dynamic capability

""A dynamic capability is a learned and stable pattern of collective activity through which the organization systematically generates and modifies its operating routines in pursuit of improved effectiveness."" (Zollo, 2002). An earlier definition is from Teece (1997) ""A firm's dynamic capabilities are the firm's ability to integrate, build and reconfigure internal and external competencies to address rapidly changing environments.""

The first definition is preferable in that it eliminates the need for a rapidly changing environment as a requirement, leaving firm to integrate, build, and reconfigure their competencies at their own pace and under any circumstances. The first definition is also not a tautology, as the second one is, or nearly is.

Dynamic capability development -- Zollo (2002)
Starting from the characterization of dynamic capabilities as systematic patterns of organizational activity aimed at the generation and adaptation of operating routines, Zollo and Winter proposed that dynamic capabilities develop through the co-evolution of three mechanisms --

• tacit accumulation of past experience -- the relative effectiveness or accumulated experience increases directly with task frequency.
• knowledge articulation -- articulation builds capability more quickly than experience itself for low to medium volume task frequencies
• knowledge codification processes -- codification efforts force the drawing of explicit conclusions about the action implications of experience, something that articulation alone, much less experience alone, does not do. Codification's more effective than experience accumulation and articulation for infrequent tasks, including newly created tasks. Codification ""done right"" can be expressed as the following principles --
1. codification should aim at developing and transferring ""know why"" as well as ""know how."" This exposes action-performance links.
2. codification efforts should be emphasized at an appropriate time in the course of learning. Premature codification risks hasty generalization from limited experience, with attendant risks of inflexibility and negative transfer of learning. Long deferred codification risks careful examination of the causal relationships frustrated by the entrenched results of tacit accumulation, which may have attained high acceptance for both superstitious and rational reasons.
3. codified guidance is to be tested by adherence. It is clear that codification cannot be an instrument of continued learning if the guidance developed after trial 7 is simply ignored at trial 8 and later. Testing also avoids inappropriate application.
4. there is a need for a supporting structure, exercising judgment, regarding departures from the standard guidance.

How Dynamic Can Organizational Capabilities Be? --
Schreyögg, Georg, (2007), and Martina Kliesch-Eberl, How Dynamic Can Organizational Capabilities Be? Towards a Dual-Process Model of Capability Dynamization, Strategic Management Journal, Vol 28, No. 9, Sep 2007, pp 913-933 --

The authors address a key strategic management issue. In the resource-based view organizational capabilities have been identified as one major source for the generation and development of sustainable competitive advantages (emphasis added). With the consideration of volatile markets, environmental uncertainty, and change, the reliance on a specific set of nurturing capabilities has been called into question. This question has been answered with some form of dynamic capabilities, where the capability itself is dynamic, adapting to take advantage of the changing environment, thereby renewing organizational capabilities.

Capabilities described --
In this discussion, capability does not represent a single resource in concert with other resources such as financial asset, technology, or manpower, but rather a distinctive and superior way of allocating resources. The complex processes that form organizational capabilities are conceived as collective and socially embedded in nature, representing a collectively shared 'way of problem solving' (Cyert and March, 1963).

• Capabilities are developed in the context of organizational resource allocation which is embedded in idiosyncratic social structures. On this basis capabilities are conceived s distinct behavioral patterns which are complex in nature involving both formal and informal processes (Dosi, Nelson, and Winter, 2000; Hofer and Schendel, 1978; Sanchez and Mahoney, 1996).
• Capabilities represent a repository of historical experiences and organizational learning (Winter, 2000).
• In the case of superior performance and a unique historical development, capabilities are assumed to build the foundation for sustainable competitive advantage.
• Capabilities do not actually represent a resource; the focus rather on the combination and linking of resources.

