The themes of technological innovation, entrepreneurship, and organizing

Dynamic Capabilities and Innovation Radicalness: Review and Analysis

Jorge Cruz-Gonzalez

Universidad Complutense de Madrid, Spain

Jose Emilio Navas-Lopez

Universidad Complutense de Madrid, Spain

Pedro Lopez-Saez

Universidad Complutense de Madrid, Spain

Miriam Delgado-Verde

Universidad Complutense de Madrid, Spain

ABSTRACT

The aim of the present chapter is to theoretically analyze the determinants offirm’s innovation radical­ness (the degree of novelty incorporated in an innovation) from a dynamic capabilities-based view of competitive advantage. Nevertheless, due to the fact that dynamic capabilities ’ concept suffers from cer­tain terminological inconsistence and its components are not entirely clear in current literature, we first need to carry out an in depth review and analysis of this construct. Based on this review, we argue that dynamic capabilities arise from firm’s orientation to knowledge exploration that enables the generation ofnew organizational capabilities, and suggest external knowledge acquisition and internal knowledge combination as its key components. Taking into account this reasoning, we propose a theoretical model on dynamic capabilities deriving some relevant propositions considering innovation radicalness as its core output and the key element to compete in dynamic environments.

DOI: 10.4018/978-1-61350-165-8.ch021

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INTRODUCTION

Since Schumpeter published The Theory of Eco­nomic Development in 1934, there has been a rising recognition of innovation as a key factor for firm’s profitability and survival. Attending to the degree of novelty of the technology, innova­tion comes in many different types ranging from incremental to disruptive. Incremental innovations consist of minor changes or plain adjustments to existing products or technology and are built on firm’s current technical capabilities; radical innovations imply the development of a highly novel or unique product/service or production process and are based on changes in firm’s tech­nological trajectory and associated organizational competencies; and disruptive innovations re-write the rules of the competitive game, creating new technological systems and sometimes even new industries (Tidd, 2001; Benner & Tushman, 2003; Dahlin & Behrens, 2005). Most innovations can be characterized as incremental, whereas radical innovations, and especially disruptive innova­tions, are much less frequent (Schoenmakers & Duysters, 2010).

As recognized in recent literature, mere im­provement of products/services or production processes is not enough to ensure firm’s viability in current environments, characterized by growing technological changes and uncertainty (Rosenkopf & Nerkar, 2001; Danneels, 2002; Schreyogg & Kliesch-Eberl, 2007). To avoid the threat of ob­solescence associated with this type of contexts, organizations must develop new capabilities that depart from current ones and to translate these new capabilities into new processes, products and services (Tidd, 2006). In other words, in a growing number of competitive landscapes, firm success depends on its ability to develop innova­tions with a higher degree of novelty (Tidd, 2001; Benner & Tushman, 2003; Jansen, Van den Bosch & Volberda, 2006).

However, in spite of many theoretical discus­sions on the effect of radical innovations, the ori­gins ofthis kind ofinnovation have so far received much less attention by researchers (Schoenmakers & Duysters, 2010). Accordingly, the aim of the present chapter is to theoretically analyze the determinants of firm’s innovation radicalness (the degree of novelty incorporated in an innovation). In doing so, the theoretical framework in which we sustain our analysis is the dynamic capabilities - based view of competitive advantage, which has notably improved its relevance during the last decade (Teece & Pisano, 1994; Teece, Pisano & Shuen, 1997; Zahra, Sapienza & Davidson, 2006; Wang & Ahmed, 2007; O’Reilly & Tushman, 2008; Pettus, Kor & Mahoney, 2009). This new perspective in the strategic management field, with important implications for the management ofinnovation, considers the evolutionary nature of the resources and capabilities of the company in relation to the changes occurred in the environment in which it operates (Lavie, 2006; Pettus et al.,

2008) . Hence, the dynamic capabilities framework tries to link the arguments of those theories that explain the sustainable competitive advantage based on contextual factors (Porter, 1981), with those that attempt to explain the sustainability of competitive advantage from a purely internal perspective (Wernefelt, 1984; Barney, 1991). In this sense, “the competence-based approach is concerned with the identification, development and exploitation of core competencies based on prior experience. However, it fails to address how firms cope when existing competencies become obsolete, or how firms acquire new competencies” (Tidd, 2006: 14). For these reasons, we consider that dynamic capabilities framework constitutes an adequate background to analyze firm’s innovation radicalness (Galende, 2006).

Nevertheless, despite its relevance and the wide and increasing number of scientific stud­ies focused on this perspective, the concept of dynamic capabilities suffers from certain termi­

nological inconsistence (Zahra et al., 2006). This fact underscores its initial phase of development (Newbert, 2007). Additionally, the lack of con­sensus with regard to the factors that influence the development of this kind of capabilities by firms is even more important (Wang & Ahmed, 2007). So, according to the main objective of the chap­ter, we first need to carry out an in depth review and analysis of this construct. Concretely, we (1) analyze the concept of dynamic capabilities in order to reconcile the different perspectives that have been developed until now, and (2) identify the key components that enable firms to develop this special kind of capabilities, or the subsets of capabilities in order to build them up.

