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  • Writer's pictureStephen Plimmer

Advocating for dynamic capability strategies in turbulent times

Updated: Oct 20, 2023

With business survival rates declining and SMBs often feeling like small boats on the turbulent waves of market forces, we reconsider the relevance of the role of dynamic capabilities in shaping a company's survival and growth prospects.



Conditions for UK SMEs

Establishing a business has never been easy. Only about half survive for three years. (ONS).


Fig 1: Survival rates of business as a function of year of birth and years since birth (ONS)


Business survival rates - Small and medium business strategies

With the latest year-one survival rates also declining, this year’s Simply Business report, on the state of UK small and medium-sized businesses (SMEs), revealed how unusually tough conditions now are: 48% are experiencing effects from reduced customer spending. 65% are challenged by late payments. In 2022, 73% of SMEs had already expressed that economic uncertainty is a significant barrier to operating successfully (Enterprise Research Centre).


The Bank of England’s August economic outlook quelled hopes of meaningful growth until at least 2026.


Tough conditions, amplified by uncertainties, are creating major challenges.


What strategies can SMEs deploy?


Plentiful advice for SMBs

If there was a silver bullet, many would have pulled the trigger. Conditions might nonetheless motivate decision-makers to remember lessons from studies into why some businesses succeed or decline, particularly during downturns.


As per Fig. 2, industry factors (e.g., growth rates, and competitive intensity) play an erstwhile role.


Fig 2: Varying business survival rates after 1 and 5 years by industry (ONS)


However, once a business has committed to an industry, many influential choices remain, like investment in innovation and collaborations.


LinkedIn offers countless articles advocating for culture, leadership, management, innovation, or technology as critical success-factors.

Business survival rates - Small and medium business strategies

It is hard to argue that they wouldn’t all help many organisations.


Remembering dynamic capabilities

However, a neglected, fundamental perspective is offered by “Dynamic capabilities”. These were defined in a seminal 1997 paper by David Teece, Gary Pisano and Amy Shuen as:


“The firm’s ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments.”


Traditional capabilities (or “competencies”) include a manufacturer’s processes, or the capability to reliably develop innovative products (like Dyson or Apple). Dynamic capabilities are, by contrast, those that create, change, or extend them.


While traditional capabilities are undoubtedly vital, excelling in one set of market conditions clearly does not guarantee success when markets change; a time when dynamic capabilities become paramount.


They have historically been grouped into three types:


Sensing capabilities are those to perceive changes in the business environment: consumer behaviour, technology, competition, supplier behaviour, etc.


Seizing capabilities enable businesses to address opportunities and threats, like agile product management, R&D, M&A and strategic partnerships.


Transforming capabilities allow a business to modify itself via (e.g.) restructuring, digital transformation, or by evolving culture.


Often, commentators appear to advocate for “speed”, “agility”, “digital first business models”, and “growth mindsets”, without recognising dynamic capabilities as broader foundational enablers.


It’s perhaps because they seem abstract. The academic field itself has recognised “ambiguous and contradictory interpretations” which we address later in this article.


For the moment, it's enough to note that today’s economy, geopolitical disruptions, AI, green regulation, hybrid working etc. are challenges that necessitate adaptation. Consequently, the capability of a business to adapt is a major advantage.


Evidence

A few words about “evidence”:




Meanwhile, the notorious challenges of digital transformation are best tackled by organisations with ‘agile governance’ and ‘modern, modular technology’ (Boston Consulting Group). Leading performers in digital, have greater dynamic capabilities including ‘dynamic market forecasting’, ‘new technology adoption’, and ‘knowledge management’. (Deloitte)


Indicators suggest businesses are increasingly investing in technologies that can contribute to dynamic capabilities. For instance, product lifecycle management software is forecast to grow by 7% per year (Mordor) and cloud services by 20% per year over the coming years (Fortune Business Insight).


Interest in academic business literature is increasing too – papers and citations about “dynamic capabilities” doubled between 2014 and 2022 according to our own research.


Admittedly, some researchers also expressed dissatisfaction with the evidence for direct causation in some situations so tended to adapt narratives to explain financial performance by accommodating mediating factors, like technology integration.


Dynamic capability strategies in practice

Anticipating that business decision-makers, like some academics, might find the concept of dynamic capabilities ambiguous, we might anticipate some challenges:


'We already do this!”

"OK - so practically, what (else) should we do?'

'How will we ever know if our dynamic capabilities are good enough?'"


Here is one approach: Rather than talking in the abstract, its helpful to consider foreseeable and plausible scenarios with a high impact potential - such as a competitor launching an improved product, a new entrant selling a disruptive innovation, a key supplier going bankrupt, or consumer demand falling 20%. (Given organisational survival rates, it is often plausible to consider that a key supplier or customer no longer exists).


Consider the three aforementioned types of dynamic capability as the basis of the following exercise: Have decision-makers consider:


1) How good are we at sensing such eventualities ahead of time and well enough to know how to respond?

2) What opportunities exist to respond (e.g., R&D, or partnerships), and how ready are we to seize these?

3) How ready are we to transform (teams, systems, processes) to then realise the benefits?


The most important processes for any business to evaluate (and, possibly, create) will vary according to its business model. However, we expect they will frequently include those to:


- Translate new market and customer insight into marketing campaigns and products.

- Develop a new partnership to create and sell a product in a new market.

- Reconfigure staff into new team structures, to deliver an innovation.

- Identify, deploy, and exploit new software that saves time and money.

- Find and integrate new suppliers who improve the bottom line.

- Embed a new cultural value.


The exercise will likely give strong indicators of whether capabilities are “good enough”.


Purist academics might be indignant at this simplification. However, dynamic capability ideas need to relate to recognisable activities in organisations to be more useful. The activity above is one way to capture their essence and raise their importance.


There is no silver bullet to today's multi-faceted issues, but a renewed strategic focus on dynamic capabilities can increase resilience, adaptability, and opportunity. This 25-year-old idea continues to explain many business outcomes and perhaps deserves a relaunch of its own.


How we help

At X2Y we help SMBs to navigate changing markets by developing their understanding of options, using a diverse range of practical and affordable research and analytic approaches, coupled with structured processes to embed the work into plans and routines. We believe long term market forecasts are fraught with challenges, but having the right insight, interpreted with appropriate methods, can provide a strong grounding to prepare for different opportunities and threats that will emerge in the near, mid and longer-term futures.

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