Dynamic capabilities as a strategic view

DCs framework as a strategic approach has emerged close to digital platform thinking in 1990s.

To this date, DCs have been applied in various disciplines such as strategic management, entrepreneurship, human resources, marketing management and information technology

management (Heaton et al. 2019; Schilke et al. 2018) and the number of research articles mentioning them have doubled during the last decade (Schilke et al. 2018). While companies in technology industries are known to have applied RBV, it fails to prove the competitive advantage, because the successful companies have been responsive and fast in innovations and possessed skills for coordination of resources in a high-paced environment (Teece et al. 1997).

Referring to Teece et al. (1997, 515), “the term ‘dynamic’ refers to the capacity to renew competences so as to achieve congruence with the changing business environment” and “the term capabilities emphasizes the key role of strategic management in appropriately adapting, integrating, and reconfiguring internal and external organizational skills, resources, and functional competences to match the requirements of a changing environment”. Teece (2017, 3) describes DCs as company’s “ability to integrate, build and reconfigure internal and external resources to address and shape changing business environments”. Companies who are able to perform the previously mentioned actions well, have sufficient DCs, and are able to perform the actions repeatedly. During the last few decades, scholars have provided different definitions on DCs. Some of them are aligned with Teece et al. (1997) original definition and some are slightly different. To clarify the variety of them, Zahra et al. (2006) concluded the most known definitions presented here in Table 1. As Ambrosini & Bowman (2009) state, all of the definitions agree that DCs are organizational processes with a goal to modify the company resources, and the definitions complement rather than exclude each other (Schilke et al. 2018). Teece’s (1997) and Eisenhardt and Martin’s (2000) definitions are the most common definitions, but slightly differing from each other (Peteraf et al. 2013).

DCs perspective is focusing on how company’s assets accumulate, their level of replicability and imitability and it is analyzed through processes, positions and paths. On the other hand, RBV focuses on the fungibility of assets and the unit of analysis are resources. Competitive forces focus on structural conditions and competitor positioning and thus, are analyzed through industries, companies and products. (Teece et al. 1997). Whereas positioning company and its products related to competitors offering is practical, DCs perspective concerns more abstract thinking to start with. Therefore, DCs perspective does not necessarily only concern for example business strategy, product strategy or marketing strategy. DCs are a broader concept, which exists or ceases to exist in different organizational levels and in different company functions. I will elaborate later in this chapter how DCs emerge in practice. Recent study by Rashidad et al. (2017) support the idea that DCs exists in a larger scheme than for example product strategy. They suggest that companies, that apply product-service differentiation,

marketing differentiation and cost-leadership strategies, and simultaneously develop DCs, such as sensing capability, integrating capability, learning capability and coordinating capability, are able to create value (Rashidad et al. 2017). The value yielded is based on Amit and Zott (2001) activity system perspective on business model, namely novelty, lock-in, complementarities and efficiency.

Table 1. Key definitions of dynamic capabilities (Zahra et al. 2016)

Previous literature related to DCs is abundant and divided to various streams of research. As Schilke et al. (2018) listed, most recent literature has underlined definition of DCs, theoretical assumptions, theoretical integration, dimensionalities, antecedents, consequences, mechanisms, moderators and dynamics. Wang and Ahmed (2007) overview that there have been 32 relevant key empirical studies, both qualitative and quantitative, between 1995-2005.

Although, the number of quantitative studies is relatively less. Zahra et al. (2006) divide DCs research into four variables, nature, antecedent, process and outcomes and note that the research on established companies is far more extensive than research on new ventures. In this literature review, I will focus on previous literature, that is related to defining the concept, utilizing DCs,

the structure and elements of DCs, strategic orientation, competitive advantage and external factors influencing the processes.

Capabilities can be divided into three levels (see Figure 3). Ordinary capabilities, also called low-order capabilities, are the best practices a company follows in routine activities, administration and governance (Winter 2003; Lessard et al. 2016). These can be imitated, copied or be other way acquired by rival companies (Lessard et al 2016). Low-order capabilities provide company means to operate and make a living at the moment (Winter 2003; Bingham et al. 2015). The next level is second-order DCs, which refers to reconfiguring and development of existing and new resources including product development and acquiring new market areas (Winter 2003; Lessard et al. 2016). The third and highest level are DCs, which consist of processes (Teece 1997) that are specific to a single company, complicated by nature, reciprocal and slowly evolving, usually intangible, and thus hard to apply by rivals (Lessard et al. 2016).

