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A Semi-Formalization of the Dynamic Capability View

Ralf Wilden
Department of Marketing & Management
Macquarie University
Level 2, E4A Building, Eastern Road
NSW 2109, Australia
Ralf.Wilden@mq.edu.au

Timothy M. Devinney
Leeds University Business School
University of Leeds
Leeds LS2 9JT, UK
T.Devinney@leeds.ac.uk

Nidthida Lin
Newcastle Business School
University of Newcastle
55 Elizabeth St, Sydney
NSW 2000, Australia
Nidthida.Lin@newcastle.edu.au

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A Semi-Formalization of the Dynamic Capability View

Abstract

Some management scholars doubt the value of the dynamic capability view when compared to

existing theories. The concern expressed is, more often than not, related to unclear definitions of

the core construct and the relationship amongst the components that make up that construct. The

end result is potentially confused and conflicting interpretations of empirical findings and non-

commensurate measurement. One solution to this problem is to formalize the core components of

the theory at hand. The purpose of this paper is not to discuss or argue for (or against) the

theoretical status of the DCV but to provide a simple, yet insightful, structured model of its core

components. Specifically, this paper takes as its basis the perspective of dynamic capabilities as

comprising the sensing, seizing and reconfiguring processes that are deployed to create a

resource base aimed at satisfying an evolving market demand and presents a simple but formal

way of characterizing it components.

INTRODUCTION

Strategy and management research has moved over time from a static view of the firm and its

competition to one that takes into account the evolving dynamic nature of the firm and its

environment to a much greater extent. This is seen most particularly in the strategy literature,

where concerns about resources and capabilities (Eisenhardt & Martin, 2000; Teece, Pisano, &

Shuen, 1997) were found to be inadequate at explaining how organizations prepare for and

implement change and what distinguished the winners from the losers in environments where

change was part of the strategic imperative. Dynamic capabilities – organizational processes

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concerned with the sensing, shaping and seizing of opportunities and making necessary resource

base reconfigurations (Teece, 2007) – have arisen as a key pillar in our attempt to understand

how firms change and adapt (Wilden, Devinney, & Dowling, 2016).

The role and importance of dynamic capabilities can be seen in the case of the German

discount retailers Aldi and Lidl. In a home market with more discount stores than gas stations,

competition is intense – a fact that led Walmart to withdraw from the German market in 2006.

Aldi and Lidl follow a fundamental business strategy that is very different to traditional retailers

– a strict low-cost strategy with a limited range of products and focusing on private label brands

rather than established brands. However, even with this focus, they realized that their strategies

needed to be reconfigured as they sensed that customers increasingly demanded not just low

prices but high quality at low prices. In response, Aldi and Lidl now offer branded products to

attract customers of traditional retailers. They also continue to grow by entering new

international markets and by diversifying through entering new domestic markets such as mobile

phone services and even bus journeys. On the technology side, adding branded products to their

assortment required business process innovations including adjustments to their IT systems to

maintain their low-cost positioning. Thus, their success – as evidenced by annual revenue growth

rates of above 5% – also rests on continuously aligning their marketing and technological

capabilities.

Although appearing to be a useful practical construct for both academics and practitioners

alike (Schilke, Hu, & Helfat, 2017; Wilden et al., 2016), some management scholars doubt the

value of the dynamic capability view when compared to existing theories (Arend & Bromiley,

2009). The concern expressed is, more often than not, related to unclear definitions of the core

construct and the relationship amongst the components that make up that construct. The end

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result is potentially confused and conflicting interpretations of empirical findings and non-

commensurate measurement. Conflicting and confused interpretation leads to a muddying of the

research field and, inevitably, provides ammunition for critics. In addition, without a basic ‘hard

core’ (Biesenthal & Wilden, 2014) of the paradigm, theory development is constrained and

empirical measurement inefficient due to a lack of comparability.

One solution to this problem is to formalize the core components of the theory at hand.

Hence, we believe that in order to advance research on dynamic capabilities it is helpful to

develop an analytic, formal foundation of the fundamental components of the dynamic capability

view (DCV) of the firm. The purpose of this paper is not to discuss or argue for (or against) the

theoretical status of the DCV but to provide a simple (for recent reviews on the DCV please see

Schilke et al., 2017; Wilden et al., 2016), yet insightful, structured model of its core components.

Specifically, this paper takes as its basis the perspective of dynamic capabilities as comprising

the sensing, seizing and reconfiguring processes that are deployed to create a resource base

aimed at satisfying an evolving market demand and presents a simple but formal way of

characterizing it components. Because of space limitations we will not go through a complete

formalization of the model (hence our use of the term ‘semi’ formalization) but provide a

perspective that allows us to show the value added by using a more systematic model building

approach.

This chapter is structured as follows. First, we provide a brief overview of the development

of the DCV. Subsequently we discuss several existing definitions of the core construct and then

introduce our model. We conclude this chapter with a discussion of the implications of a formal

model of dynamic capabilities and propose a research agenda.

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THE STUDY OF DYNAMIC CAPABILITIES

The resource-based view (RBV) of the firm considers the organizational resource base as the

starting point of strategic decision-making, and the main driver of organizational performance.

