Dynamic capabilities and the role of organizational knowledge: an exploration

Dynamic capabilities and the role of

organizational knowledge: an exploration

Isabel M. Prieto

and

Mark Easterby-Smith

Correspondence: Mark Easterby-Smith, Management School, Lancaster University, Lancaster LA1 4YX, U.K.

Tel: þ44 (0)1524 584012; Fax: þ 44 (0)1524 844262; E-mail: [email protected] Received: 3 August 2005 Revised: 8 January 2006 Accepted: 24 August 2006 Abstract

Two concepts, dynamic capabilities and knowledge management, are widely assumed to be linked to sustained competitive advantage, although researchers have found it hard to substantiate these assumptions. It has also been suggested that the interplay between the two is important, and that it needs to be better understood. In this paper, we therefore look at the nature of, and interaction between, organizational knowledge and dynamic capabilities in some detail. We do this first through a literature review, and second, through a case study of the evolution of a new international business. The study illustrates how forms of knowledge, particularly when transmitted via social interactions, can act as a source of dynamic capabilities, and we conclude with suggestions about further research on the social and political interactions between the two. European Journal of Information Systems(2006)15,500–510.

doi:10.1057/palgrave.ejis.3000642

Keywords: organizational knowledge; dynamic capabilities; social processes; knowledge transfer; knowledge management; organizational politics

Introduction

The idea of dynamic capabilities plays a central role in the analysis of complex organizational processes because it offers a potential solution to the quest for sustained competitive advantage. Although it has been discussed widely in the strategy literature, it has also been considered in related fields such as information management due to increasing awareness of the links between knowledge and organizational capabilities. A stream of recent strategy literature has explored the organizational characteristics that determine the effectiveness of the emergence, evolu-tion and utilizaevolu-tion of dynamic capabilities. In these accounts, the role of knowledge and knowledge-based processes has been central: dynamic capabilities are seen to evolve through pathways that can be described in terms of the evolution of knowledge within organizations (Zollo & Winter, 2002), and this knowledge is then considered as a key resource to drive competitive advantage in organizations (Grant, 1996). In other words, the dynamic capabilities perspective suggests that the long-term, continuous renewal of the firm rests on both the exploitation of existing knowledge-based competences and the exploration of new knowledge-knowledge-based compe-tences (Zollo & Winter, 2002; Gibson & Birkinshaw, 2004).

Scholars with a primary interest in knowledge processes have also considered their potential link to dynamic capabilities (He & Wong, 2004; Sambamurthy & Subramani, 2005), and a few empirical papers (Gold et al., 2001; Sher & Lee, 2004; Cepeda & Vera, 2005; Haas & Hansen, 2005) have taken a cross-sectional approach, examining, for example, the way in which dynamic capabilities can be facilitated by knowledge management. These studies have shown the relationship to be complex, which suggests

that there is a need to understand in greater depth the specific interplays within organizations.

The aims of this paper are twofold. First, to provide a brief review of the literature on dynamic capabilities and knowledge management, leading to a theoretical account of potential linkages between the two, and second, to illustrate through a case study how these may be manifest in practice. Although the idea of dynamic capabilities has evolved largely from theorizing, the construct has remained quite abstract and it has received little empirical verification. Our case study tries to reduce this gap by offering examples of resource configurations and routines that seem to embody dynamic capabilities. In doing so, we try to show the role played by knowledge management in relation to the evolution and use of dynamic capabilities.

The emergence of dynamic capabilities

The dynamic capabilities literature has sought to study firms’ potential to adapt to and take advantage of fast-moving environments. At the core of the concept is the idea that, when the competitive landscape evolves rapidly and unpredictably, an organization can achieve and sustain advantage by regularly adjusting and developing resources (Teece et al., 1997) and routines (Eisenhardt & Martin, 2000; Winter, 2003). But a dynamic capability does not necessarily imply constant change; more the potential to extend, modify or create these internal resources and routines as appropriate. This potential depends on complex organizational processes (routines or patterns of current practice), shaped by the firm’s specific resource positions, and the evolution paths it has adopted/inherited that condition its range of possible alterations to its existing competences (Teece et al., 1997).

Amid the consensus, there are also important differ-ences in the emphases provided by different authors. The dominant tradition comes from the ‘resource-based view’, which concentrates on the resources such as physical, human and organizational assets that can be used to implement value-creating strategies, which may be configured and reconfigured in ways that cannot easily be matched by competitors, thus yielding business advantage (Barney, 1991; Hamel & Prahalad, 1993). Because the value of resources change over time, Teece et al. (1997, pp. 516) add that competitive advantage comes not only from resources but also from the firm’s ability to continually create, integrate and reconfigure new resources.

