Breakthrough innovation: the roles of dynamic innovation capabilities and open innovation activities

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<ul><li><p>Breakthrough innovation: the roles ofdynamic innovation capabilities and open</p><p>innovation activitiesColin C.J. Cheng and Ja-Shen Chen</p><p>College of Management, Yuan Ze University, Chung-Li, Taiwan</p><p>AbstractPurpose This study aims to examine the roles of dynamic innovation capabilities and open innovation activities in breakthrough innovation. Drawingfrom the absorptive capacity perspective, organizational inertia theory, and open innovation, the authors seek to argue that dynamic innovationcapabilities have a curvilinear effect on breakthrough innovation that is moderated by open innovation activities.Design/methodology/approach A mail survey was sent to the top 1,000 firms in Taiwan, the target respondents being senior managers withexperience in developing at least three successful breakthrough innovations in the past five years. A total of 218 usable questionnaires were collected,resulting in a respondent rate of 22.9 percent.Findings The findings support the argument that dynamic innovation capabilities have an inverted U-shape relationship with breakthroughinnovation. Meanwhile, open innovation activities strengthen the positive effects of dynamic innovation capabilities on breakthrough innovation.Research limitations/implications The findings enrich the existing literature by proposing and confirming empirically that open innovationactivities help firms with effective coordination of dynamic innovation capabilities.Practical implications Managers must be aware of the limitations of their existing dynamic innovation capabilities in terms of developingbreakthrough innovation.Originality/value This study not only resolves the conflicting views about the relationship between dynamic capabilities and innovation but alsoadds to the existing literature that indicates the failure of leading firms in the face of rapid environmental change.</p><p>Keywords Breakthrough innovation, Dynamic innovation capabilities, Open innovation, Innovation, Taiwan, Managers, Business performance</p><p>Paper type Research paper</p><p>An executive summary for managers and executivereaders can be found at the end of this article.</p><p>Introduction</p><p>To enhance breakthrough innovation, proponents of theresource-based view and the dynamic capability view suggestthat firms should invest heavily in developing dynamicinnovation capabilities (Davenport et al., 2006; Song et al.,2005; Teece, 2007). Meanwhile, Chesbrough (2006, 2010)and Gassmann et al. (2010) suggest that firms can use openinnovation to produce radically new products.However, the innovation literature is divided over whether</p><p>dynamic innovation capabilities lead to breakthroughinnovation (e.g. Antikainen and Vaataja, 2010; Rosenkopfand Nerkar, 2001). For example, studies rooted in theabsorptive capacity perspective suggest that dynamicinnovation capabilities may foster greater breakthroughinnovation (Rosenkopf and Nerkar, 2001). When a firmbuilds its dynamic innovation capabilities, its absorptivecapacity increases, and as a result it is encouraged to explorenew information and eventually develop breakthrough</p><p>innovation (Lavie and Rosenkopf, 2006). However, studies</p><p>rooted in organizational inertia theory (Hannan and Freeman,</p><p>1984) suggest that dynamic innovation capabilities may</p><p>discourage breakthrough innovation (e.g. Benner and</p><p>Tushman, 2003; Levinthal and March, 1993). When firms</p><p>accumulate more experience and become more efficient at</p><p>using their existing knowledge, the self-reinforcing nature of</p><p>learning produces more incremental innovation rather than</p><p>breakthrough innovation (Benner and Tushman, 2003).</p><p>Thus, the relationship between dynamic innovation</p><p>capabilities and breakthrough innovation remains unclear.There are equally conflicting views regarding open</p><p>innovation (e.g. Lichtenthaler, 2011). Not all firms adopt</p><p>open innovation activities because some firms prefer to have</p><p>more control over the source breakthrough innovation and</p><p>their relationships with innovation partners (Cheng and</p><p>Huizingh, 2010; Di Benedetto, 2010; Lichtenthaler, 2011).</p><p>In addition, despite research on the effects of open innovation</p><p>on innovation performance (e.g. Gassmann et al., 2010;</p><p>Gassmann and Zeschky, 2008), not all firms are successful</p><p>adopting open innovation activities. For example, the direct</p><p>cost of acquiring technology from third parties is often greater</p><p>than the indirect value generated by having this technology.</p><p>As a result, the net effect on firm performance is negative</p><p>(Faems et al., 2009).