Giovanni Battista Dagnino
University of Catania, ITA
University of Pennsylvania, USA
Using the complex systems approach to extend the resource- and capability-based theory of the firm and integrate it into the strategic networks perspective, this article introduces the concept of a ‘System of Business Enterprises’ (SBE). By combining an integrative complex systems framework the two perspectives at hand (strategic resources and strategic networks), I define the SBE as a complex dynamic network of resources and capabilities. Along these lines, the study tries to lay down a first sketch of a theory of firm aggregates, and in particular of the resource- and capability-based interorganizational networks, and fleshes out a few learning points for management practice.
Management theorists and practitioners have increased their recognition that firms do not act by themselves, but are deeply embedded in ‘networks of external relationships’ that influence the exchange of resources and capabilities among them (Granovetter, 1985). Acknowledging the long-term dynamics of “continuous interaction among firms” and that “firms are acting and living together” (Nohria & Eccles, 1992), this article aims to define and introduce the concept of the System of Business Enterprises (SBE), viewed as a resource- and capability-based complex organizational network.
The SBE is defined as a collection of business firms giving shape to a complex and dynamic network of resources and capabilities. The thrust of the argument is that an SBE is a complex dynamic self-organizing network that evolves over time.
The SBE is a conceptual macro-category or meta-category intended to extend the organizational cognitive scope. I consider the SBE either as:
In order to explain how the SBE emerges in pursuing competitive rents, two perspectives, the resource- and capability based theory of the firm and the strategic network approach, provide the eclectic foundation upon which the framework is built. Notably, the two perspectives in hand yield the kernel of a third synergistic perspective: the network of resources and capabilities.
With the intention of bringing together and integrating two strategic theoretical approaches, i.e., strategic resources and strategic networks, I embrace a complex system perspective (Waldrop, 1992; McKelvey, 1997; Anderson, 1999). This perspective suggests a system concept encompassing complex systems composed of different interconnected levels and qualified by dynamic boundaries. I show below how this perspective proves helpful to integrate resource-based and strategic networks approaches in the theoretical construction of the SBE.
The article is structured as follows. First, I recap complex systems theory, the resource and network approaches, and underline their respective importance in the analysis of the SBE. Second, by integrating, in the light of the complex system theory, resource- and network-based perspectives, I define the SBE as a complex and dynamic network of resources and capabilities. Finally, I gather some relevant learning points for management practice.
Complexity theory is assuming a relevant role in strategic management and organization theory (Cohen, 1999; Axelrod & Cohen, 2000). Notions drawn from complexity theory are frequently invoked when theorizing about the trajectories of firms that will succeed in dynamic and potentially discontinuous environments (Brown & Eisenhart, 1998). Developed primarily in biology and physics (the Santa Fe’ and the European perspectives1), and the continental epistemology (Piaget, 1967; Morin, 1977; Bocchi & Ceruti, 1985), its translation into a management framework requires care and attention. However, if carefully mastered and applied, complexity theories have significant potential in management (Anderson, 1999). Among the notions stemming from the growing body of complexity, some seem to be better adapted to the study of interfirm relationships and aggregates than others. Exceptionally helpful in this context are the basic concepts of complexity itself, ‘complexity’, ‘self-organization’ (Kauffman, 1993), ‘organizational closedness’ (Maturana & Varela, 1973, 1987), ‘coevolution’ (Lewin & Volberda, 1999), and ‘emergence’ (Holland, 1998).
In the strategic resource and capability literature, it is possible to identify two schools of thought: the resource-based theory (Wernefelt, 1984; Barney, 1991; Mahoney & Pandian, 1992); and the dynamic capabilities theory (Teece, et al., 1997).
Whereas the resource-based theory focuses on the identification of Ricardian rent-generating resources as the genesis of the firm’s competitive advantage (Peteraf, 1993), dynamic capabilities theory emphasizes both the creation of the rent-generating firm’s competencies and capabilities and its earning of quasi-rents or efficiency-rents as sources of sustainable competitive advantage.
