ICLE/Oxford Union Presentation

1. SurvivalandGrowthinanUncertain
World:DynamicCapabilitiesin
BusinessandSomeImplicationfor
CompetitionPolicy
David J.Teece
David J. Teece
Institute for Business Innovation
University of California, Berkeley
Interdisciplinary Approaches to Growth and Innovation
ICLE/Oxford Union Presentation
March 6, 2021
Copyright David J. Teece

2. Contents
I. The Case For (Organizational) Capabilities in a Theory of
Economic Development
II. Structure of the Dynamic Capabilities Framework
III. The Core of the Capabilities Framework
IV. Examples from the Private Sector
V. Competition Policy Applications of the Dynamic
Capabilities Framework: An Example
Copyright David J. Teece
2

3. I. The case for
(organizational) capabilities
in a theory of economic
development
Copyright David J. Teece
3

4. “There is no manual on how to
transform a traditional economy into
an innovation economy”
Financial Times, Special Report, November, 2016.
Clearly, there is a desperate need for new mental models of economic
development… in both developing and developed economies.
Copyright David J. Teece
4

5. Nobel Laureate Amartya Sen (Trinity College, Cambridge)
Highlighted the Importance of Capabilities1 … and Capabilities are
a Missing Piece of the Economic Development Puzzle
Sen was concerned with capabilities at the individual level:
• Individuals can differ greatly in their abilities to convert a given set of resources into outputs
• Capabilities presented as the fulcrum for leveraging tangible resources into human achievement
1 A. Sen, “Commodities and Capabilities” (1985)
5
Capabilities must be understood at both the individual and the organizational levels;
organizations are complex systems that are more than the sum of the individuals involved

6. Lord Keynes noted that waiting too long for the future to unfold will
often cripple decision making.
“… our decisions to do something positive […] can only be taken as
a result of animal spirits—of a spontaneous urge to action rather
than inaction […] Thus if the animal spirits are dimmed and the
spontaneous optimism falters, ... enterprise will fade and die.”
Keynes, 1936, p.161
6
Keynes and “Animal Spirits”: Foreshadowed Dynamic
Capabilities?
Copyright David J. Teece

7. “The proximate cause [of differences in the wealth
of nations] lies, for the most part, in the
capabilities of firms”
(John Sutton, Competing in Capabilities (2012), p.8)
“In market economies, the competitive strengths
of industrial firms rest on learned organizational
capabilities ... the competitive strength of national
industries depends on the abilities of the core
firms ... to maintain and enhance their integrated
learning bases.”
(Alfred Chandler, Jr., Inventing the Electronic Century (2001), Introduction)
Firm-level Capabilities Are Finally Coming to be Recognized as
Foundational to the Wealth of Nations
7
But until now, there has been no operational theory of capabilities for managers and policy makers to employ.
Copyright David J. Teece
John Sutton, London School of Economics: Alfred Chandler, Harvard University:

8. A Capabilities Perspective is Needed to Animate a More Relevant
Theory of Growth and Economic Development
Traditional economic development theory:
• Largely ignores Sen… and has not systematically focused on capabilities
• Investment (private & public) leads to resource accumulation that combines (somehow) with labor to
generate growth
• Akin to the resource-based view of the firm in strategic management – but firms are seldom mentioned
1 R. R. Nelson and H.Pack, 1999. The Asian miracle and modern economic growth, Economic Journal, 109(457)
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Copyright David J. Teece
Nelson and Pack (1999, p. 434)1 point us in a new direction: “if ... one marshals [inputs] but does not innovate and learn,
development does not follow”… i.e., innovation and learning (and capabilities) need to be center stage

9. Definition of Dynamic Capabilities:
“The ability of an organization and its management to integrate,
build, and reconfigure internal and external competences to
address rapidly changing environments”
(Teece, Pisano, and Shuen, 1997: 516)
Copyright David J. Teece
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10. FirmsAlsoNeedOrdinary(orOperational)Capabilities(“BestPractices”)
• Efficient logistics
• Efficient manufacturing
• Effective marketing
• Necessary partnerships
But ordinary capabilities are not enough. It’s not just about doing things right; it’s also about doing
(investing in) the right things.
*Teece, et. al., “Innovation, Dynamic Capabilities and Leadership,” California Management Review 61:1, p. 15 (August 2018).
Copyright David J. Teece
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Doing things right.
Ordinary capabilities keep you busy… but you can only afford low wages

