[[MBA Course#2 International Strategic Management]] # Dynamic Capabilities [Lecture](x-devonthink-item://FC9A058B-46AE-4FE7-8BC1-02470FAE47CC) *3rd of March 2021* [[Source - The Limitations of Dynamic Capabilities]] ## Definitions > *The firm's ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments* (Teece et al. 1997, 516) > > *The Dynamic capability of a firm is the capacity of an organization to purposefully, create, extend or modify its resource base* (Helfat et al., 2009) ## Aim - "Successful firms in fiercely competitive and unpredictable shifting industries pursue a competing on the edge strategy. The goal of this strategy is not efficiency or optimality in the usual sense. **Rather the goal is flexibility**-that is adaptation to current change and evolution over time, resilience to setbacks and the ability to locate constantly changing source of advantage. Ultimately it means engaging in continual revolution." - Brown and Eisenhardt ## Introduction - Builds on [[Resource Based View]] of the firm and Market Positioning (see [[Porter's Five Forces]]). - Dynamic Capabilities cannot be bought- they must be built. They are [[path dependent]] and are built on previous dynamic capabilities. You can't jump ahead (basically, history matters here) - The use of dynamic capabilities is intentional - This doesn't stop other companies using their own history and culture to develop very similar path dependencies. [[VRIO]] is also relevant here. - As the dynamic capability opens additional opportunities to a firm (which is one of the main attractions of such capabilities), so the set of competitors to whom it must be superior also expands. Consider how Apple competes with everyone. ### Types of Dynamic capabilities - Both have lower and higher orders. Higher orders are likely to be more inimitable. - Direct imitation of a dynamic capability is likely to be hard, if not impossible. Can't just drop it into the new organisation (see path dependency above) #### **First type- continuous improvement:** - the ability to move the production frontier outwards, by improving the efficiency with which the existing set of assets and capabilities are deployed ie the practice of continuous improvement. - a higher order dynamic capability of this type would be the development and application of a routine to ensure efficiency improvements were continuously pursued. Such a process might be value stream mapping, or six sigma methods. - The first type seems to have a focus on internal capabilities #### **Second type- pivoting:** - is based on the original Teece concept of Dynamic Capabilities- that they produce a shift to a new strategic position and so require a reconfiguration of activity choices rather than just an improvement in the way a specific activity is performed (first type). This is "pivoting". - There are higher order versions of 'pivoting' which allow for quicker, better and more radical configurations of assets. - The second type seems to have a focus on improving a response to a shift in the market. **Notes** - ==There is a tension between exploration and exploitation that must be balanced==. Do you explore new territories and ways of doing things, or do you exploit the current capabilities and capacities? [[Ambidextrous Organisations]] try to do both, and both deliver competitive advantage, but it is impossible to do one without trading off the other. - Note that [[Andy Hargreaves]] and [[Lauren Beckett]] have a preference for exploitation, while I have a preference for exploration. See [[Ed's MBTI Report]] - Note that we've agreed as an SU to spend 50% of our resources deepening engagement, and 50% widening engagement with students. This factors in here. Somehow. - If you can do both types of dynamic capability then this requires aligning the entire organisation, which makes imitation difficult. - Apparently Danaher is a firm that manages to do this. Has a Danaher Management System (DMS) that it implements in all the firms it purchases. But it also sells those companies to pivot to new, more profitable, sectors when the time is right. - Any system that has given dynamic capabilities in the past then becomes difficult to change as it is codified and embedded. It is predicated on the fact that the capability itself will not be changed. - Companies have to recognise that whichever capability they choose, it will have inherent limitations. Even a dynamic capability cannot solve all problems at once. ### Aspects of Dynamic Capabilities Teece (2007) said that there were different aspects to dynamic capabilities: - Sensing. Scanning and exploring new opportunities - Seizing. Addressing opportunity through new products, processes and activities - Transforming (or re-configuring) capabilities. Renewal and reconfiguration of capabilities and investment. This one is the most valuable and difficult.