Developing strategic innovation in large corporations—The dynamic capability view of the firm

• Date: 01 October 2017
• Author: Mitsuru Kodama
• DOI: http://doi.org/10.1002/kpm.1554
• Published date: 01 October 2017

RESEARCH ARTICLE

Developing strategic innovation in large corporations—The

dynamic capability view of the firm

Mitsuru Kodama

College of Commerce, Nihon University,

Tokyo, Japan

Correspondence

Mitsuru Kodama, College of Commerce, Nihon

University, 5‐2‐1 Kinuta, Setagaya‐ku, Tokyo,

Japan.

Email: kodama.mitsuru@nihon‐u.ac.jp

Strategic innovation dynamically brings about strategic positioning through new products,

services, and business models and is a dynamic view of strategy that enables a large corporation

to maintain its competitiveness and establish sustainable growth. For these reasons, large corpo-

rations have to be innovators that can reinforce their existing positions (businesses) through

incremental innovation, while at the same time, constantly renew or destroy existing business

through radical innovation.

From detailed reviews of existing dynamic capabilities theories and further theories deeply

related to the characteristics of corporate or organizational capabilities, this article presents a the-

oretical model of a strategic innovation system as a corporate system capability to enable a large

company to achieve strategic innovation. Furthermore, through in‐depth longitudinal case stud-

ies, the article also discusses the importance of strategic innovation capabilities to achieve a

dynamic spiral of the 2 completely different ordinary and dynamic capabilities on the capabilities

map, skillfully use and combine to achieve swift or slow incremental innovationas exploitation, or

radical innovation as exploration.

1|SUSTAINABLE GROWTH THROUGH

RADICAL AND INCREMENTAL INNOVATION

Here in the 21st century, changes in business circumstances surround-

ing large corporations are becoming more pronounced. Managers and

business leaders face a wide range of challenges as businesses global-

ize and increasingly operate in emerging markets, as technologies inno-

vative rapidly, networking permeates throughout societies and

markets mature, as well as price wars and environmental problems,

Although obviously, a large corporation must continuously create

new products, services, and business models to maintain sustainable

competitiveness and growth over the long term.

The creation of new business models that changes existing rules

and radically revamp conventional products and services trigger major

transformations in the corporate strategy of large corporations.

For example, new value chains and business ecosystems in the infor-

mation and communications technology (ICT) industry that originated

in the United States with the creation of new music distribution

system and smartphones with Apple's iPhone, iPod, and iTunes

music store caused major shake‐ups in both the music and mobile

phone industries.

The collection of innovation research of recent years into radical

innovation (e.g., Leifer et al., 2000), breakthrough innovation

(e.g., Hargadon, 2003; G. O'Connor, 2008), discontinuous innovation

(e.g., Kaplan, Murray, & Henderson, 2003), and disruptive innovation

(Christensen, 1997) has offered both theoretical and practical pointers

for transforming strategies in large corporations to advance technolo-

gies and create new markets. The important implications put forth by

existing research suggest it is not enough to just be able to respond

quickly to environmental changes—Companies also need to acquire

capabilities to develop business to create new environments

(markets).

Thus, to swiftly respond to changing circumstances, companies

have to continually polish their existing capabilities to fortify their main

businesses. Incremental innovation (e.g., R. D. Dewar & J. E. Dutton,

1986; Ettlie, Bridges, & O'Keefe, 1984) through strengthening and uti-

lization of company capabilities through regular, continuous, and

cumulative upgrade and improvement activities is important. At the

same time, to drive business for radical innovation to create new envi-

ronments (markets; e.g., Henderson, 1995; McDermott & G. O'Connor,

2002), it is also necessary to seek out or create never‐before‐seen

capabilities to drive business development. In these two innovation

processes—incremental (exploitation) and radical (exploration) innova-

tion—it is the former that entails strengthening and utilizing capabilities

for a company's existing business (its main business) and pursuing

greater operational efficiency. In contrast, it is the latter that involves

a large corporation searching out or building new capabilities in pursuit

of the creativity needed to pioneer the new business models and new

Received: 29 August 2017 Accepted: 18 September 2017

DOI: 10.1002/kpm.1554

Knowl Process Manag. 2017;24:221–246. Copyright © 2017 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/kpm 221

businesses of the future. However, large corporations have to manage

these two totally different innovation processes simultaneously and

incorporate them into the nuclei of their corporate strategies.

The traditional large corporations of the past found great compet-

itiveness in reinforcing and utilizing path‐dependent capabilities to

incrementally innovate their existing products and profit by releasing

newer versions of them. In contrast, radical or breakthrough innova-

tions result in paradigm shifts accompanying new markets and technol-

ogies that bring big increases in product functionality, radical changes

to existing markets, the creation of new markets, and substantial cost

reductions (Leifer et al., 2000; C. O'Connor & Rice, 2001). In this

way, as new breakthroughs, radical innovations are different in charac-

ter to the incremental and path‐dependent innovations of the large

corporations of the past. To achieve radical innovation, large corpora-

tions need to seek out and create new capabilities that are different

from their existing skills and know‐how (e.g., R. D. Dewar & J. E.

