Knowledge Assets and Competitive Advantage

This section looks more closely at how the dynamic capabilities framework connects resources to performance through the creation and capture of value in markets.

Creating value with innovation

Despite its obvious importance, a theory of how firms create value is largely missing from the standard economics literature. To the extent it is addressed, the industrial organization literature dwells almost entirely on the funding of R&D, figuring (implicitly) that the R&D expenditure is the main driver of innovation. However, R&D activity is only one of several factors likely to determine the generation of new ideas.9 The concept of dynamic capabilities—the sensing, seizing, and transformation that ongoing innovation requires—provides a broader framework to help one understand how firms create value.

Sensing is an entrepreneurial activity—whether conducted by a new or an existing firm—that involves the identification and conceptualization of opportunities both within and beyond prevailing technological paradigms (Teece, 2008). It involves cognition. As markets evolve, changes in consumer needs, product technologies, and the competitive positioning of other companies can threaten a firm’s existing position or open the possibility of a new or better one. In some cases, as stressed by Kirzner (1973), the entrepreneur/manager may have differential access to existing information relative to rivals. More often, sensing opportunities involves scanning, ...

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