Impact Of Developing Dynamic Capabilities On Firms

Published Date: 02 Nov 2017

Amr Abd El-Hamid El-Degwi (S1100317)

The German University in Cairo

Supervisor : Dr. Raghda El Ebrashi

Abstract

The aim of this study is to understand clearly internal factors that affect firm’s performance. Actually, sometimes the differences between most of these factors are argued to be not so clear and in the practical life, a lot of managers don’t really know clearly the differences between them. Among of these factors: firm’s resources (tangible and intangible),competences (core competences and critical competence), capabilities (static and dynamic), competitive and sustainable competitive advantages.

As per the findings of this research, it became very clear that due to current dynamic business environments, focusing on the building of firm’s dynamic capabilities are very important for the firm to sustain its competitive advantage and be able to survive during all business life cycle especially in the decline periods. The research also explains the relation between dynamic capabilities and all other firm’s internal factors and how they are all combined together to achieve best business performance. A specific look on the impact of applying dynamic capabilities on firm’s performance along with the requirements to build such capabilities are also explained in this research.

Introduction

No doubt that all organizations are targeting to achieve the max benefits from running their business. The word "benefit" includes more than one aspect; financial profit, business growth, market share, etc., are some kinds of such benefits. A lot of questions are needed to be answered so that the management of the firm can take the right decisions toward achieving their targets. Among of these questions: which factors are influencing the achievement of firm’s targets; internal or external factors ? if they are both, which one has the highest influence ? concentrating on the internal factors, which factors are the most important to build the success of the firm : are they its resources ? if yes, which type of resources : tangible or intangible resources ? are they the competences that should acquire the management concentration ? or the capabilities of firm’s resources ? if yes, which type of capabilities, static or dynamic one ? what is the competitive advantage and what is its impact firm’s performance ? what is the sustainable competitive advantage ? what are the relations between all those factors ? which one develops the others ? can the management neglect some factors from them ? which factors affecting specific targets ? how to build those factors successfully ?

Actually, the target of this research is to help organization’s management to well understand all internal factors that affecting their firm’s performance to achieve their targets. Explanation for most of internal factors, their impact on the firm’s performance, the relation between them & finally how to build them; focusing on the dynamic capability as the most important factor that affected by & affecting all other factors and also that have the greatest impact on firm’s performance in current dynamic business environments during all its business life cycle especially in the difficult times.

Literature Review

What is mainly affecting firm’s performance, Industry or firm’s factors ?

The answer for the question that whether firm’s performance is mainly affected by industry or firm specific factors still in the core studies of the strategic management and not defined well yet (Siddhartha & Haimanti, 2011). Porter (1980) has recognized that firm’s performance is determined mainly by the industry attractiveness and then by firm effects (Grant, 1991a). McGahan and Porter (1997) have found that industry is the most important factor in determining firm’s economic performance especially in service industry more than in manufacturing industry. Actually, the two factors of performance are related to each other as once the firm gains its competitive advantage over its competitors, it will start to focus and deal with the industry forces to sustain its competitive advantage (Siddhartha & Haimanti, 2011). On the other hand, a number of studies (Schmalensee, 1985; Cubbin and Geroski, 1987; and Jacobsen, 1988) have found that it is the firm factors and not the industry factors that mainly affecting firm’s profitability. Also there are a lot of recent studies (Rumelt, 1991; Powell, 1996; and Hawawini et al., 2003) had the same view that firm-specific factors have the dominant effect on its performance. Firm’s sustainable competitive advantage which comes from its internal specific resources and capabilities enable the firm to improve its short-term performance along with the long-term as well (Amit and Schoemaker, 1993; Barney, 1991, 1997; Eisenhardt and Martin, 2000; Henderson and Cockburn, 1994; Powell, 2001; Teece, Pisano, and Shuen, 1997).

Resource Based View (Understanding firm’s resources, competencies and capabilities)

As per the above conclusion that the firm’s internal factors are the main dominant of its performance, so it is very important to well understand these internal factors and their relationship to be able to utilize them in the proper way that finally leads to the needed firm’s great performance. Among of those factors are resources, competences & capabilities.

