THE FOUNDATIONS OF ENTERPRISE PERFORMANCE: DYNAMIC AND ORDINARY

CAPABILITIES IN AN (ECONOMIC) THEORY OF FIRMS

Author(s): DAVID J. TEECE
Source: Academy of Management Perspectives , November 2014, Vol. 28, No. 4
(November 2014), pp. 328-352
Published by: Academy of Management

Stable URL: https://www.jstor.org/stable/43822373

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms

Academy of Management is collaborating with JSTOR to digitize, preserve and extend access to
Academy of Management Perspectives

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 , 01 Jan 1976 12:34:56 UTC
All use subject to https://about.jstor.org/terms
© The Academy of Management Perspectives
2014, Vol. 28, No. 4, 328-352.
http://dx.doi.org/10.5465/amp.2013.0116

SYMPOSIUM

THE FOUNDATIONS OF ENTERPRISE PERFORMANCE:

DYNAMIC AND ORDINARY CAPABILITIES IN AN
(ECONOMIC) THEORY OF FIRMS
DAVID J. TEECE
University of California, Berkeley

The dynamic capabilities framework has had a significant impact on strategic man-
agement theory and practice, but the sizable literature on the topic has not always been
unified. This paper begins with a restatement of the framework encompassing clarifi-
cations and extensions that have occurred since it was introduced. The paper high-
lights key elements that have been omitted or poorly integrated into the dynamic
capabilities literature: the role of individual action by entrepreneurial managers, the
role of resources, strategy, and the distinction between ordinary and dynamic capa-
bilities. Dynamic capabilities is advanced as a multidisciplinary framework to explain
long-run enterprise performance. Ambidexterity and other related frameworks are
tailored versions of dynamic capabilities. Linkages between (strategic) management
theory and (Austrian) economic theory are explored. The concepts of x-inefficiency
and d-ineffectiveness are compared.

In this paper, I outline the dynamic capabilities liver products and services. There are two impor-
framework in a manner that I hope will aid future tant classes of capability: ordinary and dynamic.
research by reconciling and integrating various per- Ordinary capabilities involve the performance of
spectives. In particular, I integrate the resources administrative, operational, and governance-re-
and capabilities paradigms in the field of strategic lated functions that are (technically) necessary to
management while analytically separating (and re- accomplish tasks. Dynamic capabilities involve
lating) strategy and capabilities. I hope that pack- higher-level activities that can enable an enterprise
aging dynamic capabilities concepts in this manner to direct its ordinary activities toward high-payoff
will help scholars and practitioners alike better endeavors. This requires managing, or "orchestrat-
understand the framework and allow it to be ap- ing," the firm's resources to address and shape
plied more consistently. rapidly changing business environments.
To address some inchoate dimensions of the dy- The dynamic capabilities framework was created
namic capabilities literature, this paper begins with with an ambitious agenda in mind, namely to pro-
a restatement of the framework incorporating clar- vide a general framework to help scholars and prac-
ifications and extensions that have occurred since
titioners understand the foundations of firm-level
it was introduced.
competitive advantage and associated enterprise
One of the fundamental concepts in the frame- value creation and maintenance. The context as-
work is that of capability. An enterprise capability sumed was business environments where there is
is a set of current or potential activities that utilize
strong innovation-driven competition, often global
the firm's productive resources to make and/or de-
in scope. It was hypothesized that strong dynamic
capabilities and good strategy anchored by diffi-
cult-to-imitate resources are the basis for the sus-
I wish to thank Greg Linden and Sunyoung Leih for
helpful comments and assistance. Thanks also to Marga- tained competitive advantage displayed by a hand-
ret Peteraf for feedback on an early draft and to an anon- ful of firms that have endured for decades, even as
ymous reviewer for helpful suggestions. they may have shifted the focus of their activities.
328

Copyright of the Academy of Management, all rights reserved. Contents may not be copied, emailed, posted to a listserv, or otherwise transmitted without the copyright holder's express
written permission. Users may print, download, or email articles for individual use only.

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 2014 Teece 329

The THE DYNAMIC CAPABILITIES FRAMEWORK:

fundam
the most AN UPDATE AND SUMMARY1 fu
ment - is "What is the inherent source of enter-
I begin this exploration of the dynamic capabili-
prise-generated future cash flows?" Figuring out
ties framework by summarizing my current think-
the foundations or inherent sources of long-term
ing on its nature. The framework is most relevant in
cash flow generation is, at a deep level, one of the
the growing number of "ecosystems" characterized
greatest conundrums in economic and financialby what D'Aveni (1994) called hypercompetition,
theory. Despite its importance, it receives little at-or what I call dynamic competition or "next-gener-
tention outside the field of strategic management. ation competition" (Teece, 2012a).2 The framework
Neither financial theory nor economic theory at-has been deepened in ways that make linkage to
tempts to explain the underpinnings of cash flowother concepts in strategic management and eco-
generation, even though cash flow is the touch- nomics more apparent. After more carefully de-
stone of enterprise valuation methodologies. Thescribing how I use the terms ordinary and dynamic
question is rarely addressed at a fundamental level, capabilities, I return to a discussion of the validity
not because it is unimportant, but because it isof the framework as an analytic lens into the activ-
extremely difficult to answer at any level of gener- ities of organizations.
ality. It is tantamount to explaining the foundations A capability, ordinary or dynamic, can be har-
of the firm's (long-run) competitive advantage. nessed, against the opposition of circumstance, to
The field of strategic management has acceptedproduce desirable outcomes. It is distinct from an
the challenge and valiantly endeavors to un-organization's intentions, motivations, or strategy.
cover the fundamental sources of competitive ad-Capabilities are not appropriately summarized by a
vantage. In particular, the "resources" and "dy-production function because capabilities are what
namic capabilities" approaches grapple with thethe organization could accomplish, not necessarily
question and have had a significant impact on what it is currently producing. Capabilities arise in
mainstream management theory and practice. Yet, part from learning, from organizational resources,
as shown bibliometrically by Peteraf, Di Stefano, and from organizational histories. They are unteth-
and Verona (2013), the sizable literature that has ered from particular purposes or products. For ex-
sprung up under the dynamic capabilities rubric ample, a capability to make machines powered by
has split into at least two distinct streams based onsmall, compact internal combustion engines can
different assumptions and perspectives. One pur- manifest itself in the manufacturing of automo-
pose of this paper is to address the issues laid out biles, outboard (boat) motors, or tractors and lawn
mowers.
by Peteraf et al. in their Strategic Management Jour-
nal article and in their follow-on article in this Dynamic capabilities govern other orga
activities.
issue (Di Stefano, Peteraf, & Verona, 2014). Another They can allow an enterprise to
goal of this paper is to more clearly explain how superior profits by developing and prod
dynamic capabilities and strategy work together to ferentiated products and services that add
shape competitive advantage at the level of the and existing markets where demand is rob
enterprise. enable the firm to integrate, build, and r
internal and external resources to maintain leader-
The paper begins by reviewing how some ver-
sions of the dynamic capabilities framework have ship in continually shifting business environments.
(perhaps inadvertently) lost sight of the original Strong dynamic capabilities enable the firm to pro-
articulation and subsequent refinements. The re- duce not just the best of a product type, but some-
finements include the distinctions between ordi- thing that is unique and exceptional in the value it
nary and dynamic capabilities and the inclusion of
non-routine managerial action as a type of dynamic
1 Some elements from this section can be found in
capability. The penultimate section of the paper
Teece (2014).
contrasts the dynamic capabilities framework with
2 Next-generation competition is characterized by mar-
mainstream and Austrian economic theory. With ket structures that are fluid, clusters of know-how and
these refinements and distinctions more clearly ar-
technologies that are globally dispersed, competition that
ticulated, it becomes easier to reconcile various takes place between business ecosystems, and innova-
branches of the literature. A concluding section tions that are dependent on combinations of technologies
summarizes the main points. (see Teece, 2012a, Table 1).

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
330 The Academy of Management Perspectives November

provides to the buyer and the order

return(Danneels,
it 2002), and substantive
generates for (Zahra, Sa-
the shareholder and other stakeholders. pienza, & Davidsson (2006). The zero-, first-, and
But strong dynamic capabilities alone are un- second- typology is used by Easterby-Smith and
likely to result in competitive advantage. Difficult- Prieto (2008) and Schilke (2014). The more com-
to-imitate (idiosyncratic) resources and good mon usage seems to be equating first-order with
strategy are necessary, too. Thus, combined, the ordinary.
strength of a firm's dynamic capabilities deter- I prefer to simply distinguish between ordinary
mines the speed and degree to which the firm's and dynamic capabilities. The ability to build new
idiosyncratic resources can be aligned and re- dynamic capabilities is just a part of the firm's
aligned consistent with the firm's strategy. bundle of dynamic capabilities. In my view, little is
Dynamic capabilities have also been called higher- gained from a more granular typology.
order capabilities, a phrase that appears to come Ordinary capabilities permit some degree of suf-
from Collis (1994), who adapted the idea of high- ficiency (and possibly excellence) in the perfor-
order derivatives from differential calculus. In mance of a well-delineated task. They generally fall
Collis' taxonomy, competitive advantage is about into three categories: administration, operations,
learning how to learn and can be undermined byand a governance.3 Ordinary capabilities are embed-
rival that is better at learning how to learn how to ded in some combination of (1) skilled personnel,
learn, and so on, in a process that leads to infiniteincluding, under certain circumstances, indepen-
regress with ever higher orders of capability such dent contractors; (2) facilities and equipment; (3)
that no level of capability can provide a durable processes and routines, including any supporting
advantage. Zollo and Winter (2002) focused mainly technical manuals; and (4) the administrative coor-
dination needed to get the job done.
on first- and second-order capabilities but said that,
in fast-changing and unpredictable contexts, "even Ordinary capabilities can be measured against
the higher-order learning approaches will them- the requirements of specific tasks, such as labor
selves need to be updated repeatedly" (p. 341),
productivity, inventory turns, and time to comple-
which has the flavor of infinite regress about it. tion, and can thus be benchmarked internally or
These perspectives stem from a very routine-fo- externally to industry best practices. Best opera-
cused view of dynamic capabilities, which may be tional practices are those that increase speed, qual-
where the concern about learning to learn and in- ity, and efficiency. Best management practices in-
finite regress comes from. Collis (1994) mitigated clude those that "continuously collect and analyze
the regress problem by suggesting that the rele- performance information, that set challenging and
interlinked short- and long-run targets, and that
vance of a given level of higher-order capabilities is
dependent on the competitive context; some indus-reward high performers and retrain/fire low per-
tries demand faster, more flexible learning and formers" (Bloom, Genakos, Sadun, & Van Reenen,
transformation. The prospect of regress becomes 2012, p. 13). Ordinary capabilities are considered
greatly diminished once one introduces non-rou- strong when the firm has achieved best practices
tine managerial actions (Teece, 2012b), ás I dis- and its employee base includes the relevant skilled
cuss later. people and advanced equipment.
I now turn to a closer examination of these first- However, best practices alone are generally in-
and second-order concepts, which I prefer to call sufficient to undergird sustainable competitive ad-
ordinary and dynamic capabilities. I then place vantage, except in weak competitive environments.
these in the context of the broader dynamic capa- This is because much of the knowledge behind
bilities framework and discuss its central claim, ordinary capabilities can be bought through consul-
namely, that (some) organizations can adjust as the
business environment shifts. Sometimes they may
3 In Winter's framework (e.g., Helfat & Winter, 2011),
actually help shape the environment, too.
ordinary capabilities are equated with operational capa-
bilities. Winter (2003) had earlier defined zero-level (or-
Ordinary Capabilities dinary) capabilities very strictly as doing the same thing
repeatedly. In this view, any change, such as new prod-
An understanding of dynamic capabilities can be uct development or opening a new branch of a retail
sharpened by comparing them with ordinary capa- chain, involves a dynamic capability. I find this defini-
bilities. Ordinary capabilities have also been called tion of ordinary capabilities too narrow to encompass the
static (Collis, 1994), zero-level (Winter, 2003), first- full range of activities involved.

