Beyond the Codes_Repositioning towards sustainable development
Dynamic Capabilities & Profiting from Innovation: With some application to the automobile industry
1. Dynamic Capabilities & Profiting
from Innovation: With some
application to the automobile
industry
DAVID J. TEECE
UC BERKELEY
INSTITUTE FOR BUSINESS INNOVATION
GUEST TALK FOR CHINESE DELEGATIONS FROM GUANGZHOU AUTOMOBILE
GROUP
19 OC TOBER 2017
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2. 2
Conventional Concept
20th Century:
Next-Generation Concept
21st Century:
Static Competition Dynamic Competition
Risk Deep Uncertainty
The West and the Rest A Semi-Globalized World
Industry-level Analysis Ecosystem-level Analysis
Homogeneous Firms Heterogeneous Firms
Single-Invention Innovation
Model
Multi-Invention Innovation Model
Vertical Integration/In house R&D Modularization
Traditional Tools Requires Newer Approaches
Conventional versus “Next Generation” Strategic Management
D.J. Teece, Next-Generation Competition: New Concepts for Understanding how Innovation Shapes Competition and Policy
in the Digital Economy, Journal of Law, Economics, & Policy, (fall 2012)
3. > “Balance sheet” view of assets
> Little emphasis on flexibility as the key to
success
> Resources, not capabilities, tend to matter
Old approach
> Recognition of “soft” assets
> Heavy emphasis on “orchestrating assets” for
deployment and redeployment
New approach
From asset accumulation to dynamic capabilities:
a paradigm shift
3
4. COPYRIGHT TEECE 2017
4
limited ability of a firm to generate “supernormal” profits over the long run
competitive advantage is often fleeting
few firms change and thrive over the long haul: ge, ibm, 3m, apple…
my thesis: with deep uncertainty, strong asset orchestration, internally and externally,
coupled with good strategy and the astute assembly of resources undergirds dynamic
capabilities which enables supernormal profits
definition of dynamic capabilities: “the ability of an organization and its management to
integrate, build, and reconfigure internal and external competences to address rapidly
changing environments” (teece et al., 1997: 516)
The fundamental question in Strategic
Management: How do firms build long-run
Competitive Advantage?
Copyright Teece 2014
5. The evolution of strategic management & “research based” thinking
5 Forces
-industry
attractiveness is
the central focus
- external forces
dominate
-fate = static, purely
competitive markets
(low profit)
RBV
-VRIN assets
drive value
creation
-barriers to
competition
determine
longevity
- all 4 VRIN
traits necessary
to sustain
advantage
Dynamic
Capabilities
-Markets are dynamic
and competition is often
disruptive
-Asset orchestration &
strategy drive advantage
-Reshaping ecosystems &
biz models is critical
1980s 1990s 2000+
The Dynamic Capability model is only the third substantive framework for
maintaining competitive advantage to emerge in the last 35 years
5
Deep
Uncertainty
Risk
6. 6
Alternative futures with known
probabilities & known conditional
probabilities
Pr(DIA)
Pr(CIB)
Risk
C D E F
prB
Pr(FIB)
Pr(CIA)
prA
Strategic Management requires differentiality
between risk and uncertainty
7. 7
Strategic Management requires differentiality between
risk and uncertainty
F1
F?
F?
F?
F?
F?
F? F?
F2
F3
F4
F?
F?
F?
F?
Uncertainty
Don’t know most futures or their probabilities with (unknown
unknowns with probabilities)
F 1-4 are possible futures
F? are undefined futures
F?