Resource Based View (RBV)

Different corporate strategies explanations were provided by various researchers (Srivastava, 2005). Most of those corporate strategies were directed towards the external environment such that firms which were able to match their internal strengths with the external opportunities in the environment were able to achieve a competitive advantage (Porter, 1985; Barney, 1991). Later on, The firm’s resource-based view has suggested that the difference tangible and intangible resources of the firm are learnt and accumulated over time to produce a source of competitive advantage (Barney, 1991; Dierickx and Cool, 1989; Dosi, 1988; Itami, 1987; Mahoney and Pandian, 1992; Nelson and Winter, 1982; Wernerfelt, 1984; Winter, 1987).

Penrose (1959) the founder of RBV has described a firm as a collection of resources and argued that firm unique character comes from the variety of the services developed from its resources (Siddhartha & Haimanti, 2011). RVB can be considered an efficiency-based theory (Peteraf and Barney, 2003). Actually, we can consider that resources, competences, and capabilities terminologies has not been standardized yet (Valery, Christos, & David, June 15, 2010). According to Hall (1992) , assets mean to have the resources and skills or competencies mean doing resources which described as information- based capabilities by Amit and Schoemaker (1993). Itami (1987) argue that invisible assets like brand image, consumer trust, etc., are described as the information-based resources and are considered very important for the long-term firm success .

To make the concepts clearer, we will go through the most critical firm’s internal factors to better understand them along with their relationships & effects on frim’s performance.

Resources

Baney (1991) has included all assets, information, capabilities, knowledge, firm attributes, organizational processes, etc., in the scope of firm resources. They can be further classified into three main categories: organizational capital, human capital and physical capital (Bogaert, Martens and Cauwenbergh, 1994). Firm resources are considered key players in the studies of strategic management (Barney, 2001a; Barney, 2001b) (Jang, 2013).Some of firm’s resources are tangible, and others are intangible. Tangible resources are the observed and quantified assets and they can be classified into four types physical, organizational technological and financial; Manufacturing facilities, production equipment, formal reporting structures and distribution centers are examples of tangible resources (Reaich, 2012). Intangible resources are assets that are found deeply in the firm’s long history and are accumulated over time and they can be classified into three types human, reputational and innovation (Reaich, 2012).Intangible resources are almost difficult for competitors to analyze or imitate Because they are built in unique firm’s internal routines; Managerial capabilities, trust between managers and employees, Knowledge, the capacity for innovation, organizational routines (the unique ways people work together), brand name, scientific capabilities and the firm’s goods or services reputation are all intangible resources (Reaich, 2012).

Actually, tangible resources value is constrained, i.e. they are difficult to leverage or to provide additional value or business from them; on the other side intangible resources, can be leveraged; for example, if two people share their individual knowledge can create additional knowledge that is new to both of them, which improves the performance of their firm (Reaich, 2012). Generally, firms prefer to rely on their intangible resources to build their core competencies and capabilities because they are less visible and difficult for their competitors to understand, imitate , substitute or purchase. We can argue that the competitive advantage can be more sustainable when it is built from intangible resources Reaich, 2012).

Competences

Competences are about doing things very well regardless of the economic vision of doing them; They are special kinds of organizational resources which result from Performing activities repetitively (Valery, Christos, & David, June 15, 2010). Competences can be quantified and measured against particular task requirements (Valery, Christos, & David, June 15, 2010).

Core Competencies

The concept of core competencies is different than the traditional strategic thinking of competition for market share and also different than Porter’s (1985) low cost and differentiation strategies (Srivastava, 2005). Actually, the competition in the product/market area is mainly for market share (Buzzell, Gale, Sultan, 1975). Researchers and strategists use the term ‘market share’ to refer specifically to ‘end product share’ or ‘brand share’ (Srivastava, 2005). The core competencies concept goes beyond the traditional market share boundaries; it is the firm’s ‘core products’ which are not the firm’s end products and are the result of combining one or more of firm’s core competencies (Hamel and Prahalad, 1990).

In 1990, C. K. Prahalad and G. Hamethe first develop the concept of "core competence " in their book "Harvard Business Discussion". They explain the performance of enterprises as per their core competence (Qingdong, February 2009).

Core competencies have been defined by a lot of authors as; capabilities that provide a competitive advantage for a firm against its competitors (Reaich, 2012), those competences which allow firms a superior advantage (Sabah, Laith, & Manar, January 2012), the special ability of an enterprise in technical innovation, marketing and product development (Qingdong, February 2009), a set of problem defining and solving visions that provide strategic growth alternatives (Lei, Hitt and Bettis, 1996), skills and knowledge that result from the integration of different firm’s business units competencies (Sabah, Laith, & Manar, January 2012).

