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Dynamic Capabilities and Knowledge Creation:
A Literature Review
“How could a firm obtains sustainable competitive advantage?” This question has been the
concern of the industry, government, and academic circles. Traditionally, common opinions on
possible reasons how a firm maintains its competitive advantages are as follows: the focus on
competitiveness analysis in the industry-specific environment (Porter, 1980) and the perspective
of the resource-based view (RBV) that emphasizes the use of specific resources (Wernerfelt,
1984; Barney, 1991). Teece, Pisano, and Shuen (1994, 1997), however, held the opinion that an
organization has to establish dynamic capabilities in order to ensure its sustainable competitive
advantages.
The dynamic capabilities view (DCV), based from the resource-based theory (RBT), further
explains the dynamic capabilities that an organization needs to possess for it to transform
resources into its competitive advantages. Under the viewpoint of RBT, a firm can obtain its
competitive advantage by means of the valuable resource and capabilities that its competitors
can hardly imitate (Barney, 1986, 1991; Peteraf, 1993). Unfortunately, the RBT neglects to
explain how a firm deploys its unique resources and obtain its core capabilities (Helfat, 1997;
Helfat and Peteraf, 2003). In this instance, a firm with core capabilities also faces the issue of
core rigidities (Leonard-Barton, 1995). On such a basis, Teece et al. (1994, 1997) extended the
RBT and formed the DCV. Today, when the industrial environment changes rapidly and market
competition is extremely fierce, dynamic capabilities emphasize the real-time response to the
updating and reconfiguration of resource capabilities in order to adapt to environmental changes.
The DCV describes the firm’s response while the environment changes rapidly, which is more
concrete and adapts more to the dynamic process of corporate operation compared to other
perspectives.
The DCV emphasizes the organization’s adaptability to the environment. The organization’s
capability of creating and absorbing new knowledge is one important basis of its dynamic
capabilities (Zollo and Winter, 2002). In the paradigm of knowledge management, the
organization’s main task is to build its knowledge pool by knowledge creation, then accumulate,
maintain, and update its core knowledge, and finally, master and create the permanent
competitive advantages (Grant, 1996ab; Teece et al., 1997; Phan and Peridis, 2000).
1. Dynamic capabilities
The RBV regards a firm as a collection of assets (tangible or intangible) and capabilities.
“Resources” is the obtainable element that a firm controls or possesses. Meanwhile, “capability”
is the capacity that a firm configures to maximize its resources (Amit et al., 1993). Regarding the
difference between capabilities and resource, the former is specific to and deeply hidden in a firm
and its processes. When a firm is transferred or the organization disappears, its capabilities just
disappear (Teece et al., 1997). The RBV perspective emphasizes the unique resource and
capability of an enterprise to provide the basic direction for corporate strategy. It is the main
source of profits not to mention that permanent and sustainable competitive advantages are
formed by accumulating and cultivating internal resource and capabilities. Hence, resource and
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capabilities are the foundation of long-term corporate strategy and emphasis in strategic thinking
(Wernerfelt, 1984, Grant, 1991).
The RBV constructs an influential theoretical structure in understanding how a firm obtains
and maintains its competitive advantage. It emphasizes the firm’s internal organization (Amit et
al., 1993) and explains how it makes use of its internal resources as it creates and maintains its
competitive advantage (Barney, 1991, Nelson, 1991, Peteraf, 1993). Facing an ever-changing
environment, RBV meets the difficulty in application due to its focus on static resources. The firm
has its own specific resources, and its competitive advantages lie on its unique and inimitable
upstream markets and resources (Teece, 1982, Rumelt, 1984, Wernerfelt, 1984). The RBV has
its constraints like emphasizing too much on internal resource and capabilities and neglecting the
influence of external factors on a firm; and its inability to explain adequately how or why does a
firm obtain the competitive advantage in a rapidly changing environment (Eisenhardt and Martin,
2000). A firm with only its unique core capability to bank on is not adequate because it will have to
face the issue of core rigidities (Leonard-Barton, 1995, Luo, 2000). A firm builds on its permanent
competitive advantages exclusively through continuous dynamic learning.
On such a basis, Teece et al. (1994, 1997) extended the RBT and developed the DCV.
“Dynamic” as capacity which renew competences so as to achieve congruence with the changing
business environment. Meanwhile, “capabilities” emphasizes on key role of strategic
management and adapting, integrating and reconfiguring organization and functional
competences to match requirements of changing environment (Teece et al., 1997). Therefore,
the DCV is originated from the RBT perspective, while emphasizes that an organization has to
possess dynamic capabilities in order to transform its resources and capabilities into competitive
advantages. Dynamic capabilities are the potential method of integration, and they further
explained the origin of competitive advances. Many companies are still inadequate in responding
to the rapidly changing environment even though they have accumulated enough resources.
