Dynamic capabilities in CSR : sustaining sustainable compatitive developments, a exploratory case study

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Dynamic Capabilities in CSR

Sustaining sustainable competitive developments,

an exploratory case study

University of Amsterdam Faculty of Economics and Business

Master Business Studies 2010/2011

Student: Casper H. Jorna, MSc. Student number: 6169481

Supervisor: Dr. M. L. van der Veen Co-reader:

Date: 04-08-2011

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Preface

This paper forms the concluding part of the Master Business Studies at the Amsterdam Business School, University of Amsterdam. The paper originates from my firm believe that acting responsibly as a company can be seamlessly combined with being profitable. Therefore I chose to complement my specialization Strategy at the university with an internship at the corporate social responsibility department of a multinational company. This thesis is based on the research I have performed at that telecommunication company. It has proved to be a valuable and pleasant ride.

The only thing I do regret is not having more time. However, this research would not have been possible in the time span it was written in without the flexibility and useful directions of my thesis supervisor M. van der Veen. Nor would it have been possible without the cooperation of the telecommunication company, the many tips and discussions along the way, and the openness and willingness of the interviewees M. de Jong, F. Klein, and D. Puma.

Thank you.

Casper Jorna August 2011

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Executive summary

Dynamic Capabilities (DC) have been put forward as the solution for the survival of companies in dynamic markets (Teece, 2007). Rooted in a Resource Based View (RBV), it allows a company to seize sensed opportunities by reconfiguring resources and capabilities to sustain a competitive advantage. This shows a remarkable resemblance to the tasks of a Corporate Social Responsibility (CSR) department. Although the processes, routines, and skills reflecting a DC are numerous, research has linked DC and CSR before. However the descriptions of what a DC in that case looks like remain vague. The main question is therefore not if but how a dynamic capability manifests itself in realized CSR strategy. To find an answer to this question this research took an exploratory case study approach to analyze three key CSR projects of a multinational telecommunication company. Five semi-‐structured interviews as well as internal and externally published reports formed the data for the analysis. The analysis was based on the definition of strategic Corporate Social Responsibility, the Resource Based View, and Dynamic Capabilities literature. The results reveal that it is not just one process reflecting a dynamic capability in the projects. Rather several different processes and skills reflect parts of a DC. It therefore seems that it is not a particular process or skill that is a dynamic capability but the CSR department as a whole that manifests itself as a dynamic capability. These findings are discussed in light of previous research. Furthermore, the limitations, recommendations for future research, and managerial implications are described.

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1. Introduction

Encouraged by the idea that corporations have some sort of responsibility to society beyond making profit, business science proposed several theories explaining on an aggregated level what corporate social responsibility (CSR) is and how it can be used. Among popular theories investigating CSR are the Resource Based View (RBV) and, by extension, the Dynamic Capabilities (DC) view. Especially DCs, that have been put forward as one of the solution for the survival of companies in dynamic markets (Teece, 2007), are increasingly being linked with CSR. In short a DC enables a firm to sense its internal and external environment for opportunities and reconfigure resources to seize the identified opportunities.

Corporate social responsibility has come a long way from merely being seen as a philanthropic gesture (McWilliams et al., 2006). A vast amount of scientific research has written about how CSR can add firm value via for example eco-‐efficiency or reputation, and how it might provide insurance in the form of a buffer against negative events (Godfrey et al., 2007; Meznar et al., 1994). There are even studies that explain how not engaging in CSR can perhaps have negative implications (Godfrey et al., 2009; Heslin & Ochoa, 2008). In any situation CSR is practiced to find out what the social needs surrounding a company are and to address them. Preferably in such a way that it also benefits the company. Therefore, in line with research (Ramachandran, 2010; Marcus & Anderson, 2006; Aragon-‐Correa & Sharma, 2003) it than takes little imagination to see the similarities between a DC and the tasks imposed on modern day CSR. The question therefore should not be if or why, but how the dynamic capabilities are reflected in CSR practice nowadays.

