Dynamic service innovation capabilities of
young firms: The relevance of external ties
in capability development
~
Master Thesis
Tyra van Putten
Student number: 10096620 Supervisor: Dr. A.S. Alexiev
Date: 9 maart 2016
MSc Business Administration
Specialization: Strategy
Opening statement and acknowledgements
During my Theories of Strategy course for my Master program I was introduced to dynamic capabilities. The concept immediately fascinated me and when the time came to pick a topic for my Master Thesis, dynamic capabilities was my first choice. However, what I was not informed about during my courses was the depth of the dynamic capabilities concept; how complex it is or that it still is a very undeveloped topic, in certain areas. During my research process I found this out for myself, but it was not an easy experience. Through my exploration I oftentimes was required to amend my research and rewrite my work to accommodate my increasing understanding of the topic. Particularly when the time came for me to choose the most appropriate method for my research. In total, I probably amended my entire research 5 times and rewrote my work 4 times as much! However, much of this was done to develop a sound research I could proudly hand in as my final project to close off this step in my academic career. My previous knowledge lay within the quantitative sphere and this thesis allowed me to develop qualitative skills. My thesis process was an intense and difficult learning process, but it definitely allowed me to expand my capabilities. Overall, it was a pleasure to learn more about dynamic capabilities and I hope this thesis will sufficiently reflect the appeal and charm of the dynamic capabilities concept.
Throughout the process my supervisor Dr. Alex Alexiev remained understanding of my progress. He offered me support and guidance when needed and I truly appreciated how he allowed me to work at my own tempo and in my own manner. For me, being able to work independently is the best way and I am grateful that under his supervision I was awarded a work method that suited me best. I also would like to thank my support system: my mother Minerva Wigley, my family and my friends. At times when I doubted my capabilities, especially when the dynamic capabilities literature felt like it was drowning me, my support system always encouraged me and for that I am immensely grateful. I also want to thank all the companies that participated in my research. Without their generosity I would not have been able to complete my work.
Author information: Tyra van Putten
tyra.vanputten@gmail.com Specialization: Strategy
Student of:
Amsterdam Business School University of Amsterdam
Abstract
In this study the dynamic service innovation capabilities of new ventures in the Creative Industries are investigated. Prior research in the dynamic capabilities literature has often forgone investigating new ventures’ dynamic capabilities, as new ventures often are treated as passive agents that are too undeveloped to have dynamic capabilities. However, in the capability development literature stands that all capabilities have a start point where it is initially created and then built upon. As dynamic capabilities are inherently capabilities like any other, this research seeks to determine the dynamic service innovation capabilities of new ventures assisted by the capability development literature. Specific focus is placed on the role of external ties in the dynamic service innovation capabilities development process. By means of cross-sectional, multi-case studies members of young service firms were interviewed. This qualitative theory building approach provided opportunity for in depth investigation into the research topics. The findings show that new ventures start developing dynamic service innovation capabilities from an early age. This is partially dependent on the knowledge of its founders brought into the young firms from their inception, as well as the firm’s own desire to survive. As these firms seek validity for their existence, external ties play very important roles in the development of their capabilities. Particularly, in relation to capabilities that reflect new ventures’ ability for opportunity discovery and concept development.
Key words: Dynamic capabilities, service innovation, new ventures, external ties, capability development, prior knowledge, organizational learning, entrepreneurship
Table of Contents
1. Introduction ... 1
1.1. Research Question ... 3
1.2. Academic and Managerial Relevancy ... 4
2. Theoretical framework ... 5
2.1. Dynamic capabilities view of the firm ... 5
2.1.1. Operational capabilities vs. dynamic capabilities ... 8
2.1.2. Interpreting the function of dynamic capabilities ... 9
2.1.3. Dynamic service innovation capabilities ... 16
2.2. New ventures ... 19
2.3. Lifecycle of capability development ... 20
2.4. External ties ... 21
2.5. Consolidated theoretical framework ... 22
3. Methodology ... 25 3.1. Research design ... 25 3.2. Research context ... 26 3.2.1. Sampling ... 28 3.3. Data collection ... 30 3.3.1. Interviewing ... 31 3.3.2. Transcribing ... 33 3.4. Data analysis ... 34
3.5. Establishing research quality ... 35
3.6. Methodological limitations ... 36
4. Results ... 38
4.1. Dynamic service innovation capabilities ... 40
4.2. Role of external ties on dynamic capabilities development ... 47
4.3. Additional findings ... 55 5. Conclusion ... 59 5.1. Propositions ... 61 6. Discussion ... 63 7. References ... 66 8. Appendices. ... 74
Appendix A Table of main definitions of dynamic capabilities ... 74
Appendix B. Summary of the cases. ... 76
Appendix C. Interview Protocol ... 77
Appendix D. Illustrative table ... 79
Appendix E. Transcript Company A ... 80
Appendix F. Transcript Company B. ... 89
Appendix G. Transcript Company C. ... 109
Appendix H. Company Transcript D. ... 133
Appendix I. Transcript Company E ... 154
Appendix J. Transcript Company F. ... 171
Appendix K. Transcript Company G. ... 179
1. Introduction
The ability to survive in times of change is very much dependent on a firm’s resources. However, not all firms are equally endowed. New ventures in particular are often characterized as being constrained by limited resources and they rarely have an extensive internal staff (Lichtenstein & Brush, 2001; Zhang & Li, 2010). Particularly, independent new ventures are at the beginning of their journey and still need to build their capabilities and acquire additional resources to contend alongside incumbents (Lichtenstein & Brush, 2001). The internal disadvantages of new ventures have contributed to ventures’ reliance and emphasis on their external environment (Zhang & Li, 2010; Zimmerman & Zeitz, 2002). Moreover, firm success does not arise in isolation and new ventures at times use external sources as substitutes for the lack of internal resources (Das & Teng, 2000; Geringer, 1991; Zhang & Li, 2010).
The value of external ties is reflected in the importance of their contribution towards a firm’s skills, competences and routines (McEvily and Zaheer, 1999). Due to their liability of newness (i.e. a higher risk of failure due to their short existence) and lack of legitimacy, it is imperative for independent new ventures to find ways to ensure their survival. Being innovative and adaptable is often regarded as a means for long-term survival, as it provides fortification and maintenance of a firm’s competitive position (Cefis & Marsili, 2005; Eisenhardt & Martin, 2000). However, innovativeness is not always intuitive to firms, and if a firm has been able to innovate once does not mean it has the propensity to introduce and exploit innovations repeatedly. Over the years, the strategy and management literature has focused on the concept of dynamic capabilities as a means to explain firm survival through innovativeness and adaptability (Baretto, 2010). Specifically, dynamic capabilities allow firms to see opportunities and create advantageous internal changes to remain competitive (Eisenhardt & Martin, 2000; Teece, 2007). Rothaermel and Hess (2007) have suggested that a firm’s network can influence the innovativeness of a firm, as these ties can be antecedents of dynamic capabilities. Also, it has also been proposed that network-level sources can substitute firm-level and individual-level sources, when the latter two sources are limited (Rothaermel & Hess, 2007). However, in the dynamic capabilities literature, the extent of the role of external ties on the development of these capabilities, particularly for new ventures, is still unexplored.
