Managing Knowledge And Innovation Through Dynamic Capabilities Management Essay

The aim of this chapter is to provide an insight into the interaction of innovation and learning through integrative view of knowledge management and dynamic capabilities approach. Firstly, theoretical foundations of dynamic capabilities perspective and knowledge management are presented. The chapter further explores the existing theoretical linkages between knowledge management and the dynamic capabilities approach, as well as assesses their impact on organizational performance. The existing theoretical foundations are used to provide a generalization, leading to an integrative theoretical model, which should serve as a basis for further empirical verification.

Key words: knowledge management, dynamic capabilities, learning, innovation


According to Teece, Pisano and Shuen (1997), a dynamic capability refers to cAlpha

ompany’s ability to integrate, build and transform internal and external competencies. They can help an organization to achieve innovative forms of competitive advantage through integration, building and transformation of internal and external competencies, as to respond to changes in the environment. Eisenhardt and Martin (2000) define dynamic capabilities in a similar manner, i.e. in the context of achieving organizational change, aligned to the external pressure: namely, these capabilities are perceived as business processes that use resources – specifically the processes of integration, restructuring, acquisition and release resources – to adapt or create market changes. Dynamic capabilities are especially helpful in explaining the sources sources of competitive advantage in extremely volatile markets (Macher, Mowery, 2009).

Dynamic capabilities are determined by organizational and managerial processes, positions and paths. The organizational and managerial processes refer to the routines, i.e. current practices in an organization, such as coordination, integration, learning, transformation, etc. This is especially important, since most organizations engage in repetitive processes, such as production and/or service delivery, which require standardized performance of specialized tasks, in order to achieve adequate performance (Becker, 2002). Routines have developed over time and, at the moment of analysing an organization, they represent successful solutions to common problems.

Organizational knowledge, accumulated through learning activities, results in new routines, which can, nevertheless, be shaped by future decisions and development directions. In the dynamic capability perspective, the strategic alternatives available to an organization are referred to as paths. The notion of path dependence indicates that future of an organization depends on its current position (which includes current resources, capabilities, routines, etc.) and potential development paths. Although the future behaviour of an organization is shaped and limited by the current decisions and routines, there is no path that ‘must’ be followed, as to achieve a certain objective. There is a multitude of potential outcomes, which can be reached as a consequence of the same strategic decision, depending on a range of initial positions and the circumstances taking place in the environment. Once the development of a strategic situation in an organization takes place (by following a certain path), the social interactions are becoming ‘frozen’ in the form of “recurrent patterns” (Becker, 2002), representing the routines. They are collective social phenomena, which are very difficult to understand and replicate or transfer, which is in line with the fundamental Resource Based View (RBV) tenets (Barney, 1991; Grant, 1991), although its initial theoretical foundations were built upon the notion of strategic resources. Current competitive advantage can be achieved through routines, i.e. processes that are shaped by company’s positions and paths (Teece, Pisano, Shuen, 1997), but organizational innovation and change should be also explained in the same manner. Namely, by using the notion of an organizational process/routine, researchers are able to discuss the behaviour of an organization in a profound manner, since routines encompass both internal and external drivers of change, as well as drivers leading to the stability (Becker et al, 2005).

Eisenhardt and Martin (2000) define dynamic capabilities as an organizational ability to gain, integrate, transform, and release resources, in order to adapt or to create market changes. This, once again, emphasizes the role of dynamic capabilities in activating/coordinating strategic resources as ‘lower level’ constructs within the RBV theory of strategic management. In this theoretical framework, dynamic capabilities are believed to consist of specific strategic and organizational processes (new product development, creating strategic alliances, strategic decisions …), which can create value for an organization.

and that dynamic have greater equifinality, homogeneity and interchangeability than the traditional resource-based theory assumes. Equifinality means that similar competence can be reached in different ways and using different resources. Also, they state that the effective forms of dynamic abilities change depending on the degree of market volatility, i.e. when markets are moderately dynamic, dynamic capabilities resemble the traditional concept of routine, and when the markets are highly volatile, dynamic capabilities are simple, experimental, unstable processes that rely on new knowledge formed in the short term. Based on all previously said, it can be concluded that dynamic capabilities are necessary, but not a sufficient contrition for competitive advantage achievement.

