Almost 15 years have passed since Teece et al (1997) conceptualized the notion of Dynamic Capabilities (DCs) as an extension of the widely acknowledged Resource Based View of the firm (Barney 1986, Dierickx & Cool, 1989; Peteraf, 1993; Penrose, 1959; Wernerfelt, 1989)

The concept of DCs has spurred on a huge array of further academic investigation in which researchers have adjusted (Barney, 1991; Conner, 1991) or fully rejected (Williamson, 1999) the original foundations of the concept. This has led to a large diversity in the fundamental construct upon which DCs should be understood and implemented.

Although most people agree that it is conceptually a good idea, there is still little agreement about what it truly means and even less agreement about “how to do it.”

The framework has been frequently challenged in the literature, “called conceptually vague and tautological, with inattention to the mechanisms by which resources actually contribute to competitive advantage” (Eisenhardt and Martin, 2000).

This article offers a systematic literature review of the DCs framework up until now. The aim of this is to guide researchers in making the concept of DCs more nuanced and practically applicable by pointing out neglected areas which might become limiting factors when wishing to reap the benefits of the DCs framework promised by its instigators.

1. Introduction

The pursuit of heterogenic performance of firms has been a question of utmost importance in the strategic management field for many decades. The evolution of theories of the firm suggesting different solutions to the realization of competitive edge has greatly sophisticated the requirements of management competences and helped widen the toolbox needed to succeed in an increasingly changing and complex world of business conduct.

The traditional logic of positioning (Porter, 1980) is deeply rooted in industrial economics, which propose that firms should look for industries with favourable conditions, illuminated by utilizing for example the “Five Forces Framework”. Having entered the industry successfully the firm should build up isolating mechanisms to help preserve their position and power.

These strategic suggestions are somewhat sound in market conditions which change only little or very slowly over time and where commitment to relatively stable resources would provide sufficient strength.

However even in such situations important impediments have been pointed out (Dierickx & Cool, 1989), which limit these tools’ scope and effectiveness when used solitarily.

The growing acknowledgement of the necessity to refine such static and one dimensional rationalization of firms’ heterogenic performance have led to the development of paradigms within which the recognition of the importance of firm resources and capabilities are key ingredients.

A fundamental outcome of this debate was the construct of the “Resource Based View” (RBV) (Barney 1986, Dierickx & Cool, 1989; Peteraf, 1993; Wernerfelt, 1989), suggesting that firms should be seen as bundles of resources and where the development of new capabilities would be a key driver of prosperity. Empirical research has shown that at great deal of performance differences within different industries stem from firm effects, rather than industry effects (Rumelt, 1991; McGahan & Porter, 1997; Eriksen & Knudsen, 2003). The VRIN framework (Barney, 1991; Conner and Prahalad, 1996; Nelson, 1991; Peteraf, 1993; Wernerfelt, 1984, 1995) was introduced into the analysis of firms, in order to detect, valuable, rare, inimitable and non-substitutable resources which would generate long term advantage.

The RBV framework has not gone without criticism (Mosakowski and McKelvey 1997; Priem & Butler, 2000) but it has been a very important factor igniting a change from pure economical foundations of firm heterogeneity towards bringing aspects of evolutionary theory into the quest for superior performance.

In 1997 Teece, Pisano & Shuen put forward their “Dynamic Capabilities Framework” as an extension and refinement of the RBV, and which could be perceived as a tool to which tries to answer a central question, namely; how can firm readily adapt to a constant changing environment? The concept of DCs has attracted attention in a wide array of general management literature (Eisenhardt & Martin, 2000; Helfat et al 2007; Makadok, 2001; Rindova & Kotha, 2001; Zollo & Winter, 2002; Winter, 2003). The attraction was mainly based upon the promise that the notion of DCs was a key contributing element in the pursuit of sustainable competitive advantage (SCA) and gave recognition to the growing importance of linking firms’ strategic choices and external environment into a more coherent bundle of tools with particular focus on firms situated in what some scholars has termed hypercompetitive environments (D’Aveni, 1994) or high-velocity environments (Bourgeois & Eisenhardt, 1988).

In such circumstances the necessity of rapid adjustments to sudden shocks and frequent shifts in the environmental conditions in which firms competes, becomes of paramount importance if firms wish to survive and grow (Teece et al, 1997).

The concept has evolved greatly over the years, but has not yet found a solid and definite position in the management tool box.

The main construct of this paper is the following; the first section will contain a structured overview of the key definitions of the DCs framework so far in the literature. This section will highlight the most important elements which collectively will provide the reader with the opportunity to follow the evolution of the concept and identify the ambiguities among researchers which have greatly contributed to the fragmentation of the actual practical use of ideas fundamental to the construct.

In the second main section I try not to come up with yet another definition of the concept, rather this section will critically assess the underlying assumptions which make up the behavioural foundations of the DCs framework. By looking at recent and most influential research in areas of organizational learning, routines, inertia and change, the aim of this section is to refine the framework and furthermore identify key elements which might be constraining factors in the practical use of the DCs framework. In the third and last section I discuss, compare and reflect upon the different identified inconsistencies in the literature concerning DCs and their underlying assumptions, in an attempt to point to essential future research areas which might prove fruitful if they were to be incorporated into the framework more explicitly.

REVISE HERFRA!!!

2. Defining and delineating the concept of Dynamic Capabilities – a review of the literature

What are Dynamic Capabilities?

As mentioned in the introduction, prior streams of research has been centred around the topic of firms needing to navigate more safely through uncertain and dynamic environments (Schumpeter, 1942; Penrose 1959; Nelson & Winter 1982; Prahalad & Hamel, 1990; Teece, 1976, 1986a, 1986b, 1988; Hayes et al, 1988):, but it was not before Teece, Pisano & Shuen in 1997 published their article “Dynamic Capabilities and Strategic Management” that the interest in Dynamic Capabilities grew significantly. The DCs framework can be seen as a reaction to the rather static nature of the RBV framework which limits itself from explaining firms’ competitive advantage in changing environments.

Teece et al (1997) generally propose that the “Dynamic Capabilities Framework” offer an extended and complete manual on how to unlock the mysteries of how big firms’ can gain the ability to create, appropriate and sustain value in dynamic settings.

DCs are defined in a broad sense as being organizational routines (Nelson & Winter, 1982) through which managers adjust the firm’s resource base by acquiring/deleting, integrating and recombining resources. The existence of such routines determines the firm’s ability to integrate, build and reconfigure their competences to meet the requirements of a rapidly changing environment (Teece et al., 1997).

Focusing on changing environments, Teece et al can be seen as a direct link to Schumpeter (1934) and his attention to the essential entrepreneurial skills of the managers as being the most important driver of economic growth.

It is important to make note of that they in line with evolutionary economics assumes that DCs are build and not bought. This notion is important as it points towards the actual business processes, such as a firm’s asset position and its evolutionary path which makes the critical differences in firms’ level of competitive advantage and by such make DCs hard to imitate.

Teece et al is very unambiguous about that the Dynamic Capabilities are a defining feature of firm heterogeneity and therefore are a key source of SCA, and that management capability and behaviour is the most important hub for achieving it.

As mentioned, the article from 1997 spurred on an array of further investigation, each with a somewhat unique conceptualization. For a brief overview of key definitions from a selection of key authors please see appendix I.

In order to make the best possible overview, the following section of this literature review is decomposed into the following key essentials of DCs:

Definition; Relevant environment; Heterogeneity; Patterns in development; Effect

These elements are all common to the different researchers and this aggregation is useful in order to bring clarity in an otherwise highly fragmented stream of literature.

Nature & Function