Other papers have tended to place greater emphasis on routines, which Winter (2003, pp. 991) defines as ‘behaviour that is learnt, highly patterned, repetitious, or quasi-repetitious, founded in part on tacit knowledge and the specificity of objectives’. Eisenhardt & Martin (2000) also focus on routines, by characterizing dynamic capabilities as specific, identifiable and organizational processes like product development, alliancing and strategic decision-making that create value for firms

within dynamic markets. But there is also an important contrast with the resource-based view which emphasizes uniqueness and inimitability, because Eisenhardt and Martin claim that dynamic capabilities exhibit common-alities across effective firms and these features represent a kind of ‘best practice’, which can be transferred from one firm to another. Dynamic capabilities are thus a necessary but not sufficient condition for competitive advantage. Other scholars, such as Zollo & Winter (2002) and Zott (2003), see high-level routines as the driving force behind changes in resource configurations.

Researchers have also shown how significant routines can be located both at strategic levels, as when companies progressively develop routines for dealing with integra-tion of new corporate acquisiintegra-tions (Zollo & Singh, 2004), and at operational levels, where detailed work practices are constrained by organizational resources and influence the potential changes in these same resources (Feldman, 2004). Feldman’s work raises the question of the links between resources and routines. On the basis of her detailed study of the management of student residences and using insights from structura-tion theory, she concludes that the chain of influence is two-way.

Although the idea of dynamic capabilities is relatively recent, it has been criticized on a number of grounds. First, the exact nature of dynamic capabilities is not well understood, and there is the argument that the concept is both vague and tautological: dynamic capabilities are the things that enable organizations to sustain competitive advantage, but we can only infer these when looking at apparently successful organizations over sustained peri-ods of time (Winter, 2003). This leads to a second weakness because there have been very few research studies that have enabled the evolution and operation of so-called dynamic capabilities to be observed over time (Priem & Butler, 2001). Most of the early papers on dynamic capabilities were illustrated with examples adapted from earlier studies, which had been designed with different targets in mind.

Third, there is some confusion about the different terms and their interrelationships. Do dynamic capabil-ities reside in resources, or only in the process of being changed; and if routines can be established for changing resource configurations, do these routines become dy-namic capabilities in their own right; and what if the routines themselves become changed, does this imply ‘meta’ dynamic capabilities? Some of these dilemmas have been tackled recently by Winter (2003), who uses the logic of differential calculus to distinguish between different levels of change (distinguishing between zero, first and second orders of change), although this frame-work has not yet been widely adopted. Finally, it is not yet clear where dynamic capabilities come from, although there is growing acknowledgement that ‘learn-ing’ must play some part in the process (Zollo & Winter, 2002). As such learning involves the potential to create, integrate and reconfigure knowledge, and to transform

existing knowledge into further knowledge (Verona & Ravasi, 2003; Doughertyet al., 2004).

This evolving interest in learning and knowledge processes underlying dynamic capabilities provides an initial rationale for this paper, but we are also interested to examine current issues including definitional pro-blems, and the relationship between resources and routines.

Organizational knowledge and its management

Economists have recognized for a long time that knowl-edge may have economic value both in society, in general (Hayek, 1945), and in the growth and development of organizations (Penrose, 1959). Moreover, Nelson & Winter (1982) paid particular attention to the signifi-cance of ‘tacit’ knowledge as a basis for both individual and organizational competence. However, it was not until the mid-1990s that companies became very inter-ested in the nature of knowledge, partly as a result of the advances in information technology, which provided the promise of being able to manage knowledge as a corporate asset. Knowledge management emerges as the integrated approach about the need to understand how to manage the actual and potential flows of knowledge creation, transfer, retention and use within and across organizations. Initially, the focus was on the provision of technological solutions, such as the introduction of intranets, the establishment of data warehouses and knowledge repositories, and the creation of directories of expertise. But there was also quick appreciation that IT-based knowledge management would not work unless considerable attention was given to the social processes upon which their implementation relied (Ruggles, 1998). Much academic comment, therefore, has concentrated on aspects of knowledge, which appeared to be

proble-matic when information technology solutions were applied. One clear distinction that emerged in the literature was a divide between those interested in the ‘technology’ side and those emphasizing the ‘social’ side of knowledge management (Alvesson & Karreman, 2001; Gloet & Berrel, 2003). As summarized in Table 1, each one of these perspectives derives from the different under-standings of knowledge and its creation through learning (Easterby-Smith & Araujo, 1999; Thomsen & Hoest, 2001; Gnyawali & Stewart, 2003). There has also been concern that social perspectives have been neglected in the literature, and that a critical factor in determining the success or failure of knowledge management systems is the impact on social relationships among the people who utilize the systems (Brown & Duguid, 2000; Hayes & Walsham, 2003; MacPherson et al., 2004; Hansen et al., 2006).