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Similarly, according to Zollo and Winter (2002), in a relatively stable environment, dynamic capabilities are most likely to be unnecessary, while in the condition of rapid market changes, dynamic capabilities are necessary. If changes are not only fast, but also unpredictable, dynamic capabilities should be continually upgraded. They emphasize the structure and stability of dynamic capabilities, and state that dynamic capabilities do not include adjusting to the environment in a creative but unstructured way. Existence of dynamic capabilities is not necessary prerequisite for change adaptation, because the company can also react to changes ad-hoc (Winter, 2003).

The value and performance of operative and dynamic capabilities can be assessed through their ”technical” and ”evolutional” appropriateness. Technical appropriates measures how well capability performs its basic functions, while ”evolutionary” appropriateness measures the extent in which capability can assure the survival of the company. Operative capabilities have strong ”technical” appropriateness, while dynamic capabilities have a strong ”evolutionary” dimension which is entrepreneurial (Helfat, 2007; Teece, 2007).


Dynamic capabilities refer to the company’s orientation toward constant reshaping, renewing and re-creating resources and capabilities, and the improvement and reconstruction of key competencies in response to market changes in a constant effort to maintain a competitive advantage (Wang and Ahmed, 2007). According to Wang and Ahmed (2004, 2007) the major components of dynamic capabilities are adaptive, absorptive and innovative capability. They support company’s ability to integrate, transform, renew and rebuild their competences and resources, and are common to all companies.

Adaptive capability

The role of the adaptive capability is to identify and exploit new market opportunities. It manifests through inherent resource possession and flexibility in the use of resources, i.e. strategic flexibility (Wang and Ahmed, 2004, 2007). Adaptive capability includes company’s ability to analyze the market, customers and competitors, allocate resources, and respond to changing market conditions (Oktemgil and Gordon 1997).

Hou and Chang’s (2008) sensing capability, which refers to the ability of understanding customer needs and market dynamics better than its competitors, could also be considered as a part of adaptive capabilities.

Absorptive capability

Absorptive capability enables company to recognize the value of new, external information, absorb it and use it (Cohen and Levinthal, 1999, Hou and Chang, 2008, Wang and Ahmed, 2007). It includes knowledge acquisition, knowledge assimilation, knowledge transformation, and knowledge exploitation (Wang and Ahmed, 2004, 2007). It is capability based on knowledge that supports the functioning of operational and dynamic capabilities (Newey, Zahra, 2009). According to the results of empirical studies, absorptive capability is necessary for firm’s success (George, 2005, Salvato, 2003, Woiceshyn, and Daellenbach, 2005).

Absorptive capability depends upon company’s interface with external environment, and transfers of knowledge within organizational units (Cohen and Levinthal, 1990).

Absorptive capability has role in allocation resources for innovative capability (Cohen and Levinthal, 1990).

Innovative capability

Innovative capability refers to new products and markets development, and it manifests through development of new products and services, development of new production methods, risk-taking by key executives, market innovation, and firm’s innovative strategic orientation (Hou and Chang, 2008, Wang and Ahmed, 2004, 2007).

Similar to Wang and Ahmed’s (2004, 2007) definition of innovative capability is McKelvie and Davidson’s notion of (2009) new product development capability and new process development capability. According to McKelvie and Davidson (2009), the role of new product development capability includes new products and services development, quality of new products and services and the variety of new products and services in relation to company’s largest competitors, while new process development capability includes performance of innovation process and adaptation of new technology to existing processes. Considering main definitions innovative capabilities (Capon, et al. 1992; Miller and Friesen, 1983; Wang and Ahmed, 2004, 2007), McKelvie and Davidson’s new product development capability and new process development capability can be seen as parts of innovative capability.

Innovation capability is ”ability to continuously transform knowledge and ideas into new products, processes and systems for the benefit of the firm and its stakeholders” (Lawson and Samson, 2001, 384).

Liao, Fey and Chen, (2007) categorize innovative capability into technical and managerial aspects of innovation.

Results of conducted empirical researches emphasize the importance of innovative capabilities for company’s evolution and survival, especially with respect to dynamic environment and constant change (Deeds et al., 1999; Delmas, 1999; Petroni, 1997; Tripsas, 1997).

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From analyzing elements of dynamic capabilities provided by above-mentioned authors, it is obvious that absorptive and innovative capability can be useful in explaining innovation and learning processes in companies. Since, according to Grover and Davenport (2001), research on knowledge management should include analysis of generation, codification, transfer and realization of knowledge, it can be seen that knowledge management perspective can be integrated in dynamic capabilities approach in explaining learning and innovation mechanisms. Even Teece (1998), one of the founders of dynamic capabilities approach, noted that strategy field could provide important insights into some aspects of knowledge management.

