Resources/Competences Distinguished from Dynamic Capabilities

The dynamic capabilities framework advances a neo-Schum- peterian theory of the firm and organizational decision making that is recognizable to those familiar with the behavioral theory of the firm, with evolutionary theorizing in economics, and with a Schumpeterian characterization of the innovation process. It also builds on what has come to be known as the resource-based approach. While the resource-based approach is inherently static, it is nevertheless relevant to dynamic capabilities. As noted by Teece, Pisano, and Shuen (1990a: 9):

the resource-based perspective also invites consideration of strategies for developing new capabilities. Indeed, if control over scarce resources is the source of economic profits, then it follows that such issues as skill acquisition and learning become fundamental strategic issues . . .

Zott (2003: 120) similarly recognizes that “dynamic capabilities are more than a simple addition to the resource-based view since they manipulate the resources and capabilities that directly engender rents”. Collis (1994) and Winter (2003) also note that one element of dynamic capabilities is that they govern the rate of change of ordinary capabilities.31 However, the notion advanced here is that, at least analytically, dynamic capabilities can be disaggregated into sensing, seizing, and transformational activities. Enterprises with good dynamic capabilities will have entrepreneurial management that is strategic in nature and achieves the value-enhancing orches- tration of assets inside, between, and amongst enterprises and other institutions within the business ecosystem. Dynamic capa- bility is a meta-competence that transcends operational compe- tence. It enables firms to not just invent but also to innovate profitably.

The dynamic capabilities framework is integrative. Dosi, Nelson, and Winter (2000: 4) noted at one point the “terminological flotilla” in the literature on organizational competences. How- ever, perhaps there is now an emerging consensus that resources/competences map well into what historically we have thought of as the enterprise’s operational capabilities, which help sustain technical fitness. Dynamic capabilities, by contrast, relate to high-level activities that link to management’s ability to sense and then seize opportunities, navigate threats, and combine and reconfigure specialized and cospecialized assets to meet changing customer needs, and to sustain and amplify evolutionary fitness, thereby building long-run value for investors.

If an enterprise possesses resources/competences but lacks dynamic capabilities, it has a chance to make a  competitive return (and possibly even a  supra-competitive  return)  for  a short period;  but  it  cannot  sustain  supra-competitive  returns for the long term except due  to  chance.  It  may  earn  Ricar- dian (quasi-)rents when demand increases for its  output,  but such quasi-rents will be competed away. It does not earn those Schumpeterian rents associated with “new combinations” and subsequent recombination, or Kirznerian rents associated with bringing markets back into equilibrium. It  might  earn  short- term Porterian rents associated with “building defenses against competitive forces” (Porter, 1991: 22), but this is far too react- ive for long-term success. Dynamically competitive enterprises don’t just build defenses to competition; they help shape com- petition and marketplace outcomes through entrepreneurship, innovation, and semi-continuous asset orchestration and business reconfiguration.

The archetypical enterprise with competences/resources but lacking dynamic capabilities will in equilibrium “earn a living by producing and selling the same product, on the same scale and to the same customer population”  (Winter,  2003:  992). Such an enterprise might even be good at invention, but it will likely fail to capitalize on its technological accomplishments. The operational/technical competences possessed might include basic ones such as order entry (to communicate what needs to be made/supplied), billings (to collect from customers), purchasing (to decide what inputs to buy and then to pay suppliers), financial controls (to restrict behavior and prevent theft), inventory con- trols (to minimize inventory costs), financial reporting (to access capital), marketing (to identify customers), and sales (to obtain orders). Management of these functions is commonly considered operations management.

Operations management is arguably at the foundation of basic management functions; but while knowledge of modern produc- tion systems took generations to develop, it is now widely diffused. The division of labor, uniform standards, the moving assembly line, measurement techniques for inspection, and control all of course had to be invented and they now constitute what we now think of as the (American) system of production.

Competitive advantage can in theory flow from superior opera- tions, or what was referred to earlier as “technical fitness”. Indeed, the Industrial Revolution saw significant differentials open up between craft systems and modern production systems, and these innovations led to an almost complete reordering of the industrial landscape. As Charles Babbage (1835: 3) noted almost 200 years ago: “[W]e shall notice, in the art of making even the most insignif- icant of [articles], processes calculated to excite our admiration by their simplicity, or to rivet our attention by their unlooked-for results.”

However, the postwar period has led to great progress in the understanding of how production systems work. Many useful tech- niques have been developed and improved. With developments in the field of management science and operations research, pre- cise answers to narrow problems exist. Much is known about inventory management, scheduling, planning, quality control, and about managing isolated subsystems. The pursuit of “benchmark- ing” and the adoption of “best practices” has helped with the diffusion of discrete skills, protocols, and procedures. However, according to one of the field’s pioneers, “we have not learned very much about the relationships between these subsystems” (Buffa, 1982: 2). This is one place where dynamic capabilities come into play.

One implication is that special know-how—know-how that is difficult to obtain and apply—is needed to sense opportunities, execute plans, and configure and reconfigure assets and systems as necessary. Skill in putting things together to capture cospe- cialization benefits is important. Even with respect to operations management, it seems the pay-off today is in understanding how subsystems are related and interact together. Put differently, the understanding of the basic business functions that constitute busi- ness administration and operations management is widely dif- fused and hence well known, at least in advanced economies. The wide diffusion of knowledge with respect to such functions means that much can be outsourced or implemented inside any enterprise with relative facility. However, by running hard at this, an enterprise may manage only to stand still—what some refer to as the “Red Queen” effect. Absent a broader overar- ching set of dynamic capabilities, a firm that is merely com- petent in operations will fail. However, understanding how to enhance performance of the enterprise through sensing future needs, making quality, timely, and unbiased investment deci- sions inside a well-designed business model, executing well on those decisions, effectuating productive combinations, promoting learning, reengineering systems that no longer work well, and implementing good governance remains enigmatic. The requisite managerial services that undergird dynamic capabilities cannot be outsourced. Understanding and implementing the processes and structures that undergird dynamic capabilities is enterprise specific, and requires intimate knowledge of  both  the  enter- prise and the ecosystem in which the enterprise cooperates and competes.

In this regard, a useful distinction can be made between entrepreneurs, managers, and administrators. Administrators are responsible for the day-to-day operations and the routine; they help ensure that the enterprise is technically fit, in the sense defined earlier. They are not expected to engage in entrepreneurial activities; for example, they are not relied on to sense new business opportunities. Nor are they typically expected to discover the need for and to design new enterprise-wide operating routines, as this constitutes evolutionary fitness. The distinctions made earlier are implicitly recognized by Porter (1996: 61) when he claims that operational effectiveness is not strategy. He recognizes that both operational effectiveness and strategy are essential to superior per- formance, but notes:

The quest for productivity, quality, and speed has spawned a remarkable number of management tools and techniques, total quality management benchmarking, time-based competition, outsourcing, partnering, reen- gineering and change management. Although the resulting operational improvements have been dramatic, many companies have been frustrated by their inability to translate gains into sustainable profitability. And bit- by-bit, almost imperceptibly, management tools have taken the place of strategy. As managers push to improve on all fronts, they move farther away from viable competitive positions.

Yet it is perhaps an overstatement to say that “operations man- agement” tools and procedures cannot be the basis of competi- tive advantage, or work against it. If there is a significant, tacit, noninimitable component of an enterprise’s superior operational competence, it has the potential for a time to support superior per- formance (it will, in fact, generate Ricardian rents).32 Nevertheless, superior operational efficiency, while valuable, is not a dynamic capability.

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

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