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Meeting 2-Group 1 - Adapting To Fast-Changing Markets and Technologies PDF
Meeting 2-Group 1 - Adapting To Fast-Changing Markets and Technologies PDF
George S. Day
Paul J.H. Schoemaker
The dynamic capabilities framework identifies three components as critical for successful organizational adaptation:
sensing, seizing and transforming. By contrasting two distinct business cases, a long-term biofuel investment by
DuPont and Novartis’s rapid deployment of digital technologies in marketing, this article assesses the managerial
implications of each of these components. It develops an embryonic contingency model that illustrates why the
relative importance of dynamic capabilities varies across firms. The article also highlights the critical role played
by strategic leaders, who must selectively adapt and refine dynamic capabilities and also serve as a last line
of defense in times of rapid change. (Keywords: Networks, Technological Change, Market Analysis, Innovation,
Creative Collaboration, Entrepreneurship, Crowdsourcing, Databases, Business-Government Relations)
W
hy are some firms adept at anticipating and exploiting the oppor-
tunities created by technology advances and rapid changes in
their markets, while others struggle or go out of business? In
addressing this question, we’ll use a dynamic capabilities lens,
following Teece and his colleagues.1 Dynamic capabilities enable firms to sense oppor-
tunities sooner than rivals, seize them more effectively, and support the organizational
transformation needed to stay ahead. When guided by a clear strategic vision, they
enable a firm to keep adapting to fluid and uncertain conditions.2
We aim to advance dynamic capabilities theory by showing how strategic leaders
can make judicious choices about which capabilities to develop, depending on the situa-
tion. Our examination will contribute to an embryonic contingency theory of the role
and functioning of different dynamic capabilities3 and help managers determine the
specific sub-capabilities they need to develop. We focus on six sub-capabilities specifi-
cally, which we derived deductively from existing theory and studies of best practice,
as well as inductively from two longitudinal cases representing very different domains.
The authors thank Nikhil C. Das, Nicholas W. Rhodes, Paul S. Schoemaker, and Eric Skoritowski of Decision
Strategies International for their great help in researching the two case studies, as well as the Mack Institute
for Innovation Management at the Wharton School for its partial funding of this research project.
Framework of
Sensing Seizing Transforming
Teece & Colleagues
Why and How They Illustrated by comparing DuPont’s Biofuel R&D investments with
Are Contingent Novartis’ Digital Marketing Strategy on the Commercial Side
Peripheral Vision
This sub-capability is more than the familiar corporate foresight activities of
analyzing the implications of identifiable trends.8 Instead, the intent is to see signals
of potential opportunities and nascent threats sooner than rivals. As with human
vision, the periphery is the fuzzy zone outside the area of primary focus.9 For organ-
izations, the periphery is difficult to see and hard to scan because of an adverse signal
to noise ratio. Information overload, distributed intelligence, and confusion are seri-
ous impediments to improving peripheral vision. To address this difficulty, a strong
peripheral vision capability requires two critical steps.
The first step, scoping, concerns how widely to scan and what issues to
address first. Managers can use various guides to ensure that their scope is neither
too broad nor too narrow, and thus avoid being overwhelmed with too many weak
signals or missing important parts of the total picture. These guides are much
broader than those used to run the present business.
Guides that frame and expand the scope emerge from three areas. First, learn
from the past, through analyzing past blind spots or finding an instructive analogy
from other industries. Second, examine the present to focus on signals that are right
in front of the leadership team but are not yet noticed or appreciated. Most surprises
have some antecedents; however, people have powerful tendencies to ignore warn-
ing signals and pretend all is well.10 There is much to be learned from mavericks, out-
liers, and defecting customers, for example. Third, envision new futures. This enquiry
can be aided by scenario thinking since this method aims to magnify important weak
signals by providing a broader context that makes them more salient. If different
scenarios highlight a particular weak signal, which may have more or less strategic
significance, the organization is less likely to be overconfident and become locked
into a single myopic view that filters out a telling signal.11
The second step in the peripheral vision sub-capability is scanning. There is
an important difference between active and passive scanning methods. All man-
agers scan, but often do so passively. They are continually exposed to a wealth
of data ranging from the fuzzy impression of trade rumors to harder evidence
Vigilant Learning
Scanning for weak signals begins the process of sensing change in the external
environment. The next sensing sub-capability requires interpreting the signals in an
exploratory as well as a vigilant manner. Vigilance in this context refers to a height-
ened state of awareness and curiosity, characterized by alertness, curiosity, and a
willingness to act on partial information. Being mindful, as defined in Ellen Langer’s
well-known book on the subject, refers to an emphasis on process over outcome,
giving freer rein to intuition and creativity, and being open to new information
and perspectives.12 Organizations can learn to see sooner by:
§ Fostering a Robust Market Orientation—Successful firms have superior skills in
understanding customers and competitors, and in attracting as well as
retaining highly valuable customers. Thus, they are able to make decisions
from the outside in.13
§ Filtering Out the Filterers—Consider an organization that was “surprised” by
some circumstance or event. Usually there were a handful of people, within
the organization or its extended network, who knew what was at stake—but
they failed to raise their voice. Senior decision makers did not know how to
identify and/or empower those people to speak—and conversely, these indi-
viduals lacked full understanding of the implications of their knowledge.
