Open innovation and the dynamic capabilities framework are closely intertwined. Open innovation involves accessing external knowledge and liberating internal expertise for external use, which aligns with dynamic capabilities of integrating, building, and reconfiguring internal and external competencies. Dynamic capabilities emphasize coordinating resources internally and externally and integrating knowledge from within and outside the firm. Sensing opportunities, seizing on them, and transforming the organization are key aspects of dynamic capabilities that can be enhanced through open innovation practices. While open innovation presents challenges of cultural changes and systems integration, it can ease organizational transformation and is mutually reinforcing with dynamic capabilities.

1. HAND IN GLOVE: OPEN
INNOVATION AND THE
DYNAMIC CAPABILITIES
FRAMEWORK
Professor David J. Teece
Thomas W. Tusher Professor in Global Business
Haas School of Business, University of California,
Berkeley
Open Innovation Conference, Haas School of
Business
October 6, 2018

2. I. OPEN INNOVATION
2

3. OPEN INNOVATION
3
The Activity
“Accessing and exploiting outside knowledge
while liberating … internal expertise for other’s
use.” (Chesbrough, 2003, pg. 12)
Key Performance Attributes
Both “accelerates internal innovation and “expands the market for
external use of innovation.” (Chesbrough, 2006, pg. 1)
Observations
• Firms are no longer technology citadels, if they were ever.
• The strengthening of U.S. patent rights in the 1980s helped facilitate the
market for know how and the transfer of licensed technology.
• While firms have to some degree practiced open innovation through
various technology transfer activities including licensing and out licensing,
what’s distinctive about modern open innovation is the magnitude of the
inflows and outflows.
Henry Chesbrough

4. OPEN INNOVATION
4
Related Prior Literature
• Alliances (e.g. Mowery)
• User innovation (e.g. Rosenberg, Von Hippel)
Open innovation accelerated by:
• Globalization
• Dispersion in sources of new knowledge
• Digital communications revolution (lower cost of external
connectedness)

5. DIGITAL CONVERGENCE HAS RENDERED
OPEN INNOVATION AN IMPERATIVE
• In almost every technology development context there are now
many key issues:
• Do I source the technology internally or externally?
• What (complementary) technologies does one need to bring
together to produce desirable products/services
• What other (complementary) assets does one need
• Do I build a platform?
• What IP strategy/posture will I take?
5

6. MANAGERIAL & ORGANIZATIONAL
DIMENSIONS
6
• The managerial and organizational
requirements to practice open innovation are
relatively understudied…hence the
importance of the open innovation forum.
• It often requires leadership, more
decentralized organization structure, and a
new mindset to move from open to closed.
• Established firms are more challenged in this
regard than start-ups.

7. TODAY THE BASTARDIZATION OF
OPEN INNOVATION BY IP COERCION
AND THEFT IS A MAJOR ISSUE
7
• China is engaged in a technology coercion game
by:
• Denying open access to the home market (contingent on
technology transfer by prospective entrants from abroad)
• Using the regulatory process as a subterfuge to access
technology from foreign firms. (e.g., antitrust
investigations and documents raids designed to scoop up
and disseminate trade secrets)
• Making unwillingness to license IP to Chinese competitors
an antitrust violation.
• Discriminating application of IP law in China (against
foreign firms)

8. CHINA SYSTEMATICALLY PRIES
TECHNOLOGY FROM FOREIGN
COMPANIES:
8
“The combination of naiveté and hubris on the
part of U.S. companies seeking to enter the
Chinese market, coupled with a sophisticated
Chinese effort to extract technology has been a
lethal combination.”
Peter Navarro
Wall Street Journal
September 26, 2018

9. II. DYNAMIC CAPABILITIES
AND OPEN INNOVATION
9

10. DYNAMIC CAPABILITIES AND
OPEN INNOVATION (OI)
10
DEFINITION OF DYNAMIC CAPABILITIES:
“The firm’s ability to integrate, build, and reconfigure internal and
external competencies to address rapidly changing environments.”
(Teece, Pisano, and Shuen, 1997, p. 516)
DYNAMIC CAPABILITIES IS A WORKABLE SYSTEM THEORY*
As such, dynamic capabilities is a framework which can (and
does)
embrace open innovation.
*See “Dynamic Capabilities as (Workable) Management
Systems Theory,”
Journal of Management and Organization, 2017)

11. PUTTING DYNAMIC CAPABILITIES AND
OPEN INNOVATION TOGETHER
1. Dynamic capabilities emphasizes coordinating and
redeploying internal and external competencies.*
2. Dynamic capabilities also emphasizes knowledge
sourcing and integration: “Integrating know-how from
outside as well as within the enterprise is especially
important to success ... Good incentive design and the
creation of learning, knowledge-sharing, and
knowledge-integrating procedures are likely to be
critical to business performance, and a key
(micro)foundation of dynamic capabilities.”**
11
*See Teece, et al., Strategic Management Journal, 1997
**See Teece, 2007, Strategic Management Journal, pg. 1339

