Transforming to a Knowledge Economy: The Role of Innovation Ecosystems and Dynamic Capabilities

Innovation drives economic growth, even more so in the new (knowledge) economy than in the industrial economy.

Innovation requires strong national systems of innovation: Nevertheless, some regions are “hot beds” of innovation because of strong regional ecosystems.

This presentation tries to explain what makes such regional ecosystems or “clusters” work.

Learn about the elements of the National/Regional Business Ecosystem, the story of Silicon Valley, many fascinating case studies, and much more in this instructive and engaging presentation from Dr. David J. Teece, the pioneer of the dynamic capabilities framework and a global expert on innovation leadership.

1. TRANSFORMING TO A KNOWLEDGE ECONOMY:
THE ROLE OF INNOVATION ECOSYSTEMS AND
DYNAMIC CAPABILITIES
Professor David J. Teece
Berkeley Research Group
Tusher Center for Intellectual Capital Management
Haas School of Business, University of California, Berkeley
Autonomous University of Barcelona Conference
9 November 2016
Copyright David J. Teece 2016 1

2. Section I
General Concepts Relating to Regional Clusters and the
Knowledge Economy
Copyright David J. Teece 2016 2

3. INNOVATION DRIVES ECONOMIC GROWTH, EVEN MORE SO IN THE
NEW (KNOWLEDGE) ECONOMY THAN IN THE INDUSTRIAL ECONOMY
Copyright David J. Teece 2016 3
Industrial Economy
Priorities
Knowledge Economy
Priorities
Raw Materials Natural Resources,
Labor, Capital
Ideas, Intellectual
Capital
Customer Focus Mass production Mass Customization
based on information
technology and
product design
Organization Large corporations,
economies of scale
Entrepreneurs, small
scale, free agents,
networks
Success FactorsLabor, quantity, low
cost, stability, control
Talent speed,
innovation, flexibility,
customization

4. THE NATURE OF THE BUSINESS FIRM CHANGED WITH THE
ARRIVAL OF THE KNOWLEDGE ECONOMY
Organization integration changed
•Vertical disintegration is frequent
•System integration is increasing
Firms have reduced the number of full time employees, and
used more independent contractors
Executives have flattened hierarchies and promoted
autonomy to fuel creativity and innovation
“Dynamic capabilities” are now the key to competitive
advantage
Copyright David J. Teece 2016
4

5. Copyright David J. Teece 2016 5
•Innovation requires strong national
systems of innovation: Nevertheless,
some regions are “hot beds” of
innovation because of strong regional
ecosystems
•This presentation tries to explain what
makes such regional ecosystems or
“clusters” work
Regional Ecosystem/Clusters

6. SOME ELEMENTS OF THE NATIONAL/REGIONAL BUSINESS ECOSYSTEM
Copyright David J. Teece 2016
suppliers and
complementors
regulatory &
standards bodies
financial institutions
research and
educational
institutions
customer
markets
media
government and
judiciary
human capital
Firms
6

7. COMPONENTS OF A CLUSTER OF INNOVATION
Copyright David J. Teece 2016
7

8. Copyright David J. Teece 2016
Low likelihood of vibrant clusters
Strong Regional
Clusters
Strong Firm-level
Dynamic
Capabilities,
resources, and
entrepreneurship
Strong National
Systems of
Innovation
Medium likelihood of vibrant
clusters
High likelihood of vibrant clusters
8

9. REGIONAL CLUSTERS OF INNOVATING FIRMS: WHAT ARE
THEY?
I.Definition of Clusters:
•Geographic concentrations of a critical mass of
interconnected companies and supporting
institutions
•Shared advantages through aggregation of
expertise and specialized resources
II.Dynamics inside of Clusters:
•New firms constantly being launched (e.g.
Facebook, Twitter)
•Rapidly growing mature businesses (Google, Apple)
•Reinvention of mature companies (IBM, Intel)
Copyright David J. Teece 2016 9

10. INTELLECTUAL HERITAGE OF CLUSTERS ANALYSIS
19
th
century English economist
Marshall remarked upon the
“concentration of specialized
industries in particular localities”
Alfred Marshall, Principals of Economics, 1890
Copyright David J. Teece 2016
10
Alfred Marshall

