Business leaders are continuously striving toward organizational ambidexterity, or the optimal balance between exploiting current sources of revenue and exploring ways to generate new ones. One way to achieve this is to tap into not only core capabilities, but also dynamic capabilities—the structures, processes, and routines that enable an organization to recognize new opportunities and build new core capabilities. In this blog series, we explore the importance of organizational ambidexterity. From there, we show you how you can build dynamic capabilities and cultivate them within your business.
There’s no single approach to building dynamic capabilities that will work for every organization; the optimal path forward accounts for your unique corporate strategy, existing operating model, culture, and the market in which you operate. Building on the dynamic capabilities framework, there are five key steps you can take to build dynamic capabilities:
- Develop a strategy that articulates the guiding policy for dynamic capabilities.
- Create new organizational structures that enable the development and governance of new capabilities.
- Dedicate workforce and investment to explore and mature new market opportunities.
- Build repeatable frameworks to test and grow new capabilities.
- Adapt core enablers to embed a new capability into your business.
1. Develop a strategy
Companies devise strategies to optimize the use of scarce resources. Every organization should have a robust, clearly articulated corporate strategy with metrics for how it plans to exploit its existing opportunities and explore new ones.
The dynamic capability strategy is a subset of—and should be informed by—your firm’s corporate strategy focusing on organizational ambidexterity (the balance between exploiting existing sources of revenue while exploring new sources). This dynamic capability strategy will enable your business to effectively search for and evaluate new opportunities that align with the overarching corporate strategy. The dynamic capability strategy helps define the cross-functional workforce, informs investment decisions, impacts operating model design, and determines how to measure a newly developed capability before integration.
As opportunities are developed, and new capabilities are integrated into the business, your strategy will naturally evolve, and insight from the dynamic capability strategy can serve as an input into your corporate strategy. As dynamic capabilities mature and learning improves, a company strengthens its ability to Search, Develop, and Integrate—the three phases of the dynamic capabilities framework. This provides a feedback loop for the corporate strategy. Dynamic capabilities can serve as a source of quantifiable data on future trends and lessons learned, affecting how your business’s strategy evolves, where it invests, and how it builds long-term resilience through the continued pursuit of ambidexterity.
Consider the varying responses of Kodak and Fujifilm to the plummeting film market in the early 2000s—approaches we detailed in an earlier blog. Kodak’s strategy was to protect its existing market share in cameras and film, whereas Fujifilm put in place enablers of dynamic capability.
2. Create new organizational structures
Static operating models typically don’t lend themselves to the introduction of new ideas and opportunities; evolution is required. Many mature organizations, however, have rigid operating models that can only pivot tangentially. New opportunities often fail to come to fruition in these organizations because they are unable to cultivate the opportunity properly within their existing operating structure.
Instead, consider implementing an operating model specific to dynamic capabilities—one developed in the unique context of your current operating model. It should account for variables such as the rigidity of your existing operating model, appetite for investment, market context, culture, and competition.
When developing an operating model, you should consider:
- Where to decentralize and create local autonomy—for example, providing regional autonomy for high-growth markets. Firms that have cultivated this ability are often called “high-ﬂex.”
- The business case to create a distinct “innovation” operating model that has its own governance, policies, and procedures, but remains tightly coupled with your existing operating model to allow integration of a new capability into the core.
- The value of having multiple “innovation” operating models that cater to distinct market opportunities. This can mean developing different "innovation" functions that can work in tandem with, or even under, the structure of the broader firm operating model.
3. Dedicate workforce and investment
Efforts to explore and exploit new opportunities as a secondary prerogative will inevitably fall short. A dedicated workforce is required—one tasked with searching for new opportunities and building them into new core capabilities. Without dedicated resources, individual KPIs become blurred, creating a lack of incentive that causes people to focus on tasks that are more clearly aligned to how their performance is measured, rather than on exploring new opportunities. A workforce dedicated to dynamic capabilities should be agile and cross-functional, with the right balance of skills needed for optimal performance. Further, you should support these employees with ample professional development opportunities.
Dynamic capabilities also require dedicated investment that’s managed rigorously. As dynamic capabilities mature, the resulting feedback loop will allow you to understand the value of investments and where they should be made.
