3000642 A

Dynamic capabilities and the role of

organizational knowledge: an exploration

Isabel M. Prieto1 andMark Easterby-Smith2

1University of Valladolid, Valladolid, Spain;2Management School, Lancaster University,

Lancaster, U.K.

Correspondence: Mark Easterby-Smith,Management School, Lancaster University,Lancaster LA1 4YX, U.K.Tel: þ44 (0)1524 584012;Fax: þ 44 (0)1524 844262;E-mail: [email protected]

Received: 3 August 2005Revised: 8 January 2006Accepted: 24 August 2006

AbstractTwo concepts, dynamic capabilities and knowledge management, are widely

assumed to be linked to sustained competitive advantage, although researchers

have found it hard to substantiate these assumptions. It has also beensuggested that the interplay between the two is important, and that it needs to

be better understood. In this paper, we therefore look at the nature of, and

interaction between, organizational knowledge and dynamic capabilities insome detail. We do this first through a literature review, and second, through a

case study of the evolution of a new international business. The study illustrates

how forms of knowledge, particularly when transmitted via social interactions,can act as a source of dynamic capabilities, and we conclude with suggestions

about further research on the social and political interactions between the two.

European Journal of Information Systems (2006) 15, 500–510.

doi:10.1057/palgrave.ejis.3000642

Keywords: organizational knowledge; dynamic capabilities; social processes; knowledgetransfer; knowledge management; organizational politics

IntroductionThe idea of dynamic capabilities plays a central role in the analysis ofcomplex organizational processes because it offers a potential solution tothe quest for sustained competitive advantage. Although it has beendiscussed widely in the strategy literature, it has also been considered inrelated fields such as information management due to increasingawareness of the links between knowledge and organizational capabilities.

A stream of recent strategy literature has explored the organizationalcharacteristics that determine the effectiveness of the emergence, evolu-tion and utilization of dynamic capabilities. In these accounts, the role ofknowledge and knowledge-based processes has been central: dynamiccapabilities are seen to evolve through pathways that can be described interms of the evolution of knowledge within organizations (Zollo & Winter,2002), and this knowledge is then considered as a key resource to drivecompetitive advantage in organizations (Grant, 1996). In other words, thedynamic capabilities perspective suggests that the long-term, continuousrenewal of the firm rests on both the exploitation of existing knowledge-based competences and the exploration of new knowledge-based compe-tences (Zollo & Winter, 2002; Gibson & Birkinshaw, 2004).

Scholars with a primary interest in knowledge processes have alsoconsidered their potential link to dynamic capabilities (He & Wong,2004; Sambamurthy & Subramani, 2005), and a few empirical papers (Goldet al., 2001; Sher & Lee, 2004; Cepeda & Vera, 2005; Haas & Hansen, 2005)have taken a cross-sectional approach, examining, for example, the way inwhich dynamic capabilities can be facilitated by knowledge management.These studies have shown the relationship to be complex, which suggests

European Journal of Information Systems (2006) 15, 500–510

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that there is a need to understand in greater depth thespecific interplays within organizations.

The aims of this paper are twofold. First, to provide abrief review of the literature on dynamic capabilities andknowledge management, leading to a theoretical accountof potential linkages between the two, and second, toillustrate through a case study how these may be manifestin practice. Although the idea of dynamic capabilities hasevolved largely from theorizing, the construct hasremained quite abstract and it has received littleempirical verification. Our case study tries to reduce thisgap by offering examples of resource configurations androutines that seem to embody dynamic capabilities. Indoing so, we try to show the role played by knowledgemanagement in relation to the evolution and use ofdynamic capabilities.

The emergence of dynamic capabilitiesThe dynamic capabilities literature has sought to studyfirms’ potential to adapt to and take advantage of fast-moving environments. At the core of the concept is theidea that, when the competitive landscape evolvesrapidly and unpredictably, an organization can achieveand sustain advantage by regularly adjusting anddeveloping resources (Teece et al., 1997) and routines(Eisenhardt & Martin, 2000; Winter, 2003). But adynamic capability does not necessarily imply constantchange; more the potential to extend, modify or createthese internal resources and routines as appropriate. Thispotential depends on complex organizational processes(routines or patterns of current practice), shaped by thefirm’s specific resource positions, and the evolution pathsit has adopted/inherited that condition its range ofpossible alterations to its existing competences (Teeceet al., 1997).

Amid the consensus, there are also important differ-ences in the emphases provided by different authors. Thedominant tradition comes from the ‘resource-basedview’, which concentrates on the resources such asphysical, human and organizational assets that can beused to implement value-creating strategies, which maybe configured and reconfigured in ways that cannoteasily be matched by competitors, thus yielding businessadvantage (Barney, 1991; Hamel & Prahalad, 1993).Because the value of resources change over time, Teeceet al. (1997, pp. 516) add that competitive advantagecomes not only from resources but also from the firm’sability to continually create, integrate and reconfigurenew resources.

