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DYNAMIC CAPABILITIES FOR CONTINUOUS PRODUCT INNOVATION

by Gianmario Verona, Davide Ravasi

DYNAMIC CAPABILITIES FOR CONTINUOUS PRODUCT INNOVATION1 Gianmario Verona, Davide Ravasi(*)

Abstract

In order to understand the organizational sources of continuous innovation, the paper provides an in– depth analysis of a leading company in the hearing aid industry, which showed impressive ability to develop and introduce innovation in the Nineties. Findings focus on three dynamic capabilities used by the innovator, and their resource-based nature. Discussion points to the generalization of the results and their main implication on the organizational understanding of both continuous innovation and the nature of dynamic capabilities.

Keywords: Dynamic capabilities, knowledge, innovation, new product development. JEL Classification Numbers : M19, 031, 032

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A later version of this paper is forthcoming on Industrial and Corporate Change, with the title “Unbundling Dynamic Capabilities: An Exploratory Study of Continuous Product Innovation”. (*)

GIANMARIO VERONA. Senior Lecturer Marketing Department, SDA Bocconi-Bocconi University School of Management Via Bocconi 8, Milano, Italy. Tel. (39) 02.5836.6522 Fax (39) 02.5836.6888 E-mail: [email protected]. DAVIDE RAVASI. Lecturer Strategic and Entrepreneurial Management Department, SDA Bocconi-Bocconi University School of Management Via Bocconi 8, Milano, Italy Tel. (39) 02.5836.2540 Fax (39) 02.5836.6892 E-mail: [email protected]

Introduction In recent years, the dialogue on organizational theory and strategy has shifted from sustainability of competitive advantage to the ability to manage innovation and change (Tushman and O’Really, 1997; Christensen, 1998). In response to the quickening pace of change, firms in several industries are feeling the need to engage in continuous innovation - managing innovation on an ongoing basis (Brown and Eisenhardt, 1997; Hargadon and Sutton, 1997). Management scholars have emphasized the virtues of product development in driving continuous change. New products have been pointed as the most natural engine that spurs change and renewal at the corporate level (Dougherty, 1992; Nonaka, 1994). Their frequent introduction into the market has been considered the most effective way to turn change into an endemic and continuous process (Eisenhardt and Tabrizi, 1996). It has also been maintained that it is mainly along the product development process that organizations perform their critical role of integrating dispersed knowledge of different nature – mainly, scientific, technological, marketing - in an innovative way (Henderson and Cockburn, 1994; Kogut and Zander, 1996; Grant, 1996) and generate new effective knowledge (Iansiti and Clark, 1994). For this reason, a growing number of studies have been theorizing about the strategies and structures that may help firms in gaining the ability to continuously innovate through the introduction of new products. Many of these studies pointed at firm resources and comptencies as key factors in understanding continuous innovation (Brown and Eisenhardt, 1995; Verona, 1999). Especially the ‘dynamic’ resourcebased view of the firm identifies dynamic capabilities as the main source of sustainable competitive advantage when the competitive landscape is changing (Teece and Pisano, 1994; Teece, Pisano, Shuen, 1997). This stream of thought suggests that “dynamic capabilities are the subset of competence/capabilities which allow the firm to create new products and processes, and respond to changing market circumstances” (Teece, Pisano, Shuen, 1997, p. 510). They are “the processes that use resources – specifically the processes to integrate, reconfigure, gain and release resources – to match and even create market change” (Eisenhardt and Martin, 2002, p. 1107). Continuous innovation is, therefore, performed through the development, combination and reconfiguration of valuable knowledge-based resources in a potentially rent-generating way. To put it in a stylised model, the 1

dynamic capability perspective suggests that long-term, continuous renewal rests on three processes conceptually distinct: •

dispersed development of specialised knowledge of different kinds, as a product of individual and collective learning (e.g., Leonard Barton, 1992; Henderson and Cockburn, 1994; Nonaka, 1994);

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creative and valuable integration of specialised knowledge into strategic initiatives or product development projects (e.g., Burgelman, 1991; Kogut and Zander, 1992; Henderson, 1994; Grant, 1996);

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periodic reconfiguration - through changes in the dominant design and competitive rationale - of the patterns of combined knowledge that form the essence of products and strategies (Henderson and Clark, 1990; Galunic and Rodan, 1998; Hargadon and Sutton, 1998). A sustained stream of new products is often the result of the activities underlying these

processes. Indeed, new products are made of new concepts (Iansiti and Clark, 1994) – e.g. they are made of new knowledge to be integrated within the company. The presence of systems of core knowledge, the ability in integrating them and learning from them enhances the chances of new product sequencing over time. Even if the three processes may seem clear in theory, research in the organization theory and strategy has just begun to empirically explore the capabilities conducive to continuous knowledge creation, combination, and reconfiguration. While indeed we have a clear understanding of the microeconomic evolution of industries in periods of technological change (e.g., Abernathy and Utterback, 1978; Nelson and Winter, 1982; Malerba and Orsenigo, 1996), it is much less clearer how these processes can be leveraged at the organizational level. Indeed, such concepts have been introduced and discussed mostly at a theoretical level and how firms can actually develop these general capabilities still remains largely unspecified. In this paper, we try to move a step forward in this direction and investigate the capabilities that actually foster continuous innovation by sustaining the development, combination and recombination of specialized knowledge. Specifically, we investigate dynamic capabilities of an excellent performer and outstanding product innovator in the hearing-aid industry, Oticon A/S. The nature and the considerable number of new products launched by the multinational Danish company during the Nineties reveal a clear ability in the management of the product development

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process, and offer interesting insights for the organizational understanding of continuous innovation. Findings of our study highlight the presence of the three above-mentioned capabilities and their nature. The success of Oticon as a continuous innovator seems indeed to rest on three specific capabilities that we have called Knowledge Creation and Absorption, Knowledge Integration, and Loose-coupling (see also Figure 1). More specifically: •

Knowledge Creation and Absorption reflects a long term commitment in the investment in basic science, its potential technological and marketing applications and the creation of a worldwide reputation in the scientific field in order to also absorb knowledge from outside;

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Knowledge Integration refers to the ability of shaping and managing a context that stimulates latent and dispersed knowledge-resources to combine and jointly contribute to the development and launch of new products;

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Loose-coupling, regards the creation of an “open” structure that allows a flexible redefinition of the role systems and the relational patterns, in order to facilitate continuous resource recombination; this final capability allows for the continuous reconfiguration required for keeping a full innovation pipeline at any time of firm’s life. The three capabilities drive the creation of new products and determine the rejuvenation of the

company through continuous innovation. Findings of the empirical research also show what dynamic capabilities are made of. Dynamic capabilities tend to leverage actors, organizational structure, incentive system, and company culture. These four groups of resources are those that dynamic capabilities must use and leverage in order to generate continuous product innovation. Resources must be compatible among them and must present internal coherence in order to allow the capability to deploy its function. In order to present our findings, we first describe the research methodology and the sustained streams of product innovations introduced by the company in the Nineties, a period of profound technological evolution for the hearing aid industry. The following sections discuss and provide an indepth evidence of the three dynamic capabilities that fuel continuous innovation. The conclusive section is dedicated to an overall discussion and generalization of the results. We especially emphasize the managerial implications of the model we propose and discuss its potential impact on academic research in the field of continuous innovation and dynamic capabilities. 3

