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Dynamic capabilities and strategic management

01 Aug 1997-Strategic Management Journal (STRATEGIC MANAGEMENT JOURNAL)-Vol. 18, Iss: 7, pp 509-533

AbstractThe dynamic capabilities framework analyzes the sources and methods of wealth creation and capture by private enterprise firms operating in environments of rapid technological change. The competitive advantage of firms is seen as resting on distinctive processes (ways of coordinating and combining), shaped by the firm's (specific) asset positions (such as the firm's portfolio of difftcult-to- trade knowledge assets and complementary assets), and the evolution path(s) it has aflopted or inherited. The importance of path dependencies is amplified where conditions of increasing retums exist. Whether and how a firm's competitive advantage is eroded depends on the stability of market demand, and the ease of replicability (expanding intemally) and imitatability (replication by competitors). If correct, the framework suggests that private wealth creation in regimes of rapid technological change depends in large measure on honing intemal technological, organizational, and managerial processes inside the firm. In short, identifying new opportunities and organizing effectively and efficiently to embrace them are generally more fundamental to private wealth creation than is strategizing, if by strategizing one means engaging in business conduct that keeps competitors off balance, raises rival's costs, and excludes new entrants. © 1997 by John Wiley & Sons, Ltd.

Topics: Competitive advantage (58%), Resource-based view (57%), Absorptive capacity (56%), Strategic fit (55%), Complementary assets (54%)

Summary (3 min read)

1. Introduction

  • Accounting for workforce diversity has become a central preoccupation among scholars who wish to explore the financial and non-financial impacts of diversity at a time when businesses have to make difficult strategic choices due to the economic, social and political turbulence that have come to characterise the early parts of the 21st century.
  • Yet the results are inconclusive with research demonstrating conflicting diversity outcomes (Jayne & Dipboye, 2004; Joshi & Roh, 2009; Mannix & Neale, 2005).
  • Furthermore, the findings highlight mixed outcomes for diversity which can be associated with positive outcomes such as low turnover, higher levels of innovation and creativity and improved performance, as well as negative outcomes such as lower levels of harmony, higher levels of conflict and low morale (Özbilgin & Tatli, 2008).
  • The authors examine four distinct approaches to accounting for diversity outcomes in global organisations: Shareholder, stakeholder, regulation and global value chain.

2. Accounting for diversity impact: towards a broader perspective

  • It is important to distinguish between studies on workforce diversity and diversity management in accounting for their respective interplay with organisational performance.
  • Studies on workforce diversity tend to link differences that exist in the workforce with organisational outcomes (Tatli & Özbilgin, 2012a).
  • Third, they often lack contextual assessment, ignoring the historical and geographic specificity of the insights that they make (See Tatli and Özbilgin 2012 for a review).
  • Similarly, the impact of gender diversity varies with organisational setting.
  • The relationship between team diversity and performance is characterised with complexities and moderated by a number of factors such as task motivation, team learning, and pro-diversity beliefs (Ely et al., 2012; Meyer & Schermuly, 2012; Winkler & Bouncken, 2011).

3. Method

  • This paper is informed by semi-structured interviews with heads of diversity or finance and accounting leaders in 22 globally significant organisations.
  • The interview schedule is designed to elicit comprehensive evidence on how organisations account for diversity outcomes.
  • Seven out of 22 interviews were conducted face-to-face with senior managers working in UK branches.
  • With the permission of the respondents, all interviews were taperecorded.
  • While the authors adopted Strauss and Corbin’s (1990) coding procedures of open coding, axial coding and selective coding, they were cognizant of the necessity to have flexibility in using these procedures (Walker, and Myrick, 2006).

4. Findings and Analysis

  • The authors interviews revealed that organisations accounted for diversity outcomes in narrow or broad ways.
  • Organisational framing of diversity outcomes included a wide compliance with law, fairness at work, increased innovation and creativity, higher levels of employee well-being, improved employee engagement, improved customer satisfaction, better market reach, compliance with international standards, capturing the spirit of globalisation, increased competitiveness, and enhanced corporate reputation.
  • Yet, their analysis which is reported below proposes ideal types of common approaches that were expressed in the interviews.

4.1. Shareholder approach to accounting for diversity impact

  • At the most basic level, accounting for diversity outcomes focuses on shareholder impact: the impact of workforce diversity on the shareholder value and the single bottom line, i.e. profits and measures of return on investment.
  • So if you’re immediately putting up barriers to, say, people with disability, you’re losing a great chunk of your high potentials.
  • Accounting for workforce diversity outcomes is not simple.
  • One participant explains how their attempt at showing shareholder impact backfired: one slide showed that the women running accounts grew faster and were more profitable than the male accounts.

4.2. Stakeholder approach to accounting for diversity impact

  • It is possible to account for diversity outcomes by focusing on a wider range of interests than shareholder value and profitability.
  • That’s a message, it’s like the authors should be very much integrated with the communities they serve.
  • And as a result of that, the authors don’t see many people in the workforce with any notable disability.
  • The stakeholder approach is similar to the shareholder approach in the sense that workforce diversity is considered as a means to an end, reflecting on a wider range of interests, and it assumes that organisations can freely and voluntarily does not mean that all interests will be integrated in practice in the workplace and work process designs.
  • It is not surprising then that stakeholder considerations alone have not been sufficient to tackle entrenched forms of inequality, unfairness and discrimination that plague labour market practices.

