Cooper Lecture 2013

DYNAMIC CAPABILITY:
THE CONCEPT AND HOW IT HELPS US
UNDERSTAND ECONOMIC CHANGE
]

Sidney G. Winter
Cooper Lecture

The Wharton School
UNU-MERIT

KNOWLEDGE FOR INNOVATION

6 November 2013

Objectives and themes

• Illuminate some aspects of the business side of innovation –
deriving from the fact that the business actors are out to make
money, and they both adapt to change and cause it.
• Explore the meaning of “change” and its contrast with “continuity” –
and the implications for innovation, profitability and development.
• Highlight the main issues in recent discussions of “dynamic
capability.”


S.G. Winter

MERIT

2013

2

DYNAMIC CAPABILITY AND CHANGE:
AN INSTRUCTIVE EXAMPLE

A


Perceptions of change

• “You could not step twice into the same river; for other
waters are ever flowing on to you.” -- Heraclitus (attrib.)
• “What has been is what will be, and what has been done is
what will be done, and there is nothing new under the sun.”
-- Ecclesiastes 1:9 (English Standard Version)
• “Plus ça change, plus c’est la même chose.”
-- J-B A Karr (1849)


S.G. Winter

MERIT

2013

4

Dynamic capability in brief

“Innovation in semiconductors? I’m not sure there is
innovation in semiconductors. They just keep doing the
same thing, over and over.”
-- Dr. Ralph Gomory
(circa 1983, when he was VP for R&D at IBM.
Quoted with permission.)


??? “Over and over” ???
• The thing “they” (particularly Intel) were doing over and over
was stepping along the miniaturization trajectory of
semiconductor technology.
• That is, enacting “Moore’s Law” – squeezing more transistors
onto a chip.
• Gomory certainly was not denying that progress was being
made in semiconductors, but somehow he didn’t find it very
exciting – because the process was in many ways repetitive.


S.G. Winter

MERIT

2013

6

Moore’s Law … per Intel today (www.intel.com)
“Intel co-founder Gordon Moore is a visionary.

His bold prediction, popularly known as Moore's Law, states
that the number of transistors on a chip will double
approximately every two years.
Intel, which has maintained this pace for decades, uses this
golden rule as both a guiding principle and a springboard for
technological advancement, driving the expansion of functions
on a chip at a lower cost per function and lower power per
transistor, by shrinking feature sizes while introducing new
materials and transistor structures.”


S.G. Winter

MERIT

2013

7

Counterpoints to the semiconductor (Intel) story

• The charming stories of many iPhone apps, individual entries
in a vast domain of creativity and “entrepreneurship.”
• The sad story of Smith Corona, later SCM, a typewriter
company that struggled to transition to the electronic age,
and succeeded to a point – but wound up in Chapter 11
bankruptcy, failed again after it emerged, and was liquidated
in 2001.


S.G. Winter

MERIT

2013

8

Danneels on the Smith Corona case.
“The above history shows that Smith Corona was successful in
transitioning within its product category, going from mechanical
to electric to electronic typewriters to personal word
processors. However, it was not able to transition into other
categories. The company never achieved more than 11.8
percent (in 1995) of sales from products outside of typewriters
and their accessories and supplies (see Table 1).”
-- Erwin Danneels, “Trying to Become a Different Kind of
Company: Dynamic Capability at Smith Corona,” SMJ 2011


S.G. Winter

MERIT

2013

9

DYNAMIC CAPABILITY:
CONCEPTS AND CONTROVERSY


Background: Knowledge and production
• The ability to achieve a certain productive result is often
considered to derive from having “the ingredients” and “the
recipe” – the latter being some symbolically rendered
account of how to achieve the result. Call this the “recipe
theory.”
• In our alternative view, the ingredients are needed and, the
recipe may be helpful, but what is also needed is the ability
to implement – to actually perform the specific actions that
achieve the result. Call this the “capability theory.”


S.G. Winter

MERIT

2013

11

The sources of capability
• At the individual level, we refer to capability as “skill”. As is well
known, the acquisition of skill involves an element of practice,
and acquiring high skill demands a lot of practice.
• In organizations, organizational routines serve as the “nervous
system” that supports effective action. Like skills, effective
routines are developed through practice.
• “An organizational capability is a high-level routine (or collection
of routines) that, together with its implementing input flows,
confers upon an organization's management a set of decision
options for producing significant outputs of a particular type.”


S.G. Winter

MERIT

2013

12

Distinguishing capabilities
• Every viable business has capabilities of some sort that
permit it to transform inputs into outputs, sell the output, buy
more inputs and keep going. These we call “ordinary” or
“operational” capabilities. They enable the firm to “ make a
living now.”
• Some businesses have “dynamic capabilities,” systematic
activities that permit them to modify ordinary capabilities so
as to continue to make a living, or make an even better living,
in the future. (The concept embraces much, but not all, of
what is usually called innovative activity.)


