The document discusses systems theory and its application to management. It provides background on systems theory and how it originated from biology and was applied to management. Some key points made include: - Systems theory takes a holistic approach but does not entirely dismiss reductionism. It is important to understand the parts as well as the whole. - Dynamic capabilities framework can serve as a workable systems theory for management by taking a holistic view of the enterprise and environment, understanding interdependencies, and emphasizing entrepreneurial action and transformation. - Both systems theory and dynamic capabilities are difficult to apply given deep specialization in education and practice but provide a more comprehensive understanding of complex realities than other approaches.

1. Dynamic Capabilities as (workable)
SystemsTheory
David J.Teece
UC Berkeley
AOMAnnual Meeting, Atlanta, GA
August 7, 2017
Copyright Teece 1

2. I. GENERAL SYSTEMSTHEORY
Copyright Teece 2

3. BACKGROUND
 Systems theory is a framework with which we can investigate phenomena from a
holistic approach.
 Knowledge is derived from the understanding of the whole and not that of the single
parts (Aristotle's Holism)
 The relationships between the parts themselves and the events they produce through
their interaction are the essence of system theory
 Interactive/Complementarities in systems makes the whole larger (or smaller) than the
sum of its parts.
 General systems theory found its way from biology (Ludwig von Bertalanffy) into
management and economics via Ross Ashby, Chester Bartnard, Kenneth Boulding, &
others and was popular in management in the 1960’s & 1970’s!.
 For example, Burns and Stalker (1961) made substantial use of systems views in setting
forth their concepts of mechanistic and organic managerial systems
Copyright Teece 3

4. HERBERT SIMON DESCRIBESTHE
CHALLENGE FORTHE SYSTEMS
APPROACH:
“In both science and engineering, the study of "systems" is an increasingly
popular activity. Its popularity is more a response to a pressing need for synthesizing
and analyzing complexity than it is to any large development of a body of knowledge
and technique for dealing with complexity. If this popularity is to be more than a fad,
necessity will have to be the mother of invention and provide substance to go with
the name”
Source: "The Architecture of Complexity," in Joseph A. Litterer,Organizations: Systems, Control and Adaptation,Vol. 2
(NewYork: John Wiley, 1969)
Copyright Teece 4

5. SYSTEMSVIEW DOESN’T ENTIRELY
VITIATE REDUCTIONISM
 Without at least a rudimentary understanding of the parts, a systems approach is
doomed to fail
 Systems thinking can never be divorced from a reductionist approach. We need both
analysis and synthesis
 The dynamic complexity of the system itself stands in the way of easy answers.
Copyright Teece 5

6. LEARNING IS CENTRALTOTHE
(SMART) SYSTEMSVIEW
 Systems Theory Applications in Management imply a learning system. Firms have skills
and competences that enable the production of new knowledge. (Nonaka and
Tacheucki, 1995)
 The concept of learning is central to smart systems. Systems are smart when they react
through technology and seek the wise and intelligent use of resources.
 "Learning is a feedback process in which our decisions alter the real world, and receive
information feedback about the work and revise the decisions we make and mental
models that motivate those decisions.” (Stermann, 1994, p.291).
Copyright Teece 6

7. SYSTEMSTHEORY ISN’T PRESCRIPTIVE &
ENTREPRENEURSHIP IS MISSING
 Does not specify the nature of interactions and interdependencies
 Is not a prescriptive management theory
a) Rather abstract
b) No tools and technologies
c) Feedback and adaption present but pro-active entrepreneurial action is missing
(biological legacy)
Copyright Teece 7

8. PHYSICAL/BIOLOGICAL ROOTS OF
SYSTEMTHEORY SUFFOCATE HUMAN
DESIGN/ENTREPRENEURIAL ACTION
 Organisms, the foundation stone of general systems theory, do not contain purposeful
(design) elements which exercise their own will.
 Concern is primarily with the way in which the organism responds to environmentally
generated inputs. Feedback concepts and the maintenance of a steady state are based
on internal adaptations to environmental forces.
 In one sense, reductionism (a system is the sum of its parts) is the enemy of the systems
approach and vice versa
Copyright Teece 8

9. THE MULTIDISCIPLINARY
REQUIREMENTS OF SYSTEMSTHEORY
ARE CONSIDERABLE
 Builds on the knowledge and concepts developed within other disciplines.
 Academics are hampered because each of the academic disciplines has taken a narrow
"partial systems view" many scholars and practitioners find comfort in the relative
certainty which this creates.
 Academic’s & Practitioners alike do an admirable job of delineating and discussing
accounting, marketing, operations, manufacturing, & strategy as separate activities.
However, they are often unable to discuss them as integrated and interrelated activities.
 Even though manager’s sometimes preach a general systems approach, they often
practice subsystems thinking.
Copyright Teece 9

10. II. DYNAMIC CAPABILITIES AS A
WORKABLE SYSTEMSTHEORY
FRAMEWORK?
Copyright Teece 10

11. DYNAMIC CAPABILITIES AS A
WORKABLE SOLUTION
Managers following dynamic capabilities precepts:
 See the enterprise and the extended environment (market and technological and
regulatory developments) as a whole
 Avoid analyzing problems in isolation, follow integrated approaches, and know how and
when to prioritize ordinary and dynamic capabilities
 Understand the internal and external ramifications
 Are entrepreneurial and good communicators/networkers inside and outside the
enterprise.
 Understand functional interdependencies of units/activities inside and outside the
enterprise
 Diagnosis competitive predicaments through good sensing & sense making
 Award decision traps & anti-cannibalization instincts
 Figure out when & how to transform.
Copyright Teece 11

