Richard Nelsons Dynamic Capabilities

J. Lamar Pierce, Christopher S. Boerner, and David J. Teece

J. Lamar Pierce and Christopher S. Boerner are doctoral candidates, and David J. Teece is the !its"bishi
Ban# Pro$essor o$ %nternational B"siness and &inance, 'aas School o$ B"siness, (C Ber#eley, )*+,-.
Introduction
The essence o$ $irm strate.y is that a $irms per$ormance is lar.ely determined by its ability to
match its capabilities to its ever/chan.in. environment. 0ver the years, a hand$"l o$ scholars
have made ma1or strides to2ard e3plicatin. and e3pandin. on this basic insi.ht. Partic"larly
in$l"ential in this re.ard are the 2or#s o$ Sch"mpeter 45)6*7, Penrose 45)8)7, Cyert and !arch
45)967, :illiamson 45)+8, 5);87, Barney 45);97, Teece 45);,, 5))*7, and, importantly, Nelson
and :inter 45);,7. :hat sets these scholars apart is that, "nli#e many o$ their contemporaries
4partic"larly in economics7, they reco.ni<ed that $irms sho"ld not be "nderstood as mere
mani$estations o$ prod"ction $"nctions. Rather, "nderstandin. the p"rpose, behavior and
bo"ndaries o$ $irms entails concept"ali<in. $irms as "ni="e modes o$ or.ani<ation, possessin.
distinct competencies and costs. %t is in $orm"latin. this more sophisticated "nderstandin. o$
$irms and $irm strate.y that the 2or# o$ Dic# Nelson has had perhaps its .reatest impact. %ndeed,
Nelsons 45);,7 2or# 2ith Sidney :inter represents an important prec"rsor to m"ch o$ o"r
c"rrent "nderstandin. o$ $irm strate.y, partic"larly the dynamic capabilities literat"re.
To $"lly appreciate the in$l"ence o$ Nelson and :inter 45);,7, it is "se$"l to sit"ate it
2ithin a broader intellect"al conte3t. 0ne o$ the most si.ni$icant early contrib"tions to o"r
"nderstandin. o$ $irm behavior is Cyert and !archs 45)967 The Behavioral Theory o$ the &irm.
%n The Behavioral Theory, Cyert and !arch pose a critical challen.e to economic orthodo3y by
rede$inin. the $irm as a "ni="e or.ani<ation, possessin. di$$ic"lt to imitate standard operatin.
proced"res. Beca"se these proced"res are $re="ently di$$ic"lt to codi$y, Cyert and !arch ar."ed
that they are not easily imitated by others or even replicated by the $irm itsel$. This e3planation
o$ $irm hetero.eneity and imm"tability provided an important $o"ndation $or "nderstandin. $irm
strate.y. 'o2ever, it did not e3press the critical importance o$ ho2 $irms strate.ically adapt to a
,
chan.in. environment. :hile Cyert and !arch reco.ni<ed the di$$ic"lty o$ s"ch chan.e, they did
not provide a mechanism $or "nderstandin. $irm evol"tion.
Nelson and :inters >n ?vol"tionary Theory o$ ?conomic Chan.e introd"ced the
theoretical advances necessary $or the establishment o$ a more dynamic vie2 o$ $irm strate.y.
This boo# placed Cyert and !archs proced"re/based $irm in a dynamic conte3t, vie2in. ho2
innately static or.ani<ations are able to evolve 2ith their environments. Rede$inin. standard
operatin. proced"res as ro"tines, Nelson and :inter de$ined ho2 these ro"tines, the .enetic
material o$ the $irm, in$l"enced the $irms adaptation in its environment. :hile Nelson and
:inters contrib"tion to economics is not limited to this role, their de$inition o$ the $irm allo2ed
s"bse="ent scholars, notably Teece, et al. 45))*7, to place $irm strate.y in a dynamic settin..
%n the remainder o$ this paper 2e trace the epistemolo.ical linea.e o$ dynamic
capabilities $rom the non/strate.ic behavioral model o$ Cyert and !arch thro".h the dynamic
evol"tionary theory o$ the $irm $o"nd in Nelson and :inter. The paper sho2s ho2 Cyert and
!archs vie2 o$ $irms as hetero.eneo"s or.ani<ations comprised o$ standard operatin.
proced"res .reatly in$l"enced Nelson and :inters model o$ ro"tine/based $irms evolvin. in a
chan.in. environment. %t then hi.hli.hts the pivotal role that Nelson and :inters evol"tionary
theory played in the development o$ a dynamic theory o$ $irm capabilities. The importance o$
both these 2or#s in the development o$ dynamic capabilities literat"re 2ill be ill"strated thro".h
the se="ential introd"ction o$ their ideas and innovations most relevant to $irm strate.y.
The behavioral theory of the firm
6
:hen Cyert and !archs 2or# appeared in 5)96, the "tility o$ concept"ali<in. the $irm
as a prod"ction $"nction had already been repeatedly challen.ed in the academic literat"re.
:hile scholars s"ch as Coase, Simon, and Penrose had p"t $or2ard b"ildin. bloc#s $or a ne2
approach, the neoclassical vie2 o$ the $irm still predominated. The ass"mptions o$ the
neoclassical vie2 2ere that the $irm en1oyed per$ect in$ormation and certainty abo"t
environmental o"tcomes, it s"$$ered no control or adaptability problems, it ma3imi<ed pro$it, and
it s"$$ered no dys$"nctional internal reso"rce allocation problems. %ts strate.ies and per$ormance
2ere predictable, it man"$act"red and assembled tan.ible components, and it sold its o"tp"t in
$inal prod"ct mar#ets. These ass"mptions provided $or a very simple and mana.eable treatment
o$ the $irm 2hich co"ld be inte.rated into neoclassical price theory@ b"t it 2as not a .ood
abstraction o$ a $irms internal or.ani<ation.
i
%ndeed, the neoclassical model $ailed to reco.ni<e
$irm hetero.eneity, strate.ic behavior, and per$ormance.
!ean2hile, early or.ani<ational theorists had $oc"sed on the internal characteristics that
acco"nted $or this diversity o$ or.ani<ation. Sociolo.ical and social psycholo.ical approaches
e3amined the decision/ma#in. processes, e$$iciency o$ individ"als and small .ro"ps, and the
coordination o$ e$$ort 4Ao"ldner 5)8*@ Bla" 5)88@ >r.yris 5)9-@ Li#ert 5)957. :hile the 2or# o$
or.ani<ational theorists had yielded insi.hts into the decision processes employed by h"mans and
in or.ani<ations, they had $ailed to speci$ically relate this "nderstandin. to the conte3t o$ the
$irm. Their theories did not address the "ni="e environmental and decision variables $acin. this
partic"lar $orm o$ or.ani<ation.
Th"s 2hile the 2or# o$ or.ani<ational theorists $ormed a basis $or analy<in. the str"ct"re
and actions o$ or.ani<ations, they had by no means developed a theory o$ the $irm. ?ndeavorin.
to $ill this void, Cyert and !arch set o"t to create a theory that Bta#es 457 the $irm as its basic "nit,
4,7 the prediction o$ $irm behavior 2ith respect to s"ch decisions as price, o"tp"t, and reso"rce
allocation as its ob1ective, and 467 an e3plicit emphasis on the act"al process o$ or.ani<ational
decision ma#in. as its basic research commitment 4Cyert and !arch, p. 5)7. >.ainst these .oals,
*
the short$alls o$ earlier theories are clear. >ltho".h the neoclassical vie2 addresses 457 and 4,7, it
$ails to approach the act"al processes o$ condition 467. Li#e2ise, or.ani<ational theory satis$ies
457 and 467, yet $ails to predict the components o$ $irm behavior in 4,7. Cyert and !arch so".ht
to create a theory that met all these challen.es and, in doin. so, develop the lan."a.e necessary
$or a rob"st theoretical disc"ssion o$ the $irm.
