Managerial Decision and Firm Performance: A Dynamic Capability Perspective

Managerial Decision and Firm Performance: A Dynamic Capability Perspective


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Short excerpt:

The study has been mainly attempted as an extension to previous studies made on dynamic capabilities and their necessity in organizational firms for goals’ accomplishments.

Purpose: The report has primarily been created to present a study on the significance of dynamic capability thereby stressing on the factors that can be dealt within organizations through the use of dynamic capabilities.

Design/methodology/approach: The study has been conducted on the basis of secondary resources. The researches of different authors and theorists on the subject of dynamic capability have been consulted and analyzed to present a research study through this report. Journal articles have been mainly used for the secondary based study.

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A resource-based view of a firm aids in the development of theory on the dynamic capabilities of the firm. As different resource-based views reflect, organizations may be capable of achieving competitive advantage on a continuous basis through the availability of resources that are important, exceptional, incomparable and that which cannot be substituted. As it can be obtained from different studies, dynamic capabilities are “the capacity of an organization to purposefully create, extend, or modify its resource base” (Ambrosini, Bowman & Collier, 2009, p.S9). Dynamic competitive capabilities or DCCs offer value for a long period of time comprising competitive advantages obtained from customs and policies of different organizations. Organizational success depends to a large extent on the short term plans and routines that get incorporated to form bigger plans for the overall organizational objectives and goals (Chen, Lee & Lay, 2009, p. 1289). Technological competence is also considered as extremely important in the current scenario of global competition (Acur, Kandemir, Weerd-Nederhof & Song, 2010, p.915).

Studies have reflected that innovativeness has the ability to alter the strategies of small and medium enterprises in their invention, development, introduction and commercialization of innovative products. Dynamic capabilities make organizations capable of such innovativeness by planning out suitable measures and finding out their impacts on the accomplishment of organizational goals (Branzei & Vertinsky, 2006, p.76). In the global world of competition, SCA or sustainable competitive advantage has been found to be of great importance and need in both marketing and strategic management of a business. Alternative systems are being focussed in the current researches conducted on marketing and management of organizations that tend to prove the worth of dynamic capabilities within organizations (Ali, Peters, He & Lettice, 2010, pp.363-364). Propositions in regard to the use of dynamic capabilities in organizations with respect to managerial decisions, resource reconfiguration, product innovation, and firm performance are being continuously developed for achievement of organizational goals. This report is mainly focused on the performance of a firm through managerial decisions from the perspective of dynamic capabilities, thus pulling out the ability of a firm to succeed through strategic planning that are facilitated by dynamic capabilities.



Literature Review and Proposition Development:

The literature review reveals several researches on the dynamic capabilities having a major significance in the organizational performance assisting in the decision-making of the management towards accomplishment of organizational goals and objectives.  The theories that are based on the resource-based views represent organizations as having huge resources and believe that firms that are competitive in nature comprise different sets of resources that are utilized in the production and manufacturing processes of a company (McKelvie & Davidsson, 2009, p.S64). Researchers believe that if an organization has the VRIN attributes, that is to say, if “valuable, rare, inimitable, and non-substitutable” resources are present within an organization, then the firm is expected to formulate greater “value-creating” strategies which may be difficult for other competitors to follow (Wu, 2010, p. 27). Literature reviews while explaining the concepts of dynamic capabilities primarily give stress on the usefulness that they provide to an organization to endure in the competitive world as well as grow and develop encountered by all possible challenges (Barrales-Molina, Benitez-Amado & Perez-Arostegui, 2010, p.1355).


