The Dynamic Capabilities of Firms

David Teece and Gary Pisano integrate the various dimensions of innovative strategy identified above into what they call the dynamic capabilities approach to corporate strategy which underlines the importance of dynamic change and corporate learning.

This source of competitive advantage dynamic capabilities emphasizes two aspects. First, it refers to the shifting character of the environment; second it emphasizes the key role of strategic management in appropriately adapting, integrating and are configuring internal and external organizational skills, resources and functional competencies towards a changing environment.

To be strategic capability must be honed to a user need (so that there are customers). Unique so that the products/services can be priced without too much regard for the competition and difficult to replicate (so that profits will not be competed away).

We advance the argument that the strategic dimensions of the firm are its managerial and organizational processes, its present positions and the paths available to it. By managerial processes we refer to the way things are done in the firm, or what might be referred to as its routines or pattern of current practice and learning. By position we refer to its current endowment of technology and intellectual property, as well as its customer base and upstream relations with suppliers. By paths we refer to the strategic alternatives available to the firm and the attractiveness of the opportunities which lie ahead.

The role of position paths and processes in the strategic management of innovation is examined.

Innovation Strategy in Small Firms:

Much of the above analysis as been directed to the problems of managing innovation in large, complex organizations where deliberate management action is necessary to coordinate or integrate specialized resources and skills. Like their large counterparts small firms also need to concern themselves with their market position, their technological trajectories and competence building and their organizational processes. However, the challenges to management present themselves in somewhat different ways. In this section we summarize the key differences between the innovation in small and large firms. At the end of the three subsequent we shall explore their implications for the strategic management of small firms in defining their positions paths, and processes. The discussion of small firms will necessity short, given the lack of systematic research on the majority firms that are not particularly innovate, but which must necessarily cope with changing technology that impacts their business as IT does today.

As Table below shows debates about the role of small firms (<500 employees in technological innovation excite strong opinions based on weak empirical evidence. The evidence also shows that compared to large innovating firms, small innovating firms have following characteristics;

Misleading assertions about innovation in small firms:

Misleading assertions

1) Small firms make most of the major innovations;
2) Small firms make few innovations since they do so little R&D.
3) Small firms are much more innovative than large firms, since the account for higher share of innovations than of R&D.
4) New small firms create a lot of employment.

What the evidence shows

1) It depends on the product and the technology.
2) They do lots of informal part time and non measured R&D and produce a share of total innovations roughly proportional to their out put and employment.
3) Not if you include unmeasured part time R&D
4) They also lose a lot since they have high birth and death rates.

Similar objectives – to develop, combine technological and other competencies to provide goods and services that satisfy customers better than alternatives and are difficult to imitate.

Organizational strengths – ease of communication, speed of decision making, degree of employees’ commitment and receptiveness to novelty. This is why small firms often do not need the formal strategies that are used in large firms to ensure communication and co-ordination.

Technological weaknesses, specialized range of technological competencies, inability to develop and manage complex systems, inability to fund long term and risky programs.

Different sectors – small firms make a greater contribution to innovation in certain sectors, such as machinery instruments and software than in chemicals electronic and transport.

Source: Managing Innovation