Other researchers argue for more of a balance by integrating the technological approach with the social approach as a basis for action (Pan & Scarbrough, 1999), thus combining the role of technology, information systems and people. In this context, technology becomes a facilitator of natural social processes, allowing specialist ‘communities of practice’ to operate across functions and geographical distance within the same organization (Alavi & Leidner, 2001; McLure & Faraj, 2005). There is also a growing acceptance of a ‘contingency’ model of knowledge management which suggests that there needs to be consistency between the firm, its people, its task and its information technologies. For example, in the context of consultancy companies and computer manu-facturers, when the nature of the task is highly auto-mated and repetitive, it is worth investing in extensive ‘codification’ of knowledge; but where the primary tasks are large, complex and fairly unique, it makes more sense

Table 1 Organizational knowledge and its management: two perspectives

Theoretical lens Treatment/modelling Conception of KM

Technology perspective Rooted in a view of knowledge as a cognitive possession

Information gathering and analysis are central to organizational learning, as they enable change in existing schemas of reality, which is knowledge

Individuals only constitute a small part of organizations

KM focuses on effective information seeking, processing and codifying in order to make decisions that optimise the organization/ environment relationship

KM enables organizations to build formal/tangible systems which enhance internal learning

Key KM features comprise IT infrastructures, and other technical and managerial systems Social perspective Rooted in a view of knowledge as a social

construction

Social activity and discursive behaviour are central to organizational learning, as they support the social construction of reality

Organizational members, individually or collectively, question and reflect on their own working processes

KM aimed to enhance shared interpretation processes by organizational members in order to make sense of the environment

KM is about building informal/intangible learning environments supported by appropriate kinds of behaviour

KM is designed around social relations and more cultural enablers. IT makes things easier, but only as tool to increase work efficiency

to develop knowledge management systems that are ‘personalized’ around the needs of individual actors (Sarvary, 1999; Hansenet al., 1999).

But a number of problems remain. For a start, there is concern about whether it is possible to manage the forms of knowledge that really matter for performance and competitive advantage. Since this knowledge tends to be tacit, and based on individual experiences and intuitions, it becomes difficult to codify and exchange. Conse-quently, knowledge management systems often become overburdened with information that has no particular performative or economic significance (Alavi & Leidner, 2001; Sutton, 2001). Furthermore, the transfer of ‘useful’ knowledge between individuals and groups depends increasingly upon the quality of relationships, and whether there is sufficient trust/reciprocity between those involved (Jones & George, 1998; Andrews & Delahaye, 2000; Za´rraga & Bonache, 2005). Underlying this is a recognition that individuals need to be appro-priately motivated to contribute to knowledge manage-ment systems (Bocket al., 2005), and that the ownership and control of knowledge within organizations becomes a particularly sensitive political issue (Leadbeater 2001; Lawrenceet al., 2005). Hence, an interest of this paper is to explore some problematic issues of organizational knowledge within the evolution over time of a real organization.

Linking dynamic capabilities and knowledge management

As we have noted above, a number of authors have made general linkages between dynamic capabilities and organizational knowledge, suggesting that the dynamic capabilities which underpin the long-term, continuous renewal of the firm rest on both the exploitation of existing knowledge-based competences and the explora-tion of new knowledge-based competences (Eisenhardt & Martin, 2000; Gibson & Birkinshaw, 2004). Zollo & Winter (2002) identify a ‘knowledge evolution cycle’, including generative variation, internal selection, repli-cation and retention, behind the development of dy-namic capabilities. Similarly, Verona & Ravasi (2003) and Doughertyet al. (2004) highlight that dynamic capabil-ities are made up of knowledge creation and acquisition, knowledge integration and knowledge reconfiguration, and moreover, suggest that these processes are based on a coherent mix of organizational conditions.

But the precise form of these linkages has not been articulated and has to be inferred from various accounts. For example, dynamic capability researchers have identi-fied forms of knowledge that serve as potential sources of competitive advantage. Leonard Barton (1995) and Verona & Ravasi (2003) note that personal skills and knowledge, physical and technical resources, structure and culture should be combined to stimulate ongoing knowledge dynamism and dynamic capabilities. Research has also explicitly identified the conditions behind knowledge-enabled dynamic capabilities. For example,

Lawson & Samson (2001) propose a model that oper-ationalizes innovation as a dynamic capability dependent on seven conditions: vision and strategy; harnessing the competence base; organizational intelligence; creativity and idea management; organizational structure and systems; culture and climate; and the management of technology. Clearly this involves combining both tech-nical and social perspectives on knowledge management. On the other hand, Doughertyet al. (2004), on the basis of extensive qualitative research, concentrate more on the social perspective – describing three sets of rules and resources (whole responsibility, valuing knowledge expertise and searching for opportunities) as social enablers of the dynamism of capabilities embedded in the structures of everyday work.