In the dynamic capabilities literature it is often agreed upon that dynamic capabilities take time to develop (Teece, Pisano, & Shuen, 1997). Yet, as Zahra, Sapienza and Davidsson (2006, p. 924) acknowledge, dynamic capabilities do not necessarily solely exist in established firms, because “the creation of dynamic capabilities and the transformation of substantive capabilities can commence very early in an organization’s life”. Though previous studies on dynamic capabilities acknowledge that dynamic capabilities are built and that they can be developed (Eisenhardt & Martin, 2000; Teece et al. 1997; Zollo & Winter, 2002), these studies all assume the complete existence of dynamic capabilities when analyzing the process. However, capability development literature suggests that capability creation can commence at the beginning of a firm’s life. Furthermore, in extant dynamic capabilities literature there is no clear indication as to when dynamic capabilities actually exists within a firm or how long it takes before a firm can consider developed capabilities as part of its dynamic capabilities. Although new ventures have often been overlooked in the dynamic capabilities literature due to their short history, the capability development literature indicates the potential existence of dynamic capabilities in young firms nonetheless. This is significant, because dynamic capabilities can be useful to young firms to increase their survival rates.
Supported by the capability development literature, this research aims to investigate the role of a young firm’s external ties influence on their possession of dynamic capabilities. Further, the dynamic capabilities literature has shown limited focus on services and service firms. However, recent development in the dynamic capabilities literature offers solutions to service firms regarding their survival in the face of change (Den Hertog et al., 2010; O’Reilly & Tushman, 2007). As services and service innovation become increasingly important, more and more focus is being placed on the specific capabilities of service firms in relation to their innovativeness (Den Hertog, Van der Aa, & de Jong, 2010; Kindström, Kowalkowski & Sandberg, 2013). Although service innovation and product innovation may have similarities (Hipp & Grupp, 2005; Nijssen, Hillebrand, Vermeulen, & Kemp, 2006), the composition of what is deemed important for innovation differs between these sectors (e.g. R&D is considered very important for product innovation, whereas it often has little value in service innovation). The growing importance of services in firms emphasizes the need for further investigation in how service firms survive long-term. Particularly, for new service firms it is important to consider how their external ties influence the development of their dynamic capabilities to ensure their long-term survival.
1.1. Research Question
This research will specifically focus on the dynamic capabilities of new ventures within the service sector. Additionally, considering that a firm’s network can be a source for dynamic capabilities development, this research seeks to expand the understanding of the role of external ties in the building and development of dynamic capabilities of new service ventures.
In recent years, the Dutch government has chosen 9 sectors, known in Dutch as the Topsectoren, which it considers to be important for the international competitive position of the Netherlands. Their intention is to invest heavily in these 9 sectors to keep the country at the forefront of the world economy while stimulating its own growth. These 9 sectors are: Agriculture & Food, Chemistry, Creative Industries, Energy, High Tech, Logistics, Life Sciences & Health, Horticulture and Water. Due to the importance of these sectors the context of this research was chosen to reflect this relevancy. However, not all sectors offer the same research opportunities. Therefore, the sector with most relevancy for this study was selected, namely the Creative Industries. This context will be discussed further in a subsequent chapter (See Section 3.2).
Thus, this research seeks to answer the research question:
How do external ties influence the development of dynamic service innovation capabilities of new ventures in the Dutch creative industries?
Figure 1 displays a simplified conceptual model of the relationship being studied in this research and reflects main aspects of the study.
1.2. Academic and Managerial Relevancy
This paper will expand the dynamic capabilities view of the firm by focusing on the presence of dynamic service innovation capabilities in young firms. This research is influenced by the paper authored by Den Hertog et al. (2010), which offers an untested framework for dynamic service innovation capabilities. However, this framework is still very nascent and it needs empirical investigation to determine its applicability. This research looks to build upon Den Hertog et al. (2010) research, to provide a possibly viable exploration of what dynamic service innovation capabilities look like in practice. Thereby, creating observable and measurable capabilities that can further develop the dynamic capabilities theory in the context of service innovation.
Research on dynamic capabilities in the context of new ventures is a vastly unexplored area. Researchers studying dynamic capabilities have posited that these capabilities are evolutionary and require a learning process (Eisenhardt & Martin, 2000; Teece et al., 1997). This research seeks to argue that dynamic capabilities can be developed at an early stage of a firm’s life. Thereby, extending the field into the scope of new ventures, specifically of new service ventures. Furthermore, this research contributes to the understanding of the value firm networks add to new venture. Therefore, taken as a whole, this research contributes to the academic field by expanding the dynamic capability literature and by investigating the collaborative development of dynamic capabilities in the new venture-external ties relationship.
The managerial contribution of this research lie in its ability to illuminate where managers and/or entrepreneurs of new ventures can redeem most value from their ties in developing their dynamic capabilities. This will hopefully lead to better strategies that may fortify ventures against typical young firm risks (e.g. liability of newness and liability of smallness).
This paper continues with an exploration of the existing literature. In the following chapter main theories and findings relating to this study are reviewed. Thereafter, the methodology of this research is described as well as an elaboration of the results. Further, the important findings are summarized in the conclusion along with the study’s propositions. This paper closes with a discussion as well as recommendations for managerial implications and future
2. Theoretical framework
This chapter discusses relevant existing literature pertaining to the concepts of this paper, namely: new ventures, external ties and dynamic (service innovation) capabilities. The literature on dynamic capabilities is still quite dispersed. Therefore, this chapter will first thoroughly discuss dynamic capabilities and dynamic service innovation capabilities. This is to determine the understanding of this ambiguous term in the context of this study. Thereafter, the term ‘new venture’ is briefly discussed. Followed by a discussion on capability development, particularly in relation to young firms. Further, a look is taken at existing literature on external ties in capability development. This chapter shall close with a consolidation of the various theoretical concepts.