Method Given the early stage of theory development on continuous innovation, we followed the logic of grounded theory by building our research on an exploratory case study (Glaser and Strauss, 1967). This method has already been successfully employed in the emergent field of continuous innovation (Burgelman, 1991; Leonard Barton, 1995; Brown and Eisenhardt, 1997), and it is consistent with the problems of theory development in the field of dynamic capabilities. It is in fact hard to develop normative prescriptions on capabilities from cross-sectional studies. Capabilities are processes embedded in firms, organizational and empirical lenses are more suitable than economic and formal modeling (Eisenhardt and Martin, 2000). They are typically the result of complex processes comprised of the accumulation of small decisions and actions undertaken over many years in a situation of great uncertainty that can be hardly identified by quantitative research (Henderson, 1994). In this sense, qualitative research can better explore their nature. In addition to this, empirical studies about competitive advantage using a resource-based approach should preferably identify significant and sustained high performers in a given industry, or strategic group within, and analyze the factors of its success using in depth field work (Rouse and Daellenbach, 1999). For all of these reasons our exploratory case study is based on an in-depth analysis of Oticon A/S, one of the leading multinational companies in the hearing aid industry. Following Pettigrew (1990), Oticon was selected because of the high visibility of the object of inquiry – i.e. the capacity to sustain impressive continuous innovation. Even though the company played a leading role since the birth of the industry, at the end of Eighties Oticon was losing ground and its balance sheets showed substantial losses.1 After a radical restructuring started in 1989, the company initiated a period of impressive growth and, most of all, of impressive change and innovation. Table 1 briefly describes the product innovations introduced by the company during the Nineties. Such a sustained rate of new product development gave Oticon a leading edge during the Nineties on much larger competitors such as Siemens and Starkey. Our study encompasses in-depth individual semi-structured interviews with CEO, Vice Presidents and other managers of both the Copenhagen headquarters and the Italian subsidiary. Among them, we interviewed the Director of the Research Center, the Vice President responsible for Business Development and several researchers and managers directly involved in the projects leading to the 4

development of MultiFocus, MicroFocus, and DigiFocus – three of the most relevant innovations launched in the Nineties by the company. It also includes archival data collection based on financial statements, internal documents, industry publications, and other written material on the company. The interviews began with the background of the respondent and her role in the organization. We asked respondents about the organizational transformation carried out at the end of the Eighties within the company and how it affected their own activities. We eventually focused on the process of product development, in order to identify the different activities required to manage continuous innovation. Respondents were first asked to describe how the process is structured and what is their specific role. They were asked to provide detailed examples, charts and documents to better clarify their statements. Then we asked them to explain the reasons, from their own perspective, for the overall improvement in product development rate and effectiveness. We tried to leave the questions as opened as possible, so to let the results emerge from our respondents. We have never asked directly about “dynamic capabilities” or analogous concepts. We stopped interviewing when saturation was reached (e.g., Glaser and Strauss, 1967). Two subsequent follow-ups were conducted to clarify minor details, solve minor discrepancies and integrate the different perspectives. The analysis started with the identification of relevant capabilities as explicitly mentioned or indirectly implied by our informants. After having identified relevant capabilities, we tracked actions, decision and structural features that were considered to be at their basis. The analysis was conducted independently by the two authors and integrated with the results of the archival collection. Our aim was to build on and move beyond our informants’ interpretations, in an attempt to interpret facts and narrative within an emerging theoretical framework. The process followed a sequential path, but results from each stage were adjusted and refined as new interpretations emerged and modified the overall framework.

Technology evolution and product innovation in the hearing-aid industry In order to understand the company adaptation through the dynamic use of its resources, it is first important to look at the technological characteristics of the industry and the sustained development and launch of new products by Oticon. A hearing aid is a highly technological instrument that filters sounds with the overall goal of 5

improving the hearing of a person. The most common types of hearing aids are available in different size and style, but they refer basically to three formats: behind-the-ear (connected to a soft plastic ear-mold which fits inside the ear), in-the-ear (fitted completely in the outer ear), and in-the-canal (similar to inthe-ear hearing aids except that it is smaller and fits mainly in the ear canal). No matter what the size or style, all hearing aids have the same basic components: a microphone, an amplifier, a receiver, and a battery for power. The microphone transforms sound into an electrical signal and sends it to the amplifier. The amplifier increases the amplitude of the electrical signal, and filters and volume or tone controls may further modify the signal. The amplified signal is transmitted to the receiver, where it is translated into sound. Until early Nineties, all hearing aids were based on an analog/adjustable circuitry. There is a tremendous range in types of analog/adjustable circuits, from a basic linear, single channel circuit through multi-channel, automatic signal processors. Notwithstanding the main characteristic is that in an analog/adjustable device all the parameters of amplification (such as gain, frequency response and maximum output) are controlled by fixed or variable components within the hearing aid. Based on a comprehensive audio-logical evaluation of hearing, basic characteristics of analog/adjustable hearing aid operation are specified by the audiologist and installed by the laboratory. The laboratory can only accomplish post-fitting modification of these basic parameters. However, the audiologist may specify additional features called trimpots, which permit fine tuning of the instrument's response through set screw adjustments. One of the advantages of an analog/adjustable instrument is efficiency - they are in fact usually less expensive than their analog/programmable or digital/programmable counterparts, born both in the Nineties. A disadvantage refers to the fact that the audiologist does not have as much flexibility in post-fitting manipulation of the various circuit parameters. Analog/programmable hearing aid circuits have become extremely popular in recent years. They differ from analog/adjustable hearing aids in the way that the audiologist can modify both basic and fine parameters of instrument performance. At the time of fitting, analog/programmable hearing aids are connected to a computer, which is used to set the various basic and fine parameters. These new settings are saved in the hearing aid and continue to give appropriate instructions to the analog amplifier even when the hearing aid is disconnected from the computer. In electronic terminology, the analog/programmable hearing aid is known as a hybrid circuit. It uses both analog and digital technology. 6

