Dynamic capabilities (organizational theory)

Dynamic capabilities are part of an approach to business organizational analysis called organizational theory. Organizations are considered entities made up of groups of people who serve a particular purpose, such as a business association or a corporation. Organizational theory is a set of related business concepts that define and explain the interactive behavior of groups and subgroups within an organization to accomplish a common goal. Since organizations are comprised of people, they are considered social units and can be better understood and explained by a theoretical approach.

Specifically within organizational theory, dynamic capability refers to the ability of a business and the people within it to build, restructure, and adapt to rapidly occurring internal and external changes to stay competitive. Business experts prefer the plural term dynamic capabilities when discussing this theory because it highlights the need for multiple capabilities to work together almost simultaneously to evolve and adapt when changes occur. The theory of dynamic capabilities focuses on three interacting capabilities that involve learning about, integrating, and transforming new and existing organizational assets. It provides a framework for business people to understand and explain why an organization is successful or unsuccessful.

Background

Industrialization in the nineteenth century caused a shift in society as the majority of workers were working for wages from a business employer instead of earning a living through agriculture and craftsmanship. This change led to growth and the development of large companies. These business organizations needed to have strong leadership and develop new strategies to stay competitive. Competing theories of business organization emerged to fill this need. Over the course of the twentieth century, modern organizational theory was developed by business scholars.

The concept of dynamic capabilities emerged in 1997 in a paper titled “Dynamic Capabilities and Strategic Management,” by David Teece, Gary Pisano, and Amy Shuen. It built on the concept of combinative capabilities, which was proposed by Bruce Kogut and Udo Zander in a paper titled “Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology” in 1992. The groundbreaking research paper on dynamic capabilities remained one of the most cited papers in economics and business.

Overview

Dynamic capabilities are processes that differ from other capabilities, such as operational and ordinary capabilities. Operational capabilities have to do with current operations of an organization. Ordinary capabilities are standard business practices for most organizations. A common example of an ordinary capability would be an automated production line, which is a standard manufacturing method many companies use. Dynamic capabilities are unique to each organization. They come from an organization’s established business models and the specialized resources each organization seeks or already contains.

A capability is a set of learned activities or processes that lead an organization to a successful outcome. They are usually based on a learned process that has led the organization to success in the past. The managerial skills of sensing opportunities, mobilizing resources, and transforming resources for continuous renewal are essential to achieving three dynamic capabilities.

Each of these three dynamic capabilities has a developmental stage that leads to the agility needed to adapt to change. The first capability looks at the capacity of an organization to identify factors that are both opportunities and threats. The second is the ability of an organization to utilize opportunities presented to build new assets, and the final capability is how the organization can maintain competitiveness by protecting or altering assets as needed.

Capability 1: Learn Quickly

As challenges and opportunities approach an organization, the resources of an organization must rise to meet them. Managers and employees are the most important resources in an organization and need to be able to communicate effectively. When they are able to quickly sense and understand a potential negative or positive change, they can make changes and take action that can lead to benefits from the impending change. This requires skills such as recognizing and stopping dysfunctional patterns, reorganizing activity routines, and making use of collaborations and alliances for acquisition of assets.

Capability 2: Integrate New Strategic Assets

Once opportunities have been identified, new strategic assets can be brought into an organization by employees and managers. These new assets, in whatever form they take, are then fully integrated into the organization. They are integrated through specialized organizational processes unique to that particular asset within the business environment. New strategic assets may be external or internal and include resources such as additional employees, technology, intellectual property, or customer feedback.

Capability 3: Transform Existing Assets

An organization’s existing asset structure must also be fluid enough to quickly reconfigure to meet the rapid internal and external transformations. Since assets of all varieties tend to depreciate over time, inherent in the organization should be a cost-effective process to transform or reuse these existing assets. Processes that promote this transformation include decentralization of authority, employee training, and strategic business partnerships.

The three capabilities that make this theory work do not operate independently. They work together through a concept called co-specialization. This concept explains how assets develop over time and are more valuable when they work together. An example of this dynamic is when employees develop better professional skills as they create intellectual property for a company that builds a product. A concept called asset orchestration is also required for managerial decisions to take into account an optimal configuration of new and existing assets. Through this process, the whole of the organization is recognized as more valuable than the sum of its parts.

Bibliography

Ackoff, Russell Lincoln. Re-creating the Corporation: A Design of Organizations for the 21st Century. Oxford UP, 1999.

Barreto, llidio. “Dynamic Capabilities: A Review of Past Research and an Agenda for the Future.” Journal of Management, 28 Dec. 2009, journals.sagepub.com/doi/abs/10.1177/0149206309350776. Accessed 17 Jan. 2019.

Haines, Stephen G. Enterprise-wide Change: Superior Results Through Systems Thinking. Pfeiffer, 2005.

Kleiner, Art “The Dynamic Capabilities of David Teece.” Strategy + Business, 11 Nov. 2013, www.strategy-business.com/article/00225?gko=d24f3. Accessed 17 Jan. 2019.

Kogut, Bruce and Udo Zander. “Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology.” Organization Science, August 1992.

Najda-Janoszka, Marta. Dynamic Capability-based Approach to Value Appropriation. Jagiellonian UP, 2016.

Teece, David J. “Dynamic Capabilities: A Guide for Managers.” Ivey Business Journal, March/April 2011, iveybusinessjournal.com/publications/dynamic-capabilities-a-guide-for-managers/. Accessed 17 Jan. 2019.

Teece, David J. "The Evolution of the Dynamic Capabilities Framework." Artificiality and Sustainability in Entrepreneurship: Exploring the Unforeseen, and Paving the Way to a Sustainable Future, edited by Richard Adams, et al, Springer, 2023, pp. 113–19, doi.org/10.1007/978-3-031-11371-0‗6. Accessed 24 July 2024.

Wong, Amanda. “The Key to Keeping Up: Dynamic Capabilities.” Berkeley Hass, 22 Aug. 2016, cmr.berkeley.edu/blog/2016/8/dynamic-capabilities/. Accessed 17 Jan. 2019.