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Sustainable Growth Through Strategic Innovation

Driving Congruence in Capabilities

Mitsuru Kodama

From detailed reviews of existing dynamic capabilities, this book presents a theoretical model of a strategic innovation system as a corporate system capability to enable a large company to achieve strategic innovation. The book includes in-depth case studies to illustrate the importance of strategic innovation capabilities.
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Chapter 9: Strategic innovation through sustainable capabilities congruence

Driving Congruence in Capabilities

Mitsuru Kodama

Through the concept of capabilities congruence presented in the theoretical section in 9.1, and case analyses presented in the case research section in 9.2, this chapter presents new theoretical propositions and implications.

First, as implications related to the issues of the first points, the chapter deepens the discussion from the Capabilities Map perspective in contrast to Helfat and Winter (2011), who assert that it is impossible to draw clear boundaries between the two types of capabilities, that of dynamic capabilities (DC) and ordinary capabilities (OC).

Second, the chapter presents a model of the corporate system for sustainable capabilities congruence and sustainable growth enabled by the demonstration of continuous strategic innovation capabilities. Also discussed in Chapter 3, there is a necessity for practitioners to intentionally change business elements of capabilities of strategy, organizations, technologies, operations and leadership in corporate systems, to bring congruence to the boundaries between these capabilities so that corporations can adapt to changing environments (or ecosystems) (creating and executing environment adaption), or actively act on the environments (or ecosystems) to create new environments (creating and executing environment creation strategies).

This means that both the capabilities congruence between corporate systems and markets (ecosystems) (dynamic external congruence) (Insight-1) and capabilities congruence between capabilities in corporate systems (congruence between subsystems) (dynamic internal congruence) (Insight-2) are required. The functions that achieve capabilities congruence both in and outside of companies are strategic innovation capabilities brought about by asset orchestration through DC. Hence, this chapter discusses the “sustainable strategic innovation model” that achieves “external and internal congruence in capabilities” that lead to sustainable strategic innovation.

Third, the chapter presents new propositions on the boundaries vision of practitioners, which are also a cognitive capability as intuition to uncover the best intangible assets (and co-specialized assets). The chapter offers new propositions on four specific factors as elements of micro strategy practiced through the demonstration of boundaries vision to achieve optimal asset orchestration processes.

9.1  CLARIFYING THE BLURRY LINE BETWEEN DYNAMIC CAPABILITIES AND ORDINARY CAPABILITIES

Helfat and Winter (2011, p. 1245) assert that it is impossible to draw clear boundaries between the two types of capabilities, that of DC and OC. They reason that: (1) change is always occurring to at least some extent; (2) we cannot distinguish dynamic from operational (ordinary) capabilities based on whether they support what is perceived as radical versus non-radical change, or new versus existing businesses; and (3) some capabilities can be used for both operational (ordinary) and dynamic purposes.

In relation to this, Helfat and Winter (2011, p. 1245) mention “Heraclitus” and “Ecclesiastes,” as follows:

Nothing ever stays exactly the same, so “one does not step into the same river twice” (Heraclitus). Yet we often say that “there is nothing new under the sun” (Ecclesiastes). As Birnholtz, Cohen, and Hoch (2007: 316) put it, this is the “paradox of the (n)ever-changing world.” If everything is changing all the time, what then is the basis of the impression that some things do not change at all? Part of the answer to this conundrum lies in one’s perspective. If you examine small details close in, you see much more change than if you attend to large phenomena or high-level descriptions, or perceive from afar.

This is a classification of changing nature of capabilities in business organizations from a perspective on how people view things, and is described by the Capabilities Map so far discussed. The Capabilities Map clearly positions the weight to which DC and OC function in terms of the degrees of uncertainty and the speed of change inside and outside of the corporate organization which corporate organizations and the practitioners involved in them sense and recognize. Nevertheless, as Helfat and Winter (2011, p. 1245) identify grounds for ambiguity of the boundaries between DC and OC, in this section the author would like to discuss the nature of “dual-purpose and multiple-variant capabilities” that they identify from the perspective of the Capabilities Map.

9.1.1  Dual-purpose and Multiple-variant Capabilities

Helfat and Winter (2011) assert that some types of capabilities entail using both operational capabilities (or OC) and DC, further complicating the issue. There are capabilities with multiple variables (some operationaloriented, some dynamic-oriented), and capabilities that simultaneously satisfy both operational and dynamic objectives. In these cases, it is certainly difficult to draw clear boundaries between operational and DC as asserted by Helfat and Winter (2011, p.1248). Below is a discussion on “dual-purpose capabilities” and “multiple-variant capabilities” from the perspective of the Capabilities Map.

9.1.2  Dual-purpose Capabilities

Helfat and Winter (2011, p.1248) discuss capabilities providing “market access” in the cases of P&G and Microsoft. “Market-access capability” is the capability required for distribution, marketing and sales, and so on. In the case of P&G, brand development for new products is done through DC, while at the same time, established brands are managed through OC. Moreover, brand managers rely on OC in common corporate routines and processes to promote sales of both the old and the new, which means brand management is a capability with both DC and OC objectives. On the other hand, Microsoft formed a new ecosystem by establishing a new market through positive feedback formed using network externalities to expand sales of its new browser by demonstrating DC. At the same time, the company’s OC elements with their “market-access capabilities” played the role of driving sales of the new-generation browser while maintaining sales of the existing browser, thus giving Microsoft a long-term competitive advantage.