11. Dynamic Capabilities for Sustained Competitive Advantage
of Firms and Nations
Sensing
Identification of
opportunities & threats at
home and abroad
Seizing
Mobilization of resources
to deliver value and
shape markets
Transforming
Continuous renewal and
periodic major strategic
shifts
These higher-order capabilities fall into three categories:
11
Innovation and learning
Copyright David J. Teece

12. II. Structure of the Dynamic
Capabilities Framework
Copyright David J. Teece
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13. Dynamic Capabilities in Brief
13
The development of strong dynamic capabilities of firms (and
governments) result in higher investment and productivity growth.
The dyncap
mental model
New
enabling
technologies
Attractive
investment
climate
+ +
Copyright David J. Teece
3 Core Requirements:
High productivity
growth and wealth
creation
=
New Mental Model R&D Rule of Law

14. DynamicCapabilitiesareEspeciallyImportantTodayBecauseof VUCA
WhichCreatesUnknownUnknowns
V = Volatility
U = Uncertainty
C = Complexity
A = Ambiguity
Caused by innovation, globalization,
and conflicts over the rule of law
Copyright David J. Teece
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Firms without strong dynamic capabilities stagnate, decline, and disappear

15. A VUCAWorldRequiresDifferentiatingBetweenRiskandKnightian
Uncertainty
Pr(DIA)
Pr(CIB)
Risk
C D E F
prB
Pr(FIB)
Pr(CIA)
prA
Alternative futures with
known probabilities & known
conditional probabilities
F1
F?
F?
F?
F?
F?
F? F?
F2
F3
F4
F?
F?
F?
F?
Uncertainty (VUCA)
Unknown Probabilities and Undefined
Futures
F 1-4 are possible futures
F? are undefined futures
F?
Weak firms manage as if the challenge is risk when in fact it’s uncertainty.
Copyright David J. Teece
15
Frank Knight
1885-1972

16. The lack of predictability and deep uncertainty is commonplace in interdependent
innovation-driven competitive global economy… but not in our theories of management
and policy.
 Existing “rules” of competition are being changed
 Entirely new “rules” are invented (e.g. cloud computing, Amazon Prime, internet of
things)
 New players constantly emerging (e.g., mobile money, start-ups versus the banks)
To succeed in this world, managers need to be entrepreneurs; and entrepreneurs need to
be (or find) managers too (e.g., Brin and Page found Schmidt to be CEO of Google).
16
Deep Uncertainty Demands Entrepreneurial Management …
in Big Companies and Small Companies Alike
Copyright David J. Teece

17. ManyFirmsUseTheWrongTools;BusinessSchoolsContributeto
theMismatch
Certainty Risk Uncertainty Ambiguity Chaos/Ignorance
Newer/Tools/Approaches
Scenario Planning
Peripheral Vision
Total Risk Management
Real Options Analysis
Systems Thinking
Idealized Design
Legitimation Theory
Honing Institution
Complexity Theory
Cost Benefit Analysis
Net Present Value
Linear Programming
Point Forecasting
Optimization Theory
Utility Theory
Decision Trees
Bayesian Updating
Monte Carlo Simulation
Portfolio Theory
Stochastic Modeling
Insurance & hedging
Known Unknown Unknowable
Traditional Tools/Approaches
Domain of Ordinary Capabilities
Domain of Dynamic Capabilities
Copyright David J. Teece
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18. “Efficiency”
protocols
and culture
dominant
Innovation protocols and culture dominant
Weak Dynamic
Capabilities Likely
Strong Dynamic
Capabilities
Likely
How Mindset/Culture Impacts Capabilities
Copyright David J. Teece
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19. The Sometimes Lethal Lure of Best Practices
 There is no benefit to being efficient at delivering the “wrong” products.
 Much of the knowledge behind ordinary capabilities can be secured through
consultants or through a modest investment in training (Bloom et al., 2013)… not a
point of difference.
 Being a top performer in productivity is unlikely to lead to competitive advantages
because it only takes a few firms at the frontier to drive prices down to
competitive levels.
19 Copyright David J. Teece
Best practices alone are generally insufficient to ensure a firm’s success and survival

