Strategic Management Journal Strat. Mgmt. J., 21: 1105-1121 (2000) DYNAMIC CAPABILITIES: WHAT ARE THEY? KATHLEEN M. EISENHARDT* and JEFFREY A. MARTIN Department of Management Science and Engineering, Stanford University, Stanford, California, U.S.A. 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. Copyright ? 2000 John Wiley Nelson, 1991; Penrose, 1959; Peteraf, 1993; Prahalad and Hamel, 1990; Schumpeter, 1934; Teece, Pisano, and Shuen, 1997; Wernerfelt, 1984). This per- spective focuses on the internal organization of firms, and so is a complement to the traditional emphasis of strategy on industry structure and strategic positioning within that structure as Key words: dynamic capabilities; competitive advan- tage; resource-based view; dynamic markets; resources; high-velocity markets; organization theory; organi- zational change *Correspondence to: Kathleen M. Eisenhardt, Department of Management Science and Engineering, Stanford University, 309 Terman, Stanford, CA 94305, U.S.A. the determinants of competitive advantage (Henderson and Cockbur, 1994; Porter, 1979). In particular, RBV assumes that firms can be conceptualized as bundles of resources, that those resources are heterogeneously distributed across firms, and that resource differences persist over time (Amit and Schoemaker, 1993; Mahoney and Pandian, 1992; Penrose, 1959; Wernerfelt, 1984). Based on these assumptions, researchers have theorized that when firms have resources that are valuable, rare, inimitable, and nonsubstitutable (i.e., so-called VRIN attributes), they can achieve sustainable competitive advantage by implementing fresh value-creating strategies that cannot be easily duplicated by competing firms (Barney, 1991; Conner and Prahalad, 1996; Nel- son, 1991; Peteraf, 1993; Wernerfelt, 1984, 1995). Finally, when these resources and their related activity systems have complementarities, their potential to create sustained competitive advan- Copyright ? 2000 John Wiley Milgrom, Qian, and Roberts, 1991; Mil- grom and Roberts, 1990; Porter, 1996). Recently, scholars have extended RBV to dynamic markets (Teece et al., 1997). The ration- ale is that RBV has not adequately explained how and why certain firms have competitive advantage in situations of rapid and unpredictable change. In these markets, where the competitive landscape is shifting, the dynamic capabilities by which firm managers integrate, build, and recon- figure internal and external competencies to address rapidly changing environments (Teece et al., 1997: 516) become the source of sustained competitive advantage. The manipulation of knowledge resources, in particular, is especially critical in such markets (Grant, 1996; Kogut, 1996). Despite the significance of RBV, the perspec- tive has not gone unchallenged. It has been called conceptually vague and tautological, with inatten- tion to the mechanisms by which resources actu- ally contribute to competitive advantage (e.g., Mosakowski and McKelvey, 1997; Priem and Butler, 2000; Williamson, 1999). It has also been criticized for lack of empirical grounding (e.g., Williamson, 1999; Priem and Butler, 2000). And, particularly relevant here, sustained competitive advantage has been seen as unlikely in dynamic markets (e.g., DAveni, 1994). The purpose of this paper is to extend our understanding of dynamic capabilities and in so doing enhance RBV. Since dynamic capabilities are processes embedded in firms, we assume an organizational and empirical lens, rather than an economic and formal modeling one (Barney, 1991; Peteraf, 1993). We examine the nature of dynamic capabilities, how tho