Organizations that place increased effort and value on developing new knowledge and innovative practices are most likely to invest more heavily in exploration. In contrast, those that have a more short-term strategic orientation are likely to focus on efficiency, often at the cost of long-term competitive advantage.
4. Build repeatable frameworks
Dynamic capabilities must have clear processes to develop, test, and iterate on new ideas. Your processes should provide the necessary structure for new capabilities to mature to the point that they become viable business models.
Establish consistent methodologies that are continuously improved to meet the required maturity defined by your organization. Consider, for example, Procter & Gamble’s well-known Connect + Develop initiative, which paired internal research and development with outside stakeholders, including vendors, consultants, educational institutions, and more, to bring in outside innovation. The model was managed through a robust stage-gate process to test ideas and was refined over time with the development of new organizational structures to systemize innovation and drive further growth. In doing so, it tripled the company's innovation success rate.
Repeatable frameworks should include three broad elements:
- A framework that establishes the maturity lifecycle and associated KPIs from idea inception through to the business model.
- A consistent way to build, test, and iterate on new ideas.
- A process for teams to collaborate and leverage existing knowledge within the business.
5. Adapt core enablers
Govern the integration. Integrating newly developed opportunities into your business is the most critical component of organizational ambidexterity. Establish precise mechanisms to govern the integration of newly established capabilities (and associated business models). Simply put, this involves having a structured way for your business to bring forward new opportunities, evaluated by a body empowered to approve, negotiate, and establish the credibility of new opportunities.
Align leadership. Your leaders must be empowered, have credibility, be able to bring clarity to ambiguous environments, and above all, learn to fail fast and pivot. To integrate successfully, senior leaders should be aligned around your strategy, share the belief that constant evolution is key to maintaining competitive advantage and actively work to embed continuous adaptation into the organization’s culture.
Accelerate velocity through culture and change.To effectively build and nourish dynamic capabilities, your culture must be open to new ideas and help enable change. Culture change must initially come from the top and then driven from the bottom up using interventions, incentives, and transparent governance. In dynamically mature organizations, innovation and change are ingrained into the business to the extent that it enables direction and pace.
The integration of new capabilities can only be effective with mature change management. As new capabilities are developed, there will be a significant impact on your strategy, organizational structure, people, processes, technology, governance, and policy. Develop and embed change management capabilities to enable smoother integration of new capabilities and help realize an evolving, adaptable organization.
Change isn’t going to slow or stop anytime soon, and organizational resilience is undoubtedly imperative. Dynamic capabilities provide your organization a structured yet adaptive way to maintain sustained competitive advantage. Our dynamic capabilities framework can help you define the methodology and building blocks while catering to your unique culture and market context.
This blog was authored in partnership with Robert Langan, Ph.D.
Robert Langan, Ph.D. is a postdoctoral researcher at the University of Geneva. He researches strategic management, focusing on CEOs, board chairs, and other leaders. His work is published in the Harvard Business Review and academic outlets such as Long Range Planning. He received his Ph.D. from IE Business School and his MBA from EDHEC Business School.
We consulted several other academic references in the development of this blog series:
- Barreto, I. “Dynamic capabilities: A review of past research and an agenda for the future”, Journal of management, 2010.
- Eisenhardt, K. M., & Martin, J. A. “Dynamic capabilities: what are they?”, Strategic management journal, 2000.
- Harreld, J. B., O'Reilly III, C. A., & Tushman, M. L. “Dynamic capabilities at IBM: Driving strategy into action”, California management review, 2007.
- Kindström, D., Kowalkowski, C., & Sandberg, E. “Enabling service innovation: A dynamic capabilities approach”, Journal of business research, 2013.
- O’Reilly III, C. A., & Tushman, M. L. “Ambidexterity as a dynamic capability: Resolving the innovator's dilemma”, Research in organizational behavior, 2008.
- Teece, D. J. “Dynamic capabilities: Routines versus entrepreneurial action”, Journal of management studies, 2012.
- Teece, D. J., Pisano, G., & Shuen, A. “Dynamic capabilities and strategic management”, Strategic management journal, 1997.
- Wamba, S. F., Gunasekaran, A., Akter, S., Ren, S. J. F., Dubey, R., & Childe, S. J. “Big data analytics and firm performance: Effects of dynamic capabilities”, Journal of Business Research, 2017.
- Winter, S. G. “Understanding dynamic capabilities”, Strategic management journal, 2003.