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Dynamic capabilities view of (competitive advantages)

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The major influence of the dynamic capabilities view began in the mid-1990s. Eisenhardt and Martin (2000), Kogut and Zander (1992), Leonard-Barton (1992), Teece et al. (1997) and Zander and Kogut (1995) are important contributors.

The dynamic capabilities view can be seen as an extension of the resource-based view (Amit and Zott, 200 1: 49; Collis, 1994: 143).

In contrast to the resource-based perspective that often is concerned with value appropriation and the sustainability of competitive advantage (e.g. Barney, 1991), the dynamic capabilities view (e.g. Teece et al., 1997) explores the ways by which valuable resources are built and acquired over time.

While the resource-based view evolved front a comparative static tradition, the capabilities identified in terms of the dynamic capabilities perspective as being advantageous are concerned dynamically with leading to the search for distinctive competencies.

Resource-based view’s contributions to the explanation of competitive advantage realization built and acquired over time.

The dynamic capabilities perspective as the resource-based view uses various axioms of rationality.

In this context, in addition to the reasoning of the resource-based view it has to be questioned if there are differences in decision-making behavior if the actions of individuals are analyzed over time, i.e. from a process-oriented perspective (Freiling, 2O01 : 84).

Pervasive uncertainty and ambiguity make it probable that managers will hold diverse expectations about such key variables ad demand growth, price levels, costs, and consumer tastes.

Further their judgments and choices are likely to exhibit idiosyncratic aversions to risk and ambiguity.

Based on this understanding, rationality of individuals is regarded as variable. It is further assumed that firms maximize while available choices are known. However, the selection of appropriate choices is uncertain.

Units of analysis in the dynamic capabilities perspective instead of resources are processes, positions and paths.

An endogenous role of industrial structure is assumed. The aim of the dynamic capabilities view is the provision of ‘a coherent framework that integrates existing conceptual and empirical knowledge, and in addition facilitates prescription (Teece et al., 1997: 515).

The dynamic capabilities approach builds upon theoretical foundations provided by Nelson and Winter (1982), Penrose (1959), Teece et al. (1994), Schumpeter (1934) and Williamson (1975, 1985).

In contrast to the resource-based view, not Ricardian but Schumpeterian or entrepreneurial rents are the center of attention.

Entrepreneurial or Schumpeterian rents can be achieved by risk-taking and entrepreneurial insights in an uncertain or complex environment.

These rents are seen as self-destructive because of knowledge diffusion. The focal concern of the dynamic capabilities perspective is directed on asset accumulation, replicability and inimitability (Teece et al., 1997: 527).

In terms of the resource-based view, economic rents are created for a firm by being more effective than the rivals with regard to resource selection.

This can be called “resource picking.” The main mechanism for the creation of economic rent from a resource-based perspective is resource-picking, i.e. according to the underlying Ricardian logic heterogeneity in performance is due to owning resources with differential productivity (Makadok, 2001).

In the dynamic capabilities perspective the role of the manager with regard to the resources and capabilities is a different one; he or she is not a “fund manager” but rather an “architect” who creates economic rent by being more effective than rivals at deploying resources.

Thus, with the advent of the dynamic capabilities view the Ricardian perspective has been challenged by the Schumpeterian perspective, which stresses the relevance of “capability-building” as an alternative rent, creation mechanism that is different from “resource-picking” (Makadok, 2001: 388).

A concept analogous to capabilities appears in various forms in other theories of the strategy field.

The concept appears in the form of knowledge, learning, habits, innovation, skills, routines, experience and organizational capabilities.

The dynamic capabilities view achieves a more elaborate representation of the “distinct competencies” which underpin a firm’s strengths and weaknesses in the early strategic literature.

In the evolutionary and institutional theories of economics, notions of innovation, technological change, learning skills and routines are central to explanations but remain obscure and inadequately developed.

In contrast to earlier contributions in the field of strategy, the dynamic capabilities view puts dynamic capabilities at the center of attention and thus contributes a concerted attempt to identify and classify capabilities according to then nature and role in the context of resources.

It is also through the concept of dynamic capabilities that promising linkages have been made between the strategy development literature and the literature on strategic implementation and individual competencies, such as the role that Quinn assigns to intellect, in his reconceptualization of firms as bundles of service obligations (Quinn, 1992; Quinn et al., 1996).

Teece et al. (1997) want to create the foundation for the dynamic capabilities approach. They define the following terms that are taken as the terminological basis in this book.

