Dynamic Capabilities Theory and Entrepreneurship
Dynamic Capabilities: How Startups Survive in Changing Markets
Do entrepreneurs exhibit dynamic capabilities? The short answer is: they must if they want to survive.
At the core of Dynamic Capabilities Theory is a simple but brutal truth: an organization's current resources, which may be perfect for today, will likely be irrelevant tomorrow. Recognizing that technologies, policies, and consumer tastes are in a state of constant flux, an organization needs the ability to adapt.
What are Dynamic Capabilities?
According to David Teece (2007):
"The competitive advantage of firms stems from dynamic capabilities rooted in high performance routines operating inside the firm, embedded in the firm’s processes, and conditioned by its history."
In simpler terms, while "ordinary capabilities" help you do things right (efficiency), "dynamic capabilities" help you do the right things (adaptation). This involves a continuous cycle of sensing new opportunities and transforming the organization to seize them.
Responding to Disruption
How do firms respond effectively to converging industries or disruptive innovation? Leaders must shift emphasis between their "core business" (what pays the bills now) and "foothold initiatives" (what will pay the bills in the future).
Exploration vs. Exploitation
Zahra et al. (2006) propose that entrepreneurial companies must "create, define, discover, and exploit opportunities." This creates a tension known as the Exploration/Exploitation Dilemma.
Exploration involves placing "cheap bets" early on to get a foothold in potentially valuable future markets. Most of these bets will fail, but a few will provide massive wins. When a win is identified, the firm generally has three options:
- License: Sell the innovation to another firm with better-suited competencies to handle it.
- Exploit: Develop the opportunity internally as a new business unit.
- Hold: Do nothing and wait for the market to mature.
A true dynamic capability is the ability to shift from exploiting a self-reinforcing resource bundle that is becoming obsolete to a new one that is less tested but represents the future.
Critique of the Resource-Based View (RBV)
Dynamic capability theory is often used to critique the Resource-Based View (RBV).
Traditional RBV suggests that competitive advantage comes from hoarding valuable, rare resources. However, in high-velocity markets, hoarding static resources is a death sentence. The prescription of RBV—to leverage competencies within a definable core business—fails when the definition of "core business" changes overnight.
Eisenhardt and Martin (2000) summarize this critique perfectly:
"At the level of RBV, we conclude that traditional RBV misidentifies the locus of long‐term competitive advantage in dynamic markets, overemphasizes the strategic logic of leverage, and reaches a boundary condition in high‐velocity markets."
Video: Teece on Dynamic Capabilities
References
Eisenhardt, K. M., & Martin, J. A. (2000). Dynamic capabilities: what are they?. Strategic Management Journal, 21(10‐11), 1105-1121.
Teece, D. J. (2007). Explicating dynamic capabilities: the nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319-1350.
Zahra, S. A., Sapienza, H. J., & Davidsson, P. (2006). Entrepreneurship and dynamic capabilities: A review, model and research agenda. Journal of Management Studies, 43(4), 917-955.