Based on a comprehensive review of the literature, we classify the main theoretical con­tributions regarding dynamic capabilities in three broad approaches to this construct: the innovation approach, the contingent approach, and the capa­bility-building approach. Although the definitions provided by each of these perspectives are quite different, we try to offer an integrative defini­tion of dynamic capabilities that brings together all these three approaches. The main conclusion of this theoretical review and analysis is that the generation of new organizational capabilities lies at the heart ofthe concept of dynamic capabilities. According to several authors framed within the resource-based view and knowledge-based theory of the firm, capabilities are based on collective and tacit knowledge (Collins, 1994; Pisano, 1994; Grant, 1996; Helfat & Peteraf, 2003; Nobre, To­bias & Walker, 2010). Therefore, the generation of new organizational capabilities that enables firm’s technological developments requires the acquisition of new knowledge by firms or, in other words, that explorative learning to take place (March, 1991; Van den Boch, Volberda & de Boer, 1999; Rosenkopf & Nerkar, 2001; Dan - neels, 2002; 2008; Tidd, 2006; Jansen et al., 2006; O’Reilly & Tushman, 2008; Uotila, Maula, Keil & Zahra, 2009).

Taking into account the organization as level of analysis (Tidd, 2006), we identify two basic sources of new organizational knowledge. On the one hand, firms can conduct an explorative learn­ing from the unexplored knowledge located inside ofit (internal source). On the other hand, organiza­tions can explore new knowledge located outside the firm boundaries (external knowledge) (Bierly & Chacrabarti, 1996; Zollo & Winter, 2002; Zahra & Nielsen, 2002; Lavie, 2006). According to the previous discussion, new capability generation requires both internal and external organizational learning. In this sense, we analyze the two main facets that, according to the literature, allow firms to carry out explorative learning from internal and external sources. These are: absorptive capacity, which allows the firm to recognize the value of new external knowledge, internalizing and ap­plying it (Cohen & Levinthal, 1990; Jansen, Van den Bosch & Volberda, 2005); and combinative capabilities, devoted to combining the existing knowledge with novelty and flexibly for gener­ating new organizational knowledge (Kogut & Zander, 1992; Van den Bosch et al., 1999). By analyzing both factors, this chapter highlights some of the main mechanisms that allow organi­zations to acquire new organizational knowledge from external sources and to generate it through current knowledge combination.

Our theoretical review and analysis leads us to develop a research model linking dynamic ca­pabilities with innovation radicalness. Based on the above reasoning, and taking into account that more radical innovations require the development of new technological capabilities, we propose that both dynamic capabilities components posi­tively influence the degree of novelty of firm’s innovation. Additionally, we justify and propose the existence a complementary effect between them on innovation radicalness. Finally, we take into account the role of radical innovations in the success of firms operating in dynamic contexts.

DYNAMIC CAPABILITIES CONCEPT

As Zahra et al. (2006) highlights, the concept of dynamic capabilities suffers from certain termi­nological inconsistence. In this section we offer the theoretical literature review carried out on this construct.

Main Approaches

Table 1 shows the major definitions adopted by the main authors framed within the dynamic capabili­ties perspective. We classify these contributions in three differentiated approaches (innovation, contingent and capability-building) that are dis­cussed in the following paragraphs.

The contributions classified into innovation approach tend to define dynamic capabilities as firm’s ability to innovate in products or services, processes or business models. This approach is based on a Schumpeterian perspective, recogniz­ing innovation as a primary means to achieve the necessary organizational renewal for firm’s ad­aptation and survival in the current business en­vironment, characterized by growing changes in technology, customers and competitors (Danneels,

2002).

The second approach, this is, the capability - building approach, is rooted both in the resource - based view (Wernefelt, 1984; Barney, 1991) and evolutionary economics (Nelson & Winter, 1982). According with the resource-based view, organizational capabilities may lead the firm to achieve a competitive advantage at present. Nevertheless, under an evolutionary perspec­tive, current attributes do not guarantee a firm’s future viability (O’Reilly & Tushman, 2008). A competitive advantage based in the same capa­bilities is not sustainable during a long period of time because organizational capabilities may be eroded by external changes, such as new actions carried out by competitors (Collins, 1994; Helfat & Peteraf, 2003; Sirmon, Hitt & Ireland, 2007). Hence, the capability-building approach under­stands dynamic capabilities as those that enable the generation of new organizational capabilities (meta-capabilities or second-order capabilities), allowing the firm to sustain its competitive ad­vantage (Collins, 1994; Danneels, 2008). “These capabilities might include the flexibility to shift between capabilities more efficiently or faster than competitors (...), or the ability to respond to or initiate radical change” (Collins, 1994: 148).

Finally, the third perspective is rooted in the contingency theory (Aragon-Correa & Sharma,

2003) . Under this approach, dynamic capabilities are defined in terms of fit with firm’s environ­mental conditions. In this sense, four scenarios can be identified: beneficial strategic change (fit), insufficient strategic change (misfit), exces­sive change (misfit), and beneficial inertia (fit) (Zajac et al., 2000: 433). Dynamic capabilities are classified in the first scenario, this is, when firm’s environment requires a strategic change and firm effectively change as needed, resulting in a higher performance. Hence, authors classi­fied under this perspective consider that firm’s dynamic capabilities follow a schema such as external signals-interpretation-response.

