Core Competence 5

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WP 10/1996 - ILT (PROTEUS)

The Role of Core Competence inOrganizing Economic Activities

A Socio-Economic Model of Strategic

Management

Henrik Sornn-Friese

WP10/1996 - ILT


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INTRODUCTION

This essay is concerned with the strategic management process of the firm;especially it is concerned with linking organizing processes and the corecompetence of the firm. Here, the expression core competence is identified both asa generative mechanism improving efficiency in terms of cost and time withwhich firms acquire, accumulate, and deploy firm specific resources andcapabilities, and as a generative mechanism improving effectiveness in terms ofaccess to external resources and overall social legitimacy. In this, core competenceis defined in both an internal and an external perspective. The implicitmethodological-philosophical perspective is that of critical realism. In thisframework causal laws are to be understood as tendencies (Lawson, 1989, p. 62).

The essay is organized in the following way: In the first section, the currentconnection between strategic management and the concept of the corecompetence of the firm is examined. This examination briefly surveys the field of

strategic management with special emphasis on competence based research andliterature. The second section digs deeper into the basic concepts and definitionsof this theoretical approach, and an internal perspective on core competence isdeveloped. In the third section, the importance of the firms industrial, societal,and natural environment for understanding competitive behavior will bediscussed theoretically. Here context is defined according to the following issues;first, by its specific dimensions of importance to firm competitive behavior. Here,the focus is on how context can be described and measured in terms of relationaland structural embeddedness. Second, context is defined by the way it is knownand how it comes to be known by the firm. The fourth section presents a socio-

economic model of the firm, integrating the two perspectives on corecompetence. The term socio-economic relates to economic activities that transpirein a social context, or through social processes1. Finally, the methodologicalimplications are considered and questions related to the transport sector areasked.

1. CORE COMPETENCE WITHIN THE STRATEGY FIELD

Strategic management is about the overall direction of organizations often with

emphasis on sustainable competitive advantage which is normally measured interms of market positioning, above normal return on investments, persistentprofit, etc.

Within the strategy field scholars have long recognized the importance offirm differences and distinctive competencies (Ansoff, 1965; Hofer and schendel,1978; Selznick, 1957), and maybe this is the main reason why strategicmanagement and economics has, for many years, existed and developedindependently of one another. Traditional strategic thinking has success followleadership, clarity of purpose, and a general notion of fit between the enterpriseand its environment (Rumelt, Schendel and Teece, 1991, p. 13).

1 Organizational or social processes consist of individual behaviors that are interlocked between

two or more individuals.


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This is the core of the SWOT-model on which traditional strategy analysis isbased. A central view is that competence is scarce and unequally distributed. Thiscorresponds to a weak form of rationality. Neoclassical economics, on thecontrary, disregard the phenomena that concern strategists, and regards firms asatomistic entities acting independently of time and of the context in which they

are embedded. This is nourished by the belief that the theory of the firm need notdescribe the actual behavior of firms (Rumelt, 1981, p. 557). Still, economicsalmost always assumes economic competence within firms. This is typicallyembedded in the assumption that economic agents are hyper-rational.

Yet, within the last 10-20 years the strategic management field hassuccessively adopted, and clearly profited from, the language and logic ofeconomics. Within this fairly new framework competitive advantage is seen assustained by mobility and entry barriers, market preemption, asset specificity,learning, causal ambiguity, tacit knowledge, resources and capabilities, etc. Aweighty cause for this tendency has been the emergence of a series of new

research traditions within the field of economics turning the single firm into thebasic unit of analysis, allowing for the existence of firm heterogeneity at group orindustry level, and thereby changing the nature of economics. According toRumelt, Schendel and Teece (1991, p. 13) at least five substantial monkeywrenches have been thrown into what was a smoothly running machine [theneo-classical theory of the firm, my comment]. They are called uncertainty,

informationasymmetry, bounded rationality, opportunism, and asset specificity.In this process there has been two theoretically conflicting trends; one

known as the entry deterrence approach (with emphasis on strategizing andmonopoly rents), and the other as the resource or competence based view of the

firm (with emphasis on economizing2

and Ricardian rents3

). The entry deterrenceapproach has long been recognized as a paradigm, incubated inside the structure-conduct-performance school of Mason (1939) and Bain (1956), while thecompetence based literature has been regarded as an emerging paradigm(Peteraf, 1993, p. 179). The normative directives in each are fundamentallyincompatible, implying different causal structures of competition. Still, a lot ofresearchers have been arguing, that the two approaches are in many aspectscomplementary (Barney, Spender and Reve, 1994; Foss, 1993; Mahoney andPandian, 1992; Porter, 1991; Reve, 1990; Teece, Pisano and Shuen, 1990). As Fossputs it the proper relation between neoclassical and evolutionary economics is...one of complementarity, so that neoclassical economics addresses those segments

2 The terms strategizing and economizing are taken from Williamsons article Strategizing,

economizing, and economic organization (1991). Williamson sees the fundamental strategic

challenge to firms as organizing and governing economic activities so as to eliminate waste; that

is, economizing.

3 In the economics and strategy literature rents are defined as the excess return to the owners of

the resources of the firm. Ricardian rents are extraordinary profits earned from resources that

are in fixed or limited supply (i.e., due to scarcity they are insufficient to satisfy demand for their

services). Monopoly rents are profits earned from collusion or government protection. In thefollowing, rents, profits, above normal returns on investments, and so on are used

interchangeably.


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of reality that as a good approximation can be taken to resemble closure, whileevolutionary economics addresses the open economic universe. The two theorieshave in other words different domains of applicability (1993, p. 23).

Williamson (1991) argues that if business strategy is to release the sources ofsustainable competitive advantage, choosing between strategizing and

economizing, economizing is much the more fundamental (p. 75), and evenmore so in market environments that are undergoing significant changes.According to Williamson, strategizing efforts to deter or defeat competitors arenot unimportant, but in the long run the best strategy is to operate and organizeefficiently. The entry deterrence approach includes elements of market powerand economies of scope in explaining diversification, but it is without strongorganizational implications (Teece, Rumelt, Dosi and Winter, 1994, p. 10).Williamsons view is heavily supported by the empirical observations of theChicago school of strategy (Cool and Schendel, 1988; Hansen and Wernerfelt,1989; Hofer and Schendel, 1978; Rumelt, 1991; etc.) pointing to the importance of

firm-specific factors in explaining performance differentials within groups andindustries. In support of this, Jacobson and Aaker (1985) find that profit is onlyweakly determined by market power, and that there seem to be a predominanceof tacit, firm-specific factors present in competition.

The Chicago-school, like Williamson, sees industry structure as reflectingefficiency outcomes rather than market power. Here, differences in firmperformance tend to signal differences in resource endowments, and high profitsare seen as returns to specialized, high-quality, difficult-to-imitate resources andcompetencies. Hofer and Schendel (1978) were the first to suggest a directrelationship between competitive advantage and distinctive organizational

competence accentuating that competitive advantage is attained through thedeployment of firm specific competence. Within this efficiency tradition a lot oftheoretical contributions have flowed together and is today dubbed thecompetence-based view of the firm (Knudsen, 1993) or the competenceperspective (Knudsen, 1995). As a new concept within strategic management thecompetence perspective includes the resource-based theory of the firm (Barney,1986; Dierickx and Cool, 1989; Lippman and Rumelt, 1982; Penrose, 1959;Wernerfelt, 1984), knowledge-based theory of the firm (Teece, 1982; Demsetz,1988), and dynamic capability theory (Teece, Pisano and Shuen, 1990).

The question of why firms differ is at the very heart of strategicmanagement. In this, the competence perspective is consistent with and rooted in

the strategic management tradition, and according to Barney and Zajac (1994, p.6) it can actually be seen as a logical extension of traditional strategyimplementation work. Discussions of distinctive competencies, and strengths andweaknesses within the strategy field are explicitly similar to what thecompetence perspective is attempting to model. And, in arguing that competencemay be scarce, the perspective argues against the neoclassical theory of the firmand the entry deterrence approach.

