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 What circumstances prompted you to take on the subject of dynamic capabilities as discussed in your highly cited 2000 Strategic Management Journal article?

Kathy Eisenhardt, my co-author, was my advisor while I was a doctoral student at Stanford. Stanford has a process where the faculty members in the Management Science and Engineering department look at the pool of doctoral candidates and each pick one to mentor, and Kathy picked me based on our similar interests. I was extremely fortunate to have Dr. Eisenhardt as my advisor.

 What was your focus, your interest, and how did it lead to the paper?

Before I went to graduate school I had a first life doing management consulting for the IBM consulting group. Many of the clients I served competed in high-technology industries that were facing constant and rapid change. Moreover, I found that the various consulting frameworks we were using seemed to fall short at times.

Because of this I wanted to dig deeper into the intellectual underpinnings of these frameworks to better help my clients solve the tough business problems they were facing. This interest in the intellectual underpinnings of how firms organize themselves and make strategy ultimately led to my desire to change my career focus from consulting to research and teaching.

 Was there an initial spark of realization that gave rise to the paper?

"...dynamic capabilities have a direct effect on a firm being able to achieve and sustain a competitive advantage, because all market environments are dynamic."

Kathy Eisenhardt's process for working with first-year doctoral students is to say, "Okay, here are several projects that I'd like to do, but I don't have time to do them unless I'm working with someone who's willing to take on the effort to get the project off the ground and keep it moving forward." There were several projects that she thought would fit with my interests. Our highly cited paper on dynamic capabilities began as the particular writing project that I picked to take on with her as a first-semester doctoral student.

Looking back it is worth mentioning that our paper was actually intended to be focused on the resource-based view of the firm, which was a fairly new concept at the time, but the paper evolved through many iterations into a paper on dynamic capabilities, which was brand new. And that's why it's cited so much. You could say that dynamic capabilities are a part of the resource-based view of the firm.

 Let's start by defining some terms. For those of us with little or no business background, what is the resource-based view of the firm?

That's viewing the firm as though it is a collection of resources. These can be physical items, like plants or materials; they can be human capital, like skilled professionals, engineers in a software firm who write the code, etc. They can be patents. Anything that gives the firm a resource advantage over what other firms may have.

In academic terms, they have these four qualities: they're valuable, which means you can make money from them; they're inimitable, which means they're hard to imitate; they're rare, which means not everybody has them, and they are non-substitutable. The acronym people used is VIRN—for value, inimitable, rare, and non-substitutable.

Kathy realized that this definition is problematic, which is why she thought we should write a paper on it. If you think about this definition—this VIRN—you're basically saying something is valuable if it actually creates value. You're defining it by a dependent variable. It's tautological. So we thought we would write a paper and try to bring greater precision and coherence to the strengths and weaknesses of the resource-based view of the firm.

The resource-based view is internal to the firm. It says that as a firm you have resources that other firms don't have, and you can actually do things to change the hand that you're dealt to be more or less competitive. You can actually make yourself different than your competition in a material way and beat them, because you've been able to make the stuff inside your firm work better.

This is all based on a very traditional or classical economics way of thinking, but Kathy and I take a more managerial approach to strategy, so we wrote this paper to bring a managerial view to the conversation on the resource based view and ultimately dynamic capabilities.

What we were saying is that a firm can have these dynamic capabilities and the managers in the firm can be better or worse at doing them, at making decisions that have to do with obtaining, integrating, reconfiguring, and releasing resources to gain a competitive advantage.

 What do managers do that constitute dynamic capabilities?

In essence, what a manager in a firm is doing is trying to survive or thrive in a dynamic environment. Managers take resources that they're using now to make money, that help them make a product that they sell, and they're going to take some of that and do something different with it than they were doing before. They don't know whether or not they're going to make more money doing that, but they're hoping that they will; that this will position them to compete in an uncertain future.

That's what makes dynamic capabilities different from, say, operational capabilities. That is, operational capabilities are about how you earn a living in the present; dynamic capabilities are about how you position yourself to earn a living in an uncertain future.

"What we were really getting down to in this paper is the idea that managers matter, particularly in high-dynamic markets."

What we were really getting down to in this paper is the idea that managers matter, particularly in high-dynamic markets. Managers can be better or worse at performing the many tasks that they do on an everyday basis, just like you could be better or worse at hitting a golf ball than someone else. For example, two firms can have the same dynamic capabilities to do acquisitions to prepare for an uncertain future, but the firm that is more proficient in utilizing their dynamic capabilities will create more value.

History has borne this out. Most firms, for instance, don't do acquisitions very well. Most firms actually see their stock value go down after they acquire another firm—like Ford after it acquired Jaguar—because most managers do a lousy job of integrating the acquisition into the firm and thus fail to capture the value they hoped for in the future. But some firms, like Cisco, became really good at developing dynamic capabilities to do it.

So when we say managers matter, we mean managers are a significant factor in determining whether a firm can out-compete another firm even to the extent of changing the marketplace itself. That is, they are not just stuck with playing the hand they were dealt in the marketplace the best that they can. Rather, the resource decisions that managers make matter and at times can change the game itself.

Yes, the dynamics of a particular industry is a significant factor in whether or not a particular firm can create a competitive advantage. What Kathy and I argue is that there is another side to the story of why particular firms succeed or fail at creating advantages. That is, managers make a substantive difference through their resource decisions in whether or not a firm creates competitive advantages.

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• 2010
• September 2010 - Author Commentaries
• Jeffrey Martin on Competing in Fast-Moving Dynamic Environments