After a careful analysis of the definitions in­cluded in Table 1, we reach the same conclusion than Zahra et al. (2006): broadly, dynamic capa­bilities definitions are tautological. In this sense, the three mentioned approaches define dynamic capabilities based on its results: innovation, new capabilities generation, and fit with external condi­tions, respectively. This tautological problem can also be found in the resource-based view literature (Priem & Butler, 2001).

We do not argue that dynamic capabilities do not lead to these results. Nevertheless, we argue that a concept, in this case dynamic capabilities, cannot be described based on its output. If we do this, dynamic capabilities will be conceived as a black box (Sirmon et al., 2007). In this sense, some of the cited authors have devoted consid­erably efforts trying to overcome this problem. For example, Helfat and Peteraf (2003) argue

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that dynamic capabilities are oriented to the gen­eration, integration, or reconfiguration of firm’s resources and capabilities. Verona and Ravasi

(2003) propose that dynamic capabilities nature is fundamentally based on knowledge and require knowledge creation and absorption, knowledge integration and knowledge reconfiguration. Simi­larly, Zahra et al. (2006) consider that dynamic capabilities consist in new reconfiguration of firm’s resources and routines. In the same way, Augier and Teece (2007) include in their dynamic capabilities definition the processes of shape, reshape, configure and reconfigure of the firm’s assets base. Another valuable example is provided by Wang andAhmed (2007) when athors argue that dynamic capabilities consist in firm’s behavioural orientation constantly to integrate, reconfigure, renew and recreate its resources and capabilities. Note that all these definitions have been classified into the capability-building approach.

Once this rider has been added, it can be seen that the capability-building approach is the per­spective in which more authors have been classi­fied. One explanation provided by the literature is that new capabilities generation is required both for innovation as well as for adaptation to envi­ronmental turbulence (Henderson & Cockburn, 1994; Zahra & George, 2002; Dannels, 2002, 2008; Jansen et al., 2006; Lavie, 2006; O’Reilly & Tushman, 2008). Accordingly, we argue that, although different, the three approaches identified are not incompatible. Hence, new capabilities generation (capability-building approach) may allow the firm to innovate in products, processes or business models (innovation approach), enabling it to be adapted to a turbulent environment (con­tingent approach). Therefore, new organizational capabilities have to be considered as the direct output of dynamic capabilities. If a firm develops new technological capabilities, it may improve its ability to produce better products, new products, or the same products at a lower cost. Similarly, if a firm develops new market capabilities, it may better serve its current customers, or to serve a new market segment (Danneels, 2008). These new technological and market capabilities are essential for firm survival in the face of changes affecting technology or customers ’ demand patterns (Lavie, 2006; Sirmon et al., 2007). So, at this point, it is necessary to consider the capability-building ap­proach as the central perspective in the academic literature focused on a dynamic capabilities-based view of competitive advantage.

The Role of Environmental Dynamism

Another question emerging from the analysis of the definitions included in Table 1 is the consid­eration of external factors as key element in the dynamic capabilities perspective. It can be seen how most authors include environmental condi­tions as a fundamental factor of their dynamic capabilities definition. Furthermore, the tendency to consider environmental dynamism increases in the most recent works. This can be explained because a growing body of literature argues that the value of firm resources and capabilities is context-dependent (Collins, 1994; Brown & Eisenhardt, 1997; Teece et al., 1997; Eisenhardt & Martin, 2000; Rindova & Kotha, 2001; Priem & Butler, 2001; Barney, 2001; Helfat & Peteraf, 2003; Benner & Tushman, 2003; Jansen et al., 2006; Lavie, 2006; Sirmon et al., 2007).

Under this reasoning, firm’s current capabili­ties, while valuable if they can provide competi­tive advantage at present, do not ensure that the firm would be able to change in the face of a new threat (Tidd, 2006; O’Reilly & Tushman,

2008) . In this sense, rapid technological prog­ress is considered as the most important source environmental dynamism (Benner & Tushman, 2003; Uotila et al., 2009), being a serious threat of obsolescence in firm’s current technological and market capabilities, since new technology developed or assimilated earlier by competitors will enable them to invent new products, improve the existing ones, or to produce at a lower cost

(Danneels, 2008; Uotila et al., 2009). Hence, under the dynamics of Schumpeterian external regimes, competitive advantage sustainability lies in firm’s ability to continually reconfigure its technological capabilities base (Danneels, 2002, 2008; Benner & Tushman, 2003).