Other papers have tended to place greater emphasis onroutines, which Winter (2003, pp. 991) defines as‘behaviour that is learnt, highly patterned, repetitious,or quasi-repetitious, founded in part on tacit knowledgeand the specificity of objectives’. Eisenhardt & Martin(2000) also focus on routines, by characterizing dynamiccapabilities as specific, identifiable and organizationalprocesses like product development, alliancing andstrategic decision-making that create value for firms

within dynamic markets. But there is also an importantcontrast with the resource-based view which emphasizesuniqueness and inimitability, because Eisenhardt andMartin claim that dynamic capabilities exhibit common-alities across effective firms and these features represent akind of ‘best practice’, which can be transferred from onefirm to another. Dynamic capabilities are thus a necessarybut not sufficient condition for competitive advantage.Other scholars, such as Zollo & Winter (2002) and Zott(2003), see high-level routines as the driving force behindchanges in resource configurations.

Researchers have also shown how significant routinescan be located both at strategic levels, as when companiesprogressively develop routines for dealing with integra-tion of new corporate acquisitions (Zollo & Singh,2004), and at operational levels, where detailed workpractices are constrained by organizational resources andinfluence the potential changes in these same resources(Feldman, 2004). Feldman’s work raises the questionof the links between resources and routines. On thebasis of her detailed study of the management ofstudent residences and using insights from structura-tion theory, she concludes that the chain of influence istwo-way.

Although the idea of dynamic capabilities is relativelyrecent, it has been criticized on a number of grounds.First, the exact nature of dynamic capabilities is not wellunderstood, and there is the argument that the concept isboth vague and tautological: dynamic capabilities are thethings that enable organizations to sustain competitiveadvantage, but we can only infer these when looking atapparently successful organizations over sustained peri-ods of time (Winter, 2003). This leads to a secondweakness because there have been very few researchstudies that have enabled the evolution and operation ofso-called dynamic capabilities to be observed over time(Priem & Butler, 2001). Most of the early papers ondynamic capabilities were illustrated with examplesadapted from earlier studies, which had been designedwith different targets in mind.

Third, there is some confusion about the differentterms and their interrelationships. Do dynamic capabil-ities reside in resources, or only in the process of beingchanged; and if routines can be established for changingresource configurations, do these routines become dy-namic capabilities in their own right; and what if theroutines themselves become changed, does this imply‘meta’ dynamic capabilities? Some of these dilemmashave been tackled recently by Winter (2003), who usesthe logic of differential calculus to distinguish betweendifferent levels of change (distinguishing between zero,first and second orders of change), although this frame-work has not yet been widely adopted. Finally, it is notyet clear where dynamic capabilities come from,although there is growing acknowledgement that ‘learn-ing’ must play some part in the process (Zollo & Winter,2002). As such learning involves the potential to create,integrate and reconfigure knowledge, and to transform

Dynamic capabilities and the role of organizational knowledge Isabel M. Prieto and Mark Easterby-Smith 501

European Journal of Information Systems

existing knowledge into further knowledge (Verona &Ravasi, 2003; Dougherty et al., 2004).

This evolving interest in learning and knowledgeprocesses underlying dynamic capabilities provides aninitial rationale for this paper, but we are also interestedto examine current issues including definitional pro-blems, and the relationship between resources androutines.

Organizational knowledge and its managementEconomists have recognized for a long time that knowl-edge may have economic value both in society, in general(Hayek, 1945), and in the growth and development oforganizations (Penrose, 1959). Moreover, Nelson &Winter (1982) paid particular attention to the signifi-cance of ‘tacit’ knowledge as a basis for both individualand organizational competence. However, it was notuntil the mid-1990s that companies became very inter-ested in the nature of knowledge, partly as a result of theadvances in information technology, which provided thepromise of being able to manage knowledge as acorporate asset. Knowledge management emerges as theintegrated approach about the need to understand howto manage the actual and potential flows of knowledgecreation, transfer, retention and use within and acrossorganizations. Initially, the focus was on the provision oftechnological solutions, such as the introduction ofintranets, the establishment of data warehouses andknowledge repositories, and the creation of directoriesof expertise. But there was also quick appreciation that IT-based knowledge management would not work unlessconsiderable attention was given to the social processesupon which their implementation relied (Ruggles, 1998).

Much academic comment, therefore, has concentratedon aspects of knowledge, which appeared to be proble-

matic when information technology solutions wereapplied. One clear distinction that emerged in theliterature was a divide between those interested in the‘technology’ side and those emphasizing the ‘social’ sideof knowledge management (Alvesson & Karreman, 2001;Gloet & Berrel, 2003). As summarized in Table 1, each oneof these perspectives derives from the different under-standings of knowledge and its creation through learning(Easterby-Smith & Araujo, 1999; Thomsen & Hoest, 2001;Gnyawali & Stewart, 2003). There has also been concernthat social perspectives have been neglected in theliterature, and that a critical factor in determining thesuccess or failure of knowledge management systemsis the impact on social relationships among the peoplewho utilize the systems (Brown & Duguid, 2000; Hayes& Walsham, 2003; MacPherson et al., 2004; Hansenet al., 2006).

