Proposing an innovation-based view of the firm

Theories of the firm are conceptualisations and models of business enterprises, which explain and predict their structures and behaviours (Grant, 1996). ‘As a result, there are many theories of the firm which both compete in offering rival explanations of the same phenomena and complement one another in clarifying these different phenomena’ (Grant, 1996: 109). The movement away from viewing the firm as a ‘black box’ is usually traced to the work of Edith Penrose, who focused on the internal resources of a firm, especially with respect to the management and experience it acquires over time (Sautet, 2000). Penrose, working in the 1950s, argued that the growth of a firm is not just a response to market changes but that it also exhibits an internal developmental process (Penrose, 2009). This paper, while respecting economics scholarship, follows the tradition of Penrose, which was further developed in the strategic management literature (Hoskisson et al., 1999). I will broadly refer to this lens as the managerial view of the firm, incorporating the RBV, the KBV and dynamic capabilities. There is an extensive body of literature on theories of the firm, and a detailed review is beyond the scope of this study. What follows is a brief overview of these incumbent theories to support the argument that they require to be supplemented by an IBV considering the significant changes in the nature of the firm driven by the opening of its boundaries chiefly through advances in ICT.

The RBV has been the subject of much academic debate and no little criticism over the past 20 years. It has become one of the most influential and cited theories in the area of management, and it aims to ‘explain the internal sources of a firm’s sustained competitive advantage (SCA)’ (Kraaijenbrink et al., 2010: 2). The RBV perceives the firm as a unique bundle of idiosyncratic resources and capabilities, where the primary task of management is to maximise value through the optimal deployment of existing resources and capabilities, while developing the firm’s resource base for the future (Barney, 1991). ‘Its central proposition is that if a firm is to achieve a state of SCA, it must acquire and control valuable, rare, inimitable, and non-substitutable (VRIN) resources and capabilities, plus have the organization (O) in place that can absorb and apply them’ (Kraaijenbrink et al., 2010: 3, based on Barney 1991). In an early assessment of the theory, Peteraf (1993) concluded that it had a significant capability to elucidate and integrate research in the area of strategic management. However, in a more recent and comprehensive study, Kraaijenbrink et al. (2010) examined RBV critiques and delineated them into eight categories. They concluded that five of these critiques did not threaten the status of RBV, but three of them raised the following serious questions: VRIN/O is neither necessary nor sufficient for SCA; the value of a resource is too indeterminate to provide for useful theory; and the definition of resource is unworkable (Kraaijenbrink et al., 2010: 6). In a conclusion that supports the work of this IBV study, Peteraf (1993) states that this is an area ripe for research and deserves the concentrated efforts of management scholars.

The KBV of a firm is an outgrowth of the RBV of the firm. The KBV would argue that maximising the value derived from the firm’s resources is derived from superior knowledge. In the KBV, the firm is conceptualised as an institution for integrating knowledge (Grant, 1996). The KBV posits that knowledge is the most strategically important of the firm’s resources. The ability to produce unique or low-cost products and services is due to superior knowledge. With knowledge, firms become more efficient and effective with the use of scarce resources. This view is gaining increasing attention due to the rapid movements towards knowledge-based economies. However, the danger inherent with the concept of organisational knowledge is that the organisational processes through which individuals engage in these activities may be obscured, by their viewing the organisation as an entity that creates, stores and deploys knowledge (Coakes, 2000). The organisational processes that integrate knowledge need explication – in particular, research is necessary to understand where knowledge workers turn to for advice, whether internally or across organisational boundaries, and exactly how they access that advice (Wasko and Faraj, 2005). According to Grant (1996), competitive advantage stems from how effective firms are at integrating the specialised knowledge of their members, and he proposes that this effectiveness depends upon efficiency, the scope, and the flexibility of knowledge integration. Grant (1996) further suggests that organisational capability depends more on the integration mechanism than on the specialist knowledge that employees possess; thus, research should focus on the difficulties of coordinating knowledge among individuals instead of producing cooperation. A major argument of this paper is that an IBV addresses these shortcomings.

Another development of RBV and KBV is the theory of ‘dynamic capabilities’, described by Douma and Schreuder (2008: 207) as ‘the capacity of an organization to purposefully create, extend or modify its resource base’. In their seminal paper on the theory, Teece et al. (1997: 516) define dynamic capability as ‘the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments’. Dynamic capabilities differ from operational capabilities as they are focused on change and, in doing so, alter the resource base of an organisation. Douma and Schreuder (2008: 208) have identified some of the following features of dynamic capabilities: co-specialisation; asset orchestration; tacit knowledge; firm specificity; and isolating mechanisms. However, the following evaluation by Helfat and Peteraf (2009: 92) should be borne in mind: ‘As a field of inquiry, it is still in its infancy; the work remains mostly conceptual and focused on foundational level issues, including the definition of the term’. Now, having presented a brief overview of three influential theories of the firm, I examine literature that links knowledge and innovation.