S.G. Winter

MERIT

2013

13

“Capabilities” vs. “Problem-solving”
• The idea of dynamic capability, like that of ordinary
capability, centrally involves an affirmation of the crucial role
played by learning and practice. DC is “learned
competence” for dealing with change.
• There are other ways to change, ways in which practice plays
a lesser role relative to creative insight, systematic thought,
or dogged pursuit of goals.
• Part of the interest in the subject arises from the challenge of
parsing the relative roles of dynamic capability and these
alternatives. (See Gomory quote again).


S.G. Winter

MERIT

2013

14

Technological paradigms
The semiconductor case illustrates most vividly the point that
dynamic capabilities are often centered on the routinized
pursuit of a “technological paradigm”, tracing out over time a
“technological trajectory”.

(See the June 2008 special issue of Industrial and Corporate
Change, commemorating Giovanni Dosi’s Research Policy
paper of 1982, “Technological Paradigms and Technological
Trajectories.”)


S.G. Winter

MERIT

2013

15

Where “dynamic capability” came from:
Teece, Pisano and Shuen, Strategic Mgmt J. 1997

“The

global competitive battles in high-technology industries
such as semiconductors, information services, and software
have demonstrated the need for an expanded paradigm to
understand how competitive advantage is achieved.
“The term 'dynamic' refers to the capacity to renew
competences so as to achieve congruence with the changing
business environment;


S.G. Winter

MERIT

2013

16

Update : Teece in SMJ 2007, “Explicating Dynamic
Capabilities
… in today’s fast-moving business environments
open to global competition, and characterized by dispersion
in the geographical and organizational sources of innovation
and manufacturing, sustainable advantage requires more
than the ownership of difficult-to-replicate (knowledge) assets.
It also requires unique and difficult-to-replicate dynamic
capabilities. These capabilities can be harnessed to
continuously create, extend, upgrade, protect, and keep
relevant the enterprise’s unique asset base.
David Teece (2007: 1319)


S.G. Winter

MERIT

2013

17

Sustainable competitive advantage?
• This emphasis on congruence with a changing competitive
environment marks the dynamic capabilities approach as
different from prior approaches in the strategic management
literature, which generally associated sustainable advantage
with a static position that was immunized against challenge
for some reason.
• Depending on circumstances, DCs may operate primarily
reactively, to adapt to identified change, or proactively, to
innovate.
• The line between these can blur, however.


S.G. Winter

MERIT

2013

18

The basic economics of dynamic capability
• In the adaptive application, a firm might hedge its commitments
to its ordinary capabilities by investing in preparedness for
various environmental contingencies, so as to smoothly
negotiate a possible future change.
•

But there are many possible contingencies and preparedness
per se generates no revenue in the short term; it is an overhead
cost burden.

• Because of its overhead costs, the use of dynamic capability as a
simple hedge against change is necessarily limited, and a
realistic option only for larger firms.


19

Implications of scale
• A common scenario is that a startup firm is born with an
initial product idea is hand, or almost in hand. This idea may
be the product of random inspiration, or more likely, it is the
result of exposure to some knowledge source.

• While this idea may yield success in the short term, few such
ideas have durable success without follow-on improvements
• Because of the cost burden, a small startup is likely to have
difficulty in transcending its initial success and producing a
continuing flow of improvements.


S.G. Winter

MERIT

2013

20

Conceptual controversy
• The original characterization of dynamic capabilities
provoked skepticism on the ground that the concept is
tautological, a phenomenon recognizable only by its
desirable effects and successful instances.

• The emphasis here on is learned competence, acquired at a
cost, and with no guarantees as to the duration of benefits.
It is not tautological and not a “rule for riches.”


S.G. Winter

MERIT

2013

21

What are we talking about here?
• Is dynamic capability best thought of as an organizational
attribute, or as a skill of the top management team …
perhaps just the CEO?
• Should primary emphasis should be given to the activities of
R&D scientists and engineers, or to managerial cognition
and tasks?
• Is dynamic capability built primarily through learning from
experience, or are human resources policies a fundamental
factor?
• Can we say “all of the above”?


S.G. Winter

MERIT

2013

22

Schumpeterian antecedents
“…mere growth of the economy, as
shown by the growth of population and
wealth,” is not “development.” (TED: 63)
In TED, development is the result of
innovations by entrepreneurs, disrupting
the equilibrium “circular flow.”

I. The Theory of Economic
Development, 1911 [1934]
II. Capitalism, Socialism and
Democracy, 3rd ed, 1950


In CSD, Schumpeter speaks of the
“routinization of innovation”, and
ascribes a central role to corporate R&D.