To step away from the abstract, and theoretical CSR in firms, this study will adhere to the need to “…start modeling actual firm’s tangible CSR” (Godfrey & Hatch, 2006: p88) and look for the dynamic capabilities in practice. Therefore this explorative study will take a closer look at the foundations of strategic CSR in a real world firm setting and try to reveal the dynamic capabilities that can contribute to the strategic purpose. According to Wang & Ahmed (2007: p36)

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these capabilities ‘are the ultimate organizational capabilities … conducive to long-term.. [strategic csr].. performance’ .

As mentioned above dynamic capabilities can be crucial for the survival of a firm, and are most important and easiest to observe in highly dynamic markets (Teece et al., 1995). Therefore in my search for dynamic capabilities in CSR I will analyze three key CSR projects executed in the most recent financial year of a firm competing in a highly dynamic market, the telecommunications industry. Additionally, dynamic capabilities have the ability to influence processes in the entire firm. The business potential for the rest of the firm of identifying a DC, that is already present in the CSR department, therefore also becomes clear.

Before we can go into identifying dynamic capabilities in CSR we need to know if the projects are of a strategic relevance for the firm. After all, research assumes that a DC can lead to a sustainable advantage, but if the activities it orchestrates are no contribution to the strategy how is that DC going to benefit a sustainable competitive advantage of the company? This is of course under the assumption that the company has chosen the best possible strategy. Furthermore, as mentioned the DC enables a firm to sense the environment. Therefore to point us in the right direction the next step is to find out where the project ideas came from. After this I will analyze the projects more closely to identify the resources and capabilities that are necessary for executing the projects. The resources are the foundations of the projects and the firm. Deploying the resources to attain a desired goal is the basis for a firm’s capabilities. When the input is different from the most important resources and capabilities resulting from the projects, a reconfiguration has taken place. Knowing this, we can than start looking for the dynamic capability in CSR (Barreto, 2010; Wang and Ahmed, 2007).

In the following chapter I describe the theoretical context, starting with CSR and strategic CSR. Following this I will describe the Resource Based View and its implications for explaining strategic CSR. Next, the thesis will go into dynamic capabilities and the relationship with strategic CSR. After having stated my research questions and my expectations the method is explained in chapter

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After a description of the industry, the company and the projects in chapter four, the results in chapter five will illustrate the aspects of the RBV and DC as they are practiced in the projects. This forms the basis for answering my research question in chapter six, the discussion & conclusion. Limitations and recommendations are also discussed in chapter six.

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2. Theory

Corporate Social Responsibility

To be able to analyze how dynamic capabilities work in the corporate social responsibility (CSR) environment one first needs an understanding of what CSR is, and what its relation is to business. Therefore I give a brief introduction.

The definitions of CSR are numerous and cover a broad spectrum of ideas. Although there are varying interpretations and explanations of CSR, many have a similar idea on what it is. This however does not prevent the same topics from popping up under different terms, such as corporate responsibility, corporate social performance, Corporate sustainability, environmental or humanitarian sustainability, and even corporate governance (Branco & Rodriguez, 2006; McWillliams, 2006; Caroll, 1991) All these definitions show commonalities. In this research however I will only use the term Corporate Social Responsibility (CSR).

CSR refers to those situations ‘where the firm goes beyond compliance and engages in actions that appear to further some social good, beyond the interest of the firm and that which is required by law’ (McWilliams et. al., 2006: p 1). In a broad sense it refers to those activities of a firm that could embody the responsibility a firm has to its stakeholders. As this is still very broad and vague I will approach CSR form an instrumental perspective. According to this view CSR can be seen ‘as a strategic tool to achieve economic objectives and, ultimately, wealth creation’ (Garriga & Melè, 2004). After having discussed the focus of CSR, its relation to firm performance and stakeholders, I will get back to this instrumental view in the paragraph on strategic CSR.

The focus of CSR

The corporate social responsibility of a firm can be focused on one or a combination of two topics, the natural environment and/or social aspect. Whereas the natural environment is mostly about the hard and ecological impact of firm, the second topic refers to the more soft and social aspects affecting and affected by a firm. Furthermore, this responsibility is regarded as beyond plain

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from merely meeting regulation to be able to operate. Ultimately CSR is aimed at enabling a firm to operate in a sustainable and profitable way so the needs of current stakeholders can be met without compromising the needs of future stakeholders (Branco & Rodriguez, 2006).