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 2014 Teece 331

teints
zation is to perform
orremain fixed. Hence, inertia is
th
(Bloom et
often inadvertently imposed by efforts to achieve
even best "best"
practice. Moreover, the perceived need to
at least
maintain best practice and high productivity som can
distract top management from
global com bringing about
change.
benchmark
nologies,
In short, ordinary capabilities can best be thought an
of as achieving technical efficiency and "doing
managemen
troduce cli
things right" in the core business functions of op-
erations, administration, and governance. Even
prietary -
though there is considerable dispersion, a rela-
innovations
to their rivals and to firms in other industries. This tively high level of (basic) ordinary capabilities ex-
pattern of diffusion was observed, for example, ists in industries open to global competition and in
with respect to the implementation of the multi- most firms in developed countries. Such capabili-
divisional (M-form) organizational structure in ties often have a high public domain component,
large-scale corporations in the middle of the 20th and, even if not, they are readily imitable and can
century.4 therefore generally be acquired.
In globally competitive industries, best practices I don't mean to denigrate the importance of ordi-
are now close to universal. Bob Lutz (2011), the nary capabilities; they are often fundamental and
former vice chairman at General Motors, illustrates can support competitive advantage for decade-long
this point for the automotive industry: periods. Indeed, in developing countries, mastering
The operations portion of the automobile business
existing technologies and practices may be more
has been thoroughly optimized over many decades, important than innovation. But on their own, they
doesn't vary much from one automobile company to won't bring long-run success unless competition is
another, and can be managed with a focus on repet- weak because of governmentally imposed barriers
itive process. It is the "hard" part of the car business to competition or other institutional and cultural
and requires little in the way of creativity, vision or barriers to competition.
imagination. Almost all car companies do this very Whereas ordinary capabilities are about doing
well, and there is little or no competitive advantage things right, dynamic capabilities are about doing
to be gained by "trying even harder" in procure- the right things, at the right time, based on new
ment, manufacturing or wholesale.
product (and process) development, unique mana-
More important, the presence of strong and even gerial orchestration processes, a strong and change-
differentiated ordinary capabilities says nothing oriented organizational culture, and a prescient
assessment of the business environment and tech-
about whether the current production schedule is
the right (or even a profitable) path to follow in the nological opportunities.5 Table 1 lays out these ba-
future. When the firm's output is tuned to what the sic distinctions, which are developed and main-
market desires, strong ordinary capabilities may be tained throughout this paper.
sufficient for competitive advantage, but only until At the risk of further oversimplifying, efficiency
conditions change. is at the heart of ordinary capabilities; dynamic
Meanwhile, best practices can become a trap, as capabilities are about adapting, orchestrating, and
the relentless and single-minded pursuit of effi- innovating. Strong dynamic capabilities allow
ciency can drive out the capacity to effectuate
change, making the organization sclerotic. Effi-
ciency is easiest to achieve if the tasks the organi- 5 Many discussions of operations strategy drift into
what I think of as dynamic capabilities. Some scholars
see operations strategy as developing resources and con-
figuring processes so that there is good strategic fit with
4 In the petroleum industry, the M-form structure dif- the business environment (Van Mieghem, 2008). In the
fused to a majority of the leading firms over a period of fast food industry, for example, ordinary capabilities in-
about 15 years (Armour & Teece, 1978). Once this organ- volve key performance indicator metrics, training sys-
izational best practice became widely adopted, the tems, motivation, monitoring, and so on. Dynamic capa-
econometric results show that the higher profits associ- bilities address figuring out new products to put on the
ated with its early adoption in the U.S. petroleum indus- menu, new operating hours (e.g., late night), and new
try dissipated. locations (central versus suburban).

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
332 The Academy of Management Perspectives November

TABLE 1
Some Differences Between Ordinary and Dynamic Capabilities
Ordinary capabilities Dynamic capabilities

Purpose Technical efficiency in business functions Achieving congruence with customer needs and with technological
and business opportunities
Mode of attainability Buy or build (learning) Build (learning)
Tripartite schema Operate, administrate, and govern Sense, seize, and transform
Key routines Best practices Signature processes
Managerial emphasis Cost control Entrepreneurial asset orchestration and leadership
Priority Doing things right Doing the right things
Instability Relatively imitable Inimitable
Result Technical fitness (efficiency) Evolutionary fitness (innovation)

market and in the business environment more gen-

firms to stay congruent with market and technolog-
erally (Pisano & Teece, 2007; Teece, Pisano, &
ical developments, as well as with broader societal
Shuen, 1997). They allow the enterprise and its top
goals.6 The late Steve Jobs made a strong statement
management to develop conjectures about the evo-
(Kirkpatrick, 1998) with respect to the importance
of spending money on the right things (i.e., effec-
lution of consumer preferences, business problems,
tiveness) when confronted with strong competi-
and technology; validate and fine-tune them; and
tion: "Innovation has nothing to do with how then
many act on them by realigning assets and activities
R&D dollars you have. When Apple came up to with
enable continuous innovation and change. Suc-
the Mac, IBM was spending at least one hundred
cessfully building strong dynamic capabilities al-
times more on R&D. It's . . . about . . . how much lowsyou
firms to challenge competitors that are enam-
get it." ored with the resources they currently possess, that
While Jobs' statement is insightful, it is also enig- ignore (or are ignorant of) changing customer
matic. The dynamic capabilities framework en- needs, that cherish the status quo, that fail to em-
deavors to unlock this enigma and explain what power entrepreneurs and change agents, and that
Jobs might have meant by "get it." Doing so requires prioritize efficiency over innovation.
one to go beyond organizational "fit" and a finan- For applied purposes, dynamic capabilities can
cial-statement view of enterprise strength to iden- usefully be broken down into three primary clus-
tify processes and managerial capacities and traits ters: (1) identification, development, codevelop-
that can help the enterprise identify latent cus- ment, and assessment of technological opportuni-
tomer needs and the most promising technological ties in relationship to customer needs (sensing); (2)
opportunities, then orchestrate the resources mobilization of resources to address needs and op-
needed to innovate, or co-innovate. In short, to portunities, and to capture value from doing so
understand how firms and managers "get it" re- (seizing); and (3) continued renewal (transforming).
quires an exploration of dynamic capabilities. Engagement in continuous or semicontinuous sens-
ing, seizing, and transforming is essential if the
Dynamic Capabilities firm is to sustain itself as customers, competitors,
and technologies change (Teece, 2007).
Strong dynamic capabilities help enable an en- The continuous renewal dimension of dynamic
terprise to profitably build and renew resources capabilities is not unlike aspects of Nonaka's (1994)
and assets that lie both within and beyond its knowledge spiral. In Nonaka's theory of knowledge
boundaries, reconfiguring them as needed to inno- creation, individual tacit knowledge is shared (so-
vate and respond to (or bring about) changes in the cialization), then made explicit (externalization)
and synthesized with newly explicit knowledge
from others (combination). This in turn gives rise to
6 Nonaka and Takeuchi (2011) noted that, unless com-
new knowledge as part of a learning process that
panies create social as well as economic value, they will
not survive in the long run. They quote former Toyota creates new tacit knowledge (internalization), and
president Eiji Toyoda: "Doing the right things, when so on in a knowledge spiral.
required, is a calling from on high" (Nonaka & Takeuchi, Dynamic capabilities reside, in part, with indi-
2011, p. 62). vidual managers and the top management team.

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 2014 Teece 333

This was
itated by other firms that did not and cannot reshare
(2003). At
this history and that have a different corporate cul-ce
CEO and
ture. th
Moreover, the replicability of a signature pro-
key develo
cess or business model is often confounded, partic-
ularly externally, by
sponse andwhat Lippman and Rumelt g
might(1982) called "uncertain
be imitability." This, along
th
with a high tacit component to the underlying
dynamic ca
knowledge, may keep a signatureand
culture, process effec-
a new
tively proprietary busin
for considerable periods. As a
integral to
result, signature processes themselves could satisfy t
dynamic
the key criteria defined by Barney (1991) for re- c
(2002,
sources that can support
p. durable competitive
14 ad-
vantage: valuable, rare, imperfectly
achieve par imitable, and
theirnon-substitutable
intern (VRIN). Hence, signature pro-
link cesses
and (and signature business models) can belean
factor that differentiates the winners from the los- important source of heterogeneity, at least for quite
ers and survivors." The reason is that knowledge a while (Jacobides & Winter, 2012).
and capabilities are not only scarce; they are often A corollary of the fact that signature processes
difficult to imitate. Sometimes they can be bought; and certain other VRIN resources are products of
generally, they have to be built. Their astute orches- the firm's heritage and past managerial decisions is
tration requires entrepreneurial capabilities that that dynamic capabilities tend to get built, are dif-
many management teams simply don't have. ficult to imitate, and cannot generally be bought.
Managerial decisions help create and shape ca- Tim Cook, a longtime executive at Apple and its
pabilities and determine how they are deployed current CEO, said in February 2013, with reference
(Dosi, Faillo, & Marengo, 2008). This "asset or- to the company's integration of hardware, software,
chestration" function (Teece, 2007), the core of and services: "Apple has the ability to innovate in
dynamic capabilities, is undergirded by three all three of these spheres and create magic

sets of organizational processes (Teece et al., isn't something you can just write a c
1997): (1) coordination/integration, (2) learning, is something you build over decade
and (3) reconfiguration.7 Coordination and inte- Cook's statement also hints at the in
gration routines involve combining various re- between innovation in all three sph
sources in an entrepreneurial fashion, such as for Over longer periods, even signatu
the development of new products. Learning is an become imitable by others. This trans
outcome of practice and experimentation and al- curred with Toyota's lean produ
lows tasks to be performed more effectively. Re- which is a tightly integrated set of
configuration, or transformation, entails recom- encompasses the entire value chain
bining and modifying existing resources. design to customer relations (Wom
Although processes are an element of dynamic Roos, 1990). The "Toyota Production
capabilities, good managers are able to think cre- vided the automaker a source of comp
atively and act entrepreneurially without the ben- tage for decades despite numerous
efit (or constraint) of routines. To the extent that attempts at imitation. However, it e
top management processes are routinized, they are fused to other firms and industries.
likely to focus on "signature processes" (Gratton & occur in the development of new d
Ghoshal, 2005). Signature processes arise from a important goal is achieving regulator
company's heritage, including its prior manage- present, many major pharmaceutic
ment actions, certain irreversible investments, and have well-developed, idiosyncrati
context-specific learning. Because of their deep, managing the approval process. In t
enterprise-specific roots, they are not so easily im- such systems could become stand
available from a business service p
this occurs, what was a higher-orde
7 In terms of the three primary clusters of dynamic the pharmaceutical industry degrades
capabilities, asset orchestration is most relevant as an order (ordinary) capability. This is t
underpinning for seizing and transforming. strong dynamic capabilities require th

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
334 The Academy of Management Perspectives November

term financial
ization have the capability to modify success; they
(or reinvent)
even signature processes, and to do so continu-
necessary.
ously, or at least semicontinuously.
Firms with weaker capabilities require different
strategies than firms with stronger capabilities. For
example, in a company that has a culture resistant
The Basic Logic of the Capabilities Framework
to change, the new capabilities required to imple-
Dynamic capabilities do not mentoperate
a strategy may alone.
need to beThey
acquired rather than
must be coupled with effectivedeveloped in-house, and to
strategizing the resulting
bring acquisitions
about competitive advantage. managed
The basic separately
logicin a way
ofthat
the minimizes con-
flicts with in
capabilities framework is shown incumbent
Figureunits. 1.
In the diagram, organizational capabilities
Ultimately, good performance drive
requires strong dy-
enterprise performance. They shape
namic and
capabilities are seize,
to sense, under-
and transform in
girded by VRIN resources. Strong
conjunction dynamic capabil-
with a good strategy. It is important to
emphasizegood
ities must also be integrated with the corollary:
strategyThe effectiveness
to of dy-
effectuate strong performance.namicIn capabilities
short, canthebe compromised
joint by poor
presence of strong dynamicstrategy. The greater the
capabilities, diversityre-
VRIN and rate of
sources, and good strategy is necessary and suffi-
change in business environments, and the greater
cient for long-run enterprisethe importance ofsuccess.
financial intangible (including relation-
Strong ordinary capabilities (operations,
ship) assets, the more critical admin-
good strategy and
istration, governance) must strong
be accessed by the en-
dynamic capabilities become for the firm's
terprise, but they need not growth
necessarily be owned.
and financial performance.
Managing a plethora of ordinary In the dynamiccapabilities can the em-
capabilities framework,
undermine dynamic capabilities. In other
pirical phenomena words,
being described are recognized
ordinary capabilities are not sufficient
as quite fluid, even if for long-concepts
the underlying

FIGURE 1

The Logical Structure of the Dynamic Capabilities Framework

Source: Based on Teece (2014).

