Dynamic capabilities and strategic management

DYNAMIC CAPABILITIES AND

STRATEGIC MANAGEMENT

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DYNAMIC

CAPABILITIES

AND STRATEGIC

MANAGEMENT

D. J. Teece

1

Great Clarendon Street, Oxford

3 OX2 6DP

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© David J. Teece, 2009

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To the University of California, Berkeley, which is my intellectual

home, and

To my friends and colleagues in academia, business, and govern￾ment who have over the years shared insights, experiences, and

bonhomie.

Preface

It is over two hundred years since Adam Smith began his “Inquiry

into the Nature and Causes of the Wealth of Nations”. The field of

strategic management1 is barely fifty years old and it struggles to

answer for the business organization the analogous question that

smith posed (and for which he provided primitive but remarkably

insightful answers) with respect to the nation state. The question

(namely, what explains the ability of the business enterprise to

generate wealth for the stockholders and other stakeholders) ani￾mates managers, policy makers, investors, and the public. Over the

last couple of decades a significant body of empirical research has

emerged which provides at least partial answers.

Research indicates that characteristics of individual businesses

explain variations in enterprise performance more successfully

than characteristics of industry. Moveover, over time risk adjusted

returns are remarkably similar across industries (but not firms) as

one would expect if capital markets are reasonably efficient. These

results call into question (or at minimum put into perspective)

well entrenched market positioning approaches which posit the

objective of strategy is to locate the enterprise’s products in a

market niche that can be insulated from strong competition so as

to generate above-average profits. The standard approach is built

on frameworks from the field of industrial organization, which

unfortunately tends to ignore intangible assets, innovation, firm

capabilities, and disequilibrium phenomena.

What is ignored by the standard market positioning or indus￾try analysis approach is central to the thesis advanced here. In

advanced post-industrial societies, the creation, ownership, and

Preface

deployment of intangible assets (especially knowledge and rela￾tionships) is at the core of any strategy likely to yield shareholder

value. Intangibles do indeed help explain differences in perfor￾mance by enterprises in the same industry. Intangibles typically do

not reside with just a few individuals, but are deeply embedded in

processes and procedures and sometimes even in simple (strategic)

rules for operating in complex environments. There is also likely

to be a unique configuration of complementry assets necessary to

support many new product and service offerings. However, intan￾gible assets and the activites (i.e. innovation) that create them are

largely ignored in market positioning approaches.

Of course, uniqueness in product offerings is not enough to

guarantee superior financial returns. Uniqueness must be married

to a good marketing strategy which ensures that the enterprise is

making distinctive products (or services) that customers want and

can afford.

This book draws on multiple fields in an endeavor to iden￾tify characteristics of the business enterprise and of management

actions, designs, and processes which undergird superior enterprise

performance. It is grounded in the analysis of markets, competi￾tion, innovation, and the organization of the business enterprise

itself. The conceptual structure developed is designed to help man￾agers and academics make sense of the vast number of real world

situations and the large amount of empirical data that are available.

It also yields testable propositions.

The approach highlights the nature and microfoundations of

enterprise level capabilities. It pulls together and integrates con￾cepts that can help one understand not just how firms stay alive

but how they develbp uniqueness and competitive advantage in

environments where competition is robust in both input and com￾ponent markets as well as in final product markets. In such envi￾ronments entry is easy but achieving profitability is challenging.

Sustainable advantage is more likely to flow from situations where

firms can create and protect intangible assets that can undergird

competitive advantage. Success in building or buying intangible

assets which are then orchestrated to meet customer needs is core.

To achieve this, management must be entrepreneurial, sensing if

vii

Preface

not creating new opportunities before others do, and executing

swiftly and expertly and collaboratively where the situation allows

and requires. This is the essence of dynamic capabilities.

The dynamic capabilities framework draws in part from eco￾nomic theory—such as basic understandings about imitability and

competition—but also from the study of innovation and orga￾nizations. However, much economic analysis focuses on analyti￾cally easy situations where technology is unchanging, and mar￾kets are in equilibrium. In contrast, the focus of dynamic capa￾bilities is on innovation (both technological and organizational)

and market disequilibrium. Because the framework is not wedded

to some of the traditional assumptions in economics—like profit￾maximizing behavior, hyperrational decisions, and costless tech￾nology/knowledge transfer—it is hopefully more useful to man￾agers, investors, and to business intellectuals trying to understand

why some companies do well while others struggle.

