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									E-GOST TSER Contract of the European Union HPSE-CT-2002-50026 (Thematic
1st workshop : April 3rd –4th, 2003 (Strasbourg)

                     ON STRATEGY OF THE FIRM:
                    A discussion of the central arguments
                    F. Amesse, A. Avadikyan, P. Cohendet

In 1994, Wernerfelt received an award for the best paper of the decade in Strategic
Management Review (A resource-based view of the firm, 1984). Considering the fortune
of the article among practicing managers (Wernerfelt, 1995), he admitted that such a
fortune had been leveraged by the 1990 article of Prahalad and Hamel in Harvard
Business Review (“The Core Competence of the Corporation”). Directly addressed to
people in management and strategy, this article was clearly prescriptive as to the best way
to set winning strategies for the firm, especially as to diversification and the abusive use
of SBUs (Strategic Business Units) in highly decentralized profit centres. “In the 1990s,
top executives will be judged on their ability to identify, cultivate, and exploit the core
competencies that make growth possible”. Since the 1990s, the resource based view
(RBV) and the core competence approach (CCA) became very attractive for many
researchers and consultants. Such interest was well supported by what seemed to be a
clear and superior way of setting strategies by large Japanese groups which frequently
served as a benchmark case of core competence management. The strong and pervasive
trends for continuous technological innovation and for technological alliances created
also a rich context for the use of RBV and CCA to strategy. Analysis and theory were
tempted to move from transaction costs to resources or competences or capabilities
sometime in a fuzzy way in interpreting strategic moves in the context of alliances and
technological changes.

Although attractive, the resource based view and core competence approach fell out of
becoming a substantive theory for the strategy of the firm as many researchers
ascertained. Very convincing criticisms challenged the perspective of RBV and CCA as a
substitute for the more classical industrial organization-based framework (I/O) in
developing strategies for firms: 1) the lack of clarity of the concept of competence; 2) the
incapacity of competence to serve as a basis for strategy and 3) the lack of connection
between competence and an existing industry. The objective of this paper is to examine
more closely those criticisms and develop basic arguments in order to enrich the
perspective of the competence approach. What is the place of the resource-based and
competence approaches to strategy is always a very important question. With time going,
many see the RBV and CCA more as a complement to the I/O approach. Such a position

has strong theoretical implications both as to the theory of the firm and the theory of

As Porter pointed out “any effort to understand success must rest on an underlying theory
of the firm and an associated theory of strategy” (1994, p.423). So we would like to
consider those key issues in the perspective of the knowledge based economy. The
discussion of the key issues will be focused on the need for a comprehensive view of the
RBV and CCA; the fundamental differences as to the theory of the firm underlying both
the I/O approach and the RBV and CCA approach and the nature of positioning and
competition in the resource and competence perspective.

   -   In the first part of the paper we will consider the main criticisms formulated
       toward RBV and CCA in their capacity to contribute to defining strategies. We
       will focus here on three of such criticisms viewed as central and expressed and
       repeated especially by Porter and Williamson.
   -   In the second part of the paper we will stress the need for a comprehensive view
       of the competence based approach by revisiting the maze of concepts and sub-
       categories associated with the RBV and CCA.
   -   In the third part we will discuss and contrast the underlying theories of the firm
       behind the I/O approach and the RBV and CCA and derive the consequences of
       those theories as to the basic unit of analysis ( activity and competence or
   -   In the forth part we will consider how RBV and CCA are connected to the
       industry and the environment by revisiting the basis of positioning and competing
       in a knowledge based economy.

   1. Resource based view and core competences under criticism.

It would be difficult to open perspectives of the resource based view and the core
competence approach on strategy without first trying to synthesize the main criticisms
made over the last ten to fifteen years by many scholars: Three of those criticisms seem
to be central and have to be carefully discussed before turning to the development of the
key arguments. The first one is the tautological and the fuzziness content of the basic
concepts underlying RBV and CCA. The second one is the incapability of RBV and CCA
to serve as a basis for strategy and, at best, its complementary role of the current I/O
framework. The third one is its inward orientation and lack of connection with the
environment and the industry.

    1.1 Tautological and fuzzy concepts
Whether we refer to resources, competences, capabilities, strategic assets, dynamic
capabilities, routines etc., the resource based view and the core competence approach
show the use of fuzzy concepts as to the basic unit of analysis. Are all those words
synonymous or are they depicting different processes have not been made clear. For sure
they are the result of different and complementary streams of thought.

Above that fuzziness the concept of resource or competence is seen by many as being
tautological. Priem and Butler (2001) argue in that way. Williamson‟s judgement (1999)
is laud and clear “obscure and often tautological definitions of key terms; and failure of
operationalization” … “this is very nearly circular, in that it comes perilously close to
saying that a core competence is a competence that is core” (p.1093). Porter‟s comments
in 1994 goes along the same line “at its worst, the resource-based view is circular.
Successful firms are successful because they have unique resources. They should nurture
these resources to be successful. But what is a unique resource? What makes it valuable?”

The tautological and fuzzy character of RBV and CCA is reinforced by the absence of
clear reference to the environment, the industry and the market. The approach have been
described by many as essentially “inward”. Such absence induces circularity in the
definition of the concept. At last as many analysis of resources and competences of firms
refer explicitly to competitive activities or products of the firms as an indicator of such
resources or competences, it did not help in defining clearly how resources or
competences are concepts different from activities or final products.
As works in the economy of knowledge is evolving such criticisms on the unit of analysis
and the tautological character of the RBV and CCA approaches have to be revisited.

    1.2 A substitute or a complement
M.E. Porter is, among others (Spannos and Lioukas, 2001) the one who has seen
important limitations to the RBV and CCA, and, at best, considers it as a complement to
the basic I/O framework. “To date, the most attention paid to the integration of the two
perspectives has been by Michael E. Porter in Competitive Advantage: Creating and
Sustaining Superior Performance, (1985) and, in the dynamic context, in his article
Towards a Dynamic Theory of Strategy (1991)” (Collis and Montgomery, 1995, pp. 61-
62). We could add to those two basic contributions the new introduction to the book
Competitive Advantage: Creating and Sustaining Superior Performance in 1998 where
Porter clearly reformulates his thoughts on the fortune of I/O and competence approach.

The basic tenets of the Porterian approach to strategy is well known and could be
summarized in a few key words: the superior performance of a firm is explained by its
competitive advantage derived by its unique positioning in the industry whether it is on
costs or on differentiation. Such positioning is based on activities performed by the firm
and systematized in a value chain. As Porter will stress it in the new introduction to its
book “ the book‟s core is an activity-based theory of the firm” (1998, p.xv)

In 1994, Porter set clearly that the resource-based view could not be a substitute to the
I/O framework but could complement such an approach. In order to arrive to such
conclusions Porter first makes a distinction in its theory of strategy between the cross-
sectional problem of strategy (“linking firm characteristics to market outcomes” (1994, p.
424) and the longitudinal problem of strategy (“the dynamic process by which positions
are created” (1994, p. 424). Looking to the resource based view he comments “the
promise of the resource based view for the strategy field is its effort to address the
longitudinal problem, or the conditions that allow firms to achieve and sustain favourable

competitive positions over time […]. The resource based view cannot be an alternative
theory of strategy […]. It cannot be separated from the cross-sectional determinants of
competitive advantage or from the conception of a firm as a collection of activities”
(1994, pp. 445-446). Such longitudinal perspective shed light on some kind of learning
and accumulated capabilities over time that could explain why a firm is better able to
perform some activities. “Activities involve human resources, purchased inputs and a
technology for performing them broadly define to include organizational routine […].
Performing an activity, or a group of linked activities also creates assets in the form of
skills, organizational routines and knowledge” (1994, pp. 435-436). We could find almost
the same reasoning in Williamson (1999) as to learning. In fact Porter will come to
conclude that resources are intermediate between activities and competitive advantage.

