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Richard Nelsons Dynamic Capabilities
J. Lamar Pierce, Christopher S. Boerner, and David J. Teece
J. Lamar Pierce and Christopher S. Boerner are doctoral candidates, and David J. Teece is the !its"bishi
Ban# Pro$essor o$ %nternational B"siness and &inance, 'aas School o$ B"siness, (C Ber#eley, )*+-.
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Introduction
The essence o$ $irm stratey is that a $irms per$ormance is larely determined by its ability to
match its capabilities to its ever/chanin environment. 0ver the years, a hand$"l o$ scholars
have made ma1or strides to2ard e3plicatin and e3pandin on this basic insiht. Partic"larly
in$l"ential in this reard are the 2or#s o$ Sch"mpeter 45)6*7, Penrose 45)8)7, Cyert and !arch
45)967, :illiamson 45)+8, 5);87, Barney 45);97, Teece 45);, 5))*7, and, importantly, Nelson
and :inter 45);7. :hat sets these scholars apart is that, "nli#e many o$ their contemporaries
4partic"larly in economics7, they reconi
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chanin environment. :hile Cyert and !arch reconin ?vol"tionary Theory o$ ?conomic Chane introd"ced the
theoretical advances necessary $or the establishment o$ a more dynamic vie2 o$ $irm stratey.
This boo# placed Cyert and !archs proced"re/based $irm in a dynamic conte3t, vie2in ho2
innately static orani
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:hen Cyert and !archs 2or# appeared in 5)96, the "tility o$ concept"ali
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the short$alls o$ earlier theories are clear. >ltho"h the neoclassical vie2 addresses 457 and 47, it
$ails to approach the act"al processes o$ condition 467. Li#e2ise, orani
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any coalition. &inally, comm"nication is not per$ect 2ithin the orani
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pricin, prod"ction proced"re, and acco"ntin proced"res. These r"les need to be consistent
2ithin the orani
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distrib"ted amon its competitors, there$ore it 2ill establish strict protocols reardin
con$identiality and in$ormation releases.
Plan proced"res de$ine ho2 reso"rces 2ill be allocated, incl"din both short/r"n and
lon/r"n b"dets and e3pendit"res. These proced"res have sini$icant in$l"ences on the $irms
lon/r"n s"ccess in that they determine 2hich aspects o$ the orani $irm 2hose
plan proced"res do not s"pport innovation is "nli#ely to s"rvive over lon periods o$ time. !ore
speci$ically, 2hat types and areas o$ research and development are s"pported 2ill tend to
determine the $irms potential evol"tion. Plan proced"res can de$ine the $irms intent and ability
to innovate and evolve, its dynamic capabilities in partic"lar directions.
The behavioral theory of the firm and strategy
Perhaps the most basic contrib"tion o$ Cyert and !arch to this literat"re is their
reconition o$ the $"ndamental importance o$ $irm heteroeneity. Their 2or# presents the $irm as
a comple3 orani
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st"dies 4Jacobson 5);;@ 'ansen and :erner$elt 5);)7. Cool and Schendel 45);;7 have sho2n
that there are systematic and sini$icant di$$erences in per$ormance amon $irms belonin to the
same strateic ro"p 2ithin the (.S. pharmace"tical ind"stry. >dditionally, R"melt 45))57 $o"nd
intra/ind"stry pro$it heteroeneity to be reater than inter/ind"stry di$$erences in pro$its,
s"estin the relative importance o$ $irm/related so"rces o$ per$ormance. %n a sense, Cyert and
!archs assertions abo"t the importance o$ $irm characteristics have been veri$ied.
The idea that $irms are $"ndamentally heteroeneo"s, in terms o$ their internal
#no2lede, s#ills, and reso"rces, is at the heart o$ the $ield o$ strateic manaement. Cyert and
!archs 2or# in The Behavioral Theory2as an important step to2ard "nderstandin this
heteroeneity. Their move to develop a complete theory o$ the $irm that e3plicitly reconiny
ob1ectives areed "pon by a manaement coalition 2o"ld inevitably be hihly ambi"o"s oals,
en$eeblin the ability o$ a top manaer or entreprene"r to tr"ly control the direction o$ the $irm.
Cyert and !arch ar"ed that 2hile individ"als have oals@ collectivities o$ people do not 45)),
p.6-7, and th"s the $irm co"ld not have 2ell/de$ined ob1ectives.
