How are innovative capabilities built and deployed over time? Explain,
providing examples of the ways in which competitive advantage can be
constructed through building capabilities.
Globalization has led to expanded markets for business enterprises. However, the level of competition has increased making it challenging for the organization to exist in the market without developing strategies to gain competitive advantage (Rothaermel, 2015). Innovation is among the important aspects that enable a company to develop superior products and services thus creating a competitive advantage. Innovation capability is developed through the creation of enabling environment for innovation development based on culture development, availing of resources, competencies and use of inter-organization networks to build an innovative organization (Thompson et al., 2013). Innovation is creation of customer values by coming up with new ways of doing things to meet new, undefined or existing market demands in unique ways. Innovation may result in the development of new or more effective merchandise, services, processes, ideas or technologies that are made available to different stakeholders.
Competitive advantage refers to the advantage a company has over other key players in the industry. Competitive advantage leads to the generation of greater sales or more customers compared to the firm’s competitors. A competitive advantage comes from the firm’s cost structure, good customer support, distribution networks, and product offerings among others (Schilke, 2014). It is hard for competitors to neutralize competitive advantage if such advantage is sustainable. Competitive advantage can either be a comparative or differential advantage. Comparative advantage occurs when a firm can produce a product or services at a lower cost as compared to its competitors. In so doing the firm will be able to sell the product at a low price. These way customers will tend to purchase such price thus creating a larger margin on sales.
Innovation is a critical aspect that leads to the creation of sustainable competitive advantages (Johnson et al., 2013). Innovation enables all the stakeholders to see things from a new angle, take risks, seeing the bigger picture and become more flexible. Therefore, management should develop an enabling environment necessary for innovation to take place. Innovation necessitates that organization should address four key innovation capabilities; technology development, operations, management and transaction capabilities. These capabilities enable a firm to achieve what is termed as Schumpeterian profits.
A firm is viewed as a hub for resources and utilized to produce products through the price mechanism. Different firms produce such products and services through different processes. Based on coordination based approach to firm development, a firm is considered to be an agent of planning and coordination of production and transaction process through the administration of a manager (Lew & Sinkovics, 2013). The management key role is to organize and allocate resources to achieve efficiency and growth. On the other hand, capabilities approach to firm development describes things that a firm can do, and how a firm seeks to change and innovation to gain business sustainability. According to Schumpeter, an entrepreneur is a change agent and success of a firm is through utilization of different sources of knowledge used in business enterprises so as to deliver goods and services (As cited Camisón & Monfort-Mir, 2012). These goals are attained by utilizing the firm’s capabilities to develop new products and manufacture them for commercial purposes.
Each organization is built based on technological synthesis that enables a firm to build business relations. An organization depends on technological and business driver to be in a position to produce a good and transact in the market. A technological driver refers to those aspects that enable an organization to develop a new product and their consequent production (Camisón, C., & Villar-López, 2014). The technological driver is dependent upon operations and development capability. Organizations that can develop and sustain these capabilities can gain competitive advantages.
On the other hand, the business driver enables a firm to integrate the different parts of the firm and move the produced goods from the firm to the market for transaction purpose. It is through management capability that a firm can achieve integration of different parts of the company (Kindström et al., 2013). The firm depends on the four innovation capabilities to become innovative and gain competitive advantage.
Development Capability (DC), this type of capability, encompasses of creating a new product, service, or solution to be offered for sale on the market (Alegre et al., 2013). Development capabilities assist in the technological development process and encompass the conscious application of knowledge to solve different problems in the market. Technological capabilities help create, adapt and develop new technologies that give a firm competitive advantage. Examples of technological resources include patents, licenses, knowledge, and skilled manpower among others.
