IT Value Research - Innovation, Organizational Capabilities and IT

Presented by : Premalatha Unnikrishnan

IT Value Research – Innovation, Organizational Capabilities and IT

Date: 18 Sept 2014

In 1985, Harvard Business School professor Michael Porter wrote the definitive business school textbook on the topic, called Competitive Advantage. In it, he outlined the three major ways companies achieve sustainable advantage: cost leadership, differentiation and focus

Competitive advantage is what distinguishes you from the competition in the minds of your customers.

Sustainable Competitive Advantage: A very secure advantage that a product or service provider has held over its competitors for a long period of time and that is not easy to surpass.

Information technology (IT) has also been mentioned for it’s role in creating sustained competitive advantages for firms (Barney, 1991; Clemons, 1986; 1991; Clemons and Kimbrough, 1986; Clemons and Row 1987; 1991a; Feeny 1988; Feeny and Ives, 1990)

• Walmart adopted purchase/inventory/distribution system to reduce it’s inventory cost (Ghemawat, 1986; Huey, 1989; Stalk, et al. 1992)

• General Electrical differentiated its service support from it’s competitors by means of its answer center technology (Benjamin, et al. 1984; Porter and Millar, 1985)

• Otis Elevator differentiates its service operations with its Otisline system (Balaguer, 1990; McFarlan and Stoddard, 1986)

(Mata, Fuerst et al. 1995) :

A firm has a sustained competitive advantage when it is implementing a strategy not simultaneously implemented by many competing firms and where these other firms face significant disadvantages in acquiring the resources necessary to implement this strategy.

A firm has a temporary competitive advantage when it is implementing a strategy not simultaneously implemented by many competing firms and where these other firms do not face significant disadvantages in acquiring the resources necessary to implement this strategy.

A firm has a competitive parity when it is implementing a strategy being simultaneously implemented by many competing firms.

A firm has a sustained competitive disadvantage when it is implementing a strategy that is not valuable.

Ross et al. 1996

IT infrastructure, IT business experience and relationship

infrastructure are tightly related, and a firm is required to

have all three components in place for achieving sustainable

competitive advantage

Bhatt, Grover et al. 2005

There is a lack of significance between quality of IT infrastructure and competitive advantage. This suggests that quality of IT infrastructure may not directly contribute to differential performance. However, it is IT business experience and more significantly, the relationship infrastructure that are related to competitive advantage.

(Cohen and Levinthal 1990):

The ability of a firm to recognize the value of new, external information, assimilate it and apply it to commercial ends is critical to it's innovative capabilities. There are two factors that will affect a firm’s incentives to learn – quantity and difficulty of knowledge.

The prior related knowledge confers an ability to recognize the value of new information, assimilate it and apply it to commercial needs. This is Absorptive Capacity. Associative learning is one in which events are recorded into memory by establishing linkages with pre-existing concepts.

Learning is cumulative – Results are maximum when the subject is already known. The effect of prior learning experience on subsequent learning tasks can be observed in a variety of tasks. Prior knowledge permits the assimilation and exploitation of new knowledge

An organization’s absorptive capacity will depend on the absorptive capacities of its individual members. Knowledge across individuals is necessary for internal communication. Intensity of effort is critical to develop an effective absorptive capacity.

Model of Absorptive Capacity and R & D Incentives

Courtesy: Cohen, Levinthal, 1990

Determinants of R & D intensity: Demand, Appropriability and technological opportunity

Assumptions to the R&D and Absorptive Capacity Model:

(Cohen and Levinthal 1990):Firms are assumed to purposefully invest in Research and Development in order to generate profits.

Knowledge generated from these activities are assumed to be useful to the firm in that increments to a firm’s own knowledge increase the firm’s profits while increments to rival’s knowledge diminish them.

Exploitation of competitor’s research findings is realized through the interaction of the firm’s absorptive capacity with competitor’s spillovers.