Core competencies are being developed over time through organizational learning of how to better deploy different capabilities and resources (Reaich, 2012), and have some characteristics: being unique, ductility, difficult to mimic, integrated , dynamic, of value and accumulative (Qingdong, February 2009).

According to Hamel and Prahalad (1994; 1990) for a competence to be considered as "core" it must meet three criteria:

Competitor Differentiation: the firm’s level of competence is better than all its competitors and also inimitatable.

Extendibility: must be able to be applied to new products and services areas

Customer Value: must has a clear input in enhancing Customer perceived value

Critical Competence

Critical competence is the firm’s ability to identify, develop , nurture, deploy and upgrade its hierarchy of competencies to achieve sustainable competitive advantage; while the core competencies of firms are diverse, their critical competence is universal so we can consider it a universal competence which is the highest level in the hierarchy of competencies to gain the sustainable competitive advantage (Srivastava, 2005).

Capabilities

There is a big variety in the literature on the calling of organizational capabilities: some call it collective skills, core competence , best practices, complex routines or organizational capabilities (Valery, Christos, & David, June 15, 2010). Gupta et al. (2009) argue that resources alone practically are not enough to achieve competitiveness over other firms. To create a competitive advantage, a firm needs to use its resources very well and to create new resources and open new doors for new products developments (Sabah, Laith, & Manar, January 2012).

Capabilities come when resources are integrated to achieve a special task or group of tasks (Reaich, 2012). Grant (1991) argues that there is a difference between resources and capabilities: ‘While resources are the source of a firm’s capabilities, capabilities are the main source of its competitive advantage’ (Grant, 1991:119). Also Dierickx & Cool (1989) state that resources are immobile assets ‘stocks’, while capabilities can be considered as ‘flows’ of knowledge, they also state that ‘…while flows can be adjusted instantaneously, stocks cannot’. Amit & Schoemaker (1993:35) define resources ‘…as stocks of available factors that are owned or controlled by the firm’ and capabilities ‘…a firm’s capacity to deploy Resources’.

The capabilities of an organization are found in its human resources and also in its

organizational routines (Nelson and Winter, 1982; Cohen et al., 1996; Dosi et al., 2000). In this context, the firm is not only the sum of its resources nor the sum of its individual members capabilities (Winter, 2003) . Actually, capabilities are very close to action; they are related to acting or practicing (Valery, Christos, & David, June 15, 2010). Capability represents more than knowledge; it covers greater dimensions of an action: tacit knowing, bodily knowledge and emotions (as cited in Georg & Martina, 2007). Moreover, capabilities are very related to performance; they are perceived as doing something that ‘must be recognized and appreciated’ (Gherardi and Nicolini, 2002: 421; Weinert, 2001). It is also noticeable that company’s capabilities for current and future decision makings are very affected by its past decisions (Arthur, 1989; Cowan and Gunby, 1996).

There are three main features regarding the capability: sirst, a capability has an intended and specific purpose (see e.g., Amit and Schoemaker, 1993; Dosi et al., 2000; Helfat et al., 2007; Winter, 2003); second, by activity performance, we mean ‘to carry out’ or ‘to do’ the activity (Merriam-Webster, 2010); third, a capability enables reliable and repeated activity performance , in contrast to un-patterned or unpracticed activity "ad hoc activity" (Dosi et al., 2000; Winter, 2000, 2003).

There are two types of capabilities: Substantive (operational or ordinary) capabilities and Dynamic capabilities. Actually, identifying a specific level of change that separates dynamic capability from operational capability is not an easy task (Constance & Sidney, 2011). Generally, Operational capabilities, such as technological or market capabilities, are needed for daily firm’s operations (see e.g., Collis, 1994; Danneels, 2002; Cepeda and Vera, 2007), whereas dynamic capabilities play a role in processes of organizational renewal (Hanna-Kaisa, Ari, & Olli, June 2011). On the other hand some capabilities can be used for both dynamic and operational purposes, either because they have different variants (Constance & Sidney, 2011). It is important to note that operational capabilities are evolving over time even without specific development activities as the accumulation of the knowledge by learning-by-doing and develop routines for key activities (Hanna-Kaisa, Ari, & Olli, June 2011). So, learning, adaptation and change don’t rely on the dynamic capabilities (see Helfat and Raubitschek, 2000; Helfat and Peteraf, 2003). But, the role of dynamic capabilities is to provide the lead in the development beyond the scope of incremental evolution (see also Pandza and Thorpe, 2009). Dynamic capabilities initiate more radical development mechanisms (transformation and substitution) than simple evolution (see Lavie, 2006).

