Strategic Management Literature: Applying Knowledge in a Workplace Environment
Abstract
The opening up to an international market had the effect of a shock on many American corporations. Relations of production in other countries lead to market effects that required decisive action and new concepts with which to address them. Adapting the resource-based view of the firm to these new conditions helped do this and thus the idea of core competencies, dynamic capabilities, and a vision of strategic management that was significantly different from the previous generation came to be popularized. No longer viewing business units as attached just to a specific product or service, these ideas helped enable teams to best exploit their core competencies. This article reviews several of the assigned writings.
Key Words
Core competencies, Strategic Management, Dynamic Capabilities, Resource-Based View, Innovation
Body
Exploring the development of concepts related to the resource-based view of the firm in response to a variety of market situations allows for a deeper appreciation of the issues which companies face in determining their market and operations strategies. Core competencies take on a variety of different forms, from the traditional conceptions defined as what companies due best to newer iterations, a la dynamic capabilities, that describe a meta approach to how firms enable the capacity to widen and deepen their core competencies.
The Core Competence of the Corporation
In the early 1980s, a number of companies stopped conceiving of themselves as a portfolio of businesses and instead started to understand themselves as a portfolio of competencies. Two of the companies that Prahalad and Hamel describe in the manner in GTE and NEC, the latter of which designed a Strategic Architecture within which to exploit their Competencies – largely in response to the pressures of Japanese manufacturers taking an increasing market share. This focus on competency allowed for the facilitation of unanticipated products and an increased capacity to adapt to changing market opportunities. The reason for some other company’s loss of market share was, according to the authors, in part their adherence to a conceptualization of the corporation that unnecessarily limited businesses to be able to fully exploit the technological capabilities they possessed. Not taking an adequate stock of the multiple streams of technologies that could be integrates – as the Japanese were doing – they let opportunities dies on the branch that could have grown had they enable core competencies to flow better within the organization. In short, while customer’s needs changed because new of new capabilities of delivering value, some producers lost out given their ossified top-down views. This is anathema to core competence – which at base communication, involvement, and a deep commitment to working across organizational boundaries.
Prahalad and Hamel’s article from Harvard Business Review sees “critical task for management is to create an organization capable of infusing products with irresistible functionality or, better yet, creating products that customers need but have not yet even imagined.” These authors highlight a number of aspects of core competencies that have not always been effectively recognized by management. One of the terms they use to describe this is the “strategic business unit (SBU) mind-set”. This occurs in large, diversified firms that frequently find themselves dependent on external sources for critical components, such as motors or compressors, for their individual business. The small business unit mindset looks at these as just components, but the authors see them as core products that contribute to their competitiveness of a wide range of end products. Put more simply, a lack of innovation in companies producing parts for purchase by assembly and marketing companies could mean higher costs and the lessening of the market share due to the lower pricing of competitors able to impose greater cost discipline over their competitors.
Building core competencies isn’t about higher budgets for R&D or shared costs between firms in value chains but about the more rigorous and innovative application of managerial skills. The authors name three specific tests that can be applied, while also admitting that there are many more. They state that core competence should provide access to a wide variety of markets, make a significant contribution to the product benefits perceived by the customer, and be difficult to imitate. Because many company managers had just “accepted” their inputs as given – the SBU mindset – this leads to many U.S. companies to lose market share to Japanese and Korean ones. Just as it’s possible to develop core competencies it’s also possible to lose them and this has a major impact on distribution channels and profits in the context of intense competition.
The solution to this is seen as developing a strategic architecture to identify and develop core competencies, apply greater rationality to patterns of communication, chart career paths, and managerial rewards, to establish a corporate wide objective for competence and growth, and to determine internal stakeholders to lead these efforts and core personnel to be counted on to assist them. All these efforts at auditing and competencies and taking actions to develop them contribute to the roots of renewed cultural/economic norms.