1.1 Introducing the Competence Perspective

According to Knudsen (1995, p. 1) the competence perspective should becharacterized as an integration of different theoretical contributions of a certain


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familiarity. Following this line he identifies three underlying themes that seem tobe central to the identity of the competence perspective. First, the firm isregarded as a knowledge accumulating entity, where new knowledge isgradually build into the firms routines. Second, the competence perspective isused to explain enduring success (i.e., why some firms simply do better than

others, and do so consistently). Third, there seem to be a shared understanding ofstrategy accentuating corporate coherence, strategies of focus, and related ratherthan non-related diversification.

In the competence perspective, following the line of Penrose (1959), the firmis viewed as a time-dependent entity consisting of a collection of unique,transaction specific resources and capabilities that progressively evolves (i.e.,resources and capabilities are in a process of constant creative destruction). This is

what Penrose described as the unfolding perspective as an analogy to the unfoldingnature of biological organisms. The firm is the constitutional frame within whichthe coalition partners of the firm are specializing their resources with respect to

the strategic development of the firm. The firm is also a social reality regarded asa changeable, open, and complex system, consisting of causally persuasivemechanisms in interaction. Resources and capabilities are managed dynamicallyfor the purpose of earning rents, but the strategic management process is causallyambiguous due to the tacitness, complexity, and specificity of resources andcapabilities, cf. section 1.1.1 below. According to Penrose (1959) the firmcombines otherwise non-distinct resources in unique ways making the firmunique relative to competitors. In this process, the importance of firm (team-embodied) capabilities or managerial services is stressed.

In focusing on resources and capabilities the perspective is challenging the

production function view of the firm in neoclassical economics by disclosing theso-called black box. In contrast to the entry deterrence approach, which looks atthe factors of production as perfectly accessible on the factor markets, thecompetence perspective emphasizes the intrinsic immobility of valuableresources and the time and cost required to accumulate those resources (Dierickxand Cool, 1989; Peteraf, 1993).

A fundamental assumption of the competence perspective is that resourcesand capabilities are heterogeneous across firms at all levels (e.g., strategic group,industry, locality, size and age). This can be described as differences in efficiencythat reflect the existence of superior productive factors, which are in limitedsupply. Some firms simply are superior to others in the long run. Firms withsuperior resource and capability combinations will experience above normalreturns on investments. Rents, being Ricardian (cf. footnote no. 3), stem fromquasi-fixed resources and capabilities. According to Peteraf (1993, p. 181) quasi-fixed productive factors are resources and capabilities that, while limited in theshort run, may be renewed and expanded incrementally within the single firm.In the language of Prahalad and Hamel (1990) the utilization of such productive

factors is termed the core competence. This process involves collective learning andis knowledge-based, and in this sense the viewpoint is essentially institutional4.

4 According to Langlois (1995, p. 249) an institution is most often defined asa regularity of

behavior, and the study of institutions is the study of systems of rules of conduct. In this


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Therefore, the notion of core competence is attributable to organizationaleconomics5.

1.1.1 Resources, capabilities, and routines

The firms resources are those factors controlled by the coalition participants ofthe firm, which enables it to formulate and implement strategies that bestow costand diversification competitive advantages. According to Wernerfelt (1984, p.172) a firms resources are defined as the tangible and intangible assets, whichthe firm holds over a long period of time (e.g. brand names, skilled personnel,external relationships, items of capital equipment, management informationsystems, etc.). Intangible resources are often identified as the strategic mostsignificant (Eriksen and Mikkelsen, 1993; Grant, 1991; Hall, 1993; etc.)6. Eriksenand Mikkelsen (1993) stress the importance of organizational capital (i.e., formalreporting structure, formal and informal planning, control, and information

systems) and social capital (i.e., social structures that facilitate actions of actors,obligations, expectations, and trustworthiness; norms and sanctions; andinformation channels). According to Barney (1991, p. 105) resources must bevaluable, rare, imperfectly imitable, and unique to sustain the firms competitiveadvantage.

Grant (1991, p. 119) defines a capability as the capacity for a team ofresources to perform some task or activity. Similarly, Teece, Pisano and Shuen(1990, p. 9) state that capabilities are based on developing, carrying, andexchanging information through the firms human capital. Therefore, teamshold the key to balancing short-term performance with longer-term institution

building and to corporate rejuvenation (Ginsberg, 1994, p. 160). In this view, thefirm is seen as being more than the arithmetic sum of single characteristics. Forexample, when a team is repeatedly confronted with the same problems, it willgradually develop the proper routines for solving these problems, therebyaccumulating the social and organizational capital of the firm (Coleman, 1988;Eriksen and Mikkelsen, 1993).

There may be a natural trajectory embedded in the firms utilization ofresources and capabilities making the overall direction of the firm pathdependent. In highlighting such institutional constraints to the strategicmanagement of the firm, the competence perspective challenges the unrealistic

sense, institutions are abstract patterns of behavior whose structure emerges organically from

the interplay of individual intention rather than from any grand scheme. So, the notion of

routines is similar to that of institutions.

5 Organizational economics is seen as a paradigm consisting of evolutionary economics,

transaction cost economics, property rights theory, positive agency theory, and now also

competence-based theory (Barney and Ouchi, 1986).

6 Hall (1993, p. 607) identifies 9 different intangible resources: (1) The intellectual property rights

of patents, trademarks, copyright and registered designs, (2) trade secrets, (3) contracts and

licenses, (4) data bases, (5) public information, (6) personal and organizational networks, (7) theknow-how of employees, professional advisors, suppliers, and distributors, (8) the reputation of

products and company, and (9) the organizational culture.


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and naive proposition that firms can adapt to changes easily. The notion of pathdependence recognizes that firms are historical entities, and that history matters(Teece, Pisano and Shuen, 1990, p. 14)7. The enthralling implication for strategy isthat the future strategic choices, and thus outcomes, of the firm are determinedby its history (e.g., the current level of strategic assets, cognitive obstacles, etc.).

Path dependence is somewhat akin to routines (defined as regular andpredictable patterns of interactions resident in group behavior that representsuccessful solutions to previous problems (Nelson and Winter, 1982, p. 14f)). Pathdependence stresses, that actions undertaken by the firm in the past constitutethe present and constrain and focus the future behavior of the firm. The notionrecognizes that, in the chain of causality, random events in the early stage of aprocess can fix an outcome (or institution) independent of its overall efficiency.This is partly due to network externalities and lock-in within the single firm, butalso to the tacit dimension, complexity, and specificity of the causal chain ofhuman action (Reed and DeFillippi, 1990). Thus, path dependence can lead to

decreased competitiveness that, because of selection mechanisms in the market,in the long run will force the firm to close down unless it is able to change itsroutines drastically. On the other hand, path dependence can also lead tosuperior performance if the firms routines match opportunities in theenvironment. This is what Teece, Pisano and Shuen (1990, p. 17) calls windows of

opportunity and the timing of strategic action. This view allows for the existence oforganizational inefficiencies present in otherwise competitive firms - an accountthat cannot be argued from a static comparative viewpoint (e.g., transaction costtheory).

1.2 The Explanatory Power of the Competence Perspective

It can be argued that the force, as well as the limitation, of the competenceperspective is that it explains rather than it predicts. It seeks to explainperformance differentials between firms over time. The perspective consists of aseries of theoretical elements, each of which has been carefully modeled toexplain particular social/organizational phenomena. The perspective delivers anumber of formally independent submodels, and in this it is still an evolvingparadigm. So, one might expect further elaboration of the framework in thefuture. The perspective helps sharpen the arguments and knowledge obtainedwithin strategic management and real life business practice, and it provides apropitious and more realistic theory of the firm relative to the neoclassical theoryof the firm. And, the perspective applies a more precise definition of firmstrengths and weaknesses to the strategic management field.

One could argue that the competence perspective has the potential to makerapid predictions by using independent testimony to the reality of corecompetence thus employing a realist approach to scientific discovery. Theexplanatory power of the perspective is actually based upon the assumption that

7

The neoclassical theory of the firm characterizes the firm as an entity independent of time.Here, strategic changes are always the result of exogenous shifts in the firms production

function.


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competence, and especially core competence, in its nature is only indirectlyobservable, and that this is the very reason for firm heterogeneity.

