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The Dynamic Capabilities of David Teece

Nokia had a research lab in Berkeley, but their base of operations was far away, in Finland, and they relied too much on their own R&D. They tapped into the science, but they missed the state of mind.

S+B: How did your idea of dynamic capabilities evolve?
In the 1980s and 1990s, I taught classical microeconomics to MBA students at Stanford and Berkeley, and one of the ideas we discussed was that a firm was a “black box.” [This theory implied that] managers of different firms would respond in the same way to external events. Some business students began asking why the theories ignored the fact that different companies had different levels of capabilities, which was obvious to anyone in the technology industries. It was also present in the cases we studied—but went unrecognized.

For instance, my own early work had focused on why companies profited (or didn’t profit) from innovation. In 1986, I had published a case story on the EMI Group, a wonderfully innovative company that failed in the marketplace. Until it went bankrupt and was sold in 2012, EMI was a diversified technology enterprise based in London. During World War II, it built the first airborne onboard radar, on the Bristol Beaufighter aircraft. In the 1960s, it was the Beatles’ first recording label. Then in 1967, an EMI electrical engineer named Godfrey Hounsfield started work on the first commercially viable computed tomography (CT) scanner. He introduced it at a radiology conference in 1971, and it became instantly famous in the profession. This was a brilliant effort, the greatest contribution to radiography since X-rays, one of the earliest devices to combine hardware and software into a single dedicated machine, and a machine that changed the world. Hounsfield won the Nobel Prize in 1979 for it. But EMI never profited from the CT scanner. It made only a few of them at first, one of which it sold to General Electric.

Stories like this tend to be told as failures of strategy. But EMI’s leaders knew that the United States was the most viable market for their product. Unfortunately, they lacked the marketing and manufacturing capabilities to succeed there. They spent a couple hundred million dollars getting a factory in place, but by the time it was complete, GE and Siemens had reverse engineered the CT scanner and taken the market over. EMI ended up with nothing, other than copyright claims in an infringement lawsuit. It wasn’t a failure in strategy. They lacked capabilities.

So I set out on my own inquiry about capabilities. I found intellectual support from non-mainstream economists who were interested in innovation and evolutionary economics: Sidney G. Winter (then at Yale, now at Wharton) and Richard R. Nelson [now professor emeritus] at Columbia. In 1997, I published my first paper on the subject [“Dynamic Capabilities and Strategic Management,” Strategic Management Journal, August 1997], with Gary Pisano (now at Harvard) and Amy Shuen (who went on to teach at San Jose State). Along with Jensen and Meckling’s paper on the agency theory of the firm, it’s one of the two most cited papers in economics and business.

S+B: How do intellectual property rights and capabilities fit together?
Unless you have truly fundamental inventions that no one else can copy, you need both. Strong intellectual property protection, in itself, will only help you on the first round of innovation. During that time, you can rent other people’s complementary capabilities. But sooner or later, you’re going to get copied, so you’ve got to move quickly to build the capabilities you need for the second round, and to try and preserve as much of the proprietary aspect of the technology as you can.

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