Building Routinization Model: Organizational Routines, Capabilities and Performance CHI-YU HUANG

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Building Routinization Model: Organizational Routines, Capabilities and Performance
CHI-YU HUANG
Doctoral Candidate, Graduate School of Management, I-Shou University, Taiwan
CHEN-WEI YANG
Assistant Professor, Department of Information Management, Fooyin University, Taiwan
ABSTRACT
Organizational routines and capabilities have become key constructs not only in
evolutionary economics, but more recently also in business administration, specifically strategic
management. The main purpose of this paper is to develop an integrative routinization model.
For this purpose, we discuss organizational routines, capabilities and performance of a firm’s
routionization process. We argue that a firms’ routinization capability is influenced by
operational routines and learning routines. Moreover, routinization capability provide with
coordination capability that can improve a firm’s routinization performance that is consist of
reducing uncertainty, responsiveness and intelligence/knowledge dissemination. We further
suggest the managerial implications and theoretical implications at the end of this paper.
Keywords:
Routinization capability; transaction cost theory; resource-based view
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Building Routinization Model: Organizational Routines, Capabilities, and Performance
In little more than twenty years, the notion of routines has become a central construct in
heterodox economics mainly evolutionary economics as well as subsequently in various fields in
business administration, mainly organization theory and strategic management. Routines have
been defined in many different ways, but the one that arguably best captures the current
understanding is the one put forward by Cohen et al. (1996) who define a routine as “... an
executable capability for repeated performance in some context that has been learned by an
organization in response to selective pressures” (Cohen et al., 1996: 683). As the quotation
suggests, routines are seen as collective (organization) level constructs that somehow embody
prior learning and are somehow selected for.
Indeed, in evolutionary economics, routines are seen as having paramount importance,
because they provide ”the central unit of analysis,” (Becker, 2004: 643), not only in the sense of
being the most “micro” unit of analysis that is conventionally applied, but also in the sense of
linking directly up with the evolutionary triad of variation (i.e., variation in routines across a
population of firms), selection (i.e., changes in the relative weights of routines in this population),
and heredity (i.e., the notion of routines as the social equivalent to genes). In fact, the new
evolutionary economics that took off after the publication of Nelson & Winter (1982) is so
strongly based on the notion of routine that a “routine-less” evolutionary economics seems
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almost impossible. Even mainstream economists have made occasional use of the routine notion
(e.g., Milgrom & Roberts, 1992: 273-277).
While the notion of routines may not enjoy similar prominence in business administration,
the strongly related (and perhaps derived) concept (cf. Dosi, Nelson & Winter 2000: 4) of
organizational capabilities has increasingly become a key construct, particularly in the field of
strategic management (e.g., Eisenhardt & Martin, 2000; Henderson & Cockburn, 1994; Nelson
& Winter, 1982; Teece et al, 1997; Zollo & Winter, 2002). Indeed, building on resource-based
logic (Barney, 1991) and the notion of organizational routines (Nelson & Winter, 1982), the
organizational capabilities approach has become perhaps the dominant way of thinking about
heterogeneity and performance in strategic management.
On the other hand, over the past two decades in management studies, transaction costs
economics has emerged as a predominant theoretical explanation of governance structure choices.
While the transaction costs theory is noteworthy for its analytical rigor in explaining such
governance choices, the theory is criticized by some for overemphasizing the influence of ex
post contractual costs (e.g. emphasizing contractual hold-up problems in large part due to asset
specificity) and for underemphasizing the influence of revenue creation on governance structure
choices (e.g. Gong, 2003; Popppo & Zenger, 1998). The resource-based theory also
complements the transaction costs theory by focusing on the role of resources in creating firmlevel revenue and in shaping firm-level decisions. It is not surprising, therefore, that recently
researchers have increasingly been integrating both theories toward providing a more complete
understanding of various corporate strategic management activities, such as vertical integration
(Mahoney, 2005), equity joint ventures (Tsang, 2000), strategic alliances (Madhok, 1997),
diversification (Silverman, 1999), and export performance (Peng & York, 2001).
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The current paper develops an integrative organizational economics framework to explain
an important theoretical thinking in organizational theory- the routinzation capability within a
firm based on the resource-based view and transaction costs theory. Routines are strategic assets
that influence the likelihood of generating and sustaining competitive advantages in a firm
(Barney, 1986). On the other hand, routine is as a repetitive pattern, recurring action and so on
(Feldman, 2000; Cohen & Bacdayan, 1994) which can save decision time and cut down the cost
and the procedure or the flow path. These are all relevance the transaction cost. Transaction cost
theory assumes opportunistic behavior existed in each deals and the firm needs to take some
means or mechanisms to defense these opportunistic behaviors. As time accumulated, the
defense mechanisms and actions would search out right way and also form defense models
repetitively. That is a kind of routines. As a result, in this paper, we consider routinzation
capability contains both characters of resource-based view and transaction cost theory.