Other researchers argue for more of a balance byintegrating the technological approach with the socialapproach as a basis for action (Pan & Scarbrough, 1999),thus combining the role of technology, informationsystems and people. In this context, technology becomesa facilitator of natural social processes, allowing specialist‘communities of practice’ to operate across functions andgeographical distance within the same organization(Alavi & Leidner, 2001; McLure & Faraj, 2005). There isalso a growing acceptance of a ‘contingency’ model ofknowledge management which suggests that there needsto be consistency between the firm, its people, its taskand its information technologies. For example, in thecontext of consultancy companies and computer manu-facturers, when the nature of the task is highly auto-mated and repetitive, it is worth investing in extensive‘codification’ of knowledge; but where the primary tasksare large, complex and fairly unique, it makes more sense

Table 1 Organizational knowledge and its management: two perspectives

Theoretical lens Treatment/modelling Conception of KM

Technology perspective � Rooted in a view of knowledge as a cognitive

possession

� Information gathering and analysis are central to

organizational learning, as they enable change in

existing schemas of reality, which is knowledge

� Individuals only constitute a small part of

organizations

� KM focuses on effective information seeking,

processing and codifying in order to make

decisions that optimise the organization/

environment relationship

� KM enables organizations to build formal/tangible

systems which enhance internal learning

� Key KM features comprise IT infrastructures, and

other technical and managerial systems

Social perspective � Rooted in a view of knowledge as a social

construction

� Social activity and discursive behaviour are central

to organizational learning, as they support the

social construction of reality

� Organizational members, individually or

collectively, question and reflect on their own

working processes

� KM aimed to enhance shared interpretation

processes by organizational members in order to

make sense of the environment

� KM is about building informal/intangible learning

environments supported by appropriate kinds of

behaviour

� KM is designed around social relations and more

cultural enablers. IT makes things easier, but only

as tool to increase work efficiency

Dynamic capabilities and the role of organizational knowledge Isabel M. Prieto and Mark Easterby-Smith502


to develop knowledge management systems that are‘personalized’ around the needs of individual actors(Sarvary, 1999; Hansen et al., 1999).

But a number of problems remain. For a start, there isconcern about whether it is possible to manage the formsof knowledge that really matter for performance andcompetitive advantage. Since this knowledge tends to betacit, and based on individual experiences and intuitions,it becomes difficult to codify and exchange. Conse-quently, knowledge management systems often becomeoverburdened with information that has no particularperformative or economic significance (Alavi & Leidner,2001; Sutton, 2001). Furthermore, the transfer of ‘useful’knowledge between individuals and groups dependsincreasingly upon the quality of relationships, andwhether there is sufficient trust/reciprocity betweenthose involved (Jones & George, 1998; Andrews &Delahaye, 2000; Zarraga & Bonache, 2005). Underlyingthis is a recognition that individuals need to be appro-priately motivated to contribute to knowledge manage-ment systems (Bock et al., 2005), and that the ownershipand control of knowledge within organizations becomesa particularly sensitive political issue (Leadbeater 2001;Lawrence et al., 2005). Hence, an interest of this paper isto explore some problematic issues of organizationalknowledge within the evolution over time of a realorganization.

Linking dynamic capabilities and knowledgemanagementAs we have noted above, a number of authors have madegeneral linkages between dynamic capabilities andorganizational knowledge, suggesting that the dynamiccapabilities which underpin the long-term, continuousrenewal of the firm rest on both the exploitation ofexisting knowledge-based competences and the explora-tion of new knowledge-based competences (Eisenhardt &Martin, 2000; Gibson & Birkinshaw, 2004). Zollo &Winter (2002) identify a ‘knowledge evolution cycle’,including generative variation, internal selection, repli-cation and retention, behind the development of dy-namic capabilities. Similarly, Verona & Ravasi (2003) andDougherty et al. (2004) highlight that dynamic capabil-ities are made up of knowledge creation and acquisition,knowledge integration and knowledge reconfiguration,and moreover, suggest that these processes are based on acoherent mix of organizational conditions.

But the precise form of these linkages has not beenarticulated and has to be inferred from various accounts.For example, dynamic capability researchers have identi-fied forms of knowledge that serve as potential sources ofcompetitive advantage. Leonard Barton (1995) andVerona & Ravasi (2003) note that personal skills andknowledge, physical and technical resources, structureand culture should be combined to stimulate ongoingknowledge dynamism and dynamic capabilities. Researchhas also explicitly identified the conditions behindknowledge-enabled dynamic capabilities. For example,

Lawson & Samson (2001) propose a model that oper-ationalizes innovation as a dynamic capability dependenton seven conditions: vision and strategy; harnessing thecompetence base; organizational intelligence; creativityand idea management; organizational structure andsystems; culture and climate; and the management oftechnology. Clearly this involves combining both tech-nical and social perspectives on knowledge management.On the other hand, Dougherty et al. (2004), on the basisof extensive qualitative research, concentrate more onthe social perspective – describing three sets of rulesand resources (whole responsibility, valuing knowledgeexpertise and searching for opportunities) as socialenablers of the dynamism of capabilities embedded inthe structures of everyday work.