11. Copyright David J. Teece 2016 11
•Ready availability of skilled labor
•Growth of supporting and ancillary trades
•Specialization up & down the value chain
•Knowledge spillovers
External economies are “spillovers” in that the benefits aren't
priced and are in one sense “free” to all firms located in the
cluster
Marshall: “GREAT ARE THE ADVANTAGES WHICH PEOPLE
FOLLOWING THE SAME SKILL OR TRADE GET FROM NEIGHBORING
TO ONE ANOTHER” (1890)
The Pillars of Marshallian Type Clusters are Today Called
“External Economies”

12. EXAMPLES OF CLUSTERS
Chemical clusters in Germany and German speaking
Switzerland
Silicon Glen, Scotland
Cambridge cluster in healthcare, life science, and IT &
computer services & design
Pharmaceutical cluster straddling Pennsylvania
Wine cluster in Napa & Sonoma Valley in California
Financial services clusters in London & New York
Super yacht clusters in Auckland, New Zealand & Via Reggio,
Italy
Boston Route 128 electronics cluster
Electronics, internet & high- tech cluster in Northern California
(“Silicon Valley”)
Copyright David J. Teece 2016 12

13. THE BIRTH OF CLUSTERS… GETTING STARTED
•Clusters of innovation emerge from a continuous process of
technology commercialization:
•Clusters result from start-ups, and the continued growth and
metamorphosis of more mature businesses
•High velocity of business activity is a characterization of a
dynamic cluster
•Cities and clusters grow because learning is facilitated by close
interaction and information exchange
•Entrepreneurs are key drivers
Copyright David J. Teece 2016 13

14. ENTREPRENEURS
•Effectuate “new combinations”
Schumpeter, 1943
•“Pursue opportunities beyond the
resources they control”
Stevenson, 1974
Copyright David J. Teece 2016 14

15. ENTREPRENEURSHIP, PROFIT, AND SOCIETAL GAIN
•A private enterprise economy has a bias first to profit, not to
innovation
•Entrepreneurship has a positive value to society when it is
focused on innovation
•Entrepreneurship has a negative (parasitic) value to society
when it is focused on organized crime or mere “rent seeking”
flowing from exploiting regulation or access to government
(Baumol)
•The job of government is to set the rules so that payoffs from
good entrepreneurship are positive and the payoffs from
socially wasteful entrepreneurship are negative (Baumol)
Copyright David J. Teece 2016 15
William Baumol, NY University

16. COMPONENTS OF AN INNOVATION CLUSTER
Entrepreneurs: Create & grow globally scalable businesses
Established Companies: Can act as helpful alliance/partners
to new entrants. They may both cooperate & compete
Universities: To supply talent (faculty & students) and
technology transfer opportunities
State of Mind/Culture: Risk taking is accepted. Failure isn’t
stigmatized, it is even celebrated. Entrepreneurs are lionized
Linkages: Born Global Companies must also have links to firms
in other regional cluster as well as to firms within its own
regional cluster
Copyright David J. Teece 2016 16

17. CONTINUED
Copyright David J. Teece 2016
Venture Capital: vital to new enterprise development and needs to be
permanent, not constantly interrupted in its supply
Service Providers: Law, accounting and consulting are essential, and
need to be willing to accept non- traditional fee structures with a high
proportion of performance based fees
Management: Entrepreneurial managers are essential to build/grow
fledgling companies
Government: Must set the rules of the game to favor development,
incentivize entrepreneurs, and penalize mere rent seekers
17

18. •Whereas Porter saw the best strategies as
ones that concentrated activities in one
country, a more distributed approach is
called for.
•Raymond’s “double diamond” framework
sees sustainable value added in a specific
country resulting from asset orchestration by
both domestic firms linked to foreign firms.
Copyright David J. Teece 2016
John H.Dunning
Alan M.Rugman
Ties to Other Clusters
18

19. It’s OK to fail if:
You shoulder the blame
Don’t blame investors
Fail fast, adapt, and learn
Show grace
Restart
Copyright David J. Teece 2016 19
Entrepreneurship:

20. Copyright David J. Teece 2016
Universities are Important Pillars to Dynamic Ecosystems
20

21. Innovating firms favor high
autonomy inside the
organization
Authoritarian structures are
anathema, “Control” is
better achieved through
leadership
Copyright David J. Teece 2016
21
High Autonomy & High Accountability Workplaces