Although the recent study emphasize the importance of organizational routine in strategy
management study (Cohen et al., 1996; Becker, 2004), the studies about how the organizational
routines are organized and what performance the routinization process is are particularly lacking.
Our paper’s specific contribution, then, is to provide a theoretical framework that explains how
routinzation capability build on the transaction costs and resource-based view to set the menu of
available choices that firms face in an industry. This is done through the identification of the
specific transaction mechanisms that determine decision making over time. The paper also
highlights other important considerations that have been underemphasized to date. First, it points
out that transaction costs themselves are not fully exogenous; their magnitude depends on the
conscious actions undertaken by firms. If industry participants stand to benefit from transaction
cost reduction, they will actively try to reduce them. Furthermore, changes in transaction involve
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a significant feedback loop in the capability development process; changing transaction changes
how capabilities evolve. Therefore, we suppose two specific research questions.
1. How the firm’s organizational routines impact its routinization capability?
2. Considering the firm’s organizational routines, how does the firm’s routinization capability
affect its routinization performance?
THEORETICAL BACKGROUND
Organizational Routines
Over the last 20 years, much progress has been made in understanding what drives the
governance structures observed in practice. A key figure in that development was Oliver
Williamson (1975, 1985, 1999), who elaborated and, crucially, operationalized the concept of
transaction costs, initially formulated by Coase (1937). That research has focused on a particular
stand f the Coasean inquiry, examining the conditions under which firms choose to abandon
markets in favor of integration. The potential for hold-ups and opportunistic behavior, this theory
suggests, is the main determinant of transactions.
Independently, another stream of literature has come to have a defining impact on
strategy as come to have a defining impact on strategy as a field: the resource- and capabilitybased view of the firm. This approach, which has its roots in Penrose (1959), and more recently
Wernerfelt (1984) and Barney (1991), emphasizes the importance of resources in guiding firm
action, and the management of a firm’s resource and capability portolio as the central concern of
strategy. Of late, this research has used principles suggested by evolutionary economists (Nelson
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& Winter, 1982) and the focus has shifted to dynamic capabilities (Teece, Pisano, & Shuen,
1997). The line of thinking would suggest that the dynamics of resource management and the
selection environment affect transactions.(Teece et al., 1994).
In the last few years, a convergence between these two theories has started, creating a
more satisfactory account of what drives transactions. Transaction cost economists, in particular,
now accepts that we cannot fully understand choices of scope without assessing the resource
bases of firms. Williamson himself recognizes that the transaction cost and internal firm
perspectives ‘deal with partly overlapping phenomena, often in complementary ways’
(Williamson, 1999: 1098) and points out that a firm’s history and capability endowment matter
to boundary choices, a theme developed by Argyres (1996) and Argyres and Liebeskind (1999).
Williamson also recommends that traditional TCE query “What is the best generic mode (market,
hybrid, firm) to organize X” be replaced by the question “How should firm A- which has preexisting strengths and weaknesses (core competences and disabilities)- organize X?”
(Williamson, 1999: 1103). This question has been recently pursued by Madhok (2002), who
suggested that an individual firm’s choice must depend not only on the characteristics of the
transactional conditions, but also on its strategic objectives, the attributes of its own capabilities,
and the governance context it has created. There is by now substantial empirical support for the
proposition that considerations of transaction governance trade off against capability
considerations when firms choose component suppliers (Walker & Weber, 1984; Poppo &
Zenger, 1998; Hoetker, 2005). These contributions consider the complementary roles of
transactional and capability considerations in the microanalysis of firm decisions.
Recent progress notwithstanding, important gaps remain in our understanding of how
transaction costs and resource/knowledge combine to determine routinization capability.
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Routines are major drivers of competitive advantage (Teece, Pisano & Shuen, 1997; Eisenhardt
& Martin, 2000). Routines and dynamic capabilities, among other internal resources, are
identified as major drivers of competitive advantage. During the last decade, research has been
mainly devoted to analyze the sources of variation within firms such as innovation processes,
learning dynamics and knowledge management as ways of building these valuable resources.
That is why categorize organizational routine by RBV. Accordingly, we categorize
organizational routine from TC and R/KBV perspectives.
Operational routines: A transaction cost perspective
Transaction cost perspective is principally concerned with managing exchange
transactions such that the sum of production and transaction costs is minimized (Williamson,
1985). Production costs are those entailed in internalizing the functions of the exchange partner
and transaction costs are those entailed in establishing agreements with, monitoring the
performance of, and enforcing contractual clauses against the exchange partner. These
agreements and monitoring both imply rules and routines in the both intra and inter-firms. In the
context of manufacturer-supplier relationships, for example, a manufacturer can manage the
supplier relationship by either routinely submitting the incumbent supplier to market discipline
through periodic competitive bidding (the market governance mechanism) or internalizing the
functions of the supplier (the hierarchy governance mechanism). Both the market and hierarchy
governance mechanisms represent trade-offs between transaction and production costs. Market
governance imposes transaction costs on the manufacturer, however it does not create production
costs. In contrast, hierarchical governance imposes production costs on the manufacturer and
minimizes transaction costs. The firm taking market or hierarchy governance mechanism
depends on the experience of firm hided in the organizational routines.
