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Dynamics Capabilities
Caroline Mudavadi
Portland State University

Farshad Madani
Portland State University

Garrett Gilliland
Portland State University

Corey White
Portland State University

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Mudavadi, Caroline; Madani, Farshad; Gilliland, Garrett; and White, Corey, "Dynamics Capabilities" (2012).
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Dynamics Capabilities

ETM 526/626

Caroline Mudavadi
Farshad Madani
Garrett Gilliland
Corey White

Presentation based on Teece, D. J. (January 01, 2007). Explicating dynamic

capabilities: the nature and microfoundations of (sustainable) enterprise
performance. Strategic Management Journal, 28, 13, 1319.
Objective
To “specify the nature and
microfoundations of the capabilities
necessary to sustain superior enterprise
performance in an open economy with rapid
innovation and globally dispersed sources
of invention, innovation, and manufacturing
capability.” Teece
Dynamic Capabilities
Enables business enterprises to
create, deploy, and protect the
intangible assets that support
superior long-run business
performance.
Resource selection vs.
Resource deployment
— Resource based view is more about resource
selection (Makadok, 2001)
— Resources are the foundation of a firm and the
basis for firm capabilities (Wang & Ahmed, 2007)
— Dynamic capability builds on the resource based view
by addressing how a firm utilizes its resources to
• Sense and shape seize opportunities and threats
• Seize opportunities and address threats
• Maintain competitiveness
• Dynamic Capabilities go beyond resource selection
and more into strategic resource deployment.
(Makadok, 2001).
 Embeddedness of DC
— Building a Portfolio of resources versus embedded
capability that enables strategic resource deployment
— Non-transferable except by acquisition of the firm
— Primary purpose of a capability is to enhance the
productivity of the other resources the firm has - systemic
vs. discrete resources (Makadok, 2001)

Resource Based View Dynamic Capability

R1 R2
R1 R2
vs.
R3 R4 R3 R4
In which environment?
1. Open to international commerce
– fully exposed to the opportunities and
threats
– Associated with rapid technological changes

2. Systematic technical change

– Multiple inventions must be combined to
create product and/or services that
address costumer needs
In which environment?
3. Well-developed global markets
– For the exchange of (component) goods and
services

4. Business environment characterized by

poorly developed markets

These characteristics can be found in large sectors of

global economy and especially in high-technology
sectors.
Foundations of dynamic
capabilities
1- Sense and shape opportunities
and Threats

)
Nature of the capability
— Some emerging marketplace trajectories
are easily recognized.
- miniaturization
◦ microelectronics -greater chip density
-compression and
digitization in information
- communication
technology

— However, most emerging trajectories are

hard to discern.
Microfoundations
— Cognitive and creative skills are need to:
◦ Accumulate and filter information

◦ Interpreting available information

– Chart
– Picture
– Conversation at a trade show
– News of scientific and technological breakthroughs
– Angst expressed by a frustrated costumer

◦ Create a conjecture or a hypothesis about the

likely evolution of technologies, customer needs, and
marketplace responses
Microfoundations
— Organizationalprocesses can be
established within enterprise to:
1. Garner new technical information
2. Tap developments in exogenous
science
3. Monitor customer needs
4. Monitor competitor activities
5. Shape new product and processes
Microfoundations
— Hypothesis development, hypothesis
“testing”, and synthesis about the meaning
of information must be performed by the
top management team.

— Recurrent synthesis and updating in

businesses designed by middle
management and/or planning unit.
 Elements for “Sensing”
Processes to Tap
Development in Exogenous
Processes to Direct Science and Technology
Internal R&D and Select
New Technologies
Analytical Systems
(and Individual
Capabilities) to Learn
and to Sense, Filter,
Shape, and Calibrate
Opportunities
Processes to Identify Target
Processes to Tap Supplier Market Segments, Changing
and Complementor Customers Needs, and
Innovation Customers Innovation
2- Seize opportunities

)
 Nature of the Capability
new product, processes,
— New opportunity or service

Maintaining and improving

Investment and Selecting or
competencies and
commercialization creating a
complimentary assets
particular
business model
•Commercialization
strategy
•Investment priorities
Organizational
Innovation

Decision making under Traditional

uncertainty and risk decision making
Microfoundations
— Selecting product architecture and business models
1. Which technologies and features are to be embedded in the
product and service
2. How the revenue and cost structure of a business is to be
“designed” or “redesigned” to meet customer needs
3. The way in which in technologies are to be assembled
4. The identity of market segments to be targeted
5. The mechanisms and manner by which value is to be captured

Business
— Success model
Factors in Business Modeling: •Value proposition
1- Analyze multiple alternatives •Appropriate technologies and
2- Deep understanding of user needs features
Articulate •Target market segments
3- Analyzing value chain •Structure of value chain
4- Outsourcing decisions •Estimate cost and revenue
Microfoundations
— Selecting enterprise boundaries
◦ An element of business modeling
◦ To make sure that innovation is more likely to benefit the
sponsor of the innovation rather than imitators and emulators
◦ Key elements:
– The appropriability regime (natural and legal protection)
– The nature of complementary assets
– The relative positioning of innovator and potential imitator with respect to
complementary assets
– The phase of industry development (pre or post the emergence of dominate
design)
◦ Critical strategic element: able to identify and control “the
bottlenecks” in the value chain from invention through the
market.
Microfoundations
— Managing Complements and Platforms
◦ High tech products are often systems containing independent
components resting on “platforms”
◦ End user demand is for the system, not for the platform.
◦ The platform owner needs complementary products to be
provided by others.

