Understanding dynamic capabilities

TLDR

Dynamic capabilities are defined as those that extend, modify, or create ordinary capabilities, forming a hierarchy of higher‑order capabilities that enable firms to sustain competitive advantage. The study argues that dynamic capabilities rely on costly patterning of activity, and firms may instead use ad hoc problem solving; the creation of higher‑order capabilities depends on investment costs versus ad hoc alternatives, determining the level at which strategic competition occurs. © 2003 John Wiley & Sons, Ltd.

Abstract

Abstract Defining ordinary or ‘zero‐level’ capabilities as those that permit a firm to ‘make a living’ in the short term, one can define dynamic capabilities as those that operate to extend, modify or create ordinary capabilities. Logically, one can then proceed to elaborate a hierarchy of higher‐order capabilities. However, it is argued here that the strategic substance of capabilities involves patterning of activity, and that costly investments are typically required to create and sustain such patterning—for example, in product development. Firms can accomplish change without reliance on dynamic capability, by means here termed ‘ad hoc problem solving.’ Whether higher‐order capabilities are created or not depends on the costs and benefits of the investments relative to ad hoc problem solving, and so does the ‘level of the game’ at which strategic competition effectively occurs. Copyright © 2003 John Wiley & Sons, Ltd.