What are dynamic capabilities and how do they differ from static capabilities - Essay Example

What are dynamic capabilities and how do they differ from 'static' capabilities The concept of dynamic capability derives from organizational capabilities by the famous Edith Penrose in her work "The Theory of the Growth of Firms". She provided stimulation in the strategic management and the development of the competence-based view of the firm as well. She perceives firms as being a unique collection of diversity, organizational capabilities which are originated from resources both physical and human. The firms acquire resources to make use of the services of those resources - It is important we differentiate this idea because one resource may provide many different services, depending on the circumstances of its use, and the knowledge of the firm using it. As the firm's state of affairs change, most significantly through continuous improvement, gaining experience and expansion of knowledge, the possibility arises that it will develop new services from existing resources. As we know that world has become a global village and for that to be effective in this boundless world organizational members need to adapt to cultures, systems and techniques different from their own that is Organisational capabilities that are the basis of firms' individuality. Economies throughout the world are going through turbulent change. The firms are learning ways to altering their procedures, where their value of organisational capabilities is not static but is affected by the dynamic processes of firm's growth and enhancement. Development comes from experience, from threats and challenges provided by competitors, from teamwork within the firm and from new skills. A business can only survive through people. People are company's number one asset. The enhanced productivity of the management resource is then employed to develop the use of other resources. Management must also realize the full utilization of all the employees to increase company's competitiveness. Penrose's theory of knowledge has a lot in common with work done by Polanyi (1966) on tacit knowledge. "Tacit" knowledge as the word implies unstated is that part of a person's skill that is not easily communicated, that cannot be codified or written down. Tacit knowledge is difficult to examine, to the extent that even the people who possess it may not be aware of the fact. It is basically hands on situation where a problem arise you solve it without having any planned solution in mind. This means that although knowledge may exist in people it can only be expressed within the organisation. As Winter said 'firms are organisations that know how to do things' (Winter, 1988, p.175). Winter is emphasizing the importance of being a part of an organization that is you are most likely to tackle a problem depending on the situation. Tacit knowledge is tough to replicate or imitate. If possible, it can only be transferred through teaching by example, and then this is only the case with knowledge which is observable. Thus this makes an organisational capability into a source of maintaining competitive advantage. Dynamic capabilities, as known today, are a set of specific and identifiable processes such as product development or strategic decision making with expected outcomes. They are detailed, analytic and stable processes for globalized manufacturing companies to continuously improve their performance and gain competitive advantage through establishing new plants and shutting down non-performing units. Thus 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" (Zollo and Winter, 2002). This proves that dynamic capabilities are procedures and understandings that help organizations to develop more competent practices and search for more efficient technologies, new or improved products and manufacturing process. According to Teece, Pisano and Shuen, many strategy scholars remain doubtful about the value of the concept of "dynamic capabilities." Though it is seen as a key to competitive advantage, critics rather believe that they are born and not made meaning they are skeptical about them being intentional genuine option for managers instead. However one can only accept this proposal productive only if it is widely adopted. Zollo and Winter (2002) exploratory research on the nature and source of dynamic capabilities clarifies the concept more clearly (ibid., p. 349). They differentiate dynamic capabilities, which they define as 'systematic methods for modifying operating routines' (ibid., p. 340), from organisational routines which are 'geared towards the operational functioning of the firm' and are the outcome of 'incremental improvements, accomplished through the tacit accumulation of experience and sporadic acts of creativity' (ibid., p. 341). They consider that dynamic capabilities derive from learning mechanisms that 'go beyond semi-automatic stimulus response processes and tacit accumulation of experience'. Dynamic capabilities include an element of experiential learning, but are also the outcomes of more conscious cognitive processes aimed at developing explicit knowledge. Dynamic capabilities typically involve long-term commitments to specialized resources. However the more determined and detailed you are with the activity the more the cost you will have to bear. Perhaps too much change may require additional costs. It should be evident that it is not necessarily advantageous for a firm to invest in dynamic capabilities. If the opportunity of gaining a competitive edge are less or maybe way too expensive to carry out, then the benefit it brings will not be greater or even equal to the added cost brought by dynamic capability. Attempting too much change - perhaps in an effort to exercise the dynamic capability - can impose additional costs when the frequent disruption of the underlying capability outweighs the competitive value of the novelty achieved. There is an ecological demand for balance between the costs of the capability and the use that is actually made of it. A common example here can be of R&D firms where one firm extensively spends on innovation and its rivals spend just