When core competencies are intentionally developed they appreciate in value ad capacity over time, unlike physical assets subject to depreciation. An example given to this effect is the Philips company, who was able to develop its competence in optical media into a wide range of products. Given the benefits which accrue to such expertise, there is an ongoing effort to build world-class competencies within these firms. This focus on developing capabilities of a level that frequently are far higher than those taught in universities is why I’ve told multiple people who’ve asked me about my work in marketing not to study it in a university setting but to get a job and work your way up in the firm.
As is repeated throughout the literature assigned for this course, Prahalad and Hamel state that it is a mistake for management to surrender core competencies to outside suppliers. While outsourcing can be a short-cut to a more competitive product – in the long term it’s seen as counter-productive to building the human capital required to be a leader in a certain field of production. Towards this end, the authors are very critical of a number of U.S. industries that became complacent and thus let their Eastern partners take over from them in product leadership.
Core products, end products, and core competencies are all distinct concepts, and because of the legal regulations and market pressures of global competition, there are different stakes for each level. Defending or building or leadership over the long term at each level requires a different type of corporate indicators which are measured and different strategies to get there as well as benefits specific to their positioning. Control over core products, for example, enables a firm to direct the evolution of end markets and applications, and in order to ensure its strategic capacity companies need to know its’ position in each plane of operation. Prahalad and Hamel’s advocacy of such a view is a new one and is at odds with the Strategic Business Unit model developed business schools and consultancies during the age of diversified, primarily national markets. Below is a chart showing how the two differ, which explains in part why failing why companies can face high costs for failure to adapt – the effects of which included bounded innovation, imprisoning resources within specific units, and underinvestment in the development of core competencies and core products.
With the adoption of the core competencies view, it becomes possible to develop a strategic architecture to align with a path towards firm’s flourishing. Rather than SBUs directing talented people in a way such that they seek to keep their most competent people to themselves, core competencies seeks to unlock their capabilities so that they get directed to the opportunity that will lead the greatest payoff. By circulating talent within a variety of business units, the specialists gain from interaction with the generalists and vice-versa.
A Literature Review on Core Competencies
It’s amusing that after 25 years of use of the concept there’s still a definitive definition of core competencies within us, and yet that is Enginoglu and Arikan’s claim and the problem they seek to solve through a literature review. From the three domains described originally by Pralahad and Hamel – market access competencies, integrity-related competencies, and functionality- related competencies – a wide variety of categories and types of core competencies have emerged as well as explication and analysis of how they relate to various market factors such as turbulence and technological change.
It’s hard not fine oneself struck by the contradictions in the approaches to modelling core competencies, something that the author’s also comment on, and to wonder why some models get used more so the others. It’s an unfortunate absence in the article that there’s no inclusion of an investigation into the views of managers – i.e. what model approximates the mode of thinking that they operate under – rather than just what’s published. This would allow for an approximate determination of which models are best for which industries and, better yet, from whence they come. It’d be interesting to note from whence their ideas came, books within the popular business press or specialist texts written by academic researchers on this matter. I imagine the former dominated simply based on my experience with mid-level executives but it’d be interesting to know if at the top end of larger, older firms if there was some effort made to take a more scientific approach to business. Knowing what a company does best and judging it’s efforts can perhaps take as many forms as there are companies – but looking at this concept’s practical use could benefit the industry as a whole rather than just the writers of literature reviews and those that are cited within them.
Core Capabilities and Core Rigidities
Core capabilities are those qualities that strategically differentiate a company from other that could be considered imitators. Using a knowledge-based view of the firm, Leonard Barton defines a core capability as the knowledge set that distinguishes and provides a competitive advantage and postulates that there are four dimensions to this knowledge set. “Its content is embodied in (1) employee knowledge and skills and embedded in (2) technical systems. The processes of knowledge creation and control are guided by (3) managerial systems. The fourth dimension is (4) the values and norms associated with the various types of embodied and embedded knowledge and with the processes of knowledge creation and control.”
