Dynamic Capabilities


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Dynamic Capabilities

  1. 1. Dynamic Capabilities Srini Kumar Marketing Strategy MBA 260G based on the paper: Dynamic Capabilities – What Are They? (Eisenhardt/Martin: Strategic Management Journal , 2000)
  2. 2. The Resource-Based View Of The Firm (RBV) <ul><li>What gives a firm competitive advantage? How is it sustained? </li></ul><ul><li>Firms are bundles of resources with competencies embedded in them </li></ul><ul><li>Different firms have different resource configurations (unequal distribution) </li></ul><ul><li>Resource differences persist over time </li></ul><ul><li>What can your firm do that other firms can’t do? What does it uniquely possess? </li></ul>
  3. 3. VRIN Attributes <ul><li>These are resources that are </li></ul><ul><ul><li>VALUABLE </li></ul></ul><ul><ul><li>RARE </li></ul></ul><ul><ul><li>INIMITABLE </li></ul></ul><ul><ul><li>NONSUBSTITUTABLE </li></ul></ul><ul><li>Lets a firm come up with new and original value-creation gambits </li></ul><ul><li>Competitors will be unable to match </li></ul>
  4. 4. How do firms handle change? <ul><li>Some firms have advantages in times of industry- or market-wide change </li></ul><ul><li>The competitive landscape shifts </li></ul><ul><li>Managers must address changing markets by reconfiguring their systems and competencies </li></ul><ul><li>Knowledge resources are especially critical in dynamic markets </li></ul>
  5. 5. Types of Dynamic Capabilities <ul><li>A dynamic capability lets a firm arrange and develop its resources to create new value </li></ul><ul><ul><li>Product Development </li></ul></ul><ul><ul><li>Alliance-Building </li></ul></ul><ul><ul><li>Strategic Decisionmaking </li></ul></ul><ul><ul><li>“ Rock-star” Cool -> Hiring Advantage -> PR Hype </li></ul></ul><ul><li>These capabilities are common across successful firms in varied industries </li></ul><ul><li>Learning mechanisms help firms evolve and improve their dynamic capabilities over time </li></ul>
  6. 6. Market Dynamism <ul><li>If there is change but the industry’s fundamental structure stays stable: </li></ul><ul><ul><li>Dynamic Capabilities can be routinized </li></ul></ul><ul><ul><li>Complicated, detailed, analytic processes </li></ul></ul><ul><ul><li>Existing knowledge; linear execution </li></ul></ul><ul><ul><li>Predictable outcomes </li></ul></ul><ul><li>If industry structure is BLURRING: </li></ul><ul><ul><li>Dynamic Capabilities are unstable, creative, experiential processes </li></ul></ul><ul><ul><li>Adaptive, unpredictable outcomes </li></ul></ul>
  7. 7. Two RBV Logics <ul><li>Two main ways that firms can shore up their competitive advantages: </li></ul><ul><li>The Logic Of Leverage </li></ul><ul><ul><li>Enhance existing resource configurations </li></ul></ul><ul><li>The Logic Of Opportunity </li></ul><ul><ul><li>Pursue temporary advantage </li></ul></ul><ul><ul><li>Flexibility in reconfiguring resources </li></ul></ul>
  8. 8. Some Resource Types <ul><li>Physical Resources </li></ul><ul><ul><li>specialized equipment </li></ul></ul><ul><ul><li>geographical location </li></ul></ul><ul><li>Human Resources </li></ul><ul><ul><li>expertise in critical topics </li></ul></ul><ul><ul><li>network effects and fan bases </li></ul></ul><ul><ul><li>lots of yummy options for new hires </li></ul></ul><ul><li>Organizational Resources </li></ul><ul><ul><li>a superior sales force </li></ul></ul>
  9. 9. Dynamic Capabilities And Resource Optimization <ul><li>Dynamic Capabilities help managers alter the Resource Base to create value </li></ul><ul><ul><li>acquire and shed resources </li></ul></ul><ul><ul><li>integrate disparate resources </li></ul></ul><ul><ul><li>recombine resources in new ways </li></ul></ul><ul><ul><li>generate new value-creation strategies </li></ul></ul><ul><li>create new Competitive Advantages </li></ul><ul><ul><li>relative to competition or substitutes </li></ul></ul><ul><ul><li>create new barriers to entry </li></ul></ul><ul><ul><li>mirror the dynamism of markets as they evolve </li></ul></ul>
  10. 10. Recombining Resources <ul><li>Product Development </li></ul><ul><ul><li>Cross-functional teams and management </li></ul></ul><ul><ul><li>Create new services from combining classic services in new ways </li></ul></ul><ul><ul><li>Get the community to help you develop it </li></ul></ul><ul><li>Strategic Decisionmaking </li></ul><ul><ul><li>Managers pool their expertise </li></ul></ul><ul><ul><li>Choices are made and execution planned </li></ul></ul><ul><ul><li>These choices shape future choices </li></ul></ul>