12. DYNAMIC CAPABILITIES CAN BE
THOUGHT OF AS FALLING IN THREE
CATEGORIES*:
12
Sensing
Identification of
opportunities &
threats at home
and abroad
Transforming
Continuous renewal
and periodic major
strategic shifts
Seizing
Mobilization of
resources to
deliver value and
shape markets
*See David J. Teece, “Explicating Dynamic Capabilities: The Nature and
Microfoundations of (Sustainable) Enterprise Performance,”
Strategic Management Journal

13. SENSING & OPEN INNOVATION
13
Jack Welch:
“Leaders must have the ability to look
around corners”
General Electric
Steve Jobs:
Companies must have “The ability to
figure out the next big thing”
Apple
An organization must be adept to using
internal and external processes to sense the
future:

14. SENSING CONT.
14
• Sometimes sensing is enabled by internal R&D
activities (“search activities”) and internal and
external scanning
and technology assessment activities that help
glimpse the future.
• Internal R&D can be complemented (but not
displaced) by crowd-sourcing ideas, or by
tapping into ideas of customers (Von Hipple),
supplies and/or other partners.
• Innovation contests are another manifestation
of crowd-sourcing. They help with ideation and
innovation too.
• The internet has greatly facilitated crowd
sourcing activities.

15. 15
• The focal firm still needs to decide which
suggestions/proposals from
users/suppliers/complementors need to be
enacted.
• Internal decision processes need to be refined to
enable this to happen efficiently.
• Crowd sourcing and the acceptance of
customer/supplier contributions to new product
development supplement well established models
of open innovation in many industries e.g. aircraft
engines.
• Co-development and co-funding models have been
in existence for decades for jet engines*
The managerial challenge is to integrate both internal
and external technologies and capabilities
*Meyer & Teece, “Unpacking strategic alliances: The structure and purpose
of alliance versus supplier relationships,” Journal of Economic Behavior &
Organization, Elsevier, vol. 66(1), pages 106-127, April.
SEIZING & OPEN INNOVATION

16. BRINGING THE PLETHORA OF
COMPLEMENTS INTO FOCUS IS AN
OPEN INNOVATION CHALLENGE
• Adner’s “Wider Lens”* is
most insightful & outlines
the importance of “lining
up all the ducks” to
achieve commercial
success
• Understanding Adner’s
“Wider Lens” requires OI,
PFI, and Dynamic
Capabilities.
16
Ron Adner,
Dartmouth
Ron Adner, “Wider Lens”, Penguin Books, (2012).

17. ADNER CORRECTLY POINTS OUT THAT
THE INNOVATOR’S SUCCESS LIKELY
DEPEND ON THE COMBINED EFFORTS
OF MULTIPLE PARTNERS
Adner’s Examples:
• Apple’s iPod & iPhone*
• Self-healing tires
Other Examples:
• Lockheed L1011 & Rolls Royce delay in developing the
RB211 engine
• Boeing Dreamliner
Chesbrough & Teece Example:
• Cell phone handset and battery producers need some in-
house R&D in order to pace technology development (HBR,
1996)
17
*See: Teece, “Dynamic Capabilities: A Guide for Managers,” Ivey Business
Journal (March/April 2011).

18. The PFI/open innovation (Teece) proposition:
The major prize might also go to the party that
puts down the first piece. It depends on
whether or not the “piece” is the bottleneck.
The scarcity of the underlying resource has
much to do with the answer. (e.g. is it is
protected by intellectual property?)
18
*Adner interview in Brian Leavy’s, “Ron Adner: managing the
interdependencies
and risks of an innovation ecosystem”, Strategy and Leadership, (2012).
Adner proposition:
“The major prize was destined to go, not to the
party that puts down the first piece of the puzzle,
but the one that puts down the final piece.”*
CONTRASTING PERSPECTIVES?

19. TRANSFORMATION & OPEN
INNOVATION
19
• The process of
transformation is eased if
one has an open
innovation culture.
• With “open approaches”,
there is less commitment
of internal resources and
less managerial
distractions (e.g. Apple;
today’s Nokia).
• Open mindset and open
culture helps effectuate
change.
• Open innovation and
transformation is mutually
reinforcing (e.g.,
“Skunkworks” can help
with transformation)

20. SENSING AND SEIZING ARE CRITICAL
ACTIVITIES FOR SUCCESSFUL OPEN
INNOVATION
• For those companies that embrace open innovation either
partially or fully, the greatest challenge is being able to
identify what is available in the market for sale or licensing
and then evaluating it in terms of its fit to their product
strategy.
• Where it is needed, intermediaries are becoming established
to join the two together and provide a set of services around
channeling innovations towards companies whose business
structure is based on open innovation. Markets are rapidly
changing.
20
The overriding aim will be to get a progressively better
return from R&D/technology spend. It will not matter
whether the approach taken is closed, open or some
combination of both.

