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ESSAY Invited article DOI: http://dx.doi.org/10.1590/S0034-759020170309

DYNAMIC CAPABILITIES: FOSTERING AN INNOVATION-FRIENDLY ENVIRONMENT IN BRAZIL

INTRODUCTION Even though twenty years have elapsed since the publication of the paper Dynamic Capabilities and Strategic Management (Teece, Pisano & Shuen, 1997), many scholars and some executives maintain their interest in this framework so as to better understand how firms develop, maintain competitive advantage, and sustain superior enterprise performance. Individual firm performance depends not only on the markets in which firms compete and the environments in which they are JÚLIA DOEBBER HERRMANN [email protected]

International Executive Director at the First Silicon Valley Institute for Business Innovation Un-conference – California, USA LUCAS CÉ SANGALLI [email protected]

embedded, but also on managerial acumen. In 2002, the 1997 Dynamic Capabilities and Strategic Management paper earned the Strategic Management Society’s Best Paper Award. In 2005, it was deemed the most cited paper worldwide in the Science Watch index of Scientific Research in Economics and Business for the period 1995–2005. The paper currently has over 28,000 Google Scholar cites. Additionally, the dynamic capabilities concept was recognized in 2009 with an award from the Emerald Literati Network. One of the possible reasons why the dynamic capabilities concept has received attention is

Executive Producer at the First Silicon Valley Institute for Business Innovation Un-conference – California, USA

that it is grounded in the activities of the lead author. The key insights in the dynamic capabilities

DAVID J. TEECE

location is done by markets; however, inside a firm, resource allocation is done by managers. More

[email protected]

Co-founder of the Silicon Valley Institute for Business Innovation – California, USA

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framework flow from Teece’s experience in building, financing, and running sizeable companies, as well as his knowledge and insight as an active scholar. We are taught in economics that resource alimportantly, the astute internal allocation of resources is just as important as the role of markets in allocating investment to higher yield opportunities. Put differently, proficiency in the allocation of © RAE

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ESSAY | Dynamic capabilities: Fostering an innovation-friendly environment in Brazil

resources inside firms is as important as that

assumption is particularly true in the models

prises abound everywhere and they can be

between firms by the capital markets.

of perfect competition – where companies

both pleasant as well as unpleasant. Any

The key difference between the two

are one amongst many – and they do not re-

circumstance characterized by deep uncer-

types of allocations is that the resources

ally impact anything. Such models are quite

tainty is one where strong dynamic capabil-

and assets that managers allocate are un-

unhelpful for much of the time.

ities are needed. Such uncertainty may be

priced because they are intangible (or, oth-

Managers should be aware that they

erwise specialized) and are rarely bought or

can often shape the business environment

sold. When markets are thin and/or transac-

to their advantage. Firms can shape the

Therefore, it is clear that dynamic ca-

tions are non-existent, they do not work well.

environment not just through innovation,

pabilities are relevant wherever surprises

Managers then have to allocate resources

but also through social and political ac-

occur. It is very difficult to gauge precisely

using what historian Alfred Chandler (1990)

tion. If an environment is not conducive to

how a globally connected economic system

called the “visible hand.” The economic sys-

a business, one can contemplate how one

functions: even the people running it are

tem simply cannot rely on Adam Smith’s “in-

can shape attitudes and government ac-

not quite sure. In this context, the world has

visible hand” in a non-existent market. These

tion through communication and informa-

a greater need for dynamic capabilities be-

considerations help explain the insights that

tion. This element adds a truly interesting

cause that is the way forward. One can nev-

the dynamic capabilities framework has pro-

dimension. It takes into consideration the

er predict what is coming next, but if one

vided through the decades.

the result of innovation, political developments, and financial disturbances.

idea that managers can benefit from the un-

can sense and prepare for it a little ahead of

It is broadly recognized nowadays that

known, which is of particular interest in sit-

the competition, and then react to it quick-

managers not only manage downwards

uations where outcomes are not easily pre-

ly, adapt, and move on, one can be advan-

through hierarchies, but also have to man-

dictable and uncertainty is widespread. This

tageously positioned.

