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     SKM 個人摘要 林澄貴 R48961114 (2008/06/26)

    Dynamic Capabilities and Knowledge Creation:

    A Literature Review

     How could a firm obtains sustainable competitive advantage? This question has been the

    concern of the industry, government, and academic circles. Traditionally, common opinions on possible reasons how a firm maintains its competitive advantages are as follows: the focus on competitiveness analysis in the industry-specific environment (Porter, 1980) and the perspective of the resource-based view (RBV) that emphasizes the use of specific resources (Wernerfelt, 1984; Barney, 1991). Teece, Pisano, and Shuen (1994, 1997), however, held the opinion that an organization has to establish dynamic capabilities in order to ensure its sustainable competitive advantages.

    The dynamic capabilities view (DCV), based from the resource-based theory (RBT), further explains the dynamic capabilities that an organization needs to possess for it to transform resources into its competitive advantages. Under the viewpoint of RBT, a firm can obtain its competitive advantage by means of the valuable resource and capabilities that its competitors can hardly imitate (Barney, 1986, 1991; Peteraf, 1993). Unfortunately, the RBT neglects to explain how a firm deploys its unique resources and obtain its core capabilities (Helfat, 1997; Helfat and Peteraf, 2003). In this instance, a firm with core capabilities also faces the issue of core rigidities (Leonard-Barton, 1995). On such a basis, Teece et al. (1994, 1997) extended the RBT and formed the DCV. Today, when the industrial environment changes rapidly and market competition is extremely fierce, dynamic capabilities emphasize the real-time response to the updating and reconfiguration of resource capabilities in order to adapt to environmental changes. The DCV describes the firm’s response while the environment changes rapidly, which is more

    concrete and adapts more to the dynamic process of corporate operation compared to other perspectives.

    The DCV emphasizes the organization’s adaptability to the environment. The organization’s capability of creating and absorbing new knowledge is one important basis of its dynamic capabilities (Zollo and Winter, 2002). In the paradigm of knowledge management, the organization’s main task is to build its knowledge pool by knowledge creation, then accumulate,

    maintain, and update its core knowledge, and finally, master and create the permanent competitive advantages (Grant, 1996ab; Teece et al., 1997; Phan and Peridis, 2000). 1. Dynamic capabilities

    The RBV regards a firm as a collection of assets (tangible or intangible) and capabilities. “Resources” is the obtainable element that a firm controls or possesses. Meanwhile, “capability”

    is the capacity that a firm configures to maximize its resources (Amit et al., 1993). Regarding the difference between capabilities and resource, the former is specific to and deeply hidden in a firm and its processes. When a firm is transferred or the organization disappears, its capabilities just disappear (Teece et al., 1997). The RBV perspective emphasizes the unique resource and capability of an enterprise to provide the basic direction for corporate strategy. It is the main source of profits not to mention that permanent and sustainable competitive advantages are formed by accumulating and cultivating internal resource and capabilities. Hence, resource and


     SKM 個人摘要 林澄貴 R48961114 (2008/06/26)

    capabilities are the foundation of long-term corporate strategy and emphasis in strategic thinking (Wernerfelt, 1984, Grant, 1991).

    The RBV constructs an influential theoretical structure in understanding how a firm obtains and maintains its competitive advantage. It emphasizes the firm’s internal organization (Amit et

    al., 1993) and explains how it makes use of its internal resources as it creates and maintains its competitive advantage (Barney, 1991, Nelson, 1991, Peteraf, 1993). Facing an ever-changing environment, RBV meets the difficulty in application due to its focus on static resources. The firm has its own specific resources, and its competitive advantages lie on its unique and inimitable upstream markets and resources (Teece, 1982, Rumelt, 1984, Wernerfelt, 1984). The RBV has its constraints like emphasizing too much on internal resource and capabilities and neglecting the influence of external factors on a firm; and its inability to explain adequately how or why does a firm obtain the competitive advantage in a rapidly changing environment (Eisenhardt and Martin, 2000). A firm with only its unique core capability to bank on is not adequate because it will have to face the issue of core rigidities (Leonard-Barton, 1995, Luo, 2000). A firm builds on its permanent competitive advantages exclusively through continuous dynamic learning.

