Aalto ENG
Rak-63.3320 Strategies in International Construction
Business (6.0 cr)
REFERENCE 8.2A
for student-specific reviewing in Spring 2015
Teece, D. J., Pisano, G. and Shuen, A.
(1997)
Dynamic capabilities and
strategic management
Strategic Management Journal,
Vol. 18, No. 7, pp. 509-533. 25 pages.
REFERENCE 8.2B
for student-specific reviewing in Spring 2015
Harreld, J. B., O’Reilly III, C. A. and
Tushman, M. L. (2007)
Dynamic capabilities at
IBM: Driving strategy into
action.
California Management Review,
Vol. 49, No. 4, pp. 21-43. 23 pages.
Strategic Management Journal, Vol. 18:7, 509–533 (1997)
DYNAMIC CAPABILITIES AND STRATEGIC
MANAGEMENT
DAVID J. TEECE1*, GARY PISANO 2 and AMY SHUEN3
1
Haas School of Business, University of California, Berkeley, California, U.S.A.
Graduate School of Business Administration, Harvard University, Boston, Massachusetts, U.S.A.
3
School of Business, San Jose State University, San Jose, California, U.S.A.
2
The dynamic capabilities framework analyzes the sources and methods of wealth creation and
capture by private enterprise firms operating in environments of rapid technological change.
The competitive advantage of firms is seen as resting on distinctive processes (ways of
coordinating and combining), shaped by the firm’s (specific) asset positions (such as the firm’s
portfolio of difficult-to-trade knowledge assets and complementary assets), and the evolution
path(s) it has adopted or inherited. The importance of path dependencies is amplified where
conditions of increasing returns exist. Whether and how a firm’s competitive advantage is
eroded depends on the stability of market demand, and the ease of replicability (expanding
internally) and imitatability (replication by competitors). If correct, the framework suggests
that private wealth creation in regimes of rapid technological change depends in large measure
on honing internal technological, organizational, and managerial processes inside the firm. In
short, identifying new opportunities and organizing effectively and efficiently to embrace them
are generally more fundamental to private wealth creation than is strategizing, if by strategizing
one means engaging in business conduct that keeps competitors off balance, raises rival’s
costs, and excludes new entrants.  1997 by John Wiley & Sons, Ltd.
INTRODUCTION
The fundamental question in the field of strategic
management is how firms achieve and sustain
competitive advantage.1 We confront this question
here by developing the dynamic capabilities
approach, which endeavors to analyze the sources
of wealth creation and capture by firms. The
development of this framework flows from a
recognition by the authors that strategic theory is
replete with analyses of firm-level strategies for
sustaining and safeguarding extant competitive
advantage, but has performed less well with
Key words: competences; capabilities; innovation;
strategy; path dependency; knowledge assets
*Correspondence to: David J. Teece, Institute of Management,
Innovation and Organization, Haas School of Business, University of California, Berkeley, CA 94720–1930, U.S.A.
1
For a review of the fundamental questions in the field of
strategy, see Rumelt, Schendel, and Teece (1994).
CCC 0143–2095/97/070509–25$17.50
 1997 by John Wiley & Sons, Ltd.
respect to assisting in the understanding of how
and why certain firms build competitive advantage in regimes of rapid change. Our approach is
especially relevant in a Schumpeterian world of
innovation-based competition, price/performance
rivalry, increasing returns, and the ‘creative
destruction’ of existing competences. The
approach endeavors to explain firm-level success
and failure. We are interested in both building a
better theory of firm performance, as well as
informing managerial practice.
In order to position our analysis in a manner
that displays similarities and differences with
existing approaches, we begin by briefly
reviewing accepted frameworks for strategic management. We endeavor to expose implicit assumptions, and identify competitive circumstances
where each paradigm might display some relative
advantage as both a useful descriptive and normative theory of competitive strategy. While numerous theories have been advanced over the past
Received 17 April 1991
Final revision received 4 March 1997
510
D. J. Teece, G. Pisano and A. Shuen
two decades about the sources of competitive
advantage, many cluster around just a few loosely
structured frameworks or paradigms. In this paper
we attempt to identify three existing paradigms
and describe aspects of an emerging new paradigm that we label dynamic capabilities.
The dominant paradigm in the field during
the 1980s was the competitive forces approach
developed by Porter (1980). This approach,
rooted in the structure–conduct–performance
paradigm of industrial organization (Mason, 1949;
Bain, 1959), emphasizes the actions a firm can
take to create defensible positions against competitive forces. A second approach, referred to as
a strategic conflict approach (e.g., Shapiro, 1989),
is closely related to the first in its focus on
product market imperfections, entry deterrence,
and strategic interaction. The strategic conflict
approach uses the tools of game theory and thus
implicitly views competitive outcomes as a function of the effectiveness with which firms keep
their rivals off balance through strategic investments, pricing strategies, signaling, and the control of information. Both the competitive forces
and the strategic conflict approaches appear to
share the view that rents flow from privileged
product market positions.
Another distinct class of approaches emphasizes building competitive advantage through capturing entrepreneurial rents stemming from fundamental firm-level efficiency advantages. These
approaches have their roots in a much older
discussion of corporate strengths and weaknesses;
they have taken on new life as evidence suggests
that firms build enduring advantages only through
efficiency and effectiveness, and as developments
in organizational economics and the study of
technological and organizational change become
applied to strategy questions. One strand of this
literature, often referred to as the ‘resource-based
perspective,’ emphasizes firm-specific capabilities
and assets and the existence of isolating mechanisms as the fundamental determinants of firm
performance (Penrose, 1959; Rumelt, 1984;
Teece, 1984; Wernerfelt, 1984).2 This perspective
2
Of these authors, Rumelt may have been the first to selfconsciously apply a resource perspective to the field of strategy. Rumelt (1984: 561) notes that the strategic firm ‘is
characterized by a bundle of linked and idiosyncratic resources
and resource conversion activities.’ Similarly, Teece (1984:
95) notes: ‘Successful firms possess one or more forms of
intangible assets, such as technological or managerial know-
recognizes but does not attempt to explain the
nature of the isolating mechanisms that enable
entrepreneurial rents and competitive advantage
to be sustained.
Another component of the efficiency-based
approach is developed in this paper. Rudimentary
efforts are made to identify the dimensions of
firm-specific capabilities that can be sources of
advantage, and to explain how combinations of
competences and resources can be developed,
deployed, and protected. We refer to this as the
‘dynamic capabilities’ approach in order to stress
exploiting existing internal and external firmspecific competences to address changing
environments. Elements of the approach can be
found in Schumpeter (1942), Penrose (1959),
Nelson and Winter (1982), Prahalad and Hamel
(1990), Teece (1976, 1986a, 1986b, 1988) and
in Hayes, Wheelwright, and Clark (1988):
Because this approach emphasizes the development of management capabilities, and difficultto-imitate combinations of organizational, functional and technological skills, it integrates and
draws upon research in such areas as the management of R&D, product and process development,
technology transfer, intellectual property, manufacturing, human resources, and organizational
learning. Because these fields are often viewed
as outside the traditional boundaries of strategy,
much of this research has not been incorporated
into existing economic approaches to strategy
issues. As a result, dynamic capabilities can be
seen as an emerging and potentially integrative
approach to understanding the newer sources of
competitive advantage.
We suggest that the dynamic capabilities
approach is promising both in terms of future
research potential and as an aid to management
endeavoring to gain competitive advantage in
increasingly demanding environments. To illustrate the essential elements of the dynamic capabilities approach, the sections that follow compare
and contrast this approach to other models of
strategy. Each section highlights the strategic
how. Over time, these assets may expand beyond the point
of profitable reinvestment in a firm’s traditional market.
Accordingly, the firm may consider deploying its intangible
assets in different product or geographical markets, where the
expected returns are higher, if efficient transfer modes exist.’
Wernerfelt (1984) was early to recognize that this approach
was at odds with product market approaches and might constitute a distinct paradigm of strategy.
Dynamic Capabilities
insights provided by each approach as well as
the different competitive circumstances in which
it might be most appropriate. Needless to say,
these approaches are in many ways complementary and a full understanding of firm-level, competitive advantage requires an appreciation of all
four approaches and more.
MODELS OF STRATEGY
EMPHASIZING THE EXPLOITATION
OF MARKET POWER
Competitive forces
The dominant paradigm in strategy at least during
the 1980s was the competitive forces approach.
Pioneered by Porter (1980), the competitive
forces approach views the essence of competitive
strategy formulation as ‘relating a company to its
environment . . . [T]he key aspect of the firm’s
environment is the industry or industries in which
it competes.’ Industry structure strongly influences the competitive rules of the game as well
as the strategies potentially available to firms.
In the competitive forces model, five industrylevel forces—entry barriers, threat of substitution,
bargaining power of buyers, bargaining power
of suppliers, and rivalry among industry
incumbents—determine the inherent profit potential of an industry or subsegment of an industry.
The approach can be used to help the firm find
a position in an industry from which it can
best defend itself against competitive forces or
influence them in its favor (Porter, 1980: 4).
This ‘five-forces’ framework provides a systematic way of thinking about how competitive
forces work at the industry level and how these
forces determine the profitability of different
industries and industry segments. The competitive
forces framework also contains a number of
underlying assumptions about the sources of competition and the nature of the strategy process.
To facilitate comparisons with other approaches,
we highlight several distinctive characteristics of
the framework.
Economic rents in the competitive forces
framework are monopoly rents (Teece, 1984).
Firms in an industry earn rents when they are
somehow able to impede the competitive forces
(in either factor markets or product markets)
which tend to drive economic returns to zero.
Available strategies are described in Porter
511
(1980). Competitive strategies are often aimed at
altering the firm’s position in the industry vis-àvis competitors and suppliers. Industry structure
plays a central role in determining and limiting
strategic action.
Some industries or subsectors of industries
become more ‘attractive’ because they have structural impediments to competitive forces (e.g.,
entry barriers) that allow firms better opportunities for creating sustainable competitive
advantages. Rents are created largely at the industry or subsector level rather than at the firm level.
While there is some recognition given to firmspecific assets, differences among firms relate
primarily to scale. This approach to strategy
reflects its incubation inside the field of industrial
organization and in particular the industrial structure school of Mason and Bain3 (Teece, 1984).
Strategic conflict
The publication of Carl Shapiro’s 1989 article,
confidently titled ‘ The Theory of Business
Strategy,’ announced the emergence of a new
approach to business strategy, if not strategic
management. This approach utilizes the tools of
game theory to analyze the nature of competitive
interaction between rival firms. The main thrust
of work in this tradition is to reveal how a firm
can influence the behavior and actions of rival
firms and thus the market environment.4
Examples of such moves are investment in
capacity (Dixit, 1980), R&D (Gilbert and Newberry, 1982), and advertising (Schmalensee,
1983). To be effective, these strategic moves
require irreversible commitments.5 The moves in
question will have no effect if they can be
costlessly undone. A key idea is that by manipulating the market environment, a firm may be
able to increase its profits.
3
In competitive environments characterized by sustainable and
stable mobility and structural barriers, these forces may
become the determinants of industry-level profitability. However, competitive advantage is more complex to ascertain in
environments of rapid technological change where specific
assets owned by heterogeneous firms can be expected to play
a larger role in explaining rents.
4
The market environment is all factors that influence market
outcomes (prices, quantities, profits) including the beliefs of
customers and of rivals, the number of potential technologies
employed, and the costs or speed with which a rival can
enter the industry.
5
For an excellent discussion of committed competition in
multiple contexts, see Ghemawat (1991).
512
D. J. Teece, G. Pisano and A. Shuen
This literature, together with the contestability
literature (Baumol, Panzar, and Willig, 1982), has
led to a greater appreciation of the role of sunk
costs, as opposed to fixed costs, in determining
competitive outcomes. Strategic moves can also
be designed to influence rivals’ behavior through
signaling. Strategic signaling has been examined
in a number of contexts, including predatory
pricing (Kreps and Wilson, 1982a, 1982b) and
limit pricing (Milgrom and Roberts, 1982a,
1982b). More recent treatments have emphasized
the role of commitment and reputation (e.g.,
Ghemawat, 1991) and the benefits of firms simultaneously pursuing competition and cooperation6
(Brandenburger and Nalebuff, 1995, 1996).
In many instances, game theory formalizes
long-standing intuitive arguments about various
types of business behavior (e.g., predatory pricing, patent races), though in some instances it has
induced a substantial change in the conventional
wisdom. But by rationalizing observed behavior
by reference to suitably designed games, in
explaining everything these models also explain
nothing, as they do not generate testable predictions (Sutton, 1992). Many specific gametheoretic models admit multiple equilibrium, and
a wide range of choice exists as to the design of
the appropriate game form to be used. Unfortunately, the results often depend on the precise
specification chosen. The equilibrium in models
of strategic behavior crucially depends on what
one rival believes another rival will do in a
particular situation. Thus the qualitative features
of the results may depend on the way price
competition is modeled (e.g., Bertrand or
Cournot) or on the presence or absence of strategic asymmetries such as first-mover advantages.
The analysis of strategic moves using game
theory can be thought of as ‘dynamic’ in the
sense that multiperiod analyses can be pursued
both intuitively and formally. However, we use
the term ‘dynamic’ in this paper in a different
sense, referring to situations where there is rapid
change in technology and market forces, and
‘feedback’ effects on firms.7
We have a particular view of the contexts in
6
Competition and cooperation have also been analyzed ouside
of this tradition. See, for example, Teece (1992) and Link,
Teece and Finan (1996).
7
Accordingly, both approaches are dynamic, but in very
different senses.
which the strategic conflict literature is relevant
to strategic management. Firms that have a
tremendous cost or other competitive advantage
vis-à-vis their rivals ought not be transfixed by
the moves and countermoves of their rivals. Their
competitive fortunes will swing more on total
demand conditions, not on how competitors
deploy and redeploy their competitive assets. Put
differently, when there are gross asymmetries in
competitive advantage between firms, the results
of game-theoretic analysis are likely to be obvious
and uninteresting. The stronger competitor will
generally advance, even if disadvantaged by certain information asymmetries. To be sure, incumbent firms can be undone by new entrants with
a dramatic cost advantage, but no ‘gaming’ will
overturn that outcome. On the other hand, if
firms’ competitive positions are more delicately
balanced, as with Coke and Pepsi, and United
Airlines and American Airlines, then strategic
conflict is of interest to competitive outcomes.
Needless to say, there are many such circumstances, but they are rare in industries where
there is rapid technological change and fast-shifting market circumstances.
In short, where competitors do not have deepseated competitive advantages, the moves and
countermoves of competitors can often be usefully formulated in game-theoretic terms. However, we doubt that game theory can comprehensively illuminate how Chrysler should compete
against Toyota and Honda, or how United Airlines can best respond to Southwest Airlines since
Southwest’s advantage is built on organizational
attributes which United cannot readily replicate.8
Indeed, the entrepreneurial side of strategy—how
significant new rent streams are created and
protected—is largely ignored by the gametheoretic approach.9 Accordingly, we find that
the approach, while important, is most relevant
8
Thus even in the air transport industry game-theoretic formulations by no means capture all the relevant dimensions of
competitive rivalry. United Airlines’ and United Express’s
difficulties in competing with Southwest Airlines because of
United’s inability to fully replicate Southwest’s operation
capabilities is documented in Gittel (1995).
9
Important exceptions can be found in Brandenburger and
Nalebuff (1996) such as their emphasis on the role of complements. However, these insights do not flow uniquely from
game theory and can be found in the organizational economics
literature (e.g., Teece, 1986a, 1986b; de Figueiredo and
Teece, 1996).
Dynamic Capabilities
when competitors are closely matched10 and the
population of relevant competitors and the identity of their strategic alternatives can be readily
ascertained. Nevertheless, coupled with other
approaches it can sometimes yield powerful
insights.
However, this research has an orientation that
we are concerned about in terms of the implicit
framing of strategic issues. Rents, from a gametheoretic perspective, are ultimately a result of
managers’ intellectual ability to ‘play the game.’