Among knowledge management researchers, the as-sumption is widely held that information technology contributes directly to organizational flexibility, and hence dynamic capabilities. This relationship continues to receive comment, for example, by Sambamurthyet al. (2003) who develop a theoretical argument suggesting that digital information technology is itself a dynamic capability. Sher & Lee (2004) see the two as separate and examine the relationship empirically to show that both endogenous and exogenous knowledge generated by a range of IT applications is linked to perceptions of dynamic capabilities across a sample of Taiwanese firms. The bulk of empirical studies on this relationship take a quantitative approach using cross-sectional surveys (Gold et al., 2001; Sher & Lee, 2004). An exception is the study by MacPherson et al. (2004), which adopted qualitative methods to examine dynamic capabilities in a knowledge-dependent firm. They concluded that there was a strong link between the ability of senior managers to gather external knowledge through business networks and the creation of dynamic capabilities for adapting routines that would enable them to recognize and exploit new business opportunities.

The knowledge management literature has also reached the point of acknowledging that social processes play a key role in the creation, sharing and configuration of knowledge, which can produce hard-to-imitate cap-abilities. For example, Argote et al. (2003) argue that social relationships provide individuals with abilities, motivation and opportunities to create, retain and transfer knowledge. A growing body of research has shed light on what affects people’s willingness to share knowledge at work. However, much of the work reported is based on limited empirical data, and is exploratory in nature, indicating the general lack of depth to the understanding of these issues in detail. How knowledge gets created by or integrated into social practice and relationships is therefore a critical aspect behind dynamic capabilities, which still needs research effort. In addition to social relations, power (Scarbrough & Carter, 2000) and political issues (Marshall & Brady, 2001) are also proper-ties of social systems associated with knowledge manage-ment outcomes that have been neglected by research.

In summary, there is general consensus that a relation exists between knowledge and dynamic capabilities, and that knowledge management is closely intertwined in this relationship because the creation and evolution of dynamic capabilities requires specific conditions to support the knowledge flows that elaborate, support or remove knowledge configurations. But the details of the relationship remain obscure and imprecise, and many questions remain, about the essence of dynamic capabil-ities, the relationships between routines and resources, the forms of knowledge that are critical to corporate performance and competitive advantage, and the way social relationships and political factors affect knowledge flows. In this paper, we aim to explore these factors with a more fine-grained analysis.

Methodology and research setting

We examine these issues through a single longitudinal case study because the time dimension provides some opportunity to infer causality, and because the complex-ity of a case examined in some depth should allow us question, and to elaborate on, the models and frame-works discussed above. The research took place in ChemCo (a pseudonym), which is one of the global leaders in the development and supply of chemicals. Over the years, it has built a huge body of technical knowledge, and this ability to create and apply knowl-edge has been regarded as the main source of its competitive advantage. Like many multinationals, it has recently reorganized its structure from product divisions into market segments. The corporate-wide reorganization was accompanied by a strategic shift that placed greater emphasis on customers and the need for technical developments to be driven by closer awareness of market expectations, and this has subsequently led to a radical rethink of the role of knowledge across the company.

Over the last 2 years, we have focused specifically on the development of a new business venture (NBV) within ChemCo, and we have tracked its evolution through interviews, observations of meetings and reviews of internal documentation. Fieldwork has included repeated interviews with most of the management group (the managing director (MD) has been interviewed four times), plus observation of a two-day management meeting in Spring 2005 that was attended throughout by all three authors. This meeting enabled observation of formal and informal discussions that were followed up with individual interviews. In addition, we have inter-viewed both senior management in ChemCo and members of partner organizations (see below) about the progress of the new venture. We have also reviewed extensive internal documentation that traces the evolu-tion and implementaevolu-tion of the current strategy since its inception in 2003. Notes were kept by each of us during meetings, and transcripts have been produced for all formal interviews. The initial interpretation of data was reached through discussions between the researchers. We then sent summaries of our conclusions (containing both

practical and theoretical implications) to senior manage-ment in the NBV for commanage-ment, and discussed our emerging theoretical framework with key managers.

The NBV is one of a number of innovative projects initiated by ChemCo in 2003, and which are actively supported by the highest levels of the company. The essence of the venture, which is still evolving at the time of writing, is to use an established French organization as a platform from which to expand the business across Europe and the Middle East. The business plans are ambitious, with an annual target of 30% growth in sales over each of the next 4 years. The strategy is to expand outside France using partnership arrangements with local specialist firms, and the expansion is driven by a small team of regional sales managers (SMs) who are respon-sible for the recruitment and development of partners in each region. See Figure 1 for a summary of the main relationships.

