Turbulent markets – ride the
waves or hold on tight?
Inter Firm Absorptive Capacity
Willemijn de Weijs
Joint Master Thesis
MSc Marketing Management
MSc Business Administration – Strategic Innovation Management
Inter Firm Absorptive Capacity
“Turbulent markets -‐ ride the waves or hold on tight?”
by
Willemijn de Weijs
University of Groningen
Abstract
This paper investigates knowledge transfer between firms by means of absorptive capacity. Question raised in this paper is to what extent complementarity of resources and relational norms influence the ability to acquire, assimilate, transform and exploit knowledge. After a thorough literature review, in which the paper of Nooteboom (2007) is used as a benchmark, eight hypotheses are empirically tested. The research shows a full positive effect of complementarity and relational norms on absorptive capacity. In addition the moderating effect of market turbulence is examined on the explorative and exploitative learning performance relationship.
Keywords: Absorptive capacity, inter firm relations, cognitive distance, explorative learning,
exploitative learning, market turbulence.
Subject: Interfirm Absorptive Capacity: It Takes Two to Tango?
Supervisor Marketing Management: Dr. J. Berger
j.berger@rug.nl
Supervisor Strategic Innovation Management: Drs. A. R. van der Eijk
r.a.van.der.eijk@rug.nl
Management summary
Over the last decades knowledge has developed as one of the most important resources of a firm. Being able to internalize knowledge that resides outside the firm requires a strong absorptive capacity and is done by means of different dimensions. Acquiring and assimilating knowledge, as well as transforming and exploiting knowledge, are considered to be important as dimension of the capability of absorptive capacity.
Complementarity of resources and relational norms, together labeled as cognitive distance, are reviewed in this paper as antecedents of a firms' potential absorptive capacity (PACAP) and realized absorptive capacity (RACAP). This research distinguishes itself from former literature, such as Cohen & Levintal (1990), Lane & Lubatkin (1998) and Tsai (2001), by its multidimensional approach of absorptive capacity. A consequence of this distinction is that the paper can clarify the dimensions in absorptive capacity that are important when a firm wants to focus on explorative learning or on exploitative learning. Market turbulence is taken into account as a moderator of the explorative and exploitative learning processes.
Preface
After six years of studying at the University of Groningen I am proud to have finalized my joint thesis. Marketing Management and Strategic Innovation Management have taken my particular interest over the last years and I am happy to have been able to combine these master studies at the Faculty of Economics and Business with this master thesis as a result.
I would like to thank my supervisor from the Department of Marketing Hans Berger for his constructive and helpful feedback. Though being very busy with his own promotion, he managed to successfully lead us through the process of writing the thesis. Secondly, my supervisor, Rene van der Eijk, from the Department of Innovation Management & Strategy provided me with additional feedback, of which I am sure it made my thesis more clear and complete. Also I would like to thank my fellow thesis students for their helpful insights and support during off-‐moments. Lastly, great thanks to my family, friends and housemates for having given me the opportunity, support and pleasure of experiencing six wonderful years in Groningen.
Writing the thesis was definitely challenging at times, but it was a good experience and it has boosted my confidence with regard to my research skills. I hope to provide the reader with clear and useful insights on the topic of absorptive capacity and to have added to field of research.