In the 1998 new introduction to Competitive Advantage he will move a little bit further by
“Is a firm a collection of activities or a set of resources and capabilities? Clearly, a firm is
both. But activities are what firms do and they define the resources and capabilities that
are relevant. Activities provide the connections between factor markets and product
markets positions” (1998, p. xix)

Clearly in the Porterian view the resource-based or competence approach could not be an
alternative theory for strategy but a complement to the I/O framework shedding light on
how firms learn over time by performing activities and accumulate competences and
resources. The firm is a nexus of both activities and resources but activities come first,
define resources and capabilities and shape strategy.

    1.3 An inward looking approach
The inward looking perspective of RBV and CCA is probably the most challenging and is
at the basis of the tautological and circular reasoning identified by many scholars as
indicated previously. Such inward looking was well described by Collis and Montgomery
“With the appearance of the concepts of core competence and competing on capabilities,
the pendulum swung dramatically in the other direction, moving from outside to inside
the company […] The external environment received little, if any, attention, and what we
had learned about industries and competitive analysis seemed to disappear from our
collective psyche” (pp. 59-60).
Those comments point to key limitations of the RBV and CCA. The first one and the
most pervasive is the explicit absence of the environment of the firm. In such a situation
RBV and CCA are viewed as being essentially focused “inward”. How to set a strategy
without a strong reference to the industry, the market, competition forces etc. This is the
locus of opportunities and threats in the language of strategists. How to assess and value
strengths and weaknesses without any benchmark? The second one, which is indirectly
connected to the absence of a clear link to the environment and to the market is the issue
of value. If resources are not valuable by themselves, how to maintain that one resource is
valuable and could lead the firm to a dominant position. Either managers, by some
miracle, define the vision and the strategic intent, select and value resources or the
industry and the market do it. How to consider the industry and the competition in the

RBV and CCA perspective and even more importantly how to define strategic

In the three next part of the paper each of those three criticisms and limitations will be

   2. The development of the RBV and CCA approaches hampered by the
      fuzziness of concepts: the need for a comprehensive view

The first criticism toward the RBV and CCA approaches is the lack of clarity of the
concepts. And, it is undeniable that the difficulty with these new approaches is that their
heterogeneity yields a plethora of terms and concepts such as strategic assets, resources,
competencies, capabilities, that seriously need clarification, not least because each
concept carries a different intellectual baggage. Without denying the difficulty to deal
with these concepts, the aim of this section is to contribute to clarify the different
conceptual approaches.

Our view is that these approaches share a clear common denominator, which is the
central role played by knowledge in the strategic vision of the firm. These approaches
underline the production aspect of the firm, with the recognition of knowledge as the key
productive resource. They focus on knowledge issues, such as the question of how
knowledge is generated, maintained, replicated, and modified (and possibly also lost) -
i.e. the question of learning and its nature. They tend to agree that competitive advantage
is more likely to arise from the intangible firm-specific knowledge which adds value to
incoming factors of production in a relatively unique manner (Spender, 1996). They all
emphasize concepts of strategy based on knowledge by focusing on how a firm chooses
to compete rather than on where it chooses to compete.

However, the ways to look at knowledge differs between these new visions of the firm,
and this to us is the main cause of heterogeneity and fuzziness. Schematically, we
consider that the different approaches belong to two main intellectual streams: 1) the
strategic management approaches (which includes the RBV and the CCA), and 2) the
evolutionary approach (which includes the dynamic capabilities approach and to which
most of the organisational learning approaches can be related). Each stream brings
forward a specific vision of knowledge, promotes a specific jargon, gives priority to
particular learning processes within the firm, reveals sub-streams with theoretical
nuances, and thus contributes to an overall impression of fuzziness. We examine briefly
these intellectual streams of research in the following paragraph (2.1). However, the main
point we emphasise is that, beyond the diversity, these streams bring complementary
visions of regarding knowledge in the firm. In this perspective we propose a coherent
framework to place these different visions in order to bring some clarity in the debate
(2.2), and to contribute to give answers to one of the main criticisms on these approaches.

   2.1 The different challenging approaches
   a) Strategic management approaches

According to these approaches, the delimitation of the competence domain of the firm is
essentially the privilege of the manager who designs an “ex ante” vision of the
management of knowledge within a firm. Managers thus endeavour to design specific
incentives to align the behaviours of members of the firm to the vision of the firm they
wish to promote:

   The resource-based view of the firm (Wernerfelt 1984, Barney 1991), inspired by
    Edith Penrose‟s work in industrial economics distinguishing tangible resources
    from the services these resources provide, aims at explaining and predicting why
    some firms are able to establish positions of sustainable competitive advantage and
    earns superior returns. A firm's resource at a given moment of time can be defined
    as those assets (tangible and intangible) which are tied semi-permanently to the
    firm (Caves, 1980). The firm is viewed as a bundle of idiosyncratic resources. The
    resources that lead to competitive advantage (e.g. brand names, in-house
    knowledge of technology, employment of skilled personnel, trade contracts,
    machinery, efficient procedures, etc.) must, by definition, be scarce, valuable and
    reasonably durable (Barney, 1991), and unlikely to be available from others
    (Rumelt, 1987). The claim that resources (that are difficult to imitate and only
    imperfectly substitutable) create sustainable advantages challenges the standard
    microeconomic argument that firm differences should erode over time due to
    imitative mechanisms.
   The strategic competence-based approach relies on strategic management concepts
    suggested by Prahalad and Hamel and centres around “collective learning of the
    organisation, especially how to co-ordinate diverse production skills, and integrate
    multiple skills of technology”. The firm is viewed as a social institution, the main
    characteristic of which is to know (well) how to do certain things. Competences are
    coherent sets of capabilities used in an efficient way. Some of the competencies are
    strategic („core-competencies‟ according to Prahalad and Hamel, 1990) and
    constitute the main sources of the competitiveness of a firm („what a firm does well
    and better than the others‟). They are the products of a selection process both
    internal and external to the firm. How these competencies are constructed,
    combined, protected and managed is critical for understanding the boundaries of
    the firm as well as the co-ordination and incentive structure of the firm. Core
    competencies are firm specific skills and cognitive traits directed towards the
    attainment of the highest possible levels of customer satisfaction vis-à-vis
    competitors. The focus of the competence based approach is, as Drejer and Riis
    (1999) summarise, on “what are the effects caused by a competence” (its functional
    characteristics), much more than on its structural characteristics. For Prahalad and
    Hamel as well as for most of the authors of this stream of research, top managers
    play a key role in identifying, developing and reinforcing core competences. Since
    these latter are cross-functional, “the change process can‟t be left to middle
    managers. It requires the hands-on guidance of the CEO and the active
    involvement of top line managers” (Stalk, Evans, and Schulman, 1992).

       b)The evolutionary economic theory.

    For evolutionary economists such as Teece, Pisano and Schuen (1991), Dosi and
    Marengo (1994), the determination of a competence domain within the firm is
    essentially the result of the process of evolution of routines. Knowledge is stored in
    routines, seen as the regular and predictable behavioural pattern of the firm, and
    innovation is an inherently unpredictable mutation of routines that cannot be guided
    by the vision of a sole manager. As Von Krogh and Grand (2002, p. 170) argue,
    “Whereas the resource-based view sees strategy as having a strong intentional
    element (Barney, 1986, 1991; Porter, 1991; Hamel and Prahalad, 1993, 1994),
    evolutionary theories are traditionally more pessimistic about the possibilities of
    significant, managerially led, proactive change (see also Witt, 1994)”. Along the same
    lines, Langlois (1994) adds, “knowledge in an organization is not something that
    resides in the head of managers; rather, the organization‟s knowledge is nothing other
    than its complex of routines, including routines for co-ordination among routines and
    routines for changing or creating routines. This repertoire of routines is what defines
    the conditional states of readiness on which messages from the environment operate.
    To put it another way, the complex of routines that make up an organization not only
    determines what an organization can do well but also conditions how the organization
    will interpret messages; how information from the environment will alter the
    organization‟s existing repertoire of routines. That is to say, the organization‟s
    routines are in a broad sense its cognitive apparatus, its „map‟. They determine what
    information the organization recognizes as meaningful, and they strongly influence
    how the organization learns and how it perceives opportunities”. In this vision,
    knowledge is not mobilised in separate domains of the firm, and the formation of a
    domain of competence is just an “ex post result” on a continuous process of evolution
    of routines1.