CSR and stakeholders

For any CSR projects to be successful it should meet the needs of the addressed stakeholders. The next logical question then is which stakeholders should a firm take into account? For this purpose Mitchell et al. (1997) developed an elaboration on the stakeholder theory as proposed by Freeman (1984). The salience of stakeholder’s and the claim they pose on an organisation depends on fulfilling one, a combination, or all three attributes of the relationship company-‐ stakeholder. The stakeholders’ claims can have Power, Legitimacy and/or Urgency.

A stakeholder has power when it has or can gain access to coercive, utilitarian, or normative means to impose its will on a relationship with the firm. When power falls together with legitimacy it forms authority. For a definition of what is meant with legitimacy here I refer to Suchman’s (1995: p571) description. Legitimacy is “a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions”. Although the definition contains many dimensions and sounds vague, managers often have a good perception when a claim is legitimate (Mitchell et al., 1997). The third attribute defining the stakeholder relationship is urgency. For a claim to be urgent it needs to be of a time sensitive nature, and the claim should be critical to important stakeholders. Therefore urgency is the degree to which stakeholder claims call for immediate attention. Urgency adds a dynamic component to the stakeholder relationship. The more attributes are applicable to a stakeholder, the more salient are its claims.

CSR and firm performance

In any definition of CSR economic firm performance plays an important role. After all a firm that goes bankrupt cannot benefit society at all (Friedman, 1970).

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However to what extent CSR directly results in financial performance is a topic of much debate with an ever so diverse outcome. It is argued that these mixed outcomes are the result of disregarding the complexity often associated with socially responsible activities. More often the costs of socially responsible activities such as environmentally friendly equipment, implementing stricter health and safety measures, or building a socially responsible reputation far precede the benefits, if these benefits are even measurable at all. For example how do you measure “deathly accidents that did not happen”, or the effects of intangible aspects such as a socially responsible corporate culture or reputation on a firm’s financial performance? Research has nevertheless stressed in many ways and for many reasons why firms should engage in CSR.

The topics discussed above are of a boundary setting nature for this paper on Dynamic Capabilities in CSR. In the search for how a firm uses DC in CSR we now know: the focus of the activities could be environmental or social; the primary stakeholder of the firm have power, legitimacy, and or urgency; and the relation between CSR and performance is complex but almost always contains an economic component.

2.1 CSR & Strategic CSR

Dynamic Capabilities are associated directly or indirectly with firm performance via the strategic use of resources and capabilities (Teece, 1997). For the search of DCs in CSR projects a better understanding is necessary of the relation between CSR, strategy and performance. Therefore strategic CSR is explained next, as well as its relation with firm value and performance.

Research used to be focused on the explicitly normative and ethics-‐ oriented arguments. In this research I take the more performance oriented and implicitly normative approach (Lee, 2008). The interest in the economic related arguments is the current conception of CSR, as opposed to merely applying philanthropic and explicit normative ideas. In fact this is a shift from focusing on what is spent on CSR to where and how the money could be earned (Branco & Rodriguez, 2006; McWillliams, 2006).

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Broadly speaking we can distinguish therefore two cases for CSR: the normative case and the business case (Branco & Rodriguez, 2006). The normative case reflects the moral decision to act in a socially responsible manner. The second case relates to the approach adopted in this paper and that is how organisations can further their economic success by paying attention to their responsibility to society. It refers to using CSR not just because it is morally the right thing but also because it is good for business: “doing well by doing good”.

The difference between the lines of thought looks straightforward. However, a mixture of both is more often the situation in business. A morally just decision can very well also benefit a firm economically but the motivation to start engaging in CSR can differ. What is clear though is that CSR can be introduced in a business case to obtain some sort of advantage (preferably long-‐ term) over the competition. Furthermore, when this CSR strategy matches a firm’s overall strategy (Porter & Kramer, 2006) and this CSR activity relates or adds to the firm’s most important capabilities or core competences (Prahalad, 1990) one can talk in terms of strategic CSR (Burke & Lodgon, 1996).