Frequent and wide communication, with an exploratory frame of mind,
can help overcome the problem of distributed intelligence in organizations.
§ Suppressing Biases—Prevailing habits of thinking can inhibit an open-minded
interpretation of ambiguous information. While groupthink is particularly
pernicious, the common human tendency to jump to the most convenient
conclusion, and then seek evidence to confirm that judgment, further distorts
the picture.
§ Triangulating Perspectives on a Complex Issue—Leonardo da Vinci, the gifted
Renaissance artist and inventor, emphasized the virtue of looking at things
from at least three different points of view.14 Just as a GPS uses three coordi-
nates to place you on a map, managers should use multiple enquiry methods
to clarify ambiguous signals, and then probe deeply to learn more about
promising patterns.
Applications of these sense-making capabilities require considerable customi-
zation to the firm’s strategy and context. For example, vigilant learning about new
market opportunities requires: a willingness to be immersed in the lives of current,
prospective, and past customers to learn how they process data and respond to
new stimuli; an open-minded approach to exploring and identifying latent needs
or learning from lead customers; and early insights into emerging microsegments
using data analytics.15
Probe-and-Learn Experimentation
Small, well-designed experiments that explore new strategic initiatives
allow for the type of sequential investments that are most likely to generate posi-
tive results.16 For example, rapid prototyping, via quasi-experimental designs, can
greatly aid complex design decisions.17 The best firms elevate this practice to a
dynamic capability that can be deployed on many fronts, provided three condi-
tions are met. First, the organization must nurture an experimental mindset,
including a willingness to challenge existing (and even sacred) beliefs.18 Second,
teams employing this method must be able to codify and share their insights.
New software tools, including advances in data analytics, can help teams keep
track of test and control groups as well as help identify the attributes that most
affect performance. Third, firms must look beyond their own organizational and
market boundaries, probing for insights from a wide array of peer companies, pre-
cursors, and network partners.
Trial-and-error learning requires leaders to actively cultivate and support a
culture in which mistakes are tolerated and even encouraged at times. Although
careless or negligent failures should be avoided, no organization can learn if it pur-
sues a policy of zero tolerance for failure. It isn’t enough to simply pay lip service to
the idea that “mistakes will be tolerated.” It takes deliberate effort to foster a climate
in which learning from failures is possible and experimentation is a norm.
A firm with failure tolerance is one in which leaders recognize that every
setback has a silver lining in terms of the potential for insight. For example, lead-
ers might conduct post mortems for every major project and investment, even and
especially those that were not broadly considered a success. At the next level,
leaders can recognize and laud not just projects that have succeeded, but a few
that failed—boldly, and for the right reasons. A valuable example of this approach
is the Danish company Grundfoss, the world’s leading pump manufacturer. At
Grundfoss, assembly line workers are asked to document things that almost went
wrong. They learn as much from these near misses as from actual mistakes, just as
the U.S. Civil Aeronautics Board does from close calls involving airplanes.
Organizational Redesign
A classic example of the power of restructuring is General Motor’s transition
during the 1930s from a functional design to a multi-divisional form under the able
leadership of Alfred Sloan. This redesign was crucial to implementing GM’s strategy
of competing against Ford’s black model T by greatly diversifying GMs product
offerings. This bold move gave rise to the Cadillac, Oldsmobile, Chevrolet and other
divisions within GM which could operate with greater autonomy. To fully pursue
innovative options may require some organizational separation from the parent,
but how much entails many leadership judgments. It took Alfred Sloan and his
team over a decade to get it fully right, as detailed in his memoir My Years with
General Motors. A contrasting case is the slow and inadequate organizational trans-
formation attempted by Kodak.
