Dynamic Capabilities: The Emperor’s New Clothes?

20 April 2009 at 1:48 pm Nicolai Foss 7 comments

| Nicolai Foss |

One of the most delightful innovations in the recent history of management journals is the “SO!apbox Editorial Essays” in Strategic Organization. These are short and pointed “opinion pieces” by thought leaders, designed to provoke and raise debate. (Interestingly, these essays seem to be the most cited contributions to the journal).

The February issue of Strategic Organization contains an excellent critique of the dynamic capabilities view (DCV) — launched in the beginning of the 1990s by David Teece (however, the much cited Teece, Pisano, and Shuen paper wasn’t published until 1997) — by Richard Arend and Phil Bromiley, “Assessing the Dynamic Capabilities View: Spare Change, Anyone?” As Arend and Bromiley notes the DCV is the “new touchstone firm-based performance-focused theory” (p. 75).

Some of their critiques have been around for some time, but this is the first systematic compilation of these critiques, and the authors add quite a number of novel critical points. Inspired by Larry Laudan’s work in the theory of science, Arend and Bromiley assess the “ability of the DCV to explain successful change with logical consistency, conceptual clarity and empirical rigor” (p. 75).

The DCV does not fare well on these criteria! Arend and Bromiley point to a lack of theoretical foundation, logical inconsistencies, halo effects of past research, incompleteness of explanation, and much else. The main problem, they assert, is the lack of a theoretical foundations; in fact, Arend and Bromiley conclude that “[i]f the DCV does not quickly develop a theoretical foundation, the field should move away from the DCV” (p. 87).

Constance Helfat and Margaret Peteraf attempt to defend the DCV (“Understanding Dynamic Capabilities: Progress Along a Developmental Path“). They argue that Arend and Bromiley are unrealistically ambitious with respect to what can be expected from an young, emerging field: “What they fail to see is that these so-called ‘deficiencies’ are the tell-tale signs on early-stage development of an area of inquiry” (p. 92). They mention transaction cost economics as an example of a theory with a 35 years gestation period. This is, however, a somewhat questionable defense. Coase’s (1937) early story had much more clarity and coherence than the DCV; what it lacked to move beyond tautology was “operationalization,” to use Williamsonese, of key explanatory concepts, notably that of transaction costs. Moreover, the alleged theoretical foundations of the DCV have around for a very long time, e.g., the behavioral view (> 50 years), the RBV (50 years, if dated from Penrose), the evolutionary theory of the firm (around 30 years), etc. As mentioned, the DCV itself has been around for at least 15 years and possibly more (I seem to recall an early version of Teece, Pisano, and Shuen dated 1991). How much more time does the DCV need? We seem to be close here to a version of what Popper called the “escatological fallacy.”

(Thx to Russ Coff for the subtitle to this blog post).

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7 Comments Add your own

1. David G. Hoopes | 21 April 2009 at 11:54 pm

The problem with most criticism in our field is that it does not offer any alternative. Although Phil’s book, “The Behavioral Foundations of Strategic Management” would seem to be an alternative. The book does not really offer a cohesive whole on which to build theories. Oddly, previous work on the behavioral foundations inspired the best of the dynamic capabilities thinking in my view: Sid Winter.

I think the basic issue deep in all of this is that simple micro-economic logic really bothers some people because it is not “realistic.” The RBV and capability theories use simple micro-economic logic as a foil. To wit: given competition, the fluidity of knowledge, that there are always new entrants to most industries, and there are quite a few reasonably efficient factor markets, how do some firms manage to outperform (however you want to define it) close competitors? Of course a similar question could be posed (by someone with subtle mind) in the more general terms of competitive heterogeneity.

For all the flaws of all of the above theories micro-econ, RBV, and capabilities perspectives allow us to think about competition in a way that is both feasible using a wide variety of theoretical approaches and can still address simple face-validity constraints of day to day business issues.

For all the sniveling about the RBV etc. people in a very wide range of fields have found it a useful set of ideas to help structure their ideas.

It is obvious to anyone who as seen one or two of my papers that I have very specific ideas about the best way to go about examining these issues in terms of theory and empiricism. And certainly, there are lot of things about the work of days gone by I don’t really like.

Still, if you look at Nelson and Winter (1982), Rumelt, (1984), Clark and Fujimoto (1991?), Fujimoto’s book on the evolution of Toyota’s capabilities, Sid’s paper on dynamic capabilities in the 2003 SMJ special issue, and some of the other Abernathy inspired work to come out of Harvard around the time of Clark and Fujimoto you can get a pretty good picture of within industry competition, the importance of unique capabilities, and the importance of second-order capabilities that allow some firms to stay ahead of their competition for a pretty long time (Toyota?).

So, it’s all very fine to sit on the sidelines spitting on everyone in the game. But, from where I sit micro-economics is by far the most elegant theory of competition. And, the rather messy descendants of that theory (RBV, Capability, and dynamic capability theories) offer a framework to discuss a very wide variety of phenomena related to strategy and organization. And for all the complaining about all of these “theories,” very little has been suggested that can serve as a framework to address the issues that interest strategic management scholars.

Aside: of course Transaction cost economics and other economic theories do offer interesting alternatives. But, most of the people who despise the above theories really really despise the evil TCE (source of so many ethical and moral problems today: Enron, Fannie Mae and Freddie Mac, Tyco. It’s all Ollie’s fault.

So, until dear Phil (whom I like very much) or someone else comes up with something besides a list of problems with other people’s theories, I don’t think the RBV-capability-dynamic capability train is slowing down any time soon.

Skoal brother. Think I’ll go play some touch.
2. Nicolai Foss | 22 April 2009 at 1:18 am

David,

I entirely agree with you on micro-economics! Moreover, like you think that the RBV is solidly built on micro-economic foundations. However, I doubt that dynamic capabilities ideas are built on the same foundations. In fact, I see the RBV and the DCV as rather different. At least some of those who endorse the DCV do so _because_ they are unhappy with the micro-economic foundations of the RBV.
I am not sure the “where’s the alternative” critique has much bite here. One of the problems with the DCV is that it borrows very perfectly well-established ideas from the (evolutionary) economics of innovation, product-development stuff, alliance theory, etc etc. and lumps it all under the DCV rubric. On the one hand, this means that the DCV is simply a loose amalgam of diverse ideas and on the other hand it means that many (all?) DCV ideas are simply new wine on old bottles.
3. David G. Hoopes | 22 April 2009 at 8:28 am

Well, since I’m thinking of Sid Winter’s paper on dynamic capabilities I guess I’m thinking that it is part of evolutionary economics.
4. David G. Hoopes | 22 April 2009 at 8:30 am

Or at least they are two parts of the same puzzle. I’m still not sure that there is any meaningful analog for genes in any theory of organizations. And without genes, evolutionary theory has some serious problems.
5. Where’s my Large Hadron Collider? « Innovation Leadership Network | 27 April 2009 at 8:47 pm

[…] we just need to build a business version of the Large Hadron Collider if anyone aims to address Nicolai Foss’ criticisms. And the even bigger question – who will provide the funding to build it? LHC looking for the Higgs […]
6. futureorientation | 5 October 2010 at 3:25 pm

I believe to enhance the understanding of why companies do better than others in changing environments we need to use in addition to the dynamic-capabilities perspective also the strategy-as-practice perspective that deals with the impact individual actors have. René
7. David Hoopes | 5 October 2010 at 5:02 pm

“On the one hand, this means that the DCV is simply a loose amalgam of diverse ideas and on the other hand it means that many (all?) DCV ideas are simply new wine on old bottles.”

I think for much of DCV both of these statements are correct.