A Case Study On Dynamic Capabilities Management Essay

In their seminal contribution, Teece et al. (1997) argue that dynamic capabilities enable organizations to integrate, build, and reconfigure their resources and competencies and, therefore, maintain performance in the face of changing business environments. The notion of dynamic capabilities was subsequently refined and expanded (Teece, 2007 and Helfat et al., 2007). However, a concise and comprehensive definition of dynamic capabilities has not been reached yet. In an effort to better understand the nature of dynamic capabilities, several scholars suggest to differentiate between dynamic and functional competences or operational capabilities. Collis (1994) distinguishes between lower-order operational capabilities, which are described as the purposive combinations of resources that enable an organization to perform functional activities, such as logistics, marketing and sales or manufacturing, and higher-order dynamic capabilities which deal with change. Zollo and Winter (2002) and Winter (2003) also distinguish dynamic capabilities from operational or ordinary capabilities. Operational capabilities enable firms to perform their everyday living, “and while dynamic (as all processes are), they are used to maintain the status quo” (Helfat et al., 2007:34). The archetypical firm equipped with ordinary but lacking dynamic capabilities will, in equilibrium, earn “its living by producing and selling the same product, on the same scale and to the same customer population over time” (Winter, 2003:992). By contrast, dynamic capabilities are those that enable a firm to constantly renew its operational capabilities and therefore achieve long-term competitive advantage.

Teece (2007) similarly recognizes that operational capabilities help sustain an organization’s technical fitness by ensuring its day-to-day operational efficiency, whereas dynamic capabilities help sustain a firm’s evolutionary fitness by enabling the creation, extension and modification of its resource base, thereby creating long-run competitive success. Taking these suggestions into account it seems that consensus is emerging about the distinction between functional or operational and dynamic capabilities, along the following broad aspects:

capabilities can be either functional or dynamic and they both reflect the firm’s capacity to perform a particular activity or function, but

functional capabilities help the firm to perform basic functional activities

while dynamic capabilities are referring to the transformation and reconfiguration of functional capabilities.

This discussion implies that dynamic capabilities create value indirectly by changing functional capabilities (i.e. through their impact on functional capabilities). To capture this thinking, in the present paper dynamic capabilities are conceived as the capacity of an organization to purposefully and systematically create, extend or modify its operational capabilities (adapted from Eisenhardt and Martin, 2000 and Helfat et al., 2007).

2.2 Dynamic Capabilities underlying Processes

Although the literature has concluded that dynamic capabilities are a set of complicated routines (Zollo and Winter, 2002), it is also argued that their existence is taken for granted without indicating the specific processes that form these capabilities (Galunic and Eisenhardt, 2001). Responding to such a criticism, Eisenhardt and Martin (2000) comment that dynamic capability processes comprise “specific and identifiable routines” which have been extensively researched. In particular, they suggest that several processes can be used as examples of dynamic capabilities such as product development (combining various skills in cross-functional teams), strategic decision making (pooling of diverse business, functional and personal expertise), alliance and acquisitions routines (new resources, pre- and post acquisition routines) and many others. In order to study in an integrated way the impact of dynamic capabilities on firm performance it is useful to abstract from specific routines and processes and to consider broader composite dimensions. This paper distinguishes three dimensions: coordinating/integrating activities, learning and strategic competitive response processes. It is thought that these constitute distinct, significant drivers that lead to the development of new configurations of functional competences.

Coordination/integration capability describes the firm’s ability to assess the value of existing resources and integrate them to shape new competences (Iansiti and Clark, 1994). Moreover, the implementation of new configurations of functional competences lies in the effective coordination of a variety of tasks and resources and the synchronization of different activities (Helfat and Peteraf, 2003). Coordination processes connect and interface single routines through communication, scheduling, task assignment and other related activities. Teece et al. (1997) suggest that the lack of efficient coordinating and combining of different resources and tasks may explain why apparently slight technological changes have overwhelming effects on incumbent firms’ competitive positions in a market. For example, Henderson and Clark (1990) have indicated the devastating impact of seemingly minor innovations on incumbent firms in the photolithographic industry, which had a major influence on how systems had to be configured. They argue that this kind of systemic or “architectural” innovations require the efficient integration and coordination of multiple engineering tasks.

