University of Cagliari, Faculty of Economics, 2011-12
Business Strategy and Policy
A course within the II level degree in
Managerial Economics
year II, semester I, 9 credits
Lecturer:
Dr Alberto Asquer
aasquer@unica.it
Phone: 070 6753399
Introduction
0. Evolutionary economics
1. Routines and evolution
2. Dynamic capabilities
3. The evolution of firm's capabilities
4. Reconfiguring firm's capabilities
------------5. Summary
1. Evolutionary economics
Evolutionary economics is a distinct field of study within the discipline
of economics
'Evolutionary' broadly refers to the property of individuals within a
population to change their features over time
'Evolutionary economics' broadly refers to the study of the dynamics of
economic systems that originate from changing features of their
agents – especially, firms – over time
(Note: 'mainstream' neoclassical economics is mostly interested in the
study of the conditions related to the equilibrium of economic
systems; evolutionary economics, instead, posits that economic
systems are not in equilibrium as they are continuously transformed
by inner 'endogenous' forces)
1. Evolutionary economics
Influential predecessors of contemporary evolutionary economics:
C. Darwin, J. Schumpeter, T. Veblen, K. E. Boulding
1. Routines and evolution
Contemporary roots of evolutionary economics:
“An Evolutionary Theory of Economic Change”,
by R. R. Nelson and and S. G. Winter (1982)
Firms are conceived as collections of routines
Routines are the capability to repeat an activity in a certain context that
has been learned by an organisation in response to selective
pressures
(in common-sense terms, routines may be understood as 'standard
ways of doing things' or 'standard operating procedures' that people
follow within any organisation because they learned from past
experience that 'they work, and this is how business is conducted
here')
1. Routines and evolution
Contemporary roots of evolutionary economics:
“An Evolutionary Theory of Economic Change”,
by R. R. Nelson and and S. G. Winter (1982)
Firms differ from each other because they consist of different 'bundles'
of routines (ways of doing things that each firm learned under
specific circumstances)
Firm's routines are repeatedly 'tested' in the economic system – certain
routines allow firms to accomplish higher performance than other
firms
Firms that possess low-performing routines are thrown out of the
economic system (e.g., they go bankrupt)
Firms that possess high-performing routines survive, and may be able
to attract resources for the maintenance and improvement of
routines
1. Routines and evolution
Contemporary roots of evolutionary economics:
“An Evolutionary Theory of Economic Change”,
by R. R. Nelson and and S. G. Winter (1982)
As environmental conditions change (e.g., as features of the economic
systems change: demography, consumers' taste, technology,
regulations, etc.), old routines (that allowed firms to survive as they
used to 'work well' in the past) may not be well-performing any more
Firms 'evolve' – in the sense of developing, strengthening, and
improving their routines that better 'pass the survival test' within the
economic system
Dynamic capabilities refer to the organisational processes that make
firms develop, strengthen, and improve their routines
(Dynamic capabilities may be conceived as routines as well. They are
the routines that relate to the generation of 'new' routines)
2. Dynamic capabilities
Dynamic capabilities broadly refer to the organisational processes that
make firms develop, strengthen, and improve their routines
S. G. Winter (2003): “An organisational capability is a high-level routine
(or collection of routines) that, together with its implementing input
flows, confers upon an organisation's management a set of
decisions options for producing significant outputs of a particular
type”
So – dynamic capabilities are a 'special type' of routines, i.e., routines
that enable the creation of 'new routines'
(note: routine is something that is learned, is highly patterned,
repetitious or quasi-repetitious, founded in part in tacit knowledge;
improvisation is not a routine)
2. Dynamic capabilities
Every firm has a 'zero-level' or 'baseline' set of routines, i.e., those that
serve the purpose of producing and marketing the given products
and services currently in the portfolio ('how we earn a living now')
Some firms have dynamic capabilities, i.e., those routines that relate to
the innovation of products and services, to the innovation of the
production process, or to the search and attraction of new
customers, etc. - dynamic capabilities implement the change of 'old'
routines with 'new' ones
(Note: R&D is important)
Possibly, a few firms have 'further level' dynamic capabilities, i.e.,
those routines that relate to the innovation of the way innovation is
pursued – e.g., highly creative 'reconfigurations' of thinking and
methods for innovating
(Note: strategic entrepreneurship is very important)
2. Dynamic capabilities
Apple as paradigmatic firm containing dynamic capabilities (Teece, 2011)
3. The evolution of firm's capabilities
Capabilities (routines) do not last for long (their capacity to perform is
'eroded' over time); dynamic capabilities allow to renew, redeploy, or
recombine existing routines into new higher-performing ones
Alternatives for the evolution of organizational capabilities over time, adapted from Helfat
and Peteraf (2003).
3. The evolution of firm's capabilities
Dynamic capabilities also relates to firms' capacity to develop and
adopt 'disruptive technologies'
Disruptive technologies are innovations that create new markets while
displacing (i.e., making obsolete) earlier technologies (C. M.
Christensen, 1995)
3. The evolution of firm's capabilities
Examples of disruptive technologies
3. The evolution of firm's capabilities
Examples of disruptive (?) technologies
3. The evolution of firm's capabilities
Examples of disruptive (?) technologies
3. The evolution of firm's capabilities
Common theme of successful dynamic capabilities: 'taking the game to
a higher level', by innovating products and processes in such a way
as to make other firms' capabilities obsolete
Investments and policies are needed to promote the advance of
cumulative knowledge, diffuse technological solutions within the
firm, and focus on visible, urgent, and frequent problems
Any firm typically follows a 'technology development path' – that is
cumulative, path-dependent, and often quite binding (i.e., the firm
become increasingly good at doing what it did in the past, it may
perfect what it is very good at, while it may be unable to radically
reconfigure its bundle of routines)
4. Reconfiguring firm's capabilities
Example: strategy renewal at IBM
40% of computer
industry sales
70% of computer
industry profits
400,000 employees
1980s
Share price downfall
Diagnosis: “We don't move
fast enough... we've got to
become more
entrepreneurial, focused,
cost driven... we've been
too bureaucratic”
200,000 employees
1990s
2000s
4. Reconfiguring firm's capabilities
Example: strategy renewal at IBM
40% of computer
industry sales
70% of computer
industry profits
400,000 employees
1980s
Share price increase
200,000 employees
1990s
426,000 employees
2000s
5. Summary
Main points
Evolutionary economics is especially concerned with how firms evolve
in such a way as to survive in the economic system. Critical is the
development, strengthening, and improvement of firm's routines
(capabilities)
Dynamic capabilities are the higher-order routines that relate to the
'upgrade' of existing routines. They have to do with innovation and
entrepreneurship
Firms evolve along technological development paths that are
cumulative, path-dependent, and often quite binding
Sometimes, a radical reconfiguration of firm's routines is needed in
order to turn around a glooming performance