Strategic CSR aims to create business benefits while simultaneously improving social or environmental conditions. The activities provide opportunities for organizations to learn from the projects they invest in and use that knowledge for building the organization’s core competencies. A coherent use of strategic CSR covers three main areas of a firm’s responsibilities: socio-‐ cultural (People), environmental (Planet), and economical (Profit) (Heslin & Ochoa, 2008). This is also referred to as the triple bottom line (Branco & Rodriguez, 2006). When strategic CSR meets the above-‐mentioned requirements it can be regarded as a form of strategic investment (McWillliams, 2006).

Strategic CSR and firm value

For a CSR project to be of strategic importance it also needs to create value for a company (Baron, 2001). Value creation occurs by combining resources in new ways to increase the potential of the company and is therefore very much about innovation. The three aspects, in no particular order, important for CSR projects

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for creating company value are centrality, visibility, and voluntarism (Husted & Allen, 2009).

The first, centrality, refers to closeness of the project to the core competences and strategy of the firm (Porter & Kramer, 2006; Husted & Allen, 2009). Projects closer to “what a firm is good at” reduce costs related to investing in necessary resources and capabilities. Moreover, firms engaging in those CSR projects are more likely to create firm value since the resources and capabilities that are developed in the solutions of social and environmental problems can then be applied to its business activities. The second mentioned aspect is visibility. It refers to the extent to which CSR projects are visible to the organization’s stakeholders. The greater the visibility of the project the greater is the value creation of such a project (Husted & Allen, 2009; Burke & Lodgon, 1996).

The third aspect enabling the creation of value with CSR activities is voluntarism. Firm’s CSR projects are undertaken freely and intentional and not in response to regulatory constraints and industry practices. Voluntarism has a special place in the CSR literature. Many who defined CSR regarded voluntary as one of the key aspects of the actions for it to be regarded as CSR in the first place (Caroll, 1999). However, those activities regarded as CSR are not always strictly voluntary in nature. Many companies for example awoke only after a heightened response form the public taking interest in issues previously not regarded as part of business (Porter & Kramer, 2006). An illustration of this is the famous Nike and child labour incident (Smith, 2003). They were forced to act more responsibly due to scrutiny of their supply chain by NGOs revealing child labour. These types of situations often lead to legislation. A firm engaging in voluntary behaviour can take advantage of the opportunity to build firm specific resources and capabilities rather than having to comply. In some situations that a company over complies to anticipate regulation, and regimes cause the regulation to stall or hold off, voluntary CSR can become a waist of resources. Nevertheless customers also ‘value voluntary non-market action more than non-voluntary action’ (Husted & Allen, 2009: p 785). And finally, voluntarism is often driven by

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project (Husted & Allen, 2009). After all the successful projects are the most likely to benefit the firm most.

Strategic CSR and competitive advantage

In the light of a proper business case the CSR activities should not only make strategic sense and have added value, but they should also create a competitive advantage to add to a firm’s performance. For understanding how CSR can lead to a competitive advantage the Resource Based View has gained considerable attention. The RBV is particularly fit for this purpose since it explicitly recognises the value of tangible but also intangible assets and skills that are often associated with strategic CSR such as reputation, know-‐how and corporate culture (Branco & Rodriguez, 2006). Furthermore, the RBV recognises that investments have to be made in the short term to gain and maintain a competitive advantage in the long-‐term, which also goes for strategic CSR if interpreted as a strategic investment. Therefore a strategic CSR that provides in resources or capabilities that fulfil the conditions set by the RBV has the potential to create this competitive advantage (Branco & Rodriguez, 2006).

Since the link with strategy and performasnce is important for dynamic capabilities this paragraph discussed how CSR activities can be strategic and how these strategic activities can add firm value via centrality, visibility, and voluntarism. But as mentioned these activities need and affect resources and capabilities. It are the DCs that orchestrate these resources. So before we can search for DCs in strategic CSR activities a discussion of the RBV is in place. Therefore next the RBV and its relation to CSR and competitive advantage is discussed.

2.2 The Resource Based View

As mentioned this paper is focused on describing DC in CSR, therefore it is well beyond the scope of this thesis to provide a full review of the Resource based View since such reviews have already been undertaken elsewhere (e.g., Acedo et al., 2006; Barney et al., 2001; Hoskisson et al., 1999; Foss, 1997; Conner, 1991) Nevertheless, to be able to recognize the resources and capabilities that indicate

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the presence of a DC in CSR an understanding of the RBV is necessary. Therefore those RBV related aspects I deem important for this research will be discussed below.