◦ What kind of decisions?

– Platform needs to be open or proprietary?
– Tools and other incentives should be provided to stimulate
investment by the complementors?
– Distribution (development) capabilities between the platform
and the complementors
Microfoundations
— Proclivities toward decision errors are not uncommon
in managerial decision making particularly in large
organizations.
◦ Investment decision errors:
– Excessive optimism
– Loss aversion
– Isolation errors
– Strategic deception
– Program persistence
— These errors can be especially damaging in fast-paced
environments.
— Biases can be recognized ahead of time by applying a
cognitively sophisticated and disciplined approach to
decision making.
 Strategic decision
skills/execution
Selecting Enterprise
Boundaries to Manage
Delineating the customer Complements and
Solution and the Business “Control” Platforms
Model
Enterprise structures,
procedures, designs,
and incentives for
seizing opportunities

Selecting Decision Building Loyalty and

Making Protocols Commitment
 2-

3- Managing Threats and Reconfiguration

Nature
— A key to sustained growth is the ability to
recombine and to reconfigure assets and
organizational structures as
◦ the enterprise grows
◦ Markets and technologies change

— Over time successful enterprises will

develop hierarchy and rules and
procedures(routines) that constrain certain
interactions and behaviors unnecessarily.
Such rules and procedures are likely to
require constant revamping.
Nature
— To sustain dynamic capabilities,
decentralization must be favored because it
brings top managers closer to new technologies,
the customer, and the market.

— In order to minimize internal conflict and to

maximize complementarities and productive
exchange inside the enterprise, top
management leadership skill are required to
achieve asset alignment, coalignment,
realignment, and redeployment
Microfoundations
— Decentralization must be pursued as the
enterprise expands, otherwise flexibility and
responsiveness will erode.

◦ Modern HRM involves more delayering,

decentralization of decision rights, teamwork, flexible
task responsibility and performance, performance-
based rewards,…

◦ Open innovation model endorses a distributed model

of innovation
Microfoundations
— Managing cospecialization
◦ Cospecialization can be of one asset to another, or of strategy to
structure, or of strategy to process.

◦ Cospecialized involves “lock-in” and is a particular form of

complementary that exits when technologies and other assets
need to be part of a tightly integrated system to achieve the
performance.

◦ Management’s ability to identify, develop, and utilize in

combination specialized and cospecialized assets built or bought
is an important dynamic capability, but it’s not always present in
enterprise settings.
Microfoundations
— Learning, knowledge management, and
corporate governance
◦ Integrating know-how from outside as well as within the
enterprise is especially important to success when “systems” and
“networks” are present.

◦ The outsource of production and the proliferation of joint

development activities create requirements that enterprises
develop governance procedures to monitor the transfer of
technology and intellectual property.
– Incentives alignment
– Controlling board performance
– Preventing the dissipation of rents by interest groups
Knowledge Management
— Knowledge management can be broken down
into eight activities (Nielsen 2006):
◦ Creation
◦ Acquisition
◦ Capture
◦ Assembly
◦ Sharing
◦ Integration
◦ Leverage
◦ Exploitation
Knowledge Management
— The eight knowledge management
activities are then assembled into:
◦ Knowledge development
◦ Knowledge (re)combination
◦ Knowledge use (Nielsen 2006)
 Strategic decision
skills/execution
Cospecialization
Decentralization and
Near Decomposability

Continuous Alignment
and Realignment of
Specific Tangible and
Intangible Assets

Governance Knowledge Management

Conceptual Debates of
Dynamic Capabilities

http://econintersect.com/wordpress/?p=17035
Definition
• Dynamic capabilities are the ultimate organizational
capabilities that are conducive to long-term
performance, rather than a subset of the capabilities
as Teece et al suggest
• Dynamic capabilities are not the processes but what
is embedded in the processes; processes are more
easily transferable across firms. (Wang & Ahmed, 2007).
o Quality control is a process easily transferable whereas
TQM is not just a process but also requires the firm's
capability to develop an organization-wide vision,
empowering employees and building a customer-
orientation culture
More Debates
— Fuzzy Origins
◦ Knowledge accumulation, asset articulation,
routine reshaping (Zollo & Winter, 1999)
– What avenues might DC be created within a firm?
– Is it simply an accumulation of know-how or does it
involve reshaping what’s already established?
◦ Evolution, Co-evolution or Revolution (Macpherson, et al. 2004)

– Would new firms more capable than established firms?

