The Last Competitive Advantage: Unlocking the Potential of Dynamic Capabilities

The speed, intensity, and frequency of changes around us is becoming staggering. The idea that a company will outpace the competition should it identify a few competencies it is best at (so-called “core competencies”), stick to them, and start improving them continuously, is no longer viable. Sustainability of the competitive advantage as a concept is now under the question mark. The new reality is that each competitive advantage is more or less short-lived and subjected to erosion. In order to survive, let alone thrive, companies now need to be alerted to and adapt to changes happening around them by changing themselves continuously.  

In order to do so, companies must continuously invent and upgrade their resources and capabilities (Argyris, 1996). A company's resources could be defined as those (tangible and intangible) assets which are tied semi-permanently to the company (Wernefelt, 1984). Capabilities, in contrast, refer to a company’s capacity to deploy and coordinate different resources, usually in combination, using organizational processes, to affect a desired end (Amit & Shoemaker, 1993). Capabilities are focused on the combination and linking of resources, i.e., they represent a distinctive and superior way of allocating resources (Schreyögg & Kliesch-Eberl, 2007). They can be perceived as high level routines that, together with its implementing input flows, confer upon a company’s management a set of decision options for producing significant outputs of a particular type (Winter, 2000). In other words, capability effectiveness of a company depends on the its ability to combine resources in a coherent and productive manner. It depends on the existing level of people competencies, process effectiveness and efficiency, technologies being used and funding (Business Architecture Guild, 2019). 

The ability to change continuously has become a core capability of successful companies (Brown & Eisenhardt, 1997). More specifically, the only organizational capability left in high-velocity markets is the ability to learn quickly and to improvise effectively (Schreyögg & Kliesch-Eberl, 2007).  Teece, Pisano and Shuen (1997) have noted that a company’s ability to thrive over time lies in its ability to integrate and build upon its current competencies while simultaneously developing fundamentally new capabilities. This is called a “dynamic capability” – the ability to simultaneously exploit current resources to secure efficiency benefits and create variations through exploratory innovation. 

This type of capability does not develop by chance. It can be fostered by close interrelations between existing and new knowledge in a company. The synergistic effect can be achieved by allowing existing resources to be more fully employed to acquire new capabilities, while at the same time permitting new knowledge to be more fully integrated into the existing pool of resources (Cao, Gedajlovic, and Zhang, 2009).

These days, companies must develop dynamic capabilities in order to survive the challenges they face. Dynamic capabilities are those that promote a seemingly radical change in how a company makes a living (Helfat & Winter, 2011) on the basis of its existing (operational) capabilities. They refer to the capacity to renew competencies (Teece, Pisano & Shuen, 1997). When change in the environment is discontinuous, residual fit usually remains between the already established company’s capabilities and some portion of the environment, which means that established capabilities as well as new ones must coexist for some period of time. This is what dynamic capabilities really mean: moving from one competency configuration to another, and maintaining multiple competencies that address inconsistent contexts simultaneously (Gilbert, 2006). 

According to the words of Graetz and Smith (2008), this is not to say that dynamic capabilities are supposed to replace operational capabilities, but rather that companies must achieve the bidirectional partnership between continuity (efficiency through operational capabilities) and change (flexibility and responsiveness through dynamic capabilities).

One of the companies that have proven their mastery over dynamic capabilities is certainly Nokia. During its 155-years long history, Nokia has traveled a long journey following different strategies: from the wood pulp mill in southwest Finland in 1865, over the cable and electronics business, radio telephone company Mobira Oy, the Nordic Mobile Telephone service (the world’s first international cellular network and the first one to allow international roaming), all the way to becoming the world leader in the mobile phone market in 1998. However, around 2010, due to the proliferation of competitors’ devices, such as the iPhone and Android-based mobile phones, Nokia experienced sharp decline in sales and revenues, leading to another strategic repositioning (https://www.irishtimes.com/business/technology/nokia-timeline-1.1514981). These days, Nokia is a provider of comprehensive portfolio of network equipment, software, services and licensing opportunities, and one of the leaders in the development and deployment of 5G networks (https://www.nokia.com/about-us/what-we-do).

Developing dynamic capabilities and using them to proactively and reactively manage changes within companies is becoming a central task of executive management. In the years to come, senior managers will experience an increased pressure to learn how to leverage people competencies, organization structures, information, processes, and technologies, by combining them in an innovative and productive manner. This is possibly the only lasting competitive advantage they can tap into. 

Partially derived from passages in the article:

Stefanovic I., Prokic S. & Milosevic D. (2014). Achieving Opposites Simultaneously: A Review of Organizational Ambidexterity. In: Levi Jaksic M., Barjaktarovic Rakocevic S. & Martic M. (eds). Innovative Management and Firm Performance: An Interdisciplinary Approach. Hampshire, United Kingdom: Palgrave Macmillan, pp. 139-164.

References: 

Argyris, N. (1996). Evidence on the Role of Firm Capabilities in Vertical Integration Decisions. Strategic Management Journal, 17 (1): 129-150.

Amit, R., & Schoemaker, P. (1993). Strategic Assets and Organizational Rent. Strategic Management Journal, 14 (1): 33-46.

Brown, S. L. & Eisenhardt, K. M. (1997). The Art of Continuous Change: Linking Complexity Theory and Time-Paced Evolution in Relentlessly Shifting Organizations. Administrative Science Quarterly, 42(1): 1-34.

Business Architecture Guild (2019). A Guide to the Business Architecture Body of Knowledge, version 8.0

Cao, Q., Gedajlovic, E. R., & Zhang, H. (2009). Unpacking Organizational Ambidexterity: Dimensions, Contingencies, and Synergistic Effects. Organization Science, 20(4): 781-796.

Gilbert, C. G. (2006). Change in the Presence of Residual Fit: Can Competing Frames Coexist? Organization Science, 17(1): 150-167.