The RBV is often described using a resource-conduct-performance structure. The core of the

RBV is the resource base of the firm consisting of tangible, intangible and human assets (i.e.,

resources) and capabilities that the firm owns, controls, or has favorable access to (Barney, 1991;

Collis & Montgomery, 2008; Dierickx, Cool, & Barney, 1989). According to the RBV,

organizations compete based on their combinations of resources and capabilities (Amit &

Schoemaker, 1993; Barney, 1991; Dierickx et al., 1989; Wernerfelt, 1984). Many empirical

studies have demonstrated a positive relationship between the resource base and performance

(e.g., Carmeli & Tishler, 2004; Chen, Chen, & Lee, 2008; Hooley, Greenley, Cadogan, & Fahy,

2005; Short, Ketchen, Palmer, & Hult, 2007; Wilden & Gudergan, 2017; Wilden & Gudergan,

2015). Resources are inputs, or assets, that are used for the creation of goods or services and are

owned or controlled by the firm. Organizational capabilities are “complex bundles of skills and

accumulated knowledge, exercised through organizational processes, that enable firms to

coordinate activities and make use of their assets (Day, 1994: 38)” and represent the firm’s

ability to perform a coordinated set of tasks aimed at achieving a particular outcome (Amit &

Schoemaker, 1993; Combe & Greenley, 2004; Helfat & Peteraf, 2003). Capabilities are based on

skills, learning and knowledge in deploying resources. Within organizational capabilities, it is

differentiated between substantive and dynamic capabilities.

The resource base has also been found to have a stronger impact on firm performance than

industry effects (Rumelt, 1991). However, a previously valuable but unchanged resource base

can become a core rigidity (Leonard-Barton, 1992); thus, the resource base needs to be modified

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by acquiring, releasing or combining resources in novel forms (Eisenhardt & Martin, 2000;

Teece et al., 1997). Consequently, the strategic goal of organizations is to develop and deploy a

resource base that competitors cannot imitate or easily buy via the market mechanism (Barney,

1996; Barney, 1986).

The DCV of the firm evolved as a response to a weakness inherent in the RBV of the firm,

the inability to explain the evolution of the resource base over time. In its original form, the DCV

sought to explain how organizations survive and grow turbulent environments; however, both the

logic and form of the DCV has moved beyond this simple characterization to account for a more

general explanation of the competitive evolution of the firm.

So, What Are Dynamic Capabilities?

Multiple definitions of dynamic capabilities exist, which is often seen as the hindrance to the

advancement of empirical investigation of the field (see Table 1). At its most basic, dynamic

capabilities are viewed as part of the organizational resource base. Unlike other capabilities, they

are developed and deployed to enable or respond to strategic change (Zahra, Sapienza, &

Davidsson, 2006). Operating capabilities, on the other hand, allow the organization to perform

‘an activity on an on-going basis using more or less the same techniques on the same scale to

support existing products and services for the same customer population’ (Helfat & Winter,

2011: 1244).

Dynamic capabilities enable organizations to respond to the environment and consequently

affect organizational performance (Winter, 2000). Dynamic capabilities have been disaggregated

into the processes of sensing and seizing opportunities, and reconfiguring the organizational

resource base (Teece, 2007). However, it is not the existence of dynamic capabilities, but their

strength and the way firms utilize them that affects performance (Wilden, Gudergan, Nielsen, &

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Lings, 2013; Zott, 2003). Dynamic capabilities do not directly influence the firm’s output, as

they do not directly concern the production of a good or the provision of a marketable service.

Rather, their deployment is directed towards strategic change (Helfat & Peteraf, 2003). Previous

empirical studies have investigated the performance implications of dynamic capabilities (Girod

& Whittington, 2017; Protogerou, Caloghirou, & Lioukas, 2012; Schilke, 2014; Wilden &

Gudergan, 2015; Wilden et al., 2013). Research suggests that performance differences between

firms can be attributed to the heterogeneity in the distinct bundles of resources and capabilities at

their disposal (Barney, 1991; Peteraf, 1993; Wernerfelt, 1984). As dynamic capabilities work off

the resource base, this heterogeneity has been hypothesized as being the result of dynamic

capability utilization. According to the equifinality assumption proposed by Eisenhardt and

Martin (2000), firms may control similar dynamic capabilities but their manifestations in

individual firms will differ. Different manifestations and deployment of dynamic capabilities

leads to heterogeneous resource base configurations that in turn affect performance (Zott, 2003).

The dynamic capability theory asserts that performance differentials, and differences in

competitive advantage, are not simply due to a firm’s idiosyncratic resources and capabilities,

but also arise from heterogeneous configurations of these resources and capabilities created as a

result of dynamic capability deployment (Cavusgil, Seggie, & Talay, 2007).

Author Definition

Helfat (1997) The subset of the competences/capabilities that allow the firm to create new
products and processes and respond to changing market circumstances.

Teece et al. (1997) The firm’s ability to integrate, build, and reconfigure internal and external
competences to address rapidly changing environments.

Eisenhardt & Martin (2000) The firm's processes that use resources – specifically the processes to integrate,
reconfigure, gain and release resources – to match or even create market
change. Dynamic capabilities thus are the organizational and strategic routines

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Author Definition
by which firms achieve new recourse configurations as markets emerge, collide,
split, evolve and die.