Learning capability can be conceived of as a principal means of attaining strategic renewal. Renewal requires that organizations explore and learn new ways while at the same time exploit what they have already learned (March, 1991). Teece et al. (1997) argue that learning is a very important process which through experimentation and repetition leads to the better and quicker resolution of specific problems and at the same time enables firms to identify new production opportunities. Learning processes are dynamic and multi-level. Although insight and innovative ideas may occur to individuals, the individually generated knowledge is shared within the organization’s context and then some of it becomes institutionalized as organization artifacts.

Strategic competitive response capability is based on the extended definition of dynamic capabilities proposed by Eisenhardt and Martin (2000) to include the creation of market change as well as the response to exogenous change (Helfat et al., 2007). This capability can be conceptualized as the ability of the firm to scan the environment, identify new opportunities, asses its competitive position and respond to competitive strategic moves. Even when a well-established firm is aware of a need for change to address shifting environmental requirements, it is often difficult to respond effectively. For example, empirical research provides evidence that changes related to even minor technology shifts are often hard to be addressed effectively (Henderson and Clark, 1990). However, the capability to sense and strategically respond to environmental challenges is of utmost importance as it enables the firm to reconfigure certain competences before they become core rigidities (Eisenhardt and Martin, 2000). In sum, the preceding arguments indicate that the processes of coordination, learning and strategic competitive response seem to be important activities that facilitate change within an organization. Thus, they can be understood as sub-dimensions of a more complex, abstract construct representing dynamic capabilities. In this way, they may contribute to a better understanding and measurement of the composite concept of dynamic capabilities.

2.3 Dynamic Capabilities and Firm Performance

Empirical testing concerning the influence of dynamic capabilities on firm performance has been hampered by difficulties regarding their description, operationalization and measurement and by their assumed tautological relationship with firm performance. However, there is increasing evidence that a firm’s dynamic capabilities significantly affect firm performance. For example, Î-enderson and Cockburn (1994) confirm that a firm’s ability to integrate knowledge from external sources is positively related to its research productivity, measured by patent counts. Zollo and Singh (1998) in their study of post-acquisition integration processes in the banking sector, provide evidence that acquirers who invested more effort in codifying their integration processes achieve superior profitability performance compared to competitors. Similarly, Deeds et al. (1999) show that dynamic capabilities such as research personnel quality or alliance formation processes are significantly related to the number of newly developed products in the biotechnology sector. Despite the ongoing progress made in the empirical inquiry of the differential effects of specific dynamic capabilities, it seems that few studies have provided a comprehensive account of their precise impact on firm performance. David Collis (1994) suggests that dynamic capabilities, which can be defined as higher-order or meta-capabilities are important because they may help firms to avoid path dependencies imposed by their current lower-order competences. Therefore, a firm has to develop capabilities to learn and redefine its resource base in order to overcome the trap laid by their existing competences and create new sources of competitive advantage. Eisenhardt and Martin (2000) reach the same conclusion using a different argument. More specifically, they assume that although dynamic capabilities can be considered as valuable and rare, at the same time they are equifinal, i.e. similar across firms in terms of their key attributes, and therefore are neither inimitable nor immobile. Thus, dynamic capabilities cannot in themselves be a source of sustainable competitive advantage; rather they contribute to the achievement of superior firm performance by combining and renewing functional competences which in turn affect performance.

In sum, we could argue that dynamic capabilities build and reconfigure resource positions (Eisenhardt and Martin, 2000), zero-order capabilities (Winter, 2003), operational routines (Zollo and Winter, 2002) or operational capabilities (Helfat and Peteraf, 2003) and, through them, affect performance. This chain of causality designates an indirect link between dynamic capabilities and performance. However, the mechanisms by which dynamic capabilities influence firm performance are not well understood (Zott, 2003).

