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Making use of the Dynamic Capabilities to
deal with Complexity
ROSSATO, Jaqueline
Matriculation number: 270405
Address: Friedrich-Naumann Str, 01 – 102.2
Telephone: +55 48 9612 5054
E-mail: [email protected]
ZULOAGA, Irati Alkorta
Matriculation number: 868420
Address: Friedrich-Naumann Str, 01 – 001.2
Telephone: +34 627797004
E-mail: [email protected]
ALGUEL, Pinar
Matriculation number: 770442
Address: Oberwirtstr.36, 65582 Diez
Telephone: 0174/1724796
E-mail: [email protected]
December, 21th 2011
Making use of the Dynamic Capabilities to deal with Complexity
Jaqueline Rossato, Irati Alkorta Zuloaga and Pinar Alguel
Wiesbaden Business School, International Business Administration
Abstract
The market has become increasingly competitive and thus, the strategic behavior is no longer
a matter of positioning of various physical activities over a chain, has become the
organization's ability to reconfigure itself in order to meet complex environments. In this
scenario, the dynamic capabilities approach has gained increasing attention in the literature
and therefore there is a need to explore and discuss what we know about it. Thus, this paper
aims to establish the relationship between the complexity and the ability of organizations to
adapt to needs of the market and complex environments. To this we have made a research in
different articles about complexity and dynamic capabilities. In conclusion, we understand
that efficient use of dynamic capabilities can enhance the organizations' strategies to deal with
complex environments and leverage the resources and organization capabilities in order to
generate sustainable competitive advantage.
Keywords: complex environments; managing complexity; dynamic capabilities
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Introduction
In many researches about management, one can find a prominent common theme
explaining why management has become extremely difficult nowadays. The common theme
is “complexity” that is supposed to have increased dramatically over the last years (Großler;
Grubner; Milling, 2006). There are many factors that have contributed to the increasing
complexity - globalization, tics, and higher competition. All this has leaded organizations to
respond to internal changes in order to maintain its market position and ensure survival in the
competition.
As the market becomes more competitive, strategic behavior is no longer a matter of
positioning of various physical activities over a chain, and becomes the organization's ability
to reconfigure itself to meet rapidly changing environments. To this end, the need arises to
explore and experience what is discussed about dynamic capabilities as a reinterpretation of
the emergence of new ways to generate and maintain competitive advantage.
During this study we support the proposal and acknowledge about the important role
of dynamic capabilities as a source of sustainable competitive advantage in complex
organizations. It is necessary to direct the on-going discussions between authors, researchers
and scholars on the concepts and definitions of complexity and dynamic capabilities,
believing that developing dynamic capabilities, is an alternative to deal with complex
environments and leverage the resources and organization capabilities in order to generate
sustainable competitive advantage over time.
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Complexity
The notion of complexity in business is an ill-defined concept. According Großler;
Grubner; Milling (2006), the definitions of complexity can be derived from business
administration literature but also from other fields of science, like philosophy, mathematics,
information science, cybernetics and biology. Detail complexity can further be divided into
three sub-components: number of elements in a system, number of connections between
elements, and types of functional relations between elements (Milling, 2002).
To understand what is complexity, Axelrod and Cohen (2000) define a complex
system as a system where there are strong interactions among its elements, so that current
events heavily influence the probabilities of many kinds of later events.
Complex and complicated are terms which occur in our everyday lives when we try to
find solutions to everyday problems. Some of these problems might be easy to resolve,
however there also ones which need a higher degree of reflection. Speaking in colloquial
terms, one would argue that these two terms are used in order to refer to actions, procedures
or processes displaying an uneasy or difficult structure. However, when one takes a deeper
look at the terminology, it becomes clear that the two terms cannot be used interchangeably.
As the primary focus of this paper is complexity, the terms complex, complexity as well as
complicated shall be defined in a more detailed way.
According to the Oxford English Dictionary (OED), “complex” occurs as a noun,
verb, and an adjective in our lexicon. Hence, in the context of a noun, “complex” refers to a
“whole comprehending in its compass a number, esp. of interconnected parts or involved
particulars; a complex or complicated whole”, whereas as an adjective it can either mean
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something “consisting of parts or elements not simply co-ordinated, but some of them
involved in various degrees of subordination; complicated, involved, intricate; not easily
analysed or distangled” (OED 2009) or if for instance dealing with a complex item as
something “consisting of or comprehending various parts united or connected together,
formed by combination of different elements; composite, compound” (OED 2009).
