What are dynamic capabilities?

The dynamic capabilities concept has come forward as an attempt to explain how organizations can remain competitive in dynamic environments (Teece et al., 1997). The concept embodies various constructs, of which ‘dynamic capabilities’ is logically the most important one. First of all, dynamic capabilities are capabilities. A capability can be defined as one or multiple routines that are purposefully combined and directed towards a particular goal (Helfat and Peteraf, 2009; Di Stefano et al., 2014). If we dissect this definition, it is firstly important to note that capabilities are purposeful (e.g. Dosi et al., 2000). In addition, as capabilities resemble a capacity to do something, they are reliable and repeatedly used (Helfat and Winter, 2011). Finally, capabilities are minimally satisfactory, meaning that, as capabilities resemble a capacity to do something, the outcome of the use of a capability

55

should be recognizable as such (Helfat and Winter, 2011). Dynamic capabilities are deployed to utilize strategic goals, essentially by change organizational resrouces (Helfat and Winter, 2011; Schilke et al., 2017).

Scholars have approached the concept of dynamic capabilities from an organizational (Teece, 2007) and managerial (Adner and Helfat, 2003) perspective, of which the former can be defined as dynamic organizational capabilities and the latter as dynamic managerial capabilities. Whereas dynamic organizational capabilities represent the capacity of an organization as a whole to adapt to challenges faced, dynamic managerial capabilities represent the capacity of a manager to adapt an organization (e.g. Teece et al., 1997; Adner and Helfat, 2003; Helfat and Winter, 2011; Helfat and Martin, 2015). Until now, these components have been researched rather independently from each other, necessitating a more fine-grained understanding of how both components relate to each other (Helfat and Peteraf, 2015; Schilke et al., 2017). We suggest distinguishing both concepts by dividing and interlinking them based on their locus of action, which is respectively at the organizational level and at the managerial level. In the coming section, we clarify the implications of a focus on the locus of action within the dynamic capabilities concept.

In our proposition, dynamic organizational capabilities represent routine organizational adaptation of organizational resources (Helfat, 1998). The change is standardized and is executed based on pre-defined agreed-upon standards and parameters (McIver et al., 2013). The routine aspect of this alteration is possible due to the accumulation of knowledge over the years and the transformation of this knowledge to routines, turning them into knowledge repositories (Nelson and Winter, 1982, Schulz, 2001; Faulkner and Runde, 2009; Argote and Miron-Spektor, 2011). As March (1981) writes: “Most change in organizations results neither from extraordinary organizational processes or forces, nor from uncommon imagination, persistence or skill, but from relatively stable, routine processes that relate organizations to their environments” (p.564).

We suggest that routines underlying dynamic organizational capabilities are change routines (Danneels, 2008, Katkalo et al., 2010; Teece, 2012). These routines are by their nature already focused on repeatedly changing parts of the organization and thus facilitate routine organizational change. To illustrate, imagine a routine that is focused on continuously renewing organizational machinery, based on a systematic check once in a

56

certain period in specific knowledge databases that contain alternative machines. In addition, imagine a routine that is focused on repeatedly checking and changing the way in which patients are admitted to a particular hospital department. Deploying dynamic organizational capabilities could mean strategically bundling these two routines in order to improve the way in which a hospital department functions and competes with departments at other hospitals (Helfat and Winter, 2011). Managers that are part of dynamic organizational capabilities govern the change process, ensuring that the change that is brought about is in the desired direction and unfolds without complications (Teece, 2007).

Our focus on dynamic capabilities rather than their underlying routines as being key for change does not mean that we do not acknowledge that routines can endogenously change and thus can also lead to organizational change, novelty and creativity (Feldman and Pentland, 2003; Deken et al., 2016; Sonenshein, 2016). Rather, we draw from the understanding that endogenous change of routines has its limits (Pentland et al., 2011) and at a certain point, routines may require being orchestrated by dynamic capabilities (Teece, 2012). Whereas various routines naturally intersect with other routines through shared practices of individuals (Feldman, 2000), this is different from the external purposeful combination of entire routine processes through dynamic organizational capabilities. The thesis in this article thus takes a capability perspective and treats routines as microfoundations and building blocks of these capabilities (Teece, 2007; Parmigiani and Howard-Grenville, 2011; Salvato and Rerup, 2011), while acknowledging also routines’

own value as dynamic mindful systems within organizations (Feldman and Pentland, 2003).

To alter organizational resources, we argue that dynamic organizational capabilities build on sensing and seizing activities that are of reconfigurational nature (Teece, 2007). Processes comprising reconfigurational sensing activities are in this regard focused on noticing structural issues that require organizational change.

We propose that dynamic managerial capabilities, in contrast to dynamic organizational capabilities, represent a more managerially driven form of organizational change of resources. We propose that these capabilities are underpinned by routines that are less complex and thus of which the outcomes reside more in managerial action (Grant, 1991), as is the case with for instance simple rules (Bingham and Eisenhardt, 2011). As these routines draw from the past to a much lesser extent due to their semistructured nature (Brown

57

and Eisenhardt, 1997), they are more suitable for altering the status quo (Bingham and Eisenhardt, 2014) and so are the dynamic managerial capabilities that they constitute. Also, as the locus of action resides in the management rather than the organization, more radical decision can follow as the ideation process is less automatic and thus potentially more improvisational of nature (Harvey, 2014). As groups can, at the cost of communication and coordination costs, better cope with complexity than individuals can (Espinosa et al., 2007), the specific nature of an encountered problem determines whether deployment of dynamic managerial capabilities can occur best by an individual or by a group of managers.

Dynamic capabilities have been argued to alter operational capabilities, which are capabilities that ensure that an organization can make a living in the present (Helfat and Winter, 2011; Protogerou et al. 2011). These capabilities support day-to-day activities in a routine way and their goal is to optimize on-going processes (Helfat and Winter, 2011). We suggest that, to be able to do so, operational capabilities consist of operational sensing and seizing activities, entailing the search of and investment in opportunities for optimization. A dynamic capability can, by reconfiguring operational capabilities, alter the way in which an organization makes its living (Helfat and Winter, 2011). In the third part of our proposition, we suggest that operational capabilities are rooted in operating routines, which are focused on optimization rather than change (Zollo and Winter, 2002). Differently than Zollo and Winter (2002), we make a distinction between operating routines and operational capabilities because of the following. An organization that produces and sells phones day after day, makes use of different routines throughout the production and sales process for this purpose. The combination of all these routines to produce and sell phones to daily make a living is in our opinion an operational capability. This definition is in line with recent studies regarding the nature of operational capabilities (e.g. Helfat and Winter, 2011).