The parameters of the hearing aid are manipulated via digital technology but the acoustic signal is converted to an electric signal and amplified using analog technology. This is the reason why they are analog/programmable. Digitally programmable hearing aids were instead introduced in the market about six years ago. These devices represented an improvement over previous technology in that they were extremely flexible, could be fine-tuned, and had advanced compression (loudness limiting) capabilities. They were still somewhat limited, however, because they still operated in an analog fashion. This meant that sound entering the hearing aid microphone would be amplified and filtered by a variety of electronic components. Because hearing is such a complex sense, the extent of filtering and amplifying required to partially correct impairment added to the limitations of the hearing instrument by producing distortion and noise. Digitization means that incoming sounds are converted to numbers, which are then analyzed and manipulated via a set of rules (algorithms) programmed into the chip controlling the hearing aid. Two devices are now available. One of the hearing aids samples sound at the speed of one million times per second, and analyzes these signals 32,000 times per second. The computerized digital aid analyzes incoming sound, makes a determination regarding speech versus noise content, then converts this information to numbers. The resultant digitized numbers are then manipulated according to the algorithm instructions, reconverted to an analog form (sound waves) and delivered to the ears, without producing the types of distortion that were commonly associated with analog technology hearing aids. Digital sound has minimal distortion. In addition, as new algorithms develop, software can be supplied to audiologists so that these improvements can be promptly implemented in the hearing aids without necessitating actual physical changes to the hearing aid itself. The biggest advantage of the 100% digital hearing aid is in its ability to analyze the auditory signal and make response modifications on a situation-by-situation basis. Digital/programmable circuits show promise for reducing the impact of background noise. The evolution of the basic technology of hearing aids is punctuated by Oticon’s products (See again Table 1). MultiFocus in 1992, MicroFocus in 1995 and DigiFocus in 1996 marked substantial discontinuities in the technology and design of hearing aids. Multifocus introduced a fully automatic system for adjusting amplification and tonal balance according to the frequency of sounds (whereas traditional hearing aids used to amplify weak sounds as much as loud sounds, high-frequencies as much as low frequencies, so that people had to keep adjusting the volume control). MultiFocus technology, 7

although relying on electronic circuitry for sound processing, was still based on analog amplification. In 1995, MicroFocus applied the knowledge gained from MultiFocus to a cosmetically attractive in-thecanal instrument that saw the passage to a analog/programmable hearing aid. MicroFocus, in fact, incorporated some of the digital technology that would have later be fully applied to DigiFocus: it could be programmed to philter sounds according not only to the specific impairment of the patient, but also to her preferences for sound quality factors and to her specific communicative context. In 1996, the introduction of DigiFocus reconfigured again the basic architecture of the product and opened up a fastgrowing and highly profitable segment that is already accounting for a considerable share of the worldwide market.2 DigiFocus was, in fact, the first fully digital hearing aid and was programmed to reproduce sounds in an entirely new way: sounds of different frequency could be processed separately and the amplification could be constantly adjusted according to the changes in the external environment. DigiFocus could therefore improve speech understanding in a wider variety of situations, including noisy environments. Oticon set the new standard and further eroded the market shares of its larger competitors, who were still exploring the possibilities of the new technologies. During these years, the company paced the rate of innovation also by introducing products that, without altering the basic technological architecture, incorporated incremental changes that exploited the potential of current design making them more appealing to specific target groups. Market-related insights and knowledge play an important role in decisions regarding aesthetics, size and ease of handling. For this reason they may also have a high impact on the way customers perceive the product. The Personic line, for instance, was released in a variety of colors, with the purpose of harmonizing with the hair style, rather than badly reproducing the skin color, and changing the view of the hearing aid from something to hide to a “modern communication system, that reflects the user’s personality, hair–style and life-style.” Also, the company designed a special line for young hearing-impaired people, Oticon 4 Kids, based on a colorful and original look and a specifically designed package and information material, that was meant to reduce the psychological burden of wearing a hearing aid at young age. The turning point for this stream of product innovations can be traced back to a radical organizational transformation, aiming at developing a faster, more creative and more efficient company, which could take advantage of upcoming technological changes affecting the industry with the advent of digital technology. Radical changes were introduced in the structure and the systems, based on a total of 8

approximately 150 people - most of them employed in administration, marketing, research and development. The essence of the transformation revolved around dismantling the formal structures regulating the authority relations and the task system. Departments, positions, titles, and job descriptions were abolished, and the previous functional structure was substituted by a project-based organization. Functional activities were re-grouped along projects and processes, which substituted departments as loci of coordination. These radical changes created a favorable context that led to the development and market of the number of new products mentioned before, which in some cases, as we have seen, contributed to redefine the rules of competition. In the following years, new product development schedule was cut by almost 50% and unprecedented and impressive financial results were achieved by the company. A 100% increase in 1991 in the rate of new product introduction compared to the previous five years, and an increase in the percentage of sales attributable to new products from 20% in 1991 to 50% five years later, provide further evidence of the major contribution of continuous innovation to company’s success. Evidence from our study suggests that dynamic capabilities regarding Knowledge Creation and Absorption, Knowledge Integration, and Loose-coupling can be pointed as the source of the company adaptation to the technological evolution in the industry.

Knowledge Creation and Absorption The basic scientific domains from which the creation of a hearing instrument draws are Audiology and Acoustics. The two sciences provide the basic knowledge regarding the way a hearing instrument works. The excellence of Danish competitors in the hearing-aid industry – together with Oticon, Copenhagen-based Widex and Danavox total around half the worldwide sales – is often ascribed to the development of the Danish educational system in these two scientific majors. Denmark’s long tradition of research and education in the acoustic and audiological field was in fact boosted in 1953 by the Danish government’s decision to provide a free hearing aid to every person who needed it. With this respect, just as US based computer firms strongly benefited from hiring Ph.D. from their domestic schools (Iansiti, 1997), Danish hearing-aid producers have strengthened their competitive position at a global level employing well educated and skilled researchers right out of local universities. The development of a hearing aid, though, is not solely based on these two basic sciences. 9

Aiding hearing impaired people, in fact, is not just a matter of pure amplification: what really matters is the way a person perceives sounds, which in turn is strongly influenced by her lifestyle and surrounding environment. In this regard, the science of Psychoacoustic is also extremely relevant. Due to its fieldbased nature, psychoacoustic research differs from research undertaken in the related domains of audiology and acoustics. In fact, it requires constant interaction with hearing impaired people in order to identify and measure the reactions to various sound stimuli. Until late seventies, as customary in the hearing aid industry, Oticon used to integrate its basic research efforts with technology development within a specific Research and Development department. Researchers employed by hearing aid firms, in fact, have usually an engineering background that makes them able to deal also with the acoustic or electroacoustic aspects of product development. In Oticon, such a model became a source of major problems. The time-consuming activities required by the development activities brought R&D people to spend most of their time solving minor technological problems - especially when there was a shortage of time to put a new product on the market. The creation of new scientific knowledge, then, did not receive the due attention. As the Director of the Oticon Research Center told us: This habit took over more and more, and in the end it was always long-term research, which was neglected. So, it was decided that if we really wanted to have a long-term research it had to be established away from the rest of the company.

This problem, together with the promising discoveries achieved in the emerging field of psychoacoustic, brought Oticon executives to consider the establishment of an in-house research center as a strategic opportunity for the development of new products. A Research Center sited in Eriksholm (about 50 miles from Copenhagen headquarters) was then opened and endowed with the most advanced technologies and infrastructures, such as one of the world most comprehensive libraries on audiology, acoustics and hearing instruments. Since then, 12 researchers working full time on the development of new scientific knowledge with hearing-impaired patients have carried out basic research. The pool of patients consists of 950 impaired hearing people involved in a long term relationship. The cost of this relationship is high, and has been considered a strategic investment. The very decision to locate the research facility in a nice resort in the countryside outside Copenhagen was aimed at making 10

participation to field experiments attractive to patients that visit the laboratory at least thrice a year. Recently, to further state this commitment in basic research, a unique museum regarding the history of hearing instruments has been built. The Eriksholm Collection presents more than 500 hundreds hearing instruments describing the technological history of the industry.3 Exclusive dedication of time, attention and efforts to basic resource created a favorable context for the development of scientific knowledge, which, in many cases, was at the root of new development projects. Scientific knowledge developed at Eriksholm, often provides a fundamental input to the conception and design of innovative products. One of the project leaders in the research facility said: What we do here is psychoacoustic research with hearing impaired subjects. We are not making major discoveries with new technologies or new production methods. We are more interested in creating the knowledge on how a new hearing aid should function: what should be the functionality of it, not how it is that functionality to come about, nor which technology should be used. That is in the sole hands of the development unit at the headquarters: they deal with discoveries in technology, production methods, marketing and things like that. (…) Our responsibility is to ascertain that we can come up with new principles of what a new hearing aid should do: not how it is constructed, but the function of it, what does it do when the sound passes through it.