Theories adhering to the KBV tend to emphasise the ensuing advantages to firms by way of knowledge acquisition and sharing activities. But such an emphasis is deficient. Innovative outcomes can only materialise when knowledge is utilised. In today’s digitally enhanced world, acquiring relevant information can potentially be only a few clicks away. Where once the challenge was accessing and sharing information, the main challenge is now the utilisation of acquired knowledge. Hence, I call for an IBV of the firm where the use of knowledge in the form of innovations is the core performance differentiator. A case in point is the study by Whelan et al. (2011) on why companies fail at open innovation. The companies studied had well-developed formal and informal mechanisms to acquire state-of-the-art knowledge from the outside world. However, what they failed to pay attention to is how that knowledge would reach those people in the firm with the skills to utilise it. Very often, valuable knowledge imported into the firm remained in storage, never to be used.

Leonard (1998) links knowledge to innovation and claims that the successful innovators are organisations that build and manage knowledge effectively. They are the most enthusiastic about pursuing knowledge and the most likely to harness the power of innovation. Leonard illustrates the dimensions of the core capabilities along which all organisations must innovate: physical systems, managerial systems, skills and norms of behaviours. She views organisations as sites of learning and information transfer rather than physical sites or financial entities. The workforce of a forward-looking organisation must be able to process and manipulate knowledge, as well as perform particular skills. Top management should encourage creative chaos among disciplines within the organisation and benchmarking with competitors.

Basadur and Gelade (2006: 45) ‘argue that ‘current concepts of knowledge management and organisational learning are, by themselves, limited in their ability to improve organisational effectiveness’. As a result, they propose a single framework that combines the ‘apprehension of knowledge (understanding) with the creative utilisation of such knowledge’. Previous work by Gordon (1956), cited in their paper, had linked learning and inventing as two parts of a continuous process. In this conceptualisation, learning was regarded as the process of gaining knowledge or understanding, while inventing involved using the knowledge or understanding.

Having briefly traced the development of theories of the firm and linking this development to the innovation debate, I now undertake an important but controversial task: defining innovation arising from a review of the topic.

Many scholars trace the introduction of innovation into the realm of economic and social change, specifically to Joseph Schumpeter’s (1934) seminal work, the ‘Theory of Economic Development’. In this work, he classified innovation into five categories: new products (or goods); new methods of production (or processes); new sources of supply (or half-manufactured goods); the exploitation of new markets; and new ways to organise business. In Schumpeter’s original schema, innovation is accomplished by ‘entrepreneurs’ who developed new combinations of existing resources (Swedberg, 1991). However, in his later works, he came to regard the large corporation as the innovative engine driving the development of leading economies (Lazonick, 2005). Fagerberg (2005) makes the fundamental distinction between invention and innovation, whereby the former is regarded as the ‘first occurrence’, while the latter is the ‘first attempt to carry it out into practice’. This is in line with Van de Ven’s (1986) assertion that ‘an invention or creative idea does not become an innovation until it is implemented or institutionalised’.

Zaltman et al.’s (1973) contingency theory of innovation predicts that the effect of structural variables will be conditional on the two main subdivisions of the innovation process: the initiation stage and the implementation stage. According to these authors, the most important contribution by James Wilson as part of his theoretical work on innovation in the 1960s was the identification of the innovation dilemma, which organisations face during the process of innovation. Wilson (1966) had concluded that it is easier to initiate than implement innovations since organisations can quickly increase capacity to generate new proposals but find it much more difficult to match this capacity in the ratification phase. Slappendel (1996), in her review of innovation from an interactive process perspective, identifies the contribution of Walton (1987), who proposed a framework that emphasised the interaction of individual, organisational and environmental features. Walton acknowledges his debt to the work of Pettigrew (1987), who argued that change should be analysed in terms of the dynamic interplay among context, content and process, with the preferred research approach being one that involved longitudinal case studies.

There is almost universal agreement that innovation is a complex phenomenon to understand and manage (Allen, 2004; Eppinger, 2001; Goffin and Mitchell, 2005; Katz, 2004; OECD, 2005; Poole and Van de Ven, 2000; Rothwell, 1994), while Storey (2004) points out that debate on the very meaning of the term has been controversial and problematical. Table 1 summarises some important contributions to innovation studies described in this section.