  11. 11. Reconfiguring Resources <ul><li>Knowledge-based Resources </li></ul><ul><ul><li>Transferring knowledge internally </li></ul></ul><ul><ul><li>Replicating processes and best practices </li></ul></ul><ul><ul><li>Altering the corporate culture </li></ul></ul><ul><ul><li>Using energy or leftover ideas from current or previous projects to fuel the future </li></ul></ul><ul><ul><li>Blatant copying of the competition </li></ul></ul><ul><li>Human Resources </li></ul><ul><ul><li>Reconnect webs of collaboration across various parts of the firm to make synergy </li></ul></ul><ul><ul><li>Harness productivity of other stakeholders (customers, employees’ families, government) </li></ul></ul>
  12. 12. Knowledge Creation <ul><li>How do managers and others create and spread new ways of thinking within the firm to spark change? </li></ul><ul><li>Cutting-edge knowledge is essential </li></ul><ul><li>Alliance and acquisition can bring new resources into the firm </li></ul><ul><li>Exit routines for resources that are unnecessary for value creation </li></ul>
  13. 13. Superior Performance <ul><li>Why do some firms outperform others? </li></ul><ul><li>First step of analysis: OBSERVATION </li></ul><ul><ul><li>What is the measure of the firm’s success? </li></ul></ul><ul><li>Second step: ATTRIBUTION </li></ul><ul><ul><li>What are the unique resources the firm has that generate its relative success? </li></ul></ul><ul><li>Third step: ANALYSIS </li></ul><ul><ul><li>What path did the firm take that let it develop these resources? </li></ul></ul>
  14. 14. “ BEST PRACTICES” <ul><li>There are archetypal frameworks for dynamic capabilities across firms </li></ul><ul><li>For instance, no matter what the industry, it pays to invest in intellectual property and to build barriers to entry </li></ul><ul><li>Another example: cross-functional teams for product development </li></ul><ul><li>Also: increase access to information </li></ul><ul><li>Finally: R&D staff with external linkages </li></ul>
  15. 15. Equifinality: Many Roads To Greatness <ul><li>There are many paths to the same Best Practices and Dynamic Capabilities. </li></ul><ul><li>Firms begin with different initial conditions and predispositions for adoption of Dynamic Capabilities </li></ul><ul><li>Firms take different adoption paths </li></ul><ul><li>Dynamic Capabilities can be transferred between industries by analogy </li></ul>
  16. 16. High-Velocity Markets <ul><li>Existing knowledge may be an obstacle if managers overgeneralize from past experience rather than being creative </li></ul><ul><li>Impossible to specify future outcomes </li></ul><ul><li>Successful business models are unclear and industry structure is blurred </li></ul><ul><li>Dynamic Capabilities are SIMPLE so managers can stay broadly focused </li></ul>
  17. 17. Boundary Conditions <ul><li>Managers are given great autonomy but are encouraged to execute within boundaries </li></ul><ul><li>Google management can make non-exclusive alliances with almost any FREE service </li></ul><ul><li>This lets them create new offerings and opportunities based on the creativity of product developers at a variety of firms </li></ul><ul><li>Flexible resource allocation to adjust for temporary conditions and create cumulative short-term advantages </li></ul>
  18. 18. Product Development Process <ul><li>Successful Practices: </li></ul><ul><ul><li>Limited routines for priority setting </li></ul></ul><ul><ul><li>A business vision that sets possiblity boundaries so mgmt stays focused </li></ul></ul><ul><ul><li>Creation of situation-specific knowledge </li></ul></ul><ul><ul><ul><li>enables re-use of knowledge if situation recurs </li></ul></ul></ul><ul><ul><li>Prototyping, early testing, feedback cycle </li></ul></ul><ul><ul><ul><li>rapid learning through small losses </li></ul></ul></ul><ul><ul><ul><li>cycle through improvement process (iterative) </li></ul></ul></ul>
  19. 19. Inputs To Dynamic Capabilities <ul><li>Real-time information </li></ul><ul><li>Flexibility to alter actions or strategy </li></ul><ul><ul><li>Partial implementation of multiple options </li></ul></ul><ul><ul><li>Provides fallback positions in case the situation changes </li></ul></ul><ul><li>Intuition about the marketplace </li></ul><ul><li>Emotional ability to cope with uncertainty and risk </li></ul>