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The transaction-cost problem owes its existence to the assumption of opportunism (John,
1984). A manufacturer's investment of specific assets in a supplier gives the supplier control over
the manufacturer. This power advantage, coupled with the assumption that the supplier is
potentially opportunistic (or may pursue its self-interest with guile), makes the manufacturer
vulnerable to the supplier (Klein, Crawford, & Alchian, 1978). Desire to avoid partner
opportunism (or anticipated transaction costs) is the process explanation that connects the
transaction cost perspective antecedent variables, asset specificity and uncertainty, to the
outcome, type of governance. That is also a kind of routines in building a defense mechanism to
resolve the opportunism problem. One party's investment of specific assets in the partner
increases the risk arising from potential partner opportunism, thereby making hierarchical
governance more economical. This premise has received support in prior research (Pilling,
Crosby, & Jackson, 1994). Transaction cost approach, however, also makes a less wellrecognized assumption about the impact of party opportunism on that party's commitment
toward, and opportunism against, the partner. It suggests (Williamson, 1985) that since specific
asset investments create delayed payoffs, the investing party has to ensure relationship continuity
in order to secure these payoffs. Accordingly, the invested party will display commitment to the
partner and refrain from behaving opportunistically against the partner in order to ensure the
necessary continuity of the exchange relationship. Organizations in order to defense the partner’s
opportunism behavior, they would set up a set of routines through properties of transaction cost
theory, assets specific to reduce cost and control uncertainty.
Learning routines: A resource-base or knowledge base view
The field of strategy is concerned with the conditions under which the microeconomic
equilibrium of homogeneous firms with zero profits can be overcome. The resource based view
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(RBV) holds that the equilibrium can be overcome if and only if two conditions are satisfied: (1)
firms hold superior resources and (2) those resources are supported by isolating mechanisms
preventing diffusion of the resource throughout the industry (Rumelt, 1984).
One such resource commonly believed to hold potential for competitive advantage is
organizational routine (Hitt & Ireland, 1985; Winter, 1987; Mahoney & Pandian, 1992).
Routines are the organizational equivalent of individuals’ skills in that they provide capability
for a smooth sequence of coordinated behavior (Nelson & Winter, 1982). Nelson and Winter
view routines as the source of sustained performance differences between firms: ‘Organizations
with certain routines do better than others [in the short term], thus their relative importance in the
population is augmented over time [through investment routines which are keyed to
profitability]’ (Nelson & Winter, 1982: 14).
Both evolutionary economics and organizational evolution predict that over time the
behavior of other firms in the industry will tend to resemble that of the leader firms. This obtains
either through adaptation of individual firms, or selection of the fittest firms (Hannan & Freeman,
1977; Hirschleifer, 1977), or both (Alchian, 1950; McKelvey, 1982; Nelson & Winter, 1982).
Adaptation can take the purposeful form of conscious imitation or trial and error (Alchian, 1950;
Nelson & Winter, 1982), or the more autonomous form of movement of employees between
organizations (McKelvey, 1982). The selection process is best perceived as the crowding out of
less fit firms by successful firms that expand to absorb a larger fraction of the market. This
process results in an increasingly higher standard being imposed as the minimum for competitive
survival (Hirschleifer, 1977). Thus without an isolating mechanism, both evolutionary
economics and organizational evolution predict that routines ought to diffuse throughout a
population, thereby losing their value.
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However, routines do seem to be imbued with inherent isolating mechanisms: tacitness
and causal ambiguity. One of the characteristics of skills imputed to routines is that the
knowledge supporting execution is tacit (Itami, 1987; Rumelt, 1987; Winter, 1987): ‘The aim of
a skillful performance is achieved by the observance of a set of rules which are not known as
such to the person following them’ (Polanyi, 1962: 49). Even if the knowledge of each
individual’s task within the organizational routine is explicit, the complex totality of the routine
is likely unknown by most participants, and is therefore effectively tacit (Winter, 1987). Further,
there may be causal ambiguity (Lippman & Rumelt, 1982) regarding which set of routines is
actually responsible for the success of the firm.
As above, we argue that the two approaches, transaction cost theory and resource-based
view, to the firm are more complementary than substitutes. We consider the firm as an
organizational device that simultaneously allocates and creates resources. In this "dual" vision,
the firm simultaneously manages resource/knowledge and transactions, but it does so according
to a specific order of priorities. The firm ranks its activities according to a key limiting factor: the
focus of attention. First, it focuses on the building of the domain of core-competences, within
which the firm functions as a processor of knowledge giving full priority to the creation of
resources, as learning routines (Nelso & Winter, 1982). In this domain, the governance
mechanisms (learning routines) are specifically devoted to knowledge co-ordination. Then, as we
move away from the core, the firm tends to allocate resources and adapt to the environment in
accordance with governance mechanisms, as operational routines, that are well analyzed by the
transaction cost approach.