The local partners are mostly small, specialized com-panies. They need to have sufficient technical expertise and business networks to sell ChemCo’s products to their customers, and since they are given exclusive rights for each country, their selection is critical. Once selected, there is a training programme that is conducted through brief assignments working with the French business, through visits to potential customers in their own countries accompanied by the regional manager or technical experts from France and through direct training provided by the French technical director. For the NBV, this model provides a route for very rapid expansion into new territories for negligible capital outlay, which then gives them the potential to claim regional presence when dealing with other global companies. Also, since Chem-Co does not need to put an infrastructure in place, it is easier then for the company to decide whether to invest or disinvest in the various markets. For the local partners, the arrangement provides local credibility due to their association with a global brand; it gives potential access to multinationals with which ChemCo has links else-where; and it provides them with substantial technical expertise and systems support. Furthermore, none of their competitors has yet managed to develop a similar business model; instead, they continue to rely mainly on selling directly to end customers.

CHEMCO NBV SM SM SM SM France Partner Customer Customer Customer Partner Partner

We believe that this case provides a fruitful setting for our research because it is evolving very quickly, hence it is likely to exhibit ‘dynamic capabilities’; it operates though a loose network that crosses both organizational and national boundaries, hence issues about the control and dissemination of knowledge are likely to be salient; and it is a live study that enables us to see how things evolve over time, hence we are more likely to observe interac-tions and causal relainterac-tions over time. Since this is a complete business, we have to recognize its complexity, and therefore are likely to observe things we had not previously expected, and yet it is small enough for us to have direct access to most of the main players, which should provide a reasonably complete picture.

Analysis and discussion

In this part of the paper, we provide an analysis of the above case that links the empirical data to theoretical constructs. It is divided into five sections. The first two consider the nature of organizational knowledge and dynamic capabilities manifest in the company, and the implications for key theoretical debates in both areas. We then look at the extent to which there appears to be a link between the two concepts. This leads to the final two sections which consider common themes which are apparent in both areas, and which have received limited acknowledgement in the literature: the importance of relationships, and the impact of power and politics. Organizational knowledge

We have identified from the case study six main flows of knowledge, which are illustrated in Figure 2. We are conscious of the distinction between technical and social forms of knowledge, but have decided for the time being not to classify each example in these terms, but to return to a discussion of these issues at the end of the section in the light of the examples provided.

The first, and critical, form of knowledge in the NBV involves the creation of technical expertise and new product development. The French operation plays a pivotal role in technical knowledge creation and this knowledge is disseminated to the SMs and national

partners through generic training and technical gui-dance. There is also a reciprocal element, because the national partners accumulate detailed knowledge of the technical requirements of customers and occasionally develop new formulations on site to deal with novel problems of customers. This knowledge is passed back to the technical office for wider dissemination to other sales operations (K1). A second form of knowledge flow (K2) involves discussion and negotiation about business targets, and the collection of data on sales performance to be measured against these targets. Discussions about targets require both the NBV and partners to share their aspirations at the start of the year and these targets are readjusted in the light of performance as the year progresses. The information on sales performance and profits is collected on a regular basis using the standard information system of ChemCo that allows data to be integrated into the financial forecasts of the wider company.

However, a different process operates for information about contractual arrangements (K3). The MD of the NBV has agreed with senior management that details of local contractual arrangements do not need to be entered into the corporate database because they include substantial variation from corporate norms. Instead, they are reported by SMs to the MD. As he commented:

an important part of our value proposition is to be very flexible and make it easy for the clients who want to do business with us. The way ChemCo normally does contracts has more inherent inflexi-bility, so part of my job is to keep our guys away from ChemCo.

In this instance, the expected knowledge flow does not take place, and is deliberately blocked.

The fourth example involves regular exchanges that take place between partners and their regional SMs, who are thus able to enrich their understanding of local market constraints and opportunities. In some cases, this becomes a close personal relationship with daily com-munication by phone or e-mail, and where the SM becomes a business advisor to the local partner (K4). These insights and local variations are then shared between the sales team and other senior managers at their bi-monthly meetings. This is a multinational team where members have close knowledge of their own patches, but they still have to explain and justify local variations in practice to their colleagues. These different forms of local, or situated, knowledge often have conflicting implications for the NBV as a whole, which have to be reconciled, occasionally through the direct intervention of the MD (K5). A final knowledge flow came to light when we were discussing the above map with two of the senior managers in the NBV. Having agreed with our overall interpretation, they pointed out that because the parent company has operations in almost every country, the local ChemCo managers normally build up relationships with national partners and are then able to provide information and guidance on new business opportunities (K6).

CHEMCO NBV SM SM SM SM France Partner Customer Customer Customer Partner Partner K1 K2 K4 K5 K3 K1 K6 K2

At this point, we can return to the distinction between social and technical forms of organizational knowledge, and it is evident from our data that the distinction is by no means clear-cut. For example, K1 and K2 combine both technical elements of knowledge (as embodied in information systems), and social elements of knowledge (involving sense-making and negotiated meanings). In the latter case, there is a continuous interweaving between the more technical forms of information such as sales performance and the social processes that require joint sense-making about the significance of performance data and the negotiations about ongoing readjustment of targets. On the other hand, K4, K5 and K6 involve primarily social forms of knowledge – generally direct face-to-face communications between key individuals (although supplemented by e-mail and telephone as necessary), either as part of a routine or on anad hoc basis.