Model of sources of firm’s technical knowledge

Courtesy: Cohen, Levinthal, 1990

There is a significant relationship between Absorptive capacity and innovative output and other outcomes that pertain to creating a competitive advantage.

Recognized ACAP as a dynamic capability that influences the nature and sustainability of a firm's competitive advantage.

Recognized the roles and importance of different components of a firm's ACAP setting the stage for future research and their influence on a firm's strategic choices.

ACAP is defined as a set of organizational routines and processes by which firms acquire, assimilate, transform and exploit knowledge to produce a dynamic organizational capability.

These capabilities build on each other to yield a dynamic capability that influences the firm’s ability to create and deploy the knowledge necessary to build other organizational capabilities like marketing, distribution and production.

(Zahra and George 2002):

Past Conceptualization of ACAP

Past Conceptualization of ACAP (Cont)

Courtesy: Zahra, George, 2002


“The four organizational capabilities of knowledge, acquisition, assimilation,

transformation and exploitation build on each other to yield ACAP – a

dynamic capability that influences the firm’s ability to create and deploy the

knowledge necessary to build other organizational capabilities (e.g.,

marketing, distribution, and production)”


Dimensions of ACAP : A Reconceptualization of components and corresponding roles


Suggested that Potential and Realized Capacities are the two components of ACAP

Realized ACAP (RACAP) is a function of the transformation and exploitation capabilities.

Potential ACAP (PACAP) makes the firm receptive to acquiring and assimilating external knowledge (Lane and

Lubatkin, 1998).

PACAP and RACAP have separate but complementary roles. Both subsets of ACAP coexist at all times and fulfill a

necessary but insufficient condition to improve firm performance.


Seven Propositions to PACAP

Greater a firm’s exposure to diverse and complementary external sources of knowledge, the greater the opportunity is for the firm to develop its PACAP

Experience will influence the development of a firm’s PACAP

Activation triggers will influence the relationship between the source of knowledge and experience and PACAP

Use of social integration mechanisms reduces the gap between PACAP and RACAP

Firms with well developed capabilities of RACAP are more likely to achieve a competitive advantage through innovation and product development than those with less developed capabilities.

Seven Propositions to PACAP (cont)

Firms with well developed capabilities of PACAP are more like to sustain a competitive advantage because of greater flexibility in reconfiguring their resource bases and in effectively timing capability development at lower costs than those with less developed capabilities.

The regime of appropriability moderates the relationship between RACAP and sustainable competitive advantage

• Under strong regimes of appropriability, there will be a significant and positive relationship between RACAP and a sustainable competitive advantage because of higher costs associated with imitation.

• Under weak regimes of appropriability, there will be a significant and positive relationship between RACAP and a sustainable competitive advantage only when firms protect their knowledge assets and capabilities through isolating mechanisms. If not, such a relationship is likely to be weak or nonexistent.



“We contribute to this growing body of literature

by unravelling how a firm’s ACAP could be a

primary source of creating and sustaining a

competitive advantage – opening the black box of

sustainability of competitive advantage in dynamic

markets and thereby extending Eisenhardt and

Martin’s (2000) work.”

(Joshi, Chi et al. 2010)

Knowledge transformation involves firm’s capability to synthesize, develop and refine knowledge through addition, deletion or reinterpretation of the absorbed knowledge.

IT can help create new knowledge by merging, categorizing, reclassifying and synthesizing existing knowledge.

IT-enabled knowledge capabilities enhance form innovation by facilitating creation of patent inventions and introduction of new products and services into the market.

Information technologies that help support knowledge acquisition and assimilation provide IT-PACAP.

Information technologies that help support knowledge transformation and exploitation provide IT-RACAP.

IT can provide a capability to help augment firm’s social capital and support direct interactions among human members of the firms to cultivate shared frame of references. This IT enabled capability is IT-SIC.

Two outcomes of Innovation – Ideated Innovation and Commercialized Innovation (CI).