4.3. Regulatory approach to accounting for diversity impact

  • The relationship between workforce diversity and organisational outcomes is governed by a large number of rules and resources.
  • Regulation, i.e. the rules for allocating resources and framing actions, can take many forms, including industry regulation, market regulation, social regulation, legal regulation, all of which may include a mixture of voluntary as well as coercive measures.
  • In formulating a regulatory approach to workforce diversity, practitioners consider both voluntary and coercive measures and operate at multiple contexts.
  • And I suspect globally, it plays out in the same way in different ways.
  • So in a sense, they are creating compulsion to look at it, simply maybe because of funding they will be forced to look at it.

4.4. Global value chain approach to accounting for diversity impact

  • Expansion of the accounting repertoire for diversity’s impact to include voluntary and coercive regulation has opened up possibilities for discussing speed and effectiveness of diversity interventions.
  • We’re getting used now to being owned from abroad and owned by people of very different backgrounds and cultures, different faith perspectives, different ethnicities and different approaches to cultural prioritisation, different focuses on the value of markets….
  • I mentioned Bangladesh is 90% Muslim so you find in my workforce here, I would say is reflective of the 90% of the population, the balance being made up of Hindu and Christian.
  • One organisation chose to assert universal standards and values, even when these may conflict with the espoused beliefs of the local branch:.
  • If an organisation allows all diversity policies to be locally determined, there can be wide discrepancies and disparities between local settings across which the organisation operates.

5. Discussion and conclusions

  • This paper identified four distinct approaches to accounting for diversity’s impact and argued that there is a need to move from narrow framing of diversity’s impact based around shareholder and stakeholder considerations towards a broader framing, which includes coercive regulation and global value chain.
  • Yet, there are calls to broaden the frameworks of how the authors account for diversity outcomes in order to strengthen the diversity management practices nationally and these calls by introducing and exploring two approaches that have been previously overlooked.
  • Taken together, the four approaches represent a more comprehensive understanding of accounting for diversity to include varied short-term and long-term, direct and indirect, and broad and narrow conceptions of the interplay between diversity management and organisational performance.
  • In accounting for diversity management, the authors recognise that global organisations have different starting points and trajectories of development in terms of their approaches.
  • They also need to reflect upon the global, regional and national context of political economy in order to assess the challenges and opportunities.

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Strategic Management Journal, Vol. 18:7, 509533 (1997)
Haas School of Business, University of California, Berkeley, California, U.S.A.
Graduate School of Business Administration, Harvard University, Boston, Massa-
chusetts, U.S.A.
School of Business, San Jose State University, San Jose, California, U.S.A.
The dynamic capabilities framework analyzes the sources and methods of wealth creation and
capture by private enterprise firms operating in environments of rapid technological change.
The competitive advantage of firms is seen as resting on distinctive processes (ways of
coordinating and combining), shaped by the firm’s (specific) asset positions (such as the firm’s
portfolio of difficult-to-trade knowledge assets and complementary assets), and the evolution
path(s) it has adopted or inherited. The importance of path dependencies is amplified where
conditions of increasing returns exist. Whether and how a firm’s competitive advantage is
eroded depends on the stability of market demand, and the ease of replicability (expanding
internally) and imitatability (replication by competitors). If correct, the framework suggests
that private wealth creation in regimes of rapid technological change depends in large measure
on honing internal technological, organizational, and managerial processes inside the firm. In
short, identifying new opportunities and organizing effectively and efficiently to embrace them
are generally more fundamental to private wealth creation than is strategizing, if by strategizing
one means engaging in business conduct that keeps competitors off balance, raises rival’s
costs, and excludes new entrants. 1997 by John Wiley & Sons, Ltd.
respect to assisting in the understanding of how
and why certain firms build competitive advan-
tage in regimes of rapid change. Our approach isThe fundamental question in the field of strategic
management is how firms achieve and sustain especially relevant in a Schumpeterian world of
innovation-based competition, price/performancecompetitive advantage.
We confront this question
here by developing the dynamic capabilities rivalry, increasing returns, and the ‘creative
destruction’ of existing competences. Theapproach, which endeavors to analyze the sources
of wealth creation and capture by firms. The approach endeavors to explain firm-level success
and failure. We are interested in both building adevelopment of this framework flows from a
recognition by the authors that strategic theory is better theory of firm performance, as well as
informing managerial practice.replete with analyses of firm-level strategies for
sustaining and safeguarding extant competitive In order to position our analysis in a manner
that displays similarities and differences withadvantage, but has performed less well with
existing approaches, we begin by briefly
reviewing accepted frameworks for strategic man-
Key words: competences; capabilities; innovation;
agement. We endeavor to expose implicit assump-
strategy; path dependency; knowledge assets
tions, and identify competitive circumstances
*Correspondence to: David J. Teece, Institute of Management,
where each paradigm might display some relative
Innovation and Organization, Haas School of Business, Uni-
advantage as both a useful descriptive and norma-
versity of California, Berkeley, CA 94720–1930, U.S.A.
tive theory of competitive strategy. While numer-
For a review of the fundamental questions in the field of
strategy, see Rumelt, Schendel, and Teece (1994).
ous theories have been advanced over the past
CCC 0143–2095/97/07050925$17.50 Received 17 April 1991
1997 by John Wiley & Sons, Ltd. Final revision received 4 March 1997