Accordingly, “complexity” results as “the quality or condition of being complex, (…) a
complicated condition, complication” (OED 2009). In contrast to this, “complicated” occurs
as an adjective that designates an object or an issue “consisting of an intimate combination of
parts or elements not easy to unravel or separate, involved, intricate, confused” (OED 2009).
However, Sargut and McGrath (2011) characterize complicated systems as having a
high number of moving parts which operate in certain patterned ways. An example for this
could be the procedures involved when an airplane flies as the different steps can be predicted
when it comes to e.g. take-off and landing.
In a more business-specific context, one can apply the definitions of complex systems
provided by Axelrod and Cohen (2000:7), they define a complex system as a system “where
there are strong interactions among its elements, so that current events heavily influence the
probabilities of many kinds of later events”. They conclude thereof that “the difference rests
with interdependencies and the possibility of future events.
Sargut and McGrath (2011) additionally underline that complex systems as well
operate in patterned ways but that they differ from complicated systems as their interactions
are continually changing. Added to this line of thought, a closer look at the term of
complexity reveals three typical properties. These are multiplicity, interdependence, and,
diversity. The number of potentially interacting elements is what is subsumed under the term
multiplicity whereas interdependence describes “how connected these elements” are.
Diversity as the third property refers to the degree of heterogeneity. Sargut and McGrath
apply these three properties to the term complexity by mentioning that “the greater the
multiplicity, interdependence, and diversity, the greater is the complexity”.
An organic growth program for example or the payment business, for instance, is
highly complex systems since they contain a tremendously high number of interactive,
interdependent and diverse elements. To make this clearer, the reader can think of payments
made by Visa and Mastercard. When booking a flight at one of the Star Alliance member
airlines for example (e.g. Lufthansa, Austrian Airlines) different payment methods can be
chosen in combination with the Miles& More point reward system depending on how you
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pay. Besides the airline, the credit card company receives an annual cardholder fee and the
vendor as well accepts a certain amount of money. As it can be seen, a variety of several
business ecosystems interact in this context, thus resulting in a complex nature. In case a
disruption occurs, it would cause problems for several parties.
To sum up, complex and complicated systems work in different ways, because
interdependence leads to specific consequences, due to an unpredictability of effects and nonlinearity. In other terms, the major difference between complex and complicated lies within
the point that one can predict the results of complicated systems as they operate according to
the same procedures and the same starting conditions. A complex system on the other hand
disposes of the characteristic that the starting conditions are known but can lead to different
outcomes, “depending on the interactions of the elements” as Sargut and McGrath (2011)
argue.
Always when we are speaking about a new investment, new decision and in sum about
a new decision, we try hard to minimize the risk that this decision have. Living in a complex
system, minimizing the risk is even a more important aspect. To do this, managers should be
able to: (1) limit or even eliminate the need for accurate predictions (sometimes is necessary
to eliminate or at least minimize the volume of predictions); (2) use decoupling and
redundancy (in this context decoupling means to try to separate the elements of a system one
from other); (3) draw on storytelling and counterfactuals (imagination and reflection are
important aspects); and (4) triangulate (to finish with the ways that we can minimize risk we
have triangulation).
There are two main strategic that can help to a manager to take the best decision about
the tradeoff that is going to do. These strategic are: (1) Take a real-options approach - the
main idea of this strategy is to make small investment that in a future will give the chance to
continue investing on them but on the other hand this future investment are not going to be
compulsory, and (2) ensure diversity of thought: In our opinion the basic of this second
strategy is very related with the concept of Triangulate.
To have the chance to use different methodologies, different processes and different
ways to see the thinks, it is very important that a company is composed by people that think in
different way. There is diversity in the way of thinking. This will help to the company to be
able to face the changes and unexpected situations that will happen. So it is very important the
capacity of a company to find the adequate employees, the adequate thinkers.
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The problem commonly faced by managers of complexity systems is making sense of
a situation. Many times, it is hard to observe and grasp the tremendous array of relationships
from a perspective as one cannot be omniscient due to cognitive limits. Thus, Sargut and
McGrath (2011) underline that “focusing on one thing can prevent from seeing others.”
Furthermore, they mention the problematic nature of particularly rare events because they do
not occur repetitively enough.
This problem emphasized that complexity puts various challenges to managerial
activity. Forecasting the future, making tradeoffs, as well as mitigating risks are tasks
managers need to face when seeking to manage complexity.
In this scenario that dynamic capabilities emerges as an alternative to deal with
complex environments and leverage the resources and organization-capable in order to
generate sustainable competitive advantage over time. Therefore it is necessary to know and
explore what is discussed on the subject.
