Paper title: DYNAMIC CAPABILITIES THEORY: PINNING DOWN A SHIFTING CONCEPT

Abbas Bleady, Qassim University, Abdel Hafiez Ali, Qassim University Siddig Balal Ibrahim, Sudan
University of Science and Technology (2018)

Citation. Bleady, A., Ali, A. H., & Ibrahim, S. B. (2018). Dynamic capabilities theory: pinning down a
shifting concept. Academy of Accounting and Financial Studies Journal, 22(2), 1-16. 1528-2635-22-2-197

Dynamic capabilities (DC) theory emerged as both an extension to and a reaction against the inability of
the resource-based view (RBV) to interpret the development and redevelopment of resources and
capabilities to address rapidly changing environments. DC may be considered as a source of competitive
advantage (Teece, Pisano & Shuen, 1997). DC theory goes beyond the idea that sustainable competitive
advantage is based on a firm’s acquisition of valuable, rare, inimitable and non-substitutable (VRIN)
resources. Dynamic capabilities are responsible for enabling organizations to integrate, marshal and
reconfigure their resources and capabilities to adapt to rapidly changing environments. Thus, DCs are
processes that enable an organization to reconfigure its strategy and resources to achieve sustainable
competitive advantages and superior performance in rapidly changing environments. Despite the wealth
of studies discussing the idea of DC, to advance the theory further requires a collective effort on the part
of researchers both to illustrate concepts related to the theory and how to link them with empirical
practices within organizations.

In this view, competitive advantage is: “when a firm is implementing a value creating strategy not
simultaneously being implemented by any current or potential competitors" (Barney, 1991, p. 102) and
sustainable competitive advantage is: “when a firm is implementing a value creating strategy not
simultaneously being implemented by any current or potential competitors and when these other firms
are unable to duplicate the benefits of this strategy” (Barney, 1991, p. 102).

Teece, Pisano & Shuen (1997) defined DCs as “the firm’s ability to integrate, build and reconfigure
internal and external competencies to address rapidly changing environments” (p. 516). DCs are thus
“the organizational and strategic routines by which firms achieve new resource configurations as
markets emerge, collide, split, evolve and die” (Eisenhardt & Martin, 2000, p. 1107). Teece (2007) made
a major contribution to DC theory by writing about the micro-foundations for each of the three
following dimensions: sensing (identification and assessment of an opportunity), seizing (mobilization of
resources to address an opportunity and to capture value) and transforming (continued renewal
“reconfiguring the business firm’s intangible and tangible assets”).

THE MOST INFLUENTIAL CONCEPTUAL DEFINITIONS AFFECTING PREVIOUS EMPIRICAL RESEARCH IN

DYNAMIC CAPABILITIES Authors Definition Teece, Pisano & Shuen (1997, p. 516) “The firm’s ability to
integrate, build and reconfigure internal and external competencies to address rapidly changing
environments”

Eisenhardt and Martin (2000, p. 1107) “The organizational and strategic routines by which firms achieve
new resource configurations as markets emerge, collide, split, evolve and die”
Title: Dynamic capabilities as (workable) management systems theory

DAVID J. TEECE (2018)

doi:10.1017/jmo.2017.75

The dynamic capabilities framework was created to help organize and prioritize the endless stream of
competing and conflicting information that cascades toward managers as they attempt to build
competitive advantage. The goal is not short-term efficiency, as in classic management, but rather the
maintenance of ‘evolutionary fitness’ over time (Teece, 2007). To accomplish this, the firm must create
an ability to respond rapidly and effectively not only to threats in the business environment but also to
opportunities (Teece, Pisano, & Shuen, 1997).

Capabilities determine what the firm is able to do and how effectively it can make changes.

Capabilities: A nested hierarchy

The core of the framework is the capability hierarchy, itself a system of nested elements and activities.
At the base of the capability hierarchy lie ordinary capabilities. Ordinary capabilities consist of the
processes that deploy people, facilities, and equipment to carry out the current business of the firm.
Strong ordinary capabilities allow a firm to achieve best-practice levels of efficiency, regardless of
whether the current output plan is likely to be suitable in the future. They lend themselves to being
measured and benchmarked, which also makes them easier to replicate. For this reason, they are an
unreliable basis for long-term advantage. Management’s approach toward ordinary capabilities can
have systemic effects. The relentless pursuit of efficiency in operational tasks can drive out the capacity
to change. It’s easiest to maintain peak efficiency when tasks remain fixed. High efficiency, without
accompanying measures to mitigate risk and an organizational culture that enables rapid improvisation,
can deprive a company of the resilience needed to change promptly when the need arises. The
vulnerability of just-in-time supply chains to a sudden shortage in the supply of even a minor part is a
case in point. When a lightning strike forced a New Mexico microchip factory offline for weeks in 2000,
Ericsson, which relied on the factory, lost an estimated US$ 400 million in revenue (Latour, 2001). By
contrast, Nokia’s supply chain team, which also depended on the factory, patched together a solution
that kept its production on target. The next level of the capability hierarchy consists of
‘microfoundations’ (Teece, 2007). These are lower-level dynamic capabilities such as processes for
forming external partnerships or for developing new products. They consist of (often idiosyncratic)
routines that are employed less often than the routines of ordinary capabilities. Microfoundations allow
the firm to integrate, reconfigure, add, or subtract resources, including ordinary capabilities (Eisenhardt
& Martin, 2000).

The higher-level dynamic capabilities are activities and assessments that channel other capabilities and
resources so as to maintain external fitness. They can be summarized as three clusters of entre
preneurial activities that take place concurrently throughout the organization: sensing, seizing and
transforming. They encompass organizational processes as well as unique managerial decisions (Augier
& Teece, 2009; Teece, 2012, 2016).

The activities for ‘sensing’ include environmental scanning, which brings disorganized information and
unstructured data from the external environment into the organizational system. Managers at various
levels must generate and test hypotheses about latent consumer demand, technological possibilities,
and other forces that affect the firm’s future. The system must allow relevant information to find its way
to where it will be properly assessed and handled. An effective intra-organizational network requires
decentralizing authority, creating a collaborative organizational culture, and propagating a shared vision.
The top management team can use the data from internal and external sources to continuously monitor
the firm’s environment, prioritize problems, and identify new opportunities.

‘Seizing’ capabilities determine how quickly the system can respond to opportunities and threats once
they have been identified and deemed important. The activities involved include investing to
commercialize new technologies and designing (or updating) and implementing business models for
various products and services. The business model for a line of business includes the activities to be
undertaken, the internal incentives to be used, the design of customer interactions, and more (Teece,
2017). It is essentially a vertical slice of the firm’s activities and has the same systemic need as the entire
firm for all its elements to be kept in alignment.

‘Transforming’ capabilities are responsible for keeping the elements of the organizational system aligned
both with each other and with the strategy. These capabilities are most critical when a new business
model involves a significant change to the organization’s design or conflicts with an existing business
model. This is often the case, for example, when an established firm adopts a digital business model that
risks cannibalizing existing sales. Minor transformations must also be made periodically to keep the
organization aligned with its environment. Fostering an organizational culture that favors flexibility and
experimentation, while challenging to bring about, can provide a firm foundation for quicker and easier
transformations and, therefore, for future advantage.

