Dynamic capabilities and the role of

organizational knowledge: an exploration

Isabel M. Prieto
1
and
Mark Easterby-Smith
2
1
University of Valladolid, Valladolid, Spain;
2
Management School, Lancaster University,
Lancaster, U.K.
Correspondence: Mark Easterby-Smith,
Management School, Lancaster University,
Lancaster LA1 4YX, U.K.
Tel: 44 (0)1524 584012;
Fax: 44 (0)1524 844262;
E-mail: m.easterby-smith@lancaster.ac.uk
Received: 3 August 2005
Revised: 8 January 2006
Accepted: 24 August 2006
Abstract
Two concepts, dynamic capabilities and knowledge management, are widely
assumed to be linked to sustained competitive advantage, although researchers
have found it hard to substantiate these assumptions. It has also been
suggested that the interplay between the two is important, and that it needs to
be better understood. In this paper, we therefore look at the nature of, and
interaction between, organizational knowledge and dynamic capabilities in
some detail. We do this first through a literature review, and second, through a
case study of the evolution of a new international business. The study illustrates
how forms of knowledge, particularly when transmitted via social interactions,
can act as a source of dynamic capabilities, and we conclude with suggestions
about further research on the social and political interactions between the two.
European Journal of Information Systems (2006) 15, 500510.
doi:10.1057/palgrave.ejis.3000642
Keywords: organizational knowledge; dynamic capabilities; social processes; knowledge
transfer; knowledge management; organizational politics
Introduction
The idea of dynamic capabilities plays a central role in the analysis of
complex organizational processes because it offers a potential solution to
the quest for sustained competitive advantage. Although it has been
discussed widely in the strategy literature, it has also been considered in
related fields such as information management due to increasing
awareness of the links between knowledge and organizational capabilities.
A stream of recent strategy literature has explored the organizational
characteristics that determine the effectiveness of the emergence, evolu-
tion and utilization of dynamic capabilities. In these accounts, the role of
knowledge and knowledge-based processes has been central: dynamic
capabilities are seen to evolve through pathways that can be described in
terms of the evolution of knowledge within organizations (Zollo & Winter,
2002), and this knowledge is then considered as a key resource to drive
competitive advantage in organizations (Grant, 1996). In other words, the
dynamic capabilities perspective suggests that the long-term, continuous
renewal of the firm rests on both the exploitation of existing knowledge-
based competences and the exploration of new knowledge-based compe-
tences (Zollo & Winter, 2002; Gibson & Birkinshaw, 2004).
Scholars with a primary interest in knowledge processes have also
considered their potential link to dynamic capabilities (He & Wong,
2004; Sambamurthy & Subramani, 2005), and a few empirical papers (Gold
et al., 2001; Sher & Lee, 2004; Cepeda & Vera, 2005; Haas & Hansen, 2005)
have taken a cross-sectional approach, examining, for example, the way in
which dynamic capabilities can be facilitated by knowledge management.
These studies have shown the relationship to be complex, which suggests
European Journal of Information Systems (2006) 15, 500510
& 2006 Operational Research Society Ltd. All rights reserved 0960-085X/06 $30.00
www.palgrave-journals.com/ejis
that there is a need to understand in greater depth the
specific interplays within organizations.
The aims of this paper are twofold. First, to provide a
brief review of the literature on dynamic capabilities and
knowledge management, leading to a theoretical account
of potential linkages between the two, and second, to
illustrate through a case study how these may be manifest
in practice. Although the idea of dynamic capabilities has
evolved largely from theorizing, the construct has
remained quite abstract and it has received little
empirical verification. Our case study tries to reduce this
gap by offering examples of resource configurations and
routines that seem to embody dynamic capabilities. In
doing so, we try to show the role played by knowledge
management in relation to the evolution and use of
dynamic capabilities.
The emergence of dynamic capabilities
The dynamic capabilities literature has sought to study
firms potential to adapt to and take advantage of fast-
moving environments. At the core of the concept is the
idea that, when the competitive landscape evolves
rapidly and unpredictably, an organization can achieve
and sustain advantage by regularly adjusting and
developing resources (Teece et al., 1997) and routines
(Eisenhardt & Martin, 2000; Winter, 2003). But a
dynamic capability does not necessarily imply constant
change; more the potential to extend, modify or create
these internal resources and routines as appropriate. This
potential depends on complex organizational processes
(routines or patterns of current practice), shaped by the
firms specific resource positions, and the evolution paths
it has adopted/inherited that condition its range of
possible alterations to its existing competences (Teece
et al., 1997).
Amid the consensus, there are also important differ-
ences in the emphases provided by different authors. The
dominant tradition comes from the resource-based
view, which concentrates on the resources such as
physical, human and organizational assets that can be
used to implement value-creating strategies, which may
be configured and reconfigured in ways that cannot
easily be matched by competitors, thus yielding business
advantage (Barney, 1991; Hamel & Prahalad, 1993).
Because the value of resources change over time, Teece
et al. (1997, pp. 516) add that competitive advantage
comes not only from resources but also from the firms
ability to continually create, integrate and reconfigure
new resources.
