Firm’s Internal and External Capabilities

Many empirical studies have identified companies create both internal (inter- organizational) and external (cross-organizational) capabilities (Sirmon, Hitt, Arregle, & Campbell, 2010; Teece, 2007; Zahra et al., 2006; Zott, 2003). The popular internal capabilities described was characterized by top management support and willingness to invest known as supply chain orientation; and the other was characterized by learning and continuous improvement known as agility. The foundation for top performance were formed by these internal capabilities. However, the best organizations was found to possess one or more capability(ies) that involved multiple organizations working together as the external capabilities to maintain and create a competitive advantage.

2.5.1 Supply Chain Orientation

Implemention of SCM at companies must first have a supply chain orientation. Mentzer, et. al (2001) identified that “the idea of viewing the coordination of a supply chain from an overall system perspective, with each of the tactical activities of distribution flows seen within a broader strategic context (what has been called SCM as a management philosophy) is more accurately called a Supply Chain Orientation. The actual implementation of this orientation, across various companies in the supply chain, is more appropriately called supply chain management.” Hult, Ketchen Jr, Adams and Mena (2008) stated that since dynamic supply chain capabilities occur as sub-routines in inter-firm, multiple supply chain-oriented organizations can establish their development. Defee and Stank (2005) highlighted that supply chain orientation

capabilities.” In addition, according to Mentzer et al. (2001), “supply chain orientation can be defined as the recognition of the systemic, strategic implications of the activities involved in managing the multiple flows in a supply chain of organizations.” These firms:

 have an embedded culture of systems approach and viewing the supply chain holistically,

 have an cooperative efforts to synchronize intra- and inter-firm capabilities,

 focus on customer to create unique sources of customer value.

Mentzer, et al. (2001) also recognized that a supply chain orientation firm builds and preserves numerous behavioural elements that enhance relations with strategic supply chain partners, including, commitment, trust, dependence, cooperative norms, top management support, and organizational compatibility. Each supply chain member possess a supply chain orientation places the foundation for the progress of dynamic supply chains capabilities. Supply chain partners with supply chain orientation are more likely together in the development of dynamic supply chain capabilities because they emphasis a systemic view of collaboration with other members of the supply chain for purposes of creating a strategic advantage based on end-customer value distribution (Stank, Davis, & Fugate, 2005).

Supply chain partners must possess a culture of viewing the supply chain as a whole and of recognizing the need for cooperative efforts. According to Lambert, Knemeyer and Gardner (2004), “without this perspective, the partners may exhibit low trust, not be committed to the improvement of new cross-organizational capabilities, and/or not receive sufficient top management support.” Supply chain oriented firms’ “display

cooperative norms that previous research has shown to produce new, innovative concepts (Eppinger & Chitkara, 2006; Sawhney, Wolcott, & Arroniz, 2006). Thus, supply chain orientation partners will foster the relational climate and behaviours needed to develop co-evolving routines and successfully collaborate on the creation of new innovative capabilities.”

Christopher (2005) stated that, “leading-edge companies have realized the real competition is not company against company, but rather supply chain against supply chain. Cooper, Lambert, and Pagh (1997) argue that organizational relationships tie firms to each other and may tie their success to the supply chain as a whole. In this context, a supply chain as a whole may have its own identity and function like an independent firm. However, to accomplish this ultimate supply chain, all companies in the supply chain must have a supply chain orientation.” The outcome is a fully managed supply chain (Mentzer et al., 2001).

2.5.2 Learning Orientation

For a firm to learn, it must be able to rebuild and adapt its knowledge base, by creatively devastate obsolete attitudes and practices. The concepts of exploration and exploitation learning (March, 1991) underpin organizational adaptation research (Gupta et al., 2006). Exploration learning includes discovery, risk taking, search, play, variation, flexibility, experimentation and innovation; whilst exploitation learning comprises choice, refinement, selection, production efficiency, execution and implementation (March, 1991). Exploration learning develops entirely new organizational routines, while exploitation learning leads to improvements of present routines (Dixon, Meyer, & Day, 2007). Winter (2003) suggested that “firms invest in

the creation of dynamic capabilities in order to solve some problem with which they are faced. Thus, the capabilities themselves arise out of a perceived need and an intentional investment.”

Zollo and Winter (2002) stated that “dynamic capabilities arise from learning and comprise the firm’s methods for modifying existing operating routines. Learning orientation is needed to develop dynamic supply chain capabilities that continuously re-tooling the obsolete cross-organizational capabilities and develop novel capabilities.” Meanwhile, Sinkula, Baker and Noordewier (1997) defined “learning orientation as the set of organizational values that influence the tendency of the firm to create and use knowledge. It is observed by a set of knowledge-questioning norms, including commitment to learning, open mindedness, and shared vision.” Therefore, learning orientation impacts what kind of information is gathered and how it is evaluated, interpreted, and shared (Calantone, Cavusgil, & Zhao, 2002).

Learning is a resource-intensive activity. According to Akbar (2003), organization must dedicate people and time to the effort for learning. “Efforts to learn explicit knowledge are typically straightforward and the effort required is easily estimated since explicit knowledge is already codified, formalized, and structured. Supply chain members can easily share and learn processes that have been documented by the focal firm. Alternatively, tacit knowledge is path dependent and developed over time through the accumulation of experiences and is therefore difficult or impossible to formalize (Berman, Down, & Hill, 2002; Zahra et al., 2006).”

Zahra, et al. (2006) highlighted that “learning orientation firms recognize the risks associated with knowledge imbalance between supply chain members leading to instability in supply chain relationships. This will limit to the learning capacity of any

single firm because of the difficulty in transferring tacit knowledge between organizations. This recognition breeds the desire to understand the supply chain partner’s distinctive existing capabilities, instead of pursuing a costly, and potentially ineffective, strategy of attempting to imitate the partner’s tacitly held capabilities.”

Co-evolving also demands supply chain partners display an awareness of the need to change, and the perceived capacity to change effectively. Referring to Zahra, et al., (2006), “learning theory contends that there are risks inherent in exercising the same, static capabilities, without exploring new ones.”

Learning occurs largely through observation of the environment and organizational interaction. With regard to customer demand uncertainty, innovation, competitive uncertainty, and technological turbulence are crucial environmental factors (Calantone et al., 2002).

According to Defee and Fugate (2010), “jointly developing new capabilities required supply chain partners to scan and process the environment within which they operate. Without learning from and about their external environment, it is difficult for firms to recognize the inflection point when existing capabilities become outdated, or which new capabilities offer the potential for competitive advantage.” According to Baker and Sinkula (1999) “the learning-oriented firms proactively question long-held routines, assumptions, and beliefs about existing capabilities to foster the development of new ideas for competitive capabilities.”