50PHOTO MAR | APRBY 2008CHRIS THE PENNSYLVANIA CRISMAN GAZETTE ALL BUSINESS

David Teece describes himself as a “practicing business intellectual.” That’s not an oxymoron. By Samuel Hughes

a sense, it all began with a note from In the late Ed Mansfield. At the time, David Teece G’73 Gr’75 was a graduate student at Penn, having come to Philadelphia from New Zealand to study international economics and industrial organization. That turned out to be the bailiwick of Mansfield, the economics pro- fessor who was internationally recognized for his systematic studies of industry. He had gotten his hands on a paper Teece had written on foreign direct investments, and apparently liked what he saw. “I got this note in my box, saying would I have lunch with Ed Mansfield,” recalls Teece, sitting in the lounge off the Faculty Club during a recent visit to campus. “No other faculty member had ever asked me to have lunch. He said that he was interested in my undergrad thesis and was interested in being my advisor.” Mansfield, Teece recalls, was something of a loner in the economics department, which was then dominated by such legends as Dr. Lawrence Klein Hon’06, now emeritus pro- fessor of economics, who would soon win a Nobel Prize for his work in developing the Wharton Econometric Forecasting Model. As Mansfield saw it, some of the theories that then held sway among economists didn’t always hold water in the fast-changing field of industrial research. “Ed openly displayed almost a disdain for modern economic theory because of the field’s infatuation with static analysis, and its abject failure to embrace the study of technology and technological change,” wrote

THE PENNSYLVANIA GAZETTE MAR | APR 2008 51 ALL Teece in a 2005 article in the Journal of mer economics professor at Yale. “But is an international provider of expert Technology Transfer honoring Mansfield much of what he has done has been analysis, testimony, and consulting ser- and his contributions. While it was a structured outside of the boundaries of vices on a broad range of business top- “daunting task” to undertake research what was considered the appropriate ics. The Wall Street Journal described in an area where very little scholarly framework for theorizing about firms him as a “renowned expert on lots of exploration had been done, Mansfield’s in economics departments.” things and pioneer of a lucrative con- advice that it was “sometimes a little “Deep down, really what I am is a prac- sulting niche that has transformed busi- easier to receive recognition if you were ticing business intellectual, and that’s ness litigation” in a front-page article the first into a field” resonated. Besides, almost an oxymoron,” Teece says matter- last March; lucrative in this case means Teece added: “As a young graduate stu- of-factly. “Business intellectuals are not that he clears between $2 million and $3 dent, I wanted to believe that the hard taken seriously, either by intellectuals million a year for his own expert testi- problems of the world were solvable.” or business people.” mony and a cut of the action from the The professor and his graduate stu- dent learned together, as Mansfield sent Teece out into the field to gather data, “In economics, the death interview executives and managers of large corporations, and glean the hid- of bad theory seems to den costs of transferring technology from one country to another. Mansfield, take much longer,” says Teece. a strong statistician who preferred to “get the right data and a small sample, “I’ve always had one foot rather than having the wrong data and the universe,” favored a multi-disciplin- in the real world.” ary approach that was ahead of its time in the way it incorporated the often Press him a bit and he admits that he other experts, many of whom make their messy data of real-world industry. may be the exception that proves the living in the academy. “Mansfield ignited an interest in me in rule. He was named one of the world’s Through his expert testimony, he is technology and technology transfer,” says top 50 living business intellectuals by sometimes able to influence business- Teece, and that ignition would have deep the Accenture Institute for Strategic related law by debunking unsound eco- implications for the study of the business Change, and he is not above bringing nomic theories that have made their enterprise. “He gave me the courage to up the fact that he was the lead author way into the books. believe that there was a methodological on the most cited article in economics “David’s articles have actually been approach there, based on understanding and business worldwide for the decade cited by the U.S. Supreme Court,” said things at the enterprise level, which was of 1995-2005 (“Dynamic Capabilities Tom Campbell, dean of the Haas School, accepted in the academic world.” and Strategic Management,” in Strategic during a 2006 presentation. Noting that In the 33 years since he finished his Management Journal). He is also one of the Teece had been a “very important wit- Ph.D. dissertation on the costs of inter- top 10 most cited scholars for that decade. ness on behalf of Oracle when the gov- national technology transfer, Teece has His 1986 “Profiting from