Bonus after ground-breaking research

Professor Paul N. Gooderham (photo: Kristian Tindeland Marthinsen)

Professor Paul N. Gooderham from the Department of Strategy and Management at NHH together with Erik Døving (Høgskolen i Oslo) was among the first to test the theory of dynamic capabilities in practice.

02.09.2008 - Knut André Karlstad (translated by Jessica Hartenberger)

For many years now, the so-called resource based theory has been the prevailing movement within the field of strategy. Among others is Jay B. Barney, the American professor who visited NHH in April and is one of the main authorities in this school of thought.

Considering changes

"In this study we utilize a theory called dynamic capabilities," explains Paul N. Gooderham. "This is presumably the first full empirical test of this theory, which many believe is going to replace the resource-based theory (RBT). The reason for this is the criticism that the resource-based theory operates under the assumption that environments are relatively stable," he elaborates.

In the study, Gooderham and Døving test the theory on an array of Norwegian accounting practices, a line of business that constantly must consider change; especially bearing in mind the frequent amendments to laws and regulations.

"We are finding clear backing and support for this theory," said Gooderham.

Critical of the resource-based theory

Dynamic capabilities can be defined as the ability to integrate, build and reconfigure internal and external competences in order to adapt to changes in the environment. The most important contributions within the theory came as late as in 2003/2004 and Gooderham and Døving have worked with the article since then.

"The theory of dynamic capabilities is critical of the resource-based theory because RBT is relatively lax concerning environmental changes. If a firm is experiencing constant change, then the resource-based theory does not have significant value. The theory of dynamic capabilities is advantageous for those businesses that do face considerable changes in environment. Some of the value here is that companies in industries with strong changes can make use of this theory to analyse if they have the capabilities in place to succeed in the future," tells Gooderham.

Significance

The article, Dynamic Capabilities as Antecedents of the Scope of Related Diversification: The Case of Small Firm Accountancy Practices will be published in the August issue of The Strategic Management Journal, and this means that Gooderham qualifies for NHH's publication bonus of 80,000 NOK.

"The nice thing about the project is that this is the second publication of significance. Earlier, together with my colleague Odd Nordhaug, and also Erik Døving and Anita Tobiassen, I published an article in this project that was chosen as one of the 20 best papers in the world within the SMB* sector the last 50 years," said Gooderham.

The project, with the name Verdiskapning i SMB-sektoren [Economic Growth in the SMB Sector] has been financed by The Research Council of Norway and The Norwegian Association of Authorized Accountants (NARF). From here, Gooderham will bring the research into the classroom. The master students at NHH have already put the application of this theory to use in their masters theses.

"We have encouraged students to use the theory as a tool for analysis and this is something we aim to continue," said Gooderham.

Furthermore, NARF has registered considerable interest among its members for the article: already almost one thousand of NAFT's 4,000 members have clicked on the article, and many are emphasizing that they will immediately adopt it into their strategy work.

Not rejected

Even though the new theory has strongly been introduced into the field, Gooderham will not discard the resource-based theory at the present.

"RBT has been a very influential theory for more than 15 years now and I do not think that it will be rejected just yet. But the theory of dynamic capabilities is something that first and foremost challenges the resource-based theory," he concludes.

*Small and medium sized companies

Facts

The resource-based theory

The leading branch of theory within the field of strategy over the past years. The theory takes, in contrast to traditional strategic theory, more consideration of a firm's internal resources, in addition to the external framework condition.

Differences in profitability between companies can be explained by the fact that companies compete with different resources. Companies in possession of especially valuable and rare resources will achieve better profitability than the others; also these resources are difficult for the competition to copy or substitute over time.

The VRIN criteria identifiy these resources (valuable, rare, inimitable and non-substitutable resources).

The theory of dynamic capabilities

Challenges the resource-based theory in that it takes more consideration of changes in the environment.

Dynamic capabilities are defined as the ability to integrate, build, and reconfigure internal and external competences to adjust to rapid changes in the environment.

Companies need three types of dynamic capabilities:

* Ability to learn quickly and build strategic assets.

* These strategic assets, like for example knowledge and technology, must be integrated into the organization.

* Existing strategic assets must be able to be changed or reconfigured