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Digital Transformation, Platforms, & Dynamic Capabilities. For AOM Session Titled: How Should We Regulate Platforms & Ecosystems? Management Tools for a Key Societal Challenge 81st Meeting of the Academy of Management, August 3, 2021

The document discusses the impact of digital transformation and the importance of dynamic capabilities for firms, especially in Europe, to remain competitive amid evolving digital platforms. It critiques the European Digital Markets Act (DMA) for potentially stifling innovation and recommends favoring dynamic competition to enhance firm capabilities rather than imposing heavy regulations. The author argues that strong management and investment in innovation are essential for firms to adapt and thrive in a rapidly changing digital economy.

Leadership & Management◦
Related topics:
Digital Transformation•Impact of Digital Platforms•
Digital Transformation, Platforms, & Dynamic Capabilities David J. Teece Institute for Business Innovation August 3, 2021 For AOM Session Titled: How Should We Regulate Platforms & Ecosystems? Management Tools for a Key Societal Challenge 81st Meeting of the Academy of Management Copyright David J. Teece
Digital Transformation • The internet and mobile wireless technologies enable: – New business models and organizational forms – Unprecedented scale and scope economies • These dynamics will sooner or later impact every sector of the economy – Big impact already in some, e.g. music distribution, shopping – Some sectors much slower, e.g. banking, healthcare, education • Result is that digital platforms will be everywhere sooner or later – Regulation of the digital economy means regulation of everything? 2 Copyright David J. Teece
Firm Capabilities are Essential to Robust Competition • Tech firms must have strong dynamic capabilities and data science skills to collect, organize, and analyze data – Machine learning and AI plays a role in classifying raw data – Understanding what data to store, and for how long, is a capability • Knowing how, when, and where to leverage data across markets is capability that helps: – Improve the product – Create new product and services – Leveraging is procompetitively employed in both B2B and B2C situations (e.g. aircraft engines; Netflix movies) 3 European firms often lack these capabilities… which is why they cannot compete Copyright David J. Teece
Management Matters… Problem Isn’t the Scale and Scope of FAANGS but the Weak Dynamic Capabilities of Many Complaining Incumbents • Consumers aren’t complaining; competitors are • Strong dynamic capabilities requires: – Entrepreneurial management – Management that favors the future – Keynesian “animal spirits” – Strong technological innovation and heavy investment in R&D; open innovation as a complement • DMA likely very bad for European innovation 4 Copyright David J. Teece
A common (but wrong) assumption is that platform dominance is inexorable  Build a platform and wait for it to tip  Light a cigar – and enjoy the easy life  Reality is quite different. “Only the paranoid survive”* Copyright David J. Teece  Industry boundaries don’t matter…competition from complements (Adner & Lieberman, 2021)  Success requires sensing current and future user/customer needs, existing and possible future capabilities, and new combinations of assets. Weak dynamic capabilities of competitors often explains dominance *Andy Grove, former CEO of Intel 5 Common to think that monopolization is natural because of increasing returns.
Platforms that do not Innovate will be overtaken by others offering something better • Excite and Lycos lost the search engine game to Yahoo. Then Yahoo lost out to Google. • Incumbency only gives you a seat at the table for the next round of innovation. • Absent strong dynamic capabilities, new entrants will fail. • There is no automatic “tipping point;” management matters. 6
Example of the Problematic (Proposed) Legislation: The European Digital Markets Act (DMA) • Allow businesses to promote offers to end users acquired via a core platform (article 5, item c) • Portability of business user data in real time (article 6, item h) • Search query and click data to be made available to third parties (article 6, item j) 7
European DMA: Monumental (Terrifying?) in Scope and Impact • Layer of heavy handed regulation on top of antitrust – Implicit assumptions: Antitrust not up to the task • Aimed at big platforms (FAANGS); but all industries will have big platforms sooner rather than later… • Far bigger experiment than the US divestiture of AT&T… and poorly thought through • Some regulation (e.g., privacy) is undoubtedly needed 8 Copyright David J. Teece
