What are dynamic capabilities? We will explain the management strategy theory required in the new era.

One of the management strategy theories that has been trending in recent years is “dynamic capabilities.”

In order to deepen your understanding of dynamic capabilities, which is attracting attention as a theory suitable for today’s rapidly changing business environment, this column will provide a detailed explanation of the meaning of the term, the background behind its attention, its constituent elements, and successful examples.

What is dynamic capability?

Dynamic capabilities are the ability of companies to self-transform in order to respond to changes in the environment, and are also referred to as “corporate transformational power.” Dynamic capabilities in a company refers to a method of ensuring a company’s competitive advantage by appropriately combining its management resources (people, goods, money, information, time) in response to changes in the external environment.

Dynamic capabilities are attracting market attention as a management strategy necessary to survive in an increasingly uncertain and rapidly changing business environment.

Difference between dynamic capabilities and ordinary capabilities

Ordinary capability is a term that is often confused with dynamic capability, so we will explain the difference.

Ordinary capabilities refer to the ability to efficiently utilize a company’s management resources (people, goods, money, information, time) and maximize profits. Ordinary capabilities, on the other hand, differ from dynamic capabilities in that they only focus on improving the efficiency of a company’s management resources, and do not incorporate the perspective of responding to changes in the external environment.

In today’s world, where uncertainty is increasing and market needs are changing at a rapid pace, it is difficult to maintain corporate competitiveness simply by responding to the internal environment. For this reason, many companies have adopted dynamic capabilities, which incorporate a perspective on changes in the external environment, as a management strategy required by the times.

The theory behind the birth of dynamic capabilities theory

Below we will introduce two theories behind the creation of dynamic capabilities.

competitive strategy theory

Competitive strategy theory refers to the theory by which companies analyze the market in which they are located and discover their optimal position. The optimal position for your company is one that allows you to establish a competitive advantage. When determining its position, companies conduct an analysis of the five forces that are competitive factors in the market (threat of new entrants, bargaining power of sellers, bargaining power of buyers, threat of substitute products, and competition among existing companies).

Competitive strategy theory is based on the idea that a company’s strategy is influenced by the market situation at the time. However, since there are companies within the same industry that have achieved success with different management strategies, the competitive strategy theory has been criticized as being weak. The resource-based theory, which I will introduce next, was born in response to the criticism of competitive strategy theory.

resource-based theory

Resource-based theory refers to the idea that differences in the competitiveness of companies in the same industry are caused by the heterogeneity of their management resources. In other words, this theory argues that the acquisition of sustainable competitive advantage is influenced by the management resources a company possesses. Resource-based theory uses a framework called VRIO to analyze the strengths and weaknesses of each company’s management resources.

VRIO is an abbreviation consisting of Value (economic value), Rarity (scarcity), Imitability (difficulty of imitation), and Organization (organization), and it is a framework that is useful when confirming market superiority, but it is based on the resource-based theory. That’s not to say that is 100% correct. This is because there are a certain number of companies that are unable to respond to market changes because they focus too much on their unique management resources.

As a result of criticism of the resource-based theory, dynamic capabilities were born, which combines the two theories of competitive strategy and resource-based theory in order to realize optimal management strategies that match the actual market conditions. is.

Why dynamic capabilities are attracting attention

The main reasons why dynamic capabilities are attracting attention are explained below.

An era of increasing uncertainty

In recent years, political and economic uncertainty has increased, and it is having a major impact on the global economy as a whole. In such an era, the ability to transform oneself in line with changes in the world has become essential, and many companies have begun working on improving dynamic capabilities.

Innovation

Technological innovations such as digital technology, IoT, and AI technology are enriching people’s lives and having a major impact on society. Improving dynamic capabilities is essential in order to effectively utilize technological innovation, which influences the sustainable growth of companies, in business and organizational management.

Globalization

With the advancement of globalization, many domestic companies now face intense international competition. In order for companies to survive in the global market, it is important to utilize new technology and recruit new human resources, as well as reuse and rebuild existing management resources. One of the reasons why it is attracting so much attention is that companies are required to improve their dynamic capabilities.

Changing customer needs

In today’s world, where customer needs are constantly changing and diversifying, it will be difficult for a company to survive in the market for a long time unless it is constantly sought after by customers. Improving dynamic capabilities is an important management factor for companies in order to respond flexibly to the ever-changing and diversifying customer needs.

Three elements that make up dynamic capabilities

The three elements that make up dynamic capabilities are explained below.