Cyert and !arch ar."e that a behavioral theory o$ the $irm re="ires attention to
or.ani<ational .oals, e3pectations, choice, and control. 0nly thro".h these characteristics can
one tr"ly "nderstand ho2 $irms $"nction. Their s"btheory on or.ani<ational .oals $oc"ses on ho2
coalitions o$ individ"als bar.ain to determine the .oals o$ the .reater or.ani<ation. :hile the
.oals o$ individ"als 2ithin a coalition may be disparate, so lon. as the reso"rces available are
.reater than the demands o$ the members, the coalition, and th"s the or.ani<ation, 2ill be
$easible. >t any .iven time, or.ani<ations 2ill have n"mero"s .oals pertainin. to each o$ the
diverse decision variables $acin. them. These .oals m"st address a variety o$ s"b1ects incl"din.
sales, mar#et share, pro$it, inventory, and prod"ction levels.
0r.ani<ational e3pectations $oc"s on ho2 a $irm .athers and interprets in$ormation $rom
its environment. (nli#e the traditional theory o$ e3pectations, Cyert and !arch do not ass"me
that $irms are able to .ather all the relevant in$ormation and per$ectly calc"late e3pected
o"tcomes. &irms are hetero.eneo"s entities 2itho"t per$ect #no2led.e o$ potential costs, ret"rns,
and probability distrib"tions. The search $or and processin. o$ in$ormation is not simply another
"se $or $irm reso"rces. Search is initially "nsystematic, 2ith commitments to action occ"rrin.
early in the search process. The intensity o$ the search increases as the implementation o$ the
action nears. &irms "se rather simple comp"tations to process the .athered in$ormation, since the
.am"t o$ alternative actions is not readily available. &easibility and improvement on c"rrent
proced"res are the necessary h"rdles $or the implementation o$ ne2 proced"res. %n addition, the
analysis o$ in$ormation and the calc"lation o$ e3pectation in the $irm is inherently biased, either
thro".h the hopes and aspirations o$ individ"als or s"b"nits, or thro".h the bar.ainin. needs o$
8
any coalition. &inally, comm"nication is not per$ect 2ithin the or.ani<ation. Comm"nication
may be biased, and individ"als may attempt in their comm"nication to eliminate this bias.
%n$ormation there$ore can not $lo2 seamlessly thro".h the $irm 2itho"t distortion, manip"lation,
and mis"nderstandin..
Cyert and !arch present the $irm as adaptively rational, 2here its learnin. and behavior
are conditioned by its e3perience. The adaptive nat"re o$ the $irm is $oc"sed in the $irms
learnin. and memory, 2hich are operationali<ed in the $orm o$ standard operatin. proced"res and
decision r"les. These standard operatin. proced"res incl"de .eneral choice proced"res and
speci$ic operatin. proced"res. Aeneral choice proced"res address three principlesC avoid
"ncertainty, maintain the r"les, and "se simple r"les. These .eneral choice proced"res have been
learned thro".h the $irms past environmental conditions and internal constraints. Conse="ently,
.eneral choice proced"res tend to be e3tremely stable in the lon./r"n and chan.e only 2ith
considerable press"re.
Speci$ic standard operatin. proced"res also chan.e slo2ly, b"t can be ad1"sted 2ith
concentrated e$$ort. These proced"res are the "ni="e characteristics o$ the $irm, 2hich de$ine and
determine ho2 the $irm reacts to stim"li and sit"ations. Some o$ these proced"res may be
codi$ied to achieve consistency in or.ani<ational protocol, b"t other proced"res may be tacit in
nat"re. Standard operatin. proced"res can there$ore entail everythin. $rom the temperat"re at
2hich co$$ee is served in a resta"rant to the tacit search o$ applications $or basic research. These
speci$ic standard operatin. proced"res hi.hly di$$erentiate even those $irms prod"cin. similar
prod"cts by creatin. embedded di$$erences in every common tas# they per$orm. Proced"res are
hi.hly $i3ed and di$$ic"lt to chan.e, and there$ore represent dissimilarities relatively inv"lnerable
to mar#et transactions.
The $o"r ma1or types o$ speci$ic standard operatin. proced"res are tas# per$ormance
r"les, contin"in. records and reports, in$ormation handlin. r"les, and plans. Tas# per$ormance
r"les deal 2ith the speci$ication o$ methods $or accomplishin. a variety o$ tas#s, incl"din.
9
pricin., prod"ction proced"re, and acco"ntin. proced"res. These r"les need to be consistent
2ithin the or.ani<ation in order to $acilitate coordination bet2een "nits per$ormin. indelibly
lin#ed tas#s. %$ "nits are "nable to "nderstand and predict ho2 complementary tas#s 2ill be
per$ormed, they may hinder one another 2ith con$lictin. decisions. Tas# per$ormance r"les
strictly de$ine the parameters 2ithin 2hich one can accomplish a tas#. This may incl"de
prod"ction line tas#s as 2ell as more complicated en.ineerin. and desi.n sol"tions. These r"les
are persistent, tho".h they may chan.e as ne2 ideas and r"les are bro".ht in 2ith labor
movement.
Contin"in. records and reports concern the doc"mentation and codi$ication o$ all
elements o$ b"siness operations important to the $irm. Records and reports are the 2ay in 2hich
a $irm controls its proced"res and predicts $"t"re o"tcomes and environments. They also control
ho2 in$ormation is stored and disseminated thro".ho"t the $irm, an element critical to the $irms
ability to monitor adherence to standard proced"res. Recordin. proced"res also determine the
level o$ codi$ication o$ standard operatin. proced"res, a concept e3tremely important in the
replicability and imitability o$ all proced"res. %n a related $ashion, in$ormation handlin. r"les
de$ine ho2 the $irm absorbs, transmits, and e3ports in$ormation. These proced"res dictate 2hat
in$ormation the $irm 2ill perceive in its o"tside environment, 2hich is critical to its ability to
reco.ni<e opport"nity and potential threats. The transmission o$ in$ormation in$l"ences ho2
di$$erent components o$ the $irm assimilate o"tside in$ormation, and 2hether or not this
in$ormation is analy<ed and applied 2ithin the $irm. These proced"res have 2ide/ran.in. e$$ects
$or technolo.y adoption and process improvements. Technolo.ical spillovers $rom o"tside the
$irm and amon. intra$irm or.ani<ations are dependent on the codi$ied and tacit proced"res $or
in$ormation transmission and dissemination. &irms "nable to e$$ectively .ain o"tside #no2led.e
and share process improvements 2ill innovate 2ith limited s"ccess and 2ill be slo2 to adapt to a
chan.in. environment. These proced"res also relate to in$ormation leavin. the $irm, or
potentially its protection o$ intellect"al property. Clearly the $irm does not 2ant its innovations
+
distrib"ted amon. its competitors, there$ore it 2ill establish strict protocols re.ardin.
con$identiality and in$ormation releases.
