Competences and Innovation

Table of Contents

Introduction

A. Theoretical Concepts of Achieving Sustainable Competitive Advantages
A. I. Market Based View
A. II. Resource Based View
A. III. The Importance of Innovations for a Firm’s Prosperity

B. Competences in Organisations
B. I. Definitions of Competences
B. II. Identifying Competences
B. III. Functions of Competences
B. IV. Development of Competences
B. IV. 1. Exploiting Competences
B. IV. 2. Exploring Competences
B. IV. 3. Leveraging Competences
B. V. Measuring the Effects of Organizational Competences for Firm’s Success

C. Competences, Innovation and Firm Renewal
C. I. Functions of Competences for Innovations and Firm Renewal
C. II. Dysfunctions of Competences for Innovations and Firm Renewal
C. III. How to Manage and Overcome Competence Rigidities
C. III. 1. Dynamization of Organizational Competences
C. III. 2. Criticism of the Dynamic Capabilities Approach

D. Results and Further Discussion

Bibliography

Introduction

The ability of certain companies being more successful in innovations resulted in a broad academic discussion and did not find an end yet. On the one hand, academics are convinced that the ability of being innovative lies anywhere within the organization, on the other hand there persists a strong belief that the ability depends on the markets and the fit with the firm’s strategy.

It is known that innovations are of fundamental importance for the development, improvement and prosperity of economies and firms.^[1] According to Schumpeter innovations represent corporate achievements and a creation and enforcement process of new combinations, whereby a “creative destruction” of the economical equilibrium is caused.^[2] Consequently, a considered need for change and the ability to enforce and support this change is required to lead to successful innovation.

In my study I want to derive the well-spring of firm’s success, focusing on the internal perspective of the company. The resource based view provides the theoretical concept, leading to the advanced approach to display firm’s competences as a source of economic welfare. The importance of competences to build innovations comes clearly into mind, since the innovation process is very intangible and abstract, yet you need competences to organize, combine and deploy the tangible and intangible input factors to build innovations.

A. Theoretical Concepts of Achieving Sustainable Competitive Advantages

One of the most fundamental questions in the field of strategic management is how firms achieve and sustain competitive advantages.^[3]

Two theoretical concepts, first the industrial economics with the structure-conduct- performance paradigm^[4] and the following derived market based view, secondly the resource based view, are trying to explain the strategic behavior and the economical success of companies in competing environments. Innovations as source of firm’s success are also widely accepted to generate a comfortable competitive position in competing environments as long as specific features (see chapter A. III.) are taken into account.

A. I. Market Based View

Since the 1950’s the academics of the Harvard Business School developed the long lasting predominant business policy of corporate strategy. The structure-conduct- performance paradigm, developed in the 50’s and 60’s by Bain and Mason, describes the characteristics of the competitive environment as the well-spring of firm’s success and displays the departing position for the development of the following explained market based view. Porter, one of the best known representatives of the also called outside-in approach, has been dominating the strategic research for decades and advanced the concept to the famous practice oriented five forces analysis which is used to describe the attractiveness of the underlying markets.

The results of this external analysis (opportunities and threats) are combined with internal strengths and weaknesses to formulate a business strategy.^[5] The successful implementation of this strategy determines whether the process to achieve and maintain sustainable competitive advantages will succeed or not.^[6] Coherently, the environment represents what must be done to compete effectively in satisfying customer needs, while resources represent what can be done.^[7] Porter precisely summarizes that at the very broad level, the success of firms is a function of two strategic fields. First the attractiveness of the industry the firm competes in and its relative position in that industry and second that firm profitability can be decomposed into an industry effect and a positioning effect.^[8] The market based view prohibits identifying internal resources as strategic potential of success, since in the 90’s of the twentieth century empirical studies did not approved the influence of the branches for a firm’s success. This matter leads also accompanied by global change to further research on resource and firm specific sources determining economical success.^[9]

A. II. Resource Based View

The central idea of the resource based view, also called inside-out approach, is that a different endowment of idiosyncratic resources within firms leads to a strategic heterogeneity which displays differences in the success of firms due to sustainable competitive advantages.^[10] This concept of firm specific bundles of resources goes back to the 1950’s when Selznick designed his sociological leadership model. As one of the first authors, he derived the importance of firm specific abilities for building strengths which he called “distinctive competencies”.^[11] Only two years later, Penrose first conceptualized firms as bundle of internal, physical and human resources and pointed out that the firm’s competences lead to a better use of the resources which results in achieving higher rents.^[12] However, the resource based view did not receive that much attention since the work of Rumelt and Wernerfelt helped the resource oriented view to new attention. Wernerfelt gave the resource based view its name and defined a resource “as anything which could be thought of as a strength or weakness of a given firm. More formally, a firm's resources at a given time could be defined as those (tangible and intangible) assets which are tied semipermanently to the firm.”^[13] Learned consequently stated that it needs the ability to find and create competences which are truly distinctive to maintain a sustainable successful company also for the future development.^[14]

Hence, the identification and constitution on internal strengths, ideally on those which are unique to the firm are the key concepts to achieve competitive advantages, but also to endure in dynamic business environments as it is the case for many firms these days. Particularly when focusing on internal strategic resources, while facing dynamic business environments in competitive markets is supposed to lead to an improved competitive position, it seems unlikely that the more rigid approach of branch or market attractiveness can still be the source of competitive sustainable advantages.^[15]

Consequently to the current higher attention there have been important further developments of the classical resource based view to a competence or capability based approach to specify and concretize functions of competences for firm’s prosperity.