age partnerships, alliances, and external

notion becomes even more interesting if we

Although uncertainty may be bad for in-

communities. This is how they energize

apply it to environments such as the Unit-

vestments, some managers seem able to

business ecosystems. The dynamic capa-

ed States under Trump’s presidency and

find a way around it. John Maynard Keynes

bilities framework highlights both these in-

post-impeachment Brazil.

attributed this to what he called “animal

ternal and external roles of managers. The

spirits.” Business people have to make de-

performance of a firm and its management

cisions even in the midst of dire amounts

ACTING IN A DEEPLY UNCERTAIN ENVIRONMENT

of uncertainty because they must act – they

helps explain why scholars have found the

Today’s world is one where mere risk is not

adroitly in a deeply uncertain environment is

dynamic capabilities framework useful. It

a grave problem anymore. Risk is some-

a dynamic capability, as is the ability to “see

very clearly defines the distinct role of man-

thing that can be managed. With known

around corners” using tools such as big data,

agers in the economy. The framework brings

risks, managers know the probability with

having insights, being in the right networks,

both the firm’s internal as well as external

which certain things are going to happen,

and having a good sense of how things hang

perspectives together in a coherent man-

even though they cannot be predicted ex-

together (Teece, Peteraf & Leih, 2016).

ner. It also helps regulators and government

actly. On the other hand, no one can ascer-

However, whence do we obtain dynam-

officials better understand the distinctive

tain how to manage uncertainty, i.e., when

ic capabilities? Are they a characteristic of a

role of the modern business enterprise.

depends on how effectively the top management avails of and employs the resources it owns and has access to. This insight

cannot sit around waiting for perfect clarity of circumstance or outcome. To act wisely and

the unknown is unknown. Events such as

firm? Is the manager of a firm somehow at-

Being aware of developments in the en-

the Trump election, Brexit, post-impeach-

tached to it in the long term? Do these capa-

vironment within which a firm competes is

ment Brazil, and so on, have elements of

bilities reside in the management team or do

part of a manager’s responsibilities. Anoth-

deep uncertainty, which is the enemy of in-

they reside deeper within the organization?

er component of strong dynamic capabilities

vestment.

involves recognizing that one should also be

The dynamic capabilities framework

able to shape the environment. This is the

is especially pertinent to regimes of rapid

point where textbook economics should be

technological change. Such regimes create

set aside, because textbooks assume that

the condition of deep uncertainty. With the

the market environment is a given, and not

advent of technological change, one does

Dynamic capabilities lie partly with the firm

subject to impact by any individual firm. This

not know what is going to happen next. Sur-

and partly with the management team. One

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WHERE DO DYNAMIC CAPABILITIES RESIDE?

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AUTHORS | Júlia Doebber Herrmann | Lucas Cé Sangalli | David J. Teece

of the key factors often overlooked is that

the other people in the management team,

cused on the long run, it is almost impos-

in the governance of a firm, the board of di-

there is a good chance that it will develop

sible for firms to exhibit strong dynamic ca-

rectors chooses the management. Further-

strong dynamic capabilities. If the CEO does

pabilities.

more, sometimes the board does not make

not share that vision, the firm’s capabilities

Dynamic capabilities can also be pres-

the best choice. Having a board of directors

are unlikely to be dynamic. That is not to say

ent in family businesses. In such business-

able to identify proficient individuals who

that all the capabilities lie with the CEO or

es, accountability is generally restricted to

are able to deliver good outcomes is a gov-

the top management team, but it is impossi-

the family members. This is an advantage if

ernance function and, as such, it is essen-

ble for other people to work around the CEO

the family is supportive of adopting a long-

tially a dynamic capability as well.

and the top management team if they are

term view, but can present a challenge if it is

not onboard for building and exercising dy-

not united and does not share a common vi-

namic capabilities.

sion of long-term growth and development.

