How to Sense & Seize Opportunities
Three dynamic capabilities — sensing, seizing and transforming— can help an organization extend its resource base.
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.