Other papers have tended to place greater emphasis on
routines, which Winter (2003, pp. 991) defines as
behaviour that is learnt, highly patterned, repetitious,
or quasi-repetitious, founded in part on tacit knowledge
and the specificity of objectives. Eisenhardt & Martin
(2000) also focus on routines, by characterizing dynamic
capabilities as specific, identifiable and organizational
processes like product development, alliancing and
strategic decision-making that create value for firms
within dynamic markets. But there is also an important
contrast with the resource-based view which emphasizes
uniqueness and inimitability, because Eisenhardt and
Martin claim that dynamic capabilities exhibit common-
alities across effective firms and these features represent a
kind of best practice, which can be transferred from one
firm to another. Dynamic capabilities are thus a necessary
but not sufficient condition for competitive advantage.
Other scholars, such as Zollo & Winter (2002) and Zott
(2003), see high-level routines as the driving force behind
changes in resource configurations.
Researchers have also shown how significant routines
can be located both at strategic levels, as when companies
progressively develop routines for dealing with integra-
tion of new corporate acquisitions (Zollo & Singh,
2004), and at operational levels, where detailed work
practices are constrained by organizational resources and
influence the potential changes in these same resources
(Feldman, 2004). Feldmans work raises the question
of the links between resources and routines. On the
basis of her detailed study of the management of
student residences and using insights from structura-
tion theory, she concludes that the chain of influence is
two-way.
Although the idea of dynamic capabilities is relatively
recent, it has been criticized on a number of grounds.
First, the exact nature of dynamic capabilities is not well
understood, and there is the argument that the concept is
both vague and tautological: dynamic capabilities are the
things that enable organizations to sustain competitive
advantage, but we can only infer these when looking at
apparently successful organizations over sustained peri-
ods of time (Winter, 2003). This leads to a second
weakness because there have been very few research
studies that have enabled the evolution and operation of
so-called dynamic capabilities to be observed over time
(Priem & Butler, 2001). Most of the early papers on
dynamic capabilities were illustrated with examples
adapted from earlier studies, which had been designed
with different targets in mind.
Third, there is some confusion about the different
terms and their interrelationships. Do dynamic capabil-
ities reside in resources, or only in the process of being
changed; and if routines can be established for changing
resource configurations, do these routines become dy-
namic capabilities in their own right; and what if the
routines themselves become changed, does this imply
meta dynamic capabilities? Some of these dilemmas
have been tackled recently by Winter (2003), who uses
the logic of differential calculus to distinguish between
different levels of change (distinguishing between zero,
first and second orders of change), although this frame-
work has not yet been widely adopted. Finally, it is not
yet clear where dynamic capabilities come from,
although there is growing acknowledgement that learn-
ing must play some part in the process (Zollo & Winter,
2002). As such learning involves the potential to create,
integrate and reconfigure knowledge, and to transform
Dynamic capabilities and the role of organizational knowledge Isabel M. Prieto and Mark Easterby-Smith 501
European Journal of Information Systems
existing knowledge into further knowledge (Verona &
Ravasi, 2003; Dougherty et al., 2004).
This evolving interest in learning and knowledge
processes underlying dynamic capabilities provides an
initial rationale for this paper, but we are also interested
to examine current issues including definitional pro-
blems, and the relationship between resources and
routines.
Organizational knowledge and its management
Economists have recognized for a long time that knowl-
edge may have economic value both in society, in general
(Hayek, 1945), and in the growth and development of
organizations (Penrose, 1959). Moreover, Nelson &
Winter (1982) paid particular attention to the signifi-
cance of tacit knowledge as a basis for both individual
and organizational competence. However, it was not
until the mid-1990s that companies became very inter-
ested in the nature of knowledge, partly as a result of the
advances in information technology, which provided the
promise of being able to manage knowledge as a
corporate asset. Knowledge management emerges as the
integrated approach about the need to understand how
to manage the actual and potential flows of knowledge
creation, transfer, retention and use within and across
organizations. Initially, the focus was on the provision of
technological solutions, such as the introduction of
intranets, the establishment of data warehouses and
knowledge repositories, and the creation of directories
of expertise. But there was also quick appreciation that IT-
based knowledge management would not work unless
considerable attention was given to the social processes
upon which their implementation relied (Ruggles, 1998).
Much academic comment, therefore, has concentrated
on aspects of knowledge, which appeared to be proble-
matic when information technology solutions were
applied. One clear distinction that emerged in the
literature was a divide between those interested in the
technology side and those emphasizing the social side
of knowledge management (Alvesson & Karreman, 2001;
Gloet & Berrel, 2003). As summarized in Table 1, each one
of these perspectives derives from the different under-
standings of knowledge and its creation through learning
(Easterby-Smith & Araujo, 1999; Thomsen & Hoest, 2001;
Gnyawali & Stewart, 2003). There has also been concern
that social perspectives have been neglected in the
literature, and that a critical factor in determining the
success or failure of knowledge management systems
is the impact on social relationships among the people
who utilize the systems (Brown & Duguid, 2000; Hayes
& Walsham, 2003; MacPherson et al., 2004; Hansen
et al., 2006).
