2007/04/27 08:45 David Teece, "Managing Dynamic Capabilities and Expert Talent in Today's Global Economy"

2007/04/27 08:45 David Teece, "Managing Dynamic Capabilities and Expert Talent in Today's Global Economy", Innovation in Services Conference, Berkeley, California

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Intro by Henry (Hank) Chesbrough

David Teece, known for dynamic capabilities

Also own consulting business

Services sector

  • Will focus on professional services, which he does as a hobby


[David Teece]

What's different?

Basis of competitive advantage has changed

  • Not managing tangibles, managing intangibles
  • Competition for intermediate goods, final goods, competitive markets
  • Can fall into the zero profit trap
  • Want better than competitive return, which you could be passive investment

Aren't markets for intangibles

  • Know-how, capabilities
  • Something isn't tradable, perfect markets don't exist, so should be able to get competitive advantage

Style and genre of management is entrepreneurial management, also called dynamic capabilities

  • Managing down through hierarchies isn't sufficient
  • 1. Have to sense new opportunities -- somethings that entrepreneurs do
  • 2. Seize new opportunities
  • 3. Reconfigure organization, because target will be different today from tomorrow.

Started in 1997 with Teece, Pisano and Shuen paper

So what does this mean about the way a company is run?

  • Organizations complement markets
  • What is it that organizations can do that markets can't?
  • Markets coordinate things, where there is a price system at work, meaning commodity markets
  • Otherwise, management has something to do: sensing, seizing and reconfiguring

Sensing means seeing where the market is in disequilibrium, or putting it into disequilibrium

  • Not new: Schumpeter
  • Putting together specialized or non-specialized asset in a combination that others don't
  • Kirzner:  entrepreneurs re-establishing equilibria
  • One way to sense is to do R&D, an exploratory activity
  • Chesbrough's Open Innovation says that innovation doesn't have to happen inside the firm
  • David Merry: companies good at showing innovation are good at doing it:  insourcing
  • In addition, have to be scanning the periphery of the organization, it's part of how organizations are alerted to new opportunities


  • How do firms come to be great?
  • Some sense early, but then screw it up
  • Putting money down in a sensible away is crucial to competitive advantage
  • Alfred Chandler looked at 100 years of history, to separate sheep from goats.
  • Companies that didn't just see the opportunity, but were willing to put their money behind it, to building manufacturing, org hierarchies
  • Important investments must be made
  • Firms good at this do better

When world changes, have to reconfigure

  • Path dependence
  • More than adaptation and response, it'shaping markets
  • Took 25 years to learn this:  economists say markets are exogenous to companies
  • More often, it goes the other way, that companies shape markets
  • e.g. Microsofts of the world shape markets, and determine the competitive
  • What pages of the textbook do you have to pull out to see what's happening in the global market?

Reconfiguring the business model

  • Took 25 years to learn this, learned it from Henry Chesbrough
  • e.g. Dell Computer, new business models with new business methods to back them up
  • In a world of open innovation, there's increasing advantage to getting the business model right

How does this play out around talent and services?

  • Expert talent, as in any high-end organization, is required
  • e.g. software, the top 5% of code writers do 90% of the creativity
  • U.C. Berkeley: 90% of the research comes from 10% of the people

How to manage top talent?  What do they need, and what don't they need?

  • They want greater autonomy, which requires greater accountability
  • Command and control structures won't work
  • Role of management is to create new structures that provide greater autonomy, and then orchestrate:  make individual talent more productive in teams

How do you do this where traditional management doesn't work?

  • Peters, 1993:  Today's professional services firm is the best model for tomorrow's organization in any industry
  • They're built around intangibles

Look at the literati: high-end educated people, who provide a lot of the talent to create new products and services

  • International trade, open markets: creates more of a winner-take-all economy
  • They solve complex problems

Assumptions about what makes literati tick:

  • They're worthy of trust
  • They like they work (sometimes too much)
  • They have important non-pecunary gogals
  • ...

Can team with highly centric, egotistical people

  • Compare traditional teams with virtuoso teams
  • Think of organizing a Broadway show:  a few highly talented actors, others not so talented, all choreographed
  • Need to have the highly talented and talented recognized
  • Don't take substance over form
  • Satisfy highly sophisticated clients

How is this organization different from a collection of individuals?

  • Sometimes not, but it can be
  • Can bring it together, brand it
  • Involves building co-dependencies
  • Will retain people if have some individual professional freedom, and combine them with people who have complementaries
  • Collective brand, can achieve common goals


  • Can't run highly centralized model
  • Got centralized from army, church
  • Weren't hierarchies in business until had them in government
  • Arthur Andersen accounting founded in 1920s in the General Motor model
  • Could have done this differently

Model probably needs to be more decentralized

  • Open and transparent incentive system
  • Some metrics-driven capabilities and rewards

Contrast expert services model with industrial model

  • Decentralized
  • Persuasion
  • ...

