In today’s increasingly VUCA (Volatile, Uncertain, Complex and Ambiguous) world, it is important for firms to be able to quickly and accurately adapt to shifts in the marketplace or changes in technology. Dynamic capabilities are the routines and processes that enable companies to transform themselves and evolve with the times. By developing these capabilities that go beyond ordinary strategic capabilities, firms will be in a strong position to achieve a long-lasting competitive advantage.
A number of frameworks have been developed to explain how firms achieve and sustain competitive advantage. Porter’s Five Forces Approach (Porter, 1979) focuses on industry structure and the actions a firm can take to create defensible positions against competitive forces. The Strategic Conflict Approach (Shapiro, 1989) emphasizes a firm’s ability to manipulate its market environment to improve its competitive outlook. Shifting attention from the external environment to the internal environment, the Resource-Based View (RBV) of the firm (Barney, 1991; Penrose, 1959; Prahalad and Hamel, 1990; Wernerfelt, 1984) suggests that the method in which resources (assets, capabilities, organizational processes, firm attributes, information and knowledge) are applied within a firm can create a competitive advantage. An expanded understanding of RBV gives way to the Dynamic Capabilities Approach (Teece, Pisano, and Shuen, 1997). Like RBV, the Dynamic Capabilities Approach identifies firm-specific capabilities as sources of competitive advantage. However, the Dynamic Capabilities Approach extends RBV to posit that the source of competitive advantage stems from the firm’s ability to manipulate its internal capabilities and resources in times of rapid and unpredictable change.
Dynamic capabilities are defined as “the firm's ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments” (Teece et al., 1997). Thus, some types of dynamic capabilities integrate firm resources (e.g., processes/routines involving product development and strategic decision making). Other types involve the reconfiguration of resources within the firm (e.g., knowledge transfer and collaboration). Finally, some are related to the gain and release of resources (e.g. knowledge creation, alliance and acquisition, and exit routines) (Eisenhardt &Martin, 2000). Such processes and routines are considered dynamic capabilities because they enable firms to create, renew, or orchestrate their resources in a manner that creates new value and allows them to compete and evolve.
Firms today need to be quick, flexible, and innovative in their response to technological and market changes. They need to be able to reinvent themselves and grow through transformation. Dynamic capabilities are the specific capabilities that enable firms to adapt to rapidly changing environments and hold on to their competitive advantage. They are absolutely critical to a firm’s long-term success.
All companies strive to build the internal capabilities that give them a competitive advantage; however, to sustain that competitive edge, it is important for companies to understand the difference between ordinary capabilities and dynamic capabilities. Ordinary capabilities are the routines or standard operating procedures that an organization uses to sell the same product, on the same scale, to the same customers, over time (Winter, 2003). These capabilities can be taught and are easily imitated by competitors offering little or no competitive advantage. Dynamic capabilities, on the other hand, operate to extend, modify, or create ordinary capabilities. They are the types of capabilities that change the product, the production process, the scale, or the customers served (Winter, 2003). Dynamic capabilities are idiosyncratic and unique to each company’s culture and history. They are hard to build and difficult to imitate, but necessary for long-term growth. In short, dynamic capabilities are key when it comes to developing innovative offerings and new business models in response to disruptive change.
The development of dynamic capabilities relies on three clusters of activities – sensing, seizing, and transforming. Sensing activities involve identifying and assessing emerging opportunities in the external environment. Seizing activities involve mobilizing resources to take advantage of these new opportunities. Transforming activities involve renewing company processes and maintaining their relevance to consumers. Firms who take the time to develop and hone their sensing, seizing, and transforming capabilities will discover that they are better able to innovate and create new business models. That being said, firms need to keep in mind that innovative offerings and new business models cannot succeed without the entrepreneurial and leadership capabilities of top management teams (Schoemaker, Heaton, & Teece, 2018).
Dynamic capabilities, along with strategy, enable firms to transform and pursue strategic objectives. For instance, incumbent firms across industries are building their dynamic capabilities to pursue effective digital business model innovation, or digital transformation. They are reconfiguring their internal and external resources to leverage emerging technologies, respond to changing consumer behaviors, and ultimately, outperform competitors. Regardless of the industry or types of transformation, investing in dynamic capabilities will deliver long-term value for a company.
The dynamic capabilities framework is a useful tool that enables leaders to think strategically about the future of their organizations. Such capabilities that allow firms to react quickly and accurately to changes in the external environment should be identified, strengthened, and incorporated into business models, strategic investments, and long-term strategic visions. By developing and building dynamic capabilities, firms will be able to transform and prolong their competitive advantage.
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