Dynamic Capabilities and Organizational Agility: Risk, Uncertainty, and Strategy in the Innovation Economy

Abstract

"Organizational agility" is often treated as an immutable quality, where it is implied that firms need to be in a constant state of transformation. But such advice ignores that changes and transformations, while often essential, come with a cost, are not always necessary, and may not even be possible. Our approach is to explore agility at a more fundamental level and relate it more specifically to dynamic capabilities. We find it essential to first understand deep uncertainty, which is ubiquitous in the innovation economy. It is very different from risk, which can be managed using traditional tools and approaches. Strong dynamic capabilities are necessary for fostering the organizational agility necessary to address deep uncertainty, such as that generated by innovation and the associated dynamic competition. 2We explore the mechanisms by which managers may calibrate the required level of organizational agility, deliver it cost effectively, and relate it to strategy. We provide a set of principles and practices that differ according to whether a firm is managing regular risk or deep uncertainty. These distinctions are critical, as the mistaken use of risk management tools in an environment of deep uncertainty can bring false comfort. Our approach embraces concepts from both financial economics (e.g., hedging and real options) and strategic management theory (e.g., managerial/entrepreneurial asset orchestration). We conclude that strong dynamic capabilities are essential when firms face deep uncertainty, which they frequently do in interdependent economies experiencing rapid technological change and financial disruption.

Convergent Innovation in Emerging Healthcare Technology Ecosystems: Addressing Complexity and Integration

“…Importantly, there are inherent differences between managing risks (with known probabilities) and uncertainty (or "unknown unknowns") (Teece et al, 2016). The major uncertainties and risks in innovation are generally considered to be technological, regulatory, and market based (Hobday, 1998), and they are typically addressed by a variety of mechanisms to "manage complexity", resulting in simplification and specialization (Levinthal & March, 1993).…”

“…In extant literature, there is more focus on the management of risk (Evanschitzky et al, 2012) than on addressing uncertainty, which is considered more likely and harder to manage (Teece et al, 2016).…”

“…The dynamic capability literature points to the use of sensing, seizing, and transforming to better manage uncertainty (Teece et al, 2016), with abduction (as a mode of inference) being important to create new thinking for subsequent testing. This suggests creative abduction (Schurz, 2008) is more relevant (versus selective abduction, which chooses from multiple explanations), although creative abduction is rarely discussed in the literature (Prendinger & Ishizuka, 2005).…”

Dynamic Capabilities in Automotive Pollutants Reduction Technologies: Case Study

“…Strong dynamic capabilities are the means to create the organizational agility necessary to deal with the increasing uncertainty generated by innovation and competition (Teece, Peteraf, & Leih, 2016). For Winter (2003), there is a broad consensus in the literature regarding the understanding that dynamic capabilities contrast with so-called ordinary (or operational) capabilities, because the former would be concerned with the change.…”

"Coupled Processes" as Dynamic Capabilities in Systems Integration

“…Our analysis considers the passage from one generation to the next of a platform product in order to define precisely the timeframe and granularity of organizational change (Helfat & Winter, 2011 Besides commercial and technological uncertainty (Keynes, 2004;Teece, Peteraf, & Leih, 2016), systems integrators have to cope with systemic uncertainty (Rosenberg, 1982) that stems from emergent properties (Rechtin, 2000;Sillitto, 2005;Zandi, 2000).…”