Willemijn de Weijs
Table of Contents
Abstract ... 3
Management summary ... 4
Preface ... 5
1. Introduction ... 8
1.1 General introduction to the field ... 8
1.2 Research question ... 9
1.3 Relevance of the study ... 10
1.4 Structure of the paper ... 12
2. Literature review ... 13
2.1 Knowledge-‐based resources ... 13
2.2 Inter firm learning ... 13
2.2.1 Explorative learning ... 14 2.2.2 Exploitative learning ... 14 2.3 Absorptive capacity ... 14
2.3.1 Acquisition ... 15 2.3.2 Assimilation ... 15 2.3.3 Transformation ... 16 2.3.4 Exploitation ... 16
2.4 PACAP and RACAP ... 17
2.4.1 Potential Absorptive Capacity ... 18
2.4.2 Realized Absorptive Capacity ... 18
2.5 Cognitive distance ... 18
2.5.1 Competence side ... 18 2.5.2 Governance side ... 19 2.6 Market turbulence ... 20
3. Conceptual model ... 22
4. Methodology ... 27
4.1 Research design ... 27
4.2 Participants ... 28
4.3 Measurements ... 28
4.3.1 Cognitive distance ... 29
4.3.2 Realized and potential absorptive capacity ... 30
4.3.3 Explorative and exploitative learning performance ... 31
4.3.4 Market turbulence ... 31
4.4 Control variables ... 32
4.5 Feasibility of the study ... 34
6. Discussion ... 44
7. Conclusion ... 48
7.1 Implications for theory ... 48
7.2 Implications for practice ... 49
7.3 Limitations and further research ... 49
Literature ... 52
Appendix A – Questionnaire ... 58
Overview of Tables and Figures Tables
Table 1 – Dimensions of ACAP Table 2 – Overview of terminology Table 3 – Overview of variables Table 4 – Reflective indicators Table 5 – Formative indicators
Table 6 – Squared roots of AVE for first order constructs Table 7 – Squared roots of AVE for second order constructs Table 8 – Second order constructs
Table 9 – Control variables
Table 10 – Overview of SEM results
Figures
Figure 1 – Conceptual model
Figure 2 – Optimal cognitive distance – Nooteboom et al. (2007)
1. Introduction
1.1 General introduction to the field
Over the last years knowledge has developed itself as being one of the most important determinants of establishing and sustaining competitive advantage (Fabrizio, 2009). The outside sources of knowledge are important when developing products and a competitive advantage upon competitors can be taken by means of the ability to internalize outside knowledge and use the knowledge to its fullest potential (Cohen & Levinthal 1990, Fabrizio 2009). Cohen and Levinthal (1990) state that this is critical when striving towards innovation.
The success of internalizing external knowledge is influenced by several factors. Fabrizio (2009) suggests that firms with internally well developed research capabilities benefit a lot from collaborations in terms of the pace of innovation, as they are able to learn from their partners. Cohen and Levinthal (1990) describe the term absorptive capacity as “the ability to recognize the value of new information, assimilate it, and apply it to commercial ends” and suggest that absorptive capacity is a byproduct of the level of investments in R&D of a firm. They argue based on psychological research that the ability to learn is positively related to prior knowledge, as newly acquired information when linked to the stored prior information, is more easily internalized. Hence when investments in R&D are high, a firm has higher level of internal knowledge, resulting in the increased ability to learn from a partner.
However not all literature confirms the positive effects of cumulative information storage. Nooteboom et al. (2007) suggest that there is tipping point in the positive effect of building knowledge. When commencing the collaboration the increase of cognitive distance between the firms leads to the firm learning more accordingly. However the point that the cognitive distance becomes too large, meaning that the firms can not mutually understand each others resource contribution, will results in decreasing ability to utilize those resources. This results in a decreased novelty value.
firms’ absorptive capacity. And what to think if a central gatekeeper does not correctly assess the value of potential knowledge; valuable knowledge might be squandered, which will have repercussions for the acquiring and assimilating phases of absorptive capacity (Cohen & Levinthal, 1990).
Zahra & George (2002) confirm the importance of acquiring and assimilating new knowledge. A firms’ potential absorptive capacity as described in their paper, can lead to competitive advantages in dynamic markets, as the firms’ receptivity to acquiring and assimilating knowledge is high (Lane & Lubatkin, 1998). The explorative nature of the relationship stimulates the search for new knowledge based resources, but does not ensure the firm of the ability to apply the new knowledge and reap the returns therefrom. The interplay with transforming and exploiting the newly acquired knowledge is essential. When the nature of the relationship is exploitative, the absorbed knowledge is transformed and put to practice in the firm. The paper of Zahra & George (2002) refers to this as realized absorptive capacity and is the larger source of improved performance.
Absorptive capacity depends on the relationship between two firms. For example the relationship between buyer and supplier, which is essential for the success of a supply chain. Both parties invest resources in the relationship and therefore both want to reap benefits from this investment (Ambrose, 2010). Christopher (2000) points out the need for firms to critically view its supply chain, as slow pipeline type of systems form a risk in the turbulent and volatile markets of today. Turbulence is a consequence of dynamism, complexity and predictability and depends on the changes in the market, the interplay between different elements, such as product groups or client groups, and the availability of information (Volberda & Van Bruggen, 1997). To be able to adequately respond to changes in the market firms should have their expectations of the collaboration aligned with the nature of the relationship and its potential. Firms in turbulent markets need to utilize resources from their partners to improve their absorptive capacity (Lane, 2006).