2.1. Dynamic capabilities view of the firm
At its core, dynamic capabilities view (DCV) relates to a firm’s ability to create (sustainable) competitive advantage. However, opposed to the belief that a firm’s success and (sustainable) competitive advantage derives from advantageous exogenous conditions, dynamic capabilities view emphasizes a firm’s assets and capabilities as the source of its competitive advantage (Teece et al, 1997). This understanding links the dynamic capabilities view to the resource-based view of the firm. Even so, the dynamic capabilities view is still a big departure from the resource-based view (RBV). Where the RBV is static and focuses on resource picking and the advantages of specific VRIN-resources in the firm, the DCV looks at what a firm does with its resources. The DCV looks within the firm at the actions a firm takes to explain its performance. The focus is on resource renewal and the combination of resources that create processes that allow a focal firm to perform better than its competitors; thereby still creating competitive, firm-specific advantage. More specifically, the dynamic capabilities view relates to the capabilities organizations possess to adapt to their changing environment (i.e. market/industry and technological changes). It also relates to firms’ ability to mold their ecosystem as well as their general capability to be innovative (Teece, 2007). Thus, dynamic capabilities are invaluable to the long-term survival of organizations.
Throughout the years multiple definitions of dynamic capabilities have been established in extant literature. Appendix A displays an incomprehensive list of definitions derived from Baretto (2010). From the literature it is apparent that there is to date no consensus on: 1) what the term ‘dynamic capabilities’ actually means, 2) what the constituents of dynamic
capabilities are, 3) how they are used and 4) what the outcomes are of these capabilities (Baretto, 2010). Even so, consensus and clarity is needed if a full understanding of dynamic capabilities is to exist. The lack of a consensus and clear definition increases the opportunity for error in the search for an understanding of dynamic capabilities, because it increases the chance of irrelevant concepts and inappropriate boundaries being included in the dynamic capabilities literature (Baretto, 2010). Due to the breadth of the dynamic capabilities concept and constituent factors such as path dependencies and idiosyncratic processes, stipulating what constitutes as dynamic capabilities has been difficult. The intangibility of the concept has lead to the concept being considered vague and tautological.
Considering the vagueness surrounding dynamic capabilities it is important for this paper to specify in detail the conceptual form being studied in this work—particularly what is understood under the term. Thus, when selecting an appropriate definition for this paper the following conditions need to be satisfied. The definition needs to 1) make account of the hierarchical level of change, 2) it needs to indicate an objective and 3) it needs to offer detailed and specified terms and degrees of dynamic capabilities as a source for the change (Baretto, 2010). However, currently there appears to be no inclusive definition that satisfies all of the above criteria. Therefore, a more appropriate definition has been constructed for this study through combining definitions that account for the criteria set for this paper.
Three definitions combined have been identified as relevant. They have all been considered as significant definitions for dynamic capabilities in previous works.
First, Eisenhardt and Martin (2000) define dynamic capabilities as: “The firm’s processes that use resources—specifically the processes to integrate, reconfigure, gain, and release resources—to match and even create market change. Dynamic capabilities thus are the organizational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve, and die” (p. 1107). By defining dynamic capabilities as they have done, Eisenhardt and Martin (2000) position dynamic capabilities as processes, which simply put are series of ways things are done in a firm (Teece et al., 1997). The definition expresses dynamic capabilities as a group of activities that conjointly create change, rather than random activities within a firm where no specific explainable relationship can be determined. It gives value to the concept dynamic capabilities and removes some of the
capabilities. Additionally, by relating the concept to processes they make it more measurable, because it allows researchers to relate idiosyncratic combinations to general organizational processes that are comparable and that can be operationalized (Baretto, 2010). Thereby creating concrete constituents from the previously abstract conditions. This definition also offers a range of actions that can be taken in relation to a firm’s resources to create changes. Lastly, this definition indicates outcomes from the change that dynamic capabilities can lead to, namely: matching and creating market change. Yet, the definition is incomplete, because it does not consider the objective of dynamic capabilities. They only focus on the result of dynamic capabilities (“resource configuration”) and the resources involved in dynamic capabilities, but not the (direct) influence of dynamic capabilities. Whereas, established research has shown that dynamic capabilities do not usually have a direct effect on performance (Baretto, 2010; Zahra et al., 2006). Additionally, this definition does not mention a hierarchical differentia, whereas this is an important aspect of dynamic capabilities.
Second, Zollo and Winter (2002) define dynamic capabilities as: “a learned and stable pattern of collective activity through which the organization systematically generates and modifies its operational routines in pursuit of improved effectiveness” (p. 340). The benefit of this definition is that the concept is presented as a firm-wide contribution. Additionally, they differentiate dynamic capabilities from general ad hoc problem solving, because they consider them capabilities that are built (i.e. a learned and stable pattern). Further, this definition references the influence of dynamic capabilities on operational routines, indicating its direct, hierarchical influence; or its objective. However, their specification of ‘collective activity’ is quite unclear. It lumps each generic activity of a firm relating to change as constituents of dynamic capabilities, whereas firms can bring about change and respond to changing environment without the use of dynamic capabilities (e.g. “fire fighting”). In other words not every activity relating to change falls within the concept of dynamic capabilities (Helfat & Winter, 2011; Zollo & Winter, 2002), but this definition does not correct for this. Moreover, the definition does not account for the aggregated composition of systematic dynamic proficiencies. Therefore, though a relevant definition, it is still one that needs improvement.
Last, Baretto (2010) suggests the following definition of dynamic capabilities: “A dynamic capability is the firm’s potential to systematically solve problems, formed by its propensity to
its resource base” (p. 271). This definition was derived as a response to the incompatibility of previously established definitions of dynamic capabilities. The definition does contain interesting multidimensional elements. However, the definition refers to systematic problem solving as a requisite for changes resulting from dynamic capabilities. Also, the conditions of market-oriented decisions are not specified. However, increased effectiveness is not always grounded in problem solving (Jantunen, Ellonen & Johansson, 2012), and market-oriented decisions needn’t be competitive, whereas competitive intentions are important in the dynamic capabilities concept. Therefore, this definition is also considered insufficient.
In an attempt to provide an appropriate, comprehensive and applicable definition of dynamic capabilities, a new definition was constructed to both encompass the benefits as well as mitigate the disadvantages of the previously discussed definitions. For this paper, dynamic capabilities are understood to be: “The firm’s distinctive, learned processes with the potential to generate competitive change through sensing opportunities and threats, and making timely decisions relating to creating, assimilating, improving, reconfiguring and discharging operational (“ordinary”) capabilities, to respond to and shape the firm’s environment”. Though verbose, this definition stipulates the understanding and boundaries of dynamic capabilities in this paper.
2.1.1. Operational capabilities vs. dynamic capabilities
To further establish what dynamic capabilities are, it is important to explain the difference between dynamic capabilities and operating capabilities.
In the academic literature dynamic capabilities are described as separate capabilities from ‘ordinary’ capabilities and routines. More specifically, dynamic capabilities are seen to bring change to these ‘ordinary’ capabilities (Baretto, 2010). However, the exact terms of the activities that dynamic capabilities are meant to bring change upon have been described differently throughout the literature. Aside from ‘ordinary’ capabilities, these activities have also been referred to as substantive capabilities, operating routines, operational capabilities, ‘zero-level’ capabilities and at times resources. These ‘ordinary’ capabilities are related to the technical fitness of the firm (Teece, 2007). They allow the firm to perform its every day activities in its current market with its current competence configuration.