20. “He who would run his business with visible
figures alone will soon have neither a
business nor visible figures to work with.”*
William Edwards Deming
*See “Out ofThe Crisis,” byW. Edwards Deming
Even W. Edwards Deming Warned of the Danger of Best Practices
Copyright David J. Teece
20

21. III. The Core of the
Capabilities Framework
Copyright David J. Teece
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22. Recap:TheCompetitiveAdvantageofFirms(andNations)Requires
OrdinaryCapabilitiesPlusStrongDynamicCapabilities
Categories of dynamic capabilities:
Sensing & Sensemaking Seizing/Asset Orchestration
Transformation
Copyright David J. Teece
22
Sensing Seizing
Trans-
forming
Economic growth and development is not just about efficiency; it’s more about… INNOVATION,
ADAPTABILITY & ENTREPRENEURIAL MANAGEMENT STYLE

23. CategoryI:SensingandSensemaking
The ability to foresee future opportunities
and threats…what Jack Welch (former CEO
of GE) once referred to as the ability to
“see around corners.”
Jack Welch
“Sensing activities are the firm’s antennae, amplifying weak signals into
data streams that are collated for diagnosing, interpreting and creating a
variety of scenarios – notably including the exploration of how a
restructured ecosystem could increase a competitive advantage.”*
*Developing Organizational Resilience: A Dynamic Model to Sustain Competitive Advantage,” Teece, Raspin, and Cox. 2018
Copyright David J. Teece
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Sensing

24. Strong Sensing Capabilities Requires Investment
in R&D and/or an Open Innovation Approach
Definition of Open Innovation:
–“The use of purposive inflows and outflows of knowledge to accelerate internal innovation, and
expand the markets for external use of innovation” (Chesbrough et al, ‘Open Innovation: Researching
a New Paradigm’, 2006)
• Recognizes that not all new ideas and products can be developed internally
• Augments internal efforts by combining them with critical ideas and resources from external
partners
• Requires search, cultivation of partners, and commitment to bilateral sharing (but not
complete openness)
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Sensing

25. CategoryII:SeizingandAssetOrchestration
No point in having strong sensing and sensemaking without strong
execution.
Requires making bold investments and coordinating activity inside and
outside the enterprise.
• In the 1960s, Tom Watson at IBM committed the financial capital and
technical resources to develop and deploy the IBM 360 system while
competitors acted cautiously.
• Xerox failed to do likewise with the PC innovations it made at Xerox Parc in
the 1970s
• Kodak had many inventions in digital film but failed to commercialize them
Copyright David J. Teece
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Seizing

26. SeizingandAssetOrchestrationareCentralto
Apple’sDynamicCapabilities
“Apple still has strong growth opportunities
because of its ability to work simultaneously on
hardware, software and services… Apple has the
ability to innovate in all three of these spheres
and create magic… This isn’t something you can
just write a check for. This is something you build
over decades.”
-Tim Cook, Apple CEO (Taipei Times, February 2013)
Implication: Dynamic Capabilities cannot be bought; they must be built
Copyright David J. Teece
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Seizing

27. Seizing Involves Applying the Profiting
From Innovation Framework
(Teece, 1986, 2006, 2018)1
An analytical framework for understanding why innovators often lose to latecomers.
Key Factors:
–Appropriability Regime (I.P. protections and the inherent complexity of the technology)
–Complementary Assets
–Timing
–Standards
–Learning Curve Advantages
–Certain complements that are scarce and hard or costly to replicate can become bottlenecks, draining value
away from the innovator if they are owned by a third party.
1 1986, "Profiting from technological innovation." Research Policy 15(6);
2006, "Reflections on 'profiting from innovation'." Research Policy 35(8);
2018, "Profiting from innovation in the digital economy." Research Policy 47(8).
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Seizing

