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Pioneer of “dynamic capabilities” pens management must-read on how to build competitive advantage
Chances are if you earned a MBA degree in the past 15 years, you’ve read the work on “dynamic capabilities” by Professor David Teece at the University of California. In Teece’s new book, he continues his masterful integration of ideas to form the quintessential framework for understanding how firms build and maintain competitive advantage in global markets.
The intent of Dynamic Capabilities & Strategic Management: Organizing for Innovation and Growth, is to inspire the uninitiated and stimulate those familiar with Teece’s theories to deeper insights.
“This is a capstone that can pull together the intellectual grit that constitutes what every business school tries to teach,” says Teece, the pioneer of the dynamic capabilities perspective. Teece currently holds the Thomas W. Tusher Chair in Global Business and is Director of the Center for Global Strategy and Governance at UC Berkeley’s Haas School of Business.
Considered an authority on the theory of firm and strategic management, Teece coined the term “dynamic capabilities” more than a decade ago. The focus: how firms innovate in the global marketplace and how they need to be managed in order to survive in rapidly changing business contexts. Capabilities refer to a business enterprise’s ability to mold assets to respond to changing technologies and markets. Published in 1997, Teece’s seminal paper Dynamic Capabilities and Strategic Management (Strategic Management Journal, 1997) was recognized by ScienceWatch as the single most cited article in all of Business and Economics from 1995 to 2005.
In his new book, Teece integrates multiple disciplines, giving his readers a framework for thinking about top management decisions. He draws on economics, finance, organizational behavior, marketing, strategy, and decision theory. Teece describes the book as providing an integrating framework for applying all of the disciplines taught in the business school curriculum, “The management literature is just full of fads and fashions as people jump from one silver bullet solution to another. This book stands back and says, ‘All right. We've had a hundred years of business history and social science research on the business enterprise. What does this scholarship bring to the understanding of long run business performance, and how does it all tie together?’"
Teece introduces readers to three classes of capabilities that he describes as sensing, seizing and managing threats/transforming. The framework identifies mechanisms by which entrepreneurially managed firms can sense or identify opportunities; seize these opportunities and capture value from innovation; and, the capacity to transform internally not only to survive, but to thrive. The framework is both theoretical and practical at the same time.
One premise behind Teece’s 25 years of research is the need to study
competition in the ecosystem. Teece believes that the industry is no longer
a satisfactory unit of analysis as it is also necessary to observe the role
of government, educational institutions, and other players in the ecosystem.
Teece’s work focuses on managing assets and building capabilities within
firms. He maintains that building the organization’s capabilities, rather
than the individual’s, is the key to competitive advantage.
For example, Teece cites the efforts by several major airlines to launch their own separate, no-frills carrier to compete with Southwest Airlines successful low-cost business model. One airline restructured by paring down its management team, targeting female customers, instigating new boarding procedures and adding more seats to each aircraft. A competitor used existing planes and personnel to create an offshoot brand. Teece says these restructurings are a perfect example of dynamic capabilities working together by modifying business models and redeploying hard and human assets simultaneously.
Citing Adam Smith’s book, The Wealth of Nations, Teece says, “I’m trying to do for the firm what Adam Smith tried to do for the nation. Believe it or not, nobody is really trying to build a comprehensive framework to explain wealth creation and maintenance by firms, despite the importance of the subject. I’m trying to explain the essence of what it takes to build and sustain competitive advantage in a highly competitive world”.
Dynamic Capabilities is geared primarily toward an academic audience. Many of the chapters are shaped from papers already published in leading academic journals. Teece says, however, the practice of building capabilities and figuring out business models to capture value is an essential and very practical managerial skill needed in today’s fast paced business environments. In the future, Teece plans to present his work in a book specifically written for the business professional.
David Teece is the former director of the Institute of Management, Innovation and Organization (IMIO) that encourages, promotes, and facilitates interdisciplinary research on matters of management, organization, policy and technology. Professor Teece is also the cofounder and vice chairman of Law and Economics Consulting Group, Inc. (LECG).
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