How to Sense & Seize Op­por­tu­ni­ties

Three dy­namic ca­pa­bil­i­ties — sens­ing, seiz­ing and trans­form­ing— can help an or­ga­ni­za­tion ex­tend its re­source base.

Rotman Management Magazine - - FRONT PAGE - By Ge­orge S. Day and Paul J.H. Schoe­maker

at an­tic­i­pat­ing and ex­ploit­ing the WHY ARE SOME FIRMS SO ADEPT op­por­tu­ni­ties cre­ated by tech­nol­ogy and rapid change, while oth­ers strug­gle to keep up — or worse, go out of busi­ness?

We be­lieve the an­swer is linked to the con­cept of ‘dy­namic ca­pa­bil­i­ties’. De­vel­oped by Haas School of Busi­ness Pro­fes­sor David Teece and his col­leagues, this frame­work shows that three dy­namic ca­pa­bil­i­ties — sens­ing, seiz­ing and trans­form­ing — en­able firms to sense op­por­tu­ni­ties sooner than their ri­vals, seize them more ef­fec­tively, and sup­port the or­ga­ni­za­tional trans­for­ma­tion that this en­tails.

In this ar­ti­cle, we will de­scribe how we have ad­vanced Dy­namic Ca­pa­bil­i­ties The­ory by adding sub-ca­pa­bil­i­ties to the frame­work. We will also show how lead­ers can make smart choices about which ca­pa­bil­i­ties to de­velop in or­der to thrive in an era of con­tin­u­ous change.

DY­NAMIC CA­PA­BIL­ITY 1: SENS­ING OP­POR­TU­NI­TIES

The abil­ity to sense emerg­ing threats and op­por­tu­ni­ties is fun­da­men­tal to a firm’s abil­ity to adapt to volatile mar­kets, tech­no­log­i­cal uncer­tainty and un­pre­dictable com­peti­tors.

Our re­search finds that suc­cess­ful sens­ing can be un­der­stood through two in­ter­re­lated learn­ing pro­cesses that func­tion as dy­namic ‘sub-ca­pa­bil­i­ties’ of sens­ing.

Sub-ca­pa­bil­ity 1: Pe­riph­eral Vi­sion

The in­tent of this ca­pa­bil­ity is to see sig­nals of po­ten­tial op­por­tu­ni­ties and nascent threats sooner than your ri­vals. As with hu­man vi­sion, the pe­riph­ery is the fuzzy zone out­side the area of pri­mary fo­cus. For or­ga­ni­za­tions, the pe­riph­ery is dif­fi­cult to scan be­cause of an ad­verse sig­nal-to-noise ra­tio. In­for­ma­tion over­load, dis­trib­uted in­tel­li­gence and con­fu­sion are se­ri­ous im­ped­i­ments to im­prov­ing pe­riph­eral vi­sion. To ad­dress this dif­fi­culty, a strong pe­riph­eral vi­sion ca­pa­bil­ity re­quires two crit­i­cal ac­tions.

SCOPING. Man­agers can use three guides to en­sure that their scope is nei­ther too broad nor too nar­row:

Learn from the past, by an­a­lyz­ing past blind spots or find­ing an in­struc­tive anal­ogy from other in­dus­tries.

Ex­am­ine the present to fo­cus on sig­nals that are right in front of your lead­er­ship team but are not yet no­ticed or ap­pre­ci­ated. Most sur­prises have some an­tecedents; how­ever, peo­ple have pow­er­ful ten­den­cies to ig­nore warn­ing sig­nals and pre­tend that ‘all is well’. There is much to be learned from mav­er­icks, out­liers and de­fect­ing cus­tomers.

En­vi­sion new fu­tures. This can be aided by sce­nario think­ing, since this method aims to mag­nify im­por­tant weak sig­nals by pro­vid­ing a broader con­text that makes them more salient. If dif­fer­ent sce­nar­ios high­light a par­tic­u­lar weak sig­nal, which may have more or less strate­gic sig­nif­i­cance, the or­ga­ni­za­tion is less likely to be over­con­fi­dent and be­come locked into a my­opic view that fil­ters out a telling sig­nal.

