Dynamic Capabilities

Dynamic capabilities are the firm’s ability to integrate, build, and reconfigure internal and external resources to address and shape rapidly changing business environments. Since its emergence in the 1990s, the dynamic capabilities framework has attracted a great deal of scholarly interest as a potentially overarching construct for the field of strategic management. The dynamic capabilities framework posits that firms are, to varying degrees, able to adapt to (or even initiate) changes in their environment. The strength of a firm’s dynamic capabilities determines the speed and degree to which the firm’s idiosyncratic resources and competences can be aligned and realigned to match the opportunities and requirements of the business environment. Strong dynamic capabilities are the basis for the sustained competitive advantage displayed by a handful of firms that have endured for decades even as they have shifted the focus of their activities. Dynamic capabilities contain an important element of creative managerial and entrepreneurial activity (e.g., pioneering new markets) by the top management team and other expert talent. They are also, however, rooted in organizational routines (e.g., product development along a known trajectory) and analysis (e.g., of investment choices). These two facets of dynamic capabilities often work together. At Apple, for example, product development follows an established process but in a way that encourages creative input through, for example, an ad hoc meeting to explore a new idea. Keeping hybrid processes such as this from going off-track is in itself a dynamic capability, rooted in the organization’s values and systems. The dynamic capabilities concept provides one of the most comprehensive accounts of what leading firms do to maintain competitive advantage. This entry begins by contrasting ordinary and dynamic capabilities. It presents the intellectual roots of the dynamic capabilities framework and a taxonomy of dynamic capabilities. It concludes with a statement of the central role of dynamic capabilities for dynamically formulating and executing strategies as competitive conditions evolve.