Technology ernment attempted to stop Oracle from gone on to achieve a rare level of suc- Innovation,” in Research Policy, is the most acquiring PeopleSoft,” Campbell pointed cess inside and outside the academy— widely cited business article in that jour- out that LECG was “unique in harnessing despite, or perhaps because of, what he nal’s history, and one that prompted the attributes of the Academy in an area calls his “lifelong battle with mainstream editors to issue a sort of Feschrift a few which was greatly in need of them, name- economics.”Currently the Tusher Chair in years ago celebrating it. ly the prestige of individual faculty with Global Business and professor of business His international background and his the nimbleness of a private company.” administration at the University of desire to be a good citizen of the world “I find that the academic training and California-Berkeley’s Haas School of prompted him to play a key role in found- familiarity with genres of research is Business, as well as director of Berkeley’s ing St. Petersburg State University’s extraordinarily valuable in helping me Institute of Management, Innovation and School of Management, the top business understand the complex reality that you Organization, his deep research into the school in Russia, which he helped start get to see up close in the context of litiga- ever-evolving nature of the business firm from scratch shortly after the collapse of tion,” says Teece. “And, moreover, if you has been highly influential—at least among the Soviet Union. (He currently chairs the can speak plain English, you do have a shot those outside of the economics orthodoxy. school’s International Academic Council, at distilling their complex reality down in a “David has done some of the most origi- and was presumably pleased with the sub- way that a jury can understand, too. nal, provocative, powerful work on the ject of its most recent international confer- “As a testifying expert, I frequently find theory of the firm of anybody that I know,” ence: “Dynamic Capabilities and Beyond.”) myself putting down bad theories,” he says Dr. Richard Nelson, the Blumenthal On the practicing side, the LECG (Law adds. “Some expert has assumed that the Professor of International and Public and Economics Consulting Group) Cor- world looks like some model that they’re Affairs at Columbia University, and a for- poration, which Teece co-founded in 1988, familiar with, but they haven’t looked

52 MAR | APR 2008 THE PENNSYLVANIA GAZETTE enough to discover that the world is bad theorists get control of resources in big picture, which may be one of his more nothing like the model.” a university, they can keep replicating outstanding traits,” Winter adds. “The “Professor Teece’s economic work was themselves. I’ve always had one foot in style is top-down. You don’t bury yourself so panoramic that he could be plugged the real world.” in details without orientation. On the con- into almost any industry dispute and Economists, especially those in the trary, you start with a conceptual orienta- presented as knowledgeable,” noted the academy, “are ordinarily concerned above tion and … drill down.” And for all the Journal. “He didn’t fluster under cross- all that their arguments be found persua- complexities inherent in Teece’s subject examination. And his New Zealand sive by other economists,” wrote Teece matter, he brings to bear “a set of intel- accent worked nicely on the witness and Sidney Winter (now the Deloitte & lectual heuristics that are very orienting stand; it made him sound erudite with- Touche Professor of Management at for a very wide range of problems.” out being pompous.” Penn, then a professor of economics and It is certainly true that Teece does not management at Yale), in a 1984 article “My academic research has been involved fluster easily. During the 1991 Oakland- titled “The Limits of Neoclassical Theory with trying to incorporate innovation into Berkeley firestorm, he and some friends in Management Education.” Since those the theory of a firm,” Teece is saying. “When ignored the “very persistent” evacuation economists “rarely suffer in their profes- you think about it, that is the quintessen- warnings of the police and stayed to fight sional lives the discomforts and anxieties tial issue that everyone in the world is the fire, brandishing hoses and saving of reliance on indispensable expertise interested in, but only a handful of schol- both his own house and his neighbor’s in operating from an alien conceptual frame- ars are touching it—because it’s inter- the process. In conversation he projects work,” they are “ill-equipped to deal with disciplinary; it’s hard to do; you can’t a comfortable tenacity that undoubtedly the complexity and diversity of manage- formalize it very well. I’ve done it, I serves him well in his own business ment problems.” suppose, as well as anybody, and that’s enterprises. Those include Canterbury While most management issues deal really why my stuff is getting cited. As International, a New Zealand-based rugby- with dynamics, Teece and Winter argued, Mansfield said, ‘You always get brownie apparel company that he bought and economic theory deals “almost exclusive- points for asking the right questions, even reorganized, and I-Cap Partners, a group ly with static equilibrium analysis.” For if you don’t get a very good answer.’” of private-equity funds that he started. that and other reasons, “one can doubt The essence of his research, he adds, He also has plans for a new state-of-the- very seriously that the discipline thus “is: ‘What is the foundation of the world art winery in New Zealand. (“We already shaped makes a wholly constructive of business enterprise?’ Adam Smith did have 200 acres of flourishing vineyards contribution to management.” Though The Wealth of Nations, and I’m trying in sauvignon blanc, pinot gris, pinot that article was written 24 years ago, its to keep a record. It sounds highfalutin, noir, and riesling,” he says.) message still resonates. but I’m trying do the same thing in “I’m really running a twin career, one “Mainline economics in the U.S. and to terms of distilling the key essence of of an academic and one that is manager/ a considerable extent in the U.K. has, what makes companies great.” entrepreneur/investor,” he adds, quickly over the last 30 to 40 years, grown very Among the questions that Teece has pointing out that Berkeley has been kind narrow and very stylized,” says Richard addressed, in his own words: enough to let him work in a half-time Nelson. “Two of the topics that it has ■ Why do firms exist? capacity. “What tends to happen to aca- grown very narrow and stylized about ■ Why are they hierarchical? demics if they get interested in business are, first, what business firms are and ■ Why don’t firms outsource every- is they quit the academic world and how they operate, and second, what tech- thing, if markets are as efficient as the become full-time executives or entre- nological change is all about, how it economics textbooks claim they are? preneurs or goodness knows what. I’m occurs, and who does it. As a result of ■ Why are firms diversified if there are sort of the last man standing in terms that, a number of people who got their gains to specialization? of doing both simultaneously.” Ph.D.s in economics, such as David Teece ■ Why should economies of scale and and Sid Winter and myself, have gone scope lead to large diversified firms down a very different intellectual path rather than strategic partnering? don’t want you to overdo this than our brothers and sisters in econom- ■ If firms have know-how, where does ‘battle with mainstream eco- ics have gone down, and a lot of what that know-how reside? If it is merely in “I nomics,’ because that will piss David Teece does is not recognized at all the minds of the employees, how can off even more of my economics col- as economics by many of the people in the firm prevent the employee from leagues,” Teece says at one point in our standard economics departments.” extracting all the value? interview. “But you know, there is good Teece’s contribution to understanding ■ How can firms profit from innova- theory and there’s bad theory, and the the business firm has been “enormously tion if they don’t have strong intellec- mix of bad to good is unfavorable. important,” in Winter’s view. “It’s been tual property? “In physics, if you’ve got a bad theory particularly important in teaching man- “These questions might sound banal and there is evidence out there that agement, particularly in the importance to the layperson, but I can assure you clearly shows it wrong, it tends to die. of the term capabilities, and his thinking they are deep questions, and we don’t But in economics, the death of bad theo- about strategy in capabilities terms. have answers as good as we would like,” ry seems to take much longer. When “I think he has a great instinct for the he told the graduating scholars at St.

THE PENNSYLVANIA GAZETTE MAR | APR 2008 53 Petersburg State University School of dynamic firm capabilities,” says Nelson, and shape opportunities and threats”; to Management, where he was delivering and indeed, Teece’s work on dynamic capa- “seize opportunities”; and to “maintain the Commencement address. That was bilities may be his most important legacy. competitiveness through enhancing, nearly six years ago (before it became His 1997 “Dynamic Capabilities and combining, protecting, and, when neces- the Graduate School of Management), Strategic Management” (with Gary Pisano sary, reconfiguring the business enter- and though he’s been working on those and Amy Shuen) sought to identify the prise’s intangible and tangible assets.” questions since then, they’ve still got decision-making process that supports the The two yardsticks for measuring/ some depth to them. “orchestration capability” of a firm’s core calibrating those capabilities, Teece In his 1986 “Profiting from Technologi- and complementary assets, and explored a wrote, are “‘technical’ fitness and ‘evo- cal Innovation: Implications for integra- new framework for analyzing the “sources lutionary’ fitness.” The former refers tion, collaboration, licensing and public and methods of wealth creation and cap- to how well a capability performs its policy,” Teece addressed the subject of ture” by firms. The core elements of dynam- function, regardless of how well it why innovating firms often “fail to obtain ic capabilities