The knowledge and skills of individuals are widely considered to represent an important component of a firm's intellectual capital. The value of individuals' knowledge is also recognised from a capability-based perspective. While routines and capabilities are considered to act as the interface for the knowledge of individuals, an important and related issue is to examine how and to what extent individuals' knowledge acts as the source of knowledge for the creation of firm-based routines and capabilities. Four firms across two online sectors, online broking and ISPs, are selected for the empirical case study research. The findings highlight the importance of the role of prior organisational experience in the development of new routines and capabilities. It is shown that variations in the role of prior organisational experience across firms and sectors are better understood in respect of the architectural and component knowledge of which managerial knowledge consists. IntroductionThe knowledge and skills of individuals are widely considered to represent valuable, intangible firm assets and, in so doing, represent an important component of a firm's intellectual capital. The value of individual skills and knowledge is also recognised from a capability-based perspective, where it is argued that underlying a firm's routines and capabilities is the knowledge of individuals (Grant, 1996). The relationship between an organisation's knowledge assets and its performance is central to both an intellectual capital as well as a capability-based perspective (Carlucci et al., forthcoming). However, while a key focus of an intellectual capital approach is the valuation of knowledge assets and the intellectual capital of which they are a part, the focus of this paper is on understanding the process of utilising and integrating knowledge assets within the organisation. More specifically, while routines and capabilities are considered to act as the interface for the knowledge of individuals, an important and related issue is to examine how and to what extent managerial knowledge comes to act as the source of knowledge for the creation of firm-based routines and capabilities. New markets provide an interesting opportunity to assess the challenge of developing new routines and capabilities and further afford the opportunity to assess the capability development process across different types of firms, where new market entry is essentially the challenge of diversification for established companies and that of entrepreneurship for new companies.

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Our understanding of dynamic capability has been impeded by lack of consensus over definition and limited empirical investigation. To better understand the nature and role of dynamic capabilities and to guide empirical research into their antecedents and consequences, we emphasize the systemic nature of capabilities. We propose capability architecture as a framework to describe and analyze firms’ capability systems in preference to the hierarchical capability structures presented in the dynamic capabilities literature. Our framework allows us to investigate not only the hierarchical structuring of capabilities but also their linkages to managerial cognition, organizational processes, and organizational structure. Within this framework, dynamic capability—a firm’s “capacity to alter how it makes its living”—emerges not only from the existence of a distinct category of “dynamic” capabilities whose explicit role is to effect change, but also from the flexibility of “ordinary” capabilities and from system-wide changes in the overall capability architecture. This integrated approach to organizational capabilities has the potential to overcome the fruitless debate over delineating dynamic from ordinary capabilities and to foster a closer linkage between conceptual and empirical research into dynamic capability.

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