With this market-access capability, in the processes in Domains I II III, brand managers simultaneously execute sales strategies in Domain III with existing OC sales routines for new product brands born through the demonstration of DC, and at the same time, execute sales strategies with existing OC in Domain III for the previous generation, and in Domain IV for several earlier generations of existing brand product lineups. Hence, “dual-purpose capabilities,” or twin-objective market-access capabilities, are equivalent to the simultaneous demonstration of DC and OC in Domain III and OC in Domain IV.

9.1.3  Integrated Capabilities: Multiple-variant Capabilities

Helfat and Winter (2011, p.1248) assert that integrated capabilities can serve an operational purpose, for example by facilitating shared activities that produce economies of scope across stages of production or product lines. Integrated capabilities that make sharing activities simpler entail R&D using DC through the Domain I II III processes to develop new technical or production platforms and put them into practical use, while at the same time in Domain III, business divisions demonstrate OC to efficiently upgrade product lines and engage in production activities, or operational management, with new platforms such as these.

The execution of these integrated capabilities simultaneously achieves the development of new platforms by demonstrating DC mainly in R&D departments through Domains I II III processes, and operational efficiency through the demonstration of OC in development, production and sales divisions, and so on in Domain III using the results of the development. Integrated capabilities have different weights on DC and OC (some directed to dynamics, some directed to operations), and in the time frame of Domains I II III processes, enable communications and collaboration spanning organizations units across entire companies from R&D divisions through to production and sales departments.

In addition, as a different type of integrated capabilities, Helfat and Winter (2011, p.1248) assert that “Other types of integrative capabilities can make change possible, such as through the coordination of design and manufacture in new product introduction” (Iansiti and Clark, 1994, p.557). Specifically, this is equivalent to design and develop elemental technologies to develop new products or execute commercialization processes using new production technologies by different organizational systems (cross-functional teams (CFT), R&D departments, and so on) from existing organizations through the demonstration of DC in the processes of Domains I II III. Thus, development design and production engage in close coordination to solve numerous problems and technical challenges.

In achieving new products, to develop elemental technologies based in basic or applied research, design and development of new products using the results of elemental technology development, and put production technology processes into practice in the processes of Domains I II, R&D and related organizations must face many difficulties and overcome the so-called “valley of death.” As DC are demonstrated in the processes of Domains I II – many prototypes are developed and much commercialization testing done, and as R&D and related divisions overcome these hurdles, uncertainties of R&D projects success reduce, and commercialization in Domain III becomes closer. In the commercialization stage in Domain III, existing routines of operations management come into focus, OC are demonstrated at the same time as new products are introduced followed by product upgrades and improvements through the demonstration of DC and OC. In this way, in processes in Domains I, II and III, integrated capabilities can be both dynamic and operational depending on the types of capabilities used in each domain and their purpose.

Helfat and Winter (2011, p.1248) also argue that an integrative capability also may serve a dual purpose, such as its use in ambidexterity to manage both new and existing businesses (Tushman and O’Reilly, 1997). This is not just expanding sales with upgrades to existing competitive products in Domain III, or maintaining business with long sellers in Domain IV, but means also managing new business development with the shift from Domain III and/or Domain IV to Domain I. For this reason, as identified by O’Reilly and Tushman (2008), the ambidexterity is partially reliant on the DC of top management who perform the integration of new and mature businesses (Adner and Helfat, 2003). The important perspective here, as identified by Helfat and Winter (2011, p.1248), is that some types of capabilities enable ambidexterity (for example, the DC of top management) – the DC of managers can contribute to organizational level integrated capabilities in ambidexterity.

As described above, the concept of “dual-purpose and multiple-variant capabilities” can be explained from the perspective of the Capabilities Map presented in this book. The Capabilities Map can clearly position the weight to which DC and OC function in terms of uncertainty and the speed of change inside and outside of the corporate organization, and can clarify the intensity of ambiguous DC and OC boundaries.

9.2  CAPABILITIES CONGRUENCE INSIDE AND OUTSIDE OF THE CORPORATION THROUGH DYNAMIC STRATEGIC MANAGEMENT

As discussed in Chapter 2, in the view of strategic management as a dynamic process, corporate systems (management factors in a company such as strategies, organizations, technologies, operations and leadership) must change dynamically to adapt to dynamically changing environments surrounding corporations (for example markets, technologies, competition and cooperation, structures). The borders or corporate boundaries between environments and corporate systems define the relationships with environments and company business models. Changes in environments bring about changes in corporate boundaries and simultaneously affect individual elements of management in corporate systems. Conversely, changes to the individual management elements in corporate systems (either passive or active) bring about changes to the corporate boundaries of a company, and in turn also affect the environment.

Helfat et al. (2007) argue that in the activities of coordination and resource allocations by business persons, markets (or environments, ecosystems) form corporations, while in the same manner corporations form markets (or environments, ecosystems), and hence, there is a co-evolutionary relationship between corporations and markets (see Figure 3.1). Thus, good asset orchestration through technical fitting by business persons enables a company to create favorable external environments, which results in raising “evolutionary fitness” (Helfat et al., 2007).