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Routinization Capability
Routinization capability mainly concept drives from resources of dynamic capabilities.
Resources are at the heart of the resource-based view (RBV). They are those specific physical
(e.g., specialized equipment, geographic location), human (e.g., expertise in chemistry), and
organizational (e.g., superior sales force) assets that canbe used to implement value-creating
strategies (Barney, 1986; Wernerfelt, 1984, 1995). They include the local abilities or
‘competencies’ that are fundamental to the competitive advantage of a firm such as skills in
molecular biology for biotech firms or in advertising for consumer products firms. As such,
resources form the basis of unique value-creating strategies and their related activity systems that
address specific markets and customers in distinctive ways, and so lead to competitive advantage
(e.g., configurations, Collis and Montgomery, 1995, 1998; Porter, 1996; core competencies,
Prahalad and Hamel, 1990; lean production, Womack, Jones, and Roos, 1991).
Dynamic capabilities are the antecedent organizational and strategic routines by which
managers alter their resource base—acquire and shed resources, integrate them together, and
recombine them—to generate new value-creating strategies (Grant, 1996; Pisano, 1994). As such,
they are the drivers behind the creation, evolution, and recombination of other resources into new
sources of competitive advantage (Henderson and Cockburn, 1994; Teece et al., 1997). Similar
to Teece and colleagues (1997), we define dynamic capabilities as:
The firm’s processes that use resources—specifically the processes to integrate, reconfigure,
gain and release resources—to match and even create market change. Dynamic capabilities
thus are the organizational and strategic routines by which firms achieve new resource
configurations as markets emerge, collide, split, evolve, and die.
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This definition of dynamic capabilities is similar to the definitions given by other authors.
For example, Kogut and Zander (1992) use the term ‘combinative capabilities’ to describe
organizational processes by which firms synthesize and acquire knowledge resources, and
generate new applications from those resources. Henderson and Cockburn (1994) similarly use
the term ‘architectural competence’ while Amit and Schoemaker (1993) use ‘capabilities.’
Why are organization routines so important? If we believe in the assumption of bounded
rationality, we cannot suppose that actions result from an optimization program. One alternative
is that actions are based on routines (Plunket, 2005), that is, regular and predictable patterns of
behavior that are repeated in similar environmental conditions and that have been learnt in
response to selective pressures (Cohen et al. 1996). Therefore, there are three aspects of routines
must be emphasized:
1. They are the result of knowledge accumulation and experience
2. Since they are the result of learning, they are context- (local) and path-dependent (historical).
3. They are partly tacit and the organization is partly unaware of their existence because they
are embedded in organizational and individual practices.
According to Nelson and Winter (1982), the cognitive aspect relates to the fact that
individuals/organizations know what to do and how to do it in recurring and similar situations,
and relates to the fact that individuals or group of individuals do what is “required” of them by
the organization. As such, routines play a major role in coordination either between individual
organizations or individual members.
Routines are stable patterns of behavior that characterize organizational reactions to
variegated, internal or external, stimuli. Every time an order is received from a customer, or a
decision is made to upgrade a production process, for instance, a host of predictable and
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interrelated (sequential and/or simultaneous) actions are initiated, which will eventually conclude
with the shipping of the ordered goods (and receipt of corresponding payment) or with the
launch of the new production system. In spite of the superficial similarity between these two
examples, though, the two patterns of behavior present a theoretically relevant distinction. The
first type of routine involves the execution of known procedures, while the second seeks to
identify the necessary changes to an existing set of production routines. Given the objectives of
the present work, it will be necessary to distinguish the first type, which can be labeled
operational routines, from the second type, usually known as learning, or search, routines
(Nelson & Winter, 1982). Routines of the latter type are a central constituent of dynamic
capability.
It is also important to recognize that routines, both operational and learning ones, have
different effects on the generation and appropriation of rents depending on the pace of change in
the environment. Of course, effective operational routines are always a necessity, and superior
operational routines are always a source of advantage. For example, all food service operations
focus on common operational routines, namely purchase ordering, stock management, food
production and sales control. This cycle of activities is the same whether your business is
involved in high street restaurants, staff catering operations, retail outlets, food production units
or any other style of catering business. This means a standardized system or procedure to save
the coordination problems, decision making time, communication cost and so on. These are
relevant part of transaction costs. In a relatively static environment, a single learning episode
may suffice to endow an organization with operational routines that are adequate, or even a
source of advantage, for an extended period. Incremental improvements are accomplished
through the tacit accumulation of experience and sporadic acts of creativity.
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Learning routines are unnecessary, and if developed may prove too costly to maintain.
But in a context where technological, regulatory and competitive conditions are subject to rapid
change, persistence in the same operational routines quickly becomes hazardous. . . Systematic
efforts at learning are needed to track the environmental change; both superiority and viability
will prove transient for an organization that has no learning routines. If change is not only rapid
but also unpredictable in direction, learning routines themselves will need to be updated
repeatedly. Failure to do so turns core competencies into core rigidities (Henderson & Clark,
1990; March & Levinthal, 1993; Leonard Burton, 1992). It seems clear, therefore, that a theory
of the development and routinization capabilities, must invoke mechanisms that go beyond semiautomatic stimulus-response processes in operations and experience-driven. Organizations must
combine both learning or searching routines and operational routines to build routinization
capability, even dynamic capability.