The adage of the strategist steeped in this
approach is ‘do unto others before they do unto
you.’ We worry that fascination with strategic
moves and Machiavellian tricks will distract managers from seeking to build more enduring
sources of competitive advantage. The approach
unfortunately ignores competition as a process
involving the development, accumulation, combination, and protection of unique skills and capabilities. Since strategic interactions are what
receive focal attention, the impression one might
receive from this literature is that success in the
marketplace is the result of sophisticated plays
and counterplays, when this is generally not the
case at all.11
In what follows, we suggest that building a
dynamic view of the business enterprise—
something missing from the two approaches we
have so far identified—enhances the probability
of establishing an acceptable descriptive theory
of strategy that can assist practitioners in the
building of long-run advantage and competitive
flexibility. Below, we discuss first the resourcebased perspective and then an extension we call
the dynamic capabilities approach.
MODELS OF STRATEGY
EMPHASIZING EFFICIENCY
Resource-based perspective
The resource-based approach sees firms with
superior systems and structures being profitable
not because they engage in strategic investments
that may deter entry and raise prices above longrun costs, but because they have markedly lower
costs, or offer markedly higher quality or product
performance. This approach focuses on the rents
accruing to the owners of scarce firm-specific
resources rather than the economic profits from
product market positioning.12 Competitive advantage lies ‘upstream’ of product markets and rests
on the firm’s idiosyncratic and difficult-toimitate resources.13
One can find the resources approach suggested
by the earlier preanalytic strategy literature. A
leading text of the 1960s (Learned et al., 1969)
noted that ‘the capability of an organization is its
demonstrated and potential ability to accomplish
against the opposition of circumstance or competition, whatever it sets out to do. Every organization has actual and potential strengths and weaknesses; it is important to try to determine what
they are and to distinguish one from the other.’
Thus what a firm can do is not just a function
of the opportunities it confronts; it also depends
on what resources the organization can muster.
Learned et al. proposed that the real key to a
company’s success or even to its future development lies in its ability to find or create ‘a competence that is truly distinctive.’14 This literature
also recognized the constraints on firm behavior
and, in particular, noted that one should not
assume that management ‘can rise to any
occasion.’ These insights do appear to keenly
anticipate the resource-based approach that has
since emerged, but they did not provide a theory
or systematic framework for analyzing business
strategies. Indeed, Andrews (1987: 46) noted that
‘much of what is intuitive in this process is
yet to be identified.’ Unfortunately, the academic
literature on capabilities stalled for a couple of
decades.
New impetus has been given to the resourcebased approach by recent theoretical developments in organizational economics and in the
theory of strategy, as well as by a growing
12
10
When closely matched in an aggregate sense, they may
nevertheless display asymmetries which game theorists can
analyze.
11
The strategic conflict literature also tends to focus practitioners on product market positioning rather than on
developing the unique assets which make possible superior
product market positions (Dierickx and Cool, 1989).
513
In the language of economics, rents flow from unique firmspecific assets that cannot readily be replicated, rather than
from tactics which deter entry and keep competitors off
balance. In short, rents are Ricardian.
13
Teece (1982: 46) saw the firm as having ‘a variety of end
products which it can produce with its organizational technology.’
14
Elsewhere Andrews (1987: 47) defined a distinctive competence as what an organization can do particularly well.
514
D. J. Teece, G. Pisano and A. Shuen
body of anecdotal and empirical literature15 that
highlights the importance of firm-specific factors
in explaining firm performance. Cool and Schendel (1988) have shown that there are systematic
and significant performance differences among
firms which belong to the same strategic group
within the U.S. pharmaceutical industry. Rumelt
(1991) has shown that intraindustry differences
in profits are greater than interindustry differences
in profits, strongly suggesting the importance of
firm-specific factors and the relative unimportance
of industry effects.16 Jacobsen (1988) and Hansen
and Wernerfelt (1989) made similar findings.
A comparison of the resource-based approach
and the competitive forces approach (discussed
earlier in the paper) in terms of their implications
for the strategy process is revealing. From the
first perspective, an entry decision looks roughly
as follows: (1) pick an industry (based on its
‘structural attractiveness’); (2) choose an entry
strategy based on conjectures about competitors’
rational strategies; (3) if not already possessed,
acquire or otherwise obtain the requisite assets to
compete in the market. From this perspective, the
process of identifying and developing the requisite assets is not particularly problematic. The
process involves nothing more than choosing
rationally among a well-defined set of investment
alternatives. If assets are not already owned, they
can be bought. The resource-based perspective is
strongly at odds with this conceptualization.
From the resource-based perspective, firms are
heterogeneous with respect to their resources/
capabilities/endowments. Further, resource endowments are ‘sticky:’ at least in the short run, firms
are to some degree stuck with what they have
and may have to live with what they lack.17 This
stickiness arises for three reasons. First, business
development is viewed as an extremely complex
15
Studies of the automobile and other industries displayed
differences in organization which often underlay differences
amongst firms. See, for example, Womack, Jones, and Roos,
1991; Hayes and Clark, 1985; Barney, Spender and Reve,
1994; Clark and Fujimoto, 1991; Henderson and Cockburn,
1994; Nelson, 1991; Levinthal and Myatt, 1994.
16
Using FTC line of business data, Rumelt showed that stable
industry effects account for only 8 percent of the variance in
business unit returns. Furthermore, only about 40 percent of
the dispersion in industry returns is due to stable industry
effects.
17
In this regard, this approach has much in common with
recent work on organizational ecology (e.g., Freeman and
Boeker, 1984) and also on commitment (Ghemawat, 1991:
17–25).
process.18 Quite simply, firms lack the organizational capacity to develop new competences
quickly (Dierickx and Cool, 1989). Secondly,
some assets are simply not readily tradeable, for
example, tacit know-how (Teece, 1976, 1980)
and reputation (Dierickx and Cool, 1989). Thus,
resource endowments cannot equilibrate through
factor input markets. Finally, even when an asset
can be purchased, firms may stand to gain little by
doing so. As Barney (1986) points out, unless a
firm is lucky, possesses superior information, or
both, the price it pays in a competitive factor
market will fully capitalize the rents from the asset.
Given that in the resources perspective firms
possess heterogeneous and sticky resource
bundles, the entry decision process suggested by
this approach is as follows: (1) identify your
firm’s unique resources; (2) decide in which markets those resources can earn the highest rents;
and (3) decide whether the rents from those assets
are most effectively utilized by (a) integrating
into related market(s), (b) selling the relevant
intermediate output to related firms, or (c) selling
the assets themselves to a firm in related businesses (Teece, 1980, 1982).
The resource-based perspective puts both vertical integration and diversification into a new strategic light. Both can be viewed as ways of capturing rents on scarce, firm-specific assets whose
services are difficult to sell in intermediate markets (Penrose, 1959; Williamson, 1975; Teece,
1980, 1982, 1986a, 1986b; Wernerfelt, 1984).
Empirical work on the relationship between performance and diversification by Wernerfelt and
Montgomery (1988) provides evidence for this
proposition. It is evident that the resource-based
perspective focuses on strategies for exploiting
existing firm-specific assets.
However, the resource-based perspective also
invites consideration of managerial strategies for
developing new capabilities (Wernerfelt, 1984).
Indeed, if control over scarce resources is the
source of economic profits, then it follows that
such issues as skill acquisition, the management
of knowledge and know-how (Shuen, 1994), and
learning become fundamental strategic issues. It
is in this second dimension, encompassing skill
acquisition, learning, and accumulation of organizational and intangible or ‘invisible’ assets (Itami
18
Capability development, however, is not really analyzed.
Dynamic Capabilities
and Roehl, 1987), that we believe lies the greatest
potential for contributions to strategy.
The dynamic capabilities approach: Overview
The global competitive battles in high-technology
industries such as semiconductors, information
services, and software have demonstrated the need
for an expanded paradigm to understand how
competitive advantage is achieved. Well-known
companies like IBM, Texas Instruments, Philips,
and others appear to have followed a ‘resourcebased strategy’ of accumulating valuable technology assets, often guarded by an aggressive
intellectual property stance. However, this strategy is often not enough to support a significant
competitive advantage. Winners in the global
marketplace have been firms that can demonstrate
timely responsiveness and rapid and flexible product innovation, coupled with the management
capability to effectively coordinate and redeploy
internal and external competences. Not surprisingly, industry observers have remarked that companies can accumulate a large stock of valuable
technology assets and still not have many useful capabilities.
We refer to this ability to achieve new forms
of competitive advantage as ‘dynamic capabilities’ to emphasize two key aspects that were not
the main focus of attention in previous strategy
perspectives. The term ‘dynamic’ refers to the
capacity to renew competences so as to achieve
congruence with the changing business environment; certain innovative responses are required
when time-to-market and timing are critical, the
rate of technological change is rapid, and the
nature of future competition and markets difficult
to determine. The term ‘capabilities’ emphasizes
the key role of strategic management in appropriately adapting, integrating, and reconfiguring
internal and external organizational skills,
resources, and functional competences to match
the requirements of a changing environment.
One aspect of the strategic problem facing
an innovating firm in a world of Schumpeterian
competition is to identify difficult-to-imitate
internal and external competences most likely to
support valuable products and services. Thus, as
argued by Dierickx and Cool (1989), choices
about how much to spend (invest) on different
possible areas are central to the firm’s strategy.
However, choices about domains of competence
515
are influenced by past choices. At any given point
in time, firms must follow a certain trajectory or
path of competence development. This path not
only defines what choices are open to the firm
today, but it also puts bounds around what its
internal repertoire is likely to be in the future.
Thus, firms, at various points in time, make longterm, quasi-irreversible commitments to certain
domains of competence.19
The notion that competitive advantage requires
both the exploitation of existing internal and
external firm-specific capabilities, and developing
new ones is partially developed in Penrose
(1959), Teece (1982), and Wernerfelt (1984).
However, only recently have researchers begun
to focus on the specifics of how some organizations first develop firm-specific capabilities and
how they renew competences to respond to shifts
in the business environment.20 These issues are
intimately tied to the firm’s business processes,
market positions, and expansion paths. Several
writers have recently offered insights and evidence on how firms can develop their capability
to adapt and even capitalize on rapidly changing
The
dynamic
capabilities
environments.21
approach seeks to provide a coherent framework
which can both integrate existing conceptual and
empirical knowledge, and facilitate prescription.
In doing so, it builds upon the theoretical foundations provided by Schumpeter (1934), Penrose
(1959), Williamson (1975, 1985), Barney (1986),
Nelson and Winter (1982), Teece (1988), and
Teece et al. (1994).
TOWARD A DYNAMIC CAPABILITIES
FRAMEWORK
Terminology
In order to facilitate theory development and
intellectual dialogue, some acceptable definitions
are desirable. We propose the following.
19
Deciding, under significant uncertainty about future states
of the world, which long-term paths to commit to and when
to change paths is the central strategic problem confronting
the firm. In this regard, the work of Ghemawat (1991) is
highly germane to the dynamic capabilities approach to
strategy.
20
See, for example, Iansiti and Clark (1994) and Henderson
(1994).
21
See Hayes et al. (1988), Prahalad and Hamel (1990),
Dierickx and Cool (1989), Chandler (1990), and Teece
(1993).
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D. J. Teece, G. Pisano and A. Shuen
Factors of production
These are ‘undifferentiated’ inputs available in
disaggregate form in factor markets. By undifferentiated we mean that they lack a firm-specific
component. Land, unskilled labor, and capital are
typical examples. Some factors may be available
for the taking, such as public knowledge. In the
language of Arrow, such resources must be ‘nonfugitive.’ 22 Property rights are usually well
defined for factors of production.
Resources23
Resources are firm-specific assets that are difficult
if not impossible to imitate. Trade secrets and
certain specialized production facilities and engineering experience are examples. Such assets are
difficult to transfer among firms because of transactions costs and transfer costs, and because the
assets may contain tacit knowledge.
Organizational routines/competences
When firm-specific assets are assembled in integrated clusters spanning individuals and groups
so that they enable distinctive activities to be
performed, these activities constitute organizational routines and processes. Examples include
quality, miniaturization, and systems integration.
Such competences are typically viable across multiple product lines, and may extend outside the
firm to embrace alliance partners.
Core competences
We define those competences that define a firm’s
fundamental business as core. Core competences
must accordingly be derived by looking across
the range of a firm’s (and its competitors) products and services.24 The value of core competences can be enhanced by combination with
the appropriate complementary assets. The degree
22
Arrow (1996) defines fugitive resources as ones that can
move cheaply amongst individuals and firms.
23
We do not like the term ‘resource’ and believe it is
misleading. We prefer to use the term firm-specific asset. We
use it here to try and maintain links to the literature on the
resource-based approach which we believe is important.
24
Thus Eastman Kodak’s core competence might be considered imaging, IBM’s might be considered integrated data
processing and service, and Motorola’s untethered communications.
to which a core competence is distinctive depends
on how well endowed the firm is relative to its
competitors, and on how difficult it is for competitors to replicate its competences.
Dynamic capabilities
We define dynamic capabilities as the firm’s
ability to integrate, build, and reconfigure internal
and external competences to address rapidly
changing environments. Dynamic capabilities thus
reflect an organization’s ability to achieve new
and innovative forms of competitive advantage
given path dependencies and market positions
(Leonard-Barton, 1992).
Products
End products are the final goods and services
produced by the firm based on utilizing the competences that it possesses. The performance
(price, quality, etc.) of a firm’s products relative
to its competitors at any point in time will depend
upon its competences (which over time depend
on its capabilities).
Markets and strategic capabilities
Different approaches to strategy view sources of
wealth creation and the essence of the strategic
problem faced by firms differently. The competitive forces framework sees the strategic problem
in terms of industry structure, entry deterrence,
and positioning; game-theoretic models view the
strategic problem as one of interaction between
rivals with certain expectations about how each
other will behave;25 resource-based perspectives
have focused on the exploitation of firm-specific
assets. Each approach asks different, often complementary questions. A key step in building a
conceptual framework related to dynamic capabilities is to identify the foundations upon which
distinctive and difficult-to-replicate advantages
can be built, maintained, and enhanced.
A useful way to vector in on the strategic
elements of the business enterprise is first to
identify what is not strategic. To be strategic, a
25
In sequential move games, each player looks ahead and
anticipates his rival’s future responses in order to reason back
and decide action, i.e., look forward, reason backward.
Dynamic Capabilities
capability must be honed to a user need26 (so
there is a source of revenues), unique (so that
the products/services produced can be priced
without too much regard to competition) and
difficult to replicate (so profits will not be competed away). Accordingly, any assets or entity
which are homogeneous and can be bought and
sold at an established price cannot be all that
strategic (Barney, 1986). What is it, then, about
firms which undergirds competitive advantage?
To answer this, one must first make some
fundamental distinctions between markets and
internal organization (firms). The essence of the
firm, as Coase (1937) pointed out, is that it
displaces market organization. It does so in the
main because inside the firms one can organize
certain types of economic activity in ways one
cannot using markets. This is not only because
of transaction costs, as Williamson (1975, 1985)
emphasized, but also because there are many
types of arrangements where injecting high-powered (market like) incentives might well be quite
destructive of cooperative activity and learning.27
Inside an organization, exchange cannot take
place in the same manner that it can outside an
organization, not just because it might be destructive to provide high-powered individual incentives, but because it is difficult if not impossible
to tightly calibrate individual contribution to a
joint effort. Hence, contrary to Arrow’s (1969)
view of firms as quasi markets, and the task
of management to inject markets into firms, we
recognize the inherent limits and possible counterproductive results of attempting to fashion firms
into simply clusters of internal markets. In particular, learning and internal technology transfer
may well be jeopardized.
Indeed, what is distinctive about firms is that
they are domains for organizing activity in a
nonmarket-like fashion. Accordingly, as we discuss what is distinctive about firms, we stress
competences/capabilities which are ways of
organizing and getting things done which cannot
be accomplished merely by using the price system
26
Needless to say, users need not be the current customers
of the enterprise. Thus a capability can be the basis for
diversification into new product markets.
27
Indeed, the essence of internal organization is that it is a
domain of unleveraged or low-powered incentives. By unleveraged we mean that rewards are determined at the group or
organization level, not primarily at the individual level, in an
effort to encourage team behavior, not individual behavior.
