What Are Dynamic Capabilities?

Dynamic capabilities are a company’s potential to approach and solve often complex issues. The issues may revolve around new opportunities or threats, ability to observe market trends, and make subsequent decisions to shift the resource base for product production. Two common aspects make up dynamic capabilities. First, the capabilities work in tandem with shifts or changes in the surrounding environment. Second, strategic management is necessary to adapt and integrate internal or external skills to the current and changing business environment.

Three individual aspects are common threads under the theory of dynamic capabilities. Learning is the process individual workers go through to better understand problems both internal and external to the company. Routine work environments allow for learning through the repeated use of standard tasks. A company can also form a partnership or collaborate with another business to learn about a problem and develop a solution. Group behavior can be an indicative source for the behavior exhibited by individuals.

Acquiring new assets is another aspect of dynamic capabilities. As companies learn and develop new processes for their operations, new assets may be necessary to complete or continue changes. A competitive advantage is also possible through the acquisition or creation of new assets. Technology plays a large role in this aspect of dynamic capabilities. As companies continue to develop and implement new technology, they can build the customer base or improve operations through the reduction of time spent on completing tasks or activities.

Transforming current assets may also be a possibility under dynamic capabilities. The business environment often continues to change — sometimes rapidly — in which a company operates. Using currently owned assets the same way each time may not maximize the company’s capabilities. Changing current assets or developing new processes for these assets help a company reduce costs associated with acquiring new assets. A review of the current market can dictate how a company transforms assets into new opportunities for capturing market share.

Typically, dynamic capabilities are difficult for another company in the business environment. Through the specific direction and guidance of a company’s management team, a business can develop a competitive advantage not easily duplicated by other firms. The only opportunity competitors have to increase market share is by producing a substitute product. Though consumers will not find this alternative product fully capable like the original, it does offer enough value to take the place of the original item if necessary. Substitute goods typically fill a market niche left open by original companies.