Plan proced"res de$ine ho2 reso"rces 2ill be allocated, incl"din. both short/r"n and
lon./r"n b"d.ets and e3pendit"res. These proced"res have si.ni$icant in$l"ences on the $irms
lon./r"n s"ccess in that they determine 2hich aspects o$ the or.ani<ation 2ill receive priority
s"pport. Research and development $"ndin. is an inte.ral part o$ a $irms ability to evolve and
.ro2, and plan proced"res dictate the relative s"pport these activities 2ill receive. > $irm 2hose
plan proced"res do not s"pport innovation is "nli#ely to s"rvive over lon. periods o$ time. !ore
speci$ically, 2hat types and areas o$ research and development are s"pported 2ill tend to
determine the $irms potential evol"tion. Plan proced"res can de$ine the $irms intent and ability
to innovate and evolve, its dynamic capabilities in partic"lar directions.
The behavioral theory of the firm and strategy
Perhaps the most basic contrib"tion o$ Cyert and !arch to this literat"re is their
reco.nition o$ the $"ndamental importance o$ $irm hetero.eneity. Their 2or# presents the $irm as
a comple3 or.ani<ation de$ined by its "ni="e .oals, e3pectations, and standard operatin.
proced"res. Beca"se each $irm is "ni="ely de$ined by these aspects, $irms are hetero.eneo"s and
th"s not easily modeled. This hetero.eneity creates ine="alities in both short and lon./term
per$ormance, as each $irms "ni="e characteristics ma#e it better or 2orse s"ited than its rivals to
s"cceed in a .iven environment. Cyert and !archs analysis o$ the internal or.ani<ation o$ the
$irm eliminates the possibility o$ the neoclassical competitive mar#et. > mar#et 2ill never reach
e="ilibri"m 2ith identical $irms earnin. the same minimal level o$ pro$its. Diversity in $irm
standard operatin. proced"res 2ithin an ind"stry 2ill inevitably prod"ce di$$erential res"lts
amon. competitors, hetero.eneity that can not be e3plained by ind"stry level e$$ects. This
per$ormance hetero.eneity has been s"bse="ently e3amined and veri$ied by several empirical
;
st"dies 4Jacobson 5);;@ 'ansen and :erner$elt 5);)7. Cool and Schendel 45);;7 have sho2n
that there are systematic and si.ni$icant di$$erences in per$ormance amon. $irms belon.in. to the
same strate.ic .ro"p 2ithin the (.S. pharmace"tical ind"stry. >dditionally, R"melt 45))57 $o"nd
intra/ind"stry pro$it hetero.eneity to be .reater than inter/ind"stry di$$erences in pro$its,
s"..estin. the relative importance o$ $irm/related so"rces o$ per$ormance. %n a sense, Cyert and
!archs assertions abo"t the importance o$ $irm characteristics have been veri$ied.
The idea that $irms are $"ndamentally hetero.eneo"s, in terms o$ their internal
#no2led.e, s#ills, and reso"rces, is at the heart o$ the $ield o$ strate.ic mana.ement. Cyert and
!archDs 2or# in The Behavioral Theory 2as an important step to2ard "nderstandin. this
hetero.eneity. Their move to develop a complete theory o$ the $irm that e3plicitly reco.ni<ed
$irm di$$erences "nderc"t the prevailin. neoclassical ass"mptions that had so hindered the
creation o$ a "se$"l theory o$ the $irm. !ost s"bse="ent economic theories o$ $irm strate.y are
conse="ently intellect"al descendents o$ Cyert and !archDs early e$$orts.
:hile The Behavioral Theory provided a revol"tionary vie2 o$ the internal
characteristics o$ the $irm, strate.ic and mana.erial considerations 2ere not the $oc"s o$ attention.
The .oal 2as not to e3plain mar#et behavior, b"t rather to "nderstand decisions and actions inside
the $irm. Cyert and !arch believed or.ani<ations 2ere incapable o$ $ollo2in. speci$ic, "ni$ied
ob1ectives. S"ch speci$ic ob1ectives are critical to the establishment o$ corporate strate.y, and
2itho"t this ability, mana.ers co"ld only mar.inally in$l"ence the direction o$ the $irm. >ny
ob1ectives a.reed "pon by a mana.ement coalition 2o"ld inevitably be hi.hly ambi."o"s .oals,
en$eeblin. the ability o$ a top mana.er or entreprene"r to tr"ly control the direction o$ the $irm.
Cyert and !arch ar."ed that 2hile Bindivid"als have .oals@ collectivities o$ people do not 45)),,
p.6-7, and th"s the $irm co"ld not have 2ell/de$ined ob1ectives.
Premised on this 2ea# 4or the absence o$7 leadership, The Behavioral Theory posits that
the $irms strate.ies and learnin. processes are short/term in $oc"s 2ith adaptations ind"ced by
crises. !ana.ement is "nable to recon$i."re internal reso"rces beca"se o$ the imm"tability o$
)
standard operatin. proced"res and the ambi."ity o$ coalition .oals. %n his disc"ssion o$ $irm
strate.y, 0liver :illiamson notes that in Cyert and !arch Bthe $irm resembles a $ire department
more than a strate.ic actor 45))), p. 5*7. The $irm is $oc"sed on $indin. sol"tions to immediate
problems, not on lon.er/term strate.ic options. >ltho".h The Behavioral Theory Bcan not
artic"late a serio"s policy proposal $or chan.in. the behavior pattern 4Cyert and !arch, 5)96. p.
,)+7, it nevertheless provides a .reater "nderstandin. o$ the limitations to strate.ic action. The
"nderstandin. o$ ho2 ro"tines and path dependency limit and enable the $irm to solve problems
2as an important step in the development o$ the strate.y literat"re.
:hile the behavioral theory introd"ced the implications o$ static $irms in a dynamic
environment, it $ailed to e3pand on ho2 and 2hy $irms evolve as they do. Their ma1or
contrib"tion to this dynamic vie2 2as the path dependency o$ relatively imm"table standard
operatin. proced"res, a concept that 2o"ld prove val"able and insi.ht$"l $or $"t"re st"dies o$ the
$irm. B"t their theory does not provide a clear pict"re o$ ho2 $irms chan.e over time, and lends a
sense o$ hopelessness to2ard the intention o$ ."idin. $irm evol"tion. &or, a$ter all, the $irm in
the The Behavioral Theory does not $oc"s on lon./term strate.ies o$ evol"tion. %t is b"oyed
alon. by its obstinate proced"res and their relentless obsession 2ith short/term sol"tions. To the
credit o$ Cyert and !arch, their intention 2as not to develop a dynamic theory o$ $irm strate.y
and lon./term $irm evol"tion. They so".ht to inte.rate economic theory and or.ani<ational
theory into a tractable model o$ $irm or.ani<ation. %n that .oal they 2ere "ndo"btedly s"ccess$"l,
as is attested the broad array o$ literat"re that they spa2ned.
The Behavioral Theory, in its $irst e$$ective modelin. o$ $irm or.ani<ation, opened .reat
opport"nities $or $"t"re 2or#. 0ne o$ these opport"nities 2as clearly in the dynamic
consideration o$ the $irm@ ho2 the $irm, and conse="entially ind"stry, evolved 2ith re.ard to
e3o.eno"s stochastic stim"l"s. Cyert and !arch opened the door to this disc"ssion 2ith their
implications $or the path dependence o$ standard operatin. proced"res. B"t it 2as Nelson and
:inter 2ho $irst so".ht to move beyond Cyert and !archs static behavioral theory to a more
5-
dynamic, evol"tionary approach. ?vol"tionary models o$ economic chan.e 2ere not ne2 at this
time, as they had earlier been championed by the li#es o$ Sch"mpeter 45)6*7, Penrose 45)8,,
5)8)7, and >lchian 45)8-7. %ndeed, Sidney :inter 45)+57 had in earlier 2or# noted the
implications o$ the behavioralists decision r"les $or an evol"tionary theorys .enetic process.
