Management System for Strategic Innovation: Building Dynamic Capabilities View of the Firm 1032304308, 9781032304304

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Management System for Strategic Innovation

Strategic innovation dynamically brings about strategic positioning through new products, services and business models, and is a dynamic view of strategy that enables a corporation to maintain its competitive advantage and establish sustainable growth. For these reasons, corporations have to be innovators that can reinforce their existing positions through incremental innovation, while at the same time constantly renewing or destroying existing business through radical innovation. This book presents a holistic theoretical model, The Strategic Innovation System, as a system of capabilities for companies to achieve strategic innovation. As a subsystem of the Strategic Innovation System, this book presents the concept of the “Capabilities Building Map”, which has characteristics of four different capabilities that correspond to the elements of speed of changes and uncertainty in the environment faced by companies. It explores how companies can change and even evolve their capabilities to achieve strategic innovation, using the latest findings of the systems-view, the process-view, and dynamic capabilities-view. The author evaluates management systems that achieve sustainable strategic innovation by utilizing knowledge assets inside and outside of organizations, including those of leaders, rather than simply relying on leaders with strong will. This book will primarily appeal to academics, researchers, and graduate students interested in innovation and technology management, digital transformation as well as strategic management and strategy planning and a broader business audience. Mitsuru Kodama is Professor of Innovation and Technology Management in the College of Commerce and Graduate School of Business Administration at Nihon University. He has published 17 books in English such as Managing IT for Innovation: Dynamic Capabilities and Competitive Advantage (Routledge, 2021), Developing Holistic Strategic Management in the Advanced ICT Era (Series on Technology Management Vol. 35) (World Scientific Europe, 2019), Sustainable Growth Through Strategic In novation (2018), Developing Holistic Leadership (2017), Collaborative Innovation (Routledge, 2015), Winning Through Boundaries Innovation (2014), Competing Through ICT Capability (2012), Knowledge Integration Dynamics (World Scientific, 2011), Boundary Management (2009), Project-Based Organization in the Knowledge-Based Society (Series on Technology Management Vol. 12) (2007), and articles in several international scholarly journals. Prior to joining University, he was working as a project leader at NTT and NTT DOCOMO for around 20 years. He received R&D 100 Awards 2003 in R&D Magazine (US).

Routledge Studies in Innovation, Organizations and Technology

Advancing Big Data Analytics for Healthcare Service Delivery Tiko Iyamu Open Labs and Innovation Management The Dynamics of Communities and Ecosystems Edited by Valérie Mérindol and David W. Versailles Technology Brands in the Digital Economy Edited by Wioleta Kucharska and Ewa Lechman Business Models for Industry 4.0 Concepts and Challenges in SME Organizations Sandra Grabowska and Sebastian Saniuk Innovation in the Digital Economy New Approaches to Management for Industry 5.0 Edited by Agnieszka Rzepka Information Technology in Contemporary Organizations Redefining IT Management for Organizational Reliability Katarzyna Tworek Impact of Artificial Intelligence in Business and Society Opportunities and Challenges Davide La Torre, Francesco Paolo Appio, Hatem Masri, Francesca Lazzeri and Francesco Schiavone Management System for Strategic Innovation Building Dynamic Capabilities View of the Firm Mitsuru Kodama For more information about this series, please visit: www.routledge.com/Routledge-Studies-inInnovation-Organizations-and-Technology/book-series/RIOT

Management System for Strategic Innovation Building Dynamic Capabilities View of the Firm Mitsuru Kodama

First published 2024 by Routledge 4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2024 Mitsuru Kodama The right of Mitsuru Kodama to be identified as author of this work has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-032-30430-4 (hbk) ISBN: 978-1-032-30431-1 (pbk) ISBN: 978-1-003-30505-7 (ebk) DOI: 10.4324/9781003305057 Typeset in Bembo by Apex CoVantage, LLC

Toward building a corporate strategy model that opens up the future

Contents

List of figures List of tables Preface and acknowledgments   1 The need for a new theoretical model and the research approach of this book

viii x xi

1

  2 Capabilities building through dynamic capabilities approach

13

  3 Capabilities building through the innovation process approach

45

  4 Capabilities building through the exploitation and exploration approach

63

  5 Strategic innovation system – a new theory from synthesis of prior literature

79

  6 The strategic innovation system – multi-case analyses in high-tech companies

106

  7 The asset orchestration process based on the boundariesbased view (BBV) and the attention-based view (ABV) – A longitudinal study of the mobile communications industry

149

  8 Implications, conclusion, and future research issues

192

Index208

Figures

1.1 1.2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 3.1 3.2 3.3 3.4 3.5 4.1 4.2 4.3 4.4 5.1 5.2 5.3 5.4 5.5 5.6 6.1 6.2 6.3

Research approach to building a new theory The structure of the book Dynamic capabilities (DC) and ordinary capabilities (OC) Activities-based view of capabilities building Contrasting the capabilities building map and capabilities lifecycle “Business Activities Map” for corporate activities Positioning various new product development (NPD) on the business activities map Capabilities building map – capabilities building through the dynamic capabilities approach The process of building capabilities in the capabilities lifecycle Capabilities – management systems in NPD processes The dynamic chain-linked model – recursive framework Micro strategy formulation and implementation in project management Components and processes of dynamic capabilities Capabilities building map – capabilities building through the innovation process approach The valley of death and the Darwinian sea models Exploration and exploitation dynamic combination processes Leader teams, project and line networks in a corporation Dynamic capabilities building through exploration and exploitation processes Capabilities building map – the dynamic and ordinary capabilities view The strategic innovation system The Helfat and Winter (2011) position in the capabilities building map Cospecialization through convergence The asset orchestration model (asset orchestration firm) Value chains and capabilities in advanced IT environments Capabilities building map (CM) and strategic innovation capabilities (SIC) Relationship between the capabilities building map and the capabilities lifecycle Organizational framework of Fujifilm R&D

8 9 14 21 21 23 24 27 37 48 50 52 55 58 66 70 73 74 80 86 94 97 99 100 108 109 112

Figures ix 6.4 Realization of “intellectual fusion and innovation” through the formation of multi-layered SC 6.5 Zoom’s business ecosystem 6.6 The strategic innovation system 6.7 Position and characteristics of a triad system 6.8 Relationship of a Ba triad and a triad system 7.1 Strategy realization and interaction between dynamic capabilities (DC) and ordinary capabilities (OC) 7.2 Asset orchestration by forming strategic communities between actors 7.3 The attention-based view and boundaries-based view in dynamic capabilities (DC) 7.4 The i-mode Business Model by Asset Orchestration 7.5 Main activities in three main GBD business strategies 7.6 Capabilities lifecycles on the capabilities building map 7.7 The growing i-mode organizational power 7.8  MM division new service development systems 7.9 Asset orchestration – learning from the i-mode development 7.10 Capabilities abrasion and friction hindering capabilities congruence 8.1 A framework of holistic leadership from complex adaptive theory 8.2 Characteristics of organizational boundaries (knowledge boundaries) 8.3 Knowledge integration through uniting boundaries (graphic): group interlock network 8.4 Positioning knowledge integration capabilities in dynamic capabilities

113 128 131 140 144 150 155 158 170 172 175 179 180 181 183 197 200 201 203

Tables

4.1 Paradoxical management of exploration and exploitation

69

Preface and acknowledgments

The book discusses strategic management and innovation activities in corporations from the perspective of the dynamic capabilities of individuals, groups, and organizations. This book is the result of substantive observations made over a long period of time by me in the business workplace, and analysis of those observations. Over 21 years, I experienced the exciting business of mainly company-internal ventures and the development of new products, services, and businesses in the rapidly changing ICT field. Through past business experience, I found that a driving force supporting learning and innovation in companies are dynamic capabilities and that these are dynamic elements that are constantly changing. My interest in “Dynamic Capabilities (DC)” stemmed from my work experience as a project leader at NTT DoCoMo. DC is described in previous studies as follows. “We define dynamic capabilities as the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” (Teece et al., 1997, p. 516). At that time, my project team at NTT DoCoMo followed exactly this process. After that, I detailed the contents of my own new service development project from the perspective of knowledge creation (knowledge integration) and the innovation process by DC and published this research result in an academic journal.1 I found that these dynamic capabilities evolve by the orchestration (or integration) of the assets (knowledge) of people and groups, the leadership of top and middle management, and staff, and dynamic process to achieve real business. The asset orchestration, leadership, and dynamic process dynamically formulate and implement strategy in corporate organizations. An important aspect of the evolution of capabilities is the theoretical perspective on dynamic capabilities. At the micro level, practitioners either consciously or unconsciously, and dynamically network assets (knowledge) to bring about continuous strategic innovation and sustainable growth. The purpose of this book is to extract micro-level theoretical frameworks (dynamic capabilities, ordinary capabilities, capabilities building map, strategic innovation capabilities, strategic innovation loop, strategic innovation system) for companies to bring about new assets (knowledge) and strategic innovation with a realistic view of organizational and strategic dynamic processes in industries that are constantly changing through time such as the fast-moving high-tech field. As a researcher of business person and in the field of business and management studies,

xii  Preface and acknowledgments the most important objective of this book is how to bridge theory and practice. For this reason, I  have immersed myself deeply in organizations and closely observed and analyzed the thinking and actions of many practitioners including those in their partnered corporations and their customers. Hence, I performed an in-depth qualitative study pursuing the research issues of how practitioners actually dynamically set down and execute strategy both inside and outside of companies, and how they restructure organizations to acquire and demonstrate new capabilities. Accordingly, the research methodologies I employed are primarily in-depth case studies centered on participant observation and ethnography. In this long-term field research, I was giving much encouragement and valuable insights into practitioners’ creation of the businesses of the future and achievement of visions in exciting business environments through practical hands-on activities as their way of life. However, there is also drama in business activity (macro and micro, and in both cases of success and failure), and it’s the subjectivity and values as beliefs and thoughts of practitioners that achieve strategy and acquire capabilities. This book could not be completed without the thorough and strict interaction that I have had with many practitioners. I would like to extend my gratitude to these practitioners that are of a number too great to count. Concerning the publication of this book, I wish to extend my appreciation to Ms. Alex Atkinson, Commissioning Editor, and Ms. Manjusha Mishra, Editorial Assistant of Routledge, for all of their support and efforts. I am also deeply grateful for the valuable comments offered by the two reviewers of the proposal for this book. Lastly, I would like to express my deep gratitude to Nihon University’s College of Commerce, my workplace which has provided me with the comforts of a day-to-day research environment. Mitsuru Kodama Note 1 Kodama, M. (2007). Innovation and knowledge creation through leadership-based strategic community: Case study on high-tech company in Japan. Technovation, 27(3), 115–132.

Reference Teece, D. J., Pisano, G. and Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509–533.

1 The need for a new theoretical model and the research approach of this book

1.1 Aims and objectives of this book – strategy transformation through strategic innovation Needless to say, the continuous creation of new products, services, and even novel business models is important for companies to gain and maintain a sustainable competitive advantage and grow over the long term (e.g., Jelinek and Schoonhoven, 1990; Morone, 1993; Kodama, 2011, 2018). In particular, the creation and execution of new business models that transform existing rules and radically revamp conventional products and services have triggered major strategy transformations in traditional large corporations throughout history. The chain of academic research of recent years on radical innovation (e.g., Leifer et al., 2000), breakthrough innovation (e.g., Hargadon, 2003), discontinuous innovation (e.g., Kaplan et al., 2003; Laurila, 2002), and disruptive innovation (Christensen and Raynor, 2003) illustrates the challenges and associated difficulties with strategy transformation of companies to pioneer new markets or create new technologies, as well as many factors of success and failure. Acquiring the organizational capabilities to quickly adapt to environmental changes and drive new technological and business development (e.g., Brown and Eisenhardt, 1997; Teece et al., 1997; Tushman and Anderson, 1986) is a top priority for companies. However, in the past, in several industries such as the PC market (Mitchell, 1989), digital photography (Tripsas and Gavetti, 2000), disk drives (Christensen and Bower, 1996), semiconductor lithography equipment (Henderson and Clark, 1990), watches (Glasmeier, 1991), and the business transformation from analog to digital technology (Kodama, 2018), cases were reported of large traditional companies that could not cope well with changing environments, which had significant impacts on their performance and survival. This is closely related to the fact that companies rely heavily on routines that utilize certain core path-dependent competencies (Nelson and Winter, 1982; Teece et al., 1997). The more efficient business activities a company pursues to drive the economic activity of increasing scale and scope, the more its existing core competencies fall into core rigidities or competency traps, meaning the company becomes less able to respond quickly to major environmental changes (Levinthal, 1991, 1997; Leonard-Barton, 1992; Levitt and March, 1988). Promoting efficiency in business DOI: 10.4324/9781003305057-1

2  New theoretical model and research approach activities inhibits diversity of operations and reduces behaviors that induce independent creativity in employees (e.g., Weick, 1995). The traditional large companies of the past found great competitiveness by utilizing their path-dependent capabilities to profit by gradually improving (incrementally innovating) their existing products to release newer versions of them in existing markets. In contrast, radical or breakthrough innovations entail the paradigm shifts of new markets and technologies and bring about big increases in product functionality, radical transformation of existing markets, the creation of new markets and substantial cost reductions, and so forth (Leifer et al., 2000; O’Connor and Rice, 2001). Thus, as new breakthrough innovation, radical innovation is different in character to incremental innovation by routine improving and upgrading through path dependency. To achieve radical innovation, companies need new knowledge that differs from their existing skills and know-how (e.g., Ettlie et al., 1984; Green et al., 1995). This is because corporations engaging in radical innovation and even individual projects must face uncertainty and discontinuity in areas such as markets, technologies, organizations and resources, and although it may be possible for some projects to overcome these hurdles, many lose momentum and fail (e.g., Leifer et al., 2000). For companies to acquire the capabilities for radical innovation, they need different capabilities (the elements of strategy, organization, resources, technology, process, and leadership) to the management (practices) developed in the past for incremental innovation (e.g., Kodama, 2003, 2007a, 2007b; O’Reilly and Tushman, 2004; Vanhaverbeke and Peeters, 2005). According to Markides (1997), strategic innovation is the dynamic creation of creative strategic positioning through new products, services and business models. Markides argues that this framework is a dynamic strategic view that establishes a sustainable competitive advantage for a company. This means companies must become innovators that do not stick to their existing position (existing business) and are always disrupting it. Govindarajan and Trimble (2005) define strategic innovation as the achievement of new business models (including new products and services) that have innovativeness in their strategies. These strategic innovations are qualitatively different from the incremental innovation mentioned earlier, as they imply a transformation from an existing business to a new business or a business innovation that has a significant impact on company performance. However, realistically, it is important for companies to dynamically create original strategic positioning through new products, services, and business models while growing their existing business – balancing existing and new businesses is the essence of strategic innovation. In other words, a strategic framework that simultaneously covers and balances the two different business activities of exploitation (growth of existing businesses) and exploration (exploration of new businesses) is a dynamic view of strategy that establishes a sustainable competitive advantage for a company. Such an innovation system is called a “strategic innovation system” in this book. 1.2 Combining incremental and radical innovation Here in the 21st century, the changes to business circumstances surrounding companies are becoming more pronounced. Business leaders and managers face a wide

New theoretical model and research approach 3 range of challenges such as increased globalization of business, rapid technological innovation, ubiquitous networking throughout society, maturing markets, price wars, and environmental problems. Obviously, in the long term, businesses must continually produce new products, services, and business models to acquire and sustain competitiveness to maintain their growth. However, the radical revamp of conventional products and services and the creation of new business models that change existing rules have triggered major transformations in corporate strategy. For instance, Apple, a company that brought sweeping changes to music distribution and smartphone businesses, created new value chains in the ICT industry with its iPod, iTunes, iPhone, iPad, and Apple Watch products. To swiftly respond to changing circumstances, companies have to continually polish their existing core competencies to fortify their main businesses. Here, incremental innovation is important to advance organizational capabilities through successive and regular improvement and reform activities. In contrast, it is through radical innovation that companies can acquire new and never-before-seen core competencies through the convergence of differing knowledge needed to acquire the organizational capability to drive the development of business for the creation of new circumstances (markets). In particular, radical innovation (e.g., Leifer et al., 2000) has led to theoretical and practical guidance for companies to transform strategies to develop new markets and create new technologies. These innovation strategies emphasize not only swift response to circumstantial change but also the acquisition of organizational capabilities to drive business development toward creating new circumstances (markets). Of these two innovation processes – incremental (exploitation) and radical (exploration) – the former is required to pursue efficiency in existing business (or main business) knowledge in the company, while the latter is required to pursue the creation of knowledge to pioneer the businesses of the future. Nevertheless, corporations must simultaneously manage both of these disparate innovation processes and build them into the core of their corporate strategies (e.g., Kodama, 2003, 2004, 2018). Viewed from the research stream of knowledge management (e.g., Nonaka et al., 2014), there is a dynamic relationship between the creation and use of knowledge. Knowledge is used to train technical know-how and personnel skills, thus in turn, the accumulation of knowledge is the fuel for new knowledge creation. Accordingly, businesses need to understand to what extent they need to balance the creation and use of knowledge and proactively manage it. In this way, the ideas of creativity and efficiency of knowledge are reflected in the concept of combining exploration and exploitation (March, 1991) – creating knowledge to bring about groundbreaking radical innovation, or using knowledge for incremental innovation of existing core businesses to maintain competitiveness. For this reason, business leaders and managers need fresh perspectives to pioneer businesses for new markets while at the same time accumulating and advancing core competences to reinforce their core businesses. Simultaneously executing and combining these two substantially different innovation processes to pioneer new and highly individualized strategic positions are a superior corporate strategy also associated with the achievement of sustainable competitiveness (e.g., Markides, 1999; Kodama, 2018).

4  New theoretical model and research approach This dynamic strategic view of strategic innovation balances the different modes of the exploration process (new routines through new changes) and the exploitation process (existing routines) to ensure the long-term growth of a company (e.g., March, 1996; Benner and Tushman, 2003; Tushman and O’Reilly, 1997). For this reason, the research question of this book looks at the following: Realistically, it is important for companies to dynamically create original strategic positioning through new products, services, and business models while growing their existing business – balancing existing and new businesses is the essence of strategic innovation. In other words, a strategic framework that simultaneously covers and balances the two different business activities of exploitation (growth of existing businesses) and exploration (exploration of new businesses) is a dynamic view of strategy that establishes a sustainable competitive advantage for a company. As mentioned, this book refers to such an innovation system as a “strategic innovation system”. To date, there has been little prior research on the strategic innovation system – a comprehensive systems approach in which companies continuously and systematically create new businesses while maintaining the growth of existing businesses. Teece (2018), who advocated “dynamic capabilities” (Teece, 2007, 2014), a major research theme of strategy theory in recent years, asserts that both the capabilities and systems frameworks require coordination between all elements of an organization and should adopt a holistic view. Systems theory is a framework designed to achieve a holistic approach to studying phenomena in a variety of fields (Jackson, 1991, 2007, 2016). The systems approach offers useful tips without getting caught up in details and losing sight of the whole. At the heart of this framework is the notion that “the whole is more than the sum of its parts”, which originated with Aristotle. While the holistic view is the most obvious feature of systems theory, a systems approach requires understanding at both levels and therefore does not neglect the study of individual elements. Thus, the academic application of systems theory to innovation research and strategic studies is extremely promising. Effective use of systems theory enables the identification of elements of systems necessary for corporate capabilities building and the relationships among them while enabling the building of theoretical models for companies to achieve continuous strategic innovation. Teece (2018) also argues that general systems theory (von Bertalanffy, 1960), which is biologically oriented and emphasizes reactivity, is consistent with evolutionary ideas about companies (Nelson and Winter, 1982) – strategic management requires a framework that can recognize both evolution (path dependency) and design (entrepreneurship), which is the framework of dynamic capabilities (Augier and Teece, 2008). Therefore, research on such strategic innovation from the perspective of corporate and management systems will become increasingly important in the future (e.g., O’Connor, 2008; Teece, 2018). This dynamic view of strategic innovation balances the different modes of the exploration process (new routines through new changes) and the exploitation process

New theoretical model and research approach 5 (existing routines) to ensure the long-term growth of a company (e.g., March, 1996; Benner and Tushman, 2003; Tushman and O’Reilly, 1997). This book asks: “What is the theoretical model of the strategic innovation system, a corporate system that simultaneously covers and balances the opposing corporate activities of exploitation (growth of existing businesses) and exploration (development of new businesses)?” and, from synthesis of a range of major prior literature, clarifies the capabilities required by companies in dynamic innovation processes to achieve strategic innovation (combined exploitation for incremental innovation and exploration for radical innovation) in a sustainable way. 1.3 Research approach To understand the capabilities required to achieve strategic innovation that ensures the long-term growth of a company by balancing the different modes of the exploration and exploitation processes, it is necessary to understand the building of organizational capabilities required for each process in new product (or new business) development. For example, realistically, in the new product development process, projects face numerous problems and challenges, and project members need to implement practical processes to overcome the “Valley of Death” (Branscomb et al., 2001; Markham, 2002; Merrifield, 1995) and the “Darwinian Sea” (e.g., Dismukes, 2004), which are phenomena noted from practical experience. However, the practical processes experienced in projects are extremely complex (e.g., Kodama, 2002, 2005, 2007c), and the quality of capabilities required of individuals and organizations is also expected to vary. Responding to the research question “what is a theoretical model of a corporate system called a ‘strategic innovation system’ that simultaneously covers and reconciles the two different corporate activities of exploitation (growth of existing businesses) and exploration (development of new businesses) (Okhuysen and Bonardi, 2011)?”, this book is an attempt to construct a new theoretical model combining several different existing theoretical studies. The capabilities of a company to achieve sustainable strategic innovation are considered to have two major dimensions. The first dimension is capability characteristics that respond to changes in business environments (a perspective from a system framework of capabilities), and the second dimension is the process of changing capabilities in business activities over time (a perspective from the temporality and process of capabilities). The first reason these two dimensions are important is that for a company to achieve strategic innovation, which means both growing existing businesses and developing new businesses, it must build capabilities to respond to diverse changes in the business environments it faces. Change in business environments refers to the degree of uncertainty and the speed of change within and outside companies. The second reason is that the concepts of temporality and process need to be considered from the perspective of sustainable growth of corporate management when building corporate capabilities. It is necessary to capture changes in the capability-building process over time, for example, how a company’s (organization’s) capabilities change

6  New theoretical model and research approach in the transition from exploratory to exploitative activities (or from exploitative to exploratory activities). Organizing these two dimensions ((1) the characteristics of capabilities with respect to changes in business environments, and (2) the temporality and process of capabilities) by the classifications “covered (elements of capability)” and “rarefied (elements of capability)”, the research streams of the different theories can then be mapped as shown in Figure 1.1. For example, in the “dynamic capabilities approach” system framework, (1) the characteristics of capabilities with respect to changes in business environments are covered, but (2) the temporality and process of capabilities are rare. In addition, in the series of major research streams called the “innovation process approach” and the “exploration and exploitation approach”, the context of (2) the temporality and process of capabilities is covered, but the context of (1) the characteristics of capabilities with respect to changes in business environments is rare. The traditional resource-based view, which originated with Penrose (1959), has been refined as neoclassical corporate theory (Wernerfelt, 1984; Barney, 1991). Michael Porter’s positioning-based view (e.g., Porter, 1980), which emphasizes market structure analysis, originates from industrial organization theory but has its roots in the same neoclassical economic theory in that it sees the relationship between firms and markets as an opposition. VRIN resources (Barney, 1991) by themselves are, by definition, inherently valuable, but Teece (2014, p. 340) notes that VRIN resources alone do not create long-term corporate value. Furthermore, the resource framework places little emphasis on entrepreneurship in response to environmental change, and on innovation and learning processes that consider temporality (Teece, 2014, p.  341). Actually, as identified by Barney and Clark (2007, p. 257), Teece (2014, p. 341) also says “resource-based theory takes the existence of heterogeneous firm resources and capabilities as given and examines the impact of the resources for the ability of firms to gain and sustain competitive advantage”. In addition, virtually all of Porter’s (2008) “Five Forces” implicitly assume a relatively predictable environment. In Porter’s approach, risks may be recognized, but deep uncertainties (indeterminacy) are ignored (Teece and Leih, 2016, p. 7). Critically missing from the resource-based and positioning-based view paradigms is the theorization of innovation processes with a temporal nature that create new equilibriums, and capabilities of people and organizations to discover, invent, and commercialize business opportunities, markets, and technologies with the intention of realizing innovation (Osono et al., 2006). In other words, these traditional theories lack analysis and consideration from the two aforementioned dimensions ((1) the characteristics of capabilities with respect to changes in business environments, and (2) the temporality and process of capabilities). The process of building capabilities for sustainable strategic innovation in this book satisfies both of the two theoretical dimensions: (1) the characteristics of capabilities with respect to changes in business environments and (2) the temporality and process of capabilities. In this regard, Okhuysen and Bonardi (2011) point out that it is possible to use a combination of multiple ideas or a blend of theories to advance new insights when building unknown new theoretical models. In other words, the

New theoretical model and research approach 7 perspectives of multiple theoretical lenses bridge silos within and between disciplines and enable new theoretical insights. Okhuysen and Bonardi (2011) note the advantages and challenges of integrating two different theoretical lenses to build a theory. They suggest that the potential for new theory building arises when the different theoretical lenses are close areas of study and when there is compatibility between the assumptions underlying the theoretical lenses being integrated. By applying the findings of Okhuysen and Bonardi (2011), the research approach in this book can be explained as follows: The degree of “proximity” is significant, that is, the conceptual distance that exists between the phenomena of the two different theoretical lenses of (1) the characteristics of capabilities with respect to changes in business environments, and (2) the temporality and process of capabilities. The areas of expertise of the two theoretical lenses are also close in terms of research, and the compatibility and fit between the assumptions underlying these two theoretical lenses is significant. In other words, changes in business environments, temporality, and processes are based on assumptions about strong influences that extend to capabilities. Based on the findings of Okhuysen and Bonardi (2011), the steps of theory building in this research approach are as follows: First, Google Scholar, Scopus, and Web of Science databases were utilized and searched for literature related to capability theory regarding the two dimensions of characteristics of capabilities and temporality or process of capabilities. Three prior research streams were found (the “dynamic capabilities approach”, the “innovation process approach”, and the “exploration and exploitation approach”) that refer in detail to capability building in relation to the two dimensions, and the major studies among them were reviewed. Then, as shown in Figure  1.1, these three research streams were integrated to reveal new knowledge about the sustainable and dynamic capability-building process in companies. This book derives the concept of the “Capabilities Building Map” as a new theoretical model, and presents a theoretical model of the strategic innovation capabilities and strategic innovation system necessary for companies to continuously generate strategic innovation. 1.4 Structure of this book This book is structured as follows (see Figure 1.2). First, the book discusses the need for a new theoretical model and the book’s research approach toward theory building. Second, the book presents a new perspective for building this theoretical model from the synthesis of major prior literature in three research areas (“dynamic capabilities approach”, “innovation process approach”, and “exploration & exploitation approach”) with a background of the system-view and/or process-view. Third, under the new theoretical development item, the book presents the following theoretical model. First, as capabilities systems of companies, this book presents the concept of the capabilities building map (four domains of capabilities), which illustrates capabilities with four different characteristics that correspond to the elements of speed and uncertainty in the environmental changes faced by companies.

8  New theoretical model and research approach

Figure 1.1 Research approach to building a new theory

Next, the book presents a model of holistic capability building called “strategic innovation capabilities”, which are corporate system capabilities to achieve a combination of both exploitation and exploration. The book presents the importance of these strategic innovation capabilities as they enable companies to achieve the dynamic spiral of the two distinct types of capabilities on the time axis – the dynamic and ordinary capabilities of the capabilities building map, which are skillfully combined to achieve exploitation for fast or slow incremental innovation and exploration for radical innovation. In addition, the book discusses the importance of building strategic innovation capabilities and the concept that encompasses the four capabilities to realize the strategic innovation loop characteristic of the strategic innovation system. Fourth, the book provides readers with theoretical and empirical findings through in-depth multi-case analysis of global high-tech companies that have built a strategic innovation system and achieved sustainable strategic innovation. This book details the dynamic innovation process such as strategy transformation of Xiaomi, HUAWEI, Fujifilm for new business development, new business model construction in the semiconductor industry by Qualcomm, TSMC, business strategy by Zoom Video Communications, and so on, and shows that construction of a strategic innovation system is important for these high-tech companies.

New theoretical model and research approach 9

Figure 1.2 The structure of the book

Fifth, as an application of new theoretical development, the book shows that strategic innovation is realized through the asset orchestration process, which is a core function of dynamic capabilities. Through in-depth multi-case analysis of global hightech companies such as Apple, NTT DOCOMO, and Fujifilm, this book shows that such organizational capabilities are the strategic innovation capabilities that realize the dynamic integration processes between dynamic and ordinary capabilities. Finally, this book describes theoretical and practical implications and future research issues. References Augier, M. and Teece, D. J. (2008). Strategy as evolution with design: The foundations of dynamic capabilities and the role of managers in the economic system. Organization Studies, 29(8–9), 1187–1208. Augier, M. and Teece, D. J. (2009). Dynamic capabilities and the role of managers in business strategy and economic performance. Organization Science, 20(2), 410–421. Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120. Barney, J. B. and Clark, D. N. (2007). Resource-Based Theory: Creating and Sustaining Competitive Advantage. Oxford: Oxford University Press. Benner, M. and Tushman, M. (2003). Exploitation, exploration, and process management: The productivity dilemma revisited. Academy of Management Review, 28(2), 238–256. Branscomb, L. M., Auerswald, P. E. and Chesbrough, H. W. (2001). Taking Technical Risks. Cambridge, MA: MIT Press.

10  New theoretical model and research approach Brown, S. L. and Eisenhardt, K. M. (1997). The art of continuous change: Linking complexity theory and time-paced evolution in relentlessly shifting organizations.  Administrative Science Quarterly, 1–34. Christensen, C. M. and Bower, J. L. (1996). Customer power, strategic investment, and the failure of leading firms. Strategic Management Journal, 17(3), 197–218. Christensen, C. M. and Raynor, M. E. (2003). Why hard-nosed executives should care about management theory. Harvard Business Review, 81(9), 66–75. Dismukes, J. P. (2004). Accelerate radical innovation-now!  Research Technology Management, 47(5), 2. Ettlie, E., Bridges, P. and O’Keefe, D. (1984). Organization strategy and structural differences for radical versus incremental innovation. Management Science, 30(6), 682–695. Glasmeier, A. (1991). Technological discontinuities and flexible production networks: The case of Switzerland and the world watch industry. Research Policy, 20(2), 469–485. Govindarajan, V. and Trimble, C. (2005). Ten Rules for Strategic Innovations. Boston, MA: Harvard Business School Press. Green, S., Gavin, M. and Aiman-Smith, L. (1995). Assessing a multidimensional measure of radical technological innovation. IEEE Transactions on Engineering Management, 42(3), 203–214. Hargadon, A. (2003). How Breakthroughs Happen: The Surprising Truth About How Companies Innovate. Boston, MA: Harvard Business School Press. Henderson, R. M. and Clark, K. B. (1990). Architectural innovation: The reconfiguration of existing product technologies and the failure of established firms. Administrative Science Quarterly, 9–30. Jackson, M. C. (1991). Critical systems thinking. In Systems Methodology for the Management Sciences (pp. 183–212). Boston, MA: Springer. Jackson, M. C. (2007). Systems Approaches to Management. New York: Springer Science  & Business Media. Jackson, M. C. (2016). Systems Thinking: Creative Holism for Managers. Hoboken, NJ: John Wiley & Sons, Inc. Jelinek, M. and Schoonhoven, C. B. (1990). The Innovation Marathon: Lessons From High Technology Firms. San Francisco, CA: Jossey-Bass Publishers. Kaplan, S., Murray, F. and Henderson, R. (2003). Discontinuities and senior management: Assessing the role of recognition in pharmaceutical firm response to biotechnology. Industrial and Corporate Change, 12(4), 203–233. Kodama, M. (2002). Transforming an old economy company through strategic communities. Long Range Planning, 35(4), 349–365. Kodama, M. (2003). Strategic innovation in traditional big business. Organization Studies, 24(2), 235–268. Kodama, M. (2004). Strategic community-based theory of firms: Case study of dialectical management at NTT DoCoMo. Systems Research and Behavioral Science, 21(6), 603–634. Kodama, M. (2005). Knowledge creation through networked strategic communities: Case studies on new product development in Japanese companies. Long Range Planning, 38(1), 27–49. Kodama, M. (2007a). The Strategic Community-Based Firm. London: Palgrave Macmillan. Kodama, M. (2007b). Knowledge Innovation – Strategic Management as Practice. Cheltenham: Edward Elgar Publishing. Kodama, M. (2007c). Project-Based Organization in the Knowledge-Based Society. London: Imperial College Press. Kodama, M. (2011). Knowledge Integration Dynamics: Developing Strategic Innovation Capability. Singapore: World Scientific Publishing.

New theoretical model and research approach 11 Kodama, M. (2018).  Sustainable Growth Through Strategic Innovation: Driving Congruence in Capabilities. Cheltenham: Edward Elgar Publishing. Laurila, J. (2002). Managing Technological Discontinuities: The Case of the Finnish Paper Industry. London: Routledge. Leifer, R., McDermott, M., O’Connor, C., Peters, S., Rice, M. and Veryzer, W. (2000). Radical Innovation: How Mature Companies Can Outsmart Upstarts. Cambridge, MA: Harvard Business School Press. Leonard-Barton, D. (1992). Core capabilities and core rigidities: A paradox in managing new product development. Strategic Management Journal, 13(2), 111–125. Levinthal, D. A. (1991). Random walks and organizational mortality.  Administrative Science Quarterly, 397–420. Levinthal, D. A. (1997). Adaptation on rugged landscapes. Management Science, 43(7), 934–950. Levitt, B. and March, J. G. (1988). Organizational learning, Annual Review of Sociology, 14(1), 319–338. March, J. (1991). Exploration and exploitation in organizational learning. Organization Science, 2(1), 71–87. March, J. (1996). Continuity and change in theories of organizational action. Administrative Science Quarterly, 41(2), 278–287. Markham, S. K. (2002). Moving technologies from lab to market. Research Technology Management, 45(6), 31–36. Markides, C. (1997). Strategic innovation. Sloan Management Review, 38(1), 9–23. Markides, C. (1999). A dynamic view of strategy. Sloan Management Review, 40(3), 55–63. Merrifield, B. D. (1995). Obsolescence of core competencies versus corporate renewal. Technology Management, 2(2), 73–83. Mitchell, W. (1989). Whether and when? Probability and timing of incumbents’ entry into emerging industrial subfields. Administrative Science Quarterly, 34(2), 208–234. Morone, J. G. (1993). Technology and competitive advantage – The role of general management. Research-Technology Management, 36(2), 16–25. Nelson, R. and Winter, S. (1982). An Evolutionary Theory of Economic Change. Boston, MA: Belknap Press. Nonaka, I., Kodama, M., Hirose, A. and Kohlbacher, F. (2014). Dynamic fractal organizations for promoting knowledge-based transformation – A new paradigm for organizational theory. European Management Journal, 32(1), 137–146. O’Connor, C. and Rice, P. (2001). Opportunity recognition and breakthrough innovation in large established firms. California Management Review, 43(2), 95–116. O’Connor, G. (2008). Major innovation as a dynamic capability: A systems approach. Journal of Product Innovation Management, 25(2), 313–330. Okhuysen, G. and Bonardi, J. P. (2011). The challenges of building theory by combining lenses. Academy of Management Review, 36(1), 6–11. O’Reilly, C. and Tushman, M. (2004). The ambidextrous organization. Harvard Business Review, 82(4), 74–82. Osono, E., Kodama, M., Yachi, H. and Nonaka, I. (2006). Practicing Theory of Innovation (in Japanese). Japan: Hakuto Shobou. Penrose, E. T. (1959). The Theory of the Growth of the Firm. New York: Wiley. Porter, M. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press. Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard Business Review, 86(1), 25–40. Teece, D. J. (2007). Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319–1350.

12  New theoretical model and research approach Teece, D. J. (2014). The foundations of enterprise performance: Dynamic and ordinary capabilities in an (economic) theory of firms. The Academy of Management Perspectives, 28(4), 328–352. Teece, D. J. (2018). Dynamic capabilities as (workable) management systems theory. Journal of Management & Organization, 24(3), 359–368. Teece, D. J. and Leih, S. (2016). Uncertainty, innovation, and dynamic capabilities: An introduction. California Management Review, 58(4), 5–12. Teece, D. J., Pisano, G. and Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(3), 509–533. Tripsas, M. and Gavetti, G. (2000). Capabilities, cognition, and inertia: Evidence from digital imaging. Strategic Management Journal, 1147–1161. Tushman, M. L. and Anderson, P. (1986). Technological discontinuities and organizational environments. Administrative Science Quarterly, 439–465. Tushman, M. L. and O’Reilly, C. A. (1997). Winning Through Innovation. Cambridge, MA: Harvard Business School Press. Vanhaverbeke, W. and Peeters, N. (2005). Embracing innovation as strategy: Corporate venturing, competence building and corporate strategy making. Creativity and Innovation Management, 14(3), 246–257. Von Bertalanffy, L. (1960). Principles and theory of growth. In W. W. Nowinski (Ed.), Fundamental Aspects of Normal and Malignant Growth, 493 (pp. 137–259). Amsterdam: Elsevier. Weick, K. E. (1995). What theory is not, theorizing is. Administrative Science Quarterly, 40(3), 385–390. Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5(2), 171–180.

2 Capabilities building through dynamic capabilities approach

2.1 Dynamic capabilities approach Resource-based theory, which focuses on independent capabilities for companies and organizations (e.g., Penrose, 1959; Richardson, 1972; Wernerfelt, 1984; Rumelt, 1984; Barney, 1991), has developed as a strategy theory framework from the viewpoints of microeconomics and organizational economics. Resource-based theory and Porter’s (1980) competition strategy theory enable a detailed analysis of strategic positioning and the relationship between competitive excellence and the internal resources already owned by companies in slowly changing environments and industries. However, it is difficult to analyze how companies in rapidly changing high-tech industries within competitive environments, such as the IT and digital sectors, create new competitive excellence. Meanwhile, in recent years, refinements to the theory of dynamic capabilities (hereinafter referred to as “DC”) (e.g., Teece et al., 1997; Teece, 2007, 2014) have progressed so that the fundamental theory clarifies the mechanisms for sustainable growth through corporate strategic innovation. Teece et al. (1997, p. 516) assert that DC are defined as “a company’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments”. Thus, they assert that dynamic capabilities reflect an organization’s ability to achieve new and innovative forms of competitive advantage given path dependencies and market positions (Leonard-Barton, 1992). In addition, Teece (2014, p. 332) suggests that strong DC help enable an enterprise to profitably build and renew resources and assets that lie both within and beyond its boundaries, reconfiguring them as needed to innovate and respond to (or bring about) changes in the market and in the business environment more generally. As micro functions of DC, DC can usefully be broken down into three primary clusters: (1) identification, development, co-development, and assessment of technological opportunities in relationship to customer needs (sensing); (2) mobilization of resources to address needs and opportunities, and to capture value from doing so (seizing); and (3) continued renewal (transforming). Engagement in continuous or semicontinuous sensing, seizing, and transforming is essential if a company is to sustain itself as customers, competitors, and technologies change (Teece, 2007, 2014) (see Figure 2.1). DOI: 10.4324/9781003305057-2

14  Capabilities building through DC approach

Figure 2.1 Dynamic capabilities (DC) and ordinary capabilities (OC) Source: Created by the author, citing Teece (2007, 2014)

Another significant feature of DC is its strategic involvement and commitment based on the basic guiding principle of “doing the right things” (Teece, 2014). There are also “signature processes” (Bruch and Ghoshal, 2004) in large traditional (leading) corporations that are difficult for other companies to copy. These signature processes also lead to raising the quality of DC. On the other hand, regarding the domain in which DC are applied, Teece et al. (1997) claimed that dynamic capabilities are important for sustainable firm-level competitive advantage, especially in high-velocity markets. In addition, strong dynamic capabilities (strong DC) allow an enterprise and its top management to develop hypotheses about the evolution of consumer preferences, business problems, and technology, validate and fine-tune them, and then act on them by realigning assets and activities to enable continuous innovation and change (Teece, 2014). In this perspective, DC can be thought of as dynamic business processes that should be demonstrated in business environments that are changing rapidly, and/or in business environments that have high levels of uncertainty. Teece (2007, 2014) clearly distinguishes these DC from “ordinary capabilities” (hereinafter referred to as “OC”). Teece (2014, p. 330) states that “ordinary capabilities have also been called static (Collis, 1994), zero-level (Winter, 2003), first order (Danneels, 2002), and substantive (Zahra et al., 2006). The zero-, firstand second typology is used by Easterby-Smith and Prieto (2008) and Schilke (2014). The more common usage seems to be equating first-order with ordinary”. Hence, these OC generally fall into three categories: administration, operations,

Capabilities building through DC approach 15 and governance (see Figure 2.1). Clarified as specific details of corporate activity, it can be said that OC enable a firm to perform an activity on an ongoing basis using more or less the same techniques on the same scale to support existing products and services for the same customer base. Such a capability is ordinary in the sense of maintaining the status quo (i.e., not out of the ordinary; Winter, 2003) (Helfat and Winter, 2011). Nevertheless, OC that pursue efficiency in terms of a company’s best practices and “doing things right” are not to be underestimated – they are often fundamental and can support competitive advantage for decade-long periods (Teece, 2014). In other words, OC are valid in businesses in environments that are relatively stable and gently changing with low levels of uncertainty but cannot ensure corporate sustainability over the long term. However, in large traditional companies that operate many businesses, to a greater or lesser degree, there will always be business domains in which such OC must be demonstrated. Demonstrating OC in business in relatively stable environments where environmental change is gradual and there are low levels of uncertainty is crucial. Accordingly, companies must apply ordinary capabilities (OC) and systematically and analytically formulate and implement strategies under relatively stable or slowmoving conditions with little business uncertainty. “Learning before doing” (Pisano, 1994), that is, formulating and implementing detailed strategy planning and policies, is a key element of OC in market structures with clear corporate boundaries and also grasps the players in value chains. Based on the above discussion, the capabilities that a company should demonstrate (capabilities that are required) differ depending on the environmental conditions it faces. From this perspective, this book presents a theory of dynamic capabilities building that takes into account the variable factors of capabilities exhibited by companies (e.g., the speed of market changes, uncertainty of markets, the time axis factors of corporate activities). Then, based on prior research, the book describes in detail the capabilities building map, a core concept of this book. 2.2 The capabilities building map 2.2.1  Resource and capabilities

Resources are intangible or tangible assets and production inputs that can be semipermanently owned, controlled, and accessed by organizations. On the other hand, capabilities are the abilities of a company (organization) to execute a series of coordinated tasks using its own resources to achieve a certain result (Helfat and Peteraf, 2003). Put differently, Teece (2016) states that capabilities are a set of activities that a company performs in a semi-routine manner and that enable it to achieve a series of tasks so that even in adversity, such as a business crisis, the company develops, produces, and provides products and services and generates revenue. Both resources and capabilities may constantly evolve and change over time, in the environment that companies face, and in the development and implementation of their intended (or unintended) strategies. These ideas suggest the importance of understanding resource-based theory in its entirety from a dynamic perspective.

16  Capabilities building through DC approach To clarify future discussions, as mentioned in the previous section, this book classifies capabilities with diverse characteristics as “ordinary (or operational)” and “dynamic”, and discusses patterns and paths of capability evolution. Winter (2000) calls operational capabilities (or ordinary capabilities) a high-level routine, or a set of routines, integrated with the execution of input flows that provides organizational management with a set of decision-making options to produce a specific type of significant output. In this definition, routine means a pattern of repeated activities (Nelson and Winter, 1982). In general, ordinary capabilities (or operational capabilities) include the execution of various processes, for example, production activities for a particular product or service using a set of routines that entail coordination and execution of the various tasks required for the activity. In contrast, Teece (2016) describes that ordinary capabilities relate to the performance of management, operations, and governance-related functions needed to complete a task, as shown in Figure 2.1, and points out the importance of getting things right. In addition, Teece (2016) says dynamic capabilities are activities at a higher level that are able to orient themselves to the development and production of products and services for which demand is (or may soon be) high. Companies with dynamic capabilities are not only able to integrate, build, and reconfigure internal and external resources (or assets or knowledge) to cope with rapidly changing business environments but also able to shape rapidly changing business environments as well (even intentionally and actively create new business environments) (e.g., Kodama, 2018a). 2.2.2  Evolution and patterns of capabilities building through time

The concept of dynamic resource-based theory, as well as dynamic capabilities with adaptation and change (Teece et al., 1997; Teece, 2007, 2014), is an important foundation for analyzing and considering the temporal evolution of capabilities. This chapter presents the concept of a “capabilities building map” that integrates dynamic resource-based theory and dynamic capabilities (as well as ordinary capabilities). Although the capabilities and resource advantages or heterogeneity of each company are one of the foundations of resource-based theory, models and frameworks describing capabilities building that explain how such advantages and heterogeneity arise (also dynamically) from a resource-based perspective are ambiguous. Thus, it is difficult to fully explain how companies use resources and capabilities to build sustainable competitive advantage while it is unclear where the advantages and heterogeneity of resources and capabilities arise (Helfat and Peteraf, 2003). The competitive advantage of a company becomes apparent after a certain amount of time and changes through time. Therefore, to explain competitive advantage, it is necessary to incorporate evolution through time of the resources and capabilities underlying a competitive advantage into the resource-based perspective. The capabilities building map contributes as a dynamic framework for resource-based theory (Wernerfelt, 1984; Rumelt, 1984; Teece et al., 1997) by providing a framework for understanding the evolutionary trajectory of capabilities over time. The capabilities building map provides a more complete and dynamic approach to resource-based theory and dynamic capabilities (and even ordinary capabilities)

Capabilities building through DC approach 17 while providing a common language and way of thinking about the evolution of capabilities. Described in Section  2.2.3, the capabilities building map complements Helfat and Peteraf ’s (2003) “capabilities lifecycle” (CLC) theory, which is an approach derived from evolutionary economics (Nelson and Winter, 1982). This section outlines the main elements of the capabilities building map and explains the theoretical and practical logic on which it is based. The capabilities building map concept is based on the premise that the capabilities possessed or demonstrated by a company are contingency-dependent. In resource-based theories (Wernerfelt, 1984; Rumelt, 1984; Teece et al., 1997), there are various streams, including “ordinary capabilities” (Teece, 2007, 2014), that are the foundation of dynamic capabilities (Teece et al., 1997; Teece, 2007, 2014) and “routine-based” (Nelson and Winter, 1982), “knowledge-based” (Kogut and Zander, 1992; Winter, 1987; Grant, 1996) theory, and capabilities lifecycle (CLC) theory (Helfat and Peteraf, 2003). The capabilities building map approach aims to converge and integrate these various streams into one. Helfat and Peteraf (2003) say that the concept of the capabilities lifecycle, which is the subject of an earlier study, necessarily follows from Wernerfelt’s (1984, p. 171) view that “for the firm, products and resources are two sides of the same coin”. The logic is that just as product development path follows a distinct pattern known as a product lifecycle, capabilities follow a similar pattern. On the other hand, the capabilities building map concept is partially based on the view that “resources and activities are, in a sense, duals of each other” (Porter, 1991, p. 109), and further that “resources and activities are two sides of the same coin” (Mathews, 2006). Porter (1991, p. 102) stated the following about activities: A firm is a collection of discrete, but interrelated economic activities such as products being assembled, salespeople making sales visits, and orders being processed. A firm’s strategy defines its configuration of activities and how they interrelate. Competitive advantage results from a firm’s ability to perform the required activities at a collectively lower cost than rivals, or perform some activities in unique ways that create buyer value and hence allow the firm to command a premium price. The required mix and configuration of activities, in turn, is altered by competitive scope. In other words, the activities exhibited by companies imply the importance of resources and capabilities in forming value chains and value systems. Meanwhile, Mathews (2006, p. 5) held a similar view to Porter (1991) that Firms are essentially instruments of action. They act on the real business world, transforming inputs into outputs, for sale in product markets (where products are goods or services). These transformations are what we shall designate as the activities of the firm. Activities generate revenues, which are earned in product markets; they are accounted for in the income statement (profit and loss statement).

18  Capabilities building through DC approach And also said the following: It is consistent with the fundamental process-based account of firms’ activities by Georgescu-Roegen (1972), and with the idea of production as a combination of input-output activities (Leontief 1951). (On this, see Neill, 2003). It is also consistent with the reconstruction of “design economics” (i.e., an economics of the industrial design process) where Baldwin and Clark (2000) define an economic process as “a method that converts inputs, tangible and intangible, into outputs that have economic value”. Activities may thus be viewed as the primary site of strategizing behavior by firms, reconfiguring value chains to produce new products or product mixes and drawing profits from the product markets. Simple activities are combined together to produce more complex activities, involving more complex value chains. These might be controlled by one firm, or by several, that combine forces in a value chain or network. The firms link up in this way as a result of their strategic choices. (Mathews, 2006, p. 5) Process-view and Practice-view

The “activities-based view of the firm” of Mathews (2006) has two findings. The first is the “Process-view” aspect of activities related to business process management, such as innovation processes (product innovation and process innovation) and a combination of input-output activities, including new product development. Second, creativity generates new ideas, and these ideas are then used for strategic innovation (e.g., Kodama, 2018a) to realize new economic value. Behind the creation of economic value is “strategizing behavior” – corporate actions in which value chains are flexibly and agilely restructured and integrated through a variety of activities by mobilizing tangible and intangible assets that cross the inside and outside of the company. Such strategizing behavior implies the importance of a “practice-view” approach that creates economic value through new innovations – not just management through a process approach. From the perspective of strategic management research, the practice-view means the human and organizational behaviors of strategizing and organizing to capture ever-changing processes, changes and power of strategy and organizations over time, where “Strategy as Practice” (Pettigrew, 2003; Whittington, 2004) and “Strategic Management as Practice” (Kodama, 2007b) lead to new knowledge creation (Nonaka and Takeuchi, 1995) and knowledge integration (Grant, 1996; Kodama, 2007a). Another meaning of practice-view is activities to promote best practice, such as improvement and enhancement of daily routines, from the perspective of knowledge management. Furthermore, practice-view points to the importance of “signature processes” (Gratton and Ghoshal, 2005) that go beyond best practice. Practice-view is also important from the perspective of academic research on strategy as practice and knowledge management. To reiterate, many of daily routine activities follow a process. Routines also include improvement and enhancement activities, and new practices created by best

Capabilities building through DC approach 19 practices become routine over time and are incorporated into an organization as processes. This is because smart companies understand how to embed best practices as internal processes. Many of the day-to-day routines in formal organizations are formalized processes. These processes are the basis for mainly driving ordinary capabilities (OC). Daily routines made into processes consist, in a micro sense, of a variety of practices. In this sense, the concept of processes can be said to encompass practice. On the other hand, practice also includes elements of non-routine practice (e.g., non-routines) other than routines that have been turned into processes, and the concept of practice can be said to encompass processes. For example, the following is a case in point. One company that currently gains a lot of attention for its world-leading innovation business is undeniably Apple of the United States. In an interview about Apple’s product development (Burrows, 2004), Steve Jobs describes product development as a mixture of creativity and routine. Regarding the management system that generates innovation at the Apple, the late Steve Jobs left us with the expression “the mechanism does not have a mechanism”. He said, “There is no system. That doesn’t mean we don’t have process. Apple is a very disciplined company, and we have great processes. But that’s not what it’s about. Process makes you more efficient”. And, on bringing about innovation: But innovation comes from people meeting up in the hallways or calling each other at 10:30 at night with a new idea, or because they realized something that shoots holes in how we’ve been thinking about a problem. It’s ad hoc meetings of six people called by someone who thinks he has figured out the coolest new thing ever and who wants to know what other people think of his idea. And it comes from saying no to 1000 things to make sure we don’t get on the wrong track or try to do too much. We’re always thinking about new markets we could enter, but it’s only by saying no that you can concentrate on the things that are really important. Jobs spoke of how innovations were born through these types of situations and discussions. Jobs’ explanation suggests that Apple’s ordinary capabilities (OC) are based on processes. On the other hand, Jobs suggests that product development is also a routine activity that involves the use of technical knowledge from past experience and the execution of individual processes in project management, but emergent thinking and action through informal and dynamic interactions with members of the team are separate activities (Teece, 2012). This “separate activities” can be considered to be elements of “non-routine” practices that are not based in processes. These nonprocess “non-routines” are informal behaviors (or practices) of practitioners, and are the primary basis that drives dynamic capabilities (DC). Realizing true innovation comes from a balance between efficiency and creativity (Kodama, 2007a). Decision-making rules, strict regulations and routines in formal organizations in companies bring efficiency to routines (the so-called elements of OC). In contrast, as creativity, ideas for innovations are mainly brought

20  Capabilities building through DC approach about through non-routine interactions between human beings in informal human networks, in other words, informal organizations (the so-called elements DC). Put differently, creativity emerges in dynamic and diverse non-routine practices between human beings through non-continuous trial and error that has departed from efficient processes. As Teece (2012) says regarding dynamic capabilities, not only routine but also the unique non-routine behaviors of middle managers, including top management, provide important theoretical and practical insights. Therefore, OC follows a routine-driven process-view. On the other hand, the practice-view contains a variety of non-routine elements and is primarily the basis that drives DC (see Figure 2.2). Trinity & triad – the capabilities building map

The “activities-view” consists of elements of integration (or compatibility) with the process-view and practice-view. Essentially, from a knowledge management perspective, the process-view, which drives OC and emphasizes the efficiency of corporate activities, is at odds with the practice-view, which drives DC and emphasizes creativity, such as generating new economic value (Brown and Duguid, 2000). However, by balancing these two views in corporate activities and dynamically embedding them within a company (and even within customers and partners), capabilities are created to dynamically build and restructure the value chains and value systems of Porter’s (1991) framework. The activities-view spans and integrates formal and informal organizations inside and outside companies and includes customers, and integrates various types of knowledge (assets) (intangible and tangible) (“asset orchestration” in the context of dynamic capabilities), and is the strategizing behavior of practitioners (see Figure 2.2). From the above perspective, and in light of previous studies, the capabilities building map is derived from the view that includes and integrates the concepts that “products and resources are two sides of the same coin” (Wernerfelt, 1984) and “resources and activities are two sides of the same coin” (Mathews, 2006). It is business activities as corporate activities that give rise to a variety of businesses, including products and services, and it is the capabilities of a company that make these business activities possible (and vice versa). In other words, products and services, business activities, and capabilities are in a “triad and trinity” relationship (see Figure 2.3). Therefore, the chronological patterns of the evolution over time of capabilities buildings and its characteristics follow the path of business development – commercialization – diffusion activities – mature business activities, including products, services, etc., that is, the characteristics of business activities (basic research – commercialization development – manufacturing – sales – improvement, etc.). Similar to innovation processes such as the product innovation process (radical and incremental innovation), the capabilities building map includes various stages of capabilities that show clear characteristics at each stage, such as basic research, practical development, manufacturing, sales, and improvement. The capabilities lifecycle of Helfat and Peteraf (2003) is a theoretically and practically useful theory but differs from the capabilities building map concept in the

Capabilities building through DC approach

Figure 2.2 Activities-based view of capabilities building Source: Created by the author based on Brown and Duguid (2000)

Figure 2.3 Contrasting the capabilities building map and capabilities lifecycle Source: Wernerfelt (1984), Helfat and Peteraf (2003). Comprehensive integration of Wernerfelt (1984), Porter (1991), Mathews (2006)

21

22  Capabilities building through DC approach following perspectives. The first is that not all products, services, or application of business is necessarily successful and leads to new business growth. In practice, many projects must overcome the “valley of death” (Branscomb et al., 2001; Markham, 2002; Merrifield, 1995) for R&D success in the face of uncertainty, or, even worse, in a fast-changing competitive environment, make it through the “Darwinian sea” (e.g., Philip and Lewis, 2003; Dismukes, 2004) (e.g., Kodama, 2011, 2017). This implies that projects are greatly affected by uncertainty and the speed of environmental change, and correspondingly, the resources and capabilities required for each new business project will differ. The capabilities building map focuses on the factors (variables) of uncertainty and the speed of environmental change in response to changes in business activities over time, and focuses on which capabilities with different characteristics are needed in response to the domain (phase) of each process. Second, the capabilities lifecycle has multiple stages, including the founding, development, and maturity stages, but the details of the characteristics of capabilities in these stages (e.g., dynamic and/or ordinary capabilities) are unclear. The capabilities building map clarifies what capabilities with what characteristics are needed for each process domain (phase) in response to changes in business activities over time. Third, in the capabilities lifecycle, various events occur at or before a capability reaches a stage of maturity, which affects the future evolution of the capability. In such cases, it is noted that capabilities branch into six phases in the capability life cycle: retirement (death), retrenchment, renewal, replication, redeployment, and recombination. Correspondingly, the capabilities building map clarifies what capabilities with what characteristics are needed in response to changes in business activities over time, in each of the six phases of branching. Next, this chapter describes the business activities map that forms the capabilities building map. 2.2.3  The business activities map

Business activities as a whole consist of elements that form value chains, such as basic research (research and development of elemental technologies), practical application development (practical application of products and services), manufacturing, sales, and improvement of existing products and services. From a more macro perspective, business activities can be divided into “business activities related to new businesses” and “business activities related to existing businesses” (however, these new and old business activities are interrelated). Also, when interpreted in the context of the innovation process, business activities refer to product and service innovation processes (radical and incremental innovation) (e.g., Kodama and Shibata, 2014a). In the new product and service development process, overall business activities, including the innovation process from basic research to practical development and from commercialization to business maturity, are realistically complex, but from an academic research perspective (e.g., Kodama, 2017; O’Connor, 2006; Burgelman et al., 2004; Branscomb, 2004; Wessner, 2001), four sub-processes are generally considered, which are described by the “business activities map” (see Figure 2.4).

