Dynamic capabilities: towards an organizing framework

Mohamud M and Sarpong D, Journal of Strategy and Management, 2016

Abstract

Purpose – The purpose of this paper is to stimulate, shape and extend current discourse on the relevance of dynamic capabilities on firm competitiveness

Design/methodology/approach –We delineate current debates on dynamic capabilities and synthesize them to develop some propositions and a heuristic framework to guide future research on dynamic capabilities as a strategic management construct.

Findings –The theoretical and methodological complexities involved in mapping the routines and processes’ underpinning dynamic capabilities has led to conceptual discrepancies, which in turn impede our understanding of the relevance and contribution of dynamic capabilities to competitiveness. Measuring dynamic capabilities remains the biggest barrier to progress in developing directions for theory and research in this area.

Practical implications- Stimulating and shaping the current discourse on the relevance of dynamic capabilities on competitiveness, our proposed integrated framework as a heuristic device can be to gauge the a firm’s dynamic capabilities vis à vis their competitors.

Originality/value – We propose a framework built around the inter-relationships of capabilities and hierarchies of capabilities to extend our understanding of how dynamic capabilities can be developed relative to a firm’s ability and embedded context.

Keywords – Dynamic capabilities, learning, hierarchies, rigidities

Paper type – Conceptual Paper

Introduction

Frequently referred to as the strategic (re) configuration of a firm's competencies generated from its resources in response to changing the business environment, the concept of dynamic capabilities have come to dominate contemporary management discourse (Ambrosini and Bowman, 2009; Teece, Pisano and Shuen, 1997; Berreto, 2010). While the existing literature contributes to our understanding of how firms develop dynamic capabilities, contradictory conceptualizations of what constitutes dynamic capabilities, coupled with subtle contradictions in definition and the measurement of the concept (Easterby-Smith and Prieto, 2009; Zahra, et al. 2006) means an explicit and definitive understanding of the concept and its influence on competitiveness is yet to emerge. Nevertheless, little effort has been offered in synthesizing the different conceptualizations to move research on dynamic capabilities to newer pastures. The literature remains sporadic and conceptually fragmented. This we argue has the potential to obfuscate the little we already know about the subject.

Our objective in this paper, therefore, is to provide a comprehensive review of the existing literature on dynamic capabilities. Our main agenda is to stimulate and shape the current discourse on the relevance of dynamic capabilities on competitiveness. This we believe would enable researchers to develop a holistic understanding of the how dynamic capabilities could be developed, relative to a firm’s ability and embedded context, and permit a careful analysis of its evolution in organizing. Our framework is built around the inter-relationships of capabilities and what we call the hierarchies of capabilities to extend our understanding of how firms can develop this capability. We go further in developing hypotheses and propose some future directions for theory and research in this area.

The dynamic capability concept

A grasp of the way ideas such as resources, competencies, and capabilities are used in strategic management research is imperative in understanding the convoluted concept of dynamic capabilities. Resources are all the possessions owned by the firm and may include the physical (such as factories, land, equipment), intellectual (patents, copyrights, logos etc.), and employees (Collis and Montgomery, 2008). In this regard, a capability can be conceptualised as the firm’s capacity to deploy its resources effectively (Drnevich and Kriauciunas, 2011). A competence, on the other hand, is the ability to do something successfully and/or efficiently (Drnevich and Kriauciunas, 2011). Capabilities and competencies are generally used synonymously in the strategic management literature. Core competencies, as defined by Teece, Pisano and Shuen (1997), are those competencies that define a business relative to their competitors; what makes them different from other firms. A range of assets, procedures and processes may enhance these core competencies.

While a re-recurrent theme of recent theory increasingly argue that the (re)configuration of a firm's competencies is what leads to dynamic capabilities (Ambrosini and Bowman, 2009; Lepak et al., 2007), the subject of dynamic capabilities remains popular yet divisive taking into consideration the plethora of definitions that has been put forward to extend our understanding. Di Stefano, Peteraf and Verona (2010), using co-citation analysis, for example, found both evidence of commonalities as well as polarizing differences when it comes to dynamic capabilities research. Others maintain that this should be expected from such a relatively new construct that is trying to frame complex phenomena (Helfat and Peteraf, 2009). We provide an overview of some of the definitions in Table1.0.