22. Promote
• Entrepreneurship and new enterprise development
• Open business environment… open to ideas,
capital, & people
• Results oriented meritocracy; no bribing and no
corruption
• Mobile, fluid workforce
Support
•Universities & national research institutions
•Collaboration between enterprises
Develop
•Specialized infrastructure: venture capital, lawyers, executive search and other professionals
•Technology parts
•Technology transfer centers
•Incubators and accelerators
Copyright David J. Teece 2016 22
Public Policies Supporting Innovation Habitats & Cluster
Development

23. Protect
•Intellectual property
•Quality of life
Ensure:
•Payoff to socially useful entrepreneurship is positive
•Payoff to parasitic entrepreneurship is negative
Copyright David J. Teece 2016 23
Everyone wants their own “Silicon Valley”
but few will be able to build one

24. IDENTIFY METHODOLOGY TO GUIDE ACTION: GAPS OR
DISJOINTS IN THE INNOVATION ECOSYSTEM AROUND
MISSING RESOURCES/STRUCTURES, AND FAILURES TO
COLLABORATE
Missing Resources (e.g.)
Venture capital?
Adequate IP?
Good governance?
Copyright David J. Teece 2016
Collaboration Failures (e.g.)
University- industry?
Government- industry?
Company to company?
Cluster to cluster?
24

25. SECTION II
SILICON VALLEY AS A REGIONAL CLUSTER AND THE
WORLD’S DOMINANT INNOVATION HUB?
Copyright David J. Teece 2016 25

26. Copyright David J. Teece 2016
What is “Silicon Valley”?
 25 percent of workforce in high-skill
occupations
 Income average 60 percent higher than
US
 5 percent US GNP, 10 percent of US
patents
 Productivity rate 50% higher than US
average
 8 Million people
2014
2005
Source: Joint Venture Silicon Valley Network, 2006
Old
New (Post 2000)
26

27. Perhaps it all started with the
birth of the transistor in 1947
at Bell Labs in New Jersey.
The technology behind the
transistor was licensed to the
world for a nominal fee.
Copyright David J. Teece 2016
Replica of the first transistor,
Bell Labs 1947
Getting Started in Silicon Valley
27

28. 1.William Schockley (inventor of the transistor)
moves to Northern California, 1955 and sets
up Shockley Semiconductor Labs
2.Sherman Fairchild (from New York) funds
Fairchild Semiconductor in Northern
California (1957)
Copyright David J. Teece 2016
28

29. LEAD TEAM FROM SHOCKLEY SEMICONDUCTOR
LABS SPLIT AND HELPS START FAIRCHILD
SEMICONDUCTOR IN 1957
Copyright David J. Teece 2016 29

30. Fairchild’s Robert Noyce and TI’s Jack Kilby independently
integrate many transistors on a single device and invent the
integrated circuit (IC)
Copyright David J. Teece 2016
Robert Noyce
Fairchild
Jack Kilby
(Texas
Instruments)
30

31. CO-LOCATION WITH STANFORD UNIVERSITY
Dean Fred Terman of Stanford
University Created its Industrial Business
Park (Stanford Research Park) in 1951
IBM & Xerox, both large established
companies, also setup research labs in
San Jose (IBM, 1956) & Palo Alto
(Xerox, 1970), respectively
Copyright David J. Teece 2016 31
Frederick Emmons Terman

32. HEWLETT PACKARD AND VARIAN WERE THE FIRST TO MOVE
TO THE STANFORD BUSINESS PARK
Copyright David J. Teece 2016
Bill Hewlett and
David Packard
32

33. THE TWO STEVE’S
CREATE THE FIRST
PERSONAL COMPUTER,
THE APPLE 1, 1976
Copyright David J. Teece 2016
Steve Wozniak and Steve Jobs
33

34. Copyright David J. Teece 2016
Ongoing Waves of Innovation Animate Silicon Valley
Source: Javed Mohammad, “Silicon Valley History and Innovation”
34

35. MILESTONE SILICON VALLEY INNOVATIONS
•Klystron tube to magnify electromagnetic waves at
microwave frequencies (Varian)
•Transistor and Integrated Circuit (Fairchild)
•Microprocessor (Intel)
•Personal computer (Apple)
•Graphical User Interface (Xerox PARC)
•Relational Databases (IBM Almaden)
•Internet Search (Google)
However, the Valley’s competitive advantage does not stem
from discrete innovations alone. It stems from the ability to
continually innovate.
Copyright David J. Teece 2016
35