Dynamic Capabilities:

As Sirmon and others have studied, positive impacts are obtained through the participation of effective “human capital” in particular issues and the collection and organization of resources by managers of organizations prove to be highly significant in competing with rivals (Sirmon & Hitt, 2009, p.1377). However according to some other researches conducted, it has been obtained that the concept of dynamic capability puts forward higher emphasis and explanation of rationality on the desirable features in regard to organizational performances but less focus is given on the interactions within firms that may be more complicated in nature (Arend & Bromiley, 2009, p.83). In order to effectively allocate resources of finance and human capital that may be limited in nature, it is necessary to have a close understanding and knowledge of an organization as well as the dynamics capabilites that a firm possesses. Managers have a significant role to play in this aspect since they have the greatest knowledge regarding their employees, their skills and interests as well as availability of resources towards organizational success (Kor & Mahoney, 2005, p.491). The significant importance of learning the dymanic capabilities of a firm arises owing to the rising “intensity of business competition” that is leading to adoption of “non-traditional management techniques and tools” by organizations (Hung, Yang, Lien, McLean & Kuo, 2010, p.285).


Dynamic Capabilities and Managerial decision:

The most imporant managerial decision in a firm is to allocate resources that involves allocation of finances, human resources, assets, products, services, customers, distribution and every other feature that lead to a firm’s success. The resource allocation processes of an organization can be viewed as a dynamic capability since these processes have a major paticipation in “strategic renewal” having positive effects on the organizations of “resources and capabilities” that are intended for long-term perspectives and “far-reaching” effects (Coen & Maritan, 2011, p.99). Strategic decision makers are mostly involved and take the concern to help organizations in their accomplishments of “differential performance” (Allred, Fawcett, Wallin & Magnan, 2011, p.129). Several researchers have analyzed the importance of dynamic capabilities and collaborations as a resource that is capable of reducing conflicts arising from functional and organizational issues within organizations. It also provides advancements in the growth of “a distinctive relational advantage” (Allred, Fawcett, Wallin & Magnan, 2011, p.130). Management scholars believe that dynamic capabilities within organizations can take a major role in the performance of the firm and several researches have been conducted to improve the concepts and understandings of the different types of capabilties that facilitate the decision making capabilities of the organizational managers (Drnevich & Kriauciunas, 2011, p.254).


Resource-Based View:

The strategic management of an organization is affected and influenced by the RBV or resource-based view of a firm. According to different researches, firms having the VRIN attributes, as already mentioned earlier, tends to obtain greater sustainability in terms of competitive advantage making it complicated for the rival companies to follow. RBV is the leading outline in the literature studies of organizational strategies that makes effort to give explanation on the differences in performances among different firms within the same industry. Adoption of a “dynamic view of resources” is considered as highly significant by the researchers since in a fast changing economic and competitive business world, the mere existence of resources is not sufficient for an organization to maintain a competitive advantage where the consumer needs vary, developments in technology are uncertain, and markets are highly volatile (Wu, 2010, pp.27-28). A “resource-picking mechanism” enables the managers of an organization to obtain information and conduct analysis on them that overcomes the market in resource availability in selection and allocation of resources (Makadok, 2001, p.387).


Dynamic Capabilities and Resource Reconfiguration:

If the resource-based view of an organization is considered, then it can be observed that the competitive advantage of the firm is dependent on the “creation, sustenance and continuous improvement of the core competencies” that have been created through the availability and effective and efficient allocation of the resources (Nobre & Walker, 2011, p.335). Dynamic capabilities with respect to a resource-based perspective imply that firms are varied in terms of their availability of resources and capabilities. Managerial strategies are considered in the resource-based views of a firm that lead to development of new capabilities. However, it is only recently that researchers have been focusing on the understandings of “firm-specific capabilities” and how the resource-based views and competencies “respond to shifts in the busniess environment” (Teece, Pisano & Shuen, 1997, pp.514-515). As researchers have argued on the RBV, two specific aspects come in front. One reflect the heterogenous availability of resources within organizations. The other is that certain resources that enable the achievement of competitive advantage are many times “embedded in interfirm resources and routines” (Allred, Fawcett, Wallin & Magnan, 2011, p.130).


