Dynamic Capabilities – A New Approach to Strategy – Part 1

Dynamic Capabilities – A New Approach to Strategy – Part 1

This article is part of a series on what causes a firm’s value to increase

The strategy field is changing, perhaps in profound ways. What we know today could become obsolete very quickly if you believe proponents of “dynamic capabilities”.

Up to now, the strategy field has provided many valuable tools, frameworks, and knowledge. The emphasis for the current tools and frameworks is around “positioning”. I have discussed many aspects of positioning over the last twenty-two months. Positioning seeks to have a firm develop a great strategy and business model and then “defend” that position. Defending comes from marketing your current offerings and brand frequently to keep you visible to current customers. Various forms of temporarily lowering prices to deter competitors and keep them at bay are classic defending tactics. Think of Wal-Mart’s price Rollback tactic. Whenever you see the Bouncing Ball, you know Wal-Mart is retaliating as a defense. Frequent “free” promotions and various customer loyalty initiatives are also part of positioning tactics. Harley Davidson’s Owner Group (HOG) is a great example.

But in our current world, defending a position may not be nearly enough. The positioning school rests on two pillars:

  1. Try to get as big as you can to enjoy economies to lower costs – i.e. volume discounts on large purchases and the reduction in costs due to learning from many cycles of meeting demand throughout a year. This is called the learning curve effect and allows you to get better and less costly at what you currently do.
  2. Try to increase the scope of your enterprise by adding business units, through acquisition or home growing them, that are related to your core business so that you can spread your marketing costs over all of them. This really leverages your marketing budget.

But new developments are making these two pillars very shaky and risky. Globally, here is what is happening now:

  1. Physical assets can be copied fairly easily and can become commodities. These assets’ contribution to firm valuation is decreasing.
  1. Intangible assets are emerging as the kind of assets that are driving increases in the value of the firm. These are things like a great brand, the unique knowledge in firms found in their R&D shops, excellent new product development prowess, and a culture for innovation. Also the enviable ability to see new winning opportunities globally before most can is a great intangible asset. Furthermore, intangible assets are very thinly traded, unlike physical assets because they are hard to value by an outside buyer. The way to grow their value is organically inside of the owning firm. Apple is a great example of this. Also intangible assets have staying power as they are almost impossible for another firm to copy.
  1. The world-wide-web (www) is allowing very small firms to be very successful. You don’t have to be big anymore. The reach and richness and speed of global information, all at very low cost, are allowing smaller firms all over the world to develop very specialized intangible assets that are valuable to other firms as inputs. Furthermore, these very specialized assets can be easily “orchestrated” as a linked global portfolio by a “community facilitator” through global information networks. Amazon was the first to perfect a community facilitator role for the benefit of all the community – their ZShops, other retailers, etc.

These developments are giving rise to a proposed new set of required skills in firms called Dynamic Capabilities. They help firms by having them become agile, low cost, product diversified premium price getters. In the old world of strategy, it was inconceivable to have all of these attributes at once. And notice from above the stage where this is playing out: the globe. Being focused only on domestic markets misses many of the specialized assets that are being developed globally – now and into the future.

Firms like Google, Apple, Keen Footwear and Cisco are already changing their approaches to strategy and leadership of their firms based on dynamic capabilities.

David Teece, the pioneer of dynamic capabilities, lists these skills as crucial:

  1. Learning processes and innovation processes to build intangible assets
  2. Being able to design many different business models at once, not just one dominant business model, to attack new opportunities in the global arena
  3. Early global opportunity recognition
  4. Making astute global investments and managing them
  5. Global contacts, global asset orchestration, global bargaining and global transaction competence
  6. Changed governance of the firm from top down to distributed and aligned incentives across a “boundaryless” global organization
  7. Moving fast to deter imitation by global competitors
  8. Protecting intellectual capital

Sounds academic or farfetched? Part 2 will chronicle how Keen Footwear, an early adopter of dynamic capabilities, became a global superstar virtually overnight and what strategy and wealth creation mean to it.

Next Up: Keen Footwear: Overnight Global Superstar – Part 2 of Dynamic Capabilities

Bill Bigler is Director of MBA Programs and associate professor of strategy at LSU Shreveport. He spent twenty five years in the strategy consulting industry before returning to academia full time at LSUS. He is the immediate past president of the board of directors of the Association for Strategic Planning, one of the leading professional associations in the field of strategy. He can be reached at bbigler@lsus.edu