However, firms are evolutionary, thus they always experience a form of change (Helfat & Winter, 2011; Nelson, 1991; Zollo & Winter, 2002). This occurs because learning is an inevitable condition. Still, firms experience different types of change. These differences in the locus of change are what inherently separate dynamic capabilities from ordinary routines.
Changes in the environment of a firm may not always require a variation in a firm’s resource configuration. In such a situation the technical fitness or the current operation of a firm is sufficient to handle the changes that may occur. However, some environmental changes erode the competitive advantages that a firm’s current configuration has created. In such a situation, purposeful responses to address and exploit the changes need to occur for a firm to survive (Zollo & Winter, 2002). These purposeful responses are where dynamic capabilities come into play.
Dynamic capabilities are what Teece (2007) connotes as capabilities that provide firms with evolutionary fitness. In other words, when current resource configurations prove to be inappropriate for the continuous success of a firm, the technical fitness of a firm becomes vulnerable and the evolutionary fitness of the firm helps it to overcome the vulnerability. Because, resources can become obsolete and competitive advantage can be eroded (Christensen, 2001). Therefore, dynamic capabilities assist in providing firms with evolutionary fitness, because the purpose and value of dynamic capabilities is in its ability to provide appropriate resource renewal to sustain the firm (Eisenhardt & Martin, 2000; Teece, 2007; Zahra et al., 2006; Zollo & Winter, 2002).
Whereas ‘ordinary’ capabilities have a direct link to the performance of a firm, dynamic capabilities are linked to the ‘ordinary’ capabilities and therefore may have an indirect influence on a firm’s performance (Pavlou & El Sawy, 2011; Zahra et al., 2006). To summarize, dynamic capabilities are the factors that ensure that a firm’s activities and assets are appropriate for changing environmental conditions, and are therefore distinct from ‘ordinary’ capabilities that represent the functionality of a firm in its current condition.
2.1.2. Interpreting the function of dynamic capabilities
Since its inception, literature on dynamic capabilities has grown substantially. However, much like the definition of dynamic capabilities, there lacks a consensus about dynamic
surrounding dynamic capabilities (Peteraf, Di Stefano, & Verona, 2013). These beliefs at times appear to strongly contradict in understandings relating to the nature, purpose, heterogeneity and other crucial factors of dynamic capabilities (Baretto, 2010). However, due to fundamental similarities, some may even argue that they are complementary. In this section, the currently established constituents of dynamic capabilities shall be analyzed, to further establish the context and boundaries of dynamic capabilities, as it is understood here.
As Peteraf et al. (2013) express the dynamic capabilities literature is strongly influenced and inspired by two main papers (See Figure 2), namely that of Teece et al. (1997) and that of Eisenhardt and Martin (2000). The two papers are similar in their understanding that the value of dynamic capabilities strongly rests in their resource configuration capabilities. Specifically, the essence of the dynamic capabilities approach is the ability to reconfigure a firm's current condition, to allow it to be adaptable to significant changes. However, regardless of this agreement their other beliefs on dynamic capabilities are what have led to the divergence. Many have since chosen one path over the other in their contributions to the dynamic capabilities concept (Peteraf et al, 2013).
The main defining discrepancies between the two papers relate to concepts of environment and sustainability. Teece et al. (1997) assert that dynamic capabilities are a source of sustainable competitive advantage. Moreover, they consider sustaining competitive advantage through dynamic capabilities particularly relevant for rapidly changing environments. This last perspective was initially the added value of the concept. In contrast, Eisenhardt and Martin (2000) have put this into question by arguing market dynamism. Specifically, that the dynamic capabilities described by Teece et al. (1997) would only be relevant in moderately dynamic markets, but that the theory loses its value in the rapid markets for which it was designed (Peteraf et al., 2013). In the so-called quintessential rapidly changing environments the advantage of dynamic capabilities is unsustainable due to the processes’ own instabilities (Eisenhardt & Martin, 2000; Peteraf et al., 2013). Therefore, Eisenhardt and Martin (2000) theorize that dynamic capabilities can only attain temporary competitive advantage, but not sustainable competitive advantage. Further, in moderate markets, where Eisenhardt and Martin (2000) consider dynamic capabilities useful, they see dynamic capabilities inherently as effective processes that firms have learnt to do well from experience (e.g. alliancing and knowledge brokering). Therefore, they are subject to ‘best
acknowledge that firms do have path-dependent, idiosyncratic existences. However, their capabilities are considered equifinal. Therefore, by their reasoning, firms ultimately can share commonalities where competitive advantage is a reward for those who are quicker and more successful in performing the ‘dynamic’ capability.
A potential reason for these contradictions may be related to the concepts earlier acknowledged (direct) link to a firm’s performance. However, throughout the years other ideas such as the hierarchical existence of capabilities have put this link into question (Winter, 2003; Zollo & Winter, 2002). Thereby, providing the concept with more viability and preserving the approach’s value.
The idea of hierarchies in capabilities suggests the existence of meta-capabilities, which signifies that there are theoretical 'infinite' processes (higher-order capabilities) upon which other, less sophisticated capabilities are dependent on (Collis, 1994).
Initially, Eisenhardt and Martin (2000) and Teece et al. (1997) did not hierarchically separate dynamic capabilities from ordinary capabilities. The former ascribe the term dynamic capabilities as expertise that a firm has developed in particular organizational processes. The latter addresses dynamic capabilities, similar to any other competences, as distinctive activities residing in a firm’s organizational processes, which are determined by the firm’s assets and path. Thus, in the consideration of Teece et al. (1997) they are not processes themselves, but merely a generic ability of the firm to change.
Considering dynamic capabilities as “ordinary”, albeit VRIN, capabilities exposes them to flaws associated with ordinary capabilities, such as being undermined by higher-order capabilities and becoming static (Collis, 1994; Zott, 2003). Additionally, ordinary capabilities already experience a limited level of change on their own, due to learning (Eisenhardt & Martin, 2000; Helfat & Winter, 2011; Zollo & Winter, 2002). This consideration reduces the value of dynamic capabilities by degrading them to redundant activities. Under these conditions ad hoc problem solving would be the preferred choice of firms, because having dynamic capabilities would be costly and offers only short-term opportunities for competitive advantage (Eisenhardt & Martin, 2000; Winter, 2003). Further, ordinary capabilities are exploitative mechanisms that bring about change through learning from exploitation.
Exploitation alone, however, increases firm rigidity, thereby increasing their vulnerability (O’Reilly & Tushman, 2008).
