The Key to Business Success – By Phin Upham

By Phin Upham

What makes one firm better than the other? What gives some firms “sustainable competitive advantage” over other companies in the marketplace? The bad news is that there isn’t a simple, one-size-fits-all answer. But there are many theories. Here’s is a look at one theory that might explain why some firms win. One of the views that attempts to answer why some firms are better than others is the dynamic capabilities view. It describes the successes, failures, and sources of challenge for business people. Complex in nature, the dynamic capabilities view is especially useful in times of change.  Although it is vital, a company with quality abilities and a relatively strong foundation gains a good portion of the competitive advantage that is important.

The dynamic capabilities point of view for companies is highlighted by the authors of “Organizational Capabilities and Behavior.” Written by Nelson and Winter (1982), the essay starts by describing the point of view from the level of the individual. According to Nelson and Winter, individuals acquire skilled behavior through routine, tacit knowledge, and past behavior. Some of the traditional schools of thought of classical micro-economics – such as inputs are homogenous and entrepreneurs are identical — are given a back seat in this essay. Nelson and Winter argue that decisions made by companies might not be perfect because they might be the result of personal experience or organizational memory. Organizational memory is tapped into and provided by individuals; it lives in their personal and organization experience, in the physical company, and in external memory. Inspired by the studies of Simon on organization and Kohneman and Tversky on heuristics, the authors of the essay take this individual point of view to and apply “evolutionary economics” to an organizational level. Therefore the theory suggests that there is a conceptual relationship between the micro and the macro as well as an underlying connection between the behavior of people in a company and the nature and behavior of the firm’s capabilities.