Other researchers argue for more of a balance by
integrating the technological approach with the social
approach as a basis for action (Pan & Scarbrough, 1999),
thus combining the role of technology, information
systems and people. In this context, technology becomes
a facilitator of natural social processes, allowing specialist
communities of practice to operate across functions and
geographical distance within the same organization
(Alavi & Leidner, 2001; McLure & Faraj, 2005). There is
also a growing acceptance of a contingency model of
knowledge management which suggests that there needs
to be consistency between the firm, its people, its task
and its information technologies. For example, in the
context of consultancy companies and computer manu-
facturers, when the nature of the task is highly auto-
mated and repetitive, it is worth investing in extensive
codification of knowledge; but where the primary tasks
are large, complex and fairly unique, it makes more sense
Table 1 Organizational knowledge and its management: two perspectives
Theoretical lens Treatment/modelling Conception of KM
Technology perspective Rooted in a view of knowledge as a cognitive
possession
Information gathering and analysis are central to
organizational learning, as they enable change in
existing schemas of reality, which is knowledge
Individuals only constitute a small part of
organizations
KM focuses on effective information seeking,
processing and codifying in order to make
decisions that optimise the organization/
environment relationship
KM enables organizations to build formal/tangible
systems which enhance internal learning
Key KM features comprise IT infrastructures, and
other technical and managerial systems
Social perspective Rooted in a view of knowledge as a social
construction
Social activity and discursive behaviour are central
to organizational learning, as they support the
social construction of reality
Organizational members, individually or
collectively, question and reflect on their own
working processes
KM aimed to enhance shared interpretation
processes by organizational members in order to
make sense of the environment
KM is about building informal/intangible learning
environments supported by appropriate kinds of
behaviour
KM is designed around social relations and more
cultural enablers. IT makes things easier, but only
as tool to increase work efficiency
Dynamic capabilities and the role of organizational knowledge Isabel M. Prieto and Mark Easterby-Smith 502
European Journal of Information Systems
to develop knowledge management systems that are
personalized around the needs of individual actors
(Sarvary, 1999; Hansen et al., 1999).
But a number of problems remain. For a start, there is
concern about whether it is possible to manage the forms
of knowledge that really matter for performance and
competitive advantage. Since this knowledge tends to be
tacit, and based on individual experiences and intuitions,
it becomes difficult to codify and exchange. Conse-
quently, knowledge management systems often become
overburdened with information that has no particular
performative or economic significance (Alavi & Leidner,
2001; Sutton, 2001). Furthermore, the transfer of useful
knowledge between individuals and groups depends
increasingly upon the quality of relationships, and
whether there is sufficient trust/reciprocity between
those involved (Jones & George, 1998; Andrews &
Delahaye, 2000; Zarraga & Bonache, 2005). Underlying
this is a recognition that individuals need to be appro-
priately motivated to contribute to knowledge manage-
ment systems (Bock et al., 2005), and that the ownership
and control of knowledge within organizations becomes
a particularly sensitive political issue (Leadbeater 2001;
Lawrence et al., 2005). Hence, an interest of this paper is
to explore some problematic issues of organizational
knowledge within the evolution over time of a real
organization.
Linking dynamic capabilities and knowledge
management
As we have noted above, a number of authors have made
general linkages between dynamic capabilities and
organizational knowledge, suggesting that the dynamic
capabilities which underpin the long-term, continuous
renewal of the firm rest on both the exploitation of
existing knowledge-based competences and the explora-
tion of new knowledge-based competences (Eisenhardt &
Martin, 2000; Gibson & Birkinshaw, 2004). Zollo &
Winter (2002) identify a knowledge evolution cycle,
including generative variation, internal selection, repli-
cation and retention, behind the development of dy-
namic capabilities. Similarly, Verona & Ravasi (2003) and
Dougherty et al. (2004) highlight that dynamic capabil-
ities are made up of knowledge creation and acquisition,
knowledge integration and knowledge reconfiguration,
and moreover, suggest that these processes are based on a
coherent mix of organizational conditions.
But the precise form of these linkages has not been
articulated and has to be inferred from various accounts.
For example, dynamic capability researchers have identi-
fied forms of knowledge that serve as potential sources of
competitive advantage. Leonard Barton (1995) and
Verona & Ravasi (2003) note that personal skills and
knowledge, physical and technical resources, structure
and culture should be combined to stimulate ongoing
knowledge dynamism and dynamic capabilities. Research
has also explicitly identified the conditions behind
knowledge-enabled dynamic capabilities. For example,
Lawson & Samson (2001) propose a model that oper-
ationalizes innovation as a dynamic capability dependent
on seven conditions: vision and strategy; harnessing the
competence base; organizational intelligence; creativity
and idea management; organizational structure and
systems; culture and climate; and the management of
technology. Clearly this involves combining both tech-
nical and social perspectives on knowledge management.
On the other hand, Dougherty et al. (2004), on the basis
of extensive qualitative research, concentrate more on
the social perspective describing three sets of rules
and resources (whole responsibility, valuing knowledge
expertise and searching for opportunities) as social
enablers of the dynamism of capabilities embedded in
the structures of everyday work.
Among knowledge management researchers, the as-
sumption is widely held that information technology
contributes directly to organizational flexibility, and
hence dynamic capabilities. This relationship continues
to receive comment, for example, by Sambamurthy et al.
(2003) who develop a theoretical argument suggesting
that digital information technology is itself a dynamic
capability. Sher & Lee (2004) see the two as separate and
examine the relationship empirically to show that both
endogenous and exogenous knowledge generated by a
range of IT applications is linked to perceptions of
dynamic capabilities across a sample of Taiwanese firms.
