Dynamic Capabilities Part 1: The Speed of Change
Given the onset of Spring – a time of constant change, new growth, and the beginning what will hopefully be a very fruitful and productive next six months – I wanted to take the opportunity to write about how we can best adapt to change and even capitalize on it. So, for the next few weeks I wanted to explore the idea of dynamic capabilities.
In organizational science, there is this notion of the resource-based view of organizations. Resources-based view states that organizations that have resources that are 1) valuable, 2) rare, 3) cannot be imitated, and 4) non-substitutable, will achieve a sustained competitive advantage because they can constantly create new differentiating strategies others cannot duplicate. In our constantly changing world, that means that organizations need strong dynamic capabilities (i.e. routines that develop new resources to match or even create market change). There are many fascinating aspects of dynamic capabilities, but the area of exploration for this week is market/organizational velocity: the speed of change.
Kathleen Eisenhardt and Jeffrey Martin published one of the seminal papers on dynamic capabilities (see references). In that paper, they summarized much of the existing research on market dynamism. They described two types of dynamic markets: moderately dynamic markets and high-velocity markets.
In that paper, they define moderately dynamic markets as ones where change happens frequently but along predictable and linear paths. The industries are fairly stable in terms of markets, major players, business models, etc. In these markets, dynamic capabilities (or the ability to respond to or drive market change) is mostly dependent on existing knowledge and complex processes of idea capture, analysis, strategy development, embedment, and evaluation.
Highly dynamic (or high-velocity) markets, are quite different. In high-velocity markets, change is much less predictable and non-linear. Markets boundaries are blurred, successful models are unclear, and major players are constantly shifting. In these situations, dynamic capabilities actually depend on how quickly and organizations can create new situation-specific knowledge and existing knowledge can actually be a disadvantage (if people rely too heavily on past experience to make sense of future states). In lieu of the complex processes used in moderately dynamic markets, adaptive capabilities in high-velocity markets are usually very simple routines that keep managers focused on the most important aspects but don’t bog them down with specific protocols, process, or behaviors.
In construction (as with many other sectors, with the exception of maybe tech and other startup-heavy industries), we often think of ourselves as being in moderately dynamic markets, however more and more we are encountering disruptive innovations that leave us scrambling to catch up… only to be caught off-guard by another innovative idea. The reality is that more and more, almost every market is become more highly dynamic and without developing the complementary dynamic capabilities, we will never catch up or (even better) be the ones driving change in the industry. What are some of the characteristics of dynamic capabilities in high-velocity markets that we should be developing?
Minimal but optimized guidance
High-velocity adaptive capabilities are based on very few rules and protocols. By providing clarity on the most important things - boundary conditions, priorities, and conditions for satisfaction – they enable lots of freedom to explore tools, techniques, and processes. Boundary conditions define the creative space so that people don’t waste their exploring ideas outside of those conditions (and therefore can be much more creative within those boundaries). Priorities help focus the analysis so that the right considerations are being addressed to arrive at a common decision. Conditions of satisfaction ensure that the process is focused on achieving the outcomes that define success. Although there is not real guidance on the actual process, these few point of guidance allow people to cut through the noise and quickly provide sensemaking in a situation where it would be easy to be overwhelmed by information overload. The challenge with these types of improvisational processes it that that require constant energy to stay on track –“they are in a continuously unstable state of either slipping into too much or too little structure, i.e. working at “the edge of chaos”.
Those of us in design and construction will recognize that this “minimal but optimized guidance” is the key to integrated project delivery. Strategies such as robust basis of design, choosing by advantages, and clear conditions of satisfaction allow teams to navigate complex situations, conduct complex/holistic analyses, to arrive at potent and valuable solutions. With these dynamic capabilities in high-velocity environments, it may also be necessary to engage a full time integrator or facilitator to navigate and enable the process and keep it balanced at “the edge of chaos”. These are roles that may not have been necessary in the past when markets where more stable, but they are critical to success in high-velocity environments.
Learn by Doing
In high-velocity environments, dynamic capabilities depend on how quickly and organizations can create new situation-specific knowledge so it is important to learn quickly about the current condition through experiential action. This “learning by doing” instead of “learning before doing” (which is what we typically do in moderately dynamic environments) is critical. Tools and techniques such as prototyping and early testing allow for rapid learning through lots of quick iteration, small losses, immediate feedback, and continuous improvement. Studies have found that solutions developed through long formal processes used in moderately dynamic environments are often well developed but not well adapted to the needs of the market. Quick learning-by-doing may result in less detailed solutions, but ones that are much better adapted to the current state and therefore much more effective.
Another part of learning by doing is the makeup of the team. Because of the complexity of the environment and the ever-changing conditions, it is necessary to have the holistic perspective of cross-functional teams. In order to integrate such a diverse team quickly, there needs to be intensive communication and real-time information to provide objective support. Other ways that these cross-functional teams balance their differing perspectives and validity of opinions is to pursue parallel ideas and partially develop solutions simultaneously. This allows the team to objectively evaluate results rather than wasting time debating hypothetical opinions and also provides them with several options that may be integrated into a more holistic solutions, but also minimize the risk of not ending up with at least one viable solution. Building on last week’s post on high-reliability organizations, pursuing parallel options may seem less efficient but it actually improves reliability (and therefore improves long-term efficiency).
In design and construction, there are clear implications for strategies such as co-located teams, cross-functional cluster teams, set-based design, and virtual or physical prototyping. I won’t go into these at length, but the increased prevalence of these terms is a direct result of our industry’s gradual migration from moderately dynamic to high-velocity.
Understanding the speed of change is critical to survival. Organizations that can’t keep up with the pace of change will find themselves obsolete. Organizations that are changing faster that the industry will either waste valuable resources or, ideally, become the leaders that determine the future of the industry. What makes all the difference is how effectively an organization develops their dynamic capabilities. Becoming skilled at the processes, tools, and techniques is one thing, but what ultimately matters is how well those processes mold the thinking, sensemaking, and adaptability of the organization’s most valuable resources – their people.
References:
Eisenhardt, Kathleen M.; Martin, Jeffrey A. (October 2000). "Dynamic capabilities:What are they?" Strategic Management Journal, 21: 1105–1122.
Teece, David J. (2009), Dynamic Capabilities and Strategic Management, Oxford: Oxford University Press.