This, of course, has methodological implications: the explanatory power ofthe competence perspective depend on the success in finding empirical evidencefor the existence of unobservable resources and capabilities (by studying the

effects of such unobservable entities), but not evidence in the sense of logical andmoderate empiricism where the explanatory power of the competenceperspective would depend upon how well its key theoretical constructs wouldcorrespond to empirical evidence of populations of firms. Because of the complexnature of social systems the only reasonable methodological approach would beto uncover firm characteristics which at best has a certain resemblance withcharacteristics of other firms in the same branch in order to develop an intuitiveas well as contextual understanding of general phenomena that would facilitatethe understanding of specific firms or institutional arrangements. A concept ormetaphor that can be used to explain this is what Wittgenstein (1968, paragraph

67) has termed family resemblance8. What is uncovered in the study of competenceand strategic management processes is not really a universal essence or generallaw but rather a complicated network of similarities overlapping and criss-crossing: sometimes overall similarities, sometimes similarities of detail (Ibid.,paragraph 66). Firms in the same branch (or strategic group) form a family justlike core competencies and specific organizing processes constitute families.Families are basically the same as populations, i.e. they are collections of entitiesin competition with each other for resources. In the words of critical realism,entities in this sense are formally related (Sayer, 1992, p. 107).

As an explanatory model the competence perspective is basically

evolutionary, that is, ontologically the competence perspective regards theeconomic universe as being essentially open and therefore chaotic by nature.Being evolutionary, the perspective stresses the emergence and spread ofnovelties, it is reductionist, and it utilizes biology as the relevant metaphor in arather pragmatic way (Foss, 1995, p. 3). Its purpose is to provide a scholastic linkbetween the social foundation of business and the behavior of the individualsthat constitutes the firm. As such, abstractions in the competence perspective arecausal statements.

In the covering law model (or the deductive-nomological9 explanatorymodel), which was originally formulated by David Hume (1739) and laterchampioned by Hempel (1962), the matter of causality and social actions is aquestion of (1) whether intentions and actions can be regarded as independent(assuming hyper-rationality), and (2) whether social actions can be understoodand predicted with the aid of empirical laws or not (that is, whether explanationsare to be derived from directly observable patterns of events and of social action,or whether models should attempt to uncover not directly observable causal

8 The notion refers to the various resemblances between members of a family: build, features,

colour of eyes, gait, temperament, etc. (Wittgenstein, 1968, paragraph 67)

9

Nomological knowledge is knowledge that is assumed to be universal, i.e., conditions thatremain unchanged in time and space. The deductive-nomological model prescribes that science

should develop explanations and predictions about reality by utilizing a deductive approach.


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mechanisms (Ekstrm, 1992, p. 108)). According to the deductive-nomologicalexplanatory approach a proposition has truth-value if the phenomenon it isattempting to explain can be abstracted from a set of general laws and somebackground conditions. These laws and conditions, it is claimed by positivists, donot need any root in reality for a theory to be true. Rather, the truth-value of any

theory is assessed on the basis of its mathematics. The competence perspectiveseems to challenge this view on causality. In emphasizing tacitness, complexity,and specificity (which are unobservable and context depending phenomena) itseems to question the very possibility of finding causal explanations for socialaction, at least in the Humean sense. As Foss (1993, p. 5) argues, adherence to arealist position does not, then, commit one to all aspects of what Popper (1963)calls essentialism, that is, one does not necessarily become committed to thefollowing propositions: 1) That theories provide ultimate explanations in thesense that such theories are neither in need nor susceptible of furtherexplanation, and 2) that the truth of theories can be established beyond any

doubt (Popper 1963: 103-105). The third part of Poppers definition ofessentialism, that scientific theories provide accounts of the natures or essence ofthings, seems however to be a feature accepted by almost all realists.

Besides, in the competence perspective organizational members areassumed bounded or procedurally rational10 indicating that social reality isconstituted by subjective interpretations and meanings, i.e. reasons are causes(Sayer, 1992, p. 110-112). In this, the competence perspective is utilizing agenerative concept of causality11. The perspective recognizes that restrictedinformation and cognitive limitations restrain the sagacious identification andappropriation of resources and capabilities. However, the perspective has not yet

fully accommodated a framework for understanding the processes throughwhich perceptions and capabilities of the organizational members produce socialstructure and performance. Hence, a competence-based framework thatinvestigates the cognitive and social processes within the firm is needed. This willbe shortly considered in section 2.2. In section 3.2 it is examined how observation,attention, and perception of the social context influence the structure of the firm.

The competence perspective advocates that resources and capabilities arethe ultimate sources of sustainable competitive advantage and that competing

from-the-inside-out (Ulrich and Lake, 1990) is the appropriate function for thestrategic management of the firm. In doing so, the perspective has very little tosay about the firms competitive surroundings, and consequently do not fully

10 Individuals are intendedly rational, but only limitedly so (Simon, 1961, p. xxiv). This view on

rationality recognizes that intentions and motivations developed within a socio-cultural

framework have a productive stamina in causing individuals to act as they do.

11 The competence perspective can be characterized as an explanatory construction predicated

within a methodological-philosophical position of critical realism. Critical realism emphasizes

the underlying processes on many different levels in the chain of causality; the development of

personality, self-consciousness and habits, intentionality and the processes whereby human

beings reflect on their situation and develop ambitions and motives for action, and the relationsbetween social actions and properties of social situational contexts, of social orders, and of

relatively enduring social structures (Ekstrm, 1992, p. 115).


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recognize that competence is context dependent. According to Collis (1994), it isalways possible to shift the analysis of competence-based competition to evermore abstract levels, which will inevitably lead to infinite regress. Only byhonoring that valuable resources and capabilities depend on the externalenvironment can this problem be addressed. This is what is entered upon in this

essay by distinguishing between an internal and an external perspective on corecompetence.

2. UTILIZING, COORDINATING AND INTEGRATING RESOURCESAND CAPABILITIES - AN INTERNAL PERSPECTIVE ON CORECOMPETENCE

In the strategic management process of the firm, core competence and strategicmanagement can be seen as generative mechanisms by which the firm learn andaccumulate new skills and capabilities in order to stay competitive. The internalperspective on core competence in this section stress the importance of firmspecific resources and capabilities at different levels of the organization in thestrategic management process. This includes characteristics of subordinates, ofdifferent tasks, of the organization12, and of the management team. It is feasiblethat organizational and individual asymmetries, like for example competenceasymmetries, on specific topics signify that individual, or a group of,subordinates obtain leadership, have a more powerful sway on subject matters,the interpretation of the issues faced, and the strategies for change.

A fundamental aspect from a socio-economic point of view is that these

characteristics are all path dependent and interdependent, making strategicchanges and adaptation to the environment difficult to manage. From agenerative view on causality these substitutes for strategy can be analyzed interms of tendencies or powers acting with certain intensity in specific directions(Lawson, 1989, p. 62f). These tendencies are concealed in any open system,manifest only in complex interaction with other tendencies. On the level of corecompetence these substitutes for strategy are therefore never to be found in theirgenuineness. They are always reinforced, modified, or neutralized by othersubstitutes.

2.1 The Concept of Core Competence

In an internal perspective core competence can be defined as a set ofdifferentiated technological skills, complementary assets, and organizationalroutines and capacities that provide the basis for a firms competitive capacitiesin a particular business (Dosi, Teece and Winter, 1990, p. 18).

This definition is more or less identical to Prahalad and Hamels definitionof core competence as the collective learning in the organization, especially howto coordinate diverse production skills and integrate multiple streams oftechnologies (...) Core competence is communication, involvement, and a deep

12 Weick (1987, p. 221) has termed these characteristics substitutes for strategy.


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commitment to working across organizational boundaries. It involves manylevels of people and all functions (1990, p. 82): However, the latter definitionseems the most dynamic. What is striking, from an economic point of view, isthat these definitions integrates both an organizational/economic dimension anda technical dimension, dimensions which are typically separated in economic

analysis.In an internal perspective, core competence can be seen as a generative

mechanism that enables the firm to compete on economizing by helping it tobuild the necessary13 strategic assets, i.e. core competence can be defined as thespecific skills that direct the process of accumulation, and the characteristics ofthese skills. In other words, core competence has to do with causality, but not inthe sense of constant conjunction of events. Core competence is a causal power orliability inherent in the social relations or structures of the firm, i.e., it contains ofinterlocked behavior cycles and rules for assembling core competence out of the total

pool of interlocked behavior cycles that are resident in teams of resources and

capabilities (Weick, 1969, p. 72)14. That is, core competence is in itself composedby the aggregate causal powers of elemental objects (resources and capabilities),and therefore the causal power of core competence is changeable with respect tothe changeability of the nature of the resources and capabilities. For example,when individuals within the firm learn or change their behavior then their causalpowers will change too, and this will or can alter the core competence of thefirm. Hence, it is fundamentally a knowledge-based view of the firm.