517
to coordinate activity.28 The very essence of most
capabilities/competences is that they cannot be
readily assembled through markets (Teece, 1982,
1986a; Zander and Kogut, 1995). If the ability
to assemble competences using markets is what
is meant by the firm as a nexus of contracts
(Fama, 1980), then we unequivocally state that
the firm about which we theorize cannot be usefully modeled as a nexus of contracts. By ‘contract’ we are referring to a transaction undergirded
by a legal agreement, or some other arrangement
which clearly spells out rights, rewards, and
responsibilities. Moreover, the firm as a nexus of
contracts suggests a series of bilateral contracts
orchestrated by a coordinator. Our view of the
firm is that the organization takes place in a more
multilateral fashion, with patterns of behavior
and learning being orchestrated in a much more
decentralized fashion, but with a viable headquarters operation.
The key point, however, is that the properties
of internal organization cannot be replicated by
a portfolio of business units amalgamated just
through formal contracts as many distinctive
elements of internal organization simply cannot
be replicated in the market.29 That is, entrepreneurial activity cannot lead to the immediate replication of unique organizational skills through
simply entering a market and piecing the parts
together overnight. Replication takes time, and
the replication of best practice may be illusive.
Indeed, firm capabilities need to be understood
not in terms of balance sheet items, but mainly
in terms of the organizational structures and
managerial processes which support productive
activity. By construction, the firm’s balance sheet
contains items that can be valued, at least at
original market prices (cost). It is necessarily the
case, therefore, that the balance sheet is a poor
shadow of a firm’s distinctive competences. 30
28
We see the problem of market contracting as a matter of
coordination as much as we see it a problem of opportunism
in the fact of contractual hazards. In this sense, we are
consonant with both Richardson (1960) and Williamson
(1975, 1985).
29
As we note in Teece et al. (1994), the conglomerate offers
few if any efficiencies because there is little provided by
the conglomerate form that shareholders cannot obtain for
themselves simply by holding a diversified portfolio of stocks.
30
Owners’ equity may reflect, in part, certain historic capabilities. Recently, some scholars have begun to attempt to measure organizational capability using financial statement data.
See Baldwin and Clark (1991) and Lev and Sougiannis
(1992).
518
D. J. Teece, G. Pisano and A. Shuen
That which is distinctive cannot be bought and
sold short of buying the firm itself, or one or
more of its subunits.
There are many dimensions of the business
firm that must be understood if one is to grasp
firm-level distinctive competences/capabilities. In
this paper we merely identify several classes of
factors that will help determine a firm’s distinctive competence and dynamic capabilities. We
organize these in three categories: processes, positions, and paths. The essence of competences
and capabilities is embedded in organizational
processes of one kind or another. But the content
of these processes and the opportunities they
afford for developing competitive advantage at
any point in time are shaped significantly by the
assets the firm possesses (internal and market)
and by the evolutionary path it has
adopted/inherited. Hence organizational processes,
shaped by the firm’s asset positions and molded
by its evolutionary and co-evolutionary paths,
explain the essence of the firm’s dynamic capabilities and its competitive advantage.
Processes, positions, and paths
We thus advance the argument that the competitive advantage of firms lies with its managerial
and organizational processes, shaped by its
(specific) asset position, and the paths available
to it.31 By managerial and organizational processes, we refer to the way things are done in the
firm, or what might be referred to as its routines,
or patterns of current practice and learning. By
position we refer to its current specific endowments of technology, intellectual property, complementary assets, customer base, and its external
relations with suppliers and complementors. By
paths we refer to the strategic alternatives available to the firm, and the presence or absence of
increasing returns and attendant path dependencies.
Our focus throughout is on asset structures for
which no ready market exists, as these are the
only assets of strategic interest. A final section
31
We are implicitly saying that fixed assets, like plant and
equipment which can be purchased off-the-shelf by all industry
participants, cannot be the source of a firm’s competitive
advantage. In asmuch as financial balance sheets typically
reflect such assets, we point out that the assets that matter
for competitive advantage are rarely reflected in the balance
sheet, while those that do not are.
focuses on replication and imitation, as it is these
phenomena which determine how readily a competence or capability can be cloned by competitors, and therefore distinctiveness of its competences and the durability of its advantage.
The firm’s processes and positions collectively
encompass its competences and capabilities. A
hierarchy of competences/capabilities ought to be
recognized, as some competences may be on the
factory floor, some in the R&D labs, some in the
executive suites, and some in the way everything
is integrated. A difficult-to-replicate or difficultto-imitate competence was defined earlier as a
distinctive competence. As indicated, the key feature of distinctive competence is that there is not
a market for it, except possibly through the market for business units. Hence competences and
capabilities are intriguing assets as they typically
must be built because they cannot be bought.
Organizational and managerial processes
Organizational processes have three roles:
coordination/integration (a static concept); learning (a dynamic concept); and reconfiguration (a
transformational concept). We discuss each in
turn.
Coordination/integration. While the price system supposedly coordinates the economy,32 managers coordinate or integrate activity inside the
firm. How efficiently and effectively internal
coordination or integration is achieved is very
important (Aoki, 1990).33 Likewise for external
coordination.34 Increasingly, strategic advantage
requires the integration of external activities and
technologies. The growing literature on strategic
32
The coordinative properties of markets depend on prices
being “sufficient” upon which to base resource allocation
decisions.
33
Indeed, Ronald Coase, author of the pathbreaking 1937
article ‘The nature of the firm,’ which focused on the costs
of organizational coordination inside the firm as compared to
across the market, half a century later has identified as critical
the understanding of ‘why the costs of organizing particular
activities differs among firms’ (Coase, 1988: 47). We argue
that a firm’s distinctive ability needs to be understood as a
reflection of distinctive organizational or coordinative capabilities. This form of integration (i.e., inside business units) is
different from the integration between business units; they
could be viable on a stand-alone basis (external integration).
For a useful taxonomy, see Iansiti and Clark (1994).
34
Shuen (1994) examines the gains and hazards of the technology make-vs.-buy decision and supplier codevelopment.
Dynamic Capabilities
alliances, the virtual corporation, and buyer–
supplier relations and technology collaboration
evidences the importance of external integration
and sourcing.
There is some field-based empirical research
that provides support for the notion that the way
production is organized by management inside
the firm is the source of differences in firms’
competence in various domains. For example,
Garvin’s (1988) study of 18 room air-conditioning plants reveals that quality performance was
not related to either capital investment or the
degree of automation of the facilities. Instead,
quality performance was driven by special organizational routines. These included routines for
gathering and processing information, for linking
customer experiences with engineering design
choices, and for coordinating factories and
component suppliers.35 The work of Clark and
Fujimoto (1991) on project development in the
automobile industry also illustrates the role played
by coordinative routines. Their study reveals a
significant degree of variation in how different
firms coordinate the various activities required to
bring a new model from concept to market. These
differences in coordinative routines and capabilities seem to have a significant impact on such
performance variables as development cost, development lead times, and quality. Furthermore,
Clark and Fujimoto tended to find significant
firm-level differences in coordination routines and
these differences seemed to have persisted for a
long time. This suggests that routines related to
coordination are firm-specific in nature.
Also, the notion that competence/capability is
embedded in distinct ways of coordinating and
combining helps to explain how and why seemingly minor technological changes can have
devastating impacts on incumbent firms’ abilities
to compete in a market. Henderson and Clark
(1990), for example, have shown that incumbments in the photolithographic equipment
industry were sequentially devasted by seemingly
minor innovations that, nevertheless, had major
impacts on how systems had to be configured.
They attribute these difficulties to the fact that
systems-level or ‘architectural’ innovations often
require new routines to integrate and coordinate
engineering tasks. These findings and others sug35
Garvin ( 1994 ) provides a typology of organizational
processes.
519
gest that productive systems display high interdependency, and that it may not be possible to
change one level without changing others. This
appears to be true with respect to the ‘lean
production’ model (Womack et al., 1991) which
has now transformed the Taylor or Ford model
of manufacturing organization in the automobile
industry.36 Lean production requires distinctive
shop floor practices and processes as well as
distinctive higher-order managerial processes. Put
differently, organizational processes often display
high levels of coherence, and when they do,
replication may be difficult because it requires
systemic changes throughout the organization and
also among interorganizational linkages, which
might be very hard to effectuate. Put differently,
partial imitation or replication of a successful
model may yield zero benefits.37
36
Fujimoto (1994: 18–20) describes key elements as they
existed in the Japanese auto industry as follows: ‘The typical
volume production system of effective Japanese makers of
the 1980s (e.g., Toyota) consists of various intertwined
elements that might lead to competitive advantages. Just-inTime (JIT), Jidoka (automatic defect detection and machine
stop), Total Quality Control (TQC), and continuous improvement (Kaizen) are often pointed out as its core subsystems.
The elements of such a system include inventory reduction
mechanisms by Kanban system; levelization of production
volume and product mix (heijunka); reduction of ‘muda’
(non-value adding activities), ‘mura’ (uneven pace of
production) and muri (excessive workload); production plans
based on dealers’ order volume (genyo seisan); reduction of
die set-up time and lot size in stamping operation; mixed
model assembly; piece-by-piece transfer of parts between
machines (ikko-nagashi); flexible task assignment for volume
changes and productivity improvement (shojinka); multi-task
job assignment along the process flow (takotei-mochi); Ushape machine layout that facilitates flexible and multiple
task assignment, on-the-spot inspection by direct workers
(tsukurikomi); fool-proof prevention of defects (poka-yoke);
real-time feedback of production troubles (andon); assembly
line stop cord; emphasis on cleanliness, order and discipline
on the shop floor (5-S); frequent revision of standard operating
procedures by supervisors; quality control circles; standardized
tools for quality improvement (e.g., 7 tools for QC, QC
story); worker involvement in preventive maintenance (Total
Productive Maintenance); low cost automation or semi-automation with just-enough functions ); reduction of process steps
for saving of tools and dies, and so on. The human-resource
management factors that back up the above elements include
stable employment of core workers (with temporary workers
in the periphery); long-term training of multi-skilled (multitask) workers; wage system based in part on skill accumulation; internal promotion to shop floor supervisors; cooperative relationships with labor unions; inclusion of production
supervisors in union members; generally egalitarian policies
for corporate welfare, communication and worker motivation.
Parts procurement policies are also pointed out often as a
source of the competitive advantage.
37
For a theoretical argument along these lines, see Milgrom
and Roberts (1990).
520
D. J. Teece, G. Pisano and A. Shuen
The notion that there is a certain rationality or
coherence to processes and systems is not quite
the same concept as corporate culture, as we
understand the latter. Corporate culture refers to
the values and beliefs that employees hold; culture can be a de facto governance system as it
mediates the behavior of individuals and economizes on more formal administrative methods.
Rationality or coherence notions are more akin
to the Nelson and Winter (1982) notion of organizational routines. However, the routines concept
is a little too amorphous to properly capture
the congruence amongst processes and between
processes and incentives that we have in mind.
Consider a professional service organization like
an accounting firm. If it is to have relatively
high-powered incentives that reward individual
performance, then it must build organizational
processes that channel individual behavior; if it
has weak or low-powered incentives, it must find
symbolic ways to recognize the high performers,
and it must use alternative methods to build effort
and enthusiasm. What one may think of as styles
of organization in fact contain necessary, not
discretionary, elements to achieve performance.
Recognizing the congruences and complementarities among processes, and between processes
and incentives, is critical to the understanding of
organizational capabilities. In particular, they can
help us explain why architectural and radical
innovations are so often introduced into an industry by new entrants. The incumbents develop
distinctive organizational processes that cannot
support the new technology, despite certain overt
similarities between the old and the new. The
frequent failure of incumbents to introduce new
technologies can thus be seen as a consequence
of the mismatch that so often exists between the
set of organizational processes needed to support
the conventional product/service and the requirements of the new. Radical organizational reengineering will usually be required to support
the new product, which may well do better
embedded in a separate subsidiary where a new
set of coherent organizatonal processes can be
fashioned.38
Learning. Perhaps even more important than
integration is learning. Learning is a process by
38
See Abernathy and Clark (1985).
which repetition and experimentation enable tasks
to be performed better and quicker. It also enables
new production opportunities to be identified.39
In the context of the firm, if not more generally,
learning has several key characteristics. First,
learning involves organizational as well as individual skills. 40 While individual skills are of relevance, their value depends upon their employment, in particular organizational settings.
Learning processes are intrinsically social and
collective and occur not only through the imitation and emulation of individuals, as with
teacher–student or master–apprentice, but also
because of joint contributions to the understanding of complex problems.41 Learning requires
common codes of communication and coordinated
search procedures. Second, the organizational
knowledge generated by such activity resides in
new patterns of activity, in ‘routines,’ or a new
logic of organization. As indicated earlier, routines are patterns of interactions that represent
successful solutions to particular problems. These
patterns of interaction are resident in group
behavior, though certain subroutines may be resident in individual behavior. The concept of
dynamic capabilities as a coordinative management process opens the door to the potential
for interorganizational learning. Researchers (Doz
and Shuen, 1990; Mody, 1993) have pointed out
that collaborations and partnerships can be a
vehicle for new organizational learning, helping
firms to recognize dysfunctional routines, and
preventing strategic blindspots.
Reconfiguration and transformation. In rapidly
changing environments, there is obviously value
in the ability to sense the need to reconfigure
the firm’s asset structure, and to accomplish the
necessary internal and external transformation
(Amit and Schoemaker, 1993; Langlois, 1994).
This requires constant surveillance of markets and
technologies and the willingness to adopt best
practice. In this regard, benchmarking is of con39
For a useful review and contribution, see Levitt and
March (1988).
40
Levinthal and March, 1993. Mahoney (1992) and Mahoney
and Pandian (1995) suggest that both resources and mental
models are intertwined in firm-level learning.
41
There is a large literature on learning, although only a
small fraction of it deals with organizational learning. Relevant
contributors include Levitt and March (1988), Argyris and
Schon (1978), Levinthal and March (1981), Nelson and
Winter (1982), and Leonard-Barton (1995).
Dynamic Capabilities
siderable value as an organized process for
accomplishing such ends (Camp, 1989). In
dynamic environments, narcissistic organizations
are likely to be impaired. The capacity to reconfigure and transform is itself a learned organizational skill. The more frequently practiced, the
easier accomplished.
Change is costly and so firms must develop
processes to minimize low pay-off change. The
ability to calibrate the requirements for change
and to effectuate the necessary adjustments would
appear to depend on the ability to scan the
environment, to evaluate markets and competitors,
and to quickly accomplish reconfiguration and
transformation ahead of competition. Decentralization and local autonomy assist these processes.
Firms that have honed these capabilities are
sometimes referred to as ‘high-flex’.
Positions
The strategic posture of a firm is determined not
only by its learning processes and by the coherence of its internal and external processes and
incentives, but also by its specific assets. By
specific assets we mean for example its specialized plant and equipment. These include its
difficult-to-trade knowledge assets and assets
complementary to them, as well as its reputational
and relational assets. Such assets determine its
competitive advantage at any point in time. We
identify several illustrative classes.
Technological assets. While there is an emerging market for know-how (Teece, 1981), much
technology does not enter it. This is either
because the firm is unwilling to sell it42 or
because of difficulties in transacting in the market
for know-how (Teece, 1980). A firm’s technological assets may or may not be protected by
the standard instruments of intellectual property
law. Either way, the ownership protection and
utilization of technological assets are clearly key
differentiators among firms. Likewise for complementary assets.
Complementary assets. Technological innovations require the use of certain related assets
to produce and deliver new products and services.
42
Managers often evoke the ‘crown jewels’ metaphor. That
is, if the technology is released, the kingdom will be lost.
521
Prior commercialization activities require and
enable firms to build such complementarities
(Teece, 1986b). Such capabilities and assets,
while necessary for the firm’s established activities, may have other uses as well. These assets
typically lie downstream. New products and processes either can enhance or destroy the value of
such assets (Tushman, Newman, and Romanelli,
1986). Thus the development of computers
enhanced the value of IBM’s direct sales force
in office products, while disk brakes rendered
useless much of the auto industry’s investment
in drum brakes.
Financial assets. In the short run, a firm’s cash
position and degree of leverage may have strategic implications. While there is nothing more
fungible than cash, it cannot always be raised
from external markets without the dissemination
of considerable information to potential investors.
Accordingly, what a firm can do in short order
is often a function of its balance sheet. In the
longer run, that ought not be so, as cash flow
ought be more determinative.
Reputational assets. Firms, like individuals,
have reputations. Reputations often summarize a
good deal of information about firms and shape
the responses of customers, suppliers, and competitors. It is sometimes difficult to disentangle
reputation from the firm’s current asset and market position. However, in our view, reputational
assets are best viewed as an intangible asset that
enables firms to achieve various goals in the
market. Its main value is external, since what is
critical about reputation is that it is a kind of
summary statistic about the firm’s current assets
and position, and its likely future behavior.