Sensing

The first element is sensing. Sensing refers to the ability to quickly sense changes in the business environment surrounding a company, such as customer needs, trends at other companies in the same industry, and social conditions. Sensing is an essential element in accurately understanding and analyzing the constantly changing business environment and formulating optimal management strategies.

Seizing

The second factor is sizing (capture). Sizing refers to the ability of a company to reconfigure and reuse its management resources according to the situation. Sizing is also an essential element in increasing a company’s competitiveness.

Transforming

The third element is transformation. Transforming refers to a company’s ability to restructure and transform its management resources in order to establish a competitive advantage. Transformation is also an important element, as it is possible to establish a sustainable competitive advantage by rapidly restructuring the organizational structure and changing internal rules in response to changes in the market.

Relationship between dynamic capabilities and DX

The DX required to improve dynamic capabilities is explained below.

What is DX in the first place?

DX is an abbreviation for Digital Transformation and refers to the use of digital technology to transform business models and establish a competitive advantage in the market. In addition, in Chapter 1 of the 2020 Manufacturing White Paper “Overview” (*1) published by the Ministry of Economy, Trade and Industry, the Ministry of Health, Labor and Welfare, and the Ministry of Education, Culture, Sports, Science, and Technology in May 2020, it states that DX (digitalization) is the key to improving dynamic capabilities. ) has been shown to be valid.

Relationship between DX and dynamic capabilities

The power of the three elements of dynamic capabilities (sensing, capturing, and transforming) mentioned above can be maximized through the use of DX. Sensing and capturing can be achieved smoothly through the use of digital technology that can collect and analyze data efficiently. Additionally, the use of digital technology is essential for rebuilding organizational structures and changing internal rules necessary for transformation. If you wish to improve your dynamic capabilities in the future, we recommend that you consider this positively, as further effects can be expected by promoting DX.

Dynamic capabilities success story

Here are three success stories of dynamic capabilities.

Filmmaker case study

Company A is famous for successfully launching new businesses by applying the advanced core technology it possessed in its film business to other industries such as cosmetics and pharmaceuticals. As a result of anticipating a future decline in film demand and developing new businesses to respond to changes in the external environment, Company A’s business performance remains strong. The case of Company A is one of the representative success stories that shows the high promotion effect of dynamic capabilities.

Case study of an air conditioner manufacturer

Company B, an air conditioner manufacturer, is a pioneer in the industry and has focused on expanding its overseas business. In recent years, Company B has attracted market attention by releasing new products that meet the needs of the European market, where environmental awareness is increasing. Another major feature of Company B’s business is that it has a policy of establishing production bases near markets. By improving dynamic capabilities, Company B has achieved stable growth in its business by creating a system that can supply products that meet the needs of each country and region with short lead times.

Example of an interior sales company

In order to respond to ever-changing market needs, Company C has built a new customer support system that allows customers to consult about products online. Through online calls, customers can now consult and make inquiries from a remote location, leading to an improved customer experience. The case of Company C, which detected and captured market needs early and succeeded in differentiating itself from other companies through organizational reform, can also be said to be a successful example of dynamic capabilities.

Challenges when promoting dynamic capabilities

There are some challenges that must be overcome in order to utilize dynamic capabilities in corporate management. Recognize the challenges in advance and prepare to drive dynamic capabilities.

The ability of managers is questioned

In today’s era of increasing uncertainty, it is necessary to accurately grasp the external and internal environment and consider management strategies to sustainably survive market competition. What comes into question here is the ability of managers. It is said that it is difficult to promote dynamic capabilities without the presence of managers who can carry out fundamental reforms with an eye to the future.

Difficult to grasp the trends of the times

In today’s rapidly changing business environment, it is extremely difficult to accurately grasp the trends and trends of the times. Many companies are unable to predict changes in the market and are struggling to formulate and develop business strategies. The challenge when promoting dynamic capabilities is being able to accurately understand and analyze the business environment, such as consumer trends and the needs of the times.

Management resources are limited

Dynamic capabilities aim to secure a company’s competitive advantage by appropriately combining existing management resources (people, goods, money, information, time), but there are cases where resources are insufficient to achieve management goals. Especially in Japan, where the shortage of human resources is becoming increasingly serious in various industries, it is not easy to secure the necessary human resources. One of the challenges that companies must overcome is the need to improve dynamic capabilities from limited management resources.

Summary of dynamic capabilities

Promoting dynamic capabilities is essential these days when the market is undergoing rapid changes and the future is difficult to predict.

In order to establish a sustainable competitive advantage in the future, let’s actively incorporate dynamic capabilities into management while utilizing digital technologies such as DX.