510 D. J. Teece, G. Pisano and A. Shuen
two decades about the sources of competitive recognizes but does not attempt to explain the
nature of the isolating mechanisms that enableadvantage, many cluster around just a few loosely
structured frameworks or paradigms. In this paper entrepreneurial rents and competitive advantage
to be sustained.we attempt to identify three existing paradigms
and describe aspects of an emerging new para- Another component of the efficiency-based
approach is developed in this paper. Rudimentarydigm that we label dynamic capabilities.
The dominant paradigm in the field during efforts are made to identify the dimensions of
firm-specific capabilities that can be sources ofthe 1980s was the competitive forces approach
developed by Porter (1980). This approach, advantage, and to explain how combinations of
competences and resources can be developed,rooted in the structureconductperformance
paradigm of industrial organization (Mason, 1949; deployed, and protected. We refer to this as the
‘dynamic capabilities’ approach in order to stressBain, 1959), emphasizes the actions a firm can
take to create defensible positions against com- exploiting existing internal and external firm-
specific competences to address changingpetitive forces. A second approach, referred to as
a strategic conflict approach (e.g., Shapiro, 1989), environments. Elements of the approach can be
found in Schumpeter (1942), Penrose (1959),is closely related to the first in its focus on
product market imperfections, entry deterrence, Nelson and Winter (1982), Prahalad and Hamel
(1990), Teece (1976, 1986a, 1986b, 1988) andand strategic interaction. The strategic conflict
approach uses the tools of game theory and thus in Hayes, Wheelwright, and Clark (1988):
Because this approach emphasizes the develop-implicitly views competitive outcomes as a func-
tion of the effectiveness with which firms keep ment of management capabilities, and difficult-
to-imitate combinations of organizational, func-their rivals off balance through strategic invest-
ments, pricing strategies, signaling, and the con- tional and technological skills, it integrates and
draws upon research in such areas as the manage-trol of information. Both the competitive forces
and the strategic conflict approaches appear to ment of R&D, product and process development,
technology transfer, intellectual property, manu-share the view that rents flow from privileged
product market positions. facturing, human resources, and organizational
learning. Because these fields are often viewedAnother distinct class of approaches empha-
sizes building competitive advantage through cap- as outside the traditional boundaries of strategy,
much of this research has not been incorporatedturing entrepreneurial rents stemming from funda-
mental firm-level efficiency advantages. These into existing economic approaches to strategy
issues. As a result, dynamic capabilities can beapproaches have their roots in a much older
discussion of corporate strengths and weaknesses; seen as an emerging and potentially integrative
approach to understanding the newer sources ofthey have taken on new life as evidence suggests
that firms build enduring advantages only through competitive advantage.
We suggest that the dynamic capabilitiesefficiency and effectiveness, and as developments
in organizational economics and the study of approach is promising both in terms of future
research potential and as an aid to managementtechnological and organizational change become
applied to strategy questions. One strand of this endeavoring to gain competitive advantage in
increasingly demanding environments. To illus-literature, often referred to as the ‘resource-based
perspective,’ emphasizes firm-specific capabilities trate the essential elements of the dynamic capa-
bilities approach, the sections that follow compareand assets and the existence of isolating mech-
anisms as the fundamental determinants of firm and contrast this approach to other models of
strategy. Each section highlights the strategicperformance (Penrose, 1959; Rumelt, 1984;
Teece, 1984; Wernerfelt, 1984).
This perspective
how. Over time, these assets may expand beyond the point
of profitable reinvestment in a firm’s traditional market.
Of these authors, Rumelt may have been the first to self-
consciously apply a resource perspective to the field of strat- Accordingly, the firm may consider deploying its intangible
assets in different product or geographical markets, where theegy. Rumelt (1984: 561) notes that the strategic firm ‘is
characterized by a bundle of linked and idiosyncratic resources expected returns are higher, if efficient transfer modes exist.’
Wernerfelt (1984) was early to recognize that this approachand resource conversion activities.’ Similarly, Teece (1984:
95) notes: ‘Successful firms possess one or more forms of was at odds with product market approaches and might consti-
tute a distinct paradigm of strategy.intangible assets, such as technological or managerial know-