    The evolutionary approach promotes the concept of dynamic capabilities, which
    stresses “the firm‟s ability to integrate, build and reconfigure internal and external
    competences to address rapidly changing environments. Dynamic capabilities thus
    reflect an organisation‟s ability to achieve new and innovative forms of competitive
    advantage given path dependencies and market positions” (Teece et al., 1996). The
    capabilities of the firm rest on processes (organisational and managerial, integration,
    learning, reconfiguration and transformation), positions (in business assets, difficult
    to trade assets, and assets complementary to them such as reputation assets), and
    paths (path dependency, technological opportunities). However, distinctive
    organisational capabilities can provide competitive advantage and generate rents only
    if they are based on a collection of routines, skills, and complementary assets that are
    difficult to imitate.

  As Nelson (1994) underlines, “successful firms can be understood in terms of a hierarchy of practised
organisational routines, which define lower-order of organisational skills and how these skills are co-
ordinated, and higher order of decision procedures for choosing what is to be done at lower level. The
notion of organisational routines is a key building block under our concept of core organisational
capabilities. At any time, the practised routines that have to be built into an organisation define a set of
things the organisation is capable of doing confidently. If the lower-order routines for doing various tasks
are absent, or if they exist but there is no practical higher-order routine for invoking them in the particular
combination needed to accomplish a particular job, then the capability to do that job lies outside the
organisation's extant core capabilities”.

     2.2 Towards a synthesis of the challenging approaches

The different streams of the RBV and CCA approaches that have been examined, might
be seen as different theoretical vantage points to look at the formation and use of
knowledge assets by the firm. However, a logical question that follows is whether there is
a fruitful way of putting these different theoretical pieces together2. In this perspective,
we propose to use a recent typology proposed by Kusonoki, Nonaka and Nagata (1998),
that offers a complementary way of looking at the interactions between the different
theoretical positions on the formation and use of competences. According to these
authors, the organisational schemes of the firms related to knowledge creation can be
categorised in three types:

          Knowledge base (distinctive individual units of knowledge, functional
           knowledge, elemental technologies, info-processing devices, patents),

          Knowledge frames (capture linkages of individual units of knowledge and their

          Knowledge dynamics (interaction between knowledge base and knowledge

Based on the previous discussion, our view is that the resource based theory deals with
the first category (knowledge base), the core-competence approach deals with the
second category (knowledge frames), while the dynamic capability approach deals
with the third category (knowledge dynamics). Thus, each approach brings a specific
insight on the organisation of knowledge in the RBV and CCA approaches of the firm
(Figure1). And, it follows that all these challenging approaches should be essentially
considered as complementary ways of dealing strategically with knowledge within the

             and     other
             strategic                                         Dynamic                                               (knowledge
             assets                                           Capabilities
             (knowledge                                                                                              frame)

  An interesting perspective on the interaction between these approaches is offered by Andreu and Ciborra (2002), through the model
of the „learning ladder‟(Figure 3.2). They link the generation and transfer of knowledge to a variety of internal learning processes
within a given organization. According to them, “core capabilities develop through a series of transformations, by which standard
resources available in open markets (where all firms can acquire them), are used and combined within the organizational context of a
firm to produce capabilities, which in turn can become the source of competitive advantage especially if they are rare and difficult to
imitate or substitute.” (Andreu and Ciborra, 2002, p.576).

    Domain of the resource based theory   Domain of the evolutionary approach                 Domain of the strategic
                                                                                              competence approach

Figure 1: The respective roles and domains of the theoretical subsets of the RBV and
CCA approaches of the firm

The respective domains of relevance of each of the approaches, and the nature of their
interactions can thus be clarified. A problem that remains as a locus of friction or even
conflict between the strategic competence approach and the evolutionary approach
relates to the ways selection mechanisms operate on routines/capabilities to shape the
core-competencies of the firm. According to the strategic competence approach, it is
the manager‟s vision that shapes the domain of core-competencies, while for the
evolutionary approach the driving force remains the external environment of the firm.
It is certainly on the agenda of research to reconcile these two ways of looking
strategically at knowledge in the firm, but despite this real problem, it seems to us that
the RBV and CCA approaches have much less fuzziness that what their critics loudly

          3. The I/O framework of strategy: the traditional theories of the firm,
          viewed as a “processor of information” versus the vision of the firm as a
          “processor of knowledge”.

The second main lines of critics on the RBV and CCA approaches is the incapacity of
competence to serve a basis for strategy, especially when compared to the notion of
“activities”. Our vision is that statement is perfectly true within the theoretical traditional
framework of the firm (as the transactional approach of the firm), when the firm is
viewed as a pure processor of information. However, we consider that this statement is
severely questioned when the firm is viewed as a processor of knowledge (which is
precisely the vision promoted by the RBV and CCA approaches).

3.1 The firm as a processor of information
Consider Porter‟s strategic analysis. It relies on the traditional contractual approaches of
the firm - transaction costs theory in particular - that are not designed to accommodate the
fundamental characteristics of knowledge. As underlined by Fransman (1994), these
traditional approaches consider the firm as a „processor of information‟, the behaviour of
which can be understood as an optimal reaction to external signs and factors which are
detected3. In the Porterian framework, the main result of the processing of information by

  The behaviour of the firm as a rational information processing machine signifies that the same signals will
give rise through time to the same pattern of action, provided that the technical conditions (as expressed by
the production function) remain unchanged. The neo-classical theory of the firm, in particular
principal/agent theory, have basically reduced the co-ordination principles to a bundle of bilateral contracts
which are meant to achieve co-ordination by devising appropriate incentive schemes in order to align self
interested individual action with the common organisational goals. The transaction cost approach, despite

firms are precisely those activities that emerge from the positioning of an end product
within an industry structure. For Porter, once activities are shaped and defined by
processing information, then these activities may drive competencies (accumulation of
collective knowledge and learning in the firm). Processing information is thus the core of
the economic decisions of the traditional firms, while creating and exchanging knowledge
is just a by-product of the current activities.
There is, however, a condition for the above hypotheses (first focus on information
processing, then consolidate knowledge by-products) to be valid: the economic
environment is supposed to be stable (in particular, the industry structure is considered as
given). In innovative environments, characterised by the development of hyper-
competition, globalisation, and knowledge based economy, the hypothesis is severely
questioned. As Bierly and Chrakrabati (1996) underline: “We believe the development of
a dynamic knowledge strategy typology or taxonomy will offer more insight than the
basic static strategy typologies such as Porter‟s (1980) which rely on the basic
assumptions that are not valid for many industries to-day. Specifically, they assume that
a) the primacy focus of strategy is about the positioning of an end-product within an
identifiable industry structure, and b) the industry structure is relatively stable and
changes to the environment are mostly incremental, linear changes that do not redefine
the product or industry. However, other researchers have observed the preponderance of
boundaryless industry structures, hyper-competition, increazing globalization, an
increasing rate of technological change and diffusion and a tremendous increase in access
to information through the advance in computer and communications (Bettis and Hitt,
1995; D‟Aveni, 1994; Hamel and Prahalad, 1994). The “static” generic strategy
typologies offer little practical value to top managers in determining how to develop a
competitive advantage, which is the primary purpose of strategy”.
In order to face these challenges, Williamson advocated (1999), that there is room in the
traditional vision of the firm to implement some of the characteristics of knowledge. It is
true, for instance, that the focus on the best reactions to imperfect information signals
coming from the environment does not imply that the contractual approaches are unable
to cope with some aspects of knowledge and to incorporate some cognitive dimensions of
economic agents (in particular, their abilities to experience learning processes). The
transaction cost approach is based on the hypothesis of bounded rationality, that precisely
admits the existence of cognitive constraints on individuals, and the analysis of key
learning processes such as learning by doing is present in traditional theory. However, the
scope of such analysis is extremely narrow, for the simple reason that in such
perspectives, the cognitive capabilities of agents are given. Bounded rational agents are
not seen to change their representation of the world through time, they do not differ in
their perception of the environment, they do not pay attention to the definition and
evolution of common sets of rules, codes and languages within the boundary of the

its different angle and its specific focus on the boundaries of the firm, comes to a similar fundamental
conclusion: the firm could be seen as a „nexus‟ of contracts. Its very reason of existence is to correct market
failures, when the functioning of market mechanisms in terms of information processing are too costly.
Transaction cost theory agrees with the principal/agent vision that information is imperfect and that the
existence of potential asymmetries of information authorises unproductive rent-seeking behaviour. The firm
is thus conceived as an institutional mechanism creating a governance structure to solve the problem of
misaligned incentives attendant on imperfect information. The focus is thus on the process of allocation of
resources needed to cope with such adaptation.