Only those who can rapidly respond, and immediately and flexibly integrate and reconfigure its
internal and external capabilities will be the final winners. Dynamic capabilities is useful in
confirming the origin of advantages, in explaining the combination of capabilities and resources,
and in developing the internal and external unique abilities of existing enterprises to respond to
the rapidly changing environment (Teece et al., 1994, 1997).
Other scholars also responded well to the DCV perspective. According to some of them, for
example, the nature of dynamic capabilities is the firm’s processes to integrate, reconfigure, gain
and release resources—to match and even create market change (Eisenhardt et al., 2000).
Dynamic capabilities originated from learning in which the organization systematically produces
and modifies its operational procedurein pursuit of better performance (Zollo et al., 2002).
Embedded in routine organizational processes that guide the evolution of a firm’s resource
configuration and operational routines. The processes involved in a firm’s system of evolutionary
learning can be classified into the categories of variation, selection, and retention as well as
influence its decision-making or problem-solving activity (Zott, 2003). Cepeda and Vera (2007)
definition of dynamic capabilities as the processes to reconfigure a firm's resources and
operational routines in the manner envisioned and deemed appropriate by its principal decision
makers. Examples of dynamic capabilities are product development, strategic decision making,
and alliance management (Eisenhardt et al., 2000). Therefore, dynamic capabilities are the firm’s
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ability in the processes of firm integration, reconfiguration, renewal, learning, and response
mechanisms.
2. Knowledge creation
According to the knowledge-based view (KBV), the most critical input and value source are
knowledge in a firm’s process of production activities (Grant, 1996b) because all inputs are
established on the foundation of knowledge. Moreover, an organization’s knowledge
improvement reduces its performance variability and increases its reliability (March, 1991).
Knowledge assets are the foundation in forming organizational capabilities. Hence, the most
critical operational principle for a firm is to create and apply knowledge assets (Nonaka, 1994;
Grant, 1996b; Teece, 1998).
Creating knowledge in an organization refers to transforming individuals’ skills or knowledge
into the knowledge embedded in the organization by means of proper transformation
mechanisms. In relation to this, Nonaka and Takaeuchi (1995) refer this as the knowledge spiral
that encompasses the stages of socialization, combination, externalization, and internalization.
Nonaka (1994) asserts that the basic structure of knowledge creation is comprised of two
aspects: epistemology and ontology. Ontology refers to the concept in which “only individuals
could create knowledge and thus an organization cannot create knowledge by itself without
individuals.” An organization needs to support creative individuals or provide a proper
environment and allow individuals to create knowledge. Hence, an organization’s knowledge
creation is its process of strengthening and concretizing the knowledge created by individuals
and forming this into its knowledge network. This process occurs within an expanded “interactive
group” of people spanning across the internal structures of an organization, or across
organizations and borders. Meanwhile, epistemology distinguishes tacit from explicit knowledge.
Tacit knowledge is individualistic and especially related to the scenario, which is difficult to
formalize or communicate. Meanwhile, explicit knowledge refers to the knowledge transferable in
formalized and standard languages.
As to the path by which an organization creates new knowledge, similar perspectives can be
found in different studies. Helleloid and Simonin (1994) explain that organizations acquire
knowledge in five paths: (1) independent internal development, (2) externally assisted internal
development, (3) purchase of new knowledge from the public market, (4) corporate cooperation,
and (5) merger and acquisition. Leonard-Barton (1995) classifies the origin of knowledge into
consultants, customers, state laboratories, universities, competitors or non-competitors, and
suppliers; therefore, it has an inter/intra organizational scope. Knowledge creation is the process
of “creating” new knowledge. The paths for the creation of new knowledge include technology
change and innovation within an organization, response to the impact of an outside competitor,
and understanding customers’ needs.
3. Dynamic capabilities and knowledge creation
The KBV emphasizes that knowledge is the important resource for a firm to create added
values (Grant, 1996b), and has to possess features of being unique, difficult to transfer, and in
duplicate (Kogut and Zander, 1992; Spender, 1996, Grant, 1996a, b). As to the research question
of “how an organization could transform individuals’ knowledge into organizational capabilities,”
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Grant (1996b) explains the organization’s ability to integrate knowledge to be the most important.
Due to ability constraints, individuals cannot integrate others’ knowledge. If transacted in the
market, explicit knowledge is difficult to price, and tacit knowledge is hardly transferable.
