Strategic Management Journal, Vol. 18:7, 509–533 (1997)
DYNAMIC CAPABILITIES AND STRATEGIC
MANAGEMENT
DAVID J. TEECE
1
*, GARY PISANO
2
and AMY SHUEN
3
1
Haas School of Business, University of California, Berkeley, California, U.S.A.
2
Graduate School of Business Administration, Harvard University, Boston, Massa-
chusetts, U.S.A.
3
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.
INTRODUCTION
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.
1
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-
1
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 0143–2095/97/070509–25$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 structure–conduct–performance
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).
2
This perspective
how. Over time, these assets may expand beyond the point
of profitable reinvestment in a firm’s traditional market.
2
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
MODELS OF STRATEGY
EMPHASIZING THE EXPLOITATION
advantages. Rents are created largely at the indus-
try or subsector level rather than at the firm level.
OF MARKET POWER
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
3
(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 forces—entry 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 firmincumbents—determine 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.
4
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.
5
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.
3
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).
4
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.
5
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-a
`
-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
6
(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.
8
Indeed, the entrepreneurial side of strategy—howCournot) or on the presence or absence of stra-
tegic asymmetries such as first-mover advantages. significant new rent streams are created and
protected—is largely ignored by the game-The analysis of strategic moves using game
theory can be thought of as ‘dynamic’ in the theoretic approach.
9
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
8
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.
7
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).
9
Important exceptions can be found in Brandenburger and
Nalebuff (1996) such as their emphasis on the role of com-
6
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).
7
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
10
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.
12
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.
13
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.
11
In what follows, we suggest that building a petence that is truly distinctive.’
14
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 identified—enhances 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
decades.
MODELS OF STRATEGY
EMPHASIZING EFFICIENCY
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
12
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
10
When closely matched in an aggregate sense, they may
nevertheless display asymmetries which game theorists can balance. In short, rents are Ricardian.
13
Teece (1982: 46) saw the firm as having ‘a variety of endanalyze.
11
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
14
Elsewhere Andrews (1987: 47) defined a distinctive com-
petence as what an organization can do particularly well.product market positions (Dierickx and Cool, 1989).