Class 5: Dynamic Capabilities Duke-Bocconi Seminar, 2010-2011

1. Class 5: Dynamic Capabilities Duke-Bocconi Seminar, 2010-2011 Yinliang Fu &Martina Pasquini Nov 22, 2010

2. Propositions • Proposition 1:Research will best explain firms' ability to change by focusing on how firms build a general ability to change that is independent of any specific context or operational capability. • Proposition 1alt: Dynamic capabilities theory is just a new name for organizational learning theory. The prospects for a theory of some general ability to change are minimal and difficult to separate from basic learning in a dynamic environment. Research will best explain firms’ ability to change by focusing on the constraints and opportunities that arise from its specific operational capabilities and their relationship to the dynamic environment.

3. Main points from Prop. Alt. • Dynamic capabilities (DC) theory ≈ Organizational learning (OL) theory • Basic learning is embodied in DC, in a dynamic environment • Existing operational capabilities & dynamic environment matter

4. Outlines • Propositions & Main arguments • Main perspectives • Dynamic capabilities • Organizational Learning • Limits to existing capabilities • Limits to external environment • An Example • Research question & Empirical studies

5. Main perspectives on the Ability to change: some definitions of DC • Firm’s ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments (Teece et al., 1997) • DCs are the antecedent organizational and strategic routines by which managers alter their resource base - acquire and shed resources, integrate them together and recombine them – to create new value-creating strategies. DC as a set of specific and identifiable processes such as product development, strategic decision making, and alliancing. (Eisenhardt and Martin, 2000) • DC is a learned and stable pattern of collective activity throughwhich the organization systematically generates and modifies its operational routines in pursuit of improved effectiveness (Zollo and Winter, 2002) • A dynamic capability is the capacity of an organization to purposefully create, extend and modify its resource base (Helfat et al., 2007)

6. Are Dynamic Capabilities a label for Organizational Learning • Learning as guide mechanism to DC: • DC as Learning process which enable tasks to be performed better and quicker. It also enables new production opportunities to be identified (Teece et al., 1997) • Capabilities evolve through path dependent processes: future trajectories are bounded by repeated practices and learning mechanisms (Eisenhardt and Martin, 2000, Helfat et al., 2007) • DC as learned and stable pattern (Zollo & Winter, 2002) • Firm develop DCs through 3 perspectives from OL: Experience accumulation; knowledge articulation; and knowledge

7. Limits to change by existing capabilities • Creation is constrained by existing capabilities • Capabilities are shaped by existing resource. Heterogeneity of capabilities among firms depends on the bundle of resources belonging to firm itself (i.e. RBV, KBV) • As Katila and Ahuja (2002) point out: firm uses and reuses its knowledge (search depth vs search scope, exploitation vs exploration) • Firms have difficulties in switching to new capabilities, and in understanding knowledge embedded in current capabilities (Kogut and Zander, 1992) • Firms tend to develop proximate capabilities (Cyert and March, 1963) • Possibility of inertia: capability creation would compete with firms’ existing capabilities that often trigger resistance (Oliver, 1997)  reduced likelihood of radical change • Modification and reconfiguration are constrained by existing capabilities and limits of operational capabilities themselves • Capabilities as high-level routines confers an organization’s management a discrete set of significant outputs (Winter, 2003)  modifying or recombining a set of org. capabilities does not provide a general ability to change, but a limited set of discrete outcomes (i.e. fitting for example with the environment)

8. Influence from external environment (1) • The context within which organizations utilize DC matters. • DCs not only have generic attributes, but also become tailored to the settings in which they function, including different industries, technologies, functional areas, and organizations. • Routinized vs. Non-routinized dynamic capabilities (Eisenhardt and Martin, 2000) • Ability to change and level of change are due to market dynamism: in moderately markets the change in capabilities is routinized and stable, while in high velocity markets change may be close to causal ambiguity and then unpredictable • Evolutionary fitness - measure the performance of DC shows context-dependence depends on the external selection environment. (Helfat et al., 2007)

9. Influence from external environment (2) Environmental dynamism might influence the typology of change: • Ad hoc solutions vs. Dynamic capabilities (Winter, 2003) • different types of change required according to the level of dynamism and predictability of the environment • costs/benefits of cumulative investments in dynamic capabilities • Internal vs. External sources of change • Stable VS Turbulent >> Exploitation VS Exploration Learn from external source - Acquisition & Alliance (Singh and Zollo, 1997; Capron and Mitchell, 1998; Capron, Mitchell, and Swaminathan, 1999)

10. An Example • Preadaptation/exploitation of previous existing capabilities • “When creating new technologies, prior experience can become a source of competitive advantage rather than a constrain” (Cattani, 2005, p.564) • Redeployment of prior experience might provide an opportunity to outcompete in a new technology-related industry (Klepper and Simons, 2000; Cattani, 2005) • Example of U.S. TV receiver industry: • - More experienced radio firms were more • likely to enter TV manufacturing, and had • a longer survival

11. Existing studies • 4 main topics in DCs: (Di Stefano, Peteraf & Verona, 2010) • Foundations and Applications • Interrelationships with Other Theoretical Perspectives • Issues of Governance Structure • Transformation Processes and Entrepreneurship

12. Empirical studies & future research • Recent literature focuses on dynamic capabilities as outcome of managerial decisions • Dynamic managerial capabilities (Adner and Helfat, 2003) as “capacity of managers to create extend or modify resource base of organization”. • Existence of managerial ingredients in developing and deploying dynamic capabilities such as asset orchestration by top managers and behaviors/experiences of senior executives (Helfat et al., 2007) • An interesting contribution is enquiring different settings of dynamic capabilities development such as entrepreneurship: • We wonder if dynamic capabilities in entrepreneurial setting depend exclusively on processes and best practices or if some cognitive elements of the entrepreneur affect the change