The establishment of a separate research facility increased knowledge absorption from external sources. In fact, a distinctive characteristic of the research site is the ample autonomy granted to researchers, in terms of fields and line of inquiry. Unless specifically related to new product development, scientific knowledge produced at Eriksholm is shared with the rest of the scientific and academic community: Oticon’s researchers are stimulated to publish on academic journals and take part, and contribute, to the major scientific meetings in the world. As a consequence, Eriksholm is widely perceived as a scientific research center, operating in the field of audiology, acoustics and psychoacoustic. As the Director of the center told us: In some way Oticon has succeeded in turning this place in many people’s conscience into a research center, not an industrial related facility. They do not see the industrial company when they come here they see a research center as they have at home. (…) When we go out talking in some scientific meetings, we never ever talk about products. We talk about measurement principles, evaluation principles, how to construct a questionnaire for hearing impaired etc. - not about the outcome or evaluation of a specific product. People are sure that we are not going to give a commercial talk. So,

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over the last five years people have stopped to be picky on the fact that we are related to a commercial company. Researchers at the University do not mind anymore to do research with us. Ten years ago it was impossible - they did not want to be ‘entangled with a greedy industrial company’!

This reputation is beneficial to Oticon as it helps to import knowledge in several ways. First of all, in collaboration with the Danish government, the company co-sponsors Ph.D. students on a specific scheme - called the Industrial Ph.D. Educational Scheme. Thanks to this initiative, an average group of three students is employed in the company for the entire period of the Ph.D. program. Students have to take courses whose topic is related to their business or their activity such as project management and product development. The ideas they mature for their thesis are often tested and developed. The firm is also directly involved in collaboration with university centers. A Swedish university, for example, carried out two Ph.D. projects that were an integral part of all the work that led to the functionality at the basis of DigiFocus. Other formal cooperation agreements are established with schools in England and in the US. And starting from 1997, the research facility holds a yearly cycle of seminars called “Consensus workshop”, chaired by outstanding scholars in the field of psychoacoustic, which invite international scientists working intensely on the topic selected for the seminar. More unconventional collaborations may be established within each single project. The evolution of the DigiFocus line, for instance, was based on a device developed during field research. The fundamental feature of this device was the possibility to access to all the parameters that were normally fixed in DigiFocus. The firm involved fifteen laboratories around the world, offering them the experimental hearing aid for their own research. They were invited over and given a seminar on this instrument, explaining how to use the new device. The only thing they were asked for was to show the company a protocol on the project these potential partners would like to carry out. Then if the company thought that this could become something that could have been patented or commercialized in some way, Oticon would have been offered the first right of refusal. The long-term focus on basic research makes Eriksholm center an area for the advancement of scientific knowledge in the field of audiology and psychoacoustic. At times, though, scientific research leads also to technological development. Specific technology for investigating hearing disorders as experienced by patients is often unavailable and scientists need to produce the devices by themselves. 12

For instance, both MultiFocus and DigiFocus were not initially conceived as products but as experimental devices for specific field tests on noise reduction, that could not be done with the traditional analog technology. In these cases, the need to capture the data for the field test brought to build up system that turned to be the first of new path-breaking generations. Besides leading to new scientific knowledge, then, field research offers ample opportunity for experimentation to be addressed to technological development. It is important to finally note that at Oticon the development of a new hearing aid does not necessarily start from the results of scientific research. As partly mentioned before, some of the new product lines released during the Nineties, were based on incremental innovations which were produced by the initiative of engineers and marketers. For instance, the development of the MultiFocus product family was initiated by a group of engineers that had been working on the original project. Their initiative led, first, to a substantial reduction in size and an improvement in the design and to an in-the-ear version of the original behind-the-ear product, and, later, to a miniature-size canal hearing aid, MicroFocus, that took advantage of the state-of-the-art technology without substantially altering the core concept and hearing aid functions. This technological development is organized around Competence Centers. The managers responsible for these centers handle the training of designers and developers of key components for new products. They are also in charge of transferring these technicians to specific new product development projects once they have developed specific capabilities that can be useful to them. This physical separation and strong focus on both research and development allows an adequate balance between the development of knowledge related to the fundamental scientific domains (that is, basic research) and technology (application). In sum, findings from the study emphasize the role of long-term commitment in the creation of scientific knowledge; in turn this knowledge creation process frequently turns into a process of knowledge absorption. Figure 2 tries to map the resources mentioned before and utilized by the company to foster innovation into a dynamic capability we called Knowledge Creation and Absorption. Actors, organizational structure, managerial systems, and culture play a fundamental role in shaping this capability. The decision to build up a research unit with a pool of extremely high-skilled researchers and loyal patients that constantly take part to field-testing works (actors) is essential to the capacity of 13

continuously experiment. The structural separation of the research center was fundamental to improve scientific knowledge creation and absorption, just as the organization culture proved essential in fueling companies new knowledge - the autonomy with which the center is managed and the cutting-edge research that is produced also act as important factors of absorptive capacity of external knowledge. Thanks to this center, Oticon now presents a worldwide reputation in doing research. It becomes therefore an ideal partner to cooperate on research both at the individual level – attracting students and scientists all over the world - and at the institutional one – attracting partners and research centers. To put it with the Director of R&D’s words: If you open up and trust you will be trusted and information will be shared with you. If you do not you will not get anything.

Knowledge Integration Until the end of the ‘80s, product development projects at Oticon adopted a sequential approach. Researchers gave the basic inputs; engineers physically developed the product, which was then handed over to marketing people in the company. The increasing complexity of technology used in the product made the sequential process inadequate to the competitive requirements introduced by the emergent digital technology and the increasing competition. For these reasons, a more organic architecture was implemented with the aim of increasing the speed and efficiency of transferring ideas and concepts across the organization. The new architecture, called Integrated Product Development (from now on, IPD), was organized around a series of cross-functional project teams in charge of single development projects. Each cross-functional team fosters and speed up integration across the organization. At the start of any IPD project, a team is formed and is already composed from scratch by all the people that will be involved throughout. All project groups dealing with new product development, for instance, have to incorporate at least one person from the research center, one or more engineers coming from technology development units that are critical for the new product design, as well as people with a background in audiology, marketing, and so on. Also, people are encouraged to take responsibility for the entire project, not only for the specific scope of their skills, and to contribute to solve problems along the entire project, regardless of the skills they possess. 14

Most employees perform different activities in different projects, some of which lying outside their formal competence or education. In terms of incentive systems, Oticon employees are required to include in their portfolio of activities something outside their specific competence or professional area. As such, recruiting is based not only on professional skills, but also on attitudes and life experience. For this reason, Oticon tries to hire people with various backgrounds and leave them a high degree of freedom within the business. A candidate with an “unconventional” resume is considered more likely to adapt to the new structure than a candidate with a traditional MBA education. The Director of a Subsidiary told us: Usually, companies have specific problems and hire people trained to solve those problems. On the contrary at Oticon, we like to hire people with different skills. If I need to hire somebody that helps me solving a problem of accounting, I also want him to know something of marketing, because sooner or later he may be involved in that. That is the reason why we’d rather hire people with various skills.