The Kodak case is not one where leaders failed to anticipate change or cre-
ate options. Eastman Kodak had developed some of the earliest digital technolo-
gies for photography. Both its scientific staff and senior leaders recognized how
disruptive the digital revolution could be. However, they seriously underestimated
its speed and breadth. Kodak had launched numerous digital projects early on,
with technological advantages in many. However, these electronic imaging activi-
ties were widely dispersed, without a cohesive strategy and limited accountability
for market performance.
When it became clear that more focus was needed around digital strategies,
Kodak brought in a very successful outside CEO in 1993 named George Fisher
who had led Motorola to great success as CEO there. Fisher assembled all of
Kodak’s digital imaging projects into a single autonomous digital division, and
charged that division with launching new products. In a marked departure from
the dominant culture, which encouraged teams to “go it alone,” Fisher also initi-
ated a number of joint alliances for digital imaging projects. To the “old guard” at
Kodak, Fisher’s moves seemed bold, even aggressive. In retrospect, however,
these maneuvers proved to be too little too late, especially since the company’s
silent middle was not on board. Middle managers did not understand the need
for urgency, felt threatened, and in many small ways retarded progress.
Organizational separation may make or break new strategic initiatives. How
much independence is needed in any case depends on the magnitude of the tech-
nological discontinuity, the speed of change, and whether the new strategy threat-
ens to undercut the competencies of the core business. The greater the differences,
the less the new business should be tied to the mothership and the more it needs its
own capabilities and freedom.20
Many large companies establish separate organizations dedicated to pursu-
ing new endeavors that don’t fit well. At their best, these “cocoons” generate inter-
nal flexibility and entrepreneurial dynamism. GM’s Saturn division, IBM’s PC unit,
and Roche’s Genentech investment are well-known examples. By “cocooning” a
new business, a firm establishes boundaries so that the new group can “experiment
within bounds”—trying out new approaches while still benefiting from the resour-
ces and experience of the parent organization.
For completely new and disruptive technologies, both physical and structural
separation may be necessary, such as a separate division that reports to senior
management or even an equity spin-out. When such a full degree of separation
is not warranted, it is still desirable to have separate funding and accounting, so that
losses from the new projects are not carried by an established business unit. The
new venture may also need its own policies that match the realities of building a
new business. It must be able to attract the best personnel and have the latitude
to do fast prototyping and probe ill-defined markets, all while keeping restrictive
or slow controls and burdensome overhead to a minimum.
External Shaping
In addition to internal redesign, transforming is also about renegotiating
the environment and shaping a company’s ecosystem. This can be done through
joint lobbying, creating new industry standards, or by reshaping the firm’s busi-
ness ecology. The latter is an especially powerful transforming capability since it
relies extensively on external networks. People inside the firm as well as outside
are connected to numerous networks. Consumers are connected through thou-
sands of social sites; companies are moving from supply chains to supply net-
works, and the focus of innovation is shifting outside the firm to diverse open
business ecologies. Advances in knowledge sharing, coordination, and pattern rec-
ognition technologies are slowly but surely unbundling the vertical, silo organiza-
tional structures of the past.21 External networking and co-creation, however,
require strong relational capabilities in order to fully access the resources of many
partners.22
Loosely coupled networks have long been used to create supportive ecosys-
tems for companies to enhance their competitive position and strengthen their oper-
ational capabilities.23 In addition, these external networks can also enhance the
firm’s ability to scan for, sense, and adapt to early signals of threats and opportunities
beyond the boundaries of the firm. The firm’s ecosystem can serve as a strategic radar
system, using its multiple touch points to pick up weak signals and thereby accelerate
the sensing process.24
Sensing
The crucial sensing period preceding DuPont’s biofuel initiative began a
decade prior to its launch. Since the early 1990s, DuPont possessed the capabilities
to make renewable polymers. The company could not do so profitably due to the
high costs of producing a key ingredient, Propanediol (PDO), needed in its hydro-
carbon-based chemical process. To solve this problem, DuPont began experiment-
ing with ways of producing PDO through biotechnology by using living organisms
to synthesize the compound. The project used organisms called methanotropes,
which required large amounts of methane and a fermenter to implement. DuPont
found a company in Norway that had already built a fermenter to handle meth-
ane generated as a by-product of oil production and approached them to create
an alliance. Combined with DuPont’s own software, the Norwegian hardware
allowed the concept to be tested without massive investments and risk. The testing
resulted in the successful development of a new process that could cost-effectively
produce PDO from corn starch (Bio-PDO®). Shortly thereafter, DuPont success-
fully launched Sorona®, the synthetic polymer used in soft floor covering, textiles,
and packaging.