8. “Ordinary” (or normal) Capabilities: resources
used efficiently but not necessarily in the right
places
• Operation, administration and governance
• Routines / standard operating procedures are key to ordinary capabilities
• Ordinary capabilities reflect technical efficiency
• “Best practices” logic connected to strong ordinary capabilities
• Diffusion by rivals is enabled by
• More information in the public domain
• Better business school training
• Management consultants
• Admittedly, not everyone gets the simple stuff right
8
9. Dynamic capabilities can be thought of as falling in three categories:
Sensing
Identification of
opportunities &
threats at home
and abroad
Transforming
Continuous renewal
and periodic major
strategic shifts
Seizing
Mobilization of
resources to
deliver value and
shape markets
9
11. 11
Capabilities and Tools Required for Stable &
Uncertain Environments are Different
Certainty Risk Uncertainty Ambiguity Chaos/Ignorance
Newer/Tools/Approaches
Influence Diagrams
Scenario Planning
Peripheral vision
Total Risk Management
Systems Thinking
Idealized Design
Leigitimation Theory
Honing Institution
Complexity Theory
Cost Benefit Analysis
Net Present Value
Linear Programming
Point Forecasting
Optimization Theory
Utility Theory
Decision Trees
Bayesian Updating
Monte Carlo Simulation
Portfolio Theory
Stochastic Modeling
Insurance & hedging
Known Unknown Unknowable
Traditional Tools/Approaches
Domain of Ordinary Capabilities
Domain of Dynamic Capabilities
13. 13
Red Queens:
• Firms learn and sometimes advance, but others
copy/imitate/emulate and take the advantage away.
• Learning does not lead to a competitive advantage… imitation is
the reason advantage (based on ordinary capabilities) is
repeatedly lost
14. FROM ORDINARY TO DYNAMIC CAPABILITIES IN AUTOS
When ordinary capabilities are widely diffused leading to “Red Queen” effects in autos:
The operations portion of the automobile business has been thoroughly optimized over
many decades, doesn’t vary much from one automobile company to another, and can be
managed with a focus on repetitive process. It requires little in the way of creativity, vision or
imagination. Almost all car companies do this very well, and there is little or no competitive
advantage to be gained by “trying even harder” in procurement, manufacturing or
wholesale.
Competitive advantage requires innovation and dynamic capabilities:
Where the real work of making a car company successful suddenly turns complex, and where
the winners are separated from the losers, is in the long-cycle product development process,
where short-term day-to-day metrics and the tabulation of results are meaningless.
Bob Lutz, former vice chairman at General Motors
Wall Street Journal, June 11, 2011
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15. From ordinary to dynamic capabilities in the us army
“ We had a culture in our forces, of excellence. It was how
good can I be at my task? How good can I be at flying an
airplane, dropping bombs, locating an enemy target? But that’s
not as important as how well those pieces mesh together.”
“The real art is [in] cooperating with civilian agencies, it’s
cooperating with conventional forces, it’s tying the pieces
together. That’s the art of war, and that’s the hard part.”
-Quotes from General Stanley McChrystal, Foreign Affairs (March/April 2013)
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16. 16
Dynamic Capabilities: A Model for Strategic
Management
SEIZE
• Revise policies/actions
• Restructure assets
• Reshape business
models
• Review decision making
SHIFT
• Co-specialized assets
• Governance/structure
• Beyond best practices
• Vision/Mission alignment
SENSE
• Scanning processes
(continuous)
• Sense-making
(inc’g analysis)
• Ecosystem
(re)shaping
• R&D/innovation
(invest/monitoring)
17. The ability to foresee future opportunities and threats… what Jack
Welsh (CEO of GE) once referred to as the ability to “see around the
corners”