These four dimensions are highly interdependent on one another – as the below image shows, and become institutionalized through the habits of those that embody the knowledge.
One of the comments I found strange is Dorothy’s assessment that Values and Norms are not commonplace within the literature on core capabilities. In every books that I’ve read regarding business leadership and developing innovation in the workplace – this was always a core component. The points made by these other authors included the need to be open to more individuality in highly centralized business operations as well as the need to be open to standardization processes in those defined by a high degree of craft. Corporate culture, at least in the post 2000s books published by Harvard Business Review I’ve read, is critical.
When a critical capacity of core capabilities have been developed it creates a something like a strategic reserve of people with complementary skills and interests outside the projects which can help shape new products with their criticism and insights. The author provides several examples of product testing to give examples of how those involved within different aspect of production and marketing allowed for swift feedback and deep insight. This pervasive technical literacy can constitute a compelling corporate resource,
Technical systems are “the systems, procedures and tools that are artifacts left behind by talented individuals, embodying many of their skills in a readily accessible form.” The value of these artifacts are implicit, a group of consultants from company’s such as McKinsey and IDEO now sell 300 of their Excel sheets and Powerpoint documents for $4000 online. Managerial systems include items such as incentive structures. When I worked at Fractl, for instance, I made use of their technical systems to better understand how to approach potential clients as their incentive of earning a 4% commission on a client signing up greatly appealed to me. The money I earned after landing a client was good enough in itself, but when the President of the company praised me in a company-wide meeting and then took me out to lunch, that further incentivized other employees to take the same kind of initiative. This willingness to give employees agency is called empowerment and is described by Mintzberg as an emergent rather than a deliberate strategy due to the higher degree of variability of outcome. Such freedom can develop into a form of entitlement that has deleterious effects on projects in the same way that core rigidities – the inverse of core capabilities, habits of thought which prevent innovative thinking in problem-solving – can develop. Leonard-Barton describes a number of the paradox that emerge and how to deal with them that place emphasis on the needs of the organization given the specific environment in which they are operating.
A Capability Theory of the Firm: An Economics and Strategic Management Perspective
In this article David Teece develops capability theory to present a deeper understanding of how differential firm-level resource allocation and performance can emerge. Based in with evolutionary and behavioral economics, a number of concepts are developed to improve the understanding of the nature of the business enterprise and its management. The author endeavors to address the issues connected to competitions he sees as lacking within the wider literature by developing a meta-theory framework of firm capabilities and a theory of how firms innovate and adapt so as to preserve evolutionary fitness. This question as to how individual firms build and manage capabilities to innovate and grow is one of the most important ones that can be answered, according to Teece, as to the extent that competitive advantage is derived from innovation rather than from some type of market restriction, it requires a sharp focus on how firms develop, learn, and benefit their stakeholders and shareholders as while scale, scope, product differentiation, network effects, and lock-in, are all components of the economists explanatory toolkit for market power, they are insufficient for explaining how individual firms establish and maintain competitive advantage. The dynamic capabilities framework is based on extensive research in the field of knowledge based theories of the firm, strategic management and innovation and “brings Williamsonian transaction costs, Penrosean resources, Knightian uncertainty, and Schumpeterian (knowledge) combinations together in a way that can potentially explain not only why firms exist, but also their scope and potential for growth and sustained profit- ability in highly competitive markets.”
Like Nelson and Winter’s An Evolutionary Theory of Economic Change, the article examines a large number of the deficiencies in economic literature. I personally find this polemical style to be engaging, especially when in the context of advocating for the need to develop a theoretical structure that’s less obtuse and is more inclusive of entrepreneurs and managers choices to invest, learn, and decide in the context of the deep uncertainty that is every- day business life. Irrationality is rational, rules of thumb for how to respond are many times ubiquitous than adherence to profit maxims, and the hubris that defines the human experience is common. Strategy, organizational capacities and business models all have an important role in the business transformation capabilities – but despite not having read the many people whose research is described in this essay I’m in agreement with Teece as even in my limited familiarity with a game theory and agent based modelling it seems way too simplistic for me to consider practical.
