Dynamic Capabilities

and Strategic

Management

David J. Teece, Gary Pisano and Amy Shuen (1997)

Strategic Management Journal, Vol. 18:7 509-533.

Focus, Methods and Motivation of This PaperFocus: How do firms achieve and sustain competitive

advantage?

Motivation: Strategic theory replete with analyses of firm-level strategies for sustaining and safeguarding extent competitive advantage. Not enough research on how and why firms build competitive advantage in regimes of rapid change.

(Question: Is asking “Why” on existing theory a way to develop new topic?)

Methods: Develop the dynamic capabilities approach; approach relevant in a Schumpeterian world of innovation-based competition, price/performance rivalry, increasing returns and “creative destruction” of existing competences.

Notes about the MethodsJoseph Alois Schumpeter (8 February 1883 – 8 January 1950)was an

Austrian-American economist and political scientist. He popularized the term "creative destruction" in economics.

Creative destruction is a term originally derived from Marxist Economic Theory which refers to the linked processes of the accumulation and annihilation [ə'naɪəleɪt] of wealth under capitalism. 

Important work: Evolutionary economics History of Economic Analysis Business cycles Schumpeter and Keynesianism Schumpeter and capitalism's demise Schumpeter and democratic theory Schumpeter and entrepreneurship Schumpeter and Innovation Schumpeter and the Gold Standard

Structure of This PaperReview of Existing and Accepted

Framework

Dynamic Capabilities Framework

Conclusions

Future Research

Review of Existed and Accepted Framework Model 1 – The exploitation of Market Power Competitive Forces entry barriers; threat of substitution; bargaining power of buyers; bargaining power of suppliers; rivalry among industry incumbents – determine the inherent profit potential of an industry or sub-segment of an industry

Strategic Conflict How firms can influence the behavior and actions of rival firms and thus the market environment? By manipulating the market environment, a firm may be able to increase its profits. Game Theory – where competitors do not have deep-seated competitive advantages, the moves and countermoves of competitors can often be usefully formulated in game-theoretical terms

Model 2 – Efficiency Resource-Based Perspective This approach sees firms with superior systems and structures being profitable not because they engage in strategic investments that may deter entry and raise prices, but because they have markedly lower costs, or offer markedly higher quality or product performance

Dynamic Capabilities – Framework introduced in this paper Dynamics – the capacity to renew competences so as to achieve congruence with the changing business environment Capabilities – the key role of strategic management in appropriately adapting, integrating, and reconfiguring internal and external organizational skills, resources and functional competences to match the requirement of a changing environment. For an innovating firm in a world of Schumpeterian competition – identify difficult-to-imitate internal and external competences is most likely to support valuable products and services

Framework of “Dynamic Capabilities Framework”Terminology

Market and Strategic Capabilities

Process, Positions and Paths

Reliability and Imitatability of Organizational Process and Positions

(Prof., in the paper, it is written imitatability, but why it is not in google?)

Dynamic Capabilities Framework - Terminology

Factors of production Undifferentiated (Lacking firm-specific component) inputs available in disaggregate form in factor markets Resources Firm-specific assets Difficult to imitate Difficult to transfer among firms due to transfer and transactions cost 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

Dynamic Capabilities Framework - Market and

Strategic CapabilitiesAddressing strategic problem as:

Competitive forces framework – industry structure, entry deterrence and positioning

Game-theoretic model – interaction between rivals with certain expectations about how each other will behave

Resource-based perspective – exploitation of firm specific assetsIdentifying the foundations upon which distinctive and difficult-to-

replicate advantages can be built, maintained, and enhanced.Identify “what is NOT strategic” ?Homogeneous product, firms that undergirds competitive advantage,

why? - Distinctions between markets and internal organizations. - Firms are domains for organizing activity in a nonmarket-like fashionEntrepreneurial activity cannot lead to the immediate replication of

unique organization skills through simply entering a market and piecing the parts together overnight – replication takes time

