Traditionally, construction has been a transaction-oriented industry. However, it is changing from the design–bid–build process into a business based on innovation capability and performance management, in which contracts are awarded on the basis of factors such as knowledge, intellectual capital and skills. This change presents a challenge to construction-sector SMEs with scarce resources, which must find ways to innovate based on those attributes to ensure their future competitiveness. This paper explores how dynamic capability, using an absorptive capacity framework in response to these challenges, has been developed in a construction-based SME. The paper also contributes to the literature on absorptive capacity and innovation by showing how the construct can be operationalized within an organization. The company studied formed a Knowledge Transfer Partnership using action research over a two-year period with a local university. The aim was to increase its absorptive capacity and hence its ability to meet the changing market challenges. The findings show that absorptive capacity can be operationalized into a change management approach for improving capability-based competitiveness. Moreover, it is important for absorptive capacity constructs and language to be contextualized within a given organizational setting (as in the case of the construction-based SME in the present study).
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