Figure 2. Network of the main theoretical streams by Peteraf et al. (2013).
It can be argued that the line between dynamic capabilities and ordinary capabilities may become blurred (Helfat & Winter, 2011). As, dual purpose or dual resources can exist to benefit both processes (e.g. retrieval of feedback and information from customers to assist in day-to-day operations). However, dynamic capabilities and ordinary capabilities significantly differ in their input and output. In the case of dynamic capabilities, these are the environmental stimuli affecting the ordinary capabilities and the reconfiguration of these ordinary capabilities, respectively (Ambrosini & Bowman, 2009). Therefore, to be relevant dynamic capabilities cannot themselves be similar to ordinary routines. The primary contrived understanding of dynamic capabilities rests on the notion that dynamic capabilities specifically influences ordinary capabilities. Thus, ordinary capabilities are dependent on dynamic capabilities to progress them beyond their static existence. This makes dynamic capabilities meta-capabilities, or capabilities of a higher order (Collis, 1994; Winter, 2003).
Nonetheless, dynamic capabilities are dependent on managerial choices and organizational learning, which also influences the position, path, timing, and costs of firm and its use of dynamic capabilities (Zollo & Winter, 2002; Zott, 2003). This in part accounts for firm
organizational politics and more, flaw managerial choices. Thereby, creating opportunity for the development of inappropriate dynamic capabilities (Ambrosini & Bowman, 2009). A fortuitous quality of dynamic capabilities is that they represent an evolutionary process. So to develop appropriate capabilities firms must develop cyclical processes of variation, selection and retention (O’Reilly & Tushman, 2007; Zott, 2003). This signifies that dynamic capabilities indeed reflect a process of compatible, interlinked capabilities that together create opportunity for reconfigurations.
In the context of dynamic capabilities the variation, selection and retention process takes on a particular form. Variation is represented by the capability to sense opportunities through scanning and shaping the environment and identifying these opportunities and threats (Pavlou & El Sawy, 2011; Teece, 2007; Wilhelm, Schlömer & Maurer, 2015). Teece (2007, p. 1322) describes it as a “creation, learning and interpretive activity”. To be successful firms need to overcome search difficulties and be able to recognize latent demand (Teece, 2007). It is an exceptionally important step within the dynamic capability process as it allows the firm to remain dynamic and adaptable given environmental change, thereby giving the firm viability and the opportunity to maintain competitive advantage (Schreyögg & Kliesch-Eberl, 2007).
The second stage (selection) has been referred to as learning (Ambrosini & Bowman, 2009; Pavlou & El Sawy, 2011; Teece et al. 1997; Wilhelm et al., 2015; Zollo & Winter, 2002) as well as seizing (Teece, 2007) in the dynamic capabilities literature. It is important to bear in mind that the term learning may be a cause for confusion, because learning is often used to reflect both the selection stage of dynamic capabilities as well as the higher-order stage where learning is a meta-capability helping to develop dynamic capabilities of a lower-order.
Although they form the selection stage, the learning and seizing concepts are very distinctive. Seizing, described by Teece (2007), refers to arranging the organization to address new opportunities. It relates to establishing appropriate enterprise structures, procedures, designs and incentives. On the other hand, the concept learning lends more towards a developmental and experimental phase. Nonetheless, assimilation is a key characteristic of this step, because it connects new knowledge with existing knowledge. Therefore, it stresses on the ambidexterity of organizations as balance between exploration and exploitation plays a valuable role (Ambrosini & Bowman, 2009; O’Reilly & Tushman, 2007; Pavlou & El Sawy,
firm to decide whether it should adapt the new knowledge, combine it with existing knowledge or remain with its current configuration (Zott, 2003). In making the best choice given its alternatives in this stage, a firm must firstly be equip to address its opportunities (Teece, 2007). Moreover, a firm must know how to appropriately learn through exploration and exploitation. Thus, these steps require firms to invest in making use of any new influxes into the firm and adapting all aspects of the organization accordingly (O’Reilly & Tushman, 2007; Teece, 2007).
The final stage (retention) concerns the execution of the reconfiguration (Pavlou & El Sawy, 2011; Zott, 2003). Wilhelm et al. (2015, p 329) describe this stage as one that involves “activities directed at reorganizing existing operating routines”. They refer to this stage in its entirety as reconfiguring. However, in strategic management literature, the activities have also been separated into categories such as leveraging and creative integration (Ambrosini & Bowman, 2009), coordination and integration (Pavlou & El Sawy, 2011; Teece et al., 1997) or replication and retention (Zollo & Winter, 2002). Dynamic capabilities are on a higher level than ordinary capabilities. Therefore, the changes occurring through the dynamic capabilities still need to be transferred effectively onto the level of the ordinary capabilities. Through capabilities that serve as a bridge between the levels, a transformation can be made to allow the tacit to be translated into the explicit (Pavlou & El Sawy, 2011; Zollo & Winter, 2002).
To achieve an appropriate reconfiguration two theoretically distinct activities need to occur (Pavlou & El Sawy, 2011). Firstly, after the sensing and learning stages, the selections made in the learning stage need to be dispersed to all the relevant parts in the firm. This stage is called integration. It is similar to Ambrosini and Bowman (2009) leveraging as well as Zollo and Winter (2002) replication phase. In the integration stage the specificities of the previous two stages are collectively shared and specific changes are made to the necessary business units (Ambrosini & Bowman, 2009; Pavlou & El Sawy, 2011; Zollo & Winter, 2002).
However, not all aspects of the organization will need changing, therefore, the old needs to blend with the new. A balance between exploration and exploitation must be made throughout the whole organization. All pieces of the organization must fit with one another and activities need to be synchronized to accomplish a successful adaptation to the changes.
re-design their structures, processes and procedures (Teece, 2007). This stage is called coordination and is similar to Zollo & Winter (2002) retention stage as well as Ambrosini and Bowman (2009) collective integration process.
Although these various stages are described sequentially in practice they can occur simultaneously and are often reciprocal. This promotes opportunities for the creation of new knowledge (Pavlou & El Sawy, 2011; Teece, 2007; Zollo & Winter, 2002). It also allows dynamic capabilities to be somewhat evolutionary and creates a cyclical process that contributes to a firm’s evolutionary fitness.
