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Dynamic Capabilities and their Microfoundations:

Implications for Strategic Management
David J. Teece
Institute for Business Innovation
Haas School of Business
University of California, Berkeley
September 15, 2010

*Based on Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Performance,
Strategic Management Journal, December 2007

Capabilities and Dynamic Capabilities

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Capabilities are the organizations ordinary ability to perform a set

of activities

Dynamic Capabilities are the ability to determine whether the

organization is performing the right activities, and then effectuate
necessary change

generally embedded in organizational routines/standard operating

procedures

The capacity to create, extend, or modify the resource base*

May be embedded in organizational routines
May also reside in one or a few individuals/leaders

Dynamic Capabilities set the speed with which the organization

aligns/realigns with requirements of and opportunities in the
business environment

*Dynamic Capabilities: Understanding Strategic Change in Organizations. Constance E. Helfat, Sydney Finkelstein, Will Mitchell,
Margaret A. Peteraf, Harbir Singh, David J. Teece, and Sidney G. Winter (Oxford: Blackwell, 2007).

What are Microfoundations?

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Microfoundations are elements of Dynamic Capabilities.

They consist of discrete process/methodologies/structures that
undergird clusters of dynamic capabilities
I. Routines/Methodologies

Organizational Routines

Ex: product development along a known trajectory

Analytical Methodologies

Ex: investment choices

II. Individual Acts and Action

Creative managerial and entrepreneurial acts

Ex: pioneering a new market

Three Clusters of Microfoundations*

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Sensing
Identification and assessment of an opportunity
Easiest to embed in the organization

Seizing

Mobilization of resources to address an opportunity and to

capture value

Transforming
Continued renewal
Inherently difficult to routinize

Each cluster is supported by organizational process; but also

by the entrepreneurial and leadership capabilities of the
top management team

*Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Performance, Strategic
Management Journal, 28:13 (December 2007), 1319-1350.

Example of (Embedded) Microfoundations

for Sensing and Seizing
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Mechanisms at IBM*
Dozens

of new business ideas are considered twice yearly

The most promising are vetted through multiple stages
A few are launched with high-level support and protected
resources
If milestones are met, the new business joins an existing
business unit

OReilly et al indicate that this process has added

billions in additional sales since its inception in 2000
*Emerging Business Opportunities at IBM (OReilly, Harreld, and Tushman, 2009)

Individual (Non-Routine) Action is also

Important
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Steve Jobs at Apple:

There is no system. That doesn't mean we don't have
process... Process makes you more efficient. But
innovation comes from people meeting up in the
hallways... It's ad hoc meetings of six people called
by someone who thinks he has figured out the coolest
new thing ever and who wants to know what other
people think of his idea. And it comes from saying no
to 1,000 things to make sure we don't get on the
wrong track or try to do too much*
*Quoted in P. Burrows, The Seed of Apple's Innovation. businessweek.com (October 12 2004)

Interrelationships Amongst Microfoundations

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The Dynamic Capabilities Framework postulates

relatively complex relationships among discrete
variables; but the framework is often silent as to
how these various elements interact
The framework recognizes that there is extensive
and vibrant research activity on each
microfoundation and it aspires to capture this
knowledge and integrate it into a broader
intellectual framework rooted in the theory of the
firm.

Intellectual Architecture of Dynamic Capabilities

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Source: Figure 1.4 (p.49) of David Teece Dynamic Capabilities and Strategic Management: Organization for Innovation and Growth

Conclusions
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Microfoundations involve both routine and nonroutine activity. Research questions include:
The

appropriate balance between routines and the

non-routine action of top management.
Under what circumstances (if any) can change be
routinized?

Empirical research can use both large data sets

(e.g. Adner and Helfat, 2003) and in-depth case
studies.