Dynamic Capabilities: Routines versus Entrepreneurial Action

I focus this short note on the role of individual executives in the dynamic capabilities framework. Unlike ordinary capabilities, certain dynamic capabilities may be based on the skills and knowledge of one or a few executives rather than on organizational routines. The thesis advanced here is that, in both large and small enterprises, entrepreneurial (managerial) capitalism is required to establish and sustain superior financial performance. This entrepreneurial management involves not merely the practice and improvement of existing routines or even the creation of new ones. In dynamically competitive enterprises, there is also a critical role for the entrepreneurial manager in both transforming the enterprise and shaping the ecosystem through sui generis strategic acts that neither stem from routines (or algorithms) nor need give rise to new routines. Dynamic capabilities are higher-level competences that determine the firm's ability to integrate, build, and reconfigure internal and external resources/competences to address, and possibly shape, rapidly changing business environments (Teece, 2007, 2010; Teece et al., 1990, 1997). They determine the speed at, and degree to which, the firm's particular resources can be aligned and realigned to match the requirements and opportunities of the business environment so as to generate sustained abnormal (positive) returns. The alignment of resources both inside and outside the firm includes assessing when and how the enterprise ought to form alliances with other organizations. Dynamic capabilities have grown in importance as the expansion of trade has led to both greater specialization and more rapid competitive responses. To make the global system of vertical specialization and cospecialization work, there is an enhanced need for the business enterprise to develop and maintain asset alignment capabilities that enable collaborating firms to combine assets so as to deliver value to customers. Dynamic capabilities can usefully be thought of as falling into three clusters of activities and adjustments: (1) identification and assessment of an opportunity (sensing); (2) mobilization of resources to address an opportunity and to capture value from doing so (seizing); and (3) continued renewal (transforming). These activities must be performed expertly if the firm is to sustain itself as markets and technologies change, although some firms will be stronger than others in performing some or all of these tasks. Dynamic capabilities are ‘strategic’ and distinct from ordinary capabilities. Firms can maintain and extend competitive advantage by layering dynamic capabilities on top of ordinary capabilities. A firm's ordinary capabilities, if well honed, enable it to perform efficiently its current activities. However, dynamic capabilities, when combined with a good strategy (Rumelt, 2011), enable the enterprise to position itself for making the right products and targeting the right markets to address the consumer needs and the technological and competitive opportunities of the future. Dynamic capabilities help the organization (especially its top management) to develop conjectures, to validate or reject them, and to realign assets as required. Strong dynamic capabilities are critical to success, especially when an innovating firm needs to pioneer a market, or a new product category. Dynamic capabilities, particularly those resting on entrepreneurial competences, are important to the market creating (and co-creating) processes associated with capitalist economic systems.1 Ordinary capabilities are perhaps rooted more firmly in routines than are dynamic capabilities. A routine is a repeated action sequence, which may have its roots in algorithms and heuristics about how the enterprise is to get things done. Organizational routines, including those related to organizational transformation, transcend the individuals involved, although the routines can, for some purposes, be usefully studied as developed and embedded in the minds of multiple employees (see, e.g. Miller et al., 2012). Capabilities change over time. Although most underlying routines tend towards stability/inertia, they can, under conditions of moderate turbulence in the environment, adapt, as suggested by the model of Pentland et al. (2012). Capabilities are built not just on individual skills but also on the collective learning derived from how employees have worked together, as well as on special equipment or facilities to which the firm has access. The longer an organization has been around, and the larger it is, the less its capabilities depend on particular individuals. The risk of extreme dependence on founders usually dissipates after 5 to 10 years, the length of time being a function of the industry and the particulars of the business. The literature has identified a plethora of particular routines that constitute the underpinnings and microfoundations of capabilities. For instance, Eisenhardt and Martin (2000) identify cross-functional R Feldman and Pentland, 2003; Zollo and Winter, 2002). Another of the determinants of whether or not the decisions of individual managers and a firm's dynamic capabilities are mediated by ‘patterned’ routines may be firm size, as suggested by the IBM example above. A smaller firm might lack the organizational and technological slack to repetitively evaluate potential opportunities. The study of managerial dynamic capabilities is challenging because they are often tied to complex corporate histories. Although managerial dynamic capabilities can to some extent be traced by using large datasets (e.g. Adner and Helfat, 2003), they can best be analysed through in-depth qualitative research (e.g. Danneels, 2011). This empirical literature is still at an early stage and opportunities abound to dig deeper into the linkages between individual or small-group managerial actions, dynamic capabilities, and long-run firm performance. The research paradigm of dynamic capabilities is still relatively new. Accordingly, illuminating case studies – hinted at in the history of Apple since its founding – are likely to yield powerful insights. I would like to thank two anonymous referees for very helpful comments and guidance.