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Definition: Dynamic Capabilities is the firm's ability to integrate, build and reconfigure internal and external competencies to address rapidly changing environments (Teece, Pisamo and Shuen, '97), thus achieving a sustainable competitive advantage.
Not to be confused with Kay's Distinctive Capabilities who constructs such competitive advantage via relationships.
See also Prahalad's Core Competence concept.
In '02, Zollo and Winter suggest to redefine DC as a learned and stable pattern of collective activity through which the organization systematically generates and modifies its operating routines in pursuit of improved effectiveness. See also Organizational Learning.