17
Sensing
18. Sensing Cont.
18
• Sometimes sensing is enabled by internal R&D activities (“search
activities”) and internal scenario planning and other tools to probe
the future
• Internal R&D can be complemented (but not displaced) by crowd-
sourcing ideas, or by tapping into ideas of customers (Von Hippel),
supplies and/or other partners
• The challenge is to develop a valid hypotheses about what is going
on in the market
19. •Explanations are developed for surprising or anomalous behavior/phenomenon
•Induction & deduction depend on the past
•Abductive reasoning moves ahead through “logical leaps of the mind” and uses
all available data in a search for patterns
•Once an abductive hypothesis is established, data is searched to test the
hypothesis, which in turn spurs original thinking
•Not used to determine if something is true or false, but to indicate a new path
to “deep truth” about a phenomenon or a situation
•
Good Sensing Requires “Abductive” Reasoning
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20. 20
Logical Implications of Abductive Reasoning
If an investment option has a deductive logic, then the options can only
ever reflect thinking that started with a proven template
If an option has an inductive logic, then “new” options simply follow an
established template
Neither inductive or deductive logic allow one to find fundamentally new
knowledge. Abduction digs deeper and helps create new knowledge
Management must suppress a tendency to apply known rules; abductive
reasoning is the handmaiden of sensing
21. 21
Asset Orchestration is Central to Dynamic Capabilities
“Apple still has strong growth opportunities
because of its ability to work simultaneously on
hardware, software and services… Apple has
the ability to innovate in all three of these
spheres and create magic… This isn’t
something you can just write a check for. This
is something you build over decades.”
-Tim Cook, Apple CEO (Taipei Times, February 2013)
22. 22
Fig 5: Leadership Undergirding Dynamic Capabilities
Source: Krupp, Steven and Paul J.H. Schoemaker, Winning the Long Game: How Strategic Leaders
Shape the Future, Public Affairs/Perseus, 2014.
Entrepreneurial and Dynamic Capabilities Orchestration
23. • Strategic “fit” over the long run
(evolutionary fitness)
• Sensing, seizing, shaping and
transforming
• Difficult ; inimitable
• Technical efficiency in basic
business functions
• Operational, administrative, and
governance
• Relatively easy; imitable
Ordinary
Capabilities
Dynamic
Capabilities
Doing things “right” Doing the “right” things
Dynamic Vs. Ordinary US Dynamic Capabilities
Purpose
Tripartite
schemes
Imitability
• Technical efficiency in basic
business functions
• Operational, administrative, and
governance
• Relatively easy; imitable
Purpose
24. Sensing, Seizing & Transforming Are The Practical Pillars Of Dynamic
Capabilities
Firm
Performance
Sensing
Co-creating and
Seizing
Transforming
Perception and
Attention
Problem Solving and
Reasoning
Communication and
Social Cognition
Opportunity
Recognition &
Creation
Strategic Investment
& Business Model
Design
Asset Alignment &
Overcoming Change
Resistance
Sample
Managerial
Cognitive
Capabilities
Dynamic
Managerial
Capabilities
Potential
Strategic
Impacts
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Source: Helfat & Peteraf (2015, p.837)
25. Strategy Must Also Be Considered. It Is Complementary To
Dynamic Capabilities
“A good strategy is a ‘specific’ and ‘coherent’ response to—and approach for
overcoming—the obstacles to progress.”
“A bad strategy is a list of blue sky goals or a fluff-and-buzzword infected ‘vision’
everybody is supposed to share.”
- Strategy Kernel (Rumelt, 2009)
Diagnosis Guiding policy Coherent action
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26. 26
Strategy must of course be married to capabilities: The Battle of
Jutland
The British Navy at the
Battle of Jutland, 1916
“There seems to be
something wrong with our
bloody ships today.”
Admiral John Jellicoe
“The real deficiency, however, was the
loss of [Vice Admiral Horatio Lord]
Nelson’s touch. It was not the bloody
ships that were principally at fault. It was
the inadequate doctrine of command and
control.”
Frank Hoffman, “What we can learn from Jackie Fisher,”
Proceedings of the Naval Institute, April 2004, p. 70.
27. 27
“You have to be fast on your feet and
adaptive or else a strategy is useless.”
Charles de Gaulle, French general and statesman
30. Concluding Proposition:
Ordinary capabilities are not usually enough to yield sustained
competitive advantage. Dynamic capabilities coupled with a validated
strategy enable an organization to change in a manner that supports
evolutionary fitness and sustainable advantage.
