Dynamic capabilities theory and entrepreneurship

Do entrepreneurs exhibit dynamic capabilities? 

At the core of the theory of dynamic capabilities is the assumption that an organization's current resources and capabilities, which may be optimally suited to the current environmental conditions, will not likely be relevant, compatible or effective with future conditions. Recognizing that changes in technology, policies, and tastes make for a continuously changing landscape of needs and wants, an organization needs to be able to respond to the changes. Organizations need to be able to transform their capabilities over time as needed to seize new opportunities. They also need to be continually sensing new opportunities.

According to Teece:
"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"

Responding to change

How do they respond effectively to changes on the order or converging industries and internet-based or AI-based disruption? Dynamic capabilities are organizational abilities that can accommodate change in the environment, including those that emerging from inside the organization. Organizational leaders shift emphasis between what they view as their core business, and initiatives that act as footholds into future business opportunities requiring different competencies.

Types of organizational activities

The underlying idea is that an organization's activities can be broken up into different types. For instance, Zahra et al. (2006) propose that entrepreneurial companies "create, define, discover, and exploit opportunities" early. According to Teece, dynamic capabilities are defined as a "firm’s ability to integrate, build, and reconfigure internal and external competences to address changing environments".

Dichotomous typologies suggest that exploration and exploitation are concepts that maximally differentiate between types of activities with very different risk/reward profiles. Exploration involves placing cheap bets early on to get foothold investments in potentially valuable future initiatives. Most of the bets fail to pay off, but a few of them provide big wins providing the firm with two options. First, the firm can seek to license out the innovation to another firm with more suited competences. Second, the firm can chose to exploit the opportunity internally as a new business. Third, an organization can hold and do noting. The ability of an organization to shift from exploiting a self-reinforcing resource bundle that is becoming obsolete with a new one that is less tested but which seems to be the way of the future is a dynamic capability.

Dynamic capability theory has been used to critique other theories such as the resource based view. Resource perspectives, including concepts like core competence, are flawed when applied firms in dynamic environments. The prescription of those approaches are to invest in and leverage competences within a definable core business area, and to essentially contract out whatever is non-core or peripheral.  

According to Eisenhardt:
"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."

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