The absence of organizational and physical barriers represents a further important aspect to continuously enhance the integration of technical knowledge. This type of knowledge is mainly developed within broad groups of individuals, associated into “professional areas”. Most professional areas do not correspond to the old departments – Marketing, Audiology, Quality Assurance and several technological development groups, called “competence centers” (Integrated Circuit, Mechanical Engineering, etc.) have replaced the old functional organization. Coordination within professional areas are achieved through “professional managers” who are in charge of securing physical, technological and human resources for the product development process. They are responsible for selecting, hiring and training people and coordinating the development of internal skills in order to maintain sources of competencies for the different projects. They are also responsible for the acquisition and in-house development of technology in their specific area. Technical knowledge developed within competence centers is then applied to a continuous activity of technical problem solving and product upgrading that goes on within projects. As the Head of the Integrated Circuit Component Center said: Projects have their own “domain” of innovation - innovation in the integrated circuit component takes place in the IC-Competence Center. We develop and provide building blocks for the ICs so that innovation in the projects does not have to take care of it. If you look at the commonalties between the needs of the different projects you realize that 50% to 90% of the content is really the same, just put

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together in a different fashion; therefore, it really pays to devote some effort to optimize component design.

Project activity often leads to further knowledge integration. Professional managers are in fact responsible for making sure that this knowledge circulates and is transferred across projects. People belonging to competence centers and professional areas use to meet weekly to discuss issues of general interest, in order to make sure that all the members can benefit and learn from experience made in individual projects. Working environment also fosters specialized knowledge integration. It consists of an open space filled with uniform workstations, based on a drawer-less desk equipped with computer, telephone and fax. Everyone has a "trolley" - a personal file cabinet on wheels - and is encouraged to freely move to and from common workstations, changing location according to her project work. For instance, when we interviewed the CEO, he told us that at that time he was working almost full time on a marketing project. And we actually could see his trolley parked around a group of desks populated by people trying to solve a pricing puzzle for the launch of a new product. In addition, all the floor of the head quarters present a cafeteria were new ideas are often shared among employees. More broadly, openness means also free access to any kind of useful information. For this reason, everyone has access through the computer system to virtually any information: people themselves are responsible for keeping themselves informed. If they want to know something, 80 to 90% of the information is available there in the system (everyone in the house are subject to stringent stock exchange rules, right because that there is so much access to information). Through an advanced computer system, everyone in the company can easily access to the available information on quality assurance results, technical documentation, and so on. All the information retained in the facility library is then stored in physical files archives and in an on line database. With this regard the CEO told us: We use paper a lot but we try to avoid filing paper: filing is all made in the computer system either scanned in or directly typed in. Having all the information accessible in an electronic archive is important because if the information is kept in physical files in closed office, it is accessible only in theory, not in practice. In our case, no matter where you sit, it is accessible. You can flexibly move around.

16

Furthermore, several creative ideas seem to benefit from the continuous external integration of information from subsidiaries around the world. They periodically report not only customer feedback on the product, but also information about the competitor moves and products in the different markets. A continuous exchange of information with the different subsidiaries plays a crucial role in the absorption of marketing knowledge. In fact, they are responsible for local marketing and are therefore more attuned to the needs and the problems within the different markets. With this respect the marketing competence center of the parent company constantly monitors and coordinates their activities, and keeps the board of executives informed of what is happening around the world in terms of social, technological and competitive trends. Oticon constantly monitors what competitors do through a technical benchmarking system. Two people in the Eriksholm research facility work on the analysis of competitors’ products; the results of their analysis are made available to everyone in the organization through internal reports. Their focus is not only on technical issues, but on the whole product concept – trying to answer to finding out how the software is structured, what is the fitting range of the hearing aid, what type of hearing loss it is designed for, what are its benefits, what are its claims, and how it compares with Oticon’s products. As the Head of a Quality Team told us: Performance benchmarking is used to assess the overall validity of different products. In fact, sometimes we even fit some of our competitors’ products to some of our subjects to get an immediate feedback on issues that you cannot describe in text.

In sum, even though the long term commitment characterizing the Knowledge Creation and Absorption capability represents a basis for innovation, the dynamic processes of continuous innovation also rests on the capability of integrating the specialized knowledge dispersed throughout the company. This capability of Knowledge Integration is the result of a deliberate policy, which embedded in the company’s resources and is represented in Figure 3. The presence of open-minded actors with heterogeneous skills, the creation of a culture based on openness and diversity, the development of an incentive system based on job mobility and heterogeneity, combined with a structural absence of physical and cultural barriers, are all the result of a 17

corporate policy that let integration emerge at the product development level. Structural arrangements such as the Integrated Product Development process and the presence of Competence Center at the organizational level, further enhances the ability of integrating specialized technical and scientific knowledge into new products.

Reconfiguration via Loose-coupling In the case of the multinational Denmark-based company, reconfiguration takes the form of Loose-coupling. The organizational design that has been implemented since 1989 was deliberately framed to avoid inertia, and was structured around a loose-architecture, inviting people to continuously be creative. A first peculiar feature of Loose-coupling regards what Oticon VPs call “the project-based organization”. After the abolition of departments, positions, titles, and job descriptions, the company was built around projects, which substituted departments. Made of people with different backgrounds they enhance the organizational creativity at a higher level. Most importantly, people can freely decide in which projects being involved. They are relatively free to decide about their time allocation among the different projects they take part into, about their working hours and even their vacation days. In this sense, people are not assigned by a hierarchical authority, but are encouraged to participate, according to their skills and interests. Everyone is responsible for the development of a portfolio of jobs corresponding to the activities performed in the different projects in which she takes part - according to her own attitudes, skills, and personal aspirations. As the CEO told us: In this organization you can’t do central planning, central coordinating of all the resources - you need to create a framework in which it takes place, not sit down with enormous papers and one hundred persons, ten categories of qualifications, twenty-five projects and twenty time periods... We create this framework by stimulating open communication as much as possible. Usually the resource conflicts are very clear to the people involved and if they have all the information, then they are the ones who can best solve them. They may occasionally make the wrong decision, but I’m sure that a central manager would make more wrong decisions. If they make their own decision they are motivated.