The dynamic capabilities framework as a system

The two other main components of the dynamic capabilities framework are resources and strategies.
Resources include employees, equipment, buildings, and intangible assets. Many resources are generic,
meaning that they can be replaced if needed via a market transaction. The more important type of
resource satisfies the criteria defined by Barney (1991): valuable, rare, imperfectly imitable, and non-
substitutable (VRIN). VRIN resources can support durable competitive advantage. They are most often
intangible (e.g., a valuable brand name) in part because most intangible assets have poorly defined
property rights, which makes them virtually non-tradable and therefore difficult to acquire (Teece, 2015

The concept of VRIN resources has been used to argue that the ownership and management of strategic
resources are the key to competitive advantage. This resource-based view of strategic man agement
(e.g., Wernerfelt, 1984), a forerunner to dynamic capabilities, had a broad influence in strategic
management but always suffered from providing only a partial-system approach to building competitive
advantage (Priem & Butler, 2001). While resources can include (at least some) capabilities, the resources
approach has no specificity about the capabilities required to excel other than the VRIN criteria. Another
weakness of the resource-based view is its lack of attention to how a firm’s key resources can be
renewed when circumstances require it. The final major component of the dynamic capabilities
framework is strategy. Whereas capabilities are primarily about what to produce and how and where to
make, market, and distribute it, strategy helps to determine the timing of market entry and how to keep
competitors at bay. The goal of strategy is to outmaneuver competitors by taking advantage of their
mistakes and leveraging in-house strengths. It is the purview of strategy theories such as Five Forces
(Porter, 1980) and isolating mechanisms (Rumelt, 1987). A strategy can be defined as ‘a coherent set of
analyses, concepts, policies, arguments, and actions that respond to a high-stakes challenge’ (Rumelt,
2011: 6). According to Rumelt (2011), a good strategy has (1) prescient diagnoses that identify obstacles,
(2) a guiding policy that specifies an approach to overcoming them, and (3) a coherent plan of action
that implements the policy. A good strategy will often not appear fully formed, but instead emerge over
a period of trial and error (provided the business environment is sufficiently forgiving to allow
experimentation). While the actions dictated by the strategy will be visible to rivals and freely imitable,
the underlying diagnosis and policy can be kept secret. Rivals may not believe it is in their interest to
copy a strategy until it is too late.

Capabilities, resources, and strategy constitute a system of interdependent elements that collectively
determine the competitiveness of a firm. Competitive advantage is enhanced when the firm-level
elements are strong and in alignment with each other and the external situation. This insight also
follows from an application of systems theory known as the congruence model (Nadler & Tushman,
1980, 1997). However, key elements of that model were underdeveloped. Internally, the model’s
system of resources, tasks, and goals inside the firm lacked any reference to a business model, which
must also align with the organization and with its strategy (Teece, 2014). A business model in which cost
and revenue are inconsistent, or which requires capabilities the firm lacks, will not be profitable or
sustainable. To capture this interdependence, the dynamic capabilities framework adopts the language
of cospecialization rather than congruence (Teece, 1986, 2010). Cospecialization describes the extra
value generated by a set of two or more assets when they’re used jointly rather than in isolation.
Congruence is far more important for cospecialized assets than for separable (modular) assets. Many
operational (ordinary) activities have this separable quality and can be outsourced. The three elements
of the capabilities framework– resources, capabilities, and strategies– are each vital for competitive
advantage. Without strong dynamic capabilities, VRIN resources, and good strategy, any advantage is
likely to be unsustainable. The dynamic capabilities that are core to enhancing processes and exploiting
possibilities must be guided and informed by strategy– and vice versa. Firms with weaker capabilities
require different strategies than firms with stronger capabilities. And the effectiveness of dynamic
capabilities will be compromised by poor strategy. To summarize, the strength of a firm’s dynamic
capabilities determines the speed and degree to which the firm’s idiosyncratic resources can be aligned
and re-aligned consistent with the firm’s strategy. Because of their strong interdependencies, the three
elements of the framework can be hard to tease out for research purposes. Although conceptually
distinct, they overlap in practice, as shown schematically in Figure 1. For example, resources include
‘managerial services,’ which would logically also be part of a firm’s dynamic capabilities. Similarly, the
sensing activities of dynamic capabilities can be identical to the ‘problem diagnosis’ step of the strategy
making process.
Title: Dynamic Capabilities: A Review of Past Research and an Agenda for the Future

Ilídio Barreto (2010)

DOI: 10.1177/0149206309350776

Teece et al. (1997: 516) defined dynamic capabilities as “the firm’s ability to integrate, build, and
reconfigure internal and external competences to address rapidly changing environments.” Their
approach was built around several main elements that highlight its major theoretical underpinnings
(nature, role, context, creation and development, outcome, and heterogeneity). First, they categorized
the nature of the concept as being an “ability” (or “capacity”), stressing the essential role of strategic
management. So they extended RBV by suggesting a special kind of capability. Second, they specified
the desired end (i.e., the role) of this special capability as being to integrate (or coordinate), build, and
reconfigure internal and external competences. Herein, they assumed an evolutionary economics
perspective (Nelson & Winter, 1982) by enunciating the role of routines, path dependencies, and
organizational learning. Third, they focused on a particular type of external context, namely, rapidly
changing environments. This was a natural consequence of their view of dynamic capabilities as an
extension of the RBV toward regimes of rapid change, for which they undertook a more entrepreneurial
perspective (Schumpeter, 1934). Fourth, they assumed that dynamic capabilities are typically built
rather than bought and that their creation and their evolution are embedded in organizational processes
that are shaped by firms’ asset positions and the evolutionary paths they have adopted in the past. Such
an assumption is consistent with the evolutionary economics perspective. Fifth, they emphasized that,
similar to resources and capabilities considered within RBV, dynamic capabilities are heterogeneous
across firms because they rest on firm specific paths, unique asset positions, and distinctive processes.
Finally, their approach explicitly stated sustained competitive advantage (or success vs. failure, or value
creation) as a direct outcome of dynamic capabilities. Again, this was consistent with the aim of supple
menting RBV in a particular type of context while still retaining its purpose, that is, to explain how some
firms and not others achieve and sustain a competitive advantage.

Teece (2007): Dynamic capabilities can be disaggregated into the capacity (a) to sense and shape
opportunities and threats, (b) to seize opportunities, and (c) to maintain competitiveness through
enhancing, combining, protecting, and, when necessary, reconfiguring the business enterprise’s
intangible and tangible assets

Eisenhardt & Martin (2000): DCs are specific and identified processes that have commonalities across
firms, whereas they are idiosyncratic in their details; there are different types of DCs depending on
market dynamism; DCs are necessary, but not sufficient conditions for competitive advantage

King & Tucci (2002): Experience in previous markets increased the probability that a firm would enter a
new market

Kor & Mahoney (2005): Firms with a history of increased resource deployments in marketing will
achieve superior economic firm-level performance than firms that lack such deployments
Lampel & Shamsie (2003): Two industry capabilities—mobilizing and transforming capabilities—play a
crucial role in assembling and transforming resource bundles into feature films

Lavie (2006): Substitution, evolution, and transformation are three mechanisms of capability
reconfiguration

Marcus & Anderson (2006): A general dynamic capability affects firms’ competence in supply chain
management, but not the competence in environmental management

Song, Droge, Hanvanich, & Calantone (2005): The effect of the interaction between marketing and
technological capabilities on performance is significant only in a highly turbulent environment

Slater, Olson, & Hult (2006): The strategy formation capability is a DC; the firms’ strategic orientation
moderates the relationship between strategy formation capability and performance

Zúñiga-Vicente & Vicente-Lorente (2006): Strategic moves under environmental shifts conditions have a
positive effect on organizational survival

Teece, Pisano, & Shuen (1997): The DCs framework is offered as a new explanation for competitive
advantage, namely, to address rapidly changing environments; DCs rest on processes, positions, and
paths; DCs are idiosyncratic

In consequence, drawing on past research on dynamic capabilities, I suggest the follow ing definition of
dynamic capabilities that accommodates old and new suggestions within the field and also attempts to
overcome some of their limitations: A dynamic capability is the firm’s potential to systematically solve
problems, formed by its propensity to sense opportunities and threats, to make timely and market-
oriented decisions, and to change its resource base.

So dynamic capability is a composite formed from four dimensions that were gradually illuminated by
past research. The propensity to change the resource base is in line with both early and more recent
proposals (e.g., Eisenhardt & Martin, 2000; Helfat et al., 2007; Teece et al., 1997) and includes firm’s
propensity to create, extend, and reconfigure the resource base. The propensity to sense opportunities
and threats is consistent with previous suggestions by Teece (2007) and the argument that a dynamic
capability should incorporate a “capability monitoring” function that continuously scans the capabilities
landscape and the environmental changes (Schreyögg & Kliesch-Eberl, 2007) and also with the findings
that the managerial framing of opportunities and threats is one key element of dynamic capabili ties
(Gilbert, 2006). The propensity to make timely decisions is also consistent with the early spirit of
dynamic capa bilities, reflected in the importance assigned by Teece et al. (1997: 521, italics added) to
the ability “to quickly accomplish reconfiguration and transformation ahead of competitors.” On the
other hand, the propensity to make market-oriented decisions also seems crucial. As argued by Adner
and Helfat (2003), decision making is relevant for dynamic capabilities not only in terms of the timing of
managerial decisions but also in what concerns the content of such decisions. That is, the direction of
major decisions matters as much as their timing, and one crucial element of such directional tendency is
the extent to which a given firm systematically pays attention to ways that provide superior value to
their customers (Priem, 2007).