Among knowledge management researchers, the as-sumption is widely held that information technologycontributes directly to organizational flexibility, andhence dynamic capabilities. This relationship continuesto receive comment, for example, by Sambamurthy et al.(2003) who develop a theoretical argument suggestingthat digital information technology is itself a dynamiccapability. Sher & Lee (2004) see the two as separate andexamine the relationship empirically to show that bothendogenous and exogenous knowledge generated by arange of IT applications is linked to perceptions ofdynamic capabilities across a sample of Taiwanese firms.The bulk of empirical studies on this relationship takea quantitative approach using cross-sectional surveys(Gold et al., 2001; Sher & Lee, 2004). An exception isthe study by MacPherson et al. (2004), which adoptedqualitative methods to examine dynamic capabilities in aknowledge-dependent firm. They concluded that therewas a strong link between the ability of senior managersto gather external knowledge through business networksand the creation of dynamic capabilities for adaptingroutines that would enable them to recognize and exploitnew business opportunities.

The knowledge management literature has alsoreached the point of acknowledging that social processesplay a key role in the creation, sharing and configurationof knowledge, which can produce hard-to-imitate cap-abilities. For example, Argote et al. (2003) argue thatsocial relationships provide individuals with abilities,motivation and opportunities to create, retain andtransfer knowledge. A growing body of research has shedlight on what affects people’s willingness to shareknowledge at work. However, much of the work reportedis based on limited empirical data, and is exploratory innature, indicating the general lack of depth to theunderstanding of these issues in detail. How knowledgegets created by or integrated into social practice andrelationships is therefore a critical aspect behind dynamiccapabilities, which still needs research effort. In additionto social relations, power (Scarbrough & Carter, 2000) andpolitical issues (Marshall & Brady, 2001) are also proper-ties of social systems associated with knowledge manage-ment outcomes that have been neglected by research.



In summary, there is general consensus that a relationexists between knowledge and dynamic capabilities, andthat knowledge management is closely intertwined inthis relationship because the creation and evolution ofdynamic capabilities requires specific conditions tosupport the knowledge flows that elaborate, support orremove knowledge configurations. But the details of therelationship remain obscure and imprecise, and manyquestions remain, about the essence of dynamic capabil-ities, the relationships between routines and resources,the forms of knowledge that are critical to corporateperformance and competitive advantage, and the waysocial relationships and political factors affect knowledgeflows. In this paper, we aim to explore these factors with amore fine-grained analysis.

Methodology and research settingWe examine these issues through a single longitudinalcase study because the time dimension provides someopportunity to infer causality, and because the complex-ity of a case examined in some depth should allow usquestion, and to elaborate on, the models and frame-works discussed above. The research took place inChemCo (a pseudonym), which is one of the globalleaders in the development and supply of chemicals.Over the years, it has built a huge body of technicalknowledge, and this ability to create and apply knowl-edge has been regarded as the main source of itscompetitive advantage. Like many multinationals, it hasrecently reorganized its structure from product divisionsinto market segments. The corporate-wide reorganizationwas accompanied by a strategic shift that placed greateremphasis on customers and the need for technicaldevelopments to be driven by closer awareness of marketexpectations, and this has subsequently led to a radicalrethink of the role of knowledge across the company.

Over the last 2 years, we have focused specifically onthe development of a new business venture (NBV) withinChemCo, and we have tracked its evolution throughinterviews, observations of meetings and reviews ofinternal documentation. Fieldwork has included repeatedinterviews with most of the management group (themanaging director (MD) has been interviewed fourtimes), plus observation of a two-day managementmeeting in Spring 2005 that was attended throughoutby all three authors. This meeting enabled observation offormal and informal discussions that were followed upwith individual interviews. In addition, we have inter-viewed both senior management in ChemCo andmembers of partner organizations (see below) about theprogress of the new venture. We have also reviewedextensive internal documentation that traces the evolu-tion and implementation of the current strategy since itsinception in 2003. Notes were kept by each of us duringmeetings, and transcripts have been produced for allformal interviews. The initial interpretation of data wasreached through discussions between the researchers. Wethen sent summaries of our conclusions (containing both

practical and theoretical implications) to senior manage-ment in the NBV for comment, and discussed ouremerging theoretical framework with key managers.

The NBV is one of a number of innovative projectsinitiated by ChemCo in 2003, and which are activelysupported by the highest levels of the company. Theessence of the venture, which is still evolving at the timeof writing, is to use an established French organization asa platform from which to expand the business acrossEurope and the Middle East. The business plans areambitious, with an annual target of 30% growth in salesover each of the next 4 years. The strategy is to expandoutside France using partnership arrangements with localspecialist firms, and the expansion is driven by a smallteam of regional sales managers (SMs) who are respon-sible for the recruitment and development of partners ineach region. See Figure 1 for a summary of the mainrelationships.

The local partners are mostly small, specialized com-panies. They need to have sufficient technical expertiseand business networks to sell ChemCo’s products to theircustomers, and since they are given exclusive rights foreach country, their selection is critical. Once selected,there is a training programme that is conducted throughbrief assignments working with the French business,through visits to potential customers in their owncountries accompanied by the regional manager ortechnical experts from France and through direct trainingprovided by the French technical director. For the NBV,this model provides a route for very rapid expansion intonew territories for negligible capital outlay, which thengives them the potential to claim regional presence whendealing with other global companies. Also, since Chem-Co does not need to put an infrastructure in place, it iseasier then for the company to decide whether to investor disinvest in the various markets. For the local partners,the arrangement provides local credibility due to theirassociation with a global brand; it gives potential accessto multinationals with which ChemCo has links else-where; and it provides them with substantial technicalexpertise and systems support. Furthermore, none oftheir competitors has yet managed to develop a similarbusiness model; instead, they continue to rely mainly onselling directly to end customers.

