A Normative Theory of Dynamic Capabilities: Connecting Strategy, Know-How, and Competition

The field of strategy has mounted an enormous effort to understand, define, predict, and measure how organizational capabilities shape competitive advantage. While the notion that capabilities influence strategy dates back to the work of Andrews (1971), attempts to formalize a “capabilities based” approach to strategy only began to take shape in the past twenty years. In particular, the publication of Teece and Pisano (1994) and Teece, Pisano, and Shuen (1997) work on “dynamic capabilities” triggered a flood of debate and discussion on the topic. Because strategy is a normative field, its theories must be evaluated in terms of how well they inform and impact practice. Judging by this standard, the dynamic research capabilities research program has come up short. It has become mired in endless debates about definitions and has engaged obsessively in an elusive search for properties that make organizations adaptable. In this paper, I argue that the research program on dynamic capabilities needs to be reset around the fundamental strategic problem facing firms: how to identify and select capabilities that lead to competitive advantage. I frame the firm’s capability strategy problem as one of choosing among different types of capability enhancing investments, ranging from general-purpose know-how to application-specific know-how. The framework also draws a distinction between investments designed to deepen the firm’s existing base of capabilities and those designed to broaden its repertoire into new realms. I explore the applicability of this framework to three general types of competitive circumstances: stable product market competition, Schumpeterian entry, and Penrosian dynamics. A major goal of the paper is to identify important gaps in our theoretical and empirical knowledge that should be a focus for future scholarly research.