At minimum, dynamic capabilities is a tool for integrating over

fifty years of scholarship and empirical analysis in economics, soci￾ology, behavioral decision theory, business history, and strategic

management itself. More pretentiously, it outlines a new theory

of management which can be the cornerstone to a much deeper

understanding of the business enterprise, competitive processes,

competitive outcomes, and wealth creation in advanced post￾industrial knowledgebased societies. The essence of the framework

is contained in Chapter 1, which outlines the book’s basic con￾ceptual structure (Figure 14 shows linkages and suggests a causal

structure, articulated in Chapter 1, section 7; intellectual lineage

and assumptions are addressed and discussed in Chapter 3).

Some readers will recognize that many of the chapters began

their life as scholarly papers that were published in academic jour￾nals. Indeed, practically all the material in this book has survived

the peer review process. The core idea of this book was contained

in a University of California working paper (co-authored with

former students Gary Pisano and Amy Shuen), and circulated in

the early 1990s (Teece et al., 1990a); indeed, this working paper

is where the term “dynamic capabilities” was first introduced into

the literature. The core idea was first published in 1994 (Teece and

viii

Preface

Pisano, 1994), and in expanded form in “Dynamic Capabilities and

Strategic Management”, Strategic Management Journal, 18: 7 (August

1997) with Gary Pisano and Amy Shuen. The published article,

like the working paper, received considerable scholarly attention.

Gary Pisano, Amy Shuen, and myself were grateful that it received

the best paper of the year award from the Strategic Management

Society in 2003. Moreover, according to Science Watch it was the

most cited paper the top hundred academic journals in business

and economics worldwide for the period 1995–2005. This was

extremely surprising to us, and deeply gratifying. Other chapters

are based on collaboration with Mie Augier at Stanford University.

Mie has a deep understanding of organization theory and practice

and has a unique understanding of the history of ideas in manage￾ment and organizations.

It is hoped that this book will provide new insights to readers

not familiar with the literature on dynamic capabilities. To those

already familiar with the literature, it is hoped that this book will

help mold disparate ideas and observations together in such a way

that it stimulates deeper insights into business and economic phe￾nomena that impact society. It is my sincerest wish that managers

who read on will become more astute and reflective managers, and

scholars who read on will grow more insightful and will join the

endeavor to create a knowledge based theory of the firm.

David J. Teece

Berkeley, California

September 2008

1 Strategic management is about the major decisions and investments needed

to achieve the goals of the enterprise: taking actions and making investments to

reflect opportunities and changing circumstances. These decisions are the most

complex and the most important facing the enterprise. Complexity enters not just

because of interdependencies, but also because of uncertainty about customer

reaction, competitor response, and market and technological change.

ix

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Contents

List of Figures and Tables xii

Part I Dynamic Capabilities

1 The Nature and Microfoundations of (Sustainable)

Enterprise Performance 3

2 The (Entrepreneurial) Function of the Manager in a

Developed Market Economy 65

3 The Foundations of Dynamic Capabilities 82

(with Mie Augier)

4 Resources, Capabilities, and Penrose Effects 113

(with Mie Augier)

5 Dynamic Capabilities and the Essence of the

Multinational Enterprise 136

Part II The Business Enterprise in Economic Development

6 The Role of Management, Enterprise, and Technology in the

Wealth of Nations 185

7 Managers, Entrepreneurs, and the Literati in

Economic Development 198

Part III Competition Policy

8 The Nature of Competition in Regimes of Rapid

Technological Change 233

References 261

Index 279

List of Figures and Tables

Figures

1.1. Elements of ecosystem framework for “sensing” market

and technological opportunities 17

1.2. Strategic decision skills/execution 35

1.3. Combination, reconfiguration, and asset protection skills 45

1.4. Foundations of dynamic capabilities and business performance 49

2.1. Thin markets and strategic managers 73

2.2. Coevolution of markets and the business enterprise 76

Tables

5.1. Imports into the USA by trade categories, as percentage of

total imports 149

7.1. Key differences between traditional teams and virtuoso teams 226

7.2. Contrasting views of the business enterprise 227

Part I

Dynamic Capabilities

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