25 June, 2016

Toward a Prescriptive Theory of Dynamic Capabilities: Connecting Strategic Choice, Competition, and Learning

Industrial and Corporate Change, 2017, volume 26, no. 5, pages 747-762

The field of strategy has mounted an enormous effort to understand, define, predict, and measure how organizational capabilities shape competitive advantage. While the notion that capabilities influence strategy dates back to the work of Andrews (1971), attempts to formalize a “capabilities based” approach to strategy only began to take shape in the past twenty years. In particular, the publication of Teece and Pisano (1994), Teece, Pisano, and Shuen (1997), and Eisenhart and Martin (2000) works on “dynamic capabilities” triggered a flood of debate and discussion on the topic. Unfortunately, the literature on dynamic capabilities has become mired in endless debates about definitions and has engaged in an elusive search for properties that make organizations adaptable. This paper argues that the research program on dynamic capabilities needs to be reset around the fundamental strategic problem facing firms: how to identify and select capabilities that lead to competitive advantage. To this end, the paper develops a framework that attempts to connect firms’ capability search strategies with their strategies in product markets. It frames firms’ capability search strategies as choices among different types of capability enhancing investments. The key distinguishing feature of capabilities in this framework is their degree of fungibility: capabilities span a continuum ranging from highly general-purpose (e.g. quality management) to highly market-specific (e.g. knowing how to manufacture an airplane wing). To illustrate the potential of the framework to shed new light on traditional strategy questions, the paper applies the framework to explore some unexplained features of Penrosian diversification strategies. The paper concludes by suggesting a research agenda for dynamic capabilities.