Routinization Performance
One of the central problems faced by management today is how to cope with the
uncertainties arising from the internationalization of competition, increasing pressures to
innovate, new communication technologies, and other sources of turbulence. With a few
exceptions (Baumol, 2002), business scholars and economists have offered remarkably little
advice in the way of helping management cope with the different forms of uncertainty that arise
from alternative sources of turbulence. In an effort to fill this gap, the present article combines
extant research from economics and strategy to identify uncertainty and the generic strategies
that are appropriate to handle each uncertainty. In addition, in knowledge management studies,
organizational knowledge represents such a resource. Its importance is increasingly recognized.
Nonaka (1991) acknowledges that the one sure source of lasting competitive advantage is
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knowledge. Knowledge represents the result of a series of processes such as information
generation, information dissemination and information interpretation (Sinkula 1994).
Specifically, organizational routines will "hold" the knowledge. It represents the "lens" through
which information is interpreted. Information will be generated based on the lessons learned
when collecting previous information that, in time, has been transformed into knowledge and be
stored in the organizational routines. That is organizational routines as firm’s new capability.
Thus a new capability is created for the organization, the capability to identify, assimilate and
exploit information (knowledge) from the environment. Specifically, a firm’s decision maker
could less uncertainty and more information to do the right decision. Cohen and Levinthal (1990)
refer to this capability as the organization's absorptive capacity. Leonard-Barton (1995)
considered this capacity to be increasingly important in today's business environment.
Categorized by the above studies of organizational routines, this study proposes that
routinization capacity affects three major factors and results, a firm’s decision maker’s
experience of uncertainty related to environmental issues, intra-firm knowledge dissemination,
and organization responsiveness.
Uncertainty. According to standard approaches in economics, the problem of choice
under uncertainty may essentially be remedied by increasing the amount of information available
to the decision maker (Luce & Raiffa, 1957). In the organization literature, this idea is mirrored
in the understanding that organizations process information to reduce uncertainty and adapt their
structures to better cope with uncertain environments (Thompson, 1967; Galbraith, 1973). In the
strategy literature, related ideas surface under the terms scanning or information processing
(Khandwalla, 1973; Miller, 1987) and in the marketing literature as coordinated decision making
under uncertainty among marketing channel members (Achrol & Stern, 1988).
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While these streams of literature mention that situations exist in which uncertainty
prevails despite organizational adaptation and despite increases in information, the situations
where information-processing strategies are appropriate are usually not distinguished from the
situations where alternative strategies must be used. The present article identifies a criterion that
distinguishes such situations of uncertainty where increasing information will help reduce
uncertainty from such situations where it will not. We use the term uncertainty to denote the
situations in which uncertainty prevails because it is impossible to associate point probabilities
with events. In the organization literature, the term equivocally denotes a similar condition
(Weick, 1979; Daft & Lengel, 1986).
As reported in the following section, our review of the economics, organization, and
strategy literatures makes clear that a distinction between forms of uncertainty promises to clear
up contradictory research findings. Milliken (1987, 1990) previously made a similar point and
provided a useful distinction between three forms of uncertainty. In this article, we add a
distinction between forms of uncertainty that is of fundamental importance as a complement to
Milliken’s (1987). Whereas organizational routinization capability is a way to reduce uncertainty,
it is appropriate to increase information when other, less demanding forms of uncertain situations
arise. Therefore, we point out that organizational routinization capability is a way to reduce
pervasive uncertainty in decision making, whereas increasing the available information is
appropriate when other, less demanding forms of uncertain situations arise.
Organization Responsiveness. Organizational responsiveness is the action taken in
response to the relevant information generated and subsequently filtered (Kohli, Jaworski, and
Kumar 1993). It is related to performance. Responsiveness reflects speed and coordination with
which the actions are implemented and periodically reviewed. It also refers to evaluation of over
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- or under-fulfilling of goals and correcting accordingly and to interdepartmental cooperation and
coordination (Kohli, Jaworski, and Kumar 1993). All these determine the success of
entrepreneurial businesses. They are compatible with Levin's (1988) approach that examined the
mechanisms used by firms to acquire technical knowledge of process and product innovations
developed by a competitor. However, we extended it beyond technical information (knowledge)
and considered all signals coming from the environment.
Intelligence and knowledge dissemination. Once information is gathered and brought
into SMEs, the next major responsibility within the company is to separate relevant market
signals and transmit and disseminate them to all interested parts of the organization. Without
information transfer and dissemination no response could be designed and implemented. Sinkula
(1994) pointed out ways to disseminate information: interdepartmental meetings and their
frequency, interdepartmental cooperation, contacts with customers and their frequency, etc.
