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Dynamic capability is defined by Teece et al. (1997) as "the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments."
The term Dynamic Capabilities was first introduced in a working paper in 1989, was influenced by Gary Hamel's multinational strategy research leading to Core Competences of the Corporation and was cited in Ikujiro Nonaka and Hirotaka Takeuchi's innovation strategy work The Knowledge-Creating Company. Originally, dynamic capabilities was distinct from operational capabilities, which pertain to the current operations of an organization. Dynamic capabilities, by contrast, refer to "the capacity of an organization to purposefully create, extend, or modify its resource base" (Helfat et al., 2007).
The basic assumption of the dynamic capabilities framework is that core competencies should be used to modify short-term competitive positions that can be used to build longer-term competitive advantage. The academic literature on dynamic capabilities grew out of (1) the resource-based view of the firm and (2) the concept of "routines" in evolutionary theories of organization (Nelson & Winter, 1982). It thus provides a bridge between the economics-based strategy literature and evolutionary approaches to organizations.
The main difference between the resource-based view of the firm and dynamic capabilities view is the fact that the latter focusses more on the issue of competitive survival rather than achievement of sustainable competitive advantage. This focus appears to be closer to contemporary business realities, the latter being more "high-velocity" than the case in previous decades. The demise of companies like Nokia shows that the more pressing issue is competitive survival. Strategy scholars Gregory Ludwig and Jon Pemberton (2011), in one of the rare and therefore important empirical studies on the topic, emphasise the need to focus on the actual process of dynamic capability building rather than generate further abstract definitions of dynamic capabilities. It is of key importance to focus on different industry contexts to further advance this emerging area of research. In many industries, changing the entire resource base in response to external changes is simply unrealistic. At the same time, ignoring external change altogether is not an alternative. Senior managers are therefore forced to engage with the complex task of dynamic capability building in order to facilitate competitive survival in the light of depreciating value of resource bases available within the firm.
Dynamic capabilities theory attempts to deal with two key questions:
1. How can senior managers of successful companies change their existing mental models and paradigms to adapt to radical discontinuous change?
2. Ultimately, how can companies maintain threshold capability standards and hence ensure competitive survival?
When senior managers are confronted with the task of building dynamic capabilities, they need to consider sometimes drastic fluctuations in the threshold capability definition standards, making it more and more complex for companies to understand the minimum requirements needed to remain in the game as an industry player. In turn, these fluctuations derive from external change in the macro environments and the total resource sum available in an entire industry. Monitoring of these external and increasingly unpredictable parameters will then allow managers to tackle the internal process of adapting their resource base. Often, this is simply not possible because of strong path dependencies or practical feasibility constraints that apply to certain industries. For example, some industries rely on a certain manufacturing process. Once a new technology arrives, changing the manufacturing process on short notice is unrealistic. It is therefore more likely that adaptations are centred around managerial routines and capability level, rather than apply to the resource base level. In other words, managers need to make the most of their existing resource material yet simultaneously understand the ongoing depreciation of this resource base.
The New Dynamic Capabilities framework focuses on the firm's ability to quickly orchestrate and reconfigure externally sourced competences—ranging from Apple, Google Android, IBM Linux developer ecosystems to crowdsourced, crowdfunded open innovations such as the Obama08 mobile app—while leveraging internal resources such as platforms, know-how, user communities and digital, social and mobile networks. The New Dynamic Capabilities framework is driven by the rise of Web 2.0 strategy, new digital, information and network economics and the fall of the transaction costs of specialized multi-party orchestration. The New Dynamic Capabilities framework for corporate strategic management bridges innovation strategy, digital strategy and multinational strategy—experimenting, innovating and learning 10x faster while orchestrating organizational capabilities worldwide for execution in a globally networked and interdependent environment.
Three dynamic capabilities are necessary in order to meet new challenges. Organizations and their employees need the capability to learn quickly and to build strategic assets. New strategic assets such as capability, technology and customer feedback have to be integrated within the company. Existing strategic assets have to be transformed or reconfigured.
Teece’s concept of dynamic capabilities essentially says that what matters for business is corporate agility: “the capacity (1) to sense and shape opportunities and threats, (2) to seize opportunities, and (3) to maintain competitiveness through enhancing, combining, protecting, and, when necessary, reconfiguring the business enterprise’s intangible and tangible assets.”
