Dynamic capabilities theory in the era of intensive innovation

Before the birth of Dynamic capabilities theory in 1994, Michael E. Porter’s Competitive forces and Jay Barney’s Resource-based view ruled the day in terms of strategic management. The overriding objective of these two approaches was to determine the strategic resources a firm could exploit to achieve a sustainable competitive advantage. During the 20th century, when innovation as a practice was in its early days, this kind of approach was highly effective. Having a top team of engineers and a sizable R&D budget pretty much guaranteed you a leading position.

 

It was the case of Ford early in the 20th century. Ford’s critical asset was their revolutionary  assembly line which massively increased the efficiency of manufacturing and reduced costs all round. In a similar vein, Toyota’s Kaizen practices allowed them to optimize the acquisition and allocation of key assets in both production and management, sending Toyota soaring into the World’s number one spot for passenger car production by the beginning of the 21st century.

 

But times have changed, and The Ford and Toyota models mentioned above are what we have come to call forms of closed innovation. Companies are shifting towards open innovation – which is based on a landscape of abundant knowledge and cooperation in innovation (either through a buy-out, joint venture or partnership).

 

This shift is partly due to the sheer number of knowledge workers on the payroll these days. Collaborators are increasingly mobile, and companies find it much harder to retain and capitalize on proprietary ideas and expertise. Distances have shrunk over the years with the event of modern transport systems and competitivity clusters, and the constant exchange of ideas and know-how from individual to individual is now fueled by the vast spread of communication and connectivity.

 

The rules of the game have changed, and all players are advised to rethink their moves accordingly.

 

A new “star” is born

In this more fluid context, a company cannot rely on building and locking its key assets in-house. The development of Dynamic capabilities theory in 1994 through the work of professor David.J Teece, Gary Pisano and Amy Shuen from Harvard University led to a novel approach which addresses this new challenging environment for companies. It focuses on:

  • Identifying and leveraging essential competencies to create dynamic competitive advantages
  • Adopting a new mindset and reacting differently to the changing environment

 

A firm’s dynamic capabilities can be defined as their abilities to integrate, create and reconfigure existing skills internally or externally, and to cope with rapid change in the environment.  

 

In the following model the red flow depicts a linear value chain which reflets 20th century practices where heavy investments and the “storage” of capabilities (whether in terms of products, services or processes) were expected to yield competitive outcomes and market strategies.

 

dynamic capabilities competitive advantages

 

Dynamic capabilities theory suggests that rather than the focussing on linear strategies derived from stored capabilities, firms should detect, capture and materialize – or “reconfigure” the flow of newly acquired capabilities and traditional in-house know-how and model them to suit market evolutions.

  • The Dynamic, aspect of dynamic capabilities theory is all about having the capacity to renew competencies in a way that fits with the changing business environment.
  • The Capabilities aspect emphasizes the key role of strategic management in adapting, integrating and reconfiguring internal and external organizational skills, resources and functional competencies.
  • The Dynamic capabilities of an organisation generally reflect its ability to achieve new and innovative forms of competitive advantages which are both in line with its traditional market positions, new market positions and dependencies.

 

On the nature of acquiring technological knowledge

The question now is how can firms renew competencies to respond to shifts in the business environment? At which point does the definition of dynamic capabilities go beyond the routine competencies of a firm? How can a mass of environmental factors translate into a concrete capabilities model?

 

Here is a paper example of this type of capability model:

 

dynamic capabilities competitive advantages

 

This three-dimensional model of a firm’s capabilities fits with dynamic capabilities theory in that it implies reconfiguration and transformation in:

  • Organizational and managerial processes: a firm’s ability to organize the exploration of valuable internal and external skills and integrate and internalize new ones alongside traditional expertise.
  • Path: a firm’s continual practices, historical preferences and expertise, but also newly-detected technological and market opportunities that require new know-how from the firm.
  • Positions: a firm’s historical assets in terms of technologies, processes and market know-how (with according complexities).

 

In this model, reconfiguration and transformation can be relevant to almost all of a firm’s activities, from product and process development, technology transfer, manufacturing, intellectual property, human resources, organizational learning and management of R&D etc.

 

Is Dynamic capabilities theory actionable?

Like many other managerial theories, the Dynamic Capability theory may seem like a recipe for complexity. Top managers may fear trying to implement it would make their jobs’ harder, not easier. In truth, turning theory into reality is a tall order, and the models which are put forward for capitalising on research are not always actionable.

 

One example of this predicament concerns the ambidextrous organization model – It focuses on the dynamic between a firm’s exploration and exploitation activities and requires skillful management of capabilities, the integration of internal and external expertise, and a pivot moment which comes into play at a specific time. It sounds good on paper, but many critics have highlighted this model’s lack of concrete algorithms and guidelines in order for it to be fully exploitable. It is nonetheless a useful model from a theory perspective, and worth the read...

 

The theory of Dynamic Capabilities is more complete, and instead of focussing on a unique pivot point, it suggests 4 categories of capability strategy choice for firms to consider:

 

dynamic capabilities intensive innovation

Source: Towards a prescriptive theory of dynamic capabilities

 

In this example, if Google chose to invest in internet search or advanced computer science, the firm would stay within the realm of its expertise (deepening strategy). However, if it chose to invest in automotive design or in biology and genomics – which is a whole science branch, Google would then try to acquire knowledge way beyond its know-how.

 

The crux of the matter is that even once the choice has been made with this model, there will almost certainly be obstacles inside and outside of the scope of the theory:

  • Which mechanisms are needed to integrate new capabilities into “stocks” of know-how efficiently?
  • How can you align key stakeholders on the same pivot strategy with constraints on resources and organization, and differing points of view?
  • At which point should a firm decide that instead of constantly adjusting to the changing environment it should adapt its environment to its own capabilities and competencies? etc.

 

Conclusion

Perhaps the biggest takeaway of Dynamic Capabilities Theory is the idea that firms must stay attuned to change in order to achieve sustainable competitive advantages. With fluctuations in customer preferences and the changing competitive landscape, emerging technologies and new government regulations, how could one conclude otherwise?

 

One efficient way to stay attuned is to be continuously detecting, seizing and reconfiguring new key capabilities and integrating them into your stock of know-how. As this is easier said than done, Stim has come up with a solution to help firms make theory actionable: the Innovation Machine.

 

We believe in the premise of Dynamic Capabilities, but also tackle the other critical issues. With Stim’s innovation machine we help you to:

  • Create an integration mechanism for incorporating new knowledge into existing stocks of know-how
  • Align top managers on a strategic pivot
  • Detect or indeed create potential disruption areas

 

Competitive advantages are being challenged by the fast pace of change and firms need to muscle up on the innovation capabilities that allow them to create, transform and reinvent their businesses. With the help of Sim’s innovation machine, you will do just that.

 

 

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