How do firms achieve and sustain competitive advantage?

That was and still is the fundamental question of strategic management. It is even more important in the times of rapid technological change.

Dynamic capabilities approach
Teece, Pisano & Shuen (1997) have created a framework that explains how companies can achieve and sustain their competitive advantage. According to this framework - a dynamic capabilities approach - the wealth creation in regimes of rapid technological change depends on improving internal technological, organizational and managerial processes inside the firm. 

Firms can improve that by: 

• identifying new opportunities and organizing effectively and efficiently to embrace them
• exploiting firm specific competences to address changing environments

The environment
In industries like semiconductors, information services, and software one can experience rapid changes in technology and market forces. This is on contrary to industries with balanced competitive positions.

Winning companies demonstrate:

• timely responsiveness 
• rapid and flexible product innovation 
• management capability to effectively coordinate and redeploy internal and external competences 

Dynamic capabilities
Dynamic capabilities is the ability to achieve new forms of competitive advantage. Dynamic defines the capacity to renew competence so as to achieve congruence with the changing business environment. Capabilities - the role of strategic management in adapting, integrating and reconfiguring skills, resources and competences to match the changing environment.

Competences and capabilities
Core competence defines a firm’s fundamental business. It tells what distincts firms from markets. Competences and capabilities which cannot be accomplished by using the price system to coordinate activity cannot be assembled through markets. The properties of internal organization cannot be replicated by a portfolio of business units combined through formal contracts (cannot be replicated in the market). Firm's capabilities need to be understood in terms of organizational structures and managerial processes which support productive activity.

There are 3 categories of factors that determine a firm’s distinctive competences and dynamic capabilities:

1. Managerial and organizational processes: the way things are done in the firm (routines, patterns of current practice and learning) 
2. Position: current specific endowments of technology, intellectual property, complementary assets, customer base, and external relations with suppliers and complementors 
3. Path: strategic alternatives available to the firm, the presence or absence of increasing returns, and attendant path dependencies

Competences and capabilities of a firm rest fundamentally on processes, shaped by positions and paths.

Competitive advantage
Competences will provide competitive advantage only if they are based on routines, skills, and complementary assets that are difficult to imitate. The ease of imitation determines the sustainability of competitive advantage. The more tacit the firm’s productive knowledge, the harder it is to replicate by the firm itself or its competitors. Intellectual property rights (patents, trade secrets, trademarks) impede imitation of certain capabilities.

Managerial implications
C-level executives should foster organization to create distinctive and difficult to imitate advantages, avoid “games” with customers and competitors.

Strategic change is difficult, capabilities cannot easily be bought – they must be built. Choose and commit to long-term paths of competence development.

Entry strategies must be made with reference to competences and capabilities relative to competition. Opportunities lie close to existing business.

Entry timing: when there is an overlap between capabilities and those needed to survive in the new market.

Diversification should be related – build upon or extends existing capabilities