Core Competencies & Dynamic Capabilities

Chapter 6 — Renewing Advantage in a Changing World

Learning Objectives

After completing this chapter, students should be able to:

Define core competencies and distinguish them from ordinary capabilities and from products themselves.
Apply Teece’s dynamic capabilities framework — sensing, seizing, and reconfiguring — to firms operating in fast-changing environments.
Recognize the strategic risk of core rigidities — the dark side of past success — and explain how organizational routines can become liabilities.
Distinguish exploitation (deepening existing competencies) from exploration (building new ones), and understand why ambidextrous organizations can do both.
Connect dynamic capabilities to the GenAI era — what does it mean to “sense, seize, and reconfigure” when AI accelerates every cycle?

6.1 From Static Resources to Dynamic Capabilities

Chapter 5 introduced the Resource-Based View as a powerful explanation for why some firms persistently outperform others. Toyota’s production system, Apple’s design culture, TSMC’s process know-how — these are deeply embedded, hard to imitate, and visibly correlated with sustained advantage.

But Chapter 5 left an unanswered question: what happens when the environment changes?

Kodak owned arguably the strongest set of resources in 20th-century photography — film chemistry, distribution, brand. Within 15 years (1995–2010), digital photography rendered most of those resources obsolete. Nokia had unmatched mobile-phone manufacturing and supply-chain capability — and was destroyed by Apple’s redefinition of the smartphone. Static resources are not enough. What firms need is the capability to reconfigure their resources as the environment shifts.

This is the territory of core competencies (核心能力) and dynamic capabilities (動態能耐) — the higher-order constructs that explain not just why a firm has advantage today, but how it will renew that advantage tomorrow.

6.2 Core Competencies

The concept of core competence was introduced by C. K. Prahalad and Gary Hamel in their landmark 1990 Harvard Business Review article. Their argument: managers think too much about products and business units, and not enough about the underlying competencies that produce winning products.

Three tests of a core competence (Prahalad & Hamel, 1990)

A capability qualifies as a core competence when it satisfies all three:

Provides access to a wide variety of markets — it is not tied to a single product.
Makes a significant contribution to perceived customer benefits of the end product.
Is difficult for competitors to imitate — it integrates multiple technologies and organizational routines.

6.2.1 Examples

Honda — competence in small engines (originally for motorcycles) opened markets in lawnmowers, generators, marine outboards, automobiles, and jet engines.
Sony — competence in miniaturization enabled successive generations of portable products from transistor radios to Walkmans to PlayStations.
3M — competence in coatings and adhesives spawned tens of thousands of products from Post-it notes to surgical drapes to LCD optical films.
Apple — competence in human-centered industrial design integrated with software transferred from Mac to iPod to iPhone to AirPods to Vision Pro.

The competence is the root; products are the fruit. Competitors who study Apple’s products often miss what makes Apple difficult to copy — the underlying integration of design, software, supply chain, and retail experience.

6.2.2 Core Competence vs. Core Product vs. End Product

Prahalad & Hamel proposed a three-level architecture:

Level	Example (Honda)	Example (Apple)
Core Competence	Engineering small, efficient engines	Integrated industrial design + software + ecosystem
Core Product	Honda engine modules	iOS / silicon (e.g., M-series chips)
End Product	Civic, Accord, Odyssey, generators	iPhone, iPad, MacBook, Apple Watch

The strategic implication: a firm that loses sight of its core competence and competes only on end products will eventually be out-innovated by a competitor who continues investing at the competence level.

6.3 Dynamic Capabilities — Teece’s Framework

David Teece formalized dynamic capabilities in a series of papers from the 1990s through the 2010s. His definition:

Dynamic capabilities are the firm’s ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments.

