This study investigates the product development process of two small firms in the Norwegian software industry. A firm’s ability to mobilize its capabilities and align them dynamically with the changing environment is of vital importance as the firm constantly innovates to survive and create its own competitive advantage. While literature has addressed new product development process and challengers it cope with, a limited focus has been taken on what capabilities are necessary to successfully overcome them. In the present paper we discuss the challengers that SME’s meet while introducing new product development process in software industry and dynamic capabilities they utilize to overcome these challengers. Our findings reveal two main challenges – the need to continuously competence improvement and the need to enhance the efficiency of product development process. We found that to cope with these challenge both firms extensively developed open innovation mode through knowledge generative capabilities as well as certain integrative capabilities.