Module MT060

Dynamic Capabilities

 

Module author

David Mackay

University of Strathclyde
UK

Learning objectives

After you studied this module, you will be able to:

  • Define dynamic capabitilies.
  • Explain what the concept is about and what it tries to explain.
  • Explain why it is relevant to know about dynamic capabilities in today's turbulent economic environment.
Workload units 1
Reading extract Dynamic Capabilities Approach

 

Why Open School of Management believes that knowing the concept of dynamic capabilities is helpful

When the term "dynamic" is used in reference to business, you can usually surmise that people are talking about flexibility. The concept of "dynamic capabilities" is a scientifically based management and business theory that is molded around this concept of being able to adapt.

What exactly are dynamic capabilities?

The original description of dynamic capabilities is "the firm's ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments." This term was defined by Teece, et al. in 1997, but its original concept was detailed in 1989.

Original influences of dynamic capabilities

The core competences of the corporation strategy research led by Gary Hamel directly and deeply influence the idea of dynamic capabilities from 1989 up until the point at which it was formally defined in 1997. The concept was also cited by Ikujiro Nonaka and Hirotaka Takeuchi in their business management strategy work which is now known as The Knowledge Creating Company.

In this stage of its development, dynamic capabilities was considered distinct from operational capabilities.

Basic assumptions of dynamic capabilities

Keeping to dynamic capabilities dictates that a company should use its core competencies in order to adapt its short-term competitive positions. In turn, these short-term advantages should be used in order to build a long-term competitive advantage.

In order to be able to adapt, a company should develop its own routines throughout its evolution. Companies should also operate on a resource-based view of their own capabilities, not a monetarily-based view. Dynamic capabilities was accepted in a widespread manner largely in part because it bridges the gap between the evolutionary approach to business organizations and strategies that are based on economics.

Differences between dynamic capabilities and resources

Dynamic capabilities is now seen as distinct between the resource-based view of the corporation. Dynamic capabilities focuses much more on real-world survival rather than simply trying to sustain a competitive advantage. Because of the more volatile nature of business as a whole, dynamic capabilities has shown itself to be a much more practical view of the world. Being dynamic means being fast, much faster than the written descriptions of business organizational theories in the past.

Practical applications of dynamic capabilities

In an incredibly poignant study, strategy scholars Jon Pemberton and Gregory Ludwig made note that the best application of dynamic capabilities was its ability to focus on the actual processes of the theory in the real world. They stated that it was useless to try to abstractly identify the concept anymore.

The two distinguished researchers also understood how important it was to focus on the context of different industries. They realized that companies would not be able to change their entire resource base; however, companies must at the same time be very aware of external changes. In this way, dynamic capabilities was defined and grounded out as a much more comprehensive theory than many of its competitors in the thought market.

The two key questions of dynamic capabilities

How can the people who are responsible for long-term strategy change their own thought processes to adapt to change that is volatile?

The key to this question is the fact that changes in the current market as defined by dynamic capabilities are said to be much more violent in nature than previously perceived. The question deals with the ability of senior management to have a mind that is similarly flexible to quick changes, both internal and external.

How can companies maintain their top capability standards at all times in order to ensure survival in a highly competitive marketplace?

Dynamic capabilities is also focused with keeping a company at its peak as a matter of course. As external conditions fluctuate, the internal standards for the company is the only thing that should not fluctuate. Managers must be well-equipped to understand how to use their resources while accounting for the depreciation of those resources at the same time.

The Four Processes of Dynamic Capabilities

1. The transformation of existing assets

Modern firms must be able to reconfigure their asset structure very quickly. These changes must be made in a cost-effective manner. The ability of a company to do this will be affected by its ability to scan the environment and evaluate competition. Transformation efforts can be supported by strategic alliances which gives tasks to satellite companies while maintaining local autonomy.

2. Co-specialization

Companies will realize that their human and physical assets work better in tandem. The unique nature of the way that these specialized talents work will give a company a more sustainable competitive advantage.

3. New assets

Strategic assets of a company must be coordinated efficiently within a company. Organizational routines should be developed when it comes to processing and gathering information. Customer experiences must be linked to engineering design choices, which will also help a company to choose who will supply its components and how its factories will run.

4. Learning

A company must be able to generate new patterns of activity and solidify those activity patterns as quickly as possible. Furthermore, these patterns must be cemented in as successful. At the same time, management will understand that certain group behaviors and subroutines will fluctuate depending on the behavior of the individual.

Management should be able to synergize new collaborations between human resources and physical resources to prevent strategic blind spots. These new synergies will become new strategic assets that will help a company to become more flexible.

 

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