Capabilities building through DC approach 23

Figure 2.4 “Business Activities Map” for corporate activities

The business activities map is divided into the following sub-processes based on the characteristics of the business process: Domain I (basic research and elemental technology research), Domain II (practical development), Domain III (new business development), and Domain IV (matured existing business). In other words, Domain I, Domain II, and Domain III are business activities related to new business and Domain IV corresponds to business activities related to existing business. In Figure 2.4, (a) is the inter-process shift in the new business development area, which generally results in a Domain I  II  III inter-process shift (including the feedback loop between processes). In particular, the Domain I  Domain II process is the so-called new product development (NPD) area, and as shown in Figure 2.5, four patterns of linear to nonlinear models have been reported in previous studies. For example, the linear model, which is well known and utilized in practice, is a logical project management method that attempts to deliver appropriate results (outputs) within a given time and cost with given resources (inputs) (e.g., Cooper and Kleinschmidt, 1986; Cooper, 1990). This model is often used in the product development process (including improvements and upgrades) and is generally dominated by the Domain I  II  III inter-process shift. On the other hand, the recursive model is applied in the NPD process where market and technological uncertainties exist (e.g., Kline, 1985; Kline and Rosenberg, 1986). In the recursive model, a feedback loop is formed within and between Domains in the Domain I  II  III process. In addition to this, there are also chaotic and

24

Characteristics

Adaptive area

Position on the business activities map

References

Linear

Logical project management methods seeking to provide appropriate results (outputs) with a given resource (input) in a defined time and cost Complex feedback loops form between each stage of innovation, overlapping the NPD stages and creating ambiguity and disorder in processes. A model that suggests the innovation process begins disorderly and ends in stability, suggesting that the later stages of product innovation are more suited to a linear framework (an extended concept of the recursive model) Frequent but ambiguous requests for subtle control. Team focus and scheduling maintained while fostering member motivation and creativity. Demonstrated adaptability to make diverse paradoxes manageable.

Routine phase product development work/ improvement (incremental innovation) NPD processes requiring market and technology uncertainty (radical innovation) Processes suitable for very radical innovation or aspects of the search and exploration of truly new products (breakthrough innovation)

Domain I  II  III

For example, Cooper and Kleinschmidt (1986), Cooper (1990)

Domain I  II  III (Feedback within and between domains)

For example, Kline (1985), Kline and Rosenberg (1986)

Domain I  II  III (The first half of the process is a recursive process/the second half is a linear process)

For example, Cheng and Van de Ven (1996), Koput (1997)

Increase the adaptability of dynamic processes between order and chaos and the potential for diverse behaviors and innovation outcomes. (Innovation in highly uncertain and rapidly changing environments)

Domain I  II  III (A mixed model of the linear and chaotic processes)

For example, Lewis and Kelemen (2002), Brown and Eisenhardt (1997)

Recursive

Chaotic

Complex Adaptive System

Figure 2.5 Positioning various new product development (NPD) on the business activities map Source: Created by the Author, citing McCarthy et al. (2006)

Capabilities building through DC approach

NPD Framework

Capabilities building through DC approach 25 complex adaptive models. However, in the three NPD models other than the linear model, there are complex feedback loops within and across domains ((a) and (c) in Figure 2.4) at the micro level, but at the macro level, these four patterns generally follow the Domain I  Domain II  III shift. Both the phase of basic research and elemental technology research in Domain I and the phase of practical application development in Domain II are highly uncertain. Furthermore, the degree of difficulty of technology development and the degree of market acceptance often have a significant impact on the decision-making process at the top levels of a company. New business development projects also face many challenges in obtaining resources (e.g., human resources, capital, and intellectual assets), and in many cases, projects are terminated midway through the process. In practice, this is sometimes expressed as the “valley of death”. Domain III is the area where products (or businesses) successfully turned into products in Domain II are commercialized. In the context of the product life cycle, this shift is the introduction phase  growth phase (although there are many cases where there is not necessarily growth). In the context of the innovation process, it also leads to the birth of an S-shaped curve (if the new venture is successful) (Foster, 1986). It is important to note that not all commercialization necessarily takes place in Domain III. Depending on the characteristics of the product or business (e.g., Internet businesses), there are many cases where trial services are first introduced into the market in Domain II during their practical application development phase (e.g., Kodama, 2005). In Domain III, the more the market value of a new product increases, the more competitors enter with imitation strategies (e.g., Schnaars, 2002), and the more the market turns into a so-called “Darwinian Sea”. During this phase, products are improved and enhanced to beat the competition, and the market gradually expands. However, not all succeed, as exemplified by the withdrawal of several Japanese cell phone manufacturers from the smartphone market. During this Domain III phase, the dominant design of the product is generally solidified and there is often a shift from product innovation to process innovation (Abernathy and Utterback, 1978; Abernathy, 1978). Realistically, however, many companies, especially those in hightech industries, aim to combine product innovation and process innovation (e.g., Kodama, 2011; Kodama and Shibata, 2014b). Finally, Domain IV, that of maturing existing business, corresponds to business that will survive and mature in stable market environments as product lines that survived in the competitive environment of Domain III. However, in the context of the product lifecycle, this domain is also the phase that gradually changes from maturity to decline as technology and markets change. In Figure  2.4, “(d) Shift to new R&D activities” means a shift from existing businesses (growing businesses and mature or declining businesses) to new business development. One such case is when a product line (or industry) that has reached maturity, with the dominant design of the product established and the process innovation described earlier becoming mainstream, shifts again toward product innovation to de-mature (Abernathy et al., 1983). Examples include a number of high-tech products (major topics include the shift in technical methods from analog to digital,

26  Capabilities building through DC approach from real-world business to online business, etc.), signifying a shift from Domain III and/or IV to Domain I. The second is a case where a company embarks on completely new business development based on the technological know-how accumulated in Domain III and Domain IV, or by integrating in-house and external technologies through open innovation (Chesbrough, 2003) (e.g., Kodama and Shibata, 2016). On the other hand, a direct shift from Domain III and/or IV to Domain II for practical development is also possible, but in practical terms, even if R&D on elemental technologies does not occur (i.e., non-technical new business), new business models need to be examined and Domain I is required as a minimum. This shift from Domain III and/or IV to Domain I triggers the search for new business (products and services), which then leads to the creation of a new product lifecycle in Domain II and beyond. In the context of the innovation process, it also leads to the birth of a new S-shaped curve (if the new venture is successful) (Foster, 1986). As described earlier, the business activities map is divided into four domains: Domain I (basic research and elemental technology research), Domain II (practical development), Domain III (new commercialization), and Domain IV (matured existing business). The characteristics of organizational capabilities in each domain are different, which raises the issue of how companies should manage, foster, and operate these different capabilities. Hereafter, each of these Domains is be referred to as “Domain I (strategic emergence)”, “Domain II (strategic selection)”, “Domain III (strategic concentration)”, and “Domain IV (strategic efficiency)”. The competitive advantages of a company, as noted earlier, become apparent after a certain amount of time and may change over time. The heterogeneity and advantages of each company’s capabilities is one of the foundations of resource-based theory, although there is no dynamic theoretical model in previous studies that takes into account time axes to explain how such heterogeneity and dominance arise. Thus, it is difficult to fully explain how firms use capacities to build a sustainable competitive advantage while it is unclear where the advantages and heterogeneity of capabilities arise. Therefore, to explain a company’s competitive advantage, it is necessary to incorporate the business activities map, which is the foundation of the competitive advantage practice process, and incorporate the corresponding dynamic evolution of capabilities into the resource-based perspective. The business activities map is a fundamental concept in business administration and a common language in practice, and is considered to provide a framework, the capabilities building map, to understand the changes of business activities and the corresponding dynamic evolution of capabilities building, and furthermore, contribute to making resource-based theory more dynamic. The next section details the concept of the capabilities building map, which incorporates the dynamic construction and sustainable development of capabilities building corresponding to the business activities map.

Capabilities building through DC approach 27 2.2.4 The capabilities building map concept – the two axes of speed of environmental change (market and competition) and uncertainty

Several prior studies show that the effectiveness of specific dynamic or ordinary capabilities is determined by market dynamics (e.g., Dosi et al., 2000; Eisenhardt and Martin, 2000; O’Connor, 2008; Kodama, 2017). Teece et al. (1997) refer to dynamic capabilities as capabilities that allow adaptation to external environments characterized by rapid or discontinuous change. Notably, the dynamic capabilities framework was developed with the goal of serving as a guide for decision-making and action regarding company and companylevel competitive advantage in rapidly changing and complex environments (characterized by deep uncertainty) (Teece, 2016). The effectiveness of such dynamic capabilities (and even ordinary capabilities) is considered to depend on two factors: the speed of environmental change (market and competition) and uncertainty. Therefore, the adaptability and effectiveness of these two types of capabilities are discussed later in terms of the four areas indicated by the two axes of environmental change and uncertainty (see Figure 2.6). Figure 2.6 shows the four domains (Domains I, II, III, and IV) corresponding to the business activities map shown in Figure  2.4. The capabilities of companies required in each of these domains are discussed later.

Figure 2.6 Capabilities building map – capabilities building through the dynamic capabilities approach

28  Capabilities building through DC approach Domain IV (strategic efficiency)

Of the four domains, Domain IV represents environments of gradual change and low uncertainty. The industry structure is relatively stable, market boundaries (as well as company boundaries) are clear, stakeholders in value chains are known, and ordinary capabilities, where existing knowledge and prior learning are effective, are demonstrated (e.g., Teece, 2014). Managers and strategists can use a structured analytical approach and existing knowledge to make decisions. Conventional or classical strategic management (e.g., Porter’s “Five Forces”) (Porter, 1990) implicitly assumes, in effect, a relatively predictable environment. In the analytical approach, risks may be recognized, but deep uncertainties are ignored (Teece, 2016). In such gradually changing and less uncertain market environments, a combination of well-structured, well-understood, efficient processes and the ability to execute them quickly and appropriately is key to building competitive advantage. Prescribing routines creates organizational memory and storage for execution, as well as improve predictability and the ability of the organization to make corrections when errors occur. Domain I (strategic emergence)

Strong dynamic capabilities are critical to success, especially when an innovative company seeks to open up a market or new product category. Dynamic capabilities based on entrepreneurial skills are particularly important in the creation (and cocreation) of markets to generate economic value relevant to the capitalist economic system (Teece, 2012). Domain I indicates a high degree of uncertainty, but not necessarily the speed of environmental change. Helfat and Winter (2011) found that capabilities supporting existing mainstream operations and seemingly non-radical changes may have important dynamic attributes, and companies may maximize revenue through iterative application of dynamic capabilities (Helfat and Winter, 2011). For example, research and development of new semiconductor materials and design technology development require significant R&D investment and human resource development, and there is a great deal of uncertainty regarding its success. For example, the blue light-emitting diode, the subject of the Nobel Prize in Physics, effectively required an extremely long period of time from basic research to practical development (Kodama, 2018c). As a result, the corporation that succeeded in the research, development, and commercialization of blue light-emitting diodes generated the greatest revenue. Helfat and Winter (2011) point to the case of Levinthal (1998), who analyzed the development of wireless telephony, where years of plodding, incremental change eventually established a completely new communications technology. Thus, the changes brought about by dynamic capabilities are often far from radical in the short term, especially in Domain I, and do not necessarily assume a rapidly changing environment.

Capabilities building through DC approach 29 Domain II (strategic selection)

As business expands, the division of labor increases and the market and competitive environment becomes more rapid, dynamic capabilities become more important. The dynamic restructuring of vertical integration and horizontal division of labor systems (e.g., Kodama, 2009, 2011) increases the need to integrate assets (or knowledge) among collaborating firms (and sometimes competing partners) to deliver customer value. Thus, responding to (or causing) changes in the business environment requires analysis of the structure of new strategic issues, good strategic planning through creativity and imagination of managers and entrepreneurs, and good execution skills. Dynamic capabilities are the higher-level competencies that determine a company’s ability to integrate, build, and reorganize internal and external resources and competencies to cope with rapidly changing business environments and, in some cases, to shape new market environments (Teece, 2007, 2010; Teece et al., 1997). For a company to maintain proper congruence (or fit) (Kodama, 2018a) in its business ecosystem (and sometimes transform the ecosystem) in fast-changing markets and competitive environments, it must continually modify and, if necessary, completely reform its business practices and execution. However, fast-paced market and competitive environments (Domains II and III) are not only fast-paced, but also different in nature from Domains I and IV. In the details of the Domain II process, from the creation of new knowledge through to the discovery of new science and invention of new technologies through corporate R&D activities, to the creation of new markets through the resulting new business development (commercialized development), the uncertainty for success is extremely high (O’Connor, 2008). In environments of high uncertainty and fast change, such as Domain II, although there may be some degree of forecasting and certain strategic guidance, frequent changes occur both outside and inside companies, and it is not always possible for companies to respond entirely by leveraging existing knowledge, as in the low uncertainty, slowly changing environments (Domain IV) described earlier. In Domain II, the speed of market changes and the competitive environment (and even activities within a company) can create uncertainty. Teece (2016) mentions that the type of environments that most require strong dynamic capabilities are those with medium to high levels of competitive conditions, and that terms such as “volatility” or “hypercompetition” or “turbulence” reflect levels of uncertainty. In other words, this points to the importance of dynamic capabilities in Domain II, fast-paced changing markets and competitive environments that are also highly uncertain. For example, when a company is in a very uncertain situation (not necessarily changing very fast), as in Domain I, and management recognizes that there are promising possibilities for application of a technology the company has developed in a market area completely different from its current business area, market boundaries become very blurred. Because new value chains must be created for businesses to

30  Capabilities building through DC approach take advantage of new technologies, new business models are needed (Eisenhardt and Martin, 2000). To create new markets in environments of great uncertainty, innovative companies are often forced to integrate forward or backward in value chains with the goal of filling voids in value or supply chains that players are unwilling (or have no plans) to enter. Therefore, in the process of reconstructing new value chains for practical development of new business, companies become active in building new project organizations and in coordinating work with in-house and external players, and the speed of change in organizational activities inside and outside companies will increase. As a result, the shift from Domain I to Domain II will accelerate. Furthermore, in real business activities, existing business units are often unable to adapt (respond) to new business opportunities using new elemental technologies, new products, service technologies (prototypes) that have just sprouted in Domain I. These market aspects and internal organizational structure issues increase organizational uncertainty and the need to consider organizational structure and resource allocation, especially within a company, and involve many members of the company. The shift from Domain I to Domain II induces an increase in the speed of change within companies. In this Domain II, company management and even project members who promote business face situations of the aforementioned volatility or hypercompetition or turbulence. Also, situations of deep uncertainty in Domain II require entrepreneurship, exploration, learning, adaptation, and transformation, rather than the optimization of operational efficiency in Domain IV. The presence of deep uncertainty requires strong dynamic capabilities (Teece, 2016). On the other hand, the process of building dynamic capabilities in Domain II, in environments of rapid change and extreme uncertainty, involves the creation of new knowledge in response to the situations at hand (Kodama, 2007d; Eisenhardt and Martin, 2000). This requires frequent repetition of experimental behaviors that lead to rapid learning to compensate for deficiencies in knowledge and repeated trialand-error of diverse practices to respond to newly available information and changing circumstances as well as absorption of new knowledge (Eisenhardt and Martin, 2000; McGrath, 2001; Kodama, 2005, 2007a). What is needed in the feedback loop of such frequent iterative actions and active communication and collaboration with partners inside and outside the company is the formation of “strategic communities” (Kodama, 2007a) and “teams of boundaries” (Kodama, 2007c) through realtime information and cross-functional interactions across professions and disciplines. These formations will interconnect new and discontinuous learning experiences and lead to the final goal. The real-time acquisition of information and knowledge fosters imagination and intuition among organizational members regarding market uncertainties and issues in general. Then, with the passage of time, diverse experiences accumulate (Kodama, 2007a; Eisenhardt, 1989). Particularly in Domain II, parallel consideration of multiple alternatives (Eisenhardt and Martin, 2000), prototyping and trial-and-error experimentation (Kodama, 2007a; Lynn et al., 1996; O’Connor, 1998; Pisano, 1994; Veryzer, 1998) leads to engagement with the market (customers) in an experimental rather than analytical

Capabilities building through DC approach 31 manner and advances rapid improvisational learning. Other initiatives include collaboration with multiple co-development partners, addressing multiple potential application areas, partnering within and outside the company to establish and launch joint ventures with a variety of partners. For some ventures, finding multiple sources of funding to do these things can be a significant challenge (Kodama, 1999, 2002). Domain III (strategic concentration)

In Domain III, where environmental change is very fast and competition with other companies is fierce, it is necessary to survive the so-called “Darwinian Sea” (e.g., Philip and Lewis, 2003; Dismukes, 2004), and dynamic capabilities at the business side plays an important role (see Figure 2.6). The “Darwinian Sea” illustrates a sea burgeoning with new organisms in competition with each other. Since competing in the rough sea and being culled is the process of evolution of organisms, this metaphor has been advocated because of its similarity to the essential meaning of evolution in business. With the shift into Domain III, newly developed products and businesses burst into these environments of competition with other companies as time passes. Nevertheless, while the degree of shift into a competitive environment is influenced by the industry or product characteristics, the actual birth of a competitive market means that uncertainty lowers in such market environments. Meanwhile, on the business side (business divisions, companies, etc.), product planning and technology development divisions upstream on the value chain establish solid value chains through dynamic capabilities in Domain III after Domain I and Domain II. In Domain III, organizational managers and staff upstream in the value chain, such as product planning and technology development departments on the business side, need to demonstrate strong dynamic capabilities, while supervisors and staff of routinized departments (sales, marketing, technical management, procurement, production, after-sales support, etc.) downstream in the value chain, need to engage in thorough and enhanced operation management based on strong ordinary capabilities (O’Connor, 2006). These downstream-positioned organizations require strong ordinary capabilities to bring current products (and their successor upgrades, improvements, and new versions) to market, win out amid stiff competition, and turn a current profit. In Domain III, the characteristics of capabilities are not the same as those Domains I and II, and there is particular importance on strong integration of DC and OC (see Figure 2.6). Another argument for this logic is deeply related to the perspective of “including and aligning existing capabilities” (Teece, 2018) in the transforming function of dynamic capabilities. Such existing capabilities are the long-term routine and operational capabilities of a company and correspond to ordinary capabilities. New findings from the capabilities building map

Considering the four domains from the perspective of the time axis of the business context, that is, the exploration and exploitation processes of a company, a continuous loop is formed among the four domains (see Figure  2.6). Domain I

32  Capabilities building through DC approach (strategic emergence) and Domain II (strategic selection) correspond to the exploration process, which is also the core process of new product and service development (NPSD). Domain III (strategic concentration) is the domain that shifts from exploration process to exploitation process to rapidly launch a market for a new product, service, or business model that has gone through the search process of Domain I (strategic emergence) and Domain II (strategic selection). Thus, Domain III (strategic concentration) is the origin of the emergence of new paths of new innovation different from existing business – those in Domain IV (strategic efficiency). New businesses that emerge in Domain III (strategic concentration) are generally businesses that underwent significant change (external and internal) in their initial stages. In the initial phases, companies change their internal management elements to create optimal value chains and supply chains to respond to external changes. Meanwhile, for Domain III (strategic concentration) businesses that have successfully launched their markets and reached a stable pattern as mainstream businesses, measures to further streamline operations and business processes (the so-called process innovation mentioned earlier) are subsequently promoted. After the growth of the business in Domain III (strategic concentration), business shifts to Domain IV (strategic efficiency), where change is slow (or small) and matures (and later declines), just as the product life cycle theory tells us. At this time, matured businesses will be either lined up alongside mainstream, established businesses or integrated (where business process efficiencies will be further promoted). On the other hand, businesses (e.g., those in the ICT industry) that continue to experience significant external changes in market and technology and internal changes in strategy, organization, resources, and operations after growing as core (mainstream) businesses in Domain III (strategic concentration) will always be located in this Domain III (strategic concentration). In other words, businesses that have newly grown into the mainstream will be placed in both (or either) Domain III (strategic concentration) and Domain IV (strategic efficiency). However, although new businesses in Domain III (strategic concentration) are mainstream reserves, not all businesses can grow into the mainstream in highly competitive environments of change, and business retreat in Domain III is possible (especially in the ICT industry). Thus, the flow of corporate innovation shifts from Domain I  Domain II  Domain III (some growing businesses with a high rate of change retain their positioning in Domain III)  Domain IV (see Figure  2.6). In this context, existing businesses in Domain IV (strategic efficiency) may be subject to a new/old business conversion with Domain III businesses (or businesses shifted from Domain III to Domain IV), a new path created by an innovation. Markides’ (2001) discussion of simultaneously managing existing and new positions means a combination of Domains IV and III, while the shift from an old position to a new one implies that existing businesses in Domain IV shift to accelerate and grow as new business in Domain III. In reality, however, many innovation projects underway in large companies are weeded out and selected in the shift of Domain I  Domain II  Domain III, and only a few innovation projects survive and develop as successful cases. In addition, often in large companies, excellent ideas

Capabilities building through DC approach 33 and business models are born in Domain I, but their realization (commercialization) is handled by a different organization (i.e., people), often resulting in the downsizing or failure of such ideas (Amabile and Khaire, 2008). This is because knowledge boundaries exist between product planning departments in charge of creating business concepts and ideas, and commercial development departments in charge of realizing such ideas, and production and manufacturing departments (Carlile, 2004; Kodama, 2007a). This is one of the challenges of innovation in large companies. Thus, the most important shift between domains is the shift from Domain III and/or Domain IV to Domain I, which is the path for creating new strategic innovation (see Figure  2.6). This corresponds to the process of creating new business model ideas, new technology discoveries, and inventions by accelerating interactions with external and internal parties based on the high-quality tacit knowledge and experiential knowledge that has been cultivated by researchers, engineers, marketers, and strategists who have experienced the “transformational experience” (King and Tucci, 2002; Amburgey et al., 1993) of routines of existing business and strategic innovation in the past through the practice of the Domain I  Domain II  Domain III  Domain IV (integration of existing business practices with new practices through innovation) shift (e.g., Kodama, 2007a). King and Tucci (2002) found that practitioners’ “transformational experience”, continuous organizational innovation in product development teams (Katz and Allen, 1982) or large-scale organizational change (Tushaman, 1985; Amburgey, 1993) has been shown to lead to continuous new product innovation or trigger resetting of rigid organizational inertia. In other words, the transformational experience increases the likelihood of creating new routines to transform an organization and embedding new capabilities in organizational members to achieve strategic innovation. For new knowledge integration (e.g., Kodama, 2005, 2011), excessive adherence to existing knowledge is a constraint; however, knowledge absorption of science technology and market perspectives from different fields and industries can also trigger new innovation. Various innovation theories, such as the importance to humans of escaping their mental models (e.g., Spender, 1990), attention to “boundaries vision” (Kodama, 2018d), the challenge of “disruptive innovation” (Christensen, 1997), provide valuable insights for innovators, although more detailed theory building is underdeveloped. Advanced routines grown and diversified through higher-order learning from Domain III and Domain IV routines essentially evolve sustainable innovation (or incremental innovation) (Christensen, 1997). The integration of this incremental innovation with new in-house and external knowledge triggers the Domain III and/ or Domain IV  Domain I shift (see Figure 2.6), and should raise the probability of realization of innovation, the integration of knowledge through new business activities. As will be discussed in detail in Chapter 7, the behavior of entrepreneurs that creates dynamic capabilities is the business activity of forming strategic communities (Kodama, 2007a, 2018a) as informal organizations through their non-routine activities. Chapter 7 presents a theoretical model for the creation of knowledge in the form of such breakthroughs and new ideas.

34  Capabilities building through DC approach Four new insights obtained from the capabilities building map above are presented here. [Insight-1] To realize the capabilities building map, a “Trinity and Triad” relationship of products and services, business activities and capabilities is necessary. Innovative companies acquire and demonstrate different capabilities in each of the four domains to realize and establish their products and services, and perform a variety of business activities in each domain. [Insight-2] Innovative companies have a dynamic view of strategy and intentionally (and partially, including emergent elements) maneuver the loop of continuous inter-domain shifts. A dynamic strategic view balances the different modes of the exploration process and the exploitation process to ensure the long-term growth of the company. [Insight-3] In the business activities of a company, each domain (Domains I–IV) with different business contexts always exists in a multilayered manner when observed at a certain point on a time axis. As multiple projects are executed in innovative companies, inter-domain shift loops are layered and functioning on different time axes. [Insight-4] The interface and interaction between management elements such as different strategies, organizational structures, core competencies, organizational cultures, and leadership of the two separate archetypes of exploration and exploitation, and incremental and radical, are important. These insights are discussed in detail in Chapter 5. 2.3 Contrasting the capabilities building map and the capabilities lifecycle This section details the relationship between the aforementioned capabilities building map and prior study of the capabilities lifecycle. The analysis and discussion that follows show that these two theoretical frameworks are complementary to each other. The capabilities lifecycle represents general patterns and potential pathways that characterize the evolution of organizational capabilities (Helfat and Peteraf, 2003). This framework is general enough to incorporate the emergence, development, and advancement of virtually any type of capability in any type of organizational environment, from small start-ups to large, diversified companies. The capabilities lifecycle can also be applied to the development of capabilities that span corporate boundaries, for example, strategic alliances and supply chains. There are multiple stages in the capabilities lifecycle. The lifecycle of new capabilities in an organization with no prior history begins with the founding stage, in which the foundations are laid for subsequent capability development. This initial stage is followed by the development stage, in which capabilities are gradually built. Eventually, capabilities building is completed, and capabilities reach the maturity stage. In addition, various events may occur at or even before capabilities reach the maturity stage, which may affect their future evolution. Helfat and Peteraf (2003) argue that capabilities then branch into at least six other stages in the capabilities lifecycle: retirement (death), retrenchment, renewal, replication, redeployment, and recombination.

Capabilities building through DC approach 35 2.3.1  The founding stage

The capabilities lifecycle begins with the founding stage. In the NPD process and the strategy process of project management described in Chapter 3, the founding stage begins when the creation of a capability is required, and people are organized around the goal of making that capability the central issue. Helfat and Peteraf (2003) argue that in the founding stage, there are two requirements: (1) an organized group or team where some leadership exists and joint action is possible and (2) a central goal whose achievement will create a new capability. Such groups and teams include R&D teams, new business development teams, and marketing teams in charge of basic research and practical development in companies. Ultimately, to build a capability, a new team needs inputs and resources (knowledge) other than those inherent in the team members. However, the ability of a new team with no previous experience to access resources (knowledge) such as capital and new technology depends on the ability of individual team members to acquire these resources (Burton et al., 2002). Therefore, the social capital that each team member brings to the table, as well as their connections inside and outside the company, including customers, are important qualities of the team in the founding stage. From practical experience, in research and development and the practical application of achievements in companies, the key is overcoming the so-called “valley of death” (Branscomb et al., 2001; Markham, 2002; Merrifield, 1995). As discussed in Chapter 3, in this founding stage, interpreted in the context of the NPD process and the strategy process of project management, it is necessary to practice “conceptualization” and “experimentation” by utilizing various resources (knowledge), and dynamic capabilities corresponding to each phase “Domain I (strategic emergence)” and “Domain II (strategic selection)” are required. 2.3.2  The development stage

The development stage begins after the team is organized (e.g., formal business units) with the goal of developing a specific capability. In this stage, as the organization seeks effective means to develop the capability, the capability is developed through experience over time through commercialization of the business model. Efforts are made to improve business processes and solve problems through learning through business practices of individual members of the organization and the organization as a whole and through reconstruction of existing knowledge (knowhow, skills, etc.) accumulated in the past. This leads to functional improvements in the organizational capability. For an organization to survive in the marketplace through the implementation of the business model it has devised, it must overcome its competitors and cross the Darwinian Sea to earn a profit or at the very least recover costs. As discussed in Chapter 3, in this stage of development, interpreted in the context of the NPD process and the strategy process of project management, the practice of commercialization of the business model takes place, which requires the ability to integrate dynamic capabilities (DC) and ordinary capabilities (OC), which corresponds to the Domain III (strategic concentration) phase.

36  Capabilities building through DC approach 2.3.3  The maturity stage

As discussed in Chapter 3, the maturity stage is a new stage (sub-process) that has not been discussed at all in the NPD process, the strategy process of project management, and the building process of dynamic capabilities). This maturity stage is the capability to maintain existing products and businesses that have matured through the founding stage (Domain I (strategic emergence) and Domain II (strategic selection)) and the development stage (Domain III (strategic concentration)). There are many such existing products and businesses in all kinds of companies, ranging from major ones (standard products) to minor ones (low profit margins). In general, these entail a low level of uncertainty, the pace of environmental change is soft, and product lineups feature various models. In addition, there are many necessities in the B2B and B2C fields, including finished products, various components of finished products, household goods, and foodstuffs. These capabilities for creating existing products and businesses are embedded in organizations over the years, and daily upgrade and improvement activities to make the business more efficient become routine. In the maturity stage, as mentioned in the previous section, companies demonstrate ordinary capabilities (OC) and seek efficiency in best practices and “doing things right” (Teece, 2014). OC work effectively in relatively stable business environments with slow environmental change and low uncertainty. Demonstrating OC in businesses in relatively stable environments where environmental change is gradual and there are low levels of uncertainty is crucial. This chapter refers to the maturity phase, where uncertainty is low and environmental changes are slow, as the Domain IV (strategic efficiency) “maturity phase”. Figure 2.7 shows the capabilities lifecycle from the founding stage to the maturity stage. As Helfat and Peteraf (2003) mention, with respect to the founding and development stages, the nature of the capabilities lifecycle makes it difficult to pinpoint the exact point of transition from one stage to the next. Helfat and Peteraf (2003) mention that in some cases only the starting point of the graph is the founding stage, while in other cases the entire first half of the graph is the founding stage. In Figure 2.7, the maturity stage is represented by straight lines. This means capabilities to maintain task performance at about the same level through the demonstration of the aforementioned OC over time.

2.3.4  The self-producing process of capabilities

The early capabilities lifecycle shows the potential for capability development over time. However, not all capabilities reach the stage of maturity, if selection events intervene from outside the capability. In addition, Helfat and Peteraf (2003) point out that selection events can also affect the evolutionary process of a capability in its mature stage (see Figure 2.7). As discussed in Chapter 3, this transformation of capabilities has not been discussed at all in the NPD process, the strategy process of project management, or the process of building dynamic capabilities. Helfat and Peteraf (2003) refer to the branching of the lifecycle by a transformation of capabilities as represented by the six

Capabilities building through DC approach 37

Figure 2.7 The process of building capabilities in the capabilities lifecycle Source: Created by the author, citing Helfat and Peteraf (2003)

Rs (retirement (death), retrenchment, renewal, replication, redeployment, and recombination). Of these, renewal, redeployment, and recombination, which have the characteristics of self-reproducing capabilities, are outlined in Figure 2.7. Figure 2.7 shows a graph of the branches of the capabilities lifecycle (renewal, redeployment, and recombination). Although branching can also occur in the development stage of the capabilities lifecycle, for simplicity, Figure 2.7 shows a capability that has already entered the maturity stage and reached the technical limits of its development. For a branching of a capability to occur during the development stage, the performance of the activity must meet the conditions to be considered a capability, in the sense that it has reached the minimum functional threshold required. In Figure 2.7, the three branches of renewal, redeployment, and recombination are represented by the same curve. This is because these three stages follow a similar trajectory, even though the original mechanisms are different (Helfat and Peteraf, 2003). First, in certain extreme situations, when companies face threats to a capability (market or technology changes, or the recent damage by COVID-19 to industries or businesses), they are forced to withdraw from the capability altogether. This means the retirement (death) of the capability. In Domain IV (the maturity stage), product and service lineups gradually become more susceptible to influence from changes in customer tastes or technical innovations, etc. For instance, there are good examples of analog products having been gradually pushed out by digital products over a long period, or telephone services shifting to become Internet services. While

38  Capabilities building through DC approach these might not happen abruptly, in many cases, by the time they are noticed, it is too late. In other words, OC begin to become a hindrance, and as environmental changes loom, product lineups that lag behind go down the path to retrenchment or retirement (see Figure 2.7). However, instead of shrinking or withdrawing from a capability, a company may try to improve or renew the capability in some way. As Winter (2000) describes, organizations faced with threats are likely to be motivated to raise the level of their capabilities. For example, if purchase prices rise sharply, companies may explore ways to improve their capabilities to increase efficiency. When capabilities are renewed, new methods are sought out and developed that bring about a stage of new progression. On the other hand, a company may consider redeployment to another product market instead of replication of a capability. Redeployment is not the same as replication of the same products and services in different regional markets, but rather involves targeting markets for products and services with a strong association. Such transfer requires the capability to be modified to some extent to accommodate new markets, and the capability must be further created and developed in new directions (Helfat and Raubitschek, 2000). Therefore, as part of redeployment, capabilities newly enter the founding and development stages. Furthermore, when companies transfer capabilities to different yet strongly related markets, there are cases that involve recombining capabilities with other capabilities instead of replication and redeployment (Helfat and Peteraf, 2003). In addition, capability recombination may lead to other approaches for capability renewal in current product markets. The concept of capability recombination is derived from the concept of knowledge recombination in innovation (Kogut and Zander, 1992; Kodama, 2009). For example, Kodak was a company that took the path of retrenchment and retirement from Domain IV due to the effects of digitalization, whereas Japanese Fujifilm successfully and strategically shifted from Domain IV to Domain I  with redeployment/recombination. Kodak felt the threats from the market changes accompanying digitalization early on, but persisted in sticking to its existing OC to seeking to maximize its profits and shareholder value. The company consistently engaged in rigid strategies such as stock measures using its own substantial capital to buy its own shares. Furthermore, Kodak’s top management at the time had no idea about innovating the company’s high-level intangible assets to respond to the environmental changes brought about by digitalization. In contrast, Fujifilm used the high-grade photographic film technologies it already had to develop a protective film for LCD screens which the company then successfully commercialized (applying its film technology to LSD TVs – redeployment). In another example of redeployment/recombination of existing technology, the company used the collagen technologies it had used to prevent photographic film from drying out to develop a cosmetic product that is now a hit. Hence, the company successfully moved into the cosmetics business, a completely different field (Kodama and Shibata, 2016). In addition, Fujifilm is also involved in medical product developments that are gaining attention in the fight against the Ebola virus and

Capabilities building through DC approach 39 COVID-19. Differing from Kodak, to survive, Fujifilm didn’t set out to maximize profits and shareholder value, but avoided zero profits, and by seizing and transforming its existing high-level intangible assets that it had accumulated, it succeeded with radical innovation by shifting from Domain IV to Domain I  Domain II  Domain III. The success of Fujifilm is a good example of strategy transformation due to capability threats and can also be thought of as the result of the processes of renewal, redeployment, or recombination functioning through the demonstration of DC from beginning to end. While the above focuses on capabilities threats, there are also new opportunities that may arise and become commercial opportunities. Many of the branches shown in Figure 2.7 are options for companies to take when responding to such opportunities. Specifically, Domain III to Domain I  Domain II  Domain III (inter-domain shift) (Figure 2.7) can also be considered. This is the concept of new radical innovation by discovering capability opportunities in rapidly changing environments and wars of attrition with rival companies. There are many cases of this, most remarkable in the world being the case of strategy transformation though DC of Apple’s radical innovation in its business shift from the PC to the music distribution business (Kodama, 2017). Apple succeeded in creating new business by integrating and innovating the best in-house and external intangible assets, instead of its traditional Mac development method (self-development). This was the result of DC enabling the processes of renewal, redeployment, or recombination to function through to the end. As strategies aiming at undeveloped markets and technologies, the new Nintendo Wii and DS game concepts were also radical innovations of gaming machines though redeployment to target brand new customers in completely different customer segments (such as the elderly or housewives who had no previous interest in computerized games) to the Sony PlayStation, a hugely popular product at the time. In summary, the following three new perspectives can be obtained. The first point is the existence of capabilities in “the maturity stage (phase)” (named Domain IV – strategic efficiency in this chapter), which has not been discussed in the NPD process, the strategy process of project management, or the process of building dynamic capabilities (as discussed in Chapter 3). The second point is the selfproducing process of capabilities. The third point is the clarification that the two frameworks, the capabilities lifecycle and capabilities building map, are in a complementary relationship with each other. 2.4 Conclusion The capabilities that a company should demonstrate (or be required to demonstrate) depend on the environmental conditions it faces. From this perspective, this chapter presented the capabilities building map, a dynamic theory of capabilities building that takes into account the variable elements of capabilities demonstrated by companies (the speed of market change, the presence of uncertainty, and the time axis of company activities). The capabilities building map, a framework for understanding the dynamic evolution of capabilities, contributes to making resource-based theory

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3 Capabilities building through the innovation process approach

3.1 The need for a new theoretical model, and the research approach of this chapter To date, there has been much research, mainly in Europe and the United States, on the strategy transformation process and organizational capabilities that are necessary to realize radical innovation. However, most of this existing research has focused on empirical studies and case studies of one-off successes or failures of individual R&D and commercialization projects within companies (large or small), or independent ventures (e.g., Miles and Covin, 2002; Kuratko et al., 1990; Greene et al., 1999). On the other hand, much of the literature emphasizes the important role played by dedicated and enthusiastic leaders (Chakrabarti, 1974; Greene et al., 1999; Howell and Higgins, 1990; Kuratko et al., 1990; Maidique, 1980; Pinchot, 1985; Shane, 1994; Kodama, 1999; Sharma, 2000). While this accumulated research is extremely valuable, it is also undeniably dependent on the success of individual champion-like projects and the special abilities of the heroes who carry them out. With Apple, for example, the existence of a visionary leader with fortitude and skills (the late Steve Jobs) is important for achieving radical innovation, but since the leader is one element (a subsystem) in the corporate system, the organization will never be able to maximize its resources and advantages if it remains dependent on the leader. Therefore, for companies to generate radical and strategic innovation systematically and continuously without relying on the abilities of specific individuals, it is becoming increasingly important to study the systemic and process perspectives of strategy and organizations. On the other hand, as mentioned in the previous section, for a company to grow sustainably, there is almost no research on the importance of promoting strategic innovation (both exploitation, which is incremental innovation, and exploration, which is radical innovation) and reasonably managing both the opposing corporate activities of exploitation (growth of existing businesses) and exploration (development of new businesses) at the same time. In existing research to date, there have been discussions about the two separate archetypes of exploration and exploitation and incremental and radical innovation (e.g., Greenwood and Hinings, 1993; Tushman and O’Reilly, 1997), or on the ambidextrous organization (e.g., O’Reilly and Tushman, 2004) etc., in management. However, it is important to understand both DOI: 10.4324/9781003305057-3

46  Innovation process approach in practice and academically the systems and processes in which companies demonstrate capabilities for the exploration and exploitation processes (March, 1991; Holland, 1975) while balancing both strategic activities so that they complement each other in the execution of strategy (He and Wong, 2004). The purpose of this book is to deepen the understanding of the question of how companies can change and even evolve their capabilities to achieve strategic innovation, using the latest findings of the systems-view, the process-view, and dynamic capabilities. The main focus of this book is to clarify management systems that achieve sustainable strategic innovation by utilizing knowledge assets inside and outside of organizations, including those of leaders, rather than simply relying on leaders with strong will. 3.2 New insights from the “innovation process approach” From reviews of each of the three research streams discussed in Chapter  1 (the dynamic capabilities approach, the innovation process approach, and the exploration and exploitation approach), the book discusses the importance of raising issues for companies to sustainably acquire and transform capabilities. Based on the analysis and discussion of capabilities building through the dynamic capabilities approach discussed in Chapter 2, this chapter reveals new insights into the process of building sustainable and dynamic capabilities in companies through the research stream of “capabilities building through the innovation process approach” (prior research from the process- and system-views: [1] the new product development process, [2] the innovation model, [3] the project management process, and [4] the new business strategy development and implementation process). 3.2.1  The process of building capabilities in the new product development process

Eisenhardt and Martin (2000) present dynamic capabilities (DC) as “The firm’s processes that use resources – specifically the processes to integrate, reconfigure, gain and release resources – to match and even create market change. Dynamic capabilities thus are the organizational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve, and die” (Eisenhardt and Martin, 2000), and inductively derived the concept of corporate dynamic capabilities required in slow and fast market environments. They also indicate the importance of “learning by doing” with simple rules to emphasize results rather than prior learning and processes, especially in high-speed market environments where uncertainty is high and corporate boundaries in industries are blurred (Eisenhardt and Sull, 2001). On the other hand, O’Connor (2008), while respecting Eisenhardt and Martin’s (2000) theory of dynamic capabilities, argues that many radical innovations develop gradually from slow (or very slow) market environments and are put to practical use over several years to several decades. He argued that the concept of dynamic capabilities is a theory that can be evaluated and applied not only in terms of the degree of market speed but also in terms of business uncertainty (including risk).

Innovation process approach 47 O’Connor (2008) argues that dynamic capabilities to adapt to highly uncertain situations regardless of the degree of market environment speed are necessary as capabilities to drive exploration and achieve radical innovation in environments of high uncertainty and risk. This concept encompasses the concept of dynamic capabilities in high-speed markets (including high uncertainty) of Eisenhardt and Martin (2000) mentioned earlier. In addition, Helfat and Winter (2011) assert that slow changes, projects currently in progress, and relatively peaceful external environments should be incorporated into research on dynamic capabilities. This is because dynamic capabilities should not be limited to brand-new businesses, environments moving rapidly, or radical changes. For example, there are plenty of cases of new product development like the Intel MPU that are essentially cases of dynamic capabilities derived from ongoing businesses in relatively peaceful environments. However, many of these businesses appear to be demonstrating routine business (called “ordinary capabilities”, discussed later), although they ultimately expand the size and scope of their business resources while forming business ecosystems to achieve major economic effects as radical innovation. Behind technological innovations like the MPU is the deep involvement of scientists, engineers, and business partners across a wide range of different fields (EDA vendors, semiconductor production equipment manufacturers, etc.), and propulsion by R&D processes in high business uncertainty (including risk) and novelty. In reality, much of radical innovation emerges from environments of slow (or very slow) basic scientific and technological research through the stages of discovery and invention. Then, based on discoveries, inventions, and other ideas, core technologies are developed, and business models are tentatively formulated, and through improvisation and other trial-and-error processes (including selection processes), such as prototyping, experimentation, and incubation, markets for products and services that utilize and apply the technologies and ideas are gradually established. After that, markets for new products and services (expected to grow or have prospects for growth) become competitive with other companies, and companies enter highspeed market environments and accelerate the investment of necessary resources. O’Connor (2008) used the term “MI dynamic capability” for capabilities that promote the “exploration” process (March, 1991) and realize major innovation (radical or really new innovation) under conditions of uncertainty and high risk. MI dynamic capability differs from the other capability theories (e.g., King and Tucci, 2002; Nelson and Winter, 1982; Winter, 2000) that emphasize the evolution of the original “exploitation” (March, 1991) process. From the perspective of systems-view and process-view, O’Connor and DeMartino (2006) and O’Connor (2006), who conducted a long-term observational analysis of radical innovation in large U.S. companies, pointed out the importance of management in the three phases of discovery  incubation  acceleration as the development framework of radical innovation in large companies (see Figure 3.1). They also found that the capabilities, that is, the skills and processes required of individuals and organizations, are different in these three phases. They then named the ability to implement these processes “breakthrough innovation capability”, and

48  Innovation process approach

Figure 3.1 Capabilities – management systems in NPD processes Source: Created by the author, citing O’Connor (2006, p. 74)

suggested that building this capability into the company is key to management systems that lead to successful radical innovation (O’Connor et al., 2008). The discovery phase requires capabilities to create, recognize, refine, and integrate opportunities for radical innovation. Depending on the capacity for discovery, scientists, mainly in corporate R&D laboratories, might not only conduct closed innovation within the company but also open innovation (Chesbrough, 2003; O’Connor, 2006) at the same time. As mentioned, in this phase, new products are launched through the discovery and invention stages in an environment of slow (or very slow) market speed and market uncertainty. In the incubation phase, the context in which opportunities for radical innovation are created by the capabilities for discovery is developed into concrete business proposals. This is the phase for setting up working hypotheses for building business models and implementing strategic learning through trial and error. In the incubation phase, through the development of core technologies and tentative formulation of business models based on the ideas obtained with discoveries and inventions, improvisation and trial-and-error processes such as prototyping, experimentation, and incubation (including the weeding out process) are carried out in the midst of uncertainty (indeterminacy) at a speed that is full of change within the company. The acceleration phase is the commercialization phase where nascent business models are turned into profitable and self-sustaining businesses within the in-house

Innovation process approach 49 departments (e.g., business units) that take them on. In this phase, the uncertainty (indeterminacy) of the market and technology is removed through experimentation and learning in the incubation phase, the value chain at the business level is established at a speed that is full of change within the company, and the newborn business model is implemented. In this phase, market and technological uncertainty (indeterminacy) decreases and competitive market environments emerge. O’Connor et al. (2008) identified that a built-in capability to carry out the processes of discovery  incubation  acceleration is an important management system that leads to the success of radical innovation. Based on these previous studies, Figure  3.1 depicts the three development processes (discovery  incubation  acceleration) by O’Connor and DeMartino (2006) in relation to the two evaluation axes of uncertainty (indeterminacy) and speed of change. This kind of three-phase management (discovery, incubation, and acceleration) is performed in projects in large corporations (and similarly in venture enterprises) to develop various new products, services, and businesses. Different practitioner (and organizational such as project team) capabilities are required in the individual business processes in each of the three phases, depending on the degree of business uncertainty and environmental change being faced. Dynamic capabilities robustly function in response to these externalities (uncertainly and environmental change) and are also a framework for demonstrating difficult-to-imitate competitiveness. Referencing the dynamic capabilities approach discussed in Chapter 2, the phases of discovery  incubation  acceleration are referred to as Domain I (strategic emergence), Domain II (strategic selection), and Domain III (strategic concentration), respectively. 3.2.2  The process of building capabilities in the innovation model

The “linear model” is one pattern of the NPD process referred to in Figure 2.5 of Chapter 2. The idea of a linear model (e.g., Zaltman et al., 1973) of the innovation process, such as new product development (NPD), stems from a logical project management approach that tries to deliver the right result (output) on time and within a given cost. In prior research, the innovation process has been interpreted as a series of events or activities. The linear model takes the form of a linear and stepwise flow in one direction, starting with basic research, followed by applied research, development, production, and market launch. However, innovation in corporate activities rarely proceeds smoothly like that, and thus the linear model does not reflect the real innovation process (e.g., Kline and Rosenberg, 1986; Leonard-Barton, 1988; Schroeder et al., 1989). In addition, the linear model does not account for the fact that, in the development of a new product or service in a company, each stage is interrelated, and that even if the final product or service does not achieve market value (or is eliminated in a competitive market), or even if the R&D fails or is terminated midway (or the results of the R&D are not accepted by the market), the tacit knowledge, such as the technological knowledge gained through the process, is accumulated within the company and can become a driving factor for future seeds and innovations.