DYNAMIC CAPABILITIES VIEW: FOUNDATIONS AND RESEARCH AGENDA

Erin Cavusgil, Steven H. Seggie, and Mehmet Berk Talay (2014)

DOI 10.2753/MTP1069-6679150205

Many examples of DC can be conceived. These include new product development, alliance formation,
strategic decision making, and knowledge brokering (Eisenhardt and Martin 2000). Long-term
competitive advantage results from using DCs sooner, and in an improved fashion, than the competition
to create resource configurations that have that advantage.

It is argued that DCs are organizational and strategic routines (also called processes) by which new
resource configurations are created in response to market changes. These routines are focused on
integrating, reconfiguring, gaining, or releasing resources to match or even create market change
(Eisenhardt and Martin 2000).

Overview of the Dynamic capabilities

Conceptualization: Specific organizational processes by which managers alter their resource base

Resources/Capabilities: Commonalities with some idiosyncratic details

Environment: Moderately dynamic versus high-velocity market

Competitive Advantage: From valuable, somewhat rare, substitutable DCs has superior value

Lies in resource configurations built from DCs

The DC framework introduces dynamic elements such as learning. Learning, according to Teece, Pisano,
and Shuen, is a “process by which repetition and experimentation enable tasks to be performed better
and quicker” (1997, p. 520). The ability to reconfigure the firm’s assets and to accomplish internal and
external transformation is also highlighted. The DC framework argues that such organizational and
managerial processes are central to achieving competitive advantage. Indeed, competences and
capabilities rest on these processes or routines.

DC framework acknowledges the critical importance of firm assets to competitive advantage.

Teece,Pisano, and Shuen (1997) discuss technological, comple-mentary, financial, reputational,
structural, institutional,and market assets. The knowledge assets are difficult totrade.

Teece, Pisano, and Shuen (1997) also emphasize the importance of replication, or transfer of
competences from one economic setting to another, to be fundamental to competi-tive advantage. The
industry examples provided later in this paper illustrate the implementation of best [Link] is
important to note that the DC view emphasizesprocesses—integrating, reconfiguring, learning, and so
on. These processes or routines are used to build resource con-figurations in dynamic markets. Firms
that can accomplish this “sooner, more astutely, or more fortuitously than the competition” will have an
advantage (Eisenhardt and Martin2000, p. 1117).

The DC extension of the RBV essentially provides a po-tent explanation of how resources can create
competitive advantage by positioning DCs as a necessary, but not a sufficient, component for achieving
competitive advantage. In high-velocity environments, both are essential to building lasting competitive
advantage. Therefore, it is argued that DCs can be used to develop resource configurations that lead to
long-term competitive advantage. The strength of this relationship is contingent upon managers’ ability
to build renewable capabilities such as superior product design or business partnering.

DCs are embedded in specific strategic and organizational processes or routines designed to manipulate
resources into value-creating strategies. Well-known learning mechanisms guide the evolution of DC and
underlie path dependence. Not all firms are equally capable of developing resource configurations from
DCs, but those that can outperform the competition in achieving this will gain long-term competitive
advantage.

Strategic processes, such as product development and strategic decision making, enable firms operating
in dynamic markets to manipulate resources into new value-creating strategies. What is critical, then, is
the firm’s ability to integrate, build, and reconfigure internal and external competences to address
rapidly changing environments. This relationship is especially valid for high-velocity, dynamic
environments. Furthermore, learning and constant refinement of business processes play an important
role in the ongoing replenishment or renewal of capabilities most critical to firm success
In an in-depth study of automotive and mainframe computer industries, Iansiti and Clark (1994) explore
the impact of integration on DCs. They aim to prove that the capacity to integrate diverse knowledge
bases through problem solving makes up the foundation of knowledge building in a company. In their
view, knowledge and knowledge-creating activities are the foundation of capability. The authors argue
that in order to understand the roots of DCs in a company, one has to understand the relationship
between knowledge and capability. The latter connection is through problem solving in concept
development and implementation. Activities in the concept development stage contribute to capability
building (e.g., identifying possible courses of action, conceptualizing desired outcomes, and deciding
what specific types of knowledge are needed). During the implementation stage, participants focus on
creating the assets and the routines that make up the new capability. Thus, problem-solving activities
are essential to developing new capabilities. The DC framework has also been used to explain
competitive advantage in global markets. In a study of plant location decisions by two companies,
Seagate Technology and Applied Materials, Bartmess and Cerny (1993) rely on the concept of “critical
capabilities” to achieve competitive advantage in dynamic business environments.

Understanding dynamic capabilities: progress along a developmental path

Constance [Link] Dartmouth College,USA Margaret [Link] Dartmouth College,USA (2009)

DOI:10.1177/1476127008100133

Teece et al. (1997: 515) state that dynamic capabilities operate on ‘organizational skills, resources, and
functional competences’. Eisenhardt and Martin (2000) state that dynamic capabilities alter a firm’s
resource base, which includes its physical, human and organizational assets. For Zollo and Winter (2002),
dynamic capabilities act on ordinary (meaning operational) capabilities. These three definitions have
been the most influential (Di Stefano et al., 2009)

The word ‘capacity’ in our definition derives from Teece et al. (1997). It indicates only some minimal
ability to perform a task, regardless of whether it is done well or poorly (Helfat et al., 2007).

The word ‘capacity’ in our definition does not imply use. It is true, however, that capabilities (including
dynamic ones) embody past learning and therefore may depreciate if unused for long periods of time
(Helfat et al., 2007; Nelson and Winter, 1982).

Empirical research on alliances, for example, suggests that firms with greater prior experience in
undertaking alliances have better outcomes (see, for example, Helfat et al., 2007; Kale et al., 2002; Zollo
et al., 2002).
Dynamic capabilities rest on firm processes that can alter current positions, leading to an effect on firm
performance and competitive advantage, as well as to new positions and paths.

Dynamic capabilities of opportunity identification (‘sensing’) and investment in these opportunities

(‘seizing’) lead to new positions and paths, which then affects firm performance in terms of growth,
profits and competitive advantage. Subsequent to investment, dynamic capabilities for recombination
and reconfiguration can alter the accumulated asset base of the organization further, leading to an
additional effect on firm performance and competitive advantage, and to new positions and paths.

Eisenhardt and Martin (2000) describe dynamic capabilities as processes that firms can use to obtain,
integrate, reconfigure and release resources, leading to new resources and resource configurations (or
new positions, in Teece’s terms). Dynamic capabilities have a direct effect on firm performance and com
petitive advantage, as well as an indirect effect through resource reconfiguration.

Helfat et al. (2007) propose two conceptual measures of performance for dynamic capabilities. The first,
technical fitness, denotes ‘how effectively a capability performs its intended function when normalized
(divided) by its cost’ (Helfat et al., 2007: 7). This metric has several advantages. First, it provides a sliding
scale of measurement; the dynamic capabilities of some firms may be less technically fit than others.

Second, technical fitness takes into account the cost of the capability

Third, technical fitness enables us to separate the performance of a task from firm performance. In
order to measure firm performance, we introduce a second metric, evolutionary fitness, which refers to
‘how well a dynamic capability enables an organization to make a living by creating, extending, or mod
ifying its resource base’ (Helfat et al., 2007: 7). These two measures remove any possibility of a
tautological link between possession of a dynamic capability and firm performance or competitive advan
tage. A firm might not use a dynamic capability that it possesses, the dynamic capability may have poor
technical fitness, and even with high technical fitness, a dynamic capability still may not lead to high firm
performance in terms of evolutionary fitness. At this early stage, we are agnostic regarding empirical
met rics that researchers might use to implement these performance yardsticks.

