Dynamic capabilities – a New Theory of Strategic Change

1. Dynamic capabilities – a New Theory of Strategic Change Aleksandra Rebeka Christopher Crittenden

2. Our proposition Setting up the debate Propositions What we will show: Proposition 1 • Dynamic capabilities theory is a new theory of strategic change. It helps us understand how firms build a general ability to change that is independent of any specific context or operational capability • What dynamic capabilities are • How a firm builds dynamic capabilities Proposition 2 • 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. • How dynamic capability theory augments organizational learning theory … why it isn’t redundant • Limitations of dynamic capabilities theory and possible directions for future research

3. Dynamic capabilities have been given multiple names • Combinative capability (Kogut and Zander, 1992) • Architectural competence (Henderson and Cockburn, 1994) • Dynamic capability (Teece, Pisano, and Shuen, 1997) • Integrative capability (Helfat and Raubitschek, 2000) • Second-order competence (Rosenkopf and Nerkar, 2001)

4. What are dynamic capabilities? “A dynamic capability is the capacity of an organization to purposefully create, extend, or modify its resource base” (Helfat et al. 2007) • A few key points: • Change in the resource base implies that the firm is doing something different, not necessarily something better • “Purposefully” indicates some degree of intent on behalf of the firm • “Capacity” suggests that the function is repeatable and reliable

5. How a firm builds dynamic capabilities Learning mechanisms guide the evolution of dynamic capabilities: Repeated practice: practice helps managers to understand processes more fully and develop more effective routines Codification of experience: codification of experience makes experience easier to apply and accelerates building routines Small mistakes: without mistakes managers tend to not reflect on learning while large mistakes raise defenses that block learning. Small mistakes however encourage reflection without defensiveness Pacing of experience: experience that comes too fast can overwhelm managers and inhibit learning • Despite idiosyncratic paths to developing dynamic capabilities, dynamic capabilities tend to be equifinal, substitutable , and fungible • Thus, DC are not a source of competitive advantage. Competitive advantage arises from the resource configurations managers achieve using their dynamic capabilities Source: Eisenhardt, Martin. 2000

6. Legend Which firm will you bet on? Learning X Firm A Firm B Firm C CRISIS Firm D Firm E Firm F

7. OC OC OC OC OC OC OC OC Legend Which firm will you bet on? OC Operational capability DC Dynamic capability Firm A Firm B Firm C OC OC OC OC OC OC OC CRISIS OC OC OC OC OC OC OC OC Firm D Firm E Firm F OC OC OC OC DC OC OC

8. WHILE DYNAMIC CAPABILITIES RESULT FROM LEARNING MECHANISMS, LEARNING DOES NOT ALWAYS RESULT IN DYNAMIC CAPABILITIES

9. Dynamic capabilities theory augments organizational learning theory by explaining path breaking behavior Technical fitness: How well you do what you do Achieving high technical and evolutionary fitness requires moving down the learning curve & dynamic capabilities This explanation is still relevant in highly dynamic markets since firms still require dynamic capabilities to overcome inertia. However, the nature of the DC are different. Firms increase technical fitness through learning (think learning curve) path dependent path breaking Evolutionary fitness: How well what you do fits the environment Firms increase evolutionary fitness through dynamic capabilities and learning

10. Theory of Dynamic Capabilities… … states that “what a firm can do is not just a function of the opportunities it confronts; it also depends on what resources it can muster” (Teece, Pisano, and Shuen, 1997) • One can argue that this statement is similar to the one that organizational learning and population ecology make; however, there are some subtle differences: • Restrictive view of population ecology and organizational learning – implies the necessity of adaptation or adjustment to the environment with what a firm has (notion of fate and luck to some extent) • Non-restrictive view of dynamic capabilities – implies that a firm can enhance what it has (through organic and non-organic development) and respond to the change. This leads to the following: • Exit is not death • Managerial capabilities are important • A firm can handle environmental turbulence

11. Theory of Dynamic Capabilities… … Relaxes the assumption that a firm exists only in one industry • Using resources across different products and markets can be another perspective to look at the growth advantage of the firm – Wernerfelt, 1984 • The strategy should include considering whether the rents from assets should be utilized by integrating them in related markets or even by selling these assets to a firm in a related business (Teece, Pisano, and Shuen, 1997) • Examples • Viagra that initially was developed for cardiovascular indication (angina) but failed in clinical trials, was then reconsidered for a different market (Adner and Levinthal, 2004) • Canon licensed its copying technology to Japanese and foreign competitors and started getting royalties, instead of marketing the product themselves (Helfat and Raubitschek, 2000)

12. Theory of Dynamic Capabilities… … explicitly assumes managerial capability to be an important source of competitive advantage • Managerial capabilities are important for “adapting, integrating, and reconfiguring internal and external organizational skills, resources, and functional competences to match the requirements of a changing environment” (Teece, Pisano, and Shuen, 1997) • The role of manager is to recognize: • The arising opportunity and not get into identity traps: • Liberty Life that refused to adopt Vitality concept because “That’s not how we do things around here” (Temlett and Wilson, Organizational Learning Presentation) • The importance of a particular capability and a necessity to dedicate resources to develop this capability: • Alliance function (Kale, Dyer, and Singh, 2002) • “Effective leaders supply the resources and support needed to exploit capabilities” (Miller, 2003; Eisenstat et al, 2001)

13. Theory of Dynamic Capabilities… … implies that a firm with developed dynamic capabilities is able to sustain technological shocks or adapt quickly to unexpected environmental circumstances • By reconfiguring itself (strategic renewal), a firm can get through the turbulence of the environment (Chen, Williams, and Agarwal, 2010) • By being attentive to the environmental and customer response, a firm is able to: • Succeed even though it deals with the situation it did not expect: • “Walking away “ – e-Secure, a Singapore-based security software developer, walked away from its strategy of developing security software solutions to developing hardware with these solutions (Bingham, 2009) • Beat its competitors, despite being technologically at par with them: • JVC proactively engaged other consumer electronics firms to sell VHS-format VCRs. Also Matsushita, JVC’s parent, pursued economy of scale and produced VCRs for other companies –- Sony refused to do it (Helfat and Raubitschek, 2000)

14. Some points remain unresolved (directions for future research) • How fungible and substitutable are dynamic capabilities? • “Given the apparently large pay-off to changing the organization and management of this crucial function, it is puzzling that there are such large and persistent differences across firms in these dimensions” (Henderson and Cockburn, 1994) • How far do dynamic capabilities enable a firm to “jump”? • The notion of path-breaking change (Karim and Mitchell, 2000) and step-function learning (Helfat and Raubitschek, 2000) • Are dynamic capabilities an advantage of experienced firms only (Chen, Williams, and Agarwal, 2010)? • Can a small firm/de novo firm have certain dynamic capabilities to get through, and if yes, then what are they? • Are dynamic capabilities really not a source of competitive advantage? • Does a certain dynamic capability have the same meaning to all firms that have developed it? • Does it make sense to move one level up and consider a bundle of dynamic capabilities vs. each dynamic capability separately • “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, Pisano, and Shuen, 1997)