Chapter 5: Innovation at the Base of the Pyramid
In complex and changing environments, competition increases and the pace of change accelerates. Under these conditions firms need to invest in exploiting existing competencies and exploring new ones (Floyd & Lane, 2000). Cohen and Levinthal (1990: 128) claim that firms increasingly need to be able to recognize the value of new, external information, assimilate it, and apply it to commercial ends, which they refer to as a firm’s absorptive capacity. Absorptive capacity leads to competitive advantage (Cohen & Levinthal, 1990) and increased firm performance (Tsai, 2001). As such, it has become an important antecedent for a firm’s success in dynamic environments. However, it has been frequently argued that firms cannot create sustainable competitive advantage without combining both exploratory and exploitative innovation. Following March (1991), we make a distinction between two forms of innovation: exploration and exploitation. Both types of innovation are important for the viability of a company. Exploitation creates reliability in experience through refinement of knowledge and thus is associated with incremental innovations (Benner & Tushman, 2003; Holmqvist, 2004; Jansen et al., 2006). Exploration results from the search for new organizational routines and the discovery of new approaches to technologies, businesses, processes and products, and therefore is closely associated with radical innovation (March, 1991; He & Wong, 2004). Returns associated with exploitative innovation are certain, closer in time and are likely to generate stable performance.
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