Premised on this 2ea# 4or the absence o$7 leadership, The Behavioral Theory posits that
the $irms strateies and learnin processes are short/term in $oc"s 2ith adaptations ind"ced by
crises. !anaement is "nable to recon$i"re internal reso"rces beca"se o$ the imm"tability o$
)
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standard operatin proced"res and the ambi"ity o$ coalition oals. %n his disc"ssion o$ $irm
stratey, 0liver :illiamson notes that in Cyert and !arch the $irm resembles a $ire department
more than a strateic actor 45))), p. 5*7. The $irm is $oc"sed on $indin sol"tions to immediate
problems, not on loner/term strateic options. >ltho"h The Behavioral Theory can not
artic"late a serio"s policy proposal $or chanin the behavior pattern 4Cyert and !arch, 5)96. p.
)+7, it nevertheless provides a reater "nderstandin o$ the limitations to strateic action. The
"nderstandin o$ ho2 ro"tines and path dependency limit and enable the $irm to solve problems
2as an important step in the development o$ the stratey literat"re.
:hile the behavioral theory introd"ced the implications o$ static $irms in a dynamic
environment, it $ailed to e3pand on ho2 and 2hy $irms evolve as they do. Their ma1or
contrib"tion to this dynamic vie2 2as the path dependency o$ relatively imm"table standard
operatin proced"res, a concept that 2o"ld prove val"able and insiht$"l $or $"t"re st"dies o$ the
$irm. B"t their theory does not provide a clear pict"re o$ ho2 $irms chane over time, and lends a
sense o$ hopelessness to2ard the intention o$ "idin $irm evol"tion. &or, a$ter all, the $irm in
the The Behavioral Theory does not $oc"s on lon/term strateies o$ evol"tion. %t is b"oyed
alon by its obstinate proced"res and their relentless obsession 2ith short/term sol"tions. To the
credit o$ Cyert and !arch, their intention 2as not to develop a dynamic theory o$ $irm stratey
and lon/term $irm evol"tion. They so"ht to interate economic theory and orani
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dynamic, evol"tionary approach. ?vol"tionary models o$ economic chane 2ere not ne2 at this
time, as they had earlier been championed by the li#es o$ Sch"mpeter 45)6*7, Penrose 45)8,
5)8)7, and >lchian 45)8-7. %ndeed, Sidney :inter 45)+57 had in earlier 2or# noted the
implications o$ the behavioralists decision r"les $or an evol"tionary theorys enetic process.
Toether, Nelson and :inter molded these earlier contrib"tions into a ne2 theory 2ith direct
implications $or $irm evol"tion and stratey.
The evolutionary theory and deliberate action
Nelson and :inters evol"tion theory is loosely based on a bioloical evol"tionary
model, 2here oranisms, 2ith enetic material, evolve in response to their chanin environment.
They are care$"l to note, ho2ever, that do not $eel beholden to remain consistent 2ith s"ch
bioloical models, as their oal is to "se models o$ evol"tionary theory to improve economic
theory. %n this spirit, they emphatically disavo2 any intention to p"rs"e bioloical analoies $or
their o2n sa#e, or even $or the sa#e o$ proress to2ard an abstract, hiher/level evol"tionary
theory that 2o"ld incorporate a rane o$ e3istin theories 45);, p.557. They are solely interested
in the "nderstandin o$ economic problems, 2ith the core concern o$ their evol"tionary theory
bein the dynamic process by 2hich $irm behavior patterns and mar#et o"tcomes are 1ointly
determined over time 45);, p. 5;7.
%n the spirit o$ this oal, they are ="ic# to note that their theory does not observe a sharp
distinction bet2een blind evol"tion and deliberate oal/see#in. This approach, 2here $irms are
both carried alon by their chanin environment and deliberately evolve to improve their
position therein, is the critical contrib"tion o$ Nelson and :inter to2ard $irm stratey and
"ltimately the dynamic capabilities theory o$ the $irm. :hile Nelson and :inter ac#no2lede
the di$$ic"lty o$ deliberate direction in $irm evol"tion, they do not espo"se the impossibility o$ it.
(nli#e Cyert and !arch, Nelson and :inter s"est a role $or lon/term strateic plannin in the
55
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dynamic per$ormance o$ the $irm. &irms are no loner p"rely myopic and inevitably tied to their
e3istin standard operatin proced"res. They have the ability to a$$ect their chances o$ lon/term
s"rvival, that is, to partially "ide their evol"tion. They do not possess the absol"te control o$
neo/classical manaers, nor do they s"$$er $rom the evol"tionary impotence o$ the behavioral
theory. They have di$$erential characteristics and abilities and th"s have "ni="e potential
evol"tionary paths. This limited b"t nonetheless e3istent adaptive control implies that $irm
stratey is not only possible, b"t also pro$itable.