It is almost impossible to get a bright line between these two types of capabilities because: 1) to some extent change is always occurring; 2) we cannot distinguish them according to the changes if they are radical or non-radical; and 3) some capabilities are used for both operational and dynamic purposes according to its nature in addition to its intended use (Constance & Sidney, 2011). However I’ll try in the coming lines to well explain each type of capabilities as much as applicable.

Substantive (Operational, Static or Ordinary) Capabilities

Substantive capabilities are the purposive combination of resources t needed for the organization to perform operational activities such as manufacturing, marketing, logistics and sales (Sadaqat, Linda, Hong-wei, & Fiona, August 2010); they are the first-level needed capabilities for day-to-day operation of the firm (see e.g., Collis, 1994; Danneels, 2002; Cepeda and Vera, 2007); the ability to perform the basic firm’s functional activities (e.g. distribution logistics, marketing campaigns and plant layout) (Collis, 1994). Smith and Prieto (2007, p. 237) argued that operational capabilities are focused towards the organization’s operational functioning. Operational capabilities are those ones which enable a firm making a living in the present (see Winter, 2003).

Dynamic Capabilities

Business history demonstrates that enterprises might fail because firms finally live in the shadows of their past successes; the main reason behind this is that those companies couldn’t change their structures and strategies to adapt to competitive conditions changes; changing capabilities require the redistribution of influence and power of everyone in the firm, so it almost will be resisted(He, 2012). A very well known case is IBM in the beginning of the 80s, it had lost its position in the market because it had lost the ability for creating new products and searching for new opportunities; actually, Its main target became protecting its old mainframes products (He, 2012). Generally, big, more stable companies have a lot of bureaucratic and hierarchical people who can see the problem coming, but can’t keep them out (He, 2012). It is good to mention that IBM has successfully recovered its situation in 2006 after long-term falling period by developing and get benefit from its resources dynamic capabilities (He, 2012).

Successful firms that have critical competence know how to deploy their core competencies and at the same time they are aware of the dynamic nature of their resources (Srivastava, 2005). The firm have to learn how to how to identify opportunities earlier than competitors and also how to turn threats into opportunities (Liisa Va¨ likangas and A. Geor ges L. Ro mme, 2012). Actually, firm’s basic competences, enable it to perform the activities that it sets out to perform efficiently; However, to confirm whether it is making the right products and targeting the right market segment, or whether it has successful future plans that matched to technological and competitive opportunities and consumer needs is determined by its dynamic capabilities (Valery, Christos, & David, June 15, 2010).

While most earlier strategic approaches were static (e.g., develop an advantage position and protect it), dynamic capabilities concerns with the need for organizations to change overtime competing in both mature and emerging businesses (Tushman and O’Reilly, 1996). Teece et al. (1997) have presented the ‘dynamic capability’ concept to explain how competencies and resources can be combined, deployed , developed, and protected. They argue that dynamic capability is the firm’s ability to build, integrate and reconfigure internal and external competencies to cope with rapidly changing environments (Siddhartha & Haimanti, 2011). In a rapidly changing environment, sustained competitive advantage can be achieved by creating, extending or changing already existing organizational capabilities (Teece, Pisano and Shuan, 1997; Winter, 2003). From resources point of view, dynamic capabilities are firms’ capacity to utilize existing resources, to develop new resources and also to generate new ways of using existing or new resources (Sanchez, 2001). They allow the generation and renewal of core competences and competitive advantage of the firm (Sadaqat, Linda, Hong-wei, & Fiona, August 2010). Dynamic capability is the extension of the Resource-Based View (RBV) in dynamic environments which refers to firm’s ability to reconfigure its resources to address fast changing environments(Rangarajan, Chenglei, & Sonny, 2011). According to Helfat and Peteraf (2003) and Helfat et al. (2007), dynamic capability is the dynamic resource-based view of the firm. Eisenhardt & Martin (2000) define dynamic capabilities as: ‘The firm’s processes that use resources – specifically the processes to integrate, reconfigure, gain and release resources – to match and even create market change’.