Dynamic Capabilities Framework – Process of the

(Process, Positions and Paths)Organizational and Managerial ProcessesCoordination/integration (a static concept) Internal and external Often display high levels of coherence The frequent failure of incumbents to introduce new technologies results from the mismatch of organizational processesLearning (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 identifiedReconfiguration and transformation Firms must develop process to minimize low pay-off The ability to scan the environment, to evaluate markets and competitors, to quickly accomplish reconfiguration and transformation ahead of competition

Dynamic Capabilities Framework – Position of the

(Process, Positions and Paths)PositionsTechnological assets: Ownership protection and utilization of technology assets are key differentiators among firms

Complementary assets: Typically lie downstream

Financial assets: what a firm can do in short order = F(Balance Sheet)

Reputational assets: a summarize of infor. about firms and

Structural assets: The formal/informal structure of organizations

Institutional assets: Public policy; institution a critical element of the business environment

Market (structure) assets: Product market position, important but often overplayed

Organizational Boundaries: tech; complementary asset, coordination

Dynamic Capabilities Framework – Paths of the

(Process, Positions and Paths)PathsPath dependencies – Function(current position, the path ahead)1, “History matters.2, Learning is a process of trial, feedback and evaluation. transaction and production specific past investments and routines constrain the firm’s future behavior3, The “lock-in” degree caused by switching cost = Function(user learning, rapidity of tech change; amount of ferment in the competitive environment, etc. )Technological opportunities Tech opportunities not completely exogenous to industry; can be firm-specific; firms looking at different choicesAssessment Firm – a sum of its parts; shift in environment = serious threat

Dynamic Capabilities Framework - Replicability and Imitatability of Organizational

Process and PositionsReplicability1, Involves transferring or redeploying competences from one concrete economic setting to another.2, Competences and capabilities and the routines they rest on, are difficult to replicate.3, Routines and competences - attributable to local or regional forces that shape firms’ capabilities at early stages in their lives4, Two types of strategic value flow from replication: a) the ability to support geographic and product line expansion b) the indication that the firm has the foundations in place for learning and improvement

Imitation1, If self-replication is difficult, imitation is likely to be harder – factors make replication harder make imitation harder2, Barrier impedes imitation – Intellectual property rights protection, e.g., patents, trade secrets, trade-marks, trade-dress3, Should not over estimate the overall importance of intellectual property protection.4, Use “Appropriability” to measure the ease of imitation. A = Function(ease of replication; the efficacy of intellectual property rights as a barrier to imitation)

Conclusions

ConclusionsEfficiency vs. Market PowerExcept in special circumstances, too much “Strategizing” can

lead firms to underinvest in core competences and neglect dynamic capabilities and thus harm long-term competitiveness.

Normative Implications: capabilities approach tends to steer managers toward creating distinctive and difficult to imitate advantages and avoiding games with customers and competitorsUnit of Analysis and Analytic focus - in capabilities/ resources/

conflict framework, strategy analysis must be situational.Strategic Change – Competitive/conflict framework see strategic

choice occurring with relative facilityEntry Strategy – “Resources/ capabilities framework” “entry

decision” “competences, capabilities and competition ”Entry Timing - “Resources/ capabilities framework” “interaction

between specialized assets and rivalry”Diversification - “Resources/ capabilities framework” meritorious;

Conflict framework more permissiveFocus and specialization – Capabilities framework, internal

process, F(assets, how to play, how to deploy and redeploy)

Complex problems are likely to benefit from insights obtained from all of the paradigms. The trick is to work out which frameworks are appropriate for the problem at hand.

Future ResearchFurther theoretical research needed to tighten

the frameworkEmpirical test needed to help people

understand how the framework works

Suggestions from the Author: Strategy researchers cooperate with researchers in the fields of Innovation, Manufacturing, Organizational Behavior and Business History.

THANK YOU!