There is an im­por­tant dif­fer­ence be­tween ac­tive and SCAN­NING. pas­sive scan­ning. All man­agers scan, but they of­ten do so pas­sively. They are con­tin­u­ally ex­posed to a wealth of data, rang­ing from the fuzzy im­pres­sion of trade ru­mours to harder ev­i­dence from their per­for­mance mea­sures. Pas­sive modes of scan­ning tend to re­in­force rather than chal­lenge pre­vail­ing be­liefs. Ac­tive scan­ning re­flects in­tense cu­rios­ity and pushes the in­quiry into the pe­riph­ery. Ac­tive scans are of­ten hy­poth­e­sis-driven, and when­ever crit­i­cal is­sues are in­volved, com­pet­ing hy­poth­e­sis should be tested. Or­ga­ni­za­tions pur­su­ing mul­ti­ple the­o­ries may mount ‘search par­ties’ us­ing teams of out­siders and in­sid­ers, with a di­verse port­fo­lio of en­quiry meth­ods.

Sub-ca­pa­bil­ity 2: Vig­i­lant Learn­ing

The next sens­ing sub-ca­pa­bil­ity re­quires in­ter­pret­ing the sig­nals you col­lect in an ex­ploratory and vig­i­lant man­ner. Vig­i­lance in this con­text refers to a height­ened state of aware­ness and cu­rios­ity, char­ac­ter­ized by alert­ness, cu­rios­ity and a will­ing­ness to act on par­tial in­for­ma­tion. Vig­i­lant learn­ing re­quires four ac­tions.

Suc­cess­ful firms have FOS­TER­ING A RO­BUST MAR­KET ORI­EN­TA­TION. su­pe­rior skills in un­der­stand­ing cus­tomers and com­peti­tors, and in at­tract­ing as well as re­tain­ing highly valu­able cus­tomers. Thus, they are able to make de­ci­sions from the out­side-in.

Con­sider an or­ga­ni­za­tion that was FIL­TER­ING OUT THE FILTERERS.

‘sur­prised’ by some cir­cum­stance or event. Usu­ally there were a hand­ful of peo­ple, within the or­ga­ni­za­tion or its ex­tended net­work, who knew what was at stake — but failed to raise their voice. Se­nior de­ci­sion-mak­ers did not know how to iden­tify and/or em­power those peo­ple to speak — and con­versely, these in­di­vid­u­als lacked full un­der­stand­ing of the im­pli­ca­tions of their knowl­edge. Fre­quent and wide com­mu­ni­ca­tion, with an ex­ploratory frame of mind, can help to over­come the prob­lem of dis­trib­uted in­tel­li­gence in or­ga­ni­za­tions.

Pre­vail­ing habits of think­ing can in­hibit an SUP­PRESS­ING BIASES. open-minded in­ter­pre­ta­tion of am­bigu­ous in­for­ma­tion. While group­think is par­tic­u­larly per­ni­cious, the com­mon hu­man ten­dency to jump to the most con­ve­nient con­clu­sion, and then seek ev­i­dence to con­firm that judg­ment, fur­ther dis­torts the pic­ture.

Re­nais­sance ‘TRIANGULATING’ PER­SPEC­TIVES ON A COM­PLEX IS­SUE. artist and in­ven­tor Leonardo da Vinci em­pha­sized the virtue of look­ing at things from at least three dif­fer­ent points of view. Just as a GPS uses three co­or­di­nates to place you on a map, man­agers should use mul­ti­ple en­quiry meth­ods to clar­ify am­bigu­ous sig­nals, and then probe deeply to learn more about promis­ing pat­terns.

DY­NAMIC CA­PA­BIL­ITY 2: SEIZ­ING OP­POR­TU­NI­TIES

In ev­ery in­dus­try, there is a grave­yard of early adopters, in­di­cat­ing that it sel­dom pays to com­mit com­pletely to a new ini­tia­tive. In­stead, a ju­di­cious ap­proach in­cludes the fol­low­ing sub­ca­pa­bil­i­ties.

Sub-ca­pa­bil­ity 1: Probe-and-learn Ex­per­i­men­ta­tion

Small, well-de­signed ex­per­i­ments that ex­plore new strate­gic ini­tia­tives al­low for the type of se­quen­tial in­vest­ments that are most likely to gen­er­ate pos­i­tive re­sults. For ex­am­ple, rapid pro­to­typ­ing, via quasi-ex­per­i­men­tal de­signs, can greatly aid com­plex de­sign de­ci­sions.

