Presented at Rendanheyi Silicon Valley Center Seminar

1. “Everything should be made as simple as possible but not simpler”
-Quote attributed to Einstein
Dynamic Simplicity:
Are Simple Rules Sufficient for Competing in
the Knowledge Economy?
David J. Teece
February 18, 2021
Rendanheyi Silicon Valley Center Seminar
Copyright David J. Teece

2. My Thesis:
• The real world business environment is volatile, uncertain,
complex, and ambiguous (VUCA).
• Managers cannot generally escape this… except by accepting
government regulation for all… but such regulation would only
substitute political for marketplace uncertainty.
• In dynamic environments simple rules can often help; but they
are not a panacea.
• Strong (high level) dynamic capabilities requires reasoning
from first principles… especially with respect to sensing and
sensemaking, and also with respect to strategy
Copyright David J. Teece 2

3. Eisenhardt’s Simple Rules as I
understand them:
• Small number of guidelines for decision making.
• Usually context specific.
• Not overly prescriptive; but nevertheless provide
guidelines.
• Some standard operating procedures can also be simple
rules.
Copyright David J. Teece 3

4. Eisenhardt and Sull Classify Simple Rules
Into Three Types
1. Boundary rules – define the spectrum of acceptable
investment and actions
2. Prioritizing rules – which of multiple paths should
organization take
3. Stopping rules – when should management pull out of
an investment
Copyright David J. Teece 4

5. Companies Themselves Often Create
Unnecessary Complexity
• More rules and controls are implemented as firms grow
in size.
– Executive teams must always stay close to the front line
team to appreciate the implications of complex reporting requirements.
– Requests for information often lead to a cascade of reporting work.
• Simplification in organizational life is almost always a virtue. Too
few rules are often better than too many.
• The virtue of simple rules is (1) they avoid “analysis paralysis” (2)
enable faster execution.
Copyright David J. Teece 5

6. The Benefit of Simple Rules at Work:
Summary
Managers can reduce self generated (artificial)
complexity by identifying and minimizing (often
unintentional) complexity that result from generating
edicts and mandates.
Simple rules manifested as standard operating
procedures economize on bounded rationality and
assists efficiency.
Copyright David J. Teece 6
But simple rules are only suitable for recurring and identical
processes (what elsewhere I call ordinary capabilities)… or
possibly lower level dynamic capabilities

7. Simple Rules and Creativity?
• Rules can become dogma and substitute for thinking. The
implicit message with rules is that understanding doesn’t
matter. Core rigidities begin to develop.
• If we never learn to take something apart, we end up trapped
in what the world tells us… i.e., trapped in the status quo.
• When the environment changes dramatically, sometimes the
simple rules must not just be modified. The simple rules book
must be thrown out/reinvented.
• When one rejects rules, you are often labelled a troublemaker.
But “troublemakers” can sometimes cause us to test the
validity of the rule. (C. Nemeth)
Copyright David J. Teece 7

8. In Short, Not All Aspects of Management
Can Be Modified Into Simple Rules
• Simple rules reflect some underlying conceptual model.
 Conceptual models are extremely important tools for
organizing and understanding otherwise complex
things
• When we want something to be simpler, we are in
essence asking for a more elegant conceptual model.
• Simple rules economize on bounded rationality… but
they don’t eliminate it… and often don’t provide much
guidance as to when they are no longer applicable.
Copyright David J. Teece 8

9. Following Nobel Laureate economist Koopmans, uncertainty can be
classified into:
(a) structural (primary)
(b) behavioral (secondary)
Structural uncertainty is “state of nature” uncertainty… inherent in the
environment.
Behavioral uncertainty can be defined as that (which is) induced by human
behavior and the organization itself.
Eisenhardt’s focus on simple rules is more apt for navigating the latter, not
the former.
Dynamic capabilities is concerned with managing under both types of
uncertainty, and particularly the former.
Copyright David J. Teece 9
Simple Rules Work Best to Manage
Behavioral (And Not Structural) Uncertainty

10. The Dynamic Capabilities Framework
Can Lend a Hand
• The capability hierarchy
– Ordinary Capabilities: for running the business on
its current trajectory
– Low-level Capabilities: for growing the firm
somewhat routinely through M&A, R&D, etc.
– Dynamic Capabilities: for shifting the trajectory,
rethinking the resource base, reshaping the
industry
• Managers with somewhat different skills are
needed to support each of these.
Copyright David J. Teece 10

11. Dynamic Capabilities Defined
The ability of an organization and its
management to integrate, build, and
reconfigure internal and external
competencies to address rapidly changing
environments.*
* Teece, Pisano, and Shuen, Strategic Management Journal, 1997
Copyright David J. Teece 11

12. Dynamic Capabilities
• Three main categories of activity*
– Sensing: Developing and testing a model of the
future
– Seizing: Implementing new business models
derived from tested conjectures
– Transforming: Keeping the organization aligned
with evolving strategies
• Sensing, Seizing, and Transforming should be
ongoing and embedded throughout the organization
* Teece “Explicating Dynamic Capabilities” Strategic Management Journal, 2007
Copyright David J. Teece 12

13. Simple Rules and the Dynamic
Capabilities
• Low-level Dynamic Capabilities can be assisted
by simple rules to provide guidance through
choppy seas with enough flexibility to respond to
emergencies
• Higher level Dynamic Capabilities rest more
heavily on entrepreneurial management to forge
a route into the unknown by reasoning from first
principles
Copyright David J. Teece 13

