The general framework advanced here sees dynamic capabilities as the foundation of enterprise-level competitive advantage in regimes of rapid (technological) change. The framework indicates that the extent to which an enterprise develops and employs superior (nonimitable) dynamic capabilities will determine the nature and amount of intangible assets it will create and/or assemble and the level of economic profits it can earn (see Fig- ure 1.4). Furthermore, the framework emphasizes that the past will impact current and future performance. However, there is much that management can do to simultaneously design processes and structures to support innovation while unshackling the enterprise from dysfunctional processes and structures designed for an earlier period.
In Teece and Pisano (1994) and Teece, Pisano, and Shuen (1997), we proposed three organizational and managerial processes— coordination/integrating, learning, and reconfiguring—as core ele- ments of dynamic capabilities. These processes are a subset of the processes that support sensing, seizing, and managing threats. Together they might be thought of as asset “orchestration” processes. A key strategic function of management is to find new value-enhancing combinations inside the enterprise, and between and amongst enterprises, and with supporting institutions external to the enterprise. Because many of the most valuable assets inside the firm are knowledge related and hence nontradable, the coor- dination and integration of such assets create value that cannot be replicated in a market. This establishes a distinctive role for managers in economic theory and in the economic system. Man- agers seek new combinations by aligning cospecialized assets. The need to sense and seize opportunities, as well as reconfigure when change occurs, requires the allocation, reallocation, combination, and recombination of resources and assets. These are the key strategic function of executives. Indeed, skills used to identify and exploit complementarities and manage cospecialization are scarce. Figuring out how to increase value from the use of the assets the enterprise owns involves knowing the fine-grained structure of the firm’s asset base, and filling in the gaps necessary to provide superior customer solutions. Gap filling may involve building new assets, or acquisitions and strategic partnerships (Ettlie and Pavlou, 2006).
Fig. 1.4. Foundations of dynamic capabilities and business performance
The dynamic capabilities framework recognizes that the busi- ness enterprise is shaped but not necessarily trapped by its past. Management can make big differences through investment choice and other decisions. Enterprises can even shape their ecosystem. In this sense, the framework is quite Chandlerian (Chandler, 1990a, 1990b). Managers really do have the potential to set technological and market trajectories, particularly early on in the development of a market (David, 1992). Indeed, the enterprise and its envir- onment frequently coevolve. However, because of the assumed context—regimes of rapid technological change exposed to the full force of international competition—there is little room for big mistakes.
Hence, the dynamic capabilities framework is partially but not entirely in the spirit of evolutionary theorizing. The dynamic capa- bilities framework endeavors to capture the key variables and relationships that need to be “manipulated” to create, protect, and leverage intangible assets so as to achieve superior enterprise performance and avoid the zero-profit trap. However, building and assembling tangible and intangible assets and effectuating change is seen as difficult. Long-run success is likely to require achieving necessary internal creative destruction, possibly involving spin- outs and spin-offs to help sustain superior performance. Decision biases must also be neutralized. In short, enterprises may be more like biological organisms than some economists, managers, and strategy scholars are willing to admit; but they are also more mal- leable than some organizational ecologists are willing to recognize. The enterprise will need sensing, seizing, and transforma- tional/reconfiguring capabilities to be simultaneously developed and applied for it to build and maintain competitive advantage. Simultaneity may not be necessary at the product level—indeed, Helfat and Peteraf (2003) distinguish between capability develop- ment and subsequent honing, grafting, and branding. Endeavoring to simultaneously achieve sensing, seizing, and reconfiguring at the individual product level could lead to chaos and lack of effective- ness, as routines and rules in the organization would likely be in a continuous state of flux.
The first two capabilities recognized as fundamental—sensing and seizing—are related to but different from March’s (1991, 1996) concepts of exploration and exploitation. March seems clear that both are necessary for adaptation, but he has recognized the ten- sions, if not incompatibilities, between the two. His argument in part is that incompatibilities flow from the fact that exploration and exploitation compete for resources and that the mindsets and organizational routines needed for one are different from the other, making simultaneous pursuit difficult, if not impossible. While there is merit to each assumption, both need to be put in per- spective. With respect to competition for resources, sensing does not necessarily involve large commitments of resources, at least not relative to seizing. Certain aspects, such as monitoring the environment, can be a low-cost activity. Early-stage exploratory research is also relatively inexpensive. Mansfield et al.’s (1971: table 6.2) studies of new product development showed that the cost of early-stage research activities was a small percentage of the total new product development costs. For instance, the costs of pharmaceutical development typically far exceed those of phar- maceutical discovery. Also, with respect to the different mindsets and routines, while there are undoubtedly tensions, these can be relieved by having different organization units (or different parts of an organizational unit) specializing to some degree in sensing as compared to seizing. As Gupta, Smith, and Shalley (2006: 697) note: “exploration or exploitation in one domain may coexist with high levels of exploration or exploitation in the other domain”. Of course, the outsourcing of manufacturing and other aspects of seizing reconciles the issues even more starkly, as the rou- tines needed for proficient manufacturing then lie external to the firm.
The need for both exploration and exploitation is well accepted for adaptive systems, and is embedded in the literature on ambidexterity (e.g. O’Reilly and Tushman, 2007). This literature recognizes that both exploration and exploitation can be assisted by differentiated but partially or weakly integrated subunits (divisions, departments). Sensing activities need to be decentralized with the information rolling up to top management. Tight planning will be a part of seizing, but less so of sensing.
To summarize, an enterprise’s ability to manage competitor threats and to reconfigure itself is dependent on its investment activity, which is in turn dependent on its ability to sense an opportunity. This aspect of dynamic capabilities indicates that the likelihood of achieving financial success depends on events and responses to them. Formally, let the probability of a high economic profits ranking for an enterprise, conditional on some extraordi- nary event E (e.g. an exogenous technological change that opens up the possibility of a new business opportunity) occurring,28 be Pr (П|E). Then: Pr (П|E) = Pr (sense|E) × Pr (seize|E, sense) × Pr (manage threats/transform|E, sense, seize,) × Pr ((П|E), sense, seize, manage threats/transform).
As indicated throughout this chapter and throughout earlier treatments by this author, it is also necessary to assess the issue of the “sustainability” or nonimitability of both assets and capa- bilities. This in turn depends upon a number of factors sum- marized adequately by the twin concepts of “isolating mecha- nism” and “appropriability regimes”.29 When the appropriability regime is “tight” and the business enterprise’s own isolating mech- anisms are strong, differential performance can be sustained, at least for a time. Dynamic capabilities of course require the cre- ation, integration, and commercialization of a continuous stream of innovation consistent with customer needs and technological opportunities.
Note that in the dynamic capabilities framework, enterprises must employ sensing, seizing, and reconfiguring mechanisms to direct their financial resources consistent with marketplace needs and imperatives. However, as a matter of pure theory, enterprises need not continuously reinvent themselves. The need to rein- vent depends on events, anticipated or otherwise. If the ecosys- tem in which the enterprise is embedded remains stable, the need to change can be modulated accordingly.30 Indeed, if an enterprise controls standards, or can somehow help stabilize its own environment, then it may not need to engage in the con- tinuous and costly exploration of radical alternatives (March, 1991). Selecting suitable business models, making the right stra- tegic investment decisions, and pursuing incremental innovation can keep an enterprise highly competitive for a decade or so (e.g. Boeing’s decision to build the 747, which 30 years later is much improved and still competitive in some configurations on some routes) if the environment is stable. Excessive internal change for the sake of it can lead to internal chaos and performance failure.
Source: Teece David J. (2009), Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth, Oxford University Press; 1st edition.