are its three organizational enables a firm to make a living, while significant economic returns from an and managerial processes—“coordination/ evolutionary fitness refers to “how well innovation, while customers, imitators integrating, learning, and reconfiguring”— the capability enables a firm to make a and other industry participants benefit.” which represent a “subset of the processes living.” Contrary to certain earlier mod- Among the examples he cited was that of that support sensing, seizing, and manag- els (such as the Five Competitive Forces EMI, the British electronics corporation, ing threats” to a firm. model of Michael Porter), Teece argued which developed the first CAT scanner in Dr. Constance Helfat, the Quinn Professor that strategizing against competitors the late 1960s but soon lost its market in Technology and Strategy at Dartmouth’s is less effective than identifying and leadership to “imitator” companies such Tuck School of Business, recalls Teece taking advantage of new opportunities: as Technicare and GE because of their working on the theory of dynamic capa- “Entrepreneurial management has little superior “complementary capabilities”— bilities as far back as 1985. “He probably to do with analyzing and optimizing. It training, technical support, servicing, and had it in his head before then, but I is more about sensing and seizing— the like. Conversely, IBM’s PC offered only remember that he drew it out on a piece figuring out the next big opportunity a “very modest technological advance” of paper in early 1985,” says Helfat. and how to address it.” over other home computers, but succeed- “I thought it was a phenomenal idea,” “David has an unusual skill at being ed wildly because it was able to offer its she adds, explaining that its importance able to identify phenomena that, once name and commitment to the project, lies in the way it elucidates “how an you say them, are completely obvious, with all the marketing, servicing, retail- organization can strategically adapt to but until then nobody has identified distribution, and technological advantag- change and even create change. There and articulated what they are,” says es that implied. is a stream of literature on organiza- Helfat. The fact that the dynamic-capa- By teasing out some very tangled tional capabilities, activities that firms bilities theory has “practically taken threads, such as industries and tech- are able to perform in teams, that was over the field of strategy today,” she nologies in which patents are effective starting to become important at the adds, “tells you how right he was.” and those in which they aren’t, Teece time. But it was not focusing on how do was able to build a very persuasive case. you change. What David identified [con- November 29, 2006, Russian It’s fair to say that the article had a cerns] the range of capabilities that is President Vladimir Putin laid significant effect. important for different types of change.” On the cornerstone for the future “The greatest homage that can be paid While Teece is not shy about saying that campus of the Graduate School of to a scholarly contribution, is, in my view, the article has been “absolutely explosive Management of St. Petersburg State the reader’s private acknowledgement in terms of its impact”—with good reason, University, located on 256 acres that that the world looked different to me after given its most-cited status for the decade— once belonged to Grand Prince Mikhail I read that,” wrote Winter in a 2006 article he and his colleagues acknowledged that Nikolaevich. It was a lavish and “careful- for Research Policy titled “The logic of it was basically an “outline” for the dynam- ly orchestrated” ceremony, recalls Teece. appropriability: From Schumpeter to ic-capabilities approach. Further theoreti- “They must have spent $100,000 on tents Arrow to Teece,” which heaped praise onto cal work—and Mansfield-style empirical with controlled heat, serving fine French Teece’s paper and traced his intellectual research—would be critical to helping wines and wonderful food …” lineage from two highly influential econo- understand “how firms get to be good, In his remarks, Putin talked about how mists, Joseph Schumpeter and Kenneth how they sometimes stay that way, why the school would “contribute to the devel- Arrow. The paper’s “well-justified fame,” and how they improve, and why they opment of the national economy,” how its Winter added, “is attributable to the fact sometimes decline.” alumni would “have to meet real-life busi- that a great many readers had such a reac- Ten years later, he extended the theory’s ness challenges” and “defend Russia’s tion, recognizing the change the article reach in “Explicating Dynamic Capabilities: interests in international markets,” and produced in their basic perceptions.” The Nature and Microfoundations of how they would “need professional train- “I see this paper as an important early (Sustainable) Enterprise Performance.” ing and skills, leadership and entrepre- step in David’s more general research and Dynamic capabilities, he wrote, can be neurship, and of course deep, fundamen- writing on the nature and importance of broken down into the capacity to “sense tal knowledge.”

