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Using the framework of the philosophy of science, this chapter explores some basic theoretical issues that must be recognized and addressed in developing theory within the competence perspective. We first develop an overview of resource-based and competence-based research to highlight some fundamental theoretical issues. We then identify a set of basic assumptions for conducting a research program focused on development of a “competence-based theory of the firm.” Working from these basic assumptions, we argue for a shift in the epistemological aim of competence theory development from explaining market success to explaining firm competitiveness. We explain how such a shift theoretical focus and approach can remedy the problem of circular reasoning often observed in resource-based thinking that tries to contribute to the competence literature.