As mentioned at the beginning of this section, regardless of all it’s different terms and interpretations, the different streams of dynamic capabilities can be unified. As distinct as Teece et al. (1997) and Eisenhardt and Martin (2000) may seem there is support for both streams, because both offer compelling theories and argumentations (Peteraf et al., 2013). Dynamic capabilities can be both large, complex routines as well as simple and unstable. They can have elements that are heterogeneous as well as aspects that seem like “best practices”, because the foundation for understanding dynamic capabilities is in its level of analysis as well as its contingencies. Firms vary due to their histories, their resources and their positions. Therefore, their dynamic capabilities come in different forms and different degrees (Collis, 1994; Peteraf et al., 2013; Teece et al. 1997). This allows firms to be idiosyncratic in detail (Teece et al., 1998). However, commonalities arise from operating in similar contexts such as similar industries that determine general requirements (Eisenhardt & Martin, 2000; Jantunen, et al., 2012). As Jantunen et al. (2012, p. 153) put it, “external industry development drives towards commonalities while the firm’s history, internal organizational mindset and strategic choices drive towards idiosyncrasy”. The dynamic capabilities approach is a very complex concept that is best understood through the contingency approach (Peteraf et al., 2013). Thus, the effectiveness, efficiency, existence and usefulness of dynamic capabilities are conditional. Its value in relation to competitive advantage is reflected in how they renew the firm’s capabilities depending on the context and time. Firms that are able to consistently identify successfully the conditions and capabilities that will be advantageous now, and in the future, are the ones to sustain their competitive advantage (Collis, 1994).
2.1.3. Dynamic service innovation capabilities
In the previous sections the dynamic capabilities approach is expressed as a general process for change. This was done to make the concept more accessible and to establish the understanding of the process of dynamic capabilities. However, the following section specifies the concept for the context of this research. As the literature on dynamic capabilities has developed, understanding of the applicability of the approach has also increased. Since dynamic capabilities can be developed to influence any process a focal firm deem necessary for sustainability, the dynamic capabilities literature has expanded to include specific conditions of dynamic capabilities (e.g.. dynamic marketing capabilities).
The earlier studies on dynamic capabilities focused on manufacturing firms, but as industries become more service-oriented the dynamic capabilities approach has adapted to also reflect service-centric firms. The term ‘services’ is a reference to an interdisciplinary concept that combines elements such a technological, organizational and human capabilities (Den Hertog, 2000). It is often characterized as an intangible, experience-based process with a significant amount of co-production between service providers and service users (Bitner, Ostrom, & Morgan, 2008; Den Hertog, 2000; Den Hertog, et al., 2010). Throughout the years it has become more and more clear that services are invaluable and, thus, so is service innovation (Den Hertog, 2000; Kindstrom et al., 2013; Oke, 2007). Therefore, having dynamic capabilities for service innovation is imperative, because for service firms, service innovations are paramount to their operations. However, literature on the application of dynamic capabilities on service innovation has been scarce (Den Hertog et al., 2010).
Existing dynamic capabilities literature, particularly that of Teece (2007) has inspired several service-related dynamic capabilities research (Fischer, Gebauer, Gregory, Ren & Fleisch, 2010; Kindström, et al., 2013; Salunke & El Sawy, 2011). With the assistance of the existing service innovation research and the dynamic capabilities research, Den Hertog et al. (2010) have constructed a conceptual dynamic service innovation capabilities framework that was designed to address all forms of service innovation in various firm types (See Figure 3).
Den Hertog et al. (2010, p. 498) refer to dynamic service innovation capabilities as “specific capabilities, i.e. organizational competencies, routines and processes organizations already have or newly develop to manage the process of service innovation. In practice this means
uncertainty of innovations, according to Den Hertog et al. (2010) there are some common required dimensions for service firms to remain dynamic.
Figure 3. Conceptual, six-dimensional model of service innovation and (dynamic) service innovation capabilities by Den Hertog et al. (2010).
According to the framework (specifically referring to letters A-F), firms should have capabilities to signal user needs and technological options. A firm must firstly “empathically understand users and sense their (potential) needs well in advance by interacting intensively with (potential) clients” (Den Hertog et al., 2010, p. 499). This requires firms to develop systems that can allow them to listen and dialogue with their customers to understand their needs as well as see beyond their explicitly expressed desires. Additionally, firms should be able to signal technological options to find new ways of solving the users’ problems as well as new ways to interact with their clients who are often co-producers of the service. This dimension serves to help the firm identify new opportunities.
Further, after the firm has identified the opportunity it must find ways to convert the opportunity into a reality. This stage is referred to as conceptualizing and it relates to making sense of the opportunity so that it can become viable. Finding the right formula is an iterative
Den Hertog et al. (2010) then refer to a third stage as (un-) bundling capability. They explain, “that in practice, many new services are newly bundled, enriched, blended or the opposite of newly unbundled, stripped down to the bare essential, service offerings” (p. 501). They claim that it is a capability specific to service firms and relates to rearranging existing elements.
Service innovation is characterized by interactive activities between the provider and the user. It is a process that requires collaboration to create the service. However, ensuring that the end goal is accomplished also requires good coordination and task division. Therefore, the capabilities relating to this are known as co-producing & orchestrating capabilities.
Following co-producing & orchestrating Den Hertog et al. (2010) describe the capabilities stretching and scaling. Scaling reflects diffusion, thus, a firm’s ability to reproduce an innovation successfully at more than one time or location. It signifies consistency within the innovation. Additionally, stretching relates to leveraging. It consists of a firm using a singular “voice” (i.e. through communication or branding) and thereby creating an overall firm fit to accompany the changes made for the innovation. It represents strategic fit and creates a collective understanding of the innovation.
Lastly, Den Hertog et al. (2010) describe the learning capability that firms use to reflect on their service innovation process deliberately, to learn how to improve it. However, the authors describe this process as relevant for “keeping track of failed and successful service innovation efforts and learning from both is hypothesized to be a key meta-capability that may inform management of service innovation. This meta-capability can be viewed as an essential part of learning from current service innovation efforts to see where an open and distributed tough-to-manage process can be improved” (p. 504).
Together these capabilities form the higher-order dynamic service innovation capabilities, where firm influence their service innovation processes, that in turn influence their operating routines to provide new service experiences and solutions as the framework describes. This model is, however, still conceptual. Therefore, it is unclear what it actually looks like in practice.
2.2. New ventures
Chrisman, Bauerschmidt and Hofer (1998, p. 6) define new ventures as “the end result of the process of creating and organizing a new business that develops, produces, and markets products or services to satisfy unmet market needs”. A venture is considered new if it has not reached the phase of maturity, which means that they have not yet reached a certain level of success (Crisman et al., 1998; Lester & Parnell, 2008). Therefore, these firms are subject to liability of newness as they strive to achieve viability (Crisman et al., 1998; Gilbert, McDougall & Audretsch, 2006; Lester & Parnell, 2008). The liability of newness theory ascribes the newness of a firm as the main reason for its failure, because these new firms lack experience, knowledge, capital, established operational routines, necessary know-how, standards, established trust and necessary important ties and relations (Stinchcombe, 1965). Additionally, new ventures often lack legitimacy (i.e. a social perception of acceptance, desirability and appropriateness within a social system), which has been considered imperative for a (new) firm to overcome its liabilities and to survive (Morse, Fowler, & Lawrence, 2007; Zimmerman & Zeitz, 2002). These liabilities and disadvantages usually reduce as a firm size and age increases (Gilbert et al., 2006).