50  Innovation process approach Linear models can reveal that inadequate structure and insufficient control can cause planning and coordination problems, but they tend to ignore the behaviors and systems that govern the diverse innovative capabilities of the NPD process (McCarthy et al., 2006; Bonner et al., 2002). In addition, such linear models tend to focus excessively on the upstream R&D process (so-called radical innovation), and overlook processes such as sales activities directly related to the market and continuous improvement and upgrading of products (so-called incremental innovation). Therefore, linear models are seen as simplifications of complex innovation processes and only explain partial aspects of such processes involving various factors. In contrast to the problems of the linear model, radical innovations or really new products have the potential to significantly change and redefine markets (Cooper and Kleinschmidt, 1993; Schmidt and Calantone, 1998; Song and Montoya-Weiss, 1998). Therefore, it has become important to distinguish between the characteristics of the NPD process that usually produce incremental product innovations (incremental innovation: exploitation) and those that can produce breakthrough product innovations (radical innovation: exploration) (e.g., McCarthy et al., 2006). Kline (1985) and Kline and Rosenberg (1986) presented one alternative to the linear model (see Figure  3.2). They presented a chain-linked model with feedback loops to explain the relationships and iterations of research, invention, innovation, production, and sales. Leonard-Barton (1988) also presents a series of small and large recursive cycles that represent NPD project setbacks and restarts. These recursive NPD frameworks aim to represent events in which activities are multiple,

Figure 3.2 The dynamic chain-linked model – recursive framework Source: Created by the author, citing Kline (1985), and Kline and Rosenberg (1986)

Innovation process approach 51 simultaneous, and divergent and show that processes involve feedback and feedforward loops (McCarthy et al., 2006; Adams, 2003, p. 232). The chain-linked model (see Figure 3.2) is similar to the linear model in its core, but the left end is not R&D, but market needs discovery and potential markets. The major differences from the linear model are as follows: First, innovation does not necessarily start with research activities, but can have a variety of starting points, such as the discovery of market needs or issues at the mid-stage of development or production. Second, since complex feedback loops are formed between each stage of innovation, progress is not linear. Third, even if the knowledge obtained at each stage of the process does not ultimately lead to the realization of market value (or is eliminated in a competitive market), or if the R&D fails or is discontinued midway (or the results of the R&D are not accepted by the market), there are cases where knowledge and technical knowledge obtained from these processes accumulates as tacit knowledge within the company, and is used as elements of future seeds or as the basis for subsequent innovations. Viewed from the perspective of the dynamic capabilities approach in Chapter 2, in contrast to the linear model, an orderly sequence of ideas, the chain-linked model can be interpreted as representing the process of radical innovation (exploration: Domain I  Domain II), in which NPD stages overlap and create ambiguity and disorder in the process, as well as the process of incremental innovation (exploitation: Domain III  Domain IV), such as production and sales activities directly related to the market after market launch, and continuous improvement and refinement of products. In particular, in the innovation model of Figure  3.2, there are capabilities for production and sales activities that were not clear in the aforementioned NPD process model. In the context of the product lifecycle, these capabilities are necessary for corporate activities in the maturity and decline phases and are also demonstrated in the Domain III and Domain IV (strategic efficiency) areas. In Figure 3.2, there are not only product improvement and enhancement activities in Domain III and Domain IV, but also feedback from distribution and sales activities (market) to R&D activities in Domain I, which is similar to the “Capabilities Building Map” in Figure 2.6 of Chapter 2. However, in the chain-linked model, there is no strategic management analysis and consideration of what capabilities are needed in which domains, as discussed in Section 3.2.1 “The process of building capabilities in the new product development process”. 3.2.3  The process of building capabilities in project management processes

Kodama (2007) analyzed in detail the business processes of project-based organizations in several Japanese companies, and how projects are constructed and strategies implemented in companies. As shown in Figure 3.3, projects interact with the environment to develop and implement market-creating strategies and market-adaptive strategies. Market-creating strategies create unconventional products, services, and business models, materialize them, and establish positioning in new business areas

52  Innovation process approach

Figure 3.3 Micro strategy formulation and implementation in project management Source: Created by the author, citing Kodama (2007, p. 214)

as a company. On the other hand, market-adaptive strategies are cases of developing customized products and providing solutions for specific customers, as well as developing products to respond to changes in markets and technologies. Market-creating strategies require consideration of new products, services, and business models in the presence of uncertainty (indeterminacy). Brainstorming takes place within projects to build new business concepts for products, services, and new businesses. Project members are a group of staff members who come from various fields of expertise, and who are responsible for developing a business concept from an image to a document-based reality (content of new products and services, business model structure) for the strategic goals to be achieved. In a market-creating strategy, in the midst of slow-paced environmental change, the various costs (for development, production, and sales promotion, etc.) necessary to realize a new business with a high degree of uncertainty (indeterminacy) are not clear from the start, which means in some cases, it is necessary to consider not only the conditions needed to realize the new business (product functions, service specifications, etc.), but at the same time the costs involved in realizing the new business. Such phases correspond to the discovery phase (Domain I: strategic emergence) referred to in the NPD process in the previous section. In addition, project members consider the core knowledge (core capabilities) inside and outside their company to realize new business and enter into consideration of network strategies for new business formation inside and outside the company. Of course, it is important to utilize the core in-house capabilities to develop

Innovation process approach 53 new products through in-house projects and utilizing the accumulated knowledge within the company. However, in recent years, many high-tech companies have been promoting open innovation (Chesbrough, 2003) by incorporating superior knowledge from outside the company, instead of in-house innovation alone. In recent years, especially in projects responsible for exploratory practice for radical innovation in high-tech companies, not only the development of products that become hits, but also the reduction of development costs and the shortening of development periods are major goals. There is no guarantee that the task of new development will be successful if the project is entirely self-directed, or if the project only has access to internal resources. Therefore, access to excellent external knowledge is the most important issue, and thus a dynamic knowledge network must be built in cooperation with internal and external development partners (Kodama, 2005, 2006). Building this dynamic knowledge network inside and outside of companies is the network strategy (see Figure 3.3). Therefore, companies need to have a dynamic view of strategy (e.g., Markides, 1997; Eisenhardt and Sull, 2001) not only to deepen and refine their own knowledge, but also continuously implement market-creating and market-adaptive strategies through the acquisition of different and new knowledge (including pathbreaking knowledge) across industry boundaries. Such projects that entail a dynamic view of strategy are carried out in highly uncertain (indeterminate) market environments with a sense of speed and change within the company, through repeated trial and error processes such as hypothesis formulation and business simulation. In this way, the optimal conditions to achieve new business (specific business models, product/service specifications, business formation, etc.) are narrowed down (see Figure 3.3). At the same time in the processes of trial and error, as specialists in various fields, project members consider “who”, “why”, “what”, “when”, “with whom”, and “how” to formulate micro strategies to optimize strategy (see Figure  3.3). This phase corresponds to the incubation phase (Domain II: strategic selection) referred to in the NPD process in the previous section. In addition, project members implement micro strategies formulated in detail. However, in reality, there are many cases where the formulation and implementation of strategies cross over. For example, since the results of coordination and negotiation with internal and external partners also affect the details of strategy formulation, project members often form internal and external partnerships in parallel with the strategy formulation process. Then, in the implementation process, project members focus on thinking and actions to specifically decide “who”, “why”, “what”, “when”, “with whom”, and “how” to implement strategies. Deep dialogue and shared values among actors across boundaries between different organizations and different fields of expertise are important for the formation of networks inside and outside the company (Kodama, 2001). However, in the process of implementation, unexpected situations (problems, new issues, etc.) may arise, and in such cases, depending on the situation, project members might have to engage in trial and error or improvisational actions between the implementation and formulation of micro strategy (see Figure  3.3). In this phase, the uncertainty (indeterminacy)

54  Innovation process approach of the market and technology is removed through experimentation and learning in the incubation phase, and the value chain at the business level is established at a speed that is full of change within the company, and the newborn business model is implemented for commercialization. In other words, this phase corresponds to the acceleration phase (Domain III: strategic concentration) referred to in the NPD process in Section 3.2.1. Importantly, as described earlier, in fast market environments (Eisenhardt, 1989; Brown and Eisenhardt, 1997; D’Aveni, 1994, 1995; Chakravarthy, 1997; Eisenhardt and Sull, 2001), projects implementing market-creating or market-adaptive strategies must be able to have process capabilities to flexibly adapt to changing environments by strengthening and maintaining conventional competitive core capabilities while actively incorporating knowledge from outside the company. For this reason, Kodama (2007) asserts that the elements of dynamic capabilities (Teece et al., 1997; Eisenhardt and Martin, 2000) are needed. 3.2.4 Process for building capabilities for the business strategy formulation and execution processes

Responding to the research question of why some companies skillfully anticipate and capitalize on opportunities created by technological advances and rapid market changes, while others struggle or go bankrupt, Day and Schoemaker (2016) analyze and discuss three important elements of dynamic capabilities for successful organizational adaptation: sensing, seizing, and transforming, from a process and systems approach. Day and Schoemaker say that companies with dynamic capabilities are able to sense commercial opportunities ahead of competitors in the process of formulating and executing new business strategies and make the organizational changes necessary to leverage and maintain their advantage more effectively. Moreover, dynamic capabilities, directed by a clear strategic vision, enable adaptation to fluid and uncertain situations. Their research is useful for a better understanding of dynamic capabilities to provide guidance for adaptation in the process of developing and implementing new business strategies. Day and Schoemaker (2016) deduced six sub-capabilities that make up the three subsystems (sub-processes) of DC from existing theories on best practices (see Figure 3.4). Sensing, which to succeed, can be understood through two interrelated learning processes that function as DC. These two processes are peripheral vision (detecting weak signals from the boundaries of business) and vigilant learning (correctly interpreting the meaning of these weak signals). The sensing function is particularly important in the R&D and marketing departments of companies. With seizing, it is necessary for leaders to actively nurture and support a culture that tolerates, and in some cases encourages, failure through trial and error and learning through probe-and-learn experimentation. From practical experience, there exists the so-called “valley of death” (Branscomb et al., 2001; Markham, 2002; Merrifield, 1995), which can be a serious impediment to R&D and commercializing its outcomes. However, it is important for companies to learn from their mistakes

Innovation process approach 55

Figure 3.4 Components and processes of dynamic capabilities Source: Created by the author, citing Teece (2018) and Day and Schoemaker (2016)

and necessary to foster a culture in which experimentation and incubation are the norm. Deploying real options, experimenting with different means, investigating puzzling conundrums in detail, and keeping an eye out for the unexpected can be an excellent way to learn quickly. Although sensing and seizing create business opportunities for companies, to properly implement new strategies and commercialize their business models (products, services, etc.), companies need the capability to set a direction in the external environment and shape it in addition to the capability to adjust their internal organizational design. This is transforming. A transformational organization is one that actively fosters an agile, entrepreneurial mindset and takes a broad approach to building external networks. As described earlier, each of the three subsystems (sub-processes) of DC, namely sensing, seizing, and transforming, can be interpreted in the context of the micro core functions of DC as “Domain I (strategic emergence)”, “Domain II (strategic selection)”, and “Domain III (strategic concentration)”, which are the three-phase management (discovery, incubation, and acceleration) processes referred to in the NPD process (Figure 3.1 and 3.2) and the strategy process of project management (Figure 3.3) (see Figure 3.4). As discussed in Section  3.2.1, managing the three phases with “MI Dynamic Capability (Major innovation)” (O’Connor, 2008) and “Breakthrough Innovation Capability (the phases of discovery, incubation, and acceleration)” (O’Connor et al.,

56  Innovation process approach 2008) can be described with the three DC functions (sensing, seizing, transforming), which can be applied in highly uncertain and rapidly changing environments, as DC also can be said to encompass the theoretical concepts of “MI Dynamic Capability (Major innovation)” (O’Connor, 2008) and “Breakthrough Innovation Capability (the phases of discovery, incubation, and acceleration)”. In the dynamic environments of “hypercompetition” (D’Aveni, 1994) or “nextgeneration competition” (Teece, 2012) gaining attention in recent years, DC is also a crucial theoretical concept for companies to drive their “ecosystems strategies” (Teece, 2014). In addition, the core DC function of “asset orchestration” (Teece, 2007) is reinforced by the three organizational processes of (1) coordination/integration, (2) learning, and (3) reconfiguration (Teece et al., 1997). With regard to such asset orchestration, Teece (2014, p. 333) states that “In terms of the three primary clusters of dynamic capabilities, asset orchestration is most relevant as an underpinning for seizing and transforming”. Teece (2007, 2014) clearly distinguishes these DC from ordinary capabilities (OC hereinafter). Teece (2014, p. 330) states that “ordinary capabilities have also been called static (Collis, 1994), zero-level (Winter, 2003), first order (Danneels, 2002), and substantive Zahra et al. (2006). The zero-, first- and second typology is used by Easterby-Smith and Prieto (2008) and Schilke (2014). The more common usage seems to be equating first-order with ordinary”. Hence, these OC generally fall into three categories: administration, operations, and governance. Clarified as specific details of corporate activity, it can be said that OC enable a firm to perform an activity on an ongoing basis using more or less the same techniques on the same scale to support existing products and services for the same customer population. Such capabilities are ordinary in the sense of maintaining the status quo (i.e., not out of the ordinary; Winter, 2003) (Helfat and Winter, 2011). Nevertheless, OC, to pursue efficiency in terms of a company’s best practices and “doing things right”, are not to be underestimated – they are often fundamental and can support competitive advantage for decade-long periods (Teece, 2014). In other words, OC are valid functions in gently changing environments with low levels of uncertainty, and business environments of relative stability, but cannot ensure corporate sustainability over the long term. However, in large traditional companies that operate many businesses, to a greater or lesser degree, there will always be business domains in which OC must be demonstrated. Demonstrating OC in businesses in relatively stable environments where environmental change is gradual and there are low levels of uncertainty is crucial. Accordingly, companies must apply ordinary capabilities (OC), and systematically and analytically formulate and implement strategies under relatively stable or slowmoving conditions with little business uncertainty. “Learning before doing” (Pisano, 1994), that is, formulating and implementing detailed strategy planning and policies, is a key element of OC in market structures with clear corporate boundaries, and also enables understanding of the players in value chains. However, in such a discussion of OC, it should be noted that there is one perspective that has not been mentioned in this existing research. It is a form of capabilities in the acceleration phase, corresponding to Domain III (strategic concentration) in Figures 3.1 and

Innovation process approach 57 3.3. Domain III is the phase of “commercialization” of business models (products and services) created by radical innovation, and it is also the phase in which companies face competitive environments with other companies. O’Connor (2006) mentions that the skills (capabilities) required in the acceleration phase, Domain III, are management capabilities in high-growth businesses. In contrast to the discovery phase of Domain I and the incubation phase of Domain II, in Domain III the focus is on exploiting the existing capabilities accumulated within the company (i.e., the aforementioned ordinary capabilities (OC)). Domain III requires the development of exploitation capabilities to make the investments necessary to drive business, to develop sales strategies and modifications to take the lead in the marketplace, and to utilize common business process iterations such as manufacturing, ordering, delivery, customer service, and support. Similarly, Kodama (2007) emphasizes the need for “full mobilization of resources and knowledge” in Domain III of Figure 3.3, which is consistent with the argument of O’Connor (2006). In Domain III, where environmental change is very fast and competition with other companies is fierce, the role of transforming at the business division side plays an important role in surviving the so-called Darwinian sea (e.g., Philip and Lewis, 2003; Dismukes, 2004) (see Figure  3.4). Here, the Darwinian sea illustrates a sea burgeoning with new organisms in competition with each other. Since competing in the rough sea and being culled is the process of evolution of organisms, this metaphor was advocated because of its similarity to evolution in business. As time passes, with the shift into Domain III, newly developed products and businesses burst into these environments of competition with other companies. Nevertheless, while the degree of shift into a competitive environment depends on the industry or product characteristics, the actual birth of a competitive market means that uncertainty lowers in such market environments. On the other hand, on the business side (business headquarters, divisions, etc.), product planning and technology development departments upstream on the value chain establish a solid value chain through sensing in Domain I, seizing in Domain II, and transforming in Domain III. In Domain III, organizational supervisors and staff in product planning and technical development departments on the business side upstream in the value chain must demonstrate strong DC, however in contrast, as mentioned by O’Connor (2006), staff and directors in routine departments downstream in the value chain (sales, technical management, procurement, manufacturing and after support, etc.) need thoroughly reinforce operational management through strong OC. These downstream-positioned organizations require strong OC to bring current products (and their successor upgrades, improvements, and new versions) to market, win out amid stiff competition and turn a profit in the present. Thus, in Domain III, the qualities of capabilities are not the same as those in Domains I and II, and there is particular importance on strong integration of DC and OC. Another argument for this logic is deeply related to the perspective of including and aligning existing capabilities (Teece, 2018) in the transforming function shown in Figure 3.4. Such existing capabilities are the long-term routine and operational capabilities of a company and correspond to OC.

58  Innovation process approach In summary, in the NPD process (Figure 3.1), the project management strategy process (Figure 3.3), and the new business strategy formulation and execution process (Figure 3.4), we can confirm the Domain I  Domain II  Domain III shift in capabilities, and the Domain III and/or Domain IV  Domain I  shift in the innovation model (Figure 3.2). 3.3 Revisiting the capabilities building map From [1] the NPD process (Figure 3.1), [2] the innovation model (Figure 3.2), [3] the project management strategy process (Figure 3.3), and [4] the new business strategy formulation and implementation process (Figure 3.4), this section presents the basic domain components that make up the capabilities systems of a company. Integrating these four research streams, this section presents the capabilities building map (four domains of capabilities), a group of domains with four different capability characteristics corresponding to external and internal corporate conditions, namely, the speed of environmental change and uncertainty factors faced by companies (see Figure 3.5). As discussed in Section  3.2.4, Process for building capabilities for the business strategy formulation and execution processes, the demonstration of DC is especially important in Domains I, II, and III on the capabilities building map in Figure 3.5 (in fast-changing and/or highly uncertain business environments). The three phases of management (discovery, incubation, and acceleration) mentioned in Figure 3.1

Figure 3.5 Capabilities building map – capabilities building through the innovation process approach

Innovation process approach 59 are named Domain I, Domain II, and Domain III, respectively, from new technology or new business inventions through to conception and commercialization. These three domains are the business fields in which DC is demonstrated (and, in Domain III, the integration of the DC and OC is required). This kind of threephase management (discovery, incubation, and acceleration) is performed in projects in large corporations (and similarly in venture enterprises) to develop various new products, services, and businesses. Different capabilities are required of practitioners (and organizations such as project teams) in the individual business processes in each of these three phases depending on the degree of business uncertainty and environmental change they are facing. As mentioned, DC robustly function in response to such external conditions (uncertainly and environmental change) and are also a framework for demonstrating difficult-to-imitate competitiveness. As discussed in Sections 3.2.1 and 3.2.4, managing the phases with MI Dynamic Capability (Major innovation)” (O’Connor, 2008) and “Breakthrough Innovation Capability (the three phases of discovery, incubation, and acceleration)” (O’Connor et  al., 2008) can be described with the three DC functions (sensing, seizing, transforming), which can be applied in highly uncertain and rapidly changing environments, as DC also can be said to encompass the theoretical concepts of MI Dynamic Capability (Major innovation)” (O’Connor, 2008) and “Breakthrough Innovation Capability (the phases of discovery, incubation, and acceleration)”. Conversely, OC function in pursuit of best practices (Teece, 2007, 2014) in stable environments with low uncertainty and slow change (Domain IV). Thus, the model of capabilities building from the innovation process approach yields similar results to the capabilities building map (see Figure 2.6) derived from the dynamic capabilities approach mentioned in Chapter 2. 3.4 Conclusion As discussed in Chapter 1, from reviews of each of the three research streams (the dynamic capabilities approach, the innovation process approach, and the exploration and exploitation approach), this chapter discussed the importance of models for companies to sustainably acquire and transform capabilities. Based on the analysis and discussion of the capabilities building through dynamic capabilities approach mentioned in Chapter  2, this chapter has clarified the capabilities building map, the process of building sustainable and dynamic capabilities in a company, from the research stream on the capabilities building through innovation process approach (based on previous studies from the process- and system-views: [1] new product development process, [2] new product development process, [3] project management process, and [4] innovation model). References Adams, R. (2003). Perceptions of Innovations: Exploring and Developing Innovation Classification. PhD dissertation, Cranfield University, UK.

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62  Innovation process approach O’Connor, G., Leifer, R., Paulson, P. and Peters, P. (2008). Grabbing Lightning: Building a Capability for Breakthrough Innovation. San Francisco, CA: Jossey-Bass. O’Reilly, C. and Tushman, M. (2004). The ambidextrous organization. Harvard Business Review, 82(4), 74–82. Philip, A. and Lewis, B. (2003). Start-ups and spin-offs: Collective entrepreneurship between invention and innovation. In D. M. Hart (Ed.), The Emergence of Entrepreneurship Policy: Governance, Start-Ups, and Growth in the Knowledge Economy. New York: Cambridge University Press. Pinchot, G. (1985). Introducing the entrepreneur’ [product management].  IEEE Spectrum, 22(4), 74–79. Pisano, G. (1994). The governance of innovation: Vertical integration and collaborative arrangements in the biotechnology industry. Research Policy, 20(3), 237–249. Schilke, O. (2014). Second-order dynamic capabilities: How do they matter? Academy of Management Perspectives, 28(4), 368–380. Schmidt, J. B. and Calantone, R. J. (1998). Are really new product development projects harder to shut down? Journal of Product Innovation Management, 15(2), 111–123. Schroeder, R. G., Van De Ven, A. H., Scudder, G. D. and Polley, D. (1989). The development of innovation ideas. In A. H. Van de Ven, H. L. Angle and M. Poole (Eds.), Research on the Management of Innovation: The Minnesota Studies (pp. 107–133). New York: Harper & Row. Shane, S. A. (1994). Are champions different from non-champions? Journal of Business Venturing, 9(5), 397–421. Sharma, S. (2000). Managerial interpretations and organizational context as predictors of corporate choice of environmental strategy. Academy of Management Journal, 43(4), 681–697. Song, X. M. and Montoya-Weiss, M. M. (1998). Critical development activities for really new versus incremental products. Journal of Product Innovation Management, 15(2), 124–135. Teece, D. J. (2007). Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319–1350. Teece, D. J. (2012). Next-generation competition: New concepts for understanding how innovation shapes competition and policy in the digital economy. Journal of Law, Economics and Policy, 9, 97. Teece, D. J. (2014). The foundations of enterprise performance: Dynamic and ordinary capabilities in an (economic) theory of firms. The Academy of Management Perspectives, 28(4), 328–352. Teece, D. J. (2018). Dynamic capabilities as (workable) management systems theory. Journal of Management & Organization, 24(3), 359–368. Teece, D. J., Pisano, G. and Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(3), 509–533. Tushman, M. L. and O’Reilly, C. A. (1997). Winning Through Innovation. Cambridge, MA: Harvard Business School Press. Winter, S. (2000). The satisficing principle in capability learning. Strategic Management Journal, 21(10–11), 981–996. Winter, S. (2003). Understanding dynamic capabilities. Strategic Management Journal, 24(10), 991–995. Zahra, S. A., Sapienza, H. J. and Davidsson, P. (2006). Entrepreneurship and dynamic capabilities: A review, model and research agenda. Journal of Management Studies, 43(4), 917–955. Zaltman, G., Duncan, R. and Holbek, J. (1973). Innovations and Organizations. New York: John Wiley & Sons, Inc.

4 Capabilities building through the exploitation and exploration approach

4.1 Exploitation and exploration In general, paradoxes within a company are observed at all levels of the organization, and various paradoxes are inherent not only in the company as a whole but also in a company’s business units, divisions, teams, and other areas such as between companies. Examples include the “paradox of management” (Thompson, 1967), which refers to resilience and certainty, the “paradox of organizational culture” (Pascale, 1985), which refers to autonomy and socialization of organizational members, and the “paradox of strategy” (Mintzberg, 1987), which refers to “deliberate strategy” and “emergent strategy”. If such paradoxes are what trigger innovation in a company, the context of the paradox will also have a significant impact on the content and quality of innovation. It is important to view paradoxes as constructive and positive ideas that drive innovation in companies (e.g., Graetz and Smith, 2007; Lewis, 2000). To survive as an innovation company and grow sustainably, it’s essential that companies cleverly create and use knowledge to combine both creativity and efficiency. The most important thing for business to remain competitive over the long term is the establishment of unique strategies to bring about high-quality and hard-to-copy knowledge. The business models of Apple in the United States (iPod, iPhone, iPad) are good examples of this. Creativity is sought after to bring about unique products and services that will differentiate a company through knowledge creation, and creating difficult-to-copy structures at low cost to differentiate from other companies also requires creativity – creativity is essential. Thus, how much unique customer value can be brought about is an important aspect of knowledge creativity. Nevertheless, once a company has taken risks to create new products and services, companies have to acquire value efficiently and productively by making derivative products and improving, upgrading, and standardizing business processes and supply chains using their existing knowledge, to shift to process innovation from product innovation (e.g., Abernathy and Utterback, 1978). Thus, how much value can be productively brought about by the knowledge created is an important aspect of the efficiency of knowledge. There is also a dynamic relationship between the creation and use of knowledge. As knowledge is used to forge technology, accumulated knowledge becomes the fuel DOI: 10.4324/9781003305057-4

64  Exploitation and exploration approach for new knowledge creation. Accordingly, it is important that companies understand how to balance the creation and use of knowledge, and they must be proactive in its management. Using knowledge both creatively and efficiently, in other words bringing about leading innovations through the creation of knowledge at the same time as using knowledge to maintain competitiveness of existing core businesses has been described as “exploration and exploitation” (March, 1991). Also, in research to date, most discussions on observations of the two separate archetypes of “exploration and exploitation”, or “incremental and radical innovation” (e.g., Greenwood and Hinings, 1993; Tushman and O’Reilly, 1997), or on the ambidextrous organization (e.g., O’Reilly and Tushman, 2004), have dealt which managerial processes or organizational structures to use. Not only the role of top management (Smith and Tushman, 2005; Tushman and O’Reilly, 1997), the roles of middle management and staff (Nonaka, 1988; Kodama, 2003; Govindarajan and Trimble, 2005) are also important in combining contradictions. Aaker (2011), while respecting the position of the ambidextrous organization, mentions that in successful marketing innovation companies, three distinct concepts need to be considered simultaneously: dynamic strategic commitment, which promotes incremental innovation of exploitation activities; selective opportunism, which promotes radical innovation of exploration activities; and centralized resource allocation, which is the resource allocation ability to appropriately execute these activities. The main theme of this chapter is how companies should build their capabilities to promote the combination of exploration and exploitation. 4.2 The valley of death and Darwinian sea models – from the perspective of exploration and exploitation In a report by the U.S. House of Representatives Committee on Science entitled “Unlocking Our Future: Toward a New National Science Policy”, Congressman Vernon Ehlers, Vice Chairman of the Committee, used the metaphor of a “valley of death” to describe the ever-widening gap between basic research funded by the federal government and applied research and development conducted by the private sector (Ehlers, 1998). The metaphor of the valley of death is also inescapably inherent in the process of industrialization of technology led by the private sector (Branscomb et al., 2001; Markham, 2002; Merrifield, 1995). Meanwhile, Congressman Ehlers’ “valley of death” has been introduced as an example of the existence of a gap and the danger of crossing it, but the desert is a poor metaphor for the gap except in emphasizing the danger. The metaphor of a “Darwinian sea”, or an ocean full of new creatures competing with each other, has been proposed in lectures and reports by the National Institute of Science and Technology (NIST), which is affiliated with the U.S. Department of Commerce (Branscomb, 2001; Branscomb and Auerswald, 2002). In other words, the process of moving from invention to innovation does not proceed smoothly as if it were following a single path from one shore to the opposite shore. Economic upheavals, ideas,

Exploitation and exploration approach 65 entrepreneurship, and the birth and death of various collaborative ventures become as essential in terms of economic evolution as they are in biological evolution. On the other hand, in OECD lecture materials called “Crossing The Valley Of Death only to Arrive in The Waters of The Darwinian Sea”, Dr. Charles Wessner of the National Academy of Science (US) states that new businesses (new products, services, etc.) that overcome the valley of death will subsequently be faced with the Darwinian sea (Wessner, 2001, 2003). In other words, he presented a view that juxtaposes the valley of death and the Darwinian sea, making the distinction that the valley of death is the barrier between invention and the launch of a new business, while the Darwinian sea is the barrier between the launch of a new business and its certainty once it is launched. These new businesses that swim across the Darwinian sea will survive to become mature industries. Although some argue that the valley of death and Darwinian sea are the same concept (e.g., Auerswald and Branscomb, 2003; Dismukes, 2004; Markham et al., 2010; Saguy, 2011), this empirical “Wessner model” is accepted by practitioners and researchers from the perspective that it corresponds to realistic business processes (e.g., Kimura, 2009; Iwasaki, 2010; Hayashida and Katayama-Yoshida, 2011; Tanikawa, 2018). Dr. Akira Yoshino, who won the Nobel Prize in Chemistry in 2019, mentions the following points (THE SANKEY NEWS, 2019). The first experience of the project is the “Devil’s River” at the basic research stage. Most of the projects drop out here without being able to swim to the opposite shore. In other words, it ends at the research stage. In addition, the “Valley of Death” awaits the project at the stage of the project’s commercialization process. There, one problem after another stands in the way, and most of the projects drop out before commercialization. Finally, the project faces “Darwin’s Sea”. However, there are cases in which the efforts of the project bear fruit and the business finally reaches commercialization, but the market does not pay attention to it. According to Fig. 4.1, “Devil’s River” corresponds to Domain I, “Valley of Death” to Domain II, and “Darwin’s Sea” to Domain III. Based on the Wessner model, this paper categorizes macroscopic processes from basic and applied research to the launch of new businesses (new products or services) and their commercialization (market formation from the competitive environment) as follows. This process is modeled as (1) Domain I [basic research (creation of seeds/ basic technology)]  (2) Domain II [practical development and commercialization (product development based on market needs)]  (3) Domain III [accelerating commercialization through market launch (accelerating competitive strategies)]  (4) Domain IV [industrialization (market share consolidation/maturation)] phase (see Figure 4.1). The aforementioned valley of death refers to the barriers that must be overcome in the processes from research and development (R&D) to commercialization to realize innovation based on technology and exists in Domain II above. In particular, the valley of death is a barrier that exists between the development stage and the commercialization stage. To manufacture and successfully sell products, it is necessary to appropriately procure management resources such as funds and human resources inside and outside companies.

66  Exploitation and exploration approach

Figure 4.1 The valley of death and the Darwinian sea models Source: Created by the author, citing Wessner (2003)

The Darwinian sea is the barrier that exists in the process of accelerating commercialization through market introduction, and it exists in Domain III. To succeed in business, it is necessary to build a competitive advantage for new businesses and win out in the race for survival with many rival companies. Darwin called natural selection the essence of evolution. Hence, the market in which this selection occurs is described as the “Darwinian sea”. This section outlines each Domain from the perspective of the “dynamic capabilities-view” mentioned in Chapter  2. In Domain I, the basic research and creation of ideas that are the source of new strategic innovation require (depending on the field) a longer period of time as the proportion of scientific elements and the degree of technological difficulty (uncertainty) rises. Achievements in Domain I are largely due to the creative thinking and actions of middle managers and staff in company R&D departments and business development divisions (e.g., Kodama, 2005). However, as shown in Figure  2.1 in Chapter  2, there are also substantial commitment and strategic contributions made by top and upper-level managers in demonstration of dynamic capabilities (DC) based on the fundamental policy of “doing the right things” (Teece, 2014). Also, importantly, there are also “signature processes” (Bruch and Ghoshal, 2004) in large traditional (leading) corporations that are difficult for other companies to copy. These signature processes also raise the quality of R&D. This Domain I is also the “exploration” stage that triggers the aforementioned radical innovation. I call this domain “strategic emergence”.

Exploitation and exploration approach 67 In Domain II, the role of “seizing” by DC on the business unit side (practical application development division) for the realization of radical innovation is significant. Practical application development divisions “sense” matches between the market and technical innovations while seizing and transforming for radical innovation as the commercial development of new processes, new technologies, and new businesses. Thus, practitioners must pursue entrepreneurial strategies (Mintzberg and Waters, 1985), demonstrate commitment, and become strategically involved based on the fundamental policy of “doing the right things”. Moreover, the quality of the signature processes unique to a company that were required in Domain I  are more strongly reflected in Domain II. This is because the practical application (commercialization) of the results of research and development faces the major obstacle known as the “valley of death”. The capabilities to surmount these hurdles are largely down to these highly rarefied signature processes unique to companies. This Domain II is also the “exploration” stage to achieve the aforementioned radical innovation. I call this domain “strategic selection”. Next, in Domain III, the domain in which the pace of environmental change is fast and competition with other companies is fierce, “transforming” through DC plays a large role on the business division side. As time passes, with the shift into Domain III, newly developed products and businesses burst into these environments of competition with other companies. However, the shift to a competitive environment depends on the industry or the features of a product, and the birth of a competitive market means that uncertainty in the environment, in other words, the market, decreases. In contrast, divisions such as product planning and technical development positioned upstream in the value chain at the business side (HQ and business units, etc.) also function to sense and detect changes in newly born markets through DC and establish robust value chains through seizing and transforming for upgrades, improvements and new versions, by rapidly and incrementally innovating (sustainably advancing technologies) new products and services that have already been successfully commercialized. Thus, to get through the Darwinian sea, practitioners pursue entrepreneurial strategies, demonstrate commitment and make strategic contributions through the basic policy of “doing the right things”. As discussed later, Domain III is also the stage of exploitation to achieve rapid incremental innovation by integrating dynamic capabilities (DC) and ordinary capabilities (OC). I call this domain “strategic concentration”. In the last Domain IV, where businesses have survived the Darwinian sea and have matured (industrialized), DC elements will have less weight, and instead, best practices based on ordinary capabilities (OC) will be the main focus. Existing traditional organizations (business divisions, etc.) observe slow changes in existing markets and execute existing operations mainly in formal organizations and strict, top-down centralized leadership (Kodama, 2019) through path-dependent, planned, and wellthought-out deliberate strategies in business divisions (Mintzberg and Waters, 1985). In Domain IV, the weight on DC diminishes, and the demonstration of best practices through OC comes to the fore. In existing traditional line organizations (business units, etc.), slow changes in existing markets are sensed, and existing operations in which formal organizations play the lead are executed through path-dependent,

68  Exploitation and exploration approach planned, and carefully considered deliberate strategies in business divisions, and strict, top-down centralized leadership (Kodama, 2004) is demonstrated. Driving slow incremental innovation by strengthening OC in Domain IV requires bringing about higher performance by evolving routines through higher-order learning for short-term gain, depending on internal and external changes (King and Tucci, 2002; Benner and Tushman, 2003; Winter, 2000; Amburgey, 1993; Nelson and Winter, 1982). Promoting such Domain IV process management accelerates the speed that an organization responds to achieve incremental innovation (Benner and Tushman, 2003). However, there is always a danger that product lineups in Domain IV could be threatened by emergent technical innovations. I call calls this domain “strategic efficiency”. 4.3 Combining exploration and exploitation As mentioned in Section 4.1, research on exploration and exploitation is an important theme in strategic management and entails the combination of exploration and exploitation of information and knowledge in companies. The actions of exploration and exploitation are contradictory and paradoxical, the way in which they should be simultaneously applied has been the subject of research (e.g., Tushman and O’Reilly, 1997), and recent research has shown that as constructive and motivating ideas for maintaining corporate innovation, the viewpoint that appreciates this paradox is of importance (e.g., Graetz and Smith, 2007; Lewis, 2000). Maintaining an appropriate balance between exploration and exploitation, (e.g., McCarthy and Gordon, 2011; Ahn et al., 2006; Kodama, 2003; Gibson and Birkinshaw, 2004) and promoting synergies between exploration and exploitation (He and Wong, 2004) are said to be ways to improve corporate performance. With the coexistence and simultaneous application of these two different archetypes (exploration and exploitation) in a company, it is crucial that “strategic contradiction” (Smith and Tushman, 2005), “creative abrasion” (Leonard-Barton, 1995), and “productive friction” (Hagel and Brown, 2005) are managed skillfully for synergies between them to be brought about. Moreover, it has been argued that organizations charged with radical innovation in a company (e.g., Leifer et al., 2000) should be physically and culturally separated from existing organizations (or line organizations) (the main stream), or set up as independent venture businesses (e.g., Hill and Rothaermel, 2003; Benner and Tushman, 2003; Burgelman and Sayles, 1988; Kanter, 1985). There are also results of analysis that suggest that the role of management is to use and integrate these two different processes as in the so-called “ambidextrous organization” (e.g., O’Reilly and Tushman, 2004). Major previous studies on corporate activities that succeed with long-term innovation show that a balance should be struck between the two conflicting strategic activities of exploration and exploitation (see Table 4.1). For this purpose, it is necessary to dynamically synthesize the activities of exploration and exploitation in a synchronous (or asynchronous) manner. This means the simultaneous execution of exploitation activities, namely incremental innovation of existing businesses

Table 4.1 Paradoxical management of exploration and exploitation Literatures

Method

Emphasized necessity for balance of paradoxical management (the key theme)

Exploration and exploitation forms

Exploration and exploitation execution

Dynamic synthesis

Synchronous

Asynchronous

X X

X X

Journal

Static synthesis

Markides (1999) Kodama (2003)

SMR OS (1)

Case studies Case studies

A dynamic view of strategy Managing paradox for innovation

X X

O’Reilly and Tushman (2004) Kodama (2004)

HBR

Case studies

X

X

X

SR&BS

A case study

X

X

X

Andriopoulos and Lewis (2009) Dixon et al. (2014) Nonaka et al. (2014) Laplume and Dass (2015) Luger et al. (2018)

OS (2)

X

X

LRP

Comparative case study A case study

Managing ambidextrous organization Developing integrative competences Virtuous cycles of ambidexterity Dynamic capabilities lifecycle

X

X

EMJ

Case studies

X

LRP

Field study

Managing dynamic fractal organization Outstreaming for ambidexterity

OS (2)

Survey/hypothesis testing

Dynamic Balancing of Exploration and Exploitation

X

X

X

X X

X

SMR: MIT Sloan Management Review, OS (1): Organization Studies, HBR: Harvard Business Review, SR&BS: Systems Research and Behavioral Science, OS (2): Organization Science, EMJ: European Management Journal, LRP: Long Range Planning

Exploitation and exploration approach

Author(s)

69

70  Exploitation and exploration approach (including the latest businesses where innovation has been realized), and exploration activities, namely radical innovation of new (future) business development. In other words, the reciprocal circulation of exploration (radical innovation) and exploitation (incremental innovation) in the valley of death and the Darwinian sea models shown in Figure 4.1 is necessary. The following analyzes and discusses the corporate capabilities building to promote the combination of exploration and exploitation by considering previous studies; “dynamic capabilities lifecycle”, the “knowledge triad model”, and the “strategic communities (SC) triad model”. 4.3.1  Dynamic capabilities lifecycle

Dixon et al. (2014) report on the need for reciprocal circulation between exploitation and exploration from the dynamic capabilities-view perspective described in Chapter  2. Regarding short- and long-term strategy and organizational reform, Dixon et  al. (2014) present a theoretical framework of the “dynamic capabilities cycle” derived from an in-depth longitudinal case study on a Russian oil company (see Figure  4.2). They cite two capabilities demonstrated by the company in its development processes over the short and long terms. Here, the first capability is the “adaption dynamic capabilities” as exploitation activities of the company to regularly polish its extant knowledge (operational

Figure 4.2 Exploration and exploitation dynamic combination processes Source: Created by the author, citing Dixon et al. (2014: Figure 1). Created by the author, citing Nonaka et al. (2014: Figure 4)

Exploitation and exploration approach 71 capabilities, or put differently ordinary capabilities) to respond to environmental changes and to temporarily gain a short-term competitive edge. This capability is demonstrated in the incremental innovation (exploration) in Domain III (DC and OC) and Domain IV (OC) in the valley of death and the Darwinian sea models in Figure 4.1. Second are the “innovation dynamic capabilities” as exploration activities of the company to acquire sustainable, long-term competitiveness through unique creative ideas and actions found in no other company. This capability is demonstrated in radical innovation (exploration) in Domain I (DC) and Domain II (DC) in the valley of death and the Darwinian sea models in Figure 4.1. These researchers named these patterns of execution of strategy the “dynamic capabilities cycle” in which leading companies cycle these two different capabilities through time (both asynchronously and synchronously). In other words, for dynamic capabilities to reconfigure, divest, and integrate resources in response to environmental changes (Teece et  al., 1997), this model is a framework that takes into account capability elements to create new innovations through new knowledge creation (Nonaka and Takeuchi, 1995) processes, such as exploration and exploitation (March, 1991) or path creation. 4.3.2  Knowledge triads model

Meanwhile, Nonaka et al. (2014) present a theoretical framework for the construction of “dynamic fractal organizations” that not only balances exploitation and exploitation in the formulation and implementation of corporate strategies, but also drives a dynamic view of strategy for synergies between different explorations and exploitations, shifts from exploitation to exploitation, shifts from exploration to exploitation, and interactions between exploitation (Domain III  Domain IV) and exploration (Domain I  Domain II). This dynamic view of strategy synthesizes the different modes of exploitation and exploitation through the “knowledge triad” – tacit knowledge, explicit knowledge, phronetic knowledge – and ensures long-term growth as well as short-term performance of companies (e.g., March, 1991; Benner and Tushman, 2003; Tushman and O’Reilly, 1997). Exploration and exploitation are not dichotomous strategic activities – companies should build knowledge triads to skillfully combine the two strategic activities (exploration and exploitation) and complement the two strategic activities (exploration and exploitation) to execute the strategy. Toyota’s Prius product development case (see Figure 4.2) was an innovation that required the convergence of various technologies (exploration) which were commercialized and continuously improved (exploitation), making it necessary to have a dynamic synthesis of exploitation and exploitation. For those reasons, Toyota’s various project teams and existing line organizations formed multilayered networked Ba both horizontally and vertically within and between organizations to simultaneously pursue the creation and utilization of knowledge. Drawing attention in this case are Ba to drive exploration activities to create knowledge for innovation (called exploration Ba) and that are the processes of sharing tacit knowledge and converting it to explicit knowledge (SE in the SECI

72  Exploitation and exploration approach process: Socialization, Externalization), and Ba that drive exploitation of knowledge to commercialize, upgrade and improve products (called exploitation Ba) that are for processes of synthesis of explicit knowledge, and internalization through personal experience (CI in the SECI process: Combination, Internalization). In other words, exploration Ba strongly involve tacit knowledge, while exploitation Ba strongly involve explicit knowledge. Nevertheless, tacit and explicit knowledge exist in a continuous and integrated in a spiral. Practical knowledge (phronesis) drives this spiral and is also created and accumulated at the same time. 4.3.3  The strategic communities (SC) triad model

To achieve strategic innovation, Kodama (2017) presented the importance of building the strategic communities (SC) triad model by purposely forming organizational groups with dissimilar characteristics (e.g., project and line organizations) in-house by leader teams that include top management to manage the exploration and exploitation processes simultaneously through business activities by these organizations. The leader teams play the role of improving R&D and new business development performance by strengthening the characteristics of the cross-functional or intercorporate integration of the exploration and exploitation SC. These multi-layered SC networks form the triad model of SC from exploration SC, exploitation SC, and synthesis SC. The multi-layered SC networks as the SC triad model have their roots in the existence of aforementioned Ba triad model. For radical innovation, in uncertain environments, project organizations inspire and create new knowledge based on creativity and imagination, to bring about concepts for new technical developments and business models (new products, services, business frameworks, etc.) through trial and error. This activity induces the Domain III and/or Domain IV  Domain I shift, in terms of corporate activities. Companies thus drive radical innovation by forming multiple multi-layered SC with strategic business partners outside of the company, taking up knowledge from both inside and outside the company in high-risk environments, and practicing emergent and entrepreneurial strategies. Individual projects in projects organizations act autonomously and are dispersed as networked organizations (Kodama, 2003), but their business activities are always monitored by organizational leaders to control the direction and objectives of business across entire project organizations. These project organizations demonstrate dynamic capabilities (DC) to bring about new product and service concepts and prototypes one after the other, and then incubate a range of these to achieve commercialization (in other words, Domain I  II  III) (see Figure 4.3). On the other hand, business processes such as production, facility construction, maintenance, sales, distribution, and after-sales support are important to ensure timely and efficient introduction, diffusion, and expansion of these new products and services in the market. Line organizations (technology, production, facility, maintenance and sales departments, etc.) are in charge of these business processes. Line organizations drive the spiraling of popularization and embedding in new markets, by releasing new products and services on to the market in Domain III that have been confirmed for marketability through the processes of concept making, marketing,

Exploitation and exploration approach 73

Figure 4.3 Leader teams, project and line networks in a corporation

elemental, practical and trial technology development, incubation and commercialization done by project organizations (Domain I  Domain II  Domain III). Based on knowledge assets built up over many years, line organizations, as bureaucratic organizations, engage in incremental innovation to make improvements and upgrades by forming line networks (exploitation SC) as multi-layered SC networks with group companies and strategic outsourcing partners, etc. Well-thought-out and orchestrated deliberate strategic plans based on strategic rules are adopted by line organizations, and they proceed with routine business activities to pursue incremental improvements and upgrades, and efficiency in exiting business processes by demonstrating ordinary capabilities (OC) in Domains III and IV. Practice in line networks in this way requires thorough productivity and efficiency. Then, through product and service innovation, line organizations quickly and efficiently (by making full use of process innovation) introduce the results of innovative new product and service concepts created by project organizations to the market, and promote and expand the products and services. This is then the interlocking of exploration SC and exploitation SC (or shifting from exploration to exploitation) (see Figure 4.3). Although being similar to the “ambidextrous organization” (Tushman and O’Reilly, 1997; O’Reilly and Tushman, 2004), this SC trial model provides the following new perspectives. The research above argues that in an ambidextrous organization, the strategic goals of both new business development organizations and existing business development organizations should be clearly defined, interaction between these two organizations at the practical level should be limited as much as

74  Exploitation and exploration approach possible, and a senior manager should oversee both organizations. In contrast, in the SC triad model, close collaboration and interaction of exploration SC consisting of project networks aiming to pursue new R&D and build and develop new business, and exploitation SC consisting of line networks that continually improve and upgrade commercialized products and services are driven by synthesis SC centered around a leader team (Kodama, 2017). Practitioners at all levels of management (top, middle, and staff) combine exploration and exploitation by driving smooth shifting between the domains through the SC triad model. Kodama (2017) and Kodama and Shibata (2016) demonstrate from case studies of NTT DOCOMO and Fujifilm that the SC triad model combines exploration and exploitation. Such a perspective provides a new theoretical framework that differs from that of the ambidextrous organization. Leader teams synthesize the knowledge in these organizations (project networks and line networks). It’s important that the apparent contradiction of simultaneously creative and planned strategic methods are combined and synthesized in leader teams. Thus, for leader teams, the configuration of the SC tried model to combine both incremental and radical innovation processes is key. Based on the above previous studies of the dynamic capabilities lifecycle, knowledge triad model, and strategic communities (SC) triad model, it can be concluded that companies that grow in the long term promote a reciprocating cycle of exploration (Domain I  Domain II) and exploitation (Domain III  Domain IV), or in other words, they combine dissimilar exploitation and exploration activities and cyclically demonstrate (asynchronously or synchronously) dynamic strategic activities (see Figure 4.4). Thus, the model of capabilities building from the exploitation and exploration approach yields similar results to the capabilities building map derived from the dynamic capabilities approach mentioned in Chapter 2 (see Figure 2.6).

Figure 4.4 Dynamic capabilities building through exploration and exploitation processes

Exploitation and exploration approach 75 4.4 Conclusion This chapter has explored the research question of how companies should build their capabilities to promote the combination of exploration and exploitation. This chapter has clarified that companies that grow in the long term promote a reciprocating cycle of exploration (Domain I  Domain II) and exploitation (Domain III  Domain IV), or in other words, they combine dissimilar exploration and exploitation activities, and cyclically demonstrate (asynchronously or synchronously) dynamic strategic activities, based on the above previous studies of the dynamic capabilities lifecycle, knowledge triad model and strategic communities (SC) triad model. Thus, the model of capabilities building from the exploitation and exploration approach yields similar results to the capabilities building map derived from the dynamic capabilities approach mentioned in Chapter 2. References Aaker, D. A. (2011). Brand Relevance: Making Competitors Irrelevant. New York: John Wiley & Sons. Abernathy, W. J. and Utterback, J. M. (1978). Patterns of industrial innovation. Technology Review, 80(7), 40–47. Ahn, J. H., Lee, D. J. and Lee, S. Y. (2006). Balancing business performance and knowledge performance of new product development. Lessons from ITS industry. Long Range Planning, 39(6), 525–542. Amburgey, T., Kelly, D. and Barnett, W. (1993). Resetting the clock: The dynamics of organizational change and failure. Administrative Science Quarterly, 38(1), 51–73. Andriopoulos, C. and Lewis, M. W. (2009). Exploitation-exploration tensions and organizational ambidexterity: Managing paradoxes of innovation.  Organization Science,  20(4), 696–717. Auerswald, P. E. and Branscomb, L. M. (2003). Valleys of death and Darwinian seas: Financing the invention to innovation transition in the United States. The Journal of Technology Transfer, 28(3), 227–239. Benner, M. and Tushman, M. (2003). Exploitation, exploration, and process management: The productivity dilemma revisited. Academy of Management Review, 28(2), 238–256. Branscomb, L. M. (2001). Research and innovation policy: A framework for research-based industrial policy in the United States. Revue d’économie industrielle, 94(1), 89–114. Branscomb, L. M. and Auerswald, P. E. (2002). Between invention and innovation an analysis of funding for early-stage technology development. NIST GCR, 02–841. Branscomb, L. M., Auerswald, P. E. and Chesbrough, H. W. (2001). Taking Technical Risks. Cambridge, MA: MIT Press. Bruch, H. and Ghoshal, S. (2004). A Bias for Action: How Effective Managers Harness Their Willpower, Achieve Results, and Stop Wasting Time. Boston, MA: Harvard Business Press. Burgelman, R. A. and Sayles, L. R. (1988). Inside Corporate Innovation. San Francisco, CA: Simon and Schuster. Dismukes, J. P. (2004). Accelerate radical innovation-now! Research Technology Management, 47(5), 2. Dixon, S., Meyer, K. and Day, M. (2014). Building dynamic capabilities of adaptation and innovation: A study of micro-foundations in a transition economy. Long Range Planning, 47(4), 186–205.

76  Exploitation and exploration approach Ehlers, V. J. (1998). Unlocking Our Future: Toward a New National Science Policy, A Report to Congress by the House Committee on Science. Washington, DC: Government Printing Office. Gibson, C. B. and Birkinshaw, J. (2004). The antecedents, consequences, and mediating role of organizational ambidexterity. Academy of Management Journal, 47(2), 209–226. Govindarajan, V. and Trimble, C. (2005). Ten Rules for Strategic Innovations. Boston, MA: Harvard Business School Press. Graetz, F. and Smith, A. (2007). The role of dualities in arbitrating continuity and change in forms of organizing. International Journal of Management Reviews, 10(3), 265–280. Greenwood, R. and Hinings, C. (1993). Understanding strategic change: The contribution of archetypes. Academy of Management Review, 36(5), 1052–1081. Hagel III, J. and Brown, J. S. (2005). Productive friction. Harvard Business Review, 83(2), 139–145. Hayashida, H. and Katayama-Yoshida, H. (2011). A new material product development management tool: A case study of high-purity ammonia gas business development for white led application. In 2011 Proceedings of PICMET’11: Technology Management in the Energy Smart World (PICMET) (pp. 1–10). IEEE. He, Z. and Wong, P. (2004). Exploration vs. exploitation: An empirical test of the ambidexterity hypothesis. Organization Science, 15(4), 481–494. Hill, C. and Rothaermel, F. (2003). The performance of incumbent firms in the face of radical technological innovation. Academy of Management Review, 28(2), 257–247. Iwasaki, T. (2010). The Art of Manufacturing: Avoiding Pitfalls Along the Royal Road. Tokyo: Kureha Corporation. Kanter, R. (1985). Supporting innovation and venture development in established companies. Journal of Business Venturing, 1(1), 47–60. Kimura, O. (2009). Is public R&D in energy efficiency really effective? – A case in Japan and its implications. In ECEEE Summer Study 2013 Proceedings. King, A. and Tucci, L. (2002). Incumbent entry into new market niches: The role of experience and managerial choice in the creation of dynamic capabilities. Management Science, 48(2), 171–187. Kodama, M. (2003). Strategic innovation in traditional big business. Organization Studies, 24(2), 235–268. Kodama, M. (2004). Strategic community-based theory of firms: Case study of dialectical management at NTT DoCoMo. Systems Research and Behavioral Science, 21(6), 603–634. Kodama, M. (2005). Knowledge creation through networked strategic communities: Case studies on new product development in Japanese companies. Long Range Planning, 38(1), 27–49. Kodama, M. (2017). Developing strategic innovation in large corporations – The dynamic capability view of the firm. Knowledge and Process Management, 24(4), 221–246. Kodama, M. (2019). Business innovation through holistic leadership‐developing organizational adaptability. Systems Research and Behavioral Science, 36(4), 365–394. Kodama, M. and Shibata, T. (2016). Developing knowledge convergence through a boundaries vision – A case study of Fujifilm in Japan. Knowledge and Process Management, 23(4), 274–292. Laplume, A. O. and Dass, P. (2015). Outstreaming for ambidexterity: Evolving a firm’s core business from components to systems by serving internal and external customers.  Long Range Planning, 48(3), 135–150. Leifer, R., McDermott, M., O’Connor, C., Peters, S., Rice, M. and Veryzer, W. (2000). Radical Innovation: How Mature Companies Can Outsmart Upstarts. Cambridge, MA: Harvard Business School Press.

Exploitation and exploration approach 77 Leonard-Barton, D. (1995). Wellsprings of Knowledge: Building and Sustaining the Source of Innovation. Cambridge, MA: Harvard Business School Press. Lewis, W. (2000). Exploring paradox: Toward a more comprehensive guide. Academy of Management Review, 25, 760–776. Luger, J., Raisch, S. and Schimmer, M. (2018). Dynamic balancing of exploration and exploitation: The contingent benefits of ambidexterity. Organization Science, 29(3), 449–470. March, J. (1991). Exploration and exploitation in organizational learning. Organization Science, 2(1), 71–87. Markham, S. K. (2002). Moving technologies from lab to market. Research Technology Management, 45(6), 31–36. Markham, S. K., Ward, S. J., Aiman‐Smith, L. and Kingon, A. I. (2010). The valley of death as context for role theory in product innovation. Journal of Product Innovation Management, 27(3), 402–417. Markides, C. C. (1999). A dynamic view of strategy. Sloan Management Review, 40(3), 55–63. McCarthy, I. P. and Gordon, B. R. (2011). Achieving contextual ambidexterity in R&D organizations: A management control system approach. R&D Management, 41(3), 240–258. Merrifield, B. D. (1995). Obsolescence of core competencies versus corporate renewal. Technology Management, 2(2), 73–83. Mintzberg, H. (1987). The strategy concept II: Another look at why organizations need strategies. California Management Review, 30(1), 25–32. Mintzberg, H. and Waters, J. A. (1985). Of strategies, deliberate and emergent. Strategic Management Journal, 6(3), 257–272. Nelson, R. and Winter, S. (1982). An Evolutionary Theory of Economic Change. Boston, MA: Belknap Press. Nonaka, I. (1988). Toward middle-up-down management: Accelerating information creation. MIT Sloan Management Review, 29(3), 9. Nonaka, I., Kodama, M., Hirose, A. and Kohlbacher, F. (2014). Dynamic fractal organizations for promoting knowledge-based transformation – A new paradigm for organizational theory. European Management Journal, 32(1), 137–146. Nonaka, I. and Takeuchi, H. (1995). The Knowledge-Creating Company. New York: Oxford University Press. O’Reilly, C. and Tushman, M. (2004). The ambidextrous organization. Harvard Business Review, 82(4), 74–82. Pascale, R. T. (1985). The paradox of corporate culture: Reconciling ourselves to socialization. California Management Review, 27(3), 26–40. Saguy, I. S. (2011). Paradigm shifts in academia and the food industry required to meet innovation challenges. Trends in Food Science & Technology, 22(9), 467–475. The Sankey News. (2019). Nobel Prize in chemistry Akira Yoshino ‘I want you to overcome the three barriers’ message to young people. October  9. www.sankei.com/ article/20191009-ZBURE3P5HROMRMKPXASO5CDLIU/. Smith, S. and Tushman, M. (2005). Managing strategic contradictions: A top management model for managing innovation streams. Organization Science, 16(5), 522–536. Tanikawa, T. (2018). Mechanization of agriculture considering its business model. In Smart Plant Factory (pp. 241–244). Singapore: Springer. Teece, D. J. (2014). The foundations of enterprise performance: Dynamic and ordinary capabilities in an (economic) theory of firms. The Academy of Management Perspectives, 28(4), 328–352. Teece, D. J., Pisano, G. and Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(3), 509–533.

78  Exploitation and exploration approach Thompson, J. D. (1967). Organizations in Action. New York: McGraw-Hill. Tushman, M. L. and O’Reilly, C. A. (1997). Winning Through Innovation. Cambridge, MA: Harvard Business School Press. Wessner, C. (2001). Public/Private Partnerships for Innovation, Presentation at OECD Workshop. US National Academy of Sciences. See www.oecd.org/sti/inno/tipworkshoponpppart nershipsforinnovationprogramme.htm. Wessner, C. (2003). Improving government-SME partnerships for the development of new technologies, The US small business innovation research program. In The U.S. Advanced Technology Program 6 Countries Programme Conference. https://slideplayer.com/slide/690896/. Winter, S. (2000). The satisficing principle in capability learning. Strategic Management Journal, 21(10–11), 981–996.

