Building dynamic capabilities in SMEs amidst the COVID‐19 crisis: an exploratory investigation of the UK’s creative industries

Small- and medium-sized enterprises (SMEs) possess operational capabilities to manage their daily operations, but they also strive to cultivate dynamic capabilities to navigate swiftly changing business environments. The building of dynamic capabilities beyond operational ones empowers SMEs to establish sustainable competitive advantages. SMEs undertake this endeavor with the aim of formulating strategic responses to the rapidly evolving demands emanating from the business environment. Over the past two years, these shifting demands have had a profound impact on SMEs due to the COVID-19 crisis. The pandemic led to the suspension of the United Kingdom's economy in 2020 and 2021, compelling SMEs to go into lockdown. Consequently, SME founders and managers found themselves compelled to swiftly explore alternative strategies and adapt to new operational paradigms in a matter of days. This circumstance has presented an unusual opportunity to deeply address the theory and practices of dynamic capabilities within SMEs, an opportunity that might not have arisen otherwise or would have remained in the background.

Drawing upon an exploratory investigation involving thirty SMEs in the creative industries of the UK, this study seeks to unravel the process by which SMEs build dynamic capabilities amidst the COVID-19 crisis. As is the case with any crisis, there is an imperative to swiftly detect and capitalise on new opportunities, mitigate threats, and subsequently reconfigure the organisation to meet emerging external demands, thereby preparing for future opportunities and threats. This research was conducted from the latter half of 2019 to the first half of 2022 and relied on thirty interviews conducted with a diverse array of SMEs within the UK's creative industries. The primary findings from these interviews suggest that the building of dynamic capabilities emerged as the primary strategy employed to contend with the challenges posed by the COVID-19 crisis. The study indicates that the effective execution of sensing and seizing new opportunities resulted in the continuation of business operations and the attainment of competitive advantages. However, the execution process of sensing, seizing, and transforming differed among SMEs, leading to varying levels of impact on firm-level performance (resulting in uneven impacts). This disparity can be attributed to the managerial resources of owner-managers at the micro-level, which in turn influenced the macro-level performance of SMEs.

The managerial resources, including cognition, social capital, and human capital of owner-managers play a critical role in the building of DC. This distinctive feature is a characteristic of SMEs, stemming from their small-scale nature and minimal bureaucracy compared to larger enterprises. In most cases, SME respondents were not necessarily competing with other similar SMEs during the crisis; instead, their primary focus was on surviving by transitioning their processes digitally. Several SME respondents managed to capitalise on the crisis by adeptly sensing and seizing opportunities, transforming threats into growth prospects in the post-COVID recovery phase. This outcome aligns with Winston Churchill's mid-1940s assertion to "Never waste a good crisis." Conversely, a small number of SME respondents struggled to adapt to the rapidly changing conditions. In summary, building dynamic capabilities proved to be an effective tool for managing strategic change in response to the swiftly evolving challenges presented by the COVID-19 crisis. SME respondents who successfully leveraged dynamic capabilities benefited significantly from the crisis, in contrast to those who did not.

This research contributes to the fields of dynamic capabilities, SMEs, and the creative industries. This pioneering study contributes to a novel stream of new publications on the COVID-19, specifically addressing effective responses to the pandemic. It is important to note that the crisis affected not only individuals' physical and clinical well-being but also had profound economic repercussions. Consequently, the empirical findings of this study offer fresh insights into SME adaptability and responses within dynamically shifting business environments. As such, the research implications of this study hold relevance for academia, policy-making, and practical application alike.