To.ether, Nelson and :inter molded these earlier contrib"tions into a ne2 theory 2ith direct
implications $or $irm evol"tion and strate.y.
The evolutionary theory and deliberate action

Nelson and :inters evol"tion theory is loosely based on a biolo.ical evol"tionary
model, 2here or.anisms, 2ith .enetic material, evolve in response to their chan.in. environment.
They are care$"l to note, ho2ever, that do not $eel beholden to remain consistent 2ith s"ch
biolo.ical models, as their .oal is to "se models o$ evol"tionary theory to improve economic
theory. %n this spirit, they Bemphatically disavo2 any intention to p"rs"e biolo.ical analo.ies $or
their o2n sa#e, or even $or the sa#e o$ pro.ress to2ard an abstract, hi.her/level evol"tionary
theory that 2o"ld incorporate a ran.e o$ e3istin. theories 45);,, p.557. They are solely interested
in the "nderstandin. o$ economic problems, 2ith the core concern o$ their evol"tionary theory
bein. Bthe dynamic process by 2hich $irm behavior patterns and mar#et o"tcomes are 1ointly
determined over time 45);,, p. 5;7.
%n the spirit o$ this .oal, they are ="ic# to note that their theory does not observe a sharp
distinction bet2een blind evol"tion and deliberate .oal/see#in.. This approach, 2here $irms are
both carried alon. by their chan.in. environment and deliberately evolve to improve their
position therein, is the critical contrib"tion o$ Nelson and :inter to2ard $irm strate.y and
"ltimately the dynamic capabilities theory o$ the $irm. :hile Nelson and :inter ac#no2led.e
the di$$ic"lty o$ deliberate direction in $irm evol"tion, they do not espo"se the impossibility o$ it.
(nli#e Cyert and !arch, Nelson and :inter s"..est a role $or lon./term strate.ic plannin. in the
55
dynamic per$ormance o$ the $irm. &irms are no lon.er p"rely myopic and inevitably tied to their
e3istin. standard operatin. proced"res. They have the ability to a$$ect their chances o$ lon./term
s"rvival, that is, to partially ."ide their evol"tion. They do not possess the absol"te control o$
neo/classical mana.ers, nor do they s"$$er $rom the evol"tionary impotence o$ the behavioral
theory. They have di$$erential characteristics and abilities and th"s have "ni="e potential
evol"tionary paths. This limited b"t nonetheless e3istent adaptive control implies that $irm
strate.y is not only possible, b"t also pro$itable.
Routines: Evolutionary theorys standard operating procedures
0ne o$ the .reat contrib"tions o$ Cyert and !arch 2as their de$inition o$ the $irm as a set
o$ standard operatin. proced"res. Nelson and :inter reco.ni<ed the le.itimacy o$ this
characteri<ation, and so".ht to rede$ine it in terms o$ $irm ro"tines. They de$ine ro"tines
similarly as the decision r"les 2hich $irms employ, both in terms o$ hi.hly de$ined prod"ction
techni="es and e3tremely tacit strate.ic directions. These ro"tines encompass most o$ 2hat is
re."lar and predictable abo"t b"siness behavior, and represent the .enetic material o$ the $irm in
the evol"tionary model. They are persistent 2ithin the $irm, and heritable to2ard the $"t"re o$ the
$irm. They de$ine not only ho2 the $irm operates no2, b"t also ho2 it 2ill tend to operate in the
$"t"re. The stochastic $orces o$ the environment, in combination 2ith the .enetic material o$ the
$irm, determine ho2 the $irm chan.es and ho2 it 2ill per$orm.
Ro"tines are patterns o$ interactions representin. sol"tions to partic"lar problems
resident in .ro"p behavior, and can only be partially codi$ied, d"e to their inherently tacit
dimension. Ro"tines can be both static and dynamic. Static ro"tines allo2 the $irm to replicate
certain previo"sly per$ormed tas#s, and altho".h they are .enerally stable, improvements and
m"tations 2ill al2ays occ"r 2ith repetition. Dynamic ro"tines are those that see# ne2 prod"ct
and process innovations and are .enerally aimed at learnin.. These ro"tines are heavily
5,
embedded in the research and development a $irm p"rs"es. >s both Nelson and :inter 45);,7
and Teece 45);,7 ar."e, ro"tines can be hi.hly tacit in nat"re. This ma#es replication or imitation
o$ them e3tremely di$$ic"lt, and renders them noncontractable in an intermediary mar#et.
Nelson and :inters 2or# also emphasi<es the ro"tine as or.ani<ational memory. They
assert that or.ani<ations learn by doin., and this #no2led.e is stored in the ro"tines o$ the $irm.
%n their vie2 o$ the $irm, in$ormation $lo2s into the or.ani<ation $rom the e3ternal environment.
!embers interpret this in$ormation and react by invo#in. ro"tines that 2ere s"ccess$"l in the
past. Their per$ormance .enerates in$ormation reco.ni<ed by others, 2ho interpret it and invo#e
the associated ro"tine. !embers o$ the or.ani<ation are th"s contin"ally reactin. to both e3ternal
and internal in$ormation. The ro"tines o$ the or.ani<ation are sel$/s"stainin., in that their
repetition stren.thens their e3istence in the $irm. %t is the con$ormity to these ro"tines that can
pose a problem $or the or.ani<ation. >s the $irms environment chan.es, ro"tines 2ill contin"e to
persist even tho".h they may no lon.er be e$$ective at solvin. the relevant problems. This
persistence is dan.ero"s i$ it ma#es the $irms "nable to adapt to a ne2 environment. &irms 2ill
tend to select inp"ts that are compatible 2ith internal ro"tines rather than alter the ro"tine to $it
ne2 alternative inp"ts.
The ro"tines in Nelson and :inter have many similarities to the standard operatin.
proced"res o$ the behavioral theory. %mbedded in the everyday operations o$ the $irm, ro"tines as
de$ined by Nelson and :inter are inherently di$$ic"lt to chan.e. They are rein$orced daily
thro".h their repetition, and are there$ore sel$/en$orcin., sel$/s"stainin. entities. Their relatively
imm"table nat"re tends to ma#e the $irms actions path/dependent, that is, the stren.thenin. o$
ro"tines thro".h their repetition ma#es their alteration di$$ic"lt. Ro"tines, li#e standard operatin.
proced"res, contain si.ni$icant levels o$ tacit #no2led.e. Ro"tines are there$ore not easily
de$ined, codi$ied, or ta".ht. Rather, they are learned and s"stained thro".h practice. Their tacit
nat"re ma#es their replication e3tremely di$$ic"lt, as they are not easily "nderstood and de$ined
proced"res that can be applied identically in an ne2 environment. Their tacitness is also typically
56
embodied at an or.ani<ational level, s"ch that individ"als are rarely capable o$ replicatin. them
thro".h a ne2 1ob assi.nment. :hile replication is di$$ic"lt, imitation may be nearly impossible.
&or 2hile the $irm can at least observe the characteristics, o"tp"ts, and processes o$ the ro"tine,
those o"tside the $irm can only .limpse it at a distance.
