The Dynamic Capabilities of Firms: an Introduction

David Lee

Competitve advantage

Winners in the global marketplace have been firms that can demonstrate timely responsiveness and rapid and flexible product innovation, coupled with the management capability to effectively coordinate and redeploy internal and external competences. These advantages are refer to as dynamic Capabilities

Dynamic Capabilities - ‘Dynamic’ refers to the responsiveness of the

company to react to external changes - ‘ Capabilities’ refers to the company resources or

skills which they need to react towards the changing environment.

 The notion that competitive advantage requires the exploitation of existing internal and external firm-specific capabilities and of developing new ones is partially developed in Penrose (1959), Teece (1982), and Wernerfelt (1984).

Toward a Dynamic Capabilities Framework

  The competitive forces framework sees the strategic problem in terms of market entry, entry deterrence, and positioning

  Game-theoretic models view the strategic problem as one of interaction between rivals with certain expectations about how each other will behave

  Resource-based perspectives have focused on the exploitation of firm-specific assets.

How to be strategic firm

 To be strategic, capability must be honed to a user need (so that there are customers), unique (so that the products/services produced can be priced without too much regard to competition), and difficult to replicate (so that profits will not be competed away)

Non-strategic assets

 Any assets or entity which is homogeous and can be bought and sold cannot be all that strategic (Barney, 1986)

Internal Organisation (Firms) competitive edge

 The essence of the firm is its strategic assets as it cannot be brought easily and that the essence of the internal organization a domain of unleveraged or low-powered incentives

Essence of the firm

 The writer mentioned that the essence of the firm is that it behave not like a market organization.

 Because of this, it can inject high powered incentives which is a domain of unleveraged or low-powered incentives.

  It focus on group or organisation level rather than individual level.

Firm competences by using the markets

  The very essence of capabilities/ competences is that they cannot be readily assembled through markets rather than a nexus of contracts.

  Contracts – referring to a transaction undergirded by a legal agreement, or some other arrangement which clearly spells out rights, rewards and responsibilities

Firms cannot be easily replicated

 Firms cannot be easily replicated just by replicating its portfolio of business units through a series of contracts.

 Replication needs time and the firm capabilities need to be understood not in terms of balance sheet but mainly in terms of the organisational structures and managerial processes.

Three categories (Processes, Path, Position )that determine the firm’s dynamic capabilities

  Processes- refers to the managerial and organizational processes

  A hierarchy of competences/capabilities ought to be recognised, as some competences may be on the factory floor, some in the R&D labs, some in the executive suites, and some in the way everything is integrated.

  A difficult-to-replicate or difficult-to-imitate competence/capability can be considered a distinctive competence.

Organizational and Mangerial Processes

  Integration reflects the need to efficiently and effectively coordinate between different activities through a series of internal or external coordination- through strategic alliances, virtual corporation, managing buyer-supplier relations and technology collaboration evidences the importance of external integration and sourcing.

An example of Integration

  The author uses Garvin’s (1988) study of eighteen room air conditioning plants which reveals that quality performance was not related to either capital investment or the degree of automation of the facilities.

  Instead, it was a series of routines which included gathering and processing information, linking customer experiences with engineering design choices, and coordinating factories and component suppliers.

Processes vs Corporate culture   Processes uses weak or low-powered

incentives targeting at team level than individual level

  In Corporate culture, the need to reward individual performance is much needed. The writer reflects that this can be seen in an accounting firm which is a professional service organisation.

  All in all, the need to identify the congruencies and complementarities among processes, and between processes and incentives, are critical to the understanding of organisational capabilities

Learning process is more important than integration

 Learning process is a ability that allow tasks to be performed better and more quickly through repetition and experimentation

Reconfiguration and Transformation Processes

The writer says that in a evolving environments, there is a need to reconfigure the firm’s asset structure and to accomplish the necessary internal and external transformation.

Change is costly and so firms must develop processes to minimize low payoff change. Decentralisation and local autonomy assists these processes. Firms that have honed these capabilities are sometimes referred to as ‘high flex’

Position process

  The strategic position of the firm with respect to its business assets will determine its market share and profitability at any point of time.

  In this context, the business assets are not the equipments, unless they are unique, rather we mean its difficult-to-trade knowledge assets and assets complementary to them, as well as its reputational and relational assets.

Business assets   Technological assets – the ownership protection and

utilization of technological assets are clearly key differentiators among firms.

  Complementary Assets – it refers to assets that complements its own product

  Financial Assets – a firm’s cash position and degree of leverage may have strategic implications

  Locational Assets – Uniqueness in certain businesses can stem for locational assets which are non-tradable, for example, positioning of a refinery in a certain geographic market.

Paths

 Path dependencies – it reflects the need to move and predict which market to occupies by learning from history and considering an industry technological opportunities or its own technological opportunities

Assessment of firm

 The assessment of a firm’s strategic capability framework needs to be analyzed in a strategic audit. This audit should include processes, positions, and path so as to predict the firms performance with respect to the external environment

Replicablitiy and Imitatability of Organizational Processes and Positions  Replication involves transferring or

redeploying competences from one economic setting to another.

 Replication involves the following:   Transmitting information   Replicating of systems of productive

knowledge   Transfer of people

Advantages of Replication

 One is the ability to support geographic and product line expansion, e.g. Nestle’s transfer of developed countyr marketing methods for infant formula to the third world (Hartley, 1989)

 Another is that the ability to replicate also indicates that the firm has the doundations in place for learning and improvement

Strategic Issues from Dynamic Capabilites Perspective

 Dynamic capabilities approach is at odds with Schumperterian views. Firms at one level need to compete on the improvement product design, product quality, process efficiency, and other attributes

  In schumperterian world, firms constantly try to improve their competences through imitating their most qualified competirors

How to resolve Schumperterian views

 The answer is through Intellectual property protection as it presents a formidable imitation barrier in cetain particular contexts. The author recommends that the the IP owners spread their fruits of success on many islands.

Conclusion.

 The firm dynamic capabilities stems from its processes and its competitive success arises from the continuous development, exploitation, and protection of firm-specific assets.