The above definitions seem somewhat similar to the definitions of firmcapabilities and resources in stressing communication, involvement,commitment, coordination, and integration, etc. But how then is core

competence to be distinguished from firm capabilities and resources? The answerto this question has several elements.First, it is important to note that a core competence is a collection of

generative mechanisms such as constituent skills and technologies resident insocial structures (i.e., capabilities), and not a single skill or technology. In this, thenotion of core competence is based on the belief that competencies can bedivisionalized and ranked in order of precedence, so that some competencies willcontribute significantly more to a firms competitive advantage than others.Whether a firms core competence is actually activated depends on thesesubordinate mechanisms or conditions15 whose appearance and configuration areuncertain. For example, the core competence a supplier of transportation servicespossess in logistics could include skills and technologies in bar-coding andlabeling, reefer distribution, warehousing, crating and palletizing, trucking and

13 The question of which assets to determine necessary are situational and depend largely on the

specific industrial and social context in which the firm is embedded, and therefore the question

must be attended from an external perspective on core competence, cf. section 3.

14 This is acknowledged in the competence perspective by emphasizing that rationality is

procedural, i.e. decision makers follow specific, routinized rules for decision-making.

15 Following the logic and language of critical realism the term conditions mean other objects that

have their own causal powers and liabilities (Sayer, 1992, p. 107).


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container drayage, freight station, quality assurance, and much more. In this, thecore competence of the firm is the integration of various single skills andmethods, but the demarcation line between a capability and a core competencemay still be very difficult to define operationally.

Second, a core competence is an activity or a process embracing both tacit

and explicit knowledge and not a regular commodity (or resource) like forexample an Operation Distributions System, trucks and combi-wagons,warehouses, etc. It is the proficiency to administer the firms strategic assets thatconstitute a core competence. In other words, core competence is the utilization,coordination, and integration of resources and capabilities in the strategicmanagement process of the firm.

There are four extensive dimensions to the firms core competence as it isdefined above (Leonard-Barton, 1992, p. 113f). The core competence of the firm isembodied in (1) employee knowledge and skills (qualifications) and embedded in(2) organizational competence or the firms technical systems. The accumulation

of assets is guided by (3) the managerial competence or systems of the firm.Finally, core competence consists of (4) the norms and values that underlie thefirst three dimensions. Together these dimensions structure the competencies ofthe firm. See figure 2-1 below. The dimensions in the figure are substantially andformally interrelated16 and interdependent, but not equally distributed in variouscore competencies, i.e. the dimensions may be represented in differentproportions for different purposes and/or for different firms. An importantaspect of core competence is that it is institutionalized, and thus it is pathdependent. That is, the dimensions reflect accumulated behaviors andconvictions based on former solutions to various decision problems. In this sense,

core competence is socially constructed. Figure 2-1 below is a somewhat staticpicture, and it is to be conceived of merely as a snapshot (a firms competencestructure) of the organizing process at a given point in time.

Figure 2-A: The four dimensions of core competence

Qualifications

Norms and values

Organizational

competence

Managerial

competence

Based on Leonard-Barton (1992, p. 114).

16 Sayer (1992, p. 88) makes a distinction between substantial relations of connection and

interaction and formal relations of similarity or dissimilarity.


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Processes of change usually involve several causal mechanisms, which may beonly circumstantially interrelated. Therefore, depending on the specificconditions, core competence can produce quite different outcomes and,alternatively, firms possessing different core competencies may, from an internalperspective, produce the same empirical outcomes. That is but one reason that an

explicitly external perspective should counterpart the internal perspective oncore competence.

The social construction of firm structures and routines means that they arethe outcome of both human, organizational, and social capital, and on thedominant conceptions of economic practices and rationalities; that is, theinteraction of qualifications, organizational and managerial competencies, andthe norms and values associated with these competencies. According to Leonard-Barton (1992, p. 113), the first dimension, qualifications, is the one most oftenassociated with core competencies, and the one most obviously relevant to newproduct development. The dimension encircles firm-specific routines and

techniques as well as scientific understanding. In the organizing process afundamental aspect of firm-specific qualifications is that it provides theopportunity for learning through processes of repetition and experimentation,which enable tasks to be performed more effectively and novelties, or existingopportunities to be identified. Qualifications are strongly related to the tacitknowledge of both superbly qualified personnel in specific core functions and ofemployees in complementary disciplines. The very notion of complementaryassets is based on the assumption that qualifications throughout the wholeorganization are of importance to the performance of single functions ordominant disciplines.

Organizational competence is the structured or codified knowledge(information systems and formal procedures) of the firm that representcompilations of knowledge, typically derived from multiple individual sources.

The third dimension, managerial competence, highlights the importance ofcoordinating and controlling the tacit and codified knowledge of the firmthrough formal educational programs or joining industrial networks, incentivesystems and reporting structures. Others conceive managerial competencies toinclude the unique capabilities of the managers to articulate a strategic vision,communicate this vision throughout the organization, and empowerorganizational members to realize that vision, and the unique ability to enact a

beneficial firm-environment relationship (Lado and Wilson, 1994, p. 703). Insection 3.2, though, it is argued that the enactment of firm-environmentrelationships is a process that involves all organizational members and thereforecannot be attributed to managerial competence alone. In my view, managerialcompetence simply relates to the element of coordination and integration, andcontrol of the tacit and codified firm-specific knowledge.

Finally, the values (as manifestations of firm culture) assigned within thefirm to the content and structure of knowledge, and to the means of collectingand controlling knowledge are infused through the qualifications, and theorganizational and managerial competence. These values form the sociallyconstructed reality according to which the firm acts or enacts.

2.2 Core Competence as a Facilitator of Asset Accumulation


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Asset accumulation is at the core of the strategic management of the firm,inasmuch as it has to do with the overall direction of the firm. In the strategicmanagement process, the core competence can allow the firm to either rapidlyamass the necessary assets or to magnify existing unique resources and

capabilities better and faster than competitors. Dierickx and Cool (1989, p. 1507f)identifies four main characteristics of the process by which assets areaccumulated: time compression diseconomies, asset mass efficiencies,interconnectedness of asset stocks, and causal ambiguity. To deter entry of rivalsthe authors also mention the erosion of assets as a typical characteristic in theprocess of maintenance.

1. Time compression diseconomies are the extra costs associated withaccumulating the necessary assets under time pressure. This factorexpresses the fundamental mechanism of the law of diminishing returnswhen one input (time) is held constant.

2. Asset mass efficiencies relates to the fact that some assets are more costlyto accumulate when the initial stock of that asset is small. In the chain ofcausality a favorable existing stock of assets facilitate further assetaccumulation.

3. Asset interconnectedness means that accumulating assets also dependupon the existing stock of complementary assets. That is, difficulties inaccumulating a specific asset need not be related to the initial stock of thatparticular asset, but to the low initial level of complementary assets. So,the way in which the firm is organized is very important to asset

accumulation.4. Causal ambiguity implies a fundamental uncertainty associated with thechain of causality. Lippman and Rumelt (1982, p. 420) state that causalambiguity is the basic ambiguity concerning the nature of causalconnections between actions and results. Occasionally these relationshipsbetween actions and outcomes can be so causally ambiguous that not eventhe managers within the firm understand them. In these situations thecharacteristics of employees, tasks, and of the organizational structure actas substitutes for strategy, i.e., conditions that either neutralize whatmanagers do or perform many of the same functions they would (Weick,1987, p. 221). According to Reed and DeFillippi (1990) causal ambiguityarises from tacitness, complexity, and specificity in the firms resourcesand capabilities.

The four factors are all impediments or barriers to asset accumulation.Overcoming them through the deployment of existing resources and capabilitiesis what actually makes each firm unique. It is the core competence that providesthe firm with advantages in building the necessary assets by improving theefficiency in terms of the cost and time of the accumulation process. Implicit inthe first three factors is the assumption that asset accumulation is a process ofdeterminism and continuity. Therefore, the notion of causal ambiguity (which

contradict this point of view) is probably the most important factor from theviewpoint of both critical realism and socio-economics.