Product Innovation:

With more and more focus on the development of innovative products, researchers believe that product innovation can be considered to be a method of renewing organizational activities towards achievement of goals. Such renewals include developments in organizational competencies, encouraging changes in the marketing of products enhancing improvements over the rival companies (Danneels, 2002, p.1095). In the modern world of competitions and changing technological surroundings, innovation in products is considered as “major drivers” that enables a firm to reach to its customers by providing them with greater value than their competitors thus “gaining competitive advantage” (Hacklin, Inganas & Marxt, 2009, p.245). Technological changes have a major association with product innovation. It is a challenging issue for different organizations to adapt to the changes in the business environment. Firms may require to make changes in its “knowledge and capabilities” that focus on the management practices concerning organizational reactions to changes thus leading to product innovation (Benner, 2009, pp.473-476).


Dynamic Capabilities and Product Innovation:

              Product innovation, although seem to have become a very important aspect of managerial decsion-making, yet it has been obtained by researchers that innovative techniques may be affected by several factors that “promote the firm’s capacity to innovate” (Spanos & Prastacos, 2004, p.621). Integration and development of dynamic capabilities have been found to have long-term positive impacts on the competitive advantage of a firm.  Marketing capabilities involving the understanding of customers as well as technological capabilities that allow firms to integrate different expertise into the production and manufacturing processes are equally significant in enabling companies to “solve technical problems, to implement new technical processes and tools, and to develop prototypes” (Marsh & Stock, 2003, pp.137-138). Dynamic capabilities that focus on configuration of resources in beneficial manner matching up with the changing business requirements involve mechanisms that are significant in product innovation (O’Connor, 2008, p.316).


Dynamic Capabilities and Firm Performance:

            The need for dynamic capabilities arise in the context of economic changes in the global marketing world. Researchers have obtained that improved changes in the abilities of an organization may reflect positive effects on the performances of the firm (Judge, Naoumova & Douglas, 2009, p.1738). Dynamic capabilities of a firm also includes the firm’s taking measures to go into alliances. Researchers have found several reasons behind these alliances that include collection of resources that may balance each other, the costs and risks may be mutually distributed that may occur while carrying out expensive and indecisive projects. Also, required resources, capabilities and knowledge may be gained through these measures (Jiang, Tao & Santoro, 2010, p.1137). Marketing capabilities have a great influence on the economic performance of an organization in the global market. Higher returns can be expected when the available resources of a company are integrated into dynamic capabilities. The integration process is specific to a firm, providing value to its customers as well as formulated in a manner that can neither be substituted nor imitated (Blesa & Ripolles, 2008, p.653).


Dynamic Capabilities and Environmental Dynamism:

Researchers have found that the ability of managers and leaders to effectively manage the strategic policies of their organizations in ever-changing environments seems to be a debatable issue. In the face of dynamic environments prevailing within organizations affected by factors including product and technology innovation, international competition as well as pioneering activities, organizational leaders have to continuously face challenges in effectively accomplishing organizational objectives. These challenges are integrated into dynamic capabilities with the belief that firms are capable of creating and integrating resources in innovative manner (Eisenhardt, Furr, Bingham, 2010, p.1263). Researchers have stressed on the issue that development of new resources needs to be an ongoing process for an organization and dynamic capabilities are significant in dealing with “new market demands” that enables a firm to sustain, grow and develop in the changing environmental global business world (Zhang, 2007, p.60). Organizations performing in different industries and varied market environments have been found to be facilitated by the dynamic ability of the organizational leaders and managers to make strategic decisions towards achieving innovative products and technology and attaining competitive advantage (Zhang, 2007, pp.60-61).


Development of Propositions:

Dynamic Capabilities are positively related to managerial decisions: The different researches have clearly indicated how dynamic capabilities play a significant role in the decision-making process of organizational managers. Dynamic capabilities enable the organizational managers to decide on the appropriate selection and allocation of available resources. Decisions in relation to investments, human resources, and other organizational issues are also the major concerns of the managers. Such decisions are significant for a firm in accomplishing the organizational objectives. Dynamic capabilities through their innovativeness aid the managers and leaders of an organization to effectively take such decisions considering all probable hindrances and opportunities. Thus, dynamic capabilities have been obtained to be positively related to managerial decisions and this proposition is constantly developing towards betterment of organizational performance.