54 MAR | APR 2008 THE PENNSYLVANIA GAZETTE He also had some kind words to say, Knowing how to negotiate the laby- It has 1,500 students in undergraduate, in English, about the help the school rinths of the academy was a valuable MBA, Ph.D., executive-education, and had received from Russia’s former Cold asset for someone trying to steer money other programs taught by some 70 full- War enemy. to the other side of the world. Teece time faculty members. “He was very generous in his recogni- enlisted the support of the Haas School, A few years ago, Teece met with phi- tion for what the United States—in partic- as well as that of other Berkeley faculty lanthropist George Soros, whose Soros ular the University of California-Berkeley experts on Russia and the Soviet Union; Foundation provided one of the grants and some of the independent donors—had latched onto some grants to supplement that supported the Berkeley-St. Peters- done for Russia,” says Teece. “He showed the meager faculty salaries at St. burg program. genuine gratitude and warmth to those Petersburg; helped round up an adviso- “He started Central European Universi- who had helped. I thought the fact that he ry board and some potential private ty, which is basically a hole in his pocket,” took the time to do that was not just a very donors; and along with his wife helped recalls Teece. “So he said, ‘I’ve got to give nice thing but contrary to the image that convince his mother-in-law to give a you credit: You did a hell of a lot better Putin has in the world.” small rental house to Berkeley and ear- with the money that you had than I did Now that Putin has made the GSOM an mark the proceeds for the program. with mine. What’s the difference?’” official National Priority Project, the school The school “had no computers and no The difference between the two schools is on sound financial ground. But it wasn’t supplies,” notes Susanne Campbell, execu- is that the GSOM was built onto a major always so. Until Teece got involved, the tive director of the Berkeley-St. Petersburg university—which, though weaker than it school was only a gleam in the eye of its program since 1993, in a piece she wrote had been historically, still had a 300-year current dean, Dr. Valery Katkalo. for the Haas website. “For the first few history of scholarship, notes Teece. “Even Katkalo had come to Berkeley from St. years people from Haas brought boxes of though the B-school part was completely Petersburg as a Fulbright Scholar to study office supplies in our suitcases. The faculty de novo, the institutional apparatus of under Dr. Oliver Williamson, the former numbered four to six. Many had basic the university was there. There was infra- Penn professor of economics whose many knowledge of economics and mathematics, structure there.” books included The Economic Institutions but they lacked the knowledge to teach For Teece, the positive effect that the of Capitalism, and whose work, like business subjects at the MBA level.” university system has had on his own Mansfield’s, greatly influenced Teece. She credits Teece with setting the tone life can hardly be overstated—or repaid. At Williamson’s suggestion, Katkalo went of the partnership from the outset: “You do it because you believe it’s a to see Teece shortly after the Soviet “What makes a business school is the good thing to do,” he says. “You don’t get Union collapsed. faculty,” he said. “Our job is to train a rewarded for it. I feel extremely fortu- “He said, ‘David, there’s no business Russian faculty, not to replace them.” nate; the university system here has school inside a university in Russia. “David played a central role in creat- treated me so well. I mean, I really believe We need one,’” recalls Teece. “He said, ing our very successful partnership with in these institutions. They are the insti- ‘If I initiate the process of starting one, Haas, which was key for starting and tutions that make America great.” would you help me?’” developing the School of Management at After thinking about it for a minute, Teece St. Petersburg University,” says Katkalo. Near the end of our interview, I ask said he would. The reasons, he says now, “David made tremendous intellectual Teece if he ever wished he could talk to boiled down to “high-minded idealism.” and organizational contributions, espe- Ed Mansfield now, or if he ever had any “The obvious thoughts of ‘Win the Cold cially in choosing the right strategy and conversations in his head with him. War, lose the peace,’ went through my business model for our school,” but also “You know, Mansfield wasn’t a particu- mind,” he recalls. As a U.S. citizen, he had in bringing Haas faculty to teach and to larly chatty guy,” he says. “But about 10 a “desire to see Russia progress in a way develop joint research projects with the years after I graduated, I sat down and that Russia would be an ally to the United St. Petersburg faculty—and in bringing wrote him a nice handwritten note, telling States—because if Russia and the U.S. the latter to Berkeley to develop courses, him that he had really been influential, can see eye to eye, then a lot of other audit classes at Haas, and do research. and essentially thanking him for his dedi- issues in the world become simpler. And “David’s involvement has always been cation to his field and his willingness to the best bet for doing that would be to get critically important because of his status [mentor] me as a graduate student. them on a market-based economy.” as one of the world leading scholars in “It’s not something that I’m sure he would He also had confidence in the enor- management research, especially in stra- have expected, or is normally done,” he mously capable Katkalo—a good thing, tegic management and management of adds. “And five years later—and I didn’t since Katkalo’s next comment to Teece technological innovation,” adds Katkalo. know this would happen—he was dead. was, “Of course it will take a lot of money.” “Both these fields have been quite new Maybe this is a selfish feeling, but I’m glad When Teece wondered aloud where that for Russian students of management that I’d at least had my chance to thank him would come from, Katkalo said quietly, and still today are on the forefront of our for his investment in me—and, implicitly, to “Well, I have some ideas.” teaching and research in the context of thank the University of Pennsylvania for “He was very shrewd,” says Teece approv- the booming Russian market economy.” accepting me as a graduate student. If ingly, adding: “I was not without a little Though the school is still a work in he’d passed away and I’d never done that, bit of political wiliness myself.” progress, it’s come a long way since then. I would have regretted it.”◆

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