organisation. This is a restricted conception of knowledge-reduced-to-information (or
“tight-coupling” between information and knowledge as Fransman (1994) suggests) that
assumes there is no cognitive dynamics at stake. Thus, the assumption is that the way to
manage knowledge can be derived from information is managed. Knowledge is just
considered as a stock resulting from the accumulation of the flux of information4
For these reasons, following Fransman, we consider that the actual innovative economic
environment invites to reconsider the foundations of the theory of the firm. In such
environments, firms should be viewed in primis as processors of knowledge. As Nonaka
and Takeuchi (1995) note, “when organizations innovate, they do not simply process
information from outside in, in order to solve existing problems and adapt to a changing
environment. They actually create new knowledge and information, from the inside out,
in order to redefine both problems and solutions and in the process, to re-create their
environment”. We consider that the competence-based approaches of the firm are the
challenging theories in such a perspective, that try to bring forwards the vision of the firm
as a processor of knowledge. This perspective implies an in-depth reconsideration of the
strategy of firms, by suggesting that: first firms select their domain of competencies, and
then they manage their activities. Competencies are thus driving activities, reversing the
Porterian order of priorities.

b) The firm as a processor of knowledge
One of the main characteristic of the RBV and CCA approaches is that, within these
approaches, the firm is conceived as „a processor of knowledge‟, as a locus of setting
up, construction, selection, usage and development of knowledge. These theoretical
streams envisage a completely different point of view than the traditional theories: the
firm is more sensitive to the sharing and distribution of knowledge than it is to the
distribution of information. “It is not so much the saturation of its abilities to deal with
information which concerns the firm, as the risk of becoming too confined by
inefficient routines” (Cohendet et al., 1997). In fact, considering the firm as a
processor of knowledge leads to the recognition that cognitive mechanisms are
essential, and that routines play a major role in keeping the internal coherence of the
organisation. In other terms, the governance of the firm is not focused on the
resolution of informational asymmetries but on the co-ordination of distributed pieces
of knowledge and distributed learning processes. The focus of the theory thus falls
clearly on the process of creation of resources. This perspective on the firm has been
taken foreward, among others, by Cyert and March (1963); Cohen, March and Olsen
(1972); Cohen (1991); Loasby (1976, 1983); Eliasson (1990); Dosi and Marengo
(1994); Marengo (1994, 1996).
In a knowledge intensive dynamic perspective, the competence-based approach sees the
firm in primis as a processor of knowledge, for which the focus of attention is the key
limiting factor5. The firm fixes its attention first on a closed subset of activities that
define the “core” domain of competencies, and then rank other activities (the

  As Frahey and Prusak (1998) suggest, “if knowledge is not something different from data and
information, then there is nothing new or interesting in knowledge management”.
  Following Simon (1982), it is attention rather than information that is becoming a rare resource as
screening and selection of information become important functions.

“periphery”) along a decreasing index of attention from the core domain 6. Such an order
implies that the firm manages competencies and transactions simultaneously, but as it
does so according to a specific lexicographic order of priorities.
 First, within its set of competencies, the firm functions as a knowledge processor
  giving full priority to the creation of resources. The firm‟s domain of competencies is
  not considered to be tradable on the market: activities belonging to the domain of
  competencies are „disconnected‟ from the make-or-buy trade-off suggested by
  transaction-cost theory. More precisely, two subsets can be distinguished in this
  domain: the zone of core competencies which correspond to the sets of activities with
  the higher focus of attention, that the firm aims to be ahead of the competition, and the
  zone of competencies that encompasses the activities which the firm „knows well how
  to do‟, but which are not necessary for a competitive advantage over others.
 Second, once the set of activities that belong to the set of competencies has been
  chosen, the other activities that do not belong to the core (the „periphery‟ or „non core
  activities‟) are then managed under traditional methods which may rely on the
  transaction cost approach7. These activities are necessary to support core activities, and
  they generally correspond to the larger number of activities and employment positions
  in the firm. These activities do not require by definition a strong commitment in terms
  of knowledge management. The firm just needs to „be informed‟ of best practice
  among other firms and of organisations that can offer equivalent support services and if
  it appears that these activities are too costly to be run within the firm compared to
  market mechanisms (according to transaction costs criteria), they will be outsourced.

To sum-up, in this part we have tried to show that the new economic environment calls
for a reconsideration of the foundations of the firm as a processor of knowledge (instead
as a processor of information ). This in turn implies a reconsideration of the principles of
strategy. In this perspective, activities and competencies are the key building blocks of
strategy, but they must be determine and manage according to a renewed framework, in
which priority is given to the constitution and development of competencies. The
competence-based approach, clearly suggests a reverse order of focus between activities
and competencies, when compared to the traditional vision. The building and
management of competencies drive the management of transactions, and thus shape the
structure of activities of the firm.

4. Co-construction of competencies and positioning of firms
The previous part of our paper put the concept of competencies at the heart of a
dynamic analysis of knowledge accumulation and renewal at the firm and industry

  For further developments on the definition of the core domain and the periphery see Amesse and
Cohendet (2001)
  In other words, in the domain of competences, low-opportunism conditions prevail, and allow more
valuable knowledge to be applied to the firm‟s activities. In the periphery domain, meanwhile, the risk of
opportunism is high and leads to the situation described by the classical transactional approach. As
(Langlois and Foss, 1996) claim, “as firms move increasingly from their core businesses, they confront
increasing adverse selection and moral hazard, since management becomes increasingly unable to
efficiently monitor employees or to evaluate their human capital. Agency costs rise correspondingly,
producing the net profitability disadvantage associated with further integration”

levels. We showed that the primacy given to competencies can allow us to grasp in a
different way the management of activities of a firm and the definition of its frontier
according to a distinction between core competencies and peripherial ones. We
furthermore insisted on the importance of combining the complementary competence-
based approaches, in order to build a unified theoretical vision of the firm as a
knowledge creating entity.

The present section will further investigate the issue which relates to the way the
competence based approaches deal with competitive analysis and the strategic
positioning of firms at the industry level. It has been underlined that one critical
difference between the Porterian approach and the competence based approach is that
the former gives priority to the analysis of strategic positioning issues by developing a
vision where industry conditions are the main drivers of firms‟ strategic activities for
creating competitive advantage. As for the latter approach it has been criticised for
having given to much emphasis to the internal environment of the firm by focusing on
concepts such as resources, core competencies and capabilities without taking into
account precisely enough the external environment and how these concepts are
inherently linked to competitive advantage and strategic positioning issues (Collis and
Montgomery, 1995).

We will show that such criticism is not necessarily valid. However, within this
approach, the strategic positioning of firms within and across industries derives
primarily from the division of knowledge (competencies) rather than the division of
labor (activities). Our main argument rests on the assumption that the knowledge and
competence construction dynamic at the firm (distinctive competencies) and industry
level (common competencies) is a dialectic process (4.1.). By referring to this dialectic
process, we will underline its organizational implications at the industry level through
the concept of „loosely coupled‟ systems (4.2.). Finally, we will show that strategic
positioning in this context derives from a process of co-construction of distinctive and
common competencies by appropriately managing the tension between cooperation
and competition (4.3.).

