1. Nature
The successful identification and calibration of technological and market opportunities, the judicious selection of technologies and product attributes, the design of business models, and the com- mitment of (financial) resources to investment opportunities can lead to enterprise growth and profitability. Profitable growth will lead to the augmentation of enterprise-level resources and assets. Success will cause the enterprise to evolve in a path-dependent way. A key to sustained profitable growth is the ability to recom- bine and to reconfigure assets and organizational structures as the enterprise grows, and as markets and technologies change, as they surely will. Reconfiguration is needed to maintain evolutionary fitness and, if necessary, to try and escape from unfavorable path dependencies. In short, success will breed some level of routine, as this is necessary for operational efficiency. Routines help sustain continuity until there is a shift in the environment. Changing rou- tines is costly, so change will not be (and should not be) embraced instantaneously. Departure from routines will lead to heightened anxiety within the organization, unless the culture is shaped to accept high levels of internal change. If innovation is incremental, routines and structures can probably be adapted gradually or in (semi-continuous) steps. When it is radical, possibly because it is science based, then there will be a mandate to completely revamp the organization and create an entirely new “break out” structure (Teece, 2000) within which an entirely different set of structures and procedures is established.
Fig. 1.2. Strategic decision skills/execution
As discussed earlier, the “anti-cannibalization” bias is a particular manifestation of incentive and structural problems that can thwart innovation in established enterprises. Incumbent enterprises possessing fixed assets may further tend to limit their new invest- ments to innovations that are “close-in” to the existing asset base. They tend to narrowly focus search activities to exploit established technological and organizational assets. This effect makes it dif- ficult for these enterprises to see potential radical innovations. In addition, incumbent enterprises tend to frame new problems in a manner consistent with the enterprise’s current knowl- edge base, assets, and/or established problem-solving heuristics and established business model. This second effect means that managers may not successfully address opportunities or potential innovations even when they do recognize them. Managers face and must overcome at least two constraints—cognitive limita- tions and framing biases—arising from established assets (Teece, 2000).
As the enterprise grows, it has more assets to manage and to protect against malfeasance and mismanagement. Shirking, free riding, the strategic manipulation of information, and internal complacency are all issues that established enterprises will confront continuously. As discussed earlier, over time successful enterprises will develop hierarchies and rules and procedures (routines) that begin to constrain certain interactions and behaviors unnecessarily. Except in very stable environments, such rules and procedures are likely to require constant revamping if superior performance is to be sustained. It is not uncommon to find that a once func- tional routine becomes dysfunctional, providing inertia and other rigidities that stand in the way of improved performance (Leonard- Barton, 1995; Rumelt, 1995). As a result, less well-resourced enterprises (sometimes established enterprises that have divested certain assets, sometimes new entrants) end up winning in the marketplace.
Traditional management approaches endorse strong hierarchies with at least three levels of management: top, middle, and lower. Control is exerted at the top and cascades down through multiple levels. Employees tend to end up beholden to the management and CEO, and not the customer. The existence of independent profit centers can lead to internal boundaries that stand in the way of providing integrated solutions that benefit customers. With centralized structures, strategic decisions made at the top tend to become isolated from marketplace realities. Customer care is relegated to employees who are lower down in the organization. In short, the systems and rules needed to manage many layers of organization tend to create struc- tural rigidities and perversities that in turn handicap customer and technological responsiveness. To sustain dynamic capabil- ities, decentralization must be favored because it brings top management closer to new technologies, the customer, and the market.
Top management leadership skills are required to sustain dynamic capabilities. An important managerial function is achiev- ing semi-continuous asset orchestration and corporate renewal, including the redesign of routines. This is because the sustained achievement of superior profitability requires semi-continuous and/or continuous efforts to build, maintain, and adjust the com- plementarity of product offerings, systems, routines, and struc- tures. Inside the enterprise, the old and the new must complement each other. If they do not, business units must be disposed of or placed in some type of separate structure. Otherwise, work will not proceed efficiently, and conflicts of one kind or another will arise. Put differently, periodic if not continuous asset orchestration— involving achieving asset alignment, coalignment, realignment, and redeployment—is necessary to minimize internal conflict and to maximize complementarities and productive exchange inside the enterprise.
Redeployment and reconfiguration (Capron et al., 1998) may also involve business model redesign as well as asset-realignment activities, and the revamping of routines. Redeployment can involve transfer of nontradable assets to another organizational or geographic location. It may or may not involve mergers, acquisi- tions, and divestments.21 Helfat and Peteraf (2003: 1006) suggest that capability redeployment takes one of two forms: the sharing of capability between the old and the new, and the geographic transfer of capability from one market to another. Both are pos- sible, but neither is easy.
Source: Teece David J. (2009), Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth, Oxford University Press; 1st edition.