The bulk of empirical studies on this relationship take
a quantitative approach using cross-sectional surveys
(Gold et al., 2001; Sher & Lee, 2004). An exception is
the study by MacPherson et al. (2004), which adopted
qualitative methods to examine dynamic capabilities in a
knowledge-dependent firm. They concluded that there
was a strong link between the ability of senior managers
to gather external knowledge through business networks
and the creation of dynamic capabilities for adapting
routines that would enable them to recognize and exploit
new business opportunities.
The knowledge management literature has also
reached the point of acknowledging that social processes
play a key role in the creation, sharing and configuration
of knowledge, which can produce hard-to-imitate cap-
abilities. For example, Argote et al. (2003) argue that
social relationships provide individuals with abilities,
motivation and opportunities to create, retain and
transfer knowledge. A growing body of research has shed
light on what affects peoples willingness to share
knowledge at work. However, much of the work reported
is based on limited empirical data, and is exploratory in
nature, indicating the general lack of depth to the
understanding of these issues in detail. How knowledge
gets created by or integrated into social practice and
relationships is therefore a critical aspect behind dynamic
capabilities, which still needs research effort. In addition
to social relations, power (Scarbrough & Carter, 2000) and
political issues (Marshall & Brady, 2001) are also proper-
ties of social systems associated with knowledge manage-
ment outcomes that have been neglected by research.
Dynamic capabilities and the role of organizational knowledge Isabel M. Prieto and Mark Easterby-Smith 503
European Journal of Information Systems
In summary, there is general consensus that a relation
exists between knowledge and dynamic capabilities, and
that knowledge management is closely intertwined in
this relationship because the creation and evolution of
dynamic capabilities requires specific conditions to
support the knowledge flows that elaborate, support or
remove knowledge configurations. But the details of the
relationship remain obscure and imprecise, and many
questions remain, about the essence of dynamic capabil-
ities, the relationships between routines and resources,
the forms of knowledge that are critical to corporate
performance and competitive advantage, and the way
social relationships and political factors affect knowledge
flows. In this paper, we aim to explore these factors with a
more fine-grained analysis.
Methodology and research setting
We examine these issues through a single longitudinal
case study because the time dimension provides some
opportunity to infer causality, and because the complex-
ity of a case examined in some depth should allow us
question, and to elaborate on, the models and frame-
works discussed above. The research took place in
ChemCo (a pseudonym), which is one of the global
leaders in the development and supply of chemicals.
Over the years, it has built a huge body of technical
knowledge, and this ability to create and apply knowl-
edge has been regarded as the main source of its
competitive advantage. Like many multinationals, it has
recently reorganized its structure from product divisions
into market segments. The corporate-wide reorganization
was accompanied by a strategic shift that placed greater
emphasis on customers and the need for technical
developments to be driven by closer awareness of market
expectations, and this has subsequently led to a radical
rethink of the role of knowledge across the company.
Over the last 2 years, we have focused specifically on
the development of a new business venture (NBV) within
ChemCo, and we have tracked its evolution through
interviews, observations of meetings and reviews of
internal documentation. Fieldwork has included repeated
interviews with most of the management group (the
managing director (MD) has been interviewed four
times), plus observation of a two-day management
meeting in Spring 2005 that was attended throughout
by all three authors. This meeting enabled observation of
formal and informal discussions that were followed up
with individual interviews. In addition, we have inter-
viewed both senior management in ChemCo and
members of partner organizations (see below) about the
progress of the new venture. We have also reviewed
extensive internal documentation that traces the evolu-
tion and implementation of the current strategy since its
inception in 2003. Notes were kept by each of us during
meetings, and transcripts have been produced for all
formal interviews. The initial interpretation of data was
reached through discussions between the researchers. We
then sent summaries of our conclusions (containing both
practical and theoretical implications) to senior manage-
ment in the NBV for comment, and discussed our
emerging theoretical framework with key managers.
The NBV is one of a number of innovative projects
initiated by ChemCo in 2003, and which are actively
supported by the highest levels of the company. The
essence of the venture, which is still evolving at the time
of writing, is to use an established French organization as
a platform from which to expand the business across
Europe and the Middle East. The business plans are
ambitious, with an annual target of 30% growth in sales
over each of the next 4 years. The strategy is to expand
outside France using partnership arrangements with local
specialist firms, and the expansion is driven by a small
team of regional sales managers (SMs) who are respon-
sible for the recruitment and development of partners in
each region. See Figure 1 for a summary of the main
relationships.
The local partners are mostly small, specialized com-
panies. They need to have sufficient technical expertise
and business networks to sell ChemCos products to their
customers, and since they are given exclusive rights for
each country, their selection is critical. Once selected,
there is a training programme that is conducted through
brief assignments working with the French business,
through visits to potential customers in their own
countries accompanied by the regional manager or
technical experts from France and through direct training
provided by the French technical director. For the NBV,
this model provides a route for very rapid expansion into
new territories for negligible capital outlay, which then
gives them the potential to claim regional presence when
dealing with other global companies. Also, since Chem-
Co does not need to put an infrastructure in place, it is
easier then for the company to decide whether to invest
or disinvest in the various markets. For the local partners,
the arrangement provides local credibility due to their
association with a global brand; it gives potential access
to multinationals with which ChemCo has links else-
where; and it provides them with substantial technical
expertise and systems support. Furthermore, none of
their competitors has yet managed to develop a similar
business model; instead, they continue to rely mainly on
selling directly to end customers.