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 2014 Teece 335

are dence on how dynamic capabilities are

not. Thbuilt and
ory maintained by showing that
is not alliance learning, a
second-order capability, shapes both the alliance
methodolo
ification
management capability and alliance performance. t
Also in this issue, Kleinbaum and Stuart (2014) dig
difficult,
ment stud
down into the interpersonal networks within an
approach.
organization that can determine the network's re-
tion-based
sponsiveness to structural change.
characteriz
& Winter,
Inertia, Transformation, and Learning
For the th
frameworkDynamic capabilities include standard entrepre-
soningneurial activities such as identifying
bas undersatis-
fied demands and mobilizing resources
develop thin such a
value way as to profit
creati from satisfying them. But the
there critical value of dynamic
is capabilities lies inmtheir
potential for helping the organization
natural seldo this re-
fied peatedly,
or thereby helping to createfa a durable
(1989)competitive advantage.rem
paramountThe "transforming" aspect of dynamic capabili-
ties is needed most obviously when radical new
measured e
Some opportunities are to be scho
addressed. But transforma-
seem tive capabilities
to must also be exercised belperiodically
This to softenis not
the rigidities that develop over time from
makes asset accumulation, standard
appa operating procedures,
and insider misappropriation of
require rent streams. A
the
but firm's assets must be kept in strategic
the rev alignment
ities vis-à-vis
can its ecosystem. Complementarities be need to
or be constantly managed (and reconfigured as neces-
badly m
sary) to achieve evolutionary fitness, such as by
Empirical s
port limiting for
loss of value when market circumstances t
depth case
shift to favor external complements. The strength of
a firm's dynamic capabilities determines
Tripsas & the speed G
ing and degree to which the firm's resources can be
traction
fat, 2003).
aligned consistent with the firm's strategy and with
and Teece
changes in the opportunities and requirements af-
businesses
forded by the business environment. Transforma-
strated
tion and asset reconfiguration depend
its critically on
The dynam
the top management team's ability to lead - that is,
empirical
to persuade others to undertake different courses of e
as other
action and adopt different states of mind (Helfat ar&
For Peteraf, 2014).
examp
The idea that organizations are potentially able to
adapt has deep roots in the literature. March and
8 Some scho
Simon (1958) recognized that, in principle, organ-
there are
izations can design processes to bring new pro- n
withstand lo
grams into existence and later modify them. In-
fields (e.g., g
status
deed, the Carnegie
of
School always recognized
a t
adaptation, which implies that change occurs, al-
structures, w
vancedbeit slowly (Cyert &(e.g.,
March, 1963).
and The potential transformation envisioned when
ordinary
an enterprise has strong dynamic capabilities
orously. Fo goes
can be. beyond narrow notions of "strategic fit" seen as

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 336 The Academy of Management Perspectives November

optimal in the "adaptation" leaders (Teece, 1992).

school of Indeed, the so-called "lean
organiza-
tional change research. Thatstartup"
school sees
methodology the
is all about envi-
effectuating rapid
ronment as exogenous. Teece (2007)transformation
and continuous and Sirmon, until winning com-
binations are discovered
Hitt, and Ireland (2007) emphasized a "fit" and enacted
that(Ries,is 2011).
far broader and embraces (1) the firm's
Anti-cannibalization internal
instincts and entrenched in-
processes, (2) partners, (3) customers,
terests often standand (4) for
in the way theincumbent firms
business environment. Achieving tight "fit" with
and undermine their dynamic capabilities. In other
all four is likely to require words,strong
firms must dynamic
address pressures and tensions
capabilities. caused by processes internal to the firm as well
The managerial message from the dynamic capa- as those in the external business environment
bilities approach is virtually orthogonal to the (Greiner, 1998).
rather bleak managerial message from the "organi- Organizational sclerosis can manifest itself as a
zational ecology" school of research (e.g., Hannan & failure to change investment patterns or a failure to
Freeman, 1977). Organizational ecologists hold change routines (Gilbert, 2005). At the core of most
that, when the business environment shifts, incum- rigidities are business models - and managers un-
bent firms face overwhelming inertia due to micro- able to recognize the need to modify or aban-
political social practices, "bargains," and/or rela- don them.
tional contracts within the company and are, as a In the dynamic capabilities framework, routines
result, displaced by organizations better suited to and business models are not viewed as completely
the changed context. Although there is evidence of wooden. It is true that routines are bound by rules,
organizational inertia, the dynamic capabilities customs, and heritage, yet they are capable of being
framework holds that management can overcome changed in most instances - especially with strong
(i.e., "manage") evolutionary forces to some degree leadership. Some companies, such as Netflix under
(O'Reilly & Tushman, 2008). The changes that have Reed Hastings, have demonstrated a remarkable
occurred in the course of the histories of numerous
ability to adopt new business models midstream,
major corporations, such as GE, IBM, Nokia, Net- but not without considerable investor angst and
flix, and Apple, suggest that this is true in practice. customer confusion.
However, further research is needed to reveal more
If an enterprise is to have strong dynamic capa-
about how and when this can be accomplished, and
bilities, it must not only ensure that strategy and
the manner and cost of doing so.
organization are aligned with anticipated changes
Incremental change by firms is, in fact, relatively
in markets, technologies, and the business environ-
common.9 More radical change is possible, but it
ment, it must also be able to effectuate change in
requires organizational mutation. Such mutation
ordinary capabilities - and their underlying rou-
must be engineered and driven by entrepreneurial
tines. In some cases, it may suffice simply to access
managers/leaders.
different suppliers. At other times, more radical
While path dependence poses a constraint on the
measures may be required.
future actions of all enterprises, for some firms the
As Jack Welch, the storied former CEO of GE, is
legacy of the past can also provide the foundation
widely quoted to have said, "If the rate of change
and ftilcrum of future growth. In the modern par-
inside an organization is less than the rate outside,
lance of Silicon Valley, firms must (and some do)
the end is in sight." However, having the impera-
"pivot" when inflection points occur in the ecosys-
tive to change is not enough. Framing a clear vision
tem or when they discover that their strategy
and/or business model isn't working. It is, of and finding the migration path from the old to the
new, including figuring out which "rules" to break
course, easier for startups than for established en-
terprises, and it may be easier for Silicon Valley- in order to get there, are likely to be required.10 If
type firms that have shallow hierarchies and strong done well, the result will be new, high-perfor-
mance signature processes.

9 Augier and Teece (2008) pointed out that the dy-

namic capabilities framework involves "evolution with
design." However, that article conflates dynamic capabil- 10 As Peter Drucker is widely quoted to have said: "If
ities with "strategic processes." In the present article, I you want something new, you have to stop doing some-
am drawing a distinction between the capabilities and thing old." But this leaves managers to fill in the messy
strategy concepts. details of what to modify and what to leave as is.

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 2014 Teece 337

Some orga
noted that there is nothing automatic about techno-
Winter
logical and organizational learning. (20
Learning and innovation benefit from light-touch
"firefightin
management
"high-paced - especially where expert talent is
haps concerned (Teece,
creati 2011b). Horizontal interaction
among talented people with diverse knowledge
behaviors."
solving bases inside and outside the enterprise
- is generally in
solving.11 required to solve complex problems, giving support Y
possible to the "open innovation" paradigm (Chesbrough,th
fighting" 2003). Dynamic capabilities demand both an exter-
have micro-routines embedded within. nal (outside the organization) and internal orienta-
Productive transformation, the kind that leads totion by management. The learning and innovation
enterprise growth, ultimately requires routines andthat undergird transformation (and dynamic capa-
entrepreneurial actions for the introduction of newbilities more generally) and contribute to durable
activities alongside existing business lines. In toocompetitive advantage often need to be global in
many organizations, there may be a readily avail- scope. Multinational enterprises competing in di-
able set of routines for downsizing the enterprise, verse contexts have the possibility to learn across
but there is generally no routine in place for grow-different geographies (Teece, 2014).
ing it. The dynamic capabilities framework could also
In the course of exploring future possibilities be applied to help illuminate national economic
while exploiting present opportunities, many po- development, such as the successes of the Asian
tentially incompatible activities will need to take "tigers" (and the lackluster outcomes in many other
place simultaneously: developing new products countries). Whereas traditional economic devel-
and services while improving existing ones, servic- opment theorists stress resource accumulation
ing existing customers while acquiring new ones, (propelled by high rates of investment), the dy-
hiring top talent while retaining current staff, in- namic capabilities framework stresses the impor-
troducing new processes while improving opera- tance of enterprise-level entrepreneurship, in-
tions, and so on. This requires a particular subset of novation, learning, and good strategy. This
dynamic capabilities that O'Reilly and Tushman resonates with emerging theories of development
(2004) called "ambidexterity." (Lall & Teubal, 1998). When Nelson and Pack
Common to the pursuit of change, the fine-tuning (1999, p. 434) noted that "if . . . one marshals
of existing (ordinary) capabilities, and the synchro- [inputs] but does not innovate and learn, devel-
nization of business processes and models with the opment does not follow," they implicitly en-
business environment is learning, a critical dimen- dorsed the importance of dynamic capabilities
sion of dynamic capabilities. The enterprise must for national economic development.12
learn (1) what customers want, (2) what new tech-
nologies might allow, (3) what aspects of the busi- THE BIFURCATION OF THE LITERATURE:
ness model are working, and (4) whether the cur- INTEGRATING AND RELATING DISPARATE
rent strategy is effective and the company is on the ELEMENTS
path toward building a great business. It should be
I have so far elaborated and expanded the logic of
the Teece and colleagues (1997) and Teece (2007)
framework. In this section, I will more directly
11 Processes can be both routinized and ad hoc. In an
address the bibliometrically defined bifurcation in
interview about product development at Apple (Bur- the dynamic capabilities literature identified by Pe-
rows, 2004), the company's late CEO, Steve Jobs, de-
scribed it as a blend of routine and creative acts: "Apple
is a very disciplined company, and we have great pro-
cesses. But that's not what it's about. Process makes you 12 Nelson and Pack (1997) distinguished between ac-
more efficient. But innovation comes from people meet- cumulation and assimilation theories of development.
ing up in the hallways or calling each other at 10:30 at The assimilation approach aligns with dynamic capabil-
night with a new idea, or because they realized some- ities theories of the development and growth of the busi-
thing that shoots holes in how we've been thinking about ness enterprise. The accumulation approach is more akin
a problem." to the resource-based view of the firm.