Put differently, there is a necessity for business people to intentionally change business elements related to capabilities of strategy, organizations, technologies, operations and leadership in corporate systems, to bring congruence to the boundaries between these business elements so that corporations can adapt to changing environments (create and execute environment adaptive strategies), or actively create new environments (create and execute environment creation strategies). This means that both the capabilities congruence between corporate systems and markets (or ecosystems) (dynamic external congruence) and capabilities congruence between business elements in corporate systems (dynamic internal congruence, or congruence between subsystems) are required. The function that achieves capabilities congruence both within and outside of companies is DC (see Figure 3.1).

Good organizational capabilities and so forth form diverse DC, however, even if they are maintained, companies must consider the possibility of losing advantage when the environment changes if their capabilities become stable routines or patterns. In other words, as discussed in Chapter 2, companies have to unceasingly renew their resource bases by integration, alignment and realignment of their resources (capabilities) to change and reconfigure the capabilities in the corporate system ((1) strategy, (2) organizational, (3) technology, (4) operational and (5) leadership capabilities) through the demonstration of DC (sensing, seizing and transforming), in step with changes in the environment.

Regarding processes of change in environments and corporate systems, the important perspectives on executing sustainable dynamic strategic management are how practitioners sense and recognize changes in boundaries between environments and corporate systems, and changes in boundaries between individual business elements in corporate systems, and how they bring congruence to these boundaries. In rapidly changing environments, leading business practitioners need to execute processes of change in strategic management to achieve the aforementioned environment adaptive and environment creation strategies. Hence, by demonstrating DC (sensing, seizing and transforming), business practitioners have to dynamically bring congruence to the boundaries between environments and corporate systems, and bring congruence to the boundaries within corporate systems.

For a company to develop and grow sustainably, it’s crucial to create new products, services and business models by practitioners demonstrating DC to bring about these processes (either gradual or rapid) of changing strategic management over time. Here, the concept and execution of capabilities congruence is pivotal (see Figure 3.2). Thus, observation and analysis focusing on the practical processes of business practitioners is required to understand the mechanisms of managing boundaries congruence (called “boundaries management”). As observed and analyzed in the case studies presented, this is specifically the process of bridging knowledge boundaries by forming human networks (in both real space and virtual space using ICT) across the boundaries of organizations and corporations, in addition to the activities of business practitioners in their formal organizations, both inside and outside of the company. Human networks are informal organizational forms such as the “strategic communities (SC)” mentioned in Chapter 2. Boundaries congruence comes about through business practitioners forming human networks, setting down and executing strategies through these practical processes. In dynamically changing environments, the way that business practitioners bring congruence to environments and business actions, and create and execute strategy on a wide range of knowledge boundaries inside and outside of corporations in dynamically changing environments is the essence of dynamic strategic management.

9.3  CONSTRUCTING A SUSTAINABLE STRATEGIC INNOVATION MODEL THROUGH DYNAMIC STRATEGIC MANAGEMENT

The case studies presented have placed importance on building business ecosystems through dynamic strategy management in high-tech companies in the ICT field such as Apple, Cisco, Fujifilm, NTT DOCOMO, SoftBank, Qualcomm and TSMC. In this section, the author would like to present a concept of a sustainable strategic innovation model as a factor of building a sustainable business ecosystem. In leader and follower corporations that play the central roles in the creation, development and growth of business ecosystems, as shown in Figure 3.1 in Chapter 3, dynamic congruence between the environment (the ecosystem) and corporate systems, and dynamic congruence with internalities of corporate systems are required.

Companies must constantly strengthen their strategic positions by actively changing their corporate governance and corporate boundaries in changing environments (or in environments that they themselves have created) (Kodama, 2009a). Research to date on corporate boundaries describes corporate governance structures and corporate boundaries decision-making as dependent on various factors in various perspectives such as transaction costs, capabilities, competences and identities. Thus, in building value chains as strategic objectives, decision-making about what type of business activity should be carried out within a company, or what type of resources should be accessed externally through agreements with the market are elements of corporate strategy that are important not only for large corporations but for ventures also (e.g., Pisano, 1991; Kodama, 2009a).

Santos and Eisenhardt (2005) describe four factors (efficiency, power, competence and identity) that determine corporate boundaries. In corporate activities, these four factors, those of cost (efficiency), autonomy (power), growth (competence) and consistency (identity) are basic business issues that managers must question, and are serious issues that determine corporate boundaries. Particularly, in reducing costs in recent years, determining corporate boundaries by strategic outsourcing has become even more prevalent as a way of making corporate activity more efficient. Also, the keiretsu networks typical of the auto industry, and rooted in long-term trust with contractor companies promote influence through power in corporate activities as well as autonomy for subcontractor companies.

In addition, the following can be said from research implications regarding competence identified by Santos and Eisenhardt (2005): In determining these corporate boundaries, new boundaries conception through the creativity views centered on leader companies drive self-creation for the creation of new business and expansion of business territory, and competitiveness (creative abilities), which ties in with the achievements of strategies for corporate creativity over the long term. Determination of these corporate (organizational) boundaries is an important business element to define the boundaries between the company (organization) and the environment to create, develop and grow new business ecosystems (Kodama, 2009a).