Written within the resource theory of the firm school, much of the concepts are those that were first introduced in Chapters 2 and 3. Ordinary capabilities are the routines, personnel, equipment, quality control methods, bench-marking capabilities, administrative capacities, etc. Dynamic capabilities are those that enable the top management team of the enterprise to formulate strategic innovation capabilities based on their capacity to forecast consumer preferences, solve new business problems, invest in the new technologies that while have high ROIs; properly substantiate indicators within the market and fine-tune their decision making processes in relation to them; and appropriately redirect activities and assets. There are three clusters identified within this realm identified by Teece on page 10:
- Identification and assessment of threats, opportunities, and customer needs (Sensing)
- Mobilization of resources to address fresh opportunities while capturing value from doing so (Seizing)
- Ongoing organizational renewal (Transforming).
The above figure charts the relationships between the aforementioned concepts using the VRIN framework – which determines if a resource is a source of sustainable competitive advantage. It visualizes the dynamic capabilities framework and , indicates how capabilities and strategy are codetermined by performance and that poor strategy will reduce the effectiveness of dynamic capabilities. Closing the gaps that can exist in capability development required measuring a number of dimensions and then taking action to move the firm. At this point Teece states that while there are bodies of literature which address the management of each particular dimension, that none exist for doing all three at the same time. This is challenge of capability theory – understanding how each interacts so as to avoid unwanted side effects with innovation management and ensure the creation of excellence.
Make, buy or rent are the three options that are traditionally pursued with normal capabilities – however Teece states that this is an especially difficult options with dynamic ones. While different concepts, dynamic capabilities are closely connected to a strategy that is able to presciently diagnose and identify obstacles, develop policies that allow them to be overcome and direct coherent action plans which coordinated activities based on those policies. By closing the gaps and achieving complementarities amongst firm activities through managerial asset evaluation and orchestration technological and organizational innovation dynamic capabilities are achieved. It’s this analysis of capabilities, Teece claims, that enables one to account for firm-level differentiation in a variety of levels not adequately addressed in a number of structural economics and developmentalist literature.
The Other Side of Innovation: Solving the Execution Challenge
Harvard Business Review Press published this book by Vijay Govindarajan and Christ Trimble and contains a wealth of research based insights on how to successfully execute innovation projects in a company. Because they study such a large variety of innovation endeavors in a variety of contexts, because of support for the Center for Global Leadership and the Tuck School of Business, they are able to generalize from the case studies and proscribe general laws in situations based on the elements of the dynamics at play. The authors’ case studies include an extended explanation of lessons garnered from Thompson Corporation and News Corporation’s (publisher of the Wall Street Journal) addition of computer software-based services to their organization. this technical data plus the wealth of psychological considerations for successful project management and development makes this an ideal book for leaders.
The two sides of innovation are ideation and execution, and in this instance, the other side of innovation in the title means execution. Brainstorming ideas can be real fun, they say, but ideas are only the beginning. Without implementation, action, follow-through, execution, whatever you want to call it – then this means nothing. The true innovation challenge lies in the idea’s transition from imagination to impact in the workplace.
If the book could be said to have a main takeaway, it’s that each innovation initiative requires a team with a custom organizational model and a plan this is revised only through a rigorous learning process. Because of this there must be much conscientious social engineering on the part of the innovation leader – which I will explain more about further in this book review.
Within compa,nies their primary activities can be generally categorized under the concept of “The Performance Engine”. This is the dedicated team of full time workers that is in charge of ongoing operations. While they are able to engage in small scale continuous process improvements and initiatives in product development that are similar to previous activities – there is little scope for innovation to be achieved within the organization. Too much is needed so a new team must be developed to help implements it. This dynamic can be easily put in the following logic:
Project team = dedicated team + shared staff
As the names suggest given the groups thus defined, the shared staff is are those that work primarily on the Performance Engine but also have Innovation Team Duties. The Dedicated Team are those that are full time workers on the initiative.