The third example (K3) is particularly interesting because it contradicts the prevailing assumption that knowledge, either in its technical or social forms, generally contributes towards organizational perfor-mance. In this case, the judgment is made by the immediate manager and those above him in the hierarchy that standardized reporting of information is likely to inhibit the evolution and growth of the new business. In recognition that gathering of this informa-tion could potentially be harmful to the business, it is agreed that normal information-gathering requirements should be suspended.

Thus, we are not able to provide a neat resolution to the debate between social and technical forms of knowl-edge. Rather, we have shown that there are a number of potential interactions and variations. Technical and social variants may exist independently, but the former is more likely to be combined with the latter, and most importantly, we have shown that in certain circum-stances technical forms of knowledge management may be considered as harmful to the well being of the organization. This accords well with the results of the quantitative study by Chuang (2004), which showed that social forms of knowledge were positively related to competitive advantage, while technical forms could be negatively linked.

In concluding this section there are two important points to note. First, there are clear political overtones to the use of knowledge within this organization. This is exemplified by the way the MD has been allowed to introduce a one-way filter in relation to local contractual arrangements, as discussed above. There is also an ongoing debate at senior management level (observed at the management meeting, and discussed subsequently with individuals) about the extent to which informa-tion about local business circumstances should be systematized – or whether it is best to maintain the existing exchange of knowledge between managers and partners at an informal, social, level. Second, knowledge flows depend very much on the quality of relationships

between the key actors. SMs, in particular, seem to play a mediating role between the partners and the head-quarters of the NBV, and the sharing of both technical and commercial knowledge among the NBV, the partners, and even some of the customers, depends greatly on the levels of trust that have been built up. We will return to these points in the discussion section.

Dynamic capabilities

The case demonstrates a number of dynamic capabilities. We will not map them as we did for organizational knowledge, but will use a similar numbering system to assist with later discussion. Several capabilities generate flexibility in the strategic deployment ofresources. First, the reliance on partnerships with established local companies means that new businesses can be established quickly, and this enables competencies and knowledge to be moved very quickly from one country or setting to another. This allows for rapid growth with minimal reliance on existing capital or infrastructure (DC1). Second, since the local partners are independent, rather than franchisees, it is easier for the partners, in consulta-tion with the regional managers, to devise contracts with customers that take account of local circumstances (DC2). Third, because of the wider international reach of the NBV, the French operation gains greater flexibility and leverage in their dealings with multinational custo-mers operating in France, thus providing novel business opportunities for the original core business (DC3). And the strategic resources of ChemCo mean that local partners gain much credibility from this association when seeking business with multinationals in their territories. As the MD of one partner said: ‘without the visible backing of ChemCo we simply would not be on the radar when bidding for a contract with Shell’ (DC4).

On the other hand, there are some resource issues that appear to act against flexibility and mobility. This is because, as a loosely coupled organization, the business is highly dependent on the technical competence of individuals and the quality of the relationships that exist between the key players. These take time to build up. For example, the U.K. partner has had successful business dealings with ChemCo over 16 years, even though the new business has only been running for 2 years. More-over, when setting up agreements with partners who are completely new, they have found that on average this takes up to 18 months, rather than the 6 months envisaged in the initial plan.

Flexibility and adaptation ofroutineswas evident in two areas. At a strategic level, there was an acceptance that business processes and partnership arrangements might vary according to different national circumstances. Thus, although there is a general rule that only one partner should be appointed in each country, there are seven partners in Italy simply because regional business differ-ences in that country are so strong (DC5). At an operational level, the youthfulness of the organization, and the consequent lack of history, means that many

routines have to be invented from scratch, and therefore there is no embedded resistance to change in the old ways of doing things. This includes routines around pricing arrangements, information reporting and perfor-mance measurement. Of course, much of this freedom was a result of having negotiated relative independence from the wider systems of ChemCo, at least for the early stages of the business (DC6).

There are several implications here for the nature of dynamic capabilities. The distinction in the literature between resources and routines appears to work quite well in this case study: DC1–DC4 are primarily about resources, while DC5 and DC6 are primarily about routines. However, in the case of DC1, there is some intermingling of the two concepts. Here it could be argued that the consistent use of partnerships represents a strategic routine that then leads to resource flexibility. There is also a meta-routine apparent in DC4 because there is a basic routine/rule that there should only be one partner in each country, there is also a meta-routine operating here which suggests that the rule can be broken under certain circumstances.

In general, these examples show that dynamic cap-abilities can be incorporated in either resources or routines, or both. Evidently the relationship between resources and routines may be complex, but that it can also be positively delineated when qualitative data is employed. Our results here complement the detailed analysis of Feldman (2004) that shows the intermingling of resources and routines within a university housing agency. Although the two concepts are largely distinct, it is quite possible for changes in one to produce transfor-mations in the other.