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Employing core competence is a process bountiful of socio-cognitiveobstacles (Ginsberg, 1994), and therefore it can be difficult to describe the innerworkings of the process. This is due to tacitness and uncertainty about the futureand the past and it is due to the causal structure of the world; complexity,instability, and endogeneity in preferences and identities; and inconsistent

preferences and identities of multiple actors confronting multiple timeperspectives resulting in conflict (p. 156). These limitations to rationality makeextensive planning equivocal. It was already shown in section 2.1 that corecompetence is the collective learning about how to utilize, coordinate, andintegrate resources and capabilities in the strategic management process of thefirm. In this process, the basic choice is to decide which resources and capabilitiesshould be maintained and enhanced and which should be removed. Corecompetence defined by the notion of process is resident in group (or interlocked)behavior only. But group behavior is, like individual behavior, subject toperplexity and inclination. Group cohesiveness and the seeking for unity lead to a

number of insufficiencies in the strategic management process. This is caused byoverconfidence in judgment and problem-solving, cognitive heterogeneitywithin the single group, group pressures, etc.

It should be clear that an internal perspective on core competence is aboutthe efficiency properties of organizing economic activities. Core competence is acausal mechanism and when exercised, its actual effects will depend upon thecondition in which they work. But, whether a firm has high internal efficiency ornot is by no means a certain indicator of that firms ability to survive in turbulentand volatile environments. In fact, volatility and uncertainty in the environmentcan be seen as a type of selection mechanism that force firms to either adapt to

environmental changes or to close down. Consequently, the firmscompetitiveness also depends on its ability to manage its dependence of theenvironment, i.e., its effectiveness. This organizational tension is implicit inAbernathys (1978) productivity dilemma, which states that productive unitscannot be both highly efficient and support a high rate of innovation (Ghemawatand Costa, 1993, p. 60). Put differently, the core competence of the firm is notonly a mechanism of efficient intrafirm resource-transformation, it also shouldallow the firm to make apt predictions of events in the environment, determineexternal control or social interdependence, and to act and counteract onenvironmental opportunities and threats, e.g. by innovation. This is dealt with inthe next section.

3. STRATEGIC RESPONSES TO ENVIRONMENTAL EVENTS - ANEXTERNAL PERSPECTIVE ON CORE COMPETENCE

Williamsons economizing firm is very different from the neoclassical, entrydeterring low-cost producer. According to Rumelt, Schendel and Teece (1991, p.24) the economizing firm may be very efficient at managing the transition fromdesign to production, or at tailoring products to local tastes. Williamsonsposition on this issue is at variance with the traditional (economic) assumption

that firms are on their cost curves. If firms are assumed to be technically efficient,the problem is simply to determine the level of output. But, high returns to


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efficient firms cannot be attributed to an artificial restriction of output or tomarket power. It cannot even be attributed to uniqueness in the absolute sense(Peteraf, 1993, p. 181). What is the key issue is that the superior resources remainlimited in supply. In an internal perspective on core competence this points tothe importance of non-imitability and immobility of resources and capabilities,

and limitations on asset accumulation. In an external perspective it highlights thesingle firms dependence of the external social actors that provides theindispensable complementary resources and capabilities (i.e., strategic productivefactors). What is viewed an external perspective on core competence in thissection, therefore, is an understanding of the firm as being dependent on, andlargely constrained by, its business, social, and natural environment (what Pfefferand Salancik phrases the organizational environment). In this, core competencedeal with the effectiveness properties of organizing economic activities.

The resource dependence theory argues that many of the actionsundertaken by firms are determined by the firms interpretation of external

forces, i.e. those actors (resource owners or coalition participants) who controlthe resources perceived relevant or necessary for the survival of the firm.Implications for strategic management are to find new ways to make the firm asindependent from this external control as possible (i.e., gaining autonomy). Inthis, the theory provides strategic insight concerning the opportunities in theoverall structure of the product and factor market, and in the web of interactingorganizations.

3.1 Dimensions of the Organizational Environment

Pfeffer and Salancik (1978, p. 63ff), building on Emery and Trist (1965), describefour different types of organizational environments. These types differ accordingto the source and nature of the interdependence (substantial relations) betweenthe environment and the firm. An important distinction is made between dyadicrelationships, organizational networks, and the overall social context withinwhich the organizations are embedded. The different types of environments arecalled (1) placid-randomized, (2) placid-clustered, (3) disturbed-reactive, and (4)turbulent. These types can be seen as stages in a chain evolving towards increasedenvironmental volatility and uncertainty. In this evolutionary chain other socialactors become increasingly important factors to the survival of the firm.

In the placid-randomized environment the resources necessary to the firmare randomly distributed throughout the environment. Firms survive to theextent they can utilize different kinds of resources, can economize on scarceresources, or can use an abundant resource. To the single firm uncertainty is low,solidity high, and long-term survival likely. Search for opportunities in bothfactor and product markets are characterized by a high level of predictability.

In the placid-clustered environment patterns in factor and product marketsare sequentially predictable. Firms survive if they can accumulate enoughresources to survive periods of scarcity or if they can reduce their need forresources in periods of decline.

Disturbed-reactive environments are characterized by competitive

interdependence and small-numbers bargaining. Predictability derives from thefirms ability to recognize external control and social interdependence and to


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foresee the sequence of actions and counteractions of competitors.Notwithstanding the highly competitive nature of disturbed-reactiveenvironments, the interconnected system of social actors is more or less limited tospecific industries or strategic groups. Firms within the same industry or groupcompete for the same resources and they transact with the same social actors and

with each other.Finally, turbulent environments differ from all the other types in that it

involves interconnectedness of social actors across industries and groups as wellas to the overall social and institutional context. Actions in distant parts of theinterconnected system can have strong impact on the single firms immediateexchanges. The most important difference between disturbed-reactive andturbulent environments is that even greater uncertainty exists in turbulentenvironments. The greater the level of interconnectedness is, the more uncertainand unstable are the surroundings for given firms. Exchange relations inturbulent environments are both competitive and cooperative depending on the

strategies undertaken by the individual firms in order to reduce uncertainty.Several factors and tendencies of change are taking place today changing

the political, economic and social structures of the society. To the single firm suchstrategic discontinuities represent both windows of opportunity, stressing thetiming of strategic action, and uncertainty constraining firm action and firmperformance. The most profound and influential factor of change is probably thatof information technology and communications altering the nature of strategyand competition in many industries leading to increased turbulence of todaysbusiness scene. Other factors that causes turbulence include the globalization ofmarkets, deregulation and new regulatory regimes, the EU, the opening of

central and eastern Europe, demographic factors, the increasing importance ofnatural environmental issues (e.g., green logistics, cleaner technology), etc.However, not all industries are equally influenced by these factors of change anddifferent firms will experience these factors at different times (Mintzberg, 1993).In the SE-model in section 4.1 these factors of change are regarded as institutionsin the sense that they are the outcome of individual behaviors, actions, andcognitions that are interlocked in social relations (i.e., embedded).

Of course, the different kinds of environments have different implicationsfor strategy. In placid-randomized and placid-clustered environments strategicplanning is a relatively trivial exercise. Planning is merely based on identifyingrepetitive historical patterns and extending them into the future. The strategic

tools are those of linear regression, Delphi-techniques, scenarios, etc. Indisturbed-reactive and turbulent environments strategic planning is not possible,at least not in the long term. Even with causal structures of competition thatseem to follow certain (fixed) trajectories planning is not possible. At any time,an unexpected discontinuity (i.e., innovation) can redirect or eradicate theelements that caused the trajectory. Therefore, the task for the strategicmanagement of the firm is adaptation, learning, and innovation.

Pfeffer and Salancik (1978, 65ff) describe the environments in threedimensions: their structural characteristics, the relationships among social actors,and the results or outcomes of these relationships and structural characteristics.

