2

2. DYNAMIC CAPABILITIES Dynamic Capability The capability by which managers “integrate, build, and reconfigure internal and external competencies to address rapidly changing environments”. Dynamic capabilities correspond to ”combinative capabilities,” i.e., the ability to aquire and synthesize knowledge resources and build new applications from those resources. As a concept, it “emphasizes the key role of strategic management in appropriately adapting, integrating, and re-configuring internal and external organizational skills, resources, and functional competencies toward a changing environment”

3. 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).

4. Example of Kodak Kodak was the dominant firm in the imaging market when the market was still based on chemical processes rather than digital image processing. Whenswithched to digital photography, Kodak was still well equipped with the needed resources to create a competitive advantage on selling film or processing the printing of images on paper. In the digital world however different resources were needed to provide a superior imaging experience. • Technology wise there was the need to develop sensors to translate an image into a digital signal, write software that allows treating digital images and create digital photo albums so that customers can store, share and show their images. • Most likely the needed resources for the digital world would also have included managerial abilities such as forming and managing alliances with partners that can contribute complementary assets, such as software companies or companies that can play complementary roles in the new value chain.

5. DYNAMICAL CAPABILITIES - ALLIANCES Firms need to renew their competences to remain competitive, often by learning from other firms (competence building). Here, alliances provide a convinient climate for this learning; • firmsin alliances discover the competences of their partners • firm dynamiccapabilities allow themto utilize the competence stock of their alliance partners when making necessary changes in their own competences • partnerships are developed or new ones are started during theprocess of synthesizing and transformingcompetences. Ex: When firms start to cooperate withcompetitors, they enter a ‘coopetitive’ strategy. In such an alliance, dynamic capabilities actas mediator of coopetitionrelationships.

6. INNOVATION Innovations are new and improved products andprocesses, new organizational forms, the application of existing technologies to new fields, the discovery of new resources, and the opening of new markets. Innovation Process Product Organizational Goods Services Technological

7. INNOVATION IN THE KNOWLEDGE ECONOMY Innovation is an interactive (social) process by which firms master and get practice of product designs and manufacturing processes that are new to them, whether they are new to the world or not. The definition also includes, • new forms of organization • institutional innovations Innovation is by definition a discontinuous process, often described by phrases like “gales of creative destruction”, “distruptive technologies”.

8. Schumpeter: • goal is not efficiency but innovation • equilibrium is not the final outcome (e.g. technical change and innovation does not allow equilibrium to settle) • entrepreneurship (entrepreneur demands the capabilities to redesign the chain of complementary activities - supply driven) • creative destruction Small Firms, Entrepreneurs Economic Growth Innovation Large Firms withIndustrial R&D Labs

9. Penrose: • goal is the growth of the firm (firm grows in order to take advantage of excess capacity notably managerial and technical capabilities - supply driven) • firm is a collection of productive resources that never reach equilibrium • it is never resources themselves that are the inputs in the production process, but only the services that the resources can render • the productivity of resources depends on each firm’s specific culture

10. In knowledge-based approach the firm; • is an organization that knows how to do things, acting like a repository of knowledge about production • naturally makes mistaken decisions in an uncertain world • has inadequate knowledge base and a flawed capacity to utilize it Hence, instead of taking uniformly efficient performance as the norm, one should consider the observed behavior and variations in it (why do firms are different in their performances?). Example: Technology is a complex system. When making decisions about technology, firm faces many uncertainities which may not be completely reduced (ie. brought under control).

11. In the evolutionary approach, firm is a complex evolutionary system; • that does not function in isolation (ie. independent of the others), but constantly interacting with a dynamic environment • making exchanges of goods, services, information, knowledge etc. through its external links • adapting to outside changes by learning and developing new routines • changing its environment as it changes • hence an element of a greater system. It follows that, an innovator does not innovate alone! External relationships and network structures are required to ensure the success of innovations.

12. TECHNOLOGY, INNOVATION Paradigm “A model and a pattern of solution of selected technological problems, based on selected principles derived from natural sciences and on selected material (relevant) technologies” Within a paradigm problem solving behaviour is developed: The selected principles generate routines, heuristics. Together they constitute relevant knowledge. Heuristic: A rule of thumb or guideline (as opposed to an invariant procedure).

13. Technological Paradigm A core concept of new economics. The term technological paradigm is used within field of the economics of technological changes, to explain the radical changes in technology as the material basis of production of goods and services. A technological paradigm denotes a specific solution to the existing technological and economic problems. Ex: water mill, eletrical machinery, internal combustion engines, aircraft trchnology, microchips, biotechnology, etc. Q: What are the next important technological paradigms?

14. When new technology; • revolutionizes the structure of the industry • dramatically alters the nature of competition • requires companies to adopt new strategies to survive it represents a technological paradigm shift. Ex: Technological change, • from steam engine to gasoline engine • from chemical medicines to molecular medicines

15. Paradigm shifts are more likely to occur when; • the established technology in the industry is mature and approaching its natural limit (e.g. semiconductors) • a new disruptive technology has entered the marketplace and is taking root in niches that are poorly served by incumbent companies using established technology (e.g. microcomputers) Technological trajectories: Once a paradigm is chosen, technological artifacts developed within this paradigm stand a good chance of being improved into new products or processes. This improvement pattern is a technological trajectory.