12. THE DYNAMIC CAPABILITIES FRAMEWORK IS
HARDTO MASTER GIVENTHAT OUR EDUCATION
SYSTEM FAVORS DEEP SPECIALIZATION
 As with general systems theory, no simple cookbook or 5 Forces distillation
 Competing approaches/models ignore innovation, don’t recognize interdependencies,
eschew entrepreneurship
 Dynamic capabilities is more difficult to comprehend and apply but can be the
foundation to a more thorough understanding of complex reality
 Good (SiliconValley type) managers have an intuitive dynamic capabilities/systems view
of the world. By making elements and inter-relationships more explicit, the dynamic
capabilities can galvanize managers and management to action
 The dynamic capabilities framework must be applied, further clarified, further
elaborated, and made more precise.
Copyright Teece 12

13. GENERAL SYSTEMSTHEORY AND
MANAGEMENT
Foundations Biological and physical
systems
Dynamic Capabilities,
evolutionary economics,
and entrepreneurial
systems
Intellectual lineage in
management/economics
R. Ashby
Emory &Trist
Burns & Stalker
C.West Chanker
K. Boulding
Talcott parsons
Vilfredo Pareto
Schumpeter
Nelson &Winter
Penrose
Copyright Teece 13

14. • Strategic “fit” over the long
run (evolutionary fitness)
• Sensing, seizing, shaping
and transforming
• Difficult; inimitable
• Technical efficiency in
basic business functions
• Operational,
administrative, and
governance
• Relatively easy; imitable
Ordinary
Capabilities
Dynamic
Capabilities
Doing things “right” Doing the “right” things
DYNAMIC VS. ORDINARY CAPABILITIES
Purpose
Tripartite
schema
Imitability
14

15. THE LOGICAL STRUCTURE OFTHE
DYNAMIC CAPABILITIES
FRAMEWORK
Copyright Teece 15

16. APPENDIX
 Key Concepts of General Systems Theory:
 Subsystems or Components: A system by definition is composed of interrelated parts
 Holism, Synergism, Organicisrn, and Gestalt:The whole is not just the sum of the parts;
 Open Systems View: Systems can be considered in two ways: (1) closed or (2) open.
Biological and social systems are inherently open systems. Open-closed is a continuance;
that is, systems are relatively open or relatively closed.
 Input-Output Model: It receives various inputs, transforms these inputs in some way, and
exports outputs.
 Feedback: Feedback can be both positive and negative, although the field of cybernetics is
based on negative feedback.
 Hierarchy: A system is composed of subsystems of a lower order and is also part of a
supra-system.Thus, there is a hierarchy of the components of the system.
 Equifinality of Open Systems: Equifinality suggests that certain results may be achieved
with different initial conditions and in different ways.This view suggests that social
organizations can accomplish their objectives with diverse inputs and with varying internal
activities (conversion processes).
Copyright Teece 16

17. APPENDIX:WHY SYSTEMSTHEORY
DOESN’T INFORM MANAGEMENT
 Social organizations do not occur naturally in nature; they are contrived by man.
 General SystemsTheory would have us accept this sanalogy berween organism and
social organization.Yet, we have a hard time swallowing it whole. Katz and Kahn warn
us of the danger-
There has been no more pervasive, persistent, and futile fallacy handicapping the social
sciences than the use of the physical model for the understanding of social structures.
The biological metaphor, with its crude comparisons of the physical parts of the body to
the parts of the social system, has been replaced by more subtle but equally misleading
analogies between biological and social functioning. This figurative type of thinking
ignores the essential difference between the socially contrived nature of social systems
and physical structure of the machine or the human organism. So long as writers are
committed to a theoretical framework based upon the physical model, they will miss
the essential social-psychlogical facts of the highly variable, loosely articulated
character of social systems.”
[19, p. 31]
Copyright Teece 17

18. APPENDIX
 There is a need to apply the systems approach but to make disciplined
generalizations and rigorous deductions
 Unfortunately, there seems to be a widely held view (often more implicit than
explicit) that open-system thinking is good and closed-system thinking is bad.
Both are appropriate under certain conditions.
Copyright Teece 18

19. APPENDIX:WE NEED A FRAMEWORK
THAT RECOGNIZES BOTH EVOLUTION
WITH DESIGN (ENTREPRENEURSHIP)
 General systems theory with its biological orientation would appear to have
evolutionary view of system effectiveness.
 While survival may be the only criterion of effectiveness in nature, it is not in the
economy system. Survival is probably an essential but not all-inclusive measure of
effectiveness.
 The practical need to deal with comprehensive systems of relationships is overrunning
our ability to fully understand and predict these relationships. Management scholars are
very much the systems paradigm but we are not sufficiently multidisciplinary to use it
appropriately.This is the dilemma.
Copyright Teece 19

20. APPENDIX
Kuhn says:
 New paradigms frequently are rejected by the scientific community.
 (At first they seem crude and limited
 They lack the apparent sophistication of the older paradigms which
they ultimately replace.
 They do not display the clarity and certainty of older paradigms which
have been refined through years of research and writing.
 But, a new paradigm does provide for a "new start" and opens up new
directions which were not possible under the old.
 Paradigms gain their status because they are more successful than
their competitors in solving a few problems that the group of
practitioners has come to recognize as acute.
Copyright Teece 20

21. “THE PRACTICE OF MANAGEMENT”
 Drucker wrote “The Practice of
Management” as he claims there
was nothing to show us how to
connect all the pieces
Peter Drucker, “The Practice of Management”, Wall Street Journal, p.R2, (Dec. 6, 2017).
21