The Dynamic Capabilities of Firms

An expanded paradigm is needed to explain how competitive advantage is gained and held. Firms resorting to ‘resource-based strategy’ attempt to accumulate valuable technology assets and employ an aggressive intellectual property stance. However, winners in the global marketplace have been frms demonstrating timely responsiveness and rapid and flexible product innovation, along with the management capability to effectively coordinate and redeploy internal and external competences. This source of competitive advantage, ‘dynamic capabilities’, emphasizes two aspects. First, it refers to the shifting character of the environment; second, it emphasizes the key role of strategic management in appropriately adapting, integrating, and re-configuring internal and external organizational skills, resources, and functional competences toward a changing environment. Only recently have researchers begun to focus on the specifics of developing firm-specific capabilities and the manner in which competences are renewed to respond to shifts in the business environment. The dynamic capabilities approach provides a coherent framework to integrate existing conceptual and empirical knowledge, and facilitate prescription. This chapter argues that the competitive advantage of firms stems from dynamic capabilities rooted in high performance routines operating inside the frm, embedded in the firm’s processes, and conditioned by its history. It offers dynamic capabilities as an emerging paradigm of the modern business firm that draws on multiple disciplines and advances, with the help of industry studies in the USA and elsewhere.