Because there is generally a strong asymmetry
between what is known inside the firm and what
is known externally, reputations may sometimes
be more salient than the true state of affairs, in
the sense that external actors must respond to
what they know rather than what is knowable.
Structural assets. The formal and informal
structure of organizations and their external linkages have an important bearing on the rate and
direction of innovation, and how competences
and capabilities co-evolve (Argyres, 1995; Teece,
1996). The degree of hierarchy and the level of
vertical and lateral integration are elements of
522
D. J. Teece, G. Pisano and A. Shuen
firm-specific structure. Distinctive governance
modes can be recognized (e.g., multiproduct, integrated firms; high ‘flex’ firms; virtual corporations; conglomerates), and these modes support
different types of innovation to a greater or lesser
degree. For instance, virtual structures work well
when innovation is autonomous; integrated structures work better for systemic innovations.
Institutional assets. Environments cannot be
defined in terms of markets alone. While public
policies are usually recognized as important in
constraining what firms can do, there is a tendency, particularly by economists, to see these
as acting through markets or through incentives.
However, institutions themselves are a critical
element of the business environment. Regulatory
systems, as well as intellectual property regimes,
tort laws, and antitrust laws, are also part of the
environment. So is the system of higher education
and national culture. There are significant national
differences here, which is just one of the reasons
geographic location matters (Nelson, 1994). Such
assets may not be entirely firm specific; firms of
different national and regional origin may have
quite different institutional assets to call upon
because their institutional/policy settings are so
different.
Market (structure) assets. Product market position matters, but it is often not at all determinative of the fundamental position of the enterprise
in its external environment. Part of the problem
lies in defining the market in which a firm competes in a way that gives economic meaning.
More importantly, market position in regimes of
rapid technological change is often extremely
fragile. This is in part because time moves on a
different clock in such environments.43 Moreover,
the link between market share and innovation has
long been broken, if it ever existed (Teece, 1996).
All of this is to suggest that product market
position, while important, is too often overplayed.
Strategy should be formulated with regard to the
more fundamental aspects of firm performance,
which we believe are rooted in competences and
capabilities and shaped by positions and paths.
43
For instance, an Internet year might well be thought of as
equivalent to 10 years on many industry clocks, because as
much change occurs in the Internet business in a year that
occurs in say the auto industry in a decade.
Organizational
boundaries. An
important
dimension of ‘position’ is the location of a firm’s
boundaries. Put differently, the degree of integration (vertical, lateral, and horizontal) is of
quite some significance. Boundaries are not only
significant with respect to the technological and
complementary assets contained within, but also
with respect to the nature of the coordination that
can be achieved internally as compared to through
markets. When specific assets or poorly protected
intellectual capital are at issue, pure market
arrangements expose the parties to recontracting
hazards or appropriability hazards. In such circumstances, hierarchical control structures may
work better than pure arms-length contracts.44
Paths
Path dependencies. Where a firm can go is a
function of its current position and the paths
ahead. Its current position is often shaped by
the path it has traveled. In standard economics
textbooks, firms have an infinite range of technologies from which they can choose and markets
they can occupy. Changes in product or factor
prices will be responded to instantaneously, with
technologies moving in and out according to
value maximization criteria. Only in the short run
are irreversibilities recognized. Fixed costs— such
as equipment and overheads—cause firms to price
below fully amortized costs but never constrain
future investment choices. ‘Bygones are bygones.’
Path dependencies are simply not recognized.
This is a major limitation of microeconomic
theory.
The notion of path dependencies recognizes
that ‘history matters.’ Bygones are rarely
bygones, despite the predictions of rational actor
theory. Thus a firm’s previous investments and
44
Williamson (1996: 102–103) has observed, failures of coordination may arise because ‘parties that bear a long term
bilateral dependency relationship to one another must recognize that incomplete contracts require gap filling and sometimes get out of alignment. Although it is always in the
collective interest of autonomous parties to fill gaps, correct
errors, and affect efficient realignments, it is also the case
that the distribution of the resulting gains is indeterminate.
Self-interested bargaining predictably obtains. Such bargaining
is itself costly. The main costs, however, are that transactions
are maladapted to the environment during the bargaining
interval. Also, the prospect of ex post bargaining invites ex
ante prepositioning of an inefficient kind.’
Dynamic Capabilities
its repertoire of routines (its ‘history’) constrain
its future behavior.45 This follows because learning tends to be local. That is, opportunities for
learning will be ‘close in’ to previous activities
and thus will be transaction and production specific (Teece, 1988). This is because learning is
often a process of trial, feedback, and evaluation.
If too many parameters are changed simultaneously, the ability of firms to conduct meaningful natural quasi experiments is attenuated. If
many aspects of a firm’s learning environment
change simultaneously, the ability to ascertain
cause–effect relationships is confounded because
cognitive structures will not be formed and rates
of learning diminish as a result. One implication
is that many investments are much longer term
than is commonly thought.
The importance of path dependencies is amplified where conditions of increasing returns to
adoption exist. This is a demand-side phenomenon, and it tends to make technologies and
products embodying those technologies more
attractive the more they are adopted. Attractiveness flows from the greater adoption of the product amongst users, which in turn enables them to
become more developed and hence more useful.
Increasing returns to adoption has many sources
including network externalities (Katz and Shapiro,
1985), the presence of complementary assets
(Teece, 1986b) and supporting infrastructure
(Nelson, 1996), learning by using (Rosenberg,
1982), and scale economies in production and
distribution. Competition between and amongst
technologies is shaped by increasing returns.
Early leads won by good luck or special circumstances (Arthur, 1983) can become amplified by
increasing returns. This is not to suggest that
first movers necessarily win. Because increasing
returns have multiple sources, the prior positioning of firms can affect their capacity to exploit
increasing returns. Thus, in Mitchell’s (1989)
study of medical diagnostic imaging, firms
already controlling the relevant complementary
assets could in theory start last and finish first.
In the presence of increasing returns, firms can
compete passively, or they may compete strate-
45
For further development, see Bercovitz, de Figueiredo, and
Teece, 1996.
523
gically through technology-sponsoring activities.46
The first type of competition is not unlike biological competition amongst species, although it can
be sharpened by managerial activities that
enhance the performance of products and processes. The reality is that companies with the best
products will not always win, as chance events
may cause ‘lock-in’ on inferior technologies
(Arthur, 1983) and may even in special cases
generate switching costs for consumers. However,
while switching costs may favor the incumbent,
in regimes of rapid technological change switching costs can become quickly swamped by
switching benefits. Put differently, new products
employing different standards often appear with
alacrity in market environments experiencing
rapid technological change, and incumbents can
be readily challenged by superior products and
services that yield switching benefits. Thus the
degree to which switching costs cause ‘lock-in’
is a function of factors such as user learning,
rapidity of technological change, and the amount
of ferment in the competitive environment.
Technological opportunities. The concept of
path dependencies is given forward meaning
through the consideration of an industry’s technological opportunities. It is well recognized that
how far and how fast a particular area of industrial activity can proceed is in part due to the
technological opportunities that lie before it. Such
opportunities are usually a lagged function of
foment and diversity in basic science, and the
rapidity with which new scientific breakthroughs
are being made.
However, technological opportunities may not
be completely exogenous to industry, not only
because some firms have the capacity to engage
in or at least support basic research, but also
because technological opportunities are often fed
by innovative activity itself. Moreover, the recognition of such opportunities is affected by the
46
Because of huge uncertainties, it may be extremely difficult
to determine viable strategies early on. Since the rules of the
game and the identity of the players will be revealed only
after the market has begun to evolve, the pay-off is likely to
lie with building and maintaining organizational capabilities
that support flexibility. For example, Microsoft’s recent aboutface and vigorous pursuit of Internet business once the NetScape phenomenon became apparent is impressive, not so
much because it perceived the need to change strategy, but
because of its organizational capacity to effectuate a strategic shift.
524
D. J. Teece, G. Pisano and A. Shuen
organizational structures that link the institutions
engaging in basic research (primarily the
university) to the business enterprise. Hence, the
existence of technological opportunities can be
quite firm specific.
Important for our purposes is the rate and
direction in which relevant scientific frontiers are
being rolled back. Firms engaging in R&D may
find the path dead ahead closed off, though breakthroughs in related areas may be sufficiently close
to be attractive. Likewise, if the path dead ahead
is extremely attractive, there may be no incentive
for firms to shift the allocation of resources away
from traditional pursuits. The depth and width of
technological opportunities in the neighborhood
of a firm’s prior research activities thus are likely
to impact a firm’s options with respect to both
the amount and level of R&D activity that it
can justify. In addition, a firm’s past experience
conditions the alternatives management is able to
perceive. Thus, not only do firms in the same
industry face ‘menus’ with different costs associated with particular technological choices, they
also are looking at menus containing different
choices.47
Assessment
The essence of a firm’s competence and dynamic
capabilities is presented here as being resident in
the firm’s organizational processes, that are in
turn shaped by the firm’s assets (positions) and its
evolutionary path. Its evolutionary path, despite
managerial hubris that might suggest otherwise,
is often rather narrow.48 What the firm can do
and where it can go are thus rather constrained
by its positions and paths. Its competitors are
likewise constrained. Rents (profits) thus tend to
flow not just from the asset structure of the firm
and, as we shall see, the degree of its imitability,
but also by the firm’s ability to reconfigure and
transform.
The parameters we have identified for determining performance are quite different from
those in the standard textbook theory of the firm,
and in the competitive forces and strategic conflict
approaches to the firm and to strategy.49 Moreover, the agency theoretic view of the firm as a
nexus of contracts would put no weight on processes, positions, and paths. While agency
approaches to the firm may recognize that opportunism and shirking may limit what a firm can
do, they do not recognize the opportunities and
constraints imposed by processes, positions, and
paths.
Moreover, the firm in our conceptualization is
much more than the sum of its parts—or a team
tied together by contracts.50 Indeed, to some
extent individuals can be moved in and out of
organizations and, so long as the internal processes and structures remain in place, performance
will not necessarily be impaired. A shift in the
environment is a far more serious threat to the
firm than is the loss of key individuals, as individuals can be replaced more readily than organizations can be transformed. Furthermore, the
dynamic capabilities view of the firm would suggest that the behavior and performance of particular firms may be quite hard to replicate, even
if its coherence and rationality are observable.
This matter and related issues involving replication and imitation are taken up in the section
that follows.
Replicability and imitatability of
organizational processes and positions
Thus far, we have argued that the competences
and capabilities (and hence competitive advantage)
of a firm rest fundamentally on processes, shaped
by positions and paths. However, competences
can provide competitive advantage and generate
rents only if they are based on a collection of
routines, skills, and complementary assets that are
difficult to imitate.51 A particular set of routines
can lose their value if they support a competence
which no longer matters in the marketplace, or
if they can be readily replicated or emulated by
competitors. Imitation occurs when firms discover
and simply copy a firm’s organizational routines
and procedures. Emulation occurs when firms
49
47
This is a critical element in Nelson and Winter’s (1982)
view of firms and technical change.
48
We also recognize that the processes, positions, and paths of
customers also matter. See our discussion above on increasing
returns, including customer learning and network externalities.
In both the firm is still largely a black box. Certainly, little
or no attention is given to processes, positions, and paths.
50
See Alchian and Demsetz (1972).
51
We call such competences distinctive. See also Dierickx
and Cool (1989) for a discussion of the characteristics of
assets which make them a source of rents.
Dynamic Capabilities
discover alternative ways of achieving the same
functionality.52
525
To understand imitation, one must first understand
replication. Replication involves transferring or
redeploying competences from one concrete economic setting to another. Since productive knowledge is embodied, this cannot be accomplished
by simply transmitting information. Only in those
instances where all relevant knowledge is fully
codified and understood can replication be collapsed into a simple problem of information transfer. Too often, the contextual dependence of original performance is poorly appreciated, so unless
firms have replicated their systems of productive
knowledge on many prior occasions, the act of
replication is likely to be difficult (Teece, 1976).
Indeed, replication and transfer are often impossible absent the transfer of people, though this
can be minimized if investments are made to
convert tacit knowledge to codified knowledge.
Often, however, this is simply not possible.
In short, competences and capabilities, and the
routines upon which they rest, are normally rather
difficult to replicate. 53 Even understanding what
all the relevant routines are that support a particular competence may not be transparent. Indeed,
Lippman and Rumelt (1992) have argued that
some sources of competitive advantage are so
complex that the firm itself, let alone its competitors, does not understand them.54 As Nelson and
Winter (1982) and Teece (1982) have explained,
many organizational routines are quite tacit in
nature. Imitation can also be hindered by the fact
few routines are ‘stand-alone;’ coherence may
require that a change in one set of routines in
one part of the firm (e.g., production) requires
changes in some other part (e.g., R&D).
Some routines and competences seem to be
attributable to local or regional forces that shape
firms’ capabilities at early stages in their lives.
Porter (1990), for example, shows that differences
in local product markets, local factor markets,
and institutions play an important role in shaping
competitive capabilities. Differences also exist
within populations of firms from the same country. Various studies of the automobile industry,
for example, show that not all Japanese automobile companies are top performers in terms of
quality, productivity, or product development
(see, for example, Clark and Fujimoto, 1991).
The role of firm-specific history has been highlighted as a critical factor explaining such firmlevel (as opposed to regional or national-level)
differences (Nelson and Winter, 1982). Replication in a different context may thus be rather
difficult.
At least two types of strategic value flow
from replication. One is the ability to support
geographic and product line expansion. To the
extent that the capabilities in question are relevant to customer needs elsewhere, replication
can confer value.55 Another is that the ability
to replicate also indicates that the firm has the
foundations in place for learning and improvement. Considerable empirical evidence supports
the notion that the understanding of processes,
both in production and in management, is the
key to process improvement. In short, an
organization cannot improve that which it does
not understand. Deep process understanding is
often required to accomplish codification.
Indeed, if knowledge is highly tacit, it indicates
that underlying structures are not well understood, which limits learning because scientific
and engineering principles cannot be as systematically applied. 56 Instead, learning is confined
to proceeding through trial and error, and the
52
55
Replication
There is ample evidence that a given type of competence
(e.g., quality) can be supported by different routines and
combinations of skills. For example, the Garvin (1988) and
Clark and Fujimoto (1991) studies both indicate that there
was no one ‘formula’ for achieving either high quality or
high product development performance.
53
See Szulanski’s (1995) discussion of the intrafirm transfer
of best practice. He quotes a senior vice president of Xerox
as saying ‘you can see a high performance factory or office,
but it just doesn’t spread. I don’t know why.’ Szulanski also
discusses the role of benchmarking in facilitating the transfer
of best practice.
54
If so, it is our belief that the firm’s advantage is likely to
fade, as luck does run out.
Needless to say, there are many examples of firms replicating their capabilities inappropriately by applying extant
routines to circumstances where they may not be applicable,
e.g., Nestle’s transfer of developed-country marketing methods
for infant formula to the Third World (Hartley, 1989). A key
strategic need is for firms to screen capabilities for their
applicability to new environments.
56
Different approaches to learning are required depending on
the depth of knowledge. Where knowledge is less articulated
and structured, trial and error and learning-by-doing are
necessary, whereas in mature environments where the underlying engineering science is better understood, organizations
can undertake more deductive approaches or what Pisano
(1994) refers to as ‘learning-before-doing.’
526
D. J. Teece, G. Pisano and A. Shuen
leverage that might otherwise come from the
application of scientific theory is denied.
Imitation
Imitation is simply replication performed by a
competitor. If self-replication is difficult, imitation
is likely to be harder. In competitive markets,
it is the ease of imitation that determines the
sustainability of competitive advantage. Easy imitation implies the rapid dissipation of rents.
Factors that make replication difficult also
make imitation difficult. Thus, the more tacit the
firm’s productive knowledge, the harder it is to
replicate by the firm itself or its competitors.
When the tacit component is high, imitation may
well be impossible, absent the hiring away of
key individuals and the transfers of key organization processes.
However, another set of barriers impedes imitation of certain capabilities in advanced industrial
countries. This is the system of intellectual property rights, such as patents, trade secrets, and
trademarks, and even trade dress.57 Intellectual
property protection is of increasing importance in
the United States, as since 1982 the legal system
has adopted a more pro-patent posture. Similar
trends are evident outside the United States.
