Implications of Dynamics Capabilities for Future Research on the Firm, the Role of the Manager, and Ecosystems

Based on the discussion of the intellectual roots and current con- tent of the dynamic capabilities research program, we can outline at least the following important implications for research on strategic processes and organizational change.

1. Finding a Place for the Manager in Economic Theory

Ronald Coase was well aware that economists have neglected the role of management in the theory of the firm when he noted that “economists have tended to neglect the main activity of the firm, running a business” (1988: 38). Indeed, there simply is no role for the manager in the economic theory of the firm. Although Williamson claims that the role of management is “significant” in transaction cost economics (1999: 1101), his support for the assertion makes reference to the adaptive properties of organiza- tion, and recognition that management can exercise “fiat”. This is a beginning, but it is inadequate.

In the dynamic capabilities framework, management plays dis- tinctive roles in sensing opportunities, making investment choices, in orchestrating nontradable assets into combinations that yield economies of scope, and in bringing about continuous organiza- tional renewal. This is a more robust role for management than transaction cost economics has so far afforded.

But whatever differences may exist between transaction cost economics and dynamic capabilities with respect to the role of the manager, they pale next to economic models of the neoclassical firm where managers and the management function have essen- tially been blotted out.18 As Baumol puts it:

Obviously, the entrepreneur has been read out of the model. There is no room for enterprise or initiative. The management group becomes a passive calculator that reacts mechanically to changes imposed on it by fortuitous external developments over which it does not exert, and does not even attempt to exert, any influence. One hears of no clever ruses, ingenious schemes, brilliant innovations, of no charisma or of any of the other stuff of which outstanding entrepreneurship is made; one does not hear of them because there is no way in which they can fit into the model. (Baumol, 1968: 67)

Teece and Winter (1984) likewise observed that entrepreneurship had been suppressed in the theory of the firm. Serious questions are raised with respect to the value of neoclassical models in management theory, management education, and, by implication, management practice.19

2. Developing the Behavioral Foundations of Dynamic Capabilities

Williamson is clear with respect to the behavioral assumptions of transaction cost theory. They are bounded rationality and oppor- tunism (1985). The dynamic capabilities framework has broader behavioral foundations than transaction cost theory (leading to a more integrative and interdisciplinary framework). It shares an emphasis on limited rationality; but we would argue that we need a richer notion of human behavior that invites analysis of economic organization not just in terms of opportunism and incentives—but also involves issues of organizational identification, loyalty, and even culture.

The modern business organization is a complex entity; and understanding and improving its performance requires more than good incentive design. It involves creating internal organizational systems that support the creation of organizational identification and loyalty. As Simon noted: “It requires organizational identifica- tion, as well as sticks and carrots, to direct behavior towards achiev- ing organizational objectives, and in highly effective organizations, the former plays the dominant role. To state the matter in classical terms, if members of organizations are maximizing their utilities, the organizational goals must constitute major parts of their utility functions” (1947: 201).

The mechanisms of organizational identification aren’t just moti- vational. If organizational identification is strong, it can counteract opportunistic behavior. Simon (2002) has suggested that relatively decentralized and “decomposed” organizational structures are bet- ter mechanisms of identification (Simon, 2002). Dynamic capabil- ities recognize that organization identification is important to the efficient and effective functioning of business organizations.

3. Entrepreneurial Management

Entrepreneurial management also plays a critical role in the dynamic capabilities framework. If, as Winter (2003) and others suggest, dynamic capabilities are defined mainly around high-level routines, perhaps the role of (strategic) management is reduced and relegated to selecting new routines. Certainly, if innovation were to ever become a routine in the business enterprise, then the manager/intrapreneur has a modest role to play after the routines are in place. The dynamic capabilities framework indicates a bigger role because it also references asset selection and asset orchestra- tion as a critical organizational capability.

In an economic system, principals and/or their agents must design and implement processes to manage change, must direct the reinvestment of cash flow, and must configure asset portfolios, including allocating resources between exploitation and explor- ation (March, 1991, 1994). They must also stand ready to recon- figure asset portfolios and organizational systems as circumstances change. In a strict evolutionary view of the world, there is no specific agent and no hierarchy responsible for regulating the evo- lutionary process (Cohendet et al., 2000).

However, except in a pure ecological view of organizations, there is room for value to be added by the managerial and entrepreneur- ial functions. The manager/entrepreneur need not be an individ- ual; in the modern corporation it is a function. As Schumpeter (1949) noted: “The entrepreneurial function may be and often is filled cooperatively—in many cases, therefore, it is difficult or even impossible to name an individual that acts as ‘the entrepreneur’ (pp. 71–2).

The manager/entrepreneur must articulate goals, help evaluate opportunities, set culture, build trust, and play a critical role in the key strategic decisions. Clearly the role of the entrepreneur and the manager overlap to a considerable extent. Sometimes they are one and the same. As Simon (1991) recognized:

Especially in the case of new or expanding firms, the entrepreneur does not face an abstract capital market. He or she exerts much effort to induce potential investors to share the company’s views (often optimistic) about its prospects. This executive is much closer to Schumpeter’s entrepreneur than to the entrepreneur of current neoclassical  theory.  Whether  the firm expands or contracts is determined not just by how its customers respond to it, but by how insightful, sanguine and energetic its owners and managers are about its opportunities. (p. 31)

The manager/entrepreneur plays a key role in asset selection and the “coordination” of economic activity, particularly when comple- mentary assets must be assembled. The manager/entrepreneur can bargain and negotiate and buy or sell or swap investments/assets, orchestrate internal assets (intrapreneurship), and transact with the owners of external assets (entrepreneurship). He is likely to have strong skills in working out new “business models” which define the architecture of new businesses (Chesbrough and Rosen- bloom, 2002). The astute performance of this function will help achieve what Porter (1996) calls “strategic fit”, not just with intern- ally controlled assets, but with the assets of alliance partners.20 The manager/entrepreneur can also shape learning processes with the firm. These are not functions which can be achieved by markets divorced from managers/entrepreneurs.

Thus the entrepreneur/manager in the dynamic capabilities framework is in part Schumpeterian (the entrepreneur introduces novelty and seeks new combinations) and in part evolutionary (the entrepreneur endeavors to promote and shape learning). Whether intrapreneur or entrepreneur, they sense new opportuni- ties and lead the organization forward to seize them. The entrepre- neur/manager must therefore lead. These are roles not recognized by economic theory; but these roles are the essence of dynamic capabilities and are critical to the theory of strategic management.

Source: Teece David J. (2009), Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth, Oxford University Press; 1st edition.

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