36. MOST IMPORTANT CHARACTERISTIC: THE REGION CONTINUALLY RE -INVENTS ITSELF!
Copyright David J. Teece 2016 36

37. LARGEST SILICON VALLEY FIRMS
Copyright David J. Teece 2016
1982
1.Hewlett-Packard
2.National Semiconductor
3.Intel
4.Memorex
5.Varian
6.Envirotech*
7.Ampex
8.Raychem*
9.Amdahl*
10.Tymshare*
*no longer existed in 2002
2002
1.Hewlett-Packard
2.Intel
3.Cisco*
4.Sun*
5.Solectron
6.Oracle
7.Agilent*
8.Applied Materials
9.Apple
10.Seagate Technology
Also: Maxtor*, Palm*, Google*,
Cadence*, Adobe*, Yahoo*
*didn’t exist in 1982
2012
1.Apple
2.Hewlett Packard
3.Intel
4.Cisco Systems
5.Google
6.Oracle
7.eBay
8.Synnex
9.Applied Materials
10.Gilead Sciences
37

38. SILICON VALLEY COMPARED TO U.S. DETROIT FIRM STABILITY OF SIZE RANKINGS
Copyright David J. Teece 2016 38
1982
1.Ford
2.General Motors
3.Chrysler
2002
1.Ford
2.General Motors
3.Daimler-Chrysler
Detroit firms remain relatively ossified; the Detroit region is not (yet) dynamic
2012
1.Ford
2.General Motors
3.Fiat-Chrysler

39. •Be agile; “pivot” when needed
•Fail graciously
•Learn from your mistakes
•Dream big
•Highly educated workforce
•Easy access to university and government research
Copyright David J. Teece 2016
39
Enablers of Dynamic Regional Ecosystem

40. Copyright David J. Teece 2016
Enablers of Dynamic Regional Ecosystem (Cont.)
•Favorable labor laws: Easy to hire and fire
•City and State government encourage and enable startups
•Good quality of life with easy access to the beach in
summer and mountains in winter and summer
•Easy to network with peers and culture that thrives on
innovation
•Free flow of information
40

41. CHARACTERISTICS OF SKILLED WORKERS OF THE FUTURE:
•Will work in numerous places over course of career
•Will have to re- train and re-tool
•Will have to distinguish self with a unique competency
•Will need high-end skills: language, writing,
communication, technical expertise
•Will need to be T-shaped
Copyright David J. Teece 2016
41

42. DEVELOPING T-SHAPED SKILLS FOR CURRENT AND FUTURE ECONOMY
Business, Technology, and People Skills
Source: “Hype vs. Reality: A.I./Robotics and impact on employability” Roundtable, IBM VP Susan Puglia
The skills needed for innovations to solve complex problems that leverage
technological advances to create a Smarter Planet are in short supply
“T-shaped” skills with depth in subject
skills and breadth in workforce skills:
•Practical Experience
•Communications
•Teaming
•Management
•Innovation
•Entrepreneurship
•People Management
•Strategic Planning
•Problem Solving via informatics
•Problem solving via social
networks
•Flexible, adaptive, and
entrepreneurial
•Produced on demand
Copyright David J. Teece 2016
42

43. ORGANIZATIONAL DESIGN ISSUES
Copyright David J. Teece 2016
•Results oriented meritocracy is necessary
•“Cronyism” is harmful
•Too much hierarchy is stultifying
43

44. SECTION III
FIRM LEVEL DYNAMIC CAPABILITIES AND THE
COMPETITIVE ADVANTAGE OF NATIONS (AND REGIONS)
Copyright David J. Teece 2016 44

45. “CREATED” COMPETITIVE ADVANTAGE LIES WITH
GOVERNMENTS AND FIRMS
Michael Porter’s (Harvard) most impactful statement was that the competitive
advantage of a nation is:
1.Hardly ever built on inherent factors of production (land, labor, capital) but
on created competitive advantages (Cohen, Teece, Tyson & Zysman)
2.Clusters of interconnected firms, supplies, related industries and institutions
support competitiveness. (His “diamond” diagram)
3.In short, the competitive advantage of nations is not just “created” out of
thin air; the mechanisms of creativity are rooted in clusters consisting of firms,
industries & national institutions
Copyright David J. Teece 2016 45