Coming up with new innovative products are key practices a firm should do from time to time to survive in the market. Nevertheless, it is required that a firm turns the technological outcome of innovation into a set of operation so as to produce goods to be sold in the market. All these is attained by means of operations capabilities (OC). Operation capabilities refer to a firm’s ability to come up with products that are of high quality and reliable at a competitive cost (Williamson et al., 2013). Operation capabilities give decisions on production, planning, and control. Some of the aspects of quality include quality, efficiency, cost, delivery, flexibility, and responsibility.
Development capacity area of concern is changing technologies. On the other hand, operation capacity focuses on routines, efficiency, stability and standardization. The aspects of Operation capacity mainly focus on features that are necessary to manufacture a product. Operation capability is very important for generating technical change.
Apart from operation capacity and development capacity, a firm requires a set of skills to enable it to integrate all internal capabilities in an efficient manner. It is through management capability that a firm is able to plan, manage and coordinate business activities to attain efficiency and growth. Management Capability assists a firm to efficiently coordinate and integrate different activities within the organization resulting in economies of scale and scope requisite for a firm to compete in the market. Managerial Capabilities are borne out of human capital, as well as cognitive and social management (Verganti, 2013). Managers are able to develop, integrate and engineer both tangible and intangible resources to gain competitive advantage. Management requires a lot of abilities and leadership skills in order to apply in problem-solving.
Transaction capabilities feature the firm’s set routines, knowledge, and abilities that a company comes up with the aim of reducing marketing cost, logistics, distribution, and trading among others. Transaction cost acts as a bridge between the firm and its external environment (Wang & Wang, 2012). Transaction capability is important for analyzing the market for new opportunities, and changes in order to offer products that satisfy customer needs and expectation.
Transaction capability enables a firm to understand demands for customers and transact at the lowest possible cost. On the same note, the firm will be able to come up with new products and services that are economically feasible.
How innovative capabilities are developed
There are many ways a corporation can create innovative capacity. An organization can either improve on its technological drivers or business drivers to attain the much desired competitive advantage through the creation of innovative goods and services.
Training and development: Organizations create an innovative and dynamic environment by training and talent development of its employees. When employees are hired, they go through rigorous training aimed at imparting the necessary skills for the employee to perform duties efficiently. The management should also identify and retain skilled workers who are innovative and perform their duties exceptionally (Li & Liu, 2014). Training and employee development help to create competencies which are responsible for quite some new goods and services that a firm develops to sell in the market.
Acquisitions: Organizations can also create innovative capability through acquisition. Firms may decide to use acquisition instead of developing innovative capabilities from scratch. Through the acquisition, a company is able to own the rights and all the resources, technology, employees and market position belonging to the acquired company. If the acquired firm is bestowed with processes and values that are a source of competitive advantage, the acquiring firms should not integrate the company into the new parent firm because it may lose these processes and values. Instead, the acquiring firm should rather let the business exist on its own but instead, provide additional information to the acquired firm and to take advantage of the acquired company’s processes and values (Reed et al., 2012). However, if the goal were to acquire the firm’s resources, then it should be integrated with the parent firm. This implies that the acquired employees, products, services, customers, and technology be integrated into the parent’s existing innovative capabilities.
Creating New Capabilities Internally
Firms can also develop new capabilities within the firm’s different units. Firms can develop new capabilities by changing organization processes, look for individuals with new skills. Raise capitals, develop organization brand and licensing the technology to create innovative capabilities and sustained competitive advantage.
However, creating change within the organization may be hard. There are organization boundaries that may hinder the creation of new processes. However, managers should come up with ways to address different challenges and develop new team boundaries that facilitate implementation of new work patterns and new capabilities requisite to transform raw materials into finished products.
