The emergence of dynamic capabilities in SMEs: A critical realist study

Abstract

How do dynamic capabilities develop in small firms? More specifically, what mechanisms account for the emergence of dynamic capabilities in SMEs? The dynamic capabilities perspective synthesises evolutionary theory, the resource based view of the firm and organisational learning to explain how firms sustain competitive advantage. However, the literature tends to focus on larger firms and assumes the existence of routines and processes, particularly those needed to assimilate new knowledge. The manner in which dynamic capabilities evolve may be different in the small firm context as routines and processes associated with seeking out and assimilating new knowledge will differ from those of large firms. This research draws on a single case study using a critical realism perspective to study the emergence of dynamic capabilities. The case firm is a small Irish owned print firm that has evolved into an international brand and artwork management business. The study draws on interviews, company records and documents, and notes from 186 meetings between the author and the CEO over a seven year period. The case data is analysed using the framework of critical realism’s ontological strata of the Empirical, the Actual and the Real to interpret the data captured and to explore the underlying mechanisms present in order to provide defensible explanations for the phenomenon observed. Analysis of the case data suggests that dynamic capabilities developed as a consequence of (i) the focus on firm performance, (ii) capacity building (people and technology), (iii) the evolution of higher order learning, (iv) managerial purposefulness, and (v) the use of third parties. Adopting a critical realist perspective suggests that dynamic capabilities emerged as a result of the interaction of the CEO’s capacity to engage in higher order learning and the CEO’s knowledge and networks as they relate to the business that allow the CEO identify, assimilate and exploit new knowledge. Contributions include a description and explanation of how dynamic capabilities emerged in an SME; the application of the dynamic capabilities perspective to the small firm context; and the use of the critical realist perspective to study dynamic capabilities in the context of small firms