CHEMCO

NBV

SM

SM

SM

SM

France

Partner

Customer

Customer

Customer

Partner

Partner

Figure 1 Main structure of the NBV.



We believe that this case provides a fruitful setting forour research because it is evolving very quickly, hence it islikely to exhibit ‘dynamic capabilities’; it operates thougha loose network that crosses both organizational andnational boundaries, hence issues about the control anddissemination of knowledge are likely to be salient; and itis a live study that enables us to see how things evolveover time, hence we are more likely to observe interac-tions and causal relations over time. Since this is acomplete business, we have to recognize its complexity,and therefore are likely to observe things we had notpreviously expected, and yet it is small enough for us tohave direct access to most of the main players, whichshould provide a reasonably complete picture.

Analysis and discussionIn this part of the paper, we provide an analysis of theabove case that links the empirical data to theoreticalconstructs. It is divided into five sections. The first twoconsider the nature of organizational knowledge anddynamic capabilities manifest in the company, and theimplications for key theoretical debates in both areas. Wethen look at the extent to which there appears to be a linkbetween the two concepts. This leads to the final twosections which consider common themes which areapparent in both areas, and which have received limitedacknowledgement in the literature: the importance ofrelationships, and the impact of power and politics.

Organizational knowledgeWe have identified from the case study six main flows ofknowledge, which are illustrated in Figure 2. We areconscious of the distinction between technical and socialforms of knowledge, but have decided for the time beingnot to classify each example in these terms, but to returnto a discussion of these issues at the end of the section inthe light of the examples provided.

The first, and critical, form of knowledge in the NBVinvolves the creation of technical expertise and newproduct development. The French operation plays apivotal role in technical knowledge creation and thisknowledge is disseminated to the SMs and national

partners through generic training and technical gui-dance. There is also a reciprocal element, because thenational partners accumulate detailed knowledge of thetechnical requirements of customers and occasionallydevelop new formulations on site to deal with novelproblems of customers. This knowledge is passed back tothe technical office for wider dissemination to other salesoperations (K1). A second form of knowledge flow (K2)involves discussion and negotiation about businesstargets, and the collection of data on sales performanceto be measured against these targets. Discussions abouttargets require both the NBV and partners to share theiraspirations at the start of the year and these targets arereadjusted in the light of performance as the yearprogresses. The information on sales performance andprofits is collected on a regular basis using the standardinformation system of ChemCo that allows data to beintegrated into the financial forecasts of the widercompany.

However, a different process operates for informationabout contractual arrangements (K3). The MD of the NBVhas agreed with senior management that details of localcontractual arrangements do not need to be entered intothe corporate database because they include substantialvariation from corporate norms. Instead, they arereported by SMs to the MD. As he commented:

an important part of our value proposition is to be very flexible and

make it easy for the clients who want to do business with us. The

way ChemCo normally does contracts has more inherent inflexi-

bility, so part of my job is to keep our guys away from ChemCo.

In this instance, the expected knowledge flow does nottake place, and is deliberately blocked.

The fourth example involves regular exchanges thattake place between partners and their regional SMs, whoare thus able to enrich their understanding of localmarket constraints and opportunities. In some cases, thisbecomes a close personal relationship with daily com-munication by phone or e-mail, and where the SMbecomes a business advisor to the local partner (K4).These insights and local variations are then sharedbetween the sales team and other senior managers attheir bi-monthly meetings. This is a multinational teamwhere members have close knowledge of their ownpatches, but they still have to explain and justify localvariations in practice to their colleagues. These differentforms of local, or situated, knowledge often haveconflicting implications for the NBV as a whole, whichhave to be reconciled, occasionally through the directintervention of the MD (K5). A final knowledge flowcame to light when we were discussing the above mapwith two of the senior managers in the NBV. Havingagreed with our overall interpretation, they pointed outthat because the parent company has operations inalmost every country, the local ChemCo managersnormally build up relationships with national partnersand are then able to provide information and guidanceon new business opportunities (K6).

CHEMCO

NBV

SM

SM

SM

SM

France

Partner

Customer

Customer

Customer

Partner

Partner

K1

K2

K4

K5

K3K1

K6

K2

Figure 2 Major knowledge flows.



At this point, we can return to the distinction betweensocial and technical forms of organizational knowledge,and it is evident from our data that the distinction is byno means clear-cut. For example, K1 and K2 combineboth technical elements of knowledge (as embodied ininformation systems), and social elements of knowledge(involving sense-making and negotiated meanings). Inthe latter case, there is a continuous interweavingbetween the more technical forms of information suchas sales performance and the social processes that requirejoint sense-making about the significance of performancedata and the negotiations about ongoing readjustment oftargets. On the other hand, K4, K5 and K6 involveprimarily social forms of knowledge – generally directface-to-face communications between key individuals(although supplemented by e-mail and telephoneas necessary), either as part of a routine or on an ad hocbasis.

