Understanding the Innovative
Capacity of Organisations
Dr Rachel Hilliard
Innovation & Structural Change cluster
Whitaker Institute

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• Business, Innovation & Economic
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• Public-Sector Innovation and Reform

Understanding the Innovative
Capacity of Organisations

Nelson and Winter, 1982, p. 134
‘It is quite inappropriate to conceive of firm
behaviour in terms of deliberate choice from a
broad menu of alternatives that some external
observer considers to be “available”
opportunities for the organisation. The menu is
not broad, but narrow and idiosyncratic; it is
built into the firm’s routines …’

Teece, Pisano and Schuen (1997)
‘a firm’s past experience conditions the
alternatives management is able to
perceive.’

Penrose’s concept of image
• Management has an image of paths open to the
company - reflection of the plant’s current capability
set and past history.
• ‘the “subjective” productive opportunity of the firm’
(Penrose, 1959: 42)

Image and growth
• Past experience shapes current growth path;
experience of growth shapes capacity to grow.
• This capacity is not just ability to act but also
perception of risk and future opportunity is
shaped by past experience.
• The capacity to grow/innovate includes image
as well as competences.

Dynamic capability field
‘one of the most influential theoretical lenses in the study of strategic
management over the past decade’
(Schilke, 2014: 179)
1000+ articles on ISI Web of Science (Peteraf et al, 2013)
2000-2005 2006-2010
2011-2013
papers 32/pa 137/pa
201/pa
cites 386/pa 3236/pa
6860/pa
(Di Stefano et al, 2013)

2 intellectuals roots
• Evolutionary economics:
How can we explain heterogeneity in the
population of firms?
• Strategic management:
How can firms achieve sustainable
competitive advantage?

Dynamic Capabilities
• higher order capabilities
• ‘capacity of an organisation to purposefully create,
extend or modify its resource base’
• systematic methods for modifying operating routines
- ‘search’
• deliberative processes of ‘collective learning’
• DCV: Explain firm competitiveness and success
through examining dynamic capabilities

Research Context
• Change in environmental regulation of
industry.
• Mandating technical change and introduction
of environmental management processes.
• Natural experiment

Capability requirements
• New technical capabilities for cleaner technology
adoption.
• New managerial capabilities for environmental
management.
• Capability to develop/acquire new technical and
managerial capability.

Pharmaceutical Sector
• 16 MNC bulk manufacturing plants
– analysis of data reported to the EPA
– correlation between presence of capability and
successful adjustment to regulations

Conclusions of Full Sector Analysis
• Firms are differentially successful in meeting new
regulations
 ability to adopt technical changes
 ability to implement managerial changes
• Success in adapting to new regulations:
associated with the possession of strong,
routinised and integrated processes for problem-
solving and strategic development.

Reasons why this shouldn’t be
• global MNC pharma companies
• access to financial resources
• in possession of extensive technical capability
re manufacturing, process development,
management.
• similar age; similar early environmental
projects
• industry willing to share good practice; EMS
not seen as commercially sensitive

Measuring dynamic capability
High Dynamic Capability =
• Routines for data collection and problem identification
• Programmes for generating cleaner technology
• Cross-functional continuous improvement teams
Low Dynamic Capability =
• Absence of pollution prevention projects
• Explicit abatement only focus
• Significant delays in application process due to lack of
information

Unpacking Firm-Specific Capabilities
STRONG DC FIRMS
• learning retained and
leveraged from early, one-
off projects
• good relationships for
learning
– cross functional
– plant / HQ
– external advice
WEAKER DC FIRMS
• early experiences only one-
off projects
• adverse relationships
– regulator
– community

• In response to the same external regulatory
demands:
firms had a different interpretation and
perception of what was required to develop
their environmental performance

Image held by Pharma P (very strong DC)
• Cleaner technology = way to ‘lift the intellectual
capacity of the organisation’.
• Plant benefits from pursuing opportunities to
maximise learning.
• Environmental excellence benefits overall plant
strategic aims.

Image held by Pharma G (absent DC)
• Environmental excellence = investment in treatment
technology
• Cleaner technology does not represent an
opportunity. External advice has nothing to offer.
• Role of EM is as a support function. Success =
avoiding disruption to core activities

Conclusion
• Performance explained by dynamic capability.
• Presence/absence of reflexive routines
for learning and problem solving are
influenced by the firm’s perception.
• Dynamic capability is a function of both
- deliberative problem solving processes
- the tacit image held by the firm