</p><p>The current issue and full text archive of this journal is available at</p><p>www.emeraldinsight.com/0885-8624.htm</p><p>Journal of Business &amp; Industrial Marketing</p><p>28/5 (2013) 444454</p><p>q Emerald Group Publishing Limited [ISSN 0885-8624]</p><p>[DOI 10.1108/08858621311330281]</p><p>Received 29 May 2011Revised 15 May 2012Accepted 25 June 2012</p><p>444</p></li><li><p>Our purpose therefore is to investigate the effect of dynamicinnovation capabilities on breakthrough innovation in light ofthe moderating role of open innovation. This studycontributes to the innovation literature in the followingways. First, it increases understanding of the effects ofdynamic innovation capabilities on breakthrough innovation.Second, it enriches the extant literature by empirically testingwhether open innovation activities help firms strengthen theirbreakthrough innovation. Evidence for positive effects ofbreakthrough performance will further demonstrate thelegitimacy of open innovation as an important researchfield. Finally, an analysis of the performance effects ofbreakthrough innovation is critical to firms that attempt toprofit from using dynamic innovation capabilities and openinnovation activities.The rest of this paper is organized as follows. We begin by</p><p>describing the theoretical background and hypotheses. Wethen present the research method and the results of a series ofstatistical assessments. Finally, we discuss our conclusionsand the implications of the findings.</p><p>Theoretical background</p><p>Breakthrough innovationThe degree of innovation can range from totally new to aminor improvement (Garcia and Calantone, 2002).Depending on their newness, innovations can be categorizedas incremental or breakthrough innovations (Johannessenet al., 2001; OConnor and De Martino, 2006; Song and DiBenedetto, 2008). Incremental innovations are minor changesin technology, simple product improvements, or lineextensions that minimally improve existing performance. Incontrast, breakthrough innovations involve substantially newtechnology, offer substantially greater customer benefitsrelative to existing products, and demand considerablechanges to consumption or usage patterns (Chandy andTellis, 2000; OConnor and De Martino, 2006; De Visseret al., 2010). Thus, a breakthrough innovation may imply agreater level of complexity (Rogers, 2003) and may require anew knowledge base and innovation capabilities (Song and DiBenedetto, 2008).</p><p>Dynamic innovation capabilitiesDynamic capabilities are an organizations abilities tointegrate, build, and reconfigure internal and externalcompetencies to address rapidly changing environments(Teece et al., 1997, p. 516). Several authors, such as Teeceet al. (1997), and most recently Zollo and Winter (2002),have challenged other researchers to further explicate theconcept and build a solid theoretical foundation for it. Thishas led us to classify dynamic capabilities into two majorstreams:1 Teece et al.s (1997) ability view; and2 Zollo and Winters (2002) process and routine</p><p>perspective.</p><p>The ability view is clearly in the lineage of Barney (1991), andclaims that dynamic capabilities are unique abilities thatcannot be replicated accurately or fully comprehended. Thiscamp, which is an extension of the resource-based view, iswell represented by Teece et al.s (1997) work on how somefirms develop and sustain competitive advantages andsuperior profitability. The process and routine perspectiveclaims that dynamic capabilities, as organizational sociallearning processes, are uniquely determined by each firmsunique history, which confers on each organization specific</p><p>know-how and traditions that are not easily replicated. Thesocial learning underlying dynamic capabilities is accumulatedalong the specific and unique path that each firm follows(Zollo and Winter, 2002).Dynamic innovation capabilities are operational capabilities</p><p>that include organizational learning processes and routinesrooted in innovation knowledge and that involvetransformation of a firms innovation knowledge resourcesand routines. Therefore, following Zollo and Winter (2002),we define dynamic innovation capabilities as those hard-to-transfer and hard-to-imitate innovation capabilities that firmsuse to develop, integrate, and reconfigure existing and newresources and operational capabilities.</p><p>Hypotheses developmentTwo theories can be used to describe dynamic innovationcapabilities:1 absorptive capacity; and2 organizational inertia (Davenport et al., 2006; Zahra and</p><p>George, 2002).</p><p>Absorptive capacity refers to a firms ability to recognize thevalue of new information, assimilate it, and apply it tocommercial ends (Cohen and Levinthal, 1990, p. 128).Absorptive capacity is primarily a function of a firms priorknowledge and is especially related to how well it can use newknowledge to achieve desired innovation (Volberda et al.,2010; Lewin et al., 2011). Each firm has its own specificinnovation capabilities. Thus, dynamic innovation capabilitiesare capabilities that organizations already have or have newlydeveloped to manage the process of innovation (Hertog et al.,2010; Davenport et al., 2006). When dynamic innovationcapabilities become embedded in organizational routines overtime, they become more valuable, inimitable, and non-substitutable, therefore representing an important source ofabsorptive capacity (Davenport et al., 2006).When a firm builds its dynamic innovation capabilities, it</p><p>invests substantial resources in new product development,which involves discovering