4.1 The dialectic process between distinctive and common competencies
One of the crucial questions in evolutionary approaches to the firm is the link between
the diversity and heterogeneity of competencies between firms at the micro-level and
the emergence of common patterns of behavior or common characteristics at the meso-
and macro levels (Nelson, 1991; McKelvey, 1998). The aim is to better understand
how one level influences the other and how learning results from a co-evolutionary
process of competence building at the individual firm level and knowledge diffusion
and accumulation at the industry level. By focusing on knowledge characteristics such
as tacitness, cumulativeness, path dependency, the evolutionary approach focuses on
the localized and non-transferable dimension of firms‟ knowledge bases. Such
characterization of knowledge has also been put forth in order to explain the
idiosyncratic structuring of internal routines and selection procedures on which firms’
rely to determine their possible technological options and innovation opportunities. On
the other hand, evolutionary theory has emphasized the industry-wide aspects of

knowledge by referring to the ‘generic’ body of knowledge (Nelson, 1987) as the
common features of technology, understanding of problems, problem-solving
heuristics, beliefs widely shared among firms in the industry or even a group of
industries. Dosi (1982) used the technological paradigm and technological trajectories
concepts in order to underline the fact that such generic knowledge bases are highly
structured, and tend to evolve along structured trajectories. This collective aspect of
knowledge refers mainly to general knowledge, in the sense that it is applicable to
many situations, codified knowledge and common knowledge which can easily be
shared among a large set of firms in a sector (i.e. engineering or technical communities
within or across industries).
By emphasizing the idea that certain aspects of knowledge are unique to individual
firms (tacit knowledge, routines) whereas other aspects are shared among a larger
group, evolutionary theories have raised the question of the way these two dimensions
interact and co-evolve. They principally underlined the importance of better
understanding the two way knowledge flow that characterize this co-evolution. On the
one hand, aggregate and structural forces, such as sectoral level variables (Pavitt, 1984;
Tidd, Bessant and Pavitt, 2001) or technological regime characteristics (Orsenigo and
Malerba, 1996; 2000) influence and offer guidelines to the actions of individual firms.
In turn, what individual (or group of) firms learn influences the common patterns of
behavior to the extent that knowledge is diffused and accepted as relevant by the
industrial system. Put in another way, “when knowledge and problem-solving
approaches are shared in a larger group, macro dynamics of learning influence micro
decisions”. However, by internalizing shared knowledge firms rely on their
idiosyncratic competencies in order to try to make such knowledge “more and more
their own and doing so, either make codified knowledge into tacit and/or use codified
to improve tacit” (McKelvey, 1998). The co-construction of distinctive and common
competencies can be analyzed by the knowledge creation and conversion spiral at the
onthological dimension proposed by Nonaka and Takeuchi (1995). Processes of
socialization and externalization contribute to the emergence of common knowledge at
the group and inter-organizational levels which in turn through a process of
combination and internalization of such knowledge create distinctive competencies.

The dialectic process between distinctive and common competencies can also be
explicited at the industry level through the „discovery cycle‟ proposed by Noteboom
(2000) which combines exploitation and exploration dynamics. Noteboom presents the
discovery cycle as an interactive process between consolidation, generalization,
differentiation and reciprocation stages. Consolidation of knowledge is based on two
rationales at the industry and organizational levels. The first is to improve efficiency
through standardization, codification and better coordination between systemic
linkages. The second is to favor generalization that is the expansion and transfer of
knowledge to new contexts: “consolidation serves as a platform for expansion and new
applications”. Both consolidation and generalization have to do with convergence of
competencies, variety reduction, and dissemination and diffusion of the same
knowledge base in varied settings (different products, organizations and industries).
Furthermore, through generalization, the use of knowledge in new contexts favors
different degrees of exploration and variety generation leading to differentiation,

reciprocation and recombination/transformation processes which are based on and
strengthen or exacerbate distinctive competencies leading to a new stage of
consolidation in order to maintain systemic efficiency and coherence.

Although, evolutionary approaches has been quite successful in better understanding how
firms and industries evolve through interaction with their external environment, they have
been less consequential in giving a comprehensive answer to the strategic and
organisational foundations of competence building, variety and novelty generation. As
noted by Nooteboom (2000) “the notion of co-evolution from biology is useful, up to a
point, but in the context of human systems it is also seriously misleading. Perhaps it does
make sense to say that the selection environment of markets and (other) institutions co-
evolves with firms or routines or competencies. However, in socio-economic evolution
the influence of firms on selection by competition is of an entirely different, non-
biological, cognitive and linguistic order. Here we are dealing with invention,
communicative interaction, social construction of selection conditions, alliance
formation, mergers and acquisitions, and political manoeuvring. To put it more precisely,
in biological co-evolution the environment sets the selection conditions for the species,
and the species affects the selection conditions for its environment. In human systems,
however the species (a form of organisation, or routine, or competence) not only affects
the selection conditions for the institutions in its environment, but by cognitive and
communicative ingenuity may dodge or directly affect the selection conditions that the
environment sets for it”.

Furthermore, in co-evolutionary approaches, the convergence to ordered or structured
settings is often seen as an emerging property of self-organisational dynamics. At the end
what differentiates one structure (organisation, network or industry) from the other is
highly sensitive to the external conditions which shape the evolutionary path. There is no
doubt that self-organisation is an important feature in the structuring of large complex
systems and networks but it fails to take into account an important factor which is related
to the intentionality of decision makers8 which determines authority, entrepreneurship,
strategic choice or intent, but also the modalities of collective action, interaction and
governance, which in turn may not only determine positioning within industry but also
alter positioning conditions9.

4.2 Co-construction of Competencies: an organisational perspective

  Most of the recent research directions within the evolutionary paradigm have tried to challenge this
weakness by a better understanding of the internal determinants of firm‟s behaviors through, for instance,
an emphasis on learning procedures within the firm and on its ability to select information from its
environment (Dosi and Marengo, 1994). But the firm still remains a re-acting agent to its environment.
  By adopting a macro-level view, both the Porterian and evolutionary approaches insist principally on the
determinants of industry level factors on individual firm behaviors. In fact the positioning view adopted by
Porter derives from the „structure-conduct-performance‟ perspective in industrial economics which has
been criticized from the competence perspective for its neglect of „strategic choice‟. We would rather say
that the Porterian approach adopts a somewhat static viewpoint to „strategic choice‟ and that the
competence based approach works in a more dynamic perspective.

Firms‟ organisational capabilities and the capabilities of the network in which they are
embedded contribute in a critical way to the enhancement of their combinative
capacity (Kogut and Zander, 1992). From an organisational perspective co-
construction of competencies refers to co-ordination imperatives between actors and
firms which although characterised by their idiosyncratic paths are embedded in a web
of complex and multilateral relationships in the process of knowledge production and
application. We will argue that in rapidly changing environments where interactions
within and across industries are organised less in relation to stable products per se but
in relation to technologies and knowledge bases that products (might) mobilise in
unpredictable ways, co-construction of competencies becomes a priority of
organisational and industrial dynamics.
The increasing complexity of products, design and production processes (Baldwin &
Clark, 1997), the systemic nature of innovations (Chesbrough and Teece, 1996), the
broader range of technological competencies that must be mobilised for mastering such
systemic interdependencies (Granstrand et al., 1997) and the speed with which
technological opportunities must be integrated in new products due to competitive
pressure have led firms to adopt more flexible forms of product innovation and
knowledge management strategies. It is in this framework that the platform concept has
attracted an increasing attention as a flexible and malleable form of co-ordination and
governance mode. By insisting on the structural aspect of platform organisations Ciborra
(1996) notes “a platform is a meta-organization, a formative context that molds
structures, and routines shaping them into well-known forms, such as the hierarchy, the
matrix, and even the network, but on a highly volatile basis…[It is] a chameleonic
organisation […] conceived as a laboratory for rapid structuring”. Purvis et al. (2001) on
the other hand refer to knowledge platforms and link them to the ability of firms to
integrate and combine in a dynamic way specialized knowledge bases dispersed across
firms and generated in the course of practice and reflection by individuals or firms
working on specific projects, products, processes and disciplines in different locations at
different times. In a similar manner Nonaka and Konno (1998) propose the concept of Ba
(place)10 as a generic organisational form and link it to the knowledge creation spiral
mentioned above11.