Besides the patent system, several other factors
cause there to be a difference between replication
costs and imitation costs. The observability of
the technology or the organization is one such
important factor. Whereas vistas into product
technology can be obtained through strategies
such as reverse engineering, this is not the case
for process technology, as a firm need not expose
its process technology to the outside in order to
benefit from it.58 Firms with product technology,
on the other hand, confront the unfortunate circumstances that they must expose what they have
got in order to profit from the technology. Secrets
57
Trade dress refers to the ‘look and feel’ of a retail establishment, e.g., the distinctive marketing and presentation style of
The Nature Company.
58
An interesting but important exception to this can be found
in second sourcing. In the microprocessor business, until the
introduction of the 386 chip, Intel and most other merchant
semi producers were encouraged by large customers like IBM
to provide second sources, i.e., to license and share their
proprietary process technology with competitors like AMD
and NEC. The microprocessor developers did so to assure
customers that they had sufficient manufacturing capability to
meet demand at all times.
are thus more protectable if there is no need to
expose them in contexts where competitors can
learn about them.
One should not, however, overestimate the
overall importance of intellectual property protection; yet it presents a formidable imitation barrier
in certain particular contexts. Intellectual property
protection is not uniform across products, processes, and technologies, and is best thought of as
islands in a sea of open competition. If one is
not able to place the fruits of one’s investment,
ingenuity, or creativity on one or more of the
islands, then one indeed is at sea.
We use the term appropriability regimes to
describe the ease of imitation. Appropriability
is a function both of the ease of replication and
the efficacy of intellectual property rights as a
barrier to imitation. Appropriability is strong
when a technology is both inherently difficult
to replicate and the intellectual property system
provides legal barriers to imitation. When it
is inherently easy to replicate and intellectual
property protection is either unavailable or ineffectual, then appropriability is weak. Intermediate conditions also exist.
CONCLUSION
The four paradigms discussed above are quite
different, though the first two have much in
common with each other (strategizing) as do the
last two (economizing). But are these paradigms
complementary or competitive? According to
some authors, ‘the resource perspective complements the industry analysis framework’ (Amit
and Schoemaker, 1993: 35). While this is
undoubtedly true, we think that in several
important respects the perspectives are also competitive. While this should be recognized, it is
not to suggest that there is only one framework
that has value. Indeed, complex problems are
likely to benefit from insights obtained from all
of the paradigms we have identified plus more.
The trick is to work out which frameworks are
appropriate for the problem at hand. Slavish
adherence to one class to the neglect of all
others is likely to generate strategic blindspots.
The tools themselves then generate strategic
vulnerability. We now explore these issues
further. Table 1 summarizes some similarities
and differences.
Table 1. Paradigms of strategy: Salient characteristics
Paradigm
Intellectual
roots
Representative
authors
addressing
strategic
management
questions
Nature
of rents
(1) Attenuating
competitive
forces
Mason,
Bain
Porter (1980)
(2) Strategic
conflict
Machiavelli,
Schelling,
Cournot,
Nash,
Harsanyi,
Shapiro
Short-run
capacity for
strategic
reorientation
Role of
industrial
structure
Focal
concern
Chamberlinean Rational
Industries,
firms,
products
High
Exogenous
Structural
conditions and
competitor
positioning
Ghemawat (1986)
Shapiro (1989)
Brandenburger and
Nalebuff (1995)
Chamberlinean Hyper-rational
Firms,
products
Often
infinite
Endogenous
Strategic
interactions
(3) Resource-based Penrose,
perspectives
Selznick,
Christensen,
Andrews
Rumelt (1984)
Chandler (1966)
Wernerfelt (1984)
Teece (1980, 1982)
Ricardian
Rational
Resources
Low
Endogenous
Asset
fungibility
(4) Dynamic
capabilities
perspective
Dosi, Teece, and
Winter (1989)
Prahalad and
Hamel (1990)
Hayes and
Wheelwright (1984)
Dierickx and
Cool (1989)
Porter (1990)
Schumpeterian
Rational
Processes,
positions,
paths
Low
Endogenous
Asset
accumulation,
replicability
and
inimitability
Dynamic Capabilities
Fundamental
units of
analysis
Schumpeter,
Nelson,
Winter,
Teece
Rationality
assumptions
of managers
527
528
D. J. Teece, G. Pisano and A. Shuen
Efficiency vs. market power
The competitive forces and strategic conflict
approaches generally see profits as stemming
from strategizing—that is, from limitations on
competition which firms achieve through raising
rivals’ costs and exclusionary behavior (Teece,
1984). The competitive forces approach in
particular leads one to see concentrated industries
as being attractive—market positions can be
shielded behind entry barriers, and rivals costs
can be raised. It also suggests that the sources
of competitive advantage lie at the level of the
industry, or possibly groups within an industry.
In text book presentations, there is almost no
attention at all devoted to discovering, creating,
and commercializing new sources of value.
The dynamic capabilities and resources
approaches clearly have a different orientation.
They see competitive advantage stemming from
high-performance routines operating ‘inside the
firm,’ shaped by processes and positions. Path
dependencies (including increasing returns) and
technological opportunities mark the road ahead.
Because of imperfect factor markets, or more
precisely the nontradability of ‘soft’ assets like
values, culture, and organizational experience,
distinctive competences and capabilities generally
cannot be acquired; they must be built. This
sometimes takes years—possibly decades. In
some cases, as when the competence is protected
by patents, replication by a competitor is ineffectual as a means to access the technology. The
capabilities approach accordingly sees definite
limits on strategic options, at least in the short
run. Competitive success occurs in part because
of policies pursued and experience and efficiency
obtained in earlier periods.
Competitive success can undoubtedly flow
from both strategizing and economizing,59 but
along with Williamson (1991) we believe that
‘economizing is more fundamental than strategizing . . . . or put differently, that economy is the
best strategy.’60 Indeed, we suggest that, except
59
Phillips (1971) and Demsetz (1974) also made the case that
market concentration resulted from the competitive success
of more efficient firms, and not from entry barriers and
restrictive practices.
60
We concur with Williamson that economizing and strategizing are not mutually exclusive. Strategic ploys can be used
to disguise inefficiencies and to promote economizing outcomes, as with pricing with reference to learning curve costs.
Our view of economizing is perhaps more expansive than
in special circumstances, too much ‘strategizing’
can lead firms to underinvest in core competences
and neglect dynamic capabilities, and thus harm
long-term competitiveness.
Normative implications
The field of strategic management is avowedly
normative. It seeks to guide those aspects of
general management that have material effects on
the survival and success of the business enterprise. Unless these various approaches differ in
terms of the framework and heuristics they offer
management, then the discourse we have gone
through is of limited immediate value. In this
paper, we have already alluded to the fact that
the capabilities approach tends to steer managers
toward creating distinctive and difficult-to-imitate
advantages and avoiding games with customers
and competitors. We now survey possible differences, recognizing that the paradigms are still in
their infancy and cannot confidently support
strong normative conclusions.
Unit of analysis and analytic focus
Because in the capabilities and the resources
framework business opportunities flow from a
firm’s unique processes, strategy analysis must
be situational. 61 This is also true with the strategic
conflict approach. There is no algorithm for
creating wealth for the entire industry. Prescriptions they apply to industries or groups of firms
at best suggest overall direction, and may indicate
errors to be avoided. In contrast, the competitive
forces approach is not particularly firm specific;
it is industry and group specific.
Strategic change
The competitive forces and the strategic conflict
approach, since they pay little attention to skills,
know-how, and path dependency, tend to see
Williamson’s as it embraces more than efficient contract
design and the minimization of transactions costs. We also
address production and organizational economies, and the
distinctive ways that things are accomplished inside the business enterprise.
61
On this point, the strategic conflict and the resources and
capabilities are congruent. However, the aspects of ‘situation’
that matter are dramatically different, as described earlier in
this paper.
Dynamic Capabilities
strategic choice occurring with relative facility.
The capabiliies approach sees value augmenting
strategic change as being difficult and costly.
Moreover, it can generally only occur incrementally. Capabilities cannot easily be bought; they
must be built. From the capabilities perspective,
strategy involves choosing among and committing
to long-term paths or trajectories of competence
development.
In this regard, we speculate that the dominance
of competitive forces and the strategic conflict
approaches in the United States may have something to do with observed differences in strategic
approaches adopted by some U.S. and some foreign firms. Hayes (1985) has noted that American
companies tend to favor ‘strategic leaps’ while,
in contrast, Japanese and German companies tend
to favor incremental, but rapid, improvements.
Entry strategies
Here the resources and the capabilities approaches
suggest that entry decisions must be made with
reference to the competences and capabilities
which new entrants have, relative to the competition. Whereas the other approaches tell you little
about where to look to find likely entrants, the
capabilities approach identifies likely entrants.
Relatedly, whereas the entry deterrence approach
suggests an unconstrained search for new business
opportunities, the capabilities approach suggests
that such opportunities lie close in to one’s existing business. As Richard Rumelt has explained
it in conversation, ‘the capabilities approach suggests that if a firm looks inside itself, and at its
market environment, sooner or later it will find
a business opportunity.’
Entry timing
Whereas the strategic conflict approach tells little
abut where to look to find likely entrants, the
resources and the capabilities approach identifies
likely entrants and their timing of entry. Brittain
and Freeman (1980) using population ecology
methodologies argued that an organization is
quick to expand when there is a significant overlap between its core capabilities and those needed
to survive in a new market. Recent research
(Mitchell, 1989) showed that the more industryspecialized assets or capabilities a firm possesses,
the more likely it is to enter an emerging techni-
529
cal subfield in its industry, following a technological discontinuity. Additionally, the interaction
between specialized assets such as firm-specific
capabilities and rivalry had the greatest influence
on entry timing.
Diversification
Related diversification—that is, diversification that
builds upon or extends existing capabilities—is
about the only form of diversification that a
resources/capabilities framework is likely to view
as meritorious (Rumelt, 1974; Teece, 1980, 1982;
Teece et al., 1994). Such diversification will be
justifiable when the firms’ traditional markets
decline.62 The strategic conflict approach is likely
to be a little more permissive; acquisitions that
raise rivals’ costs or enable firms to effectuate
exclusive arrangements are likely to be seen as
efficacious in certain circumstances.
Focus and specialization
Focus needs to be defined in terms of distinctive
competences or capability, not products. Products
are the manifestation of competences, as competences can be molded into a variety of products.
Product market specialization and decentalization
configured around product markets may cause
firms to neglect the development of core competences and dynamic capabilities, to the extent
to which competences require accessing assets
across divisions.
The capabilities approach places emphasis on
the internal processes that a firm utilizes, as well
as how they are deployed and how they will
evolve. The approach has the benefit of indicating
that competitive advantage is not just a function
of how one plays the game; it is also a function
of the ‘assets’ one has to play with, and how
these assets can be deployed and redeployed in
a changing market.
62
Cantwell shows that the technological competence of firms
persists over time, gradually evolving through firm-specific
learning. He shows that technological diversification has been
greater for chemicals and pharmaceuticals than for electrical
and electronic-related fields., and he offers as an explanation
the greater straight-ahead opportunities in electrical and electronic fields than in chemicals and pharmaceuticals. See
Cantwell (1993).
530
D. J. Teece, G. Pisano and A. Shuen
Future directions
We have merely sketched an outline for a
dynamic capabilities approach. Further theoretical
work is needed to tighten the framework, and
empirical research is critical to helping us understand how firms get to be good, how they sometimes stay that way, why and how they improve,
and why they sometimes decline.63 Researchers
in the field of strategy need to join forces with
researchers in the fields of innovation, manufacturing, and organizational behavior and business
history if they are to unlock the riddles that lie
behind corporate as well as national competitive
advantage. There could hardly be a more
ambitious research agenda in the social sciences
today.
ACKNOWLEDGEMENTS
Research for this paper was aided by support
from the Alfred P. Sloan Foundation through the
Consortium on Competitiveness and Cooperation
at the University of California, Berkeley. The
authors are grateful for helpful comments from
two anonymous referees, as well as from Raffi
Amit, Jay Barney, Joseph Bower, Henry Chesbrough, Giovanni Dosi, Sumantra Goshal, Pankaj
Ghemawat, Connie Helfat, Rebecca Henderson,
Dan Levinthal, Richard Nelson, Margie Peteraf,
Richard Rosenbloom, Richard Rumelt, Carl
Shapiro, Oliver Williamson, and Sidney Winter.
Useful feedback was obtained from workshops at
the Haas School of Business, the Wharton School,
the Kellogg School (Northwestern), the Harvard
Business School, and the International Institute
of Applied Systems Analysis (IIASA) in Vienna,
the London School of Economics, and the London
Business School.
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Dynamic
Capabilities at IBM:
DRIVING STRATEGY INTO ACTION
J. Bruce Harreld
Charles A. O’Reilly III
Michael L. Tushman
I
n the early 1990s, many Wall Street analysts had written off IBM as
a company; its stock price was the lowest it had been since 1983. By
1992, more than 60,000 jobs had been lost and, in spite of John Akers’
(the CEO until 1993) efforts at transformation, the company was failing.
When Lou Gerstner took over in 1993, the services unit was 27 percent of revenues and the software unit didn’t even exist. In 2001, services and software
were $35 billion and $13 billion businesses respectively and combined represented 58 percent of total revenues. IBM’s market cap had increased from $30
billion in 1993 to $173 billion. The share price over that period increased 7X.
Since then, with Sam Palmisano as CEO, IBM has continued this remarkable
transformation so that today IBM has revenues of $91 billion, more than 70%
from software and services.
During a 20-year period, IBM has gone from success to failure to success;
from a technology company to a broad-based solutions provider to, perhaps, an
exemplar of the new world of open systems and on-demand capabilities. Unlike
other great technical companies such as Xerox, Philips, and Polaroid that failed
to capture the benefits of their innovation, IBM has been able to leverage their
intellectual capital into businesses as diverse as life sciences, automotive, and
banking—and make healthy profits along the way.
How did this happen? While the broad story of IBM’s rise, fall, and transformation has been well documented elsewhere,1 there is a part of this story that
is essential and not widely appreciated—a story about strategy and execution
and how the IBM strategy process links the two. It is an illustration of how a
current buzzword in strategy, “dynamic capabilities,” is made real and used to
help the company succeed in mature businesses, such as mainframe computers,
as well as move into new ones, such as digital media. It is a lesson in how theory
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Dynamic Capabilities at IBM: Driving Strategy into Action
and practice combine to develop new insights that are useful for business and
generate new thinking about strategy.2
To illustrate how dynamic capabilities help IBM succeed, we first review
briefly the current thinking about strategy—and why dynamic capabilities are
an improvement on older strategy frameworks. We then describe how the company’s brush with failure led to the evolution of the IBM Business Leadership
Model and how a set of related strategic processes, including deep dives, Emerging Business Opportunities, the Strategic Leadership Forum, and the Corporate
Investment Fund, are managed by IBM’s Strategy Group and involve 25,000
executives to help identify and capture opportunities across 140 geographies
with constantly changing competitors and technologies. This process, while
hardly perfect, has, in the words of former CEO Gerstner, “helped the elephant
to dance.”
Strategy:
Why It Is So Important—and Often Fails
We suspect that every regular reader of the business press has, in one
way or another, been steeped in the logic of strategy and competitive advantage.
We have all been exposed to the notions of the five forces, core competencies,
SWOT, “co-opetition,” and a myriad of other frameworks for how leaders can
help their firms prosper.3 For the few who missed class that day, the essence
of strategy is contained in a single question: “The fundamental question in the
field of strategic management is how firms achieve and sustain competitive
advantage.”4
This basic question has preoccupied managers and academics for the
last century. The extent of this preoccupation is underscored by the results of a
search of the academic literature using “strategy” as a keyword: More than four
million citations were listed.5 Amazon lists more than 49,000 books with strategy in the title and a broad Google search shows 800 million hits. Two obvious
conclusions can be drawn from this interest: first, strategy is clearly important;
and second, given the disparate approaches, there does not seem to be a consensus about “how” strategy works—in spite of the fact that there is good consensus
on the definition of the term itself.