21. CULTURAL ISSUES NEED TO BE
ADDRESSED
• Open state of mind required.
• It takes organization and effort to run an OI
program.
• Become smarter at using licensing as a value
capture business model (when considering
selling/licensing its own
inventions/technologies).
• Requires the prioritization of the development
of technology integration skills and capabilities.
21

22. ARE THERE TECHNOLOGY TRANSFER
“BEST PRACTICES” THAT ASSIST OPEN
INNOVATION?
• Best practices are a function of the technology and the
context
• However, empirical studies of technology transfer costs show
experience curve effects and time cost trade-offs*
• Knowledge interpretation processes are generally (but not
always) easier inside firms than between firms because:
a. The movement of people is easier
b. Intellectual property issues are simplified
22
*D. Teece, “Technology Transfer by Multinational Firms: The
Resource cost of Transferring Technological Know-how”, The
Economic Journal 87, 1977(a), p.242-261; and D. Teece, “Time
Cost Trade-offs and Elasticity Elements for International Tech
Transfer”, Projects Management Science, 1977(b), p.830-837.

23. EFFECTIVE MANAGEMENT
PRACTICES ARE KEY TO THE
(FUNCTIONAL) INTEGRATION OF
KNOWLEDGE ACROSS BOUNDARIES
• Functional integration requires:
• Technology transfer (across functional firms and
geographies) skills
• Knowledge recombination (asset orchestration) skills
• Intellectual property protection and licensing capabilities
• Good governance with respect to alliance and partnerships
• Easier to assert the need for “new combinations” (a la
Schumpeter); harder to effectuate them.
• Open innovation increases the number of combinational
opportunities; but addressing them is not without cost.
• Technology transfer costs are higher for tacit than for codified
knowledge… the latter requires the movement of people.
23

24. OPEN INNOVATION IS A
HANDMAIDEN OF DYNAMIC
CAPABILITIES
…and dynamic capabilities is a handmaiden of open
innovation!
24
Dynamic Capabilities
Sensing Seizing Transforming
Open
Innovation
Profiting
from
Innovation
(PFI)/Open
Innovation
Open
Innovation
(e.g.,
Skunkworks)

25. THE DYNAMIC CAPABILITIES HIERARCHY &
SOME HUMAN RESOURCE
MICROFOUNDATIONS
25
Figure from Fallon-Byrne, L., & Harney, B. (2017). Microfoundations of
dynamic capabilities for innovation: a review and research
agenda, The Irish Journal of Management, 36(1), 21-31.

26. TECHNOLOGY DEVELOMENT
PERSPECTIVE:
TWO CHOICE VARIABLES
26
e.g.
Qualcom
m
e.g.
Tesla
e.g.
Cisco
e.g.
Linux
Foundatio
n
Proprietary strategy
Non-Proprietary
Strategy
External
Technology
Sources
In-house
R&D

27. NEW MANAGERIAL
CHALLENGES/ASSOCIATED WITH EACH
MODALITY
27
Open Closed
Systems integration a
major challenge
System integration is
critical and is easier if
done in-house
End-to-end integration
harder… requires
collaboration
End-to-end integration
easier and, if necessary,
can be done by fiat

28. • Technology: Liquid fuel reusable rockets
• Strategy: 10x cheaper than those currently in use
• Adopt a “lean startup” approach and “test and fly repeatedly”
• Space X innovation strategy:
• Do as much as possible in-house (closed) because the existing
supply chain
is wedded to defense contractors who are too cost-insensitive (cost
plus
contracting mobility)
• Reject outsourcing (i.e. Made hatch fitting out of off-the-shelf
28
VALUE CREATION AT SPACE X: SOMETIMES
OPEN INNOVATION IS NOT THE WAY
FORWARD

29. 29
VALUE CAPTURE: THE PROFITING FROM
INNOVATION (PFI) FRAMEWORK
PFI shows that
contracting out
(open innovation)
is the preferred
commercialization
strategy/model
unless a number
of criterion are
met
Open Solution
Closed (internal) Solution
D. Teece. “Profiting from Innovation,”
Research Policy, Dec. 1986
Start Here
Innovation
Requires Access
to
Complementary
Assets for
Commercial
Success
Commercializ
e Immediately
Complementary
Assets
Specialized
Appropriabilit
y Regime
Weak
Specialized
Asset Critical
Cash Position
OK
Imitations/
Competitors
Better
Positioned
Integrated
Contract
for Access
Contract
for Access
Contract
for Access
Contract
for Access
Contract
for Access
No No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
No