1.2 Research question
relevant. The extent to which the resources of firms are complementary can determine how well the firm is able to understand and re-‐apply the resources of the other firm. Also the level of governance, referring to relational norms, values and feelings (Nooteboom, 2007), can have a positive influence on a firms’ explorative and exploitative orientation. In addition to this it is important to research the turbulence of the market, which can influence the extent to which firms can seize opportunities of the changing market (Volberda & van Bruggen, 1997). This renewed angle to the current discussion has lead to discuss this topic by proposing the following research question:
Do the relational norms and the complementarity of knowledge-‐based resources between firms determine absorptive capacity and does that in its turn influence the firm’s innovative performance in a turbulent market?
To answer this research question a conceptual model will be built based upon previous literature. A distinction is made between potential and realized absorptive capacity and how this results in respectively explorative and exploitative learning performance. Also the component of market turbulence will be added to see if the innovation performance benefits from the dynamic capabilities that reside in the firm.
1.3 Relevance of the study
This research will address the degree to which the learning performance of a firm is subject to market turbulence. The scope of the paper is to provide clarity on how firms experience the knowledge exchange with their buyer/supplier and how this influences their learning performance. The domain of this research is demarcated by several boundaries. In this research performance covers innovation and does not include financial returns or expansion of the firm for example. Innovation is captured in the model by the interfirm explorative and exploitative learning performance. The research solely covers firms that are producers of physical products, so service providers are excluded. No distinction was made between national and international respondents. Though all the buyers are Dutch, the related suppliers are Dutch and non-‐Dutch.
literature denotes a positive influence on explorative learning performance (Lane & Lubatkin, 1998; Volberda & Van Bruggen, 1997). However literature lacks clarity on whether the exploitative learning process is actually performing better when the explorative learning process is well established in a turbulent market.
This study offers a critical view on two papers of Nooteboom (2007) and Nooteboom et al (2007). The research takes into account the amount of overlap that firms have in their knowledge base, which is referred to as complementarity (Nooteboom, 2007). This partly determines the cognitive distance between firms, which in its turn has a great influence on the innovative performance of firms (Nooteboom et al, 2007). Governance, in the sense of relational norms, values and beliefs is also taken into account, which is likely to add substantively to the effect of cognitive distance on a firms’ potential and realized absorptive capacity (Nooteboom, 2007). This research differs on several points from the studies done by Nooteboom and his colleagues. Here the results are based on interpretation and responses of the firms, whereas Nooteboom has focused on patents that were obtained by the firms. It is easy to compare the number of patents a firm has to those of another firm, but there are some issues in doing this. It is safe to say that patents do not give a proper image of the innovative performance of a firm, as firms do not always patent their new innovations and also the patents differ in their economic impact (Pakes & Griliches, 1982). In addition, the industry does not always benefit from tying innovations down to a firm, as filing a patent for small improvements of a product might actually slow down the development and commercialization of new products in the industry (Mansfield, 1986).
In addition, in this research the level of analysis is the inter firm relationship, as opposed to the study of Nooteboom for which the individual firms were merely analyzed. Dyer & Singh (1998) emphasize the competitive advantages that can result from idiosyncratic inter firm relations, which underscores the relevance of including the interfirm relationship in the study.
The research controls for the length of the relationship and the investments in R&D, as both factors can influence the outcomes of the research in the sense that it might show a more positive result in innovation performance (Izushi, 2003; Tsai, 2001). Lastly the research takes reflective and formative measurement scales into account, which adds to the richness of the collected information and substantially influences the estimation of results (Jarvis, MacKenzie & Podsakoff, 2003).
1.4 Structure of the paper
The paper will lead the reader through the research in the following way. First the key concepts, on which the research builds, are explained by reviewing existing literature in the following subsections: Knowledge-‐based resources, organizational learning, absorptive capacity (among which potential and realized absorptive capacity), cognitive distance; divided in to complementarity and governance, explorative and exploitative nature of the relationship and lastly the term market turbulence will be elaborated on. The key concepts are connected to each other to clarify the direction of the research. The conceptual model provides a visual overview of the expected effects, which will also be elaborated on in 8 hypotheses. The methodology section will provide information on how the research design is set up. After completing the empirical research upon the data collected by Hans Berger, the results section will provide affirmative or dissenting findings with regard to the hypotheses. The outcomes will be discussed and a conclusion will be drawn in the accompanying sections. Lastly since the scope of the paper can never be all-‐encompassing, limitations and suggestions for further research will be proposed in the last part of the paper.
