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Rapid technological advancement, global innovators entering the market, and changing market demand are all factors that affect many industries. Since the 1990s, businesses have had to constantly adapt, reconfigure, and recreate their resources and capabilities to keep up with the escalating competition (Pisano, 2017; Wang & Ahmed, 2007).
Today's businesses are unlikely to survive if they cannot foresee or adapt to external disruption.
Disruptive technologies and business models can weaken the underlying drivers of company’s advantage, causing conventional advantages irrelevant with current market and customer demands even though the company has distinctive advantages. Thus, in a rapidly changing business environment, organizations need strategies, structures, and processes that support agility and responsiveness.
The capabilities of a company determine the design and operation of business models. Therefore, the existence of dynamic capabilities within the organizations is indispensable.
Defining Dynamic Capabilities
The concept of dynamic capabilities was first introduced by Teece, Pisano, & Shuen (1997). They defined dynamic capabilities as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments. Dynamic capabilities thus reflect an organization’s ability to achieve new and innovative forms of competitive advantage given path dependencies and market positions”.
Additionally, other professionals provide their own explanations of what dynamic capabilities are. Dynamic capabilities are the end result of resources changing after being acquired, combined, and recombined to produce new strategies (Grant, 1996; Pisano, 1994). Well-known organizational and strategic procedures like alliance-building and product development are examples of dynamic capabilities. These procedures' strategic value lies in their capacity to direct resources toward value-adding actions (Eisenhardt & Martin, 2000).
Dynamic capabilities were defined by Helfat, Finkelstein, Mitchell, Peteraf, Singh, Teece, & Winter (2007) as an organization's ability to consciously add to, enlarge, or change its resource base. Dynamic capabilities, particularly in the context of the environment, can explain how businesses react to change (Newey & Zahra, 2009).
Why Dynamic Capabilities?
Acquiring dynamic capabilities can give benefits for the organization, both internally and externally.
1. Externally; either by starting a new business or growing an existing one. This includes joint ventures, alliances, and M&As (mergers and acquisitions) (Helfat et al, 2007).
2. Internally; by developing fresh, original products and services that will meet consumers' demands as those needs evolve. This applies to expanding into new markets as well as existing ones so that the business can provide its clients with cutting-edge services (Helfat et al., 2007; Teece, 2014).
Dynamic Capabilities in Digital Transformation: Overcoming Changing Business Environment and Digital Disruption
The Correlation between Digital Transformation and Dynamic Capabilities
“When digital transformation is done right, it’s like a caterpillar turning into a butterfly, but when done wrong, all you have is a really fast caterpillar.” - George Westerman, Principal Research Scientist of the MIT Sloan Initiative on Digital Economy
Today, almost every organization has made digital transformation a strategic imperative and a top priority. The opportunities are limitless, just like the threats. The speed of change has been sped up by digital disruption, which has led to an increase in environmental volatility, complexity, and uncertainty. When a company's current skills and resources are in danger of becoming obsolete due to digital disruption, they must turn their attention to their ability to change.
This is where dynamic capabilities play a crucial role in digital transformation.
Dynamic capabilities focus on the steps organizations take to modify their resources in order to continuously adapt to changing environments and create competitive advantage. They are effective for analyzing the digital transformation of established companies in traditional industries because of how disruptive digitalization is. According to reports, in order for businesses to stay relevant in the emerging digital economy, they must develop strong dynamic capabilities to quickly create, implement, and transform business models.
3 Clusters of Dynamic Capabilities
Businesses need dynamic capabilities that enable changes to their organizational structure and business models in order to successfully engage in digital transformation. Teece (2007) suggests three classes, or clusters, of dynamic capabilities, associated with the functions of sensing, seizing and reconfiguring.
1. Sensing Capabilities for Digital Transformation
Involve scanning, creating, learning, and interpreting. To understand unexpected developments in a changing business environment, digital sensing capabilities must also be developed.
2. Seizing Capabilities for Digital Transformation
Relate to sensing capabilities as opportunities need to be addressed. It also enables one to assess the value of potential business opportunities and choose which adjustments are required.
3. Reconfiguring Capabilities for Digital Transformation
A continuous renewal and transformation of organizational routines. It is crucial for developing new resources, filling current gaps, and transforming existing resources with new strategies.
Organizations with strong dynamic capabilities will be able to renew resources, assets, and capabilities, reconfiguring them to innovate and respond to changing business environment.
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