Dynamic Capabilities 511
insights provided by each approach as well as (1980). Competitive strategies are often aimed at
altering the firm’s position in the industry vis-a
-the different competitive circumstances in which
it might be most appropriate. Needless to say, vis competitors and suppliers. Industry structure
plays a central role in determining and limitingthese approaches are in many ways complemen-
tary and a full understanding of firm-level, com- strategic action.
Some industries or subsectors of industriespetitive advantage requires an appreciation of all
four approaches and more. become more ‘attractive’ because they have struc-
tural impediments to competitive forces (e.g.,
entry barriers) that allow firms better oppor-
tunities for creating sustainable competitive
advantages. Rents are created largely at the indus-
try or subsector level rather than at the firm level.
While there is some recognition given to firm-
Competitive forces
specific assets, differences among firms relate
primarily to scale. This approach to strategyThe dominant paradigm in strategy at least during
the 1980s was the competitive forces approach. reflects its incubation inside the field of industrial
organization and in particular the industrial struc-Pioneered by Porter (1980), the competitive
forces approach views the essence of competitive ture school of Mason and Bain
(Teece, 1984).
strategy formulation as ‘relating a company to its
environment . . . [T]he key aspect of the firm’s
Strategic conflict
environment is the industry or industries in which
it competes.’ Industry structure strongly influ- The publication of Carl Shapiro’s 1989 article,
confidently titled The Theory of Businessences the competitive rules of the game as well
as the strategies potentially available to firms. Strategy, announced the emergence of a new
approach to business strategy, if not strategicIn the competitive forces model, five industry-
level forcesentry barriers, threat of substitution, management. This approach utilizes the tools of
game theory to analyze the nature of competitivebargaining power of buyers, bargaining power
of suppliers, and rivalry among industry interaction between rival firms. The main thrust
of work in this tradition is to reveal how a firmincumbentsdetermine the inherent profit poten-
tial of an industry or subsegment of an industry. can influence the behavior and actions of rival
firms and thus the market environment.
The approach can be used to help the firm find
a position in an industry from which it can Examples of such moves are investment in
capacity (Dixit, 1980), R&D (Gilbert and New-best defend itself against competitive forces or
influence them in its favor (Porter, 1980: 4). berry, 1982), and advertising (Schmalensee,
1983). To be effective, these strategic movesThis ‘five-forces’ framework provides a sys-
tematic way of thinking about how competitive require irreversible commitments.
The moves in
question will have no effect if they can beforces work at the industry level and how these
forces determine the profitability of different costlessly undone. A key idea is that by manipu-
lating the market environment, a firm may beindustries and industry segments. The competitive
forces framework also contains a number of able to increase its profits.
underlying assumptions about the sources of com-
petition and the nature of the strategy process.
In competitive environments characterized by sustainable and
stable mobility and structural barriers, these forces may
To facilitate comparisons with other approaches,
become the determinants of industry-level profitability. How-
we highlight several distinctive characteristics of
ever, competitive advantage is more complex to ascertain in
the framework.
environments of rapid technological change where specific
assets owned by heterogeneous firms can be expected to play
Economic rents in the competitive forces
a larger role in explaining rents.
framework are monopoly rents (Teece, 1984).
The market environment is all factors that influence market
Firms in an industry earn rents when they are
outcomes (prices, quantities, profits) including the beliefs of
customers and of rivals, the number of potential technologies
somehow able to impede the competitive forces
employed, and the costs or speed with which a rival can
(in either factor markets or product markets)
enter the industry.
which tend to drive economic returns to zero.
For an excellent discussion of committed competition in
multiple contexts, see Ghemawat (1991).
Available strategies are described in Porter