The partnership, not just either team, executes the project plan. Because the focus of each group is very different – one is in repeating established work rhythms and the other determining the optimum means of establishing an innovation initiative – there are several principles that must be considered when deciding how to assemble a dedicated team. Not only do you need to identify the skills needed and hire the best people that can be found – even if their pay scale is above normal operations – and then you match the organizational model to the dedicated teams job. In the manner that the authors describe it, it almost reminds me of lesson plans for the first day of school – bring all of the individuals that will work on the innovation project together then start to transform them into a team by defining new roles and responsibilities; decorating and starting to fill in the new, separate space wherein the work activity will transpire; and even doing some role playing as a team in order to make charts of who will do what. After this a guided conversation needs to be headed by the innovation leader on how the usual performance based metrics for work are not going to be applicable in this work situation. This is important because the dedicated team and the performance engines need to know that even though they will share some existing processes and personnel, that they have different objectives and should have a different culture.
Defaulting to “insider knowledge” can be a trap the needs to be escaped from, and cautionary advice is provided on hiring within the organization. Not only can organizational memory eclipse the work at hand, but successful past performance aren’t reliable indicators in an innovation initiative setting as the processes are so different.
Because the key difference between typical planning processes for the performance engine and the best practices for innovation are so different, the human skills required for such an undertaking are significant. Hence the book is as much instructions for proper processes and principles as it is a guide to dealing with persons. Conflict between teams, within teams, and between executives/management and innovation leader all can have a degenerative effect on successfully execution. Dissipating a number of the myths associated with innovation – such as it being necessarily disruptive or distracting from the Performance Engine – is one of the key factors for maintaining successful control of the project.
The authors recurrent emphasis on the importance of documenting and sharing this information and be aware of the learning process reminds me of the frequent reminders that I heard as a teacher to ensure that my testing of students was part and parcel of a larger educational journey that I was leading them on. By ensuring that, excuse the pun, no child was left behind I ensured that I wouldn’t find myself in a situation where some students not making the appropriate learning gains. Since learning cannot be left to intuition – it’s important to have a rigorous learning process in place that is based on the scientific method. As such it becomes easier to refine speculative predictions into reliable predictions. With everyone involved being on the same page as to historical, current, and projected status of the initiative – from former operational hypothesis to what custom metrics metrics are being used to cost categories – it makes it easier to discuss assumptions and determine the means for best keeping the program on the correct trajectory.
Each chapter of the book ends with a series of proscriptive lessons garnered from analysis of the business cases presented– such as “Never assume that the metrics and standards used to evaluate the existing business have relevance to the innovation initiative” as the depth, power balance and operating rhythm of the two organizations are so different. This was an appreciated way of consolidating the lessons in and fast matter that I appreciated. This and the general style and concise definitions throughout made me appreciate the authors greatly.
Conclusion
One of the undercurrent running throughout all of the texts in this chapter/section is the specter of globalization. New competitors within broader markets compelled companies to restructure their value and operational imperatives in order to better exploit the capabilities that they’d developed over the years of operation within a national market. While core competencies can be interpreted in a variety of manners, it essentially means what a company does best and understanding what that means for each particular firm has required to examine the cultural, managerial, operational and informational components of their operations.
Recomendations
A focus on the creation of new capabilities is organizationally better for firms in the long run rather than letting financial performance drive operations as the former internally builds a company while the latter merely helps maintain it. Opportunities are lost as efforts become shallow and knowledge is lost. Management that is able to develop a strategic framework within which to harness and expand capabilities allows for the deepening of core competencies and thus competitive advantages. Such policies, rules, and actions that address the high stakes challenged brought up about a new global market greatly enhance firms capacity for innovation and continuation within the marketplace.
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