Summary of the article “Dynamic Capabilities and
Organizational Agility: Risk, uncertainty and strategy in the
innovation economy” By Teece, Peteraf and Leih (2016)
Previous research state that firms should become agile no matter the cost and stay in a
constant state of radical transformation
However agility sacrifices efficiency
Risk vs. uncertainty
Risk - “Known unknowns”
- Can be reduced because of ‘natural hedges’
- Can be reduced through contracts, procedures and protocols
Example: when a company has offshore subsidiaries and buys all resources in the host
country to minimize exchange rate risk
Uncertainty - “Unknown unknowns”
- Doing the right things is more important than doing things right, however really hard
when there is uncertainty
- Solution to uncertainty: dynamic capabilities
- Degree of uncertainty increased dramatically as global economy has become more
advanced & integrated ambiguity
Comparison:
- Industrial economy = Chess
o Every move is knowable, the better player almost always wins
o Finite number of moves and counter moves
o Managing risks
- New innovation economy = Mixed martial arts
o Infinity of different combinations of moves (like in the new economy)
o You have to wait for whatever your opponent does
o Entrepreneurial manager is an orchestrator coordinating activities
o Managing uncertainty
Important to differentiate between management of risk & uncertainty Agility
Agility (flexibility) = The capacity of an organization to efficiently & effectively redeploy/
redirect its resources to value creating and value protecting activities as internal and
external circumstances warrant
Manage both supply & demand
- Very costly to implement
- Agility requirements are context sensitive
- Very valuable when there is uncertainty
- Understanding agility requires a framework: dynamic capabilities
Organizational Agility: Risk, uncertainty and strategy in the
innovation economy” By Teece, Peteraf and Leih (2016)
Previous research state that firms should become agile no matter the cost and stay in a
constant state of radical transformation
However agility sacrifices efficiency
Risk vs. uncertainty
Risk - “Known unknowns”
- Can be reduced because of ‘natural hedges’
- Can be reduced through contracts, procedures and protocols
Example: when a company has offshore subsidiaries and buys all resources in the host
country to minimize exchange rate risk
Uncertainty - “Unknown unknowns”
- Doing the right things is more important than doing things right, however really hard
when there is uncertainty
- Solution to uncertainty: dynamic capabilities
- Degree of uncertainty increased dramatically as global economy has become more
advanced & integrated ambiguity
Comparison:
- Industrial economy = Chess
o Every move is knowable, the better player almost always wins
o Finite number of moves and counter moves
o Managing risks
- New innovation economy = Mixed martial arts
o Infinity of different combinations of moves (like in the new economy)
o You have to wait for whatever your opponent does
o Entrepreneurial manager is an orchestrator coordinating activities
o Managing uncertainty
Important to differentiate between management of risk & uncertainty Agility
Agility (flexibility) = The capacity of an organization to efficiently & effectively redeploy/
redirect its resources to value creating and value protecting activities as internal and
external circumstances warrant
Manage both supply & demand
- Very costly to implement
- Agility requirements are context sensitive
- Very valuable when there is uncertainty
- Understanding agility requires a framework: dynamic capabilities