CHEMCO
NBV
SM
SM
SM
SM
France
Partner
Customer
Customer
Customer

Partner
Partner
Figure 1 Main structure of the NBV.
Dynamic capabilities and the role of organizational knowledge Isabel M. Prieto and Mark Easterby-Smith 504
European Journal of Information Systems
We believe that this case provides a fruitful setting for
our research because it is evolving very quickly, hence it is
likely to exhibit dynamic capabilities; it operates though
a loose network that crosses both organizational and
national boundaries, hence issues about the control and
dissemination of knowledge are likely to be salient; and it
is a live study that enables us to see how things evolve
over time, hence we are more likely to observe interac-
tions and causal relations over time. Since this is a
complete business, we have to recognize its complexity,
and therefore are likely to observe things we had not
previously expected, and yet it is small enough for us to
have direct access to most of the main players, which
should provide a reasonably complete picture.
Analysis and discussion
In this part of the paper, we provide an analysis of the
above case that links the empirical data to theoretical
constructs. It is divided into five sections. The first two
consider the nature of organizational knowledge and
dynamic capabilities manifest in the company, and the
implications for key theoretical debates in both areas. We
then look at the extent to which there appears to be a link
between the two concepts. This leads to the final two
sections which consider common themes which are
apparent in both areas, and which have received limited
acknowledgement in the literature: the importance of
relationships, and the impact of power and politics.
Organizational knowledge
We have identified from the case study six main flows of
knowledge, which are illustrated in Figure 2. We are
conscious of the distinction between technical and social
forms of knowledge, but have decided for the time being
not to classify each example in these terms, but to return
to a discussion of these issues at the end of the section in
the light of the examples provided.
The first, and critical, form of knowledge in the NBV
involves the creation of technical expertise and new
product development. The French operation plays a
pivotal role in technical knowledge creation and this
knowledge is disseminated to the SMs and national
partners through generic training and technical gui-
dance. There is also a reciprocal element, because the
national partners accumulate detailed knowledge of the
technical requirements of customers and occasionally
develop new formulations on site to deal with novel
problems of customers. This knowledge is passed back to
the technical office for wider dissemination to other sales
operations (K1). A second form of knowledge flow (K2)
involves discussion and negotiation about business
targets, and the collection of data on sales performance
to be measured against these targets. Discussions about
targets require both the NBV and partners to share their
aspirations at the start of the year and these targets are
readjusted in the light of performance as the year
progresses. The information on sales performance and
profits is collected on a regular basis using the standard
information system of ChemCo that allows data to be
integrated into the financial forecasts of the wider
company.
However, a different process operates for information
about contractual arrangements (K3). The MD of the NBV
has agreed with senior management that details of local
contractual arrangements do not need to be entered into
the corporate database because they include substantial
variation from corporate norms. Instead, they are
reported by SMs to the MD. As he commented:
an important part of our value proposition is to be very flexible and
make it easy for the clients who want to do business with us. The
way ChemCo normally does contracts has more inherent inflexi-
bility, so part of my job is to keep our guys away from ChemCo.
In this instance, the expected knowledge flow does not
take place, and is deliberately blocked.
The fourth example involves regular exchanges that
take place between partners and their regional SMs, who
are thus able to enrich their understanding of local
market constraints and opportunities. In some cases, this
becomes a close personal relationship with daily com-
munication by phone or e-mail, and where the SM
becomes a business advisor to the local partner (K4).
These insights and local variations are then shared
between the sales team and other senior managers at
their bi-monthly meetings. This is a multinational team
where members have close knowledge of their own
patches, but they still have to explain and justify local
variations in practice to their colleagues. These different
forms of local, or situated, knowledge often have
conflicting implications for the NBV as a whole, which
have to be reconciled, occasionally through the direct
intervention of the MD (K5). A final knowledge flow
came to light when we were discussing the above map
with two of the senior managers in the NBV. Having
agreed with our overall interpretation, they pointed out
that because the parent company has operations in
almost every country, the local ChemCo managers
normally build up relationships with national partners
and are then able to provide information and guidance
on new business opportunities (K6).
CHEMCO
NBV
SM
SM
SM
SM
France
Partner
Customer
Customer
Customer

Partner
Partner
K1
K2
K4
K5
K3
K1
K6
K2
Figure 2 Major knowledge flows.
Dynamic capabilities and the role of organizational knowledge Isabel M. Prieto and Mark Easterby-Smith 505
European Journal of Information Systems
At this point, we can return to the distinction between
social and technical forms of organizational knowledge,
and it is evident from our data that the distinction is by
no means clear-cut. For example, K1 and K2 combine
both technical elements of knowledge (as embodied in
information systems), and social elements of knowledge
(involving sense-making and negotiated meanings). In
the latter case, there is a continuous interweaving
between the more technical forms of information such
as sales performance and the social processes that require
joint sense-making about the significance of performance
data and the negotiations about ongoing readjustment of
targets. On the other hand, K4, K5 and K6 involve
primarily social forms of knowledge generally direct
face-to-face communications between key individuals
(although supplemented by e-mail and telephone
as necessary), either as part of a routine or on an ad hoc
basis.