Teece organizes dynamic capabilities into three clusters:

flowchart LR
    SENSE["SENSING: Identifying opportunities and threats"]
    SEIZE["SEIZING: Mobilizing resources to capture opportunities"]
    RECONFIG["RECONFIGURING: Realigning assets and structures"]
    SENSE --> SEIZE
    SEIZE --> RECONFIG
    RECONFIG -.feedback.-> SENSE
    style SENSE fill:#D8C3A5,stroke:#004030
    style SEIZE fill:#004030,stroke:#004030,color:#FFFFFF
    style RECONFIG fill:#EFE4D2,stroke:#004030

6.3.1 Sensing (感知)

Sensing is about scanning the environment for emerging opportunities and threats — customer-need shifts, technological trajectories, regulatory changes, competitor moves. It requires:

Outward-facing organizational structures — close customer contact, supplier intimacy, ecosystem partnerships.
Cognitive diversity — teams that include people who see different futures.
Tolerance for weak signals — willingness to take seriously evidence that doesn’t fit current assumptions.

6.3.2 Seizing (掌握)

Seizing converts sensed opportunities into committed resource allocations: building factories, hiring teams, launching products, signing partnerships. It requires:

Decision speed and quality — escaping analysis paralysis.
Business-model design — choosing how to monetize the opportunity.
Investment discipline — committing meaningfully without over-committing.

The hardest part of seizing is timing. Move too early and the market isn’t ready (Apple’s 1993 Newton); move too late and competitors have locked you out (Microsoft in mobile, 2007–2015).

6.3.3 Reconfiguring (重組)

Reconfiguring is the most demanding cluster — actually changing the firm’s existing structures, routines, and culture to align with new realities. It requires:

Asset orchestration — moving resources from declining businesses to emerging ones.
Organizational change capability — managing fear, identity, and politics during transitions.
Decoupling and re-coupling — separating units that no longer fit and integrating new ones.

TSMC as a master of dynamic capabilities

TSMC’s 35-year history is a textbook case of all three clusters in action:

Sensing — Morris Chang sensed in the 1980s that semiconductor design and manufacturing would decouple, decades before the trend was obvious.
Seizing — TSMC committed to a pure-play foundry model when conventional wisdom said an IDM (integrated device manufacturer) was the only viable strategy.
Reconfiguring — TSMC has repeatedly transitioned through process generations (130nm → 90nm → 65nm → … → 3nm → 2nm), each requiring a near-total reorganization of fabs, suppliers, and customer interfaces.

The result is one of the most enduring competitive advantages in modern industrial history.

6.4 Core Rigidities — The Dark Side of Past Success

Dorothy Leonard-Barton (1992) introduced a haunting counter-concept: core rigidities (核心僵化). The same routines, values, and capabilities that produce success in one era can become obstacles in the next.

Phase	What helped	What now hurts
Year 1–10	Engineering-led culture wins markets
Year 10–25	Routines codify, scale, and refine	Engineering culture rejects design and UX as “soft”
Year 25+		Cannot pivot to design-led products; loses to Apple

This is the Innovator’s Dilemma as posed by Clayton Christensen — incumbent firms struggle to embrace disruptive technologies precisely because they are so good at their existing technology. Customers reward what works today; processes optimize what worked yesterday; values reject what doesn’t fit.

The strategic implication: a competence and a rigidity are the same thing, viewed from different time horizons. The firms that escape this trap are those that deliberately maintain a portfolio of capabilities — including some that look unproductive today but may matter tomorrow.

6.5 Ambidextrous Organizations — Doing Both at Once

How does a firm avoid core rigidities while continuing to exploit current strengths? Charles O’Reilly and Michael Tushman’s answer is the ambidextrous organization (雙元組織) — a structure that simultaneously:

Exploits existing competencies for short-term efficiency and profit, and
Explores new competencies for long-term renewal.

The key design principle is structural separation: the exploration unit operates with different processes, metrics, culture, and often physical location from the exploitation unit. The two are linked at the senior-leadership level but kept separate at the operating level.

