Dynamic capabilities and strategic management Teece, David J., Gary Pisano and Amy Shuen (1997). Strategic Management Journal, 18 (7): 509-533. He Soung Ahn September 23 2009

The fundamental question in the Strategic Management field How firms achieve and sustain competitive advantage Here, the dynamic capabilities approach is introduced The term dynamic refers to situations where there is rapid change in technology and market forces Goal is to identify the dimensions of firm-specific capabilities that can be sources of advantage, and to explain how combinations of competence and resources can be developed, deployed, and protected in the long-run

3 existing paradigms 1. The competitive forces approach Developed by Porter (1980) Rooted in the structure-conduct-performance paradigm of industrial organization Economics Industry structure and where the firm is positioned within the industry matters The key aspect of the firm’s environment is the industry or industries in which it competes (Porter 1980). 5 industry-level forces determines the profitability Monopoly rents

2. The strategic conflict approach Uses game theory to analyze the nature of competitive interaction between rival firms Key idea is that by manipulating the market environment, a firm may be able to increase profits Irreversible commitments Emphasizes the role of sunk costs, as opposed to fixed costs Commitment and reputation Signaling (ex. Predatory pricing, limit pricing) Co-opetition (Brandenburger & Nalebuff 1995, 1996) : added the concept of complementors to Porter’s 5-forces model Criticism Does not generate testable predictions Multiple equilibrium exists and the results often depend on the precise specification chosen The entrepreneurial side of strategy is ignored Most relevant when firms’ competitive advantages are symmetric

3. Emphasis on efficiency The resource-based perspective Competitive advantage depends on scarce firm-specific resources Vertical integration and diversification Managerial strategies for developing new capabilities must be considered Skill acquisition The management of knowledge and know-how learning

The dynamic capabilities approach Terminology Factors of production Undifferentiated inputs available in disaggregate form in factor markets Lacking firm-specific component Resources Firm-specific assets Difficult to imitate Difficult to transfer among firms Organizational routines/competences Distinctive activities when firm-specific assets are assembled in integrated clusters Core competences Competences that define a firm’s fundamental business as core Dynamic capabilities The firm’s ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments Products Final goods and services produced by the firm based on utilizing the competences that it possesses

Competitive advantage fundamentally depends on… 1. The firm’s managerial and organizational processes, which support productive activity Firm capabilities, because (distinctive) capabilities cannot be assembled through markets 3 roles Coordination/integration (a static concept) Both internal and external Often display high levels of coherence The frequent failure of incumbents to introduce new technologies results from the mismatch of organizational processes Learning (a dynamic concept) A process by which repetition and experimentation enable tasks to be performed better and quicker, and enables new production opportunities to be identified Requires individual skills and organizational skills (common codes of communication & coordinated search procedures) Results in new patterns of activity (“routines”) Reconfiguration and transformation (a transformational concept) Requires constant surveillance

Competitive advantage is also shaped by… 2. Specific assets it possesses (i.e. asset position) Technological assets Complementary assets Financial assets Reputational assets Structural assets The formal/informal structure of organizations Institutional assets Market (structure) assets Organizational boundaries The degree of integration

3. Paths Path dependencies Technological opportunities “History matters” Because learning is local (i.e. transaction and production specific), past investments and routines constrain the firm’s future behavior Especially important where there are increasing returns to adoption Ex) network externalities May cause “lock-in” on inferior technologies Technological opportunities Existence of such opportunities can be quite firm-specific, due to past innovation activities or organizational structures

This framework suggests that the behavior/performance of a firm would be difficult to replicate and imitate Competences can provide competitive advantage and generate rents only if they are based on a collection of routines, skills, and complementary assets that are difficult to imitate Replication : transferring/redeploying competences from one concrete economics setting to another Imitation is simply replication performed by a competitor Factors that make replication difficult also make imitation difficult Appropriability