Examples of dynamic capabilities include such capabilities needed for alliances, acquisitions, and development of new products which clearly alter the firm’s ways to earn its living (Iansiti and Clark, 1994; Helfat, 1997; Dosi et al., 2000; Eisenhardt and Martin, 2000; Kale, Dyer, and Singh, 2002; Capron and Mitchell, 2004; Zollo and Singh, 2004; Helfat et al., 2007). Actually, dynamic capabilities can be classified into three main types: sensing, seizing, and reconfiguring capabilities (Ellonen et al., 2009). Sensing capabilities which are related to firm’s activities in identifying new opportunities and scanning and monitoring operating environments changes (Hanna-Kaisa, Ari, & Olli, June 2011). Seizing capabilities are needed for product architecture, brand management and business models design; they also include practices of decision-making related to partners, distribution channel and new ventures(Hanna-Kaisa, Ari, & Olli, June 2011). Reconfiguring capabilities are used in the redeployment of existing assets, reengineering processes and complementary assets management (Hanna-Kaisa, Ari, & Olli, June 2011). It is very important to mention that not only the reconfiguring capabilities that needed to modify the resources, but also sensing and seizing capabilities can help performing the development on technological and market capabilities; this is because all dynamic capabilities types are linked with operational capability development that are innovation-related (Hanna-Kaisa, Ari, & Olli, June 2011).

Understanding Industrial Dynamics (The need for Dynamic Capabilities)

There is a big debate regarding the changing nature of the world. ‘One does not step into the same river twice’ (Heraclitus). Yet we also often say that ‘there is nothing new under the sun’ (Ecclesiastes). As Birnholz, Cohen, and Hoch (2007: 316) put it, this is the ‘paradox of the (n)ever-changing world.’. If all the time everything is changing, from where the basis of the impression that some things do not change at all comes from ? (Constance & Sidney, 2011).

What may solve this debate is that, If you examine closely small details, you would see much more changes than if you look for a high-level descriptions or large phenomena; actually, if you have a look on overall form of an organization you might observe that over time it remains the same, while there might be important changes in its capabilities or strategy (Constance & Sidney, 2011). Also, The period of time over which the extent of change is being assessed matters as well; change often takes time, so slow change takes time to build something easily perceptible (Constance & Sidney, 2011).

Today, no firm can predict that its external environment will not dramatically change; The pace of technological and globalization change, for example, places huge pressure on companies to adapt (Dutta, 2012). Firms, especially in fast-moving environments, face the challenge to keep up with new market needs; they have to improve their existing products and processes continuously, and develop new products to match market needs (Hanna-Kaisa, Ari, & Olli, June 2011). Because major firm’s transformations can provide great difficulties according to the level of required change, companies would prefer to renew themselves continuously and incrementally to be able to catch and even lead external environmental changes (Dutta, 2012). The notion of ‘dynamic’ is related to the continuous organizational capabilities renewal, which should match the rapidly changing environments demands (Georg & Martina, 2007). The concept of dynamic capabilities adds to the RBV that not only the markets are being dynamic but also organizational capabilities also should be flexible and dynamic (Helfat and Peteraf, 2003: 998).

Competitive Advantage and Sustainable Competitive Advantage in Dynamic Industry

Generally and according to Barney (1991:102), the firm has competitive advantage when it is applying a value creating strategy that is not being simultaneously applied by any current or potential competitors and the firm has a sustained competitive advantage when it is applying a value creating strategy that is not being simultaneously applied by any current or potential competitors and even those other firms cannot duplicate the benefits of such strategy. Now, we will go more deeply in the detailed concepts of both Competitive Advantage and Sustainable Competitive Advantage to well understand the relationship between firm’s dynamic capability and competitive advantage sustainability.

Competitive Advantage

Resources, capabilities and core competencies are the essential foundation of competitive advantage; Resources are combined to create organizational capabilities; In turn, capabilities are considered the source of core competencies of the firm, that are the builder of the competitive advantages (Reaich, 2012). Successful competitive strategy is coming from binding firm’s core competencies with its competitive advantages (Javidan, 1998).