Examples of ambidextrous design

Amazon runs AWS (cloud, exploration → now exploitation) alongside the original e-commerce business; both are stewarded under one corporate structure but with distinct PnL accountability.
IBM at multiple points in its history launched separate skunkworks (the original PC team in Boca Raton, the Watson AI unit) outside the mainframe culture.
Toyota maintains a hybrid-vehicle strategy (Prius, exploration in early years) alongside its core internal-combustion business.

The hard part is leadership. Senior executives must allocate resources across exploitation and exploration, defend exploration units from short-term pressure, and resist the gravity of “doing what we know works.”

6.6 Dynamic Capabilities in the GenAI Era

The 2026 environment compresses every dynamic-capability cycle:

Sensing accelerates — LLMs can synthesize customer reviews, social media, news, and competitor filings in hours, not weeks. Firms with mature AI workflows detect weak signals their competitors miss.
Seizing accelerates — Code generation, design generation, and rapid prototyping shrink the time from idea to MVP from quarters to weeks.
Reconfiguring accelerates — and disrupts — AI-driven restructuring decisions (workforce reallocation, automation rollouts) happen faster, but also create new core rigidities. Firms that build their identity around “AI-first processes” may find themselves rigid against the next paradigm shift.

Dynamic capabilities as a TP analytical lens

When you analyze your TP focal company in TP3 — Growth Strategy, ask all three questions:

Sensing — Has the firm seen the major external shifts (tech, regulatory, geopolitical) coming? What is its scanning machinery?
Seizing — When the firm has identified an opportunity, how fast does it move? Cite specific examples (acquisitions, product launches, capacity decisions) with dates.
Reconfiguring — Has the firm successfully restructured itself in the past 10 years? What did it preserve, what did it shed?

A firm that scores well on sensing but poorly on reconfiguring is a future Kodak. A firm that scores well on reconfiguring but poorly on sensing is constantly catching up. The greatest firms score well on all three.

Self-Check Questions

Question 1 — Identifying Core Competencies

For two of the following firms, identify what you believe is the firm’s true core competence (the competence behind the products, not the products themselves). Apply Prahalad & Hamel’s three-test criteria.

Tesla.
統一企業 Uni-President.
Spotify.
王品集團 Wowprime Restaurants.
Walmart.

Question 2 — Sensing Failure

Pick a famous case where an incumbent firm failed to sense a major shift in time (e.g., Kodak/digital, Nokia/smartphone, Blockbuster/streaming, Sears/e-commerce).

Reconstruct the early signals the firm could have detected.
Identify what organizational features blocked sensing — was it culture, structure, incentives, or all three?
What sensing mechanisms could a firm in a similar position install today using GenAI tools?

Question 3 — Core Rigidity Diagnosis

Choose your TP focal company. Identify one capability that is currently a strength but has the potential to become a core rigidity within the next 5–10 years.

Describe the capability and why it is currently valuable.
Identify the future environmental shift that could turn this capability into a liability.
Propose a strategy the firm could adopt now to preserve the strength while building optionality for the shift.

Question 4 — Designing Ambidexterity

Imagine you are advising a successful Taiwanese contract manufacturer that wants to build a brand-led consumer business while maintaining its OEM/ODM core. Apply ambidextrous-organization principles:

What aspects should be separated between the two businesses (culture, location, metrics, talent)?
What aspects should be shared (technology, supplier relationships, capital allocation)?
Identify two leadership challenges the CEO will face during the transition.

Looking Ahead

Chapters 5 and 6 together completed the inside-out view: static resources, value-chain activities, and the dynamic capabilities that allow firms to renew their advantage. We now have both lenses — outside-in (Chapters 3–4) and inside-out (Chapters 5–6) — and can begin synthesizing them.

Chapter 7 turns to the central question of business strategy: given an industry context and a resource base, how should a firm position itself to compete? We will introduce Porter’s Generic Strategies — cost leadership, differentiation, and focus — and the strategic decisions that shape competitive position.