In their five-stage model, Gilbert et al. (2006) consider new ventures to fall within their first two stages. Stage 1, Existence, often has one or few owners with simple structures and it focuses on viability and finding proof of business. Stage 2, Survival, is characterized by growth and the formulation of structures and routines. At this stage, decision-making is still quite centralized and success has not been reached.
As expressed previously, the literature on dynamic capabilities in new ventures is very limited. This is mainly due to the belief that dynamic capabilities can only be present in established firms with significantly defined paths (Zahra, et al., 2006). However, limiting dynamic capabilities to mature firms makes the concept a tautology, because these firms are considered to have dynamic capabilities, as they have already overcome external changes. However, new ventures are also active entities that respond to and influence their environment as well as strive to develop internal capabilities, just as established firms (Katila & Shane, 2005; Zahra et al., 2006). Additionally, even young firms are in the process of possessing capabilities that will need to be dynamic if they want to be competitive and survive. Therefore, expanding the concept towards young firms is necessary.
2.3. Lifecycle of capability development
Literature written on dynamic capabilities predominantly adheres to the notion that capabilities are built and cannot (easily) be bought (Teece et al., 1997). Additionally, more recently the role of managerial decision-making in the development of capabilities is increasingly being accepted (Baretto, 2010). These aspects in the dynamic capabilities view of the firm indicate several possibilities. Firstly, dynamic capabilities can be present in a firm at various stages of development, as building a capability is a gradual process (Montealegre, 2002). Also, dynamic capabilities can vary in degrees, because decision makers can determine how much a firm should invest in a particular dynamic capability (Helfat & Winter, 2011; Wilhelm et al., 2015). Oftentimes the dynamic capabilities literature assumes that firms possess fully built dynamic capabilities. However, accepting that capabilities are built comes with the given assumption that capabilities evolve up to a point where capability development ceases. Therefore, the analysis thus far of built-in capabilities tells an incomplete story.
The formation of a capability can start at the very conception of a new-to-the-world firm (Helfat & Peteraf, 2003). As the capability life cycle theory posit an initial capability’s lifecycle has 3 main stages: founding, development and maturity. The founding and development stage reflect the capability’s growth stages as it is being built. After the capability becomes more stable and solid it falls into a mature stage. Even when a capability is considered mature it can remain in flux, as the capability may need to evolve to remain relevant and useful. As the firm evolves and adapts to its environment, so does its capabilities. So, after the initial capabilities stages, a firm’s capability can transform (e.g. retire, retrench, renew) (Helfat & Peteraf, 2003; Winter, 2000) (See Figure 4).
Building dynamic capabilities can be costly, so the ones most invested in will be those that the firm relies on most for its evolutionary fitness (Ambrosini & Bowman, 2009; Winter, 2003). Nonetheless, the value of dynamic capabilities should be taken as a whole. Therefore, capabilities being considered not fully developed do not detract from their relevancy to the overall competitiveness of a firm. Overall, this indicates the possibility that new ventures can possess dynamic capabilities. However, these capabilities may not be similar to well-established capabilities and their presence may not be as intense.
2.4. External ties
Firm heterogeneity arises from internal choices, but also from external connections (Zaheer & Bell, 2005). Extant literature often emphasizes that external ties can add significant value to new ventures, particularly to their performance and innovativeness (Argarwal & Selen, 2009; Howells, 2006; Zhang & Li, 2010). Therefore, new ventures often establish and leverage external ties as a way to overcome their liabilities and achieve their goals (Katila & Shane, 2005; Zahra & Nambisan, 2012).
As mentioned in the previous dynamic capabilities section, overcoming search difficulties and recognizing latent needs are essential to firm success (Teece, 2007). From this perspective, external ties are important to new ventures, because external sources can reduce the search cost of new ventures and broaden their scope for opportunities recognition (McEvily & Zaheer, 1999; Zhang & Li, 2010). As Lawson and Samson (2001) put it: “Networks and alliances of customers, suppliers, competitors and other non-market participants are a key source of innovations. Networks widen the opportunity and access to key resources from the firm’s environment, like information, capital, goods and services which then have the potential to maintain or enhance competitive advantage” (p. 383). Thus, external ties can act as a resource and a knowledge source, oftentimes having central positions in regional clusters. This offers opportunities for knowledge spillovers as these ties use their extensive network to safely and reliably facilitate the exchange of information among their network. This further allows affiliated firms to generate and develop innovative ideas and novel opportunities (Hargadon, 1998; Den Hertog, 2000; Rothaermel & Hess, 2007; Wolpert, 2002; Zhang & Li, 2010).
Through network spillovers and knowledge sharing, these ties create an indirect link to the survival of new ventures. Zahra et al. (2006) claim that as firm age increases, firms rely less on external ties and more on internal search efforts. However, particularly in service firms, having a well-established network remain essential, albeit limited. Service innovations are often characterized as a co-productive process (Edvardsson, Gustafsson & Roos, 2005). This means that the creation, development, commercialization and diffusion of service innovations are often made possible through the ties that firms have established with external sources.
Findings from Rothermael and Hess (2007) suggest that external ties can be beneficial to the innovativeness of firms if the focal firm can assimilate the knowledge they obtain from their network. Although their study focused on manufacturing firms, their research still shows that firm-level antecedents may substitute individual-levels and work as a complement to network-level developments. In their research, individual-levels relates to a firm’s intellectual human capital. The network-level relates to a firm’s external ties and firm-levels signify internal developmental (i.e. R&D) activities. So, a firm’s internal development and a firm’s network ties work complementarily as antecedents of dynamic capabilities. McEvily and Zaheer (1999) have also determined that external ties can play a role in the development of competitive capabilities. However, their findings show that different relationships can have different influence on the acquisition of competitive capabilities. For example, non-redundant relationships influenced the acquisition of scanning capabilities, whereas ties with regional institutions had no significant influence on scanning capabilities, but had significant influence on other capabilities. Therefore, external ties can lead to varying developments of (competitive) capabilities.
However, due to the limited attention new ventures have received in the dynamic capabilities literature, the influence of their ties on the development of their dynamic capabilities has often been overlooked. It is understood that external ties can add value in capability development, but not in the context of dynamic capabilities relating to new ventures.
2.5. Consolidated theoretical framework
The various theoretical aspects mentioned above have not yet been explored in the context described in this study. Also, several of the theories are quite complex. Therefore, this section
shall combine the various aspects to create a consolidated theoretical framework for this study.
