To Teece, “the field of strategic management has been stranded for some time with a framework that implicitly assumes that industry structure (and product market share), mediated by enterprise behavior, determines enterprise performance.” The target of his concern is clear. Michael Porter’s framework, anchored in industrial organization economics, conceives of the firm as a black box and ignores its inner workings, neglecting the vital role of managerial decisions. Unsatisfied with this approach, Teece looks inside the firm and sees it as a set of distinctive capabilities. Companies are notable not for the positions they occupy in an industry landscape, but for the things they actually do: how they learn from their environment, how they combine ideas as they seek to develop new products, how they deliver services to customers, how they develop the talents of employees, and more. Further, these many capabilities differ from company to company because of the deliberate actions of managers. In Teece’s vision, understanding managers and the decisions they make is central to understanding company strategy and performance.
Moreover, in a competitive market economy, capabilities must be constantly reinvented and reapplied if firms are to maintain high performance. Last year’s capabilities are inadequate; new combinations are necessary. Thus, writes Teece, dynamic capabilities form the foundation of competitive advantage, for “the extent to which an enterprise develops and employs superior (nonimitable) dynamic capabilities will determine the nature and amount of intangible assets it will create.”
How do managers renew their firm’s capabilities? First by sensing new opportunities in a shifting landscape of competition and technology, and then by seizing opportunities through managerial initiatives, which in turn lead to reconfiguring capabilities. In all this, the manager plays a central role: Resources do not effortlessly combine and recombine to create new capabilities, but are manipulated by the actions of managers who function as internal entrepreneurs. Teece scolds those who build models of strategy on theoretical foundations that emphasize market structure but overlook the importance of managerial behavior: “The cavalier treatment of entrepreneurship and management in economics stems in part from a failure to understand the importance of managing organizations and the absence of well-developed and well-functioning markets for intangibles and other idiosyncratic assets.”
Dynamic Capabilities and Strategic Management is a succinct statement of what has come to be the prevailing academic school of thought in the field of strategy. It’s not hard to see why. In a world where profits erode thanks to increasingly intense competition, or so-called hypercompetition, only the ability to continually generate distinctive capabilities is likely to lead to success. Yet one of the criticisms that can be leveled against The Invisible Edge can be raised here, too. Viewed in retrospect, successful companies can always be said to have mastered dynamic capabilities, whereas failed companies can always be said to have been unable to satisfactorily sense, seize, or reconfigure. A second-order question of vital importance is not entirely resolved: What can be done to improve our ability to generate distinctive capabilities, not just once, but over and over — and defy gravity as long as possible?
The importance of managerial decisions in strategy brings us to Innovation Corrupted: The Origins and Legacy of Enron’s Collapse, by Malcolm S. Salter, the James J. Hill Professor of Business Administration Emeritus at Harvard Business School. On a superficial level, the demise of Enron is a story of dishonesty and reckless behavior, made possible by a lack of internal and external oversight. It’s tempting to blame Enron’s executives for arrogance, greed, and hubris — the same explanations offered for so many Wall Street failures in the past year. And to be sure, Jeffrey Skilling, Andy Fastow, and the late Ken Lay make excellent villains. But Salter, a veteran observer of the world of management, looks below the surface.