5 Strategic innovation system – a new theory from synthesis of prior literature

5.1 New theoretical development – the strategic innovation system Based on the synthesis from the three research areas discussed in Chapters  2, 3, and 4, this section describes the capabilities that diverse organizations in companies (R&D organizations, new business development organizations, project teams, existing line organizations, etc.) need at any given time for the various business contexts that they face on a daily basis, analyzed from the perspective of dynamic and ordinary capabilities, and presents a new theoretical framework – the strategic innovation system. The strategic innovation system also includes a theoretical framework for dynamic capabilities building to achieve innovations through strategic collaboration with stakeholders such as partnering corporate players, etc. First, this chapter presents the basic domains that make up a company’s capabilities building systems from “Capabilities building through the dynamic capabilities approach (Chapter 2)”, “Capabilities building through the innovation process approach (Chapter 3)”, “Capabilities building through the exploration & exploitation approach (Chapter 3)”. The chapter presents the capabilities building map (four domains of capabilities), which is a group of domains with four different capability characteristics corresponding to external and internal corporate conditions, namely, the speed of environmental change and uncertainty factors faced by companies (see Figure 5.1). It is especially important to demonstrate DC in Domains I, II, and III on the capabilities building map in Figure  5.1 (business environments that are changing rapidly, and/or business environments that have high levels of uncertainty). The three-phase management mentioned in Figure 3.1 in Chapter 3 (discovery, incubation, and acceleration), respectively, proposed as Domains I, II, and III, from invention or proposal to commercialization of new technologies and businesses. These three domains are business fields in which DC are demonstrated (integration of DC and OC is also required in Domain III). Such three-phase management (discovery, incubation, and acceleration) is performed in projects in large corporations (and similarly in venture enterprises) to develop various new products, services, and businesses. For practitioners (and organizations such as project teams), different capabilities are required in the individual business processes in each of these three DOI: 10.4324/9781003305057-5

80  Strategic innovation system

Figure 5.1 Capabilities building map – the dynamic and ordinary capabilities view

phases, depending on the degree of business uncertainty and environmental change being faced. As mentioned, DC robustly function in response to such external conditions (uncertainly and environmental change) and are also a framework for demonstrating difficult-to-imitate competitiveness. As discussed in Chapter  3, managing the phases with “MI Dynamic Capability (Major innovation)” (O’Connor, 2008) and “Breakthrough Innovation Capability (the 3 phases of discovery, incubation, and acceleration)” (O’Connor et al., 2008) can be described with the three DC functions (sensing, seizing, transforming), which can be applied in highly uncertain and rapidly changing environments, as DC also can be said to encompass the theoretical concepts of “MI dynamic capability (major innovation)” (O’Connor, 2008) and “breakthrough innovation capability (the phases of discovery, incubation, and acceleration)”. Conversely, OC function in pursuit of best practices (Teece, 2007, 2014) in the low uncertainty and slow change in the stable environments in Domain IV. The following describes the characteristics of the capabilities in each domain, and a capabilities building system for integrating these domains. 5.1.1  DC in Domain I

Slow or very slow environmental change with a highly uncertain domain (domain I) observed at the initial stage of radical innovation is the technology creation stage arising from new ideas, business concepts, discoveries, and invention, and corresponds

Strategic innovation system 81 to the “discovery phase” of O’Connor and DeMartino (2006). In this domain, the exploration process is advanced through the MI dynamic (or breakthrough innovation) capability mentioned earlier. Moreover, the role of the sensing element of DC in this domain is significant. To achieve radical innovation, R&D organizations in large corporations (research laboratories, development centers, new business development organizations, etc.) seek out and detect latent market potentials with sensing, and continuously or semi-continuously set down and execute medium to long-term R&D plans through the seizing and transforming processes. Needless to say, there is a need for ordinary capabilities as routines to promote R&D activities. The basic research and creation of ideas that are the source of new strategic innovation require (depending on the field) a longer period of time as the proportion of the scientific element and the degree of technological difficulty rises. Achievements in Domain I are largely due to the creative thinking and actions of middle managers and staff in company R&D departments and business development divisions (Nonaka, 1998; Kodama, 2005), but there are also substantial strategic commitments and contributions made by top and upper-level managers based on the fundamental policy of “doing the right things” (Teece, 2014). Importantly, there are also “signature processes” (Bruch and Ghoshal, 2004) in large traditional (leading) corporations that are difficult for other companies to copy. These signature processes also raise the quality of R&D. I call this domain “strategic emergence”. In the asset orchestration process in Domain I, practitioners learn with hypotheses verification in line with R&D objectives and pursue reconfiguration/transformation through coordination/integration of a wide range of intangible assets. Many patterns of asset orchestration exist. In many traditional large companies, there are still many cases of closed innovation under conventional hierarchical systems centered on internal laboratories and development divisions (Japanese manufacturing is a typical example of this) (e.g., Kodama, 2009b). To develop incremental innovation or sustaining innovation (Christensen, 1997) through path-dependent knowledge accumulated in the past, closed innovation is still an important process. In traditional high-tech fields such as heavy electrical, renewable energy systems, aviation, vehicle equipment, machine tool, medical and semiconductor production equipment industries, closed innovation plays a critical role. In contrast, in industries in which technologies are rapidly advancing such as IT, the best technical achievements and know-how are becoming increasingly spread out across the globe. In such fast-moving environments, the processes of adopting open innovation (Chesbrough, 2003) and incorporating parts of external core intangible assets to merge and integrate intangible assets both within and from the outside of companies are critical (e.g., Kodama, 2009b). In these processes, there is particular importance on the processes of coordination and integration in an entrepreneurial fashion in asset orchestration of the various resources of top and leading middle managers (Teece, 2007). In Domain I, companies must think about how to find business models. Specifically, with the aim of bringing about completed items that are the final goals of the business divisions, such as products and services, etc., or core technologies such as parts, for example, should a company adopt a vertical integration model? or should

82  Strategic innovation system it focus on its area of specialization in the industrial structure of horizontal disintegration? or should a company reinforce in-house technologies while searching out strategic alliances (strong or weak ties) with other companies? Or should a company build new value chains through coordination and integration of intangible assets – the strengths of the company and other companies – through strategic collaboration with different types of business? Thus, allowing for expanded diversification of asset orchestration, practitioners have to concentrate on learning through experiments and trial activities with trial and error. In strategic emergence in Domain I, companies have to hypothetically test their corporate boundaries in response to their strategic objectives or business environments and attempt reconfiguration/transformation of various entrepreneurial asset orchestrations through the processes of trial and error. If it is advantageous to develop or manufacture in house, then it is better to configure a vertical value chain model with a focus on creativity (Kodama, 2009b). In contrast, in many cases, if another company has achieved more with its developments than those in-house, a company should focus on efficiency, dare to abandon its development efforts, and access and acquire external intangible assets not only through strategic outsourcing but also through strategic alliances, joint developments, and M&A. In such asset orchestration processes, “cospecialization” (Teece, 2007) is important. The important point is how to increase the synergies of business elements such as core technologies – the process of cospecialized asset orchestration is an important element that raises a company’s dynamic internal and external congruence in capabilities. 5.1.2  DC in Domain II

Next, the core technologies and business concepts that migrate from the slow-moving environment of Domain I, with rapidly changing of the in-house (or occasionally external) acquisition of human resources and the maintenance and upgrading of organizations oriented to business incubation to a dramatically transforming Domain II environment that sustains speed of change and uncertainty. In this domain, the exploration processes arising from DC (MI dynamic or breakthrough innovation) by O’Connor (2008) are promoted. This domain corresponds to the incubation phase of hypothetical setups, experiments, and assessments mentioned by O’Connor and DeMartino (2006). Learning through trials and experiments also leads to less risk and uncertainty of markets and technologies and a greater probability of success for incubations aimed at realizing radical innovation (O’Connor et al., 2008). Campbell and Park (2005) indicate that since reducing organizational and resource uncertainty is difficult, projects that are high-risk in terms of organization and resources should be rejected after screening. Then top and middle management make decisions aimed at selecting and bringing to market the rigorously tested and evaluated products, services, and business models. In Domain II (the incubation phase), the role of seizing is important in commercial development divisions on the business side to achieve radical innovation. Divisions developing for commercialization must use the sensing function to match technical innovations with markets (latent customer needs, etc.), while engaging

Strategic innovation system 83 the functions of seizing and transforming for radical innovation as the commercial development of new businesses, new technologies, and new processes. Thus, practitioners must pursue entrepreneurial strategies (Mintzberg, 1978), demonstrate commitment and become strategically involved based on the fundamental policy of “doing the right things”. Moreover, the quality of the signature processes unique to a company that were required in Domain I is more strongly reflected in Domain II. This is because of the so-called “valley of death” (Branscomb et  al., 2001; Markham, 2002; Merrifield, 1995), which can be a serious impediment to R&D and the commercialization of its outcomes. The ability to overcome this major hurdle is largely due to rarefied signature processes unique to a company. Needless to say, it is necessary to have ordinary capabilities as routines to promote practical development (commercialization). On the other hand, O’Connor et al. (2008) confine this incubation domain to trial experiment and assessment models, but in many cases, current business activities go beyond trial experiments with uncertainty in dramatically changing, fast-moving environments through to the launch of commercial businesses, where companies may boldly undertake risky cases with a high degree of uncertainty. In this domain, numerous cases arise where excessive trust and commitment of the leaders and managers lead to strategic activities based on the creation of business through trial-anderror even though is still unclear whether the newly developed ideas and prototypes have the potential for new business models and value chains.1 These correspond to cases in the new online business world where products are both trialed and launched in dramatically changing domains of general high risk and uncertainty. A key point is how to select and implement promising, valuable business. I  call this domain “strategic selection”. The asset orchestration process in this domain entails selection and narrowing down of the diverse intangible and tangible assets trialed and experimented on in the strategic emergence domain. In this domain, through the processes of (1) coordination/integration, (2) learning, and (3) reconfiguration, the level of completeness of asset orchestration as products, services, and business models is raised. Depending on circumstances, a corporation might have to rethink its corporate boundaries (both vertical and horizontal) or its relationships such as partnerships with other companies and realign or reconfigure its assets. 5.1.3  DC and OC in Domain III

New businesses (including new products and services) chosen through strategic selection in Domain II that have prospects for the future and somewhat reduced uncertainty shift to Domain III, where uncertainty is reduced to some extent while external (environmental) and internal change is sustained. Domain III is the stage where the radical innovation incubated (or partially commercialized) in Domain II enters a growth orbit, and corresponds to the “acceleration phase” mentioned by O’Connor and DeMartino (2006). According to O’Connor et  al. (2008), this is where the exploitation process is promoted by breakthrough innovation capability.

84  Strategic innovation system In this domain, the building and optimization of processes and value chains for the selected new businesses are achieved. Then, new business functions are wholly or partially transferred to the business divisions appropriate to accelerate commercialization (or else new business divisions are newly established, or made independent as external ventures), and further resources are intensively invested through the strategic commitment of top and middle management by “doing the right things”. I call this domain “strategic concentration”. In the past, a large number of product and service development projects for major corporations (e.g., Kodama, 2005, 2007d) invested management resources through asset orchestration in commercialization through this kind of shift from strategic selection to strategic concentration. In Domain III, where environmental change is fast and competition with other companies is fierce, transforming at the business side plays an important role in surviving the so-called “Darwinian sea” (e.g., Philip and Lewis, 2003; Dismukes, 2004). Here, the “Darwinian sea” illustrates a sea burgeoning with new organisms in competition with each other. This metaphor was advocated because of its similarity to evolution in business, since competing in the rough sea and being culled is the process of evolution of organisms. As time passes, with the shift into Domain III, newly developed products and businesses burst into these environments of competition with other companies. Nevertheless, while the degree of shift into a competitive environment depends on the industry or product characteristics, the actual birth of a competitive market means that uncertainty of the market environment lowers. In contrast, divisions such as product planning and technical development positioned upstream in the value chain on the business side (HQ and business units, etc.) also function to sense and detect changes in newly born markets and establish robust value chains through seizing and transforming for upgrades, improvements, and new versions, by quickly and incrementally innovating (sustainably advancing technologies) new products and services that have already been successfully commercialized. For this reason, practitioners pursue entrepreneurial strategies (that include elements of both deliberate and emergent strategies) and demonstrate commitment and strategic engagement based on the fundamental policy of “doing the right things”. Moreover, to win out over the competition in Domain III, there is significant dependence on unique corporate “willpower” (Bruch and Ghoshal, 2004) in a company’s signature processes. Willpower is the energy and concentration for thinking and action that come with a sense of purpose. Energy is vigor, and concentration is directing energy toward a particular outcome. It is critical that practitioners clearly picture in their minds the scenario of their intended strategy and concentrate on its planning to consciously achieve the strategy in tough competitive environments. In this domain, much of the burden is also on signature processes enabled by the unique and highly rarefied corporate willpower. Just as Teece (2014, p. 314) argued, a strategy can be defined as “a coherent set of analyses, concepts, policies, arguments, and actions that respond to a high-stakes challenge” (Rumelt, 2011, p. 6). The best strategies require the preparation of the elements of (1) a diagnosis, (2) a guiding policy, and (3) coherent action (Rumelt, 2011) brought about by the unique signature processes of a company based on willpower. Currently, the global smartphone

Strategic innovation system 85 market is also in this Domain III stage. In Domain III, the processes of asset orchestration promoted and concentrated to complete business value chains, and the completion level of products and services is raised for rapid incremental innovation as upgrades, improvements, and new versions following commercialization. However, robust value chains must be configured in Domain III to get new products, services, and businesses off the ground and win out over the competition and survive the Darwinian Sea. As mentioned, organizational supervisors and staff in the organizations upstream in the value chain such as product planning and technical development divisions on the business side must demonstrate strong DC. However, staff and directors in routinized divisions positioned downstream in the value chain (sales, technical management, procurement, manufacturing and after support, etc.) need to thoroughly manage operations through strong OC. These downstream-positioned organizations require strong OC to bring current products (and their successor upgrades, improvements, and new versions) to the market, win out amid stiff competition, and turn a profit currently and in the near term. Thus, in Domain III, the characteristics of capabilities are not the same as those in Domains I and II, and there is particular importance on strong integration of DC and OC (see Figure 5.1). 5.1.4  OC in Domain IV

Meanwhile, a great deal of existing business is positioned in Domain IV, in slowmoving market environments with low uncertainty and a low rate of change. Here, incremental innovation is promoted with the aim of systematically enhancing business efficiency through the exploitation process, which consists of activities to improve existing business using mainstream organizations that inherently demonstrate ordinary capabilities (OC) (Teece, 2007, 2014). In Domain IV, the weight on DC diminishes, and the demonstration of best practices through OC comes to the fore. In existing traditional line organizations (business units, etc.), slow changes in existing markets are sensed, and existing operations in which formal organizations play the lead are executed through path-dependent, planned, and carefully considered deliberate strategies in business divisions, and strict, top-down centralized leadership (Kodama, 2004) is demonstrated. Driving slow incremental innovation by strengthening OC in Domain IV requires bringing about higher performance by evolving routines through higher-order learning for short-term gain, depending on internal and external changes (King and Tucci, 2002; Benner and Tushman, 2003; Winter, 2000; Amburgey, 1993; Nelson and Winter, 1982). Promoting such Domain IV process management accelerates the speed that an organization responds to achieve incremental innovation (Benner and Tushman, 2003). However, there is always a danger that product lineups in Domain IV could be threatened by emergent technical innovations. I call this domain “strategic efficiency”. Domain IV businesses (products and services) mostly include those that have survived the competitive environment of Domain III and later shifted into Domain IV and entail the conversion of old and new businesses (Markides, 2001) over long

86  Strategic innovation system periods of time. In other words, this is replacement of the strategic concentration of new business in Domain III, arrived at through the path of radical innovation (Domain I  Domain II  Domain III), with the existing strategic efficiency businesses of Domain IV (the conversion of new and old businesses). The simultaneous management of new strategic positions and existing positions discussed by Markides (2001) combine in Domains III and IV, and in shifting from an old position to a new one, existing businesses initially positioned in Domain III are replaced by new businesses that have grown and accelerated in Domain III (though the Domain I  Domain II  Domain III shift), which means the businesses initially existing in Domain III shift to Domain IV. Above, particularly important in describing the dynamics of the shifts between domains in the capabilities building map are the strategic actions in Domains III and IV that aim for sustainable growth through continued corporate strategic innovation. According to the “capabilities lifecycles” framework of Helfat and Peteraf (2003), companies uncover capabilities opportunities to achieve further radical innovation, and sometimes drive new DC in Domains III and IV to handle capability threats to achieve the shift into Domain I (see Figures 5.1 and 5.2). In other words, as discussed following, leading companies engage in a spiral of strategic activity through these four domains (Domain I  Domain II  Domain III  Domain IV  Domain I and/or Domain III  Domain I  . . .) to achieve strategic innovation through interactions with dynamic environmental change. As illustrated in “Capabilities building through the dynamic capabilities approach (Chapter  2)”, “Capabilities building through the innovation process approach

Figure 5.2 The strategic innovation system

Strategic innovation system 87 (Chapter  3)”, “Capabilities building through the exploration  & exploitation approach (Chapter 4)”, companies that grow over the long term promote a reciprocal cycle of exploitation (Domain III  Domain IV) and exploration (Domain I  Domain II). In other words, they are able to balance different exploitation and exploration activities and demonstrate dynamic activities cyclically (asynchronously or synchronously) on a time axis. In this chapter, this corporate system of achieving strategic innovation is called the strategic innovation system. The following describes the strategic innovation loop and strategic innovation capabilities that make up the strategic innovation system. 5.2 The “strategic innovation loop” and “strategic innovation capabilities” When considered from the viewpoints of corporate exploration and exploitation processes based on radical and incremental innovation, and the time axis of business contexts, the four domains form a continuous domain loop (see Figure 5.2). The strategic emergence (Domain I) and selection (Domain II) domains, which are exploratory processes through DC (asset orchestration), are the core processes for radical innovation. “Strategic concentration (Domain III)” is the acceleration phase indicated by O’Connor and DeMartino (2006). In this phase, new product, service, and business models and markets are rapidly set up through the exploratory processes of strategic emergence and selection and the domain shifts from exploration to exploitation. Strategic concentration becomes the origin of a new path of newly generated radical innovation that differs from the existing business of the strategic efficiency domain (Domain IV). In the strategic concentration domain, newly generated business always undergoes a major internal or external change in its initial phase. At this stage, internal elements aimed at building optimal value and supply chains are transformed in response to external change. This is the strategic concentration domain in which the aforementioned strong integration of DC and OC is required. Among these strategic concentration businesses, which are subject to major change, businesses that successfully establish themselves in the market and achieve stability as mainstream operations shift to the slow-moving (or small) “strategic efficiency” domain while still greater operational and business process efficiency measures are promoted, and either become part of the existing mainstream lineup or undergo business integration (in which still greater business process efficiency through strong OC is promoted). However, businesses subject to major external change in markets and technologies following mainstream growth, and major internal changes in areas such as strategy, organization, technology, operations, and leadership (e.g., IT industry involving broadband and smartphones, online businesses, and digital consumer electronics) always become positioned in this strategic concentration domain. Put another way, businesses growing in the mainstream direction become deployed in one or both of the strategic concentration and efficiency domains. Although new business in the strategic concentration domain is the “mainstream reserve”, this does not mean that

88  Strategic innovation system all businesses can grow in a mainstream environment subject to major changes, and some businesses have to withdraw. This is especially true of the IT industry. In this way, the flow of radical innovation for major corporations shifts from Domain I to Domain II, then Domain III (where some businesses undergoing major changes maintain their position), and finally to Domain IV (see Figure 5.2). Domain IV businesses (products and services) mostly include those that have survived the competitive environment of Domain III and later shifted into Domain IV, and entail conversion of old and new businesses (Markides, 2001) over long periods of time. In other words, this is the replacement of the strategic concentration of new business in Domain III, arrived at through the path of radical innovation (Domain I  Domain II  Domain III), with the existing strategic efficiency businesses of Domain IV (the conversion of new and old businesses). As mentioned, the simultaneous management of new strategic positions and existing positions discussed by Markides (2001) combine in Domains III and IV, and in shifting from an old position to a new one, existing businesses initially positioned in Domain III are replaced by new businesses that have grown and accelerated in Domain III (though the Domain I  Domain II  Domain III shift), which means those businesses initially existing in Domain III shift to Domain IV. Realistically, however, only some major corporations survive to become success stories after the natural selection process involved in the shift from Domains I to III, even though many promote various strategically innovative projects. Amabile and Khaire (2008) note a number of cases of outstanding ideas and business models born in Domain I  that were diluted and ended in failure after a major corporation employed a different managing organization to realize (commercialize) them. This is due to the existence of the knowledge boundaries between the product planning divisions that supervise the creation of business concepts and ideas, the development divisions that realize them, and the production and manufacturing divisions (Kodama, 2007a). This is one issue surrounding radical innovation in a major corporation. Observing the above domain shifts at the micro level in organizations, there are feedback mechanisms enabled through the interactions in each domain, while at the macro level, there are spiraling feedback loops. Thus, this model also covers the chain-linked model of Kline (1985). The most important inter-domain shift is that from III and/or IV to I. This is the path that creates new radical innovation (see Figure  5.2). In the Capabilities Lifecycles of Helfat and Peteraf (2003), large corporations involved in businesses in Domains III and IV find new capability opportunities and even sometimes take new strategic actions demonstrating DC as they face capability threats. It corresponds to the process that accelerates environmental and internal interaction and creates new ideas and new technological inventions and discoveries based on high-quality tacit knowledge (Nonaka and Takeuchi, 1995). This knowledge is cultivated through the practice of researchers, engineers, marketers, and strategy specialists in shifting from Domains I through IV (accumulating and integrating new practice through existing business practice and incremental, and even radical innovation) via the “transformational experience” (King and Tucci, 2002; Amburgey et al., 1993) of previously

Strategic innovation system 89 existing business routines and strategic innovation. King and Tucci (2002) suggested that the “transformational experience” of practitioners involved in the continual (Katz and Allen, 1982) and large-scale (Tushman and Romanelli, 1985; Amburgey, 1993) organizational innovation of product development teams leads to continuous new product innovation and resets rigid organizational inertia. Put another way, it enhances the potential for embedding new capabilities in organization members aimed at creating new strategic non-routines based on DC to transform organizations and realizing radical innovation. Although excessive adherence to existing knowledge to create new knowledge integration (e.g., Kodama, 2009b) becomes a hindrance, the absorption of knowledge from different sectors and industries from a scientific technological, and marketing viewpoint and the knowledge integration process can trigger new radical innovations. Various innovation theories including the importance of shedding the “mental model” (e.g., Spender, 1990), the focus on “peripheral vision” (Day and Schoemaker, 2005) and “boundary vision” (Kodama, 2011), and the challenge of achieving “cross innovation” (Johansson, 2004), and “destructive innovation” (Christensen, 1997) confer precious insights as regards innovators, but more detailed theory building is yet to be undertaken. Although discussed later, I consider, as a proposition, that the evolution and diversification of high-level strategic non-routines through the formation of strategic communities in Domains III and IV fundamentally promote DC (asset orchestration) while inducing a shift from domains III and/or IV to I arising from the incremental innovation of integrating new knowledge (assets) inside and outside the company (Kodama, 2009b), and raise the probability of achieving new knowledge integration as radical innovation.2 I would like to explain the following three new insights obtained from this framework and use them as a basis for explaining the “strategic innovation capabilities”. The first point is that outstanding companies possessing the dynamic view of the capabilities deliberately (including some emergent elements) drive loops comprised of continuous shifts among domains (termed “strategic innovation loops” [see Figure 5.2]) from Domain Ⅰ  Domain II  Domain III  Domain IV  Domain I  and/or Domain III  Domain Ⅰ. The dynamic view of the capabilities co-establishes the different modes of the exploratory and exploitative processes and secures long-term corporate growth (e.g., March, 1996; Benner and Tushman, 2003; Tushman and O’Reilly, 1997). These two processes (March, 1991; Holland, 1975) do not employ opposing strategic activities; rather, companies must implement strategy while skillfully balancing the strategic activities in a mutually complementary way (He and Wong, 2004). Meanwhile, Zollo and Winter (2002) propose a knowledge evolution process based on adjusted evolutionary theory. The continuous routine activity wellconsidered within this process can become a trigger to shift from the exploitation to the exploration process, and experiential knowledge accumulated from learning activities also becomes an element in creating new dynamic capabilities (DC) (corresponding to a shift from Domain IV and/or Domain III to Domain I). I explain how the recursive processes and co-evolution of these different modes simultaneously promote corporate challenges and process routines.

90  Strategic innovation system The second point is that observing large corporations at selected times on a time axis indicates the constant presence of each of Domains I to IV possessing different business contexts. With large corporations, multiple projects oriented to strategic innovation function as layered strategic innovation loops on different time axes. Top and middle management must therefore manage appropriately within and among these domains. Management to smoothly implement the domain shift through the strategic innovation loop is also key. Different strategies, organizational structures, technology, operation, and leadership are required within each of these domains. However, from this discussion, an especially important question is how the skills and expertise that create strategic emergence (Domain I), the new discovery and invention domain, from accumulated experiential knowledge (which arises from diverse high-level strategic non-routines through DC via the continuous strategic innovation loop) and absorb and integrate new knowledge outside the company can be created by the asset orchestration process. Regardless, learning through higherorder routines alone (Amburgey et  al., 1993; Nelson and Winter, 1982; Winter, 2000) does not make it easy to shift from Domain III and/or Domain IV to Domain I. Teece (2014, p.  338) said, “First, I  reject the notion that dynamic capabilities reside only in high-level routines”, and continued that “creative managerial and entrepreneurial acts (e.g., creating new markets) are, by their nature, often nonroutine”. In the same vein, Teece (2014, p. 332) quotes Steve Jobs, the late CEO of Apple, who said “Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least one hundred times more on R&D. It’s about how much you get it”. In another interview about product development at Apple (Burrows, 2004), Jobs described it as a blend of routine and creative acts: Apple is a very disciplined company, and we have great processes. But that’s not what it’s about. Process makes you more efficient. But innovation comes from people meeting up in the hallways or calling each other at 10:30 at night with a new idea, or because they realized something that shoots holes in how we’ve been thinking about a problem. That means Apple’s daily processes are based in OC. However, even if a new product development entails a number of routine components, Jobs said at least one part has to be different. Those different things are equivalent to the non-routine establishment of strategy and the activities of entrepreneurs. Hence, with his deep market understanding gained through his own sensing, Jobs was a driving force of new product development projects at Apple and the success of the company, as he prioritized the future based on his insatiable obsession to achieve easy-to-use products with attractive designs and advanced technologies (cospecialization through asset orchestration integrating hardware, software, applications, and contents). The creative acts of seizing and transforming brought about through diverse strategic non-routine activities at Apple could also hint at exposing the secret of what Jobs described earlier as “getting it” (Teece, 2012). As a chain of creative actions, asset orchestration can itself be attributed to the demonstration of DC.

Strategic innovation system 91 From the research, I and research collaborators conducted into organizations in corporations that achieve innovations as new products or businesses (including my direct and indirect involvement in business practice) (e.g., Kodama, 2002, 2005, 2006, 2007a, 2007b, 2007c, 2007d, 2007e), I would like to present the hypothesis that DC are generally demonstrated through strategic non-routines in configurations of informal organizations (or informal networks, which are also strategic communities), whereas practitioners demonstrate OC mainly in formal organizations and in set routines. The research that I and research collaborators have accumulated to date clarifies that depending on the characteristics of a business and environmental circumstances, the characteristics of informal organizations change in accordance with changes in boundaries (knowledge and organizational boundaries) in and between organizations (between practitioners at the micro level) (Carlile, 2002, 2004; Kodama and Shibata, 2014b). To promote the absorbing and integration of new knowledge assets or capabilities, in other words, asset orchestration through DC, entails the formation of “strategic communities” with pragmatic boundaries to promote strategic nonrouting activities (e.g., Kodama, 2004, 2005, 2006, 2009a). The third point is that the exploration and exploitation processes are especially interactive. It has been argued that organizations within major corporations undertaking radical innovation should either be isolated both physically and organizationally from the mainstream organization, or else operate as independent venture companies (e.g., Hill and Rothaermel, 2003; Benner and Tushman, 2003; Burgelman and Sayles, 1988; Kanter, 1985). Nevertheless, an appropriate interface with existing organizations is also potentially significant for accelerating radical innovation from the viewpoint of strategy and resource integration (e.g., Heller, 1999; Kodama, 2003). Questions of organizational design (How much should a new business integrate with, or separate from, existing businesses? Is it better to have complete separation, complete integration, or something in between?) (e.g., Christensen, 1997; Goold and Campbell, 2002; Tushman and O’Reilly, 1997) are arguably more important in achieving strategic innovation. Much of the previous research discussed management processes and organizations division, such as two distinct archetypes-exploratory and exploitative, or incremental or radical (e.g., Greenwood and Hinings, 1993; Tushman and O’Reilly, 1997) and the ambidextrous organization (e.g., O’Reilly and Tushman, 2004). Little detailed analysis has appeared, however, of the interfaces and interaction among management elements such as strategy, organizational structure, technology, operations, and leadership, each of which differ for each of these two archetypes (e.g., Kodama, 2003, 2004). Nevertheless, the co-establishment and coexistence of these two archetypes within the same large corporation, and the skillful management of strategic contradiction (Smith and Tushman, 2005), creative abrasion (Leonard-Barton, 1995), and productive friction (Hagel and Brown, 2005) to create synergies are also important elements of successful strategic innovation. The coexistence of contradictions highlights the important roles not just of the top management (Smith and Tushman, 2005; Tushman and O’Reilly, 1997), but also of middle management and staff (Govindarajan and Trimble, 2005). I call this “dialectical management” (Kodama, 2003, 2004).

92  Strategic innovation system Based on the three insights above, strategic innovation capabilities is a concept that embraces the following four capabilities: Company-wide capabilities that integrate dynamic capabilities (DC) and ordinary capabilities (OC); capabilities to implement the spiral strategic innovation loops; capabilities within and among domains, including shifts; and capabilities to achieve the coexistence of two different archetypes through dialectic management (see Figure 5.2). Moreover, strategic innovation capabilities embrace the existing dynamic and MI dynamic capability (or breakthrough innovation capability) concepts illustrated in Figure  5.1 while aiming to expand the concept of “dynamic apabilities (DC) and ordinary capabilities (OC)” for individual product development projects at large corporations in the direction of innovation capabilities for the corporate or management system. This book calls a management system that uses strategic innovation capabilities to activate the spiral of the strategic innovation loop and continuously co-establishes existing business with strategic innovation business a “strategic innovation system” (see Figure 5.2). I would like to note the points of difference between the “strategic innovation system” and the “management system” arising from “breakthrough innovation capability” (O’Connor et  al., 2008). One such point is that since O’Connor’s model is sequential – it shifts from discovery through cultivation to acceleration – it is weak on the positive feedback process of reflection on, and practical application of, the practical knowledge and accumulated transformational experience of in-house expertise, skills, and routines acquired through executing breakthrough innovation and existing business. Another is that the sequential model provides a weak framework for shifting to a strategic emergence domain that gives rise to discovery, invention, and creativity. Third, it provides a weak dynamic strategy view framework for a company to acquire and sustain new strategic positions over many years. With regard to this, the strategic innovation system in this article (see Figure 5.2) comprehensively considers the three points above while creating corporate and management system models for sustainable strategic innovation. They presented a chain-linked model with feedback loops to describe the relationships and iterations among research, invention, innovation, and production. In this strategic innovation system, the sensing, seizing, and transforming loop functions continuously or semi-continuously in each domain (Domain I  to Domain III) while forming feedback loops as shifts from Domain IV and/or Domain III to Domain I (see Figure 5.2). Moreover, at the microlevel, this also means there is feedback in interactions between each domain. Hence, the strategic innovation system also encompasses Kline’s (1985) chain-linked model (see Figure 3.2 in Chapter 3). 5.3 DC and OC positioning in capabilities building map – clarifying the blurry line between DC and OC Helfat and Winter (2011, p. 1425) assert that it is impossible to draw clear boundaries between the two types of capabilities, that of DC and OC. They reason that (1) change is always occurring to at least some extent; (2) we cannot distinguish dynamic from operational (ordinary) capabilities based on whether they support what is perceived as radical versus non-radical change, or new versus existing

Strategic innovation system 93 businesses; and (3) some capabilities can be used for both operational (ordinary) and dynamic purposes. In relation to this, from “Heraclitus” and “Ecclesiastes”, Helfat and Winter (2011, p. 1425) mention as follows: “Nothing ever stays exactly the same, so ‘one does not step into the same river twice’ (Heraclitus). Yet we often say that ‘there is nothing new under the sun’ (Ecclesiastes)”. As Birnholtz et al. (2007, p. 316) put it, this is the “paradox of the (n)ever-changing world”. If everything is changing all the time, what then is the basis of the impression that some things do not change at all? Part of the answer to this conundrum lies in one’s perspective. If you examine small details close in, you see much more change than if you attend to large phenomena or high-level descriptions, or perceive from afar. This is a classification of changing nature of capabilities in business organizations from a perspective on how people view things and is described by the capabilities building map so far discussed. The capabilities building map clearly positions the weight to which DC and OC function in terms of the degrees of uncertainty which corporate organizations and the practitioners involved in them sense and recognize and the degree of the speed of change inside and outside of the corporate organization. Nevertheless, as Helfat and Winter (2011, p. 1428) identify grounds for ambiguity of the boundaries between DC and OC, in this section, I would like to discuss the nature of dual-purpose and multiple-variant capabilities that they identify from the perspective of the capabilities building map. 5.3.1  Dual-purpose and multiple-variant capabilities

Helfat and Winter (2011) assert that the problem is further complicated because certain types of capabilities can be used for both operational capabilities (or ordinary capabilities: OC) and dynamic capabilities (DC). There are capabilities with multiple variables (some operational-oriented, some dynamic-oriented), and capabilities that simultaneously satisfy both operational and dynamic objectives. In these cases, Helfat and Winter (2011, p. 1248) assert that it is certainly difficult to draw clear boundaries between operational and dynamic capabilities. Below is a discussion on dual-purpose capabilities and multiple-variant capabilities from the perspective of the capabilities building map. 5.3.2  Dual-purpose capabilities

Helfat and Winter (2011, p. 1248) discuss capabilities providing “market access” in the cases of P&G and Microsoft. “Market-access capability” is the capability required for distribution, marketing and sales, etc. At P&G, brand development for new products is done with DC, while at the same time, established brands are managed with OC. Moreover, brand managers rely on common corporate routines and processes as OC to promote sales of both the old and new products, which means brand management involves capabilities with both DC and OC objectives. On the other hand, Microsoft formed a new ecosystem by establishing a new market through positive feedback formed using network externalities to expand sales of its new

94  Strategic innovation system

Figure 5.3 The Helfat and Winter (2011) position in the capabilities building map

browser by demonstrating DC. At the same time, the OC component of marketaccess capabilities helped the company maintain sales of existing browser versions and served as a catalyst for sales of the new generation of browsers, giving it a longterm market advantage. Regarding such “market-access capability”, it is important to note that the brand managers execute the sales strategy for the new product brands created through the demonstration of DC in the Domain I  Domain II  Domain III process, by leveraging existing sales routines, OC, in Domain III. At the same time, they execute the sales strategies for existing brand product lines in Domain III (one generation earlier) and Domain IV (several generations earlier) by leveraging existing OC (see Figure 5.3). Hence, “dual-purpose capabilities”, or market access capabilities with dual objectives, are equivalent to the simultaneous demonstration of DC and OC in Domain III (DC and OC) and Domain IV (OC). 5.3.3  Integrated capabilities – multiple-variant capabilities

Helfat and Winter (2011, p.  1248) assert that integrated capabilities can serve an operational purpose, for example, by facilitating shared activities that produce economies of scope across stages of production or product lines. An integrated capability to facilitate common activities means that the R&D department can demonstrate DC to develop new technology and production platforms and put them into practical use through the Domain I  Domain II  Domain III process, and at the same time, business units demonstrate OC to streamline production activities, product

Strategic innovation system 95 lineups and version upgrades in Domain III, which are operations management (i.e., ordinary capabilities: OC) leveraging these new platforms. Such integrated capabilities simultaneously realize “new platform development” through the execution of Domain I  Domain II  Domain III processes through the demonstration of DC, mainly in R&D departments, and efficient operations by demonstrating OC in Domain III in the development, production, sales, and other business departments that utilize those achievements. Integrated capabilities have several different variants (some dynamically oriented, some operationally oriented), such as DC and OC, and enable communication and collaboration across organizational units and across entire corporations including across R&D, production, sales, etc., in the timeframe of the Domain I  Domain II  Domain III processes. In addition, as different types of integrated capabilities, Helfat and Winter (2011, p. 1248) assert that “Other types of integrative capabilities can make change possible, such as through the coordination of design and manufacture in new product introduction” (Iansiti and Clark, 1994, p.  1248). Specifically, this corresponds to that organizational structures (CFT, R&D department, etc.) separated from existing organizations, demonstrate DC to develop and design elemental technologies for new product development, and to execute commercialization processes related to new production technologies through the Domain I  Domain II  Domain III processes. Thus, development and design engage in close coordination to solve numerous technological challenges and issues. In achieving new products, to develop elemental technology, and commercialize processes for new product development and design or production technologies based on basic or applied research done through Domains I  Domain II, R&D and related organizations face many difficulties and must overcome the so-called “valley of death”. DC are demonstrated in the Domain I  Domain II processes – many prototypes are developed and much testing for commercialization is done, and as R&D and related division overcome these hurdles, uncertainties for R&D projects’ success reduce, and commercialization is achieved in Domain III. In the commercialization stage of Domain III, existing routines of operations management are emphasized and OC is demonstrated, while at the same time, through the demonstration of DC and OC, new products are brought to market and subsequent product improvement and enhancement activities is promoted. Thus, integrated capabilities can be dynamic or operational, depending on the type of capability leveraged in each of these domains and its intended use in the timeframe of the Domain I  Domain II  Domain III processes (see Figure 5.3). Moreover, Helfat and Winter (2011, p. 1248) say an integrative capability also may serve a dual purpose, such as its use in ambidexterity to manage both new and existing businesses (Tushman and O’Reilly, 1996). This means not only expanding sales by upgrading existing competitive (best-selling) products in Domain III and maintaining long-selling product businesses in Domain IV, but also managing new business development by shifting to Domain III and/or Domain IV  Domain I (see Figure  5.3). For this reason, the management of ambidexterity identified by O’Reilly and Tushman (2008) is partially reliant of the DC (Adner and Helfat) of top management who perform the integration of new and mature business. The

96  Strategic innovation system important perspective here, as identified by Helfat and Winter (2011, p. 1248), is that some types of capabilities enable the management of ambidexterity (e.g., the dynamic capabilities of top management). The DC of managers can contribute to organization-level integrated capabilities for the management of ambidexterity. As described earlier, the concept of “Dual-purpose and multiple-variant capabilities” can be explained from the perspective of the capabilities building map presented in this book. The intensity of ambiguous DC and OC boundaries can be clarified by the capabilities building map that clearly positions the weight to which DC and OC function using the axes of the degree of uncertainty and the speed of change inside and outside of the corporate organization. 5.4 Implications – dynamic restructuring of corporate boundaries through strategic innovation capabilities IoT, AI, big data, and robots are further evolving conventional Internet technologies. The technical revolution of this advanced IT is developing at never-before-seen speed and bringing about never-before-seen impacts. The IoT enables bidirectional exchanges of all kinds of information in actual society via the Internet, while big data technologies collect massive amounts of data (e.g., IoT/M2M data, cloud computing information, SNS data, real and virtual commercial information, location information) and analyze it to provide new forms of value creation. In addition, AI learns by itself enabling it to make advanced judgments and act beyond the capabilities of ordinary humans. Various robotics technologies are enabling the automation of a wide range of complex tasks, which is not only bringing efficiency to business but also enabling the realization of societies previously thought to be impossible. Moving away from the one-size-fits-all services of conventional mass production, these technical innovations have the potential to dramatically change the structure of industry and employment, and enable companies to provide products customized to suit individual user needs, and to radically improve efficiency and productivity across entire supply chains by sharing data in real time. In future, advanced IT will bring about new markets by combining the core technologies and business models of various different fields as shared platforms (platform technologies) that revolutionize technology in all industries. For example, the incorporation of various biological data and fusion of genome editing technologies and such data with advanced IT will bring about new pharmaceuticals, agricultural products and bioenergy, etc. (see Figure 5.4). Such technical convergence of different professions with advanced IT is a crucial research issue in the technology and innovation management (TIM) field (e.g., Curran and Leker, 2011), and will also become a major factor in bringing about radical innovation creating brand-new markets (e.g., Kodama, 2007a). In particular, in the context of IT, technological convergence has been called the mixing of technical knowledge across clearly definable areas of specialization (Duysters and Hagedoorn, 1998; Rosenberg, 1976). In technological convergence, the knowledge convergence process (e.g., Hacklin et al., 2009; Rafols and Meyer, 2010; Kodama, 2012), which is the combination

Strategic innovation system 97

Figure 5.4 Cospecialization through convergence

of the knowledge of different specialist fields, occurs at the level spanning different areas of expertise (Kodama, 2014). Therefore, the integration of knowledge across different specialist fields is of paramount importance for successful technology convergence (Lei, 2000; Klein, 1990; Kodama, 2005, 2009a, 2011). This fusion or integration process of different knowledge corresponds to the aforementioned asset orchestration (Teece, 2007), which is a core function of DC. IT usage across various industries and integration of dissimilar technologies accelerate convergence and raise the potential to bring about new products, services, and business models that span differing industries through cospecialization (Teece, 1986, 2010, 2007). Teece (2012) also asserts that entrepreneurship in top management is necessary for the management of cospecialization. Entrepreneurship means sensing opportunities for convergence, understanding them, getting things going, discovering new or better ways to combine things and get things done, which is the process of asset orchestration. As mentioned, the function of asset orchestration (Teece, 2007), which is the core of DC, is reinforced by the three organizational processes of (1) coordination/ integration, (2) learning, and (3) reconfiguration (Teece et al., 1997). The coordination/integration routine brings together various resources in an entrepreneurial fashion for the purpose of developing new products, and so forth. Learning is an outcome of practice and experimentation and allows for more efficient task performance. Reconfiguration or transformation leads to recombining and modifying existing resources. Asset orchestration is most relevant as an underpinning for seizing

98  Strategic innovation system and transforming (Teece, 2014, p. 333, Note 7) with respect to the three major DC subsystems (sensing, seizing, transforming) mentioned earlier. Teece (2014, p. 333) asserts that clever orchestration of knowledge and capabilities requires entrepreneurial capabilities, but many business executives simply do not have them. For example, clever orchestration is also about creatively coordinating and assembling disparate elements that have the potential to be cospecialized. Entrepreneurial management has almost no relationship with (or requirement for) standardized analysis or optimization. Rather than maintaining and elaborating existing procedures, it is more important for the corporate executive to know in advance what the next big opportunity or challenge will be and come up with a way to deal with it. As Teece noted (1986), the conventional significance of economies of scale and scope in the definitions of corporate boundaries will gradually weaken and the economic elements of cospecialization will affect those definitions. In response to these changes in the environment, companies need to accelerate collaboration across similar and different industries through open innovation (Chesbrough, 2003) and collaborative innovation (Kodama, 2015), and to dynamically restructure to optimize corporate boundaries (redefinition of new vertical and horizontal boundaries). Corporate vertical boundaries determine value chains for the growth of existing businesses, while horizontal boundaries determine value chains for new business development, such as strategy transformation and innovation (Kodama, 2009a). Practitioners’ perception and recognition of the changing external environment of convergence and the dynamic asset orchestration process of a company’s internal knowledge (assets) with partners’ external knowledge (assets) drives the dynamic construction of corporate boundaries. Asset orchestration comes about through the internal and external asset networks within and outside of a company (or organization) (see Figure 5.5). Internal knowledge (internal assets) is integrated in in-house company networks, and external knowledge (external assets) is integrated in external networks (external asset networks) that transcend vertical and horizontal boundaries outside companies. In the “asset orchestration firm”, new knowledge (assets) that transcends corporate boundaries is created through asset orchestration processes using these networks through open innovation and collaborative innovation inside and outside the company. These processes bring about strategic innovation (see Figure 5.5). Realizing strategic innovation through the asset orchestration process requires company-specific high-quality organizational capabilities, which are the “strategic innovation capabilities (SIC)” to achieve the dynamic integration process of DC and OC described earlier. Asset orchestration is the reconfiguration or transformation of internal and external assets through internal and external asset networks inside and outside companies by DC. As shown in the capabilities building map in Figure 5.1, it is important to integrate and use DC and OC according to the corporate environment, including reconfiguration or transformation of internal assets by OC – the daily routine capabilities of the company. Such SIC determine corporate boundaries (vertical and horizontal boundaries) and form new value chains. Figure  5.6 conceptualizes expected value chains and capabilities required by companies in advanced IT environments. As IoT, AI, and robotics advance,

Strategic innovation system 99

Figure 5.5 The asset orchestration model (asset orchestration firm) Source: Created by the author, citing Kodama (2009a)

improvements in process efficiency and productivity mainly in downstream processes in the value chain (design, procurement, manufacturer, logistics, services, etc.) are predicted. Examples include routine operations in sales and services, automation, mass customization, labor saving and unmanned operations in design, procurement and production, and supply chain automation and efficiency in logistics and support. In contrast, it is inferred that the weight on the asset orchestration activities of highly skilled personnel rises because of the high potential to expand new business markets in various fields of industry upstream in the value chain (in management, business and product planning, marketing and R&D). For example, people or organizations at the center of asset orchestration play an important role in setting down and executing strategies and business plans for R&D activities and business creation involved with the creation of advanced IT. Also, the weight on asset orchestration activities in marketing and commercial planning rises with planning and developing business involved in data science, etc. Even in sales and service operations, high-value-added operations such as high-value goods and services where a sense of security determines purchasing cannot be replaced by advanced IT itself. This suggests that in the advanced IT era, there is growing importance on exploration work such as creating new business trends and business models by developing new IT (e.g., AI and robots) and creating new businesses by utilizing IT. In Domains I and II in Figures 5.1 and 5.2, corporate capabilities for exploration

100  Strategic innovation system

Figure 5.6 Value chains and capabilities in advanced IT environments

are mainly DC, which are a source of new value chains and coevolution models (e.g., Kodama, 2009b). Exploration activities are also engines for sustained growth of companies that bring about competitive advantage, difficulty of imitation, rare value, and cospecialization through dynamic re-establishment of corporate boundaries (vertical and horizontal). In contrast, in Domain IV, the corporate capabilities for exploitation that pursue best practices such as improvements and upgrades by making full use of IT to achieve thorough efficiency and labor saving of existing routine work are mainly OC. In Domain III, capability characteristics differ from Domain I and Domain II, and strong integration of DC and OC is particularly important. Companies must have both DC and OC functioning at the same time. These integrated capabilities are the strategic innovation capabilities (SIC). 5.5 Conclusion In the knowledge economy, and the advanced IT era, diverse human knowledge is a source of valuable products, services and business models that gives companies new competitiveness. Through convergence across different industries and diverse technologies, asset orchestration raises the potential for new products, services and business models spanning various boundaries, and raises the potential to bring about value chains and business ecosystems that will become new strategic models. Therefore, to build new businesses, companies need to reaffirm the perspective of process management to create new assets by dynamically sharing and integrating the

Strategic innovation system 101 intangible assets of people, groups, and organizations across organizational boundaries within and outside companies through the process of asset orchestration. From a systems approach, this chapter has clarified the dynamic innovation processes that companies need to achieve strategic innovation (the combination of incremental and radical innovation). In addition, the book has extracted elements of capabilities (strategic innovation capabilities) required for strategic innovation through the continued execution of incremental and radical innovations by companies. To achieve rapid and slow incremental innovation for exploitation and radical innovation for exploitation, companies must demonstrate strategic innovation capabilities to skillfully use and combine dynamic and ordinary capabilities on the capabilities building map, and execute the dynamic spiral of these two different capabilities through time. The concept of strategic innovation capabilities covers the four capabilities of: (1) Company-wide capabilities to integrate DC and OC (2) Management capabilities to execute the spiral “strategic innovation loop” (3) Management capabilities in and between Domains (including shifts between Domains) (4) Capabilities to combine the two different archetypes with dialectic management Increasingly in recent years, collaborative research systems that span organizational boundaries among industry, government, and academia have expanded the scope of exploration of business opportunities, and outstanding middle managers, including executives, work with suppliers to understand customer needs and actively engage in “open innovation” (Chesbrough, 2003) and “hybrid innovation” (Kodama, 2012) to incorporate external technologies. Here, the new knowledge of dynamic strategic management processes in which practitioners activate the core “sensing” element of DC (the ability to search, filter, and analyze business opportunities), draw grand designs for new “boundary designs” and build new business models will become a key management element in the era of convergence. In the cutting-edge business field of advanced IT, leading core technologies are distributed and innovated all over the world. Accordingly, in the age of convergence, in which valuable cospecialized assets create wealth, management with open systems and engagement in multi-perspective orchestration of intangible assets dispersed within and outside of organizations and companies, including among customers, will become increasingly important in the knowledge economy. Notes 1 The likelihood of experiencing a certain amount of failure in the strategic selection domain rises with outstanding leaders and managers. This is also a working hypothesis from the author’s own office experience. See Kodama (2017). 2 Numerous studies (e.g., Nonaka and Takeuchi, 1995; Kodama, 2007a, 2014) exist regarding the theoretical frameworks relating to the creation of knowledge such as breakthrough or new ideas. Analysis from various viewpoints will be the subject of future research topics. One such example relates to the creative process for business concepts arising from the synthesis of market and technology paradigms (see Kodama, 2007a).