46. >“Balance sheet” view of assets
>Little emphasis on flexibility as the key to
success
>Resources, not capabilities, tend to
matter
Old approach
>Recognition of “soft” assets
>Heavy emphasis on orchestrating assets for deployment and redeployment
New approach
RESOURCES YIELD MORE VALUE WHEN TIGHTLY COORDINATED
OR “ORCHESTRATED” STRATEGICALLY
46Copyright David J. Teece 2016

47. THE BATTLE OF JUTLAND: WHERE STRATEGY / ORCHESTRATION WAS ABSENT:
47
The British Navy at the
Battle of Jutland, 1916
“There seems to be
something wrong with
our bloody ships today.”
Admiral John Jellicoe
“The real deficiency, however, was the loss of [Vice Admiral Horatio Lord] Nelson’s touch. It was not the bloody ships that were principally at fault. It was the inadequate doctrine of command and control.”
Frank Hoffman, “What we can learn from Jackie Fisher,”
Proceedings of the Naval Institute, April 2004, p. 70.
Copyright David J. Teece 2016

48. “Admiral Jellicoe is the only one that
could lose the battle in an afternoon”
Winston Churchill, First Lord of the Admiralty, Great Britain,
1927
In short, strategy also matters
Copyright David J. Teece 2016
Winston Churchill
48

49. ORDINARY CAPABILITIES
 Operation, administration and governance
 Routines / standard operating procedures are key to
ordinary capabilities
 Ordinary capabilities reflect technical efficiency
 “Best practices” are strong ordinary capabilities
 Imitation by rivals is enabled by
More information in the public domain
Better business school training
Management consultants
49
Copyright David J. Teece 2016

50. DYNAMIC CAPABILITIES
“The ability of an organization and its management to
integrate, build, and reconfigure internal and external
competences to address rapidly changing
environments” (Teece et al., 1997: 516)
High-order capabilities can be thought of as falling
in three categories:
50
Sensing
Identification of
opportunities &
threats at home
and abroad
Transforming
Continuous renewal
and periodic major
strategic shifts
Seizing
Mobilization of
resources to
deliver value and
shape markets
Copyright Teece 2016
Copyright David J. Teece 2016

51. •Strategic “fit” over the
long run (evolutionary
fitness)
•Sensing, seizing, shaping
and transforming
•Difficult ; inimitable
•Technical efficiency in
basic business functions
•Operational,
administrative, and
governance
•Relatively easy; imitable
Ordinary
Capabilities
Dynamic
Capabilities
Doing things “right”
Doing the “right” things
ORDINARY VS. DYNAMIC CAPABILITIES
51
Purpose
Tripartite
schemes
Imitability
Copyright David J. Teece 2016

52. Copyright David J. Teece 2016
Ordinary capabilities are widely diffused:
The operations portion of the automobile business has been
thoroughly optimized over many decades, doesn’t vary much from one
automobile company to another, and can be managed with a focus
on repetitive process. It requires little in the way of creativity, vision or
imagination. Almost all car companies do this very well, and there is little
or no competitive advantage to be gained by “trying even harder” in
procurement, manufacturing or wholesale.
Competitive advantage requires dynamic capabilities:
Where the real work of making a car company successful suddenly
turns complex, and where the winners are separated from the losers, is in
the long-cycle product development process, where short-term day- to-
day metrics and the tabulation of results are meaningless.
Bob Lutz, former vice chairman at General Motors
Wall Street Journal, June 11, 2011
From Ordinary To Dynamic Capabilities In Autos
52

53. FROM ORDINARY TO DYNAMIC CAPABILITIES IN THE U.S. ARMY
“ We had a culture in our forces, of excellence. It was how
good can I be at my task? How good can I be at flying an
airplane, dropping bombs, locating an enemy target? But
that’s not as important as how well those pieces mesh
together.”
“The real art is [in] cooperating with civilian agencies, it’s
cooperating with conventional forces, it’s tying the pieces
together. That’s the art of war, and that’s the hard part.”
-Quotes from General Stanley McChrystal, Foreign Affairs (March/April 2013)
53Copyright David J. Teece 2016