Dynamic capabilities --
In the capability debate, the issues of volatile markets, environmental uncertainty, and change have come to the fore. Building on the observation that markets and superior market positions have increasingly become subject to erosion processes, the reliance on a specific set of nurtured capabilities has been called into question. Instead the emphasis has shifted to the ability to change and quickly develop new organizational capabilities as a critical prerequisite for sustaining competitive advantages. The salient concepts in this debate are 'dynamic capabilities' (Teece, Pisano, Shuen, 1997; Kusunoki, Nonaka, and Nagata, 1998; Eisenhardt and Martin, 2000; Zollo and Winter, 2002; Zollo, 2003) or 'dynamic core competencies' (Danneels, 2002; Lei, Hitt, and Bettis, 1996), both call for a profound dynamization of organizational capabilities.

• The notion of 'dynamic' is devoted to addressing the continuous renewal of organizational capabilities, thereby matching the demands of (rapidly) changing environments .
• The concept of dynamic capabilities revises the resource-based view of strategy and competitive advantage insofar as not only the markets but also the organizational capabilities are conceptualizes as being dynamic and flexible (Helfat and Peteraf, 2003: 998).
• The postulation of continuous renewal on the one hand and the patterned architecture of organizational capabilities on the other constitutes a serious disparity implying far-reaching theoretical and practical consequences. The idea of dynamizing capabilities is prone to 'throwing out the baby with the bath water.' The suggested dynamization is likely to crowd out the genuine essence of an organizational capability.
• The bottom line - a capability cannot be an advantageous capability and be dynamic at the same time.

The meaning of organizational capabilities --
Labels for organizational capabilities include: competence, core competence, collective skills, complex routines, best practices as well as organizational capabilities. The term 'capability' seems to be the predominant one.

There seems to be a consensus that a capability does not represent a single resource in the concert of other resources such as financial assets, technology, or manpower, but rather a distinctive and superior way of allocating resources. 'Capability' addresses complex processes across the organization such as product development, customer relationship, or supply chain management.

In contrast to rational choice theory and its focus on single actor decisions, organizational capabilities are conceived as collective and socially embedded in nature. They are brought about by social interaction and represent a collectively shared 'way of problem solving' (Cyert and March, 1963).

Accordingly, organizational capabilities can be built in different fields and on different levels of organizational activity, for instance at departmental, divisional, or corporate level.

Conceptual view of the primary characteristics of capabilities --

• problem-solving and complexity -- Capabilities are conceptualized in the context of collective organizational problem-solving. These capabilities are attributed to outstanding skills that have proved to solve extraordinary problems. These problems are described as complex. Complexity refers to the characteristics of problem situations and decision making under uncertainty, addressing ambiguous, ill-structured tasks.
• action oriented; practicing and success -- Capabilities are close to action; conceptually they cannot be separated from acting or practicing
• reliable over time -- A capability must work in a reliable manner. Capabilities represent a reliable pattern: a problem-solving architecture composed of a complex set of approved linking or combining rules -- proved to be successful across various situations. Time is a basic dimension of capabilities. Capabilities development takes time and the specific way in which time has taken is relevant for the gestalt of a capability -- its configuration or pattern having specific properties that cannot be derived from the summation of the component parts. It is exactly this time intensive and not fully understandable evolvement that makes up the non-imitable essence of the strategic relevance of organizational capabilities (Barney, 1991; Lenard-Barton, 1992).

Capabilities result from... --
Overall, any organizational capability is the result of an organizational learning process, a process in which a specific way of 'selecting and linking' resources gradually develops. Organizational capabilities apply to various problem situations, but not to all situations. They have been formed through successful responses to specific historical challenges and are thus bound to specific types of constellations (Winter, 2003). Problem-solving is embedded in organizational design, information procedures, micropolitics and communication channels as well as other organizational characteristics (culture, control regimes, etc.). All these features shape organizational capabilities and thus define their distinctiveness.

Paradox of organizational capabilities; capability-rigidity paradox --
This capability paradox can be summarized as the inherent tendency to inertia vs. the need for dynamism. See organizational inertia. The inertia built-up in the replication of successful selection and complex selection and linking patterns is the dark side of capabilities. This becomes evident particularly in volatile environments and dynamic competition with changing rules of the competitive game. In all of these cases organizational capabilities may easily invert form a strategic asset to a strategic burden.

While the inertia drivers identified below dampen the dynamism of capabilities, it would be misleading to conceive of organizational capabilities as totally immobile entities. As is true of all social artifacts, capabilities are subject to some alteration processes over time. The gradual evolution of capabilities takes place in the course of aging. This procedural idea of an ongoing process of slight capability development is limited to an organic development and therefore does not dissolve the threatening diagnosis of the dark side of capabilities and the self-reinforcing rigidity dynamics.

The strengths of capability-based behavior and its recursive reproduction can add up to a barrier to adaptation and a burden with respect to flexibility and change. The critical focus is on the inability of organizations to change their familiar 'ways of doing' when confronted with ne development. This inherent tendency to inertia forms the very basis of the recent capability debate resulting in the call for 'dynamic capabilities', the title which captures the paradox. The three causes of this paradox are as follows --

• 1 - Path-dependency and lock-in -- Path dependency means first of all that 'history matters' (David, 1985), i.e., that a company's current and future decisions capabilities are imprinted by past decisions and their underlying patterns (Arthur, 1989; Cowan and Gunby, 1996). In many cases, path dependency means more than mere historical imprinting: it refers to forceful dynamics called 'increasing returns' (Arthur, 1983). That is, once successful combinatorial activities generate positive feedback loops, thereby emergently constituting self-reinforcing processes. Empirical studies show that such self-reinforcing processes may establish strategic paths which are prone to dramatically narrowing the scope of strategic management. In the worst case, a specific orientation becomes locked, i.e., any other alternative is excluded.


• 2 - Structural inertia -- In their evolutionary framework, Hannan and Freeman stress the importance of the 'unusual capacity to produce collective outcomes of a certain...quality repeatedly' (Hannan and Freeman, 1984: 153) for the survival and sustainable success of an organization, insofar as they consider 'organizational inertia' as a precondition for organizational success. Inertia is needed in order to make an organization reliable and identifiable as a distinct unit. It is therefore a requirement for guaranteeing survival.
  Paradoxically, it is exactly this inertia that brings the risk of maladaptation. In the face of a changing environment, organizations are bound to their stabilized structures and action patterns. Central to survival is the ability to overcome organizational inertia.
  This paradox is found in many perspectives of this issue -
• Focus on learning in one area crowds out learning in other areas -- In the context of organizational learning, focusing on improvements of existing capabilities makes experimentation with alternatives less attractive (Benner and Tushman, 2003,; Henderson, 1993; Levitt and March, 1998; Repenning and Sterman, 2002).
• Exploitive competence crowds out exploration -- By exploiting current strengths, there is a tendency to crowd out explorative activities which go beyond the beaten track: 'As organizations develop greater competence in a particular activity, they engage in that activity more, thus further increasing competence in a particular activity, they engage in that activity more, thus further increasing competence in a particular activity more, thus further increasing competence and the opportunity cost of exploration' (Levinthal and March, 1993: 106)
• Learning increases organizational rigidity -- these exploitation processes not only lead to a fixation to existing capabilities but also prevent the developing of new capabilities or, put differently, 'the pitfall is that this learning increases the rigidity of the firm' (Kogut and Kulatilaka, 2001: 755)
• Learning to exploit crowds out exploration -- Thus, capability development resides in the well-known trade-off between exploitation and exploration processes in organizational learning (March, 1991), emphasizing the dysfunctional dynamics of exploitative learning processes.
Icarus Paradox -- organizations facing a long period of (outstanding ) success inherently develop the fatal tendency to (over) simplify their operational procedures and to blind the organization to discrepant feedback (Miller, 1993, 1994). A once successful pattern mutates into its opposite: a pattern of failure. The cause of failure paradoxically resides in what was once the source of success.


• 3 - Psychological commitment (cognitive traps) --
  Commitment to a particular strategic thrust is considered the prerequisite for sustained competitive advantage. The argument is advocated from both an economic and psychological point of view.
  The economic dimension focuses on resource investments. On the one hand, firm-specific (and therefore sticky) investments are needed to build heterogeneity and superior performance, i.e. to generate high quality, economies of scale, etc. (Ghemawat and Del Sol, 1998). On the other hand, investments in firm-specific resources are likely to be irreversible and rigid because the cost of separating and abandoning such sticky resources is too high. In consequence, resource commitment tends to restrict organization's options and flexibility (Bercovitz, de /Figueiredo, and Teece, 1996). The more dynamic the environment, the higher is the implied flexibility risk (Winter, 2003).
  As mentioned above, capabilities do not actually represent a resource; they focus rather on the combination and linking of resources. Although there are interactions between them, resources and capabilities represent two different conceptual levels with their own commitment dynamics. The commitment to resources resulting from specific investment should be clearly differentiated from commitments evolving when practicing capabilities. This differentiation accordingly implies a separation of resource-based inertia and capability-based rigidity (Gilbert, 2005). Going forward, only capability rigidities of concert to the dynamization of capabilities will be addressed.
  Psychological commitment traps include:
  • don't rock the boat -- the tendency to act in favor of the consented current thought and to avoid confrontation with deviating negative feedback and signals (Miller and Nelson, 2002; Tripas and Gavetti, 2000)
  • groupthink -- one of the best known effects in this context is groupthink (Esser, 1998; Janis, 1982) which is likely to commit the grout to their perspectives once developed. The commitment driver is the cohesion of the group and the willingness to protect the group against disturbances and disharmonious themes.
  • escalating commitment -- another well-known effect fostering an ultra-stabilization of capabilities is 'escalating commitment' (Staw, 1976). The argument draws on psychological sunk costs or the phenomenon that people sometimes 'throw good money after bad.' Although there is a great deal of theoretical controversy concerning the basic causes escalating commitment, it is predominantly explained as being the outcome of self justification processes (Festinger, 1957; Staw and Ross, 1978). The tendency to become entrapped with a failing course is explained by the decision maker's unwillingness to admit that their prior investment (resource allocation) was in vain. The strong urge to 'save face' in their own and other's eyes (Brockner and Rubin, 1981; Brockner, 1992) leads decision-makers to support further insufficient investment thereby (re)affirming the correctness/usefulness of the earlier decision. As a result, they start an escalation of commitment which excludes more and more reversibility of the once chosen direction - in this context, a once developed capability.
  • selective perception and mind maps - tendencies similar to escalating commitment stem from other cognitive effects such as self-reinforcing 'selective perception' (Walsh, 1988) or 'mind maps' (Weick and Roberts, 1993) to give examples. The point of departure here is the bounded capacity of actors in processing information and the necessary building of selection patterns. Due to reinforcing tendencies these patterns are likely to become trapped. Such processes are the more prominent, the more uncertain and unambiguous the situation is perceived to be. Heiner (1993) stresses the effects of complexity perception: the more difficult it is for an actor to decipher the environmental demands, the more likely the actor will impose familiar patterns of response to match the challenge (also North, 1990, 23). The same is true for perceived threats.
  • socialization mechanisms - Persistence of capabilities in the face of changing environmental demands is also caused by socialization mechanisms. Managers become socialized into the belief system in which these capabilities are embedded. Socialization into belief systems that take for granted the current capability pattern and its internal links is likely to mobilize cognitive and emotional resistance against critical signals urging a shift in the familiar patterns of acting. They do not reflect on these deep beliefs, they simply practice them, thereby becoming reluctant to acknowledge the need for changing a once brilliant problem-solving architecture and its underlying coordination pattern (Westphal and Bednar, 2005).
  • hidden imprints -- What is still more intriguing is the fact that even when people are aware of the need to change and willing to change capabilities, the hidden imprints of the capability pattern may lead them to look for alternatives only in the neighborhood of current practices (Johnson and Johnson, 2002). Thus, managers reinforce current capabilities (via project budgeting and investment policy), thereby unintentionally suppressing new unconventional project initiatives (Burgelman, 2002b; Leonard-Barton, 1992).

