Margaret A. Peteraf

Understanding dynamic capabilities: progress along a developmental path

The aim of dynamic capabilities research is ambitious: to understand how firmscan sustain a competitive advantage by responding to and creating environmen-tal change (Teece, 2007). As one of the most central and difficult questionswithin the strategy domain, this might well be characterized as the Holy Grailof strategic management. The topical domain of dynamic capabilities, in conse-quence, is as broad and as complex as any in the field. It spans the domains ofstrategy process and content, and involves multiple levels of analysis, from man-agerial decision-processes, to organizational routines, to competitive inter-actions and environmental change. The complexity of the topic is matched,fittingly, by the complexity of the theoretical underpinnings. Undoubtedly, thishas generated some confusion. It is therefore not surprising that the critique ofArend and Bromiley (A&B) in the preceding essay reflects some of this confu-sion. Here, we address this by clarifying the dynamic capabilities concept, inrelation to its development and the challenges faced.We first survey the development path of dynamic capabilities research, anddiscuss the different theoretical bases of this emerging area of scholarship. Thenwe clarify issues regarding the definition of dynamic capabilities and discuss thelink between dynamic capabilities and firm performance. As part of our analy-sis, we address the two main conclusions of A&B regarding dynamic capabil-ities research. The first is that we should abandon the dynamic capabilitiesapproach if it does not ‘quickly develop a theoretical foundation’. The second isthat regardless of the pace of theory development, we should replace theseefforts with ‘work on strategic change tied to fuller theories of strategic organ-ization’. In what follows, we explain why these conclusions are premature andunwarranted. We also address other issues raised by A&B, focusing on the mainissues raised in the body of their commentary.

Dynamic Capabilities: Current Debates and Future Directions

The field of dynamic capabilities has developed very rapidly over the last ten years. In this paper we discuss the evolution of the concept, and identify two major current debates around the nature of dynamic capabilities and their consequences. We then review recent progress as background to identifying the contributions of the seven papers in this special issue, and discuss the relative merits of qualitative and quantitative studies for investigating dynamic capabilities. We conclude with recommendations for future research arguing for more longitudinal studies which can examine the processes of dynamic abilities over time, and for studies in diverse industries and national contexts.

Do strategic groups exist? an economic framework for analysis

This paper offers a framework and methodology for resolving the question regarding the existence of strategic groups. We say that a strategic group exists if characteristics of the group affect firm performance independently of firm-level and industry-level effects. We argue that group-level effects are a byproduct of strategic interactions among members, and develop an empirical testing model, based on the ‘New Economics of Industrial Organization,’ to distinguish true group effects from spurious effects. From this model, we derive a series of logically consistent propositions, suggesting that while strategic interactions are critical for a group-level effect on profits, mobility barriers are necessary to preserve both groups and their effects over time. A review of prior empirical studies of strategic groups suggests that the inconclusive nature of prior research has been due more to the lack of a theoretical foundation for empirical analysis than to the nonexistence of groups. To the extent that our methods have been employed, there is limited evidence that a rigorous search for strategic groups may prove fruitful.

Building a Bridge Between Resource Acquisition and Resource Accumulation

Resource-based theory (RBT) has become one of the dominant perspectives in strategic management, and a very large body of work has developed; yet, there are aspects of RBT that remain underexplored and less developed than others. One of these aspects concerns how the heterogeneous resource positions that lie at the core of RBT come to exist. Two separate mechanisms have been described in the literature—resource acquisition in strategic factor markets and internal resource accumulation. The authors propose that considering these mechanisms jointly can generate insights and lay the groundwork for future work, and they discuss several issues that are critical to developing a more complete theoretical and practical understanding of the creation of heterogeneous resource positions.

