There is no question as to whether SEC and TSMC are successful companies, but the question of interest to management strategists is not whether or not a firm is successful, but how they become that way. In other words, what strategies do managers use to achieve competitive advantage in their industries?
Earlier approaches to management strategy emphasized competitive forces such as entry barriers, threat of substitution of products or services, bargaining power of buyers, bargaining power of suppliers, and rivalry among existing competitors (M. E. Porter, 1980;
M. E. Porter, 2008), or strategic conflict which uses game theory to analyze competition between firms (Shapiro, 1989). Teece refers to these approaches as “models of strategy emphasizing the exploitation of market power” (D. J. Teece, Pisano, G., & Shuen, A., 1997).
The limitations of these two approaches, according to Teece, is that the first is based in
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industry structure rather than firm structure, and the second is that it implies that “success in the marketplace is the result of sophisticated plays and counterplays, when this is generally not the case at all” (D. J. Teece, Pisano, G., & Shuen, A., 1997). He also notes that these two approaches lack a “dynamic view of the business enterprise” (D. J. Teece, Pisano, G., &
Shuen, A., 1997).
From this Teece moves to the resource-based view (RBV) (J. B.. Barney, 1986; J. B.
Barney, 1991) in which firms are profitable not because they use market forces to “deter entry and raise prices above long-run costs,” or because they are good at playing games, “but because they have markedly lower costs, or offer markedly higher quality or product
performance” (D. J. Teece, Pisano, G., & Shuen, A., 1997). In this view, competitive advantage is firm-specific, rather than industry-based, and it “lies ‘upstream’ of product markets and rests on the firm’s idiosyncratic and difficult-to-imitate resources” (D. J. Teece, Pisano, G., & Shuen, A., 1997).
Eisenhardt describes RBV as assuming “that firms can be conceptualized as bundles of resources” that are “heterogeneously distributed across firms” and that “resource
differences persist over time” (Eisenhardt, 2000). She goes on to say that “when firms have resources that are valuable, rare, inimitable, and nonsubstitutable … they can achieve sustainable competitive advantage by implementing fresh value-creating strategies that cannot be easily duplicated by competing firms” (Eisenhardt, 2000). These resources are referred to as VRIN resources, and they can consist of financial or physical assets, human resources, skills, knowledge, timing, etc. Because in the RBV resources have VRIN attributes, it contrasts with the competitive forces approach, which assumes that a firm can simply
acquire the assets necessary to compete in the market after choosing an industry to enter (D. J.
Teece, Pisano, G., & Shuen, A., 1997).
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It is from the RBV that the dynamic capabilities approach was born. The RBV itself asserts that competitive advantage springs from a firm’s resources, but it does not account for the capabilities for acquiring, using or changing these resources. Also, according to Barreto, it is “essentially static in its nature and inadequate to explain firms’ competitive advantage in changing environments” (Barreto, 2010). This is where dynamic capabilities come into play.
Teece proposed the dynamic capabilities to explain how some firms become
“[w]inners in the global marketplace” by demonstrating “timely responsiveness and rapid and flexible product innovation, coupled with the management capability to effectively
coordinate and redeploy internal and external competences” (D. J. Teece, Pisano, G., &
Shuen, A., 1997). In this view, dynamism is fundamental, and dynamic “refers to the capacity to renew competences so as to achieve congruence with the changing business environment”
(D. J. Teece, Pisano, G., & Shuen, A., 1997). The concept of a capability “emphasizes the key role of strategic management in appropriately adapting, integrating, and reconfiguring internal and external organizational skills, resources, and functional competence to match the requirements of a changing environment” (D. J. Teece, Pisano, G., & Shuen, A., 1997).
According to Teece’s (1997) definition, dynamic capabilities are made up of a number of elements. Table 1 describes the main elements of dynamic capabilities.
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Table 1: Main Elements of Dynamic Capabilities Framework
Element Explanation Definition Significance
Nature What they are Abilities Essential role of
strategic Context Where they work Rapidly changing
environments
How they are acquired Built rather than bought Heterogeneity Sameness from firm to
firm
Outcome Results Success v failure Sustained
competitive advantage Source: (Barreto, 2010; Teece, 1997)
There are many different types of dynamic capabilities, each of which can be utilized in various ways. Table 2 gives just a few examples of types of dynamic capabilities with examples of how they could be used.