%t is the di$$ic"lty o$ replication and imitation o$ ro"tines that ma#e $irms so hi.hly
hetero.eneo"s in their internal str"ct"re. ?ven i$ $irms can acc"rately observe 2hich ro"tines are
most e$$ective at obtainin. their ob1ective, they 2ill be limited in their ability to apply these
ro"tines to other, less/e$$icient parts o$ the or.ani<ation. Li#e2ise, less/e$$icient $irms, 2hile
al2ays strivin. to adopt the ro"tines o$ their more s"ccess$"l competitors, are rarely able to do so,
even thro".h the hirin. o$ #ey personnel. The tacit nat"re o$ ro"tines there$ore ma#es s"stainable
competitive advanta.e possible, and .ives importance to $irm/level characteristics. (nli#e the
orthodo3 economic treatment o$ the $irm, ro"tines are not observable, replicable prod"ction
$"nctions ripe $or imitation.
Nelson and :inter divide ro"tines into three classes. The $irst o$ these classes incl"des
the short/r"n proced"res that determine ho2 the $irm "ses its c"rrent capital stoc#. They de$ine
these ro"tines as operatin. characteristics, and note that they .overn a $irms behavior in a .iven
time period. :hile these characteristics are dealt 2ith e3tensively in Cyert and !arch, they are
.iven less $oc"s in the evol"tionary theory. This is not s"rprisin., considerin. that an
evol"tionary theory $oc"ses on chan.es bet2een periods.
The second .ro"p o$ ro"tines determines ho2 the $irm alters its capital stoc# across
periods in response to environmental stim"l"s. 'o2 the $irm chooses to e3pand or retract its
capital investment is "ni="e, and is closely determined by pro$itability. The third and $inal set o$
ro"tines are those 2hich over time alter certain aspects o$ operatin. characteristics. >s Nelson
and :inter de$ine them, these ro"tines incl"de mar#et analysis departments, operations research
shops, and research and development laboratories. They de$ine ho2 the $irm critically analy<es
the e3istin. operatin. ro"tines and decides 2hether or not to alter them. Nelson and :inter ar."e
5*
that even the 2ay in 2hich a $irm scr"tini<es and chan.es e3istin. ro"tines is r"le/."ided.
Ro"tines are there$ore hierarchical, 2ith hi.her/level strate.ic proced"res actin. to alter lo2er/
level operatin. proced"res. They ar."e that top/level ro"tines, 2hich serve to alter other ro"tines,
de$ine the probability distrib"tion o$ 2hat ro"tine modi$ications or ne2 ro"tines 2ill be $o"nd
thro".h search. &irms eval"ate potential ro"tine alterations by the criterion o$ anticipated pro$it.
Nelson and :inters characteri<ation o$ these hi.her/level ro"tines is an important
advance o$ the behavioral theory o$ the $irm. :hereas the behavioral theory o$ Cyert and !arch
de$ined the possibility o$ intendedly alterin. proced"res as ne.li.ible, the evol"tionary theory
ar."es that partic"lar ro"tines accomplish e3actly this $eat. The $irm is capable, thro".h analysis
and research, o$ intendedly m"tatin. its .enetic ro"tines, strate.ically positionin. itsel$ in the
dynamic environment it perceives. The ran.e o$ possible m"tations and the 2ay in 2hich it
accomplishes these chan.es are determined by its idiosyncratic search ro"tines and the stochastic
environment. The $irm is there$ore constrained in its ability to evolve, b"t is nevertheless
deliberate in its ability to do so. Nelson and :inter have there$ore introd"ced determinism to the
behavioral theorys concept o$ proced"res. The $irm is no lon.er .overned by the "ncontrollable
components o$ its or.ani<ation. %t has at least some ability to strate.ically alter them over time,
in response to stim"l"s $rom its environment.
This theoretical advance is critical to the application o$ the behavioral theorys
idiosyncratic $irm characteristics to the $ield o$ $irm strate.y. :itho"t some ability to dictately
chan.e over time, the $irm has no strate.ic reco"rse $or an inherently dynamic environment.
&irms de$ined as mere p"ppets o$ their o2n characteristics have no hope o$ s"stainable
competitive advanta.e. %n s"ch a case, the chan.in. e3o.eno"s environment 2ill be the sole
determinant o$ their $ate. The $irms ability to identi$y ne2 opport"nities and chan.e its lo2er/
level ro"tines to p"rs"e them 2ill there$ore be de$ined by the hi.h/level search ro"tines o$ Nelson
and :inter. Since each $irm has "ni="e ro"tines, $irms 2ill have di$$erential abilities to
58
pro$itably adapt to a dynamic environment. &irms 2ill th"s have di$$erent dynamic capabilities, a
concept to be more e3plicitly de$ined later by strate.y scholars.
>nother critical advance o$ Nelson and :inters ro"tines is that the $irm selects amon.
alternative alterations by eval"atin. their e3pected pro$it potential. The evol"tionary theorys
$irm has an ob1ective, 2hich altho".h it is not e3plicitly de$ined or evident $or the $irm,
nevertheless e3ists. This is a sharp contrast $rom the behavioral theory, 2here the $irm possesses
no coherent ob1ective b"t rather is portrayed as a coalition o$ decision/ma#ers 2ith distinctly
di$$erent ob1ectives. Nelson and :inter, more concerned 2ith lon./term evol"tion than
behavioralists, reco.ni<e that 2hile bo"nded rationality inherently limits cleanly de$ined
ob1ective $"nctions, s"ch ob1ectives nevertheless e3ist. Reco.ni<in. these ob1ectives, $irms "se
their search ro"tines to achieve them. >t an even hi.her level o$ ro"tine, $irms choose strate.ies
that over time allo2 them to adapt in the 2ay that most consistently achieves these ob1ectives. %n
the evol"tionary model o$ Nelson and :inter, B$irms have di$$erent strate.ies, and a central
analytical concern is the viability or pro$itability o$ $irms 2ith di$$erent strate.ies 4p. 6+7. :hile
they do not e3plicitly model $irms abilities to chan.e strate.ies, Bs"ch chan.es are ="ite
admissible 2ithin the lo.ic o$ o"r theory 4p. 6+7.
> third important advance o$ the evol"tionary theory is its reco.nition o$ the critical
nat"re o$ learnin. in lon./term $irm per$ormance. The search ro"tines o$ Nelson and :inter
."ide the $irm to2ard innovation similar to the $irms c"rrent stoc# o$ technolo.ical #no2led.e.
The $irm is "nli#ely to scan the entire stoc# o$ #no2led.e be$ore ma#in. their technolo.ical
choices, b"t 2ill rather $oc"s on those technolo.ies perceptible thro".h their search ro"tines.
These search ro"tines 2ill tend to $oc"s the $irm in areas in 2hich it already has e3perience, th"s
creatin. a $orm o$ technolo.ical path dependence. The stren.th o$ this path dependence and the
co"nter/actin. ability o$ the $irm to chan.e directions 2ill be determined by its hi.h/level
strate.ic ro"tines. Th"s 2hile $irms 2ill tend to2ard path dependent innovation, they are not
hopelessly loc#ed into their c"rrent co"rse.
59
Firm Resources and the Dynamic Capabilities Literature
Nelson and :inters conception o$ $irms as embodyin. or.ani<ational ro"tines plays a
central role in 2hat has become one o$ the dominant perspectives o$ $irms strate.yC the Reso"rce/
Based Eie2 o$ the &irm.