“Core competencies can represent a set oftacit and collective knowledge which is developed through learning processes” (Nobre et al. 2010: 392). In this sense, firm’s survival in the face of external turbulence lies in its ability to accomplish an explorative learning that expands its current knowledge base, allowing organizational capa­bilities regeneration (March, 1991; Levinthal & March, 1993; Danneels, 2002, 2008; Sirmon et al., 2007; 0’Reilly & Tushman, 2008; Uotila et al. 2009). However, it would be wrong to fully assimilate dynamic capabilities to environmental dynamism. This tendency to equate the presence of dynamic capabilities to environmental condi­tions is one ofthe main sources of confusion in the literature (Zahra et al., 2006). Although it seems clear that the usefulness of dynamic capabilities is higher in turbulent environments, it is necessary to avoid confusions between external conditions and firm’s internal capabilities (Zahra et al., 2006). In a similar fashion to the arguments given in the previous section when stating that dynamic capa­bilities should not be confused with their outputs, we must highlight here that neither should they be confused with the optimal conditions for their implementation.

Based on the previous discussion, we define dynamic capabilities as firm’s ability to constantly explore new market and technological knowledge in order to build new organizational capabilities. This ability is especially valuable in the face of rapid changes in markets and/or technologies. Thus, the greater the environmental dynamism, the greater should be the ability of the firm to engage in explorative learning that enables capability reconfiguration.

DYNAMIC CAPABILITIES AND INNOVATION RADICALNESS

Until now, we have argued that firms need to continuously seek new technological and market knowledge to develop their dynamic capabilities and to be adapted to a dynamic environment. As Tidd points out, a central task in corporate strategy is “(and perhaps more important), to identify and explore the new competencies that must be added if the functional capability is not to become obsolete” (2006: 8). But, where can firms find new knowledge that enables firm’s capability reconfiguration? And how leads this capability renewal to firm’s adaptation to fast - changing competitive contexts? In this section we try to identify the basic sources of new knowledge for organizations and argue that firm’s success (adaptation) in dynamic contexts is achieved through translating new capabilities generation into more than j ust incremental innovations (Tidd, 2006). Again, following Tidd, “the fit with exist­ing competencies is an important consideration when determining new product development strategy. This is particularly so for more novel or complex products (2006: 14)”. Alternatively, this author also suggest that there is an opposing motive, consisting in learn or acquire new capa­bilities. According to the exposed reasoning, firms should focus on this second motive more than on leveraging current capabilities in their innovation process when facing environmental dynamism. Additionally, Tidd also addresses an interesting problem in organizational learning research when he stays that “much of the research on technology management and organisational change has failed to address the issue of organisational learning. Instead, it has focussed on learning by individuals within organisations” (2006: 16). So, to overcome this problem, we must depart from individual learning and to focus on explorative learning at organizational level.

In doing so, literature argues that, at orga­nizational level, there are two basic sources of new knowledge: internal and external sources. According to Bierly and Chakrabarti, “internal learning occurs when members ofthe organization generate and distribute new knowledge within the boundaries of the firm”, while “external learning occurs when boundary spanners bring in knowl­edge from an outside source via either acquisition or imitation and the knowledge is then transferred through the organization” (1996: 124). These and other authors sustain that internal learning allows the firm just to improve its current capabilities (knowledge exploitation), whereas external learn­ing is required to develop a broader knowledge base (knowledge exploration), becoming critical in dynamic environments. In this sense, Lavie (2006) carries out an interesting review of the method for capability reconfiguration through three main mechanisms: capability evolution, substitution and transformation. Based on evolutionary econom­ics, capability evolution involves incremental learning through experimentation from internal sources of knowledge. Capability substitution is rooted in the competence-enhancing/destroying framework and involves radical learning from external sources, such as industry associations, alliance partners, newly acquired subsidiaries, and newly hired employees. Finally, capability transformation is an intermediate mechanism for firm capabilities reconfiguration that combines internal and external learning.

By contrast, many other authors argue that not only external knowledge, but also internal knowledge sources are important for developing a successful explorative learning process (Hen­derson & Cockburn, 1994; Zahra, 1999; Zollo & Winter, 2000; Rosenkopf & Nekar, 2001; Tidd, 2006; Jansen et al., 2006; Morrow, Sirmon, Hitt & Holcomb, 2007; Sirmon et al., 2007; Danneels,

2008).

Attending to its definition, “exploration is search for new knowledge, use ofunfamiliar tech­nologies, and creation of products with unknown demand” (Greve, 2007: 945), so “the essence of exploration is experimentation with new alterna­tives” (March, 1991: 85). This process should not be based only on external sources, but also on the firm’s uncharted internal knowledge. As Grant argues, “the essence of organizational capabili­ties is the integration of individuals’ specialized knowledge” (1996: 375). Thus, according to Kogut and Zander (1992), new capabilities creation relies on firm’s ability to generate new applications for existing knowledge and to discover the unexplored knowledge located inside the firm, so, internal learning may be also explorative when it promote s new combinations of current knowledge (Van den Bosch et al., 1999; Rosenkopf & Nekar, 2001; Jansen et al., 2006; Danneels, 2008). A firm’s ability to novelty recombine and utilize its current knowledge base is what Kogut and Zander (1992) define as combinative capabilities. This internal knowledge combination enhances knowledge exchange between individuals and disciplinary boundaries and generates new organizational knowledge (Henderson & Cockburn, 1994; Jansen et al., 2006; Tidd, 2006). In other words, “bound­aries matter; here it is not only the boundary that separates the organization from its environment, but it is also internal boundaries that have arisen to organize various technological subunits” (Rosen - kopf & Nekar, 2001: 289) within the organization. This reasoning leads Rosenkopf and Nekar (2001) to propose two types of organizational knowledge exploration: external boundary-spanning and internal boundary-spanning.