After having briefly introduced the field of research the topic of this paper was instigated. The elaboration on the relevance of the paper shows that there is need to empirically test the relations as proposed in literature.
2. Literature review
Next the central concepts of the paper will be introduced. Like in numerous literature reviews the goal is to reach consensus on terminology used in the paper. For this reason literature is compared and several definitions of and relations between the central concepts are considered, from which the most appropriate one is accepted as the explanation for the paper. At the end of the chapter a schematic overview is provided in Table 2.
2.1 Knowledge-‐based resources
First the knowledge-‐based resource will be elaborated on as this takes a central place in the process of learning. It is an important source of competitive advantage in dynamic markets. Knowledge-‐based resources are abstract and are difficult to integrate compared to physical resources (Galunic & Rodan, 1996). Knowledge-‐based resources create both an understanding of separate inputs, such as physical resources, as well as an understanding of how to coordinate the inputs in a way they can create value to the firm, leading to a higher firm performance (Galunic & Rodan, 1996; Barney, 1995). Galunic & Rodan (1996) and Nonaka (1991) propose that the ease of transferability of knowledge is linked to the level of tacitness and dispersion. Von Hippel (1994) explains the difficulty in transferring tacit knowledge is due to stickiness and the difficulty of codifying information to a product of knowledge that is manageable for the partner. The ability to correctly and completely transfer the knowledge-‐based resource is dependent on several factors, namely the complexity of the information, the nature of the relationship between the buyer and supplier and the ability of the buyer to comprehend and apply the information offered by the other party.
2.2 Inter firm learning
Inter firm learning is the capability of developing a firms knowledge base through the sharing of knowledge with a partner firm (Mohr & Sengupta, 2002). Not only does the number of resources increase with attracting a partner, also a firms perspective on which new knowledge is critical to attract, can be altered. Over time routines emerge and lead to mechanisms through which information is shared between firms (Zahra & George, 2002; Slater & Narver, 1995).
made on the definition and distinction between organizational learning and inter firm learning. This way the reader will know how to place the terms in the context. Organizational learning is described by Hirsch & Levin (1999) as an umbrella construct, which indicates that is broad term and many processes can be gathered under the concept of organizational learning. For that matter this paper suggests placing inter firm learning under the construct of organizational learning, in which it only partially covers the scope of organizational learning. The terms cannot be used interchangeable as organizational learning is defined as a dynamic capability of an organization to apply strategic renewal in an environment of discontinuous change (Sun & Anderson, 2010) and inter firm learning as internalizing knowledge from external sources, being other firms, for purposes of improving the focal firm or its products. Inter firm learning can be divided in explorative learning and exploitative learning. Both concepts have different goals as to what practice the newly acquired knowledge will be put in the firm.
2.2.1 Explorative learning
Explorative learning is focused on generating new knowledge and applying this to appeal to new possibilities. It consists of “search, variation, risk taking, experimentation, play, flexibility, discovery and innovation” (March, 1991). Risk taking refers to the fact that when investing in new knowledge development, the outcomes are uncertain; returns will not be visible immediately, but will rather have a long-‐term effect (He & Wong, 2004).
2.2.2 Exploitative learning
Exploitative learning conveys “refinement, choice, production, efficiency, selection, implementation and execution” (March, 1991). Returns from exploitative learning are more certain and likely to be acquired on a short term. In addition firms that focus on this type of learning are like to generate a more stable performance (He & Wong 2004).
2.3 Absorptive capacity
problem solving is focused on creating new knowledge. This indicates that ACAP is not only associated with internalizing new knowledge and therefore broadens the scope of ACAP. Zahra & George (2002) emphasize that ACAP is a dynamic capability, which has an influence on the nature and sustainability of a firms’ competitive advantage, as it allows firms to create competitive advantage in dynamic industries. In these industries it is essential for a firm to be innovative and strategically flexible.
