As British Airways announced its first profits in two years this autumn, it’s interesting to look at what makes businesses successful and how failing businesses can turn themselves around to re-secure competitive advantage. Step forward, dynamic capabilities.
Dynamic capabilities have become a hot topic in the strategic management and organisational change arenas since the concept was first introduced by David Teece and his co-authors in 1997. They are essentially second order capabilities – , the capabilities to develop new capabilities – that enable businesses to reconfigure their resources in order to adapt to changes in the environment and secure competitive advantage.
1. Creating a business model for excellence
Dynamic capabilities ensure organisations operate at the highest levels of excellence in their existing businesses, whilst at the same time allowing for the exploration of new ideas and the implementation of innovative business models. To get an idea of their importance, let’s take a look at a couple of companies experiencing difficulties in adapting their capabilities to new environments:
- Toyota reinvented automotive manufacturing and supply chain management in terms of its ‘lean production’ system and built its reputation on constantly raising the quality bar. But since then the company has fallen from its pre-eminent position in the global automotive industry.
- EMI, one of the most successful record labels of all time, is now encumbered with an old business model and is struggling to adapt, with capabilities that no longer fit the new cheap-download, file-sharing music environment.
2. How do businesses reinvent themselves?
On the other hand, there are businesses that manage to continually reinvent themselves, having the dynamic capabilities that enable them to learn and reconfigure their organisations:
- Google entered the internet arena with disruptive search technology that has now become a household name, but it still continues both to enhance the features of its search engine and to introduce new attractions that provide hooks for the advertising revenue they need to generate for the success of their business model.
- Apple too, in recent years, has managed continuously to hone its design and technology skills, with the launch of each new product taking the world by storm, even though not necessarily being the technology first movers.
There are also examples of firms in more traditional commodity industries that are constantly developing new capabilities, thereby securing competitive advantage, including:
- The Indian multinationals, such as Mittal Steel.
- Businesses from developing countries, such as Cemex.
3. Strategic supremacy
I’ve already described the dynamic capability of disruptive innovation in an earlier blog . Here, we look at how the dynamic capabilities lifecycle helps businesses create a virtuous circle of best practice and strategic supremacy, constantly reinforcing competitive advantage that would otherwise be eroded by imitation or substitution.
Dynamic capabilities life-cycle
Dr Sarah Dixon, Bradford University School of Management
4. The dynamic capabilities lifecycle
In stage 1 of the dynamic capabilities lifecycle (see above), businesses engage in incremental (or adaptive) innovation, continuously adapting their business model which leads to best practice and, therefore, success and temporary competitive advantage. For businesses that fail to engage in incremental innovation, there is a risk of failure and exit from the dynamic capabilities lifecycle.
Stage 2, disruptive innovation, follows on from incremental innovation and reinvents an industry or sector by introducing a product or service that disrupts the existing market. It requires organisational slack (available time and resources) and “absorptive capacity” (the ability to build on prior learning to acquire new knowledge and engage in innovation).
Examples of businesses which have successfully done this are again:
- Google, which allocates engineers 20% of their time to engage in their own projects, creating an organisational climate that is conducive to exploration; it then has the processes for turning those ideas into practical user propositions that help to sustain its overall business model.
- Apple, a company that clearly has generated huge absorptive capacity – each new invention building on existing learning and expertise – whilst still coming up with completely new product concepts such as iPod, iTunes, iPhone and iPad.
Failure to reinvent the business and to develop new sources of competitive advantage may again result in an exit from the dynamic capabilities lifecycle. Exit is more likely at this point because of the uncertainty of success from disruptive innovation. It is inherently risky and examples abound of companies that have come up with great ideas that then fail to catch on in the marketplace or that apply complex technologies that fail in their implementation.
5. New paths to business success
However, for those successful companies that create new paths and introduce innovative products, services or business models to the market, there follows the need to exploit and deploy them further within the organisation, to hone them to increasing perfection – thus returning us to incremental innovation at the beginning of the dynamic capabilities lifecycle.
The dynamic capabilities lifecycle is not a panacea that can soften the impact of short-termism and risk aversion, nor can it serve to develop the organisational slack to give managers the time to think creatively and constructively about the future. However it can serve to highlight the importance of striving for some sort of balance between incremental and disruptive innovation, or between operational excellence and new path creation.
And isn’t balancing the exploitation of current capabilities with the exploration for and development of new ones what it’s all about?