Dynamic firms make sure to stitch in time

To endure and survive, organisations in rapidly changing environments need to acquire the ability to acknowledge and respond to changes that are initiated externally. This notion, known as dynamic capabilities, has appeared in recent times as a core ingredient in rationalising how firms and organisations adapt to changing environmental conditions. Dynamic capabilities is the capacity of an organisation to resolutely create, extend or modify its existing resource base. This ability of firms to integrate, develop and reorganise internal and external competencies to rapidly address changing environments lies at the core of its capability to learn and innovate, bringing to fruition budding competitive advantages that were never on the radar screen before. These dynamic capabilities make possible not only the ability to identify a probable paradigm shift, but also to acclimatise through innovation, internally and externally.

Dynamic capabilities can smooth the progress of innovation and adaptation by presenting a firm with the opportunity to cultivate value-adding sources from new and innovative products, processes and services. These capabilities evolve from an organisation's ability to both explore new information, talents and services and exploit its current knowledge and human capital bases. Under existing economic conditions of cost cutting and budget rationing, it is an opportune time for organisations to analyse how they can develop new capabilities with existing resources in order to cope with shifting markets landscapes. The main premise is that sustainable competitive advantage comes from within, at the level of the individual and the organisation.

These capabilities require firm agility and Guanxi; to borrow from the Chinese term for networking and trust building. Firm agility is understood as the ability of firms to sense environmental changes and respond to them appropriately and judiciously. A fundamental principle here is that firms must continuously adapt their capabilities and reconfigure their resource base, be it knowledge, capital or human, in order to maintain existing competitiveness, and, possibly, gain new competitive advantage.

In order to meet competitive challenges during these difficult economic times, firms need to rearrange multiple bundles of existing resources and transform them into capabilities to generate specific competitive advantages. In an effort to improve their internal processes, organisations can temporarily move from a functional-based structure to one that is project based. Management can identify a number of projects aimed at improving internal processes, identify leaders and open the door for them to approach departments with idle human capital resources to work on these projects.

This simple exercise of resource re-bundling has a number of benefits: it makes efficient use of idle human capital; it improves the moral of employees during times of uncertainty; it enriches the skill-base of employees; and, it helps the organisation improve its internal processes. The value of understanding a firm's internal and external networks as sources of competitive advantage is imperative especially during economic recessions and downturns. The concept is simple: people who do better are better connected, and organisations that do better are better connected. Social capital is accumulated by the firm in the form of resources embedded in relationships, including individuals, organisations and business units. It represents the ability of participants of the network to secure benefits through the force of sharing memberships in social networks or other social structures.

Guanxi has been practised in China for centuries and it remains highly relevant to Chinese society today. In China, long-standing personal connections, defined as Guanxi relations, play a significant role in the Chinese system of network capitalism. Given the nature of the economic recession, a network of relationships is a valuable resource for any organisation; this network results in informational advantages as an outcome of amassed social capital resources. Guanxi as a philosophy has been viewed as the way firms build human and organisational capital to gain competitive advantage, increase efficiency and mobilise political support.

In direct translation, Guanxi denotes "connections" or "a relationship" but it is the implications of the word that are important in the business context. It implies the network of relationships among various groups that work together and support one another. In addition to social capital, assessing the level of a firm's absorptive capacity is essential in clarifying how organisations learn from their environments by identifying, assimilating and exploiting external knowledge. Firms need to transform potential absorptive capacity to realised absorptive capacities, though. Potential absorptive capacity consists of the ability to acquire and assimilate new external knowledge, while realised absorptive capacity consists of the ability to process, transform, and exploit this acquired knowledge to gain competitive advantage. In reality, many firms are able to acquire knowledge but few have the capability to transform and exploit the acquired knowledge to gain competitive advantage.

While adjusting internal resources to create dynamic capabilities, mining social capital to explore for new business relationships and exploiting existing relationships to increase realised absorptive capacity are all a direct result of the combined actions of employees, the outcome of interest in the whole exercise is the acclimatisation of the organisation itself to an environmental knowledge shift.

At the end, the whole exercise of exploration for and exploitation of knowledge will not take more than a clear vision from management, a strong commitment from employees and loyalty from business partners. The good news here is that vision, commitment and loyalty are not in short supply in this part of the world. Dr Zeinab Karake-Shalhoub is director of research at the Dubai International Financial Centre. The views expressed are those of the author