Dynamic Capabilities

Making a competitive difference through Dynamic Capabilities

Summary

Purpose of report

• Method followed (if necessary)

• Main findings

1 Strategy and Resource-Based View

Strategy of a company is about setting a direction towards the success. Competitive strategy is about being different from the competitors; it’s about choosing a unique set of activities aiming for a greater value to deliver. the resource-based perspective highlights the need for a fit between the external market context in which a company operates and its internal capabilities.

The resource-based view is the classical view on strategy that explains how competitive advantage within firms is achieved and how that advantage of firms can be sustained over the time (Barney, 1991).

Strategy is about combining activities (Horn, p86).

How?? More recent studies suggest that understanding of the RBV (Barney, Eisenhardt, Teece, 2000) should be enhanced by the extended understanding of dynamic capabilities.

resource-based view is grounded in the perspective that a firm’s internal environment, in terms of its resources and capabilities, is more critical to the determination of strategic action than is the external environment.

Another view (Peteraf, Bergen, 2003) proposes to see the Resource-based view and Market-based view as compliments to one another. In that way the authors tackle the most common criticism on Resource-based view that it is insufficiently linked to the market. The role of similarity or rather dissimilarity in from the point of view of resource type can be a stepping stone for many managers, because they fail to analyse the competitors that are not producing the exactly the closest substitute product. The keyword here is resource functionality that should be addressed when deciding on a competitive strategy, as often resource packages that are dissimilar in type may serve as effective substitutes in terms of producing the same end product. Moreover, the authors here introduce a new edge on resource-side, such as functionality to counteract the market-side element of focus – substitute detection. As the result, this draws on the importance of capabilities, the focus here is not only on product markets, but also on the competitor’s activities in resource markets as well.

2 Dynamic Capabilities

The theory of dynamic capabilities is thought to have arisen from a fundamental weakness of the resource-based view of the firm.

The RBV has been criticized for ignoring factors surrounding resources, instead assuming that they simply “exist”. Considerations such as how resources are developed, how they are integrated within the firm and how they are released have been under-explored in the literature. Dynamic capabilities attempt to bridge these gaps by adopting a process approach: by acting as a buffer between firm resources and the changing business environment, dynamic resources help a firm adjust its resource mix and thereby maintain the sustainability of the firm’s competitive advantage, which otherwise might be quickly eroded. So, while the RBV emphasizes resource choice or the selecting of appropriate resources, dynamic capabilities emphasize resource development and renewal (Barney, 1991).

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According to wade and Hulland (2004), IS resources may take on many of the attributes of dynamic capabilities, and thus may be particularly useful to firms operating in rapidly changing environments. Thus, even if IS resources do not directly lead the firm to a position of superior sustained competitive advantage, they may nonetheless be critical to the firm’s longer-term competitiveness in unstable environments if they help it to develop, add, integrate, and release other key resources over time.

The most common definition on what dynamic capabilities are is defined as “the firm’s ability to integrate, build, and recon internal and external competences to address rapidly changing environments”. The basic assumption of the dynamic capabilities framework is that today’s fast changing markets force firms to respond quickly and to be innovative (Teece,1997).

Are they easily imitable? Some says yes According to (Eisenhardt, Martin, 2000) Dynamic capabilities are more subsituable than it is usually thought.

What is their nature?

It is thought the the dynamics of the market influence can have some impact on the nature of dynamic capabilities; …..

In moderately dynamic markets dynamic capabilities resemble the traditional conception of routines (Eisenhardt, Martin, 2000). In contrast, in high velocity markets, they are simple, highly experiential and fragile processes with unpredictable outcomes.

