As innovation models are evolving, it is more obvious than ever that internal and external knowledge sources contribute significantly to innovation performance (Svetina and Prodan, 2008). Historically, know-how was likely to be developed and confined within a company and internal knowledge sources were crucial for boosting a company’s innovativeness. However, external knowledge sources are increasingly important nowadays. This is supported by the coming of the network model of Rothwell (1994) and the open innovation of Chesbrough (2003). Companies are likely to make a strategic decision on the use of external knowledge sources by considering their capabilities in handling various sources of knowledge {absorptive and transformative capacities), as well as their innovation patterns {incremental and radical innovation).
Absorptive and transformative capacities
Absorptive and transformative capacities refer to a company’s ability to build, integrate and reconfigure internal and external knowledge in response to changes in the business context in which the company operates. The company’s level in these capabilities influences the patterns of knowledge flow and the position of actors in the system (Pandza and Holt, 2007). The major difference between these two capacities can be determined by the dimension of internal-external knowledge.
Based on Cohen and Levinthal’s (1990) original definition, absorptive capacity refers to the ability to recognise, assimilate and then apply new or external knowledge within the organisation. On this basis, Liehtenthaler and Liehtenthaler (2009) defined absorptive capacity as an organisation’s ability to explore external knowledge. Accordingly, absorptive capacity in knowledge management comprises the processes of acquiring external knowledge and assimilating this knowledge into the organisation’s knowledge
Chapter 2 - K now ledge m anagement an d innovation
base (Zahra and George, 2002). In practical terms, companies need prior related knowledge to understand the knowledge that is absorbed (Cohen and Levinthal, 1990; Jansen et a l, 2005). Moreover, Chesbrough (2003) highlighted the potential benefits of establishing collaborative multifirm networks. External actors, such as universities and smaller innovative firms, are active catalysts who act as suppliers of knowledge in markets (Pandza and Holt, 2007).
On the other hand, transformative capacity refers to the ability to identify, gather, synthesise and redeploy relevant knowledge internally to meet specific current needs (Garud and Nayyar, 1994). Liehtenthaler and Liehtenthaler (2009) defined transformative capacity as an organisation’s ability to retain knowledge inside the organisation over time and reactivate it subsequently. To keep knowledge ‘alive \ knowledge retention needs to be actively managed (Lane et a l, 2006), otherwise knowledge will be lost if skills and routines are not used anymore or if employees leave the firm (Szulanski, 1996; Walsh and Ungson, 1991). Further, knowledge has to be reactivated and synthesised with additional knowledge in order to respond to new business opportunities (Pandza and Holt, 2007). Thus, in respect of knowledge management, transformative capacity refers to the processes of maintaining knowledge in an organisation’s knowledge base and subsequently reactivating this knowledge (Garud and Nayyar, 1994). Also, the more prior knowledge a firm has in a given field, the easier it is to maintain and reactivate additional knowledge (Garud and Nayyar, 1994). These benefits from prior knowledge indicate path- dependencies in knowledge retention (Pandza and Holt, 2007).
In summary, it could be argued that integration between absorptive and transformative capacities is necessary for a sustainable innovation proeess. Absorptive capacity is required to respond to exogenous changes, whereas transformative capacity is used to constantly redefine a portfolio of product or service opportunities based on endogenous knowledge. Together, they seem to be in line with the eoncept of dynamic capabilities, since this has been defined as ‘the firm's ability to integrate, build, and reconfigure internal and external
Chapter 2 - K n ow ledse management an d innovation
Incremental and radical innovation
The dimension of internal-external knowledge ean be used to describe the innovation patterns between incremental innovation and radical innovation (Abernathy and Utterbaek, 1978). In the ease of incremental innovation, development of a new product relies on the existing knowledge and resources o f a company. This new product involves modest changes in teehnology and competes with existing products in the same market. On the other hand, radical innovation requires completely new knowledge and/or resources, involving large technological advancements. It also creates a new market to replace an existing one. Most incumbents prefer to attach themselves to an incremental innovation rather than a radical innovation because their existing knowledge and resources can be used to leverage upcoming changes. Furthermore, they are impeded from pursuing radical innovation by ‘managerial mindset’ as well as ‘less motivation’. Mindset is a set of assumptions, methods or notations held by people or groups of people which has influence over these people or groups to continue to adopt or accept prior behaviours, choices, or tools; it, thereby, could inhibit companies from facing change. ‘Less motivation’ is another reason due to companies perhaps being unwilling to invest in innovation whieh will compete with or eliminate their existing products.
Similarly, the dimension of internal-external knowledge seems to be applicable to the work of Christensen (1997), regarding the dichotomy of sustaining innovation and disruptive
innovation. A sustaining innovation has characteristics of performance improvement in
existing products serving mainstream customers. In contrast, a disruptive innovation initially appears unattractive to traditional customer segments, but appears to be of worth in some marginal or new segment. In this regard, knowledge of the market plays a crucial role. The case of the disk drive industry was used to illustrate the investigation by Christensen (1997). This revealed that most incumbents were forced out of the market due to their disregard of the potential of the disruptive innovation introduced by new entrants. It is clearly not a matter of technological complexity. Although most leading companies in the market, at that time, had the capability to develop and cope with this new technology, they chose to disregard it due to the fact that the teehnology itself was at an early stage and could not meet the standards of their main customers. In other words, incumbents tend to shelve an innovation if their mainstream customers demonstrate no interest in the innovative products. Also, they tend to overlook a new potential application serving only
C hapter 2 - K now ledge m anagement an d innovation
marginal customers. This leads companies to eompletely ignore a disruptive innovation or to wait until the market is large enough to be attractive. In brief, sustaining innovation relies on knowledge of the market in whieh the company resides, whereas disruptive innovation requires sensing of new knowledge and possibilities from an emergent market.
Although the dimension of internal-external knowledge helps to describe most innovation patterns, there are some exceptional eases especially in immature industries. In some cases, new entrants managed to displace incumbents with sustaining innovations, while in other cases incumbents kept their leadership by exploiting a disruptive innovation.