The (DMA) Impact Assessment Study (Dec 2020) • Supposedly a study to support the DMA • Asserts that: – The ability of certain players to have platform control and act as gatekeepers is anticompetitive. • Platform power “risks concentrating R&D and undermining innovation” and: disrupts entry, limits choice, and potentially increases prices – Existing competition policy cannot cope. E.U. wide legislation to apply ex arte regulation is needed. – Assumes, and makes no effort to prove, that regulation will improve Europe GDP, R&D, and employment. – Assumes that DMA will lead to more R&D in Europe… no analysis to support the assumption… and it’s most assuredly wrong as there is nothing in the literature on innovation economics to support it. 9
10 Europe needs stronger dynamic capabilities to become more competitive… both then (1967) and now! “it is time for us to take stock and face the hard truth… what threatens to crush us today is… a more intelligent use of skills” What Europe needs is “the ability to transform an idea into reality through… the talent for coordinating skills and making rigid organizations flexible” i.e., dynamic capabilities! Jean-Jacques Servan- Schreiber Le Défi Américain 1967 Copyright David J. Teece
1. Favor innovation, and don’t take it for granted when it is present. 2. Endogeneity Principle of Competition: Innovation drives competition as powerfully, if not more so, as competition drives innovation. 3. Disruption comes in many flavors: Christensen, Abernathy & Utterback, Teece, Adner & Helfat, Jacobides 11 Copyright David J. Teece Lessons From the Field of Technology Management
Legislation/Regulation Should Be About Promoting Dynamic Competition 1. Dynamic competition should be favored over it’s weaker sibling: static competition • Free riding should be disfavored 2. Architectural (systemic innovation) should not be disfavored over autonomous innovation • The type of innovation the DMA is likely to encourage is autonomous innovation • “autonomous innovation can be commercialized without any accommodations by other elements of the technological systems of which it is a part” (Teece: Palgrave Encyclopedia of Strategic Management) 3. There is an alternative path: Improve antitrust by: • Favoring dynamic competition – Forward looking assessment of market structure – Recognize creation of new markets • Fast track litigation • Burden shifting on M&A issues 12 Copyright David J. Teece
Regulation Will Likely Reduce the Speed of Transformation of Incumbent Firms and Old Industries • Big Tech has been blasting into sectors of the economy that were slow to innovate, e.g.: • Books • Consumer Goods • Financial Services • Medical Supplies • Smaller platforms cannot take on stodgy old incumbents as successfully as big platforms • Transformation of the economy will be slowed when the FAANGS are “defanged” • Curtails incentives of capable firms to innovate while providing strong incentives for weak firms to free ride… resulting in unproductive entrepreneurship. (Baumol) 13 Copyright David J. Teece
Heavy Handed Regulation Will Chill Dynamic Competition • Problem isn’t with antitrust law (Klobuchar Bill) but with antitrust economics. Regulation will likely: – Creates diverging and confusing obligations on digital platforms… including with respect to consumer and business users. – Force platform developers to share the benefits of their investments with business users and rivals. – Requires companies to provide a helping hand to competitors. – Blunts investment incentives. – Allow rivals to free ride on the incumbent or innovating firms. 14 Copyright David J. Teece
Most Regulatory Initiatives with Respect to Digital Platforms 1. Failure to understand dynamic competition. a) Ignores broad spectrum dynamic competition 3. Promote free riding. a) Off-platform contracting free rides on investment in custom acquisition b) Search engine services priced on a FRAND basis 4. Risk curtailing investment in R&D and blunting innovation by incumbent platforms. a) Turns platform into “essential services” and advances a quasi public utility type regulation 5. Doesn’t recognize that innovation and competition is substantially global in nature. 15
References Teece, D. J. (2007). Explicating dynamic capabilities: the nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319-1350. Teece, D. J. (2012). Dynamic capabilities: Routines vs entrepreneurial action. Journal of Management Studies, 49(8), 1395-1401. Teece, D. J. (2014). The foundations of enterprise performance: Dynamic and ordinary capabilities in an (economic) theory of firms. Academy of Management Perspectives, 28(4), 328-352. Teece, D. J. (2016). Dynamic capabilities and entrepreneurial management in large organizations: Toward a theory of the (entrepreneurial) firm. European Economic Review, 86, 202-216. Teece, D. J. (2018). Dynamic capabilities as (workable) management systems theory. Journal of Management & Organization, 24(3), 359-368. Teece, D. J. (2019). A capability theory of the firm: an economics and (strategic) management perspective. New Zealand Economic Papers, 53(1), 1-43. Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509-533. 16