Conceptual Framework
The theoretical framework regarding the relationship between organizational routines,
routinization capacity and performance is presented in Figure 1. Performance included
organizational responsiveness, uncertainty and intelligence dissemination which represent the
dependent variable. The organizational routines, learning routine and operational routine, based
on knowledge and transaction cost perspectives separately represent predictors. More specific,
organizational routinization capability represents the mediator. It is hypothesized that the
relationship is medicated through the organizational routinization capability. According
discussed above, we bring up the theoretical framework as follows.
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-----------------------------Figure 1 about here
------------------------------
PROPOSITIONS DEVELOPMENT
Organizational Routines and Routinization Capability
In the emergence of dynamic capabilities, the entire process described in the model above
itself becomes the subject of the collective learning (Dosi, Nelson & Winter, 2000). Mindful of
the above-mentioned limitations of the existing definition of dynamic capabilities (Teece, Pisano
& Shuen, 1997), and in the spirit of bridging the behavioral and cognitive approaches to the
organizational learning phenomenon (Glynn, Lant & Milliken, 1994), Zollo and Winter (2002)
propose the definition of dynamic capability is a learned pattern of collective activity through
which the organization systematically generates and modifies its operational routines in pursuit
of improved effectiveness. However, we referee Nelson and Winter (1982) to modify the
definition of routinization capability is a learned pattern of collective activity through searching
routines to learning, searching and comparing with exist operational routines and then the
organizations systematically modifies and renews its operational routines in pursuit of improved
effectiveness.
What features distinguish an organization capable of systematically developing new and
enhanced understanding of the causal linkages between the actions it takes and the performance
outcomes it obtains?
We focus the attention on the routinization process, which supports the retention and at
least part of the variation mechanisms, and on the knowledge articulation and codification
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processes, which constitute the internal selection mechanism (Zollo & Winter, 2002). Of course,
this is not to say that the environmental scanning activities, also part of the variation mechanism
are less important. They are viewed here as inputs to the dynamic capability building process,
rather than parts of the process itself. For example, a sound understanding of what competitors
do and customers desire represents a crucial element of any firm’s competitive strategy, but, in
and of itself, does not make it any more capable of creating and modifying its own set of
operational routines. Also, an inherently tacit form of collective knowledge such as the one under
study is highly unlikely to be developed or shaped simply by the observation of competitors,
suppliers, customers or other external constituencies. It will have to be developed “in-house”
through a set of activities and cognitive processes focused on the organization’s own routines.
Finally, the replication process – the set of activities that enable an organization to replicate its
own routines in novel contexts without excessive losses in performance, they are certainly an
important part of the routinization capability.
As mention above, the firm focuses on the building of the domain of core-competences,
within which the firm functions as a processor of knowledge giving full priority to the creation of
resources, as learning routines (Nelso & Winter, 1982). In this domain, the governance
mechanisms (learning routines) are specifically devoted to knowledge co-ordination. As a result,
we address the following relationship between learning routines from resource or knowledge
based approach and routinization capability:
P1: A firm’s learning routines is positively related to its routinization capabilities.
Then, as we move away from the core, the firm tends to allocate resources and adapt to
the environment in accordance with governance mechanisms, as operational routines, that are
well analyzed by the transaction cost approach. Consequently, we propose the following
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relationship between operational routines from transaction cost approach and routinization
capability:
P2: A firm’s operational routine is positively related to its routinizational capability.
Routinization capability as a coordination mechanism, furthermore, its coordination
function can fill up transaction cost theory and resource-based view whether is intra-firms or
inter-firms. Transaction cost theory focus on the reduce cost; defend opportunistic behavior and
so on, and resource-based view major on building owned sustainable competitive advantage.
Routinization Capability and Performance
Routinization Capability and Uncertainty. Since most of the mentioned works do not clearly
distinguish between uncertainty and risk, it is unclear whether the mentioned responses are
viable under conditions of uncertainty. A promising starting point for progress in that direction is
recent work in finance (Lien, 2000) that clearly makes a distinction between uncertainty and risk
and then proceeds to outline the difference in hedging strategies between the two situations.
According to the proposed solution, hedging under uncertainty must be based on inertia in
behavior (Lien, 2000), which implies some form of routinization. Whereas the decision under
risk is whether to hedge or not, the problem under uncertainty is to choose the right degree of
hedging. The role of inertia or routinization is to limit the possible set of options that are
considered and thereby enable better decisions.
More generally, various literatures support the idea proposed in the present paper that
routines can enable decision making in situations that are characterized by environmental
turbulence (Baumol, 2002; Paswan et al., 1998; Eriksson & Sharma, 2002; March & Simon,
1958; Cyert & March, 1992; Miller, 1987; Nelson & Winter, 1982; Richardson, 1960).
According to these works, decision makers would better be able to cope with uncertainty if their
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strategic responses were constrained by routinized behavior. Based on these sources,
routinization must be viewed as a necessary requirement to cope with situations of uncertainty.
