Dynamic capabilities allow an organization to adapt to changing conditions, and thus are increasingly valued as the pace of change accelerates. This ability to change rapidly in the face of change, both positive and negative, is what makes dynamic capabilities so important and valuable as a part of an organization’s business model.
A Dynamic Capabilities Framework has evolved, and it can be used to determine your organization’s need for flexibility and to provide guidance in implementing. Project management, which is where operational change is made to happen, is right in the middle of this, and the framework has a familiar look because of emphasis on risk management, as well as opportunity management.
What Are Dynamic Capabilities?
Dynamic capabilities are those organizational capabilities that are not fixed, but rather are pliable and can be reshaped quickly and at low cost in a changing market environment that is expected to present both risk and opportunity. Dynamic capabilities include those abilities to integrate, build, and reconfigure internal capabilities as well as external partner capabilities and resources to improve the organization’s competitive position.
More officially, the concept of dynamic capabilities was defined by David Teece, Gary Pisano and Amy Shuen, in their 1997 paper “Dynamic Capabilities and Strategic Management”, as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments.”
In contrast, ordinary capabilities, as distinguished from dynamic capabilities, are operational and relatively fixed in nature to deliver what is needed at the time.
Industries have varied competitive environments, and thus have different needs for dynamic vs ordinary capabilities. And the level is not permanent – it can and will change!
As the graphic at right shows, an organization’s total set of capabilities consists of both dynamic and ordinary capabilities. If the industry is relatively slow to change and the organization can maintain competitive advantage reliably over time with a very large proportion of ordinary vs dynamic capabilities, then they should do that and shoot for the greatest efficiency possible. However, if greater amounts of change are anticipated, then building flexibility to respond to changing conditions is most important and will result in a higher relative proportion of dynamic vs ordinary capabilities.
Basics of the Dynamic Capabilities Framework
The diagram at right shows a partial representation of the dynamic capabilities framework. It shows that there is an interrelationship between dynamic capabilities, which are part of overall capabilities, and resources as well as strategy.
The framework consists of “the three P’s”:
- Processes – These include how the firm organizes itself to get things done. It includes such things as routine, patterns of practice, and learning.
- Positions – These are the specific assets and their current configuration that make up the structure of the company. Positions include technology that is used or owned, complementary assets, and customer community.
- Paths – These include strategic alternatives represented by different or potentially new configurations of the positions currently in place.
The three P’s are like a combination of ways of working, assets available, and the flexibility to change. How the company configures itself in terms of these three components is a function of its strategy – the user needs it serves, its uniqueness, and the difficulty of being imitated.
Here is a listing of some widely accepted ideas of how an organization can build dynamic capabilities:
- Learning – How can the firm learn better, faster, and about the right things?
- New assets – What assets currently not owned or employed can the firm access to better position itself for potential opportunities ahead.
- Transformation of existing assets – How can flexibility be built into assets so that they can be reconfigured for minimal cost as conditions change.
- Co-specialization – What combinations of unique strengths and capabilities can be made to devise a new, unique capability?
- Asset orchestration – In what ways can assets be operated so that they are best synchronized to create optimal value?
- Network Effects – What dynamic capabilities that are needed might be derived from ecosystem strategies, where the company leads or is a partner in specific ecosystems, or the firm leverages network advantages.
Determining how to building flexibility into systems and create dynamic capabilities takes a lot of creativity, innovative thinking, and collaboration across the organization.
Dynamic Capabilities Vs Other Strategic Approaches
Where does the Dynamic Capabilities Framework fit in the realm of strategy vs some other strategic frameworks?
One way of answering this is to think of strategy in terms of the emphasis:
- Emphasizing market power – Frameworks such as Michael Porter’s five competitive forces focus on the interplay of industries, firms, products, and external forces. Others, such as the BCG Growth Share Matrix, focus on companies and their products and services.
- Emphasizing efficiency – Resource based strategies emphasize efficiency. However, strategies based on dynamic capabilities are broader in focus, emphasizing process, positions, and paths, as outlined above. The ability to be flexible means that the organization can pivot at low cost and high efficiency. The ability to pivot is a core competency.
The Dynamic Capabilities Framework provides a structured approach that has more in common with a strategic agility approach or a lean innovation process, where flexibility in the face of change is emphasized.
With dynamic capabilities, the strategic advantage is less about having huge economies of scales in production, a widespread sales force, or even a strong financial position. It is more about having the flexibility to adapt as a core competency that provides a core strategic advantage. In many situations, this ability to morph into just what the market needs at the right time provides the power of strategic advantage.
Interplay Between Dynamic Capabilities and Projects
I recommend these PM templates (paid link):
Building Dynamic Capabilities within an organization is not unlike managing risks. If everything inside a firm and in the surrounding environment were predictable or would remain the same, there would be no need for dynamic capabilities.
However, in reality, change is the only thing that is predictable, so there is a need not only for risk management, but also for opportunity management. Here is how I see the difference:
- What could go wrong?
- What is the probability and impact of that happening?
- What can we do to reduce the probability?
- What can we do to reduce the impact?
- Can we accept the risk?
- What new opportunities can we foresee?
- If an unknown opportunity were to develop, what capabilities would we need to have to seize it?
- Can we build a flexible capability for pivoting when an opportunity arises?
- What is the probability of such opportunities happening?
- What could be the impact if we seize these opportunities?
It is also a critical consideration in planning a project to address the temporal nature of the ‘why’ of the project. In other words, what timing is needed in order to take advantage of the opportunity that the project was created to address?
Build Dynamic Capabilities Where Needed
Having an appreciation for dynamic capabilities and where they fit strategically for the organization can help a manager be a better portfolio manager by choosing projects that consider dynamic capabilities. It can help a project manager be a better leader – better able to appreciate the nuances of a strategy and maintain a tighter relationship with sponsors, and utilize resources more effectively.
Most important, mastering the concept of dynamic capabilities enables a project manager and organization to discern where it is appropriate to build flexibility to seize opportunities and control risks, and where it otherwise is appropriate to build and maintain ordinary operational, more fixed, capabilities.
I recommend these strategy resources (paid link):