28. Sensing and Seizing: How DoYou Alter the Organizational
DNA to Respond to Address Opportunities andThreats?
Lean Startup Co. Your Lean Startup Organizational Transformation. Retrieved from https://leanstartup.co/lean-startup-organizational-transformation/
1. Skunkworks
• Give large autonomy – removed from many standard firm rules, hierarchies, and
practices -- to an elite team that can rapidly create disruptive products and
services in target areas.
• “Assume it can be done.”
• Partner with customers.
• Focus on the future.
2. Lean Startup Organization (Skunkworks 2.0)
• Create new products and services amidst uncertainty.
• Confront uncertainty via iterating rapidly and learning from the market.
• Start with small teams = lean + lower risk.
• Validate the new approach.
• Make adjustments based on firm culture and context.
3. New Business Models
• Just as important as technological innovation.
Copyright David J. Teece
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Sensing
and
Seizing

29. Transforming: Requires Leadership and Getting
Organizational Culture Right
• Culture: core values about how to make decisions and how to treat employees,
customers, suppliers; and change itself
• Goal: foster innovation, internal collaboration across boundaries, and flexibility
• Leaders must demonstrate a willingness to trust: Give employees what they need to
succeed, then get out of their way.
• Bad culture hurts performance, recruitment, reputation, and innovation.
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Transforming

30. Summary:DynamicCapabilitiesinaBusinessContextFallIntoThree
Categories:
Sensing
Identification of
opportunities &
threats at home
and abroad
Transforming
Continuous renewal
and periodic major
strategic shifts
Seizing
Mobilization of
resources to
deliver value and
shape markets
It’s all about making the management team and the organization more
ENTREPRENEURIAL and INNOVATIVE and TRANSFORMATIVE.
Copyright David J. Teece
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Sensing Seizing Trans-
forming

31. IV. Examples from the
Private Sector
Copyright David J. Teece
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32. Industry Example: Ordinary v. Dynamic Capabilities in Autos
In globally competitive industries, strong ordinary capabilities are “table stakes”:
• The operations portion of the automobile business has been thoroughly optimized over many decades, doesn’t
vary much from one automobile company to another, and can be managed with a focus on repetitive process.
It requires little in the way of creativity, vision or imagination. Almost all car companies do this very well, and
there is little or no competitive advantage to be gained by “trying even harder” in procurement, manufacturing
or wholesale.
Competitive advantage requires dynamic capabilities:
• Where the real work of making a car company successful suddenly turns complex, and where the winners are
separated from the losers, is in the long-cycle product development process, where short-term day-to-day
metrics and the tabulation of results are meaningless.
• Elon Musk’s Tesla is a powerful example.
Source: Bob Lutz, former vice chairman at General Motors
Wall Street Journal, June 11, 2011
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Copyright David J. Teece

33. Dynamic Capabilities at Pepsi
“I had a choice. I could have gone pedal to the metal, stripped
out costs, delivered strong profit for a few years, and then said
adios.
But that wouldn’t have yielded long term success.
So I articulated a strategy to the board focusing on the portfolio
we needed to build, the muscles we needed to strengthen, the
capabilities to develop … we started to implement that strategy,
and we have achieved great shareholder value while
strengthening the company for the long term.”
Indra Nooyi quoted in “How Indra Nooyi Turned Design
Thinking Into Strategy: An Interview with PepsiCo's CEO,”
Harvard Business Review (September 2015).
Copyright David J. Teece
33
Seizing

34. Dynamic Capabilities At Coca-Cola
(80% of Sales Are Outside of the US)
“Innovation Will Continue to be Source of Growth”
• “Coronavirus has prompted the company to accelerate efforts to
streamline its beverage portfolio, eliminating under-performing ‘zombie’
brands and adapting its innovation pipeline.”
• “We’ve seen tremendous expansion … a lot of experimentation, a lot of
learning”
• “… an entrepreneurial edge with a tighter focus on fewer, bigger and
more relevant offerings…”
The Coca-Cola Company. (2020 Jun 18.) How Coca-Cola is Pivoting its Innovation and Commercial Strategies in the COVID-19 Era.
Retrieved from https://www.coca-colacompany.com/news/how-coca-cola-is-pivoting-its-innovation-and-commercial-strategies-in-the-covid-19-era
Copyright David J. Teece
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Seizing
Sensing