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6 The strategic innovation system – multi-case analyses in high-tech companies

6.1 Developing strategic innovation – A balance of radical innovation and incremental innovation As discussed in Chapter 1, while accumulating and developing core competence by strengthening the core business as the mainstay business, a new perspective of cultivating new business that will create new markets is essential for corporate leaders and managers. Practicing strategic innovation (SI), which simultaneously executes and balances these two different kinds of innovation processes, also signifies the pursuit and cultivation of a new, highly unique strategic position, which is also an excellent corporate strategy that will ultimately result in achieving a sustainable competitive advantage (e.g., Markides, 1999). This chapter presents a theoretical model of how companies can create a strategic innovation system (hereinafter referred to as “SIS”) that not only realizes radical innovation (hereinafter referred to as “RI”) but also incorporates the evolution of incremental innovation (hereinafter referred to as “II”) that lies behind RI, and clarifies the model through field research including multi-case analysis in high-tech companies. SI in large companies, however, has a significant impact on success (or failure) through complex interaction between subsystems that comprise the corporate system. Therefore, strategic innovation systems (SIS) are regarded as “corporate systems” and, as such, there is a need to identify individual subsystems that have an impact on SI and conduct an in-depth analysis of the characteristics of these subsystems and the relationship of interactions between these subsystems. It is possible to treat the above perspectives comprehensively with systems theory (e.g., Von Bertalanffy, 1960; Capra, 1996) and complex adaptive theory (e.g., Morel and Ramanujam, 1999; Stacey, 1996). O’Connor (2008) believes that systems theory is effective in elucidating RI systems in large corporations and offers several propositions concerning elements of their subsystems. The objective of this chapter is to deepen the reader’s understanding of the issue as to how companies can develop capabilities to achieve SI, by applying the latest results of systems theory and dynamic capabilities (DC) in recent years. The focus of this chapter is on identifying elements of the necessary sustainable SI management systems for organizational metabolism and robustness not simply through dependence on promoters with a strong will within an organization but through the effective DOI: 10.4324/9781003305057-6

The strategic innovation system 107 use of knowledge assets including those of such promoters. To do this, I surveyed a number of the most advanced global corporations, particularly in the ICT industry, and from various raw data derived from this research and reviews of existing research obtained new insights and arrived at a new framework for SI in companies. SI in corporations has a major impact on success (or failure) through the complex interaction of the elements of the subsystems that make up the “corporate system”. The chapter will then identify individual subsystem elements that have an impact on SI and will consider their characteristics and the relationships of the subsystems (e.g., organizations responsible for RI vs. existing organizations responsible for II). Then, the chapter will present a basic SIS framework and several new propositions and insights from the perspective of systems theory. Finally, it will describe future research issues. 6.2 The capabilities building map and strategic innovation system (corporate system) 6.2.1  Positioning “capabilities lifecycles” in a strategic innovation system

Practitioners perceive and recognize changes in the external environment such as technology convergence in different fields of specialization, while dynamic knowledge integration (convergence) of internal knowledge and external knowledge promotes dynamic structuring of the corporate boundaries (Kodama, 2011, 2014). Therefore, companies require unique corporate organizational capabilities1 high in quality. Such organizational capabilities are also drivers of SI as mentioned earlier. I  refer to these as “strategic innovation capabilities” (SIC) (Kodama, 2011, 2014; Kodama and Shibata, 2014). Based on the field research by I and fellow researchers, SIC has dynamic integrating characteristics for integrating dynamic capabilities (DC) with ordinary capabilities (OC) (which are also referred to as “operational capabilities” in some literary references).2 To indicate elements of SIC necessary for dynamic innovation processes for achieving SI (RI and II) for sustainable corporate growth, in Chapter 5, I devised a “Capabilities Building Map” consisting of four domains (Domains I through IV) together with an SIC concept that includes the individual characteristics of each (and their relationships with each other) of the four capabilities related to their overall (comprehensive) elements (see Figure 6.1). SIC is a concept that encompasses the following four capabilities: (1) Capabilities integrating DC and OC throughout the company (2) Management capabilities for achieving a spiral “strategic innovation loop” (3) Management capabilities within and among domains (including the shift between domains) (4) Capabilities for balancing two different archetypes through dialectical management (see Figure 6.1). The framework of Figure  6.1 indicates that for an outstanding company to achieve both II through exploitation and RI through exploration in a balanced

108  The strategic innovation system

Figure 6.1 Capabilities building map (CM) and strategic innovation capabilities (SIC) Source: Created by the author, citing Kodama (2018a)

manner, it is important for that company to skillfully and selectively apply DC and OC on the capabilities building map while allowing for both of these to coexist and dynamically execute these two distinct capabilities in a spiral-like manner on a time axis. I call this framework a strategic innovation system (SIS). On the other hand, Figure 6.2 shows the framework of the position of the four domains and their relationship with each other on the capabilities building map based on the framework of the “Capabilities Lifecycles” of Helfat and Peteraf (2003), considered from the perspective of “the dynamic view of capabilities”. On the capabilities building map, the capabilities needed by a company (organization) as a result of each shift between domains to adapt to environmental changes (uncertainty and speed) change dynamically. The shift from Domain III and/or Domain IV to Domain I  on the capabilities building map in Figure  6.2 is also a framework that succeeds in RI through the acquisition of new knowledge based on the accumulation of experience in an organization. Thus, the concept of SI is to create RI through the inspiration and acquisition of new knowledge from the accumulation of experience through II in Domain III and Domain IV. The accumulation of experience through II practice is a fundamental component of DC (Zollo and Winter, 2002). I studied the shift from Domain III and/or Domain IV to Domain I of the CM, the mechanism by which new capabilities are incorporated into organizations, in the case studies presented in the next section (those of high-tech companies of Fujifilm, Qualcomm, TSMC, Xiaomi, Huawei, and Zoom Video Communications). These cases illustrate how dynamic capabilities (DC) were leveraged to acquire new

The strategic innovation system 109

Figure 6.2 Relationship between the capabilities building map and the capabilities lifecycle Source: Created by the author, citing Kodama (2018a)

capabilities while leveraging and evolving current capabilities, and how radical innovation was achieved. The demonstration of “sensing” (Teece, 2007), one of the characteristics of DC, increases the diversity of knowledge and induces a shift to Domain III and/or Domain IV  Domain I on the CM in Figure 6.2. According to Cohen and Levinthal (1990), capabilities to evaluate and use external knowledge are largely determined by the level of previously developed relevant knowledge. Nevertheless, it is important for practitioners to increase diversity by exercising sensing functions. Therefore, to generate sustainable RI, both II and RI processes must be compatible in SI. In other words, for the sustainable growth of a company, it is important to consider not only radical innovation systems (hereinafter referred to as “RIS”), which corresponds to subsystems that constitute SIS, but also incremental innovation systems (hereinafter referred to as “IIS”) (including the interaction and consistency between the two systems, RIS and IIS). The SIS, which consists of RIS and IIS, is also the very corporate system that guarantees the sustainable growth of companies. 6.2.2  Case studies in high-tech companies (1) Fujifilm

For example, while Kodak degenerated from Domain IV to “retrenchment or retirement” due to digitization, Japan’s Fujifilm, also a leader in the same industry

110  The strategic innovation system and the same environment, succeeded in making a strategic shift from Domain IV to Domain I through “redeployment/recombination”. Although Kodak felt the threat from the changes in the market due to digitization at an early stage, it adhered to its existing (strong) OC in effort to maximize shareholder value and profits. The company consistently adopted rigid strategies including taking measures to shore up its stock price by spending sizable amounts of money in large share buybacks. Moreover, it is presumed that the top management of the company at the time had no plan for integrating existing advanced knowledge in response to the changes in the environment, which in this case was digitization. On the other hand, Fujifilm, using advanced photographic film technology which it already had within the company, succeeded in developing and commercializing special protective film technology for protecting liquid crystal (application of film technology to liquid crystal display (LCD) television: redeployment). A further example of the “redeployment/recombination” of existing technologies is Fujifilm’s application of technology on collagen, used to reduce the drying of photographic film, to develop new cosmetic products that joined the ranks of top-selling skin products. Fujifilm is continuing its foray into the cosmetics industry and is achieving success at present. In recent years, Fujifilm has even become involved in the development of pharmaceutical products and hopes to find a wonder drug that will cure the Ebola virus, which has been a topic making headlines in recent years. Thus, rather than maximizing shareholder value or profits like Kodak but at the same time avoiding going into the red in efforts to survive, Fujifilm succeeded in RI from Domain IV to Domain I to Domain II to Domain III (from the realization of RI from this Domain I to Domain II. This was followed by new II in Domain III) (Shift A in Figure 6.2) through the integration of existing advanced knowledge that it owned and accumulated (in other words, strong DC). In the case of such a Shift A in Figure 6.2, it can be assumed that in response to gradually emerging threats, the company’s extreme crisis awareness and higherorder learning as well as strategic collaboration through the formation of informal networks with different industries (in other words, strategic non-routine behavior of high quality) lead to strong DC demonstration and enhanced the possibility of a transition to Domain I. This can also be considered a good example of a strategic transformation in response to the “capability threats” described by Helfat and Peteraf (2003). On the other hand, as Winter (2000) mentioned, an organization facing a crisis may be motivated to raise the level of its capabilities. When a capability undergoes “renewal”, the exploration and development of new means may result in a new stage of development. At times, companies also opt for the “redeployment” of capabilities in different product markets. Unlike “replication”, which applies the same product or service to different regional markets, redeployment targets different but strongly related products or service markets. Furthermore, when a company transfers a capability to respond to markets that are different from the current business but have strong relevance, instead of “replication” or “redeployment”, the company may “recombine” a capability (or capabilities) with another capability (or capabilities) (Helfat and Peteraf, 2003). The success story of Fujifilm can be viewed as the

The strategic innovation system 111 result of successful functioning of such “renewal, redeployment or recombination” processes through the demonstration of strong DC. This realization of Shift A by Fujifilm was achieved through the following organizational process. To achieve its Second Foundation, it was essential for Fujifilm to develop new technologies and products through its R&D. Therefore, management was to invest aggressively in R&D while staff at the front line directed their efforts at increasing productivity in R&D. During business in 2004, sales of silver halide film fell dramatically. Moreover, there was also an across-the-board fall in profits from core products such as printing film and X-ray film. The main problem was the structure of the R&D organization, which had been optimized for silver halide film prior to 2003. Moreover, as a company, Fujifilm had very little experience and knowledge regarding new business development. On the other hand, it had significant strengths in technology and know-how, which it had developed over many decades through its core businesses. Second, it was understood that the contribution of R&D would be essential for the company to achieve the objectives of the Second Foundation. Therefore, even if it meant foregoing profits in the short term, the company was willing to invest in R&D. At the same time, it was necessary to increase productivity in R&D to fulfill expectations. With this understanding, Fujifilm proceeded with organizational reforms. In the period when silver halide was the core product, Fujifilm’s stance in R&D was to sell the products it developed. This time around, however, product development was to proceed according to a business strategy based on organizational reforms in R&D. In June 2003, the R&D organizational framework was entirely based on Fujifilm’s photo business. Moreover, the axis of business was not explicit, there was overlap in areas of resources including development, and there were various problems. At that time, the company changed the organizational structure by establishing the R&D Management Headquarters and under it a Technology Strategy Division (current Innovation and Strategy Planning Division) and an Intellectual Assets Division, which is under the direct control of the president. It also established divisional labs for the respective divisions and corporate labs to support the business divisions. The functions of the Technology Strategy Division are to plan and promote companywide R&D plans by managing various strategic projects including the distribution of resources, the promotion of industry-academic collaboration as well as activities to promote research efficiency, and the creation of group synergies among group companies, particularly with Fuji Xerox. The division is also in charge of managing and coordinating the R&D business of the entire company (see Figure 6.3). Aiming to restructure the R&D organization to one with clearly stated functions and roles and to pursue development that directly linked to business, Fujifilm introduced divisional labs and, as a new organizational concept, adopted a framework for implementing activities from R&D to commercialization as one continuous process. This kind of vertical integration of organizations from upstream to downstream, that is, from R&D to commercialization (with divisional labs directly linked to business divisions) was designed to efficiently pursue development directly linked to business and to create “exploitation SC” through collaboration between

112  The strategic innovation system

Figure 6.3 Organizational framework of Fujifilm R&D Source: Prepared by the author from materials provided by Fujifilm

divisional labs to create synergies between business divisions (see Figure 6.4). Color film, which represents Fujifilm’s core technology accumulated over decades, has a total film thickness of 20 micrometers and is carefully coated with 16–20 coats in such a way as to ensure against interfacial mixing between layers. Inside the film is silver halide, which is surrounded by various organic materials that precisely adsorb the halide, while various nano-dispersed organic materials surround these materials. Thoroughly exploiting this photo technology, Fujifilm developed a commercialization strategy for using this technology in various business areas, particularly in exploitation SC centered on the respective business divisions.3 Such exploitation SC not only improved and enhanced existing products but also demonstrated dynamic capabilities through the orchestration of various cospecialized assets for new product development. Moreover, Fujifilm strengthened collaboration among organizations to reinforce fundamental technologies and advanced research across different areas of specialization (directly linking corporate labs, technology centers, divisional labs and the R&D Management Headquarters) and organizations directly connected with business mentioned earlier (directly linking divisional labs and business divisions). Advanced research at Fujifilm includes the three Frontier Core-Technology Laboratories, Synthetic Organic Chemistry Laboratories, and Advanced Marking Research Laboratories (called “corporate laboratories” at Fujifilm), which pursue fundamental research in new fundamental technologies and new products and foster creative exploration

The strategic innovation system 113

Figure 6.4  Realization of “intellectual fusion and innovation” through the formation of multi-layered SC Source: Prepared by the author from materials provided by Fujifilm

SC. These advanced research labs aim to create new value through “intellectual fusion and innovation”. At Fujifilm, “intellectual fusion” refers to the convergence of knowledge and thinking approaches of engineers in different fields, while “innovation” refers to the creation of new disruptive innovation technology and new values. Exploration SC have an accurate understanding of the strengths and weaknesses of their technology infrastructure and core technologies the company has at present and make efforts to further build on its strengths in a creative manner through asset orchestration processes with a view to strengthening fundamental technology to thoroughly exploit photograph-related technologies (see Figure  6.4). Exploration SC became important organizational infrastructure for creating dynamic capabilities for asset orchestration. Elemental technology labs previously located in various areas of Japan are now centralized in three large research departments in the Advanced Research Laboratories. These three research labs within the Advanced Research Laboratories comprise a matrix-type organization and have a system whereby researchers come together in particular laboratories according to individual research themes, where they deliberately form autonomous exploration SC. When required, external partner companies also participate in research projects. The slogan of the Advanced Research Laboratories is “Intellectual Fusion, Innovation and Value Creation”, and their engineers, hailing from different cultures and different technologies, come together to create

114  The strategic innovation system innovation through the fusion of advanced technologies. Of critical importance in their efforts are the engineers’ own promotion of a paradigm transformation. When there is a need for the integration of technologies, “feasibility teams” are formed to consider the possibilities, and when there is a strong likelihood that new elemental technology can be achieved through the integration of technologies, project teams are formed and proceed with an investigation of development. This process will be discussed later. When the teams reach the stage of the actual product development and manufacturing technology, an exploitation SC that integrates relevant departments led by relevant divisional labs or business divisions is formed and proceeds with the actual product development. External partner companies will also participate in product development as required. These third SC that organically link exploration and exploitation SC are synthesis SC formed by corporate laboratories and divisional laboratories (which will be discussed later), and these three SC achieve the creation of new convergence knowledge through the demonstration of asset orchestration process based on dynamic capabilities. Synthesis SC consist mainly of feasibility teams and project teams formed by corporate laboratories (in some cases they include some divisional labs) (see Figure 6.4). Ideas and technologies generated in the Frontier Core-Technology Laboratories, the Synthetic Organic Chemistry Laboratories, and the Advanced Marking Research Laboratories are thoroughly discussed and researched through the establishment of feasibility teams that determine the potential of particular technologies and project teams for developing elemental technology. Moreover, to bring research to the new product stage, technologies are transferred to R&D, manufacturing and commercialization in the divisional labs and business divisions. At the same time, the Technology Strategy Division of the R&D Management Headquarters oversees the entire company’s R&D and contributes significantly as a coordinator in forming optimal teams (including feasibility and project teams) across organizational divisions to resolve various technological issues. The R&D Management Headquarters, as a cross-organizational synthesis SC, which includes the Intellectual Assets Division, holds an important position in the optimization of the entire company’s R&D and in the enhancement of its productivity. In such exploration SC, exploitation SC and synthesis SC, members selected from among researchers of the Fujifilm group make efforts to maximize the results of activities through collaboration. In this way, the company creates various new businesses and products through “intellectual fusion and innovation”. There is a pervasive belief within the company that communication and collaboration based on shared R&D goals with specialists in different fields, who have dispensed of any adherence to their own particular fields as researchers or developers, will lead to success in development that capitalizes on synergistic effects. Dispensing with adherence to specialist fields of technology is the first step in “intellectual fusion” and “innovation”, and the strengthening of teamwork through the mutual utilization and application of knowledge and innovation among researchers and engineers in various different fields leads to the establishment of multi-layered SC as shown in Figure 6.4. Fujifilm’s keywords – look through, think through, carry through, and verify through – are also indicative of the company’s perceived need for aggressive

The strategic innovation system 115 R&D, which sums up the essence of Fujifilm’s approach to business. The SC also involve commitments at technology strategy meetings attended by top management. In specific terms, SC play a vital role as Ba (Nonaka and Takeuchi, 1995; Kodama, 2005) not only for reducing the distance between management and the front line of research and increasing the motivation of researchers but also for enabling management to gain an accurate understanding of the status of R&D and to give specific instructions based on timely decision-making. In addition, a further role of the SC is to ensure that certain execution of action plans decided on at technology strategy meetings leads to improvement in research efficiency and productivity. In this way, exploration SC serve as organizational infrastructure for the smooth execution of the “research-driven cycle” from basic research to applied research, while exploitation SC serve as organizational infrastructure for the smooth execution of the “development-driven cycle” in bringing projects to the business stage and product stage. Synthesis SC also form many teams linking the corporate labs focusing on research with divisional labs focusing on development to prevent the formation of boundaries between the respective labs. In other words, they smoothly bridge what a number of academics describe as the “valley of death” (Branscomb et al., 2001; Markham, 2002; Merrifield, 1995) between research and development (as well as the commercialization process). Furthermore, it is an established company rule that when a decision on the development process of a new business product or particularly a large-scale investment is to be made through a stage gate arrangement, it must be done through a process of in-depth discussion from a business perspective. Stage gates are established at certain intervals in the R&D process, which proceeds in a manner where the stage gate decision-makers and stage gate umpires change according to the respective decision-making levels. Although decisions at the initial idea level may be made at a stage gate in a top-down manner, milestones are basically decided after a feasibility investigation. However, management deliberately refrains from controlling approximately 10–15% of research themes in corporate labs at this stage. This is particularly so for long-term themes. The company generally allows for a generous amount of freedom or “organizational slack” (Nohria and Gulati, 1996; Bourgeois, 1981) at the initial stage, and becomes increasingly strict in its judgment as a product nears commercialization. In other words, the company provides for a balance between control and freedom by deliberately allowing for freedom in 10–15% of the research conducted in corporate labs and allows for the corporate labs to take on research themes from across the whole company that no business division would consider. This is because there is an expectation that refraining from excessive control and striking a favorable balance between management and freedom will lead to the ongoing creation of new products and technologies, and the company’s own enduring development as a creator of new business. At the same time, the R&D Management Headquarters, which is responsible for unifying relevant organizations, (matters relating to intellectual property rights are the responsibility of the Intellectual Assets Division) has the role of productively coordinating and managing stage gates and milestones and creating synthesis SC that integrate creative exploration SCs and efficient exploitation SC.

116  The strategic innovation system A close examination of Fujifilm’s organizational framework and strategy from the perspective of asset orchestration processes makes it clear that its SC triad model functions successfully. To be specific, the creation of new convergence knowledge is a key factor in exploration SC. Furthermore, to advance efforts in commercialization, the synthesis SC of the feasibility teams and project teams activate the exploitation SC for commercialization and enable the creation of new convergence knowledge to realize new business. The existence of this SC triad model as an SC multi-layered network is an important element in creating the dynamic capabilities. (2)  QUALCOMM Inc.

Research and development of wireless communication technology including CDMA (code division multiple access), the development and sales of semiconductors and software, and licensing constituted Qualcomm’s main business. The company does not provide end products such as mobile telephone handsets but instead specializes in R&D and widely provides the wireless industry with the results of its technical developments in areas such as semiconductors, licenses, services, and applications (specifically, semiconductors for mobile telephone handsets, system software, development tools, and products for network development using the latest technology). In fact, as a fabless company, Qualcomm holds a mobile telephone semiconductor chip market share that is close to a global monopoly. However, even after adoption of the TDMA standard, Qualcomm refused to give up and persevered in promoting the superiority of CDMA outside the company. In 1988, it succeeded in an operational suitability test in San Diego. In 1991, Qualcomm registered a patent for its output control technology, which was to become an essential patent for 3G, and the following year, in 1992, registered a patent for soft handoff technology. During this time, as a venture company and mainly an R&D enterprise, Qualcomm worked to promote the formation of exploratory SC outside the company and developed its experiment services through a process of trial and error (Qualcomm demonstrates dynamic capabilities in Domain I and Domain II). For example, in 1994, with the aim of creating a new market for CDMA, the company decided to establish a joint venture with Sony Corporation of Japan and enter handset manufacturing as a manufacturer on its own. Thus, Qualcomm was operating in a highly uncertain business environment with a high rate of technological innovation (equivalent to Domain II). Subsequently, a major turning point in Qualcomm’s expansion was the worldwide launch of the third-generation cell phone service. Qualcomm’s CDMA2000 was developed mainly by Qualcomm as an evolution of cdmaOne (the Qualcomm-led 2G system) and also maintained compatibility with it. In Domain III and Domain IV, Qualcomm promoted the improvement and enhancement of existing infrastructure technology through the formation of internal and external partnership networks for exploitation activities (exploitation SC) centered on existing organizations as an incremental innovation system (IIS), and at the same time, toward the realization of new 3.5G, 3.9G/4G, and 5G technologies, Qualcomm drove R&D activities in Domain I and Domain II through the formation of internal and external partnership

The strategic innovation system 117 networks for exploration activities (exploration SC) centered on a new development project organization as a radical innovation system (RIS) (Shift B in Figure 6.2). At the same time, DC, DC and OC, and OC were demonstrated in Domain I/II/III/ IV for both next-generation R&D and improvement and enhancement of existing technologies. In the area of new R&D in particular, the company is investing in the development of new business in IoT, AI, and connected cars centered on semiconductor business. As a company strategy for its own growth, Qualcomm is currently promoting business by encouraging many more new entrants in diverse applications such as high-function devices, IoT, AI, and connected cars, and continues to expand the market. Therefore, within Qualcomm, triad SC (triad system) consisting of exploration SC, exploitation SC and synthesis SC form mainly in a radical innovation system (RIS) and incremental innovation system (IIS), and a balance is achieved between the existing and new businesses through strategic partnerships (and sometimes corporate acquisitions) with core stakeholders around the world. The main factors underlying the success and remarkable growth of Qualcomm from startup to becoming a major company were (1) its focus on CDMA technology at an early stage and its perseverance in R&D for practical application even when it was considered impossible at the start, (2) its thorough strategy in protecting new technologies it developed with patents, and (3) its ongoing aggressive commitment to R&D investment in new business. In other words, aiming for self-sustaining, autonomy, and sustainability, the company demonstrated strategic innovation capabilities and achieved a strategic innovation loop in each domain on the capabilities building map. (3) TSMC

Taiwan Semiconductor Manufacturing Company (TSMC) was established in 1987 at Taiwan’s Hsinchu Science Park as a company specializing in manufacturing in the semiconductor industry. Its aim from the outset was to operate as a dedicated foundry. Later, however, it established a new platform and a new business model. At present, TSMC is the largest foundry in the world and has an outstanding overall track record in the semiconductor industry including IDMs. In the early days of its establishment, TMSC received many orders from fabless companies in Silicon Valley in the United States such as nVIDIA. With its highly customized services and applications for unique specifications that cater to a wide range of customers (designers and IDMs such as fabless companies and design houses), TSMC’s “platform solution” is a platform that enables the manufacture of semiconductor products to meet specific customer needs. In other words, TSMC’s platform solution is an environment that facilitates the customer’s use of the foundry and improves several functions and services. In this way, TSMC developed a business model that took advantage of the low cost of the foundry business and the advantages of specialization in the semiconductor industry since its very founding, and despite not having state-of-the-art process technology at the time, it also had no competitors in the world. These

118  The strategic innovation system advantages paved the way to a growth trajectory for the company and, at the same time, expanded productivity through aggressive capital investment. Furthermore, until about the year 2000, TSMC maintained its cost advantage over other companies, despite having somewhat inferior process technology in areas such as microprocessing compared with the cutting-edge IDMs of developed countries. During this period, as an emerging company, TSMC promoted the formation of exploitation SC centered on existing organizations as incremental innovation system (IIS) within and outside the company mainly utilizing (as well as improving and upgrading) existing semiconductor production technology, and expanded its business (Demonstration of dynamic capabilities and ordinary capabilities in Domain III and Domain IV). In R&D projects involving next-generation semiconductor development, new R&D project organizations play a leading role as radical innovation systems (RIS) and demonstrate dynamic capabilities (DC) through SC and networked SC, which are exploration SC with external partners, which are customers (e.g., fabless companies such as Qualcomm, nVIDIA and Apple as well as semiconductor production equipment manufacturers), in Domain I and Domain II, where the level of uncertainty is high, and they promote new knowledge creation activities. This knowledge creation process corresponds to Domain III and/or IV  Domain I  Domain II  Domain III (demonstrating mainly DC) as shown in Shift B in Figure 6.2. Furthermore, synthesis SC led by TSMC’s leader teams take charge of resource distribution at every stage from R&D to commercialization and merchandising, and they make final decisions. In TSMC, the formation of triad SC (triad system) is the management system that achieves a balance between exploitation activities of such existing business (routine business, mainly semiconductor manufacturing) and exploration activities in the form of new semiconductor R&D and virtual vertical integration. (4) Xiaomi

Founded in 2010, Xiaomi has increased its market share in the Chinese smartphone industry by leveraging the excellence of its own supply chains to introduce lowcost, high-performance smartphones. In 2014, it took second place in the Chinese smartphone market behind Apple. Then, in the first half of 2015, it surpassed Apple to become No. 1. Eighty percent of the components in Xiaomi’s smartphones are the same as those in the iPhone, and by making good use of its existing supply chain, Xiaomi was able to manufacture smartphones inexpensively and quickly without building a new supply chain. Thus, Xiaomi was able to sell a high-spec model in the smartphone market at a surprisingly low price, enabling a product strategy that surprised users – the first smartphone in China with a dual-core 1.5G CPU, 4-inch display and an 8-megapixel camera. The success of Xiaomi’s low-cost, high-spec strategy can be attributed to the perfection of its supply chain for smartphone production in China. The supply chain for Xiaomi’s smartphone production is mostly in China and other East Asian countries, including Japan. The short geographical distance between Xiaomi, which is responsible for design, product planning, and software development, and the manufacturers responsible for parts procurement and final product assembly, has reduced

The strategic innovation system 119 the development cycle for new products. Xiaomi’s smartphones consist of approximately 600 components. Through partnerships with Foxconn, Inventec, Gaotong, MediaTek, nVIDIA, and others, the company has been able to quickly introduce cutting-edge components and sell the highest-specification smartphones on the market at a reasonable price. However, to efficiently update OS-level software in-house, Xiaomi developed its own operating system, MIUI, based on Android. At the same time, Xiaomi enabled weekly updates of the OS and apps by listening to customers’ opinions and ideas through its online forums. In developing its MIUI, Android-based operating system, Xiaomi opened a MIUI forum on the Internet to encourage communication not only between Xiaomi and its users but also among users. To enable its engineers to capture as many user requests and ideas as possible, Xiaomi created a business system that involves users in the product development process. Xiaomi also utilized its own online store and social services to disseminate information on the latest models on social networking sites even before their release and adopted a complete pre-order sales method, whereby products are reserved on the official website. In addition to the store on the official website, Xiaomi opened stores on Alibaba and many other online shopping platforms to sell its products online. Currently, 70% of Xiaomi’s smartphones are sold through Xiaomi’s official website. This online-only sales channel, which integrates ICT-based sales data and customer data updates, has played a major role in building trust with customers by accumulating manufacturing and sales information and improving the accuracy of demand forecasts. Positioning of Xiaomi’s capabilities in the rapid growth of the company from its founding in 2010 to 2015 can be judged to have been in Domain III, the fastchanging and competitive (and less uncertain) market for smartphones. Xiaomi demonstrated its dynamic capabilities (DC) by using competitive strategies with Apple, Samsung, and other competitors to bring to market smartphones that meet customer needs, with the goal of optimizing its own supply chain and increasing the functionality of new products. As an incremental innovation system (IIS) in Xiaomi, the existing organization took the lead in promoting the formation of “exploitation SC” as an internal and external supply chain network and rolled out the expansion of the smartphone market (demonstrating dynamic and ordinary capabilities in Domain III). Thus, Xiaomi was able to leverage mature Chinese supply chains to produce cheaper, higher-spec handsets, enter existing markets, and achieve temporary effects through the demonstration of DC. However, growth was negative in 2016, a turnaround from the highest shipments in 2015. This was because the existing leading companies (e.g., Apple and Samsung) quickly implemented countermeasures, while at the same time, emerging manufacturers that adopted strategies that mimic Xiaomi’s surpassed Xiaomi’s products with cheaper, higher-specification handsets. At the same time, several emerging manufacturers implemented strategies to target rural, untapped markets in China that Xiaomi had not targeted with more low-end products. Under pressure from these top and bottom markets, Xiaomi’s market share began to plummet from the end of 2015, turning around from its

120  The strategic innovation system highest shipments in 2015 to negative growth in 2016. Among these, Huawei, a well-established Chinese domestic brand, steadily increased its market share to take first place, while both OPPO and vivo, in second and third place, respectively, were younger startups than Xiaomi. To overcome this situation, Xiaomi positioned itself as a mobile network company to maintain sustainable growth and aimed for an ecosystem strategy vertically integrating software, hardware, and (Internet) services with the strategic goal of profiting from the Internet business in the future and in the long run. Xiaomi has steered the company toward forming an ecosystem based on its own MIUI operating system, which was developed based on Android. Further expanding the quality and quantity of applications, Xiaomi’s MIUI app store grew rapidly since its opening in 2012, surpassing 12 billion total downloads in February 2015. The 30% commission received from application developers supports the revenue. In addition, Xiaomi’s Mi Cloud service can now be shared among all Xiaomi devices, further strengthening Xiaomi’s ecosystem. In addition, Xiaomi positioned smartphones as the main devices to be used as Xiaomi’s terminals and increased the diversity of its terminals as part of its ecosystem promotion by offering a wider and more varied lineup of wearable devices, TVs, tablets, IoT products, and peripherals. The Xiaomi ecosystem is based on a three-in-one integrated service strategy of handset (hardware) and OS (software) and apps (services). As a radical innovation system (RIS), Xiaomi’s new project teams took the lead in building and promoting the business ecosystem and demonstrated dynamic capabilities (DC) to promote new business activities through SC and networked SC as exploration SC with external partners across different industries and business types. This ecosystem process of strategic innovation corresponds to a shift between Domain III  Domain I  Domain II  Domain III (Shift B in Figure 6.2). The Synthesis SC, led by the leader teams (LT) in Xiaomi’s top and middle management, is responsible for a series of resource allocation and final decision-making for Xiaomi’s business ecosystem strategy. Xiaomi has formed a triad SC (triad system) as a management system to achieve both exploitation activities in existing businesses such as handset development and sales promotion and exploration activities related to new business ecosystem strategies along with an integrated service strategy that integrates the three elements of handsets (hardware), OS (software), and applications (services). In 2018, Xiaomi’s gross profit breakdown was 46.3% for online services, 31.7% for smartphones, and 20.3% for IoT devices and household goods business. Profits earned by its Internet services business are greater than its stand-alone smartphone profits. As an ecosystem operator in the IoT era, Xiaomi has expanded its product and service portfolio and created new business areas. (5) Huawei

Huawei is a privately owned, employee-owned company founded in Shenzhen, China, in 1987 and is one of the world’s leading ICT solutions providers. Huawei’s

The strategic innovation system 121 vision and mission is to bring the value of digitization to every person, home, and organization to create an intelligent world where everything is connected. Leveraging the experience and expertise it has accumulated over the years in the telecommunications industry, Huawei is committed to fostering fertile ground where everything is connected to create new value and where everyone can reap the benefits of digitalization. Huawei has made great progress in overseas markets as its R&D capabilities have improved in recent years, and its global strategy is expanding more and more. Products developed by Huawei are used in many countries and regions around the world. Huawei has so far established 22 regional divisions around the world containing more than 100 branches. In addition, Huawei has established 16 research institutes and is developing a global R&D strategy. As a commercial business, Huawei is leading the 5G commercial process in response to globalization and has established a 5G joint innovation center with European telecom operators to continue promoting 5G commercial and application innovation. Huawei’s RuralStar series solutions have provided mobile Internet services to more than 40 million people in remote areas in over 50 countries and regions. Huawei’s corporate ICT solutions business supports the digital transformation of customers in various industries, building digital world infrastructure, and 228 companies worldwide have chosen Huawei as their digital transformation partner. Meanwhile, Huawei’s consumer handset business has maintained steady growth, shipping more than 240  million smartphones and pursuing a consumer-centric product strategy that includes PCs, tablets, smart wearable devices, and smart screens. Following is an outline of Huawei’s development process. In Huawei’s early years, from 1987 to 1995, the company’s mission was to survive in the highly competitive telecommunications equipment industry. At the time of its founding, as a distributor, Huawei was financed by importing premises switching PBXs manufactured by the Hong Kong company “Gongnian” into the local Chinese market. In 1988, CEO Ren Zhengfei felt a sense of crisis and decided to shift the company’s strategy from distributor sales to manufacturing PBX switching equipment and began independent research and development of such equipment. Subsequently, the company commercialized PBX switching equipment for hotels and small and medium-sized businesses. At that time, most private companies in the Chinese switching market had no experience in independent research and development of digital switching equipment, and foreign companies dominated the Chinese switching market. CEO Ren Zhengfei recognized the importance of telecommunications technology and invested all of the company’s capital in independent research and development of digital switching equipment. At the end of 1993, commercialization of digital switching systems began, and the company expanded its sales to the local market in China thanks to its cost competitiveness with other companies. Huawei’s strategic goal in the subsequent period 1996–2004 was to expand its market share from rural to urban areas. During this period, Huawei, as an emerging company in the fast-changing digital switching market, promoted the improvement of switching production technology (including improvements and refinements). Huawei’s existing organization as an incremental innovation system (IIS) took the

122  The strategic innovation system lead in promoting the formation of exploitation SC as an external sales network and drove the expansion of the digital switching equipment market in the Chinese market (demonstration of dynamic and ordinary capabilities in Domain III). In 1997, Huawei entered the telecommunications market in Hong Kong and later in Russia, further promoting the global expansion of digital switching equipment. Starting in 1998, Huawei focused its business strategy on Europe and the United States, and subsequently established R&D centers in Sweden, the United States and elsewhere. Behind this global strategy was the shift to a new business model that responded to changes in the business environment (increasing market uncertainty and the speed of environmental change) in the form of high-speed Internet (including next-generation mobile communications) and digital technology, and management reforms in the company’s R&D system and business management system. At the time, CEO Ren Zhengfei analyzed Huawei’s future development and risks and presented the key points and significance of the company’s reforms in an internal company lecture entitled “Huawei’s Winter”. Through radical management reforms, Huawei successfully took up the challenge of changing its global strategy and business model by expanding overseas. Then, in 2000, Huawei for the first time achieved sales of 20 billion yuan and an operating profit of over 2.9 billion yuan, ranking first in China’s Telecommunications Electrical Appliance Ranking 100 at that time. In 2002, sales in foreign markets increased to US$552 million. Furthermore, in 2003, Huawei established a new handset business unit to further expand the business product portfolio. As a shift in business model, Huawei aimed to provide optimal solutions to customers around the world as a telecommunications solution provider, rather than simply selling telecommunications equipment. To this end, Huawei unveiled a new logo in 2006 and clarified its mission, including customer orientation, R&D investment for innovation, and building win-win relationships. Nevertheless, to achieve success in developed markets such as Europe and the United States, the company shifted its strategy to a policy of cooperation rather than competition with rivals. The company then formed a joint venture with Global Marine to provide endto-end submarine cable solutions. At the end of 2007, Huawei established partnerships with all top European telecom operators. In 2010, Huawei, which was primarily a BtoB company, reformed the strategic stream of its handset business to fit the needs of consumers with respect to its BtoC business and introduced a brand concept for middle-class consumers. After reviewing the consumer business (cell phones, semiconductor chips, etc.), terminal equipment business, and various services for the Internet, a new business unit called the Consumer Business Group was established from the previous divisional organization. In its 2017 annual report, Huawei announced its mission to deliver the value of digitization to every person, home, and organization to create an intelligent world where everything is connected. Huawei was instrumental in creating a foundation for integrating ICT infrastructure and intelligence, advancing customer orientation and innovation as a bridge between the distributed digital world and a consistent intelligent world. In 2017, Huawei defined its public cloud strategy. Huawei ranked

The strategic innovation system 123 first in China’s public cloud market and in the world’s top five for the third consecutive year. In 2019, the strategy was to enter the smart car solutions market to provide network product solutions and cloud AI product services. The goal of network product solutions is to build the best, most intelligent, and most cost-effective connections in the world. The goal of cloud AI product services is to create fertile ground for computing services and cloud services to build an intelligent world where everything is connected. Huawei has been expanding into strategic markets such as cloud, AI, and smart car solutions for the past decade. The size of sales increased from $21.8 billion in 2009 to $122.972 billion in 2019. Behind the success of Huawei’s global strategy and the creation of new business models is the implementation of internal management innovation. As one of the management reforms, Huawei introduced a research and development management system called Integrated Product Development (IPD) under the guidance of IBM in 1998. IPD is a product development management process that IBM adopted worldwide. Rather than the function-centered “product-out” development of conventional product development, IPD focuses on delivering sellable products to customers with a market-in theme, from product strategy planning to the project life cycle, with the aim of understanding revenue and expenditure and maximizing profits. Prior to the IPD reform, Huawei had a weak formal internal R&D plan and established technology management system. For example, the lack of a standardized process to guide the product development process led to technical problems in most development projects. Problem-solving at that time depended on the competence and personal experience of specific R&D personnel. In addition, there was little close contact and communication between the marketing department and the R&D team. Thus, meeting the needs of a growing number of customers placed a heavy burden on the R&D department, which lacked an effective way to manage customer needs and product lines. In 1997, in particular, Huawei faced this growing disruption, with more than 1,000 product versions, and as a result, Huawei’s product development and product management fell into an inefficient trap, prompting CEO Ren Zhengfei to undertake a major management reform. The essence of IPD is comprehensive management and joint development between different departments, and IPD reforms led to the formation of a new product development team (PDT). One PDT team handles one product. To form a team, PDT team members are selected from each department, such as marketing, finance, and R&D. As a result, product development changed from being the sole responsibility of the R&D department to a collaborative process among all departments. Through IPD reform, the product development process was formed between different departments and became an open process within the company. IPD reforms enabled potential problems in the product development process to be quickly discovered, identified, and resolved at the beginning of the product design process. The essence of IPD is to consolidate the capabilities of various departments, reduce product development failures due to lack of communication between different departments in the R&D process, and successfully bridge (match) R&D and market needs. In most companies, product development is done by the R&D department, but in IPD, most company departments need to be involved in the product R&D process,

124  The strategic innovation system and the entire R&D team needs to be responsible for the outcome of the product (e.g., profit). Huawei formed a multi-layered cross-functional team (CFT) consisting of different departments to drive the IPD process. Huawei’s top-level interdepartmental team is an investment review committee formed from R&D, procurement, marketing, supply chain, manufacturing, legal, and finance. More than ten people from various departments joined to form this committee. The IPD process determines the establishment and execution of R&D projects and effectively manages the company’s product and technology development direction. The integrated portfolio management team, an interdepartmental team that coexists with the investment review committee (members come from different functional areas), decides whether to approve each development project and reports back to the investment review committee. The business management team and the product development team consist of about seven employees from different functional departments. The business management team is responsible for decision-making from development to the entire product life cycle, while the product development team is responsible for developing a single version of the product. The management and product development teams have independent accounting systems, and the performance of each member involved is closely linked to the performance of the products for which they are responsible. For technology development, there is an integrated technology management team, a technology management team, and a technology development team. These technology development-related teams typically identify the technologies needed for future product development and determine the direction of development from both a technology development and market-driven perspective. The IPD interdepartmental team system ensures that each department participates in the entire product development process and reduces the costs of repetitive communication between different departments. Such in-house multilayered PDTs and various forms of CFTs correspond to the strategic communities (SC) that bring about the dynamic capabilities (DC) mentioned in Chapters 4 and 5. In SC, the focus is strategic non-routine activities on pragmatic boundaries to solve new issues and problems. Within this multi-layered group of SC, the investment review committee and the integrated portfolio management team were the equivalent of the Synthesis SC centered on the leader teams (LTs) responsible for a series of resource allocations and final decision-making from R&D to the creation of business and commercialization. IPD interdepartmental teams as radical innovation systems (RIS) formed exploration SC for exploration activities, while at the same time, global sales and operations teams, including existing businesses, formed exploitation SC for exploitation activities as incremental innovation systems (IIS). Thus, across Huawei’s businesses, a triad SC (triad system) was formed as a management system to realize the combination of exploration activities (new R&D) and exploitation activities (overall operations including existing businesses). This IPD revolution was an important turning point in Huawei’s growth into a world-class company. With the IPD system still in operation, Huawei’s revenue increased from US$1  billion to US$122.9  billion and the number of employees

The strategic innovation system 125 increased more than tenfold. In terms of product development, product development cycles are continually shortened, product failure rates continue to decline, and customer satisfaction has been increasing year after year. Huawei’s success in product development is not only due to the perfection of the IPD system itself. More importantly, in the process of IPD revolution, Huawei has transformed its existing product development process of ordinary capabilities (OC) (including, in effect, the dynamic capabilities of its adaptive engineers who have the skills to solve some problems ad hoc or respond quickly to problems) to acquire and demonstrate its own systematic dynamic capabilities (DC) as IPD. As described earlier, to build a new business model and promote a global strategy, Huawei promoted new strategic innovation by demonstrating dynamic capabilities (DC) through SC and networked SC as exploration SC with external partners across different industries, business sectors, and business types, led by cross-functional project teams executing IPD. This process of strategic innovation corresponds to the interdomain shift Domain III  Domain I  Domain II  Domain III (Shift B in Figure 6.2). (6)  Zoom Video Communications

Nowadays, there is probably no one who does not know the name Zoom. Zoom conferencing is a videoconferencing technology optimized for Internet communications, with features such as [a] video codec optimized for IP communications, [b] software MCU functions, [c] improved security technology, and [d] improved operability and functions (improved UI). Zoom is widely expanding to B2B, B2B2C, B2C, and C2C worldwide, and is typically used for telework. Zoom Video Communications’ (hereinafter referred to as “Zoom”) corporate philosophy is delivering happiness at the core of everything it does, stating that employees must be happy to satisfy customers. The company has a corporate culture where employees care for each other. Founder Eric Yuan believes that if one can build relationships of trust with one’s customers, sales will follow. His thinking may have been influenced by the many unhappy customers he encountered during his past tenure at WebEx (where he emerged as a code developer and later rose to become WebEx’s vice president of engineering). Yuan founded SaaSbee in April 2011 in Delaware while working for Cisco Systems (which later acquired WebEx). Two months later, he left Cisco Systems, where his annual salary was $400,000, to begin two years of product development in secret with 40 engineers. Everything was developed from scratch. With cloud-based services in mind, it took 18 months of development to achieve scalability. At the time, the web conferencing market was already a competitive environment, with about 100 companies participating worldwide such as Microsoft, Cisco Systems, and BlueJeans. It was also the time that Apple released FaceTime. In terms of the business environment, value chains in the videoconferencing market were already established, there was low market uncertainty, although the market and technological innovation were changing rapidly. Companies focused on developing new software technologies (including service improvements and enhancements) and

126  The strategic innovation system were demonstrating their own dynamic capabilities (DC) based on existing ordinary capabilities (OC). At that time, Zoom’s capabilities were in “Domain III (DC and OC)” on the capabilities building map. Zoom used competitive strategies and demonstrated its unique dynamic capabilities (DC) to bring web conferencing to market in response to customer needs, with the goal of developing everything independently and without licensing from other companies. At Zoom, the existing organization as an incremental innovation system (IIS) from the start-up era took the lead in promoting the formation of exploitation SC as an internal and external supply chain network and expanded the web conferencing market (the demonstration of dynamic and ordinary capabilities in Domain III). In Yuan’s view, WebEx’s architecture was already outdated after 12 years of development. In developing web conferencing (later Zoom) beyond WebEx, Yuan considered using Web Real-Time Communication (WebRTC) (a project launched to realize real-time communication via an API in web browsers and mobile applications) as a base, but due to its functional limitations, Yuan was determined to develop the product from scratch. Zoom demonstrated its own DC in the development process in Domain III (DC and OC). Aiming to develop software suitable for the smartphone and cloud era, the 40 engineers spent 18 months completing the beta version. In May 2012, the company changed its name from SaaSbee to Zoom Video Communications. In August of the same year, a beta version was released. This version achieved HD quality group video chat with 15 people participating simultaneously. In November of the same year, Zoom signed a contract with its first customer, Stanford University, and by December the number of users reached 1,000. In January  2013, the company announced the cloud-based Unified Meeting Experience (UMX) Zoom 1.0. Up to 25 people could participate in HD video conferencing. The free version allowed calls up to 40 minutes. In June of the same year, the company released Zoom 2.0, a cloud video collaboration system. The concept for this system was “affordable, unified, cross platform meeting experience for everyone”. Additional features such as H.323 connectors were added to the system to allow for integration with existing videoconferencing systems from other companies. In July of the same year, the company launched the Works with Zoom partner program with the participation of 12 companies, including Aver Information and Logitech (Logicool). It also achieved two million users (meeting participants), 5,500 meetings/day and 100  million meetings. In December of the same year, Zoom 2.5 was released, adding enhancements for iPhone/iPad, 100 participants/meeting, 25 gallery views, connection to H.323/SIP devices, passcodes, personal meeting IDs, and other features. Then in FY2013, the company achieved 5,000 corporate contracts. From 2014, Zoom steered its development strategy toward a joint development strategy with development partners aiming for an ecosystem strategy. In April of the same year, the company introduced Zoom Presence (Zoom Rooms as of 2022) for conference rooms, offering an all-in-one touch screen, monitor, Mac mini, camera,

The strategic innovation system 127 and speakerphone. In June, ARRNet (Australia), an inter-school Internet service with 2,000 participating schools, adopted Zoom. ARRNet now has over 1 million users. In July of the same year, the number of users (conference participants) reached ten million. This represents an increase of eight million users in one year. In August of the same year, Zoom 3.0 was released, adding group messaging, co-annotation (simultaneous writing), and a new service, Zoom Webinar. In December, five months after launching Zoom 3.0 and ahead of its competitors, Zoom released Zoom 3.5, the first to support cloud recording (MP4) and mobile screen sharing (iPad/iPhone app to Mac/PC). The ability to transfer files through group messaging and other functions was also added. Poly (formerly Polycom), Logitech, Sure, Yamaha, Yealink, Aver, DTEN, Jabra, Lenovo, Personify and Revolve Robotics participated as hardware partners (technology partners) in the Zoom-centric ecosystem. The aforementioned Zoom Rooms are dedicated Zoom hardware terminals with built-in microphones, cameras, and speakers that are used with the Zoom service and are intended for conference rooms and home teleworkers. Currently, Zoom Rooms services are widespread around the globe. Zoom entered a partnership with Polycom (offering bundled products). Polycom, a long-established codec manufacturer, shifted its focus to selling webcams and speakerphones, and its business model has reached a major turning point in recent years. In addition, the ecosystem’s Software (Applications & Services) Partners (Technology Partners) include Salesforce, Miro and Slack, as well as Google Workplace, Calendar, Documents, Microsoft Teams (Schedule), Dropbox, Evernote, Zendesk (for help desk), Qumu (video streaming), Otter.ai (voice AI, minutes, etc.) and others. For example, with 1,500 applications registered, the Zoom App Marketplace is providing convenient applications that can be used in conjunction with Zoom meetings. Linking with other companies’ services such as Slack and Salesforce enables you to start a Zoom meeting from a Slack chat or from a Salesforce user’s screen (customer data and other information). Apps range from summarizing the contents of meetings (ToDo lists) to other applications. These are used to improve the quality of Zoom meetings and reduce operational stress. The apps are intended to improve the quality of Zoom meetings, but conversely, API and SDK proposals have also been actively developed recently through the execution of the Zoom Developer Program to integrate Zoom into users’ business systems. In April 2021, Zoom launched a $100 million Zoom Apps Fund. The purpose of Zoom Apps (Zoom integration apps) is to promote the growth of the Zoom ecosystem, which consists of integrations with other companies’ services, developer platforms, and compatible hardware. The fund invests in developer partners that have developed profitable products and are new to the market, with an initial investment of $250,000 to $2.5 million in each portfolio company. There are also more than 1,000 reseller and integrator partners worldwide. In 2015, to accommodate the rapid user expansion associated with three consecutive years of triple-digit hyper growth, Zoom entered into a partnership with Equinox, a data center, and contracted 13 data centers worldwide, reaching 450,000 subscribing businesses, 5,800 educational institutions, and 15 billion annual meeting minutes. In 2017, the company released services and apps one after the other,

128  The strategic innovation system including Zoom for Telehealth, a cloud-based telehealth service, in February, Zoom Connector for Polycom in May, and One Zoom One Tap Connector for Cisco terminals in June. The company also partnered with Samsung Electronics Korea to offer the Samsung Dex mobile dock, a mobile-to-desktop meeting experience. In July 2020, the company released a hardware subscription, Zoom Hardware as a Service (HaaS). The company also announced Zoom for Home for remote workers, bringing the era of subscriptions not only to the cloud but also to hardware. These hardware partners (technology partners), software service partners (applications and services) (technology partners), and reseller partners and integrator partners form a business ecosystem around the Zoom service platform, which is the backbone of Zoom’s rapid growth (see Figure 6.5). Zoom is building and accelerating its business ecosystem, led by new project teams as radical innovation systems (RIS) to demonstrate dynamic capabilities (DC) through SC and networked SC as exploration SC with external technology partners (hardware/software). At the same time, to expand operations, including existing services, organizations such as sales departments form exploitation SC with external reseller partners and integrator partners. This kind of ecosystem process of strategic innovation corresponds to a shift between Domain III  Domain I  Domain II  Domain III (Shift B in Figure  6.2). In Zoom’s business ecosystem strategy, synthesis SC, led by leader teams (LT) consist of Zoom’s top management team, is responsible for a series of resource allocation and final decision-making. Zoom forms Triad SC (Triad System) as a management system to realize the combination

Figure 6.5 Zoom’s business ecosystem

The strategic innovation system 129 of exploitation activities (global sales promotion) and exploration activities related to new business ecosystem strategies. 6.2.3  Common findings from case studies (1) Driving strategic innovation by combining exploration and exploitation

In the six high-tech companies in the aforementioned case studies, the organizational characteristics that generate strategic innovation include the coexistence of existing organizations (main organizations), which are responsible for the expansion of existing businesses, and cross-functional project organizations (new organizations), which are responsible for the development of new technologies and the realization of new business development. Common across the six companies, project organizations mainly demonstrate DC and are dedicated to R&D, service planning and new business development work, and form exploration SC that include external partners as activities for exploration. On the other hand, for related operations in the value chain (manufacturing, sales, after-sales support, etc.) that realize business, the existing OC of internal line organizations are used to form exploitation SC that include external partners as activities for exploitation. Thus, as a characteristic of a company that creates strategic innovation capabilities, which are the capabilities of an entire company integrating DC and OC, there is background evidence of the existence of an identifiable organizational structure (new organizations and main organizations) and the realization of exploration processes centered on new organizations and exploitation processes centered on main organizations by the identifiable organizational structure. (2) The SC triad model to realize inter-domain shifts and the strategic innovation loop

Between the two types of organizations (new organizations as project organizations vs. main organizations as line organizations) and multi-layered SC networks (project network exploration SC vs. line network exploitation SC), there is always a contradictory conflict and tug-of-war between them (e.g., Schad et  al., 2016). The presence of such interaction between the organizational and main organizational elements is an impediment to synthesizing the knowledge and actions of practitioners in each organization. However, a new perspective revealed in the case studies is the existence of leader teams – synthesis SC – which facilitate this synthesis. Although the organic structure of leadership teams differs from company to company, the common denominator is that they consist of departmental heads (top management, middle management, etc.) in a cross-functional fashion. The leader teams play the role of improving R&D and new business development performance by strengthening the characteristics of the cross-functional or intercorporate integration of the exploration and exploitation SC. An important element in the dialectical realization of synthesis of knowledge and strategy among different organizations is the formation of the SC triad model, which integrates exploration SC, exploitation SC and synthesis SC. As mentioned in Section 6.2.1, the formation

130  The strategic innovation system of these SC triad models can be considered to bring about [1] management capabilities to realize a spiral strategic innovation loop, [2] management capabilities within and across domains (including shifts), and [3] capabilities to balance two different archetypes through dialectical management, which are characteristics of strategic innovation capabilities (SIC), company-wide capabilities that integrate DC and OC. 6.3 RIS and IIS characteristics in the strategic innovation system Two systems, the radical innovation system (RIS) and the incremental innovation system (IIS), are subsystems of SIC and the strategic innovation loop that sustainably drive RI and II in the CM in Figure 6.1. First, it is necessary to identify the individual subsystem elements that comprise the RIS and IIS that make up the SIS. This study extracted and analyzed the elements of RIS and IIS subsystems necessary for strategic innovation from a vast amount of interview data and publicly available secondary data from Asian, European, and U.S. companies that have successfully (or unsuccessfully) implemented strategic innovation by demonstrating DC (and OC). This research study process also includes the six high-tech firms described in the aforementioned case studies. First, as empirical observations, first-order concepts related to RIS and IIS elements were derived. From these first-order concepts, the core management elements necessary for subsystems common to RIS and IIS that constitute SIS were identified and categorized, and second-order themes as theoretical observations were derived. After analyzing and discussing the second-order themes, strong interrelationships and fitness/reinforcement relationships among the identified and categorized various subsystem elements were found. Finally, from these second-order themes, three main aggregate theoretical concepts ((1) Identifiable organization structure (new organizations and main organizations), (2) Exploration process centered on new organizations and exploitation process centered on main organizations, and (3) Interaction between new organizations and main organizations) were identified as the core frame elements of RIS and IIS subsystems in the corporate system as an SIS. In addition, a necessary condition for successful corporate strategic innovation is the establishment of a business ecosystem, and dynamic congruence between the environment (market, technology, ecosystems) and the corporate system. This is because DC dynamically create new markets and transform existing markets while the market (ecosystem) leads to the transformation of industries and companies. For example, an “environment creation strategy” (Kodama, 2009) promotes a shift between Domain III and/or Domain IV  Domain I  Domain II for exploration activities, while an “environment adaptive strategy” (Kodama, 2009) promotes exploitation activities in Domain III or Domain IV. As an element that facilitates the construction of business ecosystems, it is important for companies (organizations) as stakeholders to achieve appropriate and dynamic “congruence” through interaction with the environment as the ecosystem (see Figure 6.6). Following is a description of the subsystem elements of both these contrasting systems (RIS and IIS).

The strategic innovation system 131

Figure 6.6 The strategic innovation system

6.3.1  Identifiable organization structure (new organization and main organization)

An “identifiable organizational structure” means the specific team, project, department, or other group within a company that is responsible for realizing RI, while an existing organization is generally responsible for II. According to systems theory, all systems or subsystems must be identifiable according to boundaries (sometimes open or closed) and distinct functions in a large network consisting of a series of systems in which they are operating (Capra, 1996). In fact, according to Jelinek and Schoonhoven (1993) as well as Kodama (2007a), institutionalized organizations responsible for RI actually exist in many innovative companies. Even at companies like the six hi-tech companies in the aforementioned case studies, and Apple (Kodama, 2011), Sony (Kodama, 2007c), and Nintendo (Kodama, 2011), specialized organizations responsible for radical innovation exist. In previous studies, it was argued that projects specializing in RI had to be physically and culturally independent (Benner and Tushman, 2003; Hill and Rothaermel, 2003; Kanter, 1985). However, although organizational systems with internally consistent elements are important in the development of DC, it is also advantageous to incorporate the activities of projects specializing in RI into the main organization (existing organization) where robust interaction can take place. In fact, this is a requirement of the open system (Felix, 2003) and, in reality, internal ventures such as the development of Sony’s game business (Kodama, 2007c), NTT DOCOMO’s i-mode (Kodama, 2003), and the six hi-tech companies in the aforementioned case studies, were allowed to use the assets and resources of the organization (Greene

132  The strategic innovation system et al., 1999; Penrose, 1959; Wernerfelt, 1984). Theoretically, this is a competitive advantage for large companies, which is absent from startup companies. With respect to the “essential skills and capability development” which is closely related to the management context of “organizations, technologies, operations”, when the DC required in Domains I and II are based on “transformational experience” (King and Tucci, 2002), routines for this do not exist anywhere in the company. Therefore, management’s objective is to shift the company (organization) to an active state of metabolism, where new situational learning is needed every time a new organization (new project) responsible for RI is established (Eisenhardt and Martin, 2000). Alternatively, it is necessary to bring in talented people from outside the company, as in the case of Apple’s iPod development (Kodama, 2017) and NTT DOCOMO’s i-mode development (Kodama, 2002). Because risks, uncertainty, and novelty are of an extremely significant scale in Domains I  and II, it is not possible to procedurize knowledge. Such an exploration process requires practitioners with a wide range of skills to demonstrate flexibility in response to various situations such as pursuing, changing directions, stalling, or rising of projects. On the other hand, the skills required in exploitation processes of Domains III and IV are the ability to correctly execute a series of activities that are routinized to reduce the need to make choices. 6.3.2 Exploration processes lead by new organizations, and exploitation processes lead by main organizations

Let us now look at “exploration and exploitation”, which is closely related to the business context of new organization and main organization. To build DC that are effective in environments of great uncertainty such as Domains I and II in the Capability Building Map of Figure 6.1, situation-specific knowledge that did not previously exist in the company is necessary (Eisenhardt and Martin, 2000). This knowledge is accumulated when project members engage in experimental activities, rapid learning, assessments, and change in direction (Lynn et al., 1996). In particular, the leaders (managers/administrators) of the RI project portfolio, who are responsible for exploration processes, must meet the challenge of devising an appropriate diversification strategy that is consistent with new capabilities and business fields believed to be important for the company’s future SI. Moreover, when the strategy consists of high-risk projects involving RI, leaders in particular need to adopt a new dimension of measurement and protection as guidelines for the management of the portfolios. In addition to the RIS triggering strategic metabolism through the experience of transformation, the senior management team, taking into consideration the experimental nature of the role of the RIS, must adopt a magnanimous attitude and apply different restrictions and rewards than those for business units in main organizations in regard to RI. Since it is generally considered that commercial success of exploration processes targeting RI does not occur frequently, both activity-based indicators and performance-based indicators are considered necessary. Meanwhile, in an environment with low uncertainty such as Domains III and IV, where the emphasis is on process-oriented management, it is important to stabilize routines and improve efficiency in a short period of time. At the same time, it is

The strategic innovation system 133 necessary to strictly manage the formulation and execution of a rational, analytical strategy plan in the exploitation processes. In addition, the leaders who control exploration and exploitation processes must also make appropriate decisions on the allocation of resources to RI high in risk. Meanwhile, in exploitation processes (II) targeting II in the main organization, it is necessary to strictly manage the formulation and execution of rational analytical strategy plans and focus on performance-based indicators. However, there is an internal bias toward certainty and predictable results (Benner and Tushman, 2003). When emphasis is placed on process management (routines that can be systematized), exploitative innovation takes precedence over exploratory innovation (Benner and Tushman, 2003). In other words, as described in the case studies of the six high-tech firms mentioned earlier, corporate systems must skillfully complement exploration and exploitation processes in response to uncertainty and other environmental changes (Kodama, 2003, 2004). 6.3.3  Interaction between the new organization and the main organization

As for “interaction between the new organization and the main organization”, the infrastructure in a new organization is certainly essential, but there has been no clear indication in research to date regarding the extent to which the new organization should be separated from the external influences of the main organization and the external environment. Benner and Tushman (2003) argue that an RIS requires close ties among internal elements, and loose ties to the main organization. On the issue of the importance of interaction between the new organization and the main organization, however, Dougherty (1995) states that interaction between core competencies and core incompetence is necessary for companies to enhance their own transformation capabilities. In addition, Danneels (2002), who validated the reciprocal interactions between product innovation and corporate competencies, indicated not only that DC has an impact on RI but also that the involvement required in RI initiatives also creates new DC. However, if we consider a rationalist approach (Teece et al., 1997; Zollo and Winter, 2002) for developing work routines through customary practices, accumulation, and systematization separately, I previously mentioned the concept of “boundaries vision” as a mechanism by which new capabilities (knowledge) are incorporated into an organization (Kodama, 2011, 2014; Kodama and Shibata, 2016). In addition, based on case studies of the six high-tech companies mentioned earlier, I have also indicated the potential of companies to acquire new capabilities (knowledge) while exploiting and expanding their current capabilities (knowledge). The acquisition of boundaries vision triggers a shift from Domain III and/or Domain IV to Domain I on the capabilities building map in Figure 6.1. According to Cohen and Levinthal (1990), the ability to assess and use external knowledge is largely determined by the level of relevant knowledge previously cultivated. Therefore, it is important for practitioners to increase diversity by demonstrating “boundaries vision”. Furthermore, the interaction between the new organization and the main organization is decisively important, and the interaction of the new organization (which is incorporated into the organization) with the main organization is managed by

134  The strategic innovation system both organizations, and this arrangement is believed to be beneficial in planning the timing of the company’s strategic shift from the main business to the new business (Heller, 1999; Leifer et al., 2000; Sharma, 2000; Kodama, 2003, 2011; Kodama and Shibata, 2014). In addition to listing the three elements described earlier, to prove that RIS and IIS respectively are elements constituting one system, the following four system requirements must be satisfied (Von Bertalanffy, 1968): (1) The system is identifiable, and elements of the system are independent. More­ over, if any one of the elements of the system changes, it has impact on the other elements. (2) The elements must be combined in such a way that the whole which is created is greater than the sum of the parts. (3) To achieve a living, open system, a system must have mechanisms for interacting with the larger environment, which requires self-adjusting and homeostasis. (4) An RIS and IIS must fulfill unique roles within a larger system. Each of the above four elements is independent and interacts closely with other elements and congruence between the respective elements is required. Furthermore, the RIS and IIS, which are higher-level systems are also independent. At the same time, they mutually influence each other, and the existence of congruence (consistency) is also important. To realize the SIS through SIC, all the above three elements and the RIS and IIS which comprise the SIS are necessary and sufficient conditions. If any one of the elements is missing, sustainable SI cannot be achieved. Furthermore, the proposition that “the whole is larger than the total of the parts” in (2) above refers to the way in which a company integrates the RIS and IIS, which are subsystems, to create the SIS which is a (larger) overall system. This aspect is explained in Section 6.4 A strategic innovation system (SIS) as a complex adaptive system (CAS) and Section 6.5 Systems hierarchy and the triad system. 6.4 SIS as a Complex Adaptive System (CAS) and autopoiesis SIS, as a corporate system, corresponds to a total system that integrates RIS (exploratory processes) and IIS (exploitative processes) (i.e., an SIS or corporate system that ensures the sustainable growth of a company). Such an SIS is an enterprise system that guarantees sustainable growth and has the characteristics of a complex adaptive system (CAS) and autopoiesis (see Figure 6.6). Von Bertalanffy (1968) advocated a concept of flow equilibrium where many complex systems aim for disequilibrium rather than equilibrium. A strategic innovation system (SIS), which is a system integrated with a radical innovation system (RIS) and incremental innovation system (IIS) as shown in Figure 6.6, can be considered as an entity that aims for such imbalance in large corporate systems. Flow equilibrium is a management system characterized by a constantly moving equilibrium. With constant positive or negative feedback, the system is oriented in a rapidly changing and highly unpredictable environment.

