 So welcome back again chapter 4 and I will continue the lecture on performance and conditions of change on the topic dynamic change. So in the previous clip are warned against the use of plant change theory too much because many of the changes are literally unpredictable. In this clip I will guide you towards another stream of thinking which is more about preparing the organization to be able to deal with changes as they come along. So this is about dynamic capabilities. After this clip you will understand what these dynamic capabilities are and moreover you will have the human resource management theories that go with the three most important dynamic capabilities which are adaptive capabilities, absorptive capabilities and innovative capabilities. So let's first have a look at this concept of dynamic capabilities as a thing that you need as an organization to be able to deal with change. The idea of dynamic capabilities comes from Edith Penrose, Nobel Prize winner economist thinking about what makes a successful organization and she said that it's the successful organizations they are actually not the organizations who plan to be successful but who are able to scan the environment, see which opportunities come along and then act upon that, take the opportunities from the environment and make sure that they become part of the organization. Actually a successful organization acts like a successful entrepreneur and what do entrepreneurs do? They seek for opportunities and they organize to be able to act upon these opportunities. For example if you have a brilliant business idea it could be a good start as an entrepreneur however if you'd like the money to pursue this idea then you're not prepared for your big idea. So it's always these balance between on the one hand scan the environment and seeing opportunities but on the other hand organizing make sure that you have the resources so that when the opportunity comes along you're able to grasp it and act upon it. So Edith Penrose said that what organizations need are resources that allow organizations to enterprise, to seize opportunities when they come along and these are dynamic capabilities. So organizations that are effective using dynamic capabilities they are sometimes also referred to as agile organizations and organizations that can easily adapt to what comes along and agility is a term that originally comes from the ballet. So the ability to stretch and move, I'm not going to dance here but you kept the idea, the agile is the way to be able to stretch and to learn new moves and to also respond to the music and the sound in other ballet dancers. So this concept was adopted to modern organizations as a word to express that organizations can react on opportunities and challenges as they come along by adjusting their organization and to just benefit from that. So dynamic capabilities are capabilities for dealing with change. The definition is that they help organizations to seek for opportunities as they come along but making sure that you have the right resources to be able to act upon the opportunities. If you start organizing for an opportunity the moment you see it you're probably too late. So that's the difference between these kind of theories and planned change theories. In planned change you know what's coming because that's where you want to go and then you start planning. In dynamic change theories you make sure that you have a bottom line in the organization that helps you act upon a change. There are three types of dynamic capabilities and they will guide the rest of this knowledge clip. These are adaptive capabilities, so adjusting organizations systems, management and organization structures, absorb the capability to bring in new knowledge from outside the organization to the organization and finally innovative capability to how can you prepare your organization to innovate. I'm going to explain all three of these and link them to theories that we commonly see in human resource management literature. So here you see in a figure or in a table the overview of the three dynamic capabilities. They are lifted on the left, they are mentioned on the left. They are adaptive capability, absorptive capability and innovative capability. And you can read the key actions. So the key actions are to adjust the management systems for adaptive capability to bring in new knowledge and information, absorptive capability and to develop and create new knowledge, new products and markets, innovative capability. So how can human resource management contribute to these three key dynamic capabilities? I'm going to talk you through these three human resource contributions and their particular theories that come with them. So in the adaptive capability we're talking about adjusting your workforce so that they know other things or so that they are more or less, depending on the need of the situation. The theory that I will introduce you to is the theory of the flexible firm introduced by Atkinson. For absorptive capabilities, this is all about organizational learning capabilities. So you can organize in the way of NONAC and TACRC for example to have an organization that reaches outside and brings in new knowledge. The final one, innovative capability. This is about organizing your workforce in such a way that there's a balance between exploiting or building on existing knowledge and exploration, so bringing in new knowledge. And the key author in that respect is March. So one by one, first adaptive capabilities. I'm going to take you through the logic of the flexible firm theory. As you can see, the theory was launched in 1994 and Atkinson is from the UK. If you place the position in its historical frame, you'll remember or maybe know that that was the era when the UK was facing a lot of factory shutdowns, the mines were closing. It was a particularly bad economic situation, thatcherism. So a lot of firms were struggling adjusting to this new economic climate and a change in what companies actually needed to do. They needed to move from the old industrial period, a lot of manufacturing to maybe a knowledge industry. So what Atkinson claimed in a prominent paper of 1984 is that organizations can organize the contracting and training of employees in such a way that they can easily grow and shrink depending on what the organization needs. According to Atkinson, you can adjust your organization's workforce in two ways. First is