    On such a basis, Teece et al. (1994, 1997) extended the RBT and developed the DCV. Dynamic as capacity which renew competences so as to achieve congruence with the changing business environment. Meanwhile, capabilities emphasizes on key role of strategic

    management and adapting, integrating and reconfiguring organization and functional competences to match requirements of changing environment (Teece et al., 1997). Therefore, the DCV is originated from the RBT perspective, while emphasizes that an organization has to possess dynamic capabilities in order to transform its resources and capabilities into competitive advantages. Dynamic capabilities are the potential method of integration, and they further explained the origin of competitive advances. Many companies are still inadequate in responding to the rapidly changing environment even though they have accumulated enough resources. Only those who can rapidly respond, and immediately and flexibly integrate and reconfigure its internal and external capabilities will be the final winners. Dynamic capabilities is useful in confirming the origin of advantages, in explaining the combination of capabilities and resources, and in developing the internal and external unique abilities of existing enterprises to respond to the rapidly changing environment (Teece et al., 1994, 1997).

    Other scholars also responded well to the DCV perspective. According to some of them, for example, the nature of dynamic capabilities is the firm’s processes to integrate, reconfigure, gain

    and release resourcesto match and even create market change (Eisenhardt et al., 2000).

    Dynamic capabilities originated from learning in which the organization systematically produces and modifies its operational procedurein pursuit of better performance (Zollo et al., 2002). Embedded in routine organizational processes that guide the evolution of a firm’s resource configuration and operational routines. The processes involved in a firm’s system of evolutionary learning can be classified into the categories of variation, selection, and retention as well as influence its decision-making or problem-solving activity (Zott, 2003). Cepeda and Vera (2007) definition of dynamic capabilities as the processes to reconfigure a firm's resources and operational routines in the manner envisioned and deemed appropriate by its principal decision makers. Examples of dynamic capabilities are product development, strategic decision making, and alliance management (Eisenhardt et al., 2000). Therefore, dynamic capabilities are the firm’s


     SKM 個人摘要 林澄貴 R48961114 (2008/06/26)

    ability in the processes of firm integration, reconfiguration, renewal, learning, and response mechanisms.

    2. Knowledge creation

    According to the knowledge-based view (KBV), the most critical input and value source are knowledge in a firm’s process of production activities (Grant, 1996b) because all inputs are established on the foundation of knowledge. Moreover, an organization’s knowledge

    improvement reduces its performance variability and increases its reliability (March, 1991). Knowledge assets are the foundation in forming organizational capabilities. Hence, the most critical operational principle for a firm is to create and apply knowledge assets (Nonaka, 1994; Grant, 1996b; Teece, 1998).

    Creating knowledge in an organization refers to transforming individuals’ skills or knowledge into the knowledge embedded in the organization by means of proper transformation mechanisms. In relation to this, Nonaka and Takaeuchi (1995) refer this as the knowledge spiral that encompasses the stages of socialization, combination, externalization, and internalization. Nonaka (1994) asserts that the basic structure of knowledge creation is comprised of two aspects: epistemology and ontology. Ontology refers to the concept in which “only individuals could create knowledge and thus an organization cannot create knowledge by itself without individuals.” An organization needs to support creative individuals or provide a proper

    environment and allow individuals to create knowledge. Hence, an organization’s knowledge creation is its process of strengthening and concretizing the knowledge created by individuals and forming this into its knowledge network. This process occurs within an expanded “interactive group” of people spanning across the internal structures of an organization, or across organizations and borders. Meanwhile, epistemology distinguishes tacit from explicit knowledge. Tacit knowledge is individualistic and especially related to the scenario, which is difficult to formalize or communicate. Meanwhile, explicit knowledge refers to the knowledge transferable in formalized and standard languages.

    As to the path by which an organization creates new knowledge, similar perspectives can be found in different studies. Helleloid and Simonin (1994) explain that organizations acquire knowledge in five paths: (1) independent internal development, (2) externally assisted internal development, (3) purchase of new knowledge from the public market, (4) corporate cooperation, and (5) merger and acquisition. Leonard-Barton (1995) classifies the origin of knowledge into consultants, customers, state laboratories, universities, competitors or non-competitors, and suppliers; therefore, it has an inter/intra organizational scope. Knowledge creation is the process of “creating” new knowledge. The paths for the creation of new knowledge include technology

    change and innovation within an organization, response to the impact of an outside competitor, and understanding customers’ needs.

    3. Dynamic capabilities and knowledge creation

    The KBV emphasizes that knowledge is the important resource for a firm to create added values (Grant, 1996b), and has to possess features of being unique, difficult to transfer, and in duplicate (Kogut and Zander, 1992; Spender, 1996, Grant, 1996a, b). As to the research question of “how an organization could transform individuals’ knowledge into organizational capabilities,”


     SKM 個人摘要 林澄貴 R48961114 (2008/06/26)

    Grant (1996b) explains the organization’s ability to integrate knowledge to be the most important. Due to ability constraints, individuals cannot integrate others’ knowledge. If transacted in the market, explicit knowledge is difficult to price, and tacit knowledge is hardly transferable. Therefore, Grant (1996a) stressed that the importance of knowledge integration in “how an

    organization’s manager shares the professionals’ knowledge with members in other organizations, and enhances the organization’s innovative ability by means of internalization

    among its members.” In this sense, knowledge creation and the integration mechanism are much more important than knowledge itself.

