Tacit knowledge and dynamic capability: the importance of Penrosian ‘image’.
Department of Management, NUI Galway
Last modified: May 3, 2004
The origins of dynamic capabilities have been neglected. Questions about the balance between the tacit and inimitable elements of capability and the role of intentionality require further exploration. Undoubtedly some of these questions remain open because of the paucity of empirical work (Foss, 1996; Cohen et al., 1996; Zollo and Winter, 2001). This is compounded by the finding of Becker (2001) that there is very little integration of empirical findings back into the theoretical debates, notwithstanding that many of the questions raised are not amenable to being answered by theory alone. This paper attempts to address some of these questions by providing empirical work on the nature and impact of dynamic capability that is explicitly rooted in the existing theoretical literature.
It is clear that within evolutionary economics the development of the firm is seen as being strongly path-dependent. Teece et al. (1994) argue that the future direction of the firm is partly a question of the technical opportunities open to the firm. These may be the result of internal innovation, or they may be developed externally to the firm through developments in basic science or by other firms. In either case however, the exploitation of these opportunities by the firm relies crucially on its ‘knowledge base and organisational context’ (Teece et al., 1994. p. 16), that is, on the firm’s capabilities. The technical opportunities that the firm is best able to explore will lie thus ‘close-in’ to existing technologies used by the firm (Teece and Pisano, 1994, p. 546). This is reinforced by the fact that ‘in addition, a firm’s past experience conditions the alternatives management is able to perceive’ (Teece et al., 1997, p. 524), a point made originally by Penrose (1959) who argues that the learning from past growth acts to shape the ‘image’ held by manager of future potential growth. This means that firms in the same industry may be making decisions about future activity on the basis of (a) different costs for pursuing the same technical opportunities and (b) a different set of perceived technical opportunities (Teece and Pisano, 1994).
However, that is not to say that evolutionary economics does not allow for deliberate, reflexive or strategic behaviour by firms.
Undoubtedly, there is a great deal of business behaviour that is not, within the ordinary meaning of the term, “routine.” Equally clearly, much of the business decision making that is of the highest importance, both from the point of view of the individual firm and from that of society, is nonroutine. High-level business executives do not, in the modern world, spend humdrum days at the office applying the same solutions to the same problems that they were dealing with five years before. We do not intend to imply any denial of these propositions in building our theory of business behaviour on the notion of routine (Nelson and Winter, 1982, p.15).
More recently the literature has begun to emphasise that not all capabilities have the same potential for achieving change. Teece et al. develop a concept of higher-order capabilities. ‘We define dynamic capabilities as the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments. Dynamic capabilities thus reflect an organisation’s ability to achieve new and innovative forms of competitive advantage given path dependencies and market positions’ (Teece et al., 1997, p. 516). Christensen defines capability as a ‘lower-order functional or inter-functional technical capacity to mobilise resources for productive activities,’ distinguishing this from competence, which is the ‘higher-order managerial capacity of the firm or corporate management to mobilise, harmonise and develop resources and capabilities to create value and competitive advantage’ (1996, p. 115).
The development of concepts such as dynamic capabilities may be seen as a response to criticism that the automaticity implied in Nelson and Winter’s concept of routines means that the evolutionary economics theory of the firm is as deterministic as the neoclassical theory of the firm (O’Sullivan, 2000). Similar arguments about the limits of models that rely on path-dependence but do not give a role to agent reflexivity and strategic action have been made by Sabel (1996) and Tracey et al. (2002). While these authors differ in their approaches, they all argue for the role of intentionality over path-dependent responses.
Zollo and Winter (2001) have carried out an exploration of the nature and source of dynamic capabilities that focuses on the strategic actions of deliberate reflection on firm learning and capability. They consider that dynamic capabilities derive from learning mechanisms that ‘go beyond semi-automatic stimulus-response processes and tacit accumulation of experience’ (ibid., p. 10). In their argument dynamic capabilities include an element of experiential learning, but are also the outcomes of more deliberative cognitive processes aimed at developing explicit knowledge: ‘dynamic capabilities emerge from the co-evolution of tacit experience accumulation processes with explicit knowledge articulation and codification activities’ (ibid., p. 19). However in this paper I argue for the importance of tacit processes, namely the path-dependent nature of firm perceptions, that should not be neglected in favour of a concentration on deliberative processes when looking at dynamic capability.
Earlier research established the role of organisational capabilities in explaining successful firm adaptation to a changed regulatory environment (Hilliard, 2001, Hilliard and Jacobson, 2003). Significantly the research identified the key role of dynamic capabilities in adaptation; the presence or absence of appropriate static capabilities, either technical or managerial, did not matter if firms possessed dynamic capability.
In this paper the focus is on unpacking the nature of dynamic capabilities through a cross case comparison of five firms that display either strong or weak dynamic capabilities. The intention of the case study approach is to gain insight into the evolution of organisational capability without abstracting away from context-specific factors. As well as drawing out the development of capability, the cases also focus on the importance of capability in determining the firm’s effectiveness in adjusting to the new regulatory environment. In each case evidence of routines underpinning dynamic capability is examined.
The success of regulatory compliance amongst some firms does not appear to be explained by recourse to any quantitative factors. The explanation lies rather in the qualitatively different experiences or evolutionary paths of these firms. Despite starting from a similar position to the other firms in the sector, these firms made more of the opportunities presented.
Penrose (1959) suggested that what an organisation was able to do in the future was shaped by experience gained from past growth. But further than this she argued that past experience shaped managers’ image of the opportunities open to the firm. Teece et al. describe this as ‘a firm’s past experience conditions the alternatives management is able to perceive’ (1997, p. 524). Hodgson (1996) draws the distinction between information and knowledge; information becomes knowledge only after interpretation, and the same information may not provoke the same knowledge, the difference being the interpretation performed by the firm’s cognitive framework or perception, or ‘knowledge is processed information’ (Fransman, 1994, p. 717). In the five case firms it was clear that, in response to the same external regulatory demands, they each had a different perception and interpretation of what was required to develop their environmental performance to the necessary standard.
In conclusion, dynamic capability in these case companies involves both tacit and explicit elements. The firms with effective capability are characterised by the presence of routinised processes that have been put in place as the result of strategic action. These processes are for planning change, for reflecting on past performance, for embedding and routinising learning, and for leveraging knowledge. However, there is a significant tacit, experiential and path-dependent element to environmental management strategy in these firms. Why these firms made decisions to pursue effective strategies, and other firms made equally deliberate decisions to follow different strategies seems to be in large part shaped by each firm’s perception of the opportunity set it faces.
We find that the nature of the firm’s perception or image has an influence on the presence or absence of reflexive and deliberative processes of learning and change, resulting in the failure or success in developing capability and achieving effective performance. It is therefore argued here that dynamic capability is a function of both the tacit perceptions held by a firm (arising out of past experience and learning) and deliberative, problem-solving processes. This represents a refinement of existing approaches to dynamic capability, and argues for increased importance to be given in research to the role of firm perceptions.
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