Dynamic Capabilities are positively related to resource reconfiguration: The dynamic capabilities having a resource-based view has immense attention on the resource reconfiguration dealing with the available resources in a firm. It believes in the success of a firm that possesses valuable, rare, inimitable, and non-substitutable resources. Such firms are expected to perform better than their competitors and gain a competitive advantage over others. Dynamic capabilities can be observed to have a positive relationship with resource reconfiguration since in the global business world of competition, mere existence of resources cannot suffice the increasing needs and demands of the market. Dynamic capabilities enhance the ability of a firm to capitalize on the availability of the resources intended towards achievement of goals and objectives. Thus this proposition is also developing in the current scenario of business world.


Dynamic Capabilities are positively related to product innovation: Dynamic capabilities can be found to be positively related to innovation in products since product innovation is a very significant aspect in the global competitive market where constantly the economy as well as the technology are changing at a random pace. To cope up with the changing scenario, dynamic capabilities within organizations enable the organizational management to take up measures that facilitate in innovativeness that is demanded in the market. This also focuses on the advanced use of technology as well as the changing economical environment. Product innovation has also become necessary owing to the changing demands of the customers. Dynamic capabilities enhance the understanding of such changes that eventually help a firm in undertaking innovative measures. The development of this proposition can be thus said to have a significant impact on the performance of an organization.


Dynamic Capabilities are positively related to firm’s performance: The performance of a firm is also highly related to dynamic capabilities. As it has been obtained through earlier studies, firms may enter into alliances that has a positive influence in the achievement of the organizational goals. Also, marketing capabilities have a greater participation in the improvement of a firm’s performance as they are directly related to the accomplishments of the company in relation to the consumer demands and expectations and fulfilling them to the utmost level, thus increasing the revenues as well as preferences for the company. Performance of a firm is to a large extent dependent on the dynamic capabilities of the firm since the successful performance of a firm involves several issues in regard to correct decision making, suitable selection and allocation of resources, factors that are effectively handled by dynamic capabilities. Thus this proposition is also developing in the modern business world and can be seen to have immense positive effects.


The degree of environmental dynamism is positively related to the contribution of dynamic capability: In the changing business world, it can be realized that the business environment is constantly facing challenges in the face of changes occuring in the internal as well as external surroundings. Challenges may occur for a firm in terms of its competing with its rival companies for features that may be similar among them and attractive to customers equally. Dynamic capabilities enable an organization to face such challenges through taking different measures towards effective and efficient management of goals and objectives. The various affecting factors may thus be dealt with successfully that would protect an organization from having any negative impact. Business environment can be understood to be a very important factor that may impact a firm either positively or negatively depending on the circumstances. A firm’s remaining prepared with all possible measures is thus preferable for any organization. Hence, this proposition is equally relevant in the contribution of dynamic capability.


Conclusion and discussion:

The different studies conducted and the analysis made on them give a clear picture of the advantages that dynamic capabilities provide the different organizations with. The primary intention of dynamic capabilities within organizations is to provide the firm with the strategies and measures that would enable it to efficiently and effectively handle the different circumstances that may hinder the attainment of organizational goals. It is mainly focused on the resources available within the company that may be utilized optimally and successfully towards organizational achievement. The use of dynamic capabilities within organizations tend to provide a firm with long-term success through the formulation of different strategies. Dynamic capabilities facilitate a company in its improved performances, its innovativeness in terms of products and advanced use of technololgy as well as prepares a firm to survive in the ever-changing business environment. Based on the advantages of dynamic capabilities in organizational management, different propositions are developing towards the greater understanding of the needs to integrate dynamic capabilities in organizations for the betterment of performances.

