Defining ordinary or 'zero-level' capabilities as those that permit a firm to 'make a living' in the short term, one can define dynamic capabilities as those that operate to extend, modify or create ordinary capabilities. Logically, one can then proceed to elaborate a hierarchy of higher-order capabilities. However, it is argued here that the strategic substance of capabilities involves patterning of activity, and that costly investments are typically required to create and sustain such patterning—for example, in product development. Firms can accomplish change without reliance on dynamic capability, by means here termed 'ad hoc problem solving.' Whether higherorder capabilities are created or not depends on the costs and benefits of the investments relative to ad hoc problem solving, and so does the 'level of the game' at which strategic competition effectively occurs

This paper explores how the dynamic capabilities of firms may account for the emergence of differential firm performance within an industry. Synthesizing insights from both strategic and organizational theory, four performance-relevant attributes of dynamic capabilities are proposed: timing of dynamic capability deployment, imitation as part of the search for alternative resource configurations, cost of dynamic capability deployment, and learning to deploy dynamic capabilities. Theoretical propositions are developed suggesting how these attributes contribute to the emergence of differential firm performance. A formal model is presented in which dynamic capability is modeled as a set of routines guiding a firm’s evolutionary processes of change. Simulation of the model yields insights into the process of change through dynamic capability deployment, and permits refinement of the theoretical propositions. One of the interesting findings of this study is that even if dynamic capabilities are equifinal across firms, robust performance differences may arise across firms if the costs and timing of dynamic capability deployment differ across firms.

This paper focuses on dynamic capabilities and, more generally, the resource-based view of the firm. We argue that dynamic capabilities are a set of specific and identifiable processes such as product development, strategic decision making, and alliancing. They are neither vague nor tautological. Although dynamic capabilities are idiosyncratic in their details and path dependent in their emergence, they have significant commonalities across firms (popularly termed ‘best practice’). This suggests that they are more homogeneous, fungible, equifinal, and substitutable than is usually assumed. In moderately dynamic markets, dynamic capabilities resemble the traditional conception of routines. They are detailed, analytic, stable processes with predictable outcomes. In contrast, in high-velocity markets, they are simple, highly experiential and fragile processes with unpredictable outcomes. Finally, well-known learning mechanisms guide the evolution of dynamic capabilities. In moderately dynamic markets, the evolutionary emphasis is on variation. In high-velocity markets, it is on selection. At the level of RBV, we conclude that traditional RBV misidentifies the locus of long-term competitive advantage in dynamic markets, overemphasizes the strategic logic of leverage, and reaches a boundary condition in high-velocity markets.