All these features clearly represent an organization that is loosely structured, and directed to the continuous knowledge creation and reconfiguration. But where is the coordination achieved? 18

A

“Development group” guarantees central coordination of the different development projects and initiatives. The development group is composed of seven senior managers - the CEO, the head of the research group at Eriksholm, and the coordinators of Quality Assurance, Product Development, and Marketing and Audiology activities. The development group is the only hierarchical structure that has been maintained, and it is sometimes referred to as a sort of “board of directors” for the different projects. The development group’s main responsibilities are the evaluation of new project initiatives, the allocation of financial resources among new and ongoing projects, and their periodic monitoring. The development group sets and communicates the strategic priorities of the company at information meetings held once a month. Priorities are discussed with all the employees and project proposals are evaluated according to these priorities. The evaluation process is kept as simple and informal as possible. A member of the group – a VP coordinating the product development - described it as follows: Someone comes along and says: “I have an idea, a proposal.” We say: “Fine. Could you make a sort of proposal?” At the next meeting of the development group we call that person in and have him explain about his idea and have a discussion.

The proposal is a rather simple business plan, based on a rapid pre-investigation on the feasibility of the project and the potential costs and benefits for the organization. It is interesting to note that ideas proposed are not necessarily evaluated under their economical perspective. The development group decides on priorities set on their understanding of what is most important for the company and on the resources available. The same informant told us: I wish I could say that we have a nice formalized system, that we calculate certain parameters, etc. But in fact we have not, we do not: it is all ‘gut feeling’. We obviously calculate such things as expected costs and benefits; we try to assess what is the market size of the new products, at what price it can be sold, etc. But every project is evaluated in itself. We do not have a formal system. We try very much to work ourselves into a consensual decision. Then again we are all basically experts.

The diffused high level of skills among the people involved turns the absence of this evaluation system into a flexible property of the organization. Usually, there is a general agreement on these choices, however the CEO opinion is the prevailing one in case consensus is not reached. Because most of the members of the development group are not directly involved in day-to-day activities, it is helped 19

out by a so-called Review group, composed of four persons coming from marketing, software, sales, and information technology, which has the task to review plans and programs for both the short and the long term twice a year. This system, based on creativity and characterized by loose control, allows for the continuous creation and reconfiguration of the company resources. Several projects are in fact initiated by the spontaneous initiative of groups or individuals in the organization. Indeed, the firm tries to continually encourage ideas and initiatives from as many people as possible. The CEO told us about this: Even though sometimes projects are initiated by the management group, most of the projects actually start because a single person or a group of people have found out that something is a good idea and want to realize it. A group of engineers and marketing people want so strongly to develop some projects, they do some skunk work and then all of a sudden they say: “Hey, do you want to see what we can do? Here we have a sort of prototype...” And hopefully we will say: “That sounds like a fantastic idea, why don’t you do that?” And they are ready: the group is already there. Sometimes there are occasions when we say “Fine, but you need to finish these other things before.” - because they are involved in other things.

These statements are a clear example of an organizational culture open to dispersed individual contributions; it helps sustaining the continuous creation of new knowledge and the reconfiguration of existing resources. Individual knowledge is in fact the seed that generates innovative ideas, and the openness towards it represents the more fertile ground. The ancient Latin motto “cogitate incognita” is the emblematic company motto exposed in almost every floor of the company headquarters and subsidiaries to remind employees of the constant need to “think the unthinkable” and to go beyond current practices and ideas in a constant strive for innovation. This is perfectly coherent with the company system of incentives. As we have seen, Oticon employees are required to include in their portfolio of activities something outside their specific competence or professional area. Such an unconventional job system has major implications on the way jobs are perceived. On the one hand, people have to value professional growth and personal challenge more than career advancement, as there are no formal career plans and paths. Indeed, the absence of a hierarchy makes a traditional career impossible - people experiment a growth in salary based on individual contribution and results, and a potential redefinition of their role, according to the skills they develop and the opportunities in the organization. On the other hand, the absence of a clear structure 20

demands a willingness to work in a fundamentally ambiguous environment. In sum, our study suggests that a loosely coupled architecture supporting the integration of dispersed knowledge is a third important capability for continuous innovation. Figure 4 shows the Loose-coupling capability. Oticon’s architecture does not offer only a favorable environment for the continuous emergence of creativity at the individual and organizational level. It also performs a fundamental role in keeping the structure open to further reconfigurations of combination patterns of specialized knowledge. A fundamental feature of these arrangements is deeply related to their loosely coupled nature – that is, the simultaneous presence of elements of rationality and indeterminacy in the fundamental coordination mechanisms and processes of the organization (e.g., Orton and Weick, 1990). At Oticon, the managerial systems regulating the allocation of resources play a major role in the integration of knowledge-based and entrepreneurial resources. The coordination of all the innovative efforts around a general strategic direction – what has been also described as the “orchestration of the different product development projects” (Brown and Eisenhardt, 1998) - is the primary responsibility of the development group. Although project leaders enjoy a high degree of freedom on the use of the funds they receive, in fact, they operate within the framework established by the development group through the communication of priorities and the central allocation of financial resources. In this respect, a loose architecture – that is, an ability to maintain elements of determinacy and spontaneous self-design in the mechanisms and processes that coordinate the development process – supports the continuity of the innovative process fueled by Knowledge Creation and Absorption, and Knowledge Integration.

Discussion and Conclusions In order to provide a better understanding of the organizational sources for continuous innovation and more concretely frame the theoretical concept of a dynamic capability, this paper has provided an in-depth empirical evidence of a leading company in the hearing aid industry, which showed impressive ability in creating and sustaining competitive advantage via product sequencing. Several are the limitations of this study, among which the fact that it is based on a sample of one. Also, through an in-depth case-study research, our analysis tried to detect some of the more intangible concepts that are by nature very hard to identify (Henderson, 1994). Although methodologically consistent with both the status of the theory and the prescriptions to select sample of ones (Eisenhardt, 21

1989; Rouse and Daellenbach, 1999), the study we presented is therefore far from being a robust one. Nonetheless, the stunning results gained by the company in the last twelve years in terms of product innovation and the peculiar organizational characteristics provide a fertile ground to draw some important empirical findings. As we showed in detail, after the major organizational transformation that took place in the late Eighties in a period of fast technological evolution, Oticon returned to profit, sustained growth and, most of all, developed an innovation pipeline characterized by three major results compared to its Eighties innovation pipeline: 100% increase of new product rate, 50% reduction of time to market, 250% increase to the new product contribution on the total profit. The Denmark-based company study provides then an appropriate ground to analyze the effective management of continuous innovation and provide concrete evidence of dynamic capabilities in action.4 To our understanding, Oticon built his strategic renewal on a three-stage macro-process, based on Knowledge Creation and Absorption, Knowledge Integration, and Loose-coupling. The sequence of the three dynamic capabilities let continuos innovation emerge in the company and provide an analytical frame to better investigate the processes of knowledge specialization, creation and reconfiguration at the basis of the Dynamic Capability theory. Each of them seems essential in shaping the continuous innovation context. From this model, which is grounded on Oticon experience, we think that there are several lessons that can be learned. First, in order to sustain product innovation, a firm must built dynamic capabilities that allow the generation, absorption, and combination of knowledge. In the model shown in Figure 1, these activities are performed via Knowledge Creation and Absorption, and Knowledge Integration. The former dynamic capability is deeply rooted in the presence of a long-term commitment to create scientific knowledge, through investments in a unique research center with a worldwide reputation in pursuing scientific knowledge in the acoustic, audiology, and psychoacoustic field. This capability allows the continuous creation and absorption of new knowledge, without which no product innovation can be sustained in the long run. Knowledge Integration, then, allows the combination of knowledge components dispersed within the organization. It transforms the specialized scientific and technical knowledge into new products to be launched in the market throughout the different projects. The relevance of the two capabilities is also confirmed by past fragmented research on product 22

