From contributor Phin Upham
Why are dynamic capabilities supposedly of central strategic importance? Are all dynamic capabilities of central importance?
Dynamic capabilities focuses on, according to Teece, Pisano and Shuen (1997), the firm’s ability to achieve success by being responsive to change, building organizational mechanisms to encourage rapid and flexible product innovation, as well as management’s ability to “effectively coordinate and redeploy internal and external competencies.” This focuses on how organizations renew their competencies, about the management and reconfiguration of competencies to achieve new and innovative forms of competitive advantage as it is about exploiting existing competencies. Competitive advantage, thus, lies not only in the specific assets embedded in the form but also in the managerial and organizational processes which manage these resources, by the path dependencies and market positions taken by the firms.
Specifically, Teece, Pisano and Shuen argue that the competitive advantage of a firm lies very intricately connected to its history, skills, and assets. A firm is thus path dependent in order to achieve success, not, as TCE might imply able to maximize given any industry structure. A firms advantage lies in its use of assets in evolutionary and co-evolutionary paths.
Breaking this down, Teece, Pisano and Shuen speak of dynamic capabilities including many factors. The first of these, organizational and managerial processes achieve three functions 1) coordination and integration of in internal and external resources – this will help product development and production and will help to differentiate firms since integrated firms will be harder to imitate 2) learning – information derived from reputation and experimentation which allows tasks to be preformed more quickly and better and for new opportunities to be identified. This learning can exist on many different levels for Teece, Pisano and Shuen, individual, inter-organization, and organization. 3) Reconfiguration and transformation of the firm in order to both keep the form of the firm appropriate to the environment, in terms of organization, cultural, and technology, and to identify and adopt industry best practice.
Secondly, Teece, Pisano and Shuen identify positions as a critical component of maintaining dynamic capabilities. A firms strategic position is defined by its basket of assets, including technological assets, financial assets, reputational assets, structural assets, institutional assets, and market (structure) assets. These assets “define [a firm’s] competitive advantage at any point in time. There is not enough room to go into each asset here, but suffice to say, they include difficult to trade asset such as knowledge assets and reputational assets.
Thirdly, Teece, Pisano and Shuen discuss path dependencies as a crucial piece of a firms dynamic capabilities and strategic advantage. These define, largely, where a firm can actually move in its industry landscape. “History matters” since such things as firm knowledge, experience, fixed assets, etc cannot be changed in the short run and determine the firms individual landscape of options. A firm, for example, might be best suited to capture the rents of a specialty that it already has rather than pursue some unrelated specialty, even if the unrelated specialty has higher rents from an outside perspective (the first option has lower costs for the firm). Technical opportunities in the industry give the firms path dependencies forward meaning and define the limiting opportunities of the firm. A given firm has some control over this boundary since it is partially responsible for its creation and limitation (so partly endogenous). The level of experience in innovation and technology of the firm is likely to deeply affect the firms options, as it the level of the firms R&D activity.
A firms competitive advantage is only as good as how hard it is (and how long it takes) for others to imitate this advantage and how able the firm is to replicate it internally. A competency is only valuable if it is hard to copy by others, but useful to the firm itself. Replication involves “transferring or redeploying competencies from one concrete economic setting to another.”
Other authors explore the idea of dynamic capabilities. Henderson and Cockburn (1994) attempt to tease apart some aspects of dynamic capabilities. They differentiate between component competence, or the competence embedded in local areas of the firm and architectural competence which they see as the competence that allows for the integration and flexible use of component competencies. He uses pharmaceutical firms in particular arguing that drug discovery and firm success depend on both the depth of expertise in a specific area and also the firms ability to transfer knowledge and information across the company in such a way that the scientific disciplines and the therapeutic classes have some significant integration. His study tests his hypothesis about architectural and component competence and finds significant support for the idea that integration a firm yields better results in terms of drug discovery. This integration is a kind of dynamic capability because it is the source of new and unknowable capabilities that the firm can generate. While this is a powerful study, it has its problems. For example, using information flow as the measure for a dynamic capability is not completely accurate. It is the way this information flows, the mechanisms that allow and encourage this flow, and the way this flow is handled within the company that construe the real competitive advantage. Information flow is a proxy for this. This is a good description of what Teece, Pisano and Shuen were talking about when they discussed their coordination and integration of internal activities component of dynamic capabilities.
Pisano’s (2000) detailed study of how organizations manage their learned knowledge is a good example of the complex but vital thrust of dynamic capabilities. Pisano revisits some of the themes form the 1997 paper and argues that organizations received two benefits from doing an action – that of the product or result of the action, and also the knowledge that this production generated. If an organization only focuses on exploiting its resources, this second sort of knowledge is not fully utilized. Thus, Pisano argues for the strategic use of action such that it will allow one to build knowledge bases and generate more capabilities that did not originally exist. He uses the biotech industry as well in his essay – showing that path dependency alone does not explain success or failure but hat specific organizational process in taking that knowledge and using it are also important. He the framing of the problem, the approach to experimental and analytical methods, the organizational structure, and the integration of manufacturing and process development. While no single formula for success, this essay shown how there is no “rule for riches” or ‘rule for success.” This is a good example of Teece, Pisano and Shuen’s combination of path dependencies in combination with the dynamic capability to “reconfigure and transform” while traveling that path.
Henderson and Clark (1990) use the photolithographic alignment equipment industry to try to show that there is a difference between component and architectural competency – that the dominance in competency is often not enough, a firm must able be able to change and be flexible if a firm hopes to survive in the long term. Teece, Pisano and Shuen would have agreed with this analysis pointing out that dynamic capabilities are most important in times of change and uncertainty when the old ways of doing things must be modified.
Teece, Pisano and Shuen and others who argue for dynamic capabilities do so because they believe that the world is not a static place where one strategy or one set of resources can dominate for long They see the ability to generate new competitive advantages, the ability to develop unforeseen and unforeseeable breakthroughs as crucially important for a firms long term survival. It is the ability of dynamic capabilities to be flexible in the face of unknown and unknowable future potentialities that is the core of the attraction of dynamic capabilities. It is an “open system” as Hayek might have called it. Not all dynamic capabilities are of equal importance in this conceptualization, in stagnant times, dynamic capabilities to produce new products are of the more critical importance, since this will be the source of profit an this survival. In uncertain times, dynamic capabilities that allow for architectural change and reexamination of old ways of organizing in and doing things are of the most critical importance, and is in this type of situation that I believe dynamic capabilities, as a theory, has the most to offer and is most powerful and relevant.
Lastly, the idea that dynamic capabilities brings into the strategic framework – that both capabilities and the generation of new capabilities as well as the flexible combination of capabilities in response to changes in the market are vital – is extended by Collis (1994) who points out explicitly that since dynamic capabilities or “learning to learn” are, in some senses, the 2nd order of normal capabilities, why could we not take a 3rd and 4th order capabilities in order to gain competitive advantage. He concludes that there will never be a final, ultimate source of competitive advantage since one cannot avoid infinite regression in capabilities. Dynamic capabilities build on the resource based view and extend the literature into the sort of evolutionary and complex world that Nelson and Winter envision for strategy. While they are certainly not the last word in strategy, they are an important new word.
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