quantity. And this is literally about the amount of employees or maybe to make it even more clear the amount of hours that are available for employees to put in the work that's needed in the organization. So numerical flexibility means that your organization can grow by hiring new employees or by making your current employees work more hours or shrink by firing employees, terminating contracts or make your employees work less hours, quantity. So they do nothing different, they just do more or less. Quality is about the things that employees are capable of doing. So this is allowing employees to have just a narrow task, then the quality is limited, but you can make larger qualitative flexibility if you, for example, cross-train employees over different product lines or over different departments. That way, employees become flexible in a qualitative manner. And you can easily, if one department is performing less, transfer them to another department and they can just continue working and help the organization. So organization flexibility goes along to access, quantity and quality. The flexible firm, the idea is that you combine different types of employees in the organization. So employees on permanent contracts, so they have a contract until infinity or until their retirement at least with the organization. So the organization can't just terminate their contract without going to a judge and make a legal case out of it, for example. Next to that, you can hire employees on temporary contracts and they are much easier to get rid of once you don't need them any longer. So agency workers, temporary contacts, zero-hour contracts, these are all examples of employees in the flexible rank of the organization. The figure to the right illustrates the different type of contracts that go along with this idea of quantitative and qualitative flexibility. I'm not going to dive into the figure in too much detail here, so I want you to understand the key of it. And you can read in the book chapter the details on all the different layers of the, of the, of the union model. What I do want you to know is the implications for human resource management. So according to Adkinson, you should prepare your organization to be flexible. So everything starts with the yellow line in the bottom. An organization that is in financial bad weather is not in the right state to, to introduce a model like this. They are more in the state like you need to know, you need to make reductions in order to survive anyway. So if you want your organization to be more flexible, you need to really consider to what extent you want to have core work. So people on a permanent contract and to what extent you want to have a flexible rank, the peripheral workers that are on a different type of contract with your organization and to what extent you want to have numerical flexibility. So more or less hours that people can work for the organization or you want to have this cross-training idea that you bring in new knowledge and that people can do multiple jobs within the same company. You see the HR implications following in the model. If you combine these things on the left-hand side, this is all about contracting. So what kind of contract do you offer employees? Core workers, they have a permanent contract with your organization, difficult to fire them. They come with loyalty, so in times of labor scarcity, it might be a good idea to have enough core workers to ensure that you can always do your core processes. Peripheral workers, they are the people on temporary contracts. And you can easily get rid of them, the nasty word, if you don't need their services any longer. On the functional side, you'll see either a choice between training your core workers. So use job design and training to make sure that employees are capable of doing multiple jobs in the organization. Job design can imply, for example, job enlargement, more tasks, training for another position in the organization, so a lot of investments in the knowledge and skills of workers, or hire them from, for example, a consultancy firm. So depending on how often you need a certain type of knowledge, you can decide to hire an expert every now and then. So to dive into the specific practices that go along with these different HR actions, you can think, for example, about for core workers to make them more flexible part-time work, or flexible hours, or paid overtime, or zero-hour contracts. So these people still all have a permanent contract with the firm, but they can flex the hours to some extent. The compressed work week, especially when there's bad financial weather, it's possible to agree for the entire workforce that they will work, for example, four days rather than five days a week. For the peripheral workers, these are people that are hired on temporary contract base, so directly with the organization, day laborers, sometimes self-employed employees, subcontractors, or agency workers. On the training side, think, for example, about learning on the job, working together with a colleague, doing a project together, upskilling, learning new things, to be able to not only do this part of the process, but a larger chunk. Reschooling, learning to do new things, make sure that people's jobs rotate, for example, and a very, very nice idea is also to have an internal labor market. So when job openings come up in the organization, then employees who work already in the organization, they have priority over other applicants to fill those positions. Finally, about the peripheral functional flexibility, so when to bring in experts that you don't need on a daily basis, this is about thinking about how to organize your organization. You can, for example, hire a specialist, but what also sometimes happens is organizations want to go back to their core processes, and they subcontract all the processes that are considered less key to the organization, to specialist organizations. So this peripheral work, it can be outsourced entirely. Many organizations, for example, have outsourced their cleaning and cafeteria lunch rooms to external organizations. So this is an example that fits perfectly within the flexible firm theory of at-consent to keep the core, make them numerical and functional flexible, and make sure that your organization is really good at that, and kind of not invest too much in things that are ballast, so to speak, to the organization. So the implication for human