Monday, May 18, 2015

Dynamic Capability vs. Corporate Resource

Resource and capability delineation helps clarify strategy.

Dynamic capabilities are: "an organization's ability to achieve new and innovative forms of competitive advantage." And organizational resource is aggregate attributes of those who comprise the company, and it refers to “firm-specific assets that are difficult if not impossible to imitate." There are five types of resources: (1) funds, (2) physical assets (like plant, equipment, and land), (3) people, (4) intellectual property and information, and (5) reputation, including brand names, trust by partners, and the like. In successful firms, capabilities are converted into competitive advantages. But is a Dynamic Capability a firm-specific asset that is difficult if not impossible to imitate? Or can dynamic capability be considered as a resource?

Resources (or positions) is considered one of the three building blocks of dynamic capabilities. Resources include technological, financial, reputational, market structure and institutional assets. The two other building blocks are processes (coordination/integration, guided learning, and reconfiguration) and paths (strategy). “Resources alone are generally of fleeting value. The way assets need to be deployed, usually in clusters or combinations, is likely to be dynamic and involve astute and entrepreneurial "orchestration" activity by management."(Eisenhardt & Mart’s “Dynamic Capabilities”). They further disentangle dynamic capabilities in three clusters of processes and managerial orchestrations activities: (1) sensing (2) seizing and (3) continued renewal (transformation). A poor strategy may compromise the effectiveness of dynamic capabilities. The firm’s processes use resources—specifically the processes to integrate, reconfigure, gain and release resources—to match and even create market change. Dynamic capabilities thus are the organizational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve, etc.

Resource and capability delineation helps to clarify strategy: It's worth noting that being able to delineate, for instance, between what is a “resource” and what is a “capability” is essential to be able to think about strategy in a nuanced and precise way. Without such nuance and precision, the strategy concept is a muddle, one that we see most of the time in organizations and hear about in conversations with staffs. Capabilities are utilized to convert resources into products and services valued in the marketplace. Here are all kinds of 'capitals'-resources in detail:
#1. Financial capital. Definition: Funds from investors and lenders. Examples: borrowing capacity, liquidity, ability to raise equity capital, and sustainable growth rate.
#2. Physical capital. Definition: The physical endowments a firm requires. Examples: productive capacity, investment service, dedication to maintenance, flexibility of fixed assets, technological commitment, access to suppliers.
#3. Human capital. Definition: Resources of the individuals who comprise the firm, such as knowledge, education, training, insights, etc. For examples: education, training, knowledge, employee commitment, leadership ability, trust, experience.
#4. Organizational capital. Definition: Aggregate attributes of those who comprise the company. Examples: loyalty, teamwork, reputation, product innovation, process innovation, speed.

The dilemma is whether "doing more with less" should be counted as an increase in resource: It depends on whether you choose to regard resource as "something that is" or as "something that does." For example, a production machine - is a resource, but it is only a resource when you can use it. The rest of the time is just so much sunk capital eating space. So, if you can increase the use of such a machine through Dynamic Capability, then you would count that as an increase in the resource, but that is a definitional choice, you could equally well argue that the resource is the same and the only capability has increased. So, if you have an ability to quickly reconfigure the organization to achieve the advantage, that it goes into the same category of organizational capital to catalyze innovations.

It is important to looking at dynamic capability from a quite different and systemic perspective, the ability to reconfigure your organization in this way has the effect of increasing its "variety" - its ability to match variety in the environment where variety is a measure of complexity. And working out how to increase productivity through the use of Dynamic Capability, or any other design approach is far from simple and hedged with trade offs - how to work out that trade-offs is rarely simplistic. It takes practice, practice, and practice.


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