As Helfat et al. (2007) note, topics such as technological innovation, mergers and acquisitions, strategic
alliances, top management deci sion-making, firm survival and growth, and more relate to dynamic
capabilities.

dynamic capabilities are concerned with strategic issues related to firm performance. We need stra tegic
approaches to understanding strategic change, of which dynamic capabili ties are one.
What is unique about the dynamic capabilities concept is that it also addresses that Holy Grail of
strategic questions: how to sustain a capabilities based advantage in the context of environmental
change.

Dynamic capabilities and entrepreneurial management in large organizations: Toward a theory of the
(entrepreneurial) firm

David J. Teece (2017)

[Link]

The dynamic capabilities framework sees senior managers as the core actors in an organization,
responsible for, among other things, recognizing the need for and bringing about change in business
environments where there is deep uncertainty (Augier & Teece, 2009).

An organizational capability is a resource that can be harnessed to produce a desirable outcome. Besides
being inherent in individuals, capabilities arise from learning, from combinations of organizational
assets, and from acquisitions. A capability can potentially be turned toward any of a broad range of uses,
not just (sometimes, not even) what the organization is currently producing. Examples include a
capability to rapidly introduce new products on a national or global scale in consumer goods industries
and a capability to effectively navigate the product approval process in heavily regulated industries such
as pharmaceuticals and autos. As mentioned above, there are two important classes of capability:
ordinary and dynamic. Ordinary capabilities allow the performance of the activities needed to meet
current objectives. They require only the type of efficiency-oriented management that has dominated
management education (and economic theorizing) for more than a century. Dynamic capabilities involve
higher-level activities that can enable an enterprise to upgrade its ordinary capabilities and to direct its
ordinary activities toward high-payoff endeavors. This requires developing and coordinating, or
“orchestrating,” the firm's resources to address and even shape changes in the business environment.
Strong dynamic capabilities can allow an enterprise to generate superior profits by developing and
producing differentiated products and services that address new markets, or existing markets in new
ways. The strength of a firm's dynamic capabilities determines the speed and degree to which the firm's
resources can be aligned and realigned. To achieve this, organizations must be able to con tinuously
sense and seize, and to periodically transform. To summarize, ordinary capabilities are about being
efficient; dynamic capabilities are about learning and improving and about being innovative and
effective or, in a word, entrepreneurial.

5.1. Ordinary capabilities

Ordinary capabilities permit some degree of sufficiency (and possibly excellence) in the performance of
a well-delineated task. They are embedded in some combination of (1) skilled personnel, including,
under certain circumstances, independent contractors; (2) facilities and equipment; (3) processes and
routines, including any supporting technical manuals; and (4) the administrative coordination needed to
get the job done. Ordinary capabilities can be measured against the requirements of specific tasks, such
as labor productivity, inventory turns, and time to completion, and can thus be benchmarked internally
or externally to industry best practices. Much of the knowledge behind ordinary capabilities can be
bought through consultants or through investment in training (Bloom et al., 2013). In business
environments subject to open competition, good and even “best” practices diffuse rather quickly among
at least some firms, thereby sooner or later nullifying best practices as a basis for unique competitive
differentiation.

Once this organizational best practice (for large firms) became widely adopted, the econometric results
show that the higher profits associated with its early adoption in the U.S. petroleum industry dissipated.
In developing countries, especially those with protected markets, mastering world-class practices may
have a more durable relationship to profitability. The presence of strong ordinary capabilities in a firm
says nothing about whether the current production schedule is the right (or even a profitable) path to
follow in the future should conditions change. In fact, best practices can become a trap. The single-
minded pursuit of efficiency can drive out the will to effectuate change when it is most needed because
efficiency is easiest to achieve if the tasks the organization is to perform remain fixed. Demands by a
firm's shareholders to maintain high productivity in the short term can distract top management from
recognizing when strategic change is needed. Strong dynamic capabilities can allow the organization to
modify or reinvent its processes in the pursuit not just of efficiency and cost-control, but also of greater
differentiation and competitive effectiveness.

5.2. Dynamic capabilities

Whereas ordinary capabilities are about doing things right, dynamic capabilities are about doing the
right things, at the right time. This, in turn, requires a prescient assessment of the business environment
and technological opportunities, complex managerial orchestration, and the building of a change-
oriented organizational culture.

Strong dynamic capabilities help enable an enterprise to profitably build and renew resources, assets,
and ordinary capabilities that lie both within and beyond its boundaries, reconfiguring them as needed
to innovate and respond to (or bring about) changes in the market. They are vital for firms facing not
just textbook market competition but dynamic competition, in which market disruption occurs regularly
and without respect to traditional industry boundaries (Sidak and Teece, 2009).

Successfully building strong dynamic capabilities allows firms to challenge competitors that are
enamored with the resources they currently possess, that ignore (or are ignorant of) changing customer
needs, that cherish the status quo, that fail to empower internal entrepreneurs and change agents, and
that prioritize efficiency over innovation. Innovation, of course, comes in many varieties. In general,
innovation refers to creative ideas related to the generation and delivery of products or services. They
may be new to the world or just new in a given context. An important distinction is between ideas that
extend existing activities in some way (improved process, upgraded product, new business model) and
those that are completely new (creating a new market, satisfying a previously unrecognized demand,
developing and commercializing a new technology).
This bifurcation corresponds roughly to what Baumol (2002) called routinized and independent
innovation. He saw the routinization of innovation as the response by large firms to the pressures of
free-market competition. Independent innovation is, in Baumol's view, the purview of the entrepreneur,
who is required to shepherd a revolutionary idea from its beginnings to a viable business offering.
Baumol did not, however, analyze the possibility of independent innovation conducted within large
firms. As should be evident from the discussion so far, the dynamic capabilities framework recognizes
not only the entre preneurial tasks involved in maintaining a competitive pace of so-called routinized
innovation but also the need to pursue independent innovation at the same time. This is by no means a
simple requirement. How well a firm fosters both types of innovation simultaneously is a function of the
strength of its dynamic capabilities.

Beyond innovation, the dynamic capabilities framework envisions a more general ability to recognize
threats as well as opportunities, to identify external changes that affect the alignment of the
organization with its business environment, and to prevent the onset of organizational rigidity or inertia.
They can usefully be broken down into three primary clusters: (1) the identification, development,
codevelopment, and assessment of technological opportunities in relationship to cus tomer needs
(sensing); (2) the mobilization of resources to address needs and opportunities and to capture value
from doing so (seizing); and (3) continued renewal (transforming). These capabilities must be exercised
on an ongoing basis rather than episodically if the firm is to sustain itself as customers, competitors, and
technologies change (Teece, 2007)

Dynamic capabilities reside, in part, with individual managers and the top management team (Adner and
Helfat, 2003). At critical junctures for the organization, the ability of a CEO and the top management
team to have insight into key developments and trends, delineate a response, and then reallocate
resources to lead the firm in its path forward, is likely to be the most visible feature of the firm's
dynamic capabilities. The other pillar on which dynamic capabilities rest is that of the organization's
values, culture, and collective ability to quickly implement a new business model or other changes. In
large organizations, these are partly the result of current management efforts but are also, to a large
extent, the legacy of the past and deeply embedded in the organization as a whole rather than in
particular individuals. Strategic change can only be implemented as fast as the capabilities of the
organization will allow. The dependence of dynamic capabilities on the knowledge of individual
managers and in idiosyncratic organizational routines (signature routines) that have developed over
time makes them hard for rivals to imitate (Gratton and Ghoshal, 2005). This is all the more true as the
firm itself may not entirely understand the complex cause-effect relationships that drive its performance
(Lippman and Rumelt, 1982).
Table: Differences Between Ordinary and Dynamic Capabilities

Source: Adapted from Teece (2014).