The Resource Based View theorizes that for a firm to gain a competitive advantage it requires resources to be Valuable, Rare, Inimitable, and Non-‐ substitutable (VRIN). According to the RBV for a resource to serve as a source of economic rents and performance it should have costly-‐to-‐copy attributes. These resources are build upon a certain resource disposition and are heterogeneous. Furthermore, they are assumed to be path dependent and therefore often imperfectly mobile. This however does not mean that at one point in time two firms cannot both posses a comparable advantageous resource, for example a certain reputation (Strike et al., 2006). Nevertheless it will never be exactly the same since how they got to that resource is often causally ambiguous and contextually dependent and therefore firm specific.

Resources are regarded as the primary constituencies for a firm, and hence form the basic unit of any analysis of strategy. They are the basic elements out of which firms transform inputs into outputs and services. These elements can be slack, meaning they are not committed to a necessary organizational activity. Slack resources can be readily available, recoverable from inefficiencies, or potential slack resources. Potential in this case refers to easily obtainable resources from the environment. However those resources that are committed to a firm’s activities can be strategic and can take many shapes.

Resources can be tangible such as financial or physical assets. Tangible resources are often easiest to copy by competition and are therefore to a lesser extent a source of sustaining competitive advantage. Resources can also be intangible. These are the “non-‐physical factors that are used to produce goods or provide services, or are otherwise expected to generate future economic benefits for the firm” (Branco and Rodrigues, 2006, p. 117). Examples of intangible resources are a firm’s reputation and the knowledge existing in the firm. These resources are contextual and often difficult to formalize, and therefore firm specific and hardly tradable (Barney, 1991). Hence, intangible assets are more

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If resources are the building blocks of a firm then capabilities are the processes and skills of how a firm bundles and builds with its resources. A firm’s capabilities are by its nature intangible and can require a combination of tangible and intangible resources, for example the production of a product, or the marketing of a service at a certain point in time. For a firm to gain a competitive advantage the capabilities need to adhere to the same principles as described for the resources (VRIN). Furthermore they are also assumed to be heterogeneous, path and contextual dependent, and causally ambiguous. A firm’s capabilities are regarded to be the outcome of organizational learning and can therefore be even more firm specific (Branco & Rodriquez, 2006). If these capabilities form an essential part of fulfilling the firm’s strategy they are referred to as core capabilities.

Not withstanding all the insights the RBV framework reveals, it inevitably also has its limitations. As noted by Eisenhardt and Martin (2000) the dynamic business environment challenged the RBV as being too static and not taking into account market dynamism. Prahalad and Hamel (1990) attempted to address this shortcoming by developing the concept of core competences. According to them these competences are more abstract than core capabilities and form the basis of any product or service in a firm. These competences are product/services boundary crossing and represent ‘the collective learning of the organization, especially how to coordinate diverse production skills and integrate multiple streams of technology’ (p. 82). They allow a firm to quickly adapt, within a firm’s current potential, and seize an opportunity when for example new markets present themselves. Nevertheless, core competences cannot relieve the RBV of being to static, and not taking the external environment into account (Teece, 2007; Eisenhardt & Martin, 2000; Aragon-‐Correa & Sharma, 2003).

RBV, economic performance, and competitive advantage

Research has directly (e.g. ; Hillman & Keim, 2001; Russo & Fouts, 1997; Waddock & Graves, 1997) or indirectly (e.g. Branco & Rodriguez, 2006; McWilliams & Siegel, 2001) linked resources and capabilities to economic performance (Barney et al., 2001). Above it was already explained what a strategic resource should adhere to for it to provide an advantage, such as the

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VRIN characteristics. Especially when a firm uses resources that are path dependant, socially complex, or causally ambiguous they may be a source of a competitive advantage. Socially complex and therefore intangible resources just depend on to many individuals, teams etc to be imitable. In the light of sudden changes to a firm’s competitive advantageous position (changing markets or copying by competition) sustaining that advantage turns out to be more difficult. Nevertheless, the RBV together with core competences provide a constructive theory to explain and predict firm specific differences that can drive a competitive advantage at a certain point in time.