54. STRATEGY IS COMPLEMENTARY TO DYNAMIC CAPABILITIES
54
“A good strategy is a ‘specific’ and ‘coherent’ response to—and
approach for overcoming—the obstacles to progress.”
“A bad strategy is a list of blue sky goals or a fluff-and-buzzword
infected ‘vision’ everybody is supposed to share.”
- Strategy Kernel (Rumelt, 2011)
Diagnosis
Guiding
policy
Coherent
action
Copyright David J. Teece 2016

55. STRATEGY–DYNAMIC CAPABILITIES NEXUS
55
Strategy Kernel
Related Dynamic
Capabilities
Clusters
Primary
Managerial Style
Required
Diagnosis Guiding Policy
Coherent
Action
Sensing
Seizing/
Transformation
Seizing/
Transformation
EntrepreneurialAdministrative Leadership
“You have to be fast on your feet and adaptive or else a strategy
is useless.”
-- Lou Gerstner, Fortune (April 19, 1993 )
Copyright David J. Teece 2016

56. RUNNING A BUSINESS IS LIKE A WAR AGAINST INSURGENTS
How do you win a war? (General McChrystal)
“Raids need to be married to a strategy.”
“Find information, pull it in, empower, use.”
“Old model: push information up to the top level where all
major discussions are made.”
“New model: the information is shared, and discussions are
decentralized.”
56
The “enemy” is:
Scattered widely
Highly committed
Well “armed”
Copyright David J. Teece 2016

57. Copyright David J. Teece 2016
 Ordinary capabilities involve “tuning the engine”… a
process of optimization.
 Dynamic capabilities often involves a change in
strategy or in business models. This allows “pivoting”
“Tuning” And “Pivots”
57

58. THE CENTRALITY TO COMPETITIVE ADVANTAGE OF (DYNAMIC) “CAPABILITI ES”
& LEARNING
Organizational and technological capabilities lie at
the core of corporate success; learning
is at the core of
capability building
•Strong ordinary capabilities
(operations, administration, governance)
are necessary but not sufficient for long-run (financial) success
•Strong dynamic capabilities
are both necessary and sufficient for
long-run (financial) success
58Copyright David J. Teece 2016

59. Copyright David J. Teece 2016
Ordinary capabilities are not usually enough to yield
sustained competitive advantage. Dynamic capabilities
coupled with a validated strategy enable an organization
to change in a manner that supports evolutionary fitness
and sustainable advantage.
Key Idea
59

60. Copyright David J. Teece 2016
Entrepreneurial managers:
excel at interpretation and synthesis
foster a culture of learning to build capabilities
orchestrate (select, integrate, modify)resources
devise business models
develop analyses that support strategy formulation
adjust strategy implementation
keep the organization nimble
Entrepreneurial Leadership Is A Key Element Of Dynamic
Capabilities
60

61. CAPABILITIES MUST BE BUILT; THEY CANNOT BE BOUGHT
“Apple remains ahead of its rivals in the ability
to innovate and “create magic” despite
tougher competition in key sectors like
smartphones and tablets… Apple still has
strong growth opportunities because of its
ability to work simultaneously on hardware,
software and services… Apple has the ability
to innovate in all three of these spheres and
create magic… This isn’t something you can
just write a check for. This is something you
build over decades.”
-Tim Cook, Apple CEO (Taipei Times, February
2013)
61
Copyright David J. Teece 2016

62. SENSING. SEIZING & TRANSFORMING ARE THE PRACTICAL PILLARS OF
DYNAMIC CAPABILITIES
62
Sensing Seizing
Transforming
Perception and
Attention
Problem Solving
and Reasoning
Communication
and Social
Cognition
Opportunity
Recognition &
Creation
Strategic
Investment &
Business Model
Design
Asset Alignment &
Overcoming
Change
Resistance
Firm
Performance
Sample
Managerial
Cognitive
Capabilities
Dynamic
Managerial
Capabilities
Potential
Strategic
Impacts
Copyright David J. Teece 2016
Figure 1 in Helfat & Peteraf, Managerial Cognitive Capabilities and the Microfoundations of Dynamic
Capabilities, 2014

63. FURTHER READING
Copyright David J. Teece 2016
63