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
338 The Academy of Management Perspectives November

The divide between

teraf and colleagues (2013), which they the Eisenhardt
traced cluster
toand
Eisenhardt and Martin (2000).
the Teece cluster of dynamic capabilities research
Teece and colleagues (1997) claimed
can be that
bridged, according dy-
to Peteraf and colleagues
(2013), by various
namic capabilities are important for approaches.
sustainable Perhaps the sim-
firm-level competitive advantage,
plest is to recognizeespecially
that Eisenhardt and in Martin are,
in the main, focused
high-velocity markets. Conversely, Eisenhardt and on a different class of capabil-
ities, those I described
Martin (2000) claimed that dynamic capabilities earlier as ordinary capabil-
ities, which can be
are inherently unsuited to creating sustainable ad-benchmarked for best practice
and are vulnerable
vantage and that they are likely to break to imitation.
down Thisin is a major
high-velocity markets. point of difference. As noted in Teece (2007,
p.
Writing on these contrasting 1321), "a well understood
views, Peterafand replicable best
and
practice
colleagues (2013) argued that Eisenhardtis not likely toand constitute
Mar- a dynamic
capability."
tin, in effect, endeavored to reconceptualize dy-
In the remainder
namic capabilities, "challenging the of this section, I will
purpose and begin by
mechanisms of the [Teece et al.] framework and exploring the role of managers, another key distinc-
delimiting its boundary conditions" (p. 1391). I tion between the Eisenhardt and the Teece concep-
agree with their assessment. While there can be tualizations of dynamic capabilities. Managerial ac-
benefits in reconceptualization, the reconceptual- tion is a critical complement to organizational
ization here compromised essential elements in the routines within the Teecian dynamic capabilities
framework. I will also discuss the role of VRIN
initial (Teece et al.) framework.
To clarify key distinctions between the two un-
resources and the relationship between dynamic
capabilities and strategy, before returning briefly to
derstandings of dynamic capabilities, I will start by
the central importance of the distinction between
sketching the Eisenhardt and Martin logic. First,
ordinary and dynamic capabilities.
Eisenhardt and Martin (2000, p. 1107) defined dy-
namic capabilities as "the organizational and stra- The Role of Managers
tegic routines by which firms achieve new resource
First, I reject the notion that dynamic capabil-
configurations." Next, they claimed, somewhat sur-
ities reside only in high-level routines. Teece et
prisingly, that all dynamic capabilities can be cap-
al. (1997, p. 516) defined dynamic capabilities as
tured as "best practice." Accordingly, dynamic ca-
"the firm's ability to integrate, build, and recon-
pabilities are seen as imitable by rivals, and so figure internal and external competences to ad-
cannot be a source of competitive advantage. Fi- dress rapidly changing environments." I have en-
nally, in high-velocity business environments deavored to make clear that, in my view, dynamic
(where Teece and colleagues, 1997, claimed that capabilities involve a combination of organiza-
the dynamic capabilities approach is particularly tional routines and entrepreneurial leadership/
relevant), Eisenhardt and Martin (2000, p. 1113) management (Augier & Teece, 2009; Teece, 2007,
claimed that the processes of dynamic capabilities 2012b). Creative managerial and entrepreneurial
are limited to simple rules that are less stable than acts (e.g., creating new markets) are, by their
fixed routines and are likely to "collapse." nature, often non-routine. Indeed, "many strate-
Peteraf and colleagues (2013) tried to reconcile gic actions and transformations require actions
this version of dynamic capabilities with that of that one may never replicate" (Teece, 2012b,
Teece et al. within the limitations of the assump- p. 1397). The differentiated experience of Yum!
tions stated in each article. It should also be ac-
Brands' KFC units in Japan and China would
knowledged that the Teece and colleagues (1997)appear to bear this out. KFC Japan became a
framework has continued to evolve. In fact, the success in the 1970s under the leadership of Loy
Teece et al. (1997, p. 515) paper clearly indicated Weston and Shin Ohkawara, who developed the
that it was just the first step in fleshing out a frame- local branch more as a fashion business than as
work, noting at one point that a goal of its exposi- fast food (Bartlett & Rangan, 1986). In China,
tion was "to facilitate theory development and in- however, KFC's rapid growth during the 1990s is
tellectual dialogue." There are several articles that generally attributed to the aggressive store build-
elaborate the Teece et al. view of dynamic capabil- out and radical menu localization that took place
ities in ways that endeavor to help clarify the issues under the leadership of Sam Su ( China Economic
at hand (e.g., Teece, 2007, 2012b, 2014). Review, 2011).

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 2014 Teece 339

Leadership managers/leaders. Over time, however, rules and m

tion's processes to abilit
simulate and perpetuate the intuition
and behind some elements of a good leader can be de-
change
that Di Stefano et al. introduce in their article in veloped. At Apple, for example, Steve Jobs recog-
this issue, dynamic capabilities are not just the nized the risk of having the firm be a one-man show
gears and drivetrain of the organizational machine; and set up a corporate university where executives
they include the entrepreneurial consciousness, teach professionally prepared cases about how key
imagination, and human action that guide it. Thepast decisions, such as the creation of the Apple
human action involves sensing, creating and co-Store, were reached (Lashinsky, 2011). In this way,
creating, seizing, and transforming. the values and the approach of the founders are
A theory of competitive advantage without thedisseminated among Apple's current and future
possibility of non-routine action by the top man-leaders. Similarly, Andy Grove helped keep Intel
agement team is awkward, and the dynamic capa-agile with his constant reminder that "only the
bilities framework was never meant to precludeparanoid survive" (Grove, 1996).
non-routine action. Eisenhardt and Martin's (2000) Eisenhardt and Martin (2000) held that dynamic
article demonstrates an acute awareness of the role
capabilities would break down in high- velocity en-
of managers, such as their "emotional inability to vironments because of the instability of the simple
cope with uncertainty ... in high- velocity markets" rules (basically, semi-improvised managerial ac-
(2000, p. 1112). Yet their argument about the inher- tions). It is clearly possible, however, for some
ent weakness of dynamic capabilities theory in companies to sail through a variety of high-turbu-
high-velocity environments uses only the language lence markets relatively unscathed, as TI did first
of processes and rules. with memory chips, then with software-intensive
While no firm will succeed forever in a particular chips for cell phones.
market, strong dynamic capabilities allow a firm to Of course, the notion of "simple rules" does not
ride successive waves of change across lines of necessarily preclude a decision-making role for
business by renewing and leveraging the (fungible) managers. As Di Stefano et al. point out in this
services of their valuable and difficult-to-replicate issue, simple rules "imply that the agency rests in
resources. Texas Instruments (TI), for example, individual managers."
went from being a diversified electronics producer Once we readmit one-time entrepreneurial/man-
in the 1980s to having a narrower focus on memory
agerial actions (with or without rules) as a compo-
chips in the 1990s, switched in the 2000s to digital
nent of dynamic capabilities, the logic by which
signal processors (DSPs) for cell phones and other
Eisenhardt and Martin reasoned that dynamic ca-
devices, and now has refocused yet again on analog
pabilities are unstable in high-velocity environ-
chips. These transitions, each of which drew on
ments is undermined. Yes, high- velocity environ-
existing resources within the company, occurred
ments are challenging and require, as Eisenhardt
under a series of CEOs who were all career-long TI
and Martin (2000, p. 1113) so aptly noted, "exten-
employees. Over the turbulent period 1992-2012,
sive and frequent use of prototyping, real-time in-
the company averaged a net income margin of
formation, experimentation, and multiple alterna-
nearly 12% of sales despite the downdraft of the
tives." But that is precisely the type of managerial
dot-com bust and other challenges. The strong,
responsiveness the dynamic capabilities frame-
shared values of TPs leaders and employees, the
work envisages. Strong dynamic capabilities in
firm's technological capabilities, and its ability to
high-velocity environments are not stable so
use its technology and intellectual property as-
much as protean, potentially allowing any organ-
tutely underpin the dynamic capabilities that have
ization to retain the "pivot" potential of a "lean
helped the firm to thrive in the very turbulent
global electronics industry.
startup" (Ries, 2011). Admittedly, small startups
In high- velocity environments, the business en-
can "pivot" more readily than can large estab-
terprise may well be particularly reliant on the lished enterprises.13
sensing and seizing instincts and actions of the
CEO and the top management team. To the extent
that this is so, the capabilities will, of course suffer 13 However, Lou Gerstner demonstrated with IBM that
from a degree of instability because their longevity it is possible to make elephants (i.e., large firms) dance
depends logically on the tenure of entrepreneurs/ (Gerstner, 2002).

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
340 The Academy of Management Perspectives November

Resources and the VRIN Criteria ney (1991) as those satisfying the VRIN criteria,
defined above.
A dynamic capability involves building and or-
Intangible resources in general, and intellectual
chestrating resources to perform a changing kalei-
capital in particular, are the class of assets that, in my
doscope of tasks and activities. An understanding
view (Teece, 2000), most frequently meet the VRIN
of the role of resources is therefore important to a
criteria. These were the focus of some of my early
proper understanding of the dynamic capabilities
framework.
research. Intangible resources are difficult to trade in
most cases because their property rights are likely to
Resources are potentially productive tangible
have fuzzy boundaries and their value is context-
and intangible assets and people that are semiper-
dependent (Teece, 1981). The primary exceptions are
manently attached to a firm. In the resources frame-
codified knowledge for which transferable rights
work developed by Penrose (1959) and then re- have been conferred by law, such as patents, trade-
framed by Richardson (1972) in the related marks, and copyrights, and even these face high
language of capabilities,14 the firm's managers can
transaction costs, such as those for monitoring in-
combine services yielded by resources in several
fringement and getting recalcitrant infringers to take a
ways.15 At any point, management must choose license. There is unlikely to be a well-developed mar-
which market opportunities the firm will pursueket for most intangibles, and they are also generally
with the resources on hand. difficult to transfer from one firm to another because
In earlier work, Teece (1980, 1982) explored Pen- the transfer of many intangibles, such as trade secrets,
rose's ideas of resource fungibility by assessing often entails the transfer of people.
how the nature of a resource, in particular its "trad- The resources approach implies that competitive
ability" (or lack thereof), affected the nature of en- advantage flows from heavy endowment or invest-
terprise growth through diversification. Opportuni- ment in the right (i.e., VRIN) resources. But even
ties to leverage non-tradable assets (generally high-potential resources must be astutely managed
know-how) across different lines of business pro- (orchestrated) to boost enterprise performance.
pelled the creation of diversified multiproduct Managerial coordination of resources is not fea-
firms. These early treatments focused on how trans- tured in the resource-based approach, but is critical
action costs might affect diversification strategy. in dynamic capabilities.
They did not, however, give systematic attention to The asset orchestration function is critical to or-
how non-tradable assets and resources get created, ganizational performance in the military as well as
protected, and deployed. They also neglected the in business. General Stanley McChrystal has made
role of (entrepreneurial) management. These defi- it clear that, during the period of the United States.
ciencies have been remedied by the dynamic capa- Army's involvement in Iraq, resources alone
bilities framework. were not enough: "We had a culture in our forces,
While Penrose recognized the importance of of excellence. It was how good can I be at my
productive opportunities and entrepreneurship, task? . . . But that's not as important as how well
she did not fully address the importance of re- those pieces mesh together. . . . The real art is . . .
sources for building competitive advantage. Wer- cooperating with civilian agencies, it's cooperating
nerfelt (1984) and Barney (1986, 1991) partly with conventional forces, it's tying the pieces to-
filled this gap by focusing on the possession of gether. That's the art of war, and that's the hard
certain resources as the main mechanism for an- part" (Rose, 2013, p. 6).
choring the generation of economic rent. The re- In short, VRIN resources, in and of themselves,
are inherently valuable by definition, but they
sources of strategic interest were defined by Bar-
do not generate long-term enterprise value (or mil-
itary prowess) on their own.16 For long-term
growth and survival of the enterprise, they must be
14 "Mrs. Penrose has provided us with excellent ac-
counts of how companies grow in directions set by their
capabilities and how these capabilities themselves 16 Firms with strong dynamic capabilities will likely
slowly expand and alter" (Richardson, 1972, p. 888). possess VRIN resources. Some scholars may prefer to
15 Penrose's framework includes "the range of ideas of think of dynamic capabilities themselves as being a long-
entrepreneurs among the services rendered" (Penrose, term VRIN resource. I find this confusing as it distracts
from the asset (resource) orchestration fonction that is
1959, p. 86). In this regard, Penrose was perhaps describ-
ing a dynamic capability. core to dynamic capabilities.