Dutton, 1986; Ettlie et al., 1984; Green, Gavin, & Aiman‐Smith, 1995).

However, corporations taking on radical innovation and the

various projects within themselves must face uncertainties and discon-

tinuities in areas such as markets, technologies, organizations, and

resources. Hence, although it may be possible for some projects to

overcome these hurdles, many projects lose momentum and fail

(e.g., Leifer et al., 2000). To seek out and create the new capabilities

for radical innovation, large corporations must engage in management

activities that are not the same as reinforcing and utilizing the capabil-

ities they have nurtured through their incremental innovation histories

(the business elements of strategy, organizations, resources, technolo-

gies processes, and leadership; e.g., Kodama, 2003; O'Reilly &

Tushman, 2004; Vanhaverbeke & Peeters, 2005).

There is a dynamic relationship between the creation and utiliza-

tion of these capabilities. Because strengthening and utilizing existing

capabilities for incremental innovation means forging technical know‐

how and personnel skills within companies, as they accumulate, these

capabilities can trigger the achievement of radical innovation through

the searching and creation of new capabilities. Therefore, large corpo-

rations must understand their desired level (optimal level) of balance

between creating and utilizing capabilities and must intentionally

manage them. Companies face new challenges regarding the creativity

and efficiency of their capabilities, in other words, “the combination of

exploration and exploitation,”to bring about radical innovation by

seeking out and creating new capabilities, while at the same time,

maintaining their competitiveness through incremental innovation in

their main businesses by strengthening and utilizing existing capabili-

ties (March, 1991).

Thus, leaders and managers of large corporations need a perspec-

tive on seeking out and creating new capabilities to pioneer new busi-

ness and create new markets while strengthening and utilizing

capabilities to maintain their core businesses. Simultaneously execut-

ing and combining these two substantially different innovation

processes entails the pursuit and pioneering of new and highly individ-

ualized strategic positions and is thus a superior corporate strategy

that also leads to the achievement of sustainable competitiveness

and growth (e.g., Kodama, 2006; Markides, 1999).

Markides (1997, 1998) defined strategic innovation as the dynamic

creation of creative strategic positioning from new products, services,

and business models and emphasized that this framework was a

dynamic view of strategy by which a company established sustained

competitive excellence. To achieve this, companies must not adhere

to existing positioning (existing business) but must always innovate in

ways that destroy this positioning. Moreover, Govindarajan and Trim-

ble (2005) defined strategic innovation as realizing strategically innova-

tive new business models (including new products and services). This

strategic innovation refers to business innovation that transforms

established into new business and has a major impact on corporate per-

formance. It is essentially different from incremental innovation.

However, obviously, incremental innovation is required to drive

current business and is an important corporate activity needed to reap

benefits in the immediate short term. Then, just as companies invest

the revenues gained in the short term in research and development

(R&D), they must also have initiatives in sight for radical innovation

to ensure sustainable growth into the future. In other words, to grow

sustainably, companies have to strengthen their incremental innova-

tion activities, while simultaneously directing themselves toward the

challenge of radical innovation (e.g., Burgelman & Leonard, 1986;

Christensen, 1997; Goold & Campbell, 2002; Heller, 1999; Kodama,

2003, 2004; O'Reilly & Tushman, 2004; M. L. Tushman & O'Reilly,

1997). Accordingly, in this perspective, the strategic innovation implied

by Markides (1997) and Govindarajan and Trimble (2005) must include

the simultaneous pursuit of both incremental and radical innovation.

Although there are various classifications of radical and incremen-

tal innovation in existing research with diverse cases of new product

development and reports on new R&D results, this article considers

radical innovation in the broader sense of “radical and really new inno-

vation”apart from incremental innovation, as described by Garcia and

Calantone (2002). In short, incremental innovation refers to innovation

based on continuous advancement of a company's unique existing

path‐dependent knowledge, whereas radical innovation is seen as

innovation that requires processes to acquire knowledge accompanied

by novelty and uncertainty unlike anythingthat the company has expe-

rienced in the past. G. O'Connor (2008) develops theoretical discus-

sions on dynamic capabilities (DC) based on similar positions for the

concept of this class of innovation process.

In this article, strategic activities or innovation processes that

achieve a combination of radical and incremental innovation or, in other

words, combine the exploration and exploitation mentioned earlier, the

author calls “strategic innovation,”and it is this strategic innovation that

achieves sustainable growth in large corporations. However, questions

remain—How do large corporations bring about strategic innovation,

and what kind of strategic management in (and between) leading

companies is needed to achieve sustainable growth? This article

answers these holistic research questions from the perspective of

academic research into strategic management and innovation.

Based on a number of major studies, in particular those done on

DC (D. J. Teece, 2007, 2014), this article clarifies the dynamic innova-

tion processes for establishing strategic innovation (incremental and

radical) for sustainable growth. As new theoretical models, the article

also presents a “strategic innovation system”and presents the concept

of the “capabilities map”(the four domains of capabilities) created with

the characteristics of capabilities responding to internal and external

uncertainties and the speed of environmental change facing

222 KODAMA