In the paper of Zahra & George (2002) four complementary dimensions of ACAP are described; acquisition, assimilation, transformation and exploitation. This paper will continue based on these dimensions.
2.3.1 Acquisition
Identifying and acquiring external knowledge is dependent on three attributes; intensity, speed and direction. Zahra & George (2002) explain that intensity and speed, which constitute as the effort, determine the quality of acquired knowledge, whereas direction determines the richness and complexity of the knowledge. By this the authors emphasize the benefit of having knowledge in different areas; this increases the possibility to successfully internalize external knowledge. Nooteboom et al (2007) confirm the need for a broad knowledge scope when wanting to internalize new knowledge. He states that the cognitive distance between the knowledge of the focal firm and the external firm should not be too large, as this affects innovation performance with an inverted U-‐shape. The opportunity of acquiring valuable new knowledge is elongated by the risk of misunderstanding the information that a partner is giving. For this reason a broad scope of knowledge can be useful as it gives the firm basic information to which new information can more easily be related to (Nooteboom, 2007: Cohen & Levinthal, 1990).
2.3.2 Assimilation
2.3.3 Transformation
After assimilating new information the following step is to apply the information to the firm and use it to the benefit of the firm. Zahra & George (2002) distinguish two phases from each other, whereas Cohen & Levinthal (1990) gather these in one dimension; applying information to commercial ends. They emphasize the importance of communication over firm boundaries and within firm boundaries. When external information is rather different from the existing knowledge base, dependency on gate-‐keepers will be higher. Gate-‐keepers are the actors in an organization that understand the external knowledge and are able to translate this to comprehendible information for rest of the organization. Zahra & George (2002) take a more profound perspective, as they demonstrate in which way the newly acquired knowledge will be of practical use. Their paper indicates that the transformation stage revolves around constructing a strategy based on the knowledge that already existed in the firm and the knowledge that was recently added.
2.3.4 Exploitation
Firms are, of course, not fully dependent on the capability of the gate-‐keepers, as the communication within the firm also takes on an important role, especially in exploitation. (Cohen & Levinthal, 1990). The actual exploitation of new knowledge is achieved through routines, such as the creation of goods and processes, in other words to create competencies (Zahra & George, 2002). The speed and ease whereby information is diffused among the company is a key factor in how well a firm is able to commercialize its newly acquired information, which can be improved by the introduction of cross-‐functional interfaces (Cohen & Levinthal, 1990).
information into the firm and the ongoing focus is also on spreading the new information through the firm. Lane (2006) describes the pipeline approach of Zahra & George (2002) as having a greater emphasis on exploitation, as it efficiently leads the new knowledge to the point where the knowledge is actually being applied. In his paper, Lane (2006), defines the construct of absorptive capacity as follows: “Absorptive capacity is a firm’s ability to utilize externally held knowledge through three sequential processes: (1) recognizing and understanding potentially valuable new knowledge outside the firm through exploratory learning, (2) assimilating valuable new knowledge through transformative learning, and (3) using the assimilated knowledge to create new knowledge and commercial outputs through exploitative learning”.
However, the fact that a distinction in absorptive capacity is made by Zahra & George (2002) into two subsets; potential absorptive capacity (hereafter referred to as: PACAP) and realized absorptive capacity (hereafter referred to as: RACAP), indicates that they do focus on the exploratory learning performance, as well as the exploitative learning performance. Jansen, van de Bosch & Volberda (2005) support the dimensions of Zahra & George and confirm that firms that focus on acquisition and assimilation of new knowledge can update their knowledge base, but will not reap the benefits if the focus on exploitation lacks. Firms that, on the other hand, focus on the exploitation of knowledge can overlook changes that take place in the environment (Jansen, van de Bosch & Volberda, 2005).
Table 1 -‐ Dimensions of ACAP
2.4 PACAP and RACAP
2.4.1 Potential Absorptive Capacity
PACAP consists of acquiring and assimilating new knowledge. The extent to which that can be done depends on how receptive the firm is to the new information (Lane & Lubatkin, 1998). Cohen & Levinthal (1990) emphasize the fact that firms should have some prior related knowledge to be able to efficiently internalize new knowledge, this is due to the human mind which is better able to store information that can be associated with pre-‐ existing information. This degree in overlap of is referred to by Zahra & George (2002) as complementarity: “Knowledge complementarity is the extent to which knowledge is related to and at the same time different from the knowledge of contacts in their information networks”. This indicates that cognitive distance should be present, but a basic level of common knowledge increases the chance of successfully internalizing external knowledge. However firms that focus only on renewing the knowledge stock might run into financial issues, as the costs of acquisition cannot be compensated for if the innovation is not exploited (Zahra & George, 2002). Fosfuri & Tribó (2006) confirm the essential role that PACAP plays in the innovation process. They found that firms with high PACAP obtain larger shares from total sales from their innovative products.