resource management, a lot of research to this model, it is not without risk. Obviously there are downsides for employees who are in the peripherals side of the model, but also for organizations to invest too much in all kind of peripheral layers, as consequences, for example, to the retention of knowledge within the organization. In fact, if you look at what is most effective from this model, it's still making sure that your core workers are cross-trained and flexible in terms of knowledge rather than ours. So moving on to absorptive capability, the power of the organization to bring in all kind of new knowledge, and this is this scanning, the entrepreneurial scanning of the environment, and knowing where the opportunities are and be knowledgeable also to be able to use these new developments. So this absorptive capability, it's a lot of research there. The names here is Kohen and Leventel and Zara and George, they really talk about how to organize your organization in such a way that you can bring knowledge that exists in the outside world into your organization. I'll keep it brief here since we already had a whole chapter on knowledge management. So what you can think of are what you can do for it to organize absorptive capability is literally, again, to organize organizational learning capability. So the capability of the organization as a whole to access information from outside the organization, bring it into the organization, learn from it and convert it into new knowledge. So here is, again, the importance of knowledge transfer combined with organizational learning. So chapter three in essence. What you need from an HR perspective are practices that are aimed at knowledge transfer and strong social ties. So chapter two and chapter three to bring the knowledge into the organization and make sure that within the organization there are flat layers that people can find each other and build upon it. To continue with the last bit of the dynamic capability theory is about innovative capability. So here it comes about to how, to what extent should an organization pursue being completely innovative and do novel things rather than trying to be really good at what they can do. So the theory by March is already in another one is about balancing exploitation and exploitation as a way to come to sustainable innovation for your organization. The question that is asked is, does it make sense as an organization to do something completely new every three years? And your gut feeling probably says no. The other question is, does it make sense for an organization to keep doing what they did the past hundred years and still be successful today? And the answers probably also no. Okay, so where's the balance? Exploration means doing new things. Exploitation means becoming better at what you're already good at. And both of these things have benefits for being innovative and being innovative is a way to stay competitive as an organization. So the final capability is the capability for innovation and the key concepts here are exploration, so finding new things and exploitation becoming better at what you already do. Before that, it is important to know that you should have systems in place that encourage knowledge creation and proactive behavior at all levels in the organization and a strategy oriented towards innovation. I'll dive into this last bit of the definition of capability for innovation. So what is a sound strategy for innovation? And learning from the theory and research by Martin Simon, we know that it is in fact a balance. As an organization, you strive to find a balance between on the one hand scanning and seeing opportunities that you want to pursue, try to learn new things and build with this and really innovate. And on the other hand, keep what you're good at. So successful innovation is not about radical shifts and doing something completely different. It is about the integration of existing expertise, the exploitation part with knowledge acquired in the broader context, exploration. One very nice example is about the cigar company, production facility building cigars and in the no smoke area, area that we are nowadays, the production of cigars was on a dead end. But this company happened to be really, really, really good at making cigars. But they also were really good at the technology that was needed to make the cigars. They sat together and they brainstormed about how to use their knowledge for this particular technology of making cigars and they figured that they could use this knowledge also in the 3D printing industry. So they moved their company and it involves selling the old bits to somebody who still believed in it and creating a new company moving from building cigars to building 3D printers. The technology remained the same. It was what they are good at. However, the application was entirely new and this illustrates a perfect balance between exploitation, knowing what you're good at and exploration, finding a new application and then become the market leader there. So implications for HRM are numerous. Hiring, how to do that. Flexible contracts or permanent contracts. Bringing in new knowledge by hiring people is also interesting. Training your employees, making sure that people are happy to contribute to knowledge creation and last but not least, retention of employees to the organization is really key if you want to contain these dynamic capabilities. Maybe as a final lesson, organizations that have very high turnover rates, they kind of ruin the dynamic capabilities that are needed for the organization as a whole to respond to opportunities that come along. So it's too easy to say that employees are just a cost post that should be organized as flexible as possible. That kind of diminishes the idea that employees are actually the source for dynamic capabilities. So this brings me to the end of this knowledge clip. Now you know that management should act as an entrepreneur in the sense that organizations should be ready for change. They can do this by building a set of dynamic capabilities existing of adaptive, absorptive and innovative capabilities. These dynamic capabilities can be developed by human resource management by investing in a workforce scalability, the flexible firm in organizational learning and by balancing exploration and exploitation for innovation. The next clip will be about the implications of change for employees and their careers.