The best firms el­e­vate this prac­tice to a dy­namic ca­pa­bil­ity that can be de­ployed on many fronts, pro­vided three con­di­tions are met. First, the en­ter­prise must nur­ture an ex­per­i­men­tal mind­set, in­clud­ing a will­ing­ness to chal­lenge ex­ist­ing be­liefs. Sec­ond, teams em­ploy­ing this method must be able to cod­ify and share their in­sights. New soft­ware tools, in­clud­ing ad­vances in data an­a­lyt­ics, can help teams keep track of test and con­trol groups as well as help iden­tify the at­tributes that most af­fect per­for­mance. Third, firms must look be­yond their own or­ga­ni­za­tional and mar­ket bound­aries, prob­ing for in­sights from a wide ar­ray of peer com­pa­nies, pre­cur­sors and net­work part­ners.

Im­por­tantly, trial-and-er­ror learn­ing re­quires lead­ers to ac­tively cul­ti­vate and sup­port a cul­ture in which mis­takes are tol­er­ated and even en­cour­aged at times. Although care­less

It’s not about hav­ing all the an­swers — it’s about ask­ing the right ques­tions.

fail­ures should be avoided, no or­ga­ni­za­tion can learn if it pur­sues a pol­icy of zero tol­er­ance for fail­ure.

Sub-ca­pa­bil­ity 2: De­ploy­ing Real Op­tions

Try­ing dif­fer­ent things, prob­ing puz­zling ques­tions deeply, and be­ing alert to the un­ex­pected are all valu­able ways to learn faster. Some­times, to get closer to true mar­ket in­sights, a sig­nif­i­cant fi­nan­cial in­vest­ment is re­quired. This is where real-op­tions ap­proaches are es­pe­cially use­ful, since they en­tail a small bet to pre­serve the right to make a fur­ther strate­gic move, but with­out any obli­ga­tion. The pur­pose of real op­tions is to im­prove the firm’s strate­gic po­si­tion in the face of un­cer­tain ex­ter­nal change. For ex­am­ple, a com­pany might bet mod­estly to un­der­stand a new tech­nol­ogy or mar­ket, ei­ther by sup­port­ing re­search in its own lab or through an in­vest­ment in a startup. This buys the firm an op­tion to pull the plug if its ini­tial in­vest­ment sours, while pre­serv­ing the op­por­tu­nity to in­vest more once the pi­lot project looks suf­fi­ciently promis­ing.

DY­NAMIC CA­PA­BIL­ITY 3: TRANS­FORM­ING

As in­di­cated, sens­ing and seiz­ing ca­pa­bil­i­ties can cre­ate new op­por­tu­ni­ties, but their full po­ten­tial can only be re­al­ized if a firm prop­erly ex­e­cutes on its new strate­gies — which will re­quire some de­gree of or­ga­ni­za­tional trans­for­ma­tion. This third com­po­nent refers to a firm’s abil­ity to ad­just its in­ter­nal or­ga­ni­za­tional de­sign as well as its po­ten­tial to nav­i­gate — and even shape — the ex­ter­nal en­vi­ron­ment.

Sub-ca­pa­bil­ity 1: Or­ga­ni­za­tional Re­design

Many large com­pa­nies es­tab­lish sep­a­rate or­ga­ni­za­tions ded­i­cated to pur­su­ing new en­deav­ours. At their best, these ‘co­coons’ gen­er­ate in­ter­nal flex­i­bil­ity and en­tre­pre­neur­ial dy­namism. GM’S Saturn di­vi­sion, IBM’S PC unit, and Roche’s Ge­nen­tech are well-known ex­am­ples. By ‘co­coon­ing’ a new busi­ness, a firm es­tab­lishes bound­aries so that the new group can ex­per­i­ment within bounds — try­ing out new ap­proaches while still ben­e­fit­ing from the re­sources and ex­pe­ri­ence of the par­ent or­ga­ni­za­tion.