DuPont quickly began to apply this newly acquired base of technical compe-
tence in biotech to other endeavors. Given its traditional use of energy as a major
input as well as previous ownership of Conoco, the company had a very thorough
understanding of trends in energy markets. Using their superior peripheral vision,
DuPont spotted an opportunity to apply its new innovation to the fuels sector.
The company not only saw that many governments were beginning to respond to
issues dealing with energy security and climate change, but also understood that
ethanol, the widely produced alternative fuel source, was a “disadvantaged” one.
It cost at least twice as much as gasoline to produce, had a significantly lower
energy content per unit compared to gasoline, but could be distributed using the
same infrastructure as gasoline and diesel,27 so DuPont started strategizing about
how to enter this new market.
When asked, during an interview in 2007, how DuPont made the leap
from Sorona® to biofuels, John Ranieri, DuPont’s Biofuels Vice President and
General Manager at the time, noted that decision makers at the company could
now ask the right questions, a key component to vigilant learning.28 It was always
obvious that ethanol had significant limitations and that there was great need in
the fuel opportunity space, but only after developing their new core competency
in biotechnology could researchers at DuPont ask, “Well, what biofuel would I
like to make?” That question was not a valid one before. As Ranieri gracefully
phrased it, “That’s really the key to innovation: it’s not about always having the
answers—it’s about first being able to ask the right questions.”
While sensing this opportunity in biofuels, DuPont displayed superior vigi-
lant learning skills: embedded in company culture is the process of triangulating
perspectives on a complex issue. The company’s corporate strategy can be summa-
rized by the phrase “sustainable growth.” The aim behind sustainable growth is to
enhance shareholder value, contribute positively to society, while also decreasing
its environmental “footprint” along the value chains in which it operates. These
are three very different lenses through which DuPont looked to analyze its biofuel
initiative.
Seizing
To seize the newly identified opportunity, DuPont first probed and then
invested its capital in a flexible manner. This focus on adaptive experimentation
and learning led DuPont to explore investment opportunities in many parts of
the globe. The first generation of biofuels that DuPont explored included corn eth-
anol and soybean diesel fuel. Eventually, it became clear that both corn ethanol and
soybean diesel fuel required very high land-use and water resources. Thus, reduc-
tions in greenhouse gas emissions achievable through their production were too
low to make these products worth exploring further. Instead, DuPont’s R&D focus
shifted toward second generation biofuels, using microbes and enzymes to convert
non-food cellulose materials into sugars that could be used to create biofuels.29
To do so, DuPont employed open innovation. The first facility to produce
ethanol from non-food biomass was built through a 50/50 joint venture with
Danisco in Denmark, the world’s largest industrial enzyme company (together with
Novozymes). To bring this production to commercial scale, a second joint venture
facility was completed in 2014, at an estimated capital cost of $200 million. At this
point, the focus narrowed to cellulosic ethanol produced from corn stover, which is
the readily-available biomass consisting of the stalks, leaves and cobs that remains
after the harvesting of industrial corn. This product was not without risk: through
extensive work with auto and oil companies, DuPont had come to understand its
limitations. Due to a vapor pressure that exceeds that of traditional gasoline, this
form of ethanol is incompatible with parts of the traditional fuel infrastructure.
Even with these risks in mind, DuPont saw the innate potential of a higher
value fuel that leveraged corn stover as feedstock and used a genetically modified
micro-organism to produce iso-butanol. This led to a joint venture with BP called
Butamax Advanced Biofuels, combining BP’s refining and distribution prowess
with DuPont’s proprietary biotechnology. This joint venture was able to address
and resolve further technological challenges, such as the inherent high toxicity
of bio-butanol. After 1.5 million miles of vehicle testing, DuPont eventually
resolved the issue of compatibility with existing vehicles and infrastructure. In
early 2014, the joint venture submitted a 16% butanol fuel to EPA for regulatory
approval. The economics appeared attractive; one estimate assumed that bio-butanol
would be competitive with oil at $70 - $80 per barrel. It remains to be seen whether
oil at $50 a barrel will jeopardize the project.30
The DuPont biofuels experience demonstrates how crucial dynamic capabili-
ties are to the exploration of new businesses, especially those in highly technical and
uncertain markets. In this case, large investment commitments are highly contingent
on the concurrent development of an emerging technology. After a full decade of
R&D, DuPont’s time-to-market was more than seven years. These patient invest-
ments were protected by a series of patents issued in 2005, allowing for long-term,
sustained investment. Ultimately, the goal was achieved. In hindsight, DuPont’s most
important dynamic capability was its commitment to learning from real options,
allowing critical opportunities to be explored through relatively small, staged invest-
ments. By limiting investment exposure, DuPont “reserved its right” to withdraw if
certain technologies didn’t bear fruit. More significantly, DuPont could move ahead
with the most promising technologies without significant loss of time and limited
upfront risk.