The reso"rce/based approach to $irm strate.y portrays $irms as a collection o$ tan.ible
and intan.ible assets, reso"rces or competencies, 2hich are tied to the $irm and are di$$ic"lt $or
others to imitate. Dra2in. on Nelson and :inter, Teece 45);;7 describes a $irmDs competencies
as a set o$ di$$erentiated technolo.ical s#ills, complementary assets and or.ani<ational ro"tines
that provide the basis $or a $irms competitive capacities in one or more b"sinesses. ?3ternally,
these competencies may be perceived as a $irms s#ill in a partic"lar prod"ct area. 'o2ever, a
competence is the ability o$ a $irm to solve or.ani<ational and technical problems, and th"s is not
limited to a speci$ic set o$ prod"cts.
ii
%ndeed, $irms $re="ently possess competencies that e3tend
into m"lti/prod"ct space. ?3amples o$ $irm/speci$ic competencies incl"de employment o$ s#illed
personnel, in/ho"se #no2led.e o$ technolo.y, operatin. ro"tines and trade contacts 4:erner$elt
5);*7. Consistent 2ith Nelson and :inter 45);,7, Teece notes that these reso"rces arise
primarily thro".h or.ani<ational learnin.. >s a res"lt, they are closely tied to the prod"cts and
mar#ets in 2hich the $irm has historically been active. These reso"rces enable $irms to have
mar#edly lo2er costs or to o$$er hi.her ="ality prod"cts and per$ormance than competitors. To
the e3tent that reso"rce endo2ments are Bstic#y, $irms 2ith s"perior competencies 2ill tend to be
more pro$itable than competitors.
To be considered a so"rce o$ competitive advanta.e, an or.ani<ational competence m"st
meet three conditionsC it m"st be hetero.eneo"sly distrib"ted 2ithin an ind"stry@ it m"st be
5+
di$$ic"lt to p"rchase on the mar#et@ and it m"st be di$$ic"lt or impossible to imitate 4Petera$
5))67. Considerable disc"ssion in the literat"re s"..ests that hi.h/technolo.y competencies are
partic"larly li#ely to meet these conditions since s"ch capabilities are $re="ently based on tacit
#no2led.e and are s"b1ect to considerable "ncertainty re.ardin. ="ality and per$ormance 4Dosi
5);,@ Nelson and :inter 5);,7. >s a res"lt, hi.h technolo.y competencies are li#ely to be
di$$ic"lt to ac="ire thro".h strai.ht$or2ard mar#et transactions or easily trans$er internally to ne2
"ses 4Teece 5);,@ !o2ery 5);67. The same $eat"res that ma#e the mar#et trans$er o$ technolo.y
competencies di$$ic"lt also limit the ability o$ other $irms to imitate these competencies. The
non/replicable nat"re o$ many technolo.y competencies is the cornerstone o$ their strate.ic
importance.
Teece et al. 45))*7 divide a $irmDs or.ani<ational competence into three componentsC 457
allocative competence F the decisions involvin. 2hat to prod"ce and ho2 to price it@ 4,7
transactional competence F decisions on 2hether to ma#e or to b"y, and 2hether to do so alone or
in a partnership@ and 467 administrative competence F ho2 to desi.n or.ani<ational str"ct"res and
policies to enable e$$icient per$ormance. >dditionally, they de$ine technical competence as the
ability to desi.n and develop prod"cts and processes, and as the ability to operate $acilities
e$$ectively. Technical competencies, 2hich also incl"de learnin., typically have si.ni$icant tacit
components, ma#in. them relatively sa$e $rom replication. These competencies reside lar.ely in
the or.ani<ational ro"tines that contain a $irmDs collective #no2led.e.
The reso"rce based vie2 o$ $irm strate.y, as de$ined above, b"ilds on and e3tends many
core concepts addressed by Nelson and :inter. >s 2ith Nelson and :inters disc"ssion o$
or.ani<ational ro"tines, the reso"rce/based vie2 portrays $irm competencies as sel$/s"stainin.
and static, despite a dynamic environment. Li#e ro"tines, these competencies lar.ely de$ine ho2
the $irm 2ill treat in$ormation and ho2 it 2ill solve observable problems. 0r.ani<ational
learnin. is $"ndamentally shaped by these deeply embedded competencies. Th"s, as in Nelson
5;
and :inters disc"ssion o$ ro"tines, $irm competencies are portrayed as deeply rooted in history
and di$$ic"lt to chan.e.
%n some sense, ho2ever, the reso"rce/based vie2 $ails to e3ploit 2hat is tr"ly novel and insi.ht$"l
in Nelson and :inters 2or#C its dynamic $oc"s. %ndeed, it is conceivable that a relatively static
$orm o$ the reso"rce/based theory o$ the $irm co"ld have been achieved even 2itho"t re$erence to
the 2or# o$ Nelson and :inter. S"ch a theory 2o"ld have incorporated many o$ the Cyert and
!archs behavioral theorys $irm/speci$ic aspects and even possibly the tacit nat"re o$ proced"res
and the conse="ential di$$ic"lties o$ replication and imitation. :hile s"ch a static theory 2o"ld
have been important in de$inin. the importance o$ $irm/level characteristics, it 2o"ld have
missed the critical dynamic characteristics introd"ced in The ?vol"tionary Theory. :itho"t s"ch
a dynamic vie2 o$ $irm evol"tion, the importance concept o$ s"stainable advanta.e 2o"ld be
intractable. B"ildin. directly on Nelson and :inters 2or#, the dynamic capabilities literat"re
has so".ht to st"dy $irms abilities to adapt to and e3ploit a chan.in. environment. The dynamic
capabilities theory o$ the $irm see#s to e3plain ho2 $irms achieve and s"stain competitive
advanta.e despite an ever/chan.in. environment. Dynamic capabilities ar."es that a $irm .ains
competitive advanta.e thro".h internal ro"tines or standard operatin. proced"res that de$ine the
$irms processes. Ro"tines, 2hich are patterns o$ interactions representin. s"ccess$"l sol"tions to
speci$ic problems, are deeply conditioned by its history, and not readily chan.ed or developed.
They are endemic to the $irm, observed in .ro"p behavior, and hi.hly s"b1ect to path dependency.
These ro"tines are de$ined as ho2 tas#s are accomplished, ho2 problems are solved, and ho2
#no2led.e is learned, and are not tan.ibly identi$iable or necessarily codi$ied. They are the
$irms patterns o$ c"rrent practice and its or.ani<ational learnin.. :hile dynamic capabilities
dra2s heavily $rom the reso"rce/based vie2 and transaction cost economics, its $"ndamental
vie2 o$ the $irm is a direct descendent o$ Nelson and :inter.
5)
Dynamic capabilities emphasi<es the #ey role o$ strate.ic mana.ement in appropriately
adaptin., inte.ratin., and re/con$i."rin. internal and e3ternal or.ani<ational s#ills, reso"rces, and
$"nctional competencies to2ard a chan.in. environment4Teece and Pisano 5))*, p. 8+7. The
$irms strate.ic dimensions are constrained by available paths, its c"rrent position, and its
or.ani<ational processes or ro"tines. The available paths represent the $irms opport"nities and
strate.ic alternatives. &irms are in part tied to their past and c"rrent positions, "nable to choose
$rom the in$inite array o$ technolo.ies and mar#ets in e3istence. >s in the evol"tionary theory,
$irms typically are only capable o$ s"ccess$"l learnin. in areas or 2ays close to those it c"rrently
employs 4Teece 5);;7. The mar.inal cost o$ .ainin. $"rther #no2led.e in #no2n areas is "s"ally
m"ch less than innovatin. in "nrelated $ields 4Cohen and Levinthal 5))-7. Th"s $irms 2ill tend
to innovate close in to areas they #no2 2ell. > $irm is not an in$initely malleable entity, b"t
rather is an or.ani<ation capable o$ limited chan.e at si.ni$icant cost. The past and c"rrent
activities o$ the $irm 2ill po2er$"lly in$l"ence the technolo.ical paths available to it, in that
brea#thro".hs in related areas 2ill be more readily identi$iable and e3ploitable to the $irm 4Dosi
5);,7. The research areas c"rrently $oc"sed on as 2ell as the $irms ties to o"tside innovations
2ill de$ine 2hich technolo.ical advances are potentially available $or their development and "se.
