Among complex and inconsistent external environment (Zahra, Sapienza, & Davidsson, 2006); especially, in an open economy with rapid change in innovation, globally diffuse sources of invention, innovation, manufacturing capability (Teece, 2007), and market dynamism (Eisenhardt & Martin, 2000), firms hardly rely on their resources to drive through sustainable competitive advantages.

Firms within these fluctuations will need to integrate, build, manipulate and reconfigure internal and external competences to tackle these unsteady environments, termed as ‘dynamic capabilities’ (Teece et al. 1997; Eisenhardt & Martin, 2000; and Ng, 2007). The dilemma provokes that what factors affecting firms’ competency in creating dynamic capabilities to sustain their competitive advantages to respond to market dynamism. As discussed by Eisenhardt and Martin (2000), dynamic capabilities are not themselves sources of sustained competitive advantages, it’s rather the ability to use dynamic capabilities sooner, smarter or more effectively than competitors.

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Moreover, Ng (2007) asserted that strength of dynamic capabilities depends on the ability of organisation to discover new resource combinations and uses through gathering valuable information to apply with its ‘prior knowledge’ accumulated through its path dependencies. This implies that the ability of organisations to manipulate and adapt their existing resources or new external resources in creating dynamic capabilities heavily relies on the knowledge derived from learning process within.

This view is supported by Grant (1996) that organisational capabilities are the result from knowledge integration to team-based productive activities exemplified by Chrysler’s automobile design process and Shell’s deep-sea oil exploration. As a result, it could be concluded that organisational capability relates to competitive advantages which firms need to assess and integrate their staff’s specialised knowledge. Consequently, this paper will discuss of what factors create knowledge that particular firms will utilise to generate innovation and creativity which, finally, form dynamic capabilities.

Growing of knowledge of the firm requires learning process from both internally e. g. reorganising, accidents, experiments; and externally e. g. acquisitions, joint ventures or new staff (Grant, 1996). With the help of top management to critically identify what knowledge is essential for firm success, thus creating structures in which that knowledge could be protected, and then coordinating the flow of that knowledge across functions (Holbrook, Cohen, Hounshell, & Klepper, 2000).

This concept is emphasised by Eisenhardt and Martin (2000) addressing that the evolution of dynamic capabilities occur along a unique path of any particular firm which is shaped by learning mechanisms; for example, repeated practice, small losses, crises and pace experience (e. g. Argote, 1999; Sitkin, 1992; Kim, 1228 and Hayward, 2000). Innovation and creativity, yielded from learning process, are considered to be other crucial elements comprising dynamic capabilities as they help firms reconfigure their resources (Zahra, Sapienza, & Davidsson, 2006) within to respond to dynamic market and environments.

Organisations which execute more innovations will yield more profits distinctively in terms of return on equity (Sharfman & Dean, 1997). Supported by Eisenhardt and Martin’s argument (2000) states that dynamic capabilities can be duplicated across firms, their value for competitive advantages lies in the resource configurations that they create, not in the capabilities themselves. Knowledge descended through learning process and flow of knowledge within organisation will enable firms to capture information, then to create innovation and creativity in manipulating existing firm resources.

A coordination of knowledge flow across organisation is a key mechanism of learning process within firms. Coordination is a means which firms integrate the specialised knowledge of their members (Grant, 1996). Moreover, Grant (1996) also found that organisational capability links to competitive advantages. Nevertheless, firms need to consider that it is difficult to transfer tacit knowledge within organisation, so they should transform tacit knowledge into explicit one or adopt technology to transfer relevant knowledge to the right sections within.

Technology is also one of the most important factors impulsing organisations to adapt themselves toward market change (Holbrook, Cohen, Hounshell, & Klepper, 2000). Teece (2007) stated in his work that firm success also depends upon efficient and effective technology transfer inside the enterprise and between and amongst enterprises. Technology and the coordination of this knowledge throughout the organisation will not only enable firms to grasp opportunities in dynamic market, but also empower firms to generate knowledge to their members and enhance innovation and creativity from downward direction.

Nevertheless, employing technology within the firm has its costs. Firms need to consider and analyse trends in their industry and search for any technological advancement that could help their firms to gain advantages in terms of innovation and uses of technology to strengthen their operation prior to competitors. Top management’s ability to integrate the activities and information flows across the different functional areas (Holbrook, Cohen, Hounshell, & Klepper, 2000) is considered important for individual firm performance.

Top executives are those who possess the authority to access through rganisation information, resources, and external information – economic situation and market changes. However, knowledge of the firms communicated through learning process will exist from operating-level management to middle-level executives (Floyd & Lane, 2000) whose strategic roles serve as mediating device between diversified inputs, changing demands and the status quo strategy of the firms. Thus, middle management must be able to evaluate new information in the context of the firms’ present strategy, operations and fluctuating markets in order to render this information to allow top management to understand the current issues.

Even though all the above factors contribute to the learning process of individuals and organisations in capturing all relevant information internally and externally to create creativity and innovation which are vital sources of dynamic capabilities, organisation culture has much effect on the effectiveness of the organisation learning process - openness of the management in adopting new knowledge and adapting it to the manipulation of existing firm resources.

At firm level, openness allows organisations flexibility to adapt diverse and dynamic environment as decision makers will be open to new ideas, different sources of information and their roles (Sharfman & Dean, 1997). Top or middle management who are too rigid on their intended strategies and too adhesive to their existing knowledge will block themselves from considering retrieving new information and knowledge from external sources or even competitors’ strategies; as a result, end up in dysfunctional judgmental effects (Zajac & Bazerman, 1991).

Openness also means flexibility that managers are open to allow middle executives and lower level management to participate in decision process (Sharfman & Dean, 1997) in which creating the flow of knowledge and generation of ideas through different motivation approaches. In conclusion, within rapid changing environments in terms of external and internal variables; for example, economic crises, technological changes, market fluctuation and changes in customer behaviours, dynamic capabilities cannot create sustainable competitive advantages, rather be it long-term competitive advantages.

Capturing, generating and integrating new and existing knowledge through learning process will enable firms to innovate and create dynamic capabilities or should be called here as ‘adopt and adapt’ concept to respond to external changes; meanwhile, strengthen firms’ internal resources supported by Holbrook et al (2000) that the source of knowledge, the flow of knowledge and the ability to allot ‘key knowledge’ to the relevant units within the firms are vital to the long-term performance.

The feedback in the form of information will be gathered and inserted into a cycle of the learning process of the organisations; hence, creating long-term competitive advantages continuously. Figure 1 sums up the idea of how knowledge existing through learning process generates innovations and creativity to enhance dynamic capabilities and creates long-term competitive advantages to respond to environmental dynamism effectively.

However, firms needs to consider that longevity of competitive advantages gained through knowledge depends on the inimitability of the distinctive capability; thus, transferring common knowledge through the firms but preserving specialised knowledge to those deserve to have it as Grant (1996: 117) stated, ‘the complexity of broad-scale integration creates greater causal ambiguity and greater barrier to replication. ’