Griffith & Harvey (2001) A global dynamic capability is the creation of difficult-to-imitate combinations
of resources, including effective coordination of inter-organizational
relationships, on a global basis than can provide a firm a competitive advantage.

Lee et al. (2002) A newer source of competitive advantage in conceptualizing how firms are able
to cope with environmental changes.

Rindova & Taylor (2002) Dynamic capabilities evolve at two levels: a micro-evolution through
‘upgrading the management capabilities of the firm’ and a macro-revolution
associated with ‘reconfiguring market competencies’.

Zahra & George (2002) Dynamic capabilities are essentially change-oriented capabilities that help firms
redeploy and reconfigure their resource base to meet evolving customer
demands and competitor strategies.

Zollo & Winter (2002) A dynamic capability is a learned and stable pattern of collective activity
through which the organization systematically generates and modifies its
operating routines in pursuit of improved effectiveness.

Winter (2003) Those (capabilities) that operate to extend, modify, or create ordinary
capabilities.

Zahra et al. (2006) The abilities to reconfigure a firm's resources and routines in the manner
envisioned and deemed appropriate by the firm’s principal decision makers.

Helfat et al. (2007) A dynamic capability is the capacity of an organization to purposefully create,
extend, or modify its resource base.

Augier & Teece (2007) Dynamic capabilities refer to the particular (non-imitable) capacity firms have
to shape, reshape, configure and reconfigure the firm’s asset base so as to
respond to changing technologies and markets. Dynamic capabilities refer to the
firm's ability to proactively adapt in order to generate and exploit internal and
external firm specific competences, and to address the firm’s changing
environment.

Teece 2007 Dynamic capabilities can be disaggregated into the capacity (a) to sense and
shape opportunities and threats, (b) to seize opportunities, and (c) to maintain
competitiveness through enhancing, combining, protecting, and, when
necessary, reconfiguring the business enterprise’s intangible and tangible assets

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Author Definition

Augier & Teece (2009) For analytical purposes, we believe it is possible to disaggregate dynamic
capabilities into three classes: the capability to sense opportunities, the capacity
to seize opportunities, and the capacity to manage threats through the
combination, recombination, and reconfiguring of assets inside and outside of
the firm’s boundaries.

Barreto (2010) A dynamic capability is the firm’s potential to systematically solve problems,
formed by its propensity to sense opportunities and threats, to make timely and
market-oriented decisions, and to change its resource base.

Katkalo, Pitelis, & Teece Dynamic capabilities are more than routines, whether operational or higher-
(2010)
order, in that they embody a qualitative difference, namely conscious human
action. Routines partly serve the purpose of minimizing the need for such
agency on a continual basis, by providing order and stability. Dynamic
capabilities suggest that at a higher level of decision-making, such human action
is critical in transforming existing routines, and even disrupt order and stability.

Drnevich & Kriauciunas We define dynamic capabilities as those capabilities used to extend, modify,
(2011)
change, and/or create ordinary capabilities.

Protogerou et al. (2011) Dynamic capabilities can be conceptualized as higher order strategic processes
that integrate, recombine, and generate new technological and marketing
capabilities, which, in turn, shape firm performance. In an effort to investigate
this model empirically, the article attempts to operationalize dynamic
capabilities as a composite, unified construct defined by three interrelated,
although distinct, dimensions: coordination capability, learning capability, and
strategic competitive response capability.

Wang & Ahmed (2007) A firm’s behavioral orientation constantly to integrate, reconfigure, renew and
recreate its resources and capabilities and, most importantly, upgrade and
reconstruct its core capabilities in response to the changing environment to
attain and sustain competitive advantage
Table 1: Selected dynamic capability definitions

A DEFINITIONAL MODEL OF DYNAMIC CAPABILITIES

Before presenting a more formalized model of the dynamic capabilities it is important to note

what that model is aiming to do. Our intent is not to present a general equilibrium structure or

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even one that accounts for a complete partial equilibrium solution (there is simply not space to

do that), but to present the outline of a structure that can guide the logical thinking underlying

what previous literature has characterized as dynamic capabilities. Hence, we will, at this point,

ignore what the equilibrium conditions are that make dynamic capabilities competitive – i.e.,

sustainable in a market – and focus on what form a model might take that allows us to frame

important questions related to research in field. In what follows we will work through this

structure step-by-step, adding more complex characteristics that will hopefully enlighten our

thinking and tighten our conceptualization of what is necessary for a capability to be dynamic.

A Base Model of Resources and Demand

To derive a formalization of the dynamic capabilities view we need to set up a basis for our

model. Let us consider a firm, denoted f, that possesses a resource base and faces a market

demand outline below:

Resource base. Following the logic of the RBV, the firm has access to a set of resources, Rf

Ì {Rif} ; where Ri represents the level of resource i. Resources are available at a set of prices, r Ì

{ri}; where ri denotes the price of resource i. At this point we assume that there is a fully

competitive resource market that determines the prices, which are the same for all firms (hence

there is no subscripting of the prices by f).1 If a firm has to respond to some change in the market

that requires a new resource set, R°f to meet that demand, it has to face a cost of Cf = å riR°if. In
R

this formalization there are no fixed costs.

