ca·pa·bil·i·ty \ˌkā-pə-ˈbi-lə-tē\ - the quality or state of being capable (an ability); a feature or faculty capable of development (a potential); or the facility for an indicated use. Capability to outsmart (or outspend) the competition; capability to put the Business Model Canvas to some good use; capability for new product or service development – like making a Ghostbot, a bot that “uses artificial intelligence to help daters gracefully exit undesirable situations, without having to deal with it themselves”.
Useful or otherwise, capabilities are something we talk a lot about when it comes to managing innovation. After all, wouldn’t it be nice if innovation success came with a formula? (Abode has one by the way!) A formula to make it repeatable?
Innovation = f (passion * velocity * creativity * some array of variables) ^ risk. Source: Adobe Blog.
The truth is, with so many articles, self-help books, conferences, massive open online courses like Innovation Career Lessons from a Master on Coursera and even innovation capability models (here is a great one by Ernst & Young) at our disposal, it’s often easy to miss the point about capabilities altogether.
The big question
In my research, I’m confronted with this topic all the time. What capabilities do companies need to reap benefits from collaboration? What helps them create an appropriate value? What does it mean to “have what it takes” and how to measure that? Is it about being sensitive to emerging issues, having an ability to evaluate the “make or buy” decision correctly or understanding that trust is as important as contractual relationships? Or is it more about having the capacity to prioritize between projects, put adequate reward systems in place, build a self-sustaining ecosystem of partners, and communicate with clients at all levels of the organization? As it turns out, a successful organization does a little bit of all those things. But most of all, it nurtures its absorptive capacity.
Below are a few things you should absolutely know about this concept (also see Paul’s post), and some questions to help you determine just how much of it your organization really has.
Absorptive capacity 101
The term “absorptive capacity” was first coined by professors Wesley M. Cohen (now at Duke University) and Daniel A. Levinthal (University of Pennsylvania) in 1989 in an article for the economics journal, Innovation and learning: The two faces of R&D. One year later, another paper, Absorptive Capacity: A New Perspective on Learning and Innovation written by Cohen and Levinthal as well, expanded on the topic and argued that the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends is critical to its innovative capabilities; this key ability (or rather set of abilities) was labeled a firm's absorptive capacity – something that was largely a function of the firm's prior knowledge. The idea went on to accumulate some 30,000+ citations on Google Scholar.
Since that time, the popularity of absorptive capacity has grown steadily and the term has been used widely at the organizational level to analyze innovation processes and the effect of organizational learning on the creation of sustainable competitive advantage (here is another great source if you’d like to read further).
Absorptive capacity today
Our understanding today is that absorptive capacity is linked to a set of organizational routines and strategic processes through which their firms acquire, assimilate, transform, and apply knowledge to ultimately become better at what they do – be it DNA nanobots, showers to the people or oohos – edible, plastic-free water bottles. The four categories of routines that make up absorptive capacity are:
- Acquisition capacity - a firm's ability to locate, identify, value and acquire external knowledge that is critical to its operations
- Assimilation capacity - a firm's ability to absorb external knowledge that it will later analyze, process, interpret, understand, internalize and classify
- Transformation capacity - a firm's ability to develop and refine the internal routines that facilitate the combination of previous knowledge with the newly acquired or assimilated knowledge
- Application (or exploitation) capacity – a firm’s ability to incorporate acquired, assimilated and transformed knowledge into their existing and future operations and routines
Source: Tom Fishburne
So how do you measure it?
Measuring absorptive capacity, while tricky, can be done in a number or ways. If you’re looking for some validated scales and sophisticated questionnaires to do the trick, I suggest leafing through César Camisón and Beatriz Forés’s work titled Knowledge absorptive capacity: New insights for its conceptualization and measurement. Scrolling all the way to the end of this source you will find a comprehensive list of items on which you can evaluate a firm's competitive position in relation to the average for direct competitors. For example, how does your company perform on item AD3 (acquisition capacity): Frequency and importance of cooperation with R&D organizations— universities, business schools, technological institutes, etc.—as a member or sponsor to create knowledge and innovations on a scale of 1-5, where 1 is much worse than competitors, 3 on a par with competitors, and 5 is much better than competitors? Doing the math will give you a useful answer.
Conversely, you could just start by asking basic questions like:
- How receptive is my organization to external ideas?
- How does my organization learn and what are the bottlenecks?
- What should the organization stop doing? (FastCoDesign has a few more in this neat article)
To sum up this short discussion about absorptive capacity, and following Gijs van Wulfen’s LinkedIn note, managers should not (really) be concerned with whether organizations are innovative or not; rather, they should be concerned with how they are innovative. Understanding one’s capabilities for innovation – especially absorptive capacity – can nuance that “how” and hopefully pave the way for a steadfast strategy.