COPYRIGHT TEECE 2017 30
31. Profiting from Innovative (PFI)
31
• Provides algorithms for “seizing” and predicts the
division of profits
• Core valuable are appropriability regime
• Ownership of complementary assets
• Timing
D. Teece, "Profiting from Technological Innovation," Research Policy 15:6 (December 1986), 285–305. (Selected by the editors as one of the best papers published
by Research Policy over the period 1971–1991.
32. 32
Start Here
Innovation requires
access to
complementary assets
for commercial success
Commercialize
Immediately
Complementary assets
specialized
Appropriability regime
weak
Specialized asset critical
Cash position OK
Imitators/Competitors
better positioned
Contract for Access
Contract for access
Contract for access
Contract for access
Contract for access
Integrate
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
No
Yes
Business Model Implications:
33. PFI Enhances Dynamic Capabilities
Early insights into business model design
Relates business model choice to the nature (imitability) of innovation
and the ownership of bottleneck (complementary)
Static because it consumes an innovation that is communally viable;
awards asking where innovation comes from
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35. COPYRIGHT TEECE 2014 35
Importance of Complementary/
Co-Specialized Assets
• Innovations generally need to be paired with complementary (and/or
co-specialized) assets and technologies in order to generate value
• Complementary assets can take many forms
• Skilled/knowledgeable workforce
• Tangible assets (plant, etc.)
• Distribution capabilities
• Suitable business model
• Marketing assets
• When complementary assets form a bottleneck in the system, they
can siphon off (attract) much of the economic benefit from
innovation. i.e. Through the bargaining, the innovation needs to share
the upside with the owners of complements, not owned by the
innovator
36. 36
•Profiting from Innovation framework downplays first
mover advantage
•What matters for competitive advantage is ownership and
control over complementary assets
•5G will enhance the attractiveness of “on demand” or
shared ownership services
37. 37
Start Here
Innovation Requires
Access to
Complementary
Assets for
Commercial Success
Commercialize
Immediately
Complementary
Assets Specialized
Appropriability
Regime Weak
Specialized Asset
Critical
Cash Position OK
Imitations/Competi
tors Better
Positioned
Integrate
Contract for
Access
Contract for
Access
Contract for
Access
Contract for
Access
Contract for
Access
No No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
No
Primitive business model choices specified: Licensing vs. integration for
value capture
38. PFI provides guidance for managers flows from
asking and answering core questions such as:
38
1. Where is the bottleneck in the value chain?
2. Bottlenecks can be proprietary standards, intellectual property,
and/or complementary assets
3. What business models provide the innovator the best chance to
control the bottleneck?
39. Today’s Context
39
Techno-Business Environment Changed since 1986
• Digital convergence
• Internet increasingly pervasive
• Installed base effects and digital platforms ubiquitous
• “Multi-invention” & “co-innovation” context more common (100,000+
patents implicated in the iPhone)
• A “grand convergence” may be in process
40. 40
Adner’s “Wide Lens” is a halfway house
between PFI & Dynamic Capabilities. It is
most insightful & quite practical
41. Adner’s “The Wide Lens” value blueprint
methodology
•Stresses the importance not only of alignment with customers but also
with investment partners to minimize co-innovation risk
•Adner’s “value blueprint” is a useful methodology to help clarify the
structure of required collaboration, i.e. who hands off what to who &
when?
•Helps one identify gaps in complementary assets/capabilities
•Stresses the role of ecosystem leader (what I call the ecosystem
“captain”)
41
42. 42
Adner’s modified PFI thesis:
The PFI (Teece) commentary on Adner:
The major prize might also go to the one that puts down the first piece.
It depends on whether or not the “piece” is the bottlenecks. The scarcity
of the underlying resource has much to do with the answer. (e.g. is it
intellectual property?)
