Strategic Management Journal Strat. Mgmt. J., 21: 1105���1121 (2000) DYNAMIC CAPABILITIES: WHAT ARE THEY? KATHLEEN M. EISENHARDT* and JEFFREY A. MARTIN Department of Management Science and Engineering, Stanford University, Stanford, California, U.S.A. This paper focuses on dynamic capabilities and, more generally, the resource-based view of the firm. We argue that dynamic capabilities are a set of specific and identifiable processes such as product development, strategic decision making, and alliancing. They are neither vague nor tautological. Although dynamic capabilities are idiosyncratic in their details and path dependent in their emergence, they have significant commonalities across firms (popularly termed ���best practice���). This suggests that they are more homogeneous, fungible, equifinal, and substitutable than is usually assumed. In moderately dynamic markets, dynamic capabilities resemble the traditional conception of routines. They are detailed, analytic, stable processes with predictable outcomes. In contrast, in high-velocity markets, they are simple, highly experiential and fragile processes with unpredictable outcomes. Finally, well-known learning mechanisms guide the evolution of dynamic capabilities. In moderately dynamic markets, the evolutionary emphasis is on variation. In high-velocity markets, it is on selection. At the level of RBV, we conclude that traditional RBV misidentifies the locus of long-term competitive advantage in dynamic markets, overemphasizes the strategic logic of leverage, and reaches a boundary condition in high-velocity markets. Copyright ��� 2000 John Wiley & Sons, Ltd. The resource-based view of the firm (RBV) is an influential theoretical framework for understand- ing how competitive advantage within firms is achieved and how that advantage might be sus- tained over time (Barney, 1991 Nelson, 1991 Penrose, 1959 Peteraf, 1993 Prahalad and Hamel, 1990 Schumpeter, 1934 Teece, Pisano, and Shuen, 1997 Wernerfelt, 1984). This per- spective focuses on the internal organization of firms, and so is a complement to the traditional emphasis of strategy on industry structure and strategic positioning within that structure as Key words: dynamic capabilities competitive advan- tage resource-based view dynamic markets resources high-velocity markets organization theory organi- zational change *Correspondence to: Kathleen M. Eisenhardt, Department of Management Science and Engineering, Stanford University, 309 Terman, Stanford, CA 94305, U.S.A. Copyright ��� 2000 John Wiley & Sons, Ltd. the determinants of competitive advantage (Henderson and Cockburn, 1994 Porter, 1979). In particular, RBV assumes that firms can be conceptualized as bundles of resources, that those resources are heterogeneously distributed across firms, and that resource differences persist over time (Amit and Schoemaker, 1993 Mahoney and Pandian, 1992 Penrose, 1959 Wernerfelt, 1984). Based on these assumptions, researchers have theorized that when firms have resources that are valuable, rare, inimitable, and nonsubstitutable (i.e., so-called VRIN attributes), they can achieve sustainable competitive advantage by implementing fresh value-creating strategies that cannot be easily duplicated by competing firms (Barney, 1991 Conner and Prahalad, 1996 Nel- son, 1991 Peteraf, 1993 Wernerfelt, 1984, 1995). Finally, when these resources and their related activity systems have complementarities, their potential to create sustained competitive advan-

1106 K. M. Eisenhardt and J. A. Martin tage is enhanced (Collis and Montgomery, 1995, 1998 Milgrom, Qian, and Roberts, 1991 Mil- grom and Roberts, 1990 Porter, 1996). Recently, scholars have extended RBV to dynamic markets (Teece et al., 1997). The ration- ale is that RBV has not adequately explained how and why certain firms have competitive advantage in situations of rapid and unpredictable change. In these markets, where the competitive landscape is shifting, the dynamic capabilities by which firm managers ���integrate, build, and recon- figure internal and external competencies to address rapidly changing environments��� (Teece et al., 1997: 516) become the source of sustained competitive advantage. The manipulation of knowledge resources, in particular, is especially critical in such markets (Grant, 1996 Kogut, 1996). Despite the significance of RBV, the perspec- tive has not gone unchallenged. It has been called conceptually vague and tautological, with inatten- tion to the mechanisms by which resources actu- ally contribute to competitive advantage (e.g., Mosakowski and McKelvey, 1997 Priem and Butler, 2000 Williamson, 1999). It has also been criticized for lack of empirical grounding (e.g., Williamson, 1999 Priem and Butler, 2000). And, particularly relevant here, sustained competitive advantage has been seen as unlikely in dynamic markets (e.g., D���Aveni, 1994). The purpose of this paper is to extend our understanding of dynamic capabilities and in so doing enhance RBV. Since dynamic capabilities are processes embedded in firms, we assume an organizational and empirical lens, rather than an economic and formal modeling one (Barney, 1991 Peteraf, 1993). We examine the nature of dynamic capabilities, how those capabilities are influenced by market dynamism, and their evolution over time. We have several observations. First, dynamic capabilities consist of specific strategic and organizational processes like product develop- ment, alliancing, and strategic decision making that create value for firms within dynamic markets by manipulating resources into new value-creating strategies. Dynamic capabilities are neither vague nor tautologically defined abstractions. Second, these capabilities, which often have extensive empirical research streams associated with them, exhibit commonalities across effective firms or what can be termed ���best practice.