The Behavioral, Evolutionary, and Dynamic Capabilities Theories of the Firm: Retrospective and Prospective

Work on dynamic capabilities is proving to be a fruitful direction in understanding the nature of the firm. An evaluation of this literature makes the foundational contributions of Cyert and March (1963) and Nelson and Winter (1982) abundantly clear. Cyert and March redefined firms as heterogeneous organizations possessing standard operating procedures that are difficult to codify, arguing that they are therefore not easily imitated by others or even replicated by the firm itself. Nelson and Winter redefined standard operating procedures as routines, and showed how these routines, the genetic material of the firm, influenced the firm’s adaptation in its environment. These developments allowed subsequent scholars to couch firm strategy in a dynamic setting. In this paper we trace the lineage of dynamic capabilities from the revolutionary, but generally non-strategic behavioral model of Cyert and March, through the dynamic evolutionary theory of the firm found in Nelson and Winter, then through to the more recent efforts of Teece et al (1990, 1997), Zollo and Winter (2002), and Teece (2006). The paper traces the lineage from Cyert and March’s view of firms as heterogeneous organizations comprised of standard operating procedures to the development of a dynamic theory of firm capabilities through the contribution of Nelson and Winter’s model of routine-based firms evolving in a changing environment.