The third example (K3) is particularly interestingbecause it contradicts the prevailing assumption thatknowledge, either in its technical or social forms,generally contributes towards organizational perfor-mance. In this case, the judgment is made by theimmediate manager and those above him in thehierarchy that standardized reporting of information islikely to inhibit the evolution and growth of the newbusiness. In recognition that gathering of this informa-tion could potentially be harmful to the business, it isagreed that normal information-gathering requirementsshould be suspended.

Thus, we are not able to provide a neat resolution tothe debate between social and technical forms of knowl-edge. Rather, we have shown that there are a number ofpotential interactions and variations. Technical andsocial variants may exist independently, but the formeris more likely to be combined with the latter, and mostimportantly, we have shown that in certain circum-stances technical forms of knowledge management maybe considered as harmful to the well being of theorganization. This accords well with the results of thequantitative study by Chuang (2004), which showed thatsocial forms of knowledge were positively related tocompetitive advantage, while technical forms could benegatively linked.

In concluding this section there are two importantpoints to note. First, there are clear political overtones tothe use of knowledge within this organization. This isexemplified by the way the MD has been allowed tointroduce a one-way filter in relation to local contractualarrangements, as discussed above. There is also anongoing debate at senior management level (observedat the management meeting, and discussed subsequentlywith individuals) about the extent to which informa-tion about local business circumstances should besystematized – or whether it is best to maintain theexisting exchange of knowledge between managers andpartners at an informal, social, level. Second, knowledgeflows depend very much on the quality of relationships

between the key actors. SMs, in particular, seem to play amediating role between the partners and the head-quarters of the NBV, and the sharing of both technicaland commercial knowledge among the NBV, the partners,and even some of the customers, depends greatly on thelevels of trust that have been built up. We will return tothese points in the discussion section.

Dynamic capabilitiesThe case demonstrates a number of dynamic capabilities.We will not map them as we did for organizationalknowledge, but will use a similar numbering system toassist with later discussion. Several capabilities generateflexibility in the strategic deployment of resources. First,the reliance on partnerships with established localcompanies means that new businesses can be establishedquickly, and this enables competencies and knowledge tobe moved very quickly from one country or setting toanother. This allows for rapid growth with minimalreliance on existing capital or infrastructure (DC1).Second, since the local partners are independent, ratherthan franchisees, it is easier for the partners, in consulta-tion with the regional managers, to devise contracts withcustomers that take account of local circumstances(DC2). Third, because of the wider international reachof the NBV, the French operation gains greater flexibilityand leverage in their dealings with multinational custo-mers operating in France, thus providing novel businessopportunities for the original core business (DC3). Andthe strategic resources of ChemCo mean that localpartners gain much credibility from this associationwhen seeking business with multinationals in theirterritories. As the MD of one partner said: ‘without thevisible backing of ChemCo we simply would not be on theradar when bidding for a contract with Shell’ (DC4).

On the other hand, there are some resource issues thatappear to act against flexibility and mobility. This isbecause, as a loosely coupled organization, the business ishighly dependent on the technical competence ofindividuals and the quality of the relationships that existbetween the key players. These take time to build up. Forexample, the U.K. partner has had successful businessdealings with ChemCo over 16 years, even though thenew business has only been running for 2 years. More-over, when setting up agreements with partners who arecompletely new, they have found that on average thistakes up to 18 months, rather than the 6 monthsenvisaged in the initial plan.

Flexibility and adaptation of routines was evident in twoareas. At a strategic level, there was an acceptance thatbusiness processes and partnership arrangements mightvary according to different national circumstances. Thus,although there is a general rule that only one partnershould be appointed in each country, there are sevenpartners in Italy simply because regional business differ-ences in that country are so strong (DC5). At anoperational level, the youthfulness of the organization,and the consequent lack of history, means that many



routines have to be invented from scratch, and thereforethere is no embedded resistance to change in the oldways of doing things. This includes routines aroundpricing arrangements, information reporting and perfor-mance measurement. Of course, much of this freedomwas a result of having negotiated relative independencefrom the wider systems of ChemCo, at least for the earlystages of the business (DC6).

There are several implications here for the nature ofdynamic capabilities. The distinction in the literaturebetween resources and routines appears to work quitewell in this case study: DC1–DC4 are primarily aboutresources, while DC5 and DC6 are primarily aboutroutines. However, in the case of DC1, there is someintermingling of the two concepts. Here it could beargued that the consistent use of partnerships representsa strategic routine that then leads to resource flexibility.There is also a meta-routine apparent in DC4 becausethere is a basic routine/rule that there should only be onepartner in each country, there is also a meta-routineoperating here which suggests that the rule can be brokenunder certain circumstances.

In general, these examples show that dynamic cap-abilities can be incorporated in either resources orroutines, or both. Evidently the relationship betweenresources and routines may be complex, but that it canalso be positively delineated when qualitative data isemployed. Our results here complement the detailedanalysis of Feldman (2004) that shows the interminglingof resources and routines within a university housingagency. Although the two concepts are largely distinct, itis quite possible for changes in one to produce transfor-mations in the other.