The three dimensions cannot exist independent of each other; actually they arelikely to be causally related. They are essentially identical to the dimensions in


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Granovetters concept of embeddedness. Embeddedness is defined by the factthat economic action and outcomes, like all social action and outcomes, areaffected by actors dyadic (pair wise) relations and by the structure of the overallnetwork of relations (Granovetter, 1992, p. 33), i.e., Granovetters dimensions ofthe environment are structural embeddedness, relational embeddedness, and

outcomes.According to Pfeffer and Salancik (1978, p. 68) the three most integral

structural characteristics of environments are concentration (i.e., the extend towhich power and authority is widely diffused throughout the environment),munificence (i.e., the availability or scarcity of resources), and interconnectedness(i.e., the number and pattern of linkages between organizations in theenvironment). In the chain of causality these structural characteristics determinethe relationships among social actors. The most fundamental of these are thedegree of conflict (competition and cooperation) and interdependence. These, inturn, determine the outcomes the firm encounters. Here, Pfeffer and Salancik

(1978, p. 67) notice only uncertainty. Granovetter (1992, p. 36) goes far beyonddeclaring that economic action of individuals may at times accumulate in waysthat result in larger outcomes or what we call institutions.

Figure 3-1: Relationships among the dimensions of the environment

Concentration Munificence Interconnectedness

Conflict Interdependence

Uncertainty/

institutions

Structural

characteristics

Relationalcharacteristics

Outcomes

- - - +

+

+ +

Based on Pfeffer and Salancik (1978, p. 68) and Granovetter (1992, p. 36).

The structural and relational characteristics of the environment can be specified

in a number of qualitatively different social forces, i.e. forces that are created bydifferent mechanisms and which have different influences on firm strategies.These forces could be technological and organizational opportunities, newregulatory regimes, changes in product and factor markets, institutional changes,or changes in the natural environment.

3.2 The Enacted Environment

The way that the environment affects the competence structure and thestrategies of the firm is an important element in the somewhat ambiguous

interface between the firm and its environment. If firms adapt to theenvironment and if the environment curbs and affects actions and results, then


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the question of how firms determine the environment is essential in theorganizing process. According to Pfeffer and Salancik (1978, p. 72) theorganizational environment is constructed through social and mental processesthat are unique to each firm. There is no way of knowing how to behaverationally, so actors are forced to confide in their limited and idiosyncratic

perception of the environment.It was already recognized in section 2.2 that core competence is influenced

by biases in perception. An external perspective on core competence building onthe resource dependence theory claims that this also works the other way round.Actions grounded on perceptions of reality will in fact influence and maybe evenalter reality, however at a leisurely pace. Cognitive differences generate a varietyof outcomes since actions of different firms are interdependent. According toWeick (1969, p. 27) Rather than talking about adapting to an externalenvironment, it may be more correct to argue that organizing consists ofadapting to an enacted environment, an environment which is constituted by the

actions of interdependent human actors. In other words, the human creates theenvironment to which the system then adapts. The human actor does not react to

an environment, he enacts it. It is this enacted environment, and nothing else,that is worked upon by the processes of organizing (p. 64).

This implies that the way social actors conceive and act structures not onlythe actors themselves and the resources they control, but also the very nature ofcompetition and its outcomes. Hence, economic effectiveness andcompetitiveness can only be apprehended post factum (Whitley, 1992a, p. 123).

However, the process of enactment may indeed be a very slow one.Perceptions and routines, which are based on repeated experience, are not easily

changed. As already noted this is partly due to path dependence, which again isdue to tacitness, complexity, and specificity, and this results in a cognitivefiltering mechanism. But other filtering mechanisms are present at the same time,for example filters connected with environmental surveillance (which is limitedby the forecasting and analysis techniques employed by the firm), and withpower in the organization (if the power base of an organizational member isthreatened by information of change, this actor will find it natural or key tominimize the impact of this information. If that person is a gatekeeper theinformation may never reach other persons in the organization). Even when theneed for change is evident and recognized by the actors, enactment may be slow.

Therefore, satisficing, logical incrementalism and a twisting by partisan influencecharacterize the strategic management process17.Weick (1969, 1979) asserted that social actors are chained to the environment

through various kinds of feedback-loops, i.e., firms are defined in terms ofprocesses of organizing, and therefore they are based on interlocked behaviorsembedded in conditionally related processes. Such substantially related behaviorsconsist of repetitive, reciprocal, contingent behaviors that develop and aresustained in dyadic or network social relationships. These behaviors are

17 Logical incrementalism is characterized as a process, which is fragmented, successive,

evolutionary, and intuitive (Quinn, 1988, p. 94).


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embedded in three separate processes: the enactment process, the selectionprocess, and a process of retention, see figure 3-2 below.

In the enactment process the information that the firm adapts to (i.e.,information about ecological changes) is produced. Meaning does not abideautonomously within social structures but is enacted in the process of

transforming individual and social practices into discourse in a dialogical relationwith other individual and social practices and contexts. There is not oneprivileged meaning but many meanings and many voices (Brown, 1990, p. 191).In the selection process the information is arranged on the basis of criteriaembedded in the firms routines and capabilities (procedural rationality). It is thefirms competence structure that will fix, focus, or forbid what aspects of thisinformation that are selected upon. Finally, in the process of retention theselected information is build in to the firms resources, routines and capabilities(the competence structure), and thereby changing them.

Figure 3-B: Weicks organizing model

RetentionEcological

change

Enactment Selection+ + +

+ (+,-)

(+,-)

Source: Weick (1979, p. 132).

The relationships between the processes, and from the enactment process to the

environment, are usually direct causal linkages, meaning that the same degree ofuncertainty or ambiguity will be produced in the processes as exists in itsinformational input. The plus arrows indicate this. Still, there are two exceptions.The relationships from retention to selection and from retention to enactment arecontrolled by the actors within the interlocked system, and can be both direct andreverse causal relationships18. Hence, it is these relationships that must be thefocus for strategic action. In this sense, strategy is to ask whether actions shouldcontinue to be directed by the capabilities in retention or whether the firmshould augment new capabilities and thereby change the current condition inretention. This implies an organizational tension between efficiency and

effectiveness, a tension, which seems to be central to strategy. For the firm tomaintain a balance between stability and dynamism it must decide both topreserve and to change existing capabilities.

Weicks organizing model is content-free, articulating thoughts aboutorganizing in a literal sense, and it may be applied to many levels of analysis.

18 The (+, -) designation implies that the actor has a formal choice of whether the causal

relationship should be direct or inverse by crediting or discrediting past wisdom respectively. In

other words, if a decision maker acts in accordance to existing routines and treat these as

prescriptive a direct causal relationship between retention and selection or retention andenactment is established. If, instead, he chooses to discredit existing decision routines an inverse

causal relationship is established.


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Words such as enactment, selection, and retention are metaphors, which intimatean immense diversity of modes by which the processes can occur. This generalitymakes the model abstract and the practical implications difficult to discover. Asan explanation of concrete processes the causal accounts of the model areindividually lacking, and like all metaphors they can be unloaded and substituted

by more detailed accounts. Hence, for the purpose of concrete analysis a largenumber of elements must be specified. The analysis is idiosyncratic and contextdependent, and therefore it must be situational, cf. section 5.

4. GENERATIVE MECHANISMS OF ORGANIZING

In this section, I develop a socio-economic (SE) model of the firm, integratingorganizational competence and environmental opportunities and constraints. Inthe SE-model the companys strategic behavior is the result of not only economic

incentives but also of the firms capability in taking advantage of environmentalopportunities and constraints, and the external social control that influence onorganizational choice. The model recognizes that firms increasingly need todevelop strategies that are oriented towards social and natural environmentalconstraints and demands, the purpose of which is to harmonize the firmseconomic goals with social and natural environmental goals, and link them withwindows of opportunity. Furthermore, the model stresses that an interactivesubstantial relation exists between the environment and the resource andcapability endowment, which serves to condition the enactment.

In any theoretical model of the firm, firm behavior follows from the

underlying behavioral assumptions of the model. In the neoclassical theory of thefirm it is assumed that the firm has perfect knowledge of alternative courses ofaction, and that it always picks the alternative that maximizes short-term profit.The only social responsibility of the neoclassical firm is to the owners of the firm,and all social costs, being termed negative externalities or market failures, areexcluded from firm strategy. Therefore, regulations as well as demands fromvarying interest groups (other than the owners of the firm) are, from amanagement point of view, inevitably perceived as rent lowering mechanisms tobe dealt with at minimum cost.

