The Dynamic Theory of the Firm: Theorizing the Firm Dynamics based on Social Physics and Sociobiology

This paper attempts to build a dynamic theory of the firm that deals with firm dynamics for wealth creation in an integrated, holistic and dynamic way based on an analogical approach that applies the laws and formulas of motion in physics to firm dynamics, and also the developmental biology to the interaction between industry and firm, recognizing that the ongoing shift from the Newtonian paradigm to the Complexity paradigm requires a quite different theoretical framework for wealth creation. Firstly, new concepts that construct the dynamic model of firm performance are developed and defined. And then some propositions relating to the constructs and firm performance were derived from the laws of interaction among the constructs of the model. Finally, contingency views on strategic behavior variables were provided as normative guidelines for strategic change mode. In the theory, firm performance can be recognized as an aggregate result of industry power (industry effect), firm power (firm effect), and strategic change modes to adapt to or to create the drivers of industry with strategic behavior variables of firm (interaction effect). This paper points out that in what situation, where, and what type of innovation should be sought for firm success, while Schumpeter (1934) raised the importance of innovation in economic growth. This paper also suggests that in explaining firm performance in the age of mass customization. `The Dynamic Business Paradigm Fit Approach` based on customer-oriented perspective in the dynamic management would be more recommendable than `The Competitive Advantage Approach` based on competition-oriented perspective in the strategic management or `The Efficiency-oriented Approach` in the (static) management. However, the usefulness of this theory should be empirically verified hereafter.