35. Apple: From a Computer Company to the iPhone
Ecosystem and “…a variety of related services”
“Our competitors aren’t taking away our market share with devices; but
our entire ecosystem.”
Steve Elop, CEO of Nokia
Earlier “smart phones” retained an awkward interface too close to their cell phone roots.
Apple achieved the following with the iPhone:
• created a multimedia phone with a large screen and an intuitive interface
• promoted complementary asset creation with the App Store infrastructure
• integrated hardware, software, and services
Apple Inc. Annual Report, 2019.
Teece, D.J. (2011 March / April.) Dynamic Capabilities: A Guide for Managers. Ivey Business Journal.
iPod iPhone iPad Services
Copyright David J. Teece
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Seizing

36. Pivots: Netflix, AmazonWeb Services, Disney Plus
Netflix moved
from DVDs to
streaming
Amazon made use
of extra server
capacity with AWS
Disney launched
its own streaming
service with
Disney+
Copyright David J. Teece
36
Seizing
Sensing
Trans-
forming

37. Sky Group CEO
We don’t spend too much time being overly precise on predicting specific
outcomes.
We want to understand the trends, take a wide view to make sure that we can see
them in the broadest context, and then figure out how to step into them.
And that becomes liberating, because the question is not, do we change?
It’s how, at what rate, and where?
- Jeremy Darroch, CEO of Sky Group (S+B interview, 2020)
Copyright David J. Teece
37
Seizing
Sensing

38. SpaceX: Combine Science,Technology,
and Business
• Technological and business futures are shaped by the ability to
imaginatively combine science, technology, and business.
• Silicon Valley entrepreneur Peter Thiel has remarked on the
difficulty of forming radical new combinations.
• On Elon Musk’s Tesla and SpaceX ventures, he notes that “what
was really impressive was integrating all these pieces together”
• This is “actually done surprisingly little today and so I think this
is a sort of business form that when people can pull it off, is
very valuable.”
• This “asset orchestration” and associated integration
is an essential element of entrepreneurial
management—and of dynamic capabilities.
Teece, D.J., Peteraf, M., and Leih, S. (2016.) Dynamic capabilities and organizational agility: Risk, uncertainty, and strategy in the innovation economy.
California Management Review, 58 (4).
Copyright David J. Teece
38
Seizing
Sensing

39. Steve Jobs: Innovation at Apple is not About Process
or Routines… it’s About Mindset and Passion
“. . . there is no system. That doesn’t mean we don’t have process... we have great processes. But that’s
not what it’s about. Process makes you more efficient. But innovation comes from people meeting up in
the hallways or calling each other at 10:30 at night with a new idea, or because they realized something
that shoots holes in how we’ve been thinking about a problem. It’s ad hoc meetings of six people called
by someone who thinks he has figured out the coolest new thing ever and who wants to know what
other people think of his idea. And it comes from saying no to 1,000 things to make sure we don’t get on
the wrong track or try to do too much.”
39
Cited in Burrows, 2004
Seizing
Copyright David J. Teece

40. Elon Musk Approaches Key Decisions… From First
Principles
• “You have to build up the reasoning from the ground up—from the first principles”
• “then you see if you have a conclusion that works or doesn’t work,
and it may or may not be different from what people have done in
the past”
• After Musk reasons out his goals for a project and a strategy, he tests them continually, and adjusts them regularly
based on what he learns.
• A “cook” follows recipes. A “chef” builds new ones from raw ingredients, experience, and personal taste.
from T. Urban (2015) “The cook and the chef: Musk’s secret sauce”
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Seizing
Copyright David J. Teece
Reasoning from first principles, not npv, is Musk’s guide to quality decisions.
The mindset of a great chef, not an average cook

41. Established FirmsTend to Become Bureaucratic
One of the challenges associated with a company
becoming large is that companies become
hierarchical:
They become bureaucratic.
They become slow.
They become risk averse.
- Kenneth C. Frazier, Chairman and CEO,
Merck & Co. (Merck Sharp & Dohme Corp.)
Copyright David J. Teece
41
Transforming

