Dynamic Capabilities Part 2: Sensing & Capitalizing on Disequilibrium
In high-velocity environments, sustainable competitive advantage has more to do with organizational innovation than new technologies. “Organizational innovation” refers to innovation in how an organization functions (culture, structure, processes) and is the essence of dynamic capabilities.
U.C. Berkeley’s David Teece has been one of the pioneers in the field of adaptive capabilities for the past 30 years. His book, Dynamic Capabilities & Strategic Management, shares a wealth of great information across a breadth and depth of topics related to how organizations can create sustainable competitive advantage in environments characterized by constant change. Two areas that are of specific importance are: 1) how organizations sense opportunities and 2) how they seize/capitalize on the most strategic ones.
Sensing/Creating Disequilibrium
In highly dynamic environments, opportunities exist in the constant shifting imbalance between what clients want and the services or products that the market is providing. In this discrepancy between what clients want (consciously or subconsciously) and the available products/services, there is room for someone to address that unmet need and gain greater competitive advantage. In addition to quickly sensing market disequilibrium, organizations can also be the ones to cause disequilibrium by providing a new product/service that clients didn’t know they wanted or, even better, a new way of thinking that changes the whole conversation. This is why dynamic capabilities focused on identifying and creating disequilibrium create such a significant advantage.
One means of sensing/creating disequilibrium is through research capabilities. Research can provide new perspectives on existing information (e.g. analytics). It can also identify new information (e.g. statistics, indices, and bellwethers within one’s own industry and other industries). Research also enables the development of new knowledge (e.g. deep understanding of new ideas coupled with meaningful practical application). Research can be “local” (i.e. focused on what is happening within one’s industry, what competitors are doing, and what clients are doing) or “distant” (i.e. focused on a broad range of industries that may or may not seem immediately related to one’s own industry).
Another key point regarding research – one that is often overlooked in the construction industry – is that research also needs to focus on two critical areas simultaneously: 1) deeply understanding the needs of the customer, and 2) scanning/searching/exploring across technologies and markets. Organizations that have a deep understanding of both will be in the best position to sense and capitalize on disequilibrium between them.
In the construction industry, we do a great job of researching new technologies and chasing the next “shiny object”, but when it comes to developing a deep understanding of client/customer needs we’re barely more sophisticated that client dinners and focusing on developing a “relationship” with our existing and potential clients. That being said, here are a few examples of much more robust client research efforts.
For a decade or so, Balfour Beatty has used a client feedback tool on many of our projects – from that data we can gain insight as to what are the specific notions of value that clients have, how those notions of value vary across market sectors, how specific clients have increased in sophistication over the years, and how specific strategies or tools we are using address specific notions of value. Another technique that we’ve used on occasion is a exploratory tool based on ZMET (Zaltman Metaphor Elicitation Technique) that was developed by Harvard Business School professor emeritus Gerald Zaltman. ZMET seeks to get beyond the “words of the customer” (i.e. what they say they want) and even beyond the “behavior of the customer” (i.e. what you can infer from watching them in action) to the “mind of the customer” and their true notions of value that they are often unaware of or unable to actually articulate. We have had some fascinating insights from using this process. Despite these examples, there is a tremendous need in our industry for research capabilities centered on understanding clients – both to inform the solutions we develop as well as increase the overall level of sophistication in our industry.
Fully Capitalizing on Opportunities
Identifying potential opportunities is only the first step. In highly dynamic environments, organizations need to move quickly from identifying a promising idea to developing the final product/service offering in order to truly capitalize on their insights. Teece outlines a wide spectrum of capabilities that enable this; they span from development, decision-making, resources allocation, business model and product architecture development, to organizational structure. Below are a few that I found most interesting and applicable to my industry.
Parallel Option Development
In fast-paced markets, teams don’t have the luxury of going back to the drawing board once they’ve partially developed an idea. As a result, they often end up either: using additional resources to fully develop a suboptimal idea; or they stop, take a loss on the work already in place, and miss out on that specific opportunity. The best way to navigate such a situation is by developing parallel options, staying flexible until a dominant idea emerges, and then investing heavily in it. This philosophy of “set-based design” hinges on the tools of quick prototyping, decision-making at the “last responsible moment”, and also valuing the learning and insight that come from the options that don’t move forward.
Biases in Decision Making
Another critical dynamic capability is developing managers that have awareness of and are able to navigate some inherent psychological biases in decision making to get promising ideas supported. These biases include:
Certainty - Psychologically, people are more willing to make decisions based on “certain” outcomes but discount or dismiss “probable” outcomes. This significantly limits the quality and quantity of information that goes into a decision and often results in a suboptimal outcome. We constantly run into this challenge as project teams want to see proofs before trying something but the only way we can get real proofs is by trying it on projects. To keep ideas from getting stuck in the concept phase, organizations need to find ways to value and communicate “probable” outcomes effectively.
Risk aversion – In construction in particular there is a strong preference toward loss/risk aversion over optimism. In some cases (e.g. when it comes to safety of the public and workforce) this is totally understandable and the expectation. However, this bias also influences project strategy, innovation adoption, and other decisions where there is minimal downside and significant upside potential. When overvaluing risk aversion, decisions historically lead toward low or negative returns on innovation – especially in highly dynamic markets where timing is everything.
Non-holistic decision-making – We have a tendency to looking at decisions in isolation instead of collectively. Ideally, one would arrive at the same final situation regardless of whether decisions were made one at a time or more holistically. However, in reality, isolated decision-making ignores the opportunity for risk pooling (thus tends to be overly conservative) and is often compromised by inconsistent choices. I’ve been amazed at how the simple exercise of discussing several sets of options simultaneously totally changes the outcomes (e.g. individuals are willing to make sacrifices on one decision because it enables them to get their preference on another decision).
Cospecialization
A capability that I found fascinating was that of cospecialization. Cospecialization is the process of developing innovations that feed several opportunities. Alternatively, it could involve developing a range of innovations that complement each other and subsequently create several singular valuable products/services but also combine to create much more robust and disruptive innovations. Some examples may be how high-energy batteries or touch screen technology enabled the smartphone market but can also be leveraged for a myriad of other markets. In construction, our ability to provide advanced visualization has changed the way we design, but also enabled much more thorough options analysis and communication to external stakeholders. Cospecialization forces organizations to look at the value as a function of what and idea enables in other assets (not just the value of the idea by itself).
The essence of dynamic capabilities that an organization’s sustainable strategic advantage is not in its specific products or services, but in its people and their ability to constantly listen, learn, and adapt to the changing environment – yet stay true to the core purpose behind their work. The strongest most agile performing can’t do anything without a solid foundation to push from.
References: Teece, D.J. (2009). Dynamic Capabilities & Strategic Management: Organizing for Innovation and Growth. Oxford: Oxford University Press