Demand. Demand is the demand for the final product/service provided by the firm. To keep

1
Although this may seem to be a restriction, it is nothing more than a simplification. Should the resources not be
available to all firms at the same prices, we would simply need to account for this via a price vector that is unique to
each firm – i.e., rf Ì {rif}. This would, however, necessitate a logic for how those individual firm resource prices
were determined.

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with the logic of the RBV, we relate demand simply to ‘quality’, with quality being a function of

the resources deployed. This is similar to a quality function deployment (QFD) logic in which

the ‘attributes’ demanded by customers can be functionally related to the satisfaction received by

customers. It also allows us to uniquely relate the demand faced by a firm specifically to what

that firm does as represented by its resource base. Therefore, the quality achieved by firm f, Qf,

can be defined as a mapping from the firm’s resources to the demand; Qf = Q[Rf ]. Hence, we can

m m m m
characterize the ‘best’ resource base to achieve quality Q for firm f as Qf = Q[Rf ], where Rf

represents that mixture of Rf given r that minimizes Cf given Q .


R m

With this simple specification we can easily talk about dynamic capabilities (i.e., sensing,

seizing and reconfiguring) without any initial complicated discussion about the dynamics. For

example, suppose that the firm’s managers wake up in the morning and get randomly assigned a

set of demands for a specific ‘quality’. Sensing amounts to nothing more than a random

assignment at no cost. Their initial task is to determine which of the demands they satisfy

(seizing), with their subsequent task being the purchasing of the resources on the market to

satisfy those demands for that day (reconfiguring). This is, in essence, a ‘catering’ model where

the firm (the caterer) owns only the infrastructure and reconfiguring amounts to nothing more

than daily purchasing with everything occurring contemporaneously. However, this simple

model provides not just a baseline on which to build but also reveals a few important things

about what we call dynamic capabilities.

First, we can add complicated costs associated with aggregating the resources purchased and

add in specific fixed costs, but this does not change the nature of the story at all. What drives the

outcome is not the aggregation of the resources or the fixed costs but: (a) the independence of

sensing, seizing and reconfiguring, and (b) the market availability of the resources necessary to

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meet demand.

Second, the market can be turbulent in the sense that the quality can be random but the fact

that the ‘game’ is repeated independently period-by-period means that there is no carryover of

resources or knowledge from period to period. The discount rate is infinite, as the resources have

no value after they are used once and what I knew yesterday has no value to what I will see

tomorrow. Even if we chose to relax this and added a discount rate into the structure and allowed

assets to have value over time all this would do is lead to the firm spreading out the costs and

investments over time. It would not alter the fact that the catering model was an appropriate

analogy.

A Base Model of Capabilities and Sensing, Seizing and Reconfiguring

At its essence, a capability in our formulation is little more than a collection of resources à la the

standard definition. One way to think about this is that if there are N resources, there is a

transformation matrix that represents which resources fall into the set of resources relevant to

that capability. Therefore, capability k is just represented by a vector that indicates [0,1]
k

whether a resource is in the set.2

Sensing (k ) is the capability to find the ‘correct’ quality. Hence, the more a firm invests in
S

‘sensing’ resources, the greater the likelihood it will know that any quality is ‘available’ and be

able to find the best ‘quality’ for it to produce given the resources it has available or can acquire.

Note that knowing a quality is available and choosing to actually produce that quality are

different. Sensing only implies the knowledge that the quality is available to the firm. To keep

this simple, we are not going to talk about what those resources are as the literature has covered

2
Note that these resources can be used across capabilities with no loss of generality.

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these examples extensively. For our purposes, we define sensing as kf = Pr{Q exists} with a
S

production function denoted by k (If), where If is the investment in sensing resources. Note that
S

these resources may be part of the regular resource base (Rf); however, at this point, we will

assume they are separate so as to keep the investment in DCs separate and to be able to discuss

them differentially. Thus, we only distinguish between ‘ordinary’ non-dynamic capabilities

(which we will just aggregate into the term kf ) and the dynamic capabilities (S, Z & D, see
O

below).

Seizing (k ) is the ability to meet that ‘quality’ with the existing resource base (or perhaps a
Z

better way to say it is the speed and/or cost by which time the resources can be brought to bear).

For example, one way is to characterize this is that seizing is the likelihood that the firm can

provide a product/service into the market with its existing capabilities set: kf = Pr(Q* = Q[R°f ])
Z

where R°f is the firm’s existing resource base; that is, what would make up Helfat and Winter’s

operating capabilities. Alternatively, we could characterize seizing as the distance between the

required asset base and the one that the firm possesses kf = k (Q* - Qf). Note that there is no real
Z Z

cost to ‘seizing’ in this formulation in that we have not specified any resources that are linked to

this task directly. For our purposes, we will use the first definition of seizing; that is, kf = Pr(Q* =
Z

Q[R°f ]).