innovation. Knowledge creation has been emphasized in some empirical studies focusing on experimentation (e.g., Henderson and Cockburn, 1994; Pisano, 1994). This activity was and is also the foreground of scientific knowledge absorption through the academic network. As maintained by Cohen and Levinthal (1990), the ability of importing knowledge is directly related to the presence of previous related knowledge, meaning that firm must have already invested in technical knowledge if they want to benefit from what they absorb.5 Oticon provide significant empirical evidence on both these topics. Internal combination has also been pointed as an important capability in several studies regarding the automobile, semiconductor, computer, and pharmaceutical industries. Here we illustrate that the capability of linking different parts of dispersed knowledge fits also in the case of the hearing-aid industry as well and, more importantly, Oticon evidence widens previous results by showing that effective integration is not simply a matter of the product development structural organization (which in the Oticon case take the name of Integrated Product Development). In order to facilitate integration, it is in fact also essential to go beyond structural arrangements and eliminating physical and cultural barriers. Firms should favor the presence of open-minded skillful actors within the company. Most of all, Oticon findings show us that it is the co-presence of - that is the conjoint use of - Knowledge Creation and Absorption and Knowledge Integration that stimulates the creation of individual and group creativity and, therefore, put the basis for continuous innovation. Second, findings emphasize that continuous innovation requires a further dynamic capability. If a company wants to sequence product innovations, it must create a context that spurs creativity from all the parts of the organization at any time. This idea perfectly fits with the theory of dynamic capabilities. This view has shown the relevance of continuous learning in order to introduce new product innovations and adapt to changing market conditions. Product sequencing can be seen as the consequence of a structured system of core and integrative knowledge, which, by itself, depends upon the continuous individual and collective learning within the organization (Helfat and Raubitschek, 2000). Similarly, the problem solving activity of an organization involved in continuous product development process is at the basis of the creation of specialized and integrative knowledge to be directed to the development and launch of new products (Iansiti and Clark, 1994). The study of Oticon supports these theoretical ideas by showing how continuous learning produced via Loose-coupling is the seed for continuous creation of new products. 23

Most importantly, Oticon analysis gives us a better understanding of the structure regarding how the system of learning actually works. Oticon in fact emphasizes the relevance of a context that let individual and organizational creativity emerge. Also, it provides a frame showing how the organizational culture, incentive systems, and structure are managed makes the company able to tap dispersed knowledge and stimulate local creativity. The specific ability to shape such an organizational context represents a necessary complement to focus on autonomous scientific research and to let scientific and technical knowledge integrate into specific product development projects. This context has been named Loose-coupling because it clearly resembled the loosely-coupled organization used by Weick (1976) to describe public educational system creative organizations. As the author suggests, the distribution of tasks and resources in a loosely-coupled system must not be strictly regulated by the designed structure. It is rather the interplay of people at any level, who possess the ability to identify resources and combine them in new ways that continuously redesign the organization redistributing roles, tasks and responsibilities. At Oticon, the development group accomplishes a function of coordination through the allocation of resources among different projects and the definition of the strategic context that orients the project initiatives and guides the overall process of change. The process of setting priorities and reviewing projects carried out by the development group orient the combination and recombination of dispersed knowledge that results in autonomous strategic initiatives. The centralized management of the process about strategic context determination, though, leaves ample room to the decentralized allocation of resources like time, attention and skills that is left to individual initiative and collective negotiation. An important consequence of the latter is the substantial indeterminacy of individual positions within the organization. Oticon employees’ roles are not defined a priori by design, but are continually redefined by their evolving portfolio of jobs, according to the changing needs of the organization and the evolving people’s skills and inclinations. The structure, indeed, is not super-imposed on the flow of the process, as it is true for a tightly coupled organization, but it is defined at any time by the allocation of people, resources and tasks among the projects. The division of labor, then, changes continually, as people take part in new projects, develop new skills and eventually redefine their roles. In this sense, the structure is continually reproduced according to the current needs, and emerges from the interaction between people initiating, running and taking part in the projects. It is this continual interaction, and not a pre-determined plan or design, that determines the allocation of time, resources and attention, and ultimately the structure 24

of the organization. In this respect, we find support in Weick’s alternative perspective on organizational design in creating this dynamic capability for stimulating reconfiguration. Third, the study shows that each dynamic capability actually leverages company resources, especially those regarding actors (human resources), incentive systems, organizational structure, and company culture. In order to be effective, each capability must be composed of these four resources, which, at the same time, must be designed to be coherent and perfectly fit their task. These four organizational resources represent therefore the building blocks of product innovation - it is however the dynamic capability that leverages them, which allows the new product creation. Past studies showed the relevance of each of the four variables. Culture has been considered an essential resource in strategic processes (e.g., Barney, 1986), and has also been considered a core capability for product innovation (Nonaka, 1994; Leonard Barton, 1992). Likewise, the presence of incentive systems has also been considered an important tool to spur new product development (Henderson and Cockburn, 1994; Iansiti and Clark, 1994). There is also evidence on the importance of individual skills in unleashing product innovation (Leonard Barton, 1995; Iansiti, 1997; Cusumano and Selby, 1998). However, what we figured out from Oticon experience is that the four organizational resources must coexist and be perfectly coherent in order to generate competitive advantage through continuous innovation. Let us take the case of the dynamic capability that we called Knowledge Creation and Absorption. Clearly, Oticon ability in scientific knowledge absorption is deeply rooted in the presence of a system of incentive that causes well educated and skillful company researchers to work hard on academic papers, which depends on the autonomy with which the research center is managed, which is at least partly due to the physical separation of the facility. The relevance of each of the four variables is clear. Similarly, the internal coherence among these variables is evident. Like it is evident the relevance and the coherence among the resources within the capability that we named Loose-coupling, allowing for the continuous reconfiguration of the company knowledge. Loose coupling depends upon the presence of a multiple project-based structure, where people can freely access any project and are assessed through an incentive system that brings them to a portfolio of jobs, supervised mainly by a competent senior manager committee. A dynamic capability can then be represented as an “organizational mix” – i.e., each dynamic capability can be seen as a mixture that makes up the main 25