With some slight variations in definition, “strategy” is widely used to refer
to the plans and actions that firms take to achieve their objectives. It is simultaneously a process by which plans for allocating resources are developed and the
actions required to achieve their goals are identified. It reflects management’s
understanding of the firm’s assets and position as well as the external forces it
faces. At the most basic level, strategy is about making quality decisions and
executing well on those decisions. Unfortunately, what seems so simple in theory is anything but in practice.
One of the things that makes this seemingly simple conceptual process so
difficult is the uncertainty and complexity of competition and change, particularly in fast-moving markets. To compete successfully, managers need to be able
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Dynamic Capabilities at IBM: Driving Strategy into Action
to scan their environments, identify relevant opportunities and threats, to design
responses that will satisfy customers in ways that competitors can’t easily imitate, and, finally, to ensure that these plans are implemented, even as the firm
competes across a variety of geographies and markets and in mature businesses
as well as emerging ones. Yet, capturing and distilling relevant information isn’t
a natural capability for most senior management teams. As David Teece, who is
both an academic strategist and a CEO, notes, “The skills that result in the identification or development of an opportunity are not the same as those required
to profit from or ‘exploit’ the opportunity.”6
Strategy is about understanding market and technology evolution and
transformation as well as the ability to execute against the plans. Interestingly,
the striking evidence is that some companies never see the threats or, more frequently, are unable to change quickly enough to avoid them. For many years,
the senior management at Sears refused to believe that Wal-Mart was a competitor or a threat. The large integrated steel makers, such as Bethlehem Steel, discounted the emergence of mini-mills
and Nucor, only to find themselves
J. Bruce Harreld is IBM's Senior Vice President,
bankrupt 20 years later. Famously,
Marketing and Strategy. <harreld@us.ibm.com>
in 1977, Ken Olsen, the founder and
Charles A. O'Reilly III is the Frank E. Buck Professor
CEO of DEC, said, “There is no reason
of Management at the Graduate School of Business at
Stanford University. <oreilly_charles@gsb.stanford.edu>
for any individual to have a computer
Michael L. Tushman is the Paul R. Lawrence MBA Class
in his home.” The irony here is that in
of 1942 Professor of Business Administration at the
1998 a struggling DEC was sold to
Harvard Business School. <mtushman@hbs.edu>
Compaq, a maker of computers for
people’s homes—which in turn was
acquired by HP. In the 1990s, mainline semiconductor manufacturers dismissed
the emergence of “fab-less” semiconductor firms with the phrase “real men have
fabs.” Of course everything looks clearer in hindsight, but the unfortunate fact is
that we often can’t know ex ante where to place bets. Strategy is partly a process
of hypothesis testing in which firms place bets and explore new technologies
and markets and develop new competencies, even as the firm continues to
exploit existing competencies in mature businesses.
From “Five Forces” to “Dynamic Capabilities”:
The Evolution of Strategic Thinking
Theories of strategy abound and form the basis for the four million citations mentioned earlier. Academics have developed four main paradigms for
thinking about strategy. First, there is the well-known competitive forces framework of Michael Porter in which competitive advantage comes from actions
taken by a firm to create defensible positions against competitors—for example,
by erecting strong barriers to entry.7 In this framing, the strategic problem faced
by managers is one of industry structure, entry deterrence, and positioning. In
a second framework, the resource-based view of strategy, competitive advantage
comes from difficult-to-imitate firm-specific assets that can be used to capture
rents—for instance through strong intellectual property, economies of scale, or
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a dominant brand.8 In this view, profits flow from having lower costs or higher
quality (e.g., through efficient supply chains or operational excellence), innovative products, or customer insight that allows firms to understand and meet customer needs in the way competitors cannot. Both of these perspectives are
largely static and emphasize how firms compete at a single point in time.
A third distinct theoretical approach to strategy emphasizes a strategic
conflict approach, which uses the tools of game theory to suggest how firms
can outsmart their rivals.9 The thrust of this approach emphasizes taking strategic moves, such as irreversible investments in capacity, to influence the behavior
of rivals. Intel, for example, has been bold in exiting businesses such as semiconductor memory, demanding to be a sole-source provider and refusing to license
their designs, and announcing capacity expansions to signal their commitment
to would-be competitors.10 Similarly, when Nokia chose to divest itself of all
businesses other than telecom, it was signaling to its competitors its commitment
to a single industry.
Most recently, strategy research has begun to emphasize a fourth
approach, dynamic capabilities, which builds on the notion of core competencies
but focuses on the role of management in building and adapting these competencies to address rapidly changing environments.11 This development was stimulated by the recognition that many successful or dominant firms fail to sustain
their performance as markets and technologies shift (think Memorex, RCA, Pan
Am, or Sears). In spite of having the resources, these companies failed to adapt
to changed circumstances. With dynamic capabilities, sustained competitive
advantage comes from the firm’s ability to leverage and reconfigure its existing
competencies and assets in ways that are valuable to the customer but difficult
for competitors to imitate. Dynamic capabilities help a firm sense opportunities
and then seize them by successfully reallocating resources, often by adjusting
existing competencies or developing new ones. Unlike earlier strategic frameworks that were largely static, dynamic capabilities explicitly acknowledges that
as markets and technologies evolve, firms need to adjust by reallocating assets
and learning new skills. In the early 1990s, for example, Johnson Controls was
primarily a maker of seats for U.S. automakers. Their distinctive competencies
were in manufacturing and their relationships with car companies. Recognizing
that this was an increasingly competitive market and one in which they would
be unlikely to dominate, they invested in design and partnering skills that
enabled them to move into higher margin businesses such as design, engineering, and electronics integration. They adapted and extended their competencies
in the manufacturing of seats and their relationships with auto companies to
transform the company. Between 1995 and 2002, their shareholder return
improved 400%.
It is the ability to adapt and extend existing competencies that differentiates dynamic capabilities from other strategic frameworks. This ability places a
premium on senior management’s ability to accomplish two critical tasks. First,
they must be able to accurately sense changes in their competitive environment,
including potential shifts in technology, competition, customers, and regulation.
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Dynamic Capabilities at IBM: Driving Strategy into Action
Second, they must be able to act on these opportunities and threats; to be able to
seize them by reconfiguring both tangible and intangible assets to meet new challenges.12 These two fundamental capabilities are at the core of a firm’s ability to
survive and grow over time and represent the essence of dynamic capabilities.
“Winners in the global marketplace have been firms that can demonstrate timely
responsiveness and rapid flexible product innovation, coupled with the management capability to effectively coordinate and re-deploy internal and external
competencies.”13 In IBM’s language this requires that leaders possess both strategic insight and strategic execution. One without the other is insufficient for longterm success since the marketplace is ever changing. If a firm has resources and
competencies but lacks these dynamic capabilities, it may make a competitive
return in the short-term but is unlikely to sustain this in the face of change.
Each of these approaches to strategy attempts to solve the puzzle of how
a firm can out-compete its rivals by either developing useful firm-specific skills
or positioning itself in ways that customers value and are willing to pay for
and that rivals cannot easily imitate. While earlier approaches to strategy were
largely static (e.g., develop a positional advantage and protect it), dynamic capabilities call attention to the need for organizations to change over time and compete in both emerging and mature businesses.14
From Theory to Practice:
Why Strategic Thinking Sometimes Fails
Although theories of strategy can be elegant in their formulation, they are
often less helpful in practice. What passes for strategy in many organizations too
often consists of three-ring binders, power point slides, and annual meetings as
carefully scripted as a Kabuki drama—and, just as in the Japanese version, those
who fail to play their roles often suffer an organizational fate much like the villains in the play. Worse, many strategists, especially academics who develop the
theory, typically don’t want to get their hands dirty with the myriad of details
necessary for successful execution. As a result, in many organizations a barrier
exists between strategists and operational executives. The failure of the conventional strategic planning group to devise executable plans has often resulted in
some firms giving up on strategic planning departments.15 Therefore, timely
strategic insights often go unrecognized by those line executives responsible
for execution.
Compounding this problem, many organizational strategic planning and
review processes take place annually—not an immutable time frame that technology, customer needs, or competition adheres to. Firms that do annual planning in fast-changing markets and technologies are always behind. Worse, many
operating managers in competitive markets have little time for the reflection and
analysis that good strategy requires. The IBM saga over the past decade vividly
illustrates these dangers—and offers a possible solution.
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Success, Failure, and Success:
Fixing Strategy at IBM
Through the mid-1980s, IBM enjoyed 40 percent of the computer industry’s sales and 70 percent of its profit. In 1990, IBM sales were five times their
nearest rival, but growth had slowed to less than six percent. By 1991, their
stock price had reached the lowest point since 1983. From 1986 to 1993, IBM
had taken $28 billion in charges and cut 125,000 people from their payroll—
after avoiding layoffs for more than 70 years. On January 26, 1993, in the face
of a looming disaster, CEO John Akers resigned. After a seven-month search,
Lou Gerstner was appointed as CEO—the first outsider to run IBM in its history.
Reflecting the company’s condition, a Business Week reporter described Gerstner’s
appointment as “the toughest job in Corporate America today.”16 In describing
why IBM had found itself failing, Gerstner observed that “what happened to
this company was not an act of God, some mysterious biblical plague sent down
from on high. It’s simple. People took our business away.”17 More startling, after
reviewing IBM’s strategies, he concluded that “the company didn’t lack for
smart, talented people. Its problems weren’t fundamentally technical in nature.
It had file drawers full of winning strategies. Yet the company was frozen in
place . . . The fundamental issue in my view is execution. Strategy is execution.”
What IBM lacked was not the ability to foresee threats and opportunities but the
capability to reallocate assets and reconfigure the organization to address them.
After stabilizing the company in the mid-1990s, Gerstner described IBM’s
bet on the future this way: “Our bet was this: Over the next decade, customers
would increasingly value companies that could provide solutions—solutions that
integrated technology from various suppliers and, more importantly, integrated
technology into the processes of the enterprise.”18 The core competence required
to execute this strategy was the ability to integrate systems to solve customers’
business problems—open middleware (the software that permits applications to
be used across a variety of platforms) and services were key to this. Commenting
on whether IBM, a traditional hardware company, could make this transition,
Gerstner said, “Services is entirely different. In services, you don’t make a product and sell it. You sell a capability . . . this is the kind of capability you cannot
acquire.”19
Competencies are embedded in organizational processes or routines
around coordination, learning, and transformation. For IBM, this meant it
would need to take its existing competencies in technology and quality and
add to them the capability to learn better how to serve the customer, integrate
the organization around the customer’s needs, and to transform themselves
from a great product company to one that solved customer’s problems. In the
old IBM, Gerstner observed that “all of [our] capabilities were of a business
model that had fallen wildly out of step with marketplace realities.”20 To change
meant walking away from the IBM history and the collapse of gross profit margins as they moved into services, but he was also optimistic, “History shows that
the truly great and successful companies go through constant and sometimes
difficult renewal of the base business.”21
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Since 2002, Gerstner’s successor as CEO, Sam Palmisano, has continued
the transformation of IBM into an “on-demand business” using advanced computer and software technologies to quicken the flow of knowledge within companies and help executives respond instantly to changes. This entails offering
open architecture, integrated processes, and self-managing systems—selling
computing services, not computers.22 This has required a transformation of the
company around customer needs. For instance, in a partnership with the U.S.
Postal Service, IBM has developed software to optimize mail handling and shipping while with Boeing they have partnered to create technologies for networkcentric warfare products. They have also partnered with the Mayo Clinic to do
breakthrough work on gene profiling and with Bang & Olufsen to develop an
electronic pill dispenser. Within IBM, this has required that the company reintegrate itself to bring together experts to solve customer problems—not simply
to sell products or services. The most important element of this transformation,
however, was the radical shift in IBM’s approach to strategic insight and strategic
execution and embodied in how the company approaches strategy.
How IBM Does Strategy
Up until 1999, the strategy process at IBM looked pretty much like the
process at any large, complex organization. Developments in technology were
monitored, there were occasional projects to drill down into specific issues, and,
most centrally, there was the annual strategic review process in which business
unit heads prepared and presented their plans to the senior management group.
This strategy document purported to describe what was happening in the unit’s
marketplace (e.g., competitor moves, technology changes) and what the financial implications were for the business. These separate documents would be
rolled together for IBM in what was called “the Spring Plan.”
In 1999, things changed. In preparation for one of these review meetings,
Gerstner read one of the business unit’s strategic plans. Irritated by what he saw,
he called Harreld, the SVP of Strategy, into his office, threw the strategy paper
across his desk, and asked, “Are you supposed to be in charge of strategy around
here? This thing isn’t worth the paper it’s printed on.” Knowing Gerstner, he
responded, “With all due respect, this isn’t the way we really do strategy. Surely
you don’t think this document was actually written by the business unit
leader?” Gerstner stopped, reflected for a moment, and acknowledged that
in his time as a group executive, he didn’t write those documents either. They
were farmed out to a staff expert and did not reflect the reality of the competitive landscape. For example, during the 1990s, there were more than 400 strategic planners within IBM whose primary role was to poke holes in the thinking
of general managers. The actual planning process was a staff exercise undertaken to satisfy senior management, not an accurate reflection of what the
business needed to do to be competitive and certainly not a blueprint for action.
After a discussion of the weaknesses of the current strategic review
process at IBM and the realities of their markets, Gerstner told Harreld to go
away and think about engineering a dramatic step-change in how strategy could
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Dynamic Capabilities at IBM: Driving Strategy into Action
FIGURE 1. The IBM Business Leadership Model
Leadership
Strategy
Execution
Marketplace
Insight
Talent
Market
Results
Strategic
Intent
Business
Design
Critical Tasks
Formal
Organization
Interdependencies
Innovation
Focus
Gap
Climate and
Culture
嘺 Performance
嘺 Opportunity
IBM Values
Strategic Insight
Strategic Execution
“Closing the gap requires both strategy to assess the opportunities and design
the business to address them and execution to assess and build the organizational
capabilities to deliver market results.”
—Bruce Harreld, SVP Strategy, IBM
be made more relevant at IBM—a process that would reflect the realities and
complexities of their businesses and involve the responsible general managers
in a real process of sensing the environment and seizing opportunities. What
emerged came to be labeled the “IBM Business Leadership Model” (see Figure
1) and encompassed a process of strategic insight (strategic intent, marketplace
insight, innovation focus, and business design) designed to systematically identify opportunities and strategic execution (alignment of people, structure, culture,
and process) designed to seize opportunities by ensuring that every strategic
initiative also had an associated plan for execution. In this way, the IBM Business Leadership Model reflects the two fundamental dynamic capabilities of
sensing and seizing opportunities.
From this perspective, strategy doesn’t matter unless it changes what
the company does in the marketplace. Otherwise it’s “chartware.” Strategy is
not about how to beat the competition but understanding the client’s needs
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and removing the barriers needed to help them—beating the competition is
secondary. It is the connection of knowing with great accuracy what the opportunities are with the ability to do the things necessary to accomplish them.
In a company of the size, complexity, and geographic reach of IBM it is
unrealistic to think about strategy as an annual, top-down process. To be successful, IBM believes that the process must help line managers to be engaged
and competent in the strategy-making process. A central part of this process is to
keep strategy making at the business unit level with the people who best understand the local marketplace—but also to have a process where general managers
are willing to blow the whistle and ask for help when they need it. Under the
old system, the annual strategy review process created an us-versus-them mindset where senior managers attempted to poke holes in the line-of-business plans.
Candor on the part of line managers was not rewarded. Furthermore, in the
strategic reviews, criticisms about other’s deficiencies exacerbated the tendency
for leaders to be conservative in their strategies. Under the new system, the
essence of strategy is “disciplined, fact-based conversations.” This approach now
involves more than 25,000 general managers at IBM in both the formulation
and execution of strategy.
The IBM Business Leadership Model23
As shown in Figure 1, the IBM Business Leadership Model emphasizes
the role of the general manager and the interdependence between strategy and
execution. Strategy is stimulated by leaders’ dissatisfaction, the perception of a
gap between current and desired performance. In the IBM model, this is either
a performance gap (a shortfall between expected and actual results) or an opportunity gap (a discrepancy between current business results and those achievable
with a new business design). General managers define their gaps in terms of a
clear business owner, financial metrics that quantify the gap, and a specific time
frame for addressing it (Figure 2 provides several examples). Closing the gap
requires both strategic insight to assess the opportunities and threats and strategic execution to build the capabilities to deliver market results.