Dimension Ordinary Capabilities Dynamic Capabilities

Purpose Technical efficiency in Congruence with customer needs and with
business functions technological and business opportunities
Tripartite Operate, administrate, Sense, seize, and transform
Schema and govern
Key Routines Best practices Signature (upgraded) processes
Managerial Cost control Entrepreneurial asset orchestration, leadership,
Emphasis and learning
Priority Doing things right Doing the right things
Imitability Relatively imitable Inimitable
Result Technical fitness (static Evolutionary fitness (ongoing learning,
efficiency) capability enhancement, and alignment)

I will now characterize in greater detail the critical tasks to be performed by managers if an organization
is to have strong dynamic capabilities. Sensing, seizing, and transforming will be discussed here
sequentially, but in reality they overlap and loop, and in large firms they may be staged differently in
different divisions. Of the activities involved in dynamic capabilities, sensing activities are the most
immediately recognizable as entrepreneurial. Sensing in dynamic capabilities is very similar to the
concept of “opportunity recognition” by individuals that has been developed in the entrepreneurship
literature (e.g., Baron and Ensley, 2006). For a business enterprise, sensing involves the identification of
opportunities both within and beyond prevailing technological paradigms as well as the
conceptualization of new resource combinations and business models for exploiting them. In some
cases, as stressed by Kirzner (1973), the firm may have differential access to existing information relative
to rivals. More often, though, it is a matter of the firm's managers and experts doggedly scanning,
interpreting, and learning across the same technologies and markets that are visible to rival firms in an
effort to discern the possibility of a new or better competitive position (Nelson and Winter, 1982). In
large organizations, the discovery process can also be supported by established routines, such as con
tinuous research and development activity, external scanning for new technologies, and co-
development activities with alliance partners.

When opportunities are first glimpsed, entrepreneurial managers must decide which technologies to
pursue and which market segments to target while continuing to interpret ongoing developments. They
must develop forecasts about how technologies will evolve and how—and how quickly—competitors,
suppliers, and customers will respond. Competitors may or may not see the opportunity, and even if
they do, they might calibrate it differently. The activities involved in seizing an opportunity require both
entrepreneurship and leadership on the part of managers. Devising a business model that will allow the
firm to capture a share of the value it creates for customers is a core entrepreneurial skill. Convincing
the organization and its partner firms of the rightness of this new path necessitates leadership.

A key role of entrepreneurial managers is to permit experimentation and search, then support promising
paths and close down foolish ones. It is as vital to have leadership that knows which ideas should be
rejected as to have CEOs who know when it is worth taking the risk to mobilize resources to launch new
products or processes. They must also have good instincts and analytics to go down new paths and
create entirely new markets while knowing how to keep the board of directors “onside” for such
journeys.

The seizing of new business opportunities by large organizations will often need to resemble the “lean
startup” model now popular in Silicon Valley, where new firms quickly test, then update or replace ideas
and business models that do not work (Ries, 2011). This process is greatly facilitated by the rapid
feedback afforded by social media and the availability of tools for the analysis of unstructured data. Such
agility is harder, but not impossible, to achieve in large organizations.10

Transformation of the firm in order to exploit new opportunities is the third group of capabilities
required of entrepreneurial managers. In periods of business and technological turbulence, firms can
gain considerable competitive advantage if top management is able to rapidly propagate a strategic
vision at all levels of an organization that is sufficiently flexible to execute the new strategy effectively.
Beyond the implementation of strategy, top management needs to periodically consider (and
reconsider) the “fit” of the organization with the opportunities it plans to exploit. Regular change is also
required to soften the rigidities that develop over time from asset accumulation, standard operating
procedures, and insider misappropriation of rent streams. In large organizations, renewal of the firm's
structures and processes must be a semi-continuous process. To wait until change becomes unavoidable
is to court business disaster. Successfully managing transformations requires good leadership skills
because tensions inevitably arise during the process of change. Commitment among the workforce to
existing processes, assets, and problem definitions makes change hard to accept, especially in a firm that
is currently performing satisfactorily. The best entrepreneurial leaders are able to overcome resistance
without undermining workforce morale and to obtain support among key constituencies both inside the
firm and out.

Conclusion:

The dynamic capabilities approach provides a contrasting perspective to existing economic ideas about
firms. Diversi fication is not just a matter of increasing market power or managerial self-aggrandizement;
it is, ideally, the product of a (boundedly rational) strategic analysis that balances (present and potential)
capabilities and (perceived and calibrated) opportunities. Entrepreneurs exist not just in start-ups, but
also in large organizations. Loading firms with debt in complex buy-outs does not just restrain managers
from squandering resources, it may restrain and distract them from pursuing worthwhile investments.
An understanding of dynamic capabilities in general, and the role of entrepreneurial managers in
particular, can con tribute to a firmer foundation for economic models of production and innovation.
The dynamic capabilities framework could also be applied on a macro scale. For policy makers, a deeper
understanding of the origins and evolution of organizational capabilities will help to predict likely
business responses to policy changes. The framework can also help illuminate national economic
development, such as the successes of the Asian “tigers” (and the lackluster outcomes in many less
developed countries).

the dynamic capabilities framework stresses the importance of enterprise-level entrepreneurship,

innovation, learning, and good strategy.

When Nelson and Pack (1999, p. 434) noted that “if … one marshals [inputs] but does not innovate and
learn, development does not follow,” they implicitly endorsed the importance of dynamic capabilities
for national economic development.

Dynamic capabilities and institutional theories for Industry 4.0 and digital supply chain

Shivam Gupta et al. (2020)

[Link]

Conclusion:

the study provides an empirical evidence of how does dynamic capabilities are related to the intention
of adopting Industry 4.0.

Tittle: A dynamic capabilities-based entrepreneurial theory of the multinational enterprise

David J Teece (2014)

doi:10.1057/jibs.2013.54

A capability is the capacity to utilize resources to perform a task or an activity, against the opposition of
circumstance. Essentially, capabilities flow from the astute bundling or orchestration of resources. The
organizational and managerial “technology” of the firm and its ability to transfer technology (embedded
in routines and resources) across distances and borders are very much implicated in the firm’s national
and global capabilities. The (dynamic) capabilities framework is an entrepreneurial approach that
emphasizes the importance of (signature) business processes, both inside the firm and also in linking the
firm to external partners. It also recognizes the importance of critical resources and good strategy. It is
not animated primarily by transaction cost or contractual concerns. Rather, it builds on the resource-
based approach. It is focused more on opportunity than on opportunism, and on the efficient and
effective transfer of technology between and among the various organizational units of the firm.

Wernerfelt (1984) and Barney (1991) began the task of filling this gap, building on Penrose’s view that
making better use of resources was important to enterprise growth and development. Penrose herself
viewed entrepreneurship as one of the resources of the firm, stating, “[W]e include ‘entrepreneurs’
among the resources of the firm and the range of ideas of entrepreneurs among the services rendered”
(Penrose, 1959: 86). In this regard, she was perhaps describing a dynamic capability, at least in the sense
referred to here.

Teece et al. (1997) identified the core building blocks of dynamic capabilities under the tripartite rubrics
of processes, positions, and paths. This was supplemented in Teece (2007) by a more applied focus
organized around sensing, seizing, and transforming.

In what follows, I relate the two taxonomies, and then show how strategy fits in. Important clarify ing
distinctions between ordinary and dynamic capabilities are made. Application to the MNE follows.

Processes

Teece et al. (1997) identified three classes of processes/ managerial functions that are relevant to
dynamic capabilities under the following rubrics: coordination/integration; guided learning; and
reconfiguration/transformation. Organizational processes embed the strategy and business model of the
business into the day-to-day routines of employees. The effectiveness of organizational routines is
buttressed by strong and consistent organizational values. Dynamic capabilities thus reside, at least in
part, in the managerial, entrepreneurial, and leadership skills of the firm’s top management, and in
management’s ability to design, develop, implement, and modify these routines. Either way, firms with
superior dynamic capabilities have learned to adjust to changing environments, and also to shape the
(business) environment.

Positions (resources)

As noted earlier, the asset positioning of a company matters. I am referring not just to balance sheet
assets (plant and equipment and the like) but also to human capital and knowledge assets. Teece et al.
(1997) identified technological assets, complementary assets (technological or otherwise), financial
assets, reputational assets, market structure assets, and institutional assets. It is obvious that a road
construction company will need access to heavy equipment (e.g., bulldozers and dump trucks), and a
home-building company will need access to architectural services, as well as construction tools and
skilled and unskilled labor. A bank will need financial assets, and the talent to build and run systems for
loan origination and underwriting, etc. The firm’s position, as defined by its resources, is enhanced if the
resources meet Barney’s VRIN criteria. As I have noted elsewhere (Teece, 2000), the class of assets most
likely to satisfy VRIN criteria is intellectual capital, particularly technology and know-how. Intellectual
capital readily meets most of the VRIN criteria because it tends to be tacit and idiosyncratic, and has
fuzzy edges. In essence, the criteria distinguish between ubiquitous resources available to all at
competitive prices and those that are more specific or unique. Furthermore, the VRIN criteria recognize
that a unique asset is not valuable for its own sake. It delivers value to the firm and its stakeholders only
if it supports a point of difference that is appealing to the customer, and which, furthermore, cannot
easily be replicated by others with different assets. Needless to say, it should be immediately apparent
that, in fast-paced competitive environments, positions/resources alone are generally of fleeting value.
The way assets need to be deployed (usually in clusters or combinations) is likely to be dynamic and
involve astute and entrepreneurial “orchestration” activity by management.

