Dynamic Capabilities

1. Dynamic Capabilities Elena Vidal Olga Voronina February 17, 2009

2. Proposition 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

3. Definitions • Capability - ability to perform a particular task or activity • Operational capability – any type of capability thatenables firms to earn a living in the present (Winter, 2003) • Dynamic capability - capacity of an organization to purposefully create, extend, or modify its resource base, and consists of patterned and somewhat practiced activity  General Ability to Change (Helfat et al., 2007)

4. Key points in our argument • Theory: Change is constrained by past actions and resource base. Differences in the specific context and operational capabilities demonstrate firm’s inability to change, whereas describing how firms build DCs reveals firm’s ability to change • Change affects routines, so research should focus on how firms change regardless of the current status. • Research: it is difficult to identify all boundary conditions and make any predictions for the future  Research should be generalizable and theories succinct • Operational capabilities are too idiosyncratic to be understood through research. Research should focus on general abilities, and managers should focus on how to apply that general ability into their own context. • Conclusion: to research or to consult, that is the question.

5. Taking specific context out of equation Dynamic Capabilities Operational Capabilities Evolutionary fitness • Quality • Cost • Demand • Competition

6. Focus on product sequences • Regardless of the context, at any given point in time an organization’s portfolio of products serves as a platform for future product sequences and potential success. • Thus, no matter the industry (e.g. Walmart or Fedex) or country context (Japanese Sony, Canon or NEC), the dynamic system of core and integrative knowledge provides the basis for expansion strategies, while the systems of learning create an understanding of the potential as well as the limitations of core and integrative knowledge Helfat and Raubitschek (2000)

7. Focus on the processes • Through acquisitions firms can reconfigure their business and build on existing resources as well as obtaining new ones. • Understanding the general advantages and disadvantages of acquisitions and the potential to build an acquisition capability helps us better understand how firms, aside from their specific context, can gain a competitive advantage. • The advantage lies in the process – the specific context in which the acquisition is made explains the heterogeneity in the outcomes – research on contingencies, not specifics. (Karim & Mitchell, 2000)

8. Experience • Firms can capture, integrate, and disseminate alliance-management know-how through the creation of a separate, dedicated organizational unit responsible for capturing prior experience. • There is ample anecdotal and case evidence suggesting that some firms, on the basis of repeated experience in managing certain organizational forms, have developed superior capabilities at managing them. (Kale, Dyer and Singh, 2002)

9. Ways to develop capabilities • Capability gaps  depending on the closeness and strength of the gap between the current capabilities a firm has and the ones it needs, the mechanism through which it should acquire these capabilities varies  Internal development versus external sourcing (Capron & Mitchell, 2008) • Small changes in the ways in which research is managed inside the firm appear to have major implications for its productivity Henderson and Cockburn (1994)

10. Capabilities themselves • Firms’ search efforts vary depending on the search depth and search scope. • Need to understand the general abilities that firms should build – search capability in order to balance depth and scope – in order to be better performers. (Katila & Ahuja, 2002) • Firms that expand live longer than firms that don’t; however, a failed attempt to expand may be more detrimental for the firm than not expanding in the first place. (Mitchell & Singh,1993)

11. Commonalities in dynamic capabilities • Although dynamic capabilities are idiosyncratic, they have commonalities across effective firms = “best practices” • Moreover, in moderately dynamic markets, dynamic capabilities resemble routines (detailed, analytic, stable processes with predictable outcome) • In high-velocity markets, they are simple, highly experiential and fragile processes with unpredictable outcomes Eisenhardt and Martin (2000)

12. DC as tools to reconfigure • Resources: the greater the similarity between pre-entry firm resource and the required resources in an industry, the greater the likelihood that the firm will enter the industry and will succeed and prosper (Helfat & Lieberman, 2002) • Business units: acquired and internally developed units serve different roles in the process of change, firms reconfigure biz units before divestiture (Karim’06) • Org structure: successful firms blend limited structure with extensive communication and design freedom to create improvisation (Brown&Eisenhardt’97) • Networks: relations (alliances), Toyota (Dyer&Hatch’06)