Resource based view and strategic CSR

Increased attention for CSR as an element in corporate strategy led to the examining of CSR activities through the lens of the RBV (McWilliams et. al 2006). According to McWilliams et al. (2006) the first to apply the resource-‐based view to corporate social responsibility was Hart et al. (1995). Although he had considerable success in explaining why CSR was fruitful for a firm he soon ran into problems. According to Hart et al. (2010) the RBV had one serious omission. It ignored the interaction between an organization and its natural environment. He therefore came up with the Natural Resource Based View (NRBV).

The NRBV argues that there are three key strategic capabilities in light of CSR: pollution prevention, product stewardship, and sustainable development. However, over the past 15 years most of the application of the NRBV has been focused on pollution prevention, with far less attention to research on product stewardship or sustainable development strategies. In CSR research based on the NRBV, the most frequently addressed issue was “if it pays to be green”. It therefore mainly looked at the natural environment instead of also explicitly considering the social environment. Not withstanding Hart’s critique many have since then applied the RBV framework to CSR with varying success.

The application of the RBV to the social aspects of CSR primarily originated in the business ethics research. Litz (1996) was one of the first to address the social side. He described resources and capabilities relating to recognizing stakeholder

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interdependence, a firm’s ethical awareness, and issue responsiveness as strategic resources and capabilities.

In both the environmental and social strategic CSR the RBV is considered as the inside-‐out perspective. This means that the RBV considers the CSR resources and capabilities important for performance to be internal to the firm. It does however not mean that the goal of the subsequent CSR activities is solely internal. More often the strategic advantage is related to exogenous factors (Branco and Rodrigues, 2006). Nevertheless, in order to reach that goal strategic resources and capabilities are important.

As mentioned earlier the resources can be tangible or intangible. Strategic CSR resources are most valuable when they are intangible (Wu et. al., 2008; Branco & Rodrigues, 2006). Such intangible strategic CSR resources can be used for internal goals, for example human resources, know-‐how, corporate culture. Whereas some have a direct link to performance, others can also have an indirect positive effect on resources for example via efficiency and effectiveness, and networks. Intangible CSR resources could also be focused on harvesting external benefits (Branco and Rodrigues, 2006; Litz, 1996). Examples of these resources are a social responsible reputation or corporate image, or environmentally responsible suppliers. These can respectively improve the relation with external stakeholders, lead to “goodwill”, and a higher valued or quality product/service (Wu et al., 2008; Branco & Rodrigues, 2006; Strike et al., 2006). Yet other resources specifically address both internal and external goals such as top management team’s environmental strategic perception (Wu et al., 2008).

When it comes to the capabilities that are associated with CSR the examples are numerous. To nevertheless give an example, Black & Härtel (2003) identified five important capabilities associated with CSR: dialogue with stakeholders, stakeholder management, accountability, ethics, and value-‐attuned public relations or specific PR practices. Others have identified cross-‐ functional cooperation, which help explain firms’ operational performance, as a valuable, rare, inimitable and non-‐substitutable capability (Wu et al., 2008). As these examples show any resource or capability important to, associated with, or a

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result of CSR can be analyzed and provide a competitive advantage with the RBV as long as it has VRIN attributes and contributes to the firms strategy.

The RBV focuses mostly on those aspects internal to the firm in search of a competitive advantage. It therefore falls short when it comes to sensing and seizing new opportunities in the environment (Hart et al., 2010; Stoelhorst & Bridoux, 2006; Helfat & Peteraf, 2003; Hart et al., 1995). Furthermore, the uniqueness of a strategic CSR resource is determined by its path dependency. However, the RBV provides little compelling explanations on how these resources change drastically into all new competitive advantages to address or even create opportunities (Helfat & Peteraf, 2003). In other words, when the current resources and capabilities no longer provide a competitive advantage how does a firm turn this around? To address these shortcomings of sensing, seizing, and reconfiguring researchers developed the Dynamical Capability perspective that will be described next.

2.3 Dynamic capabilities

The main question of this research is if dynamic capabilities are present in strategic CSR, and if so what do they look like? To answer this question I will discuss next what dynamic capabilities are, how they can be recognised, and their relation to strategic CSR.