Now, I develop a definition of innovation from an analysis of antecedent definitions in the literature. One of the main challenges of a review of innovation is the range of definitions from a wide body of work. In their analysis of the terms ‘innovation’ and ‘innovativeness’ from 21 empirical studies in the new product development (NPD) literature, Garcia et al. (2002) discovered that ‘no less than fifteen constructs and at least 51 distinct scale items’ were used, leading to a great deal of ambiguity. In the course of his work, McInerney (2004) assembled >30 author-centric definitions of innovation from publications since 1960. These were built from previous work by Rahmanseresht (1988) and Zain (1993), with Schumpeter’s earlier definition being added in recognition of its significance in innovation studies. A content analysis of these innovation definitions was carried out by converting the author-centric definitions in the literature into a concept-centric format in order to identify the most common concepts and also ones that may require further attention (Webster and Watson, 2002). Additional dimensions were also added to the concept matrix to facilitate the analysis. The concepts were categorised into whether they are an adjective (e.g. new, radical), a noun (e.g. product, market) or a verb (e.g. implementation, adoption). Another objective was to enable a meta-analysis of the table in order to investigate whether the definitions can contribute to the development of theory, e.g. whether they exhibit parsimony or have any theoretical glue (Whetten, 1989) – concepts that are discussed later in the paper. This analysis showed that there are only two references to ‘people’ and one reference to ‘resources’ in the definitions. This covers the two major areas of ethics: the role of people and resources in the development and implementation of an innovation. The other significant feature is that these two definitions both emanate from the work of Andrew Van de Ven et al. in the 1980s.

In summary, an innovation can be an artefact, idea or practice (Zaltman et al., 1973); it can be an organisation (Schumpeter, 1934) and is capable of being learned (Drucker, 1985). It can also be a computer system (Yin et al., 1977) or an information system (Swanson, 1994). It must be perceived to be new by an individual or unit of adoption (Rogers and Shoemaker, 1971), involves people engaged in transactions with others in an institutionalised context (Van de Ven, 1986), requires the ethical (Costello and Donnellan, 2008) use of resources and knowledge (Angle and Van de Ven, 2000) and is increasingly exercised in an open environment (Chesbrough, 2003, 2006; von Hippel, 2005; von Hippel and von Krogh, 2003). These concepts are now integrated into the following proposed definition for this study.

It is worth pointing out that this definition differs from the Schumpeterian tradition by specifically mentioning the use of both external knowledge and resources. Such a major transformation requires an investigation into why external knowledge and resources have recently had a significant impact on the nature and operation of the firm. Consequently, this article now examines how the open innovation literature informs the management perspective within the firm.

Chesbrough (2003) argues that in many industries, the centralised approach to research and development (R&D), which he terms closed innovation, has become obsolete. He argues that the closed innovation paradigm must be replaced by open innovation, whereby ideas and knowledge from outside the company are adopted in conjunction with internal processes. The factors influencing this change are the mobility of skilled people, the increasing presence of venture capital, the emergent high-tech start-ups and the significant role of university research. The success of companies such as Cisco and Intel has been attributed to their adoption of this new paradigm. In contrast, many believe that the decrease in Xerox’s innovation capacity is due to the company’s reliance on a closed R&D system. Chesbrough argues that embracing external ideas and knowledge will actually multiply the advantage of internal efforts. However, connecting external innovation to internal innovation requires a new business model.

Implementation of the business model can be greatly accelerated by buying and selling intellectual property (IP). However, there always remains the hard work of converting research ideas into products, services and solutions that solve customers’ problems. Interestingly, he states that the presence of manufacturing, distribution and brand are assets that help the firm retain some of the value it creates. Figure 1 shows an innovation funnel adapted to illustrate an open innovation model.

Figure 1

The growing significance of the Open Innovation paradigm (Pullen et al., 2012) has prompted West, Vanhaverbeke and Chesbrough (2006: 288) to propose a research framework with the following classifications: individual, organisational, value network, industry/sector and national institution. In related work, Vanhaverbeke and Cloodt (2006) suggest that emerging forms of value networks must be examined at the level of different nested layers. These diverse layers span the spectrum from the individual to firms-organisations, through Dyads, onto interorganisational networks and, ultimately, reaching to national/regional innovation systems.

In antecedent related research, von Hippel (2005) speaks about the democratisation of innovation, where users of products and services increasingly have the ability to innovate for themselves. This results in a move from manufacturing-centric to user-centric innovation processes. Christensen et al. (2005) note that the old theories of innovation may no longer be relevant to future performance. In their study of the semiconductor industry, they find that Moore’s Law is no longer the dominant paradigm for analysing this sector. Customers are less concerned about performance factors, such as clock speed, and are more focused on new parameters such as convenience and customisation. Furthermore, they contend that new, specialised, non-integrated firms will provide a serious threat to the incumbents. One way in which the semiconductor industry can manage these transitions is to adopt disruptive-innovation and value-migration frameworks. However, it is worth noting that there are some dissenting voices in the context of the rush to a total open innovation model (Birkinshaw et al., 2011), which would suggest that the degree of openness can and should be taken into account. Now, I examine the enormous changes that the revolution in ICT has brought to the firm and its environment.

