Absorptive capacity is defined as the ability of a firm to recognize the value of new,
external information, assimilate it, and apply it to commercial ends. This term was
introduced in 1990 by authors Cohen and Levinthal [42].
Absorptive capacity works both at the individual and the organizational level.
At the individual level, the accumulation of prior knowledge enhances the ability to acquire
new knowledge. Similarly, the diversity of prior knowledge facilitates novel associations and
linkages and helps deal with uncertainty.
Absorptive capacity at the organizational level is shaped by organizational structure in
conjunction with the absorptive capacity at the individual level. It is enhanced by:
- "gatekeeping" or "boundary spanning" activities with the external environment
(outward-looking absorptive capacity)
- interaction within subunits (inward-looking absorptive capacity)
- interaction between subunits (cross-functional absorptive capacity).
The effect of absorptive capacity is cumulative since it enhances the firm’s ability
to assimilate and exploit new knowledge and to evaluate the importance of new technological advances.
A low level of absorptive capacity may hinder your organization’s appreciation of emerging
new technologies and opportunities and cause it to be more reactive.
A high level of absorptive capacity will help your organization be more proactive and exploit
emerging new technologies and market opportunities. Absorptive capacity is highest in your areas of core competencies. We call these areas domains of absorptive capacity. Since organizational absorptive capacity is a function of prior knowledge, you can increase absorptive capacity by increasing your R&D investment expenditure, especially in your chosen areas of core competencies.
This is another reason why it is important for you to identify your organization’s core
competencies and strategize how you will enhance them and leverage them.
How Much Should Your Organization Spend On R&D?
A recent study of the information and communications technology sector found that organizations
spent an average of 20 percent of their sales on R&D [8]. However, since each organization’s situation
is unique, we suggest that you consider the following factors:
- the age and size of your organization
- how much your peers spend on R&D
- how smart you can be in focusing your R&D expenditure.
In summary, ask yourself the following questions:
- Do we understand the absorptive capacity potential of our organization?
- Have we strategized according to our core competencies?
- Are we spending adequately on R&D and applying it to optimize absorptive capacity?
- Have we established recognized roles for gatekeeping and boundary spanning?
- Have we fostered interaction within and between subunits?
Let us help you evaluate your organization’s absorptive capacity and show how you can improve it.
info@strategies2innovate.com
Read about other important innovation management topics.