Knowledge process includes knowledge generation, i.e. processes involved acquisition and development of knowledge, knowledge codification, which refers to the conversion of knowledge into applicable formats, and knowledge transfer from the point of codification to the point of use. Knowledge management process is recursive, expanding, and sometimes even discontinuous (Grover and Davenport, 2001). Knowledge integration is determined by efficiency of integration, scope of integration and flexibility of integration (Grant, 1996).

According to Gold, Malhotra and Segars (2001), identification and assessment of company’s capabilities and resources is necessary for understanding success of knowledge management within organizations.

There are four areas where managing knowledge is needed: acquisition, assimilation, transformation and exploitation. Acquisition and assimilation refer to potential absorptive capability, while transformation and exploitation refer to realized absorptive capability (Zahra and George, 2002; Gray, 2006; Liao et al. 2003). According to Liao et al. (2003) conducted empirical researches have been based more on realized, than potential absorptive capability.

Absorptive capability refers to ability and motivation to obtain and use external knowledge in company’s innovation capability. From that definition, close relationship between knowledge and absorptive capability is evident. Absorptive capability is path dependent, developed cumulatively on existing knowledge (Liao, Fey and Chen, 2007).

Considering that knowledge is crucial for achieving continuous innovation, it can be concluded that knowledge and innovation are closely related (Liao, Fey and Chen, 2007).

Available external sources of knowledge are important for innovation process, while the ability to exploit external knowledge is a component of innovative capabilities (Cohen and Levinthal, 1990).

Developed dynamic capabilities are necessary for effective knowledge management. Dynamic capabilities are less critical for company’s success if there is already strong protection of competitive advantage through intellectual property. Positive effects of knowledge assets and dynamic capabilities are enlarged if there are new technologies that enable rapid organic growth (Teece, 2000)

There are several empirical studies that confirm the influence of absorptive capability on company’s ability to innovate (Cohen and Levinthal, 1990; Knudsen and Roman, 2004; Liao, Fey and Chen, 2007).

Pandza and Thorpe (2009) argue that dynamic capabilities are responsible for the formation of new knowledge formation, which significantly differs from the existing body of knowledge.

Although derived from resource based (RBV), the concept of dynamic capabilities is closely related to knowledge-base view (KBV) (Acedo, Barroso, Galan, 2006).

Easterby-Smith and Prieto (2008) highlight the differences between dynamic capabilities perspective and knowledge management and explore potential synergies, as well as the area in which these approaches overlap.According to Easterby-Smith and Prieto (2008) dynamic capabilities depend on the evolution of knowledge through exploration and exploitation. Exploration refers to new ideas generation, while exploitation includes using existing methods in new contexts. The benefits of exploitation are based on increasing efficiency, and benefits of exploration are based on increasing innovation. Since it is extremely difficult to be good in both processes at the same time, the aim of the company is to achieve a balance between exploration and exploitation.

Dynamic capabilities arise from learning and are able to modify company operating routines. They are developed through mutual evolution of following learning mechanisms: tacit accumulation of past experiences, process of knowledge articulation and processes of knowledge codification. These mechanisms influence operative routines through dynamic capabilities and directly (Zollo and Winter, 2002).

Figure 1. Learning, dynamic capabilities and operative routines.

Learning mechanism

Dynamic capabilities

Evolution of operative routines

Source: Prilagođeno prema Zollo, M.; Winter, S.G. (2002): Deliberate learning and the evolution of dynamic capabilities, 2002., Organization Science, Vol. 13, No. 3, May-June, 340.

According to the model proposed by Zahra, Sapienza and Davidsson (2006), tAlpha

the combination of resources, capabilities and learning processes determines company’s performance levels, but also its knowledge base, which in turn influences dynamic capabilities of the company. At the same time, company’s dynamic capabilities transform its knowledge base and determine company’s performance levels.

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Figure 2. Knowlede, learning and dynamic capabilities

Learning processes

Dynamic capabilities



Resources and capabilities

Source: Prilagođeno prema Zahra, S.A.; Sapienza, H.J.; Davidsson, P. (2006): Entrepreneurship and Dynamic Capabilities: A Review, Model and Research Agenda, Journal of Management Studies, 43:3, 926.