Besides, in another context (Grant, 1996, Pisano, 1994) they are explained as the resources that are transformed, integrated together and recombine to generate a new value creating strategy. In that way, they are drivers behind the creation, evolution and recombination of other resources into new sources of competitive advantage (Henderson and Cockburn, 1994; Teece et al, 1997). Based on these premises (Eisenhardt, Martin, 2000) dynamic capabilities are defined as:

The firm’s processes that use resources – specifically the processes to integrate, recon, gain and release resources – to match and even create market change. Dynamic capabilities thus are the organisational and strategic routines by which firms achieve new resource configuration as markets emerge, collide, split, evolve and die.

An alternative definition that abandons the idea of high-velocity markets as the necessary context to explain dynamic capabilities says that (Zollo, Winter, 2002):

A dynamic capability is a learned and stable pattern of collective activity through which the organization systematically generates and modifies its operating routines in pursuit of improved effectiveness. This definition clearly redefines the role and function of dynamic capabilities, since it stresses their connection with learning processes.

Dynamic capabilities arise from learning; they constitute the firm’s systematic methods for modifying operating routines (Zollo, Winter, 2002). An example is given by an organisation that develops from its initial experiences with acquisitions or joint ventures a process to manage such projects in a systematic and relatively predictable fashion. The ability to plan and effectively execute postaquisition integration processes is an example of a dynamic capability, as it involves the modification of operating routines in both the acquired and the acquiring unit. In short, learning mechanisms shape operating routines directly as well as by the intermediate step of dynamic capabilities.

5 Strategic positioning and Competitive Advantage

Strategy is conceptualized as a firm’s realized position in its competitive market (Mintzberg, 1987; Porter, 1980). Each firm’s strategic position is supported by its resources and capabilities, reflecting the idea that resources and positions are two sides of the same coin (Wernerfelt, 1984).

In a constant strive for higher performance and long term successful strategy a question on strategic balance arises. Similarity among firms has raised an important question on strategic balance, how do firms chose to position themselves among their rivals? What is the value ( Deephouse, 1999) of being different (differentiation)or what is the value of being the same (conformity).

Abrahmson and Hegeman (1994) observed that strategic conformity reduces both competitive risks and opportunities for competitive advantage. This can be solved by an integrative theory of strategic balance, because as evidence suggests (Deephouse, 1999) moderately differentiated firms have higher performance than either highly conforming or highly differenciated firms.

However, (Deephouse, 1999) draws on strategic similarity as a firm-level construct representing the extent to which a firm’s strategic position resembles the strategic positions of other firms competing in its market at a particular point in time.

Strategy and IKEA

Positioning means performing different activities from rivals’ or performing similar activities in different ways. If a company is prepared to satisfy all needs of all customers it loses the distinctive positioning edge.

Since IKEA begun in 1943 it has grown into a successful global network of stores with its unique retailing concept. The global furniture retailer based in Sweden, also has a clear strategic positioning. IKEA targets young furniture buyers who want style at low cost. What turns this marketing concept into a strategic positioning is the tailored set of activities that make it work. IKEA has chosen to perform activities differently from its rivals (see 2).

In comparison to traditional furniture merchandisers who display just a fraction of their stock, IKEA takes a step further and displays all their stock in a room like settings, that way selling the whole concept of modern living. Also, by selling their own low cost designs in ready to assemble packages to fit its positioning, IKEA trades off service for cost. Customers are expected to do their own pickup and delivery, and despite of their low-cost position that comes from having customers do it themselves, IKEA offers a number of extra services that its competitors do not. Such as, childcare and extended opening hours, services that are uniquely aligned with the needs of its young and, middle class customers.

As long as consumers from Moscow to Beijing and beyond keep striving to enter the middle class, there will be a need for IKEA. Currently with 226 stores worldwide it hosts 410 million delighted shoppers a year.

Positioning choices determine not only which activities a company will perform and how it will con individual activities but also how activities relate to one another. While operational effectiveness is about achieving excellence in individual activities, or functions, strategy is about combining activities. What is the most important key factor in the success of IKEA? The answer is simply that it all is of an equal importance. Activities that form a system act as compliments to one another generating value for a company, which is a way strategic fit creates competitive advantage and superior profitability.