Firms as Sets of Capabilities: Theory and Applications

We model firms as sets of scarce capabilities, where these capabilities constitute sources of competitive advantage. Markets are also represented by sets of capabilities, identifying those capabilities that are valuable in them. Doing so provides a new perspective on several industrial organization literatures. These include merger analysis, strategic alliances, investment and market dynamics. It also provides formal foundations for a prominent theory of strategic competition in the management literature. We apply our model to reconsider merger guidelines and to provide an alternative view on industry consolidation. We argue that merger analysis should be broader than is current practice by considering more markets, and provide an explanation for industry consolidation in terms of the equilibrium acquisition of capabilities through mergers.