How­ever, for com­pletely new and dis­rup­tive tech­nolo­gies, both phys­i­cal and struc­tural sep­a­ra­tion may be nec­es­sary, such as a sep­a­rate di­vi­sion that re­ports to se­nior man­age­ment or even an eq­uity spin-out. When such a full de­gree of sep­a­ra­tion is not war­ranted, it is still de­sir­able to have sep­a­rate fund­ing and ac­count­ing, so that losses from the new projects are not car­ried by an es­tab­lished busi­ness unit. The new ven­ture may also need its own poli­cies to match the re­al­i­ties of build­ing a new busi­ness. It must be able to at­tract the best per­son­nel and have the latitude to do fast pro­to­typ­ing and probe ill-de­fined mar­kets, all while keep­ing re­stric­tive or slow con­trols and bur­den­some over­head to a min­i­mum.

Sub-ca­pa­bil­ity 2: Ex­ter­nal Shap­ing

In ad­di­tion to in­ter­nal re­design, trans­form­ing is also about rene­go­ti­at­ing the en­vi­ron­ment and shap­ing a com­pany’s ecosys­tem. This can be done through joint lob­by­ing, cre­at­ing new in­dus­try stan­dards, or by re­shap­ing the firm’s busi­ness ecol­ogy. The lat­ter is an es­pe­cially pow­er­ful trans­form­ing ca­pa­bil­ity since it re­lies ex­ten­sively on ex­ter­nal net­works.

Peo­ple inside the firm as well as out­side are con­nected to nu­mer­ous net­works. Con­sumers are con­nected through thou­sands of so­cial sites; com­pa­nies are mov­ing from sup­ply chains to sup­ply net­works, and the fo­cus of in­no­va­tion is shift­ing out­side the firm to di­verse open busi­ness ecolo­gies. Ad­vances in knowl­edge shar­ing, co­or­di­na­tion and pat­tern recog­ni­tion tech­nolo­gies are slowly but surely un­bundling the ver­ti­cal, silo or­ga­ni­za­tional struc­tures of the past. Ex­ter­nal net­work­ing and co-cre­ation, how­ever, re­quire strong re­la­tional ca­pa­bil­i­ties in or­der to fully ac­cess the re­sources of many part­ners.

Loosely-cou­pled net­works have long been used to cre­ate sup­port­ive ecosys­tems for com­pa­nies to en­hance their com­pet­i­tive po­si­tion and strengthen their op­er­a­tional ca­pa­bil­i­ties. In ad­di­tion, these ex­ter­nal net­works can also en­hance the firm’s abil­ity to scan for, sense and adapt to early sig­nals of threats and op­por­tu­ni­ties be­yond the bound­aries of the firm. Your firm’s ecosys­tem can ba­si­cally serve as a strate­gic radar sys­tem, us­ing mul­ti­ple touch points to pick up weak sig­nals and thereby ac­cel­er­ate the sens­ing process.

Ex­hibit A: Dupont’s Bio­fuel Ini­tia­tive

The six dy­namic sub-ca­pa­bil­i­ties we have in­tro­duced vary in their con­tri­bu­tion to the process of adap­ta­tion, de­pend­ing on the sit­u­a­tion. The chal­lenge for lead­ers is to un­der­stand which ca­pa­bil­i­ties mat­ter the most to them. To ex­plore this ques­tion, we will look at Dupont’s devel­op­ment of a risky green tech­nol­ogy.

Green tech­nolo­gies rep­re­sent fer­tile ground for ex­er­cis­ing dy­namic ca­pa­bil­i­ties. Ex­plor­ing al­ter­na­tive en­ergy en­tails a daunt­ing level of uncer­tainty. There are sig­nif­i­cant cap­i­tal risks

to be ab­sorbed and di­verse stake­hold­ers to be man­aged. Dupont faced this chal­lenge in 2001 and 2002, when the firm launched a bio­fu­els ini­tia­tive to lever­age its over­all biotech ex­per­tise and long-stand­ing com­pe­tency in com­mer­cial­iz­ing sci­ence.

The com­pany used a real-op­tions ap­proach to nar­row al­most 50 op­por­tu­ni­ties down to 12 strate­gic ini­tia­tives, in­clud­ing bio­fu­els, bio­ma­te­ri­als and bio­med­i­cal busi­nesses. For ex­am­ple, to de­velop biomass tech­nolo­gies, the com­pany cre­ated a $40-mil­lion joint project with the U.S. gov­ern­ment; and to ex­plore bio­ma­te­ri­als, Dupont made more than a dozen in­vest­ments in ar­eas such as sus­tain­able ma­te­ri­als and en­ergy, ap­plied bio­sur­faces, and ther­a­peu­tics.