In an influential work in economics, Heiner (1983, p. 570) has offered the important hypothesis
that ‘‘greater uncertainty will cause rule-governed behavior to exhibit increasingly predictable
regularities, so that uncertainty becomes the basic source of predictable behavior.’’
Arguments can be found that turn the direction of causality so increases in routinization
may be viewed as an uncertainty decreasing strategy. By fixing certain parameters, firms may (1)
increase predictability and at the same time (2) free limited cognitive resources. As emphasized
by Baumol (2002), Hodgson (1988), and North (1990), institutions and routines are sources of
regular and predictable behavior in the face of uncertainty, complexity, and information overload.
The classical statement is Knight’s (1921) suggestion that firms may prefer relatively predictable
lines of activity to more speculative operations. Later, Knight and Merriam (1948) suggested that
the tendency to follow routines increases predictability, and Richardson (1960) suggested that
various restraints introduce the necessary friction for the working of the economic system. More
recently, it has been emphasized that routinization reduces systems level uncertainty associated
with competition and technological risk (Shapiro & Varian, 1999). Apart from introducing
predictability at the systems level, a number of authors (March & Simon, 1958; Nelson & Winter,
1982; Simon, 1947) have emphasized that routinization also greatly reduce individual level
cognitive demands. Routines allow managers to cope with uncertainty under the constraint of
bounded rationality because they can be used to save on mental efforts and thus preserve limited
capacity required to deal with nonroutine events (March & Simon, 1958). Because routines
introduce predictability by fixing certain parameters and by freeing cognitive resources, we
propose the following relationship between routinization and uncertainty:
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P3: A firm’s routinization capability is negative relative to its decision maker’s experience of
uncertainty related to environmental issues.
Routinization Capability and Intelligence/Knowledge Dissemination. In the case of an illstructured environment, it will be impossible to derive a function that can support the ordering of
outcomes (Simon, 1955). Therefore, a countermeasure has to be designed that will simplify and
structure the decision problem so it can be handled within the decision maker’s cognitive
limitations. Earlier studies have indicated that organizational routines affect what information
decision makers collect (McNamara & Bromiley, 1997; Eriksson & Sharma, 2002). As argued in
the previous section, routinization provides a general solution to this problem. Routines greatly
reduce the cognitive demands on individuals and thus preserve limited decision-making capacity
(March & Simon, 1958). Routinization serves the further purpose of supporting increases in the
level of the organization’s intelligence and knowledge dissemination by reducing the time cost of
choosing among possible receivers. Routinization leads to a more effective channeling of
information throughout the organization. As the level of intelligence dissemination increases,
more aspects of intelligence and knowledge dissemination therefore must be routinized to obtain
the same level of effectiveness of dissemination of information. Hence, we propose the following
relationship between routinization capability and intelligence and knowledge dissemination:
P4: A firm’s routinization capability is positive relative to its intelligence and knowledge
dissemination.
Routinization Capability and Responsiveness. According to the definition given earlier,
responsiveness refers to actions taken in response to intelligence that is generated and
disseminated throughout the organization. This definition was based on the marketing literature
(Kohli et al., 1993). A literature survey of the strategy literature uncovers a similar definition of
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responsiveness as the organization-wide ability to react to changes (Milliken, 1987). The strategy
literature emphasizes three aspects of the responsiveness construct: (1) the willingness and the
readiness in reacting to changes (Guiso, 1998), (2) reaction speed (Zaheer & Zaheer, 1997), and
(3) responsiveness to local signals as opposed to global integration (Taggart, 1997). We now
argue that routinization capability increases the organization-wide ability to react to changes.
As indicated earlier, routinization capability increases the potential for focused attention
by preserving limited information processing and decision-making capacity (Simon, 1947;
Postrel & Rumelt, 1992; March & Shapira, 1987). In order to better use limited capacity,
attention is usually focused on nonroutine events whereas recurring events are dealt with
semiconsciously (Postrel & Rumelt, 1992; Simon, 1947). Since the semiconscious processing of
repetitive events requires less or almost no cognitive resources, this procedure, when established,
leads to an increase in the available cognitive potential that may be used to attend to nonroutine
events (Reason, 1990). This argument holds only if one or more domains are characterized by
uncertainty whereas at least one domain is not (Milliken, 1987). In this case, routinization must
be used in the domains characterized by uncertainty, and the free attention must be risk. That is
to say, if the decision maker lives in a sea of uncertainty, everything should be routinized and the
free attention should solely be used to devise new routines. Routinization frees cognitive
resources, but these resources must be used to deal with such problems that can be solved, i.e.,
problems in the realm of risk but not uncertainty.
In the case of change, events are always novel in some sense and thus require nonroutine
response. Routinization introduces a division of labor where trivial, frequently occurring events
are handled with very limited resources. The resources, which would otherwise be employed in
the absence of routinized behavior, are then free to respond to nonroutine events. The firm’s
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responsiveness, its ability to react to changes, should therefore increase as the degree of
routinization is increased. As a result, we propose the following relationship between
routinization capability and responsiveness:
P5: A firm’s Increasing routinization capability leads to an increase in responsiveness.