Winter (2003) defines dynamic capabilities similarly and defines them as capabilities, which extend, modify or create the ordinary capabilities. The value of DCs lies in the result of them and such DCs are useless, which cannot create value (Ambrosi & Bowman 2009). Both ordinary and dynamic capabilities have an influence on company’s performance, as research by Drnevich and Kriauciunas (2011) suggests, but Lazonick and Prencipe (2005) note that company’s strategy and finance are interdependent on capabilities and how they are employed, i.e. which capabilities are to be sought after and how are the processes to be funded. In the end, strategy and finance are the ordinary, or at most second-order capabilities, which build the base for operations. Meta-analysis conducted by Fainshmidt et al. (2016) also support Drnevich and Kriaucinas (2011) by finding proof that DCs have indeed positive effect on company’s performance. Zahra et al. (2016) make several propositions of the relationship between DCs and ordinary capabilities. They note that both of the capabilities strengthen with use (Zahra et al. 2016). This is consistent with Teece’s (2017) statement, that repetition is in the central role of DCs. Using of capabilities is an ever-evolving process in which companies express internal growth and strengthen their existence. In this case, process refers to continuity and like Teece et al. (1997) describe, dynamism is about continuous renewal. DCs are never sufficient to the opportunities and challenges that future holds, and they require constant development.

Although, this thesis concentrates only on DCs, it can be argued that ordinary and dynamic capabilities constitute one entity, which will have an impact either to company’s success or failure.

Figure 3. Hierarchy of capabilities and dynamic capabilities (Teece 2007; Lessard et al. 2016)

The elements of DCs framework are strategic. A single capability must respond to customer needs, be unique and be difficult to imitate. The capabilities together will form a well-functioning structure or a system, which cannot be duplicated by other companies. The capabilities are as important as how they are supported by organizational structure and managerial processes. Teece et al (1997) divide unique capabilities in three distinctive groups, processes, positions and paths and argues that competitive advantage is achieved by managerial and organizational processes, which is formed by asset position, meaning current assets, and the paths related. Ambrosini and Bowman (2009) suggest that internal environment, called paths and positions by Teece (1997), influences the process to create DCs, which will eventually lead to a renewed resource base. Eisenhardt and Martin (2000) reconceptualized the traditional view of dynamic capabilities to be more specific and later Teece (2007, 1319) formed three groups to help the analysis of dynamic capabilities 1) “sense and shape opportunities and threats” 2) “seize opportunities” and 3) “maintain competitiveness through enhancing, combining, protecting and, reconfiguring the business enterprise’s intangible and

tangible assets”. In this thesis, I will use the construct of dynamic capabilities presented in Figure 4, which is based on definitions by Teece (1997; 2007), Eisenhardt and Martin (2000) and Ambrosini and Bowman (2009). Wang and Ahmed (2007) further develop the elements of DCs and introduce common features, which consist of components such as adaptive, absorptive and innovative capability, and firm-specific underlying processes, aligned with Teece (1997;

2007), such as integration, reconfiguration, renewal and recreation.

Figure 4. The elements of dynamic capabilities (Teece 1997; Eisenhardt & Martin 2000;

Ambrosini & Bowman 2009).

Scholars are arguing whether the DCs are a source of a competitive advantage. Barney et al.

(2001) states that they are interdependent on the market context and once valuable can become useless in another setting. Wang and Ahmed (2007) suggest that when a company effectively develops the capabilities aligned with its strategy it will lead to sustained competitive advantage. According to Ambrosini and Bowman (2009) DCs value is a result of the output of DCs and if it DCs are not able to create valuable resources, competitive advantage cannot be acquired. Wilden et al. (2016) support Ambrosini and Bowman (2009) that DCs are only as valuable as are their ability to challenge company’s existing mechanisms that have an effect on strategy and performance. Wang et al. (2015) found proof that DCs have a positive effect on company performance. More detailed, according to Hernandez et al. (2018) studying SMEs, only learning capability and integrating capability are seen to have a significant positive effect on company performance. This supports earlier studies, that DCs should be differentiated when

studying their impact (Hernandez et al. 2018). Salvato and Vassolo (2018) add that macro- to micro-level DCs can make a change when assessing DCs influence on competitive advantage.

Eisenhardt and Martin (2000) make a division of markets into moderately dynamic and high-velocity markets, and depending on the group, DCs have various characteristics. Eisenhardt and Martin (2000) suggest that DCs themselves do not create long-term competitive advantage. The use of DCs, on the other hand, to create configurations of resources that will provide advantage will create competitive advantage if done cautious with time, before rivals (Eisenhardt & Martin 2000). Macro- to micro-level integration of DCs can also result in sustained competitive advantage, as Salvato and Vassolo (2018) describe. As argued by Fainshmidt et al. (2019) strategic orientation and external environment are important factors related to DCs. As the strategic orientation is influenced by the company’s external environment, the dynamic capabilities should support both of them to sustain competitive advantage.

Previous literature has discussed DCs broadly and from different perspectives. The literature makes suggestions that DCs can lead to enhanced competitiveness and moreover, the enhanced competitiveness stems from the result of DCs (see Wang & Ahmed 2007; Ambrosini &

Bowman 2009). Yet, the literature is not offer knowledge how DCs can lead to enhanced competitiveness through building of a digital platform. Although, academics have made the connection between DCs and changing or creating business models, an important view to be considered in this study is that DCs concept influences company on a broader spectrum than for example product or marketing strategy. Thus, it is important to study the causality from strategy to changed business model.