Abstract: An expanded paradigm is needed to explain how the competitive advantage of firms is gained and held. Firms resorting to ‘resource-based strategy’ attempt to accumulate valuable technology assets and employ an aggressive intellectual property stance, but winners in the global marketplace have been firms demonstrating timely responsiveness and rapid and flexible product innovation, along with the management capability to effectively coordinate and redeploy internal and external competences. This source of competitive advantage – dynamic capabilities – emphasizes two aspects: first, it refers to the shifting character of the environment; second, it emphasizes the key role of strategic management in appropriately adapting, integrating, and re-configuring internal and external organizational skills, resources, and functional competences towards changing environment. Researchers have only recently begun to focus on the specifics of developing firm-specific capabilities and the manner in which competences are renewed to respond to shifts in the business environment; the dynamic capabilities approach provides a coherent framework within which to integrate existing conceptual and empirical knowledge, and facilitate prescription. This paper (1) argues that the competitive advantage of firms stems from dynamic capabilities rooted in high-performance routines operating inside the firm, embedded in the firm's processes, and conditioned by its history, and (2) offers dynamic capabilities as an emerging paradigm of the modern business firm that draws on multiple disciplines and advances; industry studies in the Untied States and elsewhere are used as examples.

Keywords: business environment, changing environment, competitive advantage, dynamic capabilities, firms, functional competences, organizational resources, organizational skills, strategic management,