Transforming
Nearly as important strategically was DuPont’s decision to redefine the com-
pany’s research culture, create organizational separation between the new ven-
tures and the mother ship, and to actively engage with external partners with a
common stake in successful outcomes. Ranieri remarked that DuPont asks teams
to tackle the toughest problems first, the ones that really prevent a product from
getting to market. According to Ranieri, many other firms that conduct scientific
research will do the opposite, teaching their teams to solve the quick and easy prob-
lems first before tackling the big issues. This fundamental organizational shift in
process helped DuPont avoid “rat holes,” ensuring flexible and probing invest-
ments. Secondly, the foundation that made DuPont’s biofuel initiative possible
was laid with the original creation of the Applied Biosciences business unit. It
was to function as its own separate platform with the agility and flexibility to use
resources to look for skills within the corporation that could aid in pursuing emerg-
ing market opportunities. Lastly, the company developed partnerships with Fagen
Inc., a consortium of early adopters to support the rapid build out of bio-butanol
production. The company also remained vigilant about seeking and applying
insights from the market. Throughout its 17 years of exploration, DuPont remained
highly alert to the changing needs of automakers, regulators (including the EPA),
oil companies, legislators, and agencies whose regulatory decisions could influence
demand.
Figure 2 summarizes the relative importance of our six dynamic sub-capabilities
for the DuPont biofuels case and the Novartis case. The differential weighting of
importance of each capability to the strategic choices made (or deferred) by DuPont
management highlights the contingent nature of dynamic capabilities. This ranking
also allows us to draw a sharp distinction between DuPont’s long-term biofuel
investment and Novartis’s rapid deployment of digital technologies.
(2) Seizing
• Probe-and-learn Low High
experimentation
• Deploying real options Very High Medium
(3) Transforming
• Organizational redesign High Medium
• External shaping High High
sharp price cuts. Simultaneously, purchasing power and influence shifted to consol-
idating payers and providers. Payers instituted formulary lists, which restricted the
number of approved medications that a physician could prescribe.
By 2011, the sales force at Novartis Pharmaceuticals was deeply demoralized.
Sales representatives found themselves operating in a radically changed world; their
access to physicians was now far more limited, and the number of new products that
they could discuss when they did get in the door was dwindling as well. Nevertheless,
Novartis’s leaders stayed with the traditional “Share of Voice” detailing model, asking
the sales representatives to buckle down and apply greater effort to connect with
“key prescribers,” physicians with a demonstrated history of prescribing Novartis’s
target products. These interactions were brief, one-way communications that felt,
to the sales representatives, like monologues. As a result, Novartis Pharmaceuticals
had little data on how their drugs were being perceived and used by their customers,
and no way of knowing what sales strategies were most effective.
In response to the declining sales and the mounting frustration of the sales
force, Novartis leadership launched an initiative in 2012 to help 25,000 sales repre-
sentatives in 80 countries engage with doctors in consultative two-way dialogues.
Value-added services and broad channels of communication replaced the simple rec-
itation of standard messages, and the hand-over of static, general sales documents.
This initiative envisioned new, technologically enabled communications between
sales representatives and physicians, such that answers could be provided in real time
by bringing in the appropriate scientific staff. Reps could immediately access what-
ever data the doctor would find most relevant to their patients, whether it was effi-
cacy in women, safety in the elderly, or the risks of interactions with other drugs
being prescribed. This allowed the conversation to flow naturally, rather than being
set by a rigid agenda and formulaic sales pitch.
Novartis leadership decided to equip their sales representatives with mobile
devices that enabled videoconferencing (often, across multiple locations) while
accessing the latest digital information and interactive patient tools. This digital plat-
form also encouraged direct sharing of innovative practices across countries, rather
than relying on mostly one-way messages from headquarters to the regions. While
some competitor firms were also using digital sales tools, they were designed with
limited functionality to support, rather than supplant, the conventional sales model.