2.4.2 Realized Absorptive Capacity
The combination of transformation and exploitation capabilities forms RACAP and reflects how well a firm is able to leverage the newly acquired knowledge (Zahra & George, 2002). Firms that focus merely on transforming and exploiting new knowledge can expect short-‐ term rents, but fall short in the long run, as they cannot keep up with developing technology.
2.5 Cognitive distance
The variety that exists between the interpretations of the knowledge-‐based resources is defined as cognitive distance and depends on orientation toward exploitation or exploration (Nooteboom et al, 2007; Turner & Lourenço, 2011). If a firm focuses on exploration the cognitive distance should be larger, than for a firm focused on exploitation. Cognitive distance between firms can be limited by adopting a wide cognitive focus, which covers the competence side and the governance side (Nooteboom, 2007; Presutti et al 2011).
2.5.1 Competence side
(Nooteboom, 2007). In other words, when a firm links pre-‐existing knowledge to new knowledge provided by the other firm the cognitive distance decreases. Thus the higher the complementarity, the easier it is to link the knowledge, which leads to a smaller cognitive distance. Barile et al (2012) suggest that combination of dynamic capabilities and competencies creates a solution for difficulties in learning trajectories. Dynamic capabilities create breadth for the knowledge base, which Barile et al (2012) refer to as general schemes. Dynamic capabilities consist of processes that create value for the firm by applying resources to new-‐value creating opportunities and are very much path dependent (Eisenhardt & Martin, 2000). In addition; the dynamic capabilities vary with market dynamism. Eisenhardt & Martin (2000) exemplify this by describing the processes in high-‐ velocity markets as simple, experiential and unstable, whereas the processes can be complicated, detailed and reliant on existing knowledge when the industry is stable. This indicates that new-‐to-‐the-‐firm knowledge has to be attracted to be able to compete in a dynamic market. Competencies, however, are applied in the firm when specific knowledge is needed and a more vertical, or deep, approach is applied.
2.5.2 Governance side
However cognitive distance is also influenced by governance, to which Nooteboom (2007) refers as relational norms, values and feelings. It includes the willingness to share knowledge, which is denoted as the willingness to actively communicate the knowledge that one has and consulting with others to learn from them (Lin, 2007). Firms that focus on motivating their employees to collaborate, without restricting autonomy or competition, experience a smaller cognitive distance (Nooteboom, 2007). Barile et al (2012) confirm that when governance experiences a low moral stemming, due to lowered trust between the firms, it will lead firms to reaching the learning goal in a suboptimal way. They emphasize that interaction with partners constitutes as a variety of knowledge, which is influenced by the way firms socially interact as this could lead to different interpretations of information. However Villena et al (2011) highlight the dark side of inter firm relations, as they state that very strong social capital leads to loss of objectivity, opportunistic behavior and poor decision making (McFayden & Cannella, 2004). This is due to collective blindness for issues that can arise in the relationship between the firms.
requisite for having a positive influence on innovative performance. The knowledge-‐based resources contributed to the relationship between the firms by the partners should add value, therefore not be too much alike, but some overlap with the resources from the other firm is required to better internalize the external knowledge. In addition to this it seems acceptable to assume that firms that have relational norms, values and beliefs that are alike, are better able to absorb new knowledge (Presutti et al, 2011). This refers to the level of flexibility, exchange of information and extent to which firms feel responsible for problems that may arise. Floyd & Lane (2000) discuss relational exchange as a strategic renewal; once a partner has supplied his significant other with a service, it will expect the other partner to reciprocate with a service or in another way. Trust is an important issue in relationships, which can be broken down by partners when they behave opportunistically. This indicates that transparency is important in a relationship between firms. Firms committing to the relationship experience less opportunism and have greater similarities in norms, beliefs and priorities (Floyd & Lane, 2000).