Furthermore the smartphone, mobile phone application, contents, and game (for example, Apple, Google, Microsoft, Amazon, Sony, Nintendo, and so on) and semiconductor production fabless (for example, Qualcomm) and foundry (for example, TSMC) business models are characterized by the creation of new environments as business ecosystems through co-evolution processes with stakeholders, which has massive impacts on the boundaries between many businesses and industries (e.g., Kodama, 2011). For all of these industries and stakeholders, the new boundary conception of the “dialectic view” centered on leader companies and main follower companies combines competition and cooperation (synergy of strategies), and through the formation of business communities such as SC (construction of community systems) brings about strategic innovation.

In executing corporate strategy, the important issue is how to consider consistency between the corporation and the environment in this way, dynamically change corporate boundaries and apply them to the ecosystem environments that have already been created (or create new ecosystem environments). In other words, this is the importance of dynamic consistency between environments (ecosystems) and corporate systems. Accordingly, companies have to define the strategic objectives of their sustainably competitive products, services and business models and optimally design their vertical boundaries (value chains to achieve the strategic objectives they defined) and horizontal boundaries (expansion and diversification of business domains) to achieve the strategic objectives they defined. To design corporate boundaries that are adapted environments – or ecosystems – it is necessary to optimize the design of the corporate system consisting of the aforementioned business elements of strategies, organizations, technologies, operations and leadership.

To optimize corporate systems, partial and overall optimization of each business element (strategies, organizations, technologies, operations and leadership) that makes up the system adapted to the environment or ecosystem (optimization of each business element such as strategy, organizations, technologies, operations and leadership in HQ, each division and each functional organization) must be carried out. Optimization of a corporate system as an organic system or congruence with ecosystems or environments in this way as “systems thinking” requires congruence in corporate systems. In other words, dynamic congruence between individual business elements in corporate systems is required (see Figure 3.2 in Chapter 3).

Achieving a new business model as a new ecosystem aiming for the concept of architecture thinking in a corporate system consisting of these individual business elements entails achieving an optimized sustainable strategic innovation model that includes all stakeholders. Corporate system architecture means a uniform structure between concepts in business, which thus represents a complex structure involving a wide range of business activities, such as relationships with stakeholders, products, services, organizations, business processes and ICT, which are objects of corporate strategic activities (the form of relationships and interdependencies between elements of business activities). “Architecture” is also a comprehensive concept that simultaneously considers congruence with environmental changes and congruence of business elements both in and out of corporate systems, and dynamic congruence through time.

Thus, companies must create a sustainable strategic innovation model as corporate systems (business elements in a company such as strategies, organizations, technologies, operations and leadership) adapted to the dynamically changing environments surrounding corporations including the ecosystems of leader companies and so on (for example, markets, technologies, competition and cooperation, structures). The boundaries or corporate boundaries between environments and corporate systems define the relationships with ecosystems and overall environments and company business models.

Changes in entire environments (and ecosystems) bring about changes in corporate boundaries and simultaneously affect individual business elements in corporate systems. Conversely, dynamic changes to the individual business elements in corporate systems bring about changes to the corporate boundaries of a company, and in turn also affect entire environments (ecosystems). The aforementioned dynamic strategic management entails not only adapting to environmental change (or ecosystem change), or developing appropriate strategies for the future to create new environments (or new ecosystems), but also optimizing the business elements that make up a sustainable strategic innovation model and executing optimization of entire corporate systems.

As illustrated by Figure 3.2, the sustainable strategic model consists of the business elements of strategy, organizations, technologies, operations and leadership. Hence, there has to be suitable congruence between these business elements to bring about congruence with environments, including ecosystems. Thus, in the view of the sustainable strategic innovation model as a dynamic process, both practitioners and academics must focus on dynamic changes in corporate systems (business elements in a company such as strategies, organizations, technologies, operations and leadership) adapted to dynamically changing environments surrounding corporations (for example markets, technologies, competition and cooperation, structures).

The aforementioned boundaries or corporate boundaries between environments and corporate systems define the relationships with environments and the form of company business models and ecosystems. Changes in environments (and ecosystems) bring about changes in corporate boundaries and simultaneously affect individual business elements in corporate systems. Conversely, changes to the individual business elements in corporate systems (either passive or active) bring about changes to the corporate boundaries of a company, and in turn also affect the environment (and ecosystems).

There is a necessity for companies to intentionally change business elements related to capabilities of strategy, organizations, technologies, operations and leadership in corporate systems, to bring congruence to the boundaries between these business elements so that companies can adapt to changing environments and ecosystems (creating and executing environment adaptive strategies), or actively create new environments or ecosystems (creating and executing environment creation strategies). The author calls the capabilities of companies (or organizations) to set down and execute these environment adaptive or environment creation strategies “adaption dynamic capability” or “innovation dynamic capability” respectively, as they are similar to the existing research described below (Dixon et al., 2014).

9.3.1  The Dynamic Capabilities Cycle by Dixon et al. (2014)

Regarding short- and long-term strategy and organizational reform, Dixon et al. present a theoretical framework of the “dynamic capabilities cycle” derived from an in-depth longitudinal case study on a Russian oil company. Conceptually, they cite two capabilities demonstrated by a company in processes deployed over the short and long terms. Here, the first capability is the ability of a company to regularly polish its extant knowledge (operational capabilities, and so on) to respond to environmental changes, and engage in “adaption dynamic capabilities” as exploitation activities to temporarily gain a short-term competitive edge. This corresponds to “DC and OC” demonstration in Domain III described by the Capabilities Map in this book. The second capability is the ability for “innovation dynamic capabilities” – exploration activities for a company to acquire long-term sustainable competitiveness through unique creative ideas and action. This corresponds to “DC” demonstration in Domain I and II described by the Capabilities Map in this book (see Figure 9.1).