512 D. J. Teece, G. Pisano and A. Shuen
This literature, together with the contestability which the strategic conflict literature is relevant
to strategic management. Firms that have aliterature (Baumol, Panzar, and Willig, 1982), has
led to a greater appreciation of the role of sunk tremendous cost or other competitive advantage
-vis their rivals ought not be transfixed bycosts, as opposed to fixed costs, in determining
competitive outcomes. Strategic moves can also the moves and countermoves of their rivals. Their
competitive fortunes will swing more on totalbe designed to influence rivals’ behavior through
signaling. Strategic signaling has been examined demand conditions, not on how competitors
deploy and redeploy their competitive assets. Putin a number of contexts, including predatory
pricing (Kreps and Wilson, 1982a, 1982b) and differently, when there are gross asymmetries in
competitive advantage between firms, the resultslimit pricing (Milgrom and Roberts, 1982a,
1982b). More recent treatments have emphasized of game-theoretic analysis are likely to be obvious
and uninteresting. The stronger competitor willthe role of commitment and reputation (e.g.,
Ghemawat, 1991) and the benefits of firms simul- generally advance, even if disadvantaged by cer-
tain information asymmetries. To be sure, incum-taneously pursuing competition and cooperation
(Brandenburger and Nalebuff, 1995, 1996). bent firms can be undone by new entrants with
a dramatic cost advantage, but no ‘gaming’ willIn many instances, game theory formalizes
long-standing intuitive arguments about various overturn that outcome. On the other hand, if
firms’ competitive positions are more delicatelytypes of business behavior (e.g., predatory pric-
ing, patent races), though in some instances it has balanced, as with Coke and Pepsi, and United
Airlines and American Airlines, then strategicinduced a substantial change in the conventional
wisdom. But by rationalizing observed behavior conflict is of interest to competitive outcomes.
Needless to say, there are many such circum-by reference to suitably designed games, in
explaining everything these models also explain stances, but they are rare in industries where
there is rapid technological change and fast-shift-nothing, as they do not generate testable predic-
tions (Sutton, 1992). Many specific game- ing market circumstances.
In short, where competitors do not have deep-theoretic models admit multiple equilibrium, and
a wide range of choice exists as to the design of seated competitive advantages, the moves and
countermoves of competitors can often be use-the appropriate game form to be used. Unfortu-
nately, the results often depend on the precise fully formulated in game-theoretic terms. How-
ever, we doubt that game theory can comprehen-specification chosen. The equilibrium in models
of strategic behavior crucially depends on what sively illuminate how Chrysler should compete
against Toyota and Honda, or how United Air-one rival believes another rival will do in a
particular situation. Thus the qualitative features lines can best respond to Southwest Airlines since
Southwest’s advantage is built on organizationalof the results may depend on the way price
competition is modeled (e.g., Bertrand or attributes which United cannot readily replicate.
Indeed, the entrepreneurial side of strategyhowCournot) or on the presence or absence of stra-
tegic asymmetries such as first-mover advantages. significant new rent streams are created and
protectedis largely ignored by the game-The analysis of strategic moves using game
theory can be thought of as ‘dynamic’ in the theoretic approach.
Accordingly, we find that
the approach, while important, is most relevantsense that multiperiod analyses can be pursued
both intuitively and formally. However, we use
the term ‘dynamic’ in this paper in a different
sense, referring to situations where there is rapid
Thus even in the air transport industry game-theoretic formu-
change in technology and market forces, and
lations by no means capture all the relevant dimensions of
‘feedback’ effects on firms.
competitive rivalry. United Airlines’ and United Express’s
difficulties in competing with Southwest Airlines because of
We have a particular view of the contexts in
United’s inability to fully replicate Southwest’s operation
capabilities is documented in Gittel (1995).
Important exceptions can be found in Brandenburger and
Nalebuff (1996) such as their emphasis on the role of com-
Competition and cooperation have also been analyzed ouside
of this tradition. See, for example, Teece (1992) and Link, plements. However, these insights do not flow uniquely from
game theory and can be found in the organizational economicsTeece and Finan (1996).
Accordingly, both approaches are dynamic, but in very literature (e.g., Teece, 1986a, 1986b; de Figueiredo and
Teece, 1996).different senses.

Dynamic Capabilities 513
when competitors are closely matched
and the that may deter entry and raise prices above long-
run costs, but because they have markedly lowerpopulation of relevant competitors and the iden-
tity of their strategic alternatives can be readily costs, or offer markedly higher quality or product
performance. This approach focuses on the rentsascertained. Nevertheless, coupled with other
approaches it can sometimes yield powerful accruing to the owners of scarce firm-specific
resources rather than the economic profits frominsights.
However, this research has an orientation that product market positioning.
Competitive advan-
tage lies ‘upstream’ of product markets and restswe are concerned about in terms of the implicit
framing of strategic issues. Rents, from a game- on the firm’s idiosyncratic and difficult-to-
imitate resources.
theoretic perspective, are ultimately a result of
managers’ intellectual ability to ‘play the game.’ One can find the resources approach suggested
by the earlier preanalytic strategy literature. AThe adage of the strategist steeped in this
approach is ‘do unto others before they do unto leading text of the 1960s (Learned et al., 1969)
noted that ‘the capability of an organization is itsyou.’ We worry that fascination with strategic
moves and Machiavellian tricks will distract man- demonstrated and potential ability to accomplish
against the opposition of circumstance or compe-agers from seeking to build more enduring
sources of competitive advantage. The approach tition, whatever it sets out to do. Every organiza-
tion has actual and potential strengths and weak-unfortunately ignores competition as a process
involving the development, accumulation, combi- nesses; it is important to try to determine what
they are and to distinguish one from the other.’nation, and protection of unique skills and capa-
bilities. Since strategic interactions are what Thus what a firm can do is not just a function
of the opportunities it confronts; it also dependsreceive focal attention, the impression one might
receive from this literature is that success in the on what resources the organization can muster.
Learned et al. proposed that the real key to amarketplace is the result of sophisticated plays
and counterplays, when this is generally not the company’s success or even to its future develop-
ment lies in its ability to find or create ‘a com-case at all.
In what follows, we suggest that building a petence that is truly distinctive.’
This literature
also recognized the constraints on firm behaviordynamic view of the business enterprise
something missing from the two approaches we and, in particular, noted that one should not
assume that management ‘can rise to anyhave so far identifiedenhances the probability
of establishing an acceptable descriptive theory occasion.’ These insights do appear to keenly
anticipate the resource-based approach that hasof strategy that can assist practitioners in the
building of long-run advantage and competitive since emerged, but they did not provide a theory
or systematic framework for analyzing businessflexibility. Below, we discuss first the resource-
based perspective and then an extension we call strategies. Indeed, Andrews (1987: 46) noted that
‘much of what is intuitive in this process isthe dynamic capabilities approach.
yet to be identified.’ Unfortunately, the academic
literature on capabilities stalled for a couple of
New impetus has been given to the resource-
based approach by recent theoretical develop-
Resource-based perspective
ments in organizational economics and in the
theory of strategy, as well as by a growingThe resource-based approach sees firms with
superior systems and structures being profitable
not because they engage in strategic investments
In the language of economics, rents flow from unique firm-
specific assets that cannot readily be replicated, rather than
from tactics which deter entry and keep competitors off
When closely matched in an aggregate sense, they may
nevertheless display asymmetries which game theorists can balance. In short, rents are Ricardian.
Teece (1982: 46) saw the firm as having ‘a variety of endanalyze.
The strategic conflict literature also tends to focus prac- products which it can produce with its organizational tech-
nology.’titioners on product market positioning rather than on
developing the unique assets which make possible superior
Elsewhere Andrews (1987: 47) defined a distinctive com-
petence as what an organization can do particularly well.product market positions (Dierickx and Cool, 1989).