Links between organizational knowledge and dynamic capabilities

We have hinted at some of the potential links between organizational knowledge and dynamic capabilities in the two preceding sections. Here we examine the connections more systematically, and we note that each of the forms of organizational knowledge can be linked to one or more of the dynamic capabilities that we have identified in this case. For example, the technical exchanges between the French business and partners (K1) lead to greater flexibility and credibility for the partners (DC2 and DC3); the opportunity to discuss and renegotiate targets (K2) is likely to support the general flexibility of routines within the NBV (DC6); a regular informal exchanges between SM partners (K4) lead to advice and encouragement about the strategic shifts for the partner (DC2); the exchange of ideas and experiences between SMs (K5) leads to the dissemination of the new local practices of routines (DC6); and contacts with local ChemCo managers (K6) lead to new business opportu-nities for local partners (DC4). We also have the negative case where the agreement about restricting reporting to ChemCo (K3) leads to greater flexibility in local contrac-tual arrangements (DC6).

In general, we have assumed that forms of knowledge precede, and therefore lead to the establishment of dynamic capabilities. However, the first may also be possible, because strategic shifts in the business of individual partners (DC2) might well prompt changes in the formal and informal processes of gathering and disseminating knowledge within the NBV and between SMs. Thus, although it appears that there are relation-ships between organizational knowledge and dynamic capabilities, these may well be more complex than existing causal models assume. In this respect, we would support the insights of Bhatt & Grover (2005), who argue that a more detailed understanding of the nature and variations of dynamic capabilities need to be achieved before significant progress is to be made on the basic relationship between the two.

Relationships

It is widely recognized that knowledge flows are affected by the quality of relationships, and there are a number of illustrations of this from our data. A key feature of the business model for the NBV is that it is based on relationships between partners that are legally quite independent of each other. When discussing the reasons for the continuing success of the business (at the time of writing it remains in line with its ambitious targets), we were repeatedly told that it relies on the quality of personal contacts between the key players. As the MD said: ‘we need to understand that this is a people intensive business, a know-how intensive business’. He agonized considerably over the selection of SMs because the business model gave them considerable freedom and empowerment to act as they thought fit. Hence, he observed that one of his biggest challenges was ‘having to delegate to others, and trust in the people who are engaged in the project’.

The NBV requires a willingness to share information: both technical and product knowledge are disseminated to the SMs and national partners, while simultaneously national partners may pass to the technical office new formulations in order to deal with a customer’s specific problems, which means an ongoing learning about each individual market. Regular contacts ‘lead to understanding of the different routes to sell chemicals in different countries and how to create a value proposition to customers’. Since partners are the intermediaries between Chemco and the delivery of chemicals to customers, care and support are essential concerns. As one of the SMs said: ‘relations with partners are like family relations. If one partner gets sick, you look after him’.

The predominance of relationships in this case has an impact both on organizational knowledge and on dynamic capabilities. First, the dominance of social forms of knowledge exchange produces a scepticism of, and resistance to, undue formalization of information sys-tems. Second, the existence of positive relationships may lead to the establishment of dynamic capability because they can support a decentralized and empowered model.

But relationships can take a long time to establish and much effort to maintain, which slows down the speed with which new business links can be established, and means that considerable attention has to be devoted to issues such as training and team development. This supports the findings of Kotlarsky & Oshri (2005) about the need for social relationships to underpin collabora-tive software within IT projects, and the observations of Hansenet al. (2006) on the importance of positive direct relationships as a precursor to knowledge transfer amongst managers.

Politics

While this has been noted repeatedly in relation to organizational knowledge, the case has shown how political skills are required to influence the nature of organizational knowledge in ways that will enhance, rather than undermine, dynamic capabilities.

It is widely acknowledged in the literature that organizational knowledge has political overtones (Hislop et al., 2000; Newellet al., 2000; Hayes & Walsham, 2003; Lin & Silva, 2005), but this is less frequently noted in the literature on dynamic capabilities. Indeed, a recent search within Proquest under the terms ‘politics’ and ‘dynamic capabilities’ yielded no hits at all. In the present case, the NBV is only able to function as a distinct part of ChemCo because the unusual relationship has been approved and sanctioned by managers at the highest level of the parent company. Nevertheless, the MD still has to translate this general sanction into operational reality by gaining agreements about limiting information flows, about acceptance of non-standard contractual arrangements and about circumventing company-wide rules, such as restrictions on the additions to the head-count. These agreements were difficult to establish in the first place, and are complex to maintain. In a recent interview he commented, ‘if anything, the politics are worse than they were a year ago’. Thus, political protection is a key facilitator of the NBV’s dynamic growth because the general manager is able to provide from the procedures and systems of the wider company. This helps to have a very flexible and proactive approach to customers – because each country has a different culture – which is very different from the tradition of ChemCo.