30. OPEN INNOVATION IN MOBILE TELEPHONY
• Perhaps the greatest cooperative/open innovation
experiment in history is in mobile telecommunications,
where 3GPP has helped orchestrate the world’s greatest
collaborative “open innovation” research enterprise… which
has spawned 3G and 4G and (in 2020) 5G wireless
technology
• This cooperative enterprise has led to the “licensing out” of
standard essentials patents (SEPs) by scores of technology
contributors, and the licensing in of SEPs by hundreds of
implementers
• These technologies are enabling smart phones, tablets, the
internet of things, and in the future mobility as a system
(MaaS)
30

31. OPEN INNOVATION THROUGH
ETSI/3GPP HAS ALLOWED
MODULARITY & STIMULATED NEW
ENTRY
• With ETSi/3GPP, implementers have had ready access
to mobile technology on FRAND terms. This has
spawned a multi-billion dollar industry in mobile
devices, tablets & other devices
• This dramatically lowered entry barriers and spawned
scores of new-entrants, particularly in China & India
• There are national competitiveness implications (free
riding) because of licensing holdouts
31

32. 32
GROWTH IN MOBILE PHONE HAS BEEN
REMARKABLE
SMARTPHONE 3G/4G UNIT SALES (MILLION) - WW

33. • Mobile roadmap relevant (over 8.5 billion
smartphones shipment between 2017-2021)
• Mobile is the underpinning platform for everything.
Qualcomm:
“Qualcomm’s business model is one of the greatest successes
of open innovation in the world. Our business model has
democratized access to mobile technology. We created mobile
broadband… open innovation is the spirit of our licensing and
chipset business. Our inventions span new market places and
vibrant ecosystems. More & more companies are mobile first.
Look at Uber, Snapchat, Waze, mobile banking… they sit on
top of and are enabled by over 30 years of R&D in
wireless…every time you touch your phone, you touch a QC
invention. You may not realize it because it is being presented
to you by our partners in open innovation”
33
OPEN INNOVATION ALLOWS FAST PACED
“DEMOCRATIC” CO-INNOVATION: E.G. MOBILE
TELEPHONY
*Paul Jacobs, Chairman, Qualcomm at the World Open Innovation forum,
2017

34. III. CONCLUSION
34

35. OPEN INNOVATION ENHANCES
DYNAMIC CAPABILITIES
35
The open innovation
framework can enhance
dynamic capabilities (with
respect to all three classes
of micro-foundations)
through explicit
recognition that sensing
and seizing can be
extended to external
stakeholders and also to
crowds.

36. SOME MISCELLANEOUS
MANAGERIAL IMPLICATIONS
• Making IO work is often a challenge… despite its
conceptual ease
• Partnerships can often lead to leakage of trade secrets
• Smart “asset” orchestration… involving the combination
of internal and external technologies is what makes OI
work
• A strong commitment to OI will usually dramatically
expand the number of technology partners one has
• With OI, IP management becomes especially critical
• Open innovation requires sensing, sense-making, and
the filtering of externally developed technologies
36

37. EFFECTIVE MANAGEMENT
PRACTICES ARE KEY TO THE
(FUNCTIONAL) INTEGRATION OF
KNOWLEDGE ACROSS BOUNDARIES
• Functional integration requires:
• Technology transfer (across functional firms and
geographies) skills
• Knowledge recombination (asset orchestration) skills
• Intellectual property protection and licensing capabilities
• Good governance with respect to alliance and partnerships
• Easier to assert the need for “new combinations” (a la
Schumpeter); harder to effectuate them.
• Open innovation increases the number of combinational
opportunities; but addressing them is not without cost.
• Technology transfer costs are higher for tacit than for codified
knowledge… the latter requires the movement of people.
37

38. TOWARDS A KNOWLEDGE BASED
GENERAL SYSTEMS (AND DYNAMIC
CAPABILITIES) BASED APPROACH
• Deeper analysis of open innovation requires a
knowledge-based approach.
• Economic theory and organizational economics has
emphasized cooperation and ignored coordination
problems … assuming they can be readily accomplished
by management fiat.
• Organizational economics, blindsided by agency issues,
and assuming well-functioning markets, has in effect
belittled coordination issues (Grant, 2017). Exceptions
include Malegnsen (1961).
38
*Grant, Robert, Foreword to Tell et al, “Managing
Knowledge Integration Across Boundaries”, OUP, (2017).