16. PROFILE OF SUCCESSIVE TECHNOLOGICAL INNOVATIONS successor technology (automobile) Performance Physical limit of technology discontunity established technology (horse and cart) Effort (funds)

17. SYSTEMS VIEW OF INNOVATION the rate of technological change and companies effectiveness; • do not depend simply on the scale of R&D • but also, on the way available resources are managed and organised … System of Innovation

18. CHARACTERISTICS OF THE INNOVATION SYSTEM interactivity multidisciplinary connectivity Linkages integration Know-how internal /external

19. 1. Network of institutions that interact to initiate, import and diffuse new technologies; • government policy • corporate R&D • education and training system • structure of industry 2. Patterns of interaction between firms as collective learning process in acquisition and use of new knowledge; • internal organization of firms • network of interfirm relationships • role of public sector • degree of R&D intensity • nature of R&D organization

20. Public R&D/Labs Public Sector S&T Users University Rest of World incl. MNEs Government Private Corporations Private Labs Financial Institutions Private & Public Business Support Services : finance : knowledge

21. OECD SYSTEMS OF INNOVATION PERSPECTIVE

22. NETWORK THEORY A wider perspective of relationships: • relationships to single specific counterparts does not reflect the whole picture • one-to-one relationships do not exist in isolation, but the partners at “both ends” also are in relationships with other firms • thus, relationships are part of a larger net of relationships, a network If relationships with firms more distant in the value chain are important, and if the capability of the firm to fulfil its objectives (and its performance) depends partly on those, then the development and performance of firms will be explained by their ability to develop relationships.

23. The business relationships are processes of, • adaptation • cooperation and conflict • social interaction • routinization These relationships are, • essential for economic performance • connected By focussing on relationships and their connectedness, a business enterprise acquires quite another face than the one in the management literature, as an island, an isolated unit with clear boundaries and with standardized exchange with its environment.

24. Traditional view: enterprise as the focal object environment environment strategy enterprise organization E enterprise E Expanded view: enterprise as part of interacting system E

25. Hakansson and Johanson: The function of business relationships can be characterized with respect toactivities (which linked in which ways) • actors (who; how they are related) • resources (which; which patterns of adaptation)

26. Actors, Resources and Activities Model Actors: at different levels (from individuals to groups of companies), actors aim to increase their control of the network Actors perform activities. Actors have a certain knowledge of activities. Actors control resources (alone or jointly). Actors have a certain knowledge of resources. NETWORK Activities link resources to each other. Activities change or exchange resources through use of other resources. Resources: heterogenous, human and physical, and mutually dependent Activities: include transformation act, transaction act and activity cycles

27. What is a network? “A set of two or more connected business relationships, in which each exchange relation is between business firms that are conceptualized as collective actors”. Connected means the extent to which “exchange in one relation is contingent upon exchange (or non-exchange) in the other relationship” • The actors (companies) may or may not have a common goal, but there exist some shared beliefs about the activity pattern as well as the resource constellation • In network models of resource allocation, transactions occur neither through exchanges nor by administrative fiat, but through networks of individuals engaged in reciprocal, preferrential, mutually supportive actions

28. A network has no clear boundaries, nor any centre or apex. It exists as an “organization” in terms of a certain logic affecting the ordering of activities, resources and actors. It can be seen as an organization as it affects how companies are reciprocally related and positioned. As a form of organisation it will only be kept together as long as the network logic is accepted by enough actors • Formal or informal, networks are replacing simple market based transactions and traditional bureaucratic hierarchical org.s

29. In network approach, • firm is an agent of economic relations, a partner in the network (a system) of organizations operating in the market • network is a rather stable market structure which, - predetermines the role and place of the firm in it - affects the results of its activities - modifies firm’s management system • networks are highly specialized, decentralized, dynamic, flexible, high trust (shared vision, ideologies and values) organizations with rich communication flows • pressures towards efficiency and flexibility are pushing firms into network relations as part of their strategy • modern economy is distinguished with its cooperation between suppliers and customers

30. Networks become relations of power and trust through which org.s • exchange information and resources • take advantage of economic efficiencies Trust or social cohesion is the key organizational requirement for high-performance network. Trust is • dyadic interpersonal phenomenon • socio-economic notion which is a consensual ideology efficiency and flexibility presure network firms

31. Therefore, network analysis is characterised by; • multidisciplinary description of companies in a market • emphasis is on relationships of these companies with other companies (market is a set of actors with different role sets linked to each other via reciprocal exchange relations) • trust, which is at the center of network management

32. Kaman: 1. No actor can fulfill his dreams without the assistance of other actors: this puts him in paradoxial position, he either remains independent (and sub-optimal) or he increases his dependence (and improves his performance) 2. Relationships are based on mutual trust and are the subject of social cohesion. But can change into opportunistic behaviour and betrayal 3. The result of network behaviour is a synergetic surplus 4. The nature of a relationship between actors influences all other relationships in the network (complexity) 5. Each actor tries to maximise his share of the synergestic surplus 6. Each actor carefully balances dependence and freedom in order to improve the percieved optimal mix of effectiveness, efficiency, profitability and continuity