Dixon et al. (2014) named these patterns of execution of strategy a “dynamic capabilities cycle” in which leading companies cycle these two different capabilities through time (both asynchronously and synchronously) (see Figure 9.2). In other words, the dynamic capabilities cycle entails DC theory for dynamic resources reconfiguration, divestment and integration to respond to changing environments (Teece et al., 1997). This theory is also a framework that considers capabilities for the achievement of innovation through new knowledge creation processes (Nonaka and Takeuchi, 1995) through exploration (March, 1991) and path creation (e.g., Kodama, 2007b). At the same time, this means that capabilities of companies to achieve the creation, development and growth of an ecosystem require “dynamic capability cycle” factors through these “adaption dynamic capabilities (exploitation)” and “innovation dynamic capabilities (exploration)” (see Figure 9.2). Hence, the capabilities of companies (or organizations) to set down and execute the aforementioned environment adaptive or environment creation strategies can be interpreted as the “adaption dynamic capability” or “innovation dynamic capability” respectively.

As shown in Figure 9.1, by integrating the Capabilities Map and strategic innovation capabilities presented in this book and the model of Dixon et al. (2014), in Domains I and II where DC is mainly demonstrated, innovation dynamic capabilities are demonstrated through the execution of environment creation strategies to create new knowledge through exploration (radical innovation). Furthermore, in Domain III where DC and OC are demonstrated mainly for rapid incremental innovation (including Domain IV where OC is demonstrated for slow incremental innovation), adaption dynamic capabilities are demonstrated through the execution of environment adaptive strategies to drive knowledge utilization through exploitation (incremental innovation). Moreover, the main elements of DC, sensing, seizing and transforming, function in these innovation and adaption dynamic capabilities (see Figure 9.1).

Figure 9.1  Strategic innovation capabilities through dynamic strategic management

However, Dixon et al. (2014) do not provide details on how a company demonstrates adaption dynamic capabilities and innovation dynamic capabilities asynchronously or synchronously. Nevertheless, regarding dynamics in strategic innovation capabilities, as shown in Figure 9.1, it’s clear from the Capabilities Map that these adaption dynamic and innovation dynamic capabilities are dynamically interlocked (either asynchronously or synchronously) in the shifting between Domains of Shift A (Domain III/IV Domain I) and Shift B (Domain II Domain III) (see Figure 9.1 and Figure 9.2). Thus, strategic innovation capabilities described in this book integrate adaption and innovation dynamic capabilities, which are connected with the achievement of the spiral innovation loop leading to sustainable growth of the ecosystem.

The companies presented in this book, Apple, Cisco, Fujifilm, NTT DOCOMO, SoftBank, Qualcomm, TSMC and so forth, are companies that have succeeded in creating, developing and growing ecosystems as sustainable innovation through ambidextrous corporate activities (e.g., Ahn et al., 2006; Gibson and Birkinshaw, 2004; Kodama, 2003; He and Wong, 2004), through which they have achieved sustainable strategic innovation by combining “adaption dynamic capability” and “innovation dynamic capability” as strategic innovation capabilities (and achieving strategic innovation loop), as shown in Figure 9.1.

9.3.2  The “Capabilities Lifecycles” by Helfat and Peteraf (2003)

Chapter 2 considered and analyzed the shift of capabilities through each Domain in response to changes in environments surrounding companies (speed, risk and uncertainty) and the dynamics of dynamic organizational forms, from the framework of the “Capabilities Lifecycles” of Helfat and Peteraf (2003). The capability lifecycle articulates general patterns and paths in the evolution of organizational capabilities over time. Thus, the capability lifecycle provides a foundational framework for the dynamic resource-based view of the firm. The capability lifecycle identifies three initial stages of a capability lifecycle – founding, development, maturity – followed by possible branching into six additional stages.

Source: Dixon et al., “Dynamic Capabilities Lifecycles,”, 2014.

Figure 9.2  The “strategic innovation loop” through “strategic innovation capabilities”

Once the capability reaches the maturity stage, or even before then, a variety of events may influence the future evolution of the capability. The capability then may branch into one of at least six additional stages of the capability lifecycle: retirement (death), retrenchment, renewal, replication, redeployment, and recombination. These six stages may follow one another in a variety of possible patterns over time. Some of these branching stages also may take place simultaneously. Importantly, in each branch of the capability lifecycle, historical antecedents in the form of capability evolution prior to branching influence the subsequent evolution of the capability.

These capability lifecycles go through the stages of founding, development and maturity in each of the domains. Hence, from these six additional stages, as a new evolution system of capabilities, renewal, replication, redeployment, and recombination become shifts to subsequent domains, these capabilities lifecycles offer new knowledge on the “dynamic view of capabilities,” a view that describes the evolutionary processes of diverse capabilities in domains and shifting between domains in companies.