Clearly, the manner in which assets and other resources are coordinated and orchestrated is at least as
important to competitive success as the identity of the assets themselves. This is where asset
orchestration and market creation (or co-creation) come into play (Pitelis & Teece, 2010). Whereas
neoclassical and transaction cost economics assume that markets exist, even if they don’t function well,
the capabilities approach makes no such assumption. Markets may have to be created, in the sense that
new products and services are introduced for which after-sales support and product training, for
instance, may be lacking and may have to be built. This is what Singer did globally to allow market
development of the sewing machine. In India, Gillette has likewise been promoting the benefits of
removing beards in order to broaden the market for its safety razors. The need for such creation
activities to expand markets is assumed away in transaction based approaches, where there is almost
always a party (or customer) to transact with. The decision to invest depends on sensing an opportunity
and also on sensing how potential competitors and complementors will respond.

The focus of the dynamic capabilities framework is on how firms can create, extend, integrate, modify,
and deploy their resources and/or specific assets while simultaneously managing competitive threats
and effectuating necessary transformations.33 Whereas other approaches emphasize tangible
asset/resource ownership and protection, the dynamic capabilities perspective emphasizes intangible
assets and resource augmentation, and also asset orchestration.

Paths (strategy)

It is important to recognize that strategy must go hand in hand with processes, resources (positions),
and capabilities. Strategy, when developed successfully, involves deploying the firm’s scarce assets to
support market needs and gain advantage over rivals, while recognizing market and technological
opportunities and any constraints imposed by the firm’s historical path of evolution. Put differently, the
managerial orchestration that is core to enhancing processes and exploiting positions must be guided
and informed by strategy– and vice versa. 34 Strategy needs to be consistent, coherent, and embrace
innovation. While it is necessarily shaped by the legacy of the past, it also shapes the path ahead.
Strategy will determine which products to make, which customers to target, how to deploy the firm’s
resources, what the optimal timing will be, and how to keep competitors at bay. A strategy can be
defined as “a coherent set of analyses, concepts, policies, arguments, and actions that respond to a
high-stakes challenge” (Rumelt, 2011: 6). A good strategy has: (1) prescient diagnoses; (2) a guiding
policy; and (3) coherent action. These three functions constitute what Rumelt (2011) calls the “kernel of
strategy”.35 A good strat egy will often not appear fully formed, but instead emerge after a period of
trial and error (provided the business environment is sufficiently forgiving to allow experimentation).
While the actions dictated by the strategy may be visible to rivals, and freely imitable, rivals may not
perceive it in their interest to do so until it is too late, because the underlying diagnosis and policy can
be kept secret. In the framework advanced here, dynamic capabilities and business strategies
codetermine performance.36 Firms with weaker capabilities will require different strategies from firms
with stronger capabilities. Strong dynamic capabilities require firms to sense, seize, and transform in
conjunction with a sound strategy. A sound strategy must in turn have a strong kernel. For purposes of
operationalizing the framework, dynamic capabilities can usefully be disaggregated into three clusters of
processes and entrepreneurial/ managerial orchestration activities conducted inside firms (Teece, 2007):
(1) identification and assessment of opportunities at home and abroad (sensing); (2) mobilization of
resources globally to address opportunities, and to capture value from doing so (seizing); and (3)
continued renewal (transforming). These activities are required of the firm’s management if the firm is
to sustain itself as markets and technologies change. In a global context, the MNE’s management must
not only be entrepreneurial, but also cosmopolitan, or what Permutter (1969) called “geocentric”. It is
important to emphasize that the framework advanced here sees the effectiveness of dynamic
capabilities as being compromised by poor strategy. Strategy and dynamic capabilities can be seen as
analytically distinct concepts, although they are in practice interrelated (Table 1). For instance, sensing is
important to dynamic capabilities but also contains a strong element of diagnosis, which is important to
strategy; seizing needs to be connected to both a guiding policy and coherent action; and transforming
that is value protecting and enhancing requires a guiding policy and coherent action. The nature of the
managerial tasks for various elements of strategy is outlined in Table 1. Entrepreneurial management is
especially relevant to the firm’s ability to be prescient and sense opportunities and threats (both
market- and technology-related).

Replicability and Imitability: Ordinary vs Dynamic Capabilities In the dynamic capabilities framework,
considerable emphasis is placed on the replicability and Table 1 The interrelation of dynamic capabilities
and strategy imitability of organizational processes and positions (Teece, Pisano, & Shuen, 1997).
Clearly, if one is interested in sustainable competitive advantage, one needs to take imitability into
account. That which is easily replicated by the firm is scalable, possibly globally.37 However, that which
is easily imitated by others will clearly not be able to support superior financial returns. When examining
competitive advantage, it is therefore critical to distinguish between “ordinary” (and easily replicable)
capabil ities and dynamic capabilities, which by their very nature are hard to replicate. As explained
below, ordinary capabilities support technical fitness, while dynamic capabilities support evolutionary
fitness. The former is about the enterprise “doing things right;” the latter has more to do with “doing
the right things”.

Ordinary capabilities: Foundations It is perhaps easier to understand what dynamic capabilities are as a
class by juxtaposing them against ordinary capabilities.38 Ordinary capabilities can be broken into
operational, administrative, and govern ance capabilities (Teece, forthcoming). Here I empha size that
ordinary capabilities are about producing and selling a defined (and static) set of products and services.
The degree of proficiency, however obtained, indicates the strength of the ordinary capability, for which
practice often makes perfect. Ordinary capabilities simply allow an existing product or service to be
made, sold, and serviced. They will not necessarily permit the MNE to grow except in environments with
low competition, no technological disruptions, and very limited globali zation.39 When local capabilities
in jurisdictions where MNEs operate are weak relative to those the MNE can transfer to an affiliate,
ordinary capabilities may nevertheless allow an MNE to possess competi tive advantages for indefinite
periods. Ordinary capabilities and their diffusion matter to the MNE.40 They undergird the MNE’s
technical fitness. Technical fitness41 supports static efficien cies; but unless competition is very weak,
and demand is strong,42 ordinary capabilities are unli kely to support durable competitive advantage.
Such capabilities allow an organization to keep “earning its living by producing and selling the same
product, on the same scale and to the same customer popula tion over time” (Winter, 2003: 992).
Ordinary capabilities enable the firm to perform definable tasks. They rest on (1) non-VRIN resources
and (2) practices, even best practices. The level of ordinary capabilities can therefore be measured
against a particular task or standard. “Best practice”, in a sense, does precisely that.43 Best
management practices, for example, can be thought of as those that “continuously collect and analyze
performance information, that set challenging and interlinked short- and long-run targets, and that
reward high performers and retrain/fire low performers” (Bloom, Genakos, Sadun, & Van Reenen,
2012).44 Many best practices, however, diffuse rather quickly in a world where everyone has access to
similar benchmarks. Bob Lutz (2011), the former vice chairman at Gen eral Motors, illustrates this point
for the automotive industry: The operations portion of the automobile business has been thoroughly
optimized over many decades,doesn’tvarymuch from one automobile company to another, and can be
managed with a focus on repetitive process. It is the “hard” part of the car business and requires little in
the way of creativity, vision or imagination. Almost all car companies do this very well, and there is little
or no competitive advantage to be gained by “trying even harder” in procurement, manufacturing or
wholesale. This statement is revealing, as it indicates how best practices, hence ordinary capabilities, are
widely distributed, at least in the global automotive indus try.45 If so, they can no longer be the
foundation of competitive advantage, as elaborated below.

Ordinary capabilities: Replication and transfer.

