1 INTRODUCTION
In a world where competition is pervasive, Schumpeter’s concept of a “gale of creative destruction” (1994, p. 84) underscores the imperative for businesses to continually evolve and innovate.
The relentless pace of change necessitates organisations to abandon the notion of an enduring competitive advantage, as D’Aveni (1994) suggested and further corroborated by Wiggins and Ruefli (2005). This introduction sets the stage for understanding the profound shifts in the business landscape and the critical need for dynamic adaptation.
1.1 EMBRACING COMPLEXITY AND UNCERTAINTY
Today’s business environment is riddled with complexity and unpredictability. This intricate environment is directly attributed to the forces of globalisation and digitalisation. Globalisation has woven a complex web, interlinking companies across the globe and fostering unprecedented levels of interconnectedness.
Concurrently, digitalisation has integrated advanced technologies and the internet into virtually every aspect of business operations. Together, these dynamics cultivate a VUCA environment characterised by volatility, uncertainty, complexity, and ambiguity (Acciarini et al., 2021; Martin & Bachrach, 2018; Penttilä et al., 2020; Schoemaker et al., 2018).
In this context, managers face the formidable task of discerning viable innovations from many possibilities, evaluating their potential impact, and implementing them effectively. The stakes are high, as the ability to successfully navigate this environment determines an organisation’s capacity to survive and thrive.
The challenge lies not only in recognising innovative opportunities but also in executing them with precision and agility.
1.2 THE ESSENTIAL ROLE OF MANAGEMENT
Amid these challenges, robust management skills are paramount. Managers must adeptly navigate this complexity and devise strategies that propel their companies ahead of the competition (Adner & Helfat, 2003; Helfat & Martin, 2015b). This role can be likened to a sports coach, who meticulously plans tactics, adapts to evolving circumstances, and ensures the team remains poised for victory.
Effective management involves more than just strategic foresight; it requires the agility to pivot and adjust to the dynamic business environment. Managers must possess the ability to lead with confidence, making informed decisions that drive the organisation forward.
This includes fostering a culture of innovation, where creative ideas are encouraged and nurtured, and the organisation is continually poised to adapt to new challenges and opportunities.
1.3 DYNAMIC CAPABILITIES VIEW
The dynamic capabilities view (DCV) is the prevailing theoretical framework for analysing how competitive advantages emerge in dynamic environments (Arndt et al., 2022; Fainshmidt et al., 2016; Teece, 2014). This perspective suggests that organisational capabilities differ in firms’ abilities to “integrate, build, and reconfigure internal and external competencies” (Teece et al., 1997, p. 516).
DCV emphasises that an organisation’s ability to adapt and innovate is rooted in its dynamic capabilities. These capabilities enable the firm to respond to changing market conditions, exploit new opportunities, and maintain a competitive edge.
However, while DCV considers the role of management in strategic decision-making, it primarily focuses on firm-level dynamic capabilities and overlooks the pivotal role of individual managers (Aguinis et al., 2022; Augier & Teece, 2009; Felin & Foss, 2005).
1.4 DYNAMIC MANAGERIAL CAPABILITIES
To address this gap, Adner and Helfat (2003) introduced the concept of dynamic managerial capabilities (DMCs), emphasising the role of individual-level dynamic capabilities in strategic change. According to this microfoundational theory, DMCs have three interdependent subcomponents: managerial human capital, social capital, and cognition.
• Managerial Human Capital: The skills, knowledge, and experience that managers bring. It encompasses their ability to understand complex business environments, make informed decisions, and lead their teams effectively.
• Social Capital: The networks and relationships managers cultivate within and outside the organisation. These connections can provide valuable resources, insights, and opportunities for collaboration.
• Cognition: The mental models and cognitive frameworks managers use to process information and make strategic decisions. It includes their ability to recognise patterns, anticipate trends, and envision future scenarios.
These components, individually and collectively, influence a manager’s ability to “build, integrate, and reconfigure organisational resources and competences” (Adner & Helfat, 2003, p. 1012). Dynamic managerial capabilities are thus essential for fostering innovation and driving strategic change within the organisation.
1.5 DYNAMIC LEADERSHIP CAPABILITIES (DLCS)
The concept of dynamic leadership capabilities (DLCs) emerges from the integration of Adner and Helfat’s (2003) DMC theory with Hambrick and Mason’s (1984) upper echelons theory (UET). The DLC perspective posits the individual-level DMCs of top executives are pivotal drivers of innovation in the current hypercompetitive market.
Top executives, as the highest-ranking leaders, play a critical role in shaping the strategic direction of their organisations. Their dynamic capabilities are instrumental in steering the company through turbulent times and seizing new opportunities.
This view aligns with Teece’s (2007) assertion that “enterprises with strong dynamic capabilities are intensely entrepreneurial” (p. 1319).
In essence, the interplay of these theories underscores the pivotal role of individual managerial and leadership capabilities in fostering organisational innovation and maintaining a competitive edge. As we delve deeper into this landscape, we recognise the ability to adapt, innovate, and lead dynamically is not just an asset but a necessity in the ever-evolving business world.