By returning to our co-construction argument we can underline the fact that the
platform concept reflects the inherent tension that must be managed between
maintaining distributed, varied and evolving sources of distinctive knowledge bases on
the one hand and ensuring the development of knowledge forms that guarantee co-
ordination and adaptation between these different sources on the other within and
across firms at the industry level.

   Ba conceptualizes the dynamic contexts of interaction in places where knowledge is concentrated and
relationships emerge. It provides a platform where different subjects participate in the process of
knowledge creation.
   Corno et al. (1999) apply the concept of Ba to industrial districts. They write “Just as companies have
been analyzed from the perspective of ba, in the same way we have analyzed districts as constellations of
ba on a meta-level…which we can call district ba. We can define it as the dynamic context of interaction
between the different enterprises, which facilitates the transfer and the creation of new knowledge. In other
words, districtual ba is a meta-platform that offers to districtual enterprises opportunities for linking with
other ba … [such] as „industrial ba‟”

The concept of „loose coupling‟ to which refer Orton and Weick (1990) can be useful in
order to better understand the process through which such tension can effectively be
managed. Their definition of loosely coupled systems relies on how at the organisational
level, firms manage the link between distinctiveness and responsiveness between
knowledge bases. Distinctiveness gives priority to knowledge creating activities which
favour exploration, diversity, autonomy, local learning processes. Responsiveness is in
turn related to knowledge creating activities which favour co-ordination, interaction,
exploitation, collective processes of innovation, building of common cognitive
frameworks. According to the authors organisational systems can be characterized by
their degree of responsiveness and distinctiveness: “If there is neither responsiveness nor
distinctiveness, the system is not really a system and it can be defined as a non-coupled
system. If there is responsiveness, without distinctiveness, the system is tightly coupled.
If there is distinctiveness without responsiveness, the system is de-coupled. If there is
both distinctiveness and responsiveness, the system is loosely coupled”. Aldrich and
Whetten (1981) study for instance the qualities of loosely coupled systems in terms of
their flexibility and stability. They show how a loosely joined system provides short-run
independence of subsystems and long-run dependence only in an aggregate way.
According to their characterization, the overall industrial system can be fairly stable, due
to the absence of strong links between elements and subsystems, but individual
subsystems can be free to adapt quickly to local environmental conditions. In a certain
sense, loosely coupled systems can be interpreted in terms of absorptive capacity.
Generally, research on absorptive capacity defined as the ability of companies to
successfully integrate external knowledge or competencies has focused to the individual
firm level (Cohen and Levinthal, 1990). As Meyer-Krahmer and Schmoch (1998)
underline, a not less critical issue is what they call “structural absorptive capacity”
depending as well on micro level factors as on meso-level characteristics. Such structural
absorptive capacity depends on the organisational proprieties of networks and the way
they tune and monitor distinctiveness and responsiveness. Loosely coupled systems can
be an effective way to promote structural absorptive capacity and maintain in this way the
flexibility and stability of networks and industrial systems. In this framework industrial
platforms can be interpreted as contexts where distinctiveness and responsiveness can be
tuned more or less flexibly according to the changes required by the organisational
system or its elements. The necessity of common competence building can lead to
organisational forms favouring tight coupling. In contrast when we are in presence of
completely decomposable systems, organisations can become completely de-coupled. On
the other hand when there is more or less a need for frequent mutual adjustment between
distinctive and common competencies loose-coupling can become the appropriate
organisational form.

An interesting case of co-construction of distinctive and common competence dynamics
through such loosely coupled systems is open source software (OSS), i.e. GNU/Linux
operating system and the Apache web server. A specific feature of OSS is to combine in a
very flexible way distinctiveness and responsiveness. An important feature of OSS is that
it is a freely extensible public good. The „source code‟ used to generate the standard
software can be modified freely by its users and these individual modifications are

themselves integrated into the source code and shared within the community of users.
Such a process allows to develop in a very malleable way highly customized and
complex software products which benefit not only the private users but all the
community. How can we interpret OSS in terms of the characteristics of a loosely
coupled system and in terms of co-construction of competencies? The improvements
brought to OSS by its users depends on their specialized and heterogeneous needs. In this
sense, the modifications integrated to the software benefit from the distinctive
competencies of each user in relation to the localized nature of their learning processes
and experience. What makes OSS preferable to other standardized software packages is
than their capacity to allow for distinctiveness. On the other hand, the fact that many of
the private improvements are shared within the community and incorporated in new
versions of the product creates responsiveness in the system. The use of the most recent
version allows users to access to a common knowledge base developed through time by
the whole community and assimilate it in the process of customisation. Such a dynamic
and flexible interaction between distinctive knowledge (customized but not proprietary)
and common knowledge (public but highly customisable) is what makes OSS similar to a
virtual knowledge platform. In terms of supplier-user relationship, the logic of OSS is
based on the innovation toolkit approach used by suppliers facing highly heterogeneous
users as studied by von Hippel (2001). Innovation toolkits appear to be an efficient way
to co-ordinate and value highly distinctive and local competencies („sticky information‟)
by building a common platform which allows to redefine and reconfigure the division of
labour among suppliers and users according to the evolution of their respective
knowledge bases12.

The dynamics of co-construction in relation to loose coupling can be further explicited
from the industry perspective in the context of modularity management (Sanchez and
Mahoney, 1996; Baldwin and Clark, 1997; Langlois, 2002) under different environmental
and technological conditions. Since modularity is based on system decomposition, the
appropriate level of distinctiveness and responsiveness in system design depends whether
innovations are modular or architectural and systemic. When interdependencies between
modules are based on a given architecture, fixed interfaces and standards, the
organisational system can be considered as de-coupled (modular and decomposable). In
this case, modular innovations which are based on distinctive competencies do not
require an adaptation of common competencies once their appropriate level has been
established and the need for co-construction vanishes. However, when changes at the

   As noted by Franke and Von Hippel (2002) “Toolkits for user innovation in the software field include
four important capabilities. First, and most important, they incorporate enable users to carry out complete
cycles of experimentation and learning during the process of designing their custom product or service….
Second, toolkits must be „user friendly‟. This means that users should be able to operate them using their
existing skills and customary design languages. Third, they must contain libraries of designs for useful
components and modules for custom products that have been tested and debugged. These allow users to
adopt what they can, and focus their design efforts on the truly novel elements of the custom design being
developed. Fourth and finally, toolkits must contain information about the capabilities and limitations of the
production process that will be used to manufacture the product. This ensures that a user‟s design will in
fact be producable”. The first and second capabilities favor the emergence of distinctive competencies,
while the second and fourth capabilities focus on the establishment of a common knowledge setting. The
interactive process between these capabilities creates the co-construction dynamic.

module level introduce unpredictable interdependencies at the system level and need
architectural redefinition, loose coupling becomes necessary in order to favour learning
processes which combine flexibly responsiveness and distinctiveness to support co-
construction of competencies. Langlois (2002) suggests that loosely coupled teams may
be set up in a dynamic setting when “defining boundaries of encapsulation” between
knowledge bases, disciplines or organisational units leads to dysfunction due to
unpredictable changes13. Furthermore, as Brusoni et al. (2000) argue, in presence of a
combined high rate of change of modules and unpredictable systemic interdependence
(i.e. radical innovation), organisations can be forced to move from de-coupled or loosely
coupled systems to tightly coupled ones. In this case, common competence building
becomes the priority and distinctiveness is inhibited. The authors illustrate their argument
by focusing on hierarchically structured networks through the example of the automobile
industry “Carmakers increasingly rely on suppliers for the development and design of
components. Within a given product family, suppliers are allowed (and encouraged) to
introduce improvements at component level. Distinctiveness pays a premium, while
responsiveness is achieved by respecting the limits set by the existing product
architecture. However, carmakers do maintain in house competencies also on those
components whose production they have fully outsourced. The system remains loosely
coupled, rather than de-coupled. Indeed, only carmakers have the capabilities to design
and develop a new product family. When that occurs, carmakers (i.e. systems integrators)
have to step in and re-organize the network (or establish a new one altogether) around the
new product. Loose coupling gives way to tighter coupling, to be then loosened again
once the new regime is achieved”.