Governance is something that is integral to a firm because typically the tenure of the board of directors is longer than the ten-

We can illustrate this with three exam-

Since families are not traders, it is easier for

ure of managers. Boards need to help as-

ples. Jeff Bezo’s Amazon went from selling

them to support the management teams for

semble the right management team. How-

books online to cloud computing. Amazon

the longer term. Even though families might

ever, a good leader may not remain with the

is a firm with a constant willingness to ex-

have multigenerational issues, they are

firm forever. Hopefully, if the organization is

periment and to build to scale, with sen-

well positioned to select managers who can

aware of what is needed, and places a priori-

sitivity to the broader environment. Con-

sense, seize, and transform in order to avoid

ty on sensing, seizing, and transforming, the

sistent with dynamic capabilities, it is a

becoming obsolete and losing not only mon-

board will then select other managers who

pioneering firm that does not pay attention

ey, but also identity and reputation.

meet those criteria and will sustain the firm’s

to short-term profitability. Strong dynamic

Thus, the underpinnings of dynamic ca-

dynamic capabilities beyond the tenure of an

capabilities are often more evident in new

pabilities are present in family firms; how-

individual manager (Augier & Teece, 2009).

firms rather than in old ones. Occasionally

ever, this does not guarantee that they will,

This was one of the questions that

older firms will have periods when they be-

in fact, emerge. It demands an understand-

arose when Steve Jobs passed away. Peo-

come very dynamically capable, such as in

ing by the family of what is needed. The right

ple everywhere where asking whether that

the case of IBM, GKN, Enel, and Santa Casa

managers need to be selected from the fam-

was the end of Apple. It could have been,

de Misericórdia de Porto Alegre.

ily or elsewhere. It also involves supporting

but it was not. If the succession plan was

In large organizations, outside inves-

the managers at the board level and guiding

good and if Job’s beliefs were embedded in

tors are often constraints when they force

them toward the kind of managerial style

Apple’s organizational culture, then the firm

the firm to focus on short-term profits. Ac-

and long-term perspective that is required

could continue to have a durable, superior

tivist shareholders of publicly traded com-

by dynamic capabilities. Older generations

performance. This involves ensuring that

panies with a focus on near-term profits of-

of the family may also rely on their financial

the firm has the right people on the man-

ten pressure boards of directors to change

position to support the younger generations

agement team, which requires training that

the management team in order to increase

in their endeavors, making sure that their

is not necessarily classroom training. Bring-

(short-term) earnings per share. Invest-

investments are also diversified.

ing along, encouraging, and mentoring peo-

ments for the long term are often sacrificed

Sometimes younger people can think

ple in the “Apple way” of doing things are

to achieve these results. This problem is

“out of the box” more readily; this is part-

part of what is required.

serious in markets where traders outnum-

ly because they do not always know where

Part of the responsibility of a leader is

ber shareholders. In the United States,

the box is. That works well for startups and

the ability to instill an entrepreneurial cul-

the “hold period” for shares on the major

it is not surprising that many young people

ture in the management team that goes be-

stock exchanges has reduced from years to

are succeeding at startups. It is necessary to

yond their own tenure. Good managers nur-

weeks. When capital markets are dominat-

make it clear, though, that for dynamic capa-

ture people so they have strong sensing,

ed by a “trading” rather than a “holding”

bilities you also have to succeed in organiza-

seizing, and transforming aptitudes. An or-

mentality, the growth and long-term devel-

tions that are much larger than small start-

ganization has no chance without entrepre-

opment of listed business enterprises are

ups and that is where young people have to

neurial leaders who sustain the role of a

compromised. Achieving strong dynamic

learn. Managing a large organization has a

“bricolage,” i.e., encapsulate elements of

capabilities can thus invite a battle with in-

lot more complexity attached to it, and there

entrepreneur, leader, and manager. If a firm

vestors (Teece, 2010). Without a supportive

is a need to be very persuasive and influen-

finds a leader that can motivate and guide

investor base and governance system fo-

tial beyond the half dozen people that may

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ESSAY | Dynamic capabilities: Fostering an innovation-friendly environment in Brazil

be part of a startup team. That is where lead-

ability of management to astutely build,

book, Genentech, and many more. There are

ership comes in. Younger entrepreneurs have

select, and orchestrate assets, using the

a lot of places that create new companies,

an advantage in the startup environment be-

sense, seize, and transform mantra. If inno-

but what is unique about the Silicon Valley

cause they are not constrained by the habits

vation is an unfinished process, so are dy-

is that it tends to routinely create global scal-

of the past. However, if and when the com-

namic capabilities.