Therefore, it seems that firms can develop its ability to build new capabilities through explor­ative learning by investing in a special kind of internal learning based on its current knowledge combination, and by creating linkages to external knowledge sources. As Nobre et al. (2010) stays, organizational capabilities are key sources for innovation, and the higher the degree of novelty incorporated in an innovation, the higher must be the required firm’s technological capabilities renewal for its development (Tidd, 2001; Benner
& Tushman, 2003; Dahlin & Behrens, 2005). So, in the following subsections we present the role of the two identified learning mechanism on in­novation radicalness.

External Knowledge Acquisition and Innovation Radicalness

External knowledge acquisition by firms is the way in which organizations carry out an external boundary-spanning exploration that integrates knowledge from other organizations (Rosenkopf & Nerkar, 2001). We consider this element as one of the key components of dynamic capabilities. Table 2 presents the identified mechanisms that, according to literature review, enable external knowledge acquisition by organizations.

Henderson and Cockburn (1994) argue that one key form of ‘integrative’ or ‘architectural competences’ especially relevant as source of sustainable competitive advantage in a dynamic context, as pharmaceutical research, is “the abil­ity to access new knowledge from outside the boundaries of the organization” (1994: 66). As Rosenkopf and Nerkar (2001) highlights, greater levels of reliance on the firm’s own prior knowl­
edge is associated with more innovation, but this innovation has a lower level of novelty, because not all technological knowledge can be effec­tively generated or embodied solely within the firm (Bierly et al., 2009). This occurs because inwardly focused learning is one of the hallmarks of core competence. But such myopic behaviour leads to the development of core rigidities (Leon- ard-Barton, 1993) and competency traps (Levin - thal & March, 1993). In other words, it is not possible to carry out an explorative learning only based on firm’s current knowledge combination (Sirmon, et al., 2007). Therefore, firms need continually acquire diverse and new knowledge that serve as the seed for future technological developments (Miller, Fern & Cardinal, 2007; Escribano et al., 2009).

External knowledge acquisition has been extensively studied in the field of absorptive ca­pacity literature (Cohen & Levinthal, 1990; Van den Bosch et al., 1999; Zahra & George, 2002; Jansen et al., 2005; Lane, Koka & Pathak, 2006; Todorova & Durisin, 2007). In their seminal paper, Cohen and Levinthal define absorptive capacity as “the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends” (1990: 128). This ability to scan and acquire new external knowledge is criti­cal for firm innovation (Zahra & George, 2002).

Recent empirical results in the field of radical inventions suggest that emergent technologies are key to achieve radical innovations (Schoenmakers & Duysters, 2010), highlighting the importance of speed in understanding emergent technologies. Learning from external sources expands the firm’s knowledge base, enhances the recognition of op­portunities and threats, and provides access to new ideas that promote the generation of new techno­logical capabilities (Miller et al., 2007; Danneels,

2008) . As more radical innovations are based on distant knowledge and capability reconfiguration, it is expected that external knowledge acquisition by organizations contributes to develop innova­tions incorporating a higher degree of novelty. This is especially evident in the concept and selection stages of innovation development (Tidd, 2006). For example, scientific journals may be a source of great deal of publicly available knowledge for R&D teams (Escribano et al., 2009). Similarly, col­laborations with universities and research centres may enable the firm to access more rapidly and at a lower cost to new technological knowledge necessary for new product development (Fabrizio,

2009) . Likewise, participation in professional association’s activities may lead the firm to have access to new trends in the market and technology, providing some clues about the future evolution of the industry (Danneels, 2008). In addition, if organization uses gatekeepers, managers will be able to take new initiatives to react faster to changing market and technological conditions (Andersen, 2004). These arguments lead us to derive our first proposition.

Proposition 1. External knowledge acquisi­tion by a firm positively influences the degree of novelty of its innovations.

Internal Knowledge Combination and Innovation Radicalness

According to the reasoning followed in this chap­ter, we consider internal knowledge combination by firms as the second key component of dynamic capabilities. It can be defined as the way in which organizations carry out an internal boundary - spanning exploration that integrates technologi­cally distant knowledge residing within the firm (Rosenkopf & Nerkar, 2001). As in the previous case, we have carried out a literature review to identify the mechanisms for internal knowledge combination by organizations (Table 3).

In addition to scanning the environment, “the ability to integrate knowledge flexibly across disciplinary (...) boundaries within the organiza­tion” (1994: 66) is also considered by Henderson and Cockburn as a key form of ‘architectural competences’. This internal organizational knowl­
edge combination is what Kogut and Zander (1992) defined in their seminal paper as combina­tive capabilities.

In contrast to the conventional wisdom that radical innovations are based less on current knowledge (Bierly & Chakrabarti, 1996; Lavie, 2006), Schoenmakers and Duysters (2010) find that they are to a higher degree based on existing knowledge than non-radical innovations. These results have important implications for the man­agement of firm’s internal knowledge, showing the need for more coordination of the knowledge within the organization, and more internal open­ness because different divisions might possess knowledge that, when put together, could poten­tially deliver a radical innovation.