Table 1: Some definitions of dynamic capabilities

Author / Year / Definition
Teece, et al / 1997 / The firm’s ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments.
Helfat / 1997 / The subset of competences/capabilities which allows the firm to create new products and processes and respond to changing market circumstances
Eisenhardt and Martin / 2000 / (Dynamic capabilities) thus are the organisational and strategic routines by which firms achieve new resources configurations as markets emerge, collide, split, evolve and die.
Griffith and Harvey / 2001 / A global (dynamic capability) is the creation of difficult-to-imitate combinations of resources, including effective coordination of inter-organisational relationships, on a global basis that provide a firm competitive advantage.
Zollo and Winter / 2002 / A (dynamic capability) is a learned and stable pattern of collective activity through which the organisation systematically generates and modifies its operating routines in pursuit of improved effectiveness
Zahra and George / 2002 / (Dynamic capabilities) are essentially change-oriented capabilities that help firms redeploy and reconfigure their resource base to meet evolving customer demands and competitor strategies
Lee, Lee and Rho / 2002 / A source of sustainable advantage in Schumpeterian regimes of rapid change
Winter / 2003 / They are those operate to extend, modify and create ordinary (substantive) capabilities.
Macpherson, et al / 2004 / The ability of managers to create innovative responses to a changing business environment
Nielsen / 2006 / An extension of the RBV where the firm is conceived as a collection of resources e.g. technologies, skills, knowledge-based resources.
Zahra, et al / 2006 / The processes to reconfigure a firm’s resources and operational routines in the manner envisioned and deemed appropriate by its principle decision maker
Teece / 2007 / Difficult-to-replicate enterprise capabilities required to adopt to changing customer and technological opportunities
Wang and Ahmed / 2007 / A firm’s behavioural orientation constantly to integrate, reconfigure, renew and recreate its resources and capabilities, and upgrade and reconstruct its core capabilities in response
Helfat, et al / 2007 / The capacity of an organization to purposefully create, extend or modify its resource base
Ambrosini, et al / 2009 / There are three levels of dynamic capabilities related to a manager’s perceptions of environmental dynamism. At the first level we find incremental (dynamic capabilities)…, at the second level are renewing (dynamic capabilities)…, at the third level are regenerative (dynamic capabilities)

A dynamic capability differs because it refers to the organisational routines/processes instead of the resources themselves (Teece, et al 1997). Whereas resources are a static stock, dynamic capabilities are considered a flow that affects resources (Romme, et al., 2010). Teece et al’s (1997) seminal work coined dynamic capabilities as the firm’s ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments.

Scholars have attempted to bring to bear the essence of the construct by depicting its position to other capabilities. These hierarchical typologies aid in understanding the level of complexity intended by their curators. Winter (2003) divided capabilities into three different levels. First, he identified the ‘zero-level' capabilities referring to ordinary day-to-day functions of the firm. At this level, the firm has the capabilities to compete and achieve parity with competitors. The second level was referred to by Winter (2003) as ‘first-level’ capabilities, which modify, change and reconfigure ‘zero-level’ capabilities. Ambrosini, Bowman and Collier (2009) add that this level of capability augments the resource base to refresh, renew and adapt capabilities. At the third level, Winter (2003) adds the notion of ‘higher-level’ capabilities that change the way the firm changes its capabilities. Table 2.0 provides an overview of selected papers that have sought to develop typologies to extend our understanding on the complexity of capabilities in practice.

Table 2 hierarchical typologies of dynamic capabilities

Dynamic capabilities are Winter’s (2003) first-level capabilities since they create ordinary capabilities. This hierarchical element of dynamic capabilities is denoted in the majority of definitions explicitly, such as Helfat (1997), or implicitly, to the organisational level. The value of developing this hierarchical system is that it alludes to varying degrees of complexity. This complexity highlights the unsettled nature of the relatively new construct of dynamic capabilities and is apparent in the contrasting definitions offered in the literature (figure 2). There is disagreement as to what this concept is called; Teece et al (1997) described it as ‘an ability’; Eisendhardt and Martin (2000) refer to dynamic capabilities as ‘routines’; Wang and Ahmed (2007) regard them as ‘behavioural orientation’. These differences stem from the academics’ perception of the construct. For instance, Teece et al (1997) view the external environment as an essential in understanding the concept by referring to dynamic capabilities as those organizing capabilities that address the volatility in the market. In contrast, Wang et al (2007) in response to the fleeting external environment argue that the purpose of dynamic capabilities is to upgrade core-capabilities, whereas Zollo and Winter (2002) disregard the external environment altogether. Synthesising the three competing perspectives , Teece (2007) codified dynamic capabilities as ‘sensing’, ‘seizing’ and ‘reconfiguring’ organizational capabilities in dynamic environments.