The Novartis customer engagement initiative was implemented by teams of
dedicated leaders representing the information technology, scientific, and commer-
cial functions. The CEO’s clear commitment to this effort lent it credence; the per-
sonal credentials of the chosen team leaders gave it additional leverage. Especially
important was the designation of the respected head of IT in Europe to lead the ini-
tiative. In each major country, teams rolled out the program to great effect. Their suc-
cess can be attributed to highly skillful orchestrations of the following dynamic
capabilities, each being crucial to leveraging the digital revolution.
Sensing
Changing the sales representative’s interactions with doctors from “mono-
logues” to “dialogues” allows Novartis to sense weak signals from conversations
with customers. Compare this to the analogy of having multiple thermometers
in a room to ensure an isotropic climate; by using 25,000 direct touch points with
customers, Novartis is more apt to understand what factors are becoming most
relevant and important to its customers. Over half a million calls with the digital
platform have taken place since May 2014 and 80 percent of employees say the
digital platform has had a positive effect on how they communicate with doctors.
The new norm of “e-detailing” allows Novartis to increase its touch points, even
with the “no-see doctors” who had chosen to opt-out of the old in-person visita-
tion model.
The digital customer engagement platform captures detailed information
about the interactions of sales representatives, improves understanding of customer’s
preferences, and then personalizes the marketing message. As Novartis deepened its
market knowledge, it could notice budding problems and spot market opportunities
sooner, as well as sensitize the entire organization to making decisions from the
outside-in. The key here was the cross-functional collaboration of the users of the
information and those managing information files.
Seizing
The spirit of trial-and-error learning further suffused the customer engage-
ment initiative. As many as 42 pilot tests were conducted in multiple countries to
learn how best to design the platform, decide what features to include, and impor-
tantly to monitor acceptance by the sales representatives. The feedback from these
experiments was crucial to the final investment commitment decision.
Before the digital sales platform was in use, Novartis sales representatives
detailed only one or two drugs at a time in their meetings with potential buyers.
The new digital platform allows reps to carry an entire portfolio of drug presenta-
tions that can instantly connect to research papers regarding side effects and off-
label use requests, as well as expert opinions, visuals of clinical pathways, and
more. The platform provides reps with multiple pathways to “win” going into
their sales meetings, rather than the traditional idea of forcing a single drug upon
a buyer in a sales meeting.
Transforming
The ultimate success of the platform depended heavily on the innovative
work by various development partners. This required a non-linear navigation
approach that would let the user jump through different content domains without
losing eye contact with the physician. The company also collaborated with a cloud-
based provider of the software platform, and both were guided by numerous experi-
ments with sales representatives. In addition, local graphics agencies got involved to
work on the information architecture, file formats, and visual design to buttress
Novartis’s commercial teams in areas where they lacked skill or experience.
Novartis stepped beyond industry norms with its deep commitment to a
vision of a “digital future” within their sales force. According to CEO Joe Jimenez,
iPad adoption created an annual savings of 250 hours for each sales representative
and enabled an additional 35,000 customer visits per year. Given this initial suc-
cesses, the iPad experiment should be viewed as part of Novartis’s broader organi-
zational strategy toward embracing of innovative technology. Recent investments
are numerous and broadly available to other firms as well, then peripheral vision
and vigilant learning become prominent as part of sensing.
As these rudimentary examples suggest, the contingent nature of dynamic
capabilities clearly needs further theoretical development as well as more practical
guidance from a managerial perspective. At present, there is no widely accepted con-
tingency model in the literature to guide the development of adaptive strategies at a
more granular level. In addition, conceptual questions remain about the dynamic
capabilities framework itself from a theoretical perspective.32 No matter how these
issues are eventually resolved, adopting a contingency view strikes us as important
for both theory and practice. We should also recognize that the six capabilities we
examined represent an interconnected system, complicating the ranking of individ-
ual factors due significant interaction effects and synergies. Lastly, even though we
highlighted the contingent nature of capabilities with respect to external change,
there are also important contingencies internally relating to firm strategy, organiza-
tional design, and culture.
An especially challenging contingency concerns the relationships between
dynamic capabilities and the firm’s current platform of core competencies, which
put limits on the firm’s flexibility to adapt. The very features that give core competen-
cies competitive advantage within the resource-based view also create inertia. These
features include high path dependency in development, low imitability for outsiders,
limited time compression, deep embeddedness within the organization, diffuseness
through the organization, and system-wide complementarity. Each of these condi-
tions makes core competencies sticky, and complicates attempts to change a firm’s
systems platform of current competencies on short notice. The inherently rigid
nature of operational capabilities will be a limiting factor in how quickly and drasti-
cally the firm’s dynamic capabilities should call for change. To use an analogy, a
speedboat can change direction quickly, whereas a tanker cannot. The resource-
based view envisions the firm more like a tanker: it took a long time to build and
put in motion, and its crew cannot develop new skills readily when on the high seas.