Advantages in this second stream stem from a firm’s ability to:
Thereby among the firm’s purposes is for it to reach an acceptable balance between firm’s heterogeneous capabilities and environmental uncertainty and instability (Teece, et al., 1997). Examples of such value-creating processes include product development, strategic decision-making, knowledge creation and capabilities transfer (Eisenhardt & Martin, 2000).
As concerns SBE strategic resource research, the major limitation refers to the loci of external resources. Whereas a few strategy scholars (Gulati, 1999; Gnyawali & Madhavan, 2001) have recently turned to consider it as a relevant issue, the existence of resources external to the firm has barely received explicit emphasis. Though some contributions have pointed out the lack of a systematic attention to the environment (McWilliams & Smart, 1995; Foss & Eriksen, 1995), and others have suggested a change in the view of competition per se, introducing the concept of industry variety (Miles, et al., 1993), the resource-based focus rests on the individual firm and its internal idiosyncratic resources and capabilities.
For firm capabilities at the firm level, I refer to both Teece, et al.’s (1997) and Eisenhardt and Martin’s (2000) dynamic capabilities approach.
Find in Table 1 juxtaposition of complex systems perspective, strategic resource and capability theory and the strategic networks approach taken in the SBE viewpoint.
Bridging of organizational and social network studies with strategy research, strategic network perspective originates mainly from network theorists with a background in sociology and organization theory. The increasing interest in these particular kinds of aggregate organizational forms is made clear by the following concepts:
For they embody the analysis of collections of different firms. All these existing notions are to some extent cognate to the SBE; nevertheless they are not equal. Gulati, et al.’s (2000) concept of strategic networks is germane to the SBE in that:
This implies, on the one hand, that the different firms each play a well-defined role sharing common superior objectives, but on the other, that the locus of value creation is the interfirm network rather than the individual firm level. In this perspective, the network structure defines and limits the relationships between the units. The thrust of the argument is that firms enter a network of embedded ties in order to pursue mutual trust and valuable information exchange across organizational boundaries. A network of embedded ties accumulated over time may rest at the basis of rich information and learning networks (Gulati, 1999).
|COMPLEX SYSTEMS||STRATEGIC RESOURCES & CAPABILITIES||STRATEGIC NETWORKS|
|Unit of Analysis||Complex Systems|
Discontinuous and Turbulent Environments
|Level of Analysis||Personal|
|Firm(Industry)||Firm in Networks|
|Objectives||Behavior of Complex Systems|
|Rent-Seeking Behavior |
|Major Contributions||Prigogine & Stengers 1984|
Maturana & Varela 1987
Nicolis & Prigogine 1989
Teece, et al., 1997
Eisenhardt & Martin 2000
Gulati, et al., 2000
Gnyawali & Madhavan 2001
Table 1 Perspectives on complex systems, strategic resources and strategic networks compared
But a strategic network is also different from the SBE in that:
In the strategic network literature a notion that has come to fill the resource-based chasm on the loci of external resources is the concept of network resources. Network resources are resources that emerge from firms’ participation in interfirm networks.
Despite that, by focusing on the firm level and considering the social context in which it is embedded (i.e., the set of interfirm relationships), the network resource literature has not gone much further than coupling a single firm to its external social factors and has thus virtually failed to address unambiguously the level of firm aggregate. Stressing the informational advantage that expands the opportunity set, or space, a firm may perceive for strategic actions, network resources actually underestimate the social advantage provided by the complex interfirm endowment of resources and capabilities. Giving emphasis to specific strategic resources stemming from firms ‘relational capabilities’ (Lorenzoni & Lipparini, 1999), network resource research has overlooked the potential benefits of viewing a ‘system of firms’ as itself a network of resources and capabilities.
As heretofore mentioned, the SBE is conceptualized as a network of resources and capabilities. Two main network levels form this network: the elementary level and the complex level.
It is time to proceed with the representation of the SBE in terms of a complex system. As previously noted, the SBE is a complex network system formed by interacting and co-adapting firms that are complex subsystems in themselves. As a consequence of the inner complexity and emergence, both the firms in the SBE and the SBE complex strategic behavior cannot be accurately predicted.
Dual dynamics. The SBE presents a specific two-fold exogenous and endogenous dynamics that has a significant impact on its strategic evolution. Whilst recombining old and new and developing new resources, competencies and capabilities, the complex and dynamic network of resources and capabilities displays some endogenous emergent properties.