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Dynamic Capabilities
The concept of dynamic capability (Eisenhardt, Martin 2000, Teece et. al., 1997)
evolved from resource-based view (Barney 1991, Wernerfelt, 1984) with the intention of
explaining how and why some companies have competitive advantage in rapidly changing
markets and unpredictable. Thus, as defined by Teece, Pisano and Shuen (1997), as "the
ability of the company has to reconfigure, redirect, transform and shape their skills properly
and its internal and external resources to meet the challenges of rapidly changing market."
In 2007, Teece addresses the dynamic capabilities in three distinct capacities: (1)
sensing - the ability to sense market opportunities and threats, (2) Seizing - ability to take
advantage of the opportunity and, (3) managing and transforming - the ability to remain
competitive by improving, combining, reconfiguring and protecting the organization's
business.
One of the pioneering works, the most recognized and quoted on dynamic capabilities,
is the work of Teece, Pisano and Shuen (1997). However, more than 10 years have passed
since the publication, but the issue continues to attract the attention of management scholars
and practitioners from around the world (Easterby-Smith, Lyles, Peteraf, 2009). Part of this
interest is due to be closely associated with the resource-based theory (Barney 1991, Peteraf,
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1993; Wernerfelt, 1984), where the focus is on key issues such as skills and business
performance.
Thus, it is important to know what is discussed in the literature on dynamic
capabilities for both follows in Table 1, which presents the main concepts and definitions on
the subject.
DYNAMIC CAPABILITIES
Main Contributions
Teece; Pisano (1994)
Collins (1994)
Pisano (1994)
Henderson; Cockburn
(1994)
Helfat (1997)
Teece; Pisano; Shuen
(1997)
Zahra (1999)
Helfat; Raubitschek (2000)
Cockburn; Henderson;
Stern (2000)
Zajac; Kraatz; Besser
(2000)
Eisenhardt; Martin (2000)
Rindova; Kotha (2001)
Makadok (2001)
Griffith; Harvey (2001)
Lee et al. (2002)
Definitions of Dynamic Capabilities
"Subset of skills or capabilities that enable the company to create new products
and processes, thus responds to changing market circumstances."
There are certain organizational capabilities that drive the exchange ratio of
common resources.
He argues that the ability to change the organizational resources is a story of
strategic routines by which managers alter the resource base of the company
(purchase and shed resources, integrate and combine them all together) to
generate new strategies for creating value.
They feature the "Architectural Skills" as they are the architects behind the
creation, evolution and recombination of resources in search of new sources of
competitive advantage.
"The Dynamic Capabilities allow companies to create new products and
processes and respond to changing market conditions."
"Ability of the company to integrate, build and reconfigure internal and
external skills to adapt to the rapidly changing environments." Like, "reflect the
organizational ability to achieve new and innovative forms of competitive
advantage."
"Capabilities that can be used as platforms, from offering new products, goods
and services when change is the norm."
"The ability of companies to innovate and adapt to changes in technologies and
markets, including the ability to learn from mistakes."
"The competitive advantage of a company is derived from the company's
strategic response to changing environments or new information about
opportunities to benefit."
Organization's ability to "make the necessary changes" when "faced with the
need to change (defined by environmental contingencies and organizational),
which results in a greater benefit."
"It consists of strategic and organizational specific processes (such as product
development, alliances and strategic decision making) that create value in
companies operating in dynamic markets by manipulating resources into new
strategies for value creation."
Use the term "Continuing Metamorphosis" to refer to "profound changes" that
takes place within the company to change the "dynamic adjustment of the
company's resources and external factors associated with a changing
environment."
Shows the "importance of an alternative mechanism for generating income
(Schumpeterian) called construction capabilities, different feature selection"
(obtaining Ricardian rents).
The Global Dynamic Capabilities consist in creating combinations of resources
difficult to imitate, which includes coodenaçaão effective inter-organizational
relationships on a global basis that can provide a company a competitive edge.
"The dynamic capabilities are designed to rise in sustainable competitive
advantage in rapidly changing Schumpeterian regimes."
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Zollo; Winter (2002)
Learned pattern of collective activity through which the organization
systematically generates and modifies its operating routines to achieve greater
profitability.
Zahra; George (2002)
"They allow the company to reconfigure their resource base and adapt to
market conditions in order to achieve a competitive advantage."
Aragón-Correa y Sharma
(2003)
Winter (2003)
Helfat; Peteraf (2003)
Zahra et. al. (2006)
Teece (2007)
Augier; Teece (2007)
Wang; Ahmed (2007)
If you deal with skills that arise from the implementation of "proactive
estrtégias" that allow the organization to align with changes in the global
business environment.
