Microfoundations of the Digital Transforming Dynamic Capability

Abstract

Dynamic capabilities theory is an explanatory framework that has gained academic and management attention for its ambition to explain sources of competitive advantage and profits in highly competitive environments. For this reason, I conducted an extensive literature review exploring where the dynamic capabilities theory and digital transformation phenomenon intersect. The review resulted in the notion that digital transformation is a source of constant change that necessitates dynamic capabilities. However, the dynamic capabilities of the firm are not well understood. A stream of research has been flourishing to illuminate the origins of dynamic capabilities, known as the microfoundations of capabilities.

Reviewing research in dynamic capabilities revealed a framework that allows firms to respond to digital disruption through constant evolution in capabilities. My desk research uncovered the management research community’s ongoing investigation of dynamic capabilities’ underlying mechanisms known as microfoundations of dynamic capabilities. Examining these capability sub-dimensions showed that aggregated actions of individuals form routines that evolve into the firm’s capabilities. Developing capabilities of any kind starts from the learning and collaboration of individuals with different skill sets, beliefs, and values that make up the organization.

I approached three legacy firms in the low-tech sector of fashion and retail as a case study that exemplifies the problem of digital transformation. They were chosen based on profiles typical of a digitally-transforming firm, such as investments in digital technologies, the appointment of chief digital/information officers, size, and age. In addition to content, the firm’s headquarter operations reside in the Netherlands, and their digital transformation initiatives occurred in the last five years. I consulted annual reports, financial filings, and company press releases to trace their digital transformation journey and validated through individual interviews from digital actors, people involved in the company’s digitalization.

The empirical observations confirmed that the microfoundations perspective fits the research question due to the digital transformation’s multi-pronged approach. However, I did not observe all sub-dimensions of the dynamic capability in the case study companies. Nevertheless, I found at least one of each factor relating to individuals, processes, and structures. For example, the individual dimension emerged in the study due to the central roles of leadership and the workforce’s digital savviness in the transformation process. Furthermore, digital intensity (processual dimension) is a must in digital transformation since substantial digital technology investments are a core requirement. Their interaction and collaboration across different levels of the organization through proximity help build capabilities for digital transformation. The structural dimension also shows that a centrally organized digital initiative can move slower than a decentralized one.

The framework suggests that dynamic building capabilities are rooted in individuals learning and collaborating. Additionally, proximity and the concepts of multi-dimensional relationships (geography, cognition, social, and organizational) facilitate the learning process. My study also suggests that individuals working at different levels of the organizations build firm-level capabilities, hinting at the multi-level characteristics of capabilities of the firm. The research in microfoundations of capabilities has only recently caught traction. Thus, the elements of my thesis form a foundation for future research.