One of the most fundamental attributes of a concept is that it is clearly communicated and understandable (Dubin, 1976, 1978; Metcalfe, 2004; Weick, 1989). Innovation as a concept is extremely multifaceted and is used in many different ways in the literature. Hence, there was an endeavour to define the meaning of the term innovation for the purpose of this study in the preceding sections. Inconsistency and contradiction evoke emotive descriptions, such as those levelled at, e.g. management information systems research, such as ‘fragmented adhocracy’ (Banville and Landry, 1989) and ‘crucial but confused’ (Checkland and Holwell, 1998).

Behind any good concept or theory, there should be a strong underlying logic and rationale. Whetten (1989) refers to this as a ‘theoretical glue’ that should bind all of the factors together (Conboy, 2009: 330). However, analysis of the term innovation in the preceding text revealed a multitude of underlying constructs. Consequently, providing a definition and essential rationale for the topic of innovation was seen as a fundamental task before progressing to a theory. Additionally, the framework illustrated in Figure 3 shows the theories of the firm ‘bonded’ in a nested Russian doll formation.

Figure 3

A good concept or theory should cumulatively build on existing research (Dubin, 1978), yet this is something that, e.g. management researchers have not done particularly well (Benbasat and Zmud, 1999; Keen, 1980, 1991). Keen (1991) notes that most concepts and areas of concern in research are not as ‘new’ as often claimed and often ‘turn out to have long roots’. The literature review on innovation herein has built the foundation of the paper on research tradition in the field and the call for more theoretical work. For example, Table 1 shows a synopsis of a tradition that developed from the seminal work of Schumpeter in the 1930s.

Authoritative works on concept development usually advocate a parsimonious approach, removing any factors that provide little additional value to our understanding (Whetten, 1989). Similar to Agile research (Conboy 2009: 331), there is also much redundancy and duplication in the innovation literature together with a lot of non-value-added content. A more cohesive approach towards a theory of how innovation influences the SCA of a firm would provide a reference to help avoid duplication of effort in future research.

The range of applications of a concept is a key criterion for judging its quality (Dubin, 1976, 1978; Metcalfe, 2004; Weick, 1989), and so any ‘good’ theory should be applicable in a wide variety of contexts. Theories of the firm, despite criticism and drawbacks, have exhibited a wide range of applicability to the various manifestations of the firm. The ubiquity of innovation as a conceptual framework is applicable to large multinational firms, subsidiaries, and small- and medium-sized enterprises as well as the important emerging not-for-profit sector, which is a recent and vital development in the literature of the firm.

There has been a renewed call for ‘good concepts and theories’ to stimulate research and counteract a perceived ‘ambivalent attitude towards theory’ in the management fields (Markus and Saunders, 2007). Testing out the IBV hypothesis in the field will be a challenge for future work. Neavel-Dickens (1998: 257) states that ‘it will be important to include more practitioner voices in studies of action research’. The initial fieldwork and research that preceded this paper consisted of a 2-year longitudinal study of innovation in a multinational subsidiary. As a result, IBV has implications for decision-makers on the assessment of a firm and its subsidiaries, as it implies that more emphasis should be given to the significance of innovation vis-à-vis the current prominence of purely economic key performance indicators (KPI). Consequently, it will challenge practitioners to develop a more long-term and holistic view of a firm’s contribution. The details of implementing such a perspective are suitable for further work. It is also argued that the method can facilitate the further generation of theory as presented in this study. In this regard, the seminal Minnesota Innovation Research Program (MIRP) concluded that further theoretical development is required to incorporate local and global phenomena ‘at different levels of analysis, such as how individuals relate to project teams, teams to organisations, organisations to a larger industry community’ (Van de Ven et al., 2000: 641). Moreover, Storey (2004), in his review of key articles from >30 years of research, emphasises the growing prevalence of alliances and interorganisational networks, with their increasing importance for innovation. A prominent theme emerging from studies in the area is the subject of social relationships, which includes factors such as ‘persuasion, influence, politics and power’ (p. xxviii). The inclusion of ethics in the theory building and IBV definition was a response to the virtual absence of any reference to this fundamental philosophical topic in the analysis of the innovation definitions in the literature. Engagement of researchers with the work of philosophers such as Lévinas (1998), Davis (1996) and Alasdair MacIntyre (2002) would be a fruitful step in this direction.

The paper is limited in that the approach of abduction involves the conceiving theory and, as such, is open to the criticisms inherent in such an endeavour. More work is required to examine what IBV entails and to provide a more comprehensive explanation of its consequences. However, I consider that this initial paper was required to set out the landscape that needs further exploration.