MODELLING OF DYNAMIC CAPABILITIES: A SYSTEM DYNAMICS APPROACH.

Author:Rengkung, Leonardus Ricky
Position:Report
 
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INTRODUCTION

The organizational environment has been changed over time and described as dynamic, hyperturbulent, unpredictable, and hypercompetitive. There are many changes in organizational environment such as changes in technology, social, politic, legal or economic. These changes are originated in both the external environment and the internal of the organizations (Poulis & Jackson, 2006).

For decades, the predominant logic of organizational effectiveness has been that an organization's fit with its environment, its execution, and its predictability are the keys to its success (Lawer & Worley, 2006). Adapting to a major environmental change is an important challenge for organizations, and how organizations adapt to changes in their environments has been a prominent theme in organization and strategy research (Benner, 2009).

From several paradigms associated with the existence of the organization in achieving and retaining competitive advantages, dynamic capabilities paradigm has been viewed as viable means for managing in turbulent environments (Pavlou & Sawy, 2011). This addresses the performance of firms in adapting within changing environments (Teece et al.,1997) and focusing on processes which frequently perform adjustments of the firm's configuration to match the external conditions (Jekel, 2009).

Teece et al. (1997) define dynamic capabilities as a firm's ability to integrate, build, and reconfigure competencies to address environmental changes and Eisenhardt & Martin (2000) define as the organizational and strategic routines by which firms achieve new resources configurations as markets emerge, collide, split, evolve and die. They are not abilities but processes to address or initiate market change. Whereas, Zollo & Winter (2002) define dynamic capabilities not only as abilities, capacities and activities but also as processes and routines and Collis (1994) defines as the capability to develop the capability that innovates faster.

All definitions contain two prominent groups of words that can be considered as organizational capabilities to be more dynamic. The first group related to enabling processes consists of competency and capability (Teece & Pisano, 1994), ability and competency (Teece et al.,1997), ability (Zahra et al., 2006), capacity (Helfat, 2007; Teece, 2007; Winter,2002; Zahra et al.,2006) and the second group related to basic routines consists of process and routine (Eisenhardt & Martin, 2000), pattern and routine (Zollo & Winter, 2002; Nelson & Winter, 1982), and features or practices (Molin,2001).

Four leverage elements commonly described in dynamic capabilities as enabling processes and basic routines are sensing, learning, integrating and coordinating and some underlying elements (Pavlou & Sawy, 2011) that can play a pivotal role in developing dynamic capabilities when the opportunity or need arise (Zahra et al., 2006). Sensing capability refers to a firm's ability to learn about its market environment (Day, 1994). Learning capability is the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends (Cohen & Levinthal, 1990). Integrating capability is about knowledge integration concerning as the synthesis of existing knowledge and acquired knowledge (Kogut & Zander, 1992), and coordinating capability constructed by coordination is how to manage dependencies between activities (Malone & Crowston, 1994).

Lawer & Worley (2006) argue that most organization design and management models are born in an age when environments are stable or at least predictable. When the environment is changing slowly or predictably, these are fine models. But the pace and uncertainty of change, brought on by globalization, technological innovation, and political change, strongly argue for a new model.

Simulation models expressed in system dynamics models might be helpful in such complex initiatives and are widely used in business strategy and policy assessment (Sterman, 1992) which in accordance with the role of dynamic capabilities. Dynamic capabilities have been viewed as strategic approach to organizations of managing dynamic environments by exploring and exploiting their capabilities routinely, whereas system dynamics is a systemic model for understanding and analyzing how complex environment as a system changes over time. When dynamic capabilities exhibit embedded characteristics during the development process (Nelson & Winter, 1982; Barney & Clark, 2007), and it should be embedded in routines that can be produced via system operation (Chen & Lee, 2008).

From those points, it can be concluded that dynamic capabilities view and system dynamics are closely intertwined. They represent essential complement each other in terms of system and sub system. As a system, dynamic capabilities consist of several elements as leverage elements for enabling process and sub-elements as underlying elements for basic routines and those can be constructed in the system dynamics modelling.

In recent years, the dynamic capabilities view, has gained increasing attention to the management literature, not only in the concept's original domain (strategic management) but also in many other areas within business administration (Barreto, 2010). Some researchers in strategic management build some models of dynamic capabilities related to some areas of strategic goal of organizations, like firm performance (Zot, 2000; Baoshan & Dong, 2009), complex environments (Poulis & Jackson, 2006), inovation (Liao & Kickul 2009; Borch & Madsen, 2007), entrepreneurship (Borch, 2004), innovation product and market performance (Yalcinka et al., 2007), and new product development (Pavlou & Sawy, 2005).

However, the modelling of dynamic capabilities using simulation model like system dynamics in methodology still remain underdeveloped. It has proven by study of Eriksson (2014) that there are over a third of the 373 articles are conceptual (136 articles), 232 articles are empirical, and only 5 articles are based on simulation data.

Overcoming the limitation on applying system dynamics model to dynamic capabilities is a main factor explained in this study by combining the dynamic capabilities view and system dynamics modelling. The effect of this study further will contribute to the field of strategic management in analyzing the unstable environment in which the organizations operate, formulating and implementing strategies as well as to the field of system dynamics in modelling, simulating and producing more policies in business strategies.

So, this study is about providing a model of dynamic capabilities based on system dynamics approach by conducting an extensive review of the dynamic capabilities and system dynamics literature and by exploring leverage elements and underlying elements of sensing, learning, integrating and coordinating along with associated to a changing business environment of organizations.

LITERATURE REVIEW

Competitive Advantage

The development of theories about competitive advantage has occupied the attention of the management community and it has been central to the study of strategic management. Strategic management has been studied from various aspects, which has resulted in a wide range of different frameworks, paradigms and theories. The field of strategic management is organized around a central research question of 'why do some firms persistently outperform others?' (Barney & Clark, 2007). This suggests that firms achieve their sustained competitive advantage by implementing strategis, which exploit and explore their resources and capabilities respond to environmental opportunities.

Teece et al. (1997) categorize the theory of competitive advantage into two models, namely models of strategy emphasizing the exploitation of market power and models of strategy emphasizing efficiency. The first models consist of Competitive Forces by Porter (1980) and Strategic Conflict approach by Shapiro (1989), and the second models consist of Resources-based View (Wernerfelt, 1984) and Dynamic Capabilities Approach (Teece, 1994).

Porter's competitive forces approach emphasizes the actions of firms in creating defensible positions against competitive forces. The five industry-level forces-entry barriers, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among industry incumbents (Porter, 1980) determine the inherent profit potential of an industry or subsegment of an industry. This 'five-forces' framework provides a systematic way of thinking about how competitive forces work at the industry level and how these forces determine the profitability of different industries and industry segments (Teece et al., 1997). The approach of strategic conflict utilizes the tools of game theory to analyze the nature of competitive interaction between rival firms. The main thrust of work in this tradition is to reveal how a firm can influence the behavior and actions of rival firms and thus the market environment (Teece et al., 1997).

The resource-based view of the firm (RBV) is an influential theoretical framework for understanding how competitive advantage within firms is achieved and how that advantage might be...

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