The article by Teece, Pisano & Shuen (1997) on Dynamic Capabilities (DC) has given an impulse to the production of an impressive amount of research (Ambrosinni & Bowman, 2009). Yet the definition of what DCs are is often referred to as vague, mysterious, abstract, intractable, obscure, confusing, and/or tautological (Winter, 2003; Danneels, 2008; Williamson, 1999). Nevertheless four main characteristics stand out.

First dynamic capabilities enable a firm to sense opportunities and threats. Not only does the external environment provide many opportunities and threats, also internally to the firm are there opportunities and threats. According to Teece (2007) sensing, shaping and seizing these opportunities are the

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much ‘a scanning, creation, learning, and interpretive activity’ (Teece, 2007: p 1322). This is build upon processes that tap into internal R&D and technologies, exogenous science and technology, supplier developments, and changing markets and shifting customer needs (Teece, 2007). Seizing activities however is about addressing the sensed opportunities. In short it refers to developing new ways of staying in touch with internal and external stakeholders and addressing their needs via core competences. For example it refers to sensing society’s values and norms while keeping in mind the core business to identify where the opportunities lay to include both in addressing the stakeholder’s needs.

Secondly, DCs are about making decisions in a timely manner, meaning a firm needs to make them before the competition does to be able to sustain or create a competitive advantage (Barretto, 2010). For example, when a firm wants to differentiate it self from competitors using CSR activities it needs do develop these resources and capabilities before the competition does, otherwise there is no basis for differentiation (Branco & Rodrigues, 2006).

Thirdly there is a focus on the market and its dynamics. This refers to the direction of the decisions to systematically create superior value for the customer. The focus is not only on the content of the decisions but also on the environment the firm is situated in. Research identified a relationship between DC and the dynamism of the external environment. Several articles point to the link between rapidly changing markets and the existence of highly developed DCs (Teece et al, 1997; Teece, 2007). Eisenhardt and Martin (2000) among others argue that DCs are also valuable in moderately dynamic markets. Moderately refers to markets where change occurs on a regular basis but mostly along predictable paths. Although DCs were argued to be present, the urge to deploy them is less pressing then in very dynamic market. Zollo and Winter

(2002) take it one step further by stating that even in environments characterized by slow rates of change DC’s are of importance. Take for example commodity markets where social responsibility initiatives started to demand specific changes in stable supply chains of coffee, soy, etc, to create a superior product. Even if these changes may be to some extend expected, they still provided opportunities that had to be identified. A firm’s dynamic capabilities

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therefore focus on swiftly generating situation specific new resources and capabilities when a situation asks for it (Wang and Ahmed, 2007). That this is more often the case in highly dynamic markets is a logical consequence.

Fourth, DC’s reconfigure and manage a firm’s resource base. DC’s are regarded to be a higher-‐level variant of the existing resources and capabilities (Baretto, 2010). As mentioned the main critique on the RBV was that it is too static and unable to accommodate to changing markets (Wang and Ahmed, 2007). It is here that many researchers found their bliss in dynamic capabilities. It is these Dynamic Capabilities that are assumed to enable a firm to adapt to changing markets and sense, seize and manage opportunities by changing the firm’s resources and capabilities.

With a scattered amount of research on dynamic capability one has to prevent it from becoming an umbrella term associated with different management and research topics and infinite unworkable definitions. For this purpose Barretto (2010) reviewed the literature and defined the following multidimensional and workable definition which I will adopt in this research:

“A dynamic capability is the firm’s potential to systematically solve problems, formed by its propensity to sense opportunities and threats, to make timely and market-oriented decisions, and to change its resource base” (Baretto 2010: p 271).

Dynamical capabilities in a firm

Overall, dynamic capabilities can be seen as the organizational and strategic routines (processes) or capabilities, by which firms ‘achieve new resource configurations as markets emerge, collide, split, evolve, and die’ (Eisenhardt & Martin, 2000: p1107). Higher order variant routines that have been identified in research as dynamic capabilities are for example: A systematic market orientation complemented with reconfiguration capabilities (Menguc and Auh, 2006); Ambidexterity, which refers to simultaneously exploit and explore (O’Reilly & Tushman, 2008); Stakeholder dialogue and integration (Ayuso et al., 2006); Creating, integrating and deploying knowledge (Zahra and George, 2002); Product/service research, design and innovation (Helfat 2007; Karim and

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Mittchel, 2000); Organisational structure reconfiguration and renewal (Danneels, 2002); and even broad terms as entrepreneurship are associated with dynamic capabilities (Zahra et al., 2006).

