EXTERNAL ENVIRONMENT AND FIRM PERFORMANCE: THE ROLE OF FIRM’S DYNAMIC CAPABILITIES: A CRITICAL REVIEW OF LITERATURE
Abstract
Firm performance is dependent on how major decisions are made in anticipation of or in response to external environmental conditions. The process of making decision within environment is never ending and therefore a continual reassessment of the status of the strategic factors in this environment must take place. As the environment change therefore, organization’s survival entirely depends on devising appropriate responses to unforeseen discontinuities. Empirical evidence emerging from studies and theory on the relationship between external environment and firm performance suggest that the external environment is a source of opportunity, threats and resources as inputs for firms. The theoretical frameworks upon which external environment, firm’s dynamic capabilities and firm performance are based are varied and include the institutional theory, Dynamic capabilities theory and open system theory. Great performance is assured when the responsiveness of an organization’s dynamic capabilities matches the turbulence in the environment. Performance is a reflection of how leaders align their organizations to the environment, through firms’ dynamic capabilities practices, so as to be successful and to outdo competition. How well an organization fits itself within the external environment determines its level of performance since organizations are environment dependent and serving. Equally, firm dynamic capabilities play a pivotal role in determining the performance of the firm. In this regard, firms that are able to align certain firm features with the environment outperform other firms. Therefore, firm dynamic capabilities are essential determinants of firm performance and success. Furthermore, many firms today are facing extraordinary challenges in maintaining commercial survival and success. Arising from rapid changes happening in today’s marketplace and emerging business practices, it is more likely for firms to fall behind by not keeping up with tendencies of their external environments.
Key words: External Environment, Dynamic capabilities, Firm Performance
CITATION: Nyaberi, J. P. L. (2021). External environment and firm performance: The role of firm’s dynamic capabilities: A critical review of literature. The Strategic Journal of Business & Change Management, 8 (3), 1109 – 1115.
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DOI: http://dx.doi.org/10.61426/sjbcm.v8i3.2128
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