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 2014 Teece 341

pabilities: sensing, seizing, and transforming.

cleverly ma
callySensing capab
contains a strong element of diagnosis,
which is important to strategy. Seizing needs toT
strategy.
view be connected to both a guiding
of thepolicy and coher-
plainent action. how
Transforming that protects and en-
hances
streams value requires a guiding policy
get and co-
The herent
resourc action. The nature of the managerial tasks
on for various
entrepr elements of strategy and dynamic ca-
deed,pabilities isas
outlined in Table 2. Bar
based Earlier, I described
theor how TI demonstrated strong
firm dynamic resour
capabilities over decades with a series of
ines the
major product market transitions. But im strategy was
firmsalso implicated in each
to of these changes. Divesting
ga
(2007, p.
a major line of business such as memory chips 25 and
The focusing on DSPs involves calibrating opportuni-
dynam
to goties and realigning
furth resources, but it also involves
tions." The framework addresses (1) innovation strategic analysis such as how best to capture value
and co-creation, (2) where resources come from from the firm's intellectual property portfolio
(i.e., how they can be built), and (3) how re- (Grindley & Teece, 1997).
sources should be deployed. It approaches these Strategy and dynamic capabilities both occur at
issues by appealing to strategy (for determining the line-of-business as well as the company-wide
the resource allocation targets) and to organiza- level. This is consistent with other views of mod-
tion structure and processes (to facilitate re- ular organizations (e.g., Helfat & Eisenhardt, 2004),
source/asset redeployment). where company-wide strategy is different and sep-
arable from the day-to-day positioning strategy at
the division level. Strategy, when developed suc-
Dynamic Capabilities and Strategy
cessfully, provides the specifics of how the firm
As discussed earlier, dynamic capabilities must will deploy its scarce assets to support market
be used in aid of a good strategy to be effective. needs and outmaneuver rivals. Strong dynamic ca-
Strategy, capabilities, and the business environ- pabilities provide the flexibility to make the neces-
ment co-evolve. A strategy that is consistent, coher- sary adjustments. As Lou Gerstner said at the start
ent, and accommodating of innovation is needed to of his tenure as CEO of IBM, "You have to be fast
help achieve competitive advantage. A firm with on your feet and adaptive or else a strategy is
strong dynamic capabilities is able to flesh out the useless" (quoted in Sellers, 1993). He might as
details around strategic intent and to implement well have said that strategy is useless without
strategic actions quickly and effectively. strong dynamic capabilities.
A strategy can be defined as "a coherent set of Put differently, VRIN resource accumulation and
analyses, concepts, policies, arguments, and ac- the managerial orchestration discussed above,
tions that respond to a high-stakes challenge" which is central to enhancing processes and ex-
(Rumelt, 2011, p. 6). For Rumelt, a good strategy ploiting positions, must be guided and informed by
has (1) a diagnosis, (2) a guiding policy, and (3) strategy. Frank Hoffman's (2004) analysis of the
coherent action. It is clear that this taxonomy British Navy's inability in 1916 to win the Battle of
interacts with the three clusters of dynamic ca- Jutland seems relevant here. Despite the British

TABLE 2
The Interrelation of Dynamic Capabilities and Strategy
Strategy kernel Diagnosis Guiding policy Coherent action

Related dynamic capabilities schema Sensing Seizing/transformation Seizing/transformation

Nature of managerial orchestration Entrepreneurial Administrative Leadership

Source: Teece (2014).

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 342 The Academy of Management Perspectives November

Navy's numerical advantage, ordinary the battle

capabilities can take on onlywaszero ora pos-
stalemate.17 Both sides claimed
itive victory, but
values; a firm can either neither
perform an activity to
achieved it. British Vice Admiral
some level ofSir David
proficiency Beatty
or it can't.
ruefully proclaimed at the time As that
explained"there
earlier, ordinary
seemscapabilities,
to in-
be something wrong with our cludingbloody
best practices,ships today"
are not sufficient to drive
sustainable competitive
(which can be interpreted as surprise that advantage.
superior "Leveling up"
British naval resources did (capability
not prevail) (Butler,
equalization among competitors) is of-
2006, p. 151). Hoffman (2004, ten
p.possible
70), withreviewing the
respect to best practices (ordinary
capabilities) because
situation nearly a century later, they can be learned.
concluded that Even
standard economies
"[t]he real deficiency, however, was of scale can
the often of
loss be achieved
[Vice Admiral Horatio Lord] Nelson's touch. It through heavy investment. Strong global competi-
was not the bloody ships that were principally at tion, technology transfer activities, and operations
fault. It was the inadequate doctrine of command improvement programs led by management consul-
and control." Put differently, the British failure to tants all help with leveling up.
leverage their superior resources into a victory re- While ordinary capabilities and associated best
flected a failure in (military) strategy and dynamic practices are far from fully diffused globally (Bloom
capabilities. et al., 2012), it is easier than ever before to imitate
best practices.20 A good deal of know-how that was
tacit and proprietary just two or three decades ago
Ordinary Capabilities and Best Practices
is now explicit and even in the public domain -
As noted above, Eisenhardt and Martin's (2000) available from textbooks, consultants, schools of
article misinterpreted (or refrained) the dynamic engineering, and schools of business. Explicit (cod-
capabilities framework by claiming that all capabil- ified) knowledge travels easily, and the Internet, by
ities, including dynamic capabilities, can ulti- allowing low-cost connectivity, has served to accel-
mately be characterized by best practice and hence erate long-established trends. Because of their imi-
imitated.18 In essence, as now explained in more tability, ordinary capabilities are insufficient for
detail, Eisenhardt and Martin conflated two con- long-term survival and growth, except in very sta-
cepts that benefit from being analytically separated, ble and protected business environments (Drnevich
namely ordinary and dynamic capabilities. Ordi- & Kriauciunas, 2011).
nary and dynamic capabilities are, as discussed
earlier, quite distinct, both analytically and in prac-
Ordinary Capabilities, Dynamic Capabilities,
tice (see Table 1).
and Inimitability
To recap, ordinary capabilities involve the per-
formance of those administrative, operational, or Dynamic capabilities, by contrast, are extremely
governance-related functions that are (technically) difficult to equalize across companies. They do not
necessary to complete currently planned tasks. Or-
dinary capabilities permit a firm to get things done
and "make a living" (Winter, 2003, p. 991), albeit its, at least until competition grows stronger. However,
possibly a mediocre one.19 In mathematical terms, even though the enterprise itself may generate only
modest profits, significant employment can be gener-
ated. Nation-states may get strong benefits from having
17 The British (aided by the Australians and Canadi- business enterprises with weak dynamic capabilities
ans) had 151 combat ships, including 28 battleships. The dominate the domestic economy even when sharehold-
Germans had 99 combat ships, including 16 battleships. ers don't benefit much or at all. The inverse may also
Some commentators are convinced that the British be true: Enterprises with strong dynamic capabilities
missed a tremendous opportunity to annihilate the Ger- will generate good shareholder returns but not neces-
man fleet and win what would have been another sarily high employment.
Trafalgar. 20 Google identified eight management "behaviors"
8 Peteraf et al. noted quite correctly that just because (practices) that, based on employee interviews, lead to
rivals can imitate, to some extent, various capabilities more effective management. However, as Garvin (2013,
does not mean they will be "equally adept" (2013, p. p. 82) noted, "the eight behaviors . . . might not give
1403) or that competitors level up instantaneously. Google a lasting edge. Companies with similar competi-
19 Strong ordinary capabilities can lead, in weak tive profiles . . . can mimic Google's approach, since the
selection (competitive) environments, to steady prof- eight behaviors aren't proprietary."

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 2014 Teece 343

cycle product development process, where

typically leve short-
groundedterm day-to-day metrics and the tabulation of results
in
are
company's meaningless. un
tainty about
Put differently, a firm's ordinary capabilities en-
hard to
able the production and imit sale of a defined (but
duplicate,
static) set of products and services. However, ordi- pr
such as
nary capabilitiespresci
do not help determine whether
portunities,
the current production schedule is the right (or
judgment that
even a profitable) path to follow in the future.
difficult to
When the firm's output is tuned to what the market im
when leaders
desires, strong ordinary capabilities may be suffi-
ities might
cient for a fleeting competitive advantage but are ac
leadership
insufficient to undergird sustainable competitive(N
Dynamic
advantage as the business environment changes.22 ca
strong, a
The "real work" of building dist
an organizational ad-
colleagues (20
vantage, to paraphrase Lutz, involves building and
capabilities
using dynamic capabilities. ca
pects. Indeed,
deeply misgu
ECONOMIC THEORY AND CAPABILITY
dynamic capa
THEORY
but also nega
Dynamic cap
So far, I have addressed what I see as the main
leadership
gaps between my view of dynamic capabilities tea and
even more
the related but distinct scholarship on dynamic id
quire good ad
capabilities that has evolved, according to Peteraf
ordinary
and colleagues (2013), aroundcapaEisenhardt and Mar-
mance,tin (2000). In they
this section, I address the multidisci- l
ership-depend
plinary nature of my framework. Since my view is
tal part of
most often associated str
with the economics disci-
As noted, mo
pline, I will primarily discuss how mainstream eco-
Eisenhardt an
nomic theory has assumed away any representation
ities, of capabilities
such as
even though the capabilities of firms
formation,
undergird modern economic growth. ca
dinary Peteraf and capabi
colleagues (2013, p. 1399) identified
claim that the
separate sets of disciplinary orientations for the
criteria
"Eisenhardt group"and
of authors (organizational the- c
As noted in
ory, science, or behavior; information systems) T
technical fit
than for the "Teece group" (economics, strategy,
Only dynamic
technology). However, the involvement of scholars
ness, which has more to do with innovation and
from different disciplines should not, in itself, be a
"doing the right things" - and with continuing to
do so as the business environment shifts (Teece,
2009, p. 7). 22 Multinational enterprises investing in less-devel-
Bob Lutz (2011) of General Motors put this aspect oped economies constitute a special case. Firms domi-
of dynamic capabilities rather succinctly for the ciled in advanced economies "appear to adopt good
auto industry: management practices in almost every country in
which they operate" (Bloom et al., 2012, p. 14). They
Where the real work of making a car company suc- may thus succeed for a while with strong ordinary
cessful suddenly turns complex, and where the capabilities, because ordinary capabilities developed
winners are separated from the losers, is in the long- at home may temporarily be distinctive abroad, where
the competition or "selection" environment may be
weak. The overseas success McDonald's has had with
21 Phronesis is the Greek word for a practical type of fast food is due in part to its ability to transfer its
intelligence or wisdom. considerable ordinary capabilities.