For them, factors of production “are `undifferentiated’ inputs available in disaggregate form in factor markets” (Teece et, al., 1997); these are characterized by a lack of firm-specificity.

Resources in contrast to that are firm-specific assets that are difficult or impossible to imitate.

Organizational routines or competencies can be recognized in activities when “firm-specific assets are assembled in integrated clusters spanning individuals and groups so that they enable distinct activities to be performed” (Teece et al., 1997: 516).

Core competences “define a firm’s fundamental business as a core” (Teece et al., 1997: 516); they derive from looking across the range of products and services of a firm (and its competitors).

It is possible to increase their value by combining them with appropriate complementary assets.

Dynamic capabilities are described as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” (Teece et al., 1997: 517).”

An organization’s ability to achieve new and innovative forms of competitive advantage with given path dependencies and market positions is reflected in dynamic capabilities (Leonard-Barton, 1992).

End products in this context are defined as the final goods a firm produces using the competences it possesses.

A firm’s performance, relative to its competitors, thus depends upon its competences, which over time depend on the firm’s capabilities.

The most important characteristic of capabilities and competences is seen in the fact that it is not possible readily to assemble them through markets (Teece, 1982; Zander and Kogut, 1995).

The balance sheet is not able to reflect a firm’s distinctive competencies in an appropriate way.

Rather, “organizational processes, shaped by the firm’s asset positions and molded by its evolutionary and co-evolutionary paths, explain the essence of the firm’s dynamic capabilities and its competitive advantage” (Teece et al., 1997: 518).

The managerial and organizational processes of a firm such as those aimed at coordination, integration, reconfiguration or transformation (Eisenhardt and Martin, 2000; Teece et al., 1997), or learning (Lei et al., 1996) are the basis for dynamic capabilities. These capabilities enable firms to create and capture Schumpeterian rents (Teece et al., 1997).

Dynamic capabilities are regarded as abilities to achieve new forms of competitive advantage. “Dynamic” in this context refers to capacity to renew competences and thereby achieve congruence with the changing business environment.

“The term ‘capabilities’ emphasizes the key role of strategic management in appropriately adapting, integrating, and reconfiguring internal and external organizational skills, resources, and functional competences to match the requirements of a changing environment” (Teece et al., 1997).

The process of utilization of resources from this perspective is accomplished through complex and dynamic organizational abilities which are used to mobilize resources efficiently and effectively to secure competitive advantages which are reflected in firm performance.

Capabilities in this perspective represent a form of resource for a firm. Examples of dynamic capabilities are product development routines, alliancing routines, exit routines and knowledge management routines (Eisenhardt and Martin, 2000).

From a dynamic capabilities perspective, because firms competing in a dynamic environment require business processes with enormous capabilities for speed, strategy is increasingly developing to become a dynamic process with the objective to recreate and execute innovation options in order to gain and sustain competitive advantages.

Competences and capabilities in the perspective of the dynamic capabilities view “must be built because they cannot be bought” (Teece et al., 1997: 518) and thus can be the basis for competitive advantages.

Dynamic capabilities show commonalities across effective firms, i.e. “best practice” does exist.

Therefore, dynamic capabilities have greater equifinality, homogeneity and substitutability across firms than implied in the framework of thoughts of the resource-based view.

Eisenhardt and Martin (2000) argue that since the functionality of dynamic capabilities can be duplicated across firms, their value for competitive advantage lies in the resource configurations that they create, not in the capabilities themselves.

Dynamic capabilities are necessary, but not sufficient, conditions for competitive advantage.

The existence of common features among effective dynamic capabilities, however, does not imply that any particular dynamic capability is exactly alike across firms.

Different degrees of’ market dynamism can be distinguished, and with these different degrees the nature of dynamic capabilities varies as well.

While they resemble organizational routines relying on existing knowledge and linear execution to produce predictable outcomes in moderately dynamic markets, dynamic capabilities in very dynamic markets resemble simple, experiential and unstable processes that produce adaptive but unpredictable outcomes.

In very dynamic as well as in moderately dynamic markets, the evolution of dynamic capabilities is guided by knowledge-and learning-based mechanisms and underlies path dependence in acquiring, reconfiguring and integrating resources.

Dynamic capabilities can be regarded as combinations of simple capabilities and the accompanying routines.

Sequence steps in this context imply a temporal order in developing these simpler capabilities, or for their interaction in practice (Browly and Eisenhardt, 1997, Eisenhardt and Martin, 2000).