What undermines the power of ordinary capabilities to serve as the foundation of competitive
advantage for a particular MNE is that such capabilities can be imitated much more easily today than in
earlier times. A good deal of know-how, which used to be tacit and proprietary just two or three
decades ago, is now explicit and in the public domain– available from consultants, schools of
engineering, and the public literature.46 Explicit (codified) knowledge tra vels easily, and the Internet,
by allowing low-cost access to information, has helped enable this. The implication is that the barriers to
the transfer of ordinary capabilities have been dramatically reduced in recent decades. Indeed, many
basic business services (e.g., accounting, sales, human resource management) can today be readily
outsourced to computing resources resident in the “cloud”.47 These developments enabled by Internet
protocols, the general march of computer-processing power, and the growth of “fat clients”–greatly
facilitate starting up, as well as running, a business. Many routine operational and administrative
capabilities can be supported remotely by independent providers. Hence, they are no longer as critical
to competitive advantage. For example, the implications of “cloud computing” for the MNE are
profound. In short, the Internet facilitates the avail ability of ordinary capabilities not just because of low
cost and easy access to the flow of information, as Richard Nelson has emphasized,48 but because of
low cost and easy access to the computing, software resources, and data storage needed to support
basic, yet high-quality, business functions. Knowledge transfer within an organization pre sents a host of
difficulties (Szulanski, 1996). And replicability does not always imply imitability. Knowledge may remain
difficult for external organi zations to replicate to the extent that it is embedded in interactions among
people, tasks, and tools (Argote & Ingram, 2000). Notably, MNEs investing abroad “appear to adopt
good management practices in almost every country in which they operate” (Bloom et al., 2012: 14).
Indeed, Bloom et al. found that foreign multina tionals are generally better managed than host country
firms. MNEs may thus succeed for a while with strong ordinary capabilities, because ordinary capabilities
developed at home may temporarily be distinctive abroad.49 Some less-developed economies still lack
domestic firms performing what, from a developed-country perspective, would be thought of as
mundane tasks. Yum! brand’s success in China, for example, appears to be due in large part to its ability
to trans fer and adapt ordinary capabilities (Starvish, 2011). This adaptation is itself partially a dynamic
capability. Another “barrier” to imitation is the simple failure of rivals to implement publicly available
best prac tices (Knott, 2003). Bloom et al. (2012: 13) found in their study that there is a wide dispersion
with respect to good management practices within every country and across countries, as shown in
Figure 1. In a survey of more than 10,000 organizations across 20 countries, they also found that foreign
MNEs were generally better managed (i.e., they had better ordinary capabilities) than domestic firms
(Bloom et al., 2012: 23). Brazil and India had a large tail of very badly managed firms.

Nevertheless, competition and imitation will, over time, lead to the erosion of any advantage from
ordinary capabilities. This may occur slowly, but can be rapid in contexts where the absorptive capacity
of external organizations is high. An MNE subsidiary relying solely on strong ordinary capabilities in a
particular host country will find, if the ordinary capabilities are imitable (e.g., via knowledge spillovers
through employee turnover) and competitors can enter, that its advantage will steadily diminish. In
short, ordinary capabilities will not support long-run competitive advantage unless competition is
suppressed by governmentally or privately imposed entry barriers, or by weak physical and social
infrastructure that prevents ordinary capabilities from quickly diffusing throughout the economy.

DYNAMIC CAPABILITIES: ASSESSMENT Since the late 1970s, local differentiation, global integration, and
innovation have characterized successful firms operating globally. In the global economy today, the
competitive advantage of the business firm appears to rest on the development and deployment of
intangible assets, 50 relationships, and human capital. These developments have placed a premium on
the ability of companies to become entrepreneurial and agile at home and abroad, requiring in turn that
management operate with less authority, and organize to allow and pro mote flexibility, responsiveness,
and learning. This requires dynamic capabilities.

As already noted, dynamic capabilities are under girded by processes (routines) and resources
(positions). Dynamic capabilities rely not just on best practices but on “signature” practices; not just on
any resources but on VRIN resources. They also require astute managerial orchestration guided by what
Rumelt(2011)hascalled “good strategy”. Table 2 illustrates this, and contrasts it with ordinary
capabilities. Signature processes and signature business models are beyond industry best practices. Such
processes embody a company’s history, experience, culture, and creativity (Gratton & Ghoshal, 2005).
Because of their deep roots, they are not so easily replicated by others who do not share this history,
and may have different values, too. Over longer periods of time, such processes and business models
may become somewhat imitable by others. As Gratton and Ghoshal point out, such a transformation
occurred with Toyota’s lean manufacturing model, the Toyota System of Production. Whether signature
processes and business models are “good” may take some time to become apparent. Eventually, it
should show up in key performance indicators. However, the replicability of a process or business model
is often confounded, particularly externally, by what Lippman and Rumelt (1982) call “uncertain
imitability”. This, along with a high tacit component to the underlying knowledge, may keep a signature
process effectively proprietary. There is an obvious opportunity for all business enterprises to learn, and
to embed that learning in new signature processes and business models. Hence the MNE competing in
diverse contexts has the opportunity to develop distinct signature processes and models in different
geographies. Accordingly, the MNE as such may have an advantage in the development of new products
and signature processes and models, as it can more readily run multiple, simultaneous experiments than
can a pure domestic enterprise. Moreover, adaptation and adoption of new processes inside the MNE
are likely to be easier than they would be across unaffiliated enterprises. Certainly, top management can
endeavor to drive such adoption inside the company. A corollary of the fact that VRIN resources and
signature processes and business models are pro ducts of the firm’s heritage and past managerial
decisions is that dynamic capabilities tend to get built, are difficult to imitate, and cannot generally be
bought. For example, Tim Cook, a long-time execu tive at Apple and its current CEO, said in February
2013: “Apple has the ability to innovate in all three of these spheres and create magic… This isn’t some
thing you can just write a check for. This is something you build over decades” (AFP, 2013). This is the
reason for the “stickiness” of dynamic capabil ities– that is, they don’t tend to travel well, they are
complex, and they are hard to figure out and to implement. Once again,BobLutz(2011)
ofGeneralMotorsput it most succinctly: Where the real work of making a car company successful
suddenly turns complex, and where the winners are sepa rated from the losers, is in the long-cycle
product development process, where short-term day-to-day metrics and the tabulation of results are
meaningless.

