Dynamic capabilities

Session 7

1
What changes and what remains?
• Developing anchors for change
• What should not change
• Existing core competencies
• Core values

2
IBM- Identified reasons for struggling
business
• The existing management system rewards execution directed at short-
term results and does not value strategic business building.
“Breakthrough thinking” was not a valued leadership capability
• The company is preoccupied with current served markets and existing
offerings.
• The business model emphasizes sustained profit and EPS improvement
rather than actions oriented towards higher price/earnings.
• The firm’s approach to gathering and using market insight (fact based
analysis is inadequate for embryonic markets.
• The company lacks established disciplines for selecting, experimenting,
funding, and terminating new growth businesses.
• Once selected, many new ventures fail in execution
3
IBM- EBO revenue as a percent of total revenue

4
 Dynamic capability
• “capacity of an organization to purposefully create,
extend or modify its resource base’
• ‘Includes the capacity with which to identify the need or
opportunity for change, formulate a response to such a need or
opportunity and implement a course of action (different dynamic
capabilities may serve these different purposes)
• Capacitity to
• Sense and shape opportunities and threats
• TO seize opportunities and
• To maintain competitiveness through enhancing, combining,
protecting and where necessary- reconfiguring the business
enterprise’s intangible and tangible assets

5
Dynamic capabilties- not easily acquired
• IBM(1993-2004)
• Kodak
• Boeing

6
Percentage of Tires Shipped by Construction Type: 1961-1989

Sources: Rubber Manufacturers Association, “Tire Shipments by Construction,” Tire Industry Facts
(Akron, Ohio, 1990); Firestone Tire & Rubber Company, “Sales Forecasts,” Corporate Archives
(Akron, Ohio, 1980).
Citation:
Sull, Donald. “The Dynamics of Standing Still: Firestone Tire & Rubber and the Radial Revolution,” Business History Review, 1999, pp. 430-464. 7
 Disk Drive Industry Evolution
146 firms founded; 125 failures

2.5”
Prairietek, Quantum,
Market 3.5” Conner, Western Digital

Size Conner, Quantum, Maxtor,

Western Digital, Seagate
5.25”
Seagate, Miniscribe, Maxtor,
Micropolis, Computer Memories
8”
Shugart, Micropolis,
Priam, Quantum

14”
Control Data, IBM, Memorex,
Diablo, DEC, Ampex

1976 1981 1986 1991 1996

8
Dynamic capabilities visualized in three aspects
• Organizational processes
• Asset positions
• Evolutionary path

• From a different perspective, the ability to sense and to seize

opportunities

9
Paths
• Sub-optimal lock in: there are competing technologies and strong increasing
returns, "one technology will come to dominate the market, and it is not possible
to predict -ex ante- which of the technologies will do so. It is likely, however, that
the technology which first makes large advances along its learning curve will
emerge dominant"
• Path creation (mindful deviation) vs path dependency

10
Capabilities linked to modifying the
resources
• Sensing
• Seizing
• Reconfiguring assets

11
Effect of competitive environment on
performance
• Firms deploying dynamic capabilities in highly competitive markets
will benefit because “when rivalry is fierce, companies must innovate in
both products and processes, explore new markets, find novel ways to
compete, and examine how they will differentiate themselves from
competitors.” In highly competitive environments, responding to
competitive challenges through opportunity identification activities
should also prepare organizations better for survival.
• Thus, the effects of dynamic capabilities are enhanced when the
company faces some degree of competitive intensity, as otherwise the
organization may not require, or put to use, dynamic capabilities to the
same extent and, as a result, the development of such capabilities may
come at a cost that exceeds the benefits
12
Other important ‘routines’ that impact capabilities

• Knowledge creation routines for building new thinking

• Alliance and acquisition routines e.g. Cisco
• Biotech firms- alliance processing for accessing outside knowledge
• Exit routines for jettisoning resource combinations that are no longer
valuable

13
Dynamic capabilities: eg. Product
development
• Routines involve cross functional teams
• Routines that ensure concrete and joint experiences among team
members such as working together to fix specific problems or
brainstorming together
• Common consumer visits and feedback
• External communication facilitated by strong leaders

14
Thus , dynamic capabilities indicate
• Propensity to change the resource base
• Propensity to sense opportunities and threats
• Propensity to make timely decisions
• Propensity to make market oriented decisions