Again, it can be seen how, as Rosenkopf and Nekar (2001) maintain boundaries matter. But not just external boundaries, but also internal ones are important for knowledge creation and application, and hence for innovation. As Tidd points out, “the development of new products may demand new technology-product-market linkages and, therefore, require close collaboration between different divisions” (2006: 18). This author con­siders information distribution a key process for organizational learning and innovation, defining it as the process by which information from dif­ferent sources within an organization is shared, leading to new knowledge or understanding. This reasoning leads Tidd to stay that “firms with fewer divisional boundaries are associated with a strategy based on capabilities-broadening, whereas firms with many divisional boundaries are associated with a strategy based on capabilities-deepening” (2006: 19). So, attending to the characteristics of both incremental and radical innovations, firms with many (or strong) divisional boundaries tend to develop more incremental innovations, whereas organizations with less (or weak) divisional bound­aries tend to develop more radical innovations.

Van den Bosch et al. (1999) refer to lateral ways of coordination that enhance the scope and flexibility of organizational learning through relations between its members and groups. This kind of capabilities can be developed as a result of training and job rotation, cross-functional in­terfaces and participation of subordinates in the decision-making process (Van den Bosch et al., 1999; Jansen et al., 2005). This internal knowl­edge combination enhances knowledge exchange between different individuals and groups within the firm, so encouraging the development of new knowledge and promoting radical innovation. As Zollo and Winter highlights, “important collective learning happens when individuals express their opinions and beliefs, engage in constructive con­frontations and challenge each other’s viewpoints” (2002: 341). This constructive conflict refers to the vigorous debate of ideas, beliefs, and assump­tions by organizational members that enable the discussion of opposite views, leading to make better decisions and to develop new organizational capabilities required for incorporate maj or changes in technological trajectory (Danneels, 2008).

R&D intensity of a firm has been tradition­ally used as a primary input variable to internal learning (Bierly & Chakravarty, 1996). In this sense, internal R&D is a way to put together the knowledge possessed by the firm’s scientific staff. Although Cohen and Levinthal (1990) used this variable as a proxy of firm’s absorptive capacity, they were based on their argument that firms need some previous related knowledge to assimilate new external information. Another example of internal knowledge combination is the use of cross-functional interfaces. This practice support organizational members in rethinking the nature of existing products and services and revisit the ways in which components are integrated (Henderson & Cockburn, 1994; Jansen et al., 2005). Similarly, participation in decision-making promotes more market views and technological perspectives to be considered in innovative decisions, which should lead to more marketable radical inventions (Schoenmakers & Duysters, 2010). Job rotation of employees who each possesses diverse and varied knowledge enhances the diversity of background, increases the problem-solving skills and develops organizational contacts that may increases employ­ees’ ability to identify technological opportunities (Jansen et al., 2005). In the same way, because radical innovation requires non-routine problem solving and deviation from existing knowledge, organizational forms promoting formalization and centralization of decision making are likely to reduce the degree of novelty of firm’s innova­tion (Jansen et al., 2006). Accordingly, our second proposition stays as follows:

Proposition 2. Internal knowledge combina­tion by a firm positively influences the degree of novelty of its innovations.

Complementarities between External Knowledge Acquisition and Internal Knowledge Combination

In previous paragraphs we have exposed our reasoning about the effect that, ceteris paribus, external knowledge acquisition or internal knowl­edge combination has on innovation radicalness. However, nothing was mentioned about the possible existence of a joint effect between both elements. In other words, what could be the ef­fect on innovation radicalness if a firm develops its ability in external knowledge acquisition and internal knowledge combination simultaneously? Indirectly, we have already answered this question in previous discussion when proposing both ele­ments as the key components of firm’s dynamic capabilities that enable a major renewal of firm’s technological competences and subsequently in­troduce a higher degree of novelty on innovations.

As noted, Schoenmakers and Duysters ’ (2010) results highlight the importance of speed in un­derstanding emergent technologies for innova­tion radicalness. But this speed is higher when a firm is able not only to gets an early access to new technology as consequence of great efforts devoted to environmental scanning, but also when it is able to carry out a fast dissemination of this new external knowledge within the organization throw internal knowledge combination. In this sense, authors conclude that “firms that are quick in understanding the possibilities that emergent technologies posses, and that therefore are able to combine this knowledge with mature and well understood knowledge, might be better at delivering radical inventions” (Schoenmakers & Duysters, 2010: 1057).

Following our reasoning, it seems clear that external knowledge acquisition is imperative to introduce new knowledge within the organiza­tion necessary to develop more radical innova­tions. Nevertheless, although necessary, external knowledge acquisition per se may be not enough to carry out a complete explorative organizational learning required to incorporate more novelty on innovations. If not only external, but also internal boundaries matter (Rosenkopf & Nekar, 2001), new external knowledge acquired by the firm may be trapped by internal boundaries and therefore that knowledge will not reach the knowledge place where it would be relevant within the organization, or not at time (and speed also matters - Schoenmak­ers & Duysters, 2010). This may explain why firms exposed to the same amount of external knowledge flows might not derive equal innovation results (Escribano et al., 2009). In addition to external knowledge scanning, firms need to develop its ability in internal knowledge combination in order to rapidly understand, distribute and apply current and newly acquired external knowledge to develop radical innovations. Following this, we reach our third proposition.

