Developing Dynamic Capabilities: Identifying and Bridging Capability Gaps

Firms constantly seek to update their resources and capabilities to effectively compete with a variety of competitors. The process by which firms seek to develop new capabilities requires bridging the gap between the resources and capabilities that firms currently possess and those that firms need in order to compete in the future. Bridging a capability gap begins with the process of sensing and seizing a new opportunity. We propose that between sensing and seizing a new opportunity, firms must also undergo a critical process that involves identifying what capabilities they have and what they need; and bridging, which involves acquiring what is needed to fill the identified capability gaps. We discuss common challenges that firms may face as they identify and bridge capability gaps, as well as a strategy for identifying and bridging capability gaps as firms sense and seize new opportunities.

Explaining Organic Growth Performance

Why are some firms consistently able to grow faster than their rivals in the same industry? We employ dynamic capabilities theory to show that organic growth leaders excel because they have innovation prowess. Their prowess is gained by combining discipline in their growth-seeking activities with an organizational ability to innovate. Empirical indicators of these constructs were assessed by a sample of senior leaders in 168 companies. We found that innovation ability (comprising the interconnected elements of innovation culture, innovation capabilities, and how the firm is organized to enable innovation) explained most of the performance differences between growth leaders, average performers, and growth laggards. However, it is the interaction of innovation ability and discipline in pursuing the growth strategy that explains why growth leaders outperform the average organic growth rate of their industry.

A Semi-Formalization of the Dynamic Capability View

Some management scholars doubt the value of the dynamic capability view when compared to existing theories. The concern expressed is often related to unclear definitions of the core construct and the relationship among the components that make up that construct. The end result is potentially confused and conflicting interpretations of empirical findings and non-commensurate measurement. One solution is to formalize core components of the theory at hand. The purpose of this paper is not to discuss or argue for (or against) the theoretical status of the dynamic capability view, but to provide a simple, yet insightful, structured model of its core components. Specifically, this paper takes as its basis the perspective of dynamic capabilities as comprising the sensing, seizing, and reconfiguring processes that are deployed to create a resource base aimed at satisfying evolving market demand; it presents a simple but formal way of characterizing its components.

The Formalization of Organizational Capabilities and Learning

This work presents a critical overview of the achievements and challenges ahead facing explicit formalizations of organizational capabilities and learning. We first present the main characteristics both of NK models and of the approach based on classifier systems, focusing on their early applications to organization studies. We then discuss how the use of these models has contributed, in recent years, to the formal analysis of the development and change of firm’s dynamic capabilities by improving our understanding of processes of organizational learning, the representation of the cognitive and problem-solving capabilities of the organization, the link between capabilities and governance issues, in particular in presence of asymmetric power distributions.

Bottlenecks, Modules, and Dynamic Architectural Capabilities

How do firms create and capture value in large technical systems? In this paper, I argue that the points of both value creation and value capture are the system’s bottlenecks. Bottlenecks arise first as important technical problems to be solved. Once the problem is solved, Then the solution in combination with organizational boundaries and property rights can be used to capture a stream of rents. The tools a firm can use to manage bottlenecks are, first, an understanding first of the technical architecture of the system; and, second, an understanding of the industry architecture in which the technical system is embedded. Although these tools involve disparate bodies of knowledge, they must be used in tandem to achieve maximum effect. Dynamic architectural capabilities provide managers with the ability to see a complex technical system in an abstract way and change the system’s structure to manage bottlenecks and modules in conjunction with the firm’s organizational boundaries and property rights.

Historical Change and the Competitive Advantage of Firms

This chapter aims to deepen the scholarly dialogue between strategy and history. It does so by examining how historical models of change can contribute to theory and research on the competitive advantage of firms during periods of rapid innovation. Focusing on the dynamic capabilities framework, it shows how three models of historical change—evolutionary, dialectical, and constitutive—can be used to extend theory and deepen research about the origins, context, and micro-foundations of dynamic capabilities. We show how each model of historical change shaped the intellectual development of the dynamic capabilities framework, point to historical research that illustrates these processes, and discuss the methodological and conceptual implications for future research. We conclude by suggesting that recognizing and building on these historical models of change can provide a common conceptual language for a deeper dialogue between historians and strategy researchers.

An Economic Theory of Dynamic Capabilities

This article introduces an economic model of dynamic capabilities. The model is intended to bridge the gap between the strategic management literature on dynamic capabilities and the economics literature on the sources of productivity differentials. In the model, dynamic capabilities are an advantage in generating innovations and allow firms to enter new submarkets. We use the model to interpret three types of dynamic capabilities previously identified in the literature: sensing, seizing and transforming. We show that the model has non-trivial predictions for observables that might aid in empirically identifying dynamic capabilities. When firms must invest in order to acquire the dynamic capability to transform, in a dynamic equilibrium, higher levels of innovation may not be associated with possessing the dynamic capability: firms without the dynamic capability can invest more in innovation in order to gain it. This suggests that using innovation investment levels as an intermediate outcome to measure dynamic capabilities may incorrectly identify firms without the dynamic capability as ones with it.

Globalization, Capabilities, and Distance

This article examines how firm-level capabilities relate to competitive outcomes between multinational companies (MNCs) from advanced economies and challengers from emerging economies. It examines John Sutton’s theory of the “capability window” in light of new empirical evidence on competition in particular between MNCs and Chinese firms inside China. Market share leadership by MNCs in China is found to be positively related to industry R and D- and advertising-intensities; and where leadership varies by segment, MNCs tend to lead in high-end segments and Chinese firms in low-end segments. The empirical research provides support for Sutton’s model but also suggests a set of extensions to it—most significantly, the incorporation of horizontal distance alongside the vertical distance emphasized in his baseline model. And since dealing with both kinds of distance requires firms to do things that they have not done before, dynamic capabilities are essential to success in this context.

Dynamic Capabilities

Among various theories of the firm, the dynamic capabilities approach has not fully drawn its implications for firm boundary and organizational design. Firm boundary and structural design are abstracted away when strategy scholars study capabilities and firm-level heterogeneity. This chapter corrects for this deficiency by developing a coevolutionary model, with variations in combinations of entrepreneurial management and organizational routines as primitives of coevolution. Firms choose their boundary and structure as they select and replicate different combinations of knowledge domains and organizational routines to develop ordinary capabilities. Distinct from ordinary capabilities, dynamic capabilities embodied in top management teams enable firms to break or redefine their evolutionary paths, creating heterogeneous firm choices in boundary and structure. The model demonstrates the importance of looking at dynamic capabilities, alongside transactional and contractual characteristics, to provide a robust theory of the firm.

Reconciling Capabilities and Ambidexterity Theories

Capabilities and ambidexterity theories are both intended to shed light on how firms remain successful in the long run. However, the two research streams have developed largely independently of one another and with different foci. In this chapter, we bring them closer together by discussing how different capabilities and forms of ambidexterity may help firms address their multi-level transformational challenges (Cross-functional Linking, Rethinking and Reconfiguring, Continuous Improvement, and Ongoing Renewal) This analysis allows us to identify the areas of overlap and the points of differences between capabilities and ambidexterity theories, suggesting that the two concepts are distinct but mutually interrelated and interdependent. Furthermore, we argue that different types of ambidexterity and capabilities may coexist within an organization and that their effectiveness is contingent on the challenges a firm faces.