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

California Management Review, Forthcoming

Tuck School of Business Working Paper No. 2771245

33 Pages Posted: 28 Apr 2016 Last revised: 23 Jul 2016

See all articles by David Teece

David Teece

Institute for Business Innovation

Margaret A. Peteraf

Dartmouth College - Tuck School of Business

Sohvi Heaton

Date Written: April 7, 2016

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. We 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.

Keywords: Dynamic capabilities, agility

Suggested Citation

Teece, David J. and Peteraf, Margaret A. and Heaton, Sohvi, Dynamic Capabilities and Organizational Agility: Risk, Uncertainty and Entrepreneurial Management in the Innovation Economy (April 7, 2016). California Management Review, Forthcoming; Tuck School of Business Working Paper No. 2771245. Available at SSRN: https://ssrn.com/abstract=2771245 or http://dx.doi.org/10.2139/ssrn.2771245

David J. Teece

Institute for Business Innovation ( email )

F402 Haas School of Business, #1930
Berkeley, CA 94720-1930
United States
(510) 642-4041 (Phone)

Margaret A. Peteraf

Dartmouth College - Tuck School of Business ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-1944 (Phone)
603-646-0995 (Fax)

No contact information is available for Sohvi Heaton

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