This is one of my first chances to engage with real experts in organizational learning, CLOs and the like—it’s really a treat for me. We do need to create alliances between academia and organizations to study organizational learning further.
In this first talk, I’ll go into what dynamic capabilities are and why they are important… and then how. How do you know you have a dynamic capability and how can they be developed?
I’ll also juxtapose different directions for strategy. As learning academics and practitioners, we need to make distinctions between the various strategic directions. You can apply dynamic capabilities toward multiple strategic directions and goals; how do you determine which to pursue? Finally, I’ll bring in sustainability. That is the ultimate challenge. It doesn’t get more complex than that.
What is the definition of dynamic capabilities?
There is still some debate around the definition, even though the concept was introduced more than 20 years ago. There is still not a clear consensus, but there is some convergence: a dynamic capability is the capability to change and adapt resources and operating capabilities.
Teece, about 10 years after his initial work, has included not just change, but also sensing and learning. That makes it a pretty broad concept, not only from a management standpoint but also from an academic one. I think you have to leave some concepts on the table (like sensing and learning) so you can explain how change capacities develop.
Examples of dynamic capabilities
- Organizational change – restructuring
- Operating change – reengineering
- Innovation – product/process/business model
- Post-acquisition or joint venture innovation
- Identity / cultural change
Don Armstrong from Bechtel asked – these are all major changes, do dynamic capabilities operate at a lower level too?
Maurizio responded by saying, “I look at the organizational level. Dusya looks more at the micro/meso level. Dynamic capabilities exist at other levels too. At the organizational level, you do see the big shifts, because that’s what organizations as wholes do. Down in the trenches, you see dynamic capabilities at the routine level. You see it as an individual trait within functions. Do those functions have dynamic capabilities? That is also at the heart of the problem.”
Just because your firm has made or undergone such changes (like an acquisition or a restructuring), does that mean the firm has a dynamic capability?
No. You can e.g. manage an acquisition without having a dynamic capability. To be a dynamic capability:
- Have to manage change through established routines;
- With dedicated people, process, and tools;
- With somewhat reliable results.
Otherwise, it is not a capability. There is not enough stability to create a pattern.
Frequently firms use ad-hoc problem solving and project management instead of dynamic capabilities.
Dynamic capabilities are actually pretty rare. And when present they are often not diffused throughout the organization.
Because dynamic capabilities are rare, they are strategically valuable.
Long-term competitive advantage is a function of the firm’s capacity to adapt its strategy, governance, routines, assets, culture, and even identity to the heterogeneous and rapidly changing expectations of its key stakeholders.
Firms need to adapt faster and better than their competitors!
The components of adaptive capacity
Adaptive capacity is not JUST about change capabilities. It also consists of sensing / sense-making (understanding the demands of stakeholders) and learning capabilities (learning from the environment, making sense of what has been done in terms of cause and effect).
Example dynamic capability from audience
Amy Anderson commented that-at Verizon, we have a change capability maturity model. Verizon was a ground zero for change execution, very top down, command and control culture, and we are trying to expand change capabilities. So we are putting together strategies for that with assessment tools.
While studying acquisitions, I wanted to explain performance—why were some acquisitions more successful than others. And I had measures of how people thought of their previous acquisition. And I found a negative connection! The more you think you’ve done well, the worse you are going to do! I thought it might be random or regression to the mean. So I looked at low and high levels of experience. I expected more expertise to lead to a better outcome. Nope! More expertise makes the problem worse. Why? Experience is not just about creating competence. It creates confidence too. And the increase in confidence can outpace your actual competence, especially when you lack performance feedback. What can help get around this phenomenon of superstitious learning? Heterogeneous experience (a wide variety of past experiences) and deliberate knowledge codification.
How do you know if you have a dynamic capability? Detecting dynamic capabilities
- Identify the process used to manage one specific change challenge
- Is the process used on a systematic basis with similar challenges?
- Is the process executed in a reliable way?
- Is there a stable group or structure managing the change processes?
- Is the process generally producing the expected results?
Without these, it is ad-hoc, not dynamic capabilities.
The evolutionary model of firm adaptation
You get feedback from the environment and you start thinking of trying new and different ways of doing things. But you have to filter, and say this is what we are going to do and why. Once you try it, you have to replicate it. Diffusion and transfer across the organization is a big challenge, for dynamic capabilities and operational capabilities alike. When you transfer, you also have to localize, and that is hard too – how do you know what local variations are most important? And then retention… once it’s transferred, it might not stick. How do you make it a new routine? If it is retained, then you get new performance outcomes and feedback from the environment, and the cycle starts again.
How are capabilities developed? What are capability-building mechanisms?
Experience accumulation – as groups that are stable continue to work, they accumulate experience and grow their expertise.
Knowledge articulation – clarifying what you know about what you did and its outcomes
- Periodic brainstorming before/during projects
- Debriefing of lessons learned after the project
Knowledge codification – writing down your “know how” and “know what”
- Planning of project activities
- Auditing, performance evaluation reports
- Creation and updating of process-specific tools
- Case studies, decision-support systems, “how to” handbooks
- Cause-effect analysis: reports on “what works when and why”
Marga Biller from LILA commented that she sees a link to Eric Dane’s ideas around cognitive entrenchment. She asked, ” If people in organizations articulate the knowledge they know and codify it, could they end up with more entrenchment?”
Maurizio answered that its true. More codification can lead to more entrenchment. The key is how you codify. There are different ways of codifying. You can stifle experimentation – codes become Bibles. Or you can take a more flexible approach: “this is the current state of the art; we know it’s not perfect and we rely on you, after every experience, to collect data and alter the code.” Then the code becomes a tool to ignite and enhance adaptive capacity. So it totally depends on how it is used.
Generally speaking, in big strategic tasks like acquisition, experience is not terribly important. It does not explain future performance. Learning investments are the ones that correlate with success. Explains 10% of variance, which is 1/4 of whole model. A big deal statistically!
Why is codification so helpful?
- Repository of memory from past experiences
- Facilitates the communication and diffusion of integration practices
- Creates discipline in implementation phase
- But most importantly, in the process of creating and updating these tools, we are likely:
- to analyze our past experiences & their performance
- to figure out what worked & what didn’t
- to develop a theory about WHY (cause-effect links)
- to identify improvements to the way we manage the process.
Downsides of codification:
- Its cost, in terms of managerial attention
- Its (perceived) dependence on measurability
- Its potential misuse for political dynamics:
- Fear of punishment for exposing errors
- We codified what happened, case is closed”
- Inertia, codified knowledge can stifle learning:
- Codes become “bibles”
- Codified “know-how” enough, no “know-why.”
That tension must be managed, and should be managed because deliberate learning has so many upsides.
There is a balancing act between emerging learning approaches (expertise and improvisation) and deliberate learning approaches (diffusion, codification, and articulation).
BOTH are key; the balance is key.
Questions for reflection
What investments are necessary in my company to build world-class dynamic capabilities?
- Performance tracking metrics
- Learning change organization, structure, incentives
- Learning routines: articulation and codification
- Change specific process and tools
- Theory of change
What are the directions of change where dynamic capabilities are particularly necessary in my company?