The cru­cial sens­ing pe­riod pre­ced­ing Dupont’s bioSENSING. fuel ini­tia­tive be­gan a decade prior to its launch. Since the early 1990s, Dupont pos­sessed the ca­pa­bil­i­ties to make re­new­able poly­mers. How­ever, the com­pany could not do so prof­itably due to the high costs of pro­duc­ing a key in­gre­di­ent, Propane­diol (PDO), needed in its hy­dro­car­bon-based chem­i­cal process. To solve this prob­lem, Dupont be­gan ex­per­i­ment­ing with ways of pro­duc­ing PDO through biotech­nol­ogy by us­ing liv­ing or­gan­isms to syn­the­size the com­pound. The project used or­gan­isms called methan­otropes, which re­quired large amounts of meth­ane and a fer­menter to im­ple­ment.

Dupont found a com­pany in Nor­way that had al­ready built a fer­menter to han­dle meth­ane gen­er­ated as a by-prod­uct of oil pro­duc­tion and ap­proached it to cre­ate an al­liance. Com­bined with Dupont’s own soft­ware, the Nor­we­gian hard­ware al­lowed the con­cept to be tested with­out mas­sive in­vest­ments and risk. The test­ing re­sulted in the suc­cess­ful devel­op­ment of a new process that could cost-ef­fec­tively pro­duce PDO from corn starch (BIO-PDO®). Shortly there­after, Dupont suc­cess­fully launched Sorona®, the syn­thetic poly­mer used in soft floor cov­er­ing, tex­tiles and pack­ag­ing.

Dupont quickly be­gan to ap­ply this newly-ac­quired base of tech­ni­cal com­pe­tence in biotech to other en­deav­ours. Given its tra­di­tional use of en­ergy as a ma­jor in­put as well as pre­vi­ous own­er­ship of Conoco, the com­pany had a very thor­ough un­der­stand­ing of trends in en­ergy mar­kets. Us­ing pe­riph­eral vi­sion, Dupont spot­ted an op­por­tu­nity to ap­ply its new in­no­va­tion to the fu­els sec­tor.

The com­pany not only saw that many gov­ern­ments were be­gin­ning to re­spond to is­sues deal­ing with en­ergy se­cu­rity and cli­mate change, but also un­der­stood that ethanol, the widely pro­duced al­ter­na­tive fuel source, was a ‘dis­ad­van­taged’ one: It cost at least twice as much as gaso­line to pro­duce, had a sig­nif­i­cantly lower en­ergy con­tent per unit com­pared to gaso­line, but could be dis­trib­uted us­ing the same in­fra­struc­ture as gaso­line and diesel. Dupont started strate­giz­ing about how to en­ter this new mar­ket.

When asked, dur­ing an in­ter­view in 2007, how Dupont made the leap from Sorona® to bio­fu­els, then-bio­fu­els Vice Pres­i­dent and Gen­eral Man­ager John Ranieri noted that de­ci­sion­mak­ers at the com­pany could now ask the right ques­tions — a key com­po­nent of vig­i­lant learn­ing. It was al­ways ob­vi­ous that ethanol had sig­nif­i­cant lim­i­ta­tions and that there was great need in the fuel op­por­tu­nity space, but only af­ter de­vel­op­ing their new core com­pe­tency in biotech­nol­ogy could re­searchers at Dupont ask, ‘Well, what bio­fuel would I like to make?’ That ques­tion was not a valid one be­fore. As Ranieri phrased it, “That’s re­ally the key to in­no­va­tion. It’s not about al­ways hav­ing the an­swers — it’s about be­ing able to ask the right ques­tions.”

While sens­ing this op­por­tu­nity, Dupont dis­played su­pe­rior vig­i­lant learn­ing skills: The process of triangulating per­spec­tives

Dy­namic ca­pa­bil­i­ties re­fer to a ca­pac­ity to pur­pose­fully cre­ate, ex­tend or mod­ify your re­source base.

on a com­plex is­sue is em­bed­ded in its cul­ture. The com­pany’s cor­po­rate strat­egy can be sum­ma­rized by the phrase ‘sus­tain­able growth’. The aim is to en­hance share­holder value and con­trib­ute pos­i­tively to so­ci­ety, while also de­creas­ing its en­vi­ron­men­tal ‘foot­print’ along the value chains in which it op­er­ates. These are three very dif­fer­ent lenses through which Dupont looked to an­a­lyze its bio­fuel ini­tia­tive.

