All companies aim at creating success and maintaining a ‘competitive advantage’ using their ‘core competencies’ and more importantly, using the ‘distinctive’ ones. The fulfillment of that is the essential purpose of any strategic management process.
Competitive advantage in plain English is anything the company performs better than its competitors using its core competencies (David 2013, p.38). If the core competency helps them to gain a ‘competitive advantage’, then it is a ‘distinctive competency’ for which the company can reach a state that is not easily be imitated by its competitors (David 2013, p.151). The process of doing that starts by identifying the weaknesses, designing strategies to convert these weaknesses into strengths and finally into distinctive competencies (David 2013, pp.125–126).
The overall purpose of this post is to examine the role of dynamic capabilities in formulating company’s strategy and gaining a competitive advantage. In specific, the below questions will be answered:
- What does dynamic capability mean?
- What are the benefits of it?
- When is Dynamic Capability Used?
- How is Dynamic Capability Used?
Finally, conclusions and recommendations will be formulated.
What Does Dynamic Capability Mean?
Different scholars developed frameworks that can be used to help the organizations to sustain their competitive advantages. Some scholars examined the external environment around the company such as Porter when he developed Porter Five- Force Model (Porter 2008) and some of them examined the internal resources of the company such as the Resource Base view (RBV) theory (Barney 1991; Barney 1995). Recently, different scholars addressed the concept of Dynamic Capabilities such as Helfat et al. (2007).
The term ‘dynamic capability’ was first addressed by Teece, Pisano and Shuen in 1997 when they defined it as “the firm’s ability to integrate, build and reconfigure internal and external competencies to address rapidly changing environments” (Teece et al. 1997).
The definition includes two parts: ‘dynamic’ which requires renewing the current competencies to cope with the changes in the business environment, and ‘capabilities’ which refers to the skills, functions and resources required for that new business environment. It is worthy to mention that the term ‘resource base’ includes all the tangible, non- tangible and human resources that the organization has or can have access to and can control (Helfat et al. 2007, p.4).
The concept was developed from the Resource- Based View (RBV) approach which focuses on the internal environment of the firms (its strengths and weaknesses) rather than the external environment (David 2013, p.127). Barney (1991) illustrated how management should look at its internal resources (whether financial such a debt and equity, physically such as machines and buildings or human resource) and evaluate them based on three empirical indicators namely, ‘value’, ‘rareness’ and ‘imitability’. Barney suggested answering the below three questions as part of the evaluations process (Barney 1995).
- Value: “do a firm’s resources and capabilities add value by enabling it to exploit opportunities and/or neutralize threats?”
- Rareness: “how many competing firms already possess these valuable resources and capabilities?”
- Imitability: “Do firms without a resource or capability face a cost disadvantage in obtaining it compared to firms that already possess it?”
By doing so, the company can identify the sources of gaining and sustaining a competitive advantage.
What are the Benefits of the Dynamic Capability?
The benefits of acquiring dynamic capabilities in an organization are twofold:
- Externally; by entering a new business or extending a current one. This includes M&A (Merger and Acquisition), alliance and joint ventures (Helfat et al. 2007, p.100).
- Internally; by creating new and unique products and services that will satisfy the customers’ needs at the time of change. This goes for the existing market or even developing new markets so the company can serve its customers with new innovative ways (Helfat et al. 2007, p.100; Teece 2014).
The ultimate purpose of dynamic capabilities is to lead the company during the time of change to create more profits (Helfat et al. 2007, p.1).
When is Dynamic Capability Used?
Dynamic capability is not one type of capabilities that fits in every state of the environment. Ambrosini extended the concept by breaking it down into three levels namely: ‘incremental’, ‘renewing’ and ‘regenerative dynamic’ capabilities. The original resource base is used under stable environment. In the state of minor changes, incremental capabilities are used, but under dynamic environment, renewing type is dominant, and under hyper environment, the regenerative type is exerted (Ambrosini 2009). The three types are shown in the below figure.
How is Dynamic Capability Used?
The needed steps to implement the concept of dynamic capacities follow a normal change management process in which three tasks are conducted (Helfat et al. 2007, p.30):
- Identify change triggers which show there is a need to change something.
- Develop an appropriate response plan.
- Implement the response plan.
Under these steps, the dynamic capability will allow the company to change its resource base, either by modifying the current one or acquiring new ones, so they can respond to the external changes (Helfat et al. 2007, p.2).
Teece et al. (1997) identified three categories, 3P’s, which can help the company to achieve the dynamic capability. The 3P’s are ‘processes’, ‘positions’ and ‘paths’. When there are rapid changes in the external environment and a company wants to change its current position to a desired one, different paths (strategic alternatives) might be taken. For example, it can go for modifying the current resource base that it has and can control, it can seek an alliance relationship to learn from a partner or it can go for developing a joint venture and enter a new business (Helfat et al. 2007, p.118). By identifying the paths, the company now can use certain organizational and managerial processes to reach to the desired position. Helfat et al. (2007) discussed two processes which are:
- Search and selection of resources process (including when to acquire resources rather than modifying the current resource base of the organization, deselect resources and targets for acquisition).
- Configuration and deployment process (including interfirm knowledge-sharing routines and governance of resources).
As a result, new capabilities are acquired to face that change.
Conclusions: the Limitations and the Future of the Dynamic Capabilities
The purpose of this post was to shed some light on the use of dynamic capabilities in strategic management.
As a conclusion, the theory helps the companies to better manage under changing environment by creating new resources or even renewing the current one.
The theory should be studied further to understand if it is applicable for all size of companies. Ambrosini addressed the new level of skills that should be available in the management when dealing with the change (Ambrosini 2009), however, more studies are needed in order to define those skills and study their availability in the small and young companies rather than the big one. In addition, Helfat et al. introduced a framework to evaluate the performance of those dynamic capabilities based on ‘technical fitness’, ‘market demand’ and ‘competitors’ (Helfat et al. 2007, p.8), however, it is advised to provide further research on how to use it in different industries. A final limitation addressed by the Resource-Based View advocate, Teece, where he argued that the current state of the company does matter in selecting the required strategy. A firm with too many weaknesses has different challenges than a strong one, therefore, resource- based approach is better in bridging this gap (Teece 2014).
Managing business under changing conditions requires a high level of strategic thinking. David emphasized the importance of looking at both directions, internally for strengths and weaknesses, and externally for opportunities and threats no matter what theory is applied. According to him, there is always a degree of uncertainty for which it is difficult to conclude which one is the most important in sustaining a competitive advantage (David 2013, p.128). At a minimum, both sides should be evaluated equally as part of ‘strategy formulation stage’ in ‘strategic management process’.
Ambrosini, V., 2009. Dynamic capabilities: An exploration of How Firms Renew their Resource Base. British Journal of Management, 20(1), pp.9–24.
Barney, J., 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management, 17(1), pp.99–120.
Barney, J.B., 1995. Looking Inside for Competitive Advantage. Academy of Management Executive, 9(4), pp.49–61.
David, F., 2013. Strategic Management Concepts and Cases: a Competitive Advantage Approach 14th ed., Harlow: Pearson.
Helfat, C.E. et al., 2007. Dynamic capabilities: Understanding Strategic Change in Organizations, Oxford: Blackwell Publishing.
Porter, M.E., 2008. The five competitive forces that shape strategy. Harvard Business Review, 86(January), pp.78–94.
Teece, D.J., 2014. The foundations of Enterprise Performance: Economic Theory of Firms. The Academy of Management, 28(4), pp.328–352.
Teece, D.J., Pisano, G. & Shuen, A.M.Y., 1997. Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), pp.509–533.