There are several works that investigate the relationship between dynamic capabilities, knowledge management, innovation and learning.

Verona and Ravasi (2003) identify the knowledge-based nature of dynamic capabilities and demonstrate how continuous innovation requires simultaneous presence of knowledge creation, absorption, integration and reconfiguration, which are elements of absorptive capabilities. They conclude that, in order to sustain product innovation, company has to possess dynamic capabilities that allow creation, absorption, integration and reconfiguration of knowledge. Knowledge integration is determined by efficiency of integration, scope of integration and flexibility of integration (Grant, 1996).

Knowledge IntegrationFigure 3. Unbundling dynamic capabilities – knowledge based processes

Knowledge Reconfiguration


Knowledge Creation and Absorption

Source: Verona, G. and Ravasi, D. (2003), Unbundling dynamic capabilities: an exploratory study of continuous product innovation, Industrial and Corporate Change, 12 (3), 579.

Building dynamic capabilities that allow creation, absorption and integration of knowledge is necessary for sustaining product innovation. In order to do that, existing physical and cultural barriers for knowledge integration must be eliminated. Moreover, knowledge creation, knowledge absorption and knowledge integration have to be used in order to facilitate continuous innovation (Verona and Ravasi, 2003).

If company wants to sustain continuous innovation it has to create organizational context that manages organizational culture, systems and structure in order to collect dispersed knowledge and stimulate individual and organizational creativity (Verona and Ravasi, 2003).

In order to achieve competitive advantage through product innovation, dynamic capabilities must leverage company’s resources, especially human and physical capital, structures, systems and organizational culture, which must coexist, be coherent and be combined in order to stimulate dynamic capabilities (Verona and Ravasi, 2003).

According to Verona and Ravasi (2003), dynamic capabilities refer to ”higher order knowledge-related processes”.

Chuang (2004) develops resource-based perspective on knowledge management capability in order to explain sources of competitive advantage. He concludes that social and technical knowledge management resource, as well as knowledge management capabilities, has impact on competitive advantage.

According to findings of research by Sher and Lee (2004), managing endogenous and exogenous knowledge through IT significantly enhances dynamic capabilities. In other words, for establishing and maintaining dynamic capabilities, effective knowledge flows within company are necessary, but dynamic capabilities can be also enhanced through managing exogenous knowledge, including that of customers, suppliers and competitors. From all previously said, it can be concluded that, in order to enhance dynamic capabilities, firms should give particular attention to knowledge management (Sher and Lee, 2004).

Baskerville and Dulipovici (2006) note that abortive capabilities can enhance the knowledge transfer. They link knowledge management to dynamic capabilities perspective, and conclude that with regard to knowledge management, strong dynamic capabilities are key element for developing knowledge capabilities and knowledge asset.

Liao, Fei and Chen (2007) develop model that integrates knowledge sharing, which is the core of knowledge management, with elements of dynamic capabilities, i.e. absorptive capability and innovation capability, in order to explain sources of competitive advantage. According to them knowledge sharing, helps company to develop absorptive capability and improves company’s innovation capability.

Figure 4. Relationship between knowledge sharing, absorptive and innovation capability

Knowledge Sharing

Competitive Advantage

Innovation Capability

Absorptive Capability

Source: PrilagoÄ‘eno prema Liao, S., Fei, W.C. and Chen, C.C. (2007), Knowledge sharing, absorptive capability, and innovation capability: an empirical study of Taiwan’s knowledge-intensive firms, Journal of Information Science, 33 (3), 346.

Knowledge sharing can be process, activity or behaviour. It includes knowledge donating and collecting, i.e. it is obtained using these two methods. In this study, knowledge sharing is antecedent of innovation and absorptive capabilities (Liao, Fey and Chen, 2007). According to proposed model, knowledge sharing improves company’s innovation capability, and helps develop company’s absorptive capability. Absorptive capability has positive influence on company’s innovation capability, i.e. it improves company’s innovation capability. The link between knowledge sharing and innovation capability is mediated by absorptive capacity (Liao, Fey and Chen, 2007).

Cepeda and Vera (2007) use integrated knowledge management and dynamic capability approach to explain knowledge management processes behind development and use of dynamic capabilities. They prove the importance of knowledge management infrastructure for managing company’s knowledge gap during dynamic capabilities development.

According to the results of empirical analysis conducted by Chen (2004), explicitness of knowledge and absorptive capability, both have positive influence on knowledge transfer performance.

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