2 DYNAMIC MANAGERIAL CAPABILITIES AND THEIR SUBCOMPONENTS
DMC theory suggests that variations in organisational strategies stem from the diverse capabilities of managers, which influence the development, assimilation, and configuration of resources and competencies (Adner & Helfat, 2003; Beck & Wiersema, 2013).
Strong DMCs are critical but not the sole determinant of sustained competitive advantage. Managers equipped with superior DMCs are pivotal in facilitating organisational change (Beck & Wiersema, 2013; Helfat et al., 2007; Helfat & Martin, 2015a).
2.1 MANAGERIAL HUMAN CAPITAL
Managerial human capital encompasses specialised and general knowledge acquired through formal education and informal training.
This capital varies in specificity to context; generic human capital is broadly applicable across various settings, whereas firm-specific human capital is unique to a particular organisation (Bailey & Helfat, 2003).
Regardless of the type, all forms of human capital significantly influence an executive’s ability to recognise, interpret, and implement strategic change (Cohen & Levinthal, 1990; Helfat & Martin, 2015b):
• Specialised Knowledge: Expertise gained through industry-specific education and experience.
• General Knowledge: Broad skills applicable across different industries and roles.
• Firm-Specific Knowledge: Unique insights and competencies tailored to an organisation’s needs.
Each type of human capital plays a vital role in shaping a manager’s capacity to drive change and adapt to new challenges. The ability to leverage this knowledge effectively can determine the success of strategic initiatives and the overall adaptability of the organisation.
2.2 MANAGERIAL SOCIAL CAPITAL
Managerial social capital is defined by the networks and relationships managers cultivate within and outside the firm. These networks provide access to valuable resources, foster trust and reciprocity, and shape individual and collective behaviours (Adler & Kwon, 2002; Nahapiet & Ghoshal, 1998).
Strong social capital enhances a manager’s ability to recognise, assess, and implement strategic change (Adner & Helfat, 2003; Helfat & Martin, 2015b).
• Internal Networks: Relationships within the organisation that facilitate collaboration and resource sharing.
• External Networks: Connections outside the firm that provide access to new information, opportunities, and partnerships.
• Trust and Reciprocity: The mutual confidence and exchange of favours that strengthen network ties and resource access.
By developing and maintaining robust social capital, managers can harness various resources and support systems crucial for navigating complex strategic changes and fostering innovation.
2.3 MANAGERIAL COGNITION
Managerial cognition refers to the mental models and cognitive frameworks that underpin strategic decision-making. These cognitive structures help managers process information through historically developed heuristics and reference frames.
However, managers must be able to adapt their mental models to align with changing environments (Kahneman, 2012; Walsh, 1995). Accurate cognition is essential for making informed strategic decisions (Adner & Helfat, 2003; Walsh, 1995).
• Mental Models: Cognitive frameworks that shape how managers perceive and interpret information.
• Heuristics: Simplified decision-making rules based on past experiences.
• Adaptability: The ability to modify cognitive frameworks in response to new information and changing conditions.
Effective managerial cognition allows for better anticipation of market shifts, more accurate assessment of opportunities and threats, and more strategic alignment of organisational resources. It is the foundation upon which strategic decisions are made and executed.
In summary, the interplay of managerial human capital, social capital, and cognition forms the backbone of dynamic managerial capabilities.
These subcomponents enable managers to drive strategic change, foster innovation, and maintain a competitive edge in an ever-evolving business landscape. The ability to effectively develop, integrate, and reconfigure these capabilities is essential for sustaining organisational success and achieving long-term growth.
3 INTEGRATING DMC THEORY WITH UPPER ECHELONS THEORY: THE DCC CONCEPT
DMC theory provides a comprehensive view of how top managers influence strategic change, focusing on individual managerial capabilities (Adner & Helfat, 2003; Helfat & Martin, 2015b). Integrating DMC theory with UET gives us a more holistic perspective on the micro-level origins of strategic decision-making and organisational outcomes.
UET suggests that top managers’ decision-making processes are influenced by their strategic interpretations, shaped by observable characteristics such as age, education, and career experiences (Cannella & Holcomb, 2005; Hambrick & Mason, 1984).
This integration enriches our understanding of individual managerial capabilities within a broader theoretical framework.
3.1 THE UNIQUE ROLE OF THE CEO
CEOs, occupying the highest and most influential positions within an organisation, are tasked with realising the firm’s long-term vision by designing and implementing organisational strategies (Vera et al., 2022).
Due to their central role, CEOs differ significantly from lower-level managers in their capabilities and personalities (Hitt & Tyler, 1991; Wai & Rindermann, 2015). The unique Dynamic Managerial Capabilities of CEOs—referred to as Dynamic CEO Capabilities (DCCs)—are crucial for developing and sustaining a competitive advantage. These capabilities form the foundation for organisational change and innovation.