organizational resources of the firm. The specific composition and correct weighting of the organizational resources (actors, structure, culture, incentives) thus creates a peculiar organizational formula, and this is the idiosyncratic dynamic capability. What changes in the formation of each capability is the content of the specific organizational variables and the way in which these combine the variables themselves. Each firm is naturally based on different capabilities, and, thus, have necessarily different dynamic capabilities based on different organizational mixes. This feature denotes a profound change in the design of organizational variables. Traditionally, the design of the organizational structure, managerial systems and culture, was aimed at consistency between the firm and the market (Lawrence and Lorsch, 1997). The most recent theories have taken insights from the theory of transaction costs in terms of the opportunism of economic actors and investment specificity (Williamson, 1975). Even in these theories, however, the aim has always been the search for an organizational fit between the company and the environment (Grandori, 1987). As described by Chandler (1963), in the description of the American firms development, organizational designers have opted for functional structures in the case of limited market complexity, and divisional structures in the case of greater complexity and little synergy among the core businesses. The product/market (that is the strategic business unit) has thus always been at the core of organizational design. The shift of emphasis on dynamic capabilities shows that contemporary organizational design has to focus on the creation of mixes that can foster company resources. In other words, organizational design must create and sustain the competencies through which the firm continuously acts on the market. Individual skills, organizational structure, incentive systems, and culture should thus be combined to stimulate the dynamic capabilities on which the firm generates and sustains competitive advantage. It is not simply by chance that the last ten years have seen a progressive movement from functional and divisional structures focused on products/markets towards structures that value customers, management processes and business projects - briefly: dynamic capabilities (Clark and Wheelwright, 1993; Hammer and Champy, 1993). Organizational choices have to stimulate the most consistent mixes for the firm’s business idea. Firms will not be interested in all the organizational mixes, but they do have to try to adopt mixes that produce dynamic capabilities that will allow for the generation of value: in other words, heterogeneity, difficulty of imitation and ex ante and ex post limits on competition (Peteraf, 1993). 26

In sum by describing some of the capabilities that enhance the ability to frequently innovate, the study contributes to the emergent literature on continuous innovation. In hypercompetitive environments, technological development and imitative or innovative behavior of competitors quickly erode competitive advantage created through innovation. As a consequence, firms are continually engaged in a process of creative destruction (Schumpeter, 1934) that calls for a periodic reconfiguration of basic patterns of integration that are embodied in products and market strategies. Indeed, a radical reconfiguration of patterns of integration is prone to reproduce itself in the patterns of practices and procedures of an organization, thus creating the conditions for subsequent organizational rigidity (Henderson and Clark, 1990; Leonard Barton, 1992). Research on continuous innovation suggests that a variety of factors influence the innovative process: shared values and social norms, communication, human resource management systems, project management techniques. These factors, however, may be considered as basic building blocks of higher order capabilities that sustain the process of knowledge integration, given that organizational capabilities may be understood as “clusters” of knowledge-based resources that enable the firm to perform a specific task. Oticon case study, as was understood by our analysis, provides an empirical example of such a combination - structural arrangements, managerial systems and social norms provide an organizational context where individuals and groups are encouraged to develop and share innovative technological or commercial ideas to be applied to the product development process (see again figures 2, 3 and 4). Part of this knowledge is dispersed among the individual members. Detecting, identifying a valuable use and bringing together the specialized knowledge held by individuals is the essence of the strategic renewal process. Of capital importance in this process are other dispersed intangible resources: the intuition, foresight and creativity of the individuals. In this respect, the analysis of the structural arrangement and social dynamics that run the project organization indicates a superior ability to tap specialized dispersed individual knowledge and “entrepreneurial resources” and combine them along innovative initiatives. To conclude, the present paper identifies the three dynamic capabilities as an important base for continuous innovation. Besides adding evidence to the emergent literature on continuous innovation, the capabilities mentioned above also contribute to the Resource-based View of the Firm by pointing out 27

new issues not previously identified in this research program. Since “a fuller appreciation of the origins of competitive advantage is to be found in a better analytical and empirical understanding of the managerial processes which allows some firms to be ahead and stay ahead of the game” (Cockburn, Henderson, Stern, 2000, p. 1142), with this study we contributed to clarify the nature and the content of some of these

valuable

managerial

28

processes.

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33

Table 1. Main innovations introduced by Oticon in the 90’s. NAME MultiFocus Personic

YEAR 1992 1992

• •

Oticon 4 kids

1993

•

MultiFocus Mild

1994

•

MicroFocus

1995

•

DigiFocus DigiLife

1996 1997

• •

MAJOR BENEFITS OF THE INNOVATION First fully automatic non-linear amplifier Pleasant design and surface texture, and wide color range to harmonize with facial features Colors and design more appealing and easy-to-wear for kids Same quality of sound processing, smaller size; designed for younger users First programmable instrument, based on analog amplification process First 100% digital hearing aid Simpler and faster fitting principle, programmable via a portable unit

34

Figure 1. Unbundling dynamic capabilities: the knowledge-based processes at Oticon.

Knowledge Integration

CONTINUOUS INNOVATION Knowledge Reconfiguration

Knowledge Creation and Absorption

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Figure 2. The dynamic capability of Knowledge Creation and Absorption.

KNOWLEDGE CREATION AND ABSORPTION

Actors Researchers graduated from Danish Universities Pool composed by 950 patients Experts from worldwide research centers and schools

• • •

•

Incentive System Incentive to let scientists to participate to international research Incentive to let external excellent researchers and students to participate to internal research

• •

Structure Separate research facility Attractive research Applied (technological) research undertaken within Competence Centers

• • •

• •

Culture Cultural orientation towards scientific research Research center autonomy Institutionalization of the research center through the creation of a museum – the Eriksholm collection

Figure 3. The Dynamic Capability of Knowledge Integration.

KNOWLEDGE INTEGRATION

• •

• • • • •

Actors Technical experts with eclectic • skills People with A-shaped and T- • • shaped skills Incentive system • Hiring mechanisms for eclectic people • HRM systems structured on Job variety and Job rotation Monetary incentive to develop new skills Self-participation to projects • LAN •

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Structure Integrated Product Development Cross functional teams Substitution of departmental structure with professional centers Open space offices and cafeteria in each floor Mobile workstation

Culture Openness to creativity Global culture

Figure 4. Dynamic capability of Loose-coupling.

LOOSE-COUPLING • •

• • • •

Actors Skilled and eclectic employees Skilled managers

• •

Incentive Systems Continuous job rotation Incentives for the creation of • portfolio of jobs Resource allocation based on • expertise and skills of the Development Group members Brainstorming for enhancing creativity

1

Structure Development Group Review Group

Culture Openness to individual proposals and creativity Cogitate incognita – Think the unthinkable

The market share plummeted from 14% to 9% in an 18-month period after the introduction of a new dominant design by Starkey, an American producer of hearing aid. For historical evidence of the industry see Lovas and Goshal (2000). 2 In addition to several industrial reports, see also Business Week, 1999. 3 A visit to the website www.oticon.dk partly highlights the impressive characteristics of this museum. 4 However, this does not mean that Oticon showed “unique” capabilities. As Eisenhardt and Martin (2000) state, often dynamic capabilities present commonalties among companies within the same industry. The important thing is that they definitely contributed to change Oticon’s ability in innovating and gaining competitive advantage through innovation, and made an easier route to technological adaptation. Oticon in fact changed its performance in the Nineties and can be pointed as an outstanding innovator in the hearing aid industry (Lovan and Goshal, 2000). 5 Likewise, a strong commitment of the firm towards the scientific community can become a way to continuously exchange knowledge with the outside environment. The case of pharmaceutical industry shows how academic publications by company researchers allow a better importing of academic knowledge within the company. See, for instance, Henderson e Cockburn (1994).

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