Courtesy: Joshi et al. 2010

A Theoretical Model of IT-Enabled Knowledge Capabilities and Firm Innovation

Five Hypothesis:

1) H1: IT-enabled potential ACAP positively affects IT-RACAP.

2) H2: IT-RACAP positively affects ideated innovation.

3) H3: IT-RACAP positively affects Commercialized Innovation (CI).

4) H4: Ideated innovation positively affects Commercialized Innovation (CI).

5) H5: IT-SIC moderates the relationship between ideated innovation and CI. Specifically, a greater number of Ideated innovation will be converted into new products and services in the market when firms possess a high level of IT-SIC

(Joshi, Chi et al. 2010):


Descriptive Statistics and co-relations


Path Estimates for the research model

(Joshi, Chi et al. 2010):

A strong support for H1confirms the importance of IT in creating a strong foundation for acquiring and initializing quality data necessary to build a firm’s analytical capability for knowledge discovery (Davenport and Harris, 2007)

Strong support for H2 suggests that IT’s enabling role in understanding, synthesizing and using complex technical knowledge is essential for patent inventions.

A lack of support for H3 is possibly because IT – RACAP does not play a salient direct role in release of products and services. It may play a significant role in influencing CI indirectly.

Support for H4 is consistent with the contention that when firms posses a greater number of patent inventions, they are more likely to transform these inventions to a larger number of new products and services introduced in the market.

Support for H5 confirms that IT enabled SIC interacts with ideated innovation to positive affect CI

(Joshi et al., 2010):

“Our studies suggests that to reap full benefits from IT to facilitate firm

innovation, managers need to understand that differential impacts of IT on

various innovation outcomes along the innovation pathway.”

(Hansen and Birkinshaw 2007):

There is no universal solution for organizations wanting to improve their ability to generate, develop and disseminate new ideas, Every firm faces its own challenges in this regard.

The “innovation value chain” offers a comprehensive framework for Innovation. It breaks innovation down into three phases (idea generation, conversion and diffusion) and six critical activities (internal, cross-unit and external sourcing: idea selection and development; and spread of the idea) performed across those phases.

Using the innovation value chain, managers can identify the company’s weaknesses and, as a result, be more selective about which innovation tools and approaches to implement. The value chain can also help managers realize that focusing too many resources on perceived innovation strengths can further debilitate the weakest parts of the chain – the company’s overall innovative capabilities.

(Huston and Sakkab 2006):

Procter and Gamble introduced a new line of Pringles potato crisps in 2004 with pictures and words – trivia questions, animal facts, jokes – printed on each crisp. They were an immediate hit.

In the old days, it might have taken us two years to bring this product to market, and we would have shouldered all of the investment and risk internally. But, by applying a fundamentally new approach to innovation, we were able to accelerate Pringles Prints from concept to launch in less than a year and at a fraction of what it would have otherwise cost.

Managers need to take an end-to-end view of their innovation efforts,

pinpoint their particular weaknesses and tailor innovation best practices as

appropriate to address the deficiencies. (Hansen and Birkinshaw 2007)

Conclusion:

Questions ?

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Kohli, R. and S. Devaraj (2003). "Measuring information technology payoff: A meta-analysis of structural variables in firm-level empirical research." Information systems research 14(2): 127-145.

Mata, F. J., et al. (1995). "Information technology and sustained competitive advantage: a resource-based analysis." MIS quarterly: 487-505.

Zahra, S. A. and G. George (2002). "Absorptive capacity: A review, reconceptualization, and extension." Academy of management review 27(2): 185-203.

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Chi, L., et al. (2010). "Alliance network, information technology, and firm innovation: findings from pharmaceutical industry."

Hansen, M. T. and J. Birkinshaw (2007). "The innovation value chain." Harvard business review 85(6): 121.

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Acknowledgements:

Dr. K.D JoshiDr. SaldanhaCohorts – Jing, Mina, Zuang

Technology

IT Value Research - Innovation, Organizational Capabilities and IT