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 344 The Academy of Management Perspectives November

problem. In fact, all these different strands

over, even technical have
efficiency (the result of strong
ordinary
contributed to the development of capabilities)
the dynamic is assumed, ca-
not established,
pabilities framework to some extent.
in economic As I have ar-
theory.
gued elsewhere, dynamic capabilities One of the fewcan serve
overlaps as
with mainstream eco-
"a framework for integrating nomicsand
is thatenhancing the
the dynamic capabilities framework
entire business school curriculum" emphasizes the(Teece,
importance of2011a,
inimitability. This is
p. 499). an economic concept of great importance to the
A full understanding of how organizations and capabilities framework. It also provides a frame-
leaders exhibit strong or weak dynamic capabilities work for strategic focus; managers can unclutter
requires insights from many disciplines and sub- their radar screens by prioritizing VRIN resources
disciplines in the social sciences. A multidisci- and, if necessary, outsourcing activities that de-
plinary approach is even more critical for an un- pend on ordinary capabilities since these are of far
derstanding of the deeper question of how business less strategic importance due to their very out-
systems facilitate the integration of ideas and their sourceability/acquirability.25
conversion into actions that generate economic In the remainder of this section, I examine the
outcomes. dynamic capabilities framework with respect to
One should not be surprised if individual economic
re- theory. The basic theme is that dynamic
searchers tend to pursue research within the capabilities
dy- are not as well integrated with the
namic capabilities framework using the tools economic
and theories of the firm and of markets as
perspectives that count in their respective disci-
they should be - and are certainly less integrated
plines. However, it is my hope that dynamic withcapa-(mainstream) economic theory than some
bilities can serve as a meta-theory or framework
seem to think. However, there is compatibility
with
that facilitates multidisciplinary collaboration inthose elements of Austrian economics that
which each discipline will find a useful place.23 To the importance of innovation, uncertainty,
stress
take one of the five domains of "bifurcation" iden-
and disequilibrium.
tified by Di Stefano and colleagues (2014), a re- The significance of a capabilities framework is
searcher who selects organizations as the primary perhaps best understood when juxtaposed against
focus and one who instead focuses on managers the mainstream economic theory of resource allo-
will be able to find common ground in the dynamic cation via markets. Some economists would have
capabilities framework, which provides an under- us believe that market exchange activity is the sole
standing of the complementarity between these two basis of resource allocation and wealth creation. In
levels of analysis within the larger perspective of light of this, fundamental questions for organiza-
the pursuit of firm-level competitive advantage. tional theory are these: Why are organizational ca-
Di Stefano and colleagues (2014) find that the pabilities needed in the economic system? And
dynamic capabilities literature most associated where do firm-level capabilities fit into the intel-
with Teece and colleagues (1997) relies more on lectual framework that economics employs?
economic logic than does the Eisenhardt and Mar- Economics, we are told in almost every introduc-
tin-based cluster. While this is true, one should be tory textbook, is about the allocation of (scarce)
aware that mainstream (neoclassical) economic
theory is a long way from recognizing any concept
like capabilities, despite its need to do so.24 More- neity assumption with respect to firms. The primary
exception is game theory, where differences (asymme-
tries) are recognized. However, most game theoretical
23 For example, Di Stefano and colleagues (2014) de- models are decidedly non-robust, providing substance to
scribe how behavioral theorists favor one cluster of dy- Sutton's claim that, by proving everything, game theory
namic capabilities research over the other by studying proves nothing (Sutton, 1990).
organizational adaptation with limited concern for com- 25 Strong dynamic capabilities are a prerequisite for
petitive position. However, that they do so while invok- effective outsourcing. Boeing set up the supply chain for
ing dynamic capabilities does not weaken the dynamic its new 787 Dreamliner passenger jet using a broader
capabilities framework. Instead, it strengthens behavioral array of global suppliers than it had previously. Unfor-
theory by implicitly recognizing the broader require- tunately, it also cut back its monitoring capability. Prob-
ments of competition and profitability within which ad- lems with inadequate components led to a delay of more
aptation occurs. than three years (Kesmodel, 2011). This was a failure of
24 Much of economic theory still adopts the homoge- asset orchestration.

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 2014 Teece 345

for technology to get developed (an

resources and deployed and
ited wants.26
for products and services to get produced) actually
sources
take place? Who alloca
performs that role? Economic the-
ory
sources yields poor answers.
are This is not surprising
u
since there is nothing
(highest much that entrepreneurs and
willin
tem managers do in the economic theory
plays inof the market
allocative ef
economy. Their role in the theory is often stripped
1945) out wax
by the assumption of full informationeland the
does existence of a complete set kind
this of markets, even for
But Hayek
contingent claims.27 an
such as von
Economists have M
been very slow to recognize that
ple much organizing
do not is necessary before there
al are
goods and services to exchange in markets. Adam
consistently
and Smith, in his famous pin-making example (Smith,
means. In
1776/1904, 1.1.3), did not explain how thew
compatible pin got
economics is not. invented and how the integration and coordination
It is important to recognize that, when scarce
of non-traded pin sections (e.g., the wire, the head)
resources must be allocated among unlimited
took place inside the workshop to realize the fruits
wants, more than the price system is needed to of specialization. Somewhat surprisingly, econo-
achieve this goal. Managers and management are mists have not done much about this lacuna in the
needed too, particularly if innovation and change last 238 years.
are implicated. The (neoclassical) economic modelIt is also important to recognize that management
of market exchange takes for granted that somehow,is not just about specialization and the division of
somewhere, new goods and services are being de- labor. It's also about ideation, co-creation, and co-
signed, developed, and produced by some method ordination (orchestration). The integration of ideas
that will be technically efficient, conditional onand tasks to create or co-create innovative products
and services is as important, if not more so, than
factor costs. Moreover, it is assumed that everyone
knows about it. The transaction cost economics specialization and the division of labor. This is not
framework (Williamson, 1975, 1985) has similar a recent development, but it is not yet adequately
(perhaps deliberate) blind spots. It holds "produc-
reflected in mainstream economic theory.
tion" activity invariant even though production In short, the economic theory of markets needs to
costs may depend endogenously on the governance somehow recognize that a good deal of resource
modes, managerial actions, strategy, and structures
allocation takes place inside firms and between and
chosen. Moreover, production technologies and among firms because of entrepreneurial and mana-
governance modes are not, in the economic per- gerial decisions, activated by managerially de-
spective, proprietary, but rather available to signedall systems. Yet there is no manager present in
firms. Omniscience, not ignorance, is the norm. Adam Smith's pin-making example. The manager
As both a theoretical and practical matter, how is scarcely present even in John Roberts' (2004)
"modern firm." When managers are present, the
firms allocate resources so that they are in their first
best use is a fundamental question. How firms focus of modern economics and finance is the dis-
build, augment, and modify their resource base tribution, and less so the creation, of the spoils
over time is also of critical importance. In other between managers and shareholders (Jensen, 2000).
words, there are important resource allocation In reality, there had to be a manager in Smith's pin
functions that (neoclassical) economic theory factory;
ig- it apparently did not register on Smith that
nores: namely, how does the non-market coordina- to harness economies of specialization one needed
tion inside, between, and among firms (necessary managers.
Indeed, because of assumptions made, there is
often no need for a manager in classical, neoclassi-
26 Robbins (1932) was perhaps the first to frame the
economic problem this way. It implicitly presupposes a
knowledge of ends and means, which reduces the eco- 27 For a more complete statement about how manage-
nomic problem to one of technical efficiency and ment functions are obscured in economic theory, see
optimization. Teece and Winter (1984).

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 346 The Academy of Management Perspectives November

cal, and modern economic theory. Andpartners).

firm's alliance if managers
This managed coordina-
tionprimary
exist in economic theory, their is an equally remarkable
motivation,but very different
it would seem from the very large literature onsystem, as
kind of coordination to that of the price
agency theory, is to steal from
it involves organizing the development &
owners (Jensen and deploy-
Meckling, 1976).28 This raises the question
ment of idiosyncratic, of
non-traded (and hence non-
where the wealth inside firms comes from in the priced) assets without clear signals as to their
first place, something that agency theory doesn't value. Managerial orchestration is thus for the firm
address. what prices are to the market in that they both
Logic and simple observation dictate that good enable coordination to achieve best-use resource
managers play a most important role in value cre- allocation.
ation for the shareholder and for other constituen- There are degrees of autonomy and automaticity
cies such as employees. This is often forgotten in attached to both types of coordination. Market co-
modern treatments of corporate governance and ordination relies on the price system to generate
public policy. Agency theory has blotted out criti- signals that bring about responses from producers
cal management functions, despite the important and consumers. Internal coordination is achieved
work of business historians, such as Chandler by routines and buttressed by managers often mak-
(1977), who highlight the positive role that manag- ing highly complex allocation decisions. Given its
ers play in the economic system. history of successes in the face of uncertainty, man-
Managers are essential to resource allocation and agerial orchestration certainly seems just as re-
economic activity (and the theory of the firm). The markable an allocation process as that which Hayek
price system has little relevance to the internal observed in the workings of the price system.
allocation of resources within firms because firms, As explained in Teece (1980, 1982, 1986) and in
for very good reasons, generally eschew the use of Helfat and colleagues (2007, Chapter 2), managers,
prices as the exclusive tool to determine the inter- entrepreneurs, and innovators cannot just leave it
nal distribution of resources. The allocation pro- up to a hypothetical market devoid of entrepre-
cess is instead orchestrated by managers. neurially managed firms to line up specific assets,
One reason the price system is eschewed for in- develop new ones, and integrate them into a well-
ternal resource allocation is that many assets and functioning innovation, production, and marketing
activities inside the firm are virtually impossible to system. The reason is that markets for high-speci-
price because they are highly specialized and idio- ficity (idiosyncratic) assets generally don't exist,
syncratic, their value is context-dependent, and and if they do exist they are invariably "thin." To
there is little or no "liquidity" that would allow overcome this problem, managers collect informa-
(internal) pricing to function as a good resource tion, sense opportunities, invest in capabilities, in-
allocation mechanism. Clearly, the price system novate, and transform. They become the instru-
cannot effectuate the kind of tight coordination and ments that help achieve the shrewd allocation of
co-evolution that dynamic capabilities require. En- company resources. Markets and internal resource
trepreneurial managers, by contrast, can (and do) allocation (organized hierarchically inside the
gather information, make assessments, and give di- firm) are not only substitutes, as Coase (1937) im-
rectives so that non-priced assets are developed plicitly claimed; they are also complements. Wil-
and deployed in value-enhancing ways. This is the liamson seems to agree, noting that "the relation
orchestration function that the dynamic capabili- between competence and governance [is] both rival
ties framework assigns to managers. and complementary - more the latter than the for-
Hayek (1945) stressed the amazingly parsimoni- mer" (1999, p. 1106).
ous powers of the price system to coordinate And even if transaction costs were zero and gov-
disparate economic activities around the globe. ernance problems evaporated, learning, co-creation
However, Hayek failed to note that management (Pitelis & Teece, 2009), and asset/resource orches-
likewise achieves complex resource coordination, tration functions would still need to be carried out.
albeit inside the firm (and, in some cases, with the The entrepreneurially managed business firm is
where this can be done.
The recognition that some form of organization
28 See Bloom and Van Reenen (2007) for a notable (besides markets) is necessary in the economic sys-
exception to the virtual exclusion of firm-specific mana- tem is hardly novel to management theorists. How-
gerial practices from the economics literature. ever, management theorists assume that organiza-