13. Asking the main strategy question • Where does the potential for long-term competitive advantage lie? • In using DC sooner, more astutely, or more fortuitously than the competition to create resource configurations that have that advantage • It’s all about configurations of resources, DC are tools that manipulate these resource configurations Eisenhardt and Martin (2000)

14. Conclusion • Avenues of research that help us understand DC • Understanding how firms develop and use their ability to change, regardless of the operational capabilities, will better explain the paths that the firms have undergone. Change affects routines, so research should focus on how firms change regardless of the current status. • Contingencies, not specifics (generalizability) • Operational capabilities are too idiosyncratic to be understood in research – not much value obtained from that. Research should focus on general abilities, and managers should focus on how to apply that general ability in their own context. • RESEARCH, NOT CONSULTING: by understanding the general context, it is easier to apply it to firm-specific conditions

15. Future Research I • Phenomenon: commonalities in dynamic capabilities • Theory: Eisenhardt and Martin (2000) • Are related to more effective routines • Imply equifinality (multiple paths to the same DC) • Imply that DC are substitutable and fungible across different contexts • Research question: does E&M’s proposition about equifinality (2000) hold?

16. Setting for the study • DC in product development routine • Proposition: • all things being equal, more effective firms have multiple ways to develop the same DC • E.g. GM has 12 engineering centers tightly “knitted” to its 11 design centers to develop new products, Toyota, on the other hand, has 3 technical centers, 1 central R&D lab, 2 design centers and 2 engineering centers

17. Future Research II • Are dynamic capabilities transferable? • Research has been done in order to explain how firms build on their resource base to create dynamic capabilities, such as acquisition capabilities. • In order to study this, we could see if firms that have a dynamic capability in acquisition – both selection and implementation – have a higher ability on divestitures. • Hypothesis: • The higher the acquisition capabilities a firm has, the higher the divestiture capabilities the firm will have. • Example: Pfizer; GE; Xerox

18. Appendix

19. Org learning and DC • Learning mechanisms guide the evolution of dynamic capabilities (so it is not another org learning theory) Eisenhardt and Martin (2000)

20. Idiosyncratic firm capabilities (Henderson and Cockburn, 1994) “Component competence” (local ability or knowledge) “Architectural competence” (ability to use component c” “capabilities”(Amit&S, 1993) “integrative cap-s” (L&L, 67) “DC” (Teece et al., 1992) “implicit/social” or “collective” knowledge (Spender, 1994) “org architecture” (Nelson,91) “combinative cap-s”(K&Z,92) “mngl sys-s” and “values and norms (Leonard-Baton, 1992) “invisible assets” (Itami,1987) • “resources” (Amit&S, 1993) • “knowledge and skills” or “technical systems (Teece et al., 1992)

21. Commonalities in dynamic capabilities Eisenhardt and Martin (2000) • Suggest that DC per se are not likely to be sources of sustained competitive advantage • Suggest that the scale of DC in the empirical literature is overstated because simply putting dummies for firms leads to underspecified models that can’t capture key orgl attributes of DC as drivers of performance

22. To discuss • How DC are different from org learning • A slide on empirical difficulties in estimation of DC • We need examples of transferrable DC inside the firm (more on independence from specific context) • Operational capability = routines (=moderately dynamic environments = predictable outcomes) => if we focus on how firms change routines, we understand how firms change (DC in high-velocity environments with unpredictable outcomes acc. to E&M) – I REALLY LIKE THIS LAST POINT

23. Other papers • Mitchell & Singh (1993): firms that expand live longer than firms that don’t; however, a failed attempt to expand may be more detrimental for the firm than not expanding in the first place.  Understand that change is necessary, and it’ll help firms to apply it to their specific context.