Another example is the notion and conceptualization of change in the definitions. For example, Teece et al (1997) employ words such as ‘integrate, build and reconfigure’ whereas Winter (2003) uses the words ‘extend, modify and create’ and Zahra et al (2006) adopt only the word ‘reconfigure’. All of these words are used to describe a type of change but relate to a specific means and ends as in the case of Tsekouras et al (2010) when they examined the relationship between innovation and dynamic capabilities. Indeed, it is conceptual differences such as these that lead to contrasting definitions. Thus far, it can be understood that there are key similarities regarding dynamic capabilities and their relation to other capabilities. Therefore, it may be possible to deduce that: -

Proposition 1: Dynamic capabilities are the most complex form of capabilities of a firm.

However, deducing a clear definition of dynamic capabilities cannot be made without first pinning down the key conceptualizations. This literature review seeks to understand what the root causes of the differences are; fundamental to any construct is the understanding of its origin and purpose, which are the topics of the first two themes.

Sources of dynamic capabilities

The resource-based view was first explicitly stated by Barney (1991) and later developed by others such as Peteraf (1993) and Helfat and Peteraf (2003). The resource-based view essentially focuses on the physical possessions of the firm and how they can be leveraged to attain a sustainable competitive advantage. Barney (1991) specifies four conditions for firms to achieve sustainable competitive advantage, namely valuable, rare, inimitable and non-substitutable (VRIN). Definitions of dynamic capabilities have components of these conditions (Eisenhardt and Martin, 2000; Griffith and Harvey, 2001; Teece, 2007; Berreto, 2010). The resource-based view also led to the knowledge-based view described as the body or social context in which knowledge will be developed, sustained and protected (Grant, 1996). This construct has grown and has made numerous contributions to organisational learning (Lopez, 2005). However, both the resource-based view and knowledge-based view are static analyses of the resource portfolio; both being unable to adequately respond to an external environment that is changing exponentially (Priem and Butler, 2001; Arend and Levesque, 2010). Dynamic capabilities gain merit because the resource-based view is a static construct. Teece et al (1997) argue that their construct is designed to achieve congruence with the changing external environment. The key distinction between the resource-based view and dynamic capabilities is that the resource-based view is concerned with locating the source of profitability (Bowman and Ambrosini, 2003) in the firm where dynamic capabilities are built and cannot be bought (Makadok, 2001). There is a consensus that learning is a fundamental ingredient to dynamic capabilities (Cavusgil et al, 2007; Eisenhardt and Martin, 2000; Easterby-Smith and Prieto, 2008; Johansen, 2007). However, authors differ in the role learning plays within the construct. Teece et al (1997) define learning as the process by which repetition and experimentation enable tasks to be better performed. Zott (2003) identifies learning of resource deployment as a performance-relevant attribute of dynamic capabilities. They both, in other words, see learning as a component of the construct. Further, some authors identify learning as the catalyst that guides the evolution of dynamic capabilities (Winter, 2003; Eisenhardt & Martin, 2000).

The types of learning that take place have also been discussed in the literature. Teece, et al (1997) explain the difficulty in analysing tacit knowledge. It is not written down nor is it captured outside the individual and hence has been identified as problematic to dynamic capabilities since it limits the ability to codify and then systematically apply at the firm level (Usdiken, Kieser 2004). Teece (2007) adds that intangible assets are critical to the generation of new ideas and recommends incentive structures that enable their development. Zollo & Winter (2002) posit that the origin of dynamic capabilities is knowledge. Their argument is that through the enjoinment of experience and codification induces dynamic capabilities. Scholars have also discussed how learning is accomplished in order to underpin and develop dynamic capabilities. Teece et al (1997) assert that learning may be confined to trial and error. While Eisenhardt & Martin (2000) agree, they also add that learning comes from both failure and success. Davidsson (2003) explains when failure is corrosive – catalyst venture and failed ventures. Catalyst ventures fail because they were outsmarted by either followers or incumbents. The latter represents failed efforts due to low financial success and hence did not have any followers or incumbents.