Within the NBV itself, political issues appear to have a bearing more on the way priorities are agreed, the way successes and failures are evaluated, and the way different forms of knowledge and expertise are legitimized. For example, there is ongoing tension about the relevant value of the emergent experience of the regional SMs compared to the deeper experience of the managers in the established French business. The dilemma about how best to balance the technical and social aspects of knowledge management is also being actively explored among the senior team as a debate about whether, and how far, to systematize information gathering and exchange. This is a common and continuing debate within the information knowledge community as shown

in the work of Marshall & Brady (2001) and Marshall & Rollinson (2004). There is also a clear practical concern here: that further ‘formalization’ of knowledge manage-ment may lead to a reduction in local autonomy and creativity. The potential implication is that ‘informal’ knowledge management supports dynamic capabilities, but that ‘formal’ knowledge management may hinder it.

Conclusions

The purpose of this paper was to improve our under-standing of dynamic capabilities, organizational knowl-edge and the interplay between the two. We have presented a case study of a leading chemical company, which demonstrates several areas where knowledge acts as a source for dynamic capabilities: through the technical training provided to individual partners by the French business; through the way market informa-tion filters back by word of mouth; through informal exchanges between SMs; and through the protection that is provided from the systematic information gathering of the parent company.

The case provides examples of both social and technical organizational knowledge, which appear to contribute to dynamic capabilities conceptualized as flexibility in both resources and routines. However, it is possible that the social forms of knowledge have a greater impact, particularly in relation to flexibility of resources. This supports the view of those who argue for more attention to the social impact of knowledge, although we recognize that the current structure of the company does place greater reliance on the quality of relationships. It is also possible that the technical forms of knowledge may become more important as problems of scale and coordination increase.

Two other important points arise from this study. The first is the way power and politics appear to affect the relation between organizational knowledge and dynamic capabilities. The second point is related because we have shown in two instances that the relationship between organizational knowledge and dynamic capabilities is not necessarily positive, and that this depends very much on the broader context of the organization. We therefore suggest that general assertions about the relationship between organizational knowledge and dynamic capabil-ities require a more fine-grained analysis than has been hitherto provided.

Naturally, there are a number of limitations to this paper. It is based on a single case study with a number of unique features, which therefore limit the direct general-izability of the results. Although notionally a long-itudinal case study, the time span is limited by the fact that the company has only been in existence for 2 years, and other factors may come into play as it evolves over time. However, we have tried to be cautious in drawing inferences; we have followed a falsification logic by highlighting features that appear to contradict previous studies; and we have also tried to look for instances of counter-evidence within our own case.

The case identifies several issues that require further exploration, and we highlight four main avenues that are likely to be fruitful. First, we think it is important to explore the appropriate balance between the technical and social variants of knowledge management in con-tributing to dynamic capabilities for different types of business and at different stages of the organizational growth process. Second, the nature of dynamic capabil-ities merits further exploration through intensive, and preferably longitudinal case studies. This is because much of the existing literature is based on secondary data, and there is much repetition of ideas that are in need of fresh challenges from new data. Several aspects derived from different models of dynamic capabilities were illustrated in the above case study, which suggests that no one model provides a complete view. Third, further examina-tion of the relaexamina-tionship between organizaexamina-tional knowl-edge and dynamic capabilities should provide deeper understanding of the complex relationships between

knowledge and performance, thus extending the work of Bhatt & Grover (2005), and there is potential also to consider dynamic capabilities as an intermediate variable between knowledge and performance, as suggested by Cepeda & Vera (2005). Fourth, the relative lack of comment and guidance within existing models about how knowledge management and dynamic capabilities are created and enacted through internal debates and specific decisions among organizational actors suggests that the political aspects of the two areas would benefit from further study.

Acknowledgements

Thanks to the financial support provided by the Fundacio´n Caja Madrid, Spain, and by the Economic and Social Research Council, U.K., reference: RES-334-25-0020. We are also grateful to Manuel Grac¸a and Wayne StAmour for their contribution to data collection.

About the authors

Isabel M. Prieto is an associate professor of Business Administration at the Department of Business Manage-ment and Market Research at the University of Vallado-lid, Spain, since 1996. She received her Ph.D. from the University of Valladolid with a concentration in knowl-edge management and learning in organizations. In 2004/05 she was post-doctoral visiting scholar in the Lancaster University Management School, U.K. Her current research is on knowledge management and organizational learning in relation to new product

development, dynamic capabilities and human resources management.

Mark Easterby-Smithis President of the British Academy of Management and Professor of Management Learning at Lancaster University. In 2003 he was appointed a senior fellow of the U.K.’s Advanced Institute of Management (AIM) research initiative, and is currently leading research projects investigating the nature of dynamic capability in a variety of contexts, and the knowledge implications of product-service systems within manufacturing industry.

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