Reconfiguring (kD) is the cost of transforming the resource base from the existing base to

one that meets the configuration that will meet the optimal quality demanded; that is, the one the

firm chooses to satisfy, Q*. This can be conceptualized quite simply as kDf = kDf (RQ* - Rf), which

relates back to the cost function given earlier. Note, again, that we need not worry about the costs

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of the resources at this point, nor need we specifically talk about there being resources devoted

especially to the task of reconfiguration. What is important to note here is that the better the firm

is at reconfiguring, the lower is the cost of achieving that outcome.

Note also that we have not yet said anything about ‘turbulence’ or ‘dynamics’, as they are not

necessary at this point to discuss how one might characterize the core components of Teece’s

(2007) conceptualization of dynamic capabilities.

Overall, the optimization problem3 the firm is facing is to choose that mix of resources that

maximizes profit from producing product of a specific quality.4

R k
Max PQqQ – Cf – Cf.
Rf

This is subject to: (1) the distribution of ‘quality’ and (2) resource prices r. PQ is the demand

R
price for a product/service of quality Q and qQ is the total quantity demanded. Cf is the cost of

producing a product of that quality in that quantity based on the resources that need to be

k
deployed. Cf are the DC costs, which at this point amounts to If + (1 – kf ) • (kD). Please note
Z

that reconfiguring may occur as a result of external and internal forces and, hence, does not

necessarily require the precedence of conscious sensing investments. In this case, If will be equal

to 0 (i.e., a firm possesses the required quality and needs no investment in sensing resources)

and, hence, kD is independent of the process of sensing. Although the resources used to produce

R
the product/service – those given in the cost Cf – might also be part of the capability set – those

3
Again, we note that there is no loss of generality from using this structure versus one where the resources were
being chosen over time with a discount rate added. The addition of that ‘dynamic’ or time component simply
changes the nature of when assets are acquired and not the fundamental value of the components of the DCV.
4
We keep this simply by making the maximization only based on the resource set, as this will determine which
quality can be produced.

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k
given in the cost Cf – we have kept them separate so as to make it easier to distinguish between

the costs of meeting the demand once it has been found and the resources realigned.

While this is a very simple formulation, it allows us to say some interesting things about the

DCV logic. First, we can easily separate out the components of sensing, seizing and

reconfiguring but their structures are not identical. Each can be thought about as a production

function, but with very different forms. Sensing and seizing are fundamentally probabilistic,

while reconfiguration is a more traditional production function. This has implications for

measurement, as no study to date has attempted to account for the probabilistic nature of sensing

or seizing and treated them quite casually. In addition, little previous research has attempted to

measure these three dimensions of dynamic capabilities. Most empirical studies have used

idiosyncratic formalizations of dynamic capabilities that are only peripherally related to Teece’s

conceptualization that we have tried to formalize. For example, Schilke (2014) uses alliance

management capability and new product development capability as dynamic capabilities. Zhou

and Li (2010) operationalize dynamic capability in their study using adaptive capability, thus

also not accounting for Teece’s sub-dimensions. Following more closely Teece’s

conceptualization of dynamic capabilities, Wilden et al. (2013) find that the operationalization of

firms’ diverse sensing, seizing and reconfiguring activities needs to comprise a large number of

activities that firms may use, making it impossible to measure comprehensively all those

activities relevant to Teece’s sub-dimensions.

Second, we have said nothing about turbulence as a necessary condition for sensing, seizing

or reconfiguring to matter. However, one can easily see that if there is no change in either in the

value of the resources or in the nature of demand then ultimately the logic of the DCV would be

meaningless. Suppose that the firm can carry its knowledge of the market from one period to the

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next at no cost. At some point sensing, defined as kf = Pr{Q exists}, will approach 1 as the firm
S

spans the domain of all possibilities. Even this, however, is overly restrictive because as soon as

the firm finds those qualities it can satisfy with its resource base there is no real need for the firm

to search further. It would simply use its operational capabilities over and over again. Hence,

while turbulence may not be a necessary condition for DCs to make sense, degradation of the

value of the resource base in some form is. We will come back to this shortly.

Third, what makes a DC strategic can arise in one of two initial ways. Following on from the

RBV, it may simply be the case that the firm has access to resources that meet the criteria

outlined by Peteraf (1993). They could be rare and non-imitable – hence unavailable in the

market – and/or they could be complex, in the sense that the resources being utilized for sensing

might also make reconfiguration less costly. In this sense, the DCV adds nothing over and above

what we can learn from taking a RBV perspective, seemingly providing support to critiques such

as by Arend and Bromily (2009) who question the value added from the DCV.

However, as Teece correctly notes the value of DCs may reside not in the resources, but in

the functional forms that transform those resources into the outcomes – that is, kS, kZ and kD. It

should be obvious that the DCV is different from the RBV in this process aspect, hence we need

to understand these functions in quite a lot of detail. Failure to do so simply would otherwise

relegate the DCV to just a variant of the RBV with the capability sets being redefined and

configured in one specific manner. This implies a much greater emphasis on the form of what

makes up the form of the components of the DCV and hence a much greater emphasis on more

accurately understanding the processes at work (Teece, 2007; Wilden & Gudergan, 2015).

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The Role of Time in the DCV

The last section indicates that what may be the key factor leading to the importance of the DCV

is how the overall structure changes with time. We discuss turbulence and competition as key

factors contributing to these changes over time.