– Would older firms need drastic shifts to utilize DC? On
what scale? How drastic?
– Is DC something inherent or can it be created?
More Debates
— Fuzzy Implementation
◦ No agreed method or recipe for carrying out
the DC model
– Social Capital and participator Buy-In (Blyler & Coff, 2003)
– Venture Capitalist Involvement (Arthurs & Busenitz, 2006)
– Learning through experimentation (Pablo, et al. 2007)
◦ Reinvention or Reconstruction?
◦ Where, When and How to implement
– What environments require it?
– What environments benefit from it?
– Even then Success is not guaranteed
Link Between Firm
Performance and DC
• Measured by the firms key indicators; market
and financial relative to its main competitors
• Path to building capability is not universal
across firms and therefore the outcome of
capability development is different across firms
(Wang & Ahmed, 2007)
• Making market oriented decisions and the
timing of those decisions are key in improving
firm performance (Barreto, 2010).
Link Between Firm Performance
and DC
— Linking Performance and DC
◦ Doing the right things or doing things right (Jantunen, et al. 2005)

— Interrelations of DC and firm abilities

◦ Substantive Capabilities (Zahra, et al. 2006)
– Foundations of DC: Can the ability to dynamically problem solve
in shifting environments be considered DC?
– Changing the way a firm solves problems in dynamic
environments to best suit each case.
◦ Reconfiguration or Entrepreneurship
– Ability to Reconfigure (Jantunen, et al. 2005)
– Entrepreneurial ability – is entrepreneurship a reliable measure of
a firm’s DC? (Macpherson, et al. 2004)
– Sustainable Entrepreneurship or reconfiguring assets
So which way is the best way?
It DEPENDS!

Dynamic capabilities are themselves as

uncertain and dynamic as the environments
practitioners seek to adapt to; one method
does not necessarily apply to every case and
one case is not necessarily handled best by
one method alone.
Reexamining of Dynamic
Capabilities
 Summary
• Dynamic capabilities must be embedded
• It’s the value added to resource selection
through strategic resource deployment
• One size does not fit all
• Little commonality in definition and approach
• Knowledge management is critical
• Non-transferable except through total
acquisition (Makadok, 2001)
• Not a mature concept
References
• Nielsen, A. P. (2006). Understanding dynamic capabilities through
knowledge management. Journal of knowledge management, 10(4), 59-71.
• Makadok, R. (2001). Toward a Synthesis of the Resource-Based and
Dynamic-Capability Views of Rent Creation. Strategic Management Journal,
22(5), 387-401
• Teece, D. J. (2009). Dynamic capabilities and strategic management: Organizing
for innovation and growth. Oxford: Oxford University Press.
• Teece, D. J. (January 01, 2007). Explicating dynamic capabilities: the nature
and microfoundations of (sustainable) enterprise performance. Strategic
Management Journal, 28, 13, 1319.
• Wang, C. L., & Ahmed, P. K. (2007). Dynamic capabilities: A review and
research agenda. International Journal of Management Reviews, 9(1), 31-51.
• Barreto, I. (2010). Dynamic capabilities: A review of past research and an
agenda for the future. Journal of Management, 36(1), 256-280.
Resources
— King, A. A., & Tucci, C. L. (February 01, 2002). Incumbent Entry into New Market Niches: The Role of
Experience and Managerial Choice in the Creation of Dynamic Capabilities. Management Science, 48, 2,
171-186.
— Sher, P. J., & Lee, V. C. (2004). Information technology as a facilitator for enhancing dynamic
capabilities through knowledge management. Information & Management, 41(8), 933-945.
— Wheeler, B. C. (2002). NEBIC: A dynamic capabilities theory for assessing net-enablement. Information
Systems Research, 13(2), 125-146.
— Augier, M., & Teece, D. J. (2008). Strategy as evolution with design: the foundations of dynamic
capabilities and the role of managers in the economic system. Organization Studies, 29(8-9), 1187-1208.
— Reuter, C., Foerstl, K., Hartmann, E., & Blome, C. (2010). Sustainable global supplier management: the
role of dynamic capabilities in achieving competitive advantage. Journal of Supply Chain Management,
46(2), 45-63.
— Petroni, A. (1998). The analysis of dynamic capabilities in a competence-oriented organization.
Technovation, 18(3), 179-189.
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path. Strategic organization, 7(1), 91.
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knowledge management, 10(4), 59-71.
Resources
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strategy and economic performance. Organization Science, 20(2), 410-421.
— Døving, E., & Gooderham, P. N. (2008). Dynamic capabilities as antecedents of the scope of
related diversification: the case of small firm accountancy practices. Strategic Management
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debates and future directions. British Journal of Management, 20, S1-S8.
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Resources
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— Augier, M., & Teece, D. J. (2007). Dynamic capabilities and multinational enterprise:
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performance: insights from a simulation study. Strategic management journal, 24(2), 97-125.
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Appropriation: Ties That Split Pies. Strategic Management Journal, 24, 7, 677-686.