Routines: Evolutionary theorys standard operating procedures
0ne o$ the reat contrib"tions o$ Cyert and !arch 2as their de$inition o$ the $irm as a set
o$ standard operatin proced"res. Nelson and :inter reconi
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embedded in the research and development a $irm p"rs"es. >s both Nelson and :inter 45);7
and Teece 45);7 ar"e, ro"tines can be hihly tacit in nat"re. This ma#es replication or imitation
o$ them e3tremely di$$ic"lt, and renders them noncontractable in an intermediary mar#et.
Nelson and :inters 2or# also emphasi
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embodied at an orani
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that even the 2ay in 2hich a $irm scr"tini
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pro$itably adapt to a dynamic environment. &irms 2ill th"s have di$$erent dynamic capabilities, a
concept to be more e3plicitly de$ined later by stratey scholars.
>nother critical advance o$ Nelson and :inters ro"tines is that the $irm selects amon
alternative alterations by eval"atin their e3pected pro$it potential. The evol"tionary theorys
$irm has an ob1ective, 2hich altho"h it is not e3plicitly de$ined or evident $or the $irm,
nevertheless e3ists. This is a sharp contrast $rom the behavioral theory, 2here the $irm possesses
no coherent ob1ective b"t rather is portrayed as a coalition o$ decision/ma#ers 2ith distinctly
di$$erent ob1ectives. Nelson and :inter, more concerned 2ith lon/term evol"tion than
behavioralists, reconi third important advance o$ the evol"tionary theory is its reconition o$ the critical
nat"re o$ learnin in lon/term $irm per$ormance. The search ro"tines o$ Nelson and :inter
"ide the $irm to2ard innovation similar to the $irms c"rrent stoc# o$ technoloical #no2lede.
The $irm is "nli#ely to scan the entire stoc# o$ #no2lede be$ore ma#in their technoloical
choices, b"t 2ill rather $oc"s on those technoloies perceptible thro"h their search ro"tines.
These search ro"tines 2ill tend to $oc"s the $irm in areas in 2hich it already has e3perience, th"s
creatin a $orm o$ technoloical path dependence. The strenth o$ this path dependence and the
co"nter/actin ability o$ the $irm to chane directions 2ill be determined by its hih/level
strateic ro"tines. Th"s 2hile $irms 2ill tend to2ard path dependent innovation, they are not
hopelessly loc#ed into their c"rrent co"rse.
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Firm Resources and the Dynamic Capabilities Literature
Nelson and :inters conception o$ $irms as embodyin orani
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di$$ic"lt to p"rchase on the mar#et@ and it m"st be di$$ic"lt or impossible to imitate 4Petera$
5))67. Considerable disc"ssion in the literat"re s"ests that hih/technoloy competencies are
partic"larly li#ely to meet these conditions since s"ch capabilities are $re="ently based on tacit
#no2lede and are s"b1ect to considerable "ncertainty reardin ="ality and per$ormance 4Dosi
5);@ Nelson and :inter 5);7. >s a res"lt, hih technoloy competencies are li#ely to be
di$$ic"lt to ac="ire thro"h straiht$or2ard mar#et transactions or easily trans$er internally to ne2
"ses 4Teece 5);@ !o2ery 5);67. The same $eat"res that ma#e the mar#et trans$er o$ technoloy
competencies di$$ic"lt also limit the ability o$ other $irms to imitate these competencies. The
non/replicable nat"re o$ many technoloy competencies is the cornerstone o$ their strateic
importance.
Teece et al. 45))*7 divide a $irms orani
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and :inters disc"ssion o$ ro"tines, $irm competencies are portrayed as deeply rooted in history
and di$$ic"lt to chane.
%n some sense, ho2ever, the reso"rce/based vie2 $ails to e3ploit 2hat is tr"ly novel and insiht$"l
in Nelson and :inters 2or# its dynamic $oc"s. %ndeed, it is conceivable that a relatively static
$orm o$ the reso"rce/based theory o$ the $irm co"ld have been achieved even 2itho"t re$erence to
the 2or# o$ Nelson and :inter. S"ch a theory 2o"ld have incorporated many o$ the Cyert and
!archs behavioral theorys $irm/speci$ic aspects and even possibly the tacit nat"re o$ proced"res
and the conse="ential di$$ic"lties o$ replication and imitation. :hile s"ch a static theory 2o"ld
have been important in de$inin the importance o$ $irm/level characteristics, it 2o"ld have
missed the critical dynamic characteristics introd"ced in The ?vol"tionary Theory. :itho"t s"ch
a dynamic vie2 o$ $irm evol"tion, the importance concept o$ s"stainable advantae 2o"ld be
intractable. B"ildin directly on Nelson and :inters 2or#, the dynamic capabilities literat"re
has so"ht to st"dy $irms abilities to adapt to and e3ploit a chanin environment. The dynamic
capabilities theory o$ the $irm see#s to e3plain ho2 $irms achieve and s"stain competitive
advantae despite an ever/chanin environment. Dynamic capabilities ar"es that a $irm ains
competitive advantae thro"h internal ro"tines or standard operatin proced"res that de$ine the
$irms processes. Ro"tines, 2hich are patterns o$ interactions representin s"ccess$"l sol"tions to
speci$ic problems, are deeply conditioned by its history, and not readily chaned or developed.
