This digest was created in real-time during the meeting, based on the speaker's presentation(s) and comments from the audience. The content should not be viewed as an official transcript of the meeting, but only as an interpretation by a single individual. Lapses, grammatical errors, and typing mistakes may not have been corrected. Questions about content should be directed to the originator. The digest has been made available for purposes of scholarship, posted on the Coevolving Innovations web site by David Ing.

Event sponsors:

  • Institute of Management, Innovation & Organization (IMIO),
  • Haas School of Business, UC Berkeley
  • The Information School at UC Berkeley
  • Citizens for IT Research in the Interest of Society
  • California Management Review
  • Finnish Funding Agency for Technology and Innovation - Tekes

Intro by Henry (Hank) Chesbrough

David Teece, known for dynamic capabilities

Also own consulting business


[David Teece]

Services sector

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

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


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