Dynamic Capabilities and their Microfoundations : Implications for Strategic Management

1. Dynamic Capabilities and their Microfoundations: Implications for Strategic Management David J. Teece Institute for Business Innovation Haas School of Business University of California, Berkeley September 15, 2010 *Based on “Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Performance”, Strategic Management Journal, December 2007

2. Capabilities and Dynamic Capabilities • Capabilities are the organization’s ordinary ability to perform a set of activities • generally embedded in organizational routines/standard operating procedures • Dynamic Capabilities are the ability to determine whether the organization is performing the right activities, and then effectuate necessary change • “The capacity to create, extend, or modify the resource base”* • May be embedded in organizational routines • May also reside in one or a few individuals/leaders • Dynamic Capabilitiesset the speed with which the organization aligns/realigns with requirements of and opportunities in the business environment *Dynamic Capabilities: Understanding Strategic Change in Organizations. Constance E. Helfat, Sydney Finkelstein, Will Mitchell, Margaret A. Peteraf, Harbir Singh, David J. Teece, and Sidney G. Winter (Oxford: Blackwell, 2007).

3. What are Microfoundations? Microfoundations are “elements” of Dynamic Capabilities. They consist of discrete process/methodologies/structures that undergird clusters of dynamic capabilities I. Routines/Methodologies • Organizational Routines • Ex: product development along a known trajectory • Analytical Methodologies • Ex: investment choices II. Individual Acts and Action • Creative managerial and entrepreneurial acts • Ex: pioneering a new market

4. Three Clusters of Microfoundations* • Sensing • Identification and assessment of an opportunity • Easiest to embed in the organization • Seizing • Mobilization of resources to address an opportunity and to capture value • Transforming • Continued renewal • Inherently difficult to routinize • Each cluster is supported by organizational process; but also by the entrepreneurial and leadership capabilities of the top management team *“Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Performance”, Strategic Management Journal, 28:13 (December 2007), 1319-1350.

5. Example of (Embedded) Microfoundations for Sensing and Seizing • Mechanisms at IBM* • Dozens of new business ideas are considered twice yearly • The most promising are vetted through multiple stages • A few are launched with high-level support and protected resources • If milestones are met, the new business joins an existing business unit O’Reilly et al indicate that this process has added billions in additional sales since its inception in 2000 *“Emerging Business Opportunities” at IBM (O’Reilly, Harreld, and Tushman, 2009)

6. Individual (Non-Routine) Action is also Important Steve Jobs at Apple: “There is no system. That doesn't mean we don't have process... Process makes you more efficient. But innovation comes from people meeting up in the hallways... It's ad hoc meetings of six people called by someone who thinks he has figured out the coolest new thing ever and who wants to know what other people think of his idea. And it comes from saying no to 1,000 things to make sure we don't get on the wrong track or try to do too much”* *Quoted in P. Burrows, “The Seed of Apple's Innovation.” businessweek.com (October 12 2004)

7. Interrelationships Amongst Microfoundations • The Dynamic Capabilities Framework postulates relatively complex relationships among discrete variables; but the framework is often silent as to how these various elements interact • The framework recognizes that there is extensive and vibrant research activity on each microfoundation – and it aspires to capture this knowledge and integrate it into a broader intellectual framework rooted in the theory of the firm.

8. Intellectual Architecture of Dynamic Capabilities Source: Figure 1.4 (p.49) of David Teece “Dynamic Capabilities and Strategic Management: Organization for Innovation and Growth”

9. Conclusions • Microfoundations involve both routine and non-routine activity. Research questions include: • The appropriate balance between routines and the non-routine action of top management. • Under what circumstances (if any) can change be routinized? • Empirical research can use both large data sets (e.g. Adner and Helfat, 2003) and in-depth case studies.