*Adner interview in Brian Leavy’s, “Ron Adner: managing the interdependencies and risks of an innovation ecosystem”, Strategy and
Leadership, (2012).
“The major prize was destined to go, not to the
party that puts down the first piece of the puzzle,
but the one that puts down the final piece.”*
43. Bridging to Dynamic Capabilities
•For simplicity, PFI is static and assumes that a commercially viable
invention is at hand
•PFI provides little insight into the mechanisms which complementary
assets/technologies are developed and integrated
•Adner’s work makes an important contribution
•Dynamic capabilities puts resources/PFI approaches “on wheels”
43
44. 44
Recommendation: Stay in the game along multiple
paths, “waiting” for the dominant designs to
emerge. More than an expression of real options
theory:
•Learning is required to open up options. This isn’t captured well by
static real options thinking.
•One can proactively shape the dominant design… both as to its nature
and timing. It is not just about creating real options but also about
impacting their timing.
45. 45
Being the ecosystem “captain” is not easy. As
Ron Adner writes in The Wide Lens (2012):
“While managers have rich processes in place
to assess and manage their own execution
challenges, they do not fully understand their
dependence in their partner’s co-innovation
challenges” (p38)
46. Examples worth remembering are
1. Boeing’s debacle with rollout of the Dreamliner (in the end, it had to
go and helps its suppliers/partners)
2. Lockheed’s L10-11 program and the inability of Rolls Royce to
develop the RB 211 engine for the L1011 on time. This delay
jeopardized Lockheed’s position in the wide-bodied market.
46
49. Hype Machine: The Most Outrageous
Predictions Issued on the Subject of Driverless
Cars
“But these cars of 1960 and the highways on which they drive will have
in them devices which will correct the faults of human beings as drivers.
They will prevent the driver from committing errors. They will prevent
his turning out into traffic except when he should. They will aid him in
passing through intersections without slowing down or causing anyone
else to do so and without endangering himself to others.”
-Norman Bel Geddes, industrial designer behind GM’s 1939 Futurama exhibit, in his 1940 book, Magic Motorways
“You can count on one hand the number of years it will take before
ordinary people can experience [driverless cars].”
-Sergey Brin, Google cofounder, September 2012
49
50. Autonomous & self-driving are misnomers
Cars will not take care of themselves
•Dependent on each other
•Depend on the infrastructure (e.g. 5G)
•Algorithms are in fact helping drive your car
50
51. But there are many American-specific
challenges
•There are not just technical but political cyber/safety & emotional
barriers
•Malcolm Gladwell: In the early days of the American industry, owners
experimented with chauffeurs & rejected them in favor of self-driving
•Gladwell: “In any period of technological transition, what proves vexing
is no the technology itself… it’s working out the details, rules, and social
expectations around the technology”
51
52. Will Google, and Intel design cars that are
aesthetically pleasing?
52
53. 53
•Incumbents are advantageously positioned for autonomous vehicles if it
•Keeps options open through investing in multiple approaches
•Sees itself as the system integrator
•Makes the investment needed to accomplish this role
54. In car entertainment: 5G standard technology
will create marketplaces
Users will require & expect seamless integration between the
smartphone device environment inside & outside the car
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55. 55
Integration of mobility services is key, so
Chinese firms could lead the systems
integration function. This would not be a bad
place to be particularly if it’s in addition to
providing some discrete components and/or
sub-systems.
56. There are several issues for management to
keep in mind
•Chinese companies know how to produce cars in large volumes. Tesla
doesn’t. Of course, Tesla could use competition amongst the
incumbents to get cars built for them. This could, theoretically, drive
economic profits for the incumbents to zero. Unless of course develop
technologies co-specialized to those of the digital champions.
•What really matters is who owns the bottleneck assets (see Teece 1986,
2006). They are the ones likely to take home the pot of gold.
•Because of the broad scope of its operators and products, Chinese
companies are in an good position to become the ecosystem “captain”.
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