Dynamic Capabilities, Resources, and Competitive Advantage

The general framework advanced in this book sees difficulty-to- imitate and globally scalable dynamic capabilities (and resources) as foundational to the competitive advantage of multinational enterprises. The greater the diversity and rate of change in business environments, the more critical are dynamic capabilities for the financial performance of the MNE.

Some observers have identified a modality of competition which they refer 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: 217–18). 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 which can be characterized as hypercompetitive.

As noted above, it is of course necessary that the MNE build capabilities that are “sustainable”, that is, nonimitable. Nonim- itability is more confidently assured in the presence of “isolating mechanism” and “tight appropriability regimes”52 (Rumelt, 1987; Teece, 1986a). When the appropriability regime is “tight”, differ- ential performance can be more readily sustained, at least for a time.53 In short, dynamic capabilities alone are unlikely to suffice to create a durable or sustainable competitive advantage for the MNE.

The dynamic capabilities perspective on the MNE is about more than rapid innovation, adaptation, and flexibility. It is also about the proactive entrepreneurial shaping of the multinational enter- prise and its global environment. Achieving dynamic capabilities can be seen as both a process design task  and  an  organiza- tional design/structure task (Volberda, 2003: 467), and possibly a “market design” task. Neither flexibility nor orchestration can be achieved with rigid bureaucratic structures or with deep hierar- chies. Indeed, a considerable amount of decentralization coupled with coordination with groups and entities inside and outside the firm both at home and abroad is likely to be necessary for an MNE’s dynamic capabilities to be continuously manifested.

Dynamic capabilities are resident in a firm’s processes and rou- tines and also within the firm’s top management team. The con- tinuous manifestation of dynamic capabilities within the MNE requires continuous entrepreneurial activity. The entrepreneurial activity is different but related to the managerial activity. Entre- preneurship 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 dis- parate and usually cospecialized elements, getting “approvals” for nonroutine activities, sensing business opportunities, and finding ways to scale capabilities globally. 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 startup activities.

As noted earlier (Teece, 1977), the effective conveyance of (dynamic) capabilities constitutes the crux of the processes of tech- nology transfer, and in turn ought to be seen as the crux of the MNE. To be competitive globally, it is not enough that an enterprise have dynamic capabilities; it must be able to utilize/transfer them across national boundaries, and orchestrate them as part of a global network.

The special challenges associated with replicating capabilities globally should not be underestimated. Differences in the labor force, in financial markets (despite their global features) regu- lations and cultures are critical factors that must be taken into account in shaping strategy. Replication involves transferring or redeploying competences from one concrete economic setting to another. Since productive knowledge is embodied, this 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 product- ive 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 knowl- edge to codified knowledge. Often, however, this is simply not possible.

In short, competences and capabilities, and the routines upon which they rest, are normally rather difficult to replicate.54 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.55 As Nelson and Winter (1982) and Teece (1982) have explained, many organizational routines are quite tacit in nature. Imitation can  also  be  hin- dered 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) requires 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 stages 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 highlighted as a critical factor explaining such firm-level (as opposed to regional or national-level) differences (Nelson and Win- ter, 1982). Replication in a different context may thus be rather difficult.

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.56 Another is that the ability to replicate also indicates that the firm has the foundations in place for learning and improvement. Considerable 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 dif- ficult. Thus, the more tacit the MNE’s productive knowledge, the harder it is to replicate by the MNE itself or its competitors. When the tacit component is high, imitation may well be impossible, absent the hiring away of key individuals and the transfers of key organization processes.

In conclusion, the concept of dynamic capabilities, when applied to the MNE, highlights organizational and (strategic) manager- ial competences which can enable an MNE 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, heuristics, and protocols which enable MNEs to avoid poor investment choices and embrace astute ones. Once assets are within managements’ orbit, their effective uti- lization and continuous orchestration becomes essential. Indeed, orchestration directed at achieving new combinations and asset coalignment is central to the dynamic capabilities framework. Pre- venting imitation and internal rent dissipation are key elements too.

Lying at the heart of dynamic capabilities are five fundamen- tal management/organizational skills: (1) learning and innova- tion processes; (2) business “design” competence (what business model to employ); (3) investment allocation  decision  heuris- tics; (4) asset orchestration, bargaining, and transactional com- petence; and (5) efficient governance and incentive alignment. 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 organiza- tional competence cannot be core elements of an MNE’s dynamic capabilities.

Note that dynamic capabilities flow from more than just learn- ing and technological accumulation. In this sense, the framework offered here goes further  than  that  which  has  been advanced by Cantwell. This is not meant to downplay the importance of technological accumulation. Technological innovation and learning remain as an important mechanism by which firms build from specific (technological) capabilities. But in a world where the global outsourcing of R&D is common (Teece et al., 1988; Chesbrough, 2003) it will be problematic to rely too much on in-house R&D as undergirding competitive advantage. Furthermore, as several companies have demonstrated, distinct business models alone can be the source of competitive advantage.

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 diffi- cult to imitate in which case it can be the source of competitive advantage.

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 will undergird long-run enterprise per- formance 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, they ought to demonstrate superior enterprise performance over multiple product life cycles.

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

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