The strategic innovation system 135 Prior research has shown that to generate creative, innovative, and continuously changeable behavior, there is a need for a system that operates in a state away from equilibrium, in other words, a complex adaptive system (CAS) (Stacey, 1995). However, the key to realizing a flow equilibrium management system in the RIS is the existence of an IIS with management elements paradoxical to the RIS. In other words, creative abrasion and productive friction between the RIS and IIS will achieve a system of flow equilibrium. Furthermore, management models that accommodate this constantly changing CAS system will be elements necessary for the SIS. With such a system, sustainable execution of SI is managed, and the SIS will fulfill its role through positive and negative feedback. On the other hand, a sustainable system is self-regulating and shows characteristics of “autopoiesis” (self-creation). An open system constantly attempts to regenerate itself and to survive by continuously changing its own elements and structure (Bausch, 2002). Certain systems adapt themselves to the environment through singleloop learning. Homeostasis is a self-regulating function that allows living organisms, which are open systems, to maintain themselves in dynamic equilibrium and to vary their variables within the range of a certain tolerance. It is through double-loop learning, however, that a system doubts its own (strategy) goal. When the system diverges from its proper state, change is initiated, and the effectiveness of the system is enhanced. When predefined criteria are not met, the system attempts to adapt to the desired state as quickly as possible. This can be interpreted that the shift from Domain III and/or Domain IV to Domain I through renewal, redeployment, or recombination based on the demonstration of strong DC. Furthermore, the interaction between an SIS as an open system and the environment is important. Open systems theory points to a system with semi-permeable boundaries that avoid disorder through a continuous intake of fluent energy and substances to stay alive (Von Bertalanffy, 1968, 1972). Such a system requires interaction with a larger system into which it can be incorporated. It also requires learning through self-governance, networking, interaction, and feedback loops. The open system shows movement towards order rather than disorder, because it self-regulates in line with the environment in which it is located (Capra, 1996; Felix, 2003; von Bertalanffy, 1968). This book will demonstrate that an open system SIS (as well as RIS and IIS, which are its subsystems), through interaction with the environment, will execute dynamic strategy formation processes of “environment adaptive strategy” and “environment creation strategy” for sustainable growth (Kodama, 2009, 2015) (see Figure 6.6). 6.4.1  A Strategic Innovation System (SIS) as a Complex Adaptive System (CAS)

To realize sustainable strategic innovation, the existence of strategic innovation capabilities (SIC), which cause diverse paradoxical elements of disparate things and phenomena such as exploration and exploitation to bond, integrate and combine either continuously or discontinuously creates capabilities for guiding order and chaos in radical innovation to a special equilibrium through dynamic processes. Furthermore, SIC demonstrates the capability of “emergence” which creates “something from

136  The strategic innovation system nothing” (e.g., Apple created a series of innovative products and services such as the iPod, iPhone, iPad, iTunes music store, AppStore, and iCloud, while Fujifilm created new businesses through synergy effects in technologies based on the integration of technologies). “Emergence” in complex systems theory is a concept whereby important patterns appear completely autonomously within a complex system consisting of many elements that interact with each other and refers to the emergence of certain patterns including unexpected results, organization, and structuring (Bausch, 2002). Emergence is also unrelenting action in a complex system that attempts to form certain patterns through self-organization (Waldrop, 1992). As in the cases of Fujifilm, Qualcomm, TSMC, Xiaomi, Huawei, Zoom Video Communications, the process of “emergent thinking and actions” of practitioners integrates heterogeneous knowledge to achieve new value creation. Viewed from such a perspective, an SIS that creates SIC is closely related to a complex adaptive system (CAS). A CAS is a cohesive body formed from numerous elements where each of the respective elements constantly engages in interactive behavior and, as a result, when viewed as a whole, demonstrates certain unique behaviors greater than the sum of the activity of the individual parts (equivalent to the previously mentioned proposition that the sum is greater than the parts). Moreover, a CAS refers to all phenomena from physics to entire societies, with a large number of parts that strongly interact with each other (Waldrop, 1992). Concepts such as chaos, nonlinearity, the edge of chaos, self-organization, interaction, and emergence are developed in a CAS. Axelrod and Cohen (1999) view the issue in terms of how people should behave in a world where the future is unpredictable as they mutually adapt in the context of a CAS. In addition, they develop the discussion on how entire systems (in other words, organizations) are always in a state of flux due to the mutual interaction of participants who join the group. Waldrop (1992) indicates that CAS refer to all things, from basic substances to entire societies, which have many elements that strongly interact with each other, and that they have the power to steer order and chaos to a particular equilibrium. From the perspective of another interpretation, a CAS is a cohesive body (which has a large number of diverse, heterogeneous elements) and, as a result of the constant interaction of the individual elements with other elements, it can be said that when viewed as a whole, a CAS demonstrates certain unique behaviors that are greater than the sum of the activity of the parts. The complex adaptive systems of living things, and so on, evolve as they move toward the “edge of chaos”, which refers to the boundary between order and disorder, stability and confusion, and they adapt to the environment near the edge of chaos. According to Kauffman (1995), in regard to the edge of chaos, all CAS in the biosphere, from single cells to economic systems, evolve by moving toward a natural state at the boundary between order and chaos or toward a major point of compromise between things with structure and things that are serendipitous. In many cases where living things are concerned, this can be interpreted as the evolution of living things that occurs as they move toward a state where a balance is maintained between chaos and order. The “edge of chaos” means that critical state between order and the absence of order, and this term is used in a metaphorical sense (Gell-Mann, 1994).

The strategic innovation system 137 In other words, in excessively ordered frozen systems, complex actions are not possible. On the other hand, in systems that are too chaotic, controls do not work. In that regard, the system existing at the edge of chaos is said to display complex actions and to be capable of constructing a model that adapts rapidly to the environment. Just as those animals that have evolved by moving toward the edge of chaos have a strong ability to adapt to the environment, it can perhaps be said that leadership based on the thinking and behavior of a “pliant organization” and practitioners with autonomy, flexibility, and creativity are an organization that readily generates corporate and product innovation such as Fujifilm, Qualcomm, TSMC, Xiaomi, Huawei, and Zoom Video Communications mentioned earlier. As in the example cases, companies, organizations, and individuals that practice “improvisation” find an equilibrium at the edge of chaos. In complexity theory terms, “improvisation” is a “dissipative equilibrium”, an unstable edge between two attractors (i.e., structure and chaos) that tend to pull the system away from the edge of chaos toward the rigidity of too much structure or the confusion of too little structure. However, it is important for the system to remain at the edge of chaos, because all systems are capable of self-organizing at the edge of chaos, and adopting active, complex adaptive behavior. In other words, when systems (individuals, organizations, companies, economies, etc.) maintain a balance between a loose structure and a rigid structure (in other words, “the edge of chaos”), they are able to self-organize and adopt consistent, complex adaptive behavior. If there were more structure, then these systems would be too rigid to move. If there were less structure, then they would fly chaotically apart. The CAS as corporate systems (SIS) at Fujifilm, Qualcomm, TSMC, Xiaomi, Huawei, and Zoom Video Communications evolved through the demonstration of SIC as they moved toward the edge of chaos, which refers to the boundary between order and confusion and between stability and chaos, and they adapted to the environment near the rim of the edge of chaos. Companies such as these make it possible to achieve coexistence (without bias) of complex organizational behaviors as RI (existence of chaotic elements under a certain order: a semi-structured system) and II (existence of strong ordered elements: a structured system) (e.g., Kodama, 2003). Furthermore, if they remain at the edge of chaos, the breadth of options available to them will broaden, and they will be able to gain insight into correct strategic options. The demonstration of SIC synthesizes diverse paradoxes and achieves targeted sustainable SI via the most excellent methods. SIS that creates SIC promotes a balance between “creativity and efficiency” in people and organizations as CAS and also acts as a trigger for achieving SI. 6.4.2  A Strategic Innovation System (SIS) as autopoiesis

An open system is a self-regulating, self-organizing system which attempts to regenerate itself and to survive by constantly changing its elements through “autopoiesis” (Maturana and Varela, 1987). As Felix (2003) points out, certain systems learn through “single-loop feedback”. Any change that occurs may either strengthen the long-term survival of the system or render survival impossible. Questions regarding

138  The strategic innovation system system goals arise due to double-loop learning (e.g., Argyris, 1978). If the system deviates from its proper state, a change is initiated and the system attempts to adapt to an environment (actively or passively) or create an environment of a desired state as quickly as possible as shown in Figure 6.6 (Kodama, 2010, 2015). This includes a leap forward (or discontinuity) in the state of the system depending on the degree of change in the environment. On the other hand, Von Bertalanffy (1968) presented a concept of flow equilibrium where many complex systems aimed for disequilibrium rather than equilibrium. For example, the shift from Domains III and/or IV to Domain I on the Capabilities Map marks a shift in the corporate system toward a disequilibrium for creating new innovation, and among corporate systems of large corporations, it can be considered as an entity aiming for such disequilibrium. Characterizing the management system of flow equilibrium is a constantly moving equilibrium. Constant positive or negative feedback determines the direction of the strategy of the corporate system in a rapidly changing and highly unpredictable environment (a shift between domains on the capabilities building map). According to systems theory, corporate systems as open systems are self-regulating and self-organizing systems. Furthermore, an open system attempts to regenerate itself and to survive by constantly changing its elements through “autopoiesis” (Maturana and Varela, 1987). In such recursive processes, a feedback loop is formed for renewal/self-renewal of business ecosystems, and companies like Fujifilm, Qualcomm, TSMC, Xiaomi, Huawei, and Zoom Video Communications mentioned earlier demonstrate SIC as they attempt to renew their capabilities and redesign their strategy-making processes for implementing new radical innovation by shifting from Domain III and/or domain IV to Domain I to Domain II. “Autopoiesis” (Maturana and Varela, 1987) consists of self-maintaining characteristics from the cellular level, self-reference in the neural system, and cognitive functions as an organism. In other words, on one level it characterizes life through cumulative metabolism, and this controls the biological system. At the same time, neural and immune systems have the ability to self-adjust the state of all their own elements. Furthermore, the living body interacts with others as an independent system through recognition. In other words, the basic concept of “autopoiesis” is as follows. In regard to the nervous system as a living system, the basic of life is not explained by the elements or the composite body, its integrity, or the morphological. Rather, autopoiesis is the self-continuation of an entity’s own actions on its own and the formation of the entity’s own being through the continuation of the actions. Niklas Luhmann tried to use autopoiesis, which emerged as a theoretical model of living organisms, to shed light on social systems, and adopted autopoiesis into the structure of his own social systems theory (Luhmann,1990, 1995a, 1995b). According to Luhmann, a social system is an autopoietic system that continuously generates communication from communication, and communication is the ultimate element that cannot be broken down further in the social system, and it is there that various events are treated as problems. Communication is an element that lasts for only a short time. Communication disappears the moment it appears and must be replaced

The strategic innovation system 139 by corresponding subsequent communication. Therefore, constant, uninterrupted reproduction of new communication creates the sustainability of the social system. From the viewpoint of autopoiesis and Luhmann’s social system, one of the characteristics of a corporate system for generating sustainable strategic innovation (SIS) is also a recursive process as noted earlier. Such a recursive process is just the transformation of a corporate system in equilibrium for the creation of new radical innovation. In “autopoiesis”, instantaneous “events” (e.g., communication and organizational activities such as collaboration in corporate activities) are elements of the system. For the system to exist, elements must be constantly produced. Through element formation and element chains, system boundaries are established (i.e., each domain on the Capabilities Map corresponds to particular capabilities elements), and the elements of each domain are configured on the basis of that system. Recursive shifts between the domains on a capabilities building map such as this is just “autopoiesis”. At Fujifilm, Qualcomm, TSMC, Xiaomi, Huawei, and Zoom Video Communications mentioned earlier, a feedback loop of capabilities was formed at the respective companies for their own renewal or self-renewal, and new radical innovation was realized through the act of integrating diverse knowledge assets (or knowledge transformation) for the shifts from Domain III and/or Domain IV to Domain I to Domain II. This is “autopoiesis”. The strategic innovation loop through strategic innovation capabilities itself can also be called “autopoiesis”. The very act of demonstrating strategic innovation capabilities through such a dynamic process can be said to be “autopoiesis”. 6.5 System hierarchy and the triad system model Simon (2019) argued that systems can be approximately broken down into subsystems with stronger interaction among internal elements based on the degree of strength between the elements within the system and that those respective subsystems could also be broken down into subsystems with stronger interaction among internal elements based on the degree of strength of the interaction. Therefore, the SIS discussed thus far can be approximately broken down into RIS and IIS, which are subsystems with strong interaction among internal elements. Furthermore, RIS and IIS can be broken down into the three subsystems mentioned earlier. However, the hierarchy of the systems based on their approximate degradability is static at the time-space level, and dynamic elements are lacking. In other words, it is not possible to explain dynamic SI (and SIC), which are corporate systems that continuously generate SI only in a system hierarchy based on approximate degradability. A dynamic SIS achieves RI and II while absorbing, integrating, and reconstructing diverse knowledge inside and outside the corporate system through dynamic interaction with the environment as an open system. I propose a new, higher dynamic system that mutually links the respective elements of (1) an identifiable organizational structure, (3) interaction between the new organization and the main organization, and drives (2) exploration and exploitation processes. This higher system is positioned higher than the RIS and SIS and has the

140  The strategic innovation system function of generating SIS (see Figure 6.7). Such a higher system is constructed and reconstructed in a dynamic time-space in response to environmental changes, and influences the RIS and IIS, which are lower systems, while the SIS which is its own higher system. In reality, as mentioned earlier in the case studies of the six high-tech companies, exploration SC, exploitation SC, and synthesis SC are dynamically generated and reconstructed over time in the corporate activity process, giving rise to Triad SC systems (“triad systems”). Nakajima (2004) points out the diachronic hierarchy existence in dynamically evolving life forms. Such triad systems are systems positioned in a diachronic hierarchy. 6.5.1  Triad system that integrates RIS and IIS

Based on multiple previous case studies of the author and collaborators, a characteristic of organizations that create SIC as strategic innovation systems (SIS) is the synthesis of the existing line organizations (traditional organizations) responsible for exploitation as the development of existing business and flexible “project organizations” (e.g., Kodama, 2007c) responsible for exploration as the realization of technological development and new business development (see Figure 6.7). The project organization, operating within and outside the organization, demonstrates mainly DC and exclusively takes charge of R&D, service planning and new business

Figure 6.7 Position and characteristics of a triad system

The strategic innovation system 141 development operations, and demonstrates existing OC which the line organization in the corporation has for other related operations. In an uncertain environment, the project organization inspires and creates new knowledge based on creativity and imagination for RI, develops new technologies, and generates concepts for new business models (new products, new services, new business frameworks, etc.) through trial and error. This triggers a shift from Domain III and/or Domain IV to Domain I on the capabilities building map in Figure 6.1. There, the project organization forms multiple multi-layered strategic communities (SC) (e.g., Kodama, 2004, 2005, 2007a, 2007b, 2009) with strategic business partners outside the company based on the formation of Ba (Kodama, 2005), and they mainly promote RI through the practice of emergent strategy and entrepreneur strategy by bringing in and integrating (converging) internal and external knowledge in a high-risk environment. Individual projects within the project organization assume autonomous, decentralized behavior as a networked organization (Kodama, 2003). However, business activities are constantly monitored by the leaders of the organization, and the direction and goals of the project as a whole project organization are regulated. In this kind of project organization, through the demonstration of collaborative DC (called “collaborative dynamic capabilities”) (Kodama, 2018b) with partners outside the corporation, concepts, and prototypes for new products and new services are generated in succession and are commercialized (i.e., there is a shift from Domain I to II to III) after several incubations. The project organization inspires new knowledge through the formation of “project networks (exploration SC)” with different industries for RI and implements strategies that lead to the creation of new knowledge in the form of new markets that had not previously existed before (Kodama and Shibata, 2016). However, business processes for launching, promoting, and expanding these new products and new services in the market efficiently and in a timely manner are important. The line organization, as the core organization, is responsible for these business processes. The line organization introduces new products and services whose marketability has been confirmed by the project organization through the processes of concept-making, marketing, element and application development, prototype development, incubation and commercialization (Domain I to Domain II to Domain III) in Domain III in a timely manner and promotes the penetration and establishment of new markets in a spiral-like manner. Underpinned by knowledge assets accumulated for many years, the line organization, as a bureaucratic organization, promotes II through reform and improvement practices based on the formation of “line networks (exploitation SC)”, which are multi-layered SC networks, with group companies and strategic partner companies including cooperating companies. The line organization adopts deliberate, orchestrated, and systematic strategic planning based on strategic discipline, but through the demonstration of collaborative OC (called “collaborative ordinary capabilities”) with outside partners (Kodama, 2018b), daily routine activities for improving the efficiency of business processes of existing business and further incremental reforms and improvement of these processes take place on a daily basis in Domains III and

142  The strategic innovation system IV. Such practices in a line network require thorough productivity and efficiency. Furthermore, these practices promptly, efficiently, and with certainty introduce into the market, promote the penetration of and expand the results of innovative new product and service concepts created by the project organization. This is also a demonstration of the linkage between “exploration SC” and “exploitation SC” (signifying a shift from exploration to exploitation). These two disparate organizations, that is, the “project organization” versus the “line organization” and their multi-layered SC networks, in other words, the “project network” (exploration SC) versus the “line network” (exploitation SC) are roughly divided into an organization with practices for creativity and autonomy and an organization with practices for efficiency and control, and a tug-of-war of paradoxes constantly arises due to conflicts between these organizations with contradictory elements (e.g., Schad et al., 2016). Such elements are factors obstructing the synthesis of knowledge of practitioners in the respective organizations. This is because, as explained in the three subsystems ((1) an identifiable organizational structure, (2) exploration and exploitation processes, and (3) interaction between new organizations and main organizations), the main organization, the line organization, and the new organization, the project organization, have many different points, including essential skills and capacity development, management and decision-making mechanisms at the management level, and appropriate performance metrics. However, creative abrasion (Leonard-Barton, 1995) and productive friction (Hagel and Brown, 2005) through “dialectical dialogue” (Kodama, 2004) enable the sublation of contradictions. Promoting this synthesis are the “leader teams” which are the “synthesis SC” (see Figure 6.6). A leader team consists of executives (president, executive officers, division managers), senior managers (e.g., department managers, general managers charged with various responsibilities), managers (e.g., managers, section heads), and staff of each management level (top management level, middle management level, staff level, mixed management teams, informal cross-functional teams and task forces, etc. of the project organization and the line organization). For example, at NTT DOCOMO, through various leader teams formed from leaders of each organization and each business area including R&D, marketing, service planning development, sales, technologies, equipment, after support and maintenance services, etc., discussions take place between the project organization and the line organization regarding emergent strategies and entrepreneur strategies as well as services to accommodate these strategies, and decisions are made on the strategies, tactics, mechanisms, and resources to be mobilized and their timing. Through these leader teams, leaders engage in thorough dialectical dialogue and creative dialogue to select strategies and tactics that might truly have the potential to develop into radical innovation, and they put these into actual practice through holistic leadership (Kodama, 2017). Huawei’s investment review committee and integrated portfolio management team described in the case studies serve as such leader teams. Leader teams play a role in further strengthening the characteristics of crossfunctional or inter-company integration, which exploration SC and exploitation SC possess, and in improving the performance of R&D and new business development.

The strategic innovation system 143 To that end, each leader within a leader team is required to have elements of holistic leadership. The synergy of holistic leadership through collaboration among leaders at each management level including the president and senior management promotes dialectical dialogue as well as a precise planned strategy for carefully selected emergent and entrepreneur strategies and realizes the synthesis of knowledge and strategies through the construction of multi-layered SC networks. Such multi-layered SC networks form “triad systems” of exploration SC, exploitation SC, and synthesis SC (see Figure 6.7). 6.5.2  Ba triad model

The existence of such a triad model of multi-layered SC networks is rooted in the existence of a “Ba triad model”, which will be discussed next. Nonaka et al. (2014) point to the existence of a “Ba triad model” in excellent companies and organizations based on case studies of Toyota, Fujifilm, and Apple. For example, the case of the new product development of Toyota’s Prius required the dynamic synthesis of exploration and exploitation. In this case, exploration was RI requiring the convergence of diverse technologies, and II was exploitation to improve and refine the new product continually. To do this, various project teams and existing line organizations of Toyota formed vertical and horizontal multi-layered Ba networks within and outside the organizations to simultaneously pursue knowledge creation and exploitation. A point worth noting in such cases is the Ba promoting exploration activities (called “exploration Ba”) for the creation of knowledge for RI is charged with the processes of sharing tacit knowledge and creating explicit knowledge. On the other hand, Ba promoting exploitation activities (called “exploitation Ba”) for achieving commercialization and the efficiency in knowledge through ongoing refinements and improvements is charged with the processes for unifying explicit knowledge and internalizing it through the experience of individuals. In other words, exploration Ba have a strong tendency to be rooted in tacit knowledge while exploitation Ba have a strong tendency to be rooted in explicit knowledge. However, tacit knowledge and explicit knowledge are contiguous, and both are synthesized in a spiral-like manner through practical knowledge phronesis, which is a third form of knowledge (SECI process). What promotes this spiral-like process and at the same time achieves knowledge creation and accumulation is the “synthesis Ba”. On the other hand, Teece (2014) mentions that DC actually reinforce “phronetic leadership” (Nonaka and Toyama, 2007) but, conversely, the element that becomes the source of “holistic leadership”, which simultaneously manages different strategy and organization characteristics for the simultaneous pursuit of exploration and exploitation is the existence of “phronesis (practical wisdom)” (Kodama, 2017) (see Figure 6.8). Furthermore, there exists a “Ba triad model” that mutually links synthesis Ba that achieve the dynamic synthesis of exploration Ba and exploitation Ba. Such a Ba triad model creates an SC triad model, which consists of multi-layered SC networks

144  The strategic innovation system

Figure 6.8 Relationship of a Ba triad and a triad system Source: Created by the author, citing Nonaka et al. (2014)

with characteristics of Ba. Therefore, a triad system based on a Ba triad model also becomes a framework to achieve SI (see Figure 6.8). At the same time, this SC triad system resembles an ambidextrous organization as described by Tushman and O’Reilley (Tushman and O’Reilly, 1997; O’Reilly and Tushman, 2004) and provides a new viewpoint. Tushman and O’Reilley argue that an ambidextrous organization should clearly establish strategic goals in both the new business development organization and existing business development organization and restrict interaction between these organizations at a practical level as much as possible. They also argue that senior managers should control both organizations. On the other hand, in the triad system model, synthesis SC centered on leader teams promote close interaction and collaboration between exploration SC consisting of project networks aimed at pursuing new R&D and creating new business development, and exploitation SC consisting of line networks in pursuit of ongoing improvement and refinement of commercialized products and services. Practitioners at each management level (top management, middle management and staff) facilitate the shift between domains and combine exploration and exploitation through a triad system model. This viewpoint makes a new contribution to the theoretical framework of the ambidextrous organization. The leader teams play a role in creating strategic innovation capabilities (SIC) as a corporate system by synthesizing knowledge in the project networks and line networks of the organization. To demonstrate SIC, it is important for leader teams to

The strategic innovation system 145 balance strategic methods that are creative and at the same time systematic, methods which, at a glance, are contradictory, and to synthesize these. For the leader team, building a triad system that will balance the innovation processes of II and RI is the key to achieving success in this task. To realize the SIS as a complex adaptive system (CAS) as mentioned in Section 6.3, the key point is the presence of a triad system that will allow for various contradictions arising between the RIS and IIS and will create SIC as a corporate system. Furthermore, the presence of such a triad system also leads to a proposition where “the whole is larger than the sum of parts”. 6.6 Conclusion and future research issues This chapter identifies the subsystems that comprise the strategic innovation system (SIS), a corporate system for sustainable strategic innovation in companies, and the interactions among its subsystems. As a corporate system that guarantees sustainable growth of companies, an SIS has the characteristics of a complex adaptive system (CAS) and autopoiesis. This chapter clarified that to realize SIS as CAS and autopoiesis, a triad system is important to reconcile the various contradictions that arise between radical innovation systems (RIS) and incremental innovation systems (IIS), which are subsystems of an SIS, and to create strategic innovation capabilities (SIC) as a corporate system. Many large corporations are not always successful at demonstrating SIC and achieving sustainable SI. One reason for the difficulty in achieving SI is the lack of understanding even at the practical level that the processes of RI and II as well as DC and SIC are complex systems comprised of independent elements. Therefore, from an academic research perspective, an approach for deepening a company’s understanding of methods for systematically incorporating SIC internally, that is the concept of holistic strategic management, is essential. Therefore, analyzing complex SI through a systems theory lens is of enormous importance to the researcher. Notes 1 It is clear that the resource-based view expands not only to the organizational assets but also to the organizational capabilities (Henderson and Cockburn, 1994). “Resources” refers to tangible or intangible assets or inputs into production that an organization possesses, controls, or accesses semi-permanently. On the other hand, “organizational capabilities” means the ability of an organization to perform a coordinated set of tasks utilizing its own resources to achieve a specific final outcome (Helfat and Peteraf, 2003). 2 Operational capabilities are capabilities that enable a company to make a living in the present (Winter, 2003). With its operational capabilities, a company can continue to work to provide existing products and services to the same customer group, using more or less the same technologies on the same scale. In the sense that these capabilities maintain the status quo, they are also referred to as “ordinary” capabilities. 3 For example, TAC film, which is used as a support medium in the area of photography, and PET film are currently being used in various fields such as functional film, protective film for LCDs, and transparent electroconductive film. Furthermore, emulsifying nano dispersion technology is applied to technologies for the nano dispersion in water of materials used in cosmetics that do not dissolve in water.

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7 The asset orchestration process based on the boundaries-based view (BBV) and the attention-based view (ABV) – A longitudinal study of the mobile communications industry

7.1 Exploring the core elements of dynamic capabilities – from the boundaries-based view (BBV) and the attention-based view (ABV) Based on evolutionary and behavioral traditions in strategy research, capabilities are considered to be routines, which are stable patterns of collective behavior learned in the course of business operations by companies (Helfat and Peteraf, 2009; Nelson and Winter, 1982; Zollo and Winter, 2002). Routines are structured hierarchically. Higher-level routines are dynamic capabilities that enable organizational modification of ordinary capabilities, which are lower-level routines (Helfat and Winter, 2011; Winter, 2003; Zollo and Winter, 2002). The high-level routines here are often informal processes (Kodama, 2018), as discussed later. The asset orchestration function (Teece, 2007), a core of dynamic capabilities as high-level routines, is reinforced by the organizational processes of (1) coordination/ integration, (2) learning, and (3) reconfiguration (Teece et al., 1997). Coordination and integration routines link different types of knowledge in an entrepreneurial manner for the purpose of developing new products, for example. Learning is an outcome of practice and experimentation and enables more efficient task performance. Reconfiguration or transforming is associated with recombining or modifying existing knowledge. Asset orchestration through dynamic capabilities is more of a creation, difficult to imitate, and generally impossible to buy (Teece, 2014). Teece (2014) describes three main clusters of dynamic capabilities (subsystems: sensing, seizing, transforming), and points out that asset orchestration is the most relevant supporter of seizing and transforming. This chapter explores the mechanisms by which asset orchestration, a core element of dynamic capabilities, is created and how dynamic capabilities can change existing ordinary capabilities (and even existing dynamic capabilities), and drive the asset orchestration process. This chapter presents the process of generating dynamic capabilities that realize corporate strategy (including product strategy) from an integrated framework of the boundaries-based view (BBV) and attention-based view (ABV). In addition, the chapter discusses and analyzes a longitudinal study of the mobile communication industry in Japan from an integrated framework of the boundaries-based view (BBV) and attention-based view (ABV). DOI: 10.4324/9781003305057-7

150  Asset orchestration based on BBV and ABV 7.2 Asset orchestration by forming strategic communities through pragmatic boundaries synchronization – boundaries-based view (BBV) Business practitioners recognize a wide range of organizational boundaries in their daily business activities. Carlile (2004) characterized knowledge on boundaries in three ways, as difference, dependency, and novelty (Carlile and Rebentisch, 2003), and asserted that the correlating characteristics of these three kinds of knowledge can be expressed as an image of boundaries as vectors between two or more actors. Generally, the characteristics of these boundaries consist of three layers (Shannon and Weaver, 1949; Jantsch, 1980; Carlile, 2002, 2004) (see Figure 7.1). In the first layer, syntactic or information-processing boundaries exist on which information and knowledge is transferred exactly between actors. Specifically, this entails routines as predetermined business processes or commercializing products through established development and production methods. On syntactic boundaries within corporations, the objectives are efficient production and business processes in which importance is placed on procedures and internally determined rules that follow business and management manuals, etc. On the boundaries in the second layer (semantic and interpretive boundaries), actors engage in activities to generate new meanings, and interpret (translate) new

Figure 7.1 Strategy realization and interaction between dynamic capabilities (DC) and ordinary capabilities (OC) (Notes) Created by the author, citing Schulze and Brusoni (2022), Ocasio and Joseph (2018), Kodama (2018), and Carlile (2004).

Asset orchestration based on BBV and ABV 151 knowledge. Specifically, this entails activities along these semantic boundaries to incrementally continue to upgrade and improve existing business processes, or development and production methods. On semantic boundaries within companies, importance is also placed on rules and company procedures of the syntactic boundaries, but these boundaries are also used to promote best company practice, business improvements and upgrades such as TQM and chains of organizational learning. The formation of “communities of practice (CoP)” (Wenger, 1998) within organizations on such semantic boundaries and the aforementioned syntactic boundaries promote learning activities. In the third layer of pragmatic and political boundaries, actors deal with new issues and objectives that have never existed, and work through conflict and friction among themselves, and even political power in their activities to transform existing knowledge. On pragmatic boundaries, various issues and challenges arise, and for actors, the challenge is to resolve these issues and create new assets. This requires more practical creative abrasion (Leonard-Barton, 1992), productive friction (Hagel and Brown, 2005), and negotiating practice (Brown and Duguid, 2001) for the actors on the boundaries. These boundaries correspond to the specific achievement of completely new and unheard-of business concepts (new product and service developments to achieve new business models, new technical architecture or component developments, and new development and production methods). New knowledge, which is the source of innovation, is generated by actors from the formation of “Strategic Communities (SC)” with such pragmatic boundary characteristics (Kodama, 2007a). SC with pragmatic boundary characteristics formed by actors are sources of innovation, which as a result also leads to dynamic capabilities (and collaborative dynamic capabilities among companies: C-DC (Kodama, 2018)) of self-organizing entities (companies) to bring about sustainable competitiveness. However, the boundaries in these three layers are interdependent, and their characteristics change dramatically with changes in the environment (customer needs, competition, etc.) and the thoughts and interests of actors (syntactic boundary  semantic boundary  pragmatic boundary  syntactic boundary  semantic boundary ). In achieving innovation or corporate reform in particular, the boundaries among actors shift toward the pragmatic (syntactic boundary  semantic boundary  pragmatic boundary) when there are strong changes in circumstances or movements in the intentions of actors. The vector of the syntactic boundary  semantic boundary  pragmatic boundary shift begins with the existing knowledge of deference and dependency among actors, and as novelty increases, the level of deference and dependency expands, and hence the amount of effort required to manage this increasing complexity and boundaries also grows. Existing knowledge of related deference and dependency have positive effects on the practical use of common knowledge (or mutual knowledge) (Cramton, 2001) and have advantages for knowledge path dependency (Carlile, 2004). However, on pragmatic boundaries in particular, there are many cases where the common knowledge of the past cannot express the novelty being currently faced, (Carlile and Rebentisch, 2003), and as novelty increases, knowledge path dependency conversely has negative effects (Hargadon and Sutton, 1997).

152  Asset orchestration based on BBV and ABV In Figure 7.1, there are clearly defined lines between the types of boundaries; however, it is not easy for involved actors (main player and partners) to consciously (or unconsciously) distinguish where one line finishes and another starts in their actual practice. As well as that, the purpose of the hierarchical Figure 7.1 is to express that actors’ abilities on even more complex boundaries (e.g., pragmatic boundaries) with expanding complexity (expanding novelty) require abilities on their subordinate boundaries (e.g., semantic and syntactic boundaries). For example, on pragmatic boundaries, this means the existence of common language and common meaning is necessary to transform knowledge effectively. Carlile (2004) states that multiple iterations are required between the three types of boundaries. It’s impossible to achieve results in one go on pragmatic boundaries. In other words, actors must engage in repeated processes of mutual sharing of knowledge, evaluation, forming of new agreements, and making changes where required. Thus, as actors engage in these repetition stages, it becomes easier to (skillfully) recognize important deference and dependency on boundaries, and reach integrated understanding and methods with more suitable common language, common meanings, and advantages and disadvantages of the problems and issues being faced. This ability to engage in repetition gives actors the ability to transform the characteristics of path-dependent knowledge. Problematic scenarios often found in corporations occur due to the use of pathdependent knowledge (or common knowledge) by administrators in positions of power that constrains new knowledge of other managers expressing the novelty that they are facing. Such mismatches on boundaries result from managers with power putting themselves in even more powerful positions to demonstrate the unique knowledge of the fields in which they are involved. For example, often these cases entail only actors creating conditions only for practical processes, boundaries transfer, and syntactic processes, despite the fact that conditions for pragmatic and semantic boundaries are essentially necessary. These scenarios include, for example, disruptive innovation (Christensen, 1997), in which exists the most dangerous strategic condition, and one which actors fail to notice. As actors fail to recognize and resolve disruptive innovation, the novelty of it reaches criticality with the passing of time. Expanding the communications theories of Shannon and Weaver (1949) to organizational theories, Carlile’s (2004) 3T (Transfer  Translate  Transform) model was reported as an analytical framework in case studies of product innovation or corporate reform, etc. done in the past. For example, existing research reports the Matsushita Electronics (Panasonic) corporate reform model (Kodama, 2007d), new product development between corporations (Kodama, 2007e), knowledge sharing processes between customers and suppliers in product development (Le Dain and Merminod, 2014), and project management among stakeholders (Van Offenbeek and Vos, 2016). As an organizational framework for promoting service development between companies and the building of ecosystems, this chapter uses Carlile’s (2004) 3T model, analyzes capabilities on diverse knowledge boundaries between stakeholders, and presents the new concept of boundary synchronization. One of the main characteristics of the dynamic capabilities proposed in this chapter is that boundaries within or between organizations (or between practitioners

Asset orchestration based on BBV and ABV 153 from a micro perspective) change according to the characteristics of business and environmental conditions, and the form and characteristics of informal organizations change accordingly. As a new perspective, on pragmatic boundaries, practitioners demonstrate the dynamic capability characteristics of “sensing (identification, development, co-development, and assessment of technological opportunities in relationship to customer needs)” and “seizing (mobilization of resources to address needs and opportunities, and to capture value from doing so)”, and intentionally form informal organizations (informal networks) called “strategic communities (SC)” (Kodama, 2005). Through such SC-driven strategic non-routine activities, practitioners proactively demonstrate their dynamic capabilities (DC) centered on the asset orchestration process through seizing and transformation (reconfiguration and continued renewal) (see Figure 7.1). However, on semantic and syntactic boundaries, formal organizations defined mainly by top management of companies and those in charge of organizations, as well as “communities of practice (CoP)” (Wenger, 1998) formed consciously (or unconsciously) by practitioners, proactively exert their ordinary capabilities (OC) to maintain and strengthen routine activities. While CoP are informal organizations, their purpose is mainly to reinforce routines through best practices. Accordingly, dependent on the building abilities or characteristics of the SC that practitioners intentionally form, DC are not processes that lead to infinite regression towards higher-order capabilities mainly based on routines, as argued by Collis (1994). Additionally, it’s possible to clearly distinguish DC and OC from the dynamic differences in the characteristics of organizational boundaries involving informal strategic non-routines and formal routines. From the above perspectives, new knowledge born on the various organizational boundaries that exist within and outside companies is a wellspring of organizational capabilities (Leonard-Barton, 1995). The source of innovation is orchestration of new assets arising on various pragmatic boundaries within and outside companies that include customers and partners (in other words, synchronizing (converging) pragmatic boundaries inside and outside of companies and orchestrating distributed assets), which in turn leads to dynamic capabilities (DC) that generate sustainable competitiveness. This requires synchronization (convergence) of activities among actors on pragmatic boundaries. 7.3 Asset orchestration process by forming strategic communities among actors As the concept discussing SC characteristics, network theories (e.g., Motter, 2004; Watts, 2003; Barabási, 2002) present the new perspective, which is a mechanism to dynamically integrate (orchestrate) knowledge (assets) dispersed both inside and outside of companies. According to research done to date, networks linking people, groups, and organizations are important platforms for facilitating information and knowledge-based activities, in that the formation of organizations and networks has a major impact on the dissemination of knowledge and information (e.g., OwenSmith and Powell, 2004; Lin and Kulatilaka, 2006). It’s essential that companies form

154  Asset orchestration based on BBV and ABV networks to acquire sustainable dynamic capabilities (e.g., Kodama, 2007d), and dynamically reconfigure these networks to respond to changes in circumstances and strategic activities (e.g., Kodama, 2006). Network theories of nodes (e.g., individuals, groups of people, organizations of groups), network ties or several network topologies (e.g., small world structures, scale-free structures) provide important knowledge and insight into practitioner behavior that transcends companies and the relationships between practitioners. As well as that, the thoughts and actions surrounding the formation of human networks by practitioners are the management drivers (efficiency, creativity, resources, values, dialectics) (Kodama, 2009b), and are important triggers for executing the asset orchestration process. Network formations are generally classed as centralized or decentralized (Albert and Barabási, 2000; Ahuja and Carley, 1999). Centralized networks are best adopted for vertical interaction and efficient execution, and routine information and knowledge flows (e.g., information and knowledge sent from central nodes to peripheral nodes) (e.g., Albert and Barabási, 2000; Tushman, 1979). In contrast, decentralized networks are generally applied in uncertain conditions or when there are new challenges to be directly faced (e.g., smaller hubs) (e.g., Watts, 2003). Tight clustering and autonomy of workgroups is crucial to decentralized network formations. This structural design enhances information and knowledge exchange and interaction at the work group level and can effectively facilitate mutual coordination and adjustments among peripheral local nodes (Tushman, 1979). Furthermore, such local cluster coordination and collaboration reduces the information processing load assigned to the central node, as peripheral nodes do not need to communicate directly with the central authority whenever a decision-making situation arises. A “small-world network”, in which a high degree of local clustering and only a small number of links between any two nodes exist, was found to enhance mutual dependence among cluster nodes and facilitate communications and coordination and collaboration among actors, especially when tight collaboration is necessary for connecting value chains in-between the organization (e.g., Newman, 2004). The availability of such short paths for “bridging” nodes enhances coordination and collaboration of the network, particularly when interacting in-between organizations (e.g., Watts, 2003; Baum et al., 2004). Moreover, such network properties are effective when creating new ideas and innovation in complex and heterogeneous organizations (e.g., Braha and Bar-Yam, 2004). Moreover, small world networks provide organizations with robust network formations that can deal with sudden environmental changes such as concentrated information traffic, excessive overloads, bottlenecks or unexpected accidents, or environmental destruction (Newman, 2004; Shah, 2000). Furthermore, strategic communities (SC), different from the concept of a community of practice (CoP) (e.g., Wenger, 1998), is a form of cross-functionality by practitioners between different organizations and companies. An SC itself is a “small-world structure” (see Figure 10.2). Viewed from the perspective of social network theory, SC can be considered as clusters or cliques where people, the smallest

Asset orchestration based on BBV and ABV 155 nodes, come together (e.g., Roethlisberger and Dickson, 1939; Roethlisberger, 1977). While cliques are collectives of closely linked practitioners who interchange and share information, knowledge, and context, in SC, information is not simply exchanged among actor groups, but rather in collectives (teams and projects), and new contexts and knowledge are generated dynamically in response to environmental changes. The many specialized practitioners in an SC are a group of people that achieve innovation by discovering and solving problems on the pragmatic boundaries they face, and executing creative strategies, and are formed as the aforementioned “smallworld networks”. As discussed previously, the demonstration of DC requires synchronization (convergence) of the pragmatic boundaries between stakeholders. In other words, synchronization of pragmatic boundaries among stakeholders brings about synchronization of the DC of the players and hence brings about dynamic capabilities (see Figure 7.2). Small-world networks are characterized by short connections between nodes (the smallest node is a person) and local clustering. For example, as nodes, the short path between practitioners belonging to dissimilar organizations enables access to practitioners within the company, belonging to other companies, and customers. Furthermore, each node in a small world network is embedded in the local cluster. Hence, local clustering has the potential to foster reliable accessibility (White and Houseman, 2002). A small-world network can be formed either by randomly

Figure 7.2 Asset orchestration by forming strategic communities between actors

156  Asset orchestration based on BBV and ABV rewiring a portion of an existing regular network or by attaching each new node to a “neighborhood” that already exists (Watts and Strogatz, 1998). Furthermore, these are examples of two-mode networks (bipartite networks) and affiliation networks (e.g., Wasserman and Faust, 1994; Faust, 1997; Watts, 2003) in social network theories, as shown in Figure 7.2 (Kodama, 2005, 2009a). I place particular focus on dynamically changing SC and network SC, whose network forms have been called “group interlocked networks” by Watts, 2003. Watts (2003) said actors have a relationship with a particular context, whereas in the real world of business, actors (practitioners) form groups subjectively in particular contexts, in which they incorporate other actors (practitioners) at the same time (in other words linking actors together). Accordingly, as a group, the SC changes dynamically in response to context, and at the same time as the networked form, networked SC are dynamically formed and changed. Practitioners dynamically reconfigure SC as part of their daily activities, and multiple practitioners participate in multiple SC to share contexts, knowledge (assets) and information, and practitioners who also participate in other SC transfer contexts, knowledge (assets) and information and share and transform it with those practitioners. Through this process, networked SC are formed as the aforementioned group interlock networks. SC can be seen as nodes and hubs in the framework of this group-interlocked network. Practitioners who belong to hub or node SC inside or outside of companies create networks among the SC (or link them together) by dynamically bridging multiple and different SC. In this way, multiple SC are integrated as networks, and new contexts and knowledge (assets) are orchestrated. To develop new products or configure new business processes, practitioners consciously network multiple SC between various organizations through pragmatic boundaries synchronization both inside and outside of companies to make deep connections between the SC inside and outside of their companies. This mechanism is the essence of the asset orchestration process (see Figure 7.2). 7.4 The attention-based view (ABV) – attentional control (engagement) and problem-solving to achieve synchronized pragmatic boundaries As mentioned earlier, the core element of dynamic capabilities is the orchestration of new assets arising on various pragmatic boundaries inside and outside of companies (in other words, synchronization of pragmatic boundaries inside and outside of companies to orchestrate assets) to become a source of innovation. Various issues and challenges arise on pragmatic boundaries, and actors need to take up the challenge of resolving these issues and creating new assets. In such cases, it is important to bring about synchronization (convergence) of thoughts and activities among actors on pragmatic boundaries. To maintain thinking and activities among actors on pragmatic boundaries in novel and uncertain environments, individual actors are forced to pay attention to and show willpower toward the challenges and problems they face. This is because actors’ existing knowledge and experience cannot be easily applied on pragmatic

Asset orchestration based on BBV and ABV 157 boundaries. As Schulze and Brusoni (2022) mention, keeping actors’ attention focused on corporate and organizational change for long periods of time is stressful for both individuals (e.g., Laureiro-Martinez, 2014) and organizations (e.g., Ocasio, 1997, 2011). According to Ocasio (1997), the attention process is a structural cognitive process – processes of selecting answers or resolution of issues such as problems and challenges on which an organization should focus. Attentional Control (Engagement) promotes the creation of new meaning in response to specific stimuli (e.g., strategic goals), such as problem-solving or planning, and the intentional and sustained allocation of cognitive resources to facilitate decision-making (Ocasio, 2011). In such processes, corporate (organizational) actors can focus their time, energy, and efforts toward solving problems that correspond to strategic goals and driving organizational processes toward achieving those goals ([A] in Figure 7.1). Attentional engagement is based on two distinct but connected and complementary processes: executive attention and attentional vigilance (or sustained attention) (Ocasio, 2011). Executive attention enables a person to switch attention from one stimulus to another, whereas attentional vigilance enables a person to remain attentive to something over a longer period. Without either of these two forces, effective decision-making in an organization is impossible (Ocasio, 2011). Executive attention processes enable organizational actors to switch their attention from operational tasks with ordinary capabilities to adaptive tasks with dynamic capabilities. The attentional vigilance process is thought to help actors keep their attention focused on processes of change for extended periods of time while exercising their ordinary capabilities on a daily basis (Schulze and Brusoni, 2022). Building on these observations of Ocasio (2011), Schulze and Brusoni (2022) point out that this process may explain what firms can achieve by maintaining attentional vigilance and why some firms are better than others at switching gears in response to environmental changes at various speeds through behavioral changes enabled by executive attention (see Figure 7.1). In other words, attentional control (engagement) as a control mechanism can be interpreted as a management technique (tool) that enables companies (organizations) and even actors to direct attention over long periods (Ocasio and Wohlgezogen, 2010). Schulze and Brusoni (2022) utilized the attention-based view (ABV) of firms for the purpose of exploring how dynamic capabilities change ordinary capabilities (Ocasio, 1997). Their study is significant because there is little explanation in the past literature on how dynamic capabilities modify ordinary capabilities. The model presented by Schulze and Brusoni (2022) showed by induction from an empirical example that the structured interaction of two elements, attention control and problem-solving, enables dynamic capabilities to reconfigure resources and thus change ordinary capabilities. The problem-solving process of framing problems and solving problems in Figure 7.1 involves accurately describing the problem, setting the direction for reconfiguring and reorganizing assets (resources) with the goal of finding a meaningful solution. Such a process would affect existing ordinary capabilities (and even existing dynamic capabilities). The work of Schulze and Brusoni (2022) contributes to our

158  Asset orchestration based on BBV and ABV understanding of the micro-processes by which dynamic capabilities modify ordinary capabilities. Based on the findings of Schulze and Brusoni (2022), I propose a new theoretical process model that combines the attention-based view (ABV) of attention control and problem-solving with the boundaries-based view (BBV) described earlier to realize synchronization (convergence) on pragmatic boundaries (Figure 7.3 shows the relationship between the main elements of the BBV and the ABV). In this theoretical model, the structured interaction between the two elements of attention control and problem-solving proposed by Schulze and Brusoni (2022) shifts the characteristics of boundaries between actors (semantic boundaries  pragmatic boundaries) and synchronizes (converges) actors toward pragmatic boundaries. As mentioned earlier, in environments with synthetic boundaries (an information processing model) and semantic boundaries (an organizational learning model), there is no need for significant conversion of previously accumulated knowledge (or assets), such as the appropriation and utilization of existing knowledge or its improvement and refinement. Therefore, companies (organizations) should perform normal routines, which are ordinary capabilities. However, faced with uncertainty and novelty in the business environment, companies (organizations) need to synchronize (converge) the characteristics of boundaries between actors into pragmatic boundaries, and actors need to work on solving current issues and problems. This organizational process generates actors’ dynamic capabilities and triggers

Figure 7.3 The attention-based view and boundaries-based view in dynamic capabilities (DC)

Asset orchestration based on BBV and ABV 159 transformation (restructure, reorganize, etc.) of knowledge (or assets) that are existing ordinary capabilities (as well as existing dynamic capabilities) (see Figure 7.3). The structured interaction of the two elements, attention control and problemsolving, facilitates the thinking and action processes of actors synchronizes (converges) on pragmatic boundaries and drives new dynamic capabilities within (intra-organizational) and across (inter-organizational) companies. In particular, structured interaction between attention control and problem-solving tasks synchronizes (converges) the boundaries faced by actors and promotes the generation, sharing, and utilization of common knowledge (common lexicon, meaning, and interests) among actors. This promotes communication and collaboration among actors on pragmatic boundaries and transforms their individual existing knowledge (expertise) (see Figure 7.3). Figure 7.3 outlines the relevance and connectivity of the boundaries-based view (BBV) and attention-based view (ABV) concepts. Attentional control processes, which are executive attention processes and attention vigilance processes, induce the semantic boundaries  pragmatic boundaries shift. Furthermore, the problem-solving process synchronizes the actors onto pragmatic boundaries, enabling them to switch their attention from operational tasks with ordinary capabilities to adaptive tasks with dynamic capabilities ([B] in Figure 7.1). This results in changes to existing ordinary capabilities (or even existing dynamic capabilities), triggers new dynamic capabilities ([C] in Figure  7.1), and drives and controls the organizational process to generate new DC ([D] in Figure  7.1). Through the exertion of DC (sensing, seizing, transforming), these adaptive tasks form the aforementioned strategic communities (S)) and reconfigure and restructure assets (resources). In other words, strategic communities (and even networked strategic communities) are formed within (and between) companies, while the asset orchestration function drives the reconfiguration and restructuring of assets (resources) ([E] in Figure 7.1). Over time, as the strategy is implemented, the performance of the organizational processes created by new DC is monitored within companies (organizations), and at the same time, feedback for the construction of new strategies is implemented ([F] in Figure 7.1). Carlile (2004, p. 566) states, “A dynamic capability can be thought of as a collection of different combinations of capacities and abilities that can be used to share and assess knowledge across the various types of boundaries”. However, as described by the conceptual diagram in Figure 7.2, the reconstruction of assets generated from a bundle of strategic communities, which are pragmatic boundaries, is also called as the asset orchestration process through dynamic capabilities (and even collaborative dynamic capabilities (Kodama, 2018)) (see Figure 7.3). In the case study of agile development presented by Schulze and Brusoni (2022), the structured interaction of the two elements, attention control and problem-solving, significantly transformed organizational structure and the roles and responsibilities of actors. Specifically, in the transformation of organizational structures, teams changed from large project teams to small, multidisciplinary, agile teams with the ability to self-organize. Furthermore, the roles and responsibilities of actors changed from project managers to product managers, agile masters, and team members with partial leadership roles. In other words, actors acquired a broad range of skill sets, including

160  Asset orchestration based on BBV and ABV leadership. In decision-making, decisions regarding organization and work assignments changed from a centralized to a decentralized system. These multidisciplinary teams corresponded to the aforementioned strategic communities (SC) and played autonomous decentralized roles by demonstrating dynamic capabilities. As described later, the structured interaction of the two elements of attention control and problem-solving, and the organizational process of synchronization (convergence) to pragmatic boundaries between the actors, is the trigger to generate new dynamic capabilities in Domain I from the capabilities in Domain III and/ or Domain IV in the strategic innovation system in Figure 5.2 in Chapter 5 (Shift A and Shift B in Figure 7.5, which generate and drive new DC in Domain I) (see Figure 7.1). 7.5 The attention-based view (ABV) – attentional control (engagement) and strategic action for achieving synchronized pragmatic boundaries The case study of agile development presented by Schulze and Brusoni (2022) analyzes the process by which dynamic capabilities are generated from the structured interaction of two elements, attention control and problem-solving, in the product development process of an R&D organization. I discuss these attention-based view (ABV) and boundaries-based view (BBV) concepts from the perspective of corporate strategy (including product strategy). Ocasio (1997) points out that successful strategic performance requires the sustained focusing of attention and effort associated with controlled attentional processing. Accurate planning and execution (including speed of execution) of strategic actions in a company requires that individual and team decision-makers focus their energy, effort, and attention on a limited number of issues and tasks. For firms to succeed in strategic performance, actors need to focus sustained attention and effort for controlled attentional processing (Ocasio and Joseph, 2018). In defining strategy as a pattern of attention, from the attention-based view (ABV) perspective, it is not the original idea, plan, or intention that generates strategy, but a “strategic agenda” that has and focuses on a pattern characterized by the consistency that eventually emerges (Ocasio and Joseph, 2018). The firm’s strategic agenda prioritizes a specific set of action options that will shape the choice of markets and customer segments and promotes the development and realization of the target business model (the key elements that make up value chains and business ecosystems – the range of product and service offerings; the firm’s value propositions; firm pricing and cost structure; the development, acquisition, and deployment of assets and capabilities; the development of alliances and partnerships and responsiveness to competitors). The scope of a company’s strategic agenda is inherently broad, complex, dynamic, and continuously evolving. Resulting strategies reflect not only the configuration of previous strategic choices, but also a consistent strategic agenda for the ongoing development and refinement of new strategies (Ocasio and Joseph, 2018). In the trial-and-error processes (strategic actions) of framing and solving strategic agenda to realize a business model, the element of coherence is particularly

Asset orchestration based on BBV and ABV 161 important within companies (organizations). This coherence is achieved primarily through the integration of attention (Ocasio and Joseph, 2018) through company communication channels (Joseph and Ocasio, 2012) and communication that occur among organizational members within those channels (Ocasio et al., 2018). Coherence across an organization’s channels avoids ambiguity regarding the interpretation of strategic opportunities and threats and increases the likelihood of providing members of the organization (actors) with a consistent understanding of what a business solution should look like to solve a business challenge or problem. Companies can then focus and give sustained attention to value creation to realize superior strategies. This requires structured interaction between the two elements, attentional control and strategic action, and organizational processes for synchronization (convergence) to pragmatic boundaries among actors ([B in Figure 7.1] (see Figures 7.1 and 7.3). The organizational process of strategic action, which consists of framing and solving strategic agenda, requires interactive, trial-and-error processes between actors on pragmatic boundaries. This process of framing and solving strategic agenda corresponds to the framing problems and solving problems presented by Schulze and Brusoni (2022). The interaction of attentional control and strategic action (framing and solving strategic agenda) and strategic action (implementing strategic agenda) affects both internal and external assets and leads to the transformation of existing ordinary and even existing dynamic capabilities ([C] in Figure 7.1). This then leads to driving and controlling organizational processes to generate new DC ([D] in Figure 7.1) (see Figures 7.1 and 7.3). Through the exertion of DC (sensing, seizing, transforming), these adaptive strategic activities form the aforementioned strategic communities (SC) and reconfigure and restructure assets (resources). In other words, strategic communities (and networked strategic communities) are formed within (and between) companies, while the asset orchestration function reconfigures and restructures assets (resources) ([E] in Figure  7.1). Over time, as the strategy is implemented, the performance of the organizational processes created by new DC is monitored, and at the same time, feedback for the construction of new strategies is implemented within companies (organizations) ([F] in Figure 7.1). Schulze and Brusoni (2022) mention that although the difference between framing problems and solving problems is not a particularly new subject in the past literature, it is problem-solving that has traditionally received more attention in practice and in education. They also point out that humans tend to immediately go straight to the solution phase. The reason for this is that actors tend to adopt pre-defined solutions, those that seem closer to their areas of expertise. This tendency arises because, from the boundaries-based view (BBV) perspective, even though they are actually facing pragmatic boundaries, actors are likely to interpret them as syntactic and semantic boundaries and act in a way that appropriates or leverages existing knowledge. On pragmatic boundaries, actors should make efforts among themselves to frame problems based on actual root causes and then develop countermeasures. Ocasio and Joseph (2018) compare Apple and Motorola’s new product development from the perspective of capabilities that should garner attention over time.