Dynamic capabilities and organizational agility: Risk, uncertainty, and strategy in the innovation economy

“Organizational agility” is often treated as an immutable quality, implying that firms need to be in a constant state of transformation. However, this ignores that such transformations, while often essential, come at a cost. They are not always necessary, and may not even be possible. This article explores agility at a more fundamental level and relates it more specifically to dynamic capabilities. It demonstrates that it is first essential to understand deep uncertainty, which is ubiquitous in the innovation economy. Uncertainty is very different from risk, which can be managed using traditional tools and approaches. Strong dynamic capabilities are necessary for fostering the organizational agility necessary to address deep uncertainty, such as that generated by innovation and the associated dynamic competition. This article explores the mechanisms by which managers may calibrate the required level of organizational agility, deliver it cost effectively, and relate it to strategy.

The centrality of process

This paper makes the case for the pervasiveness, centrality, and criticality of strategy process, with the aim of increasing support for strategy process research and a greater recognition of its importance. We argue this on the basis of a framework that illustrates the fundamental property and characteristic traits of strategy process, suggesting that strategy process is at the heart of such popular topics as dynamic capabilities.

Sunk costs, contestability and airline monopoly power

This paper examines the effects of sunk costs and potential competition on pricing behavior in monopoly airline markets. We find little evidence to support the proposition from contestable markets theory that the level of sunk costs influences pricing by monopolists. Rather, the results support the view, consistent with numerous game theoretic oligopoly models, that the costs and the price-cutting reputation of potential entrants influence incumbent behavior. These results suggest that contestability theory may not be robust. Even in the markets characterized by increasing returns to scale, the perfectly contestable market may not be a useful welfare standard.

Deregulation and the Competitive Fringe: Owner-Operators in the Trucking Industry

This paper assesses the direct and indirect effects of regulatory reform in the trucking industry on the employment of owner-operators. We utilize a probit estimation form derived from driver utility functions to estimate the change in the probability that a truck driver is an owner-operator following deregulation.We find that a representative driver with mean characteristics is 155.6 percent more likely to choose employment as an owner-operator in the deregulated environment. Thirty-six percentage points of this increase is due to the indirect effects of deregulation, which operate primarily through changes in wage differentials and unionization. The direct effect of deregulation accounts for a 120% increase in the probability of a driver choosing employment as an owner-operator.

Dynamic Capabilities and Organizational Agility: Risk, Uncertainty and Entrepreneurial Management in the Innovation Economy

“Organizational agility” is often treated as an immutable quality, where it is implied that firms need to be in a constant state of transformation. But such advice ignores that changes and transformations, while often essential, come with a cost, are not always necessary, and may not even be possible. Our approach is to explore agility at a more fundamental level and relate it more specifically to dynamic capabilities. We find it essential to first understand deep uncertainty, which is ubiquitous in the innovation economy. It is very different from risk, which can be managed using traditional tools and approaches. Strong dynamic capabilities are necessary for fostering the organizational agility necessary to address deep uncertainty, such as that generated by innovation and the associated dynamic competition. We explore the mechanisms by which managers may calibrate the required level of organizational agility, deliver it cost effectively, and relate it to strategy. We provide a set of principles and practices that differ according to whether a firm is managing regular risk or deep uncertainty. These distinctions are critical, as the mistaken use of risk management tools in an environment of deep uncertainty can bring false comfort. Our approach embraces concepts from both financial economics (e.g., hedging and real options) and strategic management theory (e.g., managerial/entrepreneurial asset orchestration). We conclude that strong dynamic capabilities are essential when firms face deep uncertainty, which they frequently do in interdependent economies experiencing rapid technological change and financial disruption.

Balancing Theory and Technique: Methodological Issues in Strategic Groups Research

Research on strategic industry groups provides numerous examples of the tensions between theory and methodology in strategic management research. After an initial explosion of largely non-theoretical, methods-driven studies led to mounting criticisms, researchers recognized the need for more theoretical guidance concerning the nature of groups and their potential influences on firm performance. This refocusing on theory has produced different research streams, each with its own methodological concerns. This chapter reviews these developments with the objective of understanding how researchers balance theory and methods in current research.