Learning requires common codes of communication and coordinated search procedures. The organizational knowledge generated resides in new patterns of activity, in “routines”, or a new logic of organization. Routines are patterns of interactions that represent successful solutions to particular problems. These patterns of interaction are resident in group behavior and certain sub-routines may be resident in individual behavior. Collaborations and partnerships can be a source for new organizational learning which helps firms to recognize dysfunctional routines and prevent strategic blind spots. Similar to learning, building strategic assets is another dynamic capability. For example alliance and acquisition routines can enable firms to bring new strategic assets into the firm from external sources.
The effective and efficient internal coordination or integration of strategic assets may also determine a firm’s performance. According to Garvin (1988) quality performance is driven by special organisational routines for gathering and processing information, for linking customer experiences with engineering design choices and for coordinating factories and component suppliers. Increasingly competitive advantage also requires the integration of external activities and technologies: for example in the form of alliances and the virtual corporation. Zahra and Nielsen (2002) show that internal and external human resources and technological resources are related to technology commercialization.
Transformation of existing assets
Fast changing markets require the ability to reconfigure the firm’s asset structure and to accomplish the necessary internal and external transformation (Amit and Schoemaker, 1993). Change is costly and so firms must develop processes to find low pay-off changes. The capability to change depends on the ability to scan the environment, to evaluate markets and to quickly accomplish reconfiguration and transformation ahead of the competition. This can be supported by decentralization, local autonomy and strategic alliances.
Over time a firm's assets may become co-specialized, meaning that they are uniquely valuable in combination. An example is where the physical assets (e.g. the plants), human resources (e.g. the researchers) and the intellectual property (e.g. patents and tacit knowledge) of a company provide a synergistic combination of complementary assets. Such co-specialized assets are therefore more valuable in combination than in isolation. The combination gives a firm a more sustainable competitive advantage. (Teece, 2009 and Douma & Schreuder, 2013)
If capabilities are dependent on co-specialized assets, it makes the coordination task of management particularly difficult. Managerial decisions should take the optimal configuration of assets into account. "Asset orchestration" refers to the managerial search, selection and configuration of resources and capabilities. The term intends to convey that, in an optimal configuration of assets, the whole is more valuable than the sum of the parts.
- David J. Teece, Gary Pisano, and Amy Shuen (August 1997). "Dynamic Capabilities and Strategic Management". Strategic Management Journal (Wiley-Blackwell) 18 (7): 509–533.
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- Ikujiro Nonaka and Hirotaka Takeuchi, The Knowledge-Creating Company: How Japanese Companies Create the Dynamics of Innovation (Oxford University Press, 1995).
- Sytse Douma & Hein Schreuder (2013) "Economic Approaches to Organizations", 5th edition, London: Pearson
- Ludwig, Gregory and Pemberton, Jon (2011). "A managerial perspective of dynamic capabilities in emerging markets: the case of the Russian steel industry", Journal of East European Management Studies, 16(3), pp.215-236. ISSN 0949-6181
- Amy Shuen and Sandra Sieber, "Orchestrating the New Dynamic Capabilities", IESE Insight 2010
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- Teece, David J. (August 2007). "Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Performance". Strategic Management Journal (John Wiley & Sons) 28 (13): 1319–1350. Retrieved 2012-05-23.
- Sytse Douma & Hein Schreuder (2013) "Economic Approaches to Organizations", 5th edition, chapter 9, London: Pearson
- Barreto, Ilídio. 2010. Dynamic Capabilities: A Review of Past Research and an Agenda for the Future. Journal of Management, Vol. 36 No. 1, January 2010 256-280
- Helfat, Constance E. et al. (2007). "Dynamic Capabilities: Understanding strategic change in organizations", Oxford: Blackwell.
- Ludwig, Gregory and Pemberton, Jon (2011). "A managerial perspective of dynamic capabilities in emerging markets: the case of the Russian steel industry", Journal of East European Management Studies, 16(3), pp. 215–236. ISSN 0949-6181
- Douma, Sytse and Hein Schreuder (2013). "Economic Approaches to Organizations". 5th edition. London: Pearson  ISBN 0273735292 • ISBN 9780273735298
- Teece, David J. (2009), "Dynamic Capabilities and Strategic Management", Oxford: Oxford University Press.
- Zahra, S.A., and A.P. Nielsen. (2002). "Sources of capabilities, integration and technology commercialization." Strategic Management Journal, 23(5), pp. 377–398. http://onlinelibrary.wiley.com/doi/10.1002/smj.229/abstract