able companies, i.e., companies that go on

pany gets bigger, the younger generation’s

If a region or a nation does not have an

to comprise more than just half dozen talent-

learning needs to keep pace with the compa-

entrepreneurial culture, it is hard to have

ed people, as wonderful as that is. The Sili-

ny’s growth. If they succeed in that, they can

an effective entrepreneurial management

con Valley incubates and nurtures large en-

stay in a leadership role for a long time, as

team. The absence of an entrepreneurial

terprises that satisfy the needs of consumers

can be seen in the case of Sergey Brin and

climate in a region constrains the develop-

all over the world while simultaneously creat-

Larry Page at Google.

ment of dynamic capabilities.

ing jobs and shareholders’ wealth.

Accordingly, it is important to recog-

Industrial policy experts often fail to

What make the Silicon Valley special

nize that there is also a different set of skills

appreciate that what is distinctive in Sili-

are the supporting institutions, great univer-

that is needed when an organization be-

con Valley firms is that their management

sities, corporate research labs, government

comes bigger, which calls for larger organi-

and the entrepreneurial aspects do re-

research labs, venture capital, and start-

zations to put in place a certain amount of

quire dynamic capabilities. If a company

up companies (e.g., the Cambridge Cluster

structure. Google founders Page and Brin

does not have dynamic capabilities, it will

around Cambridge University in the Unit-

brought in Eric Schmidt as CEO to run the

not exist for very long. It is not just a state

ed Kingdom) themselves (Somaya, Teece

company in order to enable the two found-

of mind, but rather a set of organization-

& Wakeman, 2011). To replicate the Sili-

ers to build the organization. Schmidt was

al structures and business practices, cou-

con Valley, one must understand the whole

an experienced CEO. As the young found-

pled with a certain way of prioritizing that

panoply of institutions and enterprises, the

ers recognized and articulated, they need-

is important. Dynamic capabilities require

people, the way they think, and what moti-

ed “adult supervision” to run the company.

that companies stay entrepreneurial as

vates them. The Silicon Valley culture has

With that in mind, we can say that young

they scale, constantly scanning the periph-

a sense of urgency and a deep passion for

people’s skills are great for startups, but not

ery of their ecosystems and their market-

getting things done, making a difference,

all of them seem able to learn how to oper-

places to identify emerging threats and op-

creating a new business and, as Steve Jobs

ate in a large company environment. Even-

portunities. This requires knowledge that it

put it in a speech at the Stanford University,

tually, if the company is successful, they will

is actually difficult to acquire; one cannot

“making a small dent in the universe.”

need to learn or otherwise hand over control

“Google it” and find the information one

The Silicon Valley is about building

to someone else. Boards of directors and

needs. One needs to be in dense networks

bridges and creating connections. An un-

markets were once skeptical about found-

to figure out the next big thing. Bits and

derstanding between managers and aca-

ers transitioning from a startup to a large

pieces of the required information are scat-

demics must also be fostered. There is a

company. Evidence such as the F-shares

tered about in the minds of brilliant peo-

lot of wisdom in the academic literature,

(non-voting founder shares) issued by Goo-

ple in the Silicon Valley and everywhere,

and academics are aware of that. There is

gle and Facebook show that this attitude is

including in the minds of lead customers.

almost a requirement that social science

changing. The market does not significant-

Even though the Silicon Valley is a techno-

research in economics and business be

ly discount non-voting shares anymore. In-

logical hub, it is also a place with an abun-

presented to practitioners in a way that

vestors are figuring out that sometimes they

dance of customers. People come to the

is meaningful to them because having re-

are better off having the founders in control.

Silicon Valley because they also want new

search findings available but ignored is a

things; it is not only a place to create new

tragedy. A lot of managers do not read very

things, but also to discover new things.

much and keep reinventing the wheel at

However, unless one then has the capabili-

great cost to themselves and their stake-

ties and the organizational backing to exe-

holders. They have to learn things from

cute well, one will not go very far.

first principles, and learn things the hard

DYNAMIC CAPABILITIES AND THE BUSINESS ECOSYSTEM Regarding the development of strong dy-

The unique thing about the Silicon Val-

way, but there are easier ways. Therefore,

namic capabilities, it appears that it does

ley is that it has become the nursery for the

the question “why does the gap between

not matter if it is a family business, a start-

world’s great new globally scalable compa-

academics and managers not get closed”

up, or a tech giant; it all comes down to the

nies, e.g., Apple, Google, Oracle, Intel, Face-

remains unresolved.