If we situate our analysis at a more general level, governance modes at the industry level
can evolve according to the magnitude of the macro-environmental changes and create a
cycle of loose and tight coupling. Under systemic and radical innovations, the industrial
platform can progressively become tightly coupled. Superstructural elements14, such as
industry councils, technical committees, trade associations and professional societies but
also collective invention modes such as consortia or tight inter-firm networks which can
be interpreted as a way to pre-determine the standards and the division of competencies
and labour within the future emerging industry, can play a pivotal role. Once innovations
are largely diffused and interfaces are standardized, the industrial system can become de-
coupled or loosely coupled. Less centralized collective action forms can then be
developed through for example bilateral alliances, informal know how sharing, a growing
independence of subsidiaries or industrial districts (loosely coupled networks).

   Following Von Hippel (1990) he notes that “the tasks in an innovative development project cannot be
partitioned in advance, since knowledge is continually changing. In such a case, […] the modularization at
any point has to take into account the inevitability of re-modularization as learning takes place. In routine
project, […] it may be possible to predict which tasks will become the sources of information; but in
genuinely novel projects, predication becomes all but impossible”
   For Lynn et al. (1996) an innovation community consists of a substructure and a superstructure. The
former includes organizations producing the innovations or its technological complementarities. The latter
provides “collective goods to its members, often specializing in coordinating flows of information or
coordinating the activities of substructure organizations. Many superstructure organizations are thus linking

4.3 Co-construction of competencies: the tension between co-operation and

How can we link the organisational perspective presented in the previous section in terms
of co-construction of distinctive and common competencies through loosely coupled
systems to the tension between competitive and co-operative forces between firms and to
the governance modes regulating these forces?

In a rapidly changing environment and in a context where firms increasingly rely on
varied, distributed and interdependent knowledge bases which reside beyond their
frontiers, the way they manage this tension becomes a critical source of competitive
advantage. In this perspective, what seems relevant to understand is less how firms erect
entry barriers in order to protect their positions and create sustainable competitive
advantage, but rather how they position themselves to elaborate in a dynamic way rules
of the game to determine the rights of entry to the knowledge creation process and to
choose what knowledge bases to share and with whom to pool or not their competencies.

Sanchez and Heene (1997) assert that “In prior strategy research, the „success‟ of
collaborations has often been judged by the longevity of joint ventures and other forms of
interfirm alliances. Competence theory, however, suggests that in a dynamic market
context, longevity of interfirm relationships may not be an essential characteristic of
successful collaborations. Networks of firms functioning as competitive alliances may
find it mutually advantageous in the long-term to enter into successive short-term
arrangements that allow firms to quickly configure short-lived chains of resources in
response to transitory market opportunities”. However their contribution does not tackle
with the implications of such a shift in terms of governance of linkages and the
organisation of transactions between firms (Williamson, 1985)15. Their assumption
challenges the Williamsonian transaction costs theory in the sense that it does not refer to
the issue of specific investments, the switching costs associated with them and the issue
of frequency of transactions. In the traditional transaction cost approach, high level of
uncertainty, frequency of transactions and asset specificity leads to governance modes
favouring either vertical integration or long term contractual mechanisms. In order to be
able to mobilise the transaction cost theory in the case of loosely coupled systems it is
important to return to the three categories on which transactional analysis is based. In a
context where knowledge bases evolve rapidly and in unpredictable ways, high
uncertainty remains a pivotal assumption. However, facing a situation where knowledge
bases are highly distributed and interdependent, multiplicity of interactions (in terms of
variety of actors but also variety of forms) becomes as critical as frequency of
transactions (Nooteboom, 1999a). Finally, concerning asset specificity, insofar as we
consider knowledge assets, we can incorporate here our reasoning on co-construction
dynamics of competencies. First, the very characteristic of knowledge is that it can be

   Although having the ambition to present an “integrative strategy theory that incorporates economic,
organizational, and behavioral concerns” Sanchez and Heene (1997) do not mention, in their discussion on
networks and alliances, the transaction cost theory whose aim is also to incorporate the same three concerns
in a framework where the firm is however viewed as an information processing rather than knowledge
creating entity.

redeployed. Even if some costs may be incurred by the re-coordination of this knowledge
with others, the value of the knowledge accumulated within a particular relation is never
totally lost. In other words we can assert that knowledge bases are more flexible16 then
the specific materials or products in which they are incorporated (this is also the main
justification of knowledge platforms). Second, due to the multiplicity and variety of
knowledge sources, as we broaden the set of actors interacting with each other (as in the
case of a network or more globally an industry), co-ordination and synergy lead
respectively to the constitution of common and collective knowledge bases (a knowledge
infrastructure) which transcends the distinctive (specific and local) competencies of
particular actors or upon which actors rely to further improve or re-deploy their
distinctive competencies. In this sense alliances and networks more then being
investments in specific assets may represent an appropriate way to leverage distinctive
competencies by having access to the knowledge infrastructure.

In our point of view inter-firm relationships in presence of high uncertainty, multiplicity
and flexibility of knowledge sources, and a strong dialectic between common and
distinctive competencies should lead to the adoption of loosely coupled governance
modes favouring as well competition (distinctiveness) as cooperation (responsiveness)
among firms.

Several authors have already emphasised the co-existence at the network or industry level
of competitive and co-operative forces between firms. Van de Ven and Garud (1989) and
Van de Ven (1993) have shown the importance of generic competitive strategies which
involve both competition and co-operation among actors in emerging industries17: “there
is an ongoing tension for each industry participant to organise its own proprietary
functions and distribution channels as opposed to contributing to the creation of the
industry‟s resources and institutional arrangements. Although the former may advance
the firm‟s position as a first mover in the short run, the latter provides the infrastructure
that ultimately influences the collective survival of the emerging industry”. Von Hippel
(1987) has in turn illustrated and defined economic conditions under which rival firms
can develop informal proprietary know-how sharing based on reciprocity. Such know-
how sharing mechanisms are particularly underlined by studies on communities of
practice which often transcend organisational boundaries. Know-how sharing favours
mutual learning processes by confronting local and distinctive experiences of individuals
belonging to different firms which through time become community knowledge. Kogut
(2000) on the other hand refers to the evolution of relationships in horizontal networks
shifting progressively from transactions governed by market mechanisms to interactions
based on problem solving, co-ordination, and mutual know-how exchange. By referring
to Uzzi (1996), he notes that the advantage of such a shift is based on the co-existence of
“flexibility to explore new relationships and opportunities […] by allowing new entrants”
  Nooteboom (1999b) differentiates between flexible and inflexible technologies.
  They represent industry infrastructure as composed of three subsystems. The first subsystem, dealt within
the Porterian and transaction cost approaches, encompasses the mechanisms through which firms manage
their established proprietary activities and transactions. The second subsystem, concerns the knowledge
infrastructure which support the emergence and diffusion of innovations. Finally, the third subsystem refers
to the institutional dimension within the industry. It includes not only governmental action for establishing
innovation and competition policies but also collective actions from the industry.