Proposition 3. There is a complementary ef­fect between firm’s external knowledge acquisi­tion and internal knowledge combination (that is, firm’s dynamic capabilities) on the degree of novelty of its innovations. So, if a firm acquires new external knowledge and combines current and new acquired knowledge its innovations will be more radical than if it only develops one of these abilities.

Innovation Radicalness and Adaptation to Environmental Dynamism

Benner and Tushman stays that “the ability to develop new technological capabilities rapidly is especially critical in environments characterized by rapid innovation and change” (2003: 249). We have argued that this occurs because the value of firm’s resources and capabilities, that is, its potential to generate economic rents, is context - dependent (Priem & Butler, 2001; Barney, 2001; Benner & Tushman, 2003; Jansen et al., 2006; Sirmon et al., 2007), and dynamic environments are value-destroying (Teece et al., 1997; Uotila et al., 2007). In other words, firm’s current tech­nological and market capabilities, while valuable in that they can provide competitive advantage at present, do not ensure that the firm would be able to maintain its competitive advantage in the face of rapid external changes (O’Reilly & Tushman, 2008).

But the market does not value firm’s capabili­ties directly. It values organizational capabilities indirectly through valuating their outputs. And in this chapter we have followed the argument that innovation is an output of an organization’s technological capabilities (Tidd, 2006; Nobre et al., 2010). Concretely, we have argued that inno­vation radicalness is an output of firm’s dynamic capabilities that enable organizational capabilities reconfiguration. Attending to its definition, incre­mental innovations are based on firm’s current technological capabilities, whereas more radical innovations are based on the development of new technological capabilities (Tidd, 2001; Benner & Tushman, 2003; Dahlin & Behrens, 2005). In
this sense, as Jansen et al. points out, “dynamic environments make current products and services obsolete and require that new ones be developed” (2006: 1664). Accordingly, if competitors (current or potential) introduce new products based on a new technology that clearly outperforms a firm’s products and technology, and the firm just tries to improve its current products, the results will be highly unsatisfactory. This occurred to IBM’s slow response to personal computers (Benner & Tushman, 2003) or in Kodak’s inertia at introduc­ing in digital photography (Kaplan & Henderson, 2005). In both cases, radical innovations developed by other firms fundamentally changed the nature of the industry and IBM and Kodak had to spend billions to survive. Many other firms without those financial resources directly died.

So, to reduce this threat of obsolescence, orga­nizations must introduce more radical innovations that depart from existing products, services and markets. Organizations that pursue such innova­tions can capitalize on changing circumstances by creating opportunities for above-normal return by targeting premium market segments and creating new niches (Levinthal & March, 1993). Accord­ingly, we expect that firms operating in dynamic contexts that develop more radical innovations will increase their long-term performance.

Proposition 4. Environmental dynamism positively moderates the relationship between the degree of novelty of firm’s innovations and its long-term performance.

The reasoning and derived propositions devel­oped in this chapter can be graphically represented as it appears in our theoretical research model (F ig- ure 1). Note that propositions 1, 2 and 3 combine the arguments offered by capability-building and innovation approaches identified when analyzing dynamic capabilities concept. That is, the develop­ment of new organizational capabilities leads to innovations with a higher degree of novelty. On the other hand, proposition 4 combine innovation and contingency approaches. In this case, radical innovation is not an output, but an input to firm’s adaptation to its context. In this way, our model highlights the central role played by innovation radicalness in what Tidd (2006) denominate the “competence cycle”.

CONCLUSION

Inadequate responses given by organizations to growing environmental dynamism (especially to rapid technological progress) found in a greater number of competitive landscapes may be the explanation of the reduction in average life expectancy of firms in recent times (O’Reilly & Tushman, 2008). In this sense, as people do, organizations tend to fail in a “success trap”, that is, firms are inclined to repeat the same actions that have been previously rewarded (Levinthal & March, 1993). This reasoning is supported by recent empirical results suggesting that stabilised companies tend to systematically overemphasize exploitation (Uotila et al., 2009). Such behaviour leads firms to specialize in exploiting their current knowledge domain, thus being more efficient. However, if the decision-maker adopts this be­haviour in a rapid change context, its decisions will be generally unsatisfactory, since in this type of environments new challenges do not usually coincide with the already passed. As O’Reilly & Tushman highlight, “being large and successful at one point in time is no guarantee of continued survival” (2008: 186).

So, understanding why some organizations sustain their competitive advantage when facing environmental dynamism while others can not has emerged as one of the essential questions for re­cent strategic management literature (Teece et al., 1997; Jansen et al., 2006; Uotila et al., 2009). The efforts directed in answering this question have supplanted traditional and more static theories of strategy, such as industrial economy (Porter, 1981) or the resource-based view (Wernefelt, 1984; Barney, 1991), with dynamic approaches exploring how some firms acquire, recombine and integrate their resources to adapt to market and technological changes (Tidd, 2006; O’Reilly & Tushman, 2008). Dynamic capabilities framework is one of the most promising approaches in this arena (Teece et al., 1997; Zahra et al., 2006).

