University of Cagliari, Faculty of Economics, 2011-12

Business Strategy and Policy A course within the II level degree in Managerial Economics year II, semester I, 9 credits Lecturer: Dr Alberto Asquer aasquer@unica.it Phone: 070 6753399 University of Cagliari, Faculty of Economics, 2011-12

0. Evolutionary economics 1. Routines and evolution 2. Dynamic capabilities 3. The evolution of firm's capabilities 4. Reconfiguring firm's capabilities - - - - - - - - - - - - - 5. Summary Introduction

Evolutionary economics is a distinct field of study within the discipline of economics 'Evolutionary' broadly refers to the property of individuals within a population to change their features over time 'Evolutionary economics' broadly refers to the study of the dynamics of economic systems that originate from changing features of their agents – especially, firms – over time (Note: 'mainstream' neoclassical economics is mostly interested in the study of the conditions related to the equilibrium of economic systems; evolutionary economics, instead, posits that economic systems are not in equilibrium as they are continuously transformed by inner 'endogenous' forces) 1. Evolutionary economics

Influential predecessors of contemporary evolutionary economics: C. Darwin, J. Schumpeter, T. Veblen, K. E. Boulding 1. Evolutionary economics

Contemporary roots of evolutionary economics: “An Evolutionary Theory of Economic Change”, by R. R. Nelson and and S. G. Winter (1982) Firms are conceived as collections of routines Routines are the capability to repeat an activity in a certain context that has been learned by an organisation in response to selective pressures (in common-sense terms, routines may be understood as 'standard ways of doing things' or 'standard operating procedures' that people follow within any organisation because they learned from past experience that 'they work, and this is how business is conducted here') 1. Routines and evolution

Contemporary roots of evolutionary economics: “An Evolutionary Theory of Economic Change”, by R. R. Nelson and and S. G. Winter (1982) Firms differ from each other because they consist of different 'bundles' of routines (ways of doing things that each firm learned under specific circumstances) Firm's routines are repeatedly 'tested' in the economic system – certain routines allow firms to accomplish higher performance than other firms Firms that possess low-performing routines are thrown out of the economic system (e.g., they go bankrupt) Firms that possess high-performing routines survive, and may be able to attract resources for the maintenance and improvement of routines 1. Routines and evolution

Contemporary roots of evolutionary economics: “An Evolutionary Theory of Economic Change”, by R. R. Nelson and and S. G. Winter (1982) As environmental conditions change (e.g., as features of the economic systems change: demography, consumers' taste, technology, regulations, etc.), old routines (that allowed firms to survive as they used to 'work well' in the past) may not be well-performing any more Firms 'evolve' – in the sense of developing, strengthening, and improving their routines that better 'pass the survival test' within the economic system Dynamic capabilities refer to the organisational processes that make firms develop, strengthen, and improve their routines (Dynamic capabilities may be conceived as routines as well. They are the routines that relate to the generation of 'new' routines) 1. Routines and evolution

Dynamic capabilities broadly refer to the organisational processes that make firms develop, strengthen, and improve their routines S. G. Winter (2003): “An organisational capability is a high-level routine (or collection of routines) that, together with its implementing input flows, confers upon an organisation's management a set of decisions options for producing significant outputs of a particular type” So – dynamic capabilities are a 'special type' of routines, i.e., routines that enable the creation of 'new routines' (note: routine is something that is learned, is highly patterned, repetitious or quasi-repetitious, founded in part in tacit knowledge; improvisation is not a routine) 2. Dynamic capabilities

Every firm has a 'zero-level' or 'baseline' set of routines, i.e., those that serve the purpose of producing and marketing the given products and services currently in the portfolio ('how we earn a living now') Some firms have dynamic capabilities, i.e., those routines that relate to the innovation of products and services, to the innovation of the production process, or to the search and attraction of new customers, etc. - dynamic capabilities implement the change of 'old' routines with 'new' ones (Note: R&D is important) Possibly, a few firms have 'further level' dynamic capabilities, i.e., those routines that relate to the innovation of the way innovation is pursued – e.g., highly creative 'reconfigurations' of thinking and methods for innovating (Note: strategic entrepreneurship is very important) 2. Dynamic capabilities

2. Dynamic capabilities Apple as paradigmatic firm containing dynamic capabilities (Teece, 2011)

3. The evolution of firm's capabilities Capabilities (routines) do not last for long (their capacity to perform is 'eroded' over time); dynamic capabilities allow to renew, redeploy, or recombine existing routines into new higher-performing ones Alternatives for the evolution of organizational capabilities over time, adapted from Helfat and Peteraf (2003).

3. The evolution of firm's capabilities Dynamic capabilities also relates to firms' capacity to develop and adopt 'disruptive technologies' Disruptive technologies are innovations that create new markets while displacing (i.e., making obsolete) earlier technologies (C. M. Christensen, 1995)

3. The evolution of firm's capabilities Examples of disruptive technologies

3. The evolution of firm's capabilities Examples of disruptive (?) technologies

3. The evolution of firm's capabilities Common theme of successful dynamic capabilities: 'taking the game to a higher level', by innovating products and processes in such a way as to make other firms' capabilities obsolete Investments and policies are needed to promote the advance of cumulative knowledge, diffuse technological solutions within the firm, and focus on visible, urgent, and frequent problems Any firm typically follows a 'technology development path' – that is cumulative, path-dependent, and often quite binding (i.e., the firm become increasingly good at doing what it did in the past, it may perfect what it is very good at, while it may be unable to radically reconfigure its bundle of routines)

4. Reconfiguring firm's capabilities Example: strategy renewal at IBM 40% of computer industry sales 70% of computer industry profits Share price downfall Diagnosis: “We don't move fast enough... we've got to become more entrepreneurial, focused, cost driven... we've been too bureaucratic” 400,000 employees 200,000 employees 1980s 1990s 2000s

4. Reconfiguring firm's capabilities Example: strategy renewal at IBM 40% of computer industry sales 70% of computer industry profits Share price increase 400,000 employees 426,000 employees 200,000 employees 1980s 1990s 2000s

5. Summary Main points Evolutionary economics is especially concerned with how firms evolve in such a way as to survive in the economic system. Critical is the development, strengthening, and improvement of firm's routines (capabilities) Dynamic capabilities are the higher-order routines that relate to the 'upgrade' of existing routines. They have to do with innovation and entrepreneurship Firms evolve along technological development paths that are cumulative, path-dependent, and often quite binding Sometimes, a radical reconfiguration of firm's routines is needed in order to turn around a glooming performance

University of Cagliari, Faculty of Economics, 2011-12