15
Fast response
• Mechanisms to increase speed
• Flexible organizational structures, peripheries and organizational
boundaries
• Organizational slack
• Flexible and agile organizational forms that can accommodate novelty and
innovation
• Modularity- organization, products
• Ambidextrous learning organizations- organizations that can change
as well as learn

16
‘Flexibility’
• Being agile- fast on one’s feet
• Ability to move rapidly
• Change course to take advantage of an opportunity or to side step a
threat
• Ability to be versatile- doing different things and applying different
capabilities depending on the needs of a particular situation

17
Event pacing: traditional response
• Response to events such as:
• Moves by competition
• Response to a new technology
• Follow a plan and deviate when performance begins to weaken

18
Time pacing
• Not to be confused with speed
• Counteracts the natural tendency of managers to wait too long, move
too slowly and lose momentum
• Helps set the pace for change
• Is regular, rhythmic and proactive

19
Time pacing
• Phased product/service introductions
(British Airways)
• Target of revenues from new products(3M, Gillette)
• Market expansion/entering new markets (Starbucks)
• Time paced capacity build up
• Launching new businesses

20
Time based performance metrics
• Measures based on time- such as elapsed time, speed, rate
• Measuring every critical transition process with at least some time
based measure such as
• Number of products per quarter
• Average time from concept to commercial launch
• Average downtime between products

21
Capabilities created- time pacing
• Managing transitions: shifts from one activity to the next
• Managing rhythm: pace at which companies change

22
Slack
• Extent of resource utilization
• Those resources that an organization possesses that are not
committed to a necessary organizational activity

23
Uses of slack
• Slack as an inducement
• Slack as a resource for conflict resolution
• Slack as a technical buffer
• As a facilitator for strategic behaviour

24
Organizational structure
• Advantages for less formal structures in sensing, seizing and
reconfiguration

25
‘Flexible’ organizational forms
• Multi functional multi unit teams
• Sub contracting
• Collaborative partnerships

26
‘Flexibility’
• Being agile
• Fast movement
• Able to change course
• Take advantage of an opportunity or side step a threat
• Resilience to shocks

27
Role of modularity in flexibility
• Modular products- incremental additions to basic platforms
• Satisfy changing customer demands by minor alternations in products
• Choice available to the firm- between a faster but partial design or a
slower but complete redesign

28
Unique processes
• E.g Intels system of overlapping project teams which ensures that
there is one project halfway through even when the previous version
of the product is being launched
• Cisco’s system of letting its customers decide on which technologies
(and hence firms) are important.

29
Issues in dynamic capabilities
• Strategic learning and change
• Technological innovation and adaptation
• Microfoundations of dynamic capabilities
• Ambidexterity as dynamic capabilities
• Strategic alliances

30
Strategic learning and change
• knowledge assets that are leveraged into human capital and organizational
capabilities through learning mechanisms on multiple levels
• creation, recombination and integration of knowledge is crucial to the firm’s
overall innovation capacity
• the dynamization of the RBV- towards issues of strategic learning and change.

31
Technological innovation and adaptation
• Technological adaptation may be inhibited by organizational routines,
such as process management practices, that disadvantage incumbents
in the face of radical discontinuities
• In particular, pre-existing capabilities have an impact on the choice of
sourcing modes that, in turn, affect the acquisition of new capabilities

32
Microfoundations of dynamic capabilities
• Components of capabilities and to investigate how they interrelate across the
individual and the collective levels
• a knowledge-based view of corporate acquisitions
• integration capabilities and learning mechanisms that foster post-acquisition
knowledge spillovers.

33
Ambidexterity as dynamic capability
• Ambidextrous organizations are able both to explore new
knowledge domains and to exploit current ones.
• Factors that promote ambidexterity include integration
mechanisms at the senior team level, intellectual capital
architectures, total quality management, organizational
design, executive leadership and managerial cognition

34
Strategic alliances
• Learning from alliance partners- what enables firms to source
knowledge beyond their own boundaries and what the
outcomes of such processes are.
• what kind of experience a firm has gained from previous
alliances and how this is combined with internal sourcing
strategies
• how firms can retain knowledge that they have sourced
outside their boundaries and how they can use
interorganizational relations to extend their knowledge base
• Vertical scope- strategic outsourcing
35