The third example (K3) is particularly interesting
because it contradicts the prevailing assumption that
knowledge, either in its technical or social forms,
generally contributes towards organizational perfor-
mance. In this case, the judgment is made by the
immediate manager and those above him in the
hierarchy that standardized reporting of information is
likely to inhibit the evolution and growth of the new
business. In recognition that gathering of this informa-
tion could potentially be harmful to the business, it is
agreed that normal information-gathering requirements
should be suspended.
Thus, we are not able to provide a neat resolution to
the debate between social and technical forms of knowl-
edge. Rather, we have shown that there are a number of
potential interactions and variations. Technical and
social variants may exist independently, but the former
is more likely to be combined with the latter, and most
importantly, we have shown that in certain circum-
stances technical forms of knowledge management may
be considered as harmful to the well being of the
organization. This accords well with the results of the
quantitative study by Chuang (2004), which showed that
social forms of knowledge were positively related to
competitive advantage, while technical forms could be
negatively linked.
In concluding this section there are two important
points to note. First, there are clear political overtones to
the use of knowledge within this organization. This is
exemplified by the way the MD has been allowed to
introduce a one-way filter in relation to local contractual
arrangements, as discussed above. There is also an
ongoing debate at senior management level (observed
at the management meeting, and discussed subsequently
with individuals) about the extent to which informa-
tion about local business circumstances should be
systematized or whether it is best to maintain the
existing exchange of knowledge between managers and
partners at an informal, social, level. Second, knowledge
flows depend very much on the quality of relationships
between the key actors. SMs, in particular, seem to play a
mediating role between the partners and the head-
quarters of the NBV, and the sharing of both technical
and commercial knowledge among the NBV, the partners,
and even some of the customers, depends greatly on the
levels of trust that have been built up. We will return to
these points in the discussion section.
Dynamic capabilities
The case demonstrates a number of dynamic capabilities.
We will not map them as we did for organizational
knowledge, but will use a similar numbering system to
assist with later discussion. Several capabilities generate
flexibility in the strategic deployment of resources. First,
the reliance on partnerships with established local
companies means that new businesses can be established
quickly, and this enables competencies and knowledge to
be moved very quickly from one country or setting to
another. This allows for rapid growth with minimal
reliance on existing capital or infrastructure (DC1).
Second, since the local partners are independent, rather
than franchisees, it is easier for the partners, in consulta-
tion with the regional managers, to devise contracts with
customers that take account of local circumstances
(DC2). Third, because of the wider international reach
of the NBV, the French operation gains greater flexibility
and leverage in their dealings with multinational custo-
mers operating in France, thus providing novel business
opportunities for the original core business (DC3). And
the strategic resources of ChemCo mean that local
partners gain much credibility from this association
when seeking business with multinationals in their
territories. As the MD of one partner said: without the
visible backing of ChemCo we simply would not be on the
radar when bidding for a contract with Shell (DC4).
On the other hand, there are some resource issues that
appear to act against flexibility and mobility. This is
because, as a loosely coupled organization, the business is
highly dependent on the technical competence of
individuals and the quality of the relationships that exist
between the key players. These take time to build up. For
example, the U.K. partner has had successful business
dealings with ChemCo over 16 years, even though the
new business has only been running for 2 years. More-
over, when setting up agreements with partners who are
completely new, they have found that on average this
takes up to 18 months, rather than the 6 months
envisaged in the initial plan.
Flexibility and adaptation of routines was evident in two
areas. At a strategic level, there was an acceptance that
business processes and partnership arrangements might
vary according to different national circumstances. Thus,
although there is a general rule that only one partner
should be appointed in each country, there are seven
partners in Italy simply because regional business differ-
ences in that country are so strong (DC5). At an
operational level, the youthfulness of the organization,
and the consequent lack of history, means that many
Dynamic capabilities and the role of organizational knowledge Isabel M. Prieto and Mark Easterby-Smith 506
European Journal of Information Systems
routines have to be invented from scratch, and therefore
there is no embedded resistance to change in the old
ways of doing things. This includes routines around
pricing arrangements, information reporting and perfor-
mance measurement. Of course, much of this freedom
was a result of having negotiated relative independence
from the wider systems of ChemCo, at least for the early
stages of the business (DC6).
There are several implications here for the nature of
dynamic capabilities. The distinction in the literature
between resources and routines appears to work quite
well in this case study: DC1DC4 are primarily about
resources, while DC5 and DC6 are primarily about
routines. However, in the case of DC1, there is some
intermingling of the two concepts. Here it could be
argued that the consistent use of partnerships represents
a strategic routine that then leads to resource flexibility.
There is also a meta-routine apparent in DC4 because
there is a basic routine/rule that there should only be one
partner in each country, there is also a meta-routine
operating here which suggests that the rule can be broken
under certain circumstances.