enough to replicate it. Hence, a firm needs to spend on dynamic capability when there is less competition or the competitors lack the ability to imitate. Another way to change is ad hoc problem-solving which is neither a highly repetitive process nor as costly. The cost of ad hoc problem solving vanishes if there is no change to implement. Many of those costs take the form of opportunity costs of personnel who have alternative productive roles in the static capability. It is also possible that a similar pattern could obtain in an organization that had dynamic capabilities. This would mean that people could step out of their Static capability roles and into their dynamic capability roles - their learned, patterned change roles - and then step back again when change was completed. The frequency and importance of establishing new plants indicate that this is developed practices and routines well aligned with the concept of dynamic capabilities. However, how can it be that experiences indicate that establishing new plants are more loaded with risk and uncertainty than predictability even if the resource base, practices and capabilities involved are in accordance with the companies "best-practice"-systems According to Eisenhardt and Martin (2000) the value of dynamic capabilities lie in the underlying resource configuration they create and not in the capabilities themselves, and they establish that dynamic capabilities are neither blurred nor tautological and argue that "dynamic capabilities are a set of specific and identifiable processes such as product development and strategic decision making". This is well associated with what Tsoukas and Knudsen (2002) describe as the dominant representativism approach in the field of strategic management where concepts are given the status as an object, i.e. something that can be isolated, captured, and codified. Thinking is basically a representational activity and actions are within this approach based on reliable prior knowledge (Tsoukas & Knudsen). In contrast to the traditional dynamic capability view (e.g. Teece, Pisano and Shuen 1997, Eisenhardt and Martin 2000) which see a dynamic capability as something that can be isolated and captured, the enactive approach suggest that it is an emergence of distributed and historically evolved collective patterns and knowledge structures from concrete work contexts. A Static capability is a high level routine (or collection of routines) that, together with its execution of input flows, presents upon an organization's management a set of decision options for producing substantial outputs of a particular type. The points of emphasis here are the connotations of "routine" - behavior that is learned, highly patterned, repetitious, founded in part in tacit knowledge - and the specificity of objectives. "Dynamic" connotes change. There is a broad consensus in the literature that "dynamic capabilities" contrast with static capabilities by being concerned with change. Collis (1994) is particularly clear and formal in making the point that dynamic capabilities govern the rate of change of static capabilities. Static capability is also known as zero level capability. For e.g., if an organization generates revenue by selling same product over a period of time to same target market on the same scale, then they are using static capabilities. Once the organization starts innovating through bringing new product lines, types, its attributes or starts selling multiple products, or merging would be termed as dynamic capability. For organizations to stay competitive and stay in the market for long they will have to use dynamic capabilities in order to reduce loss of customer commitment and loyalty. Change does not have to be in products only. Organizations can exercise dynamic capabilities by changing their structure, technology, people and physical setting. By structure I mean intangible structure of the organisation. for instance, increasing or decreasing decentralization. Technology must be changed to be up to date with new working environment. Since technologies are introduced, employees' skill become uselessand they need to be trained. Lastly, physical setting can be the exterior and interior layout of the organization. Understanding the dynamic capability helps in performing strategic analysis, but in itself it is nothing. With the multi-facet attributes of the strategic analysis, it is the individual firm whose future is affected in this era of cut throat competition. Works Cited 1. Collis, D.J. (1994). Research note: How valuable are organizational capabilities , Strategic Management Journal, 15 (Winter special issue): 143-152 2. Eisenhardt, K.M. and Martin, J.A. (2000) Dynamic Capabilities: What are they Strategic Management Journal 21 (Special issue): 1105-1121 3. Organisational Environments". NTNU - Norwegian University of Science and Technology. 4th Mar. Retrieved March 8, 2007 from http://www.kunne.no/upload/Nye%20publikasjoner_aug06/Konferansepaper/Abstract%20EGOS%202006/Enacting%20Dynamic%20Capabilities_ArneB_abstract_EGOS2006.pdf 4. Miner, A. S., P. Bassoff, and C. Moorman . (2001). "Organizational improvisation and learning: A field study." Administrative Science Quarterly 46: 304-337. 5. Nelson, R. R., and S.G. Winter (1982). "The Schumpeterian trade-off revisited." American Economic Review 72: 114-132. 6. Nisbett, R. and Ross, L. (1980). Human Inference: Strategies and Shortcomings of Social Judgement. Englewood Cliffs, NJ: Prentice-Hall 7. Teece, D., G. Pisano, and A. Shuen (1997). "Dynamic capabilities and strategic management." Strategic Management Journal 18: 509-533. 8. Winter, S. G. (2000). "The satisficing principle in capability learning." Strategic Management Journal 21 (Oct-Nov (special issue)): 981-996. 9. Winter, Sydney G. "Understanding Dynamic Capabilities". Nov 2002 10. Zollo, M., and S.G. Winter (2002). "Deliberate learning and the evolution of dynamic capabilities." Organization Science 13: 339-351. 11. William Lazonick (June 2000). The Theory of Innovative Enterprise: Organization of Innovation in the "Learning Economy". Retrieved March 8, 2007 from http://www.druid.dk/uploads/tx_picturedb/ds2000-109.pdf Read More