The Essence of Dynamic Capabilities and their Measurement

• Author: Ola Laaksonen,Mirva Peltoniemi
• Published date: 01 April 2018
• DOI: http://doi.org/10.1111/ijmr.12122
• Date: 01 April 2018

International Journal of Management Reviews, Vol. 20, 184–205 (2018)

DOI: 10.1111/ijmr.12122

The Essence of Dynamic Capabilities

and their Measurement

Ola Laaksonen and Mirva Peltoniemi1

Katajaharjuntie 20, 00200 Helsinki, Finland, and 1Jyv¨

askyl¨

a School of Business and Economics, PO Box 35,

FI-40014 University of Jyv¨

askyl¨

a, Jyv¨

askyl¨

a, Finland

Corresponding author email: mirva.peltoniemi@jyu.fi

The growing popularity of explaining firm performance through dynamic capabili-

ties has motivated plenty of conceptual development in the field. However, empirical

approaches to measuring dynamic capabilities have so far not been under compre-

hensive scrutiny. The authors; purpose is to assess the extent to which different ways

of measuring dynamic capabilities in quantitative studies correspond to the theoret-

ical essence of the concept, and develop recommendations for future research. They

find that four types of operationalizations have been used: (1) managers’ evaluations;

(2) financial data; (3) company’s experience, actions and performance; and

(4) managers’ or employees’experience, actions and performance. Based on their anal-

ysis, the authors provide eight recommendationsfor future research that relate to iden-

tifying ordinary and dynamic capabilities, avoiding common method bias, taking into

account the quality and fitness rather than the quantity of dynamic capabilities, and ac-

knowledging the cumulativenessof dynamic capabilities through the use of longitudinal

data. They conclude that refiningthe dynamic capability operationalizations would help

to formulate competing hypothesesand to increase the theoretical precision of the field.

Introduction

Dynamic capabilities have gained significant promi-

nence in strategic management research. This is

manifest in the multiple literature reviews that map

the theoretical developments and empirical research

results related to dynamic capabilities (Ambrosini

and Bowman 2009; Barreto 2010; Di Stefano et al.

2010; Easterby-Smith et al. 2009; Helfat and Winter

2011; Pavlou and El Sawy 2011; Peteraf et al.

2013; Teece 2007; Vogel and G¨

uttel 2013; Wang

and Ahmed 2007). Such reviews have identified

conceptual challenges for the development of the

field, some of which have been resolved in recent

work (e.g. Di Stefano et al. 2014; Felin et al. 2012;

Peteraf et al. 2013; Teece 2007, 2012). Empirical

challenges, in contrast, have been left with much less

attention. Some reviews have pointed to problems in

The authors would like to thank Teppo Felin, Juha-Antti

Lamberg and three anonymous reviewers for constructive

comments on earlier drafts.

the research designs of empirical dynamic capabili-

ties studies (Arend and Bromiley 2009; Pavlou and

El Sawy 2011). However, we still lack a systematic

review of how dynamic capabilities are operational-

ized. To address this gap, we ask the following three

questions: (1) How are dynamic capabilities mea-

sured? (2) Towhat extent do the measures correspond

to the theoretical essence of dynamic capabilities?

(3) How should the operationalizations of dynamic

capabilities be developed in future studies?1

Weargue that a better understanding of operational-

izations could advance dynamic capabilities research,

1We use the term ‘operationalization’ to refer exclusively to

devising quantitativemeasures for a phenomenon that cannot

be measured directly. Initially, we also included qualitative

studies in the review. However,we realized that they represent

a wide variety of approaches and differ greatly from quanti-

tative studies in their research design, data and interpretation.

Therefore, we decided to exclude them, and believe that the

methods used to observe dynamic capabilities in qualitative

studies deserve a review of their own.

