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Key words: dynamic capabilities; change; cost-benefit; problem solving
Defining ordinary or 'zero-level' capabilities as those that permit a firm to 'make a living' in the short term, one can define dynamic capabilities as those that operate to extend, modify or create ordinary capabilities. Logically, one can then proceed to elaborate a hierarchy of higher-order capabilities. However, it is argued here that the strategic substance of capabilities involves patterning of activity, and that costly investments are typically required to create and sustain such patterning-for example, in product development. Firms can accomplish change without reliance on dynamic capability, by means here termed 'ad hoc problem solving.' Whether higherorder capabilities are created or not depends on the costs and benefits of the investments relative to ad hoc problem solving, and so does the 'level of the game' at which strategic competition effectively occurs. Copyright (C) 2003 John Wiley &Sons, Ltd.
Many strategy scholars remain skeptical about the value of the concept of 'dynamic capabilities.' While some see dynamic capabilities as the key to competitive advantage (Teece, Pisano, and Shuen, 1997), others seem to doubt that there actually are such things. Still others believe that they exist, but suspect that they are 'born, not made'-i.e., they doubt that deliberate efforts to strengthen such capabilities are a genuine option for managers. And some believe that while they are a genuine option, they are not necessarily something that confers competitive advantage. This note seeks to reduce the mystery surrounding both the terminology and the phenomenon. It identifies some key issues and argues that clarity is served by keeping these issues distinct. As regards terminology, it offers a proposal that seems constructive-but of course will really prove to be so only if it is widely adopted.
ROUTINES AND CAPABILITIES
Following my own proposal (Winter, 2000), I begin by founding the concept of organizational capability on the broader concept of organizational routine: An organizational capability is a high-level routine (or collection of routines) that, together with its implementing input flows, confers upon an organization's management a set of decision options for producing significant outputs of a particular type. For present purposes, the points deserving emphasis here are the connotations of 'routine'-behavior that is learned, highly patterned, repetitious, or quasi-repetitious, founded in...