    The organization’s capabilities are the foundation for the creation and integration of the

    knowledge of individuals inside the organization. According to Foss (1996), an organization’s capability is a special knowledge capital that enables the firm to execute some activities more effectively than others. An organization’s capabilities should be accumulated by its knowledge

    creation and by mutual learning among its members. Such a mechanism of knowledge creation, integration, and learning is the optimum feature of dynamic capabilities as emphasized by Teece et al. (1994, 1997). Dynamic capabilities as organizational routines, learning and knowledge management processes guide their development, evolution, and use (Eisenhardt et al., 2000). For example, knowledge codification into procedures and technologies makes experience and routines easier to apply (Zander and Kogut, 1995). The knowledge evolution cycle includes four phases: generative variation, internal selection, replication, and retention (Zollo and Winter, 2002); this cycle enables firms to change the way they do things in pursuit of greater rents. An organization creates new knowledge by means of the Knowledge Spiral method, a process of transforming the tacit knowledge into explicit knowledge, converting it into innovation knowledge that an organization can deploy, and then using this innovation knowledge to obtain competitive advantage in the market (Nonaka, 1994).

    4. Discussion and conclusion

    Structured on DCV, this paper attempts to clarity knowledge creation into the study pattern and made the following contributions to the existing literature on the topic.

    First, the enterprise with the sharpest competitive edge in the era of knowledge has to create, integrate, and apply knowledge rapidly into the market. Meanwhile, a firm has to improve the quality of its products or services by continuous knowledge innovation and transfer (Nonaka and Takeuchi, 1995). Therefore, knowledge-based capability is much more important than entity-based capability. A firms could accumulate its achieve and sustain competitive advantage only by learning its dynamic capabilities (Luo, 2000).

    Second, specific capabilities is the origin of the firm’s competitive advantage. Compared to

    dynamic capabilities, the firm’s internal and external specific abilities are strengthened in

    responding to environmental changes. From the perspective of dynamic capabilities, a firm’s

    existing resource is developed from past experiences and accumulated resources. A firm builds its capability in integrating, establishing, and restructuring internal and external assets in order to respond to the rapidly changing environment (Teece et al., 1997). For example, the development of new products, strategic alliance, and business decisions are all new values created by companies in a dynamic market by deploying past resources (Elsenhardt et al., 2000).


     SKM 個人摘要 林澄貴 R48961114 (2008/06/26)

    Third, the discussion on RBV highlights that mere possession of valuable resources and assets cannot guarantee profitability (Elsenhardt et al., 2000), but dynamic capabilities in responding to environmental changes and integrating and coordinating internal and external resources do. Hence, the structure of dynamic capabilities could explain the formation of the firm’s competitive advantage (Teece et al., 1997). In summary, the author thinks that the idea of dynamic capabilities is continuing the focus on the inside of an organization in RBV and also the strategic logic extending from the inside to the outside. Different from RBV, DCV emphasizes more on the proper matches between the changes inside and outside of an organization as well as the whereabouts and development course of competitive advantages.

    Fourth, Elsenhardt et al., (2000) propose a different argument, albeit with similar implications. They argue that capabilities to gain, integrate, release and reconfigure resources are typically valuable and rare, but are equifinal, and hence neither inimitable nor immobile. This quality implies that dynamic capabilities cannot be a source of sustainable competitive advantage (Zott, 2003). Competitive advantage is the value created by the manager in deploying dynamic capabilities and establishing or configuring resources, instead of focusing on the benefits of dynamic capabilities.

    Fifth, the industrial structure is stable in a common dynamic market. Dynamic capabilities include analyzable and identifiable routines, and change is linearly predictable. In the fast-changing market, the industrial structure is unstable, and market change is unpredictable. Dynamic capabilities include simple and experimental routines. Managers can also make decisions rapidly (Elsenhardt et al., 2000). Furthermore, dynamic capabilities are uplifted gradually as a rapid response capability in the fast-changing market. The study regards this response capability as a repeated and non-linear execution path.

    Sixth, although most definitions imply that dynamic capabilities are (or can be) valuable, some

    scholars correctly note that dynamic capabilities create value indirectly. Helfat and Peteraf (2003), for instance, observe that, unlike new product development for example, dynamic capabilities do

    not involve production of a good or provision of a marketable service. That is, the capacity to

    change routines is valuable to the extent that the resulting substantive capabilities are valuable (Zahra, Sapienza, and Davidsson, 2006).


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Other (abbreviated)


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