162  Asset orchestration based on BBV and ABV Despite starting from similar strategic ideas about smartphones, the performance levels achieved by the two companies have been very different. In other words, the presentation of a clear mechanism by which these strategic action processes – the transformation and framing of ideas into concrete, successful strategic agendas, and then solutions – are made possible by dynamic capabilities. In a good strategy, a company uses also its identity, which allows it to focus on a strategic agenda and continuously direct attention toward driving organizational processes that correspond to its strategic goals ([A] in Figure 7.1) (Ocasio and Joseph, 2018). Identity brings commonality in the focus of attention among members of an organization, which is an important determinant of a company’s attention perspective (Ocasio, 2011). Such identity has the effect of synchronizing (converging) the characteristics of the boundaries between actors (their thoughts and actions) into pragmatic boundaries. At the same time, identity is the source of a firm’s unique capabilities, embodied in its institutional commitments and repeated patterns of decision-making (see Figure 7.3). Although Apple and Motorola shared a common identity as leading high-tech product companies, the identities of the two firms were, in many other respects, quite different. Apple’s strong organizational identity was based on designing and developing superior products with the goal of changing the world. Focus on digital design, obsession with improving the customer experience, and delighting and surprising customers as well as meeting their expectations are Apple’s organizational identities. On the other hand, Motorola, which focused on superior products but had a more traditional organizational identity as an engineering company, did not share the same organizational identity as Apple (Ocasio and Joseph, 2018). A company’s identity shapes and reflects its product concept, range of product offerings, differentiation from other companies with similar product offerings, and competitive rules. Thus, as shown in Figure  7.1, companies can use identity to focus their strategic agenda and the actors in the company can focus their attention continuously on the realization of a good strategy that determines the business model. In other words, the structured interaction of the two elements, attentional control and strategic action (framing and solving strategic agenda), facilitates the thinking and action processes of actors synchronized (converged) on pragmatic boundaries and modifies existing ordinary capabilities (or existing dynamic capabilities) to drive new dynamic capabilities within (intra-organizational) and across (inter-organizational) companies (see Figure 7.3). Meanwhile, as noted earlier, successful strategic performance requires actors to sustain their focus of attention and effort related to controlled attentional processing for the realization of the core business model of the strategy. To achieve controlled attentional processing in a sustainable manner, it is important for actors to demonstrate focused and decentralized management and leadership. The success of Apple in commercializing the iPhone smartphone was due to the coexistence of not only rigid centralized networks but also flexible distributed networks that deviated from hierarchical networks as the structure of Apple’s internal organizational network. This type of network structure created a small-world network (Watts and Strogatz, 1998) that has the characteristics of a strategic community (SC), as described earlier.

Asset orchestration based on BBV and ABV 163 Kodama (2017, 2019) refers to an organizational structure like Apple’s as a network collaboration organization. In Apple’s rigid centralized networks of official organizations, discipline, rules, and processes are always emphasized, and the centralized leadership of the late Steve Jobs (now Tim Cook) and senior executives has full control of the most trivial issues and action items (and sometimes the essential strategic agenda) upstream to downstream in the business process. Meanwhile, at Apple, the executive team (ET) led by the late Steve Jobs (now Tim Cook) draws up a comprehensive strategy and narrows down a strategic agenda. Then, distributed networks will function to mobilize the best of Apple’s internal and external assets to solve strategic agendas and build new business models. In other words, Apple’s executive team (ET) exercises autonomous and creative distributed leadership, rewiring (or short cutting) the human network to acquire new knowledge and build the aforementioned strategic communities (SC) (and networked SC) (Kodama, 2017, 2019). Apple’s network thinking, which uses or coexists with centralized networks by such centralized leadership and distributed networks by distributed leadership, or “holistic leadership” (Kodama, 2017, 2019), is implemented at each of Apple’s management levels (top management, middle management, and staff). By incorporating holistic leadership into the process of strategic action, SC and networked SC are established to mobilize all of Apple’s internal and external assets (asset orchestration) for the development of new products that have never existed before. More generally, holistic leadership induces actors to think and act in ways that respond to organizational adaptability to changes in the environment (uncertainty and speed of change). The continuous realization of the framing and implementation of the strategic agenda is achieved through concentration and decentralization management by holistic leadership through controlled attentional processing, as the driving force of organizational processes to handle strategic goals ([A] in Figure 7.1) (see Chapter 8 for more details). 7.6 A longitudinal study of the mobile communication industry in Japan 7.6.1 The i-mode innovation by NTT DOCOMO – the mobile internet revolution

Japanese mobile telecommunications carrier NTT DOCOMO (DOCOMO hereinafter) led the world in the development and popularization of Internet and multimedia services with mobile communications. The i-mode innovation that was launched in Japan in February of 1999, enabled data communications with mobile telephones, expand the potential for using the Internet with mobile telephones, and had a big advance in mobile telephone usability. Technology that enabled Internet access from mobile telephones such as the DOCOMO i-mode have transformed mobile telephones from just simply being portable telephones to being information terminals. Around the year 2000, Japan was at least 2–3  years ahead of the West regarding the use of mobile Internet. An American journalist even pointed out that

164  Asset orchestration based on BBV and ABV the mobile Internet Services that Japan was so enthusiastic about had the potential to lead the world. Behind the i-mode development was the 1992 formation of DOCOMO (it was split off from the NTT mobile communications division), and it was predicted that the 1999 market would be 10% of the Japanese population, or 12 million mobile phones units, which was said to be quite a bullish forecast at the time (made by the first DOCOMO CEO Koji Oboshi). However, in actual fact, the speed of popularization was much faster than that predicted, and Oboshi’s forecast was reached three years early in 1996. Seeing such a rapid take-up, Oboshi was convinced that the market would become saturated in the not-too-distant future and began to feel the need to create a new market outside the voice communications field. Thus, Oboshi, who had the ideas that the mobile computing field had the right potential, and that text and data communications should be expanded from business uses to ordinary people, poured his efforts into creating and enhancing non-voice communications services in the public market under the rubric of “from volume to value”. By January 97, Enoki, who was working as General Manager of the Corporate Sales and Marketing Department at the time (later General Manager of the Gateway Business Department) was ordered by Oboshi to develop a non-voice mobile phone communications service for the ordinary user. Oboshi also ordered Enoki to form a new organization from personnel scouted from outside the company and recruited in-house and gave Enoki full authority to start up the new service (in terms of both personnel and capital). Thus, the formation of the new organization began with the guidance of top management. Oboshi said the following about selecting people to carry out this new business. I knew there was much more reliance on the capabilities of individuals rather than organizations in bringing about this new field from having conversations directly with many staff in the past. In other words, the most important thing was who to get to conceive, plan and develop the new product – Many new and novel ideas are born in the brains of individuals. Then, nurturing, processing and refining such ideas so that they speak to the market is up to the capabilities of organizations. (Oboshi, 2000) Thus, Enoki brought together an originally 10-member team with remarkable abilities from both inside and outside of the company to start the project and then inaugurated a new 70-person organization in August 1997 (the Gateway Business Department, GBD hereinafter). Then, with Enoki at the helm, GBD undertook the development of the new i-mode service. The success of i-mode has been reported in several examples of existing research (e.g., Kodama, 2002, 2009a). The activity of the organization configured from dissimilar personnel from both inside and outside of the company played a major role in the success of i-mode. This new organization was named The Gateway Business Department (GBD) and was organized as a set of mostly mid-career staff head hunted externally – there were not very many staff from NTT in it. Although

Asset orchestration based on BBV and ABV 165 DOCOMO had inherited the NTT corporate culture, this new organization had members that brought a new organizational culture dissimilar to the DOCOMO corporate culture. GBD received strong support from the then president, Oboshi, and was also separated both physically and geographically from the DOCOMO headquarters at the time. In the process of developing i-mode, this new organization, GBD, had many interactions with staff also involved in existing organizations at DOCOMO (departments from R&D, network design and facilities, through to sales and system design, etc.). However, heading this organization, Enoki had to field in-house opposition and suspicions and get the understanding and consent of the entire company. For example, the following episode occurred (Matsunaga, 2000). At one time, in a meeting of executives, there was opposition to the i-mode idea, because the small mobile phone LCD screen was supposedly too small to see properly. In response, Enoki said the following: “The mobile phone we are developing is not targeted at people like those sitting at this table. It is aimed at your children”. There was also opposition heard by staff within GBD, but Enoki stood up to it and managed a variety of friction. One of the factors of the success of the i-mode development was the effect of positive interactions of the capabilities of GBD and those of existing organizations (capabilities abrasion, friction) (Kodama, 2018). Driving creative abrasion and productive friction, the new i-mode innovation was brought about by combining and prioritizing (coordinating with tradeoffs) the positive collision and opposing elements of staff with their different viewpoints, knowledge, capabilities, and strategic objectives. As a result of these processes, a diversity of friction was transformed into cooperation. This required understanding and sharing of strategic objectives (overall and partial) between GBD and existing organizations, clarified decision-making processes and open in-house discussions. The element of coherence mentioned in Section  7.5 on the attention-based view (ABB), was important in converting these various internal frictions into collaborative actions. This coherence could be achieved by integration of attention (Ocasio and Joseph, 2018) through communication channels within DOCOMO (between GBD and existing organizations) (Joseph and Ocasio, 2012) and communication occurring among organizational members within the channels (Ocasio et al., 2018). For DOCOMO, the coherence among all channels of an organization avoided ambiguity in the interpretation of strategic opportunities (from volume to value) and threats (saturation of the voice communications market) in the mobile telephone industry and raised the probability of providing organizational members (actors) with a consistent understanding of business issues and strategic goals, and what business solutions to problems should look like. DOCOMO was then able to focus and sustain attention on creating value in the form of a new business model to realize a superior strategy. This organizational process enabled a structured interaction between the two elements of attention control and strategic action and synchronization (convergence) of pragmatic boundaries among organizational members within DOCOMO (between GBD and existing organizations, including top management) (see Figures 7.1 and 7.3). Then, within

166  Asset orchestration based on BBV and ABV DOCOMO, trial-and-error processes (strategic actions) toward framing and solving strategic agenda were executed to realize the i-mode business model. Organizational behavior based on the attention-based view (ABV) and boundariesbased view (BBV) transforms existing capabilities (dynamic and ordinary capabilities in Domain III), forms multi-layered strategic communities (SC) inside and outside companies, including various partner companies, and realizes asset orchestration as an element of dynamic capabilities (DC). This behavior was a major key factor in the realization of i-mode. In the realization of i-mode, the cospecialization mechanism, which uses creative and productive friction to improve both DOCOMO’s capabilities and those of its partners (strengthening strengths and reinforcing weaknesses), was important to build a shared sense of purpose (vision) and trust, motivate and uplift partners, and establish win-win relationships (see Box-1). Kodama (2018) and Figure 2.7 in Chapter 2 of this book discuss the four domains of the capabilities building map from the framework of Capabilities Lifecycles by Helfat and Peteraf (2003). The positioning of the domains and their relationships are discussed from the perspective of the dynamic view of capabilities (see Figure 7.6). The capabilities required by a company (organization) change dynamically as it adapts to changes in the environment (uncertainty and speed) and shifts between domains. Spiral feedback loops form through each selection event at the macro level in the shifts between the domains in Figure 7.6. At the time, a new strategy was born out of a deadlock in strategy to gain market share with competitors in Domain III in DOCOMO’s i-mode strategy. At that time, Domain III required not only the ordinary capabilities accumulated in the past, but also the element of dynamic capabilities to respond to the need to develop new handsets and services with diverse functions in the non-voice communication market, to handle the speed of environmental change and customer needs. For DOCOMO, however, the development of technology in the non-voice communications market, where market uncertainties are extremely high, was a new challenge. This required new dynamic capabilities that were different from the dynamic capabilities for the voice communications market. In other words, the i-mode business model was born through a major transformation by restructuring assets (knowledge or resources) (see Box-2: Asset restructuring and transformation) The i-mode strategy corresponded to Domain III  Domain I (Shift B in Figures 7.6 and 7.10). DOCOMO found capability opportunities in the war of attrition with competitors in the rapidly changing environment of the cell phone market and succeeded in pursuing the new radical innovation called i-mode. DOCOMO created new dynamic capabilities in contrast to the existing dynamic and ordinary capabilities in Domain III. DOCOMO’s capabilities shifted, evolved, and developed into Domain I. There are many examples of such a shift to Domain III  Domain I (Shift B in Figures 7.6 and 7.10), including the case studies in Chapter 6 (see Box-3). However, even though i-mode had been successful in Japan, the response to the Google and Apple iPhone and Android smartphones was sluggish – these products hit Japanese mobile telephone manufacturers hard. At the time, nobody was able to predict such a dynamically changing environment (even me, having worked as a project leader at DOCOMO).

Asset orchestration based on BBV and ABV 167 Box-1  A new business model through asset orchestration (1) Formation of a new organization directed by top management To cultivate a market for this new service, Oboshi led the team that would build a new organization for planning new services. In January 1997, Enoki, who was serving as Corporate Business Director at the time (currently senior vice president and senior manager of the Gateway Business Department), was appointed by Oboshi to develop non-voice communication services over mobile phones targeting general users. Oboshi then assigned Enoki to the task of building a new organization by means of recruiting human resources within or outside the company and empowered him (with personnel and financial management) to start up the new service. With diverse and talented human resources recruited from both inside and outside the company, Enoki started a new project (responsible for Gateway Business) staffed by some 10 persons, a unit that by August 1997 had evolved into the Gateway Business Department (GBD) staffed by 70 employees. GBD was then at work developing a new service dubbed “i-mode”. (2) GBD’s strategic agenda and specific actions to realize i-mode services Positive feedback of the elements through which content providers (CP) would continuously provide useful content to end-users of i-mode-compliant mobile phones was urgently needed for the business model that was planned for successful i-mode service. This model was designed to expand the number of end users as well as enhance the content provided by CP. One of the tasks aimed at implementing this business model was to develop easy-to-use i-mode-compliant mobile phones and to develop the network system (i-mode servers and other hardware) that would deliver the content. The second task was a software-based effort to obtain CP with content that would attract end users. To solve these two hardware and software tasks and implement the new service, Enoki felt that it was essential to integrate the knowledge and competence based on the new concepts and viewpoints of the diverse human resources at GBD, to take advantage of years of experience with existing organizations within DOCOMO other than GBD, to incorporate the intellectual assets inherent in the CP which were outside customers of DOCOMO, as well as to tap the intellectual assets inherent in the terminal manufacturers and platform vendors which were outside partners of DOCOMO. The integrated knowledge and competence would thus become important elements capable of building a new business model for i-mode service.

168  Asset orchestration based on BBV and ABV Therefore, Enoki actively formed strategic communities (SC) with GBD and other traditional organizations within the company, as well as with its customer, CP. GBD overcame the two aforementioned challenges by combining the new knowledge and competence generated from the formation of these SC groups, creating a business model for i-mode services in which positive feedback was possible. (3)  Formation of SC with traditional organizations Coordination among the traditional organizations and the development and technical departments was required to develop i-mode-compliant mobile phones and network systems. At the outset, there was a conflict arising out of differences of concept or opinions between GBD and other departments, or there were some objections to the service voiced from within DOCOMO. To overcome various conflicts arising between the GBD and traditional organizations, Enoki led the team at the forefront of coordination and consensus building through persistent dialogue and collaboration with the departments concerned. He strove to leverage such conflicts as a catalyst for constructive and productive dialogue and discussions (Robbins, 1974). The strong motivation of professionals assembled at the GBD staking their pride on the success of the i-mode service and the innovative leadership of Enoki to orchestrate the operation of GBD members were the motivating forces leading the traditional organizations. Enoki exhibited strong leadership in promoting the i-mode service and was successful in obtaining the understanding and agreement of the top leaders of the traditional organizations. He then launched the Mobile Gateway Service Introduction Promotion Committee within DOCOMO. The committee consists of the top leaders of all departments in the traditional organizations, including the president and Enoki. The committee was to become a forum for dialogue and decision-making aimed at sharing information and knowledge at the top management level that would eventually result in the launch of the i-mode service and promote this business. On the other hand, each of the project leaders at GBD led by Enoki started seven working groups (Network Server WG, Mobile Phone WG, Facilities Building WG, Facilities Maintenance WG, System/Sales WG, Content WG, and Application WG) in the form of task forces consisting of GBD middle management and traditional organizations. These work groups identified and discussed problems and tasks aimed at the launch of the i-mode service. In addition, the task force specializing in i-mode mobile terminal development and system development convened once a week under the name, Gateway Service Specifications Review Committee, where the service specifications and technical specifications were determined in order to implement the i-mode service. To promote dialogue or collaboration within the organization at the GBD, all members of the committee met regularly for the purpose

Asset orchestration based on BBV and ABV 169 of sharing information and knowledge with all GBD members and also sharing value systems and awareness among all members aiming to promote the i-mode service. As such, Enoki formed the company strategic communities (see SC-a in Figure 7.4) at the top and middle management levels and actively promoted knowledge management within this SC. In the SC, the coordination of the value system at each management level (Kodama, 2001) was promoted for the major mission of business expansion aimed at DOCOMO’s new business, and a new asset (knowledge) (Kodama, 2002) called the i-mode service was created. In other words, integration of attention promoted synchronization (convergence) to pragmatic boundaries within and between organizations within DOCOMO. (4)  Formation of SC with customers (CP) A major task of the GBD Content Planning Project was how to find and establish ties with CP that could provide useful content. The strategy elaborated by Content Planning Project Leaders was to establish win-win relationships between DOCOMO and the CP. An important factor in the establishment of win-win relationships was the idea that the CP and DOCOMO would think and behave in a manner of equal partnership, sharing the risks and profits, instead of DOCOMO simply purchasing content from certain CP or charging CP with tenant fees when providing a lineup of i-mode content. As a solution, DOCOMO encouraged CP to create their own content and provided them with the platform used in establishing a “content service charge collection agency system” to allow users to earn profits from providing their own services. Content Planning Project Leaders explained the concept of a win-win relationship to many CP personnel and successfully obtained their understanding and aroused sympathy for the concept. As a result, the value systems of both DOCOMO and the CP were unified, and an SC aiming to start a new business was formed (see SC-b in Figure 7.4). In this SC, based on the shared question, “what kind of content will truly delight end users and make them pay for content services?”, discussions were held in terms of breaking news, accuracy, continuity, and end-user satisfaction with the content, and attractive content was created to keep end-users engaged. GBD’s content planning project helped many CPs understand and sympathize with the concept of the i-mode business model, and successively gained influential CPs (mobile banking, credit cards, airlines, hotels, news, newspapers, magazines, and many others). By the time i-mode service was launched (February 1999), 67 CPs had been acquired. Enoki endeavored to form an internal corporate SC and an SC with customers (CP) until the startup of the i-mode service, and he promoted

170  Asset orchestration based on BBV and ABV

Figure 7.4 The i-mode Business Model by Asset Orchestration Source: Created by the author, citing, Kodama (2002)

knowledge management in each SC. By organically combining these two SC, the new community asset (knowledge) known as “business model construction” was created as a route to implementing the i-mode service. (5) GBD’s business strategy and organization after the launch of i-mode service (from February 1999) Enoki felt that a number of measures had to be implemented so that end users could enjoy the advantage of fully subscribing to i-mode to trigger an explosive growth of the i-mode service. The first measure was the “portal strategy” for developing new, useful content for the i-mode service. The second measure was the “terminal strategy” to develop new i-mode mobile phone terminals including add-on features. The third measure was the “platform strategy” to break ground for i-mode users using platforms with devices other than mobile terminals. Furthermore, these three business strategies were interactive with each other, thus capable of triggering a major synergy depending on the strategy concerned. In order to promote these business strategies, an important task was to proceed with the strategic alliance with many outside partners to yield practicable results.

Asset orchestration based on BBV and ABV 171 After the startup of the i-mode service in February 1999, the GBD formed the SC in succession through strategic alliances with outside partners in order to acquire end users at an early stage of the project. The first step was to form a “portal SC” (see SC-b in Figure 7.4) to act as the core of the portal strategy and enhance the details of the i-mode portal operated by DOCOMO through which diverse risks and interests could be shared with CP while enhancing the value of the content so as to provide new values for the end user. In addition, an advertisement delivery service was promoted on the i-mode portal, and a top-tier financial service was also implemented at the birth of the net-based banking business. This strategy was recognized as an important positioning of services prior to the launch of i-mode sales. The second step was to form a “technical SC” (see SC-c in Figure 7.4) linked with terminal manufacturers which would become the core of the terminal strategy. This strategy was intended to trigger new demand for end user terminals and to motivate users to replace their terminals by periodically adding new features to i-mode mobile phones. For CP, the development of new mobile phones (such as JAVA-compliant phones) opened the possibility that content could be developed under new applications with the advantage of attracting new end users. DOCOMO could also enjoy an increase in new revenue from increased communications traffic due to a greater penetration of mobile phones equipped with new features. The third step was to form a “platform community” (see SC-d in Figure 7.4) to serve as the core of the platform strategy in order to expand the scope of i-mode availability. Combining i-mode mobile phones with game machines, car navigation systems, and other platforms would further expand i-mode availability. Thanks to the time pacing strategy (Eisenhardt and Brown, 1998) which continuously put forward three strategies on an individual organization basis, the GBD continued to acquire new end users and CP as customers in quick succession. Figure 7.5 shows the practicable measures arranged in time series about these three business strategies proposed by the GBD. In March 2001, the GBD reached the target of acquiring 25 million subscribers (end users) in just two and a half years following the launch of the service. Each project team at the GBD worked to promote strategic tie-ups with outside partners and continued to proceed with their business through prompt decision-making and expeditious activities as though they were small venture businesses. On the other hand, each project team leader continued to embody new concepts, strategies, and tactics adopted by the strategic concept and the innovative leadership of Enoki, the top leader of the GBD. At the same time, new strategies and tactics born out of the close tie-up with each project leader were also implemented. Meanwhile, Enoki and all GBD members shared a vision and value system for the main mission of promoting i-mode services.

172  Asset orchestration based on BBV and ABV

Year

1999

2000

Portal strategy

• Pay contents charge/ data warehouse for personalization/ Guidance features (February) • Character delivery service started (June) • Regional-based menu list for nine districts (September)

• Established advertising business “D2 Communications” (June) (Promote i-mode advertising business) • Established JapaNet Bank (September) (Internet-based banking) • Established i-mode contents consulting business “DoCoMo.Com” (October) • Started banner advertising (October)

Terminal strategy

• Technical alliance with Sun Microsystems (March) • Web server/e-mailcompliant i-mode terminal (501i) (February) • Announced JAVAcompliant i-mode terminal prototype (June) • Expanded i-mode mailing function (July) • Ring melody download-compliant i-mode terminal (502i) (December)

• i-mode terminal from NOKIA (April) • i-mode/PHS dual mode i-mode terminal (June) • English-version i-mode terminal trial (June) • JAVA-compliant i-mode terminal (503i) (February 01)

Platform strategy

• Started experiment on car navigation coordination (February) • Jointly developed i-mode-compliant group ware product with US Buma Technology (February)

• Invested in “PlayStation.com. Japan” (April) (working with i-mode and game machine) • Technical alliance with Sony Computer Entertainment (SCEI) (August) • Strategic alliance with AOL (September) • Tie-up with KPN Mobile on mobile Internet business (September) • Established “i Convenience” with Lawson, Matsushita, and Mitsubishi (October) (promoted networking between i-mode and street sites)

Figure 7.5  Main activities in three main GBD business strategies

To be evolving and developed

3 strategies

Asset orchestration based on BBV and ABV 173 Although the GBD had, as a whole, strong emergent factors on a strategic basis, the deliberate strategic factors of each project leader and the tightcoupling factors linking each project leader led by Enoki eventually allowed the i-mode business model to be combined with practical businesses in a deliberate and feasible manner. Furthermore, after the launch of i-mode services, Enoki organically integrated the four SC groups in Figure 7.4 (asset orchestration in each SC group) to maximize the synergy effects of the three business strategies to expand the penetration of i-mode services. Cospecialization mechanisms to improve both the company’s own capabilities and those of its partners (to strengthen strengths and reinforce weaknesses) were realized through the asset orchestration process. The organization of GBD necessary for deploying novel and complex strategies was a complex and environmentally adaptive system with two distinctive characteristics: the tight-coupling organizational factor strictly coordinated between Enoki, the top leader, and each project leader; and the loose-coupling organizational factor having both flexibility and autonomy reflected on each project.

Box-2  Asset restructuring and transformation Evidence of asset (resource) reconfiguration, reorganization, and transformation was abundantly observed in this case study (due to my tenure at DOCOMO, working side by side with the GBD organization). DOCOMO developed its existing ordinary capabilities and revolutionized its assets to break out of the war of attrition with competitors in the fast-changing environment of the cell phone market. Since the business model of cell phone services for the traditional voice communications market and the business model for the non-voice communications market were completely different, a major rethinking of the service concept and the development of a strategic agenda to realize the new business model were necessary. To this end, all DOCOMO employees involved in the development of i-mode services learned, accumulated, and developed new ideas and new skills and know-how to realize them in a concrete way. The conventional organizational structure for the voice communications market demonstrated ordinary capabilities through normal functional organizations and inter-organizational collaboration. However, to build new assets, GBD, a cross-functional team (CFT) consisting of dissimilar members from inside and outside the company (multidisciplinary and bringing in different organizational cultures from outside the company) was organized at the time of i-mode development. This relationship between GBD and existing

174  Asset orchestration based on BBV and ABV organizations (traditional organizations) was not an innovation development through the building of the well-known organizational model of the “Ambidextrous organization” (Tushman and O’Reilly, 1997; O’Reilly and Tushman, 2004). Put differently, dense interaction between GBD and traditional organizations created new assets to solve the strategic agenda. The seven taskforce-like working groups consisting of middle management classes from GBD and traditional organizations were good examples. Furthermore, the types of external stakeholders (business cooperation partners) and relationships necessary to realize cell phone services for the traditional voice communications market had changed significantly. In the traditional voice communications market, business cooperation partners have been communications equipment manufacturers, such as cell phone equipment manufacturers, and companies related to equipment construction and sales promotion. In contrast, the i-mode development required collaboration with business partners across a variety of different industries, business sectors, and business types to solve the issues of the three strategic agendas of a portal strategy, a technical strategy, and a platform strategy. To realize a new business model, we reorganized, restructured, and transformed (i.e., asset orchestration) the assets of many business partners. Thus, DOCOMO established new dynamic capabilities while making significant changes to its existing business processes and asset infrastructure for the traditional voice communications market.

Box-3  Examples of interdomain shifts (Shift A and Shift B in Figure 7.6) The most striking strategy transformation in the world is Apple’s radical innovation from its PC business to the music distribution business. Apple successfully developed a new business by moving away from the traditional Mac development approach (in-house development) and orchestrating superior internal and external intangible assets. This was also the result of a fully functioning renewal, redeployment, and recombination processes through dynamic capabilities (Kodama, 2018). Also, Nintendo’s new game console concepts, such as the Wii and DS, were targeted at a completely different customer segment from Sony’s PlayStation, which was mainstream at the time (customers who were not interested in games, such as the elderly and housewives). Nintendo redeployed its customer target and demonstrated dynamic capabilities through the Domain III  Domain I shift (Shift B in Figures 7.6 and 7.10), giving birth to the radical innovation of a new game console. Shift B in Figure 7.6 is a strategy to target untapped markets and technologies, including the case of Apple’s radical

Asset orchestration based on BBV and ABV 175

Figure 7.6  Capabilities lifecycles on the capabilities building map Source: Created by the author, citing (Kodama, 2018)

innovation from the PC business to the music distribution business, and has similarities with the “blue ocean strategy” (Chan Kim and Mauborgne, 2004). For example, as discussed in Box-1, Kodak of the United States was a company that took the path of retrenchment and retirement from Domain IV because of digitalization, whereas Fujifilm of Japan successfully and strategically shifted from Domain IV to Domain I with redeployment/recombination (Shift A in Figure 7.6). Kodak, on the other hand, from its early days, sensed the threat posed by the changing marketplace of digitalization, but consistently adopted a rigid strategy of seeking to maximize shareholder value and profits by adhering to its existing ordinary capabilities (OC), purchasing large amounts of its own stock with its ample funds to take stock price measures, etc. Furthermore, top management at Kodak at the time had no idea about orchestrating the company’s high-level intangible assets to respond to the changing environment of digitalization. In the case of Shift A in Figure 7.6, an in-house extreme sense of urgency, higher-order learning, and strategic collaboration through the formation of informal networks with other industries (i.e., high-quality, strategic, nonroutine actions) in response to a gradually approaching threat transforms the existing ordinary capabilities (OC) and enhanced the possibility of transitioning to Domain I  through the demonstration of dynamic capabilities (DC). Fujifilm’s strategic leadership of top management and organizational

176  Asset orchestration based on BBV and ABV processes, which responded to the extreme sense of crisis within the company, realized a structured interaction between the two elements of attention control and strategic action, and a synchronization (convergence) among organizational members toward pragmatic boundaries (see Figure 7.1 and 7.3). This is also a good example of strategy transformation through capability threats, as described by Helfat and Peteraf (2003).

7.6.2 NTT DOCOMO’s mobile multimedia challenge – third-generation mobile phone services

The first-generation analog mobile phones were introduced in Japan in 1979 as car phones, while the first digital, second-generation mobile phones were commercialized in 1993. After that, with the abolishment of security deposits, the introduction of systems for buying mobile phones, falling rates, and so forth saw the number of mobile phone subscribers surpass that of fixed-line users in March  2000. In this way, the mobile phone market, centered on voice communications, quickly grew. However, because there are limits to the population to which the services can be spread, DOCOMO did not just stop at strengthening its main conventional services, its voice communications, but also embarked on the basic “from volume to value” strategy for a second wave of growth enabled by expanding its traffic from voice to non-voice communications. The i-mode service discussed earlier was the first step toward converging the Internet with mobile telephones, and by November 2003 had 40 million subscribers, adding a huge contribution to the opening up of the mobile multimedia market. DOCOMO’s sales enjoyed a 12-fold increase in the nine years from its beginning at JPY 4.6 trillion, and then reached 5.2 trillion in 2001, its tenth year, based on March 2002 calculations. The stock market capitalization of the company reached JPY 20  trillion enabling it to become the largest company in Japan. Including DOCOMO, mobile telecommunications carriers in Japan created a JPY 7 trillion market and succeeded in creating 800,000 new while engaging in fierce competition with each other. On 30 May  2001, DOCOMO led the world with a test service of a thirdgeneration mobile telephone service (FOMA) based on the W-CDMA system. DOCOMO positioned FOMA to play a central role as a strategic product that would radically expand the mobile multimedia market internationally by making the most of its characteristic high speed and large capacity data transfer capabilities. As well as that, and even richer range of mobile multimedia services became available with businesses provided by FOMA such as high-speed i-mode, TV phoning, video distribution, international roaming and mobile commerce, and various other services in the consumer domain. With FOMA, DOCOMO achieved business developments targeting not only users demanding high-speed data communications and high functionality, but also ordinary consumers, by improving user convenience by adding higher value to mobile communications services. FOMA embodied the

Asset orchestration based on BBV and ABV 177 “from volume to value” strategy and is a service that played a role in achieving the mobile multimedia, ubiquitous services, and globalization of the future. (1) The dynamic capability challenge through my actual experiences in the field

NTT East was formed with the split of NTT in June  2000, and I  transferred to DOCOMO in December of the same year. I was put in an organization involved with planning multimedia services called the Mobile Multimedia Division (MM division) and was charged with supervising a planning and development project for a mobile video service as a project leader. The aforementioned i-mode development Gateway Business Department (GBD) was also in the MM division, although the department I was in was not GBD. Most of the organizational members of GBD were mid-career personnel head hunted from outside the department – not many of them were from NTT. In contrast, staff outside GBD in the MM division were mostly from NTT. Hence, the MM division consisted of staff who had the NTT organizational culture embedded in them, and mid-career staff in GBD who had a different culture. Naturally, clashes of these different cultures were unavoidable. Moreover, because GBD had succeeded with the new i-mode service, its members also had a lot of sway and political power in the company. Under this company environment, having been posted to DOCOMO from NTT East in December of 2000, I had to execute his mission to plan and develop a new service, while at the same time, I had to experience internal strife with GBD on a regular basis. In planning and development work as a project leader, I also uncovered and experienced a number of competency traps (e.g., Martins and Kambil, 1999) and core rigidities (Leonard-Barton, 1995) caused by the success of i-mode. For example, the number of subscribers grew with the mobile phone with built-in camera jointly developed by Sharp and J-PHONE, a competing mobile communications carrier at the time. At the same time, Sharp had also approached DOCOMO with a proposal for a mobile phone with a built-in camera. However, at the time, DOCOMO was enjoying the height of market expansion for its i-mode mobile telephones, whose sales were rising day by day. As a priority service strategy at the time, DOCOMO’s main theme was expanding the popularization of i-mode and thought that adding a camera to a mobile phone would raise its price, making it less attractive. Moreover, DOCOMO predicted that users would mostly save photographs shot with the camera in the phone rather than send them using DOCOMO’s packet communications lines. Hence, as a communications carrier, DOCOMO could see no advantage if images taken with these phones were not sent, because there would be no contribution to packet communications revenues. Accordingly, DOCOMO did not warm to Sharp’s proposal. Sharp aimed for a potential partnership with DOCOMO in the development of the mobile phone with built-in camera, but unfortunately, this was not achieved at the time. DOCOMO also pointed out this reasoning at the time. Certainly, it became clear that after the spread of camera phones, there was a strong tendency for users to save the photographs they took for their own enjoyment without attaching

178  Asset orchestration based on BBV and ABV them to e-mail and sending them. Nevertheless, after that, if a mobile phone did not have the camera accessory, it would no longer sell. At the time, the following episode occurred in an in-house meeting that I attended. This was a meeting of the sales directors from all around the country at headquarters to discuss problems and issues. Speaking with a sense of business crisis, one of these sales directors made the comment that J-PHONE’s camera phone subscriptions were on the rise in the Hiroshima area, and that DOCOMO should also sell phones with built-in cameras. In response, one of the i-mode supervising executives asserted that camera phones were only a temporary fashion, and their growth would one day settle down – this assertion could also be said to be a trap caused by the successful experience of i-mode (competency traps and core rigidities). Thus, lagging behind J-PHONE and au (KDDI), DOCOMO began selling camera phones through a collaboration with Sharp in June 2002. The i-mode organization (i-mode division) was not involved in the commercial development of DOCOMO’s camera phones. Being carried out by the sales department at headquarters, this was an extremely unusual event for the company, one outside its normal business up to that time. The sense of crisis coming from the front line around the country was received by the sales department at headquarters, causing it to act with a sense of urgency. There were other similar examples. Around 2001, there were discussions in the company about including GPS functions with mobile telephones. However, the “i-area” simple mapping service for mobile phones was included as an i-mode application, and those in the company with the political power and sway asserted that the i-area function was sufficient and that there was no need to incur extra costs by including GPS. Of course, in hindsight, it goes without saying that these GPS and camera functions have been providing enormous value to consumers using mobile and smart phones. In this way, it can be said that the “sensing” functions of dynamic capabilities to intuit or instinctively see through to the markets of the future can be dulled by the competency traps and core rigidities that arise from the experience of success. As discussed later, such an excessive inclination towards great successful experiences caused unproductive paranoia in the organizational leaders – they were strongly constrained by their experience of success, having initially achieved a radical innovation, but unable to move on to further innovations, which leads to the new proposition that having had success with radical innovation, these leaders have made the effort to transform it into simple incremental innovation with their own path dependencies. In contrast, the multimedia service development organization (actually consisting of three departments) in the MM to which I belonged experienced something largely opposite to that of GBD above (see Figure  7.7). Initially, many project leaders, including me, were taken up to plan and develop new (subsequent) services different from i-mode, and there were a few 10s of these projects. One of these was the mobile video link project, for which I served as project leader, and for which the mission was to plan and develop a new service to enable the use of video with the 3G mobile telephones slated for commercialization two years later. Apart from this project, there were also a number of other projects that had

Asset orchestration based on BBV and ABV 179

Figure 7.7 The growing i-mode organizational power

been instigated, such as ITS/location information, broadcast and communications, music distribution, mobile EC and C2C services, etc. (see Figure 7.8). One of the major factors of conflict between GBD and the multimedia service development organizations was the compatibility of new service plans with i-mode (e.g., cannibalization). In particular, in the strategic domain (in which GBD had in-house hegemony) with its focus on B2C/C2C services such as i-mode (in other words, content, applications, and services for consumers), if the troop to which I belonged (an organization related to multi-media service development) brought in a B2C/C2C plan, some friction or conflicts would arise, which is the case in many companies in the processes of planning and proposals for new business. These kinds of conflict and friction arise in all projects, including in the ones in which I was involved. As shown in Figure  7.7, reflecting the successful performance of the i-mode, between July 2001 and July 2004 when GBD boasted top status as a star department in the company as the independent “i-mode Business Division”. During that time, the conflict and friction between the i-mode Business Division and the MM Business Division grew greater. This led to MM Business Division being forced to aim most of the new services it had planned and developed as B2B rather than B2C/ C2C. There was increased pressure and control from i-mode Business Division for control over service strategies. In my project, two service planning and development projects were underway simultaneously. One of these was a live video delivery service (Kodama, 2003), which had to be started up as a service initially restricted to B2B or navigation sites

180  Asset orchestration based on BBV and ABV

Figure 7.8 MM division new service development systems

other than the i-menu (also called free sites at the time), because it would handle consumer-oriented content (the i-mode team was very opposed to the idea). I was greatly dissatisfied with the inability of DOCOMO as a company to take advantage of the i-menu site, which is consumer-oriented content. Another new service planning and development project of ours was a multipoint videophone service for cell phones1 (Kodama et al., 2003; Ohira et al., 2003a; Kodama, 2007d), which could be provided on a B2C/C2C basis without opposition from the i-mode team because it was a communication service rather than a content service for consumers. Having to accept many constraints within the company, we proceeded with development in the direct face of a variety of friction and discord. In this environment, not only I, the project leader, but also many of my subordinates had to promote non-routine strategic operations that we had never experienced before, and we had to demonstrate dynamic capabilities that were different from the regular ordinary capabilities we had accumulated up to that point (see Box-4). Focusing on creating value in the form of a new business model to realize the world’s first live video streaming service (V-live) for cell phones (Kodama, 2003; Ohira et al., 2003b), commercialization approval2 by several internal councils (multilayered entities such as divisional, company-wide, and management level) enabled

Asset orchestration based on BBV and ABV 181 sustained interest and attention from relevant organizations within the company to our project team. Through this organizational process, structured interaction between the two elements of attention control and strategic action and synchronization (convergence) of organizational members onto pragmatic boundaries were realized within DOCOMO (between our project team and existing organizations, including top management) (see Figures 7.1 and 7.9). Then, within DOCOMO, to realize the V-live business model, a trial-and-error process (strategic action) toward framing strategic agenda and solving strategic agenda was implemented in each department, led by our project team. Our project team then went through the Domain I  Domain II process in the Capabilities Building Map described in Figure 5.1 in Chapter 5, and accumulated efforts to demonstrate dynamic capabilities. To demonstrate dynamic capabilities, project team members learned from the i-mode development team, which was the first to successfully launch a content service. This was none other than the asset orchestration process – the integration of intangible assets through the formation of multi-layered strategic communities (SC) involving customers and their needs, DOCOMO group companies and its external partners (see Figure 7.9).

Figure 7.9 Asset orchestration – learning from the i-mode development

182  Asset orchestration based on BBV and ABV Box-4  Transformation of existing ordinary capabilities (OC) – findings from my action research I arrived at DOCOMO’s MM Division (Multimedia Services Development Organizations) with six project subordinates from my NTT days (see Figure 7.7). My subordinates, including me, had technical skills in product planning and development of videoconferencing systems for fixed-line communication and sales and marketing skills, but none of us had any skills in planning and development of new video communication services for thirdgeneration cell phones. Therefore, at that time, I and project members only had ordinary capabilities to deal with video communication technology and market development. I assumed that my project was positioned in Domain IV of the capabilities building map in Figure 7.5 at the time of my arrival. In other words, at the beginning, my project team did not have a concrete service concept for third-generation cell phones, and when I arrived at DOCOMO, most of the project members, including me, could not experience the uncertainty of the environment and the speed of change. However, I was entrusted by the head of the MM Division (Nakamura) with the entire business process from planning to execution of the service. In the absence of third-generation cell phones (at the time, second-generation cell phone service was widespread worldwide), the project members had no choice but to study the technical specifications of a prototype (experimental device) developed by DOCOMO’s research laboratory and in-house documents describing the technical characteristics of third-generation networks. After several months of daily learning and trial-and-error efforts, including an understanding of global trends, the concept of a new service conceived by our project team emerged. The concept was to view live video on your cell phone anytime, anywhere. Today, viewing live video on smartphones is a common practice, but at the time, “photo-mail” (still images) was the technological limit at best. However, it was necessary to realize a new service business model by performing the functions of sensing with an eye on potential future markets, seizing, such as concrete conception of new technological architecture for products and services and coordination with external partner companies, including customers, as well as the function of transforming, which is restructuring of resources (assets) through integration of internal and external assets (orchestration). Thus, over time, the degree of uncertainty of the future market (third-generation cell phones) as the environment our project team faced, increased dramatically (while the speed of change in the environment, such as responding to competitors, was not fast because it was an unknown market). After trial-and-error processes (strategic action) toward framing and solving strategic agenda, the world’s first live video streaming service (V-live) for cell phones was realized through radical innovation (Shift A in Figure 7.5) from Domain IV to Domain I  Domain II  Domain III (commercialization).

Asset orchestration based on BBV and ABV 183 (2) Capabilities abrasion/friction – unproductive paranoia

From the perspective of dynamic capabilities, taking an objective view of the various events I experienced at the time, the stronger the capabilities of organizations in the company that had clout and political power (including their dynamic elements), the greater negative interactions (the effects of capabilities abrasion and friction) between the respective capabilities of other organizations (including their dynamic elements). Depending on how the interactions between the organizations are perceived, in terms of common interests (Kodama, 2007c), they can have both negative and positive effects. The biggest factor regarding the degree of interaction, whether they be positive or negative, is conflicts arising from self-interest or stakeholder relationships, which are dependent on the excellence of capabilities and political power of individual organizations in a company (or in an industry) (see Figure 7.10). Factors that originate in the self-interests and stakeholder relationships between different organizations ignite intentional political action in and between organizations (e.g., Ferris et  al., 1989), and entail the wielding of power to control the advantageous resources of an organization (Bacharach and Lawler, 1980). This, of course, means conflict is unavoidable. In all kinds of organizations, conflict is a natural and inevitable consequence and should have both positive and negative effects on capabilities congruence within a company (Kodama, 2018). To have positive effects with capabilities congruence, it is necessary to promote productive conflict between organizations, which is also a factor that will raise the quality of decision-making in companies, stimulate organizational creativity and innovation, and drive dynamic capabilities.

Figure 7.10 Capabilities abrasion and friction hindering capabilities congruence

184  Asset orchestration based on BBV and ABV Of particular concern is the existence of organizations that have had the experience of a major success in a company (in-house organizations that have forcefulness or clout). To drive business, these sorts of organizations consistently take strong actions above and beyond what is necessary to defend their strategic business territory and show wariness and so forth toward any trivial problems or issues related to their own territory. Then, in cases in which the business context from other organizations infringes on the current (exploitation) business of the organization as well as its exploration for the future (boundary business, partial cross over or cannibalization), means overreacting to thoroughly eliminate the business of other organizations. If these kinds of exclusive organizational actions cause unproductive friction and conflict to arise between organizations, there is a good chance that the capabilities congruence of the entire company will be negatively impacted. The greater the experience of success (performance) that an organization has, the greater the more prone the organization (and its leaders) will be to actions that bring about unproductive conflict and friction. I  call these sorts of organizations “unproductive paranoid organizations”, but there are few cases of leaders in these organizations that have the converse elements of “productive paranoia” described in existing research (Collins and Hansen, 2011). Productive paranoia entails leaders always thinking about the worst-case scenario for their company or organization, and engaging in thinking and action to raise safety margins by not neglecting to be prepared, fostering emergency measures, and creating mechanisms to mitigate attacks. Former Intel CEO Grove, who said “only the paranoid survive”, also asserted that since there will sooner or later be changes that overturn the foundations of business in an industry, it’s necessary to distinguish the “strategic inflection points” and engage in strategy transformation (Grove, 1996). As a company that was impacted by attacks from Japanese companies in 1985, Intel withdrew completely from the semiconductor memory business, which had been its identity, and successfully surmounted that strategic inflexion point by shifting its business resources over to microprocessors. The way the company was steered at this inflexion point determined its future. Handling unforeseeable strategic inflexion points necessarily entails taking actions when there is no data at hand, solely by relying on one’s intuition and judgment. In conventional methods and theories, attempting to overcome these issues can lead to the innovator’s dilemma (Christensen, 1997). Accordingly, managers and leaders must make use of the sensing function of their dynamic capabilities, polish their intuition, and distinguish a range of signals from the noise, so that only their useful paranoia will remain. Such productive paranoia has positive effects on the capabilities congruence of a company. In contrast, leaders in unproductive paranoid organizations are prone to legitimacy through rational self-dilution or defensiveness of their interests. Such unproductive paranoia elements can drag down the capabilities congruence of an entire company. In the DOCOMO case, to circumvent such negative interactions, in July 2004 the MM Business Division and the i-mode Business Division were merged to become the “P&S Business Division”, with Enoki, who had been in charge of the i-mode development, serving as Executive General Manager (see Figure 7.7). One might question the nature of the top management and governance at the time, as it was the role of those at the top to prevent conflict and contradiction between

Asset orchestration based on BBV and ABV 185 organizations such as these. Although I author can only discuss my own personal opinion, it is his interpretation that top management at the time fully knew that friction between similar business proposals (or cannibalization of existing services) from the projects in GBD (later the i-mode Business division) and MM Business Division could not be avoided, and to invigorate the company, maintained the stance of allowing organizational slack (Nohria and Gulati, 1996; Bourgeois, 1981) in the company as much as possible. However, too much organizational slack can be also a cause of confusion in the development workplace. Also, MM Business Division was an organization that has the support of Tachikawa who succeeded Oboshi, the first CEO of the company. Tachikawa also gave the impression that he wanted to create new performance targets that were different from the i-mode (also an achievement of the previous CEO, Oboshi). In contrast to DOCOMO, Apple’s Jobs’ pursuit of simplicity through productive paranoia in its in-house organizational structures, and its product and service systems, had positive effects on the capabilities congruence of the company as a whole (Kodama, 2018). 7.6.3 Core rigidities that spread through Japan (and the world) with conventional mobile phones

As discussed, although though i-mode had been successful in Japan, the Japanese response to the Apple iPhone and Google Android smartphones was sluggish, and these products hit Japanese mobile telephone manufacturers hard. These environmental changes were also unpredicted. After the release of the iPhone in 2007, Tadashi Onodera, CEO of KDDI (au), which was the no. 2 carrier in the Japanese market in September 2008, said the attraction of smartphones, including the iPhone, was inferior to the 10-key mobile telephone, as follows: Even looking at the total sales for smartphones, the attractiveness of these terminals is low. Mobile phones (conventional mobile phones devices) are still genuinely easier to use. Even for input, the 10-key input is a given for Japanese mobile users. Based on the assumption that Japanese language conversion is much easier on a 10-key device than the current smartphones, I  thought iPhone might be a temporary boom, but questionable whether the general public would find these terminals attractive. I assumed this is what would happen. But the world moved in a different direction. Clearly, the smartphone market grew after the release of the iPhone, even in Japan. Hence, the management team made a massive strategic mistake. In contrast, Japanese no. 3 SoftBank Mobile’s CEO Masayoshi Son adopted to a different strategy to that of KDDI or DOCOMO. Here, Son’s used his unique sensing abilities, one of the elements of dynamic capabilities, to buy the goodwill of the then Vodafone Japan to become a mobile communications carrier for the future. And then, he quickly got the rights from Jobs to sell iPhone exclusively in Japan. The company’s current position as one of Japan’s, and indeed the world’s leading carriers, is due to the above exchange with Apple. Son’s own entrepreneurial leadership is a necessary element of dynamic capabilities

186  Asset orchestration based on BBV and ABV and is the kind of CEO leadership required to make important strategic decisions about the future of a company, just like that of Jobs. In this way, Son and Jobs are both equipped with the dynamic capabilities leadership needed to take action by themselves on matters too important to be left up to their subordinates. Furthermore, another indication of the Japanese mobile telephone industry’s failure to keep pace with smartphones at the time was its product and service strategies involved in the development and sales of the personal digital assistant (PDA) for businesses. In March of 2002, DOCOMO began offering its “infogate” portal site service for PDAs (mobile information terminals). DOCOMO positioned it as “i-menu” navigation PDA version of i-mode to provide information the company selected for mobile telephones. This was an offering of ASP services such as news and other information, and groupware for businesses (my project team also commercialized a PDA video distribution service as one of these infogate services). The infogate service represented a shift from Domain III to Domain I  for the development of new services for existing i-mode services (Shift B in Figures 7.6 and 7.10). Although DOCOMO successfully developed and commercialized the infogate service, it terminated the service in June 2005, ending a series of services for PDAs. This infogate project was organizationally separated from the i-mode project. Looking back on those days, it was difficult to say that the strategic vision and agenda, such as What should the future of cell phone services and business models be? What should be the future of mobile computing and the creation of new customer experiences? What will emerge following i-mode? What should the new mobile handsets be like instead of the current feature phones? were sufficiently shared on the development side within DOCOMO. As a result, integration of attention through internal communication channels and communication that occurs among organizational members within those channels was not as fully achieved as it was during the aforementioned i-mode development. This lack of integration of attention significantly reduced the potential to provide organizational members at the time with a coherent understanding of how to interpret strategic opportunities and threats, and how business solutions to solve business challenges and problems should look, for DOCOMO, and for the Japanese cell phone industry going forward. As a result, the lack of structured interaction between the two elements, attention control and strategic action, prevented synchronization (convergence) to pragmatic boundaries among organizational members within DOCOMO. As a result, DOCOMO’s infogate strategy could not evolve and develop through Domain III  Domain I (Shift B in Figures 7.6 and 7.10)  Domain II (and  Domain III). This case of DOCOMO’s infogate is partly similar to the aforementioned comparative analysis by Ocasio and Joseph (2018) of Apple and Motorola’s new product development (smartphones), in which Motorola’s main organization at the time was fragmented (DOCOMO’s main organization was similarly fragmented), which resulted in very different performance levels achieved by the two companies, even though they started with similar strategic ideas for smartphones.