Therefore, Grant (1996a) stressed that the importance of knowledge integration in “how an
organization’s manager shares the professionals’ knowledge with members in other
organizations, and enhances the organization’s innovative ability by means of internalization
among its members.” In this sense, knowledge creation and the integration mechanism are much
more important than knowledge itself.
The organization’s capabilities are the foundation for the creation and integration of the
knowledge of individuals inside the organization. According to Foss (1996), an organization’s
capability is a special knowledge capital that enables the firm to execute some activities more
effectively than others. An organization’s capabilities should be accumulated by its knowledge
creation and by mutual learning among its members. Such a mechanism of knowledge creation,
integration, and learning is the optimum feature of dynamic capabilities as emphasized by Teece
et al. (1994, 1997). Dynamic capabilities as organizational routines, learning and knowledge
management processes guide their development, evolution, and use (Eisenhardt et al., 2000).
For example, knowledge codification into procedures and technologies makes experience and
routines easier to apply (Zander and Kogut, 1995). The knowledge evolution cycle includes four
phases: generative variation, internal selection, replication, and retention (Zollo and Winter,
2002); this cycle enables firms to change the way they do things in pursuit of greater rents. An
organization creates new knowledge by means of the Knowledge Spiral method, a process of
transforming the tacit knowledge into explicit knowledge, converting it into innovation knowledge
that an organization can deploy, and then using this innovation knowledge to obtain competitive
advantage in the market (Nonaka, 1994).
4. Discussion and conclusion
Structured on DCV, this paper attempts to clarity knowledge creation into the study pattern
and made the following contributions to the existing literature on the topic.
First, the enterprise with the sharpest competitive edge in the era of knowledge has to create,
integrate, and apply knowledge rapidly into the market. Meanwhile, a firm has to improve the
quality of its products or services by continuous knowledge innovation and transfer (Nonaka and
Takeuchi, 1995). Therefore, knowledge-based capability is much more important than
entity-based capability. A firms could accumulate its achieve and sustain competitive advantage
only by learning its dynamic capabilities (Luo, 2000).
Second, specific capabilities is the origin of the firm’s competitive advantage. Compared to
dynamic capabilities, the firm’s internal and external specific abilities are strengthened in
responding to environmental changes. From the perspective of dynamic capabilities, a firm’s
existing resource is developed from past experiences and accumulated resources. A firm builds
its capability in integrating, establishing, and restructuring internal and external assets in order to
respond to the rapidly changing environment (Teece et al., 1997). For example, the development
of new products, strategic alliance, and business decisions are all new values created by
companies in a dynamic market by deploying past resources (Elsenhardt et al., 2000).
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Third, the discussion on RBV highlights that mere possession of valuable resources and
assets cannot guarantee profitability (Elsenhardt et al., 2000), but dynamic capabilities in
responding to environmental changes and integrating and coordinating internal and external
resources do. Hence, the structure of dynamic capabilities could explain the formation of the
firm’s competitive advantage (Teece et al., 1997). In summary, the author thinks that the idea of
dynamic capabilities is continuing the focus on the inside of an organization in RBV and also the
strategic logic extending from the inside to the outside. Different from RBV, DCV emphasizes
more on the proper matches between the changes inside and outside of an organization as well
as the whereabouts and development course of competitive advantages.
Fourth, Elsenhardt et al., (2000) propose a different argument, albeit with similar implications.
They argue that capabilities to gain, integrate, release and reconfigure resources are typically
valuable and rare, but are equifinal, and hence neither inimitable nor immobile. This quality
implies that dynamic capabilities cannot be a source of sustainable competitive advantage (Zott,
2003). Competitive advantage is the value created by the manager in deploying dynamic
capabilities and establishing or configuring resources, instead of focusing on the benefits of
dynamic capabilities.
Fifth, the industrial structure is stable in a common dynamic market. Dynamic capabilities
include analyzable and identifiable routines, and change is linearly predictable. In the
fast-changing market, the industrial structure is unstable, and market change is unpredictable.
Dynamic capabilities include simple and experimental routines. Managers can also make
decisions rapidly (Elsenhardt et al., 2000). Furthermore, dynamic capabilities are uplifted
gradually as a rapid response capability in the fast-changing market. The study regards this
response capability as a repeated and non-linear execution path.
Sixth, although most definitions imply that dynamic capabilities are (or can be) valuable, some
scholars correctly note that dynamic capabilities create value indirectly. Helfat and Peteraf (2003),
for instance, observe that, unlike new product development for example, dynamic capabilities “do
not involve production of a good or provision of a marketable service.” That is, the capacity to
change routines is valuable to the extent that the resulting substantive capabilities are valuable
(Zahra, Sapienza, and Davidsson, 2006).
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Other (abbreviated)
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