Although it has been obtained by some researchers that certain details of the studies on dynamic capabilities have not been conducted yet; however, the relevance of the dynamic capabilities in organizations can be understood from the studies that have reflected the improvements that firms experience with the possession of such capabilities. Allocation of resources that have a significant impact on the organizational performance is efficiently managed by dynamic capabilities. Managers are assisted in taking effective decisions and resolving issues of conflicts. RBV or resource-based view is the main aspect of dynamic capability. This helps organizations to not only make resources available in their firms but also making utmost utilizations of them through appropriate strategic measures. Market information are also made available to managers who can analyse them to further decide on their ventures. Managerial strategies are well thought-out in the resource-based views of a firm that direct a way to advancement of new capabilities.

Dynamic capabilities have also been found to be an important part in the product innovations and advanced uses of technology in different organizations. It can be realized that dynamic capability focuses on the changing needs of both the organizations as well as its customers and prepares a firm accordingly to face the challenges encountered due to the changing business environment. In other words, the concepts of dynamic capabilities help organizations to adapt to the changes in the business environment. When dynamic capabilities are involved in product innovation and technological changes, the companies also get assisted through the solutions available to technical problems and implementation of new techniques and processes. The greater need and importance of dynamic capabilities arise owing to the constant changes that are prevailing in the business environment.  Marketing capabilities have been found to have a great positive influence on the economic performance of an organization in the global market.

From the studies conducted and the significance of the dynamic capabilities as observed in relation to organizational performances and accomplishments of goals and objectives, it may be drawn as a conclusion that dynamic capabilities have a major role to play in the organizational management where the leaders and managers are facilitated in their decision making towards organizational success. Dynamic capabilities can be observed as focusing on various aspects of a firm dealing with the selection and proper allocation of resources, product innovations and technological advances, handling and facing challenges from the changing business environment as well as improving the performance of the firm as a whole. The development of different propositions also reflect the increasing importance of dynamic capabilities in organizations that managers are integrating in their strategic management practices all the more from before. While it can be realized that negative effects may occur on the performances and success of a company, this study reveals that the availability of dynamic capabilities imply that a firm may be protected from the negative impacts through planned strategic measures intended to encounter challenges and uncertainties and yet perform to the utmost level and succeed in achieving organizational goals and objectives.


Directions for future research:

As different studies reflected through the literature reviews imply, the concerned topic on dynamic capabilities can be understood as a significant issue with huge scopes for further researches.  It can be observed that Penrose while researching on Taiwanese IT companies had mentioned the significance of internal characteristics of a firm that enables the firm to attain sustainable growth. Acclimatization has been focused by the studies of Porter who had conducted studies on strategy of firms from the perspective of the industry in which the firm exists (Wu, 2006, p.448). Porter’s studies on the cost and differentiation aspects being sources of performances have not been sufficient for researches to continue. Scientific investigation have always been found to deduce more information through the formulation of hypothesis and proving the factors significant in sustainable development of a firm (Tang & Liou, 2009, p.44).

Also, different scholars have presented their studies reflecting the importance of organizational leaders and managers, who have a major participation in the outcomes of the business. They take the most important part by taking the all the necessary decisions of  the company, depending on which the firm attains its goals and objectives. Leadership and management have thus been focused as important integral parts of dynamic capabilities of a firm, by several authors (Martin, 2011, p.118). All these studies and the ones discussed in the literature review indicate that there are tremendous opportunities to make further researches on the dynamic capabilities and their significance in business organizations. New researchers may make use of the earlier studies and associate them with newer issues that may be prominent as difficulties for organizational success. Particularly in a changing business environment, it is highly necessary for each and every organization to undertake innovative strategies that are focused to both the organizational objectives as well as the needs and expectations of the customers. Thus further researches may be expected to enhance the understanding of the different issues in relation to dynamic capailities and find out new measures towards achievement of organizational success.

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