Accordingly, the neoclassical theory of the firm cannot account for firmbehavior that is long-term, weakly rational, and responsible to interest groupsother than the owners. Hence, we need a socio-economic model integrating thecompetence-based theory of the firm and the resource dependence theory. In thismodel, the strategic behavior of the firm is determined both by (1) perceptions ofrelational and structural events in the organizational environment, and (2) byperceptions of the firms competence structure. Unlike the neoclassical model ofthe firm, the SE-model has environmental events as endogenous factors orvariables, why the interaction between the environment and the organizingprocess of the firm can be modeled. Therefore, the SE-model of the firm is reallya model of the causal structure of organizing economic activities in which corecompetence is the mechanism linking firm performance with industry and

societal dynamics. As a generative mechanism core competence exists (ortranspires) somewhere in between the enactment and the selection process.


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The model is subjective and evolutionary more than it is intentional, eventhough intentional (as well as subjective) aspects of organizing must berecognized as existing causal powers or liabilities. In some sense, this is actuallywhat separates socio-economic explanations from both purely sociological andpurely economic explanations, the former being predominantly functional, and

the latter utterly intentional, i.e., oversocialized vs. undersocialized conceptionsof human action (Granovetter, 1992, p. 28f). In other words, it is recognized thatstrategic behavior is embedded and, consequently, can take on different formsand degrees since both intentional, functional, and incidental aspects areinvolved in the model.

Also, it is recognized that not all activities are equally embedded;embeddedness of economic activities increases with increased complexity in thecontext (both organizational and environmental) to which the specific firm issubject. For example, within the transport sector, the sale of simple, standardizedtransport services are less embedded (and needs less embedding) than the sale of

more complex and customized logistic services. It has been stated that theprocurement of logistical services is becoming increasingly relational (Bowersoxet al. 1989), and therefore it can be argued that transport service agreements inthe aggregate are becoming more embedded (and needs more embedding).

4.1 The SE-Model

Figure 4-1 below summarizes the SE-model of the firm expressed as causalrelationships, and in doing so it has a certain resemblance to Weicks organizingmodel from which it is also motivated.

The figure connotes a complex system of positive cause-mechanism-effectrelationships, some of which are strong and direct and others, which are weakand indirect. In the words of critical realism, these relationships are expressed asevent-mechanism-structure dependencies. In this sense, the broken linesrepresent the actions of other actors (competing firms), while the full-drawn linesare the actions and processes, which depend directly upon the focal actor. Thebroken lines from structure and mechanism to events suggest a weak causalrelationship that is the outcome of competitors attempts to imitate thecompetence structure and the core competence of the firm. Of course this is morelikely to happen if the focal firm is superior to its competitors. These causalrelationships are weak because of the existence of impediments to imitation. Themost significant impediment to imitation stems from ambiguity as to whatfactors constitute the core competence and the competence structure of the firm(Dierickx and Cool, 1989, p.1508), cf. section 2.2. Such ambiguity is captured bythe notion of uncertain imitability, which obtains when the creation of newproduction functions [the creation of a new firm] is inherently uncertain andwhen either causal ambiguity or property rights in unique resources impedeimitation and factor mobility (Lippman and Rumelt, 1982, p. 421).

Figure 4-1: The socio-economic model of the firm


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Environmental opportunities

Technological

Organizational

Deregulation and new

regulatory regimes

Changes in market

conditions

Product market

Factor market

Changes in

social institutions

Changes in the natural

environment

Pollution

Resource degradation

Qualifications

Norms and values

Organizationalcompetence

Managerialcompetence

Asset

stock

Assets

required

The core competence of the firm

Path dependenceIsolating mechanisms,

complementary

assets, and routines

The strategic

management process of

asset accumulation

Enactment

Selection

EventsChanges in the

structural and

relational dimensions

of the environment

StructureOrganizational

structures

and artifacts

MechanismThe process of

transformation or

reproduction

4.1.1 Structures, events, and mechanisms

The dimensions of the environment and the firm itself are social structures. Theyare the result of the social relations in which people are entangled. Such social

structures consist of actors internally related standings, and the resources andcapabilities of these actors. As noted in section 1.1.1 resources and capabilities areroutinized and withstand beyond the individual organizational members, anddue to path dependencies may abide even despite changes in the firm. Economicactivities, like all human activities, implicate and are settled within socialrelations. Therefore, in some sense, the SE-model infers trust and sharedcomprehensions of rules of conduct among social actors. Social structures affectbut do not induce human actions or events, which are situational, circumstantial,and subject to human cognition.

Events structure the firms who enact the environment; a process of

continuous dialectic. Consequently, social structures cannot be characterizedapart from the individual and collective actions that enacted it. Still, it isimportant to recognize that all social structures in some sense pre-exist anyindividual, and therefore individual and collective action do not literally createor constitute the context in which they are embedded as stated by Weick, cf.section 3.2. Rather it modifies context19. Implicit in this dialectic is theevolutionary (and consequently prescriptive) assumption, that the environmentover time will select the organizational forms, which are the most fitted. Putdifferently, enactment is a process of reproduction (maintaining stability) or

19 In the competence perspective this is made explicit in terms of tacit knowledge and firm

routines, related diversification, complementary assets, path dependence, and lock-in, etc.


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transformation (representing failure to reproduce a prior selected form andtherefore creating variations or mutations), not a process of creation. In thewords of critical realism, context is an ensemble of structures, practices, andconventions that individuals reproduce or transform. But which would not existunless they did so (Bhaskar, 1989, p. 76).

In the SE-model, the firms actions and behaviors are partially controlledand determined by events in the structural and relational dimensions of theorganizational environment and partially controlled and determined byorganizational structures and artifacts (existing knowledge). An event consists ofsome qualitative change or happening that occurs at a specific point in time. Thatis, events do not gradually evolve; they represent relatively sharp cleavagesbetween what was before and what follows. Instead, what is evolutionary is theway firms enact on these events or discontinuities. It should be evident thatdifferent firms do not respond to events in similar ways. This is mainly because(and the reason why) firms utilize different core competencies. Put differently,

firms direct attention to certain perceived aspects of the environment becausetheir core competence has a limiting and focusing effect on the organizing orstrategic management process. The organizing of meaningful personal and socialreality is based on the intersubjective deployment of symbol structures residentin individual and group behaviors through which these qualitative changes areinterpreted into events and experience. The process of retention is an establishingof competencies by which certain aspects of reality are fixed, focused, orconstrained. In this view, events can be seen as a background of unspokenexistence (Brown, 1990, p. 191).

4.1.2 Context as institutions

In the SE-model, changes in the structural and relational characteristics of theenvironment are assumed to happen within separate but interrelatedinstitutional forms such as environmental opportunities, regulatory regimes,industrial or economic institutions, social institutions, and the naturalenvironment. Some of these institutional forms have a more transformative effectthan others, for example technological innovation that can have a very strongimpact on social structures and firm actions and behaviors. In the following, eachof the above-mentioned institutional forms is discussed.

As an institutional form environmental opportunities can be characterizedas novelties or innovations. These novelties are the existing and potentialorganizational and technological elaborations that the firm can utilize to amendtheir competitiveness and social legitimacy. Environmental opportunities orinnovations can create new firms and industries or transform or destroy existingones. Of importance in gaining social legitimacy are those opportunities relatedto the demands of different external actors of importance to the firm; e.g.,government or municipal offices, public opinion on specific matters such aspollution and resource degradation, customers and clients, alliance partners,suppliers, etc. Examples of opportunities could be cleaner technologies, newmethods in materials handling, new organizational designs such as the

knowledge-based or learning organization, the virtual organization, JIT or


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synchronized production, flexible specialization, network organization, and soon.

New regulatory regimes can be both explicit and implicit regulatoryobjectives. Explicit regulatory objectives and political recommendations typicallyhave direct, instantaneous, and salient impact on firm behavior. Implicit

regulatory objectives are more dubious in their impact on firm behavior becausethey are based on the expectations and perceptions of the single firm.

The market is the arena where the efficiency and effectiveness features ofthe firm are tested through different exchanges. Markets consist of regularexchanges of goods and services among social actors and have the price system asthe dominant coordinating device. The price system, and so the market, aresubject to organization, rules, and regulation that consist of interlocked behaviorcycles between the actors, and it is in this sense the market is identified as aninstitution. There are two types of markets; factor markets and product markets,and each differs significantly according to the way exchanges are organized.