Separately, however, the dynamic capabilities framework will be displayed in detail (See Figure 5). In the dynamic capabilities different labels have been used in the literature to refer to similar capabilities, or similar labels for different capabilities. This has resulted in the dynamic capabilities view of the firm being dispersed with inconsistent and divergent understandings. However, as mentioned above many of the streams in the dynamic capabilities literature are extensions of one another, making some of the most influential approaches complementary, even commensurate at times. Moreover, the following framework shows they are quite comparable. Four pre-existing frameworks from often-cited papers were used to create the consolidated framework, to depict how they are expressed in the dynamic capabilities literature. Most of these frameworks have largely been accepted, replicated, modified and tested in the literature and therefore represent viable depictions of dynamic capabilities. This framework sets boundaries for where the concept and understanding of dynamic capabilities lie in this study, which will here on out be demarcated based on commonalities within the literature.
A simplified depiction of the overall theoretical framework of this study is also presented (See figure 6). The capability lifestyle stages are shown from founding to maturity (Helfat & Peteraf, 2003). This study theorizes that the first stage reflects the resources and capabilities the venture is endowed with at founding (Stage 1). Dynamic capabilities consist of bundles of resources and routines (Teece et al., 1997). However, in the initial stages these bundles may not reflect stable capabilities, but also through the influence of external ties they develop further. Overtime, firm processes become more set in their ways (Zahra et al., 2006). The capabilities become more stable in the development stage and the process becomes easier for ventures to perform (Stage 2). Additionally, the interlinked capabilities are more fluid (Eisenhardt & Martin, 2000; Zollo & Winter, 2002). It is theorized that throughout the founding and development stages external ties continue to play a vital role in capability development. They help new ventures further solidify their dynamic capabilities and develop them into stable, viable capabilities. These external ties remain relevant, albeit more limited, to dynamic capabilities development as the capabilities become mature and managerial decision-making determine what capabilities shall remain in the firm (i.e. what shall be discharged and what new capabilities should be developed into the process) (Stage 3). However, the exact transition to each stage is difficult to determine.
Figure 6. Consolidated theoretical framework for dynamic capabilities development through external ties based on stages of the capability lifecycle inspired by Helfat & Peteraf (2003)
External Ties
Discharged Maturity stages Selection Event Stage 1 Dynamic capabilities Stage 2 Dynamic capabilities Stage 3 Dynamic capabilities The development stage The founding stage3. Methodology
This chapter describes the methodology of this study. The research design, data collection and data analysis methods will be specified and the choices made for each element will be clarified. The chapter also describes the research context, the sampling decisions and the actions taken to encourage integrity for the conduct and result of the study.
In designing this research a criterion was used that was inspired by Edmondson en McManus (2007). The authors emphasize the necessity of methodological fit. This advocates the coherence of the various elements of the research. Said differently, they advise consistency in relation to the research question, the use of prior work, data collection and data analysis process. This consistency is dependent on the stage of research of the topic being studied. Saunders and Lewis (2012) consider conducting research in a similar manner with their concept of the research onion. Their research onion basically represents a visual progression promoting alignment in research methodology based on choices researchers need to make ranging from world view (philosophy) down to conduct (e.g. time horizon, data collection and data analysis).
On the continuum of research stages, traditional dynamic capability can arguably be described to be positioned somewhere in its intermediate to mature phase. However, regardless of the stage of traditional dynamic capabilities research, it can be argued that in the specific context of this study the theory is in its nascent stage. As Edmondson and McManus (2007) posit topics are considered nascent when little to no previous theory exists. The explorations of this paper are in exceptionally unexplored realms within the dynamic capability concept. Little research has been done on dynamic capabilities in relation to new service ventures and their service innovation. Moreover, no research has been conducted in this context relating to the influence of external ties. Studies that combine the various concepts of this research are significantly lacking. Theory building is central in this stage, with the aim at uncover and explain phenomena (Edmondson & McManus, 2007).
3.1. Research design
Considering the theory’s nascent stage, a qualitative approach is recommended (Edmondson & McManus, 2007). A qualitative and exploratory approach was chosen to gain insight in dynamic service innovation capabilities of new ventures. This method offers richness in data,
flexibility, and the ability to fulfill the research purpose of identifying and understanding the range of activities involved.
This research is motivated by the constructivist paradigm, which argues that there are multiple realities based on interpretations of that being studied (Doyle et al., 2009). Although inspired by existing dynamic capabilities frameworks this study is still inductive in nature. The lack of prior research provides opportunities for discovering new patterns of dynamic capabilities within new ventures and the role of their external ties.
The chosen design is strongly influenced by both the grounded theory methodology (Strauss & Corbin, 1998) as well as the case study methodology (Yin, 2013). This choice has been inspired by the recommendations of Eisenhardt (1989), Creswell (2013), and Salunke et al. (2011). However, the chosen dominant strategy for this study is the case study design.
Case studies are used to understand the conditions of events through the analysis of specific, well-defined instances of the events (Eisenhardt, 1989; George & Bennett, 2005). However, unlike usual case studies that take a deductive approach, no fixed hypothesis or propositions have been defined prior to investigation. As Eisenhardt (1989) explain the identification of potential, suggestive explanations may be helpful, however, they need to be unsettled so the researcher can be open to new findings. Due to the resources available for this research (e.g. time and access) a cross-sectional study was conducted. A cross-sectional design refers to the collection of data at a particular time (Saunders & Lewis, 2012).
3.2. Research context
This research focused on new ventures in the Netherlands. The Netherlands is a thriving startup hotspot and it is known for its entrepreneurial culture. However, according to Dutchstartupdatabase1, of all cities in the Netherlands, Amsterdam is the most flourishing of Dutch cities as a startup scene (See Figure 7).
An article published by the Central Bureau of Statistics (2007) stated that in 2005 commercial services accounted for 71% of activities in the Greater Amsterdam area, with financial and business services being the most significant. Additionally, in 2012 commercial
Figure 7. Percentile proportion of Dutch startups by city.
and non-commercial service sectors accounted for the majority of the labor volume in North Holland (Central Bureau of Statistics, 2015). Although, this is relative to the increasing amount of self-employment indexes, these businesses are still predominantly service firms. These publications may indicate a reflection of an increasing importance of service firms particularly within the Greater Amsterdam area. Thus, this offers additional support for the location of the research context.
Further, the context of this study is the Dutch Creative Industries. As is expressed in the previous chapter, dynamic capabilities are still not a fully developed concept. There are various conversations on the type of firms and their environments that can be measured for dynamic capabilities. However, a contingency approach that allows for variation on particular conditions can be beneficial for making dynamic service innovation capabilities a viable theory of the firm. The Creative Industries is a broad field that encompasses various structurally diverse sub-sectors. These domains consist of:
