Dynamic Capabilities, Resources, and Competitive Advantage: Implications for MNEs

While Penrose may not have fully developed the capability con- cept, the subsequent development of the (dynamic) capabilities approach can be usefully applied to MNEs. Somewhat underre- searched in mainstream MNE theory (at least as far as internal- ization theory is concerned), has been consideration of the import- ance and the particulars of the firm’s managerial and organizational capabilities, although this is now being addressed.25 To the extent that notions of organizational capability have been around for decades, and have received much attention recently, more efforts to embed the capability concept into MNE theory would appear useful so as to align more closely academic research on the MNE and strategic management theory.

As discussed above, Edith Penrose had provided elements of a resource-based/capabilities perspective. She viewed the firm as an administrative organization, and as a pool of production resources: “At all times there exist, within every firm, pools of unused pro- ductive resources and these together with the changing knowledge of management, create a productive opportunity which is unique to each firm. Unused productive services are, for the enterprising firm, at the same time a challenge to innovate, an incentive to expand, and a source of competitive advantage” (Penrose, 1960: 2). As Pitelis (2000) notes, unused resources are critical to Penrose’s theory of internal or “organic” endogenous enterprise expansion.

Penrose certainly did not overplay, from a theoretical perspec- tive, the international aspects of large corporations, believing that the differences do not, in fact, require theoretical distinction (1987: 56). However, she did note that “the managerial, technological, or financial contribution from the parent may be considerable and generally make new real resources available to the local economy” (1968: 43).

The general framework advanced by dynamic capability theory sees difficulty-to-imitate and globally exercised dynamic capabil- ities (and resources) as foundational to the competitive advantage of MNEs.26 The greater the diversity and rate of change in business environments, the more critical dynamic capabilities become for the MNE’s financial performance.

Some observers have identified a modality of competition, referred to as hypercompetition. It is a modality “characterized by intense and rapid competitive moves, in which competitors must move quickly to build [new] advantages and erode the advantages of their rivals” (D’Aveni and Gunther, 1994: 217 ff.). Hypercom- petition appears to be the result of rapid innovation, globalization, and deregulation. Dynamic capabilities are likely to be essential to the survival of MNE in industries and environments characterized as hypercompetitive.

As noted above, it is necessary that the MNE build capabilities that are “sustainable”, that is, inimitable. Inimitability is more likely to occur in the presence of “isolating mechanisms” and “tight appropriability regimes” (Rumelt, 1987; Teece, 1986a, 2000).27 When the appropriability regime is “tight”, differential perform- ance can be more readily sustained, at least for some length of time.28

The dynamic capabilities perspective on the MNE addresses more than simply the need for rapid innovation, adaptation, and flexibility. It also identifies the importance of proactive entrepre- neurial behavior shaping the MNE’s footprint. In the presence of significant gaps between the cost structures and growth rates of national economies, the MNE’s ability to respond to—and shape— the changing kaleidoscope of opportunities at home and abroad is critical to success. Outsourcing and offshoring activities to foreign subsidiaries and alliance partners involves establishing quality con- trol and product/service evaluation protocols on a global basis.

Indeed, dynamic capabilities are resident in a firm’s processes and routines as well as within the firm’s top management team. Maintaining dynamic capabilities within the MNE requires con- tinuous entrepreneurial activity on a global scale. Entrepreneurial activity is different from—but related to—managerial activity. It is about understanding opportunities, getting things started, and finding new and better ways of putting things together. It is about coordinating on a global basis the assembly of disparate and usu- ally cospecialized resources, getting “approvals” for non-routine activities, sensing business opportunities, and finding ways to deploy capabilities globally as well as locally. We have come to associate the entrepreneur with the individual who starts a new business providing a new or improved product or service. Such action is clearly entrepreneurial; but the entrepreneurial function required in the MNE context should not be thought of as confined to new enterprise startup activities.

The replication of capabilities involves transferring or redeploy- ing competences (technological or organizational) from one con- crete economic setting to another. Since productive knowledge is usually embodied, the transfer of skill cannot be accomplished by simply transmitting information. Only in those instances where all relevant knowledge is fully codified and understood can replication be collapsed into a simple problem of information transfer. Too often, the contextual dependence of original performance in the home market is poorly appreciated, so unless the MNE has already replicated its systems of productive knowledge in other markets, the act of replication is likely to be difficult (Teece, 1976). Indeed, replication and transfer are often impossible absent the transfer of people, though this can be minimized if investments are made to convert tacit knowledge to codified knowledge. Often, however, this is simply not possible.

In short, competences and capabilities, and the routines upon which they rest, are usually rather difficult to replicate. Even understanding what all the relevant routines are that support a particular competence may not be transparent. Indeed, Lippman and Rumelt (1982) have argued that some sources of competi- tive advantage are so complex that the firm itself, let alone its competitors, does not understand them.?? As Nelson and Winter (1982) and Teece (1981b) have explained, many organizational routines are quite tacit in nature. Imitation can also be hindered by the fact that few routines are “stand-alone”; coherence may require that a change in one set of routines in one part of the firm (e.g. production) be accompanied by changes in some other part (e.g. R&D).

Some routines and competences seem to be attributable to local or regional forces that shape firms’ capabilities at early states in their lives. Porter (1990), for example, shows that differences in local product markets, local factor markets, and institutions play an important role in shaping competitive capabilities. Differences also exist within populations of firms from the same country. Various studies of the automobile industry, for example, show that not all Japanese automobile companies are top performers in terms of quality, productivity, or product development (see e.g. Clark and Fujimoto, 1991). The role of firm-specific history has been high- lighted as a critical factor explaining such firm-level (as opposed to regional or national-level) differences (Nelson and Winter, 1982).29 Replication in a different context may thus be rather difficult.30

At least two types of strategic value flow from replication. One is the ability to support geographic expansion, and has been empha- sized here. The other is the ability to support product-line expan- sion. To the extent that the capabilities in question are relevant to customer needs elsewhere, replication can confer value.31 Another is that the ability to replicate also indicates that the enterprise has the foundations in place for learning and improvement. Consider- able empirical evidence supports the notion that the understanding of processes, both in production and in management, is the key to process improvement. In short, an organization cannot improve that which it does not understand.

Factors that make replication difficult also make imitation diffi- cult. Thus, when the MNE’s productive knowledge is more tacit, it becomes harder for the MNE itself to replicate it, and for competi- tors to imitate it. When the tacit component is high, imitation may well be impossible, absent the hiring away of key individuals and the transfer of key organizational processes.

In conclusion, the concept of dynamic capabilities, when applied to the MNE, highlights organizational and managerial compe- tences, critical to achieve superior performance. Key ingredients are difficult-to-replicate routinized processes, the basic manner in which a business is designed, as well as the decision frames, heuris- tics, and protocols that enable MNEs to avoid poor investment choices and embrace astute ones. Once assets are within man- agement’s orbit, their effective utilization and continuous orches- tration on a global basis becomes essential. Indeed, orchestration directed at achieving new combinations and new asset coalign- ments is central to the dynamic capabilities framework. Preventing imitation and internal rent dissipation are key elements too.

Lying at the heart of dynamic capabilities are several funda- mental management/organizational skills, including: (1) learning and innovation processes; (2) business “design” competence (what business model to employ); (3) investment allocation decision heuristics; (4) asset orchestration, bargaining, and transactional competence; and (5) efficient governance and incentive align- ment (Teece, 2007). Buttressing these is an understanding of the processes of imitation and the strategies and processes that can be used to protect intellectual property. Widely diffused managerial and organizational competence cannot be core elements of an MNE’s dynamic capabilities.

Note that dynamic capabilities flow from more than just learning and technological accumulation. This is not meant to downplay the importance of technological accumulation. Technological innova- tion and learning remain important mechanisms by which firms build from specific (technological) capabilities. However, in a world where the global outsourcing of R&D is common (Teece et al., 1988; Chesbrough, 2003) it becomes problematic to rely too much on in-house R&D as the sole foundation of competitive advantage. Orchestrating a global portfolio of technological assets inside and outside the enterprise is now essential.

The dynamic capabilities framework relegates an MNE’s admin- istrative competence to secondary importance, unless such com- petence is embedded in distinct and difficult-to-replicate business processes. Stable administrative functions can typically be out- sourced to multiple vendors. Of course, there may well be cir- cumstances where administration is complex, novel, and difficult to imitate, in which case it can be the source of competitive advan- tage.

The distinct skills which constitute an MNE’s dynamic capabil- ities cannot generally be bought or “outsourced”; they must be built, or at least assembled. Once cospecialized assets are assem- bled, they must be skillfully orchestrated on a global basis. Such orchestration skills require astute decision-making on a global basis and an entrepreneurial capacity built into the management team. These skills and processes are instrumental to long-run enterprise performance and cannot be outsourced without loss of competitive advantage. They lie at the core of the MNE’s capabilities. MNEs possessing dynamic capabilities are able to quickly respond to—and shape—evolving technologies and marketplaces. Accordingly, such firms should exhibit superior enterprise performance over multiple product life cycles.

While Penrose did not anticipate most and certainly not all ele- ments critical to successful international expansion, she did play an important role by being an important inspiration to dynamic capabilities. Her search for a theory of the growth of the firm is in some measure answered by the dynamic capabilities framework.

Source: Teece David J. (2009), Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth, Oxford University Press; 1st edition.

Leave a Reply

Your email address will not be published. Required fields are marked *