Developing knowledge in education systems is essential in capacity building. When the intention is to build collective capacity and sustain the capacity in schools, we claim there is a need to understand how organizational knowledge is developed and what form this knowledge may take in the school as an organization. However, theory seems to have put little weight on the development of organizational knowledge. In this article, we draw on two cases to discuss why there is a need for theoretical perspectives that may help conceptualize and aid knowledge development in capacity building. Our contribution is a theoretical model that builds on a graded theory concept, in which theory and practice are understood as entangled in process rather than as dichotomous and static categories. We hope to contribute to an understanding of capacity building that avoids the tyranny of theory and the tyranny of practice, and where teachers' and school leaders' professional theorizing is seen as essential for success.