42. TransformationatHaier
• Haier has gone through multiple transformations since Zhang Ruimin assumed
control of what was then Qingdao Refrigerator Co. in 1984.
• At its core, Haier has transformed…from “an executive culture to an
entrepreneurial culture.”
Phase 1
The inception of
Ren Dan He Yi
Phase 2
Turned structure of
the organization into
that of an inverted
pyramid
Phase 3
Featured the
transformation into
a self-organized
enterprise
Phase 5
Turned the
organization into a
community-based
ecosystem
Phase 4
Broke the
organization into
microenterprises.
RenDanHeYi 1.0/ RenDanHeYi Win-Win Model RenDanHeYi 2.0
Interview with Zhang Ruimin, June 19, 2017, MIT Sloan Management Review with Paul Michelman
Strategy, urgency, and learning
Copyright David J. Teece
42
Transforming

43. Nokia: From Forestry to Handsets to
Network Equipment
Finland Ministry of Foreign Affairs. (2020). Nokia’s tradition of adaptability.
Retrieved from https://finland.fi/business-innovation/nokias-tradition-of-adaptability/
Decades of Adaptation
•Founded in
the 1860s
with a wood
mill in
Tampere,
Finland
•Known for
production
of rubber
boots in the
early 20th
century
Pivoted to
telecom in
the 1960s
Moved to
mobile
phones from
the 1980s to
the 2000s
Pivoted to
network
equipment
in the 2010s
Copyright David J. Teece
43
Transforming

44. Sensing, Seizing, andTransforming Require MultipleTypes of
Managerial Skills in theTop ManagementTeam
Three types of management:
–Entrepreneurs: SENSE opportunities and innovate new products and services
–Entrepreneurial Managers: SEIZE new markets with innovative business models
–Leaders: TRANSFORM companies to be more daring and open to change
44

45. Entrepreneurial Management Plays a Key Role in Developing Strong
Firm Level Dynamic Capabilities
Entrepreneurial managers are needed in established firms and institutions, not just in startups.
They:
–excel at interpretation and synthesis
–foster a culture of learning to build capabilities
–orchestrate (select, integrate, modify) resources
–devise business models
–develop analyses that support strategy formulation
–adjust strategy implementation
–keep the organization nimble
45

46. • Technical efficiency in basic
business functions
• Operational, administrative, and
governance
• Relatively easy; imitable
Ordinary
Capabilities
Doing things “right” Doing the “right” things
Summary: Dynamic v. Ordinary Capabilities
46
Tripartite
schemes
Imitability
Purpose
(Improvement) (Innovation)
Copyright David J. Teece
Dynamic
Capabilities
• Strategic “fit” over the long run
(evolutionary fitness)
• Sensing, seizing, and transforming
• Difficult; inimitable
LESSON: AVOID DOING THE WRONG THINGS THE RIGHT WAY.

47. The Entrepreneurial Manager is Critical to Dynamic Capabilities
47
Copyright David J. Teece
P. Schoemaker and G. Day “How to
Make Sense of Weak Signals” MIT
Sloan Management Review, Dec 2008

48. Few ManagersAre Entrepreneurial… Firms with Strong Dynamic
CapabilitiesAre Uncommon
• Great operational managers add value and differentiation, too
• Tim Cook famously built Apple’s best-in-class supply chain capabilities
• Entrepreneurial management combines creativity, logical rigor, high risk tolerance, and people skills
• Not all entrepreneurial managers are of the same quality
• Poor managers can hold the firm back instead of propelling it forward (Rosenbloom, 2000)
• Board of directors have to search for and support CEO candidates who are both entrepreneurial and have operational
experience and capabilities too.
48
Copyright David J. Teece

49. Ambidexterity is a Hallmark of ManagementTeams with Strong
Dynamic Capabilities
• Multiple entrepreneurial efforts across an organization must be protected from rivalry for resources by
established businesses
• Getting this wrong has produced some major missed opportunities
• Xerox botched the PC revolution
• Kodak botched digital firm/cameras
• Incumbent firms have no difficulty building the raw organizational capabilities necessary to compete in the
new markets yet they are frequently tripped up by organizational conflict between new businesses and the
old (Bresnahan, Greenstein, and Henderson, 2011)
• Ambidexterity is part of dynamic capabilities (O’Reilly and Tushman, 2008)
• It’s a form of “asset orchestration,” which is part of “Seizing”
49
Copyright David J. Teece

