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

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  • Breakthrough innovation: the roles ofdynamic innovation capabilities and open

    innovation activitiesColin C.J. Cheng and Ja-Shen Chen

    College of Management, Yuan Ze University, Chung-Li, Taiwan

    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.

    Keywords Breakthrough innovation, Dynamic innovation capabilities, Open innovation, Innovation, Taiwan, Managers, Business performance

    Paper type Research paper

    An executive summary for managers and executivereaders can be found at the end of this article.

    Introduction

    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

    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

    innovation (Lavie and Rosenkopf, 2006). However, studies

    rooted in organizational inertia theory (Hannan and Freeman,

    1984) suggest that dynamic innovation capabilities may

    discourage breakthrough innovation (e.g. Benner and

    Tushman, 2003; Levinthal and March, 1993). When firms

    accumulate more experience and become more efficient at

    using their existing knowledge, the self-reinforcing nature of

    learning produces more incremental innovation rather than

    breakthrough innovation (Benner and Tushman, 2003).

    Thus, the relationship between dynamic innovation

    capabilities and breakthrough innovation remains unclear.There are equally conflicting views regarding open

    innovation (e.g. Lichtenthaler, 2011). Not all firms adopt

    open innovation activities because some firms prefer to have

    more control over the source breakthrough innovation and

    their relationships with innovation partners (Cheng and

    Huizingh, 2010; Di Benedetto, 2010; Lichtenthaler, 2011).

    In addition, despite research on the effects of open innovation

    on innovation performance (e.g. Gassmann et al., 2010;

    Gassmann and Zeschky, 2008), not all firms are successful

    adopting open innovation activities. For example, the direct

    cost of acquiring technology from third parties is often greater

    than the indirect value generated by having this technology.

    As a result, the net effect on firm performance is negative

    (Faems et al., 2009).

    The current issue and full text archive of this journal is available at

    www.emeraldinsight.com/0885-8624.htm

    Journal of Business & Industrial Marketing

    28/5 (2013) 444454

    q Emerald Group Publishing Limited [ISSN 0885-8624]

    [DOI 10.1108/08858621311330281]

    Received 29 May 2011Revised 15 May 2012Accepted 25 June 2012

    444

  • 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

    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.

    Theoretical background

    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).

    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

    perspective.

    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

    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

    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.

    Hypotheses developmentTwo theories can be used to describe dynamic innovationcapabilities:1 absorptive capacity; and2 organizational inertia (Davenport et al., 2006; Zahra and

    George, 2002).

    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 beco