2.6 Market turbulence
According to Santos-‐Vijande & Alvarez-‐Gonzalez (2007) market turbulence consists of two dimensions; market dynamism and market uncertainty. Market dynamism is the change that the customer base and the competitors are subject to. Customer preferences are constantly changing, which leads to customers switching away or towards a company (Santos-‐Vijande & Álvarez-‐González, 2007). Subsequently the question rises how firms can prepare to cope with new competitors and products. This is captured by the term market uncertainty. In this research no distinction is made among market turbulence in dynamism and uncertainty, however these terms help to clarify the scope of market turbulence. Milliken (1987) denotes several approaches to market uncertainty in her paper, consisting of the inability of assigning a probability to the likelihood of a future event taking place, ambiguity on causal effects in the market and the inability to oversee the effect of a decision. These forces in the market cannot be influenced by one single firm, as competitive uncertainty results from actions taken by rivals and demand uncertainty revolves around the demand of products from the customer side (Burger et al., 2003; Beckman et al, 2004).
The topics discussed in this literature review were summarized in a table to give the reader a compact overview of the terminology. This overview can be found on the next page in Table
Terminology Description Literature
Knowledge based resources -‐ Abstract resource that creates both understanding of separate inputs and how to coordinate the inputs.
-‐ Difficulty in transferring resources lies in stickiness and codifiability of knowledge
-‐ Galunic & Rodan (1996) & Barney (1995)
-‐ Nonaka (1991) & Von Hippel (1994)
Inter firm learning • Explorative learning • Exploitative learning
-‐ Capability of developing a firms knowledge base through the sharing of knowledge with a partner firm
-‐ Generating new knowledge to appeal to new possibilities. Outcomes are uncertain.
-‐ Refinement of existing knowledge. Focus is more on efficient execution. Outcomes are good on short term.
-‐ Mohr & Sengupta, 2002
-‐ March (1991) & He & Wong (2004)
-‐ March (1991) & He & Wong (2004)
Absorptive capacity • PACAP • RACAP
-‐ The ability to acquire, assimilate, transform and exploit knowledge.
-‐ The extent to which a firm is receptive to new knowledge.
-‐ Ability to leverage the absorbed knowledge.
-‐ Zahra & George (2002)
-‐ Zahra & George (2002) & Lane & Lubatkin (1998)
-‐ Zahra & George (2002)
Cognitive distance • Complementarity • Relational norms
-‐ Variety between interpretation of knowledge based resources.
-‐ Different, but related resources and competencies.
-‐ Willingness to share knowledge and collaborate.
-‐ Nooteboom (2007) & Turner & Lourenco (2011)
-‐ Berger (2015)
-‐ Lin (2007) and Nooteboom (2007)
Market turbulence -‐ The effect of dynamism and
uncertainty in the market. Changes in customer preferences and competitive actions.
-‐ Milliken (1987), Burger et al. (2003), Beckman et al. (2004), Santos-‐Vijande & Alvarez-‐Gonzalez (2007)
Table 2 -‐ Overview of terminology
3. Conceptual model
Based on the knowledge acquired from previous literature a conceptual model (Figure 1) is made. The exogenous variables Complementarity and Relational norms, which together determine Cognitive distance according to Nooteboom (2007), are incorporated to test its effect on PACAP and RACAP. RACAP has been researched thoroughly, however according Zahra & George (2002) PACAP has not received as much attention. They state that the underexposure of PACAP is a loss, since PACAP can lead to companies obtaining a competitive advantage in dynamic industries. Fosfuri & Tribó (2006) confirm the possibility for a high potential absorptive capacity to lead to a competitive advantage. They describe the contribution of PACAP as crucial in the innovation process, as firms with higher levels of such capabilities show better financial results derived from their innovations. This leads to the relevance of the conceptual model as proposed in this research.
The conceptual model can be separated into two constructs in which PACAP and RACAP take a dual role. On the left side of PACAP and RACAP an exogenous construct is formed as this latent construct has no structural path relations pointing at it. On the right side an endogenous construct shows the influence of other latent variables within the model (Hair et al. 2011).