Strategic threat of capabilities -- Paradox implications for capability management
The inherent tendency of capabilities to persist amounts to a strategic threat which cannot be neglected. Management faces a paradoxical situation:

• on the one hand, the building of complex and reliable problem-solving architecture constitutes strength and allows for developing sustainable competitive advantage.
• On the other hand, this advantageous side of capabilities is, however, attained by (unconsciously) suppressing alternatives, pluralistic ignorance and reduced flexibility.

Any capability therefore contains an inherent risk, i.e. the risk of rigidity and helplessness in the face of fundamentally changing conditions. As a consequence, organizations are confronted with a dilemma: on the one side, they have to develop reliable patterns of selecting and linking resources in order to attain superior performance and competitive advantages and on the other side this endeavor constitutes-at least in volatile markets- a considerable risk of becoming locked into exactly these capabilities. How can this paradox be resolved?

Approaches to dynamic capabilities --
The capability-rigidity, or simply capability, paradox drivers are primarily, as described above --

• path dependency
• structural inertia
• psychological commitment

Dynamic capabilities is the most salient suggestion to overcome the capability paradox (Eisenhardt and Martin, 2000; Kusunoki et al., 1998; Teece et al., Zollo and Winter, 2002; Winter, 2003). This notion of developing dynamic capabilities to provide a solution to resolve the capability-rigidity paradox is examined below.

Dynamic capabilities are the idea as to how to solve the capability-rigidity paradox. Three different theories of dynamic capabilities can be identified:

• 1 - radical dynamization,
• 2 - integrative approach, and
• 3 - innovation routines.

1 - Radical dynamization approach to dynamic capabilities -- radical dynamization treats dynamic capabilities as a functional equivalent to classical capabilities in dynamic environments. The core idea of total dynamization is to transform the conception of capabilities into full-blown adaptability - at least in high velocity markets. Based on a differentiation between different degrees and patterns of dynamic capabilities, a contingency approach of dynamization depending on the degree of market dynamic is advocated (Eisenhardt and Martin, 2000). A clear distinction is drawn between moderately dynamic and high velocity markets.

moderate dynamic markets -- require dynamic capabilities which come close to the classic conception of capabilities, i.e. the pattern-driven conception of problem-solving with some incremental changes.

high-velocity environments -- mastering high velocity environments with rapidly and discontinuously changing market conditions and rules (Bourgeouis and Eisenhardt, 1988). Radical dynamic capabilities are conceived to master this volatility. The linking and selection process has to continuously create new combinations of resources: 'They are in a continuously unstable state' (Eisenhardt and Martin, 2000: 1113). Dynamic capabilities in this sense build different types of capabilities, which amount to experiential, improvisational, and highly fragile processes of reconfiguration, integration, and acquisition of resources. They make use of real-time information, simultaneously explore multiple alternatives, rely on quickly created new knowledge, are governed by very few simple rules, do not get stored in the organizational memory, and thus do not produce predictable outcomes. Their strength no longer flows from architecture but rather from its ability to continuously produce new constellations and solutions. The new basis for building competitive advantages is seen in the encompassing capability to change very quickly and to master unforeseeable environmental demands (Eisenhardt, 2002).

This conception of dynamic capabilities comes very close to the functioning of adhocracy (Mintzberg, 1979) or the 'total learning organization' (Pedler, Burgoyne, and Bydell, 1991; Vaill, 1996). The distinguishing characteristic of the learning organization is that all activities permanently operate in the learning mode, i.e., they are not bound to history/experience or any rules. The learning organization is always ready to revise hitherto cognitions and change expectations; they are in flux or, as Weick (1997) puts it, they are 'chronically unfrozen.'

Issues with the radical dynamization approach --
The solution to the high-velocity markets capability paradox essentially denies the need for capabilities, as they are the subject dynamized, meaning the generation and reproduction of capabilities are no longer needed or even become dysfunctional. The only organizational capability left in high velocity markets is the ability to learn and to improvise effectively. Problems are solved without relying on previously built expertise and competitive advantages can only be gained from rapid learning and flexible pacing (Eisenhardt and Martin, 2000: 1116).