Turbulence

We can think about turbulence in three ways. First, we can have turbulence in the sense that it

alters the structure of the demand the firm is facing. Second, we can have degradation in the

resources available to the firm. Third, we can have turbulence with respect to the level of the

available resources.

Turbulence in demand. As noted in the prior section, it does not appear that turbulence

alone is sufficient to make the components of the DCV valuable. However, turbulence of a

specific form can add to the role that DCs play, other things held constant. The simplest and

most parsimonious way to think about turbulence in our formulation is as a random shock to

quality that makes quality and demand time dependent; that is, Qt = Qt-1 + Xt, where Xt represents

the turbulence component.5 This implies that the firm needs to go through the processes of

sensing, seizing and reconfiguring over and over again and the knowledge about the structure of

demand loses value. This starts with the fact that seeking needs to be updated – implying that

they must now invest more, implying that If will be increased6 – and this leads to flow on effects

requiring the firm to engage in reconfiguration more often. Empirically, this type of structure

also implies that what we are really modeling in the DCV world is not just the Qt but Xt. And it

5
An even more general formulation would be Qt = atQt-1 + Xt, where at would have some temporal characterization
as well. However, the additional complexity is unnecessary to address the issues we are discussing here.
6
Note what this implies that it is the total investment in seeking over time increases. Without turbulence a firm
would invest in sensing early and simply use what it learned later on. With turbulence, the value of that information
declines requiring the firm to invest more and to do so for longer.

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is how you think about the evolution of X that is important. For example, suppose we

parameterize X with a stationary and non-stationary component; i.e., Xt = Wt + zt, where the first

part (Wt) is stationary – meaning it can be modeled and forecasted – while the second (zt) is truly

unpredictable – meaning we cannot estimate its parameters or even assume they are stable. The

implication is that the resource configuration necessary to meet quality changes with time but

also that the firm will never be able to fully adjust to the needs of the market. Indeed, with large

enough turbulence of this form – i.e., when X is large relative to Q – the firm might forego

sensing, seizing and reconfiguring completely if z is large relative to W. Hence, DC’s value

increase with turbulence but only with turbulence of a certain type. With too much turbulence

and turbulence of the wrong type the value of DCs will begin to decline beyond some point.

Degradation of resources and resource turbulence. The second and third ways in which

time can come into the DCV is in the degradation or erosion of resources and turbulence in the

resource base and, as a consequence, in the degradation in the effectiveness of the capabilities.

We can incorporate this quite simply by adding a decay function into the resources equation. So

Rf is now Rft = Rft-1 + xt, where xt is the decay function. A typical such function would be a

simple depreciation function7 where the resource base declines in effectiveness in some fixed

way. We can complicate this by considering cases where there is correlation in the degradation

but need not consider that at this point.

As in the case of demand turbulence, we can also incorporate turbulence that influences the

resources. This complication breaks xt into a random stationary component (e.g., the depreciation

function) and a non-stationary component; i.e., xt = θt + ηt, where the first part (θt) is stationary

7
In the case where the resources are independent, we could define this for each resource, i, as dxi = μiRi dt where μi
is the percentage per period, t, drift or degradation (hence < 0). In other words, xit – xit-1 = μiRi.

18
while the second (ηt) is non-stationary.8 The larger the non-stationary component of this resource

drift the greater is the inability of the firm to operate at all (or at least make meaningful

decisions).9 Hence, a necessary condition for the firm to be able to deploy its resource base

effectively is that ηt << θt and that θt be small. In this structure, we are proposing this will

directly impact on ability to sense, seize and reconfigure as well on the underlying operating

capabilities.

We can immediately see the implications of this for the DCV.

First, as the resource base depreciates the firm must invest in replenishment. This is not

surprising but implies that firms will accept less accurate sensing, are willing to seize less often,

and may operate with less than optimally configured resources than they would without resource

depreciation. All of this, of course, assumes that these activities are substitutable. In reality,

they, (a) may not be substitutable (or very imperfectly so), and (b) could actually be

complementary. Point (a) does not add huge complexity to the structure being discussed.

However, point (b), complicates it quite a bit as doing so implies sensing, seizing and

reconfiguring would need to be used in specific combinations that generate additional advantages

and that there are process inter-relationships that make breaking the components apart impossible

empirically and render discussion of their separateness theoretically limiting.

Second, as the non-stationary component increases, the firm can rely much less on its

operational capabilities. This can be seen by remembering that the seizing capability is defined

8
Note that the example given in footnote 6 represents a case where the process is stationary. In the case where the
resources are independent and the process is non-stationary, we could define this for each resource, i, as dxi = μiRi dt
+ σiRi dW; where μi is the percentage per period, t, drift or degradation (hence < 0), W is a Weiner process with
parameters N(μ, σ2).
9
This formulation also reveals why firms will be less likely to make longer-term decisions regarding seeking,
seizing and reconfiguring. The non-stationary component will increase the longer out in time one looks (e.g., it will
be larger between period t and t+1 versus period t and t+2).