Strategic Insight
As shown in the left-hand side of Figure 1, strategy formulation emphasizes four interrelated disciplines: strategic intent, market insight, innovation
focus, and business design. While each of these disciplines is well known to
organizational strategists, IBM emphasizes the interdependence among these
elements as a key to successful strategy formulation.
▪ Strategic Intent sets the overall direction and goal for the organization.
This statement sets priorities for the achievement of strategic advantage
and defines the boundaries of any subsequent analytic effort. For example, Palmisano’s 2002 declaration that IBM would become an “ondemand company” led to the development by the software organization of service-oriented architecture (SOA) to make software more adaptable and the consulting organization to emphasize component business
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FIGURE 2. Performance and Opportunity Gaps
Performance Gaps
Opportunity Gaps
Our revenue growth over the past 10 years has lagged the
market (4% vs. 8%). Our goal is to break out of this pattern of
low growth and achieve 10% profitable revenue growth in the
next 24 months. Achieving this result will result in an estimated
$5 billion in top line growth.
Current revenue growth per customer in
our existing markets is growing only slowly
(5% per annum) and customer expectations
are increasing. If we are able to move up the
stack and provide solutions rather than point
products, we should be able to increase
revenues and profits by 20% over the next
3 years.
Business Owner: VP of Line of Business
The business has grown dramatically over the past 5 years.
During this period the quality of our products has declined. Our
attempts at introducing six sigma have failed and we have lost 5
points in market share in the past 12 months. Each point lost
represents roughly $500 million in revenue. Our intent is to
regain this market share over the next 24 months.
Business Owner: VP Quality
The goal of our 2003 merger was to dramatically reduce costs
(estimated savings of $1 billion) and improve product development times (reduce times from 12 months to 6). In spite of
a reorganization, we have failed to achieve our time, quality, or
cost targets.We need to achieve our time-to-market of 6
months within the next year.
Business Owner: VP Product Development
Business Owner: Division GM
Our R&D group has developed a new
technology platform which represents a
potential disruptive technology in our
industry. At present, we anticipate a firstmover opportunity of about 12-18 months
if we can introduce this technology within
the next 6 months. Our current product
development cycle takes 18-24 months.To
succeed, we must shorten this cycle to 6
months.
Business Owner:
VP Technology and Manufacturing
modeling to help clients more easily use IBM services. Absent a clear
strategic intent, it is difficult to generate a comprehensive fact-base for
market insight and business design.
▪ Market Insight involves a focus on understanding customer needs, competitor moves, technology developments, and market economics. This is
a fact-gathering, analytical effort, the goal of which is to specify in detail
what is happening in the market, how profits are shifting, and the implications for the IBM business. This activity is often what passes for strategy
narrowly defined. It typically includes the development of an in-depth
understanding of the customer’s economic drivers (revenues, costs, economic model) and leads to value propositions that speak to specific
buyer’s needs. For instance, the analysis may reveal opportunities to drive
customer revenue, reduce costs, or use assets more efficiently. For example, IBM’s recognition that the customers wanted to buy solutions to
problems and not IT infrastructure led them to develop outsourcing
solutions.
▪ Innovation Focus challenges general managers to actively experiment
and challenge their thinking in the design and implementation of strategy, including taking ideas from a wide range of sources and creating
pilots and experiments to shape industry change. Creativity is encouraged
not simply with new products and services, but also with operational and
business model innovations. Most calls for innovation implicitly focus on
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the development of new products, but research suggests that innovation
in business models can contribute more to shareholder return.24 For
example, Amazon, Dell, GEICO, Apple iTunes, and Wal-Mart succeeded
not because of “new” products, but through business model innovation.
At IBM, this business model innovation has led to the company’s support
of open-source software, putting IBM intellectual property in the public
domain, and the development of the Engineering and Technical Services
business, a new $2 billion services play, in which IBM technical experts
help other companies design products and services.
▪ Business Design is based on the external insight gained from the three
elements above and specifies how the business will go to market. Business design involves answering five key questions and answers the business strategy question: “How will we compete?”
– Customer Selection—What customer segments do we choose to serve—
and what will we not serve? Customer selection can be defined on a
number of dimensions (e.g., customer types, purchase behavior, value
chain location, segment maturity, and price). The central challenge
here is getting clarity on who the target customers are and who they
are not. Southwest Airlines, for example, actively discourages customers who have complicated travel itineraries. Abercrombie & Fitch
design their stores to appeal to a particular younger demographic
segment—and discourage older shoppers.
– Value Proposition—Given our customer segment, what is our offering
and how will we be differentiated from our competitors? Why should
any customer prefer our offering to anyone else’s? This involves specifying the tangible results specific customers will get from you versus
the competition and is especially important for displacing market
share leaders and creating new markets. It can be based on elements
such as product performance or cost, ease of use, quality and reliability, or ease of doing business. For example, the value proposition of
Salesforce.Com, an on-line provider of CRM software, is to offer small
businesses CRM capability without having to purchase and operate
computer systems of their own.
– Value Capture—Given the answers to the first two, how will we make
money? This entails a deep understanding of the economics of the
offering and clarity about how the business will earn money. Progressive Insurance, for instance, has successfully targeted hard-to-insure
drivers and uses sophisticated statistical analysis to discriminate
between those from whom they can make money from the genuinely
high-risk drivers. Wal-Mart enjoys a 22 percent margin advantage in
retail groceries. Iansiti and Levien estimate that two-thirds of this
comes from their ability to manage their eco-system and one-third
comes from operational efficiencies.25
– Scope of Activities—What will we do internally and for what activities
will we rely on our value net partners? These decisions flow from
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Dynamic Capabilities at IBM: Driving Strategy into Action
clear marketplace insight, customer selection, and the value proposition. Those activities that provide a clear competitive differentiation
are kept and others become candidates for outsourcing or joint venturing. For example, IBM has decided sharing intellectual property
can promote innovation and has made available many of their
patents. P&G has also decided that instead of doing all innovation
internally, they would open their innovation and begin to rely on
open-source innovation with partners.26
– Sustainability—How will we defend the profitability of our offerings
against competitor responses? Any successful strategy will generate
competitive responses. The issue is how to protect future revenue
streams by identifying strategic control points. These may range
from owning the standard (e.g., Microsoft, Qualcomm) to brands
and patents (e.g., Intel Inside, and Rolex) to cost advantages (e.g.,
Southwest, Wal-Mart). The choice here is to decide in advance how
to maintain profitability and to build this into the strategy.
While these components of strategic insight are comprehensive, there is
little here that is novel or unique to IBM. Most organizations with sophisticated
approaches to strategy would cover this same territory. What makes these elements so useful at IBM is the emphasis on complementarity—ensuring that they
are aligned and work together. If marketplace insight is done well but the business design isn’t reflective of this, the strategy is likely to fail. Similarly, if the
business design is robust but predicated on inadequate market intelligence, failure is also likely. What makes this process unique at IBM is that general managers are charged with being both rigorous in their analysis and consistent in
linking this insight to execution.
Strategic Execution
The right-hand side of Figure 1 illustrates the elements required by general managers for the execution of their strategic plan. The strategy-making
process culminates in a clearly communicated business design and the allocation
of required resources. Implementation begins with an honest appraisal of current organizational alignment and capabilities—identifying misalignments and
specifying the steps needed to correct them. Based on the business design, execution focuses on aligning four key organizational elements to ensure that the
business can deliver on the strategic intent:
▪ Critical Tasks and Processes—These are the key success factors necessary
to deliver on the value proposition and scope of activities specified in
the business design. They are the concrete tasks and interdependencies
needed to add value from the customer’s perspective. At DaVita, a $3
billion provider of kidney dialysis, the two major key success factors are
operational excellence (to control costs and ensure compliance with government regulations) and customer satisfaction (that helps patients
achieve better health outcomes and attracts higher value patients with
private health insurance). Identification of these key success factors is
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what permits organizational alignment. Said differently, if the critical
tasks are unclear, it is not possible to evaluate whether the organizational
alignment will help or hinder the execution of strategy.
▪ Formal Organization—These are the explicit structures, metrics, and
rewards required to direct, control, and motivate individuals and groups
to perform the unit’s critical tasks. The question asked is “does the current
formal organization facilitate the accomplishment of the required critical
tasks and interdependencies?” For example, the complex matrix structure
of IBM has been identified as a hindrance to moving quickly in new markets, so new organizational designs were developed to promote
exploration.
▪ People and Skills—Does the unit have the requisite human resource characteristics, capabilities, and competencies needed to execute the critical
tasks? Are people motivated and engaged? For example, one of IBM’s
technology-based business units realized that there was a large potential
consumer market for their product, but in developing their strategy they
discovered that they lacked any marketing capabilities required in the
new segments.
▪ Culture—Does the existing culture (expectations about how people need
to behave) support the accomplishment of the critical tasks? Given the
new business design, are there new behaviors that will be required to
deliver on the value proposition? One of IBM’s divisions that had been
competing on technical excellence in stable markets announced a new
growth initiative that placed a premium on initiative and risk taking only
to discover that the dominant culture was highly risk averse. The general
manager realized that to be successful required a significant shift in the
unit’s culture.
Business unit performance is a function of having the right strategy as
well as alignment or congruence among these four organizational elements.27
The successful execution of strategy critically depends on this alignment. What
is sometimes overlooked, however, is that whenever a strategy is changed, it is
almost always the case that the existing organizational alignment will also need
to be changed. The IBM Business Leadership Model forces line managers to be
explicit in diagnosing the current versus the needed organizational alignment
and to ensure that these changes are made by the top management team as a
part of their new strategy. Existing organizational architectures reflect old strategies. Unless management actively realigns their business to reflect the new strategy, execution will suffer.
IBM’s Dynamic Capabilities
Palmisano’s “On Demand Business” campaign is taking the next step by
transforming IBM from a set of conventional silos (e.g., hardware, software, and
services) to an integrated structure oriented around providing solutions for customer needs. To make this new approach work, the entire role of the corporate
strategy group at IBM needed to change. If all the group did was to manage an
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Dynamic Capabilities at IBM: Driving Strategy into Action
annual strategy process, they would be largely irrelevant to line managers—just
another staff function wasting valuable resources. To be successful, the strategy
group needed to help business leaders gain strategic insight and to help act on
these insights. General mangers needed to be involved in the entire process.
Under the old model, IBM’s strategy department was exclusively populated with strategic planning professionals who had strong skills in formulating
strategic insight. However, since few of these professionals had run a business,
their strategic executional capabilities were limited. Today, two-thirds of the
strategy organization is composed of successful general managers who join the
team for an 18- to 30-month period. These executives bring invaluable operational skills to the strategy team. Their presence has transformed the
department’s formerly academic planning culture to one that is much more
action-oriented. In return, these general managers develop improved strategy
skills, thus better preparing them for their next line management assignment.
To ensure that the strategy process provides the insight necessary to sense
opportunities and the execution required to seize them, a set of complementary
mechanisms have evolved. The specific mechanisms that underlie the two fundamental dynamic capabilities of sensing and seizing opportunities are outlined
in Figure 3. In this figure, the above-the-line activities include those actions
designed to both sense new opportunities and to seize them by reallocating
resources and reconfiguring the organization. In Jim March’s terms, these are
activities that promote “exploration” and learning.28 “Exploitation” is equally as
important and is accomplished through the existing organization—sometimes
referred to within the company as a “disciplined machine.” What is notable
about the IBM approach to strategy is less in what they do and more in how
they do it. Each of the elements shown in Figure 3 is replicable by competitors.
What is more difficult to copy is the integrated way in which these activities are
implemented. Figure 4 illustrates how the above the line activities map onto the
dynamic capabilities of sensing and seizing opportunities.
Sensing New Opportunities: Strategic Insight
▪ The Technology Team meets monthly and assesses the market readiness
and the potential of emerging technologies. This team draws on the deep
expertise of IBM Fellows and Distinguished Engineers. Decisions can
result in accelerated funding for a project or in its demise.
▪ The Strategy Team also meets monthly to examine the market results of
existing unit strategies as well as to explore new growth areas. Decisions
can result in new market entry, adjustments to existing business plans, or
complete exit from a business. This team is composed of a cross section of
general managers, strategy executives, and other key functional leaders.
▪ The Integration & Values Team is a group of 300 key leaders, selected
annually by the CEO and senior executives, who are considered responsible for integrating IBM through company-wide initiatives. These initiatives, known as Winning Plays, are corporate-wide strategic efforts (e.g.,
issues that require cross-organization interdependence). Each initiative
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FIGURE 3. The Strategy Process at IBM
Explore into
new spaces:
Strategic
Leadership
Forums
I&VT
Winning Plays
Technology
Team
Strategy
Teams
Corporate
Investment
Fund
Emerging
Business
Opportunities
Deep Dives
IBM Business Leadership Model
Exploit existing capabilities and processes:
The IBM Company: “A Disciplined Machine”
• Metrics
• Structure
• Leader Behavior
has assigned leaders and, often, uses the “deep dive” process. Results are
reported quarterly to the entire Integration & Values Team and, in
abridged form, to the entire company.
▪ A Deep Dive is a structured process, typically requested by a general manager confronting a performance or opportunity gap and staffed jointly by
the operating unit and the strategy group. This is an intensive, focused
process where a topic (e.g., a new technology or change in competition) is
scrutinized in great detail. This process is highly analytical and fact-based.
It typically results in a strategic decision to either pursue a market or
technology, to change strategy, or to exit a market. Intentionally these
efforts are not run to a preset time line; the work continues until all questions are answered, the decisions are clear, and the necessary adjustments
to the organizational model are clearly delineated.
Each of these processes helps ensure continuous scrutiny of the competitive environment and involves line managers in this effort. The deep dives, for
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FIGURE 4. Dynamic Capabilities at IBM
example, are routinely called out by
business managers facing problems.
Strategic Elements Sensing Seizing
The technology team offers a way
to link technological advances with
Technology Team
X
business needs. The strategy team
Strategy Team
X
ensures dynamic adjustments to
Integration and Values
strategy and execution are made in
Team/Winning Plays
X
X
a timely manner. The winning plays
Deep Dives
X
provide a way of communicating and
Emerging Business
focusing the organization on comOpportunities (EBOs)
X
pany-wide initiatives. The primary
Strategic Leadership
Forums (SLFs)
X
capability in sensing opportunities
Corporate
is the ability to make high-quality
Investment Fund
X
unbiased investment decisions under
conditions of high uncertainty. These
four mechanisms provide a multifaceted way of continually monitoring
and assessing changes, a clear decision process for making timely decisions, and
the ability to allocate resources in support of these decisions.
Seizing New Opportunities: Strategic Execution
In addition to these mechanisms that help identify opportunities, the IBM
strategic process also has a set of mechanisms to help seize them by reallocating
resources and, when needed, reconfiguring the organization. The key here is the
ability to recombine and reconfigure assets and structures as markets and technologies change. In addition to the Integration & Values Team and Winning
Plays described above, which also have elements that help seize opportunities,
three powerful mechanisms help ensure what Teece refers to as “asset
orchestration.”29
▪ Emerging Business Opportunities (EBOs) are an integrated set of
processes, incentives, and structures designed explicitly to enable IBM to
address new business opportunities and drive revenue growth. The EBO
process begins with the recognition that mature, well-established businesses need to operate differently from new, exploratory ones. To succeed, emerging businesses have different key success factors and require
a different style of leadership and different alignments of people, formal
organizations, and culture. IBM recognized that the current management
system rewarded short-term execution aimed at current markets. Trying
to operate new business within a mature one can be exceedingly difficult,
with the result that the new business is often killed. Further, the company lacked the disciplines for selecting, experimenting, funding, and
terminating new businesses. This led to the development of a process to
identify new growth opportunities and to establish separate new organizations with their own leadership, alignment, and funding—all with
senior management oversight to ensure that the new businesses get the
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resources needed to explore the opportunity. Under the new system,
these aren’t product upgrades or just technical opportunities; they’re
business opportunities—ones that can be turned into revenue-producing
businesses.
The EBO process begins when growth opportunities are identified
that require significant cross-organization integration to be successful.