Organizational type and functioning implications -
A total learning system strikes at the heart of the logic for organizations. A total learning system is supposed to react to any signal from a volatile environment in a new way. Organizations could no longer observe and handle environmental developments on the basis of proven selection patterns and operating rules. The handling would have to be created case by case from scratch without any guidance from the past and experiences of successful practices. This approach advocates spontaneous acting throughout the system. Any capability structure for guiding the development of these activities would hinder the advanced full flexibility. However, it is hard to see how organizations can build resource heterogeneity and sustainable superior performance on this basis. The working of such improvised solutions cannot be anticipated because they are supposed to be new each time and thus there are no experiences that allow for properly assessing the effects of the new solutions. The success of mere spontaneous reactions is likely to depend on mere luck and/or intuition only. This mode of adaptive acting does not meet in any way the basic dimensions of a capability as outlined earlier. Winter (2003) points out that such streams of newly created activities and spontaneous adaptations cannot be understood as exercising capabilities; rather they represent a completely different mode of acting and practicing, namely ad hoc problem solving.

Tending toward markets, denying the need for a firm -
Winter (2003) holds that the mode of ad hoc problem-solving can be considered as a functional equivalent to building dynamic capabilities. In his view organizations, in volatile circumstances, are well advised to calculate whether ad hoc problem-solving is - compared to capability building - the preferable option since it does not require longer-term investment in resources. Following this line of thinking, the need for an organization, i.e. a firm, begins to be called into question. It is also hard to see how this mode of acting could amount to a sustainable advantage. The more fundamental question raised is why this type of coordinating activity should be conducted in the realm of an organization. The logic of mere ad hoc problem-solving comes so close to the (unpatterned) mode of market coordination that the boundaries blur. Ultimately, the mode of total flexibility (ad hoc problem solving) eliminates the very reason for creating organizations/hierarchies instead of market coordination (Williamson, 1975). There is no rationale why ad hoc problem-solving in organizations should outperform market coordination.

Systems theory support for organizations-superior scheme building for complex environments -
Modern systems theory (Luhmann, 1995) and cognitive schools of organizational thought (e.g. Daft and Weick, 1984; March and Simon, 1958) can provide further insights to substantiate this argument. They all see pattern building and structuring as both preconditional and being the actual motive for creating and maintaining organizations. Their argument starts with environmental complexity and ambiguity and the requirement to provide orientation by developing workable schemes for enabling action.

• Volatile environments do not appear on the 'organizational screen' in terms of clear-cut problems; rather than actors must actively construe models for understanding and deciphering the complex world in order to survive.
• Collective actors/organizations are considered to provide superior schemes, which is ultimately the reason for their existence.
• Organizations have to safeguard and cultivate their knowledgeable and actionable schemes to guarantee effectiveness.
• At the same time, the safeguarded schemes for the organizational boundary by drawing distinction between inside and outside.
• If organizations refrained from doing so, they would simply merge with the environment after having solved a specific problem. The distinction, and thus the boundary, would vanish as there is no such thing as a boundaryless organization.

A world of fully dynamized 'capabilities' would come close to a world without organizations.

Cognitive psychology support for organizations as pattern producing and containing systems -
Learning is structurally bound to the existence of cognitive patterns or mental maps. They are the precondition for perceiving and thinking and subsequently for learning. The lesson is that there is no unconditioned observation and perception. In the same way, to be able to act and learn, organizations need their own sense-making patterns to reduce environmental complexity to an appropriate level.

Organizational capability reiterated -
The notion of organizational capability essentially builds on patterns and maps. It is the very function of the capability to enable an organization to skillfully get along with these complex challenges from a volatile environment and possibly provide a platform to master these challenges in a better way than competitors are able to.

Summary of the radical dynamization approach to dealing with the capability paradox -
Full blown dynamization of capabilities means in the final analysis not only eliminating the operating basis for the organization but also to drop the idea of capability building. If there are no patterns, no organizational memories, and no assets then there is no basis to grow for any capability at all-irrespective of whether we address classical or dynamic capabilities (Helfat and Peteraf, 2003).