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Journal ArticleDOI
TL;DR: Seeks to present a better understanding of dynamic capabilities and the resource-based view of the firm to help managers build using these dynamic capabilities.
Abstract: This paper focuses on dynamic capabilities and, more generally, the resource-based view of the firm. We argue that dynamic capabilities are a set of specific and identifiable processes such as product development, strategic decision making, and alliancing. They are neither vague nor tautological. Although dynamic capabilities are idiosyncratic in their details and path dependent in their emergence, they have significant commonalities across firms (popularly termed ‘best practice’). This suggests that they are more homogeneous, fungible, equifinal, and substitutable than is usually assumed. In moderately dynamic markets, dynamic capabilities resemble the traditional conception of routines. They are detailed, analytic, stable processes with predictable outcomes. In contrast, in high-velocity markets, they are simple, highly experiential and fragile processes with unpredictable outcomes. Finally, well-known learning mechanisms guide the evolution of dynamic capabilities. In moderately dynamic markets, the evolutionary emphasis is on variation. In high-velocity markets, it is on selection. At the level of RBV, we conclude that traditional RBV misidentifies the locus of long-term competitive advantage in dynamic markets, overemphasizes the strategic logic of leverage, and reaches a boundary condition in high-velocity markets. Copyright © 2000 John Wiley & Sons, Ltd.

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  • ...…theoretical framework for understanding how competitive advantage within firms is achieved and how that advantage might be sustained over time (Barney, 1991; Nelson, 1991; Penrose, 1959; Peteraf, 1993; Prahalad and Hamel, 1990; Schumpeter, 1934; Teece, Pisano, and Shuen, 1997; Wernerfelt, 1984)....


  • ...The literature characterizes dynamic capabilities as complicated routines that emerge from pathdependent processes (Nelson and Winter, 1982; Teece et al., 1997; Zollo and Winter, 1999)....


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Abstract: Researchers have used the absorptive capacity construct to explain various organizational phenomena. In this article we review the literature to identify key dimensions of absorptive capacity and offer a reconceptualization of this construct. Building upon the dynamic capabilities view of the firm, we distinguish between a firm's potential and realized capacity. We then advance a model outlining the conditions when the firm's potential and realized capacities can differentially influence the creation and sustenance of its competitive advantage.

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Abstract: This paper draws on the social and behavioral sciences in an endeavor to specify the nature and microfoundations of the capabilities necessary to sustain superior enterprise performance in an open economy with rapid innovation and globally dispersed sources of invention, innovation, and manufacturing capability. Dynamic capabilities enable business enterprises to create, deploy, and protect the intangible assets that support superior long- run business performance. The microfoundations of dynamic capabilities—the distinct skills, processes, procedures, organizational structures, decision rules, and disciplines—which undergird enterprise-level sensing, seizing, and reconfiguring capacities are difficult to develop and deploy. Enterprises with strong dynamic capabilities are intensely entrepreneurial. They not only adapt to business ecosystems, but also shape them through innovation and through collaboration with other enterprises, entities, and institutions. The framework advanced can help scholars understand the foundations of long-run enterprise success while helping managers delineate relevant strategic considerations and the priorities they must adopt to enhance enterprise performance and escape the zero profit tendency associated with operating in markets open to global competition. Copyright  2007 John Wiley & Sons, Ltd.

7,883 citations

Cites background from "Dynamic capabilities and strategic ..."

  • ...In Teece and Pisano (1994) and Teece et al. (1997), we proposed three organizational and managerial processes—coordination/integrating, learning, and reconfiguring—as core elements of dynamic capabilities....


  • ...As noted in Teece et al. (1997), more decentralized organizations with greater local autonomy are less likely to be blindsided by market and technological developments....


  • ...It involves interpreting available information in whatever form it appears—a chart, a picture, a conversation at a trade show, news of scientific and technological breakthroughs, or the angst expressed by a frustrated customer....


  • ...In an earlier treatment (Teece et al., 1997: 530) it was noted that ‘we have merely sketched an outline for a dynamic capabilities approach.’...


  • ...Early statements of the dynamic capabilities framework can be found in Teece, Pisano, and Shuen (1990a, 1990b, 1997) and Teece and Pisano (1994)....