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Table 2: Examples of Types of Dynamic Capabilities
Type Example Resource integration Product development routines by which managers combine
their varied skills and functional backgrounds to create revenue-producing products and services.
Reconfiguration of resources with firms
Resource allocation routines are used to distribute scarce resources such as capital and manufacturing assets from central points with the hierarchy.
Gain and release of resources
Alliance and acquisition routines that bring new resources into the firm from external sources.
Exit routines that jettison resource combinations that no longer provide competitive advantage.
Source: (Eisenhardt, 2000)
In addition to Teece’s original definition of dynamic capabilities as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” (D. J. Teece, Pisano, G., & Shuen, A., 1997), there have been numerous subsequent studies that put forward their own definitions. Table 3 summarizes the main definitions of dynamic capabilities.
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Table 3: Main Definitions of Dynamic Capabilities
Study Definition Teece & Pisano The subset of the competences and capabilities that
allow the firm to create new products and processes and respond to changing market circumstances (D. Teece, Pisano, Gary, 1994).
Teece, Pisano, & Shuen The firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments (D. J. Teece, Pisano, G., &
Shuen, A., 1997).
Eisenhardt & Martin 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 (Eisenhardt, 2000).
Teece The ability to sense and then seize opportunities quickly and proficiently (D. J. Teece, 2000).
Zollo & Winter A dynamic capability is a learned and stable pattern of collective activity through which the organization systematically generates and modifies its operating routines in pursuit of improved effectiveness (Zollo, 2002).
Winter Those (capabilities) that operate to extend, modify, or create ordinary capabilities (Winter, 2003).
Zahra, Sapienza, & Davidsson The abilities to reconfigure a firm’s resources and routines in the manner envisioned and deemed appropriate by its principal decision maker(s) (Zahra, 2006).
Helfat et al. The capacity of an organization to purposefully create, extend, or modify its resource base (Helfat, 2007).
Teece Dynamic capabilities can be disaggregated into the capacity (a) to sense and shape opportunities and threats, (b) to seize opportunities, and (c) to maintain
competitiveness through enhancing, combining, protecting, and, when necessary, reconfiguring the business enterprise’s intangible and tangible assets (David J. Teece, 2007).
Source: (Barreto, 2010)
In addition to the definitions in Table 3, Barreto suggests his own definition: “A dynamic capability is the firm’s potential to systematically solve problems, formed by its propensity to sense opportunities and threats, to make timely and market-oriented decisions, and to change its resource base” (Barreto, 2010). This is the definition that will be used for
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this study, to which is added “dynamic capabilities influence competitiveness, and subsequently financial performance” (Wu & Wang, 2007).
In examining the success and future implications of SEC and TSMC, this study used the dynamic capabilities approach, as it is the most appropriate for firms in the semiconductor industry, which is characterized by a rapidly changing environment. According to Wu, “for technology-based manufacturers, dynamic capability, or the capability to adjust to rapid environmental change, is particularly important to survival” (Wu & Wang, 2007). As such, it is particularly important to note that, according to Eisenhardt, “dynamic capabilities vary with market dynamism” and that in moderately dynamic markets in which “change occurs in the context of stable industry structure, dynamic capabilities resemble the traditional
conception of routines” in that they are “complicated, detailed, analytic processes that rely extensively on existing knowledge and linear execution to produce predictable outcomes”
(Eisenhardt, 2000). This is in contrast to “high-velocity markets where structure is blurring”
in which “dynamic capabilities take on a different character” (Eisenhardt, 2000). Specifically,
“[t]hey are simple, experiential, unstable processes that rely on quickly created new knowledge and iterative execution to produce adaptive but unpredictable outcomes”
(Eisenhardt, 2000). It is the position of this paper that the semiconductor industry, of which SEC and TSMC are part, has the attributes of the former, being moderately dynamic, and therefore the dynamic capabilities demonstrated by the two firms show the characteristics consistent with moderately dynamic markets.