Links between organizational knowledge anddynamic capabilitiesWe have hinted at some of the potential links betweenorganizational knowledge and dynamic capabilities inthe two preceding sections. Here we examine theconnections more systematically, and we note that eachof the forms of organizational knowledge can be linked toone or more of the dynamic capabilities that we haveidentified in this case. For example, the technicalexchanges between the French business and partners(K1) lead to greater flexibility and credibility for thepartners (DC2 and DC3); the opportunity to discuss andrenegotiate targets (K2) is likely to support the generalflexibility of routines within the NBV (DC6); a regularinformal exchanges between SM partners (K4) lead toadvice and encouragement about the strategic shifts forthe partner (DC2); the exchange of ideas and experiencesbetween SMs (K5) leads to the dissemination of the newlocal practices of routines (DC6); and contacts with localChemCo managers (K6) lead to new business opportu-nities for local partners (DC4). We also have the negativecase where the agreement about restricting reporting toChemCo (K3) leads to greater flexibility in local contrac-tual arrangements (DC6).

In general, we have assumed that forms of knowledgeprecede, and therefore lead to the establishment ofdynamic capabilities. However, the first may also bepossible, because strategic shifts in the business ofindividual partners (DC2) might well prompt changesin the formal and informal processes of gathering anddisseminating knowledge within the NBV and betweenSMs. Thus, although it appears that there are relation-ships between organizational knowledge and dynamiccapabilities, these may well be more complex thanexisting causal models assume. In this respect, we wouldsupport the insights of Bhatt & Grover (2005), who arguethat a more detailed understanding of the nature andvariations of dynamic capabilities need to be achievedbefore significant progress is to be made on the basicrelationship between the two.

RelationshipsIt is widely recognized that knowledge flows are affectedby the quality of relationships, and there are a number ofillustrations of this from our data. A key feature of thebusiness model for the NBV is that it is based onrelationships between partners that are legally quiteindependent of each other. When discussing the reasonsfor the continuing success of the business (at the time ofwriting it remains in line with its ambitious targets), wewere repeatedly told that it relies on the quality ofpersonal contacts between the key players. As the MDsaid: ‘we need to understand that this is a people intensivebusiness, a know-how intensive business’. He agonizedconsiderably over the selection of SMs because thebusiness model gave them considerable freedom andempowerment to act as they thought fit. Hence, heobserved that one of his biggest challenges was ‘having todelegate to others, and trust in the people who are engaged inthe project’.

The NBV requires a willingness to share information:both technical and product knowledge are disseminatedto the SMs and national partners, while simultaneouslynational partners may pass to the technical office newformulations in order to deal with a customer’s specificproblems, which means an ongoing learning about eachindividual market. Regular contacts ‘lead to understandingof the different routes to sell chemicals in different countriesand how to create a value proposition to customers’. Sincepartners are the intermediaries between Chemco and thedelivery of chemicals to customers, care and support areessential concerns. As one of the SMs said: ‘relations withpartners are like family relations. If one partner gets sick, youlook after him’.

The predominance of relationships in this case has animpact both on organizational knowledge and ondynamic capabilities. First, the dominance of social formsof knowledge exchange produces a scepticism of, andresistance to, undue formalization of information sys-tems. Second, the existence of positive relationships maylead to the establishment of dynamic capability becausethey can support a decentralized and empowered model.



But relationships can take a long time to establish andmuch effort to maintain, which slows down the speedwith which new business links can be established, andmeans that considerable attention has to be devoted toissues such as training and team development. Thissupports the findings of Kotlarsky & Oshri (2005) aboutthe need for social relationships to underpin collabora-tive software within IT projects, and the observations ofHansen et al. (2006) on the importance of positive directrelationships as a precursor to knowledge transferamongst managers.

PoliticsWhile this has been noted repeatedly in relation toorganizational knowledge, the case has shown howpolitical skills are required to influence the nature oforganizational knowledge in ways that will enhance,rather than undermine, dynamic capabilities.

It is widely acknowledged in the literature thatorganizational knowledge has political overtones (Hislopet al., 2000; Newell et al., 2000; Hayes & Walsham, 2003;Lin & Silva, 2005), but this is less frequently noted in theliterature on dynamic capabilities. Indeed, a recent searchwithin Proquest under the terms ‘politics’ and ‘dynamiccapabilities’ yielded no hits at all. In the present case, theNBV is only able to function as a distinct part of ChemCobecause the unusual relationship has been approved andsanctioned by managers at the highest level of the parentcompany. Nevertheless, the MD still has to translate thisgeneral sanction into operational reality by gainingagreements about limiting information flows, aboutacceptance of non-standard contractual arrangementsand about circumventing company-wide rules, such asrestrictions on the additions to the head-count. Theseagreements were difficult to establish in the first place,and are complex to maintain. In a recent interview hecommented, ‘if anything, the politics are worse than theywere a year ago’. Thus, political protection is a keyfacilitator of the NBV’s dynamic growth because thegeneral manager is able to provide from the proceduresand systems of the wider company. This helps to have avery flexible and proactive approach to customers –because each country has a different culture – which isvery different from the tradition of ChemCo.