S.G. Winter

MERIT

2013

23

Routinization of innovation?
“… it is much easier now than it has been in the past to do
things that lie outside familiar routine – innovation itself is
being reduced to routine. Technological progress is
increasingly becoming the business of teams of trained
specialists who turn out what is required and make it work in
predictable ways….” CSD: 132.
• This sounds like routinization of product development, i.e.,
“invention,” which is not innovation in Schumpeter’s sense.
• Dynamic capability is a kindred idea to the routinization of
Schumpeter II, but it is a broader idea than Schumpeter’s.


S.G. Winter

MERIT

2013

24

MORE EXAMPLES,
IMPLICATIONS

.


Expanding the examples
• There are many other companies that, like Intel, have
maintained market success over many decades on the basis
of extending a central technological competence
• The struggles of the pharma companies to negotiate
changing drug discovery regimes are broadly analogous to
those of Intel with miniaturization.
• A quite different class of examples is provided by the large
replicator organizations in fast food, mass retailing, hotels,
furniture, banking.


S.G. Winter

MERIT

2013

26

Replication in economic evolution
• A central problem for any evolutionary theory is how a “type”
becomes extended in space and time.
• In standard economics, there has been a tendency to
trivialize this process, but it is both interesting and
important to development.
• The dynamic capabilities of replicator organizations reside in
the central structures that guide the geographic extension of
the network and support it.


S.G. Winter

MERIT

2013

27

Replication studies: the questions
• Origins and growth.

• Learning – about the product, the system, and the replication
process.
• Replication methods – how much flexibility?
• Site heterogeneity – picking sites, coping with idiosyncrasy
• Organization forms – franchises vs. company-owned,
control, incentives.
• Public policy aspects – regulatory, trade, acceptance.


S.G. Winter

MERIT

2013

28

Generalizations about dynamic capability
1. Dynamic capability is a pervasive phenomenon in the global
economy and a major source of economic change in many
sectors.
2. It is most characteristically illustrated in large organizations
that have had success in doing “the same thing” over
periods of many decades.
3. Success requires repeatedly overcoming novel, multidimensional challenges – not just technical challenges.


S.G. Winter

MERIT

2013

29

Much of the resulting change is to be celebrated, but the total
amount of social change being produced is enormous whether
it is desirable or not. In one area after another, significant
concerns arise precisely because of the sustained innovative
prowess of large organizations.
Uncertainty? Who suffers the uncertainty? Sustainable
advantage? How about sustainable development?


S.G. Winter

MERIT

2013

30

Bibliography of cited and related works
Danneels, E. (2010). "Trying to become a different type of company: Dynamic
capability at Smith Corona." Strategic Management Journal 32: 1-31.
Dosi, G. (1982). "Technological paradigms and technological trajectories."
Research Policy 11: 147-162.
Dosi, G., R. R. Nelson, et al. (2000). The Nature and Dynamics of Organizational

Capabilities. Oxford, Oxford University Press.
Helfat, C. E., S. Finkelstein, et al. (2007). Dynamic Capabilities: Understanding
Strategic Change in Organizations. Malden, MA, Blackwell.

Schumpeter, J. (1934 [1911]). The Theory of Economic Development. Cambridge,
Harvard University Press.


S.G. Winter

MERIT

2013

31

Bibliography 2
Schumpeter, J. A. (1950). Capitalism, Socialism and Democracy. New York,
Harper and Row.
Teece, D., G. Pisano, et al. (1997). "Dynamic capabilities and strategic
management." Strategic Management Journal 18(7): 509-533.
Teece, D. J. (2007). "Explicating dynamic capabilities: The nature and

microfoundations of (sustainable) enterprise performance." Strategic
Management Journal 28: 1319-1350.
Teece, D. J. (2009). Dynamic Capabilities and Strategic Management. New York,
Oxford University Press.
Winter, S. G. (2000). "The satisficing principle in capability learning." Strategic
Management Journal 21(Oct-Nov (special issue)): 981-996.


S.G. Winter

MERIT

2013

32

Bibliography 3
Winter, S. G. (2003). "Understanding dynamic capabilities." Strategic
Management Journal 24: 991-995.

Winter, S. G. (2008). Dynamic capability as a source of change. The Institutions
of the Market:: Organisations, Social Systems and Governance. N. Beck and A.
Ebner. Oxford, Oxford University Press.
Winter, S. G. (2010). The replication perspective on productive knowledge.

Dynamics of Knowledge, Corporate Systems and Innovation. H. Itami, K.
Kunisoki, T. Numagami and A. Takeishi. Berlin, Springer-Verlag: 95-121.
Winter, S. G. and G. Szulanski (2001). "Replication as strategy." Organization
Science 12: 730-743.
Zollo, M. and S. G. Winter (2002). "Deliberate learning and the evolution of
dynamic capabilities." Organization Science 13: 339-351.


S.G. Winter

MERIT

2013

33


S.G. Winter

MERIT

2013

34

Cooper Lecture 2013

More Related Content

Similar to Cooper Lecture 2013 (20)

More from UNU-MERIT (20)

Recently uploaded (20)

Cooper Lecture 2013