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Essence of Dynamic Capabilities 185

because a strong link betweenconstr ucts and their em-

pirical measures is necessary for theory development

(Venkatramanand Grant 1986). Since theoretical def-

initions of the constructs within the resource-based

view are often all-inclusive and elastic (e.g. Kraatz

and Zajac 2001; Priem and Butler 2001; Williamson

1999), operationalizations provide a means for un-

derstanding what researchers specifically mean by

dynamic capabilities.2In the context of management

research, Yaniv (2011, p. 590) has gone so far as

to state that ‘a theoretical construct has no value if

it is not reducible to specific observations’. Look-

ing at researchers’ uses of different empirical mea-

sures can also shed light on their theoretical stances

and help evaluate how well the theoretical construct

works in different empirical settings (Berg 1995,

p. 23). Moreover, operationalizations are also cen-

tral for practitioner relevance: dynamic capabilities

cannot be purposefully developed or assessed if there

is uncertainty over how they are manifest in the em-

pirical world. Operational validity depends on ‘the

ability of the practitioner to implement action im-

plications of a theory by manipulating its causal (or

independent) variables’ (Thomas and Tymon 1982,

p. 348), and hence a sound understanding of the rele-

vant variables is essential if dynamic capabilities are

to be developed systematically.

We begin this review by defining the theoretical

essence of dynamic capabilities based on highly cited

and influential theoretical contributions. This allows

us to compare the operationalizations used with the

theoretical ideal. We find that the essence of the

dynamic capabilities construct consists of a distinc-

tion between ordinary and dynamic capabilities (e.g.

Eisenhardt and Martin 2000), the role of performance

as an indirect outcome of dynamic capabilities (e.g.

Zahra et al. 2006), the importance of whether firms

possess certain types of dynamic capabilities rather

than how much of a dynamic capability they pos-

sess (e.g. Eisenhardt and Martin 2000; Teece et al.

1997), and focus on change over time (e.g. Win-

ter 2003). These characteristics give us ample ad-

2We do not provide an exact definition of dynamic capabili-

ties ourselves owingto the following logic: we review studies

that analyze a phenomenon that is explicitly identified in the

study as dynamic capabilities, regardless of the theoretical

definition for dynamic capabilities that the study provides.

However, we discuss the ‘essence’ of the dynamic capabili-

ties construct – that is, certain key characteristics most often

posited for the construct in prior research, and subsequently

analyze how the different operationalizations adhere to this

essence.

vice as to how dynamic capabilities should be mea-

sured. Wethen review empirical dynamic capabilities

studies and identify 232 distinct operationalizations

of dynamic capabilities, which we classify into four

categories: (1) managers’ evaluations; (2) financial

data; (3) company’s experience, actions and perfor-

mance; and (4) managers’ or employees’ experience,

actions and performance. Finally, we offer eight rec-

ommendations for future research on how opera-

tionalizations of dynamic capabilities can best cap-

ture the theoretical essence of the construct.

This study joins a growing stream of reviews eval-

uating operationalizations in management research

(Karren and Barringer 2002; Lohrke et al. 2010;

Venkatraman and Grant 1986), but is the first to

concentrate on the operationalizations of dynamic

capabilities.

The essence of dynamic capabilities

In defining the essence of the dynamic capabilities

construct, the key theoretical studies offer ample

advice as to how dynamic capabilities should be

measured. In order to approach the essence of the con-

struct in a systematic manner, we have followed the

framework of Di Stefano et al. (2014) on the five key

structural components that define dynamic capabil-

ities, including their object (what is the object of the

action of dynamic capabilities), aim (what is their

goal), nature (what they fundamentally are), agent

(who exerts them) and action (what do they do).

Below, we discuss these key characteristics of

dynamic capabilities and their implications for

empirical measurement.

Dynamic and ordinary capabilities

Dynamic capabilities literature makes a conceptual

distinction between ordinary capabilities and the

firm’s broad resource base, on the one hand, and

dynamic capabilities, on the other. Ordinary ca-

pabilities (also called operational or ‘zero order’

capabilities) determine how a firm makes its living at

the moment, whereas dynamic capabilities enable the

firm to change (Winter 2003; Zollo and Winter 2002).

Ordinary capabilities enable operational effective-

ness, whereas dynamic capabilities enable sensing

and seizing new business opportunities (Teece2007).

Dynamic capabilities create opportunities for new

value-creating strategies through modifying ordinary

capabilities (Eisenhardt and Martin 2000).

In consequence, in order to operationalize dynamic

capabilities, there is a need to identify the object of

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