3.2 DIRECT EFFECT OF DCCS ON INNOVATION
Innovation involves commercialising new ideas, encompassing products, services, or processes (Damanpour, 1991; Gupta et al., 2007; Van de Ven, 1986). Continuous investment in innovation ensures that firms can adapt to changing environments and secure future financial returns (Deutsch, 2005).
However, these investments often require short-term performance sacrifices and involve inherent risks, creating a delicate balance between short-term losses and long-term gains (Baysinger et al., 1991; Laverty, 1996).
3.3 CEO AS INNOVATION CHAMPION
CEOs with strong DCCs will likely become innovation champions, possessing the requisite skills to drive and sustain innovative efforts (Howell et al., 2005; Howell & Higgins, 1990). These CEOs demonstrate three key behaviours:
• Proactive Communication of Innovation Strategies: Effectively articulate and promote innovation initiatives throughout the organisation.
• Persistence in Innovation Efforts: Maintaining a steadfast commitment to innovation despite challenges and setbacks.
• Ensuring Commitment from Key Decision-Makers: Securing other executives’ and stakeholders’ buy-in and support to facilitate innovation.
Based on these behaviours, review the following moderating effects:
3.4 MODERATION EFFECTS OF CEO POWER
CEO power refers to the ability of a CEO to leverage personal interests, intentions, and plans within the organisation (Combs et al., 2007; Finkelstein, 1992). This power can significantly influence innovation investments due to such projects’ inherently uncertain and long-term nature (Finkelstein, 1992; Mintzberg, 1983).
Understanding how CEO power moderates the relationship between DCCs and innovation is critical for grasping the dynamics of strategic decision-making.
3.5 CEO DUALITY
CEO duality, where the same individual serves as both CEO and board chairman, can amplify the benefits of DCCs for innovation. This dual leadership structure streamlines command chains, focuses on strategic direction, and facilitates long-term commitment within the firm.
The unity of command associated with CEO duality can enhance innovation by reducing board approval complexities and information asymmetries (Adams & Ferreira, 2007; Brickley et al., 1997).
3.6 CEO DISCRETION
CEO discretion refers to the latitude of action available to a CEO in a given situation, primarily determined by the availability of resources. High discretion empowers CEOs to make proactive and creative decisions that foster innovation (Chin et al., 2021).
Conversely, environments with low discretion limit a CEO’s ability to pursue innovative initiatives.
In summary, integrating DMC theory with UET and exploring Dynamic CEO Capabilities offer a nuanced understanding of how top executives drive innovation. By examining the roles of CEO power, duality, and discretion, we gain deeper insights into the factors that enable or constrain strategic change and innovation within organisations.
This comprehensive perspective underscores the pivotal role of executive leadership in fostering an environment where innovation can thrive, ultimately contributing to sustained competitive advantage.
4 BOARD INDEPENDENCE
Independent boards, comprising a large share of outside directors, may hinder innovation due to a lack of firm-specific knowledge and reluctance to approve uncertain investments.
While outside directors can provide external resources, their limited involvement often results in a preference for financial over strategic controls, which can stifle innovation (Baysinger et al., 1991; Hoskisson et al., 2002).
4.1 CEO TENURE
CEO tenure follows a temporal pattern, initially increasing the positive influence of DCCs on innovation. However, as CEOs grow “stale in the saddle” (Miller, 1991, p. 49), they may become risk-averse and focused on stability.
Shorter-tenured CEOs may promote innovation by focusing on exploration. In contrast, longer-tenured CEOs may hinder innovation due to their emphasis on exploitation.
This comprehensive approach aims to provide deeper insights into the role of individual-level DCCs in fostering innovation and how various aspects of CEO power influence this relationship.
By integrating DMC theory with UET, we offer a robust framework for understanding the micro-level origins of strategic decision-making and their impact on organisational outcomes.
5 CONCLUSION
The culmination of our exploration reveals the profound influence of DCCs on organisational innovation. These capabilities, rooted in managerial human capital, social capital, and cognition, empower CEOs to drive transformative change amidst complexity and uncertainty.
By integrating the dynamic managerial capabilities theory with the upper echelons theory, we illuminate the unique role of CEOs in shaping strategic direction and fostering a culture of continuous innovation.
CEOs who harness their DCCs effectively champion innovation, persistently communicate strategic visions and galvanise commitment from key stakeholders. Their ability to leverage power through dual roles or broad discretion amplifies their impact, enabling decisive action in volatile market conditions.
However, CEOs’ tenure and board structure also play crucial roles. While shorter-tenured CEOs may inject fresh perspectives and a propensity for exploration, longer-tenured CEOs must guard against complacency.
Similarly, while valuable for external oversight, independent boards must balance financial prudence with strategic risk-taking to avoid stifling innovation.
In essence, the journey of innovation is neither linear nor solitary. It requires the strategic orchestration of diverse capabilities, underscored by a relentless commitment to adapt and thrive. By embracing this dynamic interplay, organisations can unlock unparalleled growth and enduring success.
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