Cognitive distance as described by Nooteboom (2007) is said to be related to innovation performance through an inverted U-‐shape (Figure 2, Nooteboom). The greater the distance between the resources of the firm, the more the firms can learn from one another, which should lead to higher innovative performance. However if the distance becomes too large and the knowledge bases do not have sufficient overlap anymore, the innovation performance decreases. Figure 2 gives a graphic representation of the expected optimal cognitive distance when two firms share knowledge.
The curved line ‘learning’ is a result of the linear ‘absorptive capacity’ and ‘novelty value’ (Cohen & Levinthal, 1990). When the cognitive distance increases the absorptive capacity decreases, wheareas the novelty value increases. The novelty value is the degree to which the knowledge is new to the firm, for which the increase is logical as a greater cognitive distance indicates less overlap of present knowledge in the firms, therefore more unknown knowledge is offered by the other firm (Nooteboom et al, 2007).
Potential absorptive capacity consists of acquiring and assimilating new knowledge. The degree to which a firm is receptive, determines its potential to absorb external knowledge (Lane & Lubatkin, 1998). Receptivity comes with a broad knowledge base, as it is then easier to place the new knowledge in the framework of knowledge that already exists. Therefore firms with high potential absorptive capacity will benefit from an increasing cognitive distance. This reasoning is in line with the paper by Nooteboom (2007) as he denotes the expectation that the positive effect of cognitive distance is larger for innovations geared towards exploration, than geared towards exploitation. Firms that focus on exploration need a greater potential absorptive capacity as this is aimed at the search for new knowledge and focused on acquiring it. However also to the receptiveness of a firm a limit will occur, which indicates that there will be a tipping point at which the cognitive distance is too large to comprehend the new information. Nooteboom (2007) makes a distinction between the complementarity of resources and governance, which together is defined as cognitive distance.
Respondents were asked to answer questions related to complementarity on a 7-‐point Likert scale, which translates to responses denoting a 7 -‐ “Strongly agree” as the informants
experiencing the knowledge of both firms as very much complementary, which is favourable. For informants who responded with a 1 -‐ “Strongly disagree” two possible underlying issues can be denoted; the complementarity between resources is too small, so knowledge bases show too much overlap, thus not enough new knowledge is available to the partner firm. Or the resources are too far apart, which leads to firms not being able to properly relate the new knowledge to their own knowledge base. Since it not possible to differentiate among these two outcomes using a 7-‐point Likert scale, which was pre-‐ determined for this research, only the linear relationship is relevant.
With regard to relational norms, values and beliefs, affiliaton between the two firms is mostly important for PACAP. PACAP, as described by Cepeda-‐Carrion et al. (2012) places more emphasis on “personal internal processes such as reflection, intuition and interpretation, whereas RACAP reflects the efficiency of leveraging externally absorbed knowledge”. This indicates that firms highly focused on PACAP could reap more benefits of properly aligned relational norms and therefore the U-‐shape is expected to be more pronounced. The expectation is that the relations between relational norms and PACAP/RACAP are positive, but decrease after a certain point. The critical point is when collective blindness takes place, often in a mature stage of the relationship. Buyer and supplier think alike and are less preoccupied with critically viewing what course of action to take and reviewing the alternatives (Villena et al., 2011). Turner (2010) underscores that the degree of automaticity that is accompanied with collective blindness leads to a less flexible and dynamically adaptable firm. This leads to the first four hypotheses;
H1: Complementarity of resources between firms and potential absorptive capacity are positively related.
H2: Complementarity of resources between firms and realized absorptive capacity are positively related.
H3: The relationship between relational norms and potential absorptive capacity is an inverted-‐U shape relationship, which is more pronounced than for realized absorptive
H4: The relationship between relational norms and realized absorptive capacity is an inverted-‐U shape relationship.
Realized absorptive capacity consists of transforming and exploiting new knowledge and thereby leveraging the absorbed knowledge. The new knowledge should be internalized efficiently, so a firm does not reap benefits from the cognitive distance becoming larger. This would make the process of internalizing more difficult. As stated in the paper of Zahra & George (2002) realized absorptive capacity is a function of the exploitative capabilities of a firm. Moreover the potential absorptive capcity is coupled to the explorative capabilities. Therefore it is expected that both these relationships will be positive and significant.
H5: The potential absorptive capacity is positively related to a firms’ explorative learning performance.
H6: The realized absorptive capacity is positively related to a firms’ exploitative learning performance.