radically new product ideas,accumulating state-of-the-art knowledge, and trainingpersonnel (Afuah, 2002). The accumulation ofbreakthrough innovation knowledge increases the firmsability to evaluate and use new techniques and skills inbreakthrough innovation (OConnor, 2009; Zahra andGeorge, 2002). Thus, the firm can quickly identifybreakthrough innovation trends, experiment with emergingdesigns, and engage in breakthrough innovations beyondcurrent innovation boundaries (Gassmann et al., 2010;Rosenkopf and Nerkar, 2001). Accordingly, theaccumulation of dynamic innovation capabilities facilitatesbreakthrough innovation.The opposite perspective can be found in the organizational</p><p>inertia literature. Organizational inertia refers to the stabilityin innovation development that underlies insufficientadaptation to changes in the environment (Hannan andFreeman, 1984). Organizations in the throes of organizationalinertia often establish routines to maximize the efficiency.When these routines become embedded within anorganization over time, they decrease the firms innovationcapabilities in response to demands in the environment and asa result create strong internal resistance against radical change(Benner and Tushman, 2003; Nelson and Winter, 1982).Thus, firms dynamic innovation capabilities develop over</p><p>time and accumulate as a result of their past experience. Theyreflect firms abilities to use existing resources (Christensenet al., 2005; Afuah, 2002). Levinthal and March (1993) and</p><p>Breakthrough innovation: the roles of capabilities and activities</p><p>Colin C.J. Cheng and Ja-Shen Chen</p><p>Journal of Business &amp; Industrial Marketing</p><p>Volume 28 Number 5 2013 444454</p><p>445</p></li><li><p>Christensen (1997) suggest that firms with a superiorcapability in a particular field are more likely to search formore current information and use their existing knowledgestores to achieve immediate advantage. Empirical evidenceprovides support for this argument. For example, Benner andTushman (2003) indicate that process managementtechniques and skills promote exploitative learning and as aresult facilitate incremental innovation.Thus, the accumulation of innovation expertise enables a</p><p>firm to better understand and recognize the value of newproduct development in the existing innovation trajectory,which in turn provides insights into how to exploit currentknowledge and skills. When the firm accumulates knowledge,the self-reinforcing nature of learning makes the firm moreefficient at integrating additional skills into its existingknowledge base (Lieberman and Montgomery, 1998). As aresult, dynamic innovation capabilities can facilitate greaterexploitation of existing knowledge that thus producesincremental innovation (Lavie and Rosenkopf, 2006).Therefore, we propose the following:</p><p>H1. There is an inverted U-shape relationship betweendynamic innovation capability and breakthroughinnovation.</p><p>To enhance breakthrough innovation, it is necessary for firmsto break down institutional boundaries (Gassmann et al.,2010; Chesbrough, 2007). A recently proposed model forboundary breaking is open innovation (Chesbrough, 2003),which refers to the use of purposive inflows and outflows ofknowledge to accelerate internal innovation, and expand themarkets for external use of innovation, respectively(Chesbrough, 2006, p. 2). Because open innovationemphasizes the flexible use of resources and thereconfiguration of innovation processes with third parties, itenables firms to achieve a competitive advantage throughopen coordination (Chesbrough, 2010). Following this newapproach, firms are beginning to share or sell their internalresources to third parties to create value (namely, inside-outprocesses). Meanwhile, firms are also able to incorporateexternal resources into their own innovation activities (namelyoutside-in processes; Gassmann et al., 2010; Chesbrough,2007).Open innovation may create activities that support</p><p>breakthrough innovation (Chesbrough, 2007, 2010; Deck,2008). However, because open innovation activities serve asan organizing principle for coordinating various resources andfunctional units (Wirtz et al., 2010; Chesbrough, 2006), theymay not directly affect a firms innovation output bythemselves. Instead, they may enhance dynamic innovationcapabilities in breakthrough innovation. Although currentresearch has yet to determine how a firm integrates openinnovation activities into dynamic innovation capabilities, weargue that open innovation activities strengthen the positiveeffect of dynamic innovation capabilities on breakthroughinnovation.Firms that actively seek out external resources to</p><p>supplement their own innovation projects (outside-inprocesses) can enjoy more advantages than firms thatchoose to do everything in house, from research anddevelopment productivity to radical innovation (Dodgsonet al., 2006; Gassmann et al., 2010; Rohrbeck et al., 2009). Inaddition, because of the dramatic increase in the number andmobility of knowledge workers in various industries, firms thatengage in open innovation activities can not onl...</p></li></ul>

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