Organizational inertness may bestow advantage today, but could be a serious obsta-
cle to timely adaptation tomorrow. To manage these trade-offs well requires sea-
soned leadership.
“If the rate of change inside an organization is less than the rate outside, the end
is in sight…Leaders must develop a sixth sense, an ability to see around the
corner”—Jack Welch
with network partners, and learn to profit from increased market and technology
uncertainty. The traditional strategy process of long internal debates leading to
detailed budgets and multi-year plans will be replaced by greater clarity and consis-
tency about how to sustain an advantage built around dynamic capabilities, struc-
tures, and processes.33
Even the best-designed dynamic capabilities, however, cannot succeed
without seasoned managerial judgment. No strategic architect can envision all pos-
sible scenarios the firm may encounter. When Jeff Immelt took over as CEO of
General Electric in 1991, following several decades of spectacular wealth creation
by legendary CEO Jack Welch, he could hardly have anticipated what awaited
him. In his words, “When I started I could never have forecast so many tail-risk
events hitting GE: 9/11, Enron, Hurricane Katrina, Fukushima, the global financial
crisis.”34 Immelt could also have added various Arab Springs that turned into fore-
boding autumns, China asserting its power in Asia and beyond, protracted civil
wars in Syria and Iraq, global warming challenges, prolonged unemployment,
and myriad other black swans. Adaptation strategies clearly cannot be reduced to
algorithms, and so organizations need to develop sufficient leadership capacity as
well to deal with the unexpected.
Building better sensing and dynamic capabilities throughout the organiza-
tion is a powerful way to manage stormy waters with fast-moving currents. By
necessity, however, these systems are premised on subjective worldviews about
what matters in the current environment and also what may lie ahead. The con-
tingent nature of dynamic capabilities will often favor the known present over
the unknown future. Ideally, sensing and adaptation systems are less-tailored
to the firm’s current capabilities and more to future trends and uncertainties.
Even in the best case, much will be missed in fast-changing environments. This
means that strategic leaders, rather than systems, will be the last line of defense
when unexpected scenarios materialize. The contingent nature of dynamic capa-
bilities as well as the crucial role of leaders both merit greater attention in how
organizations can and should adapt when facing deeply uncertain futures.
Notes
1. D.J. Teece, G. Pisano, and A. Shuen, “Dynamic Capabilities and Strategic Management,” Strate-
gic Management Journal, 18/7 (August 1997): 509-533. See also D.J. Teece, “Explicating Dynamic
Capabilities: The Nature and Micro-Foundations of (Sustainable) Enterprise Performance,” Stra-
tegic Management Journal, 28/13 (December 2007): 1319-1350.
2. The nature of dynamic sensing (and shaping) capabilities is described in D.J. Teece, Dynamic
Capabilities and Strategic Management (New York, NY: Oxford University Press, 2009); D.J. Teece,
“The Foundations of Enterprise Performance: Dynamic and Ordinary Capabilities in an
(Economic) Theory of Firms,” Academy of Management Perspectives, 28/4 (November 2014):
328-352.
3. Contingency theories were developed in the strategic management literature to show how the
effectiveness of various management practices, techniques, and capabilities will vary according
to the circumstances. See, for example, E. Daneels, “The Dynamics of Product Innovations and
Firm Competences,” Strategic Management Journal, 23/12 (December 2002): 1095-1121;
E. Daneels, “Trying to Become a Different Type of Company: Dynamic Capability at Smith
Corona,” Strategic Management Journal, 32/1 (January 2011): 1-31; M. Tripsas and G. Goretti,
“Capabilities, Cognition, and Inertia: Evidence from Digital Imaging,” Strategic Management
Journal, 21/10 (October/November 2000): 1147-1161.
and S. Evans, “Super-Flexibility for Real-Time Adaptation: Perspective from Silicon Valley,”
California Management Review, 53/3 (Spring 2011): 21-39.
20. For an excellent analysis of balancing the old and the new organizations, see Vijay Govindar-
ajan and Chris Trimble, Ten Rules for Strategic Innovators: From Idea to Execution (Boston, MA:
Harvard Business Press, 2005).