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 2014 Teece 347

tionswork, that
are ne
is merely the tip of the iceberg in terms
The of the ways that (entrepreneurial) management
dynam
explain
matters. why
how theWhile not couched in the language
econ of x-ineffi-
economic the
ciency, the dynamic capabilities framework implic-
Another stan
itly accepts elements of that 50-year-old concept.30
tention in
Leibenstein and others attributed x-inefficiency to e
technical
a lack of competition, but the more efffundamental
if firms ma
reason is likely to be poor management, limited
ciency. Leib
information, different histories, and weak ordinary
inefficiency
and dynamic capabilities. Explanations along these
abovelines haveits co
not garnered attention among econo-
mist (outside
mists (in trying to explain x-inefficiency) in Leiben-
ognize that
stein's time or since. f
logical The dynamic effici
capabilities framework suggests a
may therefor
theory of the firm that not only accommodates
same industr
firms with x-inefficiency (i.e., firms with weak or-
Leibenstein
dinary capabilities, as evidenced by costs above the
managers mi
technically efficient level). It also accommodates
entrepreneu
firms that suffer from what might be called "d-
efficiency
ineffectiveness" (i.e., weak, ineffective dynamicth ca-
has not reall
pabilities). In fact, I posit that most firms are d-in-
enigmatic d
effective, because, at any point, many are likely to
A very rece
be offering a portfolio of products not ideally suited
colleagues
to current market needs. (2
Journal of
Clearly, strategic management scholars have long
(p. base 40)
recognized the problem of suboptimal management
Indian texti
practices that, putting Leibenstein and Bloom et al.
known (in d
to one side, economic theory assumes away. As
tices, resulti
noted, a key tenet of the field of strategic manage-
the first yea
ment is that there is heterogeneity among firms. Not
initial (avoid
all firms will follow best practice, let alone generate
managers ha
and adapt new practices that outclass all others.
practices or
One way to remedy the shortfalls in economic
heard. This confirms basic Austrian School notions
about imperfect information (and inaction) being theory described here is to embrace capability the-
ubiquitous in the economic system. ory, or "capability economics," because it allows
However, Bloom and colleagues (2013) did not for (and helps explain) innovation and heterogene-
characterize the economic role of the manager as ity among firms. It also embraces strategy. While
being the orchestration of non-priced assets and of the Austrian School finds room for the entrepre-
co-creation activity, as the dynamic capabilities neur, it doesn't have much room for the manager. In
framework implies. Rather, they focused on show- capability economics, there is a complementary
ing that management matters with respect to devel- place for the entrepreneur and the manager. Hence,
oping and using quite ordinary capabilities, which capability theory takes Austrian economics to the
are amenable to transfer and testing in an experi- next logical step.
mental setting. In the dynamic capabilities frame-

30 In particular, the dynamic capabilities framework

29 Google recently set out to test whether management recognizes that (1) not all firms are at the best practice
matters at Google. They found that "even 'the smallestfrontier and (2) even those that have adopted best prac-
incremental increases in manager quality were quite tice may be producing the "wrong" products (relative to
powerful'" (Garvin, 2013, p. 77, citing Neal Patel, co- current market requirements and technological opportu-
leader of Google's internal study). nities) and they would do better to innovate.

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
348 The Academy of Management Perspectives November

CONCLUSIONS and investment decisions and motivates the quest

for understanding enterprise survival and growth.
Developments in the global economy have
Teece and colleagues (1997) specified that rapid
placed a premium on the ability of companies to
(technological) change gave salience to dynamic
become entrepreneurial and agile at home and
capabilities. In essence, rapid change requires firms
abroad, requiring in turn that management for-
to create and co-create, and to consistently assess
mulate and follow good strategies and organize to
and reassess whether they are fully taking advan-
allow and promote flexibility, learning, and, of
tage and contributing to the development of tech-
course, innovation. This is the price of survival
nological and market opportunities that provide
and growth in much of today's global economy.
what customers want, when they want it, and at
However, economic theory, if not management
desirable price points. In recent decades, the forces
theory, is decades behind in recognizing these
new realities.
of globalization have amplified competition, expos-
ing more markets to rapid change. This required
The thesis advanced here is that good strategy,
new business models and made dynamic capabili-
ownership of (or access to) VRIN resources, access
ties more salient. While globalization is by no
to (but not necessarily ownership of) strong ordi- means complete - in fact, semiglobalization (Ghe-
nary capabilities, scale (of some kind, in some mawat, 2003) is a more accurate characterization -
circumstances), and strong dynamic capabilities globalization is unlikely to be reversed, short of a
augment the chances of an enterprise achieving global economic calamity triggering a return to
long-term enterprise growth and survival. Put dif- autarky.
ferently, what I referred to earlier as d-ineffective In the dynamic capabilities framework, it is only
firms - those with weak dynamic capabilities - will what I call d-effective firms that are built to last.
have a short life, even if they don't suffer fromOrdinary capabilities are less salient and can often
x-inefficiency. be outsourced. Efficiency alone is not enough for
We have here the outlines of a (dynamic capabil- survival and growth. Capability theory provides the
ities) theory of firms, one that encompasses howtools to allow (strategic) management theory to in-
firms survive, grow, and prosper. As Gibbonsform a deeper understanding of durable firm-level
(2005) noted, resources/capabilities approaches competitiveness, economic development, and the
have "mouth-watering potential implications" for a proper functioning of the economic system.
formal theory of organizational development (2005,
p. 202). The dynamic capabilities framework is dis-
tinguished from related approaches, such as Nona-
REFERENCES
ka's (1994) knowledge spiral, O'Reilly and Tush-
man's (2004, 2008) ambidexterity, March's (1991) Adner, R., & Helfat, C. E. (2003). Corporate effects and
exploration and exploitation, or Argyris's (1976) dynamic managerial capabilities. Strategic Manage-
double-loop learning in that it takes imitability and ment Journal, 24(10), 1011-1025.
appropriability into account and shows how re- AFP. (2013, February 12). Apple still has "magic," inno-
sources and strategy are intertwined with, and re- vation, says CEO Cook, afp.com. Retrieved from
late to, dynamic capabilities in establishing and http://www.globalpost.com/dispatch/news/afp/
sustaining competitive advantage. 13021 2/apple-still-has-magic-innovation-says-ceo-
cook-0
With the dynamic capabilities framework, I
would like to believe that we are indeed a few steps Ambrosini, V„ Bowman, C., & Collier, N. (2009). Dy-
closer to a truly fundamental understanding of the namic capabilities: An exploration of how firms re-
origins of firm-level heterogeneity and the sources new their resource base. British Journal of Manage-
ment, 20{ si), S9-S24.
of enterprise-level value creation, capture, and
growth. No other framework is as ambitious in its Arend, R., & Bromiley, P. (2009). Assessing the dynamic
reach. As noted earlier, understanding the origins capabilities view: Spare change, everyone? Strategic
of long-term cash flow generation is the fundamen- Organization, 7(1), 75-90.
tal question in strategic management and also the Argyris, C. (1976). Single-loop and double-loop models
deepest unanswered question in microeconomic in research on decision making. Administrative Sci-
and financial theory. Nor is it adequately addressed ence Quarterly, 363-375.
by organization theory. It is the question that di-Augier, M., & Teece, D. J. (2008). Strategy as evolution
rectly and indirectly animates management theory with design: The foundations of dynamic capabili-

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 2014 Teece 349

ties Retrieved from http://www.chinaeconomicreview

and the
tem. com/content/original-recipe
Organ
Coase, R. A. (1937). The nature
Augier, M.,of the firm. Económic
and the16(4), 386-405. rol
economic pe
Collis, D. J. (1994). Research note: How valuable are
410-421.
organizational capabilities? Strategic Management
Journal,
Bardolet, D., Lovallo, D., & Teece, D. J. (2014). Firm level 15(S 1), 143-152.
dynamic capabilities and resource allocation:
Cyert, The
R. M., & March, J. G. (1963). A behavioral theory of
empirical foundations of financial agility. Manu-
the firm. Englewood Cliffs, NJ: Prentice Hall.
script submitted for publication.
D' A veni, R. A. (1994). Hypercompetition : Managing the
Barney, J. B. (1986). Organizational culture: Candynamics
it be aof strategic maneuvering. New York: Free
source of sustained competitive advantage? Press.
Acad-
emy of Management Review, 11( 3), 656-665. Danneels, E. (2002). The dynamics of product innovation
Barney, J. B. (1991). Firm resources and sustained and firm competences. Strategic Management Jour-
com-
petitive advantage. Journal of Management, nal, 23(12), 1095-1121.
17(1),
99-120.
Danneels, E. (2011). Trying to become a different type of
company: Dynamic capability at Smith Corona. Stra-
Barney, J. B., & Clark, D. N. (2007). Resource-based the-
ory: Creating and sustaining competitive advantage tegic
. Management Journal, 32(1), 1-31.
Oxford, UK: Oxford University Press. Di Stefano, G., Peteraf, M., & Verona, G. (2014). The
organizational drivetrain: A road to integration of
Bartlett, C. A., & Ghoshal, S. (2002). Managing across
dynamic capabilities research. Academy of Manage-
borders: The transnational solution (2nd ed.). Cam-
bridge, MA: Harvard Business School Press. ment Perspectives, this issue.
Dosi,Fried
Bartlett, C. A., & Rangan, U. S. (1986). Kentucky G., Faillo, M., & Marengo, L. (2008). Organizational
capabilities, patterns of knowledge accumulation
Chicken (Japan) Limited (Case No. 9-387-043). Bos-
ton: Harvard Business School. and governance structures in business firms: An in-
troduction. Organization Studies, 29(8-9), 1165-
Bloom, N., Eifert, B., Mahajan, A., McKenzie, D., & Rob- 1185.
erts, J. (2013). Does management matter? Evidence
from India. Quarterly Journal of Economics, 128(1),
Drnevich, P. L., & Kriauciunas, A. P. (2011). Clarifying
the conditions and limits of the contributions of
1-51.
ordinary and dynamic capabilities to relative firm
Bloom, N., Genakos, C., Sadun, R., & Van Reenen, J.
performance. Strategic Management Journal, 32(3),
(2012). Management practices across firms and
254-279.
countries. Academy of Management Perspectives,
Easterby-Smith, M., & Prieto, I. M. (2008). Dynamic
20(1), 12-33.
pabilities and knowledge management: An integr
Bloom, N., & Van Reenen, J. (2007). Measuring and ex-
tive role for learning? British Journal of Manag
plaining management practices across firms and ment, 19(3), 235-249.
countries. Quarterly Journal of Economics, 122(4),
Eisenhardt, K. M., & Martin, J. A. (2000). Dynamic capa
1351-1408.
bilities: What are they? Strategic Management Jour
nal, 21( 10-11), 1105-1121.
Burrows, P. (2004, October 12). The seed of Apple's inno-
vation. Businessweek.com . Retrieved from http://
Garvin, D. A. (2013). How Google sold its engineers
www.businessweek.com/print/bwdaily/dnflash/
management. Harvard Business Review, 91(12), 74
oct2004/nf20041012_4018_db083.htm 82.

Butler, D. A. (2006). Distant victory: The battle of Gerstner,

Jutland L. V. (2002). Who says elephants can't dance?
and the Allied triumph in the First World War. West- Inside IBM's historic turnaround. New York: Harper-
port, CT: Praeger Security International. Business.

