1. Dynamic Capabilities and Strategic Management
David J. Teece; Gary Pisano; Amy Shuen
Strategic Management Journal, 1997
BADM545, Fall 3012; Prepared by: Hyunsun Kim

2. Motivation Fundamental Question in Strategy Environmental Conditions
How do firms achieve and sustain competitive advantage?
Sources of wealth creation and capture by firms
Environmental Conditions
Schumpeterian world of innovation-based competition, price/performance rivalry, increasing returns, and the ‘creative destruction’ of existing competences
Research Question
How and why certain firms build competitive advantage in regimes of rapid change?

3. Theoretical Background
Approaches on the Sources of Competitive Advantages
Market Position Advantages
Competitive forces approach (Porter, 1980)
Emphasis on industry structure; five industry level forces
Strategic conflict approach (e.g., Shapiro, 1989)
Game theoretic model, analyzing competitive interaction between rival firms, and market environment; strategic moves
Firm-level Efficiency Advantages
Resource-based perspective(Penrose, 1959)
emphasizes firm-specific resources leading to lower costs or higher quality products
Dynamic capabilities
Competitive forces approach (Porter, 1980) : emphasizes the actions a firm can take to create defensible positions against competitive forces.
five industry- level forces-entry barriers, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among industry incumbents-determine the inherent profit potential of an industry or subsegment of an industry
Strategic conflict approach (e.g., Shapiro, 1989) : focus on product market imperfections, entry deterrence, and strategic interaction.
resource-based perspective(Penrose, 1959): emphasizes firm-specific capabilities and assets and the existence of isolating mechanisms as the fundamental determinants of firm performance

4. Dynamic Capabilities Approach
An efficiency-based approach
firm-specific capabilities that can be sources of advantage, and to explain how combinations of competences and resources can be developed, deployed, and protected.
Elements
management capabilities, and
difficult- to-imitate combinations of organizational, functional and technological skills,
New dimensions to strategic research
the management of R&D; product and process development; technology transfer; intellectual property; manufacturing; human resources; and organizational learning.

5. Dynamic Capabilities
Definition: the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments
Emphasis: an organization’s ability to achieve new and innovative forms of competitive advantage
Why Firm-Level Capabilities?
Capabilities/competence cannot be readily assembled through markets
many distinctive elements of internal organization cannot be replicated in the market, or just through formal contracts
Other Terminologies
Factors of Production
: ‘undifferentiated’ inputs; property rights usually well defined
Resources
: firm-specific assets that are difficult to imitate
Organizational routines/competences :
Core competences
: competences that define a firm’s fundamental business
Products
Final goods and services produced, utilizing the firm’s competences

6. Processes, Positions, Paths
Processes: the way things are done in the firm (i.e., routines*, patterns of current practice and learning)
Position: current specific endowments of technology, intellectual property, complementary assets, customer base, and its external relations with suppliers and complementors
Paths: the strategic alternatives available to the firm, path dependencies
*routines: patterns of interactions that represent successful
solutions to particular problems

7. Processes Organizational and Managerial Processes
Coordination/integration: static
Rationality or coherence to processes and systems
=> requirements from radical or architectural innovation might mismatch with the incumbents’ existing organizational processes
Learning: dynamic
Social and collective processes
=> potentials for inter-organizational learning, through collaborations and partnerships
Reconfiguration: transformational
Change is costly for organizations
=> ability to scan the environment and flexibility becomes important (e.g., decentralization; local autonomy)

8. Positions = specific assets
Technological assets: know-how. Might be protected.
Complementary assets: i.e., prior commercialization activities
Financial assets: the firm’s cash position
Reputational assets: an intangible asset in the market
Structural assets: degree of hierarchy, governance
Institutional assets: regulatory systems and public policies
Market (structural) assets: product market position
Organizational boundaries: degree of integration

9. Paths Path dependencies
“history” (the firm’s investments and repertoire of routines) matters
May “lock-in” on inferior technologies
Technological opportunities
Prior R&D activity confines the feasible opportunities for the firm
Managerial perceptions are conditioned by the firm’s past experiences

10. Replicability and Imitability
Replication
transferring or redeploying competences
Enables market expansions (geographical and product)
Foundations for learning and improvement
Imitation
replication performed by a competitor
Possible barrier: intellectual property rights

11. Paradigms of Strategy