In considering the key social institutions that influence the strategicmanagement processes of the firm a distinction can be made between those thatstructure general patterns of trust, cooperation, identity and subordination in asociety and those that are more directly involved in the economic system andconstitute the more immediate business environment (Whitley, 1992b, p. 19ff).The former is termed background social institutions and the latter proximate social

institutions. Background social institutions are the broad societal authorities thatmirror the publics awareness and anxieties, and the societys welfare goals andrequirements. They can be described broadly in terms of culture, loyalty, trust,individuality, identity, personal rights and obligations, etc. Such social

institutions tend to encourage certain behaviors of the firm, but they are alsodifficult to identify and they tend to be very diffuse in their impact onorganizational behavior. Approximate social institutions operate in the moreimmediate business environment (Op.cit.) and their impact on organizationalbehavior tends to be direct, immediate, and notable. Such social institutionsinclude financial systems, education and training systems, trade associations,publicly certified skills and professional expertise (consultants, lawyers, lobbyists,etc.), state commitment to industrial development and risk sharing, standardindustry practices, etc. Background social institutions are likely to be reproducedby human behavior in the long run, whereas proximate social institutions aremore exposed to immediate transformation.

The natural environment as an institution has become still more importantto business firms, as issues such as sustainability of the biosphere, the protectionof endangered species, preservation of scarce natural resources, etc. increasinglyhas become of great concern to society. As an institution the natural environmentis important to business firms mainly because of irreversibility and uncertainty(Chisholm, 1988). Irreversibility has to do with a basic inability of man or natureto restore critical natural resources. This resource degradation is primarily due tothe speed with which natural resources are utilized. Uncertainty is normal toeconomic life, but it is argued that even greater uncertainty exist when it comesto the potential future benefits from conserving eco-systems or questions of

sustainable resource-use (Op.cit., p. 188). This even greater uncertainty, it can beargued, is caused by an increased interconnectedness between social actors that


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occurs because local pollution and resource degradation can have incalculableimpacts on a large (global) scale.

5. METHODOLOGICAL IMPLICATIONS

According to the competence perspective, because of a genuine tacitness,complexity, and specificity it is not possible to establish explicit causal statementsabout the structures and processes of organizing economic activities. In the SE-model, the stochastic nature of the organizing process stem from an inability toidentify some of the relevant variables because of a basic ambiguity concerningthe nature of the causal connections between actions and outcomes. Instead, theaim of abstraction is to develop an understanding of the nature of organizingeconomic activities in terms of tendencies that will successively improve theability to uncover the enacted relations between any one firm and its

environment. Even a critical realist would prefer theories that are testable andcan be well verified by empirical inquiry, i.e., the goal is to make the directlyunobservable indirectly observable. This can be obtained through exploratorystudies. This also implies that the very process of collecting empirical evidenceshould be flexible and gradually revised and amended during the researchprocess.

It is recognized in both the internal and external perspective on corecompetence that the behaviors of firms are not based on unconscious intuition.People do follow some rules for decision-making (i.e., rationality is procedural),and problem solving is indeed a conscious process, limited as it may be.

Therefore, another aim of abstraction is to contribute to a consistency ofunderstanding by which it is possible to gain knowledge about howorganizational members perceive the firm and the environment, how theirunderstanding is build, and how this understanding influence the strategicmanagement process. Here, it is important to note that the organizing ofeconomic activities is a dynamic process, and that the characteristics oforganizing are indeed of a transient nature. In addition, enactment indicates thatemphasis on certain aspects of reality may in itself alter these aspects and therebychange reality. Hence, abstractions and concepts must be sensitizing and everchanging in order to uncover the dynamic features of the process of organizing.Accordingly, characteristics should be only vaguely defined just as conceptsshould not be ascertained as fixed semantic singletons. The linguistic ambiguityof such open-minded concepts provides combining symbolic purposes for theresearchers and practitioners in the field.

In the SE-model, firms are unique in every aspects, and measures andmethods of asset accumulation, and organizing and strategic managementprocesses can have meaning only with regard to the single firm. What are takento be the facts of any matter are not the results of events in themselves. Instead,a forestructure of labels or methods is deployed socially to negotiate what is to bemarked as deviance, suicide, and the like (Brown, 1990, p. 190). So, for thepractitioner strategy analysis must be situational and intuitive. Here, the aim of

strategic management would be (1) to determine exactly which competenciesthat can result in a competitive advantage, and (2) to understand the nature of


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these competencies so that competitive advantage can be sustained, i.e. maintaina balance between efficiency and effectiveness. For this purpose, strategicmanagement must constantly select and preserve existing competencies, buildnew competencies, and deploy and protect its core competence.

For the researcher the most appropriate methodology likely for

understanding structures and processes, at least at the organizational andrelational level, is an intensive research design (as opposed to an extensiveresearch design). The intensive research design is an essentially qualitativeapproach. The phenomenon to be studied concerns how specific causal processeswork in a particular firm or in a limited number of firms (Sayer, 1992, p. 242).Research question would be of the type How does core competence work as a

facilitator of asset accumulation in a specific firm or in a small number of firms? , In what

proportions are the four dimensions of core competence represented in a specific firm or

in a small number of firms? , What did the organizational members actually do? , Through

which media do a specific firm or a small number of firms gather information about the

environment?, etc. A typical method in the intensive approach is the case study.For the case study there are two implications of the SE-model. First, the case

study should not be like the early case studies within the strategic managementfield (unstructured and non-theoretical). What is needed is a semi-structured,open-ended approach that can generate empirical knowledge (that allows forempirical variations) grounded on the theoretical framework of the SE-model.Such a methodology would neither be purely an inductive nor a deductive one.Rather it would be abductive, recognizing that the theoretical thinking andinterpretation of the researcher inevitably influence all empirical evidence. Insuch an analytical process deductive as well as inductive thinking would both be

very much a part.Second, the case study must be a multiple one, studying families of firms

facing the same type of environment, in order to ascertain how these firms differwith regard to their core competencies. Of course, determining the type ofenvironment represent a central problem in itself, particularly at the relationallevel. However, it is likely that some structural environmental features arecommon to all firms within and across industries. Such characteristics arenomological in nature and so represent some kind of objective reality, andtherefore can act as a starting point for the description of the environmentalcontext in the multiple case analysis. Such nomologically oriented statements are

built on generally shared experiences of both practitioners and scholars. That is, ifperceptions of the environment are shared between practitioners and/orscholars, then it should be possible to generate some empirical knowledge thatcould be attached to the case analysis. One methodological approach could bethat of longitudinal event history studies. Others could be surveys or purelystatistical methods. Still, it is worth recognizing that environmental factors ofsuch generality do not contribute to the understanding of core competence andenduring competitiveness, only the actions undertaken in response to suchfactors are potential determinants.


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REFERENCES

Amit, R. and P. J. H. Schoemaker: Strategic assets and organizational rent, Strategic

Management Journal, vol. 14, 1993, p. 33-46.

Bain, J. S.: Barriers to New Competition. Cambridge, Massachusetts: Harvard University Press,1956.

Barney, J. B.: Strategic Factor Markets: Expectations, Luck, and Business Strategy, Management

Science, vol. 32, 1986, p. 1231-1241.

Barney, J. B.: Firm resources and sustained competitive advantage, Journal of Management, vol.

17, 1991, p. 99-120.

Barney, J. B. and W. G. Ouchi: Organizational Economics: Toward a New Paradigm for Studying and

Understanding Organizations. San Francisco, CA: Jossey-Bass, 1986.

Barney, J. B., J.-C. Spender and T. Reve: Does Management Matter? - On competencies and

competitive advantage, Institute of Economic Research, Lund University: Lund University Press,

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Barney, J. B. and E. J. Zajac: Competitive Organizational Behavior: Toward an Organizationally-

Based Theory of Competitive Advantage, Strategic Management Journal, vol. 15, 1994, p. 5-9.

Brown, R. H.: Rhetoric, Textuality, and the Postmodern Turn in Sociological Theory,

Sociological Theory, vol. 8, 1990, p. 188-197.

Burns, T. and G. M. Stalker: The Management of Innovation. London: Tavistock, 1961.

Chisholm, A. H.: Sustainable Resource Use an

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