Each EBO is typically characterized by a new value proposition—which
may cannibalize existing offerings, involves multiple groups within the
company, is in a high-growth domain but with offerings that may not be
well-defined, and requires evangelism to develop successfully. EBOs are
rigorously reviewed monthly by a senior sponsor against milestones, a
process some leaders equate to “root canals.” The combination of a clear
discipline for identifying and attacking new opportunities, senior management oversight to protect the new business, and the ability to leverage
existing infrastructure allows the company to systematically experiment
in new areas, even as the rest of the firm focuses on exploitation. This
process drives asset reallocation and permits the company to reconfigure
itself.
In 1999-2005, 18 opportunities were identified, including Linux,
autonomic computing, blade servers, digital media, and network processing. Some of these have succeeded and been folded back into existing
businesses; others have failed and new ones have been added. Life Sciences, for example, was predicated on the potential opportunities offered
by the needs for new hardware, software, and services demanded by
pharmaceutical firms involved in proteomics and the promise of personalized medicine. A number of earlier efforts within the company to address
these emerging markets had failed. However, since its founding as an
EBO in 1999, its leader, Carol Kovac, has grown this business to more
than $2B in revenues, has begun new businesses to address emerging
opportunities, and has evolved other startup businesses to a mature
category.
▪ The Strategic Leadership Forums (SLFs) are 3.5-day team-based workshops built around specific performance or opportunity gaps that bring
extended teams together for intensive work on problems or opportunities.
These workshops begin with work on refining the gap statement, challenging the strategy, a deep-root cause analysis of the specific underlying
causes of the performance or opportunity gap, and the development of
an action plan. Teams are selected to include all those responsible for the
issue to be addressed. During the SLF, groups are supported by members
of the strategy group and facilitation is provided by members of IBM’s
Global Executive and Organizational Capability group. This process helps
line managers to have a structured, candid conversation with a common
language—and to explicitly link strategic insight to execution in a disciplined way.
These forums were used to address significant strategic initiatives
such as accelerating the development of Emerging Business Opportunities
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such as Life Sciences, Pervasive Computing, and Technology Services,
addressing performance gaps within mature businesses, linking IBM Fellows and Distinguished Engineers to the on-demand effort, and even
resolving significant organizational conflicts across lines of business. A
typical SLF would begin when either senior executives called out a strategic initiative or a general manager surfaced the need for a focused intervention. Once identified, the strategy group would help identify team
leaders, build a fact base, and convene the SLF. At the SLF, there would
be disciplined conversations about the strategy, a root cause analysis of
the gap, the development of an implementation plan, and senior management follow-up to ensure execution. Given the importance of the topics
addressed in these events, the SLFs were not typical corporate off-sites
but intensely focused, often emotional debates about the future of the
business. As Palmisano said in his introduction to one SLF, “I want you
to argue and fight but leave in agreement . . . the strategy is ‘IBM first.’”
The SLF is not simply education but a mechanism to solve major
strategic problems. Based on the success of this effort, the strategy group
now supports “mini-SLFs” throughout the company. This process, driven
by the IBM Business Leadership Model, provides a powerful common
methodology and language that is used throughout IBM and facilitates
a common systematic approach to strategic initiatives.
▪ The Corporate Investment Fund was developed as a way of providing
funding for new initiatives identified by the Integration & Values Team
or EBOs. This $500M fund was taken from existing units and specifically
designed to provide the resources to start new initiatives. Funding decisions are made once a quarter. However, as Gerstner noted, “We worked
very hard at the process of starving the losers and investing in the big
bets. . . . The new ventures had to be protected from the normal
budgetary cycle because if things get tight, more often than not, profitcenter managers would be tempted to starve the future-oriented
projects.”30
The Corporate Investment Fund is not the conventional internal
venture fund found in many companies. Rather, it is designed with the
recognition that the annual budgeting process may not be sufficiently
responsive to fund new initiatives as they emerge during the year—
especially those that cut across business units and may not be attractive
enough for any specific business to fund by itself. Funds can be used to
support Winning Play initiatives or other projects that aren’t included in
the annual budgeting process. For example, after committing to the ondemand transformation, the fund was used to support service-oriented
architecture in the software group and the development of enabling technology in the consulting organization. Funds have also been allocated to
permit the accelerated development of executive talent in China and
India.
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Taken together, these processes emphasize strategic insight and execution
as well as general management leadership responsibility. While many organizations have several of these elements as a part of their strategy process, what is
different about the IBM approach is that they have an integrated set of mechanisms to both sense and seize opportunities. This allows the firm to consider
trends in markets and technology, to identify issues that are relevant to customers, to examine them in detail, and to reconfigure assets to address them. Once
these decisions are made, this allows the new initiatives to be embedded into the
disciplined machine that characterizes IBM’s more mature businesses.
The Strategy Group at IBM
Strategy, and the role of the strategy group at IBM, has a very different
profile than conventional approaches. In the IBM context, strategy is an ongoing, disciplined conversation between general managers and senior executives
about the future of the corporation—not an annual process or the work of a
group of internal consultants. As mentioned earlier, the strategy team itself is
composed largely of line managers who spend an 18- to 30-month stint deepening their strategic skills. These individuals are assigned by IBM’s senior executives without the strategy unit’s input. This not only broadens the perspective
of the strategy group, but is a valuable developmental tool for ensuring that the
future senior managers of the company have deep strategic skills.
One of the enablers of IBM’s strategy process is that the career strategists
within the strategy department have no designs on any other jobs within the
company; their role is to facilitate difficult or critical conversations with a focus
on the facts and not some larger but hidden agenda. Further, if the input from
the strategy group is to be effective, this team needs to be in place through several investment cycles in order to ensure consistency of strategic choice over
time. Without this continuity, the aggregate effects of investments are unlikely
to give the strategy a chance to succeed.
The IBM Business Leadership Model explicitly makes three important
points. First, leadership by general managers requires both strategic insight and
execution. To be timely, this capability cannot reside in an annual, centralized
strategy process. Second, the strategy is anchored on either a performance or
opportunity gap as manifest in hard performance outcomes such as market share
gain, margins, growth, or profit. The metrics used to assess the success of strategy implementation are always grounded in business outcomes—and where the
business is gaining or losing traction. In Harreld’s view, it is about only two
things: customer satisfaction and shareholder return.
Third, this process highlights the importance of alignment or complementarities among the components. For example, strategic execution occurs not
from attention to people or incentives or culture but from the alignment of all
of them with the critical tasks necessary to execute the chosen strategy. Effective
strategy is not simply the articulation of a strategic intent, but the linking of it
to innovation, solid marketplace insight, and an appropriate business design.
The overarching challenge is to ensure general management involvement and
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Dynamic Capabilities at IBM: Driving Strategy into Action
ownership in this process—and not to let it become a staff function. As useful
as the IBM Leadership Model might be, the danger is that lower-level managers
might see it as another set of overheads—and might become cynical about it.
Part of the strategy group’s responsibility is to make sure that this does not
happen.
Dynamic Capabilities:
Driving Strategy Into Action
Harreld is the first to acknowledge that the IBM approach to strategy is
imperfect.
Amidst all the praise he received for transforming IBM, Gerstner was also
suitably modest and noted that when he left in 2002, IBM was in the same businesses that it had been when he arrived (e.g., hardware, software, and even
services). The real change required was for the company to reallocate assets and
to reconfigure itself to be able to compete in a different way. It meant walking
away from its history and long-standing business model. This required seeing
the marketplace differently—but Gerstner claimed that IBM already had the
right strategies. More importantly, it required a cultural transformation that
allowed the company to reconfigure itself and to reallocate resources so that
they could execute these strategies. As Gerstner noted at his last annual shareholder meeting, “In the new IBM, we’ve always believed that our ability to execute is as important as the strength of our strategies.”31 This is the essence of
dynamic capabilities: the ability of a firm to sense new opportunities and to seize
them.
What the transformation of IBM illustrates is that while organizations are
often characterized by strong inertial forces that limit change, it is by no means
impossible. Teece argues this in saying that “Genetic engineering is possible with
organizations; but it is not easy . . . The key to sustained profitable growth is the
ability to recombine and reconfigure assets and organizational structures as markets and technologies change.”32 To accomplish such change, however, requires
that senior managers be able to not only sense the changes needed by their
firms, but also to be able to seize them by allocating resources and reconfiguring
the organization to address them. This involves seeing things realistically, being
willing to cannibalize existing businesses when necessary, and being ambidextrous or able to manage both mature and emerging businesses.33
In this regard, a key leadership element is the importance of fit or complementarity among strategy, structure, culture, and process. As Michael Porter
observed, “Strategic fit among activities is fundamental not only to competitive
advantage, but also to the sustainability of competitive advantage. It is harder for
a rival to match an array of interlocked activities than it is merely to imitate a
particular sales approach, match a process technology, or replicate a set of product features.”34 In this sense, dynamic capabilities composed of complementary
processes—such as the ability to reallocate and reconfigure assets—form the
basis of a difficult-to-imitate competitive advantage. The fact that such “soft”
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Dynamic Capabilities at IBM: Driving Strategy into Action
capabilities cannot be easily purchased but must be developed over time only
enhances their value.
At IBM, these dynamic capabilities have been developed over time as an
integral part of how the company does strategy. It is the combination and complementarities among those processes that promote strategic insight (e.g., deep
dives, winning plays, and ownership by general managers in the strategy-making process) and those that link this insight to execution (e.g., EBOs, the Strategic leadership Forum, and the Corporate Investment Fund), which allows the
firm to compete simultaneously in emerging and mature markets. This approach
permits the company to make small, frequent investments and to learn from
them. It encourages organizational learning—not solely by making smart decisions from the top down, but through an evolutionary process of variationselection-retention.
Conclusion
Helping organizations develop dynamic capabilities is, we believe, the
fundamental and enduring task of executive leadership. As Alfred Chandler
has shown, organizations, especially successful ones, can stagnate over time.35
Pursuing the same strategy and sticking with the same core competencies may
make a firm successful in the short term but is likely to be fatal in the long term.
Senior leaders are responsible for ensuring that this does not happen. Unfortunately, the evidence shows that too often firms get trapped by their own success.
The only way out of this trap is for senior leaders to help their firms develop the
dynamic capabilities that promote sustained competitive advantage.
In the past decade, IBM has undergone a remarkable transformation.
While there are many reasons for this success, at least part of it has been in their
ability to both sense and seize opportunities and to reconfigure the company’s
structure and competencies to address them. In strategic terms, these dynamic
capabilities have been made real through an ongoing process of disciplined, factbased conversations; a common language and problem-solving methodology as
manifest in the IBM Business Leadership Model; and a clear commitment by
leaders to compete in mature as well as emerging markets. This language and
process is employed throughout the company—from the senior executive levels
to first-level managers. It is an integrated way to focus on both the formulation
of strategy and its implementation.
Unlike other piecemeal approaches to strategy, the IBM process is one
driven by line management based on the realities of the marketplace as seen
in performance and opportunity gaps, not a staff exercise or slide deck. This has
moved the strategy-making process from an annual ritual to a continual process,
from an emphasis on planning to one on action, from a staff function to one that
line managers own, and from a concern with strategy only to a focus on both
strategy and execution. It has changed the role of the strategy group from that
of a critic to a partner in fixing problems—and one that is aligned with general
managers in identifying future problems and opportunities for the company.
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Dynamic capabilities are not abstract academic concepts but a concrete
set of mechanisms that help managers address the fundamental question of
strategy, which is to develop a truly sustainable competitive advantage. Interestingly, we are beginning to realize that sustainability is fleeting unless it is aligned
with capabilities to continually sense how the marketplace is changing and seize
these changes through dynamic organizational realignment.
Notes
1. Louis V. Gerstner, Who Says Elephants Can’t Dance? (New York, NY: Harper Business, 2002);
Paul Carroll, Big Blues: The Unmaking of IBM (New York, NY: Reed Business, 1993); Doug
Garr, IBM Redux: Gerstner and the Business Turnaround of the Decade (New York, NY: Harper
Collins, 1999).
2. M. Tushman, C. O’Reilly, A. Fenelosa, A. Kleinbaum, and D. McGrath, “Relevance and
Rigor: Executive Education as a Lever in Shaping Research and Practice,” Academy of Management Learning and Education (forthcoming 2007).
3. A.M. Brandenberger and B.J. Nalebuff, Co-opetition: A Revolution in Mindset that Combines
Competition and Strategy (Boston, MA: Harvard Business School Press, 1997); R. Burgelman,
Strategy is Destiny: How Strategy-Making Shapes a Company’s Future (New York, NY: Free Press,
2001); M.E. Porter, Competitive Strategy (New York, NY: Free Press, 1980); C.K. Prahalad and
G. Hamel, “The Core Competence of the Corporation,” Harvard Business Review, 68/3
(May/June 1990): 79-91.
4. D. Teece, G. Pisano, and A. Shuen, “Dynamic Capabilities and Strategic Management,”
Strategic Management Journal, 18/7 (August 1997): 509-533.
5. Using the Google Scholar search function, a total of 4,170,000 cites were returned. A search
on “competitive advantage” returned 707,000 hits.
6. D. Teece, “Explicating Dynamic Capabilities: The Nature and Microfoundations of (LongRun) Enterprise Performance,” Working Paper, Haas School of Business, 2006, p. 23.
7. M. Porter, Competitive Strategy (New York, NY: Free Press, 1980).
8. E. Penrose, The Theory of the Growth of the Firm (London: Basil Blackwell, 1959); R. Rumelt,
Strategy, Structure and Economic Performance (Cambridge, MA: Harvard University Press, 1974);
D. Teece, “Economic Analysis and Strategic Management,” California Management Review,
26/3 (Spring 1984): 87-110.
9. Brandenburger and Nalebuff, op. cit.; D. Kreps and R. Wilson, “Reputation and Imperfect
Information,” Journal of Economic Theory, 27/2 (August 1982): 253-279; C. Shapiro, “The
Theory of Business Strategy,” Rand Journal of Economics, 20/1 (Spring 1989): 125-137.
10. R. Burgelman, Strategy Is Destiny: How Strategy-Making Shapes a Company’s Future (New York,
NY: Free Press, 2001).
11. Teece (2006), op. cit.; K. Eisenhardt and J. Martin, “Dynamic Capabilities: What Are They?”
Strategic Management Journal, 21/10-11 (October/November 2000): 1105-1121.
12. Teece (2006), op. cit.
13. Teece et al. (1997), op. cit., p. 515.
14. C. O’Reilly and M. Tushman, “Ambidexterity as a Dynamic Capability: Resolving the Innovator’s Dilemma,” Research in Organizational Behavior, 28 (in press); M. Tushman and C.
O’Reilly, “The Ambidextrous Organization: Managing Evolutionary and Revolutionary
Change,” California Management Review, 38/4 (Summer 1996): 8-30.
15. R. Rumelt, D. Schendel, and D. Teece, Fundamental Issues in Strategy (Boston, MA: Harvard
Business School Press, 1994); R.J. Shea-Van Fossen, H.R. Rothstein, and H.J. Korn, “ThirtyFive Years of Strategic Planning and Firm Performance Research: A Meta-Analysis,” paper
presented at the Annual Meetings of the Academy of Management, Atlanta, 2006.
16. Business Week, October 4, 1993.
17. New York Times, June 26, 1994.
18. Gerstner, op. cit., p. 123.
19. Ibid., p. 133.
20. Ibid., p. 176.
21. Ibid., p. 220.
22. IBM, The New Agenda: IBM and the On-Demand Era.
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23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
IBM internal document, 2004.
IBM Global Services 2006. Expanding the Innovation Horizon: The Global CEO Study.
Marco Iansiti and Roy Levien, “Strategy as Ecology,” Harvard Business Review, (March 2004).
Henry Chesbrough, Open Innovation (Boston, MA: Harvard Business School Press, 2003).
M. Tushman and C. O’Reilly, Winning Through Innovation (Boston, MA: Harvard Business
School Press, 2002).
James G. March, “Exploration and Exploitation in Organizational Learning,” Organizational
Science, 2/1 (February 1991): 71-87.
Teece (2006), op. cit., p. 46.
Gerstner, op. cit., p. 227.
Lou Gerstner, Annual Meeting, Savannah, Georgia.
Teece (2006), op. cit., p. 21.
C. O’Reilly and M. Tushman, “The Ambidextrous Organization,” Harvard Business Review,
82/4 (April 2004): 74-81.
M. Porter, “What Is Strategy?” Harvard Business Review, 74/6 (November/December 1996):
73.
A. Chandler, Scale and Scope (Cambridge, MA: Belknap Press, 1990).
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