In general, these examples show that dynamic cap-
abilities can be incorporated in either resources or
routines, or both. Evidently the relationship between
resources and routines may be complex, but that it can
also be positively delineated when qualitative data is
employed. Our results here complement the detailed
analysis of Feldman (2004) that shows the intermingling
of resources and routines within a university housing
agency. Although the two concepts are largely distinct, it
is quite possible for changes in one to produce transfor-
mations in the other.
Links between organizational knowledge and
dynamic capabilities
We have hinted at some of the potential links between
organizational knowledge and dynamic capabilities in
the two preceding sections. Here we examine the
connections more systematically, and we note that each
of the forms of organizational knowledge can be linked to
one or more of the dynamic capabilities that we have
identified in this case. For example, the technical
exchanges between the French business and partners
(K1) lead to greater flexibility and credibility for the
partners (DC2 and DC3); the opportunity to discuss and
renegotiate targets (K2) is likely to support the general
flexibility of routines within the NBV (DC6); a regular
informal exchanges between SM partners (K4) lead to
advice and encouragement about the strategic shifts for
the partner (DC2); the exchange of ideas and experiences
between SMs (K5) leads to the dissemination of the new
local practices of routines (DC6); and contacts with local
ChemCo managers (K6) lead to new business opportu-
nities for local partners (DC4). We also have the negative
case where the agreement about restricting reporting to
ChemCo (K3) leads to greater flexibility in local contrac-
tual arrangements (DC6).
In general, we have assumed that forms of knowledge
precede, and therefore lead to the establishment of
dynamic capabilities. However, the first may also be
possible, because strategic shifts in the business of
individual partners (DC2) might well prompt changes
in the formal and informal processes of gathering and
disseminating knowledge within the NBV and between
SMs. Thus, although it appears that there are relation-
ships between organizational knowledge and dynamic
capabilities, these may well be more complex than
existing causal models assume. In this respect, we would
support the insights of Bhatt & Grover (2005), who argue
that a more detailed understanding of the nature and
variations of dynamic capabilities need to be achieved
before significant progress is to be made on the basic
relationship between the two.
Relationships
It is widely recognized that knowledge flows are affected
by the quality of relationships, and there are a number of
illustrations of this from our data. A key feature of the
business model for the NBV is that it is based on
relationships between partners that are legally quite
independent of each other. When discussing the reasons
for the continuing success of the business (at the time of
writing it remains in line with its ambitious targets), we
were repeatedly told that it relies on the quality of
personal contacts between the key players. As the MD
said: we need to understand that this is a people intensive
business, a know-how intensive business. He agonized
considerably over the selection of SMs because the
business model gave them considerable freedom and
empowerment to act as they thought fit. Hence, he
observed that one of his biggest challenges was having to
delegate to others, and trust in the people who are engaged in
the project.
The NBV requires a willingness to share information:
both technical and product knowledge are disseminated
to the SMs and national partners, while simultaneously
national partners may pass to the technical office new
formulations in order to deal with a customers specific
problems, which means an ongoing learning about each
individual market. Regular contacts lead to understanding
of the different routes to sell chemicals in different countries
and how to create a value proposition to customers. Since
partners are the intermediaries between Chemco and the
delivery of chemicals to customers, care and support are
essential concerns. As one of the SMs said: relations with
partners are like family relations. If one partner gets sick, you
look after him.
The predominance of relationships in this case has an
impact both on organizational knowledge and on
dynamic capabilities. First, the dominance of social forms
of knowledge exchange produces a scepticism of, and
resistance to, undue formalization of information sys-
tems. Second, the existence of positive relationships may
lead to the establishment of dynamic capability because
they can support a decentralized and empowered model.
Dynamic capabilities and the role of organizational knowledge Isabel M. Prieto and Mark Easterby-Smith 507
European Journal of Information Systems
But relationships can take a long time to establish and
much effort to maintain, which slows down the speed
with which new business links can be established, and
means that considerable attention has to be devoted to
issues such as training and team development. This
supports the findings of Kotlarsky & Oshri (2005) about
the need for social relationships to underpin collabora-
tive software within IT projects, and the observations of
Hansen et al. (2006) on the importance of positive direct
relationships as a precursor to knowledge transfer
amongst managers.
Politics
While this has been noted repeatedly in relation to
organizational knowledge, the case has shown how
political skills are required to influence the nature of
organizational knowledge in ways that will enhance,
rather than undermine, dynamic capabilities.
It is widely acknowledged in the literature that
organizational knowledge has political overtones (Hislop
et al., 2000; Newell et al., 2000; Hayes & Walsham, 2003;
Lin & Silva, 2005), but this is less frequently noted in the
literature on dynamic capabilities. Indeed, a recent search
within Proquest under the terms politics and dynamic
capabilities yielded no hits at all. In the present case, the
NBV is only able to function as a distinct part of ChemCo
because the unusual relationship has been approved and
sanctioned by managers at the highest level of the parent
company. Nevertheless, the MD still has to translate this
general sanction into operational reality by gaining
agreements about limiting information flows, about
acceptance of non-standard contractual arrangements
and about circumventing company-wide rules, such as
restrictions on the additions to the head-count. These
agreements were difficult to establish in the first place,
and are complex to maintain. In a recent interview he
commented, if anything, the politics are worse than they
were a year ago. Thus, political protection is a key
facilitator of the NBVs dynamic growth because the
general manager is able to provide from the procedures
and systems of the wider company. This helps to have a
very flexible and proactive approach to customers
because each country has a different culture which is
very different from the tradition of ChemCo.