The examples above show that common characteristics of dynamic capabilities are identifiable across firms (Wang & Ahnmed, 2007). All these DC’s demonstrate commonalities in their key features and refer to some sort of sensing, seizing, or (re-‐) configuration. However, firms have developed their dynamic capabilities from their unique starting points and through their unique paths. Therefore DC’s remain idiosyncratic in the details (Eisenhardt & Martin, 2000). Identifying DC’s in a firm thus requires the search for firm specific processes, routines, or firm structures that delineate the dynamic link with internal changing resource configurations and the external environment. These firm specific representations of dynamic capabilities can be identified by three main component factors, namely adaptive capabilities, absorptive capabilities and innovative capabilities (Wang and Ahmed, 2007).

Adaptive capabilities are defined as a firm’s ability to identify and capitalize on emerging market opportunities. It focuses more on effective search and balancing exploration and exploitation behavior than on an optimal end state of survival. It refers to monitoring and responding to stakeholders. Furthermore, adaptive capability is strongly associated with resource flexibility and the development is often accompanied by changing organizational forms and strategies. But it is also about challenging traditions, practices and sacred cows (Gibson & Birkinshaw, 2004). The ‘strategic flexibility of resources and the alignment between the firm’s resources, its organizational form and constantly shifting strategic needs’ (Wang & Ahmed, 2007: p 37) reflects the adaptive component factor in a DC. Therefore a firm that has a high level of adaptive capability infers a dynamic capability (Teece et al. 1997).

Absorptive capability refers to the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to business purposes. This ability to evaluate and utilize outside knowledge builds upon prior knowledge (Wang & Ahmed, 2007; Cohen and Levinthal, 1990). Firms with high absorptive capabilities demonstrate a better capacity to acquire, assimilate,

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transform, integrate and utilize information. In other words, such a firm is able to transform valuable information into tacit and explicit knowledge. In the face of frequent external technological changes absorptive capabilities were found to be especially critical for success (Woiceshyn & Daellenbach, 2005; Wang & Ahmed, 2007). More successful absorption is characterized by long term commitment to resources, learning from various partners and own research, thorough analyses, and developing and using complementary assets and skills. The more a firm demonstrates its absorptive capability, the more it exhibits dynamic capabilities. (Wang & Ahmed, 2007)

The innovative capability refers to ‘a firm’s ability to develop new products and/or markets, through aligning strategic innovative orientation with innovative behaviors and processes’ (Wang & Ahmed, 2007: p 38). It is recognized by the deliberate emergence of new products, markets, processes and skills, and strategies. Innovation has been a subject of much research and covers multiple dimensions. (Wang and Ahmed, 2004). The more innovative a firm is, the more likely it possesses dynamic capabilities.

Dynamic capabilities and competitive advantage

A dynamic capability does not directly influence a firm’s financial or economic performance. Rather, it is the seizing of sensed opportunities, and the resources and capabilities the DC reconfigures that have an impact on performance (Teece, 2007; Ambrosini & Bowman, 2003; Teece et al., 1997). Even with regard to competitive advantage research is not unambiguous. Among others Helfat et al., (2007) have stated that the impact of a DC is indirectly linked to competitive advantage. Only when the DC in a firm develops resources and capabilities that show VRIN characteristics will they lead to an advantage over the competition (Ambrosini & Bowman, 2003). DC themselves can also have value and be rare. Non-‐imitable and non substitutable are not applicable since DC are firm specific in the details but can very well be common across firms. What becomes evident though is that without DC it becomes very difficult for a firm to stand ones ground against competition, especially in the face of dynamic exogenous factors (Aragon-‐Correa & Sharma, 2003).

Dynamic capabilities in CSR : sustaining sustainable compatitive developments, a exploratory case study