Dynamic capabilities also help characterize how an enterprise obtains strengths, extends these strengths
(for instance by developing new business models), synchronizes business processes and models with the
business environment, and/or shapes the business environment in its favor (Teece et al., 1997). They are
higher-order, difficult-to-replicate capabilities. Asset orchestration is implicated, and dynamic
capabilities support the firm beyond merely achieving superior “coordination”. They are based on
processes that are beyond best practice, and on resources that meet the VRIN criteria. Firms with strong
dynamic capabilities exhibit technological and market agility. To achieve this, they use less hierarchy.
Agility, coupled with the ability to sense new opportunities and threats, supports evolutionary fitness.51
This inevitably requires that firms constantly create new technologies, differ entiated and superior
processes, and better business models to stay ahead of the competition, stay in tune with the market,
and even shape the market if necessary.52 The firm must be able to simultaneously cope with changes
in the external environment and with changes caused by processes internal to the firm (Greiner,
1998).53 It will be aided if it has sufficient resources and superior information, talent, and capital,
including relationship capital. However, absent the required ability to orchestrate resources, and to
create and execute a quality strategy, such resources are likely to be of little value. As noted, strong
dynamic capabilities will help organizations to stay relevant to marketplace needs and technological
opportunities. Organizations must change their capabilities to reflect anticipated changes in markets,
technologies, and the business environment more generally. However, as Winter explains, change can
be reactive– firms can easily get into a “fire fighting” mode, which he describes as “high paced,
contingent, opportunistic and per haps creative search for satisfactory alternative behaviors”. Winter
(2003: 993) called this “ad hoc problem-solving”. This is in contrast to routine directed problem-solving.
In Winter’s terminology, the latter is a capability. He correctly recognized that it is possible that on close
examination even “fire fighting” approaches to problem-solving may have micro-routines embedded
within. Certainly, skills are implicated. The individual and organizational skills at issue with dynamic
capabilities are much more oriented to creating unique problem-solving methodologies and signature
processes. Problem-solving is very much a dynamic capability.54 There is much dis tance between the
purely routinized and that which is purely ad hoc. The middle ground also constitutes a (dynamic)
capability. Indeed, most invention isn’t fully directed. The innovation process is neither completely
routinized nor ad hoc. The capabilities approach, expanded upon below, sees MNE activity as driven by
the opportunity to leverage capabilities and create and capture value from innovation on a global scale.
Entrepreneurial managers are not just resource allocators; they also sense, shape, and exploit
opportunities. A theory of the (multinational) firm that doesn’t recognize this logic and these
phenomena, and their associated locational dimensions, will be unable to explain the MNE's sustainable
competitive advantage.55 To create and exploit opportunities globally, entre preneurial activity must be
linked up with capital and other complementary assets, because property rights over discoveries and
inventions are incom plete. Some ownership and control over comple mentary assets is likely to be
needed to assist the MNE in the appropriation of value needed to sup port continued investment
(Teece, 1986b, 2006b). As explained in Teece (1980, 1982, 1986b), man agers, entrepreneurs, and
innovators cannot just leave it up to the market to line up specific assets and develop new ones, and
integrate them into a well-functioning global invention, production, and marketing system that provides
the theoretical rai son d’être and management for the MNE. They are themselves the instruments that
make markets work well. Even if Coasian transaction costs were zero, learning, co-creation, and
orchestration functions would still need to be carried out. The entrepreneu rially managed MNE is a
vehicle designed to do so. The firm is indeed, as Coase (1937: 388) noted, an island of conscious power–
but it is unsatisfactory to frame managerial capacity primarily in transaction cost-minimizing terms, as
Coase asserted. Rather, the functions of management can be framed in terms of assisting in the building
and/or securing and deploying of VRIN resources and signature processes not typically available for sale
(or, if avail able, not routinely priced in a liquid market). The business firm is an island of (non-market)
resource allocation orchestrated to enhance learning, value creation, know-how transfer, and value
capture. These factors help explain why it is necessary to transform internalization theory into an
entrepre neurial/capabilities theory of the MNE. The economic logic of the framework is reflected in
Figure 2.

CAPABILITIES AND MNE PERFORMANCE

While ordinary capabilities are insufficient for long term survival and growth, dynamic capabilities
enable the firm to have a better chance of establish ing and maintaining competitive advantage (and
concomitant superior performance) in economies where change is rapid, and intangible assets are
critical to competitive differentiation.56 However, as indicated in Figure 2, the firm also needs good
strategy. Dynamic capabilities are hard to develop, and difficult to transfer across borders, in part
because they are tacit, in part because they are often embedded in a unique set of relationships and
histories, and in part because of uncertain imitabil ity. In short, dynamic capabilities undergird the
“future” of any MNE, because, along with strategy, they undergird competitive advantage in fast
moving, knowledge-based economies. They often lie at the heart of both short- and long-cycle product
development processes. Bartlett and Ghoshal (2002: 14) noted that “as major global competitors
achieve parity in the scale of their operations and their international market positions, the ability to link
and leverage knowledge is increasingly the factor that differentiates the winners from the losers and
survivors”. These authors were tilting toward elements of a dynamic capabilities framework, because
such a framework is also about linking and leveraging know-how. Good strategy, strong ordinary
capabilities, scale (in some circumstances), and strong dynamic capabilities are all needed for long-term
growth and survival in the framework advanced here. As noted, ordinary capabilities are about doing
things right, whereas dynamic capabilities are about doing the right things, at the right time, based on
unique processes, organizational culture, and a pres cient assessment of the business environment and
technological opportunities.57 By the right things, I refer to investment in new products, processes, and
business models that are in tune with the firm’s business environments at home and abroad, and with
its strategy. The late Steve Jobs made a strong statement with respect to the importance of spending
money on the right things: Innovation has nothing to do with how many R&D dollars you have. When
Apple came up with the Mac, IBM was spending at least one hundred times more on R&D. It’s … about
…howmuchyougetit. (cited in Kirkpatrick, 1998) “Getting it” requires strong dynamic capabilities. The
dynamic capabilities perspective goes beyond organizational “fit”,58 and also beyond a financial
statement view of enterprise strength, to emphasize recognition of the most promising opportunities
and the managerial orchestration needed to create, accommodate, and fashion resources both inside
and outside the firm, at home and abroad. Included are the external linkages and alliances that are
common in the global economy,andwell documen ted and analyzed in the international business
literature. At a quite general level, dynamic capabilities are about how an enterprise seizes the future
and develops the products, processes, and business models to meet (and shape) ever-changing markets.
Dynamic capabilities result from superior top management orchestration skills. They are hard to teach,
in part because there is a large tacit component (Teece et al., 1997). The greater the diversity and rate
of change in business environments, and the greater the impor tance of intangible (including
relationship) assets, the more critical good strategy and strong dynamic capabilities become for the
MNE’s growth and finan cial performance. To maintain competitiveness, the MNE must develop and
maintain asset alignment both internally and with collaborating firms. The MNE and its partner firms
must develop and deliver joint “solutions” that are in tune with customer needs in multiple
environments. It is not just a matter of selecting the right organizational bound aries to achieve fit,
although that is clearly one element.59 Strong dynamic capabilities include the processes, business
models, and leadership skills needed to effectuate high-performance sensing, seiz ing, and transforming.
Strong dynamic capabilities help ensure evolutionary fitness; ordinary capabil ities are more attuned to
the requirements for tech nical fitness.60

THE CAPABILITIES APPROACH JUXTAPOSED AGAINST TRADITIONAL MNE THEORY

Prior sections of this paper have treated the firm in a general way, consistent with the need to
encompass multinationality. This section explores particular issues squarely within the established
domain of international business studies. It is, after all, the potential for synergistic interaction between
head quarters and foreign locations (Cantwell, 2009), with their distinct institutional contexts and cap
abilities profiles, that distinguishes the MNE case from the general theory of the firm. Efforts are made
to explain how a capabilities approach leads to an
Dynamic capabilities themselves (involving as they do sensing, seizing, and, ultimately, transform ing)
can in most cases be sequenced over time and across different geographic markets. It is more chal
lenging if the firm has to perform all three simulta neously in each of its businesses, and in all of its
markets. However, such simultaneity is sometimes required.65

In the dynamic capabilities framework, asset augmentation comes fundamentally from R&D and
learning processes (e.g., learning by doing; learning by using), whether internal or from (and with)
partners, and from apply ing the logic of the “profiting from technological innovation” paradigm (Teece
1986b, 2006b). It also requires recognizing that innovation necessitates collaboration with a panoply of
partners in an ecosystem. Ongoing engagement with ecosystem partners can be seen as leading to the
migration of the locus of value creation from the firm to the level of the business ecosystem. External
sourcing and collaboration can, when done well, augment the firm’s internal capabilities (Capron &
Mitchell, 2009; Chesbrough, 2003). However, it can also drain them if partners are laggards, and fail to
contribute as agreed.

For the purpose of this paper, the main point is that the global distribution of R&D can be seen as a
phenomenon that supports the creation of capabilities in different geographies: capabilities that
perhaps then need to be integrated to produce new products, as in the case of the civilian aircraft
industry. Governance (transaction cost) theory produces only limited insight into this phenomenon.
Insights from the strategy and capabil ities perspectives seem more pertinent.

Conclusion

Where certain capabilities and markets are absent, they need to be created. In these environments,
entrepreneurs and managers in parents and subsidiaries build signature processes, deploy distinct
resources, and design good business models and strategies in pursuit of profits. The basic question to be
answered by a robust theory of the MNE is not simply where to locate in order to minimize produc tion
and transaction costs, but where to locate to build or deploy signature processes and obtain market
access while guarding intellectual property and lever aging the firm’s existing VRIN resources into new
business/market environments.

The MNE’s growth and survival is not just about adapting to market failures; it’s also about creating and
deploying VRIN resources and signature processes and distinct business models to enable excellence in
meeting (or possibly even modifying) market demand in ways that are hard for competitors to imitate.
This, in turn, may lead the MNE to engage in technology and capability transfer, and possibly even the
strengthening of complementors and suppliers.70 Put differently, the building and leveraging
(extending) of dynamic capabilities can animate FDI decisions.