>dditionally, mana.ements ability to identi$y and choose amon. these opport"nities 2ill
determine the $irms capability in adaptin. to and e3ploitin. chan.in. technolo.ies.
The $irms c"rrent position is de$ined by its intellect"al property, s"pplier relations,
strate.ic alliances, and endo2ment o$ technolo.y. >s in the reso"rce/based vie2, tradable and
readily trans$erable assets represent no concrete competitive advanta.e. These assets there$ore
are o$ten tacit #no2led.e assets, ones deeply embedded in the ro"tines and processes o$ the $irm
4Teece 5);57. 0ther assets, s"ch as the $irms location and $inancial position, can also determine
its available strate.ic options. Those assets that are di$$ic"lt to replicate or imitate, ho2ever, $orm
the #ey competencies o$ the $irms, and dynamic capabilities are those competencies that allo2 the
$irm to respond to and e3ploit chan.in. mar#et environments.
,-
The or.ani<ational processes or ro"tines o$ the $irm can be partly vie2ed in ho2
e$$icient the $irm is in the inte.ration o$ its internal activities and its e3ternal ties. These ro"tines
.overn ho2 in$ormation is .athered and processed, aspects critical to innovation and problem
solvin.. Ro"tines e3ist in ho2 the $irm relates to its s"ppliers, and ho2 in$ormation is .athered
$rom e3ternal so"rces. The coordination o$ separate .ro"ps 2ithin the $irm is ro"tini<ed in the
practices o$ mana.ement, as are research and development processes, $ields, and .oals. The
incentives and controls 2ithin the $irm are critical ro"tines de$inin. its position and $"t"re paths.
Some o$ the most important ro"tines 2ithin the $irm involve learnin.. %n the dynamic
capabilities vie2, learnin. in the $irm is an inherently or.ani<ational process. :hile individ"al
s#ills and #no2led.e can contrib"te critically to the or.ani<ation, learnin. processes are
intrinsically social and collective. The coordination o$ search proced"res and comm"nication are
necessary $or e$$ective learnin., and the c"rrent ro"tines determine ho2 and 2hat a $irm can
process. >dditionally, the or.ani<ational #no2led.e .ained $rom learnin. is stored in the ne2
ro"tines and lo.ic o$ the or.ani<ation. The e3istin. processes $or locatin., identi$yin., and
inte.ratin. important in$ormation into the $irm 2ill ."ide the tra1ectory o$ the $irms learnin.. .
>s disc"ssed in Nelson and :inter, learnin. by the $irm is lar.ely determined by these ro"tines
and is th"s hi.hly path/dependent in nat"re.
>ltho".h e3istin. ro"tines are lar.ely determinant o$ the $irms learnin. tra1ectory, the
$irm may still have di$$ic"lty harnessin. competencies based in these ro"tines $or speci$ic
strate.ic adaptations. The $irm may 2ish to apply its hi.hly s"ccess$"l ro"tines to2ard other
aspects o$ its or.ani<ation. Replication o$ s"ccess$"l ro"tines allo2s the $irm to en.a.e in
.eo.raphic and prod"ct line e3pansion, and may help it better "nderstand the ro"tines in order to
modi$y and improve them. The capabilities created by ro"tines may be di$$ic"lt to "nderstand
beca"se they involve tacit #no2led.e and prod"ction and research processes not readily
observable or codi$ied. The tacit nat"re o$ these processes may be impossible to replicate, even
by the $irm itsel$, and the $irms ability to replicate its ro"tines may be inevitably hampered by its
,5
inability to identi$y them. Lippman and R"melt 45);,7 have ar."ed that some so"rces o$
competitive advanta.e are so transparent that $irm itsel$ can not identi$y them. ?ven i$ the $irm
can identi$y its ro"tines, the $irm may not 2holly "nderstand them, or may $ind them inseparably
lin#ed to other speci$ic ro"tines 4Teece 5)+97. Th"s attemptin. to apply these ro"tines in
strate.ic initiative may be improbable.
:hen the $irm is "nable to replicate its s"ccess$"l ro"tines, its competitors are even more
"nli#ely to s"ccess$"lly imitate them. :hen ro"tines are hi.hly tacit, imitation 2ill li#ely be
impossible, as competitors have no ability to observe internal proced"res. :hen competitors are
able to observe and imitate competence/$ormin. ro"tines, ho2ever, the $irm may be able to
protect itsel$ 2ith intellect"al property ri.hts. >ltho".h intellect"al property ri.hts, s"ch as
patents, are hi.hly observable, they are mostly limited to prod"ct technolo.ies. Process
technolo.ies, or the ro"tines endemic in the $irms prod"ction, are not readily observable, and
th"s can not be easily imitated. S"ch ro"tines may be di$$ic"lt to replicate as 2ell, b"t allo2 no
2indo2 o$ observation $or the potential imitator.
The critical aspects o$ dynamic capabilities are the ability o$ the $irm to identi$y the
chan.in. mar#et environment, to sense the opport"nity, then to sei<e it. The ability o$ the $irm to
sense the need and the opport"nity and then accomplish the necessary trans$ormation is the
essence o$ dynamic capability, and creates si.ni$icant val"e. 4>mit and Schoema#er 5))6@
Lan.lois 5))*7 Part o$ this ability is dependent on the $irms ability to locate and assimilate
in$ormation $rom its environment. The location and inte.ration o$ this in$ormation is .ro"nded in
part on the $irms search and in$ormation processin. ro"tines, mani$ested in research and
development and the $irms e3istin. ties to the o"tside environment. Not only m"st the $irm
discover ne2 paths thro".h its o2n and others research, it m"st also reco.ni<e the importance o$
these paths. Past e3perience conditions the $easible alternatives mana.ement is li#ely to perceive
4Teece, Pisano and Sh"en 5))+7. &irms not only $ace di$$erent costs associated 2ith partic"lar
,,
technolo.ies, b"t they also $ace di$$erent perceived technolo.ical choices 4Nelson and :inter
5);,7.
The $irm m"st also be able to recon$i."re its or.ani<ation and assets be$ore its
competitors "pon reco.nition o$ a ne2 opport"nity or environmental shi$t. Despite the assertion
o$ mana.ers, the $irms evol"tionary path is rather narro2, and the alternative directions available
to the $irm are limited by its positions and previo"s path. The 2idth o$ the potential path
determines the n"mber o$ options $rom 2hich a $irm can choose. The ability o$ the $irm to
s"ccess$"lly $ollo2 the chosen path is o$ e="al importance in these capabilities. Gey
characteristics and ro"tines o$ the $irm 2ill determine its ability to locate opport"nities and
accomplish the necessary ad1"stments, and 2ill directly determine the e3tent o$ its dynamic
capabilities. %n partic"lar, the ability to locate and address them is an inherently entreprene"rial
$"nction, not an administrative one.
>n eval"ation o$ the dynamic capabilities literat"re ma#es the contrib"tions o$ Nelson
and :inter ab"ndantly clear. 0r.ani<ational ro"tines, as re$ined by Nelson and :inter, are the
determinin. characteristic o$ a $irms ability to perceive and adapt to environmental chan.es.