Asset orchestration based on BBV and ABV 187 Again, as mentioned earlier, DOCOMO put an end to the range of services for PDAs called the infogate service. This was due to slow growth of the PDA market in Japan. Even though some 220,000 infogate subscribers remained, DOCOMO thought that the service could be supplemented to some degree by i-mode, and so shut it down. If the developers at that time had worked on a concrete development plan based on future predictions that PDAs of the time would evolve and become the smartphones of today (like Apple’s iPhone), the strategic position of the Japanese cell phone industry in the global market may have been different from what it is today. In other words, it is assumed that dynamic capabilities (especially the sensing element) were lacking not only in DOCOMO but also in the major players in the Japanese cell phone industry at that time. Meanwhile, the more the i-mode Japanese cell phone device evolved and achieved success in the market, the more it fell into the success trap, which can be interpreted as hindering the demonstration of new dynamic capabilities. This means that while i-mode mobile phone technologies and services became core capabilities of the Japanese mobile phone industry, it was badly managed core capabilities that paradoxically also became core rigidities. In other words, the company’s strength was also its weakness (Leonard-Barton, 1995). The i-mode core capabilities deteriorated into core rigidities, which instead of producing new knowledge like core capabilities should, they interfered with the flow of knowledge. Although already clarified, the Japanese mobile phone industry, which had too heavily leaned toward the business models of the older mobile telephones (including i-mode), was unable to later respond to the smartphone business models like the iPhone. In a different interpretation, the whole Japanese mobile phone industry at the time (mobile telecommunications carriers and mobile phone manufacturers) became infused with unproductive paranoia, which entailed insistence on legitimacy through rational self-dilution and self-defense for the sake of profit. This had the effect of lowering capabilities congruence right across the industry, which has consequently been unable to properly demonstrate the sensing functions of dynamic capabilities to respond to the smartphone market. 7.7 Conclusion This chapter has explored the mechanisms by which asset orchestration, a core element of dynamic capabilities, is created and how dynamic capabilities can change existing ordinary capabilities (and existing dynamic capabilities), and drive the asset orchestration process. The theory proposed in this chapter is an integrated model of the “boundaries-based view (BBV)” and the “attention-based view (ABV)” of an organization (company). This chapter presented a new theoretical process model to realize synchronization (convergence) on pragmatic boundaries by combining the attention-based view (ABV) of attention control and problem-solving with the boundaries-based view (BBV). In this model, the structured interaction between the two elements of attention control and problem-solving shifts the characteristics of boundaries between actors (semantic boundaries  pragmatic boundaries) and synchronizes (converges) actors toward pragmatic boundaries.

188  Asset orchestration based on BBV and ABV Faced with uncertainty and novelty in the business environment, companies (organizations) need to synchronize (converge) the characteristics of boundaries among actors into pragmatic boundaries, and actors need to work on solving current issues and problems. This organizational process generates actors’ dynamic capabilities and triggers transformation (orchestration) (restructuring, reorganization, etc.) of knowledge (assets) that are existing ordinary capabilities (as well as existing dynamic capabilities). This chapter has shown that an integrated framework of the boundaries-based view (BBV) and attention-based view (ABV) is a key management element that generates dynamic capabilities (in particular, asset orchestration) of companies (or organizations) and determines the execution performance of corporate strategies (including product strategies). Notes 1 This service received a 2003 R&D 100 Award in the United States as the platform for the M-Stage Visualnet Service. The R&D 100 Award is a traditional and prestigious award sponsored by R&D World Magazine in the United States that recognizes the 100 best products and technologies developed by world-class research institutions and companies and put into practical use over the past year. 2 There were a number of new projects that were weeded out in the many internal meetings entities that were involved in making commercialization decisions. This was equivalent to the project facing the valley of death (Branscomb et al., 2001; Markham, 2002; Merrifield, 1995).

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8 Implications, conclusion, and future research issues

8.1 New implications Chapter 6 referred to the need to form triad systems as elements for the generation of dynamic capabilities (DC) and strategic innovation capabilities (SIC), and the formation of strategic innovation systems (SIS). Chapter 7 also showed that it is the structured interaction of the two elements of attention control and problem-solving or strategic action that generates dynamic capabilities in the attention-based view (ABV). In particular, in the attention-based view (ABV), successful strategic performance by exercising DC to realize the core business model of a strategy requires sustained focus of attention and effort by actors related to controlled attentional processing. From Chapters 6 and 7, holistic leadership (see Figures 6.7 and 7.1) of a company (or organization) is necessary as a common finding in forming triad systems and generating DC. In other words, holistic leadership is important leadership that should be demonstrated by practitioners of companies (or organizations) that produce DC and SIC. Another common finding is that strategic innovation capabilities (SIC), the integration of DC and ordinary capabilities (OC), facilitate the dynamic construction and innovation of corporate boundaries by facilitating a dynamic asset orchestration process (or knowledge integration process) of internal and external knowledge in companies (see Figure  5.5). On the other hand, Chapter  7 showed that, from the boundaries-based view (BBV), the core elements of DC that orchestrate new assets that arise from various pragmatic boundaries, are the source of innovation (see Figure 7.1). Chapters 5, 6, and 7 showed the existence of the asset orchestration process or knowledge integration process as organizational processes in companies (or organizations), as a common finding in promoting innovation through DC and SIC. In other words, the asset orchestration process or knowledge integration process can be regarded as important organizational actions to be taken by practitioners in companies (or organizations) that produce DC and SIC. These implications and future research issues are discussed later. 8.2 Holistic leadership of companies (organizations) that produce DC and SIC In the 21st century, organizational adaptability to respond to changes in the environment (or to create new environments) to achieve business innovation is a top DOI: 10.4324/9781003305057-8

Conclusion and future research issues 193 priority for many companies (e.g., Burke et al., 2006; Hooijberg et al., 1997; Parry, 1999; Rosing et al., 2011; Uhl-Bien and Marion, 2009). Organizational adaptability is the ability to react quickly to new business opportunities, adapt to volatile market conditions, and drive self-change (Birkinshaw and Gibson, 2004). Organizational adaptability requires both an organic (distributed) organizational structure for exploration toward innovation and a rigid (centralized) organizational structure for exploitation toward expansion of existing business (e.g., Duncan, 1976; Thompson, 1967; Kodama, 2003). In other words, organizational adaptability for the simultaneous pursuit of exploration and exploitation is important. Such organizational adaptability is none other than the strategic innovation capabilities (SIC) presented in this book. Business innovation means not only the development of conventional new products and services but also the realization of new knowledge creation (Nonaka and Takeuchi, 1995; Nonaka et al., 2014) that realizes new business models and new business rules. Knowledge creation through innovative leadership to realize new business innovation therefore becomes especially important for practitioners (e.g., von Krogh et al., 2012). However, it is not enough to simply recognize the importance of knowledge (or assets). Practitioners must always ask how to create, share, and utilize knowledge in their practical activities, and how to strategically approach such knowledge creation for business innovation in their organizations and corporate activities as a whole. In other words, emphasis needs to be placed not only on the knowledge itself as the resultant product, but also on the way knowledge is strategically created, that is, mechanisms (processes). Thus, the most important management issue is what kind of leadership the practitioners will acquire and demonstrate to continuously create valuable, high-quality knowledge inside and outside companies and strategically generate new business innovations. One firm that at present has been attracting attention for having the most outstanding innovation management in the world is Apple in the United States. The late Steve Jobs once commented on the management system that created business innovation at that company by saying, “The system is that there is no system” (Burrows, 2004). What he was saying was “That doesn’t mean we don’t have process. Apple is a very disciplined company, and we have great processes. But that’s not what it’s about. Process makes you more efficient”. But innovation comes from people meeting up in the hallways or calling each other at 10:30 at night with a new idea, or because they realized something that shoots holes in how we’ve been thinking about a problem. It’s ad hoc meetings of six people called by someone who thinks he has figured out the coolest new thing ever and who wants to know what other people think of his idea. Steve Jobs said that it was from this kind of interaction that business innovation was born. In other words, the realization of true business innovation comes from a balance between efficiency and creativity. Decision-making, strict discipline, and routine

194  Conclusion and future research issues within the formal organizations of a company create efficient business processes as strategic management processes. On the other hand, creativity in the form of ideas for realizing business innovation develops mainly from interaction among people in informal organizations, in other words, informal human networks. Essentially, creativity has its roots in dynamic, diverse practices among people based on discontinuous trial and error that deviates from efficient processes. However, business innovation cannot be realized through informal network practices among staff alone. This is because to realize creativity in terms of specific ideas and concepts, such as the establishment of a superior supply chain, for example, strategic management (process management) for realizing an efficient business model is also necessary. Therefore, one question leader practitioners face is how to manage the “tug of war between efficiency and creativity” that is constantly occurring within and outside organizations. A further question that must be considered is what kind of leadership is required for practitioners to execute such management. Of particular importance is the viewpoint of “micro-leadership processes and dynamism” that practitioners demonstrate in the company as well as the dynamic, innovative leadership concepts and practices the practitioners, as micro-entities, execute intentionally (or unintentionally) according to circumstances not only in formal organizations but also in informal organizations to strategically generate new business innovation. My research revealed that the leadership demonstrated by practitioners in the area where the previously mentioned “tug of war between efficiency and creativity” takes place is a critical factor in producing high-quality business innovation. In other words, in these areas where the tug of war between efficiency and creativity occurs, leadership of practitioners (practitioners in top and middle management, and lower staff levels) that uses organizational adaptability, or strategic innovation capabilities (SIC), to combine these elements while skillfully maintaining the balance between them is crucial for achieving business innovation. In other words, the pursuit of efficiency requires concentration with control in an organization, while the pursuit of creativity requires decentralization with autonomy in an organization. As mentioned in Chapter  7, for successful strategic performance, from an attention-based view (ABV) perspective, actors need to sustainably focus their attention and efforts related to controlled attentional processing to realize the core business model of a strategy. This suggests that actors’ management and leadership with concentration and decentralization is important to sustain controlled attentional processing. In Apple’s rigid centralized networks of official organizations (strategic communities for exploitation activities – exploitation SC), discipline, rules, and processes are always emphasized, and the centralized leadership regulated by the late Steve Jobs (now Tim Cook) and senior executives enables full control of the most trivial issues and action items (and sometimes the essential strategic agenda) upstream to downstream in the business process. Meanwhile, at Apple, the executive team (ET) led by the late Steve Jobs (now Tim Cook) draws up a comprehensive strategy and narrows down a strategic agenda.

Conclusion and future research issues 195 Apple then rewires (or short cuts) its human networks to mobilize and acquire new and better internal and external assets to solve strategic agenda and build new business models, and creates strategic communities (SC) (and networked SC) as distributed networks (strategic communities for exploration activities – exploration SC). Furthermore, Apple’s executive team (ET) plays the role of the leader team (LT) referred to in Chapter 6, and simultaneously exercises autonomous and creative distributed leadership and organizationally controlled centralized leadership, forming synthesis SC and dynamically constructing an SC triad system. Apple’s holistic leadership through its organizational adaptability to use or coexist with centralized networks by such centralized leadership and distributed networks by distributed leadership (Kodama, 2017, 2019) creates DC and SIC in the company (or its organizations). Holistic leadership is implemented through each of Apple’s management levels (top and middle management, and staff), and integrated into strategic action processes to develop and realize new products that have never existed. Holistic leadership has fractality as a complex adaptive system. Holistic leadership is a leadership style in which practitioners (in the three management layers of top and middle management, and staff) dynamically use or combine centralized, dialectic, and distributed leadership in three practice layers (the formal organizational layer, the psychological boundary layer (adaptive space), and the informal organizational layer) according to the situation, and balance contradictions such as the tug of war between efficiency and creativity, and, as organizational adaptability, demonstrate DC as well as SIC (Kodama, 2017, 2019). The centralized leadership forms exploitation SC for exploitation activities, while distributed leadership forms exploration SC for exploration activities. These two types of SC (exploitation SC and exploration SC) are integrated by synthesis SC and triad SC formed by the leader team’s dialectical leadership. Triad SC integrate the radical innovation system (RIS) and the incremental innovation system (IIS) mentioned in Chapter 6 to create corporate (organizational) DC and SIC. More generally speaking, holistic leadership induces the ability to think and act in response to organizational adaptability to changes in actors’ environments (uncertainty and speed of change) and brings about DC and SIC in companies (or organizations). The continuous realization of the framing and implementation of strategic agenda is achieved through management with concentration and decentralization by holistic leadership through controlled attentional processing. 8.3 Holistic leadership as complex adaptive leadership One of the major issues facing corporate leaders is raising organizational adaptability to demonstrate innovation as well as develop the existing businesses of individual practitioners and organizations in constantly changing and wildly fluctuating competitive environments. In other words, in organizational adaptability, developing existing business means “exploitation”, while innovation means “exploration” (March, 1991). March (1991) expressed these diametrically opposed requirements as the two aspects of organizational learning of “exploration” and “exploitation”. Exploration

196  Conclusion and future research issues is the act of generating new knowledge, skills, and processes to maintain the survivability of a company (organization) into the future through such aspects as investigation, diversity, risk-taking, experimenting, play, flexibility, innovation, and discovery. In contrast, exploitation entails using existing knowledge, skills, and processes for the purpose of bringing about successful corporate (organizational) results at the current time through such aspects as selection, refinement, screening, efficiency, and execution. Leadership for organizational adaptability that combines both exploration and exploitation is different from that described in conventional leadership theories. The traits of leadership for organizational adaptability newly derived from this research differ from traits of “style leadership” theory, which, like conventional leadership theory, are attributes of only top management and certain leaders. Style leadership theory has been criticized for not sufficiently taking into consideration contingencies (Gill, 2006). This is due to the existence of style leadership independent of a strategy context or organizational context that changes dynamically, and the leadership style and behavior therefore remain static. Therefore, it can be said that static leadership of this type is unsuitable as a leadership theory for achieving business innovation in a dynamically changing management environment. As identified by Uhl-Bien and Arena (2018), leadership for organizational adaptability is not the same as simply commanding transformation. For example, it does not place a focus on driving transformation top-down from leaders with visions and inspiration, etc. (e.g., Baur et al., 2016), but instead the focus is on how leaders can make organizations and their members demonstrate adaptability when faced with complex challenges such as the achievement of innovation. In other words, managers and leaders at various management layers in an organization must drive communication and collaboration among organizational members, so that they have the flexibility, agility, and adaptability to handle changes in the world that are often dramatic and unpredictable (e.g., Keister, 2014; Uhl-Bien et al., 2007). According to Uhl-Bien and Arena (2018), in the integrated framework, leadership for organizational adaptability requires the three aspects of (a) “entrepreneurial leadership” (e.g., endogenous entrepreneurship), (b) “enabling leadership” to enable adaptive processes through adaptive spaces, and (c) “operational leadership” that handles novelty (e.g., reintegration) with novelty incorporated into the core of business management as an adaptive new order. Rather than a hierarchical process, these three types of leadership forms are demonstrated in all management layers, and in informal and formal organizations. In particular, entrepreneurial leadership, which focuses on innovation, is mainly demonstrated in informal organizations, which are autonomous, decentralized networks in new organizations, and corresponds to the distributed leadership described earlier. On the other hand, operational leadership, which focuses on core businesses, is mainly demonstrated in formal organizations as existing organizations with centralized control and corresponds to the centralized leadership described earlier. Enabling leadership corresponds to the dialectical leadership described earlier, and is exercised between decentralization and concentration of informal (networked) and formal organizations (structures).

Conclusion and future research issues 197 Entrepreneurial leadership (distributed leadership) is not necessarily bottom-up. In actual fact, this type of leadership is often demonstrated from the top (e.g., the CEOs such as Steve Jobs discussed earlier). Even if driven by top leaders, these business issues are the same in whatever layer of management. Leaders must move forward to commercialize an entrepreneurial idea, a process which takes place in “adaptive spaces” (see Figure 8.1). In complex adaptive systems, by creating adaptive spaces (Arena et  al., 2017; Uhl-Bien and Arena, 2017) to bring about adaptability in the connections between the diametrically opposite requirements of exploration (entrepreneurial activity) and exploitation (activity of main, existing business), conflicts and relationships of tension can be overcome. These adaptive spaces handle tensions (conflicts) that arise from these pressures and bring about adaptive reactions (elements of dynamic capabilities such as learning, innovation, etc.) that enable new adaptive order as new business in the core of business management (new structures of resources and business routines – reintegration) by using integration mechanisms (e.g., connecting). Here, integration mechanisms (e.g., connecting) mean mechanisms to connect ideas, knowledge, human resources and technology, etc. to expand novelty and innovation, and to bring about advantageous new orders to existing management (business) systems. Leaders achieve these connections (Arena et al., 2017; Uhl-Bien and Arena, 2017) by configuring informal organizations that invigorate and amplify the emergence of novelty and innovation (network structures such as strategic

Figure 8.1 A framework of holistic leadership from complex adaptive theory Source: Created by the author, citing Figures 4 and 5 in Uhl-Bien and Arena (2018)

198  Conclusion and future research issues communities) (e.g., Kodama, 2005) and creating adaptive spaces. Such organizational processes correspond to asset orchestration by dynamic capabilities (DC). Leaders’ effective involvement in conflicts (i.e., tensions) and connections (i.e., integration) triggers and amplifies the generation of ideas (adaptive reactions for innovation), which enables the creation of “adaptive spaces” and “adaptive processes” to bring about structures and processes to achieve organizational new adaptive order (i.e., reintegration). To realize such adaptive space and adaptive process, the structured interaction of the two elements of attentional control and problem-solving or strategic action through controlled attentional processing and the organizational process of synchronization (convergence) of the actors to pragmatic boundaries as described in Chapter 7 are necessary (see Figures 7.1 and 7.3). This enables leaders to demonstrate dynamic capabilities, reconfigure resources (assets) (transforming existing ordinary capabilities), and thereby stimulate and amplify the emergence of novelty and innovation, including ideas. These core adaptive processes are initiatives for handling tense relationships between the necessity of innovation and driving existing main business (March, 1991). These adaptive processes by leaders entail the following behavioral forms: Entrepreneurial leaders move forward through the demonstration of entrepreneurial leadership (distributed leadership) of new ideas that conflict with the management systems of existing main business (because the idea can’t be achieved easily, it’s too expensive, it requires resources that the organization currently doesn’t have, it goes against the dominant organizational identity, or its disruptive technology etc.). Then, entrepreneurial leaders reconfigure the best and most feasible ideas (new products, processes, services, technology or marketability, etc.), which then is taken to commercialization as a formal management system (business system) through the demonstration of operational leadership (centralized leadership) by leaders of existing organizations involved with commercializing the idea. During the processes of generating such an idea through to commercializing it, enabling leaders to create conditions (adaptive spaces) to enable conflict and connection through the demonstration of “enabling leadership (dialectical leadership)”, trigger, invigorate, and amplify ideas, and expand these ideas to reach new orders (emergence) in forms matched to the adaptive needs of organizations and their environments. Enabling leaders support the process all the way from the generation of ideas through to commercialization (see Figure 8.1). In such adaptive spaces and adaptive processes, actors need to continuously focus their attention and efforts related to controlled attentional processing and to synchronize (converge) to pragmatic boundaries to generate dynamic capabilities (DC) for the realization of the core business model of a strategy. As described earlier, the three types of leadership form – entrepreneurial leadership (distributed leadership), enabling leadership (dialectical leadership), and operational leadership (centralized leadership) – can be positioned in organizational management layers, informal and formal organizations, new and existing organizations, and adaptive space categories, as shown in Figure 8.1. An important perspective is that these three types of leadership forms are appropriately positioned and demonstrated in any management layer (the three layers of top, middle, and lower

Conclusion and future research issues 199 management), in any organizational structures (formal and informal organizations) and in adaptive spaces that enable conflict and connection, rather than being a hierarchical process. These three types of leadership forms can also be described as “ambidextrous leadership” (O’Reilly and Tushman, 2004) that has two different elements of entrepreneurial leadership (distributed leadership) and operational leadership (centralized leadership), centered on enabling leadership (dialectical leadership). Ambidextrous leadership characteristically appears not only in top management but also in all persons in an organization (Birkinshaw and Gibson, 2004). Staff who engage in ambidextrous leadership make their own judgments and consciously select objects and methods to pour their energy into without looking for permission or support from their superiors. These people are sufficiently motivated to act by their own will, recognize the necessity to take actions consistent with strategy while aiming for adaption, and create cooperative situations between differing organizations (Birkinshaw and Gibson, 2004). 8.4 Asset orchestration or knowledge integration processes of companies (organizations) that bring about DC and SIC 8.4.1  Findings from knowledge boundary theory and network theory

Leonard-Barton (1995) mentions that many innovations occur between disciplines or specialties. In knowledge in organizations, knowledge boundaries (e.g., Brown and Duguid, 1991) exist between disciplines. Knowledge is both a source and a barrier to innovation. Knowledge (or assets) is also the reason why tasks performed across boundaries are a major source of competitive advantage and why innovation is so difficult to generate and sustain (Carlile, 2002). Therefore, knowledge boundaries are deeply related to the innovation process and have a significant impact on the knowledge integration process. Carlile (2004), referring to the three properties of knowledge in boundaries (syntactic boundaries/semantic boundaries/pragmatic boundaries) from the boundariesbased view (BBV) mentioned in Chapter  7, pointed out that the correlative properties of knowledge (difference, dependency, novelty) can be represented by imagining boundaries as vectors between two or more actors (see Figure 8.2). One of the characteristics of innovation-related boundaries is that on particularly important pragmatic boundaries, actors transform existing knowledge through friction, conflict, and even political power among themselves to accomplish new tasks and goals that didn’t exist before. These boundaries correspond to the specific achievement of new business concepts (new product and service developments to achieve new business models, new technical architecture or component developments or new development and production methods, etc.). New knowledge, the source of innovation, is born on these pragmatic boundaries. In the context of organizational learning theory, semantic boundaries, characteristic of communities of practice (e.g., Brown and Duguid, 1991), share meaning

200  Conclusion and future research issues

Figure 8.2 Characteristics of organizational boundaries (knowledge boundaries) Source: Created by the author, citing Carlile (2002, 2004) and Kodama (2007a)

for learning when individuals participate in similar activities (Dougherty, 1992). On pragmatic boundaries, on the other hand, increased novelty creates a variety of interests among actors, preventing them from sharing and evaluating knowledge. Therefore, it is necessary to form business communities (Kodama, 2007a) to realize appropriate means for sharing and evaluating knowledge on boundaries and to transform existing knowledge. This is where an understanding and sharing of interests, intentions, and perspectives is required as common knowledge among actors. The formation of organizational entities as business communities, matches (or converges) the capacity for common knowledge among actors and the types of boundaries they face, creating the ability for actors to evaluate and leverage (and transform) the common knowledge and expertise (Kodama, 2018a, 2018b). However, Carlile (2004) does not clarify what organizational forms (e.g., informal organizations) with pragmatic boundary characteristics generate and integrate new knowledge. I focus on the formation of informal organizations, which are dynamic multilayered networks of small-world structures with characteristics of pragmatic boundaries that span within and between organizations (Kodama, 2007a, 2009) (see Figure 8.3). The formation of contextual networks called group interlock networks (Watts, 2004) is assumed to evaluate, integrate, and transform knowledge on multiple layered pragmatic boundaries for new knowledge creation (or knowledge integration) (e.g., Kodama, 2002, 2005), but detailed research is a future issue. Carlile’s (2004) 3T (Transfer/Translate/Transform) model, which further extends Shannon and Weaver’s (1949) communication theory to organizational theory, has been used as an analytical framework in case studies and quantitative empirical research on product innovation and corporate transformation in companies.

Conclusion and future research issues 201

Figure 8.3 Knowledge integration through uniting boundaries (graphic): group interlock network Source: Created by the author, citing Kodama (2009)

For example, prior studies such as Matsushita’s model of corporate transformation through knowledge integration (Kodama, 2007d), the knowledge integration process in new product development spanning companies (Kodama, 2007c), the knowledge sharing process between customers and suppliers in product development (Le Dain and Merminod, 2014), project management among stakeholders (Van Offenbeek and Vos, 2016), and the correlation between knowledge integration capability and common knowledge in the 3T model (Acharya et al., 2022) and others have been reported. From the above perspectives, analysis and consideration from such knowledge boundary theory and network theory are important to unravel the black box that is the knowledge integration process. 8.4.2 Positioning of knowledge integration capabilities in dynamic capabilities – the relationship with asset orchestration in dynamic capabilities

Few prior studies exist on the relationship between knowledge integration capabilities and dynamic capabilities (e.g., Teece, 2007, 2014). However, the fact that many innovations occur on inter-disciplinary boundaries (Leonard-Barton, 1995) indicates that effectively managing knowledge across various boundaries within and outside organizations can provide a competitive advantage. Applying the knowledge boundary theory framework (e.g., the 3T model) to strategic questions may provide a concrete way to explain the core concept of dynamic capabilities (Carlile, 2004).

202  Conclusion and future research issues Carlile (2004) mentions that at the company level, dynamic capability can be viewed as various combinations of capacities and abilities that can be used to share and evaluate knowledge across various boundaries. From perspectives such as these, he argues that a company can be more perfectly described by viewing it not as a bundle of resources (Barney, 1991) but as a bundle of various types of boundaries that require knowledge sharing and evaluation, but the details are not clear. However, based on the i-mode case study in Chapter 7 and the results of my own action research on new service development, the aforementioned integration of a multi-layered network of small-world structures with the characteristics of pragmatic boundaries crossing inside and outside an organization (in other words, a bundle of many pragmatic boundaries) provides a hint for clarifying the strategic and organizational characteristics of dynamic capability (Kodama, 2018a, 2018b). On the other hand, the asset orchestration function (Teece, 2007), a central concept in dynamic capability, is reinforced by three organizational processes: (1) coordination/integration, (2) learning, and (3) reconfiguration (Teece et al., 1997). Coordination and integration routines link various types of knowledge in an entrepreneurial manner for the purpose of, for example, new product development. Learning is an outcome of practice and experimentation and enables more efficient task performance. Reconfiguration or transformation involves recombining, modifying, or transforming existing knowledge. The ability to orchestrate assets through dynamic capability is more of a creation, difficult to imitate, and generally impossible to purchase (Teece, 2014). In another interpretation, the asset orchestration function refers to the ability to transform (recombine, modify, or convert) existing knowledge on pragmatic boundaries, to which Carlile (2004) referred. Teece (2014, p.  340) discusses the comments of U.S. Army General Stanley McChrystal regarding such asset orchestration functions. We had a culture in our forces, of excellence. It was how good can I  be at my task? . . . But that’s not as important as how well those pieces mesh together . . . The real art is . . . cooperating with civilian agencies, it’s cooperating with conventional forces, it’s tying the pieces together. That’s the art of war, and that’s the hard part. This means that resources alone were not sufficient during the period the U.S. Army was involved in Iraq. In addition, the late Steve Jobs of Apple Inc. had the following to say about new product development: designing a product is keeping 5,000 things in your brain, these concepts, and fitting them all together and kind of continuing to push to fit them together in new and different ways to get what you want, and every day you discover something new that is a new problem or a new opportunity to fit these things together a little differently, and it’s that process that is the magic and . . . (Jobs, 1995)

Conclusion and future research issues 203

Figure 8.4 Positioning knowledge integration capabilities in dynamic capabilities

The asset orchestration function for realizing innovation, as well as the knowledge integration process, are essentially about how skillfully to combine individual pieces, how to recombine a large number of concepts through trial and error and connect them in new ways to create what you want. Teece (2014) mentions that VRIN resources (Barney, 1991) are, by definition, inherently valuable in themselves, but VRIN resources alone do not create longterm corporate value (e.g., the aforementioned military forces or Apple’s ability to develop new products). Long-term growth and survival of a company requires smart orchestration (i.e., knowledge integration processes) by management and middle managers who pursue good strategies with dynamic capabilities. The common denominator between knowledge integration capabilities and dynamic capabilities is the knowledge integration process of asset orchestration. However, the dynamic mechanisms of the knowledge integration process and asset orchestration are largely unknown (see Figure 8.4). Furthermore, which pieces are skillfully combined to achieve cospecialization? – It is assumed that the creation of boundaries knowledge (Kodama, 2019, 2020) is necessary for cospecialization (Teece, 2007). This is a topic for future research. 8.5 Conclusion This book describes the dynamic innovation process for companies to achieve strategic innovation (both incremental innovation and radical innovation) from a systems approach. The book also presented the “strategic innovation system”, a holistic

204  Conclusion and future research issues theoretical model that is a capabilities system for companies to realize strategic innovation, and defined the capabilities (strategic innovation capabilities) necessary for companies to continuously implement incremental and radical innovation and realize strategic innovation. To achieve rapid and slow incremental innovation for exploitation and radical innovation for exploitation, companies must demonstrate strategic innovation capabilities to skillfully use both dynamic and ordinary capabilities on the capabilities building map, combine them and execute the dynamic spiral of these two different capabilities through time. The concept of strategic innovation capabilities covers the four capabilities of: (1) Capabilities integrating DC and OC throughout the company (2) Management capabilities for achieving spiral “strategic innovation loops” (3) Management capabilities within and among domains (including shifts between domains) (4) Capabilities for balancing two different archetypes through dialectical management In terms of promoting existing businesses and developing new businesses, the business process of corporate activities generally consists of four domains, as shown in the “Business Activity Map” in Chapter 2 (Figure 2.4). Therefore, the capabilities exhibited by organizations in each domain (capabilities building map in Figure 2.6) are different. In each domain, the existing ordinary capabilities (OC) of organizations are the foundation, but environmental conditions (uncertainty and speed of change) will inevitably require existing OC to be transformed and dynamic capabilities (DC) to be demonstrated. In particular, sustainable strategic innovation requires shifting between domains on the capabilities building map. Companies need to find capability opportunities and aim for new radical innovation to create new businesses to break out of the fast-changing environment of competitive markets, the war of attrition with competitors, and declining markets. To this end, it is important for companies to create new DC for existing OC (which may include existing DC) to transform, evolve, and develop capabilities (Shifts A and B in Figures 7.6 and 7.10). Based on the findings of systems theory, strategic innovation capabilities are a component of the strategic innovation system (SIS) as a corporate system. Furthermore, the SIS that guarantees sustainable growth of a company through strategic innovation capabilities should be corporate system that integrates RIS (exploratory processes) and IIS (exploitative processes). Such an SIS has the characteristics of a complex adaptive system (CAS) and autopoiesis. Collaborative research systems with industry, government, and academia that transcend the boundaries of corporate organizations globally have expanded the scope of business opportunity exploration, while excellent middle managers, including those at the executive level, have identified customer needs and worked with suppliers to actively develop “open innovation” (Chesbrough, 2003) and “hybrid innovation” (Kodama, 2011) that incorporate outside technologies, which have become increasingly more and more common in recent years. Here, in addition to OC, practitioners use strategic innovation capabilities to perform the core elements

Conclusion and future research issues 205 of DC, sensing, to search, filter, and analyze business opportunities, seizing to create a grand design for a new business model, and transforming to change and implement the strategy. New insights into such dynamic strategic innovation are becoming important management elements in the era of convergence. In the advanced IT age, superior core technologies in cutting-edge business fields are distributed and innovated all over the world. Therefore, in the era of convergence, where valuable cospecialized assets create wealth, it is increasingly important in the knowledge economy for management to integrate excellent intangible assets that are open and distributed inside and outside companies, including customers, from multiple perspectives, through the demonstration of strategic innovation capabilities. Future research on dynamic capabilities (DC) needs to explore more deeply the dynamic processes and mechanisms by which dynamic capabilities affect existing ordinary capabilities (including existing dynamic capabilities) in a variety of business environments (e.g., levels of uncertainty, speed of change, and relative stability). Furthermore, it is necessary to study the mechanism of asset orchestration, which is a core function of DC, and the leadership (including holistic leadership presented in this book) that executives and managers should exercise to realize asset orchestration. I think that the capabilities building map that expresses dynamic changes in capabilities, and strategic innovation capabilities presented in this book, as well as the integrated and theoretical perspectives of the boundaries-based view (BBV) and the attention-based view (ABV) will provide new insights for future capabilities research. References Acharya, C., Ojha, D., Gokhale, R. and Patel, P. C. (2022). Managing information for innovation using knowledge integration capability: The role of boundary spanning objects. International Journal of Information Management, 62, 102438. Arena, M., Cross, R., Sims, J. and Uhl-Bien, M. (2017). Groundswell: Tapping the power of employee networks to fuel emergent innovation. MIT Sloan Management Review, 58(4), 39–47. Barney, J. (1991). Firm resources and sustained competitive advantage.  Journal of Management, 17(1), 99–120. Baur, J. E., Parker Ellen, B., Buckley, M. R., Ferris, G. R., Allison, T. H., McKenny, A. F. and Short, J. C. (2016). More than one way to articulate a vision: A configurations approach to leader charismatic rhetoric and influence. The Leadership Quarterly, 27(1), 156–171. Birkinshaw, J. and Gibson, C. (2004). Building ambidexterity into an organization. MIT Sloan Management Review, 45(4), 47–55. Brown, J. S. and Duguid, P. (1991). Organizational learning and communities-of-practice: Toward a unified view of working, learning, and innovation.  Organization Science,  2(1), 40–57. Burke, C. S., Pierce, L. G. and Salas, E. (2006). Understanding Adaptability: A Prerequisite for Effective Performance Within Complex Environments. Amsterdam, Netherlands: Elsevier. Burrows, P. (2004). The seed of apple’s innovation. Business Week, 12. Carlile, P. (2002). A pragmatic view of knowledge and boundaries: Boundary objects in new product development. Organization Science, 13(4), 442–455.

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Index

3T model 152, 200 – 201 activities-based view of the firm 18, 21 adaption dynamic capabilities 70 adaptive processes 196 – 198 adaptive spaces 195 – 199 ambidextrous leadership 199, 207 ambidextrous organization 11, 45, 62, 64, 68, 73 – 74, 77, 91, 104 – 105, 144, 148, 174, 191, 206 – 207 Apple 3, 9, 19, 39 – 40, 45, 63, 90, 102, 118 – 119, 125, 131 – 132, 136, 143, 161 – 163, 166, 174, 185 – 187, 193 – 195, 202 – 203, 205 asset orchestration xi, 9, 20 – 21, 56, 58, 80 – 85, 87, 89 – 91, 97 – 101, 113 – 114, 116, 149 – 150, 153 – 156, 158 – 159, 161, 163, 166 – 167, 170, 173 – 174, 181, 187 – 188, 192, 198 – 199, 201 – 203, 205 attentional control 150, 156 – 162, 198 attention-based view 149 – 150, 156 – 160, 165 – 166, 187 – 188, 190, 192, 194, 197, 205 autopoiesis 131, 134 – 135, 137 – 140, 145, 204 Barabási, A. L. 153 – 154, 188 Barney, J. B. 6, 9, 13, 40, 202 – 203, 205 Bonardi, J. P. 5 – 8, 11 boundaries-based view 149 – 150, 158 – 161, 187 – 188, 192, 197, 205 boundaries vision 33, 42, 76, 89, 104, 133, 147, 151 boundary designs 101 Branscomb, L. M. 5, 9, 22, 35, 40, 54, 60, 64 – 65, 75, 83, 102, 115, 146, 188

breakthrough innovation 1 – 2, 11, 24, 62, 82, 100, 104 breakthrough innovation capability 47 – 48, 55 – 56, 58 – 59, 80 – 81, 83, 92 Brusoni, S. 150, 157 – 161, 191 business activities map 22 – 24, 26 – 27, 204 capabilities abrasion 165, 179, 183 capabilities building 4 – 5, 7 – 9, 13, 15 – 17, 20 – 21, 26 – 27, 34, 39, 45 – 46, 58 – 59, 63, 70, 73 – 75, 79 – 80, 86 – 87 capabilities building map xi, 7 – 8, 15 – 17, 20 – 22, 26 – 27, 31, 34, 39 – 40, 51, 58 – 59, 74 – 75, 79 – 80, 86, 92 – 94, 96, 98, 101, 107 – 109, 117, 126, 132 – 133, 138 – 139, 141, 166, 175, 181 – 183, 204 – 205 capabilities lifecycle 17, 20 – 22, 34 – 37, 39, 41, 69 – 70, 74 – 75, 86, 88, 103, 107 – 109, 146, 166, 175, 189 Carlile, P. 33, 40, 91, 102, 150 – 152, 158 – 159, 188, 199 – 202, 205 – 206 centralized leadership 67 – 68, 85, 163, 194 – 199 centralized networks 154, 162 – 163, 194 – 196 chain-linked model 50 – 51, 88, 92 Chesbrough, H. W. 9, 26, 40, 43, 48, 53, 60, 61, 75, 81, 98, 101 – 102, 146, 188, 204, 206 Christensen, C. M. 1, 10, 33, 40, 81, 89, 91, 100, 102, 152, 184, 189 collaborative innovation i, 98 – 99, 104, 147, 206 communities of practice 151, 153 – 154, 191, 199 – 200, 202, 205 complex adaptive system 24, 42, 61, 134 – 136, 145, 195, 197, 204

Index  209 convergence 3, 42 – 43, 71, 76, 96 – 98, 100 – 102, 104 – 105, 107, 113, 143, 147, 153, 155 – 156, 158, 160 – 161, 165, 169, 176, 180 – 181, 186 – 187, 198, 205 – 206 core rigidities 1, 11, 42, 177 – 178, 185, 187, 190 corporate system 5, 8, 45, 87, 106 – 107, 109, 130 – 131, 133 – 134, 137 – 140, 144 – 145, 204 cospecialization 82, 90, 97 – 98, 100, 166, 173, 203 COVID-19 37, 39 creative abrasion 68, 91, 131, 135, 140, 142, 151, 165, 200 cross-functional team 124 – 125, 129, 142, 173 cross innovation 89 Darwinian sea 5, 22, 25, 31, 35, 57, 64 – 67, 70 – 71, 75, 84 – 85 Day, G. 54 – 55, 60, 89, 102 decentralized networks 154, 196 Devil’s River 65 discontinuous innovation 1, 42, 44, 100, 147 disruptive innovation 1, 33, 100, 113, 152 distributed networks 162 – 163, 195 Dixon, S. 69 – 70, 75 doing the right things 14, 58, 66 – 67, 80 – 81, 83 – 84 doing things right 14 – 15, 36, 56, 58, 80 dual-purpose capabilities 93 – 94, 96 dynamic capabilities i – ii, xi – xii, 4, 7, 9, 11 – 17, 19 – 21, 27 – 31, 33, 35 – 37, 39, 41 – 44, 46 – 49, 54 – 56, 58 – 62, 66 – 67, 70 – 77, 79 – 80, 86, 89 – 90, 92 – 94, 96, 100, 103 – 108, 112 – 114, 116, 118 – 120, 124 – 126, 128, 131, 141, 146 – 162, 166, 174 – 175, 177 – 178, 180 – 181, 183 – 189, 191 – 192, 197 – 198, 201 – 207 dynamic capabilities approach 6 – 9, 13, 27, 46, 49, 51, 59, 74 – 75, 79, 86 dynamic capabilities cycle 70 – 71 dynamic capabilities lifecycle 69 – 71, 74 – 75 edge of chaos 136 – 137, 148 Ehlers, E. 64 Ehlers, V. J. 64, 76 Eisenhardt, K. 1, 10, 24, 27, 30, 40 – 41, 46 – 47, 53 – 54, 60, 132, 146, 171, 189

enabling leadership 196 – 199 entrepreneurial leadership 185, 196 – 199 executive team 163, 194 – 195 exploitation 2 – 5, 8 – 9, 11, 27, 31 – 32, 34, 45 – 47, 50 – 51, 57, 60 – 61, 63 – 64, 66 – 77, 83, 85 – 87, 89, 91, 94, 100 – 102, 104, 107 – 108, 112 – 113, 116, 118, 120, 124, 129 – 133, 135, 139 – 140, 142 – 144, 146, 184, 193 – 197, 204, 207 exploitation Ba 70, 72, 143 – 144 exploitation SC 72 – 74, 111 – 119, 122, 124, 126, 128 – 129, 140 – 144, 194 – 195 exploration 2 – 5, 8 – 9, 11, 24, 27, 30 – 32, 34, 45 – 47, 50 – 51, 60 – 61, 63 – 64, 66 – 77, 81 – 82, 86 – 87, 89, 91, 94, 99 – 102, 104, 107 – 108, 110, 112 – 113, 117 – 118, 120, 124, 129 – 133, 135, 139 – 140, 142 – 144, 146, 184, 193, 195 – 197, 204, 207 exploration and exploitation approach 6 – 9, 46, 59, 63 – 78, 79, 87 exploration Ba 70 – 72, 143 – 144 exploration SC 72 – 74, 113 – 118, 120, 124 – 125, 128 – 129, 140 – 144, 195 feedback loop 23 – 25, 30, 50 – 51, 88, 92, 135, 138 – 139, 166 five forces 6, 28 Fujifilm 8 – 9, 38 – 39, 42, 74, 76, 104, 108 – 116, 136 – 139, 143, 147, 175 group interlocked networks 156, 200 – 201 Grove, A. S. 184, 189 Helfat, C. E. 15 – 17, 20 – 21, 28, 34 – 38, 41, 47, 56, 60, 86, 88, 92 – 96, 103, 108 – 110, 145 – 146, 149, 166, 175 – 176, 189 holistic leadership i, 76, 142 – 144, 147, 150, 158, 163, 190, 192, 195, 197, 205 – 206 HUAWEI 8, 108, 120 – 125, 136 – 139, 142 hybrid innovation 101, 204 ICT industry 3, 32, 102, 107 i-mode 131 – 132, 163 – 181, 183 – 187, 190, 202 incremental innovation i, 2 – 3, 5, 8, 10, 20, 22, 24, 33, 45, 50 – 51, 58, 64, 66 – 68, 70 – 71, 73, 80 – 81, 85 – 87, 89, 94, 100 – 101, 106, 108, 131, 140, 178, 203 – 204

210 Index incremental innovation system 109, 116 – 119, 121, 124, 126, 130 – 131, 134, 140, 145, 195 innovation process xi, 3, 5 – 6, 8, 18, 20, 22, 24 – 26, 49 – 50, 74, 101, 106 – 107, 145, 199, 203 innovation process approach 6 – 9, 45 – 46, 58 – 59, 79, 86 integrated capabilities 94 – 96, 100 Intel 47, 184 J-PHONE 177 – 178 KDDI 178, 185 Kline, S. J. 23 – 24, 41, 49 – 50, 61, 88, 92, 103 knowledge creation xi – xii, 3, 10, 18, 41, 43, 61, 63 – 64, 70 – 71, 76 – 77, 103 – 104, 118, 143, 147 – 148, 189, 193, 200, 206 – 207 knowledge integration i, xi, 10, 18, 21, 27, 33, 42, 70, 89, 103, 107, 144, 147, 190, 192, 199 – 201, 203, 205 – 206 knowledge triad 70 – 71 knowledge triads model 70 – 71, 74 – 75 Kodak 38 – 39, 109 – 110, 175 Kodama, M. i – iv, xii, 1 – 3, 5, 10 – 11, 16, 18 – 19, 22, 25 – 31, 33, 38 – 39, 41 – 42, 45, 51 – 54, 57, 61, 64, 66 – 69, 72, 74, 76 – 77, 81 – 82, 84 – 85, 88 – 89, 91, 96 – 101, 103 – 104, 107 – 109, 115, 130 – 135, 137 – 138, 140 – 143, 146 – 154, 156, 158 – 159, 163 – 166, 169 – 170, 174 – 175, 179 – 181, 183, 185, 189 – 191, 191, 193, 195, 198, 200 – 204, 206 – 207 LCD 38, 110, 145, 165 leader team 72 – 74, 118, 120, 124, 128 – 129, 140, 142 – 145, 195 learning before doing 15, 56, 58, 80 Leonard-Barton, D. 1, 11, 13, 42, 49 – 50, 61, 68, 77, 91, 104, 142, 147, 151, 153, 177, 187, 190, 199 – 201, 207 linear model 23, 25, 49 – 51 line networks 73 – 74, 129, 140 – 142, 144 Luhmann, N. 138 – 139, 147 major innovation 11, 43, 47 – 48, 55 – 56, 58 – 59, 61, 80, 104, 148 management system i – ii, 4, 12, 19, 43, 46, 48 – 49, 61 – 62, 92, 104, 106, 118, 120, 122 – 124, 128, 134 – 135, 138, 146, 193, 198

March, J. 1, 3 – 5, 11, 46 – 47, 61, 64, 71, 77, 89, 104, 171 – 172, 176, 186, 195, 198, 207 market-access capability 93 – 94 Markides, C. 2 – 3, 11, 32, 42, 53, 61, 69, 77, 85 – 86, 88, 104, 106, 147 Matsushita Electronic 103, 152, 172, 201, 206 MI dynamic capability 47 – 48, 55 – 56, 58 – 59, 80 – 82, 92 multi-layered SC 72 – 73, 113 – 114, 124, 129, 141 – 143, 166, 181 multiple-variant capabilities 93 – 94, 96 Nelson, R. 1, 4, 11, 16 – 17, 41 – 42, 47, 61, 68, 77, 85, 90, 104, 149, 190 networked organizations 72, 141 networked strategic communities 10, 41, 61, 76, 103, 147, 159, 161, 189, 206 new product development 5, 10 – 11, 18, 23 – 24, 41 – 42, 44, 46 – 47, 49, 51, 59 – 62, 75 – 76, 90, 95, 102 – 104, 112, 123, 143, 147, 152, 161, 186, 188 – 190, 201 – 202, 205 – 207 NIST 64, 75 Nobel Prize 28, 65, 77 Nonaka, I. 3, 11, 18, 43, 64, 69 – 71, 77, 81, 88, 101, 104, 115, 143 – 144, 148, 193, 207 NTT DOCOMO i, xi, 9 – 10, 74, 76, 103, 131 – 132, 142, 147, 163 – 174, 176 – 178, 180 – 182, 184 – 187, 190, 206 Ocasio, W. 150, 157 – 158, 160 – 162, 165, 186, 189 – 190 O’Connor, G. 2, 4, 11, 22, 27, 29 – 31, 43, 46 – 49, 55 – 59, 61 – 62, 76, 80 – 83, 87, 92, 104, 106, 147 – 148 OECD 44, 65, 78 Okhuysen, G. 5 – 8, 11 open innovation 26, 40, 43, 48, 53, 60 – 61, 81, 98, 101 – 102, 204, 206 operational leadership 196 – 199 ordinary capabilities xi, 8 – 9, 12, 14 – 17, 19, 21 – 22, 27 – 28, 31, 35 – 37, 40, 43, 47, 56 – 58, 62, 67, 71, 73 – 74, 77, 79 – 81, 83, 85 – 86, 92 – 95, 100 – 101, 105, 107 – 108, 118 – 119, 122, 125 – 126, 131, 141, 145, 148 – 150, 153, 155, 157 – 159, 162, 166, 173, 175, 180, 182, 187 – 188, 191 – 192, 198, 204 – 205, 207

Index  211 O’Reilly, C. 2, 4 – 5, 11 – 12, 45, 62, 64, 68 – 69, 71, 73, 77 – 78, 89, 91, 95, 100, 104 – 105, 144, 148, 174, 191, 199, 207 organizational slack 115, 146, 185, 188 path dependency 1 – 2, 4, 13, 67, 81, 85, 151 – 152, 178 Penrose, E. T. 6, 11, 13, 43, 132, 148 peripheral vision 54 – 55, 89 Peteraf, M.A. 15 – 17, 20, 34 – 38, 41, 86, 88, 103, 108, 110, 145 – 146, 149, 166, 176, 189 phronesis 72, 143, 148 pliant organization 137 Porter, M. 6, 11, 13, 17, 20 – 21, 28, 43, 149 positioning-based view 6, 8 practical knowledge 72, 92, 143 practice-view 18, 20 pragmatic boundaries91, 124, 150 – 153, 155 – 156, 158 – 162, 165, 169, 176, 181, 186 – 188, 192, 197 – 200, 202 process-view i, 7, 18, 20, 46 – 47 productive friction 68, 76, 91, 102, 131, 135, 140, 142, 146, 151, 165 – 166, 183, 189, 200 project management 19, 23 – 24, 35 – 36, 39, 46, 49, 51 – 52, 55, 58 – 59, 152, 191, 201, 207 project networks 73 – 74, 129, 140 – 142, 144 Qualcomm 8, 108, 116 – 118, 136 – 139 radical innovation i, 1 – 3, 5, 8, 10 – 11, 24, 39, 41, 43, 45 – 51, 53, 57 – 58, 60 – 61, 64, 66 – 68, 70 – 76, 80, 82 – 83, 86 – 89, 91, 94, 96, 100 – 102, 104, 106, 108 – 109, 117 – 118, 120, 124, 128, 130 – 131, 134 – 135, 138 – 140, 142, 145, 147, 166, 174, 178, 182, 195, 203 – 204 radical innovation systems 109, 117 – 118, 120, 124, 128, 130 – 131, 134, 140, 145, 195 recombination 22, 34, 37 – 39, 97, 109 – 111, 135, 149, 174 – 175, 202 – 203 redeployment 22, 34, 37 – 39, 109 – 111, 135, 174 – 175 renewal 11, 13, 22, 34, 37 – 39, 42, 44, 61, 77, 81, 104, 109 – 111, 135, 138 – 139, 147, 153, 174 – 175, 190 replication 22, 34, 37 – 38, 42, 109 – 110, 175 resource-based theory 6, 9, 13, 15 – 17, 26, 39 – 40

retirement (death) 22, 34, 37 – 38, 109, 175 retrenchment 22, 34, 37 – 38, 109, 175 Rumelt, R. 13, 16 – 17, 43, 84, 105 Schoemaker, P. 54 – 55, 60, 89, 102 Schulze, A. 150, 157 – 161, 191 SECI 71, 143 seizing 13 – 14, 39, 54 – 57, 59, 67, 80 – 82, 84, 90, 92, 97, 149 – 150, 153, 159, 161, 182, 203, 205 semantic boundaries 150 – 153, 155, 158 – 159, 161, 187, 199 – 200 sensing 13 – 14, 54 – 57, 59, 80 – 82, 90, 92, 97 – 98, 101, 109, 149 – 150, 153, 159, 161, 178, 182, 184 – 185, 187, 205 signature processes 14, 18, 58, 66 – 67, 80 – 81, 83 – 84 small-world network 154 – 155, 162, 191 small-world structure 154 – 155, 200 – 202 SoftBank 185 S-shaped curve 25 – 26 Steve Jobs 19, 45, 90, 163, 193 – 194, 197, 202 strategic actions 86, 88, 150, 158, 160 – 163, 165 – 166, 176, 181 – 182, 186, 192, 195, 198 strategic agenda 150, 158, 160 – 163, 166 – 167, 173 – 174, 181 – 182, 194 – 195 strategic communities xii, 10, 30, 33, 41 – 42, 61, 70, 72, 74 – 76, 89, 91, 103, 124, 141, 146, 150 – 151, 153 – 155, 158 – 163, 166, 168 – 170, 181, 189, 194 – 195, 201, 206 strategic contradiction 68, 77, 91, 105 strategic innovation i – iii, xi, 1 – 2, 4 – 11, 13, 18, 33, 41 – 42, 45 – 46, 61, 66, 72 – 73, 76, 86, 89, 91 – 92, 98 – 99, 101 – 104, 106, 120, 125, 128 – 130, 135, 139, 145, 147, 190, 203 – 206 strategic innovation capabilities xi, 7 – 10, 42, 86 – 87, 89, 92, 94, 96, 98 – 101, 104, 107 – 108, 117, 129 – 130, 135, 139, 144 – 145, 147, 192 – 194, 204 – 205, 207 strategic innovation loop xi, 8, 86 – 87, 89 – 90, 92, 94, 101, 107 – 108, 117, 129 – 130, 139, 204 strategic innovation system i, xi, 2, 4 – 5, 7 – 9, 45, 79 – 148, 160, 192, 203 – 204 strategic management i, xi – xii, 4, 12, 18, 28, 42 – 43, 51, 68, 77, 101, 104 – 105, 145, 147 – 148, 191, 194

212 Index strategic management as practice 10, 18, 41, 103, 147, 189, 206 strategy as practice 18 strategy transformation 1, 8, 39, 42, 45, 98, 104, 147, 174, 176, 184, 207 style leadership 196 subsystems i, 45, 54 – 55, 98, 106 – 107, 109, 130 – 131, 134 – 135, 139 – 140, 142, 145, 149 systems theory 4, 12, 43, 62, 106 – 107, 131, 135 – 136, 138, 145, 146, 148, 204 system-view 7, 46, 59 Teece, D. xi–xii, 1, 4, 6, 9, 11 – 17, 19 – 20, 27 – 31, 36, 43 – 44, 54 – 55, 56 – 59, 62, 66, 71, 77, 80 – 82, 84 – 85, 90, 97 – 98, 100, 105, 109, 133, 143, 148 – 149, 191, 201 – 203, 207 Tim Cook 163, 194 Toyota 70 – 71, 143 transformational experience 33, 88 – 89, 92, 132 transforming 10, 13 – 14, 17, 31, 39 – 41, 54 – 57, 59, 67, 80 – 84, 90, 92, 98, 102 – 103, 146, 149, 159, 161, 182, 188 – 189, 198, 202 – 203, 205 – 206 trinity & triad 20 – 21, 34 TSMC 8, 108, 117 – 118, 136 – 139 Tushman, M. 1 – 2, 4 – 5, 9, 11 – 12, 45, 62, 64, 68, 69, 71, 73, 75, 77 – 78, 85,

89, 91, 95, 100, 102, 104 – 105, 131, 133, 144, 146, 148, 154, 174, 191, 199, 207 Uhl-Bien, M. 193, 196 – 197, 205, 207 unproductive paranoia 178, 183 – 184, 187 valley of death 5, 22, 25, 35, 54, 64–67, 70–71, 75, 77, 83, 95, 115, 117, 188 von Bertalanffy 4, 12, 106, 134 – 135, 138, 148 VRIN 6, 203 Watts, D. 153 – 154, 156, 162, 191, 200, 207 Weick, K. E. 2, 12 Wernerfelt, B. 6, 12 – 13, 16 – 17, 20 – 21, 44, 132, 148 Wessner, C. 22, 44, 65 – 66, 78 willpower 58, 75, 80, 84, 102, 156 Winter, S. 1, 4, 11, 14 – 17, 28, 38, 41 – 42, 44, 47, 56, 60 – 62, 68, 77 – 78, 85, 89 – 90, 92 – 96, 103 – 105, 108, 110, 122, 133, 145, 148 – 149, 189 – 191 Xiaomi 8, 108, 118 – 120, 136 – 139 Yoshino, T. 65, 77 Zoom Video Communications 8, 108, 125 – 128, 136 – 139