Review: Strategy, Innovation and the Theory of the Firm

David J. Teece

David J. Teece’s Strategy, Innovation and the Theory of the Firm uses a couple of dozen papers to explore his own scholarship and that of his co-authors on strategy research and innovation as the engine of growth. He develops the “Dynamic Capabilities Framework” – how the various streams of research on management and innovation converge, the framework and derivative theories are tested and how they can be developed into a capabilities-based theory of the firm.

In discussing the foundations of the theory of the firm, Teece first turns to Alfred Chandler who left a considerable legacy. “He helped explain, as no one else has, how and why large industrial enterprises emerged and expanded, domestically and internationally.” Chandler didn’t focus on financialization but did note:

Where decisions and actions have been motivated by the desire to obtain… profits based solely in the transactions involved in the buying or selling of companies… they appear to have reduced and even destroyed the capabilities essential to compete.

Early theories of the firm downplayed or even “blotted out” the role of the manager. In the “dynamic capabilities” framework management plays an important role in sensing opportunities, choosing investments, organizing assets and ensuring continuous renewal. “Transaction cost economics” recognizes that management can exercise “fiat” over the organization. Teece brings the reader up to date with a discussion of behavioral considerations and the role of entrepreneurial management.

His discussion of system-level integration (SLI) and application-specific integrated circuits (ASICs) includes a helpful taxonomy on the nature of knowledge, recognizing that knowledge and related intangibles have emerged as the key drivers on competitive advantage.  “There is no such thing as a privileged product market position – unless it rests on some upstream intangible asset.”

With Gary Pisano and Amy Shuen, Teece’s “Dynamic Capabilities and Strategic Management” was the most cited paper in economics and business for the period from 1995 to 2005.” His work is of central importance since it focuses on developing organizational capacity to sense, shape and seize opportunities and to maintain competitiveness through enhancing, combining, protecting, and reconfiguring tangible, but more importantly, intangible assets. This book can help you do the same. 

I don’t recall making an issue out of typeface before but I’m sixty-five now and found that most of the type in this volume to be unbearably small. Unfortunately, when it was larger, it was often of poor quality.  Generally, such issues don’t detract substantially from the book. However, in this case it did. Perhaps I should have waited for a Kindle edition. Hopefully, you won’t find it so much of a strain.