2.4 The Impact of Dynamic Capabilities on Functional Competences

Dynamic capabilities, as defined by Teece et al. (1997), do not engage in the production of a marketable good or service. Instead, they build, integrate or reconfigure functional competences. Considering the notion of higher-order or meta-capabilities, Collis (1994) defined them as capabilities of the learning-to-learn type. In the same line, Winter (2003) argues that as capabilities are “complex, structured and multidimensional” concepts it is important to make effective use of ‘zero-order’ (functional competences) and higher-order capabilities. Dynamic capabilities govern the rate of change of functional capabilities and therefore can be understood as higher-order constructs.

In the present theoretical framework we define dynamic capabilities as higher-order competences that allow firms to exploit existing lower-order competences and more importantly to identify and acquire new technological and/or marketing competences. The effective and efficient realization of coordination processes by the firm management is of particular importance. Coordination capabilities enhance the coordination and integration of tacit and codified knowledge allowing firms to more cost effectively deliver their products and acquire more information about their customers’ needs (Helfat and Raubitschek, 2000). Coordination capabilities are often related to new product development, where teams belonging to different firm departments work together combining their varied skills and backgrounds in order to design and develop the specific product (Helfat and Raubitschek, 2000). Learning processes that promote, enhance and renew technological knowledge is of critical importance for sustainable competitive advantage, especially in high-technology industries such as semiconductors, pharmaceuticals, etc (Helfat, 1997). More specifically, processes such as team-working and job rotation practices facilitate the distribution and sharing of knowledge within an organization, while at the same time, make the combination of new knowledge with existing skills and experience much easier. In particular, cross-functional teams enhance the absorption of new marketing or technological knowledge by encouraging interaction among employees belonging to different business functions and thus may have a positive impact on the transformation and recombination of marketing and technological competences. Furthermore, it is suggested that job rotation increases the effectiveness of knowledge absorption as it enhances the complementarity of experience inside the firm (Cohen and Levinthal, 1990). For example, one of the basic elements of Toyotas’ dynamic capability is the inter-plant exchange of information and knowledge. In that way, promising production ideas, which may be accepted by the management, unions, and the shop floor, are quickly distributed across the plants using various channels, such as cross-functional meetings and projects, rotation of plant general managements and so on. In this way, expansion of new ideas, policies and technologies are disseminated across different plants contributing significantly to the reorganization and evolution of Toyota’s manufacturing systems (Fujimoto, 2002). The firm’s ability to reshape its asset base is also dependant on the mechanisms and processes it has developed in order to sense the changes taking place in the environment and to opt for efficient actions in its relations with other agents. For example, competitive benchmarking as an organized process can be valuable to that direction. Thus, the ability to scan the environment and evaluate markets’ and competitors’ moves may have a significant impact on the firm’s capacity to redefine its technological and marketing competence and in consequence, result in an improved or refined product portfolio. Finally, the ability of an organization to effectuate change is closely linked to its flexibility potential and its decentralized organizational structure.

Thus, the absence of dynamic capabilities may constrain the renewal opportunities that firms pursue. For instance, it is not enough for firms to just improve their internal competency in R&D. As history reveals, firms with considerable capability to perform successful R&D activities, such as IBM and Sun Microsystems, still found it difficult to compete when their business environment changed. Rather, firms need to develop higher-order capabilities that enable learning form and leveraging of both internal and external resources. On the other hand, dynamic capabilities may diminish the effect of path dependencies. For example, the renewal of marketing competence through dynamic capabilities serves to overcome the history of having a specific customer base. Mere exploitation of already existing strategic assets will not lead to competitive advantage. Superior dynamic capabilities allow firms to continually build and renovate functional competences faster and cheaper than competitors. Simply holding some excellent competences do not enable firms to cope with the renewal challenges faced in the context of a more or less dynamic environment.