21. Paul R. Kleindorfer and Yoram Wind, The Network Challenge: Strategy, Profit and Risk in an Inter-
linked World (Upper Saddle River, NJ: Wharton School Publishing, 2009).
22. J.H. Dyer and H. Singh, “The Relational View: Cooperative Strategy and Sources of Interorganiza-
tional Competitive Advantage,” Academy of Management Review, 23/4 (October 1998): 660-679;
C.F. Helfat, ed., Dynamic Capabilities: Understanding Strategic Change in Organizations (Malden, MA:
Blackwell, 2007).
23. P.J. Williamson and Arnoud De Meyer, “Ecosystem Advantage: How to Harness the Power of
Partners,” California Management Review, 55/1 (Fall 2012): 24-46.
24. P.J.H. Schoemaker, G.S. Day, and S.A. Snyder, “Integrating Organizational Networks, Weak
Signals, Strategic Radars and Scenario Planning,” Technological Forecasting & Social Change, 80
(2013): 815-824.
25. Other contingency factors may also be at work such as the ability to protect intellectual prop-
erty, the rate and direction of change in the environment and the level of environmental hos-
tility. See H. Mintzberg, The Structuring of Organizations: Synthesis of the Research (Englewood
Cliffs, NJ: Prentice-Hall, 1979); I.P. McCarthy, T.B. Lawrence, B. Wixted, and B.R. Gordon,
“A Multidimensional Conceptualization of Environmental Velocity,” Academy of Management
Review, 35/4 (October 2010): 604-626.
26. “Green technologies” are science-based applications that aim to conserve the natural environ-
ment and resources by minimizing waste and toxicity, conserving energy, and reducing pollution
and carbon emissions. G.S. Day and P.J.H. Schoemaker, “Managing Uncertainty: Ten Lessons for
Green Technologies,” MIT Sloan Management Review, 52/4 (September 2011): 53-60.
27. Among the sources we consulted was R. Rapier, “A Look at DuPont Biofuel’s Work on Cellulosic
Ethanol and Butanol,” <www.energytrendsinsider.com/2013/01/07/a-look-at-dupont-biofuels-
work-on-cellulosic-ethanol-and-butanol/ >, January 7, 2013.
28. T. Semans and A. de Fontaine, “Innovating through Alliance: A Case Study of the DuPont-BP
Partnership on Biofuels,” Pew Center on Global Climate Change, September 2009, <www.
c2es.org/publications/dupont-bp-partnership-on-biofuels-sept-2009>.
29. Dupont Applied Biosciences FactSheet, May 11, 2010, <www2.dupont.com/Media_Center/
en_US/assets/downloads/pdf/FactSheet_IR_ABS.pdf>.
30. Bringing biofuels to market has proved to be slower and more costly than expected and a
recent report sounded a pessimistic note. “What Happened to Biofuels?” The Economist,
September 7, 2013.
31. This description of the Novartis digital initiative drew from D.A. Marchand and P. Bochukova,
“Digital Transformation at Novartis to Improve Customer Engagement,” case no. IMD-32437,
IMD, Lausanne, Switzerland, January 1, 2014; “From Monologue to Dialogue: Fostering Mean-
ingful Engagement with the Medical Community,” Novartis AG, April 22, 2015; S. Bennett,
“From Snitch Pill to Xbox Sensors, Novartis Goes Digital,” Bloomberg.com, March 24, 2015.
32. R.J. Arend and P. Bromiley, “Assessing the Dynamic Capabilities View: Spare Change, Every-
one?” Strategic Organization, 7/1 (February 2009): 75-90.
33. H. Bahrami, “The Emerging Flexible Organization: Perspectives from Silicon Valley,” California
Management Review, 34/4 (Summer 1992): 33-52; K. Eisenhardt and S. Brown, Competing on the
Edge: Strategy as Structured Chaos (Boston, MA: Harvard Business School Press, 1998).
34. “A Hard Act to Follow,” The Economist, June 28, 2014, <www.economist.com/news/business/
21605916-it-has-taken-ges-boss-jeffrey-immelt-13-years-escape-legacy-his-predecessor-jack>.
California Management Review, Vol. 58, No. 4, pp. 59–77. ISSN 0008-1256, eISSN 2162-8564. © 2016 by
The Regents of the University of California. All rights reserved. Request permission to photocopy or
reproduce article content at the University of California Press’s Reprints and Permissions web page,
http://www.ucpress.edu/journals.php?p=reprints.2016 DOI: 10.1525/cmr.2016.58.4.59.