  20. 20. Creating Multiple Alternatives <ul><li>Quality strategic decisionmaking charts out various scenarios and determines optimal firm tactics for each </li></ul><ul><li>Real-time information is critical as is experimentation and cross-functional teams </li></ul><ul><li>Contrasts with analytical and sequential firm planning in lower-velocity markets </li></ul><ul><li>More and earlier testing & prototypes create alternative development paths </li></ul>
  21. 21. Dynamic Capabilities in High-Velocity Markets <ul><li>Processes for altering the firm’s course: </li></ul><ul><li>Simple (not complicated) </li></ul><ul><li>Experiential (not analytic) </li></ul><ul><li>Iterative (not linear) </li></ul><ul><li>“ They rely on the creation of situation-specific knowledge that is applied in the context of simple boundary and prioirity-setting rules.” </li></ul>
  22. 22. Dynamic Capabilities in High-Velocity Markets <ul><li>With little structures, managers tend to FORGET routines & tactics from earlier </li></ul><ul><li>These firms also have fast staff turnover and knowledge gets old fast </li></ul><ul><li>DISSIPATIVE PROCESSES: it requires time, effort, money to stay on track! </li></ul><ul><li>Management challenge: develop and fix on the optimal amount of structure </li></ul>
  23. 23. Learning Mechanisms <ul><li>Repeated Practice </li></ul><ul><ul><li>Helps people understand processes </li></ul></ul><ul><ul><li>Over time, effective routines are developed </li></ul></ul><ul><ul><li>“ Learning Curves” </li></ul></ul><ul><li>Codification of Procedures </li></ul><ul><ul><li>Accelerates the building of routines </li></ul></ul><ul><li>Organizational Breakthroughs </li></ul><ul><ul><li>Building a distinct Alliance Department </li></ul></ul><ul><li>Mistakes, Close Calls, Analogies, Adaptation </li></ul>
  24. 24. Failure Is Always A Way To Learn <ul><li>Managers pay more attention to failures than they do to successes </li></ul><ul><li>Keep the failures small because major failures tend to make people cover up </li></ul><ul><li>Skills are built through failure </li></ul><ul><li>Learn from the past and create rules that will avoid repeating negatives </li></ul><ul><li>Crises can develop dynamic capabilities </li></ul>
  25. 25. The Pacing Of Experience <ul><li>Experience must be transformed into learning but lessons must be absorbed </li></ul><ul><li>Experience that comes too fast can be overwhelming for managers </li></ul><ul><li>If there isn’t enough experience, then managers may forget it </li></ul><ul><li>Knowledge accumulates over time, but so do unaddressed deficits </li></ul>
  26. 26. The Pacing Of Experience <ul><li>Experience in similar or analogous situations can be very helpful </li></ul><ul><li>Frequent, small variations in responsibility can keep management sharp and deepen their capacities </li></ul><ul><li>The goal: efficient, robust creative routines that can help management lead the ship even through turbulence </li></ul>
  27. 27. The Pacing Of Experience <ul><li>“ Managers with extensive experience were able to discern similarities and differences between current and previous acquisitions, and so apply their acquisition skills in a more discriminatory manner that was associated with superior performance.” </li></ul><ul><li>Which experiences should be canonized and which ones are best forgotten? </li></ul>
  28. 28. Dynamic Capability Development <ul><li>Dynamic Capabilities are often combinations of simpler capabilities </li></ul><ul><li>These simpler capabilities must be learned first and then combined </li></ul><ul><li>For instance, the Dynamic Capability of Multiple Product Development involves: </li></ul><ul><ul><li>Single Product Development capability </li></ul></ul><ul><ul><li>Probing The Future capability </li></ul></ul><ul><ul><li>Linking Routines between each project </li></ul></ul>
  29. 29. Dynamic Capability Development <ul><li>The Ingredients: </li></ul><ul><ul><li>Key commonalities of capabilities </li></ul></ul><ul><ul><li>The will to develop dynamic capabilities </li></ul></ul><ul><ul><li>New knowledge from specific situations </li></ul></ul><ul><li>The Recipe: </li></ul><ul><ul><li>Order of implementation of capabilities </li></ul></ul><ul><ul><li>Best Practices from other organizations </li></ul></ul>
  30. 30. Competitive Advantage <ul><li>Using Dynamic Capabilities </li></ul><ul><ul><li>Sooner </li></ul></ul><ul><ul><li>More Astutely </li></ul></ul><ul><ul><li>More Fortuitously </li></ul></ul><ul><li>To Create Resource Configurations That Outcompete Other Firms </li></ul><ul><li>Market dynamism is a source of profits for flexible firms that can move fast </li></ul><ul><li>Cumulative short-term advantages more likely than long-term positional advantages </li></ul>