They are endemic to the $irm, observed in ro"p behavior, and hihly s"b1ect to path dependency.
These ro"tines are de$ined as ho2 tas#s are accomplished, ho2 problems are solved, and ho2
#no2lede is learned, and are not tanibly identi$iable or necessarily codi$ied. They are the
$irms patterns o$ c"rrent practice and its orani
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Dynamic capabilities emphasi $irm is not an in$initely malleable entity, b"t
rather is an oranidditionally, manaements ability to identi$y and choose amon these opport"nities 2ill
determine the $irms capability in adaptin to and e3ploitin chanin technoloies.
The $irms c"rrent position is de$ined by its intellect"al property, s"pplier relations,
strateic alliances, and endo2ment o$ technoloy. >s in the reso"rce/based vie2, tradable and
readily trans$erable assets represent no concrete competitive advantae. These assets there$ore
are o$ten tacit #no2lede assets, ones deeply embedded in the ro"tines and processes o$ the $irm
4Teece 5);57. 0ther assets, s"ch as the $irms location and $inancial position, can also determine
its available strateic options. Those assets that are di$$ic"lt to replicate or imitate, ho2ever, $orm
the #ey competencies o$ the $irms, and dynamic capabilities are those competencies that allo2 the
$irm to respond to and e3ploit chanin mar#et environments.
-
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The orani
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inability to identi$y them. Lippman and R"melt 45);7 have ar"ed that some so"rces o$
competitive advantae are so transparent that $irm itsel$ can not identi$y them. ?ven i$ the $irm
can identi$y its ro"tines, the $irm may not 2holly "nderstand them, or may $ind them inseparably
lin#ed to other speci$ic ro"tines 4Teece 5)+97. Th"s attemptin to apply these ro"tines in
strateic initiative may be improbable.
:hen the $irm is "nable to replicate its s"ccess$"l ro"tines, its competitors are even more
"nli#ely to s"ccess$"lly imitate them. :hen ro"tines are hihly tacit, imitation 2ill li#ely be
impossible, as competitors have no ability to observe internal proced"res. :hen competitors are
able to observe and imitate competence/$ormin ro"tines, ho2ever, the $irm may be able to
protect itsel$ 2ith intellect"al property rihts. >ltho"h intellect"al property rihts, s"ch as
patents, are hihly observable, they are mostly limited to prod"ct technoloies. Process
technoloies, or the ro"tines endemic in the $irms prod"ction, are not readily observable, and
th"s can not be easily imitated. S"ch ro"tines may be di$$ic"lt to replicate as 2ell, b"t allo2 no
2indo2 o$ observation $or the potential imitator.
The critical aspects o$ dynamic capabilities are the ability o$ the $irm to identi$y the
chanin mar#et environment, to sense the opport"nity, then to seimit and Schoema#er 5))6@
Lanlois 5))*7 Part o$ this ability is dependent on the $irms ability to locate and assimilate
in$ormation $rom its environment. The location and interation o$ this in$ormation is ro"nded in
part on the $irms search and in$ormation processin ro"tines, mani$ested in research and
development and the $irms e3istin ties to the o"tside environment. Not only m"st the $irm
discover ne2 paths thro"h its o2n and others research, it m"st also reconi
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technoloies, b"t they also $ace di$$erent perceived technoloical choices 4Nelson and :inter
5);7.