50. Dynamic Capabilities:
Big bold brassy (and
smart) bets
A New Paradigm?
Who would have thought…
Dubai in the 1960s would become Dubai as we
know it today?
Amazon would go from selling books to
everything?
SpaceX could be a commercial space company?
Apple would be the highest market cap firm in the
world?
Copyright David J. Teece
50

51. Strong Dynamic Capabilities are Needed Everywhere… and
Requires a New Breed of Leader
–All organizations (Large and Small Firms, Universities, Government Agencies) have some level of Dynamic
Capabilities...
–But in many organizations Dynamic Capabilities are weak
› Too inward-looking
› Poor business models
› Blind to opportunities and threats
› Slow to adjust
–Strong Dynamic Capabilities take time to develop and require continuous refinement, which calls for the
investment of resources.
–An organization must determine the nature of its need for foresight and flexibility before launching the
investment/development effort.
51
Evolutionary Fitness is the Goal

52. V. Competition Policy
Applications of the
Dynamic Capabilities
Framework: An Example
Copyright David J. Teece
52

53. The (DMA) Impact Assessment Study (Dec 2020)
• Recognize that digitization of services is associated with widespread innovation, increased competition, and
consumer benefits.
• Asserts that:
• The ability of certain players to have platform control and act as gatekeepers is anticompetitive
• Platform power “risks concentrating R&D and undermining innovation” and: disrupts entry, limits choice, and potentially increases
prices
• Existing competition policy cannot cope. E.U. wide legislation to apply ex arte regulation is needed.
• Regulation will improve Europe GDP, R&D, and employment
53

54. The European Digital Markets Act (DMA) Provisions Include:
• Allow businesses to promote offers to end users acquired via a core platform (article 5,
item c)
• Portability of business user data in real time
(article 6, item h)
• Search query and check data to be made available to third parties (article 6, item j)
54

55. Anti-competition Conduct Identified Supposedly Includes:
“UNEQUAL OPPORTUNITIES FOR INNOVATION”
My hypothesis: Europe’s innovation problem flows from it’s heavy
handed regulation, and lack of dynamic capabilities and
entrepreneurship.
The DMA ignores dynamic capabilities and implicitly assumes that
market position of industry leaders is accidental and not due to
“superior foresight and industry.”
55

56. Other Serious Flaws in Economic Analysis
1) Failure to understand dynamic competition.
2) Ignores broad spectrum dynamic competition
3) Promotes (rather than curtails) free riding.
a) Off-platform contracting free rides on investment in custom acquisition
b) Search engine services priced on a FRAND basis
4) Risks curtailing investment in R&D and blunts innovation by
incumbent platforms.
a) Turns platform into “essential services” and advances a quasi public
utility type regulation
56

57. The EU’s Assumption:
 Build a platform and wait for it to tip
 Light a cigar – and enjoy the easy life
Copyright David J. Teece
 Stay paranoid, as “only the paranoid survive.”*
 Industry boundaries don’t matter.
 Sense current and future user/customer needs, your existing and possible
future capabilities, find new combinations of assets and embed them within
a business model that’s viable.
 Weed out that which doesn’t align; build the capabilities for the future you
expect.
Dynamic capabilities mantra:
*Andy Grove, former CEO of Intel
57

58. Failure of European Policy Makers to Understand Dynamic
Competition and Dynamic Capabilities
Digitally-based enterprises are different.
• Not just about network effects
• Not just about economies of scale
• The boundaries between different types of services are being demolished in USA
and EA… and even more so in China
Google and Facebook are different kinds of companies from IBM & Microsoft
• Not just about using/exploiting their data in a single domain
• Not just about the opportunity system or the algorithm
Competitive advantage is now about receiving and acting upon real time data on customers
and their behaviors that have relevance across multiple domains
• Digital giants do not stick to their own swim lanes… Facebook is now promoting
shopping services on its social networks
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Copyright David J. Teece
BROAD SPECTRUM COMPETITION HAS ARRIVED
Sensing