DISCUSSION
There are two specific research questions in this paper: (1) How the firm’s organizational
routines impact its routinization capability? And (2) Considering the firm’s organizational
routines, how does the firm’s routinization capability affect its routinization performance? We
discuss these questions by providing an integrative organizational economics framework to the
study of the building of routinization capability within organization. It does so by drawing on
arguments derived from both the transaction cost theory and resource/knowledge based view.
Starting from a complementary relationship of transaction cost theory and resource based view
that highlights the role of systematic patterns of organizational activity aimed at the generation of
new, and the adaptation of existing, operational routines, we have proposed that they are likely to
emerge from the co-evolution of both mechanisms: learning routines and operational routines.
One of the most intriguing implications of the inference, for theoretists and practitioners
alike, is the somewhat counterintuitive notion that interaction between learning routines and
operational routines activities become superior mechanisms with respect to the accumulation of
expertise as the frequency and the homogeneity of the tasks are reduced. The result is in fact
quite the opposite of what organizations typically do. A bank would copiously codify its branch
operations (how to open an account, execute a wire transfer etc.), a manufacturer would do the
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same with its standard operating procedures, but neither would typically be prepared to do the
same when it comes to managing a re-engineering process. In our view, this is just one example
of the potential benefits for theory building and management development purposes that may be
derived from an inquiry into how routinization capability is generated and evolves within an
organization.
The present article discusses implications in a number of ways to the body of knowledge
in cope with uncertainty. First, on the basis of the strategy and economics literature, we have
identified uncertainty and risk. Whereas organizational routines are a way to reduce uncertainty
in decision-making, we pointed out that the second generic strategy of increasing the available
information is appropriate when risk situations arise. We propose the proposition that
organizational routinization capability is a way to reduce uncertainty. This result provides an
important basis for future empirical research that aims to uncover in more detail how
organizational routines mitigate uncertainty. A second advantage of the present analysis is that
such future empirical research can be designed to include treatments that take the distinct
differences in uncertain situations into account.
A third advantage is that prescriptive studies as well as practitioners can take heed of the
argument that distinct uncertain situations require distinct remedies. It is clearly important for
management to distinguish between risk that can be reduced and uncertainty that cannot be
influenced in any way. In the latter case, we have argued that routinization capability is a viable
strategy that enables decision makers to direct limited cognitive resources at problems that can
actually be solved. In consequence, the decision maker will experience less uncertainty, and the
quality of the decisions that get made increases because the ineffective use of limited cognitive
resources has been diminished.
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The practical value of our argument lies in providing a theoretically sound basis for
distinguishing two very different situations of uncertainty. The distinction between risk and
uncertainty is important in evaluating the recent effects of the internationalization of competition,
increasing pressures to innovate, new communication technologies, and other sources of
turbulence. Distinguishing situations of risk from situations of uncertainty provides managers
with a much more fine-grained understanding of the problems they are facing. Our argument not
only supports the idea that different strategies are appropriate in each situation. It also identifies a
strategy not usually considered for coping with risk, namely, routinizing decision making. In
consequence, managers are provided with a basis for choosing the most appropriate generic
strategy: In situations of risk, increase the information available. In situations of uncertainty,
increase the routinization of decision-making.
This study proposes the theoretical argument that routines help managers cope with
uncertainty by freeing cognitive resources. Fixing the recurring and relatively unimportant
parameters in a decision problem by routinization seems to be a viable strategy in coping with
uncertainty. It also implies that semiconscious mechanisms deal with recurring problems so
attention can be freed to focus on the problems that can be solved. Our results build on and
extend recent research that questions this opposition of routine and change. Rather than having to
break routines in order to be flexible, Feldman (2000) argues that endogenous change is
comprised in routines. Accordingly, in order to better understand organizational change, a better
understanding of routines, both operational routines and learning routines, is required. The
present article provides the argument that routinization and change are not necessarily in
contradiction. However, the identification of these semiconscious mechanisms and
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understanding the interaction between a semiconscious mode of operation and information
processing deserve much more attention in future research.
We know little, for example, of how the characteristics of the organizational structure and
culture interact with the features of the task to be mastered in determining the relative
effectiveness of the various learning behaviors. Under what conditions does that enable, as
opposed to inhibit, performance? To what extent is intentionality necessary to produce adaptive
adjustments in existing routines? The complexity of these questions is only comparable to the
magnitude of the expected returns from the advancement of our knowledge on these issues. We
hope that the present work will stimulate further research that addresses these unsolved questions
on the role of routines in reducing uncertainty and costs. However, in order to provide a
constructive explanation for organizational routinization process within the firm, further
empirical research and literature review is required.
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FIGURE 1
Theoretical Framework
TC approach
P1+
P3-
-Operational
Routinization
Capability
routines
P4+
KBV/RBV
-Learning routines
P5+
P2+
35
Uncertainty
Responsiveness
Intelligence/Knowledge
Dissemination