Chandler, A. D. (1977). The visible hand . Cambridge,

Ghemawat, P. (2003). Semiglobalization and interna-
MA: Harvard University Press. tional business strategy. Journal of International
Chesbrough, H. W. (2003). Open innovation: The Business
new Studies, 34(2), 138-152.
imperative for creating and profiting from technol-
Gibbons, R. (2005). Four formal(izable) theories of the
ogy . Boston: Harvard Business School Press. firm? Journal of Economic Behavior and Organiza-
tion, 58(2), 200-245.
China Economic Review. (2011, November 1). Original rec-
ipe: KFC remains far ahead of McDonald's in China.
Gilbert, C. G. (2005). Unbundling the structure of inertia:

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 350 The Academy of Management Perspectives November

Resource versus routine rigidity.http://online.wsj.com/article/SBl000142405297

Academy of Man-
204058404577111091095438300.html
agement Journal 40(5), 741-763.
Gratton, L., & Ghoshal, S. (2005). Beyond
Kirkpatrick, best
D. (1998, practice.
November 9). The second coming
MIT Sloan Management Review of , Apple.
46(3), 49-57.
Fortune . Retrieved from http://money.cnn.
Greiner, L. E. (1998). Evolution andcom/magazines/fortune/fortune_archive/l
revolution as organ- 998/11/
09/250834/index.htm
izations grow. Harvard Business Review , 76(3), 55-
60.
Kleinbaum, A. M., & Stuart, T. E. (2014). Network respon-
siveness: The social structural microfoundations of
Grindley, P. C., & Teece, D. J. (1997). Managing intellec-
tual capital: Licensing and cross-licensing in elec- dynamic capabilities. Academy of Management Per-
tronics. California Management Review, 39[ 2), 8-41. spectives, this issue.

Grove, A. S. (1996). Only the paranoid survive: How Lall,

to S., & Teubal, M. (1998). "Market-stimulating" tech-
exploit the crisis points that challenge every com- nology policies in developing countries: A frame-
pany and career . New York: Currency Doubleday. work with examples from East Asia. World Develop-
ment, 26(8), 1369-1385.
Hannan, M. T., & Freeman, J. (1977). The population
ecology of organizations. American Journal of Soci- Lashinsky, A. (2011, August 25). How Apple works: In-
ology , 62(5), 929-964. side the world's biggest startup. Fortune . Retrieved
from http://tech.fortune.cnn.com/2011/08/25/how-
Hayek, F. A. (1945). The use of knowledge in society.
apple-works-inside-the-worlds-biggest-startup
American Economic Review , 35(4), 519-530.
Leibenstein, H. (1966). Allocative efficiency vs. "X-inef-
Hayek, F. A. (1989). The pretense of knowledge. Ameri-
ficiency." American Economic Review, 56(3), 392-
can Economic Review ; 79(6), 3-7. 419.

Helfat, C. E., & Eisenhardt, K. M. (2004). Inter-temporal

Lippman, S. A., & Rumelt, R. P. (1982). Uncertain imita-
economies of scope, organizational modularity, and
bility: An analysis of inter-firm differences in effi-
the dynamics of diversification. Strategic Manage-
ciency under competition. Bell Journal of Econom-
ment Journal, 25(13), 1217-1232.
ics, Í 3(2), 418-438.
Helfat, C. E., Finkelstein, S., Mitchell, W., Peteraf, M. A.,
Lutz, B. (2011, June 11). Life lessons from the car guy.
Singh, H., Teece, D. J., & Winter, S. G. (2007). Dy-
WSJ.com. Retrieved from http://online.wsj.com/
namic capabilities: Understanding strategic change article/SBl000142405270230425930457637579023
in organizations . Oxford, UK: Blackwell. 7203556.html
Helfat, C. E., & Peteraf, M. A. (2014). Managerial cogni-
March, J. G. (1991). Exploration and exploitation in or-
tive capabilities and the microfoundations of dy-
ganizational learning. Organization Science, 2(1),
namic capabilities. Strategic Management Journal, 71-87.
in press. Retrieved from onlinelibrary.wiley.com/
enhanced/doi/10.1002/smj2.2247 March, J. G., & Simon, H. A. (1958). Organizations . New
York: Wiley.
Helfat, C. E., & Winter, S. G. (2011). Untangling dynamic
Nelson,
and operational capabilities: Strategy for the (n)ever- R. R., & Pack, H. (1999). The Asian miracle and
changing world. Strategic Management Journal, modern economic growth. Economic Journal,
32(11), 1243-1250. 109(457), 416-436.

Hoffman, F. (2004). What we can learn from Jackie Nelson, R. R., & Winter, S. G. (1982). An evolutionary
Fisher. Naval Institute Proceedings, 130{ 4), 68-71. theory of economic change. Cambridge, MA: Har-
vard University Press.
Jacobides, M. G., & Winter, S. G. (2012). Capabilities:
Structure, agency, and evolution. Organization Sci- Nonaka, I. (1994). A dynamic theory of organizational
ence, 23(5), 1365-1381. knowledge creation. Organization Science, 5(1), 14-
37.
Jensen, M. C. (2000). A theory of the firm: Governance,
residual claims, and organizational forms . Cam- Nonaka, I., & Toyama, R. (2007). Strategic management as
bridge, MA: Harvard University Press. distributed practical wisdom (phronesis). Industrial
and Corporate Change, 26(3), 371-394.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the
firm: Managerial behavior, agency costs and owner- O'Reilly, C. A., & Tushman, M. L. (2004). The ambidex-
ship structure. Journal of Financial Economics, 3(4), trous organization. Harvard Business Review, 62(4),
305-360. 74-81.

O'Reilly,
Kesmodel, D. (2011, December 30). Boeing examines sup- C. A., & Tushman, M. (2008). Ambidexterit
a dynamic capability: Resolving the innovator'
ply chain for weak links. WSJ.com . Retrieved from

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
 2014 Teece 351

lemma. Res
Teece, D. J. (1980). Economies of scope and the scope of
185-206. the enterprise. Journal of Economic Behavior and
Organization, 1(3), 223-247.
Penrose, E. T. (1959). The theory of the growth of the
firm. New York: John Wiley. Teece, D. J. (1981). The market for know-how and the
Peteraf, M., Di Stefano, G., & Verona, G. (2013). The efficient international transfer of technology. Annals
of the American Academy of Political and Social
elephant in the room of dynamic capabilities: Bring-
Science, 458(1), 81-96.
ing two diverging conversations together. Strategic
Management Journal , 34(12), 1389-1410. Teece, D. J. (1982). Towards an economic theory of the
multiproduct firm. Journal of Economic Behavior
Pisano, G., & Teece, D. J. (2007). How to capture value
and Organization, 3(1), 39-63.
from innovation: Shaping intellectual property and
industry architecture. California Management Teece,
Re- D. J. (1986). Profiting from technological innova-
view 50(1), 278-296. tion. Research Policy, 15(6), 285-305.
Pitelis, C. N., & Teece, D. J. (2009). The (new) nature and Teece, D. J. (1992). Competition, cooperation, and inno-
essence of the firm. European Management Review, vation: Organizational arrangements for regimes of
0(1), 5-15. rapid technological progress. Journal of Economic
Behavior and Organization, 18(1), 1-25.
Richardson, G. B. (1972). The organisation of industry.
Economic Journal, 82(327), 883-896. Teece, D. J. (2000). Managing intellectual capital: Orga-
nizational, strategic, and policy dimensions . Oxford,
Ries, E. (2011). The lean startup: How today's entrepre-
UK: Oxford University Press.
neurs use continuous innovation to create radically
successful businesses. New York: Crown Business. Teece, D. J. (2006). Reflections on profiting from innova-
tion. Research Policy, 35(8), 1131-1146.
Robbins, L. (1932). An essay on the nature & significance
of economic science . London: Macmillan. Teece, D. J. (2007). Explicating dynamic capabilities: The
nature and microfoundations of (sustainable) enter-
Roberts, J. (2004). The modern firm: Organizational de-
prise performance. Strategic Management Journal,
sign for performance and growth . New York: Oxford
28(13), 1319-1350.
University Press.
Rose, G. (2013). Generation kill: A conversation with
Teece, D. J. (2009). Dynamic capabilities and strategic
management: Organizing for innovation and growth.
Stanley McChrystal. Foreign Affairs, 92(4), 2-8.
New York: Oxford University Press.
Rosen, S. (1997). Austrian and neoclassical economics:
Teece, D. J. (2011a). Achieving integration of the business
Any gains from trade? Journal of Economic Perspec-
tives, 11(4), 139-152.
school curriculum using the dynamic capabilities
framework. Journal of Management Development,
Rumelt, R. (2011). Good strategy/bad strategy : The dif- 30(5), 499-518.
ference and why it matters . New York: Crown Busi-
ness.
Teece, D. J. (2011b). Human capital, capabilities and the
firm: Literati, numerati, and entrepreneurs in the
Schilke, O. (2014). Second-order dynamic capabilities:
21st-century enterprise. In A. Burton-Jones & J.-C.
How do they matter? Academy of Management Per-
Spender (Eds.), The Oxford handbook of human
spectives, this issue. capital (pp. 527-562). Oxford, UK: Oxford Univer-
Sellers, P. (1993, April 19). Can this man sity
savePress.IBM?
Fortune . Retrieved from http://archive.fortune.
Teece, D. J. (2012a). Next-generation competition: New
com/magazines/fortune/fortune_archive/1993/04/
concepts for understanding how innovation shapes
19/77748/index.htm competition and policy in the digital economy. Jour-
Sirmon, D. G., Hitt, M. A., & Ireland, D. (2007). Managing nal of Law, Economics and Policy, 0(1), 97-118.
firm resources in dynamic environments to create Teece, D. J. (2012b). Dynamic capabilities: Routines ver-
value: Looking inside the black box. Academy of sus entrepreneurial action. Journal of Management
Management Review, 32(1), 273-292. Studies, 49(8), 1395-1401.
Smith, A. (1776/1904). In E. Cannan (Ed.), An inquiry Teece, D. J. (2014). A dynamic capabilities-based entre-
into the nature and causes of the wealth of nations. preneurial theory of the multinational enterprise.
London: Methuen and Co, Ltd. Retrieved from Journal of International Business Studies, 45(1),
http://www.econlib.org/library/Smith/smWN.html 8-37.

Sutton, J. (1990). Explaining everything, explaining noth- Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynam
ing? Game theoretic models in industrial economics. capabilities and strategic management. Strategi
European Economic Review, 34(2), 505-512. Management Journal, 18(7), 537-533.

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms
352 The Academy of Management Perspectives November

chusetts Institute of
Tripsas, M., & Gavetti, G. (2000). Capabilities, Technology 5-million-dollar
cognition,
and inertia: Evidence from digital5-year
imaging.
study on the future
Strategic
of the automobile. New
York:1147-1161.
Management Journal , 2i(10-ll), Rawson Associates.

Zahra, S. A.,
Van Mieghem, J. A. (2008). Operations Sapienza, H. J.,
strategy: & Davidsson, P. (2006).
Princi-
Entrepreneurship
ples and practices . Belmont, MA: Dynamic and Ideas.
dynamic capabilities: A re-
view, model
Wernerfeit, B. (1984). A resource-based viewand research
of the agenda. Journal of Man-
firm.
Strategic Management Journal , agement
5(2), Studies , 43{ 4), 917-955.
171-180.
Williamson, O. E. (1975). Markets and hierarchies. New
York: Free Press.

Williamson, O. E. (1985). The economic institutions of

capitalism . New York: Free Press. David
Chair and director of the Tusher Center for Intellectual
Williamson, O. E. (1999). Strategy research: Governance
and competence perspectives. Strategic Manage- Capital at the Haas School of Business at the University
ment Journal , 20(12), 1087-1108. of California, Berkeley. He is also chairman of the Berke-
ley Research Group and has published more than 20
Winter, S. G. (2003). Understanding dynamic capabili- books and 200 articles on the role of technology and
ties. Strategic Management Journal, 24{ 10), 991-995. capabilities in enterprise performance.
Womack, J. P., Jones, D. T., & Roos, D. (1990). The ma-
chine that changed the world: Based on the Massa-

This content downloaded from

193.54.67.93 on Sun, 25 Sep 2022 15:05:53 UTC
All use subject to https://about.jstor.org/terms