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.