Porter is the leader author in this field who introduced explicitly concepts of competitive strategy, competitive forces and competitive advantage (Christopher Heywood, Russell Kenley, 2008). According to the classical model of Porter, cost and differentiation are the two main competitive advantages sources (He, 2012). Low Cost strategy is based on efficiency along with overall cost leadership (Porter, 1985).Differentiation means offering unique technology, products, brand and customer service to gain the highest market share (Porter, 1985). Until now, there are two views in the classical strategic concepts: A resource-based view and capability-based view (He, 2012). The resource-based view argues that a firm can provide competitive advantage only when it has scarce, valuable , inimitable and nonsubstitutable resources; i.e. the resources of the firm must meet three requirements: nontradable, nonimitable, and nonsubstitutable (He, 2012). The capability-based view argues that the success of strategy of the firm is totally dependent on the ability of transforming its resources to competitive advantage (He, 2012). Therefore, the capability-based view is closer demonstrate how frims develop and maintain their competitive advantage (Liqin Ren, Guangya Xie, Koos Krabbendam, 2009). It is also worth to mention that while competitive advantage requires valuable and rarity of resources; a resource may be valuable but not scare, so all competing firms get the resource and then implement common strategy and finally no firm to get competitive advantage (Siddhartha & Haimanti, 2011). Also, a resource may be scare but not valuable, then the firm having this resource will not be able to use it effectively and efficiently to provide economic value than its competitors (Siddhartha & Haimanti, 2011).

From the economic point of view, for a firm to gain competitive advantage, it has to provide greater economic value to its customers than its least efficient competitor (Peteraf, 1993; and Peteraf and Barney, 2003). In RBV, competitive advantage (greater economic value) is achieved by the resources efficiency which help the firm to produce greater perceived benefits with the same cost (differentiation efficiency) or same perceived benefits with a lower cost (lower cost strategy) (Siddhartha & Haimanti, 2011). According to Peteraf and Barney (2003), firms that achieved a competitive advantage have developed more economic value (the difference between the benefits of resource-capability mix and the cost to utilize them) than their competitors.

Sustainable Competitive Advantage (SCA)

Once a firm establishes its competitive advantage, it should check if it is sustainable or not; actually, the answer depends on both inimitability and non-substitutability of firm’s resources (Siddhartha & Haimanti, 2011). According to Barney (1991), resources are considered not imitable for some reasons: (1) resource came from special historical conditions; (2) ambiguity; and (3) social complexity. Another requirement for sustainable competitive advantage is non-substitutability; If there is a substitute, then other firms can make the same strategy which will destroy the competitive advantage (Siddhartha & Haimanti, 2011).

sustainable competitive advantage does not necessarily be the outcome of operating in a high opportunity and low threat environment, but also depends on the existence and exploitation of the firm’s resources and capabilities that are valuable, rare and costly to imitate (Barney, 1995). For sustainable competitive advantage, firms have to identify, build, and exploit all core competencies which make growth to the firm (Prahalad and

Hamel, 1990). Accordingly, firm strategy has to shift from competing for product/service leadership to core competence leadership (Sabah, Laith, & Manar, January 2012). Therefore, competitive advantage sustainability depends on three major characteristics regarding firm’s resources and capabilities: Durability; the period during which competitive advantage is sustained, Transferability; higher competitive advantage sustainability comes from difficulty of resources transferability, and finally Replicability; means that resources/capabilities couldn’t be replicated or purchased (Sadler, 2003). Barney (1991) argues that resources of the firm should have four specific attributes to provide sustained competitive advantage: (I) valuable, (II) rare, (III) imperfectly imitable, and (IV) no strategically equivalent substitutes.

Organizational capabilities in the resource-based view (RBV) are considered a major source for the generation of sustainable competitive advantages (Barney, 1991; Wernerfelt, 1984). Managers should invest resources, effort and time to develop their critical competence which has great influence on the sustainability of firm’s competitive advantage (Srivastava, 2005).

Dynamic Capabilities and Sustainable Competitive Advantage

With dynamic capabilities, sustained competitive advantage are gained from the ability of the firm to reconfigure its existing assets and competencies in valuable ways to the customer while are difficult to be imitated by other competitors (Dutta, 2012). It is the dynamic capabilities that are more important for the production of sustainable competitive advantage (Pitelis and Teece, 2009). The most important thing to mention here is that while dynamic capabilities can be common across different firms (which is against the RBV assumption of differences across firms) and therefore themselves cannot be sources of sustainable competitive advantage; Their strategic value in building sustainable competitive advantage is coming from their ability to create successful resource configurations (Eisenhardt & Martin, 2000). Actually, The new vision for building competitive advantages is seen in the capability of changing very quickly and responding to unexpected environmental demands, which is the core concept of the dynamic capabilities (Eisenhardt, 2002).

