Winter, Sidney G2023-05-222023-05-222003-10-012016-06-27https://repository.upenn.edu/handle/20.500.14332/40446Defining 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 (Collis 1994). 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 higher order 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 is the peer reviewed version of the following article: Winter, S. G. (2003), Understanding dynamic capabilities. Strat. Mgmt. J., 24: 991–995., which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1002/smj.318/abstract doi: 10.1002/smj.318. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving http://olabout.wiley.com/WileyCDA/Section/id-820227.html#terms.dynamic capabilitieschangecost-benefitproblem solvingBusiness Administration, Management, and OperationsArticle