Service innovation requires new knowledge

  • It requires managing intangibles
  • Starting in a game where there isn't as much foundation
  • Talent is scarce, have to build it, can't buy it
  • Have to move to dynamic capabilities


Metric-based compensation, like to paid for what I accomplish.  How well can it be assessed?  e.g. lawyer that does a good case, but loses

  • Have to inject some market rationality
  • If lead partner does a bad job, not only internal sanctions, will have some external
  • Requiring metrics
  • If you don't have metrics base, then have to set up a compensation committee, then there will competition to be on that committee; and then those who aren't on the committee lobby those who are, which is really inefficiency
  • Oriented towards influencing
  • Have to avoid, it's how politicizing happens
  • Want them to kiss up to customer, not internal
  • External deficiencies easier to deal with than internal

Juniors at piece rate.  At senior levels, rainmakers take out what they're worth to another firm

  • Being under that brand has benefits that another brand doesn't
  • Fundamentally a race to build brand and complementariness

Stop people from moving?

  • Incentives are necessary but not sufficient
  • Culture, values, leadership

Knowledge management.  Where does trust play?

  • Multiple ways
  • Individual has to trust the organization to do the right thing
  • Organization has to trust individual
  • Individuals have to trust others, which requires norms
  • Building trust with heterogeneous talent is tough
  • It sometimes takes 10 years to get someone to trust an organization
  • A manager can easily under 5 to 10 years of work
  • Haven't done as much research into trust as would like, hard to measure

Dynamic capabilities, but where does the customer come to play?  In services, co-creating of value.

  • Haven't thought of this
  • Hank Chesbrough: professional services requires integration with a customer more than others
  • Not just 1-800 number
  • Quasi-joint ventures
  • Opportunity to sense the marketplace, as close to customer
  • In seizing, desire for joint ventures
  • See this in computer services business, particularly hardware and software
  • Some relevance, haven't thought it all of the way through

Few people in an organization can be described as virtuosos.  Yet 80% of the economy is services. So how to apply this idea to the larger services economy

  • Things that are not virtuoso are on the way to India
  • Virtuoso companies will stay in high-wage countries, that's where the customers are.
  • Not many people are virtuoso, but that's where the value is

What's a virtuoso? One company has 2 people, one driving the truck and the other supervising; the other has one person doing everything

  • Virtuoso needs to adapt
  • Non-virtuoso can be given the book and guide

Business orchestration, combined with virtuosity.  Orchestration in cultures. Experience: in some cultures, time is absolute, can fix dates in advance.

  • Haven't thought about this
  • Time element is important
  • Virtuoso teams operate on spontaneity
  • On the other hand, still need to perform when the curtain comes down
  • In law firms, have to show up at court
  • Have to back off a little bit in terms of organization, virtuoso teams need some basic project management skills

Talent motivated by challenge, that could be a deadline

  • My organization missed 4Q last year, because didn't have the platforms in place
  • As an economist, figure that people with right incentives will work it out
  • But need project management skills
  • Have a revised journal article on strategic management, in Strategic Management Journal
  • Used to have entrepreneurial management, doesn't just mean being intrapreneurial: have to set up supplier arrangements
  • Work with Peter Grindley: hierarchy upside down, the job of top managers isn't just administration down, it's managing externally that is important
  • You wouldn't pick this up in the Haas School, where management is down rather than out sideways
  • COO does down
  • CEO does external stuff

University example.  We don't have these incentive models in universities and government

  • We're getting them in this university, Berkeley was one of slowest to move
  • It has to come
  • It won't happen in public sector, and the public sector will continue to underperform
  • In organizations that need to compete -- governments don't have to compete -- it will happen

In coopetition and two-sided markets?

  • New paper deals with these
  • The way value is created, where intangibles are hard to trade, is putting specialized assets together intangibles
  • Markets can't put together idiosyncratic, non-tradeable assets
  • In dynamic capabilities, try to put a role of managers into the economic system
  • Economic textbooks only talk about principals and agents, not managers
  • Tradeable assets can orchestrate value

Contrasting market governance and hierarchical governance.  Now starting towards network governance and relational governance.  Inter-organizational management.  Dealing with incremental value systems.  More like emergence.  Contingency effects.

  • Profound
  • A lot is incremental
  • Being best of breed or being benchmarked processes doesn't build competitive advantage where everyone has access to those process
  • Technical fitness versus ecological fitness
  • Technical fitness means doing the operations well, but they may not be what the markets need
  • Dynamic capabilities already assumes strong operations, but then, how to stay consonant with the external marketplace
  • Debate within Harvard strategy and operations people, Michael Porter:  if don't have world class operations, don't have a strategy, but then Porter says necessary but not sufficient to be competitive

How to make change? Surgery? Chemotherapy?

  • Have to sensititize the organization to changing competitive advantage
  • Rethink of market strategies, and business models
  • Can you adapt?  Organizational ecology, John Freeman says organizations can't adapt, they're type by birth date, and there's so much path dependence
  • Harvard Business School: managers can change the world
  • Truth is somewhere in between
  • There is a lot around strategy and class of products that are malleable
  • Absent changing underlying routines, can't do much
  • Changing business model isn't easy