Impact of developing Dynamic capabilities on firm’s performance

Performance is the final result of activities; it is the actual strategic management process outcomes (Sabah, Laith, & Manar, January 2012). The value of strategic management is in its ability for the organization’s performance improvement (Wheelen & Hunger, 2010). While organizational performance includes many dimensions of firm outcomes ( Richard et al., 2009; Thang et al., 2008; Morgan & Strong, 2003; Nwokah, 2008), we mainly focus on two key dimensions: Profitability and Growth (Sabah, Laith, & Manar, January 2012).

Building special capabilities is very critical for high firm performance achievement (Reaich, 2012).Actually, dynamic capabilities of the firm affect significantly its performance either directly or indirectly (Deeds, DeCarolis, & Coombs, 1999; Eisenhardt & Martin, 2000; Helfat & Peteraf, 2003; Henderson & Cockburn, 1994; Pavlou & El Sawy, 2006; Winter, 2003; Zahra, Sapienza, & Davidsson, 2006; Zollo & Singh, 1998). Historically, there is no clear agreement in the literature regarding the relationship between dynamic capabilities and firm performance (Sadaqat, Linda, Hong-wei, & Fiona, August 2010). Some authors (e.g. Deeds et al., 1999; Henderson & Cockburn, 1994; Zollo & Singh, 1998) argues that dynamic capabilities have a direct positive effect on frim’s performance; while others (e.g. Eisenhardt & Martin, 2000; Helfat & Peteraf, 2003; Pavlou & El Sawy, 2006; Winter, 2003; Zahra et al., 2006) have the view that dynamic capabilities effect on the performance of the organization is indirect and work through the development of other substantive capabilities (operational capabilities). According to Eisenhardt and Martin (2000), Helfat and Peteraf (2003), Pavlou and El Sawy (2005), Winter (2003), and Zahra et al. (2006), competitive advantage comes from the new configurations of resources and routines resulted from the dynamic capabilities and not directly from the dynamic capabilities themselves. In addition they state that: ‘Operational routines or capabilities are the visible outcome of dynamic capabilities. These capabilities are geared towards the operational functioning of the firm, and they can affect performance measures and lead to above-average returns’ (Easterby-Smith & Prieto, 2007, p. 245). This means that firms are using dynamic capabilities to develop firm-specific competences which contribute to the building of firm’s competitive advantage (Sadaqat, Linda, Hong-wei, & Fiona, August 2010). Dynamic capabilities attributes (sensing, seizing, and transforming) are critical to long-term profitability (Teece, 2007b). Practically, in the global market place, winners are the firms that can provide fast response and rapid product innovation, along with the management capability to effectively reassess and then redeploy internal and external competencies (Dutta, 2012). In the ever changing market place, if a firm has resources and competencies without dynamic capabilities, it might make a good return in the short run but will not achieve the long term success (Dutta, 2012).

Finally, substantive capabilities may be provide partially sufficient results in boom times, but for the firm to attain and sustain the leadership in its industry during both boom and difficult times, dynamic capabilities are needed (Rangarajan, Chenglei, & Sonny, 2011). So as a conclusion, It could be argued that strong dynamic capabilities can provide supernormal returns for the organization (Valery, Christos, & David, June 15, 2010).

How to develop Dynamic capabilities

Teece et al. (1997) argue that capabilities generally cannot be bought; instead they must be built which might take years or sometimes decades. Therefore, competitive success today depends on experience, policies and efficiency gained in earlier periods (ibid,1997).