The $irm m"st also be able to recon$i"re its oranin eval"ation o$ the dynamic capabilities literat"re ma#es the contrib"tions o$ Nelson
and :inter ab"ndantly clear. 0rani
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The "se o$ ro"tines in the dynamic capabilities literat"re can be traced thro"h Nelson
and :inter to the oriinal standard operatin proced"res o$ Cyert and !arch. Cyert and !arch
intently $oc"s on the critical in$l"ence o$ standard operatin proced"res in the "ni="e character o$
the $irm, and stress their role in $irms abilities to identi$y and adapt to chanes in their
environment. :hile they portray all $irms as sharin the same basic principles o$ eneral choice
proced"re 4"ncertainty avoidance, r"les maintenance, simple r"les7, they ar"e that each $irm has
speci$ic standard operatin proced"res that de$ine the direction o$ constantly reocc"rrin
activities. These proced"res provide consistency 2ithin the $irm and directly in$l"ence
orani
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Be$ore Nelson and :inter, theorists larely vie2ed the $irm as either "nable to control its $"t"re
co"rse or completely $le3ible in its evol"tion. Their de$inition o$ the $irm as deterministic yet
path dependent, 2hile not "ni="e, 2as e3tensive and clearly pivotal in the development o$
dynamic capabilities.
>nother characteristic o$ dynamic capabilities ro"tines derived $rom Nelson and :inter
is the ability o$ the $irm to p"rs"e ob1ectives. 0nce aain, this concept 2as also not ne2, and
$ormed the $o"ndation o$ orthodo3 economic theory, b"t its interation 2ith components o$ the
behavioral theorys detailed treatment o$ $irm heteroeneity 2as revol"tionary. :hile orthodo3
economics ar"ed that $irms had clearly de$inable ob1ective $"nctions, behavioralists s"ch as
Cyert and !arch ar"ed that the $irm 2as a coalition o$ individ"als 2ith di$$erent ob1ectives.
They ar"ed that the $irm 2as there$ore "nable to move in any distinct direction to2ard a "ni$ied
ob1ective. Nelson and :inter, 2hile sympathetic to the behavioralists, incorporated ob1ectives
into the $irms ro"tines, th"s allo2in it to search and strateically choose dynamic co"rses
consistent 2ith that ob1ective. > $irm 2itho"t an ob1ective is inherently impossible to
strateically direct, and 2itho"t this introd"ction to the behavioral vie2 o$ the $irm, dynamic
strateic behavior by the $irm 2as inherently impossible. The dynamic capabilities vie2 co"ld
not e3ist 2itho"t this combination o$ behavioral ro"tines and strateic p"rs"it o$ ob1ectives.
Their interation is deeply o2ed to Nelson and :inter.
Conclusion
>s is sho2n in this paper, both The Behavioral Theory o$ the &irm and The ?vol"tionary
Theory o$ ?conomic Chane have richly contrib"ted to a tradition o$ literat"re c"lminatin in
theories on $irm competence and dynamic capabilities. The $oc"s o$ Cyert and !arch on the
heteroeneity and path dependence o$ $irm characteristics 2as critical to the development o$ these
theories, b"t it is the 2or# o$ Nelson and :inter that m"st be reconi
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and theory necessary $or the development o$ a dynamic, strateic theory o$ $irm behavior. Their
2or# introd"ced a sel$/deterministic ="ality in the behavioralist $irm by allo2in it to p"rs"e
ob1ectives even 2ithin the constraints o$ bo"nded rationality. :hile the idiosyncratic
characteristics o$ $irms $"ndamental to the reso"rced/based and dynamic capabilities literat"re
can be attrib"ted to Cyert and !arch, the dynamic and deterministic aspects o$ the $irm
introd"ced by Nelson and :inter 2ere the paramo"nt step to developin tr"ly strateic models o$
$irm behavior. The "nderstandin o$ the process by 2hich $irms identi$y opport"nities and adapt
to e3ploit them is a direct res"lt o$ the evol"tionary insiht o$ Nelson and :inter, 2ho proved to
be the critical lin# bet2een a behavioral theory o$ the $irm and the evol"tionary stratey o$ the
dynamic capabilities literat"re.
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:illiamson, 0liver ? 45)))7, Stratey Research Aovernance and Competence Perspectives,:or#in Paper BPP/+*,'aas School o$ B"siness, (niversity o$ Cali$ornia, Ber#eley.
:omac#, J., Jones, D. and Roos, D. 45))57, The !achine That Chaned The :orld, Ne2 Ior#
'arper/Perennial.
)
8/21/2019 Richard Nelsons Dynamic Capabilities
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i?conomists s"ch as &riedman 45)867 ar"ed that 2hether or not the model acc"rately represented the $irm 2as irrelevantso lon as its predictive val"e 2as hih.ii> $irms competencies, as de$ined by Teece, are typically implicitly or e3plicitly assumedin economic theory. >s s"ch,
competencies are vie2ed as 2idely and $reely distrib"ted amon $irms, th"s ivin limited insiht into heteroeneity,
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