To seize the newly-iden­ti­fied op­por­tu­nity, Dupont first SEIZ­ING. probed and then in­vested its cap­i­tal in a flex­i­ble man­ner. This fo­cus on adap­tive ex­per­i­men­ta­tion and learn­ing led it to ex­plore in­vest­ment op­por­tu­ni­ties in many parts of the globe. The first gen­er­a­tion of bio­fu­els that Dupont ex­plored in­cluded corn ethanol and soy­bean diesel fuel. Even­tu­ally, it be­came clear that both corn ethanol and soy­bean diesel fuel re­quired very high land-use and water re­sources. Thus, re­duc­tions in green­house gas emis­sions achiev­able through their pro­duc­tion were too low to make these prod­ucts worth ex­plor­ing fur­ther. In­stead, Dupont’s R&D fo­cus shifted to­ward sec­ond-gen­er­a­tion bio­fu­els, us­ing mi­crobes and en­zymes to con­vert non-food cel­lu­lose ma­te­ri­als into sug­ars that could be used to cre­ate bio­fu­els.

To do so, Dupont em­ployed open in­no­va­tion. The first fa­cil­ity to pro­duce ethanol from non-food biomass was built through a 50/50 joint ven­ture with Danisco in Den­mark, the world’s largest in­dus­trial en­zyme com­pany (to­gether with Novozymes). To bring this pro­duc­tion to com­mer­cial scale, a sec­ond joint ven­ture fa­cil­ity was com­pleted in 2014, at an es­ti­mated cap­i­tal cost of $200 mil­lion. At this point, the fo­cus nar­rowed to cel­lu­losic ethanol pro­duced from corn stover, which is the read­ily avail­able biomass con­sist­ing of the stalks, leaves and cobs that re­mains af­ter the har­vest­ing of in­dus­trial corn. This prod­uct was not with­out risk: Through ex­ten­sive work with auto and oil com­pa­nies, Dupont had come to un­der­stand its lim­i­ta­tions. Due to a vapour pres­sure that ex­ceeds that of tra­di­tional gaso­line, this form of ethanol is in­com­pat­i­ble with parts of the tra­di­tional fuel in­fra­struc­ture.

Even with these risks in mind, Dupont saw the in­nate po­ten­tial of a higher value fuel that lever­aged corn stover as feed­stock and used a ge­net­i­cally mod­i­fied mi­cro-or­gan­ism to pro­duce isobu­tanol. This led to a joint ven­ture with BP called Bu­ta­max Ad­vanced Bio­fu­els, com­bin­ing BP’S re­fin­ing and dis­tri­bu­tion prow­ess with Dupont’s pro­pri­etary biotech­nol­ogy. This joint ven­ture

was able to ad­dress and re­solve fur­ther tech­no­log­i­cal chal­lenges, such as the in­her­ently high tox­i­c­ity of biobu­tanol.

Af­ter 1.5 mil­lion miles of ve­hi­cle test­ing, Dupont even­tu­ally re­solved the is­sue of com­pat­i­bil­ity with ex­ist­ing ve­hi­cles and in­fra­struc­ture. In early 2014, the joint ven­ture sub­mit­ted a 16 per cent bu­tanol fuel to the En­vi­ron­men­tal Pro­tec­tion Agency (EPA) for reg­u­la­tory ap­proval. The eco­nom­ics ap­peared at­trac­tive; one es­ti­mate as­sumed that biobu­tanol would be com­pet­i­tive with oil at $70 - $80 per bar­rel. It re­mains to be seen whether oil at $50 a bar­rel will jeop­ar­dize the project.

The Dupont case demon­strates how cru­cial dy­namic ca­pa­bil­i­ties are to the ex­plo­ration of new busi­nesses, es­pe­cially those in highly tech­ni­cal and un­cer­tain mar­kets. In this case, large in­vest­ment com­mit­ments are highly con­tin­gent on the con­cur­rent devel­op­ment of an emerg­ing tech­nol­ogy. Af­ter a full decade of R&D, Dupont’s time-to-mar­ket was more than seven years. These pa­tient in­vest­ments were pro­tected by a se­ries of patents is­sued in 2005, al­low­ing for long-term, sus­tained in­vest­ment. Ul­ti­mately, the goal was achieved.