33. Hakansson and Snehota (“No Business is an Island”) : 1. Business organizations often operate in a context in which their behaviour is conditioned by a limited number of counterparts, each of which is unique and engaged in pushing its goals 2. In relation to these entities, an org. engages in continuous interactions that constitute a framework for the exchange process. Relationships make it possible to access and exploit the resources of other parties and to link the party’s activities together 3. The distinctive capabilities of an organization develop through interactions in its relationships that it maintains with other parties

34. 4.Since the other parties to the interaction also operate under similar conditions, organizations’ performance is conditioned by the totality of the network as a context, i.e. even by interdependencies among third parties

35. REASONS for LINKAGE CREATON

36. SUMMING UP: PERSPECTIVES ON NETWORKS • networks as relationships • networks as structures • networks as positions • networks as process See: ‘networks as relationships, structures, positions and processes.

37. Networks as relationships Relationships comprise four elements; • mutual orientation • dependence that each partner has, or believes it has, upon the other • bonds of various kinds and strengths • investments each partner has made in the relationship

38. Networks as structures • interdependence introduces constraints on the actions of individual firms • basic assumption: networks are heterogeneous in nature • role of the division of labour • concepts of social network analysis: • structuredness: general level of interdependence in a network • homogeneity: similarity of firms in terms of their bond types, relative importance of firms and the functions each firm may undertake • exclusiveness: extent to which a network is insulated from other networks

39. Networks as positions • level of analysis: focus is at least partly upon single firms rather than the network • network is seen as aggregation of interlocking positions • position: a role that the organisation has for other organisations that it is related to, directly or indirectly • the firm is expected by other firms to behave according to the norms associated with the position • characteristics of position: • function: that firms are held to perform • identity: if the net changes then the expectations change and so does the position • relative importance of the firm in its net: correlates of power

40. - macro- and micro-positions (relationships between individual firms vs. the firm's relationship to the network as a whole)strength of relationship Networks as process • coordination of firms in an industrial system is effected by three kinds of mechanisms: • Market • Firm (hierarchy) • Networks: firms are not too independent but neither so dependent that the market controls their actions • strong relationships exert a coordinative influence on the system through the need for coordination at the level of the dyad

41. direction of change is governed by the pattern of relationships that the participant firms judge, on a resultant rather than a collective basis, to be most favourable • network processes are dominated by the distribution of power and interest structures. Some firms in the network have access to more and better resources than others • networks are stable but not static • any change in a network requires resources to be mobilised

42. SOCIAL CAPITAL Physical/HumanCapital: Tools and training that enhance individual productivity Social Capital: Features of social organization, such as relationships, networks, norms, sanctions and trust that; • facilitate coordination and cooperation for mutual benefit • shape the quantity and co-operative quality of asociety’s social interactions The notion of social capital enlargens our understanding of "cooperation" in two significant ways; • linking cooperation to the economic concept "capital" signals the investment or growth potential of a group’s ability to work jointly • the concept identifies the structure created from collaborative effort as capital.

43. Well-functioning partnerships, consortia, and networks are themselves "forms of social capital." Capital is located both in the sharable resources held by individual institutions in a network and in the overall structure--the relationship--among the institutions in a network. The constituent elements of social capital are, • trust • norms • networks

44. 1. Trust is developed over time as individuals gainconfidence in the reliability of others in a series of interactions. Networks may exhibit generalized trust without closepersonal contact among all members, as can be seen in the below case: A trusts B B A C trusts B then A trusts C A C Trust allows actors to engage in productive collaboration, but trust also provides a necessary condition for fraud and other illegal activities

45. Norms of appropriate behavior develop as a social contract is negotiated among actors.Examples: • Norm of reciprocity is essential to valueable relationships • Norm of upholding group-interest over self-interest may yield bigger gains Norms decrease transaction costs and regulate behavior, but when improperly used, they may stifle the creativity and diversity of opinion necessary for solving novel and complex problems trustworthiness networks of social exchange norms of reciprocity Norm: A way of behaving or believing that is normal for a group or culture. All societies have their norms, they are simply what most people do.

46. 3. Actors in collaborative networks look for partners with reputation for trustworthiness. Social capital is preserved by careful selection of network players and strict sanctioning of inappropriate (network-destroying) behaviors. A network develops when a group of individuals or organizations develop reliable, productive communication and decision channels and a more or less permeable boundary to define members. Networks of firms collaborating to produce new technologies or applications widely report the benefits of cooperation; cartels, unfortunately, also understand the benefits of network approaches to production and distribution. networks as creators of social capital

47. Social capital is a powerful resource thatdevelops from productive social ties. Its use depends entirely upon the values and objectives of the actors involved. Putnam: “Cooperation is facilitated if a community has inherited a substantial stock of social capital in the form of norms of reciprocity and networks of civic engagement”