In the case of Shift A (Domain IV Domain I) in Figure 9.2, as threats encroached, companies well aware of the dangers and higher-order learning, and strategic collaboration through the formation of informal networks with differing areas of business (in other words, high-quality strategic non-routine activities) lead to the demonstration of strong DC to raise the potential for a shift to Domain I. This is a good example of strategy transformation through capability threats (Helfat and Peteraf, 2003). In addition, as Winter (2000) describes, organizations faced with threats are likely to be motivated to raise the level of their capabilities. When capabilities are renewed, new methods are sought out and developed, and a stage of new progression comes about. In some cases, companies also redeploy their capabilities in markets for different products. Redeployment is not the same as replication of the same products and services in a different regional market, but rather involves targeting markets for different products and services with a strong association. Furthermore, when companies transfer capabilities to different businesses, but ones that have strong linkages to their current business, there are often cases that involve recombining of capabilities with other capabilities instead of replication and redeployment (Helfat and Peteraf, 2003). As discussed in Chapter 6, the success of Fujifilm’s new business development can also be thought of as the result of the processes of renewal, redeployment or recombination successfully functioning through strong DC.

On the other hand, an example of the shift from Domain III Domain I (Shift A (Domain III Domain I) in Figure 9.2 is the case where environmental change is rapid, and competitors are locked in a fight to the death, in which uncovering “capability opportunities” is the idea behind the objective of new radical innovation. As described in Chapter 4, there are many cases of this, the most remarkable in the world being the case of strategy transformation through strong DC with Apple’s radical innovation in its business shift from the PC to the music distribution and smartphone businesses. Apple succeeded in new business by moving from its in-house Mac development to orchestration of the best intangible assets both inside and outside of the company (co-specialized assets). This was the result of strong DC enabling processes of renewal, redeployment, or recombination to function well. The new Nintendo Wii and DS game concepts were also a radical innovation of gaming machines through redeployment to target customers in a completely different customer segment to the Sony PlayStation, a hugely popular product at the time (customers such as the elderly or housewives who had no previous interest in computerized games).

In contrast, the achievements of commercial development in Domain II that have overcome the “valley of death” as selection events move to the establishment of new product value chains with the shift to Domain III for renewal, replication, redeployment, or recombination enabled by the demonstration of new DC (see Figure 9.2 Shift B (Domain II Domain III)). This shift from Domain II to Domain III is also triggered by “capability opportunities.” In Domain III, further improvements and upgrades of new products accelerate renewal processes, and create the potential for “replication/redeployment” to duplicate, transfer or apply the results of commercial development in other business territories. As well as that, the possibilities for new products and services brought about by “recombination” of one’s company’s products or services and those of another through strategic alliances or M&A also increase.

As shown above, the framework of capabilities lifecycles according to Helfat and Peteraf (2003) can be integrated in the spiral strategic innovation loop through strategic innovation capabilities that integrate the adaption and innovation dynamic capabilities (see Figure 9.2).

9.4  THE FRAMEWORK OF THE SUSTAINABLE STRATEGIC INNOVATION MODEL

As shown in the case studies in this book of Apple, Cisco, Fujifilm, NTT DOCOMO, SoftBank, Qualcomm, TSMC and so forth, companies that create, develop and grow ecosystems as sustainable innovation achieved through ambidextrous corporate activities involving adaption and innovation dynamic capabilities, are cases of companies that simultaneously manage different contexts of five individual business elements of the corporate system (strategy, organizations, technologies, operations, leadership) and bring congruence among these internal elements.

As discussed above, regarding processes of change in environments and corporate systems, the important perspectives on executing dynamic strategic management are how practitioners sense and recognize changes in boundaries between environments and corporate systems, and changes in boundaries between individual business elements in corporate systems, and how they bring congruence to these boundaries. In rapidly changing environments, to achieve environment adaptive and environment creation strategies, it is crucial that practitioners execute processes of change in strategic management to bring congruence to the boundaries between corporate systems and the environment, and on the boundaries between the internal parts of the corporate system.

The theoretical framework of the “sustainable strategic innovation model” presented in Figure 9.3 aims to encompass the theories of the “positioning-based view” (e.g., Porter 1980, 1985), the “resource-based view” (e.g., Wernerfelt, 1984; Barney, 1991), the DC and OC of Teece (2007, 2014), the dynamic capabilities cycle of Dixon et al. (2014), and the “Capabilities Lifecycles” of Helfat and Peteraf (2003). For a company to develop and grow sustainably, practitioners must bring about processes to change strategic business (both incremental and radical processes) through time to create new business models. Thus, the sustainable strategic innovation model including the concept of “boundaries congruence” for dynamically integrating internal and external perspectives on corporate boundaries suggests that it can be expanded to strategic theories on business ecosystems that include diverse stakeholders.

Companies actualize these environment adaptive and creation strategies within the corporate system to grow existing business adapted to environmental change and realize new business aimed at creating environments, and so become able to establish a sustainable competitive edge. Figure 9.3 shows a strategy practice process framework for a company to continuously implement both an environment adaptive strategy to grow existing business through knowledge utilization and an environment creation strategy to build new market positions through knowledge creation aimed at achieving future strategic innovations and acquiring new knowledge.