19
as kf = Pr(Q* = Q[R°f ]), where R°f is the firm’s existing resource base. With time drift this would
Z

imply that the probability of seizing the opportunity with the operational resources available in

time t would be kft = Pr(Qt* = Q[μ R°ft-1]). This is a relatively simple problem since the firm would
Z

know the depreciation function for the set of resources (μ) and can ‘top up’ the affected

resources. However, if there is also random drift, the problem is made very difficult as this now

becomes kft = Pr(Qt* = Q[μ R°ft-1 + σiRi dW]) which includes a component, σiRi dW, that the firm
Z

cannot see until after the fact.

Competition

Competition has been found to play an important role in the DCV (Wilden & Gudergan, 2015).

There are several ways to include competition into the model we are discussing. The most

obvious implication is that competition leads to changes in customer demand and the availability

of resources to the firm. First, competition as changes in customer demand can be simply viewed

as part of turbulence in the demand component (i.e., Xt)) as explained in the previous section.

This would arise in a game theoretic sense in that competitive actions and reactions that are

predictable (i.e., form consistent conjectures in game theory parlance) do not matter as much as

those that arise as surprises and cannot be forestalled by pre-determined actions. Second,

competition may lead to changes in the availability of resources, which can be modelled as an

increase in the price of required resources and/or a decline in the quality of resources available to

the firm. We note that the competition each firm faces at a given point in time is the key factor

leading to firm-level heterogeneity in our model of DCV.

Increases in price. More firms entering the market and competing over resources required to

produce the product leads to an increase in the price of required resources. We incorporate this

into the model by adding a demand shock into the price equation of the firm’s resource base.

20
Therefore, ri is now rit = ri(t-1) + gt, where gt represents the random price increase for a particular

resource due to an unpredictable increase in its demand. This will result in an increase in the cost

of the firm’s resource base through the cost equation Cf = å riR°if, leading to a change in the
R

optimization of the firm’s profit discussed earlier.

We can further break the demand shock gt into a stationary and non-stationary component;

that is, gt = st + nt, where the first part (st) is the stationary component with an underlying

forecast function and the second part (nt) is the non-stationary component, which is truly random

and unpredictable. Hence, the implication is that when the non-stationary component nt is large

relative to the stationary component st , the cost of the firm’s resource base puts the firm in a

strategic disadvantage as it cannot plan effectively in terms of what parts of that base to utilize.

In this situation, the firm might decide to search for substitute resources to deliver the product

with the expected quality, where better resources are a trade-off between their direct economic or

strategic value and the degree of uncertainty they create for the whole resource base.10

Decline in quality. The change in resource availability due to increasing competition in the

market may also lead to a decline in the quality of resources available to the firm. The decline in

quality implies a time dependent component in the quality equation. The parsimonious way to

incorporate this into the model is to view the decline in quality as a negative shock to the quality;

that is, Qt = Qt-1 + Xt + dt where dt represents the unexpected decline in quality due to competition

the firm faces at time t.

10
There is potentially an interesting link here with real options theory. First, as the firm uses many resources what
matters is not the shock to any one asset, but the shock to the portfolio of assets. Given this, the firm may be facing
many shocks but the shock to the portfolio could be greater or less than the shock to any individual resource
(depending on how substitutable or complementary the resources are) (see Devinney & Stewart, 1988). Second, the
firm may be able to ‘hedge’ the shock to the portfolio either financially via financial options or strategically by
utilizing a real options approach

21
As in the previous case of turbulence and increase in price, the negative shock to the quality

is parameterized with a stationary and a non-stationary component, dt = tt + yt, tt represents the

component of a negative shock to quality that can be modeled and yt represents the non-

stationary component of the negative shock whose parameters cannot be estimated. This further

reinforces our argument that the firm can never perfectly reconfigure their resources to match the

customer demand and attempting to do so becomes even more challenging when the non-

stationary component of the negative shock on quality is large relative to the stationary

component.

CONCLUSION AND IMPLICATIONS FOR FUTURE RESEARCH

We have aimed our discussion at providing some rigor to the many disparate strains of thought

pervading the literature on dynamic capabilities. We believe that in order to move this promising

research field forward and to provide theoretical clarity it is imperative to provide the DCV with

a formal foundation regarding the underlying mechanisms and processes. Specifically, our model

views the firm as a bundle of resources available at a set of prices that it uses to meet specific

market demand. The dynamic capabilities of sensing, seizing and reconfiguring come into the

mix to the degree that they provide the firm with an ability to meet that demand competitively.

The formalization we have outlined is certainly incomplete but highlights quite easily and

readily some basic requirements for moving dynamic capabilities research forward.

First, as shown by our formulation of the underlying functional logic of sensing, seizing and

reconfiguring, we need to think more seriously about how it is that these processes/functions are

measured. In our structure, sensing and seizing were probabilistic functions – one being

informational and the other transformational – while reconfiguring was a more traditional

production activity. However, this sort of difference has never been addressed in the empirical

22
literature, where measures of the specific dimensions of the DCs are either done via instrumental

variables or assumed to be of similar forms.