Journal ArticleDOI
TL;DR: The argument is made that dynamic capabilities are shaped by the coevolution of these learning mechanisms, and the relative effectiveness of these capability-building mechanisms is analyzed here as contingent upon selected features of the task to be learned, such as its frequency, homogeneity, and degree of causal ambiguity.
Abstract: This paper investigates the mechanisms through which organizations develop dynamic capabilities, defined as routinized activities directed to the development and adaptation of operating routines. It addresses the role of (1) experience accumulation, (2) knowledge articulation, and (3) knowledge codifi- cation processes in the evolution of dynamic, as well as operational, routines. The argument is made that dynamic capabilities are shaped by the coevolution of these learning mechanisms. At any point in time, firms adopt a mix of learning behaviors constituted by a semiautomatic accumulation of experience and by deliberate investments in knowledge articulation and codification activities. The relative effectiveness of these capability-building mechanisms is analyzed here as contingent upon selected features of the task to be learned, such as its frequency, homogeneity, and degree of causal ambiguity. Testable hypotheses about these effects are derived. Somewhat counterintuitive implications of the analysis include the relatively superior effectiveness of highly deliberate learning processes such as knowledge codification at lower levels of frequency and homogeneity of the organizational task, in contrast with common managerial practice.

5,529 citations

Cites background from "Dynamic capabilities and strategic ..."

  • ...From pioneering efforts such as Selznick' s (1957) "distinctive competence," to the more recent and refined notions of organizational routines (Nelson and Winter 1982), absorptive capacity (Cohen and Levinthal 1990), architectural knowledge (Henderson and Clark 1990), combinative capabilities (Kogut and Zander 1992) and, finally, dynamic capabilities (Teece et al. 1997), there are decades of investment in sorting out the traits and the boundaries of the phenomena....


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Abstract: This study develops an evolutionary theory of the capabilities and behavior of business firms operating in a market environment. It includes both general discussion and the manipulation of specific simulation models consistent with that theory. The analysis outlines the differences between an evolutionary theory of organizational and industrial change and a neoclassical microeconomic theory. The antecedents to the former are studies by economists like Schumpeter (1934) and Alchian (1950). It is contrasted with the orthodox theory in the following aspects: while the evolutionary theory views firms as motivated by profit, their actions are not assumed to be profit maximizing, as in orthodox theory; the evolutionary theory stresses the tendency of most profitable firms to drive other firms out of business, but, in contrast to orthodox theory, does not concentrate on the state of industry equilibrium; and evolutionary theory is related to behavioral theory: it views firms, at any given time, as having certain capabilities and decision rules, as well as engaging in various ‘search' operations, which determines their behavior; while orthodox theory views firm behavior as relying on the use of the usual calculus maximization techniques. The theory is then made operational by the use of simulation methods. These models use Markov processes and analyze selection equilibrium, responses to changing factor prices, economic growth with endogenous technical change, Schumpeterian competition, and Schumpeterian tradeoff between static Pareto-efficiency and innovation. The study's discussion of search behavior complicates the evolutionary theory. With search, the decision making process in a firm relies as much on past experience as on innovative alternatives to past behavior. This view combines Darwinian and Lamarkian views on evolution; firms are seen as both passive with regard to their environment, and actively seeking alternatives that affect their environment. The simulation techniques used to model Schumpeterian competition reveal that there are usually winners and losers in industries, and that the high productivity and profitability of winners confer advantages that make further success more likely, while decline breeds further decline. This process creates a tendency for concentration to develop even in an industry initially composed of many equal-sized firms. However, the experiments conducted reveal that the growth of concentration is not inevitable; for example, it tends to be smaller when firms focus their searches on imitating rather than innovating. At the same time, industries with rapid technological change tend to grow more concentrated than those with slower progress. The abstract model of Schumpeterian competition presented in the study also allows to see more clearly the public policy issues concerning the relationship between technical progress and market structure. The analysis addresses the pervasive question of whether industry concentration, with its associated monopoly profits and reduced social welfare, is a necessary cost if societies are to obtain the benefits of technological innovation. (AT)

22,526 citations

01 Jan 1990
Abstract: The Need for a New Paradigm - PART I: FOUNDATIONS - The Competitive Advantage of Firms in Global Industries - Determinants of National Competitive Advantage - The Dynamics of National Advantage - PART II: INDUSTRIES - Four Studies in National Competitive Advantage - National Competitive Advantage in Services - PART III: NATIONS - Patterns of National Competitive Advantage: The Early Postwar Winners - Emerging Nations in the 1970s and 1980s - Shifting National Advantage - The Competitive Development of National Economies - PART IV: IMPLICATIONS - Company Strategy - Government Policy - National Agendas - Epilogue - Appendices - References

22,081 citations

"Dynamic capabilities and strategic ..." refers background in this paper

  • ...Porter (1990), for example, shows that differencesReplication in local product markets, local factor markets, and institutions play an important role in shapingTo understand imitation, one must first understand replication....