Describes the Dynamic Capabilities and organizational capabilities (high-level
routines or set of routines) affected by the change and that "can change the
product, production process, scale, or customers (markets) attended.
"By definition, the dynamic capabilities require adaptation and change, because
they build, integrate and reconfigure other resources or capabilities."
"The ability to reconfigure resources and routines of a company as established
and considered as the most appropriate for its main decision-maker" ...
"Presence of rapidly changing problems" for which the company has "the
ability to change the way that solves their problems (dynamic capacity of a
higher order of change capacity )"... through "dynamic ability to change,
reconfigure their existing organizational capabilities."
"Capabilities of the company, difficult to imitate, needed to adapt to customer
demands and new technological opportunities. It also includes the company's
ability to configure the environment in which it operates, develop new products
and processes and design and implement viable business models".
"Capacity (inimitable) with which the company has to form, reform, configure
and reconfigure its asset base to respond to changes in markets and
technologies."
"Orientation behavior of the company for continuous integration,
reconfiguration, refurbishment and rebuilding of their resources and
capabilities and, more importantly, the increment and reconstruction of their
core capabilities in response to a changing environment in order to sustain
competitive advantage."
Ng (2007)
"It refers to the ability of organizations to develop and seek new resources and
configurations that fit the changing market conditions."
Oliver; Holzinger (2008)
"It refers to the ability of companies to maintain or create value by developing
and deploying internal competencies to maximize consistency with the
requirements of a changing environment."
Table 1 - Key concepts and definitions of dynamic capabilities
Source: Compiled by the authors
For Helfat and Peteraf (2009), a dynamic capability is a theory or an approach that has
developed and has attracted the attention of many researchers in the field of organizational
strategies. There is a lack of empirical studies and it takes a while to achieve robust ones. The
complexity of the topic or the gaps have not been limiting factors for studies in a specific
area, just the opposite they have motivate new research and, more importantly, serve to raise
discussions about management change, strategy and sources of competitive advantage.
Therefore, this article seeks to contribute to the area of organizational studies to
present the main concepts and definitions of dynamic capabilities and promote a discussion
on how organizations and their decision makers have evolved in their thinking and conduct
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business in constant search for obtaining and maintaining sustainable competitive advantage,
and also in environments of rapid change.
However, Menon and Mohanty (2008), confirm that the development, use and
maintenance of dynamic capabilities are important and necessary for the proper performance
of organizations, particularly in environments of rapid change, however, is not sufficient
condition or guarantee sustainable competitive advantage.
It is noteworthy that this study did not seek to restrict or exhausting all the attributes
that could be found within the different perspectives found in the literature on dynamic
capabilities. However, the survey of the literature is justified by the need and emergence of
the theme for the field of strategy and organizational studies.
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Conclusions: Capabilities to Managing Environmental Complexity
Complexity and dynamic capabilities can be related in an strong way. Concerning to
dynamic capabilities we have said that sensing is the ability that organizations should have in
order to be able to sense the opportunities and threats of the market. Furthermore, making
sense of the situation is one of the main problems of complexity. Here is a big reason, to think
that if an organization is able to develop dynamic capabilities, then his ability of sensing will
be higher and consequently will be stronger in front of the complex environment. In this
context, ensuring a diversity of thought will increase the possibility of sensing the
environment as it is.
In addition, drawing on storytelling and counterfactuals and creating different
scenarios also help to choose the right way. If an organization is able to develop seizing, the
second main point of dynamic capabilities, will have develop an ability to take advantage of
the best opportunities. This will lead to a decrease in the possibility to make wrong decision,
or a decrease of failures.
A constant adaptation and reconfiguration of the system is also need in order to be
able to answer or respond to all the needs (new and old) that exist on the market. Managing
and transforming, the third main pillar of the approach of dynamic capabilities will help to the
organization to remain the competitive advantage. Organizations should be able to adapt all
their system to the complex environment. All resources, employees, all services that they
offer should be ready in order to continue alive.
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Understanding that organizations nowadays live in a very complex environment, they
have to be able to adapt and reconfigurate themselves in order to answer the needs of the
market. In this context, the importance that is taking dynamic capabilities is increasing in a
very fast way, as a new way of creating and maintaining and competitive advantages.
The central ideas of this paper assumes that the complexity puts various challenges to
managerial activity. Forecasting the future, making tradeoffs, as well as mitigating risks are
tasks managers need to face when seeking to manage complexity. And to meet this need, we
believe that the dynamic capabilities, an approach explored in this paper, is a alternative to
deal with complex environments and leverage the resources and organization capabilities in
order to generate sustainable competitive advantage over time.
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