[competition] and of a “high density of relationships among firms […] that support long-
term trust [co-operation]”. A similar proposition is made by Nooteboom (1999a) in terms
of innovation policy who suggests to “establish a reconciliation between co-operation
(durable linkages) and competition in the sense of multiplicity of relations, and of a
greater ease of entry and exit in networks, due to relations being sufficiently durable but
no more than needed to recover the specific investments needed for high quality of
products and collaboration in innovation”. Nooteboom (1999b) presents this model as a
“third way” corporate control mode based on „informal‟ and „multiple‟ relations which
derives from the combination of two generic governance modes: mode A based on
„formal‟ and „multiple‟ relations favoring radical innovations and mode B based on
„informal‟ and „exclusive‟ relations favoring incremental innovations.

A characteristic of these loosely coupled governance modes is that their viability rests on
two critical variables: trust (particularly emphasized by Nooteboom due to informal
relations) and knowledge infrastructure. Variabes that might be considered as closely
tied-up and self-reinforcing each other. As noted by Kogut (2000) “the preservation of
co-operation is maintained because exclusion to the club deprives the defecting member
from sharing the group rents”. As a firms‟ capability can be considered as more than the
sum of the knowledge or competencies of its members, in a similar way capabilities at the
platform, network or industrial levels could be assumed to be more then the sum of the
knowledge of the members or firms being part of them. The difference generates what we
can call the knowledge infrastructure rent and can dissuade members from adopting an
opportunistic behavior at the risk of loosing access not only to the knowledge
infrastructure but also the opportunity to value and further develop their distinctive

Through which mechanisms can then trust and knowledge infrastructure be built within a
loosely coupled governance system? A first possibility is to consider that both factors are
an emergent property of self-organizational dynamics at the network and industry levels.
Given multiplicity of actors, rapidly evolving knowledge sources and the necessity of
flexibility, under such a possibility the system can hardly reach stability and it can take a
long time to built the appropriate level of trust and knowledge infrastructure (if we have
in mind relationships within a group and not only bilateral relationships). A second
possibility is to design explicit and dedicated collective governance structures and
methods through which responsiveness (co-operation) is promoted by maintaining
distinctiveness (competition).

We will illustrate our argument by insisting more particularly on the link between
organizational/knowledge platforms and intellectual property rights in order to illustrate
how flexibility of knowledge creation and exploitation can be maintained between
competitive actors within appropriate institutional and collective settings. The fact that
knowledge bases are more and more distributed and rapidly evolving, have created a
profound need for more interaction and knowledge sharing between firms. The growing
number of alliances and licensing strategies illustrates this need. At the same time, the
necessity to protect and avoid hold-up of knowledge resources has led firms to adopt
more „aggressive‟ knowledge protection strategies through intellectual property rights

(i.e. patents). These tendencies can be viewed as closely related in the sense that
knowledge sharing goes hand in hand with strong intellectual property rights in order to
not loose control of proprietary technologies.

However, in a context where innovations and standards setting have an increasing
systemic character, meaning that their success relies on overlapping technologies and
knowledge bases (like in the case of architectural innovation), an excessive protection of
fragmented knowledge bases can have detrimental effects on innovative activity. Heller
(1998) referred to the anti-commons tragedy in order to underline the fact that by
opposition to the commons tragedy where the absence of property rights leads to overuse
of resources, the former situation is characterized by under-utilization of resources. The
argument rests on the idea that if property rights are justified for preventing the tragedy of
commons, an excessive fragmentation of property rights can deter or delay innovations
and discoveries (Heller and Eisenberg, 1998). In other words, property rights create
incentives for distinctive competence building and allow firms to protect their
competitive advantage by preventing imitation from competitors. However, the
exacerbate parcelization and protection of knowledge bases leads also to slow down their
dissemination and their exploitation due to transaction costs. This in turn has direct
implications on the development dynamics of the knowledge infrastructure (and
consequently of distinctive competencies) because it hinders co-ordination, synergies and
complementarities between over-partitioned knowledge pieces.

It is then useful to confront our reasoning in terms of organizational and knowledge
platforms in the previous section with the tragedy of anti-commons. The smooth
functioning of such platforms depends actually on institutional arrangements which allow
actors to flexibly co-operate in presence of new innovation opportunities. This has to do
with mechanisms which allow to bundle, re-bundle, combine, recombine property rights
in a transaction cost minimizing way according to emerging synergies and
complementarities between distributed and proprietary knowledge bases (Langlois,
2002). The increasing importance of knowledge pooling has in fact created a growing
interest on institutional arrangements based on patent pooling mechanisms (Shapiro,
2000) and collective patenting mechanisms (Cassier and Foray, 2001). Members of such
platforms can in fact decide through the creation of an independent collective entity to
negotiate property rights and license royalties in a coordinated way. As pointed out by
Brousseau (2000b) such institutions could be considered as an intermediary co-ordination
mode of contractual relationships (loosely-coupled governance mode) between general
and public institutions (tightly coupled governance system) and bilateral governance
structures (de-coupled governance systems).

The resource-based view and the core competence approach have been, for the last fifteen
years, heavily questioned as to their capacity to be a legitimate theory of strategy.
Clearly, such an approach to strategy is the result of many streams of thought not always
well integrated and sometimes contradictory especially, for example, as to the key role of
top management and the influence of the environment and the market (the strategic
competence-based approach versus the evolutionary competence-based theories).

The resource-based view and the competence approach, because of their inward
orientation, are more or less clearly differentiated from the mainstream thought in
strategy and namely the I/O framework as developed by Porter in the 80s. It is not always
clear what differentiate an activity from a resource or a competence as the basic unit of
strategic planning. RBV and CCA have been seen more and more as a complement to the
standard framework enlightening the cumulative learning process of the firm in
performing activities.

Recalling the premises of Porter that a theory of strategy is framed by a theory of the
firm, we tried to demonstrate that the I/O framework and the RBV and CCA approaches
do not refer to the same theory of the firm:
The I/O framework refers clearly to the firm as a processor of information as theorized by
the transaction cost theory. Such an approach is not designed to accommodate the basic
characteristics of knowledge.
The RBV an CCA approaches refer to the firm as a processor of knowledge as theorized
in the literature on the knowledge based economy. In such a case, it is not activities that
shape and drive competences or resources. Competence comes first and shapes activities
and products.

In such a perspective, the RBV and CCA approaches are not basically “inward” and
disconnected from the industry and the environment. Such connection is not done on the
basis of the division of labor in a stable environment as in the I/O framework but on the
basis of knowledge in a dynamic environment. The positioning of the firm in the market
is the result of a co-evolutionary and dialectic process. The firm is both contributing to
the development of a common knowledge base for the industry and differentiating and
positioning itself through the development of its own knowledge base. The firm is
managing a dialectic process through which she compete and cooperate with other firms
in loosely coupled systems.

The perspective developed here (i.e. RBV and CCA as a theory of strategy based on a
vision of the firm as a knowledge processor and connected to the environment through a
co-evolutionary process by which the division of knowledge is done and the positioning
of the firm is defined) is very well adapted to the type of environment we are living in.
Most scholars point to RBV and CCA in an environment of technological change,
continuous and disruptive innovations, blurred industry frontiers, and emerging markets.

But how fast and flexible RBV and CCA are as an approach to strategy is another
fundamental question. We frequently, especially by referring to routine, see construction
and reconfiguration of competences as being slow and difficult. Recent contributions in a
series of article in Harvard Business Review on the theme of “Corporate Strategy in the
New Economy” shed some doubts on the capacity of RBV and CCA to cope with rapidly
changing and ambiguous markets and technologies. Such doubts are expressed, among
others by Eisenhardt (2001) contrasting strategy based on activities and positioning in
stable industry structure, strategy based on competence and resources in moderately
changing but well structured markets and strategy based on simple rules in chaos and

very rapidly and ill defined markets. Simple rules focus on a few basic rules as a process
to cope with unpredictable change. Such questioning on the ability of RBV and CCA to
cope with fast change bring us also to some interesting questions on the type of co-
evolution of firms within the industry and especially to the recent trend observed of
moving from alliances to mergers and acquisitions in very fast changing markets.

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