%nherently tacit ro"tines that are di$$ic"lt to replicate lend the $irm a s"stainable competitive
advanta.e. The $irms evol"tionary path is critical to its ran.e o$ possible alterations to its
e3istin. ro"tines, and "ltimately to its lon./term s"ccess. The idea that Bhistory matters is cr"cial
to the dynamic capabilities literat"re, 2hich vie2s this history dependence as the drivin. $orce in
lon./r"n per$ormance hetero.eneity. !ost important in dynamic capabilities, ho2ever, are 2hat
Nelson and :inter 2o"ld de$ine as hi.h/level ro"tines, those that determine the $irms ability to
perceive ne2 opport"nities and those that allo2 the $irm to alter lo2er/level ro"tines to achieve
these opport"nities. :itho"t the critical role o$ these hi.h/level ro"tines, dynamic capabilities is
simply a static, reso"rce/based theory o$ the $irm. By incorporatin. these evol"tionary concepts
disc"ssed in Nelson and :inter, dynamic capabilities is able to e3plain ho2 $irms can .ain
competitive advanta.e, and 1"st as importantly s"stain it over time.
,6
The "se o$ ro"tines in the dynamic capabilities literat"re can be traced thro".h Nelson
and :inter to the ori.inal standard operatin. proced"res o$ Cyert and !arch. Cyert and !arch
intently $oc"s on the critical in$l"ence o$ standard operatin. proced"res in the "ni="e character o$
the $irm, and stress their role in $irms abilities to identi$y and adapt to chan.es in their
environment. :hile they portray all $irms as sharin. the same basic principles o$ .eneral choice
proced"re 4"ncertainty avoidance, r"les maintenance, simple r"les7, they ar."e that each $irm has
speci$ic standard operatin. proced"res that de$ine the direction o$ constantly reocc"rrin.
activities. These proced"res provide consistency 2ithin the $irm and directly in$l"ence
or.ani<ational decisions. Speci$ic standard operatin. proced"res dictate ho2 the $irm cond"cts
all o$ its operations, $rom the m"ndane to technolo.ically sophisticated. They also direct ho2 the
$irm inte.rates, records, reports, locates, and "tili<es the in$ormation necessary to identi$y
potential problems and sol"tions. %n addition, they in$l"ence the $irms strate.ic behavior in the
allocation o$ its limited reso"rces amon. potential alternative "ses. Standard operatin.
proced"res ma#e a $irm "ni="e, both in its static nat"re and in its dynamic capabilities. They are
2hat de$ine the competencies o$ the or.ani<ation, made o$ the ro"tines that de$ine its ability to
inte.rate reso"rces and prod"ce prod"cts. Ro"tines are also 2hat limit the $irm in its ability to
adapt to its dynamic environment, $or in .ivin. stability to the or.ani<ation, they limit its
$le3ibility. %n the 2ords o$ Cyert and !arch, Bthese proced"res chan.e slo2ly, 45)),, p. 5,,7
and the di$$erential ability to accelerate this rate can determine the s"rvival o$ the $irm.
:hile Cyert and !archs proced"res can be directly lin#ed to the ro"tines o$ dynamic
capabilities, those o$ the latter theory possess several #ey characteristics that m"st be credited to
Nelson and :inter. &irst, they possess strate.ic characteristics that allo2 the $irm to control its
evol"tion over time. :hile this evol"tion is hi.hly path dependent, the $irm is nevertheless
capable o$ strate.ically alterin. its many lo2/level ro"tines thro".h hi.h/level strate.ic and
search ro"tines. Sel$/determination o$ the $irm is hardly revol"tionary, b"t its incl"sion in an
inherently behavioralist vie2 o$ the $irm 2as a critical contrib"tion o$ the evol"tionary theory.
,*
Be$ore Nelson and :inter, theorists lar.ely vie2ed the $irm as either "nable to control its $"t"re
co"rse or completely $le3ible in its evol"tion. Their de$inition o$ the $irm as deterministic yet
path dependent, 2hile not "ni="e, 2as e3tensive and clearly pivotal in the development o$
dynamic capabilities.
>nother characteristic o$ dynamic capabilities ro"tines derived $rom Nelson and :inter
is the ability o$ the $irm to p"rs"e ob1ectives. 0nce a.ain, this concept 2as also not ne2, and
$ormed the $o"ndation o$ orthodo3 economic theory, b"t its inte.ration 2ith components o$ the
behavioral theorys detailed treatment o$ $irm hetero.eneity 2as revol"tionary. :hile orthodo3
economics ar."ed that $irms had clearly de$inable ob1ective $"nctions, behavioralists s"ch as
Cyert and !arch ar."ed that the $irm 2as a coalition o$ individ"als 2ith di$$erent ob1ectives.
They ar."ed that the $irm 2as there$ore "nable to move in any distinct direction to2ard a "ni$ied
ob1ective. Nelson and :inter, 2hile sympathetic to the behavioralists, incorporated ob1ectives
into the $irms ro"tines, th"s allo2in. it to search and strate.ically choose dynamic co"rses
consistent 2ith that ob1ective. > $irm 2itho"t an ob1ective is inherently impossible to
strate.ically direct, and 2itho"t this introd"ction to the behavioral vie2 o$ the $irm, dynamic
strate.ic behavior by the $irm 2as inherently impossible. The dynamic capabilities vie2 co"ld
not e3ist 2itho"t this combination o$ behavioral ro"tines and strate.ic p"rs"it o$ ob1ectives.
Their inte.ration is deeply o2ed to Nelson and :inter.
Conclusion
>s is sho2n in this paper, both The Behavioral Theory o$ the &irm and The ?vol"tionary
Theory o$ ?conomic Chan.e have richly contrib"ted to a tradition o$ literat"re c"lminatin. in
theories on $irm competence and dynamic capabilities. The $oc"s o$ Cyert and !arch on the
hetero.eneity and path dependence o$ $irm characteristics 2as critical to the development o$ these
theories, b"t it is the 2or# o$ Nelson and :inter that m"st be reco.ni<ed $or providin. the insi.ht
,8
and theory necessary $or the development o$ a dynamic, strate.ic theory o$ $irm behavior. Their
2or# introd"ced a sel$/deterministic ="ality in the behavioralist $irm by allo2in. it to p"rs"e
ob1ectives even 2ithin the constraints o$ bo"nded rationality. :hile the idiosyncratic
characteristics o$ $irms $"ndamental to the reso"rced/based and dynamic capabilities literat"re
can be attrib"ted to Cyert and !arch, the dynamic and deterministic aspects o$ the $irm
introd"ced by Nelson and :inter 2ere the paramo"nt step to developin. tr"ly strate.ic models o$
$irm behavior. The "nderstandin. o$ the process by 2hich $irms identi$y opport"nities and adapt
to e3ploit them is a direct res"lt o$ the evol"tionary insi.ht o$ Nelson and :inter, 2ho proved to
be the critical lin# bet2een a behavioral theory o$ the $irm and the evol"tionary strate.y o$ the
dynamic capabilities literat"re.
,9
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,)
i
?conomists s"ch as &riedman 45)867 ar."ed that 2hether or not the model acc"rately represented the $irm 2as irrelevant
so lon. as its predictive val"e 2as hi.h.
ii
> $irmDs competencies, as de$ined by Teece, are typically implicitly or e3plicitly assumed in economic theory. >s s"ch,
competencies are vie2ed as 2idely and $reely distrib"ted amon. $irms, th"s .ivin. limited insi.ht into hetero.eneity,
or.ani<ational str"ct"re or $irm per$ormance.