This essay explores evolutionary and competence‐based theories of the firm. Evolutionary theories can be regarded as a subset of a wider class of theories, variously described as “capabilities”, “resource‐based”, or “competence‐based” theories of the firm. These contrast with a different set of contractarian theories, emanating largely from the work of Coase. It is argued that the contractarian theories of the firm misleadingly assume given individuals thus neglecting processes of individual learning and transformation. Similarly underestimated is importance of technology and the persistence of variety in firm structure and performance. The genesis of the alternative, competence‐based approach is outlined, including the important subset of “evolutionary” approaches of the Nelson‐Winter type. The paper concludes with a discussion of the relevance of the competence‐based approach to strategic management.
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