Creation of innovation capabilities through Spin-Out process
Organization will be able to create new capabilities by looking at the current trends and adopt new technology in the production (Davenport, 2013). This can be achieved by spawning capabilities within spin-out ventures. Rarely do large firms whose cost structured is developed in such a way to compete in high-end markets work well in the low-end market. Such firms should develop a cost structure that is competitive and profitable. The spin-out operation is necessary when the current size of the new opportunity is small compared to the growth demand of the mainstream firm. The firm should run the old business strategy while looking out for new value-based business processes
Ways in which Competitive Advantage can be constructed through building capabilities
Sustainable competitive advantage is becoming more dynamic because of globalization and increased competition. In the past, competitive advantage was created through strategic positioning, first-order capabilities, production scale and delivery and customer care (Wang & Wang, 2012). These factors are still important today. However, these factors alone are not able to provide sustainable competitive advantage. Thus, things have changed, and organizations are constantly looking for new organizational capabilities that can result in rapid adaptation to new changes. Firms are required to be good at learning how to do new things in a better and innovative manner. Organizations with sustainable competitive advantage are able to act quickly to change. Such organizations engage in Research & Development and have learned how to experiment faster, economically and frequently (Davenport, 2013). Such firms research not only on the production of goods and services but also on strategies, processes and business models.
A good example of an organization that is able to read and act quickly based on signals is Google Company. This company is able to do dynamic research on the changes in the external environment. On the same note, the firm can rapidly act on the information to re-invent its business model and produce information that is necessary to meet customer demands.
Organization capabilities enable a firm to create new and innovative products that give them a competitive advantage over its competitors. For example, Apple Incorporation can constantly develop revolutionary smartphones through innovation and resource capability. Apple Inc. possesses unique resources and human capital and other technological drivers that enable them to develop unique products that suit customer needs. The firm also engages in extensive research and development as well as consumer analysis to spot trends and provide goods that suit customer needs and demands.
Innovation capabilities also enable a firm to produce products at a lower production cost and thus create a competitive advantage (Reed et al., 2012). Innovation capabilities enable a firm to develop new ways of production that are efficient and cost effective. Through innovation capabilities, firms are able to reduce production cost significantly. This way, the firm will able to sell it products and services at a lower cost compared to other competitors and thus able to gain sustainable competitive advantage. Another example of a firm that has gained a sustainable competitive advantage through low pricing is Wal-Mart. Through innovation capabilities, Wal-Mart is able to utilize strong pricing strategy to gain competitive advantage
Similarly, innovation capabilities enable a firm to develop unique processes that cannot be easily imitated by other competitors (Alegre et al., 2013). A good example is Coca-Cola company sustained competitive advantage. Coca-Cola Company can gain a sustained competitive advantage because of the unique formula for creating cola products. All of its competitors are not able to copy or use this formula in creating their products, therefore, giving Coca-Cola a competitive edge over other key players in the drinks and refreshments industry.
Innovation capabilities also enable a firm to create superior database management and data processing capabilities and thus creating sustainable competitive advantage. A good example is Google Inc. The firm possesses superior data analysis, processing, and management making the company market leader.
Innovation capabilities also enable a firm to develop strategic assets such as patents that lead to sustained competitive advantage (Johnson et al., 2013). Such assets are not easily acquired because they are protected by patents and other legal rights. A good example of a firm that is able to obtain sustained competitive advantage is General Electric. The company has several patents that help to protect its strategic assets making the firm very powerful.
Creation of Brand Value: innovative capabilities enable a firm to create brand equity. Brand equity enables a brand to gain customers because of its reputation for producing products that are unique, innovative and easily recognized in the market. Examples of companies that are able to gain brand equity include Coca-Cola and Apple. Coca-Cola company products are well known all over the world. People prefer taking Coca-Cola drinks more than Pepsi and other brands of Soda.
In conclusion, innovation is very important for a firm’s business success and sustainable competitive advantages. Therefore, business organizations should focus on developing innovative capabilities that add to the firm’s innovation performance. These capabilities include development capabilities, operations capabilities, management capabilities and transaction capabilities. By developing these different aspects of innovative capabilities, a firm is able to create sustained competitive advantage through the development of new products, strategic assets, f brand equity, and superior database management among others.
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