The implementation cycle of the environment adaptive strategy adapts to a situation of environmental change (gradual or sudden progress, or a mixture of the two), and spontaneously synthesizes or separates deliberate strategy through daily commitment and organizational learning (improvement activities for daily tasks), and intentional emergent strategy through sensing, seizing and transforming with regard to strategy aims characterized by high motivation and hurdles. In the implementation cycle of the environment creation strategy, it is important for a company to implement intentional, contingent emergent and entrepreneurial strategies (Mintzberg, 1978) through sensing, seizing and transforming, thus creating its own sudden environmental change through innovative and strategic intent resulting from new emergence. As described below, these two cycles are not independent but interdependent.

The implementational shift from an environment adaptive strategy to a new environment creation strategy (Shift A in Figure 9.3) (Domain III/IV Domain I) comprises action to enter completely new fields (and sometimes industries), and creates new business domains through new technologies emerging in the growth processes of existing businesses. The music distribution and smartphone businesses of Apple described in Chapter 4 and the move into the cosmetics business by Fujifilm described in Chapter 6 are examples of this strategy-making process.

Another example of strategy practice process is the case where the implementation of an environment creation strategy results in the redefining of newly emerging business domains as a company’s core business, and a company achieves a sustainable environment adaptive strategy through committing to and investing new resources in this core business (Shift B in Figure 9.3) (Domain II Domain III). This corresponds to venture companies (or established companies) with special technologies starting up from an environment creation strategy, and multiple rivals later entering the newly emerged markets, the competitive environments of the new markets steadily changing as they grow, and the expanded venture company (already grown to a medium-sized enterprise) (or established companies) changing toward an environment adaptive strategy.

Sony’s game business through its corporate venture (subsidiary) Sony Computer Entertainment (SCE) (Kodama, 2007c), or Japanese Fujitsu’s in-house venture Fanuc involved in the numerical computing market that was spun off from its parent (Kodama and Shibata, 2014a) are also examples of the strategy-making process in Shift B. These corporate venture startup companies built ecosystems as new markets, in which many competitors subsequently participated, hence, to adapt to the new competitive environment, these startup companies strengthened their environment adaptive strategies to become leader corporations in the ecosystem. This is a process which is equivalent to Shift B.

Moreover, in the sustainable growth of a business ecosystem, the renewal stage acting as the trigger creating new business (Shift A in Figure 9.3: Domain III/IV Domain I) becomes a key condition for sustainable co-evolution with each stakeholder. Here, the leader companies within the business ecosystem set out a timely environment creation strategy and promote a shift from an environment creation to an environment adaptive strategy together with the stakeholders. Then the cyclic strategy stream flowing from environment creation strategy to environment adaptive strategy (Shift B in Figure 9.3: Domain II Domain III) and back again (Shift A in Figure 9.3: Domain III/IV Domain I) becomes the motive force behind the growth of a sustainable business ecosystem.

With recent corporate activities, the timespan for the effective functioning of the strategy has shortened while the focus–expand–redefine cycle of strategic activity has accelerated (Zook 2007). Accordingly, companies must pioneer and promote existing business growth and new business domains while implementing a spiral of sustainable strategy practice processes by achieving dynamic congruence of environment change and the corporate system, while skillfully managing environment adaptive and creation strategies.

Execution of these environment adaptive strategy through adaption dynamic capability and environment creation strategy through innovation dynamic capability hinges on congruence inside and outside of the corporate system ((1) strategies, (2) organizations, (3) technologies, (4) operations and (5) leadership). The dynamic capabilities cycles of the strategic activities of corporations in Figure 9.3 that integrate the cycle of adaption dynamic capability and innovation dynamic capability (asynchronously and synchronously) are their strategic innovation capabilities. The SC triad model shown in Fujifilm in Chapter 6 (Figure 6.1) is also an organizational form that enables ambidextrous strategy activities as this adaption dynamic capability and innovation dynamic capability, and promotes boundaries congruence both inside and outside of a company.

Hamel mentions that 21st century management innovation has to enhance both operational efficiency and the strategic aspects of adaptability (Hamel, 2008). This means that companies should sustainably implement the innovation streams of environment adaptive strategy. Hamel also talks about the importance of successively creating daring, rule-breaking innovations, saying “first picture the future, then create that future.” Thus companies should sustainably implement the streams of environment creation strategy. In this way, “strategic innovation capabilities” also include and conceptualize Hamel’s two assertions. Leading cases of “strategic innovation capabilities,” including Apple, Cisco, Fujifilm, NTT DOCOMO, SoftBank, Qualcomm and TSMC also accord with these. These companies deliberately and simultaneously implement incremental innovation through sustainable improvement as an environment adaptive strategy and radical innovation through innovative behavior as an environment creation strategy (see Figure 9.3).

Figure 9.3  The framework of the sustainable strategic innovation model

Present-day business activities are complex, however, and the implementation of “strategic innovation capabilities” poses both a problem and a challenge. As Raynor (2007) points out, the future is uncertain, and it is unclear what strategies will succeed (cases abound where commitment to specific strategies that seemed sure to succeed in benefiting the whole company resulted in very little gain). This is truly a strategic paradox. However outstanding a technology appears to be, the value from the customer’s point of view might be quite different. However, corporate dynamic strategic management with a sustaining strategic innovation model with embedded strategic innovation capabilities leads to the creation, development and growth of sustainable ecosystems.