Learning , Innovation, Evolution, Transformation and Substitution

Strategic management Authors (e.g. Bowman & Ambrosini, 2003; Eisenhardt & Martin, 2000; Teece et al., 1997; Zollo & Winter, 2002) have referred to the continuous learning as the underlying process of the evolution and development of dynamic capabilities. This learning must be translated into routines, processes and resources that are substantive competencies (Sadaqat, Linda, Hong-wei, & Fiona, August 2010). Teece et al. (1997) assumed that the evolution of DCs is incremental and sequential. However, later research by Eisenhardt and Martin (2000) argued that the evolution could be described more accurately in the terms of learning mechanisms (codification of experience, repeated practice, small losses, mistakes and pacing of experience).Zollo and Winter (2002) consider DCs as a result of learning to produce operational capabilities, which implies that learning itself can be considered as a ‘second-order’ dynamic capability; they consider the learning as a central element in dynamic capabilities creation and renewal.Also, Smith and Prieto (2007, p. 237) have argued that learning capabilities play a basic role in the creation and modification of dynamic capabilities. this concept of dynamic capabilities building is very close to the what is known as adhocracy (as cited in Georg & Martina, 2007) or the ‘total learning organization’ (Pedler, Burgoyne, and Boydell, 1991; Vaill, 1996). In the learning organization all activities operate permanently in the learning mode, i.e., they are not bound to experience /history or any other rules (Georg & Martina, 2007). The learning organization is ready always to revise up to date cognitions and change expectations; actually they are in flux or, as Weick (1977) states, they are ‘chronically unfrozen’. To help a firm to overcome the rigidity trap of its organizational capabilities, innovation routines should be installed and applied (Nelson and Winter, 1982; Zollo and Winter, 2002). Innovations are the creation of any kind of novelty , i.e. the creation of novel patterns for problem solving (Georg & Martina, 2007).

Lavie (2006) argues that there are three main mechanisms t reconfigure the capabilities: evolution (evolutionary development), transformation (reconfigure old capabilities), and substitution (the old is substituted by the new). Capability evolution is related to incremental learning along with modifying existing routines (Lavie, 2006). In most cases the internal environment is the learning source (Hanna-Kaisa, Ari, & Olli, June 2011). According to Lavie (2006), capability transformation involves the disbandment, modification and acquisition of routines. Nevertheless, the transformed capabilities. It involves learning from both internal and external sources (Lavie, 2006). Capability substitution is the most radical type in Lavie’s classification as it argues that some of the old capabilities become obsolete (Hanna-Kaisa, Ari, & Olli, June 2011). Collis (1994) sees that for market leaders the risk of substitution is high as their competitors normally would follow the substitution strategy. Complex capabilities with large number of routines are most likely to be substituted as it might be ineffective or difficult to fully reconfigure them (Lavie, 2006).

Investments

Dynamic capability needs durable funds commitment to support keeping highly skilled personnel in addition to specialized facilities and equipment; most of these needed costs are considered sunk costs (non recoverable through sale) because physical investments, development of routines and the requisite training are specific to the organization (Constance & Sidney, 2011). Those sunk costs make dynamic capabilities costly and revenues must cover the costs of production in addition to the costs of developing and maintaining the dynamic capabilities; this implies that firms should deploy dynamic capability repeatedly to be able to generate revenues from new and improved products and services that is sufficient to cover the costs (Winter, 2003). By contrast, smaller companies need to avoid the overhead of developing such costly dynamic capabilities (Constance & Sidney, 2011). They do this frequently by diverting resources temporarily from ordinary capabilities to change oriented project teams (as cited in Constance & Sidney, 2011).

Management Capabilities

According to the dynamic capabilities framework there is a continuous need to change , create, extend and upgrade company’s assets and/or capabilities to stay competitive (Teece, 2007). Many company-level changes involve corporate managers decisions (Adner and Helfat, 2003) and dynamic capabilities deployment requires commitment of time and energy from the managers (Ambrosini and Bowman, 2009, see also Lavie, 2006). This implies that dynamic capabilities are linked closely to the top management strategic decision-making (Hanna-Kaisa, Ari, & Olli, June 2011). Actually, managers should pay attention to both dynamic and operational capabilities, and consider carefully their relationships which provides the competitive advantage and then superior performance (Hanna-Kaisa, Ari, & Olli, June 2011). The managers also have to be warned that some dynamic capabilities may make renewal but without any value, then couldn’t gain the needed long term competitive advantage (Helfat et al., 2007). The role of the management in the development of dynamic capabilities could be concluded in two basic tasks; first they must be able to sense accurately the changes in their competitive environment including changes in competition, customers, technology and regulation; second, they must be able to act according to these opportunities and threats; i.e. to be able to seize them by reconfiguring tangible and intangible resources to meet the new challenges (Teece, 2006).