Implications of moderately and very dynamic markets on dynamic capabilities are summarized below.

Even though dynamic capabilities can meet the conditions for being a source of sustainable competitive advantage, there are limits to the extent of their relevance.

Such capabilities are susceptible to threats of erosion, substitution and, especially, of being superseded by a higher-order capability in terms of a “learning to learn” variety.

Thus, in this view there can be an infinite regress with regard to the explanation and prediction of sustainable competitive advantage.

Collis (1994) sees a solution for this dilemma in the fact that the value of organizational capabilities depends on the specific context, and recognition that the strategy field will never find the ultimate source of sustainable advantage.

A danger with regard to organizational core capabilities is seen in fact that they may change to core over time (Collis, 1994).

Further more, it is seen as a threat that capabilities might be replaced by alternative capabilities that create consumer value in different ways (i.e. horizontal substitution) or that are generally better (i.e. vertically replacement).

The strategic logic of leverage in the dynamic capabilities perspective in contrast to the resource-based view is not over-emphasized, since it assumes that in dynamic markets long-term competitive advantage is not frequently achieved (Eisenhardt and Martin, 2000).

The contribution to the explanation of competitive advantage realization by the dynamic capabilities perspective lies in referring to firm’s abilities to achieve new forms of competitive advantage by renewing competencies in order to create congruence with the changing business environment (Eisenhardt and Martin, 2000: Teece et al., 1997).

A dynamic view is taken which acknowledges that firms must continuously build, adapt and reconfigure internal as well as external competencies.

The appropriate task for strategic management is seen in competing on capabilities rather than choosing a product market position or making traditional resource investments (Collis, 1994: 143-4).

The dynamic capabilities perspective is regarded as most relevant in a dynamic, i.e. Schumpeterian, environment characterized by innovation-based competition, price/performance rivalry, increasing returns, and the creative destruction of existing competencies (Collis, 1994; Eisenhardt and Martin, 2000; Teece et al., 1997).

In such an environment dynamic capabilities are not in themselves a source of long-term competitive advantage, but rather means to achieve resource configurations that provide advantage.

However, this advantage provision might possibly only work in the short term, because in dynamic marketplaces business opportunities to gain competitive advantages emerge, collide, evolve and then die.

The dynamic capabilities approach has recently been discussed intensively in the field of strategic management.

Even though research is still in its infancy and opportunities for the deduction of strong normative conclusions are limited (Teece et al., 1997: 528), relevant variables have been identified and first research questions are being developed, especially when looking at the realization of competitive advantages in very dynamic markets.

The discovery of particular processes as dynamic capabilities leads to different implications, and enlarges thinking to a substantive body of empirical research.

Further, specific routines and dynamic capabilities are defined in terms of their functional relationships to resource manipulation and creating value that is defined independent of firm performance – i.e. empirical falsification is possible (Eisenhardt and Martin, 2000).

In contrast to valuable resources that enable sustainable competitive advantage, dynamic capabilities can be imitated or developed through multiple learning paths. In addition, dynamic capabilities are common across firms and industries.

The particular firm management’s capabilities can lie in demonstrating timely responsiveness and rapid innovation as well as effective coordination and redeployment of internal and external resources and competencies, which in turn base on managerial and organizational processes, market positions and path dependencies (Leonard-Barton, 1992; Teece et al., 1997).

Dynamic capabilities can be conceptualized as instruments to manipulate resource configurations, which sometimes help to improve existing resource configuration and strengthen the current position in terms of a resource-based path-dependent strategic logic of leverage (i.e. the objective is to achieve long-term competitive advantage).

However, in dynamic markets it frequently makes more sense to engage in building new resource configurations and move into new competitive positions in terms of a path-breaking strategic logic of change (i.e. the objective here is a series of temporary competitive advantages) (Eisenhardt and Martin, 2000).

In the framework of thoughts of the dynamic capabilities view there are commonalities across firms in terms of key features that are often called “best practice.

In this case the assumption of the resource-based view, that there is persistent heterogeneity across firms, is violated.

Dynamic capabilities are thus not themselves the source for competitive advantage. However, firms can realize competitive advantages in relation to their competitors if they have more effective dynamic capabilities (e.g. superior product innovation and alliancing processes) than their competitors.

Dynamic capabilities can create resource configurations that generate value-creating strategies.

The possibility to achieve competitive advantage on the basis of dynamic capabilities lies in applying them sooner, more astutely, or more fortuitously than rivals (Eisenhardt and Martin, 2000).

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