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AUTHORS | Júlia Doebber Herrmann | Lucas Cé Sangalli | David J. Teece

We might suggest that there is both a communication and a translation gap. Ac-

a global impact requires an awareness of

be an exhausting job, it must be done. Not

what is going on outside of Brazil.

doing so would imply a possible lapse and a

ademics need to learn how to convey their

Brazilians can travel to the Silicon Val-

risk of using outmoded technology. Embark-

ideas simply and understand the context

ley and Silicon Valley participants can trav-

ing on such an endeavor is challenging and

in which research-based knowledge is ap-

el to Brazil. A first step in bridging the gap

a parochial mindset would not be condu-

plicable. This requires more than just un-

between academia and the corporate world

cive. However, those who venture out and

derstanding the research; it also requires

and between the Silicon Valley and Brazil

augment their firms’ dynamic capabilities

wisdom to know how the research relates

was the First Silicon Valley Institute for Busi-

will herald the progress of their local com-

to other research and practices. Academ-

ness Innovation Un-conference (SViBi) that

munities and their country.

ics need to be broadly read and exposed to

took place in Mountain View, California, in

practices; there are no silver bullets. One

January 2017. Academics from the Univer-

also needs deep and broad networks to be

sity of California Berkeley, Stanford Univer-

effective. If someone comes up with just

sity, Harvard University, the London Busi-

one little snippet of research or of informa-

ness School, and the University of Chicago,

tion, or just a little idea, and hopes to help

amongst others, met with a broad range of

managers, the chances of success are low.

Brazilian companies and other internation-

Once the problem is understood, one can

al firms, from the sectors of healthcare, avi-

be well equipped to assist companies and

ation, banking, and cosmetics to discuss

their management. More of that will hap-

how to foster innovation-friendly ecosys-

pen in places like Brazil once there is rec-

tems in Brazil.

ognition in the corporate world that, in fact,

It is very important to connect across

some academics have the capacity to trans-

boundaries, organizational and geographic,

late ideas into action.

to find ideas from the outside; from Silicon

If entrepreneurs want to create a glob-

Valley, Cambridge, Milan, Shanghai, Tel-

al scalable company or be better at man-

Aviv, and Geneva. There are bits and piec-

aging, they need to have connections ev-

es of a new future scattered everywhere. In-

erywhere, not only in the corporate world,

deed, one of the key attributes of the Silicon

but also with the academy and government.

Valley is that it is itself connected to other

They have to know the markets trends and

entrepreneurial hubs. As a result of this,

regulatory developments, where consum-

whatever one does in Brazil, one is neces-

er needs are going, and where technolog-

sarily connected to other key ecosystems

ical and business model opportunities lie.

beyond Silicon Valley.

Some of those may be prevalent in Brazil,

These ecosystems are found around

in which case the challenge for Brazilian

the world and also in Latin America. While

companies is simplified. However, creating

building and maintaining these links might

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REFERENCES Augier, M., & Teece, D. J. (2009). Dynamic capabilities and the role of managers in business strategy and economic performance. Organization Science, 20(2), 410421. doi:10.1287/orsc.1090.0424 Chandler, A. (1990). Scale and scope: The dynamics of industrial capitalism. London, UK: Harvard Business School Press. Somaya, D., Teece, D. J., & Wakeman, S. (2011). Innovation in multi-invention contexts: Mapping solutions to technological and intellectual property complexity. California Management Review, 53(4), 47-79. doi:10.1525/cmr.2011.53.4.47 Teece, D. J. (2010). Business models, business strategy and innovation. Long Range Planning, 43(2-3), 172-194. doi:10.1016/j. lrp.2009.07.003 Teece, D. J., Peteraf, M., & Leih, S. (2016). Dynamic capabilities and organizational Aagility. California Management Review, 58(4), 13-35. doi:10.1525/cmr.2016.58.4.13 Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509-533. doi: 10.1002/ (sici)1097-0266(199708)18:73.0.co;2-z

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