59. Tech Firms Must Have Strong Dynamic Capabilities and Data Science Skills
to Collect, Organize, and Analyze Data
• Machine learning and AI plays a role in classifying raw data.
• Understanding what data to store, and for how long, is a capability.
• Knowing how, when, and where to leverage data across markets is
capability that helps:
• improve the product
• create new products and services
• Leveraging is procompetitively employed in both B2B and B2C
situations (e.g. aircraft engines; Netflix movies)
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Copyright David J. Teece

60. • Excite and Lycos lost the search engine game to Yahoo. Then Yahoo lost out to
Google.
• Incumbency only gives you a seat at the table for the next round of innovation.
• There is not automatic “tipping point;” management matters
• Absent strong dynamic capabilities:
• Incumbents will fail
• New entrants will fail
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Copyright David J. Teece
Platforms That Do Not Innovate Will Be Overtaken By Others With
Stronger Dynamic Capabilities

61. DMA Will Chill Dynamic Competition
• Creates diverging and confusing obligations on digital platforms…
including with respect to consumer and business users.
• Force platform developers to share the benefits of their investments with
business users and rivals.
• Requires companies to provide a helping hand to competitors.
• Blunts investment incentives.
• Rivals get the chance of free riding on the incumbent or innovating to
create something new and better… and they are likely to take the easy
road.
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Copyright David J. Teece

62. Likely Competitive Effects of the DMA?
• Incentives to promote and expand innovation on existing platforms deeply impaired.
• Favors autonomous and “me too” innovation at the “edge;” but transformative systemic innovation at
the core of platforms will be harmed.
• Impacts on systemic innovation are completely ignored in the DMA impact support study… an
egregious omission.
• Functionally equivalent to imposing a compulsory licensing regime while simultaneously
narrowing the scope of the patent.
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DMA favors neither dynamic or static competition!
Copyright David J. Teece

63. ONE HELLUVA GAMBLE
Based on a belief (not supported by data) that innovation around the edges
of platforms will swamp loss of innovation on the core platforms.
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The EUS’s Digital Market Act
Copyright David J. Teece

64. 1. Systemic (core platforms) innovation is important to the E.U.’s
long-term prosperity and competition.
2. Edge innovation is mainly “me too.”
3. Big Tech is in fact already highly competitive because of “broad
spectrum competition.”
4. Management (and in particular, dynamic capabilities of firms)
matters, and Europe has too few entrepreneurial managers.
64
DMAWill Retard the E.U.’s Economy if Any
One of the Following isTrue
Copyright David J. Teece

65. 65
“it is time for us to take stock and face the hard truth… what threatens to
crush us today is… a more intelligent use of skills”
What Europe needs is “the ability to transform an idea into reality
through… the talent for coordinating skills and making rigid organizations
flexible” i.e., dynamic capabilities!
Jean-Jacques Servan-Schreiber
Le Défi Américain, 1967
Europe Needs Stronger Dynamic CapabilitiesTo Become
More Competitive… BothThen (1967) And Now!
The DMA will hobble successful American firms and tilt the playing
field to weak European firms who will never be able to deliver the
innovative prowess of the FANG’s.

66. References
Teece, D. J. (2007). Explicating dynamic capabilities: the nature and microfoundations of (sustainable) enterprise performance. Strategic
Management Journal, 28(13), 1319-1350.
Teece, D. J. (2012). Dynamic capabilities: Routines vs entrepreneurial action. Journal of Management Studies, 49(8), 1395-1401.
Teece, D. J. (2014). The foundations of enterprise performance: Dynamic and ordinary capabilities in an (economic) theory of firms. Academy of
Management Perspectives, 28(4), 328-352.
Teece, D. J. (2016). Dynamic capabilities and entrepreneurial management in large organizations: Toward a theory of the (entrepreneurial)
firm. European Economic Review, 86, 202-216.
Teece, D. J. (2018). Dynamic capabilities as (workable) management systems theory. Journal of Management & Organization, 24(3), 359-368.
Teece, D. J. (2019). A capability theory of the firm: an economics and (strategic) management perspective. New Zealand Economic Papers, 53(1),
1-43.
Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509-533.
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