9.5  ASSETS ORCHESTRATION PROCESSES AND MICRO STRATEGY PROCESSES: SENSING THROUGH BOUNDARIES VISION

In the knowledge economy, diverse human knowledge is the source of valuable products, services and business models that can give a company new competitiveness. Through convergence across different and diverse industries, co-specialized asset orchestration raises the potential to produce new products, services and business models that span wide-ranging boundaries, and value chains as new strategic models. Accordingly, for companies to configure new businesses, it’s necessary to once again recognize the perspective of process-oriented management to create new intangible assets by transcending the organizational boundaries both in and between companies to dynamically share and integrate the intangible assets of people, groups and organizations. Thus, entire strategic processes must be optimized by dynamic assets orchestration on multiple organizational boundaries (which also means knowledge integration), through internal congruence in capabilities of the (1) strategy capabilities, (2) organizational capabilities, (3) technology capabilities, (4) operational capabilities, (5) leadership capabilities that make up the corporate system, and external congruence in capabilities with the environment.

For this, practitioners must use “sensing.” Sensing functions to seek out, filter and analyze business opportunities, and is dependent on the cognitive capabilities of individual practitioners, such as members of leader organizations in management layers. In the process of R&D and selecting new technologies with innovation, the appropriate cognitive capabilities of management layers such as business opportunities are of extreme importance in responding to dynamic external environments.

In recent years, Helfat and Peteraf (2015) have discussed how differences (heterogeneity) in the cognitive capabilities of top manager teams bring about disparities in organizational performance in changing situations. According to their reviews of the theories of cognitive psychology, cognitive science, social psychology, cognitive neuroscience and behavioral decision theory, cognitive capabilities entail important aspects that are specific to certain contexts or areas. It has also been argued in existing research that these aspects can affect heterogeneity in cognitive capabilities (e.g., Ericsson and Lehmann, 1996).

Regarding cognitive capabilities underlying these mental processes, through research into management, Helfat and Peteraf (2015) assert that these cognitive capabilities are important attributes of managers at the top of organizations over many years, and present a number of cases of evidence such as research by Rosenbloom (2000) into NCR, and research by Tripsas and Gavetti (2000) into Polaroid. Furthermore, they also suggest that top managers should simultaneously strengthen “paradoxical cognition” (Smith and Tushman, 2005) to be able to pursue exploration and exploitation (March, 1991), and at the same time, warn that past empirical knowledge may adversely affect, from the many cases of failure caused by unwitting and inappropriate reliance on specialist knowledge of the past when companies search for new technologies and strategies (Miller and Ireland, 2005). As confirmed by existing research into the field of management, heterogeneity in the cognition of top management teams affects the heterogeneity of approaches to strategic change and their outcomes.

Nevertheless, the role of cognitive capabilities of leading practitioners, their intuition, is also significant, and much awareness and inspiration comes from intuition brought about by deep interactions with various stakeholders (customers, business partners, and so on). To demonstrate the cognitive capability of intuition, practitioners must have the capability of boundaries vision (Kodama, 2011; Kodama and Shibata, 2016) to be able to acquire new insights from complex and diverse boundaries. The concept of boundaries vision is a new proposition that entails dissimilar knowledge integration capability – the ability to orchestrate dissimilar intangible assets (knowledge integration), boundaries architecture – the ability to achieve corporate design for new business models by defining new corporate boundaries by integrating dissimilar boundaries, and boundaries innovation – the process of innovation across the boundaries between companies and industries (Kodama, 2009a) and so forth (Kodama, 2011).

In recent years, it has become necessary to engage in open innovation (Chesbrough, 2003) or hybrid innovation (Kodama, 2011) to bring in the best technologies from the outside to expand the breadth of the search for business opportunities through joint research systems between industry, government and academia that transcend the boundaries between corporate organizations, or to grasp customer needs through leading middle management and management layers cooperating with suppliers. In this era of convergence, important managerial considerations include new knowledge about the dynamic strategic processes of configuring new business models with “boundaries architects” using their boundaries vision to draw up grand designs for new boundaries architecture.

Business people and managers have to face these issues in their strategic thinking and actions focusing on wide-ranging boundaries to orchestrate different intangible assets (and co-specialized assets) to bring about innovations. Recently, the best core technologies of the world’s cutting-edge businesses have become disbursed around the globe and are innovated all over the world. Accordingly, going forward in this era of convergence, in which valuable co-specialized assets bring about wealth, management that integrates in open systems multi-perspective intangible assets (assets orchestration) dispersed within and outside of organizations, and with customers, will become increasingly important. Thus, in knowledge economy, to create new products, services and business models, the concept of open innovation is extremely important to develop and accumulate competitive intangible assets in a company, at the same time, to orchestrate the company’s intangible assets (and co-specialized assets) with those of other companies.

In the seizing process, boundaries vision is an extremely important cognitive capability or intuition of practitioners which enables them to uncover the best intangible assets (and co-specialized assets). Moreover, practitioners need to drive the four specific factors (context-specific, person-specific, timing-specific, network-specific) (see Kodama, 2006) to promote capabilities congruence with the environment and practice the asset orchestration process. Apple’s foray into the music distribution and smartphone businesses described in Chapter 4, and Fujifilm’s foray into the cosmetics business described in Chapter 6 are the results of this boundaries vision and these four specific factors.