Within the NBV itself, political issues appear to have abearing more on the way priorities are agreed, the waysuccesses and failures are evaluated, and the way differentforms of knowledge and expertise are legitimized. Forexample, there is ongoing tension about the relevantvalue of the emergent experience of the regional SMscompared to the deeper experience of the managers inthe established French business. The dilemma about howbest to balance the technical and social aspects ofknowledge management is also being actively exploredamong the senior team as a debate about whether, andhow far, to systematize information gathering andexchange. This is a common and continuing debatewithin the information knowledge community as shown

in the work of Marshall & Brady (2001) and Marshall &Rollinson (2004). There is also a clear practical concernhere: that further ‘formalization’ of knowledge manage-ment may lead to a reduction in local autonomy andcreativity. The potential implication is that ‘informal’knowledge management supports dynamic capabilities,but that ‘formal’ knowledge management may hinder it.

ConclusionsThe purpose of this paper was to improve our under-standing of dynamic capabilities, organizational knowl-edge and the interplay between the two. We havepresented a case study of a leading chemical company,which demonstrates several areas where knowledge actsas a source for dynamic capabilities: through thetechnical training provided to individual partners bythe French business; through the way market informa-tion filters back by word of mouth; through informalexchanges between SMs; and through the protection thatis provided from the systematic information gathering ofthe parent company.

The case provides examples of both social andtechnical organizational knowledge, which appear tocontribute to dynamic capabilities conceptualized asflexibility in both resources and routines. However, it ispossible that the social forms of knowledge have a greaterimpact, particularly in relation to flexibility of resources.This supports the view of those who argue for moreattention to the social impact of knowledge, although werecognize that the current structure of the company doesplace greater reliance on the quality of relationships. It isalso possible that the technical forms of knowledge maybecome more important as problems of scale andcoordination increase.

Two other important points arise from this study. Thefirst is the way power and politics appear to affect therelation between organizational knowledge and dynamiccapabilities. The second point is related because we haveshown in two instances that the relationship betweenorganizational knowledge and dynamic capabilities is notnecessarily positive, and that this depends very much onthe broader context of the organization. We thereforesuggest that general assertions about the relationshipbetween organizational knowledge and dynamic capabil-ities require a more fine-grained analysis than has beenhitherto provided.

Naturally, there are a number of limitations to thispaper. It is based on a single case study with a number ofunique features, which therefore limit the direct general-izability of the results. Although notionally a long-itudinal case study, the time span is limited by the factthat the company has only been in existence for 2 years,and other factors may come into play as it evolves overtime. However, we have tried to be cautious in drawinginferences; we have followed a falsification logic byhighlighting features that appear to contradict previousstudies; and we have also tried to look for instances ofcounter-evidence within our own case.



The case identifies several issues that require furtherexploration, and we highlight four main avenues that arelikely to be fruitful. First, we think it is important toexplore the appropriate balance between the technicaland social variants of knowledge management in con-tributing to dynamic capabilities for different types ofbusiness and at different stages of the organizationalgrowth process. Second, the nature of dynamic capabil-ities merits further exploration through intensive, andpreferably longitudinal case studies. This is because muchof the existing literature is based on secondary data, andthere is much repetition of ideas that are in need of freshchallenges from new data. Several aspects derived fromdifferent models of dynamic capabilities were illustratedin the above case study, which suggests that no onemodel provides a complete view. Third, further examina-tion of the relationship between organizational knowl-edge and dynamic capabilities should provide deeperunderstanding of the complex relationships between

knowledge and performance, thus extending the workof Bhatt & Grover (2005), and there is potential also toconsider dynamic capabilities as an intermediate variablebetween knowledge and performance, as suggested byCepeda & Vera (2005). Fourth, the relative lack ofcomment and guidance within existing models abouthow knowledge management and dynamic capabilitiesare created and enacted through internal debates andspecific decisions among organizational actors suggeststhat the political aspects of the two areas would benefitfrom further study.

AcknowledgementsThanks to the financial support provided by the FundacionCaja Madrid, Spain, and by the Economic and Social

Research Council, U.K., reference: RES-334-25-0020. We

are also grateful to Manuel Graca and Wayne StAmour fortheir contribution to data collection.

About the authors

Isabel M. Prieto is an associate professor of BusinessAdministration at the Department of Business Manage-ment and Market Research at the University of Vallado-lid, Spain, since 1996. She received her Ph.D. from theUniversity of Valladolid with a concentration in knowl-edge management and learning in organizations. In2004/05 she was post-doctoral visiting scholar in theLancaster University Management School, U.K. Hercurrent research is on knowledge management andorganizational learning in relation to new product

development, dynamic capabilities and human resourcesmanagement.Mark Easterby-Smith is President of the British Academyof Management and Professor of Management Learning atLancaster University. In 2003 he was appointed a seniorfellow of the U.K.’s Advanced Institute of Management(AIM) research initiative, and is currently leading researchprojects investigating the nature of dynamic capability ina variety of contexts, and the knowledge implications ofproduct-service systems within manufacturing industry.

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