This advancement of the resource based view to the competence based approach will provide my scaffolding to explain the correlation of organizational competences and firm’s success considering the important effect innovations determine.

A. III. The Importance of Innovations for a Firm’s Prosperity

Innovations are a destructive process. Existing products and processes are becoming detached by the diffusion of new combinations which occurs discontinuously. The effect is called by Schumpeter a process of “creative destruction”.^[16] This creation of something new is scaled by Schumpeter in his classical functional typology which is combined by Zahn and Weidler in the following three dimensions: (1) technical innovations like products, processes, technical knowledge, (2) organizational innovations like structures, cultures systems and (3) in business related innovations like the renewal of business models, industry structure, market structures and barriers, and market rules.^[17]

Innovations, whether relating to new products, markets, initiatives and processes or technologies, within firms are supposed to cause sustainable earnings and an improved competitive position in the market, since the firms need to acquire new resources and combine or reconfigure them, with resources they already possess.^[18] Many empirical studies analyzed the correlation between innovations as well as firm’s prosperity and found evidence of the hypothesis that as long as innovations are taking place in an innovation-friendly corporate culture, which accepts the work- sharing nature of benefits; produce a technological novel product which provides the customer with additional benefits; the product launch proceeds after market research and strategic planning; and finally the innovation process which requires professional project management and key human capital with excellent experience they collected in previous innovation projects.^[19] Hauschildt criticized deficits in content and methodology of the research and thus provides a theoretical concept which consists of three approaches to enable successful innovations. The theoretical concept of the leader perspective is a perception which takes the innovation process either as decision making or enforcement process or out of technological perspective as development or realization process. The theoretical concept of the resource perspective determines the innovation process as specific combination of certain production factors deriving from the resource based view. Last, the theoretical concept of the diffusion perspective implies the fact that inventions transform into innovations by succeeding in the market, which is oriented to the market based view.^[20] However, the importance of innovations to achieve sustainable competitive advantages highly depends on the volatility of the market environment certain firms are facing. The more volatile and competitive the market is the more denote innovations for the firm’s prosperity.

B. Competences in Organisations

To get a clear idea what is meant with competences some definitions will be given at first and secondly it will be continued with the identification, function, development and measurement.

The following will rather focus on the competences within organisations as on individual or inter-organizational competences notwithstanding they are not less important, but against the background of innovation organizational competences seem more relevant to me.^[21]

B. I. Definitions of Competences

Starting with defining competences it must be said that there are various definitions and notions like competences, capabilities, core competences, distinctive competences etc. which are taken on this research topic for almost the same issues. Collis states that “[…] there are almost as many definitions of organizational capabilities as there are authors on the subject.”^[22] Dosi describes this fact in a metaphor saying that “the term ‘capability’ floats in the literature like an iceberg in a foggy Arctic sea, one iceberg among many, not easily recognized as different from several icebergs near by.”^[23]

[...]

^[1] see Zahn (1986), p. 16.

^[2] see Schumpeter (1993), p. 100 pp.

^[3] cf. Teece (1997) et al, p. 509.

^[4] see Mason (1939), p. 69 pp.; Bain (1968), p. 3 pp.

^[5] This procedure is known as the SWOT-Analysis.

^[6] see Staehle (1999), p. 603 pp.

^[7] cf. Priem/Butler (2001), p. 23 pp.

^[8] cf. Porter (1991), p. 99f.

^[9] see Staehle (1999), p. 606.

^[10] Due to the current state of research and the evolvement of the „relational view“ concept the implied coherence of the resource based view and the inside-out approach can no longer be invoked that directly. In the following I neglect this aspect.

^[11] cf. Selznick, (1957), p. 139 pp.

^[12] see Penrose (1959), p.24 - 54.

^[13] Wernerfelt (1984), p. 172; Wernerfelt (1984); Rumelt (1984).

^[14] see Learned et al. (1969).

^[15] see Staehle (1999), p. 607.

^[16] cf. Schumpeter (1931), p. 100 pp.

^[17] cf. Zahn/Weidler (1995), p. 362 pp.

^[18] cf. McGrath et al. (1995), p. 252; Hauschildt (2007), p. 35.

^[19] see Hauschildt (2007), p. 38.

^[20] see Hauschildt (2007), p. 39 pp.

^[21] I am convinced of the fact, that all three kinds of competences are inter-acting and necessary to generate innovations but in this study it should not be the question of research.

^[22] Collis (1994), p. 144.

^[23] Dosi (2000), p. 3.