The SBE continuously shapes and reshapes itself: in a nutshell, it is ‘self organizing’ and ‘self-designing’. The resource/capability complex network shows neither definite borders nor predefined evolutionary paths: the coevolution of the firms embedded in it (Uzzi, 1997) makes the SBE order change constantly and induces it to display thermodynamic openness and organizational closedness. Nevertheless, for the interaction with the exogenous environmental forces, the SBE also evolves exogenously. Since it coevolves with its general environment, the SBE shows an intense environmental connection with both its own institutional environment (e.g., public institutions, local communities) and the other SBEs. This continuous benchmark consents to determine and measure the SBE economic and social performance and to grasp the advancements made in its evolution and development.
Dell case. We consider Dell Computer tightly related ‘direct model’ (Dell, 1998) as a characteristic SBE. As Dell stitches together a business model with many partners (customers and suppliers) that are treated as intimately as if they are inside the company (Magretta, 1998), Dell system is a complex network of resources and capabilities. Since it is a dynamic complex network system of firms, blurring traditional boundaries in the value chain(s) among suppliers, manufacturers and end users and proposing a model of ‘vertical disintegration’, Dell has developed its direct system in a way that is practically counterpoised to vertical integration. In addition, Dell’s massive investment on the relational side of the exchange presents the basic traits of complex systems: complexity, self-organization, organizational closeness, coevolution and emergence.
Industrial districts. We take into account Italian industrial district, such as Carpi (knitwear and sweaters), Parma (cured ham, Parmesan cheese), Prato (textiles and clothing), and Valenza Po (gold jewelry) (Brusco, 1982; Pyke et al., 1990) made of multiple interconnected small and medium firms. They present emergent properties and a high internal self-organizing capability in that they tend to cover all the value net of production and distribution and are able to adapt themselves to changing conditions. Nonetheless, they are also dependent on the external environment: both on their own community, institutions and, at times, on the governance of a focal firm.
As regard, another economic organizing principle of an effective SBE, is that of ‘coopetition’. The mutual cooperation among the firms embedded in the SBE, which is essential for strategic planning, R&D, production, marketing and distribution of new products or new processes, is matched with the internal interfirm competition. Interfirm reciprocal interdependence, trust and cooperation coupled with the ongoing interfirm competition generate a peculiar system dynamics that takes the shape of coopetition (Brandenburger & Nalebuff, 1996; Lado, et al., 1997).
Find in Table 2 the emerging framework that gathers complex systems, economic and social properties and patterns of integration of the SBE observed as a complex resource and capability network.
As previously observed, the SBE properties of emergence and coevolution - its flexibility and reactivity - lead to the formation of a complex network of resources and capabilities. Since the simple interaction and exchange between elementary resources and capabilities is not suitable to shape a complex and dynamic network, to give birth to a complex dynamic network of resources and capabilities, a three-step framework turns up to support us. This framework is made by social exchanges, knowledge flows and enduring commitments intervening at multiple levels in the SBE (individual, firm, interfirm, SBE levels).
Table 2 Properties & Patterns of Integration in the SBE observed as a Complex Resource and Capability Network
Starting from the complex system integration of strategic resource and network perspectives, this paper proposes a conceptualization of the SBE as a firm aggregate organizing itself as a two-level complex dynamic network of resources and capabilities. Summing up, the paper contributes to the resource-based and network-based literature by:
As previously noted, this article has drawn extensively on the burgeoning theoretical body labeled ‘dynamic complex systems’. It includes the application of a system perspective in the analysis of firm aggregations. The SBE is conceived as a complex system, which is self-organizing, coevolving, organizationally closed and emergent. Since this attempt has tried to find new links between theories and approaches in strategy research, the SBE concept connects a plurality of interpretive levels (complexity science, strategic resources, and strategic networks perspectives) in a sketch of a multilevel (individual, firm, interfirm, SBE) and multidimensional (economic, social, strategic) framework (Gioia & Pitre, 1990; Weaver & Gioia, 1994).
On the basis of these premises, we may be able to gather some normative implications for managerial practice.
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