Dynamic Capabilities Part 3: The Power of People
The ultimate sustainable competitive advantage comes from an organization’s people. The collective experiences and expertise of an organization’s technical specialist, managers, and entrepreneurs are what allow great organizations to create something much greater than the sum of their parts - especially as markets become increasingly volatile and dynamic.
The organizations of the last two centuries relied on workers that, although skilled, were interchangeable “cogs in the machine”. Each had a specific role, several levels of management to oversee and coordinate those roles, and for the most part anyone was replaceable. As we’ve moved into a more information/knowledge-centric world, the resources that organizations value most are now the experiences, perspectives, and technical proficiency the specific people making up the organization. This inherent value is no longer an easily replacable commodity – it is embedded in the person and comes and goes with them.
There are three main roles worth discussing in depth: 1) entrepreneurs, 2) managers, and 3) talented specialists. Each serves a very specific purpose in the development of dynamic capabilities. In David Teece’s Dynamic Capabilities & Strategic Management, there is a lot of great insight regarding these roles (specifically Chapter 7). In this post, I’ll simply highlight the points that I found most interesting.
The essence of an organization that has mastered dynamic capabilities is that they are able to sense opportunities – whether in the form of new products/services/ideas or in the form of new customer needs – and quickly capitalize on them better than their competitors. Any new idea may take the form of an invention or innovation, but it is important to distinguish between these two terms. In Denning and Dunham’s book The Innovator’s Way, they make the point that invention does not necessarily result in innovation. Innovation is about taking an invention or combination of inventions and creating useful products or services that can be brought to market. While the talented specialists are usually the ones coming up with novel ideas (i.e. inventions), it is the entrepreneurs and managers that are responsible for leveraging those ideas and turning them into profitable differentiators.
Entrepreneurs
The first part of this (i.e. exploration) falls to the entrepreneur who is responsible for taking an invention (or series of inventions) and creating an innovation. Entrepreneurs are the ones that (as I discussed in last week’s post) need to be able to sense disequilibrium in a market and utilize that insight to create new opportunities. Great entrepreneurs find ways to either create disequilibrium, restore equilibrium, or ideally do both. They make and manage the organization’s investment in R&D and are constantly scanning the environment for new inventions as well as new customer needs. The key to being a successful entrepreneur is in understanding the market’s evolution and foreseeing its transformation. With that insight, one can filter and select the best ideas out of the multitude and develop them into products or services that will hopefully provide a significant competitive advantage.
Managers
The second part of this falls to the manager who is responsible for getting the organization to fully leveraging an innovation (i.e. exploitation). To squeeze every bit of value out of a good idea, manager need to master a few skills:
Gain buy-in: One of the obstacles that managers need to address is that often innovations challenge the established way of doing things, so managers need to find a way to win over or neutralize naysayers and transform the organization’s perspective.
Make the business case: There are two ways that investment in an innovation can make sense: 1) the investment will increase significantly in value over time, or 2) the investment combined with other existing assets will allow those existing assets to become significantly more profitable. With either business case the key is that it is not just about increasing profit or market share, but about doing so in a greater capacity than the competition.
Decision making under uncertainty: In highly dynamic environments, managers also need to be skilled at making good decisions under uncertainty. Some of the biggest barriers to fully leveraging a great idea are indecision, biases, and inaction. There is an interesting tension that arises with decision-making under uncertainty. On the one hand, being disciplined about following established processes for information gathering, analysis, and governance are important for being able to quickly sort through the abundance of information to arrive at a clear decision. On the other hand, these established processes need to be modified regularly as the market changes. To balance this tension, organizations that are serious about innovation need to establish a “tight fit” (as Teece calls it) between structure, strategy, and process. Basically, this means that there needs to be simplicity in how organizational structure, organizational strategy, and the various organizational processes inform each other so that reconfiguration can happen easily and quickly).
Creative resource allocation: In dynamic organizations, there are some additional considerations that managers need to keep in mind when deciding to invest in new innovations. One is the idea of irreversibility (i.e. as development occurs, if the environment changes, how easy is it to stop or redirect development?). Another is how to manage what Teece calls “cannibalization” of existing resources (i.e. the creative repurposing of existing people, tools, or processes to develop something new). The third consideration – cospecialization - we discussed in last week’s post. All three of these are not traditionally in the purview of managers, however, they are becoming much more prevalent as more markets and organizations become highly-dynamic and innovation-focused.
Talented Specialists
Of course none of this is possible without talented specialists. They are the ones that come up with the inventions and ideas that entrepreneurs and managers develop and bring to market. One of the important things to discuss related to talented specialists is that they are motivated by distinctly different means than workers of the past.
These individuals often are looking for greater autonomy and greater responsibility. They are self-motivated and therefore do not need to be “supervised” in the traditional sense, in fact, they often see themselves as equals with their managers. While compensation and advancement are still important as a measure of their relative value, there are also factor such as freedom in work style and work focus (provided it supports the performance goals of the organization) that are also important. The main benefits that an organization brings to a talented specialist are: 1) status/brand/reputation/credibility that comes from that individual being associated with the organization, 2) the ability to work with other highly talented specialists, 3) the ability to focus more intently on one’s work, and 4) the promise that as part of the organization the specialist will be able to achieve more than they would individually or with any other organization. Again, the main drivers for talented specialists are personal and professional growth, strengthening of their personal brand, and freedom and responsibility.
The Singularity
While the role of the entrepreneur and manager were described separately earlier, they are becoming more and more enmeshed. In fact, in recent years I’ve been promoting this idea of “the integrator” role as a sort of hybrid of the three roles described above. The integrator needs to be intensely entrepreneurial while simultaneously being good at execution and management of talented specialists. They are focused on productivity enhancement (making the most of the team and its ideas). As such they need to master the skill of enabling (instead of dictating or delegating), proactively managing the team dynamic, creating alignment and facilitating cross-learning amongst a diverse range of specialists, and fostering strong commitment to collective goals.
Individuals that can possess the best of all three of these roles will be the ones that drive their organization and industry into the future. The organizations that develop means to repeatedly create these superstars will have mastered the most critical part of dynamic capabilities – their people – and will be untouchable as we move full speed ahead into our next industrial evolution centered on information and knowledge.
References:
Denning, P.J., and Dunham, R. (2010) The Innovator’s Way: Essential Practices for Innovation. The MIT Press.
Teece, D.J. (2009). Dynamic Capabilities & Strategic Management: Organizing for Innovation and Growth. Oxford: Oxford University Press
Phelps, A.F. (2011). The Collective Potential: A Holistic Approach to Managing Information Flow in Collaborative Design and Construction Environments. Turning Point Press.