Second, perhaps most importantly, the value of dynamic capabilities requires some degree of

uncertainty (i.e., turbulence and competition in the parlance of the earlier DC research) but

uncertainty alone is not sufficient to make them competitively valuable. The literature has

struggled with this issue, with authors arguing over the extent to which turbulence and

competition were or were not important for DCs (Wilden & Gudergan, 2015). What we show is

that turbulence and competition are necessary but not sufficient condition for DCs to be of

potentially competitive value. What is important is: (a) the magnitude of the turbulence and

competition – in our terms the larger is X, x, g and d – and (b) the degree to which that turbulence

and competition are driven by the non-stationary component.

This chapter leaves several substantial issues for future research. Our formulation here was

meant to be an example of how we might think about dynamic capabilities in more structured

way and how we might use that structure to both solve some questions about the theory (e.g.,

what are necessary and sufficient conditions) and bring to the fore issues about the form and

nature of dynamic capabilities. We are aware that the DCV was formulated partly as a response

to the narrow economic models of dynamics and the general absence of the role of managers in

economic theory (Teece & Winter, 1984). Scholars may argue that a model, which incorporates

all aspects of the DCV, cannot be built; however, we believe that our model serves as a starting

point for further development and discussion.

An interesting extension of our framework may discuss the intricacies of dynamic capability

costs. Our model implies a trade-off between investments in resource ‘replenishment’ in sensing,

seizing and reconfiguring; thus implying that costs can be measured in monetary values.

23
However, many dynamic capability costs comprise costs related to managerial time and attention

related to sensing, seizing and reconfiguring, also referred to as asset orchestration.

Related to the issues of asset orchestration, future research may benefit from extending our

model by including the role of the manager. Teece stresses the importance of the individual

manager and groups of managers for sensing, seizing and reconfiguring (Teece, 2007). Extensive

previous works in behavioral strategy, cognitive science and management has stressed the

importance of managers in firm’s strategic decision making affecting firm performance in

general (Daft & Weick, 1984; Gavetti, Greve, Levinthal, & Ocasio, 2012). This has led to

increasing discussions about the role of managers in the DCV as well, culminating in the

conceptualization of so-called dynamic managerial capabilities (Adner & Helfat, 2003; Helfat &

Martin, 2015). These are defined as “the capabilities with which managers create, extend, and

modify the ways in which firms make a living” (Helfat & Martin, 2015: 1281). Some initial

conceptual and empirical research has advanced both our conceptual and practical understanding

of how dynamic managerial capabilities may affect the sensing, seizing and reconfiguring (e.g.,

Bingham & Eisenhardt, 2014; Maghzi, Gudergan, Wilden, & Lin, 2015; Maitland &

Sammartino, 2015). In the context of our model, for example, managers may affect the sensing

and the evaluation of the required quality. Further, through their human capital, social capital and

cognition managers will affect the type of investments undertaken, which opportunities are

seized and which reconfiguring path is chosen.

Further refinement and extensions of the formal model presented in this chapter are needed,

for example, by applying its theoretical predictions and managerial relevance to important

organizational behaviors such as strategic divestment, alliancing and outsourcing. Future

research should aim to identify how to measure and operationalize the analytically defined

24
conceptualization of dynamic capabilities and a firm’s resource base in a meaningful way.

A further extension of the model could include discussions of the speed of sensing, seizing

and reconfiguring processes, which will ultimately affect firm performance. Teece et al. (1997:

521) state that it is important for firms “to scan the environment […] and to quickly accomplish

reconfiguration and transformation ahead of competition.” A higher speed with which firms go

through the processes of sensing, seizing and reconfiguring, which is different to the timing of

using dynamic capabilities is likely to increase strategic flexibility (Brown & Eisenhardt, 1995).

Firms may differ in the speed of using dynamic capabilities due to management’s

(un)willingness to take action (Stinchcombe, 1965) or from coincidence (Barney, 1986). In the

context of our model, differences in speed may impact the resource availability, the competitive

situation, which opportunities the firm can choose from and the costs of reconfiguring.

Learning is an important aspect of the DCV (Zollo & Winter, 2002; Zott, 2003). Zahra et al.

(2006) state that the effectiveness of capabilities improves commensurately with the frequency

with which they are used, thus increasing their technical fitness (that is, how good the capability

is at performing its intended function). As firms use their dynamic capabilities in similar and

dissimilar situations, “they learn more about cause-and effect relationships and how to achieve

desired results” (Zahra et al., 2006: 927). The more frequently firms engage in processes relating

to sensing and seizing opportunities and reconfiguring their resource base, the more these

processes become part of the organisational memory and increase the speed with which the firm

can deploy them. Thus, it would be interesting to integrate Romme et al.’s (2010) model on

dynamic capabilities, deliberate learning and environmental dynamism into our model. Their

model posits that dynamic capabilities develop from the interaction of tacit experience,

articulated knowledge, codified knowledge and turbulence. Consequently, in the context of our

25
model, learning is expected to affect all sensing, seizing and reconfiguring processes, and thus

related investments, costs and the quality assessment.

Finally, future research may also extend our model by more explicitly integrating the

intricacies of environmental turbulence and its interactions with the firm-specific resource base

and dynamic capabilities in shaping strategic performance. For example, while we included

competition as an important source of turbulence, technological change also affects both the

quality and the availability of resources. Also, in the context of the discussed importance of

learning, changes in technologies may also make previous knowledge obsolete and require new

learning.

26
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