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

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*Based on “Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Performance”, Strategic Management Journal, December 2007

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 Capabilities set the speed with which the organization aligns/realigns with requirements of and opportunities in the business environment

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*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).

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

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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

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*“Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Performance”, Strategic Management Journal, 28:13 (December 2007), 1319-1350.

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

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*“Emerging Business Opportunities” at IBM (O’Reilly, Harreld, and Tushman, 2009)

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)

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Individual (Non-Routine) Action is also Important

Interrelationships Amongst Microfoundations 7

  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.

Intellectual Architecture of Dynamic Capabilities 8

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

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.

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