14. Reasoning From First Principles (Not Simple
Rules) is Critical for (High Level) DCs:
• Break down a complicated problem into basic elements
and then reason from the ground up.
• Used by Aristotle and by Elon Musk and Charlie Munger
– Allows managers to cut through the fog of shoddy &
inadequate reasoning to see opportunities that others miss
Aristotle:
“In every systematic inquiry where there are first principles,
or causes, or elements, knowledge results from arguing
knowledge of these”
Copyright David J. Teece 14

15. “People’s thinking process is too bound by analogy to prior
experience… you have to build up the reasoning from the ground up…
from first principles.”
Elon Musk, 2015
• Musk reasons out his plan of action and adjusts based on what he learns.
• Musk says “It’s the difference between being a cook and a chef. Cooks practice
routines; chefs innovate.”
Copyright David J. Teece
15
Elon Musk’s (Tesla, Space X) Approach
to Deep Uncertainty is to “Reason From
First Principles”

16. Haier Has Strong Dynamic Capabilities
• Chairman Zhang most likely reasoned from first
principals as there were no simple rules around… they
all had to be invented
• Relying on the microenterprise model simplifies decision
making and avoids many stultifying rules.
Copyright David J. Teece 16

17. Rendanheyi is an Enabler of Haier’s
Dynamic Capabilities
1Interview with Zhang Ruimin, June 19, 2017, MIT Sloan
Management Review with Paul Michelman, p.7
“The micro-enterprises … are very entrepreneurial
and very good at identifying, developing and seizing
new market opportunities…they are very self
organized.” 1
“Self organize” is a simple rule.
17

18. Rendanheyi and Dynamic Capabilities
Both Adopt a Holistic Perspective
1Interview with Zhang Ruimin, June 19, 2017, MIT Sloan
Management Review with Paul Michelman
“We tend to look at things from a holistic
perspective…so we are applying traditional holistic
thinking to our management.” 1
Adopting a holistic perspective requires more
than simple rules… it requires dynamic
capabilities.
18

19. Consider the elements of R. Rumelt’s Strategy Kernel:
• Diagnosis
• Guiding policy
• Coherent actions
• Simple rules can sustain a strategy and help construct a
guiding policy. But there is much more to strategy than policy.
•
“Create value, capture value” and “navigate obstacles to
progress” are not simple rules.
Copyright David J. Teece 19
Simple Rules and Strategy?

20. Appendix
Copyright David J. Teece 20

21. By Allowing for Ease and Speed in Decision
Making, Simple Rules Assist Dynamic Capabilities
by Avoiding:
• The rigidity and burdensomeness of complex rules
• The chaos and confusion of no rules at all
Copyright David J. Teece 21
With uncertainty, one never has the full information and a simple rule that is
“good enough” lets one make a decision, learn, pivot, and move on.

22. The Cook v. The Chef
The chef is the trailblazer that reasons from first principles.
He knows the raw ingredients and how to combine them.
The cook uses a recipe (simple rules) and reasons by
analogy.
A good chef has dynamic capabilities; a cook only has
ordinary capabilities… or at best low-level dynamic
capabilities.
Copyright David J. Teece 22

23. Ways to Reason by First Principles:
• Socratic questioning – asking why why why?
• Explain the foundations of your thinking
• Examine consequences and implications
• Challenge assumptions
• Look for evidence
• Consider alternative hypothesis
• Question the question
Copyright David J. Teece 23

24. Reasoning From First Principles
1. Removes the clutter of conventional thinking and allows one
to think anew. It’s hard work… which is why so few people do it.
2. Is necessary when you are:
a. doing something original
b. dealing with complexity
c. managing “wicked” problems
Conclusion: Simple rules are not an Occam's razor for tech
sector decision making. You still need dynamic capabilities!
Copyright David J. Teece 24

25. With “wicked” problems, you make progress by
reasoning from first principles, and thereby
hopefully breaking the mold… and reframing the
problem.
Reasoning by analogy is easier, e.g. tigers don’t
change their stripes. Therefore, neither tigers nor
people can change.
While it’s easier, it’s often wrong.
Copyright David J. Teece 25

26. Winter Eisenhardt Helfat et al. Teece
“zero order” or “zero level” - the
'how we earn a living now'
capabilities: producing and
selling the same product, on the
same scale and to the same
customer population
“operational” – enables the firm to
perform ongoing tasks for making
a living
“ordinary capabilities” -
administrative, operational, and
governance-related functions that
are necessary to the execution of
current plans
“first order” – new product
development or the opening of
new outlets (A “dynamic
capability” enables a firm to
alter how it currently makes its
living; definition also implies
“reliable patterned behavior”)
“dynamic capabilities” -
organizational and strategic
routines by which managers
alter their resource base—
acquire and shed resources,
integrate them together, and
recombine them—to generate
new value-creating strategies.
Examples: product
development, TMT decision
making, replication, resource
allocation, coevolving, patching,
knowledge creation, alliance
formation, M&A. Defined and
assessed relative to the
resources they change, not to
firm performance
“dynamic capabilities” – the
capacity of an organization to
purposefully create, extend, or
modify its resource base. The
function must be repeatable and
can be reliably executed.
“low-level DCs” or, in one paper,
“microfoundations” - processes for
forming external partnerships or for
developing new products. They
consist of (often idiosyncratic)
routines that are employed less
often than the routines of ordinary
capabilities. Microfoundations
allow the firm to integrate,
reconfigure, add, or subtract
resources
“higher order” - investments in
organizational learning to
facilitate the creation and
modification of dynamic
capabilities for the management
of acquisitions or alliances
“dynamic managerial capabilities”
- the capacity of managers to
create, extend, or modify the
resource base; can also change
the external environment
“dynamic capabilities” - activities
and assessments that channel
other capabilities and resources so
as to maintain external fitness.
Copyright David J. Teece 26
Terminology Table
Greg Linden and David J. Teece, Feb 2021