Within the NBV itself, political issues appear to have a
bearing more on the way priorities are agreed, the way
successes and failures are evaluated, and the way different
forms of knowledge and expertise are legitimized. For
example, there is ongoing tension about the relevant
value of the emergent experience of the regional SMs
compared to the deeper experience of the managers in
the established French business. The dilemma about how
best to balance the technical and social aspects of
knowledge management is also being actively explored
among the senior team as a debate about whether, and
how far, to systematize information gathering and
exchange. This is a common and continuing debate
within the information knowledge community as shown
in the work of Marshall & Brady (2001) and Marshall &
Rollinson (2004). There is also a clear practical concern
here: that further formalization of knowledge manage-
ment may lead to a reduction in local autonomy and
creativity. The potential implication is that informal
knowledge management supports dynamic capabilities,
but that formal knowledge management may hinder it.
Conclusions
The purpose of this paper was to improve our under-
standing of dynamic capabilities, organizational knowl-
edge and the interplay between the two. We have
presented a case study of a leading chemical company,
which demonstrates several areas where knowledge acts
as a source for dynamic capabilities: through the
technical training provided to individual partners by
the French business; through the way market informa-
tion filters back by word of mouth; through informal
exchanges between SMs; and through the protection that
is provided from the systematic information gathering of
the parent company.
The case provides examples of both social and
technical organizational knowledge, which appear to
contribute to dynamic capabilities conceptualized as
flexibility in both resources and routines. However, it is
possible that the social forms of knowledge have a greater
impact, particularly in relation to flexibility of resources.
This supports the view of those who argue for more
attention to the social impact of knowledge, although we
recognize that the current structure of the company does
place greater reliance on the quality of relationships. It is
also possible that the technical forms of knowledge may
become more important as problems of scale and
coordination increase.
Two other important points arise from this study. The
first is the way power and politics appear to affect the
relation between organizational knowledge and dynamic
capabilities. The second point is related because we have
shown in two instances that the relationship between
organizational knowledge and dynamic capabilities is not
necessarily positive, and that this depends very much on
the broader context of the organization. We therefore
suggest that general assertions about the relationship
between organizational knowledge and dynamic capabil-
ities require a more fine-grained analysis than has been
hitherto provided.
Naturally, there are a number of limitations to this
paper. It is based on a single case study with a number of
unique features, which therefore limit the direct general-
izability of the results. Although notionally a long-
itudinal case study, the time span is limited by the fact
that the company has only been in existence for 2 years,
and other factors may come into play as it evolves over
time. However, we have tried to be cautious in drawing
inferences; we have followed a falsification logic by
highlighting features that appear to contradict previous
studies; and we have also tried to look for instances of
counter-evidence within our own case.
Dynamic capabilities and the role of organizational knowledge Isabel M. Prieto and Mark Easterby-Smith 508
European Journal of Information Systems
The case identifies several issues that require further
exploration, and we highlight four main avenues that are
likely to be fruitful. First, we think it is important to
explore the appropriate balance between the technical
and social variants of knowledge management in con-
tributing to dynamic capabilities for different types of
business and at different stages of the organizational
growth process. Second, the nature of dynamic capabil-
ities merits further exploration through intensive, and
preferably longitudinal case studies. This is because much
of the existing literature is based on secondary data, and
there is much repetition of ideas that are in need of fresh
challenges from new data. Several aspects derived from
different models of dynamic capabilities were illustrated
in the above case study, which suggests that no one
model provides a complete view. Third, further examina-
tion of the relationship between organizational knowl-
edge and dynamic capabilities should provide deeper
understanding of the complex relationships between
knowledge and performance, thus extending the work
of Bhatt & Grover (2005), and there is potential also to
consider dynamic capabilities as an intermediate variable
between knowledge and performance, as suggested by
Cepeda & Vera (2005). Fourth, the relative lack of
comment and guidance within existing models about
how knowledge management and dynamic capabilities
are created and enacted through internal debates and
specific decisions among organizational actors suggests
that the political aspects of the two areas would benefit
from further study.
Acknowledgements
Thanks to the financial support provided by the Fundacio n
Caja Madrid, Spain, and by the Economic and Social
Research Council, U.K., reference: RES-334-25-0020. We
are also grateful to Manuel Graca and Wayne StAmour for
their contribution to data collection.
About the authors
Isabel M. Prieto is an associate professor of Business
Administration at the Department of Business Manage-
ment and Market Research at the University of Vallado-
lid, Spain, since 1996. She received her Ph.D. from the
University of Valladolid with a concentration in knowl-
edge management and learning in organizations. In
2004/05 she was post-doctoral visiting scholar in the
Lancaster University Management School, U.K. Her
current research is on knowledge management and
organizational learning in relation to new product
development, dynamic capabilities and human resources
management.
Mark Easterby-Smith is President of the British Academy
of Management and Professor of Management Learning at
Lancaster University. In 2003 he was appointed a senior
fellow of the U.K.s Advanced Institute of Management
(AIM) research initiative, and is currently leading research
projects investigating the nature of dynamic capability in
a variety of contexts, and the knowledge implications of
product-service systems within manufacturing industry.
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