��� Therefore, dynamic capabilities have greater equifinality, homogeneity, and substitutability across firms Copyright ��� 2000 John Wiley & Sons, Ltd. Strat. Mgmt. J., 21: 1105���1121 (2000) than traditional RBV thinking implies. Third, effective patterns of dynamic capabilities vary with market dynamism. When markets are moder- ately dynamic such that change occurs in the context of stable industry structure, dynamic capabilities resemble the traditional conception of routines (e.g., Cyert and March, 1963 Nelson and Winter, 1982). That is, they are complicated, detailed, analytic processes that rely extensively on existing knowledge and linear execution to produce predictable outcomes. In contrast, in high-velocity markets where industry structure is blurring, dynamic capabilities take on a different character. They are simple, experiential, unstable processes that rely on quickly created new knowledge and iterative execution to produce adaptive, but unpre- dictable outcomes. Finally, well-known learning mechanisms guide the evolution of dynamic capa- bilities and underlie path dependence. Overall, our work attempts to contribute to RBV by explicating the nature of dynamic capabilities in a way that is realistic, empirically valid, and non-tautological. Our work also attempts to clarify RBV���s logic of dynamic capabilities, resources, and competitive advantage. We argue that, since the functionality of dynamic capabilities can be duplicated across firms, their value for competitive advantage lies in the resource configurations that they create, not in the capabilities themselves. Dynamic capabilities are necessary, but not suf- ficient, conditions for competitive advantage. We also argue that dynamic capabilities can be used to enhance existing resource configurations in the pursuit of long-term competitive advantage (RBV���s logic of leverage). They are, however, also very frequently used to build new resource configur- ations in the pursuit of temporary advantages (logic of opportunity). Most significant, we suggest a boundary condition. RBV breaks down in high- velocity markets, where the strategic challenge is maintaining competitive advantage when the dur- ation of that advantage is inherently unpredictable, where time is an essential aspect of strategy, and the dynamic capabilities that drive competitive advantage are themselves unstable processes that are challenging to sustain. DYNAMIC CAPABILITIES Resources are at the heart of the resource-based view (RBV). They are those specific physical

Dynamic Capabilities 1107 (e.g., specialized equipment, geographic location), human (e.g., expertise in chemistry), and organi- zational (e.g., superior sales force) assets that can be used to implement value-creating strategies (Barney, 1986 Wernerfelt, 1984, 1995). They include the local abilities or ���competencies��� that are fundamental to the competitive advantage of a firm such as skills in molecular biology for biotech firms or in advertising for consumer prod- ucts firms. As such, resources form the basis of unique value-creating strategies and their related activity systems that address specific markets and customers in distinctive ways, and so lead to competitive advantage (e.g., configurations, Collis and Montgomery, 1995, 1998 Porter, 1996 core competencies, Prahalad and Hamel, 1990 lean production, Womack, Jones, and Roos, 1991). Dynamic capabilities are the antecedent organi- zational and strategic routines by which managers alter their resource base���acquire and shed resources, integrate them together, and recombine them���to generate new value-creating strategies (Grant, 1996 Pisano, 1994). As such, they are the drivers behind the creation, evolution, and recombination of other resources into new sources of competitive advantage (Henderson and Cockburn, 1994 Teece et al., 1997). Similar to Teece and colleagues (1997), we define dynamic capabilities as: The firm���s processes that use resources���speci- fically the processes to integrate, reconfigure, gain and release resources���to match and even create market change. Dynamic capabilities thus are the organizational and strategic routines by which firms achieve new resource configurations as mar- kets emerge, collide, split, evolve, and die. This definition of dynamic capabilities is simi- lar to the definitions given by other authors. For example, Kogut and Zander (1992) use the term ���combinative capabilities��� to describe organi- zational processes by which firms synthesize and acquire knowledge resources, and generate new applications from those resources. Henderson and Cockburn (1994) similarly use the term ���architec- tural competence��� while Amit and Schoemaker (1993) use ���capabilities.��� Dynamic capabilities as identifiable, specific processes Dynamic capabilities are often described in vague Copyright ��� 2000 John Wiley & Sons, Ltd. Strat. Mgmt. J., 21: 1105���1121 (2000) terms such as ���routines to learn routines��� that have been criticized as being tautological, end- lessly recursive, and nonoperational (e.g., Mosakowski and McKelvey, 1997 Priem and Butler, 2000 Williamson, 1999). Yet, dynamic capabilities actually consist of identifiable and specific routines that often have been the subject of extensive empirical research in their own right outside of RBV. Some dynamic capabilities integrate resources. For example, product development routines by which managers combine their varied skills and functional backgrounds to create revenue- producing products and services (e.g., Clark and Fujimoto, 1991 Dougherty, 1992 Helfat and Raubitschek, 2000) are such a dynamic capability. Toyota has, for example, used its superior product development skills to achieve competitive advan- tage in the automotive industry (Clark and Fuji- moto, 1991). Similarly, strategic decision making is a dynamic capability in which managers pool their various business, functional, and personal expertise to make the choices that shape the major strategic moves of the firm (e.g., Eisen- hardt, 1989 Fredrickson, 1984 Judge and Miller, 1991). Other dynamic capabilities focus on recon- figuration of resources within firms. Transfer processes including routines for replication and brokering (e.g., Hansen, 1999 Hargadon and Sut- ton, 1997 Szulanski, 1996) are used by managers to copy, transfer, and recombine resources, especially knowledge-based ones, within the firm. For example, at the premier product design firm, IDEO, managers routinely create new products by knowledge brokering from a variety of pre- vious design projects in many industries and from many clients (Hargadon and Sutton, 1997). Resource allocation routines are used to distribute scarce resources such as capital and manufactur- ing assets from central points within the hierarchy (e.g., Burgelman, 1994). At a more strategic level, coevolving involves the routines by which man- agers reconnect webs of collaborations among various parts of the firm to generate new and synergistic resource combinations among busi- nesses (e.g., Eisenhardt and Galunic, 2000). Dis- ney, for example, has historically excelled at coevolving to create shifting synergies that drive superior performance (Wetlaufer, 2000). Patching is a strategic process that centers on routines to realign the match-up of businesses (i.e., add,