  • ...Porter (1990) , for example, shows that differences in local product markets, local factor markets, and institutions play an important role in shaping competitive capabilities....


Journal ArticleDOI
Abstract: Economic theory has suffered in the past from a failure to state clearly its assumptions. Economists in building up a theory have often omitted to examine the foundations on which it was erected. This examination is, however, essential not only to prevent the misunderstanding and needless controversy which arise from a lack of knowledge of the assumptions on which a theory is based, but also because of the extreme importance for economics of good judgement in choosing between rival sets of assumptions. For instance, it is suggested that the use of the word “firm” in economics may be different from the use of the term by the “plain man.”1 Since there is apparently a trend in economic theory towards starting analysis with the individual firm and not with the industry,2 it is all the more necessary not only that a clear definition of the word “firm” should be given but that its difference from a firm in the “real world,” if it exists, should be made clear. Mrs. Robinson has said that “the two questions to be asked of a set of assumptions in economics are: Are they tractable? and: Do they correspond with the real world?”3 Though, as Mrs. Robinson points out, “more often one set will be manageable and the other realistic,” yet there may well be branches of theory where assumptions may be both manageable and realistic. It is hoped to show in the following paper that a definition of a firm may be obtained which is not only realistic in that it corresponds to what is meant by a firm in the real world, but is tractable by two of the most powerful instruments of economic analysis developed by Marshall, the idea of the margin and that of substitution, together giving the idea of substitution at the margin.

20,413 citations

Journal ArticleDOI
Abstract: Summary The paper explores the usefulness of analysing firms from the resource side rather than from the product side. In analogy to entry barriers and growth-share matrices, the concepts of resource position barrier and resource-product matrices are suggested. These tools are then used to highlight the new strategic options which naturally emerge from the resource perspective.

17,255 citations

"Dynamic capabilities and strategic ..." refers background in this paper

  • ...Each section highlights the strategic performance (Penrose, 1959; Rumelt, 1984; Teece, 1984; Wernerfelt, 1984)....


  • ...See, for example, Teece (1992) and Link, plements. However, these insights do not flow uniquely from game theory and can be found in the organizational economics Teece and Finan (1996). 7 Accordingly, both approaches are dynamic, but in very literature (e....


  • ...The resource-based perspective is strongly at odds with this conceptualization. kets (Penrose, 1959; Williamson, 1975; Teece, 1980, 1982, 1986a, 1986b; Wernerfelt, 1984)....


  • ...…firm-specific capabilities, and developingand others appear to have followed a ‘resourc - based strategy’ of accumulating valuable tech- new ones is partially developed in Penrose (1959), Teece (1982), and Wernerfelt (1984).nology assets, often guarded by an aggressive intellectual property stance....


  • ...29 As we note in Teece t al. (1994), the conglomerate offers few if any efficiencies because there is little provided by 26 Needless to say, users need not be the current customers of the enterprise. Thus a capability can be the basis for the conglomerate form that shareholders cannot obtain for themselves simply by holding a diversified portfolio of stocks. diversification into new product markets. 27 Indeed, the essence of internal organization is that it is a 30 Owners’ equity may reflect, in part, certain historic capabilities. Recently, some scholars have begun to attempt to measdomain of unleveraged or low-powered incentives. By unleveraged we mean that rewards are determined at the group or ure organizational capability using financial statement data. See Baldwin and Clark (1991) and Lev and Sougiannis organization level, not primarily at the individual level, in an effort to encourage team behavior, not individual behavior....


Journal ArticleDOI
Abstract: (1987). The Economic Institutions of Capitalism. Journal of Economic Issues: Vol. 21, No. 1, pp. 528-530.

16,753 citations

Frequently Asked Questions (7)
Q1. What are the contributions in "Dynamic capabilities and strategic management" ?

The dynamic capabilities framework analyzes the sources and methods of wealth creation and capture by private enterprise firms operating in environments of rapid technological change this paper. 

Because of imperfect factor markets, or more Unit of analysis and analytic focus precisely the nontradability of ‘soft’ assets like values, culture, and organizational experience, Because in the capabilities and the resources framework business opportunities flow from adistinctive competences and capabilities generally cannot be acquired; they must be built. 

Szulanski also and structured, trial and error and learning-by-doing are necessary, whereas in mature environments where the underly-discusses the role of benchmarking in facilitating the transfer of best practice. 

The strategic conflict approach is likelycompanies tend to favor ‘strategic leaps’ while, in contrast, Japanese and German companies tend to be a little more permissive; acquisitions that raise rivals’ costs or enable firms to effectuateto favor incremental, but rapid, improvements. 

Porter (1990), for example, shows that differencesReplication in local product markets, local factor markets, and institutions play an important role in shapingTo understand imitation, one must first understand replication. 

Brittain and Freeman (1980) using population ecology methodologies argued that an organization is 62 Cantwell shows that the technological competence of firmsquick to expand when there is a significant overpersists over time, gradually evolving through firm-specific lap between its core capabilities and those needed learning. 

the notion that the understanding of processes, both in production and in management, is theLippman and Rumelt (1992) have argued that some sources of competitive advantage are so key to process improvement.