In hind­sight, Dupont’s most im­por­tant dy­namic ca­pa­bil­ity was its com­mit­ment to learn­ing from real op­tions, al­low­ing crit­i­cal op­por­tu­ni­ties to be ex­plored through rel­a­tively small, staged in­vest­ments. By lim­it­ing in­vest­ment ex­po­sure, Dupont ‘re­served its right’ to with­draw if cer­tain tech­nolo­gies didn’t bear fruit. More sig­nif­i­cantly, it could move ahead with the most promis­ing tech­nolo­gies with­out sig­nif­i­cant loss of time and lim­ited up-front risk.

Nearly as im­por­tant strate­gi­cally was Dupont’s TRANS­FORM­ING. de­ci­sion to re­de­fine its re­search cul­ture, cre­ate or­ga­ni­za­tional sep­a­ra­tion be­tween the new ven­tures and the moth­er­ship, and to ac­tively en­gage with ex­ter­nal part­ners with a com­mon stake in suc­cess­ful out­comes. Ranieri re­marked that Dupont asks teams to tackle the tough­est prob­lems first — the ones that re­ally pre­vent a prod­uct from get­ting to mar­ket. Ac­cord­ing to Ranieri, many other firms that con­duct sci­en­tific re­search do the op­po­site — teach­ing their teams to solve the quick and easy prob­lems first, be­fore tack­ling the big is­sues. This fun­da­men­tal or­ga­ni­za­tional shift in process helped Dupont avoid ‘rat holes’, en­sur­ing flex­i­ble and prob­ing in­vest­ments. Se­condly, the foun­da­tion that made Dupont’s bio­fuel ini­tia­tive pos­si­ble was laid with the orig­i­nal cre­ation of its Ap­plied Bio­sciences busi­ness unit. This unit was to func­tion as its own sep­a­rate plat­form with the agility and flex­i­bil­ity to use re­sources and look for skills within the cor­po­ra­tion that could aid in pur­su­ing emerg­ing mar­ket op­por­tu­ni­ties.

Lastly, the com­pany de­vel­oped part­ner­ships with Fa­gen Inc., a con­sor­tium of early adopters to sup­port the rapid build out of biobu­tanol pro­duc­tion. The com­pany also re­mained vig­i­lant about seek­ing and ap­ply­ing in­sights from the mar­ket. Through­out its 17 years of ex­plo­ration, Dupont re­mained highly alert to the chang­ing needs of au­tomak­ers, reg­u­la­tors (in­clud­ing the EPA), oil com­pa­nies, leg­is­la­tors and agen­cies whose reg­u­la­tory de­ci­sions could in­flu­ence de­mand.

The Dupont case sug­gests the fol­low­ing ad­vice: When a firm’s ex­ter­nal en­vi­ron­ment changes dras­ti­cally — such that new busi­ness mod­els need to be ex­plored en­tail­ing sig­nif­i­cant in­vest­ments in new IP amid high uncer­tainty — real op­tions anal­y­sis be­comes a crit­i­cal com­po­nent of the firm’s seiz­ing ca­pa­bil­ity.

In clos­ing

As in­di­cated, dy­namic ca­pa­bil­i­ties are dis­tinct from op­er­a­tional ca­pa­bil­i­ties, which per­tain to the day-to-day op­er­a­tions of your or­ga­ni­za­tion. By con­trast, dy­namic ca­pa­bil­i­ties re­fer to a ca­pac­ity to pur­pose­fully cre­ate, ex­tend or mod­ify your re­source base. Clearly, such adap­ta­tion strate­gies can­not be re­duced to an al­go­rithm. Or­ga­ni­za­tions need to de­velop suf­fi­cient lead­er­ship ca­pac­ity to cover these ca­pa­bil­i­ties. In the end, build­ing dy­namic ca­pa­bil­i­ties through­out your or­ga­ni­za­tion is a pow­er­ful way to nav­i­gate stormy wa­ters with fast-mov­ing cur­rents.

FIG­URE TWO

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