Considering the argument given by Benner and Tushman that because “organizational outcomes are affected by delayed or inadequate responses to environmental turbulence, (...) adaptation to environmental uncertainty and variation requires similar variety within the firm” (2003: 250), this chapter has tried to theoretically identify the orga­nizational antecedents of innovation radicalness, since radical innovations are based on changes in firm’s technological trajectory and associated organizational competencies. In other words, we have tried to answer the question ofwhat attributes lead firms to achieve variety. In doing so, we have drawn on the dynamic capabilities-based view of competitive advantage.

Our theoretical review and analysis ofthe con­cept has leaded us to define dynamic capabilities as firm’s ability to constantly explore new market and technological knowledge in order to build new organizational capabilities and to consider this ability especially valuable in the face of rapid changes in markets and/or technologies. This definition constitutes an attempt to integrate the three identified approaches on dynamic capabili­ties in a sequential way: new capabilities genera­tion (capability-building approach) is necessary to develop more radical innovations (innovation approach), enabling firm’s adaptation to environ­mental dynamism (contingent approach).

The next step was to identify the mechanisms that allow firms to carry out an explorative learning at organizational level (that is, to develop their dy­namic capabilities). By reviewing organizational learning literature, we have identified several mechanisms that can be classified into two fac­tors : external knowledge acquisition, which allows the firm to have access to externally generated information; and internal knowledge combination, which leads the firm to newly recombine current and acquired knowledge and to distribute it along internal boundaries.

Taking into account both organizational learn­ing mechanisms, we have derived a theoretical model linking dynamic capabilities and firm’s adaptation to environmental dynamism proposing that innovation radicalness plays a central role on this process, that is, radical innovations are considered an output of dynamic capabilities and, at the same time, an input of firm’s adaptation to environmental dynamism. So, managers of firms operating in rapid change contexts should promote some ofthe identified mechanisms for explorative organizational learning in order to develop more than just incremental innovations that may be rapidly obsolete in their competitive arenas.

FUTURE RESEARCH DIRECTIONS

The first research challenge emerging from our theoretical analysis consists in to carry out em­pirical tests. Most of the empirical studies in the field of dynamic capabilities are qualitative (Wang & Ahmed, 2007). This fact, again, underscores the initial state of the perspective. Our work has highlighted some measures and possible scales for operationalizing dynamic capabilities based on internal organizational process which may be very useful for researchers interested in this field.

In addition to innovation, it may be interest­ing to empirically address the link between the two explorative learning mechanisms proposed and other elements of firm’s strategy, such as diversification, changes in competitive strategy or higher levels of internationalization, among oth­ers. All of these strategic decisions should require new knowledge on markets and technology to be successful and dynamic capabilities may lead to changes not only in the resource and capabilities base, but also in the way that they are managed and in where they are employed.

One relevant research issue consists in to de­terminate what external knowledge sources may have a higher impact on the degree of novelty of innovations. This is related to the debate on “market pull” vs. “technology push” knowledge strategies. In this sense, Tidd (2006) argues that “market pull” is better for incremental adaptations or product line extensions, whereas “technology push” is necessary for more radical innovations. In the same line, it would be also interesting to investigate if some mechanisms for external knowledge acquisition may be more adequate than others for developing radical innovations depending on the industry in which firms oper­ate. For example, it seems that collaborations with universities and research centres is highly important in experimental sciences sectors, such us pharmaceutical industry (Henderson & Cockburn, 1994), whereas in the automobile industry it could be more important to develop collaborations with suppliers. Similarly, differ­ent competitive sectors may demand different mechanisms for internal knowledge combination. Just few recent studies have tried to fill this gap, and have focused exclusively in some mechanism for external knowledge acquisitions, such us col­laboration with universities (Bierly et al., 2009). In this sense, the results obtained by Grimpe & Softka (2009) support this reasoning. These au­thors find that a search pattern that targets market knowledge (customers and competitors) provide superior innovation success in low-technology sectors, whereas technological knowledge leads to higher innovation success in high-technology sectors. It can be explained because, as Tidd (2006) argues, market knowledge contributes to more incremental innovations which lead to better results in relatively static environments, whereas technological knowledge contributes to develop more radical innovations leading to higher performance in turbulent environments. But more evidence is needed.

In addition, the moderating role of environ­mental dynamism also needs to be tested. If our proposition that predicts a greater effect of radical innovations on firm performance is supported, important managerial implications will be derived. In this sense, managers should overcome their risk - taking aversion and try to increase their emphasis on exploration when the environment requires it. Our review has highlighted some mechanism that managers may use in order to promote knowledge exploration, and as a result innovation radicalness, in their organizations (Tables 2 and 3). Again, empirical research about exploration of new knowledge, innovation radicalness and environmental dynamism is very scarce (Jansen et al., 2006; Danneels, 2008, Uotila et al., 2009), so the gap is just beginning to be filled.