Dynamic Capabilities: making business more agile in an uncertain world

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Blog for the Clinton Leadership Institute. In the Blog I aim to summarise the relevance of Dynamic Capabilities for business. The text of the blog was as follows:

 

Dynamic Capabilities: Making Businesses More Agile in an Uncertain World

 

Within executive education esoteric sounding terms are applied to useful ideas. The term ‘efficiency wages’ for example demonstrates that wages are not simply prices that clear markets. Unlike the price of a conventional product (e.g. ice cream), which is limited to creating a balance between the wishes of producers or consumers, wage rates  perform a number of other roles, they help to recruit, retain and motivate staff. In consequence, labour markets may not clear for very sensible commercial reasons (market clearing wage levels may do little to raise productivity). Such obstacles to labour market clearing - or what economists term wage ‘stickiness’ - in turn may help explain why unemployment and high productivity levels can coexist even under normal economic conditions.

The term ‘dynamic capabilities’ is another fancy sounding term for a concept with important implications for understanding business strategy. Dynamic capabilities, with its emphasis on uncertainty, provides an analytical tool for thinking about creating better strategy and more agile businesses. In the best of times, such capabilities are vital; the idea really comes into its own when (as now) uncertainty has become the norm.

 Dynamic capabilities has two elements to it.  The first element (the capability one) tells us that what sets firms apart are the assets they own. These assets, which are called ‘resources’ and the abilities that firms have, which are termed ‘capabilities’, help firms develop and sustain competitive advantages. Capabilities covers a wide range of possibilities. They could for instance represent a reputation for excellent consumer service, the ability to create a fast fashion or a set of informational advantages that an online retailer possesses. Each of these capabilities within retailing may give a firm a competitive advantage. In a conventional setting these resources and capabilities are judged at a point in time. Accordingly, a firm possessing a competitive advantage at such a point in time can be said to possess a favourable ‘bundle’ of resources and capabilities.

  The dynamic element within ‘dynamic capabilities’ is the second aspect and this tells us that this model is about business performance through time rather than at any one point of time. In short, it is about getting the future into your business. Agility, as it relates to firm’s ability to manage uncertainties, viewed from 2020 representsa particularly relevant form of dynamic capability. The good news is that the ability to redeploy the ‘bundle’ provides scope for significant competitive advantages, the bad news is that agility is costly to develop and maintain.

In terms of public policy there are plenty of possible repercussions relevant to business strategy in a post-covid - or more likely, covid-adjusted - business environment. There are already many discussions regarding how covid will shape the conduct of future macroeconomic policy. It’s clear that in the area of fiscal policy that the public borrowing increase needed to respond to the pandemic will need to be repaid slowly. However, it is equally obvious that some areas of public expenditure will also need to grow.  Meanwhile, the Bank of England has already been involved in secondary market activities, so the role of UK monetary policy has already been to facilitate fiscal expansion.

Competition represents another vital, but less commented on area of economic policy. However, the repercussions of the pandemic are still immense when we consider dynamic capabilities. In the area of firm strategy the future formulation and implementation of competition policy will be shaped by the challenge of covid. Capabilities of course can be purchased and thus mergers and acquisitions may be a legitimate strategic response to the uncertain business environment. Economic commentators have already said that M&A is the easiest way to promote agility.

Of course, regulators may see part of this M&A activity as potentially harmful to the public interest. In the UK such vigilance will have important economic consequences because the Competition and Markets Authority (CMA), the relevant competition authority, is very evidence-led. Prior to the pandemic it had moreover already become increasingly activist. The combination of a shrewd and well-informed regulator faced with an increase in its workload needs to be factored into any business viewing M&A as the route to greater agility.  This aspect is just one of many ways in which dynamic capabilities helps us understand business.

 

 

Period08 Jun 2020

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