Dynamic capabilities

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The basic assumption of the dynamic capabilities framework is that today’s fast changing markets force firms to respond quickly and to be innovative.

[edit] Processes

The following three dynamic capabilities are necessary. First, in order to meet these challenges organisations and their employees need the capability to learn quickly and to build strategic assets. Second, new strategic assets, like for example knowledge, technology and customer feedback, have to be integrated within the company. Third, existing strategic assets have to be transformed or reconfigured. The processes are now described in more detail ^[1]^[2]

1.) Learning is the process by which repetition and experimentation enable tasks to be performed better and quicker. It also enables new production opportunities to be identified. In the context of the firm, learning has several key characteristics. It requires common codes of communication and coordinated search procedures. The organisational knowledge generated resides in new patterns of activity, in “routines”, or a new logic of organisation. Routines are patterns of interactions that represent successful solutions to particular problems. These patterns of interaction are resident in group behaviour and certain sub-routines may be resident in individual behaviour. Collaborations and partnerships can be a source for new organisational learning, helping firms to recognise dysfunctional routines, and preventing strategic blind spots. Similar to learning, building strategic assets is another dynamic capability. For example, alliance and acquisition routines can enable firms to bring new strategic assets into the firm from external sources.

2.) The effective and efficient internal coordination or integration of strategic assets may also determine a firm’s performance. According to Garvin (1988) quality performance is driven by special organisational routines for gathering and processing information, for linking customer experiences with engineering design choices and for coordinating factories and component suppliers. Increasingly, competitive advantage also requires the integration of external activities and technologies, for example in the form of alliances and the virtual corporation. Zahra and Nielsen (2002) show that internal and external human resources and technological resources are related to technology commercialisation.

3.) Fast changing markets require the ability to reconfigure the firm’s asset structure, and to accomplish the necessary internal and external transformation (Amit and Schoemaker, 1993). Change is costly and so firms must develop processes to minimise low pay-off change. The capability to change depends on the ability to scan the environment, to evaluate markets, and to quickly accomplish reconfiguration and transformation ahead of the competition. This can be supported, for example, by decentralization, local autonomy and strategic alliances.

[edit] Routines

Eisenhardt and Martin (2000) ^[2] examined the nature of dynamic capabilities, and concluded that dynamic capabilities consisted of specific organisational processes like product development, alliancing and strategic decision making that created value for firms within dynamic markets by manipulating strategic assets into new value-creating strategies. Furthermore, they suggest that effective patterns of dynamic capabilities vary with market dynamism. When markets are moderately dynamic such that change occurs in the context of stable industry structure, dynamic capabilities resemble the traditional concept of routines (Nelson and Winter, 1982). In that context, they are complicated, detailed, analytic processes and rely extensively on existing knowledge and linear execution to produce predictable outcomes. In contrast, in high-velocity markets where industry structures are blurring, dynamic capabilities take on a different character. They are simple, experimental, unstable processes that rely on quickly created new knowledge and iterative execution to produce adaptive, but unpredictable outcomes. Dynamic capabilities consist of identifiable and specific routines, which have often been researched in other fields, outside the Resource-Based View of the firm. Eisenhardt and Martin (2000)^[2] offer the following examples for learning, integrating and reconfiguring resources:

1) Learning capabilities are crucial in industries like, for example, pharmaceuticals and optical disks, where cutting edge technology is essential for performance (Helfat, 1997; Henderson and Cockburn, 1994). This includes alliance and acquisition routines that bring new resources into the firm from external sources (Gulati, 1999). Cisco systems has, for example, a very effective acquisition process by which managers have assembled a changing array of products and engineering know-how that creates competitive advantage. Biotech firms have strong alliancing processes for accessing outside knowledge (Powell, Koput and Smith-Doerr, 1996).

2) Product development routines by which managers combine their varied skills and functional backgrounds to create revenue-producing products and services are an example of integrative capabilities (Helfat and Raubitschek, 2000), which helped Toyota to achieve competitive advantage (Clark and Fujimoto, 1991). Strategic decision making is another integrative capability, in which managers pool their various business, functional and personal expertise to make the choices that shape the major strategic moves of the firm (Eisenhardt, 1989).

3) Transfer processes, including routines for replication and brokering (Hansen, 1999), are an example of reconfiguration capabilities. They are used to copy, transfer and combine strategic assets within the firm. For example, at the premier product design firm, IDEO, managers routinely create new products by knowledge brokering from a variety of previous design projects in many industries and from many clients (Hargadon and Sutton, 1997). Resource allocation routines are used to distribute scarce resources like, for example, capital and manufacturing assets, within the firm (Burgelman, 1994). At a more strategic level co-evolving involves the routines by which managers reconnect webs of collaborations among businesses (Eisenhardt and Galunic, 2000). For example, Disney has co-evolved to create shifting synergies that drive superior performance (Wetlaufer, 2000). Patching is a strategic process based on routines to realign the match-up of businesses and their related resources to changing market opportunities (Eisenhardt and Brown, 1999). Dell’s constant segmentation of operating businesses to match shifting customer demands, is an example of a superior patching process (Magretta, 1998). Furthermore, exit routines that jettison resource combinations that no longer provide competitive advantage, are also necessary to achieve sustained competitive advantage (Sull, 1999).